Security-Based Swap Execution and Registration and Regulation of Security-Based Swap Execution Facilities, 87156-87328 [2023-24587]

Download as PDF 87156 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 200, 201, 232, 240, 242, and 249 [Release No. 34–98845; File No. S7–14–22] RIN 3235–AK93 Security-Based Swap Execution and Registration and Regulation of Security-Based Swap Execution Facilities Securities and Exchange Commission. ACTION: Final rule. AGENCY: The Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) is adopting a set of rules and forms under the Securities Exchange Act of 1934 (‘‘SEA’’) that would create a regime for the registration and regulation of security-based swap execution facilities (‘‘SBSEFs’’) and address other issues relating to securitybased swap (‘‘SBS’’) execution generally. One of the rules being adopted implements an element of the Dodd-Frank Act that is intended to mitigate conflicts of interest at SBSEFs and national securities exchanges that trade SBS (‘‘SBS exchanges’’). Other rules being adopted address the crossborder application of the SEA’s trading venue registration requirements and the trade execution requirement for SBS. In addition, the Commission is amending an existing rule to exempt, from the SEA definition of ‘‘exchange,’’ certain registered clearing agencies, as well as registered SBSEFs that provide a market place only for SBS. The Commission is also adopting a new rule that, while affirming that an SBSEF would be a broker under the SEA, exempts a registered SBSEF from certain broker requirements. Further, the Commission is adopting certain new rules and amendments to its Rules of Practice to allow persons who are aggrieved by certain actions by an SBSEF to apply for review by the Commission. Finally, the Commission is delegating new authority to the Director of the Division of Trading and Markets and to the General Counsel to take actions necessary to carry out the rules being adopted. DATES: Effective date: February 13, 2024. Compliance dates: See section XVI (Compliance Schedule). FOR FURTHER INFORMATION CONTACT: Michael E. Coe, Assistant Director; David Liu, Special Counsel; Leah Mesfin, Special Counsel; Michou Nguyen, Special Counsel; or Geoffrey Pemble, Special Counsel, at (202) 551– ddrumheller on DSK120RN23PROD with RULES2 SUMMARY: VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 5000, Office of Market Supervision, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: The Commission is adopting new 17 CFR 242.800 through 242.835 (‘‘Regulation SE’’) to create a regime for the registration and regulation of SBSEFs and to address other issues relating to SBS execution generally. Regulation SE consists of 17 CFR 242.800 through 242.835 (Rules 800 through 835). Key rules within Regulation SE include Rule 803, which establishes a process for SBSEF registration; Rules 804 to 810, which establish procedures for rule and product filings by SBSEFs; Rule 815, which establishes permissible execution methods for SBS that are subject to the SEA’s trade execution requirement; Rule 816, which sets out a procedure for SBSEFs to make an SBS available to trade and establish certain exemptions from the trade execution requirement; Rules 818 to 831, which implement the 14 Core Principles for SBSEFs set forth in section 3D(d) of the SEA; Rules 832 to 833, which address cross-border matters; and Rule 834, which imposes requirements addressing conflicts of interest involving SBSEFs and SBS exchanges, as required by section 765 of the Dodd-Frank Act. In addition to the rules described above, the Commission is also adopting 17 CFR 249.1701 (Form SBSEF), which is the form that an entity will use to register with the Commission as an SBSEF; 17 CFR 249.1702 (a submission cover sheet), which will be required to accompany filings with the Commission made by SBSEFs for rule and rule amendments and for product listings; adopting amendments to 17 CFR 232.405 (Rule 405 of Regulation S–T) to require various SBSEF filings to be provided in Inline eXtensible Business Reporting Language (‘‘Inline XBRL’’), a structured data language; adopting amendments to 17 CFR 240.3a1–1 (Rule 3a1–1) to exempt from the SEA definition of ‘‘exchange’’ certain registered clearing agencies, as well as registered SBSEFs that provide a market place only for SBS; adopting 17 CFR 240.15a–12 (Rule 15a–12), which, while affirming that an SBSEF would also be a broker under the SEA, exempts a registered SBSEF from certain broker requirements; providing for the sunset of existing temporary exemptions from the requirement to register as a clearing agency that, among other things, applies to an entity performing the functions of an SBSEF but that is not yet registered as such, and from the requirement to register as an SBSEF or a national PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 securities exchange for entities that meet the statutory definition of SBSEF; adopting certain new rules and amendments to 17 CFR part 201 (Rules of Practice) to allow persons who are aggrieved by certain actions by an SBSEF to apply for review by the Commission; and adopting amendments to 17 CFR 200.30–3 and 17 CFR 200.30– 14 regarding delegations of authority to the Director of the Division of Trading and Markets and to the General Counsel. Table of Contents I. Background II. Introductory Provisions of Regulation SE A. Rule 800—Scope B. Rule 801—Applicable Provisions C. Rule 802—Definitions III. Registration of SBSEFs A. Rule 803—Requirements and Procedures for Registration B. Form SBSEF IV. Rule and Product Filings by SBSEFs A. Rule 804—Listing Products for Trading by Certification B. Rule 805—Voluntary Submission of New Products for Commission Review and Approval C. Rule 806—Voluntary Submission of Rules for Commission Review and Approval D. Rule 807—Self-Certification of Rules E. Submission Cover Sheet and Instructions F. Rule 808—Availability of Public Information G. Rule 809—Staying of Certification and Tolling of Review Period Pending Jurisdictional Determination H. Rule 810—Product Filings by SBSEFs That Are Not Yet Registered and by Dormant SBSEFs V. Miscellaneous Requirements A. Rule 811—Information Relating to SBSEF Compliance B. Rule 812—Enforceability C. Rule 813—Prohibited Use of Data Collected for Regulatory Purposes D. Rule 814—Entity Operating Both a National Securities Exchange and an SBSEF E. Rule 815—Methods of Execution for Required and Permitted Transactions F. Rule 816—Trade Execution Requirement and Exemptions Therefrom G. Rule 817—Trade Execution Compliance Schedule VI. Implementation of Core Principles A. Rule 818—Core Principle 1— Compliance With Core Principles B. Rule 819—Core Principle 2— Compliance With Rules C. Rule 820—Core Principle 3—SBS Not Readily Susceptible to Manipulation D. Rule 821—Core Principle 4—Monitoring of Trading and Trade Processing E. Rule 822—Core Principle 5—Ability To Obtain Information F. Rule 823—Core Principle 6—Financial Integrity of Transactions G. Rule 824—Core Principle 7—Emergency Authority H. Rule 825—Core Principle 8—Timely Publication of Trading Information E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations I. Rule 826—Core Principle 9— Recordkeeping and Reporting J. Rule 827—Core Principle 10—Antitrust Considerations K. Rule 828—Core Principle 11—Conflicts of Interest L. Rule 829—Core Principle 12—Financial Resources M. Rule 830—Core Principle 13—System Safeguards N. Rule 831—Core Principle 14— Designation of Chief Compliance Officer VII. Cross-Border Rules A. Rule 832—Cross-Border Mandatory Trade Execution B. Rule 833—Cross-Border Exemptions for Foreign Trading Venues and Relating to the Trade Execution Requirement VIII. Rule 834—Implementation of Section 765 of the Dodd-Frank Act and Governance of SBSEFs and SBS Exchanges A. Rule 834(a) B. Rule 834(b) C. Rule 834(c) D. Rule 834(d) E. Rule 834(e) F. Rule 834(f) G. Rule 834(g) H. Rule 834(h) IX. Rule 835—Notice to Commission by SBSEF of Final Disciplinary Action, Denial or Conditioning of Membership, or Denial or Limitation of Access X. Amendments to Existing Rule 3a1–1 Under the SEA-Exemptions From the Definition of ‘‘Exchange’’ XI. Rule 15a–12—SBSEFs as Registered Brokers; Relief From Certain Broker Requirements XII. Termination of Temporary Exemptions XIII. Electronic Filings Under Regulation SE A. Use of Electronic Filing Systems and Structured Data B. Use of Identifiers XIV. Amendments to Commission’s Rules of Practice for Appeals of SBSEF Actions A. Amendment to Rule 101 B. Amendment to Rule 202 C. Amendment to Rule 210 D. Amendment to Rule 401 E. Rule 442—Right To Appeal F. Rule 443—Sua sponte Review by Commission G. Amendment to Rule 450 H. Amendment to Rule 460 XV. Amendments to Delegations of Authority in Rule 30–3 and Rule 30–14 A. Delegated Authority Related to SBSEF Registration and Form SBSEF B. Delegated Authority Related to New Products Proposed by an SBSEF C. Delegated Authority Related to New Rules or Rule Amendments Proposed by an SBSEF D. Delegated Authority Related To Request for Joint Interpretation E. Delegated Authority Related to SBSEF Submissions Contemplated by Rule 811 F. Delegated Authority Related to Information Sharing G. Delegated Authority Related to Commission Review Proceedings XVI. Compliance Schedule XVII. Economic Analysis A. Introduction VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 B. Economic Baseline C. Benefits and Costs D. Effects on Efficiency, Competition, and Capital Formation E. Reasonable Alternatives XVIII. Paperwork Reduction Act A. Summary of Collection of Information B. Proposed Use of Information C. Respondents D. Total Annual Reporting and Recordkeeping Burden E. Collection of Information is Mandatory F. Responses To Collection of Information Will Not Be Confidential G. Retention Period of Recordkeeping Requirements XIX. Regulatory Flexibility Certification A. SBSEFs B. Persons Requesting an Exemption Order Pursuant to Rule 833 C. SBS Exchanges D. Certification XX. Other Matters I. Background The Commission is adopting Regulation SE,1 which governs the registration and regulation of SBSEFs, as required by section 3D of the SEA.2 Section 3D was enacted as part of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank Act’’).3 The Dodd-Frank Act was enacted, among other reasons, to promote the financial stability of the United States by improving accountability and transparency in the financial system.4 The 2008 financial crisis highlighted significant issues in the over-the-counter (‘‘OTC’’) derivatives markets, which experienced dramatic growth in the years leading up to the financial crisis and are capable of affecting significant sectors of the U.S. economy. Section 3D(a)(1) of the SEA provides that no person may operate a facility for the trading or processing of SBS unless the facility is registered as an SBSEF or as a national securities exchange. Section 3D(d) enumerates 14 Core Principles with which SBSEFs must comply.5 And section 3D(f) requires the Commission to prescribe rules governing the regulation of SBSEFs. In addition, section 765 of the Dodd-Frank Act directs the Commission to adopt rules to mitigate conflicts of interest with respect to clearing agencies that 1 The Commission proposed Regulation SE on Apr. 6, 2022. See Rules Relating to Security-Based Swap Execution and Registration and Regulation of Security-Based Swap Execution Facilities (Proposed Rule), SEA Release No. 94615 (Apr. 6, 2022), 87 FR 28872 (May 11, 2022) (‘‘Proposing Release’’). 2 15 U.S.C. 78c–4. In this release, the Commission is defining the Securities Exchange Act as the ‘‘SEA’’ to distinguish it from the Commodity Exchange Act (‘‘CEA’’). 3 Public Law 111–203, H.R. 4173, sec. 763(c). 4 See Public Law 111–203 Preamble. 5 See infra section VI (listing the Core Principles). PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 87157 clear SBS (‘‘SBS clearing agencies’’), SBSEFs, and national securities exchanges that post or make available for trading SBS (‘‘SBS exchanges’’). On April 6, 2022, the Commission proposed Regulation SE, relating to the registration and regulation of SBSEFs and to SBS execution generally.6 As discussed in the Proposing Release, the proposed rules superseded previous Commission proposals on these subjects.7 The SBS market is closely related to the swaps market, which is regulated by the Commodity Futures Trading Commission (‘‘CFTC’’).8 In June 2013, the CFTC adopted rules (in 17 CFR chapter I) under Title VII of the DoddFrank Act for swap execution facilities (‘‘SEFs’’).9 The swaps market has grown and matured within the framework established by the CFTC’s rules.10 As 6 See Proposing Release, supra note 1. In 2011, the Commission published for comment proposed Regulation SBSEF relating to, among other things, the registration and regulation of SBSEFs. Registration and Regulation of Security-Based Swap Execution Facilities, SEA Release No. 63825 (Feb. 2, 2011), 76 FR 10948 (Feb. 28, 2011) (‘‘2011 SBSEF Proposal’’). The Proposing Release, which contains a more detailed discussion of that and related proposals, withdrew the 2011 SBSEF Proposal. See Proposing Release, 87 FR at 28874. 7 See Proposing Release, supra note 1, 87 FR at 28874. However, Rule 834 of proposed Regulation SE would implement section 765 only with respect to SBSEFs and SBS exchanges. See infra section VIII. 8 In adopting Regulation SE, the Commission has consulted and coordinated with the CFTC and the prudential regulators, in accordance with the consultation mandate of the Dodd-Frank Act. Section 712(a)(2) of the Dodd-Frank Act provides in relevant part that the Commission shall ‘‘consult and coordinate to the extent possible with the Commodity Futures Trading Commission and the prudential regulators for the purposes of assuring regulatory consistency and comparability, to the extent possible.’’ In addition, section 752(a) of the Dodd-Frank Act provides in relevant part that ‘‘[i]n order to promote effective and consistent global regulation of swaps and security-based swaps, the Commodity Futures Trading Commission, the Securities and Exchange Commission, and the prudential regulators . . . as appropriate, shall consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards with respect to the regulation (including fees) of swaps.’’ The term ‘‘prudential regulator’’ is defined in section 1a(39) of the CEA, 7 U.S.C. 1a(39), and that definition is incorporated by reference in section 3(a)(74) of the SEA, 15 U.S.C. 78c(a)(74). 9 See CFTC, Core Principles and Other Requirements for Swap Execution Facilities, 78 FR 33476 (June 4, 2013) (‘‘2013 CFTC Final SEF Rules Release’’); CFTC, Process for a Designated Contract Market or Swap Execution Facility To Make a Swap Available to Trade, Swap Transaction Compliance and Implementation Schedule, and Trade Execution Requirement Under the Commodity Exchange Act, 78 FR 33606 (June 4, 2013) (‘‘2013 CFTC Final MAT Rules Release’’). 10 In 2018, the CFTC proposed to make fundamental changes to the SEF regulatory structure. See CFTC, Swap Execution Facilities and Trade Execution Requirement, 83 FR 61946 (Nov. E:\FR\FM\15DER2.SGM Continued 15DER2 87158 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 discussed in the Proposing Release, the SBS market is a small fraction of the overall swaps market, and the swaps market provides greater opportunities for revenue capture from swap execution as compared to SBS execution.11 For example, as of November 25, 2022, the gross notional amount outstanding in the SBS market was approximately $8.5 trillion across the credit, equity, and interest rate asset classes,12 while the gross notional amount outstanding in the swaps market was approximately $352 trillion across the interest rate, credit, and foreign-exchange asset classes.13 The Commission was sensitive in the Proposing Release to the economic impact its proposed SBSEF rules could have.14 In addition, the Commission recognized that the entities that are most likely to register with the Commission as SBSEFs are existing, CFTC-registered SEFs, which have already made substantial investments in systems, policies, and procedures to comply with and adapt to the regulatory system developed by the CFTC. Harmonization between the Commission’s SBSEF rules and the CFTC’s SEF rules could facilitate the ability of entities to dually register and minimize costs by allowing incumbent SEFs to use their existing systems, policies, and procedures to comply with the Commission’s SBSEF rules.15 Thus, in proposing Regulation SE, the Commission took the general approach of harmonizing closely with analogous CFTC SEF rules, except where differences in the SEC’s statutory authority relative to the CFTC’s statutory authority, or differences in the SBS market relative to the swaps market, necessitated differences 30, 2018) (‘‘2018 SEF Proposal’’). In 2021, the CFTC ultimately declined to finalize the 2018 SEF Proposal and elected instead ‘‘to improve the SEF framework through targeted rulemakings that address distinct issues.’’ Accordingly, the CFTC withdrew the unadopted portions of its 2018 proposal. See CFTC, Swap Execution Facilities and Trade Execution Requirement—Proposed rule; partial withdrawal, 86 FR 9304, 9304 (Feb. 12, 2021). 11 See Proposing Release, supra note 1, 87 FR at 28874–76. 12 See Report on Security-Based Swaps (Mar. 20, 2023), available at https://www.sec.gov/files/reportsecurity-based-swaps-032023.pdf. See also infra note 815 and accompanying text (discussing security-based swap transactions data in the credit, equity, and interest rate derivatives asset classes reported by registered SBSDRs). 13 See CFTC Swaps Report, available at https:// www.cftc.gov/MarketReports/SwapsReports/ L3Grossexp.html (accessed on Sept. 27, 2023). 14 See Proposing Release, supra note 1, 87 FR at 28875. 15 See Proposing Release, supra note 1, 87 FR at 28875. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 between the Commission’s rules and the CFTC’s, or where the benefits of deviating from the CFTC’s rules would otherwise justify the burdens and costs associated with imposing different or additional requirements than the corresponding CFTC rule. And the Commission sought public comment on this approach.16 One commenter opposes this harmonization approach, and argues that it does not make sense to harmonize with the ‘‘looser’’ rules of SEFs, which he believes would allow ‘‘more fraud and false narratives to creep into the market,’’ and instead advocates that the Commission start from scratch with new rules.17 Many other commenters, however, generally support this harmonization approach.18 16 The comment letters are available at https:// www.sec.gov/comments/s7-14-22/s71422.htm. The Commission also received comments on topics outside the scope of the proposal that are not addressed in this release. See, e.g., Letter from Anonymous (Apr. 27, 2022) (discussing CFTC oversight and transparency); Letter from Anonymous (Apr. 20, 2022) (discussing securities financial transactions). 17 See Letter from Robert McLaughlin (Apr. 7, 2022). 18 See, e.g., Letter from Robert Laorno, General Counsel, ICE Swap Trade, LLC, to Vanessa A. Countryman, Secretary, Commission, at 1–2 (June 20, 2022) (‘‘ICE Letter’’); Letter from Stephen W. Hall, Legal Director and Securities Specialist, and Jason Grimes, Senior Counsel, Better Markets, Inc., to Vanessa A. Countryman, Secretary, Commission, at 9–11 (June 10, 2022) (‘‘Better Markets Letter’’); Letter from Derek J. Kleinbauer, Vice-President, Bloomberg SEF LLC, and Benjamin MacDonald, Global Head Enterprise Products, Bloomberg L.P., to Vanessa A. Countryman, Secretary, Commission, at 1–2 (June 10, 2022) (‘‘Bloomberg Letter’’); Letter from Bella Rosenberg, Senior Counsel and Head of Legal and Regulatory Practice Group, International Swaps and Derivatives Association, Inc., and Kyla Brandon, Managing Director, Head of Derivatives Policy, Securities Industry and Financial Markets Association, to Vanessa Countryman, Secretary, Commission, at 1–2 (June 10, 2022) (‘‘ISDA–SIFMA Letter’’); Letter from Sarah A. Bessin Associate General Counsel, and Nicholas Valderrama, Counsel, Investment Company Institute, at 1–2 (June 10, 2022) (‘‘ICI Letter’’); Letter from Elizabeth Kirby, Head of U.S. Market Structure, Tradeweb Markets Inc., to Vanessa A. Countryman, Secretary, Commission, at 1–2 (June 10, 2022) (‘‘Tradeweb Letter’’); Letter from Williams Shields, Chairman, Wholesale Markets Brokers’ Association, Americas, to Vanessa A. Countryman, Secretary, Commission, at 1–2 (June 10, 2022) (‘‘WMBAA Letter’’); Letter from Lindsey Weber Keljo, Head of SIFMA Asset Management Group, and William Thun, Associate General Counsel, SIFMA Asset Management Group, to Vanessa A. Countryman, Secretary, Commission, at 1–2 (June 10, 2022) (‘‘SIFMA AMG Letter’’); Letter from Jennifer W. Han, Chief Counsel & Head of Regulatory Affairs, Managed Funds Association, at 1–2 (June 10, 2022) (‘‘MFA Letter’’); Letter from Stephen John Berger, Global Head of Government & Regulatory Policy, Citadel and Citadel Securities (June 10, 2022) (‘‘Citadel Letter’’). While these commenters support the Commission’s general harmonization approach, they also provide specific recommendations on changes to the Commission’s Regulation SE proposal that they believe would improve the rules, as described in detail below in the sections discussing these individual rules. See infra sections II through XVII. PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 Many of these commenters echo the Commission’s rationale for harmonizing with the CFTC’s SEF rules, and state that such harmonization would minimize the compliance burden for dually registered entities.19 Two of these commenters also state that the CFTC’s regulatory framework has been in place for almost a decade and has functioned well.20 One commenter also supports the Commission’s decision and rationale in withdrawing proposed Regulation MC 21 and the Commission’s 2011 SBSEF Proposal.22 The Commission disagrees with the comment that harmonizing with the CFTC approach would allow for more fraud and false narratives in the SBS markets. Standing up a formal regulatory framework for SBSEFs where none yet exists will provide greater accountability and oversight for the SBS market and should, contrary to this commenter’s views, serve to detect and deter abusive and manipulative trading practices by providing for a set of Commission rules that SBSEFs must adhere to in operating their platforms and by requiring SBSEFs to make filings with the Commission regarding the operation of their platforms and to make their rules publicly available, as described in detail in sections II through XVII below. Given the relative size of the SBS market as compared to the swaps market, the fact that the CFTC’s SEF regulation has been in place for many years now, and the cost efficiencies and reduced burdens that would result from harmonized rules for dually registered SEFs/SBSEFs, it is appropriate to generally harmonize the Commission’s SBSEF regulatory framework with the CFTC’s SEF regulatory framework. At the same time, where appropriate, adopted Regulation SE differs in certain targeted respects from the CFTC’s regulatory framework for SEFs. This includes areas where differences in the Commission’s statutory authority relative to the CFTC’s statutory authority or differences in the SBS market relative to the swaps market necessitate differences between the 19 See, e.g., ICE Letter, supra note 18, at 1–2; ISDA–SIFMA Letter, supra note 18, at 1–2; ICI Letter, supra note 18, at 1–2; Tradeweb Letter, supra note 18, at 1–2; WMBAA Letter, supra note 18, at 1–2; MFA Letter, supra note 18, at 1. 20 See, e.g., ISDA–SIFMA Letter, supra note 18, at 1–2; SIFMA AMG Letter, supra note 18, at 1–2. 21 Ownership Limitations and Governance Requirements for Security-Based Swap Clearing Agencies, Security-Based Swap Execution Facilities, and National Securities Exchanges With Respect to Security-Based Swaps Under Regulation MC, SEA Release No. 63107 (Oct. 14, 2010), 75 FR 65882 (Oct. 26, 2010) (‘‘Regulation MC Proposal’’). 22 See Bloomberg Letter, supra note 18, at 2. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations Commission’s rules and the CFTC’s, or where the benefits of deviating from the CFTC’s rules would otherwise justify the burdens and costs associated with imposing different or additional requirements than the corresponding CFTC rule. The specific approach to harmonization that the Commission has pursued, along with differences from CFTC’s regime for SEFs, are described in detail in sections II through XVII below. As discussed below, the Commission is modifying the proposed provisions of Regulation SE regarding the definition of ‘‘block trade,’’ 23 the treatment of package transactions,24 the treatment of SBS transactions that are intended to be cleared but are not accepted for clearing by a registered clearing agency,25 permitting SBSEFs to contract with designated contract markets (‘‘DCMs’’) to provide services to assist in complying with the SEA and Commission rules thereunder,26 the content and timing of the Daily Market Data Report,27 an exception to ownership and voting restrictions for SBSEFs,28 the application of deadlines and standard of review for Commission review of SBSEF actions,29 and the applicability of electronic filing and structured-data requirements with respect to specific SBSEF filings.30 Otherwise, the rules of Regulation SE are generally being adopted as proposed, in some instances with minor or technical modifications, which are described in more detail below.31 II. Introductory Provisions of Regulation SE A. Rule 800—Scope ddrumheller on DSK120RN23PROD with RULES2 Proposed Rule 800 is based on 17 CFR 37.1, which provides that part 37 of the CFTC’s regulations applies to every SEF that is registered or applying to become registered as a SEF under section 5h of the CEA. Proposed Rule 800 would provide that the provisions of Regulation SE apply to every SBSEF that is registered or is applying to become registered as an SBSEF under section 3D of the SEA. The Commission received no comments on Proposed Rule 800 and is adopting Rule 800 as proposed, with 23 See infra section V.E.1(c). infra section V.E.4. 25 See infra section V.E.7. 26 See infra section VI.B.5. 27 See infra section VI.H. 28 See infra section VIII.B. 29 See infra section XIV.E. 30 See infra section XIII. 31 See infra note 32. 24 See VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 minor technical modifications,32 for the reasons stated in the Proposing Release. B. Rule 801—Applicable Provisions Proposed Rule 801 is based on § 37.2 of the CFTC’s rules, which provides that a SEF shall comply with the requirements of part 37 and all other applicable CFTC regulations, including 17 CFR 1.60 and part 9, and including any related definitions and crossreferenced sections. Proposed Rule 801 would require an SBSEF to comply with the requirements of Regulation SE and all other applicable Commission rules, including any related definitions and cross-referenced sections. The Commission did not receive any comments on Proposed Rule 801 and is adopting Rule 801 as proposed, with minor technical modifications.33 C. Rule 802—Definitions Proposed Rule 802 would set forth the definitions of terms that are used in multiple rules in proposed Regulation SE. The majority of these terms were adapted from the CFTC’s swaps rules. Other terms were taken from section 3 of the SEA 34 or from a Commission rule under the SEA. In particular, Proposed Rule 802 would define the term ‘‘security-based swap execution facility’’ by cross-referencing the definition of that term provided in section 3(a)(77) of the SEA,35 but with one carve-out. An entity that is registered with the Commission as a clearing agency pursuant to section 17A of the SEA 36 and limits its SBSEF functions to operation of a trading session that is designed to further the accuracy of endof-day valuations—i.e., a ‘‘forced trading session’’—would be exempt from the definition of ‘‘security-based swap execution facility.’’ 37 32 In several instances, here and as noted below, the Commission has made technical modifications to the proposed regulatory text to conform crossreferences in the regulatory text to the CFR to the required style, as well as to correct simple typographical errors. Here, the Commission has modified Rule 800 to change a reference from ‘‘[t]he provisions of this section’’ to ‘‘[t]he provisions of §§ 242.800 through 242.835.’’ In other instances, the Commission has added the words ‘‘of this section’’ to a CFR cross-reference to conform to the required form of citation. Other types of technical modifications, and any substantive modifications, are described below with respect to specific instances. 33 See id. 34 15 U.S.C. 78c. 35 15 U.S.C. 78c(a)(77). 36 15 U.S.C. 78q–1. 37 See Proposing Release, supra note 1, 87 FR at 28878. This provision codifies a series of exemptions granted by the Commission to SBS clearing agencies that operate ‘‘forced trading’’ sessions. See, e.g., Order Granting Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With Request on Behalf of ICE PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 87159 Although the Commission received comments regarding the proper application of the proposed definitions with respect to registration requirements, discussed below in section III.A.2, and the proposed amendments to Rule 3a1–1, discussed below in section X, the Commission did not receive comments suggesting a modification of the definitions themselves. The term ‘‘security-based swap execution facility’’ is defined directly in section 3(a)(77) of the SEA as ‘‘a trading system or platform in which multiple participants have the ability to execute or trade security-based swaps by accepting bids and offers made by multiple participants in the facility or system. . . ,’’ 38 and it is appropriate to adopt the same definition in Rule 802, with a narrow exception to address certain activities of registered clearing agencies in furthering the accuracy of end-of-day valuations.39 Specifically, it is necessary or appropriate in the public interest, and is consistent with the protection of investors, to exempt a registered clearing agency that utilizes a forced trading functionality for SBS from the definition of ‘‘security-based swap execution facility.’’ Such an entity will continue to be registered as a clearing agency and subject to the requirements of section 17A of the SEA. Furthermore, a registered clearing agency is a selfregulatory organization (‘‘SRO’’); therefore, all of its rules—including U.S. Trust LLC Related to Central Clearing of Credit Default Swaps, and Request for Comments, SEA Release No. 59527 (Mar. 6, 2009), 74 FR 10791, 10796 (Mar. 12, 2009) (providing, among other things, an exemption from sections 5 and 6 of the SEA because ‘‘ICE Trust will periodically require ICE Trust Participants to execute certain CDS trades at the applicable end-of-day settlement price. Requiring ICE Trust Participants to trade CDS periodically in this manner is designed to help ensure that such submitted prices reflect each ICE Trust Participant’s best assessment of the value of each of its open positions in Cleared CDS on a daily basis, thereby reducing risk by allowing ICE Trust to impose appropriate margin requirements’’); Order Extending and Modifying Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With Request of Chicago Mercantile Exchange Inc. Related to Central Clearing of Credit Default Swaps, and Request for Comments, SEA Release No. 61164 (Dec. 14, 2009), 74 FR 67258, 67262 (Dec. 18, 2009) (providing, among other things, an exemption from sections 5 and 6 of the SEA because, ‘‘[a]s part of the CDS clearing process, CME will periodically require CDS clearing members to trade at prices generated by their indicative settlement prices where those indicative settlement prices generate crossed bids and offers, pursuant to CME’s price quality auction methodology’’). 38 15 U.S.C. 78c(a)(77). 39 Because this exception for certain clearing agencies specifies ‘‘an entity that is registered with the Commission as a clearing agency pursuant to section 17A of the [SEA]’’ and meets other specified conditions, the exception would not be available to any exempt clearing agency. E:\FR\FM\15DER2.SGM 15DER2 87160 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations those governing the forced trading session—have to be submitted to the Commission pursuant to section 19 of the SEA. Therefore, codification of the exemption from the definitions of ‘‘exchange’’ and ‘‘security-based swap execution facility’’ preserves the status quo and eliminates a largely duplicative and unnecessary set of regulatory requirements. This exemption covers only the forced-trading functionality of an SBS clearing agency; any other exchange or SBSEF activity in which a clearing agency might engage could subject the clearing agency to the SEA provisions and the Commission’s rules thereunder applying to exchanges or SBSEFs. Proposed Rule 802 would have defined the term ‘‘block trade’’ to be an SBS transaction that, among other requirements, is an SBS based on a single credit instrument (or issuer of credit instruments) or a narrow-based index of credit instruments (or issuers of credit instruments) having a notional size of $5 million or greater.40 The Commission received a number of comments on the proposed definition of ‘‘block trade.’’ These comments are discussed below in section V.E.1(c) relating to Rule 815(a), which specifies mandatory methods of execution for a Required Transaction that is not a block trade. As discussed in detail below in section V.E.1(c), the Commission is not adopting the proposed definition of ‘‘block trade.41 Therefore, the Commission is adopting Rule 802 as proposed, except for the definition of ‘‘block trade,’’ which it is reserving, and minor technical modifications.42 ddrumheller on DSK120RN23PROD with RULES2 III. Registration of SBSEFS Section 3D(a)(1) of the SEA 43 provides that no person may operate a facility for the trading or processing of SBS 44 unless the facility is registered as 40 See Proposing Release, supra note 1, 87 FR at 28896, 28975. 41 Additionally, as discussed below, the Commission is removing the term ‘‘block trade’’ from the text of certain rules other than Rule 815(a), see infra sections VI.B.1 (Rule 819(a)(3)), V.B (Rule 812(b)), VI.B.4 (Rule 819(d)(1)), VI.H (Rule 825(c)(1)(i) and (ii)), and is adding language regarding future definition of ‘‘block trade’’ in Rule 825(c)(1)(iii). See infra section VI.H. 42 See supra note 32. The Commission has also replaced the term ‘‘SBSEF’’ with ‘‘security-based swap execution facility,’’ defined ‘‘SBS exchange’’ when the term is first used, added the words ‘‘of this definition of trading facility’’ to paragraph (2)(C)(ii) of the definition of ‘‘trading facility,’’ and moved the definition of ‘‘dormant security-based swap execution facility’’ so that it appears in alphabetical order. 43 15 U.S.C. 78c–4(a)(1). 44 The term ‘‘security-based swap’’ is defined in section 3(a)(68) of the SEA, 15 U.S.C. 78c(a)(68), to include, among other things, a swap that is based VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 an SBSEF or as a national securities exchange. After issuing the 2011 SBSEF Proposal, the Commission granted temporary exemptions pursuant to section 36(a)(1) of the SEA 45 to entities that meet the definition of ‘‘securitybased swap execution facility’’ from having to register with the Commission as an SBSEF or national securities exchange (‘‘Temporary SBSEF Exemptions’’).46 According to their terms, the Temporary SBSEF Exemptions expire upon the earliest compliance date for the Commission’s final rules regarding SBSEF registration.47 A. Rule 803—Requirements and Procedures for Registration 1. Summary of Proposed Rule 803 Proposed Rule 803 of Regulation SE is closely modeled on § 37.3 of the CFTC’s rules and would set forth a process for registration with the Commission as an SBSEF. Paragraph (a)(1) of Proposed Rule 803 would track the language of § 37.3(a)(1) on a single security or loan, including any interest therein or on the value thereof. A single security could include, for example, a cash equity, a crypto/ digital asset security, or a security option. 45 15 U.S.C. 78mm(a)(1). 46 See SEA Release No. 64678 (June 15, 2011), 76 FR 36287 (June 22, 2011) (temporarily exempting entities that meet the definition of ‘‘security-based swap execution facility’’ from the requirement to register with the Commission as an SBSEF) (‘‘June 2011 Exemptive Order’’); SEA Release No. 64795 (July 1, 2011), 76 FR 39927 (July 7, 2011) (temporarily exempting entities that meet the definition of ‘‘security-based swap execution facility’’ from the restrictions and requirements of sections 5 and 6 of the SEA) (‘‘July 2011 Exemptive Order’’). An entity that meets the definition of ‘‘security-based swap execution facility’’ is required to register as an SBSEF under section 3D of the SEA or as an exchange under section 6 of the SEA. But because the Commission has not previously adopted final rules relating to SBSEFs, such entities have been unable to register with the Commission as SBSEFs. The Temporary SBSEF Exemptions have allowed such entities to continue trading SBS without needing to register either as SBSEFs or national securities exchanges before the compliance date of the SBSEF registration rules. 47 See June 2011 Exemptive Order, supra note 46, 76 FR at 36293, 36306; July 2011 Exemptive Order, supra note 46, 76 FR at 39934, 39939. The July 2011 Exemptive Order also provided an exemption from the broker registration requirements of section 15(a)(1) of the SEA, 15 U.S.C. 78o(a)(1), and other requirements of the SEA and the Commission’s rules thereunder that apply to a broker, solely in connection with broker activities involving SBS (‘‘Broker Exemptions’’). The Broker Exemptions generally expired on Oct. 6, 2021; however, because an entity that meets the definition of ‘‘securitybased swap execution facility’’ also would also meet the definition of ‘‘broker’’ in section 3(a)(4) of the SEA, 15 U.S.C. 78c(a)(4), the Commission extended the Broker Exemptions solely for persons acting as an SBSEF until the expiration of the Temporary SBSEF Exemptions (i.e., the earliest compliance date set forth in any of the Commission’s final rules regarding registration of SBSEFs). See SEA Release No. 87005 (Sept. 19, 2019), 84 FR 68550, 68602 (Dec. 16, 2019). PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 closely, and would provide that any person operating a facility that offers a trading system or platform in which more than one market participant has the ability to execute or trade securitybased swaps with more than one other market participant on the system or platform shall register the facility as a security-based swap execution facility under this section or as a national securities exchange pursuant to section 6 of the SEA.48 Paragraph (a)(2) of Rule 803, like § 37.3(a)(2), would require an SBSEF, at a minimum, to offer an order book, which would be defined in Rule 802 to mean an electronic trading facility, a trading facility, or a trading system or platform in which all market participants in the trading system or platform have the ability to enter multiple bids and offers, observe or receive bids and offers entered by other market participants, and transact on such bids and offers.49 Paragraph (a)(3) of Rule 803 is closely modeled on § 37.3(a)(4) and would provide a narrow exception to the requirement to provide an order book for a Required Transaction 50 to allow an SBSEF not to offer an order book for the SBS component(s) of a package transaction that contains a mix of products, with some parts of the 48 A person that registers with the Commission as a national securities exchange pursuant to section 6 of the SEA does not fall within the statutory definition of ‘‘security-based swap execution facility,’’ see sec. 3(a)(77) of the SEA, 15 U.S.C. 78c(a)(77), and thus does not need to register as an SBSEF under Rule 803. Furthermore, as discussed below, see infra section X (discussing proposed paragraph (a)(4) of SEA Rule 3a1–1), a person that registers as an SBSEF under Rule 803 and provides a market place for no securities other than SBS is exempt from the definition of ‘‘exchange’’ and does not need to register as such pursuant to section 6 of the SEA. 15 U.S.C. 78c(a)(1) (defining ‘‘exchange’’ as ‘‘any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange’’). 49 Section 37.3(a)(3) defines ‘‘trading facility’’ and ‘‘electronic trading facility’’ by cross-referencing definitions of those terms in the CEA. Rather than cross-referencing the CEA, the Commission adapted the CEA definitions of those terms directly into Rule 802. See Proposed Rule 802 (defining ‘‘trading facility’’ and ‘‘electronic trading facility’’). 50 As discussed below in section V.E.1(a), the Commission is incorporating into Regulation SE the concepts of ‘‘Required Transaction’’ and ‘‘Permitted Transaction’’ in a manner closely modeled on the CFTC’s use of those terms. A Required Transaction would be a transaction involving an SBS that is subject to the trade execution requirement. Section 37.3 of the CFTC’s rules requires an order book as a minimum trading functionality for all SEFs and is not limited to provision of an order book only for Required Transactions. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations package being subject to a trade execution requirement and some not. Paragraph (b) of Proposed Rule 803 is closely modeled on § 37.3(b) and would set out procedures for full registration of an SBSEF. Paragraph (b)(1), like § 37.3(b)(1), would provide that an applicant requesting registration must file electronically a complete Form SBSEF or any successor forms, and all information and documentation described in such forms with the Commission using the Electronic Data Gathering, Analysis, and Retrieval (‘‘EDGAR’’) system as an Interactive Data File in accordance with Rule 405 of Regulation S–T, and must provide to the Commission, upon the Commission’s request, any additional information and documentation necessary to review an application. Paragraph (b)(2) of Proposed Rule 803, like § 37.3(b)(2), would provide that an applicant requesting registration as an SBSEF must identify with particularity any information in the application that will be subject to a request for confidential treatment pursuant to Rule 24b–2 under the SEA.51 Paragraph (b)(2) would also provide that, as set forth in Rule 808, certain information provided in an application shall be made publicly available. Paragraph (b)(3) of Proposed Rule 803 would address amendments to the SBSEF registration application. Like § 37.3(b)(3), Rule 803(b)(3) would provide that an applicant amending a pending application or requesting an amendment to an order of registration shall file an amended application electronically with the Commission using the EDGAR system as an Interactive Data File in accordance with Rule 405 of Regulation S–T. Subsequent to being registered, an SBSEF would be required to submit rule and product filings under Rule 806 or Rule 807, as well as provide other updates as may be required pursuant to other rules for SBSEFs. Paragraph (b)(4) of Proposed Rule 803 would address the effect of an incomplete application. Like § 37.3(b)(4), Proposed Rule 803(b)(4) would provide that, if an application is incomplete, the Commission shall notify the applicant that its application will ddrumheller on DSK120RN23PROD with RULES2 51 See 17 CFR 240.24b–2 (setting forth the procedures for identifying and redacting the portion of a submission under the SEA for which confidential treatment is requested). As the Commission stated in the Proposing Release, it is not necessary or appropriate to establish and utilize one set of procedures to handle confidential treatment requests made by SBSEFs while utilizing a different set of procedures for other persons who request confidential treatment from the Commission under the SEA. See Proposing Release, supra note 1, 87 FR at 28880 n.50. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 not be deemed to have been submitted for purposes of the Commission’s review. Paragraph (b)(5) of Proposed Rule 803 would establish the Commission review period for an application to register as an SBSEF. Proposed Rule 803(b)(5) is closely modeled on § 37.3(b)(5) and would require the Commission to approve or deny an application for registration as an SBSEF within 180 days of the filing of the application. Proposed Rule 803(b)(5) would further provide that, if the Commission notifies the person that its application is materially incomplete and specifies the deficiencies in the application, the running of the 180-day period would be stayed from the time of that notification until the application is resubmitted in completed form. In such a case, the Commission would have not less than 60 days to approve or deny the application from the time the application is resubmitted in completed form. Paragraph (b)(6)(i) of Proposed Rule 803, like § 37.3(b)(6)(i), would provide that the Commission shall issue an order granting registration upon a Commission determination, in its discretion, that the applicant has demonstrated compliance with the SEA and the Commission’s rules applicable to SBSEFs. Paragraph (b)(6)(i) would allow the Commission to issue an order granting registration, subject to conditions. Paragraph (b)(6)(ii) of Proposed Rule 803, modeled on § 37.3(b)(6)(ii), would provide that the Commission may issue an order denying registration upon a Commission determination, in its own discretion, that the applicant has not demonstrated compliance with the SEA and the Commission’s rules applicable to SBSEFs. If the Commission denies an application under Rule 803(b)(6)(ii), it would be required to specify the grounds for the denial. Paragraph (c) of Proposed Rule 803, like § 37.3(d), would address reinstatement of a dormant registration. Proposed Rule 803(c) would provide that a dormant SBSEF 52 may reinstate its registration under the procedures of Rule 803(b). Proposed Rule 803(c) 52 See Proposed Rule 802 (defining ‘‘dormant security-based swap execution facility’’ to mean ‘‘a security-based swap execution facility on which no trading has occurred for the previous 12 consecutive calendar months; provided, however, that no security-based swap execution facility shall be considered to be a dormant security-based swap execution facility if its initial and original Commission order of registration was issued within the preceding 36 consecutive calendar months’’). This definition is modeled on the definition of ‘‘dormant swap execution facility’’ found in § 40.1(f). PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 87161 would further provide that the applicant may rely upon previously submitted materials if such materials accurately describe the dormant SBSEF’s conditions at the time that it applies for reinstatement of its registration. Paragraph (d) of Proposed Rule 803, like § 37.3(e), would set out procedures for an SBSEF to request a transfer of registration. Paragraph (d)(1), which is closely modeled on § 37.3(e)(1), would provide that an SBSEF seeking to transfer its registration from its current legal entity to a new legal entity as a result of a corporate change shall file a request for approval to transfer such registration with the Commission in the form and manner specified by the Commission. Paragraph (d)(2), modeled on § 37.3(e)(2), would provide that a request for transfer of registration shall be filed no later than three months prior to the anticipated corporate change; or in the event that the SBSEF could not have known of the anticipated change three months prior to the anticipated change, as soon as it knows of that change. Paragraph (d)(3) of Proposed Rule 803, like § 37.3(e)(3), would require an SBSEF’s request for a transfer of registration to include the underlying agreement governing the corporate change, a description of the corporate change, a discussion of the transferee’s ability to comply with the SEA, the governing documents of the transferee, the transferee’s rules marked to show changes from the rules of the SBSEF, and specified representations by the transferee.53 Paragraph (d)(4) of Proposed Rule 803, modeled on § 37.3(e)(4), would provide that, upon review of a request for transfer of registration, the Commission, as soon as practicable, shall issue an order either approving or denying the request. Paragraph (e) of Proposed Rule 803, like § 37.3(f), would provide that an applicant for registration as an SBSEF may withdraw its application by filing a withdrawal request electronically with the Commission using the EDGAR system as an Interactive Data File in accordance with Rule 405 of Regulation S–T.54 Proposed Rule 803(e) would further provide that withdrawal of an application for registration shall not affect any action taken or to be taken by 53 See Proposing Release, supra note 1, 87 FR at 28880–81. 54 17 CFR 232.405. The proposed electronic filing requirement discussed above does not appear in the CFTC version of this provision. The Commission is adding this specification to implement the Inline XBRL and EDGAR electronic filing requirements for certain documents required by Regulation SE. See infra section XIII.A. E:\FR\FM\15DER2.SGM 15DER2 87162 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations the Commission based upon actions, activities, or events occurring during the time that the application was pending with the Commission. Paragraph (f) of Proposed Rule 803, like § 37.3(g), would provide that an SBSEF may request that its registration be vacated by filing a vacation request electronically with the Commission using the EDGAR system and must be provided as an Interactive Data File in accordance with Rule 405 of Regulation S–T at least 90 days prior to the date that the vacation is requested to take effect. 2. Comments and Analysis ddrumheller on DSK120RN23PROD with RULES2 (a) Registration Requirements, Generally Two commenters support the proposed SBSEF registration requirements under Rule 803 being modeled on the CFTC’s rules and state that, as market participants are familiar with CFTC’s requirements, they appreciate the Commission’s attempts to minimize registration burdens and expedite the establishment of the SBSEF regime.55 One commenter states that the Commission should ensure that all multilateral trading venues for SBS are required to register as an SBSEF, regardless of the specific trading protocol used.56 Another commenter argues that section 3D(a)(1) of the SEA requires the registration of any ‘‘facility for the trading or processing of SBS,’’ not just those that meet the statutory definition of SBSEF, which includes multiple-to-multiple trading.57 Accordingly, this commenter states that single-dealer platforms should be required to register as SBSEFs and to change their operations to offer multiple-to-multiple trading, consistent with the definition of SBSEF.58 One commenter asks the Commission to ‘‘make clear that the SBSEF registration requirement applies only to these types of platforms that are within the statutory and proposed regulatory 55 See SIFMA AMG Letter, supra note 18, at 5; see also Bloomberg Letter, supra note 18, at 11. 56 See Citadel Letter, supra note 18, at 9 (‘‘[A] security-based swap transaction executed via a fully electronic multilateral RFQ protocol should be subject to the same regulations as one executed by voice with the assistance of a voice broker (who may or may not be employed by the SBSEF)’’). 57 As discussed above, see supra note 38 and accompanying text, the statutory definition of SBSEF provides in relevant part that an SBSEF is ‘‘a trading system platform in which multiple participants have the ability to execute or trade security-based swaps by accepting bids and offers made by multiple participants. . . .’’ SEA section 3(a)(77), 15 U.S.C. 78c(a)(77) (emphasis added). This is sometimes referred to as ‘‘multiple-tomultiple trading.’’ 58 See Better Markets Letter, supra note 18, at 11– 13. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 definition and does not include any broader CFTC staff interpretations purporting to expand the SEF definition.’’ 59 This commenter states that CFTC Staff Letter 21–19 60 maintains that platforms can be required to register as SEFs ‘‘(i) even where multiple participants cannot simultaneously request, make, or accept bids and offers from market participants; or (ii) where multiple participants can initiate a one-to-many communication.’’ 61 The commenter states that extending the definition of SBSEF to include ‘‘facilities offering one-to-many or bilateral communications if more than one participant is able to submit an RFQ on the platform’’ would ‘‘contradict Congress’ express intent’’ to limit the scope of SBSEF registration requirements to multiple-to-multiple platforms; that the Commission should make clear that the CFTC staff guidance is inapplicable to SBSEFs; and that the Commission should confirm that it is not adopting or incorporating, explicitly or implicitly, similar guidance.62 The Commission agrees with the comment that the definition of SBSEF applies to multilateral trading facilities regardless of the specific trading protocol used. As the statutory definition of SBSEF makes clear, a trading facility would fall under the definition of SBSEF if it offers ‘‘multiple participants the ability to execute or trade security-based swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce. . . .’’ 63 Whether a specific instance or practice of brokering in fact offers multiple participants the ability to accept the bids or offers made by multiple participants, though, will depend on the attendant facts and circumstances of that instance or practice. The Commission does not, however, agree with the comment that the language of SEA section 3D(a)(1) means that single-dealer platforms for trading SBS must register as SBSEFs and, consistent with the statutory definition of SBSEF, change their operations to provide multiple-tomultiple trading. SEA section 3D is titled ‘‘Security-based swap execution 59 See MFA Letter, supra note 18, at 3. CFTC Staff Advisory on Swap Execution Facility Registration Requirement, Letter No. 21–19 (Sept. 29, 2021), available at https://www.cftc.gov/ node/238336. 61 See MFA Letter, supra note 18, at 3 (quoting CFTC Staff Letter No. 21–19, supra note 60 (emphasis in original)). 62 MFA Letter, supra note 18, at 3–4 (internal quotations omitted). 63 SEA section 3(a)(77), 15 U.S.C. 78c(a)(77) (emphasis added). 60 See PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 facilities,’’ and section 3D(a)(1) states, in full, ‘‘No person may operate a facility for the trading or processing of securitybased swaps, unless the facility is registered as a security-based swap execution facility or as a national securities exchange under this section.’’ 64 The Commission is not persuaded that the phrase ‘‘facility for the trading or processing of securitybased swaps’’ in this context can reasonably be read to apply more broadly to encompass anything other than an SBSEF or an SBS exchange. Since the definitions of both SBSEF and exchange include the concept of multiple-to-multiple trading,65 singledealer ‘‘one-to-many’’ trading platforms that do not offer multiple-to-multiple trading are outside the scope of the provisions of section 3D(a)(1). It is not necessary to incorporate the guidance in CFTC Staff Letter 21–19 into this release, because the CFTC staff letter in large part refers to fact-specific circumstances that the Commission has yet to encounter since Reg SE is not yet effective and the application of the SBSEF definition depends on the particular facts and circumstances of a platform’s structure and operations. For the same reason, it would be premature to reject the possibility of taking a position similar to that of the CFTC guidance with regard to SBSEFs, as one commenter suggested.66 Moreover, because the statutory definition of SBSEF does not include the word ‘‘simultaneous,’’ the Commission declines to issue its own guidance to reflect a requirement for simultaneity here. Where operators of SBS trading platforms have questions about the facts and circumstances particular to their situations, they can discuss their particular circumstances with Commission staff. (b) Abbreviated Registration Procedures for CFTC-Registered SEFs Several commenters state that the Commission should use its exemptive authority to provide a streamlined registration process for SBSEFs that are already registered with the CFTC as 64 SEA section 3D(a)(1), 15 U.S.C. 78c–4(a)(1). SEA section 3(a)(77), 15 U.S.C. 78c(a)(77) (defining SBSEF in relevant part as ‘‘a trading system or platform in which multiple participants have the ability to execute or trade security-based swaps by accepting bids and offers made by multiple participants in the facility or system . . .’’); SEA section 3(a)(1), 15 U.S.C. 78c(a)(1) (defining an exchange in relevant part as ‘‘any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities’’) (emphasis added). 66 See supra notes 59–62 and accompanying text. 65 See E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 SEFs.67 One commenter states that, because many entities will likely be registering with both the Commission and the CFTC, a streamlined SBSEF registration process will ease the burden of new requirements imposed on potential dual-registrants.68 This commenter further states that allowing currently registered CFTC SEFs to become SEC-registered SBSEFs would be more efficient and would more quickly kick-start the Commission’s SBS regime. This commenter thus supports the use of exemptive authority for SEFs that are currently registered, provided that the Commission’s approach to exemptive authority does not disrupt the existing market structure and the relationships between venues and participants. Another commenter states that a streamlined registration process for SEFs currently registered and in good standing with the CFTC would have the potential to lower the costs of registration and encourage the entry of market participants.69 One commenter that supports a streamlined SBSEF registration process for SEFs states that a prolonged registration process, particularly for venues already registered with the CFTC, only further delays the introduction of regulated price discovery, liquidity formation, and trade execution for SBS.70 This commenter also states that SBSEF registration also further expedites SBS data reporting to the extent SBSEFs will report trades to an SBS swap data repository under the Commission’s Regulation SBSR, as this service cannot be provided until SBSEFs are registered and operational. If the Commission were not to retain the exemptive authority within Rule 803, this commenter supports a process that gives deference to existing CFTC SEFs and provides a more streamlined process for such registrants. The commenter states that, as the Commission observed in the proposing release, most of the SBS liquidity will likely be centralized around a few facilities, with most (if not all) of them already operating CFTC-regulated SEFs.71 Another commenter states that SEFs that are currently registered and in good standing with the CFTC should be permitted to register with the Commission utilizing their current documentation filed pursuant to the 67 See SIFMA AMG Letter, supra note 18, at 5; Bloomberg Letter, supra note 18, at 11; WMBAA Letter, supra note 18, at 3; ICE Letter, supra note 18, at 5. 68 See SIFMA AMG Letter, supra note 18, at 5. 69 See Bloomberg Letter, supra note 18, at 11. 70 See WMBAA Letter, supra note 18, at 3. 71 See WMBAA Letter, supra note 18, at 3–4. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 requirements of Form SEF.72 This commenter states that CFTC registered SEFs are required to keep their Form SEF and its exhibits current through post-registration amendments and that, as the Commission is modeling proposed Form SBSEF on the CFTC’s Form SEF, substituting the forms should not be problematic for the Commission to review. The commenter states that the Commission should permit registered SEFs seeking to register as an SBSEF to submit their Form SEF and exhibits, with an accompanying addendum reflecting only those changes necessary to fulfill the specific requirements of proposed Regulation SE, in lieu of filing a new Form SBSEF. One commenter, however, stated that ‘‘relaxing or eliminating any registration requirements would be highly inappropriate,’’ and argued that the Commission must be ‘‘rigorous in reviewing and approving SBSEFs applicants while upholding complete impartiality.’’ 73 This commenter further states that both active SEFs and nonSEFs seeking to register SBSEFs ‘‘must be held under the same standard to avoid any conflict of interests.’’ 74 Therefore, this commenter states that the Commission should not use exemptive authority under SEA section 36(a)(1) to adopt an abbreviated procedure for SEFs seeking to register as SBSEFs, because doing so would rely on the ‘‘CFTC’s biased judgment’’ and would not permit an ‘‘unprejudiced determination’’ by the Commission.75 In the Proposing Release, the Commission stated that it was considering that, after adopting final rules establishing a registration process for SBSEFs, it could exercise its exemptive authority under section 36(a)(1) of the SEA 76 to relax or eliminate entirely certain of the registration requirements for entities that are already registered as SEFs with the CFTC.77 The Commission recognizes that many of the entities that will seek registration with the Commission as SBSEFs are already registered with the CFTC as SEFs. Entities that seek dual registration presumably see efficiencies in utilizing the same systems, policies, and procedures to trade both swaps and SBS. As noted throughout this release, the Commission has sought to harmonize the SBSEF regulatory regime as closely as practicable with the 72 See ICE Letter, supra note 18, at 5. from J. T. at 1 (May 26, 2022). 73 Letter 74 Id. 75 Id. 76 15 U.S.C. 78mm(a)(1). Proposing Release, supra note 1, 87 FR at 77 See 28882. PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 87163 CFTC’s SEF regulatory regime, achieving similar regulatory benefits as the CFTC regime while minimizing costs so as to impose only marginal costs on dually registered SEF/SBSEFs and their members. As a result of these harmonized regimes, SEFs that seek dual registration with the SEC would likely need to make only minor adjustments to their rules and trading procedures to support trading of SBS in addition to the trading of swaps. While one commenter states that it would be inappropriate to relax or eliminate any SBSEF registration requirements for CFTC-registered SEFs,78 an entity’s status as a registered SEF in good standing with the CFTC is relevant when considering its application to register as an SBSEF and that reducing the registration burden for CFTC-registered SEFs, where possible, is appropriate. However, granting exemptive relief under section 36(a)(1), which this commenter opposes, or providing for a formally abbreviated SBSEF registration regime for CFTCregistered SEFs is not necessary to accomplish expedited registration and reduced registration burdens.79 Requiring all applicants to submit Form SBSEF will support consistency in the review by the Commission and its staff of applications for registration of SBSEFs, which will include a review of the proposed rules for the SBSEFs. The Commission expects that prospective SBSEFs will be able to use the information in their SEF applications to complete their SBSEF applications, as discussed below. For the reasons discussed above, the Commission is adopting Rule 803 as proposed, with minor technical modifications.80 B. Form SBSEF The Commission proposed new § 249.2001 to require that entities use Form SBSEF to register with the Commission as an SBSEF. Form SBSEF would also be used for submitting any 78 See supra note 75 and accompanying text. the Proposing Release, the Commission stated that it was ‘‘preliminarily considering’’ that it would exercise exemptive authority under section 36(a)(1) of the Act, 15 U.S.C. 78mm(a)(1), ‘‘to relax or eliminate entirely certain of the registration requirements for entities that are already registered as SEFs with the CFTC.’’ Proposing Release, supra note 1, 87 FR at 28882. 80 See supra note 32. The Commission is also deleting the header text ‘‘Minimum trading functionality’’ from paragraph (a)(3), and is adding the header text ‘‘Request to register’’ to paragraph (b)(1), in order to maintain consistency of style in the regulatory text. Additionally, the Commission is removing the requirement to use an Interactive Data File for filing requests to withdraw or vacate an application for registration pursuant to Rules 803(e) and 803(f). See infra section XIII.A. 79 In E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87164 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations updates, corrections, or supplemental information to a pending application for registration. Form SBSEF is closely modeled on the CFTC’s Form SEF for entities that seek to register with the CFTC as SEFs, with only minor changes to remove from the form the concept of post-registration amendments, as the proposed rule would not require any amendments to Form SBSEF postregistration. The exhibits that were proposed along with Form SBSEF are very similar to the exhibits in Form SEF. As with Form SEF, each applicant submitting a Form SBSEF would be required to provide the Commission with documents and descriptions pertaining to its business organization, financial resources, and compliance program, including various documents describing the applicant’s legal and financial status. An applicant would be required to disclose any affiliates, provide a brief description of the nature of the affiliation, and submit copies of any agreements between the SBSEF and third parties that would assist the applicant in complying with its duties under the SEA. In addition, an applicant would be required to demonstrate operational capability through documentation, including technical manuals and third-party service provider agreements. Under Rule 803(b)(1), an applicant for SBSEF registration would be required to complete Form SBSEF and provide, upon the Commission’s request, any additional necessary information and documentation in order review the application. The determination as to when an application submission is complete would be at the sole discretion of the Commission. The Commission would review Form SBSEF and, at the conclusion of its review, by order either: (i) grant registration; (ii) deny the application for registration; or (iii) grant registration subject to certain conditions. After an applicant is granted registration, any updates or amendments to the information contained in its Form SBSEF by an active SBSEF would be required to be submitted as rules or rule amendments under Rule 806 or Rule 807 or as may be required by other rules in Regulation SE. One commenter states that the Commission should closely harmonize the rules for SBSEF registration with the CFTC’s rules, with the exception of Exhibits D and H of Form SBSEF, which require: (a) a list of all affiliates and a description of any material pending legal proceedings of such affiliates, and (b) the financial statements of the affiliates. This commenter states that the information required by these exhibits is VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 ‘‘burdensome and not fit for purpose’’ and should not be required unless the affiliate provides support services to the SBSEF or the legal proceedings are expected to have a material effect on the applicant or the operation of its proposed SBSEF.81 As discussed above, several commenters expressed support for the Commission providing an expedited process for CFTC-registered SEFs that wish to register as SBSEFs. The CFTC adopted rules for the registration and regulation of SEFs in 2013,82 and the CFTC’s process for registering SEFs appears to be well understood by the industry and well designed for being adapted to the SBS market. Therefore, the Commission has used the CFTC’s process as a basis for its own process for registering SBSEFs, and information about SBSEF affiliates is relevant to the Commission’s oversight of SBSEFs and, in particular, oversight of SBSEF compliance with Rule 828 (conflicts of interest).83 In addition, we assume that most if not all SBSEFs will be dually registered as SEFs. However, while the content and exhibits of Form SBSEF closely match the form and content of Form SEF, exhibits to Form SEF are provided to the CFTC as unstructured documents, whereas most exhibits to Form SBSEF will be provided to the Commission as structured, machine-readable documents. Permitting SBSEFs to provide copies of Form SEF exhibits in lieu of Form SBSEF exhibits, while likely resulting in an expedited registration process for most SBSEFs, would also potentially result in a much higher volume of unstructured data, making the Form SBSEF disclosures more difficult for market participants and the Commission to analyze in an efficient manner. Thus, notwithstanding some commenters’ support for an expedited registration process, the final rules do not permit SBSEFs to provide copies of Form SEF exhibits in lieu of Form SBSEF exhibits. The Commission is therefore adopting 17 CFR 249.2001 as proposed, but is renumbering it as 17 CFR 249.1701 under new subpart R (‘‘Forms for Registration of, and Filings by, Security-Based Swap Execution Facilities’’) and is making a minor technical correction.84 81 See 82 See Bloomberg Letter, supra note 18, at 11. 2013 CFTC Final SEF Rules Release, supra note 9. 83 See infra section VI.K. 84 The Commission is correcting the text in Instruction 20 to Form SBSEF to read ‘‘a list with the name(s) of the clearing agency(ies)’’ instead of ‘‘a list of the name of the clearing organization(s).’’ PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 IV. Rule and Product Filings by SBSEFs Unlike section 19(b) of the SEA,85 which sets out a process whereby national securities exchanges and other SROs submit filings to the Commission to add, delete, or amend rules (including rules to list products), section 3D of the SEA 86 does not set out an equivalent process for SBSEFs, which are not SROs. It can be expected, however, that an SBSEF will seek to change its rules over time in order, for example, to implement new trading methodologies and to expand its product offerings to make its market more attractive to participants, and adopting rules for filings related to these changes will promote public transparency regarding the changes, as well as consistent handling of those filings by the Commission. An appropriate review process is necessary to assess whether changes to an SBSEF’s rules and product offerings are consistent with section 3D of the SEA and the Commission’s rules thereunder, and the CFTC’s filing procedures are an appropriate model on which to base the Commission’s own filing procedures. Furthermore, because of the likelihood that most if not all SBSEFs will be dually registered with the CFTC as SEFs, and that many rule changes for a dual registrant will affect both its SBS and swap trading businesses, close harmonization with the CFTC’s filing procedures would allow a dual registrant to make a similar filing to each agency, allowing each agency to carry out its oversight functions while minimizing the burdens on dual registrants. Parts 37 and 40 of the CFTC’s rules set out processes whereby SEFs may establish or amend rules and list products. These processes allow a SEF to voluntarily submit a rule, rule amendment, or new product for CFTC review and approval, or to ‘‘self-certify’’ that a rule, rule amendment, or new product meets applicable standards under the CEA and the CFTC’s rules thereunder without obtaining CFTC approval, although the CFTC retains the ability, in certain circumstances, to stay the self-certification for further review before it may become effective. Using its general authority to impose any requirement on SBSEFs and to prescribe rules governing the regulation of SBSEFs,87 the Commission proposed to 85 15 U.S.C. 78s(b). U.S.C. 78c–4. 87 See 15 U.S.C. 78c–4(d)(1)(A)(ii) (requiring an SBSEF, in order to be registered and to maintain registration, to comply with any requirement that the Commission may impose by rule or regulation); 15 U.S.C. 78c–4(f) (directing the Commission to prescribe rules governing the regulation of SBSEFs). 86 15 E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations establish similar filing processes for registered SBSEFs in Rules 804 to 810 of Regulation SE.88 A. Rule 804—Listing Products for Trading by Certification 1. Summary of the Proposed Rule ddrumheller on DSK120RN23PROD with RULES2 Proposed Rule 804 is modeled on 17 CFR 40.2 of the CFTC’s rules and would set forth procedures by which an SBSEF may list a product via certification. Paragraph (a)(1) of Proposed Rule 804 would require an SBSEF to file its submission electronically with the Commission using the EDGAR system as an Interactive Data File in accordance with Rule 405 of Regulation S–T. Paragraph (a)(2) of Proposed Rule 804 would provide that the Commission must receive the submission by the open of business on the business day that is 10 business days preceding the product’s listing.89 Paragraph (a)(3) of Proposed Rule 804 would require a self-certification to include a copy of the submission cover sheet; 90 a copy of the product’s rules, including all rules related to its terms and conditions; the intended listing date; a certification by the SBSEF that the product to be listed complies with the SEA and the Commission’s rules thereunder; a concise explanation and analysis of the product and its compliance with applicable provisions of the SEA, including the Core Principles, and the Commission’s rules thereunder; a certification that the SBSEF posted a notice of pending product certification with the Commission and a copy of the submission, concurrent with the filing of a submission with the Commission, on the SBSEF’s website; 91 and a request 88 The CFTC has proposed to amend the rules that govern how CFTC-registered entities submit selfcertifications and requests for approval of their rules, rule amendments, and new products for trading and clearing, as well as the CFTC’s review and processing of such submissions. See CFTC, Provisions Common to Registered Entities (Notice of Proposed Rulemaking), 88 FR 61432 (Sept. 9, 2023). The CFTC’s proposing release states that the proposed amendments ‘‘are intended to clarify, simplify and enhance the utility of those regulations for market participants and the [CFTC].’’ Id. at 61432. The CFTC has not yet taken action on this proposal. 89 By contrast, the parallel provision in § 40.2(a) provides that a DCM or SEF must file the selfcertification only one business day before listing the product. See § 40.2(a)(2) (one of the conditions for a valid self-certification of a product is that the CFTC has received the submission by the open of business on the business day preceding the product’s listing). 90 The Commission proposed, in new § 249.2002, a submission cover sheet (with instructions) that is closely modeled on the CFTC’s submission cover sheet. 91 Under Rule 804(a)(3)(vi), information that the SBSEF seeks to keep confidential can be redacted VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 for confidential treatment, if appropriate, as permitted pursuant to SEA Rule 24b–2.92 Paragraph (b) of Proposed Rule 804, modeled on § 40.2(b), would provide that, if requested by Commission staff, an SBSEF shall provide any additional evidence, information, or data that demonstrates that the SBS meets, initially or on a continuing basis, the requirements of the SEA or the Commission’s rules or policies thereunder. Paragraph (c)(1) of Proposed Rule 804 would provide that the Commission may stay the certification of a new product by issuing a notification informing the SBSEF that the Commission is staying the certification on the grounds that the product presents novel or complex issues that require additional time to analyze, is accompanied by an inadequate explanation, or is potentially inconsistent with the SEA or the Commission’s rules thereunder.93 Under paragraph (c)(1), the Commission would have an additional 90 days from the date of the notification to conduct the review. Paragraph (c)(2) would require the Commission to provide a 30-day comment period during that 90-day period, and to publish a notice of the 30-day comment period on the Commission’s website. Comments from the public could be submitted as specified in that notice. Paragraph (c)(3) would provide that the product that had been stayed would from the documents published on the SBSEF’s website but would have to be republished consistent with any determination made pursuant to SEA Rule 24b–2. 92 Section 40.2(a)(3) instructs filers to make any request for confidential treatment pursuant to § 40.8 of the CFTC’s rules, which in turn cross-references 17 CFR 145.9. The Commission proposed instead to direct filers to make any request for confidential treatment pursuant to existing SEA Rule 24b–2. See supra note 51. 93 Rule 807(c) is based on § 40.2(c), which provides that the CFTC may stay the listing of a contract pursuant to paragraph (a) of this section during the pendency of CFTC proceedings for filing a false certification or during the pendency of a petition to alter or amend the contract terms and conditions pursuant to section 8a(7) of the CEA. The SEA does not include the CEA’s provisions regarding altering or amending the terms and conditions of an SBS listed by an SBSEF like the authority granted to the CFTC with respect to products listed by SEFs, such that the Commission would be able to stay the listing of an SBS that it believes may be inconsistent with the SEA, pending proceedings to exercise that authority. Nor are proceedings for false certification of an SBS contemplated by the SEA. For this reason, in lieu of harmonizing with § 40.2(c), the Commission proposed, in Rule 804(c), a provision that would allow the Commission to stay the certification of a new product in the same manner that Rule 807(c) would allow the Commission to stay the selfcertification of a new rule or rule amendment. PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 87165 become effective, pursuant to the certification, at the expiration of the 90day review period, unless the Commission withdraws the stay prior to that time, or the Commission notifies the SBSEF during the 90-day time period that it objects to the proposed certification on the grounds that the proposed product is inconsistent with the SEA or the Commission’s rules. 2. Comments and Analysis One commenter states that, while the proposed self-certification process does include improvements to the CFTC’s self-certification process, including extending the initial review period from one business day to 10 business days and expanding the scope of reasons for staying the self-certification, it is still fundamentally flawed. This commenter states that the CFTC’s self-certification process is mandated by statute and that, in the absence of any statutory mandate analogous to that applicable to the CFTC, the Commission must, at the very least, provide a coherent policy justification for its proposed selfcertification process.94 This commenter states that it is not clear why it is necessary or desirable for SBSEFs to be able to bring new products to the market ‘‘speedily’’ and that selfcertification turns the regulatory process on its head, creating in effect a presumption of regulatory compliance and putting the onus on the agency, under a predetermined timeline, to fully evaluate a proposed product that may threaten significant harm to investors and market stability.95 This is especially the case, the commenter states, considering the context in which the SEC was given comprehensive authority to regulate and oversee the SBS market, i.e., a financial crisis caused in large part by SBS and other novel financial products whose risks regulators and market participants thought were well understood, but in fact were not. Given this context, the commenter states, it ‘‘makes little policy sense to establish a regime whereby an SBSEF could introduce a new potentially dangerous product to the financial system without an affirmative, independent SEC 94 See Better Markets Letter, supra note 18, at 13. Better Markets Letter, supra note 18, at 13– 14; see also Letter from Bryce Keeney (Apr. 27, 2022) (‘‘Keeney Letter’’) (stating that ‘‘[d]erivatives are not the purpose of the market’’ and that the Commission should ‘‘align rules to focus on the primary purpose, not to support tertiary aspects that result in systemic risk and systemic abuse’’); Letter from Kevin (Apr. 20, 2023) (‘‘Kevin Letter’’) (stating that the proposed rules do not protect retail investors and that ‘‘[c]reating a self governing regime, allowing easier swaps trading across borders, exemption exchanges and registered brokers . . . sound like a terrible recipe for disaster in a multi-trillion marketplace’’). 95 See E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87166 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations determination that such product not only complies with the SBSEF Core Principles and other requirements, but also that it does not pose an unwarranted danger to investors, the financial system, and the broader economy.’’ 96 For several reasons the Commission does not agree with the objections raised by this commenter. First, the Commission does not agree that the selfcertification process of Rule 804 either ‘‘turns the regulatory process on its head’’ or would deny the Commission the opportunity to ‘‘fully evaluate a proposed product that may threaten significant harm to investors and market stability.’’ 97 The ability of the Commission to stay the effectiveness of any product self-certification, to seek public comment on that selfcertification, and to object to (i.e., effectively disapprove) the proposed certification on the grounds that the product is inconsistent with the SEA or the Commission’s rules will provide the Commission with sufficient opportunity (including the opportunity to seek public comment) to consider the selfcertified rules and take steps to protect investors and maintain fair, orderly, and efficient markets. Further, the selfcertification process does not create a ‘‘presumption of compliance,’’ because: (a) Rule 804(b) requires an SBSEF to provide, at Commission request, any ‘‘additional evidence, information, or data that demonstrates that the SBS meets, initially or on a continuing basis, the requirements of the SEA or the Commission’s rules or policies thereunder’’; (b) Rule 804(c)(1) permits the Commission to suspend a new product certification because ‘‘the product presents novel or complex issues that require additional time to analyze, is accompanied by an inadequate explanation, or is potentially inconsistent with the SEA or the Commission’s rules thereunder’’ (emphasis added); and (c) Rule 804(c)(3) does not create a presumption of compliance but instead provides the Commission a mechanism by which to object to a proposed certification ‘‘on the grounds that the proposed product is inconsistent with the SEA or the Commission’s rules.’’ 98 Second, given the relationship between the swaps market and the SBS market, as well as the likelihood that 96 Better Markets Letter, supra note 18, at 13–14. supra note 96 and accompanying text. 98 Section IV.D, infra, discusses the process for self-certification of rule changes, including the Commission’s ability to stay the effectiveness of such a filing, which would lead to a public comment period and the opportunity for the Commission to object to the certification. 97 See VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 most or all entities seeking to register as SBSEFs will be CFTC-registered SEFs, harmonization with the CFTC filing procedures for new products should facilitate the ability of entities to dually register and minimize costs by allowing incumbent SEFs to use their existing systems, policies, and procedures to comply with the Commission’s SBSEF rules. The aim of the rule is, however, not merely to allow SBSEFs to bring products to market ‘‘speedily,’’ or at minimal cost, and, as discussed below in this section, it is appropriate for its rules to provide for a longer review period than the CFTC’s rules. And third, the Commission disagrees with this commenter’s view that the self-certification process ‘‘would pose an unwarranted danger to investors, the financial system, and the broader economy.’’ The new-product provisions of Regulation SE must be read in the context of the other relevant provisions of Title VII of the Dodd-Frank Act and the Commission’s rules thereunder, which include, among other things, rules governing the registration and regulation of Security-Based Swap Dealers (‘‘SBSDs’’) and Major SecurityBased Swap Participants (‘‘MSBSPs’’); 99 capital, margin, and segregation requirements for SBSDs and MSBSPs; 100 business conduct standards and chief compliance officer requirements for SBSDs and MSBSPs; 101 and post-trade reporting and public dissemination of SBS transactions.102 Because of the significant role these other rules play in addressing potential risks posed by SBS, the Commission’s ability to require SBSEFs to provide any evidence, information, or data demonstrating that the SBS meets, initially or on a continuing basis, the requirements of the SEA or the Commission’s rules or policies thereunder, and the Commission’s ability to suspend and ultimately object to SBSEF self99 See Registration Process for Security-Based Swap Dealers and Major Security-Based Swap Participants, SEA Release No. 75611 (Aug. 5, 2015), 80 FR 48963 (Aug. 14, 2015) (‘‘SBSD and MSBSP Registration Release’’). 100 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital and Segregation Requirements for Broker-Dealers, SEA Release No. 86175 (June 21, 2019), 84 FR 43872 (Aug. 22, 2019) (‘‘Capital, Margin, and Segregation Release’’). 101 See Business Conduct Standards for SecurityBased Swap Dealers and Major Security-Based Swap Participants, SEA Release No. 77617 (Apr. 14, 2016), 81 FR 29959 (May 13, 2016) (‘‘Business Conduct Standards Release’’). 102 See Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, SEA Release No, 78321 (July 14, 2016), 81 FR 53546 (Aug. 12, 2016) (‘‘Regulation SBSR Release’’). PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 certifications, are appropriate to protect investors, the financial system, and the broader economy with respect to new SBSEF products and rules.103 Thus, the self-certification process in this context is appropriate for the underlying aims of the Dodd-Frank Act. Two commenters state that the relatively low volume of SBS products expected to be self-certified supports a shorter review period than the proposed ten-business-day Commission review period.104 Both commenters recommend a shorter review period of one day to harmonize with the CFTC’s approach.105 Alternatively, one of the commenters suggests a two-day review period.106 This commenter suggests that a shorter review period would be beneficial to allow market operators to meet participants’ demands to transact on regulated platforms in a reasonable period of time.107 The commenter also states that a shorter review period would accommodate participants’ needs to hedge risk in a timely manner.108 The other commenter states that a longer review period would reduce the competitive benefit to SBSEFs that develop new products because a 10-day review period would enable competitors to list similar products.109 This commenter also suggests varying from the one-day review period in certain limited circumstances, such as when an SBSEF submits an SBS for a madeavailable-to-trade determination.110 While a ten-day review period differs from the CFTC’s one-day review period, one business day would not provide the SEC staff sufficient time to review a new product filing for error or incompleteness, let alone review a new product for compliance with the SEA or Regulation SE. Further, if a product does warrant a stay, the Commission would also need sufficient time to go through the administrative steps of formally issuing the stay.111 The 103 The Commission’s rules for SBSEFs do not directly affect retail investors. Only eligible contract participants (‘‘ECPs’’) are eligible to trade on an SBSEF, see section 6(l) of the SEA, 15 U.S.C. 78f(l), and retail investors would have access to an SBS only after an SBS exchange has filed a proposed rule change with the Commission under Rule 19b– 4, 17 CFR 240.19b–4, to amend its rules to permit the listing of a registered SBS, with that proposed rule change being published for public comment. 104 See WMBAA Letter, supra note 18, at 4; ICE Letter, supra note 18, at 2. 105 See WMBAA Letter, supra note 18, at 4; ICE Letter, supra note 18, at 2. 106 See WMBAA Letter, supra note 18, at 4. 107 See id. 108 See id. 109 See ICE Letter, supra note 18, at 3. 110 See id. 111 See infra sections XV.D and XV.E (delegating authority to the Director of the Division of Trading and Markets to stay the effectiveness of a self- E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 proposed ten-business-day review period for self-certified products also accords with the CFTC’s ten-businessday review period for self-certified rules,112 which the Commission is replicating in Rule 807(a)(3).113 Further, while a shorter review period may allow SBS to trade on an SBSEF more quickly, failing to provide the Commission with a meaningful period for review of a new product would hamper the Commission’s ability to protect market participants and maintain fair, orderly, and efficient SBS markets. A ten-day review period would still permit market participants to trade SBS on regulated platforms within a ‘‘reasonable period’’ and would provide the Commission the time it needs to review submissions. The Commission also disagrees with the comment that a shorter review period is necessary to accommodate market participants’ need to hedge risk in a timely manner. During the relatively brief and time-limited period for Commission review of an SBSEF new-product filings, market participants would remain able to hedge that risk in other ways, such as in the OTC SBS market or other related securities markets, depending on the risk to be managed. Finally, while the 10-day review period might reduce the first-to-market competitive advantage of an SBSEF that first lists a given SBS,114 the extent of such an advantage may vary considerably based on other factors in the SBSEF market, and that, in any event, the need for the Commission to have sufficient time to review a new product before it is listed justifies the potential competitive effect. Thus, a ten-business-day review period strikes an appropriate balance between allowing SBSEFs to list new products quickly and affording Commission staff a sufficient time period in which to assess those products prior to listing. One commenter asks the Commission to confirm that it does not expect SBSEFs to self-certify for every security for which there may exist a related SBS.115 This commenter states that, for example, while an SBSEF may publish certification and to extend the period for consideration of a new product). 112 See § 40.6(a)(3) (one of the conditions for a valid self-certification of a rule or rule amendment is that the CFTC has received the submission not later than the open of business on the business day that is 10 business days prior to the registered entity’s implementation of the rule or rule amendment). 113 See infra section IV.D. 114 Cf. ICI Letter, supra note 18, at 9 n.29 (discussing ‘‘first mover’’ advantage in the context of an SBSEF that has made an SBS available to trade). 115 See WMBAA Letter, supra note 18, at 4. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 ‘‘terms and conditions’’ relevant for an instrument (like a single-name total return SBS) under Rule 804, the Commission might receive thousands of underlying national market system equity stocks from each SBSEF, exponentially increasing the number of products the Commission would need to review. The commenter also states that, given the potential 10-day review period (compared to the CFTC’s shorter timeframe), SBSEFs will be forced to proactively self-certify every potential SBS in an attempt to meet all potential participant demand without a two-week delay, only increasing the volume of self-certifications the Commission may receive. This commenter states that listing the instrument, and not each equity that may be linked to the instrument, is an appropriate approach to balance the SBSEFs and the Commission’s resources with respect to product self-certification. The Commission is conscious of the large number of individual SBS that may constitute a ‘‘class’’ of SBS, such as single-name, total return SBS given as an example by the commenter. While an SBSEF should not necessarily be required to make an individual filing for each of the securities underlying a single such class of SBS, a filing for a simple class certification that merely described the parameters of the SBS covered by the certification would not necessarily provide sufficient information for the Commission to determine whether all the potential products covered by the class are consistent with the SEA and the rules thereunder, including Regulation SE. Therefore, while the Commission is not providing for ‘‘class certifications’’ of SBS, the Commission will not necessarily require separate submissions for each underlying security.116 The Commission will consider submissions for an SBS that might overlie one or more of a list of securities, provided that those potential underlying securities are specifically identified and that the submission addresses, as part of the requirement in Rule 804 to submit ‘‘a concise explanation and analysis of the product and its compliance with applicable provisions of the Act, including core principles, and the Commission’s rules thereunder,’’ 117 why all included underlying securities meet the applicable provisions of the 116 By contrast, paragraph (d) of § 40.2 provides that a DCM or SEF may submit a class certification of swaps based on an ‘‘excluded commodity,’’ subject to certain conditions. See section 1a(19) of the CEA, 7 U.S.C. 1a(19) (defining ‘‘excluded commodity’’). 117 Rule 804(a)(3)(v). PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 87167 SEA and the Commission’s rules thereunder.118 Accordingly, for the reasons discussed above, the Commission is adopting Rule 804 as proposed, with the exception of the proposed Inline XBRL and EDGAR filing requirements, and with minor technical modifications.119 B. Rule 805—Voluntary Submission of New Products for Commission Review and Approval Proposed Rule 805 is closely modeled on § 40.3 of the CFTC’s rules and would set forth procedures by which an SBSEF may voluntarily submit new SBS products for Commission review and approval. Paragraph (a) of Proposed Rule 805 would adapt these requirements for SBSEFs.120 First, an SBSEF would be required to file its submission electronically with the Commission using the EDGAR system as an Interactive Data File in accordance with Rule 405 of Regulation S–T. The filing would also have to include a copy of the submission cover sheet, a copy of the rules that set forth the terms and conditions of the SBS to be listed, and an explanation and analysis of the product and its compliance with applicable provisions of the SEA, including the Core Principles and the Commission’s rules thereunder.121 The submission would also have to describe any agreements or contracts entered into 118 For example, a submission might cover a single-name total return SBS on any of the components of a given index, provided that the submission explains why the minimum criteria for inclusion in that index are sufficient to ensure that the proposed SBS are consistent with the requirements of the SEA and the rules thereunder, including Regulation SE. 119 See supra note 32. As described in further detail in the discussion of electronic filing systems and structured data, the Commission will require all rule and product filings required by Rules 804 through 807 and 816 to be filed in unstructured format through EFFS, rather than in Inline XBRL through EDGAR. See infra section XIII.A. 120 Paragraph (a) of Rule 805 omits two provisions in § 40.3(a). First, § 40.3(a)(6) requires the submitting entity to include the certifications required in 17 CFR 41.22 for product approval of a commodity that is a security future or a security futures product, as defined in sections 1a(44) or 1a(45) of the CEA, respectively. The Commission did not propose to adapt this provision into proposed Regulation SE because it pertains to security futures and security futures products, not to swaps or SBS. Second, § 40.3(a)(8) requires the submitting entity to include a filing fee. The Commission is not proposing to charge SBSEFs filing fees for submitting new product proposals. 121 This explanation and analysis would have to either be accompanied by the documentation relied upon to establish the basis for compliance with the applicable law, or incorporate information contained in such documentation, with appropriate citations to data sources. E:\FR\FM\15DER2.SGM 15DER2 87168 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 with other parties that enable the SBSEF to carry out its responsibilities. Furthermore, paragraph (a) of Proposed Rule 805, modeled on § 40.3(a), would require the SBSEF to include, if requested by Commission staff, additional evidence, information, or data demonstrating that the SBS meets, initially or on a continuing basis, the requirements of the SEA, or other requirement for registration under the SEA, or the Commission’s rules or policies thereunder. The SBSEF would be required to submit the requested information by the open of business on the date that is two business days from the date of request by Commission staff, or at the conclusion of such extended period agreed to by Commission staff after timely receipt of a written request from the SBSEF. Paragraph (a) of Proposed Rule 805, like § 40.3(a), would permit the submitting SBSEF to include a request for confidential treatment.122 Finally, paragraph (a) of Proposed Rule 805, like § 40.3(a), would require the SBSEF to certify that it posted a notice of its request for Commission approval of the new product and a copy of the submission, concurrent with the filing of a submission with the Commission, on the SBSEF’s website.123 Paragraph (b) of Proposed Rule 805, like § 40.3(b), would provide that the Commission shall approve a new product unless the terms and conditions of the product violate the SEA or the Commission’s rules thereunder. Paragraph (c) of Proposed Rule 805, modeled on § 40.3(c), would provide that a product submitted for Commission approval under Rule 805 shall be deemed approved by the Commission 45 days after receipt by the Commission, or at the conclusion of an extended period as provided under Rule 805(d), unless notified otherwise within the applicable period, if the submission complies with the requirements of Rule 805(a) and the SBSEF does not amend the terms or conditions of the product or supplement the request for approval, except as requested by the Commission or for correction of typographical errors, renumbering, or other non-substantive revisions, during that period. Paragraph (c) would also provide that any voluntary, substantive amendment by 122 Section 40.3(a), like § 40.2(a)(3), instructs filers to make any request for confidential treatment pursuant to § 40.8 of the CFTC’s rules, which in turn cross-references § 145.9. As noted previously, the Commission proposes instead to direct filers to make any request for confidential treatment pursuant to SEA Rule 24b–2. See supra note 51. 123 Information that the SBSEF seeks to keep confidential could be redacted from the documents published on the SBSEF’s website but would have to be republished consistent with any determination made pursuant to SEA Rule 24b–2. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 the SBSEF would be treated as a new submission under Rule 805. Paragraph (d) of Proposed Rule 805, modeled on § 40.3(d), would provide that the Commission may extend the 45day review period in paragraph (c) for an additional 45 days, if the product raises novel or complex issues that require additional time to analyze, in which case the Commission shall notify the SBSEF within the initial 45-day review period and briefly describe the nature of the specific issue(s) for which additional time for review is required. Paragraph (d) would also provide that the Commission may extend the 45-day review period for any length of time to which the SBSEF agrees in writing. Paragraph (e) of Proposed Rule 805 would provide that the Commission may, at any time during its review, notify the SBSEF that it will not, or is unable to, approve the product. This notification would have to briefly specify the nature of the issues raised and the specific provision of the SEA or the Commission’s rules thereunder, including the form or content requirements of Rule 805(a), that the product violates, appears to violate, or potentially violates but which cannot be ascertained from the submission. Paragraph (f) of Proposed Rule 805, like § 40.3(f), would provide that a notification of the Commission’s determination not to approve a product does not prejudice the SBSEF from subsequently submitting a revised version of the product for Commission approval, or from submitting the product as initially proposed pursuant to a supplemented submission. Furthermore, the notification would be presumptive evidence that the entity may not truthfully certify under Rule 804 that the same, or substantially the same, product does not violate the SEA or the Commission’s rules thereunder. The Commission did not receive any comments on this proposed rule. It is reasonable and appropriate to supplement the product certification procedures in Rule 804 by also including in Regulation SE, as Rule 805, procedures for voluntary submission of new products for Commission review and approval. Providing this approval process, as the CFTC does, can be valuable to an SBSEF seeking the Commission’s concurrence that a new product does not violate the SEA or the Commission’s rules thereunder prior to listing it. The CFTC’s procedures in this regard are well articulated and well understood by SEFs, and that closely harmonizing with these procedures would yield comparable regulatory benefits while minimizing burdens on PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 SBSEFs.124 Therefore, the Commission is adopting Rule 805 as proposed, with the exception of the proposed Inline XBRL and EDGAR filing requirements, and with minor technical modifications.125 C. Rule 806—Voluntary Submission of Rules for Commission Review and Approval Proposed Rule 806 is closely modeled on § 40.5 of the CFTC’s rules and would set forth procedures by which an SBSEF may voluntarily submit rules, rule amendments, or dormant rules for Commission review and approval. Paragraph (a) of Proposed Rule 806 would provide that an SBSEF may request that the Commission approve a new rule, rule amendment, or dormant rule prior to implementation of the rule. First, an SBSEF must file its submission electronically with the Commission using the EDGAR system as an Interactive Data File in accordance with Rule 405 of Regulation S–T. The filing would be required to include a copy of the submission cover sheet and to set forth the text of the rule or rule amendment (in the case of a rule amendment, deletions and additions must be indicated). Further, the SBSEF would be required to describe the proposed effective date of the rule or rule amendment and any action taken or anticipated to be taken to adopt the proposed rule by the SBSEF or by its governing board or by any committee 124 As stated in the Proposing Release, the Commission does not discount the possibility that an entity might elect to register as an SBSEF with the SEC but not as a SEF with the CFTC. In such case, the SEC-only registrant would not have any familiarity with the CFTC’s rules and filing procedures. Nevertheless, because most if not all entities that will seek SBSEF registration with the SEC are or will also be registered as SEFs with the CFTC, such dual registrants would benefit from harmonized rules. Furthermore, because the Commission is adopting these procedures substantially as proposed, is unnecessary to establish and apply one set of procedures for dual registrants and a different set for SEC-only SBSEFs. See Proposing Release, supra note 1, 87 FR at 28956 (stating that if the Commission ‘‘establishe[d] different or additive requirements, dually registered entities and their market participants might need to incur costs and burdens to modify their systems, policies, and procedures to comply with the SECspecific rules’’). See also Bloomberg Letter, supra note 18, at 10 (‘‘[A] harmonized framework has the potential to lower compliance costs by allowing SBSEFs and market participants to integrate with existing operational and compliance frameworks. Any potential differences would require SBSEF registrants to devote resources toward assessing the potential gaps and consequences of regulatory divergence.’’). 125 See supra note 32. As described in further detail in the discussion of electronic filing systems and structured data, the Commission will require all rule and product filings required by Rules 804 through 807 and 816 to be filed in unstructured format through EFFS, rather than in Inline XBRL through EDGAR. See infra section XIII.A. E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations thereof, and to cite the rules of the SBSEF that authorize the adoption of the proposed rule. The SBSEF would be required to provide an explanation and analysis of the operation, purpose, and effect of the proposed rule or rule amendment and its compliance with applicable provisions of the SEA, including the Core Principles relating to SBSEFs and the Commission’s rules thereunder, and, as applicable, a description of the anticipated benefits to market participants or others, any potential anticompetitive effects on market participants or others, and how the rule fits into the SBSEF’s framework of regulation. Additionally, if a proposed rule affects, directly or indirectly, the application of any other rule of the SBSEF, the pertinent text of any such rule would be required to be set forth and the anticipated effect described. The SBSEF would also be required to provide a brief explanation of any substantive opposing views expressed to the SBSEF by governing board or committee members, members of the SBSEF, or market participants that were not incorporated into the rule, or a statement that no such opposing views were expressed. The SBSEF could, as appropriate, include a request for confidential treatment as permitted under SEA Rule 24b–2. Finally, the SBSEF would be required to certify that it posted a notice of the pending rule with the Commission and a copy of the submission, concurrent with the filing of a submission with the Commission, on the SBSEF’s website.126 Paragraph (b) of Proposed Rule 806, modeled on § 40.5(b), would provide that the Commission shall approve a new rule or rule amendment unless the rule or rule amendment is inconsistent with the SEA or the Commission’s rules thereunder. Paragraph (c) of Proposed Rule 806, like § 40.5(c), would provide that a rule or rule amendment submitted for Commission approval under Rule 806 shall be deemed approved by the Commission 45 days after receipt by the Commission, or at the conclusion of such extended period as provided under paragraph (d) of this section, unless the SBSEF is notified otherwise within the applicable period, if the submission complies with the requirements of Rule 806(a) and the SBSEF does not amend the proposed rule or supplement the submission, except as requested by the Commission, during the pendency of 126 Information that the SBSEF seeks to keep confidential could be redacted from the documents published on the SBSEF’s website but would have to be republished consistent with any determination made pursuant to SEA Rule 24b–2. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 the review period, other than for correction of typographical errors, renumbering, or other non-substantive revisions. Paragraph (c) would also provide that any amendment or supplementation not requested by the Commission would be treated as the submission of a new filing under Rule 806. Paragraph (d) of Proposed Rule 806, modeled on § 40.5(d), would provide that the Commission may further extend the review period in paragraph (c) for an additional 45 days, if the proposed rule or rule amendment raises novel or complex issues that require additional time for review or is of major economic significance, the submission is incomplete, or the requestor does not respond completely to Commission questions in a timely manner, in which case the Commission shall notify the submitting SBSEF within the initial 45day review period and shall briefly describe the nature of the specific issues for which additional time for review shall be required. Paragraph (d) would also allow an extension to which the SBSEF agrees in writing. Paragraph (e) of Proposed Rule 806, like § 40.5(e), would provide that, at any time during its review, the Commission may notify the SBSEF that it will not, or is unable to, approve the new rule or rule amendment. This notification would have to briefly specify the nature of the issues raised and the specific provision of the SEA or the Commission’s rules thereunder, including the form or content requirements of Proposed Rule 806, with which the new rule or rule amendment is inconsistent or appears to be inconsistent with the SEA or the Commission’s rules thereunder. Paragraph (f) of Proposed Rule 806, like § 40.5(f), would provide that such a notification to an SBSEF would not prevent the SBSEF from subsequently submitting a revised version of the proposed rule or rule amendment for Commission review and approval or from submitting the new rule or rule amendment as initially proposed in a supplemented submission. Paragraph (f) would further provide that the revised submission would be reviewed without prejudice. Finally, paragraph (f) would provide that such a notification to an SBSEF of the Commission’s determination not to approve a proposed rule or rule amendment shall be presumptive evidence that the SBSEF may not truthfully certify the same, or substantially the same, proposed rule or rule amendment under Rule 807(a). Paragraph (g) of Proposed Rule 806, like § 40.5(g), would provide that, notwithstanding Rule 806(c), changes to PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 87169 a proposed rule or a rule amendment, including changes to terms and conditions of a product that are consistent with the SEA and the Commission’s rules thereunder, may be approved by the Commission at such time and under such conditions as the Commission shall specify in the written notification; provided, however, that the Commission may, at any time, alter or revoke the applicability of such a notice to any particular product or rule amendment. The Commission received no comments on Proposed Rule 806 and the Commission is adopting Rule 806 as proposed, with the exception of the proposed Inline XBRL and EDGAR filing requirements, and with minor technical modifications, for the reasons stated in the Proposing Release.127 D. Rule 807—Self-Certification of Rules Proposed Rule 807 is closely modeled on § 40.6 of the CFTC’s rules and would set forth procedures by which an SBSEF may self-certify changes to its rules. Paragraph (a) of Proposed Rule 807, modeled on § 40.6(a), would set forth the conditions that an SBSEF must comply with before implementing a rule or rule amendment via self-certification. Like § 40.6(a), Proposed Rule 807(a) would permit an SBSEF to implement a rule or rule amendment without obtaining the Commission’s prior approval under Rule 806, but only if it ‘‘self-certifies’’ the rule or rule amendment in compliance with the conditions set forth in Rule 807. Proposed Rule 807(a) would also permit an SBSEF to self-certify a rule or rule amendment that the Commission had previously approved under Rule 806, or that the SBSEF had previously selfcertified under Rule 807, but that in the interim had become a dormant rule (i.e., unimplemented for 12 consecutive calendar months).128 127 See supra note 32. As described in further detail in the discussion of electronic filing systems and structured data, the Commission will require all rule and product filings required by Rules 804 through 807 and 816 to be filed in unstructured format through EFFS, rather than in Inline XBRL through EDGAR. See infra section XIII.A. 128 Also, like § 40.6(a), Proposed Rule 807(a) would include an exception that would allow an SBSEF to implement a certain kind of rule without having to comply with the full set of conditions set forth in paragraphs (a)(1) through (8) of Rule 807, the details of which are discussed below. Specifically, the exception would provide that, when submitting a rule delisting or withdrawing the certification of a product with no open interest, an SBSEF would only be required to meet the conditions of paragraphs (a)(1), (a)(2), and (a)(6) of Rule 807. The introductory language in paragraph (a) of Proposed Rule 807 would generally track the language of § 40.6(a), with slight changes for clarity. However, Proposed Rule 807(a) would not include E:\FR\FM\15DER2.SGM Continued 15DER2 87170 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 Paragraph (a)(1) of Proposed Rule 807 would require the SBSEF to file its submission electronically with the Commission using the EDGAR system as an Interactive Data File in accordance with Rule 405 of Regulation S–T. Paragraph (a)(2) would require the SBSEF to provide a certification that the SBSEF posted a notice of the selfcertification with the Commission and a copy of the submission, concurrent with the filing of a submission with the Commission, on the SBSEF’s website.129 Paragraph (a)(3) would provide that the Commission must have received the submission not later than the open of business on the business day that is 10 business days before the SBSEF’s implementation of the rule or rule amendment. Paragraph (a)(4) would provide that the SBSEF may not implement the rule or rule amendment if the Commission has stayed it pursuant to Rule 807(c). Paragraph (a)(5) of Proposed Rule 807 would set out procedures for emergency rule certifications. Paragraph (a)(5)(i) would require a new rule or rule amendment that establishes standards for responding to an emergency 130 to be submitted pursuant to Rule 807(a). Paragraph (a)(5)(ii) would provide that a rule or rule amendment implemented under procedures of the governing board to respond to an emergency shall, if practicable, be filed with the Commission prior to implementation or, if not practicable, be filed with the Commission at the earliest possible time after implementation, but in no event more than 24 hours after implementation. In addition, paragraph (a)(5)(ii) would provide that any such submission be subject to the an equivalent of the reference in § 40.6(a) to submissions under § 40.10, which concerns only systemically important derivatives clearing organizations and thus is not relevant to SBSEFs. 129 Information that the SBSEF seeks to keep confidential could be redacted from the documents published on the SBSEF’s website but must be republished consistent with any determination made pursuant to SEA Rule 24b–2. 130 See § 40.1(h) (defining ‘‘emergency’’ as ‘‘any occurrence or circumstance that, in the opinion of the governing board of a registered entity, or a person or persons duly authorized to issue such an opinion on behalf of the governing board of a registered entity under circumstances and pursuant to procedures that are specified by rule, requires immediate action and threatens or may threaten such things as the fair and orderly trading in, or the liquidation of or delivery pursuant to, any agreements, contracts, swaps or transactions or the timely collection and payment of funds in connection with clearing and settlement by a derivatives clearing organization’’). The definition goes on to list a series of circumstances that are deemed emergencies under the definition. The Commission is adopting a definition of ‘‘emergency’’ in Rule 802 that is adapted from § 40.1(h). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 certification and stay provisions of Rules 807(b) and (c), described below. Paragraph (a)(6) of Proposed Rule 807, modeled on § 40.6(a)(7), would set out the required elements for a rule submission under Rule 807. These requirements would include a copy of the submission cover sheet (in the case of a rule or rule amendment that responds to an emergency, ‘‘Emergency Rule Certification’’ should be noted in the description section of the submission cover sheet); the text of the rule (in the case of a rule amendment, deletions and additions must be indicated); the date of intended implementation; a certification by the SBSEF that the rule complies with the SEA and the Commission’s rules thereunder; a concise explanation and analysis of the operation, purpose, and effect of the proposed rule or rule amendment and its compliance with applicable provisions of the SEA, including the Core Principles relating to SBSEFs and the Commission’s rules thereunder; and a brief explanation of any substantive opposing views expressed to the SBSEF by governing board or committee members, members of the SBSEF, or market participants, that were not incorporated into the rule, or a statement that no such opposing views were expressed. Paragraph (a)(6)(vii) would also permit the SBSEF to include, as appropriate, a request for confidential treatment pursuant to the procedures provided in Rule 240.24b– 2.131 Paragraph (a)(7) of Proposed Rule 807, like § 40.6(a)(8), would require an SBSEF to provide, if requested by Commission staff, additional evidence, information, or data that may be beneficial to the Commission in conducting a due diligence assessment of the filing and the SBSEF’s compliance with any of the requirements of the SEA or the Commission’s rules or policies thereunder. Paragraph (b) of Proposed Rule 807, modeled on § 40.6(b), would provide the Commission 10 business days to review the new rule or rule amendment before it is deemed certified and can be made effective, unless the Commission notifies the SBSEF during that tenbusiness-day review period that it intends to issue a stay of the certification under Rule 807(c). 131 Section 40.6(a)(7)(vii) directs the submitting entity to follow the procedures in § 40.8 when making a request for confidential treatment, which in turn cross-references § 145.9. As noted previously, the Commission proposes instead to direct filers to make any request for confidential treatment pursuant to SEA Rule 24b–2. See supra note 51. PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 Paragraph (c)(1) of Proposed Rule 807, modeled on § 40.6(c)(1), would provide that the Commission may stay the certification of a new rule or rule amendment by issuing a notification informing the SBSEF that the Commission is staying the certification on the grounds that it presents novel or complex issues that require additional time to analyze, is accompanied by an inadequate explanation, or is potentially inconsistent with the SEA or the Commission’s rules thereunder. In addition, paragraph (c)(1) affords the Commission an additional 90 days from the date of the notification to conduct the review. Paragraph (c)(2) of Proposed Rule 807, modeled on § 40.6(c)(2), would require the Commission to provide a 30-day comment period within the 90-day period in which the stay is in effect. The Commission would be required to publish a notice of the 30-day comment period on the Commission’s internet website, and comments from the public could be submitted as specified in that notice. Paragraph (c)(3) of Proposed Rule 807, modeled on § 40.6(c)(3), would provide that the new rule or rule amendment subject to the stay shall become effective, pursuant to the certification, at the expiration of the 90-day review period, unless the Commission withdraws the stay prior to that time, or the Commission notifies the SBSEF during the 90-day period that it objects to the proposed certification on the grounds that the proposed rule or rule amendment is inconsistent with the SEA or the Commission’s rules thereunder. Paragraph (d) of Proposed Rule 807, modeled on § 40.6(d), would provide that certain kinds of rules or rule amendments may be put into effect by an SBSEF without certification to the Commission if similar enumerated conditions are met. Some would be subject to a Weekly Notification of Rule Amendments, which is closely modeled on the CFTC notification; others would not be subject to any notification requirement. Under paragraph (d)(2) of Proposed Rule 807, the following types of rules could be put into effect by an SBSEF without self-certification, so long as they are disclosed on the Weekly Notification of Rule Amendments: • Non-substantive revisions. Corrections of typographical errors, renumbering, periodic routine updates to identifying information about the SBSEF, and other such non-substantive revisions of a product’s terms and conditions that have no effect on the economic characteristics of the product; E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations • Fees. Fees or fee changes, other than fees or fee changes associated with market making or trading incentive programs, that total $1.00 or more per contract, and are established by an independent third party or are unrelated to delivery, trading, clearing, or dispute resolution. • Survey lists. Changes to lists of banks, brokers, dealers, or other entities that provide price or cash market information to an independent third party and that are incorporated by reference as product terms; • Approved brands. Changes in lists of approved brands or markings pursuant to previously certified or Commission approved standards or criteria; • Trading months. The initial listing of trading months, which may qualify for implementation without notice, within the currently established cycle of trading months; or • Minimum tick. Reductions in the minimum price fluctuation (or ‘‘tick’’). Under paragraph (d)(3)(ii) of Rule 807, the following types of rules can be put into effect by an SBSEF without selfcertification and without having to be disclosed on the Weekly Notification of Rule Amendments: • Transfer of membership or ownership. Procedures and forms for the purchase, sale, or transfer of membership or ownership, but not including qualifications for membership or ownership, any right or obligation of membership or ownership, or dues or assessments; • Administrative procedures. The organization and administrative procedures of governing bodies such as a governing board, officers, and committees, but not voting requirements, governing board, or committee composition requirements or procedures, decision-making procedures, use or disclosure of material non-public information gained through the performance of official duties, or requirements relating to conflicts of interest; • Administration. The routine daily administration, direction, and control of employees, requirements relating to gratuity and similar funds, but not guaranty, reserves, or similar funds; declaration of holidays; and changes to facilities housing the market, trading floor, or trading area; • Standards of decorum. Standards of decorum or attire or similar provisions relating to admission to the floor, badges, or visitors, but not the establishment of penalties for violations of such rules; • Fees. Fees or fee changes, other than fees or fee changes associated with VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 market making or trading incentive programs that are less than $1.00 or relate to matters such as dues, badges, telecommunication services, booth space, real-time quotations, historical information, publications, software licenses, or other matters that are administrative in nature. • Trading months. The initial listing of trading months which are within the currently established cycle of trading months. One commenter states that the CFTC’s self-certification process has been relied upon by CFTC registrants for most submissions, leaving little that is reviewed or capable of challenge by market participants or the CFTC unless it is inconsistent with the statute or CFTC regulation.132 This commenter states that rulebook or contractual changes can alter protections within Commission-regulated markets and that the Commission should be able to object to any such change it deems inconsistent with Commission policy, including considerations of compliance costs and the impact on consumer protections, all of which would be best informed by a requirement for public comment prior to certification. Under the CFTC regime, the commenter states, there is no formal process to allow market participants to object to a submission for changes that are submitted for certification. Decisions to adopt or modify rules by selfcertification are typically made by the registrant’s board of directors or a board committee, this commenter states, with market participants only learning of the rule after the registrant has self-certified the rule or amendment. This commenter supports an alternative approach in which the Commission can review all material rule and contractual changes by SBSEFs, clearing agencies, SBS data depositories, and exchanges. This commenter also recommends that the Commission adopt a requirement for public comment for such changes. Regulation SE will afford the Commission a sufficient mechanism to assess new SBSEF rules and rule amendments for consistency with section 3D of the SEA, while also permitting SBSEFs to submit new rules and rule amendments using a selfcertification process closely aligned with § 40.6. The CFTC’s procedures are 132 See SIFMA AMG Letter, supra note 18, at 5– 6. Another commenter raised questions specifically about self-certification in the context of a determination by an SBSEF that an SBS has been ‘‘made available to trade.’’ See MFA Letter, supra note 18, at 6. This comment is discussed below in the context of made-available-to-trade determinations under Rule 816(a). See infra section V.F.2. PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 87171 well articulated and well understood by SEFs, and closely harmonizing with these procedures should yield comparable regulatory benefits while minimizing burdens on SBSEFs. It is likely that certain rules of dually registered SEF/SBSEFs will apply to member behavior generally—and not to one product market (e.g., swaps or SBS) exclusively—and that these rules will thus have to be filed with both the SEC and CFTC. Adding a default comment period or otherwise altering the standard so that the Commission reviews all material rule or contractual changes by SBSEFs, as requested by one commenter,133 would significantly alter the timing of self-certified SBSEF rules compared to their SEF equivalents. By contrast, closely harmonizing the SEC’s filing procedures and standards of review with the CFTC’s would allow dually registered entities to submit the same (or substantially the same) filing to both agencies for review. Moreover, if the Commission exercises its authority to stay the effectiveness of a selfcertified rule and seek public comment—i.e., with respect to a rule that is novel, complex, inadequately explained, or potentially inconsistent with the SEA or the regulations thereunder, including Regulation SE— market participants would be able to convey their concerns regarding that rule to the Commission. The specified types of SBSEF rules or rule amendments that may be put into effect under Rule 807(d) without certification to the Commission are appropriate because they are limited to the types of rule changes described earlier in this section (e.g., administration), which do not implicate significant protections to market participants, including compliance costs and customer protection. Therefore, the Commission has harmonized Rule 807(d) with § 40.6(d) to allow such filings to be made without selfcertification or Commission review. Thus, it is not necessary to require SBSEFs to make a substantially different type of filing to the SEC than to the CFTC for the same underlying rule. For the reasons discussed above, the Commission is adopting Rule 807 as proposed, with the exception of the proposed Inline XBRL and EDGAR filing requirements, and with minor technical modifications.134 133 See SIFMA AMG Letter, supra note 18, at 5– 6. 134 See supra note 32. The Commission has also moved the word ‘‘and’’ from the end of paragraph (d)(3)(D) to the end of paragraph (d)(3)(E)(2). As described in further detail in the discussion of electronic filing systems and structured data, the E:\FR\FM\15DER2.SGM Continued 15DER2 87172 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 E. Submission Cover Sheet and Instructions In proposed new § 249.2002, the Commission proposed to require that an SBSEF use a submission cover sheet in conjunction with filings submitted pursuant to Rules 804 through 807, 809, and 816. The cover sheet and the instructions therein are modeled on the cover sheet and instructions used by SEFs in conjunction with their analogous filings with the CFTC.135 The same cover sheet and instructions would be used for a new rule, rule amendment, or new product filing, with the SBSEF checking the appropriate box to indicate which of these types the filing represents. The SBSEF would also be required to check boxes to indicate whether the submission was seeking approval by the Commission or whether it was being filed as a certification by the SBSEF; and to identify the specific provision in the Commission’s rules pursuant to which the filing was being submitted. The submission cover sheet also includes a box that the SBSEF would check if it intends to submit a request for a joint interpretation from the Commission and the CFTC regarding whether the product is a swap, an SBS, or mixed swap pursuant to SEA Rule 3a68–2.136 Finally, the cover sheet includes a check box by which an SBSEF can indicate that it is requesting confidential treatment of materials in the submission. The cover sheet divides the rule and rule amendment filings into two categories: one for general rules of the SBSEF and the other for rules relating to the terms and conditions of a product. Additional boxes would need to be checked if a filing under the termsand-conditions category concerned specifically a determination by the SBSEF that a particular SBS was now to be considered ‘‘made available to trade’’ (or ‘‘MAT’’); 137 or if the filing concerned the delisting of an SBS with no open interest.138 The cover sheet Commission will require all rule and product filings required by Rules 804 through 807 and 816 to be filed in unstructured format through EFFS, rather than in Inline XBRL through EDGAR. See infra section XIII.A. 135 The CFTC cover sheet and instructions, found in appendix D to part 40 of the CFTC’s rules, are designed for rule and product filings from a wider range of registered entities than just SEFs, and thus include entries that are omitted from the Commission’s proposed adaptation. 136 Rule 809 provides that a product filing will be stayed or tolled, as applicable, if such a request for a joint interpretation is made by the SBSEF, the SEC, or the CFTC. See infra section IV.G. 137 Rule 809 provides that a product filing will be stayed or tolled, as applicable, if such a request for a joint interpretation is made by the SBSEF, the SEC, or the CFTC. See infra section IV.G. 138 See supra note 128. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 would need to be used in conjunction with the weekly notifications that SBSEFs would be required to file pursuant to Rule 807(d) for certain changes that do not need to be approved or certified, as discussed above. Paragraph (a) of the submission cover sheet instructions provides that a properly completed submission cover sheet must accompany all rule and product submissions filed electronically with the Commission by an SBSEF using the Electronic Form Filing System (EFFS).139 Per paragraph (a), a properly completed submission cover sheet would include: (1) the name and platform ID of the SBSEF; 140 (2) the date of the filing; (3) an indication as to whether the filing is a new rule, rule amendment, or new product; (4) for rule filings, the rule number(s) being adopted or, in the case of rule amendments, the number of the rule(s) being modified; and (4) for rule or rule amendment filings, a description of the new rule or rule amendment, including a discussion of its expected impact on the SBSEF, its members, and the overall market. The instructions state that the narrative should describe the substance of the submission with enough specificity to characterize all material aspects of the filing. 139 The Electronic Form Filing System (EFFS) is a secure, web-based system used for filing Forms 19b–4, 19b–7, and SCI. The system also supports pre-filings of certain types of Form 19b–4 filings. EFFS is used for form filing by SROs, including national securities exchanges, national securities associations, clearing agencies, and Systems Compliance Integrity (SCI) entities, including SCI SROs, SCI alternative trading systems, plan processors, and exempt clearing agencies subject to Automation Review Policy. See https:// www.sec.gov/tm/electronic-form-filing-systemresources. 140 ‘‘Platform ID’’ is a term utilized in Regulation SBSR, 17 CFR 242.900 et seq., and means the unique identification code assigned to a platform on which an SBS is executed. See 17 CFR 242.900(w). The term ‘‘platform’’ includes an SBSEF. See Rule 900(v), 17 CFR 242.900(v). A registered SBSEF is required by Rule 903(a) of Regulation SBSR, 17 CFR 242.903(a), to use as its platform ID an identifier issued by an internationally recognized standardssetting system (‘‘IRSS’’) if the IRSS meets enumerated criteria and has therefore been recognized by the Commission pursuant to Rule 903(a). This identification requirement stems from a registered SBSEF’s status as a ‘‘participant’’ of a registered SBSDR under Rule 900(u), 17 CFR 242.900(u), because the term ‘‘participant’’ includes a ‘‘platform,’’ as defined in Rule 900(v), 17 CFR 242.900(v), that incurs reporting duties under Rule 901(a), 17 CFR 242.901(a). Currently, the Global Legal Entity Identifier System (‘‘GLEIS’’) is the only IRSS that has been recognized by the Commission under Rule 903(a). See Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, SEA Release No. 74244 (Feb. 11, 2015), 80 FR 14563, 14631–32 (Mar. 19, 2015) (‘‘Regulation SBSR Adopting Release I’’). Therefore, Legal Entity Identifiers (‘‘LEIs’’) issued through the GLEIS are currently the only allowable platform IDs that may be used by registered SBSEFs. PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 Paragraph (b) of the submission cover sheet instructions states that a submission must comply with all applicable filing requirements for proposed rules, rule amendments, or products, and that the filing of the submission cover sheet does not obviate the SBSEF’s responsibility to comply with applicable filing requirements. Paragraph (c) of the submission cover sheet states that checking the box marked ‘‘confidential treatment requested’’ does not obviate the submitter’s responsibility to comply with all applicable requirements for requesting confidential treatment under SEA Rule 24b–2 and does not substitute for notice or full compliance with such requirements. One commenter states that the submission cover sheet and instructions for SBSEF filings should harmonize with those of the CFTC.141 This commenter states that entities currently registered with the CFTC as SEFs will be able to seamlessly enact the necessary steps for required SEC filings because of their familiarity with the CFTC’s filing process. This commenter also states that any identifiers regarded as necessary should be included on the cover sheet. The Commission agrees that the use of a submission cover sheet that is harmonized with that required for CFTC filings by SEFs is likely to facilitate the filing process for SBSEFs that are also registered as SEFs. For this reason, the proposed submission coversheet is harmonized with the CFTC’s, with differences only in the details specific to the rules and processes of the SEC. The Commission contemplates providing for electronic completion (as well as submission) of the cover sheet and attachment of the submissions required by Rules 804, 805, 806, 807, and 809, and intends to advise affected persons regarding its use by public announcement in advance of the effective date of these rules.142 For the reasons discussed above, the Commission is adopting 17 CFR 249.2002 as proposed, but is renumbering it as 17 CFR 249.1702 under new subpart R (‘‘Forms for Registration of, and Filings by, SecurityBased Swap Execution Facilities’’), and is also adopting the submission cover sheet and instructions as proposed with the exception of the proposed Inline 141 See Letter from J.T. (May 26, 2022). In section XIII.B, infra, the Commission discusses the use of identifiers, such as the LEI. 142 Below in section XIII.A, the Commission addresses the requirements to use the EDGAR system and Inline XBRL for submissions. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations XBRL and EDGAR filing requirements.143 F. Rule 808—Availability of Public Information Proposed Rule 808 is closely modeled on § 40.8 of the CFTC’s rules.144 Proposed Rule 808(a) would provide that certain parts of an application to register as an SBSEF would be made publicly available on the Commission’s website, unless confidential treatment is obtained pursuant to SEA Rule 24b–2. Specifically, Proposed Rule 808(a) would make the following parts of a Form SBSEF publicly available: the (i) transmittal letter and first part of the application cover sheet; (ii) Exhibit C; (iii) Exhibit G; (iv) Exhibit L; and (v) Exhibit M.145 Paragraph (b) of Proposed Rule 808, adapted from § 40.8(c), would provide that the Commission shall make publicly available on its website, unless confidential treatment is obtained pursuant to SEA Rule 24b–2,146 an SBSEF’s filing of new products pursuant to the self-certification procedures of Rule 804, new products for Commission review and approval pursuant to Rule 805, new rules and rule amendments for Commission review and approval pursuant to Rule 806, and new rules and rule amendments pursuant to the selfcertification procedures of Rule 807. Paragraph (c), adapted from § 40.8(d), would provide that the terms and conditions of a product submitted to the Commission pursuant to any of Rules 804 through 807 shall be made publicly available at the time of submission unless confidential treatment is obtained pursuant to SEA Rule 24b–2. The Commission received one comment on Proposed Rule 808. This 143 See id. ddrumheller on DSK120RN23PROD with RULES2 144 Section 40.8 of the CFTC’s rules is entitled ‘‘Availability of public information.’’ 145 Section 40.8(a) does not provide a list of the exhibits required to be made public, but rather refers to a general description of items required to be made public. For purposes of clarity and ease of reference, however, the Commission proposed to list the specific corresponding exhibits in Rule 808 that would be made publicly available. Exhibit C would require a narrative that sets forth the fitness standards for the governing board and its composition; Exhibit G would require a copy of the corporate governance documents for the applicant; Exhibit L would require a narrative and any other form of documentation that describes the manner in which the applicant is able to comply with each core principle; and Exhibit M would require a copy of the applicant’s proposed rules and any technical manuals, guides, or other instructions for members. 146 An application for confidential treatment shall contain, among other things, a statement of the grounds of objection referring to, and containing an analysis of, the applicable exemption(s) from disclosure under the Freedom of Information Act, and a justification of the period of time for which confidential treatment is sought. See 17 CFR 240.24b–2(b)(2)(ii). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 commenter states that the Commission should not allow requests for confidential treatment and that these requests are currently abused and result in little information being made available to the public.147 A blanket prohibition on requesting confidential treatment would not be appropriate, however, because each request for confidential treatment should be addressed on its particular facts and circumstances. Moreover, as the Commission stated in the Proposing Release, ‘‘it is not necessary or appropriate to establish and utilize one set of procedures to handle confidential treatment requests made by SBSEFs while utilizing a different set of procedures for other persons who request confidential treatment from the Commission under the SEA.’’ 148 The Commission anticipates that while SBSEFs may request confidential treatment for their filings pursuant to existing SEA Rule 24–2, the items enumerated in Rule 808 are not of the type that typically would constitute confidential information. Finally, it is appropriate to adopt a rule that is adapted from § 40.8, because Rule 808 will apply to submissions made under Rules 804–807, which are, as discussed above, also based on provisions of the CFTC’s rules for SEFs. Therefore, the Commission is adopting Rule 808 as proposed. G. Rule 809—Staying of Certification and Tolling of Review Period Pending Jurisdictional Determination Section 718 of the Dodd-Frank Act, entitled ‘‘Determining Status of Novel Derivative Products,’’ sets forth a mechanism for addressing a situation in which a person wishes to list or trade a novel derivative product that may have elements of both securities and contracts of sale of a commodity for future delivery (or options on such contracts or options on commodities)— i.e., a situation in which it is unclear whether the product in question is a security under the jurisdiction of the SEC or a future under the jurisdiction of the CFTC. Section 718(a) provides that the SEC or the CFTC may request that the other agency issue a determination as to the classification of that product, and section 718(b) provides that the CFTC and SEC may petition for judicial review of any such determination.149 147 See Keeney Letter, supra note 95. Release, supra note 1, 87 FR at 28880 n.50. 149 Section 40.12 of the CFTC’s rules is entitled ‘‘Staying of certification and tolling of review period pending jurisdictional determination’’ and reflects the process described in section 718 of the Dodd-Frank Act. Section 40.12 provides that if a 148 Proposing PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 87173 As described in the Proposing Release, Proposed Rule 809 is loosely modeled on § 40.12, but modified to focus on the products and jurisdictional issues that are more likely to be relevant to SBSEFs.150 Paragraph (a) of Proposed Rule 809, modeled on § 40.12(b), would provide that a product certification made by an SBSEF pursuant to Rule 804 shall be stayed, or the review period for a product that has been submitted for Commission approval by an SBSEF pursuant to Rule 805 shall be tolled, upon request for a joint interpretation of whether the product is a swap, SBS, or mixed swap made pursuant to Rule 3a68–2 under the SEA 151 by the SBSEF, the SEC, or the CFTC. Paragraph (b) is modeled on § 40.12(b)(1) and would require the SEC to provide the SBSEF with a written notice of the stay or tolling pending issuance of a joint interpretation by the SEC and CFTC. Paragraph (c) is modeled on § 40.12(b)(2) and would provide that the stay shall be withdrawn, or the approval review period shall resume, if a joint interpretation finding that the SEC has jurisdiction over the product is issued. The Commission did not receive any comments on Proposed Rule 809. While section 718 of the Dodd-Frank Act addresses situations where it is unclear whether a product is a security or a future, the SEC and the CFTC have adopted separate rules—SEA Rule 3a68–2 and 17 CFR 1.8, respectively— governing requests for interpretation regarding a product that might be an SBS, a swap, or a mixed swap. It is appropriate for Regulation SE to include a mechanism for the staying or tolling of a filing by an SBSEF when it is unclear whether the product is a swap or an SBS, and it would be appropriate for Rule 809 to reflect the process set forth in SEA Rule 3a68–2. Tailoring, as proposed, the scope of Rule 809, in relation to § 40.12, appropriately addresses the jurisdictional questions that are likely to arise from a product listed by an SBSEF.152 Therefore, the Commission is adopting Rule 809 as proposed. SEF (among other registered entities) certifies, submits for approval, or otherwise files a proposal to list or trade such a novel derivative product, the product certification shall be stayed or the approval review period shall be tolled until a final determination order is issued under section 718. 150 As noted in the Proposing Release, an SBSEF might seek to list a product where it is unclear whether the product is a swap or an SBS. See Proposing Release, supra note 1, 87 FR at 28890. 151 17 CFR 240.3a68–2. 152 The objective of Rule 809 is consistent with the objective of § 40.12: to provide for a stay or tolling of a product filing where it is unclear whether the product is under the jurisdiction of the SEC or the CFTC. E:\FR\FM\15DER2.SGM 15DER2 87174 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations H. Rule 810—Product Filings by SBSEFs That Are Not Yet Registered and by Dormant SBSEFs Proposed Rule 810 is closely modeled on § 37.4 of the CFTC’s rules and would provide a process whereby a not-yetregistered SBSEF or a dormant SBSEF could submit product filings. Specifically, Proposed Rule 810 would provide that an applicant for registration as an SBSEF may submit an SBS’s terms and conditions prior to listing the product as part of its application for registration and that any such terms and conditions or rules submitted as part of an SBSEF’s application for registration shall be considered for approval by the Commission at the time the Commission issues the SBSEF’s order of registration. Similarly, any SBS terms and conditions or rules submitted as part of an application to reinstate the registration of a dormant SBSEF would be considered for approval by the Commission at the time the Commission approves the reinstatement of registration of the dormant SBSEF. The Commission did not receive any comments on Proposed Rule 810 and is adopting Rule 810 as proposed, for the reasons stated in the Proposing Release. V. Miscellaneous Requirements Sections 37.5 to 37.12 of the CFTC’s rules impose miscellaneous requirements on SEFs, and the Commission proposed to impose similar requirements on SBSEFs in Rules 811 to 817 of Regulation SE. ddrumheller on DSK120RN23PROD with RULES2 A. Rule 811—Information Relating to SBSEF Compliance 1. Harmonization With § 37.5 Paragraphs (a) to (c) of Proposed Rule 811 are modeled on § 37.5, which is entitled ‘‘Information regarding swap execution facility compliance.’’ Paragraph (a) of Proposed Rule 811 is closely modeled on § 37.5(a) and would provide that, upon the Commission’s request, an SBSEF shall file with the Commission information related to its business as an SBSEF in the form and manner, and within the timeframe, specified by the Commission. Paragraph (b) is closely modeled on § 37.5(b) and would provide that, upon the Commission’s request, an SBSEF shall file with the Commission a written demonstration, containing supporting data, information, and documents, that it is in compliance with one or more Core Principles or with its other obligations under the SEA or the Commission’s rules thereunder, as the Commission specifies in its request. Also, under Proposed Rule 811(b), the SBSEF would be required to file such VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 written demonstration in the form and manner, and within the timeframe, specified by the Commission. Paragraph (c)(1) of Proposed Rule 811 is closely modeled on § 37.5(c)(1) and would provide that an SBSEF shall file with the Commission a notification of any transaction involving the direct or indirect transfer of 50% or more of the equity interest in the SBSEF. Also, under Proposed Rule 811(c)(1), the Commission could, upon receiving such a notification, request supporting documentation of the transaction. Paragraph (c)(2) is closely modeled on § 37.5(c)(2) and would provide that the equity interest transfer notice shall be filed with the Commission in a form and manner specified by the Commission at the earliest possible time, but in no event later than the open of business 10 business days following the date upon which the SBSEF enters into a firm obligation to transfer the equity Interest. Paragraph (c)(3) is closely modeled on § 37.5(c)(3) and would provide that, notwithstanding the foregoing, if any aspect of an equity interest transfer requires an SBSEF to file a rule, the SBSEF shall comply with the applicable rule filing requirements of Rule 806 or Rule 807. Paragraph (c)(4) of Proposed Rule 811 is closely modeled on § 37.5(c)(4) and would provide that, upon a transfer of an equity interest of 50% or more in an SBSEF, the SBSEF shall file with the Commission, in a form and manner specified by the Commission, a certification that the SBSEF meets all of the requirements of section 3D of the SEA and the Commission rules thereunder, no later than two business days following the date on which the equity interest of 50% or more was acquired. The Commission did not receive any comments on Rule 811(a) to (c). It is appropriate for Regulation SE to include provisions requiring an SBSEF to provide the Commission with the information described above. Information about an SBSEF’s business as an SBSEF and transfers of 50% or more of its equity would promote understanding of its operations and ownership, which should facilitate oversight of the SBSEF. Therefore, the Commission is clarifying, as proposed, that, similar to the CFTC, it may request such information from an SBSEF. In addition, as anticipated in the Proposing Release, should questions about compliance arise, the Commission should be able to obtain from an SBSEF supporting data, information, and documents that the SBSEF is in compliance with relevant obligations under the SEA, and the rule provides for PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 this. By modeling its proposed requirements on existing CFTC rules, the Commission seeks to obtain comparable regulatory benefits while imposing only marginal additional burdens on dually registered entities that are already subject to similar obligations. The Commission is changing the phrase ‘‘a transfer of an equity interest of 50 percent or more in a securitybased swap execution facility’’ in paragraph (c)(4) to ‘‘an equity transfer described in paragraph (c)(1) of this section’’ because the text of paragraph (c)(4) should be modified to parallel the text of paragraphs (c)(2) and (c)(3). For these reasons, the Commission is adopting Rule 811(a) to (c) as proposed, with the change described to paragraph (c)(4). 2. Harmonization With § 1.60 Paragraph (d) of Proposed Rule 811 is not modeled on § 37.5, but rather on § 1.60 of the CFTC’s rules, which is entitled ‘‘Pending legal proceedings.’’ Because it is conceptually similar to § 37.5 in that it would require another type of information relevant to the regulatory oversight of a SEF, the Commission proposed to adapt this provision into Rule 811.153 Paragraph (d)(1) of Proposed Rule 811 is closely modeled on § 1.60(a) and would provide that an SBSEF shall submit to the Commission a copy of the complaint, any dispositive or partially dispositive decision, any notice of appeal filed concerning such decision, and such further documents as the Commission may thereafter request filed in any material legal proceeding to which the SBSEF is a party or to which its property or assets are subject. Paragraph (d)(2) is closely modeled on § 1.60(c) and would provide that an SBSEF shall submit to the Commission a copy of the complaint, any dispositive or partially dispositive decision, any notice of appeal filed concerning such decision, and such further documents as the Commission may thereafter request filed in any material legal proceeding instituted against any officer, director, or other official of the SBSEF from conduct in such person’s capacity as an official of the SBSEF and alleging violations of the SEA or any rule, regulation, or order thereunder; the 153 Section 1.60 requires a SEF (among other entities) to provide the CFTC with copies of any legal proceeding to which it is a party, or to which its property or assets is subject. Paragraph (d) of Rule 811 would adapt paragraphs (a), (c), and (e) of § 1.60 to apply to SBSEFs. Paragraphs (b) and (d) of § 1.60 apply to futures commission merchants and do not appear germane to SEFs or SBSEFs. Therefore, the Commission is not adapting these paragraphs into Rule 811(d). E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations constitution, bylaws, or rules of the SBSEF; or the applicable provisions of state law relating to the duties of officers, directors, or other officials of business organizations. Paragraph (d)(3) of Proposed Rule 811 is loosely modeled on § 1.60(e) and would provide that documents required by Rule 811(d) to be submitted to the Commission shall be submitted electronically in a form and manner specified by the Commission within 10 days after the initiation of the legal proceedings to which they relate, after the date of issuance, or after receipt by the SBSEF of the notice of appeal, as the case may be. Paragraph (d)(4) of Proposed Rule 811 is closely modeled on the final two sentences of § 1.60(e) and would provide that, for purposes of Rule 811(d), a ‘‘material legal proceeding’’ includes but is not limited to actions involving alleged violations of the SEA or the Commission rules thereunder, and that a legal proceeding is not ‘‘material’’ for the purposes of Rule 811 if the proceeding is not in a Federal or State court or if the Commission is a party. The Commission did not receive any comments on Proposed Rule 811(d) and is adopting Rule 811(d) as proposed, for the reasons stated in the Proposing Release. B. Rule 812—Enforceability ddrumheller on DSK120RN23PROD with RULES2 Proposed Rule 812 generally is modeled on § 37.6. Paragraph (a) of Rule 812, which is based on § 37.6(a)(1), and would provide that a transaction on or pursuant to the rules of an SBSEF cannot be invalidated as a result of a violation by the SBSEF of section 3D of the SEA or the Commission’s rules thereunder.154 An SBS executed on an SBSEF should not be invalidated by the SBSEF’s violation of any of the securities laws, given that swaps executed on SEFs are afforded the same legal certainty under § 37.6(a). Paragraph (b) of Proposed Rule 812 is modeled on the first sentence of § 37.6(b), which requires a SEF to provide each counterparty to a transaction that is entered into on or pursuant to the rules of the SEF with a written record of all of the terms of the transaction which shall legally 154 The Commission is not adapting into Rule 812 paragraphs (a)(2) and (a)(3) of § 37.6, which provide that a transaction on a SEF may not be invalidated by CFTC proceedings that alter or supplement SEF rules, terms, and conditions, because the Commission has no authority in the SEA analogous to the CFTC’s authority under section 8a(7) of the CEA to conduct such proceedings. See supra note 93 and accompanying text. See also Proposing Release, supra note 1, 87 FR at 28893 n.90. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 supersede any previous agreement.155 Proposed Rule 812(b) differs, however, in that it would provide that an SBSEF shall, as soon as technologically practicable after the time of execution of a transaction entered into on or pursuant to the rules of the facility, provide a written record to each counterparty of all of the terms of the transaction that were agreed to on the facility, which shall legally supersede any previous agreement regarding such terms. One commenter agrees that Rule 812 should be modeled on § 37.6 and states that, like § 37.6, Rule 812 should require the SBSEF to confirm ‘‘all the terms of the transaction,’’ rather than being limited, as proposed, to ‘‘all of the terms that were agreed to on the facility.’’ 156 This commenter states that Rule 812 as proposed may cause issues with clearing SBS because SBS clearing agencies will likely require SBSEFs to represent that any transaction executed on the SBSEF is final and irrevocable (as CFTC-registered clearing agencies require for SEFs). Since Rule 812 only requires an SBSEF confirmation to be limited in scope to ‘‘all of the terms that were agreed to on the facility,’’ this commenter states the SBSEF would not necessarily know any terms agreed upon by counterparties outside the SBSEF, and therefore could not represent to the clearing agency that the transaction is ‘‘final and irrevocable,’’ which would be a roadblock for straight-through processing and full adoption of clearing for SBS.157 This commenter states that, to address this issue, SBSEFs should have the ability to prohibit trading relationship documentation or enablements for cleared SBS transactions executed on an SBSEF, which are prohibited for CFTCregistered SEFs in accordance with the CFTC’s 2013 Staff Impartial Access Guidance,158 and that Rule 812 should require that the SBSEF confirm ‘‘all of the terms of the transaction.’’ 159 155 Furthermore, under § 37.6(b), the confirmation of all terms of the transaction must take place at the same time as execution, provided that specific customer identifiers for accounts included in bunched orders need not be included in confirmations if certain conditions are met. 156 See Bloomberg Letter, supra note 18, at 4, 12– 13. 157 See infra section VI.F (discussing, among other things, straight-through processing). 158 See CFTC Division of Clearing and Risk, Division of Market Oversight, and Division of Swap Dealer and Intermediary Oversight, Guidance on Application of Certain Commission Regulations to Swap Execution Facilities (Nov. 14, 2013), available at https://www.cftc.gov/sites/default/files/idc/ groups/public/@newsroom/documents/file/ dmostaffguidance111413.pdf. 159 See Bloomberg Letter, supra note 18, at 4, 12– 13. PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 87175 Another commenter, however, states that it is not practical or cost effective for an SBSEF to collect, review, and store each free-standing agreement underlying an SBS transaction entered into between numerous counterparties.160 This commenter states that the CFTC has not required SEFs to comply with the requirements of 37.6(b) since 2014, when staff noaction relief was issued due to the impracticability of compliance.161 Thus, this commenter supports the proposal in Rule 812 to require an SBSEF to provide a written record of all the terms of the transaction that were agreed to on an SBSEF, which shall legally supersede any previous agreement regarding such terms. It is appropriate to require an SBSEF to inform counterparties as soon as technologically practicable after they have effected a trade on or pursuant to the rules of the SBSEF, and to provide them with a written record of the terms to which they have agreed to on the SBSEF. With respect to uncleared SBS, it would be impractical for an SBSEF to be aware of, or responsible for, confirming terms of an SBS that were agreed to off the SBSEF’s trading platform, such as terms contained in a credit support agreement between the two counterparties to an uncleared SBS. Thus, the Commission is not including in Rule 812 a requirement that the SBSEF provide a written record of any such terms.162 160 See ICE Letter, supra note 18, at 5. id. (citing CFTC Division of Market Oversight, Staff No-Action Position Regarding SEF Confirmations and Recordkeeping Requirements under Certain Provisions Included in Regulations 37.6(b) and 45.2, Letter No. 14–108 (Aug. 18, 2014), available at https://www.cftc.gov/csl/14-108/ download). 162 Section 37.6(b) requires a SEF to provide a written record of ‘‘all of the terms of the transaction which shall legally supersede any previous agreement and serve as a confirmation of the transaction.’’ In the adopting release for the final part 37 rules, the CFTC explained that, with respect to uncleared swaps, a SEF could satisfy this requirement by incorporating by reference terms set forth in agreements previously negotiated by the counterparties, provided that such agreements had been submitted to the SEF ahead of execution. See 2013 CFTC Final SEF Rules Release, supra note 9, 78 FR at 33491 n.195. The CFTC staff has taken a no-action position with respect to the confirmation requirements for uncleared swaps in response to assertions by industry participants that it is impracticable for a SEF to satisfy the written confirmation requirements by incorporating by reference terms from previously negotiated agreements between the counterparties if the SEF must receive copies of such agreements prior to execution. See CFTC No Action Letter 17–17 (Mar. 24, 2017) (issued by the CFTC’s Division of Market Oversight). In the no-action letter, the CFTC staff stated that it was continuing to assess confirmation requirements, including establishing a permanent solution to the issues raised. Given these circumstances, it is appropriate to require an SBSEF 161 See E:\FR\FM\15DER2.SGM Continued 15DER2 87176 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations In response to the comment that Proposed Rule 812 may cause issues with clearing because the rule requires SBSEFs to confirm only the terms of an SBS transaction ‘‘that were agreed to on the facility,’’ additional terms in trading relationship documents or enablements are unlikely to hinder the acceptance by a clearing agency of SBS that are intended to be cleared or might inhibit impartial access to trading of cleared SBS on an SBSEF. First, a cleared SBS would be a standardized product, the complete terms of which would be known to the SBSEF, agreed to by the counterparties trading that SBS on the SBSEF, and capable of being confirmed to the parties in writing by the SBSEF, as well as represented to the clearing agency by the SBSEF as ‘‘final and irrevocable.’’ Thus, all the terms of the cleared transaction are confirmed when executed on the SBSEF. And second, Proposed Rule 819(c) would require that an SBSEF provide impartial access to its market and market services,163 and it would not be consistent with an SBSEF’s impartial access obligations to permit members to incorporate additional terms for a cleared SBS in trading relationship documentation, enablement documentation, or elsewhere, or to otherwise permit improper discrimination with respect to trading in cleared SBS against SBSEF members who have a direct or indirect clearing relationship with the clearing agency for a given SBS. Therefore, for the foregoing reasons, the Commission is adopting Rule 812 as proposed. ddrumheller on DSK120RN23PROD with RULES2 C. Rule 813—Prohibited Use of Data Collected for Regulatory Purposes Proposed Rule 813 is modeled on § 37.7, and would provide that an SBSEF shall not use, for business or marketing purposes, any proprietary data or personal information that it collects or receives from or on behalf of any person for the purpose of fulfilling its regulatory obligations. An SBSEF would be able to use such data or information for business or marketing purposes if the person consents, but the SBSEF would not be able to condition to provide counterparties with a written record of only those terms that are agreed to on the SBSEF. Additionally, the CFTC recently issued a notice of proposed rulemaking to adopt a rule codifying the no-action position, which would enable SEFs to incorporate such terms by reference in an uncleared swap confirmation without being required to obtain the underlying, previously negotiated agreements. See CFTC, Swap Confirmation Requirements for Swap Execution Facilities (Notice of Proposed Rulemaking), 88 FR 58145, 58147 (Aug. 25, 2023). The CFTC has not yet taken action on this proposal. 163 See infra section VI.B.3 (discussing the impartial access requirements of Rule 819(c)). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 access to the SBSEF on the person’s providing such consent. Finally, Proposed Rule 813 would provide that an SBSEF, where necessary for regulatory purposes, may share such data or information with another SBSEF or a national securities exchange. The Commission did not receive any comments on Proposed Rule 813 and is adopting Rule 813 as proposed, for the reasons stated in the Proposing Release. D. Rule 814—Entity Operating Both a National Securities Exchange and an SBSEF Proposed Rule 814 is modeled on § 37.8. Paragraph (a) of Proposed Rule 814 would provide that an entity intending to operate both a national securities exchange and an SBSEF shall separately register the two facilities pursuant to section 6 of the SEA and Rule 803 under the SEA. Paragraph (b), although consistent with § 37.8(b), draws its specific language from section 3D(c) of the SEA,164 which contemplates that a single entity may operate both a national securities exchange and an SBSEF. Paragraph (b) of Proposed Rule 814 would provide that a national securities exchange shall, to the extent that the exchange also operates an SBSEF and uses the same electronic trade execution system for listing and executing trades of SBS on or through the exchange and the facility, identify whether electronic trading of SBS is taking place on or through the national securities exchange or the SBSEF. Two commenters state that the key requirements applicable to SBSEFs should also apply to SBS exchanges to create a level regulatory environment and avoid encouraging regulatory arbitrage.165 One of the commenters specifically identifies trading protocols, impartial access, limits on pre-execution communication, and straight-through processing as important aspects of SBSEF regulation that should also apply to SBS exchanges.166 Another commenter states that more detailed rules are needed to address the separation of SBSEFs from SBS exchanges in order to avoid the aggregation of power in the financial markets and to clearly separate the roles of an entity operating both an SBSEF and an SBS exchange.167 The comment suggesting that requirements for SBSEFs should be applied to SBS exchanges is outside the 164 15 U.S.C. 78c–4(c). Citadel Letter, supra note 18, at 17; MFA Letter, supra note 18, at 14. 166 See Citadel Letter, supra note 18, at 17. 167 See Keeney Letter, supra note 95. 165 See PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 scope of this rulemaking, which is designed to set forth requirements for SBSEFs, not exchanges. Additionally, more detailed rules are not necessary to separate the roles of an entity operating both an SBSEF and an SBS exchange. Each entity would be required to make rule or new product submissions to the Commission under a separate set of rules—Rules 804 to 807 for SBSEFs, and Rule 19b–4 for national securities exchanges—making it clear which rules will apply on which platform. Also, Rule 814(b)—which requires that a national securities exchange that also operates an SBSEF identify the platform on which an SBS transaction occurs—will provide further clarity to the market about the roles of an entity operating both an SBSEF and an SBS exchange. Further, the ability of an entity to operate both an SBSEF and an SBS exchange is unlikely to lead to the aggregation of power in the financial markets, because allowing for a variety of SBS trading platforms and ownership models should promote competition in the market for SBS trading. It is appropriate for proposed Regulation SE to include a rule that clarifies the registration status of an entity that operates both an exchange and an SBSEF, and that broadly parallels § 37.8. Therefore, for the reasons discussed above, the Commission is adopting Rule 814 as proposed. E. Rule 815—Methods of Execution for Required and Permitted Transactions 1. Rule 815(a) (a) Background The Dodd-Frank Act provides that if the Commission makes a mandatory clearing determination regarding an SBS, such SBS becomes subject to mandatory trade execution if at least one exchange or SBSEF makes the product ‘‘available to trade.’’ 168 The Dodd-Frank Act does not require, however, that all SBS be subject to mandatory clearing or mandatory trade execution, and it does not impose any execution requirements for transactions in an SBS unless the SBS is subject to mandatory clearing and it has been made available to trade. Section 37.9 of the CFTC’s rules addresses these issues for SEFs using the concepts of ‘‘Required Transactions’’ and ‘‘Permitted Transactions,’’ and the Commission proposed Rule 815 of Regulation SE to adapt § 37.9 for 168 See 15 U.S.C. 78c–3(a)(1) (mandatory clearing for SBS) and 78c–3(h) (trade execution for SBS). See also infra section V.F.3 (discussing the six factors that an SBSEF shall consider, as appropriate, before making an SBS ‘‘available to trade’’). E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations SBSEFs. Rule 815(a)(1) defines ‘‘Required Transaction’’ as ‘‘any transaction involving a security-based swap that is subject to the trade execution requirement in section 3C(h) of the Act.’’ (b) Methods of Execution for Required Transactions ddrumheller on DSK120RN23PROD with RULES2 (i) Background Proposed Rule 815(a)(2) would require that, except for block trades or the exceptions described in paragraph (d) or (e) of the rule and discussed below,169 the mandatory execution methods for a Required Transaction would be either: (a) an order book or (b) an RFQ system in conjunction with an order book, and the rule permits the SBSEF to use any means of interstate commerce for providing these execution methods.170 Proposed Rule 815(a)(3) would define an RFQ system as ‘‘a trading system or platform in which a market participant transmits a request for a quote to buy or sell a specific instrument to no less than three market participants in the trading system or platform, to which all such market participants may respond’’ and would specify other requirements for an RFQ system to be recognized as such under the rule. The three market participants to which the RFQ is addressed could not be affiliates of or controlled by the requester and cannot be affiliates of or controlled by each other. The proposed rule would also provide that an SBSEF that offers an RFQ system in connection with a Required Transaction must have the following functionalities: (i) at the same time that the requester receives the first responsive bid or offer, the SBSEF must communicate to the requester any firm bid or offer pertaining to the same SBS resting on any of the SBSEF’s order books; (ii) the SBSEF must provide the requester with the ability to execute against those firm resting bids or offers along with any responsive orders; and (iii) the SBSEF must ensure that its trading protocols provide each of its members with equal priority in receiving requests for quotes and in transmitting and displaying for execution responsive orders. The requirements of Proposed Rule 815(a)(3) are referred to as the ‘‘RFQ-to-3 requirement.’’ 169 See infra section V.E.3. Rule 815(a)(2)(ii) would provide that any means of interstate commerce includes, but is not limited to, the mail, internet, email, and telephone, provided that the chosen execution method satisfies the requirements for order books in 17 CFR 242.800(x) or in paragraph (a)(3) of Rule 815. 170 Proposed VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 (ii) Comments on the RFQ-to-3 Requirement The Commission received comments on the proposed RFQ-to-3 requirement in Proposed Rule 815(a)(3).171 One commenter suggests that the Commission expand the permitted modes of SBS execution for swaps mandated for trading on SBSEFs in order to provide for a less prescriptive, more principles-based approach that balances transparency, competition, and liquidity through a flexible set of rules and states that any means of execution that provides sufficient pre-trade price transparency and preserves competition should be available.172 This commenter, while supporting general harmonization between the Commission’s and the CFTC’s rules on trading protocols and methods of execution, argues that the Commission’s rule also needs to balance harmonization with the need to reflect the unique and sensitive liquidity conditions that exist in SBS markets. Stating that an RFQ-to-3 requirement for Required Transactions that are SBSs means something completely different than for swaps, this commenter urges the Commission to consider a lower RFQ threshold given the nature of the SBS market. This commenter states that, in some cases, for an asset manager to seek three quotes would effectively require the asset manager to contact many of the primary price makers in the SBS market, as there simply are not the same number of liquidity providers, particularly for less liquid, more thinly traded SBSs, as the number of participants, the trading volume, and the depth of market liquidity are very different in the SBS market. The commenter suggests that requesting quotes from two participants, for example, would allow the asset manager to retain some control over the information disseminated about its interest to the market while preserving the statute’s ‘‘multiple to multiple’’ definition requirement.173 Another commenter also urges the Commission to consider an alternative approach to the proposed RFQ-to-3 requirement, and to provide a ‘‘phasedin compliance’’ with the required methods of execution, whereby a MAT SBS product may be executed on an SBSEF via any method of execution until such time as it is determined through notice and comment that an appropriate level of liquidity exists to enable an order book or RFQ-to-3 171 See ISDA–SIFMA Letter, supra note 18, at 5– 6; SIFMA AMG Letter, supra note 18, at 8–9. 172 See SIFMA AMG Letter, supra note 18, at 8. 173 See id. at 9. PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 87177 system.174 This commenter states that, considering the lack of liquidity in SBS products, pre-trade transparency via the proposed RFQ-to-3 requirement could negatively impact liquidity provision for end-users. The commenter states that, if clients are required to ‘‘show their hand to three liquidity providers,’’ it may lead to information leakage and an inability to hedge the clients’ risks through the SBS markets.175 The commenter asserts that this is particularly so given that there are a relatively small number of active dealers for many SBS products, stating that, based on DTCC 176 data on credit SBS for the top 700 issuers, there are on average 2.7 dealers, and 400 of the top 700 issuers have fewer than three active dealers per month.177 This commenter further argues that an RFQ-to-3 requirement would be problematic for SBS equities, where the current execution processes are very different from their swaps counterpart. The commenter states that clients in SBSs typically ask their preferred dealer to execute shares in SBS at market price (or some other pricing structure), the dealer then purchases the shares directly for hedging purposes, and the dealer then executes the swap at the end of the day with the client at an average market price.178 The commenter states that, in this case, the dealer’s interaction is more akin to a broker than a dealer counterparty, and that these trading practices would not be possible on an RFQ-to-3 or order book system. In addition, the commenter states that it has ‘‘compared the credit swaps activity that occurred on-venue back in 2012 before the CFTC trade execution requirement kicked in, with the credit SBS activity that occurs on-venue today’’ and asserts that the results suggest ‘‘that the swaps market was much more ready for the implementation of the trade execution requirement than the SBS market is today.’’ 179 This commenter states that, ‘‘[a]bsent a phased-in implementation approach, the SBS market could suffer from significant disruptions.’’ 180 While the Commission acknowledges that there are differences between the liquidity in the SBS market and the 174 See ISDA–SIFMA Letter, supra note 18, at 5– 6. 175 Id. at 6. 176 ‘‘DTCC’’ refers to the Depository Trust and Clearing Corporation. 177 See ISDA–SIFMA Letter, supra note 18, at 6. 178 The commenter also stipulates that at the onset of the relationship, clients will negotiate a grid with dealers where certain short/long benchmarks and spreads are agreed for equity issuers on a jurisdictional or other basis. See ISDA– SIFMA Letter, supra note 18, at 6. 179 Id. 180 Id. E:\FR\FM\15DER2.SGM 15DER2 87178 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 swaps market, the process required before the execution requirement would apply to an SBS will reduce the risk of ‘‘substantial disruptions.’’ The required methods of execution would be applied to an SBS only to the extent that it is subject to the clearing mandate and has been ‘‘made available to trade.’’ Before making an SBS subject to the clearing mandate, the Commission would be able to take into account a number of factors, including the existence of significant outstanding notional exposures, trading liquidity, and the adequacy of pricing data.181 Further, to make an SBS ‘‘available to trade,’’ an SBSEF would, under Proposed Rule 816(a)(1),182 have to make a filing with the Commission under Rule 806 or Rule 807—both of which would allow the Commission to find that a filing was not consistent with the requirements of the SEA or Regulation SE.183 Moreover, the SBSEF’s filing would, under Proposed Rule 816(b), have to address, as appropriate, a number of relevant factors, including whether there are ready and willing buyers and sellers; the frequency or size of transactions; the trading volume; the number and types of market participants; the bid/ask spread; and the usual number of resting firm or indicative bids and offers. Similarly, a national securities exchange that wished to make an SBS ‘‘available to trade’’ would have to file a rule change under Rule 19b–4,184 and that proposed rule change would be subject to Commission review for compliance with the requirements of the SEA, which requires that the rules of a national securities exchange, among other things, promote just and equitable principles of trade, remove impediments to and perfect the mechanism of a free and open market and a national market system, protect investors and the public interest, and not impose a burden on competition not necessary or appropriate in furtherance of the purposes of the SEA.185 Thus, before an SBS becomes subject to the trade execution requirement, the Commission would have had multiple opportunities to consider the trading characteristics of that SBS. 181 See SEA section 3C(b)(4)(i), 15 U.S.C. 78c– 3(b)(4)(i). See also SEA section 3C(b)(4)(ii) through (v), 15 U.S.C. 78c–3(b)(4)(ii) through (v) (discussing other factors that the Commission would be required to take into account when making a mandatory clearing determination). 182 See infra section V.F.2. 183 See supra sections IV.A and B. 184 17 CFR 240.19b–4. 185 See Section 6(b)(5) and (8) of the SEA, 15 U.S.C. 78f(b)(5) and (8). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 Additionally, most, if not all, SBSEFs are likely to be dually registered with the CFTC as SEFs, and that most, if not all, market participants in the SBS market will be participants in the swaps market. The Commission remains concerned that different or additive requirements—particularly for the key concept of a ‘‘Required Transaction’’— could introduce complexity and confusion if one set of trading protocols applied to Required Transactions for swaps but different protocols—different from ones that have been understood and utilized for many years—applied to Required Transactions for SBS transactions. Thus, it is not appropriate to modify the requirement that a qualifying RFQ system under Proposed Rule 815(c) transmit a request for a quote to no fewer than three market participants in the trading system or platform. The question whether sufficient liquidity exists in the market for a given SBS to trade RFQ-to-3 can be addressed when the SBS is subject to the clearing mandate and when a national securities exchange or SBSEF seeks to make that SBS available to trade. Until that time, SBSs would be Permitted Transactions on SBSEFs and thus could be traded using other methods of execution, thus avoiding any potential disruptions to liquidity in the SBS markets. (iii) RFQ Functionalities The Commission also received two comment letters on the functionalities required for RFQ systems under Proposed Rule 815(a)(3).186 Both commenters suggest that the proposed rule be amended to require an SBSEF to communicate any firm bid or offer pertaining to the same instrument resting on any of the SBSEF’s trading systems or protocols, not just firm bids or offers on the SBSEF’s order book.187 One of the commenters argues that, in practice, order books continue to be infrequently used on SEFs that offer RFQ systems and that, therefore, the same interaction requirement on SEFs has had little impact.188 The commenter cites, for example, that ‘‘request for stream’’ trading protocols, which allow liquidity providers to stream firm prices, are not required to be 186 See Citadel Letter, supra note 18, at 13–14; MFA Letter, supra note 18, at 8. 187 See Citadel Letter, supra note 18, at 13; MFA Letter, supra note 18, at 8. Rule 813(a)(3)(i) requires an SBSEF to communicate to the requester any firm bid or offer pertaining to the same instrument resting on any of the SBSEF’s order books. 188 See Citadel Letter, supra note 18, at 13; see also MFA Letter, supra note 18, at 8 (also referencing the request-for-stream protocol). PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 communicated to clients sending an RFQ. This commenter also suggests that the proposed rule should be modified to ensure that the RFQ requester has the ability to execute against all of the prices provided in connection with an RFQ on the same screen. The commenter argues that this will prevent an SBSEF from requiring the RFQ requester to click through multiple screens in order to execute against firm prices, which, the commenter argues, serves to disadvantage those prices versus other prices provided in response to an RFQ.189 Finally, the commenter recommends that the requirements of Rule 815(a)(3) be modified to apply to all SBS transactions on an SBSEF, not solely Required Transactions, as they argued that this will help ensure that market participants transacting on SBSEFs are always provided with the necessary transparency to achieve the most favorable execution possible.190 The other commenter also urges the Commission to modify the requirement to ensure that the SBSEF communicates to the requester any firm prices available on the SBSEF, in addition to resting firm bids or quotes on the SBSEFs order book(s), and that they make this functionality available for Permitted Transactions as well.191 In the commenter’s view, this approach is necessary in order to ensure the availability of quotes for SBS transactions that will be essential to maintaining liquidity and promoting open and equitable participation in the markets. As previously noted, given that most if not all SBSEFs will be dually registered as SEFs, there is a public interest in harmonizing its requirements for trading protocols with those of the CFTC.192 The commenters’ suggestions to apply the proposed interaction requirement to all trading systems and protocols on the SBSEF would be a deviation from the CFTC’s requirements for SEFs that would likely introduce operational and compliance challenges created by having different standards. This would undercut the Commission’s goal of minimizing operational and compliance burdens by seeking to harmonize requirements between SEFs and SBSEFs. For instance, the commenters’ suggestions to apply the order interaction requirement to all transactions on the SBSEF, not only Required Transactions, or to require that firm interest outside the SBSEF’s order 189 See Citadel Letter, supra note 18, at 13–14. id. at 14. 191 See MFA Letter, supra note 18, at 8. 192 See supra section I. 190 See E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations book be communicated in response to RFQs, would be a significant deviation from the CFTC’s method-of-execution requirements and would have wide ramifications for the SBS markets, particularly in view of the liquidity and information leakage concerns that other commenters expressed elsewhere regarding the less liquid and thinly traded SBS products that may trade on an SBSEF.193 As a result, applying such requirements to Permitted Transactions, which the CFTC does not do, would be likely to have the undesirable effect of discouraging market participants from voluntarily executing Permitted Transactions on SBSEFs, which would lessen market transparency and would not provide greater opportunities for market participants to interact with trading interest not subject to the trade execution requirement. Further, it is not necessary for the Commission to mandate the technical details of how the SBSEF displays responses to RFQs to its members. Rule 819(c), discussed below,194 requires SBSEFs to provide all ECPs and independent software vendors with impartial access market and market services, and this requirement is sufficient to address a situation in which an SBSEF designed its RFQ responses to systematically disadvantage certain market participants or types of market participants. (c) Block-Trade Exception ddrumheller on DSK120RN23PROD with RULES2 (i) General Treatment of Block Trades Under both the CEA and SEA, Core Principle 2 requires a SEF/SBSEF to specify trading procedures to be used in entering and executing orders on the facility, including block trades.195 The CFTC implemented this provision by excepting block trades from the required execution methods in § 37.9(a)(2).196 Proposed Rule 815(a)(2) would also exclude block trades from the required execution methods using language closely modeled on § 37.9(a)(2). Specifically, Proposed Rule 815(a)(2)(i) would apply required methods of execution to ‘‘[e]ach Required Transaction that is not a block trade.’’ 197 Thus, the Commission’s proposal to include an exception from the required methods of execution for block trades in Regulation SE is consistent with the approach taken by the CFTC. The 193 See supra note 175 and accompanying text. 194 See infra section VI.B.3. 195 15 U.S.C. 78c–4(d)(2)(C); 7 U.S.C. 7b– 3(f)(2)(C). 196 That rule cross-references § 43.2, which defines the term ‘‘block trade’’ for purposes of public dissemination of swap transactions. 197 See Proposed Rule 815(a)(2)(i) (emphasis added). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 purpose of having a block-trade exception to the required methods of execution is to balance the promotion of price competition and all-to-all trading against the potential costs to market participants who wish to trade large orders. Forcing a market participant who seeks liquidity to expose a large order to an order book or to utilize RFQto-3 could cause the market to move against the liquidity requester before it can obtain an execution. Under the CFTC’s rules, a block trade in a product that is subject to mandatory trade execution may be traded on-SEF using flexible means of execution on the SEF’s non-order-book trading system or platform, or away from a SEF’s trading system or platform, provided that it is executed pursuant to the SEF’s rules and procedures. As noted above, the Commission proposed a similar approach for block trades on SBSEFs, excepting block trades from the required execution methods of Proposed Rule 815(a)(2). The Commission received a number of comments on its proposal for a block trade exception. Commenters generally support the inclusion of a block trade exception from the Required Transaction requirement in Rule 815(a)(2).198 One commenter, supporting the Commission’s harmonization with the CFTC’s approach to block trades by providing an exception for those trades, states that a flexible block execution regime permits trading of larger-sized transactions in a manner that incentivizes dealers to provide liquidity and capital without creating market distortions.199 Another commenter asserts that exempting block trades from order book and RFQ execution requirements is critical to the functioning of the SBS markets, particularly to execute large trades without affecting price.200 This commenter expresses concerns that, absent such an exception, market participants would have difficulty executing, or would be unable to execute, large bona fide trades, since they would be required to do so only through the order book. This would increase the cost of trading and hedging, the commenter says, which could reduce participation in certain markets, 198 See Bloomberg Letter, supra note 18, at 14; Citadel Letter, supra note 18, at 9–10, ICI Letter, supra note 18, at 10–13; SIFMA AMG Letter, supra note 18, at 9–10; ISDA–SIFMA Letter, supra note 18, at 7–9; MFA Letter, supra note 18, at 5–6. Many of these commenters raised questions about the proposed size of the block-trade threshold. See infra section V.E.1(c). 199 See SIFMA AMG Letter, supra note 18, at 10. 200 See MFA Letter, supra note 18, at 5–6. PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 87179 resulting in less liquidity and increased volatility. Another commenter states that the proposed exception for block trades would provide important flexibility for market participants executing SBS transactions of a significantly large size, and that rules that facilitate swap block trades allow market participants, such as regulated funds, to engage in large transactions while mitigating the risks of information leakage and impairment of market liquidity.201 Another commenter also supports the Commission’s proposal to align closely its approach to block trades with the approach taken by the CFTC.202 This commenter agrees with the Proposing Release’s assessment that the block exception to the required methods of execution balances the promotion of price competition and all-to-all trading against the potential costs to the market participants who wish to trade large orders, the importance of which they note is more acute in the SBS market, which is a smaller and less liquid market than the swaps market. The Commission agrees with these commenters that a block-trade exception is appropriate, not only to maintain harmonization with the CFTC regime for swaps but also to facilitate trading of SBS. This approach, which is consistent with the approach of the CFTC for swaps, will be especially important in the smaller, less liquid SBS markets if and when a clearing determination has been made for one or more SBS. A block-trade exception for SBSs subject to the trade-execution requirement, provided that ‘‘block trade’’ is appropriately defined for those SBSs, can help ensure that large trades are not significantly more difficult and costly to execute because of the risks posed by information leakage and the potential for adverse price movement, which could significantly impair liquidity in the markets for those SBSs. Therefore, the Commission is adopting Rule 815(a) as proposed, but is, as discussed immediately below, modifying the proposal with respect to the definition of ‘‘block trade’’ in Rule 802. (ii) Block-Trade Definition for Credit SBS The Commission also proposed to align the regulatory text defining ‘‘block trade’’ in proposed Regulation SE with the CFTC’s definition. The proposed definition in Rule 802 of Regulation SE was based on the four-pronged definition found in § 43.2(a), but with one modification. The third prong of the 201 See 202 See E:\FR\FM\15DER2.SGM ICI Letter, supra note 18, at 10. Bloomberg Letter, supra note 18, at 14. 15DER2 87180 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 CFTC definition characterizes a block trade in a particular swap as having ‘‘a notional or principal amount at or above the appropriate minimum block size applicable to such swap.’’ 203 For the third prong of the ‘‘block trade’’ definition, the Commission proposed that the SBS be based on a single credit instrument (or issuer of credit instruments) or a narrow-based index of credit instruments (or issuers of credit instruments) having a notional size of $5 million or greater,204 considered the distribution of transactions in the single-name CDS market 205 and took into consideration that FINRA applies a $5 million cap when disseminating transaction reports of economically similar cash debt securities.206 A number of commenters question the basis for the proposed $5 million block threshold size and advocate a variety of different approaches to establishing the block size threshold for SBS products, as alternatives to the proposed $5 million notional size block trade threshold.207 One commenter presents data that it argues supports its assertion that the block threshold for credit SBS should be recalibrated.208 The commenter recommends that the Commission first establish an appropriate methodology to determine block thresholds based on current market-wide data. This commenter states that, otherwise, the already illiquid SBS market will be required to comply with an arbitrary, ‘‘one-size-fits-all’’ threshold amount that fails to consider the unique levels of market liquidity and risk sensitivity of various instruments. The commenter suggests that average daily volume (‘‘ADV’’) is an appropriate indicator of liquidity levels because it represents a measure of how much trading occurs in a given issuer across the market as a whole, and that the lower the ADV, the 203 Appendix F to the CFTC’s part 43 divides swap asset classes into a number of categories and sets forth a minimum block size threshold to each category. SBSs are not within the CFTC’s jurisdiction, so the CFTC had not considered what an appropriate minimum block size threshold would be for any SBS asset class. In this respect, there was no CFTC-defined threshold for the Commission to harmonize with, so the Commission proposed to establish a threshold tailored specifically for the SBS market, see Proposing Release, supra note 1, 87 FR at 28956, as discussed below. 204 See Proposing Release, supra note 1, 87 FR at 28896. 205 See id. at 28944. 206 See id. at 28944 n.369. 207 See Citadel Letter, supra note 18, at 9; ICI Letter, supra note 18, at 10–12; MFA Letter, supra note 18, at 5–8; SIFMA AMG Letter, supra note 18, at 10; ISDA–SIFMA Letter, supra note 18, at 7–9. 208 See ISDA–SIFMA Letter, supra note 18, at 7– 9. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 lower the liquidity of the product. Based on its analysis of ADV data for credit default swaps (‘‘CDS’’), which it retrieved from the DTCC Trade Information Warehouse, the commenter posits that liquidity in single-name CDS is significantly lower than in broadbased CDS. Thus, the commenter argues, it is not appropriate to mirror the block threshold for credit SBS to the threshold for debt securities, when there are clear differences in liquidity levels within the CDS market itself. This commenter also asserts that the data reveal that liquidity in single-name CDS is disproportionately concentrated in the most actively traded issuers, which, the commenter contends, corroborates its assertion that block thresholds should be calibrated at a more granular level in order to reflect the different liquidity levels of credit SBS products. The commenter cautions that, absent a data-based approach to setting block thresholds for credit SBS instruments, the proposal runs the risk that $5 million may be an inappropriately high threshold for those products, which may widen bid/offer spreads, further reduce liquidity, and force large-sized transactions to be publicly reported with their full size, leaving the dealer that ‘‘wins’’ in the position of risking the market moving against the dealer before the dealer is able to adequately lay-off its exposure. This risk to the dealer, the commenter asserts, could increase the costs of transacting with immediacy substantially, leading to overall increased costs and time delays in executing hedges, and adding to or taking down positions, which would have a direct impact on clients and endusers, who will ultimately bear the increased costs and inefficiencies when forced to split large trades into smaller sizes for liquidity purposes. The commenter states that these clients, endusers, and liquidity providers may decide that it is more economical to exit the market entirely, given that most of them do not trade in large volumes of SBS.209 The same commenter also states that, because ‘‘the appropriate block threshold depends on factors such as liquidity and risk sensitivity[,] which can change over time, . . . the rules should provide a formal adjustment mechanism that would allow market participants to petition the Commission to temporarily change block thresholds based on observed market conditions, or enable the Commission’s staff to do so, 209 See PO 00000 id. Frm 00026 Fmt 4701 Sfmt 4700 subject to a public comment process.’’ 210 Several commenters argue for establishing a range of block trade threshold sizes, based on the product.211 One commenter recommends that the Commission delay implementation of the required execution methods until it considers its approach to block trades more comprehensively.212 This commenter argues that calibrating appropriate block threshold sizes for SBSs has significant implications for market participants from both a pre- and a post-trade transparency perspective. With respect to pre-trade transparency, the commenter states that requiring a fund to disclose its trading interest in an SBS of a large notional size to multiple participants—via an order book or an RFQ system—would ‘‘enable opportunistic market participants to piece together information about the fund’s holdings or investment strategy and lead to frontrunning of those potential trades.’’ 213 With respect to post-trade transparency, the commenter states that setting a block trade threshold that is too high would unnecessarily limit the ability to report large-sized SBS transactions on a delay, which would make it difficult for liquidity providers to hedge such positions, leading to higher trading costs and less efficient trading for funds and other market participants. The commenter also states that the magnitude of these risks depends on, among other factors, an SBS’s liquidity profile. The commenter also states that having a single threshold—across all applicable SBSs with respect to SBSEF trading and for any additional future rulemaking related to post-trade public reporting—does not adequately account for varying levels of liquidity across different categories or types of SBSs. The commenter recommends that, given the differences in liquidity across different SBSs, the Commission should base its thresholds on more comprehensive transaction data obtained pursuant to Regulation SBSR. The commenter asserts that taking such a data-driven approach would allow the Commission to assess the liquidity of different SBSs based on, for example, swap term, underlying security, and other characteristics. The commenter also argues that this would enable the Commission, similar to the CFTC, to formulate different types or categories of 210 Id. at 9 n.23. MFA Letter, supra note 18, at 7; ICI Letter, supra note 18, at 11; SIFMA AMG Letter, supra note 18, at 10. 212 See ICI Letter, supra note 18, at 11–12. 213 Id. at 11. 211 See E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 SBSs and propose differing block trade sizes that are more appropriately tailored to the liquidity characteristics of each type or group. Another commenter states that the CFTC sets different minimum block sizes for different categories of swaps and argues that the Commission should similarly develop a more structured and tailored approach.214 The commenter expresses concerns that setting a miscalibrated block size will likely limit the utility of the block trade exception, thereby preventing many market participants from executing transactions on SBSEFs. Another commenter recommends that the Commission adopt the CFTC’s approach for block trades based on a ‘‘67 percent notional amount calculation.’’ 215 That commenter also recommends that the Commission reserve the ability to update block thresholds on a regular basis to ensure they remain representative of current market conditions.216 Another commenter states that the proposed block threshold is not a result of any empirical analysis on the market conditions for credit SBSs and suggested that, as the SBS market develops and grows, it may become more appropriate for amendments to the credit SBS threshold.217 The Commission has considered the comments received and has determined, for the reasons discussed below, not to adopt a definition of ‘‘block trade.’’ While the Commission had proposed the single block threshold for credit SBS based on its preliminary view that the block-trade threshold applicable to an SBS trade should be consistent with any reporting cap for that SBS trade, and any reporting cap applicable to the cash markets for the securities,218 the Commission acknowledges commenters’ concerns that the proposed $5 million block-trade threshold for all credit SBSs would not be sufficiently tailored to the unique and varying trading and risk characteristics of the full range of credit SBS, creating the potential for the adverse market risks that commenters point out may arise from having a onesize-fits-all block threshold. Further, unless and until the Commission has made a clearing determination for a given SBS and an SBSEF or a national securities exchange has made that SBS ‘‘available to trade,’’ all transactions in that SBS will be 214 See MFA Letter, supra note 18, at 7. Citadel Letter, supra note 18, at 9. 216 See id. at 10. 217 See SIFMA AMG Letter, supra note 18, at 10. 218 See 2019 Cross-Border Application of Certain Security-Based Swap Requirements, SEA Release No. 87780 (Dec. 18, 2019), 85 FR 6270, 6347 (Feb. 4, 2020) (‘‘2019 Cross-Border Adopting Release’’). 215 See VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 Permitted Transactions. On the effective date of Regulation SE, and until the Commission has made a clearing determination for an SBS, no SBSEF or national securities exchange will be able to make that SBS ‘‘available to trade.’’ Consequently, there could be no mandatory trading requirement and thus there are no transactions to be excepted. Without a mandatory trading requirement, a block-trade threshold, therefore, has no effect on the ability of market participants to choose their preferred means of execution for trades in that SBS. Unless and until the Commission has made a mandatory clearing determination regarding an SBS, it is not necessary to define a block-trade threshold for SBS, and it would be appropriate for the Commission to identify a block-trade threshold in the future after considering credit SBS transaction data and credit SBS markets at that time. In addition, the Commission agrees with commenters that additional consideration of credit SBS transaction data, including data reported under Regulation SBSR, would help the Commission determine the appropriate block threshold for credit SBS products, including whether different thresholds should apply to different types or groups of SBS. The Commission also agrees with commenters that the credit SBS markets are likely to evolve over time and that analysis of market data continues to be an important aspect of setting appropriate thresholds for both block trades and credit SBS public trade reporting.219 Therefore, the Commission is not adopting the proposed definition of ‘‘block trade’’ under Proposed Rule 802, or any other block-trade threshold.220 In conjunction with any mandatory clearing determination by the 219 In adopting Regulation SBSR, the Commission directed its staff to make reports in connection with the determination of block thresholds and reporting delays for security-based swap transaction data. See 17 CFR 242.901 (Appendix) (discussing the studies for the determination of block thresholds and reporting delays); see also Regulation SBSR Adopting Release I, supra note 140, 80 FR at 14625. The Commission stated that it intends to use these reports to inform its specification of the criteria for determining what constitutes a large notional SBS transaction (i.e., block trade) for particular markets and contracts; and the appropriate time delay for reporting large notional SBS transactions to the public. See 17 CFR 242.901 (Appendix). The reports for each asset class are to be completed no later than two years following the initiation of public dissemination of security-based swap transaction data by the first registered SDR in that asset class— in other words, the reports are anticipated to be complete by Feb. 14, 2024—and then published for comment in the Federal Register. See id. 220 Because the Commission is not adopting a definition of ‘‘block trade’’ at this time, it is also modifying other rules within Regulation SE that reference block trades. See supra note 41. PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 87181 Commission for SBS, or with any Commission proposal to specify the criteria for determining what constitutes a large notional SBS transaction for particular markets and contracts with respect to trade reporting, the Commission will have the opportunity to engage in rulemaking to propose a definition of ‘‘block trade’’ for purposes of Regulation SE—and to solicit public comment on Commission’s proposal and its economic analysis of the proposed definition—before it considers adopting a definition. In response to the comment that the Commission should delay implementation of the trade execution requirement until it has considered block trades more comprehensively, unless and until the Commission has made a clearing determination for a given SBS and an SBSEF or a national securities exchange has made that SBS ‘‘available to trade,’’ all transactions in that SBS will be Permitted Transactions. Thus, it is not necessary to formally delay the implementation of the trade execution requirement, because the Commission will have the opportunity if and when it makes a clearing determination for SBS—i.e., before any SBS transaction becomes a Required Transaction—to address whether a block-trade threshold should be set; what methodology should be used to determine that threshold; and what that threshold would be. At that time, because amending Rule 802 to define ‘‘block trade’’ would entail notice-andcomment rulemaking, market participants would have the opportunity to comment on the Commission’s proposed action. For the reasons discussed above, the Commission is not adopting the definition of ‘‘block trade’’ in Rule 802 as proposed but is instead adding a note to Rule 802 informing stakeholders the Commission has not yet adopted a definition of ‘‘block trade.’’ 221 (iii) Block-Trade Definition for Equity SBS In the Proposing Release, the Commission did not propose a definition of ‘‘block trade’’ applicable to equity SBS. Accordingly, no equity SBS would qualify for the exception to required means of execution for block trades in Proposed Rule 815(a)(2).222 221 The Commission has corrected a crossreference from 242.800(x) to 242.802. 222 As discussed in the Proposing Release, appendix F to part 43 of the CFTC’s rules does not define a block trade for equity swaps, and accordingly, no equity swap transaction could qualify for the exception to the required means of execution for block trades under § 37.9(a)(2). See Proposing Release, supra note 1, 87 FR at 28896. E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87182 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations Several commenters submitted comment letters on the proposal to exclude equity swaps from the proposed block-trade exception.223 One commenter states that, in its view, the use of block trades for equity SBS is at least as necessary as for credit SBS, due to the need to customize the size of transactions and to obtain timely and efficient executions.224 This commenter asserts that requiring equity SBS trades to be executed only through the order book or RFQ system could result in these trades having ‘‘significant price impact’’ on SBSEF products, which would ultimately inhibit the ability of market participants to efficiently arrange and execute large, customized trades that are essential for market participants’ risk management activities.225 The commenter also asserts that this would disincentivize market participants from using equity SBS for their legitimate business purposes, including hedging, which could increase volatility and reduce liquidity in equity SBS markets (as well as underlying equity markets). The commenter also argues that excluding equity SBS block trades would ultimately inhibit capital formation as an inability to execute blocks in equity SBS would make it riskier, more expensive, and more difficult to hedge, which would in turn inhibit market participants from participating in offerings. This commenter further states that equity SBS are quite distinct from CFTC equity swaps in ways that make it more critical to allow block trades in equity SBS. Specifically, the commenter states that since CFTC-regulated equity swaps are based on broad-based equity indices, which reflect markets and not individual issuers, they are used to assume or hedge exposure to the relevant market or sector generally. By contrast, the commenter posits that equity SBS may reference a single name and are therefore a preferred tool for hedging exposure to specific equities, which makes them essential to capital formation. The commenter also argues that markets for SBS on individual equities will, in many cases, be less liquid than the markets for broad-based equity index swaps, further necessitating the opportunity for block trades.226 Another commenter also recommends that the Commission conduct further 223 See MFA Letter, supra note 18, at 6–7; ICI Letter, supra note 18, at 12–13; ISDA–SIFMA Letter, supra note 18, at 9; SIFMA AMG Letter, supra note 18, at 10. 224 See MFA Letter, supra note 18, at 6–7. 225 Id. at 6. 226 See MFA Letter, supra note 18, at 6–7. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 analysis before determining block treatment for equity SBSs.227 That commenter states that it previously disagreed with CFTC’s similar approach with respect to equity swaps. The commenter argues that the Commission should undertake additional analysis to demonstrate that the CFTC’s justifications for its approach apply equally to the categories or types of equity-based swaps specifically under its jurisdiction, which include, for example, total return swaps based on a single security or loan, or a narrowbased security index. The commenter also recommends that the Commission determine whether block treatment would be appropriate for equity-based SBSs in the pre-trade transparency context. The commenter argues that similar to other categories or types of large-sized SBSs that would qualify for block treatment, flexible execution with respect to large-sized, equity-based SBSs is important to avoid information leakage regarding a market participant’s investment strategies. One commenter suggests that, if there is the ability to have fungible, singlename total return swaps in equity products, and they become subject to mandatory clearing in the future, that the commenter would expect there to be appropriately calibrated block size thresholds that are applied to those equity-based swaps.228 Another commenter suggests that if an equity SBS product becomes subject to mandatory trade execution, there should be an appropriate methodology for establishing equity block thresholds.229 While the Commission acknowledges commenters’ concerns, the general concerns expressed about the need for equity blocks lack specificity or analysis regarding a particular definition of ‘‘block trade’’ for equity SBS—whether a specific threshold or a methodology— that the Commission could adopt. Commenters’ concerns focus on the need to customize the size of equity SBS transactions, to obtain timely and efficient executions, and to avoid information leakage. And commenters state that the lack of a block-trade exception could result in significant price impact and inhibit the large, customized trades essential for risk management and hedging, which would discourage hedging, increase volatility and reduce liquidity in equity SBS markets (as well as underlying equity markets), and ultimately inhibit capital formation and participation in offerings. 227 See ICI Letter, supra note 18, at 12–13. SIFMA AMG Letter, supra note 18, at 10. 229 See ISDA–SIFMA Letter, supra note 18, at 9. 228 See PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 With respect to the stated need for certain parties to use an equity SBS block-trade exception, a relevant consideration for the Commission in determining whether to establish a block-size threshold for equity SBSs, if and when it makes a clearing determination for those SBSs, is whether establishing that block-trade threshold would have the potential to create a situation where SBSEFs provide less transparency than exists in the underlying cash equity markets or the listed options markets. An inappropriate block-trade threshold for equity SBSs could create incentives for market participants to favor equity SBS markets over cash equities or listed options markets, either of which may be used, in many cases, to achieve economically equivalent trading objectives as strategies using equity SBS, and neither of which provides for block-trade reporting delays. If transactions were to migrate from cash equities or listed options markets to the SBS market, this could lead to decreased market transparency and could potentially undercut the goal of the Dodd-Frank Act to bring transparency to the trading of SBS.230 Additionally, as a general matter, it is important to harmonize the treatment of equity SBS with the treatment of equity swaps. There is no block-trade exception for equity swaps in the CFTC’s rules, and the Commission does not wish to create incentives for market participants to trade equity SBS over swaps. And while a commenter states that equity SBS are quite distinct from equity swaps, the treatment of equity SBS transactions should be broadly consistent with the treatment of transactions in the cash equities underlying them to avoid, as discussed above, creating incentives for market participants to trade equity SBS instead of the underlying cash instruments. For these reasons and those discussed above regarding credit SBS,231 the Commission has determined not to adopt a definition of ‘‘block trade’’ in Rule 802. Thus, with respect to commenters’ concerns, until the Commission has made a clearing determination with respect to equity SBS, equity SBS will be able to trade OTC, just as their underlying cash equities can trade OTC. Moreover, before making a clearing determination for an equity SBS—which would create 230 See Proposing Release, supra note, 87 FR at 28894 (‘‘The legislative history of the Dodd-Frank Act indicates that exchange trading is a mechanism to ‘provide pre- and post-trade transparency for end users, market participants, and regulators.’ ’’ S. Rep. No. 111–176, at 34 (2010)). 231 See supra section V.E.1(c)(ii). E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 the circumstances in which equity SBS might be MAT and therefore subject to the trade-execution requirement—the Commission would have the opportunity to solicit and consider additional public comment on the effect of such a determination, including comment with respect to the concerns commenters have raised to date regarding, among other things, timely and efficient executions, hedging, and capital formation. 2. Rule 815(b) Paragraph (b) of Proposed Rule 815 would require a time delay for certain orders being entered by a broker or dealer on an SBSEF’s order book. This provision would only apply to situations in which the broker or dealer is seeking to trade against a customer order (a ‘‘facilitation cross’’) or to cross two customer orders (a ‘‘customer cross’’), following some form of prearrangement or pre-negotiation of such orders, and where the transaction is a Required Transaction.232 Under Proposed Rule 815(b)(1), an SBSEF would require that the broker or dealer must expose one of the two orders in this transaction on the SBSEF order book for a minimum time period of 15 seconds so that other market participants have the opportunity to offer a better price than the broker or dealer had intended for the cross. Proposed Rule 815(b)(2) would permit the SBSEF to adjust the time period of the required delay based on the SBS’s liquidity or other product-specific considerations, provided that the time delay is a sufficient period of time so that an order is exposed to the market and other market participants have a meaningful opportunity to execute against the order. The Commission received comments on the provisions regarding the prearrangement or pre-negotiation of trades in Proposed Rule 815(b).233 One commenter requests that the Commission address the extent to which market participants may utilize ‘‘preexecution communications’’ when trading on an SBSEF, noting that the CFTC has specified that such communications may occur pursuant to a SEF’s rules that have been certified or approved by the CFTC.234 This commenter urges the Commission to align its rules to those of the CFTC in this respect, given that pre-execution 232 The Commission has modified the text of Rule 815(b)(1) to specify that the requirements in this provision only apply with regards to Required Transactions. 233 See Citadel Letter, supra note 18, at 14–15; ICI Letter, supra note 18, at 13–14. 234 See ICI Letter, supra note 18, at 13–14. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 communication is a standard market practice that investment advisers use to guard against information leakage and obtain fair pricing for large-sized trades and packaged transactions, among other types of transactions, on behalf of funds and other clients. Another commenter, arguing that the Proposing Release and the CFTC rules are silent with respect to the permissibility of pre-arrangement on RFQ systems, urges the Commission to require SBSEF rulebooks to prohibit the pre-arrangement of Required Transactions, arguing that it is important that pre-trade transparency and the RFQ-to-3 requirement not be undermined through bilateral prearrangement of a Required Transaction followed by a directed RFQ that merely formalizes the transaction.235 The Commission agrees with the comment that it should view preexecution communications in a way that is consistent with CFTC guidance on this matter.236 The CFTC has viewed pre-execution communications as communications between market participants to discern interest in the execution of a transaction prior to the exposure of the market participants’ orders (e.g., price, size, and other terms) to the market and has stated that such communications include discussion of the size, side of market, or price of an SBS order or a potentially forthcoming order.237 Consistent with the CFTC’s approach, the Commission is generally of the view that the terms ‘‘prenegotiation’’ and ‘‘pre-arrangement’’ within the meaning of Rule 802(b) should ordinarily be understood to include all communications between market participants to discern interest in the execution of a transaction prior to the exposure of the market participants’ orders (e.g., price, size, and other terms) to the market, including discussion of the size, side of market, or price of an SBS order, or a potentially forthcoming order. Additionally, while the CFTC has acknowledged that pre-execution communications may be permitted by a SEF, it has stated that any SEF that allows pre-execution communications must adopt rules regarding such communications that have been certified to or approved by the CFTC.238 Consistent with this view, the rulebook of an SBSEF generally should address, with clarity, the application of the terms ‘‘pre-arrangement’’ and ‘‘preCitadel Letter, supra note 18, at 15. ICI Letter, supra note 18, at 13–14. 237 See 2013 CFTC Final SEF Rules Release, supra note 9, 78 FR at 33503. 238 See id. 87183 negotiation’’ in Rule 802(b) so that market participants will know what types of pre-execution communications are covered by the rule. An SBSEF’s rules in this regard must, of course, also comply with the other provisions of the SEA and the rules thereunder, including the impartial access requirement of Rule 819(c).239 With respect to the comment that the Commission should ban prearrangement or pre-negotiation of RFQ trades on an SBSEF, while the CFTC regulation is silent regarding the permissibility of pre-arrangement on RFQ systems, the CFTC’s adopting release with respect to its SEF rules expressly contemplates the permissible pre-arrangement of trades executed via RFQ.240 Moreover, the CFTC explained in its adopting release that it refrained from requiring a time delay for Required Transactions entered into RFQ systems because the requirement to send an RFQ to three other market participants already provides pre-trade price transparency.241 Thus, the CFTC has acknowledged that pre-arranged Required Transactions may be submitted into a SEF’s RFQ system, and without a time delay. The Commission recognizes that, as one of the commenters also states, preexecution communications are a standard practice for many participants in the SBS market, and that to prohibit them entirely would be a major departure from the CFTC’s approach and could have significant negative ramifications on the ability of market participants to effect their SBS transactions. Accordingly, and to maintain harmonization with the CFTC’s treatment of pre-arrangement and pre-negotiation of swaps transactions, the Commission is not modifying Rule 815(b) to prohibit the use of pre-arrangement or prenegotiation with respect to SBS transactions via RFQ or to impose a time delay before any such SBS can be executed via RFQ. One of the commenters also requests that the Commission require SBSEFs to provide periodic regulatory reporting around pre-arranged trading on their platforms, including reporting the percentage of pre-arranged orders for which other SBSEF participants step in to join the trade, and that it also require an SBSEF to demonstrate that it offers a bona fide order book in order for the SBSEF to permit the execution of prearranged orders (such as a minimum 235 See 236 See PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 239 See infra section VI.B.3. 2013 CFTC Final SEF Rules Release, supra note 9, 78 FR at 33504. 241 See id. 240 See E:\FR\FM\15DER2.SGM 15DER2 87184 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations level of trading activity on the order book or a minimum percentage of prearranged orders where pricing is improved as a result of other SBSEF participants stepping in).242 The suggested reporting requirements or ‘‘bona fide order book’’ standard, however, would exceed what SEFs are required to do under the CFTC rules. The Commission is concerned that different or additive requirements to the key concept of an order book, such as whether that order book is ‘‘bona fide,’’ could introduce complexity and confusion if one set of trading protocols applied to Required Transactions for swaps but different protocols—different from ones that have been understood and utilized for many years—applied to Required Transactions for SBS transactions. Moreover, the commenter’s proposed reporting requirements—such as a minimum percentage of prearranged orders where pricing is improved as a result of other SBSEF participants stepping in—appear to be primarily relevant to an evaluation of a particular SBSEF has met the standard for having a ‘‘bona fide’’ order book. Accordingly, because the added complexity and costs associated with imposing the ‘‘bona fide’’ order book standard have not been justified, it is not appropriate to adopt the proposed regulatory reporting requirement suggested by the commenter with respect to cross-trading. For the reasons discussed above, the Commission is adopting Rule 815(b) as proposed, with a clarifying change to the rule text to reiterate that the requirement applies only to Required Transactions.243 3. Rule 815(c) Proposed Rule 815(c) is modeled on § 37.9(c) of the CFTC’s rules and would define a ‘‘Permitted Transaction’’ as a transaction not involving an SBS that is subject to the mandatory trade execution requirement. This rule provides that an SBSEF may offer any method of execution for Permitted Transactions. The Commission did not receive any comments on the definition of Permitted Transactions 244 and is adopting Rule 242 See Citadel Letter, supra note 18, at 14–15. heading of the proposed rule text already indicated that it was a ‘‘Time delay requirement for Required Transactions on an order book.’’ The rule text has been modified only to add ‘‘With regard to Required Transactions,’’ at the beginning of the rule text, to reiterate the parameters indicated in the title and to clarify its application. 244 As discussed above, one commenter recommends that the requirements of Rule 815(a)(3) be modified to apply to all SBS transactions on an SBSEF, which would include Permitted Transactions. See supra note 190 and ddrumheller on DSK120RN23PROD with RULES2 243 The VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 815(c) as proposed, for the reasons discussed in the Proposing Release. 4. Rule 815(d) Paragraph (d) of § 37.9 provides an exception for package transactions that allows for flexible methods of execution for what would otherwise be Required Transactions. The Commission proposed to include similar exceptions in Proposed Rule 815(d). Proposed Rule 815(d)(1) would define ‘‘package transaction’’ as two or more component transactions executed between two or more counterparties where at least one component is a Required Transaction, execution of each component is contingent upon the execution of all other components, and the component transactions are priced or quoted together as one economic transaction with simultaneous (or nearsimultaneous) execution of all components. Proposed Rule 815(d)(2) would provide that a Required Transaction that is executed as a component of a package transaction that includes a component SBS that is subject exclusively to the Commission’s jurisdiction, but is not subject to mandatory clearing, may be executed on an SBSEF using any method of execution as if it were a Permitted Transaction. Proposed Rule 815(d)(3) would provide that a Required Transaction that is executed as a component of a package transaction that includes a component that is not an SBS may be executed on an SBSEF using any method of execution as if it were a Permitted Transaction. Proposed Rule 815(d)(3) would further state that this general exception, which allows flexible means of execution for certain package transactions, shall not apply to a Required Transaction that is executed as a component of a package transaction in which all other non-SBS components are U.S. Treasury securities; a Required Transaction that is executed as a component of a package transaction in which all other non-SBS components are contracts for the purchase or sale of a commodity for future delivery; a Required Transaction that is executed as a component of a package transaction in which all other non-SBS components are agency mortgage-backed securities; or a Required Transaction that is executed as a component of a package transaction that includes a component transaction that is the issuance of a bond in a primary market. The Commission received comments on the proposed exception for packaged accompanying text (describing and discussing that comment). PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 transactions.245 Several commenters support the Commission’s proposal.246 One commenter supports the proposal to harmonize with the CFTC rules, but suggested modifications to the proposed rule text.247 First, the commenter suggests that Rule 815(d)(2) be modified so that the package-transaction exception is not available if the other SBS in the package is either subject to the clearing requirement or intended to be cleared. This commenter states that, because the scope of any future clearing requirement for SBSs is unclear, there may be significant trading activity in packages containing SBSs that are intended to be cleared, but not subject to the clearing requirement, and the commenter states that, for purposes of the package transaction exception, SBS that are cleared, whether by mandate or intention, should be treated the same. This commenter also recommends that Rule 815(d)(3) be modified to clarify that the exception would not apply to package transactions where all of the other components are swaps subject to the CFTC’s trade execution requirement. The commenter states that this modification would prevent evasion for packages containing only SBSs and swaps that are subject to trade execution requirements on the Commission and the CFTC side, respectively.248 Another commenter, while agreeing that it is appropriate to treat package transactions differently from outright, single-legged transactions, suggests that the Commission take a different approach from that of the CFTC, stating that the current state of the CFTC’s rules reflect the culmination of a phased implementation approach developed over time via no-action letters.249 That commenter argues that it would be better for the Commission to tailor its rules for packaged transactions to address the particular market dynamics relevant to the SBS market instead of the swaps market. The commenter recommends that the Commission build into the MAT determination process a framework for identifying what types of package transactions exist for prospectively MAT SBS and then develop tailored rules around the execution of such transactions. Rule 815(d) is closely modeled on § 37.9(d) and is designed to balance the goal of promoting transparency in the 245 See Bloomberg Letter, supra note 18, at 14, Citadel Letter, supra note 18, at 12–13, and ISDA– SIFMA Letter, supra note 18, at 9–10. 246 See Bloomberg Letter, supra note 18, at 14 and ISDA–SIFMA Letter, supra note 18, at 9–10. 247 See Citadel Letter, supra note 18, at 12–13. 248 See id. 249 See ISDA–SIFMA Letter, supra note 18, at 9– 10. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 SBS market through required methods of execution against the market efficiency of allowing multiple instruments to trade as a package using flexible methods of execution.250 As noted in the Proposing Release, a rule that was too lenient could subvert the goal of promoting transparency and competition through all-to-all trading, while a rule that was too strict could cause market participants to break the package into its individual components, thereby increasing transaction costs and reducing the economic purpose and efficiency of the package transaction.251 The Commission agrees with a commenter’s suggestions that Proposed Rule 815(d)(2) and (3) should be modified to narrow the scope of the package-transaction exception. Accordingly, the Commission is modifying these rules so that neither an SBS that is intended to be cleared (even if it is not required to be cleared) nor a swap subject to a CFTC trade execution requirement would create an exception from required methods of execution for a Required Transaction that is part of the same package. For purposes of exempting a Required Transaction in a package transaction from the required means of execution, there is no reason to distinguish mandatorily cleared SBS from voluntarily cleared SBS, or cleared swaps from cleared SBS. Therefore, the Commission is adding the words ‘‘and is not intended to be cleared’’ to Rule 815(d)(2) so that it covers only a Required Transaction that is executed as a component of a package transaction that includes a component securitybased swap that is subject exclusively to the Commission’s jurisdiction but is not subject to the clearing requirement under section 3C of the SEA and is not intended to be cleared. And the Commission is adding new subsection (iv) to Rule 815(d)(3) to provide that a Required Transaction in a package transaction is ineligible to be treated as a Permitted Transaction if it is ‘‘[a] Required Transaction that is executed as a component of a package transaction in which all other non-SBS components are swaps that are subject to a trade execution requirement under the CFTC’s rules.’’ 250 To the extent that counterparties may be facilitating a package transaction that involves a ‘‘swap,’’ as defined in section 1(a)(47) of the CEA, 7 U.S.C. 1a(47), or any contract for the purchase or sale of a commodity for future delivery (or option on such a contract), or any component agreement, contract, or transaction over which the Commission does not have exclusive jurisdiction, the Commission does not opine on whether such activity complies with other applicable law and regulations. 251 See Proposing Release, supra note 1, 87 FR at 28896. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 With respect to the suggestion that the Commission take a different approach from that of the CFTC and develop tailored rules for SBS, the packagetransaction rule is not the appropriate place to recognize the differences between the swaps and the SBS market. Rather, the clearing determinations and MAT determinations will necessarily consider the trading characteristics of a given SBS, and both these determinations will have to be made before the package transaction exception would ever potentially be relevant to a transaction in that SBS. For the foregoing reasons, the Commission is adopting Rule 815(d) with the modifications to paragraph (d)(2) and (d)(3), as described above. 5. Rule 815(e) Proposed Rule 815(e) is modeled on § 37.9(e), which requires SEFs to maintain rules and procedures for resolution of operational and clerical error trades, which could be for swaps that otherwise would be subject to required methods of execution. Proposed Rule 815(e) would also require an SBSEF to maintain rules and procedures that facilitate the resolution of error trades and sets forth certain requirements designed to promote resolution in a fair, transparent, and consistent manner. Definitions of the terms ‘‘correcting trade,’’ ‘‘error trade,’’ and ‘‘offsetting trade’’ would be included in Rule 802 rather than in Rule 815(e).252 The Commission received one comment letter on this provision.253 The commenter states that, with respect to a cleared SBS, correcting an error trade that was rejected by a clearing agency is not feasible unless the rejected error trade is declared by the SBSEF void ab initio. Otherwise, the commenter states, the parties might be encumbered by unresolved obligations related to the rejected SBS trade, and this might further prevent a timely and efficient resolution of the error. For this reason, the commenter recommends that the SBSEF should be able to declare void ab 252 See Proposed Rule 802 (defining ‘‘correcting trade’’ as a trade executed and submitted for clearing to a registered clearing agency with the same terms and conditions as an error trade other than any corrections to any operational or clerical error and the time of execution); Proposed Rule 802 (defining ‘‘error trade’’ as any trade executed on or subject to the rules of an SBSEF that contains an operational or clerical error); Proposed Rule 802 (defining ‘‘offsetting trade’’ as a trade executed and submitted for clearing to a registered clearing agency with terms and conditions that economically reverse an error trade that was accepted for clearing). These definitions are modeled on the definitions of the same terms in § 37.9(e)(1). 253 See Bloomberg Letter, supra note 18, at 3, 14. PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 87185 initio any trade rejected by a clearing agency.254 The CFTC’s rules for addressing error trades are well articulated and well understood by the market, and they continue to serve as an appropriate model for the Commission’s rules. Furthermore, because most if not all SBSEFs also will be registered with the CFTC as SEFs, close harmonization in this regard would allow dually registered entities to employ the same procedures for addressing error trades, whether they arise in the context of swap trading or SBS trading. Therefore, the rules for addressing error trades should not differ between the SBS regime and the swaps regime. While the Commission appreciates the difficulties that might arise in trying to correct an error trade that has been rejected by a clearing agency, under Proposed Rule 815(e), an SBSEF would be required to adopt rules and procedures for addressing such situations, which it could do by, among other things, declaring trades rejected by a clearing agency as void ab initio, as it would be required to do for non-error trades that are rejected for clearing under Rule 815(g). For the foregoing reasons, the Commission is adopting Rule 815(e) as proposed. 6. Rule 815(f) Rule 815(f) is modeled on § 37.9(f), which addresses counterparty anonymity and is widely referred to as the prohibition on ‘‘post-trade name give-up’’ (‘‘PTNGU’’). Proposed Rule 815(f) would generally prohibit any person, directly or indirectly (including through a third-party service provider), from disclosing the identity of a counterparty to an SBS that is executed anonymously on an SBSEF and intended to be cleared and requires the SBSEF to establish and maintain rules to that effect. Furthermore, it provides that ‘‘executed anonymously’’ as used in the rule includes an SBS that is prearranged or pre-negotiated anonymously, including by an SBSEF participant. Finally, Rule 815(f) provides that, for a package transaction that includes a component SBS that is not intended to be cleared, disclosing the identity of a counterparty would not violate the rule. The Commission received several comments on Proposed Rule 815(f).255 Most of the commenters support the 254 See id. Bloomberg Letter, supra note 18, at 14–15, Citadel Letter, supra note 18, at 10–12, SIFMA AMG Letter, supra note 18, at 10–12, WMBAA Letter, supra note 18, at 5. 255 See E:\FR\FM\15DER2.SGM 15DER2 87186 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 rule.256 Several commenters state that they strongly support the proposal harmonizing with the CFTC rules to prohibit PTNGU for SBSs executed anonymously on SBSEFs and that are intended to be cleared.257 One commenter asserts that PTNGU has no legitimate purpose for centrally cleared financial instruments, since trading counterparties face the central clearinghouse and do not have any credit, operational, or legal exposure to each other post-trade.258 This commenter states that PTNGU functions as a source of uncontrolled information leakage since a market participant has no control over who it will be matched with when executing through a pretrade anonymous trading protocol, such as an order book. Accordingly, a buyside firm must be comfortable potentially sharing its trading activity with every other participant on the trading venue, including other buy-side firms before using an anonymous order book with PTNGU. The commenter considers this an unattractive proposition for buy-side firms that completely undermines the anonymous nature of the trading protocol and deters access and participation. The commenter also argues that PTNGU is a discriminatory practice that impedes market participant access to trading venues by allowing dealers to monitor whether buy-side firms have started to transact in anonymous order books and use this information as a policing mechanism to deter buy-side access and participation.259 The commenter also states that Rule 815(f)(3) 260 is drafted to prevent evasion by voice brokers. Other commenters express similar views.261 Another commenter states that if the Commission prohibits PTNGU, its 256 See Bloomberg Letter, supra note 18, at 14–15, Citadel Letter, supra note 18, at 10–12, SIFMA AMG Letter, supra note 18, at 10–12. 257 See Citadel Letter, supra note 18, at 10; SIFMA AMG Letter, supra note 18, at 10. 258 See Citadel Letter, supra note 18, at 10. 259 See Citadel Letter, supra note 18, at 11. This commenter also cites news articles relating the accounts of buy-side firms of dealers contacting them to get them not to join SEF platforms. See id. at 11 n.20. 260 Rule 815(f)(3) provides that SBSs that are ‘‘executed anonymously’’ include SBSs that are prearranged or pre-negotiated anonymously, which would include voice broker trades. 261 See SIFMA AMG Letter, supra note 18, at 10 (stating that PTNGU for anonymously traded cleared SBSs is unnecessary and does not provide any advantages to clients, but rather leads to uncontrolled information leakage); Bloomberg Letter, supra note 18, at 15 (stating that prohibiting PTNGU facilitates and promotes trading on SBSEFs and promotes pre-trade price transparency by encouraging more participants to bid anonymously, whereas the practice of requiring disclosure of one counterparty’s name to the other counterparty increases the risk of information leakage and can deter participation by liquidity seekers on SBSEFs). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 policy would mirror the CFTC’s approach and that certain traders would be more likely to participate on venues that offer anonymous execution, including order book functionality.262 This, in turn, the commenter argues, could result in deeper liquidity pools on SBSEFs and promote the development, innovation, and growth of the SBS market.263 The commenter asserts that the Commission’s rules should be designed to better promote the development, innovation, and growth of the swaps market, with the intent of attracting liquidity formation onto SBSEFs, in a manner that adds to efficiency for the market and market participants. One commenter also states that PTNGU was a more important feature of the market when few swaps were centrally cleared and market participants needed to know their counterparty’s identity to manage the associated credit risk; however, with the prevalence of central clearing, the need for PTNGU is diminished for cleared swaps.264 A few commenters, while generally supportive of the rule, suggest some modifications to it.265 One commenter argues that Rule 815(f)(4) 266 is overbroad and may significantly limit the scope of the prohibition.267 Specifically, this commenter states that many security-based swaps are transacted as part of a package transaction with other instruments (e.g., single-name CDS and index CDS). The commenter argues that, at a minimum, any exception for package transactions should only apply to packages that include a component that is not an SBS intended to be cleared or a swap that is intended to be cleared. The commenter expresses concern that the current language would appear to exempt packages containing CFTC-regulated swaps, even if those instruments should be subject to an equivalent prohibition (notwithstanding the working of the corresponding CFTC exception for packages). The commenter encourages the Commission to work with the CFTC to avoid creating a loophole for common packages containing swaps and security262 See SIFMA AMG Letter, supra note 18, at 10. id. at 11. 264 See Bloomberg Letter, supra note 18, at 15. 265 See Bloomberg Letter, supra note 18, at 15, Citadel Letter, supra note 18, at 11, WMBAA Letter, supra note 18, at 5. 266 Rule 815(f)(4) provides that, for a package transaction that includes a component transaction that is not an SBS intended to be cleared, disclosing the identity of a counterparty shall not violate the other provisions in the rule that prohibit the disclosure of the identity of a counterparty for SBSs executed anonymously. 267 See Citadel Letter, supra note 18, at 11. 263 See PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 based swaps that are all intended to be cleared. Furthermore, the commenter questions the need for Rule 815(f)(4) at all. The commenter states that, as proposed, the prohibition on PTNGU applies only to security-based swaps that are executed anonymously and intended to be cleared. The commenter argues that PTNGU could still be used for the uncleared security-based swap leg of a package transaction containing both a cleared security-based swap and an uncleared security-based swap, even without Rule 815(f)(4). One commenter argues that the Commission should take an evolutionary approach to the prohibition on name give-up, which initially should apply only to Required Transactions, and not Permitted Transactions on an SBSEF where clearing may not be certain leading up to or at the time of trade execution.268 This commenter believes that this approach would encourage liquidity formation and further development of less liquid SBSs where an SBSEF trading mandate is not required. One commenter suggests that the Commission augment the rule with a prohibition on trade-relationship documentation for SBS that are intended to be cleared and grant the SBSEF the ability to void ab initio trades rejected from clearing to avoid the necessity of post-trade name disclosure in case of an error trade.269 The Commission agrees with commenters that prohibiting post-trade name give-up for cleared trades is reasonably necessary to facilitate and promote trading on SBSEFs, and Proposed Rule 815(f) would accomplish these goals. The Commission disagrees with the comment that Rule 815(f)(4) is overbroad and unnecessary. The Commission finds that Rule 815(f)(4) is necessary and important to provide clarity about the application of the PTNGU prohibition to package transactions and also to provide consistency with the CFTC’s approach. Narrowing the exception in Rule 815(f)(4) as suggested by one commenter so that it would not apply if a component of a package transaction were a cleared swap would cause the Commission’s approach to PTNGU to differ from that of the CFTC and create the potential for different PTNGU rules to apply to different components of the same package transaction. That is, if the Commission modified Rule 815(f)(4) as the commenter suggests, in the case of a package transaction comprising an 268 See 269 See E:\FR\FM\15DER2.SGM WMBAA Letter, supra note 18, at 5. Bloomberg Letter, supra note 18, at 15. 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations SBS that is intended to be cleared and a swap that is intended to be cleared, Rule 815(f)(4) would prohibit PTNGU, but § 37.9(f)(4) would permit PTNGU.270 To avoid this situation, the Commission declines to modify Rule 815(f)(4) as suggested. Further, the Commission disagrees with the comment that the prohibition on PTNGU should initially apply only to Required Transactions. The prohibition on PTNGU is designed to promote pre-trade price transparency by encouraging a greater number, and a more diverse set, of market participants to anonymously post bids and offers on regulated markets, and it does so by preventing the sharing of the names of counterparties where such sharing is unnecessary—namely, when a transaction is cleared. Whether clearing the transaction is required or voluntary is not relevant to the purposes of prohibiting PTNGU. With regards to trades rejected from clearing, the prohibition on PTNGU would apply to all trades that are intended to be cleared, not just those that are successfully cleared, so that prohibition would also apply to a trade that is submitted but then rejected for clearing. For the foregoing reasons, the Commission is adopting Rule 815(f), as proposed, with minor technical modifications.271 7. Rule 815(g) ddrumheller on DSK120RN23PROD with RULES2 One commenter states that in order to protect counterparty anonymity in the event of an SBS that is executed anonymously and intended to be cleared, but is nonetheless rejected for clearing, the SBSEF should declare the trade void ab initio.272 The commenter suggests that the Commission augment the rule to prohibit trade relationship documentation for SBS that are intended to be cleared and to grant SBSEFs the ability to declare trades rejected from clearing void ab initio in order to avoid post-trade name disclosure in the case of a rejected trade. 270 Section 37.9(f)(4) provides, in relevant part, that ‘‘[f]or a package transaction that includes a component transaction that is not a swap intended to be cleared, disclosing the identity of a counterparty shall not violate’’ the prohibition against PTNGU. 17 CFR 37.9(f)(4). 271 The Commission has corrected a reference in paragraph (f)(2) to a ‘‘security-based swap execution facility’’ to refer instead to a ‘‘security-based swap.’’ The Commission has also changed first instance of the word ‘‘paragraph’’ in paragraph (f)(4) to ‘‘paragraphs.’’ 272 See Bloomberg Letter, supra note 18, at 14–15. See also Citadel Letter, supra note 18, at 5 (stating that the CFTC guidance regarding trades that are void ab initio has eased trading of cleared swaps on SEFs and ‘‘facilitated the entry of new liquidity providers that do not have legacy bilateral trading documentation in place with clients’’). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 The Commission agrees that declaring such trades void ab initio, which helps prevent trades rejected from clearing from effectively becoming bilateral transactions where the identity of counterparties might be disclosed. This approach is also consistent with practices in the swaps market with respect to such trades.273 Therefore, the Commission is amending Rule 815 to add a new paragraph (g), which specifies that SBSEFs shall establish and enforce rules that provide that a security-based swap that is intended to be cleared at the time of the transaction, but is not accepted for clearing at a registered clearing agency, shall be void ab initio. In light of new paragraph (g), the Commission is generally of the view that it would not be consistent with the impartial-access requirements of Rule 819(c) for an SBSEF to permit its members to require bilateral relationship documentation from their counterparties with respect to SBS that are intended to be cleared.274 Consequently, the Commission finds that it is not necessary to include a prohibition on trade relationship documentation in Rule 815 for SBS that are intended to be cleared. For the foregoing reasons, the Commission adopting Rule 815(f)(1) through (4), with minor technical modifications,275 and is also adding a new paragraph (g), as discussed above. F. Rule 816—Trade Execution Requirement and Exemptions Therefrom Section 3C of the SEA 276 sets out a procedure whereby an SBS becomes subject to mandatory clearing. Section 3C(h) of the SEA provides that, if a transaction involving an SBS is subject to the mandatory clearing requirement, the counterparties shall execute the transaction on an exchange, on an SBSEF registered under section 3D of the SEA, or on an SBSEF that is exempt from registration under section 3D(e) of the SEA, unless no national securities exchange or SBSEF makes the SBS available to trade or the SBS transaction is subject to an exception from the clearing requirement under section 3C(g) of the SEA. This obligation under 273 See CFTC, Division of Clearing and Risk and Division of Market Oversight Staff Guidance on Swaps Straight-Through Processing (Sept. 26, 2013), available at https://www.cftc.gov/sites/ default/files/idc/groups/public/@newsroom/ documents/file/stpguidance.pdf (‘‘CFTC 2013 STP Guidance’’). 274 See also infra section VI.B.3. 275 See supra note 271. 276 15 U.S.C. 78c–3. PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 87187 section 3C(h) is commonly referred to as the ‘‘trade execution requirement.’’ Proposed Rule 816 of Regulation SE establishes procedures for an SBSEF to make an SBS ‘‘available to trade’’ (assuming it is also subject to the clearing requirement), thereby activating the trade execution requirement with respect to that SBS. Rule 816 also includes three proposed exemptions from the trade execution requirement. Paragraphs (a) through (d) of Rule 816 are modeled on § 37.10 of the CFTC’s rules and establish a process whereby an SBS product is MAT by an SBSEF. An SBSEF may list an SBS that is subject to mandatory clearing, but listing the product does not by itself subject the product to the trade execution requirement in section 3C(h) of the SEA. Only if a product that is subject to mandatory clearing is listed and a MAT determination has been made would the SBS then become subject to the trade execution requirement. A MAT determination would have to be made and filed by an SBSEF pursuant to Rule 816 to trigger the trade execution requirement, similar to the MAT process of § 37.10. 1. General Comments on Harmonization With CFTC MAT Process Several commenters cite efforts by the CFTC to review its MAT process as an indication that the Commission should take a different approach for making MAT determinations rather than align with the CFTC’s current rule.277 One commenter cites to the findings of the Market Risk Advisory Committee (‘‘MRAC’’), an advisory committee that provided recommendations to the CFTC, and states that the MRAC and the CFTC raised concerns regarding the current MAT process for swaps.278 This commenter states that reforming the MAT process was included as an agenda item in the CFTC 2021 fall rulemaking agenda and that, for this reason, the Commission should align the MAT process for SBS with the recommendations made by the MRAC or, in the alternative, coordinate with the CFTC to ensure that the MAT process is aligned and conducted in a manner that allows input from a variety of stakeholders and the Commission. Another commenter also urges the Commission to review the CFTC MRAC’s recommendations with an eye towards adopting a more flexible regime given the unique characteristics of the 277 See Bloomberg Letter, supra note 18, at 15–16; ISDA–SIFMA Letter, supra note 18, at 5. 278 See Bloomberg Letter, supra note 18, at 15–16. E:\FR\FM\15DER2.SGM 15DER2 87188 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 SBS market.279 One commenter strongly recommends that the Commission refrain from adopting a MAT determination process that is based on the existing CFTC process, but rather coordinate with the CFTC as it considers potential reforms to improve its MAT process.280 It is appropriate for Regulation SE to establish a MAT SBS process that aligns with the CFTC’s process as closely as possible. While commenters state that the CFTC may be considering changes to its MAT process, the CFTC has not yet proposed any such changes, so it is not certain that the CFTC would adopt the recommendations of the MRAC, either in whole or in part, or with modification, or when the CFTC might act if it does make changes to its MAT process. Additionally, because no MAT determination can be made with respect to an SBS unless and until the Commission has made a mandatory clearing determination as to that SBS, the Commission would have the opportunity, if and when it makes a mandatory clearing determination with respect to an SBS, or category of SBS, to consider whether changes to the process for a MAT determination with respect to that SBS would be appropriate. Further, in the event that the CFTC does move forward with changes to its MAT process, the Commission will have the opportunity to reassess its own MAT process and to consider further harmonization with the CFTC regime, as appropriate. For the present, the CFTC’s procedures are well articulated and well understood by SBS markets, so closely harmonizing with these procedures would yield comparable regulatory benefits while minimizing burdens on SBSEFs. In particular, even though the SEF and SBSEF markets differ in ways that are relevant to the application of the criteria for MAT determinations, the criteria themselves are equally applicable to the SEF and SBSEF markets. Thus, the Commission is adopting the rule as proposed, without any different or additional criteria that would have to be considered by an SBSEF in order to MAT an SBS product. 2. Rule 816(a) Paragraph (a)(1) of Rule 816 provides that an SBSEF that makes an SBS available to trade in accordance with paragraph (b) of the rule must submit to the Commission its determination with respect to that SBS, pursuant to the procedures under Rule 806 (voluntary submission for Commission review and 279 See 280 See ISDA–SIFMA Letter, supra note 18, at 5. ICI Letter, supra note 18, at 5. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 approval) or Rule 807 (selfcertification).281 Paragraph (a)(2) provides that an SBSEF that makes an SBS available to trade must demonstrate that it lists or offers that SBS for trading on its trading system or platform. The Commission received a number of comments on Rule 816(a).282 Many commenters raise concerns about an SBSEF having the sole ability to make a MAT determination and generally advocate that the Commission and other market participants have a greater role in making MAT determinations.283 One commenter states that experience with the existing CFTC regime suggests that the scope of the trade execution requirement should not be determined solely by the SBSEFs.284 This commenter states that the trade execution requirement is a key pillar of the G20 post-crisis reforms and recommends that the Commission also be able to propose MAT determinations for public comment, based on its independent assessment of the criteria set forth in Rule 816(b). One commenter asserts that it has long believed that a MAT determination should not rest solely with a single SBSEF.285 This commenter states that such an approach risks introducing commercial and other motives beyond an objective assessment of the factors set forth in the rule. Another commenter states that it does not believe that a trading venue should be solely responsible for identifying the types of products that should be subject to a trade execution requirement.286 Instead, the commenter states that a Commission-led process is more appropriate. The commenter argues that a Commission-led process would ensure that the views of all relevant market participants (including SBSEFs) are considered in making a MAT determination. In addition, the commenter asserts that the Commission is likely to have better access to data regarding the overall SBS market than any individual trading venue will have. The commenter requests that the Commission provide in Regulation SE that MAT determinations are to be made 281 See supra sections IV.C (discussing Rule 806) and IV.D (discussing Rule 807). 282 See Bloomberg Letter, supra note 18, at 15–16; Citadel Letter, supra note 18, at 15–16; ICI Letter, supra note 18, at 4–10; ISDA–SIFMA Letter, supra note 18, at 4–5; MFA Letter, supra note 18, at 9; SIFMA AMG Letter, supra note 18, at 6–8; WMBAA Letter, supra note 18, at 5; Tradeweb Letter, supra note 18, at 3–4. 283 See Citadel Letter, supra note 18, at 15–16; see Bloomberg Letter, supra note 18, at 15–16; ICI Letter, supra note 18, at 5–8; ISDA–SIFMA Letter, supra note 18, at 4–5. 284 See Citadel Letter, supra note 18, at 15–16. 285 See WMBAA Letter, supra note 18, at 5. 286 See Tradeweb Letter, supra note 18, at 3–4. PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 by the Commission following a notice and comment rulemaking process that takes into account the views of SBSEFs and other market participants. Because no MAT determination can be made for an SBS until the Commission has made a mandatory clearing determination for that SBS, the MAT-determination process is, in that sense, inherently a Commission-led process. Moreover, because the SBSEFs will have direct experience with the trading of SBSs on SBSEFs, they will be best positioned make the initial decision as to whether it is appropriate to submit a MAT determination for an SBS. However, the Commission would still play a primary role in the MAT process, as it will have the opportunity to review all SBSEF MAT determinations, whether they are self-certified or voluntarily filed for Commission approval, to determine whether those determinations are adequately supported by evidence and consistent with the SEA and the rules thereunder, including the six factors to be considered for MAT determinations under Rule 816(b), which are discussed below. In the absence of such evidence, the Commission can decline to approve or can stay and then object to a MAT petition, which will ultimately allow the Commission to prevent an inappropriate MAT determination from taking effect. Some commenters also recommend that the MAT process provide other market participants the ability to provide comment on any MAT proposal.287 One commenter proposes that market participants have a meaningful opportunity to review and opine on a petitioning SBSEF’s proposed MAT determination.288 This commenter argues that the MAT factors are intended to measure trading liquidity that is available and that this assessment should include the perspectives of market participants.289 Another commenter also states that it has long believed that market participants should have the ability or a forum to comment on proposed MAT determinations.290 One commenter recommends that, in order to support the MAT process and to guard against inappropriate MAT determinations, the Commission permit market participants and other interested parties to participate in the MAT analysis by introducing a public notice and 287 See SIFMA AMG Letter, supra note 18, at 7; MFA Letter, supra note 18, at 9; ICI Letter, supra note 18, at 5, 7–8.WMBAA Letter, supra note 18, at 5. 288 See SIFMA AMG Letter, supra note 18, at 7. 289 See id. 290 See WMBAA Letter, supra note 18, at 5. E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations comment period into the MAT assessment timeline.291 This commenter states that this would provide market participants, who would be those most affected by a MAT determination, with the opportunity to identify specific aspects of individual SBS products that may limit their liquidity, which would help ensure each MAT determination is appropriate for the relevant SBS product. Another commenter states that one of the shortcomings of the MAT process is that it puts too much responsibility in the hands of the trading platform and does not require, or even consider, input from market participants.292 This commenter states that the implications of this outcome are even more evident in the context of an SBS MAT determination, as such a determination would only be relevant to a small segment of the global SBS market, which the commenter states is much smaller and less liquid than its swaps counterpart. One commenter also states that the proposed approach will give SBSEFs the sole ability to dictate the scope of SBSEF trading for market participants based on the commercial interests of SBSEFs.293 This commenter recommends that the Commission require a 30-day public comment period for all MAT determinations. The commenter expresses concern that, under the proposal, it would be possible for a MAT determination to become effective without an opportunity for public comment and that the MAT process would be controlled almost entirely by one segment of the SBS markets, the SBSEFs. The commenter states that market participants can provide the Commission with invaluable commentary, insights, and data on the potential effects of proposed rules, as well as help to ensure that rules are implemented in a fair and orderly manner. The commenter asserts that, because MAT determinations are data intensive, 30 days would give market participants sufficient time to analyze the data presented by the SBSEF, prepare their own data and analyses, and comment effectively on operational and technological implications. This commenter also recommends that the Commission consider creating an advisory board to provide recommendations both to the Commission and to SBSEFs on SBSs that should be added to or removed from the list of SBSs that are subject to 291 See 292 See MFA Letter, supra note 18, at 9. ISDA–SIFMA Letter, supra note 18, at 4– 293 See ICI Letter, supra note 18, at 5, 7–8. 5. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 the trade execution requirements.294 The commenter states that the advisory board should have appropriate expertise and balanced representation, including from the buy side, sell side, and other stakeholders. The commenter asserts that this would help further address some of their concerns about the MAT process and ensure that the SBSs made subject to the trade execution requirement are only the most liquid. Furthermore, the commenter argues that the advisory board could also help the Commission assess the functioning of the MAT determination process and of the overall SBS regulatory framework and provide recommendations for improvement.295 Another commenter states that the process for MAT determinations should include input from both market participants and the Commission.296 The commenter states that market participants may trade on multiple venues and in multiple jurisdictions and have a greater or different perspective from the SBSEF making the MAT determination. Additionally, the commenter states that the Commission’s input should be considered as well. The Commission will have sufficient opportunity to assess self-certified MAT determinations for consistency with the criteria of Rule 816(b), as well as with the SEA and the other regulations thereunder, while also permitting SBSEFs to use a self-certification process closely aligned with § 40.6. The CFTC’s procedures are well articulated and well understood by SEFs, and closely harmonizing with these procedures should yield comparable regulatory benefits while minimizing burdens on SBSEFs. Certain MAT determinations of dually registered SEF/ SBSEFs may apply to SBSs and swaps that are related and that related MAT determinations will thus have to be filed with both the SEC and CFTC. Adding a default comment period or otherwise altering the standard so that the Commission reviews all MAT determinations by SBSEFs, as commenters requested, would significantly alter the timing of selfcertified SBSEF MAT determinations compared to their SEF equivalents. By contrast, closely harmonizing the SEC’s filing procedures and standards of review with the CFTC’s would allow dually registered entities to submit related MAT determinations to both agencies for review. Moreover, if the Commission exercises its authority to stay the effectiveness of a self-certified 294 See id. at 9–10. 295 See id. 296 See Bloomberg Letter, supra note 18, at 15–16. PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 87189 MAT determination and seek public comment—i.e., with respect to a rule that is novel, complex, inadequately explained, or potentially inconsistent with the SEA or the regulations thereunder, including Regulation SE— market participants would be able to convey their concerns regarding that rule to the Commission. For SBS MAT determinations submitted under the Rule 806 process that present novel or complex issues or meet other criteria under Rule 806(d), the initial 45-day review period for rule approval submissions may be extended for an additional 45 days. The Commission recognizes the importance of public input regarding any MAT determination, and not only does Rule 808(b) provide that the Commission make publicly available on its website Rule 806 filings, such as an SBSEF’s MAT filing, but the Commission is also, as discussed below, delegating to its staff the authority to make filings under Rule 806 available on the Commission’s website, which will expedite the process of providing interested persons with the ability to review a MATdetermination filing so that they can communicate their views to the Commission. Thus, in either process, if MAT petitions present novel or complex issues, the Commission will have sufficient time to receive and consider public comment for those submissions. Further, accepting public comment from all interested market participants in the context of a specific MAT determination would more efficiently aid the Commission’s review of SBSEF MATdetermination filings than forming a formal advisory board to offer opinions on adding or removing SBS from the list of products that have been MAT. Several commenters question the extent of the Commission’s role in the MAT determination process.297 One commenter cites the lack of Commission authority to delay or decline an SBSEF submission for a MAT determination, particularly without comment from market participants, as the basis for its concerns about the proposed MAT process.298 Another commenter recommends that the Commission enhance its oversight by ensuring that it has a more meaningful ability to review and reject MAT determinations, as well as the ability to initiate determinations itself as appropriate.299 This commenter also expresses concern that the Commission would not have adequate time to consider, or authority to 297 See SIFMA AMG Letter, supra note 18, at 6; ICI Letter, supra note 18, at 6–7. 298 See SIFMA AMG Letter, supra note 18, at 6. 299 See ICI Letter, supra note 18, at 5–8. E:\FR\FM\15DER2.SGM 15DER2 87190 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 challenge, the basis for a MAT determination. The Commission, however, does have the authority to prevent an SBSEF MAT determination under either Rule 806 or Rule 807 from taking effect. As noted above, under Rule 806, the Commission has a 45-day period to consider a submission under Rule 806, which could be extended for another 45 days. The Commission can, if it finds the determination to be inconsistent with the SEA or the rules thereunder, notify the SBSEF that it will not, or is unable to, approve the new rule or rule amendment. Under Rule 807, MAT determinations cannot go into effect for at least 10 business days, during which the Commission has the opportunity to determine whether the determination presents novel or complex issues, if it is inadequately explained, or if it is potentially inconsistent with the SEA or the rules thereunder. If the Commission determines that any of these concerns is present, the Commission can stay the MAT determination for a 90-day period for further review. Within those 90 days, the Commission will have the opportunity to object to the proposed certification on the grounds that the proposed rule or rule amendment is inconsistent with the SEA or the Commission’s rules thereunder, thereby preventing the self-certified MAT determination from going into effect. Therefore, the processes for submitting MAT determinations do afford the Commission sufficient time and authority to review and, where appropriate, decline to approve, or object to, MAT determinations. For the reasons discussed above, the Commission is adopting Rule 816(a) as proposed. 3. Rule 816(b) Paragraph (b) of Rule 816 sets forth six factors that an SBSEF shall consider, as appropriate, when making a MAT determination for an SBS product, which are the same six factors enumerated in the CFTC rule. Those factors are: (1) whether there are ready and willing buyers and sellers; (2) the frequency or size of transactions; (3) the trading volume; (4) the number and types of market participants; (5) the bid/ ask spread; and (6) the usual number of resting firm or indicative bids and offers. The Commission received several comments on the factors for making a MAT determination described in Rule 816(b).300 Several commenters express 300 See SIFMA AMG Letter, supra note 18, at 6– 8; ICI Letter, supra note 18, at 5; MFA Letter, supra note 18, at 9; WMBAA Letter, supra note 18, at 5. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 concern that the factors for consideration enumerated in Rule 816(b) are not mandatory.301 One commenter states that the rule requires that an SBSEF’s submission consider the factors in the rule, as appropriate, when making a MAT determination.302 This commenter proposes that all of the MAT factors must be considered for mandatory SBSEF trading. This commenter also urges the Commission to assess the MAT factors on the basis of the current trading activity of the relevant SBSs on the SBSEF against stringent standards, and in the aggregate, in order to determine whether there is proven liquidity on SBSEFs to support mandatory SBSEF trading. The commenter also proposes that the Commission expand the MAT factors to require evidence demonstrating that the SBSEF has the requisite infrastructure to support mandatory SBSEF trading by: (a) adding an assessment of technological readiness, and (b) requiring threshold numbers of SBSEFs as well as liquidity providers on the SBSEF transacting in the relevant SBS. The commenter argues that, while the expansion of MAT factors may be viewed as requiring more intervention and resources by the Commission, the revised approach will ultimately lead to a streamlined process, while at the same time avoiding a potential sacrifice of liquidity if a particular SBS is mandated for SBSEF trading prematurely. One commenter also expresses concern that the factors in Rule 816(b) are neither mandatory nor based on calculated thresholds, and that they would permit SBSEFs to assert that an SBS should be MAT even absent objective evidence of a sufficiently liquid trading market.303 This commenter states that this could have negative consequences for buy-side participants such as funds—requiring SBSs with insufficient liquidity to be traded via order book or an RFQ system, which would raise a significant risk of revealing advisers’ sensitive portfolio management strategies. This commenter also states that, without requiring SBSEFs to consider any objective factors (e.g., threshold levels), it is not clear how the Commission could ever find that a MAT determination is inconsistent with the SEA or the Commission’s rules. This commenter recommends that the Commission enhance the MAT determination factors 301 See SIFMA AMG Letter, supra note 18, at 7– 8; ICI Letter, supra note 18, at 5; WMBAA Letter, supra note 18, at 5. 302 See SIFMA AMG Letter, supra note 18, at 6– 8. 303 See ICI Letter, supra note 18, at 5–6. PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 by: clarifying that all factors must be evaluated, rather than just one or a subset; adding as a factor the number of SBSEFs that list the SBS; requiring that at least two SBSEFs list the SBS; and requiring a minimum amount of trading history (e.g., that an SBS has been listed for at least 90 days). The commenter also recommends that the Commission make the MAT determination factors more robust by establishing at least some objective mandatory criteria. The commenter argues that adopting these recommendations would provide the Commission with greater authority to reject a MAT determination and would address the conflict raised by an SBSEF’s commercial incentive to make an SBS MAT, as well as ensure that there is enough liquidity in an SBS before it is subject to a MAT determination. The commenter urges that a more robust MAT determination process is critical to bring consistency to the SBS market over time, as having objective standards would avoid MAT determinations based on subjective assessments of liquidity that may change over time. The Commission’s approach of requiring the MAT factors to be considered as appropriate, rather than mandating the consideration of all the factors, is consistent with the approach the CFTC has taken. The CFTC adopted its approach to provide more flexibility so that its markets could accommodate swaps with different trading characteristics that can be supported in a centralized trading environment.304 And a similarly flexible approach is appropriate for the different SBSs that would be traded on its SBSEFs, as the appropriate thresholds on any of the factors may vary depending on the SBS and over time. Adopting specific thresholds would create excessive rigidity at the outset. MAT submissions, under Rules 806(a)(5) and 807(a)(6), would be required to contain an explanation and analysis of the SBSEF’s determination, including a discussion of the factors enumerated in the rule, and how it complies with the SEA and the Commission’s regulations thereunder. Rule 816(b) requires SBSEFs to consider all the factors enumerated in the rule, as appropriate. However, such consideration, to be meaningful, generally should discuss the factors in the context of the general market, relative to some outside benchmark. And the SBSEF would have the burden of providing support for any assertions it makes regarding the adequacy of any of the factors it considers, with 304 See 2013 CFTC Final MAT Rules Release, supra note 9, 78 FR at 33613. E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations reference to some external, objective standard. The explanations and analyses provided by the SBSEF generally should provide adequate justification as to how all the factors considered apply to the SBS MAT determination, as well as to why any factors enumerated in Rule 816(b) that are not addressed are not relevant. A failure, on the part of the SBSEF, to address any factors that are relevant or to adequately support its assertions would be a basis for the Commission to find that a MAT determination is inconsistent with the SEA and its rules. One commenter, while supporting harmonization with the CFTC’s MAT standards, expresses concern with the current framework for determining whether mandatorily cleared SBS should also be mandated for SBSEF trading through the MAT process. This commenter urges that there be a substantive analysis of whether an SBS has sufficient liquidity available to market participants on the SBSEF. The commenter states that, absent a robust MAT process requiring the SBSEF to demonstrate that voluntary exchange trading has met minimum liquidity and other standards, an absence of liquidity for the newly MAT-ed product on the SBSEF could shut out asset managers from accessing liquidity for their clients once OTC trading is prohibited. To this end, the commenter recommends that the Commission specify that the MAT standards are not synonymous with the clearing requirement standards. The commenter asserts that its assessment reflects the fact that necessary market conditions that make central clearing appropriate are different from the necessary market conditions that make mandatory SBSEF execution appropriate.305 Another commenter, while generally supporting the Commission’s approach to MAT determinations and the six factors enumerated in the rule, urges the Commission to take a cautious approach in its assessment of whether a MAT determination is appropriate. Specifically, the commenter recommends that the Commission carefully consider each factor, individually and collectively, in assessing whether a particular SBS has sufficient liquidity to support mandatory SBSEF trading. The commenter also cautions that the Commission should avoid broad MAT categorizations for specific types of SBS when individual SBS products within 305 See each category may be more or less suitable for a MAT designation.306 From the factors enumerated in Rule 816(b), it is clear that additional factors, beyond the fact that a product is subject to mandatory clearing, will need to be considered in determining whether an SBS is suitable to be MAT, and these factors are directly relevant to the liquidity of trading in a given SBS: whether there are willing buyers and sellers, the frequency and size of transactions, the trading volume, the number and types of market participants, the bid/ask spread, and the usual number of resting firm or indicative bids and offers. Adopting specific thresholds, however, would be too rigid an approach to accommodate the different kinds of SBSs that may be traded on an SBSEF, particularly at this early stage. As stated above, the Commission or its staff will review SBS products on a case-by-case basis, and for SBS products presenting novel or complex issues there will be an extended period for the Commission to review the submission and consider public comments on the appropriateness of a MAT determination on a case-by-case basis, taking into account the facts and circumstances of the SBS subject to the determination, including when a filing seeks to include a broad category of SBS within a MAT determination. The Commission has carefully considered the concerns raised by commenters regarding the determination of when an SBS is appropriate for a MAT determination by an SBSEF, and the Commission is adopting Rule 816(b) as proposed. The Commission appreciates that a MAT determination for an SBS will be consequential for market participants, and that the enumerated factors in Rule 816(b) are important components of an analysis of whether an SBS is appropriate for a MAT determination. Rule 816(b) will require SBSEFs to consider each of the factors enumerated in Rule 816(b), as appropriate. As noted above, a flexible approach to the enumerated factors will accommodate the different kinds of SBSs that will be traded on SBSEFs. While the rule does not require that every factor be considered in every case, to the extent that a factor is relevant and an SBSEF’s MAT determination submission fails to sufficiently address that factor, the Commission would be in a position to either disapprove the submission, if made under Rule 806, or stay and ultimately object to the submission, if self-certified under Rule 807. SIFMA AMG Letter, supra note 18, at 6– 306 See 7. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 PO 00000 MFA Letter, supra note 18, at 9. Frm 00037 Fmt 4701 Sfmt 4700 87191 Furthermore, the rules for filing MAT determinations require SBSEFs to provide, among other things, an explanation and analysis of the proposed MAT determination, including a discussion of its compliance with the SEA, the Core Principles for SBSEFs, and the Commission’s rules thereunder. In the case of a MAT determination, the SBSEF generally should do more than simply state that it is consistent with the SEA and the Commission’s rules thereunder, but should also provide supporting analysis, and supporting documentation as appropriate, for its conclusion. If an SBSEF fails to provide adequate explanation or analyses of the MAT determination, it would be difficult for the Commission to find that the determination is consistent with the SEA and the Commission’s rules thereunder. Thus, MAT determination filings generally should be accompanied with adequate discussion and support for a MAT determination based on all relevant factors in Rule 816(b), including discussion supporting a conclusion that the SBS product subject to the MAT determination achieves the appropriate thresholds for that category of products. Furthermore, for MAT determinations presenting novel or complex issues, there will be an extended period for the Commission to solicit and consider public comments on, among other things, the appropriateness of the factors considered. For the reasons discussed above, the Commission is adopting Rule 816(b) as proposed. 4. Rule 816(c) Paragraph (c) of Rule 816 provides that, upon a determination that an SBS has been MAT on an SBSEF or SBS exchange,307 all other SBSEFs and SBS exchanges shall comply with the requirements of section 3C(h) of the SEA in listing or offering that SBS for trading. The Commission received no comments on Rule 816(c) and the Commission is adopting Rule 816(c) as proposed for the reasons stated in the Proposing Release. 5. Rule 816(d) Paragraph (d) of Rule 816 provides that the Commission may issue a 307 An SBS exchange, like all national securities exchanges, must submit any rule change—including a rule change to list a new derivative securities product and/or to MAT an SBS product—pursuant to SEA Rule 19b–4, 17 CFR 240.19b–4. The proposed rule text did not establish a new procedure for SBS exchanges to list or MAT SBS products. See Proposing Release, 87 FR at 28898 n.107. E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87192 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations determination that an SBS is no longer MAT upon determining that no SBSEF or SBS exchange lists that SBS for trading. The Commission received one comment on Rule 816(d).308 This commenter recommends that the Commission modify its proposed approach to removing an SBS from the trade execution requirement. The commenter states that the proposed approach raises a significant risk that an SBS may be required to be traded on an SBSEF merely because it is listed on one SBSEF, even if there is no liquidity to sustain trading in that SBS, which could be detrimental for both buy-side and sell-side market participants. To ensure that there is adequate liquidity in MAT SBSs, the commenter recommends that the Commission adopt a process for removing an SBS from the MAT scope that is similar to the process for making a MAT determination. The commenter also urges the Commission, given the industry’s recent experience with the COVID–19 crisis, and consistent with the MRAC Report, to consider the implications that a temporary outage at one or more SBSEFs or a major market disruption would have for SBSs subject to the trade execution requirement. For this reason, the commenter recommends that the Commission consider the circumstances under which it would allow for a temporary suspension of the trade execution requirement and any possible terms for such a suspension, as well as any other relief measures the Commission may be able to provide.309 The commenter’s concern that an SBS may be required to be traded on an SBSEF merely because a single SBSEF has listed that SBS, even if there is no liquidity to sustain trading in that SBS, is addressed by the requirements in Rule 816(b) that must be met by an SBSEF before it submits a MAT determination under Rule 806 or Rule 807, as well as by the Commission’s ability to disapprove, or stay and then object to, any MAT determination by an SBSEF. In considering an SBSEF’s MAT submission, the Commission will generally consider how many SBSEFs list and trade a given SBS, as well as the liquidity and trading characteristics of that SBS. Further, to the extent market circumstances change to make a previous MAT determination unsuitable for then-prevailing market conditions, and if the SBSEF that has made a MAT determination is unwilling to withdraw that determination, the Commission would be able to grant exemptive relief (including on an emergency basis) 308 See 309 See ICI Letter, supra note 18, at 9. id. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 pursuant to its authority in section 36 of the SEA in order to address that situation.310 For these reasons, the Commission would have the ability to address market circumstances that disrupt the ability of market participants to trade SBS in compliance with the trade execution requirement. Therefore, the Commission is adopting Rule 816(d) as proposed. 6. Rule 816(e) Paragraph (e) of Proposed Rule 816 has no analog in § 37.10, but instead is adapted from 17 CFR 36.1 of the CFTC’s rules, which sets out certain exemptions from the trade execution requirement. The exemptions incorporated into § 36.1 result from the CFTC’s many years of experience in administering the CEA’s trade execution requirement. Paragraph (e)(1) of Rule 816 provides that an SBS transaction that is executed as a component of a package transaction and that also includes a component transaction that is the issuance of a bond in a primary market is exempt from the trade execution requirement in section 3C(h) of the SEA. In addition, paragraph (e)(1) provides that, for purposes of paragraph (e), a package transaction consists of two or more component transactions executed between two or more counterparties where: at least one component transaction is subject to the trade execution requirement in section 3C(h) of the SEA; execution of each component transaction is contingent upon the execution of all other component transactions; and the component transactions are priced or quoted together as one economic transaction with simultaneous or nearsimultaneous execution of all components. Paragraph (e)(2) of Rule 816, which is adapted from § 36.1(b), provides that section 3C(h) of the SEA does not apply to an SBS transaction that qualifies for an exception 311 under section 3C(g) of the SEA, or any exemption from the clearing requirement that is granted by the Commission, for which the associated requirements are met.312 Unlike the CFTC, the Commission does not have a specific rule to cite to regarding exemptions from the clearing 310 See 15 U.S.C. 78mm. 3C(g) of the SEA is entitled ‘‘Exceptions,’’ not ‘‘Exemptions.’’ 312 As with section 2(h)(8) of the CEA, section 3C(h) of the SEA provides that the trade execution requirement does not apply to SBS that are excepted from the clearing requirement pursuant to section 3C(g) of the SEA. However, the Commission could, like the CFTC, grant exemptions from the clearing requirement pursuant to other statutory authority, such as section 36 of the SEA. 311 Section PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 requirement, so Rule 816(e)(2) would refer only generally to such exemptions. Paragraph (e)(3) of Rule 816, which is adapted from § 36.1(c), provides that section 3C(h) of the SEA does not apply to an SBS transaction that is executed between counterparties that qualify as ‘‘eligible affiliate counterparties.’’ 313 Counterparties would be ‘‘eligible affiliate counterparties’’ for purposes of Rule 816(e)(3) if: (i) one counterparty, directly or indirectly, holds a majority ownership interest in the other counterparty, and the counterparty that holds the majority interest in the other counterparty reports its financial statements on a consolidated basis under Generally Accepted Accounting Principles (‘‘GAAP’’) or International Financial Reporting Standards (‘‘IFRS’’), and such consolidated financial statements include the financial results of the majority-owned counterparty; or (ii) a third party, directly or indirectly, holds a majority ownership interest in both counterparties, and the third party reports its financial statements on a consolidated basis under GAAP or IFRS, and such consolidated financial statements include the financial results of both of the counterparties. In addition, for purposes of Rule 816(e)(3), a counterparty or third party directly or indirectly would hold a majority ownership interest if it directly or indirectly holds a majority of the equity securities of an entity, or the right to receive upon dissolution, or the contribution of, a majority of the capital of a partnership. The Commission received comments on Rule 816(e).314 One commenter supports the proposed carve-out for package transactions.315 Another commenter, however, states that the CFTC’s rules for package transactions were ‘‘developed by the CFTC, initially via staff no-action relief, after SEFs had adopted various MAT determinations and market participants had provided input to the CFTC regarding the particular types of package transactions 313 Section 36.1(c) provides that section 2(h)(8) of the CEA does not apply to a swap transaction that is executed between counterparties that have eligible affiliate counterparty status pursuant to paragraph (a) of § 50.52 of the CFTC’s rules, which provides an exception from the clearing requirement for inter-affiliate swaps, subject to conditions. Counterparties to a swap that have eligible affiliate counterparty status may rely on the § 36.1(c) even if they clear the swap transaction. Since the Commission does not have an equivalent to § 50.52 to reference, the Commission is instead defining the term ‘‘eligible affiliate counterparties’’ directly in Rule 816(e)(3). These definitions are closely modeled on the equivalent definitions used in § 50.52, which are incorporated into § 36.1(c). 314 See ISDA–SIFMA Letter, supra note 18, at 9– 10; SIFMA AMG Letter, supra note 18, at 6. 315 See SIFMA AMG Letter, supra note 18, at 6. E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations common in the market for the relevant types of MAT swaps.’’ 316 The commenter states that it is for this reason that particular types of package transactions addressed by the CFTC generally focus on transactions common in the interest-rate swaps market, which make up the majority of MAT swaps. In addition, the commenter asserts that the current state of the CFTC’s rules in this area reflect the culmination of a phased implementation approach developed over time via no-action letters. The commenter argues that, in light of this, it would be better for the Commission to tailor its rules for package transactions to address the particular market dynamics relevant to the SBS market instead of those in the swaps market. The commenter recommends that the Commission build into the MAT determination process a framework for identifying what types of package transactions exist for prospective MAT SBS and then develop tailored rules around the execution of such transactions.317 The Commission does not agree that it is necessary to tailor the Commission’s rules for package transactions to address the particular market dynamics relevant to the SBS market, because no MAT determinations for SBS have been made, and no MAT determinations can yet be made because no SBS are required to be cleared. Moreover, the Commission does not yet have a sufficient basis on which to tailor the rules for package transactions to address SBS market dynamics, because the market dynamics relevant to trading of SBS on SBSEFs have yet to develop. It would be preferable to address those dynamics with respect to package transactions if and when it becomes necessary or appropriate to do so, because, at that point, the Commission and commenters would be better informed about the nature of trading various SBS on SBSEFs. In the meantime, it is desirable for Rule 816(e) to be harmonized with § 36.1 of the CFTC’s rules to promote similar treatment of package trades, whether they involve SBS or swaps, as this will facilitate the participation of current SEF participants on SBSEFs. If, after SBSEFs have become operational and MAT determinations have been made, the Commission observes that the rules for package transactions are no longer suitable for the SBS market, the Commission could consider amending Rule 816(e) at that time. 316 ISDA–SIFMA 317 See Letter, supra note 18, at 9. ISDA–SIFMA Letter, supra note 18, at 9– 10. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 For the reasons discussed above, the Commission is adopting Rule 816(e) as proposed. G. Rule 817—Trade Execution Compliance Schedule Proposed Rule 817 is modeled on § 37.12 of the CFTC’s rules, which is designed to inform market participants of the precise date on which the trade execution requirement for a particular product commences.318 Accordingly, paragraph (a) of Rule 817 provides that an SBS transaction shall be subject to the requirements of section 3C(h) of the SEA upon the later of (1) a determination by the Commission that the SBS is required to be cleared as set forth in section 3C(a) or any later compliance date that the Commission may establish as a term or condition of such determination or following a stay and review of such determination pursuant to section 3C(c) of the SEA and Rule 3Ca–1 thereunder; and (2) 30 days after the available-to-trade determination submission or certification for that SBS is, respectively, deemed approved under Rule 806 or deemed certified under Rule 807. Paragraph (b) of Rule 817 also provides that a counterparty may voluntarily comply with the trade execution requirement sooner than required by paragraph (a). The Commission received several comment letters about the sufficiency of the time period allotted for compliance with a MAT determination.319 One commenter encourages the Commission to provide an extended duration of time until any MAT determination becomes effective so that asset managers and other market participants have adequate time to make the necessary operational and market structure arrangements to accommodate the trade execution requirement.320 Another commenter urges the Commission to ensure that all SBSEFs and market participants have adequate time to prepare for the operational and market conditions that come along with a MAT determination.321 Some commenters recommend that a MAT determination not be effective for 318 Rule 3Ca–1 under the SEA provides that the Commission may determine, following a submission from a clearing agency, that an SBS (or a group, category, type, or class of SBS) must be cleared. This determination could follow a stay of the clearing requirement for additional review. 17 CFR 240.3Ca–1. 319 See Bloomberg Letter, supra note 18, at 16; ICI Letter, supra note 18, at 8–9; ISDA–SIFMA Letter, supra note 18, at 5, SIFMA AMG Letter, supra note 18, at 7; WMBAA Letter, supra note 18, at 5. 320 See SIFMA AMG Letter, supra note 18, at 7. 321 See WMBAA Letter, supra note 18, at 5. PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 87193 at least 90 days.322 One commenter emphasizes that, after a MAT determination, market participants should be provided with sufficient time to comply with any new trade execution requirement, and that commenter believes that market participants would benefit from 90 days to comply.323 Another commenter, citing its experience with the MAT requirement, states that it has observed that 30 days provides insufficient time to adjust trading protocols and ensure a smooth transition to trading on SEFs.324 In this regard, the commenter asks the Commission to extend the time between when a MAT determination is made and when it becomes effective from the proposed 30 days to 90 days. The commenter also asserts that this is consistent with the recommendations of the CFTC MRAC report that examined the appropriateness, efficacy, and sustainability of the MAT process. Another commenter also cites the CFTC MRAC’s report in recommending that the Commission provide 90 days after a MAT determination is final before it becomes effective. This commenter emphasizes that market participants will need an adequate compliance period after a mandatory clearing determination is made and after the SBS is first made available to trade on an SBSEF to prepare. The commenter expresses concern that, under the proposed approach, if an SBS is made available to trade fewer than 30 days before a mandatory clearing determination, then the SBS would be subject to mandatory trading on an SBEF with a less than 30-day compliance period. This commenter urges the Commission to clarify that the scope of eligible SBS for MAT determination is limited to only those that have already been determined to be subject to mandatory clearing. This commenter also asserts that, even when an SBS is already subject to mandatory clearing, the proposed 30-day compliance period would still be inadequate given the complex operational and technological steps that must be taken to trade a new SBS on an SBSEF. The commenter states that market participants such as regulated funds will need time to onboard to an SBSEF if necessary, and to further update their systems, processes, and procedures to transact via an SBSEF’s order book or RFQ system.325 322 See Bloomberg Letter, supra note 18, at 16; ICI Letter, supra note 18, at 8; ISDA–SIFMA Letter, supra note 18, at 5. 323 See Bloomberg Letter, supra note 18, at 16. 324 See ISDA–SIFMA Letter, supra note 18, at 5. 325 See ICI Letter, supra note 18, at 3, 8. E:\FR\FM\15DER2.SGM 15DER2 87194 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations The Commission has considered commenters’ requests for an extended compliance period for the mandatory trading requirement once a MAT determination has been made with respect to an SBS. The presence of ready and willing buyers and sellers and the number and types of market participants, among other things, are relevant factors in a MAT determination under Rule 816(b).326 As noted above, the extent to which a MAT determination is likely to be disruptive to the market for a given SBS is best addressed in the context of making the MAT determination, which, as discussed above, allows for the Commission oversight of the determination through its review and approval or disapproval of a filing under Rule 806, or through staying and seeking public comment on a selfcertification under Rule 807.327 Further, with respect to the suggestion that the Commission clarify that the scope of eligible SBS for MAT determination is limited to only those that have already been determined to be subject to mandatory clearing, a MAT determination filing would not have any relevance until there are any SBSs subject to the clearing requirement. It is not necessary to revise the 30-day period for compliance with a MAT determination, because the readiness of the market to comply with a MAT determination for a particular SBS would be relevant to the MAT determination itself, including the analysis of the six factors enumerated in Rule 816(b), and because an analysis of that readiness would best be undertaken based on the facts and circumstances attending a specific MAT determination. For the reasons discussed above, the Commission is adopting Rule 817 as proposed. VI. Implementation of Core Principles Section 3D(d) of the SEA 328 sets forth 14 Core Principles with which SBSEFs must comply. These provisions, with one exception, correspond to the 15 Core Principles for SEFs set forth in section 5h(f) of the CEA.329 Core principle title CEA # ddrumheller on DSK120RN23PROD with RULES2 Compliance with Core Principles ............................................................................................................................. Compliance with Rules ............................................................................................................................................ (Security-Based) Swaps Not Readily Susceptible to Manipulation ......................................................................... Monitoring of Trading and Trade Processing .......................................................................................................... Ability to Obtain Information .................................................................................................................................... Position Limits or Accountability .............................................................................................................................. Financial Integrity of Transactions ........................................................................................................................... Emergency Authority ............................................................................................................................................... Timely Publication of Trading Information ............................................................................................................... Recordkeeping and Reporting ................................................................................................................................. Antitrust Considerations ........................................................................................................................................... Conflicts of Interest .................................................................................................................................................. Financial Resources ................................................................................................................................................ System Safeguards ................................................................................................................................................. Designation of Chief Compliance Officer ................................................................................................................ It continues to be appropriate to closely harmonize with the CFTC rules that implement the SEF Core Principles, although there are some instances where close harmonization is not practicable. Where there are substantive differences between an existing CFTC rule and the SEC rule being adopted, the discussion below addresses those differences. The discussion below will also address where there is not, or at least there is not intended to be, a difference between the SEC rule and the analogous existing CFTC rule. Part 37 of the CFTC’s rules includes an appendix B, setting forth ‘‘Guidance on, and Acceptable Practices in, Compliance with Core Principles.’’ The introduction to appendix B provides that the guidance for the Core Principle is illustrative only and ‘‘is not intended to be used as a mandatory checklist.’’ 330 Where the CFTC has included guidance and/or accepted practices pertaining to a Core Principle for SEFs, the discussion 326 See supra section V.F.3. supra section V.F.2. 328 15 U.S.C. 78c–4(d). 329 Compare 7 U.S.C. 7b–3(f) (enumerating 15 Core Principles for SEFs), with 15 U.S.C. 78c–4(d) (enumerating 14 Core Principles for SBSEFs). CEA 327 See VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 below addresses how (if at all) the Commission has incorporated the substance of these statements into Regulation SE. A. Rule 818—Core Principle 1— Compliance With Core Principles Core Principle 1 331 requires an SBSEF, to be registered and maintain registration as an SBSEF, and to comply with the Core Principles and any requirement that the Commission may impose by rule or regulation. Core Principle 1 also provides that an SBSEF shall have reasonable discretion in establishing the manner in which it complies with the Core Principles.332 Proposed Rule 818, like § 37.100 of the CFTC’s rules, repeats the relevant statutory text of the Core Principle. The Commission received no comments on Proposed Rule 818 and is adopting Rule 818 as proposed for the reasons stated in the Proposing Release. Core Principle 6 for SEFs (Position Limits or Accountability) has no analog in the SEA, so the numbering of the subsequent Core Principles between the two statutes differs by one. 330 17 CFR appendix-B-to-part-37 1. PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 SEA # 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1 2 3 4 5 n/a 6 7 8 9 10 11 12 13 14 B. Rule 819—Core Principle 2— Compliance With Rules Core Principle 2 requires an SBSEF to establish and enforce compliance with any rule that is established by the SBSEF, including the terms and conditions of the SBS that it trades or processes, and any limitation on access to the SBSEF.333 It further requires the SBSEF to establish and enforce trading, trade processing, and participation rules that will deter abuses, and to have the capacity to detect, investigate, and enforce those rules, including the means to provide market participants with impartial access to the market and to capture information that may be used in establishing whether rule violations have occurred. Finally, Core Principle 2 requires an SBSEF to establish rules governing the operation of the facility, including rules specifying trading procedures to be used in entering and executing orders traded or posted on the 331 Section 3D(d)(1) of the SEA, 15 U.S.C. 78c– 4(d)(1). 332 CEA Core Principle 1 is substantively identical. See 7 U.S.C. 7b–3(f)(1). 333 Section 3D(d)(2) of the SEA, 15 U.S.C. 78c– 4(d)(2). E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations facility, including block trades. Core Principle 2 for SEFs 334 is substantively identical, except that it includes an additional paragraph requiring a SEF to provide in its rules that, when a swap dealer or major swap participant enters into or facilitates a swap that is subject to the mandatory clearing requirement, the swap dealer or major swap participant shall be responsible for compliance with the trade execution requirement.335 As described in the Proposing Release, the Commission modeled Rules 819 (a) through (g) on subpart C of part 37 of the CFTC’s rules,336 and Rules 819 (h) through (k) on other parts of the CFTC’s rules.337 1. Rule 819(a)—General Paragraph (a) of Proposed Rule 819, like § 37.200 of the CFTC’s rules,338 would repeat the statutory text of Core Principle 2.339 The Commission did not receive any comments on Proposed Rule 819(a). It is appropriate to repeat the statutory text of Core Principle 2 in Rule 819(a) and is adopting Rule 819(a) as proposed, except that it is deleting the words ‘‘including block trades,’’ in light of its decision not to adopt a definition of ‘‘block trade.’’ 340 2. Rule 819(b)—Operation of SecurityBased Swap Execution Facility and Compliance With Rules Paragraph (b) of Proposed Rule 819 is closely modeled on § 37.201 of the CFTC’s rules,341 and would require an SBSEF to specify trading procedures (including for block trades, if offered) and to establish and impartially enforce compliance with the rules of the SBSEF.342 The Commission did not receive any comments on Proposed Rule 819(b). It is appropriate for an SBSEF to specify trading procedures and to establish and impartially enforce compliance with its rules, and the Commission is adopting Rule 819(b) as proposed, except that it is deleting the words ‘‘including block trades, if offered,’’ in light of its decision not to adopt a definition of ‘‘block trade,’’ 343 which will have no effect on the 334 7 U.S.C. 7b–3(f)(2). 7 U.S.C. 7b–3(f)(2)(D). 336 See Proposing Release, supra note 1, 87 FR at 28901–05. 337 See id. at 28905–09. 338 17 CFR 37.200; see also Proposing Release, supra note 1, 87 FR at 28901. 339 See Proposing Release, supra note 1, 87 FR at 28902. 340 See supra section V.E.1(c). 341 17 CFR 37.201; see also Proposing Release, supra note 1, 87 FR at 28901. 342 See Proposing Release, supra note 1, 87 FR at 28902. 343 See supra section V.E.1(c). ddrumheller on DSK120RN23PROD with RULES2 335 See VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 requirement as compared to the proposed rule. 3. Rule 819(c)—Access Requirements Paragraph (c) of Proposed Rule 819 is closely modeled on § 37.202 of the CFTC’s rules,344 and would require an SBSEF, consistent with section 3D(d)(2)(B)(i) of the SEA,345 to provide any ECP and any independent software vendor with impartial access to its market(s) and market services, including any indicative quote screens or any similar pricing data displays. An SBSEF will also be required to establish nondiscriminatory fee structures for ECPs and independent software vendors based on the level of access to or services provided by the SBSEF. Rule 819 further requires an SBSEF to establish and impartially enforce rules governing any decision to allow, deny, suspend, or permanently bar an ECP’s access to the SBSEF, including when a decision is made as part of a disciplinary or emergency action taken by the SBSEF. Several commenters express general support for the adoption of impartial access standards for SBSEFs.346 One commenter specifically supports the Commission’s close harmonization with CFTC rules.347 One commenter expresses support for Proposed Rule 819(c), but states that the Commission’s proposal does not provide market participants with sufficient clarity regarding how Proposed Rule 819(c) will be interpreted and applied in practice, and the commenter encourages the Commission to provide in the final rule that access to SBSEFs should be based on ‘‘objective, pre-established’’ criteria, and that any ECP should be able to demonstrate financial soundness by showing that it is a clearing member or that it has clearing arrangements in place with a clearing member.348 This commenter states that the CFTC has provided market participants with extensive guidance regarding impartial access and encourages the Commission to provide similar clarity when finalizing the SBSEF rules, including guidance with respect to membership 344 17 CFR 37.202; see also Proposing Release, supra note 1, 87 FR at 28901. 345 15 U.S.C. 78c–4(d)(2)(B)(i) (‘‘a security-based swap execution facility shall . . . establish and enforce trading, trade processing, and participation rules that will deter abuses and have the capacity to detect, investigate, and enforcement those rules, including means . . . to provide market participants with impartial access to the market’’). 346 See Citadel Letter, supra note 18, at 6–7; SIFMA AMG Letter, supra note 18, at 4; MFA Letter, supra note 18, at 10. 347 See MFA Letter, supra note 18, at 10. 348 See Citadel Letter, supra note 18, at 6–7. PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 87195 criteria, trading protocols and functionality, and fee arrangements. Specifically, this commenter urges the Commission to provide in the final rule that an SBSEF may not limit membership to (i) self-clearing members; (ii) registered security-based swap dealers; (iii) banks or liquidity providers with a minimum amount of Tier 1 capital; (iv) liquidity providers that have been ‘‘enabled’’ by, or have bilateral documentation with, a minimum number of other liquidity providers; or (v) liquidity providers with a minimum amount of transaction volume.349 This commenter also states that SBSEFs should not be permitted to apply trading protocols in a manner that results in impermissible discrimination among market participants. Specifically, the commenter states that SBSEFs should not allow participants to selectively restrict their trading with other SBSEF participants through ‘‘enablement mechanisms’’; that market participants should be permitted to act as both liquidity providers and liquidity takers on an SBSEF; that all SBSEF participants should be permitted to both send and receive RFQs (instead of only designated liquidity providers being eligible to receive RFQs); and that SBSEFs should not be permitted to require participants to have bilateral documentation in place to trade cleared security-based swaps, as this could provide a pretext for some participants to restrict trading with other participants. This commenter further states that SBSEFs should not be permitted to use fee arrangements to effect otherwise impermissible discrimination with respect to access.350 Another commenter also urges the Commission to incorporate the CFTC’s impartial access requirement guidance with respect to SBSEFs, which would assist market participants in interpreting how the impartial access rules should work. Coordination of impartial access ‘‘not only affects an entity operating both an SEF and SBSEF but also their clients, many of whom use the same individual traders to trade both instrument types.351 One commenter specifically encourages the Commission to address the potential use of restrictive requirements to obtain access to SBSEFs and to make clear that an SBSEF’s reasonable discretion in establishing access criteria must be impartial, 349 See Citadel Letter, supra note 18, at 6–7. id. 351 See MFA Letter, supra note 18, at 10. 350 See E:\FR\FM\15DER2.SGM 15DER2 87196 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 transparent, and applied in a fair and nondiscriminatory manner.352 One commenter states that the trading documentation requirement of Rule 15Fi-5 may at times conflict with the impartial access requirement of Proposed Rule 819(c) because it is unlikely that all SBSEF members trading cleared swaps will have trading relationship documentation with all other members trading cleared SBS.353 This commenter encourages the Commission to adopt the CFTC guidance regarding enablement mechanisms and states that such mechanisms were historically used to eliminate credit risk, but that no such risk exists if an SBSEF intended to be cleared is void ab initio if rejected for clearing. The Commission agrees with commenters that impartial access to an SBSEF encompasses both impartial access to membership in an SBSEF and the ability to fully interact on the SBSEF’s order book or RFQ system, and that an SBSEF’s rules must incorporate impartial criteria for this access. The Commission expects that most, if not all, entities that will seek SBSEF registration with the SEC are or will also be registered as SEFs with the CFTC and that ensuring consistency of access to SBSEFs and SEFs will provide market participants with greater certainty about permissible practices regarding access to these platforms.354 Efforts to undermine the principle of impartial access may take myriad forms over time. The text of Rule 819(c) is consistent with the text of § 37.202 of the CFTC’s regulations and emphasizes the general principal that access to an SBSEF and its services must be impartial. The Commission does not find it necessary to describe within 819(c) specific practices that would violate its requirements. For the purposes of the Commission’s review process for a denial or limitation of access or membership that is inconsistent with Rule 918(c), the Commission will apply a standard of review consistent with standards of review that the Commission uses in similar contexts.355 The Commission is aware of the CFTC staff guidance on impartial access related to § 37.202 of the CFTC’s 352 See SIFMA AMG Letter, supra note 18, at 4. Bloomberg Letter, supra note 18, at 3–4. 354 See Proposing Release, supra note 1, 87 FR at 28876. 355 See Rule 819(c)(4). The Commission is adopting Rule 819(c) with the addition of paragraph (c)(4). The Commission notes that the CFTC has a standard of review applicable to its process. See 17 CFR 9.2(c); 17 CFR 9.33(c). 353 See VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 regulations.356 The Commission finds it is appropriate to similarly provide guidance as to certain criteria or practices that are inconsistent with Rule 819(c)’s requirement to provide impartial access. The Commission agrees that it is inconsistent with providing impartial access for an SBSEF to limit membership based on an ECP’s status, such as by limiting membership to (1) self-clearing members; (2) registered security-based swap dealers; (3) banks or liquidity providers with a minimum amount of Tier 1 capital; (4) liquidity providers that have been ‘‘enabled’’ by, or have bilateral documentation with, a minimum number of other liquidity providers; or (5) liquidity providers with a minimum amount of transaction volume.357 Access to an SBSEF generally should be determined, for example, on an SBSEF’s ‘‘impartial evaluation of an applicant’s disciplinary history and financial and operational soundness against objective, pre-established criteria.’’ 358 As one example of such criteria, any ECP should be able to demonstrate financial soundness either by showing that it is a clearing member of a clearing agency that clears products traded on that SBSEF or by showing that it has clearing arrangements in place with such a clearing member.359 Further, providing impartial access as required by Proposed Rule 819(c) means providing all of an SBSEF’s market participants—dealers and non-dealers alike—with the ability to fully interact on the order book or RFQ system as liquidity providers, liquidity takers, or both, including viewing, placing, or responding to all indicative or firm bids and offers and to place, receive, and respond to RFQs. Therefore, it would be incompatible with impartial access for an SBSEF’s rules to permit mechanisms, schemes, functionalities, counterparty filters, or other arrangements that 356 See Division of Clearing and Risk, Division of Market Oversight and Division of Swap Dealer and Intermediary Oversight Guidance on Application of Certain Commission Regulations to Swap Execution Facilities, CFTC (Nov. 14, 2013), available at https://www.cftc.gov/sites/default/files/idc/groups/ public/@newsroom/documents/file/ dmostaffguidance111413.pdf. 357 See Citadel Letter, supra note 18, at 6. Membership requirements based on any combination of these factors would similarly be inconsistent with providing impartial access. 358 See 2013 CFTC Final SEF Rules Release, supra note 9, at 78 FR at 33598 (discussing ‘‘impartial access’’ to swap execution facilities). 359 See id. Similarly, it is not consistent with impartial access for an SBSEF to require that an ECP have clearing arrangements in order to trade security-based swaps that are not intended to be cleared. In such a case, the SBSEF’s standards of financial soundness should be objective and impartial and should have a relevant relationship to trading on the SBSEF. PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 prevent an SBSEF participant from interacting or trading with, or viewing the bids and offers (firm or indicative) displayed by, any other market participant on that SBSEF, whether by means of any condition or restriction on its ability or authority to display a quote to any other market participant or to respond to any quote issued by any other market participant on that SBSEF with respect to security-based swap transactions that are intended to be cleared. It is also inconsistent with impartial access for an SBSEF’s rules to require bilateral documentation or to permit bilateral enablements in order to trade security-based swaps that are intended to be cleared, because providing for such documentation or enablements solely to address occasional trade rejections by a clearing agency would undercut the ability of all ECPs to post or interact with interest on securitybased swaps that are intended to be cleared, and because such documentation or enablements are unnecessary in light of the provisions of Rule 815(g), which, as discussed supra section V.E.7, would require an SBSEF’s rules to provide that a trade that is intended to be cleared at the time of the transaction, but is not accepted for clearing by a registered clearing agency, is void ab initio. Providing that such trades are void ab initio also reflects the economic reality that an uncleared transaction is significantly different from a cleared transaction in terms of the credit risk faced by the counterparties. Lastly, it is inconsistent with impartial access for an SBSEF to employ fee structures that would have a disproportionate or adverse effect on certain market participants based on their status, as described above,360 with respect to the ability to fully interact on the order book or RFQ system as liquidity providers, liquidity takers, or both, including viewing, placing, or responding to all indicative or firm bids and offers and to place, receive, and respond to RFQs. With respect to the comment that the documentation requirements of Rule 15Fi–5 may, at times, conflict with the impartial access requirement of Proposed Rule 819(c), no such conflict exists, because Rule 15Fi–5(a)(1)(ii) provides that the rule does not apply to cleared swaps, and Rule 15Fi(a)(1)(iii) further provides that the rule does not apply to security-based swap transactions executed anonymously on an SBSEF or a national securities 360 See E:\FR\FM\15DER2.SGM supra note 357 and accompanying text. 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations exchange, provided that certain conditions are met.361 ddrumheller on DSK120RN23PROD with RULES2 4. Rule 819(d)—Rule Enforcement Program Paragraph (d) of Proposed Rule 819 is closely modeled on § 37.203. Paragraph (d)(1) of Proposed Rule 819 would require an SBSEF to prohibit abusive trading practices generally, enumerating certain practices in particular.362 Paragraph (d)(2) would require an SBSEF to have arrangements and resources for effective enforcement of its rules, including the authority to collect information and documents on both a routine and non-routine basis and to supervise its market to determine whether a rule violation has occurred. Paragraph (d)(3) would require an SBSEF to establish and maintain sufficient compliance staff and resources to ensure that it can conduct effective audit trail reviews, trade practice surveillance, market surveillance, and real-time market monitoring. Paragraph (d)(4) would require an SBSEF to maintain an automated trade surveillance system that meets certain criteria. Paragraph (d)(5) would require real-time market monitoring of all trading activity on the SBSEF. The SBSEF would also be required to have the authority to adjust trade prices or cancel trades when necessary to mitigate market disrupting events caused by malfunctions in its system(s) or platform(s) or errors in orders submitted by members. Paragraph (d)(6) is modeled on § 37.203(f), again using the same structure and rule text. Like § 37.203(f), Rule 819(d)(6) addresses investigations and investigation reports and includes provisions relating to procedures, timeliness, the reporting requirements when a reasonable basis does or does not exist for finding a violation, and warning letters.363 361 See 17 CFR 240.15Fi–5(a)(1)(ii) and (iii). Rule 15Fi–5(a)(1)(iii) provides in part that SBSs executed anonymously on an SEF or a national securities exchange are exempt from the provisions of Rule 15Fi–5, provided that: (1) the SBSs are intended to be cleared and are actually submitted for clearing to a clearing agency; (2) all terms of the SBSs conform to the rules of the clearing agency; and (3) upon acceptance of such an SBS by the clearing agency the original SBS is extinguished; the original SBS is replaced by equal and opposite SBS with the clearing agency; and all terms of the SBS conform to the product specifications of the cleared SBS established under the clearing agency’s rules. See 17 CFR 240.15Fi–5(a)(1)(iii). 362 To promote uniformity throughout proposed Regulation SE, it is appropriate to denote all persons who have a right to participate in an SBSEF’s market as ‘‘members.’’ 363 Rule 819(d)(6)(v) provides that the rules of an SBSEF may authorize its compliance staff to issue a warning letter to a person or entity under investigation or to recommend that a disciplinary VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 The Commission did not receive any comments on Rule 819(d) and is adopting Rule 819(d) as proposed, except that, in light of its decision not to adopt a definition of ‘‘block trade,’’ 364 the Commission is deleting the words ‘‘block trades or other types of’’ from the phrase ‘‘pre-arranged trading (except for block trades or other types of transactions approved by or certified to the Commission pursuant to § 242.806 or § 242.807, respectively).’’ While the deletion of this text would remove an automatic exemption for block trades from the prohibition against pre-arranged trading that an SBSEF’s rules would be required to include, it is appropriate given that a definition of block trade has not been adopted. At such time as the Commission adopts a definition of block trade, an SBSEF could submit a rule change under Rule 806 or Rule 807 to address trades that meet the definition of block trade. 5. Rule 819(e)—Regulatory Services Provided by a Third Party Paragraph (e) of Proposed Rule 819 is modeled on § 37.204 and would allow an SBSEF to contract with a regulatory services provider. If it does so, the SBSEF would have to ensure that such provider has the capacity and resources necessary to provide timely and effective regulatory services, retain sufficient compliance staff to supervise the quality and effectiveness of the regulatory services provided on its behalf, hold regular meetings with the regulatory service provider, and conduct periodic reviews of the adequacy and effectiveness of services provided on its behalf. The SBSEF would at all times remain responsible for the performance of any regulatory services received and retain exclusive authority in all substantive decisions made by its regulatory service provider. One commenter states that SBSEFs should be able to use regulatory service providers and that the types of regulatory service providers permitted under Proposed Rule 819(e)(1) are appropriate.365 Another commenter also supports the use of regulatory service providers but believes that the Commission should include DCMs among the types of entities permitted to act as regulatory service providers, as they are ‘‘uniquely qualified’’ and are permitted to act as regulatory service panel take such an action, and that no more than one warning letter could be issued to the same person or entity found to have committed the same rule violation within a rolling 12-month period. 364 See supra section V.E.1(c). 365 See Bloomberg Letter, supra note 18, at 16. PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 87197 provider under the CFTC SEF regime.366 This commenter states that DCMs have well-established regulatory protocols and are subject to CFTC oversight, conduct regulatory activities similar to registered futures associations, have developed expertise in securities markets, and are permitted to list futures on individual stocks and to list swap contracts for trading.367 The Commission agrees that SBSEFs should be able to contract with DCMS for the provision of regulatory services. As the commenter states, DCMs have well-established regulatory protocols and are subject to CFTC oversight, and they are permitted to act as regulatory service providers for SEFs. Additionally, permitting an SBSEF to use the same regulatory service provider as an affiliated SEF may create efficiencies for both the SBSEF and SEF, while maintaining regulatory oversight of the entity that is providing the regulatory services. While the CFTC’s regulation for SEFs does not contain a reciprocal provision permitting national securities exchanges to perform regulatory services for SEFs, harmonization in practical terms with this aspect of the CFTC regime—i.e., so that DCMs can perform regulatory services for both SBSEFs and SEFs—is appropriate in light of the relative size of the SBSEF market compared to the swaps market and because most if not all entities that will seek to register as SBSEFs are already registered as SEFs. Significantly, regardless of the type of entity acting as regulatory service provider for an SBSEF, the SBSEF will at all times remain responsible for the performance of any regulatory services received and retain exclusive authority in all substantive decisions made by its regulatory service provider. Accordingly, the Commission is adopting Rule 819(e) as amended to permit SBSEFs to contract with DCMs for the provision of services to assist in complying with the SEA and Commission rules thereunder, as approved by the Commission.368 6. Rule 819(f)—Audit Trail Paragraph (f) of Proposed Rule 819 is modeled on § 37.205, using the same paragraph structure and rule text. Paragraph (f) would require an SBSEF to 366 See ICE Letter, supra note 18, at 3. id. at 3–4 (also stating that, for example, ICE Futures U.S., Inc. is a DCM that provides regulatory services to SEFs). 368 Specifically, the Commission is adding to Rule 819(e) the language ‘‘a board of trade designated as a contract market (under section 5 of the Commodity Exchange Act)’’—in other words, a DCM—to the list of entities with which an SBSEF may enter into a contract for the provision of regulatory services. 367 See E:\FR\FM\15DER2.SGM 15DER2 87198 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 capture and retain all audit trail data necessary to detect, investigate, and prevent customer and market abuses, and imposes other requirements on the SBSEF’s audit trail pertaining to the records that must be kept, electronic analysis capability, safe-storage capability, and enforcement of the audit trail requirements. The Commission did not receive any comments on Proposed Rule 819(f). An audit trail is a crucial component of a trading venue’s ability to ensure compliance with its rules. These requirements should be modeled on the parallel CFTC regulations regarding SEFs, as most, if not all, entities that will register as SBSEFs will be SEFs registered with the CFTC, and that consistent requirements will promote a consistent approach to compliance. Accordingly, the Commission is adopting Rule 819(f) as proposed, with minor technical modifications.369 7. Rule 819(g)—Disciplinary Procedures and Sanctions Paragraph (g) of Proposed Rule 819 is based on § 37.206 of the CFTC’s rules and generally tracks all of its rule text but would include additional language derived from guidance in appendix B of part 37 of the CFTC’s rules. Converting the guidance to rule text, and thus grouping conceptually related items together, yields the most coherent and readable ruleset, instead of incorporating the guidance into a standalone section of the rules. Accordingly, paragraph (g)(1)(i) of Proposed Rule 819 is taken from § 37.206(a) and would require an SBSEF to establish and maintain sufficient enforcement staff and resources to effectively and promptly prosecute possible rule violations within the disciplinary jurisdiction of the SBSEF. Paragraphs (g)(1)(ii) through (iv) are taken from the appendix B guidance and would provide, respectively, that: • The enforcement staff of an SBSEF shall 370 not include members or other persons whose interests conflict with their enforcement duties. • A member of the enforcement staff shall not operate under the direction or control of any person or persons with trading privileges at the SBSEF. • The enforcement staff of an SBSEF may operate as part of the SBSEF’s compliance department. 369 The Commission has corrected a reference to Core Principle 9 and corrected the phrase ‘‘account(s) owner(s)’’ to read ‘‘account’s owner(s).’’ 370 In this bullet and the next bullet, the word used in the corresponding CFTC guidance was ‘‘should,’’ but the Commission proposed to replace ‘‘should’’ with ‘‘shall’’ in both places to convert the guidance into an enforceable rule. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 Paragraph (g)(2) of Rule 819 is modeled on § 37.206(b) and would require an SBSEF to establish one or more disciplinary panels that are authorized to fulfill their obligations under Proposed Rule 819. Section 37.206(b) provides that disciplinary panels must meet the composition requirements of part 40. To help ensure fairness and prevent special treatment or preference of any person or member and to provide for consistency in the makeup of members of SBSEF major disciplinary committees and hearing panels, the Commission proposed instead to require the disciplinary panels established under Proposed Rule 819(g)(2) to meet the composition requirements of Rule 834(d), which apply to each major disciplinary committee and hearing panel of an SBSEF.371 Paragraphs (g)(3) through (8) of Proposed Rule 819 have no parallel in § 37.206 itself but derive from the guidance in appendix B pertaining to § 37.206, following the paragraph structure and wording of the guidance closely. Paragraph (g)(3) would impose procedural requirements relating to the notice of charges made to a respondent. Paragraph (g)(4) would provide that a respondent has a right to representation. Paragraph (g)(5) would provide that a respondent must be given adequate time to respond to any charges. Paragraph (g)(6) would state that the rules of an SBSEF may provide that, if a respondent admits or fails to deny any of the charges, a disciplinary panel may find that the violations alleged in the notice of charges have been committed. Paragraph (g)(6) would further state that, if the SBSEF’s rules so provide, then: (i) The disciplinary panel may impose a sanction for each violation found to have been committed; (ii) The disciplinary panel shall promptly notify the respondent in writing of any sanction to be imposed and shall advise the respondent that the respondent may request a hearing on such sanction within the period of time, which shall be stated in the notice; and (iii) The rules of the SBSEF may provide that, if a respondent fails to request a hearing within the period of time stated in the 371 Proposed Rule 834(d) would require each SBSEF and SBS exchange to ensure that its disciplinary processes preclude any member, or group or class of its members, from dominating or exercising disproportionate influence on the disciplinary process, and that each major disciplinary committee or hearing panel include sufficient different groups or classes of its members so as to ensure fairness and to prevent special treatment or preference for any person or member in the conduct of the responsibilities of the committee or panel. See infra section VIII. PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 notice, the respondent will be deemed to have accepted the sanction. Paragraph (g)(7) of Proposed Rule 819 would provide that, where a respondent has requested a hearing on a charge that is denied, or on a sanction set by the disciplinary panel, the respondent shall be given an opportunity for a hearing in accordance with the rules of the SBSEF. Paragraph (g)(8) would address settlement offers. Paragraph (g)(9) of Proposed Rule 819 returns to the text of § 37.206(c) for provisions regarding hearings. Paragraph (g)(9)(i) is modeled on § 37.206(c)(1) and would require an SBSEF to have rules requiring a hearing to be fair, conducted before members of the disciplinary panel, and promptly convened after reasonable notice to the respondent. The Commission proposed an additional provision, which derives from the guidance, that an SBSEF need not apply the formal rules of evidence for a hearing; nevertheless, the procedures for the hearing may not be so informal as to deny a fair hearing. Paragraphs (g)(9)(ii) through (vi) of Proposed Rule 819 are also adapted from the guidance in appendix B of part 37. Paragraph (g)(9)(ii) would bar a member of the disciplinary panel for the hearing from having a financial, personal, or other direct interest in the matter under consideration. Paragraph (g)(9)(iii) would address the respondent’s access to evidence in the SBSEF’s possession. Paragraph (g)(9)(iv) would provide that the SBSEF’s enforcement and compliance staffs shall 372 be parties to the hearing, and the enforcement staff shall present their case on those charges and sanctions that are the subject of the hearing. Paragraph (g)(9)(v) would provide that the respondent shall be entitled to appear personally at the hearing, to crossexamine any persons appearing as witnesses at the hearing, to call witnesses, and to present such evidence as may be relevant to the charges. Paragraph (g)(9)(vi) would provide that the SBSEF shall require persons within its jurisdiction who are called as witnesses to participate in the hearing and produce evidence. Paragraph (g)(9)(vii) of Proposed Rule 819 is modeled on the text of § 37.206(c)(2) and would require that, if the respondent has requested a hearing, a copy of the hearing shall be made and shall become a part of the record of the proceeding. Paragraph (g)(9)(vii) would not require the record to be transcribed 372 The CFTC’s guidance in appendix B that is adapted into paragraphs (g)(9)(ii) through (vi) of Proposed Rule 819 uses the word ‘‘should’’ here and in other similar instances. The Commission uses the word ‘‘shall’’ in such instances instead. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 unless the transcript is requested by Commission staff or the respondent, the decision is appealed pursuant to the rules of the SBSEF, or the decision is reviewed by the Commission pursuant to § 201.442.373 In all other instances, a summary record of a hearing is permitted. Paragraph (g)(10) of Proposed Rule 819 is modeled on § 37.206(d) and would provide that, promptly following a hearing conducted in accordance with the rules of the SBSEF, the disciplinary panel shall render a written decision based upon the weight of the evidence contained in the record of the proceeding and shall provide a copy to the respondent. The written decision must include six enumerated elements, all of which are closely modeled on those in § 37.206(d). Paragraph (g)(11) of Proposed Rule 819 would address emergency disciplinary actions and is drawn from the guidance in appendix B of part 37. It would provide that an SBSEF may impose a sanction, including suspension, or take other summary action against a person or entity subject to its jurisdiction upon a reasonable belief that such immediate action is necessary to protect the best interest of the market place. Furthermore, any emergency disciplinary action would have to be taken in accordance with an SBSEF’s procedures that provide for notice (if practicable), rights for representation in all proceedings, an opportunity for a hearing as soon as reasonably practicable, and the rendering of a written decision promptly following the hearing based upon the weight of the evidence contained in the record. Proposed Rule 819(g)(11) would seek to balance the need to allow an SBSEF to take summary action against the need to afford due process to respondents.374 Paragraph (g)(12) of Proposed Rule 819 also is drawn from the appendix B guidance and would provide that, if the rules of the SBSEF permit appeals,375 373 See infra section XIV.E (discussing Rule 442, which establishes the right to appeal to the Commission certain actions taken by an SBSEF and sets out certain procedural matters relating to any such appeal). 374 Compare Proposed Rule 819(g)(11)(i) (allowing an SBSEF to impose a sanction, including suspension, or take other summary action against a person or entity subject to its jurisdiction upon a reasonable belief that such immediate action is necessary to protect the best interest of the market place), with Proposed Rule 819(g)(11)(ii)(A) (providing that, if practicable, a respondent should be served with a notice before the action is taken, or otherwise at the earliest possible opportunity). 375 Neither § 37.206 nor the associated guidance from appendix B requires a SEF to allow appeals. The guidance states, rather, that a SEF’s rules ‘‘may permit’’ appeals and includes certain procedural VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 87199 the SBSEF shall establish an appellate panel that is authorized to hear appeals. The composition of the panel would have to be consistent with Rule 834(d) 376 and could not include any members of the SBSEF’s compliance staff or any person involved in adjudicating any other stage of the same proceeding. Promptly following the appeal or review proceeding, the appellate panel would be required to issue a written decision and to provide a copy to the respondent. As to the Commission’s process of reviewing disciplinary actions, the Commission will apply a standard of review consistent with standards of review that the Commission uses in similar contexts.377 Paragraph (g)(13) of Proposed Rule 819 is adapted partly from § 37.206(e) and partly from the appendix B guidance. Paragraph (g)(13)(i) is drawn from § 37.206(e) and would provide that all disciplinary sanctions imposed by an SBSEF or its disciplinary panels shall be commensurate with the violations committed and shall be clearly sufficient to deter recidivism or similar violations by other members. All disciplinary sanctions, including sanctions imposed pursuant to an accepted settlement offer, would have to take into account the respondent’s disciplinary history. In the event of demonstrated customer harm, any disciplinary sanction would have to include full customer restitution, except where the amount of restitution or to whom it should be provided cannot be reasonably determined. Paragraph (g)(13)(i) is adapted from the appendix B guidance and would allow an SBSEF to adopt a summary fine schedule for violations of rules relating to the failure to timely submit accurate records required for clearing or verifying each day’s transactions. The Commission received no comments on Proposed Rule 819(g) and, apart from the addition of paragraph (g)(14) regarding Commission review,378 is adopting Rule 819(g) as proposed for the reasons stated in the Proposing Release. 8. Rule 819(h)—Activities of SecurityBased Swap Execution Facility’s Employees, Governing Board Members, Committee Members, and Consultants Paragraph (h) of Proposed Rule 819 would generally prohibit persons who are employees of an SBSEF, or who otherwise might have access to confidential information because of their role with the SBSEF, from improperly utilizing that information. Proposed Rule 819(h) is modeled on § 1.59 of the CFTC’s rules, which requires a SEF (among other CFTCregulated entities) to place restrictions on trading by its governing board members, committee members, consultants, and employees and to prohibit any such person from disclosing any material, non-public information obtained as a result of their official duties with the SRO. Paragraph (h)(2)(i) of Proposed Rule 819 would require an SBSEF to maintain in effect rules that, at a minimum, prohibit an employee of the SBSEF from trading, directly or indirectly, any ‘‘covered interest.’’ Proposed Rule 819(h)(1)(i) would define ‘‘covered interest’’ to mean, with respect to an SBSEF: an SBS that trades on the SBSEF; a security of an issuer that has issued a security that underlies an SBS that is listed on the SBSEF; or a derivative based on a security that falls within the immediately preceding prong. The opportunity to observe order submission and trading in an SBS on an SBSEF could yield material non-public information about the future performance not just of that SBS, but of all securities issued by that entity.379 Paragraph (h)(2)(ii), modeled on § 1.59(b)(1)(ii), would prohibit an SBSEF employee from disclosing to any other person any material non-public information that the employee obtains as a result of their employment at the SBSEF, and where the employee has or should have a reasonable expectation that the information disclosed may assist another person in trading any covered interest. In addition, paragraph (h)(2)(ii), like § 1.59(b)(1)(ii), would provide an exception for disclosures made in the course of an employee’s duties, or disclosures made to another SBSEF, court of competent jurisdiction, or representative of any agency or department of the Federal or State requirements only if the rules of a swap execution facility permit appeals. The Commission adhered to this permissive approach in the proposal but sought comment on whether the final rules should require an SBSEF to create an appeals procedure. 376 See infra section VIII.D. 377 See Rule 819(g)(14); see also supra note 355. 378 See supra note 377 and accompanying text. 379 The single-name CDS market, in particular, is a market for assessing the creditworthiness of particular issuers. Non-public information derived from activity on the SBSEF pertaining to the market’s assessment of an issuer’s creditworthiness is likely to be material to the markets for that issuer’s cash securities as well as to markets for derivatives based on the issuer’s cash securities (e.g., single-stock options). PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 E:\FR\FM\15DER2.SGM 15DER2 87200 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 government acting in their official capacity. Paragraph (h)(3) of Proposed Rule 819, modeled on § 1.59(b)(2), would allow an SBSEF to adopt rules setting forth circumstances under which exemptions from the employee trading prohibition may be granted. In particular, paragraph (h)(3) would include the following possible carveouts from the employee trading prohibition: (1) participation by an employee in a ‘‘pooled investment vehicle’’ where the employee has no direct or indirect control with respect to transactions executed for or on behalf of such vehicle; (2) trading by an employee in a derivative based on such a pooled investment vehicle; (3) trading by an employee in a derivative based on an index in which no covered interest constitutes more than 10% of the index; and (4) trading by an employee under circumstances enumerated in rules which the SBSEF determines are not contrary to applicable law, the public interest, or just and equitable principles of trade.380 The first and the fourth carve-outs listed above are comparable to those listed in § 1.59(b)(2). The Commission proposed to include the second and third carve-outs to permit an SBSEF employee to trade derivatives that provide indirect exposure to a covered interest where the exposure to the covered interest is sufficiently diluted.381 In such cases, it would be unlikely that the employee would be using material non-public information about the covered interest to gain an unfair advantage when trading the derivative. The Commission proposed to depart from the CFTC definition of ‘‘pooled investment vehicle’’ 382 to adapt it for the SBS and securities markets. Rule (h)(1)(ii) defines ‘‘pooled investment vehicle’’ to mean an 380 The first and the fourth carve-outs listed above are comparable to those listed in § 1.59(b)(2). The Commission proposed to include the second and third carve-outs to permit an SBSEF employee to trade derivatives that provide indirect exposure to a covered interest where the exposure to the covered interest is sufficiently diluted. In such cases, it would be unlikely that the employee would be using material non-public information about the covered interest to gain an unfair advantage when trading the derivative. 381 See Proposing Release, supra note 1, 87 FR at 28905. 382 See § 1.59(a)(10) (defining ‘‘pooled investment vehicle’’ to mean ‘‘a trading vehicle organized and operated as a commodity pool within the meaning of § 4.10(d) of this chapter, and whose units of participation have been registered under the Securities Act of 1933, or a trading vehicle for which § 4.5 of this chapter makes available relief from regulation as a commodity pool operator, i.e., registered investment companies, insurance company separate accounts, bank trust funds, and certain pension plans’’). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 investment company registered under the Investment Company Act of 1940 in which no covered interest constitutes more than 10% of the investment company’s assets. Thus, under this definition, if an SBSEF were to list a single-name CDS on company XYZ, a ‘‘pooled investment vehicle’’ would include a broad-based mutual fund or ETF that contains a security issued by company XYZ, assuming that the XYZ security does not exceed 10% of the fund’s holdings. The 10% limit on a covered interest’s composition of the fund is designed to permit SBSEF employees to trade most index-based mutual funds and ETFs that contain covered interests, except those where a component of the fund becomes sufficiently large that material nonpublic information about an issuer derived from activity on the SBSEF could provide an unfair advantage to an SBSEF employee when trading that fund. Finally, under Proposed Rule 819(h)(3)—as with § 1.59(b)(2)—the exemptions from the trading restrictions would not be automatically available to SBSEF employees. Proposed Rule 819(h)(3) would still require the SBSEF to adopt rules that set forth circumstances under which exemptions from the trading prohibition may be granted. Furthermore, Proposed Rule 819(h)(3), which is modeled on § 1.59(b)(2), would state that any exemption must be administered by the SBSEF ‘‘on a case-by-case basis.’’ Paragraph (h)(4) of Proposed Rule 819, like § 1.59(d), would address prohibited conduct not just by employees of an SBSEF, but also of governing board members, committee members, and consultants of the SBSEF. Paragraph (h)(4)(i)(A) is modeled on § 1.59(d)(1)(i) and would prohibit any employee, governing board member, committee member, or consultant of the SBSEF from trading for their own account, or for or on behalf of any other account, in any covered interest on the basis of any material, non-public information obtained through special access related to the performance of their official duties as an employee, governing board member, committee member, or consultant. Paragraph (h)(4)(i)(B), modeled on § 1.59(d)(1)(ii), would prohibit any employee, governing board member, committee member, or consultant of the SBSEF from disclosing for any purpose inconsistent with the performance of their official duties as an employee, governing board member, committee member, or consultant any material, non-public information obtained through special access related to the PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 performance of those duties. Paragraph (h)(4)(ii), modeled on § 1.59(d)(2), would provide that no person shall trade for their own account, or for or on behalf of any other account, in any covered interest on the basis of any material, non-public information that the person knows was obtained in violation of paragraph (h)(4) of this section from an employee, governing board member, committee member, or consultant. The Commission received no comments on Proposed Rule 819(h) and is adopting Rule 819(h) as proposed, with minor technical modifications,383 for the reasons stated in the Proposing Release. 9. Rule 819(i)—Service on SecurityBased Swap Execution Facility Boards or Committees by Persons With Disciplinary Histories Paragraph (i) of Proposed Rule 819 would bar persons with specified disciplinary histories from serving on the governing board or committees of an SBSEF and would impose certain other duties on the SBSEF associated with that fundamental requirement. Rule 819(i) is modeled on § 1.63 of the CFTC’s rules, which imposes similar requirements in connection with SEFs and certain other entities. Paragraph (i) of Proposed Rule 819 is closely modeled on § 1.63. Paragraph (i)(1), like § 1.63(b), would require an SBSEF to maintain rules 384 that render a person ineligible to serve on its disciplinary committees,385 arbitration 383 See supra note 32. 1.63(b), in relevant part, requires a SEF to maintain rules that have been submitted to the CFTC pursuant to section 5c(c) of the CEA and part 40 of the CFTC’s rules. As noted above, the Commission proposed to adapt §§ 40.5 (Voluntary submission of rules for Commission review and approval) and 40.6 (Self-certification of rules) into Proposed Rules 806 and 807, respectively. Therefore, Proposed Rule 819(i)(1) would require an SBSEF to maintain in effect rules that have been submitted to the Commission pursuant to Rule 806 or Rule 807. 385 Proposed Rule 802 would define ‘‘disciplinary committee’’ as any person or committee of persons, or any subcommittee thereof, that is authorized by an SBSEF or SBS exchange to issue disciplinary charges, to conduct disciplinary proceedings, to settle disciplinary charges, to impose disciplinary sanctions, or to hear appeals thereof in cases involving any violation of the rules of the SBSEF or SBS exchange, except those cases where the person or committee is authorized summarily to impose minor penalties for violating rules regarding decorum, attire, the timely submission of accurate records for clearing or verifying each day’s transactions, or other similar activities. The CFTC rules contain two slightly different definitions of ‘‘disciplinary committee’’ that appear in § 1.63(a)(2) and § 1.69(a)(1), respectively. Because the definition in § 1.69(a)(1) is more comprehensive, the Commission has modeled its definition of ‘‘disciplinary committee’’ on § 1.69(a)(1) rather than on § 1.63(a)(2). The Commission is locating the 384 Section E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 panels, oversight panels,386 or governing boards if that person falls into any of six enumerated criteria, all of which are modeled closely on the criteria in § 1.63(b).387 Paragraph (i)(2), modeled on § 1.63(c), would impose a direct bar on any person from serving on a disciplinary committee, arbitration panel, oversight panel, or governing board of an SBSEF if that person meets any of the six criteria enumerated in Rule 819(i)(1). Paragraph (i)(3), modeled on § 1.63(d), would require an SBSEF to submit to the Commission a schedule listing the rule violations that constitute disciplinary offenses that would trigger the bar and, to the extent necessary to reflect revisions, would have to submit an amended schedule within 30 days of the end of each calendar year. The SBSEF would be required to maintain and keep current this schedule and post it on its website so that it is in a public place designed to provide notice to members and otherwise ensure its availability to the general public. Paragraph (i)(4), like § 1.63(e), would require an SBSEF to submit to the Commission within 30 days of the end of each calendar year a certified list of any persons who have been removed from its disciplinary committees, arbitration panels, oversight panels, or governing board pursuant to Rule 819(i) during the prior year. Paragraph (i)(5), modeled on § 1.63(f), would provide that, whenever an SBSEF finds by final decision that a person has committed a disciplinary offense and that finding makes the person ineligible to serve on that SBSEF’s disciplinary committees, definition in Rule 802, since the term is used by multiple rules in Regulation SE. 386 Proposed Rule 802 would define ‘‘oversight panel’’ as any panel, or any subcommittee thereof, authorized by an SBSEF or SBS exchange to recommend or establish policies or procedures with respect to the surveillance, compliance, rule enforcement, or disciplinary responsibilities of the SBSEF or SBS exchange. The CFTC’s definitions of ‘‘oversight panel’’ are contained in § 1.63(a)(4) and § 1.69(a)(4), respectively. Because the definition in § 1.69(a)(4) is more comprehensive, the Commission has modeled its definition of ‘‘oversight panel’’ on § 1.69(a)(4) rather than on § 1.63(a)(4). As with the definition of ‘‘disciplinary committee,’’ the Commission is locating the definition of ‘‘oversight panel’’ in Rule 802, since the term is used by multiple rules in Regulation SE. 387 Section 1.63(b)(5) provides that one criterion for the bar would be that the person in question is subject to or has had imposed on him within the prior three years a CFTC registration revocation or suspension in any capacity for any reason, or has been convicted within the prior three years of any of the felonies listed in section 8a(2)(D)(ii) through (iv) of the CEA. Since the SEC is not subject to the CEA and cannot cross-reference those provisions, the Commission proposed for the equivalent criterion in Rule 819(i)(1)(v) that a person would be barred for having been convicted within the prior three years of any felony, without limitation on the type of felony. See Proposing Release, supra note 1, 87 FR at 28907 n.145. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 arbitration panels, oversight panels, or governing board, the SBSEF shall inform the Commission of that finding and the length of the ineligibility, in a form and manner specified by the Commission. Paragraph (i)(6) of Proposed Rule 819 would define the terms ‘‘arbitration panel,’’ ‘‘disciplinary offense,’’ and ‘‘final decision’’ that are used in Rule 819(i).388 These definitions are closely modeled on those provided in § 1.63(a).389 The Commission received no comments on Proposed Rule 819(i) and is adopting Rule 819(i) as proposed, with minor technical modifications,390 for the reasons stated in the Proposing Release. 10. Rule 819(j)—Notification of Final Disciplinary Action Involving Financial Harm to a Customer Paragraph (j) of Proposed Rule 819 is a modified version of § 1.67 of the CFTC’s rules. Paragraph (j)(1) of Proposed Rule 819 would be designed to replicate for SBSEFs the fundamental duty of § 1.67 and provides that, upon any final disciplinary action in which an SBSEF finds that a member has committed a rule violation that involved a transaction for a customer, whether executed or not, and that resulted in financial harm to the customer, the SBSEF must promptly provide written notice of the disciplinary action to the member. In addition, the SBSEF would be required to have established a rule pursuant to Rule 806 or Rule 807 that requires a member that receives such a notice to promptly provide that notice 388 Proposed Rule 819(i)(6)(i) would define ‘‘arbitration panel’’ as any person or panel empowered by an SBSEF to arbitrate disputes involving the SBSEF’s members or their customers. Rule 819(i)(6)(ii) defines ‘‘disciplinary offense’’ as: any violation of the rules of an SBSEF, except a violation resulting in fines aggregating to less than $5000 within a calendar year involving decorum or attire, financial requirements, or reporting or recordkeeping; any rule violation which involves fraud, deceit, or conversion or results in a suspension or expulsion; any violation of the SEA or the Commission’s rules thereunder; or any failure to exercise supervisory responsibility when such failure is itself a violation of either the rules of the SBSEF, the SEA, or the Commission’s rules thereunder. Proposed Rule 819(i)(6)(iii) would define ‘‘final decision’’ as a decision of an SBSEF which cannot be further appealed within the SBSEF, is not subject to the stay of the Commission or a court of competent jurisdiction, and has not been reversed by the Commission or any court of competent jurisdiction; or any decision by an administrative law judge, a court of competent jurisdiction, or the Commission which has not been stayed or reversed. 389 Since these terms are used only in Proposed Rule 819(i) and not elsewhere in Regulation SE, the Commission has defined them in Proposed Rule 819(i) and not the omnibus definitions rule in Regulation SE (Proposed Rule 802). 390 See supra note 32. PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 87201 to the customer, as disclosed on the member’s books and records.391 Paragraph (j)(2) would provide that the written notice must include the principal facts of the disciplinary action and a statement that the SBSEF has found that the member has committed a rule violation that involved a transaction for the customer, whether executed or not, and that resulted in financial harm to the customer. Paragraph (j)(3) of Proposed Rule 819 would provide definitions for two terms used in Rule 819(j). The definition of ‘‘final disciplinary action’’ is closely modeled on the CFTC’s definition in § 1.67(a).392 The definition of ‘‘customer’’ is only loosely modeled on the definition of ‘‘customer’’ provided in § 1.3, which includes complexities deriving from the CEA that are not necessary or appropriate to adapt into a rule that applies to SBSEFs.393 The Commission proposed to define ‘‘customer’’ in Rule 819(j)(3)(i) as a person that utilizes an agent in connection with trading on an SBSEF. The Commission received no comments on Proposed Rule 819(j) and is adopting Rule 819(j) as proposed, with minor technical modifications,394 for the reasons stated in the Proposing Release. 11. Rule 819(k)—Designation of Agent for Non-U.S. Member Paragraph (k) of Proposed Rule 819 would require non-U.S. persons who trade on an SBSEF to have an agent for service of process, which could be an agent of its own choosing or, by default, the SBSEF. Proposed Rule 819(k) is modeled on § 15.05(i) of the CFTC’s rules, which concerns the designation of agents for foreign persons participating 391 The provision on which Proposed Rule 819(j)(1)(i)(B) is based, § 1.67(b)(1)(ii), requires a futures commission merchant or other registrant that receives such a notice to forward it to the injured customer. Because of differences in the respective agencies’ statutory authority, the Commission proposed to require the SBSEF to establish a rule that requires the relevant member to forward the notice, not to propose a Commission rule that would impose such a duty on the member directly. 392 See Proposed Rule 819(j)(3)(ii) (defining ‘‘final disciplinary action’’ as any decision by or settlement with an SBSEF in a disciplinary matter that cannot be further appealed at the SBSEF, is not subject to the stay of the Commission or a court of competent jurisdiction, and has not been reversed by the Commission or any court of competent jurisdiction). 393 The definitions of ‘‘customer’’ and ‘‘final disciplinary action’’ would apply only within Proposed Rule 819(j), so the Commission has not included them in the omnibus definitions rule for proposed Regulation SE (Proposed Rule 802). 394 See supra note 32. E:\FR\FM\15DER2.SGM 15DER2 87202 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 on ‘‘reporting markets,’’ a category in the CFTC’s rules that includes SEFs.395 Paragraph (k)(1) of Proposed Rule 819 is modeled on § 15.05(i) and would provide that an SBSEF that admits a non-U.S. person as a member shall be deemed to be the agent of the ‘‘non-U.S. member’’ 396 with respect to any SBS executed by the non-U.S. member. Under Proposed Rule 819(k)(1), service or delivery of any communication issued by or on behalf of the Commission to the SBSEF would constitute valid and effective service upon the non-U.S. member. If an SBSEF is served with a communication issued by or on behalf of the Commission to a non-U.S. member, the SBSEF would be required to transmit the communication to the non-U.S. member. Paragraph (k)(2) of Proposed Rule 819 is modeled on § 15.05(i)(1) and would provide that it shall be unlawful for an SBSEF to permit a non-U.S. member to execute SBS transactions on the facility unless the SBSEF informs the non-U.S. member in writing of the requirements of Rule 819(k). Paragraph (k)(3) of Proposed Rule 819 is modeled on § 15.05(i)(2) and would permit a non-U.S. member of an SBSEF to utilize an agent for service of process other than the SBSEF. The non-U.S. member would have to provide a copy of its agreement with the alternate agent to the SBSEF, and the SBSEF would then have to file the agreement with the Commission, before executing any transaction on the SBSEF. Paragraph (k)(4) of Proposed Rule 819, modeled on § 15.05(i)(3), would require the non-U.S. member to notify the Commission if the agency agreement is no longer in effect. For an SBSEF to have an effective regulatory program and thereby comply with Core Principle 2 (Compliance with Rules), the SBSEF must have jurisdiction over all of its members, including members who are not U.S. persons. Proposed Rule 819(k) would further an SBSEF’s ability to ensure 395 A ‘‘reporting market’’ is defined in § 15.00(q) to mean a DCM or registered entity under section 1a(40) of the CEA. The term ‘‘registered entity’’ as defined in section 1a(40) of the CEA includes SEFs, among other entities. 396 ‘‘Non-U.S. member’’ is a defined term in Rule 819(k) that does not appear in § 15.05 of the CFTC’s rules but which appropriately conveys the meaning of the CFTC rule for purposes of SBSEFs in Proposed Rule 819(k). A foreign trader that executes contracts on a trading platform such as an SBSEF must be a member of that platform. Therefore, to promote uniformity throughout Regulation SE, the Commission is using the term ‘‘member’’ for this concept. Furthermore, the Commission has defined the term ‘‘U.S. person’’ for purposes of the crossborder application of its Title VII rules, see Rule 3a71–3(a)(4), § 240.3a71–3(a)(4), and has thus defined ‘‘non-U.S. member’’ in Rule 802 as ‘‘a member of a security-based swap execution facility that is not a U.S. person.’’ VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 compliance by its non-U.S. members with its rules by requiring each non-U.S. member of the SBSEF to have an agent for service of process, whether an agent of its own choosing that has been disclosed to the SBSEF and the Commission or, as a default, the SBSEF itself. This would eliminate any question of how to provide valid notice to a non-U.S. member of any proceedings involving potential rule violations. The Commission received no comments on Proposed Rule 819(k) and is adopting Rule 819(k) as proposed for the reasons stated in the Proposing Release. C. Rule 820—Core Principle 3—SBS Not Readily Susceptible to Manipulation Core Principle 3 397 provides that an SBSEF may permit trading only in SBS that are not readily susceptible to manipulation. CEA Core Principle 3 for SEFs is substantively identical.398 Proposed Rule 820 is modeled after § 37.300 of the CFTC’s rules and would implement Core Principle 3. The Commission received no comments on Proposed Rule 820, and is adopting Rule 820 as proposed for the reasons stated in the Proposing Release. D. Rule 821—Core Principle 4— Monitoring of Trading and Trade Processing Core Principle 4 399 requires an SBSEF to establish and enforce rules or terms and conditions defining or specifications detailing: (1) trading procedures to be used in entering and executing orders traded on or through the facilities of the SBSEF; and (2) procedures for trade processing of SBS on or through the facilities of the SBSEF. Core Principle 4 also requires an SBSEF to monitor trading in SBS to prevent manipulation, price distortion, and disruptions of the delivery or cash settlement process through surveillance, compliance, and disciplinary practices and procedures, including methods for conducting real-time monitoring of trading and comprehensive and accurate trade reconstructions. CEA Core Principle 4 for SEFs 400 is substantively identical. Proposed Rule 821 would implement Core Principle 4 and is closely modeled on the rules in subpart E of part 37 and the CFTC’s guidance and acceptable 397 Section 3D(d)(3) of the SEA, 15 U.S.C. 78c– 4(d)(3). 398 See Section 5h(f)(3) of the CEA, 7 U.S.C. 7b– 3(f)(3). 399 Section 3D(d)(4) of the SEA, 15 U.S.C. 78c– 4(d)(4). 400 Section 5h(f)(4) of the CEA, 7 U.S.C. 7b– 3(f)(4). PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 practices in appendix B to part 37. As explained in the Proposing Release, paragraph (a) of Proposed Rule 821, like § 37.400 of the CFTC’s rules, incorporates the requirements of Core Principle 4 described above, and the remaining paragraphs of Proposed Rule 821 are modeled on §§ 37.401 to 37.408 of the CFTC’s rules and also incorporate guidance and acceptable practices from appendix B to part 37.401 Paragraph (b) of Proposed Rule 821 would specify an SBSEF’s marketoversight obligations. Paragraph (c) of Proposed Rule 821 would specify requirements for an SBSEF’s monitoring of physical-delivery SBS. Paragraph (d) of Proposed Rule 821 would specify additional requirements for cash-settled SBS. Paragraph (e) of Proposed Rule 821 would specify requirements for an SBSEF’s ability to obtain information. Paragraph (f) of Proposed Rule 821 would require an SBSEF to establish and maintain risk control mechanisms to prevent and reduce the potential risk of market disruptions. Paragraph (g) of Proposed Rule 821 would require an SBSEF to have the ability to comprehensively and accurately reconstruct all trading on its facility and requires an SBSEF to make all audittrail data and reconstructions available to the Commission. And paragraph (h) of Proposed Rule 821 would provide that an SBSEF shall comply with the rules in this section through a dedicated regulatory department or by contracting with a regulatory service provider pursuant to Rule 819(e). The Commission received no comments on Proposed Rule 821 and is adopting Rule 821 as proposed for the reasons stated in the Proposing Release. E. Rule 822—Core Principle 5—Ability To Obtain Information Core Principle 5 402 requires an SBSEF to establish and enforce rules that will allow the SBSEF to obtain any necessary information to perform any of the functions described in the Core Principles, provide the information to the Commission on request, and have the capacity to carry out such international information-sharing agreements as the Commission may require. CEA Core Principle 5 for SEFs 403 is substantively identical. Proposed Rule 822 implements Core Principle 5 and is substantively identical to subpart F of part 37. Paragraph (a) of Proposed Rule 822 401 See Proposing Release, supra note 1, 87 FR at 28910–11. 402 Section 3D(d)(5) of the SEA, 15 U.S.C. 78c– 4(d)(5). 403 Section 5h(f)(5) of the CEA, 7 U.S.C. 7b– 3(f)(5). E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations would repeat the statutory text of Core Principle 5. Paragraph (b), modeled on § 37.501, would require that an SBSEF establish and enforce rules that will allow the SBSEF to have the ability and authority to obtain sufficient information to allow it to fully perform its operational, risk management, governance, and regulatory functions and any requirements under Regulation SE. Paragraph (c), like § 37.502, would require an SBSEF to have rules that allow it to collect information on a routine basis, allow for the collection of non-routine data from its members, and allow for its examination of books and records kept by members on its facility.404 Paragraph (d), like § 37.503, would require that an SBSEF provide information in its possession to the Commission upon request, in a form and manner specified by the Commission. Finally, paragraph (e), like § 37.504, would require an SBSEF to share information with other regulatory organizations, data repositories, and third-party data reporting services as required by the Commission or as otherwise necessary and appropriate to fulfill its regulatory and reporting responsibilities, and that appropriate information-sharing agreements can be established with such entities, or the Commission can act in conjunction with the SBSEF to carry out such information sharing. The Commission received no comments on Proposed Rule 822 and is adopting Rule 822 as proposed for the reasons stated in the Proposing Release. ddrumheller on DSK120RN23PROD with RULES2 F. Rule 823—Core Principle 6— Financial Integrity of Transactions Core Principle 6 sets forth requirements related to the financial integrity of transactions that are entered on or through the facilities of an SBSEF.405 Specifically, paragraph (a) of Proposed Rule 823 would require an SBSEF to establish and enforce rules and procedures for ensuring the financial integrity of SBS entered on or through the facilities of the SBSEF, including the clearance and settlement of SBS pursuant to section 3C(a)(1) of the SEA.406 Paragraph (b) would provide that transactions required to be cleared or voluntarily cleared must be cleared through a registered clearing 404 While § 37.502 of subpart F uses the term ‘‘market participant,’’ Proposed Rule 822 would substitute the term ‘‘member’’ in these places, since the rule pertains to market participants who are acting as members of the SEF/SBSEF. See supra note 362. 405 Section 3D(d)(6)(A) of the SEA, 15 U.S.C. 78c– 4(d)(6). 406 15 U.S.C. 78c–3(a)(1). See supra note 168 and accompanying text (discussing mandatory clearing provisions). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 agency (or an exempt clearing agency). Paragraph (c) addresses the manner in which an SBSEF shall provide for the financial integrity of transactions. Finally, paragraph (d) would require an SBSEF to monitor its members to ensure that they continue to qualify as eligible contract participants. As described in the Proposing Release, the Commission modeled Rule 823 on subpart H of part 37 of the CFTC’s rules,407 which implements CEA Core Principle 7 for SEFs.408 1. Rule 823(a)—General Paragraph (a) of Proposed Rule 823 would repeat the statutory text of SEA Core Principle 6 in the same manner that § 37.700 of the CFTC’s rules 409 repeats the statutory language of CEA Core Principle 7 for SEFs.410 Proposed Rule 823(a) would require an SBSEF to establish and enforce rules and procedures for ensuring the financial integrity of SBS entered on or through the facilities of the SBSEF, including the clearance and settlement of SBS pursuant to section 3C(a)(1) of the SEA.411 The Commission did not receive any comments on Proposed Rule 823(a) and is adopting Rule 823(a) as proposed for the reasons stated in the Proposing Release. 2. Rule 823(b)—Required Clearing Paragraph (b) of Proposed Rule 823 is closely modeled on § 37.701 of the CFTC’s rules,412 and it would provide that transactions executed on or through an SBSEF that are required to be cleared under section 3C(a)(1) of the SEA or are voluntarily cleared by the counterparties shall be cleared through a registered clearing agency or a clearing agency that has obtained an exemption from clearing agency registration to provide central counterparty services for SBS. The Commission did not receive any comments on Proposed Rule 823(b) and is adopting Rule 823(b) as proposed for the reasons stated in the Proposing Release. 3. Rule 823(c)—General Financial Integrity Paragraph (c) of Proposed Rule 823 is closely modeled on § 37.702 of the 407 See Proposing Release, supra note 1, 87 FR at 28912. 408 Section 5h(f)(7) of the CEA, 7 U.S.C. 7b– 3(f)(7). 409 17 CFR 37.700; see also Proposing Release, supra note 1, 87 FR at 28912. 410 Section 5h(f)(7) of the CEA, 7 U.S.C. 7b– 3(f)(7). 411 15 U.S.C. 78c–3(a)(1). 412 17 CFR 37.701; see also Proposing Release, supra note 1, 87 FR at 28912. PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 87203 CFTC’s rules,413 and would require an SBSEF to provide for the financial integrity of transactions by establishing minimum financial standards for its members, which shall at a minimum require members to be ECPs. Proposed Rule 823(c) would further require an SBSEF to provide for the financial integrity of transactions by ensuring that the SBSEF, for transactions cleared by a registered clearing agency, has the capacity to route transactions to the registered clearing agency in a manner acceptable to the clearing agency, and by coordinating with each registered clearing agency to which it submits transactions for clearing in the development of rules and procedures to facilitate prompt and efficient transaction processing. One commenter characterizes the CFTC regime as providing detailed straight-through-processing (‘‘STP’’) standards for swaps executed on SEFs that are intended to be cleared but believes that the Commission’s proposal lacks such standards.414 The commenter observes that there is a lack of market consistency regarding the execution-toclearing workflow for SBS that are intended to be cleared, which complicates the trading of cleared SBS. The commenter highlights ‘‘clearing submission timeframes’’ and ‘‘clearing certainty’’ as key issues and discusses the manner in which the CFTC has addressed these issues in its rules and guidance. The commenter states that the CFTC’s STP standards, including ‘‘preexecution credit checks’’ and ‘‘welldefined submission timeframes,’’ have been successfully implemented by the industry since 2013, enhancing the SEF trading environment. The commenter argues that the timeframes minimize delays between execution and clearing acceptance and increase pre-trade clearing certainty, decreasing market, credit, and operational risks for market participants and clearing agencies, and broadens the range of trading counterparties. For these reasons, the commenter recommends harmonizing with the CFTC by establishing STP standards, incorporating relevant CFTC guidance, and prohibiting breakage agreements for SBS that are intended to be cleared.415 Another commenter agrees that applying the CFTC’s approach to STP would further harmonize SBSEFs with SEFs and would provide greater certainty of execution and clearing, encourage more clearing, facilitate 413 17 CFR 37.702; see also Proposing Release, supra note 1, 87 FR at 28912. 414 See Citadel Letter, supra note 18, at 4–6. 415 See id. E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87204 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations electronic trading, and promote accessible, competitive markets and access to best execution.416 Lastly, a third commenter supports harmonization and encourages the Commission to both codify the guidance in appendix B to part 37 of the CFTC regulations and the CFTC’s staff guidance regarding STP.417 The commenter believes that the STP requirements have been successfully implemented by market participants for nearly a decade, and modifying them now would introduce significant market, operational, and credit risk, along with additional complexity and cost for market participants.418 As previously stated, harmonization with the CFTC regime for SEFs is an important consideration for the Commission, given that it expects most registered SBSEFs to also be registered SEFs. Consistent with this view, Proposed Rule 823 is largely based on subpart H of part 37, and the key language of Rule 823(c)(2) relevant to STP is substantively identical to § 37.702(b). Both provisions require an SBSEF or SEF to (i) ensure that it has the capacity to route transactions to the relevant clearing agency in a manner acceptable to the clearing agency for purposes of clearing; and (ii) coordinate with each relevant clearing agency to which it submits transactions for clearing, in the development of rules and procedures to facilitate prompt and efficient transaction processing. Rule 249.1701, Exhibit T further requires SBSEFs to provide ‘‘the name(s) of the clearing agency(ies) that will clear the Applicant’s trades, and a representation that clearing members of that organization will be guaranteeing such trades.’’ 419 The Commission generally expects an SBSEF’s rules and procedures to demonstrate compliance with these requirements with respect to SBS that are intended to be cleared or that would become subject to a mandatory clearing requirement in the future. Since SBSEFs are required to establish rules and procedures for clearing in coordination with each relevant clearing agency to which it submits trades, SBSEFs should be able to route executed trades to relevant clearing agencies promptly, particularly if fully automated systems are used. Furthermore, if an SBSEF were to act to purposefully delay clearing submission in order to favor certain 416 See MFA Letter, supra note 18, at 12. SIFMA AMG Letter, supra note 18, at 9. 418 See id. 419 See Form SBSEF (Exhibits Instructions, Instruction No. 20, Exhibit T); see also supra note 84. 417 See VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 market participants over others, that type of action could be addressed under the impartial access requirements of Rule 819(c).420 Lastly, as noted previously, the Commission is adopting Rule 815(g), which specifies that SBSEFs shall establish and enforce rules that provide that a security-based swap that is intended to be cleared at the time of the transaction, but is not accepted for clearing at a registered clearing agency, shall be void ab initio. Together, these provisions should help ensure that SBSEFs will process trades promptly and efficiently. These provisions are also consistent with the CFTC’s staff guidance related to SEFs. The CFTC staff guidance also addressed regulatory requirements related to intermediaries and clearing organizations that are beyond the scope of this rulemaking. For the reasons stated above, the Commission is adopting Rule 823(c) as proposed.421 4. Rule 823(d)—Monitoring for Financial Soundness Paragraph (d) of Proposed Rule 823 is closely modeled on § 37.703 of the CFTC’s rules,422 and it would require an SBSEF to monitor its members to ensure that they continue to qualify as ECPs. The Commission did not receive any comments on Rule 823(d) and is adopting Rule 823(d) as proposed for the reasons stated in the Proposing Release. G. Rule 824—Core Principle 7— Emergency Authority SEA Core Principle 7 423 requires an SBSEF to adopt rules to provide for the exercise of emergency authority, in consultation or cooperation with the Commission, as is necessary and appropriate, including the authority to liquidate or transfer open positions in any SBS or to suspend or curtail trading in an SBS. CEA Core Principle 8 for SEFs 424 is substantively identical, and the CFTC implemented Core Principle 8 for SEFs in subpart I of part 37. Section 420 See supra section VI.B.3 (discussing the impartial access requirements of Proposed Rule 819(c)). For example, if an SBSEF purposefully delayed clearing submission of only certain market participants that the SBSEF favors, that would be contrary to the requirement of Proposed Rule 819(c) of providing impartial access to market services. 421 While one commenter suggests that the Commission incorporate guidance from appendix B to part 37 of the CFTC rules, the appendix does not contain any guidance or acceptable practices under Core Principle 7 of section 5h of the CEA— Financial Integrity of Transactions. 422 17 CFR 37.703; see also Proposing Release, supra note 1, 87 FR at 28912. 423 Section 3D(d)(7) of the SEA, 15 U.S.C. 78c– 4(d)(7). 424 Section 5h(f)(8) of the CEA, 7 U.S.C. 7b– 3(f)(8). PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 37.800 of subpart I repeats the statutory text of the Core Principle. Section 37.801 provides that a SEF ‘‘may refer’’ to the guidance in appendix B to part 37 ‘‘to demonstrate to the Commission compliance with [Core Principle 8].’’ Proposed Rule 824 would implement SEA Core Principle 7 and is closely modeled on subpart I of part 37 and the guidance for CEA Core Principle 8 in appendix B to part 37. Paragraph (a) of Proposed Rule 824 would repeat the statutory text of the Core Principle. Paragraph (b) of Proposed Rule 824 would incorporate much of the language in paragraph (a)(1) of the CFTC’s guidance on CEA Core Principle 8. Under paragraph (b), an SBSEF would be required to adopt rules that are reasonably designed to: (1) Allow the SBSEF to intervene as necessary to maintain markets with fair and orderly trading and to prevent or address manipulation or disruptive trading practices, whether the need for intervention arises exclusively from the SBSEF’s market or as part of a coordinated, cross-market intervention; (2) Have the flexibility and independence to address market emergencies in an effective and timely manner consistent with the nature of the emergency, as long as all such actions taken by the SBSEF are made in good faith to protect the integrity of the markets; (3) Take market actions as may be directed by the Commission, including, in situations where an SBS is traded on more than one platform, emergency action to liquidate or transfer open interest as directed, or agreed to, by the Commission or the Commission’s staff; (4) Include procedures and guidelines for decision-making and implementation of emergency intervention that avoid conflicts of interest; (5) Include alternate lines of communication and approval procedures to address emergencies associated with real-time events; (6) Allow the SBSEF, to address perceived market threats, to impose or modify position limits, impose or modify price limits, impose or modify intraday market restrictions, impose special margin requirements, order the liquidation or transfer of open positions in any contract, order the fixing of a settlement price, extend or shorten the expiration date or the trading hours, suspend or curtail trading in any contract, transfer customer contracts and the margin, or alter any contract’s settlement terms or conditions, or, if applicable, provide for the carrying out of such actions through its agreements E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations with its third-party provider of clearing or regulatory services. Paragraph (c) of Proposed Rule 824 is based on paragraph (a)(2) of the CFTC’s guidance on CEA Core Principle 8 and would require an SBSEF to promptly notify the Commission of its exercise of emergency action, explaining its decision-making process, the reasons for using its emergency authority, and how conflicts of interest were minimized, including the extent to which the SBSEF considered the effect of its emergency action on the underlying markets and on markets that are linked or referenced to the contracts traded on its facility, including similar markets on other trading venues. In addition, Proposed Rule 824(c) would require information on all regulatory actions carried out pursuant to an SBSEF’s emergency authority to be included in a timely submission of a certified rule pursuant to Rule 807. The Commission received no comments on Proposed Rule 824 and is adopting Rule 824 as proposed, with minor technical modifications,425 for the reasons stated in the Proposing Release. H. Rule 825—Core Principle 8—Timely Publication of Trading Information SEA Core Principle 8 426 requires an SBSEF to make public timely information on price, trading volume, and other trading data on SBS to the extent prescribed by the Commission, and to have the capacity to electronically capture and transmit and disseminate trade information with respect to transactions executed on or through the facility. CEA Core Principle 9 427 is substantively identical to SEA Core Principle 8, and the CFTC implemented CEA Core Principle 9 in subpart J of part 37. Proposed Rule 825 would implement SEA Core Principle 8 and is closely modeled on subpart J of part 37. Paragraph (a) of Proposed Rule 825, like § 37.900, would repeat the statutory language of the Core Principle. While § 37.901 provides that a SEF shall report swap transaction data pursuant to parts 43 and 45 of the CFTC’s rules, paragraph (b) of Proposed Rule 825 would direct SBSEFs to report SBS ddrumheller on DSK120RN23PROD with RULES2 425 The Commission has corrected a reference to ‘‘exercise of emergency action’’ to read ‘‘exercise of emergency authority.’’ The Commission has also made two non-substantive corrections to the text of Proposed Rule 824. The Commission has replaced a period with a semicolon at the end of paragraph (b)(3) and has added the word ‘‘and’’ to the end of paragraph (b)(5). 426 Section 3D(d)(8) of the SEA, 15 U.S.C. 78c– 4(d)(8). 427 Section 5h(f)(9) of the CEA, 7 U.S.C. 7b– 3(f)(9). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 transaction data in a manner specified in the SEC’s Regulation SBSR.428 Paragraph (c) of Proposed Rule 825 would require the publication, on an SBSEF’s website, of a ‘‘Daily Market Data Report.’’ The data fields that the Commission proposed to require for the Daily Market Data Report approximated, although they were not the same as, those required by part 16. Under Proposed Rule 825(c)(1), the Daily Market Data Report for a business day would be required to contain the following information for each tenor of each SBS traded on that SBSEF during that business day: (i) The trade count (including block trades but excluding error trades, correcting trades, and offsetting trades); (ii) The total notional amount traded (including block trades but excluding error trades, correcting trades, and offsetting trades 429); (iii) The number of block trades; (iv) The total notional amount of block trades; (v) The opening and closing price; (vi) The price that is used for settlement purposes, if different from the closing price; and (vii) The lowest price of a sale or offer, whichever is lower, and the highest price of a sale or bid, whichever is higher, that the SBSEF reasonably determines accurately reflects market conditions. Bids and offers vacated or withdrawn shall not be used in making this determination. A bid is vacated if followed by a higher bid or price and an offer is vacated if followed by a lower offer or price. Paragraph (c)(2) of Proposed Rule 825 would require an SBSEF to provide certain explanatory information regarding data presented on the Daily Market Data Report: (i) The method used by the SBSEF in determining nominal prices and settlement prices; and (ii) If discretion is used by the SBSEF in determining the opening and/or closing ranges or the settlement prices, an explanation that certain discretion may be employed by the SBSEF and a description of the manner in which that discretion may be employed. Discretionary authority would have to 428 Section 13(m)(1) of the SEA, 15 U.S.C. 78m(m)(1), authorizes the Commission to make SBS transaction, volume, and pricing data available to the public in such form and at such times as the Commission determines appropriate to enhance price discovery. The Commission has adopted rules relating to the reporting and public dissemination of SBS transaction and pricing data as Regulation SBSR. Rule 901(a)(1) of Regulation SBSR, 17 CFR 242.901(a)(1), imposes certain reporting duties on SBSEFs. 429 Each of these terms is defined in Proposed Rule 802 and also used in Proposed Rule 815. PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 87205 be noted explicitly in each case in which it is applied (for example, by use of an asterisk or footnote). Paragraph (c)(3) of Proposed Rule 825 would set out various requirements regarding the form and manner by which an SBSEF makes available its Daily Market Data Report. Paragraph (c)(3)(i) would require the SBSEF to post on its website its Daily Market Data Report in a downloadable and machinereadable format using the most recent versions of the associated XML schema and PDF renderer as published on the Commission’s website. Paragraph (c)(3)(ii) would require the SBSEF to make available its Daily Market Data Report without fees or other charges. Paragraph (c)(3)(iii) would prohibit the SBSEF from imposing any encumbrances on access or usage restrictions with respect to the Daily Market Data Report. Paragraph (c)(3)(iv) would prohibit the SBSEF from requiring a user to agree to any terms before being allowed to view or download the Daily Market Data Report, such as by waiving any requirements of Rule 825(c)(3). Paragraph (c)(3)(iv) would further provide that any such waiver agreed to by a user would be null and void.430 Paragraph (c)(4) of Proposed Rule 825 would require the SBSEF to publish the Daily Market Data Report on its website no later than the SBSEF’s commencement of trading on the next business day after the day to which the information pertains. Finally, paragraph (c)(5) would require the SBSEF to keep each Daily Market Data Report available on its website in the same location as all other Daily Market Data Reports for no less than one year after the date of first publication. Several commenters criticized the Daily Market Data Report required by Proposed Rule 825.431 One commenter states that the Daily Market Report would require inappropriate and 430 The presence of any such waiver requirements on a click-through screen could chill use of the Daily Market Data Report, because the user would be compelled to agree to the waiver even to view the report. The Commission recognizes that individual users may not have the time or the incentive to contest the appropriateness of any such waiver provisions in order to secure access. Proposed Rule 825(c)(3)(iv) is designed to assure such users that, even if an SBSEF were to insist on the waiver click-through as a condition of access, users would not in fact be sacrificing their ability to use the data free of charges and usage restrictions because the waiver would be null and void. 431 See MFA Letter, supra note 18, at 13; WMBAA Letter, supra note 18, at 5–6; ISDA–SIFMA Letter, supra note 18, at 10; Bloomberg Letter, supra note 18, at 5, 17. Eleven commenters supported general transparency in markets but did not address the Daily Market Data Report specifically. See, e.g., Letter from David Mounts (Oct. 29, 2022); Letter from Katie K. (Apr. 7, 2022). E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87206 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations detrimental disclosures that would undermine the Commission’s goal of fostering a competitive and efficient market for SBS trading.432 This commenter states that there are significant differences in the information required to be reported under the SEC and CFTC regimes. The commenter states that Proposed Rule 825(c)(1) increases the burden on SBSEFs compared to SEFs by requiring additional information regarding sale and offer prices, as well as qualitative descriptions of certain data that are reported. This commenter further states that the Commission’s proposal does not address why the CFTC’s approach would not be acceptable in the context of SBSEFs and does not justify the increased operational costs to SBSEFs (which will ultimately be passed on to members). The commenter also states that the Commission has not considered the costs and potential for duplicative requirements in the context of Regulation SBSR reporting requirements. The commenter concludes that, in sum, the Daily Market Data Report is overly granular and duplicative, is unnecessary for transparency purposes, and could negatively impact the market and market participants. The commenter states that the Commission should therefore remove the Daily Market Data Report in favor of harmonizing with the analogous CFTC rules and that, if the Commission does not eliminate the Daily Market Data Report requirement altogether, it should adopt additional masking protections for trades, specifically with respect to block trades. Failure to do so, the commenter states, would cause inappropriate and detrimental disclosures and would ‘‘negate the benefits that the rule purports to achieve by exempting block trades from clearing [sic] requirements.’’ 433 Another commenter states that the requirement for a Daily Market Data Report is a departure from the otherwise generally harmonized rule proposal and risks overly complicating the SBSEF regime for limited benefit, particularly with SBS reporting and dissemination in place through Regulation SBSR.434 The commenter states that the Daily Market Data Report serves as a duplicative source of information that fails to improve price discovery or liquidity formation, and that the Daily Market Data Report could negatively 432 See MFA Letter, supra note 18, at 13. id. Regulation SE does not address any exemption from clearing requirements. 434 See WMBAA Letter, supra note 18, at 5–6. 433 See VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 impact conditions, particularly for block trades, especially given the relatively illiquid SBS market, which has a relatively small number participants. This commenter encourages the Commission to remove the proposed Daily Market Data Report and review this issue with the benefit of several years’ experience with these rules, particularly once Regulation SBSR is fully operational. One commenter states that the Daily Market Report is not necessary because the CFTC SEF regulatory framework, which does not impose such a requirement, provides sufficient price transparency.435 This commenter states that the Commission has not pointed to any observable issues with the SEF transparency framework to justify a need for these reports, and the commenter states that the daily publication of information related to block trade numbers and block notional amounts, coupled with aggregate pricing information, would magnify the problems associated with the ‘‘winner’s curse.’’ This is particularly concerning, the commenter states, where a dealer is unable to fully lay-off its risk from a block trade within the course of a single day—a scenario that is extremely likely considering the thin nature of SBS markets. Based on the information published in the report as proposed, the commenter states, SBSEF participants may be able to identify a particular block trade and the likely price point, and then use that information to upcharge the dealer who is seeking to lay off the rest of its risk, thus frustrating the key objective of block trading. This commenter further states that the issues it has identified are amplified even further if the Daily Market Report does not follow the cap requirements that apply in the public price dissemination of data under the Commission’s trade reporting rule and related Commission no-action relief. The commenter states that publication of uncapped trade sizes could, in certain cases, reveal the exact notional amount of a trade to the public, which is not permitted under the Commission’s SBS trade reporting rules. The commenter states that this is especially concerning given that the proposed Daily Market Report provides detailed information by SBS product and tenor. The commenter states that the Commission should abandon its proposed Daily Market Report or, if it does not, require publication of the proposed report on a monthly or quarterly basis and make it subject to the cap size requirements imposed on SBSDRs. This, the 435 See PO 00000 ISDA–SIFMA Letter, supra note 18, at 10. Frm 00052 Fmt 4701 Sfmt 4700 commenter states, would ensure that the report does not conflict with the protections afforded to market participants per the cap size requirements and under the Commission’s SBS trade reporting rules and related relief for SBS.436 Another commenter states that, in its experience with the reports required under CFTC part 16, which requires the compilation of similar information as the proposed Daily Market Data Report, the timeline for publication proposed under Rule 825(c)(4) would be impractical, if not technologically impossible.437 This commenter states that it operates a SEF with trading hours that run from 00:01 hours to 24:00 hours, Sunday through Friday. The commenter envisions SBS trading to be permitted during the same trading hours and states that the break between the end of trading one day and the beginning of trading the next day—one minute—means that it would likely not be possible to compile the required report ‘‘no later than the SBSEF’s commencement of trading on the next business day.’’ This commenter proposes synchronizing Rule 825(c)(4) with CFTC Rule 16.01(d)(2) to allow additional time for the publication of the Daily Market Data Report. With regard to the content of the report, this commenter states that the settlement price required under Rule 825(c)(1) should be included in the report only to the extent it is calculated by an SBSEF. Many of the reporting requirements of the Daily Market Data Report under Proposed Rule 825 are closely aligned with the data required to be disclosed on a daily basis by SEFs under § 16.01 of the CFTC’s rules. Both rules require the daily disclosure of: (1) a measure of trading volume in terms of trades or contracts; 438 (2) the total notional volume traded; 439 (3) the notional amount of block trades; 440 (4) the opening and closing prices; 441 (5) the price used for settlement, if different 436 See id. Bloomberg Letter, supra note 18, at 5, 17. 438 Compare Proposed Rule 825(c)(1)(i) (trade count, including block trades but excluding error trades, correcting trades, and offsetting trades), with 17 CFR 16.01(a)(1)(iii) (trading volume and open contracts by product type term life of the swap). 439 Compare Proposed Rule 825(c)(1)(ii) (total notional amount traded, including block trades but excluding error trades, correcting trades, and offsetting trades), with 17 CFR 16.01(a)(2)(iv) (total trading volume in terms of the number of contracts traded for standard-sized contract or in terms of notional value for non-standard-sized contracts). 440 Compare Proposed Rule 825(c)(1)(iv) (total notional amount of block trades), with 17 CFR 16.01(a)(2)(vi) (total volume of block trades included in the total volume of trading). 441 See Proposed Rule 825(c)(1)(v); 17 CFR 16.01(b)(2)(i). 437 See E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 from the closing price; 442 (6) the lowest price of a sale or offer, whichever is lower, and the highest price of a sale or bid, whichever is higher, that the facility reasonably determines accurately reflects market conditions; 443 (7) the method used by the facility in determining nominal prices and settlement prices, and if discretion is used in determining the opening or closing ranges or the settlement prices, an explanation that certain discretion may be employed and a description of the manner in which that discretion may be employed; 444 and (8) in each instance in which such discretion was applied, an explicit notation that discretion was applied.445 Further, the Commission is modifying Proposed Rule 825 to resolve the two differences between the proposed Daily Market Data Report and the existing CFTC reporting scheme under § 16.01: (1) that the Daily Market Data Report would include the number of block trades executed; 446 and (2) that the Daily Market Data Report would be posted on the SBSEF’s website no later than the beginning of trading on the next business day,447 while the information required by § 16.01 must be made public no later than the next business day.448 A number of commenters raised specific concerns that the disclosures in the Daily Market Data Report would hamper the efficient trading of block trades.449 The Commission agrees that the additional disclosed data element for SBSEFs—the number of block trades—could lead to additional information leakage while a dealer that facilitated a block trade might still be laying off the risk it undertook in facilitating that trade. Therefore, consistent with the CFTC’s disclosure elements under § 16.01, the Commission is modifying Rule 825(c)(1) as proposed to delete paragraph (c)(1)(iii), which requires the disclosure of the number of block trades, and to renumber the following paragraphs accordingly. The 442 See Proposed Rule 825(c)(1)(vi); 17 CFR 16.01(b)(2)(ii). 443 See Proposed Rule 825(c)(1)(vii); 17 CFR 16.01(b)(2)(iii). 444 See Proposed Rule 825(c)(2)(i); 17 CFR 16.01(b)(4)(i). 445 See Proposed Rule 825(c)(2)(ii); 17 CFR 16.01(b)(4)(ii). 446 See Proposed Rule 825(c)(1)(iii). 447 See Proposed Rule 825(c)(4). 448 See 17 CFR 16.01(e). The Commission views the requirement to keep each Daily Market Data Report on an SBSEF’s website for one year, see Proposed Rule 825(c)(5), as a small additional burden for an SBSEF and does not view it as a significant departure from harmonization with the CFTC’s SEF regime. 449 See supra notes 433–436 and accompanying text. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 Commission is also, pursuant to its determination not to adopt a definition of ‘‘block trade,’’ 450 deleting the words ‘‘including block trades but’’ from the text of paragraph (c)(i) and (ii) of Rule 825, and is adding the words ‘‘after such time as the Commission adopts a definition of ‘block trade’ ’’ to paragraph (c)(iii) of Rule 825 (formerly paragraph (c)(iv) of Proposed Rule 825 451), which will have no effect on the requirement as compared to the proposed rule. The Commission is also modifying Proposed Rule 825 to address the comment that an SBSEF that operates nearly 24 hours a day might not be able to comply with the requirement to publish the Daily Market Data Report before the beginning of trading on the next business day. Accordingly, the Commission is modifying Proposed Rule 825(c)(4) to require the publication of the Daily Market Data Report ‘‘as soon as reasonably practicable on the next business day after the day to which the information pertains, but in no event later than 7 a.m. on the next business day.’’ This modified requirement, while less stringent than the requirement as proposed, would differ slightly from the CFTC’s requirement that such information must be made public ‘‘no later than the next business day.’’ 452 Making each trading day’s information available to market participants before the beginning of the next trading is reasonably designed to foster transparency and efficiency in the market for SBS. With these modifications, the proposed Daily Market Data Report for SBSEFs is consistent with the required daily disclosures for SEFs. While one commenter states that Proposed Rule 825(c)(1) increases the burden on SBSEFs compared to SEFs, including by calling for qualitative descriptions of certain data, the data called for by Rule 825(c)(1), as modified, does not differ materially from that required to be published daily under § 16.01. Thus, the Commission does not agree with the commenter that the data required under the Commission approach differs materially from that required under the CFTC approach or that the Daily Market Data Report will result in an unjustified increase in operational costs. 450 See supra section V.E.1(c)(ii). Commission is also correcting the form of a cross-reference in paragraph (b) to ‘‘Regulation SBSR’’ to read ‘‘§§ 242.900 through 242.909 (Regulation SBSR).’’ 452 See 17 CFR 16.01(e). The Commission views the requirement to keep each Daily Market Data Report on an SBSEF’s website for one year, see Proposed Rule 825(c)(5), as a small additional burden for an SBSEF and does not view it as a significant departure from harmonization with the CFTC’s SEF regime. 451 The PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 87207 Further, the Commission does not agree with commenters that the Daily Market Data Report would serve as a duplicative source of information to reporting under Regulation SBSR and therefore risks overly complicating the SBSEF regime for limited benefit, without benefit to price improvement or liquidity formation. Regulation SBSR requires the reporting and public dissemination of SBS transactions,453 but because the transaction reports for credit SBS are permitted to be capped at a notional volume of $5 million,454 market participants would be unable to glean the information provided by the Daily Market Data Report—which would publish daily total notional volumes based on uncapped transaction amounts—from the individual reports of SBS transactions under Regulation SBSR. Thus, the Daily Market Data Report would provide market participants with information about pricing and trading volume for SBS on SBSEFs that goes beyond the information that could be obtained from SBS transaction reports that are publicly disseminated pursuant to Regulation SBSR. And because individual trades would not be reported—and, with the modification the Commission is making, the number of block trades would also not be reported—a size cap on reporting volume used to provide summary data to the market is not necessary or appropriate. Additionally, with the respect to the comment that the settlement price required under Proposed Rule 825(c)(1) should be included in the report only to the extent it is calculated by an SBSEF, the language of the requirement—‘‘[t]he price that is used for settlement. . .’’ 455—means that if no settlement price is calculated for a given SBS, that data element does not need to be reported. With respect to the means of publication of the information, while the means of publishing the Daily Market Data Report varies from that specified under the CFTC regime, the difference is not material. The Commission proposed that this information be posted on an SBSEF’s website in the most recent XML schema and PDF renderer, without fees or charges, without any encumbrances on access or usage, and without requiring 453 See 17 CFR 242.900 et seq. 2019 Cross-Border Adopting Release, supra note 218, 85 FR at 6347 (providing no-action relief with respect to Rule 902 of Regulation SBSR, 17 CFR 242.902, for reports of credit SBS transaction disseminated with a capped size of $5 million). 455 See Proposed Rule 825(c)(1)(vi) (emphasis added). 454 See E:\FR\FM\15DER2.SGM 15DER2 87208 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations a user to agree to any terms before viewing or downloading the report.456 And the CFTC, in addition to requiring that this information be provided to the CFTC, requires it be made available to news media and the general public ‘‘in a format that readily enables the consideration of such data.’’ 457 Proposed Rule 825(c)(3) is designed to promote wide use of the SBS trading information contained in the Daily Market Data Report by prohibiting an SBSEF from imposing any financial, legal, or operational burdens on that use, and, as the Commission stated in the Proposing Release, the prohibition against an SBSEF imposing any usage restrictions on its Daily Market Data Report would necessarily encompass a prohibition on bulk redistribution of the Daily Market Data Report or any information contained therein.458 The Commission seeks to encourage market observers to access the Daily Market Data Report and scrub, reconfigure, aggregate, analyze, repurpose, or otherwise add value to the information contained in the report as they see fit. For the reasons discussed above, the Commission is adopting Rule 825 as modified.459 I. Rule 826—Core Principle 9— Recordkeeping and Reporting SEA Core Principle 9 460 sets forth recordkeeping and reporting obligations for SBSEFs. Core Principle 9 requires an SBSEF to maintain records of all activities relating to the business of the facility, including a complete audit trail, in a form and manner acceptable to the Commission for a period of five years. The Core Principle further requires an SBSEF to report to the Commission, in a form and manner acceptable to the Commission, such information as the Commission determines to be necessary or appropriate for the Commission to perform its duties. Finally, under Core Principle 9, the Commission must adopt data collection and reporting requirements for SBSEFs that are comparable to requirements for clearing agencies and SBS data repositories.461 ddrumheller on DSK120RN23PROD with RULES2 456 See Proposed Rule 825(c)(3). 457 17 CFR 16.01(e). 458 See Proposing Release, supra note 1, 87 FR at 28915. 459 See supra note 32. 460 Section 3D(d)(9) of the SEA, 15 U.S.C. 78c– 4(d)(9). 461 As discussed below in this section, the Commission is adopting Rule 826 to require an SBSEF to maintain records of all activities relating to the business of the SBSEF for a period of not less than five years. Similarly, Rule 17a–1 under the SEA, 17 CFR 240.17a–1, requires a clearing agency to keep and preserve one copy of all documents made or received in the course of its business and conduct of its self-regulatory activities for a period VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 CEA Core Principle 10 for SEFs, although it includes an additional clause not present in the equivalent SEA Core Principle 9,462 is substantively identical. To implement SEA Core Principle 9, the Commission proposed Rule 826, which roughly approximates §§ 1.31 and 45.2 of the CFTC’s rules,463 while also drawing on concepts from the books and records requirements applicable to brokers, SEC-registered SROs, and other SEC-registered entities.464 Paragraph (a) of Proposed Rule 826 would repeat the statutory text of the Core Principle. Paragraph (b) would require an SBSEF to keep full, complete, and systematic records,465 together with all pertinent data and memoranda, of all activities relating to its business with respect to SBS. Under paragraph (b), such records would be required to include, without limitation, the audit trail information required under Rule 819(f) and all other records that an SBSEF is required to create or obtain under Regulation SE. Paragraph (c) of Proposed Rule 826 would require an SBSEF to keep records of any SBS from the date of execution until the termination, maturity, expiration, transfer, assignment, or novation date of the transaction, and for a period of not less than five years, the first two years in an easily accessible place, after such date. Paragraph (c) also would require an SBSEF to keep each record (other than a record of an SBS noted in the previous sentence) for a period of not less than five years, the of not less than five years. In addition, Rule 13n– 7(b) under the SEA, 17 CFR 240.13n–7(b), requires an SBS data repository to keep and preserve a copy of all documents made or received by it in the course of its business for at least five years. 462 CEA Core Principle 10 includes a clause stating that a SEF shall keep any records relating to certain swaps open to inspection and examination by the SEC. See 7 U.S.C. 7b3(f)(10)(A)(iii). 463 Section 1.31 imposes on ‘‘records entities’’ (which term includes SEFs) various requirements relating to record retention and production. Section 45.2 imposes various recordkeeping, retention, and retrieval requirements applicable to SEFs (among others) to support trade reporting. 464 See infra section XI (discussing in the context of Proposed Rule 15a–12 that an SBSEF registered with the Commission is also a registered broker and, as such, is subject to the SEA’s recordkeeping and reporting requirements applicable to brokers). 465 While § 1.31(a) defines the terms ‘‘regulatory records’’ and ‘‘electronic regulatory records’’ and utilizes them throughout § 1.31, the Commission is utilizing instead the term ‘‘records,’’ which is defined in section 3(a)(37) of the SEA, 15 U.S.C. 78c(a)(37). In doing so, the Commission seeks to avoid any ambiguities or inconsistencies that could arise by using variants of a term that is defined in the Commission’s governing statute. The Commission has included a definition of ‘‘records’’ in Rule 802 that cross-references section 3(a)(37) of the SEA. PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 first two years in an easily accessible place, from the date on which the record was created. The five-year retention requirements would be consistent with section 3D(d) of the SEA 466 and are modeled on the requirements for SEFs in §§ 1.31 and 45.2. The proposed requirement that the records be kept ‘‘in an easily accessible place’’ for the first two years derives from an analogous requirement in the Commission’s principal books and records rule for exchange members, brokers, and dealers.467 Paragraph (d)(1) of Proposed Rule 826 would require an SBSEF to retain all records in a form and manner that ensures the authenticity and reliability of such records in accordance with the SEA and the Commission’s rules thereunder. Paragraph (d)(2) would require an SBSEF, upon request of any representative of the Commission, to promptly 468 furnish to the representative legible, true, complete, and current copies of any records required to be kept and preserved under Rule 826. Paragraph (d)(3) would provide that an electronic record shall be retained in a form and manner that allows for prompt production at the request of any representative of the Commission. Paragraph (d)(3) would also include provisions modeled on § 1.31(c)(2) requiring an SBSEF that maintains electronic records to establish appropriate systems and controls that ensure the authenticity and reliability of electronic records. Paragraph (e) of Proposed Rule 826 would provide that all records required to be kept by an SBSEF pursuant to Rule 826 would be subject to examination by any representative of the Commission pursuant to section 17(b) of the SEA, which is the source of the Commission’s examination authority for registered brokers (among other types of registered entities). Proposed Rule 826(e) is designed only to remind SBSEFs of this statutory authority and would not seek to limit or expand that authority using the Commission’s powers over SBSEFs in section 3D of the SEA. 466 See 15 U.S.C. 78c–4(d)(9)(A)(i) (requiring an SBSEF to ‘‘maintain records of all activities relating to the business of the facility, including a complete audit trail, in a form and manner acceptable to the Commission, for a period of five years’’) (emphasis added). 467 See Rule 17a–4(b) under the SEA, 17 CFR 240.17a–4(b). 468 In this context, ‘‘prompt’’ or ‘‘promptly’’ means making reasonable efforts to produce records that are requested by the staff during an examination without delay. In many cases, it is likely that an SBSEF could furnish records immediately or within a few hours of a request, and it would therefore be required to do so. An SBSEF generally should produce records within 24 hours unless there are unusual circumstances. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations Proposed Rule 826 would include a paragraph (f) that is not modeled on any provision of § 1.31 or § 45.2, but rather on § 1.37(c) of the CFTC’s rules, which would provide: ‘‘Each designated contract market and swap execution facility shall keep a record in permanent form, which shall show the true name, address, and principal occupation or business of any foreign trader executing transactions on the facility or exchange. In addition, upon request, a designated contract market or swap execution facility shall provide to the Commission information regarding the name of any person guaranteeing such transactions or exercising any control over the trading of such foreign trader.’’ Proposed Rule 826(f) is modeled closely on § 1.37(c), except that it would use the term ‘‘non-U.S. member’’ rather than ‘‘foreign trader.’’ 469 The Commission received no comments on Proposed Rule 826 and is adopting Rule 826 as proposed, with minor technical modifications,470 for the reasons stated in the Proposing Release. ddrumheller on DSK120RN23PROD with RULES2 J. Rule 827—Core Principle 10— Antitrust Considerations SEA Core Principle 10 471 provides that, unless necessary or appropriate to achieve the purposes of the SEA, an SBSEF shall not: (1) adopt any rules or take any actions that result in any unreasonable restraint of trade, or (2) impose any material anticompetitive burden on trading or clearing. CEA Core Principle 11 472 is substantively identical. Proposed Rule 827 would implement SEA Core Principle 10 and reiterate the statutory text of the Core Principle.473 469 Since a ‘‘foreign trader’’ in § 1.37(c) is executing transactions on the SEF, it must be a member of the SEF. Because the term ‘‘member’’ is used elsewhere in the CFTC rules pertaining to SEFs, the term ‘‘member’’ as used throughout Regulation SE is defined in Rule 802. The term ‘‘non-U.S. member,’’ also found in Rule 802, is defined as ‘‘a member of a security-based swap execution facility that is not a U.S. person.’’ 470 See supra note 32. 471 Section 3D(d)(10) of the SEA, 15 U.S.C. 78c– 4(d)(10). 472 Section 5h(f)(11) of the CEA, 7 U.S.C. 7b– 3(f)(11). 473 The Commission has not adapted the guidance from appendix B pertaining to CEA Core Principle 11 into its rule. As explained in the Proposing Release, it is not appropriate to adapt this guidance into a rule that applies to SBSEFs because the SEA (which applies to SBSEFs) does not have a provision that is closely comparable to section 15(b) of the CEA (which applies to SEFs). See Proposing Release, supra note 1, 87 FR at 28917 n.196. Furthermore, the guidance pertaining to CEA Core Principle 10 for SEFs sets out only a general approach to how the CFTC addresses antitrust issues applying to SEFs and does not include provisions that can readily be adapted into rule text. Id. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 The Commission did not receive any comments on Proposed Rule 827 and is adopting Rule 827 as proposed, for the reasons stated in the Proposing Release. K. Rule 828—Core Principle 11— Conflicts of Interest SEA Core Principle 11 474 requires an SBSEF to establish and enforce rules to minimize conflicts of interest in its decision-making process and to establish a process for resolving the conflicts of interest. CEA Core Principle 12 475 is substantively identical, and the CFTC implemented CEA Core Principle 12 in subpart M of part 37.476 Proposed Rule 828 would implement SEA Core Principle 11. Paragraph (a) of Rule 828, like § 37.1200, would repeat the statutory text of the Core Principle. Paragraph (b) would direct an SBSEF to comply with the requirements of Rule 834, which, as discussed below, would implement section 765 of the DoddFrank Act for both SBSEFs and SBS exchanges.477 The Commission received no comments on Proposed Rule 828 and is adopting Rule 828 as proposed for the reasons stated in the Proposing Release. L. Rule 829—Core Principle 12— Financial Resources Core Principle 12 478 sets forth certain requirements related to the financial resources of an SBSEF. Paragraph (a)(1) requires an SBSEF to have adequate financial, operational, and managerial resources to discharge each responsibility of the SBSEF, as determined by the Commission. Paragraph (a)(2) would provide that the financial resources of an SBSEF shall be considered to be adequate if the value of the financial resources: (i) enables the organization to meet its financial obligations to its members and participants notwithstanding a default by the member or participant creating 474 Section 3D(d)(11) of the SEA, 15 U.S.C. 78c– 4(d)(11). 475 7 U.S.C. 7b–3(f)(12). 476 Section 37.1200 of subpart M repeats the statutory text of Core Principle 12. There are no other provisions in subpart M, nor is there any guidance or acceptable practices associated with Core Principle 12 in appendix B to part 37. The CFTC has proposed additional rules regarding the mitigation of conflicts of interest but has not adopted any such rules. See CFTC, Requirements for Derivatives Clearing Organizations, Designated Contract Markets, and Swap Execution Facilities Regarding the Mitigation of Conflicts of Interest, 75 FR 63732 (Oct. 18, 2010); CFTC, Governance Requirements for Derivatives Clearing Organizations, Designated Contract Markets, and Swap Execution Facilities; Additional Requirements Regarding the Mitigation of Conflicts of Interest, 76 FR 722 (Jan. 6, 2011). 477 See infra section VIII. 478 Section 3D(d)(12) of the SEA, 15 U.S.C. 78c– 4(d)(12). PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 87209 the largest financial exposure for that organization in extreme but plausible market conditions; and (ii) exceeds the amount that would enable the SBSEF to cover operating costs of the SBSEF for a one-year period, as calculated on a rolling basis. Finally, paragraphs (b) through (g) provide details and instruction on how to comply with the requirements of Core Principle 12. CEA Core Principle 13 for SEFs 479 is substantively identical to SEA Core Principle 12 but lacks the clause in section 3D(d)(12)(B)(i) of the SEA relating to an SBSEF meeting financial obligations to members and participants notwithstanding a default by the member or participant creating the largest financial exposure for the SBSEF in extreme but plausible market conditions. As described in the Proposing Release, the Commission modeled Rule 829 on subpart N of part 37 of the CFTC’s rules,480 which implements CEA Core Principle 13 for SEFs. 1. Rule 829(a)—General Paragraph (a) of Proposed Rule 829 would repeat the statutory text of SEA Core Principle 12. One commenter states that the language in paragraph (a)(2)(i) of Proposed Rule 829 that requires an SBSEF to have sufficient financial resources ‘‘to meet its financial obligations to its members notwithstanding a default by a member creating the largest financial exposure for that organization in extreme but plausible market conditions’’ is not adequate.481 The commenter believes that an SBSEF should be required to have resources significantly in excess of this requirement because, during financial uncertainties and stress, the SBSEF would need even greater resources.482 Another commenter states that the same provision, paragraph (a)(2)(i) of Proposed Rule 829, is overly burdensome and unnecessary.483 The commenter states that the provision would add significantly to the amount of capital required to operate an SBSEF with little corresponding benefit to the market. The commenter argues that trading platforms such as SEFs and SBSEFs will have credit exposure to a member in limited circumstances and 479 Section 5h(f)(13) of the CEA, 7 U.S.C. 7b– 3(f)(13). 480 See Proposing Release, supra note 1, 87 FR at 28919. 481 See Letter from Chris Barnard to Commission at 2 (May 21, 2022) (submitted under cover email dated June 6, 2022). 482 See id. 483 See Bloomberg Letter, supra note 18, at 8. E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87210 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations for very limited periods of time. Therefore, this commenter states, requiring a trading platform to maintain capital sufficient to cover the largest financial exposure of a member trading on the SBSEF, when the trading platform will not be called upon to cover the cost of a default, is unnecessary and overly burdensome. The commenter also states that the provision is not in the parallel CFTC rule. The commenter suggests eliminating the provision or, in the alternative, affirm that satisfying the financial requirements in Rule 829(b), relating to having adequate resources to enable an SBSEF to comply with the SEA and applicable Commission rules for one year, would be sufficient to satisfy the requirements of Rule 829(a) as well.484 The requirements of Proposed Rule 829(a)(2)(i), which repeats the statutory text of SEA Core Principle 12, do not need to be more stringent, as suggested by the first commenter. The provision requires an SBSEF to have adequate resources to ‘‘meet its financial obligations to its members’’ even in case of a default by a member creating the largest financial exposure. By the plain meaning of its terms, the provision requires that an SBSEF meet its financial obligations. The Commission does not see a benefit to requiring an SBSEF to have the financial resources that exceed its obligations. As long as an SBSEF’s obligations are met, its members can be made whole with respect to any obligations of the SBSEF and the SBSEF can continue to operate. Therefore, ensuring that an SBSEF can meet its financial obligations is sufficient. Furthermore, the provision itself already envisions ‘‘extreme but plausible market conditions,’’ analogous to the ‘‘conditions of financial uncertainty and stress’’ that the commenter discusses. At the same time, Proposed Rule 829(a)(2)(i) should not be eliminated, and the rules should not be interpreted in a manner that allows the requirements of Proposed Rule 829(a)(2)(i) to be satisfied by complying with Proposed Rule 829(b). First, the requirement that an SBSEF be able to cover its financial obligations even when its largest member defaults is in the statutory language of the SEA, and the Commission is not adopting a rule inconsistent with this requirement. The statutory language is an appropriate requirement to impose on SBSEFs because it seeks to address a plausible risk caused by the default of a member, a financial risk that, if an SBSEF has not 484 See id. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 accounted for it, could endanger the SBSEF’s ability to continue to operate. While, the commenter is correct that the CFTC’s rules do not have a similar provision, it is also the case that the CEA does not have a similar provision. Therefore, while the Commission is, as explained above, generally striving for harmonization with the CFTC, the Commission is not modifying Proposed Rule 829(a) to remove the requirement that an SBSEF have adequate resources to meet its financial obligations to its members even in case of a default by a member creating the largest financial exposure. Second, the Commission will not affirm that it will, as requested by a commenter, interpret the rules in a manner that allows the requirement of Rule 829(a) to be satisfied by satisfying the requirements of Rule 829(b). The scope of Proposed Rule 829(a) and Proposed Rule 829(b) are different. Proposed Rule 829(a) would in general address having adequate financial (and operational and managerial) resources to discharge each responsibility of an SBSEF. Proposed Rule 829(b) would specifically address the financial (not operational or managerial) resources that are necessary to comply with one type (not each type) of responsibility of the SBSEF, i.e., compliance with section 3D of the SEA and the applicable Commission rules. Because Proposed Rule 829(a) would address topics beyond the scope of Proposed Rule 829(b), including the topic of a default by a member creating the largest financial exposure, the requirements of Proposed Rule 829(a) cannot be satisfied by merely satisfying the requirements of Proposed Rule 829(b). For the reasons discussed above, the Commission is adopting Rule 829(a) as proposed, with a minor technical modification.485 2. Rule 829(b)—General Requirements Paragraph (b) of Proposed Rule 829 is closely modeled on § 37.1301 of the CFTC’s rules,486 and it requires an SBSEF to maintain financial resources that are adequate to enable it to comply with the SBSEF Core Principles set forth in the SEA and the Commission rules for a one-year period, calculated on a rolling basis. The Commission did not receive any comments and is adopting Rule 829(b) as proposed for the reasons stated in the Proposing Release. 485 The technical modification removes a stray parenthesis. 486 17 CFR 37.1301; see also Proposing Release, supra note 1, 87 FR at 28918. PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 3. Rule 829(c)—Types of Financial Resources Paragraph (c) of Proposed Rule 829 is closely modeled on § 37.1302 of the CFTC’s rules,487 and it describes the types of financial resources that may satisfy the requirements of Rule 829(b). The Commission did not receive any comments on Proposed Rule 829(c) and is adopting Rule 829(c) as proposed for the reasons stated in the Proposing Release. 4. Rule 829(d)—Liquidity of Financial Resources Paragraph (d) of Proposed Rule 829 is closely modeled on § 37.1303 of the CFTC’s rules,488 and would provide that the financial resources allocated by an SBSEF to meet the financial resources requirements shall include unencumbered, liquid financial assets equal to at least the greater of three months of projected operating costs or the projected costs needed to wind down the SBSEF’s operations. If an SBSEF lacks sufficient unencumbered, liquid financial assets, it may satisfy this obligation by obtaining a committed line of credit in an amount at least equal to the deficiency. The Commission did not receive any comments on Proposed Rule 829(d) and is adopting Rule 829(d) as proposed for the reasons stated in the Proposing Release. 5. Rule 829(e)—Computation of Costs To Meet Financial Resources Requirement Paragraph (e) of Proposed Rule 829 is closely modeled on § 37.1304 of the CFTC’s rules,489 and would require an SBSEF, each fiscal quarter, to make a reasonable calculation of its projected operating costs and wind-down costs in order to determine its applicable obligations under Rule 829. Paragraph (e) would further provide that the SBSEF shall have reasonable discretion in determining the methodology used to compute such amounts, provided that the Commission may review the methodology and require changes as appropriate. Proposed Rule 829(e) would also append language based on the CFTC guidance from appendix B to part 37 concerning the following topics, all of which relate to computation of costs: (i) reasonableness of calculating projected operating costs and what may be excluded from such calculation; (ii) 487 17 CFR 37.1302; see also Proposing Release, supra note 1, 87 FR at 28918. 488 17 CFR 37.1303; see also Proposing Release, supra note 1, 87 FR at 28919. 489 17 CFR 37.1304; see also Proposing Release, supra note 1, 87 FR at 28919. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations proration of expenses; and (iii) allocation of expenses among affiliates. The Commission did not receive any comments on Proposed Rule 829(e) and is adopting Rule 829(e) as proposed, with a minor technical modification for the reasons stated in the Proposing Release.490 ddrumheller on DSK120RN23PROD with RULES2 6. Rule 829(f)—Valuation of Financial Resources Paragraph (f) of Proposed Rule 829 is closely modeled on § 37.1305 of the CFTC’s rules,491 and would provide that, no less than each fiscal quarter, an SBSEF must compute the current market value of each financial resource used to meet its obligations under Rule 829 and that reductions in value to reflect market and credit risk (‘‘haircuts’’) shall be applied as appropriate. The Commission did not receive any comments on Proposed Rule 829(f) and is adopting Rule 829(f) as proposed for the reasons stated in the Proposing Release. 7. Rule 829(g)—Reporting to the Commission Paragraph (g) of Proposed Rule 829 is closely modeled on § 37.1306 of the CFTC’s rules,492 and would address reporting to the Commission regarding an SBSEF’s financial resources. Paragraph (g)(1) would generally provide that, each fiscal quarter, or at any time upon Commission request, an SBSEF shall report the amount of financial resources necessary to meet the requirements of Rule 829 and the market value of each financial resource available, and shall provide the Commission with financial statements prepared in accordance with GAAP. Paragraph (g)(2) would provide that the calculations required under Rule 829(g) shall be made as of the last business day of the SBSEF’s fiscal quarter. Paragraph (g)(3) would generally require the SBSEF to provide the Commission with sufficient documentation to explain its methodology for computing its financial requirements. Paragraph (g)(4) would generally provide the timing for submission of reports and supporting documentation. Paragraph (g)(5) would require an SBSEF to provide notice to the Commission no later than 48 hours after it knows or reasonably should know that it no longer meets its obligations under Rule 829(b) and (d). 490 The technical modification corrects an incorrect internal cross-reference to a paragraph in the rule. 491 17 CFR 37.1305; see also Proposing Release, supra note 1, 87 FR at 28919. 492 17 CFR 37.1306; see also Proposing Release, supra note 1, 87 FR at 28919. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 Paragraph (g)(6) would require the use of EDGAR to submit reports and documentation required under Rule 829. The Commission did not receive any comments on Proposed Rule 829(g) and is adopting Rule 829(g) as proposed, with minor technical modifications, for the reasons stated in the Proposing Release.493 M. Rule 830—Core Principle 13— System Safeguards Paragraph (A) of SEA Core Principle 13 494 provides that an SBSEF must establish and maintain a program of risk analysis and oversight to identify and minimize sources of operational risk, through the development of appropriate controls and procedures, and automated systems, that are reliable and secure and that have adequate scalable capacity. Paragraph (B) requires that an SBSEF must also establish and maintain emergency procedures, backup facilities, and a plan for disaster recovery that allow for the timely recovery and resumption of operations; and the fulfillment of the responsibilities and obligations of the SBSEF. Finally, paragraph (C) of SEA Core Principle 13 requires an SBSEF to periodically conduct tests to verify that the backup resources of the SBSEF are sufficient to ensure continued order processing and trade matching; price reporting; market surveillance; and maintenance of a comprehensive and accurate audit trail. CEA Core Principle 14 495 is substantively identical to SEA Core Principle 13, and the CFTC implemented this Core Principle through subpart O of part 37, which is entitled ‘‘System Safeguards.’’ Proposed Rule 830 is closely modeled on subpart O of part 37 of the CFTC’s rules, except in one aspect. Subpart O includes language relating to ‘‘critical financial markets,’’ 496 which is a designation applied by the CFTC to certain of its registrants that would subject them to more stringent requirements, although the CFTC has not yet adopted any such 493 See supra note 32. The Commission has also changed the word ‘‘paragraph’’ in Rule 829(g)(5) to the plural form. 494 Section 3D(d)(13)(A) of the SEA, 15 U.S.C. 78c–4(d)(13). 495 Section 5h(f)(14) of the CEA, 7 U.S.C. 7b– 3(f)(14). 496 See § 37.1401(c) (providing that SEFs determined by the CFTC to be critical financial markets are subject to more stringent requirements); § 37.1401(d); § 37.1401(j) (providing that part 40 governs the obligations of registered entities that the CFTC has determined to be critical financial markets, with respect to maintenance and geographic dispersal of disaster recovery resources sufficient to meet a same-day recovery time objective in the event of a wide-scale disruption). PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 87211 requirements.497 A similar concept in the SEC’s rules is ‘‘SCI entity.’’ 498 When adopting Regulation SCI, the Commission considered whether it should apply Regulation SCI to SBSEFs, among other entities, and determined not to do so,499 and when proposing amendments to Regulation SCI in 2023 to, among other things, expand the definition of ‘‘SCI entity,’’ the Commission did not propose to include SBSEFs as SCI entities.500 One commenter states that it has seen no changes in the SBS market that should cause the Commission to revisit its decision not to apply Regulation SCI to SBSEFs. The commenter states that, as the Commission has noted, the greatest operations risk to a dually registered entity is likely to arise from the swap business rather than the SBS business. From this standpoint, according to the commenter, it is appropriate for the Commission to align with the CFTC approach to ensure that SEFs and SBSEFs alike have adequate system safeguards and business continuity protocols that are aligned with this risk.501 Subpart O is reasonably designed to promote SEF operational capability, and that the most appropriate way to implement SEA Core Principle 13 is to closely harmonize with the CFTC’s rules that implement the corresponding Core Principle. As with SEA Core Principle 12 (Financial resources),502 the Commission recognizes that the swap business of a dually registered SEF/ SBSEF is likely to be much larger than its SBS business. Therefore, the greatest operational risk to a dually registered entity is likely to arise from the swap business rather than the SBS business, so it would be logical for the SEC to 497 The provisions in subpart O relating to ‘‘critical financial markets’’ reference § 40.9 of the CFTC’s rules, which is marked as ‘‘Reserved.’’ 498 See Rule 1000 of Regulation SCI (defining ‘‘SCI entity’’). In Nov. 2014, the Commission adopted Regulation Systems Compliance and Integrity (‘‘SCI’’) to strengthen the technology infrastructure of the U.S. securities markets, reduce the occurrence of systems issues in those markets, improve their resiliency when technological issues arise, and establish an updated and formalized regulatory framework, thereby helping to ensure more effective Commission oversight of such systems. See Regulation Systems Compliance and Integrity, SEA Release No. 73639 (Nov. 19, 2014), 79 FR 72252 (Dec. 5, 2014). 499 See id., 79 FR at 72363–64 (reviewing comments received regarding the potential application of Regulation SCI to SBSEFs, among others). 500 See Regulation Systems Compliance and Integrity, SEA Release No. 97143 (Mar. 15, 2023), 88 FR 23146 (Apr. 14, 2023) (Proposed Amendments) (File No. S7–07–23). 501 See Bloomberg Letter, supra note 18, at 18. 502 See supra section VI.L (discussing Core Principle 12). E:\FR\FM\15DER2.SGM 15DER2 87212 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations defer to the CFTC’s approach for ensuring that SEFs have adequate system safeguards and business continuity protocols. Different or additive requirements imposed by the SEC could increase costs for SEF/ SBSEFs while generating benefits that are marginal at best. The Commission does not observe any differences in the SBS market relative to the swaps market that warrant imposing different or additive operational capability requirements on SBSEFs. Additionally, because SBSEFs are not SCI entities and the corresponding CFTC rule has not imposed additional requirements on critical financial markets, it is not necessary or appropriate to adapt into Rule 830 the language of subpart O applicable to critical financial markets.503 Therefore, the Commission is adopting Rule 830 as proposed, with minor technical modifications.504 N. Rule 831—Core Principle 14— Designation of Chief Compliance Officer ddrumheller on DSK120RN23PROD with RULES2 SEA Core Principle 14 505 requires each registered SBSEF to designate a chief compliance officer (‘‘CCO’’), and requires the CCO to review the SBSEF’s compliance with the Core Principles, resolve conflicts of interest, be responsible for establishing and administering policies and procedures required under the Core Principles, establish procedures for the remediation of noncompliance, prepare and sign an annual report that describes the SBSEF’s compliance, certify that the report is accurate and complete, and submit the report to the Commission. CEA Core Principle 15 for SEFs 506 is substantively identical. Proposed Rule 831 would implement SEA Core Principle 14 and is closely modeled on subpart P of part 37, with two minor substantive exceptions.507 The first relates to disqualification of the CCO. Section 37.1501(b)(2)(ii) states: 503 While subpart O frequently uses the term ‘‘market participant,’’ Proposed Rule 830 would substitute the term ‘‘member’’ in these places, since the rule pertains to market participants who are engaging as members of the SEF/SBSEF. See supra note 362. 504 See supra note 32. 505 Section 3D(d)(14) of the SEA, 15 U.S.C. 78c– 4(d)(14). 506 Section 5h(f)(15) of the CEA, 7 U.S.C. 7b– 3(f)(15). 507 In addition, the requirement in Proposed Rule 831 that the CCO’s annual compliance report be submitted electronically to the Commission, based on § 37.1501(e)(2), includes an added clause to provide that the submission must be made using the EDGAR system and must be provided as an Interactive Data File in accordance with Rule 405 of Regulation S–T, in conformance with other rules in Regulation SE requiring electronic submissions. See Proposed Rule 831(j)(2). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 ‘‘No individual disqualified from registration pursuant to sections 8a(2) or 8a(3) of the [CEA] may serve as a chief compliance officer.’’ The Commission proposed instead, in Rule 831(c)(2), that no individual that would be disqualified from serving on an SBSEF’s governing board 508 or committees pursuant to the criteria set forth in § 242.819(i) may serve as the CCO. As noted above,509 the disqualification criteria in Rule 819(i) are adapted from § 1.63 of the CFTC’s rules. Second, the Commission adapted the acceptable practices pertaining to CEA Core Principle 15 into paragraph (c) of Proposed Rule 831.510 The Commission received one comment on Proposed Rule 831. The commenter states that he fully supports the intent of the proposed regulations and believes that the CCO role is the single most important compliance role in an SBSEF and that it is critical that its job description, and the entity’s rules, structures, and procedures, act to secure and maintain the CCO’s independence. For example, the commenter states, the CCO should have a single compliance role and no other competing role or responsibility that could create conflicts of interest or threaten its independence. Therefore, the commenter suggests that the rules restrict the CCO position from being held by an attorney who represents the SBSEF or its board of directors, such as an in-house or general counsel. The commenter also states that the remuneration of the CCO must be specifically designed in such a way that avoids potential conflicts of interest with its compliance role.511 The commenter further states that although the CCO would normally report to an executive officer, the CCO must also have a direct reporting line to the independent directors, and the CCO should report to the audit committee at least yearly. The commenter strongly recommends amending § 242.831 such that the authority and sole responsibility to designate or remove the CCO, or to materially change its 508 Subpart P uses the term ‘‘board of directors,’’ while the Commission proposed to use the term ‘‘governing board’’ instead throughout proposed Regulation SE. See Proposing Release, supra note 1, 87 FR at 28877 n.29. 509 See supra section VI.B.9. 510 Proposed Rule 831(c) would provide that, in determining whether the background and skills of a potential CCO are appropriate for fulfilling the responsibilities of the role of the CCO, an SBSEF would have the discretion to base its determination on the totality of the qualifications of the potential CCO, including, but not limited to, compliance experience, related career experience, training, potential conflicts of interest, and any other relevant factors. 511 See Letter from Chris Barnard (May 20, 2022) (submitted under cover email dated June 6, 2022). PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 duties and responsibilities, vests only with the independent directors and not with the full board. This would help, the commenter states, to ensure the independence of the CCO within the entity and would possibly mitigate the need to promulgate rules requiring the SBSEF to insulate the CCO from undue pressure and coercion or to address the potential conflict between and among compliance interests, commercial interests and ownership interests of an SBSEF.512 The CFTC has implemented CEA Core Principle 14 for SEFs in an appropriate way, and that closely harmonizing with subpart P of part 37 would yield comparable regulatory benefits while imposing only marginal additional costs. While the commenter’s suggestions would support the independence of the CCO, key provisions of paragraph (b) of Proposed Rule 831 would sufficiently protect the independence and authority of an SBSEF’s CCO in performing the required functions. Significantly, paragraph (b)(1) would require that the position of CCO carry with it sufficient authority and resources to fulfill the position’s duties, and paragraph (b)(2) would provide that the CCO shall have supervisory authority over all staff acting at the CCO’s direction. The SBSEF remains responsible for establishing and administering required policies and procedures. The Commission also recognizes that most SBSEFs are likely to be dually registered SEF/SBSEFs and that the swaps business of a dually registered SEF/SBSEF is likely to be much larger than its SBS business. Therefore, the greatest compliance risks to a dually registered entity are likely to arise from the swap business rather than the SBS business, and it is thus logical for the SEC to harmonize with the CFTC’s rules regarding the CCO. There are strong economic incentives for a dually registered entity to appoint the same individual to serve as the CCO for both the swap and SBS businesses, and for the CCO to carry out their functions under a similar set of rules. Different or additive requirements imposed by the SEC could increase costs for SEF/ SBSEFs while generating benefits that are marginal at best. The Commission does not observe any differences in the SBS market relative to the swaps market that warrant imposing different or additive CCO requirements on SBSEFs relating to the CCO. For the reasons discussed above, the Commission is adopting Rule 831 as 512 See E:\FR\FM\15DER2.SGM id. 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations proposed, with minor technical modifications.513 VII. Cross-Border Rules ddrumheller on DSK120RN23PROD with RULES2 A. Rule 832—Cross-Border Mandatory Trade Execution Given the global nature of the SBS market, where there is frequent interaction among counterparties domiciled in different jurisdictions, the Commission proposed Rule 832 to address when the trade execution requirement would apply to a crossborder SBS transaction.514 The proposed rule would be consistent with the Commission’s territorial approach to applying Title VII requirements in other contexts, where relevant activity need not occur wholly within the United States or solely between U.S. persons for Title VII requirements to apply.515 As discussed further below, the relevant activity here is ‘‘to engage in a securitybased swap’’ in whole or in part in the United States.516 Paragraph (a) of Rule 832 would provide that the trade execution requirement set forth in section 3C(h) of the SEA shall not apply to an SBS unless at least one counterparty to the SBS is a ‘‘covered person’’ as defined in paragraph (b). Paragraph (b) of Rule 832 would define the term ‘‘covered person’’ with respect to a particular securitybased swap, as any person that is: (1) a U.S. person; 517 (2) a non-U.S. person whose performance under an SBS is guaranteed by a U.S. person; or (3) a non-U.S. person who, in connection with its SBS dealing activity, uses U.S. personnel located in a U.S. branch or office, or personnel of an agent of such non-U.S. person located in a U.S. branch or office, to arrange, negotiate, or execute a transaction. Taken together, the provisions of Rule 832 apply to persons who are—consistent with the relevant statutory provisions added by Title VII—engaging in SBS in the United States. Two commenters express support for Rule 832 or its subparts. Specifically, 513 See supra note 32. The Commission has also deleted an extraneous ‘‘and’’ at the end of the text of Rule 831(a)(1)(v). 514 See supra section V.F (discussing the trade execution requirement of section 3C(h) of the SEA); see also Proposing Release, supra note 1, 87 FR at 28922–25 (discussing proposed Rule 832 in more detail). 515 See Proposing Release, supra note 1, 87 FR at 28922–23. 516 See SEA section 3C(a)(1), 15 U.S.C. 78c– 3(a)(1). 517 Transactions effected through the foreign branch of a U.S. person would be subject to the trade execution requirement, as ‘‘a foreign branch has no separate existence from the U.S. person itself.’’ See Proposing Release, supra note 1, 87 FR at 28923. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 one commenter states that inclusion of paragraphs (b)(2) and (b)(3) in the proposed rule—where one counterparty of an SBS transaction is a non-U.S. person whose performance under an SBS is guaranteed by a U.S. person (‘‘guaranteed person transactions’’), and where one counterparty of an SBS transaction is a non-U.S. person who, in connection with its SBS dealing activity, uses U.S. personnel located in a U.S. branch or office, or personnel of an agent of such non-U.S. person located in a U.S. branch or office, to arrange, negotiate, or execute a transaction (‘‘ANE transactions’’), respectively—are ‘‘appropriately broad [and] will help prevent attempted evasion of the trade execution requirement by ensuring that it will apply where there is a significant connection to the U.S., even when neither counterparty is a U.S. person.’’ 518 While generally supportive of Rule 832, this commenter believes that, in addition to guaranteed person transactions, the rule should also cover transactions that include a ‘‘de facto guarantee’’ by a U.S. person, which this commenter states represents ‘‘an unspoken but nevertheless powerful arrangement whereby a parent or other U.S. person has a virtually irresistible incentive to cover the losses incurred by another affiliated entity’’ given the reputational impact a failure of even a non-guaranteed affiliate could have.519 Another commenter expresses support for paragraph (b)(3) of Rule 832 relating to ANE transactions.520 This commenter agrees that such transactions fall within the Commission’s jurisdiction, even if they are booked to non-U.S. entities, and believes that, given the Commission’s supervisory interests and policy objectives, it is warranted for the Commission to exercise its jurisdiction over ANE transactions. This commenter states that, ‘‘following the CFTC granting noaction relief from the trade execution requirement for ANE transactions, interdealer trading activity in EUR interest rate swaps began to be booked almost exclusively to non-U.S. entities, a fact pattern that academic research found was ‘consistent with (although not direct proof of) swap dealers strategically choosing the location of the desk executing a particular trade in 518 Better Markets Letter, supra note 18, at 14–15. at 15–16. This commenter cited Citigroup’s experience with certain structured investment vehicles during the 2008 financial crisis, which this commenter states Citigroup ‘‘chose’’ to bring onto its balance sheet even though it had no legal obligation to do so. See id. 520 See Citadel Letter, supra note 18, at 16. 519 Id. PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 87213 order to avoid trading in a more transparent and competitive setting.’ ’’ 521 The commenter states that this is ‘‘an outcome to avoid in the SBS market.’’ 522 Several commenters oppose certain aspects of Rule 832. One commenter disagrees with the Commission’s application of the trade execution requirement to transactions involving foreign branches of U.S. persons, as well as to guaranteed person transactions.523 This commenter believes that ‘‘mandatory trade execution is not designed to address or mitigate systemic risk’’ and, thus, it is unnecessary to extend SBSEF rules to transactions with non-U.S. counterparties ‘‘where the lack of such rules would have no ability of posing risk to the U.S. financial system.’’ 524 This commenter states that guaranteed entities (by definition nonU.S. persons) and foreign branches of U.S. persons are both subject to the laws and regulations of their home country or the foreign jurisdictions in which they and their counterparties operate, respectively, and the commenter states that imposing the rule’s mandatory trading obligations on them in transactions with non-U.S. counterparties would result in duplicative regulation, which would increase compliance costs and add complexity and inefficiencies to crossborder trading.525 This commenter also states that foreign trading venues are already subject to comprehensive regulatory oversight in their home jurisdictions and, based on its experience with the CFTC’s SEF trading rules prior to the grant of equivalency to major foreign trading platforms in Europe and Asia, ‘‘foreign platforms will deny access to any entity with any connection to the United States, no matter how remote, for fear of being captured by the SEC’s regime’’ and will further fragment SBS markets.526 Several commenters also oppose subjecting ANE transactions to the trade execution requirement in Rule 832(b)(3). One commenter believes that ANE transactions fall outside the jurisdictional reach of Title VII, and that 521 Id. (citing Benos, E., Payne, R., and Vasios, M., Centralized trading, transparency and interest rate swap market liquidity: evidence from the implementation of the Dodd-Frank Act, Bank of England Staff Working Paper, at 30 (May 2018), available at https://www.bankofengland.co.uk/-/ media/boe/files/working-paper/2018/centralizedtrading-transparency-and-interest-rate-swapmarket-liquidity-update). 522 Id. 523 See ISDA–SIFMA Letter, supra note 18, at 12– 13. 524 Id. at 12. 525 See id. at 13. 526 Id. E:\FR\FM\15DER2.SGM 15DER2 87214 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ‘‘the location of personnel or agents within the United States should not form the basis for extending the [Commission’s] trading mandate. . . .’’ 527 This commenter states that, when assessing the necessity of extending the extraterritorial reach of a particular ruleset, ‘‘it is important to consider the objectives of individual rulesets’’ and further states that ‘‘platform trading rules are not intended to address or mitigate risk, and therefore, the Commission should exercise more flexibility’’ when deciding whether these rules should extend to ANE transactions.528 This commenter believes that including ANE transactions ‘‘would bring a random selection of additional transactions into scope merely due to some supporting role played by a U.S. based sales person, trader or other function caught up in ANE.’’ 529 Several commenters warn of negative implications for the SBS market from applying the trade execution requirements to ANE transactions.530 One commenter expresses concern generally about the rule’s ‘‘complexities and over-broad reach.’’ 531 Another commenter states that firms and platforms would be required to make representations ‘‘that no ANE touchpoint is present in the U.S. for any SBS subject to the trading mandate’’ so as not to run afoul of Rule 832’s requirements, which this commenter states would ‘‘require the development of a costly parallel infrastructure completely devoid of U.S. touchpoints. . . .’’ 532 Similarly, another commenter states that, without regulatory certainty and clear jurisdictional boundaries, market participants may be unsure of which rules apply to a particular SBS transaction because ‘‘non-U.S. counterparties and platform operators frequently do not know whether a transaction involves U.S. ANE activities,’’ which this commenter states will likely result in confusion among market participants and platform operators and may result in some 527 Id. at 11. This commenter states that rules related to mandatory platform execution are intended to provide counterparties with a sufficient level of pretrade price transparency and that they should be addressed by the market regulators in the jurisdiction where the majority of trading activity is taking place. See id. 529 Id. at 12. 530 See SIFMA AMG Letter, supra note 18, at 11; Tradeweb Letter, supra note 18, at 3–4; ISDA– SIFMA Letter, supra note 18, at 11–12. 531 SIFMA AMG Letter, supra note 18, at 11. 532 ISDA–SIFMA Letter, supra note 18, at 12. ddrumheller on DSK120RN23PROD with RULES2 528 Id. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 market participants deciding not to transact in SBS at all.533 These commenters also state that foreign jurisdictions have adopted robust regulatory regimes that already subject non-U.S. persons and foreign trading venues to comparable and comprehensive regulations in their respective jurisdictions.534 These commenters contrast the Commission’s proposed approach with the CFTC’s efforts ‘‘to curtail the U.S.’ approach to extra-territoriality in light of the progress made by other jurisdictions in establishing robust derivatives regulatory regimes,’’ 535 with one noting that, in adopting its cross-border rules for certain swap-market participants in 2020, the CFTC announced that it would not consider ANE as a relevant factor in non-U.S. dealers’ swap transactions.536 Another commenter asks the Commission to be mindful of whether CFTC-registered SEFs would be forced to change their rules in order comply with the new proposed SBSEF rules.537 Finally, one commenter requests that the Commission make more explicit that the ‘‘covered person’’ definition in Rule 832 is a transaction-based test,538 while another commenter requests additional clarity about the application of the rule.539 The Commission has considered the comments received for Rule 832 and is adopting the rule as proposed, with minor technical modifications.540 As an initial matter, the Commission disagrees with those comments suggesting that Rule 832 may exceed the Commission’s statutory authority. The trade execution requirement of section 3C(h)(1) provides 533 Tradeweb Letter, supra note 18, at 4–5. id. at 4; ISDA–SIFMA Letter, supra note 18, at 12. See also SIFMA AMG Letter, supra note 18, at 11. 535 ISDA–SIFMA Letter, supra note 18, at 12. See also Tradeweb Letter, supra note 18, at 4; SIFMA AMG Letter, supra note 18, at 11. Section VII.B, infra, discusses the exemptions under Rule 833. 536 ISDA–SIFMA Letter, supra note 18, at 12 n.28. See also CFTC, Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants, 85 FR 56924, 56961–63 (Sept. 14, 2020); CFTC Release No. 8212–20 (July 23, 2020) (CFTC Withdraws ‘‘ANE’’ Staff Advisory and Issues New Cross-Border No-Action Relief). 537 SIFMA AMG Letter, supra note 18, at 11. 538 See ISDA–SIFMA Letter, supra note 18, at 11 n.26. Specifically, this commenter appreciates the Commission’s clarification that the ‘‘covered person’’ definition is a transaction-based test but believes that the rule text could be more explicit in such regard by replacing: in prong (2) of the definition ‘‘a security-based swap’’ with ‘‘that security-based swap;’’ and in prong (3) of the definition ‘‘a transaction’’ with ‘‘that security-based swap transaction.’’ 539 See SIFMA AMG Letter, supra note 18, at 11– 12. 540 See supra note 32. 534 See PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 that the Commission’s authority with respect to trade execution is coextensive with the Commission’s authority to require SBS clearing under section 3C(a)(1) of SEA.541 And the clearing requirement of section 3C(a)(1) provides for SBS clearing when a person is ‘‘engage[d] in a security-based swap’’ in the United States.542 Thus, consistent with the Commission’s territorial approach and Title VII, the relevant domestic activity that triggers the execution requirement is engaging in an SBS in the United States. Rule 832 fits comfortably within the bounds of that statutory authority. A U.S. person undertaking SBS transactions within the United States is, as no commenter disputes, engaging in an SBS in the United States (irrespective of whether the counterparty is overseas). And this is true even if the U.S. person is undertaking the SBS transaction from a foreign office. As the Commission has explained, ‘‘a foreign office has no separate existence from the U.S. person itself.’’ 543 It is the U.S. based entity that has legal and financial responsibility for the SBS transaction and for the ensuing obligations that will flow from the transaction over the life of the SBS. Thus, it is reasonable to understand the U.S. entity to have engaged in the United States in the SBS even if the initial undertaking (i.e., the SBS transaction) occurred in the entity’s foreign office. For similar reasons, a non-U.S. person who enters an SBS with another nonU.S. person has nonetheless engaged in an SBS in the United States (at least in part) if that SBS arrangement is guaranteed by a U.S. person. When a non-U.S. person operates with a guarantee from a U.S. person for the non-U.S. person’s performance under an SBS, the SBS arrangement is economically equivalent and substantially identical with a transaction entered into directly with the U.S. guarantor. With such an arrangement, an essential element of the transaction from the viewpoint of the 541 Section 3C(h)(1) of the SEA (requiring trade execution ‘‘[w]ith respect to transactions involving security-based swaps subject to the clearing requirement of subsection (a)(1)’’ of the SEA). 542 Section 3C(a)(1) of the SEA (‘‘It shall be unlawful for any person to engage in a securitybased swap unless that person submits such security-based swap for clearing to a clearing agency that is registered under this Act or a clearing agency that is exempt from registration . . . .’’). 543 Proposing Release, supra note 1, 87 FR at 28923 (citing Application of ‘‘Security-Based Swap Dealer’’ and ‘‘Major Security-Based Swap Participant’’ Definitions to Cross-Border SecurityBased Swap Activities; Republication, SEA Release No. 72472 (June 25, 2014), 79 FR 47278, 47289 (Aug. 12, 2014) (‘‘2014 Cross-Border Adopting Release’’)). E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 guaranteed person’s counterparty is the legal and financial obligations such a guarantee imposes on the U.S. guarantor (without which there would be no need to include the U.S. guarantor) and brings the U.S. person legally and financially into the transaction as an interested party. This economic reality makes it appropriate to include guaranteed non-U.S. persons within the definition of ‘‘covered persons’’ in Rule 832. Further, the statutory language is, in the Commission’s view, reasonably understood to encompass a non-U.S. person who, in connection with its SBS dealing activity, uses U.S. personnel located in a U.S. branch or office, or personnel of an agent of such non-U.S. person located in a U.S. branch or office, to arrange, negotiate, or execute an SBS transaction. These activities rise to the level of engaging in an SBS in the United States. Undertaking critical steps in an SBS transaction qualifies as engaging in an SBS in the United States, no less than placing ultimate legal or financial responsibility for an SBS with a person in the United States (as occurs in the cases discussed above of an SBS transaction involving either a foreign office of a U.S. person or a U.S. guarantor). The Commission’s assessment of the relevant domestic activities that constitute engaging in an SBS is consistent not only with the statutory text, but also the statutory objectives underlying the execution requirement. These objectives include, among other things, helping to ensure the financial stability of U.S. persons engaged in SBS transactions, the promotion of transparency in price formation for SBS transactions that have a nexus to the U.S. securities markets, and the prevention of manipulation, price distortion and disruptions of the delivery or cash settlement process within the U.S. market system. Each of the components of Rule 832 helps to advance one or more of these statutory goals and, thus, further supports the Commission’s reasonable understanding of what constitutes engaging in an SBS in the United States.544 544 In the alternative, the Commission relies on the anti-evasion authority of section 30(c) of the SEA, 15 U.S.C. 78dd(c), as statutory authority for Rule 832. Section 30(c) authorizes the Commission to apply Title VII requirements to persons transacting a business ‘‘without the jurisdiction of the United States’’ if they contravene rules that the Commission has prescribed as ‘‘necessary or appropriate to prevent the evasion of any provision’’ of Title VII. For example, without Rule 832(b)(2), U.S. persons could have an incentive to evade the trade execution requirement by engaging in SBS via a guaranteed affiliate, while the economic reality of transactions arising from that VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 With that general explanation of how Rule 832 fits comfortably within our statutory authority, the Commission will address the specific comments that were received on the rule. For the reasons discussed above, the Commission disagrees with the comment that Rule 832 should not extend the trade execution requirement to transactions involving foreign branches of U.S. persons or guaranteed person transactions.545 With respect to the commenter that believes Rule 832’s definition of ‘‘covered person’’ should also cover a transaction that includes a ‘‘de facto guarantee’’ by a U.S. person,546 the Commission appreciates that, even for an affiliate that is not a guaranteed person, a dealer or large trader might be unwilling to allow such an affiliate to fail because of the reputational and other consequences such a failure might have on its interactions with potential counterparties. At the same time, given the lack of a legal obligation by the ‘‘de facto guarantor,’’ it is not clear how the Commission could determine—before the fact—which ‘‘de facto guarantees’’ exist and which such ‘‘de facto guarantors’’ should be included, or how market participants, including counterparties, would be able to determine the applicability of Regulation SE to a transaction potentially subject to a ‘‘de facto guarantee.’’ Thus, the Commission is not including ‘‘de facto guarantee’’ transactions within Rule 832’s definition of ‘‘covered persons.’’ For the reasons discussed above, as well as the reasons discussed immediately below, the Commission also disagrees with the argument that the Commission should not extend SBSEF rules, which include mandatory trade execution, to transactions with non-U.S. counterparties (even if they involve guaranteed persons) where the lack of such rules would have no ability of posing risk to the U.S. financial system.547 While Title VII’s trade execution requirements do not relate to systemic risk in precisely the same manner that certain other Title VII rules—such as capital, margin, and segregation requirements for SBSDs and activity—including the risks these transactions introduce to the U.S. market—would be no different in most respects than transactions entered into directly by U.S. persons. See Proposing Release, supra note 1, 87 FR at 28923 n.228. And, without Rule 832(b)(3), non-U.S. persons could retain the benefits of operating in the United States while avoiding compliance with the trade execution requirement. See id. at 28923 n.230. 545 See supra note 523 and accompanying text. 546 See supra note 519 and accompanying text. 547 See supra note 524 and accompanying text. PO 00000 Frm 00061 Fmt 4701 Sfmt 4700 87215 MSBSPs,548 post-trade reporting and public dissemination of SBS transactions,549 registration and regulation of SBSDs and MSBSPs,550 among others—the Commission disagrees with the notion that the trade execution and other SBSEF requirements are not important in addressing and mitigating risk, including potentially systemic risk, to the U.S. financial system. The application of the trade execution requirement to a cross-border SBS transaction is not simply a matter of whether a particular form of execution (such as RFQ-to-3 or the use of an order book) is required. Instead, the application of this requirement to such a transaction would subject the transaction to the various requirements of Regulation SE, many of which relate to mitigating risks to the counterparties of the transaction and, ultimately, the U.S. financial system. The Core Principles for SBSEFs—which are set forth in the Dodd-Frank Act 551 and implemented in the rules of Regulation SE—seek to, among other things, provide for transparency in price formation for SBS,552 impartial access to SBS trading,553 the financial resources of SBS trading venues,554 the efficient submission of eligible SBS transactions to central clearing,555 and the prevention of manipulation, price distortion, and disruptions of the delivery or cash settlement process.556 With respect to commenters’ views opposing the inclusion of ANE transactions in Rule 832,557 the Commission understands that this differs from the CFTC’s policy towards ANE transactions and is cognizant of the potential complexities and costs that can arise if market participants are unsure of which jurisdictions’ rules apply to a particular SBS transaction. 548 See Capital, Margin, and Segregation Release, supra note 100. 549 See Regulation SBSR Release, supra note 102. 550 See SBSD and MSBSP Registration Release, supra note 99. 551 Core Principles of section 3D(d) of the SEA, 15 U.S.C. 78c–4(d). 552 See, e.g., Rule 815 (methods of execution); Rule 816 (trade execution requirement); Rule 825 (Core Principle 8—timely publication of trading information). 553 See, e.g., Rule 819(c) (Core Principle 2—access requirements). 554 See, e.g., Rule 829 (Core Principle 12— financial resources). 555 See, e.g., Rule 823(c) (Core Principle 6— financial integrity of transactions). 556 See, e.g., Rule 820 (Core Principle 3—SBS not readily susceptible to manipulation); Rule 821(Core Principle 4—monitoring of trading and trade processing); Rule 823 (Core Principle 6—financial integrity of transactions). 557 See supra notes 527–537 and accompanying text. E:\FR\FM\15DER2.SGM 15DER2 87216 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations The Commission also recognizes commenters’ views that certain foreign jurisdictions have adopted ‘‘robust’’ regulatory regimes.558 However, the purpose of Rule 832 is to ‘‘address when the . . . trade execution requirement applies to a cross-border SBS transaction.’’ 559 Absent an exemption, the trade execution requirement applies in cross-border contexts wherever covered persons are involved in an SBS transaction, regardless of whether the relevant foreign jurisdictions have robust regulatory regimes—such as those the Commission may consider in connection with a foreign trading venue’s application to the Commission for an exemption from the trade execution requirement under Rule 833(b).560 In adopting Rule 832, the Commission has been mindful of its impact on CFTCregistered SEFs and, as a commenter suggests,561 whether they might be forced to change their rules because of the Commission’s ANE approach for SBSEFs. As discussed below in section VII.B with respect to applications for exemptions relating to the trade execution requirement under Rule 833(b), foreign trading venues that have already received exemptive relief from the CFTC for swaps trading where robust regulatory regimes may exist with requirements comparable to those applicable to SBS transactions in the United States may apply for exemptive relief under Rule 833(b). If exempted under Rule 833(b), trading of SBS on such foreign trading venues would not require CFTC-registered SEFs to change their rules.562 Similarly, for SBS transactions that the Commission exempts from the trade execution requirement based on an application submitted under Rule 833(b), the concerns expressed by commenters regarding complexities and costs would no longer be applicable,563 and 558 See supra note 534 and accompanying text. Release, supra note 1, 87 FR at ddrumheller on DSK120RN23PROD with RULES2 559 Proposing 28924. 560 See infra section VII.B (discussing crossborder exemptions under Rule 833, including exemptions relating to the trade execution requirement under Rule 833(b)). The Commission may consider, among other things, the extent to which the SBS traded in a foreign jurisdiction are subject to a comparable trade-execution requirement. 561 See supra note 537 and accompanying text. 562 See infra notes 624–627 and accompanying text. 563 According to one commenter, these issues no longer apply in the SBS markets given that the CFTC resolved it ‘‘when it granted equivalency to major foreign trading platforms in Europe and Asia.’’ See supra note 526 and accompanying text. The CFTC has granted orders of exemptions to certain markets pursuant to CEA section 5h(g), which authorizes the CFTC to exempt, VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 commenters’ concerns regarding the Commission’s treatment of ANE transactions should be allayed as well, because the effect of such exemptions would likely result in SBS transactions in foreign jurisdictions with what may be considered robust regulatory regimes being exempt from the Commission’s trade execution requirement and, in practice, have similar treatment of transactions on applicable foreign trading venues as the CFTC. On the other hand, if the Commission does not grant an exemption to such an SBS transaction, that would mean that the Commission would not have made a finding that granting such an exemption would be in the public interest and consistent with the protection of investors, in light of any information submitted with the application which the Commission may have considered regarding comparable requirements in that foreign jurisdiction. For such SBS transactions, it would be appropriate for the trade execution requirements to apply. The Commission also disagrees with the characterization of Rule 832 with respect to ANE transactions as bringing ‘‘a random selection of additional transactions into scope’’ and the belief that the location of personnel in the United States should not form the basis for applying the Commission’s trade execution requirement.564 The mere fact that an entity has personnel located in the U.S. does not subject an SBS transaction to the trade execution requirement; rather, it is the role such personnel play in arranging, negotiating, or executing the transaction that brings them within the definition of ‘‘covered person’’ for purposes of Rule 832. ANE transactions would not be a ‘‘random selection of additional transactions;’’ 565 instead, it would be appropriate to apply its carefully considered and tailored guidance given in other Title VII requirements for the phrase ‘‘arranged, negotiated, or executed’’ for the purposes of the application of the trade execution requirement in the cross-border context. Specifically, the Commission has clarified that Title VII requirements using an ‘‘arranged, negotiated, or conditionally or unconditionally, a SEF from registration under CEA section 5h if the CFTC finds that the facility is ‘‘subject to comparable, comprehensive supervision and regulation on a consolidated basis by . . . the appropriate governmental authorities in the home country of the facility.’’ See ‘‘Exemption of Foreign Swap Trading Facilities from SEF Registration,’’ available at https://www.cftc.gov/International/ ForeignMarketsandProducts/ExemptSEFs. 564 See supra notes 527 and 529 and accompanying text. 565 See supra note 564 and accompanying text. PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 executed’’ test are not triggered in certain circumstances where the marketfacing activity of U.S. personnel is ‘‘so limited that it would not implicate the regulatory interests underlying the relevant Title VII requirements.’’ 566 Such instances arise when U.S. personnel provide ‘‘market color’’ in connection with SBS transactions, where such market color is ‘‘limited to background information regarding pricing or market conditions associated with particular instruments or with markets more generally’’ 567 and when the U.S. personnel have no client responsibility 568 and do not receive any transaction-linked compensation.569 However, market-facing activity by personnel located in the United States also would not be ‘‘market color’’ (i.e., would be considered to be ‘‘arranged, negotiated, or executed’’) if such activity involves: providing recommendations, such as recommending particular instruments; providing predictions regarding potential merits or risks of, or providing trading ideas or strategies relating to, a proposed security-based swap transaction; structuring a particular SBS transaction; or finalizing or reaching agreement with respect to any pricing or non-pricing element, such as underlier, notional amount or tenor, that must be resolved to complete an SBS transaction.570 With this existing guidance that applies to cross-border ANE transactions subject to Rule 832,571 declining to apply Title VII requirements to SBS transactions of foreign entities that use U.S. personnel to engage in ANE transactions would allow such entities to exit the Title VII regulatory regime without exiting the U.S. market.572 This is problematic 566 See 2019 Cross-Border Adopting Release, supra note 218, 85 FR at 6274. 567 Id. at 6275–76. Background information includes information regarding (1) current or historic pricing, volatility or market depth, and (2) trends or predictions regarding pricing, volatility, or market depth, as well as information related to risk management. See id. at 6275. 568 No client responsibility would mean that the U.S. personnel have not been assigned, and do not otherwise exercise, client responsibility in connection with the transaction. See id. at 6275–76. 569 Not receiving any transaction-linked compensation means the U.S. personnel do not receive compensation based on, or otherwise linked to, the completion of individual transactions on which the U.S. personnel provide market color. See id. 570 See id. at 6275. 571 See supra notes 566–570 and accompanying text. 572 See Proposing Release, supra note 1, 87 FR at 28923 (citing Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, SEA Release No. 78321 (July 14, 2016), 81 FR 53546, 53591 (Aug. 12, 2016) (‘‘Regulation SBSR Adopting Release II’’)). E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations because, as the Commission stated in the Proposing Release, ‘‘applying the trade execution requirement to such persons is necessary or appropriate as a prophylactic measure to help prevent the evasion of the provisions of the SEA that were added by the Dodd-Frank Act, and thus help prevent the relevant purposes of the Dodd-Frank Act from being undermined. Without this rule, non-U.S. persons could retain the benefits of operating in the United States while avoiding compliance with the trade execution requirement.’’ 573 Finally, with respect to the request by one commenter that the Commission revise the ‘‘covered person’’ definition in Rule 832 to make more explicit that it is a transaction-based test,574 the Commission affirms again that the definition is intended to apply on a transaction-by-transaction basis,575 and views the language in the rule (e.g., ‘‘with respect to a particular securitybased swap’’) as sufficiently clear in this regard.576 Accordingly, for the reasons discussed above, the Commission is adopting Rule 832 as proposed, with minor technical modifications.577 ddrumheller on DSK120RN23PROD with RULES2 B. Rule 833—Cross-Border Exemptions for Foreign Trading Venues and Relating to the Trade Execution Requirement As discussed above, Rule 832 specifies when the trade execution requirement applies to an individual cross-border SBS transaction. When covered persons (as defined in Rule 832) are members of a foreign trading venue for SBS (a ‘‘foreign SBS trading venue’’) with respect to SBS transacted on that venue, whether or not such SBS are subject to the trade execution requirement, the foreign SBS trading venue could be required to register with 573 Proposing Release, supra note 1, 87 FR at 28923 n.230. See also supra note 521 and accompanying text (providing an example of swap dealers strategically choosing the location of the desk executing a particular trade in order to avoid trading in a more transparent and competitive setting after no-action relief from the trade execution requirement for ANE transaction). 574 See supra note 538 and accompanying text. 575 See Proposing Release, supra note 1, 87 FR at 28922 n.221 (‘‘The proposed term ‘covered person’ is designed to apply on a transaction-by-transaction basis.’’). 576 With respect to the commenter that requested additional clarity with respect to Rule 832, see supra note 539 and accompanying text, the Commission’s discussion of the rule in this section including, for example, the applicability of existing guidance with respect to ANE transactions and the availability of exemptions under Rule 833(b) from the mandatory trade execution requirement as discussed in section VII.B below, should provide market participants with more clarity on when and to whom the rule’s requirements would apply. 577 See supra notes 32 and 540. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 the Commission as a national securities exchange or SBSEF 578 or, because the foreign SBS trading venue would be facilitating the execution of SBS between persons, a broker.579 To address the situation of a foreign SBS trading venue that wishes to avoid registering with the Commission in one or more of these capacities, the Commission proposed Rule 833(a). Rule 833(a), which would specify that a foreign SBS trading venue can request that the Commission grant it an exemption under section 36(a)(1) of the SEA 580 by submitting, pursuant to SEA Rule 0–12,581 a complete application for exemptive relief. Rule 833(a) would also provide that such an application under section 36(a)(1) and Rule 0–12, relating to the status of the foreign SBS trading venue under the SEA, may state that the application is also submitted pursuant to Rule 833(a).582 When such an application is submitted pursuant to Rule 833(a), the Commission would consider the submission as an application to exempt the foreign SBS trading venue, with respect to its providing a market place for SBS, from: the definition of ‘‘exchange’’ in section 3(a)(1) of the SEA; 583 the definition of ‘‘security-based swap execution facility’’ in section 3(a)(77) of the SEA; 584 the definition of ‘‘broker’’ in section 3(a)(4) of the SEA; 585 and section 3D(a)(1) of the SEA.586 Because a foreign SBS trading venue for which the Commission grants an exemptive order 578 See 15 U.S.C. 78c–4(a)(1) (stating that no person may operate a facility for the trading or processing of SBS, unless the facility is registered as an SBSEF or national securities exchange). 579 A ‘‘broker’’ is generally defined as a person engaged in the business of effecting transactions in securities for the account of others. See Section 3(a)(4) of the SEA, 15 U.S.C. 78c(a)(4). Section 15(a)(1) of the SEA, 15 U.S.C. 78o(a)(1), generally provides that it shall be unlawful for any broker to make use of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security unless such broker is registered in accordance with SEA section 15(b). See also infra section XI (discussing Rule 15a–12). 580 15 U.S.C. 78mm(a)(1). 581 17 CFR 240.0–12 (setting forth procedures for filing applications for orders for exemptive relief under section 36 of the SEA). 582 An application for an exemption under Rule 833(a) could be submitted by a foreign SBS trading venue itself or by another interested party. For example, a financial regulatory authority in a foreign jurisdiction could submit an application under Rule 833(a) on behalf of one or more SBS trading venues licensed and regulated in that jurisdiction. 583 15 U.S.C. 78c(a)(1). 584 15 U.S.C. 78c(a)(77). 585 15 U.S.C. 78c(a)(4). 586 15 U.S.C. 78c–4(a)(1) (stating that no person may operate a facility for the trading or processing of SBS, unless the facility is registered as an SBSEF or national securities exchange). PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 87217 under SEA section 36 and Rule 833(a) 587 would be exempt from these definitions and from section 3D(a)(1) of the SEA, the foreign SBS trading venue would not be required to register with the Commission as a national securities exchange, SBSEF, or broker, or to comply with other requirements applicable to such entities under the SEA or Commission rules thereunder.588 As with other exemptions issued pursuant to section 36, to issue a Rule 833(a) exemption, the Commission would be required to find that the exemption is necessary or appropriate in the public interest, and consistent with the protection of investors.589 As contemplated in section 36(a)(1), the Commission may issue a Rule 833(a) exemption with conditions. The Commission also proposed Rule 833(b), which would address requests for exemptive relief relating to the application of the trade execution requirement to transactions executed on a foreign SBS trading venue. Rule 833(b)(2) would provide that, in considering whether to issue a Rule 833(b) exemption, the Commission may consider: (i) the extent to which the SBS traded in the foreign jurisdiction covered by the request are subject to a trade execution requirement comparable to that in section 3C(h) of the SEA and the Commission’s rules thereunder; (ii) the extent to which trading venues in the foreign jurisdiction covered by the request are subject to regulation and supervision comparable to that under the SEA, including section 3D of the SEA, and the Commission’s rules thereunder; (iii) whether the foreign trading venue or venues where covered 587 For the remainder of this discussion, an exemption under SEA section 36 and Rule 833(a) will be referred to simply as a ‘‘Rule 833(a) exemption.’’ In addition, the Commission will use the term ‘‘trading venue covered by an exemption order under Rule 833’’ (or a similar formulation) rather than ‘‘exempt exchange,’’ ‘‘exempt SBSEF’’ or ‘‘exempt broker’’ because, pursuant to an exemption granted under Rule 833(a), the covered trading venue would no longer be an exchange, SBSEF, or broker (as defined by the SEA). 588 However, as discussed further below, the Rule 833(a) exemption is designed to address only activities related to providing a market place for SBS. An entity that engages in other SBS-related activity or any activity involving non-SBS securities would, with respect to such other SBS-related activity or any activity involving non-SBS securities, still be subject to any applicable requirements to register with the Commission as a national securities exchange, SBSEF, or broker, or to comply with other requirements applicable to such entities under the SEA or Commission rules thereunder. 589 See 15 U.S.C. 78mm(a)(1). Unlike the CFTC, which has exemptive authority under section 5h(g) of the CEA, the Commission would not be required to find that the foreign trading venue is subject to comparable, comprehensive supervision and regulation by a U.S. or foreign regulator. E:\FR\FM\15DER2.SGM 15DER2 87218 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 persons intend to trade SBS have received an exemptive order contemplated by Rule 833(a); and (iv) any other factor that the Commission believes is relevant for assessing whether the exemption is in the public interest and consistent with the protection of investors.590 As with other exemptions issued pursuant to section 36, to issue a Rule 833(b) exemption, the Commission would be required to find that the exemption is necessary or appropriate in the public interest, and consistent with the protection of investors. As contemplated by section 36(a)(1), the Commission may issue a Rule 833(b) exemption with conditions. One commenter expresses general support for the establishment of a rule granting exemptions for foreign trading venues and for cross-border trade execution exemptions, noting that ‘‘difficulties that can arise when the trade execution requirement applies in two separate jurisdictions’’ and that ‘‘it is important for market participants and trading venues to have regulatory certainty while maintaining flexibility in where transactions may be consummated.’’ 591 Another commenter believes the Commission’s proposed exemption rule should be made more robust to prevent evasion of the SBSEF registration and trade execution requirements. This commenter believes that Rule 833 does not provide meaningful standards for how the Commission will assess requests for such exemptions, which this commenter believes is insufficient, and provides the Commission with ‘‘unreasonably broad, nearly unlimited, discretion, in how it assess foreign swaps regulatory frameworks,’’ which this commenter believes may result in the Commission ‘‘facilitating evasion of Title VII.’’ 592 This commenter states that the Dodd-Frank Act ‘‘requires that the SEC must, at the very least . . . make an affirmative determination that such an application demonstrates that the exemption could not be used to evade those requirements[, which would] require the SEC [to] make a credible, comprehensive determination that the foreign regulatory requirements applicable to the applicant is actually written, applied and enforced, are the same as those that would otherwise apply to the applicant absent an exemption.’’ 593 One commenter argues that Rule 833(b)’s requirements are unnecessary if a foreign trading venue has received an exemption under Rule 833(a), given that the Commission would be required to find that the Rule 833(a) exemption is ‘‘necessary or appropriate in the public interest and consistent with the protection of investors,’’ which this commenter believes ‘‘should be sufficient for the purposes of trading SBS on foreign trading venues, even when the trade execution requirement applies.’’ 594 Thus, this commenter requests that the Commission ‘‘remove the 833(b) exemption and clarify that . . . if a foreign trading venue has been granted an 833(a) exemption . . ., a market participant should be permitted to trade SBS on that venue.’’ 595 Another commenter does not believe the exemptions in Rule 833 are sufficiently clear, and requests that the Commission consider setting forth charts or examples to better facilitate compliance.596 With respect to Rule 833(b) specifically, several comments appear to anticipate that, in order for a transaction on a foreign SBS trading venue to qualify for the trade execution exemption under Rule 833(b), the relevant foreign jurisdiction would have to require RFQ-to-3 or an order book for Required Transactions.597 One commenter states that ‘‘the CFTC, appropriately in our view, recognized that there are multiple ways that a regulator can ensure appropriate pretrade transparency and competition, such that restricting execution methods to [central limit order books] and RFQto-3 systems are not the only ways to achieve these objectives. Failing to recognize this fact in the course of making comparability determinations would incorrectly turn the statutory comparability standard into a test for identical rules.’’ 598 Two commenters state that it would be difficult for many foreign SBS trading venues to demonstrate comparability if RFQ-to-3 and an order book were required, with one stating that ‘‘[f]ew jurisdictions require RFQ to 3, and some do not 593 Id. 590 For a more detailed discussion of the items in Rule 833(b)(2) that the Commission may consider, see Proposing Release, supra note 1, 87 FR at 28925–26. 591 Bloomberg Letter, supra note 18, at 18. However, as discussed below in this section VII.B, this commenter criticizes various aspects of Rule 833. 592 Better Markets Letter, supra note 18, at 16. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 594 Bloomberg Letter, supra note 18, at 7. 595 Id. 596 See SIFMA AMG Letter, supra note 18, at 11– 12. 597 See Bloomberg Letter, supra note 18, at 6; Tradeweb Letter, supra note 18, at 5–6; ISDA– SIFMA Letter, supra note 18, at 14. See also ICE Letter, supra note 18, at 4. 598 Tradeweb Letter, supra note 18, at 6. PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 require SBS to be traded on an organized trading venue.’’ 599 Two commenters oppose requiring an exemption under Rule 833 to depend upon a ‘‘rule-by-rule’’ comparison or analysis. One commenter states that this would be ‘‘unduly burdensome and at odds with the overall goal of achieving comparable outcomes.’’ 600 The other commenter requests that the Commission adopt ‘‘a more flexible approach to the recognition of foreign trading venues—one that relies on holistic outcomes and governing principles, rather than a rule-by-rule analysis.’’ 601 Several commenters believe that Rule 833, as they understand it, would result in various negative consequences. One commenter states that covered persons would not be able to fulfill the trade execution requirement and that, as a result, market participants would then be forced to trade on a limited subset of venues, disrupting liquidity and requiring them to expend time and resources in onboarding to a compliant trading venue.602 Another commenter warns that ‘‘the limited liquidity in the SBS market is not going to withstand significant disruptions, increased costs, and market fragmentation, thus making it more likely for market participants to exit the SBS markets entirely.’’ 603 This commenter believes that the Commission’s approach ‘‘will force market participants to trade SBS within the jurisdictional borders of the United States, restricting access to global liquidity and thus further diminishing already thin SBS markets,’’ rather than ‘‘the decision where to trade the most standardized and liquid swaps [being] dictated by the available liquidity and 599 Bloomberg Letter, supra note 18, at 6. See also ICE Letter, supra note 18, at 4 (stating that ‘‘EU and UK based multilateral trading facilities are not required under their home country regulation to ensure that a request-for-quote be sent to three different recipients or offer a central-limit-orderbook’’ and thus the proposed criteria cannot be satisfied from the outset); Bloomberg Letter, supra note 18, at 19 (stating that ‘‘at least three Bloomberg-affiliated [foreign venues] would seek an exemption’’ but may be ‘‘effectively barred at the door by the Proposal’s requirement that securitybased swaps are subject to a trade execution requirement in the foreign jurisdiction that is comparable to that in 15 U.S.C. 78c–3(h) and the Commission’s rules thereunder’’); ISDA–SIFMA Letter, supra note 18, at 14 (stating that hardly any (if any at all) foreign trading venues would be able to enjoy an Exempt SBSEF status and that, as far as the commenter is aware, none of the CFTC recognized multilateral trading facilities or organized trading facilities are required to offer a central limit order books on their platforms). 600 Bloomberg Letter, supra note 18, at 7. 601 ISDA–SIFMA Letter, supra note 18, at 15. 602 See Bloomberg Letter, supra note 18, at 6–7. See also Tradeweb Letter, supra note 18, at 6. 603 ISDA–SIFMA Letter, supra note 18, at 15. See also Tradeweb Letter, supra note 18, at 6. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations prices in global markets.’’ 604 Similarly, another commenter contrasts the approach taken under Rule 833 with the approach the CFTC has taken to exempt certain foreign SEFs from SEF registration, and states that Rule 833 would prevent covered persons from trading SBS on such exempt SEFs and would impair their ability to manage risk effectively.605 If covered persons are no longer able to trade SBS on these venues, this commenter states, they also ‘‘may not find it feasible to trade other instruments, such as swaps and foreign corporate debt, due to the bifurcation of liquidity that will result.’’ 606 This commenter states that the ability to combine trading interest in related products on the same trading platform is critical to the effective transfer of risk within the financial system, and preventing ‘‘this single pool of liquidity jeopardizes that risk transfer and impairs price formation and ultimately increases systemic risk.’’ 607 These commenters argue that the Commission should instead align with the CFTC’s approach to exemptions, which does not require exempt foreign SEFs to have order books or to satisfy the RFQ-to-3 requirement, stating that the CFTC’s ‘‘flexible, outcomes-based approach serves market participants well.’’ 608 One commenter argues for the Commission to avoid the ‘‘unintended economic disadvantage if other global market participants avoid trading with the managers’ non-US fund clients solely to avoid being subject to the Commission’s SBSEF requirements’’ and the significant costs and burdens that would arise if the two regulatory approaches produce different outcomes for swaps and SBS.609 These commenters state that the CFTC has ‘‘already granted exemptions to a number of foreign trading venues across jurisdictions in Europe and Asia,’’ 610 with one commenter stating that the ‘‘CFTC process, while imperfect, provides a more streamlined and workable approach for the Commission.’’ 611 These commenters argue that the Commission should ‘‘ensure that its proposed approach to granting exemption will produce outcomes 604 ISDA–SIFMA ddrumheller on DSK120RN23PROD with RULES2 605 See Letter, supra note 18, at 14. ICE Letter, supra note 18, at 4. 606 Id. 607 Id. at 4–5. 608 Bloomberg Letter, supra note 18, at 7. See also ISDA–SIFMA Letter, supra note 18, at 14–15; Tradeweb Letter, supra note 18, at 6. 609 ICI Letter, supra note 18, at 14. 610 Bloomberg Letter, supra note 18, at 7. See also ICE Letter, supra note 18, at 4. See also ISDA– SIFMA Letter, supra note 18, at 14. 611 Bloomberg Letter, supra note 18, at 7. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 similar to those of the CFTC’’ so as to ‘‘further harmonize with the CFTC’s SEF framework, and promote consistency and simplicity. . . .’’ 612 Several of these commenters recommend that the Commission grant automatic exemptions for trading venues that are currently exempt under the CFTC’s rules.613 Some commenters stated that this approach would be consistent with the Commission’s general approach of harmonizing closely with the CFTC’s SEF rules where appropriate and also stated that, as there are no distinctions outside of the United States between the regulation of swaps and the regulation of SBS, SBS are currently traded on foreign venues that have been recognized by the CFTC.614 Three commenters requested that the Commission recognize such exemptions (i.e., CFTC-exempt SEFs as ‘‘exempt’’ SBSEFs) at the adoption of Regulation SE.615 And one of these three commenters also requests that, in the alternative, and ‘‘in order to avoid duplicative or conflicting regulation . . . the Commission grant an exemption from the trade execution requirement if the SBS transaction at issue is subject to mandatory trading in another jurisdiction.’’ 616 The Commission has considered the comments received for Rule 833 and is adopting the rule as proposed. As the Commission stated in the Proposing Release,617 Rule 833(a) is designed to address only activities relating to providing a market place for SBS and would not extend to trading in any other type of security or to other activities with respect to SBS.618 A foreign SBS trading venue covered by an exemptive order under Rule 833(a) might offer trading in other types of securities; however, the exemptive order would permit covered persons to trade only SBS on that trading venue without causing the trading venue to have to 612 ICI Letter, supra note 18, at 14. See also Bloomberg Letter, supra note 18, at 7, 18; ISDA– SIFMA Letter, supra note 18, at 14–15; Tradeweb Letter, supra note 18, at 6. 613 See Bloomberg Letter, supra note 18, at 7, 18; ISDA–SIFMA Letter, supra note 18, at 14–15; Tradeweb Letter, supra note 18, at 6. 614 See Bloomberg Letter, supra note 18, at 18–19; ISDA–SIFMA Letter, supra note 18, at 14–15. 615 See ICE Letter, supra note 18, at 5; ISDA– SIFMA Letter, supra note 18, at 15; Tradeweb Letter, supra note 18, at 6. 616 ISDA–SIFMA Letter, supra note 18, at 15. 617 See Proposing Release, supra note 1, 87 FR at 28924. 618 For example, although a foreign trading venue covered by a Rule 833(a) exemption would be exempt from the definition of ‘‘broker,’’ that exemption would extend only to the operation of a market place for SBS and would not permit the foreign trading venue to otherwise act as a securities broker using U.S. jurisdictional means. PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 87219 register with the Commission as a national securities exchange, SBSEF, or broker. The exemptive order would not address any registration obligations that might arise from any other SBS-related activity or any activity involving nonSBS securities by the foreign trading venue.619 The bulk of the comments received opposing Rule 833 appear to emanate from commenters’ interpretation—and misunderstanding—of what would be required in order to receive a Rule 833(b) exemption. The Commission proposed Rule 833(b) to address requests for exemptive relief relating to the application of the trade execution requirement under section 3C(h) of the SEA to transactions executed on a foreign SBS trading venue. Pursuant to section 3C(h) of the SEA, an SBS that is subject to the trade execution requirement must be executed on an exchange, on an SBSEF registered under section 3D of the SEA, or on an SBSEF that is exempt from registration under section 3D(e) of the SEA.620 As a result, a covered person (as defined in Rule 832) would not be permitted to execute an SBS that is subject to the trade execution requirement on a foreign SBS trading venue unless that venue has registered with the Commission as a national securities exchange or an SBSEF, or has received an exemption under section 3D(e) of the SEA. Several commenters interpret the rule and the Commission’s discussion of the rule in the Proposing Release to mean that a foreign SBS trading venue must have RFQ-to-3 and an order book for Required Transactions in order for transactions on that venue to qualify for a Rule 833(b) exemption.621 These commenters, however, are incorrect in this understanding of the requirements for a Rule 833(b) exemption. First, Rule 833(b)(2) does not contain a list of items that ‘‘are required,’’ but rather lists items that the Commission ‘‘may consider’’ when it receives a 619 The Commission also emphasizes that a Rule 833(a) exemption would not have any impact on section 6(l) of the SEA, 15 U.S.C. 78f(l), which makes it unlawful for any person to effect a transaction in an SBS with or for a person that is not an ECP, unless such transaction is effected on a national securities exchange registered pursuant to section 6(b) of the SEA. Because a foreign SBS trading venue covered by a Rule 833(a) exemption would not be registered as a national securities exchange, the foreign SBS trading venue would not be permitted to effect SBS transactions with or for a covered person that is not an ECP. 620 Section 3D(e) of the SEA gives the Commission authority to exempt an SBSEF from registration if it is subject to comparable, comprehensive supervision and regulation by the CFTC. See 15 U.S.C. 78c–4(e). 621 See supra notes 597–599 and accompanying text. E:\FR\FM\15DER2.SGM 15DER2 87220 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations request for a Rule 833(b) exemption.622 And second, Rule 833(b)(2)(i) states, in relevant part, that the Commission may consider ‘‘the extent to which the security-based swaps traded in the foreign jurisdiction covered by the request are subject to a trade execution requirement comparable to that in section 3C(h) of the Act . . . and the Commission’s rules thereunder.’’ (Emphasis added.) In the Proposing Release, the Commission described this requirement by stating that ‘‘a trade execution requirement in a foreign jurisdiction would not be comparable to the trade execution requirement under the SEA if the foreign jurisdiction’s rules did not require SBS products subject to that requirement to be executed through means comparable to Required Transactions as described in Rule 815 (e.g., if the foreign jurisdiction allowed the use of single-dealer platforms to discharge any mandatory trading execution requirement in that jurisdiction).’’ 623 That is, the Commission’s proposed rule would not require foreign SBS trading venues to have RFQ-to-3 and an order book in order for the Commission to consider their SBS executions for an exemption under Rule 833(b). While, as commenters correctly state, for Required Transactions, Rule 815 requires SBS transactions to be executed through a limit order book or an RFQto-3 system,624 neither the text of Rule 833(b) nor the Commission’s description of Rule 833(b) states that a limit order book or an RFQ-to-3 system is required to receive a Rule 833(b) exemption.625 The phrase ‘‘comparable to’’ does not carry the same meaning as phrases such as ‘‘identical to’’ or ‘‘substantially similar to,’’ and the Commission uses this phrase with respect to Rule 833(b) exemptions because SBS transactions would not be disqualified from receiving a Rule 833(b) exemption simply because they were not executed through a limit order book or an RFQto-3 system. Rather, the Commission agrees with commenters that there may be foreign SBS trading venues—many of which have already received exemptive relief from the CFTC for swaps trading 626—that may be appropriate 622 Rule 833(b)(2). Release, supra note 1, 87 FR at 28925 (emphasis added). 624 See supra section V.E (discussing methods of execution and Rule 815). 625 In the Proposing Release, the Commission stated its preliminary belief that ‘‘the use of singledealer platforms to discharge any mandatory trading execution requirement’’ would not meet the proposed rule’s requirements. See Proposing Release, supra note 1, 87 FR at 28925. 626 See www.cftc.gov/International/ ForeignMarketsandProducts/ExemptSEFs (listing ddrumheller on DSK120RN23PROD with RULES2 623 Proposing VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 candidates for exemptive relief, that are subject to what may be considered robust regulatory regimes for SBS trading. With respect to such foreign SBS trading venues, the Commission encourages market participants to submit a request for exemptive relief under Rule 833(b) if they seek to be exempt from the Commission’s trade execution requirement for their SBS transactions.627 Certain commenters also object that, in their understanding, a Rule 833(b) exemption request would require a ‘‘rule-by-rule’’ comparison or analysis,628 which one commenter characterized as unduly burdensome.629 In addition to Rule 833(b)(2)(i) discussed above, another relevant factor (among others) that the Commission may consider is whether the trading venues in the foreign jurisdiction are subject to regulation and supervision comparable to that under the SEA, including section 3D of the SEA and the Commission’s rules thereunder, which the Commission described in the Proposing Release to include being subject to rules designed to foster foreign swap trading facilities that the CFTC has exempted from its SEF registration requirements, including certain such facilities in the European Union, Japan, and Singapore). Market practices continued in this regard without change after the United Kingdom (‘‘UK’’) withdrew from the European Union, based upon a CFTC staff no-action letter addressing certain UK swap trading facilities. See CFTC Letter No. 22–16 (Dec. 1, 2022), available at https://www.cftc.gov/csl/22-16/download. 627 Several commenters describe the negative consequences that would occur because, they believe, the Commission’s Rule 833(b) exemption would require foreign jurisdictions to require RFQto-3 and order book methods of execution, which these commenters believe forecloses many foreign trading venues from obtaining exemptive relief from the Commission for their SBS trading even though they have received similar exemptions from their CFTC. See supra notes 602–611 and accompanying text. Similarly, one commenter requests that, in the alternative, the Commission grant an exemption from the trade execution requirement if the SBS transaction at issue is subject to mandatory trading in another jurisdiction. See supra note 616 and accompanying text. As the Commission has explained, Rule 833(b) exemptions are not limited to those jurisdictions that require RFQ-to-3 and order books, but rather Rule 833(b)(2)(i) states that the Commission may consider the extent to which SBS transactions are subject to a trade execution requirement comparable to such methods of execution. Accordingly, SEFs would not be foreclosed from obtaining exemptive relief from the Commission for their SBS trading. For this reason, the Commission also does not agree with the commenter’s suggested alternative to grant an exemption from the trade execution requirement if the SBS transaction at issue is subject to mandatory trading in another jurisdiction, because exemptive relief under 833(b) may be applied for in such instances, which would give the Commission the opportunity to appropriately consider the applicable facts and circumstances. 628 See supra notes 600–601 and accompanying text. 629 See supra note 600 and accompanying text. PO 00000 Frm 00066 Fmt 4701 Sfmt 4700 comparable levels of pre- and post-trade transparency, access, and liquidity.630 An 833(b) exemptive request generally should include an analysis that could assist the Commission’s determination as to whether the regulation and supervision of a foreign SBS trading venue in an applicable foreign jurisdiction is subject to regulation and supervision comparable to that under the SEA. Given the central roles the jurisdiction’s applicable laws, rules and regulations, as well as a foreign SBS trading venue’s own rules, play in such a determination, an exemptive request generally should include an analysis of these requirements. A precise form of any such analysis—whether it is done as a ‘‘rule-by-rule’’ comparison or through some other methodology (e.g., in a more holistic manner)—is not specified by Rule 833(b), would be at the discretion of the entity submitting the exemptive request, and should be provided in order to help the Commission and its staff understand what requirements apply to the foreign SBS trading venue. With respect to the comments that the Commission should automatically provide exemptions for foreign trading venues that have received a parallel exemption from the CFTC for their SEF trading,631 and that the Commission should do so contemporaneously with adopting Regulation SE,632 while doing so would promote consistency, simplicity, and harmonization with the CFTC’s SEF rules, such a blanket exemption would not afford the Commission the opportunity to appropriately consider the relevant facts and circumstances in support of a finding that an exemption is necessary or appropriate in the public interest and consistent with the protection of investors. However, persons interested in submitting a request for exemptive relief should be mindful of the implementation period that will take place before Regulation SE’s requirements take effect, as described in more detail below.633 With respect to the comment that the provisions of Rule 833 are not robust enough,634 the Commission disagrees. Importantly, in order to issue any exemption under Rule 833, the Commission would be required to find that the exemption is necessary or 630 See Proposed Rule 833(b)(2)(ii) and Proposing Release, supra note 1, 87 FR at 28925. 631 See supra notes 612–615 and accompanying text. 632 See supra note 615 and accompanying text. See also supra note 626. 633 See infra section VIII. See also infra note 787 and accompanying text. 634 See supra note 593 and accompanying text. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations appropriate in the public interest and consistent with the protection of investors, and the Commission may issue the exemptive relief with conditions. A blanket grant of exemptive relief would be inconsistent with carefully considering whether a specific exemptive request meets the applicable standard and might lead to a greater percentage of SBS transactions being executed beyond the scope of any U.S. regulatory oversight. Finally, the Commission disagrees with the commenter that suggested that Rule 833(b)’s requirements are unnecessary if a foreign trading venue has received an exemption under Rule 833(a).635 The two exemptions under Rule 833 provide exemptive relief from different requirements of the SEA and are also directed at different entities. Specifically, a Rule 833(a) exemption provides exemptive relief to a foreign trading venue that, absent the exemption, could be required to register with the Commission as an exchange, SBSEF, and/or broker if it traded SBS (regardless of whether such SBS are subject to the trade execution requirement). On the other hand, Rule 833(b)’s exemption provides exemptive relief to the counterparties of an SBS transaction with respect to the trading execution requirement in section 3C(h) of the SEA.636 Accordingly, for the reasons discussed above, the Commission is adopting Rule 833 as proposed. VIII. Rule 834—Implementation of Section 765 of the Dodd-Frank Act and Governance of SBSEFs and SBS Exchanges ddrumheller on DSK120RN23PROD with RULES2 Section 765(a) of the Dodd-Frank Act 637 provides in relevant part that, to mitigate conflicts of interest, the Commission ‘‘shall adopt rules which may include numerical limits on the control of, or the voting rights with respect to’’ any clearing agency that clears SBS, or on the control of any SBSEF or SBS exchange by certain bank holding companies, certain nonbank financial companies, an affiliate of such a bank holding company or nonbank financial company, an SBS dealer, major SBS participant, or person associated with an SBS dealer or major SBS 635 See supra note 595 and accompanying text. respect to the commenter that requested additional clarity with respect to Rule 833, see supra note 596 and accompanying text, the Commission’s discussion of the exemptions, including the standard of ‘‘comparable to’’ and the type of analysis that should be presented, should provide market participants with more clarity on how a person could seek exemptive relief. 637 15 U.S.C. 8343. 636 With VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 participant.638 Section 765(b) states that the purpose of the statutory provision is ‘‘to improve the governance of, or to mitigate systemic risk, promote competition, or mitigate conflicts of interest in connection with’’ an SBS dealer or major SBS participant’s conduct of business with, a clearing agency, SBSEF, or SBS exchange and in which such SBS dealer or major SBS participant ‘‘has a material debt or equity investment.’’ Finally, section 765(c) provides in relevant part that, in adopting rules pursuant to section 765, the Commission shall consider any conflicts of interest arising from the amount of equity owned by a single investor, the ability to vote, cause the vote of, or withhold votes entitled to be cast on any matters by the holders of the ownership interest. In 2010, the Commission proposed Regulation MC to implement section 765.639 In view of the significant amount of time that had elapsed and the significant evolution in the swap and SBS markets since the proposal of Regulation MC, the Commission withdrew that proposal,640 and proposed Rule 834 to implement section 765 of the Dodd-Frank Act with respect to SBSEFs and SBS exchanges.641 A. Rule 834(a) Paragraph (a) of Proposed Rule 834 would define terms used in Rule 834. The Commission received no comments on of Proposed Rule 834(a) and is adopting Rule 834(a) as proposed for the reasons stated in the Proposing Release. B. Rule 834(b) Paragraph (b) of Proposed Rule 834 would impose a cap on the size of the voting rights that an individual member of an SBSEF or SBS exchange may own 638 The Commission recognizes that promulgating rules under section 765 alone will not result in a highly competitive market for SBS. There could be other ways for anticompetitive forces to impede the growth of SBS trading on transparent, regulated platforms other than by misuse of a large voting interest in the trading venue. For example, a large SBS dealer or coalition of SBS dealers, even absent any voting interest in any SBSEF or SBS exchange, could threaten to move their business elsewhere unless given an unfair advantage by the trading venue. A large SBS dealer or coalition of SBS dealers also could conspire to shut out end users who sought to trade more actively on these transparent, regulated venues rather than continuing to trade in the bilateral OTC markets. The Commission will be alert to any such anticompetitive practices and consider appropriate prophylactic measures. At present, adopting rules under section 765 is a necessary and appropriate first step to guard against conflicts of interest arising on SBSEFs and SBS exchanges. See Proposing Release, supra note 1, 87 FR at 28930. 639 See Regulation MC Proposal, supra note 21. 640 See Proposing Release, supra note 1, 87 FR at 28874. 641 See id. at 29001–03. PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 87221 or direct, barring an SBSEF or SBS exchange from permitting any of its members, either alone or together with any officer, principal, or employee of the member, to: (1) Own, directly or indirectly, 20% or more of any class of voting securities or of other voting interest in the SBSEF or SBS exchange; or (2) Directly or indirectly vote, cause the voting of, or give any consent or proxy with respect to the voting of, any interest that exceeds 20% of the voting power of any class of securities or of other ownership interest in the SBSEF or SBS exchange. One commenter supports the Commission’s goal to adopt rules that aim to achieve better governance and mitigation of conflicts of interest that arise out of the operation of SBSEFs, but the commenter opposes Rule 834 because it believes that the rule would disrupt the closely harmonized rules with the CFTC, as the CFTC has not adopted corresponding provisions for its SEF registrants. This commenter recommends that the Commission, like the CFTC, should focus on board governance, conflicts of interest, and antitrust considerations rather than proscriptive, bright line rules. The commenter states that the Commission’s concerns regarding conflicts of interest ‘‘can best be addressed by ensuring compliance with the SBSEF Core Principles rather than an additional regulation,’’ 642 and specifically that the proposed 20 percent limitation on the voting interest that may be held by members of any SBSEF or SBS exchange ‘‘goes beyond what is necessary to effectively mitigate conflicts of interest.’’ 643 Rather, this commenter states, the ownership limit would limit access to necessary capital and act as barriers to entry for SBSEFs and SBS exchanges. The commenter also states that section 765 of Dodd-Frank does not require the Commission to restrict the ability to hold significant ownership interests in SBSEFs and that the statutory language instead provides that the Commission is authorized to adopt rules upon determining, after review, that such restrictions are necessary or appropriate to improve the governance of SBSEFs or to mitigate systemic risk, to promote competition, or mitigate conflicts of interest.644 Another commenter states that that the proposed 20% voting cap requirement could potentially thwart the Commission’s objective to ensure that only incremental changes would be 642 SIFMA AMG Letter, supra note 18, at 12. 643 Id. 644 See E:\FR\FM\15DER2.SGM id. 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87222 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations necessary to adopt the SBSEF framework. The proposed cap, this commenter states, may require SEFs to set up an entirely new legal entity with a different governance structure, making it more challenging to obtain dual registration. The commenter also states that the conflicts of interest rules implemented by the CFTC, which do not include a 20% voting cap, sufficiently address any conflicts of interest concerns, as SEFs have operated under those rules for almost 10 years, and there have been no observable issues that would warrant such a regulatory shift.645 One commenter states that it strongly opposes Rule 834 and that, as written, Rule 834 would have the effect of prohibiting certain SBSEF participants from having common ownership and control as the SBSEF. An SBSEF, the commenter states, would likely not be able to onboard an affiliated introducing broker, even if the introducing broker would be subject to the same rules and practices as an unaffiliated participant. The commenter states that some CFTCregistered SEFs, including the commenter’s member firms, have affiliated introducing-broker participants that execute their respective swaps business on their affiliated SEFs, and the affiliated transactions make up a majority of the SEF’s business. The commenter states that these firms may choose not to register as an SBSEF and take on the costs and burdens of being an SBSEF if they cannot accommodate their affiliate’s trade execution needs, which would thwart the goal of developing a competitive landscape of regulated SBS market places.646 This commenter further states that it and many others previously opposed these hard caps when they were proposed in 2010, and that—with a decade of experience operating SEFs and venues for other financial products, including Commission regulated alternative trading systems—the commenter still believes the rule’s approach is ‘‘too heavy-handed’’ a way to solve a problem that has been more than adequately addressed through less burdensome measures.647 The commenter states that the CFTC never adopted its proposed ownership/ governance prohibition for SEFs, that the CFTC’s existing conflicts of interest rules have proven satisfactory, and that, rather than mandating ownership limits, the Commission should instead permit SBSEFs to exercise reasonable 645 See 646 See ISDA–SIFMA Letter, supra note 18, at 16. WMBAA Letter, supra note 18, at 2. 647 Id. VerDate Sep<11>2014 discretion as to its mechanisms for mitigating conflicts of interest and should rely instead on the conflict of interest and antitrust provisions already embedded in the SBSEF regulatory regime.648 The Commission has considered the comments and, as discussed below, is modifying Proposed Rule 834 to provide an exemption from the ownership and voting caps for an SBSEF that has mitigated the potential conflict of interest with respect to compliance with the rules of the SBSEF by entering into an agreement with a registered futures association or a national securities association for the provision of regulatory services that encompass, at a minimum, real-time market monitoring, investigations, and investigation reports. The 20% cap in Proposed Rule 834(b) is designed to balance competing policy interests. On one hand, execution venues need capital, expertise, and liquidity to establish and grow. Historically, market participants who become members of an execution venue are a source of all three components, and any person contributing capital to a new venture might reasonably expect to have a voting interest commensurate with the amount of capital contributed. Too low a cap, even if imposed in the name of eliminating conflicts of interest, could have the unintended effect of impeding the development of execution venues for SBS altogether, if market participants who become members have no (or substantially limited) ability to vote their equity interest. On the other hand, allowing a member of an SBSEF or SBS exchange too large a voting interest could undermine the public policy benefits of having transparent, fair, and regulated markets for the trading of SBS. A member of an SBSEF or SBS exchange with a sufficiently large voting interest could exercise undue influence over the rules and policies applicable to members, the venue’s access criteria, decisions regarding access, and disciplinary matters, among other things. In particular, members who are SBS dealers and conduct a significant amount of business in the bilateral OTC market have incentives to restrict the scope of SBS that an SBSEF or SBS exchange makes eligible for trading. Trading in a market with robust order competition and pre-trade transparency reduces search costs for end users and liquidity seekers and reduces the information and bargaining asymmetry of end users and liquidity seekers relative to SBS dealers. An SBS dealer with a large voting interest in an SBSEF 648 See 19:22 Dec 14, 2023 Jkt 262001 PO 00000 id. at 2–3. Frm 00068 Fmt 4701 Sfmt 4700 or SBS exchange, if it perceived that trading on the regulated venue was diminishing the rents obtained from its bilateral OTC business, might seek to utilize its voting influence in a number of ways to degrade the capability of the regulated venue, thus making the OTC market by comparison a more attractive option. Capping a member’s voting interest at 20% strikes a reasonable balance between these competing interests, absent additional measures to ensure that a member or members with large voting power could tilt the playing field in their favor. And the Commission does not agree with the comment that a more general focus on board governance, conflicts of interest, and antitrust considerations, or on simply ensuring compliance with the SBSEF Core Principles,649 is sufficient to address this concern because, based on its long experience in regulating the markets on which the instruments underlying SBS trade, the ownership and voting structure of a regulated entity can give rise to conflicts of interest between the organization’s business interests and its regulatory obligations. Further, even if the CFTC has not to date adopted its own ownership and governance prohibitions for SEFs, the appropriate comparison with respect to ownership and governance for SBSEFs is national securities exchanges, because both types of entities operate markets to which fair or impartial access requirements comprehensively apply.650 Therefore, SBSEFs should be subject to ownership restrictions that are similar to those in the rules of national securities exchanges, as approved by the Commission, which limit ownership by any one member and do not permit an exchange to merely ‘‘exercise reasonable discretion’’ with respect to its mechanisms for mitigating conflicts of interest. The Commission, however, appreciates the concerns expressed by commenters that a cap of 20% on voting interest in all cases could prevent would-be SBSEFs from onboarding their affiliated introducing brokers, and that the burdens imposed in setting up an SBSEF that is legally remote from affiliated introducing brokers may dissuade current SEFs from registering as SBSEFs, which would lead to their ceasing to offer SBS trading on their 649 See supra note 642. SEA sections 6(b)(2) and 6(c), 15 U.S.C. 78f(b)(2) and 78f(c). Alternative Trading Systems, by contrast, are subject to ‘‘fair access’’ requirements only if they meet certain volume trading thresholds. See Rule 301(b)(5)(i), 17 CFR 242.301(b)(5)(i). 650 See E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations platforms.651 Therefore, the Commission is modifying Rule 834 as proposed to add new paragraph (b)(3) to provide an exemption from the 20% cap for an SBSEF that has entered into an agreement with a registered futures association or a national securities association for the provision of regulatory services that encompass, at a minimum, real-time market monitoring and investigations and investigation reports. This exemption, which is conditioned upon an SBSEF conducting its market monitoring and investigative activities through a self-regulatory body that has broader membership than an individual SBSEF and that does not operate its own SBSEF, would mitigate concerns that members with large ownership shares might be given preferential treatment with respect to their compliance with the SBSEF’s rules. And the exemption should also, by permitting SBSEFs to exceed the 20% ownership and voting cap, serve to facilitate the formation and registration of SBSEFs, thereby also facilitating the movement of SBS trading to venues that are more transparent and that have affirmative regulatory obligations. The Commission acknowledges that this exemption, because it focuses on surveillance and compliance functions, does not directly address concerns about an SBSEF adopting rules that hamper impartial access to an SBSEF, restrict the scope of SBS that might trade on a given SBSEF, or degrade the capability of a given SBSEF in ways that would favor a member’s OTC SBS business. These concerns, however, can be addressed in other ways. With respect to impartial access, the requirements of Proposed Rule 819(c), together with the guidance the Commission has provided regarding the application of that rule,652 set clear limits on the ability of an SBSEF to favor the interest of any members, including its large members, by unfairly excluding other market participants. And competition among SBSEFs will discourage any individual SBSEF from declining to list particular SBS or from degrading the capability of the SBSEF to favor a member, as trading in the affected SBS may migrate not to the OTC market, but to a direct competitor. Because the Commission has modified Proposed Rule 834 to provide for an exemption from the 20% ownership and voting cap, it is not the case that, as one commenter states, existing SEFs would necessarily be required to set up a new legal entity to 651 See 652 See supra notes 645–648. infra section VI.B.3. VerDate Sep<11>2014 19:22 Dec 14, 2023 operate an SBSEF, making it more challenging to obtain dual registration and potentially thwarting the Commission’s objective to ensure that only incremental changes would be necessary to adopt the SBSEF framework. And although the Commission’s proposed ownership rule departs from the CFTC’s rules for SEFs, which do not include caps on ownership or voting, the Commission is also mindful of the trading relationship between SBS and their underlying securities—which trade on exchanges that have a similar 20% ownership and voting cap as a result of their Commission-approved rules—and the Commission wishes to avoid creating a regulatory incentive for activity to migrate from trading securities on national securities exchanges to trading SBS on SBSEF. For similar reasons, it would not be appropriate to extend the exemption in new paragraph (b)(3) of Proposed Rule 834 to SBS exchanges. Providing an exemption from the 20% ownership and voting cap requirements for SBS exchanges in Proposed Rule 834(b)(1) would result in different treatment from other national securities exchanges simply because one set of exchanges trades SBS, and this is not a sufficient reason to permit different ownership structures only for those exchanges, as this could lead to regulatory arbitrage by creating incentives for new exchanges to register first as SBS exchanges, without the ownership and voting caps, and then seek to amend their rulebooks to commence trading in cash equities. As it stated in the Proposing Release, the Commission proposed to apply the 20% ownership and voting on SBS exchanges based on its ‘‘long experience with handling questions of member influence over national securities exchanges raised in applications to register with the Commission on Form 1 and in governance rule filings made on SEA Form 19b–4,’’ 653 and SBSEF rules seeking to manage conflicts of interest would not by themselves be sufficient to mitigate conflict-of-interest concerns when those concerns arise from one or a few SBS dealers or a major SBS participants having majority voting rights in an SBSEF or SBS exchange in which they are a member. Finally, the Commission reiterates that Proposed Rule 834(b) would cover both direct and indirect voting interests. The purpose of including indirect voting interest is to prevent potential circumvention of the 20% cap if, for example, a member placed its voting 653 See Proposing Release, supra note 1, 87 FR at 28927 and n.257. Jkt 262001 PO 00000 Frm 00069 Fmt 4701 Sfmt 4700 87223 interest in an SBSEF or SBS exchange of 20% or more in a shell company or other affiliate and directed how the shell company or affiliate casts those votes. Accordingly, Proposed Rule 834(b) would look through the nonmember entities holding interests in SBSEFs and SBS exchanges to consider whether any member could indirectly control 20% or more of the voting interest through the non-member entity having the direct interest. Furthermore, Proposed Rule 834(b) would look through the corporate structure of the SBSEF or SBS exchange to consider whether any member could indirectly have 20% or more of the voting interest in the underlying trading venue. For example, an SBSEF or SBS exchange could be wholly owned by a holding company. In such a case, the voting restriction in Proposed Rule 834(b) would apply to the voting interest in the parent holding company held by a member of the child SBSEF or SBS exchange, since a direct voting interest of 20% or more in the parent would equate to an indirect voting interest of 20% or more in the child trading venue. And, similar to its approach to indirect voting interest, Proposed Rule 834(b) would aggregate the voting interest of the member itself with the voting interest held by any officer, principal, or employee of the member for purposes of determining compliance with the 20% cap. Without this provision, the member—or an officer, principal, or employee of the member— could split the voting interest held in the SBSEF or SBS exchange across multiple persons who would likely be voting that interest in concert, thereby potentially acting as a conflict of interest. The Commission did not receive comments on the aggregation-ofinterest aspect of Proposed Rule 834(b). For these reasons, the Commission is adopting Rule 834(b) with the modifications discussed above. C. Rule 834(c) Paragraph (c) of Proposed Rule 834 would include requirements designed to reinforce the 20% cap in paragraph (b). Paragraph (c) would require the rules of each SBSEF and SBS exchange to be reasonably designed, and have an effective mechanism, to: (1) Deny effect to the portion of any voting interest held by a member in excess of the 20% limitation; (2) Compel a member who possesses a voting interest in excess of the 20% limitation to divest enough of that voting interest to come within that limit; and (3) Obtain information relating to its ownership and voting interests owned E:\FR\FM\15DER2.SGM 15DER2 87224 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations or controlled, directly or indirectly, by its members. The Commission received no comments on Proposed Rule 834(c) and is adopting Rule 834(c) as proposed, with minor technical modifications,654 for the reasons stated in the Proposing Release. D. Rule 834(d) ddrumheller on DSK120RN23PROD with RULES2 Paragraph (d) of Proposed Rule 834 is designed to mitigate conflicts of interest in the disciplinary process of an SBSEF or SBS exchange and would provide as follows: ‘‘Each security-based swap execution facility and SBS exchange shall ensure that its disciplinary processes preclude any member, or group or class of its members, from dominating or exercising disproportionate influence on the disciplinary process. Each major disciplinary committee or hearing panel thereof shall include sufficient different groups or classes of its members so as to ensure fairness and to prevent special treatment or preference for any person or member in the conduct of the responsibilities of the committee or panel.’’ Paragraph (d) of Proposed Rule 834 would recognize that one way that a conflict of interest could manifest itself is in the disciplinary process. Therefore, the Commission proposed, as the first sentence of Proposed Rule 834(d), that each SBSEF and SBS exchange should ‘‘preclude any member, or group or class of its members, from dominating or exercising disproportionate influence on the disciplinary process.’’ The second sentence of Proposed Rule 834(d) is adapted from § 1.64 of the CFTC’s rules, which addresses the composition of various SRO governing boards and major disciplinary committees.655 Proposed Rule 834(d) would reflect the Commission’s belief that an SBSEF or SBS exchange should be mindful of its different membership interests, and how they are represented on disciplinary committees and hearing panels in particular matters, to avoid potential conflicts of interest. The Commission received no comments on Proposed Rule 834(d) and is adopting Rule 834(d) as proposed for 654 The Commission has corrected an internal cross-reference within Proposed Rule 834. 655 Proposed Rule 834(a)(2) would define ‘‘major disciplinary committee’’ as a committee of persons who are authorized by an SBSEF to conduct disciplinary hearings, to settle disciplinary charges, to impose disciplinary sanctions, or to hear appeals thereof in cases involving any violation of the rules of the SBSEF except those which are related to decorum or attire, financial requirements, or reporting or recordkeeping and do not involve fraud, deceit, or conversion. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 the reasons stated in the Proposing Release. E. Rule 834(e) Paragraph (e) of Proposed Rule 834 is closely modeled on § 1.64(b). Paragraph (e)(1)(i) would require each SBSEF and SBS exchange to ensure that 20% or more of the persons who are eligible to vote routinely on matters being considered by the governing board (excluding those members who are eligible to vote only in the case of a tie vote by the governing board) are persons who are knowledgeable of SBS trading or financial regulation, or otherwise capable of contributing to governing board deliberations. Paragraphs (e)(1)(ii) through (v) of Proposed Rule 834 are based on four of the prongs in § 1.64(b)(1)(ii) and would provide that 20% or more of the persons who are eligible to vote routinely on matters being considered by the governing board (excluding those members who are eligible to vote only in the case of a tie vote by the governing board) must not be: members of the SBSEF or SBS exchange; 656 salaried employees of the SBSEF or SBS exchange; primarily performing services for the SBSEF or SBS exchange in a capacity other than as a member of the governing board; or officers, principals, or employees of a firm which holds a membership at the SBSEF or SBS exchange, either in its own name or through an employee on behalf of the firm. Paragraph (e)(2) of Proposed Rule 834, modeled on § 1.64(b)(3), would require each SBSEF and SBS exchange to ensure that membership of its governing board includes a diversity of groups or classes of its members. The Commission did not receive comments on Proposed Rule 834(e) and is adopting Rule 834(e) as proposed, for the reasons stated in the Proposing Release. F. Rule 834(f) Paragraph (f) of Proposed Rule 834 is based closely on § 1.64(d) and would require each SBSEF and SBS exchange to submit to the Commission, within 30 days after each governing board election, a list of the governing board’s members, the groups or classes of members that they represent, and how the composition of the governing board otherwise meets the requirements of Rule 834. 656 Proposed Rule 834(e)(1)(ii), read together with Proposed Rule 834(b), would allow four members of an SBSEF or SBS exchange to control up to 80% of the voting interest (assuming that each of the four holds 20%). Under Proposed Rule 834(e)(1)(ii), at least 20% of the voting interest would have to be held by non-members. PO 00000 Frm 00070 Fmt 4701 Sfmt 4700 The Commission received no comments on Proposed Rule 834(f) and is adopting Rule 834(f) as proposed for the reasons stated in the Proposing Release. G. Rule 834(g) Paragraph (g) of Proposed Rule 834 is modeled on § 1.69, which requires an SRO to further address the avoidance of conflicts of interest in the execution of its self-regulatory functions. Proposed Rule 834(g) closely follows the paragraph structure and language of § 1.69, with a few minor exceptions (beyond modifying the rule’s application to SBSEFs and SBS exchanges, rather than, in the CFTC original, all SROs). First, paragraph (g)(1)(i)(A) of Proposed Rule 834 is based closely on § 1.69(b)(1)(i) and would set out the types of relationships with the named party of interest that would create a conflict of interest for a member of the governing board, disciplinary committee, or oversight panel.657 Second, Proposed Rule 834(g)(1)(ii)(C) is a simplified version of § 1.69(b)(2)(iii). Rather than incorporating the first four prongs of § 1.69(b)(2)(iii), which cross-reference definitions elsewhere in the CFTC’s rules, Rule 834(g)(1)(ii)(C) would instead incorporate only the final, catchall prong, which would cover any positions held by any member of an SBSEF’s governing board, disciplinary committees, or oversight committees that would have been covered under the other four prongs.658 Third, Proposed Rule 834(g)(1)(ii)(C) would omit a requirement in § 1.69(b)(2)(iv) that an SRO, when making a determination of whether a conflict of interest exists, must take into consideration ‘‘[t]he most recent large trader reports and clearing records available to the self-regulatory organization.’’ These types of reports 657 Paragraph (g)(1)(i)(A) of Proposed Rule 834, however, would incorporate only four of the five prongs in § 1.69(b)(1)(i). The Commission did not propose to include a prong about being associated with a named party of interest through a ‘‘broker association,’’ as defined in § 156.1 of the CFTC’s rules, as that concept does not exist under the SEA. 658 Thus, the relevant language in Rule 834(g)(1)(ii)(C) would read, ‘‘Such determination must include a review of any positions, whether maintained at that security-based swap execution facility, SBS exchange, or elsewhere, held in the member’s personal accounts or the proprietary accounts of the member’s affiliated firm that the security-based swap execution facility or SBS exchange reasonably expects could be affected by the significant action.’’ Proposed Rule 834(a)(3) would define a ‘‘member’s affiliated firm’’ as a firm in which the member is a principal or an employee, and Proposed Rule 834(a)(5) would define ‘‘significant action’’ to include several types of actions or rule changes by an SBSEF or SBS exchange that could be implemented without the Commission’s prior approval related to addressing an emergency and certain changes in margin levels. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations may not be as prevalent in the securities and SBS markets as the swaps market. The final, catch-all prong in § 1.69(b)(2)(iv)—‘‘Any other source of information that is held by and reasonably available to the selfregulatory organization’’—would suffice, and proposed it as Rule 834(g)(1)(ii)(C)(2). The Commission did not receive comments on paragraph (g) of Proposed Rule 834 and is adopting Rule 834(g) as proposed, for the reasons stated in the Proposing Release. ddrumheller on DSK120RN23PROD with RULES2 H. Rule 834(h) Proposed Rule 834(h) would require each SBSEF and SBS exchange to maintain in effect various rules that would be required under Rule 834. An SBSEF would be required to file these rules under Rule 806 or Rule 807 of Regulation SE; an SBS exchange would be required to file such rules under existing SEA Rule 19b–4.659 Proposed Rule 834(h) is loosely modeled on various provisions in §§ 1.64 and 1.69 providing that the SRO rules required under those CFTC rules must be filed with the CFTC pursuant to relevant provisions of the CEA and the CFTC’s rules thereunder. The Commission received no comments on Proposed Rule 834(h) and is adopting Rule 834(h) as proposed for the reasons stated in the Proposing Release. IX. Rule 835—Notice to Commission by SBSEF of Final Disciplinary Action, Denial or Conditioning of Membership, or Denial or Limitation of Access The Commission proposed Rule 835 to require an SBSEF to provide the Commission notice of a final disciplinary action, a final action with respect to a denial or conditioning of membership, or a final action with respect to a denial or limitation of access. Such notice is designed to ensure that the Commission is kept aware of significant disciplinary actions, denials or conditionings of membership, or denials or limitations on access by SBSEFs that could be the subject of an aggrieved person’s request for review by the Commission. The requirement to provide notice to the Commission would also obligate an SBSEF to be cognizant of, and make records for, each such instance, and such records would become a necessary part of the record should the aggrieved person seek Commission review of the SBSEF’s action. Specifically, paragraph (a) of Proposed Rule 835 would provide that, 659 17 CFR 240.19b–4. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 if an SBSEF issues a final disciplinary action against a member, or takes a final action with respect to a denial or conditioning of membership, or a final action with respect to a denial or limitation of access of a person to any services offered by the SBSEF, the SBSEF shall file a notice of such action with the Commission within 30 days and serve a copy on the affected person. Proposed Rule 835(a) would use the phrase ‘‘final disciplinary action against a member’’ (emphasis added) because an SBSEF may utilize its disciplinary authority under Core Principle 2 (Compliance with Rules) in section 3D of the SEA 660 only with respect to its members; but uses the phrase ‘‘denies or limits access of a person’’ (emphasis added) because the person whose access is denied or limited might not be a member. For example, a person that is denied membership by an SBSEF would fall under this category. Paragraph (b)(1) of Proposed Rule 835 would provide that, for purposes of paragraph (a), a disciplinary action would not be considered final unless: (1) the affected person has sought an adjudication or hearing with respect to the matter, or otherwise exhausted their administrative remedies at the SBSEF; and (2) the disciplinary action is not a summary action permitted under Rule 819(g)(13)(ii).661 In addition, paragraph (b)(2) of Proposed Rule 835 would provide that, for purposes of paragraph (a), a disposition of a matter with respect to a denial or conditioning of membership, or a denial or limitation of access, would not be considered final unless such person has sought an adjudication or hearing, or otherwise exhausted their administrative remedies at the SBSEF with respect to such matter. Paragraph (c) of Proposed Rule 835 would provide that the notice required under Rule 835(a) must include the name of the member or the associated person and last known address, as reflected in the SBSEF’s records, of the 660 15 U.S.C. 78c–4(d)(2). discussed above, see supra section VI.B.7, Proposed Rule 819(g)(13)(ii) would permit an SBSEF to adopt a summary fine schedule for violations of rules relating to the failure to timely submit accurate records required for clearing or verifying each day’s transactions, which may be summarily imposed against persons within the SBSEF’s jurisdiction for violating such rules. Furthermore, an SBSEF’s summary fine schedule could allow for warning letters to be issued for firsttime violations or violators. If adopted, a summary fine schedule would be required by Proposed Rule 819(g)(13)(ii) to provide for progressively larger fines for recurring violations. A summary fine schedule, if an SBSEF elects to adopt one, would have to be part of the SBSEF’s rules, and thus would need to be submitted to the Commission. See Proposed Rule 819(g)(13)(ii). 661 As PO 00000 Frm 00071 Fmt 4701 Sfmt 4700 87225 member or associated person, as well as the name of the person, committee, or other organizational unit of the SBSEF that initiated the disciplinary action or access restriction. In the case of a final disciplinary action, the notice would be required to include a description of the acts or practices, or omissions to act, upon which the sanction is based, including, as appropriate, the specific rules that the SBSEF has found to have been violated; a statement describing the respondent’s answer to the charges; and a statement of the sanction imposed and the reasons for such sanction. In the case of a denial or conditioning of membership or a denial or limitation of access, the notice would be required to include: the financial or operating difficulty of the prospective member or member (as the case may be) upon which the SBSEF determined that the prospective member or member could not be permitted to do, or continue to do, business with safety to investors, creditors, other members, or the SBSEF; the pertinent failure to meet qualification requirements or other prerequisites for membership or access and the basis upon which the SBSEF determined that the person concerned could not be permitted to have membership or access with safety to investors, creditors, other members, or the SBSEF; or the default of any delivery of funds or securities to a clearing agency by the member. Finally, the notice would be required to include the effective date of such final disciplinary action, denials or conditioning of membership, or denial or limitation of access, as well as any other information that the SBSEF may deem relevant. The Commission received no comments on Proposed Rule 835. Because the language of paragraphs (b)(1)(i) and (b)(2) should more clearly state that certain actions by an SBSEF shall not be ‘‘final’’ unless the affected person has exhausted their administrative remedies at the SBSEF, the Commission is modifying the phrase ‘‘person has sought an adjudication or hearing, or otherwise exhausted their administrative remedies’’ in both paragraphs (b)(1)(i) and (b)(2) so that it now reads simply, ‘‘person has exhausted their administrative remedies,’’ and is adopting Rule 835 as modified. X. Amendments to Existing Rule 3a1–1 Under the Sea—Exemptions From the Definition of ‘‘Exchange’’ An entity that meets the definition of ‘‘security-based swap execution facility’’ would also likely meet the definition of ‘‘exchange’’ set forth in section 3(a)(1) of E:\FR\FM\15DER2.SGM 15DER2 87226 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations the SEA 662 and the interpretation of that definition set forth in Rule 3b–16 thereunder.663 Thus, absent an exemption, an entity needing to register with the Commission as an SBSEF would also likely need to register with the Commission as a national securities exchange.664 The Commission has previously stated that it ‘‘believes that Congress specifically provided a comprehensive regulatory framework for SBSEFs in the [SEA], as amended by the Dodd Frank Act, and therefore that such entities that are registered as SBSEFs should not also be required to register and be regulated as national securities exchanges.’’ 665 Therefore, the Commission proposed to exercise its authority under section 36(a)(1) of the SEA 666 to exempt an SBSEF from the definition of ‘‘exchange’’—and thus the obligation to register as a national securities exchange—if it provides a market place solely for the trading of SBS (and no securities other than SBS) and has registered with the Commission as an SBSEF. To effect this exemption, the Commission proposed to amend Rule 3a1–1 under the SEA 667 by adding new paragraph (a)(4). The proposed amendment would add new paragraph (a)(4) to existing Rule 3a1–1 to provide that an organization, association, or group of persons that has registered with the Commission as an SBSEF pursuant to Rule 803 and provides a market place for no securities other than SBS is exempt from the definition of ‘‘exchange’’ under section 3(a)(1) of the SEA, and thus would not be subject to the requirement in section 5 of the SEA to register as a national securities exchange or obtain a lowvolume exemption.668 662 15 U.S.C. 78c(a)(1). CFR 240.3b–16. See also supra section III.A (discussing Rule 803 and the requirements and procedures for registration, including the overlap between the definitions of ‘‘exchange’’ and ‘‘security-based swap execution facility’’). See also infra note 678 and accompanying text (discussing the Commission’s proposed amendments to Rule 3b–16). 664 See § 3D(a)(1) of the SEA, 15 U.S.C. 78c– 4(a)(1) (‘‘No person may operate a facility for the trading or processing of security-based swaps, unless the facility is registered as a security-based swap execution facility or as a national securities exchange under this section’’). 665 2011 SBSEF Proposal, supra note 6, 76 FR at 10958. 666 15 U.S.C. 78mm(a)(1). 667 17 CFR 240.3a1–1. 668 An SBSEF that fails to comply with the condition to the exemption provided under paragraph (a)(4) of Rule 3a1–1 would no longer qualify for the exemption and might thus be operating as an unregistered exchange under the section 5 of the SEA. 15 U.S.C. 78e. Section 5 also generally provides that a broker or dealer may not use any facility of an exchange to effect or report In addition, the Commission proposed new paragraph (a)(5) to existing Rule 3a1–1 under the SEA, which would provide that an organization, association, or group of persons shall be exempt from the definition of the term ‘‘exchange’’ if that organization, association, or group of persons has registered with the Commission as a clearing agency pursuant to section 17A of the SEA and limits its exchange functions to operation of a trading session that is designed to further the accuracy of end-of-day valuations.669 As noted above, this provision would codify a series of exemptions that the Commission has granted over several years to SBS clearing agencies that operate ‘‘forced trading’’ sessions.670 As part of the clearing and risk management processes, an SBS clearing agency must establish an end-of-day valuation for any SBS in which any of its members has a cleared position. Certain SBS clearing agencies utilize a valuation mechanism whereby they require clearing members to submit indicative settlement prices for SBS products, and, to provide an incentive for accurate submissions, the clearing agency can require those members to trade at those quoted prices. The precise means by which the clearing agency matches quotes from different clearing members could cause the clearing agency to fall within the definition of ‘‘exchange’’ in section 3(a)(1) of the SEA. The Commission has previously found that it was necessary or appropriate in the public interest and consistent with the protection of investors to exempt clearing agencies that engage in this activity from the definition of ‘‘exchange,’’ 671 and the Commission proposed to codify this exemption.672 Finally, the Commission proposed to amend the introductory language of paragraph (b) of Rule 3a1–1 to cover only paragraphs (a)(1) through (a)(3), not paragraph (a) as a whole.673 The changed language is designed to clarify that the revocation provisions would not apply to organizations, associations, or groups of persons who fall within amended Rule 3a1–1(a)(4) or (a)(5). Thus, even if a registered SBSEF were to become a substantial market, Rule 3a1–1(b), as proposed to be amended, would not afford a basis for the Commission to revoke an SBSEF’s exemption from the definition of ‘‘exchange’’ under Rule 3a1–1(a)(4), which would force the SBSEF to register as a national securities exchange (to avoid being an unregistered exchange). The Commission received two comment letters regarding the proposed amendments to Rule 3a1–1.674 One commenter does not support an exemption for clearing agencies from the definition of exchange, stating that the exemption would create a loophole.675 However, the limited scope of the exemption—which applies solely to trades that a clearing agency requires its members to undertake in support of the accuracy of the clearing agency’s end-of-day valuation process—is sufficiently narrow to prevent use of the exemption as a loophole allowing clearing agencies to act as, or on behalf of exchanges, without sufficient public reporting. The language of new paragraph (a)(5) of Rule 3a1–1, however, should more precisely reflect that the Commission is codifying exemptive relief that was provided with respect to trading sessions to support end-of-day valuations of SBS,676 and the Commission is therefore modifying paragraph (a)(5) to add the words ‘‘of any transaction in a security unless that exchange is registered as a national securities exchange or is exempt from registration by reason of the limited volume of transactions effected on the exchange. Brokers and dealers who are members of a registered SBSEF would not be in violation of section 5 by effecting or reporting any SBS transactions on that SBSEF, because an SBSEF that qualifies for the exemption under Rule 3a1–1(a)(4) would not be an exchange within the meaning of section 5. 669 As discussed above, see supra note 37 and accompanying text, such a trading session is also referred to as a ‘‘forced-trading session.’’ 670 See supra note 37; Proposing Release, supra note 1, 87 FR at 28878. 671 See id. 672 See Proposing Release, supra note 1, 87 FR at 28878. This exemption would cover only the forced-trading session of an SBS clearing agency; any other exchange activity that a clearing agency might engage in could remain subject to the SEA provisions and the Commission’s rules thereunder applying to national securities exchanges or alternative trading systems. 673 Specifically, the Commission proposed to amend the introductory language of existing paragraph (b) of Rule 3a1–1, which states: ‘‘Notwithstanding paragraph (a) of this rule, an organization, association, or group of persons shall not be exempt under this rule from the definition of ‘exchange’ if . . . .’’ Paragraph (b) then sets out procedural and substantive criteria for the Commission to revoke an exemption under paragraph (a) of Rule 3a1–1 if an exchange’s share of the market in any one of the specified classes of securities exceeds a defined threshold. 674 See Keeney Letter, supra note 95; ISDA– SIFMA Letter, supra note 18, at 17. 675 See Keeney Letter, supra note 95 (stating that the exemption would permit clearing agencies to ‘‘do the bidding of exchanges’’ while being exempt from reporting requirements). 676 See Proposing Release, supra note 1, 87 FR at 28932 (‘‘This exemption would cover only the forced-trading session of an SBS clearing agency; any other exchange activity that a clearing agency might engage in could remain subject to the SEA provisions and the Commission’s rules thereunder applying to exchanges.’’). ddrumheller on DSK120RN23PROD with RULES2 663 17 VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00072 Fmt 4701 Sfmt 4700 E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations security-based swaps’’ at the end of the paragraph. Another commenter supports the proposed amendments and also addresses another Commission rulemaking related to the definition of ‘‘exchange.’’ 677 The Commission has separately proposed certain amendments to Rule 3b–16, a rule which defines certain terms used in the statutory definition of ‘‘exchange’’ under section 3(a)(1) of the SEA.678 The commenter states that the Commission should exempt from the definition of ‘‘exchange’’ any market place that solely trades SBS, whether or not that market place is registered as an SBSEF.679 This commenter states that the Commission has ‘‘proposed to expand Rule 3b–16 substantially’’ and that this proposal, if adopted, would ‘‘reverse the previous relationship between the ‘exchange’ definition (as interpreted in Rule 3b–16) and the SBSEF definition.’’ 680 This commenter states that an organization that makes available certain methods for parties to interact regarding SBS might fall within the expanded definition of exchange but outside the definition of SBSEF and therefore be required to register as an exchange because SBSEF registration would be unavailable.681 The Commission does not agree with the commenter’s request to extend the Rule 3a1–1 exemption from the ‘‘exchange’’ definition to any entity that provides a market place for no securities other than SBS, regardless of whether they are registered as an SBSEF. The purpose of the exemption under Rule 3a1–1(a)(4) is not to universally exempt from the definition of ‘‘exchange’’ all entities that provide a market place for no securities other than SBS. Rather, given that Congress has provided a regulatory framework for SBSEFs through the Dodd Frank Act, 677 See ISDA–SIFMA Letter, supra note 18, at 17. Amendments Regarding the Definition of ‘‘Exchange’’ and Alternative Trading Systems (ATSs) That Trade U.S. Treasury and Agency Securities, National Market System (NMS) Stocks, and Other Securities, SEA Release No. 94062 (Jan. 26, 2022), 87 FR 15496 (Mar. 18, 2022) (File No. S7– 02–22) (‘‘Rule 3b–16 Proposal’’). See also Reopening of Comment Periods for ‘‘Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews’’ and ‘‘Amendments Regarding the Definition of ‘Exchange’ and Alternative Trading Systems (ATSs) That Trade U.S. Treasury and Agency Securities, National Market System (NMS) Stocks, and Other Securities,’’ SEA Release No. 94868 (May 9, 2022), 87 FR 29059 (May 12, 2022) (S7–02–22); Supplemental Information and Reopening of Comment Period for Amendments Regarding the Definition of ‘‘Exchange,’’ SEA Release No. 97309 (Apr. 14, 2023), 88 FR 29448 (May 5, 2023) (File No. S7–02–22). 679 See ISDA–SIFMA Letter, supra note 18, at 17. 680 Id. 681 See id. ddrumheller on DSK120RN23PROD with RULES2 678 See VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 the exemption is narrowly designed to avoid burdening registered SBSEFs with a second regulatory framework— namely, registration as national securities exchanges. Further, creating that commenter’s suggested exemption in Rule 3a1–1(a) would create a regulatory gap in which some entities that meet the definition of exchange are registered neither as national securities exchanges nor as SBSEFs. The language of new paragraph (a)(4) of Rule 3a1–1, however, should more closely track the language and scope of section 3(a)(1) of the SEA, which uses the term ‘‘market place or facilities,’’ rather than the term ‘‘market place,’’ 682 and the Commission is therefore modifying proposed paragraph (a)(4) of Rule 3a1–1 to replace the term ‘‘market place’’ with the term ‘‘market place or facilities.’’ Accordingly, for the reasons discussed above, the Commission is adopting the amendments to Rule 3a1– 1 with the modifications to paragraphs (a)(4) and (a)(5) discussed above and with minor technical modifications.683 XI. Rule 15a–12—SBSEFs as Registered Brokers; Relief From Certain Broker Requirements An SBSEF, by facilitating the execution of SBS between persons, also is engaged in the business of effecting transactions in securities for the account of others and therefore meets the SEA definition of ‘‘broker.’’ 684 Absent an exception or exemption, an SBSEF—in addition to being subject to the registration and regulatory requirements for SBSEFs—would also be required to register with the Commission as a broker pursuant to sections 15(a) and 15(b) of the SEA 685 and would be subject to all regulatory requirements applicable to brokers.686 For example, brokers and dealers must comply with a number of rules that govern their conduct, including those relating to customer confirmations and disclosure 682 See 15 U.S.C. 78c(a)(1). supra note 32. 684 See SEA section 3(a)(4), 15 U.S.C. 78c(a)(4). 685 15 U.S.C. 78o(a) and 78o(b). Section 15(a)(1) generally provides that, absent an exception or exemption, a broker or dealer that uses the mails or any means of interstate commerce to effect transactions in, or to induce or attempt to induce the purchase or sale of, any security must register with the Commission. Section 15(b) generally provides the manner of registration of brokers and dealers and other requirements applicable to registered brokers and dealers. 686 As discussed in note 47, supra, a person that is acting as a broker solely because it is acting as an SBSEF is currently exempt from the requirement to register with the Commission as a broker and the Commission’s rules under the SEA that apply to brokers. This exemption will expire upon the earliest compliance date for the Commission’s final rules regarding SBSEF registration. 683 See PO 00000 Frm 00073 Fmt 4701 Sfmt 4700 87227 of credit terms in margin transactions.687 The Commission proposed new Rule 15a–12 under the SEA, which would deem registration with the Commission as an SBSEF to also constitute registration as a broker, and which would exempt a registered SBSEF from many broker requirements in light of the SBSEF regulatory regime to which it would also be subject. The accommodation provided in Rule 15a– 12, however, would not be available to an SBSEF that engages in other types of brokerage activity. Paragraph (a) of Proposed Rule 15a– 12 would define the term ‘‘SBSEF–B’’ to mean an SBSEF that does not engage in any securities activity other than facilitating the trading of SBS on or through the SBSEF. Thus, an SBSEF that acts as agent to SBS counterparties or that acts in a discretionary manner with respect to the execution of SBS transactions, could not avail itself of Rule 15a–12. Also, if an inter-dealer broker elects not to separate its interdealer broker functions from its SBSEF (by, for example, housing them in separate legal entities), and instead chooses to operate the SBSEF in the same legal entity as the inter-dealer broker, the entity could avail itself of Rule 15a–12 because it would not be an SBSEF–B under the rule. Paragraph (b) of Proposed Rule 15a– 12 would provide that an SBSEF–B, if it registered as an SBSEF pursuant to Rule 803, would be deemed also to have registered with the Commission pursuant to sections 15(a) and (b) of the SEA.688 Paragraphs (c) and (d) of Proposed Rule 15a–12 would set out the scope of broker requirements from which an SBSEF–B is exempt and which broker requirements would continue to apply. Paragraph (c) would provide that an SBSEF–B would be exempt from any provision of the SEA or the Commission’s rules thereunder applicable to brokers that by its terms requires, prohibits, restricts, limits, conditions, or affects the activities of a broker, unless such provision specifies 687 See 17 CFR 240.10b–10 and 240.10b–16. Commission’s proposal would not have exempted SBSEFs from registration as brokers. Rather, given the registration and regulatory requirements that were being proposed for SBSEFs through Regulation SE, the Commission proposed for such SBSEFs to be deemed registered as brokers so as to prevent subjecting those entities to a second, separate registration process as well as duplicative additional regulatory requirements. As discussed in the Proposing Release, an additional layer of registration processes and duplicative requirements would not be appropriate or necessary. See Proposing Release, supra note 1, 87 FR 28933. 688 The E:\FR\FM\15DER2.SGM 15DER2 87228 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations that it applies to an SBSEF. Paragraph (d) of Proposed Rule 15a–12 would provide that, notwithstanding paragraph (c), an SBSEF–B is still subject to section 15(b)(4),689 section 15(b)(6),690 and section 17(b) of the SEA.691 Finally, paragraph (e) of Proposed Rule 15a–12 would exempt an SBSEF– B from the Securities Investor Protection Act (‘‘SIPA’’).692 SIPA established the Securities Investor Protection Corporation (‘‘SIPC’’), which oversees the liquidation of member firms that close when a member firm is bankrupt or in financial trouble and customer assets are missing.693 SIPC protection is funded by assessments made on member firms.694 Section 2 of SIPA 695 states that, unless otherwise provided, the SEA shall apply as if SIPA constituted an amendment to, and was included as a section of, the SEA. An SBSEF–B, by definition, would operate only as an SBSEF. It would not be equitable to require an SBSEF–B to become a member of SIPC and pay SIPC assessments, because the SBSEF–B would not have brokerage customers and would not hold any customer funds or securities. Accordingly, under section 36(a)(1) of the SEA,696 the Commission finds that it is necessary or appropriate in the public interest, and is consistent with the protection of investors, to exempt SBSEF–Bs from any requirement under SIPA, including the requirement to pay assessments to the SIPC insurance fund. The Commission is codifying this exemption as Rule 15a– 12(e). The Commission received no comments on Proposed Rule 15a–12 and is adopting Rule 15a–12 as proposed, with minor technical modifications,697 for the reasons stated in the Proposing Release. 689 15 U.S.C. 78o(b)(4). U.S.C. 78o(b)(6). 691 15 U.S.C. 78q(b). 692 15 U.S.C. 78aaa, et seq. 693 See https://www.sipc.org/about-sipc/sipcmission (‘‘In a liquidation under the Securities Investor Protection Act, SIPC and the courtappointed Trustee work to return customers’ securities and cash as quickly as possible. Within limits, SIPC expedites the return of missing customer property by protecting each customer up to $500,000 for securities and cash (including a $250,000 limit for cash only).’’). 694 See 15 U.S.C. 78ddd(d). 695 15 U.S.C. 78bbb. 696 15 U.S.C. 78mm(a)(1) (giving the Commission exemptive authority, including the ability to exempt any person or classes of persons from any provision of the SEA or any rules thereunder, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors). 697 See supra note 32. ddrumheller on DSK120RN23PROD with RULES2 690 15 VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 XII. Termination of Temporary Exemptions As discussed above and in the Proposing Release, after issuing the 2011 SBSEF Proposal,698 the Commission granted the Temporary SBSEF Exemptions.699 In relevant part, Temporary SBSEF Exemptions have: (1) Allowed an entity that trades SBS and is not currently registered as a national securities exchange, or that cannot yet register as an SBSEF because final rules for such registration have not yet been adopted, to continue trading SBS during this temporary period without registering as a national securities exchange or SBSEF; 700 (2) Exempted national securities exchanges (to the extent that they also operate an SBSEF and use the same electronic trade execution system for listing and executing trades of SBS on or through the exchange and the facility) from the requirement to identify whether electronic trading of those SBS is taking place on or through the national securities exchange or the SBSEF; 701 (3) Exempted any person, other than a clearing agency acting as a central counterparty in security-based swaps, that, solely due to its activities relating to security-based swaps, would fall within the definition of exchange and thus be required to register as an exchange from the requirement to register as a national securities exchange in sections 5 and 6 of the Exchange Act; 702 (4) Permitted brokers and dealers to effect transactions in SBS on an exchange that is operating without registering as a national securities exchange in reliance on the exemption described above; 703 (5) Exempted SBSEFs from the broker registration requirements of section 15(a)(1) of the SEA; 704 and (6) Exempted any SBS contract entered into on or after July 16, 2011, from being void or considered voidable 698 See supra note 6. supra notes 45–47 and accompanying text. 700 See June 2011 Exemptive Order, supra note 46, 76 FR at 36293 (granting temporary exemptive relief from SEA section 3D(a)(1), 15 U.S.C. 78c– 4(a)(1)). 701 See id. at 36293 (granting temporary exemptive relief from SEA section 3D, 15 U.S.C. 78c–4). 702 See July 2011 Exemptive Order, supra note 46, 76 FR at 39934. 703 See id. 704 See id.; see also Requirements for SecurityBased Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers; Capital Rule for Certain Security-Based Swap Dealers, SEA Release No. 87005 (Sept. 19, 2019), 84 FR 68550, 68602 (Dec. 16, 2019) (‘‘Recordkeeping and Reporting Adopting Release’’). 699 See PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 by reason of section 29 of the SEA 705 because any person that is a party to the SBS contract violated a provision of the Exchange Act that was amended or added by subtitle B of Title VII of the Dodd Frank Act and for which the Commission has taken the view that compliance will be triggered by registration of a person or by adoption of final rules by the Commission, or for which the Commission has provided an exception or exemptive relief herein, until such date as the Commission specifies.706 In the Temporary SBSEF Exemptions, the Commission specified that the exemptive relief would expire ‘‘on the earliest compliance date set forth in any of the final rules regarding registration of SBSEFs,’’ 707 or in the case of the relief regarding section 29 of the SEA, ‘‘until such date as the Commission specifies.’’ 708 Additionally, in 2020, the Commission adopted Rule 17Ad–24 under the SEA 709 to exempt from the definition of ‘‘clearing agency’’ in section 3(a)(23) of the SEA 710 certain entities, including a registered SBSEF, that 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 SBSEF, 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.711 In adopting the rule, the Commission explained that an entity performing such functions that triggers the requirement to register as a clearing agency—but that is not yet registered with the Commission as an SBSEF—could rely on a temporary exemption from the requirement to register as a clearing agency that the Commission issued in 2011.712 In the Proposing Release, the Commission sought public comment on whether it should ‘‘sunset’’ the 2011 Clearing Agency Exemption and stated that it 705 15 U.S.C. 78cc(b). June 2011 Exemptive Order, supra note 46, 76 FR at 36305–06. 707 See id. at 36293; July 2011 Exemptive Order, supra note 46, 76 FR at 39934. 708 See June 2011 Exemptive Order, supra note 46, 76 FR at 36306. 709 17 CFR 240.17Ad–24. 710 15 U.S.C. 78c(a)(23). 711 See SEA Release No. 90667 (Dec. 16, 2020), 86 FR 7637 (Feb. 1, 2021). 712 See id., 86 FR at 7650; SEA Release No. 64796 (July 1, 2011), 76 FR 39963, 39964 (July 7, 2011) (‘‘2011 Clearing Agency Exemption’’). 706 See E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations preliminarily believed that, if it adopted a framework for the registration of SBSEFs, the 2011 Clearing Agency Exemption would no longer be necessary because entities carrying out the functions of SBSEFs would be able to register with the Commission as such, thereby falling within the exemption from the definition of ‘‘clearing agency’’ in existing Rule 17Ad–24.713 The Commission received no comment regarding the sunsetting of past exemptive relief for entities operating as SBSEFs. Upon the effectiveness of Regulation SE, the exemptive relief described above would no longer be necessary, because SBSEFs will be able to register with the Commission and will be subject to regulatory obligations under Regulation SE. Therefore, the Commission is sunsetting the exemptive relief consistent with the compliance schedule for Regulation SE.714 Thus, the exemptive relief described above will terminate 180 days after the Effective Date of Regulation SE, which will be 60 days after the date of publication in the Federal Register, except that (1) with respect to an SBSEF that has filed an application to register with the Commission on Form SBSEF within 180 days of the Effective Date of Regulation SE, as well as trading of SBS on such an SBSEF, the relief will terminate 240 days after the Effective Date of Regulation SE; and (2) with respect to an SBSEF that filed an application to register on Form SBSEF within 180 days after the Effective Date of Regulation SE and whose application on Form SBSEF is complete for purposes of Rule 803(b)(5) (having responded to requests by the Commission’s staff for revisions or amendments) within 240 days after the effective date, as well as trading of SBS on such an SBSEF, the exemptive relief will terminate 30 days after the Commission acts to approve or deny the SBSEF’s application on Form SBSEF. Specifically with respect to the exemptive relief providing that any SBS contract entered into on or after July 16, 2011, will not be void or considered voidable by reason of section 29 of the SEA 715 because any person that is a party to the SBS contract violated a provision of the Exchange Act that was amended or added by subtitle B of Title VII of the Dodd Frank Act and for which the Commission has taken the view that compliance will be triggered by registration of a person or by adoption 713 See Proposing Release, supra note 1, 87 FR at 28934. 714 See infra section XVI (discussing compliance schedule). 715 15 U.S.C. 78cc(b). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 of final rules by the Commission, or for which the Commission has provided an exception or exemptive relief herein, this exemptive relief will continue to apply to SBS entered into between July 16, 2011, and the date 30 days after the Commission acts to approve the first SBSEF registration. For any entity currently relying on the 2011 Clearing Agency Exemption that becomes required to register as a clearing agency, the exemptive relief will terminate 180 days after the Effective Date of Regulation SE, which will be 60 days after the date of publication in the Federal Register, except that (1) with respect to an entity that has filed an application to register as a clearing agency with the Commission on Form CA–1 within 180 days of the Effective Date of Regulation SE, the relief will terminate 240 days after the Effective Date of Regulation SE; and (2) with respect to an entity that has filed an application on Form CA–1 within 180 days after the Effective Date of Regulation SE and whose application on Form CA–1 is complete (having responded to requests by the Commission’s staff for revisions or amendments) within 240 days after the effective date, the exemptive relief will terminate 30 days after the Commission acts to approve or disapprove the application on Form CA–1. XIII. Electronic Filings Under Regulation SE A. Use of Electronic Filing Systems and Structured Data Various provisions of proposed Regulation SE would have required registered SBSEFs (or SBSEF applicants) to file specified information electronically with the Commission using the EDGAR system in Inline XBRL, a structured, machine-readable data language.716 These provisions include: • Rule 803(b)(1)(i) and (b)(3), regarding filings of, and amendments to, a Form SBSEF application. • Rules 803(e) and 803(f), regarding requests to withdraw or vacate an application for registration. 716 The structured data requirements are generally consistent with objectives of the recently enacted Financial Data Transparency Act (‘‘FDTA’’), which directs the Commission and other financial regulators of data standards for collections of information. Such data standards would need to meet specified criteria relating to openness and machine-readability and promote interoperability of financial regulatory data across members of the Financial Stability Oversight Council. See James M. Inhofe National Defense Authorization Act for Fiscal Year 2023, Public Law 117–263, tit. LVIII, 136 Stat. 2395, 3421–39 (Dec. 23, 2022). PO 00000 Frm 00075 Fmt 4701 Sfmt 4700 87229 • Rule 804(a)(1), regarding filings for listing products for trading by certification. • Rule 805(a)(1), regarding filings for voluntary submission of new products for Commission review and approval. • Rule 806(a)(1), regarding filings for voluntary submission of rules for Commission review and approval. • Rule 807(a)(1), regarding filings for self-certification of rules. • Rule 807(d), regarding filings of weekly notifications to the Commission of rules and rule amendments that were not required to be certified. • Rule 829(g)(6), regarding submission to the Commission of reports related to financial resources and related documentation. • Rule 831(j)(2), regarding submission to the Commission of the annual compliance report of SBSEF’s CCO. In addition to including these requirements in each of the rules listed above, the Commission proposed to amend Rule 405 of Regulation S–T to reflect these requirements.717 The Commission received comments specifically regarding the proposed methods and formats of electronic filing in Regulation SE discussed above.718 One commenter states that if certain entities report a portion of needed data to one regulator (CFTC) and the rest of the data to a different regulator (SEC), data consumers will be required to extract data from two different datasets to provide a complete picture. The commenter states that if data reported to the CFTC is in PDF or HTML format, and data reported to the SEC is in machine-readable (XBRL) format, this will increase the complexity of data access.719 Another commenter does not believe that EDGAR is the appropriate system for these filings. The commenter believes that requiring the use of EDGAR will require most filers to retain a third-party vendor and incur substantial costs and may have the potential to deter market participants from entering this space, noting that a more appropriate alternative filing process, the Commission’s Electronic Form Filing System (EFFS), a secure, web-based electronic filing application used to process filings from SROs and SCI entities, is already available, and its use would harmonize the filing approach with SBS exchanges, and more broadly with the approach taken by the CFTC. Alternatively, the 717 See Proposing Release, supra note 1, 87 FR at 28872, 28972–73. 718 See Letter from Campbell Pryde, President and CEO, XBRL US, to Secretary, Commission, at 2 (June 10, 2022) (‘‘XBRL US Letter’’); Bloomberg Letter, supra note 18, at 20–21. 719 See XBRL US Letter, supra note 718, at 2. E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87230 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations commenter encourages the Commission to adopt the process used by the CFTC, which permits filings (including initial registration filings, quarterly financial filings and rulebook filings) to be made via a dedicated portal in PDF form.720 As discussed in further detail below, taking into account comments received, the Commission is requiring SBSEFs to submit the information related to rule and product filings under Rules 804 to 807 of Regulation SE in unstructured format via EFFS in order to alleviate compliance burdens on SBSEFs. The Commission has considered the comments received on the provisions regarding electronic filing in Regulation SE discussed above and is adopting Inline XBRL and EDGAR requirements for some, but not all, of the disclosures that Regulation SE will require. Specifically, Regulation SE will require SBSEFs to file the information under the following rules electronically via EDGAR using Inline XBRL: • Rule 829, regarding submission to the Commission of reports related to financial resources and related documentation. • Rule 831, regarding submission to the Commission of the annual compliance report of the SBSEF’s CCO. • Exhibits C through F to Form SBSEF, regarding governing board fitness standards and composition; organizational structure; personnel qualifications; and staffing requirements, respectively. • Exhibits H through L to Form SBSEF, regarding material pending legal proceedings; financial information (except for any copies of agreements filed with the exhibit); affiliate financial information; dues, fees, and other charges for services; and compliance with Core Principles, respectively. • Exhibit P through S to Form SBSEF, regarding disciplinary and enforcement protocols; operation of trading systems or platforms; rules prohibiting specific trade practices; and the maintenance of trading data, respectively. For these specific disclosures, the Commission is adopting as proposed the requirement that they be made through EDGAR using Inline XBRL and is adopting the amendments to Rule 405 as proposed, with minor technical modifications.721 For certain other disclosures required under Regulation SE, in a change from the proposal, the Commission is 720 See Bloomberg Letter, supra note 18, at 20–21. Commission is, in light of its renumbering of the provisions relating to Form SBSEF, see supra section III.B, and because Form SBSEF will not appear in the Code of Federal Regulations, replacing ‘‘17 CFR 249.2001 of this chapter’’ with ‘‘referenced in 17 CFR 249.1701 of this chapter.’’ 721 The VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 requiring the use of a custom XML data language rather than Inline XBRL. Specifically, Regulation SE will require SBSEFs to file the following information electronically via EDGAR using custom XML: • Rules 803(e) and 803(f), regarding requests for withdrawal or vacation applications. • The Form SBSEF Cover Sheet. • Exhibit A to Form SBSEF, regarding the SBSEF’s ownership information (except for any copies of agreements filed along with the Exhibit). • Exhibit B to Form SBSEF, regarding the officers, directors, and other control persons of the SBSEF. • Exhibit G to Form SBSEF, regarding organizational documents (except for copies of organizational documents filed with the Exhibit). • Exhibit M to Form SBSEF, regarding rules and technical manuals (except for copies of rules and technical manuals filed with the Exhibit). • Exhibit N to Form SBSEF, regarding agreements and contracts (except for copies of agreements and contracts). • Exhibit T to Form SBSEF, regarding clearing agencies.722 The Commission is requiring some disclosures to be structured in Inline XBRL, and other disclosures to be structured in custom XML, because Inline XBRL is well-suited for certain types of content—such as financial statements and extended narrative discussions—whereas other types of content can be readily captured using custom XML data languages that yield smaller file sizes than Inline XBRL and thus facilitate more streamlined data processing. Such custom XML languages also enable EDGAR to generate fillable web forms that will permit SBSEFs to input disclosures into form fields rather than encode their disclosures in custom XML themselves, thus likely easing compliance burdens on SBSEFs. Certain Form SBSEF exhibits also include requirements to attach copies of existing documents, such as copies of by-laws, written agreements, and compliance manuals. The Commission is requiring SBSEFs to file these copies of documents as unstructured PDF attachments to the otherwise structured Form SBSEF filing.723 Requiring 722 In addition to the custom XML exhibits to Form SBSEF that will be submitted via EDGAR, the Commission is also adopting as proposed the requirement in Rule 825 of Regulation SE that SBSEFs post Daily Market Data Reports on their websites using a custom XML schema and a PDF renderer, both of which the Commission will make available on its website. See supra section VI.H. 723 In addition to these copies of existing documents, the Commission is requiring Exhibit U PO 00000 Frm 00076 Fmt 4701 Sfmt 4700 SBSEFs to retroactively structure such existing documents, which were prepared for purposes outside of fulfilling the Commission’s disclosure requirements, could impose compliance burdens on SBSEFs that may not be justified in light of the commensurate informational benefits associated with having such documents in structured form. The specific requirements to include these attached copies are included in the following provisions of Regulation SE: • Exhibit A to Form SBSEF (specifically, copies of agreements through which persons may control or direct the management or policies of the SBSEF). • Exhibit G to Form SBSEF (specifically, copies of the SBSEF’s organizational documents). • Exhibit I to Form SBSEF (specifically, copies of agreements supporting the SBSEF’s conclusions regarding the liquidity of its financial assets). • Exhibit M to Form SBSEF (specifically, copies of the SBSEF’s rules, technical manuals, guides, or other instructions). • Exhibit N to Form SBSEF (specifically, copies of agreements or contracts that enable the SBSEF’s compliance with Core Principles). • Exhibit O to Form SBSEF (specifically, copies of the SBSEF’s compliance manual). To implement the reduced scope of Inline XBRL requirements for Form SBSEF compared to the proposed rules, the Commission is making changes to the rule text for Form SBSEF, Rule 803 of Regulation SE, and Rule 405 of Regulation S–T. In the Registration Instructions to Form SBSEF, rather than requiring the disclosures on Form SBSEF to be provided as an Interactive Data File in accordance with Rule 405 of Regulation S–T as proposed, the final rule text lists a subset of Form SBSEF Exhibits that are to be provided as an Interactive Data File in accordance with Rule 405 of Regulation S–T, and clarifies that the Interactive Data File requirement does not extend to copies of existing documents.724 In Rule 803 of to Form SBSEF, which includes any information in the application that is subject to a confidential treatment request, to be filed as an unstructured PDF attachment. The confidential information that an applicant includes on Exhibit U could be responsive to disclosure requirements set forth in multiple other Form SBSEF Exhibits (potentially spanning multiple different data languages or formats). As a result, implementing technical validations on the structuring of the information on Exhibit U would not be technically feasible. 724 See Registration Instructions to Form SBSEF, referenced in 17 CFR 249.1701. Rule 405 of Regulation S–T sets forth the requirements for E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 Regulation SE, rather than requiring SBSEF applicants to file Form SBSEF as an Interactive Data File in accordance with Rule 405 of Regulation S–T as proposed, the final rule text requires SBSEF applicants to file the information specified in the Registration Instructions to Form SBSEF (i.e., the listed Exhibits) as an Interactive Data File in accordance with Rule 405 of Regulation S–T.725 In Rule 405 of Regulation S–T, the final rule text omits references to subparagraphs of Rule 803 that were included within the scope of the proposed rule text, while retaining the references to information specified in the Registration Instructions to Form SBSEF.726 Requiring use of EDGAR and structured data languages for certain disclosures under Regulation SE has benefits. Requiring SBSEFs to make required certain filings via EDGAR will provide the Commission and the public with a centralized, publicly accessible electronic database for SBSEF-provided data in the form that is most accessible and useful to regulators, market participants, and the public alike. The use of EDGAR also enables technical validation of the disclosures, thus potentially reducing the incidence of non-discretionary errors (e.g., the inclusion of text for a disclosure that should contain only numbers) in those Regulation SE disclosures that are filed via EDGAR. Moreover, requiring structured data languages for many of the reported disclosures will make those disclosures more easily available and accessible to, and reusable by, market participants and the Commission for retrieval, aggregation, and comparison across different SBSEFs and time periods, as compared to an unstructured PDF, HTML, or ASCII format requirement for those disclosures.727 Interactive Data File submissions. Rule 405(b) of Regulation SE sets forth the content to be included within the Interactive Data File, and Rule 405(a)(3) of Regulation S–T specifies Inline XBRL as the data language to be used for Interactive Data File submissions. In a technical change from the proposed rule text, the Commission is expanding the group of entities listed within Rule 405(a)(3) of Regulation S–T to add electronic filers subject to Regulation SE, reflecting the addition of electronic filers subject to Regulation SE to Rule 405(b) of Regulation S–T in the proposed and final rule text. 725 See Rule 803(b)(1)(i) of Regulation SE. We have made conforming changes to Rules 803(b)(3), (e), and (f) to narrow the proposed Inline XBRL requirements for Form SBSEF amendments, withdrawal requests, and vacation requests. See Rules 803(b)(3), 803(e), and 803(f) of Regulation SE. 726 See the introductory text, subparagraphs (a)(2), (a)(4), and (b)(5)(ii), and Note 1 to Rule 405 of Regulation S–T. 727 See Securities Act Release No. 10514 (June 28, 2018), 83 FR 40846, 40847 (Aug. 16, 2018). Inline XBRL allows filers to embed XBRL data directly into an HTML document, eliminating the need to VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 Permitting all Regulation SE disclosures to be filed entirely in PDF, HTML, or ASCII format, while perhaps simpler for the SBSEF making the filings, would reduce the accessibility of information in the filings to the Commission and to market participants who will access these filings through EDGAR. Further, harmonizing with the CFTC in this regard by permitting all Regulation SE filings to be made entirely in PDF format, as the CFTC does, would not carry comparable benefits to harmonization of other aspects of Regulation SE. The benefits of using EDGAR and structured data highlighted above justify the potential inconvenience to registrants, as well as to data users, of having to access two separate databases to extract information regarding SEC-regulated SBSEFs and CFTC-regulated SEFs. As discussed above, in a change from the proposal, the Commission is requiring SBSEFs to provide the rule and product filings required under Rules 804 through 807and 816 of Regulation SE through EFFS in an unstructured format, rather than providing them through EDGAR in Inline XBRL. While the information in SBSEF rule and product filings will not be machine-readable, the absence of structuring requirements for rule and product filings under Regulation SE (which aligns with the current rule and product filing process for SROs) 728 will help contain compliance burdens for SBSEFs, because SBSEFs will not be subject to compliance costs associated with structuring those filings.729 In light of the significant volume of other machine-readable data regarding SBSEFs that will be available to the market and data users under Regulation SE, this requirement having a lower compliance burden justifies the lack of machine-readability for the information in rule and product filings required under Rules 804 through 807 and 816 of Regulation SE. To implement the change from the proposed Inline XBRL and EDGAR filing requirement to the final unstructured format and EFFS requirement for rule and product filings, the Commission is modifying the rule text for Rules 804 through 807 of Regulation SE, the Security-Based Swap Execution Facility Cover Sheet that the Commission is adopting as § 249.1702, and Rule 405 of Regulation S–T. For Rules 804 through 807, the final rule text specifies that SBSEFs must file the tag a copy of the information in a separate XBRL exhibit. See id., 83 FR at 40851. 728 See supra note 139. 729 See infra section XVII.C.3(f). PO 00000 Frm 00077 Fmt 4701 Sfmt 4700 87231 rule and product filings through the EFFS system, rather than through the EDGAR system as an Interactive Data File in accordance with Rule 405 of Regulation S–T as proposed.730 The Commission is not making analogous changes to Rule 816 of Regulation SE, because Rule 816 instructs SBSEFs to follow the procedures under Rule 806 or 807 of Regulation SE.731 For the Security-Based Swap Execution Facility Cover Sheet, the final rule text specifies that SBSEFs must file the cover sheet using the EFFS system, rather than using the EDGAR system in accordance with Rule 405 of Regulation S–T as proposed.732 In Rule 405 of Regulation S–T, the final rule text omits references to subparagraphs of Rules 804 through 807 and the Security-Based Swap Execution Facility Cover Sheet that were included within the scope of the proposed rule text.733 B. Use of Identifiers As discussed above, the Commission is adopting, as § 249.1702, a submission cover sheet and instructions that an SBSEF must use for filings submitted pursuant to Rules 804 through 807 and 816. Paragraph (a) of the submission cover sheet instructions provides that a properly completed submission cover sheet must accompany all rule and product submissions submitted electronically to the Commission by an SBSEF.734 Per paragraph (a), a properly completed submission cover sheet would include, among other things, the name and platform ID of the SBSEF.735 Currently, LEIs issued through the GLEIS are the only allowable platform IDs that may be used by registered SBSEFs.736 The Commission received comments on the use of LEIs, as well as the potential use of other identifiers in filings to the Commission under Regulation SE.737 One commenter supports the Commission’s effort to include the LEI for identifying SBSEFs, stating that the Commission’s decision to include the LEI creates consistency and transparency for the identification 730 See Rules 804(a)(1), 805(a)(1), 806(a)(1), 807(a)(1), and 807(d)(1) of Regulation SE. 731 See Rule 816(a)(1) of Regulation SE. 732 See Instruction (a) to the Security-Based Swap Execution Facility Sheet adopted as § 249.1702. 733 See the introductory text, subparagraphs (a)(2), (a)(4), and (b)(5)(ii), and Note 1 to Rule 405 of Regulation S–T. 734 See supra section IV.E. 735 See supra note 140. 736 Id. 737 See Letter from Stephan Wolf, CEO, Global Legal Entity Identifier Foundation, at 1–2 (June 10, 2022) (‘‘GLEIF Letter’’) at 1–2; Bloomberg Letter, supra note 18, at 11–12. E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87232 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations of execution facilities, while also enabling information sharing across agencies.738 The commenter points out that the LEI is the only global standard for legal entity identification and argues that by implementing the LEI more comprehensively the Commission would set forth a consistent identification scheme highlighted by the LEI. The commenter also supports the inclusion of the Unique Product Identifier (‘‘UPI’’), which is also an International Organization for Standardization (‘‘ISO’’) standard, as well as the Financial Instrument Global Identifier (‘‘FIGI’’), an adopted U.S. standard, arguing that open, nonproprietary data standards, which are established by voluntary standard bodies, facilitate the open exchange of information for regulators.739 Another commenter agrees that standard identifiers such as LEI, FIGI, and UPI should be included in an SBSEF’s other reporting obligations under Regulation SE. In particular, this commenter highlights a number of the potential benefits of FIGI, a unique, publicly available identifier that covers financial instruments across asset classes that arise, expire, and change on a daily basis. The commenter states that it developed FIGI to help solve licensing challenges and shortcomings in data organizations and governance that persist in the current regionally based security identifier numbering approaches. The commenter states that one of the benefits of FIGI is that it enables interoperability between other identification systems and does not force the use of a single identification system, which could lower costs when interacting between legacy systems, which may depend upon a single identifier, and newer systems, which typically have a more modern architecture. As a general matter, the commenter believes that firms should be permitted to choose among identifiers and have the flexibility to adopt, integrate, or switch to other identifiers as appropriate. According to the commenter, this would allow firms to orient decisions around reducing costs of integration or realizing added benefits that offset any such integration cost concerns.740 The Commission has considered the comments received on the provisions regarding LEIs and other identifiers. The Commission is adopting the submission cover sheet and instructions as proposed because LEIs issued through the GLEIS are currently the only 738 See GLEIF Letter, supra note 737, at 1. 739 See id. at 1–2. 740 See Bloomberg Letter, supra note 18, at 11–12. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 allowable platform IDs that may be used by registered SBSEFs, and as such it is appropriate and acceptable for them to be used on the submission cover sheet. With respect to other identifiers discussed by the commenters (i.e., UPI and FIGI), as well as other identifiers that may be under development globally by various entities, because they are not currently allowable IDs, it would not be appropriate or acceptable for them to be used on the submission cover sheet. XIV. Amendments to Commission’s Rules of Practice for Appeals of SBSEF Actions As noted above,741 SEA Core Principle 2 directs an SBSEF to exercise regulatory powers over its market.742 Under Rule 819 of Regulation SE, an SBSEF could take a variety of disciplinary actions against a member that is found to violate the SBSEF’s rules, including fining the member, limiting the member’s access, or barring the member entirely.743 SEA Core Principle 2 also requires an SBSEF to establish rules governing access to its market.744 An SBSEF could apply those rules in such a way as to limit a person’s access to the SBSEF or to deny access entirely without due process. Recognizing these concerns, in the Proposing Release, the Commission proposed a number of amendments to its Rules of Practice to allow for appeals for final disciplinary actions taken by an SBSEF, for denials or conditionings of membership, and for limitations or denials of access, noting that the CFTC has similar procedures with respect to SEFs.745 The Commission did not receive any comments on these proposed amendments to its Rules of Practice. General principles of due process necessitate an appeals procedure for 741 See supra section VI.B. e.g., 15 U.S.C. 78c–4(d)(2)(A) (directing an SBSEF to ‘‘establish and enforce compliance’’ with its rules) (emphasis added); 15 U.S.C. 78c– 4(d)(2)(C) (directing an SBSEF to ‘‘establish and enforce trading, trade processing, and participation rules that will deter abuses and have the capacity to detect, investigate, and enforce those rules’’) (emphasis added). 743 See supra section VI.B. See also Rule 819(c)(3) (relating to limitations on access, including suspensions and permanent bars); Rule 819(g) (relating to disciplinary procedures and sanctions). 744 See 15 U.S.C. 78c–4(d)(2)(A)(ii) (directing an SBSEF to establish and enforce compliance with any rule that imposes any limitation on access to the facility); 15 U.S.C. 78c–4(d)(2)(B)(i) (requiring an SBSEF to provide market participants with impartial access to the market). 745 See Proposing Release, supra note 1, 87 FR at 18935–37; See also part 9 of the CFTC’s rules (Rules Relating to Review of Exchange Disciplinary, Access Denial or Other Adverse Actions). For purposes of part 9, the term ‘‘exchange’’ includes a SEF. 742 See, PO 00000 Frm 00078 Fmt 4701 Sfmt 4700 SBSEF members aggrieved by disciplinary action taken by an SBSEF. Therefore, the Commission is adopting the amendments to its Rules of Practice as proposed, as detailed below, with a minor modification to Rule 442. A. Amendment to Rule 101 Existing Rule 101 of the Commission’s Rules of Practice 746 sets out definitions for several terms used in the Rules of Practice. In particular, existing Rule 101(a)(9) defines ‘‘proceeding’’ with respect to applications of review of actions by a variety of entities that are subject to the Commission’s jurisdiction. The Commission proposed a new paragraph (a)(9)(ix) of Rule 101 that provides that an application for a review of a determination (such as a final disciplinary action or a limitation or denial of access to any service) by an SBSEF would be a ‘‘proceeding’’ and thereby trigger the applicability of the Rules of Practice. The Commission received no comment on the proposed amendment to Rule 101 and is adopting this amendment to Rule 101 as proposed. B. Amendment to Rule 202 Existing Rule 202 of the Commission’s Rules of Practice 747 permits a party in certain proceedings before the Commission to make a motion to specify certain procedures with respect to such proceeding. Rule 202(a) excludes certain types of proceedings, including enforcement or disciplinary proceedings, proceedings to review a determination by an SRO, and proceedings to review a determination of the Public Company Accounting Oversight Board (‘‘PCAOB’’). Because the Commission proposed new Rules 442 and 443, which set out specific procedures with respect to proceedings to review a determination of an SBSEF,748 the Commission proposed to revise Rule 202(a) to add these SBSEFrelated proceedings to the list of exclusions. The Commission received no comment on the proposed amendment to Rule 202 and is adopting this amendment to Rule 202 as proposed. C. Amendment to Rule 210 Existing Rule 210 of the Commission’s Rules of Practice 749 sets out Commission rules with respect to parties, limited participants, and amici curiae in various proceedings before the Commission. Paragraph (a)(1) of Rule 746 17 CFR 201.101. CFR 201.202. 748 See infra sections XIV.E and F. 749 17 CFR 201.210. 747 17 E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 210 states that persons shall not be granted leave to become a party or nonparty participant on a limited basis in an enforcement or disciplinary proceeding, a proceeding to review a determination by an SRO, or a proceeding to review a determination by the PCAOB, except as authorized by paragraph (c) of Rule 210 (which permits limited instances in which persons may participate for Commission disciplinary and enforcement proceedings). Because the Commission proposed new Rules 442 and 443, which set out specific procedures with respect to proceedings to review a determination of an SBSEF,750 the Commission proposed to revise Rule 210 to exclude proceedings to review a determination by an SBSEF among the types of proceedings from which persons may be granted leave to become a party or a non-party participant on a limited basis. The Commission received no comment on the proposed amendment to Rule 210 and is adopting this amendment to Rule 210 as proposed. D. Amendment to Rule 401 The Commission proposed to amend existing Rule 401 of its Rules of Practice by adding a new paragraph (f). Paragraph (f)(1) would permit any person aggrieved by a stay of action by an SBSEF entered in accordance with Rule 442(c) to make a motion to lift the stay. The Commission could also, at any time, on its own motion determine whether to lift the automatic stay. Paragraph (f)(2) would provide that the Commission may lift a stay summarily, without notice and opportunity for hearing. Finally, paragraph (f)(3) would provide that the Commission may expedite consideration of a motion to lift a stay of action by an SBSEF, consistent with the Commission’s other responsibilities. Where consideration is expedited, persons opposing the lifting of the stay could file a statement in opposition within two days of service of the motion requesting lifting of the stay unless the Commission, by written order, specifies a different period. It is appropriate to allow persons affected by certain stays of action by an SBSEF the opportunity to make a motion to request the lifting of the stay. As discussed below, pursuant to Rule 442, an aggrieved person can file an application for review with the Commission with respect to a final disciplinary action, a final action with respect to a denial or conditioning of membership, or a final action with respect to a denial or limitation of 750 See infra sections XIV.E and F. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 access. The filing of such an application would operate as a stay of the SBSEF’s determination, and because of this automatic stay procedure, an aggrieved person or the SBSEF itself should be afforded a mechanism by which it could request the Commission to lift the stay, in addition to the Commission’s ability under Rule 401(f)(2) to lift a stay summarily, without notice and opportunity of hearing. The Commission received no comment on Proposed Rule 401(f) and is adopting Rule 401(f) as proposed. E. Rule 442—Right to Appeal Proposed Rule 442 would establish the right to an appeal to the Commission of certain final actions taken by an SBSEF and would set out certain procedural matters relating to any such appeal. Paragraph (a) of Rule 442 provides that an application for review by the Commission may be filed by any person who is aggrieved by a determination of an SBSEF with respect to any: (1) final disciplinary action, as defined in Rule 835(b)(1); (2) final action with respect to a denial or conditioning of membership, as defined in Rule 835(b)(2); or (3) final action with respect to a denial or limitation of access to any service offered by the SBSEF, as defined in Rule 835(b)(2). Paragraph (b) of Rule 442 sets forth the procedure in such cases. Specifically, an aggrieved person can file an application for review with the Commission (pursuant to existing Rule 151) within 30 days after the notice filed by the SBSEF with the Commission pursuant to Rule 835 is received by the aggrieved person, and must serve the application on the SBSEF at the same time.751 The Commission is modifying the text of Rule 442(b) from the proposal to clarify that the 30-day period for filing an application for review will not be extended absent a showing of extraordinary circumstances and that Rule 442(b) will be the exclusive remedy for seeking an extension of the 30-day period. Strict compliance with filing deadlines facilitates finality and encourages parties to act timely in seeking review. 751 Such an application would be required to identify the SBSEF’s determination complained of, set forth in summary form a statement of alleged errors in the action and supporting reasons therefor, and state an address where the applicant can be served. The application would be expected not to exceed two pages in length, and the notice of appearance required by § 201.102(d) would have to accompany the application if the applicant is to be represented by a representative. Any exception to an action not supported in an opening brief that complies with § 201.450(b) could, at the discretion of the Commission, be deemed to have been waived by the applicant. PO 00000 Frm 00079 Fmt 4701 Sfmt 4700 87233 Paragraph (c) of Rule 442 provides that filing an application for review with the Commission pursuant to Rule 835(b) would operate as a stay of the SBSEF’s determination, unless the Commission otherwise orders either pursuant to a motion filed in accordance with Rule 401(f) or upon its own motion.752 It is appropriate for the filing of an application for review to operate as an automatic stay of the SBSEF’s determination, because that determination could have the effect of significantly or even permanently damaging an aggrieved person’s business while the Commission was conducting a review, which could take substantial time.753 In addition, the Commission proposed in Rule 401(f) a procedure whereby a person aggrieved by such stay, including the SBSEF, can request that the Commission lift the stay.754 The rules also contain certain requirements relating to certification of the record and service of the index.755 Specifically, within 14 days after receipt of an application for review, an SBSEF would be required to certify and file with the Commission one unredacted copy of the record upon which it took the complained-of action. The SBSEF would be required to file electronically with the Commission one copy of an index of the record and serve one copy of the index on each party, subject to the requirements in Rule 442(d)(2) relating to sensitive personal information; if applicable, these filings would have to be certified that they have complied with the requirements relating to sensitive personal information. These requirements are appropriate to ensure that sensitive personal information is not improperly or inadvertently disseminated by an SBSEF as part of its filing of the record relating to the appeal review. 752 17 CFR 201.442(c). Commission received one comment describing the ability of persons aggrieved by certain actions by an SBSEF to apply for Commission review as ‘‘some kind of mandatory arbitration process, overseen by a self governing regulatory body,’’ and stating that this would not help retail investors. See Kevin Letter, supra note 95. The review of SBSEF action under Rule 442 would not be arbitration by a self-governing regulatory body but instead review by the Federal agency tasked by Congress with regulating SBSEFs. Further, only ECPs would be eligible to trade SBS on an SBSEF, and any offer or sale of SBS to ‘‘retail investors’’ would have to be effected on a national securities exchange. See SEA section 6(l), 15 U.S.C. 78f(l) (‘‘It shall be unlawful for any person to effect a transaction in a security-based swap with or for a person that is not an eligible contract participant, unless such transaction is effected on a national securities exchange . . . .’’). 754 See supra section XIV.D. 755 17 CFR 201.442(d) and (e). 753 The E:\FR\FM\15DER2.SGM 15DER2 87234 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations The Commission received no comment on Proposed Rule 442 and is adopting Rule 442 as proposed, with the modification to Rule 442(b) described above. ddrumheller on DSK120RN23PROD with RULES2 F. Rule 443—Sua sponte Review by Commission New Rule 443 756 provides that the Commission, on its own initiative, can order review of any determination by an SBSEF (which would include a final disciplinary action, a final action with respect to a denial or conditioning of membership, or a final action with respect to a denial or limitation of access to any services) that could be subject to an application for review pursuant to Rule 442(a) within 40 days after the SBSEF filed notice thereof. Rule 443 further provides that the Commission can, at any time before issuing its decision, raise or consider any matter that it deems material, whether or not raised by the parties. If it does so, the Commission must, under Rule 443, give notice to the parties and an opportunity for supplemental briefing with respect to issues not briefed by the parties, where the Commission believes that such briefing could significantly aid the decisional process. It is appropriate that the Commission have the ability to review any determination filed by an SBSEF that could be subject to an application for review under Rule 442(a), even without an appeal of that determination by an aggrieved party, should the Commission believe that further consideration is warranted. Therefore, the rule provides the Commission authority to obtain additional information through supplemental briefings, as needed. The Commission received no comment on Proposed Rule 443 and is adopting Rule 443 as proposed. G. Amendment to Rule 450 Existing Rule 450 of the Commission’s Rules of Practice 757 sets out requirements for briefs filed with the Commission. Rule 450(a) sets out a briefing schedule, and paragraph (a)(2) provides that the briefing schedule order shall be issued within 21 days, or such longer time as provided by the Commission, of receipt by the Commission of various types of appeals. The Commission proposed to amend Rule 450 by adding a new paragraph (a)(2)(iv) providing that the 21 days would be triggered by ‘‘[r]eceipt by the Commission of an Index to the record of a determination by a security-based 756 17 757 17 CFR 201.443. CFR 201.450. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 swap execution facility filed pursuant to § 201.442(d).’’ The Commission received no comment on the proposed amendment to Rule 450 and is adopting this amendment to Rule 450 as proposed. The Commission finds, in accordance with the Administrative Procedure Act (‘‘APA’’), that these amendments to the delegations of authority relate solely to agency organization, procedure, or practice.761 Accordingly, the APA’s provisions regarding notice of H. Amendment to Rule 460 rulemaking and opportunity for public Existing Rule 460 of the Commission’s comment are not applicable to these rules. These rules do not substantially Rules of Practice 758 states that the affect the rights or obligations of nonCommission shall determine each agency parties and pertain to increasing matter on the basis of the record. Rule 460(a) defines the contents of the record efficiency of internal Commission operations. For the same reasons, the with respect to various types of action. provisions of the Small Business The Commission proposed a new Regulatory Enforcement Fairness Act paragraph (a)(4) of Rule 460, which are not applicable to these rules.762 states that, in a proceeding for a final Additionally, the provisions of the decision before the Commission 763 which reviewing a determination of an SBSEF, Regulatory Flexibility Act, apply only when notice and comment the record shall consist of: (i) the record are required by the APA or other law, certified by the SBSEF pursuant to are not applicable to these rules.764 The § 201.442(d); (ii) any application for amendments to these rules do not review; and (iii) any submissions, contain any collection of information moving papers, and briefs filed on requirements as defined by the appeal or review. Paperwork Reduction Act of 1995.765 To The Commission received no the extent that these rules relate to comment on the proposed amendment agency information collections during to Rule 460 and is adopting this the conduct of administrative amendment to Rule 460 as proposed. proceedings, they are exempt from XV. Amendments to Delegations of review under the PRA. Further, because Authority in Rule 30–3 and Rule 30–14 these amendments impose no new burdens on private parties, the In connection with the adoption of amendments will not have any impact Regulation SE, the Commission is of section revising its rules delegating authority to on competition for purposes 766 23(a)(2) of the Exchange Act. the Director of the Division of Trading Accordingly, the Commission is and Markets (‘‘TM Division Director’’) amending its rules, by adding new and to the General Counsel in order to paragraphs (95)–(102) to Rule 30–3, to delegate authority to take actions delegate authority to the Division necessary to carry out the rules under Director to perform certain actions Regulation SE and to facilitate the necessitated by Regulation SE. The operation of the regulatory structure Commission is also amending created in Regulation SE.759 These paragraphs (4), (5), (7), and (8) of Rule revisions are intended to conserve 30–14 (17 CFR 200.30–14) to delegate Commission resources and increase the authority to the General Counsel to effectiveness and efficiency of the perform certain actions in connection Commission’s process for handling with Commission review proceedings of certain processes required by Regulation SBSEF actions. Under these delegations, SE and for resolving appeals of SBSEF the Division Director or the General final actions.760 Congress has authorized Counsel, as applicable, (or, under his or such delegation by Public Law 87–592, her direction, such person or persons as 76 Stat. 394, 15 U.S.C. 78d–1(a), which might be designated from time to time provides that the Commission ‘‘shall by the Chairman of the Commission 767) have the authority to delegate, by is authorized to perform the actions published order or rule, any of its discussed below. Notwithstanding these functions to . . . an employee or employee board, including functions 761 5 U.S.C. 553(b)(3)(A). 762 See 5 U.S.C. 804(3)(C) (the term ‘‘rule’’ does with respect to hearing, determining, not include ‘‘any rule of agency organization, ordering, certifying, reporting, or procedure, or practice that does not substantially otherwise acting as to any work, affect the rights or obligations of non-agency business or matter.’’ parties’’). 763 5 758 17 CFR 201.460. 759 17 CFR 200.30–3. 760 In the Proposing Release, the Commission stated that it ‘‘may address delegations of its authority in the adopting release for Regulation SE.’’ Proposing Release, supra note 1, 87 FR at 28877. PO 00000 Frm 00080 Fmt 4701 Sfmt 4700 U.S.C. 60 et seq. 5 U.S.C. 601(2). 765 See 5 CFR 1320.3. 766 15 U.S.C. 78w(a)(2). 767 See 17 CFR 200.30–3 and 17 CFR 200.30–14 (sub-delegation language applicable as a result of the addition of subparagraphs related to Regulation SE to the existing rules). 764 See E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations delegations, the Division Director or the General Counsel, as applicable, may submit any matter he or she believes appropriate to the Commission.768 Furthermore, any action taken by the Division Director or the General Counsel, as applicable, pursuant to delegated authority would be subject to Commission review as provided by Rules 430 and 431 of the Commission’s Rules of Practice, 17 CFR 201.430– 201.431 and 15 U.S.C. 78d–1(b). ddrumheller on DSK120RN23PROD with RULES2 A. Delegated Authority Related to SBSEF Registration and Form SBSEF With respect to certain Commission actions related to the registration process for SBSEFs and the review of Form SBSEF under Rule 803 and Rule 808, the Division Director has delegated authority: to publish notice on the Commission’s website of a completed Form SBSEF and make available on the Commission’s website certain specified parts of a Form SBSEF; to notify the applicant that its application is incomplete; to request from the applicant additional information and documentation necessary; to notify the applicant that its application is materially incomplete and to specify the deficiencies in the application, for purposes of staying the 180-day period for Commission review of the Form SBSEF; and to issue an order vacating the SBSEF’s registration and to send a copy of the related request and order of vacation to all other SBSEFs, SBS exchanges, and registered clearing agencies that clear security-based swaps.769 B. Delegated Authority Related to New Products Proposed by an SBSEF With respect to certain Commission actions related to self-certification of new products by an SBSEF under Rule 804, the Division Director has delegated authority: to stay for a period of up to 90 days the effectiveness of a securitybased swap execution facility’s selfcertification of a new product; to publish notice on the Commission’s website of a 30-day period for public comment; and to withdraw the stay or notify the security-based swap execution facility that the Commission objects to the proposed certification.770 With respect to certain Commission actions related to voluntary submission of new products by an SBSEF under Rule 805, the Division Director has delegated authority: to notify the submitting SBSEF that a submission for 768 17 CFR 200.30–3(l) and 17 CFR 200.30–14(l). 769 See 17 CFR 200.30–3(a)(95), as adopted herein. 770 See 17 CFR 200.30–3(a)(96), as adopted herein. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 a new product does not comply with paragraph (a) of Rule 805; to make the SBSEF’s submission publicly available on the Commission’s website; to extend by an additional 45 days the period for consideration of a new product voluntarily submitted by an SBSEF if the product raises novel or complex issues that require additional time to analyze, and to notify the SBSEF of the same; to issue an extension of such longer period as to which the SBSEF agrees in writing; to approve a proposed new product and provide notice of the approval to the SBSEF; to notify the SBSEF that the Commission will not, or is unable to, approve the product, and to specify the nature of the issues raised and the specific provision of the SEA or the Commission’s rules thereunder, that the product violates, appears to violate, or potentially violates but which cannot be ascertained from the submission.771 C. Delegated Authority Related to New Rules or Rule Amendments Proposed by an SBSEF With respect to certain Commission actions related to proposed rules or rule amendments proposed by an SBSEF under Rule 806, the Division Director will have delegated authority: to notify the submitting SBSEF that a submission for a new rule or rule amendment does not comply with paragraph (a) of Rule 806; to make the SBSEF’s submission publicly available on the Commission’s website; to extend by an additional 45 days the period for consideration of a proposed rule or rule amendment voluntarily submitted by an SBSEF if the proposed rule or rule amendment raises novel or complex issues that require additional time to review or is of major economic significance, the submission is incomplete, or the requester does not respond completely to the Commission questions in a timely manner, and to notify the SBSEF of the same; to issue an extension of such longer period as to which the SBSEF agrees in writing; to approve a proposed rule or rule amendment and provide notice of the approval to the SBSEF; to notify the SBSEF that the Commission will not, or is unable to, approve the new rule or rule amendment, and to specify the nature of the issues raised and the specific provisions of the SEA or the Commission’s rules thereunder, including the form or content requirements of Rule 806, with which the new rule or rule amendment is inconsistent or appears to be inconsistent; and to approve a proposed rule or a rule amendment, including 771 See 17 CFR 200.30–3(a)(97), as adopted herein. PO 00000 Frm 00081 Fmt 4701 Sfmt 4700 87235 changes to terms and conditions of a product, on an expedited basis under such conditions as shall be specified in the written notification.772 In addition, the Division Director has delegated authority to undertake certain Commission actions related to proposed rules or rule amendments self-certified by an SBSEF under Rule 807. Specifically, the Division Director has delegated authority: to make publicly available on the Commission’s website a security-based swap execution facility’s filing of new rules and rule amendments pursuant to the self-certification procedures of Rule 807; to stay for a period of up to 90 days the effectiveness of an SBSEF’s self-certification of a new rule or rule amendment; to publish notice on the Commission’s website of a 30-day period for public comment; and to withdraw the stay or notify the security-based swap execution facility that the Commission objects to the proposed certification.773 D. Delegated Authority Related To Request for Joint Interpretation With respect to a request by an SBSEF, the Commission, or the CFTC, for a joint interpretation of whether a proposed product is a swap, securitybased swap, or mixed swap under existing SEA Rule 3a68–2, as contemplated by Rule 809, the Division Director has delegated authority to provide written notice to an SBSEF of a stay or tolling pending issuance of a joint interpretation.774 E. Delegated Authority Related to SBSEF Submissions Contemplated by Rule 811 With respect to information relating to SBSEF compliance under Rule 811, the Division Director has delegated authority: to request pursuant to Rule 811(a) that an SBSEF file with the Commission information related to its business as a security-based swap execution facility, and to specify the form, manner, and timeframe for the filing; to request pursuant to Rule 811(b) that an SBSEF file with the Commission a written demonstration that it is in compliance with one or more Core Principles or with its other obligations under the SEA or the Commission’s rules thereunder and to specify the form, manner, and timeframe for such a filing; to specify, pursuant to Rule 811(c)(2), the form and manner of the notification required pursuant to Rule 811(c)(1) by an SBSEF of any 772 See 17 CFR 200.30–3(a)(98), as adopted herein. 773 See 17 CFR 200.30–3(a)(99), as adopted herein. 774 See 17 CFR 200.30–3(a)(100), as adopted herein. E:\FR\FM\15DER2.SGM 15DER2 87236 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations transaction involving the direct or indirect transfer of 50 percent or more of the equity interest in the securitybased swap execution facility, and to request supporting documentation of the transaction; to specify the form and manner of the certification required pursuant to Rule 811(c)(4) that an SBSEF meets all of the requirements of section 3D of the SEA and the Commission rules thereunder; and to specify the form and manner of the submission by an SBSEF of documents filed in any material legal proceeding to which the security-based swap execution facility is a party or its property or assets is subject, as specified in Rule 811(d)(1), or in any material legal proceeding instituted against any officer, director, or other official of the SBSEF from conduct in such person’s capacity as an official of the SBSEF, as specified in Rule 811(d)(2), and to request further documents.775 ddrumheller on DSK120RN23PROD with RULES2 F. Delegated Authority Related to Information Sharing With respect to certain Commission actions related to information sharing under Rule 822, the Division Director has delegated authority to require that an SBSEF provide information in its possession to the Commission and to specify the form and manner of that provision, and to require an SBSEF share information with other regulatory organizations, data repositories, and third-party data reporting services as necessary and appropriate to fulfill the SBSEF’s regulatory and reporting responsibilities.776 G. Delegated Authority Related to Commission Review Proceedings With respect to Commission review proceedings for final disciplinary actions taken by an SBSEF, for denials or conditionings of membership, and for limitations or denials of access, the General Counsel has delegated authority: to determine that an application for review has been abandoned and then to issue an order dismissing the application; to determine applications to stay Commission orders pending appeal of those orders to the federal courts and to determine application to vacate such stays; to grant or deny requests for oral argument before the Commission; and to determine whether to lift the automatic stay of a disciplinary sanction imposed by an SBSEF.777 775 See 17 CFR 200.30–3(a)(101), as adopted herein. 776 See 17 CFR 200.30–3(a)(102), as adopted herein. 777 See 17 CFR 200.30–14(4) through (5) and (7) through (8), as adopted herein. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 XVI. Compliance Schedule In the Proposing Release, the Commission stated that it intended to include a compliance schedule along with any final rules, and it sought public comment to assist it in developing an appropriate compliance schedule.778 The Commission received several comments. One commenter agrees that SEF operators can leverage their experience with SEF registration and operation in order to comply with any final SBSEF rules, but states that creating and maintaining a new platform, regardless of any similarities to existing systems, will inevitably require substantial time and resources to ensure operational, technical, and regulatory compliance. This commenter suggests that the Commission provide a compliance timeline of at least 12 months following the effective date of any final rules.779 Another commenter states that, while substantial harmonization should lower compliance and operations costs by allowing SBSEFs and market participants to use their existing procedures and systems, it is still important to allow sufficient lead time for potential SBSEFs and market participants to come into compliance with the new regulatory framework. The commenter states that existing SEFs will need to make certain technological changes to their platform to conform to the new rules and that additional time will be required for testing, finalizing a new rulebook, and putting in place the requisite agreements with SBSEF clients. This commenter states that the Commission should set a compliance date that is at least 18 months from the date of effectiveness of any final rule.780 One commenter states that, absent a phased-in implementation approach, the SBS market could suffer from significant disruptions. Therefore, this commenter states, the Commission should provide ‘‘phased-in compliance’’ with the required methods of execution, whereby a MAT SBS product may be executed on an SBSEF via any method of execution until such time as it is determined through notice and comment that an appropriate level of liquidity exists to enable an order book or RFQ-to-3 system. This commenter states that, when considering the lack of liquidity in SBS products, pre-trade price transparency via the proposed RFQ-to-3 requirement could negatively affect liquidity provision for end-users because, if clients are required to show 778 See Proposing Release, supra note 1, 87 FR at 28937. 779 See Tradeweb Letter, supra note 18, at 6–7. 780 See Bloomberg Letter, supra note 18, at 21. PO 00000 Frm 00082 Fmt 4701 Sfmt 4700 their hand to three liquidity providers, it may lead to information leakage and an inability to hedge their risks through SBS markets. This is particularly so, the commenter says, because there are only a relatively small number of active dealers for many SBS products.781 This commenter further states that an RFQ-to-3 requirement would also be problematic for SBS equities, where current execution processes are very different from their swaps counterpart, and where common trading practices and counterparty exchanges would not be possible on an RFQ-to-3 or order book system. The commenter states that it has compared the credit swaps activity that occurred on-venue in 2012 (before the CFTC trade execution requirement became effective) with the credit SBS activity that occurs on venue today. The commenter reports that the result is that 48.2% of AMRS CDX trading client volume was on-venue in 2012, while only 4.9% of AMRS SNCDS trading client volume occurred onvenue in 2022 (up to the date of the commenter’s letter). The commenter states that this shows that the swaps market was much more ready for the implementation of the trade execution requirement than the credit SBS market is today.782 The Commission agrees that some period of time will be required for would-be SBSEFs not only to register with the Commission, but also to create a new platform; put in place policies, procedures, and arrangements to ensure operational, technical and regulatory compliance; establish its own rules; and put in place the requisite agreements with SBSEF clients. The Commission does not agree, however, with the comment that a separate, ‘‘phased-in’’ compliance schedule should be put in place for the required methods of execution and that the Commission should engage in future notice and comment before applying the required methods of execution to SBS that have been made available to trade. First, no SBS are currently subject to a clearing determination, so it would not be possible for any SBSEF to make an SBS available to trade and subject it to the required methods of execution. Second, as discussed above, before an SBS becomes subject to the trade execution requirement, the Commission would have had multiple opportunities to consider the trading characteristics of the SBS.783 Even after the Commission has made a clearing determination with 781 See ISDA–SIFMA Letter, supra note 18, at 6. id. 783 See supra notes 181–185 and accompanying text. 782 See E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations respect to an SBS, to make that SBS ‘‘available to trade,’’ an SBSEF would, under Rule 816(a)(1), have to make a filing with the Commission under Rule 806 or Rule 807—both of which would allow the Commission to find that a filing was not consistent with the requirements of the SEA or Regulation SE.784 This filing would, under Rule 816(b), have to address, as appropriate, a number of relevant factors, including whether there are ready and willing buyers and sellers; the frequency or size of transactions; the trading volume; the number and types of market participants; the bid/ask spread; and the usual number of resting firm or indicative bids and offers. And a national securities exchange that wished to make an SBS ‘‘available to trade’’ would have to file a rule change under Rule 19b–4,785 and that proposed rule change would be subject to Commission review for compliance with the requirements of the SEA. Therefore, the Commission is not adopting a separate, ‘‘phased-in’’ compliance schedule for the required methods of execution. Further, with respect to commenters who proposed specific timeframes for implementation (e.g., 12 months or 18 months), the Commission’s proposed compliance schedule is better designed to facilitate timely and achievable implementation of Regulation SE because it reflects that the entities that are likely to register as SBSEFs have been accustomed to operating SBS trading platforms pursuant to exemptive relief granted by the Commission.786 Thus, it is appropriate to provide these entities with a reasonable period of time—through a compliance schedule tied to the completion of the steps required for registration as an SBSEF— to come into compliance with the requirements of Regulation SE. Further, because most, if not all, entities that seek to register as SBSEFs will be CFTCregistered SEFs—and because the Commission has sought to harmonize both the registration form and exhibits for SBSEFs and the substance of the rules applicable to SBSEFs with the CFTC regulations applicable to SEFs— the entities seeking to register as SBSEFs will be able to complete the each of the steps necessary for registration in the allotted periods. Therefore, the Commission is adopting the following compliance schedule for Regulation SE. The SBSEF rules shall become effective 60 days after the date of publication in the Federal Register (‘‘Effective Date’’). 784 See supra sections IV.A and B. CFR 240.19b–4. 786 See supra section XII. 785 17 VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 Once Regulation SE has become effective, any entity that meets the definition of SBSEF may file an application to register with the Commission on Form SBSEF at any time after the Effective Date.787 As discussed above,788 the Temporary SBSEF Exemptions will expire 180 days after the Effective Date for any entity that has not filed an application to register with the Commission on Form SBSEF. Thus, an entity that meets the definition of SBSEF and engages in such activities but fails to submit an application on Form SBSEF by 180 days after the Effective Date would be in violation of the registration requirement of Rule 803. For an entity that has submitted an application on Form SBSEF by 180 days after the Effective Date, the exemptive relief relating to SBSEF registration would expire 240 days after the Effective Date, except with respect to an entity whose application on Form SBSEF is complete (having responded to requests by the Commission’s staff for revisions or amendments) within 240 days of the Effective Date. An entity that has submitted an application within 180 days of the Effective Date and whose application is complete within 240 days of the Effective Date will continue to benefit from the exemption from registration until 30 days after the Commission acts to approve or disapprove the application on Form SBSEF. XVII. Economic Analysis A. Introduction To increase the transparency and oversight of the OTC derivatives market,789 Title VII of the Dodd-Frank Act requires the Commission to undertake a number of rulemakings to implement the regulatory framework for SBS that is set forth in the legislation, including among other things, (1) the registration and regulation 790 of SBSEFs; and (2) mitigating conflicts of interest with respect to SBSEFs, SBS exchanges, and SBS clearing agencies. To satisfy these statutory mandates, the Commission is adopting Regulation SE and associated forms under section 3D of the SEA that would create a regime 787 Once Regulation SE has become effective, applications for exemptions under Rule 833 may also be submitted. See supra section VII.B (discussing cross-border exemptions for foreign trading venues and relating to the trade execution requirement). 788 See supra section XII (discussing the rescission of exemptive relief). 789 See Public Law 111–203 Preamble. 790 The regulation of SBSEFs includes, among other things, requiring SBSEFs to comply with the Core Principles set forth in section 3D(d) of the SEA. See supra section VI. PO 00000 Frm 00083 Fmt 4701 Sfmt 4700 87237 for the registration and regulation of SBSEFs and address other issues relating to SBS execution generally.791 One of the rules being adopted as part of Regulation SE, Rule 834, implements section 765 of the Dodd-Frank Act, which is intended to mitigate conflicts of interest at SBSEFs and SBS exchanges. Other rules being adopted as part of Regulation SE address the crossborder application of the SEA’s trading venue registration requirements and the trade execution requirement for SBS. In addition, the Commission is amending existing Rule 3a1–1 under the SEA to exempt, from the SEA definition of ‘‘exchange,’’ registered SBSEFs that provide a market place for no securities other than SBS, and certain registered clearing agencies. The Commission is also adopting new Rule 15a–12 under the SEA that, while affirming that an SBSEF also would be a broker under the SEA, would exempt a registered SBSEF from certain broker requirements. The Commission is also adopting certain new rules and amendments to its Rules of Practice to allow persons who are aggrieved by certain actions by an SBSEF to apply for review by the Commission. Currently, SBS trade in the OTC market, rather than on regulated trading venues. The existing market for SBS is opaque, with little, if any, pre-trade transparency. With limited transparency, the information asymmetry between liquidity providers (i.e., SBS dealers) and end users could be significant. Specifically, liquidity providers may observe information about the trading process (e.g., trading interest, quotes, order flows, and trades) that end users typically cannot observe. The SBS market also is decentralized such that market participants incur search costs to locate other market participants in order to trade. While the SBS market is decentralized, it also is interconnected and global in scope.792 SBS dealers can have hundreds of counterparties, consisting of end users and other SBS dealers. Trading venues may serve hundreds of end user and SBS dealer participants. SBS transactions arranged, negotiated, or executed by personnel located in the U.S. may involve wholly foreign counterparties. Furthermore, U.S. persons may choose to trade SBSs on foreign venues, which are subject to 791 Among other things, the Commission is adopting Form SBSEF for persons seeking to register with the Commission as an SBSEF and a submission cover sheet and instructions to be used in rule and product filings made by SBSEFs. 792 See also section VII.A supra and XVII.B.2 infra (discussing the global nature of the SBS market). E:\FR\FM\15DER2.SGM 15DER2 87238 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations OTC derivatives regulations imposed by local regulatory authorities. The adopted rules and amendments will affect SBSEFs, SBS exchanges, foreign SBS trading venues, and ECPs (i.e., SBS dealers and end users).793 In addition, the adopted rules and amendments will affect entities that act as third-party service providers to SBSEFs. The Commission is mindful of the economic effects, including the costs and benefits, of the adopted rules and amendments. Section 3(f) of the SEA, 15 U.S.C. 78c(f), directs the Commission, when engaging in rulemaking where it is required to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation. In addition, section 23(a)(2) of the SEA, 15 U.S.C. 78w(a)(2), requires the Commission, when making rules under the SEA, to consider the impact that the rules would have on competition, and prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the SEA. The analysis below addresses the likely economic effects of the adopted rules and amendments, including their anticipated and estimated benefits and costs and their likely effects on efficiency, competition, and capital formation. The Commission also discusses the potential economic effects of certain alternatives to the approaches taken in this release. The Commission received a number of comments related to various aspects of the economic analysis in the Proposing Release. The Commission has considered and responds to these comments in the sections that follow. B. Economic Baseline ddrumheller on DSK120RN23PROD with RULES2 1. Existing Regulatory Framework The economic analysis appropriately considers existing regulatory requirements, including recently adopted rules, as part of its economic baseline against which the costs and benefits of the adopted rules and amendments are measured.794 The 793 Only ECPs are eligible to trade on an SBSEF, and retail investors would have access to an SBS only after an SBS exchange has filed a proposed rule change with the Commission under Rule 19b– 4, 17 CFR 240.19b–4, to amend its rules to permit the listing of a registered SBS, with that proposed rule change being published for public comment. See supra note 103. 794 See, e.g., Nasdaq v. SEC, 34 F.4th 1105, 1111– 15 (D.C. Cir. 2022). This approach also follows SEC staff guidance on economic analysis for rulemaking. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 analysis includes provisions of the SEA, as amended by the Dodd-Frank Act, that currently govern the SBS market, and rules adopted by the Commission thereunder, including in the Intermediary Definitions Adopting Release,795 the Cross-Border Adopting Release,796 the SDR Rules and Core Principles Adopting Release,797 the Regulation SBSR Adopting Release I,798 the Registration Adopting Release,799 the ANE Adopting Release,800 the Business Conduct Adopting Release,801 the Trade Acknowledgement and Verification Adopting Release,802 the Regulation SBSR Adopting Release II,803 the Rule of Practice 194 Adopting Release,804 the Capital, Margin, and Segregation Adopting Release,805 the Recordkeeping and Reporting Adopting Release,806 the Risk Mitigation Adopting Release,807 the Cross-Border Amendments Adopting Release,808 and the Clearing Exemption Adopting Release.809 The baseline also includes the Temporary SBSEF Exemptions 810 and the CFTC rules that apply to CFTCregistered SEFs. See Staff’s ‘‘Current Guidance on Economic Analysis in SEC Rulemaking’’ (Mar. 16, 2012), available at https://www.sec.gov/divisions/riskfin/ rsfi_guidance_econ_analy_secrulemaking.pdf (‘‘The economic consequences of proposed rules (potential costs and benefits including effects on efficiency, competition, and capital formation) should be measured against a baseline, which is the best assessment of how the world would look in the absence of the proposed action.’’); Id. at 7 (‘‘The baseline includes both the economic attributes of the relevant market and the existing regulatory structure.’’). The best assessment of how the world would look in the absence of the proposed or final action typically does not include recently proposed actions, because doing so would improperly assume the adoption of those proposed actions. 795 See Further Definition of ‘‘Swap Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap Participant,’’ ‘‘Major Security-Based Swap Participant’’ and ‘‘Eligible Contract Participant,’’ SEA Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012) (‘‘Intermediary Definitions Adopting Release’’). 796 See Application of ‘‘Security-Based Swap Dealer’’ and ‘‘Major Security-Based Swap Participant’’ Definitions to Cross-Border SecurityBased Swap Activities, SEA Release No. 72472 (June 25, 2014), 79 FR 47278 (Aug. 12, 2014) (‘‘Cross-Border Adopting Release’’). 797 See Security-Based Swap Data Repository Registration, Duties, and Core Principles, SEA Release No. 74246 (Feb. 11, 2015), 80 FR 14438 (Mar. 19, 2015) (‘‘SDR Rules and Core Principles Adopting Release’’). 798 See Regulation SBSR Adopting Release I, supra note 140. 799 See Registration Process for Security-Based Swap Dealers and Major Security-Based Swap Participants, SEA Release No. 75611 (Aug. 5, 2015), 80 FR 48964 (Aug. 14, 2015) (‘‘Registration Adopting Release’’). 800 See Security-Based Swap Transactions Connected with a Non-U.S. Person’s Dealing Activity That Are Arranged, Negotiated, or Executed By Personnel Located in a U.S. Branch or Office or in a U.S. Branch or Office of an Agent; Security-Based Swap Dealer De Minimis Exception, SEA Release No. 77104 (Feb. 10, 2016), 81 FR 8598 (Feb. 19, 2016) (‘‘ANE Adopting Release’’). 801 See Business Conduct Standards Release, supra note 101. 802 See Trade Acknowledgment and Verification of Security-Based Swap Transactions, SEA Release No. 78011 (June 8, 2016), 81 FR 39808 (June 17, 2016) (‘‘Trade Acknowledgment and Verification Adopting Release’’). 803 See Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, SEA Release No. 78321 (July 14, 2016), 81 FR 53546 (Aug. 12, 2016) (‘‘Regulation SBSR Adopting Release II’’). Final SBS Entity registration rules have been adopted and compliance was required as of November 1, 2021.811 As of September 28, 2023, there were 51 entities registered with the Commission as SBS dealers, and no entity registered as a major SBS participant.812 One commenter asserts that not all registered SBS dealers are consistently active in trading SBS. Trading activity in the SBS markets tends to be more concentrated among a subset of such registered SBS PO 00000 Frm 00084 Fmt 4701 Sfmt 4700 2. Security-Based Swap Data, Market Participants, Dealing Structures, Levels of Security-Based Swap Trading Activity, and Market Participant Domiciles 804 See Applications by Security-Based Swap Dealers or Major Security-Based Swap Participants for Statutorily Disqualified Associated Persons To Effect or Be Involved in Effecting Security-Based Swaps, SEA Release No. 84858 (Dec. 19, 2018), 84 FR 4906 (Feb. 19, 2019) (‘‘Rule of Practice 194 Adopting Release’’). 805 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital and Segregation Requirements for Broker-Dealers, SEA Release No. 86175 (June 21, 2019), 84 FR 43872 (Aug. 22, 2019) (‘‘Capital, Margin, and Segregation Adopting Release’’). 806 See Recordkeeping and Reporting Adopting Release, supra note 704. 807 See Risk Mitigation Techniques for Uncleared Security-Based Swaps, SEA Release No. 87782 (Dec. 18, 2019), 85 FR 6359 (Feb. 4, 2020) (‘‘Risk Mitigation Adopting Release’’). 808 See Cross-Border Application of Certain Security-Based Swap Requirements, SEA Release No. 87780 (Dec. 18, 2019), 85 FR 6270 (Feb. 4, 2020) (‘‘Cross-Border Amendments Adopting Release’’). 809 See Exemption from the Definition of ‘‘Clearing Agency’’ for Certain Activities of Security-Based Swap Dealers and Security-Based Swap Execution Facilities, SEA Release No. 90667 (Dec. 16, 2020), 86 FR 7637 (Feb. 1, 2021) (‘‘Clearing Exemption Adopting Release’’). 810 See supra section III and note 46. 811 See Key Dates for Registration of SecurityBased Swap Dealers and Major Security-Based Swap Participants, available at https:// www.sec.gov/page/key-dates-registration-securitybased-swap-dealers-and-major-security-basedswap-participants. 812 See List of Registered Security-Based Swap Dealers and Major Security-Based Swap Participants, available at https://www.sec.gov/files/ list-sbsds-msbsps-9-28-2023-locked-final.xlsx (providing the list of registered SBS dealers and major SBS participants that was updated as of Sept. 28, 2023). E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations dealers, which increases liquidity concerns in these markets.813 Market participants such as SBS dealers and major SBS participants were required to report security-based swap transactions to registered security-based swap data repositories (‘‘SBSDRs’’) pursuant to Regulation SBSR beginning on November 8, 2021.814 The Commission uses information reported pursuant to Regulation SBSR to two registered SBSDRs—Depository Trust & Clearing Corporation Data Repository (‘‘DDR’’) and ICE Trade Vault (‘‘ITV’’)—to describe the baseline.815 Table 1 shows that U.S. security-based swaps market activity is split across three asset classes: credit, equity, and interest rate.816 Based on information reported to DDR, as of November 25, 2022, there were approximately 523,000, 3.4 million, and 5,700 active security-based swaps in the credit, equity, and interest rate asset classes, respectively. The gross notional amounts outstanding in the credit, equity, and interest rate asset classes were respectively, approximately $2.8, $3.6, and $0.18 trillion.817 Based on information reported to ITV, as of November 25, 2022, there were approximately 155,000 active credit security-based swaps with gross notional amount outstanding of approximately $1.9 trillion. Table 1 also shows that U.S. SBS market participants trade a variety of security-based swaps in each of the three asset classes. Based on information reported to DDR, as of November 25, 2022, for active credit security-based swaps, single-name corporate CDS constitute the largest product type, with approximately 364,000 active CDS and $1.6 trillion gross notional amount outstanding. The second largest active credit securitybased swaps product type consists of single-name sovereign CDS, with approximately 94,000 active CDS and $0.9 trillion gross notional amount outstanding. For active equity security-based swaps, equity portfolio swaps constitute the largest product type, with approximately 2.3 million active equity 87239 portfolio swaps and $1.7 trillion gross notional amount outstanding. The second largest active equity securitybased swaps product type consists of equity swaps, with approximately 492,000 active equity swaps and $1.2 trillion gross notional amount outstanding.818 In the interest rate asset class, exotics constitute the largest product type, with approximately $0.1 trillion gross notional amount and 4,400 active exotic swaps outstanding. Based on information reported to ITV, as of November 25, 2022, active credit security-based swaps fall into two product types. Single-name corporate CDS constitute the largest product type, with approximately 135,000 active CDS and $1.3 trillion gross notional amount outstanding. The second largest active credit security-based swaps product type consists of single-name sovereign CDS, with approximately 20,000 active CDS and $0.5 trillion gross notional amount outstanding. TABLE 1—GROSS NOTIONAL AMOUNT AND ACTIVE SECURITY-BASED SWAPS OUTSTANDING ON NOV. 25, 2022, CATEGORIZED BY ASSET CLASS AND PRODUCT CLASSIFICATION a Active security-based swap count SBSDR Asset class Product type DDR ..................... Credit ............................................. Index .......................................................................... Single-Name: Corporate ............................................ Single-Name: Sovereign ............................................ Total Return Swap b .................................................. Other c ........................................................................ 44,407 1,556,315 900,072 156,849 122,970 2,992 364,465 93,807 49,867 12,081 Total ....................................................................... Portfolio Swap ........................................................... Swap .......................................................................... Contract For Difference ............................................. Option ........................................................................ Forward ...................................................................... 2,780,613 1,688,672 1,183,279 398,952 6,915 5,663 523,212 2,266,706 491,508 642,965 1,281 1,393 Equity ............................................. 813 See ISDA–SIFMA Letter, supra note 18, at 2 n.5. ddrumheller on DSK120RN23PROD with RULES2 Gross notional amount outstanding (millions of USD) 814 See SEC Approves Registration of First Security-Based Swap Data Repository; Sets the First Compliance Date for Regulation SBSR, available at https://www.sec.gov/news/press-release/2021-80. 815 DDR operates as a registered SBSDR for security-based swap transactions in the credit, equity, and interest rate derivatives asset classes. ITV operates as a registered SBSDR for securitybased swap transactions in the credit derivatives asset class. See Security-Based Swap Data Repositories; DTCC Data Repository (U.S.) LLC; Order Approving Application for Registration as a Security-Based Swap Data Repository, Exchange Act Release No. 91798 (May 7, 2021), 86 FR 26115 (May 12, 2021); Security-Based Swap Data Repositories; ICE Trade Vault, LLC; Order Approving Application for Registration as a Security-Based Swap Data Repository, Exchange Act Release No. 92189 (June 16, 2021), 86 FR 32703 (June 22, 2021). The statistics presented herein are based on the Report on Security-Based Swaps Pursuant to section 13(m)(2) of the Securities VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 Exchange Act of 1934, that the Commission issued on Mar. 20, 2023 and is available at https:// www.sec.gov/files/report-security-based-swaps032023.pdf (‘‘SBS Report’’). 816 In this release, interest-rate security-based swaps refer to non-CDS debt security-based swaps, which are primarily total return swaps that replicate the payoff of a bond or a narrow index of bonds, where the buyer usually pays either a fixed or floating benchmark rate to the seller in exchange for the total return of the bond or the narrow index of bonds. These swaps are a subset of over-thecounter derivatives in the interest-rate asset class. 817 Active security-based swaps are those that have been neither terminated nor reached their scheduled maturity and are therefore open positions as of Nov. 25, 2022. Gross notional amount outstanding represents the total outstanding notional value of active, market-facing securitybased swaps on Nov. 25, 2022. Security-based swaps are considered to be ‘‘market-facing’’ when they are executed at arms-length between third parties. While a reporting party is only required to report a transaction to one SBSDR—either DDR or PO 00000 Frm 00085 Fmt 4701 Sfmt 4700 ITV—some uncleared security-based swaps in DDR also appear in ITV. As of Nov. 25, 2022, there were 605 active credit security-based swaps in ITV that were reported as uncleared (0.4% of the 154,903 active credit security-based swaps in ITV). The 605 active credit security-based swaps had a gross notional outstanding of $4.73 billion (0.3% of the approximately $1,900 billion gross notional outstanding of all active credit security-based swaps in ITV). These statistics provide an upper bound of the overlap between ITV and DDR and indicate that the overlap is very limited in scope. See SBS Report, supra note 815, at 4, 10. 818 An equity swap references a single underlier while an equity portfolio swap involves a portfolio wrapper under which multiple swaps can be traded with operational efficiency. See ISDA, Central Clearing in the Equity Derivatives Market: An ISDA Study (June 2014) at 10, available at https:// www.isda.org/a/6PDDE/central-clearing-in-the-eqdmarket-final.pdf; ISDA Taxonomy 2.0—Finalized, ISDA.org (Sept. 4, 2019), available at https:// www.isda.org/a/o1MTE/ISDA-Taxonomy_EQ-CRFX-IR_v2.0__3-_September_2019-FINAL.xls. E:\FR\FM\15DER2.SGM 15DER2 87240 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations TABLE 1—GROSS NOTIONAL AMOUNT AND ACTIVE SECURITY-BASED SWAPS OUTSTANDING ON NOV. 25, 2022, CATEGORIZED BY ASSET CLASS AND PRODUCT CLASSIFICATION a—Continued SBSDR Gross notional amount outstanding (millions of USD) Active security-based swap count Other d ........................................................................ 330,136 41,115 Total ....................................................................... Exotic ......................................................................... Forward ...................................................................... Other e ........................................................................ 3,613,617 153,306 23,818 868 3,444,968 4,419 1,164 122 Total ....................................................................... 177,992 5,705 Single-Name: Corporate ............................................ Single-Name: Sovereign ............................................ Total ....................................................................... 1,348,002 544,414 1,892,416 134,741 20,162 154,903 Asset class Product type Interest Rate .................................. ITV ....................... Credit ............................................. a For cleared security-based swaps in DDR, this table incorporates only one of the two security-based swaps that result from the clearing process. For ITV, this table incorporates all of the cleared security-based swaps. b As a general matter, total return swaps include non-CDS debt-based security swaps, equity-based security swaps, and mixed swaps. Counterparties in the total return swaps market use the contracts to obtain exposure, usually leveraged, to the total economic performance of a security or index and benefit from not having to own the security itself. Market participants, such as mutual funds, hedge funds, and endowments, use total return swaps to obtain exposure in markets where they would face difficulties purchasing or selling the underlying security (e.g., a market participant may find it difficult to buy a foreign company’s security or locate a security to sell short) while taking advantage of the capital efficiencies of not holding the security in their inventories. c Includes the following products reported to SBSDRs: exotic, index tranche, swaptions, and other single-name (e.g., asset-backed, loan, and municipal security-based swaps). d ‘‘Other’’ is a category in the DDR Equity Product ID field. All Product ID categories are listed in the table. e Includes the following products reported to SBSDRs: inflation, debt option, and cross-currency. Table 2 shows that both SBS Entities and non-SBS Entities participate in all three asset classes in the U.S. securitybased swap market. Based on information reported to DDR, as of November 25, 2022, SBS Entities and non-SBS Entities had, respectively, entered into approximately 813,000 and 234,000 active credit security-based swaps.819 The gross notional amounts outstanding of the active credit securitybased swaps held by SBS Entities and non-SBS Entities were, respectively, approximately $4.4 and $1.2 trillion. In the equity asset class, SBS Entities and non-SBS Entities had, respectively, entered into approximately 4.0 million and 2.9 million active equity securitybased swaps. The gross notional amounts outstanding of the active equity security-based swaps held by SBS Entities and non-SBS Entities were, respectively, approximately $4.5 and $2.7 trillion. In the interest rate asset class, SBS Entities and non-SBS Entities had, respectively, entered into approximately 6,200 and 5,200 active interest rate security-based swaps. The gross notional amounts outstanding of the active interest rate security-based swaps held by SBS Entities and non-SBS Entities were, respectively, approximately $0.2 and $0.1 trillion. Based on information reported to ITV, as of November 25, 2022, SBS Entities and non-SBS Entities had, respectively, entered into approximately 123,000 and 33,000 active credit security-based swaps. The gross notional amounts outstanding of the active credit securitybased swaps held by SBS Entities and non-SBS Entities were, respectively, approximately $1.6 and $0.3 trillion. TABLE 2—GROSS NOTIONAL AMOUNT AND ACTIVE SECURITY-BASED SWAPS OUTSTANDING ON NOV. 25, 2022, CATEGORIZED BY ASSET CLASS AND REGISTRANT TYPE a SBSDR Asset class Registrant type DDR ..................... Credit ............................................. Total ........................................................................... SBS Entities ........................................................... Other ...................................................................... Total ........................................................................... SBS Entities ........................................................... Other ...................................................................... Total ........................................................................... SBS Entities ........................................................... Other ...................................................................... Total ........................................................................... SBS Entities ........................................................... ddrumheller on DSK120RN23PROD with RULES2 Equity ............................................. Interest Rate .................................. ITV ....................... Credit ............................................. 819 For cleared security-based swaps where at least one counterparty is an SBS Entity, Table 2 reflects the security-based swaps entered into by VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 each of the original counterparties, but does not include the positions of the clearing agencies themselves. For uncleared security-based swaps, PO 00000 Frm 00086 Fmt 4701 Sfmt 4700 Gross notional amount outstanding (millions of USD) Active security-based swap count 5,561,226 4,403,130 1,158,096 7,227,234 4,490,592 2,736,642 355,984 210,663 145,321 1,897,249 1,632,251 1,046,424 812,647 233,777 6,889,936 4,013,393 2,876,543 11,410 6,214 5,196 155,578 122,831 Table 2 reflects the security-based swaps entered into by each of the original counterparties. See SBS Report, supra note 815, at 5. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations 87241 TABLE 2—GROSS NOTIONAL AMOUNT AND ACTIVE SECURITY-BASED SWAPS OUTSTANDING ON NOV. 25, 2022, CATEGORIZED BY ASSET CLASS AND REGISTRANT TYPE a—Continued SBSDR Asset class Registrant type Other ...................................................................... Gross notional amount outstanding (millions of USD) Active security-based swap count 264,998 32,747 a For ddrumheller on DSK120RN23PROD with RULES2 cleared security-based swaps where at least one counterparty is an SBS Entity, Table 2 reflects the security-based swaps entered into by each of the original counterparties, but does not include the positions of the clearing agencies themselves. For uncleared security-based swaps, Table 2 reflects the security-based swaps entered into by each of the original counterparties. In addition to information reported to registered SBSDRs, the Commission also uses nonpublic data from the DTCC Derivatives Repository Limited Trade Information Warehouse (‘‘DTCC–TIW’’) to describe the baseline, specifically the single-name CDS market. DTCC–TIW provided data regarding the activity of market participants in the single-name CDS market during the period from November 2006 to September 2022.820 The Commission acknowledges that limitations in the data constrain the extent to which it is possible to quantitatively characterize the securitybased swap market.821 Firms that act as SBS dealers 822 play a central role in the single-name CDS market. Based on an analysis of singlename CDS data in DTCC–TIW in the 12month period from October 2021 to September 2022, accounts of registered SBS dealer firms intermediated transactions with a gross notional amount of approximately $1.7 trillion, with approximately 66% of the gross notional intermediated by the top five SBS dealer accounts. These SBS dealers transact with hundreds or thousands of counterparties. One SBS dealer (when accounts are sorted by number of counterparties) transacted with over a thousand counterparty accounts, consisting of both other SBS dealers and non-SBS dealers. The next 13% of SBS dealers each transacted with 500 to 1,000 counterparty accounts; the following 21% of SBS dealers each transacted with 100 to 500 counterparty accounts; and 64% of SBS dealers each transacted security-based swaps with fewer than 100 counterparty accounts in the 12-month period from October 2021 to September 2022. The median number of counterparty accounts across SBS dealers is 18 (the mean is approximately 172). Non-SBS dealer counterparties transacted almost exclusively with these SBS dealers. The median non-SBS dealer counterparty transacted with one SBS dealer account (with an average of approximately 1.8 SBS dealer accounts) in the 12-month period from October 2021 to September 2022. Non-SBS dealer single-name CDS market participants include, but are not limited to, investment companies, pension funds, private funds, sovereign entities, and industrial companies. The Commission observes that most users of CDS that are not SBS dealers do not engage in trading directly, but trade through banks, investment advisers, or other types of firms, which are collectively referred to as transacting agents, consistent with DTCC–TIW terminology.823 Based on an analysis of DTCC–TIW data, there were 2,397 transacting agents that engaged directly in trading between November 2006 and September 2022.824 As shown in Table 3 below, approximately 79% of these transacting agents were identified as investment advisers, of which approximately 40% (about 32% of all transacting agents) were registered as investment advisers under the Investment Advisers Act.825 Although investment advisers were the vast majority of transacting agents, the transactions they executed account for only 15% of all single-name CDS trading activity reported to DTCC–TIW, measured by number of transactionsides (each transaction has two transaction sides, i.e., two transaction counterparties). The vast majority of transactions (81.3%) measured by number of transaction-sides were executed by ISDA-recognized SBS dealers. 820 DTCC–TIW provided weekly positions and monthly transaction files for single-name and index-based CDS that had been received voluntarily from market participants. These data cover all positions and transactions where one of the counterparties is a U.S. entity or the reference entity is a U.S. entity, with status as a U.S. entity determined by DTCC–TIW. In DTCC–TIW, the Commission observes end of week CDS positions for all U.S. entities, foreign counterparties to a U.S. entity, or foreign counterparties trading a CDS referencing a U.S. underlying entity. The DTCC– TIW data have limitations. The data do not address two foreign counterparties with CDS referencing foreign underlying entities. In addition, the DTCC– TIW data do not provide any intra-weekly CDS position information, nor any information on the underlying security holdings of reference entities. The Commission had used DTCC–TIW data in prior rulemakings, most recently in Prohibition Against Fraud, Manipulation, or Deception in Connection with Security-Based Swaps; Prohibitions Against Undue Influence over Chief Compliance Officers, SEA Release No. 97656 (June 7, 2023), 88 FR 42546 (June 30, 2023). 821 See supra note 820 (discussing DTCC–TIW data limitations). The Commission also relies on qualitative information regarding market structure and evolving market practices provided by commenters and the knowledge and expertise of Commission staff. 822 Dealers are generally persons engaged in the business of buying and selling securities for their own account, through a broker or otherwise. 15 U.S.C. 78c(a)(5). SEA Rule 3a71–1 defines the term security-based swap dealer. 17 CFR 240.3a71–1. 823 Transacting agents participate directly in the single-name CDS market, without relying on an intermediary, on behalf of their principals. For example, a university endowment may hold a position in a single-name CDS that is established by an investment adviser that transacts on the endowment’s behalf. In this case, the university endowment is a principal that uses the investment adviser as its transacting agent. 824 These 2,397 transacting agents, which are presented in more detail in Table 3 below, include all DTCC-defined ‘‘firms’’ shown in DTCC–TIW as transaction counterparties that report at least one transaction to DTCC–TIW as of Sep. 2022. The staff in the Division of Economic and Risk Analysis classified these transacting agents by matching names, automatically or manually, to third-party databases. See, e.g., ANE Adopting Release, 81 FR 8602, at n.43. Manual classification was based in part on searches of the EDGAR and Bloomberg databases, the SEC’s Investment Adviser Public Disclosure database (available at https:// adviserinfo.sec.gov/), and a firm’s public website or the public website of the account represented by a firm. The staff also matched names using International Swaps and Derivatives Association (ISDA) protocol adherence letters available on the ISDA website. See ISDA, Small Bang Protocol List of Adhering Parties, available at https:// www.isda.org/traditional-protocol/small-bangprotocol/adhering-parties/; ISDA, Small Bang Protocol List of Adhering Parties, https:// www.isda.org/traditional-protocol/big-bangprotocol/adhering-parties/. 825 See 15 U.S.C. 80b–1 through 80b–21. The staff in the Division of Economic and Risk Analysis determined whether an entity is an SEC registered investment adviser using the Investment Adviser Public Disclosure website. See supra note 824. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00087 Fmt 4701 Sfmt 4700 E:\FR\FM\15DER2.SGM 15DER2 87242 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations TABLE 3—THE NUMBER OF TRANSACTING AGENTS BY COUNTERPARTY TYPE AND THE FRACTION OF TOTAL TRADING ACTIVITY, FROM NOV. 2006 THROUGH SEP. 2022, REPRESENTED BY EACH COUNTERPARTY TYPE Transacting agents Number Transaction share (percent) Percent Investment Advisers .................................................................................................................... —SEC registered ......................................................................................................................... Banks (non-ISDA-recognized SBS dealers) ................................................................................ Pension Funds ............................................................................................................................. Insurance Companies .................................................................................................................. ISDA-Recognized SBS Dealers a ................................................................................................ Other b .......................................................................................................................................... 1,891 762 279 31 49 17 130 78.9 31.8 11.6 1.3 2.0 0.7 5.4 15.0 10.0 3.3 0.1 0.2 81.3 0.2 Total ...................................................................................................................................... 2,397 100.0 100 a For the purpose of this analysis, the ISDA-recognized SBS dealers are those identified by ISDA as belonging to the G14 or G16 dealer group during the period. See, e.g., ISDA, 2010 ISDA Operations Benchmarking Survey (2010), available at https://www.isda.org/a/5eiDE/isda-operations-survey-2010.pdf. b This category excludes clearing counterparties (CCPs). Same-day cleared trades are recorded in the DTCC dataset as two clearing legs, each between a CCP (ICE Clear Credit, ICE Clear Europe, and LCH.Clearnet) and the original counterparty in the underlying trade. As these are not price-forming trades, the counts in the last column of the table are adjusted to reflect the original counterparties, excluding a CCP. Though original counterparties cannot be paired up to same-day cleared trades, to adjust for same-day clearing each leg against the CCP is counted as one half of a transaction and the notional amount of the trade is halved as well. Principal holders of CDS risk exposure are represented by ‘‘accounts’’ in DTCC–TIW.826 The staff’s analysis of these accounts in DTCC–TIW shows that the 2,397 transacting agents classified in Table 3 represent 16,061 principal risk holders. Table 4 below classifies these principal risk holders by their counterparty type and whether they are represented by a registered or unregistered investment adviser.827 For instance, banks in Table 3 allocated transactions across 375 accounts, of which 35 were represented by investment advisers. In the remaining instances, banks traded for their own accounts. Meanwhile, ISDA-recognized SBS dealers in Table 3 allocated transactions across 104 accounts. Private funds are the largest type of account holders that the Commission was able to classify.828 TABLE 4—THE NUMBER AND PERCENTAGE OF ACCOUNT HOLDERS—BY TYPE—WHO PARTICIPATE IN THE SBS MARKET THROUGH A REGISTERED INVESTMENT ADVISER, AN UNREGISTERED INVESTMENT ADVISER, OR DIRECTLY AS A TRANSACTING AGENT, FROM NOV. 2006 THROUGH SEP. 2022 Account holders by type Number Represented by a registered investment adviser Represented by an unregistered investment adviser (percent) (percent) (percent) Private Funds ............................................................................ DFA Special Entities ................................................................. Registered Investment Companies ........................................... Banks (non-ISDA-recognized SBS dealers) ............................. Insurance Companies ............................................................... ISDA-Recognized SBS Dealers ................................................ Foreign Sovereigns ................................................................... Non-Financial Corporations ...................................................... Finance Companies .................................................................. Other/Unclassified ..................................................................... 4,816 1,631 1,454 375 356 104 98 129 62 7,036 2,486 1,565 1,367 26 219 0 71 96 46 4,262 52 96 94 7 62 0 72 74 74 61 2,271 44 83 9 49 0 7 10 0 2,477 47 3 6 2 14 0 7 8 0 35 59 22 4 340 88 104 20 23 16 297 1 1 0 91 25 100 20 18 26 4 All .............................................................................................. 16,061 10,138 63 4,950 31 973 6 a This ddrumheller on DSK120RN23PROD with RULES2 Participant is a transacting agent a column reflects the number of participants who are also trading for their own accounts. As depicted in Figure 1 below, domiciles of new accounts participating in the single-name CDS market have shifted over time. It is unclear whether these shifts represent changes in the types of participants active in this market, changes in reporting, or changes in transaction volumes in CDS referencing particular underliers. For example, the percentage of new entrants that are foreign accounts increased from 24.4% in the first quarter of 2008 to approximately 53% in the third quarter of 2022, which might reflect an increase in participation by foreign account holders in the single-name CDS market, though the total number of new entrants that are foreign accounts decreased from 826 ‘‘Accounts’’ as defined in the DTCC–TIW context are not equivalent to ‘‘accounts’’ in the definition of ‘‘U.S. person’’ in SEA Rule 3a71– 3(a)(4)(i)(C). They also do not necessarily represent separate legal persons. One entity or legal person might have multiple accounts. For example, a bank may have one DTCC–TIW account for its U.S. headquarters and one DTCC–TIW account for one of its foreign branches. 827 Unregistered investment advisers include all investment advisers not registered under the Investment Advisers Act and might include investment advisers registered with a state or a foreign authority, as well as investment advisers that are exempt reporting advisers under section 203(l) or 203(m) of the Investment Advisers Act. 828 Most of the funds that could not be classified appear to be private funds. For the purposes of this discussion, ‘‘private fund’’ encompasses various unregistered investment vehicles, including hedge funds, private equity funds, and venture capital funds. There remain over almost 7,000 DTCC–TIW accounts unclassified by type. Although unclassified, Commission staff manually reviewed each account to verify that it was not likely to be a special entity under SEA Rule 15Fh–2(d) and instead was likely to be an entity such as a corporation, an insurance company, or a bank. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00088 Fmt 4701 Sfmt 4700 E:\FR\FM\15DER2.SGM 15DER2 87243 112 in the first quarter of 2008 to 62 in the third quarter of 2022.829 Additionally, the percentage of the subset of new entrants that are foreign accounts managed by U.S. persons increased from 4.6% in the first quarter of 2008 to 5.2% in the third quarter of 2022, and the absolute number changed from 21 to 6, which also might reflect more specifically the flexibility with which market participants can restructure their market participation in response to regulatory intervention, competitive pressures, and other incentives.830 At the same time, apparent changes in the percentage of new accounts with foreign domiciles might also reflect improvements in reporting by market participants to DTCC–TIW, an increase in the percentage of transactions between U.S. and non-U.S. counterparties, and/or increased transactions in single-name CDS on U.S. reference entities by foreign persons.831 Figure 2 below describes the percentage of global, notional transaction volume in North American corporate single-name CDS reported to DTCC–TIW between January 2011 and September 2022, separated by whether transactions are between two ISDArecognized SBS dealers (‘‘interdealer transactions’’) or whether a transaction has at least one non-SBS dealer counterparty. Figure 2 also shows that the portion of the notional volume of North American corporate single-name CDS represented by interdealer transactions has remained fairly constant through 2015, before falling from approximately 68% in 2015 to under 40% in 2022. This change corresponds to the availability of clearing to non-SBS dealers. Interdealer transactions continue to represent a significant fraction of trading activity, even as notional volume has declined over the past 12 years,832 from just 829 These estimates were calculated by Commission staff using DTCC–TIW data. 830 See Charles Levinson, U.S. banks moved billions in trades beyond the CFTC’s reach, Reuters (Aug. 21, 2015) (retrieved from Factiva database). The estimates of 21 and 6 were calculated by Commission staff using DTCC–TIW data. 831 See supra note 820 (discussing the singlename CDS transactions that are in the DTCC–TIW data). 832 The start of this decline predates the enactment of the Dodd-Frank Act and the proposal of rules thereunder. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00089 Fmt 4701 Sfmt 4700 E:\FR\FM\15DER2.SGM 15DER2 ER15DE23.000</GPH> ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations 87244 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations The high level of interdealer trading activity reflects the central position of a small number of SBS dealers, each of which intermediates trades with many hundreds of counterparties. While the Commission is unable to quantify the current level of trading costs for singlename CDS, these SBS dealers appear to enjoy market power as a result of their small number and the large proportion of order flow that they intermediate. As shown in Figure 3 below, half of the trading activity in North American corporate single-name CDS was between counterparties domiciled in the United States and counterparties domiciled abroad. Using the self-reported registered office location of the DTCC– TIW accounts as a proxy for domicile, the Commission estimates that only 13% of the global transaction volume by VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 notional volume between January 2008 and September 2022 was between two U.S.-domiciled counterparties, compared to 50% entered into between one U.S.-domiciled counterparty and a foreign-domiciled counterparty, and 37% entered into between two foreigndomiciled counterparties.833 If the Commission instead considers the number of cross-border transactions from the perspective of the domicile of the corporate group (e.g., by classifying a foreign bank branch or foreign subsidiary of a U.S. entity as domiciled in the United States), the percentages 833 For purposes of this discussion, the Commission has assumed that the registered office location reflects the place of domicile for the fund or account, but this domicile does not necessarily correspond to the location of an entity’s sales or trading desk. See ANE Adopting Release, 81 FR at 8607 n.83. PO 00000 Frm 00090 Fmt 4701 Sfmt 4700 shift significantly. Under this approach, the fraction of transactions entered into between two U.S.-domiciled counterparties increases to 36% and remains at 50% for transactions entered into between a U.S.-domiciled counterparty and a foreign-domiciled counterparty.834 By contrast, the proportion of activity between two foreign-domiciled counterparties drops from 37% to 14%. This change in 834 These estimates do not indicate the fraction of North American corporate single-name CDS transactions that would be subject to the trade execution requirement, if it were in force for such transactions. In particular, if the trade execution requirement were in force for North American corporate single-name CDS, a foreign subsidiary of a U.S. entity transacting in such CDS would only be subject to the trade execution requirement if the U.S. parent provides a guarantee to the foreign subsidiary. E:\FR\FM\15DER2.SGM 15DER2 ER15DE23.001</GPH> ddrumheller on DSK120RN23PROD with RULES2 under $2 trillion in 2011 to less than $500 billion in 2022. respective shares based on different classifications suggests that the activity of foreign subsidiaries of U.S. firms and foreign branches of U.S. banks accounts for a higher percentage of SBS activity than U.S. subsidiaries of foreign firms and U.S. branches of foreign banks. It also demonstrates that financial groups based in the United States are involved in an overwhelming majority (approximately 86%) of all reported transactions in North American corporate single-name CDS. Financial groups based in the United States are also involved in a majority of interdealer transactions in North American corporate single-name CDS. Of the transactions on North American corporate single-name CDS between two ISDA-recognized SBS dealers and their branches or affiliates over the 12-month period from October 2021 to September 2022, 80.7% of transaction notional volume involved at least one account of an entity with a U.S. parent.835 In addition, a majority of North American corporate single-name CDS transactions occur in the interdealer market or between SBS dealers and foreign nonSBS dealers, with the remaining portion of the market consisting of transactions between SBS dealers and U.S.-person non-SBS dealers. Specifically, 86% of North American corporate single-name CDS transactions involved either two ISDA-recognized SBS dealers or an ISDA-recognized SBS dealer and a foreign non-SBS dealer. Approximately 14% of such transactions involved an ISDA-recognized SBS dealer and a U.S.person non-SBS dealer. 3. Other Markets and Regulatory Frameworks jurisdiction, is slightly smaller than the index CDS market, which falls under CFTC jurisdiction.838 For example, persons who register as SBS dealers and major SBS participants are likely also to be engaged in swap activity. In part, this overlap reflects the relationship between single-name CDS contracts, which are SBS, and index CDS contracts, which may be swaps or SBS. A single-name CDS contract covers default events for a single reference entity or reference security. Index CDS contracts and related products make payouts contingent on the default of index components and allow participants in these instruments to gain exposure to the credit risk of the basket of reference entities that comprise the index, which is a function of the credit risk of the index components. A default event for a reference entity that is an Proposing Release that the SBS market is a small fraction of the swap market). 838 As of Nov. 25, 2022, the SBS market had a gross notional amount outstanding of approximately $8.5 trillion (see supra section I and section XVII.B.2, Table 1), while the swap market (comprising, for purposes of this discussion, swaps in the interest rate, credit, and foreign-exchange asset classes) had a gross notional amount outstanding of approximately $352 trillion. See supra section I. The gross notional amount outstanding in single-name CDS (both corporate and sovereign) was approximately $4.3 trillion (see supra section XVII.B.2, Table 1), while the gross notional amount outstanding in index CDS (including index CDS tranches) was approximately $4.5 trillion. Data on gross notional amount outstanding in index CDS is from CFTC Swaps Report, available at https://www.cftc.gov/ MarketReports/SwapsReports/L3Grossexp.html (accessed on Sept. 27, 2023). The numerous financial markets are integrated, often attracting the same market participants that trade across corporate bond, swap, and SBS markets, among others.836 This is notwithstanding the fact that the SBS market is a small fraction of the swap market 837 and the single-name CDS market, which falls under SEC ddrumheller on DSK120RN23PROD with RULES2 87245 835 Since the Commission is unable to pair up the same-day cleared trades, this 80.7% estimate is based on bilateral trades that were not same-day cleared in the 12-month period from Oct. 2021 to Sept. 2022. 836 See Rule 194 Proposing Release, 80 FR at 51711. 837 See ISDA–SIFMA Letter, supra note 18, at 2 (agreeing with the Commission’s statement in the VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00091 Fmt 4701 Sfmt 4700 E:\FR\FM\15DER2.SGM 15DER2 ER15DE23.002</GPH> Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations 87246 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations index component will result in payoffs on both single-name CDS written on the reference entity and index CDS written on indices that contain the reference entity. Because of this relationship between the payoffs of single-name CDS and index CDS products, the prices of these products depend upon one another,839 creating hedging opportunities across these markets. These hedging opportunities mean that participants that are active in one market are likely to be active in the other. Commission staff analysis of approximately 3,829 DTCC–TIW accounts that participated in the market for single-name CDS in the 12-month period from October 2021 to September 2022 revealed that approximately 2,836 of those accounts, or 74%, also participated in the market for index CDS. Of the accounts that participated in both markets, data regarding transactions in these 12 months suggest that, conditional on an account transacting in notional volume of index CDS in the top third of accounts, the probability of the same account landing in the top third of accounts in terms of single-name CDS notional volume is approximately 53%; by contrast, the probability of the same account landing in the bottom third of accounts in terms of single-name CDS notional volume is only 12%. As a result of cross-market participation, informational efficiency, pricing, and liquidity may spill over across markets.840 Of the 51 registered SBS dealers, 44 are dually registered with the CFTC as swap dealers and are therefore subject to CFTC requirements for entities registered with the CFTC as swap dealers. Further, of the 51 registered SBS dealers, 30 have a prudential regulator. 4. Number of Entities That Likely Will Register as SBSEFs Entities that will seek to register with the Commission as SBSEFs are likely to be SEFs that are active in the index CDS market. Three commenters are generally supportive of this belief, stating that the ddrumheller on DSK120RN23PROD with RULES2 839 ‘‘Correlation’’ typically refers to linear relationships between variables; ‘‘dependence’’ captures a broader set of relationships that may be more appropriate for certain swaps and SBS. See, e.g., George Casella & Roger L. Berger, Statistical Inference 171 (2nd ed. 2002). 840 See Business Conduct Standards Release, supra note 101, 81 FR at 30108; Christopher L. Culp, Andria van der Merwe, & Bettina J. Starkle, Single-name Credit Default Swaps: A Review of the Empirical Academic Literature 71–85 (ISDA Study, Sept. 2016), available at https://www.isda.org/a/ KSiDE/single-name-cdsliterature-review-culp-vander-merwe-staerkleisda.pdf; Patrick Augustin, Marti G. Subrahmanyam, Dragon Y. Tang, & Sarah Q. Wang, Credit Default Swaps: Past, Present, and Future, 8 Ann. Rev. Fin. Econ. 175 (2016). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 entities most likely to register as SBSEFs are those that are already registered with the CFTC as SEFs.841 No commenters express disagreement with this belief. Currently, 24 SEFs are registered with the CFTC.842 Of these SEFs, seven list index CDS for trading.843 If these SEFs were to list single-name CDS or other SBS for trading, they would be required to register as SBSEFs with the Commission. In 2022, index CDS volume on U.S. SEFs was distributed as follows: one SEF had the largest share of index CDS volume (in notional amount) at $10.6 trillion (68%); one SEF had the second largest share at $3.4 trillion (22%); and the remaining 10% of volume was shared among four other SEFs.844 The number of SBSEF registrants most likely falls between two and seven, but there is uncertainty around the upper end of this estimate. The likely number of SBSEF registrants is five. 5. SBS Trading on Platforms By analyzing SBS transactions reported to registered SBSDRs,845 the 841 See ICE Letter, supra note 18, at 1–2; ICI Letter, supra note 18, at 1; Tradeweb Letter, supra note 18, at 1–2. 842 See CFTC, Swap Execution Facilities (registered) (retrieved June 28, 2023), available at https://www.cftc.gov/IndustryOversight/ IndustryFilings/SwapExecutionFacilities?Status= Registered&Date_From=&Date_To=&Show_All=0. 843 For purposes of this discussion, options on index CDS and index CDS tranches are included as part of index CDS. For SEFs that list index CDS for trading, see BGC Derivative Markets, L.P. Contract Specifications (Oct. 31, 2022), available at https:// www.bgcsef.com/wp-content/uploads/2022/11/ BGC-SEF-Contract-Specifications_10-31-22.pdf; Bloomberg SEF LLC Rulebook (Dec. 5, 2022), available at https://assets.bbhub.io/professional/ sites/10/BSEF-Effective-Rulebook.pdf; GFI Swaps Exchange: Products & Contract Specifications, GFI Group, available at https://www.gfigroup.com/ markets/gfi-sef/products/; ICE Swap Trade, LLC, Swap Execution Facility Rulebook Version: 2.42 (effective May 8, 2023), available at https:// www.theice.com/publicdocs/swap_trade/ Rulebook.pdf; TW SEF LLC, Swap Execution Facility Rules (effective Jan. 6, 2023), available at https://www.tradeweb.com/48ceb9/globalassets/ our-businesses/market-regulation/sef-rulebook-jan2023/tw-sef-rulebook-1.6.23.pdf; Tradition SEF, Appendix B to Tradition SEF Rulebook: Credit Product Listing, available at https:// www.traditionsef.com/assets/regulatory/RulebookAppendix-B-TSEF-Rulebook-6-02-2023.pdf; tpSEF Inc., tpSEF Inc. Rulebook Appendix B: tpSEF Inc. Swap Specifications (effective Mar. 7, 2023), available at https://www.tullettprebon.com/swap_ execution_facility/documents/tpSEF%20%20Rulebook%20-%20Appendix%20B%20%20Swap%20Specifications.pdf?2023411. 844 Index CDS volume traded on SEFs is from Futures Industry Association’s SEF Tracker. See SEF Tracker Historical Volume, FIA, available at https://www.fia.org/monthly-volume. 845 The estimates presented in this section differ from those presented in the Proposing Release, supra note 1, 87 FR at 28946, because of a number of reasons. First, staff from the Division of Economic and Risk Analysis derived the estimates presented herein using reports of SBS transactions PO 00000 Frm 00092 Fmt 4701 Sfmt 4700 Commission has estimated the extent of SBS trading on platforms. Of the new transactions in credit SBS executed between November 8, 2021, and December 2, 2022, 14,163 were executed on platforms (2% of all new transactions in credit SBS). During the same period, 329 new transactions in equity SBS were executed on platforms (less than 0.01% of all new transactions in equity SBS), while one new transaction in interest rate SBS was executed on a platform (0.01% of all new transactions in interest rate SBS). These observations suggest that the vast majority of SBS trading continues to be conducted bilaterally in the OTC market. The Commission identified 18 platforms on which new SBS transactions were executed between November 8, 2021, and December 2, 2022. Of these 18 platforms, 14 are foreign SBS trading venues and four are U.S. SBS trading venues. Of the four U.S. SBS trading venues, two are CFTCregistered SEFs and two are affiliated with CFTC-registered SEFs. Of the new transactions in credit SBS executed between November 8, 2021, and December 2, 2022, 710 were executed on non-U.S. platforms and involved at least one counterparty that is a U.S. person or a non-U.S. person whose performance under the SBS is guaranteed by a U.S. person (0.1% of all new transactions in credit SBS). During the same period, 241 new transactions in equity SBS were executed on a nonU.S. platform and involved at least one counterparty that is a U.S. person or a non-U.S. person whose performance under the SBS is guaranteed by a U.S. person (less than 0.01% of all new transactions in equity SBS transactions).846 One commenter states that only a minority of SEFs currently offer trading in SBS and SEFs that do offer trading in SBS estimate that they have approximately 50 or fewer trades per day in SBS.847 As discussed earlier, the Commission identified two CFTCregistered SEFs on which new SBS executed between Nov. 8, 2021, and Dec. 2, 2022, whereas in the Proposing Release, the staff used reports of SBS transactions executed between Nov. 8, 2021, and Feb. 28, 2022. Second, the staff implemented additional filters to the reports of SBS transactions to (1) more accurately identify and exclude from the analysis those SBS transactions that arise from the allocation of an executed bunched order; (2) exclude potentially erroneous reports (e.g., SBS transactions with extremely large or small notional amount or SBS transactions with improperly sequenced timestamps); (3) identify the current version of a given report; and (4) exclude duplicate reports. 846 The one new transaction in interest rate SBS, discussed earlier in this section, was executed on a U.S. platform. 847 See ISDA–SIFMA Letter, supra note 18, at 2. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations transactions were executed between November 8, 2021, and December 2, 2022. During this period, one CFTCregistered SEF had on average 2.4 new SBS transactions executed per day, while the other CFTC-registered SEF had on average 2.8 new SBS transactions executed per day. These estimates are broadly consistent with the commenter’s estimate. ddrumheller on DSK120RN23PROD with RULES2 6. Global Regulatory Efforts In 2009, the G20 leaders—whose membership includes the United States, 18 other countries, and the European Union—addressed global improvements in the OTC derivatives market. They expressed their view on a variety of issues relating to OTC derivatives contracts.848 In subsequent summits, the G20 leaders have returned to OTC derivatives regulatory reform and reaffirmed their goal of completing such reform.849 Foreign legislative and regulatory efforts have generally focused on five areas: (1) moving standardized OTC derivatives onto organized trading platforms; (2) requiring central clearing of OTC derivatives; (3) requiring posttrade reporting of transaction data to trade repositories; (4) establishing or enhancing capital requirements for noncentrally cleared OTC derivatives transactions; and (5) establishing or enhancing margin and other risk mitigation requirements for noncentrally cleared OTC derivatives transactions. The rules being adopted in this release concern the registration and regulation of SBSEFs, a type of organized trading platform. As of the end of 2022, platform trading requirements were in force in 12 foreign jurisdictions while seven jurisdictions were in the process of proposing legislation or rules to implement platform trading requirements.850 Eight foreign jurisdictions have made determinations with respect to the specific OTC 848 See G20, Leaders’ Statement: The Pittsburgh Summit (Sept. 24–25, 2009) at para. 13. 849 See, e.g., G20, Osaka Summit Declaration (June 28–29, 2019) at para. 19; Rome Summit Declaration (Oct. 30–31, 2021) at para. 40. 850 Apart from the 12 foreign jurisdictions, the United States is considered to have platform trading requirements in place based on the CFTC’s implementation of platform trading requirements. See FSB, OTC Derivatives Market Reforms: Implementation Progress in 2022 Tables 1 & K (Nov. 7, 2022), available at https://www.fsb.org/wpcontent/uploads/P071122.pdf (describing progress made towards implementing platform trading requirements in 2022) and FSB, OTC Derivatives Market Reforms: 2019 Progress Report on Implementation Table A (Oct. 15, 2019), available at https://www.fsb.org/2019/10/otc-derivativesmarket-reforms-2019-progress-report-onimplementation/ (discussing the CFTC’s implementation of platform trading requirements). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 derivatives that are required to be traded on platforms.851 7. Trading Models Unlike the markets for cash equity securities and listed options, the market for SBS currently is characterized by bilateral negotiation in the OTC swap market; is largely decentralized; has many non-standardized instruments; and has many SBS that are not centrally cleared. The lack of uniform rules concerning the trading of SBS and the one-to-one nature of trade negotiation in SBS has resulted in different models for the trading of these securities, ranging from bilateral negotiations carried out over the telephone, to RFQ systems (e.g., single-dealer and multi-dealer RFQ platforms), request-for-stream protocol, and limit order books outside the United States, as more fully described below. The use of electronic media to execute transactions in SBS varies greatly across trading models, with some models being highly electronic whereas others rely almost exclusively on non-electronic means such as the telephone. The reasons for use of, or lack of use of, electronic media vary from such factors as user preference to limitations in the existing infrastructure of certain trading platforms. The description below of the ways in which SBS may be traded is based in part on discussions with market participants and incorporates comments received on the Proposing Release. The Commission uses the term ‘‘bilateral negotiation’’ to refer to the model whereby one party uses the telephone, email, or other communications to contact directly a potential counterparty to negotiate an SBS transaction. Once the terms are agreed, the SBS transaction is executed and the terms are memorialized.852 In a bilateral negotiation, there might be no 851 These jurisdictions are China (bond forwards; certain currency forwards, options, and swaps); the European Union (certain index CDS and certain IRS denominated in Euro); India (certain overnight index swaps); Indonesia (equity and commodity derivative products); Japan (selected Yendenominated IRS); Mexico (certain Pesodenominated IRS); Singapore (certain IRS denominated in Euro, U.S. dollar, and British pound); and United Kingdom (certain index CDS and certain IRS denominated in Euro and certain IRS denominated in British pound). See FSB, 2019 Progress Report (Table R); FSB, Implementation Progress in 2022 (footnote 12), supra note 850, and Financial Conduct Authority, Register of derivatives subject to the trading obligation under article 28 of UK MiFIR (July 24, 2023), available at https:// register.fca.org.uk/servlet/ servlet.FileDownload?file=0150X000006gbbG. In its 2022 report, see supra note 850, the FSB noted no change in status in the implementation of platform trading requirements since its 2019 report. 852 See, e.g., Trade Acknowledgement and Verification Adopting Release, supra note 802, 81 FR at 39809. PO 00000 Frm 00093 Fmt 4701 Sfmt 4700 87247 pre-trade or post-trade transparency available to the market because only the two parties to the transaction are aware of the terms of the negotiation and the final terms of the agreement. Further, no terms of the proposed transaction are firm until the transaction is executed. However, reputational costs generally serve as a deterrent to either party’s failing to honor any quoted terms. Dealer-to-customer bilateral negotiation currently is used for all SBS asset classes, and particularly for trading in less liquid SBS, in situations where the parties prefer a privately negotiated transaction, such as for a large notional transaction, or in other circumstances in which it is not cost-effective for a party to the trade to use one of the execution methods described below. One commenter elaborates on this model of trading, focusing specifically on dealer-to-client trading in the SBS market.853 According to this commenter, at the moment, dealer-to-client trading in security-based swaps is largely opaque and fragmented, with most executions arising out of one-to-one private negotiations. When engaging with clients, liquidity providers typically provide ‘‘indicative’’ quotes (as opposed to firm binding quotes), inviting interested clients to follow-up bilaterally in order to obtain an executable price for a specific instrument.854 Given that these executable prices are often only then honored at that exact moment in time, clients are unable to effectively put liquidity providers in competition and have little to no pre-trade transparency regarding other available prices in the market.855 Instead clients face the choice of either accepting the first executable price received or starting over with a new one-to-one negotiation, where pricing could move against the client as its trading interest is sequentially disclosed to additional market participant.856 The commenter states that this opaque and fragmented execution process impairs client access to best execution by denying clients the ability to effectively compare and evaluate the quality of prices.857 Another model for the trading of SBS is the RFQ system. An RFQ system typically allows market participants to obtain quotes for a particular SBS by simultaneously sending messages to one or more potential respondents (SBS 853 See Citadel Letter, supra note 18, at 8. 854 Id. 855 Id. 856 Id. 857 Id. E:\FR\FM\15DER2.SGM 15DER2 87248 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 dealers).858 The initiating participant is typically required to provide information related to the request in a message, which may include the name of the initiating participant, SBS identifier, side, and size. SBS dealers that observe the initiating participant’s request have the option to respond to the request with a price quote.859 These respondents are often, though not always, pre-selected. The initiating participant can then select among the respondents by either accepting one of multiple responses or rejecting all responses, usually within a ‘‘good for’’ time period. After the initiating participant and a respondent agree on the terms of the trade, the trade will then proceed to post-trade processing. RFQ systems provide a certain degree of pre-trade transparency in that the initiating participant can observe the quotes it receives (if any) in response to its RFQ. The number of quotes received depends, in part, on the number of respondents that are invited to participate in the RFQ. As the Commission discussed elsewhere, several factors may influence the number of respondents that are invited to participate in an RFQ.860 First, the RFQ system itself may limit the total number of respondents that can be selected for a single RFQ, typically to five counterparties. This limitation may encourage SBS dealers to respond to RFQs, since it reduces the number of other SBS dealers they would compete with in any give request session. Second, the initiating participant may have an incentive to limit the degree of information leakage. If the trade the initiating participant is seeking to complete with the help of the RFQ is not completely filled in that one session, and other participants know this, quotes the initiating participant receives elsewhere may be affected, including in subsequent RFQ sessions. Third, respondents and initiators both have an incentive to limit price impact because of the expense it will add to the 858 See Lynn Riggs, Esen Onur, David Reiffen, and Haoxiang Zhu, Swap Trading After Dodd-Frank: Evidence from Index CDS, 137 J. Financial Economics 857 (2020) (finding that, in the index CDS market, an initiating participant is more likely to send RFQs to its relationship dealers, i.e., its clearing members or dealers with whom it has traded more actively in the recent past). 859 See id. (finding that, in the index CDS market, a dealer’s response rate to an RFQ declines with the number of dealers included in the RFQ). 860 See Amendments to Exchange Act Rule 3b–16 Regarding the Definition of ‘‘Exchange’’; Regulation ATS for ATSs That Trade U.S. Government Securities, NMS Stocks, and Other Securities; Regulation SCI for ATSs That Trade U.S. Treasury Securities and Agency Securities SEA Release No. 94062 (Jan. 26, 2022), 87 FR 15496 (Mar. 18, 2022) (‘‘ATS–G Proposal’’), section VIII.B.1.a therein. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 offsetting trade that must follow. Specifically, an SBS dealer who takes a position to fill a customer order through an RFQ will often subsequently offset that position in the interdealer market. If a large number of SBS dealers are invited to participate in an RFQ, this would lead to widespread knowledge that the SBS dealer with the winning bid will now try to offset that position, which could impact the prices available to that dealer in the interdealer market. Two commenters describe the ‘‘request-for-stream’’ trading protocol, which allows liquidity providers to stream firm prices on trading platforms such as those run by SEFs.861 These firm prices are not required to be communicated to clients sending an RFQ on these trading platforms. A fourth model for the trading of SBS is a limit order book system or similar system, which the Commission understands is not yet in operation for the trading of SBS in the United States.862 Today, securities and futures exchanges in the United States display a limit order book in which firm bids and offers are posted for all participants to see, with the identity of the parties withheld until a transaction occurs.863 Bids and offers are then matched based on price-time priority or other established parameters and trades are executed accordingly. The quotes on a limit order book system are firm. In general, a limit order book system also provides greater pre-trade transparency than the models described above, because participants can view bids and offers before placing their bids and offers. However, broadly communicating trading interest, particularly about a large trade, might increase hedging costs, and thus costs to investors, as reflected in the prices from the SBS dealers. The system can also 861 See Citadel Letter, supra note 18, at 13; MFA Letter, supra note 18, at 8. See also supra section V.E.1(b)(iii). See also Lynn Riggs, Esen Onur, David Reiffen, and Haoxiang Zhu, Swap Trading After Dodd-Frank: Evidence from Index CDS, 137 J. Financial Economics 857 (2020) (documenting that this trading protocol—also referred to as ‘‘request for streaming’’—is one of the trading protocols used in the trading of index CDS on SEFs). 862 With respect to swaps traded on CFTCregistered SEFs, CFTC regulation § 37.9(a) provides that Required Transactions that are not block trades must generally be executed via an order book or RFQ system. CFTC regulations §§ 37.9(d) and (e) contain exceptions to the § 37.9(a) execution requirements for certain package transactions and error trades, respectively. See supra section V.E. 863 Under CFTC rules applicable to the swaps markets, § 37.9(f) prohibits the practice of post-trade name give-up for swaps that are executed, prearranged, or pre-negotiated anonymously on or pursuant to the rules of a SEF and intended to be cleared, subject to an exception related to certain package transactions. See supra section V.E (discussing Rule 815). PO 00000 Frm 00094 Fmt 4701 Sfmt 4700 provide post-trade transparency, to the extent that participants can see the terms of executed transactions. The models described above represent broadly the types of trading of SBS in the OTC market today. These examples may not represent every method in existence today, but the discussion above is intended to give an overview of the models without providing the nuances of each particular type. C. Benefits and Costs The Commission’s consideration of the benefits and costs of the adopted rules and amendments takes into account the connection between the trade execution requirement and the mandatory clearing requirement mandated by Congress. Specifically, the Dodd-Frank Act amended the SEA to require, among other things, the following with respect to SBS transactions: (1) transactions in SBS must be cleared through a clearing agency if they are required to be cleared; 864 and (2) if the SBS is subject to the clearing requirement, the transaction must be executed on an exchange or on an SBSEF registered under section 3D of the SEA or an SBSEF exempt from registration under section 3D(e) of the SEA, unless no SBSEF or exchange makes such SBS available for trading or the SBS is subject to the clearing exception in section 3C(g) of the SEA.865 The benefits and costs associated with the trade execution requirement will not materialize unless and until the Commission makes mandatory clearing determinations, i.e., determining what SBS transactions must be cleared by a clearing agency. The general approach to finalizing requirements relating to SBS execution could mitigate costs associated with the adopted rules and amendments. As discussed in section I, the Commission’s approach is to harmonize as closely as practicable with analogous CFTC rules for SEFs, unless a reason exists to do otherwise in a particular area. Based on the Commission’s belief that SBSEF registrants likely would be registered SEFs that have established systems and policies and procedures to comply with CFTC rules, the Commission’s general approach potentially will result in compliance costs for registered SBSEFs that are lower than compliance costs that would have resulted had the Commission chosen not to harmonize its approach as closely as practicable 864 See Public Law 111–203, 763(a) (adding section 3C(a)(1) of the SEA). 865 See id. See also Public Law 111–203, 761(a) (adding section 3(a)(77) of the SEA to define the term ‘‘security-based swap execution facility’’). E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 with analogous CFTC rules for SEFs.866 Several commenters state that the Commission’s general approach would mitigate costs for registered SBSEFs and SBS market participants.867 In assessing the economic impact of the adopted rules and amendments, the Commission considers the broader costs and benefits associated with the application of the adopted rules and amendments, including the costs and benefits of applying the substantive Title VII requirements to the trading of SBS.868 The Commission’s analysis also considers ‘‘assessment’’ costs—i.e., those that arise from current and future market participants expending resources to assess how they will be affected by Regulation SE, and could incur expenses in making this assessment even if they ultimately are not subject to rules for which they made an assessment. Many of the benefits and costs discussed below are difficult to quantify. These benefits and costs would depend on how potential SBSEFs and their prospective members respond to the adopted rules and amendments. If potential SBSEFs perceive the costs associated with operating registered SBSEFs to be high, such that few or no entities come forward to register as SBSEFs, there could be no triggering of the trade execution requirement, which depends on MAT determinations made by registered SBSEFs (or exchanges). Under this scenario, the future state of the SBS market likely will not differ from the current baseline and the potential costs and benefits discussed below will not materialize. An alternative scenario is that prospective SBSEFs perceive the costs associated with operating registered SBSEFs to be high but nevertheless register as SBSEFs because they expect to be able to pass on such costs to their members to help maintain the commercial viability of operating a registered SBSEF. MAT determinations by registered SBSEFs 866 In section XVIII infra, for purposes of the PRA, the Commission estimates burdens applicable to a stand-alone SBSEF. However, the Commission anticipates that most if not all SBSEFs will be dually registered with the CFTC as SEFs, and thus will already be complying with relevant CFTC rules that have analogs to rules contained within Regulation SE. Therefore, the Commission’s burden estimates may be larger for stand-alone SBSEF than may exist in practice, considering the effect of overlapping CFTC rules. 867 See Bloomberg Letter, supra note 18, at 2, 10, 18; ICE Letter, supra note 18, at 2; ISDA–SIFMA Letter, supra note 18, at 2; SIFMA AMG Letter, supra note 18, at 5; Tradeweb Letter, supra note 18, at 1–2. 868 In certain prior Title VII releases, the Commission had referred to such costs and benefits as programmatic costs and benefits. See, e.g., Regulation SBSR Adopting Release I, supra note 140. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 will move trading of the products covered by the determinations onto SBSEFs, which can generate benefits and costs associated with increased pretrade transparency, in addition to benefits and costs associated with the operation of regulated markets. A third possibility is that entities come forward to register as SBSEFs because they perceive the associated costs of operating SBSEFs to be low in light of the close harmonization of Regulation SE with analogous CFTC SEF rules. If these registered SBSEFs do not make MAT determinations and thus do not trigger the trade execution requirement, the benefits and costs associated with increased pre-trade transparency likely will not arise. If SBSEF trading is limited because of an absence of MAT determinations, the benefits and costs associated with the operation of regulated markets potentially will be limited as well. A fourth possibility is that entities do come forward to register as SBSEFs because they perceive the associated costs of operating SBSEFs to be low and these registered SBSEFs make MAT determinations and trigger the trade execution requirement. Under this scenario, the benefits and costs associated with increased pre-trade transparency and regulated markets likely will arise. The Commission does not have the data to determine which of the above possibilities will prevail following the adoption of the rules and amendments considered herein. The Commission has attempted to quantify economic effects where possible, but much of the discussion of economic effects is necessarily qualitative. 1. Overarching Benefits of the Rules and Amendments Broadly, the Commission anticipates that the new rules and amendments may bring several overarching benefits to the SBS market. Improved Transparency. The final rules would enable the Commission to obtain information about SBSEFs, thereby facilitating the Commission’s oversight of these entities.869 In addition, the requirements relating to pre-trade transparency would increase pre-trade transparency in the 869 For example, Rule 826, among other things, requires an SBSEF to maintain records of its business activities (including a complete audit trail) for a period of five years and report to the Commission such information as the Commission determines to be necessary or appropriate for performing the duties of the Commission under the SEA. See infra this section for a discussion of how Regulation SE would provide the means for the Commission to gain better insight into and oversight of SBSEFs and the SBS market. PO 00000 Frm 00095 Fmt 4701 Sfmt 4700 87249 market for SBS.870 Increased pre-trade price transparency should allow an increased number of market participants to better see the trading interest of other market participants prior to trading, which should lead to increased price competition among market participants.871 The requirements with respect to pre-trade price transparency should lead to more efficient pricing in the SBS market.872 Evidence from the swap market suggests that an increase in pre-trade transparency is associated with improved liquidity and reduced transaction costs.873 The Commission is not aware of any difference between the swap market and the SBS market that would cause the empirical findings regarding the impact of pre-trade price transparency on liquidity and transaction costs not to carry over into the SBS market, when implemented. The Commission is mindful that, under certain circumstances, pre-trade price transparency could also discourage the provision of liquidity by some market participants.874 However, having two 870 Rules 803(a)(2) and (3) require an SBSEF to offer, at a minimum, an order book for SBS trading, subject to certain exceptions related to package transactions. Rule 815(a) requires SBS transactions subject to the trade execution requirement to be executed using either an order book or via an RFQto-3 system. Rule 816 sets forth the process by which an SBSEF would subject an SBS to the trade execution requirement. Rule 817 informs market participants of the date on which the trade execution requirement for a particular SBS commences. Rule 832 describes those cross-border SBS transactions that would be subject to the trade execution requirement. 871 See, e.g., Ananth Madhavan, Market Microstructure: A Practitioner’s Guide, 58 Fin. Analysts J., at 38 (2002) (nondisclosure of pre-trade price information benefits dealers by reducing price competition). 872 See, e.g., Ekkehart Boehmer, et al., Lifting the Veil: An Analysis of Pre-trade Transparency at the NYSE, 60 J. Fin. 783 (2005) (greater pre-trade price transparency leads to more efficient pricing). 873 See Evangelos Benos, Richard Payne, and Michalis Vasios, Centralized Trading, Transparency, and Interest Rate Swap Market Liquidity: Evidence from the Implementation of the Dodd-Frank Act, 55 J. Fin. and Quantitative Analysis 159 (2020) (finding, among other things, that imposition of the CFTC’s trade execution requirement improved the liquidity of IRS that were subject to the requirement, and that the liquidity improvement was associated with more intense competition between swap dealers); Y.C. Loon and Zhaodong (Ken) Zhong, Does Dodd-Frank Affect OTC Transaction Costs and Liquidity? Evidence from Real-Time CDS Trade Reports, 119 J. Fin. Econ. 645 (2016) (finding that index CDS transactions executed on SEFs have lower transaction costs and improved liquidity than index CDS transactions executed bilaterally). 874 See, e.g., Ananth Madhavan, et al., Should Securities Markets Be Transparent?, 8 J. Fin. Markets 265 (2005) (finding that an increase in pretrade price transparency leads to lower liquidity and higher execution costs, because limit-order traders are reluctant to submit orders given that their orders essentially represent free options to other traders). E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87250 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations execution methods for Required Transactions (limit order book and RFQto-3) would provide market participants with flexibility in the degree of pretrade transparency they wish to employ. Using RFQ-to-3, a market participant could choose to reveal its trading interest to no more than three market participants; using a limit order book, the market participant would reveal its trading interest to all other market participants that have access to the same limit order book, which may exceed three market participants. The flexibility in the degree of pre-trade transparency should diminish potential concerns associated with the exposure of pretrade trading interest. Two commenters agree that the proposal would increase transparency in the SBS market.875 One of these commenters believes that the introduction of multilateral trading protocols would increase pre-trade transparency and competition, which should improve liquidity conditions, reduce transaction costs, and facilitate execution quality analysis, as clients will be able to put liquidity providers in direct competition.876 One commenter believes that proposed Rule 819(c) would help ensure that investment advisers to regulated funds will be able to participate on SBSEFs, accessing the pricing and other market information that may be available on SBSEF, which would increase transparency in the derivatives market.877 The Commission agrees that Rule 819(c), by requiring an SBSEF to provide any ECP with impartial access to its market(s) and market services, would help ensure that ECPs, including investment advisers, are able to access pricing and other market information on SBSEFs thereby increasing transparency in the SBS market. Improved oversight of trading. Regulation SE requires, among other things, that SBSEFs maintain an audit trail and automated trade surveillance system; conduct real-time market monitoring; establish and enforce rules for information collection; and comply with reporting and recordkeeping requirements.878 These requirements are designed to provide an SBSEF with sufficient information to oversee trading on its market, including detecting and deterring abusive trading practices. Additionally, an SBSEF shall permit trading only in SBS that are not readily 875 See Bloomberg Letter, supra note 18, at 1; Citadel Letter, supra note 18, at 8. 876 See Citadel Letter, supra note 18, at 8. 877 See ICI Letter, supra note 18, at 11 n.6. 878 See Rules 819, 821, 822, and 826. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 susceptible to manipulation 879 and adopt rules that are reasonably designed to allow the SBSEF to intervene as necessary to maintain markets with fair and orderly trading and to prevent or address manipulation or disruptive trading practices.880 This framework could enhance investor protection and increase confidence in a well-regulated market among SBS market participants, which could in turn make them more willing to increase their participation or entice new participants. An increase in participation in the SBS market would, all else being equal, benefit the SBS market as a whole. Further, to the extent that market participants utilize SBS to better manage their risk with respect to a position in underlying securities or assets, their participation in the SBS market could impact their willingness to participate in the underlying asset markets. Thus, Regulation SE could benefit the securities markets overall by encouraging a more efficient, and potentially higher, level of capital investment. Improved access and competition. Currently, the SBS market is dominated by a small group of SBS dealers.881 A mandatory clearing determination by the Commission, followed by a MAT determination by one or more SBSEFs or exchanges, should help foster greater competition in the trading of SBS by promoting greater order interaction and increasing access to and participation on SBSEFs. The final rules provide a framework for allowing a number of trading venues to register as SBSEFs and thus more effectively compete for business in SBS. Furthermore, Rule 827 is designed to promote competition generally by prohibiting an SBSEF from adopting any rules or taking any actions that unreasonably restrain trade or imposing any material anticompetitive burden on trading or clearing. Rule 819(c), among other things, requires an SBSEF to provide any ECP with impartial access to its market(s) and market services. Rule 819(c)(4), Rule 819(g)(14), along with the new rules and amendments to the Commission’s Rules of Practice allow persons who are aggrieved by a final disciplinary action, a final action with respect to a denial or conditioning of membership, or a final action with respect to a denial or limitation of access by an SBSEF to file an application for review by the 879 See Rule 820. Rule 824(b)(1). 881 See supra section XVII.B.2. 880 See PO 00000 Frm 00096 Fmt 4701 Sfmt 4700 Commission in a timely manner.882 These rules and amendments are designed to improve access to, foster confidence in, and provide for the oversight of SBSEF functions by creating a procedure for making appeals to the Commission. Taken together, these rules and amendments should foster greater access to SBSEFs by SBS market participants, which in turn could promote greater participation by liquidity providers on SBSEFs. Increased participation on SBSEFs could increase competition in liquidity provision and lower trading costs, which may lead to increased participation in the SBS market. One commenter agrees that Rule 819(c), in particular, would increase competition in the SBS market. The commenter further states that the rule would increase liquidity, efficiency, and fairness in the SBS market.883 The Commission agrees that Rule 819(c), together with the other rules described earlier, could increase competition in the SBS market, specifically competition in liquidity provision as discussed above. To the extent that increased competition in liquidity provision lowers bid-offer spreads and transaction costs, liquidity and efficiency in the SBS market would increase. Rule 819(c), by requiring an SBSEF to provide any ECP with impartial access to its market(s) and market services, would help ensure that all ECPs will receive the same treatment with respect to access to the SBSEF’s market(s) and market services and thus help to increase fairness in the SBS market. Two commenters believe that Proposed Rule 815(f), which is designed to prohibit post-trade name give up for an SBS that is executed anonymously on an SBSEF and intended to be cleared, would increase participation on SBSEFs and in turn increase competition, liquidity, and efficiency.884 One of these commenters also believes the proposed rule would increase fairness in the SBS markets.885 Rules 815(f) and 815(g) could generate such beneficial effects. The practice of post-trade name give-up increases the risk of information leakage and can 882 See Rules 819(c)(4) and 819(g)(14); Rules 442 and 443; amendments to Rules 101, 202, 210, 401, 450, and 460. Rule 442(b), among other things, clarifies that the 30-day period for filing an application for review will not be extended absent a showing of extraordinary circumstances, which is intended to encourage parties to act timely in seeking review. 883 See ICI Letter, supra note 18, at 2. 884 See id.; SIFMA AMG Letter, supra note 18, at 11. 885 See ICI Letter, supra note 18, at 2. E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations deter participation by liquidity seekers on SBSEFs. By prohibiting such a practice for an SBS that is executed anonymously on an SBSEF and intended to be cleared, Rule 815(f) would reduce the risk of information leakage and encourage more liquidity seekers to participate on SBSEFs. Further, by helping to protect the anonymity of market participants, Rule 815(f) could encourage a more diverse set of market participants to transact in anonymous order books. Rule 815(g) specifies that SBSEFs shall establish and enforce rules that provide that a security-based swap that is intended to be cleared at the time of the transaction, but is not accepted for clearing at a registered clearing agency, shall be void ab initio. The rule would ensure that a trade that is rejected for clearing would not become a bilateral transaction, in which case the counterparties would have to divulge their identities. As such, the rule would reduce the risk of information leakage and protect the anonymity of market participants for SBS that is executed anonymously and intended to be cleared, but is nonetheless rejected for clearing. This in turn could increase participation on SBSEFs by liquidity seekers and those wishing to transact in anonymous order books, similar to Rule 815(f). Increased participation by liquidity seekers on SBSEFs could in turn increase participation by liquidity providers and promote competition in liquidity provision. Greater participation in anonymous order books also could promote competition in liquidity provision if erstwhile liquidity seekers choose to provide liquidity in competition with SBS dealers in these order books. To the extent that increased competition in liquidity provision lowers bid-offer spreads and transaction costs, liquidity and efficiency in the SBS market would increase. By helping to protect the anonymity of those that transact in anonymous order books, the rule would deprive SBS dealers of a means of deterring access to and participation in such order books by buy-side market participants.886 Thus, Rule 815(g) could help promote a level playing field by ensuring that both buyside market participants and dealers can participate in these order books. Regulation SE would promote competition among entities that act as third-party service providers to SBSEFs. 886 See Citadel Letter, supra note 18, at 11 (stating that PTNGU, by revealing counterparty identities, can be used as a policing mechanism by dealers to deter buy-side access and participation). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 Rule 819(c) would, among other things, require an SBSEF to provide any independent software vendor with impartial access to its market(s) and market services. The rule would provide a level playing field to software vendors with respect to access to SBSEFs and promote competition among these vendors as they vie for an SBSEF’s business. Rule 819(e) would permit an SBSEF to contract with a registered futures association, a DCM, a national securities exchange, a national securities association, or another SBSEF for the provision of services to assist in complying with the SEA and Commission rules thereunder, as approved by the Commission. By permitting an SBSEF to choose from a range of regulatory services providers, Rule 819(e) could promote competition among regulatory services providers. To the extent that increased competition among independent software vendors and regulatory services providers incentivizes them to offer cheaper, higher quality services to SBSEFs thereby lowering their costs, market participants that are SBSEF members could benefit to the extent the SBSEFs pass on the cost savings in the form of lower fees to their members. Lower fees for SBSEF members would help reduce the overall costs of trading on SBSEFs and increase the efficiency of SBS trading. Improved Commission oversight. One of the goals of the Dodd-Frank Act is to increase regulatory oversight of SBS trading relative to the existing OTC SBS market.887 Regulation SE would provide the means for the Commission to gain better insight into and oversight of SBSEFs and the SBS market by, among other things, allowing the Commission to review new rules, rule amendments, and product listings by SBSEFs 888 and to obtain other relevant information from SBSEFs.889 Additionally, Rule 826(b) requires every SBSEF to keep full, complete, and systematic records of all activities relating to its business with respect to SBS. In addition, Rule 819(f) requires an SBSEF to capture and retain a full audit trail of activity on its facility. The records required to be kept by an SBSEF would help the Commission to determine whether an SBSEF is operating in compliance with the SEA and the Commission’s rules thereunder. The audit trail data required to be captured and retained would facilitate the ability of the SBSEF and the Commission to carry out their respective 887 See Public Law 111–203, Preamble. Rules 804, 805, 806, and 807. 889 See Rule 811. obligations under the SEA, by facilitating the detection of abusive or manipulative trading activity, allowing reconstructions of activity on the SBSEF, and generally understanding the causes of both specific trading events and general market activity. Furthermore, Rule 835 requires an SBSEF to provide the Commission notice of a final disciplinary action, a final action with respect to a denial or conditioning of membership, or a final action with respect to a denial or limitation of access, which facilitates the Commission’s review of the SBSEF’s disciplinary process and exercise of its regulatory powers, providing the Commission an additional tool to carry out its oversight responsibilities. Rule 813 provides for Commission oversight of SBSEFs in their use of information collected for regulatory purposes and is designed to deter the misappropriation or misuse of such information. Rule 824(c) requires an SBSEF to, among other things, promptly notify the Commission of its exercise of emergency authority and provide information related to the use of that authority. The registration requirements and related Form SBSEF, and the CCO’s annual compliance report, which are further discussed below, would also help the Commission with its oversight responsibilities. Improved automation. To comply with Regulation SE’s requirements relating to recordkeeping and surveillance, an SBSEF potentially would need to invest in and develop automated technology systems to store, monitor, and communicate a variety of trading data, including orders, RFQs, RFQ responses, and quotations.890 The final rules should promote increased automation in the SBS market, although CFTC-registered SEFs that plan to register as SBSEFs are already deploying automated systems that could be supplemented to support an SBS business. In addition, the automation and systems development associated with the regulation of SBSEFs could provide SBS market participants with new platforms and tools to execute and process transactions in SBS more rapidly and at a lower expense per transaction. Such increased efficiency could enable members of the SBSEF to handle increased volumes of SBS with greater efficiency and timeliness. 2. Benefits Associated With Specific Rules In addition to the broad benefits that the Commission anticipates as a result of the rules and amendments adopted in 888 See PO 00000 Frm 00097 Fmt 4701 Sfmt 4700 87251 890 See E:\FR\FM\15DER2.SGM Rules 819(d)(4) and 826. 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87252 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations this release, individual rules could bring particular benefits to the SBS market.891 These include the following: Registration requirements and Form SBSEF. SBSEF registration is required under the Dodd-Frank Act.892 Rule 818(a) incorporates the requirement under the Dodd-Frank Act that an SBSEF, in order to be registered and maintain registration, must comply with the Core Principles in section 3D(d) of the SEA and the Commission’s rules thereunder. The registration process described in Rule 803 implements this statutory requirement and assists the Commission in overseeing and regulating the SBS market. The information to be provided on Form SBSEF is designed to enable the Commission to assess whether an applicant has the capacity and the means to perform the duties of an SBSEF and to comply with the Core Principles and other requirements imposed on SBSEFs. Rule 803 is closely modelled on analogous CFTC registration requirements for SEFs. The choice to align the Commission’s registration requirements for SBSEFs with the CFTC’s requirements for SEFs is designed to achieve the abovementioned benefits while imposing only marginal costs on SBSEF registrants, who likely are SEFs. Finally, Rule 814(a) helps provide regulatory certainty for an entity that operates both an exchange and an SBSEF by clarifying that such an entity is required to separately register the two facilities pursuant to section 6 of the SEA and Rule 803, respectively. Exemptions (Rule 833, Rule 816(e), amendments to Rule 3a1–1, and Rule 15a–12). Rule 833 is designed to preserve access to foreign markets by ‘‘covered persons’’ (as defined in Rule 832). As discussed in section XVII.B.2, an analysis of SBS transaction data indicates that certain trades executed on foreign SBS trading venues involve at least one counterparty that is a covered person. Absent the rule, these trading venues might elect to avoid having members that are covered persons if those venues do not wish to register with the Commission in some capacity (such as an exchange or SBSEF). In addition, covered persons will not be permitted to execute SBS that are subject to the trade execution requirement on these venues if the 891 Unless otherwise stated, quantified benefits in this section are adjusted for CPI inflation using data published by the Bureau of Labor Statistics. See CPI Inflation Calculator, U.S. Bureau of Labor Statistics, available at https://www.bls.gov/data/inflation_ calculator.htm. 892 See SEA section 3D(a)(1), 15 U.S.C. 78c– 4(a)(1). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 venues do not register with the Commission in some capacity (such as an exchange or SBSEF) or obtain an appropriate exemption. This would limit access to foreign SBS trading venues by covered persons, potentially making it harder for them to locate counterparties and obtain liquidity for SBS that trade on those venues. This in turn could increase their trading costs because they might spend more time and effort to locate counterparties or because they have less bargaining power relative to the remaining pool of potential counterparties with which they could trade. To the extent that a foreign SBS trading venue can obtain a Rule 833(a) exemption, it could continue to provide members that are covered persons with access to and liquidity on its market. Furthermore, a Rule 833(b) exemption would allow covered persons to continue accessing foreign SBS trading venues to execute SBS that are subject to the SEA’s trade execution requirement. Currently, all trading venues that trade SBS—whether domestic or foreign—are exempt from having to register as a national securities exchange or SBSEF on account of the SBS trading business. This exemption expires when the Commission’s rules for registering and regulating SBSEFs come into force.893 Thus, removal of the existing exemption restores the status quo ante, where the SEA itself, as amended by the Dodd-Frank Act, requires entities meeting the definition of ‘‘securitybased swap execution facility’’ or ‘‘exchange’’ and falling within the territorial jurisdiction of the SEA to register with the Commission. By offering foreign SBS trading venues the possibility of an exemption from the definitions of ‘‘security-based swap execution facility’’ and ‘‘exchange’’ as well as from section 3D(a)(1) of the SEA, Rule 833(a) allows foreign SBS trading venues to operate in conditions similar to the current baseline (if the Commission ultimately grants an exemption under Rule 833(a)). Paragraph (a)(4) of Rule 3a1–1 provides that an entity that has registered with the Commission as an SBSEF and provides a market place for no securities other than SBS will not fall within the definition of ‘‘exchange’’ and thus will not be subject to the requirement in section 5 of the SEA to register as a national securities exchange (or obtain a low-volume exemption). The benefit of the amendment is to clarify to prospective SBSEF applicants that, if they register with the Commission as SBSEFs, they will not 893 See PO 00000 supra section III. Frm 00098 Fmt 4701 Sfmt 4700 face duplicative registration and regulatory requirements as exchanges. In addition, paragraph (a)(5) of Rule 3a1–1 codifies a series of exemptions that the Commission has granted over several years to SBS clearing agencies that operate ‘‘forced trading’’ sessions to support end-of-day valuations of SBS. Because the amendment is intended to codify existing exemptions, any associated economic effects would be minimal. New Rule 15a–12 is designed to minimize overlapping compliance burdens for SBSEFs, which are also brokers under the SEA, that restrict their activity to engaging in the business of operating an SBSEF (and no other broker activities). Absent the rule, such SBSEFs (defined as ‘‘SBSEF–Bs’’ for purposes of Rule 15a–12) will need to register as SBSEFs and be subject to the SBSEF regulatory regime, in addition to registering as brokers and being subject to the broker regulatory regime. Rule 15a–12 allows an SBSEF–B to satisfy the requirement to register as a broker by registering as an SBSEF under Rule 803 and exempts an SBSEF–B from SIPA and other broker requirements, except for sections 15(b)(4), 15(b)(6), and 17(b) of the SEA. As a result of the rule, SBSEF–Bs could avoid incurring duplicative and unnecessary compliance burdens. Each SBSEF–B could save an estimated $345,826 in initial broker registration costs 894 and $62,878 in annual ongoing costs of meeting broker registration requirements.895 In deriving these estimates, the Commission assumes that the activities an SBSEF–B performs to register and maintain registration as a broker do not overlap with those that it performs to register and maintain registration as an SBSEF–B. If there is an overlap in such activities, the estimated cost savings could be smaller. Each SBSEF–B could save an estimated $821 in ongoing costs associated with satisfying broker minimum capital 894 The Commission previously estimated that an entity would incur costs of $301,400 to register as a broker-dealer and become a member of a national securities association. See Cross-Border Amendments Adopting Release, 85 FR at 6312. Adjusted for inflation through Dec. 2022, these costs are $345,826. 895 The Commission previously estimated that an entity would incur ongoing annual costs of $54,800 to maintain broker-dealer registration and membership of a national securities association. See Cross-Border Amendments Adopting Release, 85 FR 6312. Adjusted for inflation through Dec. 2022, these costs are $62,878. The estimation of ongoing annual costs is based on the assumption that the entity would use existing staff to perform the functions of the registered broker-dealer and would not incur incremental costs to hire new staff. To the extent that the entity chooses to hire new staff, the ongoing annual costs would likely be higher. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 requirements.896 The estimated aggregate initial and annual ongoing savings are $1,729,130 and $318,495, respectively.897 Rule and product filings. Rules 806 and 807 set forth alternative filing processes for a new rule or rule amendment of a registered SBSEF, and Rules 804 and 805 set forth alternative filing processes for an SBSEF to file an SBS product that it wishes to list. Rule 810 would address new product filings by an entity that has applied for SBSEF registration but has not yet been registered, or by a dormant SBSEF seeking reinstatement of its registration. The self-certification processes of Rules 804 and 807 require SBSEFs to include a certification that the product, rule, or rule amendment, as the case may be, complies with the SEA and Commission rules thereunder.898 The information to be provided by the SBSEF under Rules 804, 805, and 810 will further the ability of the Commission to obtain information regarding SBS that an SBSEF intends to list on its market. The rules will assist the Commission in overseeing and regulating the trading of SBS and to help ensure that SBSEFs operate in compliance with the SEA. In addition, Rule 806(a)(5), which requires an SBSEF to explain the anticipated benefits and potential anticompetitive effects on market participants of a proposed new rule or rule amendment, potentially could help foster a competitive SBS market because it could prompt SBSEFs to consider the positive as well as negative aspects of their proposed rules or rule amendments with respect to competition. Rule 808 is designed to facilitate the public’s ability to obtain information from SBSEF applications as well as rule and product filings. Rule 808(a) specifies the parts of an SBSEF 896 Absent the rule, an SBSEF–B would comply with the minimum net capital requirement of $5,000 for a registered broker-dealer because it would not receive, owe, or hold customer funds or securities; carry customer accounts; and engage in certain other activities. See Rule 15c3–1(a)(2)(vi) under the SEA, 17 CFR 240.15c3–1(a)(2)(vi). The Commission estimates the cost of capital using the annual stock returns on a value-weighted portfolio of financial stocks from 1988 to 2022 (see Kenneth French, 48 Industry Portfolios, available at https:// mba.tuck.dartmouth.edu/pages/faculty/ken.french/ ftp/48_Industry_Portfolios_CSV.zip (accessed on May 18, 2023). These returns were averaged to arrive at an estimate of 16.41%. The cost of capital = 16.41% × $5,000 = $820.50 or approximately $821. 897 The Commission estimates the number of SBSEF–Bs as the number of entities that likely will register as SBSEFs. See supra section XVII.B.4. Aggregate initial savings = $345,826 × 5 (number of SBSEF–Bs) = $1,729,130. Aggregate annual ongoing savings = ($62,878 + $821) × 5 (number of SBSEFs) = $318,495. 898 See Rules 804(a)(3)(iv) and 807(a)(6)(iv). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 application that the Commission shall make publicly available unless confidential treatment is obtained pursuant to SEA Rule 24b–2. Rule 808(b) provides that the Commission shall make an SBSEF’s rule and product filings publicly available unless confidential treatment is obtained pursuant to SEA Rule 24b–2. Rule 808(c) provides that the terms and conditions of a product submitted to the Commission pursuant to any of Rules 804 through 807 shall be made publicly available at the time of submission unless confidential treatment is obtained pursuant to SEA Rule 24b–2. Rule 809 provides a mechanism for the staying of a product certification or the tolling of a review period for a filing by an SBSEF relating to a product while the appropriate jurisdictional classification of that product is determined. The rule is designed to provide regulatory certainty for SBSEFs and market participants who may be interested in trading products whose classification as an SBS subject to SEC jurisdiction or a swap subject to CFTC jurisdiction is unclear. In particular, Rule 809 would help ensure that determinations regarding whether the SEC or CFTC appropriately has jurisdiction over a product are made before the product is traded. The Commission’s election to model Rules 804 through 810 closely on analogous rules in part 40 of the CFTC’s rules that apply to SEFs (and other registered entities) is designed to promote efficiency. Utilizing the same processes for rule and product filings, with which dually registered SEF/ SBSEFs are familiar, would impose only minimal burdens on such entities while obtaining the similar regulatory benefits as the CFTC rules. In some cases, where a new rule or rule amendment affects both the swap and SBS business of a dually registered entity, the same or a very similar filing could be made to each of the CFTC and SEC, in lieu of having to make different filings to support the same rule change. Chief Compliance Officer. Rule 831, among other things, requires the CCO of an SBSEF to submit an annual compliance report to the Commission. The report will assist the Commission in carrying out its oversight of the SBSEFs and the SBS market by providing the Commission with information about the compliance activities of SBSEFs. Furthermore, by requiring an SBSEF to designate an individual as the CCO and making the CCO responsible for ensuring compliance with the SEA and the Commission’s rules thereunder, Rule 831 would promote regulatory compliance on SBSEFs and the SBS PO 00000 Frm 00099 Fmt 4701 Sfmt 4700 87253 market generally.899 This in turn would further the goal of moving SBS trading away from opaque and unregulated OTC markets and onto transparent and regulated markets by promoting effective regulation of the latter. Conflicts of Interest. Rule 831, among other things, requires the CCO to resolve material conflicts of interest that may arise in consultation with the governing board or the senior officers of the SBSEF.900 Rule 828(a) requires an SBSEF to establish and enforce rules to minimize conflicts of interest in its decision-making process and establish a process for resolving the conflicts of interest. Rule 828(b) would require an SBSEF to comply with the requirements of Rule 834, which is designed to implement section 765 of the DoddFrank Act with respect to SBSEFs and SBS exchanges. Rule 834, among other things, imposes a 20% cap on the voting interest held by an individual member of an SBSEF or SBS exchange, mitigates conflicts of interest in the disciplinary process of an SBSEF or SBS exchange, sets forth certain minimum requirements for the composition of the governing board of an SBSEF or SBS exchange, sets forth reporting requirements related to governing board elections, and addresses the avoidance of conflicts of interest in the execution of regulatory functions by an SBSEF or SBS exchange.901 The rules would mitigate conflicts of interest between an SBSEF or SBS exchange and its members as discussed in section VIII. Relative to the bilateral OTC SBS market, SBSEFs and SBS exchanges promote competition between liquidity providers, potentially forcing them to lower their prices for supplying liquidity (e.g., narrowing bidask spread) and reducing their profits from liquidity provision. However, if SBS dealers or major SBS participants were able to restrict access to such venues by, for example, exercising their voting interest in an SBSEF or SBS exchange, they could stifle competition in SBSEFs and SBS exchanges and preserve their profits from liquidity provision. Regulation SE, by mitigating such conflicts of interest could help ensure access to SBSEFs and SBS exchanges and in turn increase competition in liquidity provision and lower transaction costs. Rules 834(e), (f), and (g) also may promote good governance at SBSEFs and SBS exchanges. To the extent that improved 899 The SBSEF remains responsible for establishing and administering required policies and procedures. See supra section VI.N. 900 See Rules 831(a)(2)(iii) and (h)(2). 901 See Rules 834(b) to (g). E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87254 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations governance result in more effective oversight by SBSEFs and SBS exchanges of their markets, market participants may benefit. These benefits could be limited to the extent that prospective SBSEFs and SBS exchanges already have rules in place that comply with the rules. Structured Data Requirements. Rule 825(c)(3) requires an SBSEF to publish a Daily Market Data Report on its website without charge or usage restrictions and in a downloadable and machine-readable format using the most recent version of the associated XML schema and PDF renderer as published on the Commission’s website.902 Requiring the Daily Market Data Report to be provided in a structured, machinereadable data language (using a Commission-created XML schema) will facilitate the use of the price, trading volume, and other trading data on the report by end users such as SBS market participants and market observers. By including a structured data requirement, the information in the report will be made available in a consistent and openly accessible manner that will allow for automatic processing by software applications, thus enabling search capabilities and statistical and comparative analyses across SBSEFs and date ranges.903 This will ensure that SBS market participants and market observers seeking to use the data will not have to spend time manually collecting and entering the data into a format that allows for analysis. One commenter stated that using custom XML rather than Inline XBRL ‘‘would essentially require re-creating what XBRL already offers’’ and that the use of custom XML ‘‘would result in added costs for all stakeholders, reduced efficiencies in adapting to changes, and the inability to commingle datasets.’’ 904 The Daily Market Data Report, which includes the trade count, the total notional amount traded, and the opening and closing price, is wellsuited for custom XML as the information would easily fit within a table and the use of custom XML would make the file size of the document smaller than would be the case with Inline XBRL, which helps to reduce operating system overhead. Posting the Daily Market Data Report would not impose significant costs to prospective and actual SBSEFs due to the limited extent and complexity of the required 902 See Rule 825(c)(3). addition, the associated PDF renderer will provide users with a human-readable document for those who prefer to review manually individual reports, while still providing a uniform presentation. 904 See XBRL US Letter, supra note 718, at 2. 903 In VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 data points to be reported, and because SBSEFs are already required to use structured data to fulfill their reporting requirements under Regulation SBSR 905 and therefore would have relevant systems in place to structure and publicly disseminate other SBS trading information.906 While the use of custom XML will make it more difficult for data users to aggregate and compare the data points on the Daily Market Data Report with data points in other Inline XBRL datasets in an efficient manner, the streamlined schema and reduced file size justify that drawback. Regulation SE requires SBSEFs to file disclosures required under various provisions in the EDGAR system using structured (machine-readable) data languages.907 Requiring a centralized filing location and a machine-readable data language for these disclosures will facilitate access, retrieval, analysis, and comparison of the disclosed information across different SBSEFs and time periods by the Commission and the public, thus potentially augmenting the informational benefits of the various disclosure requirements discussed herein. Also, because EDGAR provides basic technical validation capabilities, the use of EDGAR could reduce the incidence of technical errors (e.g., letters instead of numbers in a field requiring only numbers) and thereby improve the quality of the structured disclosures. The structured data requirements under Regulation SE will facilitate access to the structured information in the filings, enabling Commission staff to perform more efficient retrieval, aggregation, and comparison across different SBSEFs and time periods, as compared to an unstructured PDF, HTML, or ASCII format requirement. The functionality enabled by a machinereadable data requirement will allow staff to better utilize the structured information in Regulation SE filings to ensure compliance with the SEA and rules and regulations thereunder applicable to SBSEFs (e.g., by enabling efficient staff identification of material 905 See 17 CFR 242.907(a)(2) (requiring information to be submitted to SDRs in an ‘‘opensource structured data format that is widely used by participants’’). 906 See infra section XVII.C.3 for a discussion of the specific content of the Daily Market Data Report and how it differs from the SBS transaction reports disseminated under Regulation SBSR. 907 This includes the documents required under: Rule 803(b)(1)(i) and (3) (filings of, and amendments to, specified exhibits in a Form SBSEF application); Rules 803(e) and 803(f) (requests to withdraw or vacate an application for registration); Rule 829(g)(6) (submission to the Commission of reports related to financial resources and related documentation); and Rule 831(j)(2) (submission to the Commission of the annual compliance report of the SBSEF’s CCO). See supra section XIII.A. PO 00000 Frm 00100 Fmt 4701 Sfmt 4700 changes to compliance policies or material non-compliance matters to gauge the soundness of SBSEF compliance programs), thus ultimately furthering the Commission’s mission of maintaining fair, orderly, and efficient markets. In a change from the proposal, Regulation SE will require some of the structured disclosures to be filed in custom XML rather than Inline XBRL.908 Because both custom XML and Inline XBRL are structured data languages that result in machinereadable disclosures, the aforementioned benefits would apply in both cases. Inline XBRL specifically provides the ability to tag detailed facts within narrative text blocks, and is thus well-suited to accommodate many disclosures required under proposed Regulation SE, several of which require extended narrative discussions (e.g., the chief compliance officer’s report required under Rule 831).909 In addition, certain required disclosures consist of financial information (e.g., the financial statements of the SBSEF required under Exhibit I to Form SBSEF), and Inline XBRL is designed specifically for the accurate capture and communication of financial information, among other uses. A benefit specific to custom XML disclosures is that EDGAR can create fillable web forms allowing SBSEFs, at their option, to input their disclosures manually and have EDGAR convert them into the specific custom XML data language, removing the need for SBSEFs to structure the disclosures in the custom XML data language themselves. This added flexibility may ease compliance burdens for any SBSEFs that choose to use the fillable web form. One commenter noted that an Inline XBRL requirement for the proposed disclosures would allow financial identification and textual data in both a human- and machine-readable format consistently in a fashion that would allow Form SBSEF data to be commingled with other SEC-reported datasets.910 While we generally agree that Inline XBRL provides such benefits 908 The custom XML requirements apply to information required under Rules 803(e) and (f) regarding withdrawal or vacation applications; the Form SBSEF Cover Sheet; and Exhibits A, B, G, M, N, and T to Form SBSEF. The Inline XBRL requirements apply to information required under Rules 829 and 831 regarding financial resources reports and CCO compliance reports, respectively; and Exhibits C through F, H through L, and P through S to Form SBSEF. See supra section XIII.A. See also supra notes 724–726 and accompanying text (discussing the final rule text revisions that implement the reduced scope of Inline XBRL requirements for Form SBSEF). 909 See Rule 831. 910 See XBRL US Letter, supra note 718, at 2. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations related to data use, the greater compliance flexibility afforded by custom XML merits using custom XML for the specified disclosures. In another change from the proposal, where Regulation SE requires copies of existing documents (e.g., copies of manuals, contracts, organizational documents) to be attached to filings, those copies will be filed as unstructured PDF attachments.911 The absence of structuring requirements for these documents will further reduce compliance burdens on SBSEFs, and although the content of those copies will not be machine-readable, we do not believe the informational benefits associated with having such documents in structured form would be significant enough to merit requiring SBSEFs to retroactively structure such existing documents. In addition, filings related to new SBSEF rules and products under Rules 804 through 807 and 816 will be filed as unstructured documents through the EFFS system rather than through EDGAR. As noted by one commenter, the absence of structuring requirements for these filings will similarly reduce compliance burdens on SBSEFs.912 ddrumheller on DSK120RN23PROD with RULES2 3. Costs Although Regulation SE would benefit the SBS market, the Commission recognizes that Regulation SE also would entail certain costs.913 Some costs are difficult to precisely quantify and are discussed below. The Commission is mindful that any rules it may adopt with respect to SBSEFs under the Dodd-Frank Act may impact the incentives of market participants with respect to where and how they trade SBS. If the rules adopted by the Commission are, or are perceived to be, too costly for trading venues to comply with, fewer entities than expected may seek to register as SBSEFs, which would not further the goal of moving a greater percentage of SBS trading from opaque and unregulated OTC markets to transparent and regulated trading 911 This includes attached copies of existing documents required under Exhibits A, G, I, M, N, and O to Form SBSEF. See supra section XIII.A. See also supra notes 724–726 and accompanying text (discussing the final rule text revisions that implement the reduced scope of Inline XBRL requirements for Form SBSEF). 912 See Bloomberg Letter, supra note 18, at 20. See also supra notes 730–733 (discussing the final rule text revisions that implement the requirement for SBSEFs to file rule and product filings in unstructured format using the EFFS system). 913 Unless otherwise stated, quantified costs in this section are adjusted for CPI inflation using data published by the Bureau of Labor Statistics. See CPI Inflation Calculator, U.S. Bureau of Labor Statistics, available at https://www.bls.gov/data/inflation_ calculator.htm. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 venues. In addition, if the rules for trading on an SBSEF are perceived as too burdensome by market participants, SBS trading may continue in the OTC market absent a mandatory clearing determination and a triggering of the mandatory trade execution requirement, thus frustrating the goals of the DoddFrank Act.914 Even if the trade execution requirement is triggered for an SBS, market participants that wish to avoid being subject to the requirement may do so by strategically choosing the location of the desk executing a trade in that SBS.915 At the same time, if the rules relating to SBSEFs are too lenient, they may have little or no impact on the market structure and surveillance of the SBS market relative to the status quo, which could result in the loss of many of the benefits discussed above and fail to achieve the goals of the Dodd-Frank Act. In addition, SBS traded on SBSEFs may be perceived to be subject to increased costs, monetary and otherwise. For example, the requirements related to pre-trade transparency could cause market participants to reveal valuable economic information regarding their trading interest more broadly than they may believe would be economically prudent and could discourage participation in the SBS market. An additional impact of pre-trade transparency is perceived costs associated with front-running, if customers or SBS dealers are required to show their trading interest before a trade is executed. These potential costs of pretrade transparency may change market participants’ trading strategies, which could result in them working more orders or finding ways to attempt to hide their interest.916 These potential costs would likely vary based on the notional size of the SBS transaction and, in particular, would likely be greater for market participants engaging in SBS trades of a larger notional size.917 If 914 See supra section XVII.C (noting that the benefits and costs associated with the trade execution requirement would not materialize unless and until the Commission makes a mandatory clearing determination). 915 See Citadel Letter, supra note 18, at 16. 916 See, e.g., Ananth Madhavan, Market Microstructure: A Survey, J. of Fin. Markets, Vol. 3 (2000). 917 The potential costs associated with SBS trades of a larger notional size could be affected by a definition of ‘‘block trade’’ that includes a block trade threshold that market participants could rely on for the exception from the Required Transaction requirement in Rule 815(a)(2). As discussed in section V.E.1(c)(i), supra, a block-trade exception for SBSs subject to the trade-execution requirement, provided that ‘‘block trade’’ is appropriately defined for those SBSs, can help ensure that large trades are not significantly more difficult and costly to execute because of the risks posed by information PO 00000 Frm 00101 Fmt 4701 Sfmt 4700 87255 market participants view Regulation SE as too burdensome with respect to pretrade transparency, SBS dealers may be less willing to supply liquidity for SBS that trade on SBSEFs or exchanges, thus adversely affecting liquidity and competition. However, such effects could be mitigated by Rules 815(d)(2) and Rules 815(d)(3) that provide an exception for certain package transactions that allows for flexible methods of execution for what would be otherwise Required Transactions.918 On the other hand, if the requirements with respect to pre-trade transparency bring about only a marginal increase in pre-trade transparency, the result could be that there would be no substantive change from the status quo, including no benefits of alleviating informational asymmetries, increasing price competition, and supplying better executions beyond the changes in response to the other requirements of the Dodd-Frank Act. This actual impact would depend on the degree of pretrade transparency required and the characteristics of the trading market. The rules are intended to provide for greater pre-trade transparency than currently exists without requiring pretrade transparency in a manner that would cause participants to avoid providing liquidity on SBSEFs. There would be transaction costs, such as fees and connectivity costs, that trading counterparties would incur in executing or trading SBS subject to the trade execution requirement on SBSEFs. Likewise, although unregulated trading venues exist in today’s OTC derivatives market, the Commission does not have information regarding what, if any, fees and connectivity costs are associated with transacting on these unregulated trading venues. In the Proposing Release, the Commission invited comment on the likely fees and costs associated with transacting on SBSEFs as well as fees and costs associated with transacting on unregulated trading venues that exist in today’s OTC derivatives market. Commenters did not provide estimates of likely fees and costs associated with transacting on SBSEFs or fees and costs associated with transacting on unregulated trading venues. As discussed in section XVII.B, prospective SBSEF registrants are likely leakage and the potential for adverse price movement, which could significantly impair liquidity in the markets for those SBSs. 918 See Rule 815(d)(2) and Rule 815(d)(3). Neither an SBS that is intended to be cleared (even if it is not required to be cleared) nor a swap subject to a CFTC trade execution requirement would create an exception from required methods of execution for a Required Transaction that is part of the same package. E:\FR\FM\15DER2.SGM 15DER2 87256 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 to be CFTC-registered SEFs that are active in the index CDS market. Because the final rules are harmonized as closely as practicable with analogous CFTC rules for SEFs, unless a reason exists to do otherwise in a particular area, much of the systems, policies, and procedures that are used to support SEF trading also could be used to support SBSEF trading. The prospective SBSEF registrants likely would incur marginal costs associated with listing SBS products on their venues 919 and making limited changes to their systems, policies, and procedures to comply with SEC rules that differ slightly from analogous CFTC rules. The Commission estimates the one-time costs associated with such changes to systems, policies, and procedures would range between $26,393 and $1,583,550 per SBSEF and between $131,965 and $7,917,750 in the aggregate, depending on the changes needed. These cost ranges reflect significant uncertainties about the extent of changes that different registrants might need. The annual ongoing costs of maintaining the technology (e.g., ensuring any necessary technological updates and improvements are made) and applying the technology to ongoing compliance requirements are estimated to be in the range of $1,055,700 to $2,111,400 per SBSEF and in the range of $5,278,500 to $10,557,000 in the aggregate.920 919 See infra section XVII.C.3(c) (discussing the costs that these entities might incur to list SBS products). 920 In the Proposing Release, the Commission estimated that the one-time costs associated with changes to systems, policies, and procedures would range between $25,000 and $1.5 million per SBSEF, depending on the changes needed. The Commission estimated the annual ongoing costs to be between $1 million and $2 million. See Proposing Release, supra note 1, 87 FR at 28953. Adjusting for inflation in 2022, the Commission now estimates that the one-time costs associated with changes to systems, policies, and procedures would range between $25,000 × 1.0557 (CPI inflation adjustment for 2022) = $26,392.50 or approximately $26,393 and $1.5 million × 1.0557 (CPI inflation adjustment for 2022) = $1,583,550 per SBSEF, depending on the changes needed. In the aggregate, the one-time costs associated with changes to systems, policies, and procedures would range between $26,393 × 5 SBSEFs = $131,965 and $1,583,550 × 5 SBSEFs = $7,917,750, depending on the changes needed. Adjusting for inflation in 2022, the Commission now estimates the annual ongoing costs per SBSEF to be between $1 million × 1.0557 (CPI inflation adjustment for 2022) = $1,055,700 and $2 million × 1.0557 (CPI inflation adjustment for 2022) = $2,111,400. In the aggregate, the annual ongoing costs would be between $1,055,700 × 5 SBSEFs = $5,278,500 and $2,111,400 × 5 SBSEFs = $10,557,000. One commenter states that any potential differences between SEC rules and analogous CFTC rules would require SBSEF registrants to devote resources toward assessing the potential gaps and consequences of regulatory divergence. See Bloomberg Letter, supra note 18, at 10. Such costs would be part of the one-time costs associated with changes to systems, policies, and VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 Several commenters agree that the Commission’s general approach to finalizing requirements relating to SBS execution would mitigate costs for registered SBSEFs.921 One commenter is concerned that Rule 816 as proposed would permit SBSEFs to make an SBS available to trade even absent objective evidence of a sufficiently liquid trading market.922 According to the commenter, requiring SBS with insufficient liquidity to be traded via an order book or an RFQ system would raise a significant risk of revealing investment advisers’ sensitive portfolio management strategies.923 Such information leakage could lead to front-running of funds’ trades and to other abusive trading practices that would negatively affect the pricing of SBS and of other related instruments, resulting in higher investment costs for investment advisers’ clients, including funds and their investors.924 The Commission agrees that an inappropriate MAT determination such as the one described by the commenter could result in higher investment costs for investment advisers’ clients by increasing the risk of information leakage, front-running, and other abusive trading practices. Regulation SE as adopted would address concerns related to inappropriate MAT determinations. As discussed in section V.F.2, the Commission will have the opportunity to review all SBSEF MAT determinations, whether they are selfcertified or voluntarily filed for Commission approval, to consider whether those determinations are adequately supported by evidence and consistent with the SEA and the rules thereunder, including the six factors to be considered for MAT determinations under Rule 816(b).925 In the absence of such evidence, the Commission can decline to approve or can stay and then object to a MAT petition, which will ultimately allow the Commission to prevent an inappropriate MAT determination from taking effect. procedures. It is possible that SBSEF registrants might incur additional costs toward assessing the potential gaps and consequences of regulatory divergence. In that case, the one-time costs associated with changes to systems, policies, and procedures could be higher than the Commission’s estimates. 921 See supra section XVII.C and note 867. 922 See ICI Letter, supra note 18, at 5. 923 See id. at 6. 924 Id. 925 These six factors are: (1) whether there are ready and willing buyers and sellers; (2) the frequency or size of transactions; (3) the trading volume; (4) the number and types of market participants; (5) the bid/ask spread; or (6) the usual number of resting firm or indicative bids and offers. See Rule 816(b). PO 00000 Frm 00102 Fmt 4701 Sfmt 4700 One commenter states that requiring a fund to disclose its trading interest in an SBS of a large notional size to multiple participants—via an order book or an RFQ system—would enable opportunistic market participants to piece together information about the fund’s holdings or investment strategy and lead to front-running of those potential trades.926 The Commission agrees that requiring a fund to disclose its trading interest in an SBS of a large notional size to multiple participants via an order book or an RFQ system could impose costs associated with information leakage and front-running. However, these costs have to be considered in light of the benefits of increased pre-trade transparency: increased price competition, increased price efficiency, improved liquidity, and reduced transaction costs.927 By adopting two execution methods for Required Transactions (limit order book and RFQ-to-3), market participants have flexibility in the degree of pre-trade transparency they wish to employ, which should diminish potential concerns associated with the exposure of pre-trade trading interest. Further, a market participant that wishes to engage in Permitted Transactions of a large notional size can choose any method of execution that is offered by an SBSEF and is not restricted to using a limit order book or RFQ-to-3. For these transactions, any costs associated with information leakage and front-running likely would not be different from those costs that would prevail under the baseline. One commenter states that Proposed Rule 834 would have the effect of prohibiting certain SBSEF participants from having common ownership and control as the SBSEF. The commenter is concerned that the proposed rule would prevent prospective SBSEFs that are CFTC-registered SEFs from onboarding their affiliated introducing brokers because doing so would exceed the ownership and voting caps set forth in Proposed Rule 834(b).928 Another commenter is concerned that the rule’s 20% ownership cap would limit access to capital and act as barriers to entry for SBSEF and SBS exchanges.929 Observing that the CFTC did not adopt rules analogous to Proposed Rule 834, the commenters suggest that the proposed rule, if adopted, would be a fundamental departure from the CFTC’s rules, minimizing many of the other 926 See ICI Letter, supra note 18, at 11. supra section XVII.C.1 (discussing the benefits of increased pre-trade transparency). 928 See WMBAA Letter, supra note 18, at 2. 929 See SIFMA AMG Letter, supra note 18, at 12. 927 See E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations benefits of a harmonized regime, and thwart efforts to smoothly implement Regulation SE.930 One commenter further states that some CFTC registered SEFs, which are prospective SBSEFs, might have to review their ownership and governance structure and, possibly, amend their organization.931 In response to these concerns, the Commission is adopting Rule 834(b)(3), which provides an exemption from the ownership and voting caps for an SBSEFs that has mitigated the potential conflict of interest with respect to compliance with the rules of the SBSEF by entering into an agreement with a registered futures association or a national securities association for the provision of regulatory services that encompass, at a minimum, real-time monitoring under Rule 819(d)(5) and investigations and investigation reports under Rule 819(d)(6). This exemption should address concerns regarding certain SBSEF participants not being able to have common ownership and control as the SBSEF (provided these appropriate conditions are met); the onboarding of affiliated introducing brokers by certain prospective SBSEFs; access to capital and entry barriers; and potential disruption or delays to the implementation of Regulation SE. With respect to the Daily Market Data Report required by Proposed Rule 825, one commenter states that the Daily Market Data Report would require inappropriate and detrimental disclosures that would undermine the Commission’s goal of fostering a competitive and efficient market for SBS trading. This commenter states that there are significant differences in the information required to be reported under the SEC and CFTC regimes. The commenter states that Proposed Rule 825(c)(1) increases the burden on SBSEFs compared to SEFs by requiring additional information regarding sale and offer prices, as well as qualitative descriptions of certain data that are reported.932 This commenter further states that the Commission’s proposal does not address why the CFTC’s approach would not be acceptable in the context of SBSEFs and does not justify the increased operational costs to SBSEFs (which will ultimately be passed on to members). The commenter also states that the Commission has not considered the costs and potential for duplicative requirements in the context of Regulation SBSR reporting requirements. The commenter 930 See id.; WMBAA Letter, supra note 18, at 3. WMBAA Letter, supra note 18, at 3. 932 See MFA Letter, supra note 18, at 13. 931 See VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 concludes that, in sum, the Daily Market Data Report is overly granular and duplicative, is unnecessary for transparency purposes, and could negatively impact the market and market participants. The commenter states that the Commission should therefore remove the Daily Market Data Report in favor of harmonizing with the analogous CFTC rules and that, if the Commission does not eliminate the Daily Market Data Report requirement altogether, it should adopt additional masking protections for trades, specifically with respect to block trades. Failure to do so, the commenter states, would cause inappropriate and detrimental disclosures and would ‘‘negate the benefits that the rule purports to achieve by exempting block trades from clearing [sic] requirements.’’ 933 As discussed in Section IV.H, many of the reporting requirements of the Daily Market Data Report under Proposed Rule 825 are closely aligned with the data required to be disclosed on a daily basis by SEFs under § 16.01 of the CFTC’s rule. Further, the Commission is modifying Proposed Rule 825 to resolve the two differences between the proposed Daily Market Data Report and the existing CFTC reporting scheme under § 16.01: (1) that the Daily Market Data Report would include the number of block trades executed; 934 and (2) that the Daily Market Data Report would be posted on the SBSEF’s website no later than the beginning of trading on the next business day,935 while the information required by § 16.01 must be made public no later than the next business day.936 Rule 825(c)(1), as adopted, does not require the disclosure of the number of block trades.937 Further, Rule 825(c)(4), as adopted, requires the publication of the Daily Market Data Report ‘‘as soon as reasonably practicable on the next business day after the day to which the 933 See id. Regulation SE does not address any exemption from clearing requirements. 934 See Proposed Rule 825(c)(1)(iii). 935 See Proposed Rule 825(c)(4). 936 See 17 CFR 16.01(e). The Commission views the requirement to keep each Daily Market Data Report on an SBSEF’s website for one year, see Proposed Rule 825(c)(5), as a small additional burden for an SBSEF and does not view it as a significant departure from harmonization with the CFTC’s SEF regime. 937 The Commission is also, pursuant to its determination not to adopt a definition of ‘‘block trade’’ at this time, deleting the words ‘‘including block trades but’’ from the text of paragraph (c)(i) and (ii) of Rule 825, and is adding the words ‘‘after such time as the Commission adopts a definition of ‘block trade’ ’’ to paragraph (c)(iii) of Rule 825 (formerly paragraph (c)(iv) of Proposed Rule 825) which will have no effect on the requirement as compared to the proposed rule. See supra section VI.H. PO 00000 Frm 00103 Fmt 4701 Sfmt 4700 87257 information pertains, but in no event later than 7 a.m. on the next business day.’’ With these modifications, the data called for by Rule 825(c)(1) is consistent with the required daily disclosures for SEFs. These modifications should help address concerns regarding increased burden on SBSEFs compared to SEFs, increased operational costs to SBSEFs, the Daily Market Data Report being overly granular, and negative impact on the market and market participants. The fact that Rule 825(c)(1), as adopted, does not require the disclosure of the number of block trades would obviate the need to adopt masking protections for block trades and address the commenter’s concern about inappropriate and detrimental disclosures that would adversely affect competition and efficiency in the SBS market. To the extent that the disclosure of the number of block trades prompts market prices to move against the dealers that facilitated such block trades thereby raising their hedging costs, dealers could raise the price of liquidity provision (e.g., by widening the bid-ask spread) charged to market participants, increase transaction costs, and reduce the efficiency of SBS trading. To the extent that the cost of transacting block trades increases, market participants may choose to exit the SBS market and trade alternative securities. This in turn could reduce participation and competition in the SBS market. Rule 825(c)(1), by not requiring the disclosure of the number of block trades, should mitigate these potential adverse effects on competition and efficiency in the SBS market. With respect to the concern that the Daily Market Data Report is duplicative of Regulation SBSR and unnecessary for transparency purposes, the former performs a function that is different from the reporting and public dissemination of SBS transactions required by Regulation SBSR.938 The Daily Market Data Report would consolidate trading information by venue and provide useful summary information about SBS trading on an SBSEF for all market participants without requiring them to incur costs to collect, process, and aggregate information from individual reports of SBS transactions that are executed on an SBSEF and publicly disseminated pursuant to Regulation SBSR. In addition, the Daily Market Data Report provides information regarding trading on an SBSEF that is not available in the SBS transaction reports that are publicly disseminated pursuant to Regulation SBSR. Among other things, the Daily Market Data Report would provide the 938 See E:\FR\FM\15DER2.SGM 17 CFR 242.900 et seq. 15DER2 87258 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 opening and closing price; the price that is used for settlement purposes, if different from the closing price; the lowest price of a sale or offer, whichever is lower; the highest price of a sale or bid, whichever is higher; the method used by the SBSEF in determining nominal prices and settlement prices; and a description of the manner in which discretion is used to determine the opening and/or closing ranges or the settlement prices.939 Further, because the transaction reports for credit SBS are permitted to be capped at a notional volume of $5 million,940 market participants would be unable to glean the information provided by the Daily Market Data Report—which would publish daily total notional volumes based on uncapped transaction amounts—from the individual reports of SBS transactions under Regulation SBSR. Thus, the Daily Market Data Report would provide market participants, at little to no cost, with information about pricing and trading volume for SBS on SBSEFs that goes beyond the information that could be obtained from SBS transaction reports that are publicly disseminated pursuant to Regulation SBSR. Several commenters are concerned that Proposed Rule 832(b)(3), which would apply the trade execution requirement to ANE transactions, could create complexities,941 prompt market participants and platforms to develop costly infrastructure to avoid engaging in ANE transactions,942 confuse market participants and platforms and reduce market participation.943 One commenter asks the Commission to be mindful of whether CFTC-registered SEFs would be forced to change their rules in order comply with the new proposed SBSEF rules.944 With respect to the concern that CFTC-registered SEFs might be forced to change their rules because of the Commission’s ANE approach for SBSEFs, foreign trading venues that have already received exemptive relief from the CFTC for swaps trading where robust regulatory regimes may exist with requirements comparable to those applicable to SBS transactions in the United States might seek and obtain exemptive relief under Rule 833(b). If 939 See Rules 825(c)(1)(iv) through (vi) and 825(c)(2). 940 See 2019 Cross-Border Adopting Release, supra note 218, 85 FR at 6347 (providing no-action relief with respect to Rule 902 of Regulation SBSR, 17 CFR 242.902, for reports of credit SBS transaction disseminated with a capped size of $5 million). 941 See SIFMA AMG Letter, supra note 18, at 11. 942 See ISDA–SIFMA Letter, supra note 18, at 12. 943 See Tradeweb Letter, supra note 18, at 4–5. 944 See SIFMA AMG Letter, supra note 18, at 11. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 exempted under Rule 833(b), trading of SBS on such foreign trading venues would not require CFTC-registered SEFs to change their rules.945 Similarly, for SBS transactions that the Commission exempts from the trade execution requirement based on an application submitted under Rule 833(b), the concerns expressed by commenters regarding complexities and costs would no longer be applicable. The effect of such exemptions would likely result in SBS transactions in foreign jurisdictions with what may be considered robust regulatory regimes to be exempt from the Commission’s trade execution requirement and, in practice, have similar treatment of transactions on applicable foreign trading venues as the CFTC. This should address concerns about confusion among market participants and platforms in foreign jurisdictions; the regulatory certainty provided by the exemptions should help to mitigate any adverse effects on market participation and obviate the need to develop costly infrastructure to avoid engaging in ANE transactions. Several commenters are concerned that many foreign SBS trading venues would not be able to obtain a Rule 833(b) exemption because they believe the rule would require foreign jurisdictions to require RFQ-to-3 and order book methods of execution, while hardly any foreign jurisdictions have identical requirements, with some jurisdictions not requiring SBS to be traded on an organized trading venue.946 These commenters believe that the inability of foreign trading venues to obtain a Rule 833(b) exemption would result in various negative consequences: increased costs; disruption and fragmentation of the SBS markets; reduced liquidity and participation in the SBS markets; impaired risk transfer, risk management, and price formation; and increased systemic risk.947 The Commission acknowledges the concerns raised by commenters, which appear to emanate from commenters’ interpretation—and misunderstanding— of what would be required in order to receive a Rule 833(b) exemption. Specifically, several commenters interpret the rule and the Commission’s discussion of the rule in the Proposing Release to mean that a foreign SBS trading venue must have RFQ-to-3 and 945 See supra notes 624–627 and accompanying text. 946 See supra note 599; Bloomberg Letter, supra note 18, at 6, 19; ICE Letter, supra note 18, at 4; ISDA–SIFMA Letter, supra note 18, at 14; Tradeweb Letter, supra note 18, at 6. 947 See supra note 602–607 and accompanying text. PO 00000 Frm 00104 Fmt 4701 Sfmt 4700 an order book for Required Transactions in order for transactions on that venue to qualify for a Rule 833(b) exemption.948 As discussed in Section VII.B, the proposed rule would not require foreign SBS trading venues to have RFQ-to-3 and an order book in order for the Commission to consider their SBS executions for an exemption under Rule 833(b). Neither the text of Rule 833(b) nor the Commission’s description of Rule 833(b) states that a limit order book or an RFQ-to-3 system is required to receive a Rule 833(b) exemption.949 There may be foreign SBS trading venues—many of which have already received exemptive relief from the CFTC for swaps trading 950—that may be appropriate candidates for exemptive relief, that are subject to what may be considered robust regulatory regimes for SBS trading. With respect to such foreign SBS trading venues, the Commission encourages market participants to submit a request for exemptive relief under final Rule 833(b) if they seek to be exempt from the Commission’s trade execution requirement for their SBS transactions. This discussion should address concerns about the potential unavailability of a Rule 833(b) exemption to SBS foreign trading venues and the negative consequences that could arise if SBS foreign trading venues are unable to obtain a Rule 833(b) exemption. We detail below cost estimates for specifics parts of the adopted rules. Many of these cost estimates are based on the PRA estimates of costs and burdens from section XVIII.951 (a) Registration Requirements for SBSEFs and Form SBSEF The registration provisions would impose costs on entities that seek registration as SBSEFs. The Commission estimates that initial filings on Form SBSEF by prospective SBSEFs seeking to register with the Commission 948 See supra notes 597–599 and accompanying text. 949 In the Proposing Release, the Commission stated its preliminary belief that ‘‘the use of singledealer platforms to discharge any mandatory trading execution requirement’’ would not meet the proposed rule’s requirements. See Proposing Release, supra note 1, 87 FR at 28925. 950 See supra note 626. 951 In section XVIII infra, for purposes of the PRA, the Commission estimates burdens applicable to a stand-alone SBSEF. However, most if not all SBSEFs will be dually registered with the CFTC as SEFs and thus will already be complying with relevant CFTC rules that have analogs to rules in Regulation SE. Therefore, the Commission’s burden estimates are greater for stand-alone SBSEFs than may actually take place for those already registered with the CFTCs because of the effect of the CFTC’s corresponding rules. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations pursuant to Rule 803 would result in aggregate initial costs of $100,300 for prospective SBSEFs.952 (b) Ongoing Compliance With Other Requirements That Are Similar to the Remainder of Part 37 As discussed in section XVIII.D.2.b, the Commission estimates the aggregate annual paperwork burden for SBSEFs to comply with all of the SBSEF rules that have analogs in part 37 to be 1935 hours.953 These burdens are estimated to impose aggregate ongoing annual costs of $131,580 on SBSEFs.954 (c) Rule and Product Filing Processes for SBSEFs The Commission estimates that the aggregate ongoing annual costs incurred by all SBSEFs to prepare and submit rule and product filings under Rules 804, 805, 806, and 807 (including the cover sheet) would be $33,000.955 (d) Rules 809, 811, 819, 826, 829, 833, 834, and 835 ddrumheller on DSK120RN23PROD with RULES2 The Commission estimates the aggregate ongoing annual costs incurred by SBSEFs to comply with Rule 809 would be $604.956 952 $100,300 = 1,475 burden hours × $68/hour blended hourly rate. The $68/hour blended hourly rate is the $59/hour blended hourly rate computed by the CFTC and adjusted for CPI inflation through Dec. 2022. The CFTC used the blended hourly wage to estimate PRA costs associated with part 37. See infra section XVIII.D.2(a); OMB, Supporting Statement for New and Revised Information Collections: Core Principles and Other Requirements for Swap Execution Facilities, OMB Control Number 3038–0074, Attachment A (July 7, 2021), available at https://omb.report/icr/2021073038-004/doc/113431800.pdf. 953 See infra section XVIII.D.2(b). This estimate excludes the paperwork burdens associated with registration requirements for SBSEFs and Form SBSEF and provisions of certain rules to be discussed subsequently. 954 $131,580 = 1,935 burden hours × $68/hour blended hourly rate. See supra note 952 (derivation of the $68/hour blended hourly rate). 955 $33,000 = 300 hours × $110/hour blended hourly rate. The $110/hour blended hourly rate is the $96.26/hour blended hourly rate computed by the CFTC and adjusted for CPI inflation through Dec. 2022. The CFTC used the blended hourly rate to estimate PRA costs associated with part 40. See infra section XVIII.D.3(a); OMB, Supporting Statement for Information Collection Renewal: OMB Control Number 3038–0093, Attachment A (July 10, 2020), available at https://omb.report/icr/ 202005-3038-001/doc/101274002.pdf. The platform ID requirement on the submission cover sheet would not impose burdens for obtaining a platform ID, because an SBSEF (whether registered or exempt) is already required under Rule 903(a) of Regulation SBSR to obtain an LEI to identify itself as its platform ID. See supra section IV.E and n.140. 956 $604 = 1.25 hours × $483/hour national hourly rate for an attorney. The per-hour figure for an attorney is from SIFMA’s Management and Professional Earnings in the Securities Industry— 2013, as modified by Commission staff to adjust for inflation (through Dec. 2022) and to account for an 1,800-hour work-year, and multiplied by 5.35 to VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 87259 The Commission estimates the aggregate ongoing annual costs incurred by SBSEFs to comply with requests for documents or information pursuant to Rule 811(d) would be $88.957 The Commission estimates the aggregate ongoing annual costs incurred by SBSEFs to comply with Rule 819(i) would be $27,142.958 The Commission estimates the aggregate ongoing annual costs incurred by SBSEFs to comply with Rule 819(j) would be $1,208.959 The Commission estimates the aggregate ongoing annual costs incurred by SBSEFs to update information required by Rule 826(f) would be $162.960 The Commission estimates that interested parties would incur aggregate one-time costs of $115,920 in the first year and $77,280 in each subsequent year to submit exemption requests under one or both paragraphs of Rule 833.961 The Commission estimates that SBSEFs and SBS exchanges would incur aggregate one-time costs of $50,880 associated with drafting and implementing rules to comply with Rules 834(b) and (c).962 The Commission estimates that SBSEFs and SBS exchanges would incur aggregate ongoing annual costs of $680 to comply with Rules 834(d), 834(e), and 834(f).963 The Commission estimates that SBSEFs and SBS exchanges would incur aggregate one-time costs of $1,088 to comply with Rule 834(g).964 The Commission estimates that SBSEFs would incur aggregate ongoing annual costs of $21,735 to comply with Rule 835.965 SBSEFs likely would incur costs to comply with the financial resources requirement of Rule 829(b). Assuming that SBSEFs satisfy this requirement by holding financial resources in the form of their own capital pursuant to Rule 829(c)(1), the Commission estimates that SBSEFs would incur an aggregate annual cost of capital of $35,436.966 account for bonuses, firm size, employee benefits, and overhead. See infra section XVIII.D.3(b)(ii); Supporting Statement for the Paperwork Reduction Act New Information Collection Submission for Rule 3a68–2 (Interpretation of Swaps, SecurityBased Swaps, and Mixed Swaps) and Rule 3a68– 4(c) (Process for Determining Regulatory Treatment for Mixed Swaps), OMB Control Number 3235– 0685, Supporting Statement A (Dec. 23, 2021), available at https://omb.report/icr/202112-3235018/doc/117438500.pdf. 957 $88 = 1.25 hour × $70/hour hourly rate for a financial manager. The $70/hour hourly rate is the $65/hour hourly rate computed by the CFTC and adjusted for CPI inflation through Dec. 2022. The CFTC used the hourly rate to estimate PRA costs associated with part 1.6. See infra section XVIII.D.4(a); OMB, Supporting Statement for New and Revised Information Collections: OMB Control Number 3038–0033 (Oct. 29, 2021), available at https://omb.report/icr/202110-3038-001/doc/ 115991000.pdf. 958 $27,142 = 399.15 hours × $68/hour blended hourly rate. The burdens associated with this rule are not different from burdens associated with rules that have part 37 analogs. Thus, it would be appropriate to apply the $68/hour blended hourly rate to estimate the paperwork related costs associated with this rule. See infra section XVIII.D.4(c). See also supra note 952 (derivation of the $68/hour blended hourly rate). 959 $1,208 = 2.5 hours × $483/hour national hourly rate for an attorney. See infra section XVIII.D.4. See also supra note 956 (derivation of the national hourly rate for an attorney). 960 $162 = 2 hours × $81/hour national hourly rate for a compliance clerk. See infra section XVIII.D.4(f). The per-hour figure for a compliance clerk is from SIFMA’s Office Salaries in the Securities Industry—2013, as modified by Commission staff to adjust for inflation (through Dec. 2022) and to account for an 1,800-hour workyear, and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead. 961 First year costs: $115,920 = 240 hours × $483/ hour national hourly rate for an attorney. Costs in each subsequent year: $77,280 = 160 hours × $483/ hour national hourly rate for an attorney. See infra section XVIII.D.5(a). See also supra note 956 (derivation of the national hourly rate for an attorney). 962 $50,880 = 120 hours × $424/hour national hourly rate for a compliance attorney. The estimate of 120 burden hours is based on the Commission’s estimate that five SBSEFs and three SBS exchanges will incur paperwork burdens associated with Rules 834(b) and (c). See infra section XVIII.D.4(g). The per-hour figure for a compliance attorney is from SIFMA’s Management and Professional Earnings in the Securities Industry—2013, as modified by Commission staff to adjust for inflation (through Dec. 2022) and to account for an 1,800-hour workyear, and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead. 963 $680 = 10 hours × $68/hour blended hourly rate. Further, the costs incurred by SBSEFs = 5 (number of SBSEFs) × 1.25 hours per SBSEF × $68/ hour blended hourly rate = $425. The burdens associated with this rule are not different from burdens associated with rules that have part 37 analogs. Thus, it is appropriate to apply the $68/ hour blended hourly rate to estimate the paperwork related costs associated with this rule. See infra section XVIII.D.4(g). See also supra note 952 (derivation of the $68/hour blended hourly rate). 964 $1,088 = 16 hours × $68/hour blended hourly rate. The burdens associated with this rule are not different from burdens associated with rules that have part 37 analogs. Thus, it is appropriate to apply the $68/hour blended hourly rate to estimate the paperwork related costs associated with this rule. See infra section XVIII.D.4(g). See also supra note 952 (derivation of the $68/hour blended hourly rate). 965 $21,735 = 45 hours × $483/hour national hourly rate for an attorney. See infra section XVIII.D.5(b). See also supra note 956 (derivation of the national hourly rate for an attorney). 966 The Commission estimates the financial resources that SBSEFs would need to hold pursuant to Rule 829(b) as their projected operating costs. See Rule 829(b). Further, the Commission estimates SBSEFs’ projected operating costs as the sum of the aggregate ongoing annual costs incurred by SBSEFs to comply with Regulation SE. Thus, SBSEFs’ estimated projected operating costs = $131,580 (ongoing compliance with other requirements that are similar to the remainder of part 37) + $33,000 (rule and product filing processes by SBSEFs) + $604 (Rule 809) + $88 (Rule 811(d)) + $27,142 (Rule 819(i)) + $1,208 (Rule 819(j)) + $162 (Rule 826(f)) PO 00000 Frm 00105 Fmt 4701 Sfmt 4700 E:\FR\FM\15DER2.SGM Continued 15DER2 87260 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations SBSEFs could lower this cost if their capital consists of financial assets that generate a return that would serve to offset the cost of capital. However, this cost mitigation is potentially limited by Rule 829(d), which would require an SBSEF to include among the financial resources it holds a certain amount of unencumbered, liquid financial assets (i.e., cash and/or highly liquid securities),967 that tend to generate little or no return. ddrumheller on DSK120RN23PROD with RULES2 (e) Assessment Costs The Commission estimates that 86 entities likely would incur assessment costs as a result of Rule 832, based on a staff analysis of counterparties to U.S. single-name CDS for the 12-month period from October 2021 to September 2022. Such costs would be related primarily to the identification of the counterparty status and origination location of the transaction to determine whether the trade execution requirement would apply. Market participants would request representations from their transaction counterparties to determine the U.S.person status of their counterparties. In addition, if the transaction is guaranteed by a U.S. person, the guarantee would be part of the trading documentation and, therefore, the existence of the guarantee would be a readily ascertainable fact. Similarly, market participants would be able to rely on their counterparties’ representations as to whether a transaction is arranged, negotiated, or executed by a person within the United States. Therefore, the assessment costs associated with Rule 832 should be limited to the costs of + $425 (Rules 834(d), (e), and (f)) + $21,735 (Rule 835) = $215,943. Thus, the Commission estimates that SBSEFs would hold $215,943 in the form of their own capital to comply with Rule 829(b). The Commission estimates SBSEFs’ cost of capital to be 16.41%. See supra note 896 (describing how the cost of capital is estimated). SBSEFs’ aggregate annual cost of capital = $215,943 × 16.41% = $35,436. The Commission acknowledges that there is uncertainty associated with this estimate. The estimate does not account for the fact that SBSEFs may use reasonable discretion in determining the methodologies used to calculate projected operating costs and wind down costs, pursuant to Rule 829(e). Depending on how SBSEFs exercise this reasonable discretion, the resulting methodologies could yield projected operating costs and in turn, required financial resources, that may be higher or lower than the Commission’s estimate. 967 The CFTC’s experience overseeing SEFs would appear to support the belief that SBSEFs would hold unencumbered, liquid financial assets rather than obtain a line of credit to comply with Rule 829(d). In a previous rulemaking, the CFTC noted that most SEFs satisfy the liquidity requirement of § 37.1303 (the analog of Rule 829(d)) through maintaining liquid assets rather than obtaining a line of credit. See CFTC, Swap Execution Facilities, 86 FR 9224, 9242 n.247 (Feb. 11, 2021) (‘‘2021 SEF Amendments Adopting Release’’). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 establishing a compliance policy and procedure of requesting and collecting representations from trading counterparties and maintaining the collected representations as part of the market participants’ recordkeeping procedures. Such assessment costs would be approximately $19,320 per entity.968 Requesting and collecting representations would be part of the standardized transaction process reflected in the policies and procedures regarding SBS transactions and trading practices and should not result in separate assessment costs. The Commission also considers the likelihood that market participants could implement systems to keep track of counterparty status for purposes of future trading of SBS that are similar to, if not the same as, the systems implemented by market participants for purposes of assessing SBS dealer or major SBS participant status. Implementation of such a system would involve one-time programming costs of $15,758 per entity.969 Therefore, the Commission estimates the total one-time costs per entity associated with Rule 832 could be $35,078 and the aggregate one-time costs could be $3,016,708.970 To the extent that market participants have incurred costs relating to similar or the same assessments with respect to 968 $19,320 = 40 hours × $483/hour national hourly rate for an attorney. This estimate is based on an estimated 40 hours of in-house legal or compliance staff’s time to establish a procedure of requesting and collecting representations from trading counterparties, taking into account that such representations may be built into a form of standardized trading documentation. See supra note 956 (derivation of the national hourly rate for an attorney). 969 This is based on an estimate of the time required for a programmer analyst to modify the software to track the covered person status of a counterparty, including consultation with internal personnel, and an estimate of the time such personnel would require to ensure that these modifications conformed to the definition of ‘‘covered person’’ (as defined in Rule 832). $15,758 = (2 hours × $424/hour national hourly rate for a compliance attorney) + (4 hours × $360/hour national hourly rate for a compliance manager) + (40 hours × $280/hour national hourly rate for a programmer analyst) + (4 hours × $266/hour national hourly rate for a senior internal auditor) + (2 hours × $603/hour rate for a Chief Financial Officer). The per-hour figures for compliance attorney, compliance manager, programmer analyst, and senior internal auditor are from SIFMA’s Management & Professional Earnings in the Securities Industry—2013, as modified by Commission staff to adjust for inflation (through Dec. 2022) and to account for an 1,800-hour workyear, and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead. The hourly rate for a Chief Financial Officer is the $473 hourly rate for the same position used in the CrossBorder Adopting Release (see 78 FR 31140 n.1425) and adjusted for inflation through Dec. 2022. 970 Total one-time costs per entity = $19,320 (compliance policy and procedure) + $15,758 (systems) = $35,078. Aggregate one-time costs = 86 entities × $35,078 = $3,016,708. PO 00000 Frm 00106 Fmt 4701 Sfmt 4700 counterparty status and transaction location for other Title VII requirements, their assessment costs with respect to Rule 832 may be less. (f) Structured Data and Electronic Filing Costs As mentioned previously, the Commission will require many of the disclosures required under Regulation SE to be provided via EDGAR in a structured data language. SBSEFs will likely incur limited costs to comply with the proposed requirement in Rule 825(c)(3) to publish Daily Market Data Reports using the most recent versions of the associated XML schema and PDF renderer as published on the Commission’s website. Because SBSEFs are required to use structured data to fulfill their reporting requirements under Regulation SBSR, the compliance cost associated with the Rule 825(c)(3) requirement will be limited to the cost prospective SBSEF registrants will incur to update their systems to incorporate the Commission’s XML schema for Daily Market Data Reports.971 Such costs are included among the costs for prospective SBSEF registrants in making limited changes to their systems, policies, and procedures to comply with proposed SEC rules that differ slightly from analogous CFTC rules, as discussed in further detail above.972 With respect to the Inline XBRL requirements for various disclosures required under Regulation SE, SBSEFs will incur initial Inline XBRL implementation costs (such as the cost of training in-house staff to prepare filings in Inline XBRL, and the cost to license Inline XBRL filing preparation software from vendors) and ongoing Inline XBRL compliance burdens that will result from the tagging requirements, because prospective SBSEF registrants are not currently subject to Inline XBRL requirements. The custom XML requirements under Regulation SE will not impose these costs on SBSEFs, because SBSEFs will have the option of complying with those requirements by completing a fillable web form rather than structuring the disclosures in custom XML themselves. Also, as discussed in greater detail below, the Inline XBRL implementation costs could be mitigated to some extent, because six of the seven SEFs that list index CDS for trading (i.e., the pool of likely SBSEF applicants) have parent or affiliate entities that make filings in Inline XBRL, which raises the 971 See 17 CFR 242.907(a)(2) (requiring information to be submitted to SDRs in an ‘‘opensource structured data format that is widely used by participants’’). 972 See supra note 920 and accompanying text. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 possibility that some (if not most) SBSEFs might be able to take advantage of the knowledge of Inline XBRL possessed by their parent or affiliate entities. Further, the compliance costs associated with the structured data requirements, as adjusted for inflation, will likely decrease over time. SBSEFs will likely comply with structuring requirements more efficiently after gaining experience over repeated filings, though such an effect will likely be diminished for affected entities that already have experience structuring similar data in other documents. Thirdparty vendors of structured data compliance software or services may decrease the prices of their products over time; the XBRL compliance costs reported in the 2018 AICPA survey of smaller operating companies reflect such a trend, as they represented a 45% decline in average cost and a 69% decline in median cost from 2014.973 In addition to costs associated with structured data requirements, because prospective SBSEF registrants are not currently subject to EDGAR requirements, hey will incur a one-time compliance burden of submitting a Form ID as required by Rule 10(b) of Regulation S–T.974 The aforementioned costs are included among the costs for prospective SBSEF registrants in making limited changes to their systems, policies, and procedures to comply with proposed SEC rules that differ slightly from analogous CFTC rules, as discussed in further detail above.975 As noted above, we are requiring SBSEFs to submit rule and product filings in unstructured format using EFFS, rather than structuring the filings and submitting them via EDGAR.976 As a result of this change from the proposal, SBSEFs will not incur the compliance costs associated with applying Inline XBRL tags to their rule and product filings. We agree with one commenter who noted that an Inline XBRL requirement would cause SBSEFs to incur related compliance costs, although we do not agree that such costs would be so substantial as to serve as a potential market entry deterrent, or would create an unlevel playing field 973 AICPA, XBRL Costs for Small Companies Have Declined 45% since 2014 (2018), available at https://us.aicpa.org/content/dam/aicpa/ interestareas/frc/accountingfinancialreporting/xbrl/ downloadabledocuments/xbrl-costs-for-smallcompanies.pdf. This survey was limited to operating companies, and was conducted before the transition from XBRL to Inline XBRL and the implementation of cover page tagging requirements for periodic reports. 974 See 17 CFR 232.10(b). 975 See supra note 920 and accompanying text. 976 See supra section XVII.C.2. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 whereby national securities exchanges would have a competitive advantage over SBSEFs due to these discrepant costs. Rather, we are requiring rule and product filings to be filed through EFFS in unstructured format, because we believe the alleviation of compliance burdens resulting from the absence of a structuring requirement merits the lesser volume of machine-readable data, especially in light of the significant volume of structured SBSEF data available pursuant to other Regulation SE provisions. D. Effects on Efficiency, Competition, and Capital Formation The new rules and amendments would likely affect competition, capital formation, and efficiency in various ways discussed below. 1. Competition As discussed earlier, currently, the SBS market is dominated by a small group of SBS dealers.977 A mandatory clearing determination by the Commission, followed by a MAT determination by one or more SBSEFs, should help foster greater competition in the trading of SBS by promoting greater order interaction and increasing participation on SBSEFs. The final rules provide a framework for allowing a number of trading venues to register as SBSEFs and thus more effectively compete for business in SBS. Furthermore, Rule 827 is designed to promote competition generally by prohibiting an SBSEF from adopting any rules or taking any actions that unreasonably restrain trade or impose any material anticompetitive burden on trading or clearing. Additionally, rules that improve access to SBSEFs by market participants (e.g., Rule 819(c)) could increase participation and competition in liquidity provision in the SBS market.978 Rules that improve regulatory oversight, market integrity, and market predictability on SBSEFs and rules that reduce the risk of trading disruption on SBSEFs likely would increase market participants’ confidence in the soundness of SBSEFs.979 To the extent that greater confidence in the soundness of SBSEFs increases participation by liquidity providers on SBSEFs, competition in liquidity provision could increase. To the extent 977 See supra section XVII.B.2. supra sections XVII.C.1 (discussing improved access and competition as an overarching benefit of the rules and amendments) and XVII.C.2 (discussing how rules that mitigate conflicts of interest between an SBSEF or SBS exchange and its members could help ensure access to SBSEFs and SBS exchanges and in turn increase competition in liquidity provision and lower transaction costs). 979 See infra section XVII.D.2. 978 See PO 00000 Frm 00107 Fmt 4701 Sfmt 4700 87261 that increased competition in liquidity provision reduces the price of liquidity provision (e.g., bid-ask spread), market participants could benefit in terms of lower transaction costs. Rules 815(f) and 815(g), by reducing the risk of information leakage and protecting market participants’ anonymity for an SBS that is anonymously executed on an SBSEF and intended to be cleared, could increase participation on SBSEFs. This in turn could increase competition in liquidity provision, liquidity, and efficiency in the SBS market.980 Rule 806(a)(5), which requires an SBSEF to explain the anticipated benefits and potential anticompetitive effects on market participants of a proposed new rule or rule amendment, potentially could help foster a competitive SBS market because it could prompt SBSEFs to consider the positive as well as negative aspects of their proposed rules or rule amendments with respect to competition.981 As discussed earlier, Rules 819(c) and 819(e) would promote competition among entities that act as third-party service providers to SBSEFs. To the extent that increased competition among third-party service providers incentivizes them to offer cheaper, higher quality services to SBSEFs thereby lowering their costs, market participants that are SBSEF members could benefit if the SBSEFs pass on the cost savings in the form of lower fees to their members.982 Lower fees for SBSEF members would help reduce the overall costs of trading on SBSEFs and increase the efficiency of SBS trading. 2. Capital Formation Regulation SE could promote capital formation by helping to improve regulatory oversight, market integrity, and market predictability. Regulation SE requires, among other things, that SBSEFs maintain an audit trail and automated trade surveillance system; conduct real-time market monitoring; establish and enforce rules for information collection; and comply with reporting and recordkeeping requirements. These requirements are designed to provide an SBSEF with sufficient information to oversee trading on its market, including detecting and 980 See supra section XVII.C.1 (discussing improved access and competition as an overarching benefit). 981 See supra section XVII.C.2 (discussing benefits associated with rule and product filings). 982 See supra section XVII.C.1 (discussing improved access and competition as an overarching benefit). E:\FR\FM\15DER2.SGM 15DER2 87262 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 deterring abusive trading practices.983 The audit trail and recordkeeping and reporting requirements, by providing the Commission access to information about SBSEFs, will increase the Commission’s ability to assess risks in the SBS market and to oversee the market, which all else being equal should reduce the amount of risky or abusive behavior in the SBS market.984 Further, Rule 831, the requirements relating to the CCO, would promote regulatory compliance on SBSEFs and the SBS market generally.985 In addition, Regulation SE provides for various safeguards to help promote market integrity, including Rule 819(c) relating to impartial access to the SBSEF 986 and Rule 830 relating to systems safeguards. Rule 812(a) would help to improve predictability in the market by providing that a transaction entered into on or pursuant to the rules of an SBSEF shall not be void, voidable, subject to rescission, otherwise invalidated, or rendered unenforceable as a result of a violation by the SBSEF of the provisions of section 3D of the SEA or the Commission’s rules thereunder. Any resulting increase in regulatory oversight, market integrity, and market predictability likely would increase market participants’ confidence in the soundness of SBSEFs, which in turn could spill over into increased confidence in the soundness of the SBS market more broadly. Such increased confidence could lead to the greater use of SBS, particularly those traded on SBSEFs, by corporate entities to hedge their business risks and investors to hedge their portfolio risks with respect to positions in underlying securities. To the extent that corporate entities can improve their hedging efficiency with SBS, they may divert resources from precautionary savings into productive assets, thereby promoting capital formation. To the extent that investors can improve their hedging efficiency with SBS, they may be more willing to invest in the underlying securities, which should facilitate capital raising and formation by issuers. Therefore, the adopted rules would help encourage capital formation. Also, by reducing the risk of trading disruptions on SBSEFs, Rules 829 and 830 could increase market participants’ 983 See Rules 819, 821, 822, 826 and supra section XVII.C.1 (discussing improved oversight of trading by SBSEFs as an overarching benefit of the rules and amendments). 984 See supra section XVII.C.1 (discussing improved Commission oversight as an overarching benefit of the rules and amendments). 985 See supra section XVII.C.2 (discussing the benefits associated with Rule 831). 986 See supra note 978. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 confidence in the soundness of SBSEFs, which in turn could lead to the greater use of SBS traded on SBSEFs thereby promoting capital formation as discussed above. 3. Efficiency The general approach of harmonizing as closely as practicable with analogous CFTC rules for SEFs, unless a reason exists to do otherwise in a particular area, likely will generate cost efficiencies and reduced burdens for SBSEF registrants that likely would be registered SEFs that have established systems and policies and procedures to comply with CFTC rules.987 Further, increased competition among thirdparty service providers, as a result of Rules 819(c) and 819(e), could lower SBSEFs’ costs and bring about greater efficiency in their operation and SBS trading.988 The automation and systems development associated with the regulation of SBSEFs could provide SBS market participants with new platforms and tools to execute and process transactions in SBS more rapidly and at a lower expense per transaction. Such increased efficiency could enable members of the SBSEF to handle increased volumes of SBS with greater efficiency and timeliness.989 The requirements with respect to pretrade price transparency could lead to more efficient pricing in the SBS market. The rules are designed to increase pre-trade price transparency for SBS, which should aid market participants in evaluating current market prices for SBS, thereby furthering more efficient price discovery. Increased pre-trade price transparency, coupled with increased competition in liquidity provision as discussed above,990 could decrease the spread in quoted prices and lead to higher efficiency in the trading of SBS. The Commission recognizes the possibility that pre-trade price transparency could cause market 987 For example, the Commission’s election to model Rules 804 through 810 closely on analogous rules in part 40 of the CFTC’s rules that apply to SEFs (and other registered entities) would impose minimal burdens on dually registered SEF/SBSEFs while obtaining similar regulatory benefits as the CFTC rules. In some cases, where a new rule or rule amendment affects both the swap and SBS business of a dually registered entity, the same or a very similar filing could be made to each of the CFTC and SEC, in lieu of having to make different filings to support the same rule change. See supra section XVII.C.2 (discussing the benefits associated with rule and product filings). 988 See supra section XVII.D.1. 989 See supra section XVII.C.1 (discussing improved automation as an overarching benefit of the rules and amendments). 990 See supra section XVII.D.1. PO 00000 Frm 00108 Fmt 4701 Sfmt 4700 participants to reveal more information about trading interest than they believe would be economically desirable. If market participants consider that pretrade price transparency requirements are too burdensome and choose not to participate in the market, market efficiency could be reduced insofar as these market participants forgo any potential economic benefits that may have resulted from transacting in the SBS market. However, several factors mitigate such concerns. First, pursuant to Rule 815(c)(2), an SBSEF may offer any execution method for Permitted Transactions. Thus, a market participant engaging in a Permitted Transaction may choose to use an execution method that reveals the desired, or at least preferred, amount of information about trading interest. Second, pursuant to Rule 815(a)(2), an SBSEF will be required to offer two execution methods for Required Transactions (limit order book and RFQ-to-3). Thus, market participants have flexibility in the degree of pre-trade transparency they wish to employ, which should attenuate potential concerns associated with revealing too much information about trading interest.991 Rules 829 and 830 may reduce the risk of trading disruptions on SBSEFs that may otherwise prevent market participants from impounding information into SBS prices through market activity (e.g., order submission), and thus could improve the price efficiency in the SBS market. E. Reasonable Alternatives The Commission considered a number of alternatives when finalizing the rules and amendments in this release. 1. Abbreviated Registration Procedures for CFTC-Registered SEFs Several commenters suggest that the Commission provide abbreviated registration procedures for CFTCregistered SEFs either by using the Commission’s exemptive authority to provide a streamlined registration process for such applicants 992 or by permitting such applicants to register utilizing their current documentation filed pursuant to the requirements of Form SEF with an accompanying addendum reflecting only those changes necessary to fulfill the specific requirements of proposed Regulation 991 See supra section XVII.C.1 (discussing the different degrees of pre-trade transparency associated with limit order book and RFQ-to-3). 992 See SIFMA AMG Letter, supra note 18, at 5; Bloomberg Letter, supra note 18, at 11; WMBAA Letter, supra note 18, at 3; ICE Letter, supra note 18, at 5. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations SE, in lieu of filing a new Form SBSEF.993 Some of these commenters believe that a streamlined registration process would ease the burden of new requirements imposed on potential dual-registrants, be more efficient, lower registration costs, encourage the entry of market participants, and expedite the establishment and operation of SBSEFs.994 The Commission acknowledges that the alternative could potentially have such beneficial effects. However, the adopted approach is preferable to the alternative. As a general matter, the SBSEF registration process is intended for all applicants. While entities that will seek to register as SBSEFs are likely to be CFTCregistered SEFs,995 the registration process should nevertheless address the possibility that some applicants might not be CFTC-registered SEFs. Requiring all applicants to follow the same registration process will provide a level playing field for all applicants by avoiding conferring a competitive advantage on applicants that are CFTCregistered SEFs. This in turn may encourage the entry of additional market participants. As discussed in section III.A.2., the adopted approach supports consistency in the review by the Commission and its staff of applications for registration of SBSEFs and avoids introducing bias or prejudice into the Commission’s review. Such consistency could in turn increase the efficiency of the review process and help expedite the establishment and operation of SBSEFs. ddrumheller on DSK120RN23PROD with RULES2 2. Shorten Review Period for SelfCertified Product Listing In connection with the ten-businessday review period under Proposed Rule 804(a)(2), two commenters recommend a shorter review period of one business day to harmonize with the CFTC’s approach.996 Alternatively, one of the commenters suggests a two-businessday review period.997 According to these commenters, a shorter review period will allow market operators to meet participants’ demands to transact on regulated platforms in a reasonable period of time; accommodate participants’ needs to hedge risk in a timely manner; and increase the competitive benefit and innovation incentive to SBSEFs to develop new products by making it less attractive for 993 See ICE Letter, supra note 18, at 5. SIFMA AMG Letter, supra note 18, at 5; Bloomberg Letter, supra note 18, at 11; WMBAA Letter, supra note 18, at 3. 995 See supra section XVII.B.4. 996 See WMBAA Letter, supra note 18, at 4; ICE Letter, supra note 18, at 2. 997 See WMBAA Letter, supra note 18, at 4. 994 See VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 87263 3. Incorporate CFTC’s Impartial Access Requirement Guidance Several commenters urge the Commission to incorporate the CFTC’s impartial access requirement guidance with respect to access to SBSEFs into the text of Rule 819. According to these commenters, such an alternative would provide market participants with guidance and clarity regarding how Proposed Rule 819(c) will be interpreted and applied in practice. The commenters believe that the alternative would increase competition, transparency, and liquidity in the SBS markets; lower transaction costs through increased competition; and result in greater market-led innovation in the SBS markets.999 The Commission acknowledges that the alternative could have beneficial effects on competition, transaction costs, transparency, liquidity, and innovation as the commenters asserts. However, the alternative raises several concerns. First, if, in the future, the CFTC’s impartial access requirement guidance were to be modified, the regulatory regime for SEFs might differ from that for SBSEFs. This in turn could limit harmonization with the CFTC’s regulatory regime and potentially increase compliance burdens for market participants if they have to comply with different requirements for SEFs and SBSEFs. Second, as discussed in section VI.B.3 above, efforts to undermine the principle of impartial access may take myriad forms over time. It is preferable to emphasize the principle of impartial access in the rule text as an affirmative requirement with which to comply. The adopted approach would incentivize SBSEFs to constantly review their practices to ensure compliance with the principle of impartial access. The Commission also considered the alternative of incorporating into the text of Rule 819 a non-exclusive list of the means that may violate the principle of impartial access. This alternative would raise the same concerns discussed above. The adopted approach may nevertheless generate the beneficial effects suggested by the commenters. Rule 819(c) is broad enough to permit market participants to use the same practices that they are using pursuant to the CFTC guidance. Consistent with the Commission’s belief that prospective SBSEF registrants are likely to be CFTCregistered SEFs that are active in the index CDS market,1000 prospective SBSEF registrants likely will use the systems, policies, and procedures that were created to comply with the CFTC 998 In this context, SBSEFs that wish to list products expeditiously likely will not choose to list them pursuant to Rule 805, which requires a 45-day review period that could be extended for an additional 45 days. See Rules 805(c) and (d). 999 See Bloomberg Letter, supra note 18, at 3, 16; Citadel Letter, supra note 18, at 6–7; MFA Letter, supra note 18, at 2, 9–11; SIFMA AMG Letter, supra note 18, at 4. 1000 See supra section XVII.B. other SBSEFs to list ‘‘look alike’’ products. In finalizing Rule 804(a)(2), the Commission has considered the trade-off between the benefits of a shorter review period as described by the commenters and the benefits of having sufficient time to review a new product filing and to issue a stay if warranted. The ten-business-day review period set forth in final Rule 804(a)(2) strikes an appropriate balance between these sets of benefits. To the extent that the ten-business-day review period limits market operators’ ability to meet participants’ demands to transact on regulated platforms in a reasonable period of time, that limitation is appropriate in light of the benefits of having sufficient time to review a new product filing and to issue a stay if warranted. While a shorter review period may accommodate market participants’ need to hedge risk in a timely manner, these market participants also could hedge their risk during the ten-business-day review period, albeit in the OTC SBS market. The Commission does not believe the additional hedging benefit, if any, associated with a shorter review period is sufficient to justify adopting this alternative. Rule 804 may not necessarily limit the competitive benefit and innovation incentive to SBSEFs to develop new products. SBSEFs that wish to list ‘‘look alike’’ products also will face a ten-business-day review period if they list such products pursuant to Rule 804.998 Thus, such SBSEFs will lag behind the SBSEF that first lists a given SBS, which could capture a significant portion, if not most, of the revenues associated with the trading of that product. Even if the 10-day review period were to reduce the first-to-market competitive advantage of an SBSEF that first lists a given SBS, the extent of such an advantage may vary considerably based on other factors in the SBSEF market. Ultimately, the need for the Commission to have sufficient time to review a new product before it is listed and thereby help ensure it meets regulatory requirements aimed to protect investors and support fair and efficient markets justifies this potential competitive effect. Accordingly, the adopted approach is preferable to the alternative. PO 00000 Frm 00109 Fmt 4701 Sfmt 4700 E:\FR\FM\15DER2.SGM 15DER2 87264 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations guidance to comply with Rule 819(c) in order to limit their compliance burdens. The Commission is adopting Rule 815(g), which specifies that SBSEFs shall establish and enforce rules that provide that a security-based swap that is intended to be cleared at the time of the transaction, but is not accepted for clearing at a registered clearing agency, shall be void ab initio. This rule would obviate the need for breakage agreements for SBS that are intended to be cleared, one of the items prohibited by the CFTC’s guidance.1001 As discussed in section XVII.C, Regulation SE may bring several benefits to the SBS market including, among other things, increased competition,1002 transparency, and liquidity; reduced transaction costs; 1003 and market innovation in the form of new platforms and tools to execute and process SBS transactions more efficiently.1004 In light of the above, the adopted approach is preferable to the alternative. ddrumheller on DSK120RN23PROD with RULES2 4. Harmonize With CFTC’s STP Requirements In connection with Proposed Rule 823, several commenters recommend that the Commission harmonize with CFTC’s STP requirements by establishing STP standards, incorporating relevant CFTC guidance, and prohibiting breakage agreements for SBS that are intended to be cleared.1005 The commenters suggest the alternative could reduce market, credit, and operational risks; facilitate hedging activity; avoid complexity and costs; increase competition; promote trading on SBSEFs and electronic trading; and increase transparency, liquidity, and fairness in the SBS markets.1006 The Commission acknowledges that the alternative could have beneficial effects 1001 See Division of Clearing and Risk, Division of Market Oversight and Division of Swap Dealer and Intermediary Oversight Guidance on Application of Certain Commission Regulations to Swap Execution Facilities, CFTC (Nov. 14, 2013), n.3, available at https://www.cftc.gov/sites/default/files/idc/groups/ public/@newsroom/documents/file/ dmostaffguidance111413.pdf. 1002 See supra sections XVII.C.1 (discussing improved access and competition as an overarching benefit of the rules and amendments) and XVII.D.1 (discussing how the new rules and amendments would likely affect competition). 1003 See supra section XVII.C.1 (discussing improved transparency, increased liquidity, and reduced transaction costs as overarching benefits of the rules and amendments). 1004 See supra section XVII.C.1 (discussing improved automation as an overarching benefit of the rules and amendments). 1005 See Citadel Letter, supra note 18, at 6; MFA Letter, supra note 18, at 11–12; SIFMA AMG Letter, supra note 18, at 9. 1006 See Citadel Letter, supra note 18, at 5; MFA Letter, supra note 18, at 12; SIFMA AMG Letter, supra note 18, at 9. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 as suggested by the commenters. However, the alternative raises several concerns. First, if, in the future, the CFTC’s staff guidance were to be modified, the regulatory regime for SEFs might differ from that for SBSEFs. This in turn could limit harmonization with the CFTC’s regulatory regime and potentially increase compliance burdens for market participants if they have to comply with different requirements for SEFs and SBSEFs. Second, the timeframes for a clearinghouse to accept or reject a trade for clearing set forth in the CFTC staff guidance could become outdated with advances in technology.1007 If that were to occur, changing those timeframes would be more difficult if they were included as part of Regulation SE, or even as Commission guidance included as part of this release. Any delays in changing those timeframes could mean that market participants would not be able to benefit from any reductions in market, credit, and operational risks associated with the technological advances that render obsolete the timeframes set forth in the CFTC staff guidance. The adopted approach may nevertheless generate the beneficial effects suggested by the commenters. As discussed in section VI.F.3, Rule 823(c) is broad enough to permit market participants to use the same practices that they are using pursuant to the CFTC guidance. Consistent with the Commission’s belief that prospective SBSEF registrants are likely to be CFTCregistered SEFs that are active in the index CDS market,1008 prospective SBSEF registrants likely will use the systems, policies, and procedures that were created to comply with the CFTC guidance to comply with Rule 823(c) in order to limit their compliance burdens. Further, to comply with the impartial access requirements of Rule 819(c), registered SBSEFs would, among other things, avoid acts that purposefully delay clearing submission in order to favor certain market participants over others. Lastly, the Commission is adopting Rule 815(g), which specifies that SBSEFs shall establish and enforce rules that provide that a security-based swap that is intended to be cleared at the time of the transaction, but is not accepted for clearing at a registered clearing agency, shall be void ab initio. 1007 CFTC staff guidance on STP states that ‘‘[derivatives clearing organizations] clearing swaps that are executed competitively on or subject to the rules of a . . . SEF and are accepting or rejecting trades within 10 seconds after submission are compliant with the timing standard of Regulation 39.12(b)(7).’’ See CFTC 2013 STP Guidance, supra note 273. 1008 See supra section XVII.B. PO 00000 Frm 00110 Fmt 4701 Sfmt 4700 This rule would obviate the need for breakage agreements for SBS that are intended to be cleared. Accordingly, the adopted approach is preferable to the alternative. 5. No Block Trade Exception In finalizing Regulation SE, the Commission considered the alternative of not adopting a block trade exception from the Required Transaction requirement in Rule 815(a)(2) for credit SBS. This alternative could extend the benefits of increased pre-trade transparency 1009 to SBS transactions of a larger notional size. However, this alternative would deviate from the CFTC’s approach to block trades and thus reduce harmonization with the CFTC regime for swaps. In addition, as one commenter expressed, under this alternative, market participants would have difficulty executing, or would be unable to execute, large bona fide trades, since they would be required to do so only through the order book. This would increase the cost of trading and hedging, the commenter says, which could reduce participation in certain markets, resulting in less liquidity and increased volatility.1010 This commenter asserts that exempting block trades from order book and RFQ execution requirements is critical to the functioning of the SBS markets, particularly to execute large trades without affecting price.1011 Another commenter states that the proposed exception for block trades would provide flexibility for market participants executing SBS transactions of a significantly large size and mitigate the risks of information leakage and impairment of market liquidity.1012 Another commenter agrees with the Proposing Release’s assessment that the block exception to the required methods of execution balances the promotion of price competition and all-to-all trading against the potential costs to the market participants who wish to trade large orders, the importance of which they note is more acute in the SBS market, which is a smaller and less liquid market than the swap market.1013 The Commission agrees with commenters that a block-trade exception is appropriate for credit SBS, not only to maintain harmonization with the CFTC regime for swaps but also to 1009 See supra section XVII.C.1 (discussing that increased pre-trade transparency could increase price competition and price efficiency; improve liquidity; reduce transaction costs; and facilitate execution quality analysis). 1010 See MFA Letter, supra note 18, at 5–6. 1011 Id. 1012 See ICI Letter, supra note 18, at 10. 1013 See Bloomberg Letter, supra note 18, at 14. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 facilitate trading of credit SBS. This approach, which is consistent with the approach of the CFTC for swaps, will be especially important in the smaller, less liquid credit SBS markets if and when a clearing determination has been made for one or more SBS. A block-trade exception for credit SBSs subject to the trade-execution requirement, provided that ‘‘block trade’’ is appropriately defined for those SBSs, can help ensure that large trades are not significantly more difficult and costly to execute because of the risks posed by information leakage and the potential for adverse price movement, which could significantly impair liquidity in the markets for those SBSs. Accordingly, the adopted approach is preferable to the alternative. 6. Adopting Proposed Block Trade Definition Now In finalizing Regulation SE, the Commission considered the alternative of adopting the proposed definition of ‘‘block trade’’ under Rule 802. For the third prong of the ‘‘block trade’’ definition, the Commission proposed that the SBS be based on a single credit instrument (or issuer of credit instruments) or a narrow-based index of credit instruments (or issuers of credit instruments) having a notional size of $5 million or greater.1014 As discussed earlier,1015 a number of commenters raise concerns that the proposed $5 million block-trade threshold for all credit SBSs would not be sufficiently tailored to the unique and varying trading and risk characteristics of the full range of credit SBS, creating the potential for the adverse market risks that commenters point out may arise from having a onesize-fits-all block threshold. As discussed above, the Commission acknowledges these commenters’ concerns. Further, unless and until the Commission has made a mandatory clearing determination regarding an SBS, it is not necessary to define a block-trade threshold for SBS, and it would be appropriate for the Commission to identify a block-trade threshold in the future after considering credit SBS transaction data and credit SBS markets at that time. In addition, the Commission agrees with commenters that additional consideration of credit SBS transaction data would help the Commission 1014 See Proposing Release, supra note 1, 87 FR at 28896. 1015 See supra section V.E.1(c)(ii) and Citadel Letter, supra note 18, at 9; ICI Letter, supra note 18, at 10–12; MFA Letter, supra note 18, at 5–8; SIFMA AMG Letter, supra note 18, at 10; ISDA–SIFMA Letter, supra note 18, at 7–9. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 determine the appropriate block-trade threshold for credit SBS products, including whether different thresholds should apply to different types or groups of SBS. The Commission also agrees with commenters that the credit SBS markets are likely to evolve over time and that analysis of market data continues to be an important aspect of setting appropriate thresholds for both block trades and credit SBS public trade reporting.1016 Therefore, as discussed above, the Commission is not adopting the proposed definition of ‘‘block trade’’ under Proposed Rule 802, or any other block-trade threshold. Instead, Rule 802 will include a note that a definition of ‘‘block trade’’ has not yet been adopted. This would allow the Commission to identify a block-trade threshold in the future after considering credit SBS transaction data and the evolution of the credit SBS markets. In light of the above, the adopted approach is preferable to the alternative. 7. Block Trade Definition for Equity SBS In finalizing Regulation SE, the Commission considered the alternative of adopting a definition of ‘‘block trade’’ applicable to equity SBS. One commenter suggests that the alternative would facilitate timely and efficient executions of equity SBS thereby supporting risk management activities, encourage the use of equity SBS for legitimate business purposes, including hedging, and facilitate capital formation.1017 Another commenter argues that the alternative would avoid information leakage regarding a market participant’s investment strategies.1018 The Commission acknowledges that the alternative could have beneficial effects as suggested by the commenters. However, as discussed in section V.E.1(c)(iii), an inappropriate block trade threshold for equity SBSs could create incentives for market participants to trade equity SBS over cash equities, listed equity options, and equity swaps. The Commission is concerned, in particular, that a shift in trading activity away from cash equities and listed equity options towards equity SBS could generate several adverse effects. First, such a shift in trading activity could reduce participation in the cash equities and listed equity options markets, including participation by liquidity providers. Reduced participation by liquidity providers could reduce competition in liquidity provision in these markets, which in 1016 See supra note 219. MFA Letter, supra note 18, at 6–7. 1018 See ICI Letter, supra note 18, at 12–13. 1017 See PO 00000 Frm 00111 Fmt 4701 Sfmt 4700 87265 turn could increase trading costs and decrease liquidity. Trading in these markets could become less efficient because of increased trading costs and decreased liquidity. Second, to the extent that trading becomes more costly in the cash equities and listed equity options markets, trading in these markets could be reduced, which could impede the incorporation of new information into the prices of cash equities and listed equity options through trading. This in turn could reduce price efficiency in the cash equities and listed equity options markets. Third, decreased liquidity in the cash equities market could raise the cost of capital for cash equities,1019 which in turn could discourage firms from issuing cash equity securities to finance investment projects and reduce capital formation. The adopted approach may nevertheless generate the beneficial effects suggested by the commenters. Regulation SE would increase pre-trade price transparency and competition in liquidity provision, which could decrease the spread in quoted prices and lead to higher efficiency in the trading of SBS.1020 In addition, the automation and systems development associated with the regulation of SBSEFs could provide SBS market participants with new platforms and tools to execute and process transactions in SBS more rapidly and at a lower expense per transaction. Such increased efficiency could enable members of the SBSEF to handle increased volumes of SBS with greater efficiency and timeliness.1021 Further, increased competition among thirdparty service providers, as a result of Rules 819(c) and 819(e), could lower SBSEFs’ costs and bring about greater efficiency in their operation and SBS trading.1022 As discussed in section XVII.D.2, Regulation SE could improve regulatory oversight, market integrity, and market predictability, which could lead to the greater use of SBS (including equity SBS) and promote capital formation. 1019 See, e.g., Viral V. Acharya and Lasse Heje Pedersen, Asset Pricing With Liquidity Risk, 77 J. Fin. Econ. 375 (2005) and Yakov Amihud, Illiquidity and Stock Returns: Cross-Section and Time-Series Effects, 5 J. Fin. Markets 31 (2002) (suggesting that the expected return of a stock, or cash equity security, increases as its liquidity decreases. To the extent that a cash equity security’s expected return measures the cost of capital associated with cash equity financing, the cited research suggests that when a cash equity security’s liquidity decreases, its cost of capital may increase.). 1020 See supra section XVII.D.3. 1021 Id. 1022 Id. E:\FR\FM\15DER2.SGM 15DER2 87266 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations Also, by reducing the risk of trading disruptions on SBSEFs, Rules 829 and 830 could increase market participants’ confidence in the soundness of SBSEFs, which in turn could lead to the greater use of SBS traded on SBSEFs thereby promoting capital formation.1023 Regulation SE would address concerns about information leakage in various ways. First, pursuant to Rule 815(c)(2), an SBSEF may offer any execution method for Permitted Transactions. Thus, a market participant engaging in a Permitted Transaction (e.g., a large trade in equity SBS) may choose to use an execution method that reveals the desired, or at least preferred, amount of information about trading interest. Second, pursuant to Rule 815(a)(2), an SBSEF will be required to offer two execution methods for Required Transactions (limit order book and RFQ-to-3). Thus, market participants have flexibility in the degree of pre-trade transparency they wish to employ, which should attenuate potential concerns associated with revealing too much information about trading interest.1024 In addition, until the Commission has made a clearing determination with respect to equity SBS, equity SBS will be able to trade OTC, just as their underlying cash equities can trade OTC. Moreover, before making a clearing determination for an equity SBS—which would create the circumstances in which equity SBS might be MAT and therefore subject to the trade-execution requirement—the Commission would have the opportunity to solicit and consider additional public comment on the effect of such a determination, including comment with respect to the concerns commenters have raised to date regarding, among other things, timely and efficient executions, hedging, and capital formation. In light of the above, the adopted approach is preferable to the alternative. ddrumheller on DSK120RN23PROD with RULES2 8. Alternatives to Rule 833 In finalizing Rule 833, the Commission considered alternative approaches suggested by commenters. Four commenters suggest that the Commission grant automatic exemptions for foreign trading venues that are currently exempt under the CFTC’s rules.1025 One commenter 1023 See supra section XVII.D.2. supra sections XVII.D.3 and XVII.C.1 (discussing the different degrees of pre-trade transparency associated with limit order book and RFQ-to-3). 1025 See Bloomberg Letter, supra note 18, at 7, 18; ICE Letter, supra note 18, at 5; ISDA–SIFMA Letter, supra note 18, at 15; Tradeweb Letter, supra note 18, at 6. 1024 See VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 suggests the Commission grant an exemption from the trade execution requirement if the SBS transaction at issue is subject to mandatory trading in another jurisdiction.1026 With respect to these alternatives, the Commission is concerned that granting automatic exemptions would not afford the Commission the opportunity to appropriately consider the relevant facts and circumstances in support of a finding that an exemption is necessary or appropriate in the public interest and consistent with the protection of investors. Further, to the extent that there are certain CFTC exempt foreign trading venues that do not intend to offer trading in SBS, it is unclear how the Commission’s granting of an automatic exemption to these venues would benefit market participants that wish to trade SBS on regulated platforms. In light of the above, the adopted approach is preferable to these alternatives. 9. Alternatives From Proposal The Commission also considered certain alternatives discussed in the Proposing Release: (1) not harmonizing Regulation SE with analogous CFTC rules; (2) harmonizing the third prong of the definition of ‘‘block trade’’ with the third prong of the CFTC definition of ‘‘block trade’’; (3) requiring SBSEFs to submit the information in the Daily Market Data Report directly to the Commission; (4) requiring an exemption order under Rule 833(a) to apply to a foreign trading venue only if it traded SBS and no other types of securities; (5) applying the revocation provisions of Rule 3a1–1(b) to SBSEFs and clearing agencies that are covered by paragraphs (a)(4) and (a)(5), respectively of Rule 3a1–1; and (6) not exempting SBSEF-Bs from section 17(a) of the SEA.1027 With respect to the alternative of not harmonizing Regulation SE with analogous CFTC rules, commenters generally agreed with the Commission’s approach vis-a`-vis this alternative. The Commission did not receive comments addressing the other alternatives and continues to believe that its approach with respect to these alternatives is appropriate, and believes the rules as adopted are preferable to these alternatives. 10. Structured Disclosure Alternative The Commission also considered the alternative of requiring, as proposed, Inline XBRL for all SBSEF filings other than Daily Market Data Reports under Rule 825. However, limiting the scope of Inline XBRL requirements under Regulation SE will ease compliance burdens for SBSEFs while maintaining a significant level of machinereadability for SBSEF data available to market participants and public data users as well as Commission staff. Some of the disclosures proposed with Inline XBRL structuring will still be structured in the final rule, but with a custom XML requirement rather than an Inline XBRL requirement. This will allow SBSEFs to, at their option, input those disclosures into fillable web forms rather than structure the disclosures in the custom XML data language themselves, thereby providing greater flexibility to SBSEFs and potentially easing compliance burdens. For copies of existing documents attached to Form SBSEF, and for rule and product filings that were proposed with an Inline XBRL requirement will instead be filed in unstructured formats. Given the reduced compliance burdens on SBSEFs resulting from a more limited scope of Inline XBRL requirements, the adopted rules are preferable to the alternative.1028 XVIII. Paperwork Reduction Act Certain provisions of the rules in Regulation SE contain new ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).1029 The Commission published a notice requesting comment on these collections 1030 and submitted the proposed collection of information to the Office of Management and Budget (‘‘OMB’’) for review in accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. The title of the new collection of information is Regulation SE, and OMB Control Number 3235–0793 has been assigned. As adopted, Regulation SE creates a regime for the registration and regulation of SBSEFs and addresses other issues relating to SBS execution. In addition, the Commission is amending Rule 3a1–1 under the SEA to exempt a registered SBSEF from the statutory definition of ‘‘exchange.’’ Furthermore, the Commission is adopting new Rule 15a–12 under the SEA that, while affirming that an SBSEF would also be a broker under the SEA, would exempt a registered SBSEF from certain broker requirements under the SEA. Regulation SE includes rules regarding the registration of a prospective SBSEF on Form SBSEF, the 1026 ISDA–SIFMA 1028 See 1027 See 1029 44 Letter, supra note 18, at 15. Proposing Release, supra note 1, 87 FR at 28956–57. PO 00000 Frm 00112 Fmt 4701 Sfmt 4700 supra section XVII.C.3(f). U.S.C. 3501 et seq. 1030 See Proposing Release, 87 FR at 28958–69. E:\FR\FM\15DER2.SGM 15DER2 87267 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations filing of new or amended rules or new products with the Commission, and rules implementing the Core Principles for SBSEFs under section 3D(d) of the SEA.1031 An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. A. Summary of Collection of Information The rules and rule amendments contained in Regulation SE include a collection of information within the meaning of the PRA for SBSEFs that are required to comply with Regulation SE and file a Form SBSEF with the Commission for registration as an SBSEF and, among other things, submit certain filings to the Commission pursuant to Rules 804–807 with respect to new products and proposed rule changes. In addition, Rule 833 includes a collection of information within the meaning of the PRA for persons that wish to seek an exemption order under that rule, and Rule 834 includes a collection of information within the meaning of the PRA for SBS exchanges (in addition to SBSEFs). The Commission generally is adopting Regulation SE as proposed, except for certain sections that have been modified in response to comments received. The modified Rules that have associated paperwork burdens are Rules 804, 815, 819, 825, and 834. Each of these modifications and their impact on the paperwork burden are described in more detail below. Many of the rules that constitute Regulation SE are modeled after analogous CFTC rules, with only minor edits to reflect differences between the statutory regimes of the two agencies. Entities that are most likely to register with the Commission as SBSEFs are those already registered with the CFTC as SEFs. Such entities have made substantial investments in systems, policies, and procedures to comply with and adapt to the regulatory system developed by the CFTC. Harmonization will allow these dually registered entities to utilize their existing systems, policies, and procedures to comply with the Commission’s SBSEF rules, and SEF members would likely face only marginal additional burdens to trade SBS as well as swaps on those SEF/ SBSEFs. In light of these factors, the Commission has based many of its paperwork burden estimates on CFTC burden estimates calculated for analogous CFTC rules. The CFTC estimated PRA burdens by aggregating the burdens produced by a group of related rules, as explained more fully in section XX(D) below. In most cases, the Commission has modeled its methodology, assumptions, and calculations on those used by the CFTC with respect to its SEF Paperwork burden created? Rule No. and title Overview of rule 800—Scope ................................................................................ States that the provisions of this section shall apply to every SBSEF that is registered or is applying to become registered as an SBSEF under section 3D of the SEA. Requires an SBSEF to comply with all applicable Commission rules, including any related definitions and cross-referenced sections. Definitions .................................................................................. Sets out a process for registering with the Commission as an SBSEF, including the submission of Form SBSEF. Procedures by which an SBSEF, via self-certification, may list a product for trading. Procedures for voluntary submission of new products for Commission review and approval. Procedures for voluntary submission of new rules or rule amendments for Commission review and approval. 801—Applicable provisions ......................................................... 802—Definitions .......................................................................... 803—Requirements and procedures for registration ................. 804—Listing products for trading by certification ....................... 805—Voluntary submission of new products for Commission review and approval. 806—Voluntary submission of rules for Commission review and approval. ddrumheller on DSK120RN23PROD with RULES2 regulations, while making adjustments that reflect differences between the scale of the market for swaps relative to the market for SBS—for example, the estimated number of SBSEFs, number of SBS market participants, and number of SBS transactions—as necessary. The Commission received no comments on its proposed PRA methodology, assumptions, calculations, and estimates, and such an approach continues to be appropriate. As noted above, almost all of the burden estimates are based on CFTC estimates that have been approved by OMB. The CFTC estimates that serve as the basis for the Commission’s estimates have not changed since the Proposing Release has been published, with the exception of one estimate for Rule 811(d). Consequently, the Commission continues to estimate the burdens as those set forth in the Proposing Release, except for one adjustment to match a subsequent adjustment in the CFTC estimate relevant to Rule 811(d). As explained in more detail below, for rules that have been modified that contain associated paperwork burdens, the modifications do not result in any change in paperwork burden. The following is a summary of the rules contained in Regulation SE.1032 The paperwork burdens associated with each rule in Regulation SE are discussed in section XX(D) below. 1031 15 U.S.C. 78c–4(d). As adopted, Regulation SE contains 36 separately designated rules (800 to 835, inclusive), which (if adopted) would be located in 17 CFR 242; a Form SBSEF (with instructions); and a submission cover sheet (with instructions). If adopted, the form and the submission cover sheet would be located in 17 CFR 249. 1032 See supra section II.A (discussing Rule 800); section II.B (discussing Rule 801); section II.C (discussing Rule 802); section III.A (discussing the registration provisions contained in Rule 803); section III.B (discussing Form SBSEF); section IV.A (discussing Rule 804); section IV.B (discussing Rule VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 805); section IV.C (discussing Rule 806); section IV.D (discussing Rule 807); section IV.GIV.F (discussing Rule 808); section IV.G (discussing Rule 809); section IV.H (discussing Rule 810); section V.A (discussing Rule 811); section V.B (discussing Rule 812); section V.C (discussing Rule 813); section V.D (discussing Rule 814); section V.E (discussing Rule 815); section V.F (discussing Rule 816); section V.G (discussing Rule 817); section VI.A (discussing Rule 818); section VI.B (discussing Rule 819); section VI.C (discussing Rule 820); section VI.D (discussing Rule 821); section VI.E (discussing Rule 822); section VI.F (discussing Rule 823); section VI.G (discussing Rule 824); section PO 00000 Frm 00113 Fmt 4701 Sfmt 4700 No. No. No. Yes. Yes.a Yes. Yes. VI.H (discussing Rule 825); section VI.I (discussing Rule 826); section VI.J (discussing Rule 827); section VI.K (discussing Rule 828); section VI.L (discussing Rule 829); section VI.M (discussing Rule 830); section VI.N (discussing Rule 831); section VII.A (discussing Rule 832); section VII.B (discussing Rule 833); section VIII (discussing Rule 834); section IX (discussing the notice required by Rule 835); section X (discussing amendments to Rule 3a1–1); section XI (discussing proposed Rule 15a–12); section XIV (discussing new rules and amendments to the Commission’s Rules of Practice). E:\FR\FM\15DER2.SGM 15DER2 87268 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations Overview of rule 807—Self-certification of rules .................................................... Procedures by which an SBSEF can implement a new rule or rule amendment via self-certification. Sets out the information that will be made public with respect to applications to become an SBSEF as well as filings relating to rules and products. Provides for a stay of a product certification or tolling of a review period for a product where it is unclear whether the product should be classified as an SBS under the jurisdiction of the SEC or a swap under the jurisdiction of the CFTC pending the issuance of a joint interpretation by the SEC and CFTC clarifying which agency has jurisdiction over the product. Provides that an applicant for registration as an SBSEF may submit for Commission review and approval an SBS’s terms and conditions or rules prior to listing the product as part of its application for registration. Provides that an SBSEF shall submit information to the Commission that the Commission requests, including demonstrations that the SBSEF is in compliance with one or more Core Principles, notification of a transfer 50% or more of the equity interest in the SBSEF, and information about pending legal proceedings. Provides that a transaction entered into on or pursuant to the rules of an SBSEF shall not be void, voidable, subject to rescission, otherwise invalidated, or rendered unenforceable because of a violation by the SBSEF of section 3D of the SEA or the Commission’s rules thereunder; also requires an SBSEF to provide each counterparty to a transaction on the SBSEF with a written record of all the terms of the transaction that were agreed to on the SBSEF. Provides that an SBSEF shall not use for business or marketing purposes any proprietary data or personal information that it collects or receives, from or on behalf of any person, for the purpose of fulfilling its regulatory obligations, without such person’s consent; also requires the SBSEF not to condition access to its markets on such consent and provide that the SBSEF may, where necessary for regulatory purposes, share such data or information with other registered SBSEFs or exchanges. Provides that an entity that intends to operate both a national securities exchange and an SBSEF shall separately register the two facilities pursuant to section 6 of the SEA and Rule 803, respectively; also provides that a national securities exchange shall, to the extent that the exchange also operates an SBSEF and uses the same electronic trade execution system, identify whether electronic trading of SBS is taking place on or through the national securities exchange or the SBSEF. Provides that a Required Transaction must be executed on an SBSEF through an order book or RFQ system, whereas a Permitted Transaction can be executed in any manner; also requires an SBSEF to maintain rules and procedures that facilitate the resolution of error trades and that an SBSEF shall not generally disclose the identity of a counterparty to an SBS that is executed anonymously and intended to be cleared. Sets out a process and standards for an SBSEF to MAT an SBS; also establishes certain exemptions from the trade execution requirement. Provides that an SBS transaction shall be required to be executed on an SBS exchange or SBSEF upon the later of a determination by the Commission that the SBS is required to be cleared and 30 days after a MAT determination submission or certification for that SBS is approved or certified, respectively. Requires a registered SBSEF to comply with the SEA’s Core Principles for SBSEFs. 808—Availability of public information ........................................ 809—Staying of certification and tolling of review period pending jurisdictional determination. 810—Product filings by SBSEFs that are not yet registered and by dormant SBSEFs. 811—Information relating to SBSEF compliance ....................... 812—Enforceability ..................................................................... 813—Prohibited use of data collected for regulatory purposes 814—Entity operating both a national securities exchange and SBSEF. 815—Methods of execution for Required and Permitted Transactions. 816—Trade execution requirement and exemptions therefrom 817—Trade execution compliance schedule .............................. ddrumheller on DSK120RN23PROD with RULES2 Paperwork burden created? Rule No. and title 818—Core Principle 1 (Compliance with Core Principles) ......... VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00114 Fmt 4701 Sfmt 4700 E:\FR\FM\15DER2.SGM 15DER2 Yes. No. Yes. Yes. Yes. Yes. No. No. Yes. Yes. No. Yes. 87269 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations Overview of rule 819—Core Principle 2 (Compliance with rules) ......................... Requires a registered SBSEF to establish, comply with, and enforce its own rules—including rules regarding market access; rules governing trading, trade processing, and participation that will deter abuses; rules governing the operation of the SBSEF; and rules to capture and retain an audit trail—and have the capacity to detect, investigate, and enforce those rules; also requires an SBSEF to establish rules that generally prohibit employees from trading any covered interest or disclosing any material, non-public information obtained as a result of their employment by the SBSEF; also requires an SBSEF to maintain in effect rules that render a person ineligible to serve on the SBSEF’s disciplinary committees, arbitration panels, oversight panels, or governing board who has been found to have committed enumerated offenses. Requires an SBSEF to permit trading only in SBS that are not readily susceptible to manipulation. Requires an SBSEF to establish and enforce rules detailing trading and trade processing procedures, and to monitor trading and market activity to prevent manipulation, price distortion, and delivery or settlement disruptions; also requires an SBSEF to demonstrate that it has access to sufficient information to assess whether trading on its market or in the underlying assets or indexes is being used to affect prices on its market. Requires an SBSEF to establish and enforce rules that would allow it to obtain any information necessary to comply with section 3D of the SEA and to provide that information to the Commission on request. Requires an SBSEF to establish and enforce rules for ensuring the financial integrity of SBS on its facility, including the clearance and settlement of the SBS; also requires that SBS that are required to be cleared shall be cleared by a registered clearing agency (or a clearing agency that has obtained an exemption from clearing agency registration to provide central counterparty services for SBS), that the SBSEF provide for minimum financial standards for its members, and that the SBSEF monitor its members for compliance with those standards. Requires an SBSEF to adopt rules to provide for the exercise of emergency authority, in order for the SBSEF to maintain fair and orderly trading and prevent or address manipulation or disruptive trading practices. Requires an SBSEF to make public timely information on price, trading volume, and other trading data on SBS transactions, as required by Regulation SBSR, and to publish on its website a Daily Market Data Report. Sets forth recordkeeping and reporting obligations for SBSEFs and requires an SBSEF to maintain, for a period of five years and in a form and manner acceptable to the Commission, records of all activities relating to the business of the facility, including a complete audit trail,. Provides that, unless necessary or appropriate to achieve the purposes of the SEA, an SBSEF shall not adopt any rules or take any actions that result in any unreasonable restraint of trade or impose any material anticompetitive burden on trading or clearing. Requires an SBSEF to establish and enforce rules to minimize conflicts of interest in its decision-making process and to establish a process for resolving such conflicts. Requires an SBSEF to have adequate financial, operational, and managerial resources to discharge its responsibilities; would also set forth the standards used to calculate the adequacy of such resources and require certain reports to the Commission. 820—Core Principle 3 (SBS not readily susceptible to manipulation). 821—Core Principle 4 (Monitoring of trading and trade processing). 822—Core Principle 5 (Ability to obtain information) ................. 823—Core Principle 6 (Financial integrity of transactions) ........ 824—Core Principle 7 (Emergency authority) ............................ 825—Core Principle 8 (Timely publication of trading information). 826—Core Principle 9 (Recordkeeping and reporting) .............. 827—Core Principle 10 (Antitrust considerations) ..................... 828—Core Principle 11 (Conflicts of interest) ............................ 829—Core Principle 12 (Financial resources) ............................ ddrumheller on DSK120RN23PROD with RULES2 Paperwork burden created? Rule No. and title VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00115 Fmt 4701 Sfmt 4700 E:\FR\FM\15DER2.SGM 15DER2 Yes. Yes. Yes. Yes. Yes. Yes. Yes. Yes. No. Yes. Yes. 87270 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations Paperwork burden created? Rule No. and title Overview of rule 830—Core Principle 13 (System safeguards) ............................ Requires an SBSEF to establish and maintain a program of automated systems and risk analysis to identify and minimize sources of operational risk, through the development of appropriate controls and procedures; would also require an SBSEF to establish and maintain emergency procedures, backup facilities, and a plan for disaster recovery; conduct periodic tests to verify those resources are sufficient; and notify the Commission promptly of any cyber incidents and material planned changes to the SBSEF’s systems safeguards. Requires an SBSEF to designate a CCO and set forth regulatory and reporting obligations for the CCO. Explains when the SEA’s trade execution requirement applies to a cross-border SBS transaction. Provides for a process by which the Commission, upon making the requisite findings, could grant exemptions from the SEA definitions of ‘‘exchange,’’ ‘‘security-based swap execution facility,’’ and ‘‘broker’’ and exempt cross-border SBS from the SEA’s trade execution requirement. Provides that each SBSEF and SBS exchange must create and maintain rules to mitigate conflicts of interest between SBSEFs and SBS exchanges and their members, including by prohibiting members from owning 20% or more of the voting securities of an SBSEF or SBS exchange (with certain exceptions), and from exercising disproportionate influence in disciplinary proceedings; would also require each SBSEF and SBS exchange to submit to the Commission after every governing board election a list of each governing board’s members, the groups they represent, and how the composition of the board complies with the requirements of Rule 834. Provides that, if an SBSEF issues a final disciplinary action against a member, denies or conditions membership, or denies or limits access of a person to any services offered by the SBSEF, the SBSEF shall file a notice of such action with the Commission within 30 days and serve a copy on the affected person. Exempts from the SEA definition of ‘‘exchange’’ a registered SBSEF that provides a market place for no securities other than SBS, and an entity that has registered with the Commission as a clearing agency and limits its exchange functions to operation of a trading session that is designed to further the accuracy of end-of-day valuations. Exempts a registered SBSEF from certain broker requirements while affirming that an SBSEF is a broker under the SEA. New rules and amendments to the Rules of Practice to allow persons who are aggrieved by a final disciplinary action, a denial or conditioning of membership, or a denial or limitation of access by an SBSEF to seek an application for review by the Commission. Amendments to Commission’s rules delegating authority to the Division Director and to the General Counsel in order to delegate authority to take actions necessary to carry out the rules under Regulation SE and to facilitate the operation of the regulatory structure created in Regulation SE. 831—Core Principle 14 (Designation of CCO) ........................... 832—Cross-border mandatory trade execution ......................... 833—Cross-border exemptions .................................................. 834—Mitigation of conflicts of interest of SBSEFs and SBS exchanges. 835—Notice to Commission by SBSEF of final disciplinary action or denial or limitation of access. 3a1–1—proposed amendments .................................................. 15a–12—Exemption for certain SBSEFs from certain broker requirements. Rules and amendments to the Commission’s Rules of Practice Amendments to Delegations of Authority in Rules 30–3 and 30–14. Yes. Yes. No. Yes. Yes. Yes. No. No. No **. No **. ddrumheller on DSK120RN23PROD with RULES2 ** The Commission finds, in accordance with section 553(b)(3)(A) of the Administrative Procedure Act (‘‘APA’’), 5 U.S.C. 553(b)(3)(A), that the revisions to the Commission’s Rules of Practice, as well as the amendments to the Commission’s delegations of authority to the Director of Trading and Markets pursuant to 17 CFR 200.30–3 and to the General Counsel pursuant to 17 CFR 200.30–14, relate solely to agency organization, procedure, or practice. They are therefore not subject to the provisions of the APA requiring notice, opportunity for public comment, and publication. To the extent that these rules relate to agency information collections during the conduct of administrative proceedings, they are exempt from review under the PRA. Notwithstanding this finding, the Commission published certain proposed changes to the Commission’s Rules of Practice for notice and comment in the Proposing Release but received no specific comments pertaining to them. See supra section XIV. B. Proposed Use of Information 1. Registration Requirements and Form SBSEF Regulation SE imposes various requirements relating to SBSEF VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 registration, which are set forth in Rule 803.1033 1033 See, e.g., Proposed Rule 803(b)(1) (requiring an entity that wishes to register with the Commission as an SBSEF to submit a Form SBSEF). PO 00000 Frm 00116 Fmt 4701 Sfmt 4700 The information collected pursuant to these adopted rules will enhance the ability of the Commission to determine whether to approve the registration of an entity as an SBSEF; to monitor and oversee SBSEFs; to determine whether E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations SBSEFs initially comply, and continue to operate in compliance, with the SEA, including the Core Principles applicable to SBSEFs; to carry out its statutorily mandated oversight functions; and to maintain accurate and updated information regarding SBSEFs. Because the registration information will be publicly available, except to the extent that a request for confidential treatment is granted, it could also be useful to an SBSEF’s members, other market participants, other regulators, and the public generally. 2. Requirements for SBSEFs To Establish Rules Various provisions of Regulation SE require SBSEFs to establish certain rules, policies, and procedures to comply with applicable requirements of the SEA and the Commission’s rules thereunder.1034 The rules also will help an SBSEF’s members to understand and comply with the rules of the SBSEF. 3. Reporting Requirements for SBSEFs Various provisions of Regulation SE require SBSEFs and certain other persons to submit reports or provide specified information.1035 This information will generally be used by the Commission in its oversight of SBSEFs and the SBS markets; certain of the information to be collected could be used by market participants to confirm their SBS transactions. 4. Recordkeeping Required Under Regulation SE ddrumheller on DSK120RN23PROD with RULES2 Regulation SE requires an SBSEF to keep specified records.1036 The audit trail information required to be maintained under Regulation SE will aid the SBSEF in detecting and deterring fraudulent and manipulative acts with respect to trading on its market, as well as help the SBSEF to fulfill the statutory requirement in Core Principle 4 that an SBSEF monitor trading in SBS, including through comprehensive and accurate trade reconstructions. In addition, Commission access to these records will provide a valuable tool to help the Commission carry out its oversight 1034 See, e.g., Proposed Rule 819(a)(2) (requiring an SBSEF to establish and enforce trading, trade processing, and participation rules). 1035 See, e.g., Proposed Rule 829 (requiring an SBSEF, quarterly or upon Commission request, to provide the Commission a report that includes the amount of financial resources necessary to meet the requirements of Rule 829). 1036 See Proposed Rule 826 (requiring an SBSEF to maintain records of all activities relating to the business of the facility, including a complete audit trail, and to report information to the Commission upon request). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 responsibility over SBSEFs and the SBS markets in general. 5. Timely Publication of Trading Information Requirement for SBSEFs Regulation SE imposes certain publication burdens on SBSEFs in Rule 825.1037 The requirement contained in Rule 825 that an SBSEF have the capacity to electronically capture, transmit, and disseminate information on price, trading volume, and other trading data on all SBS executed on or through the SBSEF will assist the SBSEF in carrying out its regulatory responsibilities under the SEA and enable the SBSEF to comply with reasonable requests to provide information to others. Furthermore, Rule 825 requires an SBSEF to publish a Daily Market Data Report that is designed to provide market observers with a daily snapshot of market activity on the SBSEF. 6. Rule Filing and Product Filing Processes for SBSEFs Regulation SE establishes various filing requirements applicable to SBSEFs. Rules 804 and 805 provide mechanisms for an SBSEF to submit filings for new products that it seeks to list either through a self-certification process or by voluntarily requesting Commission approval, respectively. Rules 806 and 807 require an SBSEF to submit new rule or rule amendments either through a self-certification process or by voluntarily requesting Commission approval, respectively. Rule 808 addresses the public availability of certain information in an application to register as an SBSEF and SBSEF filings made under the selfcertification procedures or pursuant to Commission review and approval. Rule 809 establishes procedures for addressing a situation where an SBSEF wishes to list a product and it is unclear whether that product is an SBS or swap (i.e., whether it properly falls under the jurisdiction of the SEC or the CFTC). Rule 810 provides that an applicant for registration as an SBSEF may submit for Commission review and approval an SBS’s terms and conditions or rules prior to listing the product as part of its application for registration. The information collected under Rules 804 and 805 will help the Commission assess whether an SBS listed by an SBSEF complies with relevant provisions of the SEA. In addition, this information will assist the Commission in overseeing the SBSEF’s 1037 See Proposed Rule 825 (requiring an SBSEF to make publicly available a ‘‘Daily Market Data Report’’). PO 00000 Frm 00117 Fmt 4701 Sfmt 4700 87271 compliance with its regulatory obligations generally and to learn about developments in the SBS product market. Rules 804 and 805 also provide a mechanism whereby market participants, other SBSEFs, other regulators, and the public generally could learn what products an SBSEF intends to list and to obtain information regarding such products. The information collected under Rules 806 and 807 will help the Commission assess whether a new rule or rule amendment of an SBSEF complies with relevant provisions of the SEA and assist the Commission in overseeing the SBSEF’s compliance with its regulatory obligations generally. Rules 806 and 807 also provide a mechanism whereby an SBSEF’s members (and prospective members) could learn what new rules or rule amendments the SBSEF intends to apply in its market. The information collected under Rules 809 and 810 will help the Commission assess an SBSEF’s compliance with relevant provisions of the SEA and assist the Commission in overseeing the SBSEF’s compliance with its regulatory obligations. This information also will be useful to the SBSEF’s members, because they would be subject to such new or amended rules or products and thus would have an interest in learning about those rules or products. Other market participants, other SBSEFs, and other regulators, as well as the public generally, may find information about proposed new or amended rules or products useful. 7. Requirements Relating to the CCO Regulation SE includes Rule 831 that would set out requirements relating to an SBSEF’s CCO. The information that will be collected under Rule 831 will help ensure compliance by SBSEFs with relevant provisions of the SEA and assist the Commission in overseeing SBSEFs generally. The Commission could use the annual compliance report to help it evaluate whether an SBSEF is carrying out its statutorily mandated regulatory obligations and, among other things, to discern the scope of any denials of access or refusals to grant access by the SBSEF and to obtain information on the status of the SBSEF’s regulatory compliance program. The SBSEF’s fourth-quarter financial report will provide the Commission with important information on the financial health of the SBSEF. E:\FR\FM\15DER2.SGM 15DER2 87272 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations 8. Surveillance Systems Requirements for SBSEFs The rules that require an SBSEF to maintain surveillance systems and to monitor trading 1038 are designed to promote compliance by an SBSEF with its obligations under the SEA to oversee trading on its market, and to prevent manipulation and other unlawful activity or disruption of its market. C. Respondents ddrumheller on DSK120RN23PROD with RULES2 The respondents subject to the collection of information burdens associated with Regulation SE are: (1) SBSEFs (and entities wishing to register with the Commission as SBSEFs); (2) in the case of Rule 833, persons that seek an exemption order under that rule; and (3) in the case of Rule 834, SBS exchanges. Currently there are no registered SBSEFs. Based on the number of SEFs registered with the CFTC that trade index CDS (the closest analog to singlename CDS, which is likely to be the product most frequently traded on SECregistered SBSEFs), as well as general industry information, the Commission preliminarily estimated that five entities will seek to register as SBSEFs and thus become subject to the collection of information requirements of these rules.1039 The Commission did not receive comments about its estimate of the number of SBSEF registrants, and its initial estimate continues to be reasonable. The Commission preliminarily estimated that three persons would request exemption orders under one or both paragraphs of Rule 833.1040 The CFTC has granted three exemptions similar to those contemplated by Rule 833,1041 which suggests that the number of jurisdictions having organized trading venues for swap and SBS products that overlap with products traded on similar venues in the United States is not large. The Commission did not receive comments about its estimate of the number of persons requesting exemption orders under Rule 833, and 1038 See, e.g., Proposed Rule 819(d)(3) (requiring an SBSEF to establish and maintain sufficient compliance staff and resources to ensure that it can conduct effective audit trail reviews, trade practice surveillance, market surveillance, and real-time market monitoring). 1039 See Proposing Release, supra note 1, 87 FR at 28963. 1040 Id. The Commission anticipates that such persons could include foreign SBS trading venues, foreign authorities that license and regulate those trading venues, or covered persons (as defined in Rule 832) who are members of such trading venues. 1041 See also supra note 626 (discussing a CFTC staff no-action letter addressing certain UK swap trading facilities). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 its initial estimate continues to be reasonable. The Commission preliminarily estimated that three entities will operate as SBS exchanges.1042 These are likely to be existing national securities exchanges that, in the future, seek to list SBS and thereby become SBS exchanges. The Commission did not receive comments about its estimate of the number of SBS exchanges, and its initial estimate continues to be reasonable. The Commission considered whether any provision of proposed Regulation SE would impose any burdens (as defined in the PRA) on SBSEF members but received no comments on this point and continues to estimate that the provisions of Regulation SE would not impose PRA burdens on SBSEF members. D. Total Annual Reporting and Recordkeeping Burden 1. Overview The CFTC, based on its experience in developing rules for SEFs and regulating the SEF market, has over the years developed, refined, and received approval from OMB for paperwork burden hours estimates, both for SEF rules directly as well as for ancillary rules on which various rules in Regulation SE are modeled.1043 Those 1042 See Proposing Release, supra note 1, 87 FR at 28963. 1043 See Core Principles and Other Requirements for Swap Execution Facilities (May 17, 2013), 78 FR 33476, 33548–49 (June 4, 2013) (Final Rule PRA for CFTC part 37); Swap Execution Facility Requirements (Nov. 27, 2020), 85 FR 82313, 82324 (Dec. 18, 2020) (Final Rule PRA for 17 CFR 36.1); Core Principles and Other Requirements for Swap Execution Facilities: OMB Control Number 3038– 0074 Supporting Statements (last updated July 26, 2021), available at https://omb.report/omb/30380074 (PRA Supporting Statements for CFTC Core Principles for SEFs, 17 CFR 36.1); Provisions Common to Registered Entities (July 19, 2011), 76 FR 44776, 44789–90 (July 27, 2011) (Final Rule PRA for CFTC part 40); part 40, Provisions Common to Registered Entities: OMB Control Number 3038– 0093 Supporting Statements (last updated Feb. 4, 2021), available at https://omb.report/omb/30380093 (PRA Supporting Statements for CFTC part 40, 17 CFR 36.1); Notification of Pending Legal Proceedings: OMB Control Number 3038–0033 Supporting Statements (last updated Oct. 29, 2021), available at https://omb.report/omb/3038-0033 (PRA Supporting Statements for 17 CFR 1.60(a), (c), and (e)); Adaptation of Regulations To Incorporate Swaps (Oct. 16, 2012), 77 FR 66288, 66306–08 (Nov. 2, 2012) (Final Rule PRA for 17 CFR 1.59 and 1.37(c)); Recordkeeping (May 23, 2017), 82 FR 24479, 24485 (May 30, 2017) (Final Rule PRA for 17 CFR 1.31); Adaptation of Regulations to Incorporate Swaps-Exclusion of Utility OperationsRelated Swaps with Utility Special Entities from De Minimis Threshold: OMB Control Number 3038– 0090 Supporting Statements (last updated July 1, 2020), available at https://omb.report/omb/30380090 (PRA Supporting Statements for 17 CFR 1.31, 1.37(c), 1.59, and 1.67); Service on Self-Regulatory Organization Governing Boards or Committees by PO 00000 Frm 00118 Fmt 4701 Sfmt 4700 estimates are presented in the form of aggregate totals for compliance with: • Part 37 of the CFTC regulations regarding initial registration requirements applicable to SEFs; • Part 37 regarding other requirements applicable to SEFs, including the statutory Core Principles; • Part 40 of the CFTC regulations regarding requirements applicable to SEFs (and other CFTC-registered entities); and • 17 CFR 1.60(a), 1.60(c), 1.60(e), 36.1, 1.59, 1.63, 1.67, 15.05, 1.37(c), 1.64, and 1.69 regarding requirements applicable to SEFs (and other CFTCregistered entities). The rules applicable to SBSEFs are, with limited exceptions discussed above, substantively similar to those applicable to SEFs. Therefore, the Commission is basing its estimates for the paperwork burdens for SBSEFs on the CFTC’s paperwork burden calculations for analogous rules that apply to SEFs, which have been approved by OMB.1044 However, in certain cases, the paperwork burdens estimated by the CFTC are scaled down for SBSEFs to account for the likelihood that there will be fewer SBSEFs than SEFs and that the SBS business of dually registered SEF/SBSEFs is likely to be smaller than the swap business. Although there are minor differences between the CFTC rules and the Commission rules being adopted, the Commission does not need to Persons with Disciplinary Histories (Feb. 27, 1990), 55 FR 7884, 7890 (Mar. 6, 1990) (Final Rule PRA for 17 CFR 1.63); Final Rule and Rule Amendments Concerning Composition of Various Self-Regulatory Organization Governing Boards and Major Disciplinary Committees (June 29, 1993), 58 FR 37644, 37653 (July 13, 1993) (Final Rule PRA for§ 1.64); Voting by Interested Members of SelfRegulatory Organization Governing Boards and Committees (Dec. 23, 1998), 64 FR 16, 22 (Jan. 4, 1999) (Final Rule PRA for 17 CFR 1.69); Rules Pertaining to Contract Markets and Their Members: OMB Control Number 3038–0022 Supporting Statements (last updated Dec. 21, 2010), available at https://omb.report/omb/3038-0022 (PRA Supporting Statements for 17 CFR 1.63, 1.64, and 1.69); Swap Data Recordkeeping and Reporting Requirements (Dec. 20, 2011), 77 FR 2136, 2171– 76 (Jan. 13, 2012) (Final Rule PRA for 17 CFR 45.2); Swap Data Recordkeeping and Reporting Requirements: OMB Control Number 3038–0096 Supporting Statements (last updated Mar. 16, 2021), available at https://omb.report/omb/3038-0096 (PRA Supporting Statements for 17 CFR 45.2); Repeal of the Exempt Commercial Market and Exempt Board of Trade Exemptions (Sept. 28, 2015), 80 FR 59575, 59576 (Oct. 2, 2015) (Final Rule PRA for 17 CFR 15.05). 1044 Rule 835, which requires SBSEFs to file with the Commission notices of final disciplinary actions and denials and limitations of access, is not based on a CFTC rule but rather on an existing Commission rule that imposes a similar filing requirement on SROs. Therefore, the Commission is utilizing the burden estimates in its rulemaking for SROs to estimate the burdens of this rule for SBSEFs. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 substantially deviate from the CFTC’s estimates of aggregated burden hours for compliance (beyond scaling back the CFTC’s estimates to account for the smaller number of SBSEFs, and the smaller size of the SBS market relative to the swaps market). These minor differences between the CFTC’s existing rules for SEFs and the Commission’s rules for SBSEFs are prompted, in some cases, by minor differences between the statutory provisions that apply to SEFs under the CEA and the statutory provisions that apply to SBSEFs under the SEA, and, in other cases, by differences between the swaps market and SBS market. In either case, however, the Commission anticipates that the burdens on SBSEFs would be substantially similar to the burdens set out in the CFTC estimates, which serve as the basis for the Commission’s estimates.1045 Furthermore, basing the burden estimates for SBSEFs on the CFTC’s estimates for SEFs would be more accurate than using burden hours estimates for any other entity that the Commission currently regulates (e.g., national securities exchanges) because SBSEFs share many more similarities with SEFs than they do with any other SEC-registered entities. The Commission anticipates that most if not all entities that seek to register with the Commission as SBSEFs will also register, or will already be registered, with the CFTC as SEFs. With a few exceptions, the rules being adopted by the Commission are adapted from existing rules of the CFTC. With these rules, the Commission intends to obtain comparable regulatory benefits as the CFTC rules while imposing only marginal additional burdens on SEF/ SBSEFs. However, for purposes of its PRA analysis, the Commission will estimate the burdens as if a respondent were subject only to the Commission’s rules.1046 1045 When the CFTC adopted the SEF rules in 2013, the CFTC took a similar approach to burden hours estimation. The CFTC relied on the aggregate burden hours for three types of entities that it regulated (DCMs, derivatives transaction execution facilities, and certain exempt commercial markets) and applied those burden hours to SEFs unadjusted, even though there are differences between the regulations that govern SEFs and those that govern the other entities. The CFTC noted that those entities, like SEFs, were subject to certain statutory Core Principles and rules thereunder, and that, despite variations in the applicable regulations, it was still appropriate to use the average aggregate burden number for those entities as the estimate for SEFs without adjustment. See CFTC, Core Principles and Other Requirements for Swap Execution Facilities, 78 FR at 33548–51. 1046 However, there may be instances in which a rule would require an SBSEF to generate the same paperwork that is already being created pursuant to a CFTC rule. In such cases, compliance with the existing CFTC requirement would satisfy the SEC VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 The burden hours discussed below represent annual/ongoing burdens, with three exceptions that represent initial, one-time burdens: registration burdens for SBSEFs under Rule 803, exemption requests regarding foreign SBS trading venues under Rule 833, and certain rules under Rules 834(b) and (c). The Commission requested comments on its entire proposed approach to estimating burden hours and received no comment.1047 The Commission continues to estimate the burdens at the levels set forth in the Proposing Release. Therefore, for any provision that the Commission is adopting as proposed, it is not changing its preliminary estimate, except in one instance to account for an update in an estimate by the CFTC that the Commission is using to base its burden estimates.1048 For any provision that the Commission is modifying from the proposal, as discussed in more detail below, the Commission estimates that the modification would result in no change in the burden estimate compared to the proposal. 2. Aggregate Burdens for Rules Modeled After CFTC Part 37 Rules (a) Registration Requirements for SBSEFs and Form SBSEF A submission by an entity wishing to register with the Commission as an SBSEF would be required to be made on Form SBSEF, pursuant to Rule 803, on a one-time basis. The Commission estimates that five entities initially would seek to register with the Commission as SBSEFs. The Commission estimates the burdens of Rule 803 and Form SBSEF to be per respondent and aggregate of 295 and 1,475 hours, respectively. These entities would incur initial, one-time burdens, because once an entity is registered as an SBSEF, its registration obligations are complete. The Commission’s estimate regarding the initial burden that an entity would incur to file a Form SBSEF is informed by the estimates made by the CFTC for the completion of Form SEF and compliance with § 37.3 of the CFTC regulations (which governs registration of SEFs). Form SBSEF requests almost exactly the same information as required by Form SEF, and Rule 803 is substantially similar to § 37.3. The CFTC has estimated that the initial compliance burden associated requirement, and in reality there would be few or de minimis burdens imposed on dually registered SEF/SBSEFs. 1047 See Proposing Release, supra note 1, 87 FR at 28969. 1048 As discussed below, the Commission has revised its burden estimate for Rule 811(d) due to a corresponding revision by the CFTC of its analogous rule. PO 00000 Frm 00119 Fmt 4701 Sfmt 4700 87273 with its registration requirements in § 37.3 and Form SEF to be 295 hours per SEF applicant.1049 For purposes of calculating burden hours, the CFTC considered the entire SEF application process to constitute a single information collection; the Commission is utilizing the same approach for SBSEFs. SBSEFs would likely prepare Form SBSEF internally. (b) Ongoing Compliance With Other Requirements That Are Similar to the Remainder of Part 37 The Commission estimates the aggregate ongoing annual hour burden for compliance with all of the SBSEF rules that have analogs in part 37 to be 1,935 hours.1050 The CFTC has estimated that the compliance burden for all of the sections of part 37 combined, other than the initial burden of 295 hours per SEF for registrationrelated compliance discussed above, to be an ongoing annual burden of 387 hours per SEF.1051 With the exception of § 37.600, which implements a CEA Core Principle for SEFs relating to position limits that is not present in the SEA, every other section of part 37 has an analog in proposed Regulation SE that is substantively similar.1052 Therefore, the aggregate CFTC estimate of 387 hours per SEF per year serves as a reasonable estimate for the annual hourly burden on each SBSEF. As noted above, the Commission is adopting Rule 815 and 819 as proposed, except that it is: (1) removing the proposed definition of a ‘‘Block Trade’’, a term used in Rule 815, from Rule 802 and reserving that definition; (2) modifying Rule 815(d)(2) and (d)(3) to 1049 See OMB, Supporting Statement for New and Revised Information Collections: Core Principles and Other Requirements for Swap Execution Facilities, OMB Control Number 3038–0074, Attachment A (July 7, 2021), available at https:// omb.report/icr/202107-3038-004/doc/ 113431800.pdf. 1050 1,935 hours = 387 hours (annual burden per respondent) × 5 (number of respondents). 1051 See OMB, Supporting Statement for New and Revised Information Collections, OMB Control Number 3038–0074, at 8 (estimating that on a net basis the total burden hours imposed on each SEF will be 387 hours). 1052 As discussed previously, the Commission proposed to incorporate portions of the CFTC guidance into certain rules in Regulation SE. The Commission is now adopting those portions of the CFTC guidance as proposed into the rules of Regulation SE. The CFTC guidance clarifies portions of its rules by suggesting means for compliance and does not fundamentally alter those rules. When the CFTC adopted this guidance into its regulations, it did not alter its burden hours estimate. See, e.g., 2021 SEF Amendments Adopting Release. Therefore, no adjustments to the CFTC estimates, on which the Commission is basing its own estimates, would be appropriate despite adapting that guidance into the Commission’s rules. E:\FR\FM\15DER2.SGM 15DER2 87274 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 narrow the scope of the packagetransaction exception to the method of execution requirements of Rule 815; (3) adding section (g) to Rule 815 to specify that a security-based swap that is intended to be cleared at the time of the transaction, but is not accepted for clearing at a registered clearing agency, shall be void ab initio; (4) amending Rule 819(e) to permit SBSEFs to contract with DCMs for the provision of services to assist in complying with the SEA and Commission rules thereunder, as approved by the Commission; (5) adding sections (c)(4) and (g)(14) to Rule 819 to address Commission review of: (i) denial or limitation of access to any service or denial or conditioning of membership by an SBSEF and (ii) disciplinary sanctions imposed by an SB SEF; and (6) removing certain mentions of block trades in various places throughout Rule 819 because as mentioned above, a definition of that term has not been adopted. Although these changes may have a practical impact on respondents’ SBS trading activity, the Commission estimates that they do not increase or decrease the burden hours for compliance with the Core Principles that are similar to the remainder of part 37. The changes simply: (1) make modifications to accommodate reserving the definition for a block trade; (2) narrow the scope of an exception relating to packagetransactions; (3) automatically declare trades intended to be cleared but not accepted for clearing to be void ab initio; (4) permit SBSEFs to contract with DCMs for certain services; and (5) address Commission review of certain actions taken by SBSEFs. None of these changes requires additional recordkeeping or reporting burdens (or results in a decrease in record-keeping and reporting obligations). Therefore, the Commission estimates that the perrespondent or aggregate totals of 387 hours and 1,935 hours, respectively. In addition, the Commission is modifying Rule 825 to make changes to what type of information is required to be submitted in and timing of publication of the daily market data report and to remove certain mentions of block trades because that term will not be defined in Regulation SE at this time. Rule 825 will not require the disclosure of the number of block trades and will require publication of the report as soon as reasonably practicable on the next business day but no later than 7 a.m. (rather than before the beginning of trading) and several mentions of block trades in Rule 825(c) have been removed. Not requiring the disclosure of the number of block trades Analogous SBSEF Rule # (387 aggregate burden hours per SBSEF not including Rule 803 (registration) and certain other rules not modeled on part 37 rules (discussed separately in the following sections) CFTC part 37 section (387 aggregate burden hours per SEF not including § 37.3 (registration) Topic 37.1 ................................................. 37.2 ................................................. 37.4 ................................................. 37.5 ................................................. 37.6 ................................................. 37.7 ................................................. 37.8 ................................................. 37.9 ................................................. 37.10 ............................................... 37.11 ............................................... 37.12 ............................................... 37.100 ............................................. 37.200 through 37.206 .................... 37.300 through 37.301 .................... 37.400 through 37.408 .................... 37.500 through 37.504 .................... 37.600 through 37.601 .................... Scope ......................................................................... Applicable provisions ................................................. Procedures for listing products .................................. Compliance ................................................................ Enforceability ............................................................. Prohibited use of data ............................................... Entities operating as SEFs and DCMs ..................... Methods of execution ................................................ Process to make swaps available for trade .............. Reserved section ....................................................... Trade execution compliance schedule ...................... CP 1 (compliance with Core Principles) ................... CP 2 (compliance with rules) .................................... CP 3 (manipulation) ................................................... CP 4 (monitoring of trading and trade processing) ... CP 5 (ability to obtain information) ............................ CP 6 (position limits) ................................................. 37.700 through 37.703 .................... 37.800 through 37.801 .................... 37.900 through 37.901 .................... 37.1000 through 37.1001 ................ 37.1100 through 37.1101 ................ 37.1200 ........................................... 37.1300 through 37.1307 ................ 37.1400 through 37.1401 ................ 37.1500 through 1501 ..................... Appendix A (Form SEF) .................. Appendix B ...................................... CP 7 (financial integrity of transactions) ................... CP 8 (emergency authority) ...................................... CP 9 (publication of trading information) .................. CP 10 (recordkeeping and reporting) ........................ CP 11 (anti-trust) ....................................................... CP 12 (conflicts of interest) ....................................... CP 13 (financial resources) ....................................... CP 14 (system safeguards) ....................................... CP 15 (CCO) ............................................................. Form SEF .................................................................. Guidance relating to Core Principles ........................ a The will have a negligible impact on the reporting burden of preparing the daily market data report. Rule 825 requires the report to contain numerous items. The Commission estimates that eliminating block trades from one of the required items (trade count) will reduce the hours burden for compiling the report by a negligible amount. Similarly, changing the timing of the publication of the report will have no impact on burden hours. The Commission estimates that it will not require a greater or fewer number of hours to compile the report as a result of the change in timing for publication as it is the same report that is being compiled. Therefore, the Commission continues to estimate a per-respondent and aggregate totals of 387 hours and 1,935 hours, respectively. As discussed in more detail below, certain SBSEF rules being adopted in Regulation SE are derived from other parts of the CFTC’s rules (e.g., part 40) and the burdens for those rules will be based on the appropriate burden hours of the corresponding CFTC part. For reference, the following table lists all sections of part 37 and the corresponding SBSEF rule. Please see above for more detailed descriptions of a particular SBSEF rule. 800. 801. 810. 811. 812. 813. 814. 815. 816. not applicable. 817. 818 (CP1). 819 (CP2). 820 (CP3). 821 (CP4). 822 (CP5). no equivalent requirement in the SEA; CP numbering diverges after this point. 823 (CP6). 824 (CP7). 825 (CP 8). 826 (CP 9). 827 (CP10). 828 (CP 11). 829 (CP 12). 830 (CP 13). 831 (CP 14). Form SBSEF a. guidance incorporated throughout rules 818 through 831. burdens of registering using Form SBSEF are discussed in the previous section. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00120 Fmt 4701 Sfmt 4700 E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations 3. Aggregate Burdens for Rules Modeled on CFTC Part 40 Rules A number of rules contained in Regulation SE are modeled on rules in part 40 of the CFTC’s rules, including §§ 40.2 (Listing products for trading by certification), 40.3 (Voluntary submission of new products for Commission review and approval), 40.5 (Voluntary submission of rules for Commission review and approval), and 40.6 (Self-certification of rules). The Commission is adopting Rules 804, 805, 806, and 807—which are closely modeled on §§ 40.2, 40.3, 40.5, and 40.6, respectively—in order to harmonize with the procedures that the CFTC applies to SEFs with respect to establishing new rules and listing products. In addition, Rule 808 is modeled after § 40.8 and provides that certain information in a Form SBSEF application or a rule or product filing would be made publicly available, unless confidential treatment is obtained pursuant to Rule 24b–2. Rule 809 is loosely modeled after § 40.12 and sets forth a mechanism for a tolling of the period for consideration of a product pending the issuance by the SEC and the CFTC of joint interpretation clarifying which agency has jurisdiction over the product. (a) Rule and Product Filing Processes for SBSEFs ddrumheller on DSK120RN23PROD with RULES2 Rules 804 and 805 require an SBSEF to submit filings for new products that it seeks to list. Under Rules 806 and 807, an SBSEF is required to submit rule filings for new rules or rule amendments, including changes to a product’s terms or conditions. The Commission’s estimate regarding the burdens that an SBSEF would incur to comply with the rule and product filing processes in Rules 804, 805, 806, and 807 is informed by the estimates made by the CFTC for compliance with §§ 40.2, 40.3, 40.5, and 40.6, the burden hours for which have been approved by OMB.1053 The Commission is estimating a total of five SBSEF respondents. The Commission estimates that the aggregate ongoing annual hourly burden for all SBSEFs to prepare and submit rule and product filings under Rules 804, 805, 1053 See 75 FR 67282 (Nov. 2, 2010) (CFTC proposal to amend 17 CFR 40.2 through 40.5); OMB, Supporting Statement for Information Collection Renewal: OMB Control Number 3038– 0093, Attachment A (July 10, 2020), available at https://omb.report/icr/202005-3038-001/doc/ 101274002.pdf (noting the estimated average number of hours to burden hours report is 2 hours, and the number of annual responses from each entity is 100). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 806, and 807 (including the cover sheet 1054) would be 300 hours. Based on the CFTC’s experience with SEFs, the Commission estimates that on average an SBSEF would incur an ongoing annual burden of 2 hours of work per rule or product filing. Although the CFTC estimated an average of 100 responses per year per respondent,1055 an estimate of 30 responses is appropriate given the more limited scope of the SBS market, as opposed to the swaps market. This would result in a total estimated ongoing annual burden of 60 hours per respondent 1056 and 300 hours for all the respondents annually.1057 As noted above, the Commission is stating in this release that, where a respondent is seeking to list a new category of product of which there would be multiple specific products based on different underlying securities, separate submissions under Rule 804 with respect to each underlying security would not be required, but the submission made would have to address why each of the included underlying securities meets the relevant standards required by Regulation SE. ‘‘Blanket’’ certifications—e.g., a single submission for all equity total return security-based swaps to be listed—would not meet the requirements of Rule 804. This flexibility does not result in any increase or decrease in estimated burden hours. Any time savings from the ability to combine submissions under Rule 804 is likely to be substantially, if not fully, offset by the burden of drafting the explanation of why each of the included underlying securities meets the relevant standards required by Regulation SE. Therefore, the changes do not increase or decrease the burden hours for compliance with the rules pertaining to new product filings under Rules 804 and 805. Indeed, as described above, the per-respondent estimate for the requirements related to 1054 Each of the filings that is required by Rules 804 through 807 would have to include a submission cover sheet that is modeled on the cover sheet and instructions used by SEFs in conjunction with analogous filings with the CFTC, with the submitting entity checking the appropriate box to indicate which type of the filing it is making. Any burden hours attributable to a respondent completing this cover sheet, which is an integral part of the filing, are not estimated separately from the paperwork burden of the substantive filing. Instead, they are contained within the aggregate burden hours estimate for rule and product filings pursuant to Rules 804 through 807, which are based upon the CFTC’s estimates. See supra note 1053. 1055 See supra note 1053. 1056 60 hours = 30 (number of responses per year per respondent) × 2 hours (burden per response). 1057 300 hours = 60 hours (annual burden per respondent pursuant to Rules 804, 805, 806, and 807) × 5 (number of respondents). PO 00000 Frm 00121 Fmt 4701 Sfmt 4700 87275 the rule and product filing processes of 60 hours was an estimate informed by the CFTC’s similar provisions and was meant to encompass the combined burdens that an SBSEF would incur to comply with the rule and product filing processes in Rules 804, 805, 806, and 807. Therefore, the Commission continues to estimate the perrespondent and aggregate totals to be 60 hours and 300 hours, respectively. (b) Burdens Related to Rules Modeled After Other Part 40 Rules (i) Rule 802 Certain definitions contained in Rule 802 are modeled after provisions of part 40. These definitions do not result in any paperwork burden. (ii) Rule 809 Rule 809 is loosely modeled on § 40.12 of the CFTC’s rules and would apply when an SBSEF wishes to list a product and it is unclear whether the product should be classified as an SBS subject to the jurisdiction of the SEC or a swap subject to the jurisdiction of the CFTC. Rule 809 provides that a product certification made by an SBSEF pursuant to Rule 804 shall be stayed, or the review period for a product that has been submitted for Commission approval by an SBSEF pursuant to Rule 805 shall be tolled, upon a request, made pursuant to Rule 3a68–2 under the SEA 1058 by the SBSEF, the SEC, or the CFTC, for a joint interpretation of whether the product is a swap, SBS, or mixed swap. Rule 809 itself does not include a process for determining whether the SEC or CFTC has jurisdiction over a product. Rule 809 would enable the SEC to stay or toll the product filing while the SEC and CFTC consider a joint interpretation under existing SEA Rule 3a68–2, the burden hours of which have already been approved by OMB.1059 The only burden imposed on an SBSEF under Rule 809 would be checking a box on the submission cover sheet when the SBSEF intends to request a joint interpretation from the Commission and the CFTC pursuant to SEA Rule 3a68– 2.1060 The Commission estimates that 1058 17 CFR 240.3a68–2. recently approved an extension without change of the collection for Rule 3a68–2. See Supporting Statement for the Paperwork Reduction Act New Information Collection Submission for Rule 3a68–2 (Interpretation of Swaps, SecurityBased Swaps, and Mixed Swaps) and Rule 3a68– 4(c) (Process for Determining Regulatory Treatment for Mixed Swaps), OMB Control Number 3235– 0685, Supporting Statement A (Dec. 23, 2021), available at https://omb.report/icr/202112-3235018/doc/117438500.pdf. 1060 See supra section IV.E. 1059 OMB E:\FR\FM\15DER2.SGM 15DER2 87276 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations each such request would impose a burden of 0.25 hours. Furthermore, the Commission estimates that each SBSEF would make one such request per year.1061 Accordingly, the aggregate ongoing annual burden for all SBSEFs to comply with Rule 809 would be 1.25 hours.1062 This work, should it be required, is likely to be conducted internally. 4. Aggregate Burdens for Rules Modeled After CFTC Rules Other Than Parts 37 and 40 Adopted rules similar to rules of the CFTC other than part 37 and part 40 are Rules 811(d), 816(e), 819(h), 819(i), 819(j), 819(k), 826(f), and 834. These rules generate various categories of burdens for SBSEFs or market participants. ddrumheller on DSK120RN23PROD with RULES2 (a) Rule 811(d) Section 1.60 of the CFTC’s rules requires a SEF to provide the CFTC with copies of any legal proceeding to which it is a party, or to which its property or assets is subject. Paragraph (d) of Rule 811 adapts paragraphs (a), (c), and (e) of § 1.60 to apply to SBSEFs. Paragraph (d)(1) requires an SBSEF to provide the Commission a copy of the complaint, any dispositive or partially dispositive decision, any notice of appeal filed concerning such decision, and such further documents as the Commission may thereafter request filed in any material legal proceeding to which the SBSEF is a party or to which its property or assets are subject. Paragraph (d)(2) requires an SBSEF to provide notices of similar actions against any officer, director, or other official of the SBSEF from conduct in such person’s capacity as an official of the SBSEF alleging violations of certain enumerated actions. The Commission estimates that an SBSEF would provide the information required by Rule 811(d) once per year, and that each submission would take 0.25 hours. Thus, the Commission estimates that the aggregate ongoing annual burden for all SBSEFs to comply 1061 The establishment of a registration regime and listing procedures for SBSEFs could affect the distribution, but likely not the total number, of requests for joint interpretations under Rule 3a68– 2 of the SEA. SBS products may be developed in the bilateral market before they are listed on SBSEFs, and there are incentives to resolving jurisdictional issues before they can develop traction in the market. Accordingly, requests for a joint interpretation under Rule 3a68–2 could occur before such products are listed by an SBSEF, and such requests are already considered in the approved PRA burden estimates for Rule 3a68–2. 1062 1.25 hours = 1 (number of responses per year per respondent) × 0.25 hours (burden per response) × 5 (number of respondents). VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 with requests for documents or information pursuant to Rule 811(d) would be 1.25 hours.1063 The Commission is basing its estimate on the CFTC estimate included in its submission to OMB for § 1.60 of the CFTC’s rules, for which the CFTC estimated that each of the 97 entities to which the rule applies makes, on average, one submission of documents to the Commission per year. The CFTC further estimated that the time required to prepare one submission is approximately 0.25 hour, totaling 24.25 hours (97 × 0.25) annually.1064 For PRA purposes, it is reasonable to apply the CFTC’s approach to Rule 811(d).1065 This work, should it be required, is likely to be conducted internally. (b) Rule 819(h) Paragraph (h) of Rule 819 generally prohibits persons who are employees of an SBSEF, or who otherwise might have access to confidential information because of their role with the SBSEF, from improperly utilizing that information. Rule 819(h) is modeled on § 1.59 of the CFTC’s rules. The Commission does not estimate that this rule would result in a paperwork burden. (c) Rule 819(i) Paragraph (i) of Rule 819 bars persons with specified disciplinary histories from serving on the governing board or committees of an SBSEF and impose certain other duties on the SBSEF associated with that fundamental requirement. Rule 819(i) is modeled on § 1.63 of the CFTC’s rules. The Commission estimates that an SBSEF would provide the information required by Rule 819(i) once per year, and that each submission would take 79.83 hours. Thus, the Commission estimates that the aggregate ongoing annual burden for all SBSEFs to comply with Rule 819(i) would be 399.15 1063 1 (number of responses per year per respondent) × 0.25 hours (burden per response) × 5 (number of respondents) = 1.25 hour. 1064 See OMB, Supporting Statement for New and Revised Information Collections: OMB Control Number 3038–0033 (Oct. 29, 2021), available at https://omb.report/icr/202110-3038-001/doc/ 115991000.pdf. 1065 In its preliminary estimates, the Commission based its burden hour calculations upon CFTC 2018 submission to OMB. The Commission is now updating the numbers to reflect numbers from the 2021 submission to OMB. The result is the per response burden has increased from .2 hours to .25 hours. See OMB, Supporting Statement for New and Revised Information Collections: OMB Control Number 3038–0033 (Oct. 29, 2021), available at https://omb.report/icr/202110-3038-001/doc/ 115991000.pdf. PO 00000 Frm 00122 Fmt 4701 Sfmt 4700 hours.1066 The Commission is basing this estimate on the estimate the CFTC included in its submission to OMB for its adoption of § 1.63, where the CFTC estimated that each respondent would make, on average, one such submission to the CFTC per year. The CFTC further estimated that the time required to prepare one submission is approximately 79.83 hours.1067 For PRA purposes, it is reasonable to apply the CFTC’s approach to Rule 819(i), and this work is likely to be conducted internally. (d) Rule 819(j) Paragraph (j) of Rule 819 is modeled on § 1.67 of the CFTC’s rules. Rule 819(j)(1) provides that, upon any final disciplinary action in which an SBSEF finds that a member has committed a rule violation that involved a transaction for a customer, whether executed or not, and that resulted in financial harm to the customer, the SBSEF must promptly provide written notice of the disciplinary action to the member. The Commission estimates that an SBSEF would need 0.5 hours to prepare a notice and provide it to a member. This estimate is based on a previous Commission estimate for the time that it would take to prepare and submit a simple notice.1068 The Commission estimates that these notices would occur once per year at each SBSEF, resulting in an aggregate ongoing annual burden to comply with Rule 819(j) of 2.5 hours.1069 This work, should it be required, is likely to be conducted internally. (e) Rule 819(k) Paragraph (k) of Rule 819 requires non-U.S. persons who trade on an SBSEF to have an agent for service process, which could be an agent of its own choosing or, by default, the SBSEF. 1066 1 (number of responses per year per respondent) × 79.83 hours (burden per response) × 5 (number of respondents) = 399.15 hours. 1067 See CFTC, Service on Self-Regulatory Organization Governing Boards or Committees by Persons with Disciplinary Histories (Feb. 27, 1990), 55 FR 7884, 7890 (Mar. 6, 1990) (final rule PRA for § 1.63). 1068 Rule 819(j) does not address any of the requirements or process concerning taking final disciplinary actions; it merely requires that a notice be provided. A provision of Regulation SCI, Rule 1000(b)(4)(i), also requires providing a simple notice and the Commission estimated that it would take 0.5 hours to prepare and such a notice. See Regulation Systems Compliance and Integrity; Final Rule, SEA Release No. 73639 (Nov. 19, 2014), 79 FR 72251, 72381 (Dec. 5, 2014). 1069 2.5 hours (0.5 hours of in-house counsel time) × (1 responses per year) × (5 respondents). The once per year estimate is based on a previous CFTC estimate included in its submission to OMB for § 1.67 along with other rules. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations Rule 819(k) is modeled on provisions of § 15.05 of the CFTC’s rules that apply to SEFs. The Commission does not estimate that this rule would result in a paperwork burden. (f) Rule 826(f) Rule 826(f) is modeled on § 1.37(c) and requires an SBSEF to keep a record in permanent form, which shall show the true name, address, and principal occupation or business of any non-U.S. member that executes transactions on the SBSEF and must, upon request, provide to the Commission information regarding the name of any person guaranteeing such transactions or exercising any control over the trading of such non-U.S. member. The Commission estimates that each SBSEF would need to update information required by Rule 826(f) once per year and that each submission would take 0.4 hours. Thus, the Commission estimates that the aggregate ongoing annual burden for all SBSEFs to comply with requests for documents or information pursuant to Rule 826(f) would be 2 hours.1070 The Commission is basing its estimate on the estimate included by the CFTC in its submission to OMB regarding § 1.37(c), where the CFTC estimated that it would take a SEF 0.4 hours to prepare each record in accordance with § 1.37(c). For PRA purposes, it is reasonable to apply the CFTC’s approach to Rule 826(f). This work, should it be required, is likely to be conducted internally. ddrumheller on DSK120RN23PROD with RULES2 (g) Rule 834 Rule 834 of Regulation SE implements section 765 of the Dodd-Frank Act with respect to SBSEFs and SBS exchanges and, in addition, adapt certain CFTC rules that are designed to mitigate conflicts of interest at SEFs (and other CFTC-registered entities). Rule 834 provides that each SBSEF and SBS exchange must create and maintain rules to mitigate conflicts of interest between SBSEFs and SBS exchanges and their members, including by prohibiting members from owning 20% or more of the voting rights of an SBSEF or SBS exchange and from exercising disproportionate influence in disciplinary proceedings. Rule 834 also requires each SBSEF and SBS exchange to submit to the Commission after every governing board election a list of each governing board’s members, the groups they represent, and how the composition of the board complies with the requirements of Rule 834. 1070 1 (number of responses per year per respondent) × 0.40 hours (burden per response) × 5 (number of respondents) = 2 hours. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 Establishing such rules and submitting such lists to the Commission would result in a paperwork burden for SBSEFs and SBS exchanges. The Commission estimates that Rules 834(b) and (c) together would have an initial, one-time paperwork burden of 15 hours per entity associated with drafting and implementing any such rules, for an aggregate one-time paperwork burden of 120 hours.1071 Rules 834(b) and (c) are substantially similar to Proposed Rule 702(c) of Regulation MC.1072 In its PRA analysis for Proposed Rule 702(c), the Commission estimated that there would be a one-time paperwork burden of 15 hours per entity associated with drafting and implementation of any such rules by each SBSEF or SBS exchange.1073 While the Commission is modifying Rule 834(b) to provide an exception to the 20% restriction mentioned above to SBSEFs that have entered into an agreement with a registered futures association or a national securities association for the provision of certain specified regulatory services, the Commission does not estimate that this exception would result in a change in burden hours for compliance with Rule 834(b). The modification does not affect the information collection under this rule, as it does not involve any record keeping, reporting, or third-party disclosure obligations. Therefore, the Commission is not altering its estimate of 15 hours per entity for Rule 834(b).1074 Additionally, the Commission estimates that Rule 834(d), Rule 834(e), and Rule 834(f), combined, would result in an aggregate ongoing annual paperwork burden of 10 hours.1075 Rules 834(d), (e), and (f) are substantially similar to Proposed Rule 702(h) in Regulation MC in 2010 1076 and CFTC § 1.64(c)(4), CFTC § 1.64(b), and CFTC § 1.64(d), respectively. The Commission is basing its estimate on the CFTC’s estimate that Rules 1.41(d),1077 1071 1 (number of responses per respondent) × 15 hours (burden per response) × 8 (5 SBSEFs + 3 SBS exchanges) = 120 hours. Rule 834(a) contains defined terms and would not result in a paperwork burden. 1072 Regulation MC Proposal, supra note 21, 75 FR at 65916. 1073 Id. 1074 See supra section VIII.B for discussion of the 20% restriction. 1075 10 hours = 1 (number of responses per respondent) × 1.25 hours (burden per response) × 8 (number of SBSEF + SBS exchange respondents). 1076 Regulation MC Proposal, supra note 21, 75 FR at 65932. 1077 While § 1.41(d) created an exemption from the requirements of section 5a(a)(12)(A) of the CEA for contract market rules not related to terms and conditions, the CFTC did not break out the portion of the burden hours for which this amendment is PO 00000 Frm 00123 Fmt 4701 Sfmt 4700 87277 1.63, 1.64, and 1.67 would result in an average annual paperwork burden of 1.25 hours per response that was included in its submission to OMB.1078 The Commission estimates that Rule 834(g) would have an aggregate ongoing annual burden of 16 hours.1079 Rule 834(g) is substantially similar to § 1.69 of the CFTC’s rules, and the Commission is basing its estimate on the CFTC’s estimate for § 1.69 of 2 hours per response that was included in its submission to OMB.1080 The Commission does not estimate that Rule 834(h) would result in a paperwork burden not already included in the above estimates. Rule 834(h) incorporates into a single rule the requirements for an SBSEF to file rules to comply with Rule 834. As it has already described the paperwork burdens of Rules 834(b) through (g), the Commission does not estimate that Rule 834(h) would result in a separate paperwork burden not already included above. Thus, the total aggregate ongoing annual burden is estimated at 26 hours.1081 5. Miscellaneous Burdens (a) Rule 833 Rule 833 describes how exemptions could be obtained for foreign SBS trading venues from the SEA definitions of ‘‘exchange,’’ ‘‘security-based swap execution facility,’’ and ‘‘broker’’ and how SBS executed on a foreign trading venue could become exempt from the SEA’s trade execution requirement. Based on the CFTC’s experience in the SEF market,1082 the Commission estimates that there would be three requests for an exemption order under either or both paragraphs (a) and (b) of Rule 833 in the first year and two requests in each subsequent year; and that each submission would require an initial, one-time burden of 80 hours. Once an exemption has been granted to an applicant, no further action would be required. The Commission estimates the burden to submit an exemption request under one or both paragraphs of Rule 833 would be 240 hours in the first responsible. Therefore, to be conservative, the Commission is including it in its estimate for the burden hours of Rules 834(d), (e), and (f). 1078 See 58 FR 37644, 37653. 1079 16 hours = 1 (number of responses per respondent) × 2 hours (burden per response) × 8 (number of SBSEF + SBS exchange respondents). 1080 See 64 FR at 16, 22. 1081 26 hours = 10 hours (from the second sentence of Rules 834(d), 834(e), and 834(f)) + 16 hours (from Rule 834(g)) + 0 hours (from Rule 834(h). 1082 See supra text accompanying note 1041. E:\FR\FM\15DER2.SGM 15DER2 87278 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations year 1083 and 160 hours in each subsequent year.1084 (b) Rule 835 Rule 835 provides that, if an SBSEF issues a final disciplinary action against a member, takes final action with respect to a denial or conditioning membership, or takes final action with respect to a denial or limitation of access of a person to any services offered by the SBSEF, the SBSEF shall file a notice of such action with the Commission within 30 days and serve a copy on the affected person. The Commission estimates that it would take 0.5 hours to prepare this notice and provide it to the Commission and the affected person. This estimate is based on a previous Commission estimate for the time that it would take to prepare and submit a simple notice.1085 The Commission estimates that it would take an additional 0.25 hours to create and serve a copy of that notice on the affected person. The Commission estimates that these notices would occur once per month at each SBSEF, resulting in an aggregate annual burden to comply with Rule 835 of 45 hours.1086 This work, should it be required, is likely to be conducted internally. 6. Total Paperwork Burden Under Proposed Regulation SE Based on the foregoing, the Commission estimates that the total onetime burden for all SBSEFs, persons that seek an exemption order under Rule 833, and SBS exchanges combined pursuant to the requirements under Regulation SE is equal to 1,995 hours. The Commission estimates that annual ongoing burden for all SBSEFs, persons that seek an exemption order under Rule 833, and SBS exchanges combined pursuant to the requirements under Regulation SE is equal to 2,712.15 hours. SUMMARY OF AGGREGATE BURDEN HOURS Burden hours per respondent Rule or provision Registration (Rule 803, Form SBSEF) ............................... Rules modeled on CFTC part 37 (other than registration) Rule and product filing processes (Rules 804 through 807). 809 ...................................................................................... 811(d) .................................................................................. 819(i) ................................................................................... 819(j) ................................................................................... 826(f) ................................................................................... 833 ...................................................................................... 834(b) through (c) ............................................................... 834(d) through (g) ............................................................... 835 ...................................................................................... a Three Respondents Total hours 295 387 60 One-Time ............................. Ongoing ................................ Ongoing ................................ 5 5 5 1,475 1,935 300 0.25 0.25 79.83 0.5 0.4 80 15 3.25 9 Ongoing ................................ Ongoing ................................ Ongoing ................................ Ongoing ................................ Ongoing ................................ One-Time ............................. One-Time ............................. Ongoing ................................ Ongoing ................................ 5 5 5 5 5 a 3 and 2 8 8 5 1.25 1.25 399.15 2.5 2 240 and 160 120 26 45 respondents in the first year and then two each subsequent year. E. Collection of Information is Mandatory not be kept confidential, unless confidential treatment is requested and granted by the Commission pursuant to Rule 24b–2 under the SEA. XIX. Regulatory Flexibility Certification The collection of information required under Regulation SE would generally G. Retention Period of Recordkeeping Requirements Although recordkeeping and retention requirements have not yet been established for SBSEFs, the Commission is authorized to adopt such rules under section 3D of the SEA. Rule 826 under Regulation SE implements section 3D(d)(9) of the SEA to require an SBSEF to maintain records, for a minimum of five years, of all activities relating to the business of the SBSEF, including a complete audit trail. The Regulatory Flexibility Act (‘‘RFA’’) 1087 requires Federal agencies, in promulgating rules, to consider the impact of those rules on small entities. Section 603(a) of the Administrative Procedure Act,1088 as amended by the RFA, generally requires the Commission to undertake a final regulatory flexibility analysis of rules it is adopting, unless the Commission certifies that the rules would not have a significant impact on a substantial number of ‘‘small entities.’’ 1089 Section 605(b) of the RFA states that this requirement shall not apply to any proposed rule or proposed rule amendment which, if adopted, 1083 240 hours (80 hours of in-house counsel time) × (3 respondents). 1084 160 hours (80 hours of in-house counsel time) × (2 respondents). This estimate is informed by Rule 908(c) of the Commission’s Regulation SBSR, which sets forth the requirements surrounding requests under which regulatory reporting and public dissemination of SBS transactions can be satisfied by complying with the rules of a foreign jurisdiction rather than the parallel rules applicable in the United States. The materials necessary to support such a request under Rule 908(c) are broadly similar to the materials necessary to support a request for an exemption order under one or both paragraphs of Rule 833. The Commission estimated that the burden of a request under Rule 908(c) would be 80 hours of in-house counsel time; therefore, the Commission estimates that burden for submitting documents and information in support of a request for an exemption order under Rule 833 would be the same. 1085 A provision of Regulation SCI, Rule 1000(b)(4)(i), also requires providing a simple notice and the Commission estimated that it would take 0.5 hours to prepare and such a notice. See Regulation Systems Compliance and Integrity; Final Rule, SEA Release No. 73639 (Nov. 19, 2014), 79 FR 72251, 72381 (Dec. 5, 2014). 1086 45 hours (0.75 hours of in-house counsel time) × (12 responses per year) × (5 respondents). 1087 5 U.S.C. 601 et seq. 1088 5 U.S.C. 603(a). 1089 Although section 601(b) of the RFA defines the term ‘‘small entity,’’ the statute permits agencies to formulate their own definitions. The Commission has adopted definitions for the term ‘‘small entity’’ for the purposes of Commission rulemaking in accordance with the RFA. Those definitions, as relevant to this rulemaking, are set forth in Rule 0– 10 under the SEA, 17 CFR 240.0–10. See SEA Release No. 18452 (Jan. 28, 1982), 47 FR 5215 (Feb. 4, 1982) (File No. AS–305). The collections of information imposed on SBSEFs throughout Regulation SE is mandatory for registered SBSEFs. The collection of information with respect to Rule 833 is mandatory for persons that seek an exemption order under Rule 833. The collection of information with respect to Rule 834 is mandatory for SBS exchanges. F. Responses to Collection of Information Will Not Be Confidential ddrumheller on DSK120RN23PROD with RULES2 One-time or ongoing VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00124 Fmt 4701 Sfmt 4700 E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations would not have a significant economic impact on a substantial number of small entities.1090 In the Proposing Release, the Commission certified, pursuant to section 605(b) of the RFA, that that the proposed rules, form, and cover sheet under Regulation SE and the related rules and rule amendments, if adopted, would not have a significant economic impact on a substantial number of small entities for purposes of the RFA.1091 The Commission solicited but did not receive any comments on the certification as it related to the entities impacted by Regulation SE. The Commission’s analysis of the existing information relating to entities subject to Regulation SE, for purposes of the RFA, is discussed below. ddrumheller on DSK120RN23PROD with RULES2 A. SBSEFs Most of Regulation SE, and the related rules and rule amendments, apply to registered SBSEFs (or entities that are seeking to register with the Commission as SBSEFs). In the Dodd-Frank Act, Congress defined SBSEFs as a new type of trading venue for SBS and mandated the registration of these entities. Based on its understanding of the market, and review of and consultation with industry sources, the Commission estimates that five entities will seek to register as SBSEFs and thus would be subject to Regulation SE and the related rules and rule amendments. For purposes of Commission rulemaking in connection with the FRFA, a small entity includes: (1) when used with reference to an ‘‘issuer’’ or a ‘‘person,’’ other than an investment company, an ‘‘issuer’’ or ‘‘person’’ that, on the last day of its most recent fiscal year, had total assets of $5 million or less; 1092 or (2) a broker-dealer with total capital (net worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal year as of which its audited financial statements were prepared pursuant to Rule 17a–5(d) under the SEA,1093 or, if not required to file such statements, a broker-dealer with total capital (net worth plus subordinated liabilities) of less than $500,000 on the last business day of the preceding fiscal year (or in the time that it has been in business, if shorter); and is not affiliated with any person (other than a natural person) that is not a small business or small organization.1094 Under the standards adopted by the Small Business Administration 1090 See 5 U.S.C. 605(b). Proposing Release, supra note 1, 87 FR at 28969–70. 1092 See 17 CFR 240.0–10(a). 1093 17 CFR 240.17a–5(d). 1094 See 17 CFR 240.0–10(c). 1091 See VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 (‘‘SBA’’), entities in financial investments and related activities 1095 are considered small entities if they have $41.5 million or less in annual receipts. Most, if not all, SBSEFs would be large business entities or subsidiaries of large business entities, and that every SBSEF (or its parent entity) would have assets in excess of $5 million (or in the case of a broker-dealer, total capital of less than $500,000) and annual receipts in excess of $41,500,000. Therefore, for purposes of the RFA none of the potential SBSEFs would be considered small entities. B. Persons Requesting an Exemption Order Pursuant to Rule 833 Rule 833 describes how foreign SBS trading venues could become exempt from the SEA definitions of ‘‘exchange,’’ ‘‘security-based swap execution facility,’’ and ‘‘broker’’ and how SBS executed on a foreign trading venue could become exempt from the SEA’s trade execution requirement. Based on the fact that the CFTC has granted similar exemptions with respect to three foreign jurisdictions,1096 the Commission estimates that there would be three requests under one or both paragraphs of Rule 833 in the first year and two in each subsequent year. These requests would likely be submitted by foreign SBS trading venues, foreign authorities that license and regulate those trading venues, or covered persons (as defined in Rule 832) who are members of such trading venues. Based on the Commission’s existing information about the SBS market, the Commission estimates that for purposes of the FRFA no person likely to request an exemption order pursuant to Rule 833 would be considered a small entity. The Commission estimates that most, if not all, of the persons requesting exemptions would be large business entities or subsidiaries of large business entities, and on its own, or through its parent entity, would have assets in excess of $5 million (or in the case of a broker-dealer, total capital of less than $500,000) and annual receipts in excess of $41,500,000. Therefore, the Commission estimates that for purposes of the RFA they would not be considered small entities. C. SBS Exchanges Certain rules under Regulation SE apply to SBS exchanges. Currently, there are no SBS exchanges. However, the Commission estimates that there could be up to three entities that would be considered SBS exchanges and would thus be subject to certain requirements of Regulation SE. For purposes of Commission rulemaking in connection with the RFA, a small entity includes, when used with reference to an exchange, an exchange that has been exempted from the reporting requirements of Rule 601 of Regulation NMS 1097 and is not affiliated with any person (other than a natural person) that is not a small business or small organization.1098 Under the standards adopted by the SBA, entities involved in financial investments and related activities 1099 are considered small entities if they have $41.5 million or less in annual receipts. Based on these definitions and the Commission’s existing information about national securities exchanges, for purposes of the RFA the entities likely to be considered SBS exchanges would not be considered small entities. Under the standard requiring exemption from the reporting requirements of Rule 601 under the SEA, none of the exchanges subject to Regulation SE is a ‘‘small entity’’ for the purposes of the RFA. In addition, the Commission estimates that any SBS exchange would have annual receipts in excess of $41,500,000. Therefore, for purposes of the RFA, no potential SBS exchange would be considered small entities. D. Certification For the foregoing reasons, the Commission certifies, pursuant to section 605(b) of Title 5 of the U.S. Code, that the rules, form, and cover sheet under Regulation SE and the related rules and rule amendments will not have a significant economic impact on a substantial number of small entities. XX. Other Matters If any of the provisions of these rules, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other 1097 17 1095 These entities would include firms involved in investment banking and securities dealing; securities brokerage; commodity contracts dealing; commodity contracts brokerage; securities and commodity exchanges; portfolio management; investment advice; trust, fiduciary and custody activities; miscellaneous intermediation; and miscellaneous financial investment activities. See SBA’s Table of Small Business Size Standards, Subsector 523. 1096 See supra text accompanying note 1041. PO 00000 Frm 00125 Fmt 4701 Sfmt 4700 87279 CFR 242.601. 17 CFR 240.0–10(e). 1099 These entities would include firms involved in investment banking and securities dealing, securities brokerage, commodity contracts dealing, commodity contracts brokerage, securities and commodity exchanges, miscellaneous intermediation, portfolio management, investment advice, trust, fiduciary and custody activities, and miscellaneous financial investment activities. See SBA’s Table of Small Business Size Standards, Subsector 523. 1098 See E:\FR\FM\15DER2.SGM 15DER2 87280 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations 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,1100 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). Statutory Authority Pursuant to the SEA (particularly sections 3(b), 3C, 3D, and 36 thereof, 15 U.S.C. 78c, 78c–3, 78c–4, and 78mm, respectively) and the Dodd-Frank Act (particularly section 765 thereof, 15 U.S.C. 8343), the Commission is amending §§ 201.101, 201.202, 201.210, 201.401, 201.450, 201.460, 232.405, and 240.3a1–1 of chapter II of title 17 of the Code of Federal Regulations and is adopting new §§ 201.442, 201.443, 240.15a–12, and 242.800 through 242.835, as set forth below. List of Subjects Organization; Conduct and Ethics; and Information and Requests. 17 CFR Part 201 Administrative practice and procedure. 17 CFR Part 232 Administrative practice and procedure, Confidential business information, Incorporation by reference, Reporting and recordkeeping requirements, Securities. 17 CFR Part 240 Brokers, Dealers, Registration, Securities. 17 CFR 242 and 249 Brokers, Security-based swap execution facilities, Reporting and recordkeeping requirements. For the reasons stated in the preamble, the Commission is amending title 17, chapter II of the Code of the Federal Regulations as follows: PART 200—ORGANIZATION; CONDUCT AND ETHICS; INFORMATION AND REQUESTS 1. The authority citation for part 200 continues to read as follows: ddrumheller on DSK120RN23PROD with RULES2 ■ Authority: 5 U.S.C. 552, 552a, 552b, and 557; 11 U.S.C. 901 and 1109(a); 15 U.S.C. 77c, 77e, 77f, 77g, 77h, 77j, 77o, 77q, 77s, 77u, 77z–3, 77ggg(a), 77hhh, 77sss, 77uuu, 78b, 78c(b), 78d, 78d–1, 78d–2, 78e, 78f, 78g, 78h, 78i, 78k, 78k–1, 78l, 78m, 78n, 78o, U.S.C. 801 et seq. VerDate Sep<11>2014 19:22 Dec 14, 2023 Subpart A—Organization and Program Management 2. Amend § 200.30–3 by adding paragraphs (a)(95) through (102) to read as follows: ■ § 200.30–3 Delegation of authority to Director of Division of Trading and Markets. * 17 CFR Part 200 1100 5 78o–4, 78q, 78q–1, 78w, 78t–1, 78u, 78w, 78ll(d), 78mm, 78eee, 80a–8, 80a–20, 80a–24, 80a–29, 80a–37, 80a–41, 80a–44(a), 80a– 44(b), 80b–3, 80b–4, 80b–5, 80b–9, 80b–10(a), 80b–11, 7202, and 7211 et seq.; 29 U.S.C. 794; 44 U.S.C. 3506 and 3507; Reorganization Plan No. 10 of 1950 (15 U.S.C. 78d); sec. 8G, Pub. L. 95–452, 92 Stat. 1101 (5 U.S.C. App.); sec. 913, Pub. L. 111–203, 124 Stat. 1376, 1827; sec. 3(a), Pub. L. 114–185, 130 Stat. 538; E.O. 11222, 30 FR 6469, 3 CFR, 1964– 1965 Comp., p. 36; E.O. 12356, 47 FR 14874, 3 CFR, 1982 Comp., p. 166; E.O. 12600, 52 FR 23781, 3 CFR, 1987 Comp., p. 235; Information Security Oversight Office Directive No. 1, 47 FR 27836; and 5 CFR 735.104 and 5 CFR parts 2634 and 2635, unless otherwise noted. Jkt 262001 * * * * (a) * * * (95) Pursuant to §§ 242.803 and 242.808(a) and (b) of this chapter (Rules 803 and 808(a) and (b)): (i) To publish notice on the Commission’s website of a completed application (‘‘Form SBSEF’’), to register as a security-based swap execution facility; (ii) To make available on the Commission’s website certain specified parts of a Form SBSEF; (iii) To notify the applicant that its application is incomplete and will not be deemed to have been submitted for purposes of the Commission’s review; (iv) To request from the applicant any additional information and documentation necessary to review an application; (v) To notify the applicant that its application is materially incomplete and to specify the deficiencies in the application, for purposes of staying the 180-day period for Commission review of the Form SBSEF; and (vi) Upon receipt of a request submitted in good form by a securitybased swap execution facility for vacation of its registration, to issue an order vacating the security-based swap execution facility’s registration and to send a copy of the request and its order to all other security-based swap execution facilities, national securities exchanges that trade security-based swaps, and registered clearing agencies that clear security-based swaps. (96) Pursuant to §§ 242.804(c)(1) and (2) and 242.808(b) of this chapter: (i) To make publicly available on the Commission’s website a security-based PO 00000 Frm 00126 Fmt 4701 Sfmt 4700 swap execution facility’s filing of new products pursuant to the selfcertification procedures of § 242.804 of this chapter; (ii) To stay for a period of up to 90 days the effectiveness of a securitybased swap execution facility’s selfcertification of a new product; (iii) To publish notice on the Commission’s website of a 30-day period for public comment; and (iv) To withdraw the stay or notify the security-based swap execution facility that the Commission objects to the proposed certification. (97) Pursuant to §§ 242.805(b) through (e) and 242.808(b) of this chapter: (i) To make publicly available on the Commission’s website a security-based swap execution facility’s filing of new products for Commission review and approval pursuant to § 242.805 of this chapter (Rule 805); (ii) To notify the submitting securitybased swap execution facility that a submission for a new product does not comply with paragraph (a) of § 242.805 of this chapter (Rule 805); (iii) To extend by an additional 45 days the period for consideration of a new product voluntarily submitted by a security-based swap execution facility to the Commission for approval, if the product raises novel or complex issues that require additional time to analyze, and to notify the security-based swap execution facility of the extension within the initial 45-day review period and briefly describe the nature of the specific issue(s) for which additional time for review is required; (iv) To extend the period for consideration of a new product voluntarily submitted by a securitybased swap execution facility to the Commission for approval by such longer period as to which the security-based swap execution facility agrees in writing; (v) To approve a proposed new product and provide notice of the approval to the security-based swap execution facility; (vi) To notify the security-based swap execution facility that the Commission will not, or is unable to, approve the product, and to specify the nature of the issues raised and the specific provision of the Act or the Commission’s rules thereunder, including the form or content requirements § 242.805(a) of this chapter, that the product violates, appears to violate, or potentially violates but which cannot be ascertained from the submission. (98) Pursuant to §§ 242.806(b) through (e) and 242.808(b) of this chapter: (i) To make publicly available on the Commission’s website a security-based E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations swap execution facility’s filing of new rules and rule amendments for Commission review and approval pursuant to § 242.806(a) of this chapter; (ii) To notify the submitting securitybased swap execution facility that a submission for a new rule or rule amendment does not comply with § 242.806(a) of this chapter; (iii) To extend by an additional 45 days the period for consideration of a new rule or rule amendment voluntarily submitted by a security-based swap execution facility to the Commission, if the proposed rule or rule amendment raises novel or complex issues that require additional time to review or is of major economic significance, the submission is incomplete, or the requester does not respond completely to the Commission questions in a timely manner, and to notify the security-based swap execution facility of the extension within the initial 45-day review period and briefly describe the nature of the specific issue(s) for which additional time for review is required; (iv) To extend the period for consideration of a new rule amendment voluntarily submitted by a securitybased swap execution facility to the Commission for approval by such longer period as to which the security-based swap execution facility agrees in writing; (v) To approve a proposed rule or rule amendment and provide notice of the approval to the security-based swap execution facility; (vi) To notify a security-based swap execution facility that the Commission will not, or is unable to, approve the new rule or rule amendment and to specify the nature of the issues raised and the specific provision of the Act or the Commission’s rules thereunder, including the form or content requirements of this section, with which the new rule or rule amendment is inconsistent or appears to be inconsistent with the Act or the Commission’s rules thereunder, including the form or content requirements of Rule 806, with which the new rule or rule amendment is inconsistent or appears to be inconsistent; and (vii) To approve a proposed rule or a rule amendment, including changes to terms and conditions of a product, on an expedited basis under such conditions as shall be specified in the written notification. (99) Pursuant to §§ 242.807(c) and 242.808(b) of this chapter: (i) To make publicly available on the Commission’s website a security-based swap execution facility’s filing of new rules and rule amendments pursuant to VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 the self-certification procedures of § 242.807 of this chapter; (ii) To stay for a period of up to 90 days the effectiveness of a securitybased swap execution facility’s selfcertification of a new rule or rule amendment; (iii) To publish notice on the Commission’s website of a 30-day period for public comment; and (iv) To withdraw the stay or notify the security-based swap execution facility that the Commission objects to the proposed certification. (100) Pursuant to §§ 242.809 of this chapter, to provide written notice to a security-based swap execution facility of a stay or tolling pending issuance of a joint interpretation upon request for a joint interpretation of whether a proposed product is a swap, securitybased swap, or mixed swap made pursuant to § 240.3a68–2 of this chapter by the security-based swap execution facility, the Commission, or the Commodity Futures Trading Commission. (101) Pursuant to § 242.811 of this chapter: (i) To request pursuant § 242.811(a) of this chapter that a security-based swap execution facility file with the Commission information related to its business as a security-based swap execution facility, and to specify the form, manner, and timeframe for the filing by the security-based swap execution facility; (ii) To request pursuant to § 242.811(b) of this chapter that a security-based swap execution facility file with the Commission a written demonstration, containing supporting data, information, and documents, that it is in compliance with one or more Core Principles or with its other obligations under the Act or the Commission’s rules thereunder, to specify the Core Principles and other obligations under the Act or the Commission’s rules that the securitybased swap execution facility’s filing must address, and to specify the form, manner, and timeframe for the securitybased swap execution facility’s filing; (iii) To specify, pursuant to § 242.811(c)(2) of this chapter, the form and manner of the notification required pursuant to § 242.811(c)(1) of this chapter by a security-based swap execution facility of any transaction involving the direct or indirect transfer of 50 percent or more of the equity interest in the security-based swap execution facility, and to request supporting documentation of the transaction; PO 00000 Frm 00127 Fmt 4701 Sfmt 4700 87281 (iv) To specify the form and manner of the certification required pursuant to § 242.811(c)(4) of this chapter; and (v) To specify the form and manner of the submission by a security-based swap execution facility of documents filed in any material legal proceeding to which the security-based swap execution facility is a party or its property or assets is subject, as specified in § 242.811(d)(1) of this chapter, or in any material legal proceeding instituted against any officer, director, or other official of the security-based swap execution facility from conduct in such person’s capacity as an official of the security-based swap execution facility, as specified in § 242.811(d)(2) of this chapter, and to request further documents. (102) Pursuant to § 242.822 of this chapter (Rule 822), to require that a security-based swap execution provide information in its possession to the Commission and to specify the form and manner of that provision, and to require a security-based swap execution facility to share information with other regulation organizations, data repositories, and third-party data reporting services as necessary and appropriate to fulfill the security-based swap execution facility’s regulatory and reporting responsibilities. * * * * * ■ 3. Amend § 200.30–14 by revising paragraphs (h)(4), (h)(5), (h)(7), and (h)(8) to read as follows: § 200.30–14 Delegation of authority to the General Counsel. * * * * * (h) * * * (4) With respect to proceedings conducted under sections 19(d), (e), and (f) of the Securities Exchange Act of 1934, 15 U.S.C. 78s(d), (e), and (f), Title I of the Sarbanes–Oxley Act of 2002, 15 U.S.C. 7211–7219, and § 201.442 of this chapter (Rule 442 of the Commission’s Rules of Practice) to determine that an application for review under any of those sections has been abandoned, under the provisions of’§ 201.420, § 201.440, or § 201.442 of this chapter (Rule 420, Rule 440, or Rule 442 of the Commission’s Rules of Practice), or otherwise, and accordingly to issue an order dismissing the application. (5) With respect to proceedings conducted pursuant to the Securities Exchange Act of 1934, 15 U.S.C. 78a et seq., the Investment Company Act of 1940, 15 U.S.C. 80a–1 et seq., the Investment Advisers Act of 1940, 15 U.S.C. 80b–1 et seq., the provisions of § 201.102(e) or § 201.442 of this chapter (Rule 102(e) or Rule 442 of the Commission’s Rules of Practice), and E:\FR\FM\15DER2.SGM 15DER2 87282 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations Title I of the Sarbanes–Oxley Act of 2002, 15 U.S.C. 7211–7219, to determine applications to stay Commission orders pending appeal of those orders to the federal courts and to determine application to vacate such stays. * * * * * (7) In connection with Commission review of actions taken by selfregulatory organizations pursuant to sections 19(d), (e), and (f) of the Securities Exchange Act of 1934, 15 U.S.C. 78s(d), (e), and (f), by the Public Company Accounting Oversight Board pursuant to Title I of the Sarbanes– Oxley Act of 2002, 15 U.S.C. 7211–7219, or by a security-based swap execution facility pursuant to § 201.442 of this chapter (Rule 442 of the Commission’s Rules of Practice) to grant or deny requests for oral argument in accordance with the provisions of § 201.451 of this chapter (Rule 451 of the Commission’s Rules of Practice). (8) In connection with Commission review of actions taken by the Public Company Accounting Oversight Board pursuant to Title I of the Sarbanes-Oxley Act of 2002, 15 U.S.C. 7211–7219, or by a security-based swap execution facility pursuant to § 201.442 of this chapter (Rule 442 of the Commission’s Rules of Practice), to determine whether to lift the automatic stay of a disciplinary sanction. * * * * * PART 201—RULES OF PRACTICE 4. The general authority citation for part 201 continues to read as follows: ■ Authority: 15 U.S.C. 77s, 77sss, 78w, 78x, 80a–37, and 80b–11; 5 U.S.C. 504(c)(1). * * * * * Subpart D—Rules of Practice 5. The authority citation subpart D is revised to read as follows: ■ Authority: 15 U.S.C. 77f, 77g, 77h, 77h–1, 77j, 77s, 77u, 77sss, 78c(b), 78d–1, 78d–2, 78l, 78m, 78n, 78o(d), 78o–3, 78o–10(b)(6), 78s, 78u–2, 78u–3, 78v, 78w, 80a–8, 80a–9, 80a–37, 80a–38, 80a–39, 80a–40, 80a–41, 80a–44, 80b–3, 80b–9, 80b–11, 80b–12, 7202, 7215, and 7217. 6. Amend § 201.101 by adding paragraph (a)(9)(ix) to read as follows: ddrumheller on DSK120RN23PROD with RULES2 ■ § 201.101 Definitions. (a) * * * (9) * * * (ix) By the filing, pursuant to § 201.442, of an application for review of a determination of a security-based swap execution facility; * * * * * VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 7. Amend § 201.202 by revising paragraph (a) to read as follows: ■ § 201.202 Specification of procedures by parties in certain proceedings. (a) Motion to specify procedures. In any proceeding other than an enforcement or disciplinary proceeding, a proceeding to review a determination by a self-regulatory organization pursuant to §§ 201.420 and 201.421, a proceeding to review a determination of the Board pursuant to §§ 201.440 and 201.441, or a proceeding to review a determination by a security-based swap execution facility pursuant to §§ 201.442 and 201.443, a party may, at any time up to 20 days prior to the start of a hearing, make a motion to specify the procedures necessary or appropriate for the proceeding with particular reference to: (1) Whether there should be an initial decision by a hearing officer; (2) Whether any interested division of the Commission may assist in the preparation of the Commission’s decision; and (3) Whether there should be a 30-day waiting period between the issuance of the Commission’s order and the date it is to become effective. * * * * * ■ 8. Amend § 201.210 by revising the paragraph (a) heading, (a)(1), paragraph (b) heading, (b)(1), and paragraph (c) introductory text to read as follows: § 201.210 Parties, limited participants and amici curiae. (a) Parties in an enforcement or disciplinary proceeding, a proceeding to review a self- regulatory organization determination, a proceeding to review a Board determination, or a proceeding to review a determination by a securitybased swap execution facility. (1) Generally. No person shall be granted leave to become a party or a non-party participant on a limited basis in an enforcement or disciplinary proceeding, a proceeding to review a determination by a self- regulatory organization pursuant to §§ 201.420 and 201.421, a proceeding to review a determination by the Board pursuant to §§ 201.440 and 201.441, or a proceeding to review a determination by a security-based swap execution facility pursuant to §§ 201.442 and 201.443, except as authorized by paragraph (c) of this section. * * * * * (b) Intervention as party. (1) Generally. In any proceeding, other than an enforcement proceeding, a disciplinary proceeding, a proceeding to review a self-regulatory determination, a proceeding to review a Board PO 00000 Frm 00128 Fmt 4701 Sfmt 4700 determination, or a proceeding to review a security-based swap execution facility determination, any person may seek leave to intervene as a party by filing a motion setting forth the person’s interest in the proceeding. No person, however, shall be admitted as a party to a proceeding by intervention unless it is determined that leave to participate pursuant to paragraph (c) of this section would be inadequate for the protection of the person’s interests. In a proceeding under the Investment Company Act of 1940, any representative of interested security holders, or any other person whose participation in the proceeding may be in the public interest or for the protection of investors, may be admitted as a party upon the filing of a written motion setting forth the person’s interest in the proceeding. * * * * * (c) Leave to participate on a limited basis. In any proceeding, other than an enforcement proceeding, a disciplinary proceeding, a proceeding to review a self-regulatory determination, a proceeding to review a Board determination, or a proceeding to review a security-based swap execution facility determination, any person may seek leave to participate on a limited basis as a non-party participant as any matter affecting the person’s interests: * * * * * ■ 9. Amend § 201.401 by adding paragraph (f) to read as follows: § 201.401 Consideration of stays. * * * * * (f) Lifting of stay of action by a security-based swap execution facility. (1) Availability. Any person aggrieved by a stay of action by a security-based swap execution facility entered in accordance with § 201.442(c) may make a motion to lift the stay. The Commission may, at any time, on its own motion determine whether to lift the automatic stay. (2) Summary action. The Commission may lift a stay summarily, without notice and opportunity for hearing. (3) Expedited consideration. The Commission may expedite consideration of a motion to lift a stay of action by a security-based swap execution facility, consistent with the Commission’s other responsibilities. Where consideration is expedited, persons opposing the lifting of the stay may file a statement in opposition within two days of service of the motion requesting lifting of the stay unless the Commission, by written order, shall specify a different period. ■ 10. Add § 201.442 to read as follows: E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 § 201.442 Appeal of determination by security-based swap execution facility. (a) Application for review; when available. An application for review by the Commission may be filed by any person who is aggrieved by a determination of a security-based swap execution facility with respect to any: (1) Final disciplinary action, as defined in § 240.835(b)(1) of this chapter; (2) Final action with respect to a denial or conditioning of membership, as defined in § 240.835(b)(2) of this chapter; or (3) Final action with respect to a denial or limitation of access to any service offered by the security-based swap execution facility, as defined in § 240.835(b)(2) of this chapter. (b) Procedure. An aggrieved person may file an application for review with the Commission pursuant to § 201.151 within 30 days after the notice filed with the Commission pursuant to § 242.835 of this chapter by the securitybased swap execution facility of the determination is received by the aggrieved person. The Commission will not extend this 30-day period, absent a showing of extraordinary circumstances. This section is the exclusive remedy for seeking an extension of the 30-day period. The aggrieved person shall serve the application on the security-based swap execution facility at the same time. The application shall identify the determination complained of, set forth in summary form a statement of alleged errors in the action and supporting reasons therefor, and state an address where the applicant can be served. The application should not exceed two pages in length. If the applicant will be represented by a representative, the application shall be accompanied by the notice of appearance required by § 201.102(d). Any exception to an action not supported in an opening brief that complies with § 201.450(b) may, at the discretion of the Commission, be deemed to have been waived by the applicant. (c) Stay of determination. Filing an application for review with the Commission pursuant to paragraph (b) of this section operates as a stay of the security-based swap execution facility’s determination, unless the Commission otherwise orders either pursuant to a motion filed in accordance with § 201.401(f) or upon its own motion. (d) Certification of the record; service of the index. Within 14 days after receipt of an application for review, the security-based swap execution facility shall certify and file electronically in the form and manner specified by the Office of the Secretary one unredacted VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 copy of the record upon which it took the complained-of action. (1) The security-based swap execution facility shall file electronically with the Commission one copy of an index of such record in the form and manner specified by the Commission and shall serve one copy of the index on each party. If such index contains any sensitive personal information, as defined in paragraph (d)(2) of this section, the security-based swap execution facility also shall file electronically with the Commission one redacted copy of such index, subject to the requirements of paragraph (d)(2) of this section. (2) Sensitive personal information includes a Social Security number, taxpayer identification number, financial account number, credit card or debit card number, passport number, driver’s license number, State-issued identification number, home address (other than city and State), telephone number, date of birth (other than year), names and initials of minor children, as well as any unnecessary health information identifiable by individual, such as an individual’s medical records. Sensitive personal information shall not be included in, and must be redacted or omitted from, all filings. (i) Exceptions. The following information may be included and is not required to be redacted from filings: (A) The last four digits of a financial account number, credit card or debit card number, passport number, driver’s license number, and State-issued identification number; (B) Home addresses and telephone numbers of parties and persons filing documents with the Commission; and (C) Business telephone numbers. (ii) [Reserved] (e) Certification. Any filing made pursuant to this section, other than the record upon which the action complained of was taken, must include a certification that any information described in paragraph (d)(2) of this section has been omitted or redacted from the filing. ■ 11. Add § 201.443 to read as follows: § 201.443 Commission consideration of security-based swap execution facility determinations. (a) Commission review other than pursuant to an application for review. The Commission may, on its own initiative, order review of any determination by a security-based swap execution facility that could be subject to an application for review pursuant to § 201.442(a) within 40 days after the security-based swap execution facility PO 00000 Frm 00129 Fmt 4701 Sfmt 4700 87283 provided notice to the Commission thereof. (b) Supplemental briefing. The Commission may at any time before issuing its decision raise or consider any matter that it deems material, whether or not raised by the parties. The Commission will give notice to the parties and an opportunity for supplemental briefing with respect to issues not briefed by the parties where the Commission believes that such briefing could significantly aid the decisional process. ■ 12. Amend § 201.450, by: ■ a. Redesignating paragraphs (a)(2)(iv) and (a)(2)(v) as paragraphs (a)(2)(v) and (a)(2)(vi); and ■ b. Adding new paragraph (a)(2)(iv). The addition reads as follows: § 201.450 Briefs filed with the Commission. (a) * * * (2) * * * (iv) Receipt by the Commission of an index to the record of a determination by a security-based swap execution facility filed pursuant to § 201.442(d). * * * * * ■ 13. Amend § 201.460 by adding paragraph (a)(4) to read as follows: § 201.460 Record before the Commission. * * * * * (a) * * * (4) In a proceeding for final decision before the Commission reviewing a determination of a security-based swap execution facility, the record shall consist of: (i) The record certified pursuant to § 201.442(d) by the security-based swap execution facility; (ii) Any application for review; and (iii) Any submissions, moving papers, and briefs filed on appeal or review. * * * * * PART 232—REGULATION S–T— GENERAL RULES AND REGULATIONS FOR ELECTRONIC FILINGS 14. The general authority citation for part 232 continues to read as follows: ■ Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z–3, 77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a–6(c), 80a–8, 80a–29, 80a–30, 80a–37, 80b–4, 80b–6a, 80b– 10, 80b–11, 7201 et seq.; and 18 U.S.C. 1350, unless otherwise noted. * * * * * 15. Amend § 232.405 by: a. Revising the introductory text, paragraphs (a)(2), (a)(3)(i) introductory text, (a)(3)(ii), (a)(4), and (b)(5) introductory text; ■ b. Adding paragraph (b)(5)(ii); and ■ c. Revising Note 1 to § 232.405. ■ ■ E:\FR\FM\15DER2.SGM 15DER2 87284 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations The revisions and addition read as follows: ddrumheller on DSK120RN23PROD with RULES2 § 232.405 Interactive Data File submissions. This section applies to electronic filers that submit Interactive Data Files. Section 229.601(b)(101) of this chapter (Item 601(b)(101) of Regulation S–K), General Instruction F of § 249.311 (Form 11–K), paragraph (101) of Part II— Information Not Required to be Delivered to Offerees or Purchasers of Form F–10 (§ 239.40 of this chapter), § 240.13a–21 of this chapter (Rule 13a– 21 under the Exchange Act), paragraph 101 of the Instructions as to Exhibits of Form 20–F (§ 249.220f of this chapter), paragraph B.(15) of the General Instructions to Form 40–F (§ 249.240f of this chapter), paragraph C.(6) of the General Instructions to Form 6–K (§ 249.306 of this chapter), § 240.17Ad– 27(d) of this chapter (Rule 17Ad–27(d) under the Exchange Act), Note D.5 of § 240.14a–101 of this chapter (Rule 14a– 101 under the Exchange Act), Item 1 of § 240.14c–101 of this chapter (Rule 14c– 101 under the Exchange Act), General Instruction I of § 249.333 of this chapter (Form F–SR), General Instruction C.3.(g) of Form N–1A (§§ 239.15A and 274.11A of this chapter), General Instruction I of Form N–2 (§§ 239.14 and 274.11a–1 of this chapter), General Instruction C.3.(h) of Form N–3 (§§ 239.17a and 274.11b of this chapter), General Instruction C.3.(h) of Form N–4 (§§ 239.17b and 274.11c of this chapter), General Instruction C.3.(h) of Form N–6 (§§ 239.17c and 274.11d of this chapter), General Instruction 2.(l) of Form N–8B–2 (§ 274.12 of this chapter), General Instruction 5 of Form S–6 (§ 239.16 of this chapter), General Instruction C.4 of Form N–CSR (§§ 249.331 and 274.128 of this chapter), §§ 242.829 and 831 of this chapter (Rules 829 and 831 of Regulation SE), and the Registration Instructions to Form SBSEF (§ 249.1701 of this chapter) specify when electronic filers are required or permitted to submit an Interactive Data File (§ 232.11), as further described in note 1 to this section. This section imposes content, format, and submission requirements for an Interactive Data File, but does not change the substantive content requirements for the financial and other disclosures in the Related Official Filing (§ 232.11). (a) * * * (2) Be submitted only by an electronic filer either required or permitted to submit an Interactive Data File as specified by § 229.601(b)(101) of this chapter (Item 601(b)(101) of Regulation S–K), Instruction F of Form 11–K (§ 249.311 of this chapter), paragraph VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 (101) of Part II—Information Not Required to be Delivered to Offerees or Purchasers of Form F–10 (§ 239.40 of this chapter), § 240.13a–21 of this chapter (Rule 13a–21 under the Exchange Act), paragraph 101 of the Instructions as to Exhibits of Form 20– F (§ 249.220f of this chapter), paragraph B.(15) of the General Instructions to Form 40–F (§ 249.240f of this chapter), paragraph C.(6) of the General Instructions to Form 6–K (§ 249.306 of this chapter), § 240.17Ad–27(d) of this chapter (Rule 17Ad–27(d) under the Exchange Act), Note D.5 of § 240.14a– 101 of this chapter (Rule 14a–101 under the Exchange Act), Item 1 of § 240.14c– 101 of this chapter (Rule 14c–101 under the Exchange Act), General Instruction I to Form F–SR (§ 249.333 of this chapter), General Instruction C.3.(g) of Form N–1A (§§ 239.15A and 274.11A of this chapter), General Instruction I of Form N–2 (§§ 239.14 and 274.11a–1 of this chapter), General Instruction C.3.(h) of Form N–3 (§§ 239.17a and 274.11b of this chapter), General Instruction C.3.(h) of Form N–4 (§§ 239.17b and 274.11c of this chapter), General Instruction C.3.(h) of Form N–6 (§§ 239.17c and 274.11d of this chapter), General Instruction 2.(l) of Form N–8B–2 (§ 274.12 of this chapter), General Instruction 5 of Form S–6 (§ 239.16 of this chapter), General Instruction C.4 of Form N–CSR (§§ 249.331 and 274.128 of this chapter), §§ 242.829 and 242.831 of this chapter (Rules 829 and 831 of Regulation SE), and the Registration Instructions to Form SBSEF (§ 249.1701 of this chapter), as applicable; * * * * * (3) * * * (i) If the electronic filer is not a management investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a et seq.), a separate account as defined in section 2(a)(14) of the Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment Company Act of 1940, a business development company as defined in section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a–2(a)(48)), a unit investment trust as defined in Section 4(2) of the Investment Company Act of 1940 (15 U.S.C. 80a–4), or a clearing agency that provides a central matching service, or is subject to §§ 242.800 through 242.835 (Regulation SE), and is not within one of the categories specified in paragraph (f)(1)(i) of this section, as partly embedded into a filing with the remainder simultaneously submitted as an exhibit to: * * * * * PO 00000 Frm 00130 Fmt 4701 Sfmt 4700 (ii) If the electronic filer is a management investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a et seq.), a separate account (as defined in section 2(a)(14) of the Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment Company Act of 1940, a business development company as defined in section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a–2(a)(48)), a unit investment trust as defined in Section 4(2) of the Investment Company Act of 1940 (15 U.S.C. 80a–4), or a clearing agency that provides a central matching service, or is subject to §§ 242.800 through 242.835 (Regulation SE), and is not within one of the categories specified in paragraph (f)(1)(ii) of this section, as partly embedded into a filing with the remainder simultaneously submitted as an exhibit to a filing that contains the disclosure this section requires to be tagged; and (4) Be submitted in accordance with the EDGAR Filer Manual and, as applicable, Item 601(b)(101) of § 229.601(b)(101) of this chapter (Regulation S–K), General Instruction F of Form 11–K (§ 249.311 of this chapter), paragraph (101) of Part II— Information Not Required to be Delivered to Offerees or Purchasers of Form F–10 (§ 239.40 of this chapter), § 240.13a–21 of this chapter (Rule 13a– 21 under the Exchange Act), paragraph 101 of the Instructions as to Exhibits of Form 20–F (§ 249.220f of this chapter), paragraph B.(15) of the General Instructions to Form 40–F (§ 249.240f of this chapter), paragraph C.(6) of the General Instructions to Form 6–K (§ 249.306 of this chapter), § 240.17Ad– 27(d) of this chapter (Rule 17Ad–27(d) under the Exchange Act), Note D.5 of § 240.14a–101 of this chapter (Rule 14a– 101 under the Exchange Act), Item 1 of § 240.14c–101 of this chapter (Rule 14c– 101 under the Exchange Act), General Instruction I to Form F–SR (§ 249.333 of this chapter), General Instruction C.3.(g) of Form N–1A (§§ 239.15A and 274.11A of this chapter), General Instruction I of Form N–2 (§§ 239.14 and 274.11a–1 of this chapter), General Instruction C.3.(h) of Form N–3 (§§ 239.17a and 274.11b of this chapter), General Instruction C.3.(h) of Form N–4 (§§ 239.17b and 274.11c of this chapter), General Instruction C.3.(h) of Form N–6 (§§ 239.17c and 274.11d of this chapter), Instruction 2.(l) of Form N–8B–2 (§ 274.12 of this chapter); General Instruction 5 of Form S–6 (§ 239.16 of this chapter); General Instruction C.4 of Form N–CSR (§§ 249.331 and 274.128 of this chapter), §§ 242.829 and 831 of this chapter E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 (Rules 829 and 831 of Regulation SE), and the Registration Instructions to Form SBSEF (§ 249.1701 of this chapter), as applicable. (b) * * * (5) If the electronic filer is a clearing agency that provides a central matching service, or is subject to §§ 242.800 through 242.835 (Regulation SE), an Interactive Data File must consist only of a complete set of information for all corresponding data in the Related Official Filing, no more and no less, as follows: * * * * * (ii) For electronic filers subject to Regulation SE, the content of documents required to be filed electronically under §§ 242.829 and 242.831 of this chapter (Rules 829 and 831 of Regulation SE); and the Registration Instructions to § 249.1701 of this chapter (Form SBSEF), as applicable. * * * * * Note 1 to § 232.405: Section 229.601(b)(101) of this chapter (Item 601(b)(101) of Regulation S–K) specifies the circumstances under which an Interactive Data File must be submitted and the circumstances under which it is permitted to be submitted, with respect to § 239.11 of this chapter (Form S–1), § 239.13 of this chapter (Form S–3), § 239.25 of this chapter (Form S– 4), § 239.18 of this chapter (Form S–11), § 239.31 of this chapter (Form F–1), § 239.33 of this chapter (Form F–3), § 239.34 of this chapter (Form F–4), § 249.310 of this chapter (Form 10–K), § 249.308a of this chapter (Form 10–Q), and § 249.308 of this chapter (Form 8–K). General Instruction F of § 249.311 of this chapter (Form 11–K) specifies the circumstances under which an Interactive Data File must be submitted, and the circumstances under which it is permitted to be submitted, with respect to Form 11–K. Paragraph (101) of Part II— Information not Required to be Delivered to Offerees or Purchasers of § 239.40 of this chapter (Form F–10) specifies the circumstances under which an Interactive Data File must be submitted and the circumstances under which it is permitted to be submitted, with respect to Form F–10. Paragraph 101 of the Instructions as to Exhibits of § 249.220f of this chapter (Form 20–F) specifies the circumstances under which an Interactive Data File must be submitted and the circumstances under which it is permitted to be submitted, with respect to Form 20–F. Paragraph B.(15) of the General Instructions to § 249.240f of this chapter (Form 40–F) and Paragraph C.(6) of the General Instructions to § 249.306 of this chapter (Form 6–K) specify the circumstances under which an Interactive Data File must be submitted and the circumstances under which it is permitted to be submitted, with respect to § 249.240f of this chapter (Form 40–F) and § 249.306 of this chapter (Form 6–K). Section 240.17Ad– 27(d) of this chapter (Rule 17Ad–27(d) under the Exchange Act) specifies the circumstances under which an Interactive VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 87285 Data File must be submitted with respect the reports required under Rule 17Ad–27. Note D.5 of § 240.14a–101 of this chapter (Schedule 14A) and Item 1 of § 240.14c–101 of this chapter (Schedule 14C) specify the circumstances under which an Interactive Data File must be submitted with respect to Schedules 14A and 14C. Section 240.13a–21 of this chapter (Rule 13a–21 under the Exchange Act) and General Instruction I to § 249.333 of this chapter (Form F–SR) specify the circumstances under which an Interactive Data File must be submitted, with respect to Form F–SR. §§ 242.829 and 242.831 of this chapter (Rules 829 and 831 of Regulation SE) and the Registration Instructions to § 249.1701 of this chapter (Form SBSEF), as applicable, specify the circumstances under which an Interactive Data File must be submitted with respect to filings made under Regulation SE. accuracy of end-of-day valuations of security-based swaps. (b) Notwithstanding paragraphs (a)(1) through (3) of this section, an organization, association, or group of persons shall not be exempt under this section from the definition of ‘‘exchange,’’ if: * * * * * ■ 18. Add § 240.15a–12 to read as follows: § 240.3a1–1 Exemption from the definition of ‘‘Exchange’’ under section 3(a)(1) of the Act. PART 242—REGULATIONS M, SHO, ATS, AC, NMS, SE, AND SBSR, AND CUSTOMER MARGIN REQUIREMENTS FOR SECURITY FUTURES § 240.15a–12 Exemption for certain security-based swap execution facilities from certain broker requirements. (a) For purposes of this section, an SBSEF–B means a security-based swap execution facility that does not engage in any securities activity other than facilitating the trading of security-based PART 240—GENERAL RULES AND swaps on or through the security-based REGULATIONS, SECURITIES swap execution facility. EXCHANGE ACT OF 1934 (b) An SBSEF–B that registers with the Commission pursuant to § 242.803 ■ 16. The general authority citation for of this chapter shall be deemed also to part 240 continues to read as follows: have registered with the Commission Authority: 15 U.S.C. 77c, 77d, 77g, 77j, pursuant to sections 15(a) and (b) of the 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, Act (15 U.S.C. 78o(a)(1) and (b)). 77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, (c) Except as provided in paragraph 78g, 78i, 78j, 78j–1, 78j–4, 78k, 78k–1, 78l, (d) of this section, an SBSEF–B shall be 78m, 78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q, 78q–1, 78s, 78u–5, 78w, 78x, 78dd, 78ll, exempt from any provision of the Act or 78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– the Commission’s rules thereunder 3, 80b–4, 80b–11, 7201 et seq., and 8302; 7 applicable to brokers that, by its terms, U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 requires, prohibits, restricts, limits, U.S.C. 1350; and Pub. L. 111–203, 939A, 124 conditions, or affects the activities of a Stat. 1376 (2010); and Pub. L. 112–106, sec. broker, unless such provision specifies 503 and 602, 126 Stat. 326 (2012), unless that it applies to a security-based swap otherwise noted. execution facility. * * * * * (d) Notwithstanding paragraph (c) of ■ 17. Amend § 240.3a1–1 by: this section, the following provisions of ■ a. Removing the word ‘‘or’’ from the the Act and the Commission’s rules end of paragraph (a)(2); thereunder shall apply to an SBSEF–B: ■ b. Removing the period from the end (1) Section 15(b)(4) of the Act (15 of paragraph (a)(3) and adding a U.S.C. 78o(b)(4)); semicolon in its place; (2) Section 15(b)(6) of the Act (15 ■ c. Adding paragraphs (a)(4) and (5); U.S.C. 78o(b)(6)); and and (3) Section 17(b) of the Act (15 U.S.C. ■ d. Revising paragraph (b) introductory 78q(b)). text. The additions and revisions read as (e) An SBSEF–B shall be exempt from follows: the Securities Investor Protection Act. * * * * * (a) * * * (4) Has registered with the Commission as a security-based swap execution facility pursuant § 242.803 of this chapter and provides a market place or facilities for no securities other than security-based swaps; or (5) Has registered with the Commission as a clearing agency pursuant to section 17A of the Act (15 U.S.C. 78q–1) and limits its exchange functions to operation of a trading session that is designed to further the PO 00000 Frm 00131 Fmt 4701 Sfmt 4700 19. The authority citation for part 242 is revised to read as follows: ■ Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78c–4, 78g(c)(2), 78i(a), 78j, 78k– 1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 78q(a), 78q(b), 78q(h), 78w(a), 78dd–1, 78mm, 80a–23, 80a–29, 80a–37, and 8343. 20. The heading for part 242 is revised to read as set forth above. ■ 21. Add §§ 242.800 through 242.835 to read as follows: ■ E:\FR\FM\15DER2.SGM 15DER2 87286 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations Regulation SE—Registration and Regulation of Security-Based Swap Execution Facilities Sec. ddrumheller on DSK120RN23PROD with RULES2 * * * * * 242.800 Scope. 242.801 Applicable provisions. 242.802 Definitions. 242.803 Requirements and procedures for registration. 242.804 Listing products for trading by certification. 242.805 Voluntary submission of new products for Commission review and approval. 242.806 Voluntary submission of rules for Commission review and approval. 242.807 Self-certification of rules. 242.808 Availability of public information. 242.809 Stay of certification and tolling of review period pending jurisdictional determination. 242.810 Product filings by security-based swap execution facilities that are not yet registered and by dormant security-based swap execution facilities. 242.811 Information relating to securitybased swap execution facility compliance. 242.812 Enforceability. 242.813 Prohibited use of data collected for regulation purposes. 242.814 Entity operating both a national securities exchange and security-based swap execution facility. 242.815 Methods of execution for Required and Permitted Transactions. 242.816 Trade execution requirement and exemptions therefrom. 242.817 Trade execution compliance schedule. 242.818 Core Principle 1—Compliance with core principles. 242.819 Core Principle 2—Compliance with rules. 242.820 Core Principle 3—Security-based swaps not readily susceptible to manipulation. 242.821 Core Principle 4—Monitoring of trading and trade processing. 242.822 Core Principle 5—Ability to obtain information. 242.823 Core Principle 6—Financial integrity of transactions. 242.824 Core Principle 7—Emergency authority. 242.825 Core Principle 8—Timely publication of trading information. 242.826 Core Principle 9—Recordkeeping and reporting. 242.827 Core Principle 10—Antitrust considerations. 242.828 Core Principle 11—Conflicts of interest. 242.829 Core Principle 12—Financial resources. 242.830 Core Principle 13—System safeguards. 242.831 Core Principle 14—Designation of chief compliance officers. 242.832 Application of the trade execution requirement to cross-border securitybased swap transactions. 242.833 Cross-border exemptions. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 242.834 Mitigation of conflicts of interest of security-based swap execution facilities and certain exchanges. 242.835 Notice to Commission by securitybased swap execution facility of final disciplinary action or denial or limitation of access. § 242.800 Scope. The provisions of §§ 242.800 through 242.835 shall apply to every securitybased swap execution facility that is registered or is applying to become registered as a security-based swap execution facility under section 3D of the Securities Exchange Act (‘‘Act’’). § 242.801 Applicable provisions. A security-based swap execution facility shall comply with the requirements of §§ 242.800 through 242.835 and all other applicable Commission rules, including any related definitions and cross- referenced sections. § 242.802 Definitions. The following terms, and any other terms defined within §§ 242.800 through 242.835, are defined as follows solely for purposes of §§ 242.800 through 242.835: Business day means the intraday period of time starting at 8:15 a.m. and ending at 4:45 p.m. eastern standard time or eastern daylight saving time, whichever is currently in effect in Washington, DC, on all days except Saturdays, Sundays, and Federal holidays in Washington, DC. Committee member means a member, or functional equivalent thereof, of any committee of a security-based swap execution facility. Correcting trade means a trade executed and submitted for clearing to a registered clearing agency with the same terms and conditions as an error trade other than any corrections to any operational or clerical error and the time of execution. Disciplinary committee means any person or committee of persons, or any subcommittee thereof, that is authorized by a security-based swap execution facility or SBS exchange to issue disciplinary charges, to conduct disciplinary proceedings, to settle disciplinary charges, to impose disciplinary sanctions, or to hear appeals thereof in cases involving any violation of the rules of the securitybased swap execution facility or SBS exchange, except those cases where the person or committee is authorized summarily to impose minor penalties for violating rules regarding decorum, attire, the timely submission of accurate records for clearing or verifying each PO 00000 Frm 00132 Fmt 4701 Sfmt 4700 day’s transactions, or other similar activities. Dormant product means: (1) Any security-based swap listed on security-based swap execution facility that has no open interest and in which no trading has occurred for a period of 12 complete calendar months following a certification to, or approval by, the Commission; provided, however, that no security-based swap initially and originally certified to, or approved by, the Commission within the preceding 36 complete calendar months shall be considered to be a dormant product; (2) Any security-based swap of a dormant security-based swap execution facility; or (3) Any security-based swap not otherwise a dormant product that a security-based swap execution facility self-declares through certification to be a dormant product. Dormant rule means: (1) Any rule of a security-based swap execution facility which remains unimplemented for 12 consecutive calendar months following a certification with, or an approval by, the Commission; or (2) Any rule or rule amendment of a dormant security-based swap execution facility. Dormant security-based swap execution facility means a securitybased swap execution facility on which no trading has occurred for the previous 12 consecutive calendar months; provided, however, that no securitybased swap execution facility shall be considered to be a dormant securitybased swap execution facility if its initial and original Commission order of registration was issued within the preceding 36 consecutive calendar months. Electronic trading facility means a trading facility that operates by means of an electronic or telecommunications network and maintains an automated audit trail of bids, offers, and the matching orders or the execution of transactions on the facility. Emergency means any occurrence or circumstance that, in the opinion of the governing board of a security-based swap execution facility, or a person or persons duly authorized to issue such an opinion on behalf of the governing board of the security-based swap execution facility under circumstances and pursuant to procedures that are specified by rule, requires immediate action and threatens or may threaten such things as the fair and orderly trading in, or the liquidation of or delivery pursuant to, any security-based swaps, including: E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations (1) Any manipulative or attempted manipulative activity; (2) Any actual, attempted, or threatened corner, squeeze, congestion, or undue concentration of positions; (3) Any circumstances which may materially affect the performance of security-based swaps or transactions, including failure of the payment system or the bankruptcy or insolvency of any market participant; (4) Any action taken by any governmental body, or any other security-based swap execution facility, market, or facility which may have a direct impact on trading or clearing and settlement; and (5) Any other circumstance which may have a severe, adverse effect upon the functioning of the security-based swap execution facility. Employee means any person hired or otherwise employed on a salaried or contract basis by a security-based swap execution facility, but does not include: (1) Any governing board member compensated by the security-based swap execution facility solely for governing board activities; or (2) Any committee member compensated by a security-based swap execution facility solely for committee activities; or (3) Any consultant hired by a security-based swap execution facility. Error trade means any trade executed on or subject to the rules of a securitybased swap execution facility that contains an operational or clerical error. Governing board means the board of directors of a security-based swap execution facility, or for a securitybased swap execution facility whose organizational structure does not include a board of directors, a body performing a function similar to a board of directors. Governing board member means a member, or functional equivalent thereof, of the governing board of a security-based swap execution facility. Member, with respect to a national securities exchange, has the same meaning as in section 3(a)(3) of the Act. Member, with respect to a securitybased swap execution facility, means an individual, association, partnership, corporation, or trust owning or holding a membership in, admitted to membership representation on, or having trading privileges on the security-based swap execution facility. Non-U.S. member means a member of a security-based swap execution facility that is not a U.S. person. Offsetting trade means a trade executed and submitted for clearing to a registered clearing agency with terms and conditions that economically VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 reverse an error trade that was accepted for clearing. Order book means an electronic trading facility, a trading facility, or a trading system or platform in which all market participants in the trading system or platform have the ability to enter multiple bids and offers, observe or receive bids and offers entered by other market participants, and transact on such bids and offers. Oversight panel means any panel, or any subcommittee thereof, authorized by a security-based swap execution facility or security-based swap exchange (‘‘SBS exchange’’) to recommend or establish policies or procedures with respect to the surveillance, compliance, rule enforcement, or disciplinary responsibilities of the security-based swap execution facility or SBS exchange. Records has the meaning as in section 3(a)(37) of the Act (15 U.S.C. 78c(a)(37)). Rule means any constitutional provision, article of incorporation, bylaw, rule, regulation, resolution, interpretation, stated policy, advisory, terms and conditions, trading protocol, agreement, or instrument corresponding thereto, including those that authorize a response or establish standards for responding to a specific emergency, and any amendment or addition thereto or repeal thereof, made or issued by a security-based swap execution facility or by the governing board thereof or any committee thereof, in whatever form adopted. SBS exchange means a national securities exchange that posts or makes available for trading security-based swaps. Security-based swap execution facility has the same meaning as in section 3(a)(77) of the Act (15 U.S.C. 78c(a)(77)) but does not include an entity that is registered with the Commission as a clearing agency pursuant to section 17A of the Act (15 U.S.C. 78q–1) and limits its security-based swap execution facility functions to operation of a trading session that is designed to further the accuracy of end-of-day valuations. Senior officer means the chief executive officer or other equivalent officer of a security-based swap execution facility. Terms and conditions means any definition of the trading unit or the specific asset underlying a securitybased swap, description of the payments to be exchanged under a security-based swap, specification of cash settlement or delivery standards and procedures, and establishment of buyers’ and sellers’ rights and obligations under the security-based swap. Terms and PO 00000 Frm 00133 Fmt 4701 Sfmt 4700 87287 conditions of a security-based swap include provisions relating to the following: (1) Identification of the major group, category, type, or class in which the security-based swap falls (such as a credit or equity security-based swap) and of any further sub-group, category, type, or class that further describes the security-based swap; (2) Notional amounts, quantity standards, or other unit size characteristics; (3) Any applicable premiums or discounts for delivery of a non-par product; (4) Trading hours and the listing of security-based swaps; (5) Pricing basis for establishing the payment obligations under, and markto-market value of, the security-based swap including, as applicable, the accrual start dates, termination, or maturity dates, and, for each leg of the security-based swap, the initial cash flow components, spreads, and points, and the relevant indexes, prices, rates, coupons, or other price reference measures; (6) Any price limits, trading halts, or circuit breaker provisions, and procedures for the establishment of daily settlement prices; (7) Payment and reset frequency, day count conventions, business calendars, and accrual features; (8) If physical delivery applies, delivery standards and procedures, including fees related to delivery or the delivery process, alternatives to delivery, and applicable penalties or sanctions for failure to perform; (9) If cash-settled, the definition, composition, calculation, and revision of the cash settlement price, and the settlement currency; (10) Payment or collection of option premiums or margins; (11) Option exercise price, if it is constant, and method for calculating the exercise price, if it is variable; (12) Threshold prices for an option, the existence of which is contingent upon those prices; (13) Any restrictions or requirements for exercising an option; and (14) Life cycle events. Trading facility. (1) In general. The term trading facility means a person or group of persons that constitutes, maintains, or provides a physical or electronic facility or system in which multiple participants have the ability to execute or trade agreements, contracts, or transactions: (i) By accepting bids or offers made by other participants that are open to multiple participants in the facility or system; or E:\FR\FM\15DER2.SGM 15DER2 87288 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations (ii) Through the interaction of multiple bids or multiple offers within a system with a pre- determined nondiscretionary automated trade matching and execution algorithm. (2) Exclusions. (i) The term trading facility does not include: (A) A person or group of persons solely because the person or group of persons constitutes, maintains, or provides an electronic facility or system that enables participants to negotiate the terms of and enter into bilateral transactions as a result of communications exchanged by the parties and not from interaction of multiple bids and multiple offers within a predetermined, nondiscretionary automated trade matching and execution algorithm; (B) A government securities dealer or government securities broker, to the extent that the dealer or broker executes or trades agreements, contracts, or transactions in government securities, or assists persons in communicating about, negotiating, entering into, executing, or trading an agreement, contract, or transaction in government securities (as the terms government securities dealer, government securities broker, and government securities are defined in section 3(a) of the Act); or (C) A facility on which bids and offers, and acceptances of bids and offers effected on the facility, are not binding. (ii) Any person, group of persons, dealer, broker, or facility described in paragraphs (2)(i)(A) through (C) of this definition of trading facility is excluded from the meaning of the term ‘‘trading facility’’ without any prior specific approval, certification, or other action by the Commission. (3) Special rule. A person or group of persons that would not otherwise constitute a trading facility shall not be considered to be a trading facility solely as a result of the submission to a registered clearing agency of transactions executed on or through the person or group of persons. U.S. person has the same meaning as in § 240.3a71–3(a)(4) of this chapter. Note 1 to § 242.802. The Commission has not yet adopted a definition of ‘‘block trade.’’ ddrumheller on DSK120RN23PROD with RULES2 § 242.803 Requirements and procedures for registration. (a) Requirements for registration. (1) Any person operating a facility that offers a trading system or platform in which more than one market participant has the ability to execute or trade security-based swaps with more than one other market participant on the system or platform shall register the VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 facility as a security-based swap execution facility under this section or as a national securities exchange pursuant to section 6 of the Act. (2) A security-based swap execution facility shall, at a minimum, offer an order book. (3) A security-based swap execution facility is not required to provide an order book under this section for transactions defined in § 242.815(d)(2), (3), and (4) except that a security-based swap execution facility must provide an order book under this section for Required Transactions that are components of transactions defined in § 242.815(d)(2), (3), and (4) when such Required Transactions are not executed as components of transactions defined in § 242.815(d)(2), (3), and (4). (b) Procedures for full registration. (1) Request to register. An entity requesting registration as a security-based swap execution facility shall: (i) File electronically a complete Form SBSEF (referenced in § 249.1701), or any successor forms, and all information and documentation described in such forms with the Commission using the EDGAR system and, for the information specified in the Registration Instructions to Form SBSEF, as an Interactive Data File in accordance with § 232.405 of this chapter; and (ii) Provide to the Commission, upon the Commission’s request, any additional information and documentation necessary to review an application. (2) Request for confidential treatment. (i) An applicant requesting registration as a security-based swap execution facility shall identify with particularity any information in the application that will be subject to a request for confidential treatment pursuant to § 240.24b–2 of this chapter. (ii) As set forth in § 242.808, certain information provided in an application shall be made publicly available. (3) Amendment of application prior to full registration. An applicant amending a pending application for registration as a security-based swap execution facility or requesting an amendment to an order of registration shall file an amended application electronically with the Commission using the EDGAR system and, for the information specified in the Registration Instructions to Form SBSEF, as an Interactive Data File in accordance with § 232.405 of this chapter. (4) Effect of incomplete application. If an application is incomplete pursuant to paragraph (b)(1) of this section, the Commission shall notify the applicant that its application will not be deemed PO 00000 Frm 00134 Fmt 4701 Sfmt 4700 to have been submitted for purposes of the Commission’s review. (5) Commission review period. The Commission shall approve or deny an application for registration as a securitybased swap execution facility within 180 days of the filing of the application. If the Commission notifies the person that its application is materially incomplete and specifies the deficiencies in the application, the running of the 180-day period shall be stayed from the time of such notification until the application is resubmitted in completed form, provided that the Commission shall have not less than 60 days to approve or deny the application from the time the application is resubmitted in completed form. (6) Commission determination. (i) The Commission shall issue an order granting registration upon a Commission determination, in its own discretion, that the applicant has demonstrated compliance with the Act and the Commission’s rules applicable to security-based swap execution facilities. If deemed appropriate, the Commission may issue an order granting registration subject to conditions. (ii) The Commission may issue an order denying registration upon a Commission determination, in its own discretion, that the applicant has not demonstrated compliance with the Act and the Commission’s rules applicable to security-based swap execution facilities. If the Commission denies an application, it shall specify the grounds for the denial. (c) Reinstatement of dormant registration. A dormant security-based swap execution facility may reinstate its registration under the procedures of paragraph (b) of this section. The applicant may rely upon previously submitted materials if such materials accurately describe the dormant security-based swap execution facility’s conditions at the time that it applies for reinstatement of its registration. (d) Request for transfer of registration. (1) A security-based swap execution facility seeking to transfer its registration from its current legal entity to a new legal entity as a result of a corporate change shall file a request for approval to transfer such registration with the Commission in the form and manner specified by the Commission. (2) A request for transfer of registration shall be filed no later than three months prior to the anticipated corporate change; or in the event that the security-based swap execution facility could not have known of the anticipated change three months prior E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations to the anticipated change, as soon as it knows of such change. (3) The request for transfer of registration shall include the following: (i) The underlying agreement that governs the corporate change; (ii) A description of the corporate change, including the reason for the change and its impact on the securitybased swap execution facility, including its governance and operations, and its impact on the rights and obligations of members; (iii) A discussion of the transferee’s ability to comply with the Act, including the core principles applicable to security-based swap execution facilities and the Commission’s rules thereunder; (iv) The governing documents of the transferee, including, but not limited to, articles of incorporation and bylaws; (v) The transferee’s rules marked to show changes from the current rules of the security-based swap execution facility; (vi) A representation by the transferee that it: (A) Will be the surviving entity and successor-in-interest to the transferor security-based swap execution facility and will retain and assume, without limitation, all of the assets and liabilities of the transferor; (B) Will assume responsibility for complying with all applicable provisions of the Act and the Commission’s rules thereunder; (C) Will assume, maintain, and enforce all rules implementing and complying with the core principles applicable to security-based swap execution facilities, including the adoption of the transferor’s rulebook, as amended in the request, and that any such amendments will be submitted to the Commission pursuant to § 242.806 or § 242.807; (D) Will comply with all regulatory responsibilities except if otherwise indicated in the request, and will maintain and enforce all regulatory programs; and (E) Will notify members of all changes to the transferor’s rulebook prior to the transfer and will further notify members of the concurrent transfer of the registration to the transferee upon Commission approval and issuance of an order permitting this transfer. (vii) A representation by the transferee that upon the transfer: (A) It will assume responsibility for and maintain compliance with core principles for all security-based swaps previously made available for trading through the transferor, whether by certification or approval; and VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 (B) None of the proposed rule changes will affect the rights and obligations of any member. (4) Upon review of a request for transfer of registration, the Commission, as soon as practicable, shall issue an order either approving or denying the request. (e) Request for withdrawal of application for registration. An applicant for registration as a securitybased swap execution facility may withdraw its application submitted pursuant to paragraph (b) of this section by filing a withdrawal request electronically with the Commission using the EDGAR system. Withdrawal of an application for registration shall not affect any action taken or to be taken by the Commission based upon actions, activities, or events occurring during the time that the application was pending with the Commission. (f) Request for vacation of registration. A security-based swap execution facility may request that its registration be vacated by filing a vacation request electronically with the Commission using the EDGAR system at least 90 days prior to the date that the vacation is requested to take effect. Upon receipt of such request, the Commission shall promptly order the vacation to be effective upon the date named in the request and send a copy of the request and its order to all other security-based swap execution facilities, SBS exchanges, and registered clearing agencies that clear security-based swaps. Vacation of registration shall not affect any action taken or to be taken by the Commission based upon actions, activities, or events occurring during the time that the security-based swap execution facility was registered by the Commission. From and after the date upon which the vacation became effective the said security-based swap execution facility can thereafter be registered again by applying to the Commission in the manner provided in paragraph (b) of this section for an original application. § 242.804 Listing products for trading by certification. (a) General. A security-based swap execution facility must comply with the submission requirements of this section prior to listing a product for trading that has not been approved under § 242.805 or that remains a dormant product subsequent to being submitted under this section or approved under § 242.805. A submission shall comply with the following conditions: (1) The security-based swap execution facility has filed its submission PO 00000 Frm 00135 Fmt 4701 Sfmt 4700 87289 electronically with the Commission using the EFFS system; (2) The Commission has received the submission by the open of business on the business day that is 10 business days preceding the product’s listing; and (3) The submission includes: (i) A copy of the submission cover sheet in accordance with the instructions therein; (ii) A copy of the product’s rules, including all rules related to its terms and conditions; (iii) The intended listing date; (iv) A certification by the securitybased swap execution facility that the product to be listed complies with the Act and the Commission’s rules thereunder; (v) A concise explanation and analysis of the product and its compliance with applicable provisions of the Act, including core principles, and the Commission’s rules thereunder. This explanation and analysis shall either be accompanied by the documentation relied upon to establish the basis for compliance with applicable law, or incorporate information contained in such documentation, with appropriate citations to data sources; (vi) A certification that the securitybased swap execution facility posted a notice of pending product certification with the Commission and a copy of the submission, concurrent with the filing of a submission with the Commission, on the security-based swap execution facility’s website. Information that the security-based swap execution facility seeks to keep confidential may be redacted from the documents published on the security-based swap execution’s website but must be republished consistent with any determination made pursuant to § 240.24b–2 of this chapter; and (vii) A request for confidential treatment, if appropriate, as permitted under § 240.24b–2 of this chapter. (b) Additional information. If requested by Commission staff, a security-based swap execution facility shall provide any additional evidence, information, or data that demonstrates that the security-based swap meets, initially or on a continuing basis, the requirements of the Act or the Commission’s rules or policies thereunder. (c) Stay of certification of product. (1) General. The Commission may stay the certification of a product submitted pursuant to paragraph (a) of this section by issuing a notification informing the security-based swap execution facility that the Commission is staying the certification of the product on the E:\FR\FM\15DER2.SGM 15DER2 87290 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations grounds that the product presents novel or complex issues that require additional time to analyze, the product is accompanied by an inadequate explanation, or the product is potentially inconsistent with the Act or the Commission’s rules thereunder. The Commission will have an additional 90 days from the date of the notification to conduct the review. (2) Public comment. The Commission shall provide a 30-day comment period within the 90-day period in which the stay is in effect, as described in paragraph (c)(1) of this section. The Commission shall publish a notice of the 30-day comment period on the Commission’s website. Comments from the public shall be submitted as specified in that notice. (3) Expiration of a stay of certification of product. A product subject to a stay pursuant to this paragraph shall become effective, pursuant to the certification, at the expiration of the 90-day review period described in paragraph (c)(1) of this section, unless the Commission withdraws the stay prior to that time, or the Commission notifies the securitybased swap execution facility during the 90-day time period that it objects to the proposed certification on the grounds that the product is inconsistent with the Act or the Commission’s rules. ddrumheller on DSK120RN23PROD with RULES2 § 242.805 Voluntary submission of new products for Commission review and approval. (a) Request for approval. A securitybased swap execution facility may request that the Commission approve a new or dormant product prior to listing the product for trading, or if a product was initially submitted under § 242.804, subsequent to listing the product for trading. A submission requesting approval shall: (1) Be filed electronically with the Commission using the EFFS system; (2) Include a copy of the submission cover sheet in accordance with the instructions therein; (3) Include a copy of the rules that set forth the security-based swap’s terms and conditions; (4) Include an explanation and analysis of the product and its compliance with applicable provisions of the Act, including the core principles and the Commission’s rules thereunder. This explanation and analysis shall either be accompanied by the documentation relied upon to establish the basis for compliance with the applicable law, or incorporate information contained in such documentation, with appropriate citations to data sources; VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 (5) Describe any agreements or contracts entered into with other parties that enable the security-based swap execution facility to carry out its responsibilities; (6) Include, if appropriate, a request for confidential treatment as permitted under § 240.24b–2 of this chapter; (7) Certify that the security-based swap execution facility posted a notice of its request for Commission approval of the new product and a copy of the submission, concurrent with the filing of a submission with the Commission, on the security-based swap execution facility’s website. Information that the security-based swap execution facility seeks to keep confidential may be redacted from the documents published on the security-based swap execution facility’s website but must be republished consistent with any determination made pursuant to § 240.24b–2 of this chapter; and (8) Include, if requested by Commission staff, additional evidence, information, or data demonstrating that the security-based swap meets, initially or on a continuing basis, the requirements of the Act, or other requirement for registration under the Act, or the Commission’s rules or policies thereunder. The security-based swap execution facility shall submit the requested information by the open of business on the date that is two business days from the date of request by Commission staff, or at the conclusion of such extended period agreed to by Commission staff after timely receipt of a written request from the securitybased swap execution facility. (b) Standard for review and approval. The Commission shall approve a new product unless the terms and conditions of the product violate the Act or the Commission’s rules thereunder. (c) Forty-five-day review. A product submitted for Commission approval under this paragraph shall be deemed approved by the Commission 45 days after receipt by the Commission, or at the conclusion of an extended period as provided under paragraph (d) of this section, unless notified otherwise within the applicable period, if: (1) The submission complies with the requirements of paragraph (a) of this section; and (2) The submitting security-based swap execution facility does not amend the terms or conditions of the product or supplement the request for approval, except as requested by the Commission or for correction of typographical errors, renumbering, or other non-substantive revisions, during that period. Any voluntary, substantive amendment by the security-based swap execution PO 00000 Frm 00136 Fmt 4701 Sfmt 4700 facility will be treated as a new submission under this section. (d) Extension of time. The Commission may extend the 45-day review period in paragraph (c) of this section for: (1) An additional 45 days, if the product raises novel or complex issues that require additional time to analyze, in which case the Commission shall notify the security-based swap execution facility within the initial 45day review period and shall briefly describe the nature of the specific issue(s) for which additional time for review is required; or (2) Any extended review period to which the security-based swap execution facility agrees in writing. (e) Notice of non-approval. The Commission, at any time during its review under this section, may notify the security-based swap execution facility that it will not, or is unable to, approve the product. This notification will briefly specify the nature of the issues raised and the specific provision of the Act or the Commission’s rules thereunder, including the form or content requirements of paragraph (a) of this section, that the product violates, appears to violate, or potentially violates but which cannot be ascertained from the submission. (f) Effect of non-approval. (1) Notification to a security-based swap execution facility under paragraph (e) of this section of the Commission’s determination not to approve a product does not prejudice the security-based swap execution facility from subsequently submitting a revised version of the product for Commission approval, or from submitting the product as initially proposed pursuant to a supplemented submission. (2) Notification to a security-based swap execution facility under paragraph (e) of this section of the Commission’s refusal to approve a product shall be presumptive evidence that the securitybased swap execution facility may not truthfully certify under § 242.804 that the same, or substantially the same, product does not violate the Act or the Commission’s rules thereunder. § 242.806 Voluntary submission of rules for Commission review and approval. (a) Request for approval of rules. A security-based swap execution facility may request that the Commission approve a new rule, rule amendment, or dormant rule prior to implementation of the rule, or if the request was initially submitted under § 242.806 or § 242.807, subsequent to implementation of the rule. A request for approval shall: E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations (1) Be filed electronically with the Commission using the EFFS system; (2) Include a copy of the submission cover sheet in accordance with the instructions therein; (3) Set forth the text of the rule or rule amendment (in the case of a rule amendment, deletions and additions must be indicated); (4) Describe the proposed effective date of the rule or rule amendment and any action taken or anticipated to be taken to adopt the proposed rule by the security-based swap execution facility or by its governing board or by any committee thereof, and cite the rules of the security-based swap execution facility that authorize the adoption of the proposed rule; (5) Provide an explanation and analysis of the operation, purpose, and effect of the proposed rule or rule amendment and its compliance with applicable provisions of the Act, including the core principles relating to security-based swap execution facilities and the Commission’s rules thereunder and, as applicable, a description of the anticipated benefits to market participants or others, any potential anticompetitive effects on market participants or others, and how the rule fits into the security-based swap execution facility’s framework of regulation; (6) Certify that the security-based swap execution facility posted a notice of the pending rule with the Commission and a copy of the submission, concurrent with the filing of a submission with the Commission, on the security-based swap execution facility’s website. Information that the security-based swap execution facility seeks to keep confidential may be redacted from the documents published on the security-based swap execution facility’s website but must be republished consistent with any determination made pursuant to § 240.24b–2 of this chapter; (7) Provide additional information which may be beneficial to the Commission in analyzing the new rule or rule amendment. If a proposed rule affects, directly or indirectly, the application of any other rule of the security-based swap execution facility, the pertinent text of any such rule must be set forth and the anticipated effect described; (8) Provide a brief explanation of any substantive opposing views expressed to the security-based swap execution facility by governing board or committee members, members of the security-based swap execution facility, or market participants that were not incorporated VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 into the rule, or a statement that no such opposing views were expressed; and (9) As appropriate, include a request for confidential treatment as permitted under § 240.24b–2 of this chapter. (b) Standard for review and approval. The Commission shall approve a new rule or rule amendment unless the rule or rule amendment is inconsistent with the Act or the Commission’s rules thereunder. (c) Forty-five-day review. A rule or rule amendment submitted for Commission approval under paragraph (a) of this section shall be deemed approved by the Commission 45 days after receipt by the Commission, or at the conclusion of such extended period as provided under paragraph (d) of this section, unless the security-based swap execution facility is notified otherwise within the applicable period, if: (1) The submission complies with the requirements of paragraph (a) of this section; (2) The security-based swap execution facility does not amend the proposed rule or supplement the submission, except as requested by the Commission, during the pendency of the review period, other than for correction of typographical errors, renumbering, or other non- substantive revisions. Any amendment or supplementation not requested by the Commission will be treated as the submission of a new filing under this section. (d) Extension of time for review. The Commission may further extend the review period in paragraph (c) of this section for: (1) An additional 45 days, if the proposed rule or rule amendment raises novel or complex issues that require additional time for review or is of major economic significance, the submission is incomplete, or the requestor does not respond completely to Commission questions in a timely manner, in which case the Commission shall notify the submitting security-based swap execution facility within the initial 45day review period and shall briefly describe the nature of the specific issues for which additional time for review shall be required; or (2) Any period, beyond the additional 45 days provided in paragraph (d)(1) of this section, to which the security-based swap execution facility agrees in writing. (e) Notice of non-approval. Any time during its review under this section, the Commission may notify the securitybased swap execution facility that it will not, or is unable to, approve the new rule or rule amendment. This notification will briefly specify the nature of the issues raised and the PO 00000 Frm 00137 Fmt 4701 Sfmt 4700 87291 specific provision of the Act or the Commission’s rules thereunder, including the form or content requirements of this section, with which the new rule or rule amendment is inconsistent or appears to be inconsistent with the Act or the Commission’s rules thereunder. (f) Effect of non-approval. (1) Notification to a security-based swap execution facility under paragraph (e) of this section does not prevent the security-based swap execution facility from subsequently submitting a revised version of the proposed rule or rule amendment for Commission review and approval or from submitting the new rule or rule amendment as initially proposed in a supplemented submission. The revised submission will be reviewed without prejudice. (2) Notification to a security-based swap execution facility under paragraph (e) of this section of the Commission’s determination not to approve a proposed rule or rule amendment shall be presumptive evidence that the security-based swap execution facility may not truthfully certify the same, or substantially the same, proposed rule or rule amendment under § 242.807(a). (g) Expedited approval. Notwithstanding the provisions of paragraph (c) of this section, changes to a proposed rule or a rule amendment, including changes to terms and conditions of a product that are consistent with the Act and the Commission’s rules thereunder, may be approved by the Commission at such time and under such conditions as the Commission shall specify in the written notification; provided, however, that the Commission may, at any time, alter or revoke the applicability of such a notice to any particular product or rule amendment. § 242.807 Self-certification of rules. (a) Required certification. A securitybased swap execution facility shall comply with the following conditions prior to implementing any rule—other than a rule delisting or withdrawing the certification of a product with no open interest and submitted in compliance with paragraphs (a)(1), (2), and (6) of this section—that has not obtained Commission approval under § 242.806, or that remains a dormant rule subsequent to being submitted under this section or approved under § 242.806. (1) The security-based swap execution facility has filed its submission electronically with the Commission using the EFFS system. (2) The security-based swap execution facility has provided a certification that E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87292 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations it posted a notice of pending certification with the Commission and a copy of the submission, concurrent with the filing of a submission with the Commission, on the security-based swap execution facility’s website. Information that the security-based swap execution facility seeks to keep confidential may be redacted from the documents published on the securitybased swap execution facility’s website, but it must be republished consistent with any determination made pursuant to § 240.24b–2 of this chapter. (3) The Commission has received the submission not later than the open of business on the business day that is 10 business days prior to the security-based swap execution facility’s implementation of the rule or rule amendment. (4) The Commission has not stayed the submission pursuant to § 242.807(c). (5) A new rule or rule amendment that establishes standards for responding to an emergency shall be submitted pursuant to § 242.807(a). A rule or rule amendment implemented under procedures of the governing board to respond to an emergency shall, if practicable, be filed with the Commission prior to implementation or, if not practicable, be filed with the Commission at the earliest possible time after implementation, but in no event more than 24 hours after implementation. Any such submission shall be subject to the certification and stay provisions of paragraphs (b) and (c) of this section. (6) The rule submission shall include: (i) A copy of the submission cover sheet in accordance with the instructions therein (in the case of a rule or rule amendment that responds to an emergency, ‘‘Emergency Rule Certification’’ should be noted in the description section of the submission cover sheet); (ii) The text of the rule (in the case of a rule amendment, deletions and additions must be indicated); (iii) The date of intended implementation; (iv) A certification by the securitybased swap execution facility that the rule complies with the Act and the Commission’s rules thereunder; (v) A concise explanation and analysis of the operation, purpose, and effect of the proposed rule or rule amendment and its compliance with applicable provisions of the Act, including core principles relating to security-based swap execution facilities and the Commission’s rules thereunder; (vi) A brief explanation of any substantive opposing views expressed to the security-based swap execution VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 facility by governing board or committee members, members of the security-based swap execution facility, or market participants, that were not incorporated into the rule, or a statement that no such opposing views were expressed; and (vii) As appropriate, a request for confidential treatment pursuant to the procedures provided in § 240.24b–2 of this chapter. (7) The security-based swap execution facility shall provide, if requested by Commission staff, additional evidence, information, or data that may be beneficial to the Commission in conducting a due diligence assessment of the filing and the security-based swap execution facility’s compliance with any of the requirements of the Act or the Commission’s rules or policies thereunder. (b) Review by the Commission. The Commission shall have 10 business days to review the new rule or rule amendment before the new rule or rule amendment is deemed certified and can be made effective, unless the Commission notifies the security-based swap execution facility during the 10business-day review period that it intends to issue a stay of the certification under paragraph (c) of this section. (c) Stay. (1) Stay of certification of new rule or rule amendment. The Commission may stay the certification of a new rule or rule amendment submitted pursuant to paragraph (a) of this section by issuing a notification informing the security-based swap execution facility that the Commission is staying the certification of the rule or rule amendment on the grounds that the rule or rule amendment presents novel or complex issues that require additional time to analyze, the rule or rule amendment is accompanied by an inadequate explanation, or the rule or rule amendment is potentially inconsistent with the Act or the Commission’s rules thereunder. The Commission will have an additional 90 days from the date of the notification to conduct the review. (2) Public comment. The Commission shall provide a 30-day comment period within the 90-day period in which the stay is in effect, as described in paragraph (c)(1) of this section. The Commission shall publish a notice of the 30-day comment period on the Commission website. Comments from the public shall be submitted as specified in that notice. (3) Expiration of a stay of certification of new rule or rule amendment. A new rule or rule amendment subject to a stay pursuant to this paragraph shall become effective, pursuant to the certification, at PO 00000 Frm 00138 Fmt 4701 Sfmt 4700 the expiration of the 90-day review period described in paragraph (c)(1) of this section, unless the Commission withdraws the stay prior to that time, or the Commission notifies the securitybased swap execution facility during the 90-day time period that it objects to the proposed certification on the grounds that the proposed rule or rule amendment is inconsistent with the Act or the Commission’s rules thereunder. (d) Notification of rule amendments. Notwithstanding the rule certification requirement of paragraph (a) of this section, a security-based swap execution facility may place the following rules or rule amendments into effect without certification to the Commission if the following conditions are met: (1) The security-based swap execution facility provides to the Commission at least weekly a summary notice of all rule amendments made effective pursuant to this paragraph during the preceding week. Such notice must be labeled ‘‘Weekly Notification of Rule Amendments’’ and need not be filed for weeks during which no such actions have been taken. One copy of each such submission shall be furnished electronically using the EFFS system; and (2) The rule governs: (i) Non-substantive revisions. Corrections of typographical errors, renumbering, periodic routine updates to identifying information about the security-based swap execution facility, and other such non-substantive revisions of a product’s terms and conditions that have no effect on the economic characteristics of the product; (ii) Fees. Fees or fee changes, other than fees or fee changes associated with market making or trading incentive programs, that: (A) Total $1.00 or more per contract, and (B) Are established by an independent third party or are unrelated to delivery, trading, clearing, or dispute resolution. (iii) Survey lists. Changes to lists of banks, brokers, dealers, or other entities that provide price or cash market information to an independent third party and that are incorporated by reference as product terms; (iv) Approved brands. Changes in lists of approved brands or markings pursuant to previously certified or Commission approved standards or criteria; (v) Trading months. The initial listing of trading months, which may qualify for implementation without notice pursuant to paragraph (d)(3)(ii)(F) of this section, within the currently established cycle of trading months; or E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations (vi) Minimum tick. Reductions in the minimum price fluctuation (or ‘‘tick’’). (3) Notification of rule amendments not required. Notwithstanding the rule certification requirements of paragraph (a) of this section, a security-based swap execution facility may place the following rules or rule amendments into effect without certification or notice to the Commission if the following conditions are met: (i) The security-based swap execution facility maintains documentation regarding all changes to rules; and (ii) The rule governs: (A) Transfer of membership or ownership. Procedures and forms for the purchase, sale, or transfer of membership or ownership, but not including qualifications for membership or ownership, any right or obligation of membership or ownership, or dues or assessments; (B) Administrative procedures. The organization and administrative procedures of a security-based swap execution facility’s governing bodies such as a governing board, officers, and committees, but not voting requirements, governing board, or committee composition requirements or procedures, decision-making procedures, use or disclosure of material non-public information gained through the performance of official duties, or requirements relating to conflicts of interest; (C) Administration. The routine daily administration, direction, and control of employees, requirements relating to gratuity and similar funds, but not guaranty, reserves, or similar funds; declaration of holidays; and changes to facilities housing the market, trading floor, or trading area; (D) Standards of decorum. Standards of decorum or attire or similar provisions relating to admission to the floor, badges, or visitors, but not the establishment of penalties for violations of such rules; (E) Fees. Fees or fee changes, other than fees or fee changes associated with market making or trading incentive programs, that: (1) Are less than $1.00; or (2) Relate to matters such as dues, badges, telecommunication services, booth space, real-time quotations, historical information, publications, software licenses, or other matters that are administrative in nature; and (F) Trading months. The initial listing of trading months which are within the currently established cycle of trading months. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 § 242.808 Availability of public information. (a) The Commission shall make publicly available on its website the following parts of an application to register as a security-based swap execution facility, unless confidential treatment is obtained pursuant to § 240.24b–2 of this chapter: (1) Transmittal letter and first page of the application cover sheet; (2) Exhibit C; (3) Exhibit G; (4) Exhibit L; and (5) Exhibit M. (b) The Commission shall make publicly available on its website, unless confidential treatment is obtained pursuant to § 240.24b–2 of this chapter, a security-based swap execution facility’s filing of new products pursuant to the self-certification procedures of § 242.804, new products for Commission review and approval pursuant to § 242.805, new rules and rule amendments for Commission review and approval pursuant to § 242.806, and new rules and rule amendments pursuant to the selfcertification procedures of § 242.807. (c) The terms and conditions of a product submitted to the Commission pursuant to § 242.804, 242.805, 242.806, or 242.807 shall be made publicly available at the time of submission unless confidential treatment is obtained pursuant to § 240.24b–2 of this chapter. § 242.809 Staying of certification and tolling of review period pending jurisdictional determination. (a) A product certification made by a security-based swap execution facility pursuant to § 242.804 shall be stayed, or the review period for a product that has been submitted for Commission approval by a security-based swap execution facility pursuant to § 242.805 shall be tolled, upon request for a joint interpretation of whether the product is a swap, security-based swap, or mixed swap made pursuant to § 240.3a68–2 of this chapter by the security-based swap execution facility, the Commission, or the Commodity Futures Trading Commission. (b) The Commission shall provide the security-based swap execution facility with a written notice of the stay or tolling pending issuance of a joint interpretation. (c) The stay shall be withdrawn, or the approval review period shall resume, if a joint interpretation finding that the Commission has jurisdiction over the product is issued. PO 00000 Frm 00139 Fmt 4701 Sfmt 4700 87293 § 242.810 Product filings by securitybased swap execution facilities that are not yet registered and by dormant securitybased swap execution facilities. (a) An applicant for registration as a security-based swap execution facility may submit a security-based swap’s terms and conditions prior to listing the product as part of its application for registration. (b) Any security-based swap terms and conditions or rules submitted as part of a security-based swap execution facility’s application for registration shall be considered for approval by the Commission at the time the Commission issues the security-based swap execution facility’s order of registration. (c) After the Commission issues the order of registration, the security-based swap execution facility shall submit a security-based swap’s terms and conditions, including amendments to such terms and conditions, new rules, or rule amendments pursuant to the procedures in §§ 242.804, 242.805, 242.806, and 242.807. (d) Any security-based swap terms and conditions or rules submitted as part of an application to reinstate the registration of a dormant security-based swap execution facility shall be considered for approval by the Commission at the time the Commission approves the reinstatement of registration of the dormant securitybased swap execution facility. § 242.811 Information relating to securitybased swap execution facility compliance. (a) Request for information. Upon the Commission’s request, a security-based swap execution facility shall file with the Commission information related to its business as a security-based swap execution facility in the form and manner, and within the timeframe, specified by the Commission. (b) Demonstration of compliance. Upon the Commission’s request, a security-based swap execution facility shall file with the Commission a written demonstration, containing supporting data, information, and documents, that it is in compliance with one or more core principles or with its other obligations under the Act or the Commission’s rules thereunder, as the Commission specifies in its request. The security-based swap execution facility shall file such written demonstration in the form and manner, and within the timeframe, specified by the Commission. (c) Equity interest transfer. (1) Equity interest transfer notification. A securitybased swap execution facility shall file with the Commission a notification of any transaction involving the direct or E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87294 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations indirect transfer of 50 percent or more of the equity interest in the securitybased swap execution facility. The Commission may, upon receiving such notification, request supporting documentation of the transaction. (2) Timing of notification. The equity interest transfer notice described in paragraph (c)(1) of this section shall be filed with the Commission in a form and manner specified by the Commission at the earliest possible time, but in no event later than the open of business 10 business days following the date upon which the security-based swap execution facility enters into a firm obligation to transfer the equity interest. (3) Rule filing. Notwithstanding the foregoing, if any aspect of an equity interest transfer described in paragraph (c)(1) of this section requires a securitybased swap execution facility to file a rule, the security-based swap execution facility shall comply with the applicable rule filing requirements of § 242.806 or § 242.807. (4) Certification. Upon an equity interest transfer described in paragraph (c)(1) of this section, the security-based swap execution facility shall file with the Commission, in a form and manner specified by the Commission, a certification that the security-based swap execution facility meets all of the requirements of section 3D of the Act and the Commission rules thereunder, no later than two business days following the date on which the equity interest of 50 percent or more was acquired. (d) Pending legal proceedings. (1) A security-based swap execution facility shall submit to the Commission a copy of the complaint, any dispositive or partially dispositive decision, any notice of appeal filed concerning such decision, and such further documents as the Commission may thereafter request filed in any material legal proceeding to which the security-based swap execution facility is a party or its property or assets is subject. (2) A security-based swap execution facility shall submit to the Commission a copy of the complaint, any dispositive or partially dispositive decision, any notice of appeal filed concerning such decision, and such further documents as the Commission may thereafter request filed in any material legal proceeding instituted against any officer, director, or other official of the security-based swap execution facility from conduct in such person’s capacity as an official of the security-based swap execution facility and alleging violations of: (i) The Act or any rule, regulation, or order under the Act; VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 (ii) The constitution, bylaws, or rules of the security-based swap execution facility; or (iii) The applicable provisions of State law relating to the duties of officers, directors, or other officials of business organizations. (3) All documents required by this paragraph (d) to be submitted to the Commission shall be submitted electronically in a form and manner specified by the Commission within 10 days after the initiation of the legal proceedings to which they relate, after the date of issuance, or after receipt by the security-based swap execution facility of the notice of appeal, as the case may be. (4) For purposes of this paragraph (d), a ‘‘material legal proceeding’’ includes but is not limited to actions involving alleged violations of the Act or the Commission rules thereunder. However, a legal proceeding is not ‘‘material’’ for the purposes of this rule if the proceeding is not in a Federal or State court or if the Commission is a party. § 242.812 Enforceability. (a) A transaction entered into on or pursuant to the rules of a security-based swap execution facility shall not be void, voidable, subject to rescission, otherwise invalidated, or rendered unenforceable as a result of a violation by the security-based swap execution facility of the provisions of section 3D of the Act or the Commission’s rules thereunder. (b) A security-based swap execution facility shall, as soon as technologically practicable after the time of execution of a transaction entered into on or pursuant to the rules of the facility, provide a written record to each counterparty of all of the terms of the transaction that were agreed to on the facility, which shall legally supersede any previous agreement regarding such terms. § 242.813 Prohibited use of data collected for regulatory purposes. A security-based swap execution facility shall not use for business or marketing purposes any proprietary data or personal information it collects or receives, from or on behalf of any person, for the purpose of fulfilling its regulatory obligations; provided, however, that a security-based swap execution facility may use such data or information for business or marketing purposes if the person from whom it collects or receives such data or information clearly consents to the security-based swap execution facility’s use of such data or information in such manner. A security-based swap PO 00000 Frm 00140 Fmt 4701 Sfmt 4700 execution facility shall not condition access to its market(s) or market services on a person’s consent to the securitybased swap execution facility’s use of proprietary data or personal information for business or marketing purposes. A security-based swap execution facility, where necessary for regulatory purposes, may share such data or information with one or more securitybased swap execution facilities or national securities exchanges registered with the Commission. § 242.814 Entity operating both a national securities exchange and security-based swap execution facility. (a) An entity that intends to operate both a national securities exchange and a security-based swap execution facility shall separately register the two facilities pursuant to section 6 of the Act and § 242.803, respectively. (b) A national securities exchange shall, to the extent that the exchange also operates a security-based swap execution facility and uses the same electronic trade execution system for listing and executing trades of securitybased swaps on or through the exchange and the facility, identify whether electronic trading of such security-based swaps is taking place on or through the national securities exchange or the security-based swap execution facility. § 242.815 Methods of execution for Required and Permitted Transactions. (a) Execution methods for Required Transactions. (1) Required Transaction means any transaction involving a security-based swap that is subject to the trade execution requirement in section 3C(h) of the Act. (2) Execution methods. (i) Each Required Transaction that is not a block trade shall be executed on a securitybased swap execution facility in accordance with one of the following methods of execution, except as provided in paragraph (d) or (e) of this section: (A) An order book; or (B) A request-for-quote system that operates in conjunction with an order book. (ii) In providing either one of the execution methods set forth in paragraph (a)(2)(i)(A) or (B) of this section, a security-based swap execution facility may for purposes of execution and communication use any means of interstate commerce, including, but not limited to, the mail, internet, email, and telephone, provided that the chosen execution method satisfies the requirements for order books in § 242.802 of this chapter or in paragraph (a)(3) of this section for request-forquote systems. E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations (3) Request-for-quote system means a trading system or platform in which a market participant transmits a request for a quote to buy or sell a specific instrument to no less than three market participants in the trading system or platform, to which all such market participants may respond. The three market participants shall not be affiliates of or controlled by the requester and shall not be affiliates of or controlled by each other. A securitybased swap execution facility that offers a request-for-quote system in connection with Required Transactions shall provide the following functionality: (i) At the same time that the requester receives the first responsive bid or offer, the security-based swap execution facility shall communicate to the requester any firm bid or offer pertaining to the same instrument resting on any of the security-based swap execution facility’s order books; (ii) The security-based swap execution facility shall provide the requester with the ability to execute against such firm resting bids or offers along with any responsive orders; and (iii) The security-based swap execution facility shall ensure that its trading protocols provide each of its market participants with equal priority in receiving requests for quotes and in transmitting and displaying for execution responsive orders. (b) Time delay requirement for Required Transactions on an order book. (1) Time delay requirement. With regard to Required Transactions, a security-based swap execution facility shall require that a broker or dealer who seeks to either execute against its customer’s order or execute two of its customers’ orders against each other through the security-based swap execution facility’s order book, following some form of pre-arrangement or pre-negotiation of such orders, be subject to at least a 15-second time delay between the entry of those two orders into the order book, such that one side of the potential transaction is disclosed and made available to other market participants before the second side of the potential transaction, whether for the broker’s or dealer’s own account or for a second customer, is submitted for execution. (2) Adjustment of time delay requirement. A security-based swap execution facility may adjust the time period of the 15-second time delay requirement described in paragraph (b)(1) of this section, based upon a security-based swap’s liquidity or other product-specific considerations; however, the time delay shall be set for a sufficient period of time so that an VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 order is exposed to the market and other market participants have a meaningful opportunity to execute against such order. (c) Execution methods for Permitted Transactions. (1) Permitted Transaction means any transaction not involving a security-based swap that is subject to the trade execution requirement in section 3C(h) of the Act. (2) Execution methods. A securitybased swap execution facility may offer any method of execution for each Permitted Transaction. (d) Exceptions to required methods of execution for package transactions. (1) For purposes of this paragraph, a package transaction consists of two or more component transactions executed between two or more counterparties where: (i) At least one component transaction is a Required Transaction; (ii) Execution of each component transaction is contingent upon the execution of all other component transactions; and (iii) The component transactions are priced or quoted together as one economic transaction with simultaneous or near-simultaneous execution of all components. (2) A Required Transaction that is executed as a component of a package transaction that includes a component security-based swap that is subject exclusively to the Commission’s jurisdiction, but is not subject to the clearing requirement under section 3C of the Act and is not intended to be cleared, may be executed on a securitybased swap execution facility in accordance with paragraph (c)(2) of this section as if it were a Permitted Transaction; (3) A Required Transaction that is executed as a component of a package transaction that includes a component that is not a security-based swap may be executed on a security-based swap execution facility in accordance with paragraph (c)(2) of this section as if it were a Permitted Transaction. This provision shall not apply to: (i) A Required Transaction that is executed as a component of a package transaction in which all other nonsecurity-based swap components are U.S. Treasury securities; (ii) A Required Transaction that is executed as a component of a package transaction in which all other nonsecurity-based swap components are contracts for the purchase or sale of a commodity for future delivery; (iii) A Required Transaction that is executed as a component of a package transaction in which all other non- PO 00000 Frm 00141 Fmt 4701 Sfmt 4700 87295 security-based swap components are agency mortgage-backed securities; (iv) A Required Transaction that is executed as a component of a package transaction that includes a component transaction that is the issuance of a bond in a primary market; and (v) A Required Transaction that is executed as a component of a package transaction in which all other nonsecurity-based swap components are swaps that are subject to a trade execution requirement under 17 CFR 37.9. (4) A Required Transaction that is executed as a component of a package transaction that includes a component security-based swap that is not exclusively subject to the Commission’s jurisdiction may be executed on a security-based swap in accordance with paragraph (c)(2) of this section as if it were a Permitted Transaction. (e) Resolution of operational and clerical error trades. (1) A securitybased swap execution facility shall maintain rules and procedures that facilitate the resolution of error trades. Such rules shall be fair, transparent, and consistent; allow for timely resolution; require members to provide prompt notice of an error trade—and, as applicable, offsetting and correcting trades—to the security-based swap execution facility; and permit members to: (i) Execute a correcting trade, in accordance with paragraph (c)(2) of this section, regardless of whether it is a Required or Permitted Transaction, for an error trade that has been rejected from clearing as soon as technologically practicable, but no later than one hour after a registered clearing agency provides notice of the rejection; or (ii) Execute an offsetting trade and a correcting trade, in accordance with paragraph (c)(2) of this section, regardless of whether it is a Required or Permitted Transaction, for an error trade that was accepted for clearing as soon as technologically practicable, but no later than three days after the error trade was accepted for clearing at a registered clearing agency. (2) If a correcting trade is rejected from clearing, then the security-based swap execution facility shall not allow the counterparties to execute another correcting trade. (f) Counterparty anonymity. (1) Except as otherwise required under the Act or the Commission’s rules thereunder, a security-based swap execution facility shall not directly or indirectly, including through a thirdparty service provider, disclose the identity of a counterparty to a securitybased swap that is executed E:\FR\FM\15DER2.SGM 15DER2 87296 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations anonymously and intended to be cleared. (2) A security-based swap execution facility shall establish and enforce rules that prohibit any person from directly or indirectly, including through a thirdparty service provider, disclosing the identity of a counterparty to a securitybased swap that is executed anonymously and intended to be cleared. (3) For purposes of paragraphs (f)(1) and (2) of this section, ‘‘executed anonymously’’ shall include a securitybased swap that is pre-arranged or prenegotiated anonymously, including by a member of the security-based swap execution facility. (4) For a package transaction that includes a component transaction that is not a security-based swap intended to be cleared, disclosing the identity of a counterparty shall not violate paragraphs (f)(1) or (2) of this section. For purposes of this paragraph (f), a ‘‘package transaction’’ consists of two or more component transactions executed between two or more counterparties where: (i) Execution of each component transaction is contingent upon the execution of all other component transactions; and (ii) The component transactions are priced or quoted together as one economic transaction with simultaneous or near-simultaneous execution of all components. (g) Transactions not accepted for clearing. A security-based swap execution facility shall establish and enforce rules that provide that a security-based swap that is intended to be cleared at the time of the transaction, but is not accepted for clearing at a registered clearing agency, shall be void ab initio. ddrumheller on DSK120RN23PROD with RULES2 § 242.816 Trade execution requirement and exemptions therefrom. (a) General. (1) Required submission. A security-based swap execution facility that makes a security-based swap available to trade in accordance with paragraph (b) of this section, shall submit to the Commission its determination with respect to such security-based swap as a rule, pursuant to the procedures under § 242.806 or § 242.807. (2) Listing requirement. A securitybased swap execution facility that makes a security-based swap available to trade must demonstrate that it lists or offers that security-based swap for trading on its trading system or platform. (b) Factors to consider. To make a security-based swap available to trade VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 for purposes of section 3C(h) of the Act, a security-based swap execution facility shall consider, as appropriate, the following factors with respect to such security-based swap: (1) Whether there are ready and willing buyers and sellers; (2) The frequency or size of transactions; (3) The trading volume; (4) The number and types of market participants; (5) The bid/ask spread; or (6) The usual number of resting firm or indicative bids and offers. (c) Applicability. Upon a determination that a security-based swap is available to trade on a securitybased swap execution facility or national securities exchange, all other security-based swap execution facilities and SBS exchanges shall comply with the requirements of section 3C(h) of the Act in listing or offering such securitybased swap for trading. (d) Removal. The Commission may issue a determination that a securitybased swap is no longer available to trade upon determining that no securitybased swap execution facility or SBS exchange lists such security-based swap for trading. (e) Exemptions to trade execution requirement. (1) A security-based swap transaction that is executed as a component of a package transaction that also includes a component transaction that is the issuance of a bond in a primary market is exempt from the trade execution requirement in section 3C(h) of the Act. For purposes of paragraph (e) of this section, a package transaction consists of two or more component transactions executed between two or more counterparties where: (i) At least one component transaction is subject to the trade execution requirement in section 3C(h) of the Act; (ii) Execution of each component transaction is contingent upon the execution of all other component transactions; and (iii) The component transactions are priced or quoted together as one economic transaction with simultaneous or near-simultaneous execution of all components. (2) Section 3C(h) of the Act does not apply to a security-based swap transaction that qualifies for an exception under section 3C(g) of the Act, or any exemption from the clearing requirement that is granted by the Commission, for which the associated requirements are met. (3)(i) Section 3C(h) of the Act does not apply to a security-based swap transaction that is executed between counterparties that qualify as ‘‘eligible PO 00000 Frm 00142 Fmt 4701 Sfmt 4700 affiliate counterparties,’’ as defined below. (ii) For purposes of this paragraph (e)(3), counterparties will be ‘‘eligible affiliate counterparties’’ if: (A) One counterparty, directly or indirectly, holds a majority ownership interest in the other counterparty, and the counterparty that holds the majority interest in the other counterparty reports its financial statements on a consolidated basis under Generally Accepted Accounting Principles or International Financial Reporting Standards, and such consolidated financial statements include the financial results of the majority-owned counterparty; or (B) A third party, directly or indirectly, holds a majority ownership interest in both counterparties, and the third party reports its financial statements on a consolidated basis under Generally Accepted Accounting Principles or International Financial Reporting Standards, and such consolidated financial statements include the financial results of both of the counterparties. (iii) For purposes of this paragraph (e)(3), a counterparty or third party directly or indirectly holds a majority ownership interest if it directly or indirectly holds a majority of the equity securities of an entity, or the right to receive upon dissolution, or the contribution of, a majority of the capital of a partnership. § 242.817 Trade execution compliance schedule. (a) A security-based swap transaction shall be subject to the requirements of section 3C(h) of the Act upon the later of: (1) A determination by the Commission that the security-based swap is required to be cleared as set forth in section 3C(a) or any later compliance date that the Commission may establish as a term or condition of such determination or following a stay and review of such determination pursuant to section 3C(c) of the Act and § 240.3Ca–1 of this chapter thereunder; and (2) Thirty days after the available-totrade determination submission or certification for that security-based swap is, respectively, deemed approved under § 242.806 or deemed certified under § 242.807. (b) Nothing in this section shall prohibit any counterparty from complying voluntarily with the requirements of section 3C(h) of the Act sooner than as provided in paragraph (a) of this section. E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations § 242.818 Core Principle 1—Compliance with core principles. (a) In general. To be registered, and maintain registration, as a securitybased swap execution facility, the security-based swap execution facility shall comply with the core principles described in section 3D of the Act, and any requirement that the Commission may impose by rule or regulation. (b) Reasonable discretion of securitybased swap execution facility. Unless otherwise determined by the Commission, by rule or regulation, a security-based swap execution facility described in paragraph (a) of this section shall have reasonable discretion in establishing the manner in which it complies with the core principles described in section 3D of the Act. ddrumheller on DSK120RN23PROD with RULES2 § 242.819 Core Principle 2—Compliance with rules. (a) General. A security-based swap execution facility shall: (1) Establish and enforce compliance with any rule established by such security-based swap execution facility, including the terms and conditions of the security-based swaps traded or processed on or through the facility, and any limitation on access to the facility; (2) Establish and enforce trading, trade processing, and participation rules that will deter abuses and have the capacity to detect, investigate, and enforce those rules, including means to provide market participants with impartial access to the market and to capture information that may be used in establishing whether rule violations have occurred; and (3) Establish rules governing the operation of the facility, including rules specifying trading procedures to be used in entering and executing orders traded or posted on the facility. (b) Operation of security-based swap execution facility and compliance with rules. (1) A security-based swap execution facility shall establish rules governing the operation of the securitybased swap execution facility, including, but not limited to, rules specifying trading procedures to be followed by members when entering and executing orders traded or posted on the security-based swap execution facility. (2) A security-based swap execution facility shall establish and impartially enforce compliance with the rules of the security-based swap execution facility, including, but not limited to: (i) The terms and conditions of any security-based swaps traded or processed on or through the securitybased swap execution facility; VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 (ii) Access to the security-based swap execution facility; (iii) Trade practice rules; (iv) Audit trail requirements; (v) Disciplinary rules; and (vi) Mandatory trading requirements. (c) Access requirements. (1) Impartial access to markets and market services. A security-based swap execution facility shall provide any eligible contract participant and any independent software vendor with impartial access to its market(s) and market services, including any indicative quote screens or any similar pricing data displays, provided that the facility has: (i) Criteria governing such access that are impartial, transparent, and applied in a fair and non-discriminatory manner; (ii) Procedures whereby eligible contract participants provide the security-based swap execution facility with written or electronic confirmation of their status as eligible contract participants, as defined by the Act and Commission rules thereunder, prior to obtaining access; and (iii) Comparable fee structures for eligible contract participants and independent software vendors receiving comparable access to, or services from, the security-based swap execution facility. (2) Jurisdiction. Prior to granting any eligible contract participant access to its facilities, a security-based swap execution facility shall require that the eligible contract participant consent to its jurisdiction. (3) Limitations on access. A securitybased swap execution facility shall establish and impartially enforce rules governing any decision to allow, deny, suspend, or permanently bar an eligible contract participant’s access to the security-based swap execution facility, including when a decision is made as part of a disciplinary or emergency action taken by the security-based swap execution facility. (4) Commission review with respect to a denial or limitation of access to any service or a denial or conditioning of membership. (i) In general. An application for review by the Commission may be filed by any person who is aggrieved by a determination of a security-based swap execution facility with respect to any final action with respect to a denial or limitation of access to any service offered by the security-based swap execution facility or any final action with respect to a denial or conditioning of membership, as defined in § 242.835(b)(2) of this chapter (Rule 835(b)(2)), in accordance with § 201.442 of this chapter (Rule of Practice 442). PO 00000 Frm 00143 Fmt 4701 Sfmt 4700 87297 (ii) Standard to govern Commission review. In reviewing such a determination, if the Commission finds that the specific grounds on which such denial, limitation, or conditioning is based exist in fact, that such denial, limitation, or conditioning is in accordance with the rules of the security-based swap execution facility, and that such rules are, and were applied in a manner, consistent with the purposes of the Exchange Act, the Commission, by order, shall dismiss the proceeding. If the Commission does not make any such finding or if it finds that such denial, limitation, or conditioning imposes any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act, the Commission, by order, shall set aside the action of the security-based swap execution facility and require it to admit such person to membership or participation or grant such person access to services offered by the security-based swap execution facility. (d) Rule enforcement program. A security-based swap execution facility shall establish and enforce trading, trade processing, and participation rules that will deter abuses and it shall have the capacity to detect, investigate, and enforce those rules. (1) Abusive trading practices prohibited. A security-based swap execution facility shall prohibit abusive trading practices on its markets by members. A security-based swap execution facility that permits intermediation shall prohibit customerrelated abuses including, but not limited to, trading ahead of customer orders, trading against customer orders, accommodation trading, and improper cross trading. Specific trading practices that shall be prohibited include frontrunning, wash trading, pre-arranged trading (except for transactions approved by or certified to the Commission pursuant § 242.806 or § 242.807, respectively), fraudulent trading, money passes, and any other trading practices that a security-based swap execution facility deems to be abusive. A security-based swap execution facility shall also prohibit any other manipulative or disruptive trading practices prohibited by the Act or by the Commission pursuant to Commission regulation. (2) Capacity to detect and investigate rule violations. A security-based swap execution facility shall have arrangements and resources for effective enforcement of its rules. Such arrangements shall include the authority to collect information and documents on both a routine and non-routine basis, including the authority to examine E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87298 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations books and records kept by the securitybased swap execution facility’s members and by persons under investigation. A security-based swap execution facility’s arrangements and resources shall also facilitate the direct supervision of the market and the analysis of data collected to determine whether a rule violation has occurred. (3) Compliance staff and resources. A security-based swap execution facility shall establish and maintain sufficient compliance staff and resources to ensure that it can conduct effective audit trail reviews, trade practice surveillance, market surveillance, and real-time market monitoring. The security-based swap execution facility’s compliance staff shall also be sufficient to address unusual market or trading events as they arise, and to conduct and complete investigations in a timely manner, as set forth in paragraph (d)(6) of this section. (4) Automated trade surveillance system. A security-based swap execution facility shall maintain an automated trade surveillance system capable of detecting potential trade practice violations. The automated trade surveillance system shall load and process daily orders and trades no later than 24 hours after the completion of the trading day. The automated trade surveillance system shall have the capability to detect and flag specific trade execution patterns and trade anomalies; compute, retain, and compare trading statistics; reconstruct the sequence of market activity; perform market analyses; and support system users to perform in-depth analyses and ad hoc queries of trade-related data. (5) Real-time market monitoring. A security-based swap execution facility shall conduct real-time market monitoring of all trading activity on its system(s) or platform(s) to identify any market or system anomalies. A securitybased swap execution facility shall have the authority to adjust trade prices or cancel trades when necessary to mitigate market disrupting events caused by malfunctions in its system(s) or platform(s) or errors in orders submitted by members. Any trade price adjustments or trade cancellations shall be transparent to the market and subject to standards that are clear, fair, and publicly available. (6) Investigations and investigation reports. (i) Procedures. A security-based swap execution facility shall establish and maintain procedures that require its compliance staff to conduct investigations of possible rule violations. An investigation shall be commenced upon the receipt of a request from Commission staff or upon the discovery or receipt of information VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 by the security-based swap execution facility that indicates a reasonable basis for finding that a violation may have occurred or will occur. (ii) Timeliness. Each compliance staff investigation shall be completed in a timely manner. Absent mitigating factors, a timely manner is no later than 12 months after the date that an investigation is opened. Mitigating factors that may reasonably justify an investigation taking longer than 12 months to complete include the complexity of the investigation, the number of firms or individuals involved as potential wrongdoers, the number of potential violations to be investigated, and the volume of documents and data to be examined and analyzed by compliance staff. (iii) Investigation reports when a reasonable basis exists for finding a violation. Compliance staff shall submit a written investigation report for disciplinary action in every instance in which compliance staff determines from surveillance or from an investigation that a reasonable basis exists for finding a rule violation. The investigation report shall include the reason the investigation was initiated; a summary of the complaint, if any; the relevant facts; compliance staff’s analysis and conclusions; and a recommendation as to whether disciplinary action should be pursued. (iv) Investigation reports when no reasonable basis exists for finding a violation. If after conducting an investigation, compliance staff determines that no reasonable basis exists for finding a rule violation, it shall prepare a written report including the reason the investigation was initiated; a summary of the complaint, if any; the relevant facts; and compliance staff’s analysis and conclusions. (v) Warning letters. The rules of a security-based swap execution facility may authorize its compliance staff to issue a warning letter to a person or entity under investigation or to recommend that a disciplinary panel take such an action. No more than one warning letter may be issued to the same person or entity found to have committed the same rule violation within a rolling 12-month period. (e) Regulatory services provided by a third party. (1) Use of regulatory service provider permitted. A security-based swap execution facility may choose to contract with a registered futures association (under section 17 of the Commodity Exchange Act), a board of trade designated as a contract market (under section 5 of the Commodity Exchange Act), a national securities PO 00000 Frm 00144 Fmt 4701 Sfmt 4700 exchange, a national securities association, or another security-based swap execution facility (each a ‘‘regulatory service provider’’), for the provision of services to assist in complying with the Act and Commission rules thereunder, as approved by the Commission. A security-based swap execution facility that chooses to contract with a regulatory service provider shall ensure that such provider has the capacity and resources necessary to provide timely and effective regulatory services, including adequate staff and automated surveillance systems. A security-based swap execution facility shall at all times remain responsible for the performance of any regulatory services received, for compliance with the security-based swap execution facility’s obligations under the Act and Commission rules thereunder, and for the regulatory service provider’s performance on its behalf. (2) Duty to supervise regulatory service provider. A security-based swap execution facility that elects to use the service of a regulatory service provider shall retain sufficient compliance staff to supervise the quality and effectiveness of the regulatory services provided on its behalf. Compliance staff of the security-based swap execution facility shall hold regular meetings with the regulatory service provider to discuss ongoing investigations, trading patterns, market participants, and any other matters of regulatory concern. A security-based swap execution facility shall also conduct periodic reviews of the adequacy and effectiveness of services provided on its behalf. Such reviews shall be documented carefully and made available to the Commission upon request. (3) Regulatory decisions required from the security-based swap execution facility. A security-based swap execution facility that elects to use the service of a regulatory service provider shall retain exclusive authority in all substantive decisions made by its regulatory service provider, including, but not limited to, decisions involving the cancellation of trades, the issuance of disciplinary charges against members, and denials of access to the trading platform for disciplinary reasons. A security-based swap execution facility shall document any instances where its actions differ from those recommended by its regulatory service provider, including the reasons for the course of action recommended by the regulatory service provider and the reasons why the security-based swap execution facility chose a different course of action. E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations (f) Audit trail. A security-based swap execution facility shall establish procedures to capture and retain information that may be used in establishing whether rule violations have occurred. (1) Audit trail required. A securitybased swap execution facility shall capture and retain all audit trail data necessary to detect, investigate, and prevent customer and market abuses. Such data shall be sufficient to reconstruct all indications of interest, requests for quotes, orders, and trades within a reasonable period of time and to provide evidence of any violations of the rules of the security-based swap execution facility. An acceptable audit trail shall also permit the security-based swap execution facility to track a customer order from the time of receipt through execution on the security-based swap execution facility. (2) Elements of an acceptable audit trail program. (i) Original source documents. A security-based swap execution facility’s audit trail shall include original source documents. Original source documents include unalterable, sequentially identified records on which trade execution information is originally recorded, whether recorded manually or electronically. Records for customer orders (whether filled, unfilled, or cancelled, each of which shall be retained or electronically captured) shall reflect the terms of the order, an account identifier that relates back to the account’s owner(s), the time of order entry, and the time of trade execution. A security-based swap execution facility shall require that all orders, indications of interest, and requests for quotes be immediately captured in the audit trail. (ii) Transaction history database. A security-based swap execution facility’s audit trail program shall include an electronic transaction history database. An adequate transaction history database shall include a history of all indications of interest, requests for quotes, orders, and trades entered into a security-based swap execution facility’s trading system or platform, including all order modifications and cancellations. An adequate transaction history database shall also include: (A) All data that are input into the trade entry or matching system for the transaction to match and clear; (B) The customer type indicator code; and (C) Timing and sequencing data adequate to reconstruct trading. (iii) Electronic analysis capability. A security-based swap execution facility’s audit trail program shall include electronic analysis capability with VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 respect to all audit trail data in the transaction history database. Such electronic analysis capability shall ensure that the security-based swap execution facility has the ability to reconstruct indications of interest, requests for quotes, orders, and trades, and identify possible trading violations with respect to both customer and market abuse. (iv) Safe-storage capability. A security-based swap execution facility’s audit trail program shall include the capability to safely store all audit trail data retained in its transaction history database. Such safe-storage capability shall include the capability to store all data in the database in a manner that protects it from unauthorized alteration, as well as from accidental erasure or other loss. Data shall be retained in accordance with the recordkeeping requirements of § 242.826 (Core Principle 9). (3) Enforcement of audit trail requirements. (i) Annual audit trail and recordkeeping reviews. A security-based swap execution facility shall enforce its audit trail and recordkeeping requirements through at least annual reviews of all members and persons and firms subject to the security-based swap execution facility’s recordkeeping rules to verify their compliance with the security-based swap execution facility’s audit trail and recordkeeping requirements. Such reviews shall include, but are not limited to, reviews of randomly selected samples of frontend audit trail data for order routing systems; a review of the process by which user identifications are assigned and user identification records are maintained; a review of usage patterns associated with user identifications to monitor for violations of user identification rules; and reviews of account numbers and customer type indicator codes in trade records to test for accuracy and improper use. (ii) Enforcement program required. A security-based swap execution facility shall establish a program for effective enforcement of its audit trail and recordkeeping requirements. An effective program shall identify members, persons, and firms subject to the security-based swap execution facility’s recordkeeping rules that have failed to maintain high levels of compliance with such requirements, and impose meaningful sanctions when deficiencies are found. Sanctions shall be sufficient to deter recidivist behavior. No more than one warning letter shall be issued to the same person or entity found to have committed the same violation of audit trail or recordkeeping PO 00000 Frm 00145 Fmt 4701 Sfmt 4700 87299 requirements within a rolling 12-month period. (g) Disciplinary procedures and sanctions. A security-based swap execution facility shall establish trading, trade processing, and participation rules that will deter abuses and have the capacity to enforce such rules through prompt and effective disciplinary action, including suspension or expulsion of members that violate the rules of the security-based swap execution facility. (1) Enforcement staff. (i) A securitybased swap execution facility shall establish and maintain sufficient enforcement staff and resources to effectively and promptly prosecute possible rule violations within the disciplinary jurisdiction of the securitybased swap execution facility. (ii) The enforcement staff of a security-based swap execution facility shall not include members or other persons whose interests conflict with their enforcement duties. (iii) A member of the enforcement staff shall not operate under the direction or control of any person or persons with trading privileges at the security-based swap execution facility. (iv) The enforcement staff of a security-based swap execution facility may operate as part of the securitybased swap execution facility’s compliance department. (2) Disciplinary panels. A securitybased swap execution facility shall establish one or more disciplinary panels that are authorized to fulfill their obligations under the rules of this section. Disciplinary panels shall meet the composition requirements of § 242.834(d), and shall not include any members of the security-based swap execution facility’s compliance staff or any person involved in adjudicating any other stage of the same proceeding. (3) Notice of charges. If compliance staff authorized by a security-based swap execution facility or disciplinary panel thereof determines that a reasonable basis exists for finding a violation and adjudication is warranted, it shall direct that the person or entity alleged to have committed the violation be served with a notice of charges. A notice of charges shall adequately state the acts, conduct, or practices in which the respondent is alleged to have engaged; state the rule or rules alleged to have been violated (or about to be violated); advise the respondent that it is entitled, upon request, to a hearing on the charges; and prescribe the period within which a hearing on the charges may be requested. If the rules of the security-based swap execution facility so provide, a notice may also advise: E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87300 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations (i) That failure to request a hearing within the period prescribed in the notice, except for good cause, may be deemed a waiver of the right to a hearing; and (ii) That failure to answer or to deny expressly a charge may be deemed to be an admission of such charge. (4) Right to representation. Upon being served with a notice of charges, a respondent shall have the right to be represented by legal counsel or any other representative of its choosing in all succeeding stages of the disciplinary process, except by any member of the security-based swap execution facility’s governing board or disciplinary panel, any employee of the security-based swap execution facility, or any person substantially related to the underlying investigations, such as a material witness or respondent. (5) Answer to charges. A respondent shall be given a reasonable period of time to file an answer to a notice of charges. The rules of a security-based swap execution facility governing the requirements and timeliness of a respondent’s answer to a notice of charges shall be fair, equitable, and publicly available. (6) Admission or failure to deny charges. The rules of a security-based swap execution facility may provide that, if a respondent admits or fails to deny any of the charges, a disciplinary panel may find that the violations alleged in the notice of charges for which the respondent admitted or failed to deny any of the charges have been committed. If the security-based swap execution facility’s rules so provide, then: (i) The disciplinary panel may impose a sanction for each violation found to have been committed; (ii) The disciplinary panel shall promptly notify the respondent in writing of any sanction to be imposed and shall advise the respondent that the respondent may request a hearing on such sanction within the period of time, which shall be stated in the notice; and (iii) The rules of a security-based swap execution facility may provide that, if a respondent fails to request a hearing within the period of time stated in the notice, the respondent will be deemed to have accepted the sanction. (7) Denial of charges and right to hearing. Where a respondent has requested a hearing on a charge that is denied, or on a sanction set by the disciplinary panel, the respondent shall be given an opportunity for a hearing in accordance with the rules of the security-based swap execution facility. (8) Settlement offers. (i) The rules of a security-based swap execution facility VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 may permit a respondent to submit a written offer of settlement at any time after an investigation report is completed. The disciplinary panel presiding over the matter may accept the offer of settlement, but may not alter the terms of a settlement offer unless the respondent agrees. (ii) The rules of a security-based swap execution facility may provide that, in its discretion, a disciplinary panel may permit the respondent to accept a sanction without either admitting or denying the rule violations upon which the sanction is based. (iii) If an offer of settlement is accepted, the panel accepting the offer shall issue a written decision specifying the rule violations it has reason to believe were committed, including the basis or reasons for the panel’s conclusions, and any sanction to be imposed, which shall include full customer restitution where customer harm is demonstrated, except where the amount of restitution or to whom it should be provided cannot be reasonably determined. If an offer of settlement is accepted without the agreement of the enforcement staff, the decision shall adequately support the disciplinary panel’s acceptance of the settlement. Where applicable, the decision shall also include a statement that the respondent has accepted the sanctions imposed without either admitting or denying the rule violations. (iv) The respondent may withdraw its offer of settlement at any time before final acceptance by a disciplinary panel. If an offer is withdrawn after submission, or is rejected by a disciplinary panel, the respondent shall not be deemed to have made any admissions by reason of the offer of settlement and shall not be otherwise prejudiced by having submitted the offer of settlement. (9) Hearings. A security-based swap execution facility shall adopt rules that provide for the following minimum requirements for any hearing: (i) The hearing shall be fair, shall be conducted before members of the disciplinary panel, and shall be promptly convened after reasonable notice to the respondent. A securitybased swap execution facility need not apply the formal rules of evidence for a hearing; nevertheless, the procedures for the hearing may not be so informal as to deny a fair hearing; (ii) No member of the disciplinary panel for the hearing may have a financial, personal, or other direct interest in the matter under consideration; (iii) In advance of the hearing, the respondent shall be entitled to examine PO 00000 Frm 00146 Fmt 4701 Sfmt 4700 all books, documents, or other evidence in the possession or under the control of the security-based swap execution facility. The security-based swap execution facility may withhold documents that are privileged or constitute attorney work product; were prepared by an employee of the security-based swap execution facility but will not be offered in evidence in the disciplinary proceedings; may disclose a technique or guideline used in examinations, investigations, or enforcement proceedings; or disclose the identity of a confidential source; (iv) The security-based swap execution facility’s enforcement and compliance staffs shall be parties to the hearing, and the enforcement staff shall present their case on those charges and sanctions that are the subject of the hearing; (v) The respondent shall be entitled to appear personally at the hearing, to cross-examine any persons appearing as witnesses at the hearing, to call witnesses, and to present such evidence as may be relevant to the charges; (vi) The security-based swap execution facility shall require persons within its jurisdiction who are called as witnesses to participate in the hearing and produce evidence. The securitybased swap execution facility shall make reasonable efforts to secure the presence of all other persons called as witnesses whose testimony would be relevant. The rules of a security-based swap execution facility may provide that a sanction may be summarily imposed upon any person within its jurisdiction whose actions impede the progress of a hearing; and (vii) If the respondent has requested a hearing, a copy of the hearing shall be made and shall become a part of the record of the proceeding. The record shall not be required to be transcribed unless: (A) The transcript is requested by Commission staff or the respondent; (B) The decision is appealed pursuant to the rules of the security-based swap execution facility; or (C) The decision is reviewed by the Commission pursuant to § 201.442 of this chapter. In all other instances, a summary record of a hearing is permitted. (10) Decisions. Promptly following a hearing conducted in accordance with the rules of the security-based swap execution facility, the disciplinary panel shall render a written decision based upon the weight of the evidence contained in the record of the proceeding and shall provide a copy to the respondent. The decision shall include: E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations (i) The notice of charges or a summary of the charges; (ii) The answer, if any, or a summary of the answer; (iii) A summary of the evidence produced at the hearing or, where appropriate, incorporation by reference of the investigation report; (iv) A statement of findings and conclusions with respect to each charge and a complete explanation of the evidentiary and other basis for such findings and conclusions with respect to each charge; (v) An indication of each specific rule that the respondent was found to have violated; and (vi) A declaration of all sanctions imposed against the respondent, including the basis for such sanctions and the effective date of such sanctions. (11) Emergency disciplinary actions. (i) A security-based swap execution facility may impose a sanction, including suspension, or take other summary action against a person or entity subject to its jurisdiction upon a reasonable belief that such immediate action is necessary to protect the best interest of the market place. (ii) Any emergency disciplinary action shall be taken in accordance with a security-based swap execution facility’s procedures that provide for the following: (A) If practicable, a respondent should be served with a notice before the action is taken, or otherwise at the earliest possible opportunity. The notice shall state the action, briefly state the reasons for the action, and state the effective time and date, and the duration of the action. (B) The respondent shall have the right to be represented by legal counsel or any other representative of its choosing in all proceedings subsequent to the emergency action taken. The respondent shall be given the opportunity for a hearing as soon as reasonably practicable and the hearing shall be conducted before the disciplinary panel pursuant to the rules of the security-based swap execution facility. (C) Promptly following the hearing, the security-based swap execution facility shall render a written decision based upon the weight of the evidence contained in the record of the proceeding and shall provide a copy to the respondent. The decision shall include a description of the summary action taken; the reasons for the summary action; a summary of the evidence produced at the hearing; a statement of findings and conclusions; a determination that the summary action should be affirmed, modified, or VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 reversed; and a declaration of any action to be taken pursuant to the determination, and the effective date and duration of such action. (12) Right to appeal. The rules of a security-based swap execution facility may permit the parties to a proceeding to appeal promptly an adverse decision of a disciplinary panel in all or in certain classes of cases. Such rules may require a party’s notice of appeal to be in writing and to specify the findings, conclusions, or sanctions to which objection are taken. If the rules of a security-based swap execution facility permit appeals, then both the respondent and the enforcement staff shall have the opportunity to appeal and: (i) The security-based swap execution facility shall establish an appellate panel that is authorized to hear appeals. The rules of the security-based swap execution facility may provide that the appellate panel may, on its own initiative, order review of a decision by a disciplinary panel within a reasonable period of time after the decision has been rendered; (ii) The composition of the appellate panel shall be consistent with § 242.834(d) and shall not include any members of the security-based swap execution facility’s compliance staff or any person involved in adjudicating any other stage of the same proceeding. The rules of a security-based swap execution facility shall provide for the appeal proceeding to be conducted before all of the members of the appellate panel or a panel thereof; (iii) Except for good cause shown, the appeal or review shall be conducted solely on the record before the disciplinary panel, the written exceptions filed by the parties, and the oral or written arguments of the parties; and (iv) Promptly following the appeal or review proceeding, the appellate panel shall issue a written decision and shall provide a copy to the respondent. The decision issued by the appellate panel shall adhere to all the requirements of paragraph (g)(10) of this section to the extent that a different conclusion is reached from that issued by the disciplinary panel. (13) Disciplinary sanctions. (i) In general. All disciplinary sanctions imposed by a security-based swap execution facility or its disciplinary panels shall be commensurate with the violations committed and shall be clearly sufficient to deter recidivism or similar violations by other members. All disciplinary sanctions, including sanctions imposed pursuant to an accepted settlement offer, shall take into PO 00000 Frm 00147 Fmt 4701 Sfmt 4700 87301 account the respondent’s disciplinary history. In the event of demonstrated customer harm, any disciplinary sanction shall also include full customer restitution, except where the amount of restitution or to whom it should be provided cannot be reasonably determined. (ii) Summary fines for violations of rules regarding timely submission of records. A security-based swap execution facility may adopt a summary fine schedule for violations of rules relating to the failure to timely submit accurate records required for clearing or verifying each day’s transactions. A security-based swap execution facility may permit its compliance staff, or a designated panel of security-based swap execution facility officials, to summarily impose minor sanctions against persons within the security-based swap execution facility’s jurisdiction for violating such rules. A security-based swap execution facility’s summary fine schedule may allow for warning letters to be issued for first-time violations or violators. If adopted, a summary fine schedule shall provide for progressively larger fines for recurring violations. (14) Commission review of a disciplinary sanction. (i) In general. An application for review by the Commission may be filed by any person who is aggrieved by a determination of a security-based swap facility with respect to any final disciplinary action, as defined in § 242.835(b)(1) of this chapter (Rule 835(b)(1)), in accordance with § 201.442 of this chapter (Rule of Practice 442). (ii) Standard to govern Commission review. (A) In reviewing such a determination, if the Commission finds that such person has engaged in such acts or practices, or has omitted such acts, as the security-based swap execution facility has found him to have engaged in or omitted, that such acts or practices, or omissions to act, are in violation of the Exchange Act, the rules or regulations thereunder, or the rules of the security-based swap execution facility, and that such provisions are, and were applied in a manner, consistent with the purposes of Exchange Act, the Commission, by order, shall so declare and, as appropriate, affirm the sanction imposed by the security-based swap execution facility, modify the sanction in accordance with paragraph (C) of this subsection, or remand to the securitybased swap execution facility for further proceedings; or (B) if the Commission does not make any such finding it shall, by order, set aside the sanction imposed by the security-based swap execution facility E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87302 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations and, if appropriate, remand to the security-based swap execution facility for further proceedings. (C) If the Commission, having due regard for the public interest and the protection of investors, finds that a sanction imposed by a security-based swap execution facility upon such person imposes any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act or is excessive or oppressive, the Commission may cancel, reduce, or require the remission of such sanction. (h) Activities of security-based swap execution facility’s employees, governing board members, committee members, and consultants. (1) Definitions. The following definitions shall apply only in this paragraph (h): (i) Covered interest, with respect to a security-based swap execution facility, means: (A) A security-based swap that trades on the security-based swap execution facility; (B) A security of an issuer that has issued a security that underlies a security-based swap that is listed on that facility; or (C) A derivative based on a security that falls within paragraph (h)(1)(i)(B) of this section. (ii) Pooled investment vehicle means an investment company registered under the Investment Company Act of 1940 in which no covered interest constitutes more than 10 percent of the investment company’s assets. (2) Required rules. A security-based swap execution facility must maintain in effect rules which have been submitted to the Commission pursuant to § 242.806 or § 242.807 that, at a minimum, prohibit an employee of the security-based swap execution facility from: (i) Trading, directly or indirectly, any covered interest; and (ii) Disclosing to any other person any material, non-public information which such employee obtains as a result of their employment at the security-based swap execution facility, where such employee has or should have a reasonable expectation that the information disclosed may assist another person in trading any covered interest; provided, however, that such rules shall not prohibit disclosures made in the course of an employee’s duties, or disclosures made to another security-based swap execution facility, court of competent jurisdiction, or representative of any agency or department of the Federal or State government acting in their official capacity. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 (3) Possible exemptions. A securitybased swap execution facility may adopt rules, which must be submitted to the Commission pursuant to § 242.806 or § 242.807, which set forth circumstances under which exemptions from the trading prohibition contained in paragraph (h)(2)(i) of this section may be granted; such exemptions are to be administered by the security-based swap execution facility on a case-bycase basis. Specifically, such circumstances may include: (i) Participation by an employee in a pooled investment vehicle where the employee has no direct or indirect control with respect to transactions executed for or on behalf of such vehicle; (ii) Trading by an employee in a derivative based on a pooled investment vehicle that falls within paragraph (h)(3)(i) of this section; (iii) Trading by an employee in a derivative based on an index in which no covered interest constitutes more than 10 percent of the index; and (iv) Trading by an employee under circumstances enumerated by the security-based swap execution facility in rules which the security-based swap execution facility determines are not contrary to applicable law, the public interest, or just and equitable principles of trade. (4) Prohibited conduct. (i) No employee, governing board member, committee member, or consultant of a security-based swap execution facility shall: (A) Trade for such person’s own account, or for or on behalf of any other account, in any covered interest on the basis of any material, non-public information obtained through special access related to the performance of such person’s official duties as an employee, governing board member, committee member, or consultant; or (B) Disclose for any purpose inconsistent with the performance of such person’s official duties as an employee, governing board member, committee member, or consultant any material, non-public information obtained through special access related to the performance of such duties. (ii) No person shall trade for such person’s own account, or for or on behalf of any other account, in any covered interest on the basis of any material, non-public information that such person knows was obtained in violation of this paragraph (h)(4) from an employee, governing board member, committee member, or consultant. (i) Service on security-based swap execution facility governing boards or committees by persons with disciplinary PO 00000 Frm 00148 Fmt 4701 Sfmt 4700 histories. (1) A security-based swap execution facility shall maintain in effect rules which have been submitted to the Commission pursuant to § 242.806 or § 242.807 that render a person ineligible to serve on its disciplinary committees, arbitration panels, oversight panels, or governing board who: (i) Was found within the prior three years by a final decision of a securitybased swap execution facility, a selfregulatory organization, an administrative law judge, a court of competent jurisdiction, or the Commission to have committed a disciplinary offense; (ii) Entered into a settlement agreement with a security-based swap execution facility, a court of competent jurisdiction, or the Commission within the prior three years in which any of the findings or, in the absence of such findings, any of the acts charged included a disciplinary offense; (iii) Currently is suspended from trading on any security-based swap execution facility, is suspended or expelled from membership with a selfregulatory organization, is serving any sentence of probation, or owes any portion of a fine imposed pursuant to: (A) A finding by a final decision of a security-based swap execution facility, a self-regulatory organization, an administrative law judge, a court of competent jurisdiction, or the Commission that such person committed a disciplinary offense; or (B) A settlement agreement with a security-based swap execution facility, a court of competent jurisdiction, or the Commission in which any of the findings or, in the absence of such findings, any of the acts charged included a disciplinary offense; (iv) Currently is subject to an agreement with the Commission, a security-based swap execution facility, or a self-regulatory organization not to apply for registration with the Commission or membership in any selfregulatory organization; (v) Currently is subject to or has had imposed on him or her within the prior three years a Commission registration revocation or suspension in any capacity for any reason, or has been convicted within the prior three years of any felony; or (vi) Currently is subject to a denial, suspension, or disqualification from serving on a disciplinary committee, arbitration panel, or governing board of any security-based swap execution facility or self-regulatory organization. (2) No person may serve on a disciplinary committee, arbitration panel, oversight panel or governing E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations board of a security-based swap execution facility if such person is subject to any of the conditions listed in paragraphs (i)(1)(i) through (vi) of this section. (3) A security-based swap execution facility shall submit to the Commission a schedule listing all those rule violations which constitute disciplinary offenses and, to the extent necessary to reflect revisions, shall submit an amended schedule within 30 days of the end of each calendar year. A securitybased swap execution facility shall maintain and keep current the schedule required by this section, and post the schedule on the security-based swap execution facility’s website so that it is in a public place designed to provide notice to members and otherwise ensure its availability to the general public. (4) A security-based swap execution facility shall submit to the Commission within 30 days of the end of each calendar year a certified list of any persons who have been removed from its disciplinary committees, arbitration panels, oversight panels, or governing board pursuant to the requirements of this section during the prior year. (5) Whenever a security-based swap execution facility finds by final decision that a person has committed a disciplinary offense and such finding makes such person ineligible to serve on that security-based swap execution facility’s disciplinary committees, arbitration panels, oversight panels, or governing board, the security-based swap execution facility shall inform the Commission of that finding and the length of the ineligibility in a form and manner specified by the Commission. (6) For purposes of this paragraph: (i) Arbitration panel means any person or panel empowered by a security-based swap execution facility to arbitrate disputes involving the security-based swap execution facility’s members or their customers. (ii) Disciplinary offense means: (A) Any violation of the rules of a security-based swap execution facility, except a violation resulting in fines aggregating to less than $5,000 within a calendar year involving: (1) Decorum or attire; (2) Financial requirements; or (3) Reporting or recordkeeping; (B) Any rule violation which involves fraud, deceit, or conversion or results in a suspension or expulsion; (C) Any violation of the Act or the Commission’s rules thereunder; or (D) Any failure to exercise supervisory responsibility when such failure is itself a violation of either the rules of the security-based swap VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 execution facility, the Act, or the Commission’s rules thereunder. (E) A disciplinary offense must arise out of a proceeding or action which is brought by a security-based swap execution facility, the Commission, any Federal or State agency, or other governmental body. (iii) Final decision means: (A) A decision of a security-based swap execution facility which cannot be further appealed within the securitybased swap execution facility, is not subject to the stay of the Commission or a court of competent jurisdiction, and has not been reversed by the Commission or any court of competent jurisdiction; or (B) Any decision by an administrative law judge, a court of competent jurisdiction, or the Commission which has not been stayed or reversed. (j) Notification of final disciplinary action involving financial harm to a customer. (1) Upon any final disciplinary action in which a security-based swap execution facility finds that a member has committed a rule violation that involved a transaction for a customer, whether executed or not, and that resulted in financial harm to the customer: (i) The security-based swap execution facility shall promptly provide written notice of the disciplinary action to the member; and (ii) The security-based swap execution facility shall have established a rule pursuant to § 242.806 or § 242.807 that requires a member that receives such a notice to promptly provide written notice of the disciplinary action to the customer, as disclosed on the member’s books and records. (2) A written notice required by paragraph (j)(1) of this section must include the principal facts of the disciplinary action and a statement that the security-based swap execution facility has found that the member has committed a rule violation that involved a transaction for the customer, whether executed or not, and that resulted in financial harm to the customer. (3) Solely for purposes of this paragraph (j): (i) Customer means a person that utilizes an agent in connection with trading on a security-based swap execution facility. (ii) Final disciplinary action means any decision by or settlement with a security-based swap execution facility in a disciplinary matter which cannot be further appealed at the security-based swap execution facility, is not subject to the stay of the Commission or a court of competent jurisdiction, and has not PO 00000 Frm 00149 Fmt 4701 Sfmt 4700 87303 been reversed by the Commission or any court of competent jurisdiction. (k) Designation of agent for non-U.S. member. (1) A security-based swap execution facility that admits a non-U.S. person as a member shall be deemed to be the agent of the non-U.S. member with respect to any security-based swaps executed by the non-U.S. member. Service or delivery of any communication issued by or on behalf of the Commission to the security-based swap execution facility shall constitute valid and effective service upon the non-U.S. member. The security-based swap execution facility which has been served with, or to which there has been delivered, a communication issued by or on behalf of the Commission to a non-U.S. member shall transmit the communication promptly and in a manner which is reasonable under the circumstances, or in a manner specified by the Commission in the communication, to the non-U.S. member. (2) It shall be unlawful for a securitybased swap execution facility to permit a non-U.S. member to execute securitybased swaps on the facility unless the security-based swap execution facility prior thereto informs the non-U.S. member in writing of the requirements of this section. (3) The requirements of paragraphs (k)(1) and (2) of this section shall not apply if the non-U.S. member has duly executed and maintains in effect a written agency agreement in compliance with this paragraph with a person domiciled in the United States and has provided a copy of the agreement to the security-based swap execution facility prior to effecting any transaction on the security-based swap execution facility. This agreement must authorize the person domiciled in the United States to serve as the agent of the non-U.S. member for purposes of accepting delivery and service of all communications issued by or on behalf of the Commission to the non-U.S. member and must provide an address in the United States where the agent will accept delivery and service of communications from the Commission. This agreement must be filed with the Commission by the security-based swap execution facility prior to permitting the non-U.S. member to effect any transactions in security-based swaps. Such agreements shall be filed in a manner specified by the Commission. (4) A non-U.S. member shall notify the Commission immediately if the written agency agreement is terminated, revoked, or is otherwise no longer in effect. If the security-based swap execution facility knows or should E:\FR\FM\15DER2.SGM 15DER2 87304 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations know that the agreement has expired, been terminated, or is no longer in effect, the security-based swap execution facility shall notify the Commission immediately. § 242.820 Core Principle 3—Securitybased swaps not readily susceptible to manipulation. The security-based swap execution facility shall permit trading only in security-based swaps that are not readily susceptible to manipulation. ddrumheller on DSK120RN23PROD with RULES2 § 242.821 Core Principle 4—Monitoring of trading and trade processing. (a) General. The security-based swap execution facility shall: (1) Establish and enforce rules or terms and conditions defining, or specifications detailing: (i) Trading procedures to be used in entering and executing orders traded on or through the facilities of the securitybased swap execution facility; and (ii) Procedures for trade processing of security-based swaps on or through the facilities of the security-based swap execution facility; and (2) Monitor trading in security-based swaps to prevent manipulation, price distortion, and disruptions of the delivery or cash settlement process through surveillance, compliance, and disciplinary practices and procedures, including methods for conducting realtime monitoring of trading and comprehensive and accurate trade reconstructions. (b) Market oversight obligations. A security-based swap execution facility shall: (1) Collect and evaluate data on its members’ market activity on an ongoing basis in order to detect and prevent manipulation, price distortions, and, where possible, disruptions of the physical-delivery or cash-settlement process; (2) Monitor and evaluate general market data in order to detect and prevent manipulative activity that would result in the failure of the market price to reflect the normal forces of supply and demand; (3) Demonstrate an effective program for conducting real-time monitoring of trading for the purpose of detecting and resolving abnormalities. A securitybased swap execution facility shall employ automated alerts to detect abnormal price movements and unusual trading volumes in real time and instances or threats of manipulation, price distortion, and disruptions on at least a T + 1 basis. The T + 1 detection and analysis should incorporate any additional data that becomes available on a T + 1 basis, including the trade reconstruction data; VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 (4) Demonstrate the ability to comprehensively and accurately reconstruct daily trading activity for the purpose of detecting instances or threats of manipulation, price distortion, and disruptions; and (5) Have rules in place that allow it to intervene to prevent or reduce market disruptions. Once a threatened or actual disruption is detected, the securitybased swap execution facility shall take steps to prevent the market disruption or reduce its severity. (c) Monitoring of physical-delivery security-based swaps. For physicaldelivery security-based swaps, the security-based swap execution facility shall demonstrate that it: (1) Monitors a security-based swap’s terms and conditions as they relate to the underlying asset market; and (2) Monitors the availability of the supply of the asset specified by the delivery requirements of the securitybased swap. (d) Additional requirements for cashsettled security-based swaps. (1) For cash-settled security-based swaps, the security-based swap execution facility shall demonstrate that it monitors the pricing of the reference price used to determine cash flows or settlement. (2) For cash-settled security-based swaps listed on the security-based swap execution facility where the reference price is formulated and computed by the security-based swap execution facility, the security-based swap execution facility shall demonstrate that it monitors the continued appropriateness of its methodology for deriving that price and shall promptly amend any methodologies that result, or are likely to result, in manipulation, price distortions, or market disruptions, or impose new methodologies to resolve the threat of disruptions or distortions. (3) For cash-settled security-based swaps listed on the security-based swap execution facility where the reference price relies on a third-party index or instrument, including an index or instrument traded on another venue, the security-based swap execution facility shall demonstrate that it monitors for pricing abnormalities in the index or instrument used to calculate the reference price and shall conduct due diligence to ensure that the reference price is not susceptible to manipulation. (e) Ability to obtain information. (1) A security-based swap execution facility shall demonstrate that it has access to sufficient information to assess whether trading in security-based swaps listed on its market, in the index or instrument used as a reference price, or in the underlying asset for its listed securitybased swaps is being used to affect PO 00000 Frm 00150 Fmt 4701 Sfmt 4700 prices on its market. The security-based swap execution facility shall demonstrate that it can obtain position and trading information directly from members that conduct substantial trading on its facility or through an information-sharing agreement with other venues or a third-party regulatory service provider. If the position and trading information is not available directly from its members but is available through information-sharing agreements with other trading venues or a third-party regulatory service provider, the security-based swap execution facility should cooperate in such information-sharing agreements. (2) A security-based swap execution facility shall have rules that require its members to keep records of their trading, including records of their activity in the underlying asset, and related derivatives markets, and make such records available, upon request, to the security-based swap execution facility or, if applicable, to its regulatory service provider and the Commission. The security-based swap execution facility may limit the application of this requirement to only those members that conduct substantial trading on its facility. (f) Risk controls for trading. A security-based swap execution facility shall establish and maintain risk control mechanisms to prevent and reduce the potential risk of market disruptions, including, but not limited to, market restrictions that pause or halt trading under market conditions prescribed by the security-based swap execution facility. Such risk control mechanisms shall be designed to avoid market disruptions without unduly interfering with that market’s price discovery function. The security-based swap execution facility may choose from among controls that include: pre-trade limits on order size, price collars or bands around the current price, message throttles, daily price limits, and intraday position limits related to financial risk to the clearing member, or design other types of controls, as well as clear errortrade and order-cancellation policies. Within the specific array of controls that are selected, the security-based swap execution facility shall set the parameters for those controls, so that the specific parameters are reasonably likely to serve the purpose of preventing market disruptions and price distortions. (g) Trade reconstruction. A securitybased swap execution facility shall have the ability to comprehensively and accurately reconstruct all trading on its facility. All audit-trail data and reconstructions shall be made available E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations to the Commission in a form, manner, and time that is acceptable to the Commission. (h) Regulatory service provider. A security-based swap execution facility shall comply with the rules in this section through a dedicated regulatory department or by contracting with a regulatory service provider pursuant to § 242.819(e). ddrumheller on DSK120RN23PROD with RULES2 § 242.822 Core Principle 5—Ability to obtain information. (a) General. The security-based swap execution facility shall: (1) Establish and enforce rules that will allow the facility to obtain any necessary information to perform any of the functions described in section 3D of the Act; (2) Provide the information to the Commission on request; and (3) Have the capacity to carry out such international information-sharing agreements as the Commission may require. (b) Establish and enforce rules. A security-based swap execution facility shall establish and enforce rules that will allow the security-based swap execution facility to have the ability and authority to obtain sufficient information to allow it to fully perform its operational, risk management, governance, and regulatory functions and any requirements under this section, including the capacity to carry out international information-sharing agreements as the Commission may require. (c) Collection of information. A security-based swap execution facility shall have rules that allow it to collect information on a routine basis, allow for the collection of non-routine data from its members, and allow for its examination of books and records kept by members on its facility. (d) Provide information to the Commission. A security-based swap execution facility shall provide information in its possession to the Commission upon request, in a form and manner specified by the Commission. (e) Information-sharing agreements. A security-based swap execution facility shall share information with other regulatory organizations, data repositories, and third-party data reporting services as required by the Commission or as otherwise necessary and appropriate to fulfill its regulatory and reporting responsibilities. Appropriate information-sharing agreements can be established with such entities, or the Commission can act in conjunction with the security-based VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 swap execution facility to carry out such information sharing. § 242.823 Core Principle 6—Financial integrity of transactions. (a) General. The security-based swap execution facility shall establish and enforce rules and procedures for ensuring the financial integrity of security-based swaps entered on or through the facilities of the securitybased swap execution facility, including the clearance and settlement of securitybased swaps pursuant to section 3C(a)(1) of the Act. (b) Required clearing. Transactions executed on or through the securitybased swap execution facility that are required to be cleared under section 3C(a)(1) of the Act or are voluntarily cleared by the counterparties shall be cleared through a registered clearing agency or a clearing agency that has obtained an exemption from clearing agency registration to provide central counterparty services for security-based swaps. (c) General financial integrity. A security-based swap execution facility shall provide for the financial integrity of its transactions: (1) By establishing minimum financial standards for its members, which shall, at a minimum, require that each member qualify as an eligible contract participant; (2) For transactions cleared by a registered clearing agency: (i) By ensuring that the security-based swap execution facility has the capacity to route transactions to the registered clearing agency in a manner acceptable to the clearing agency for purposes of clearing; and (ii) By coordinating with each registered clearing agency to which it submits transactions for clearing, in the development of rules and procedures to facilitate prompt and efficient transaction processing. (d) Monitoring for financial soundness. A security-based swap execution facility shall monitor its members to ensure that they continue to qualify as eligible contract participants. § 242.824 Core Principle 7—Emergency authority. (a) The security-based swap execution facility shall adopt rules to provide for the exercise of emergency authority, in consultation or cooperation with the Commission, as is necessary and appropriate, including the authority to liquidate or transfer open positions in any security-based swap or to suspend or curtail trading in a security-based swap. (b) To comply with this core principle, a security-based swap PO 00000 Frm 00151 Fmt 4701 Sfmt 4700 87305 execution facility shall adopt rules that are reasonably designed to: (1) Allow the security-based swap execution facility to intervene as necessary to maintain markets with fair and orderly trading and to prevent or address manipulation or disruptive trading practices, whether the need for intervention arises exclusively from the security-based swap execution facility’s market or as part of a coordinated, crossmarket intervention; (2) Have the flexibility and independence to address market emergencies in an effective and timely manner consistent with the nature of the emergency, as long as all such actions taken by the security-based swap execution facility are made in good faith to protect the integrity of the markets; (3) Take market actions as may be directed by the Commission, including, in situations where a security-based swap is traded on more than one platform, emergency action to liquidate or transfer open interest as directed, or agreed to, by the Commission or the Commission’s staff; (4) Include procedures and guidelines for decision-making and implementation of emergency intervention that avoid conflicts of interest; (5) Include alternate lines of communication and approval procedures to address emergencies associated with real-time events; and (6) Allow the security-based swap execution facility, to address perceived market threats, to impose or modify position limits, impose or modify price limits, impose or modify intraday market restrictions, impose special margin requirements, order the liquidation or transfer of open positions in any contract, order the fixing of a settlement price, extend or shorten the expiration date or the trading hours, suspend or curtail trading in any contract, transfer customer contracts and the margin, or alter any contract’s settlement terms or conditions, or, if applicable, provide for the carrying out of such actions through its agreements with its third-party provider of clearing or regulatory services. (c) A security-based swap execution facility shall promptly notify the Commission of its exercise of emergency authority, explaining its decisionmaking process, the reasons for using its emergency authority, and how conflicts of interest were minimized, including the extent to which the security-based swap execution facility considered the effect of its emergency action on the underlying markets and on markets that are linked or referenced to the contracts traded on its facility, including similar E:\FR\FM\15DER2.SGM 15DER2 87306 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations markets on other trading venues. Information on all regulatory actions carried out pursuant to a security-based swap execution facility’s emergency authority shall be included in a timely submission of a certified rule pursuant to § 242.807. ddrumheller on DSK120RN23PROD with RULES2 § 242.825 Core Principle 8—Timely publication of trading information. (a)(1) The security-based swap execution facility shall make public timely information on price, trading volume, and other trading data on security-based swaps to the extent prescribed by the Commission. (2) The security-based swap execution facility shall be required to have the capacity to electronically capture and transmit and disseminate trade information with respect to transactions executed on or through the facility. (b) A security-based swap execution facility shall report security-based swap transaction data as required by §§ 242.900 through 242.909 (Regulation SBSR). (c) A security-based swap execution facility shall make available a ‘‘Daily Market Data Report’’ containing the information required in paragraphs (c)(1) and (2) of this section in a manner and timeframe required by this section. (1) Contents. The Daily Market Data Report of a security-based swap execution facility for a business day shall contain the following information for each tenor of each security-based swap traded on that security-based swap execution facility during that business day: (i) The trade count (excluding error trades, correcting trades, and offsetting trades); (ii) The total notional amount traded (excluding error trades, correcting trades, and offsetting trades); (iii) The total notional amount of block trades, after such time as the Commission adopts a definition of ‘‘block trade’’ in § 242.802 of this chapter (Rule 802); (iv) The opening and closing price; (v) The price that is used for settlement purposes, if different from the closing price; and (vi) The lowest price of a sale or offer, whichever is lower, and the highest price of a sale or bid, whichever is higher, that the security-based swap execution facility reasonably determines accurately reflects market conditions. Bids and offers vacated or withdrawn shall not be used in making this determination. A bid is vacated if followed by a higher bid or price and an offer is vacated if followed by a lower offer or price. (2) Additional information. A security-based swap execution facility VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 must record the following information with respect to security-based swaps on that reporting market: (i) The method used by the securitybased swap execution facility in determining nominal prices and settlement prices; and (ii) If discretion is used by the security-based swap execution facility in determining the opening and/or closing ranges or the settlement prices, an explanation that certain discretion may be employed by the security-based swap execution facility and a description of the manner in which that discretion may be employed. Discretionary authority must be noted explicitly in each case in which it is applied (for example, by use of an asterisk or footnote). (3) Form of publication. A securitybased swap execution facility shall publicly post the Daily Market Data Report on its website: (i) In a downloadable and machinereadable format using the most recent versions of the associated XML schema and PDF renderer as published on the Commission’s website; (ii) Without fees or other charges; (iii) Without any encumbrances on access or usage restrictions; and (iv) Without requiring a user to agree to any terms before being allowed to view or download the Daily Market Data Report, such as by waiving any requirements of this paragraph (c)(3). Any such waiver agreed to by a user shall be null and void. (4) Timing of publication. A securitybased swap execution facility shall publish the Daily Market Data Report on its website as soon as reasonably practicable on the next business day after the day to which the information pertains, but in no event later than 7 a.m. on the next business day. (5) Duration. A security-based swap execution facility shall keep each Daily Market Data Report available on its website in the same location as all other Daily Market Data Reports for no less than one year after the date of first publication. § 242.826 Core Principle 9— Recordkeeping and reporting. (a) In general. (1) A security-based swap execution facility shall: (i) Maintain records of all activities relating to the business of the facility, including a complete audit trail, in a form and manner acceptable to the Commission for a period of five years; and (ii) Report to the Commission, in a form and manner acceptable to the Commission, such information as the Commission determines to be necessary PO 00000 Frm 00152 Fmt 4701 Sfmt 4700 or appropriate for the Commission to perform the duties of the Commission under the Act. (2) The Commission shall adopt data collection and reporting requirements for security-based swap execution facilities that are comparable to corresponding requirements for clearing agencies and security-based swap data repositories. (b) Required records. A security-based swap execution facility shall keep full, complete, and systematic records, together with all pertinent data and memoranda, of all activities relating to its business with respect to securitybased swaps. Such records shall include, without limitation, the audit trail information required under § 242.819(f) and all other records that a security-based swap execution facility is required to create or obtain under §§ 242.800 through 242.835 (Regulation SE). (c) Duration of retention. (1) A security-based swap execution facility shall keep records of any security-based swap from the date of execution until the termination, maturity, expiration, transfer, assignment, or novation date of the transaction, and for a period of not less than five years, the first two years in an easily accessible place, after such date. (2) A security-based swap execution facility shall keep each record other than the records described in paragraph (c)(1) of this section for a period of not less than five years, the first two years in an easily accessible place, from the date on which the record was created. (d) Record retention. (1) A securitybased swap execution facility shall retain all records in a form and manner that ensures the authenticity and reliability of such records in accordance with the Act and the Commission’s rules thereunder. (2) A security-based swap execution facility shall, upon request of any representative of the Commission, promptly furnish to the representative legible, true, complete, and current copies of any records required to be kept and preserved pursuant to this section. (3)(i) An electronic record shall be retained in a form and manner that allows for prompt production at the request of any representative of the Commission. (ii) A security-based swap execution facility maintaining electronic records shall establish appropriate systems and controls that ensure the authenticity and reliability of electronic records, including, without limitation: (A) Systems that maintain the security, signature, and data as necessary to ensure the authenticity of E:\FR\FM\15DER2.SGM 15DER2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations the information contained in electronic records and to monitor compliance with the Act and the Commission’s rules thereunder; (B) Systems that ensure that the security-based swap execution facility is able to produce electronic records in accordance with this section, and ensure the availability of such electronic records in the event of an emergency or other disruption of the security-based swap execution facility’s electronic record retention systems; and (C) The creation and maintenance of an up-to-date inventory that identifies and describes each system that maintains information necessary for accessing or producing electronic records. (e) Record examination. All records required to be kept by a security-based swap execution facility pursuant to this section are subject to examination by any representative of the Commission pursuant to section 17(b) of the Act (15 U.S.C. 78q). (f) Records of non-U.S. members. A security-based swap execution facility shall keep a record in permanent form, which shall show the true name, address, and principal occupation or business of any non-U.S. member that executes transactions on the facility. Upon request, the security-based swap execution facility shall provide to the Commission information regarding the name of any person guaranteeing such transactions or exercising any control over the trading of such non-U.S. member. § 242.827 Core Principle 10—Antitrust considerations. Unless necessary or appropriate to achieve the purposes of the Act, the security-based swap execution facility shall not: (a) Adopt any rules or take any actions that result in any unreasonable restraint of trade; or (b) Impose any material anticompetitive burden on trading or clearing. ddrumheller on DSK120RN23PROD with RULES2 § 242.828 interest. Core Principle 11—Conflicts of (a) The security-based swap execution facility shall: (1) Establish and enforce rules to minimize conflicts of interest in its decision-making process; and (2) Establish a process for resolving the conflicts of interest. (b) A security-based swap execution facility shall comply with the requirements of § 242.834. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 § 242.829 Core Principle 12—Financial resources. (a) In general. (1) The security-based swap execution facility shall have adequate financial, operational, and managerial resources to discharge each responsibility of the security-based swap execution facility, as determined by the Commission. (2) The financial resources of a security-based swap execution facility shall be considered to be adequate if the value of the financial resources: (i) Enables the organization to meet its financial obligations to its members notwithstanding a default by a member creating the largest financial exposure for that organization in extreme but plausible market conditions; and (ii) Exceeds the total amount that would enable the security-based swap execution facility to cover the operating costs of the security-based swap execution facility for a one-year period, as calculated on a rolling basis. (b) General requirements. A securitybased swap execution facility shall maintain financial resources on an ongoing basis that are adequate to enable it to comply with the core principles set forth in section 3D of the Act and any applicable Commission rules. Financial resources shall be considered adequate if their value exceeds the total amount that would enable the security-based swap execution facility to cover its projected operating costs necessary for the security-based swap execution facility to comply with section 3D of the Act and applicable Commission rules for a one-year period, as calculated on a rolling basis pursuant to paragraph (e) of this section. (c) Types of financial resources. Financial resources available to satisfy the requirements of this section may include: (1) The security-based swap execution facility’s own capital, meaning its assets minus its liabilities calculated in accordance with generally accepted accounting principles in the United States; and (2) Any other financial resource deemed acceptable by the Commission. (d) Liquidity of financial resources. The financial resources allocated by a security-based swap execution facility to meet the ongoing requirements of paragraph (b) of this section shall include unencumbered, liquid financial assets (i.e., cash and/or highly liquid securities) equal to at least the greater of three months of projected operating costs, as calculated on a rolling basis, or the projected costs needed to wind down the security-based swap execution facility’s operations, in each case as PO 00000 Frm 00153 Fmt 4701 Sfmt 4700 87307 determined under paragraph (e) of this section. If a security-based swap execution facility lacks sufficient unencumbered, liquid financial assets to satisfy its obligations under this section, the security-based swap execution facility may satisfy this requirement by obtaining a committed line of credit or similar facility in an amount at least equal to such deficiency. (e) Computation of costs to meet financial resources requirement. (1) A security-based swap execution facility shall, each fiscal quarter, make a reasonable calculation of its projected operating costs and wind-down costs in order to determine its applicable obligations under this section. The security-based swap execution facility shall have reasonable discretion in determining the methodologies used to compute such amounts. (i) Calculation of projected operating costs. A security-based swap execution facility’s calculation of its projected operating costs shall be deemed reasonable if it includes all expenses necessary for the security-based swap execution facility to comply with the core principles set forth in section 3D of the Act and any applicable Commission rules, and if the calculation is based on the security-based swap execution facility’s current level of business and business model, taking into account any projected modification to its business model (e.g., the addition or subtraction of business lines or operations or other changes), and any projected increase or decrease in its level of business over the next 12 months. A security-based swap execution facility may exclude the following expenses (‘‘excludable expenses’’) from its projected operating cost calculations: (A) Costs attributable solely to sales, marketing, business development, product development, or recruitment and any related travel, entertainment, event, or conference costs; (B) Compensation and related taxes and benefits for personnel who are not necessary to ensure that the securitybased swap execution facility is able to comply with the core principles set forth in section 3D of the Act and any applicable Commission rules; (C) Costs for acquiring and defending patents and trademarks for securitybased swap execution facility products and related intellectual property; (D) Magazine, newspaper, and online periodical subscription fees; (E) Tax preparation and audit fees; (F) The variable commissions that a voice-based security-based swap execution facility may pay to its trading specialists, calculated as a percentage of transaction revenue generated by the E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87308 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations voice-based security-based swap execution facility; and (G) Any non-cash costs, including depreciation and amortization. (ii) Prorated expenses. A securitybased swap execution facility’s calculation of its projected operating costs shall be deemed reasonable if an expense is prorated and the securitybased swap execution facility: (A) Maintains sufficient documentation that reasonably shows the extent to which an expense is partially attributable to an excludable expense; (B) Identifies any prorated expense in the financial reports that it submits to the Commission pursuant to paragraph (g) of this section; and (C) Sufficiently explains why it prorated any expense. Common allocation methodologies that may be used include actual use, headcount, or square footage. A security-based swap execution facility may provide documentation, such as copies of service agreements, other legal documents, firm policies, audit statements, or allocation methodologies to support its determination to prorate an expense. (iii) Expenses allocated among affiliates. A security-based swap execution facility’s calculation of its projected operating costs shall be deemed reasonable if it prorates any shared expense that the security-based swap execution facility pays for, but only to the extent that such shared expense is attributable to an affiliate and for which the security-based swap execution facility is reimbursed. To prorate a shared expense, the securitybased swap execution facility shall: (A) Maintain sufficient documentation that reasonably shows the extent to which the shared expense is attributable to and paid for by the security-based swap execution facility and/or affiliated entity. The securitybased swap execution facility may provide documentation, such as copies of service agreements, other legal documents, firm policies, audit statements, or allocation methodologies, that reasonably shows how expenses are attributable to, and paid for by, the security-based swap execution facility and/or its affiliated entities to support its determination to prorate an expense; (B) Identify any shared expense in the financial reports that it submits to the Commission pursuant to paragraph (g) of this section; and (C) Sufficiently explain why it prorated the shared expense. (2) Notwithstanding any provision of paragraph (e)(1) of this section, the Commission may review the VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 methodologies and require changes as appropriate. (f) Valuation of financial resources. No less than each fiscal quarter, a security-based swap execution facility shall compute the current market value of each financial resource used to meet its obligations under this section. Reductions in value to reflect market and credit risk (‘‘haircuts’’) shall be applied as appropriate. (g) Reporting to the Commission. (1) Each fiscal quarter, or at any time upon Commission request, a security-based swap execution facility shall provide a report to the Commission that includes: (i) The amount of financial resources necessary to meet the requirements of this section, computed in accordance with the requirements of paragraph (e) of this section, and the market value of each available financial resource, computed in accordance with the requirements of paragraph (f) of this section; and (ii) Financial statements, including the balance sheet, income statement, and statement of cash flows of the security-based swap execution facility. (A) The financial statements shall be prepared in accordance with generally accepted accounting principles in the United States, prepared in English, and denominated in U.S. dollars. (B) The financial statements of a security-based swap execution facility that is not domiciled in the United States, and is not otherwise required to prepare financial statements in accordance with generally accepted accounting principles in the United States, may satisfy the requirement in paragraph (g)(1)(ii)(A) of this section if such financial statements are prepared in accordance with either International Financial Reporting Standards issued by the International Accounting Standards Board, or a comparable international standard as the Commission may otherwise accept in its discretion. (2) The calculations required by this paragraph (g) shall be made as of the last business day of the security-based swap execution facility’s applicable fiscal quarter. (3) With each report required under paragraph (g) of this section, the security-based swap execution facility shall also provide the Commission with sufficient documentation explaining the methodology used to compute its financial requirements under this section. Such documentation shall: (i) Allow the Commission to reliably determine, without additional requests for information, that the security-based swap execution facility has made reasonable calculations pursuant to paragraph (e) of this section; and PO 00000 Frm 00154 Fmt 4701 Sfmt 4700 (ii) Include, at a minimum: (A) A total list of all expenses, without any exclusion; (B) All expenses and the corresponding amounts, if any, that the security-based swap execution facility excluded or prorated when determining its operating costs, calculated on a rolling basis, required under this section, and the basis for any determination to exclude or prorate any such expenses; (C) Documentation demonstrating the existence of any committed line of credit or similar facility relied upon for the purpose of meeting the requirements of this section (e.g., copies of agreements establishing or amending a credit facility or similar facility); and (D) All costs that a security-based swap execution facility would incur to wind down its operations, the projected amount of time for any such wind-down period, and the basis of its determination for the estimation of its costs and timing. (4) The reports and supporting documentation required by this section shall be filed not later than 40 calendar days after the end of the security-based swap execution facility’s first three fiscal quarters, and not later than 90 calendar days after the end of the security-based swap execution facility’s fourth fiscal quarter, or at such later time as the Commission may permit, in its discretion, upon request by the security-based swap execution facility. (5) A security-based swap execution facility shall provide notice to the Commission no later than 48 hours after it knows or reasonably should know that it no longer meets its obligations under paragraphs (b) and (d) of this section. (6) A security-based swap execution facility shall provide the report and documentation required by this section to the Commission electronically using the EDGAR system as an Interactive Data File in accordance with § 232.405 of this chapter. § 242.830 Core Principle 13—System safeguards. (a) In general. The security-based swap execution facility shall: (1) Establish and maintain a program of risk analysis and oversight to identify and minimize sources of operational risk, through the development of appropriate controls and procedures, and automated systems, that: (i) Are reliable and secure; and (ii) Have adequate scalable capacity; (2) Establish and maintain emergency procedures, backup facilities, and a plan for disaster recovery that allow for: (i) The timely recovery and resumption of operations; and E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations (ii) The fulfillment of the responsibilities and obligations of the security-based swap execution facility; and (3) Periodically conduct tests to verify that the backup resources of the security-based swap execution facility are sufficient to ensure continued: (i) Order processing and trade matching; (ii) Price reporting; (iii) Market surveillance; and (iv) Maintenance of a comprehensive and accurate audit trail. (b) Requirements. (1) A security-based swap execution facility’s program of risk analysis and oversight with respect to its operations and automated systems shall address each of the following categories of risk analysis and oversight: (i) Enterprise risk management and governance. This category includes, but is not limited to: Assessment, mitigation, and monitoring of security and technology risk; security and technology capital planning and investment; governing board and management oversight of technology and security; information technology audit and controls assessments; remediation of deficiencies; and any other elements of enterprise risk management and governance included in generally accepted best practices. (ii) Information security. This category includes, but is not limited to, controls relating to: Access to systems and data (including least privilege, separation of duties, account monitoring, and control); user and device identification and authentication; security awareness training; audit log maintenance, monitoring, and analysis; media protection; personnel security and screening; automated system and communications protection (including network port control, boundary defenses, and encryption); system and information integrity (including malware defenses and software integrity monitoring); vulnerability management; penetration testing; security incident response and management; and any other elements of information security included in generally accepted best practices. (iii) Business continuity-disaster recovery planning and resources. This category includes, but is not limited to: Regular, periodic testing and review of business continuity-disaster recovery capabilities; the controls and capabilities described in paragraphs (b)(3) and (10) of this section; and any other elements of business continuitydisaster recovery planning and resources included in generally accepted best practices. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 (iv) Capacity and performance planning. This category includes, but is not limited to: Controls for monitoring the security-based swap execution facility’s systems to ensure adequate scalable capacity (including testing, monitoring, and analysis of current and projected future capacity and performance, and of possible capacity degradation due to planned automated system changes); and any other elements of capacity and performance planning included in generally accepted best practices. (v) Systems operations. This category includes, but is not limited to: System maintenance; configuration management (including baseline configuration, configuration change and patch management, least functionality, and inventory of authorized and unauthorized devices and software); event and problem response and management; and any other elements of system operations included in generally accepted best practices. (vi) Systems development and quality assurance. This category includes, but is not limited to: Requirements development; pre-production and regression testing; change management procedures and approvals; outsourcing and vendor management; training in secure coding practices; and any other elements of systems development and quality assurance included in generally accepted best practices. (vii) Physical security and environmental controls. This category includes, but is not limited to: Physical access and monitoring; power, telecommunication, and environmental controls; fire protection; and any other elements of physical security and environmental controls included in generally accepted best practices. (2) In addressing the categories of risk analysis and oversight required under paragraph (b)(1) of this section, a security-based swap execution facility shall follow generally accepted standards and best practices with respect to the development, operation, reliability, security, and capacity of automated systems. (3) A security-based swap execution facility shall maintain a business continuity-disaster recovery plan and business continuity-disaster recovery resources, emergency procedures, and back-up facilities sufficient to enable timely recovery and resumption of its operations and resumption of its ongoing fulfillment of its responsibilities and obligations as a security-based swap execution facility following any disruption of its operations. Such responsibilities and obligations include, without limitation: PO 00000 Frm 00155 Fmt 4701 Sfmt 4700 87309 Order processing and trade matching; transmission of matched orders to a registered clearing agency for clearing, where appropriate; price reporting; market surveillance; and maintenance of a comprehensive audit trail. A securitybased swap execution facility’s business continuity-disaster recovery plan and resources generally should enable resumption of trading and clearing of security-based swaps executed on or pursuant to the rules of the securitybased swap execution facility during the next business day following the disruption. A security-based swap execution facility shall update its business continuity-disaster recovery plan and emergency procedures at a frequency determined by an appropriate risk analysis, but at a minimum no less frequently than annually. (4) A security-based swap execution facility satisfies the requirement to be able to resume its operations and resume its ongoing fulfillment of its responsibilities and obligations during the next business day following any disruption of its operations by maintaining either: (i) Infrastructure and personnel resources of its own that are sufficient to ensure timely recovery and resumption of its operations and resumption of its ongoing fulfillment of its responsibilities and obligations as a security-based swap execution facility following any disruption of its operations; or (ii) Contractual arrangements with other security-based swap execution facilities or disaster recovery service providers, as appropriate, that are sufficient to ensure continued trading and clearing of security-based swaps executed on the security-based swap execution facility, and ongoing fulfillment of all of the security-based swap execution facility’s responsibilities and obligations with respect to such security-based swaps, in the event that a disruption renders the security-based swap execution facility temporarily or permanently unable to satisfy this requirement on its own behalf. (5) A security-based swap execution facility shall notify Commission staff promptly of all: (i) Electronic trading halts and material system malfunctions; (ii) Cyber-security incidents or targeted threats that actually or potentially jeopardize automated system operation, reliability, security, or capacity; and (iii) Activations of the security-based swap execution facility’s business continuity-disaster recovery plan. E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87310 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations (6) A security-based swap execution facility shall provide Commission staff timely advance notice of all material: (i) Planned changes to automated systems that may impact the reliability, security, or adequate scalable capacity of such systems; and (ii) Planned changes to the securitybased swap execution facility’s program of risk analysis and oversight. (7) As part of a security-based swap execution facility’s obligation to produce books and records in accordance with § 242.826 (Core Principle 9), the security-based swap execution facility shall provide to the Commission the following systemsafeguards-related books and records, promptly upon the request of any Commission representative: (i) Current copies of its business continuity-disaster recovery plans and other emergency procedures; (ii) All assessments of its operational risks or system safeguards-related controls; (iii) All reports concerning system safeguards testing and assessment required by this chapter, whether performed by independent contractors or by employees of the security-based swap execution facility; and (iv) All other books and records requested by Commission staff in connection with Commission oversight of system safeguards pursuant to the Act or Commission rules, or in connection with Commission maintenance of a current profile of the security-based swap execution facility’s automated systems. (v) Nothing in paragraph (b)(7) of this section shall be interpreted as reducing or limiting in any way a security-based swap execution facility’s obligation to comply with § 242.826 (Core Principle 9). (8) A security-based swap execution facility shall conduct regular, periodic, objective testing and review of its automated systems to ensure that they are reliable, secure, and have adequate scalable capacity. A security-based swap execution facility shall also conduct regular, periodic testing and review of its business continuity-disaster recovery capabilities. Such testing and review shall include, without limitation, all of the types of testing set forth in this paragraph (b)(8). (i) Definitions. As used in this paragraph (b)(8): Controls means the safeguards or countermeasures employed by the security-based swap execution facility to protect the reliability, security, or capacity of its automated systems or the confidentiality, integrity, and availability of its data and information, VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 and to enable the security-based swap execution facility to fulfill its statutory and regulatory responsibilities. Controls testing means assessment of the security-based swap execution facility’s controls to determine whether such controls are implemented correctly, are operating as intended, and are enabling the security-based swap execution facility to meet the requirements of this section. Enterprise technology risk assessment means a written assessment that includes, but is not limited to, an analysis of threats and vulnerabilities in the context of mitigating controls. An enterprise technology risk assessment identifies, estimates, and prioritizes risks to security-based swap execution facility operations or assets, or to market participants, individuals, or other entities, resulting from impairment of the confidentiality, integrity, and availability of data and information or the reliability, security, or capacity of automated systems. External penetration testing means attempts to penetrate the security-based swap execution facility’s automated systems from outside the systems’ boundaries to identify and exploit vulnerabilities. Methods of conducting external penetration testing include, but are not limited to, methods for circumventing the security features of an automated system. Internal penetration testing means attempts to penetrate the security-based swap execution facility’s automated systems from inside the systems’ boundaries, to identify and exploit vulnerabilities. Methods of conducting internal penetration testing include, but are not limited to, methods for circumventing the security features of an automated system. Security incident means a cybersecurity or physical security event that actually jeopardizes or has a significant likelihood of jeopardizing automated system operation, reliability, security, or capacity, or the availability, confidentiality or integrity of data. Security incident response plan means a written plan documenting the security-based swap execution facility’s policies, controls, procedures, and resources for identifying, responding to, mitigating, and recovering from security incidents, and the roles and responsibilities of its management, staff, and independent contractors in responding to security incidents. A security incident response plan may be a separate document or a business continuity-disaster recovery plan section or appendix dedicated to security incident response. PO 00000 Frm 00156 Fmt 4701 Sfmt 4700 Security incident response plan testing means testing of a security-based swap execution facility’s security incident response plan to determine the plan’s effectiveness, identify its potential weaknesses or deficiencies, enable regular plan updating and improvement, and maintain organizational preparedness and resiliency with respect to security incidents. Methods of conducting security incident response plan testing may include, but are not limited to, checklist completion, walk-through or table-top exercises, simulations, and comprehensive exercises. Vulnerability testing means testing of a security-based swap execution facility’s automated systems to determine what information may be discoverable through a reconnaissance analysis of those systems and what vulnerabilities may be present on those systems. (ii) Vulnerability testing. A securitybased swap execution facility shall conduct vulnerability testing of a scope sufficient to satisfy the requirements set forth in paragraph (b)(10) of this section. (A) A security-based swap execution facility shall conduct such vulnerability testing at a frequency determined by an appropriate risk analysis. (B) Such vulnerability testing shall include automated vulnerability scanning, which shall follow generally accepted best practices. (C) A security-based swap execution facility shall conduct vulnerability testing by engaging independent contractors or by using employees of the security-based swap execution facility who are not responsible for development or operation of the systems or capabilities being tested. (iii) External penetration testing. A security-based swap execution facility shall conduct external penetration testing of a scope sufficient to satisfy the requirements set forth in paragraph (b)(10) of this section. (A) A security-based swap execution facility shall conduct such external penetration testing at a frequency determined by an appropriate risk analysis. (B) A security-based swap execution facility shall conduct external penetration testing by engaging independent contractors or by using employees of the security-based swap execution facility who are not responsible for development or operation of the systems or capabilities being tested. (iv) Internal penetration testing. A security-based swap execution facility shall conduct internal penetration testing of a scope sufficient to satisfy the E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations requirements set forth in paragraph (b)(10) of this section. (A) A security-based swap execution facility shall conduct such internal penetration testing at a frequency determined by an appropriate risk analysis. (B) A security-based swap execution facility shall conduct internal penetration testing by engaging independent contractors, or by using employees of the security-based swap execution facility who are not responsible for development or operation of the systems or capabilities being tested. (v) Controls testing. A security-based swap execution facility shall conduct controls testing of a scope sufficient to satisfy the requirements set forth in paragraph (b)(10) of this section. (A) A security-based swap execution facility shall conduct controls testing, which includes testing of each control included in its program of risk analysis and oversight, at a frequency determined by an appropriate risk analysis. Such testing may be conducted on a rolling basis. (B) A security-based swap execution facility shall conduct controls testing by engaging independent contractors or by using employees of the security-based swap execution facility who are not responsible for development or operation of the systems or capabilities being tested. (vi) Security incident response plan testing. A security-based swap execution facility shall conduct security incident response plan testing sufficient to satisfy the requirements set forth in paragraph (b)(10) of this section. (A) A security-based swap execution facility shall conduct such security incident response plan testing at a frequency determined by an appropriate risk analysis. (B) A security-based swap execution facility’s security incident response plan shall include, without limitation, the security-based swap execution facility’s definition and classification of security incidents, its policies and procedures for reporting security incidents and for internal and external communication and information sharing regarding security incidents, and the hand-off and escalation points in its security incident response process. (C) A security-based swap execution facility may coordinate its security incident response plan testing with other testing required by this section or with testing of its other business continuity-disaster recovery and crisis management plans. (D) A security-based swap execution facility may conduct security incident VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 response plan testing by engaging independent contractors or by using employees of the security-based swap execution facility. (vii) Enterprise technology risk assessment. A security-based swap execution facility shall conduct enterprise technology risk assessment of a scope sufficient to satisfy the requirements set forth in paragraph (b)(10) of this section. (A) A security-based swap execution facility shall conduct enterprise technology risk assessment at a frequency determined by an appropriate risk analysis. A security-based swap execution facility that has conducted an enterprise technology risk assessment that complies with this section may conduct subsequent assessments by updating the previous assessment. (B) A security-based swap execution facility may conduct enterprise technology risk assessments by using independent contractors or employees of the security-based swap execution facility who are not responsible for development or operation of the systems or capabilities being assessed. (9) To the extent practicable, a security-based swap execution facility shall: (i) Coordinate its business continuitydisaster recovery plan with those of its members that it depends upon to provide liquidity, in a manner adequate to enable effective resumption of activity in its markets following a disruption causing activation of the security-based swap execution facility’s business continuity-disaster recovery plan; (ii) Initiate and coordinate periodic, synchronized testing of its business continuity- disaster recovery plan with those of members that it depends upon to provide liquidity; and (iii) Ensure that its business continuity-disaster recovery plan takes into account the business continuitydisaster recovery plans of its telecommunications, power, water, and other essential service providers. (10) The scope for all system safeguards testing and assessment required by this section shall be broad enough to include the testing of automated systems and controls that the security-based swap execution facility’s required program of risk analysis and oversight and its current cybersecurity threat analysis indicate is necessary to identify risks and vulnerabilities that could enable an intruder or unauthorized user or insider to: (i) Interfere with the security-based swap execution facility’s operations or with fulfillment of its statutory and regulatory responsibilities; PO 00000 Frm 00157 Fmt 4701 Sfmt 4700 87311 (ii) Impair or degrade the reliability, security, or adequate scalable capacity of the security-based swap execution facility’s automated systems; (iii) Add to, delete, modify, exfiltrate, or compromise the integrity of any data related to the security-based swap execution facility’s regulated activities; or (iv) Undertake any other unauthorized action affecting the security-based swap execution facility’s regulated activities or the hardware or software used in connection with those activities. (11) Both the senior management and the governing board of a security-based swap execution facility shall receive and review reports setting forth the results of the testing and assessment required by this section. A securitybased swap execution facility shall establish and follow appropriate procedures for the remediation of issues identified through such review, as provided in paragraph (b)(12) of this section, and for evaluation of the effectiveness of testing and assessment protocols. (12) A security-based swap execution facility shall identify and document the vulnerabilities and deficiencies in its systems revealed by the testing and assessment required by this section. The security-based swap execution facility shall conduct and document an appropriate analysis of the risks presented by such vulnerabilities and deficiencies, to determine and document whether to remediate or accept the associated risk. When the security-based swap execution facility determines to remediate a vulnerability or deficiency, it must remediate in a timely manner given the nature and magnitude of the associated risk. § 242.831 Core Principle 14—Designation of chief compliance officer. (a)(1) In general. Each security-based swap execution facility shall designate an individual to serve as a chief compliance officer. (2) Duties. The chief compliance officer shall: (i) Report directly to the board or to the senior officer of the facility; (ii) Review compliance with the core principles in this subsection; (iii) In consultation with the board of the facility, a body performing a function similar to that of a board, or the senior officer of the facility, resolve any conflicts of interest that may arise; (iv) Be responsible for establishing and administering the policies and procedures required to be established pursuant to this section; (v) Ensure compliance with the Act and the rules and regulations issued E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87312 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations under the Act, including rules prescribed by the Commission pursuant to section 3D of the Act; (vi) Establish procedures for the remediation of noncompliance issues found during compliance office reviews, look backs, internal or external audit findings, self-reported errors, or through validated complaints; and (vii) Establish and follow appropriate procedures for the handling, management response, remediation, retesting, and closing of noncompliance issues. (3) Annual reports. (i) In general. In accordance with rules prescribed by the Commission, the chief compliance officer shall annually prepare and sign a report that contains a description of: (A) The compliance of the securitybased swap execution facility with the Act; and (B) The policies and procedures, including the code of ethics and conflict of interest policies, of the security-based swap execution facility. (ii) [Reserved] (4) Requirements. The chief compliance officer shall: (i) Submit each report described in paragraph (a)(3) of this section with the appropriate financial report of the security-based swap execution facility that is required to be submitted to the Commission pursuant to this section; and (ii) Include in the report a certification that, under penalty of law, the report is accurate and complete. (b) Authority of chief compliance officer. (1) The position of chief compliance officer shall carry with it the authority and resources to develop, in consultation with the governing board or senior officer, the policies and procedures of the security-based swap execution facility and enforce such policies and procedures to fulfill the duties set forth for chief compliance officers in the Act and the Commission’s rules thereunder. (2) The chief compliance officer shall have supervisory authority over all staff acting at the direction of the chief compliance officer. (c) Qualifications of chief compliance officer. (1) The individual designated to serve as chief compliance officer shall have the background and skills appropriate for fulfilling the responsibilities of the position. (2) No individual that would be disqualified from serving on a securitybased swap execution facility’s governing board or committees pursuant to the criteria set forth in § 242.819(i) may serve as a chief compliance officer. (3) In determining whether the background and skills of a potential VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 chief compliance officer are appropriate for fulfilling the responsibilities of the role of the chief compliance officer, a security-based swap execution facility has the discretion to base its determination on the totality of the qualifications of the potential chief compliance officer, including, but not limited to, compliance experience, related career experience, training, potential conflicts of interest, and any other relevant factors to the position. (d) Appointment and removal of chief compliance officer. (1) Only the governing board or the senior officer may appoint or remove the chief compliance officer. (2) The security-based swap execution facility shall notify the Commission within two business days of the appointment or removal, whether interim or permanent, of a chief compliance officer. (e) Compensation of the chief compliance officer. The governing board or the senior officer shall approve the compensation of the chief compliance officer. (f) Annual meeting with the chief compliance officer. The chief compliance officer shall meet with the governing board or senior officer of the security-based swap execution facility at least annually. (g) Information requested of the chief compliance officer. The chief compliance officer shall provide any information regarding the regulatory program of the security-based swap execution facility as requested by the governing board or the senior officer. (h) Duties of chief compliance officer. The duties of the chief compliance officer shall include, but are not limited to, the following: (1) Overseeing and reviewing compliance of the security-based swap execution facility with section 3D of the Act and the Commission rules thereunder; (2) Taking reasonable steps, in consultation with the governing board or the senior officer of the securitybased swap execution facility, to resolve any material conflicts of interest that may arise, including, but not limited to: (i) Conflicts between business considerations and compliance requirements; (ii) Conflicts between business considerations and the requirement that the security-based swap execution facility provide fair, open, and impartial access as set forth in § 242.819(c); and (iii) Conflicts between a securitybased swap execution facility’s management and members of the governing board; PO 00000 Frm 00158 Fmt 4701 Sfmt 4700 (3) Establishing and administering written policies and procedures reasonably designed to prevent violations of the Act and the rules of the Commission; (4) Taking reasonable steps to ensure compliance with the Act and the rules of the Commission; (5) Establishing procedures reasonably designed to handle, respond, remediate, retest, and resolve noncompliance issues identified by the chief compliance officer through any means, including any compliance office review, look-back, internal or external audit finding, self-reported error, or validated complaint; (6) Establishing and administering a compliance manual designed to promote compliance with the applicable laws, rules, and regulations and a written code of ethics for the securitybased swap execution facility designed to prevent ethical violations and to promote honesty and ethical conduct by personnel of the security-based swap execution facility; (7) Supervising the regulatory program of the security-based swap execution facility with respect to trade practice surveillance; market surveillance; real-time market monitoring; compliance with audit trail requirements; enforcement and disciplinary proceedings; audits, examinations, and other regulatory responsibilities (including taking reasonable steps to ensure compliance with, if applicable, financial integrity, financial reporting, sales practice, recordkeeping, and other requirements); and (8) Supervising the effectiveness and sufficiency of any regulatory services provided to the security-based swap execution facility by a regulatory service provider in accordance with § 242.819(e). (i) Preparation of annual compliance report. The chief compliance officer shall, not less than annually, prepare and sign an annual compliance report that covers the prior fiscal year. The report shall, at a minimum, contain: (1) A description and self-assessment of the effectiveness of the written policies and procedures of the securitybased swap execution facility, including the code of ethics and conflict of interest policies, to reasonably ensure compliance with the Act and applicable Commission rules; (2) Any material changes made to compliance policies and procedures during the coverage period for the report and any areas of improvement or recommended changes to the compliance program; E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations (3) A description of the financial, managerial, and operational resources set aside for compliance with the Act and applicable Commission rules; (4) Any material non-compliance matters identified and an explanation of the corresponding action taken to resolve such non-compliance matters; and (5) A certification by the chief compliance officer that, to the best of their knowledge and reasonable belief, and under penalty of law, the annual compliance report is accurate and complete in all material respects. (j) Submission of annual compliance report and related matters. (1) Furnishing the annual compliance report prior to submission to the Commission. Prior to submission to the Commission, the chief compliance officer shall provide the annual compliance report for review to the governing board or, in the absence of a governing board, to the senior officer. Members of the governing board and the senior officer shall not require the chief compliance officer to make any changes to the report. (2) Submission of annual compliance report to the Commission. The annual compliance report shall be submitted electronically to the Commission using the EDGAR system as an Interactive Data File in accordance with § 232.405 of this chapter not later than 90 calendar days after the end of the security-based swap execution facility’s fiscal year. The security-based swap execution facility shall concurrently file the annual compliance report with the fourthquarter financial report pursuant to § 242.829(g). (3) Amendments to annual compliance report. (i) Promptly upon discovery of any material error or omission made in a previously filed annual compliance report, the chief compliance officer shall file an amendment with the Commission to correct the material error or omission. The chief compliance officer shall submit the amended annual compliance report to the governing board, or in the absence of a governing board, to the senior officer, pursuant to paragraph (j)(1) of this section. (ii) An amendment shall contain the certification required under paragraph (i)(5) of this section. (4) Request for extension. A securitybased swap execution facility may request an extension of time to file its annual compliance report from the Commission. Reasonable and valid requests for extensions of the filing deadline may be granted at the discretion of the Commission. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 (k) Recordkeeping. A security-based swap execution facility shall maintain all records demonstrating compliance with the duties of the chief compliance officer and the preparation and submission of annual compliance reports consistent with § 242.826 (Core Principle 9). § 242.832 Application of the trade execution requirement to cross-border security-based swap transactions. (a) The trade execution requirement set forth in section 3C(h) of the Act shall not apply in connection with a securitybased swap unless at least one counterparty to the security-based swap is a ‘‘covered person’’ as defined in paragraph (b) of this section. (b) A ‘‘covered person’’ means, with respect to a particular security-based swap, any person that is: (1) A U.S. person; (2) A non-U.S. person whose performance under a security-based swap is guaranteed by a U.S. person; or (3) A non-U.S. person who, in connection with its security-based swap dealing activity, uses U.S. personnel located in a U.S. branch or office, or personnel of an agent of such non-U.S. person located in a U.S. branch or office, to arrange, negotiate, or execute a transaction. § 242.833 Cross-border exemptions. (a) Exemptions for foreign trading venues for security-based swaps. An application for an order for exemptive relief under section 36(a)(1) of the Act (15 U.S.C. 78mm(a)(1)) relating to the registration status under the Act of a foreign trading venue for security-based swaps that has one or more members who are covered persons, as defined in § 242.832, with respect to security-based swaps transacted on that venue may state that the application also is submitted pursuant to this paragraph (a). In such case, the Commission will consider the submission as an application to exempt the foreign trading venue, with respect to its providing a market place for securitybased swaps, from: (1) The definition of ‘‘exchange’’ in section 3(a)(1) of the Act (15 U.S.C. 78c(a)(1)); (2) The definition of ‘‘security-based swap execution facility’’ in section 3(a)(77) of the Act (15 U.S.C. 78c(a)(77)); (3) The definition of ‘‘broker’’ in section 3(a)(4) of the Act (15 U.S.C. 78c(a)(4)); and (4) Section 3D(a)(1) of the Act (15 U.S.C. 78c–4(a)(1)). (b) Exemptions relating to the trade execution requirement. (1) An application for an order for exemptive PO 00000 Frm 00159 Fmt 4701 Sfmt 4700 87313 relief under section 36(a)(1) of the Act (15 U.S.C. 78mm(a)(1)) relating to the application of the trade execution requirement in section 3C(h) of the Act (15 U.S.C. 78c–3(h)) to security-based swaps executed on a foreign trading venue, may state that the application also is submitted pursuant to this paragraph (b). (2) When considering an application under section 36 of the Act (15 U.S.C. 78mm) and this paragraph (b), the Commission may consider: (i) The extent to which the securitybased swaps traded in the foreign jurisdiction covered by the request are subject to a trade execution requirement comparable to that in section 3C(h) of the Act (15 U.S.C. 78c–3(h)) and the Commission’s rules thereunder; (ii) The extent to which trading venues in the foreign jurisdiction covered by the request are subject to regulation and supervision comparable to that under the Act, including section 3D of the Act (15 U.S.C. 78c–4), and the Commission’s rules thereunder; (iii) Whether the foreign trading venue or venues where covered persons, as defined in § 242.832, intend to trade security-based swaps have received an exemption order contemplated by paragraph (a) of this section; and (iv) Any other factor that the Commission believes is relevant for assessing whether the exemption is in the public interest and consistent with the protection of investors. § 242.834 Mitigation of conflicts of interest of security-based swap execution facilities and certain exchanges. (a) Definitions. For purposes of this section: Family relationship of a person means the person’s spouse, former spouse, parent, stepparent, child, stepchild, sibling, stepbrother, stepsister, grandparent, grandchild, uncle, aunt, nephew, niece, or in-law. Major disciplinary committee means a committee of persons who are authorized by a security-based swap execution facility to conduct disciplinary hearings, to settle disciplinary charges, to impose disciplinary sanctions, or to hear appeals thereof in cases involving any violation of the rules of the securitybased swap execution facility except those which: (i) Are related to decorum or attire, financial requirements, or reporting or recordkeeping; and (ii) Do not involve fraud, deceit, or conversion. Member’s affiliated firm is a firm in which the member is a principal or an employee. E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 87314 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations Named party in interest means a person or entity that is identified by name as a subject of any matter being considered by a governing board, disciplinary committee, or oversight panel. Significant action includes any of the following types of actions or rule changes by a security-based swap execution facility or SBS exchange that can be implemented without the Commission’s prior approval: (i) Any actions or rule changes which address an emergency; and (ii) Any changes in margin levels that are designed to respond to extraordinary market conditions such as an actual or attempted corner, squeeze, congestion, or undue concentration of positions, or that otherwise are likely to have a substantial effect on prices in any contract traded or cleared at such security-based swap execution facility or SBS exchange; but does not include any rule not submitted for prior Commission approval because such rule is unrelated to the terms and conditions of any security-based swap traded at such security-based swap execution facility or SBS exchange. (b) Ownership and voting limitations. Each security-based swap execution facility and SBS exchange shall not permit any of its members, either alone or together with any officer, principal, or employee of the member, to: (1) Own, directly or indirectly, 20 percent or more of any class of voting securities or of other voting interest in the security-based swap execution facility or SBS exchange; or (2) Directly or indirectly vote, cause the voting of, or give any consent or proxy with respect to the voting of, any interest that exceeds 20 percent of the voting power of any class of securities or of other ownership interest in the security-based swap execution facility or SBS exchange. (3) The ownership and voting limitations in paragraphs (b)(1) and (2) of this section shall not apply to an SBSEF that has, pursuant to § 242.819(e), entered into an agreement with a registered futures association or a national securities association for the provision of regulatory services that encompass, at a minimum, real-time market monitoring under § 242.819(d)(5) and investigations and investigation reports under § 242.819(d)(6). (c) Enforcement of limitations. The rules of each security-based swap execution facility and SBS exchange must be reasonably designed, and have an effective mechanism, to: (1) Deny effect to the portion of any voting interest held by a member in VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 excess of the limitations in paragraph (b) of this section; (2) Compel a member who possesses a voting interest in excess of the limitations in paragraph (b) of this section to divest enough of that voting interest to come within those limitations; and (3) Obtain information relating to its ownership and voting interests owned or controlled, directly or indirectly, by its members. (d) Disciplinary committees and hearing panels. Each security-based swap execution facility and SBS exchange shall ensure that its disciplinary processes preclude any member, or group or class of its members, from dominating or exercising disproportionate influence on the disciplinary process. Each major disciplinary committee or hearing panel thereof shall include sufficient different groups or classes of its members so as to ensure fairness and to prevent special treatment or preference for any person or member in the conduct of the responsibilities of the committee or panel. (e) Governing board composition. Each security-based swap execution facility and SBS exchange shall ensure that: (1) Twenty percent or more of the persons who are eligible to vote routinely on matters being considered by the governing board (excluding those members who are eligible to vote only in the case of a tie vote by the governing board) are: (i) Knowledgeable of security-based swap trading or financial regulation, or otherwise capable of contributing to governing board deliberations; (ii) Not members of the security-based swap execution facility or SBS exchange; (iii) Not salaried employees of the security-based swap execution facility or SBS exchange; (iv) Not primarily performing services for the security-based swap execution facility or SBS exchange in a capacity other than as a member of the governing board; and (v) Not officers, principals, or employees of a firm which holds a membership at the security-based swap execution facility or SBS exchange, either in its own name or through an employee on behalf of the firm; and (2) The membership of the governing board includes a diversity of groups or classes of its members. The securitybased swap execution facility or SBS exchange must be able to demonstrate that the board membership fairly represents the diversity of interests at such security-based swap execution PO 00000 Frm 00160 Fmt 4701 Sfmt 4700 facility or SBS exchange and is otherwise consistent with the composition requirements of this section. (f) Providing information about the board to the Commission. Each securitybased swap execution facility and SBS exchange shall submit to the Commission, within 30 days after each governing board election, a list of the governing board’s members, the groups or classes of its members that they represent, and how the composition of the governing board otherwise meets the requirements of this section. (g) Voting by interested members of governing boards and various committees of security-based swap execution facilities and SBS exchanges. (1) Rules required. Each security-based swap execution facility and SBS exchange shall maintain in effect rules to address the avoidance of conflicts of interest in the execution of its regulatory functions. Such rules must provide for the following: (i) Relationship with named party in interest. (A) Nature of relationship. A member of a governing board, disciplinary committee, or oversight panel of a security-based swap execution facility or SBS exchange must abstain from such body’s deliberations and voting on any matter involving a named party in interest where such member: (1) Is a named party in interest; (2) Is an employer, employee, or fellow employee of a named party in interest; (3) Has any other significant, ongoing business relationship with a named party in interest, not including relationships limited to executing security-based swaps opposite of each other or to clearing security-based swaps through the same clearing member; or (4) Has a family relationship with a named party in interest. (B) Disclosure of relationship. Prior to the consideration of any matter involving a named party in interest, each member of a governing board, disciplinary committee, or oversight panel of a security-based swap execution facility or SBS exchange must disclose to the appropriate staff of the security-based swap execution facility or SBS exchange whether they have one of the relationships listed in paragraph (g)(1)(i)(A) of this section with a named party in interest. (C) Procedure for determination. Each security-based swap execution facility and SBS exchange must establish procedures for determining whether any member of its governing board, disciplinary committees, or oversight E:\FR\FM\15DER2.SGM 15DER2 ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations committees is subject to a conflicts restriction in any matter involving a named party in interest. Taking into consideration the exigency of the committee action, such determinations should be based upon: (1) Information provided by the member pursuant to paragraph (g)(1)(i)(B) of this section; and (2) Any other source of information that is held by and reasonably available to the security-based swap execution facility or SBS exchange. (ii) Financial interest in a significant action. (A) Nature of interest. A member of the governing board, disciplinary committee, or oversight panel of a security-based swap execution facility or SBS exchange must abstain from such body’s deliberations and voting on any significant action if the member knowingly has a direct and substantial financial interest in the result of the vote based upon either exchange or nonexchange positions that could reasonably be expected to be affected by the action. (B) Disclosure of interest. Prior to the consideration of any significant action, each member of a governing board, disciplinary committee, or oversight panel of a security-based swap execution facility or SBS exchange must disclose to the appropriate staff of the security-based swap execution facility or SBS exchange the position information referred to in paragraph (g)(1)(ii)(C) of this section that is known to them. This requirement does not apply to members who choose to abstain from deliberations and voting on the subject significant action. (C) Procedure for determination. Each security-based swap execution facility and SBS exchange must establish procedures for determining whether any member of its governing board, disciplinary committees, or oversight committees is subject to a conflicts restriction under this section in any significant action. Such determination must include a review of any positions, whether maintained at that securitybased swap execution facility, SBS exchange, or elsewhere, held in the member’s personal accounts or the proprietary accounts of the member’s affiliated firm that the security-based swap execution facility or SBS exchange reasonably expects could be affected by the significant action. (D) Bases for determination. Taking into consideration the exigency of the significant action, such determinations should be based upon: (1) Information provided by the member with respect to positions pursuant to paragraph (f)(2)(ii)(B) of this section; and VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 (2) Any other source of information that is held by and reasonably available to the security-based swap execution facility or SBS exchange. (iii) Participation in deliberations. (A) Under the rules required by this section, a governing board, disciplinary committee, or oversight panel of a security-based swap execution facility or SBS exchange may permit a member to participate in deliberations prior to a vote on a significant action for which they otherwise would be required to abstain, pursuant to paragraph (g)(1)(ii) of this section, if such participation would be consistent with the public interest and the member recuses from voting on such action. (B) In making a determination as to whether to permit a member to participate in deliberations on a significant action for which they otherwise would be required to abstain, the deliberating body shall consider the following factors: (1) Whether the member’s participation in deliberations is necessary for the deliberating body to achieve a quorum in the matter; and (2) Whether the member has unique or special expertise, knowledge, or experience in the matter under consideration. (C) Prior to any determination pursuant to paragraph (g)(1)(iii)(A) of this section, the deliberating body must fully consider the position information which is the basis for the member’s direct and substantial financial interest in the result of a vote on a significant action pursuant to paragraph (g)(1)(ii) of this section. (iv) Documentation of determination. The governing boards, disciplinary committees, and oversight panels of each security-based swap execution facility and SBS exchange must reflect in their minutes or otherwise document that the conflicts determination procedures required by this section have been followed. Such records also must include: (A) The names of all members who attended the meeting in person or who otherwise were present by electronic means; (B) The name of any members who voluntarily recused themselves or were required to abstain from deliberations and/or voting on a matter and the reason for the recusal or abstention, if stated; and (C) Information on the position information that was reviewed for each member. (h) Rules required. (1) A securitybased swap execution facility shall maintain in effect rules to comply with this section that have been submitted to PO 00000 Frm 00161 Fmt 4701 Sfmt 4700 87315 the Commission pursuant to § 242.806 or § 242.807. (2) An SBS exchange shall maintain in effect rules to comply with this section that have been submitted to the Commission pursuant to § 240.19b-4 of this chapter. § 242.835 Notice to Commission by security-based swap execution facility of final disciplinary action or denial or limitation of access. (a) If a security-based swap execution facility issues a final disciplinary action against a member, or takes final action with respect to a denial or conditioning membership, or takes final action with respect to a denial or limitation of access of a person to any services offered by the security-based swap execution facility, the security-based swap execution facility shall file a notice of such action with the Commission within 30 days and serve a copy on the affected person. (b) For purposes of paragraph (a) of this section: (1) A disciplinary action shall not be considered ‘‘final’’ unless: (i) The affected person has exhausted their administrative remedies at the security-based swap execution facility; and (ii) The disciplinary action is not a summary action permitted under § 242.819(g)(13)(ii). (2) A disposition of a matter with respect to a denial or conditioning of membership, or a denial or limitation of access shall not be considered ‘‘final’’ unless such person has exhausted their administrative remedies at the securitybased swap execution facility with respect to such matter. (c) A notice required by paragraph (a) of this section shall provide the following information: (1) The name of the member and its last known address, as reflected in the security-based swap execution facility’s records; (2) The name of the person, committee, or other organizational unit of the security-based swap execution facility that initiated the disciplinary action or access restriction; (3) In the case of a final disciplinary action: (i) A description of the acts or practices, or omissions to act, upon which the sanction is based, including, as appropriate, the specific rules that the security-based swap execution facility has found to have been violated; (ii) A statement describing the respondent’s answer to the charges; and (iii) A statement of the sanction imposed and the reasons therefor; (4) In the case of a final action with respect to a denial or conditioning of E:\FR\FM\15DER2.SGM 15DER2 87316 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations ddrumheller on DSK120RN23PROD with RULES2 membership, or a denial or limitation of access: (i) The financial or operating difficulty of the member or prospective member (as the case may be) upon which the security-based swap execution facility determined that the member or prospective member could not be permitted to do, or continue to do, business with safety to investors, creditors, other members, or the security-based swap execution facility; (ii) The pertinent failure to meet qualification requirements or other prerequisites for membership or access and the basis upon which the securitybased swap execution facility determined that the person concerned could not be permitted to have membership or access with safety to investors, creditors, other members, or the security-based swap execution facility; or (iii) The default of any delivery of funds or securities to a clearing agency by the member; (5) The effective date of the final disciplinary action, or final action with respect to a denial or conditioning of membership, or a denial or limitation of access; and (6) Any other information that the security-based swap execution facility may deem relevant. VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934 22. The general authority citation for part 249 continues to read in part as follows: ■ Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111–203, 124 Stat. 1904; Sec. 102(a)(3), Pub. L. 112–106, 126 Stat. 309 (2012); Sec. 107, Pub. L. 112–106, 126 Stat. 313 (2012), Sec. 72001, Pub. L. 114–94, 129 Stat. 1312 (2015), and secs. 2 and 3, Pub. L. 116–222, 134 Stat. 1063 (2020), unless otherwise noted. * ■ * * * * 23. Add subpart R to read as follows: Subpart R—Forms for Registration of, and Filings by, Security-Based Swap Execution Facilities Sec. 249.1701 Form SBSEF. 249.1702 Security-Based Swap Execution Facility Cover Sheet. § 249.1701 Form SBSEF, for application for registration as a security-based swap execution facility or to amend such application or registration. This form shall be used for application for registration as a securitybased swap execution facility, pursuant to section 3D of the Securities Exchange Act of 1934 (15 U.S.C. 78c–4) and PO 00000 Frm 00162 Fmt 4701 Sfmt 4700 § 242.803 of this chapter, or to amend such application or registration. § 249.1702 Submission cover sheet, for rule and product submissions. This submission cover sheet shall be used by registered security-based swap execution facilities for making submissions pursuant to §§ 242.804 through 242.807, 242.809, and 242.816). ■ 24. Add Form SBSEF (referenced in § 249.1701). Note: Form SBSEF is attached as Appendix A to this document. Form SBSEF will not appear in the Code of Federal Regulations. 25. Add Security-Based Swap Execution Facility Submission Cover Sheet (referenced in § 249.1702). ■ Note: Security-Based Swap Execution Facility Submission Cover Sheet is attached as Appendix B to this document. The Security-Based Swap Execution Facility Submission Cover Sheet will not appear in the Code of Federal Regulations. By the Commission. Dated: November 2, 2023. J. Matthew DeLesDernier, Deputy Secretary. Note: The following appendices will not appear in the Code of Federal Regulations. Appendix A—Form SBSEF BILLING CODE 8011–01–P E:\FR\FM\15DER2.SGM 15DER2 VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00163 Fmt 4701 Sfmt 4725 E:\FR\FM\15DER2.SGM 15DER2 87317 ER15DE23.005</GPH> ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations VerDate Sep<11>2014 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00164 Fmt 4701 Sfmt 4725 E:\FR\FM\15DER2.SGM 15DER2 ER15DE23.006</GPH> ddrumheller on DSK120RN23PROD with RULES2 87318 VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00165 Fmt 4701 Sfmt 4725 E:\FR\FM\15DER2.SGM 15DER2 87319 ER15DE23.007</GPH> ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations VerDate Sep<11>2014 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00166 Fmt 4701 Sfmt 4725 E:\FR\FM\15DER2.SGM 15DER2 ER15DE23.008</GPH> ddrumheller on DSK120RN23PROD with RULES2 87320 VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00167 Fmt 4701 Sfmt 4725 E:\FR\FM\15DER2.SGM 15DER2 87321 ER15DE23.009</GPH> ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations VerDate Sep<11>2014 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00168 Fmt 4701 Sfmt 4725 E:\FR\FM\15DER2.SGM 15DER2 ER15DE23.010</GPH> ddrumheller on DSK120RN23PROD with RULES2 87322 VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00169 Fmt 4701 Sfmt 4725 E:\FR\FM\15DER2.SGM 15DER2 87323 ER15DE23.011</GPH> ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations VerDate Sep<11>2014 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00170 Fmt 4701 Sfmt 4725 E:\FR\FM\15DER2.SGM 15DER2 ER15DE23.012</GPH> ddrumheller on DSK120RN23PROD with RULES2 87324 VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00171 Fmt 4701 Sfmt 4725 E:\FR\FM\15DER2.SGM 15DER2 87325 ER15DE23.013</GPH> ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations VerDate Sep<11>2014 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00172 Fmt 4701 Sfmt 4725 E:\FR\FM\15DER2.SGM 15DER2 ER15DE23.014</GPH> ddrumheller on DSK120RN23PROD with RULES2 87326 VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00173 Fmt 4701 Sfmt 4725 E:\FR\FM\15DER2.SGM 15DER2 87327 ER15DE23.015</GPH> ddrumheller on DSK120RN23PROD with RULES2 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations 87328 Federal Register / Vol. 88, No. 240 / Friday, December 15, 2023 / Rules and Regulations [FR Doc. 2023–24587 Filed 12–14–23; 8:45 am] VerDate Sep<11>2014 19:22 Dec 14, 2023 Jkt 262001 PO 00000 Frm 00174 Fmt 4701 Sfmt 9990 E:\FR\FM\15DER2.SGM 15DER2 ER15DE23.016</GPH> ddrumheller on DSK120RN23PROD with RULES2 BILLING CODE 8011–01–C

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 88, Number 240 (Friday, December 15, 2023)]
[Rules and Regulations]
[Pages 87156-87328]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-24587]

[[Page 87155]]

Vol. 88

Friday,

No. 240

December 15, 2023

Part III

Securities and Exchange Commission

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17 CFR Parts 200, 201, 232, et al.

Security-Based Swap Execution and Registration and Regulation of
Security-Based Swap Execution Facilities; Final Rule

Federal Register / Vol. 88 , No. 240 / Friday, December 15, 2023 /
Rules and Regulations

[[Page 87156]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 201, 232, 240, 242, and 249

[Release No. 34-98845; File No. S7-14-22]
RIN 3235-AK93

Security-Based Swap Execution and Registration and Regulation of
Security-Based Swap Execution Facilities

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') is adopting a set of rules and forms under the
Securities Exchange Act of 1934 (``SEA'') that would create a regime
for the registration and regulation of security-based swap execution
facilities (``SBSEFs'') and address other issues relating to security-
based swap (``SBS'') execution generally. One of the rules being
adopted implements an element of the Dodd-Frank Act that is intended to
mitigate conflicts of interest at SBSEFs and national securities
exchanges that trade SBS (``SBS exchanges''). Other rules being adopted
address the cross-border application of the SEA's trading venue
registration requirements and the trade execution requirement for SBS.
In addition, the Commission is amending an existing rule to exempt,
from the SEA definition of ``exchange,'' certain registered clearing
agencies, as well as registered SBSEFs that provide a market place only
for SBS. The Commission is also adopting a new rule that, while
affirming that an SBSEF would be a broker under the SEA, exempts a
registered SBSEF from certain broker requirements. Further, the
Commission is adopting certain new rules and amendments to its Rules of
Practice to allow persons who are aggrieved by certain actions by an
SBSEF to apply for review by the Commission. Finally, the Commission is
delegating new authority to the Director of the Division of Trading and
Markets and to the General Counsel to take actions necessary to carry
out the rules being adopted.

DATES:
Effective date: February 13, 2024.
Compliance dates: See section XVI (Compliance Schedule).

FOR FURTHER INFORMATION CONTACT: Michael E. Coe, Assistant Director;
David Liu, Special Counsel; Leah Mesfin, Special Counsel; Michou
Nguyen, Special Counsel; or Geoffrey Pemble, Special Counsel, at (202)
551-5000, Office of Market Supervision, Division of Trading and
Markets, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is adopting new 17 CFR
242.800 through 242.835 (``Regulation SE'') to create a regime for the
registration and regulation of SBSEFs and to address other issues
relating to SBS execution generally. Regulation SE consists of 17 CFR
242.800 through 242.835 (Rules 800 through 835). Key rules within
Regulation SE include Rule 803, which establishes a process for SBSEF
registration; Rules 804 to 810, which establish procedures for rule and
product filings by SBSEFs; Rule 815, which establishes permissible
execution methods for SBS that are subject to the SEA's trade execution
requirement; Rule 816, which sets out a procedure for SBSEFs to make an
SBS available to trade and establish certain exemptions from the trade
execution requirement; Rules 818 to 831, which implement the 14 Core
Principles for SBSEFs set forth in section 3D(d) of the SEA; Rules 832
to 833, which address cross-border matters; and Rule 834, which imposes
requirements addressing conflicts of interest involving SBSEFs and SBS
exchanges, as required by section 765 of the Dodd-Frank Act.
In addition to the rules described above, the Commission is also
adopting 17 CFR 249.1701 (Form SBSEF), which is the form that an entity
will use to register with the Commission as an SBSEF; 17 CFR 249.1702
(a submission cover sheet), which will be required to accompany filings
with the Commission made by SBSEFs for rule and rule amendments and for
product listings; adopting amendments to 17 CFR 232.405 (Rule 405 of
Regulation S-T) to require various SBSEF filings to be provided in
Inline eXtensible Business Reporting Language (``Inline XBRL''), a
structured data language; adopting amendments to 17 CFR 240.3a1-1 (Rule
3a1-1) to exempt from the SEA definition of ``exchange'' certain
registered clearing agencies, as well as registered SBSEFs that provide
a market place only for SBS; adopting 17 CFR 240.15a-12 (Rule 15a-12),
which, while affirming that an SBSEF would also be a broker under the
SEA, exempts a registered SBSEF from certain broker requirements;
providing for the sunset of existing temporary exemptions from the
requirement to register as a clearing agency that, among other things,
applies to an entity performing the functions of an SBSEF but that is
not yet registered as such, and from the requirement to register as an
SBSEF or a national securities exchange for entities that meet the
statutory definition of SBSEF; adopting certain new rules and
amendments to 17 CFR part 201 (Rules of Practice) to allow persons who
are aggrieved by certain actions by an SBSEF to apply for review by the
Commission; and adopting amendments to 17 CFR 200.30-3 and 17 CFR
200.30-14 regarding delegations of authority to the Director of the
Division of Trading and Markets and to the General Counsel.

Table of Contents

I. Background
II. Introductory Provisions of Regulation SE
A. Rule 800--Scope
B. Rule 801--Applicable Provisions
C. Rule 802--Definitions
III. Registration of SBSEFs
A. Rule 803--Requirements and Procedures for Registration
B. Form SBSEF
IV. Rule and Product Filings by SBSEFs
A. Rule 804--Listing Products for Trading by Certification
B. Rule 805--Voluntary Submission of New Products for Commission
Review and Approval
C. Rule 806--Voluntary Submission of Rules for Commission Review
and Approval
D. Rule 807--Self-Certification of Rules
E. Submission Cover Sheet and Instructions
F. Rule 808--Availability of Public Information
G. Rule 809--Staying of Certification and Tolling of Review
Period Pending Jurisdictional Determination
H. Rule 810--Product Filings by SBSEFs That Are Not Yet
Registered and by Dormant SBSEFs
V. Miscellaneous Requirements
A. Rule 811--Information Relating to SBSEF Compliance
B. Rule 812--Enforceability
C. Rule 813--Prohibited Use of Data Collected for Regulatory
Purposes
D. Rule 814--Entity Operating Both a National Securities
Exchange and an SBSEF
E. Rule 815--Methods of Execution for Required and Permitted
Transactions
F. Rule 816--Trade Execution Requirement and Exemptions
Therefrom
G. Rule 817--Trade Execution Compliance Schedule
VI. Implementation of Core Principles
A. Rule 818--Core Principle 1--Compliance With Core Principles
B. Rule 819--Core Principle 2--Compliance With Rules
C. Rule 820--Core Principle 3--SBS Not Readily Susceptible to
Manipulation
D. Rule 821--Core Principle 4--Monitoring of Trading and Trade
Processing
E. Rule 822--Core Principle 5--Ability To Obtain Information
F. Rule 823--Core Principle 6--Financial Integrity of
Transactions
G. Rule 824--Core Principle 7--Emergency Authority
H. Rule 825--Core Principle 8--Timely Publication of Trading
Information

[[Page 87157]]

I. Rule 826--Core Principle 9--Recordkeeping and Reporting
J. Rule 827--Core Principle 10--Antitrust Considerations
K. Rule 828--Core Principle 11--Conflicts of Interest
L. Rule 829--Core Principle 12--Financial Resources
M. Rule 830--Core Principle 13--System Safeguards
N. Rule 831--Core Principle 14--Designation of Chief Compliance
Officer
VII. Cross-Border Rules
A. Rule 832--Cross-Border Mandatory Trade Execution
B. Rule 833--Cross-Border Exemptions for Foreign Trading Venues
and Relating to the Trade Execution Requirement
VIII. Rule 834--Implementation of Section 765 of the Dodd-Frank Act
and Governance of SBSEFs and SBS Exchanges
A. Rule 834(a)
B. Rule 834(b)
C. Rule 834(c)
D. Rule 834(d)
E. Rule 834(e)
F. Rule 834(f)
G. Rule 834(g)
H. Rule 834(h)
IX. Rule 835--Notice to Commission by SBSEF of Final Disciplinary
Action, Denial or Conditioning of Membership, or Denial or
Limitation of Access
X. Amendments to Existing Rule 3a1-1 Under the SEA-Exemptions From
the Definition of ``Exchange''
XI. Rule 15a-12--SBSEFs as Registered Brokers; Relief From Certain
Broker Requirements
XII. Termination of Temporary Exemptions
XIII. Electronic Filings Under Regulation SE
A. Use of Electronic Filing Systems and Structured Data
B. Use of Identifiers
XIV. Amendments to Commission's Rules of Practice for Appeals of
SBSEF Actions
A. Amendment to Rule 101
B. Amendment to Rule 202
C. Amendment to Rule 210
D. Amendment to Rule 401
E. Rule 442--Right To Appeal
F. Rule 443--Sua sponte Review by Commission
G. Amendment to Rule 450
H. Amendment to Rule 460
XV. Amendments to Delegations of Authority in Rule 30-3 and Rule 30-
14
A. Delegated Authority Related to SBSEF Registration and Form
SBSEF
B. Delegated Authority Related to New Products Proposed by an
SBSEF
C. Delegated Authority Related to New Rules or Rule Amendments
Proposed by an SBSEF
D. Delegated Authority Related To Request for Joint
Interpretation
E. Delegated Authority Related to SBSEF Submissions Contemplated
by Rule 811
F. Delegated Authority Related to Information Sharing
G. Delegated Authority Related to Commission Review Proceedings
XVI. Compliance Schedule
XVII. Economic Analysis
A. Introduction
B. Economic Baseline
C. Benefits and Costs
D. Effects on Efficiency, Competition, and Capital Formation
E. Reasonable Alternatives
XVIII. Paperwork Reduction Act
A. Summary of Collection of Information
B. Proposed Use of Information
C. Respondents
D. Total Annual Reporting and Recordkeeping Burden
E. Collection of Information is Mandatory
F. Responses To Collection of Information Will Not Be
Confidential
G. Retention Period of Recordkeeping Requirements
XIX. Regulatory Flexibility Certification
A. SBSEFs
B. Persons Requesting an Exemption Order Pursuant to Rule 833
C. SBS Exchanges
D. Certification
XX. Other Matters

I. Background

The Commission is adopting Regulation SE,\1\ which governs the
registration and regulation of SBSEFs, as required by section 3D of the
SEA.\2\ Section 3D was enacted as part of Title VII of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'').\3\
The Dodd-Frank Act was enacted, among other reasons, to promote the
financial stability of the United States by improving accountability
and transparency in the financial system.\4\ The 2008 financial crisis
highlighted significant issues in the over-the-counter (``OTC'')
derivatives markets, which experienced dramatic growth in the years
leading up to the financial crisis and are capable of affecting
significant sectors of the U.S. economy.
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\1\ The Commission proposed Regulation SE on Apr. 6, 2022. See
Rules Relating to Security-Based Swap Execution and Registration and
Regulation of Security-Based Swap Execution Facilities (Proposed
Rule), SEA Release No. 94615 (Apr. 6, 2022), 87 FR 28872 (May 11,
2022) (``Proposing Release'').
\2\ 15 U.S.C. 78c-4. In this release, the Commission is defining
the Securities Exchange Act as the ``SEA'' to distinguish it from
the Commodity Exchange Act (``CEA'').
\3\ Public Law 111-203, H.R. 4173, sec. 763(c).
\4\ See Public Law 111-203 Preamble.
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Section 3D(a)(1) of the SEA provides that no person may operate a
facility for the trading or processing of SBS unless the facility is
registered as an SBSEF or as a national securities exchange. Section
3D(d) enumerates 14 Core Principles with which SBSEFs must comply.\5\
And section 3D(f) requires the Commission to prescribe rules governing
the regulation of SBSEFs. In addition, section 765 of the Dodd-Frank
Act directs the Commission to adopt rules to mitigate conflicts of
interest with respect to clearing agencies that clear SBS (``SBS
clearing agencies''), SBSEFs, and national securities exchanges that
post or make available for trading SBS (``SBS exchanges'').
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\5\ See infra section VI (listing the Core Principles).
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On April 6, 2022, the Commission proposed Regulation SE, relating
to the registration and regulation of SBSEFs and to SBS execution
generally.\6\ As discussed in the Proposing Release, the proposed rules
superseded previous Commission proposals on these subjects.\7\
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\6\ See Proposing Release, supra note 1. In 2011, the Commission
published for comment proposed Regulation SBSEF relating to, among
other things, the registration and regulation of SBSEFs.
Registration and Regulation of Security-Based Swap Execution
Facilities, SEA Release No. 63825 (Feb. 2, 2011), 76 FR 10948 (Feb.
28, 2011) (``2011 SBSEF Proposal''). The Proposing Release, which
contains a more detailed discussion of that and related proposals,
withdrew the 2011 SBSEF Proposal. See Proposing Release, 87 FR at
28874.
\7\ See Proposing Release, supra note 1, 87 FR at 28874.
However, Rule 834 of proposed Regulation SE would implement section
765 only with respect to SBSEFs and SBS exchanges. See infra section
VIII.
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The SBS market is closely related to the swaps market, which is
regulated by the Commodity Futures Trading Commission (``CFTC'').\8\ In
June 2013, the CFTC adopted rules (in 17 CFR chapter I) under Title VII
of the Dodd-Frank Act for swap execution facilities (``SEFs'').\9\ The
swaps market has grown and matured within the framework established by
the CFTC's rules.\10\ As

[[Page 87158]]

discussed in the Proposing Release, the SBS market is a small fraction
of the overall swaps market, and the swaps market provides greater
opportunities for revenue capture from swap execution as compared to
SBS execution.\11\ For example, as of November 25, 2022, the gross
notional amount outstanding in the SBS market was approximately $8.5
trillion across the credit, equity, and interest rate asset
classes,\12\ while the gross notional amount outstanding in the swaps
market was approximately $352 trillion across the interest rate,
credit, and foreign-exchange asset classes.\13\ The Commission was
sensitive in the Proposing Release to the economic impact its proposed
SBSEF rules could have.\14\
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\8\ In adopting Regulation SE, the Commission has consulted and
coordinated with the CFTC and the prudential regulators, in
accordance with the consultation mandate of the Dodd-Frank Act.
Section 712(a)(2) of the Dodd-Frank Act provides in relevant part
that the Commission shall ``consult and coordinate to the extent
possible with the Commodity Futures Trading Commission and the
prudential regulators for the purposes of assuring regulatory
consistency and comparability, to the extent possible.'' In
addition, section 752(a) of the Dodd-Frank Act provides in relevant
part that ``[i]n order to promote effective and consistent global
regulation of swaps and security-based swaps, the Commodity Futures
Trading Commission, the Securities and Exchange Commission, and the
prudential regulators . . . as appropriate, shall consult and
coordinate with foreign regulatory authorities on the establishment
of consistent international standards with respect to the regulation
(including fees) of swaps.'' The term ``prudential regulator'' is
defined in section 1a(39) of the CEA, 7 U.S.C. 1a(39), and that
definition is incorporated by reference in section 3(a)(74) of the
SEA, 15 U.S.C. 78c(a)(74).
\9\ See CFTC, Core Principles and Other Requirements for Swap
Execution Facilities, 78 FR 33476 (June 4, 2013) (``2013 CFTC Final
SEF Rules Release''); CFTC, Process for a Designated Contract Market
or Swap Execution Facility To Make a Swap Available to Trade, Swap
Transaction Compliance and Implementation Schedule, and Trade
Execution Requirement Under the Commodity Exchange Act, 78 FR 33606
(June 4, 2013) (``2013 CFTC Final MAT Rules Release'').
\10\ In 2018, the CFTC proposed to make fundamental changes to
the SEF regulatory structure. See CFTC, Swap Execution Facilities
and Trade Execution Requirement, 83 FR 61946 (Nov. 30, 2018) (``2018
SEF Proposal''). In 2021, the CFTC ultimately declined to finalize
the 2018 SEF Proposal and elected instead ``to improve the SEF
framework through targeted rulemakings that address distinct
issues.'' Accordingly, the CFTC withdrew the unadopted portions of
its 2018 proposal. See CFTC, Swap Execution Facilities and Trade
Execution Requirement--Proposed rule; partial withdrawal, 86 FR
9304, 9304 (Feb. 12, 2021).
\11\ See Proposing Release, supra note 1, 87 FR at 28874-76.
\12\ See Report on Security-Based Swaps (Mar. 20, 2023),
available at https://www.sec.gov/files/report-security-based-swaps-032023.pdf. See also infra note 815 and accompanying text
(discussing security-based swap transactions data in the credit,
equity, and interest rate derivatives asset classes reported by
registered SBSDRs).
\13\ See CFTC Swaps Report, available at https://www.cftc.gov/MarketReports/SwapsReports/L3Grossexp.html (accessed on Sept. 27,
2023).
\14\ See Proposing Release, supra note 1, 87 FR at 28875.
---------------------------------------------------------------------------

In addition, the Commission recognized that the entities that are
most likely to register with the Commission as SBSEFs are existing,
CFTC-registered SEFs, which have already made substantial investments
in systems, policies, and procedures to comply with and adapt to the
regulatory system developed by the CFTC. Harmonization between the
Commission's SBSEF rules and the CFTC's SEF rules could facilitate the
ability of entities to dually register and minimize costs by allowing
incumbent SEFs to use their existing systems, policies, and procedures
to comply with the Commission's SBSEF rules.\15\
---------------------------------------------------------------------------

\15\ See Proposing Release, supra note 1, 87 FR at 28875.
---------------------------------------------------------------------------

Thus, in proposing Regulation SE, the Commission took the general
approach of harmonizing closely with analogous CFTC SEF rules, except
where differences in the SEC's statutory authority relative to the
CFTC's statutory authority, or differences in the SBS market relative
to the swaps market, necessitated differences between the Commission's
rules and the CFTC's, or where the benefits of deviating from the
CFTC's rules would otherwise justify the burdens and costs associated
with imposing different or additional requirements than the
corresponding CFTC rule. And the Commission sought public comment on
this approach.\16\
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\16\ The comment letters are available at https://www.sec.gov/comments/s7-14-22/s71422.htm. The Commission also received comments
on topics outside the scope of the proposal that are not addressed
in this release. See, e.g., Letter from Anonymous (Apr. 27, 2022)
(discussing CFTC oversight and transparency); Letter from Anonymous
(Apr. 20, 2022) (discussing securities financial transactions).
---------------------------------------------------------------------------

One commenter opposes this harmonization approach, and argues that
it does not make sense to harmonize with the ``looser'' rules of SEFs,
which he believes would allow ``more fraud and false narratives to
creep into the market,'' and instead advocates that the Commission
start from scratch with new rules.\17\ Many other commenters, however,
generally support this harmonization approach.\18\ Many of these
commenters echo the Commission's rationale for harmonizing with the
CFTC's SEF rules, and state that such harmonization would minimize the
compliance burden for dually registered entities.\19\ Two of these
commenters also state that the CFTC's regulatory framework has been in
place for almost a decade and has functioned well.\20\ One commenter
also supports the Commission's decision and rationale in withdrawing
proposed Regulation MC \21\ and the Commission's 2011 SBSEF
Proposal.\22\
---------------------------------------------------------------------------

\17\ See Letter from Robert McLaughlin (Apr. 7, 2022).
\18\ See, e.g., Letter from Robert Laorno, General Counsel, ICE
Swap Trade, LLC, to Vanessa A. Countryman, Secretary, Commission, at
1-2 (June 20, 2022) (``ICE Letter''); Letter from Stephen W. Hall,
Legal Director and Securities Specialist, and Jason Grimes, Senior
Counsel, Better Markets, Inc., to Vanessa A. Countryman, Secretary,
Commission, at 9-11 (June 10, 2022) (``Better Markets Letter'');
Letter from Derek J. Kleinbauer, Vice-President, Bloomberg SEF LLC,
and Benjamin MacDonald, Global Head Enterprise Products, Bloomberg
L.P., to Vanessa A. Countryman, Secretary, Commission, at 1-2 (June
10, 2022) (``Bloomberg Letter''); Letter from Bella Rosenberg,
Senior Counsel and Head of Legal and Regulatory Practice Group,
International Swaps and Derivatives Association, Inc., and Kyla
Brandon, Managing Director, Head of Derivatives Policy, Securities
Industry and Financial Markets Association, to Vanessa Countryman,
Secretary, Commission, at 1-2 (June 10, 2022) (``ISDA-SIFMA
Letter''); Letter from Sarah A. Bessin Associate General Counsel,
and Nicholas Valderrama, Counsel, Investment Company Institute, at
1-2 (June 10, 2022) (``ICI Letter''); Letter from Elizabeth Kirby,
Head of U.S. Market Structure, Tradeweb Markets Inc., to Vanessa A.
Countryman, Secretary, Commission, at 1-2 (June 10, 2022)
(``Tradeweb Letter''); Letter from Williams Shields, Chairman,
Wholesale Markets Brokers' Association, Americas, to Vanessa A.
Countryman, Secretary, Commission, at 1-2 (June 10, 2022) (``WMBAA
Letter''); Letter from Lindsey Weber Keljo, Head of SIFMA Asset
Management Group, and William Thun, Associate General Counsel, SIFMA
Asset Management Group, to Vanessa A. Countryman, Secretary,
Commission, at 1-2 (June 10, 2022) (``SIFMA AMG Letter''); Letter
from Jennifer W. Han, Chief Counsel & Head of Regulatory Affairs,
Managed Funds Association, at 1-2 (June 10, 2022) (``MFA Letter'');
Letter from Stephen John Berger, Global Head of Government &
Regulatory Policy, Citadel and Citadel Securities (June 10, 2022)
(``Citadel Letter''). While these commenters support the
Commission's general harmonization approach, they also provide
specific recommendations on changes to the Commission's Regulation
SE proposal that they believe would improve the rules, as described
in detail below in the sections discussing these individual rules.
See infra sections II through XVII.
\19\ See, e.g., ICE Letter, supra note 18, at 1-2; ISDA-SIFMA
Letter, supra note 18, at 1-2; ICI Letter, supra note 18, at 1-2;
Tradeweb Letter, supra note 18, at 1-2; WMBAA Letter, supra note 18,
at 1-2; MFA Letter, supra note 18, at 1.
\20\ See, e.g., ISDA-SIFMA Letter, supra note 18, at 1-2; SIFMA
AMG Letter, supra note 18, at 1-2.
\21\ Ownership Limitations and Governance Requirements for
Security-Based Swap Clearing Agencies, Security-Based Swap Execution
Facilities, and National Securities Exchanges With Respect to
Security-Based Swaps Under Regulation MC, SEA Release No. 63107
(Oct. 14, 2010), 75 FR 65882 (Oct. 26, 2010) (``Regulation MC
Proposal'').
\22\ See Bloomberg Letter, supra note 18, at 2.
---------------------------------------------------------------------------

The Commission disagrees with the comment that harmonizing with the
CFTC approach would allow for more fraud and false narratives in the
SBS markets. Standing up a formal regulatory framework for SBSEFs where
none yet exists will provide greater accountability and oversight for
the SBS market and should, contrary to this commenter's views, serve to
detect and deter abusive and manipulative trading practices by
providing for a set of Commission rules that SBSEFs must adhere to in
operating their platforms and by requiring SBSEFs to make filings with
the Commission regarding the operation of their platforms and to make
their rules publicly available, as described in detail in sections II
through XVII below.
Given the relative size of the SBS market as compared to the swaps
market, the fact that the CFTC's SEF regulation has been in place for
many years now, and the cost efficiencies and reduced burdens that
would result from harmonized rules for dually registered SEFs/SBSEFs,
it is appropriate to generally harmonize the Commission's SBSEF
regulatory framework with the CFTC's SEF regulatory framework. At the
same time, where appropriate, adopted Regulation SE differs in certain
targeted respects from the CFTC's regulatory framework for SEFs. This
includes areas where differences in the Commission's statutory
authority relative to the CFTC's statutory authority or differences in
the SBS market relative to the swaps market necessitate differences
between the

[[Page 87159]]

Commission's rules and the CFTC's, or where the benefits of deviating
from the CFTC's rules would otherwise justify the burdens and costs
associated with imposing different or additional requirements than the
corresponding CFTC rule. The specific approach to harmonization that
the Commission has pursued, along with differences from CFTC's regime
for SEFs, are described in detail in sections II through XVII below.
As discussed below, the Commission is modifying the proposed
provisions of Regulation SE regarding the definition of ``block
trade,'' \23\ the treatment of package transactions,\24\ the treatment
of SBS transactions that are intended to be cleared but are not
accepted for clearing by a registered clearing agency,\25\ permitting
SBSEFs to contract with designated contract markets (``DCMs'') to
provide services to assist in complying with the SEA and Commission
rules thereunder,\26\ the content and timing of the Daily Market Data
Report,\27\ an exception to ownership and voting restrictions for
SBSEFs,\28\ the application of deadlines and standard of review for
Commission review of SBSEF actions,\29\ and the applicability of
electronic filing and structured-data requirements with respect to
specific SBSEF filings.\30\ Otherwise, the rules of Regulation SE are
generally being adopted as proposed, in some instances with minor or
technical modifications, which are described in more detail below.\31\
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\23\ See infra section V.E.1(c).
\24\ See infra section V.E.4.
\25\ See infra section V.E.7.
\26\ See infra section VI.B.5.
\27\ See infra section VI.H.
\28\ See infra section VIII.B.
\29\ See infra section XIV.E.
\30\ See infra section XIII.
\31\ See infra note 32.
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II. Introductory Provisions of Regulation SE

A. Rule 800--Scope

Proposed Rule 800 is based on 17 CFR 37.1, which provides that part
37 of the CFTC's regulations applies to every SEF that is registered or
applying to become registered as a SEF under section 5h of the CEA.
Proposed Rule 800 would provide that the provisions of Regulation SE
apply to every SBSEF that is registered or is applying to become
registered as an SBSEF under section 3D of the SEA.
The Commission received no comments on Proposed Rule 800 and is
adopting Rule 800 as proposed, with minor technical modifications,\32\
for the reasons stated in the Proposing Release.
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\32\ In several instances, here and as noted below, the
Commission has made technical modifications to the proposed
regulatory text to conform cross-references in the regulatory text
to the CFR to the required style, as well as to correct simple
typographical errors. Here, the Commission has modified Rule 800 to
change a reference from ``[t]he provisions of this section'' to
``[t]he provisions of Sec. Sec. 242.800 through 242.835.'' In other
instances, the Commission has added the words ``of this section'' to
a CFR cross-reference to conform to the required form of citation.
Other types of technical modifications, and any substantive
modifications, are described below with respect to specific
instances.
---------------------------------------------------------------------------

B. Rule 801--Applicable Provisions

Proposed Rule 801 is based on Sec. 37.2 of the CFTC's rules, which
provides that a SEF shall comply with the requirements of part 37 and
all other applicable CFTC regulations, including 17 CFR 1.60 and part
9, and including any related definitions and cross-referenced sections.
Proposed Rule 801 would require an SBSEF to comply with the
requirements of Regulation SE and all other applicable Commission
rules, including any related definitions and cross-referenced sections.
The Commission did not receive any comments on Proposed Rule 801
and is adopting Rule 801 as proposed, with minor technical
modifications.\33\
---------------------------------------------------------------------------

\33\ See id.
---------------------------------------------------------------------------

C. Rule 802--Definitions

Proposed Rule 802 would set forth the definitions of terms that are
used in multiple rules in proposed Regulation SE. The majority of these
terms were adapted from the CFTC's swaps rules. Other terms were taken
from section 3 of the SEA \34\ or from a Commission rule under the SEA.
In particular, Proposed Rule 802 would define the term ``security-based
swap execution facility'' by cross-referencing the definition of that
term provided in section 3(a)(77) of the SEA,\35\ but with one carve-
out. An entity that is registered with the Commission as a clearing
agency pursuant to section 17A of the SEA \36\ and limits its SBSEF
functions to operation of a trading session that is designed to further
the accuracy of end-of-day valuations--i.e., a ``forced trading
session''--would be exempt from the definition of ``security-based swap
execution facility.'' \37\
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\34\ 15 U.S.C. 78c.
\35\ 15 U.S.C. 78c(a)(77).
\36\ 15 U.S.C. 78q-1.
\37\ See Proposing Release, supra note 1, 87 FR at 28878. This
provision codifies a series of exemptions granted by the Commission
to SBS clearing agencies that operate ``forced trading'' sessions.
See, e.g., Order Granting Temporary Exemptions Under the Securities
Exchange Act of 1934 in Connection With Request on Behalf of ICE
U.S. Trust LLC Related to Central Clearing of Credit Default Swaps,
and Request for Comments, SEA Release No. 59527 (Mar. 6, 2009), 74
FR 10791, 10796 (Mar. 12, 2009) (providing, among other things, an
exemption from sections 5 and 6 of the SEA because ``ICE Trust will
periodically require ICE Trust Participants to execute certain CDS
trades at the applicable end-of-day settlement price. Requiring ICE
Trust Participants to trade CDS periodically in this manner is
designed to help ensure that such submitted prices reflect each ICE
Trust Participant's best assessment of the value of each of its open
positions in Cleared CDS on a daily basis, thereby reducing risk by
allowing ICE Trust to impose appropriate margin requirements'');
Order Extending and Modifying Temporary Exemptions Under the
Securities Exchange Act of 1934 in Connection With Request of
Chicago Mercantile Exchange Inc. Related to Central Clearing of
Credit Default Swaps, and Request for Comments, SEA Release No.
61164 (Dec. 14, 2009), 74 FR 67258, 67262 (Dec. 18, 2009)
(providing, among other things, an exemption from sections 5 and 6
of the SEA because, ``[a]s part of the CDS clearing process, CME
will periodically require CDS clearing members to trade at prices
generated by their indicative settlement prices where those
indicative settlement prices generate crossed bids and offers,
pursuant to CME's price quality auction methodology'').
---------------------------------------------------------------------------

Although the Commission received comments regarding the proper
application of the proposed definitions with respect to registration
requirements, discussed below in section III.A.2, and the proposed
amendments to Rule 3a1-1, discussed below in section X, the Commission
did not receive comments suggesting a modification of the definitions
themselves. The term ``security-based swap execution facility'' is
defined directly in section 3(a)(77) of the SEA as ``a trading system
or platform in which multiple participants have the ability to execute
or trade security-based swaps by accepting bids and offers made by
multiple participants in the facility or system. . . ,'' \38\ and it is
appropriate to adopt the same definition in Rule 802, with a narrow
exception to address certain activities of registered clearing agencies
in furthering the accuracy of end-of-day valuations.\39\
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\38\ 15 U.S.C. 78c(a)(77).
\39\ Because this exception for certain clearing agencies
specifies ``an entity that is registered with the Commission as a
clearing agency pursuant to section 17A of the [SEA]'' and meets
other specified conditions, the exception would not be available to
any exempt clearing agency.
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Specifically, it is necessary or appropriate in the public
interest, and is consistent with the protection of investors, to exempt
a registered clearing agency that utilizes a forced trading
functionality for SBS from the definition of ``security-based swap
execution facility.'' Such an entity will continue to be registered as
a clearing agency and subject to the requirements of section 17A of the
SEA. Furthermore, a registered clearing agency is a self-regulatory
organization (``SRO''); therefore, all of its rules--including

[[Page 87160]]

those governing the forced trading session--have to be submitted to the
Commission pursuant to section 19 of the SEA. Therefore, codification
of the exemption from the definitions of ``exchange'' and ``security-
based swap execution facility'' preserves the status quo and eliminates
a largely duplicative and unnecessary set of regulatory requirements.
This exemption covers only the forced-trading functionality of an SBS
clearing agency; any other exchange or SBSEF activity in which a
clearing agency might engage could subject the clearing agency to the
SEA provisions and the Commission's rules thereunder applying to
exchanges or SBSEFs.
Proposed Rule 802 would have defined the term ``block trade'' to be
an SBS transaction that, among other requirements, is an SBS based on a
single credit instrument (or issuer of credit instruments) or a narrow-
based index of credit instruments (or issuers of credit instruments)
having a notional size of $5 million or greater.\40\ The Commission
received a number of comments on the proposed definition of ``block
trade.'' These comments are discussed below in section V.E.1(c)
relating to Rule 815(a), which specifies mandatory methods of execution
for a Required Transaction that is not a block trade. As discussed in
detail below in section V.E.1(c), the Commission is not adopting the
proposed definition of ``block trade.\41\
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\40\ See Proposing Release, supra note 1, 87 FR at 28896, 28975.
\41\ Additionally, as discussed below, the Commission is
removing the term ``block trade'' from the text of certain rules
other than Rule 815(a), see infra sections VI.B.1 (Rule 819(a)(3)),
V.B (Rule 812(b)), VI.B.4 (Rule 819(d)(1)), VI.H (Rule 825(c)(1)(i)
and (ii)), and is adding language regarding future definition of
``block trade'' in Rule 825(c)(1)(iii). See infra section VI.H.
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Therefore, the Commission is adopting Rule 802 as proposed, except
for the definition of ``block trade,'' which it is reserving, and minor
technical modifications.\42\
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\42\ See supra note 32. The Commission has also replaced the
term ``SBSEF'' with ``security-based swap execution facility,''
defined ``SBS exchange'' when the term is first used, added the
words ``of this definition of trading facility'' to paragraph
(2)(C)(ii) of the definition of ``trading facility,'' and moved the
definition of ``dormant security-based swap execution facility'' so
that it appears in alphabetical order.
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III. Registration of SBSEFS

Section 3D(a)(1) of the SEA \43\ provides that no person may
operate a facility for the trading or processing of SBS \44\ unless the
facility is registered as an SBSEF or as a national securities
exchange. After issuing the 2011 SBSEF Proposal, the Commission granted
temporary exemptions pursuant to section 36(a)(1) of the SEA \45\ to
entities that meet the definition of ``security-based swap execution
facility'' from having to register with the Commission as an SBSEF or
national securities exchange (``Temporary SBSEF Exemptions'').\46\
According to their terms, the Temporary SBSEF Exemptions expire upon
the earliest compliance date for the Commission's final rules regarding
SBSEF registration.\47\
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\43\ 15 U.S.C. 78c-4(a)(1).
\44\ The term ``security-based swap'' is defined in section
3(a)(68) of the SEA, 15 U.S.C. 78c(a)(68), to include, among other
things, a swap that is based on a single security or loan, including
any interest therein or on the value thereof. A single security
could include, for example, a cash equity, a crypto/digital asset
security, or a security option.
\45\ 15 U.S.C. 78mm(a)(1).
\46\ See SEA Release No. 64678 (June 15, 2011), 76 FR 36287
(June 22, 2011) (temporarily exempting entities that meet the
definition of ``security-based swap execution facility'' from the
requirement to register with the Commission as an SBSEF) (``June
2011 Exemptive Order''); SEA Release No. 64795 (July 1, 2011), 76 FR
39927 (July 7, 2011) (temporarily exempting entities that meet the
definition of ``security-based swap execution facility'' from the
restrictions and requirements of sections 5 and 6 of the SEA)
(``July 2011 Exemptive Order''). An entity that meets the definition
of ``security-based swap execution facility'' is required to
register as an SBSEF under section 3D of the SEA or as an exchange
under section 6 of the SEA. But because the Commission has not
previously adopted final rules relating to SBSEFs, such entities
have been unable to register with the Commission as SBSEFs. The
Temporary SBSEF Exemptions have allowed such entities to continue
trading SBS without needing to register either as SBSEFs or national
securities exchanges before the compliance date of the SBSEF
registration rules.
\47\ See June 2011 Exemptive Order, supra note 46, 76 FR at
36293, 36306; July 2011 Exemptive Order, supra note 46, 76 FR at
39934, 39939. The July 2011 Exemptive Order also provided an
exemption from the broker registration requirements of section
15(a)(1) of the SEA, 15 U.S.C. 78o(a)(1), and other requirements of
the SEA and the Commission's rules thereunder that apply to a
broker, solely in connection with broker activities involving SBS
(``Broker Exemptions''). The Broker Exemptions generally expired on
Oct. 6, 2021; however, because an entity that meets the definition
of ``security-based swap execution facility'' also would also meet
the definition of ``broker'' in section 3(a)(4) of the SEA, 15
U.S.C. 78c(a)(4), the Commission extended the Broker Exemptions
solely for persons acting as an SBSEF until the expiration of the
Temporary SBSEF Exemptions (i.e., the earliest compliance date set
forth in any of the Commission's final rules regarding registration
of SBSEFs). See SEA Release No. 87005 (Sept. 19, 2019), 84 FR 68550,
68602 (Dec. 16, 2019).
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A. Rule 803--Requirements and Procedures for Registration

1. Summary of Proposed Rule 803
Proposed Rule 803 of Regulation SE is closely modeled on Sec. 37.3
of the CFTC's rules and would set forth a process for registration with
the Commission as an SBSEF.
Paragraph (a)(1) of Proposed Rule 803 would track the language of
Sec. 37.3(a)(1) closely, and would provide that any person operating a
facility that offers a trading system or platform in which more than
one market participant has the ability to execute or trade security-
based swaps with more than one other market participant on the system
or platform shall register the facility as a security-based swap
execution facility under this section or as a national securities
exchange pursuant to section 6 of the SEA.\48\
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\48\ A person that registers with the Commission as a national
securities exchange pursuant to section 6 of the SEA does not fall
within the statutory definition of ``security-based swap execution
facility,'' see sec. 3(a)(77) of the SEA, 15 U.S.C. 78c(a)(77), and
thus does not need to register as an SBSEF under Rule 803.
Furthermore, as discussed below, see infra section X (discussing
proposed paragraph (a)(4) of SEA Rule 3a1-1), a person that
registers as an SBSEF under Rule 803 and provides a market place for
no securities other than SBS is exempt from the definition of
``exchange'' and does not need to register as such pursuant to
section 6 of the SEA. 15 U.S.C. 78c(a)(1) (defining ``exchange'' as
``any organization, association, or group of persons, whether
incorporated or unincorporated, which constitutes, maintains, or
provides a market place or facilities for bringing together
purchasers and sellers of securities or for otherwise performing
with respect to securities the functions commonly performed by a
stock exchange as that term is generally understood, and includes
the market place and the market facilities maintained by such
exchange'').
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Paragraph (a)(2) of Rule 803, like Sec. 37.3(a)(2), would require
an SBSEF, at a minimum, to offer an order book, which would be defined
in Rule 802 to mean an electronic trading facility, a trading facility,
or a trading system or platform in which all market participants in the
trading system or platform have the ability to enter multiple bids and
offers, observe or receive bids and offers entered by other market
participants, and transact on such bids and offers.\49\
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\49\ Section 37.3(a)(3) defines ``trading facility'' and
``electronic trading facility'' by cross-referencing definitions of
those terms in the CEA. Rather than cross-referencing the CEA, the
Commission adapted the CEA definitions of those terms directly into
Rule 802. See Proposed Rule 802 (defining ``trading facility'' and
``electronic trading facility'').
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Paragraph (a)(3) of Rule 803 is closely modeled on Sec. 37.3(a)(4)
and would provide a narrow exception to the requirement to provide an
order book for a Required Transaction \50\ to allow an SBSEF not to
offer an order book for the SBS component(s) of a package transaction
that contains a mix of products, with some parts of the

[[Page 87161]]

package being subject to a trade execution requirement and some not.
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\50\ As discussed below in section V.E.1(a), the Commission is
incorporating into Regulation SE the concepts of ``Required
Transaction'' and ``Permitted Transaction'' in a manner closely
modeled on the CFTC's use of those terms. A Required Transaction
would be a transaction involving an SBS that is subject to the trade
execution requirement. Section 37.3 of the CFTC's rules requires an
order book as a minimum trading functionality for all SEFs and is
not limited to provision of an order book only for Required
Transactions.
---------------------------------------------------------------------------

Paragraph (b) of Proposed Rule 803 is closely modeled on Sec.
37.3(b) and would set out procedures for full registration of an SBSEF.
Paragraph (b)(1), like Sec. 37.3(b)(1), would provide that an
applicant requesting registration must file electronically a complete
Form SBSEF or any successor forms, and all information and
documentation described in such forms with the Commission using the
Electronic Data Gathering, Analysis, and Retrieval (``EDGAR'') system
as an Interactive Data File in accordance with Rule 405 of Regulation
S-T, and must provide to the Commission, upon the Commission's request,
any additional information and documentation necessary to review an
application.
Paragraph (b)(2) of Proposed Rule 803, like Sec. 37.3(b)(2), would
provide that an applicant requesting registration as an SBSEF must
identify with particularity any information in the application that
will be subject to a request for confidential treatment pursuant to
Rule 24b-2 under the SEA.\51\ Paragraph (b)(2) would also provide that,
as set forth in Rule 808, certain information provided in an
application shall be made publicly available.
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\51\ See 17 CFR 240.24b-2 (setting forth the procedures for
identifying and redacting the portion of a submission under the SEA
for which confidential treatment is requested). As the Commission
stated in the Proposing Release, it is not necessary or appropriate
to establish and utilize one set of procedures to handle
confidential treatment requests made by SBSEFs while utilizing a
different set of procedures for other persons who request
confidential treatment from the Commission under the SEA. See
Proposing Release, supra note 1, 87 FR at 28880 n.50.
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Paragraph (b)(3) of Proposed Rule 803 would address amendments to
the SBSEF registration application. Like Sec. 37.3(b)(3), Rule
803(b)(3) would provide that an applicant amending a pending
application or requesting an amendment to an order of registration
shall file an amended application electronically with the Commission
using the EDGAR system as an Interactive Data File in accordance with
Rule 405 of Regulation S-T. Subsequent to being registered, an SBSEF
would be required to submit rule and product filings under Rule 806 or
Rule 807, as well as provide other updates as may be required pursuant
to other rules for SBSEFs.
Paragraph (b)(4) of Proposed Rule 803 would address the effect of
an incomplete application. Like Sec. 37.3(b)(4), Proposed Rule
803(b)(4) would provide that, if an application is incomplete, the
Commission shall notify the applicant that its application will not be
deemed to have been submitted for purposes of the Commission's review.
Paragraph (b)(5) of Proposed Rule 803 would establish the
Commission review period for an application to register as an SBSEF.
Proposed Rule 803(b)(5) is closely modeled on Sec. 37.3(b)(5) and
would require the Commission to approve or deny an application for
registration as an SBSEF within 180 days of the filing of the
application. Proposed Rule 803(b)(5) would further provide that, if the
Commission notifies the person that its application is materially
incomplete and specifies the deficiencies in the application, the
running of the 180-day period would be stayed from the time of that
notification until the application is resubmitted in completed form. In
such a case, the Commission would have not less than 60 days to approve
or deny the application from the time the application is resubmitted in
completed form.
Paragraph (b)(6)(i) of Proposed Rule 803, like Sec. 37.3(b)(6)(i),
would provide that the Commission shall issue an order granting
registration upon a Commission determination, in its discretion, that
the applicant has demonstrated compliance with the SEA and the
Commission's rules applicable to SBSEFs. Paragraph (b)(6)(i) would
allow the Commission to issue an order granting registration, subject
to conditions. Paragraph (b)(6)(ii) of Proposed Rule 803, modeled on
Sec. 37.3(b)(6)(ii), would provide that the Commission may issue an
order denying registration upon a Commission determination, in its own
discretion, that the applicant has not demonstrated compliance with the
SEA and the Commission's rules applicable to SBSEFs. If the Commission
denies an application under Rule 803(b)(6)(ii), it would be required to
specify the grounds for the denial.
Paragraph (c) of Proposed Rule 803, like Sec. 37.3(d), would
address reinstatement of a dormant registration. Proposed Rule 803(c)
would provide that a dormant SBSEF \52\ may reinstate its registration
under the procedures of Rule 803(b). Proposed Rule 803(c) would further
provide that the applicant may rely upon previously submitted materials
if such materials accurately describe the dormant SBSEF's conditions at
the time that it applies for reinstatement of its registration.
---------------------------------------------------------------------------

\52\ See Proposed Rule 802 (defining ``dormant security-based
swap execution facility'' to mean ``a security-based swap execution
facility on which no trading has occurred for the previous 12
consecutive calendar months; provided, however, that no security-
based swap execution facility shall be considered to be a dormant
security-based swap execution facility if its initial and original
Commission order of registration was issued within the preceding 36
consecutive calendar months''). This definition is modeled on the
definition of ``dormant swap execution facility'' found in Sec.
40.1(f).
---------------------------------------------------------------------------

Paragraph (d) of Proposed Rule 803, like Sec. 37.3(e), would set
out procedures for an SBSEF to request a transfer of registration.
Paragraph (d)(1), which is closely modeled on Sec. 37.3(e)(1), would
provide that an SBSEF seeking to transfer its registration from its
current legal entity to a new legal entity as a result of a corporate
change shall file a request for approval to transfer such registration
with the Commission in the form and manner specified by the Commission.
Paragraph (d)(2), modeled on Sec. 37.3(e)(2), would provide that a
request for transfer of registration shall be filed no later than three
months prior to the anticipated corporate change; or in the event that
the SBSEF could not have known of the anticipated change three months
prior to the anticipated change, as soon as it knows of that change.
Paragraph (d)(3) of Proposed Rule 803, like Sec. 37.3(e)(3), would
require an SBSEF's request for a transfer of registration to include
the underlying agreement governing the corporate change, a description
of the corporate change, a discussion of the transferee's ability to
comply with the SEA, the governing documents of the transferee, the
transferee's rules marked to show changes from the rules of the SBSEF,
and specified representations by the transferee.\53\
---------------------------------------------------------------------------

\53\ See Proposing Release, supra note 1, 87 FR at 28880-81.
---------------------------------------------------------------------------

Paragraph (d)(4) of Proposed Rule 803, modeled on Sec. 37.3(e)(4),
would provide that, upon review of a request for transfer of
registration, the Commission, as soon as practicable, shall issue an
order either approving or denying the request.
Paragraph (e) of Proposed Rule 803, like Sec. 37.3(f), would
provide that an applicant for registration as an SBSEF may withdraw its
application by filing a withdrawal request electronically with the
Commission using the EDGAR system as an Interactive Data File in
accordance with Rule 405 of Regulation S-T.\54\ Proposed Rule 803(e)
would further provide that withdrawal of an application for
registration shall not affect any action taken or to be taken by

[[Page 87162]]

the Commission based upon actions, activities, or events occurring
during the time that the application was pending with the Commission.
---------------------------------------------------------------------------

\54\ 17 CFR 232.405. The proposed electronic filing requirement
discussed above does not appear in the CFTC version of this
provision. The Commission is adding this specification to implement
the Inline XBRL and EDGAR electronic filing requirements for certain
documents required by Regulation SE. See infra section XIII.A.
---------------------------------------------------------------------------

Paragraph (f) of Proposed Rule 803, like Sec. 37.3(g), would
provide that an SBSEF may request that its registration be vacated by
filing a vacation request electronically with the Commission using the
EDGAR system and must be provided as an Interactive Data File in
accordance with Rule 405 of Regulation S-T at least 90 days prior to
the date that the vacation is requested to take effect.
2. Comments and Analysis
(a) Registration Requirements, Generally
Two commenters support the proposed SBSEF registration requirements
under Rule 803 being modeled on the CFTC's rules and state that, as
market participants are familiar with CFTC's requirements, they
appreciate the Commission's attempts to minimize registration burdens
and expedite the establishment of the SBSEF regime.\55\
---------------------------------------------------------------------------

\55\ See SIFMA AMG Letter, supra note 18, at 5; see also
Bloomberg Letter, supra note 18, at 11.
---------------------------------------------------------------------------

One commenter states that the Commission should ensure that all
multilateral trading venues for SBS are required to register as an
SBSEF, regardless of the specific trading protocol used.\56\ Another
commenter argues that section 3D(a)(1) of the SEA requires the
registration of any ``facility for the trading or processing of SBS,''
not just those that meet the statutory definition of SBSEF, which
includes multiple-to-multiple trading.\57\ Accordingly, this commenter
states that single-dealer platforms should be required to register as
SBSEFs and to change their operations to offer multiple-to-multiple
trading, consistent with the definition of SBSEF.\58\
---------------------------------------------------------------------------

\56\ See Citadel Letter, supra note 18, at 9 (``[A] security-
based swap transaction executed via a fully electronic multilateral
RFQ protocol should be subject to the same regulations as one
executed by voice with the assistance of a voice broker (who may or
may not be employed by the SBSEF)'').
\57\ As discussed above, see supra note 38 and accompanying
text, the statutory definition of SBSEF provides in relevant part
that an SBSEF is ``a trading system platform in which multiple
participants have the ability to execute or trade security-based
swaps by accepting bids and offers made by multiple participants. .
. .'' SEA section 3(a)(77), 15 U.S.C. 78c(a)(77) (emphasis added).
This is sometimes referred to as ``multiple-to-multiple trading.''
\58\ See Better Markets Letter, supra note 18, at 11-13.
---------------------------------------------------------------------------

One commenter asks the Commission to ``make clear that the SBSEF
registration requirement applies only to these types of platforms that
are within the statutory and proposed regulatory definition and does
not include any broader CFTC staff interpretations purporting to expand
the SEF definition.'' \59\ This commenter states that CFTC Staff Letter
21-19 \60\ maintains that platforms can be required to register as SEFs
``(i) even where multiple participants cannot simultaneously request,
make, or accept bids and offers from market participants; or (ii) where
multiple participants can initiate a one-to-many communication.'' \61\
The commenter states that extending the definition of SBSEF to include
``facilities offering one-to-many or bilateral communications if more
than one participant is able to submit an RFQ on the platform'' would
``contradict Congress' express intent'' to limit the scope of SBSEF
registration requirements to multiple-to-multiple platforms; that the
Commission should make clear that the CFTC staff guidance is
inapplicable to SBSEFs; and that the Commission should confirm that it
is not adopting or incorporating, explicitly or implicitly, similar
guidance.\62\
---------------------------------------------------------------------------

\59\ See MFA Letter, supra note 18, at 3.
\60\ See CFTC Staff Advisory on Swap Execution Facility
Registration Requirement, Letter No. 21-19 (Sept. 29, 2021),
available at https://www.cftc.gov/node/238336.
\61\ See MFA Letter, supra note 18, at 3 (quoting CFTC Staff
Letter No. 21-19, supra note 60 (emphasis in original)).
\62\ MFA Letter, supra note 18, at 3-4 (internal quotations
omitted).
---------------------------------------------------------------------------

The Commission agrees with the comment that the definition of SBSEF
applies to multilateral trading facilities regardless of the specific
trading protocol used. As the statutory definition of SBSEF makes
clear, a trading facility would fall under the definition of SBSEF if
it offers ``multiple participants the ability to execute or trade
security-based swaps by accepting bids and offers made by multiple
participants in the facility or system, through any means of interstate
commerce. . . .'' \63\ Whether a specific instance or practice of
brokering in fact offers multiple participants the ability to accept
the bids or offers made by multiple participants, though, will depend
on the attendant facts and circumstances of that instance or practice.
The Commission does not, however, agree with the comment that the
language of SEA section 3D(a)(1) means that single-dealer platforms for
trading SBS must register as SBSEFs and, consistent with the statutory
definition of SBSEF, change their operations to provide multiple-to-
multiple trading. SEA section 3D is titled ``Security-based swap
execution facilities,'' and section 3D(a)(1) states, in full, ``No
person may operate a facility for the trading or processing of
security-based swaps, unless the facility is registered as a security-
based swap execution facility or as a national securities exchange
under this section.'' \64\ The Commission is not persuaded that the
phrase ``facility for the trading or processing of security-based
swaps'' in this context can reasonably be read to apply more broadly to
encompass anything other than an SBSEF or an SBS exchange. Since the
definitions of both SBSEF and exchange include the concept of multiple-
to-multiple trading,\65\ single-dealer ``one-to-many'' trading
platforms that do not offer multiple-to-multiple trading are outside
the scope of the provisions of section 3D(a)(1).
---------------------------------------------------------------------------

\63\ SEA section 3(a)(77), 15 U.S.C. 78c(a)(77) (emphasis
added).
\64\ SEA section 3D(a)(1), 15 U.S.C. 78c-4(a)(1).
\65\ See SEA section 3(a)(77), 15 U.S.C. 78c(a)(77) (defining
SBSEF in relevant part as ``a trading system or platform in which
multiple participants have the ability to execute or trade security-
based swaps by accepting bids and offers made by multiple
participants in the facility or system . . .''); SEA section
3(a)(1), 15 U.S.C. 78c(a)(1) (defining an exchange in relevant part
as ``any organization, association, or group of persons, whether
incorporated or unincorporated, which constitutes, maintains, or
provides a market place or facilities for bringing together
purchasers and sellers of securities'') (emphasis added).
---------------------------------------------------------------------------

It is not necessary to incorporate the guidance in CFTC Staff
Letter 21-19 into this release, because the CFTC staff letter in large
part refers to fact-specific circumstances that the Commission has yet
to encounter since Reg SE is not yet effective and the application of
the SBSEF definition depends on the particular facts and circumstances
of a platform's structure and operations. For the same reason, it would
be premature to reject the possibility of taking a position similar to
that of the CFTC guidance with regard to SBSEFs, as one commenter
suggested.\66\ Moreover, because the statutory definition of SBSEF does
not include the word ``simultaneous,'' the Commission declines to issue
its own guidance to reflect a requirement for simultaneity here. Where
operators of SBS trading platforms have questions about the facts and
circumstances particular to their situations, they can discuss their
particular circumstances with Commission staff.
---------------------------------------------------------------------------

\66\ See supra notes 59-62 and accompanying text.
---------------------------------------------------------------------------

(b) Abbreviated Registration Procedures for CFTC-Registered SEFs
Several commenters state that the Commission should use its
exemptive authority to provide a streamlined registration process for
SBSEFs that are already registered with the CFTC as

[[Page 87163]]

SEFs.\67\ One commenter states that, because many entities will likely
be registering with both the Commission and the CFTC, a streamlined
SBSEF registration process will ease the burden of new requirements
imposed on potential dual-registrants.\68\ This commenter further
states that allowing currently registered CFTC SEFs to become SEC-
registered SBSEFs would be more efficient and would more quickly kick-
start the Commission's SBS regime. This commenter thus supports the use
of exemptive authority for SEFs that are currently registered, provided
that the Commission's approach to exemptive authority does not disrupt
the existing market structure and the relationships between venues and
participants. Another commenter states that a streamlined registration
process for SEFs currently registered and in good standing with the
CFTC would have the potential to lower the costs of registration and
encourage the entry of market participants.\69\
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\67\ See SIFMA AMG Letter, supra note 18, at 5; Bloomberg
Letter, supra note 18, at 11; WMBAA Letter, supra note 18, at 3; ICE
Letter, supra note 18, at 5.
\68\ See SIFMA AMG Letter, supra note 18, at 5.
\69\ See Bloomberg Letter, supra note 18, at 11.
---------------------------------------------------------------------------

One commenter that supports a streamlined SBSEF registration
process for SEFs states that a prolonged registration process,
particularly for venues already registered with the CFTC, only further
delays the introduction of regulated price discovery, liquidity
formation, and trade execution for SBS.\70\ This commenter also states
that SBSEF registration also further expedites SBS data reporting to
the extent SBSEFs will report trades to an SBS swap data repository
under the Commission's Regulation SBSR, as this service cannot be
provided until SBSEFs are registered and operational. If the Commission
were not to retain the exemptive authority within Rule 803, this
commenter supports a process that gives deference to existing CFTC SEFs
and provides a more streamlined process for such registrants. The
commenter states that, as the Commission observed in the proposing
release, most of the SBS liquidity will likely be centralized around a
few facilities, with most (if not all) of them already operating CFTC-
regulated SEFs.\71\
---------------------------------------------------------------------------

\70\ See WMBAA Letter, supra note 18, at 3.
\71\ See WMBAA Letter, supra note 18, at 3-4.
---------------------------------------------------------------------------

Another commenter states that SEFs that are currently registered
and in good standing with the CFTC should be permitted to register with
the Commission utilizing their current documentation filed pursuant to
the requirements of Form SEF.\72\ This commenter states that CFTC
registered SEFs are required to keep their Form SEF and its exhibits
current through post-registration amendments and that, as the
Commission is modeling proposed Form SBSEF on the CFTC's Form SEF,
substituting the forms should not be problematic for the Commission to
review. The commenter states that the Commission should permit
registered SEFs seeking to register as an SBSEF to submit their Form
SEF and exhibits, with an accompanying addendum reflecting only those
changes necessary to fulfill the specific requirements of proposed
Regulation SE, in lieu of filing a new Form SBSEF.
---------------------------------------------------------------------------

\72\ See ICE Letter, supra note 18, at 5.
---------------------------------------------------------------------------

One commenter, however, stated that ``relaxing or eliminating any
registration requirements would be highly inappropriate,'' and argued
that the Commission must be ``rigorous in reviewing and approving
SBSEFs applicants while upholding complete impartiality.'' \73\ This
commenter further states that both active SEFs and non-SEFs seeking to
register SBSEFs ``must be held under the same standard to avoid any
conflict of interests.'' \74\ Therefore, this commenter states that the
Commission should not use exemptive authority under SEA section
36(a)(1) to adopt an abbreviated procedure for SEFs seeking to register
as SBSEFs, because doing so would rely on the ``CFTC's biased
judgment'' and would not permit an ``unprejudiced determination'' by
the Commission.\75\
---------------------------------------------------------------------------

\73\ Letter from J. T. at 1 (May 26, 2022).
\74\ Id.
\75\ Id.
---------------------------------------------------------------------------

In the Proposing Release, the Commission stated that it was
considering that, after adopting final rules establishing a
registration process for SBSEFs, it could exercise its exemptive
authority under section 36(a)(1) of the SEA \76\ to relax or eliminate
entirely certain of the registration requirements for entities that are
already registered as SEFs with the CFTC.\77\ The Commission recognizes
that many of the entities that will seek registration with the
Commission as SBSEFs are already registered with the CFTC as SEFs.
Entities that seek dual registration presumably see efficiencies in
utilizing the same systems, policies, and procedures to trade both
swaps and SBS. As noted throughout this release, the Commission has
sought to harmonize the SBSEF regulatory regime as closely as
practicable with the CFTC's SEF regulatory regime, achieving similar
regulatory benefits as the CFTC regime while minimizing costs so as to
impose only marginal costs on dually registered SEF/SBSEFs and their
members. As a result of these harmonized regimes, SEFs that seek dual
registration with the SEC would likely need to make only minor
adjustments to their rules and trading procedures to support trading of
SBS in addition to the trading of swaps.
---------------------------------------------------------------------------

\76\ 15 U.S.C. 78mm(a)(1).
\77\ See Proposing Release, supra note 1, 87 FR at 28882.
---------------------------------------------------------------------------

While one commenter states that it would be inappropriate to relax
or eliminate any SBSEF registration requirements for CFTC-registered
SEFs,\78\ an entity's status as a registered SEF in good standing with
the CFTC is relevant when considering its application to register as an
SBSEF and that reducing the registration burden for CFTC-registered
SEFs, where possible, is appropriate. However, granting exemptive
relief under section 36(a)(1), which this commenter opposes, or
providing for a formally abbreviated SBSEF registration regime for
CFTC-registered SEFs is not necessary to accomplish expedited
registration and reduced registration burdens.\79\ Requiring all
applicants to submit Form SBSEF will support consistency in the review
by the Commission and its staff of applications for registration of
SBSEFs, which will include a review of the proposed rules for the
SBSEFs. The Commission expects that prospective SBSEFs will be able to
use the information in their SEF applications to complete their SBSEF
applications, as discussed below.
---------------------------------------------------------------------------

\78\ See supra note 75 and accompanying text.
\79\ In the Proposing Release, the Commission stated that it was
``preliminarily considering'' that it would exercise exemptive
authority under section 36(a)(1) of the Act, 15 U.S.C. 78mm(a)(1),
``to relax or eliminate entirely certain of the registration
requirements for entities that are already registered as SEFs with
the CFTC.'' Proposing Release, supra note 1, 87 FR at 28882.
---------------------------------------------------------------------------

For the reasons discussed above, the Commission is adopting Rule
803 as proposed, with minor technical modifications.\80\
---------------------------------------------------------------------------

\80\ See supra note 32. The Commission is also deleting the
header text ``Minimum trading functionality'' from paragraph (a)(3),
and is adding the header text ``Request to register'' to paragraph
(b)(1), in order to maintain consistency of style in the regulatory
text. Additionally, the Commission is removing the requirement to
use an Interactive Data File for filing requests to withdraw or
vacate an application for registration pursuant to Rules 803(e) and
803(f). See infra section XIII.A.
---------------------------------------------------------------------------

B. Form SBSEF

The Commission proposed new Sec. 249.2001 to require that entities
use Form SBSEF to register with the Commission as an SBSEF. Form SBSEF
would also be used for submitting any

[[Page 87164]]

updates, corrections, or supplemental information to a pending
application for registration. Form SBSEF is closely modeled on the
CFTC's Form SEF for entities that seek to register with the CFTC as
SEFs, with only minor changes to remove from the form the concept of
post-registration amendments, as the proposed rule would not require
any amendments to Form SBSEF post-registration. The exhibits that were
proposed along with Form SBSEF are very similar to the exhibits in Form
SEF. As with Form SEF, each applicant submitting a Form SBSEF would be
required to provide the Commission with documents and descriptions
pertaining to its business organization, financial resources, and
compliance program, including various documents describing the
applicant's legal and financial status. An applicant would be required
to disclose any affiliates, provide a brief description of the nature
of the affiliation, and submit copies of any agreements between the
SBSEF and third parties that would assist the applicant in complying
with its duties under the SEA. In addition, an applicant would be
required to demonstrate operational capability through documentation,
including technical manuals and third-party service provider
agreements.
Under Rule 803(b)(1), an applicant for SBSEF registration would be
required to complete Form SBSEF and provide, upon the Commission's
request, any additional necessary information and documentation in
order review the application. The determination as to when an
application submission is complete would be at the sole discretion of
the Commission. The Commission would review Form SBSEF and, at the
conclusion of its review, by order either: (i) grant registration; (ii)
deny the application for registration; or (iii) grant registration
subject to certain conditions. After an applicant is granted
registration, any updates or amendments to the information contained in
its Form SBSEF by an active SBSEF would be required to be submitted as
rules or rule amendments under Rule 806 or Rule 807 or as may be
required by other rules in Regulation SE.
One commenter states that the Commission should closely harmonize
the rules for SBSEF registration with the CFTC's rules, with the
exception of Exhibits D and H of Form SBSEF, which require: (a) a list
of all affiliates and a description of any material pending legal
proceedings of such affiliates, and (b) the financial statements of the
affiliates. This commenter states that the information required by
these exhibits is ``burdensome and not fit for purpose'' and should not
be required unless the affiliate provides support services to the SBSEF
or the legal proceedings are expected to have a material effect on the
applicant or the operation of its proposed SBSEF.\81\ As discussed
above, several commenters expressed support for the Commission
providing an expedited process for CFTC-registered SEFs that wish to
register as SBSEFs.
---------------------------------------------------------------------------

\81\ See Bloomberg Letter, supra note 18, at 11.
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The CFTC adopted rules for the registration and regulation of SEFs
in 2013,\82\ and the CFTC's process for registering SEFs appears to be
well understood by the industry and well designed for being adapted to
the SBS market. Therefore, the Commission has used the CFTC's process
as a basis for its own process for registering SBSEFs, and information
about SBSEF affiliates is relevant to the Commission's oversight of
SBSEFs and, in particular, oversight of SBSEF compliance with Rule 828
(conflicts of interest).\83\ In addition, we assume that most if not
all SBSEFs will be dually registered as SEFs.
---------------------------------------------------------------------------

\82\ See 2013 CFTC Final SEF Rules Release, supra note 9.
\83\ See infra section VI.K.
---------------------------------------------------------------------------

However, while the content and exhibits of Form SBSEF closely match
the form and content of Form SEF, exhibits to Form SEF are provided to
the CFTC as unstructured documents, whereas most exhibits to Form SBSEF
will be provided to the Commission as structured, machine-readable
documents. Permitting SBSEFs to provide copies of Form SEF exhibits in
lieu of Form SBSEF exhibits, while likely resulting in an expedited
registration process for most SBSEFs, would also potentially result in
a much higher volume of unstructured data, making the Form SBSEF
disclosures more difficult for market participants and the Commission
to analyze in an efficient manner. Thus, notwithstanding some
commenters' support for an expedited registration process, the final
rules do not permit SBSEFs to provide copies of Form SEF exhibits in
lieu of Form SBSEF exhibits. The Commission is therefore adopting 17
CFR 249.2001 as proposed, but is renumbering it as 17 CFR 249.1701
under new subpart R (``Forms for Registration of, and Filings by,
Security-Based Swap Execution Facilities'') and is making a minor
technical correction.\84\
---------------------------------------------------------------------------

\84\ The Commission is correcting the text in Instruction 20 to
Form SBSEF to read ``a list with the name(s) of the clearing
agency(ies)'' instead of ``a list of the name of the clearing
organization(s).''
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IV. Rule and Product Filings by SBSEFs

Unlike section 19(b) of the SEA,\85\ which sets out a process
whereby national securities exchanges and other SROs submit filings to
the Commission to add, delete, or amend rules (including rules to list
products), section 3D of the SEA \86\ does not set out an equivalent
process for SBSEFs, which are not SROs. It can be expected, however,
that an SBSEF will seek to change its rules over time in order, for
example, to implement new trading methodologies and to expand its
product offerings to make its market more attractive to participants,
and adopting rules for filings related to these changes will promote
public transparency regarding the changes, as well as consistent
handling of those filings by the Commission.
---------------------------------------------------------------------------

\85\ 15 U.S.C. 78s(b).
\86\ 15 U.S.C. 78c-4.
---------------------------------------------------------------------------

An appropriate review process is necessary to assess whether
changes to an SBSEF's rules and product offerings are consistent with
section 3D of the SEA and the Commission's rules thereunder, and the
CFTC's filing procedures are an appropriate model on which to base the
Commission's own filing procedures. Furthermore, because of the
likelihood that most if not all SBSEFs will be dually registered with
the CFTC as SEFs, and that many rule changes for a dual registrant will
affect both its SBS and swap trading businesses, close harmonization
with the CFTC's filing procedures would allow a dual registrant to make
a similar filing to each agency, allowing each agency to carry out its
oversight functions while minimizing the burdens on dual registrants.
Parts 37 and 40 of the CFTC's rules set out processes whereby SEFs
may establish or amend rules and list products. These processes allow a
SEF to voluntarily submit a rule, rule amendment, or new product for
CFTC review and approval, or to ``self-certify'' that a rule, rule
amendment, or new product meets applicable standards under the CEA and
the CFTC's rules thereunder without obtaining CFTC approval, although
the CFTC retains the ability, in certain circumstances, to stay the
self-certification for further review before it may become effective.
Using its general authority to impose any requirement on SBSEFs and to
prescribe rules governing the regulation of SBSEFs,\87\ the Commission
proposed to

[[Page 87165]]

establish similar filing processes for registered SBSEFs in Rules 804
to 810 of Regulation SE.\88\
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\87\ See 15 U.S.C. 78c-4(d)(1)(A)(ii) (requiring an SBSEF, in
order to be registered and to maintain registration, to comply with
any requirement that the Commission may impose by rule or
regulation); 15 U.S.C. 78c-4(f) (directing the Commission to
prescribe rules governing the regulation of SBSEFs).
\88\ The CFTC has proposed to amend the rules that govern how
CFTC-registered entities submit self-certifications and requests for
approval of their rules, rule amendments, and new products for
trading and clearing, as well as the CFTC's review and processing of
such submissions. See CFTC, Provisions Common to Registered Entities
(Notice of Proposed Rulemaking), 88 FR 61432 (Sept. 9, 2023). The
CFTC's proposing release states that the proposed amendments ``are
intended to clarify, simplify and enhance the utility of those
regulations for market participants and the [CFTC].'' Id. at 61432.
The CFTC has not yet taken action on this proposal.
---------------------------------------------------------------------------

A. Rule 804--Listing Products for Trading by Certification

1. Summary of the Proposed Rule
Proposed Rule 804 is modeled on 17 CFR 40.2 of the CFTC's rules and
would set forth procedures by which an SBSEF may list a product via
certification. Paragraph (a)(1) of Proposed Rule 804 would require an
SBSEF to file its submission electronically with the Commission using
the EDGAR system as an Interactive Data File in accordance with Rule
405 of Regulation S-T.
Paragraph (a)(2) of Proposed Rule 804 would provide that the
Commission must receive the submission by the open of business on the
business day that is 10 business days preceding the product's
listing.\89\
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\89\ By contrast, the parallel provision in Sec. 40.2(a)
provides that a DCM or SEF must file the self-certification only one
business day before listing the product. See Sec. 40.2(a)(2) (one
of the conditions for a valid self-certification of a product is
that the CFTC has received the submission by the open of business on
the business day preceding the product's listing).
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Paragraph (a)(3) of Proposed Rule 804 would require a self-
certification to include a copy of the submission cover sheet; \90\ a
copy of the product's rules, including all rules related to its terms
and conditions; the intended listing date; a certification by the SBSEF
that the product to be listed complies with the SEA and the
Commission's rules thereunder; a concise explanation and analysis of
the product and its compliance with applicable provisions of the SEA,
including the Core Principles, and the Commission's rules thereunder; a
certification that the SBSEF posted a notice of pending product
certification with the Commission and a copy of the submission,
concurrent with the filing of a submission with the Commission, on the
SBSEF's website; \91\ and a request for confidential treatment, if
appropriate, as permitted pursuant to SEA Rule 24b-2.\92\
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\90\ The Commission proposed, in new Sec. 249.2002, a
submission cover sheet (with instructions) that is closely modeled
on the CFTC's submission cover sheet.
\91\ Under Rule 804(a)(3)(vi), information that the SBSEF seeks
to keep confidential can be redacted from the documents published on
the SBSEF's website but would have to be republished consistent with
any determination made pursuant to SEA Rule 24b-2.
\92\ Section 40.2(a)(3) instructs filers to make any request for
confidential treatment pursuant to Sec. 40.8 of the CFTC's rules,
which in turn cross-references 17 CFR 145.9. The Commission proposed
instead to direct filers to make any request for confidential
treatment pursuant to existing SEA Rule 24b-2. See supra note 51.
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Paragraph (b) of Proposed Rule 804, modeled on Sec. 40.2(b), would
provide that, if requested by Commission staff, an SBSEF shall provide
any additional evidence, information, or data that demonstrates that
the SBS meets, initially or on a continuing basis, the requirements of
the SEA or the Commission's rules or policies thereunder.
Paragraph (c)(1) of Proposed Rule 804 would provide that the
Commission may stay the certification of a new product by issuing a
notification informing the SBSEF that the Commission is staying the
certification on the grounds that the product presents novel or complex
issues that require additional time to analyze, is accompanied by an
inadequate explanation, or is potentially inconsistent with the SEA or
the Commission's rules thereunder.\93\ Under paragraph (c)(1), the
Commission would have an additional 90 days from the date of the
notification to conduct the review.
---------------------------------------------------------------------------

\93\ Rule 807(c) is based on Sec. 40.2(c), which provides that
the CFTC may stay the listing of a contract pursuant to paragraph
(a) of this section during the pendency of CFTC proceedings for
filing a false certification or during the pendency of a petition to
alter or amend the contract terms and conditions pursuant to section
8a(7) of the CEA. The SEA does not include the CEA's provisions
regarding altering or amending the terms and conditions of an SBS
listed by an SBSEF like the authority granted to the CFTC with
respect to products listed by SEFs, such that the Commission would
be able to stay the listing of an SBS that it believes may be
inconsistent with the SEA, pending proceedings to exercise that
authority. Nor are proceedings for false certification of an SBS
contemplated by the SEA. For this reason, in lieu of harmonizing
with Sec. 40.2(c), the Commission proposed, in Rule 804(c), a
provision that would allow the Commission to stay the certification
of a new product in the same manner that Rule 807(c) would allow the
Commission to stay the self-certification of a new rule or rule
amendment.
---------------------------------------------------------------------------

Paragraph (c)(2) would require the Commission to provide a 30-day
comment period during that 90-day period, and to publish a notice of
the 30-day comment period on the Commission's website. Comments from
the public could be submitted as specified in that notice.
Paragraph (c)(3) would provide that the product that had been
stayed would become effective, pursuant to the certification, at the
expiration of the 90-day review period, unless the Commission withdraws
the stay prior to that time, or the Commission notifies the SBSEF
during the 90-day time period that it objects to the proposed
certification on the grounds that the proposed product is inconsistent
with the SEA or the Commission's rules.
2. Comments and Analysis
One commenter states that, while the proposed self-certification
process does include improvements to the CFTC's self-certification
process, including extending the initial review period from one
business day to 10 business days and expanding the scope of reasons for
staying the self-certification, it is still fundamentally flawed. This
commenter states that the CFTC's self-certification process is mandated
by statute and that, in the absence of any statutory mandate analogous
to that applicable to the CFTC, the Commission must, at the very least,
provide a coherent policy justification for its proposed self-
certification process.\94\
---------------------------------------------------------------------------

\94\ See Better Markets Letter, supra note 18, at 13.
---------------------------------------------------------------------------

This commenter states that it is not clear why it is necessary or
desirable for SBSEFs to be able to bring new products to the market
``speedily'' and that self-certification turns the regulatory process
on its head, creating in effect a presumption of regulatory compliance
and putting the onus on the agency, under a predetermined timeline, to
fully evaluate a proposed product that may threaten significant harm to
investors and market stability.\95\ This is especially the case, the
commenter states, considering the context in which the SEC was given
comprehensive authority to regulate and oversee the SBS market, i.e., a
financial crisis caused in large part by SBS and other novel financial
products whose risks regulators and market participants thought were
well understood, but in fact were not. Given this context, the
commenter states, it ``makes little policy sense to establish a regime
whereby an SBSEF could introduce a new potentially dangerous product to
the financial system without an affirmative, independent SEC

[[Page 87166]]

determination that such product not only complies with the SBSEF Core
Principles and other requirements, but also that it does not pose an
unwarranted danger to investors, the financial system, and the broader
economy.'' \96\
---------------------------------------------------------------------------

\95\ See Better Markets Letter, supra note 18, at 13-14; see
also Letter from Bryce Keeney (Apr. 27, 2022) (``Keeney Letter'')
(stating that ``[d]erivatives are not the purpose of the market''
and that the Commission should ``align rules to focus on the primary
purpose, not to support tertiary aspects that result in systemic
risk and systemic abuse''); Letter from Kevin (Apr. 20, 2023)
(``Kevin Letter'') (stating that the proposed rules do not protect
retail investors and that ``[c]reating a self governing regime,
allowing easier swaps trading across borders, exemption exchanges
and registered brokers . . . sound like a terrible recipe for
disaster in a multi-trillion marketplace'').
\96\ Better Markets Letter, supra note 18, at 13-14.
---------------------------------------------------------------------------

For several reasons the Commission does not agree with the
objections raised by this commenter. First, the Commission does not
agree that the self-certification process of Rule 804 either ``turns
the regulatory process on its head'' or would deny the Commission the
opportunity to ``fully evaluate a proposed product that may threaten
significant harm to investors and market stability.'' \97\ The ability
of the Commission to stay the effectiveness of any product self-
certification, to seek public comment on that self-certification, and
to object to (i.e., effectively disapprove) the proposed certification
on the grounds that the product is inconsistent with the SEA or the
Commission's rules will provide the Commission with sufficient
opportunity (including the opportunity to seek public comment) to
consider the self-certified rules and take steps to protect investors
and maintain fair, orderly, and efficient markets. Further, the self-
certification process does not create a ``presumption of compliance,''
because: (a) Rule 804(b) requires an SBSEF to provide, at Commission
request, any ``additional evidence, information, or data that
demonstrates that the SBS meets, initially or on a continuing basis,
the requirements of the SEA or the Commission's rules or policies
thereunder''; (b) Rule 804(c)(1) permits the Commission to suspend a
new product certification because ``the product presents novel or
complex issues that require additional time to analyze, is accompanied
by an inadequate explanation, or is potentially inconsistent with the
SEA or the Commission's rules thereunder'' (emphasis added); and (c)
Rule 804(c)(3) does not create a presumption of compliance but instead
provides the Commission a mechanism by which to object to a proposed
certification ``on the grounds that the proposed product is
inconsistent with the SEA or the Commission's rules.'' \98\
---------------------------------------------------------------------------

\97\ See supra note 96 and accompanying text.
\98\ Section IV.D, infra, discusses the process for self-
certification of rule changes, including the Commission's ability to
stay the effectiveness of such a filing, which would lead to a
public comment period and the opportunity for the Commission to
object to the certification.
---------------------------------------------------------------------------

Second, given the relationship between the swaps market and the SBS
market, as well as the likelihood that most or all entities seeking to
register as SBSEFs will be CFTC-registered SEFs, harmonization with the
CFTC filing procedures for new products should facilitate the ability
of entities to dually register and minimize costs by allowing incumbent
SEFs to use their existing systems, policies, and procedures to comply
with the Commission's SBSEF rules. The aim of the rule is, however, not
merely to allow SBSEFs to bring products to market ``speedily,'' or at
minimal cost, and, as discussed below in this section, it is
appropriate for its rules to provide for a longer review period than
the CFTC's rules.
And third, the Commission disagrees with this commenter's view that
the self-certification process ``would pose an unwarranted danger to
investors, the financial system, and the broader economy.'' The new-
product provisions of Regulation SE must be read in the context of the
other relevant provisions of Title VII of the Dodd-Frank Act and the
Commission's rules thereunder, which include, among other things, rules
governing the registration and regulation of Security-Based Swap
Dealers (``SBSDs'') and Major Security-Based Swap Participants
(``MSBSPs''); \99\ capital, margin, and segregation requirements for
SBSDs and MSBSPs; \100\ business conduct standards and chief compliance
officer requirements for SBSDs and MSBSPs; \101\ and post-trade
reporting and public dissemination of SBS transactions.\102\ Because of
the significant role these other rules play in addressing potential
risks posed by SBS, the Commission's ability to require SBSEFs to
provide any evidence, information, or data demonstrating that the SBS
meets, initially or on a continuing basis, the requirements of the SEA
or the Commission's rules or policies thereunder, and the Commission's
ability to suspend and ultimately object to SBSEF self-certifications,
are appropriate to protect investors, the financial system, and the
broader economy with respect to new SBSEF products and rules.\103\
Thus, the self-certification process in this context is appropriate for
the underlying aims of the Dodd-Frank Act.
---------------------------------------------------------------------------

\99\ See Registration Process for Security-Based Swap Dealers
and Major Security-Based Swap Participants, SEA Release No. 75611
(Aug. 5, 2015), 80 FR 48963 (Aug. 14, 2015) (``SBSD and MSBSP
Registration Release'').
\100\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital and Segregation Requirements for Broker-
Dealers, SEA Release No. 86175 (June 21, 2019), 84 FR 43872 (Aug.
22, 2019) (``Capital, Margin, and Segregation Release'').
\101\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, SEA Release No.
77617 (Apr. 14, 2016), 81 FR 29959 (May 13, 2016) (``Business
Conduct Standards Release'').
\102\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, SEA Release No, 78321 (July 14,
2016), 81 FR 53546 (Aug. 12, 2016) (``Regulation SBSR Release'').
\103\ The Commission's rules for SBSEFs do not directly affect
retail investors. Only eligible contract participants (``ECPs'') are
eligible to trade on an SBSEF, see section 6(l) of the SEA, 15
U.S.C. 78f(l), and retail investors would have access to an SBS only
after an SBS exchange has filed a proposed rule change with the
Commission under Rule 19b-4, 17 CFR 240.19b-4, to amend its rules to
permit the listing of a registered SBS, with that proposed rule
change being published for public comment.
---------------------------------------------------------------------------

Two commenters state that the relatively low volume of SBS products
expected to be self-certified supports a shorter review period than the
proposed ten-business-day Commission review period.\104\ Both
commenters recommend a shorter review period of one day to harmonize
with the CFTC's approach.\105\ Alternatively, one of the commenters
suggests a two-day review period.\106\ This commenter suggests that a
shorter review period would be beneficial to allow market operators to
meet participants' demands to transact on regulated platforms in a
reasonable period of time.\107\ The commenter also states that a
shorter review period would accommodate participants' needs to hedge
risk in a timely manner.\108\ The other commenter states that a longer
review period would reduce the competitive benefit to SBSEFs that
develop new products because a 10-day review period would enable
competitors to list similar products.\109\ This commenter also suggests
varying from the one-day review period in certain limited
circumstances, such as when an SBSEF submits an SBS for a made-
available-to-trade determination.\110\
---------------------------------------------------------------------------

\104\ See WMBAA Letter, supra note 18, at 4; ICE Letter, supra
note 18, at 2.
\105\ See WMBAA Letter, supra note 18, at 4; ICE Letter, supra
note 18, at 2.
\106\ See WMBAA Letter, supra note 18, at 4.
\107\ See id.
\108\ See id.
\109\ See ICE Letter, supra note 18, at 3.
\110\ See id.
---------------------------------------------------------------------------

While a ten-day review period differs from the CFTC's one-day
review period, one business day would not provide the SEC staff
sufficient time to review a new product filing for error or
incompleteness, let alone review a new product for compliance with the
SEA or Regulation SE. Further, if a product does warrant a stay, the
Commission would also need sufficient time to go through the
administrative steps of formally issuing the stay.\111\ The

[[Page 87167]]

proposed ten-business-day review period for self-certified products
also accords with the CFTC's ten-business-day review period for self-
certified rules,\112\ which the Commission is replicating in Rule
807(a)(3).\113\
---------------------------------------------------------------------------

\111\ See infra sections XV.D and XV.E (delegating authority to
the Director of the Division of Trading and Markets to stay the
effectiveness of a self-certification and to extend the period for
consideration of a new product).
\112\ See Sec. 40.6(a)(3) (one of the conditions for a valid
self-certification of a rule or rule amendment is that the CFTC has
received the submission not later than the open of business on the
business day that is 10 business days prior to the registered
entity's implementation of the rule or rule amendment).
\113\ See infra section IV.D.
---------------------------------------------------------------------------

Further, while a shorter review period may allow SBS to trade on an
SBSEF more quickly, failing to provide the Commission with a meaningful
period for review of a new product would hamper the Commission's
ability to protect market participants and maintain fair, orderly, and
efficient SBS markets. A ten-day review period would still permit
market participants to trade SBS on regulated platforms within a
``reasonable period'' and would provide the Commission the time it
needs to review submissions. The Commission also disagrees with the
comment that a shorter review period is necessary to accommodate market
participants' need to hedge risk in a timely manner. During the
relatively brief and time-limited period for Commission review of an
SBSEF new-product filings, market participants would remain able to
hedge that risk in other ways, such as in the OTC SBS market or other
related securities markets, depending on the risk to be managed.
Finally, while the 10-day review period might reduce the first-to-
market competitive advantage of an SBSEF that first lists a given
SBS,\114\ the extent of such an advantage may vary considerably based
on other factors in the SBSEF market, and that, in any event, the need
for the Commission to have sufficient time to review a new product
before it is listed justifies the potential competitive effect.
---------------------------------------------------------------------------

\114\ Cf. ICI Letter, supra note 18, at 9 n.29 (discussing
``first mover'' advantage in the context of an SBSEF that has made
an SBS available to trade).
---------------------------------------------------------------------------

Thus, a ten-business-day review period strikes an appropriate
balance between allowing SBSEFs to list new products quickly and
affording Commission staff a sufficient time period in which to assess
those products prior to listing.
One commenter asks the Commission to confirm that it does not
expect SBSEFs to self-certify for every security for which there may
exist a related SBS.\115\ This commenter states that, for example,
while an SBSEF may publish ``terms and conditions'' relevant for an
instrument (like a single-name total return SBS) under Rule 804, the
Commission might receive thousands of underlying national market system
equity stocks from each SBSEF, exponentially increasing the number of
products the Commission would need to review. The commenter also states
that, given the potential 10-day review period (compared to the CFTC's
shorter timeframe), SBSEFs will be forced to proactively self-certify
every potential SBS in an attempt to meet all potential participant
demand without a two-week delay, only increasing the volume of self-
certifications the Commission may receive. This commenter states that
listing the instrument, and not each equity that may be linked to the
instrument, is an appropriate approach to balance the SBSEFs and the
Commission's resources with respect to product self-certification.
---------------------------------------------------------------------------

\115\ See WMBAA Letter, supra note 18, at 4.
---------------------------------------------------------------------------

The Commission is conscious of the large number of individual SBS
that may constitute a ``class'' of SBS, such as single-name, total
return SBS given as an example by the commenter. While an SBSEF should
not necessarily be required to make an individual filing for each of
the securities underlying a single such class of SBS, a filing for a
simple class certification that merely described the parameters of the
SBS covered by the certification would not necessarily provide
sufficient information for the Commission to determine whether all the
potential products covered by the class are consistent with the SEA and
the rules thereunder, including Regulation SE. Therefore, while the
Commission is not providing for ``class certifications'' of SBS, the
Commission will not necessarily require separate submissions for each
underlying security.\116\ The Commission will consider submissions for
an SBS that might overlie one or more of a list of securities, provided
that those potential underlying securities are specifically identified
and that the submission addresses, as part of the requirement in Rule
804 to submit ``a concise explanation and analysis of the product and
its compliance with applicable provisions of the Act, including core
principles, and the Commission's rules thereunder,'' \117\ why all
included underlying securities meet the applicable provisions of the
SEA and the Commission's rules thereunder.\118\
---------------------------------------------------------------------------

\116\ By contrast, paragraph (d) of Sec. 40.2 provides that a
DCM or SEF may submit a class certification of swaps based on an
``excluded commodity,'' subject to certain conditions. See section
1a(19) of the CEA, 7 U.S.C. 1a(19) (defining ``excluded
commodity'').
\117\ Rule 804(a)(3)(v).
\118\ For example, a submission might cover a single-name total
return SBS on any of the components of a given index, provided that
the submission explains why the minimum criteria for inclusion in
that index are sufficient to ensure that the proposed SBS are
consistent with the requirements of the SEA and the rules
thereunder, including Regulation SE.
---------------------------------------------------------------------------

Accordingly, for the reasons discussed above, the Commission is
adopting Rule 804 as proposed, with the exception of the proposed
Inline XBRL and EDGAR filing requirements, and with minor technical
modifications.\119\
---------------------------------------------------------------------------

\119\ See supra note 32. As described in further detail in the
discussion of electronic filing systems and structured data, the
Commission will require all rule and product filings required by
Rules 804 through 807 and 816 to be filed in unstructured format
through EFFS, rather than in Inline XBRL through EDGAR. See infra
section XIII.A.
---------------------------------------------------------------------------

B. Rule 805--Voluntary Submission of New Products for Commission Review
and Approval

Proposed Rule 805 is closely modeled on Sec. 40.3 of the CFTC's
rules and would set forth procedures by which an SBSEF may voluntarily
submit new SBS products for Commission review and approval.
Paragraph (a) of Proposed Rule 805 would adapt these requirements
for SBSEFs.\120\ First, an SBSEF would be required to file its
submission electronically with the Commission using the EDGAR system as
an Interactive Data File in accordance with Rule 405 of Regulation S-T.
The filing would also have to include a copy of the submission cover
sheet, a copy of the rules that set forth the terms and conditions of
the SBS to be listed, and an explanation and analysis of the product
and its compliance with applicable provisions of the SEA, including the
Core Principles and the Commission's rules thereunder.\121\ The
submission would also have to describe any agreements or contracts
entered into

[[Page 87168]]

with other parties that enable the SBSEF to carry out its
responsibilities.
---------------------------------------------------------------------------

\120\ Paragraph (a) of Rule 805 omits two provisions in Sec.
40.3(a). First, Sec. 40.3(a)(6) requires the submitting entity to
include the certifications required in 17 CFR 41.22 for product
approval of a commodity that is a security future or a security
futures product, as defined in sections 1a(44) or 1a(45) of the CEA,
respectively. The Commission did not propose to adapt this provision
into proposed Regulation SE because it pertains to security futures
and security futures products, not to swaps or SBS. Second, Sec.
40.3(a)(8) requires the submitting entity to include a filing fee.
The Commission is not proposing to charge SBSEFs filing fees for
submitting new product proposals.
\121\ This explanation and analysis would have to either be
accompanied by the documentation relied upon to establish the basis
for compliance with the applicable law, or incorporate information
contained in such documentation, with appropriate citations to data
sources.
---------------------------------------------------------------------------

Furthermore, paragraph (a) of Proposed Rule 805, modeled on Sec.
40.3(a), would require the SBSEF to include, if requested by Commission
staff, additional evidence, information, or data demonstrating that the
SBS meets, initially or on a continuing basis, the requirements of the
SEA, or other requirement for registration under the SEA, or the
Commission's rules or policies thereunder. The SBSEF would be required
to submit the requested information by the open of business on the date
that is two business days from the date of request by Commission staff,
or at the conclusion of such extended period agreed to by Commission
staff after timely receipt of a written request from the SBSEF.
Paragraph (a) of Proposed Rule 805, like Sec. 40.3(a), would permit
the submitting SBSEF to include a request for confidential
treatment.\122\ Finally, paragraph (a) of Proposed Rule 805, like Sec.
40.3(a), would require the SBSEF to certify that it posted a notice of
its request for Commission approval of the new product and a copy of
the submission, concurrent with the filing of a submission with the
Commission, on the SBSEF's website.\123\
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\122\ Section 40.3(a), like Sec. 40.2(a)(3), instructs filers
to make any request for confidential treatment pursuant to Sec.
40.8 of the CFTC's rules, which in turn cross-references Sec.
145.9. As noted previously, the Commission proposes instead to
direct filers to make any request for confidential treatment
pursuant to SEA Rule 24b-2. See supra note 51.
\123\ Information that the SBSEF seeks to keep confidential
could be redacted from the documents published on the SBSEF's
website but would have to be republished consistent with any
determination made pursuant to SEA Rule 24b-2.
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Paragraph (b) of Proposed Rule 805, like Sec. 40.3(b), would
provide that the Commission shall approve a new product unless the
terms and conditions of the product violate the SEA or the Commission's
rules thereunder.
Paragraph (c) of Proposed Rule 805, modeled on Sec. 40.3(c), would
provide that a product submitted for Commission approval under Rule 805
shall be deemed approved by the Commission 45 days after receipt by the
Commission, or at the conclusion of an extended period as provided
under Rule 805(d), unless notified otherwise within the applicable
period, if the submission complies with the requirements of Rule 805(a)
and the SBSEF does not amend the terms or conditions of the product or
supplement the request for approval, except as requested by the
Commission or for correction of typographical errors, renumbering, or
other non-substantive revisions, during that period. Paragraph (c)
would also provide that any voluntary, substantive amendment by the
SBSEF would be treated as a new submission under Rule 805.
Paragraph (d) of Proposed Rule 805, modeled on Sec. 40.3(d), would
provide that the Commission may extend the 45-day review period in
paragraph (c) for an additional 45 days, if the product raises novel or
complex issues that require additional time to analyze, in which case
the Commission shall notify the SBSEF within the initial 45-day review
period and briefly describe the nature of the specific issue(s) for
which additional time for review is required. Paragraph (d) would also
provide that the Commission may extend the 45-day review period for any
length of time to which the SBSEF agrees in writing.
Paragraph (e) of Proposed Rule 805 would provide that the
Commission may, at any time during its review, notify the SBSEF that it
will not, or is unable to, approve the product. This notification would
have to briefly specify the nature of the issues raised and the
specific provision of the SEA or the Commission's rules thereunder,
including the form or content requirements of Rule 805(a), that the
product violates, appears to violate, or potentially violates but which
cannot be ascertained from the submission.
Paragraph (f) of Proposed Rule 805, like Sec. 40.3(f), would
provide that a notification of the Commission's determination not to
approve a product does not prejudice the SBSEF from subsequently
submitting a revised version of the product for Commission approval, or
from submitting the product as initially proposed pursuant to a
supplemented submission. Furthermore, the notification would be
presumptive evidence that the entity may not truthfully certify under
Rule 804 that the same, or substantially the same, product does not
violate the SEA or the Commission's rules thereunder.
The Commission did not receive any comments on this proposed rule.
It is reasonable and appropriate to supplement the product
certification procedures in Rule 804 by also including in Regulation
SE, as Rule 805, procedures for voluntary submission of new products
for Commission review and approval. Providing this approval process, as
the CFTC does, can be valuable to an SBSEF seeking the Commission's
concurrence that a new product does not violate the SEA or the
Commission's rules thereunder prior to listing it. The CFTC's
procedures in this regard are well articulated and well understood by
SEFs, and that closely harmonizing with these procedures would yield
comparable regulatory benefits while minimizing burdens on SBSEFs.\124\
Therefore, the Commission is adopting Rule 805 as proposed, with the
exception of the proposed Inline XBRL and EDGAR filing requirements,
and with minor technical modifications.\125\
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\124\ As stated in the Proposing Release, the Commission does
not discount the possibility that an entity might elect to register
as an SBSEF with the SEC but not as a SEF with the CFTC. In such
case, the SEC-only registrant would not have any familiarity with
the CFTC's rules and filing procedures. Nevertheless, because most
if not all entities that will seek SBSEF registration with the SEC
are or will also be registered as SEFs with the CFTC, such dual
registrants would benefit from harmonized rules. Furthermore,
because the Commission is adopting these procedures substantially as
proposed, is unnecessary to establish and apply one set of
procedures for dual registrants and a different set for SEC-only
SBSEFs. See Proposing Release, supra note 1, 87 FR at 28956 (stating
that if the Commission ``establishe[d] different or additive
requirements, dually registered entities and their market
participants might need to incur costs and burdens to modify their
systems, policies, and procedures to comply with the SEC-specific
rules''). See also Bloomberg Letter, supra note 18, at 10 (``[A]
harmonized framework has the potential to lower compliance costs by
allowing SBSEFs and market participants to integrate with existing
operational and compliance frameworks. Any potential differences
would require SBSEF registrants to devote resources toward assessing
the potential gaps and consequences of regulatory divergence.'').
\125\ See supra note 32. As described in further detail in the
discussion of electronic filing systems and structured data, the
Commission will require all rule and product filings required by
Rules 804 through 807 and 816 to be filed in unstructured format
through EFFS, rather than in Inline XBRL through EDGAR. See infra
section XIII.A.
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C. Rule 806--Voluntary Submission of Rules for Commission Review and
Approval

Proposed Rule 806 is closely modeled on Sec. 40.5 of the CFTC's
rules and would set forth procedures by which an SBSEF may voluntarily
submit rules, rule amendments, or dormant rules for Commission review
and approval.
Paragraph (a) of Proposed Rule 806 would provide that an SBSEF may
request that the Commission approve a new rule, rule amendment, or
dormant rule prior to implementation of the rule. First, an SBSEF must
file its submission electronically with the Commission using the EDGAR
system as an Interactive Data File in accordance with Rule 405 of
Regulation S-T. The filing would be required to include a copy of the
submission cover sheet and to set forth the text of the rule or rule
amendment (in the case of a rule amendment, deletions and additions
must be indicated). Further, the SBSEF would be required to describe
the proposed effective date of the rule or rule amendment and any
action taken or anticipated to be taken to adopt the proposed rule by
the SBSEF or by its governing board or by any committee

[[Page 87169]]

thereof, and to cite the rules of the SBSEF that authorize the adoption
of the proposed rule. The SBSEF would be required to provide an
explanation and analysis of the operation, purpose, and effect of the
proposed rule or rule amendment and its compliance with applicable
provisions of the SEA, including the Core Principles relating to SBSEFs
and the Commission's rules thereunder, and, as applicable, a
description of the anticipated benefits to market participants or
others, any potential anticompetitive effects on market participants or
others, and how the rule fits into the SBSEF's framework of regulation.
Additionally, if a proposed rule affects, directly or indirectly,
the application of any other rule of the SBSEF, the pertinent text of
any such rule would be required to be set forth and the anticipated
effect described. The SBSEF would also be required to provide a brief
explanation of any substantive opposing views expressed to the SBSEF by
governing board or committee members, members of the SBSEF, or market
participants that were not incorporated into the rule, or a statement
that no such opposing views were expressed.
The SBSEF could, as appropriate, include a request for confidential
treatment as permitted under SEA Rule 24b-2. Finally, the SBSEF would
be required to certify that it posted a notice of the pending rule with
the Commission and a copy of the submission, concurrent with the filing
of a submission with the Commission, on the SBSEF's website.\126\
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\126\ Information that the SBSEF seeks to keep confidential
could be redacted from the documents published on the SBSEF's
website but would have to be republished consistent with any
determination made pursuant to SEA Rule 24b-2.
---------------------------------------------------------------------------

Paragraph (b) of Proposed Rule 806, modeled on Sec. 40.5(b), would
provide that the Commission shall approve a new rule or rule amendment
unless the rule or rule amendment is inconsistent with the SEA or the
Commission's rules thereunder. Paragraph (c) of Proposed Rule 806, like
Sec. 40.5(c), would provide that a rule or rule amendment submitted
for Commission approval under Rule 806 shall be deemed approved by the
Commission 45 days after receipt by the Commission, or at the
conclusion of such extended period as provided under paragraph (d) of
this section, unless the SBSEF is notified otherwise within the
applicable period, if the submission complies with the requirements of
Rule 806(a) and the SBSEF does not amend the proposed rule or
supplement the submission, except as requested by the Commission,
during the pendency of the review period, other than for correction of
typographical errors, renumbering, or other non-substantive revisions.
Paragraph (c) would also provide that any amendment or supplementation
not requested by the Commission would be treated as the submission of a
new filing under Rule 806.
Paragraph (d) of Proposed Rule 806, modeled on Sec. 40.5(d), would
provide that the Commission may further extend the review period in
paragraph (c) for an additional 45 days, if the proposed rule or rule
amendment raises novel or complex issues that require additional time
for review or is of major economic significance, the submission is
incomplete, or the requestor does not respond completely to Commission
questions in a timely manner, in which case the Commission shall notify
the submitting SBSEF within the initial 45-day review period and shall
briefly describe the nature of the specific issues for which additional
time for review shall be required. Paragraph (d) would also allow an
extension to which the SBSEF agrees in writing.
Paragraph (e) of Proposed Rule 806, like Sec. 40.5(e), would
provide that, at any time during its review, the Commission may notify
the SBSEF that it will not, or is unable to, approve the new rule or
rule amendment. This notification would have to briefly specify the
nature of the issues raised and the specific provision of the SEA or
the Commission's rules thereunder, including the form or content
requirements of Proposed Rule 806, with which the new rule or rule
amendment is inconsistent or appears to be inconsistent with the SEA or
the Commission's rules thereunder.
Paragraph (f) of Proposed Rule 806, like Sec. 40.5(f), would
provide that such a notification to an SBSEF would not prevent the
SBSEF from subsequently submitting a revised version of the proposed
rule or rule amendment for Commission review and approval or from
submitting the new rule or rule amendment as initially proposed in a
supplemented submission. Paragraph (f) would further provide that the
revised submission would be reviewed without prejudice. Finally,
paragraph (f) would provide that such a notification to an SBSEF of the
Commission's determination not to approve a proposed rule or rule
amendment shall be presumptive evidence that the SBSEF may not
truthfully certify the same, or substantially the same, proposed rule
or rule amendment under Rule 807(a).
Paragraph (g) of Proposed Rule 806, like Sec. 40.5(g), would
provide that, notwithstanding Rule 806(c), changes to a proposed rule
or a rule amendment, including changes to terms and conditions of a
product that are consistent with the SEA and the Commission's rules
thereunder, may be approved by the Commission at such time and under
such conditions as the Commission shall specify in the written
notification; provided, however, that the Commission may, at any time,
alter or revoke the applicability of such a notice to any particular
product or rule amendment.
The Commission received no comments on Proposed Rule 806 and the
Commission is adopting Rule 806 as proposed, with the exception of the
proposed Inline XBRL and EDGAR filing requirements, and with minor
technical modifications, for the reasons stated in the Proposing
Release.\127\
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\127\ See supra note 32. As described in further detail in the
discussion of electronic filing systems and structured data, the
Commission will require all rule and product filings required by
Rules 804 through 807 and 816 to be filed in unstructured format
through EFFS, rather than in Inline XBRL through EDGAR. See infra
section XIII.A.
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D. Rule 807--Self-Certification of Rules

Proposed Rule 807 is closely modeled on Sec. 40.6 of the CFTC's
rules and would set forth procedures by which an SBSEF may self-certify
changes to its rules. Paragraph (a) of Proposed Rule 807, modeled on
Sec. 40.6(a), would set forth the conditions that an SBSEF must comply
with before implementing a rule or rule amendment via self-
certification. Like Sec. 40.6(a), Proposed Rule 807(a) would permit an
SBSEF to implement a rule or rule amendment without obtaining the
Commission's prior approval under Rule 806, but only if it ``self-
certifies'' the rule or rule amendment in compliance with the
conditions set forth in Rule 807. Proposed Rule 807(a) would also
permit an SBSEF to self-certify a rule or rule amendment that the
Commission had previously approved under Rule 806, or that the SBSEF
had previously self-certified under Rule 807, but that in the interim
had become a dormant rule (i.e., unimplemented for 12 consecutive
calendar months).\128\
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\128\ Also, like Sec. 40.6(a), Proposed Rule 807(a) would
include an exception that would allow an SBSEF to implement a
certain kind of rule without having to comply with the full set of
conditions set forth in paragraphs (a)(1) through (8) of Rule 807,
the details of which are discussed below. Specifically, the
exception would provide that, when submitting a rule delisting or
withdrawing the certification of a product with no open interest, an
SBSEF would only be required to meet the conditions of paragraphs
(a)(1), (a)(2), and (a)(6) of Rule 807. The introductory language in
paragraph (a) of Proposed Rule 807 would generally track the
language of Sec. 40.6(a), with slight changes for clarity. However,
Proposed Rule 807(a) would not include an equivalent of the
reference in Sec. 40.6(a) to submissions under Sec. 40.10, which
concerns only systemically important derivatives clearing
organizations and thus is not relevant to SBSEFs.

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[[Page 87170]]

Paragraph (a)(1) of Proposed Rule 807 would require the SBSEF to
file its submission electronically with the Commission using the EDGAR
system as an Interactive Data File in accordance with Rule 405 of
Regulation S-T. Paragraph (a)(2) would require the SBSEF to provide a
certification that the SBSEF posted a notice of the self-certification
with the Commission and a copy of the submission, concurrent with the
filing of a submission with the Commission, on the SBSEF's
website.\129\ Paragraph (a)(3) would provide that the Commission must
have received the submission not later than the open of business on the
business day that is 10 business days before the SBSEF's implementation
of the rule or rule amendment. Paragraph (a)(4) would provide that the
SBSEF may not implement the rule or rule amendment if the Commission
has stayed it pursuant to Rule 807(c).
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\129\ Information that the SBSEF seeks to keep confidential
could be redacted from the documents published on the SBSEF's
website but must be republished consistent with any determination
made pursuant to SEA Rule 24b-2.
---------------------------------------------------------------------------

Paragraph (a)(5) of Proposed Rule 807 would set out procedures for
emergency rule certifications. Paragraph (a)(5)(i) would require a new
rule or rule amendment that establishes standards for responding to an
emergency \130\ to be submitted pursuant to Rule 807(a). Paragraph
(a)(5)(ii) would provide that a rule or rule amendment implemented
under procedures of the governing board to respond to an emergency
shall, if practicable, be filed with the Commission prior to
implementation or, if not practicable, be filed with the Commission at
the earliest possible time after implementation, but in no event more
than 24 hours after implementation. In addition, paragraph (a)(5)(ii)
would provide that any such submission be subject to the certification
and stay provisions of Rules 807(b) and (c), described below.
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\130\ See Sec. 40.1(h) (defining ``emergency'' as ``any
occurrence or circumstance that, in the opinion of the governing
board of a registered entity, or a person or persons duly authorized
to issue such an opinion on behalf of the governing board of a
registered entity under circumstances and pursuant to procedures
that are specified by rule, requires immediate action and threatens
or may threaten such things as the fair and orderly trading in, or
the liquidation of or delivery pursuant to, any agreements,
contracts, swaps or transactions or the timely collection and
payment of funds in connection with clearing and settlement by a
derivatives clearing organization''). The definition goes on to list
a series of circumstances that are deemed emergencies under the
definition. The Commission is adopting a definition of ``emergency''
in Rule 802 that is adapted from Sec. 40.1(h).
---------------------------------------------------------------------------

Paragraph (a)(6) of Proposed Rule 807, modeled on Sec. 40.6(a)(7),
would set out the required elements for a rule submission under Rule
807. These requirements would include a copy of the submission cover
sheet (in the case of a rule or rule amendment that responds to an
emergency, ``Emergency Rule Certification'' should be noted in the
description section of the submission cover sheet); the text of the
rule (in the case of a rule amendment, deletions and additions must be
indicated); the date of intended implementation; a certification by the
SBSEF that the rule complies with the SEA and the Commission's rules
thereunder; a concise explanation and analysis of the operation,
purpose, and effect of the proposed rule or rule amendment and its
compliance with applicable provisions of the SEA, including the Core
Principles relating to SBSEFs and the Commission's rules thereunder;
and a brief explanation of any substantive opposing views expressed to
the SBSEF by governing board or committee members, members of the
SBSEF, or market participants, that were not incorporated into the
rule, or a statement that no such opposing views were expressed.
Paragraph (a)(6)(vii) would also permit the SBSEF to include, as
appropriate, a request for confidential treatment pursuant to the
procedures provided in Rule 240.24b-2.\131\
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\131\ Section 40.6(a)(7)(vii) directs the submitting entity to
follow the procedures in Sec. 40.8 when making a request for
confidential treatment, which in turn cross-references Sec. 145.9.
As noted previously, the Commission proposes instead to direct
filers to make any request for confidential treatment pursuant to
SEA Rule 24b-2. See supra note 51.
---------------------------------------------------------------------------

Paragraph (a)(7) of Proposed Rule 807, like Sec. 40.6(a)(8), would
require an SBSEF to provide, if requested by Commission staff,
additional evidence, information, or data that may be beneficial to the
Commission in conducting a due diligence assessment of the filing and
the SBSEF's compliance with any of the requirements of the SEA or the
Commission's rules or policies thereunder.
Paragraph (b) of Proposed Rule 807, modeled on Sec. 40.6(b), would
provide the Commission 10 business days to review the new rule or rule
amendment before it is deemed certified and can be made effective,
unless the Commission notifies the SBSEF during that ten-business-day
review period that it intends to issue a stay of the certification
under Rule 807(c).
Paragraph (c)(1) of Proposed Rule 807, modeled on Sec. 40.6(c)(1),
would provide that the Commission may stay the certification of a new
rule or rule amendment by issuing a notification informing the SBSEF
that the Commission is staying the certification on the grounds that it
presents novel or complex issues that require additional time to
analyze, is accompanied by an inadequate explanation, or is potentially
inconsistent with the SEA or the Commission's rules thereunder. In
addition, paragraph (c)(1) affords the Commission an additional 90 days
from the date of the notification to conduct the review.
Paragraph (c)(2) of Proposed Rule 807, modeled on Sec. 40.6(c)(2),
would require the Commission to provide a 30-day comment period within
the 90-day period in which the stay is in effect. The Commission would
be required to publish a notice of the 30-day comment period on the
Commission's internet website, and comments from the public could be
submitted as specified in that notice.
Paragraph (c)(3) of Proposed Rule 807, modeled on Sec. 40.6(c)(3),
would provide that the new rule or rule amendment subject to the stay
shall become effective, pursuant to the certification, at the
expiration of the 90-day review period, unless the Commission withdraws
the stay prior to that time, or the Commission notifies the SBSEF
during the 90-day period that it objects to the proposed certification
on the grounds that the proposed rule or rule amendment is inconsistent
with the SEA or the Commission's rules thereunder.
Paragraph (d) of Proposed Rule 807, modeled on Sec. 40.6(d), would
provide that certain kinds of rules or rule amendments may be put into
effect by an SBSEF without certification to the Commission if similar
enumerated conditions are met. Some would be subject to a Weekly
Notification of Rule Amendments, which is closely modeled on the CFTC
notification; others would not be subject to any notification
requirement.
Under paragraph (d)(2) of Proposed Rule 807, the following types of
rules could be put into effect by an SBSEF without self-certification,
so long as they are disclosed on the Weekly Notification of Rule
Amendments:
Non-substantive revisions. Corrections of typographical
errors, renumbering, periodic routine updates to identifying
information about the SBSEF, and other such non-substantive revisions
of a product's terms and conditions that have no effect on the economic
characteristics of the product;

[[Page 87171]]

Fees. Fees or fee changes, other than fees or fee changes
associated with market making or trading incentive programs, that total
$1.00 or more per contract, and are established by an independent third
party or are unrelated to delivery, trading, clearing, or dispute
resolution.
Survey lists. Changes to lists of banks, brokers, dealers,
or other entities that provide price or cash market information to an
independent third party and that are incorporated by reference as
product terms;
Approved brands. Changes in lists of approved brands or
markings pursuant to previously certified or Commission approved
standards or criteria;
Trading months. The initial listing of trading months,
which may qualify for implementation without notice, within the
currently established cycle of trading months; or
Minimum tick. Reductions in the minimum price fluctuation
(or ``tick'').
Under paragraph (d)(3)(ii) of Rule 807, the following types of
rules can be put into effect by an SBSEF without self-certification and
without having to be disclosed on the Weekly Notification of Rule
Amendments:
Transfer of membership or ownership. Procedures and forms
for the purchase, sale, or transfer of membership or ownership, but not
including qualifications for membership or ownership, any right or
obligation of membership or ownership, or dues or assessments;
Administrative procedures. The organization and
administrative procedures of governing bodies such as a governing
board, officers, and committees, but not voting requirements, governing
board, or committee composition requirements or procedures, decision-
making procedures, use or disclosure of material non-public information
gained through the performance of official duties, or requirements
relating to conflicts of interest;
Administration. The routine daily administration,
direction, and control of employees, requirements relating to gratuity
and similar funds, but not guaranty, reserves, or similar funds;
declaration of holidays; and changes to facilities housing the market,
trading floor, or trading area;
Standards of decorum. Standards of decorum or attire or
similar provisions relating to admission to the floor, badges, or
visitors, but not the establishment of penalties for violations of such
rules;
Fees. Fees or fee changes, other than fees or fee changes
associated with market making or trading incentive programs that are
less than $1.00 or relate to matters such as dues, badges,
telecommunication services, booth space, real-time quotations,
historical information, publications, software licenses, or other
matters that are administrative in nature.
Trading months. The initial listing of trading months
which are within the currently established cycle of trading months.
One commenter states that the CFTC's self-certification process has
been relied upon by CFTC registrants for most submissions, leaving
little that is reviewed or capable of challenge by market participants
or the CFTC unless it is inconsistent with the statute or CFTC
regulation.\132\ This commenter states that rulebook or contractual
changes can alter protections within Commission-regulated markets and
that the Commission should be able to object to any such change it
deems inconsistent with Commission policy, including considerations of
compliance costs and the impact on consumer protections, all of which
would be best informed by a requirement for public comment prior to
certification. Under the CFTC regime, the commenter states, there is no
formal process to allow market participants to object to a submission
for changes that are submitted for certification. Decisions to adopt or
modify rules by self-certification are typically made by the
registrant's board of directors or a board committee, this commenter
states, with market participants only learning of the rule after the
registrant has self-certified the rule or amendment. This commenter
supports an alternative approach in which the Commission can review all
material rule and contractual changes by SBSEFs, clearing agencies, SBS
data depositories, and exchanges. This commenter also recommends that
the Commission adopt a requirement for public comment for such changes.
---------------------------------------------------------------------------

\132\ See SIFMA AMG Letter, supra note 18, at 5-6. Another
commenter raised questions specifically about self-certification in
the context of a determination by an SBSEF that an SBS has been
``made available to trade.'' See MFA Letter, supra note 18, at 6.
This comment is discussed below in the context of made-available-to-
trade determinations under Rule 816(a). See infra section V.F.2.
---------------------------------------------------------------------------

Regulation SE will afford the Commission a sufficient mechanism to
assess new SBSEF rules and rule amendments for consistency with section
3D of the SEA, while also permitting SBSEFs to submit new rules and
rule amendments using a self-certification process closely aligned with
Sec. 40.6. The CFTC's procedures are well articulated and well
understood by SEFs, and closely harmonizing with these procedures
should yield comparable regulatory benefits while minimizing burdens on
SBSEFs. It is likely that certain rules of dually registered SEF/SBSEFs
will apply to member behavior generally--and not to one product market
(e.g., swaps or SBS) exclusively--and that these rules will thus have
to be filed with both the SEC and CFTC. Adding a default comment period
or otherwise altering the standard so that the Commission reviews all
material rule or contractual changes by SBSEFs, as requested by one
commenter,\133\ would significantly alter the timing of self-certified
SBSEF rules compared to their SEF equivalents. By contrast, closely
harmonizing the SEC's filing procedures and standards of review with
the CFTC's would allow dually registered entities to submit the same
(or substantially the same) filing to both agencies for review.
Moreover, if the Commission exercises its authority to stay the
effectiveness of a self-certified rule and seek public comment--i.e.,
with respect to a rule that is novel, complex, inadequately explained,
or potentially inconsistent with the SEA or the regulations thereunder,
including Regulation SE--market participants would be able to convey
their concerns regarding that rule to the Commission.
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\133\ See SIFMA AMG Letter, supra note 18, at 5-6.
---------------------------------------------------------------------------

The specified types of SBSEF rules or rule amendments that may be
put into effect under Rule 807(d) without certification to the
Commission are appropriate because they are limited to the types of
rule changes described earlier in this section (e.g., administration),
which do not implicate significant protections to market participants,
including compliance costs and customer protection. Therefore, the
Commission has harmonized Rule 807(d) with Sec. 40.6(d) to allow such
filings to be made without self-certification or Commission review.
Thus, it is not necessary to require SBSEFs to make a substantially
different type of filing to the SEC than to the CFTC for the same
underlying rule. For the reasons discussed above, the Commission is
adopting Rule 807 as proposed, with the exception of the proposed
Inline XBRL and EDGAR filing requirements, and with minor technical
modifications.\134\
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\134\ See supra note 32. The Commission has also moved the word
``and'' from the end of paragraph (d)(3)(D) to the end of paragraph
(d)(3)(E)(2). As described in further detail in the discussion of
electronic filing systems and structured data, the Commission will
require all rule and product filings required by Rules 804 through
807 and 816 to be filed in unstructured format through EFFS, rather
than in Inline XBRL through EDGAR. See infra section XIII.A.

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[[Page 87172]]

E. Submission Cover Sheet and Instructions

In proposed new Sec. 249.2002, the Commission proposed to require
that an SBSEF use a submission cover sheet in conjunction with filings
submitted pursuant to Rules 804 through 807, 809, and 816. The cover
sheet and the instructions therein are modeled on the cover sheet and
instructions used by SEFs in conjunction with their analogous filings
with the CFTC.\135\
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\135\ The CFTC cover sheet and instructions, found in appendix D
to part 40 of the CFTC's rules, are designed for rule and product
filings from a wider range of registered entities than just SEFs,
and thus include entries that are omitted from the Commission's
proposed adaptation.
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The same cover sheet and instructions would be used for a new rule,
rule amendment, or new product filing, with the SBSEF checking the
appropriate box to indicate which of these types the filing represents.
The SBSEF would also be required to check boxes to indicate whether the
submission was seeking approval by the Commission or whether it was
being filed as a certification by the SBSEF; and to identify the
specific provision in the Commission's rules pursuant to which the
filing was being submitted. The submission cover sheet also includes a
box that the SBSEF would check if it intends to submit a request for a
joint interpretation from the Commission and the CFTC regarding whether
the product is a swap, an SBS, or mixed swap pursuant to SEA Rule 3a68-
2.\136\ Finally, the cover sheet includes a check box by which an SBSEF
can indicate that it is requesting confidential treatment of materials
in the submission.
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\136\ Rule 809 provides that a product filing will be stayed or
tolled, as applicable, if such a request for a joint interpretation
is made by the SBSEF, the SEC, or the CFTC. See infra section IV.G.
---------------------------------------------------------------------------

The cover sheet divides the rule and rule amendment filings into
two categories: one for general rules of the SBSEF and the other for
rules relating to the terms and conditions of a product. Additional
boxes would need to be checked if a filing under the terms-and-
conditions category concerned specifically a determination by the SBSEF
that a particular SBS was now to be considered ``made available to
trade'' (or ``MAT''); \137\ or if the filing concerned the delisting of
an SBS with no open interest.\138\ The cover sheet would need to be
used in conjunction with the weekly notifications that SBSEFs would be
required to file pursuant to Rule 807(d) for certain changes that do
not need to be approved or certified, as discussed above.
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\137\ Rule 809 provides that a product filing will be stayed or
tolled, as applicable, if such a request for a joint interpretation
is made by the SBSEF, the SEC, or the CFTC. See infra section IV.G.
\138\ See supra note 128.
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Paragraph (a) of the submission cover sheet instructions provides
that a properly completed submission cover sheet must accompany all
rule and product submissions filed electronically with the Commission
by an SBSEF using the Electronic Form Filing System (EFFS).\139\ Per
paragraph (a), a properly completed submission cover sheet would
include: (1) the name and platform ID of the SBSEF; \140\ (2) the date
of the filing; (3) an indication as to whether the filing is a new
rule, rule amendment, or new product; (4) for rule filings, the rule
number(s) being adopted or, in the case of rule amendments, the number
of the rule(s) being modified; and (4) for rule or rule amendment
filings, a description of the new rule or rule amendment, including a
discussion of its expected impact on the SBSEF, its members, and the
overall market. The instructions state that the narrative should
describe the substance of the submission with enough specificity to
characterize all material aspects of the filing.
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\139\ The Electronic Form Filing System (EFFS) is a secure, web-
based system used for filing Forms 19b-4, 19b-7, and SCI. The system
also supports pre-filings of certain types of Form 19b-4 filings.
EFFS is used for form filing by SROs, including national securities
exchanges, national securities associations, clearing agencies, and
Systems Compliance Integrity (SCI) entities, including SCI SROs, SCI
alternative trading systems, plan processors, and exempt clearing
agencies subject to Automation Review Policy. See https://www.sec.gov/tm/electronic-form-filing-system-resources.
\140\ ``Platform ID'' is a term utilized in Regulation SBSR, 17
CFR 242.900 et seq., and means the unique identification code
assigned to a platform on which an SBS is executed. See 17 CFR
242.900(w). The term ``platform'' includes an SBSEF. See Rule
900(v), 17 CFR 242.900(v). A registered SBSEF is required by Rule
903(a) of Regulation SBSR, 17 CFR 242.903(a), to use as its platform
ID an identifier issued by an internationally recognized standards-
setting system (``IRSS'') if the IRSS meets enumerated criteria and
has therefore been recognized by the Commission pursuant to Rule
903(a). This identification requirement stems from a registered
SBSEF's status as a ``participant'' of a registered SBSDR under Rule
900(u), 17 CFR 242.900(u), because the term ``participant'' includes
a ``platform,'' as defined in Rule 900(v), 17 CFR 242.900(v), that
incurs reporting duties under Rule 901(a), 17 CFR 242.901(a).
Currently, the Global Legal Entity Identifier System (``GLEIS'') is
the only IRSS that has been recognized by the Commission under Rule
903(a). See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, SEA Release No. 74244 (Feb. 11,
2015), 80 FR 14563, 14631-32 (Mar. 19, 2015) (``Regulation SBSR
Adopting Release I''). Therefore, Legal Entity Identifiers
(``LEIs'') issued through the GLEIS are currently the only allowable
platform IDs that may be used by registered SBSEFs.
---------------------------------------------------------------------------

Paragraph (b) of the submission cover sheet instructions states
that a submission must comply with all applicable filing requirements
for proposed rules, rule amendments, or products, and that the filing
of the submission cover sheet does not obviate the SBSEF's
responsibility to comply with applicable filing requirements.
Paragraph (c) of the submission cover sheet states that checking
the box marked ``confidential treatment requested'' does not obviate
the submitter's responsibility to comply with all applicable
requirements for requesting confidential treatment under SEA Rule 24b-2
and does not substitute for notice or full compliance with such
requirements.
One commenter states that the submission cover sheet and
instructions for SBSEF filings should harmonize with those of the
CFTC.\141\ This commenter states that entities currently registered
with the CFTC as SEFs will be able to seamlessly enact the necessary
steps for required SEC filings because of their familiarity with the
CFTC's filing process. This commenter also states that any identifiers
regarded as necessary should be included on the cover sheet.
---------------------------------------------------------------------------

\141\ See Letter from J.T. (May 26, 2022). In section XIII.B,
infra, the Commission discusses the use of identifiers, such as the
LEI.
---------------------------------------------------------------------------

The Commission agrees that the use of a submission cover sheet that
is harmonized with that required for CFTC filings by SEFs is likely to
facilitate the filing process for SBSEFs that are also registered as
SEFs. For this reason, the proposed submission coversheet is harmonized
with the CFTC's, with differences only in the details specific to the
rules and processes of the SEC. The Commission contemplates providing
for electronic completion (as well as submission) of the cover sheet
and attachment of the submissions required by Rules 804, 805, 806, 807,
and 809, and intends to advise affected persons regarding its use by
public announcement in advance of the effective date of these
rules.\142\
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\142\ Below in section XIII.A, the Commission addresses the
requirements to use the EDGAR system and Inline XBRL for
submissions.
---------------------------------------------------------------------------

For the reasons discussed above, the Commission is adopting 17 CFR
249.2002 as proposed, but is renumbering it as 17 CFR 249.1702 under
new subpart R (``Forms for Registration of, and Filings by, Security-
Based Swap Execution Facilities''), and is also adopting the submission
cover sheet and instructions as proposed with the exception of the
proposed Inline

[[Page 87173]]

XBRL and EDGAR filing requirements.\143\
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\143\ See id.
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F. Rule 808--Availability of Public Information

Proposed Rule 808 is closely modeled on Sec. 40.8 of the CFTC's
rules.\144\ Proposed Rule 808(a) would provide that certain parts of an
application to register as an SBSEF would be made publicly available on
the Commission's website, unless confidential treatment is obtained
pursuant to SEA Rule 24b-2. Specifically, Proposed Rule 808(a) would
make the following parts of a Form SBSEF publicly available: the (i)
transmittal letter and first part of the application cover sheet; (ii)
Exhibit C; (iii) Exhibit G; (iv) Exhibit L; and (v) Exhibit M.\145\
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\144\ Section 40.8 of the CFTC's rules is entitled
``Availability of public information.''
\145\ Section 40.8(a) does not provide a list of the exhibits
required to be made public, but rather refers to a general
description of items required to be made public. For purposes of
clarity and ease of reference, however, the Commission proposed to
list the specific corresponding exhibits in Rule 808 that would be
made publicly available. Exhibit C would require a narrative that
sets forth the fitness standards for the governing board and its
composition; Exhibit G would require a copy of the corporate
governance documents for the applicant; Exhibit L would require a
narrative and any other form of documentation that describes the
manner in which the applicant is able to comply with each core
principle; and Exhibit M would require a copy of the applicant's
proposed rules and any technical manuals, guides, or other
instructions for members.
---------------------------------------------------------------------------

Paragraph (b) of Proposed Rule 808, adapted from Sec. 40.8(c),
would provide that the Commission shall make publicly available on its
website, unless confidential treatment is obtained pursuant to SEA Rule
24b-2,\146\ an SBSEF's filing of new products pursuant to the self-
certification procedures of Rule 804, new products for Commission
review and approval pursuant to Rule 805, new rules and rule amendments
for Commission review and approval pursuant to Rule 806, and new rules
and rule amendments pursuant to the self-certification procedures of
Rule 807. Paragraph (c), adapted from Sec. 40.8(d), would provide that
the terms and conditions of a product submitted to the Commission
pursuant to any of Rules 804 through 807 shall be made publicly
available at the time of submission unless confidential treatment is
obtained pursuant to SEA Rule 24b-2.
---------------------------------------------------------------------------

\146\ An application for confidential treatment shall contain,
among other things, a statement of the grounds of objection
referring to, and containing an analysis of, the applicable
exemption(s) from disclosure under the Freedom of Information Act,
and a justification of the period of time for which confidential
treatment is sought. See 17 CFR 240.24b-2(b)(2)(ii).
---------------------------------------------------------------------------

The Commission received one comment on Proposed Rule 808. This
commenter states that the Commission should not allow requests for
confidential treatment and that these requests are currently abused and
result in little information being made available to the public.\147\ A
blanket prohibition on requesting confidential treatment would not be
appropriate, however, because each request for confidential treatment
should be addressed on its particular facts and circumstances.
Moreover, as the Commission stated in the Proposing Release, ``it is
not necessary or appropriate to establish and utilize one set of
procedures to handle confidential treatment requests made by SBSEFs
while utilizing a different set of procedures for other persons who
request confidential treatment from the Commission under the SEA.''
\148\ The Commission anticipates that while SBSEFs may request
confidential treatment for their filings pursuant to existing SEA Rule
24-2, the items enumerated in Rule 808 are not of the type that
typically would constitute confidential information. Finally, it is
appropriate to adopt a rule that is adapted from Sec. 40.8, because
Rule 808 will apply to submissions made under Rules 804-807, which are,
as discussed above, also based on provisions of the CFTC's rules for
SEFs. Therefore, the Commission is adopting Rule 808 as proposed.
---------------------------------------------------------------------------

\147\ See Keeney Letter, supra note 95.
\148\ Proposing Release, supra note 1, 87 FR at 28880 n.50.
---------------------------------------------------------------------------

G. Rule 809--Staying of Certification and Tolling of Review Period
Pending Jurisdictional Determination

Section 718 of the Dodd-Frank Act, entitled ``Determining Status of
Novel Derivative Products,'' sets forth a mechanism for addressing a
situation in which a person wishes to list or trade a novel derivative
product that may have elements of both securities and contracts of sale
of a commodity for future delivery (or options on such contracts or
options on commodities)--i.e., a situation in which it is unclear
whether the product in question is a security under the jurisdiction of
the SEC or a future under the jurisdiction of the CFTC. Section 718(a)
provides that the SEC or the CFTC may request that the other agency
issue a determination as to the classification of that product, and
section 718(b) provides that the CFTC and SEC may petition for judicial
review of any such determination.\149\
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\149\ Section 40.12 of the CFTC's rules is entitled ``Staying of
certification and tolling of review period pending jurisdictional
determination'' and reflects the process described in section 718 of
the Dodd-Frank Act. Section 40.12 provides that if a SEF (among
other registered entities) certifies, submits for approval, or
otherwise files a proposal to list or trade such a novel derivative
product, the product certification shall be stayed or the approval
review period shall be tolled until a final determination order is
issued under section 718.
---------------------------------------------------------------------------

As described in the Proposing Release, Proposed Rule 809 is loosely
modeled on Sec. 40.12, but modified to focus on the products and
jurisdictional issues that are more likely to be relevant to
SBSEFs.\150\ Paragraph (a) of Proposed Rule 809, modeled on Sec.
40.12(b), would provide that a product certification made by an SBSEF
pursuant to Rule 804 shall be stayed, or the review period for a
product that has been submitted for Commission approval by an SBSEF
pursuant to Rule 805 shall be tolled, upon request for a joint
interpretation of whether the product is a swap, SBS, or mixed swap
made pursuant to Rule 3a68-2 under the SEA \151\ by the SBSEF, the SEC,
or the CFTC. Paragraph (b) is modeled on Sec. 40.12(b)(1) and would
require the SEC to provide the SBSEF with a written notice of the stay
or tolling pending issuance of a joint interpretation by the SEC and
CFTC. Paragraph (c) is modeled on Sec. 40.12(b)(2) and would provide
that the stay shall be withdrawn, or the approval review period shall
resume, if a joint interpretation finding that the SEC has jurisdiction
over the product is issued.
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\150\ As noted in the Proposing Release, an SBSEF might seek to
list a product where it is unclear whether the product is a swap or
an SBS. See Proposing Release, supra note 1, 87 FR at 28890.
\151\ 17 CFR 240.3a68-2.
---------------------------------------------------------------------------

The Commission did not receive any comments on Proposed Rule 809.
While section 718 of the Dodd-Frank Act addresses situations where it
is unclear whether a product is a security or a future, the SEC and the
CFTC have adopted separate rules--SEA Rule 3a68-2 and 17 CFR 1.8,
respectively--governing requests for interpretation regarding a product
that might be an SBS, a swap, or a mixed swap. It is appropriate for
Regulation SE to include a mechanism for the staying or tolling of a
filing by an SBSEF when it is unclear whether the product is a swap or
an SBS, and it would be appropriate for Rule 809 to reflect the process
set forth in SEA Rule 3a68-2. Tailoring, as proposed, the scope of Rule
809, in relation to Sec. 40.12, appropriately addresses the
jurisdictional questions that are likely to arise from a product listed
by an SBSEF.\152\ Therefore, the Commission is adopting Rule 809 as
proposed.
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\152\ The objective of Rule 809 is consistent with the objective
of Sec. 40.12: to provide for a stay or tolling of a product filing
where it is unclear whether the product is under the jurisdiction of
the SEC or the CFTC.

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[[Page 87174]]

H. Rule 810--Product Filings by SBSEFs That Are Not Yet Registered and
by Dormant SBSEFs

Proposed Rule 810 is closely modeled on Sec. 37.4 of the CFTC's
rules and would provide a process whereby a not-yet-registered SBSEF or
a dormant SBSEF could submit product filings. Specifically, Proposed
Rule 810 would provide that an applicant for registration as an SBSEF
may submit an SBS's terms and conditions prior to listing the product
as part of its application for registration and that any such terms and
conditions or rules submitted as part of an SBSEF's application for
registration shall be considered for approval by the Commission at the
time the Commission issues the SBSEF's order of registration.
Similarly, any SBS terms and conditions or rules submitted as part of
an application to reinstate the registration of a dormant SBSEF would
be considered for approval by the Commission at the time the Commission
approves the reinstatement of registration of the dormant SBSEF.
The Commission did not receive any comments on Proposed Rule 810
and is adopting Rule 810 as proposed, for the reasons stated in the
Proposing Release.

V. Miscellaneous Requirements

Sections 37.5 to 37.12 of the CFTC's rules impose miscellaneous
requirements on SEFs, and the Commission proposed to impose similar
requirements on SBSEFs in Rules 811 to 817 of Regulation SE.

A. Rule 811--Information Relating to SBSEF Compliance

1. Harmonization With Sec. 37.5
Paragraphs (a) to (c) of Proposed Rule 811 are modeled on Sec.
37.5, which is entitled ``Information regarding swap execution facility
compliance.'' Paragraph (a) of Proposed Rule 811 is closely modeled on
Sec. 37.5(a) and would provide that, upon the Commission's request, an
SBSEF shall file with the Commission information related to its
business as an SBSEF in the form and manner, and within the timeframe,
specified by the Commission. Paragraph (b) is closely modeled on Sec.
37.5(b) and would provide that, upon the Commission's request, an SBSEF
shall file with the Commission a written demonstration, containing
supporting data, information, and documents, that it is in compliance
with one or more Core Principles or with its other obligations under
the SEA or the Commission's rules thereunder, as the Commission
specifies in its request. Also, under Proposed Rule 811(b), the SBSEF
would be required to file such written demonstration in the form and
manner, and within the timeframe, specified by the Commission.
Paragraph (c)(1) of Proposed Rule 811 is closely modeled on Sec.
37.5(c)(1) and would provide that an SBSEF shall file with the
Commission a notification of any transaction involving the direct or
indirect transfer of 50% or more of the equity interest in the SBSEF.
Also, under Proposed Rule 811(c)(1), the Commission could, upon
receiving such a notification, request supporting documentation of the
transaction. Paragraph (c)(2) is closely modeled on Sec. 37.5(c)(2)
and would provide that the equity interest transfer notice shall be
filed with the Commission in a form and manner specified by the
Commission at the earliest possible time, but in no event later than
the open of business 10 business days following the date upon which the
SBSEF enters into a firm obligation to transfer the equity Interest.
Paragraph (c)(3) is closely modeled on Sec. 37.5(c)(3) and would
provide that, notwithstanding the foregoing, if any aspect of an equity
interest transfer requires an SBSEF to file a rule, the SBSEF shall
comply with the applicable rule filing requirements of Rule 806 or Rule
807.
Paragraph (c)(4) of Proposed Rule 811 is closely modeled on Sec.
37.5(c)(4) and would provide that, upon a transfer of an equity
interest of 50% or more in an SBSEF, the SBSEF shall file with the
Commission, in a form and manner specified by the Commission, a
certification that the SBSEF meets all of the requirements of section
3D of the SEA and the Commission rules thereunder, no later than two
business days following the date on which the equity interest of 50% or
more was acquired.
The Commission did not receive any comments on Rule 811(a) to (c).
It is appropriate for Regulation SE to include provisions requiring an
SBSEF to provide the Commission with the information described above.
Information about an SBSEF's business as an SBSEF and transfers of 50%
or more of its equity would promote understanding of its operations and
ownership, which should facilitate oversight of the SBSEF. Therefore,
the Commission is clarifying, as proposed, that, similar to the CFTC,
it may request such information from an SBSEF. In addition, as
anticipated in the Proposing Release, should questions about compliance
arise, the Commission should be able to obtain from an SBSEF supporting
data, information, and documents that the SBSEF is in compliance with
relevant obligations under the SEA, and the rule provides for this. By
modeling its proposed requirements on existing CFTC rules, the
Commission seeks to obtain comparable regulatory benefits while
imposing only marginal additional burdens on dually registered entities
that are already subject to similar obligations.
The Commission is changing the phrase ``a transfer of an equity
interest of 50 percent or more in a security-based swap execution
facility'' in paragraph (c)(4) to ``an equity transfer described in
paragraph (c)(1) of this section'' because the text of paragraph (c)(4)
should be modified to parallel the text of paragraphs (c)(2) and
(c)(3). For these reasons, the Commission is adopting Rule 811(a) to
(c) as proposed, with the change described to paragraph (c)(4).
2. Harmonization With Sec. 1.60
Paragraph (d) of Proposed Rule 811 is not modeled on Sec. 37.5,
but rather on Sec. 1.60 of the CFTC's rules, which is entitled
``Pending legal proceedings.'' Because it is conceptually similar to
Sec. 37.5 in that it would require another type of information
relevant to the regulatory oversight of a SEF, the Commission proposed
to adapt this provision into Rule 811.\153\
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\153\ Section 1.60 requires a SEF (among other entities) to
provide the CFTC with copies of any legal proceeding to which it is
a party, or to which its property or assets is subject. Paragraph
(d) of Rule 811 would adapt paragraphs (a), (c), and (e) of Sec.
1.60 to apply to SBSEFs. Paragraphs (b) and (d) of Sec. 1.60 apply
to futures commission merchants and do not appear germane to SEFs or
SBSEFs. Therefore, the Commission is not adapting these paragraphs
into Rule 811(d).
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Paragraph (d)(1) of Proposed Rule 811 is closely modeled on Sec.
1.60(a) and would provide that an SBSEF shall submit to the Commission
a copy of the complaint, any dispositive or partially dispositive
decision, any notice of appeal filed concerning such decision, and such
further documents as the Commission may thereafter request filed in any
material legal proceeding to which the SBSEF is a party or to which its
property or assets are subject. Paragraph (d)(2) is closely modeled on
Sec. 1.60(c) and would provide that an SBSEF shall submit to the
Commission a copy of the complaint, any dispositive or partially
dispositive decision, any notice of appeal filed concerning such
decision, and such further documents as the Commission may thereafter
request filed in any material legal proceeding instituted against any
officer, director, or other official of the SBSEF from conduct in such
person's capacity as an official of the SBSEF and alleging violations
of the SEA or any rule, regulation, or order thereunder; the

[[Page 87175]]

constitution, bylaws, or rules of the SBSEF; or the applicable
provisions of state law relating to the duties of officers, directors,
or other officials of business organizations.
Paragraph (d)(3) of Proposed Rule 811 is loosely modeled on Sec.
1.60(e) and would provide that documents required by Rule 811(d) to be
submitted to the Commission shall be submitted electronically in a form
and manner specified by the Commission within 10 days after the
initiation of the legal proceedings to which they relate, after the
date of issuance, or after receipt by the SBSEF of the notice of
appeal, as the case may be.
Paragraph (d)(4) of Proposed Rule 811 is closely modeled on the
final two sentences of Sec. 1.60(e) and would provide that, for
purposes of Rule 811(d), a ``material legal proceeding'' includes but
is not limited to actions involving alleged violations of the SEA or
the Commission rules thereunder, and that a legal proceeding is not
``material'' for the purposes of Rule 811 if the proceeding is not in a
Federal or State court or if the Commission is a party.
The Commission did not receive any comments on Proposed Rule 811(d)
and is adopting Rule 811(d) as proposed, for the reasons stated in the
Proposing Release.

B. Rule 812--Enforceability

Proposed Rule 812 generally is modeled on Sec. 37.6. Paragraph (a)
of Rule 812, which is based on Sec. 37.6(a)(1), and would provide that
a transaction on or pursuant to the rules of an SBSEF cannot be
invalidated as a result of a violation by the SBSEF of section 3D of
the SEA or the Commission's rules thereunder.\154\ An SBS executed on
an SBSEF should not be invalidated by the SBSEF's violation of any of
the securities laws, given that swaps executed on SEFs are afforded the
same legal certainty under Sec. 37.6(a).
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\154\ The Commission is not adapting into Rule 812 paragraphs
(a)(2) and (a)(3) of Sec. 37.6, which provide that a transaction on
a SEF may not be invalidated by CFTC proceedings that alter or
supplement SEF rules, terms, and conditions, because the Commission
has no authority in the SEA analogous to the CFTC's authority under
section 8a(7) of the CEA to conduct such proceedings. See supra note
93 and accompanying text. See also Proposing Release, supra note 1,
87 FR at 28893 n.90.
---------------------------------------------------------------------------

Paragraph (b) of Proposed Rule 812 is modeled on the first sentence
of Sec. 37.6(b), which requires a SEF to provide each counterparty to
a transaction that is entered into on or pursuant to the rules of the
SEF with a written record of all of the terms of the transaction which
shall legally supersede any previous agreement.\155\ Proposed Rule
812(b) differs, however, in that it would provide that an SBSEF shall,
as soon as technologically practicable after the time of execution of a
transaction entered into on or pursuant to the rules of the facility,
provide a written record to each counterparty of all of the terms of
the transaction that were agreed to on the facility, which shall
legally supersede any previous agreement regarding such terms.
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\155\ Furthermore, under Sec. 37.6(b), the confirmation of all
terms of the transaction must take place at the same time as
execution, provided that specific customer identifiers for accounts
included in bunched orders need not be included in confirmations if
certain conditions are met.
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One commenter agrees that Rule 812 should be modeled on Sec. 37.6
and states that, like Sec. 37.6, Rule 812 should require the SBSEF to
confirm ``all the terms of the transaction,'' rather than being
limited, as proposed, to ``all of the terms that were agreed to on the
facility.'' \156\ This commenter states that Rule 812 as proposed may
cause issues with clearing SBS because SBS clearing agencies will
likely require SBSEFs to represent that any transaction executed on the
SBSEF is final and irrevocable (as CFTC-registered clearing agencies
require for SEFs). Since Rule 812 only requires an SBSEF confirmation
to be limited in scope to ``all of the terms that were agreed to on the
facility,'' this commenter states the SBSEF would not necessarily know
any terms agreed upon by counterparties outside the SBSEF, and
therefore could not represent to the clearing agency that the
transaction is ``final and irrevocable,'' which would be a roadblock
for straight-through processing and full adoption of clearing for
SBS.\157\ This commenter states that, to address this issue, SBSEFs
should have the ability to prohibit trading relationship documentation
or enablements for cleared SBS transactions executed on an SBSEF, which
are prohibited for CFTC-registered SEFs in accordance with the CFTC's
2013 Staff Impartial Access Guidance,\158\ and that Rule 812 should
require that the SBSEF confirm ``all of the terms of the transaction.''
\159\
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\156\ See Bloomberg Letter, supra note 18, at 4, 12-13.
\157\ See infra section VI.F (discussing, among other things,
straight-through processing).
\158\ See CFTC Division of Clearing and Risk, Division of Market
Oversight, and Division of Swap Dealer and Intermediary Oversight,
Guidance on Application of Certain Commission Regulations to Swap
Execution Facilities (Nov. 14, 2013), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/dmostaffguidance111413.pdf.
\159\ See Bloomberg Letter, supra note 18, at 4, 12-13.
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Another commenter, however, states that it is not practical or cost
effective for an SBSEF to collect, review, and store each free-standing
agreement underlying an SBS transaction entered into between numerous
counterparties.\160\ This commenter states that the CFTC has not
required SEFs to comply with the requirements of 37.6(b) since 2014,
when staff no-action relief was issued due to the impracticability of
compliance.\161\ Thus, this commenter supports the proposal in Rule 812
to require an SBSEF to provide a written record of all the terms of the
transaction that were agreed to on an SBSEF, which shall legally
supersede any previous agreement regarding such terms.
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\160\ See ICE Letter, supra note 18, at 5.
\161\ See id. (citing CFTC Division of Market Oversight, Staff
No-Action Position Regarding SEF Confirmations and Recordkeeping
Requirements under Certain Provisions Included in Regulations
37.6(b) and 45.2, Letter No. 14-108 (Aug. 18, 2014), available at
https://www.cftc.gov/csl/14-108/download).
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It is appropriate to require an SBSEF to inform counterparties as
soon as technologically practicable after they have effected a trade on
or pursuant to the rules of the SBSEF, and to provide them with a
written record of the terms to which they have agreed to on the SBSEF.
With respect to uncleared SBS, it would be impractical for an SBSEF to
be aware of, or responsible for, confirming terms of an SBS that were
agreed to off the SBSEF's trading platform, such as terms contained in
a credit support agreement between the two counterparties to an
uncleared SBS. Thus, the Commission is not including in Rule 812 a
requirement that the SBSEF provide a written record of any such
terms.\162\
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\162\ Section 37.6(b) requires a SEF to provide a written record
of ``all of the terms of the transaction which shall legally
supersede any previous agreement and serve as a confirmation of the
transaction.'' In the adopting release for the final part 37 rules,
the CFTC explained that, with respect to uncleared swaps, a SEF
could satisfy this requirement by incorporating by reference terms
set forth in agreements previously negotiated by the counterparties,
provided that such agreements had been submitted to the SEF ahead of
execution. See 2013 CFTC Final SEF Rules Release, supra note 9, 78
FR at 33491 n.195. The CFTC staff has taken a no-action position
with respect to the confirmation requirements for uncleared swaps in
response to assertions by industry participants that it is
impracticable for a SEF to satisfy the written confirmation
requirements by incorporating by reference terms from previously
negotiated agreements between the counterparties if the SEF must
receive copies of such agreements prior to execution. See CFTC No
Action Letter 17-17 (Mar. 24, 2017) (issued by the CFTC's Division
of Market Oversight). In the no-action letter, the CFTC staff stated
that it was continuing to assess confirmation requirements,
including establishing a permanent solution to the issues raised.
Given these circumstances, it is appropriate to require an SBSEF to
provide counterparties with a written record of only those terms
that are agreed to on the SBSEF. Additionally, the CFTC recently
issued a notice of proposed rulemaking to adopt a rule codifying the
no-action position, which would enable SEFs to incorporate such
terms by reference in an uncleared swap confirmation without being
required to obtain the underlying, previously negotiated agreements.
See CFTC, Swap Confirmation Requirements for Swap Execution
Facilities (Notice of Proposed Rulemaking), 88 FR 58145, 58147 (Aug.
25, 2023). The CFTC has not yet taken action on this proposal.

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

[[Page 87176]]

In response to the comment that Proposed Rule 812 may cause issues
with clearing because the rule requires SBSEFs to confirm only the
terms of an SBS transaction ``that were agreed to on the facility,''
additional terms in trading relationship documents or enablements are
unlikely to hinder the acceptance by a clearing agency of SBS that are
intended to be cleared or might inhibit impartial access to trading of
cleared SBS on an SBSEF. First, a cleared SBS would be a standardized
product, the complete terms of which would be known to the SBSEF,
agreed to by the counterparties trading that SBS on the SBSEF, and
capable of being confirmed to the parties in writing by the SBSEF, as
well as represented to the clearing agency by the SBSEF as ``final and
irrevocable.'' Thus, all the terms of the cleared transaction are
confirmed when executed on the SBSEF. And second, Proposed Rule 819(c)
would require that an SBSEF provide impartial access to its market and
market services,\163\ and it would not be consistent with an SBSEF's
impartial access obligations to permit members to incorporate
additional terms for a cleared SBS in trading relationship
documentation, enablement documentation, or elsewhere, or to otherwise
permit improper discrimination with respect to trading in cleared SBS
against SBSEF members who have a direct or indirect clearing
relationship with the clearing agency for a given SBS.
---------------------------------------------------------------------------

\163\ See infra section VI.B.3 (discussing the impartial access
requirements of Rule 819(c)).
---------------------------------------------------------------------------

Therefore, for the foregoing reasons, the Commission is adopting
Rule 812 as proposed.

C. Rule 813--Prohibited Use of Data Collected for Regulatory Purposes

Proposed Rule 813 is modeled on Sec. 37.7, and would provide that
an SBSEF shall not use, for business or marketing purposes, any
proprietary data or personal information that it collects or receives
from or on behalf of any person for the purpose of fulfilling its
regulatory obligations. An SBSEF would be able to use such data or
information for business or marketing purposes if the person consents,
but the SBSEF would not be able to condition access to the SBSEF on the
person's providing such consent. Finally, Proposed Rule 813 would
provide that an SBSEF, where necessary for regulatory purposes, may
share such data or information with another SBSEF or a national
securities exchange.
The Commission did not receive any comments on Proposed Rule 813
and is adopting Rule 813 as proposed, for the reasons stated in the
Proposing Release.

D. Rule 814--Entity Operating Both a National Securities Exchange and
an SBSEF

Proposed Rule 814 is modeled on Sec. 37.8. Paragraph (a) of
Proposed Rule 814 would provide that an entity intending to operate
both a national securities exchange and an SBSEF shall separately
register the two facilities pursuant to section 6 of the SEA and Rule
803 under the SEA. Paragraph (b), although consistent with Sec.
37.8(b), draws its specific language from section 3D(c) of the
SEA,\164\ which contemplates that a single entity may operate both a
national securities exchange and an SBSEF. Paragraph (b) of Proposed
Rule 814 would provide that a national securities exchange shall, to
the extent that the exchange also operates an SBSEF and uses the same
electronic trade execution system for listing and executing trades of
SBS on or through the exchange and the facility, identify whether
electronic trading of SBS is taking place on or through the national
securities exchange or the SBSEF.
---------------------------------------------------------------------------

\164\ 15 U.S.C. 78c-4(c).
---------------------------------------------------------------------------

Two commenters state that the key requirements applicable to SBSEFs
should also apply to SBS exchanges to create a level regulatory
environment and avoid encouraging regulatory arbitrage.\165\ One of the
commenters specifically identifies trading protocols, impartial access,
limits on pre-execution communication, and straight-through processing
as important aspects of SBSEF regulation that should also apply to SBS
exchanges.\166\ Another commenter states that more detailed rules are
needed to address the separation of SBSEFs from SBS exchanges in order
to avoid the aggregation of power in the financial markets and to
clearly separate the roles of an entity operating both an SBSEF and an
SBS exchange.\167\
---------------------------------------------------------------------------

\165\ See Citadel Letter, supra note 18, at 17; MFA Letter,
supra note 18, at 14.
\166\ See Citadel Letter, supra note 18, at 17.
\167\ See Keeney Letter, supra note 95.
---------------------------------------------------------------------------

The comment suggesting that requirements for SBSEFs should be
applied to SBS exchanges is outside the scope of this rulemaking, which
is designed to set forth requirements for SBSEFs, not exchanges.
Additionally, more detailed rules are not necessary to separate the
roles of an entity operating both an SBSEF and an SBS exchange. Each
entity would be required to make rule or new product submissions to the
Commission under a separate set of rules--Rules 804 to 807 for SBSEFs,
and Rule 19b-4 for national securities exchanges--making it clear which
rules will apply on which platform. Also, Rule 814(b)--which requires
that a national securities exchange that also operates an SBSEF
identify the platform on which an SBS transaction occurs--will provide
further clarity to the market about the roles of an entity operating
both an SBSEF and an SBS exchange. Further, the ability of an entity to
operate both an SBSEF and an SBS exchange is unlikely to lead to the
aggregation of power in the financial markets, because allowing for a
variety of SBS trading platforms and ownership models should promote
competition in the market for SBS trading.
It is appropriate for proposed Regulation SE to include a rule that
clarifies the registration status of an entity that operates both an
exchange and an SBSEF, and that broadly parallels Sec. 37.8.
Therefore, for the reasons discussed above, the Commission is adopting
Rule 814 as proposed.

E. Rule 815--Methods of Execution for Required and Permitted
Transactions

1. Rule 815(a)
(a) Background
The Dodd-Frank Act provides that if the Commission makes a
mandatory clearing determination regarding an SBS, such SBS becomes
subject to mandatory trade execution if at least one exchange or SBSEF
makes the product ``available to trade.'' \168\ The Dodd-Frank Act does
not require, however, that all SBS be subject to mandatory clearing or
mandatory trade execution, and it does not impose any execution
requirements for transactions in an SBS unless the SBS is subject to
mandatory clearing and it has been made available to trade. Section
37.9 of the CFTC's rules addresses these issues for SEFs using the
concepts of ``Required Transactions'' and ``Permitted Transactions,''
and the Commission proposed Rule 815 of Regulation SE to adapt Sec.
37.9 for

[[Page 87177]]

SBSEFs. Rule 815(a)(1) defines ``Required Transaction'' as ``any
transaction involving a security-based swap that is subject to the
trade execution requirement in section 3C(h) of the Act.''
---------------------------------------------------------------------------

\168\ See 15 U.S.C. 78c-3(a)(1) (mandatory clearing for SBS) and
78c-3(h) (trade execution for SBS). See also infra section V.F.3
(discussing the six factors that an SBSEF shall consider, as
appropriate, before making an SBS ``available to trade'').
---------------------------------------------------------------------------

(b) Methods of Execution for Required Transactions
(i) Background
Proposed Rule 815(a)(2) would require that, except for block trades
or the exceptions described in paragraph (d) or (e) of the rule and
discussed below,\169\ the mandatory execution methods for a Required
Transaction would be either: (a) an order book or (b) an RFQ system in
conjunction with an order book, and the rule permits the SBSEF to use
any means of interstate commerce for providing these execution
methods.\170\
---------------------------------------------------------------------------

\169\ See infra section V.E.3.
\170\ Proposed Rule 815(a)(2)(ii) would provide that any means
of interstate commerce includes, but is not limited to, the mail,
internet, email, and telephone, provided that the chosen execution
method satisfies the requirements for order books in 17 CFR
242.800(x) or in paragraph (a)(3) of Rule 815.
---------------------------------------------------------------------------

Proposed Rule 815(a)(3) would define an RFQ system as ``a trading
system or platform in which a market participant transmits a request
for a quote to buy or sell a specific instrument to no less than three
market participants in the trading system or platform, to which all
such market participants may respond'' and would specify other
requirements for an RFQ system to be recognized as such under the rule.
The three market participants to which the RFQ is addressed could not
be affiliates of or controlled by the requester and cannot be
affiliates of or controlled by each other. The proposed rule would also
provide that an SBSEF that offers an RFQ system in connection with a
Required Transaction must have the following functionalities: (i) at
the same time that the requester receives the first responsive bid or
offer, the SBSEF must communicate to the requester any firm bid or
offer pertaining to the same SBS resting on any of the SBSEF's order
books; (ii) the SBSEF must provide the requester with the ability to
execute against those firm resting bids or offers along with any
responsive orders; and (iii) the SBSEF must ensure that its trading
protocols provide each of its members with equal priority in receiving
requests for quotes and in transmitting and displaying for execution
responsive orders. The requirements of Proposed Rule 815(a)(3) are
referred to as the ``RFQ-to-3 requirement.''
(ii) Comments on the RFQ-to-3 Requirement
The Commission received comments on the proposed RFQ-to-3
requirement in Proposed Rule 815(a)(3).\171\ One commenter suggests
that the Commission expand the permitted modes of SBS execution for
swaps mandated for trading on SBSEFs in order to provide for a less
prescriptive, more principles-based approach that balances
transparency, competition, and liquidity through a flexible set of
rules and states that any means of execution that provides sufficient
pre-trade price transparency and preserves competition should be
available.\172\ This commenter, while supporting general harmonization
between the Commission's and the CFTC's rules on trading protocols and
methods of execution, argues that the Commission's rule also needs to
balance harmonization with the need to reflect the unique and sensitive
liquidity conditions that exist in SBS markets.
---------------------------------------------------------------------------

\171\ See ISDA-SIFMA Letter, supra note 18, at 5-6; SIFMA AMG
Letter, supra note 18, at 8-9.
\172\ See SIFMA AMG Letter, supra note 18, at 8.
---------------------------------------------------------------------------

Stating that an RFQ-to-3 requirement for Required Transactions that
are SBSs means something completely different than for swaps, this
commenter urges the Commission to consider a lower RFQ threshold given
the nature of the SBS market. This commenter states that, in some
cases, for an asset manager to seek three quotes would effectively
require the asset manager to contact many of the primary price makers
in the SBS market, as there simply are not the same number of liquidity
providers, particularly for less liquid, more thinly traded SBSs, as
the number of participants, the trading volume, and the depth of market
liquidity are very different in the SBS market. The commenter suggests
that requesting quotes from two participants, for example, would allow
the asset manager to retain some control over the information
disseminated about its interest to the market while preserving the
statute's ``multiple to multiple'' definition requirement.\173\
---------------------------------------------------------------------------

\173\ See id. at 9.
---------------------------------------------------------------------------

Another commenter also urges the Commission to consider an
alternative approach to the proposed RFQ-to-3 requirement, and to
provide a ``phased-in compliance'' with the required methods of
execution, whereby a MAT SBS product may be executed on an SBSEF via
any method of execution until such time as it is determined through
notice and comment that an appropriate level of liquidity exists to
enable an order book or RFQ-to-3 system.\174\ This commenter states
that, considering the lack of liquidity in SBS products, pre-trade
transparency via the proposed RFQ-to-3 requirement could negatively
impact liquidity provision for end-users. The commenter states that, if
clients are required to ``show their hand to three liquidity
providers,'' it may lead to information leakage and an inability to
hedge the clients' risks through the SBS markets.\175\ The commenter
asserts that this is particularly so given that there are a relatively
small number of active dealers for many SBS products, stating that,
based on DTCC \176\ data on credit SBS for the top 700 issuers, there
are on average 2.7 dealers, and 400 of the top 700 issuers have fewer
than three active dealers per month.\177\
---------------------------------------------------------------------------

\174\ See ISDA-SIFMA Letter, supra note 18, at 5-6.
\175\ Id. at 6.
\176\ ``DTCC'' refers to the Depository Trust and Clearing
Corporation.
\177\ See ISDA-SIFMA Letter, supra note 18, at 6.
---------------------------------------------------------------------------

This commenter further argues that an RFQ-to-3 requirement would be
problematic for SBS equities, where the current execution processes are
very different from their swaps counterpart. The commenter states that
clients in SBSs typically ask their preferred dealer to execute shares
in SBS at market price (or some other pricing structure), the dealer
then purchases the shares directly for hedging purposes, and the dealer
then executes the swap at the end of the day with the client at an
average market price.\178\ The commenter states that, in this case, the
dealer's interaction is more akin to a broker than a dealer
counterparty, and that these trading practices would not be possible on
an RFQ-to-3 or order book system. In addition, the commenter states
that it has ``compared the credit swaps activity that occurred on-venue
back in 2012 before the CFTC trade execution requirement kicked in,
with the credit SBS activity that occurs on-venue today'' and asserts
that the results suggest ``that the swaps market was much more ready
for the implementation of the trade execution requirement than the SBS
market is today.'' \179\ This commenter states that, ``[a]bsent a
phased-in implementation approach, the SBS market could suffer from
significant disruptions.'' \180\
---------------------------------------------------------------------------

\178\ The commenter also stipulates that at the onset of the
relationship, clients will negotiate a grid with dealers where
certain short/long benchmarks and spreads are agreed for equity
issuers on a jurisdictional or other basis. See ISDA-SIFMA Letter,
supra note 18, at 6.
\179\ Id.
\180\ Id.
---------------------------------------------------------------------------

While the Commission acknowledges that there are differences
between the liquidity in the SBS market and the

[[Page 87178]]

swaps market, the process required before the execution requirement
would apply to an SBS will reduce the risk of ``substantial
disruptions.'' The required methods of execution would be applied to an
SBS only to the extent that it is subject to the clearing mandate and
has been ``made available to trade.'' Before making an SBS subject to
the clearing mandate, the Commission would be able to take into account
a number of factors, including the existence of significant outstanding
notional exposures, trading liquidity, and the adequacy of pricing
data.\181\
---------------------------------------------------------------------------

\181\ See SEA section 3C(b)(4)(i), 15 U.S.C. 78c-3(b)(4)(i). See
also SEA section 3C(b)(4)(ii) through (v), 15 U.S.C. 78c-3(b)(4)(ii)
through (v) (discussing other factors that the Commission would be
required to take into account when making a mandatory clearing
determination).
---------------------------------------------------------------------------

Further, to make an SBS ``available to trade,'' an SBSEF would,
under Proposed Rule 816(a)(1),\182\ have to make a filing with the
Commission under Rule 806 or Rule 807--both of which would allow the
Commission to find that a filing was not consistent with the
requirements of the SEA or Regulation SE.\183\ Moreover, the SBSEF's
filing would, under Proposed Rule 816(b), have to address, as
appropriate, a number of relevant factors, including whether there are
ready and willing buyers and sellers; the frequency or size of
transactions; the trading volume; the number and types of market
participants; the bid/ask spread; and the usual number of resting firm
or indicative bids and offers. Similarly, a national securities
exchange that wished to make an SBS ``available to trade'' would have
to file a rule change under Rule 19b-4,\184\ and that proposed rule
change would be subject to Commission review for compliance with the
requirements of the SEA, which requires that the rules of a national
securities exchange, among other things, promote just and equitable
principles of trade, remove impediments to and perfect the mechanism of
a free and open market and a national market system, protect investors
and the public interest, and not impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the
SEA.\185\ Thus, before an SBS becomes subject to the trade execution
requirement, the Commission would have had multiple opportunities to
consider the trading characteristics of that SBS.
---------------------------------------------------------------------------

\182\ See infra section V.F.2.
\183\ See supra sections IV.A and B.
\184\ 17 CFR 240.19b-4.
\185\ See Section 6(b)(5) and (8) of the SEA, 15 U.S.C.
78f(b)(5) and (8).
---------------------------------------------------------------------------

Additionally, most, if not all, SBSEFs are likely to be dually
registered with the CFTC as SEFs, and that most, if not all, market
participants in the SBS market will be participants in the swaps
market. The Commission remains concerned that different or additive
requirements--particularly for the key concept of a ``Required
Transaction''--could introduce complexity and confusion if one set of
trading protocols applied to Required Transactions for swaps but
different protocols--different from ones that have been understood and
utilized for many years--applied to Required Transactions for SBS
transactions.
Thus, it is not appropriate to modify the requirement that a
qualifying RFQ system under Proposed Rule 815(c) transmit a request for
a quote to no fewer than three market participants in the trading
system or platform. The question whether sufficient liquidity exists in
the market for a given SBS to trade RFQ-to-3 can be addressed when the
SBS is subject to the clearing mandate and when a national securities
exchange or SBSEF seeks to make that SBS available to trade. Until that
time, SBSs would be Permitted Transactions on SBSEFs and thus could be
traded using other methods of execution, thus avoiding any potential
disruptions to liquidity in the SBS markets.
(iii) RFQ Functionalities
The Commission also received two comment letters on the
functionalities required for RFQ systems under Proposed Rule
815(a)(3).\186\ Both commenters suggest that the proposed rule be
amended to require an SBSEF to communicate any firm bid or offer
pertaining to the same instrument resting on any of the SBSEF's trading
systems or protocols, not just firm bids or offers on the SBSEF's order
book.\187\ One of the commenters argues that, in practice, order books
continue to be infrequently used on SEFs that offer RFQ systems and
that, therefore, the same interaction requirement on SEFs has had
little impact.\188\ The commenter cites, for example, that ``request
for stream'' trading protocols, which allow liquidity providers to
stream firm prices, are not required to be communicated to clients
sending an RFQ.
---------------------------------------------------------------------------

\186\ See Citadel Letter, supra note 18, at 13-14; MFA Letter,
supra note 18, at 8.
\187\ See Citadel Letter, supra note 18, at 13; MFA Letter,
supra note 18, at 8. Rule 813(a)(3)(i) requires an SBSEF to
communicate to the requester any firm bid or offer pertaining to the
same instrument resting on any of the SBSEF's order books.
\188\ See Citadel Letter, supra note 18, at 13; see also MFA
Letter, supra note 18, at 8 (also referencing the request-for-stream
protocol).
---------------------------------------------------------------------------

This commenter also suggests that the proposed rule should be
modified to ensure that the RFQ requester has the ability to execute
against all of the prices provided in connection with an RFQ on the
same screen. The commenter argues that this will prevent an SBSEF from
requiring the RFQ requester to click through multiple screens in order
to execute against firm prices, which, the commenter argues, serves to
disadvantage those prices versus other prices provided in response to
an RFQ.\189\ Finally, the commenter recommends that the requirements of
Rule 815(a)(3) be modified to apply to all SBS transactions on an
SBSEF, not solely Required Transactions, as they argued that this will
help ensure that market participants transacting on SBSEFs are always
provided with the necessary transparency to achieve the most favorable
execution possible.\190\
---------------------------------------------------------------------------

\189\ See Citadel Letter, supra note 18, at 13-14.
\190\ See id. at 14.
---------------------------------------------------------------------------

The other commenter also urges the Commission to modify the
requirement to ensure that the SBSEF communicates to the requester any
firm prices available on the SBSEF, in addition to resting firm bids or
quotes on the SBSEFs order book(s), and that they make this
functionality available for Permitted Transactions as well.\191\ In the
commenter's view, this approach is necessary in order to ensure the
availability of quotes for SBS transactions that will be essential to
maintaining liquidity and promoting open and equitable participation in
the markets.
---------------------------------------------------------------------------

\191\ See MFA Letter, supra note 18, at 8.
---------------------------------------------------------------------------

As previously noted, given that most if not all SBSEFs will be
dually registered as SEFs, there is a public interest in harmonizing
its requirements for trading protocols with those of the CFTC.\192\ The
commenters' suggestions to apply the proposed interaction requirement
to all trading systems and protocols on the SBSEF would be a deviation
from the CFTC's requirements for SEFs that would likely introduce
operational and compliance challenges created by having different
standards. This would undercut the Commission's goal of minimizing
operational and compliance burdens by seeking to harmonize requirements
between SEFs and SBSEFs. For instance, the commenters' suggestions to
apply the order interaction requirement to all transactions on the
SBSEF, not only Required Transactions, or to require that firm interest
outside the SBSEF's order

[[Page 87179]]

book be communicated in response to RFQs, would be a significant
deviation from the CFTC's method-of-execution requirements and would
have wide ramifications for the SBS markets, particularly in view of
the liquidity and information leakage concerns that other commenters
expressed elsewhere regarding the less liquid and thinly traded SBS
products that may trade on an SBSEF.\193\ As a result, applying such
requirements to Permitted Transactions, which the CFTC does not do,
would be likely to have the undesirable effect of discouraging market
participants from voluntarily executing Permitted Transactions on
SBSEFs, which would lessen market transparency and would not provide
greater opportunities for market participants to interact with trading
interest not subject to the trade execution requirement. Further, it is
not necessary for the Commission to mandate the technical details of
how the SBSEF displays responses to RFQs to its members. Rule 819(c),
discussed below,\194\ requires SBSEFs to provide all ECPs and
independent software vendors with impartial access market and market
services, and this requirement is sufficient to address a situation in
which an SBSEF designed its RFQ responses to systematically
disadvantage certain market participants or types of market
participants.
---------------------------------------------------------------------------

\192\ See supra section I.
\193\ See supra note 175 and accompanying text.
\194\ See infra section VI.B.3.
---------------------------------------------------------------------------

(c) Block-Trade Exception
(i) General Treatment of Block Trades
Under both the CEA and SEA, Core Principle 2 requires a SEF/SBSEF
to specify trading procedures to be used in entering and executing
orders on the facility, including block trades.\195\ The CFTC
implemented this provision by excepting block trades from the required
execution methods in Sec. 37.9(a)(2).\196\ Proposed Rule 815(a)(2)
would also exclude block trades from the required execution methods
using language closely modeled on Sec. 37.9(a)(2). Specifically,
Proposed Rule 815(a)(2)(i) would apply required methods of execution to
``[e]ach Required Transaction that is not a block trade.'' \197\
---------------------------------------------------------------------------

\195\ 15 U.S.C. 78c-4(d)(2)(C); 7 U.S.C. 7b-3(f)(2)(C).
\196\ That rule cross-references Sec. 43.2, which defines the
term ``block trade'' for purposes of public dissemination of swap
transactions.
\197\ See Proposed Rule 815(a)(2)(i) (emphasis added).
---------------------------------------------------------------------------

Thus, the Commission's proposal to include an exception from the
required methods of execution for block trades in Regulation SE is
consistent with the approach taken by the CFTC. The purpose of having a
block-trade exception to the required methods of execution is to
balance the promotion of price competition and all-to-all trading
against the potential costs to market participants who wish to trade
large orders. Forcing a market participant who seeks liquidity to
expose a large order to an order book or to utilize RFQ-to-3 could
cause the market to move against the liquidity requester before it can
obtain an execution. Under the CFTC's rules, a block trade in a product
that is subject to mandatory trade execution may be traded on-SEF using
flexible means of execution on the SEF's non-order-book trading system
or platform, or away from a SEF's trading system or platform, provided
that it is executed pursuant to the SEF's rules and procedures. As
noted above, the Commission proposed a similar approach for block
trades on SBSEFs, excepting block trades from the required execution
methods of Proposed Rule 815(a)(2).
The Commission received a number of comments on its proposal for a
block trade exception. Commenters generally support the inclusion of a
block trade exception from the Required Transaction requirement in Rule
815(a)(2).\198\
---------------------------------------------------------------------------

\198\ See Bloomberg Letter, supra note 18, at 14; Citadel
Letter, supra note 18, at 9-10, ICI Letter, supra note 18, at 10-13;
SIFMA AMG Letter, supra note 18, at 9-10; ISDA-SIFMA Letter, supra
note 18, at 7-9; MFA Letter, supra note 18, at 5-6. Many of these
commenters raised questions about the proposed size of the block-
trade threshold. See infra section V.E.1(c).
---------------------------------------------------------------------------

One commenter, supporting the Commission's harmonization with the
CFTC's approach to block trades by providing an exception for those
trades, states that a flexible block execution regime permits trading
of larger-sized transactions in a manner that incentivizes dealers to
provide liquidity and capital without creating market distortions.\199\
Another commenter asserts that exempting block trades from order book
and RFQ execution requirements is critical to the functioning of the
SBS markets, particularly to execute large trades without affecting
price.\200\ This commenter expresses concerns that, absent such an
exception, market participants would have difficulty executing, or
would be unable to execute, large bona fide trades, since they would be
required to do so only through the order book. This would increase the
cost of trading and hedging, the commenter says, which could reduce
participation in certain markets, resulting in less liquidity and
increased volatility.
---------------------------------------------------------------------------

\199\ See SIFMA AMG Letter, supra note 18, at 10.
\200\ See MFA Letter, supra note 18, at 5-6.
---------------------------------------------------------------------------

Another commenter states that the proposed exception for block
trades would provide important flexibility for market participants
executing SBS transactions of a significantly large size, and that
rules that facilitate swap block trades allow market participants, such
as regulated funds, to engage in large transactions while mitigating
the risks of information leakage and impairment of market
liquidity.\201\ Another commenter also supports the Commission's
proposal to align closely its approach to block trades with the
approach taken by the CFTC.\202\ This commenter agrees with the
Proposing Release's assessment that the block exception to the required
methods of execution balances the promotion of price competition and
all-to-all trading against the potential costs to the market
participants who wish to trade large orders, the importance of which
they note is more acute in the SBS market, which is a smaller and less
liquid market than the swaps market.
---------------------------------------------------------------------------

\201\ See ICI Letter, supra note 18, at 10.
\202\ See Bloomberg Letter, supra note 18, at 14.
---------------------------------------------------------------------------

The Commission agrees with these commenters that a block-trade
exception is appropriate, not only to maintain harmonization with the
CFTC regime for swaps but also to facilitate trading of SBS. This
approach, which is consistent with the approach of the CFTC for swaps,
will be especially important in the smaller, less liquid SBS markets if
and when a clearing determination has been made for one or more SBS. A
block-trade exception for SBSs subject to the trade-execution
requirement, provided that ``block trade'' is appropriately defined for
those SBSs, can help ensure that large trades are not significantly
more difficult and costly to execute because of the risks posed by
information leakage and the potential for adverse price movement, which
could significantly impair liquidity in the markets for those SBSs.
Therefore, the Commission is adopting Rule 815(a) as proposed, but is,
as discussed immediately below, modifying the proposal with respect to
the definition of ``block trade'' in Rule 802.
(ii) Block-Trade Definition for Credit SBS
The Commission also proposed to align the regulatory text defining
``block trade'' in proposed Regulation SE with the CFTC's definition.
The proposed definition in Rule 802 of Regulation SE was based on the
four-pronged definition found in Sec. 43.2(a), but with one
modification. The third prong of the

[[Page 87180]]

CFTC definition characterizes a block trade in a particular swap as
having ``a notional or principal amount at or above the appropriate
minimum block size applicable to such swap.'' \203\
---------------------------------------------------------------------------

\203\ Appendix F to the CFTC's part 43 divides swap asset
classes into a number of categories and sets forth a minimum block
size threshold to each category. SBSs are not within the CFTC's
jurisdiction, so the CFTC had not considered what an appropriate
minimum block size threshold would be for any SBS asset class. In
this respect, there was no CFTC-defined threshold for the Commission
to harmonize with, so the Commission proposed to establish a
threshold tailored specifically for the SBS market, see Proposing
Release, supra note 1, 87 FR at 28956, as discussed below.
---------------------------------------------------------------------------

For the third prong of the ``block trade'' definition, the
Commission proposed that the SBS be based on a single credit instrument
(or issuer of credit instruments) or a narrow-based index of credit
instruments (or issuers of credit instruments) having a notional size
of $5 million or greater,\204\ considered the distribution of
transactions in the single-name CDS market \205\ and took into
consideration that FINRA applies a $5 million cap when disseminating
transaction reports of economically similar cash debt securities.\206\
---------------------------------------------------------------------------

\204\ See Proposing Release, supra note 1, 87 FR at 28896.
\205\ See id. at 28944.
\206\ See id. at 28944 n.369.
---------------------------------------------------------------------------

A number of commenters question the basis for the proposed $5
million block threshold size and advocate a variety of different
approaches to establishing the block size threshold for SBS products,
as alternatives to the proposed $5 million notional size block trade
threshold.\207\
---------------------------------------------------------------------------

\207\ See Citadel Letter, supra note 18, at 9; ICI Letter, supra
note 18, at 10-12; MFA Letter, supra note 18, at 5-8; SIFMA AMG
Letter, supra note 18, at 10; ISDA-SIFMA Letter, supra note 18, at
7-9.
---------------------------------------------------------------------------

One commenter presents data that it argues supports its assertion
that the block threshold for credit SBS should be recalibrated.\208\
The commenter recommends that the Commission first establish an
appropriate methodology to determine block thresholds based on current
market-wide data. This commenter states that, otherwise, the already
illiquid SBS market will be required to comply with an arbitrary,
``one-size-fits-all'' threshold amount that fails to consider the
unique levels of market liquidity and risk sensitivity of various
instruments. The commenter suggests that average daily volume (``ADV'')
is an appropriate indicator of liquidity levels because it represents a
measure of how much trading occurs in a given issuer across the market
as a whole, and that the lower the ADV, the lower the liquidity of the
product. Based on its analysis of ADV data for credit default swaps
(``CDS''), which it retrieved from the DTCC Trade Information
Warehouse, the commenter posits that liquidity in single-name CDS is
significantly lower than in broad-based CDS. Thus, the commenter
argues, it is not appropriate to mirror the block threshold for credit
SBS to the threshold for debt securities, when there are clear
differences in liquidity levels within the CDS market itself.
---------------------------------------------------------------------------

\208\ See ISDA-SIFMA Letter, supra note 18, at 7-9.
---------------------------------------------------------------------------

This commenter also asserts that the data reveal that liquidity in
single-name CDS is disproportionately concentrated in the most actively
traded issuers, which, the commenter contends, corroborates its
assertion that block thresholds should be calibrated at a more granular
level in order to reflect the different liquidity levels of credit SBS
products. The commenter cautions that, absent a data-based approach to
setting block thresholds for credit SBS instruments, the proposal runs
the risk that $5 million may be an inappropriately high threshold for
those products, which may widen bid/offer spreads, further reduce
liquidity, and force large-sized transactions to be publicly reported
with their full size, leaving the dealer that ``wins'' in the position
of risking the market moving against the dealer before the dealer is
able to adequately lay-off its exposure. This risk to the dealer, the
commenter asserts, could increase the costs of transacting with
immediacy substantially, leading to overall increased costs and time
delays in executing hedges, and adding to or taking down positions,
which would have a direct impact on clients and end-users, who will
ultimately bear the increased costs and inefficiencies when forced to
split large trades into smaller sizes for liquidity purposes. The
commenter states that these clients, end-users, and liquidity providers
may decide that it is more economical to exit the market entirely,
given that most of them do not trade in large volumes of SBS.\209\
---------------------------------------------------------------------------

\209\ See id.
---------------------------------------------------------------------------

The same commenter also states that, because ``the appropriate
block threshold depends on factors such as liquidity and risk
sensitivity[,] which can change over time, . . . the rules should
provide a formal adjustment mechanism that would allow market
participants to petition the Commission to temporarily change block
thresholds based on observed market conditions, or enable the
Commission's staff to do so, subject to a public comment process.''
\210\
---------------------------------------------------------------------------

\210\ Id. at 9 n.23.
---------------------------------------------------------------------------

Several commenters argue for establishing a range of block trade
threshold sizes, based on the product.\211\ One commenter recommends
that the Commission delay implementation of the required execution
methods until it considers its approach to block trades more
comprehensively.\212\ This commenter argues that calibrating
appropriate block threshold sizes for SBSs has significant implications
for market participants from both a pre- and a post-trade transparency
perspective. With respect to pre-trade transparency, the commenter
states that requiring a fund to disclose its trading interest in an SBS
of a large notional size to multiple participants--via an order book or
an RFQ system--would ``enable opportunistic market participants to
piece together information about the fund's holdings or investment
strategy and lead to frontrunning of those potential trades.'' \213\
With respect to post-trade transparency, the commenter states that
setting a block trade threshold that is too high would unnecessarily
limit the ability to report large-sized SBS transactions on a delay,
which would make it difficult for liquidity providers to hedge such
positions, leading to higher trading costs and less efficient trading
for funds and other market participants. The commenter also states that
the magnitude of these risks depends on, among other factors, an SBS's
liquidity profile. The commenter also states that having a single
threshold--across all applicable SBSs with respect to SBSEF trading and
for any additional future rulemaking related to post-trade public
reporting--does not adequately account for varying levels of liquidity
across different categories or types of SBSs. The commenter recommends
that, given the differences in liquidity across different SBSs, the
Commission should base its thresholds on more comprehensive transaction
data obtained pursuant to Regulation SBSR. The commenter asserts that
taking such a data-driven approach would allow the Commission to assess
the liquidity of different SBSs based on, for example, swap term,
underlying security, and other characteristics. The commenter also
argues that this would enable the Commission, similar to the CFTC, to
formulate different types or categories of

[[Page 87181]]

SBSs and propose differing block trade sizes that are more
appropriately tailored to the liquidity characteristics of each type or
group.
---------------------------------------------------------------------------

\211\ See MFA Letter, supra note 18, at 7; ICI Letter, supra
note 18, at 11; SIFMA AMG Letter, supra note 18, at 10.
\212\ See ICI Letter, supra note 18, at 11-12.
\213\ Id. at 11.
---------------------------------------------------------------------------

Another commenter states that the CFTC sets different minimum block
sizes for different categories of swaps and argues that the Commission
should similarly develop a more structured and tailored approach.\214\
The commenter expresses concerns that setting a miscalibrated block
size will likely limit the utility of the block trade exception,
thereby preventing many market participants from executing transactions
on SBSEFs. Another commenter recommends that the Commission adopt the
CFTC's approach for block trades based on a ``67 percent notional
amount calculation.'' \215\ That commenter also recommends that the
Commission reserve the ability to update block thresholds on a regular
basis to ensure they remain representative of current market
conditions.\216\ Another commenter states that the proposed block
threshold is not a result of any empirical analysis on the market
conditions for credit SBSs and suggested that, as the SBS market
develops and grows, it may become more appropriate for amendments to
the credit SBS threshold.\217\
---------------------------------------------------------------------------

\214\ See MFA Letter, supra note 18, at 7.
\215\ See Citadel Letter, supra note 18, at 9.
\216\ See id. at 10.
\217\ See SIFMA AMG Letter, supra note 18, at 10.
---------------------------------------------------------------------------

The Commission has considered the comments received and has
determined, for the reasons discussed below, not to adopt a definition
of ``block trade.'' While the Commission had proposed the single block
threshold for credit SBS based on its preliminary view that the block-
trade threshold applicable to an SBS trade should be consistent with
any reporting cap for that SBS trade, and any reporting cap applicable
to the cash markets for the securities,\218\ the Commission
acknowledges commenters' concerns that the proposed $5 million block-
trade threshold for all credit SBSs would not be sufficiently tailored
to the unique and varying trading and risk characteristics of the full
range of credit SBS, creating the potential for the adverse market
risks that commenters point out may arise from having a one-size-fits-
all block threshold.
---------------------------------------------------------------------------

\218\ See 2019 Cross-Border Application of Certain Security-
Based Swap Requirements, SEA Release No. 87780 (Dec. 18, 2019), 85
FR 6270, 6347 (Feb. 4, 2020) (``2019 Cross-Border Adopting
Release'').
---------------------------------------------------------------------------

Further, unless and until the Commission has made a clearing
determination for a given SBS and an SBSEF or a national securities
exchange has made that SBS ``available to trade,'' all transactions in
that SBS will be Permitted Transactions. On the effective date of
Regulation SE, and until the Commission has made a clearing
determination for an SBS, no SBSEF or national securities exchange will
be able to make that SBS ``available to trade.'' Consequently, there
could be no mandatory trading requirement and thus there are no
transactions to be excepted. Without a mandatory trading requirement, a
block-trade threshold, therefore, has no effect on the ability of
market participants to choose their preferred means of execution for
trades in that SBS. Unless and until the Commission has made a
mandatory clearing determination regarding an SBS, it is not necessary
to define a block-trade threshold for SBS, and it would be appropriate
for the Commission to identify a block-trade threshold in the future
after considering credit SBS transaction data and credit SBS markets at
that time. In addition, the Commission agrees with commenters that
additional consideration of credit SBS transaction data, including data
reported under Regulation SBSR, would help the Commission determine the
appropriate block threshold for credit SBS products, including whether
different thresholds should apply to different types or groups of SBS.
The Commission also agrees with commenters that the credit SBS markets
are likely to evolve over time and that analysis of market data
continues to be an important aspect of setting appropriate thresholds
for both block trades and credit SBS public trade reporting.\219\
---------------------------------------------------------------------------

\219\ In adopting Regulation SBSR, the Commission directed its
staff to make reports in connection with the determination of block
thresholds and reporting delays for security-based swap transaction
data. See 17 CFR 242.901 (Appendix) (discussing the studies for the
determination of block thresholds and reporting delays); see also
Regulation SBSR Adopting Release I, supra note 140, 80 FR at 14625.
The Commission stated that it intends to use these reports to inform
its specification of the criteria for determining what constitutes a
large notional SBS transaction (i.e., block trade) for particular
markets and contracts; and the appropriate time delay for reporting
large notional SBS transactions to the public. See 17 CFR 242.901
(Appendix). The reports for each asset class are to be completed no
later than two years following the initiation of public
dissemination of security-based swap transaction data by the first
registered SDR in that asset class--in other words, the reports are
anticipated to be complete by Feb. 14, 2024--and then published for
comment in the Federal Register. See id.
---------------------------------------------------------------------------

Therefore, the Commission is not adopting the proposed definition
of ``block trade'' under Proposed Rule 802, or any other block-trade
threshold.\220\ In conjunction with any mandatory clearing
determination by the Commission for SBS, or with any Commission
proposal to specify the criteria for determining what constitutes a
large notional SBS transaction for particular markets and contracts
with respect to trade reporting, the Commission will have the
opportunity to engage in rulemaking to propose a definition of ``block
trade'' for purposes of Regulation SE--and to solicit public comment on
Commission's proposal and its economic analysis of the proposed
definition--before it considers adopting a definition.
---------------------------------------------------------------------------

\220\ Because the Commission is not adopting a definition of
``block trade'' at this time, it is also modifying other rules
within Regulation SE that reference block trades. See supra note 41.
---------------------------------------------------------------------------

In response to the comment that the Commission should delay
implementation of the trade execution requirement until it has
considered block trades more comprehensively, unless and until the
Commission has made a clearing determination for a given SBS and an
SBSEF or a national securities exchange has made that SBS ``available
to trade,'' all transactions in that SBS will be Permitted
Transactions. Thus, it is not necessary to formally delay the
implementation of the trade execution requirement, because the
Commission will have the opportunity if and when it makes a clearing
determination for SBS--i.e., before any SBS transaction becomes a
Required Transaction--to address whether a block-trade threshold should
be set; what methodology should be used to determine that threshold;
and what that threshold would be. At that time, because amending Rule
802 to define ``block trade'' would entail notice-and-comment
rulemaking, market participants would have the opportunity to comment
on the Commission's proposed action.
For the reasons discussed above, the Commission is not adopting the
definition of ``block trade'' in Rule 802 as proposed but is instead
adding a note to Rule 802 informing stakeholders the Commission has not
yet adopted a definition of ``block trade.'' \221\
---------------------------------------------------------------------------

\221\ The Commission has corrected a cross-reference from
242.800(x) to 242.802.
---------------------------------------------------------------------------

(iii) Block-Trade Definition for Equity SBS
In the Proposing Release, the Commission did not propose a
definition of ``block trade'' applicable to equity SBS. Accordingly, no
equity SBS would qualify for the exception to required means of
execution for block trades in Proposed Rule 815(a)(2).\222\
---------------------------------------------------------------------------

\222\ As discussed in the Proposing Release, appendix F to part
43 of the CFTC's rules does not define a block trade for equity
swaps, and accordingly, no equity swap transaction could qualify for
the exception to the required means of execution for block trades
under Sec. 37.9(a)(2). See Proposing Release, supra note 1, 87 FR
at 28896.

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

[[Page 87182]]

Several commenters submitted comment letters on the proposal to
exclude equity swaps from the proposed block-trade exception.\223\ One
commenter states that, in its view, the use of block trades for equity
SBS is at least as necessary as for credit SBS, due to the need to
customize the size of transactions and to obtain timely and efficient
executions.\224\ This commenter asserts that requiring equity SBS
trades to be executed only through the order book or RFQ system could
result in these trades having ``significant price impact'' on SBSEF
products, which would ultimately inhibit the ability of market
participants to efficiently arrange and execute large, customized
trades that are essential for market participants' risk management
activities.\225\ The commenter also asserts that this would
disincentivize market participants from using equity SBS for their
legitimate business purposes, including hedging, which could increase
volatility and reduce liquidity in equity SBS markets (as well as
underlying equity markets). The commenter also argues that excluding
equity SBS block trades would ultimately inhibit capital formation as
an inability to execute blocks in equity SBS would make it riskier,
more expensive, and more difficult to hedge, which would in turn
inhibit market participants from participating in offerings.
---------------------------------------------------------------------------

\223\ See MFA Letter, supra note 18, at 6-7; ICI Letter, supra
note 18, at 12-13; ISDA-SIFMA Letter, supra note 18, at 9; SIFMA AMG
Letter, supra note 18, at 10.
\224\ See MFA Letter, supra note 18, at 6-7.
\225\ Id. at 6.
---------------------------------------------------------------------------

This commenter further states that equity SBS are quite distinct
from CFTC equity swaps in ways that make it more critical to allow
block trades in equity SBS. Specifically, the commenter states that
since CFTC-regulated equity swaps are based on broad-based equity
indices, which reflect markets and not individual issuers, they are
used to assume or hedge exposure to the relevant market or sector
generally. By contrast, the commenter posits that equity SBS may
reference a single name and are therefore a preferred tool for hedging
exposure to specific equities, which makes them essential to capital
formation. The commenter also argues that markets for SBS on individual
equities will, in many cases, be less liquid than the markets for
broad-based equity index swaps, further necessitating the opportunity
for block trades.\226\
---------------------------------------------------------------------------

\226\ See MFA Letter, supra note 18, at 6-7.
---------------------------------------------------------------------------

Another commenter also recommends that the Commission conduct
further analysis before determining block treatment for equity
SBSs.\227\ That commenter states that it previously disagreed with
CFTC's similar approach with respect to equity swaps. The commenter
argues that the Commission should undertake additional analysis to
demonstrate that the CFTC's justifications for its approach apply
equally to the categories or types of equity-based swaps specifically
under its jurisdiction, which include, for example, total return swaps
based on a single security or loan, or a narrow-based security index.
The commenter also recommends that the Commission determine whether
block treatment would be appropriate for equity-based SBSs in the pre-
trade transparency context. The commenter argues that similar to other
categories or types of large-sized SBSs that would qualify for block
treatment, flexible execution with respect to large-sized, equity-based
SBSs is important to avoid information leakage regarding a market
participant's investment strategies.
---------------------------------------------------------------------------

\227\ See ICI Letter, supra note 18, at 12-13.
---------------------------------------------------------------------------

One commenter suggests that, if there is the ability to have
fungible, single-name total return swaps in equity products, and they
become subject to mandatory clearing in the future, that the commenter
would expect there to be appropriately calibrated block size thresholds
that are applied to those equity-based swaps.\228\ Another commenter
suggests that if an equity SBS product becomes subject to mandatory
trade execution, there should be an appropriate methodology for
establishing equity block thresholds.\229\
---------------------------------------------------------------------------

\228\ See SIFMA AMG Letter, supra note 18, at 10.
\229\ See ISDA-SIFMA Letter, supra note 18, at 9.
---------------------------------------------------------------------------

While the Commission acknowledges commenters' concerns, the general
concerns expressed about the need for equity blocks lack specificity or
analysis regarding a particular definition of ``block trade'' for
equity SBS--whether a specific threshold or a methodology--that the
Commission could adopt. Commenters' concerns focus on the need to
customize the size of equity SBS transactions, to obtain timely and
efficient executions, and to avoid information leakage. And commenters
state that the lack of a block-trade exception could result in
significant price impact and inhibit the large, customized trades
essential for risk management and hedging, which would discourage
hedging, increase volatility and reduce liquidity in equity SBS markets
(as well as underlying equity markets), and ultimately inhibit capital
formation and participation in offerings.
With respect to the stated need for certain parties to use an
equity SBS block-trade exception, a relevant consideration for the
Commission in determining whether to establish a block-size threshold
for equity SBSs, if and when it makes a clearing determination for
those SBSs, is whether establishing that block-trade threshold would
have the potential to create a situation where SBSEFs provide less
transparency than exists in the underlying cash equity markets or the
listed options markets. An inappropriate block-trade threshold for
equity SBSs could create incentives for market participants to favor
equity SBS markets over cash equities or listed options markets, either
of which may be used, in many cases, to achieve economically equivalent
trading objectives as strategies using equity SBS, and neither of which
provides for block-trade reporting delays. If transactions were to
migrate from cash equities or listed options markets to the SBS market,
this could lead to decreased market transparency and could potentially
undercut the goal of the Dodd-Frank Act to bring transparency to the
trading of SBS.\230\
---------------------------------------------------------------------------

\230\ See Proposing Release, supra note, 87 FR at 28894 (``The
legislative history of the Dodd-Frank Act indicates that exchange
trading is a mechanism to `provide pre- and post-trade transparency
for end users, market participants, and regulators.' '' S. Rep. No.
111-176, at 34 (2010)).
---------------------------------------------------------------------------

Additionally, as a general matter, it is important to harmonize the
treatment of equity SBS with the treatment of equity swaps. There is no
block-trade exception for equity swaps in the CFTC's rules, and the
Commission does not wish to create incentives for market participants
to trade equity SBS over swaps. And while a commenter states that
equity SBS are quite distinct from equity swaps, the treatment of
equity SBS transactions should be broadly consistent with the treatment
of transactions in the cash equities underlying them to avoid, as
discussed above, creating incentives for market participants to trade
equity SBS instead of the underlying cash instruments.
For these reasons and those discussed above regarding credit
SBS,\231\ the Commission has determined not to adopt a definition of
``block trade'' in Rule 802. Thus, with respect to commenters'
concerns, until the Commission has made a clearing determination with
respect to equity SBS, equity SBS will be able to trade OTC, just as
their underlying cash equities can trade OTC. Moreover, before making a
clearing determination for an equity SBS--which would create

[[Page 87183]]

the circumstances in which equity SBS might be MAT and therefore
subject to the trade-execution requirement--the Commission would have
the opportunity to solicit and consider additional public comment on
the effect of such a determination, including comment with respect to
the concerns commenters have raised to date regarding, among other
things, timely and efficient executions, hedging, and capital
formation.
---------------------------------------------------------------------------

\231\ See supra section V.E.1(c)(ii).
---------------------------------------------------------------------------

2. Rule 815(b)
Paragraph (b) of Proposed Rule 815 would require a time delay for
certain orders being entered by a broker or dealer on an SBSEF's order
book. This provision would only apply to situations in which the broker
or dealer is seeking to trade against a customer order (a
``facilitation cross'') or to cross two customer orders (a ``customer
cross''), following some form of pre-arrangement or pre-negotiation of
such orders, and where the transaction is a Required Transaction.\232\
Under Proposed Rule 815(b)(1), an SBSEF would require that the broker
or dealer must expose one of the two orders in this transaction on the
SBSEF order book for a minimum time period of 15 seconds so that other
market participants have the opportunity to offer a better price than
the broker or dealer had intended for the cross. Proposed Rule
815(b)(2) would permit the SBSEF to adjust the time period of the
required delay based on the SBS's liquidity or other product-specific
considerations, provided that the time delay is a sufficient period of
time so that an order is exposed to the market and other market
participants have a meaningful opportunity to execute against the
order.
---------------------------------------------------------------------------

\232\ The Commission has modified the text of Rule 815(b)(1) to
specify that the requirements in this provision only apply with
regards to Required Transactions.
---------------------------------------------------------------------------

The Commission received comments on the provisions regarding the
prearrangement or pre-negotiation of trades in Proposed Rule
815(b).\233\ One commenter requests that the Commission address the
extent to which market participants may utilize ``pre-execution
communications'' when trading on an SBSEF, noting that the CFTC has
specified that such communications may occur pursuant to a SEF's rules
that have been certified or approved by the CFTC.\234\ This commenter
urges the Commission to align its rules to those of the CFTC in this
respect, given that pre-execution communication is a standard market
practice that investment advisers use to guard against information
leakage and obtain fair pricing for large-sized trades and packaged
transactions, among other types of transactions, on behalf of funds and
other clients.
---------------------------------------------------------------------------

\233\ See Citadel Letter, supra note 18, at 14-15; ICI Letter,
supra note 18, at 13-14.
\234\ See ICI Letter, supra note 18, at 13-14.
---------------------------------------------------------------------------

Another commenter, arguing that the Proposing Release and the CFTC
rules are silent with respect to the permissibility of pre-arrangement
on RFQ systems, urges the Commission to require SBSEF rulebooks to
prohibit the pre-arrangement of Required Transactions, arguing that it
is important that pre-trade transparency and the RFQ-to-3 requirement
not be undermined through bilateral pre-arrangement of a Required
Transaction followed by a directed RFQ that merely formalizes the
transaction.\235\
---------------------------------------------------------------------------

\235\ See Citadel Letter, supra note 18, at 15.
---------------------------------------------------------------------------

The Commission agrees with the comment that it should view pre-
execution communications in a way that is consistent with CFTC guidance
on this matter.\236\ The CFTC has viewed pre-execution communications
as communications between market participants to discern interest in
the execution of a transaction prior to the exposure of the market
participants' orders (e.g., price, size, and other terms) to the market
and has stated that such communications include discussion of the size,
side of market, or price of an SBS order or a potentially forthcoming
order.\237\ Consistent with the CFTC's approach, the Commission is
generally of the view that the terms ``pre-negotiation'' and ``pre-
arrangement'' within the meaning of Rule 802(b) should ordinarily be
understood to include all communications between market participants to
discern interest in the execution of a transaction prior to the
exposure of the market participants' orders (e.g., price, size, and
other terms) to the market, including discussion of the size, side of
market, or price of an SBS order, or a potentially forthcoming order.
---------------------------------------------------------------------------

\236\ See ICI Letter, supra note 18, at 13-14.
\237\ See 2013 CFTC Final SEF Rules Release, supra note 9, 78 FR
at 33503.
---------------------------------------------------------------------------

Additionally, while the CFTC has acknowledged that pre-execution
communications may be permitted by a SEF, it has stated that any SEF
that allows pre-execution communications must adopt rules regarding
such communications that have been certified to or approved by the
CFTC.\238\ Consistent with this view, the rulebook of an SBSEF
generally should address, with clarity, the application of the terms
``pre-arrangement'' and ``pre-negotiation'' in Rule 802(b) so that
market participants will know what types of pre-execution
communications are covered by the rule. An SBSEF's rules in this regard
must, of course, also comply with the other provisions of the SEA and
the rules thereunder, including the impartial access requirement of
Rule 819(c).\239\
---------------------------------------------------------------------------

\238\ See id.
\239\ See infra section VI.B.3.
---------------------------------------------------------------------------

With respect to the comment that the Commission should ban pre-
arrangement or pre-negotiation of RFQ trades on an SBSEF, while the
CFTC regulation is silent regarding the permissibility of pre-
arrangement on RFQ systems, the CFTC's adopting release with respect to
its SEF rules expressly contemplates the permissible pre-arrangement of
trades executed via RFQ.\240\ Moreover, the CFTC explained in its
adopting release that it refrained from requiring a time delay for
Required Transactions entered into RFQ systems because the requirement
to send an RFQ to three other market participants already provides pre-
trade price transparency.\241\ Thus, the CFTC has acknowledged that
pre-arranged Required Transactions may be submitted into a SEF's RFQ
system, and without a time delay.
---------------------------------------------------------------------------

\240\ See 2013 CFTC Final SEF Rules Release, supra note 9, 78 FR
at 33504.
\241\ See id.
---------------------------------------------------------------------------

The Commission recognizes that, as one of the commenters also
states, pre-execution communications are a standard practice for many
participants in the SBS market, and that to prohibit them entirely
would be a major departure from the CFTC's approach and could have
significant negative ramifications on the ability of market
participants to effect their SBS transactions. Accordingly, and to
maintain harmonization with the CFTC's treatment of pre-arrangement and
pre-negotiation of swaps transactions, the Commission is not modifying
Rule 815(b) to prohibit the use of pre-arrangement or pre-negotiation
with respect to SBS transactions via RFQ or to impose a time delay
before any such SBS can be executed via RFQ.
One of the commenters also requests that the Commission require
SBSEFs to provide periodic regulatory reporting around pre-arranged
trading on their platforms, including reporting the percentage of pre-
arranged orders for which other SBSEF participants step in to join the
trade, and that it also require an SBSEF to demonstrate that it offers
a bona fide order book in order for the SBSEF to permit the execution
of pre-arranged orders (such as a minimum

[[Page 87184]]

level of trading activity on the order book or a minimum percentage of
pre-arranged orders where pricing is improved as a result of other
SBSEF participants stepping in).\242\
---------------------------------------------------------------------------

\242\ See Citadel Letter, supra note 18, at 14-15.
---------------------------------------------------------------------------

The suggested reporting requirements or ``bona fide order book''
standard, however, would exceed what SEFs are required to do under the
CFTC rules. The Commission is concerned that different or additive
requirements to the key concept of an order book, such as whether that
order book is ``bona fide,'' could introduce complexity and confusion
if one set of trading protocols applied to Required Transactions for
swaps but different protocols--different from ones that have been
understood and utilized for many years--applied to Required
Transactions for SBS transactions. Moreover, the commenter's proposed
reporting requirements--such as a minimum percentage of pre-arranged
orders where pricing is improved as a result of other SBSEF
participants stepping in--appear to be primarily relevant to an
evaluation of a particular SBSEF has met the standard for having a
``bona fide'' order book. Accordingly, because the added complexity and
costs associated with imposing the ``bona fide'' order book standard
have not been justified, it is not appropriate to adopt the proposed
regulatory reporting requirement suggested by the commenter with
respect to cross-trading.
For the reasons discussed above, the Commission is adopting Rule
815(b) as proposed, with a clarifying change to the rule text to
reiterate that the requirement applies only to Required
Transactions.\243\
---------------------------------------------------------------------------

\243\ The heading of the proposed rule text already indicated
that it was a ``Time delay requirement for Required Transactions on
an order book.'' The rule text has been modified only to add ``With
regard to Required Transactions,'' at the beginning of the rule
text, to reiterate the parameters indicated in the title and to
clarify its application.
---------------------------------------------------------------------------

3. Rule 815(c)
Proposed Rule 815(c) is modeled on Sec. 37.9(c) of the CFTC's
rules and would define a ``Permitted Transaction'' as a transaction not
involving an SBS that is subject to the mandatory trade execution
requirement. This rule provides that an SBSEF may offer any method of
execution for Permitted Transactions.
The Commission did not receive any comments on the definition of
Permitted Transactions \244\ and is adopting Rule 815(c) as proposed,
for the reasons discussed in the Proposing Release.
---------------------------------------------------------------------------

\244\ As discussed above, one commenter recommends that the
requirements of Rule 815(a)(3) be modified to apply to all SBS
transactions on an SBSEF, which would include Permitted
Transactions. See supra note 190 and accompanying text (describing
and discussing that comment).
---------------------------------------------------------------------------

4. Rule 815(d)
Paragraph (d) of Sec. 37.9 provides an exception for package
transactions that allows for flexible methods of execution for what
would otherwise be Required Transactions. The Commission proposed to
include similar exceptions in Proposed Rule 815(d). Proposed Rule
815(d)(1) would define ``package transaction'' as two or more component
transactions executed between two or more counterparties where at least
one component is a Required Transaction, execution of each component is
contingent upon the execution of all other components, and the
component transactions are priced or quoted together as one economic
transaction with simultaneous (or near-simultaneous) execution of all
components. Proposed Rule 815(d)(2) would provide that a Required
Transaction that is executed as a component of a package transaction
that includes a component SBS that is subject exclusively to the
Commission's jurisdiction, but is not subject to mandatory clearing,
may be executed on an SBSEF using any method of execution as if it were
a Permitted Transaction.
Proposed Rule 815(d)(3) would provide that a Required Transaction
that is executed as a component of a package transaction that includes
a component that is not an SBS may be executed on an SBSEF using any
method of execution as if it were a Permitted Transaction. Proposed
Rule 815(d)(3) would further state that this general exception, which
allows flexible means of execution for certain package transactions,
shall not apply to a Required Transaction that is executed as a
component of a package transaction in which all other non-SBS
components are U.S. Treasury securities; a Required Transaction that is
executed as a component of a package transaction in which all other
non-SBS components are contracts for the purchase or sale of a
commodity for future delivery; a Required Transaction that is executed
as a component of a package transaction in which all other non-SBS
components are agency mortgage-backed securities; or a Required
Transaction that is executed as a component of a package transaction
that includes a component transaction that is the issuance of a bond in
a primary market.
The Commission received comments on the proposed exception for
packaged transactions.\245\ Several commenters support the Commission's
proposal.\246\ One commenter supports the proposal to harmonize with
the CFTC rules, but suggested modifications to the proposed rule
text.\247\ First, the commenter suggests that Rule 815(d)(2) be
modified so that the package-transaction exception is not available if
the other SBS in the package is either subject to the clearing
requirement or intended to be cleared. This commenter states that,
because the scope of any future clearing requirement for SBSs is
unclear, there may be significant trading activity in packages
containing SBSs that are intended to be cleared, but not subject to the
clearing requirement, and the commenter states that, for purposes of
the package transaction exception, SBS that are cleared, whether by
mandate or intention, should be treated the same. This commenter also
recommends that Rule 815(d)(3) be modified to clarify that the
exception would not apply to package transactions where all of the
other components are swaps subject to the CFTC's trade execution
requirement. The commenter states that this modification would prevent
evasion for packages containing only SBSs and swaps that are subject to
trade execution requirements on the Commission and the CFTC side,
respectively.\248\
---------------------------------------------------------------------------

\245\ See Bloomberg Letter, supra note 18, at 14, Citadel
Letter, supra note 18, at 12-13, and ISDA-SIFMA Letter, supra note
18, at 9-10.
\246\ See Bloomberg Letter, supra note 18, at 14 and ISDA-SIFMA
Letter, supra note 18, at 9-10.
\247\ See Citadel Letter, supra note 18, at 12-13.
\248\ See id.
---------------------------------------------------------------------------

Another commenter, while agreeing that it is appropriate to treat
package transactions differently from outright, single-legged
transactions, suggests that the Commission take a different approach
from that of the CFTC, stating that the current state of the CFTC's
rules reflect the culmination of a phased implementation approach
developed over time via no-action letters.\249\ That commenter argues
that it would be better for the Commission to tailor its rules for
packaged transactions to address the particular market dynamics
relevant to the SBS market instead of the swaps market. The commenter
recommends that the Commission build into the MAT determination process
a framework for identifying what types of package transactions exist
for prospectively MAT SBS and then develop tailored rules around the
execution of such transactions.
---------------------------------------------------------------------------

\249\ See ISDA-SIFMA Letter, supra note 18, at 9-10.
---------------------------------------------------------------------------

Rule 815(d) is closely modeled on Sec. 37.9(d) and is designed to
balance the goal of promoting transparency in the

[[Page 87185]]

SBS market through required methods of execution against the market
efficiency of allowing multiple instruments to trade as a package using
flexible methods of execution.\250\ As noted in the Proposing Release,
a rule that was too lenient could subvert the goal of promoting
transparency and competition through all-to-all trading, while a rule
that was too strict could cause market participants to break the
package into its individual components, thereby increasing transaction
costs and reducing the economic purpose and efficiency of the package
transaction.\251\
---------------------------------------------------------------------------

\250\ To the extent that counterparties may be facilitating a
package transaction that involves a ``swap,'' as defined in section
1(a)(47) of the CEA, 7 U.S.C. 1a(47), or any contract for the
purchase or sale of a commodity for future delivery (or option on
such a contract), or any component agreement, contract, or
transaction over which the Commission does not have exclusive
jurisdiction, the Commission does not opine on whether such activity
complies with other applicable law and regulations.
\251\ See Proposing Release, supra note 1, 87 FR at 28896.
---------------------------------------------------------------------------

The Commission agrees with a commenter's suggestions that Proposed
Rule 815(d)(2) and (3) should be modified to narrow the scope of the
package-transaction exception. Accordingly, the Commission is modifying
these rules so that neither an SBS that is intended to be cleared (even
if it is not required to be cleared) nor a swap subject to a CFTC trade
execution requirement would create an exception from required methods
of execution for a Required Transaction that is part of the same
package. For purposes of exempting a Required Transaction in a package
transaction from the required means of execution, there is no reason to
distinguish mandatorily cleared SBS from voluntarily cleared SBS, or
cleared swaps from cleared SBS. Therefore, the Commission is adding the
words ``and is not intended to be cleared'' to Rule 815(d)(2) so that
it covers only a Required Transaction that is executed as a component
of a package transaction that includes a component security-based swap
that is subject exclusively to the Commission's jurisdiction but is not
subject to the clearing requirement under section 3C of the SEA and is
not intended to be cleared. And the Commission is adding new subsection
(iv) to Rule 815(d)(3) to provide that a Required Transaction in a
package transaction is ineligible to be treated as a Permitted
Transaction if it is ``[a] Required Transaction that is executed as a
component of a package transaction in which all other non-SBS
components are swaps that are subject to a trade execution requirement
under the CFTC's rules.''
With respect to the suggestion that the Commission take a different
approach from that of the CFTC and develop tailored rules for SBS, the
package-transaction rule is not the appropriate place to recognize the
differences between the swaps and the SBS market. Rather, the clearing
determinations and MAT determinations will necessarily consider the
trading characteristics of a given SBS, and both these determinations
will have to be made before the package transaction exception would
ever potentially be relevant to a transaction in that SBS.
For the foregoing reasons, the Commission is adopting Rule 815(d)
with the modifications to paragraph (d)(2) and (d)(3), as described
above.
5. Rule 815(e)
Proposed Rule 815(e) is modeled on Sec. 37.9(e), which requires
SEFs to maintain rules and procedures for resolution of operational and
clerical error trades, which could be for swaps that otherwise would be
subject to required methods of execution. Proposed Rule 815(e) would
also require an SBSEF to maintain rules and procedures that facilitate
the resolution of error trades and sets forth certain requirements
designed to promote resolution in a fair, transparent, and consistent
manner. Definitions of the terms ``correcting trade,'' ``error trade,''
and ``offsetting trade'' would be included in Rule 802 rather than in
Rule 815(e).\252\
---------------------------------------------------------------------------

\252\ See Proposed Rule 802 (defining ``correcting trade'' as a
trade executed and submitted for clearing to a registered clearing
agency with the same terms and conditions as an error trade other
than any corrections to any operational or clerical error and the
time of execution); Proposed Rule 802 (defining ``error trade'' as
any trade executed on or subject to the rules of an SBSEF that
contains an operational or clerical error); Proposed Rule 802
(defining ``offsetting trade'' as a trade executed and submitted for
clearing to a registered clearing agency with terms and conditions
that economically reverse an error trade that was accepted for
clearing). These definitions are modeled on the definitions of the
same terms in Sec. 37.9(e)(1).
---------------------------------------------------------------------------

The Commission received one comment letter on this provision.\253\
The commenter states that, with respect to a cleared SBS, correcting an
error trade that was rejected by a clearing agency is not feasible
unless the rejected error trade is declared by the SBSEF void ab
initio. Otherwise, the commenter states, the parties might be
encumbered by unresolved obligations related to the rejected SBS trade,
and this might further prevent a timely and efficient resolution of the
error. For this reason, the commenter recommends that the SBSEF should
be able to declare void ab initio any trade rejected by a clearing
agency.\254\
---------------------------------------------------------------------------

\253\ See Bloomberg Letter, supra note 18, at 3, 14.
\254\ See id.
---------------------------------------------------------------------------

The CFTC's rules for addressing error trades are well articulated
and well understood by the market, and they continue to serve as an
appropriate model for the Commission's rules. Furthermore, because most
if not all SBSEFs also will be registered with the CFTC as SEFs, close
harmonization in this regard would allow dually registered entities to
employ the same procedures for addressing error trades, whether they
arise in the context of swap trading or SBS trading. Therefore, the
rules for addressing error trades should not differ between the SBS
regime and the swaps regime. While the Commission appreciates the
difficulties that might arise in trying to correct an error trade that
has been rejected by a clearing agency, under Proposed Rule 815(e), an
SBSEF would be required to adopt rules and procedures for addressing
such situations, which it could do by, among other things, declaring
trades rejected by a clearing agency as void ab initio, as it would be
required to do for non-error trades that are rejected for clearing
under Rule 815(g). For the foregoing reasons, the Commission is
adopting Rule 815(e) as proposed.
6. Rule 815(f)
Rule 815(f) is modeled on Sec. 37.9(f), which addresses
counterparty anonymity and is widely referred to as the prohibition on
``post-trade name give-up'' (``PTNGU''). Proposed Rule 815(f) would
generally prohibit any person, directly or indirectly (including
through a third-party service provider), from disclosing the identity
of a counterparty to an SBS that is executed anonymously on an SBSEF
and intended to be cleared and requires the SBSEF to establish and
maintain rules to that effect. Furthermore, it provides that ``executed
anonymously'' as used in the rule includes an SBS that is pre-arranged
or pre-negotiated anonymously, including by an SBSEF participant.
Finally, Rule 815(f) provides that, for a package transaction that
includes a component SBS that is not intended to be cleared, disclosing
the identity of a counterparty would not violate the rule.
The Commission received several comments on Proposed Rule
815(f).\255\ Most of the commenters support the

[[Page 87186]]

rule.\256\ Several commenters state that they strongly support the
proposal harmonizing with the CFTC rules to prohibit PTNGU for SBSs
executed anonymously on SBSEFs and that are intended to be
cleared.\257\ One commenter asserts that PTNGU has no legitimate
purpose for centrally cleared financial instruments, since trading
counterparties face the central clearinghouse and do not have any
credit, operational, or legal exposure to each other post-trade.\258\
This commenter states that PTNGU functions as a source of uncontrolled
information leakage since a market participant has no control over who
it will be matched with when executing through a pre-trade anonymous
trading protocol, such as an order book. Accordingly, a buy-side firm
must be comfortable potentially sharing its trading activity with every
other participant on the trading venue, including other buy-side firms
before using an anonymous order book with PTNGU. The commenter
considers this an unattractive proposition for buy-side firms that
completely undermines the anonymous nature of the trading protocol and
deters access and participation. The commenter also argues that PTNGU
is a discriminatory practice that impedes market participant access to
trading venues by allowing dealers to monitor whether buy-side firms
have started to transact in anonymous order books and use this
information as a policing mechanism to deter buy-side access and
participation.\259\ The commenter also states that Rule 815(f)(3) \260\
is drafted to prevent evasion by voice brokers. Other commenters
express similar views.\261\
---------------------------------------------------------------------------

\255\ See Bloomberg Letter, supra note 18, at 14-15, Citadel
Letter, supra note 18, at 10-12, SIFMA AMG Letter, supra note 18, at
10-12, WMBAA Letter, supra note 18, at 5.
\256\ See Bloomberg Letter, supra note 18, at 14-15, Citadel
Letter, supra note 18, at 10-12, SIFMA AMG Letter, supra note 18, at
10-12.
\257\ See Citadel Letter, supra note 18, at 10; SIFMA AMG
Letter, supra note 18, at 10.
\258\ See Citadel Letter, supra note 18, at 10.
\259\ See Citadel Letter, supra note 18, at 11. This commenter
also cites news articles relating the accounts of buy-side firms of
dealers contacting them to get them not to join SEF platforms. See
id. at 11 n.20.
\260\ Rule 815(f)(3) provides that SBSs that are ``executed
anonymously'' include SBSs that are pre-arranged or pre-negotiated
anonymously, which would include voice broker trades.
\261\ See SIFMA AMG Letter, supra note 18, at 10 (stating that
PTNGU for anonymously traded cleared SBSs is unnecessary and does
not provide any advantages to clients, but rather leads to
uncontrolled information leakage); Bloomberg Letter, supra note 18,
at 15 (stating that prohibiting PTNGU facilitates and promotes
trading on SBSEFs and promotes pre-trade price transparency by
encouraging more participants to bid anonymously, whereas the
practice of requiring disclosure of one counterparty's name to the
other counterparty increases the risk of information leakage and can
deter participation by liquidity seekers on SBSEFs).
---------------------------------------------------------------------------

Another commenter states that if the Commission prohibits PTNGU,
its policy would mirror the CFTC's approach and that certain traders
would be more likely to participate on venues that offer anonymous
execution, including order book functionality.\262\ This, in turn, the
commenter argues, could result in deeper liquidity pools on SBSEFs and
promote the development, innovation, and growth of the SBS market.\263\
The commenter asserts that the Commission's rules should be designed to
better promote the development, innovation, and growth of the swaps
market, with the intent of attracting liquidity formation onto SBSEFs,
in a manner that adds to efficiency for the market and market
participants.
---------------------------------------------------------------------------

\262\ See SIFMA AMG Letter, supra note 18, at 10.
\263\ See id. at 11.
---------------------------------------------------------------------------

One commenter also states that PTNGU was a more important feature
of the market when few swaps were centrally cleared and market
participants needed to know their counterparty's identity to manage the
associated credit risk; however, with the prevalence of central
clearing, the need for PTNGU is diminished for cleared swaps.\264\
---------------------------------------------------------------------------

\264\ See Bloomberg Letter, supra note 18, at 15.
---------------------------------------------------------------------------

A few commenters, while generally supportive of the rule, suggest
some modifications to it.\265\ One commenter argues that Rule 815(f)(4)
\266\ is overbroad and may significantly limit the scope of the
prohibition.\267\ Specifically, this commenter states that many
security-based swaps are transacted as part of a package transaction
with other instruments (e.g., single-name CDS and index CDS). The
commenter argues that, at a minimum, any exception for package
transactions should only apply to packages that include a component
that is not an SBS intended to be cleared or a swap that is intended to
be cleared. The commenter expresses concern that the current language
would appear to exempt packages containing CFTC-regulated swaps, even
if those instruments should be subject to an equivalent prohibition
(notwithstanding the working of the corresponding CFTC exception for
packages). The commenter encourages the Commission to work with the
CFTC to avoid creating a loophole for common packages containing swaps
and security-based swaps that are all intended to be cleared.
Furthermore, the commenter questions the need for Rule 815(f)(4) at
all. The commenter states that, as proposed, the prohibition on PTNGU
applies only to security-based swaps that are executed anonymously and
intended to be cleared. The commenter argues that PTNGU could still be
used for the uncleared security-based swap leg of a package transaction
containing both a cleared security-based swap and an uncleared
security-based swap, even without Rule 815(f)(4).
---------------------------------------------------------------------------

\265\ See Bloomberg Letter, supra note 18, at 15, Citadel
Letter, supra note 18, at 11, WMBAA Letter, supra note 18, at 5.
\266\ Rule 815(f)(4) provides that, for a package transaction
that includes a component transaction that is not an SBS intended to
be cleared, disclosing the identity of a counterparty shall not
violate the other provisions in the rule that prohibit the
disclosure of the identity of a counterparty for SBSs executed
anonymously.
\267\ See Citadel Letter, supra note 18, at 11.
---------------------------------------------------------------------------

One commenter argues that the Commission should take an
evolutionary approach to the prohibition on name give-up, which
initially should apply only to Required Transactions, and not Permitted
Transactions on an SBSEF where clearing may not be certain leading up
to or at the time of trade execution.\268\ This commenter believes that
this approach would encourage liquidity formation and further
development of less liquid SBSs where an SBSEF trading mandate is not
required.
---------------------------------------------------------------------------

\268\ See WMBAA Letter, supra note 18, at 5.
---------------------------------------------------------------------------

One commenter suggests that the Commission augment the rule with a
prohibition on trade-relationship documentation for SBS that are
intended to be cleared and grant the SBSEF the ability to void ab
initio trades rejected from clearing to avoid the necessity of post-
trade name disclosure in case of an error trade.\269\
---------------------------------------------------------------------------

\269\ See Bloomberg Letter, supra note 18, at 15.
---------------------------------------------------------------------------

The Commission agrees with commenters that prohibiting post-trade
name give-up for cleared trades is reasonably necessary to facilitate
and promote trading on SBSEFs, and Proposed Rule 815(f) would
accomplish these goals.
The Commission disagrees with the comment that Rule 815(f)(4) is
overbroad and unnecessary. The Commission finds that Rule 815(f)(4) is
necessary and important to provide clarity about the application of the
PTNGU prohibition to package transactions and also to provide
consistency with the CFTC's approach. Narrowing the exception in Rule
815(f)(4) as suggested by one commenter so that it would not apply if a
component of a package transaction were a cleared swap would cause the
Commission's approach to PTNGU to differ from that of the CFTC and
create the potential for different PTNGU rules to apply to different
components of the same package transaction. That is, if the Commission
modified Rule 815(f)(4) as the commenter suggests, in the case of a
package transaction comprising an

[[Page 87187]]

SBS that is intended to be cleared and a swap that is intended to be
cleared, Rule 815(f)(4) would prohibit PTNGU, but Sec. 37.9(f)(4)
would permit PTNGU.\270\ To avoid this situation, the Commission
declines to modify Rule 815(f)(4) as suggested.
---------------------------------------------------------------------------

\270\ Section 37.9(f)(4) provides, in relevant part, that
``[f]or a package transaction that includes a component transaction
that is not a swap intended to be cleared, disclosing the identity
of a counterparty shall not violate'' the prohibition against PTNGU.
17 CFR 37.9(f)(4).
---------------------------------------------------------------------------

Further, the Commission disagrees with the comment that the
prohibition on PTNGU should initially apply only to Required
Transactions. The prohibition on PTNGU is designed to promote pre-trade
price transparency by encouraging a greater number, and a more diverse
set, of market participants to anonymously post bids and offers on
regulated markets, and it does so by preventing the sharing of the
names of counterparties where such sharing is unnecessary--namely, when
a transaction is cleared. Whether clearing the transaction is required
or voluntary is not relevant to the purposes of prohibiting PTNGU. With
regards to trades rejected from clearing, the prohibition on PTNGU
would apply to all trades that are intended to be cleared, not just
those that are successfully cleared, so that prohibition would also
apply to a trade that is submitted but then rejected for clearing. For
the foregoing reasons, the Commission is adopting Rule 815(f), as
proposed, with minor technical modifications.\271\
---------------------------------------------------------------------------

\271\ The Commission has corrected a reference in paragraph
(f)(2) to a ``security-based swap execution facility'' to refer
instead to a ``security-based swap.'' The Commission has also
changed first instance of the word ``paragraph'' in paragraph (f)(4)
to ``paragraphs.''
---------------------------------------------------------------------------

7. Rule 815(g)
One commenter states that in order to protect counterparty
anonymity in the event of an SBS that is executed anonymously and
intended to be cleared, but is nonetheless rejected for clearing, the
SBSEF should declare the trade void ab initio.\272\ The commenter
suggests that the Commission augment the rule to prohibit trade
relationship documentation for SBS that are intended to be cleared and
to grant SBSEFs the ability to declare trades rejected from clearing
void ab initio in order to avoid post-trade name disclosure in the case
of a rejected trade.
---------------------------------------------------------------------------

\272\ See Bloomberg Letter, supra note 18, at 14-15. See also
Citadel Letter, supra note 18, at 5 (stating that the CFTC guidance
regarding trades that are void ab initio has eased trading of
cleared swaps on SEFs and ``facilitated the entry of new liquidity
providers that do not have legacy bilateral trading documentation in
place with clients'').
---------------------------------------------------------------------------

The Commission agrees that declaring such trades void ab initio,
which helps prevent trades rejected from clearing from effectively
becoming bilateral transactions where the identity of counterparties
might be disclosed. This approach is also consistent with practices in
the swaps market with respect to such trades.\273\ Therefore, the
Commission is amending Rule 815 to add a new paragraph (g), which
specifies that SBSEFs shall establish and enforce rules that provide
that a security-based swap that is intended to be cleared at the time
of the transaction, but is not accepted for clearing at a registered
clearing agency, shall be void ab initio. In light of new paragraph
(g), the Commission is generally of the view that it would not be
consistent with the impartial-access requirements of Rule 819(c) for an
SBSEF to permit its members to require bilateral relationship
documentation from their counterparties with respect to SBS that are
intended to be cleared.\274\ Consequently, the Commission finds that it
is not necessary to include a prohibition on trade relationship
documentation in Rule 815 for SBS that are intended to be cleared.
---------------------------------------------------------------------------

\273\ See CFTC, Division of Clearing and Risk and Division of
Market Oversight Staff Guidance on Swaps Straight-Through Processing
(Sept. 26, 2013), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/stpguidance.pdf
(``CFTC 2013 STP Guidance'').
\274\ See also infra section VI.B.3.
---------------------------------------------------------------------------

For the foregoing reasons, the Commission adopting Rule 815(f)(1)
through (4), with minor technical modifications,\275\ and is also
adding a new paragraph (g), as discussed above.
---------------------------------------------------------------------------

\275\ See supra note 271.
---------------------------------------------------------------------------

F. Rule 816--Trade Execution Requirement and Exemptions Therefrom

Section 3C of the SEA \276\ sets out a procedure whereby an SBS
becomes subject to mandatory clearing. Section 3C(h) of the SEA
provides that, if a transaction involving an SBS is subject to the
mandatory clearing requirement, the counterparties shall execute the
transaction on an exchange, on an SBSEF registered under section 3D of
the SEA, or on an SBSEF that is exempt from registration under section
3D(e) of the SEA, unless no national securities exchange or SBSEF makes
the SBS available to trade or the SBS transaction is subject to an
exception from the clearing requirement under section 3C(g) of the SEA.
This obligation under section 3C(h) is commonly referred to as the
``trade execution requirement.''
---------------------------------------------------------------------------

\276\ 15 U.S.C. 78c-3.
---------------------------------------------------------------------------

Proposed Rule 816 of Regulation SE establishes procedures for an
SBSEF to make an SBS ``available to trade'' (assuming it is also
subject to the clearing requirement), thereby activating the trade
execution requirement with respect to that SBS. Rule 816 also includes
three proposed exemptions from the trade execution requirement.
Paragraphs (a) through (d) of Rule 816 are modeled on Sec. 37.10
of the CFTC's rules and establish a process whereby an SBS product is
MAT by an SBSEF. An SBSEF may list an SBS that is subject to mandatory
clearing, but listing the product does not by itself subject the
product to the trade execution requirement in section 3C(h) of the SEA.
Only if a product that is subject to mandatory clearing is listed and a
MAT determination has been made would the SBS then become subject to
the trade execution requirement. A MAT determination would have to be
made and filed by an SBSEF pursuant to Rule 816 to trigger the trade
execution requirement, similar to the MAT process of Sec. 37.10.
1. General Comments on Harmonization With CFTC MAT Process
Several commenters cite efforts by the CFTC to review its MAT
process as an indication that the Commission should take a different
approach for making MAT determinations rather than align with the
CFTC's current rule.\277\ One commenter cites to the findings of the
Market Risk Advisory Committee (``MRAC''), an advisory committee that
provided recommendations to the CFTC, and states that the MRAC and the
CFTC raised concerns regarding the current MAT process for swaps.\278\
This commenter states that reforming the MAT process was included as an
agenda item in the CFTC 2021 fall rulemaking agenda and that, for this
reason, the Commission should align the MAT process for SBS with the
recommendations made by the MRAC or, in the alternative, coordinate
with the CFTC to ensure that the MAT process is aligned and conducted
in a manner that allows input from a variety of stakeholders and the
Commission. Another commenter also urges the Commission to review the
CFTC MRAC's recommendations with an eye towards adopting a more
flexible regime given the unique characteristics of the

[[Page 87188]]

SBS market.\279\ One commenter strongly recommends that the Commission
refrain from adopting a MAT determination process that is based on the
existing CFTC process, but rather coordinate with the CFTC as it
considers potential reforms to improve its MAT process.\280\
---------------------------------------------------------------------------

\277\ See Bloomberg Letter, supra note 18, at 15-16; ISDA-SIFMA
Letter, supra note 18, at 5.
\278\ See Bloomberg Letter, supra note 18, at 15-16.
\279\ See ISDA-SIFMA Letter, supra note 18, at 5.
\280\ See ICI Letter, supra note 18, at 5.
---------------------------------------------------------------------------

It is appropriate for Regulation SE to establish a MAT SBS process
that aligns with the CFTC's process as closely as possible. While
commenters state that the CFTC may be considering changes to its MAT
process, the CFTC has not yet proposed any such changes, so it is not
certain that the CFTC would adopt the recommendations of the MRAC,
either in whole or in part, or with modification, or when the CFTC
might act if it does make changes to its MAT process. Additionally,
because no MAT determination can be made with respect to an SBS unless
and until the Commission has made a mandatory clearing determination as
to that SBS, the Commission would have the opportunity, if and when it
makes a mandatory clearing determination with respect to an SBS, or
category of SBS, to consider whether changes to the process for a MAT
determination with respect to that SBS would be appropriate. Further,
in the event that the CFTC does move forward with changes to its MAT
process, the Commission will have the opportunity to reassess its own
MAT process and to consider further harmonization with the CFTC regime,
as appropriate. For the present, the CFTC's procedures are well
articulated and well understood by SBS markets, so closely harmonizing
with these procedures would yield comparable regulatory benefits while
minimizing burdens on SBSEFs. In particular, even though the SEF and
SBSEF markets differ in ways that are relevant to the application of
the criteria for MAT determinations, the criteria themselves are
equally applicable to the SEF and SBSEF markets. Thus, the Commission
is adopting the rule as proposed, without any different or additional
criteria that would have to be considered by an SBSEF in order to MAT
an SBS product.
2. Rule 816(a)
Paragraph (a)(1) of Rule 816 provides that an SBSEF that makes an
SBS available to trade in accordance with paragraph (b) of the rule
must submit to the Commission its determination with respect to that
SBS, pursuant to the procedures under Rule 806 (voluntary submission
for Commission review and approval) or Rule 807 (self-
certification).\281\ Paragraph (a)(2) provides that an SBSEF that makes
an SBS available to trade must demonstrate that it lists or offers that
SBS for trading on its trading system or platform.
---------------------------------------------------------------------------

\281\ See supra sections IV.C (discussing Rule 806) and IV.D
(discussing Rule 807).
---------------------------------------------------------------------------

The Commission received a number of comments on Rule 816(a).\282\
Many commenters raise concerns about an SBSEF having the sole ability
to make a MAT determination and generally advocate that the Commission
and other market participants have a greater role in making MAT
determinations.\283\ One commenter states that experience with the
existing CFTC regime suggests that the scope of the trade execution
requirement should not be determined solely by the SBSEFs.\284\ This
commenter states that the trade execution requirement is a key pillar
of the G20 post-crisis reforms and recommends that the Commission also
be able to propose MAT determinations for public comment, based on its
independent assessment of the criteria set forth in Rule 816(b). One
commenter asserts that it has long believed that a MAT determination
should not rest solely with a single SBSEF.\285\ This commenter states
that such an approach risks introducing commercial and other motives
beyond an objective assessment of the factors set forth in the rule.
---------------------------------------------------------------------------

\282\ See Bloomberg Letter, supra note 18, at 15-16; Citadel
Letter, supra note 18, at 15-16; ICI Letter, supra note 18, at 4-10;
ISDA-SIFMA Letter, supra note 18, at 4-5; MFA Letter, supra note 18,
at 9; SIFMA AMG Letter, supra note 18, at 6-8; WMBAA Letter, supra
note 18, at 5; Tradeweb Letter, supra note 18, at 3-4.
\283\ See Citadel Letter, supra note 18, at 15-16; see Bloomberg
Letter, supra note 18, at 15-16; ICI Letter, supra note 18, at 5-8;
ISDA-SIFMA Letter, supra note 18, at 4-5.
\284\ See Citadel Letter, supra note 18, at 15-16.
\285\ See WMBAA Letter, supra note 18, at 5.
---------------------------------------------------------------------------

Another commenter states that it does not believe that a trading
venue should be solely responsible for identifying the types of
products that should be subject to a trade execution requirement.\286\
Instead, the commenter states that a Commission-led process is more
appropriate. The commenter argues that a Commission-led process would
ensure that the views of all relevant market participants (including
SBSEFs) are considered in making a MAT determination. In addition, the
commenter asserts that the Commission is likely to have better access
to data regarding the overall SBS market than any individual trading
venue will have. The commenter requests that the Commission provide in
Regulation SE that MAT determinations are to be made by the Commission
following a notice and comment rulemaking process that takes into
account the views of SBSEFs and other market participants.
---------------------------------------------------------------------------

\286\ See Tradeweb Letter, supra note 18, at 3-4.
---------------------------------------------------------------------------

Because no MAT determination can be made for an SBS until the
Commission has made a mandatory clearing determination for that SBS,
the MAT-determination process is, in that sense, inherently a
Commission-led process. Moreover, because the SBSEFs will have direct
experience with the trading of SBSs on SBSEFs, they will be best
positioned make the initial decision as to whether it is appropriate to
submit a MAT determination for an SBS. However, the Commission would
still play a primary role in the MAT process, as it will have the
opportunity to review all SBSEF MAT determinations, whether they are
self-certified or voluntarily filed for Commission approval, to
determine whether those determinations are adequately supported by
evidence and consistent with the SEA and the rules thereunder,
including the six factors to be considered for MAT determinations under
Rule 816(b), which are discussed below. In the absence of such
evidence, the Commission can decline to approve or can stay and then
object to a MAT petition, which will ultimately allow the Commission to
prevent an inappropriate MAT determination from taking effect.
Some commenters also recommend that the MAT process provide other
market participants the ability to provide comment on any MAT
proposal.\287\ One commenter proposes that market participants have a
meaningful opportunity to review and opine on a petitioning SBSEF's
proposed MAT determination.\288\ This commenter argues that the MAT
factors are intended to measure trading liquidity that is available and
that this assessment should include the perspectives of market
participants.\289\ Another commenter also states that it has long
believed that market participants should have the ability or a forum to
comment on proposed MAT determinations.\290\ One commenter recommends
that, in order to support the MAT process and to guard against
inappropriate MAT determinations, the Commission permit market
participants and other interested parties to participate in the MAT
analysis by introducing a public notice and

[[Page 87189]]

comment period into the MAT assessment timeline.\291\ This commenter
states that this would provide market participants, who would be those
most affected by a MAT determination, with the opportunity to identify
specific aspects of individual SBS products that may limit their
liquidity, which would help ensure each MAT determination is
appropriate for the relevant SBS product. Another commenter states that
one of the shortcomings of the MAT process is that it puts too much
responsibility in the hands of the trading platform and does not
require, or even consider, input from market participants.\292\ This
commenter states that the implications of this outcome are even more
evident in the context of an SBS MAT determination, as such a
determination would only be relevant to a small segment of the global
SBS market, which the commenter states is much smaller and less liquid
than its swaps counterpart.
---------------------------------------------------------------------------

\287\ See SIFMA AMG Letter, supra note 18, at 7; MFA Letter,
supra note 18, at 9; ICI Letter, supra note 18, at 5, 7-8.WMBAA
Letter, supra note 18, at 5.
\288\ See SIFMA AMG Letter, supra note 18, at 7.
\289\ See id.
\290\ See WMBAA Letter, supra note 18, at 5.
\291\ See MFA Letter, supra note 18, at 9.
\292\ See ISDA-SIFMA Letter, supra note 18, at 4-5.
---------------------------------------------------------------------------

One commenter also states that the proposed approach will give
SBSEFs the sole ability to dictate the scope of SBSEF trading for
market participants based on the commercial interests of SBSEFs.\293\
This commenter recommends that the Commission require a 30-day public
comment period for all MAT determinations. The commenter expresses
concern that, under the proposal, it would be possible for a MAT
determination to become effective without an opportunity for public
comment and that the MAT process would be controlled almost entirely by
one segment of the SBS markets, the SBSEFs. The commenter states that
market participants can provide the Commission with invaluable
commentary, insights, and data on the potential effects of proposed
rules, as well as help to ensure that rules are implemented in a fair
and orderly manner. The commenter asserts that, because MAT
determinations are data intensive, 30 days would give market
participants sufficient time to analyze the data presented by the
SBSEF, prepare their own data and analyses, and comment effectively on
operational and technological implications. This commenter also
recommends that the Commission consider creating an advisory board to
provide recommendations both to the Commission and to SBSEFs on SBSs
that should be added to or removed from the list of SBSs that are
subject to the trade execution requirements.\294\ The commenter states
that the advisory board should have appropriate expertise and balanced
representation, including from the buy side, sell side, and other
stakeholders. The commenter asserts that this would help further
address some of their concerns about the MAT process and ensure that
the SBSs made subject to the trade execution requirement are only the
most liquid. Furthermore, the commenter argues that the advisory board
could also help the Commission assess the functioning of the MAT
determination process and of the overall SBS regulatory framework and
provide recommendations for improvement.\295\
---------------------------------------------------------------------------

\293\ See ICI Letter, supra note 18, at 5, 7-8.
\294\ See id. at 9-10.
\295\ See id.
---------------------------------------------------------------------------

Another commenter states that the process for MAT determinations
should include input from both market participants and the
Commission.\296\ The commenter states that market participants may
trade on multiple venues and in multiple jurisdictions and have a
greater or different perspective from the SBSEF making the MAT
determination. Additionally, the commenter states that the Commission's
input should be considered as well.
---------------------------------------------------------------------------

\296\ See Bloomberg Letter, supra note 18, at 15-16.
---------------------------------------------------------------------------

The Commission will have sufficient opportunity to assess self-
certified MAT determinations for consistency with the criteria of Rule
816(b), as well as with the SEA and the other regulations thereunder,
while also permitting SBSEFs to use a self-certification process
closely aligned with Sec. 40.6. The CFTC's procedures are well
articulated and well understood by SEFs, and closely harmonizing with
these procedures should yield comparable regulatory benefits while
minimizing burdens on SBSEFs. Certain MAT determinations of dually
registered SEF/SBSEFs may apply to SBSs and swaps that are related and
that related MAT determinations will thus have to be filed with both
the SEC and CFTC. Adding a default comment period or otherwise altering
the standard so that the Commission reviews all MAT determinations by
SBSEFs, as commenters requested, would significantly alter the timing
of self-certified SBSEF MAT determinations compared to their SEF
equivalents. By contrast, closely harmonizing the SEC's filing
procedures and standards of review with the CFTC's would allow dually
registered entities to submit related MAT determinations to both
agencies for review. Moreover, if the Commission exercises its
authority to stay the effectiveness of a self-certified MAT
determination and seek public comment--i.e., with respect to a rule
that is novel, complex, inadequately explained, or potentially
inconsistent with the SEA or the regulations thereunder, including
Regulation SE--market participants would be able to convey their
concerns regarding that rule to the Commission.
For SBS MAT determinations submitted under the Rule 806 process
that present novel or complex issues or meet other criteria under Rule
806(d), the initial 45-day review period for rule approval submissions
may be extended for an additional 45 days. The Commission recognizes
the importance of public input regarding any MAT determination, and not
only does Rule 808(b) provide that the Commission make publicly
available on its website Rule 806 filings, such as an SBSEF's MAT
filing, but the Commission is also, as discussed below, delegating to
its staff the authority to make filings under Rule 806 available on the
Commission's website, which will expedite the process of providing
interested persons with the ability to review a MAT-determination
filing so that they can communicate their views to the Commission.
Thus, in either process, if MAT petitions present novel or complex
issues, the Commission will have sufficient time to receive and
consider public comment for those submissions. Further, accepting
public comment from all interested market participants in the context
of a specific MAT determination would more efficiently aid the
Commission's review of SBSEF MAT-determination filings than forming a
formal advisory board to offer opinions on adding or removing SBS from
the list of products that have been MAT.
Several commenters question the extent of the Commission's role in
the MAT determination process.\297\ One commenter cites the lack of
Commission authority to delay or decline an SBSEF submission for a MAT
determination, particularly without comment from market participants,
as the basis for its concerns about the proposed MAT process.\298\
Another commenter recommends that the Commission enhance its oversight
by ensuring that it has a more meaningful ability to review and reject
MAT determinations, as well as the ability to initiate determinations
itself as appropriate.\299\ This commenter also expresses concern that
the Commission would not have adequate time to consider, or authority
to

[[Page 87190]]

challenge, the basis for a MAT determination. The Commission, however,
does have the authority to prevent an SBSEF MAT determination under
either Rule 806 or Rule 807 from taking effect. As noted above, under
Rule 806, the Commission has a 45-day period to consider a submission
under Rule 806, which could be extended for another 45 days. The
Commission can, if it finds the determination to be inconsistent with
the SEA or the rules thereunder, notify the SBSEF that it will not, or
is unable to, approve the new rule or rule amendment. Under Rule 807,
MAT determinations cannot go into effect for at least 10 business days,
during which the Commission has the opportunity to determine whether
the determination presents novel or complex issues, if it is
inadequately explained, or if it is potentially inconsistent with the
SEA or the rules thereunder. If the Commission determines that any of
these concerns is present, the Commission can stay the MAT
determination for a 90-day period for further review. Within those 90
days, the Commission will have the opportunity to object to the
proposed certification on the grounds that the proposed rule or rule
amendment is inconsistent with the SEA or the Commission's rules
thereunder, thereby preventing the self-certified MAT determination
from going into effect. Therefore, the processes for submitting MAT
determinations do afford the Commission sufficient time and authority
to review and, where appropriate, decline to approve, or object to, MAT
determinations.
---------------------------------------------------------------------------

\297\ See SIFMA AMG Letter, supra note 18, at 6; ICI Letter,
supra note 18, at 6-7.
\298\ See SIFMA AMG Letter, supra note 18, at 6.
\299\ See ICI Letter, supra note 18, at 5-8.
---------------------------------------------------------------------------

For the reasons discussed above, the Commission is adopting Rule
816(a) as proposed.
3. Rule 816(b)
Paragraph (b) of Rule 816 sets forth six factors that an SBSEF
shall consider, as appropriate, when making a MAT determination for an
SBS product, which are the same six factors enumerated in the CFTC
rule. Those factors are: (1) whether there are ready and willing buyers
and sellers; (2) the frequency or size of transactions; (3) the trading
volume; (4) the number and types of market participants; (5) the bid/
ask spread; and (6) the usual number of resting firm or indicative bids
and offers.
The Commission received several comments on the factors for making
a MAT determination described in Rule 816(b).\300\ Several commenters
express concern that the factors for consideration enumerated in Rule
816(b) are not mandatory.\301\ One commenter states that the rule
requires that an SBSEF's submission consider the factors in the rule,
as appropriate, when making a MAT determination.\302\ This commenter
proposes that all of the MAT factors must be considered for mandatory
SBSEF trading. This commenter also urges the Commission to assess the
MAT factors on the basis of the current trading activity of the
relevant SBSs on the SBSEF against stringent standards, and in the
aggregate, in order to determine whether there is proven liquidity on
SBSEFs to support mandatory SBSEF trading. The commenter also proposes
that the Commission expand the MAT factors to require evidence
demonstrating that the SBSEF has the requisite infrastructure to
support mandatory SBSEF trading by: (a) adding an assessment of
technological readiness, and (b) requiring threshold numbers of SBSEFs
as well as liquidity providers on the SBSEF transacting in the relevant
SBS. The commenter argues that, while the expansion of MAT factors may
be viewed as requiring more intervention and resources by the
Commission, the revised approach will ultimately lead to a streamlined
process, while at the same time avoiding a potential sacrifice of
liquidity if a particular SBS is mandated for SBSEF trading
prematurely.
---------------------------------------------------------------------------

\300\ See SIFMA AMG Letter, supra note 18, at 6-8; ICI Letter,
supra note 18, at 5; MFA Letter, supra note 18, at 9; WMBAA Letter,
supra note 18, at 5.
\301\ See SIFMA AMG Letter, supra note 18, at 7-8; ICI Letter,
supra note 18, at 5; WMBAA Letter, supra note 18, at 5.
\302\ See SIFMA AMG Letter, supra note 18, at 6-8.
---------------------------------------------------------------------------

One commenter also expresses concern that the factors in Rule
816(b) are neither mandatory nor based on calculated thresholds, and
that they would permit SBSEFs to assert that an SBS should be MAT even
absent objective evidence of a sufficiently liquid trading market.\303\
This commenter states that this could have negative consequences for
buy-side participants such as funds--requiring SBSs with insufficient
liquidity to be traded via order book or an RFQ system, which would
raise a significant risk of revealing advisers' sensitive portfolio
management strategies. This commenter also states that, without
requiring SBSEFs to consider any objective factors (e.g., threshold
levels), it is not clear how the Commission could ever find that a MAT
determination is inconsistent with the SEA or the Commission's rules.
This commenter recommends that the Commission enhance the MAT
determination factors by: clarifying that all factors must be
evaluated, rather than just one or a subset; adding as a factor the
number of SBSEFs that list the SBS; requiring that at least two SBSEFs
list the SBS; and requiring a minimum amount of trading history (e.g.,
that an SBS has been listed for at least 90 days). The commenter also
recommends that the Commission make the MAT determination factors more
robust by establishing at least some objective mandatory criteria. The
commenter argues that adopting these recommendations would provide the
Commission with greater authority to reject a MAT determination and
would address the conflict raised by an SBSEF's commercial incentive to
make an SBS MAT, as well as ensure that there is enough liquidity in an
SBS before it is subject to a MAT determination. The commenter urges
that a more robust MAT determination process is critical to bring
consistency to the SBS market over time, as having objective standards
would avoid MAT determinations based on subjective assessments of
liquidity that may change over time.
---------------------------------------------------------------------------

\303\ See ICI Letter, supra note 18, at 5-6.
---------------------------------------------------------------------------

The Commission's approach of requiring the MAT factors to be
considered as appropriate, rather than mandating the consideration of
all the factors, is consistent with the approach the CFTC has taken.
The CFTC adopted its approach to provide more flexibility so that its
markets could accommodate swaps with different trading characteristics
that can be supported in a centralized trading environment.\304\ And a
similarly flexible approach is appropriate for the different SBSs that
would be traded on its SBSEFs, as the appropriate thresholds on any of
the factors may vary depending on the SBS and over time. Adopting
specific thresholds would create excessive rigidity at the outset. MAT
submissions, under Rules 806(a)(5) and 807(a)(6), would be required to
contain an explanation and analysis of the SBSEF's determination,
including a discussion of the factors enumerated in the rule, and how
it complies with the SEA and the Commission's regulations thereunder.
Rule 816(b) requires SBSEFs to consider all the factors enumerated in
the rule, as appropriate. However, such consideration, to be
meaningful, generally should discuss the factors in the context of the
general market, relative to some outside benchmark. And the SBSEF would
have the burden of providing support for any assertions it makes
regarding the adequacy of any of the factors it considers, with

[[Page 87191]]

reference to some external, objective standard. The explanations and
analyses provided by the SBSEF generally should provide adequate
justification as to how all the factors considered apply to the SBS MAT
determination, as well as to why any factors enumerated in Rule 816(b)
that are not addressed are not relevant. A failure, on the part of the
SBSEF, to address any factors that are relevant or to adequately
support its assertions would be a basis for the Commission to find that
a MAT determination is inconsistent with the SEA and its rules.
---------------------------------------------------------------------------

\304\ See 2013 CFTC Final MAT Rules Release, supra note 9, 78 FR
at 33613.
---------------------------------------------------------------------------

One commenter, while supporting harmonization with the CFTC's MAT
standards, expresses concern with the current framework for determining
whether mandatorily cleared SBS should also be mandated for SBSEF
trading through the MAT process. This commenter urges that there be a
substantive analysis of whether an SBS has sufficient liquidity
available to market participants on the SBSEF. The commenter states
that, absent a robust MAT process requiring the SBSEF to demonstrate
that voluntary exchange trading has met minimum liquidity and other
standards, an absence of liquidity for the newly MAT-ed product on the
SBSEF could shut out asset managers from accessing liquidity for their
clients once OTC trading is prohibited. To this end, the commenter
recommends that the Commission specify that the MAT standards are not
synonymous with the clearing requirement standards. The commenter
asserts that its assessment reflects the fact that necessary market
conditions that make central clearing appropriate are different from
the necessary market conditions that make mandatory SBSEF execution
appropriate.\305\
---------------------------------------------------------------------------

\305\ See SIFMA AMG Letter, supra note 18, at 6-7.
---------------------------------------------------------------------------

Another commenter, while generally supporting the Commission's
approach to MAT determinations and the six factors enumerated in the
rule, urges the Commission to take a cautious approach in its
assessment of whether a MAT determination is appropriate. Specifically,
the commenter recommends that the Commission carefully consider each
factor, individually and collectively, in assessing whether a
particular SBS has sufficient liquidity to support mandatory SBSEF
trading. The commenter also cautions that the Commission should avoid
broad MAT categorizations for specific types of SBS when individual SBS
products within each category may be more or less suitable for a MAT
designation.\306\
---------------------------------------------------------------------------

\306\ See MFA Letter, supra note 18, at 9.
---------------------------------------------------------------------------

From the factors enumerated in Rule 816(b), it is clear that
additional factors, beyond the fact that a product is subject to
mandatory clearing, will need to be considered in determining whether
an SBS is suitable to be MAT, and these factors are directly relevant
to the liquidity of trading in a given SBS: whether there are willing
buyers and sellers, the frequency and size of transactions, the trading
volume, the number and types of market participants, the bid/ask
spread, and the usual number of resting firm or indicative bids and
offers. Adopting specific thresholds, however, would be too rigid an
approach to accommodate the different kinds of SBSs that may be traded
on an SBSEF, particularly at this early stage. As stated above, the
Commission or its staff will review SBS products on a case-by-case
basis, and for SBS products presenting novel or complex issues there
will be an extended period for the Commission to review the submission
and consider public comments on the appropriateness of a MAT
determination on a case-by-case basis, taking into account the facts
and circumstances of the SBS subject to the determination, including
when a filing seeks to include a broad category of SBS within a MAT
determination.
The Commission has carefully considered the concerns raised by
commenters regarding the determination of when an SBS is appropriate
for a MAT determination by an SBSEF, and the Commission is adopting
Rule 816(b) as proposed. The Commission appreciates that a MAT
determination for an SBS will be consequential for market participants,
and that the enumerated factors in Rule 816(b) are important components
of an analysis of whether an SBS is appropriate for a MAT
determination. Rule 816(b) will require SBSEFs to consider each of the
factors enumerated in Rule 816(b), as appropriate. As noted above, a
flexible approach to the enumerated factors will accommodate the
different kinds of SBSs that will be traded on SBSEFs. While the rule
does not require that every factor be considered in every case, to the
extent that a factor is relevant and an SBSEF's MAT determination
submission fails to sufficiently address that factor, the Commission
would be in a position to either disapprove the submission, if made
under Rule 806, or stay and ultimately object to the submission, if
self-certified under Rule 807.
Furthermore, the rules for filing MAT determinations require SBSEFs
to provide, among other things, an explanation and analysis of the
proposed MAT determination, including a discussion of its compliance
with the SEA, the Core Principles for SBSEFs, and the Commission's
rules thereunder. In the case of a MAT determination, the SBSEF
generally should do more than simply state that it is consistent with
the SEA and the Commission's rules thereunder, but should also provide
supporting analysis, and supporting documentation as appropriate, for
its conclusion. If an SBSEF fails to provide adequate explanation or
analyses of the MAT determination, it would be difficult for the
Commission to find that the determination is consistent with the SEA
and the Commission's rules thereunder. Thus, MAT determination filings
generally should be accompanied with adequate discussion and support
for a MAT determination based on all relevant factors in Rule 816(b),
including discussion supporting a conclusion that the SBS product
subject to the MAT determination achieves the appropriate thresholds
for that category of products. Furthermore, for MAT determinations
presenting novel or complex issues, there will be an extended period
for the Commission to solicit and consider public comments on, among
other things, the appropriateness of the factors considered.
For the reasons discussed above, the Commission is adopting Rule
816(b) as proposed.
4. Rule 816(c)
Paragraph (c) of Rule 816 provides that, upon a determination that
an SBS has been MAT on an SBSEF or SBS exchange,\307\ all other SBSEFs
and SBS exchanges shall comply with the requirements of section 3C(h)
of the SEA in listing or offering that SBS for trading.
---------------------------------------------------------------------------

\307\ An SBS exchange, like all national securities exchanges,
must submit any rule change--including a rule change to list a new
derivative securities product and/or to MAT an SBS product--pursuant
to SEA Rule 19b-4, 17 CFR 240.19b-4. The proposed rule text did not
establish a new procedure for SBS exchanges to list or MAT SBS
products. See Proposing Release, 87 FR at 28898 n.107.
---------------------------------------------------------------------------

The Commission received no comments on Rule 816(c) and the
Commission is adopting Rule 816(c) as proposed for the reasons stated
in the Proposing Release.
5. Rule 816(d)
Paragraph (d) of Rule 816 provides that the Commission may issue a

[[Page 87192]]

determination that an SBS is no longer MAT upon determining that no
SBSEF or SBS exchange lists that SBS for trading.
The Commission received one comment on Rule 816(d).\308\ This
commenter recommends that the Commission modify its proposed approach
to removing an SBS from the trade execution requirement. The commenter
states that the proposed approach raises a significant risk that an SBS
may be required to be traded on an SBSEF merely because it is listed on
one SBSEF, even if there is no liquidity to sustain trading in that
SBS, which could be detrimental for both buy-side and sell-side market
participants. To ensure that there is adequate liquidity in MAT SBSs,
the commenter recommends that the Commission adopt a process for
removing an SBS from the MAT scope that is similar to the process for
making a MAT determination. The commenter also urges the Commission,
given the industry's recent experience with the COVID-19 crisis, and
consistent with the MRAC Report, to consider the implications that a
temporary outage at one or more SBSEFs or a major market disruption
would have for SBSs subject to the trade execution requirement. For
this reason, the commenter recommends that the Commission consider the
circumstances under which it would allow for a temporary suspension of
the trade execution requirement and any possible terms for such a
suspension, as well as any other relief measures the Commission may be
able to provide.\309\
---------------------------------------------------------------------------

\308\ See ICI Letter, supra note 18, at 9.
\309\ See id.
---------------------------------------------------------------------------

The commenter's concern that an SBS may be required to be traded on
an SBSEF merely because a single SBSEF has listed that SBS, even if
there is no liquidity to sustain trading in that SBS, is addressed by
the requirements in Rule 816(b) that must be met by an SBSEF before it
submits a MAT determination under Rule 806 or Rule 807, as well as by
the Commission's ability to disapprove, or stay and then object to, any
MAT determination by an SBSEF. In considering an SBSEF's MAT
submission, the Commission will generally consider how many SBSEFs list
and trade a given SBS, as well as the liquidity and trading
characteristics of that SBS. Further, to the extent market
circumstances change to make a previous MAT determination unsuitable
for then-prevailing market conditions, and if the SBSEF that has made a
MAT determination is unwilling to withdraw that determination, the
Commission would be able to grant exemptive relief (including on an
emergency basis) pursuant to its authority in section 36 of the SEA in
order to address that situation.\310\ For these reasons, the Commission
would have the ability to address market circumstances that disrupt the
ability of market participants to trade SBS in compliance with the
trade execution requirement.
---------------------------------------------------------------------------

\310\ See 15 U.S.C. 78mm.
---------------------------------------------------------------------------

Therefore, the Commission is adopting Rule 816(d) as proposed.
6. Rule 816(e)
Paragraph (e) of Proposed Rule 816 has no analog in Sec. 37.10,
but instead is adapted from 17 CFR 36.1 of the CFTC's rules, which sets
out certain exemptions from the trade execution requirement. The
exemptions incorporated into Sec. 36.1 result from the CFTC's many
years of experience in administering the CEA's trade execution
requirement.
Paragraph (e)(1) of Rule 816 provides that an SBS transaction that
is executed as a component of a package transaction and that also
includes a component transaction that is the issuance of a bond in a
primary market is exempt from the trade execution requirement in
section 3C(h) of the SEA. In addition, paragraph (e)(1) provides that,
for purposes of paragraph (e), a package transaction consists of two or
more component transactions executed between two or more counterparties
where: at least one component transaction is subject to the trade
execution requirement in section 3C(h) of the SEA; execution of each
component transaction is contingent upon the execution of all other
component transactions; and the component transactions are priced or
quoted together as one economic transaction with simultaneous or near-
simultaneous execution of all components.
Paragraph (e)(2) of Rule 816, which is adapted from Sec. 36.1(b),
provides that section 3C(h) of the SEA does not apply to an SBS
transaction that qualifies for an exception \311\ under section 3C(g)
of the SEA, or any exemption from the clearing requirement that is
granted by the Commission, for which the associated requirements are
met.\312\ Unlike the CFTC, the Commission does not have a specific rule
to cite to regarding exemptions from the clearing requirement, so Rule
816(e)(2) would refer only generally to such exemptions.
---------------------------------------------------------------------------

\311\ Section 3C(g) of the SEA is entitled ``Exceptions,'' not
``Exemptions.''
\312\ As with section 2(h)(8) of the CEA, section 3C(h) of the
SEA provides that the trade execution requirement does not apply to
SBS that are excepted from the clearing requirement pursuant to
section 3C(g) of the SEA. However, the Commission could, like the
CFTC, grant exemptions from the clearing requirement pursuant to
other statutory authority, such as section 36 of the SEA.
---------------------------------------------------------------------------

Paragraph (e)(3) of Rule 816, which is adapted from Sec. 36.1(c),
provides that section 3C(h) of the SEA does not apply to an SBS
transaction that is executed between counterparties that qualify as
``eligible affiliate counterparties.'' \313\ Counterparties would be
``eligible affiliate counterparties'' for purposes of Rule 816(e)(3)
if: (i) one counterparty, directly or indirectly, holds a majority
ownership interest in the other counterparty, and the counterparty that
holds the majority interest in the other counterparty reports its
financial statements on a consolidated basis under Generally Accepted
Accounting Principles (``GAAP'') or International Financial Reporting
Standards (``IFRS''), and such consolidated financial statements
include the financial results of the majority-owned counterparty; or
(ii) a third party, directly or indirectly, holds a majority ownership
interest in both counterparties, and the third party reports its
financial statements on a consolidated basis under GAAP or IFRS, and
such consolidated financial statements include the financial results of
both of the counterparties. In addition, for purposes of Rule
816(e)(3), a counterparty or third party directly or indirectly would
hold a majority ownership interest if it directly or indirectly holds a
majority of the equity securities of an entity, or the right to receive
upon dissolution, or the contribution of, a majority of the capital of
a partnership.
---------------------------------------------------------------------------

\313\ Section 36.1(c) provides that section 2(h)(8) of the CEA
does not apply to a swap transaction that is executed between
counterparties that have eligible affiliate counterparty status
pursuant to paragraph (a) of Sec. 50.52 of the CFTC's rules, which
provides an exception from the clearing requirement for inter-
affiliate swaps, subject to conditions. Counterparties to a swap
that have eligible affiliate counterparty status may rely on the
Sec. 36.1(c) even if they clear the swap transaction. Since the
Commission does not have an equivalent to Sec. 50.52 to reference,
the Commission is instead defining the term ``eligible affiliate
counterparties'' directly in Rule 816(e)(3). These definitions are
closely modeled on the equivalent definitions used in Sec. 50.52,
which are incorporated into Sec. 36.1(c).
---------------------------------------------------------------------------

The Commission received comments on Rule 816(e).\314\ One commenter
supports the proposed carve-out for package transactions.\315\ Another
commenter, however, states that the CFTC's rules for package
transactions were ``developed by the CFTC, initially via staff no-
action relief, after SEFs had adopted various MAT determinations and
market participants had provided input to the CFTC regarding the
particular types of package transactions

[[Page 87193]]

common in the market for the relevant types of MAT swaps.'' \316\ The
commenter states that it is for this reason that particular types of
package transactions addressed by the CFTC generally focus on
transactions common in the interest-rate swaps market, which make up
the majority of MAT swaps. In addition, the commenter asserts that the
current state of the CFTC's rules in this area reflect the culmination
of a phased implementation approach developed over time via no-action
letters. The commenter argues that, in light of this, it would be
better for the Commission to tailor its rules for package transactions
to address the particular market dynamics relevant to the SBS market
instead of those in the swaps market. The commenter recommends that the
Commission build into the MAT determination process a framework for
identifying what types of package transactions exist for prospective
MAT SBS and then develop tailored rules around the execution of such
transactions.\317\
---------------------------------------------------------------------------

\314\ See ISDA-SIFMA Letter, supra note 18, at 9-10; SIFMA AMG
Letter, supra note 18, at 6.
\315\ See SIFMA AMG Letter, supra note 18, at 6.
\316\ ISDA-SIFMA Letter, supra note 18, at 9.
\317\ See ISDA-SIFMA Letter, supra note 18, at 9-10.
---------------------------------------------------------------------------

The Commission does not agree that it is necessary to tailor the
Commission's rules for package transactions to address the particular
market dynamics relevant to the SBS market, because no MAT
determinations for SBS have been made, and no MAT determinations can
yet be made because no SBS are required to be cleared. Moreover, the
Commission does not yet have a sufficient basis on which to tailor the
rules for package transactions to address SBS market dynamics, because
the market dynamics relevant to trading of SBS on SBSEFs have yet to
develop. It would be preferable to address those dynamics with respect
to package transactions if and when it becomes necessary or appropriate
to do so, because, at that point, the Commission and commenters would
be better informed about the nature of trading various SBS on SBSEFs.
In the meantime, it is desirable for Rule 816(e) to be harmonized with
Sec. 36.1 of the CFTC's rules to promote similar treatment of package
trades, whether they involve SBS or swaps, as this will facilitate the
participation of current SEF participants on SBSEFs. If, after SBSEFs
have become operational and MAT determinations have been made, the
Commission observes that the rules for package transactions are no
longer suitable for the SBS market, the Commission could consider
amending Rule 816(e) at that time.
For the reasons discussed above, the Commission is adopting Rule
816(e) as proposed.

G. Rule 817--Trade Execution Compliance Schedule

Proposed Rule 817 is modeled on Sec. 37.12 of the CFTC's rules,
which is designed to inform market participants of the precise date on
which the trade execution requirement for a particular product
commences.\318\ Accordingly, paragraph (a) of Rule 817 provides that an
SBS transaction shall be subject to the requirements of section 3C(h)
of the SEA upon the later of (1) a determination by the Commission that
the SBS is required to be cleared as set forth in section 3C(a) or any
later compliance date that the Commission may establish as a term or
condition of such determination or following a stay and review of such
determination pursuant to section 3C(c) of the SEA and Rule 3Ca-1
thereunder; and (2) 30 days after the available-to-trade determination
submission or certification for that SBS is, respectively, deemed
approved under Rule 806 or deemed certified under Rule 807. Paragraph
(b) of Rule 817 also provides that a counterparty may voluntarily
comply with the trade execution requirement sooner than required by
paragraph (a).
---------------------------------------------------------------------------

\318\ Rule 3Ca-1 under the SEA provides that the Commission may
determine, following a submission from a clearing agency, that an
SBS (or a group, category, type, or class of SBS) must be cleared.
This determination could follow a stay of the clearing requirement
for additional review. 17 CFR 240.3Ca-1.
---------------------------------------------------------------------------

The Commission received several comment letters about the
sufficiency of the time period allotted for compliance with a MAT
determination.\319\ One commenter encourages the Commission to provide
an extended duration of time until any MAT determination becomes
effective so that asset managers and other market participants have
adequate time to make the necessary operational and market structure
arrangements to accommodate the trade execution requirement.\320\
Another commenter urges the Commission to ensure that all SBSEFs and
market participants have adequate time to prepare for the operational
and market conditions that come along with a MAT determination.\321\
---------------------------------------------------------------------------

\319\ See Bloomberg Letter, supra note 18, at 16; ICI Letter,
supra note 18, at 8-9; ISDA-SIFMA Letter, supra note 18, at 5, SIFMA
AMG Letter, supra note 18, at 7; WMBAA Letter, supra note 18, at 5.
\320\ See SIFMA AMG Letter, supra note 18, at 7.
\321\ See WMBAA Letter, supra note 18, at 5.
---------------------------------------------------------------------------

Some commenters recommend that a MAT determination not be effective
for at least 90 days.\322\ One commenter emphasizes that, after a MAT
determination, market participants should be provided with sufficient
time to comply with any new trade execution requirement, and that
commenter believes that market participants would benefit from 90 days
to comply.\323\ Another commenter, citing its experience with the MAT
requirement, states that it has observed that 30 days provides
insufficient time to adjust trading protocols and ensure a smooth
transition to trading on SEFs.\324\ In this regard, the commenter asks
the Commission to extend the time between when a MAT determination is
made and when it becomes effective from the proposed 30 days to 90
days. The commenter also asserts that this is consistent with the
recommendations of the CFTC MRAC report that examined the
appropriateness, efficacy, and sustainability of the MAT process.
---------------------------------------------------------------------------

\322\ See Bloomberg Letter, supra note 18, at 16; ICI Letter,
supra note 18, at 8; ISDA-SIFMA Letter, supra note 18, at 5.
\323\ See Bloomberg Letter, supra note 18, at 16.
\324\ See ISDA-SIFMA Letter, supra note 18, at 5.
---------------------------------------------------------------------------

Another commenter also cites the CFTC MRAC's report in recommending
that the Commission provide 90 days after a MAT determination is final
before it becomes effective. This commenter emphasizes that market
participants will need an adequate compliance period after a mandatory
clearing determination is made and after the SBS is first made
available to trade on an SBSEF to prepare. The commenter expresses
concern that, under the proposed approach, if an SBS is made available
to trade fewer than 30 days before a mandatory clearing determination,
then the SBS would be subject to mandatory trading on an SBEF with a
less than 30-day compliance period. This commenter urges the Commission
to clarify that the scope of eligible SBS for MAT determination is
limited to only those that have already been determined to be subject
to mandatory clearing. This commenter also asserts that, even when an
SBS is already subject to mandatory clearing, the proposed 30-day
compliance period would still be inadequate given the complex
operational and technological steps that must be taken to trade a new
SBS on an SBSEF. The commenter states that market participants such as
regulated funds will need time to onboard to an SBSEF if necessary, and
to further update their systems, processes, and procedures to transact
via an SBSEF's order book or RFQ system.\325\
---------------------------------------------------------------------------

\325\ See ICI Letter, supra note 18, at 3, 8.

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

[[Page 87194]]

The Commission has considered commenters' requests for an extended
compliance period for the mandatory trading requirement once a MAT
determination has been made with respect to an SBS. The presence of
ready and willing buyers and sellers and the number and types of market
participants, among other things, are relevant factors in a MAT
determination under Rule 816(b).\326\ As noted above, the extent to
which a MAT determination is likely to be disruptive to the market for
a given SBS is best addressed in the context of making the MAT
determination, which, as discussed above, allows for the Commission
oversight of the determination through its review and approval or
disapproval of a filing under Rule 806, or through staying and seeking
public comment on a self-certification under Rule 807.\327\ Further,
with respect to the suggestion that the Commission clarify that the
scope of eligible SBS for MAT determination is limited to only those
that have already been determined to be subject to mandatory clearing,
a MAT determination filing would not have any relevance until there are
any SBSs subject to the clearing requirement.
---------------------------------------------------------------------------

\326\ See supra section V.F.3.
\327\ See supra section V.F.2.
---------------------------------------------------------------------------

It is not necessary to revise the 30-day period for compliance with
a MAT determination, because the readiness of the market to comply with
a MAT determination for a particular SBS would be relevant to the MAT
determination itself, including the analysis of the six factors
enumerated in Rule 816(b), and because an analysis of that readiness
would best be undertaken based on the facts and circumstances attending
a specific MAT determination.
For the reasons discussed above, the Commission is adopting Rule
817 as proposed.

VI. Implementation of Core Principles

Section 3D(d) of the SEA \328\ sets forth 14 Core Principles with
which SBSEFs must comply. These provisions, with one exception,
correspond to the 15 Core Principles for SEFs set forth in section
5h(f) of the CEA.\329\
---------------------------------------------------------------------------

\328\ 15 U.S.C. 78c-4(d).
\329\ Compare 7 U.S.C. 7b-3(f) (enumerating 15 Core Principles
for SEFs), with 15 U.S.C. 78c-4(d) (enumerating 14 Core Principles
for SBSEFs). CEA Core Principle 6 for SEFs (Position Limits or
Accountability) has no analog in the SEA, so the numbering of the
subsequent Core Principles between the two statutes differs by one.

------------------------------------------------------------------------
Core principle title CEA # SEA #
------------------------------------------------------------------------
Compliance with Core Principles......... 1 1
Compliance with Rules................... 2 2
(Security-Based) Swaps Not Readily 3 3
Susceptible to Manipulation............
Monitoring of Trading and Trade 4 4
Processing.............................
Ability to Obtain Information........... 5 5
Position Limits or Accountability....... 6 n/a
Financial Integrity of Transactions..... 7 6
Emergency Authority..................... 8 7
Timely Publication of Trading 9 8
Information............................
Recordkeeping and Reporting............. 10 9
Antitrust Considerations................ 11 10
Conflicts of Interest................... 12 11
Financial Resources..................... 13 12
System Safeguards....................... 14 13
Designation of Chief Compliance Officer. 15 14
------------------------------------------------------------------------

It continues to be appropriate to closely harmonize with the CFTC
rules that implement the SEF Core Principles, although there are some
instances where close harmonization is not practicable. Where there are
substantive differences between an existing CFTC rule and the SEC rule
being adopted, the discussion below addresses those differences. The
discussion below will also address where there is not, or at least
there is not intended to be, a difference between the SEC rule and the
analogous existing CFTC rule.
Part 37 of the CFTC's rules includes an appendix B, setting forth
``Guidance on, and Acceptable Practices in, Compliance with Core
Principles.'' The introduction to appendix B provides that the guidance
for the Core Principle is illustrative only and ``is not intended to be
used as a mandatory checklist.'' \330\ Where the CFTC has included
guidance and/or accepted practices pertaining to a Core Principle for
SEFs, the discussion below addresses how (if at all) the Commission has
incorporated the substance of these statements into Regulation SE.
---------------------------------------------------------------------------

\330\ 17 CFR appendix-B-to-part-37 1.
---------------------------------------------------------------------------

A. Rule 818--Core Principle 1--Compliance With Core Principles

Core Principle 1 \331\ requires an SBSEF, to be registered and
maintain registration as an SBSEF, and to comply with the Core
Principles and any requirement that the Commission may impose by rule
or regulation. Core Principle 1 also provides that an SBSEF shall have
reasonable discretion in establishing the manner in which it complies
with the Core Principles.\332\ Proposed Rule 818, like Sec. 37.100 of
the CFTC's rules, repeats the relevant statutory text of the Core
Principle.
---------------------------------------------------------------------------

\331\ Section 3D(d)(1) of the SEA, 15 U.S.C. 78c-4(d)(1).
\332\ CEA Core Principle 1 is substantively identical. See 7
U.S.C. 7b-3(f)(1).
---------------------------------------------------------------------------

The Commission received no comments on Proposed Rule 818 and is
adopting Rule 818 as proposed for the reasons stated in the Proposing
Release.

B. Rule 819--Core Principle 2--Compliance With Rules

Core Principle 2 requires an SBSEF to establish and enforce
compliance with any rule that is established by the SBSEF, including
the terms and conditions of the SBS that it trades or processes, and
any limitation on access to the SBSEF.\333\ It further requires the
SBSEF to establish and enforce trading, trade processing, and
participation rules that will deter abuses, and to have the capacity to
detect, investigate, and enforce those rules, including the means to
provide market participants with impartial access to the market and to
capture information that may be used in establishing whether rule
violations have occurred. Finally, Core Principle 2 requires an SBSEF
to establish rules governing the operation of the facility, including
rules specifying trading procedures to be used in entering and
executing orders traded or posted on the

[[Page 87195]]

facility, including block trades. Core Principle 2 for SEFs \334\ is
substantively identical, except that it includes an additional
paragraph requiring a SEF to provide in its rules that, when a swap
dealer or major swap participant enters into or facilitates a swap that
is subject to the mandatory clearing requirement, the swap dealer or
major swap participant shall be responsible for compliance with the
trade execution requirement.\335\
---------------------------------------------------------------------------

\333\ Section 3D(d)(2) of the SEA, 15 U.S.C. 78c-4(d)(2).
\334\ 7 U.S.C. 7b-3(f)(2).
\335\ See 7 U.S.C. 7b-3(f)(2)(D).
---------------------------------------------------------------------------

As described in the Proposing Release, the Commission modeled Rules
819 (a) through (g) on subpart C of part 37 of the CFTC's rules,\336\
and Rules 819 (h) through (k) on other parts of the CFTC's rules.\337\
---------------------------------------------------------------------------

\336\ See Proposing Release, supra note 1, 87 FR at 28901-05.
\337\ See id. at 28905-09.
---------------------------------------------------------------------------

1. Rule 819(a)--General
Paragraph (a) of Proposed Rule 819, like Sec. 37.200 of the CFTC's
rules,\338\ would repeat the statutory text of Core Principle 2.\339\
The Commission did not receive any comments on Proposed Rule 819(a). It
is appropriate to repeat the statutory text of Core Principle 2 in Rule
819(a) and is adopting Rule 819(a) as proposed, except that it is
deleting the words ``including block trades,'' in light of its decision
not to adopt a definition of ``block trade.'' \340\
---------------------------------------------------------------------------

\338\ 17 CFR 37.200; see also Proposing Release, supra note 1,
87 FR at 28901.
\339\ See Proposing Release, supra note 1, 87 FR at 28902.
\340\ See supra section V.E.1(c).
---------------------------------------------------------------------------

2. Rule 819(b)--Operation of Security-Based Swap Execution Facility and
Compliance With Rules
Paragraph (b) of Proposed Rule 819 is closely modeled on Sec.
37.201 of the CFTC's rules,\341\ and would require an SBSEF to specify
trading procedures (including for block trades, if offered) and to
establish and impartially enforce compliance with the rules of the
SBSEF.\342\ The Commission did not receive any comments on Proposed
Rule 819(b). It is appropriate for an SBSEF to specify trading
procedures and to establish and impartially enforce compliance with its
rules, and the Commission is adopting Rule 819(b) as proposed, except
that it is deleting the words ``including block trades, if offered,''
in light of its decision not to adopt a definition of ``block trade,''
\343\ which will have no effect on the requirement as compared to the
proposed rule.
---------------------------------------------------------------------------

\341\ 17 CFR 37.201; see also Proposing Release, supra note 1,
87 FR at 28901.
\342\ See Proposing Release, supra note 1, 87 FR at 28902.
\343\ See supra section V.E.1(c).
---------------------------------------------------------------------------

3. Rule 819(c)--Access Requirements
Paragraph (c) of Proposed Rule 819 is closely modeled on Sec.
37.202 of the CFTC's rules,\344\ and would require an SBSEF, consistent
with section 3D(d)(2)(B)(i) of the SEA,\345\ to provide any ECP and any
independent software vendor with impartial access to its market(s) and
market services, including any indicative quote screens or any similar
pricing data displays. An SBSEF will also be required to establish
nondiscriminatory fee structures for ECPs and independent software
vendors based on the level of access to or services provided by the
SBSEF. Rule 819 further requires an SBSEF to establish and impartially
enforce rules governing any decision to allow, deny, suspend, or
permanently bar an ECP's access to the SBSEF, including when a decision
is made as part of a disciplinary or emergency action taken by the
SBSEF.
---------------------------------------------------------------------------

\344\ 17 CFR 37.202; see also Proposing Release, supra note 1,
87 FR at 28901.
\345\ 15 U.S.C. 78c-4(d)(2)(B)(i) (``a security-based swap
execution facility shall . . . establish and enforce trading, trade
processing, and participation rules that will deter abuses and have
the capacity to detect, investigate, and enforcement those rules,
including means . . . to provide market participants with impartial
access to the market'').
---------------------------------------------------------------------------

Several commenters express general support for the adoption of
impartial access standards for SBSEFs.\346\ One commenter specifically
supports the Commission's close harmonization with CFTC rules.\347\
---------------------------------------------------------------------------

\346\ See Citadel Letter, supra note 18, at 6-7; SIFMA AMG
Letter, supra note 18, at 4; MFA Letter, supra note 18, at 10.
\347\ See MFA Letter, supra note 18, at 10.
---------------------------------------------------------------------------

One commenter expresses support for Proposed Rule 819(c), but
states that the Commission's proposal does not provide market
participants with sufficient clarity regarding how Proposed Rule 819(c)
will be interpreted and applied in practice, and the commenter
encourages the Commission to provide in the final rule that access to
SBSEFs should be based on ``objective, pre-established'' criteria, and
that any ECP should be able to demonstrate financial soundness by
showing that it is a clearing member or that it has clearing
arrangements in place with a clearing member.\348\
---------------------------------------------------------------------------

\348\ See Citadel Letter, supra note 18, at 6-7.
---------------------------------------------------------------------------

This commenter states that the CFTC has provided market
participants with extensive guidance regarding impartial access and
encourages the Commission to provide similar clarity when finalizing
the SBSEF rules, including guidance with respect to membership
criteria, trading protocols and functionality, and fee arrangements.
Specifically, this commenter urges the Commission to provide in the
final rule that an SBSEF may not limit membership to (i) self-clearing
members; (ii) registered security-based swap dealers; (iii) banks or
liquidity providers with a minimum amount of Tier 1 capital; (iv)
liquidity providers that have been ``enabled'' by, or have bilateral
documentation with, a minimum number of other liquidity providers; or
(v) liquidity providers with a minimum amount of transaction
volume.\349\
---------------------------------------------------------------------------

\349\ See Citadel Letter, supra note 18, at 6-7.
---------------------------------------------------------------------------

This commenter also states that SBSEFs should not be permitted to
apply trading protocols in a manner that results in impermissible
discrimination among market participants. Specifically, the commenter
states that SBSEFs should not allow participants to selectively
restrict their trading with other SBSEF participants through
``enablement mechanisms''; that market participants should be permitted
to act as both liquidity providers and liquidity takers on an SBSEF;
that all SBSEF participants should be permitted to both send and
receive RFQs (instead of only designated liquidity providers being
eligible to receive RFQs); and that SBSEFs should not be permitted to
require participants to have bilateral documentation in place to trade
cleared security-based swaps, as this could provide a pretext for some
participants to restrict trading with other participants. This
commenter further states that SBSEFs should not be permitted to use fee
arrangements to effect otherwise impermissible discrimination with
respect to access.\350\
---------------------------------------------------------------------------

\350\ See id.
---------------------------------------------------------------------------

Another commenter also urges the Commission to incorporate the
CFTC's impartial access requirement guidance with respect to SBSEFs,
which would assist market participants in interpreting how the
impartial access rules should work. Coordination of impartial access
``not only affects an entity operating both an SEF and SBSEF but also
their clients, many of whom use the same individual traders to trade
both instrument types.\351\ One commenter specifically encourages the
Commission to address the potential use of restrictive requirements to
obtain access to SBSEFs and to make clear that an SBSEF's reasonable
discretion in establishing access criteria must be impartial,

[[Page 87196]]

transparent, and applied in a fair and nondiscriminatory manner.\352\
---------------------------------------------------------------------------

\351\ See MFA Letter, supra note 18, at 10.
\352\ See SIFMA AMG Letter, supra note 18, at 4.
---------------------------------------------------------------------------

One commenter states that the trading documentation requirement of
Rule 15Fi-5 may at times conflict with the impartial access requirement
of Proposed Rule 819(c) because it is unlikely that all SBSEF members
trading cleared swaps will have trading relationship documentation with
all other members trading cleared SBS.\353\ This commenter encourages
the Commission to adopt the CFTC guidance regarding enablement
mechanisms and states that such mechanisms were historically used to
eliminate credit risk, but that no such risk exists if an SBSEF
intended to be cleared is void ab initio if rejected for clearing.
---------------------------------------------------------------------------

\353\ See Bloomberg Letter, supra note 18, at 3-4.
---------------------------------------------------------------------------

The Commission agrees with commenters that impartial access to an
SBSEF encompasses both impartial access to membership in an SBSEF and
the ability to fully interact on the SBSEF's order book or RFQ system,
and that an SBSEF's rules must incorporate impartial criteria for this
access. The Commission expects that most, if not all, entities that
will seek SBSEF registration with the SEC are or will also be
registered as SEFs with the CFTC and that ensuring consistency of
access to SBSEFs and SEFs will provide market participants with greater
certainty about permissible practices regarding access to these
platforms.\354\ Efforts to undermine the principle of impartial access
may take myriad forms over time. The text of Rule 819(c) is consistent
with the text of Sec. 37.202 of the CFTC's regulations and emphasizes
the general principal that access to an SBSEF and its services must be
impartial. The Commission does not find it necessary to describe within
819(c) specific practices that would violate its requirements. For the
purposes of the Commission's review process for a denial or limitation
of access or membership that is inconsistent with Rule 918(c), the
Commission will apply a standard of review consistent with standards of
review that the Commission uses in similar contexts.\355\
---------------------------------------------------------------------------

\354\ See Proposing Release, supra note 1, 87 FR at 28876.
\355\ See Rule 819(c)(4). The Commission is adopting Rule 819(c)
with the addition of paragraph (c)(4). The Commission notes that the
CFTC has a standard of review applicable to its process. See 17 CFR
9.2(c); 17 CFR 9.33(c).
---------------------------------------------------------------------------

The Commission is aware of the CFTC staff guidance on impartial
access related to Sec. 37.202 of the CFTC's regulations.\356\ The
Commission finds it is appropriate to similarly provide guidance as to
certain criteria or practices that are inconsistent with Rule 819(c)'s
requirement to provide impartial access. The Commission agrees that it
is inconsistent with providing impartial access for an SBSEF to limit
membership based on an ECP's status, such as by limiting membership to
(1) self-clearing members; (2) registered security-based swap dealers;
(3) banks or liquidity providers with a minimum amount of Tier 1
capital; (4) liquidity providers that have been ``enabled'' by, or have
bilateral documentation with, a minimum number of other liquidity
providers; or (5) liquidity providers with a minimum amount of
transaction volume.\357\ Access to an SBSEF generally should be
determined, for example, on an SBSEF's ``impartial evaluation of an
applicant's disciplinary history and financial and operational
soundness against objective, pre-established criteria.'' \358\ As one
example of such criteria, any ECP should be able to demonstrate
financial soundness either by showing that it is a clearing member of a
clearing agency that clears products traded on that SBSEF or by showing
that it has clearing arrangements in place with such a clearing
member.\359\
---------------------------------------------------------------------------

\356\ See Division of Clearing and Risk, Division of Market
Oversight and Division of Swap Dealer and Intermediary Oversight
Guidance on Application of Certain Commission Regulations to Swap
Execution Facilities, CFTC (Nov. 14, 2013), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/dmostaffguidance111413.pdf.
\357\ See Citadel Letter, supra note 18, at 6. Membership
requirements based on any combination of these factors would
similarly be inconsistent with providing impartial access.
\358\ See 2013 CFTC Final SEF Rules Release, supra note 9, at 78
FR at 33598 (discussing ``impartial access'' to swap execution
facilities).
\359\ See id. Similarly, it is not consistent with impartial
access for an SBSEF to require that an ECP have clearing
arrangements in order to trade security-based swaps that are not
intended to be cleared. In such a case, the SBSEF's standards of
financial soundness should be objective and impartial and should
have a relevant relationship to trading on the SBSEF.
---------------------------------------------------------------------------

Further, providing impartial access as required by Proposed Rule
819(c) means providing all of an SBSEF's market participants--dealers
and non-dealers alike--with the ability to fully interact on the order
book or RFQ system as liquidity providers, liquidity takers, or both,
including viewing, placing, or responding to all indicative or firm
bids and offers and to place, receive, and respond to RFQs. Therefore,
it would be incompatible with impartial access for an SBSEF's rules to
permit mechanisms, schemes, functionalities, counterparty filters, or
other arrangements that prevent an SBSEF participant from interacting
or trading with, or viewing the bids and offers (firm or indicative)
displayed by, any other market participant on that SBSEF, whether by
means of any condition or restriction on its ability or authority to
display a quote to any other market participant or to respond to any
quote issued by any other market participant on that SBSEF with respect
to security-based swap transactions that are intended to be cleared.
It is also inconsistent with impartial access for an SBSEF's rules
to require bilateral documentation or to permit bilateral enablements
in order to trade security-based swaps that are intended to be cleared,
because providing for such documentation or enablements solely to
address occasional trade rejections by a clearing agency would undercut
the ability of all ECPs to post or interact with interest on security-
based swaps that are intended to be cleared, and because such
documentation or enablements are unnecessary in light of the provisions
of Rule 815(g), which, as discussed supra section V.E.7, would require
an SBSEF's rules to provide that a trade that is intended to be cleared
at the time of the transaction, but is not accepted for clearing by a
registered clearing agency, is void ab initio. Providing that such
trades are void ab initio also reflects the economic reality that an
uncleared transaction is significantly different from a cleared
transaction in terms of the credit risk faced by the counterparties.
Lastly, it is inconsistent with impartial access for an SBSEF to employ
fee structures that would have a disproportionate or adverse effect on
certain market participants based on their status, as described
above,\360\ with respect to the ability to fully interact on the order
book or RFQ system as liquidity providers, liquidity takers, or both,
including viewing, placing, or responding to all indicative or firm
bids and offers and to place, receive, and respond to RFQs.
---------------------------------------------------------------------------

\360\ See supra note 357 and accompanying text.
---------------------------------------------------------------------------

With respect to the comment that the documentation requirements of
Rule 15Fi-5 may, at times, conflict with the impartial access
requirement of Proposed Rule 819(c), no such conflict exists, because
Rule 15Fi-5(a)(1)(ii) provides that the rule does not apply to cleared
swaps, and Rule 15Fi(a)(1)(iii) further provides that the rule does not
apply to security-based swap transactions executed anonymously on an
SBSEF or a national securities

[[Page 87197]]

exchange, provided that certain conditions are met.\361\
---------------------------------------------------------------------------

\361\ See 17 CFR 240.15Fi-5(a)(1)(ii) and (iii). Rule 15Fi-
5(a)(1)(iii) provides in part that SBSs executed anonymously on an
SEF or a national securities exchange are exempt from the provisions
of Rule 15Fi-5, provided that: (1) the SBSs are intended to be
cleared and are actually submitted for clearing to a clearing
agency; (2) all terms of the SBSs conform to the rules of the
clearing agency; and (3) upon acceptance of such an SBS by the
clearing agency the original SBS is extinguished; the original SBS
is replaced by equal and opposite SBS with the clearing agency; and
all terms of the SBS conform to the product specifications of the
cleared SBS established under the clearing agency's rules. See 17
CFR 240.15Fi-5(a)(1)(iii).
---------------------------------------------------------------------------

4. Rule 819(d)--Rule Enforcement Program
Paragraph (d) of Proposed Rule 819 is closely modeled on Sec.
37.203. Paragraph (d)(1) of Proposed Rule 819 would require an SBSEF to
prohibit abusive trading practices generally, enumerating certain
practices in particular.\362\ Paragraph (d)(2) would require an SBSEF
to have arrangements and resources for effective enforcement of its
rules, including the authority to collect information and documents on
both a routine and non-routine basis and to supervise its market to
determine whether a rule violation has occurred. Paragraph (d)(3) would
require an SBSEF to establish and maintain sufficient compliance staff
and resources to ensure that it can conduct effective audit trail
reviews, trade practice surveillance, market surveillance, and real-
time market monitoring. Paragraph (d)(4) would require an SBSEF to
maintain an automated trade surveillance system that meets certain
criteria. Paragraph (d)(5) would require real-time market monitoring of
all trading activity on the SBSEF. The SBSEF would also be required to
have the authority to adjust trade prices or cancel trades when
necessary to mitigate market disrupting events caused by malfunctions
in its system(s) or platform(s) or errors in orders submitted by
members. Paragraph (d)(6) is modeled on Sec. 37.203(f), again using
the same structure and rule text. Like Sec. 37.203(f), Rule 819(d)(6)
addresses investigations and investigation reports and includes
provisions relating to procedures, timeliness, the reporting
requirements when a reasonable basis does or does not exist for finding
a violation, and warning letters.\363\
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\362\ To promote uniformity throughout proposed Regulation SE,
it is appropriate to denote all persons who have a right to
participate in an SBSEF's market as ``members.''
\363\ Rule 819(d)(6)(v) provides that the rules of an SBSEF may
authorize its compliance staff to issue a warning letter to a person
or entity under investigation or to recommend that a disciplinary
panel take such an action, and that no more than one warning letter
could be issued to the same person or entity found to have committed
the same rule violation within a rolling 12-month period.
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The Commission did not receive any comments on Rule 819(d) and is
adopting Rule 819(d) as proposed, except that, in light of its decision
not to adopt a definition of ``block trade,'' \364\ the Commission is
deleting the words ``block trades or other types of'' from the phrase
``pre-arranged trading (except for block trades or other types of
transactions approved by or certified to the Commission pursuant to
Sec. 242.806 or Sec. 242.807, respectively).'' While the deletion of
this text would remove an automatic exemption for block trades from the
prohibition against pre-arranged trading that an SBSEF's rules would be
required to include, it is appropriate given that a definition of block
trade has not been adopted. At such time as the Commission adopts a
definition of block trade, an SBSEF could submit a rule change under
Rule 806 or Rule 807 to address trades that meet the definition of
block trade.
---------------------------------------------------------------------------

\364\ See supra section V.E.1(c).
---------------------------------------------------------------------------

5. Rule 819(e)--Regulatory Services Provided by a Third Party
Paragraph (e) of Proposed Rule 819 is modeled on Sec. 37.204 and
would allow an SBSEF to contract with a regulatory services provider.
If it does so, the SBSEF would have to ensure that such provider has
the capacity and resources necessary to provide timely and effective
regulatory services, retain sufficient compliance staff to supervise
the quality and effectiveness of the regulatory services provided on
its behalf, hold regular meetings with the regulatory service provider,
and conduct periodic reviews of the adequacy and effectiveness of
services provided on its behalf. The SBSEF would at all times remain
responsible for the performance of any regulatory services received and
retain exclusive authority in all substantive decisions made by its
regulatory service provider.
One commenter states that SBSEFs should be able to use regulatory
service providers and that the types of regulatory service providers
permitted under Proposed Rule 819(e)(1) are appropriate.\365\ Another
commenter also supports the use of regulatory service providers but
believes that the Commission should include DCMs among the types of
entities permitted to act as regulatory service providers, as they are
``uniquely qualified'' and are permitted to act as regulatory service
provider under the CFTC SEF regime.\366\ This commenter states that
DCMs have well-established regulatory protocols and are subject to CFTC
oversight, conduct regulatory activities similar to registered futures
associations, have developed expertise in securities markets, and are
permitted to list futures on individual stocks and to list swap
contracts for trading.\367\
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\365\ See Bloomberg Letter, supra note 18, at 16.
\366\ See ICE Letter, supra note 18, at 3.
\367\ See id. at 3-4 (also stating that, for example, ICE
Futures U.S., Inc. is a DCM that provides regulatory services to
SEFs).
---------------------------------------------------------------------------

The Commission agrees that SBSEFs should be able to contract with
DCMS for the provision of regulatory services. As the commenter states,
DCMs have well-established regulatory protocols and are subject to CFTC
oversight, and they are permitted to act as regulatory service
providers for SEFs. Additionally, permitting an SBSEF to use the same
regulatory service provider as an affiliated SEF may create
efficiencies for both the SBSEF and SEF, while maintaining regulatory
oversight of the entity that is providing the regulatory services.
While the CFTC's regulation for SEFs does not contain a reciprocal
provision permitting national securities exchanges to perform
regulatory services for SEFs, harmonization in practical terms with
this aspect of the CFTC regime--i.e., so that DCMs can perform
regulatory services for both SBSEFs and SEFs--is appropriate in light
of the relative size of the SBSEF market compared to the swaps market
and because most if not all entities that will seek to register as
SBSEFs are already registered as SEFs. Significantly, regardless of the
type of entity acting as regulatory service provider for an SBSEF, the
SBSEF will at all times remain responsible for the performance of any
regulatory services received and retain exclusive authority in all
substantive decisions made by its regulatory service provider.
Accordingly, the Commission is adopting Rule 819(e) as amended to
permit SBSEFs to contract with DCMs for the provision of services to
assist in complying with the SEA and Commission rules thereunder, as
approved by the Commission.\368\
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\368\ Specifically, the Commission is adding to Rule 819(e) the
language ``a board of trade designated as a contract market (under
section 5 of the Commodity Exchange Act)''--in other words, a DCM--
to the list of entities with which an SBSEF may enter into a
contract for the provision of regulatory services.
---------------------------------------------------------------------------

6. Rule 819(f)--Audit Trail
Paragraph (f) of Proposed Rule 819 is modeled on Sec. 37.205,
using the same paragraph structure and rule text. Paragraph (f) would
require an SBSEF to

[[Page 87198]]

capture and retain all audit trail data necessary to detect,
investigate, and prevent customer and market abuses, and imposes other
requirements on the SBSEF's audit trail pertaining to the records that
must be kept, electronic analysis capability, safe-storage capability,
and enforcement of the audit trail requirements.
The Commission did not receive any comments on Proposed Rule
819(f). An audit trail is a crucial component of a trading venue's
ability to ensure compliance with its rules. These requirements should
be modeled on the parallel CFTC regulations regarding SEFs, as most, if
not all, entities that will register as SBSEFs will be SEFs registered
with the CFTC, and that consistent requirements will promote a
consistent approach to compliance. Accordingly, the Commission is
adopting Rule 819(f) as proposed, with minor technical
modifications.\369\
---------------------------------------------------------------------------

\369\ The Commission has corrected a reference to Core Principle
9 and corrected the phrase ``account(s) owner(s)'' to read
``account's owner(s).''
---------------------------------------------------------------------------

7. Rule 819(g)--Disciplinary Procedures and Sanctions
Paragraph (g) of Proposed Rule 819 is based on Sec. 37.206 of the
CFTC's rules and generally tracks all of its rule text but would
include additional language derived from guidance in appendix B of part
37 of the CFTC's rules. Converting the guidance to rule text, and thus
grouping conceptually related items together, yields the most coherent
and readable ruleset, instead of incorporating the guidance into a
stand-alone section of the rules. Accordingly, paragraph (g)(1)(i) of
Proposed Rule 819 is taken from Sec. 37.206(a) and would require an
SBSEF to establish and maintain sufficient enforcement staff and
resources to effectively and promptly prosecute possible rule
violations within the disciplinary jurisdiction of the SBSEF.
Paragraphs (g)(1)(ii) through (iv) are taken from the appendix B
guidance and would provide, respectively, that:
The enforcement staff of an SBSEF shall \370\ not include
members or other persons whose interests conflict with their
enforcement duties.
---------------------------------------------------------------------------

\370\ In this bullet and the next bullet, the word used in the
corresponding CFTC guidance was ``should,'' but the Commission
proposed to replace ``should'' with ``shall'' in both places to
convert the guidance into an enforceable rule.
---------------------------------------------------------------------------

A member of the enforcement staff shall not operate under
the direction or control of any person or persons with trading
privileges at the SBSEF.
The enforcement staff of an SBSEF may operate as part of
the SBSEF's compliance department.
Paragraph (g)(2) of Rule 819 is modeled on Sec. 37.206(b) and
would require an SBSEF to establish one or more disciplinary panels
that are authorized to fulfill their obligations under Proposed Rule
819. Section 37.206(b) provides that disciplinary panels must meet the
composition requirements of part 40. To help ensure fairness and
prevent special treatment or preference of any person or member and to
provide for consistency in the makeup of members of SBSEF major
disciplinary committees and hearing panels, the Commission proposed
instead to require the disciplinary panels established under Proposed
Rule 819(g)(2) to meet the composition requirements of Rule 834(d),
which apply to each major disciplinary committee and hearing panel of
an SBSEF.\371\
---------------------------------------------------------------------------

\371\ Proposed Rule 834(d) would require each SBSEF and SBS
exchange to ensure that its disciplinary processes preclude any
member, or group or class of its members, from dominating or
exercising disproportionate influence on the disciplinary process,
and that each major disciplinary committee or hearing panel include
sufficient different groups or classes of its members so as to
ensure fairness and to prevent special treatment or preference for
any person or member in the conduct of the responsibilities of the
committee or panel. See infra section VIII.
---------------------------------------------------------------------------

Paragraphs (g)(3) through (8) of Proposed Rule 819 have no parallel
in Sec. 37.206 itself but derive from the guidance in appendix B
pertaining to Sec. 37.206, following the paragraph structure and
wording of the guidance closely. Paragraph (g)(3) would impose
procedural requirements relating to the notice of charges made to a
respondent. Paragraph (g)(4) would provide that a respondent has a
right to representation. Paragraph (g)(5) would provide that a
respondent must be given adequate time to respond to any charges.
Paragraph (g)(6) would state that the rules of an SBSEF may provide
that, if a respondent admits or fails to deny any of the charges, a
disciplinary panel may find that the violations alleged in the notice
of charges have been committed. Paragraph (g)(6) would further state
that, if the SBSEF's rules so provide, then: (i) The disciplinary panel
may impose a sanction for each violation found to have been committed;
(ii) The disciplinary panel shall promptly notify the respondent in
writing of any sanction to be imposed and shall advise the respondent
that the respondent may request a hearing on such sanction within the
period of time, which shall be stated in the notice; and (iii) The
rules of the SBSEF may provide that, if a respondent fails to request a
hearing within the period of time stated in the notice, the respondent
will be deemed to have accepted the sanction.
Paragraph (g)(7) of Proposed Rule 819 would provide that, where a
respondent has requested a hearing on a charge that is denied, or on a
sanction set by the disciplinary panel, the respondent shall be given
an opportunity for a hearing in accordance with the rules of the SBSEF.
Paragraph (g)(8) would address settlement offers.
Paragraph (g)(9) of Proposed Rule 819 returns to the text of Sec.
37.206(c) for provisions regarding hearings. Paragraph (g)(9)(i) is
modeled on Sec. 37.206(c)(1) and would require an SBSEF to have rules
requiring a hearing to be fair, conducted before members of the
disciplinary panel, and promptly convened after reasonable notice to
the respondent. The Commission proposed an additional provision, which
derives from the guidance, that an SBSEF need not apply the formal
rules of evidence for a hearing; nevertheless, the procedures for the
hearing may not be so informal as to deny a fair hearing.
Paragraphs (g)(9)(ii) through (vi) of Proposed Rule 819 are also
adapted from the guidance in appendix B of part 37. Paragraph
(g)(9)(ii) would bar a member of the disciplinary panel for the hearing
from having a financial, personal, or other direct interest in the
matter under consideration. Paragraph (g)(9)(iii) would address the
respondent's access to evidence in the SBSEF's possession. Paragraph
(g)(9)(iv) would provide that the SBSEF's enforcement and compliance
staffs shall \372\ be parties to the hearing, and the enforcement staff
shall present their case on those charges and sanctions that are the
subject of the hearing. Paragraph (g)(9)(v) would provide that the
respondent shall be entitled to appear personally at the hearing, to
cross-examine any persons appearing as witnesses at the hearing, to
call witnesses, and to present such evidence as may be relevant to the
charges. Paragraph (g)(9)(vi) would provide that the SBSEF shall
require persons within its jurisdiction who are called as witnesses to
participate in the hearing and produce evidence.
---------------------------------------------------------------------------

\372\ The CFTC's guidance in appendix B that is adapted into
paragraphs (g)(9)(ii) through (vi) of Proposed Rule 819 uses the
word ``should'' here and in other similar instances. The Commission
uses the word ``shall'' in such instances instead.
---------------------------------------------------------------------------

Paragraph (g)(9)(vii) of Proposed Rule 819 is modeled on the text
of Sec. 37.206(c)(2) and would require that, if the respondent has
requested a hearing, a copy of the hearing shall be made and shall
become a part of the record of the proceeding. Paragraph (g)(9)(vii)
would not require the record to be transcribed

[[Page 87199]]

unless the transcript is requested by Commission staff or the
respondent, the decision is appealed pursuant to the rules of the
SBSEF, or the decision is reviewed by the Commission pursuant to Sec.
201.442.\373\ In all other instances, a summary record of a hearing is
permitted.
---------------------------------------------------------------------------

\373\ See infra section XIV.E (discussing Rule 442, which
establishes the right to appeal to the Commission certain actions
taken by an SBSEF and sets out certain procedural matters relating
to any such appeal).
---------------------------------------------------------------------------

Paragraph (g)(10) of Proposed Rule 819 is modeled on Sec.
37.206(d) and would provide that, promptly following a hearing
conducted in accordance with the rules of the SBSEF, the disciplinary
panel shall render a written decision based upon the weight of the
evidence contained in the record of the proceeding and shall provide a
copy to the respondent. The written decision must include six
enumerated elements, all of which are closely modeled on those in Sec.
37.206(d).
Paragraph (g)(11) of Proposed Rule 819 would address emergency
disciplinary actions and is drawn from the guidance in appendix B of
part 37. It would provide that an SBSEF may impose a sanction,
including suspension, or take other summary action against a person or
entity subject to its jurisdiction upon a reasonable belief that such
immediate action is necessary to protect the best interest of the
market place. Furthermore, any emergency disciplinary action would have
to be taken in accordance with an SBSEF's procedures that provide for
notice (if practicable), rights for representation in all proceedings,
an opportunity for a hearing as soon as reasonably practicable, and the
rendering of a written decision promptly following the hearing based
upon the weight of the evidence contained in the record. Proposed Rule
819(g)(11) would seek to balance the need to allow an SBSEF to take
summary action against the need to afford due process to
respondents.\374\
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\374\ Compare Proposed Rule 819(g)(11)(i) (allowing an SBSEF to
impose a sanction, including suspension, or take other summary
action against a person or entity subject to its jurisdiction upon a
reasonable belief that such immediate action is necessary to protect
the best interest of the market place), with Proposed Rule
819(g)(11)(ii)(A) (providing that, if practicable, a respondent
should be served with a notice before the action is taken, or
otherwise at the earliest possible opportunity).
---------------------------------------------------------------------------

Paragraph (g)(12) of Proposed Rule 819 also is drawn from the
appendix B guidance and would provide that, if the rules of the SBSEF
permit appeals,\375\ the SBSEF shall establish an appellate panel that
is authorized to hear appeals. The composition of the panel would have
to be consistent with Rule 834(d) \376\ and could not include any
members of the SBSEF's compliance staff or any person involved in
adjudicating any other stage of the same proceeding. Promptly following
the appeal or review proceeding, the appellate panel would be required
to issue a written decision and to provide a copy to the respondent. As
to the Commission's process of reviewing disciplinary actions, the
Commission will apply a standard of review consistent with standards of
review that the Commission uses in similar contexts.\377\
---------------------------------------------------------------------------

\375\ Neither Sec. 37.206 nor the associated guidance from
appendix B requires a SEF to allow appeals. The guidance states,
rather, that a SEF's rules ``may permit'' appeals and includes
certain procedural requirements only if the rules of a swap
execution facility permit appeals. The Commission adhered to this
permissive approach in the proposal but sought comment on whether
the final rules should require an SBSEF to create an appeals
procedure.
\376\ See infra section VIII.D.
\377\ See Rule 819(g)(14); see also supra note 355.
---------------------------------------------------------------------------

Paragraph (g)(13) of Proposed Rule 819 is adapted partly from Sec.
37.206(e) and partly from the appendix B guidance. Paragraph (g)(13)(i)
is drawn from Sec. 37.206(e) and would provide that all disciplinary
sanctions imposed by an SBSEF or its disciplinary panels shall be
commensurate with the violations committed and shall be clearly
sufficient to deter recidivism or similar violations by other members.
All disciplinary sanctions, including sanctions imposed pursuant to an
accepted settlement offer, would have to take into account the
respondent's disciplinary history. In the event of demonstrated
customer harm, any disciplinary sanction would have to include full
customer restitution, except where the amount of restitution or to whom
it should be provided cannot be reasonably determined. Paragraph
(g)(13)(i) is adapted from the appendix B guidance and would allow an
SBSEF to adopt a summary fine schedule for violations of rules relating
to the failure to timely submit accurate records required for clearing
or verifying each day's transactions.
The Commission received no comments on Proposed Rule 819(g) and,
apart from the addition of paragraph (g)(14) regarding Commission
review,\378\ is adopting Rule 819(g) as proposed for the reasons stated
in the Proposing Release.
---------------------------------------------------------------------------

\378\ See supra note 377 and accompanying text.
---------------------------------------------------------------------------

8. Rule 819(h)--Activities of Security-Based Swap Execution Facility's
Employees, Governing Board Members, Committee Members, and Consultants
Paragraph (h) of Proposed Rule 819 would generally prohibit persons
who are employees of an SBSEF, or who otherwise might have access to
confidential information because of their role with the SBSEF, from
improperly utilizing that information. Proposed Rule 819(h) is modeled
on Sec. 1.59 of the CFTC's rules, which requires a SEF (among other
CFTC-regulated entities) to place restrictions on trading by its
governing board members, committee members, consultants, and employees
and to prohibit any such person from disclosing any material, non-
public information obtained as a result of their official duties with
the SRO.
Paragraph (h)(2)(i) of Proposed Rule 819 would require an SBSEF to
maintain in effect rules that, at a minimum, prohibit an employee of
the SBSEF from trading, directly or indirectly, any ``covered
interest.'' Proposed Rule 819(h)(1)(i) would define ``covered
interest'' to mean, with respect to an SBSEF: an SBS that trades on the
SBSEF; a security of an issuer that has issued a security that
underlies an SBS that is listed on the SBSEF; or a derivative based on
a security that falls within the immediately preceding prong. The
opportunity to observe order submission and trading in an SBS on an
SBSEF could yield material non-public information about the future
performance not just of that SBS, but of all securities issued by that
entity.\379\
---------------------------------------------------------------------------

\379\ The single-name CDS market, in particular, is a market for
assessing the creditworthiness of particular issuers. Non-public
information derived from activity on the SBSEF pertaining to the
market's assessment of an issuer's creditworthiness is likely to be
material to the markets for that issuer's cash securities as well as
to markets for derivatives based on the issuer's cash securities
(e.g., single-stock options).
---------------------------------------------------------------------------

Paragraph (h)(2)(ii), modeled on Sec. 1.59(b)(1)(ii), would
prohibit an SBSEF employee from disclosing to any other person any
material non-public information that the employee obtains as a result
of their employment at the SBSEF, and where the employee has or should
have a reasonable expectation that the information disclosed may assist
another person in trading any covered interest. In addition, paragraph
(h)(2)(ii), like Sec. 1.59(b)(1)(ii), would provide an exception for
disclosures made in the course of an employee's duties, or disclosures
made to another SBSEF, court of competent jurisdiction, or
representative of any agency or department of the Federal or State

[[Page 87200]]

government acting in their official capacity.
Paragraph (h)(3) of Proposed Rule 819, modeled on Sec. 1.59(b)(2),
would allow an SBSEF to adopt rules setting forth circumstances under
which exemptions from the employee trading prohibition may be granted.
In particular, paragraph (h)(3) would include the following possible
carve-outs from the employee trading prohibition: (1) participation by
an employee in a ``pooled investment vehicle'' where the employee has
no direct or indirect control with respect to transactions executed for
or on behalf of such vehicle; (2) trading by an employee in a
derivative based on such a pooled investment vehicle; (3) trading by an
employee in a derivative based on an index in which no covered interest
constitutes more than 10% of the index; and (4) trading by an employee
under circumstances enumerated in rules which the SBSEF determines are
not contrary to applicable law, the public interest, or just and
equitable principles of trade.\380\
---------------------------------------------------------------------------

\380\ The first and the fourth carve-outs listed above are
comparable to those listed in Sec. 1.59(b)(2). The Commission
proposed to include the second and third carve-outs to permit an
SBSEF employee to trade derivatives that provide indirect exposure
to a covered interest where the exposure to the covered interest is
sufficiently diluted. In such cases, it would be unlikely that the
employee would be using material non-public information about the
covered interest to gain an unfair advantage when trading the
derivative.
---------------------------------------------------------------------------

The first and the fourth carve-outs listed above are comparable to
those listed in Sec. 1.59(b)(2). The Commission proposed to include
the second and third carve-outs to permit an SBSEF employee to trade
derivatives that provide indirect exposure to a covered interest where
the exposure to the covered interest is sufficiently diluted.\381\ In
such cases, it would be unlikely that the employee would be using
material non-public information about the covered interest to gain an
unfair advantage when trading the derivative. The Commission proposed
to depart from the CFTC definition of ``pooled investment vehicle''
\382\ to adapt it for the SBS and securities markets. Rule (h)(1)(ii)
defines ``pooled investment vehicle'' to mean an investment company
registered under the Investment Company Act of 1940 in which no covered
interest constitutes more than 10% of the investment company's assets.
Thus, under this definition, if an SBSEF were to list a single-name CDS
on company XYZ, a ``pooled investment vehicle'' would include a broad-
based mutual fund or ETF that contains a security issued by company
XYZ, assuming that the XYZ security does not exceed 10% of the fund's
holdings. The 10% limit on a covered interest's composition of the fund
is designed to permit SBSEF employees to trade most index-based mutual
funds and ETFs that contain covered interests, except those where a
component of the fund becomes sufficiently large that material non-
public information about an issuer derived from activity on the SBSEF
could provide an unfair advantage to an SBSEF employee when trading
that fund.
---------------------------------------------------------------------------

\381\ See Proposing Release, supra note 1, 87 FR at 28905.
\382\ See Sec. 1.59(a)(10) (defining ``pooled investment
vehicle'' to mean ``a trading vehicle organized and operated as a
commodity pool within the meaning of Sec. 4.10(d) of this chapter,
and whose units of participation have been registered under the
Securities Act of 1933, or a trading vehicle for which Sec. 4.5 of
this chapter makes available relief from regulation as a commodity
pool operator, i.e., registered investment companies, insurance
company separate accounts, bank trust funds, and certain pension
plans'').
---------------------------------------------------------------------------

Finally, under Proposed Rule 819(h)(3)--as with Sec. 1.59(b)(2)--
the exemptions from the trading restrictions would not be automatically
available to SBSEF employees. Proposed Rule 819(h)(3) would still
require the SBSEF to adopt rules that set forth circumstances under
which exemptions from the trading prohibition may be granted.
Furthermore, Proposed Rule 819(h)(3), which is modeled on Sec.
1.59(b)(2), would state that any exemption must be administered by the
SBSEF ``on a case-by-case basis.''
Paragraph (h)(4) of Proposed Rule 819, like Sec. 1.59(d), would
address prohibited conduct not just by employees of an SBSEF, but also
of governing board members, committee members, and consultants of the
SBSEF. Paragraph (h)(4)(i)(A) is modeled on Sec. 1.59(d)(1)(i) and
would prohibit any employee, governing board member, committee member,
or consultant of the SBSEF from trading for their own account, or for
or on behalf of any other account, in any covered interest on the basis
of any material, non-public information obtained through special access
related to the performance of their official duties as an employee,
governing board member, committee member, or consultant. Paragraph
(h)(4)(i)(B), modeled on Sec. 1.59(d)(1)(ii), would prohibit any
employee, governing board member, committee member, or consultant of
the SBSEF from disclosing for any purpose inconsistent with the
performance of their official duties as an employee, governing board
member, committee member, or consultant any material, non-public
information obtained through special access related to the performance
of those duties. Paragraph (h)(4)(ii), modeled on Sec. 1.59(d)(2),
would provide that no person shall trade for their own account, or for
or on behalf of any other account, in any covered interest on the basis
of any material, non-public information that the person knows was
obtained in violation of paragraph (h)(4) of this section from an
employee, governing board member, committee member, or consultant.
The Commission received no comments on Proposed Rule 819(h) and is
adopting Rule 819(h) as proposed, with minor technical
modifications,\383\ for the reasons stated in the Proposing Release.
---------------------------------------------------------------------------

\383\ See supra note 32.
---------------------------------------------------------------------------

9. Rule 819(i)--Service on Security-Based Swap Execution Facility
Boards or Committees by Persons With Disciplinary Histories
Paragraph (i) of Proposed Rule 819 would bar persons with specified
disciplinary histories from serving on the governing board or
committees of an SBSEF and would impose certain other duties on the
SBSEF associated with that fundamental requirement. Rule 819(i) is
modeled on Sec. 1.63 of the CFTC's rules, which imposes similar
requirements in connection with SEFs and certain other entities.
Paragraph (i) of Proposed Rule 819 is closely modeled on Sec.
1.63. Paragraph (i)(1), like Sec. 1.63(b), would require an SBSEF to
maintain rules \384\ that render a person ineligible to serve on its
disciplinary committees,\385\ arbitration

[[Page 87201]]

panels, oversight panels,\386\ or governing boards if that person falls
into any of six enumerated criteria, all of which are modeled closely
on the criteria in Sec. 1.63(b).\387\ Paragraph (i)(2), modeled on
Sec. 1.63(c), would impose a direct bar on any person from serving on
a disciplinary committee, arbitration panel, oversight panel, or
governing board of an SBSEF if that person meets any of the six
criteria enumerated in Rule 819(i)(1). Paragraph (i)(3), modeled on
Sec. 1.63(d), would require an SBSEF to submit to the Commission a
schedule listing the rule violations that constitute disciplinary
offenses that would trigger the bar and, to the extent necessary to
reflect revisions, would have to submit an amended schedule within 30
days of the end of each calendar year. The SBSEF would be required to
maintain and keep current this schedule and post it on its website so
that it is in a public place designed to provide notice to members and
otherwise ensure its availability to the general public. Paragraph
(i)(4), like Sec. 1.63(e), would require an SBSEF to submit to the
Commission within 30 days of the end of each calendar year a certified
list of any persons who have been removed from its disciplinary
committees, arbitration panels, oversight panels, or governing board
pursuant to Rule 819(i) during the prior year. Paragraph (i)(5),
modeled on Sec. 1.63(f), would provide that, whenever an SBSEF finds
by final decision that a person has committed a disciplinary offense
and that finding makes the person ineligible to serve on that SBSEF's
disciplinary committees, arbitration panels, oversight panels, or
governing board, the SBSEF shall inform the Commission of that finding
and the length of the ineligibility, in a form and manner specified by
the Commission.
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\384\ Section 1.63(b), in relevant part, requires a SEF to
maintain rules that have been submitted to the CFTC pursuant to
section 5c(c) of the CEA and part 40 of the CFTC's rules. As noted
above, the Commission proposed to adapt Sec. Sec. 40.5 (Voluntary
submission of rules for Commission review and approval) and 40.6
(Self-certification of rules) into Proposed Rules 806 and 807,
respectively. Therefore, Proposed Rule 819(i)(1) would require an
SBSEF to maintain in effect rules that have been submitted to the
Commission pursuant to Rule 806 or Rule 807.
\385\ Proposed Rule 802 would define ``disciplinary committee''
as any person or committee of persons, or any subcommittee thereof,
that is authorized by an SBSEF or SBS exchange to issue disciplinary
charges, to conduct disciplinary proceedings, to settle disciplinary
charges, to impose disciplinary sanctions, or to hear appeals
thereof in cases involving any violation of the rules of the SBSEF
or SBS exchange, except those cases where the person or committee is
authorized summarily to impose minor penalties for violating rules
regarding decorum, attire, the timely submission of accurate records
for clearing or verifying each day's transactions, or other similar
activities. The CFTC rules contain two slightly different
definitions of ``disciplinary committee'' that appear in Sec.
1.63(a)(2) and Sec. 1.69(a)(1), respectively. Because the
definition in Sec. 1.69(a)(1) is more comprehensive, the Commission
has modeled its definition of ``disciplinary committee'' on Sec.
1.69(a)(1) rather than on Sec. 1.63(a)(2). The Commission is
locating the definition in Rule 802, since the term is used by
multiple rules in Regulation SE.
\386\ Proposed Rule 802 would define ``oversight panel'' as any
panel, or any subcommittee thereof, authorized by an SBSEF or SBS
exchange to recommend or establish policies or procedures with
respect to the surveillance, compliance, rule enforcement, or
disciplinary responsibilities of the SBSEF or SBS exchange. The
CFTC's definitions of ``oversight panel'' are contained in Sec.
1.63(a)(4) and Sec. 1.69(a)(4), respectively. Because the
definition in Sec. 1.69(a)(4) is more comprehensive, the Commission
has modeled its definition of ``oversight panel'' on Sec.
1.69(a)(4) rather than on Sec. 1.63(a)(4). As with the definition
of ``disciplinary committee,'' the Commission is locating the
definition of ``oversight panel'' in Rule 802, since the term is
used by multiple rules in Regulation SE.
\387\ Section 1.63(b)(5) provides that one criterion for the bar
would be that the person in question is subject to or has had
imposed on him within the prior three years a CFTC registration
revocation or suspension in any capacity for any reason, or has been
convicted within the prior three years of any of the felonies listed
in section 8a(2)(D)(ii) through (iv) of the CEA. Since the SEC is
not subject to the CEA and cannot cross-reference those provisions,
the Commission proposed for the equivalent criterion in Rule
819(i)(1)(v) that a person would be barred for having been convicted
within the prior three years of any felony, without limitation on
the type of felony. See Proposing Release, supra note 1, 87 FR at
28907 n.145.
---------------------------------------------------------------------------

Paragraph (i)(6) of Proposed Rule 819 would define the terms
``arbitration panel,'' ``disciplinary offense,'' and ``final decision''
that are used in Rule 819(i).\388\ These definitions are closely
modeled on those provided in Sec. 1.63(a).\389\
---------------------------------------------------------------------------

\388\ Proposed Rule 819(i)(6)(i) would define ``arbitration
panel'' as any person or panel empowered by an SBSEF to arbitrate
disputes involving the SBSEF's members or their customers. Rule
819(i)(6)(ii) defines ``disciplinary offense'' as: any violation of
the rules of an SBSEF, except a violation resulting in fines
aggregating to less than $5000 within a calendar year involving
decorum or attire, financial requirements, or reporting or
recordkeeping; any rule violation which involves fraud, deceit, or
conversion or results in a suspension or expulsion; any violation of
the SEA or the Commission's rules thereunder; or any failure to
exercise supervisory responsibility when such failure is itself a
violation of either the rules of the SBSEF, the SEA, or the
Commission's rules thereunder. Proposed Rule 819(i)(6)(iii) would
define ``final decision'' as a decision of an SBSEF which cannot be
further appealed within the SBSEF, is not subject to the stay of the
Commission or a court of competent jurisdiction, and has not been
reversed by the Commission or any court of competent jurisdiction;
or any decision by an administrative law judge, a court of competent
jurisdiction, or the Commission which has not been stayed or
reversed.
\389\ Since these terms are used only in Proposed Rule 819(i)
and not elsewhere in Regulation SE, the Commission has defined them
in Proposed Rule 819(i) and not the omnibus definitions rule in
Regulation SE (Proposed Rule 802).
---------------------------------------------------------------------------

The Commission received no comments on Proposed Rule 819(i) and is
adopting Rule 819(i) as proposed, with minor technical
modifications,\390\ for the reasons stated in the Proposing Release.
---------------------------------------------------------------------------

\390\ See supra note 32.
---------------------------------------------------------------------------

10. Rule 819(j)--Notification of Final Disciplinary Action Involving
Financial Harm to a Customer
Paragraph (j) of Proposed Rule 819 is a modified version of Sec.
1.67 of the CFTC's rules. Paragraph (j)(1) of Proposed Rule 819 would
be designed to replicate for SBSEFs the fundamental duty of Sec. 1.67
and provides that, upon any final disciplinary action in which an SBSEF
finds that a member has committed a rule violation that involved a
transaction for a customer, whether executed or not, and that resulted
in financial harm to the customer, the SBSEF must promptly provide
written notice of the disciplinary action to the member. In addition,
the SBSEF would be required to have established a rule pursuant to Rule
806 or Rule 807 that requires a member that receives such a notice to
promptly provide that notice to the customer, as disclosed on the
member's books and records.\391\ Paragraph (j)(2) would provide that
the written notice must include the principal facts of the disciplinary
action and a statement that the SBSEF has found that the member has
committed a rule violation that involved a transaction for the
customer, whether executed or not, and that resulted in financial harm
to the customer.
---------------------------------------------------------------------------

\391\ The provision on which Proposed Rule 819(j)(1)(i)(B) is
based, Sec. 1.67(b)(1)(ii), requires a futures commission merchant
or other registrant that receives such a notice to forward it to the
injured customer. Because of differences in the respective agencies'
statutory authority, the Commission proposed to require the SBSEF to
establish a rule that requires the relevant member to forward the
notice, not to propose a Commission rule that would impose such a
duty on the member directly.
---------------------------------------------------------------------------

Paragraph (j)(3) of Proposed Rule 819 would provide definitions for
two terms used in Rule 819(j). The definition of ``final disciplinary
action'' is closely modeled on the CFTC's definition in Sec.
1.67(a).\392\ The definition of ``customer'' is only loosely modeled on
the definition of ``customer'' provided in Sec. 1.3, which includes
complexities deriving from the CEA that are not necessary or
appropriate to adapt into a rule that applies to SBSEFs.\393\ The
Commission proposed to define ``customer'' in Rule 819(j)(3)(i) as a
person that utilizes an agent in connection with trading on an SBSEF.
---------------------------------------------------------------------------

\392\ See Proposed Rule 819(j)(3)(ii) (defining ``final
disciplinary action'' as any decision by or settlement with an SBSEF
in a disciplinary matter that cannot be further appealed at the
SBSEF, is not subject to the stay of the Commission or a court of
competent jurisdiction, and has not been reversed by the Commission
or any court of competent jurisdiction).
\393\ The definitions of ``customer'' and ``final disciplinary
action'' would apply only within Proposed Rule 819(j), so the
Commission has not included them in the omnibus definitions rule for
proposed Regulation SE (Proposed Rule 802).
---------------------------------------------------------------------------

The Commission received no comments on Proposed Rule 819(j) and is
adopting Rule 819(j) as proposed, with minor technical
modifications,\394\ for the reasons stated in the Proposing Release.
---------------------------------------------------------------------------

\394\ See supra note 32.
---------------------------------------------------------------------------

11. Rule 819(k)--Designation of Agent for Non-U.S. Member
Paragraph (k) of Proposed Rule 819 would require non-U.S. persons
who trade on an SBSEF to have an agent for service of process, which
could be an agent of its own choosing or, by default, the SBSEF.
Proposed Rule 819(k) is modeled on Sec. 15.05(i) of the CFTC's rules,
which concerns the designation of agents for foreign persons
participating

[[Page 87202]]

on ``reporting markets,'' a category in the CFTC's rules that includes
SEFs.\395\
---------------------------------------------------------------------------

\395\ A ``reporting market'' is defined in Sec. 15.00(q) to
mean a DCM or registered entity under section 1a(40) of the CEA. The
term ``registered entity'' as defined in section 1a(40) of the CEA
includes SEFs, among other entities.
---------------------------------------------------------------------------

Paragraph (k)(1) of Proposed Rule 819 is modeled on Sec. 15.05(i)
and would provide that an SBSEF that admits a non-U.S. person as a
member shall be deemed to be the agent of the ``non-U.S. member'' \396\
with respect to any SBS executed by the non-U.S. member. Under Proposed
Rule 819(k)(1), service or delivery of any communication issued by or
on behalf of the Commission to the SBSEF would constitute valid and
effective service upon the non-U.S. member. If an SBSEF is served with
a communication issued by or on behalf of the Commission to a non-U.S.
member, the SBSEF would be required to transmit the communication to
the non-U.S. member. Paragraph (k)(2) of Proposed Rule 819 is modeled
on Sec. 15.05(i)(1) and would provide that it shall be unlawful for an
SBSEF to permit a non-U.S. member to execute SBS transactions on the
facility unless the SBSEF informs the non-U.S. member in writing of the
requirements of Rule 819(k).
---------------------------------------------------------------------------

\396\ ``Non-U.S. member'' is a defined term in Rule 819(k) that
does not appear in Sec. 15.05 of the CFTC's rules but which
appropriately conveys the meaning of the CFTC rule for purposes of
SBSEFs in Proposed Rule 819(k). A foreign trader that executes
contracts on a trading platform such as an SBSEF must be a member of
that platform. Therefore, to promote uniformity throughout
Regulation SE, the Commission is using the term ``member'' for this
concept. Furthermore, the Commission has defined the term ``U.S.
person'' for purposes of the cross-border application of its Title
VII rules, see Rule 3a71-3(a)(4), Sec. 240.3a71-3(a)(4), and has
thus defined ``non-U.S. member'' in Rule 802 as ``a member of a
security-based swap execution facility that is not a U.S. person.''
---------------------------------------------------------------------------

Paragraph (k)(3) of Proposed Rule 819 is modeled on Sec.
15.05(i)(2) and would permit a non-U.S. member of an SBSEF to utilize
an agent for service of process other than the SBSEF. The non-U.S.
member would have to provide a copy of its agreement with the alternate
agent to the SBSEF, and the SBSEF would then have to file the agreement
with the Commission, before executing any transaction on the SBSEF.
Paragraph (k)(4) of Proposed Rule 819, modeled on Sec. 15.05(i)(3),
would require the non-U.S. member to notify the Commission if the
agency agreement is no longer in effect.
For an SBSEF to have an effective regulatory program and thereby
comply with Core Principle 2 (Compliance with Rules), the SBSEF must
have jurisdiction over all of its members, including members who are
not U.S. persons. Proposed Rule 819(k) would further an SBSEF's ability
to ensure compliance by its non-U.S. members with its rules by
requiring each non-U.S. member of the SBSEF to have an agent for
service of process, whether an agent of its own choosing that has been
disclosed to the SBSEF and the Commission or, as a default, the SBSEF
itself. This would eliminate any question of how to provide valid
notice to a non-U.S. member of any proceedings involving potential rule
violations.
The Commission received no comments on Proposed Rule 819(k) and is
adopting Rule 819(k) as proposed for the reasons stated in the
Proposing Release.

C. Rule 820--Core Principle 3--SBS Not Readily Susceptible to
Manipulation

Core Principle 3 \397\ provides that an SBSEF may permit trading
only in SBS that are not readily susceptible to manipulation. CEA Core
Principle 3 for SEFs is substantively identical.\398\ Proposed Rule 820
is modeled after Sec. 37.300 of the CFTC's rules and would implement
Core Principle 3.
---------------------------------------------------------------------------

\397\ Section 3D(d)(3) of the SEA, 15 U.S.C. 78c-4(d)(3).
\398\ See Section 5h(f)(3) of the CEA, 7 U.S.C. 7b-3(f)(3).
---------------------------------------------------------------------------

The Commission received no comments on Proposed Rule 820, and is
adopting Rule 820 as proposed for the reasons stated in the Proposing
Release.

D. Rule 821--Core Principle 4--Monitoring of Trading and Trade
Processing

Core Principle 4 \399\ requires an SBSEF to establish and enforce
rules or terms and conditions defining or specifications detailing: (1)
trading procedures to be used in entering and executing orders traded
on or through the facilities of the SBSEF; and (2) procedures for trade
processing of SBS on or through the facilities of the SBSEF. Core
Principle 4 also requires an SBSEF to monitor trading in SBS to prevent
manipulation, price distortion, and disruptions of the delivery or cash
settlement process through surveillance, compliance, and disciplinary
practices and procedures, including methods for conducting real-time
monitoring of trading and comprehensive and accurate trade
reconstructions. CEA Core Principle 4 for SEFs \400\ is substantively
identical.
---------------------------------------------------------------------------

\399\ Section 3D(d)(4) of the SEA, 15 U.S.C. 78c-4(d)(4).
\400\ Section 5h(f)(4) of the CEA, 7 U.S.C. 7b-3(f)(4).
---------------------------------------------------------------------------

Proposed Rule 821 would implement Core Principle 4 and is closely
modeled on the rules in subpart E of part 37 and the CFTC's guidance
and acceptable practices in appendix B to part 37. As explained in the
Proposing Release, paragraph (a) of Proposed Rule 821, like Sec.
37.400 of the CFTC's rules, incorporates the requirements of Core
Principle 4 described above, and the remaining paragraphs of Proposed
Rule 821 are modeled on Sec. Sec. 37.401 to 37.408 of the CFTC's rules
and also incorporate guidance and acceptable practices from appendix B
to part 37.\401\
---------------------------------------------------------------------------

\401\ See Proposing Release, supra note 1, 87 FR at 28910-11.
---------------------------------------------------------------------------

Paragraph (b) of Proposed Rule 821 would specify an SBSEF's market-
oversight obligations. Paragraph (c) of Proposed Rule 821 would specify
requirements for an SBSEF's monitoring of physical-delivery SBS.
Paragraph (d) of Proposed Rule 821 would specify additional
requirements for cash-settled SBS. Paragraph (e) of Proposed Rule 821
would specify requirements for an SBSEF's ability to obtain
information. Paragraph (f) of Proposed Rule 821 would require an SBSEF
to establish and maintain risk control mechanisms to prevent and reduce
the potential risk of market disruptions. Paragraph (g) of Proposed
Rule 821 would require an SBSEF to have the ability to comprehensively
and accurately reconstruct all trading on its facility and requires an
SBSEF to make all audit-trail data and reconstructions available to the
Commission. And paragraph (h) of Proposed Rule 821 would provide that
an SBSEF shall comply with the rules in this section through a
dedicated regulatory department or by contracting with a regulatory
service provider pursuant to Rule 819(e).
The Commission received no comments on Proposed Rule 821 and is
adopting Rule 821 as proposed for the reasons stated in the Proposing
Release.

E. Rule 822--Core Principle 5--Ability To Obtain Information

Core Principle 5 \402\ requires an SBSEF to establish and enforce
rules that will allow the SBSEF to obtain any necessary information to
perform any of the functions described in the Core Principles, provide
the information to the Commission on request, and have the capacity to
carry out such international information-sharing agreements as the
Commission may require. CEA Core Principle 5 for SEFs \403\ is
substantively identical.
---------------------------------------------------------------------------

\402\ Section 3D(d)(5) of the SEA, 15 U.S.C. 78c-4(d)(5).
\403\ Section 5h(f)(5) of the CEA, 7 U.S.C. 7b-3(f)(5).
---------------------------------------------------------------------------

Proposed Rule 822 implements Core Principle 5 and is substantively
identical to subpart F of part 37. Paragraph (a) of Proposed Rule 822

[[Page 87203]]

would repeat the statutory text of Core Principle 5. Paragraph (b),
modeled on Sec. 37.501, would require that an SBSEF establish and
enforce rules that will allow the SBSEF to have the ability and
authority to obtain sufficient information to allow it to fully perform
its operational, risk management, governance, and regulatory functions
and any requirements under Regulation SE. Paragraph (c), like Sec.
37.502, would require an SBSEF to have rules that allow it to collect
information on a routine basis, allow for the collection of non-routine
data from its members, and allow for its examination of books and
records kept by members on its facility.\404\ Paragraph (d), like Sec.
37.503, would require that an SBSEF provide information in its
possession to the Commission upon request, in a form and manner
specified by the Commission. Finally, paragraph (e), like Sec. 37.504,
would require an SBSEF to share information with other regulatory
organizations, data repositories, and third-party data reporting
services as required by the Commission or as otherwise necessary and
appropriate to fulfill its regulatory and reporting responsibilities,
and that appropriate information-sharing agreements can be established
with such entities, or the Commission can act in conjunction with the
SBSEF to carry out such information sharing.
---------------------------------------------------------------------------

\404\ While Sec. 37.502 of subpart F uses the term ``market
participant,'' Proposed Rule 822 would substitute the term
``member'' in these places, since the rule pertains to market
participants who are acting as members of the SEF/SBSEF. See supra
note 362.
---------------------------------------------------------------------------

The Commission received no comments on Proposed Rule 822 and is
adopting Rule 822 as proposed for the reasons stated in the Proposing
Release.

F. Rule 823--Core Principle 6--Financial Integrity of Transactions

Core Principle 6 sets forth requirements related to the financial
integrity of transactions that are entered on or through the facilities
of an SBSEF.\405\ Specifically, paragraph (a) of Proposed Rule 823
would require an SBSEF to establish and enforce rules and procedures
for ensuring the financial integrity of SBS entered on or through the
facilities of the SBSEF, including the clearance and settlement of SBS
pursuant to section 3C(a)(1) of the SEA.\406\ Paragraph (b) would
provide that transactions required to be cleared or voluntarily cleared
must be cleared through a registered clearing agency (or an exempt
clearing agency). Paragraph (c) addresses the manner in which an SBSEF
shall provide for the financial integrity of transactions. Finally,
paragraph (d) would require an SBSEF to monitor its members to ensure
that they continue to qualify as eligible contract participants. As
described in the Proposing Release, the Commission modeled Rule 823 on
subpart H of part 37 of the CFTC's rules,\407\ which implements CEA
Core Principle 7 for SEFs.\408\
---------------------------------------------------------------------------

\405\ Section 3D(d)(6)(A) of the SEA, 15 U.S.C. 78c-4(d)(6).
\406\ 15 U.S.C. 78c-3(a)(1). See supra note 168 and accompanying
text (discussing mandatory clearing provisions).
\407\ See Proposing Release, supra note 1, 87 FR at 28912.
\408\ Section 5h(f)(7) of the CEA, 7 U.S.C. 7b-3(f)(7).
---------------------------------------------------------------------------

1. Rule 823(a)--General
Paragraph (a) of Proposed Rule 823 would repeat the statutory text
of SEA Core Principle 6 in the same manner that Sec. 37.700 of the
CFTC's rules \409\ repeats the statutory language of CEA Core Principle
7 for SEFs.\410\ Proposed Rule 823(a) would require an SBSEF to
establish and enforce rules and procedures for ensuring the financial
integrity of SBS entered on or through the facilities of the SBSEF,
including the clearance and settlement of SBS pursuant to section
3C(a)(1) of the SEA.\411\ The Commission did not receive any comments
on Proposed Rule 823(a) and is adopting Rule 823(a) as proposed for the
reasons stated in the Proposing Release.
---------------------------------------------------------------------------

\409\ 17 CFR 37.700; see also Proposing Release, supra note 1,
87 FR at 28912.
\410\ Section 5h(f)(7) of the CEA, 7 U.S.C. 7b-3(f)(7).
\411\ 15 U.S.C. 78c-3(a)(1).
---------------------------------------------------------------------------

2. Rule 823(b)--Required Clearing
Paragraph (b) of Proposed Rule 823 is closely modeled on Sec.
37.701 of the CFTC's rules,\412\ and it would provide that transactions
executed on or through an SBSEF that are required to be cleared under
section 3C(a)(1) of the SEA or are voluntarily cleared by the
counterparties shall be cleared through a registered clearing agency or
a clearing agency that has obtained an exemption from clearing agency
registration to provide central counterparty services for SBS. The
Commission did not receive any comments on Proposed Rule 823(b) and is
adopting Rule 823(b) as proposed for the reasons stated in the
Proposing Release.
---------------------------------------------------------------------------

\412\ 17 CFR 37.701; see also Proposing Release, supra note 1,
87 FR at 28912.
---------------------------------------------------------------------------

3. Rule 823(c)--General Financial Integrity
Paragraph (c) of Proposed Rule 823 is closely modeled on Sec.
37.702 of the CFTC's rules,\413\ and would require an SBSEF to provide
for the financial integrity of transactions by establishing minimum
financial standards for its members, which shall at a minimum require
members to be ECPs. Proposed Rule 823(c) would further require an SBSEF
to provide for the financial integrity of transactions by ensuring that
the SBSEF, for transactions cleared by a registered clearing agency,
has the capacity to route transactions to the registered clearing
agency in a manner acceptable to the clearing agency, and by
coordinating with each registered clearing agency to which it submits
transactions for clearing in the development of rules and procedures to
facilitate prompt and efficient transaction processing.
---------------------------------------------------------------------------

\413\ 17 CFR 37.702; see also Proposing Release, supra note 1,
87 FR at 28912.
---------------------------------------------------------------------------

One commenter characterizes the CFTC regime as providing detailed
straight-through-processing (``STP'') standards for swaps executed on
SEFs that are intended to be cleared but believes that the Commission's
proposal lacks such standards.\414\ The commenter observes that there
is a lack of market consistency regarding the execution-to-clearing
workflow for SBS that are intended to be cleared, which complicates the
trading of cleared SBS. The commenter highlights ``clearing submission
timeframes'' and ``clearing certainty'' as key issues and discusses the
manner in which the CFTC has addressed these issues in its rules and
guidance. The commenter states that the CFTC's STP standards, including
``pre-execution credit checks'' and ``well-defined submission
timeframes,'' have been successfully implemented by the industry since
2013, enhancing the SEF trading environment. The commenter argues that
the timeframes minimize delays between execution and clearing
acceptance and increase pre-trade clearing certainty, decreasing
market, credit, and operational risks for market participants and
clearing agencies, and broadens the range of trading counterparties.
For these reasons, the commenter recommends harmonizing with the CFTC
by establishing STP standards, incorporating relevant CFTC guidance,
and prohibiting breakage agreements for SBS that are intended to be
cleared.\415\
---------------------------------------------------------------------------

\414\ See Citadel Letter, supra note 18, at 4-6.
\415\ See id.
---------------------------------------------------------------------------

Another commenter agrees that applying the CFTC's approach to STP
would further harmonize SBSEFs with SEFs and would provide greater
certainty of execution and clearing, encourage more clearing,
facilitate

[[Page 87204]]

electronic trading, and promote accessible, competitive markets and
access to best execution.\416\ Lastly, a third commenter supports
harmonization and encourages the Commission to both codify the guidance
in appendix B to part 37 of the CFTC regulations and the CFTC's staff
guidance regarding STP.\417\ The commenter believes that the STP
requirements have been successfully implemented by market participants
for nearly a decade, and modifying them now would introduce significant
market, operational, and credit risk, along with additional complexity
and cost for market participants.\418\
---------------------------------------------------------------------------

\416\ See MFA Letter, supra note 18, at 12.
\417\ See SIFMA AMG Letter, supra note 18, at 9.
\418\ See id.
---------------------------------------------------------------------------

As previously stated, harmonization with the CFTC regime for SEFs
is an important consideration for the Commission, given that it expects
most registered SBSEFs to also be registered SEFs. Consistent with this
view, Proposed Rule 823 is largely based on subpart H of part 37, and
the key language of Rule 823(c)(2) relevant to STP is substantively
identical to Sec. 37.702(b). Both provisions require an SBSEF or SEF
to (i) ensure that it has the capacity to route transactions to the
relevant clearing agency in a manner acceptable to the clearing agency
for purposes of clearing; and (ii) coordinate with each relevant
clearing agency to which it submits transactions for clearing, in the
development of rules and procedures to facilitate prompt and efficient
transaction processing. Rule 249.1701, Exhibit T further requires
SBSEFs to provide ``the name(s) of the clearing agency(ies) that will
clear the Applicant's trades, and a representation that clearing
members of that organization will be guaranteeing such trades.'' \419\
---------------------------------------------------------------------------

\419\ See Form SBSEF (Exhibits Instructions, Instruction No. 20,
Exhibit T); see also supra note 84.
---------------------------------------------------------------------------

The Commission generally expects an SBSEF's rules and procedures to
demonstrate compliance with these requirements with respect to SBS that
are intended to be cleared or that would become subject to a mandatory
clearing requirement in the future. Since SBSEFs are required to
establish rules and procedures for clearing in coordination with each
relevant clearing agency to which it submits trades, SBSEFs should be
able to route executed trades to relevant clearing agencies promptly,
particularly if fully automated systems are used. Furthermore, if an
SBSEF were to act to purposefully delay clearing submission in order to
favor certain market participants over others, that type of action
could be addressed under the impartial access requirements of Rule
819(c).\420\ Lastly, as noted previously, the Commission is adopting
Rule 815(g), which specifies that SBSEFs shall establish and enforce
rules that provide that a security-based swap that is intended to be
cleared at the time of the transaction, but is not accepted for
clearing at a registered clearing agency, shall be void ab initio.
Together, these provisions should help ensure that SBSEFs will process
trades promptly and efficiently. These provisions are also consistent
with the CFTC's staff guidance related to SEFs. The CFTC staff guidance
also addressed regulatory requirements related to intermediaries and
clearing organizations that are beyond the scope of this rulemaking.
---------------------------------------------------------------------------

\420\ See supra section VI.B.3 (discussing the impartial access
requirements of Proposed Rule 819(c)). For example, if an SBSEF
purposefully delayed clearing submission of only certain market
participants that the SBSEF favors, that would be contrary to the
requirement of Proposed Rule 819(c) of providing impartial access to
market services.
---------------------------------------------------------------------------

For the reasons stated above, the Commission is adopting Rule
823(c) as proposed.\421\
---------------------------------------------------------------------------

\421\ While one commenter suggests that the Commission
incorporate guidance from appendix B to part 37 of the CFTC rules,
the appendix does not contain any guidance or acceptable practices
under Core Principle 7 of section 5h of the CEA--Financial Integrity
of Transactions.
---------------------------------------------------------------------------

4. Rule 823(d)--Monitoring for Financial Soundness
Paragraph (d) of Proposed Rule 823 is closely modeled on Sec.
37.703 of the CFTC's rules,\422\ and it would require an SBSEF to
monitor its members to ensure that they continue to qualify as ECPs.
The Commission did not receive any comments on Rule 823(d) and is
adopting Rule 823(d) as proposed for the reasons stated in the
Proposing Release.
---------------------------------------------------------------------------

\422\ 17 CFR 37.703; see also Proposing Release, supra note 1,
87 FR at 28912.
---------------------------------------------------------------------------

G. Rule 824--Core Principle 7--Emergency Authority

SEA Core Principle 7 \423\ requires an SBSEF to adopt rules to
provide for the exercise of emergency authority, in consultation or
cooperation with the Commission, as is necessary and appropriate,
including the authority to liquidate or transfer open positions in any
SBS or to suspend or curtail trading in an SBS. CEA Core Principle 8
for SEFs \424\ is substantively identical, and the CFTC implemented
Core Principle 8 for SEFs in subpart I of part 37. Section 37.800 of
subpart I repeats the statutory text of the Core Principle. Section
37.801 provides that a SEF ``may refer'' to the guidance in appendix B
to part 37 ``to demonstrate to the Commission compliance with [Core
Principle 8].''
---------------------------------------------------------------------------

\423\ Section 3D(d)(7) of the SEA, 15 U.S.C. 78c-4(d)(7).
\424\ Section 5h(f)(8) of the CEA, 7 U.S.C. 7b-3(f)(8).
---------------------------------------------------------------------------

Proposed Rule 824 would implement SEA Core Principle 7 and is
closely modeled on subpart I of part 37 and the guidance for CEA Core
Principle 8 in appendix B to part 37. Paragraph (a) of Proposed Rule
824 would repeat the statutory text of the Core Principle. Paragraph
(b) of Proposed Rule 824 would incorporate much of the language in
paragraph (a)(1) of the CFTC's guidance on CEA Core Principle 8. Under
paragraph (b), an SBSEF would be required to adopt rules that are
reasonably designed to:
(1) Allow the SBSEF to intervene as necessary to maintain markets
with fair and orderly trading and to prevent or address manipulation or
disruptive trading practices, whether the need for intervention arises
exclusively from the SBSEF's market or as part of a coordinated, cross-
market intervention;
(2) Have the flexibility and independence to address market
emergencies in an effective and timely manner consistent with the
nature of the emergency, as long as all such actions taken by the SBSEF
are made in good faith to protect the integrity of the markets;
(3) Take market actions as may be directed by the Commission,
including, in situations where an SBS is traded on more than one
platform, emergency action to liquidate or transfer open interest as
directed, or agreed to, by the Commission or the Commission's staff;
(4) Include procedures and guidelines for decision-making and
implementation of emergency intervention that avoid conflicts of
interest;
(5) Include alternate lines of communication and approval
procedures to address emergencies associated with real-time events;
(6) Allow the SBSEF, to address perceived market threats, to impose
or modify position limits, impose or modify price limits, impose or
modify intraday market restrictions, impose special margin
requirements, order the liquidation or transfer of open positions in
any contract, order the fixing of a settlement price, extend or shorten
the expiration date or the trading hours, suspend or curtail trading in
any contract, transfer customer contracts and the margin, or alter any
contract's settlement terms or conditions, or, if applicable, provide
for the carrying out of such actions through its agreements

[[Page 87205]]

with its third-party provider of clearing or regulatory services.
Paragraph (c) of Proposed Rule 824 is based on paragraph (a)(2) of
the CFTC's guidance on CEA Core Principle 8 and would require an SBSEF
to promptly notify the Commission of its exercise of emergency action,
explaining its decision-making process, the reasons for using its
emergency authority, and how conflicts of interest were minimized,
including the extent to which the SBSEF considered the effect of its
emergency action on the underlying markets and on markets that are
linked or referenced to the contracts traded on its facility, including
similar markets on other trading venues. In addition, Proposed Rule
824(c) would require information on all regulatory actions carried out
pursuant to an SBSEF's emergency authority to be included in a timely
submission of a certified rule pursuant to Rule 807.
The Commission received no comments on Proposed Rule 824 and is
adopting Rule 824 as proposed, with minor technical modifications,\425\
for the reasons stated in the Proposing Release.
---------------------------------------------------------------------------

\425\ The Commission has corrected a reference to ``exercise of
emergency action'' to read ``exercise of emergency authority.'' The
Commission has also made two non-substantive corrections to the text
of Proposed Rule 824. The Commission has replaced a period with a
semicolon at the end of paragraph (b)(3) and has added the word
``and'' to the end of paragraph (b)(5).
---------------------------------------------------------------------------

H. Rule 825--Core Principle 8--Timely Publication of Trading
Information

SEA Core Principle 8 \426\ requires an SBSEF to make public timely
information on price, trading volume, and other trading data on SBS to
the extent prescribed by the Commission, and to have the capacity to
electronically capture and transmit and disseminate trade information
with respect to transactions executed on or through the facility. CEA
Core Principle 9 \427\ is substantively identical to SEA Core Principle
8, and the CFTC implemented CEA Core Principle 9 in subpart J of part
37.
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\426\ Section 3D(d)(8) of the SEA, 15 U.S.C. 78c-4(d)(8).
\427\ Section 5h(f)(9) of the CEA, 7 U.S.C. 7b-3(f)(9).
---------------------------------------------------------------------------

Proposed Rule 825 would implement SEA Core Principle 8 and is
closely modeled on subpart J of part 37. Paragraph (a) of Proposed Rule
825, like Sec. 37.900, would repeat the statutory language of the Core
Principle. While Sec. 37.901 provides that a SEF shall report swap
transaction data pursuant to parts 43 and 45 of the CFTC's rules,
paragraph (b) of Proposed Rule 825 would direct SBSEFs to report SBS
transaction data in a manner specified in the SEC's Regulation
SBSR.\428\
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\428\ Section 13(m)(1) of the SEA, 15 U.S.C. 78m(m)(1),
authorizes the Commission to make SBS transaction, volume, and
pricing data available to the public in such form and at such times
as the Commission determines appropriate to enhance price discovery.
The Commission has adopted rules relating to the reporting and
public dissemination of SBS transaction and pricing data as
Regulation SBSR. Rule 901(a)(1) of Regulation SBSR, 17 CFR
242.901(a)(1), imposes certain reporting duties on SBSEFs.
---------------------------------------------------------------------------

Paragraph (c) of Proposed Rule 825 would require the publication,
on an SBSEF's website, of a ``Daily Market Data Report.'' The data
fields that the Commission proposed to require for the Daily Market
Data Report approximated, although they were not the same as, those
required by part 16. Under Proposed Rule 825(c)(1), the Daily Market
Data Report for a business day would be required to contain the
following information for each tenor of each SBS traded on that SBSEF
during that business day:
(i) The trade count (including block trades but excluding error
trades, correcting trades, and offsetting trades);
(ii) The total notional amount traded (including block trades but
excluding error trades, correcting trades, and offsetting trades
\429\);
---------------------------------------------------------------------------

\429\ Each of these terms is defined in Proposed Rule 802 and
also used in Proposed Rule 815.
---------------------------------------------------------------------------

(iii) The number of block trades;
(iv) The total notional amount of block trades;
(v) The opening and closing price;
(vi) The price that is used for settlement purposes, if different
from the closing price; and
(vii) The lowest price of a sale or offer, whichever is lower, and
the highest price of a sale or bid, whichever is higher, that the SBSEF
reasonably determines accurately reflects market conditions. Bids and
offers vacated or withdrawn shall not be used in making this
determination. A bid is vacated if followed by a higher bid or price
and an offer is vacated if followed by a lower offer or price.
Paragraph (c)(2) of Proposed Rule 825 would require an SBSEF to
provide certain explanatory information regarding data presented on the
Daily Market Data Report:
(i) The method used by the SBSEF in determining nominal prices and
settlement prices; and
(ii) If discretion is used by the SBSEF in determining the opening
and/or closing ranges or the settlement prices, an explanation that
certain discretion may be employed by the SBSEF and a description of
the manner in which that discretion may be employed. Discretionary
authority would have to be noted explicitly in each case in which it is
applied (for example, by use of an asterisk or footnote).
Paragraph (c)(3) of Proposed Rule 825 would set out various
requirements regarding the form and manner by which an SBSEF makes
available its Daily Market Data Report. Paragraph (c)(3)(i) would
require the SBSEF to post on its website its Daily Market Data Report
in a downloadable and machine-readable format using the most recent
versions of the associated XML schema and PDF renderer as published on
the Commission's website. Paragraph (c)(3)(ii) would require the SBSEF
to make available its Daily Market Data Report without fees or other
charges. Paragraph (c)(3)(iii) would prohibit the SBSEF from imposing
any encumbrances on access or usage restrictions with respect to the
Daily Market Data Report. Paragraph (c)(3)(iv) would prohibit the SBSEF
from requiring a user to agree to any terms before being allowed to
view or download the Daily Market Data Report, such as by waiving any
requirements of Rule 825(c)(3). Paragraph (c)(3)(iv) would further
provide that any such waiver agreed to by a user would be null and
void.\430\
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\430\ The presence of any such waiver requirements on a click-
through screen could chill use of the Daily Market Data Report,
because the user would be compelled to agree to the waiver even to
view the report. The Commission recognizes that individual users may
not have the time or the incentive to contest the appropriateness of
any such waiver provisions in order to secure access. Proposed Rule
825(c)(3)(iv) is designed to assure such users that, even if an
SBSEF were to insist on the waiver click-through as a condition of
access, users would not in fact be sacrificing their ability to use
the data free of charges and usage restrictions because the waiver
would be null and void.
---------------------------------------------------------------------------

Paragraph (c)(4) of Proposed Rule 825 would require the SBSEF to
publish the Daily Market Data Report on its website no later than the
SBSEF's commencement of trading on the next business day after the day
to which the information pertains. Finally, paragraph (c)(5) would
require the SBSEF to keep each Daily Market Data Report available on
its website in the same location as all other Daily Market Data Reports
for no less than one year after the date of first publication.
Several commenters criticized the Daily Market Data Report required
by Proposed Rule 825.\431\ One commenter states that the Daily Market
Report would require inappropriate and

[[Page 87206]]

detrimental disclosures that would undermine the Commission's goal of
fostering a competitive and efficient market for SBS trading.\432\ This
commenter states that there are significant differences in the
information required to be reported under the SEC and CFTC regimes. The
commenter states that Proposed Rule 825(c)(1) increases the burden on
SBSEFs compared to SEFs by requiring additional information regarding
sale and offer prices, as well as qualitative descriptions of certain
data that are reported.
---------------------------------------------------------------------------

\431\ See MFA Letter, supra note 18, at 13; WMBAA Letter, supra
note 18, at 5-6; ISDA-SIFMA Letter, supra note 18, at 10; Bloomberg
Letter, supra note 18, at 5, 17. Eleven commenters supported general
transparency in markets but did not address the Daily Market Data
Report specifically. See, e.g., Letter from David Mounts (Oct. 29,
2022); Letter from Katie K. (Apr. 7, 2022).
\432\ See MFA Letter, supra note 18, at 13.
---------------------------------------------------------------------------

This commenter further states that the Commission's proposal does
not address why the CFTC's approach would not be acceptable in the
context of SBSEFs and does not justify the increased operational costs
to SBSEFs (which will ultimately be passed on to members). The
commenter also states that the Commission has not considered the costs
and potential for duplicative requirements in the context of Regulation
SBSR reporting requirements. The commenter concludes that, in sum, the
Daily Market Data Report is overly granular and duplicative, is
unnecessary for transparency purposes, and could negatively impact the
market and market participants. The commenter states that the
Commission should therefore remove the Daily Market Data Report in
favor of harmonizing with the analogous CFTC rules and that, if the
Commission does not eliminate the Daily Market Data Report requirement
altogether, it should adopt additional masking protections for trades,
specifically with respect to block trades. Failure to do so, the
commenter states, would cause inappropriate and detrimental disclosures
and would ``negate the benefits that the rule purports to achieve by
exempting block trades from clearing [sic] requirements.'' \433\
---------------------------------------------------------------------------

\433\ See id. Regulation SE does not address any exemption from
clearing requirements.
---------------------------------------------------------------------------

Another commenter states that the requirement for a Daily Market
Data Report is a departure from the otherwise generally harmonized rule
proposal and risks overly complicating the SBSEF regime for limited
benefit, particularly with SBS reporting and dissemination in place
through Regulation SBSR.\434\ The commenter states that the Daily
Market Data Report serves as a duplicative source of information that
fails to improve price discovery or liquidity formation, and that the
Daily Market Data Report could negatively impact conditions,
particularly for block trades, especially given the relatively illiquid
SBS market, which has a relatively small number participants. This
commenter encourages the Commission to remove the proposed Daily Market
Data Report and review this issue with the benefit of several years'
experience with these rules, particularly once Regulation SBSR is fully
operational.
---------------------------------------------------------------------------

\434\ See WMBAA Letter, supra note 18, at 5-6.
---------------------------------------------------------------------------

One commenter states that the Daily Market Report is not necessary
because the CFTC SEF regulatory framework, which does not impose such a
requirement, provides sufficient price transparency.\435\ This
commenter states that the Commission has not pointed to any observable
issues with the SEF transparency framework to justify a need for these
reports, and the commenter states that the daily publication of
information related to block trade numbers and block notional amounts,
coupled with aggregate pricing information, would magnify the problems
associated with the ``winner's curse.'' This is particularly
concerning, the commenter states, where a dealer is unable to fully
lay-off its risk from a block trade within the course of a single day--
a scenario that is extremely likely considering the thin nature of SBS
markets. Based on the information published in the report as proposed,
the commenter states, SBSEF participants may be able to identify a
particular block trade and the likely price point, and then use that
information to up-charge the dealer who is seeking to lay off the rest
of its risk, thus frustrating the key objective of block trading.
---------------------------------------------------------------------------

\435\ See ISDA-SIFMA Letter, supra note 18, at 10.
---------------------------------------------------------------------------

This commenter further states that the issues it has identified are
amplified even further if the Daily Market Report does not follow the
cap requirements that apply in the public price dissemination of data
under the Commission's trade reporting rule and related Commission no-
action relief. The commenter states that publication of uncapped trade
sizes could, in certain cases, reveal the exact notional amount of a
trade to the public, which is not permitted under the Commission's SBS
trade reporting rules. The commenter states that this is especially
concerning given that the proposed Daily Market Report provides
detailed information by SBS product and tenor. The commenter states
that the Commission should abandon its proposed Daily Market Report or,
if it does not, require publication of the proposed report on a monthly
or quarterly basis and make it subject to the cap size requirements
imposed on SBSDRs. This, the commenter states, would ensure that the
report does not conflict with the protections afforded to market
participants per the cap size requirements and under the Commission's
SBS trade reporting rules and related relief for SBS.\436\
---------------------------------------------------------------------------

\436\ See id.
---------------------------------------------------------------------------

Another commenter states that, in its experience with the reports
required under CFTC part 16, which requires the compilation of similar
information as the proposed Daily Market Data Report, the timeline for
publication proposed under Rule 825(c)(4) would be impractical, if not
technologically impossible.\437\ This commenter states that it operates
a SEF with trading hours that run from 00:01 hours to 24:00 hours,
Sunday through Friday. The commenter envisions SBS trading to be
permitted during the same trading hours and states that the break
between the end of trading one day and the beginning of trading the
next day--one minute--means that it would likely not be possible to
compile the required report ``no later than the SBSEF's commencement of
trading on the next business day.'' This commenter proposes
synchronizing Rule 825(c)(4) with CFTC Rule 16.01(d)(2) to allow
additional time for the publication of the Daily Market Data Report.
With regard to the content of the report, this commenter states that
the settlement price required under Rule 825(c)(1) should be included
in the report only to the extent it is calculated by an SBSEF.
---------------------------------------------------------------------------

\437\ See Bloomberg Letter, supra note 18, at 5, 17.
---------------------------------------------------------------------------

Many of the reporting requirements of the Daily Market Data Report
under Proposed Rule 825 are closely aligned with the data required to
be disclosed on a daily basis by SEFs under Sec. 16.01 of the CFTC's
rules. Both rules require the daily disclosure of: (1) a measure of
trading volume in terms of trades or contracts; \438\ (2) the total
notional volume traded; \439\ (3) the notional amount of block trades;
\440\ (4) the opening and closing prices; \441\ (5) the price used for
settlement, if different

[[Page 87207]]

from the closing price; \442\ (6) the lowest price of a sale or offer,
whichever is lower, and the highest price of a sale or bid, whichever
is higher, that the facility reasonably determines accurately reflects
market conditions; \443\ (7) the method used by the facility in
determining nominal prices and settlement prices, and if discretion is
used in determining the opening or closing ranges or the settlement
prices, an explanation that certain discretion may be employed and a
description of the manner in which that discretion may be employed;
\444\ and (8) in each instance in which such discretion was applied, an
explicit notation that discretion was applied.\445\
---------------------------------------------------------------------------

\438\ Compare Proposed Rule 825(c)(1)(i) (trade count, including
block trades but excluding error trades, correcting trades, and
offsetting trades), with 17 CFR 16.01(a)(1)(iii) (trading volume and
open contracts by product type term life of the swap).
\439\ Compare Proposed Rule 825(c)(1)(ii) (total notional amount
traded, including block trades but excluding error trades,
correcting trades, and offsetting trades), with 17 CFR
16.01(a)(2)(iv) (total trading volume in terms of the number of
contracts traded for standard-sized contract or in terms of notional
value for non-standard-sized contracts).
\440\ Compare Proposed Rule 825(c)(1)(iv) (total notional amount
of block trades), with 17 CFR 16.01(a)(2)(vi) (total volume of block
trades included in the total volume of trading).
\441\ See Proposed Rule 825(c)(1)(v); 17 CFR 16.01(b)(2)(i).
\442\ See Proposed Rule 825(c)(1)(vi); 17 CFR 16.01(b)(2)(ii).
\443\ See Proposed Rule 825(c)(1)(vii); 17 CFR 16.01(b)(2)(iii).
\444\ See Proposed Rule 825(c)(2)(i); 17 CFR 16.01(b)(4)(i).
\445\ See Proposed Rule 825(c)(2)(ii); 17 CFR 16.01(b)(4)(ii).
---------------------------------------------------------------------------

Further, the Commission is modifying Proposed Rule 825 to resolve
the two differences between the proposed Daily Market Data Report and
the existing CFTC reporting scheme under Sec. 16.01: (1) that the
Daily Market Data Report would include the number of block trades
executed; \446\ and (2) that the Daily Market Data Report would be
posted on the SBSEF's website no later than the beginning of trading on
the next business day,\447\ while the information required by Sec.
16.01 must be made public no later than the next business day.\448\
---------------------------------------------------------------------------

\446\ See Proposed Rule 825(c)(1)(iii).
\447\ See Proposed Rule 825(c)(4).
\448\ See 17 CFR 16.01(e). The Commission views the requirement
to keep each Daily Market Data Report on an SBSEF's website for one
year, see Proposed Rule 825(c)(5), as a small additional burden for
an SBSEF and does not view it as a significant departure from
harmonization with the CFTC's SEF regime.
---------------------------------------------------------------------------

A number of commenters raised specific concerns that the
disclosures in the Daily Market Data Report would hamper the efficient
trading of block trades.\449\ The Commission agrees that the additional
disclosed data element for SBSEFs--the number of block trades--could
lead to additional information leakage while a dealer that facilitated
a block trade might still be laying off the risk it undertook in
facilitating that trade. Therefore, consistent with the CFTC's
disclosure elements under Sec. 16.01, the Commission is modifying Rule
825(c)(1) as proposed to delete paragraph (c)(1)(iii), which requires
the disclosure of the number of block trades, and to renumber the
following paragraphs accordingly. The Commission is also, pursuant to
its determination not to adopt a definition of ``block trade,'' \450\
deleting the words ``including block trades but'' from the text of
paragraph (c)(i) and (ii) of Rule 825, and is adding the words ``after
such time as the Commission adopts a definition of `block trade' '' to
paragraph (c)(iii) of Rule 825 (formerly paragraph (c)(iv) of Proposed
Rule 825 \451\), which will have no effect on the requirement as
compared to the proposed rule.
---------------------------------------------------------------------------

\449\ See supra notes 433-436 and accompanying text.
\450\ See supra section V.E.1(c)(ii).
\451\ The Commission is also correcting the form of a cross-
reference in paragraph (b) to ``Regulation SBSR'' to read
``Sec. Sec. 242.900 through 242.909 (Regulation SBSR).''
---------------------------------------------------------------------------

The Commission is also modifying Proposed Rule 825 to address the
comment that an SBSEF that operates nearly 24 hours a day might not be
able to comply with the requirement to publish the Daily Market Data
Report before the beginning of trading on the next business day.
Accordingly, the Commission is modifying Proposed Rule 825(c)(4) to
require the publication of the Daily Market Data Report ``as soon as
reasonably practicable on the next business day after the day to which
the information pertains, but in no event later than 7 a.m. on the next
business day.'' This modified requirement, while less stringent than
the requirement as proposed, would differ slightly from the CFTC's
requirement that such information must be made public ``no later than
the next business day.'' \452\ Making each trading day's information
available to market participants before the beginning of the next
trading is reasonably designed to foster transparency and efficiency in
the market for SBS.
---------------------------------------------------------------------------

\452\ See 17 CFR 16.01(e). The Commission views the requirement
to keep each Daily Market Data Report on an SBSEF's website for one
year, see Proposed Rule 825(c)(5), as a small additional burden for
an SBSEF and does not view it as a significant departure from
harmonization with the CFTC's SEF regime.
---------------------------------------------------------------------------

With these modifications, the proposed Daily Market Data Report for
SBSEFs is consistent with the required daily disclosures for SEFs.
While one commenter states that Proposed Rule 825(c)(1) increases the
burden on SBSEFs compared to SEFs, including by calling for qualitative
descriptions of certain data, the data called for by Rule 825(c)(1), as
modified, does not differ materially from that required to be published
daily under Sec. 16.01. Thus, the Commission does not agree with the
commenter that the data required under the Commission approach differs
materially from that required under the CFTC approach or that the Daily
Market Data Report will result in an unjustified increase in
operational costs.
Further, the Commission does not agree with commenters that the
Daily Market Data Report would serve as a duplicative source of
information to reporting under Regulation SBSR and therefore risks
overly complicating the SBSEF regime for limited benefit, without
benefit to price improvement or liquidity formation. Regulation SBSR
requires the reporting and public dissemination of SBS
transactions,\453\ but because the transaction reports for credit SBS
are permitted to be capped at a notional volume of $5 million,\454\
market participants would be unable to glean the information provided
by the Daily Market Data Report--which would publish daily total
notional volumes based on uncapped transaction amounts--from the
individual reports of SBS transactions under Regulation SBSR. Thus, the
Daily Market Data Report would provide market participants with
information about pricing and trading volume for SBS on SBSEFs that
goes beyond the information that could be obtained from SBS transaction
reports that are publicly disseminated pursuant to Regulation SBSR. And
because individual trades would not be reported--and, with the
modification the Commission is making, the number of block trades would
also not be reported--a size cap on reporting volume used to provide
summary data to the market is not necessary or appropriate.
Additionally, with the respect to the comment that the settlement price
required under Proposed Rule 825(c)(1) should be included in the report
only to the extent it is calculated by an SBSEF, the language of the
requirement--``[t]he price that is used for settlement. . .'' \455\--
means that if no settlement price is calculated for a given SBS, that
data element does not need to be reported.
---------------------------------------------------------------------------

\453\ See 17 CFR 242.900 et seq.
\454\ See 2019 Cross-Border Adopting Release, supra note 218, 85
FR at 6347 (providing no-action relief with respect to Rule 902 of
Regulation SBSR, 17 CFR 242.902, for reports of credit SBS
transaction disseminated with a capped size of $5 million).
\455\ See Proposed Rule 825(c)(1)(vi) (emphasis added).
---------------------------------------------------------------------------

With respect to the means of publication of the information, while
the means of publishing the Daily Market Data Report varies from that
specified under the CFTC regime, the difference is not material. The
Commission proposed that this information be posted on an SBSEF's
website in the most recent XML schema and PDF renderer, without fees or
charges, without any encumbrances on access or usage, and without
requiring

[[Page 87208]]

a user to agree to any terms before viewing or downloading the
report.\456\ And the CFTC, in addition to requiring that this
information be provided to the CFTC, requires it be made available to
news media and the general public ``in a format that readily enables
the consideration of such data.'' \457\
---------------------------------------------------------------------------

\456\ See Proposed Rule 825(c)(3).
\457\ 17 CFR 16.01(e).
---------------------------------------------------------------------------

Proposed Rule 825(c)(3) is designed to promote wide use of the SBS
trading information contained in the Daily Market Data Report by
prohibiting an SBSEF from imposing any financial, legal, or operational
burdens on that use, and, as the Commission stated in the Proposing
Release, the prohibition against an SBSEF imposing any usage
restrictions on its Daily Market Data Report would necessarily
encompass a prohibition on bulk redistribution of the Daily Market Data
Report or any information contained therein.\458\ The Commission seeks
to encourage market observers to access the Daily Market Data Report
and scrub, reconfigure, aggregate, analyze, repurpose, or otherwise add
value to the information contained in the report as they see fit.
---------------------------------------------------------------------------

\458\ See Proposing Release, supra note 1, 87 FR at 28915.
---------------------------------------------------------------------------

For the reasons discussed above, the Commission is adopting Rule
825 as modified.\459\
---------------------------------------------------------------------------

\459\ See supra note 32.
---------------------------------------------------------------------------

I. Rule 826--Core Principle 9--Recordkeeping and Reporting

SEA Core Principle 9 \460\ sets forth recordkeeping and reporting
obligations for SBSEFs. Core Principle 9 requires an SBSEF to maintain
records of all activities relating to the business of the facility,
including a complete audit trail, in a form and manner acceptable to
the Commission for a period of five years. The Core Principle further
requires an SBSEF to report to the Commission, in a form and manner
acceptable to the Commission, such information as the Commission
determines to be necessary or appropriate for the Commission to perform
its duties. Finally, under Core Principle 9, the Commission must adopt
data collection and reporting requirements for SBSEFs that are
comparable to requirements for clearing agencies and SBS data
repositories.\461\ CEA Core Principle 10 for SEFs, although it includes
an additional clause not present in the equivalent SEA Core Principle
9,\462\ is substantively identical.
---------------------------------------------------------------------------

\460\ Section 3D(d)(9) of the SEA, 15 U.S.C. 78c-4(d)(9).
\461\ As discussed below in this section, the Commission is
adopting Rule 826 to require an SBSEF to maintain records of all
activities relating to the business of the SBSEF for a period of not
less than five years. Similarly, Rule 17a-1 under the SEA, 17 CFR
240.17a-1, requires a clearing agency to keep and preserve one copy
of all documents made or received in the course of its business and
conduct of its self-regulatory activities for a period of not less
than five years. In addition, Rule 13n-7(b) under the SEA, 17 CFR
240.13n-7(b), requires an SBS data repository to keep and preserve a
copy of all documents made or received by it in the course of its
business for at least five years.
\462\ CEA Core Principle 10 includes a clause stating that a SEF
shall keep any records relating to certain swaps open to inspection
and examination by the SEC. See 7 U.S.C. 7b-3(f)(10)(A)(iii).
---------------------------------------------------------------------------

To implement SEA Core Principle 9, the Commission proposed Rule
826, which roughly approximates Sec. Sec. 1.31 and 45.2 of the CFTC's
rules,\463\ while also drawing on concepts from the books and records
requirements applicable to brokers, SEC-registered SROs, and other SEC-
registered entities.\464\
---------------------------------------------------------------------------

\463\ Section 1.31 imposes on ``records entities'' (which term
includes SEFs) various requirements relating to record retention and
production. Section 45.2 imposes various recordkeeping, retention,
and retrieval requirements applicable to SEFs (among others) to
support trade reporting.
\464\ See infra section XI (discussing in the context of
Proposed Rule 15a-12 that an SBSEF registered with the Commission is
also a registered broker and, as such, is subject to the SEA's
recordkeeping and reporting requirements applicable to brokers).
---------------------------------------------------------------------------

Paragraph (a) of Proposed Rule 826 would repeat the statutory text
of the Core Principle. Paragraph (b) would require an SBSEF to keep
full, complete, and systematic records,\465\ together with all
pertinent data and memoranda, of all activities relating to its
business with respect to SBS. Under paragraph (b), such records would
be required to include, without limitation, the audit trail information
required under Rule 819(f) and all other records that an SBSEF is
required to create or obtain under Regulation SE.
---------------------------------------------------------------------------

\465\ While Sec. 1.31(a) defines the terms ``regulatory
records'' and ``electronic regulatory records'' and utilizes them
throughout Sec. 1.31, the Commission is utilizing instead the term
``records,'' which is defined in section 3(a)(37) of the SEA, 15
U.S.C. 78c(a)(37). In doing so, the Commission seeks to avoid any
ambiguities or inconsistencies that could arise by using variants of
a term that is defined in the Commission's governing statute. The
Commission has included a definition of ``records'' in Rule 802 that
cross-references section 3(a)(37) of the SEA.
---------------------------------------------------------------------------

Paragraph (c) of Proposed Rule 826 would require an SBSEF to keep
records of any SBS from the date of execution until the termination,
maturity, expiration, transfer, assignment, or novation date of the
transaction, and for a period of not less than five years, the first
two years in an easily accessible place, after such date. Paragraph (c)
also would require an SBSEF to keep each record (other than a record of
an SBS noted in the previous sentence) for a period of not less than
five years, the first two years in an easily accessible place, from the
date on which the record was created. The five-year retention
requirements would be consistent with section 3D(d) of the SEA \466\
and are modeled on the requirements for SEFs in Sec. Sec. 1.31 and
45.2. The proposed requirement that the records be kept ``in an easily
accessible place'' for the first two years derives from an analogous
requirement in the Commission's principal books and records rule for
exchange members, brokers, and dealers.\467\
---------------------------------------------------------------------------

\466\ See 15 U.S.C. 78c-4(d)(9)(A)(i) (requiring an SBSEF to
``maintain records of all activities relating to the business of the
facility, including a complete audit trail, in a form and manner
acceptable to the Commission, for a period of five years'')
(emphasis added).
\467\ See Rule 17a-4(b) under the SEA, 17 CFR 240.17a-4(b).
---------------------------------------------------------------------------

Paragraph (d)(1) of Proposed Rule 826 would require an SBSEF to
retain all records in a form and manner that ensures the authenticity
and reliability of such records in accordance with the SEA and the
Commission's rules thereunder. Paragraph (d)(2) would require an SBSEF,
upon request of any representative of the Commission, to promptly \468\
furnish to the representative legible, true, complete, and current
copies of any records required to be kept and preserved under Rule 826.
Paragraph (d)(3) would provide that an electronic record shall be
retained in a form and manner that allows for prompt production at the
request of any representative of the Commission. Paragraph (d)(3) would
also include provisions modeled on Sec. 1.31(c)(2) requiring an SBSEF
that maintains electronic records to establish appropriate systems and
controls that ensure the authenticity and reliability of electronic
records.
---------------------------------------------------------------------------

\468\ In this context, ``prompt'' or ``promptly'' means making
reasonable efforts to produce records that are requested by the
staff during an examination without delay. In many cases, it is
likely that an SBSEF could furnish records immediately or within a
few hours of a request, and it would therefore be required to do so.
An SBSEF generally should produce records within 24 hours unless
there are unusual circumstances.
---------------------------------------------------------------------------

Paragraph (e) of Proposed Rule 826 would provide that all records
required to be kept by an SBSEF pursuant to Rule 826 would be subject
to examination by any representative of the Commission pursuant to
section 17(b) of the SEA, which is the source of the Commission's
examination authority for registered brokers (among other types of
registered entities). Proposed Rule 826(e) is designed only to remind
SBSEFs of this statutory authority and would not seek to limit or
expand that authority using the Commission's powers over SBSEFs in
section 3D of the SEA.

[[Page 87209]]

Proposed Rule 826 would include a paragraph (f) that is not modeled
on any provision of Sec. 1.31 or Sec. 45.2, but rather on Sec.
1.37(c) of the CFTC's rules, which would provide: ``Each designated
contract market and swap execution facility shall keep a record in
permanent form, which shall show the true name, address, and principal
occupation or business of any foreign trader executing transactions on
the facility or exchange. In addition, upon request, a designated
contract market or swap execution facility shall provide to the
Commission information regarding the name of any person guaranteeing
such transactions or exercising any control over the trading of such
foreign trader.'' Proposed Rule 826(f) is modeled closely on Sec.
1.37(c), except that it would use the term ``non-U.S. member'' rather
than ``foreign trader.'' \469\
---------------------------------------------------------------------------

\469\ Since a ``foreign trader'' in Sec. 1.37(c) is executing
transactions on the SEF, it must be a member of the SEF. Because the
term ``member'' is used elsewhere in the CFTC rules pertaining to
SEFs, the term ``member'' as used throughout Regulation SE is
defined in Rule 802. The term ``non-U.S. member,'' also found in
Rule 802, is defined as ``a member of a security-based swap
execution facility that is not a U.S. person.''
---------------------------------------------------------------------------

The Commission received no comments on Proposed Rule 826 and is
adopting Rule 826 as proposed, with minor technical modifications,\470\
for the reasons stated in the Proposing Release.
---------------------------------------------------------------------------

\470\ See supra note 32.
---------------------------------------------------------------------------

J. Rule 827--Core Principle 10--Antitrust Considerations

SEA Core Principle 10 \471\ provides that, unless necessary or
appropriate to achieve the purposes of the SEA, an SBSEF shall not: (1)
adopt any rules or take any actions that result in any unreasonable
restraint of trade, or (2) impose any material anticompetitive burden
on trading or clearing. CEA Core Principle 11 \472\ is substantively
identical. Proposed Rule 827 would implement SEA Core Principle 10 and
reiterate the statutory text of the Core Principle.\473\
---------------------------------------------------------------------------

\471\ Section 3D(d)(10) of the SEA, 15 U.S.C. 78c-4(d)(10).
\472\ Section 5h(f)(11) of the CEA, 7 U.S.C. 7b-3(f)(11).
\473\ The Commission has not adapted the guidance from appendix
B pertaining to CEA Core Principle 11 into its rule. As explained in
the Proposing Release, it is not appropriate to adapt this guidance
into a rule that applies to SBSEFs because the SEA (which applies to
SBSEFs) does not have a provision that is closely comparable to
section 15(b) of the CEA (which applies to SEFs). See Proposing
Release, supra note 1, 87 FR at 28917 n.196. Furthermore, the
guidance pertaining to CEA Core Principle 10 for SEFs sets out only
a general approach to how the CFTC addresses antitrust issues
applying to SEFs and does not include provisions that can readily be
adapted into rule text. Id.
---------------------------------------------------------------------------

The Commission did not receive any comments on Proposed Rule 827
and is adopting Rule 827 as proposed, for the reasons stated in the
Proposing Release.

K. Rule 828--Core Principle 11--Conflicts of Interest

SEA Core Principle 11 \474\ requires an SBSEF to establish and
enforce rules to minimize conflicts of interest in its decision-making
process and to establish a process for resolving the conflicts of
interest. CEA Core Principle 12 \475\ is substantively identical, and
the CFTC implemented CEA Core Principle 12 in subpart M of part
37.\476\
---------------------------------------------------------------------------

\474\ Section 3D(d)(11) of the SEA, 15 U.S.C. 78c-4(d)(11).
\475\ 7 U.S.C. 7b-3(f)(12).
\476\ Section 37.1200 of subpart M repeats the statutory text of
Core Principle 12. There are no other provisions in subpart M, nor
is there any guidance or acceptable practices associated with Core
Principle 12 in appendix B to part 37. The CFTC has proposed
additional rules regarding the mitigation of conflicts of interest
but has not adopted any such rules. See CFTC, Requirements for
Derivatives Clearing Organizations, Designated Contract Markets, and
Swap Execution Facilities Regarding the Mitigation of Conflicts of
Interest, 75 FR 63732 (Oct. 18, 2010); CFTC, Governance Requirements
for Derivatives Clearing Organizations, Designated Contract Markets,
and Swap Execution Facilities; Additional Requirements Regarding the
Mitigation of Conflicts of Interest, 76 FR 722 (Jan. 6, 2011).
---------------------------------------------------------------------------

Proposed Rule 828 would implement SEA Core Principle 11. Paragraph
(a) of Rule 828, like Sec. 37.1200, would repeat the statutory text of
the Core Principle. Paragraph (b) would direct an SBSEF to comply with
the requirements of Rule 834, which, as discussed below, would
implement section 765 of the Dodd-Frank Act for both SBSEFs and SBS
exchanges.\477\
---------------------------------------------------------------------------

\477\ See infra section VIII.
---------------------------------------------------------------------------

The Commission received no comments on Proposed Rule 828 and is
adopting Rule 828 as proposed for the reasons stated in the Proposing
Release.

L. Rule 829--Core Principle 12--Financial Resources

Core Principle 12 \478\ sets forth certain requirements related to
the financial resources of an SBSEF. Paragraph (a)(1) requires an SBSEF
to have adequate financial, operational, and managerial resources to
discharge each responsibility of the SBSEF, as determined by the
Commission. Paragraph (a)(2) would provide that the financial resources
of an SBSEF shall be considered to be adequate if the value of the
financial resources: (i) enables the organization to meet its financial
obligations to its members and participants notwithstanding a default
by the member or participant creating the largest financial exposure
for that organization in extreme but plausible market conditions; and
(ii) exceeds the amount that would enable the SBSEF to cover operating
costs of the SBSEF for a one-year period, as calculated on a rolling
basis. Finally, paragraphs (b) through (g) provide details and
instruction on how to comply with the requirements of Core Principle
12.
---------------------------------------------------------------------------

\478\ Section 3D(d)(12) of the SEA, 15 U.S.C. 78c-4(d)(12).
---------------------------------------------------------------------------

CEA Core Principle 13 for SEFs \479\ is substantively identical to
SEA Core Principle 12 but lacks the clause in section 3D(d)(12)(B)(i)
of the SEA relating to an SBSEF meeting financial obligations to
members and participants notwithstanding a default by the member or
participant creating the largest financial exposure for the SBSEF in
extreme but plausible market conditions. As described in the Proposing
Release, the Commission modeled Rule 829 on subpart N of part 37 of the
CFTC's rules,\480\ which implements CEA Core Principle 13 for SEFs.
---------------------------------------------------------------------------

\479\ Section 5h(f)(13) of the CEA, 7 U.S.C. 7b-3(f)(13).
\480\ See Proposing Release, supra note 1, 87 FR at 28919.
---------------------------------------------------------------------------

1. Rule 829(a)--General
Paragraph (a) of Proposed Rule 829 would repeat the statutory text
of SEA Core Principle 12.
One commenter states that the language in paragraph (a)(2)(i) of
Proposed Rule 829 that requires an SBSEF to have sufficient financial
resources ``to meet its financial obligations to its members
notwithstanding a default by a member creating the largest financial
exposure for that organization in extreme but plausible market
conditions'' is not adequate.\481\ The commenter believes that an SBSEF
should be required to have resources significantly in excess of this
requirement because, during financial uncertainties and stress, the
SBSEF would need even greater resources.\482\
---------------------------------------------------------------------------

\481\ See Letter from Chris Barnard to Commission at 2 (May 21,
2022) (submitted under cover email dated June 6, 2022).
\482\ See id.
---------------------------------------------------------------------------

Another commenter states that the same provision, paragraph
(a)(2)(i) of Proposed Rule 829, is overly burdensome and
unnecessary.\483\ The commenter states that the provision would add
significantly to the amount of capital required to operate an SBSEF
with little corresponding benefit to the market. The commenter argues
that trading platforms such as SEFs and SBSEFs will have credit
exposure to a member in limited circumstances and

[[Page 87210]]

for very limited periods of time. Therefore, this commenter states,
requiring a trading platform to maintain capital sufficient to cover
the largest financial exposure of a member trading on the SBSEF, when
the trading platform will not be called upon to cover the cost of a
default, is unnecessary and overly burdensome. The commenter also
states that the provision is not in the parallel CFTC rule. The
commenter suggests eliminating the provision or, in the alternative,
affirm that satisfying the financial requirements in Rule 829(b),
relating to having adequate resources to enable an SBSEF to comply with
the SEA and applicable Commission rules for one year, would be
sufficient to satisfy the requirements of Rule 829(a) as well.\484\
---------------------------------------------------------------------------

\483\ See Bloomberg Letter, supra note 18, at 8.
\484\ See id.
---------------------------------------------------------------------------

The requirements of Proposed Rule 829(a)(2)(i), which repeats the
statutory text of SEA Core Principle 12, do not need to be more
stringent, as suggested by the first commenter. The provision requires
an SBSEF to have adequate resources to ``meet its financial obligations
to its members'' even in case of a default by a member creating the
largest financial exposure. By the plain meaning of its terms, the
provision requires that an SBSEF meet its financial obligations. The
Commission does not see a benefit to requiring an SBSEF to have the
financial resources that exceed its obligations. As long as an SBSEF's
obligations are met, its members can be made whole with respect to any
obligations of the SBSEF and the SBSEF can continue to operate.
Therefore, ensuring that an SBSEF can meet its financial obligations is
sufficient. Furthermore, the provision itself already envisions
``extreme but plausible market conditions,'' analogous to the
``conditions of financial uncertainty and stress'' that the commenter
discusses.
At the same time, Proposed Rule 829(a)(2)(i) should not be
eliminated, and the rules should not be interpreted in a manner that
allows the requirements of Proposed Rule 829(a)(2)(i) to be satisfied
by complying with Proposed Rule 829(b). First, the requirement that an
SBSEF be able to cover its financial obligations even when its largest
member defaults is in the statutory language of the SEA, and the
Commission is not adopting a rule inconsistent with this requirement.
The statutory language is an appropriate requirement to impose on
SBSEFs because it seeks to address a plausible risk caused by the
default of a member, a financial risk that, if an SBSEF has not
accounted for it, could endanger the SBSEF's ability to continue to
operate. While, the commenter is correct that the CFTC's rules do not
have a similar provision, it is also the case that the CEA does not
have a similar provision. Therefore, while the Commission is, as
explained above, generally striving for harmonization with the CFTC,
the Commission is not modifying Proposed Rule 829(a) to remove the
requirement that an SBSEF have adequate resources to meet its financial
obligations to its members even in case of a default by a member
creating the largest financial exposure. Second, the Commission will
not affirm that it will, as requested by a commenter, interpret the
rules in a manner that allows the requirement of Rule 829(a) to be
satisfied by satisfying the requirements of Rule 829(b). The scope of
Proposed Rule 829(a) and Proposed Rule 829(b) are different. Proposed
Rule 829(a) would in general address having adequate financial (and
operational and managerial) resources to discharge each responsibility
of an SBSEF. Proposed Rule 829(b) would specifically address the
financial (not operational or managerial) resources that are necessary
to comply with one type (not each type) of responsibility of the SBSEF,
i.e., compliance with section 3D of the SEA and the applicable
Commission rules. Because Proposed Rule 829(a) would address topics
beyond the scope of Proposed Rule 829(b), including the topic of a
default by a member creating the largest financial exposure, the
requirements of Proposed Rule 829(a) cannot be satisfied by merely
satisfying the requirements of Proposed Rule 829(b).
For the reasons discussed above, the Commission is adopting Rule
829(a) as proposed, with a minor technical modification.\485\
---------------------------------------------------------------------------

\485\ The technical modification removes a stray parenthesis.
---------------------------------------------------------------------------

2. Rule 829(b)--General Requirements
Paragraph (b) of Proposed Rule 829 is closely modeled on Sec.
37.1301 of the CFTC's rules,\486\ and it requires an SBSEF to maintain
financial resources that are adequate to enable it to comply with the
SBSEF Core Principles set forth in the SEA and the Commission rules for
a one-year period, calculated on a rolling basis.
---------------------------------------------------------------------------

\486\ 17 CFR 37.1301; see also Proposing Release, supra note 1,
87 FR at 28918.
---------------------------------------------------------------------------

The Commission did not receive any comments and is adopting Rule
829(b) as proposed for the reasons stated in the Proposing Release.
3. Rule 829(c)--Types of Financial Resources
Paragraph (c) of Proposed Rule 829 is closely modeled on Sec.
37.1302 of the CFTC's rules,\487\ and it describes the types of
financial resources that may satisfy the requirements of Rule 829(b).
---------------------------------------------------------------------------

\487\ 17 CFR 37.1302; see also Proposing Release, supra note 1,
87 FR at 28918.
---------------------------------------------------------------------------

The Commission did not receive any comments on Proposed Rule 829(c)
and is adopting Rule 829(c) as proposed for the reasons stated in the
Proposing Release.
4. Rule 829(d)--Liquidity of Financial Resources
Paragraph (d) of Proposed Rule 829 is closely modeled on Sec.
37.1303 of the CFTC's rules,\488\ and would provide that the financial
resources allocated by an SBSEF to meet the financial resources
requirements shall include unencumbered, liquid financial assets equal
to at least the greater of three months of projected operating costs or
the projected costs needed to wind down the SBSEF's operations. If an
SBSEF lacks sufficient unencumbered, liquid financial assets, it may
satisfy this obligation by obtaining a committed line of credit in an
amount at least equal to the deficiency.
---------------------------------------------------------------------------

\488\ 17 CFR 37.1303; see also Proposing Release, supra note 1,
87 FR at 28919.
---------------------------------------------------------------------------

The Commission did not receive any comments on Proposed Rule 829(d)
and is adopting Rule 829(d) as proposed for the reasons stated in the
Proposing Release.
5. Rule 829(e)--Computation of Costs To Meet Financial Resources
Requirement
Paragraph (e) of Proposed Rule 829 is closely modeled on Sec.
37.1304 of the CFTC's rules,\489\ and would require an SBSEF, each
fiscal quarter, to make a reasonable calculation of its projected
operating costs and wind-down costs in order to determine its
applicable obligations under Rule 829. Paragraph (e) would further
provide that the SBSEF shall have reasonable discretion in determining
the methodology used to compute such amounts, provided that the
Commission may review the methodology and require changes as
appropriate. Proposed Rule 829(e) would also append language based on
the CFTC guidance from appendix B to part 37 concerning the following
topics, all of which relate to computation of costs: (i) reasonableness
of calculating projected operating costs and what may be excluded from
such calculation; (ii)

[[Page 87211]]

proration of expenses; and (iii) allocation of expenses among
affiliates.
---------------------------------------------------------------------------

\489\ 17 CFR 37.1304; see also Proposing Release, supra note 1,
87 FR at 28919.
---------------------------------------------------------------------------

The Commission did not receive any comments on Proposed Rule 829(e)
and is adopting Rule 829(e) as proposed, with a minor technical
modification for the reasons stated in the Proposing Release.\490\
---------------------------------------------------------------------------

\490\ The technical modification corrects an incorrect internal
cross-reference to a paragraph in the rule.
---------------------------------------------------------------------------

6. Rule 829(f)--Valuation of Financial Resources
Paragraph (f) of Proposed Rule 829 is closely modeled on Sec.
37.1305 of the CFTC's rules,\491\ and would provide that, no less than
each fiscal quarter, an SBSEF must compute the current market value of
each financial resource used to meet its obligations under Rule 829 and
that reductions in value to reflect market and credit risk
(``haircuts'') shall be applied as appropriate.
---------------------------------------------------------------------------

\491\ 17 CFR 37.1305; see also Proposing Release, supra note 1,
87 FR at 28919.
---------------------------------------------------------------------------

The Commission did not receive any comments on Proposed Rule 829(f)
and is adopting Rule 829(f) as proposed for the reasons stated in the
Proposing Release.
7. Rule 829(g)--Reporting to the Commission
Paragraph (g) of Proposed Rule 829 is closely modeled on Sec.
37.1306 of the CFTC's rules,\492\ and would address reporting to the
Commission regarding an SBSEF's financial resources. Paragraph (g)(1)
would generally provide that, each fiscal quarter, or at any time upon
Commission request, an SBSEF shall report the amount of financial
resources necessary to meet the requirements of Rule 829 and the market
value of each financial resource available, and shall provide the
Commission with financial statements prepared in accordance with GAAP.
Paragraph (g)(2) would provide that the calculations required under
Rule 829(g) shall be made as of the last business day of the SBSEF's
fiscal quarter. Paragraph (g)(3) would generally require the SBSEF to
provide the Commission with sufficient documentation to explain its
methodology for computing its financial requirements. Paragraph (g)(4)
would generally provide the timing for submission of reports and
supporting documentation. Paragraph (g)(5) would require an SBSEF to
provide notice to the Commission no later than 48 hours after it knows
or reasonably should know that it no longer meets its obligations under
Rule 829(b) and (d). Paragraph (g)(6) would require the use of EDGAR to
submit reports and documentation required under Rule 829.
---------------------------------------------------------------------------

\492\ 17 CFR 37.1306; see also Proposing Release, supra note 1,
87 FR at 28919.
---------------------------------------------------------------------------

The Commission did not receive any comments on Proposed Rule 829(g)
and is adopting Rule 829(g) as proposed, with minor technical
modifications, for the reasons stated in the Proposing Release.\493\
---------------------------------------------------------------------------

\493\ See supra note 32. The Commission has also changed the
word ``paragraph'' in Rule 829(g)(5) to the plural form.
---------------------------------------------------------------------------

M. Rule 830--Core Principle 13--System Safeguards

Paragraph (A) of SEA Core Principle 13 \494\ provides that an SBSEF
must establish and maintain a program of risk analysis and oversight to
identify and minimize sources of operational risk, through the
development of appropriate controls and procedures, and automated
systems, that are reliable and secure and that have adequate scalable
capacity. Paragraph (B) requires that an SBSEF must also establish and
maintain emergency procedures, backup facilities, and a plan for
disaster recovery that allow for the timely recovery and resumption of
operations; and the fulfillment of the responsibilities and obligations
of the SBSEF. Finally, paragraph (C) of SEA Core Principle 13 requires
an SBSEF to periodically conduct tests to verify that the backup
resources of the SBSEF are sufficient to ensure continued order
processing and trade matching; price reporting; market surveillance;
and maintenance of a comprehensive and accurate audit trail. CEA Core
Principle 14 \495\ is substantively identical to SEA Core Principle 13,
and the CFTC implemented this Core Principle through subpart O of part
37, which is entitled ``System Safeguards.''
---------------------------------------------------------------------------

\494\ Section 3D(d)(13)(A) of the SEA, 15 U.S.C. 78c-4(d)(13).
\495\ Section 5h(f)(14) of the CEA, 7 U.S.C. 7b-3(f)(14).
---------------------------------------------------------------------------

Proposed Rule 830 is closely modeled on subpart O of part 37 of the
CFTC's rules, except in one aspect. Subpart O includes language
relating to ``critical financial markets,'' \496\ which is a
designation applied by the CFTC to certain of its registrants that
would subject them to more stringent requirements, although the CFTC
has not yet adopted any such requirements.\497\ A similar concept in
the SEC's rules is ``SCI entity.'' \498\ When adopting Regulation SCI,
the Commission considered whether it should apply Regulation SCI to
SBSEFs, among other entities, and determined not to do so,\499\ and
when proposing amendments to Regulation SCI in 2023 to, among other
things, expand the definition of ``SCI entity,'' the Commission did not
propose to include SBSEFs as SCI entities.\500\
---------------------------------------------------------------------------

\496\ See Sec. 37.1401(c) (providing that SEFs determined by
the CFTC to be critical financial markets are subject to more
stringent requirements); Sec. 37.1401(d); Sec. 37.1401(j)
(providing that part 40 governs the obligations of registered
entities that the CFTC has determined to be critical financial
markets, with respect to maintenance and geographic dispersal of
disaster recovery resources sufficient to meet a same-day recovery
time objective in the event of a wide-scale disruption).
\497\ The provisions in subpart O relating to ``critical
financial markets'' reference Sec. 40.9 of the CFTC's rules, which
is marked as ``Reserved.''
\498\ See Rule 1000 of Regulation SCI (defining ``SCI entity'').
In Nov. 2014, the Commission adopted Regulation Systems Compliance
and Integrity (``SCI'') to strengthen the technology infrastructure
of the U.S. securities markets, reduce the occurrence of systems
issues in those markets, improve their resiliency when technological
issues arise, and establish an updated and formalized regulatory
framework, thereby helping to ensure more effective Commission
oversight of such systems. See Regulation Systems Compliance and
Integrity, SEA Release No. 73639 (Nov. 19, 2014), 79 FR 72252 (Dec.
5, 2014).
\499\ See id., 79 FR at 72363-64 (reviewing comments received
regarding the potential application of Regulation SCI to SBSEFs,
among others).
\500\ See Regulation Systems Compliance and Integrity, SEA
Release No. 97143 (Mar. 15, 2023), 88 FR 23146 (Apr. 14, 2023)
(Proposed Amendments) (File No. S7-07-23).
---------------------------------------------------------------------------

One commenter states that it has seen no changes in the SBS market
that should cause the Commission to revisit its decision not to apply
Regulation SCI to SBSEFs. The commenter states that, as the Commission
has noted, the greatest operations risk to a dually registered entity
is likely to arise from the swap business rather than the SBS business.
From this standpoint, according to the commenter, it is appropriate for
the Commission to align with the CFTC approach to ensure that SEFs and
SBSEFs alike have adequate system safeguards and business continuity
protocols that are aligned with this risk.\501\
---------------------------------------------------------------------------

\501\ See Bloomberg Letter, supra note 18, at 18.
---------------------------------------------------------------------------

Subpart O is reasonably designed to promote SEF operational
capability, and that the most appropriate way to implement SEA Core
Principle 13 is to closely harmonize with the CFTC's rules that
implement the corresponding Core Principle. As with SEA Core Principle
12 (Financial resources),\502\ the Commission recognizes that the swap
business of a dually registered SEF/SBSEF is likely to be much larger
than its SBS business. Therefore, the greatest operational risk to a
dually registered entity is likely to arise from the swap business
rather than the SBS business, so it would be logical for the SEC to

[[Page 87212]]

defer to the CFTC's approach for ensuring that SEFs have adequate
system safeguards and business continuity protocols. Different or
additive requirements imposed by the SEC could increase costs for SEF/
SBSEFs while generating benefits that are marginal at best. The
Commission does not observe any differences in the SBS market relative
to the swaps market that warrant imposing different or additive
operational capability requirements on SBSEFs. Additionally, because
SBSEFs are not SCI entities and the corresponding CFTC rule has not
imposed additional requirements on critical financial markets, it is
not necessary or appropriate to adapt into Rule 830 the language of
subpart O applicable to critical financial markets.\503\
---------------------------------------------------------------------------

\502\ See supra section VI.L (discussing Core Principle 12).
\503\ While subpart O frequently uses the term ``market
participant,'' Proposed Rule 830 would substitute the term
``member'' in these places, since the rule pertains to market
participants who are engaging as members of the SEF/SBSEF. See supra
note 362.
---------------------------------------------------------------------------

Therefore, the Commission is adopting Rule 830 as proposed, with
minor technical modifications.\504\
---------------------------------------------------------------------------

\504\ See supra note 32.
---------------------------------------------------------------------------

N. Rule 831--Core Principle 14--Designation of Chief Compliance Officer

SEA Core Principle 14 \505\ requires each registered SBSEF to
designate a chief compliance officer (``CCO''), and requires the CCO to
review the SBSEF's compliance with the Core Principles, resolve
conflicts of interest, be responsible for establishing and
administering policies and procedures required under the Core
Principles, establish procedures for the remediation of noncompliance,
prepare and sign an annual report that describes the SBSEF's
compliance, certify that the report is accurate and complete, and
submit the report to the Commission. CEA Core Principle 15 for SEFs
\506\ is substantively identical.
---------------------------------------------------------------------------

\505\ Section 3D(d)(14) of the SEA, 15 U.S.C. 78c-4(d)(14).
\506\ Section 5h(f)(15) of the CEA, 7 U.S.C. 7b-3(f)(15).
---------------------------------------------------------------------------

Proposed Rule 831 would implement SEA Core Principle 14 and is
closely modeled on subpart P of part 37, with two minor substantive
exceptions.\507\ The first relates to disqualification of the CCO.
Section 37.1501(b)(2)(ii) states: ``No individual disqualified from
registration pursuant to sections 8a(2) or 8a(3) of the [CEA] may serve
as a chief compliance officer.'' The Commission proposed instead, in
Rule 831(c)(2), that no individual that would be disqualified from
serving on an SBSEF's governing board \508\ or committees pursuant to
the criteria set forth in Sec. 242.819(i) may serve as the CCO. As
noted above,\509\ the disqualification criteria in Rule 819(i) are
adapted from Sec. 1.63 of the CFTC's rules. Second, the Commission
adapted the acceptable practices pertaining to CEA Core Principle 15
into paragraph (c) of Proposed Rule 831.\510\
---------------------------------------------------------------------------

\507\ In addition, the requirement in Proposed Rule 831 that the
CCO's annual compliance report be submitted electronically to the
Commission, based on Sec. 37.1501(e)(2), includes an added clause
to provide that the submission must be made using the EDGAR system
and must be provided as an Interactive Data File in accordance with
Rule 405 of Regulation S-T, in conformance with other rules in
Regulation SE requiring electronic submissions. See Proposed Rule
831(j)(2).
\508\ Subpart P uses the term ``board of directors,'' while the
Commission proposed to use the term ``governing board'' instead
throughout proposed Regulation SE. See Proposing Release, supra note
1, 87 FR at 28877 n.29.
\509\ See supra section VI.B.9.
\510\ Proposed Rule 831(c) would provide that, in determining
whether the background and skills of a potential CCO are appropriate
for fulfilling the responsibilities of the role of the CCO, an SBSEF
would have the discretion to base its determination on the totality
of the qualifications of the potential CCO, including, but not
limited to, compliance experience, related career experience,
training, potential conflicts of interest, and any other relevant
factors.
---------------------------------------------------------------------------

The Commission received one comment on Proposed Rule 831. The
commenter states that he fully supports the intent of the proposed
regulations and believes that the CCO role is the single most important
compliance role in an SBSEF and that it is critical that its job
description, and the entity's rules, structures, and procedures, act to
secure and maintain the CCO's independence. For example, the commenter
states, the CCO should have a single compliance role and no other
competing role or responsibility that could create conflicts of
interest or threaten its independence. Therefore, the commenter
suggests that the rules restrict the CCO position from being held by an
attorney who represents the SBSEF or its board of directors, such as an
in-house or general counsel. The commenter also states that the
remuneration of the CCO must be specifically designed in such a way
that avoids potential conflicts of interest with its compliance
role.\511\
---------------------------------------------------------------------------

\511\ See Letter from Chris Barnard (May 20, 2022) (submitted
under cover email dated June 6, 2022).
---------------------------------------------------------------------------

The commenter further states that although the CCO would normally
report to an executive officer, the CCO must also have a direct
reporting line to the independent directors, and the CCO should report
to the audit committee at least yearly. The commenter strongly
recommends amending Sec. 242.831 such that the authority and sole
responsibility to designate or remove the CCO, or to materially change
its duties and responsibilities, vests only with the independent
directors and not with the full board. This would help, the commenter
states, to ensure the independence of the CCO within the entity and
would possibly mitigate the need to promulgate rules requiring the
SBSEF to insulate the CCO from undue pressure and coercion or to
address the potential conflict between and among compliance interests,
commercial interests and ownership interests of an SBSEF.\512\
---------------------------------------------------------------------------

\512\ See id.
---------------------------------------------------------------------------

The CFTC has implemented CEA Core Principle 14 for SEFs in an
appropriate way, and that closely harmonizing with subpart P of part 37
would yield comparable regulatory benefits while imposing only marginal
additional costs. While the commenter's suggestions would support the
independence of the CCO, key provisions of paragraph (b) of Proposed
Rule 831 would sufficiently protect the independence and authority of
an SBSEF's CCO in performing the required functions. Significantly,
paragraph (b)(1) would require that the position of CCO carry with it
sufficient authority and resources to fulfill the position's duties,
and paragraph (b)(2) would provide that the CCO shall have supervisory
authority over all staff acting at the CCO's direction. The SBSEF
remains responsible for establishing and administering required
policies and procedures.
The Commission also recognizes that most SBSEFs are likely to be
dually registered SEF/SBSEFs and that the swaps business of a dually
registered SEF/SBSEF is likely to be much larger than its SBS business.
Therefore, the greatest compliance risks to a dually registered entity
are likely to arise from the swap business rather than the SBS
business, and it is thus logical for the SEC to harmonize with the
CFTC's rules regarding the CCO. There are strong economic incentives
for a dually registered entity to appoint the same individual to serve
as the CCO for both the swap and SBS businesses, and for the CCO to
carry out their functions under a similar set of rules. Different or
additive requirements imposed by the SEC could increase costs for SEF/
SBSEFs while generating benefits that are marginal at best. The
Commission does not observe any differences in the SBS market relative
to the swaps market that warrant imposing different or additive CCO
requirements on SBSEFs relating to the CCO.
For the reasons discussed above, the Commission is adopting Rule
831 as

[[Page 87213]]

proposed, with minor technical modifications.\513\
---------------------------------------------------------------------------

\513\ See supra note 32. The Commission has also deleted an
extraneous ``and'' at the end of the text of Rule 831(a)(1)(v).
---------------------------------------------------------------------------

VII. Cross-Border Rules

A. Rule 832--Cross-Border Mandatory Trade Execution

Given the global nature of the SBS market, where there is frequent
interaction among counterparties domiciled in different jurisdictions,
the Commission proposed Rule 832 to address when the trade execution
requirement would apply to a cross-border SBS transaction.\514\ The
proposed rule would be consistent with the Commission's territorial
approach to applying Title VII requirements in other contexts, where
relevant activity need not occur wholly within the United States or
solely between U.S. persons for Title VII requirements to apply.\515\
As discussed further below, the relevant activity here is ``to engage
in a security-based swap'' in whole or in part in the United
States.\516\
---------------------------------------------------------------------------

\514\ See supra section V.F (discussing the trade execution
requirement of section 3C(h) of the SEA); see also Proposing
Release, supra note 1, 87 FR at 28922-25 (discussing proposed Rule
832 in more detail).
\515\ See Proposing Release, supra note 1, 87 FR at 28922-23.
\516\ See SEA section 3C(a)(1), 15 U.S.C. 78c-3(a)(1).
---------------------------------------------------------------------------

Paragraph (a) of Rule 832 would provide that the trade execution
requirement set forth in section 3C(h) of the SEA shall not apply to an
SBS unless at least one counterparty to the SBS is a ``covered person''
as defined in paragraph (b). Paragraph (b) of Rule 832 would define the
term ``covered person'' with respect to a particular security-based
swap, as any person that is: (1) a U.S. person; \517\ (2) a non-U.S.
person whose performance under an SBS is guaranteed by a U.S. person;
or (3) a non-U.S. person who, in connection with its SBS dealing
activity, uses U.S. personnel located in a U.S. branch or office, or
personnel of an agent of such non-U.S. person located in a U.S. branch
or office, to arrange, negotiate, or execute a transaction. Taken
together, the provisions of Rule 832 apply to persons who are--
consistent with the relevant statutory provisions added by Title VII--
engaging in SBS in the United States.
---------------------------------------------------------------------------

\517\ Transactions effected through the foreign branch of a U.S.
person would be subject to the trade execution requirement, as ``a
foreign branch has no separate existence from the U.S. person
itself.'' See Proposing Release, supra note 1, 87 FR at 28923.
---------------------------------------------------------------------------

Two commenters express support for Rule 832 or its subparts.
Specifically, one commenter states that inclusion of paragraphs (b)(2)
and (b)(3) in the proposed rule--where one counterparty of an SBS
transaction is a non-U.S. person whose performance under an SBS is
guaranteed by a U.S. person (``guaranteed person transactions''), and
where one counterparty of an SBS transaction is a non-U.S. person who,
in connection with its SBS dealing activity, uses U.S. personnel
located in a U.S. branch or office, or personnel of an agent of such
non-U.S. person located in a U.S. branch or office, to arrange,
negotiate, or execute a transaction (``ANE transactions''),
respectively--are ``appropriately broad [and] will help prevent
attempted evasion of the trade execution requirement by ensuring that
it will apply where there is a significant connection to the U.S., even
when neither counterparty is a U.S. person.'' \518\
---------------------------------------------------------------------------

\518\ Better Markets Letter, supra note 18, at 14-15.
---------------------------------------------------------------------------

While generally supportive of Rule 832, this commenter believes
that, in addition to guaranteed person transactions, the rule should
also cover transactions that include a ``de facto guarantee'' by a U.S.
person, which this commenter states represents ``an unspoken but
nevertheless powerful arrangement whereby a parent or other U.S. person
has a virtually irresistible incentive to cover the losses incurred by
another affiliated entity'' given the reputational impact a failure of
even a non-guaranteed affiliate could have.\519\
---------------------------------------------------------------------------

\519\ Id. at 15-16. This commenter cited Citigroup's experience
with certain structured investment vehicles during the 2008
financial crisis, which this commenter states Citigroup ``chose'' to
bring onto its balance sheet even though it had no legal obligation
to do so. See id.
---------------------------------------------------------------------------

Another commenter expresses support for paragraph (b)(3) of Rule
832 relating to ANE transactions.\520\ This commenter agrees that such
transactions fall within the Commission's jurisdiction, even if they
are booked to non-U.S. entities, and believes that, given the
Commission's supervisory interests and policy objectives, it is
warranted for the Commission to exercise its jurisdiction over ANE
transactions. This commenter states that, ``following the CFTC granting
no-action relief from the trade execution requirement for ANE
transactions, interdealer trading activity in EUR interest rate swaps
began to be booked almost exclusively to non-U.S. entities, a fact
pattern that academic research found was `consistent with (although not
direct proof of) swap dealers strategically choosing the location of
the desk executing a particular trade in order to avoid trading in a
more transparent and competitive setting.' '' \521\ The commenter
states that this is ``an outcome to avoid in the SBS market.'' \522\
---------------------------------------------------------------------------

\520\ See Citadel Letter, supra note 18, at 16.
\521\ Id. (citing Benos, E., Payne, R., and Vasios, M.,
Centralized trading, transparency and interest rate swap market
liquidity: evidence from the implementation of the Dodd-Frank Act,
Bank of England Staff Working Paper, at 30 (May 2018), available at
https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2018/centralized-trading-transparency-and-interest-rate-swap-market-liquidity-update).
\522\ Id.
---------------------------------------------------------------------------

Several commenters oppose certain aspects of Rule 832. One
commenter disagrees with the Commission's application of the trade
execution requirement to transactions involving foreign branches of
U.S. persons, as well as to guaranteed person transactions.\523\ This
commenter believes that ``mandatory trade execution is not designed to
address or mitigate systemic risk'' and, thus, it is unnecessary to
extend SBSEF rules to transactions with non-U.S. counterparties ``where
the lack of such rules would have no ability of posing risk to the U.S.
financial system.'' \524\ This commenter states that guaranteed
entities (by definition non-U.S. persons) and foreign branches of U.S.
persons are both subject to the laws and regulations of their home
country or the foreign jurisdictions in which they and their
counterparties operate, respectively, and the commenter states that
imposing the rule's mandatory trading obligations on them in
transactions with non-U.S. counterparties would result in duplicative
regulation, which would increase compliance costs and add complexity
and inefficiencies to cross-border trading.\525\ This commenter also
states that foreign trading venues are already subject to comprehensive
regulatory oversight in their home jurisdictions and, based on its
experience with the CFTC's SEF trading rules prior to the grant of
equivalency to major foreign trading platforms in Europe and Asia,
``foreign platforms will deny access to any entity with any connection
to the United States, no matter how remote, for fear of being captured
by the SEC's regime'' and will further fragment SBS markets.\526\
---------------------------------------------------------------------------

\523\ See ISDA-SIFMA Letter, supra note 18, at 12-13.
\524\ Id. at 12.
\525\ See id. at 13.
\526\ Id.
---------------------------------------------------------------------------

Several commenters also oppose subjecting ANE transactions to the
trade execution requirement in Rule 832(b)(3). One commenter believes
that ANE transactions fall outside the jurisdictional reach of Title
VII, and that

[[Page 87214]]

``the location of personnel or agents within the United States should
not form the basis for extending the [Commission's] trading mandate. .
. .'' \527\ This commenter states that, when assessing the necessity of
extending the extraterritorial reach of a particular ruleset, ``it is
important to consider the objectives of individual rulesets'' and
further states that ``platform trading rules are not intended to
address or mitigate risk, and therefore, the Commission should exercise
more flexibility'' when deciding whether these rules should extend to
ANE transactions.\528\ This commenter believes that including ANE
transactions ``would bring a random selection of additional
transactions into scope merely due to some supporting role played by a
U.S. based sales person, trader or other function caught up in ANE.''
\529\
---------------------------------------------------------------------------

\527\ Id. at 11.
\528\ Id. This commenter states that rules related to mandatory
platform execution are intended to provide counterparties with a
sufficient level of pre-trade price transparency and that they
should be addressed by the market regulators in the jurisdiction
where the majority of trading activity is taking place. See id.
\529\ Id. at 12.
---------------------------------------------------------------------------

Several commenters warn of negative implications for the SBS market
from applying the trade execution requirements to ANE
transactions.\530\ One commenter expresses concern generally about the
rule's ``complexities and over-broad reach.'' \531\ Another commenter
states that firms and platforms would be required to make
representations ``that no ANE touchpoint is present in the U.S. for any
SBS subject to the trading mandate'' so as not to run afoul of Rule
832's requirements, which this commenter states would ``require the
development of a costly parallel infrastructure completely devoid of
U.S. touchpoints. . . .'' \532\ Similarly, another commenter states
that, without regulatory certainty and clear jurisdictional boundaries,
market participants may be unsure of which rules apply to a particular
SBS transaction because ``non-U.S. counterparties and platform
operators frequently do not know whether a transaction involves U.S.
ANE activities,'' which this commenter states will likely result in
confusion among market participants and platform operators and may
result in some market participants deciding not to transact in SBS at
all.\533\
---------------------------------------------------------------------------

\530\ See SIFMA AMG Letter, supra note 18, at 11; Tradeweb
Letter, supra note 18, at 3-4; ISDA-SIFMA Letter, supra note 18, at
11-12.
\531\ SIFMA AMG Letter, supra note 18, at 11.
\532\ ISDA-SIFMA Letter, supra note 18, at 12.
\533\ Tradeweb Letter, supra note 18, at 4-5.
---------------------------------------------------------------------------

These commenters also state that foreign jurisdictions have adopted
robust regulatory regimes that already subject non-U.S. persons and
foreign trading venues to comparable and comprehensive regulations in
their respective jurisdictions.\534\ These commenters contrast the
Commission's proposed approach with the CFTC's efforts ``to curtail the
U.S.' approach to extra-territoriality in light of the progress made by
other jurisdictions in establishing robust derivatives regulatory
regimes,'' \535\ with one noting that, in adopting its cross-border
rules for certain swap-market participants in 2020, the CFTC announced
that it would not consider ANE as a relevant factor in non-U.S.
dealers' swap transactions.\536\ Another commenter asks the Commission
to be mindful of whether CFTC-registered SEFs would be forced to change
their rules in order comply with the new proposed SBSEF rules.\537\
---------------------------------------------------------------------------

\534\ See id. at 4; ISDA-SIFMA Letter, supra note 18, at 12. See
also SIFMA AMG Letter, supra note 18, at 11.
\535\ ISDA-SIFMA Letter, supra note 18, at 12. See also Tradeweb
Letter, supra note 18, at 4; SIFMA AMG Letter, supra note 18, at 11.
Section VII.B, infra, discusses the exemptions under Rule 833.
\536\ ISDA-SIFMA Letter, supra note 18, at 12 n.28. See also
CFTC, Cross-Border Application of the Registration Thresholds and
Certain Requirements Applicable to Swap Dealers and Major Swap
Participants, 85 FR 56924, 56961-63 (Sept. 14, 2020); CFTC Release
No. 8212-20 (July 23, 2020) (CFTC Withdraws ``ANE'' Staff Advisory
and Issues New Cross-Border No-Action Relief).
\537\ SIFMA AMG Letter, supra note 18, at 11.
---------------------------------------------------------------------------

Finally, one commenter requests that the Commission make more
explicit that the ``covered person'' definition in Rule 832 is a
transaction-based test,\538\ while another commenter requests
additional clarity about the application of the rule.\539\
---------------------------------------------------------------------------

\538\ See ISDA-SIFMA Letter, supra note 18, at 11 n.26.
Specifically, this commenter appreciates the Commission's
clarification that the ``covered person'' definition is a
transaction-based test but believes that the rule text could be more
explicit in such regard by replacing: in prong (2) of the definition
``a security-based swap'' with ``that security-based swap;'' and in
prong (3) of the definition ``a transaction'' with ``that security-
based swap transaction.''
\539\ See SIFMA AMG Letter, supra note 18, at 11-12.
---------------------------------------------------------------------------

The Commission has considered the comments received for Rule 832
and is adopting the rule as proposed, with minor technical
modifications.\540\ As an initial matter, the Commission disagrees with
those comments suggesting that Rule 832 may exceed the Commission's
statutory authority. The trade execution requirement of section
3C(h)(1) provides that the Commission's authority with respect to trade
execution is co-extensive with the Commission's authority to require
SBS clearing under section 3C(a)(1) of SEA.\541\ And the clearing
requirement of section 3C(a)(1) provides for SBS clearing when a person
is ``engage[d] in a security-based swap'' in the United States.\542\
Thus, consistent with the Commission's territorial approach and Title
VII, the relevant domestic activity that triggers the execution
requirement is engaging in an SBS in the United States.
---------------------------------------------------------------------------

\540\ See supra note 32.
\541\ Section 3C(h)(1) of the SEA (requiring trade execution
``[w]ith respect to transactions involving security-based swaps
subject to the clearing requirement of subsection (a)(1)'' of the
SEA).
\542\ Section 3C(a)(1) of the SEA (``It shall be unlawful for
any person to engage in a security-based swap unless that person
submits such security-based swap for clearing to a clearing agency
that is registered under this Act or a clearing agency that is
exempt from registration . . . .'').
---------------------------------------------------------------------------

Rule 832 fits comfortably within the bounds of that statutory
authority. A U.S. person undertaking SBS transactions within the United
States is, as no commenter disputes, engaging in an SBS in the United
States (irrespective of whether the counterparty is overseas). And this
is true even if the U.S. person is undertaking the SBS transaction from
a foreign office. As the Commission has explained, ``a foreign office
has no separate existence from the U.S. person itself.'' \543\ It is
the U.S. based entity that has legal and financial responsibility for
the SBS transaction and for the ensuing obligations that will flow from
the transaction over the life of the SBS. Thus, it is reasonable to
understand the U.S. entity to have engaged in the United States in the
SBS even if the initial undertaking (i.e., the SBS transaction)
occurred in the entity's foreign office.
---------------------------------------------------------------------------

\543\ Proposing Release, supra note 1, 87 FR at 28923 (citing
Application of ``Security-Based Swap Dealer'' and ``Major Security-
Based Swap Participant'' Definitions to Cross-Border Security-Based
Swap Activities; Republication, SEA Release No. 72472 (June 25,
2014), 79 FR 47278, 47289 (Aug. 12, 2014) (``2014 Cross-Border
Adopting Release'')).
---------------------------------------------------------------------------

For similar reasons, a non-U.S. person who enters an SBS with
another non-U.S. person has nonetheless engaged in an SBS in the United
States (at least in part) if that SBS arrangement is guaranteed by a
U.S. person. When a non-U.S. person operates with a guarantee from a
U.S. person for the non-U.S. person's performance under an SBS, the SBS
arrangement is economically equivalent and substantially identical with
a transaction entered into directly with the U.S. guarantor. With such
an arrangement, an essential element of the transaction from the
viewpoint of the

[[Page 87215]]

guaranteed person's counterparty is the legal and financial obligations
such a guarantee imposes on the U.S. guarantor (without which there
would be no need to include the U.S. guarantor) and brings the U.S.
person legally and financially into the transaction as an interested
party. This economic reality makes it appropriate to include guaranteed
non-U.S. persons within the definition of ``covered persons'' in Rule
832.
Further, the statutory language is, in the Commission's view,
reasonably understood to encompass a non-U.S. person who, in connection
with its SBS dealing activity, uses U.S. personnel located in a U.S.
branch or office, or personnel of an agent of such non-U.S. person
located in a U.S. branch or office, to arrange, negotiate, or execute
an SBS transaction. These activities rise to the level of engaging in
an SBS in the United States. Undertaking critical steps in an SBS
transaction qualifies as engaging in an SBS in the United States, no
less than placing ultimate legal or financial responsibility for an SBS
with a person in the United States (as occurs in the cases discussed
above of an SBS transaction involving either a foreign office of a U.S.
person or a U.S. guarantor).
The Commission's assessment of the relevant domestic activities
that constitute engaging in an SBS is consistent not only with the
statutory text, but also the statutory objectives underlying the
execution requirement. These objectives include, among other things,
helping to ensure the financial stability of U.S. persons engaged in
SBS transactions, the promotion of transparency in price formation for
SBS transactions that have a nexus to the U.S. securities markets, and
the prevention of manipulation, price distortion and disruptions of the
delivery or cash settlement process within the U.S. market system. Each
of the components of Rule 832 helps to advance one or more of these
statutory goals and, thus, further supports the Commission's reasonable
understanding of what constitutes engaging in an SBS in the United
States.\544\
---------------------------------------------------------------------------

\544\ In the alternative, the Commission relies on the anti-
evasion authority of section 30(c) of the SEA, 15 U.S.C. 78dd(c), as
statutory authority for Rule 832. Section 30(c) authorizes the
Commission to apply Title VII requirements to persons transacting a
business ``without the jurisdiction of the United States'' if they
contravene rules that the Commission has prescribed as ``necessary
or appropriate to prevent the evasion of any provision'' of Title
VII. For example, without Rule 832(b)(2), U.S. persons could have an
incentive to evade the trade execution requirement by engaging in
SBS via a guaranteed affiliate, while the economic reality of
transactions arising from that activity--including the risks these
transactions introduce to the U.S. market--would be no different in
most respects than transactions entered into directly by U.S.
persons. See Proposing Release, supra note 1, 87 FR at 28923 n.228.
And, without Rule 832(b)(3), non-U.S. persons could retain the
benefits of operating in the United States while avoiding compliance
with the trade execution requirement. See id. at 28923 n.230.
---------------------------------------------------------------------------

With that general explanation of how Rule 832 fits comfortably
within our statutory authority, the Commission will address the
specific comments that were received on the rule. For the reasons
discussed above, the Commission disagrees with the comment that Rule
832 should not extend the trade execution requirement to transactions
involving foreign branches of U.S. persons or guaranteed person
transactions.\545\ With respect to the commenter that believes Rule
832's definition of ``covered person'' should also cover a transaction
that includes a ``de facto guarantee'' by a U.S. person,\546\ the
Commission appreciates that, even for an affiliate that is not a
guaranteed person, a dealer or large trader might be unwilling to allow
such an affiliate to fail because of the reputational and other
consequences such a failure might have on its interactions with
potential counterparties. At the same time, given the lack of a legal
obligation by the ``de facto guarantor,'' it is not clear how the
Commission could determine--before the fact--which ``de facto
guarantees'' exist and which such ``de facto guarantors'' should be
included, or how market participants, including counterparties, would
be able to determine the applicability of Regulation SE to a
transaction potentially subject to a ``de facto guarantee.'' Thus, the
Commission is not including ``de facto guarantee'' transactions within
Rule 832's definition of ``covered persons.''
---------------------------------------------------------------------------

\545\ See supra note 523 and accompanying text.
\546\ See supra note 519 and accompanying text.
---------------------------------------------------------------------------

For the reasons discussed above, as well as the reasons discussed
immediately below, the Commission also disagrees with the argument that
the Commission should not extend SBSEF rules, which include mandatory
trade execution, to transactions with non-U.S. counterparties (even if
they involve guaranteed persons) where the lack of such rules would
have no ability of posing risk to the U.S. financial system.\547\ While
Title VII's trade execution requirements do not relate to systemic risk
in precisely the same manner that certain other Title VII rules--such
as capital, margin, and segregation requirements for SBSDs and
MSBSPs,\548\ post-trade reporting and public dissemination of SBS
transactions,\549\ registration and regulation of SBSDs and
MSBSPs,\550\ among others--the Commission disagrees with the notion
that the trade execution and other SBSEF requirements are not important
in addressing and mitigating risk, including potentially systemic risk,
to the U.S. financial system. The application of the trade execution
requirement to a cross-border SBS transaction is not simply a matter of
whether a particular form of execution (such as RFQ-to-3 or the use of
an order book) is required. Instead, the application of this
requirement to such a transaction would subject the transaction to the
various requirements of Regulation SE, many of which relate to
mitigating risks to the counterparties of the transaction and,
ultimately, the U.S. financial system. The Core Principles for SBSEFs--
which are set forth in the Dodd-Frank Act \551\ and implemented in the
rules of Regulation SE--seek to, among other things, provide for
transparency in price formation for SBS,\552\ impartial access to SBS
trading,\553\ the financial resources of SBS trading venues,\554\ the
efficient submission of eligible SBS transactions to central
clearing,\555\ and the prevention of manipulation, price distortion,
and disruptions of the delivery or cash settlement process.\556\
---------------------------------------------------------------------------

\547\ See supra note 524 and accompanying text.
\548\ See Capital, Margin, and Segregation Release, supra note
100.
\549\ See Regulation SBSR Release, supra note 102.
\550\ See SBSD and MSBSP Registration Release, supra note 99.
\551\ Core Principles of section 3D(d) of the SEA, 15 U.S.C.
78c-4(d).
\552\ See, e.g., Rule 815 (methods of execution); Rule 816
(trade execution requirement); Rule 825 (Core Principle 8--timely
publication of trading information).
\553\ See, e.g., Rule 819(c) (Core Principle 2--access
requirements).
\554\ See, e.g., Rule 829 (Core Principle 12--financial
resources).
\555\ See, e.g., Rule 823(c) (Core Principle 6--financial
integrity of transactions).
\556\ See, e.g., Rule 820 (Core Principle 3--SBS not readily
susceptible to manipulation); Rule 821(Core Principle 4--monitoring
of trading and trade processing); Rule 823 (Core Principle 6--
financial integrity of transactions).
---------------------------------------------------------------------------

With respect to commenters' views opposing the inclusion of ANE
transactions in Rule 832,\557\ the Commission understands that this
differs from the CFTC's policy towards ANE transactions and is
cognizant of the potential complexities and costs that can arise if
market participants are unsure of which jurisdictions' rules apply to a
particular SBS transaction.

[[Page 87216]]

The Commission also recognizes commenters' views that certain foreign
jurisdictions have adopted ``robust'' regulatory regimes.\558\ However,
the purpose of Rule 832 is to ``address when the . . . trade execution
requirement applies to a cross-border SBS transaction.'' \559\ Absent
an exemption, the trade execution requirement applies in cross-border
contexts wherever covered persons are involved in an SBS transaction,
regardless of whether the relevant foreign jurisdictions have robust
regulatory regimes--such as those the Commission may consider in
connection with a foreign trading venue's application to the Commission
for an exemption from the trade execution requirement under Rule
833(b).\560\
---------------------------------------------------------------------------

\557\ See supra notes 527-537 and accompanying text.
\558\ See supra note 534 and accompanying text.
\559\ Proposing Release, supra note 1, 87 FR at 28924.
\560\ See infra section VII.B (discussing cross-border
exemptions under Rule 833, including exemptions relating to the
trade execution requirement under Rule 833(b)). The Commission may
consider, among other things, the extent to which the SBS traded in
a foreign jurisdiction are subject to a comparable trade-execution
requirement.
---------------------------------------------------------------------------

In adopting Rule 832, the Commission has been mindful of its impact
on CFTC-registered SEFs and, as a commenter suggests,\561\ whether they
might be forced to change their rules because of the Commission's ANE
approach for SBSEFs. As discussed below in section VII.B with respect
to applications for exemptions relating to the trade execution
requirement under Rule 833(b), foreign trading venues that have already
received exemptive relief from the CFTC for swaps trading where robust
regulatory regimes may exist with requirements comparable to those
applicable to SBS transactions in the United States may apply for
exemptive relief under Rule 833(b). If exempted under Rule 833(b),
trading of SBS on such foreign trading venues would not require CFTC-
registered SEFs to change their rules.\562\ Similarly, for SBS
transactions that the Commission exempts from the trade execution
requirement based on an application submitted under Rule 833(b), the
concerns expressed by commenters regarding complexities and costs would
no longer be applicable,\563\ and commenters' concerns regarding the
Commission's treatment of ANE transactions should be allayed as well,
because the effect of such exemptions would likely result in SBS
transactions in foreign jurisdictions with what may be considered
robust regulatory regimes being exempt from the Commission's trade
execution requirement and, in practice, have similar treatment of
transactions on applicable foreign trading venues as the CFTC. On the
other hand, if the Commission does not grant an exemption to such an
SBS transaction, that would mean that the Commission would not have
made a finding that granting such an exemption would be in the public
interest and consistent with the protection of investors, in light of
any information submitted with the application which the Commission may
have considered regarding comparable requirements in that foreign
jurisdiction. For such SBS transactions, it would be appropriate for
the trade execution requirements to apply.
---------------------------------------------------------------------------

\561\ See supra note 537 and accompanying text.
\562\ See infra notes 624-627 and accompanying text.
\563\ According to one commenter, these issues no longer apply
in the SBS markets given that the CFTC resolved it ``when it granted
equivalency to major foreign trading platforms in Europe and Asia.''
See supra note 526 and accompanying text. The CFTC has granted
orders of exemptions to certain markets pursuant to CEA section
5h(g), which authorizes the CFTC to exempt, conditionally or
unconditionally, a SEF from registration under CEA section 5h if the
CFTC finds that the facility is ``subject to comparable,
comprehensive supervision and regulation on a consolidated basis by
. . . the appropriate governmental authorities in the home country
of the facility.'' See ``Exemption of Foreign Swap Trading
Facilities from SEF Registration,'' available at https://www.cftc.gov/International/ForeignMarketsandProducts/ExemptSEFs.
---------------------------------------------------------------------------

The Commission also disagrees with the characterization of Rule 832
with respect to ANE transactions as bringing ``a random selection of
additional transactions into scope'' and the belief that the location
of personnel in the United States should not form the basis for
applying the Commission's trade execution requirement.\564\ The mere
fact that an entity has personnel located in the U.S. does not subject
an SBS transaction to the trade execution requirement; rather, it is
the role such personnel play in arranging, negotiating, or executing
the transaction that brings them within the definition of ``covered
person'' for purposes of Rule 832. ANE transactions would not be a
``random selection of additional transactions;'' \565\ instead, it
would be appropriate to apply its carefully considered and tailored
guidance given in other Title VII requirements for the phrase
``arranged, negotiated, or executed'' for the purposes of the
application of the trade execution requirement in the cross-border
context.
---------------------------------------------------------------------------

\564\ See supra notes 527 and 529 and accompanying text.
\565\ See supra note 564 and accompanying text.
---------------------------------------------------------------------------

Specifically, the Commission has clarified that Title VII
requirements using an ``arranged, negotiated, or executed'' test are
not triggered in certain circumstances where the market-facing activity
of U.S. personnel is ``so limited that it would not implicate the
regulatory interests underlying the relevant Title VII requirements.''
\566\ Such instances arise when U.S. personnel provide ``market color''
in connection with SBS transactions, where such market color is
``limited to background information regarding pricing or market
conditions associated with particular instruments or with markets more
generally'' \567\ and when the U.S. personnel have no client
responsibility \568\ and do not receive any transaction-linked
compensation.\569\ However, market-facing activity by personnel located
in the United States also would not be ``market color'' (i.e., would be
considered to be ``arranged, negotiated, or executed'') if such
activity involves: providing recommendations, such as recommending
particular instruments; providing predictions regarding potential
merits or risks of, or providing trading ideas or strategies relating
to, a proposed security-based swap transaction; structuring a
particular SBS transaction; or finalizing or reaching agreement with
respect to any pricing or non-pricing element, such as underlier,
notional amount or tenor, that must be resolved to complete an SBS
transaction.\570\
---------------------------------------------------------------------------

\566\ See 2019 Cross-Border Adopting Release, supra note 218, 85
FR at 6274.
\567\ Id. at 6275-76. Background information includes
information regarding (1) current or historic pricing, volatility or
market depth, and (2) trends or predictions regarding pricing,
volatility, or market depth, as well as information related to risk
management. See id. at 6275.
\568\ No client responsibility would mean that the U.S.
personnel have not been assigned, and do not otherwise exercise,
client responsibility in connection with the transaction. See id. at
6275-76.
\569\ Not receiving any transaction-linked compensation means
the U.S. personnel do not receive compensation based on, or
otherwise linked to, the completion of individual transactions on
which the U.S. personnel provide market color. See id.
\570\ See id. at 6275.
---------------------------------------------------------------------------

With this existing guidance that applies to cross-border ANE
transactions subject to Rule 832,\571\ declining to apply Title VII
requirements to SBS transactions of foreign entities that use U.S.
personnel to engage in ANE transactions would allow such entities to
exit the Title VII regulatory regime without exiting the U.S.
market.\572\ This is problematic

[[Page 87217]]

because, as the Commission stated in the Proposing Release, ``applying
the trade execution requirement to such persons is necessary or
appropriate as a prophylactic measure to help prevent the evasion of
the provisions of the SEA that were added by the Dodd-Frank Act, and
thus help prevent the relevant purposes of the Dodd-Frank Act from
being undermined. Without this rule, non-U.S. persons could retain the
benefits of operating in the United States while avoiding compliance
with the trade execution requirement.'' \573\
---------------------------------------------------------------------------

\571\ See supra notes 566-570 and accompanying text.
\572\ See Proposing Release, supra note 1, 87 FR at 28923
(citing Regulation SBSR--Reporting and Dissemination of Security-
Based Swap Information, SEA Release No. 78321 (July 14, 2016), 81 FR
53546, 53591 (Aug. 12, 2016) (``Regulation SBSR Adopting Release
II'')).
\573\ Proposing Release, supra note 1, 87 FR at 28923 n.230. See
also supra note 521 and accompanying text (providing an example of
swap dealers strategically choosing the location of the desk
executing a particular trade in order to avoid trading in a more
transparent and competitive setting after no-action relief from the
trade execution requirement for ANE transaction).
---------------------------------------------------------------------------

Finally, with respect to the request by one commenter that the
Commission revise the ``covered person'' definition in Rule 832 to make
more explicit that it is a transaction-based test,\574\ the Commission
affirms again that the definition is intended to apply on a
transaction-by-transaction basis,\575\ and views the language in the
rule (e.g., ``with respect to a particular security-based swap'') as
sufficiently clear in this regard.\576\
---------------------------------------------------------------------------

\574\ See supra note 538 and accompanying text.
\575\ See Proposing Release, supra note 1, 87 FR at 28922 n.221
(``The proposed term `covered person' is designed to apply on a
transaction-by-transaction basis.'').
\576\ With respect to the commenter that requested additional
clarity with respect to Rule 832, see supra note 539 and
accompanying text, the Commission's discussion of the rule in this
section including, for example, the applicability of existing
guidance with respect to ANE transactions and the availability of
exemptions under Rule 833(b) from the mandatory trade execution
requirement as discussed in section VII.B below, should provide
market participants with more clarity on when and to whom the rule's
requirements would apply.
---------------------------------------------------------------------------

Accordingly, for the reasons discussed above, the Commission is
adopting Rule 832 as proposed, with minor technical modifications.\577\
---------------------------------------------------------------------------

\577\ See supra notes 32 and 540.
---------------------------------------------------------------------------

B. Rule 833--Cross-Border Exemptions for Foreign Trading Venues and
Relating to the Trade Execution Requirement

As discussed above, Rule 832 specifies when the trade execution
requirement applies to an individual cross-border SBS transaction. When
covered persons (as defined in Rule 832) are members of a foreign
trading venue for SBS (a ``foreign SBS trading venue'') with respect to
SBS transacted on that venue, whether or not such SBS are subject to
the trade execution requirement, the foreign SBS trading venue could be
required to register with the Commission as a national securities
exchange or SBSEF \578\ or, because the foreign SBS trading venue would
be facilitating the execution of SBS between persons, a broker.\579\
---------------------------------------------------------------------------

\578\ See 15 U.S.C. 78c-4(a)(1) (stating that no person may
operate a facility for the trading or processing of SBS, unless the
facility is registered as an SBSEF or national securities exchange).
\579\ A ``broker'' is generally defined as a person engaged in
the business of effecting transactions in securities for the account
of others. See Section 3(a)(4) of the SEA, 15 U.S.C. 78c(a)(4).
Section 15(a)(1) of the SEA, 15 U.S.C. 78o(a)(1), generally provides
that it shall be unlawful for any broker to make use of the mails or
any means or instrumentality of interstate commerce to effect any
transactions in, or to induce or attempt to induce the purchase or
sale of, any security unless such broker is registered in accordance
with SEA section 15(b). See also infra section XI (discussing Rule
15a-12).
---------------------------------------------------------------------------

To address the situation of a foreign SBS trading venue that wishes
to avoid registering with the Commission in one or more of these
capacities, the Commission proposed Rule 833(a). Rule 833(a), which
would specify that a foreign SBS trading venue can request that the
Commission grant it an exemption under section 36(a)(1) of the SEA
\580\ by submitting, pursuant to SEA Rule 0-12,\581\ a complete
application for exemptive relief. Rule 833(a) would also provide that
such an application under section 36(a)(1) and Rule 0-12, relating to
the status of the foreign SBS trading venue under the SEA, may state
that the application is also submitted pursuant to Rule 833(a).\582\
When such an application is submitted pursuant to Rule 833(a), the
Commission would consider the submission as an application to exempt
the foreign SBS trading venue, with respect to its providing a market
place for SBS, from: the definition of ``exchange'' in section 3(a)(1)
of the SEA; \583\ the definition of ``security-based swap execution
facility'' in section 3(a)(77) of the SEA; \584\ the definition of
``broker'' in section 3(a)(4) of the SEA; \585\ and section 3D(a)(1) of
the SEA.\586\ Because a foreign SBS trading venue for which the
Commission grants an exemptive order under SEA section 36 and Rule
833(a) \587\ would be exempt from these definitions and from section
3D(a)(1) of the SEA, the foreign SBS trading venue would not be
required to register with the Commission as a national securities
exchange, SBSEF, or broker, or to comply with other requirements
applicable to such entities under the SEA or Commission rules
thereunder.\588\
---------------------------------------------------------------------------

\580\ 15 U.S.C. 78mm(a)(1).
\581\ 17 CFR 240.0-12 (setting forth procedures for filing
applications for orders for exemptive relief under section 36 of the
SEA).
\582\ An application for an exemption under Rule 833(a) could be
submitted by a foreign SBS trading venue itself or by another
interested party. For example, a financial regulatory authority in a
foreign jurisdiction could submit an application under Rule 833(a)
on behalf of one or more SBS trading venues licensed and regulated
in that jurisdiction.
\583\ 15 U.S.C. 78c(a)(1).
\584\ 15 U.S.C. 78c(a)(77).
\585\ 15 U.S.C. 78c(a)(4).
\586\ 15 U.S.C. 78c-4(a)(1) (stating that no person may operate
a facility for the trading or processing of SBS, unless the facility
is registered as an SBSEF or national securities exchange).
\587\ For the remainder of this discussion, an exemption under
SEA section 36 and Rule 833(a) will be referred to simply as a
``Rule 833(a) exemption.'' In addition, the Commission will use the
term ``trading venue covered by an exemption order under Rule 833''
(or a similar formulation) rather than ``exempt exchange,'' ``exempt
SBSEF'' or ``exempt broker'' because, pursuant to an exemption
granted under Rule 833(a), the covered trading venue would no longer
be an exchange, SBSEF, or broker (as defined by the SEA).
\588\ However, as discussed further below, the Rule 833(a)
exemption is designed to address only activities related to
providing a market place for SBS. An entity that engages in other
SBS-related activity or any activity involving non-SBS securities
would, with respect to such other SBS-related activity or any
activity involving non-SBS securities, still be subject to any
applicable requirements to register with the Commission as a
national securities exchange, SBSEF, or broker, or to comply with
other requirements applicable to such entities under the SEA or
Commission rules thereunder.
---------------------------------------------------------------------------

As with other exemptions issued pursuant to section 36, to issue a
Rule 833(a) exemption, the Commission would be required to find that
the exemption is necessary or appropriate in the public interest, and
consistent with the protection of investors.\589\ As contemplated in
section 36(a)(1), the Commission may issue a Rule 833(a) exemption with
conditions.
---------------------------------------------------------------------------

\589\ See 15 U.S.C. 78mm(a)(1). Unlike the CFTC, which has
exemptive authority under section 5h(g) of the CEA, the Commission
would not be required to find that the foreign trading venue is
subject to comparable, comprehensive supervision and regulation by a
U.S. or foreign regulator.
---------------------------------------------------------------------------

The Commission also proposed Rule 833(b), which would address
requests for exemptive relief relating to the application of the trade
execution requirement to transactions executed on a foreign SBS trading
venue. Rule 833(b)(2) would provide that, in considering whether to
issue a Rule 833(b) exemption, the Commission may consider: (i) the
extent to which the SBS traded in the foreign jurisdiction covered by
the request are subject to a trade execution requirement comparable to
that in section 3C(h) of the SEA and the Commission's rules thereunder;
(ii) the extent to which trading venues in the foreign jurisdiction
covered by the request are subject to regulation and supervision
comparable to that under the SEA, including section 3D of the SEA, and
the Commission's rules thereunder; (iii) whether the foreign trading
venue or venues where covered

[[Page 87218]]

persons intend to trade SBS have received an exemptive order
contemplated by Rule 833(a); and (iv) any other factor that the
Commission believes is relevant for assessing whether the exemption is
in the public interest and consistent with the protection of
investors.\590\
---------------------------------------------------------------------------

\590\ For a more detailed discussion of the items in Rule
833(b)(2) that the Commission may consider, see Proposing Release,
supra note 1, 87 FR at 28925-26.
---------------------------------------------------------------------------

As with other exemptions issued pursuant to section 36, to issue a
Rule 833(b) exemption, the Commission would be required to find that
the exemption is necessary or appropriate in the public interest, and
consistent with the protection of investors. As contemplated by section
36(a)(1), the Commission may issue a Rule 833(b) exemption with
conditions.
One commenter expresses general support for the establishment of a
rule granting exemptions for foreign trading venues and for cross-
border trade execution exemptions, noting that ``difficulties that can
arise when the trade execution requirement applies in two separate
jurisdictions'' and that ``it is important for market participants and
trading venues to have regulatory certainty while maintaining
flexibility in where transactions may be consummated.'' \591\
---------------------------------------------------------------------------

\591\ Bloomberg Letter, supra note 18, at 18. However, as
discussed below in this section VII.B, this commenter criticizes
various aspects of Rule 833.
---------------------------------------------------------------------------

Another commenter believes the Commission's proposed exemption rule
should be made more robust to prevent evasion of the SBSEF registration
and trade execution requirements. This commenter believes that Rule 833
does not provide meaningful standards for how the Commission will
assess requests for such exemptions, which this commenter believes is
insufficient, and provides the Commission with ``unreasonably broad,
nearly unlimited, discretion, in how it assess foreign swaps regulatory
frameworks,'' which this commenter believes may result in the
Commission ``facilitating evasion of Title VII.'' \592\ This commenter
states that the Dodd-Frank Act ``requires that the SEC must, at the
very least . . . make an affirmative determination that such an
application demonstrates that the exemption could not be used to evade
those requirements[, which would] require the SEC [to] make a credible,
comprehensive determination that the foreign regulatory requirements
applicable to the applicant is actually written, applied and enforced,
are the same as those that would otherwise apply to the applicant
absent an exemption.'' \593\
---------------------------------------------------------------------------

\592\ Better Markets Letter, supra note 18, at 16.
\593\ Id.
---------------------------------------------------------------------------

One commenter argues that Rule 833(b)'s requirements are
unnecessary if a foreign trading venue has received an exemption under
Rule 833(a), given that the Commission would be required to find that
the Rule 833(a) exemption is ``necessary or appropriate in the public
interest and consistent with the protection of investors,'' which this
commenter believes ``should be sufficient for the purposes of trading
SBS on foreign trading venues, even when the trade execution
requirement applies.'' \594\ Thus, this commenter requests that the
Commission ``remove the 833(b) exemption and clarify that . . . if a
foreign trading venue has been granted an 833(a) exemption . . ., a
market participant should be permitted to trade SBS on that venue.''
\595\
---------------------------------------------------------------------------

\594\ Bloomberg Letter, supra note 18, at 7.
\595\ Id.
---------------------------------------------------------------------------

Another commenter does not believe the exemptions in Rule 833 are
sufficiently clear, and requests that the Commission consider setting
forth charts or examples to better facilitate compliance.\596\
---------------------------------------------------------------------------

\596\ See SIFMA AMG Letter, supra note 18, at 11-12.
---------------------------------------------------------------------------

With respect to Rule 833(b) specifically, several comments appear
to anticipate that, in order for a transaction on a foreign SBS trading
venue to qualify for the trade execution exemption under Rule 833(b),
the relevant foreign jurisdiction would have to require RFQ-to-3 or an
order book for Required Transactions.\597\ One commenter states that
``the CFTC, appropriately in our view, recognized that there are
multiple ways that a regulator can ensure appropriate pre-trade
transparency and competition, such that restricting execution methods
to [central limit order books] and RFQ-to-3 systems are not the only
ways to achieve these objectives. Failing to recognize this fact in the
course of making comparability determinations would incorrectly turn
the statutory comparability standard into a test for identical rules.''
\598\ Two commenters state that it would be difficult for many foreign
SBS trading venues to demonstrate comparability if RFQ-to-3 and an
order book were required, with one stating that ``[f]ew jurisdictions
require RFQ to 3, and some do not require SBS to be traded on an
organized trading venue.'' \599\
---------------------------------------------------------------------------

\597\ See Bloomberg Letter, supra note 18, at 6; Tradeweb
Letter, supra note 18, at 5-6; ISDA-SIFMA Letter, supra note 18, at
14. See also ICE Letter, supra note 18, at 4.
\598\ Tradeweb Letter, supra note 18, at 6.
\599\ Bloomberg Letter, supra note 18, at 6. See also ICE
Letter, supra note 18, at 4 (stating that ``EU and UK based
multilateral trading facilities are not required under their home
country regulation to ensure that a request-for-quote be sent to
three different recipients or offer a central-limit-order-book'' and
thus the proposed criteria cannot be satisfied from the outset);
Bloomberg Letter, supra note 18, at 19 (stating that ``at least
three Bloomberg-affiliated [foreign venues] would seek an
exemption'' but may be ``effectively barred at the door by the
Proposal's requirement that security-based swaps are subject to a
trade execution requirement in the foreign jurisdiction that is
comparable to that in 15 U.S.C. 78c-3(h) and the Commission's rules
thereunder''); ISDA-SIFMA Letter, supra note 18, at 14 (stating that
hardly any (if any at all) foreign trading venues would be able to
enjoy an Exempt SBSEF status and that, as far as the commenter is
aware, none of the CFTC recognized multilateral trading facilities
or organized trading facilities are required to offer a central
limit order books on their platforms).
---------------------------------------------------------------------------

Two commenters oppose requiring an exemption under Rule 833 to
depend upon a ``rule-by-rule'' comparison or analysis. One commenter
states that this would be ``unduly burdensome and at odds with the
overall goal of achieving comparable outcomes.'' \600\ The other
commenter requests that the Commission adopt ``a more flexible approach
to the recognition of foreign trading venues--one that relies on
holistic outcomes and governing principles, rather than a rule-by-rule
analysis.'' \601\
---------------------------------------------------------------------------

\600\ Bloomberg Letter, supra note 18, at 7.
\601\ ISDA-SIFMA Letter, supra note 18, at 15.
---------------------------------------------------------------------------

Several commenters believe that Rule 833, as they understand it,
would result in various negative consequences. One commenter states
that covered persons would not be able to fulfill the trade execution
requirement and that, as a result, market participants would then be
forced to trade on a limited subset of venues, disrupting liquidity and
requiring them to expend time and resources in onboarding to a
compliant trading venue.\602\ Another commenter warns that ``the
limited liquidity in the SBS market is not going to withstand
significant disruptions, increased costs, and market fragmentation,
thus making it more likely for market participants to exit the SBS
markets entirely.'' \603\ This commenter believes that the Commission's
approach ``will force market participants to trade SBS within the
jurisdictional borders of the United States, restricting access to
global liquidity and thus further diminishing already thin SBS
markets,'' rather than ``the decision where to trade the most
standardized and liquid swaps [being] dictated by the available
liquidity and

[[Page 87219]]

prices in global markets.'' \604\ Similarly, another commenter
contrasts the approach taken under Rule 833 with the approach the CFTC
has taken to exempt certain foreign SEFs from SEF registration, and
states that Rule 833 would prevent covered persons from trading SBS on
such exempt SEFs and would impair their ability to manage risk
effectively.\605\ If covered persons are no longer able to trade SBS on
these venues, this commenter states, they also ``may not find it
feasible to trade other instruments, such as swaps and foreign
corporate debt, due to the bifurcation of liquidity that will result.''
\606\ This commenter states that the ability to combine trading
interest in related products on the same trading platform is critical
to the effective transfer of risk within the financial system, and
preventing ``this single pool of liquidity jeopardizes that risk
transfer and impairs price formation and ultimately increases systemic
risk.'' \607\
---------------------------------------------------------------------------

\602\ See Bloomberg Letter, supra note 18, at 6-7. See also
Tradeweb Letter, supra note 18, at 6.
\603\ ISDA-SIFMA Letter, supra note 18, at 15. See also Tradeweb
Letter, supra note 18, at 6.
\604\ ISDA-SIFMA Letter, supra note 18, at 14.
\605\ See ICE Letter, supra note 18, at 4.
\606\ Id.
\607\ Id. at 4-5.
---------------------------------------------------------------------------

These commenters argue that the Commission should instead align
with the CFTC's approach to exemptions, which does not require exempt
foreign SEFs to have order books or to satisfy the RFQ-to-3
requirement, stating that the CFTC's ``flexible, outcomes-based
approach serves market participants well.'' \608\ One commenter argues
for the Commission to avoid the ``unintended economic disadvantage if
other global market participants avoid trading with the managers' non-
US fund clients solely to avoid being subject to the Commission's SBSEF
requirements'' and the significant costs and burdens that would arise
if the two regulatory approaches produce different outcomes for swaps
and SBS.\609\ These commenters state that the CFTC has ``already
granted exemptions to a number of foreign trading venues across
jurisdictions in Europe and Asia,'' \610\ with one commenter stating
that the ``CFTC process, while imperfect, provides a more streamlined
and workable approach for the Commission.'' \611\
---------------------------------------------------------------------------

\608\ Bloomberg Letter, supra note 18, at 7. See also ISDA-SIFMA
Letter, supra note 18, at 14-15; Tradeweb Letter, supra note 18, at
6.
\609\ ICI Letter, supra note 18, at 14.
\610\ Bloomberg Letter, supra note 18, at 7. See also ICE
Letter, supra note 18, at 4. See also ISDA-SIFMA Letter, supra note
18, at 14.
\611\ Bloomberg Letter, supra note 18, at 7.
---------------------------------------------------------------------------

These commenters argue that the Commission should ``ensure that its
proposed approach to granting exemption will produce outcomes similar
to those of the CFTC'' so as to ``further harmonize with the CFTC's SEF
framework, and promote consistency and simplicity. . . .'' \612\
Several of these commenters recommend that the Commission grant
automatic exemptions for trading venues that are currently exempt under
the CFTC's rules.\613\ Some commenters stated that this approach would
be consistent with the Commission's general approach of harmonizing
closely with the CFTC's SEF rules where appropriate and also stated
that, as there are no distinctions outside of the United States between
the regulation of swaps and the regulation of SBS, SBS are currently
traded on foreign venues that have been recognized by the CFTC.\614\
Three commenters requested that the Commission recognize such
exemptions (i.e., CFTC-exempt SEFs as ``exempt'' SBSEFs) at the
adoption of Regulation SE.\615\ And one of these three commenters also
requests that, in the alternative, and ``in order to avoid duplicative
or conflicting regulation . . . the Commission grant an exemption from
the trade execution requirement if the SBS transaction at issue is
subject to mandatory trading in another jurisdiction.'' \616\
---------------------------------------------------------------------------

\612\ ICI Letter, supra note 18, at 14. See also Bloomberg
Letter, supra note 18, at 7, 18; ISDA-SIFMA Letter, supra note 18,
at 14-15; Tradeweb Letter, supra note 18, at 6.
\613\ See Bloomberg Letter, supra note 18, at 7, 18; ISDA-SIFMA
Letter, supra note 18, at 14-15; Tradeweb Letter, supra note 18, at
6.
\614\ See Bloomberg Letter, supra note 18, at 18-19; ISDA-SIFMA
Letter, supra note 18, at 14-15.
\615\ See ICE Letter, supra note 18, at 5; ISDA-SIFMA Letter,
supra note 18, at 15; Tradeweb Letter, supra note 18, at 6.
\616\ ISDA-SIFMA Letter, supra note 18, at 15.
---------------------------------------------------------------------------

The Commission has considered the comments received for Rule 833
and is adopting the rule as proposed. As the Commission stated in the
Proposing Release,\617\ Rule 833(a) is designed to address only
activities relating to providing a market place for SBS and would not
extend to trading in any other type of security or to other activities
with respect to SBS.\618\ A foreign SBS trading venue covered by an
exemptive order under Rule 833(a) might offer trading in other types of
securities; however, the exemptive order would permit covered persons
to trade only SBS on that trading venue without causing the trading
venue to have to register with the Commission as a national securities
exchange, SBSEF, or broker. The exemptive order would not address any
registration obligations that might arise from any other SBS-related
activity or any activity involving non-SBS securities by the foreign
trading venue.\619\
---------------------------------------------------------------------------

\617\ See Proposing Release, supra note 1, 87 FR at 28924.
\618\ For example, although a foreign trading venue covered by a
Rule 833(a) exemption would be exempt from the definition of
``broker,'' that exemption would extend only to the operation of a
market place for SBS and would not permit the foreign trading venue
to otherwise act as a securities broker using U.S. jurisdictional
means.
\619\ The Commission also emphasizes that a Rule 833(a)
exemption would not have any impact on section 6(l) of the SEA, 15
U.S.C. 78f(l), which makes it unlawful for any person to effect a
transaction in an SBS with or for a person that is not an ECP,
unless such transaction is effected on a national securities
exchange registered pursuant to section 6(b) of the SEA. Because a
foreign SBS trading venue covered by a Rule 833(a) exemption would
not be registered as a national securities exchange, the foreign SBS
trading venue would not be permitted to effect SBS transactions with
or for a covered person that is not an ECP.
---------------------------------------------------------------------------

The bulk of the comments received opposing Rule 833 appear to
emanate from commenters' interpretation--and misunderstanding--of what
would be required in order to receive a Rule 833(b) exemption. The
Commission proposed Rule 833(b) to address requests for exemptive
relief relating to the application of the trade execution requirement
under section 3C(h) of the SEA to transactions executed on a foreign
SBS trading venue. Pursuant to section 3C(h) of the SEA, an SBS that is
subject to the trade execution requirement must be executed on an
exchange, on an SBSEF registered under section 3D of the SEA, or on an
SBSEF that is exempt from registration under section 3D(e) of the
SEA.\620\ As a result, a covered person (as defined in Rule 832) would
not be permitted to execute an SBS that is subject to the trade
execution requirement on a foreign SBS trading venue unless that venue
has registered with the Commission as a national securities exchange or
an SBSEF, or has received an exemption under section 3D(e) of the SEA.
---------------------------------------------------------------------------

\620\ Section 3D(e) of the SEA gives the Commission authority to
exempt an SBSEF from registration if it is subject to comparable,
comprehensive supervision and regulation by the CFTC. See 15 U.S.C.
78c-4(e).
---------------------------------------------------------------------------

Several commenters interpret the rule and the Commission's
discussion of the rule in the Proposing Release to mean that a foreign
SBS trading venue must have RFQ-to-3 and an order book for Required
Transactions in order for transactions on that venue to qualify for a
Rule 833(b) exemption.\621\ These commenters, however, are incorrect in
this understanding of the requirements for a Rule 833(b) exemption.
---------------------------------------------------------------------------

\621\ See supra notes 597-599 and accompanying text.
---------------------------------------------------------------------------

First, Rule 833(b)(2) does not contain a list of items that ``are
required,'' but rather lists items that the Commission ``may consider''
when it receives a

[[Page 87220]]

request for a Rule 833(b) exemption.\622\ And second, Rule 833(b)(2)(i)
states, in relevant part, that the Commission may consider ``the extent
to which the security-based swaps traded in the foreign jurisdiction
covered by the request are subject to a trade execution requirement
comparable to that in section 3C(h) of the Act . . . and the
Commission's rules thereunder.'' (Emphasis added.) In the Proposing
Release, the Commission described this requirement by stating that ``a
trade execution requirement in a foreign jurisdiction would not be
comparable to the trade execution requirement under the SEA if the
foreign jurisdiction's rules did not require SBS products subject to
that requirement to be executed through means comparable to Required
Transactions as described in Rule 815 (e.g., if the foreign
jurisdiction allowed the use of single-dealer platforms to discharge
any mandatory trading execution requirement in that jurisdiction).''
\623\ That is, the Commission's proposed rule would not require foreign
SBS trading venues to have RFQ-to-3 and an order book in order for the
Commission to consider their SBS executions for an exemption under Rule
833(b).
---------------------------------------------------------------------------

\622\ Rule 833(b)(2).
\623\ Proposing Release, supra note 1, 87 FR at 28925 (emphasis
added).
---------------------------------------------------------------------------

While, as commenters correctly state, for Required Transactions,
Rule 815 requires SBS transactions to be executed through a limit order
book or an RFQ-to-3 system,\624\ neither the text of Rule 833(b) nor
the Commission's description of Rule 833(b) states that a limit order
book or an RFQ-to-3 system is required to receive a Rule 833(b)
exemption.\625\ The phrase ``comparable to'' does not carry the same
meaning as phrases such as ``identical to'' or ``substantially similar
to,'' and the Commission uses this phrase with respect to Rule 833(b)
exemptions because SBS transactions would not be disqualified from
receiving a Rule 833(b) exemption simply because they were not executed
through a limit order book or an RFQ-to-3 system. Rather, the
Commission agrees with commenters that there may be foreign SBS trading
venues--many of which have already received exemptive relief from the
CFTC for swaps trading \626\--that may be appropriate candidates for
exemptive relief, that are subject to what may be considered robust
regulatory regimes for SBS trading. With respect to such foreign SBS
trading venues, the Commission encourages market participants to submit
a request for exemptive relief under Rule 833(b) if they seek to be
exempt from the Commission's trade execution requirement for their SBS
transactions.\627\
---------------------------------------------------------------------------

\624\ See supra section V.E (discussing methods of execution and
Rule 815).
\625\ In the Proposing Release, the Commission stated its
preliminary belief that ``the use of single-dealer platforms to
discharge any mandatory trading execution requirement'' would not
meet the proposed rule's requirements. See Proposing Release, supra
note 1, 87 FR at 28925.
\626\ See www.cftc.gov/International/ForeignMarketsandProducts/ExemptSEFs (listing foreign swap trading facilities that the CFTC
has exempted from its SEF registration requirements, including
certain such facilities in the European Union, Japan, and
Singapore). Market practices continued in this regard without change
after the United Kingdom (``UK'') withdrew from the European Union,
based upon a CFTC staff no-action letter addressing certain UK swap
trading facilities. See CFTC Letter No. 22-16 (Dec. 1, 2022),
available at https://www.cftc.gov/csl/22-16/download.
\627\ Several commenters describe the negative consequences that
would occur because, they believe, the Commission's Rule 833(b)
exemption would require foreign jurisdictions to require RFQ-to-3
and order book methods of execution, which these commenters believe
forecloses many foreign trading venues from obtaining exemptive
relief from the Commission for their SBS trading even though they
have received similar exemptions from their CFTC. See supra notes
602-611 and accompanying text. Similarly, one commenter requests
that, in the alternative, the Commission grant an exemption from the
trade execution requirement if the SBS transaction at issue is
subject to mandatory trading in another jurisdiction. See supra note
616 and accompanying text. As the Commission has explained, Rule
833(b) exemptions are not limited to those jurisdictions that
require RFQ-to-3 and order books, but rather Rule 833(b)(2)(i)
states that the Commission may consider the extent to which SBS
transactions are subject to a trade execution requirement comparable
to such methods of execution. Accordingly, SEFs would not be
foreclosed from obtaining exemptive relief from the Commission for
their SBS trading. For this reason, the Commission also does not
agree with the commenter's suggested alternative to grant an
exemption from the trade execution requirement if the SBS
transaction at issue is subject to mandatory trading in another
jurisdiction, because exemptive relief under 833(b) may be applied
for in such instances, which would give the Commission the
opportunity to appropriately consider the applicable facts and
circumstances.
---------------------------------------------------------------------------

Certain commenters also object that, in their understanding, a Rule
833(b) exemption request would require a ``rule-by-rule'' comparison or
analysis,\628\ which one commenter characterized as unduly
burdensome.\629\ In addition to Rule 833(b)(2)(i) discussed above,
another relevant factor (among others) that the Commission may consider
is whether the trading venues in the foreign jurisdiction are subject
to regulation and supervision comparable to that under the SEA,
including section 3D of the SEA and the Commission's rules thereunder,
which the Commission described in the Proposing Release to include
being subject to rules designed to foster comparable levels of pre- and
post-trade transparency, access, and liquidity.\630\
---------------------------------------------------------------------------

\628\ See supra notes 600-601 and accompanying text.
\629\ See supra note 600 and accompanying text.
\630\ See Proposed Rule 833(b)(2)(ii) and Proposing Release,
supra note 1, 87 FR at 28925.
---------------------------------------------------------------------------

An 833(b) exemptive request generally should include an analysis
that could assist the Commission's determination as to whether the
regulation and supervision of a foreign SBS trading venue in an
applicable foreign jurisdiction is subject to regulation and
supervision comparable to that under the SEA. Given the central roles
the jurisdiction's applicable laws, rules and regulations, as well as a
foreign SBS trading venue's own rules, play in such a determination, an
exemptive request generally should include an analysis of these
requirements. A precise form of any such analysis--whether it is done
as a ``rule-by-rule'' comparison or through some other methodology
(e.g., in a more holistic manner)--is not specified by Rule 833(b),
would be at the discretion of the entity submitting the exemptive
request, and should be provided in order to help the Commission and its
staff understand what requirements apply to the foreign SBS trading
venue.
With respect to the comments that the Commission should
automatically provide exemptions for foreign trading venues that have
received a parallel exemption from the CFTC for their SEF trading,\631\
and that the Commission should do so contemporaneously with adopting
Regulation SE,\632\ while doing so would promote consistency,
simplicity, and harmonization with the CFTC's SEF rules, such a blanket
exemption would not afford the Commission the opportunity to
appropriately consider the relevant facts and circumstances in support
of a finding that an exemption is necessary or appropriate in the
public interest and consistent with the protection of investors.
However, persons interested in submitting a request for exemptive
relief should be mindful of the implementation period that will take
place before Regulation SE's requirements take effect, as described in
more detail below.\633\
---------------------------------------------------------------------------

\631\ See supra notes 612-615 and accompanying text.
\632\ See supra note 615 and accompanying text. See also supra
note 626.
\633\ See infra section VIII. See also infra note 787 and
accompanying text.
---------------------------------------------------------------------------

With respect to the comment that the provisions of Rule 833 are not
robust enough,\634\ the Commission disagrees. Importantly, in order to
issue any exemption under Rule 833, the Commission would be required to
find that the exemption is necessary or

[[Page 87221]]

appropriate in the public interest and consistent with the protection
of investors, and the Commission may issue the exemptive relief with
conditions. A blanket grant of exemptive relief would be inconsistent
with carefully considering whether a specific exemptive request meets
the applicable standard and might lead to a greater percentage of SBS
transactions being executed beyond the scope of any U.S. regulatory
oversight.
---------------------------------------------------------------------------

\634\ See supra note 593 and accompanying text.
---------------------------------------------------------------------------

Finally, the Commission disagrees with the commenter that suggested
that Rule 833(b)'s requirements are unnecessary if a foreign trading
venue has received an exemption under Rule 833(a).\635\ The two
exemptions under Rule 833 provide exemptive relief from different
requirements of the SEA and are also directed at different entities.
Specifically, a Rule 833(a) exemption provides exemptive relief to a
foreign trading venue that, absent the exemption, could be required to
register with the Commission as an exchange, SBSEF, and/or broker if it
traded SBS (regardless of whether such SBS are subject to the trade
execution requirement). On the other hand, Rule 833(b)'s exemption
provides exemptive relief to the counterparties of an SBS transaction
with respect to the trading execution requirement in section 3C(h) of
the SEA.\636\
---------------------------------------------------------------------------

\635\ See supra note 595 and accompanying text.
\636\ With respect to the commenter that requested additional
clarity with respect to Rule 833, see supra note 596 and
accompanying text, the Commission's discussion of the exemptions,
including the standard of ``comparable to'' and the type of analysis
that should be presented, should provide market participants with
more clarity on how a person could seek exemptive relief.
---------------------------------------------------------------------------

Accordingly, for the reasons discussed above, the Commission is
adopting Rule 833 as proposed.

VIII. Rule 834--Implementation of Section 765 of the Dodd-Frank Act and
Governance of SBSEFs and SBS Exchanges

Section 765(a) of the Dodd-Frank Act \637\ provides in relevant
part that, to mitigate conflicts of interest, the Commission ``shall
adopt rules which may include numerical limits on the control of, or
the voting rights with respect to'' any clearing agency that clears
SBS, or on the control of any SBSEF or SBS exchange by certain bank
holding companies, certain nonbank financial companies, an affiliate of
such a bank holding company or nonbank financial company, an SBS
dealer, major SBS participant, or person associated with an SBS dealer
or major SBS participant.\638\ Section 765(b) states that the purpose
of the statutory provision is ``to improve the governance of, or to
mitigate systemic risk, promote competition, or mitigate conflicts of
interest in connection with'' an SBS dealer or major SBS participant's
conduct of business with, a clearing agency, SBSEF, or SBS exchange and
in which such SBS dealer or major SBS participant ``has a material debt
or equity investment.'' Finally, section 765(c) provides in relevant
part that, in adopting rules pursuant to section 765, the Commission
shall consider any conflicts of interest arising from the amount of
equity owned by a single investor, the ability to vote, cause the vote
of, or withhold votes entitled to be cast on any matters by the holders
of the ownership interest.
---------------------------------------------------------------------------

\637\ 15 U.S.C. 8343.
\638\ The Commission recognizes that promulgating rules under
section 765 alone will not result in a highly competitive market for
SBS. There could be other ways for anticompetitive forces to impede
the growth of SBS trading on transparent, regulated platforms other
than by misuse of a large voting interest in the trading venue. For
example, a large SBS dealer or coalition of SBS dealers, even absent
any voting interest in any SBSEF or SBS exchange, could threaten to
move their business elsewhere unless given an unfair advantage by
the trading venue. A large SBS dealer or coalition of SBS dealers
also could conspire to shut out end users who sought to trade more
actively on these transparent, regulated venues rather than
continuing to trade in the bilateral OTC markets. The Commission
will be alert to any such anticompetitive practices and consider
appropriate prophylactic measures. At present, adopting rules under
section 765 is a necessary and appropriate first step to guard
against conflicts of interest arising on SBSEFs and SBS exchanges.
See Proposing Release, supra note 1, 87 FR at 28930.
---------------------------------------------------------------------------

In 2010, the Commission proposed Regulation MC to implement section
765.\639\ In view of the significant amount of time that had elapsed
and the significant evolution in the swap and SBS markets since the
proposal of Regulation MC, the Commission withdrew that proposal,\640\
and proposed Rule 834 to implement section 765 of the Dodd-Frank Act
with respect to SBSEFs and SBS exchanges.\641\
---------------------------------------------------------------------------

\639\ See Regulation MC Proposal, supra note 21.
\640\ See Proposing Release, supra note 1, 87 FR at 28874.
\641\ See id. at 29001-03.
---------------------------------------------------------------------------

A. Rule 834(a)

Paragraph (a) of Proposed Rule 834 would define terms used in Rule
834. The Commission received no comments on of Proposed Rule 834(a) and
is adopting Rule 834(a) as proposed for the reasons stated in the
Proposing Release.

B. Rule 834(b)

Paragraph (b) of Proposed Rule 834 would impose a cap on the size
of the voting rights that an individual member of an SBSEF or SBS
exchange may own or direct, barring an SBSEF or SBS exchange from
permitting any of its members, either alone or together with any
officer, principal, or employee of the member, to:
(1) Own, directly or indirectly, 20% or more of any class of voting
securities or of other voting interest in the SBSEF or SBS exchange; or
(2) Directly or indirectly vote, cause the voting of, or give any
consent or proxy with respect to the voting of, any interest that
exceeds 20% of the voting power of any class of securities or of other
ownership interest in the SBSEF or SBS exchange.
One commenter supports the Commission's goal to adopt rules that
aim to achieve better governance and mitigation of conflicts of
interest that arise out of the operation of SBSEFs, but the commenter
opposes Rule 834 because it believes that the rule would disrupt the
closely harmonized rules with the CFTC, as the CFTC has not adopted
corresponding provisions for its SEF registrants. This commenter
recommends that the Commission, like the CFTC, should focus on board
governance, conflicts of interest, and antitrust considerations rather
than proscriptive, bright line rules. The commenter states that the
Commission's concerns regarding conflicts of interest ``can best be
addressed by ensuring compliance with the SBSEF Core Principles rather
than an additional regulation,'' \642\ and specifically that the
proposed 20 percent limitation on the voting interest that may be held
by members of any SBSEF or SBS exchange ``goes beyond what is necessary
to effectively mitigate conflicts of interest.'' \643\ Rather, this
commenter states, the ownership limit would limit access to necessary
capital and act as barriers to entry for SBSEFs and SBS exchanges. The
commenter also states that section 765 of Dodd-Frank does not require
the Commission to restrict the ability to hold significant ownership
interests in SBSEFs and that the statutory language instead provides
that the Commission is authorized to adopt rules upon determining,
after review, that such restrictions are necessary or appropriate to
improve the governance of SBSEFs or to mitigate systemic risk, to
promote competition, or mitigate conflicts of interest.\644\
---------------------------------------------------------------------------

\642\ SIFMA AMG Letter, supra note 18, at 12.
\643\ Id.
\644\ See id.
---------------------------------------------------------------------------

Another commenter states that that the proposed 20% voting cap
requirement could potentially thwart the Commission's objective to
ensure that only incremental changes would be

[[Page 87222]]

necessary to adopt the SBSEF framework. The proposed cap, this
commenter states, may require SEFs to set up an entirely new legal
entity with a different governance structure, making it more
challenging to obtain dual registration. The commenter also states that
the conflicts of interest rules implemented by the CFTC, which do not
include a 20% voting cap, sufficiently address any conflicts of
interest concerns, as SEFs have operated under those rules for almost
10 years, and there have been no observable issues that would warrant
such a regulatory shift.\645\
---------------------------------------------------------------------------

\645\ See ISDA-SIFMA Letter, supra note 18, at 16.
---------------------------------------------------------------------------

One commenter states that it strongly opposes Rule 834 and that, as
written, Rule 834 would have the effect of prohibiting certain SBSEF
participants from having common ownership and control as the SBSEF. An
SBSEF, the commenter states, would likely not be able to onboard an
affiliated introducing broker, even if the introducing broker would be
subject to the same rules and practices as an unaffiliated participant.
The commenter states that some CFTC-registered SEFs, including the
commenter's member firms, have affiliated introducing-broker
participants that execute their respective swaps business on their
affiliated SEFs, and the affiliated transactions make up a majority of
the SEF's business. The commenter states that these firms may choose
not to register as an SBSEF and take on the costs and burdens of being
an SBSEF if they cannot accommodate their affiliate's trade execution
needs, which would thwart the goal of developing a competitive
landscape of regulated SBS market places.\646\
---------------------------------------------------------------------------

\646\ See WMBAA Letter, supra note 18, at 2.
---------------------------------------------------------------------------

This commenter further states that it and many others previously
opposed these hard caps when they were proposed in 2010, and that--with
a decade of experience operating SEFs and venues for other financial
products, including Commission regulated alternative trading systems--
the commenter still believes the rule's approach is ``too heavy-
handed'' a way to solve a problem that has been more than adequately
addressed through less burdensome measures.\647\ The commenter states
that the CFTC never adopted its proposed ownership/governance
prohibition for SEFs, that the CFTC's existing conflicts of interest
rules have proven satisfactory, and that, rather than mandating
ownership limits, the Commission should instead permit SBSEFs to
exercise reasonable discretion as to its mechanisms for mitigating
conflicts of interest and should rely instead on the conflict of
interest and antitrust provisions already embedded in the SBSEF
regulatory regime.\648\
---------------------------------------------------------------------------

\647\ Id.
\648\ See id. at 2-3.
---------------------------------------------------------------------------

The Commission has considered the comments and, as discussed below,
is modifying Proposed Rule 834 to provide an exemption from the
ownership and voting caps for an SBSEF that has mitigated the potential
conflict of interest with respect to compliance with the rules of the
SBSEF by entering into an agreement with a registered futures
association or a national securities association for the provision of
regulatory services that encompass, at a minimum, real-time market
monitoring, investigations, and investigation reports.
The 20% cap in Proposed Rule 834(b) is designed to balance
competing policy interests. On one hand, execution venues need capital,
expertise, and liquidity to establish and grow. Historically, market
participants who become members of an execution venue are a source of
all three components, and any person contributing capital to a new
venture might reasonably expect to have a voting interest commensurate
with the amount of capital contributed. Too low a cap, even if imposed
in the name of eliminating conflicts of interest, could have the
unintended effect of impeding the development of execution venues for
SBS altogether, if market participants who become members have no (or
substantially limited) ability to vote their equity interest.
On the other hand, allowing a member of an SBSEF or SBS exchange
too large a voting interest could undermine the public policy benefits
of having transparent, fair, and regulated markets for the trading of
SBS. A member of an SBSEF or SBS exchange with a sufficiently large
voting interest could exercise undue influence over the rules and
policies applicable to members, the venue's access criteria, decisions
regarding access, and disciplinary matters, among other things. In
particular, members who are SBS dealers and conduct a significant
amount of business in the bilateral OTC market have incentives to
restrict the scope of SBS that an SBSEF or SBS exchange makes eligible
for trading. Trading in a market with robust order competition and pre-
trade transparency reduces search costs for end users and liquidity
seekers and reduces the information and bargaining asymmetry of end
users and liquidity seekers relative to SBS dealers. An SBS dealer with
a large voting interest in an SBSEF or SBS exchange, if it perceived
that trading on the regulated venue was diminishing the rents obtained
from its bilateral OTC business, might seek to utilize its voting
influence in a number of ways to degrade the capability of the
regulated venue, thus making the OTC market by comparison a more
attractive option.
Capping a member's voting interest at 20% strikes a reasonable
balance between these competing interests, absent additional measures
to ensure that a member or members with large voting power could tilt
the playing field in their favor. And the Commission does not agree
with the comment that a more general focus on board governance,
conflicts of interest, and antitrust considerations, or on simply
ensuring compliance with the SBSEF Core Principles,\649\ is sufficient
to address this concern because, based on its long experience in
regulating the markets on which the instruments underlying SBS trade,
the ownership and voting structure of a regulated entity can give rise
to conflicts of interest between the organization's business interests
and its regulatory obligations. Further, even if the CFTC has not to
date adopted its own ownership and governance prohibitions for SEFs,
the appropriate comparison with respect to ownership and governance for
SBSEFs is national securities exchanges, because both types of entities
operate markets to which fair or impartial access requirements
comprehensively apply.\650\ Therefore, SBSEFs should be subject to
ownership restrictions that are similar to those in the rules of
national securities exchanges, as approved by the Commission, which
limit ownership by any one member and do not permit an exchange to
merely ``exercise reasonable discretion'' with respect to its
mechanisms for mitigating conflicts of interest.
---------------------------------------------------------------------------

\649\ See supra note 642.
\650\ See SEA sections 6(b)(2) and 6(c), 15 U.S.C. 78f(b)(2) and
78f(c). Alternative Trading Systems, by contrast, are subject to
``fair access'' requirements only if they meet certain volume
trading thresholds. See Rule 301(b)(5)(i), 17 CFR 242.301(b)(5)(i).
---------------------------------------------------------------------------

The Commission, however, appreciates the concerns expressed by
commenters that a cap of 20% on voting interest in all cases could
prevent would-be SBSEFs from onboarding their affiliated introducing
brokers, and that the burdens imposed in setting up an SBSEF that is
legally remote from affiliated introducing brokers may dissuade current
SEFs from registering as SBSEFs, which would lead to their ceasing to
offer SBS trading on their

[[Page 87223]]

platforms.\651\ Therefore, the Commission is modifying Rule 834 as
proposed to add new paragraph (b)(3) to provide an exemption from the
20% cap for an SBSEF that has entered into an agreement with a
registered futures association or a national securities association for
the provision of regulatory services that encompass, at a minimum,
real-time market monitoring and investigations and investigation
reports.
---------------------------------------------------------------------------

\651\ See supra notes 645-648.
---------------------------------------------------------------------------

This exemption, which is conditioned upon an SBSEF conducting its
market monitoring and investigative activities through a self-
regulatory body that has broader membership than an individual SBSEF
and that does not operate its own SBSEF, would mitigate concerns that
members with large ownership shares might be given preferential
treatment with respect to their compliance with the SBSEF's rules. And
the exemption should also, by permitting SBSEFs to exceed the 20%
ownership and voting cap, serve to facilitate the formation and
registration of SBSEFs, thereby also facilitating the movement of SBS
trading to venues that are more transparent and that have affirmative
regulatory obligations.
The Commission acknowledges that this exemption, because it focuses
on surveillance and compliance functions, does not directly address
concerns about an SBSEF adopting rules that hamper impartial access to
an SBSEF, restrict the scope of SBS that might trade on a given SBSEF,
or degrade the capability of a given SBSEF in ways that would favor a
member's OTC SBS business. These concerns, however, can be addressed in
other ways. With respect to impartial access, the requirements of
Proposed Rule 819(c), together with the guidance the Commission has
provided regarding the application of that rule,\652\ set clear limits
on the ability of an SBSEF to favor the interest of any members,
including its large members, by unfairly excluding other market
participants. And competition among SBSEFs will discourage any
individual SBSEF from declining to list particular SBS or from
degrading the capability of the SBSEF to favor a member, as trading in
the affected SBS may migrate not to the OTC market, but to a direct
competitor.
---------------------------------------------------------------------------

\652\ See infra section VI.B.3.
---------------------------------------------------------------------------

Because the Commission has modified Proposed Rule 834 to provide
for an exemption from the 20% ownership and voting cap, it is not the
case that, as one commenter states, existing SEFs would necessarily be
required to set up a new legal entity to operate an SBSEF, making it
more challenging to obtain dual registration and potentially thwarting
the Commission's objective to ensure that only incremental changes
would be necessary to adopt the SBSEF framework. And although the
Commission's proposed ownership rule departs from the CFTC's rules for
SEFs, which do not include caps on ownership or voting, the Commission
is also mindful of the trading relationship between SBS and their
underlying securities--which trade on exchanges that have a similar 20%
ownership and voting cap as a result of their Commission-approved
rules--and the Commission wishes to avoid creating a regulatory
incentive for activity to migrate from trading securities on national
securities exchanges to trading SBS on SBSEF. For similar reasons, it
would not be appropriate to extend the exemption in new paragraph
(b)(3) of Proposed Rule 834 to SBS exchanges. Providing an exemption
from the 20% ownership and voting cap requirements for SBS exchanges in
Proposed Rule 834(b)(1) would result in different treatment from other
national securities exchanges simply because one set of exchanges
trades SBS, and this is not a sufficient reason to permit different
ownership structures only for those exchanges, as this could lead to
regulatory arbitrage by creating incentives for new exchanges to
register first as SBS exchanges, without the ownership and voting caps,
and then seek to amend their rulebooks to commence trading in cash
equities. As it stated in the Proposing Release, the Commission
proposed to apply the 20% ownership and voting on SBS exchanges based
on its ``long experience with handling questions of member influence
over national securities exchanges raised in applications to register
with the Commission on Form 1 and in governance rule filings made on
SEA Form 19b-4,'' \653\ and SBSEF rules seeking to manage conflicts of
interest would not by themselves be sufficient to mitigate conflict-of-
interest concerns when those concerns arise from one or a few SBS
dealers or a major SBS participants having majority voting rights in an
SBSEF or SBS exchange in which they are a member.
---------------------------------------------------------------------------

\653\ See Proposing Release, supra note 1, 87 FR at 28927 and
n.257.
---------------------------------------------------------------------------

Finally, the Commission reiterates that Proposed Rule 834(b) would
cover both direct and indirect voting interests. The purpose of
including indirect voting interest is to prevent potential
circumvention of the 20% cap if, for example, a member placed its
voting interest in an SBSEF or SBS exchange of 20% or more in a shell
company or other affiliate and directed how the shell company or
affiliate casts those votes. Accordingly, Proposed Rule 834(b) would
look through the non-member entities holding interests in SBSEFs and
SBS exchanges to consider whether any member could indirectly control
20% or more of the voting interest through the non-member entity having
the direct interest. Furthermore, Proposed Rule 834(b) would look
through the corporate structure of the SBSEF or SBS exchange to
consider whether any member could indirectly have 20% or more of the
voting interest in the underlying trading venue. For example, an SBSEF
or SBS exchange could be wholly owned by a holding company. In such a
case, the voting restriction in Proposed Rule 834(b) would apply to the
voting interest in the parent holding company held by a member of the
child SBSEF or SBS exchange, since a direct voting interest of 20% or
more in the parent would equate to an indirect voting interest of 20%
or more in the child trading venue.
And, similar to its approach to indirect voting interest, Proposed
Rule 834(b) would aggregate the voting interest of the member itself
with the voting interest held by any officer, principal, or employee of
the member for purposes of determining compliance with the 20% cap.
Without this provision, the member--or an officer, principal, or
employee of the member--could split the voting interest held in the
SBSEF or SBS exchange across multiple persons who would likely be
voting that interest in concert, thereby potentially acting as a
conflict of interest. The Commission did not receive comments on the
aggregation-of-interest aspect of Proposed Rule 834(b).
For these reasons, the Commission is adopting Rule 834(b) with the
modifications discussed above.

C. Rule 834(c)

Paragraph (c) of Proposed Rule 834 would include requirements
designed to reinforce the 20% cap in paragraph (b). Paragraph (c) would
require the rules of each SBSEF and SBS exchange to be reasonably
designed, and have an effective mechanism, to:
(1) Deny effect to the portion of any voting interest held by a
member in excess of the 20% limitation;
(2) Compel a member who possesses a voting interest in excess of
the 20% limitation to divest enough of that voting interest to come
within that limit; and
(3) Obtain information relating to its ownership and voting
interests owned

[[Page 87224]]

or controlled, directly or indirectly, by its members.
The Commission received no comments on Proposed Rule 834(c) and is
adopting Rule 834(c) as proposed, with minor technical
modifications,\654\ for the reasons stated in the Proposing Release.
---------------------------------------------------------------------------

\654\ The Commission has corrected an internal cross-reference
within Proposed Rule 834.
---------------------------------------------------------------------------

D. Rule 834(d)

Paragraph (d) of Proposed Rule 834 is designed to mitigate
conflicts of interest in the disciplinary process of an SBSEF or SBS
exchange and would provide as follows: ``Each security-based swap
execution facility and SBS exchange shall ensure that its disciplinary
processes preclude any member, or group or class of its members, from
dominating or exercising disproportionate influence on the disciplinary
process. Each major disciplinary committee or hearing panel thereof
shall include sufficient different groups or classes of its members so
as to ensure fairness and to prevent special treatment or preference
for any person or member in the conduct of the responsibilities of the
committee or panel.'' Paragraph (d) of Proposed Rule 834 would
recognize that one way that a conflict of interest could manifest
itself is in the disciplinary process. Therefore, the Commission
proposed, as the first sentence of Proposed Rule 834(d), that each
SBSEF and SBS exchange should ``preclude any member, or group or class
of its members, from dominating or exercising disproportionate
influence on the disciplinary process.''
The second sentence of Proposed Rule 834(d) is adapted from Sec.
1.64 of the CFTC's rules, which addresses the composition of various
SRO governing boards and major disciplinary committees.\655\ Proposed
Rule 834(d) would reflect the Commission's belief that an SBSEF or SBS
exchange should be mindful of its different membership interests, and
how they are represented on disciplinary committees and hearing panels
in particular matters, to avoid potential conflicts of interest.
---------------------------------------------------------------------------

\655\ Proposed Rule 834(a)(2) would define ``major disciplinary
committee'' as a committee of persons who are authorized by an SBSEF
to conduct disciplinary hearings, to settle disciplinary charges, to
impose disciplinary sanctions, or to hear appeals thereof in cases
involving any violation of the rules of the SBSEF except those which
are related to decorum or attire, financial requirements, or
reporting or recordkeeping and do not involve fraud, deceit, or
conversion.
---------------------------------------------------------------------------

The Commission received no comments on Proposed Rule 834(d) and is
adopting Rule 834(d) as proposed for the reasons stated in the
Proposing Release.

E. Rule 834(e)

Paragraph (e) of Proposed Rule 834 is closely modeled on Sec.
1.64(b). Paragraph (e)(1)(i) would require each SBSEF and SBS exchange
to ensure that 20% or more of the persons who are eligible to vote
routinely on matters being considered by the governing board (excluding
those members who are eligible to vote only in the case of a tie vote
by the governing board) are persons who are knowledgeable of SBS
trading or financial regulation, or otherwise capable of contributing
to governing board deliberations. Paragraphs (e)(1)(ii) through (v) of
Proposed Rule 834 are based on four of the prongs in Sec.
1.64(b)(1)(ii) and would provide that 20% or more of the persons who
are eligible to vote routinely on matters being considered by the
governing board (excluding those members who are eligible to vote only
in the case of a tie vote by the governing board) must not be: members
of the SBSEF or SBS exchange; \656\ salaried employees of the SBSEF or
SBS exchange; primarily performing services for the SBSEF or SBS
exchange in a capacity other than as a member of the governing board;
or officers, principals, or employees of a firm which holds a
membership at the SBSEF or SBS exchange, either in its own name or
through an employee on behalf of the firm.
---------------------------------------------------------------------------

\656\ Proposed Rule 834(e)(1)(ii), read together with Proposed
Rule 834(b), would allow four members of an SBSEF or SBS exchange to
control up to 80% of the voting interest (assuming that each of the
four holds 20%). Under Proposed Rule 834(e)(1)(ii), at least 20% of
the voting interest would have to be held by non-members.
---------------------------------------------------------------------------

Paragraph (e)(2) of Proposed Rule 834, modeled on Sec. 1.64(b)(3),
would require each SBSEF and SBS exchange to ensure that membership of
its governing board includes a diversity of groups or classes of its
members.
The Commission did not receive comments on Proposed Rule 834(e) and
is adopting Rule 834(e) as proposed, for the reasons stated in the
Proposing Release.

F. Rule 834(f)

Paragraph (f) of Proposed Rule 834 is based closely on Sec.
1.64(d) and would require each SBSEF and SBS exchange to submit to the
Commission, within 30 days after each governing board election, a list
of the governing board's members, the groups or classes of members that
they represent, and how the composition of the governing board
otherwise meets the requirements of Rule 834.
The Commission received no comments on Proposed Rule 834(f) and is
adopting Rule 834(f) as proposed for the reasons stated in the
Proposing Release.

G. Rule 834(g)

Paragraph (g) of Proposed Rule 834 is modeled on Sec. 1.69, which
requires an SRO to further address the avoidance of conflicts of
interest in the execution of its self-regulatory functions. Proposed
Rule 834(g) closely follows the paragraph structure and language of
Sec. 1.69, with a few minor exceptions (beyond modifying the rule's
application to SBSEFs and SBS exchanges, rather than, in the CFTC
original, all SROs). First, paragraph (g)(1)(i)(A) of Proposed Rule 834
is based closely on Sec. 1.69(b)(1)(i) and would set out the types of
relationships with the named party of interest that would create a
conflict of interest for a member of the governing board, disciplinary
committee, or oversight panel.\657\ Second, Proposed Rule
834(g)(1)(ii)(C) is a simplified version of Sec. 1.69(b)(2)(iii).
Rather than incorporating the first four prongs of Sec.
1.69(b)(2)(iii), which cross-reference definitions elsewhere in the
CFTC's rules, Rule 834(g)(1)(ii)(C) would instead incorporate only the
final, catch-all prong, which would cover any positions held by any
member of an SBSEF's governing board, disciplinary committees, or
oversight committees that would have been covered under the other four
prongs.\658\ Third, Proposed Rule 834(g)(1)(ii)(C) would omit a
requirement in Sec. 1.69(b)(2)(iv) that an SRO, when making a
determination of whether a conflict of interest exists, must take into
consideration ``[t]he most recent large trader reports and clearing
records available to the self-regulatory organization.'' These types of
reports

[[Page 87225]]

may not be as prevalent in the securities and SBS markets as the swaps
market. The final, catch-all prong in Sec. 1.69(b)(2)(iv)--``Any other
source of information that is held by and reasonably available to the
self-regulatory organization''--would suffice, and proposed it as Rule
834(g)(1)(ii)(C)(2).
---------------------------------------------------------------------------

\657\ Paragraph (g)(1)(i)(A) of Proposed Rule 834, however,
would incorporate only four of the five prongs in Sec.
1.69(b)(1)(i). The Commission did not propose to include a prong
about being associated with a named party of interest through a
``broker association,'' as defined in Sec. 156.1 of the CFTC's
rules, as that concept does not exist under the SEA.
\658\ Thus, the relevant language in Rule 834(g)(1)(ii)(C) would
read, ``Such determination must include a review of any positions,
whether maintained at that security-based swap execution facility,
SBS exchange, or elsewhere, held in the member's personal accounts
or the proprietary accounts of the member's affiliated firm that the
security-based swap execution facility or SBS exchange reasonably
expects could be affected by the significant action.'' Proposed Rule
834(a)(3) would define a ``member's affiliated firm'' as a firm in
which the member is a principal or an employee, and Proposed Rule
834(a)(5) would define ``significant action'' to include several
types of actions or rule changes by an SBSEF or SBS exchange that
could be implemented without the Commission's prior approval related
to addressing an emergency and certain changes in margin levels.
---------------------------------------------------------------------------

The Commission did not receive comments on paragraph (g) of
Proposed Rule 834 and is adopting Rule 834(g) as proposed, for the
reasons stated in the Proposing Release.

H. Rule 834(h)

Proposed Rule 834(h) would require each SBSEF and SBS exchange to
maintain in effect various rules that would be required under Rule 834.
An SBSEF would be required to file these rules under Rule 806 or Rule
807 of Regulation SE; an SBS exchange would be required to file such
rules under existing SEA Rule 19b-4.\659\ Proposed Rule 834(h) is
loosely modeled on various provisions in Sec. Sec. 1.64 and 1.69
providing that the SRO rules required under those CFTC rules must be
filed with the CFTC pursuant to relevant provisions of the CEA and the
CFTC's rules thereunder.
---------------------------------------------------------------------------

\659\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

The Commission received no comments on Proposed Rule 834(h) and is
adopting Rule 834(h) as proposed for the reasons stated in the
Proposing Release.

IX. Rule 835--Notice to Commission by SBSEF of Final Disciplinary
Action, Denial or Conditioning of Membership, or Denial or Limitation
of Access

The Commission proposed Rule 835 to require an SBSEF to provide the
Commission notice of a final disciplinary action, a final action with
respect to a denial or conditioning of membership, or a final action
with respect to a denial or limitation of access. Such notice is
designed to ensure that the Commission is kept aware of significant
disciplinary actions, denials or conditionings of membership, or
denials or limitations on access by SBSEFs that could be the subject of
an aggrieved person's request for review by the Commission. The
requirement to provide notice to the Commission would also obligate an
SBSEF to be cognizant of, and make records for, each such instance, and
such records would become a necessary part of the record should the
aggrieved person seek Commission review of the SBSEF's action.
Specifically, paragraph (a) of Proposed Rule 835 would provide
that, if an SBSEF issues a final disciplinary action against a member,
or takes a final action with respect to a denial or conditioning of
membership, or a final action with respect to a denial or limitation of
access of a person to any services offered by the SBSEF, the SBSEF
shall file a notice of such action with the Commission within 30 days
and serve a copy on the affected person. Proposed Rule 835(a) would use
the phrase ``final disciplinary action against a member'' (emphasis
added) because an SBSEF may utilize its disciplinary authority under
Core Principle 2 (Compliance with Rules) in section 3D of the SEA \660\
only with respect to its members; but uses the phrase ``denies or
limits access of a person'' (emphasis added) because the person whose
access is denied or limited might not be a member. For example, a
person that is denied membership by an SBSEF would fall under this
category.
---------------------------------------------------------------------------

\660\ 15 U.S.C. 78c-4(d)(2).
---------------------------------------------------------------------------

Paragraph (b)(1) of Proposed Rule 835 would provide that, for
purposes of paragraph (a), a disciplinary action would not be
considered final unless: (1) the affected person has sought an
adjudication or hearing with respect to the matter, or otherwise
exhausted their administrative remedies at the SBSEF; and (2) the
disciplinary action is not a summary action permitted under Rule
819(g)(13)(ii).\661\ In addition, paragraph (b)(2) of Proposed Rule 835
would provide that, for purposes of paragraph (a), a disposition of a
matter with respect to a denial or conditioning of membership, or a
denial or limitation of access, would not be considered final unless
such person has sought an adjudication or hearing, or otherwise
exhausted their administrative remedies at the SBSEF with respect to
such matter.
---------------------------------------------------------------------------

\661\ As discussed above, see supra section VI.B.7, Proposed
Rule 819(g)(13)(ii) would permit an SBSEF to adopt a summary fine
schedule for violations of rules relating to the failure to timely
submit accurate records required for clearing or verifying each
day's transactions, which may be summarily imposed against persons
within the SBSEF's jurisdiction for violating such rules.
Furthermore, an SBSEF's summary fine schedule could allow for
warning letters to be issued for first-time violations or violators.
If adopted, a summary fine schedule would be required by Proposed
Rule 819(g)(13)(ii) to provide for progressively larger fines for
recurring violations. A summary fine schedule, if an SBSEF elects to
adopt one, would have to be part of the SBSEF's rules, and thus
would need to be submitted to the Commission. See Proposed Rule
819(g)(13)(ii).
---------------------------------------------------------------------------

Paragraph (c) of Proposed Rule 835 would provide that the notice
required under Rule 835(a) must include the name of the member or the
associated person and last known address, as reflected in the SBSEF's
records, of the member or associated person, as well as the name of the
person, committee, or other organizational unit of the SBSEF that
initiated the disciplinary action or access restriction. In the case of
a final disciplinary action, the notice would be required to include a
description of the acts or practices, or omissions to act, upon which
the sanction is based, including, as appropriate, the specific rules
that the SBSEF has found to have been violated; a statement describing
the respondent's answer to the charges; and a statement of the sanction
imposed and the reasons for such sanction. In the case of a denial or
conditioning of membership or a denial or limitation of access, the
notice would be required to include: the financial or operating
difficulty of the prospective member or member (as the case may be)
upon which the SBSEF determined that the prospective member or member
could not be permitted to do, or continue to do, business with safety
to investors, creditors, other members, or the SBSEF; the pertinent
failure to meet qualification requirements or other prerequisites for
membership or access and the basis upon which the SBSEF determined that
the person concerned could not be permitted to have membership or
access with safety to investors, creditors, other members, or the
SBSEF; or the default of any delivery of funds or securities to a
clearing agency by the member. Finally, the notice would be required to
include the effective date of such final disciplinary action, denials
or conditioning of membership, or denial or limitation of access, as
well as any other information that the SBSEF may deem relevant.
The Commission received no comments on Proposed Rule 835. Because
the language of paragraphs (b)(1)(i) and (b)(2) should more clearly
state that certain actions by an SBSEF shall not be ``final'' unless
the affected person has exhausted their administrative remedies at the
SBSEF, the Commission is modifying the phrase ``person has sought an
adjudication or hearing, or otherwise exhausted their administrative
remedies'' in both paragraphs (b)(1)(i) and (b)(2) so that it now reads
simply, ``person has exhausted their administrative remedies,'' and is
adopting Rule 835 as modified.

X. Amendments to Existing Rule 3a1-1 Under the Sea--Exemptions From the
Definition of ``Exchange''

An entity that meets the definition of ``security-based swap
execution facility'' would also likely meet the definition of
``exchange'' set forth in section 3(a)(1) of

[[Page 87226]]

the SEA \662\ and the interpretation of that definition set forth in
Rule 3b-16 thereunder.\663\ Thus, absent an exemption, an entity
needing to register with the Commission as an SBSEF would also likely
need to register with the Commission as a national securities
exchange.\664\ The Commission has previously stated that it ``believes
that Congress specifically provided a comprehensive regulatory
framework for SBSEFs in the [SEA], as amended by the Dodd Frank Act,
and therefore that such entities that are registered as SBSEFs should
not also be required to register and be regulated as national
securities exchanges.'' \665\
---------------------------------------------------------------------------

\662\ 15 U.S.C. 78c(a)(1).
\663\ 17 CFR 240.3b-16. See also supra section III.A (discussing
Rule 803 and the requirements and procedures for registration,
including the overlap between the definitions of ``exchange'' and
``security-based swap execution facility''). See also infra note 678
and accompanying text (discussing the Commission's proposed
amendments to Rule 3b-16).
\664\ See Sec. 3D(a)(1) of the SEA, 15 U.S.C. 78c-4(a)(1) (``No
person may operate a facility for the trading or processing of
security-based swaps, unless the facility is registered as a
security-based swap execution facility or as a national securities
exchange under this section'').
\665\ 2011 SBSEF Proposal, supra note 6, 76 FR at 10958.
---------------------------------------------------------------------------

Therefore, the Commission proposed to exercise its authority under
section 36(a)(1) of the SEA \666\ to exempt an SBSEF from the
definition of ``exchange''--and thus the obligation to register as a
national securities exchange--if it provides a market place solely for
the trading of SBS (and no securities other than SBS) and has
registered with the Commission as an SBSEF. To effect this exemption,
the Commission proposed to amend Rule 3a1-1 under the SEA \667\ by
adding new paragraph (a)(4).
---------------------------------------------------------------------------

\666\ 15 U.S.C. 78mm(a)(1).
\667\ 17 CFR 240.3a1-1.
---------------------------------------------------------------------------

The proposed amendment would add new paragraph (a)(4) to existing
Rule 3a1-1 to provide that an organization, association, or group of
persons that has registered with the Commission as an SBSEF pursuant to
Rule 803 and provides a market place for no securities other than SBS
is exempt from the definition of ``exchange'' under section 3(a)(1) of
the SEA, and thus would not be subject to the requirement in section 5
of the SEA to register as a national securities exchange or obtain a
low-volume exemption.\668\
---------------------------------------------------------------------------

\668\ An SBSEF that fails to comply with the condition to the
exemption provided under paragraph (a)(4) of Rule 3a1-1 would no
longer qualify for the exemption and might thus be operating as an
unregistered exchange under the section 5 of the SEA. 15 U.S.C. 78e.
Section 5 also generally provides that a broker or dealer may not
use any facility of an exchange to effect or report any transaction
in a security unless that exchange is registered as a national
securities exchange or is exempt from registration by reason of the
limited volume of transactions effected on the exchange. Brokers and
dealers who are members of a registered SBSEF would not be in
violation of section 5 by effecting or reporting any SBS
transactions on that SBSEF, because an SBSEF that qualifies for the
exemption under Rule 3a1-1(a)(4) would not be an exchange within the
meaning of section 5.
---------------------------------------------------------------------------

In addition, the Commission proposed new paragraph (a)(5) to
existing Rule 3a1-1 under the SEA, which would provide that an
organization, association, or group of persons shall be exempt from the
definition of the term ``exchange'' if that organization, association,
or group of persons has registered with the Commission as a clearing
agency pursuant to section 17A of the SEA and limits its exchange
functions to operation of a trading session that is designed to further
the accuracy of end-of-day valuations.\669\ As noted above, this
provision would codify a series of exemptions that the Commission has
granted over several years to SBS clearing agencies that operate
``forced trading'' sessions.\670\ As part of the clearing and risk
management processes, an SBS clearing agency must establish an end-of-
day valuation for any SBS in which any of its members has a cleared
position. Certain SBS clearing agencies utilize a valuation mechanism
whereby they require clearing members to submit indicative settlement
prices for SBS products, and, to provide an incentive for accurate
submissions, the clearing agency can require those members to trade at
those quoted prices. The precise means by which the clearing agency
matches quotes from different clearing members could cause the clearing
agency to fall within the definition of ``exchange'' in section 3(a)(1)
of the SEA. The Commission has previously found that it was necessary
or appropriate in the public interest and consistent with the
protection of investors to exempt clearing agencies that engage in this
activity from the definition of ``exchange,'' \671\ and the Commission
proposed to codify this exemption.\672\
---------------------------------------------------------------------------

\669\ As discussed above, see supra note 37 and accompanying
text, such a trading session is also referred to as a ``forced-
trading session.''
\670\ See supra note 37; Proposing Release, supra note 1, 87 FR
at 28878.
\671\ See id.
\672\ See Proposing Release, supra note 1, 87 FR at 28878. This
exemption would cover only the forced-trading session of an SBS
clearing agency; any other exchange activity that a clearing agency
might engage in could remain subject to the SEA provisions and the
Commission's rules thereunder applying to national securities
exchanges or alternative trading systems.
---------------------------------------------------------------------------

Finally, the Commission proposed to amend the introductory language
of paragraph (b) of Rule 3a1-1 to cover only paragraphs (a)(1) through
(a)(3), not paragraph (a) as a whole.\673\ The changed language is
designed to clarify that the revocation provisions would not apply to
organizations, associations, or groups of persons who fall within
amended Rule 3a1-1(a)(4) or (a)(5). Thus, even if a registered SBSEF
were to become a substantial market, Rule 3a1-1(b), as proposed to be
amended, would not afford a basis for the Commission to revoke an
SBSEF's exemption from the definition of ``exchange'' under Rule 3a1-
1(a)(4), which would force the SBSEF to register as a national
securities exchange (to avoid being an unregistered exchange).
---------------------------------------------------------------------------

\673\ Specifically, the Commission proposed to amend the
introductory language of existing paragraph (b) of Rule 3a1-1, which
states: ``Notwithstanding paragraph (a) of this rule, an
organization, association, or group of persons shall not be exempt
under this rule from the definition of `exchange' if . . . .''
Paragraph (b) then sets out procedural and substantive criteria for
the Commission to revoke an exemption under paragraph (a) of Rule
3a1-1 if an exchange's share of the market in any one of the
specified classes of securities exceeds a defined threshold.
---------------------------------------------------------------------------

The Commission received two comment letters regarding the proposed
amendments to Rule 3a1-1.\674\ One commenter does not support an
exemption for clearing agencies from the definition of exchange,
stating that the exemption would create a loophole.\675\ However, the
limited scope of the exemption--which applies solely to trades that a
clearing agency requires its members to undertake in support of the
accuracy of the clearing agency's end-of-day valuation process--is
sufficiently narrow to prevent use of the exemption as a loophole
allowing clearing agencies to act as, or on behalf of exchanges,
without sufficient public reporting. The language of new paragraph
(a)(5) of Rule 3a1-1, however, should more precisely reflect that the
Commission is codifying exemptive relief that was provided with respect
to trading sessions to support end-of-day valuations of SBS,\676\ and
the Commission is therefore modifying paragraph (a)(5) to add the words
``of

[[Page 87227]]

security-based swaps'' at the end of the paragraph.
---------------------------------------------------------------------------

\674\ See Keeney Letter, supra note 95; ISDA-SIFMA Letter, supra
note 18, at 17.
\675\ See Keeney Letter, supra note 95 (stating that the
exemption would permit clearing agencies to ``do the bidding of
exchanges'' while being exempt from reporting requirements).
\676\ See Proposing Release, supra note 1, 87 FR at 28932
(``This exemption would cover only the forced-trading session of an
SBS clearing agency; any other exchange activity that a clearing
agency might engage in could remain subject to the SEA provisions
and the Commission's rules thereunder applying to exchanges.'').
---------------------------------------------------------------------------

Another commenter supports the proposed amendments and also
addresses another Commission rulemaking related to the definition of
``exchange.'' \677\ The Commission has separately proposed certain
amendments to Rule 3b-16, a rule which defines certain terms used in
the statutory definition of ``exchange'' under section 3(a)(1) of the
SEA.\678\ The commenter states that the Commission should exempt from
the definition of ``exchange'' any market place that solely trades SBS,
whether or not that market place is registered as an SBSEF.\679\ This
commenter states that the Commission has ``proposed to expand Rule 3b-
16 substantially'' and that this proposal, if adopted, would ``reverse
the previous relationship between the `exchange' definition (as
interpreted in Rule 3b-16) and the SBSEF definition.'' \680\ This
commenter states that an organization that makes available certain
methods for parties to interact regarding SBS might fall within the
expanded definition of exchange but outside the definition of SBSEF and
therefore be required to register as an exchange because SBSEF
registration would be unavailable.\681\
---------------------------------------------------------------------------

\677\ See ISDA-SIFMA Letter, supra note 18, at 17.
\678\ See Amendments Regarding the Definition of ``Exchange''
and Alternative Trading Systems (ATSs) That Trade U.S. Treasury and
Agency Securities, National Market System (NMS) Stocks, and Other
Securities, SEA Release No. 94062 (Jan. 26, 2022), 87 FR 15496 (Mar.
18, 2022) (File No. S7-02-22) (``Rule 3b-16 Proposal''). See also
Reopening of Comment Periods for ``Private Fund Advisers;
Documentation of Registered Investment Adviser Compliance Reviews''
and ``Amendments Regarding the Definition of `Exchange' and
Alternative Trading Systems (ATSs) That Trade U.S. Treasury and
Agency Securities, National Market System (NMS) Stocks, and Other
Securities,'' SEA Release No. 94868 (May 9, 2022), 87 FR 29059 (May
12, 2022) (S7-02-22); Supplemental Information and Reopening of
Comment Period for Amendments Regarding the Definition of
``Exchange,'' SEA Release No. 97309 (Apr. 14, 2023), 88 FR 29448
(May 5, 2023) (File No. S7-02-22).
\679\ See ISDA-SIFMA Letter, supra note 18, at 17.
\680\ Id.
\681\ See id.
---------------------------------------------------------------------------

The Commission does not agree with the commenter's request to
extend the Rule 3a1-1 exemption from the ``exchange'' definition to any
entity that provides a market place for no securities other than SBS,
regardless of whether they are registered as an SBSEF.
The purpose of the exemption under Rule 3a1-1(a)(4) is not to
universally exempt from the definition of ``exchange'' all entities
that provide a market place for no securities other than SBS. Rather,
given that Congress has provided a regulatory framework for SBSEFs
through the Dodd Frank Act, the exemption is narrowly designed to avoid
burdening registered SBSEFs with a second regulatory framework--namely,
registration as national securities exchanges. Further, creating that
commenter's suggested exemption in Rule 3a1-1(a) would create a
regulatory gap in which some entities that meet the definition of
exchange are registered neither as national securities exchanges nor as
SBSEFs. The language of new paragraph (a)(4) of Rule 3a1-1, however,
should more closely track the language and scope of section 3(a)(1) of
the SEA, which uses the term ``market place or facilities,'' rather
than the term ``market place,'' \682\ and the Commission is therefore
modifying proposed paragraph (a)(4) of Rule 3a1-1 to replace the term
``market place'' with the term ``market place or facilities.''
---------------------------------------------------------------------------

\682\ See 15 U.S.C. 78c(a)(1).
---------------------------------------------------------------------------

Accordingly, for the reasons discussed above, the Commission is
adopting the amendments to Rule 3a1-1 with the modifications to
paragraphs (a)(4) and (a)(5) discussed above and with minor technical
modifications.\683\
---------------------------------------------------------------------------

\683\ See supra note 32.
---------------------------------------------------------------------------

XI. Rule 15a-12--SBSEFs as Registered Brokers; Relief From Certain
Broker Requirements

An SBSEF, by facilitating the execution of SBS between persons,
also is engaged in the business of effecting transactions in securities
for the account of others and therefore meets the SEA definition of
``broker.'' \684\ Absent an exception or exemption, an SBSEF--in
addition to being subject to the registration and regulatory
requirements for SBSEFs--would also be required to register with the
Commission as a broker pursuant to sections 15(a) and 15(b) of the SEA
\685\ and would be subject to all regulatory requirements applicable to
brokers.\686\ For example, brokers and dealers must comply with a
number of rules that govern their conduct, including those relating to
customer confirmations and disclosure of credit terms in margin
transactions.\687\
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\684\ See SEA section 3(a)(4), 15 U.S.C. 78c(a)(4).
\685\ 15 U.S.C. 78o(a) and 78o(b). Section 15(a)(1) generally
provides that, absent an exception or exemption, a broker or dealer
that uses the mails or any means of interstate commerce to effect
transactions in, or to induce or attempt to induce the purchase or
sale of, any security must register with the Commission. Section
15(b) generally provides the manner of registration of brokers and
dealers and other requirements applicable to registered brokers and
dealers.
\686\ As discussed in note 47, supra, a person that is acting as
a broker solely because it is acting as an SBSEF is currently exempt
from the requirement to register with the Commission as a broker and
the Commission's rules under the SEA that apply to brokers. This
exemption will expire upon the earliest compliance date for the
Commission's final rules regarding SBSEF registration.
\687\ See 17 CFR 240.10b-10 and 240.10b-16.
---------------------------------------------------------------------------

The Commission proposed new Rule 15a-12 under the SEA, which would
deem registration with the Commission as an SBSEF to also constitute
registration as a broker, and which would exempt a registered SBSEF
from many broker requirements in light of the SBSEF regulatory regime
to which it would also be subject. The accommodation provided in Rule
15a-12, however, would not be available to an SBSEF that engages in
other types of brokerage activity.
Paragraph (a) of Proposed Rule 15a-12 would define the term
``SBSEF-B'' to mean an SBSEF that does not engage in any securities
activity other than facilitating the trading of SBS on or through the
SBSEF. Thus, an SBSEF that acts as agent to SBS counterparties or that
acts in a discretionary manner with respect to the execution of SBS
transactions, could not avail itself of Rule 15a-12. Also, if an inter-
dealer broker elects not to separate its inter-dealer broker functions
from its SBSEF (by, for example, housing them in separate legal
entities), and instead chooses to operate the SBSEF in the same legal
entity as the inter-dealer broker, the entity could avail itself of
Rule 15a-12 because it would not be an SBSEF-B under the rule.
Paragraph (b) of Proposed Rule 15a-12 would provide that an SBSEF-
B, if it registered as an SBSEF pursuant to Rule 803, would be deemed
also to have registered with the Commission pursuant to sections 15(a)
and (b) of the SEA.\688\
---------------------------------------------------------------------------

\688\ The Commission's proposal would not have exempted SBSEFs
from registration as brokers. Rather, given the registration and
regulatory requirements that were being proposed for SBSEFs through
Regulation SE, the Commission proposed for such SBSEFs to be deemed
registered as brokers so as to prevent subjecting those entities to
a second, separate registration process as well as duplicative
additional regulatory requirements. As discussed in the Proposing
Release, an additional layer of registration processes and
duplicative requirements would not be appropriate or necessary. See
Proposing Release, supra note 1, 87 FR 28933.
---------------------------------------------------------------------------

Paragraphs (c) and (d) of Proposed Rule 15a-12 would set out the
scope of broker requirements from which an SBSEF-B is exempt and which
broker requirements would continue to apply. Paragraph (c) would
provide that an SBSEF-B would be exempt from any provision of the SEA
or the Commission's rules thereunder applicable to brokers that by its
terms requires, prohibits, restricts, limits, conditions, or affects
the activities of a broker, unless such provision specifies

[[Page 87228]]

that it applies to an SBSEF. Paragraph (d) of Proposed Rule 15a-12
would provide that, notwithstanding paragraph (c), an SBSEF-B is still
subject to section 15(b)(4),\689\ section 15(b)(6),\690\ and section
17(b) of the SEA.\691\
---------------------------------------------------------------------------

\689\ 15 U.S.C. 78o(b)(4).
\690\ 15 U.S.C. 78o(b)(6).
\691\ 15 U.S.C. 78q(b).
---------------------------------------------------------------------------

Finally, paragraph (e) of Proposed Rule 15a-12 would exempt an
SBSEF-B from the Securities Investor Protection Act (``SIPA'').\692\
SIPA established the Securities Investor Protection Corporation
(``SIPC''), which oversees the liquidation of member firms that close
when a member firm is bankrupt or in financial trouble and customer
assets are missing.\693\ SIPC protection is funded by assessments made
on member firms.\694\
---------------------------------------------------------------------------

\692\ 15 U.S.C. 78aaa, et seq.
\693\ See https://www.sipc.org/about-sipc/sipc-mission (``In a
liquidation under the Securities Investor Protection Act, SIPC and
the court-appointed Trustee work to return customers' securities and
cash as quickly as possible. Within limits, SIPC expedites the
return of missing customer property by protecting each customer up
to $500,000 for securities and cash (including a $250,000 limit for
cash only).'').
\694\ See 15 U.S.C. 78ddd(d).
---------------------------------------------------------------------------

Section 2 of SIPA \695\ states that, unless otherwise provided, the
SEA shall apply as if SIPA constituted an amendment to, and was
included as a section of, the SEA. An SBSEF-B, by definition, would
operate only as an SBSEF. It would not be equitable to require an
SBSEF-B to become a member of SIPC and pay SIPC assessments, because
the SBSEF-B would not have brokerage customers and would not hold any
customer funds or securities. Accordingly, under section 36(a)(1) of
the SEA,\696\ the Commission finds that it is necessary or appropriate
in the public interest, and is consistent with the protection of
investors, to exempt SBSEF-Bs from any requirement under SIPA,
including the requirement to pay assessments to the SIPC insurance
fund. The Commission is codifying this exemption as Rule 15a-12(e).
---------------------------------------------------------------------------

\695\ 15 U.S.C. 78bbb.
\696\ 15 U.S.C. 78mm(a)(1) (giving the Commission exemptive
authority, including the ability to exempt any person or classes of
persons from any provision of the SEA or any rules thereunder, to
the extent that such exemption is necessary or appropriate in the
public interest, and is consistent with the protection of
investors).
---------------------------------------------------------------------------

The Commission received no comments on Proposed Rule 15a-12 and is
adopting Rule 15a-12 as proposed, with minor technical
modifications,\697\ for the reasons stated in the Proposing Release.
---------------------------------------------------------------------------

\697\ See supra note 32.
---------------------------------------------------------------------------

XII. Termination of Temporary Exemptions

As discussed above and in the Proposing Release, after issuing the
2011 SBSEF Proposal,\698\ the Commission granted the Temporary SBSEF
Exemptions.\699\ In relevant part, Temporary SBSEF Exemptions have:
---------------------------------------------------------------------------

\698\ See supra note 6.
\699\ See supra notes 45-47 and accompanying text.
---------------------------------------------------------------------------

(1) Allowed an entity that trades SBS and is not currently
registered as a national securities exchange, or that cannot yet
register as an SBSEF because final rules for such registration have not
yet been adopted, to continue trading SBS during this temporary period
without registering as a national securities exchange or SBSEF; \700\
---------------------------------------------------------------------------

\700\ See June 2011 Exemptive Order, supra note 46, 76 FR at
36293 (granting temporary exemptive relief from SEA section
3D(a)(1), 15 U.S.C. 78c-4(a)(1)).
---------------------------------------------------------------------------

(2) Exempted national securities exchanges (to the extent that they
also operate an SBSEF and use the same electronic trade execution
system for listing and executing trades of SBS on or through the
exchange and the facility) from the requirement to identify whether
electronic trading of those SBS is taking place on or through the
national securities exchange or the SBSEF; \701\
---------------------------------------------------------------------------

\701\ See id. at 36293 (granting temporary exemptive relief from
SEA section 3D, 15 U.S.C. 78c-4).
---------------------------------------------------------------------------

(3) Exempted any person, other than a clearing agency acting as a
central counterparty in security-based swaps, that, solely due to its
activities relating to security-based swaps, would fall within the
definition of exchange and thus be required to register as an exchange
from the requirement to register as a national securities exchange in
sections 5 and 6 of the Exchange Act; \702\
---------------------------------------------------------------------------

\702\ See July 2011 Exemptive Order, supra note 46, 76 FR at
39934.
---------------------------------------------------------------------------

(4) Permitted brokers and dealers to effect transactions in SBS on
an exchange that is operating without registering as a national
securities exchange in reliance on the exemption described above; \703\
---------------------------------------------------------------------------

\703\ See id.
---------------------------------------------------------------------------

(5) Exempted SBSEFs from the broker registration requirements of
section 15(a)(1) of the SEA; \704\ and
---------------------------------------------------------------------------

\704\ See id.; see also Requirements for Security-Based Swap
Dealers, Major Security-Based Swap Participants, and Broker-Dealers;
Capital Rule for Certain Security-Based Swap Dealers, SEA Release
No. 87005 (Sept. 19, 2019), 84 FR 68550, 68602 (Dec. 16, 2019)
(``Recordkeeping and Reporting Adopting Release'').
---------------------------------------------------------------------------

(6) Exempted any SBS contract entered into on or after July 16,
2011, from being void or considered voidable by reason of section 29 of
the SEA \705\ because any person that is a party to the SBS contract
violated a provision of the Exchange Act that was amended or added by
subtitle B of Title VII of the Dodd Frank Act and for which the
Commission has taken the view that compliance will be triggered by
registration of a person or by adoption of final rules by the
Commission, or for which the Commission has provided an exception or
exemptive relief herein, until such date as the Commission
specifies.\706\
---------------------------------------------------------------------------

\705\ 15 U.S.C. 78cc(b).
\706\ See June 2011 Exemptive Order, supra note 46, 76 FR at
36305-06.
---------------------------------------------------------------------------

In the Temporary SBSEF Exemptions, the Commission specified that
the exemptive relief would expire ``on the earliest compliance date set
forth in any of the final rules regarding registration of SBSEFs,''
\707\ or in the case of the relief regarding section 29 of the SEA,
``until such date as the Commission specifies.'' \708\
---------------------------------------------------------------------------

\707\ See id. at 36293; July 2011 Exemptive Order, supra note
46, 76 FR at 39934.
\708\ See June 2011 Exemptive Order, supra note 46, 76 FR at
36306.
---------------------------------------------------------------------------

Additionally, in 2020, the Commission adopted Rule 17Ad-24 under
the SEA \709\ to exempt from the definition of ``clearing agency'' in
section 3(a)(23) of the SEA \710\ certain entities, including a
registered SBSEF, that 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 SBSEF, 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.\711\
In adopting the rule, the Commission explained that an entity
performing such functions that triggers the requirement to register as
a clearing agency--but that is not yet registered with the Commission
as an SBSEF--could rely on a temporary exemption from the requirement
to register as a clearing agency that the Commission issued in
2011.\712\ In the Proposing Release, the Commission sought public
comment on whether it should ``sunset'' the 2011 Clearing Agency
Exemption and stated that it

[[Page 87229]]

preliminarily believed that, if it adopted a framework for the
registration of SBSEFs, the 2011 Clearing Agency Exemption would no
longer be necessary because entities carrying out the functions of
SBSEFs would be able to register with the Commission as such, thereby
falling within the exemption from the definition of ``clearing agency''
in existing Rule 17Ad-24.\713\
---------------------------------------------------------------------------

\709\ 17 CFR 240.17Ad-24.
\710\ 15 U.S.C. 78c(a)(23).
\711\ See SEA Release No. 90667 (Dec. 16, 2020), 86 FR 7637
(Feb. 1, 2021).
\712\ See id., 86 FR at 7650; SEA Release No. 64796 (July 1,
2011), 76 FR 39963, 39964 (July 7, 2011) (``2011 Clearing Agency
Exemption'').
\713\ See Proposing Release, supra note 1, 87 FR at 28934.
---------------------------------------------------------------------------

The Commission received no comment regarding the sunsetting of past
exemptive relief for entities operating as SBSEFs. Upon the
effectiveness of Regulation SE, the exemptive relief described above
would no longer be necessary, because SBSEFs will be able to register
with the Commission and will be subject to regulatory obligations under
Regulation SE. Therefore, the Commission is sunsetting the exemptive
relief consistent with the compliance schedule for Regulation SE.\714\
Thus, the exemptive relief described above will terminate 180 days
after the Effective Date of Regulation SE, which will be 60 days after
the date of publication in the Federal Register, except that (1) with
respect to an SBSEF that has filed an application to register with the
Commission on Form SBSEF within 180 days of the Effective Date of
Regulation SE, as well as trading of SBS on such an SBSEF, the relief
will terminate 240 days after the Effective Date of Regulation SE; and
(2) with respect to an SBSEF that filed an application to register on
Form SBSEF within 180 days after the Effective Date of Regulation SE
and whose application on Form SBSEF is complete for purposes of Rule
803(b)(5) (having responded to requests by the Commission's staff for
revisions or amendments) within 240 days after the effective date, as
well as trading of SBS on such an SBSEF, the exemptive relief will
terminate 30 days after the Commission acts to approve or deny the
SBSEF's application on Form SBSEF. Specifically with respect to the
exemptive relief providing that any SBS contract entered into on or
after July 16, 2011, will not be void or considered voidable by reason
of section 29 of the SEA \715\ because any person that is a party to
the SBS contract violated a provision of the Exchange Act that was
amended or added by subtitle B of Title VII of the Dodd Frank Act and
for which the Commission has taken the view that compliance will be
triggered by registration of a person or by adoption of final rules by
the Commission, or for which the Commission has provided an exception
or exemptive relief herein, this exemptive relief will continue to
apply to SBS entered into between July 16, 2011, and the date 30 days
after the Commission acts to approve the first SBSEF registration.
---------------------------------------------------------------------------

\714\ See infra section XVI (discussing compliance schedule).
\715\ 15 U.S.C. 78cc(b).
---------------------------------------------------------------------------

For any entity currently relying on the 2011 Clearing Agency
Exemption that becomes required to register as a clearing agency, the
exemptive relief will terminate 180 days after the Effective Date of
Regulation SE, which will be 60 days after the date of publication in
the Federal Register, except that (1) with respect to an entity that
has filed an application to register as a clearing agency with the
Commission on Form CA-1 within 180 days of the Effective Date of
Regulation SE, the relief will terminate 240 days after the Effective
Date of Regulation SE; and (2) with respect to an entity that has filed
an application on Form CA-1 within 180 days after the Effective Date of
Regulation SE and whose application on Form CA-1 is complete (having
responded to requests by the Commission's staff for revisions or
amendments) within 240 days after the effective date, the exemptive
relief will terminate 30 days after the Commission acts to approve or
disapprove the application on Form CA-1.

XIII. Electronic Filings Under Regulation SE

A. Use of Electronic Filing Systems and Structured Data

Various provisions of proposed Regulation SE would have required
registered SBSEFs (or SBSEF applicants) to file specified information
electronically with the Commission using the EDGAR system in Inline
XBRL, a structured, machine-readable data language.\716\ These
provisions include:
---------------------------------------------------------------------------

\716\ The structured data requirements are generally consistent
with objectives of the recently enacted Financial Data Transparency
Act (``FDTA''), which directs the Commission and other financial
regulators of data standards for collections of information. Such
data standards would need to meet specified criteria relating to
openness and machine-readability and promote interoperability of
financial regulatory data across members of the Financial Stability
Oversight Council. See James M. Inhofe National Defense
Authorization Act for Fiscal Year 2023, Public Law 117-263, tit.
LVIII, 136 Stat. 2395, 3421-39 (Dec. 23, 2022).
---------------------------------------------------------------------------

Rule 803(b)(1)(i) and (b)(3), regarding filings of, and
amendments to, a Form SBSEF application.
Rules 803(e) and 803(f), regarding requests to withdraw or
vacate an application for registration.
Rule 804(a)(1), regarding filings for listing products for
trading by certification.
Rule 805(a)(1), regarding filings for voluntary submission
of new products for Commission review and approval.
Rule 806(a)(1), regarding filings for voluntary submission
of rules for Commission review and approval.
Rule 807(a)(1), regarding filings for self-certification
of rules.
Rule 807(d), regarding filings of weekly notifications to
the Commission of rules and rule amendments that were not required to
be certified.
Rule 829(g)(6), regarding submission to the Commission of
reports related to financial resources and related documentation.
Rule 831(j)(2), regarding submission to the Commission of
the annual compliance report of SBSEF's CCO.
In addition to including these requirements in each of the rules
listed above, the Commission proposed to amend Rule 405 of Regulation
S-T to reflect these requirements.\717\ The Commission received
comments specifically regarding the proposed methods and formats of
electronic filing in Regulation SE discussed above.\718\ One commenter
states that if certain entities report a portion of needed data to one
regulator (CFTC) and the rest of the data to a different regulator
(SEC), data consumers will be required to extract data from two
different datasets to provide a complete picture. The commenter states
that if data reported to the CFTC is in PDF or HTML format, and data
reported to the SEC is in machine-readable (XBRL) format, this will
increase the complexity of data access.\719\ Another commenter does not
believe that EDGAR is the appropriate system for these filings. The
commenter believes that requiring the use of EDGAR will require most
filers to retain a third-party vendor and incur substantial costs and
may have the potential to deter market participants from entering this
space, noting that a more appropriate alternative filing process, the
Commission's Electronic Form Filing System (EFFS), a secure, web-based
electronic filing application used to process filings from SROs and SCI
entities, is already available, and its use would harmonize the filing
approach with SBS exchanges, and more broadly with the approach taken
by the CFTC. Alternatively, the

[[Page 87230]]

commenter encourages the Commission to adopt the process used by the
CFTC, which permits filings (including initial registration filings,
quarterly financial filings and rulebook filings) to be made via a
dedicated portal in PDF form.\720\ As discussed in further detail
below, taking into account comments received, the Commission is
requiring SBSEFs to submit the information related to rule and product
filings under Rules 804 to 807 of Regulation SE in unstructured format
via EFFS in order to alleviate compliance burdens on SBSEFs.
---------------------------------------------------------------------------

\717\ See Proposing Release, supra note 1, 87 FR at 28872,
28972-73.
\718\ See Letter from Campbell Pryde, President and CEO, XBRL
US, to Secretary, Commission, at 2 (June 10, 2022) (``XBRL US
Letter''); Bloomberg Letter, supra note 18, at 20-21.
\719\ See XBRL US Letter, supra note 718, at 2.
\720\ See Bloomberg Letter, supra note 18, at 20-21.
---------------------------------------------------------------------------

The Commission has considered the comments received on the
provisions regarding electronic filing in Regulation SE discussed above
and is adopting Inline XBRL and EDGAR requirements for some, but not
all, of the disclosures that Regulation SE will require. Specifically,
Regulation SE will require SBSEFs to file the information under the
following rules electronically via EDGAR using Inline XBRL:
Rule 829, regarding submission to the Commission of
reports related to financial resources and related documentation.
Rule 831, regarding submission to the Commission of the
annual compliance report of the SBSEF's CCO.
Exhibits C through F to Form SBSEF, regarding governing
board fitness standards and composition; organizational structure;
personnel qualifications; and staffing requirements, respectively.
Exhibits H through L to Form SBSEF, regarding material
pending legal proceedings; financial information (except for any copies
of agreements filed with the exhibit); affiliate financial information;
dues, fees, and other charges for services; and compliance with Core
Principles, respectively.
Exhibit P through S to Form SBSEF, regarding disciplinary
and enforcement protocols; operation of trading systems or platforms;
rules prohibiting specific trade practices; and the maintenance of
trading data, respectively.
For these specific disclosures, the Commission is adopting as
proposed the requirement that they be made through EDGAR using Inline
XBRL and is adopting the amendments to Rule 405 as proposed, with minor
technical modifications.\721\
---------------------------------------------------------------------------

\721\ The Commission is, in light of its renumbering of the
provisions relating to Form SBSEF, see supra section III.B, and
because Form SBSEF will not appear in the Code of Federal
Regulations, replacing ``17 CFR 249.2001 of this chapter'' with
``referenced in 17 CFR 249.1701 of this chapter.''
---------------------------------------------------------------------------

For certain other disclosures required under Regulation SE, in a
change from the proposal, the Commission is requiring the use of a
custom XML data language rather than Inline XBRL. Specifically,
Regulation SE will require SBSEFs to file the following information
electronically via EDGAR using custom XML:
Rules 803(e) and 803(f), regarding requests for withdrawal
or vacation applications.
The Form SBSEF Cover Sheet.
Exhibit A to Form SBSEF, regarding the SBSEF's ownership
information (except for any copies of agreements filed along with the
Exhibit).
Exhibit B to Form SBSEF, regarding the officers,
directors, and other control persons of the SBSEF.
Exhibit G to Form SBSEF, regarding organizational
documents (except for copies of organizational documents filed with the
Exhibit).
Exhibit M to Form SBSEF, regarding rules and technical
manuals (except for copies of rules and technical manuals filed with
the Exhibit).
Exhibit N to Form SBSEF, regarding agreements and
contracts (except for copies of agreements and contracts).
Exhibit T to Form SBSEF, regarding clearing agencies.\722\
---------------------------------------------------------------------------

\722\ In addition to the custom XML exhibits to Form SBSEF that
will be submitted via EDGAR, the Commission is also adopting as
proposed the requirement in Rule 825 of Regulation SE that SBSEFs
post Daily Market Data Reports on their websites using a custom XML
schema and a PDF renderer, both of which the Commission will make
available on its website. See supra section VI.H.
---------------------------------------------------------------------------

The Commission is requiring some disclosures to be structured in
Inline XBRL, and other disclosures to be structured in custom XML,
because Inline XBRL is well-suited for certain types of content--such
as financial statements and extended narrative discussions--whereas
other types of content can be readily captured using custom XML data
languages that yield smaller file sizes than Inline XBRL and thus
facilitate more streamlined data processing. Such custom XML languages
also enable EDGAR to generate fillable web forms that will permit
SBSEFs to input disclosures into form fields rather than encode their
disclosures in custom XML themselves, thus likely easing compliance
burdens on SBSEFs.
Certain Form SBSEF exhibits also include requirements to attach
copies of existing documents, such as copies of by-laws, written
agreements, and compliance manuals. The Commission is requiring SBSEFs
to file these copies of documents as unstructured PDF attachments to
the otherwise structured Form SBSEF filing.\723\ Requiring SBSEFs to
retroactively structure such existing documents, which were prepared
for purposes outside of fulfilling the Commission's disclosure
requirements, could impose compliance burdens on SBSEFs that may not be
justified in light of the commensurate informational benefits
associated with having such documents in structured form. The specific
requirements to include these attached copies are included in the
following provisions of Regulation SE:
---------------------------------------------------------------------------

\723\ In addition to these copies of existing documents, the
Commission is requiring Exhibit U to Form SBSEF, which includes any
information in the application that is subject to a confidential
treatment request, to be filed as an unstructured PDF attachment.
The confidential information that an applicant includes on Exhibit U
could be responsive to disclosure requirements set forth in multiple
other Form SBSEF Exhibits (potentially spanning multiple different
data languages or formats). As a result, implementing technical
validations on the structuring of the information on Exhibit U would
not be technically feasible.
---------------------------------------------------------------------------

Exhibit A to Form SBSEF (specifically, copies of
agreements through which persons may control or direct the management
or policies of the SBSEF).
Exhibit G to Form SBSEF (specifically, copies of the
SBSEF's organizational documents).
Exhibit I to Form SBSEF (specifically, copies of
agreements supporting the SBSEF's conclusions regarding the liquidity
of its financial assets).
Exhibit M to Form SBSEF (specifically, copies of the
SBSEF's rules, technical manuals, guides, or other instructions).
Exhibit N to Form SBSEF (specifically, copies of
agreements or contracts that enable the SBSEF's compliance with Core
Principles).
Exhibit O to Form SBSEF (specifically, copies of the
SBSEF's compliance manual).
To implement the reduced scope of Inline XBRL requirements for Form
SBSEF compared to the proposed rules, the Commission is making changes
to the rule text for Form SBSEF, Rule 803 of Regulation SE, and Rule
405 of Regulation S-T. In the Registration Instructions to Form SBSEF,
rather than requiring the disclosures on Form SBSEF to be provided as
an Interactive Data File in accordance with Rule 405 of Regulation S-T
as proposed, the final rule text lists a subset of Form SBSEF Exhibits
that are to be provided as an Interactive Data File in accordance with
Rule 405 of Regulation S-T, and clarifies that the Interactive Data
File requirement does not extend to copies of existing documents.\724\
In Rule 803 of

[[Page 87231]]

Regulation SE, rather than requiring SBSEF applicants to file Form
SBSEF as an Interactive Data File in accordance with Rule 405 of
Regulation S-T as proposed, the final rule text requires SBSEF
applicants to file the information specified in the Registration
Instructions to Form SBSEF (i.e., the listed Exhibits) as an
Interactive Data File in accordance with Rule 405 of Regulation S-
T.\725\ In Rule 405 of Regulation S-T, the final rule text omits
references to subparagraphs of Rule 803 that were included within the
scope of the proposed rule text, while retaining the references to
information specified in the Registration Instructions to Form
SBSEF.\726\
---------------------------------------------------------------------------

\724\ See Registration Instructions to Form SBSEF, referenced in
17 CFR 249.1701. Rule 405 of Regulation S-T sets forth the
requirements for Interactive Data File submissions. Rule 405(b) of
Regulation SE sets forth the content to be included within the
Interactive Data File, and Rule 405(a)(3) of Regulation S-T
specifies Inline XBRL as the data language to be used for
Interactive Data File submissions. In a technical change from the
proposed rule text, the Commission is expanding the group of
entities listed within Rule 405(a)(3) of Regulation S-T to add
electronic filers subject to Regulation SE, reflecting the addition
of electronic filers subject to Regulation SE to Rule 405(b) of
Regulation S-T in the proposed and final rule text.
\725\ See Rule 803(b)(1)(i) of Regulation SE. We have made
conforming changes to Rules 803(b)(3), (e), and (f) to narrow the
proposed Inline XBRL requirements for Form SBSEF amendments,
withdrawal requests, and vacation requests. See Rules 803(b)(3),
803(e), and 803(f) of Regulation SE.
\726\ See the introductory text, subparagraphs (a)(2), (a)(4),
and (b)(5)(ii), and Note 1 to Rule 405 of Regulation S-T.
---------------------------------------------------------------------------

Requiring use of EDGAR and structured data languages for certain
disclosures under Regulation SE has benefits. Requiring SBSEFs to make
required certain filings via EDGAR will provide the Commission and the
public with a centralized, publicly accessible electronic database for
SBSEF-provided data in the form that is most accessible and useful to
regulators, market participants, and the public alike. The use of EDGAR
also enables technical validation of the disclosures, thus potentially
reducing the incidence of non-discretionary errors (e.g., the inclusion
of text for a disclosure that should contain only numbers) in those
Regulation SE disclosures that are filed via EDGAR. Moreover, requiring
structured data languages for many of the reported disclosures will
make those disclosures more easily available and accessible to, and
reusable by, market participants and the Commission for retrieval,
aggregation, and comparison across different SBSEFs and time periods,
as compared to an unstructured PDF, HTML, or ASCII format requirement
for those disclosures.\727\ Permitting all Regulation SE disclosures to
be filed entirely in PDF, HTML, or ASCII format, while perhaps simpler
for the SBSEF making the filings, would reduce the accessibility of
information in the filings to the Commission and to market participants
who will access these filings through EDGAR. Further, harmonizing with
the CFTC in this regard by permitting all Regulation SE filings to be
made entirely in PDF format, as the CFTC does, would not carry
comparable benefits to harmonization of other aspects of Regulation SE.
The benefits of using EDGAR and structured data highlighted above
justify the potential inconvenience to registrants, as well as to data
users, of having to access two separate databases to extract
information regarding SEC-regulated SBSEFs and CFTC-regulated SEFs.
---------------------------------------------------------------------------

\727\ See Securities Act Release No. 10514 (June 28, 2018), 83
FR 40846, 40847 (Aug. 16, 2018). Inline XBRL allows filers to embed
XBRL data directly into an HTML document, eliminating the need to
tag a copy of the information in a separate XBRL exhibit. See id.,
83 FR at 40851.
---------------------------------------------------------------------------

As discussed above, in a change from the proposal, the Commission
is requiring SBSEFs to provide the rule and product filings required
under Rules 804 through 807and 816 of Regulation SE through EFFS in an
unstructured format, rather than providing them through EDGAR in Inline
XBRL. While the information in SBSEF rule and product filings will not
be machine-readable, the absence of structuring requirements for rule
and product filings under Regulation SE (which aligns with the current
rule and product filing process for SROs) \728\ will help contain
compliance burdens for SBSEFs, because SBSEFs will not be subject to
compliance costs associated with structuring those filings.\729\ In
light of the significant volume of other machine-readable data
regarding SBSEFs that will be available to the market and data users
under Regulation SE, this requirement having a lower compliance burden
justifies the lack of machine-readability for the information in rule
and product filings required under Rules 804 through 807 and 816 of
Regulation SE.
---------------------------------------------------------------------------

\728\ See supra note 139.
\729\ See infra section XVII.C.3(f).
---------------------------------------------------------------------------

To implement the change from the proposed Inline XBRL and EDGAR
filing requirement to the final unstructured format and EFFS
requirement for rule and product filings, the Commission is modifying
the rule text for Rules 804 through 807 of Regulation SE, the Security-
Based Swap Execution Facility Cover Sheet that the Commission is
adopting as Sec. 249.1702, and Rule 405 of Regulation S-T. For Rules
804 through 807, the final rule text specifies that SBSEFs must file
the rule and product filings through the EFFS system, rather than
through the EDGAR system as an Interactive Data File in accordance with
Rule 405 of Regulation S-T as proposed.\730\ The Commission is not
making analogous changes to Rule 816 of Regulation SE, because Rule 816
instructs SBSEFs to follow the procedures under Rule 806 or 807 of
Regulation SE.\731\ For the Security-Based Swap Execution Facility
Cover Sheet, the final rule text specifies that SBSEFs must file the
cover sheet using the EFFS system, rather than using the EDGAR system
in accordance with Rule 405 of Regulation S-T as proposed.\732\ In Rule
405 of Regulation S-T, the final rule text omits references to
subparagraphs of Rules 804 through 807 and the Security-Based Swap
Execution Facility Cover Sheet that were included within the scope of
the proposed rule text.\733\
---------------------------------------------------------------------------

\730\ See Rules 804(a)(1), 805(a)(1), 806(a)(1), 807(a)(1), and
807(d)(1) of Regulation SE.
\731\ See Rule 816(a)(1) of Regulation SE.
\732\ See Instruction (a) to the Security-Based Swap Execution
Facility Sheet adopted as Sec. 249.1702.
\733\ See the introductory text, subparagraphs (a)(2), (a)(4),
and (b)(5)(ii), and Note 1 to Rule 405 of Regulation S-T.
---------------------------------------------------------------------------

B. Use of Identifiers

As discussed above, the Commission is adopting, as Sec. 249.1702,
a submission cover sheet and instructions that an SBSEF must use for
filings submitted pursuant to Rules 804 through 807 and 816.
Paragraph (a) of the submission cover sheet instructions provides
that a properly completed submission cover sheet must accompany all
rule and product submissions submitted electronically to the Commission
by an SBSEF.\734\ Per paragraph (a), a properly completed submission
cover sheet would include, among other things, the name and platform ID
of the SBSEF.\735\ Currently, LEIs issued through the GLEIS are the
only allowable platform IDs that may be used by registered SBSEFs.\736\
---------------------------------------------------------------------------

\734\ See supra section IV.E.
\735\ See supra note 140.
\736\ Id.
---------------------------------------------------------------------------

The Commission received comments on the use of LEIs, as well as the
potential use of other identifiers in filings to the Commission under
Regulation SE.\737\ One commenter supports the Commission's effort to
include the LEI for identifying SBSEFs, stating that the Commission's
decision to include the LEI creates consistency and transparency for
the identification

[[Page 87232]]

of execution facilities, while also enabling information sharing across
agencies.\738\ The commenter points out that the LEI is the only global
standard for legal entity identification and argues that by
implementing the LEI more comprehensively the Commission would set
forth a consistent identification scheme highlighted by the LEI. The
commenter also supports the inclusion of the Unique Product Identifier
(``UPI''), which is also an International Organization for
Standardization (``ISO'') standard, as well as the Financial Instrument
Global Identifier (``FIGI''), an adopted U.S. standard, arguing that
open, non-proprietary data standards, which are established by
voluntary standard bodies, facilitate the open exchange of information
for regulators.\739\
---------------------------------------------------------------------------

\737\ See Letter from Stephan Wolf, CEO, Global Legal Entity
Identifier Foundation, at 1-2 (June 10, 2022) (``GLEIF Letter'') at
1-2; Bloomberg Letter, supra note 18, at 11-12.
\738\ See GLEIF Letter, supra note 737, at 1.
\739\ See id. at 1-2.
---------------------------------------------------------------------------

Another commenter agrees that standard identifiers such as LEI,
FIGI, and UPI should be included in an SBSEF's other reporting
obligations under Regulation SE. In particular, this commenter
highlights a number of the potential benefits of FIGI, a unique,
publicly available identifier that covers financial instruments across
asset classes that arise, expire, and change on a daily basis. The
commenter states that it developed FIGI to help solve licensing
challenges and shortcomings in data organizations and governance that
persist in the current regionally based security identifier numbering
approaches. The commenter states that one of the benefits of FIGI is
that it enables interoperability between other identification systems
and does not force the use of a single identification system, which
could lower costs when interacting between legacy systems, which may
depend upon a single identifier, and newer systems, which typically
have a more modern architecture. As a general matter, the commenter
believes that firms should be permitted to choose among identifiers and
have the flexibility to adopt, integrate, or switch to other
identifiers as appropriate. According to the commenter, this would
allow firms to orient decisions around reducing costs of integration or
realizing added benefits that offset any such integration cost
concerns.\740\
---------------------------------------------------------------------------

\740\ See Bloomberg Letter, supra note 18, at 11-12.
---------------------------------------------------------------------------

The Commission has considered the comments received on the
provisions regarding LEIs and other identifiers. The Commission is
adopting the submission cover sheet and instructions as proposed
because LEIs issued through the GLEIS are currently the only allowable
platform IDs that may be used by registered SBSEFs, and as such it is
appropriate and acceptable for them to be used on the submission cover
sheet. With respect to other identifiers discussed by the commenters
(i.e., UPI and FIGI), as well as other identifiers that may be under
development globally by various entities, because they are not
currently allowable IDs, it would not be appropriate or acceptable for
them to be used on the submission cover sheet.

XIV. Amendments to Commission's Rules of Practice for Appeals of SBSEF
Actions

As noted above,\741\ SEA Core Principle 2 directs an SBSEF to
exercise regulatory powers over its market.\742\ Under Rule 819 of
Regulation SE, an SBSEF could take a variety of disciplinary actions
against a member that is found to violate the SBSEF's rules, including
fining the member, limiting the member's access, or barring the member
entirely.\743\ SEA Core Principle 2 also requires an SBSEF to establish
rules governing access to its market.\744\ An SBSEF could apply those
rules in such a way as to limit a person's access to the SBSEF or to
deny access entirely without due process. Recognizing these concerns,
in the Proposing Release, the Commission proposed a number of
amendments to its Rules of Practice to allow for appeals for final
disciplinary actions taken by an SBSEF, for denials or conditionings of
membership, and for limitations or denials of access, noting that the
CFTC has similar procedures with respect to SEFs.\745\
---------------------------------------------------------------------------

\741\ See supra section VI.B.
\742\ See, e.g., 15 U.S.C. 78c-4(d)(2)(A) (directing an SBSEF to
``establish and enforce compliance'' with its rules) (emphasis
added); 15 U.S.C. 78c-4(d)(2)(C) (directing an SBSEF to ``establish
and enforce trading, trade processing, and participation rules that
will deter abuses and have the capacity to detect, investigate, and
enforce those rules'') (emphasis added).
\743\ See supra section VI.B. See also Rule 819(c)(3) (relating
to limitations on access, including suspensions and permanent bars);
Rule 819(g) (relating to disciplinary procedures and sanctions).
\744\ See 15 U.S.C. 78c-4(d)(2)(A)(ii) (directing an SBSEF to
establish and enforce compliance with any rule that imposes any
limitation on access to the facility); 15 U.S.C. 78c-4(d)(2)(B)(i)
(requiring an SBSEF to provide market participants with impartial
access to the market).
\745\ See Proposing Release, supra note 1, 87 FR at 18935-37;
See also part 9 of the CFTC's rules (Rules Relating to Review of
Exchange Disciplinary, Access Denial or Other Adverse Actions). For
purposes of part 9, the term ``exchange'' includes a SEF.
---------------------------------------------------------------------------

The Commission did not receive any comments on these proposed
amendments to its Rules of Practice. General principles of due process
necessitate an appeals procedure for SBSEF members aggrieved by
disciplinary action taken by an SBSEF. Therefore, the Commission is
adopting the amendments to its Rules of Practice as proposed, as
detailed below, with a minor modification to Rule 442.

A. Amendment to Rule 101

Existing Rule 101 of the Commission's Rules of Practice \746\ sets
out definitions for several terms used in the Rules of Practice. In
particular, existing Rule 101(a)(9) defines ``proceeding'' with respect
to applications of review of actions by a variety of entities that are
subject to the Commission's jurisdiction. The Commission proposed a new
paragraph (a)(9)(ix) of Rule 101 that provides that an application for
a review of a determination (such as a final disciplinary action or a
limitation or denial of access to any service) by an SBSEF would be a
``proceeding'' and thereby trigger the applicability of the Rules of
Practice.
---------------------------------------------------------------------------

\746\ 17 CFR 201.101.
---------------------------------------------------------------------------

The Commission received no comment on the proposed amendment to
Rule 101 and is adopting this amendment to Rule 101 as proposed.

B. Amendment to Rule 202

Existing Rule 202 of the Commission's Rules of Practice \747\
permits a party in certain proceedings before the Commission to make a
motion to specify certain procedures with respect to such proceeding.
Rule 202(a) excludes certain types of proceedings, including
enforcement or disciplinary proceedings, proceedings to review a
determination by an SRO, and proceedings to review a determination of
the Public Company Accounting Oversight Board (``PCAOB''). Because the
Commission proposed new Rules 442 and 443, which set out specific
procedures with respect to proceedings to review a determination of an
SBSEF,\748\ the Commission proposed to revise Rule 202(a) to add these
SBSEF-related proceedings to the list of exclusions.
---------------------------------------------------------------------------

\747\ 17 CFR 201.202.
\748\ See infra sections XIV.E and F.
---------------------------------------------------------------------------

The Commission received no comment on the proposed amendment to
Rule 202 and is adopting this amendment to Rule 202 as proposed.

C. Amendment to Rule 210

Existing Rule 210 of the Commission's Rules of Practice \749\ sets
out Commission rules with respect to parties, limited participants, and
amici curiae in various proceedings before the Commission. Paragraph
(a)(1) of Rule

[[Page 87233]]

210 states that persons shall not be granted leave to become a party or
non-party participant on a limited basis in an enforcement or
disciplinary proceeding, a proceeding to review a determination by an
SRO, or a proceeding to review a determination by the PCAOB, except as
authorized by paragraph (c) of Rule 210 (which permits limited
instances in which persons may participate for Commission disciplinary
and enforcement proceedings). Because the Commission proposed new Rules
442 and 443, which set out specific procedures with respect to
proceedings to review a determination of an SBSEF,\750\ the Commission
proposed to revise Rule 210 to exclude proceedings to review a
determination by an SBSEF among the types of proceedings from which
persons may be granted leave to become a party or a non-party
participant on a limited basis.
---------------------------------------------------------------------------

\749\ 17 CFR 201.210.
\750\ See infra sections XIV.E and F.
---------------------------------------------------------------------------

The Commission received no comment on the proposed amendment to
Rule 210 and is adopting this amendment to Rule 210 as proposed.

D. Amendment to Rule 401

The Commission proposed to amend existing Rule 401 of its Rules of
Practice by adding a new paragraph (f). Paragraph (f)(1) would permit
any person aggrieved by a stay of action by an SBSEF entered in
accordance with Rule 442(c) to make a motion to lift the stay. The
Commission could also, at any time, on its own motion determine whether
to lift the automatic stay. Paragraph (f)(2) would provide that the
Commission may lift a stay summarily, without notice and opportunity
for hearing. Finally, paragraph (f)(3) would provide that the
Commission may expedite consideration of a motion to lift a stay of
action by an SBSEF, consistent with the Commission's other
responsibilities. Where consideration is expedited, persons opposing
the lifting of the stay could file a statement in opposition within two
days of service of the motion requesting lifting of the stay unless the
Commission, by written order, specifies a different period.
It is appropriate to allow persons affected by certain stays of
action by an SBSEF the opportunity to make a motion to request the
lifting of the stay. As discussed below, pursuant to Rule 442, an
aggrieved person can file an application for review with the Commission
with respect to a final disciplinary action, a final action with
respect to a denial or conditioning of membership, or a final action
with respect to a denial or limitation of access. The filing of such an
application would operate as a stay of the SBSEF's determination, and
because of this automatic stay procedure, an aggrieved person or the
SBSEF itself should be afforded a mechanism by which it could request
the Commission to lift the stay, in addition to the Commission's
ability under Rule 401(f)(2) to lift a stay summarily, without notice
and opportunity of hearing.
The Commission received no comment on Proposed Rule 401(f) and is
adopting Rule 401(f) as proposed.

E. Rule 442--Right to Appeal

Proposed Rule 442 would establish the right to an appeal to the
Commission of certain final actions taken by an SBSEF and would set out
certain procedural matters relating to any such appeal. Paragraph (a)
of Rule 442 provides that an application for review by the Commission
may be filed by any person who is aggrieved by a determination of an
SBSEF with respect to any: (1) final disciplinary action, as defined in
Rule 835(b)(1); (2) final action with respect to a denial or
conditioning of membership, as defined in Rule 835(b)(2); or (3) final
action with respect to a denial or limitation of access to any service
offered by the SBSEF, as defined in Rule 835(b)(2).
Paragraph (b) of Rule 442 sets forth the procedure in such cases.
Specifically, an aggrieved person can file an application for review
with the Commission (pursuant to existing Rule 151) within 30 days
after the notice filed by the SBSEF with the Commission pursuant to
Rule 835 is received by the aggrieved person, and must serve the
application on the SBSEF at the same time.\751\ The Commission is
modifying the text of Rule 442(b) from the proposal to clarify that the
30-day period for filing an application for review will not be extended
absent a showing of extraordinary circumstances and that Rule 442(b)
will be the exclusive remedy for seeking an extension of the 30-day
period. Strict compliance with filing deadlines facilitates finality
and encourages parties to act timely in seeking review.
---------------------------------------------------------------------------

\751\ Such an application would be required to identify the
SBSEF's determination complained of, set forth in summary form a
statement of alleged errors in the action and supporting reasons
therefor, and state an address where the applicant can be served.
The application would be expected not to exceed two pages in length,
and the notice of appearance required by Sec. 201.102(d) would have
to accompany the application if the applicant is to be represented
by a representative. Any exception to an action not supported in an
opening brief that complies with Sec. 201.450(b) could, at the
discretion of the Commission, be deemed to have been waived by the
applicant.
---------------------------------------------------------------------------

Paragraph (c) of Rule 442 provides that filing an application for
review with the Commission pursuant to Rule 835(b) would operate as a
stay of the SBSEF's determination, unless the Commission otherwise
orders either pursuant to a motion filed in accordance with Rule 401(f)
or upon its own motion.\752\
---------------------------------------------------------------------------

\752\ 17 CFR 201.442(c).
---------------------------------------------------------------------------

It is appropriate for the filing of an application for review to
operate as an automatic stay of the SBSEF's determination, because that
determination could have the effect of significantly or even
permanently damaging an aggrieved person's business while the
Commission was conducting a review, which could take substantial
time.\753\ In addition, the Commission proposed in Rule 401(f) a
procedure whereby a person aggrieved by such stay, including the SBSEF,
can request that the Commission lift the stay.\754\ The rules also
contain certain requirements relating to certification of the record
and service of the index.\755\ Specifically, within 14 days after
receipt of an application for review, an SBSEF would be required to
certify and file with the Commission one unredacted copy of the record
upon which it took the complained-of action. The SBSEF would be
required to file electronically with the Commission one copy of an
index of the record and serve one copy of the index on each party,
subject to the requirements in Rule 442(d)(2) relating to sensitive
personal information; if applicable, these filings would have to be
certified that they have complied with the requirements relating to
sensitive personal information. These requirements are appropriate to
ensure that sensitive personal information is not improperly or
inadvertently disseminated by an SBSEF as part of its filing of the
record relating to the appeal review.
---------------------------------------------------------------------------

\753\ The Commission received one comment describing the ability
of persons aggrieved by certain actions by an SBSEF to apply for
Commission review as ``some kind of mandatory arbitration process,
overseen by a self governing regulatory body,'' and stating that
this would not help retail investors. See Kevin Letter, supra note
95. The review of SBSEF action under Rule 442 would not be
arbitration by a self-governing regulatory body but instead review
by the Federal agency tasked by Congress with regulating SBSEFs.
Further, only ECPs would be eligible to trade SBS on an SBSEF, and
any offer or sale of SBS to ``retail investors'' would have to be
effected on a national securities exchange. See SEA section 6(l), 15
U.S.C. 78f(l) (``It shall be unlawful for any person to effect a
transaction in a security-based swap with or for a person that is
not an eligible contract participant, unless such transaction is
effected on a national securities exchange . . . .'').
\754\ See supra section XIV.D.
\755\ 17 CFR 201.442(d) and (e).

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[[Page 87234]]

The Commission received no comment on Proposed Rule 442 and is
adopting Rule 442 as proposed, with the modification to Rule 442(b)
described above.

F. Rule 443--Sua sponte Review by Commission

New Rule 443 \756\ provides that the Commission, on its own
initiative, can order review of any determination by an SBSEF (which
would include a final disciplinary action, a final action with respect
to a denial or conditioning of membership, or a final action with
respect to a denial or limitation of access to any services) that could
be subject to an application for review pursuant to Rule 442(a) within
40 days after the SBSEF filed notice thereof.
---------------------------------------------------------------------------

\756\ 17 CFR 201.443.
---------------------------------------------------------------------------

Rule 443 further provides that the Commission can, at any time
before issuing its decision, raise or consider any matter that it deems
material, whether or not raised by the parties. If it does so, the
Commission must, under Rule 443, give notice to the parties and an
opportunity for supplemental briefing with respect to issues not
briefed by the parties, where the Commission believes that such
briefing could significantly aid the decisional process. It is
appropriate that the Commission have the ability to review any
determination filed by an SBSEF that could be subject to an application
for review under Rule 442(a), even without an appeal of that
determination by an aggrieved party, should the Commission believe that
further consideration is warranted. Therefore, the rule provides the
Commission authority to obtain additional information through
supplemental briefings, as needed.
The Commission received no comment on Proposed Rule 443 and is
adopting Rule 443 as proposed.

G. Amendment to Rule 450

Existing Rule 450 of the Commission's Rules of Practice \757\ sets
out requirements for briefs filed with the Commission. Rule 450(a) sets
out a briefing schedule, and paragraph (a)(2) provides that the
briefing schedule order shall be issued within 21 days, or such longer
time as provided by the Commission, of receipt by the Commission of
various types of appeals. The Commission proposed to amend Rule 450 by
adding a new paragraph (a)(2)(iv) providing that the 21 days would be
triggered by ``[r]eceipt by the Commission of an Index to the record of
a determination by a security-based swap execution facility filed
pursuant to Sec. 201.442(d).''
---------------------------------------------------------------------------

\757\ 17 CFR 201.450.
---------------------------------------------------------------------------

The Commission received no comment on the proposed amendment to
Rule 450 and is adopting this amendment to Rule 450 as proposed.

H. Amendment to Rule 460

Existing Rule 460 of the Commission's Rules of Practice \758\
states that the Commission shall determine each matter on the basis of
the record. Rule 460(a) defines the contents of the record with respect
to various types of action. The Commission proposed a new paragraph
(a)(4) of Rule 460, which states that, in a proceeding for a final
decision before the Commission reviewing a determination of an SBSEF,
the record shall consist of: (i) the record certified by the SBSEF
pursuant to Sec. 201.442(d); (ii) any application for review; and
(iii) any submissions, moving papers, and briefs filed on appeal or
review.
---------------------------------------------------------------------------

\758\ 17 CFR 201.460.
---------------------------------------------------------------------------

The Commission received no comment on the proposed amendment to
Rule 460 and is adopting this amendment to Rule 460 as proposed.

XV. Amendments to Delegations of Authority in Rule 30-3 and Rule 30-14

In connection with the adoption of Regulation SE, the Commission is
revising its rules delegating authority to the Director of the Division
of Trading and Markets (``TM Division Director'') and to the General
Counsel in order to delegate authority to take actions necessary to
carry out the rules under Regulation SE and to facilitate the operation
of the regulatory structure created in Regulation SE.\759\ These
revisions are intended to conserve Commission resources and increase
the effectiveness and efficiency of the Commission's process for
handling certain processes required by Regulation SE and for resolving
appeals of SBSEF final actions.\760\ Congress has authorized such
delegation by Public Law 87-592, 76 Stat. 394, 15 U.S.C. 78d-1(a),
which provides that the Commission ``shall have the authority to
delegate, by published order or rule, any of its functions to . . . an
employee or employee board, including functions with respect to
hearing, determining, ordering, certifying, reporting, or otherwise
acting as to any work, business or matter.''
---------------------------------------------------------------------------

\759\ 17 CFR 200.30-3.
\760\ In the Proposing Release, the Commission stated that it
``may address delegations of its authority in the adopting release
for Regulation SE.'' Proposing Release, supra note 1, 87 FR at
28877.
---------------------------------------------------------------------------

The Commission finds, in accordance with the Administrative
Procedure Act (``APA''), that these amendments to the delegations of
authority relate solely to agency organization, procedure, or
practice.\761\ Accordingly, the APA's provisions regarding notice of
rulemaking and opportunity for public comment are not applicable to
these rules. These rules do not substantially affect the rights or
obligations of non-agency parties and pertain to increasing efficiency
of internal Commission operations. For the same reasons, the provisions
of the Small Business Regulatory Enforcement Fairness Act are not
applicable to these rules.\762\ Additionally, the provisions of the
Regulatory Flexibility Act,\763\ which apply only when notice and
comment are required by the APA or other law, are not applicable to
these rules.\764\ The amendments to these rules do not contain any
collection of information requirements as defined by the Paperwork
Reduction Act of 1995.\765\ To the extent that these rules relate to
agency information collections during the conduct of administrative
proceedings, they are exempt from review under the PRA. Further,
because these amendments impose no new burdens on private parties, the
amendments will not have any impact on competition for purposes of
section 23(a)(2) of the Exchange Act.\766\
---------------------------------------------------------------------------

\761\ 5 U.S.C. 553(b)(3)(A).
\762\ See 5 U.S.C. 804(3)(C) (the term ``rule'' does not include
``any rule of agency organization, procedure, or practice that does
not substantially affect the rights or obligations of non-agency
parties'').
\763\ 5 U.S.C. 60 et seq.
\764\ See 5 U.S.C. 601(2).
\765\ See 5 CFR 1320.3.
\766\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

Accordingly, the Commission is amending its rules, by adding new
paragraphs (95)-(102) to Rule 30-3, to delegate authority to the
Division Director to perform certain actions necessitated by Regulation
SE. The Commission is also amending paragraphs (4), (5), (7), and (8)
of Rule 30-14 (17 CFR 200.30-14) to delegate authority to the General
Counsel to perform certain actions in connection with Commission review
proceedings of SBSEF actions. Under these delegations, the Division
Director or the General Counsel, as applicable, (or, under his or her
direction, such person or persons as might be designated from time to
time by the Chairman of the Commission \767\) is authorized to perform
the actions discussed below. Notwithstanding these

[[Page 87235]]

delegations, the Division Director or the General Counsel, as
applicable, may submit any matter he or she believes appropriate to the
Commission.\768\ Furthermore, any action taken by the Division Director
or the General Counsel, as applicable, pursuant to delegated authority
would be subject to Commission review as provided by Rules 430 and 431
of the Commission's Rules of Practice, 17 CFR 201.430-201.431 and 15
U.S.C. 78d-1(b).
---------------------------------------------------------------------------

\767\ See 17 CFR 200.30-3 and 17 CFR 200.30-14 (sub-delegation
language applicable as a result of the addition of subparagraphs
related to Regulation SE to the existing rules).
\768\ 17 CFR 200.30-3(l) and 17 CFR 200.30-14(l).
---------------------------------------------------------------------------

A. Delegated Authority Related to SBSEF Registration and Form SBSEF

With respect to certain Commission actions related to the
registration process for SBSEFs and the review of Form SBSEF under Rule
803 and Rule 808, the Division Director has delegated authority: to
publish notice on the Commission's website of a completed Form SBSEF
and make available on the Commission's website certain specified parts
of a Form SBSEF; to notify the applicant that its application is
incomplete; to request from the applicant additional information and
documentation necessary; to notify the applicant that its application
is materially incomplete and to specify the deficiencies in the
application, for purposes of staying the 180-day period for Commission
review of the Form SBSEF; and to issue an order vacating the SBSEF's
registration and to send a copy of the related request and order of
vacation to all other SBSEFs, SBS exchanges, and registered clearing
agencies that clear security-based swaps.\769\
---------------------------------------------------------------------------

\769\ See 17 CFR 200.30-3(a)(95), as adopted herein.
---------------------------------------------------------------------------

B. Delegated Authority Related to New Products Proposed by an SBSEF

With respect to certain Commission actions related to self-
certification of new products by an SBSEF under Rule 804, the Division
Director has delegated authority: to stay for a period of up to 90 days
the effectiveness of a security-based swap execution facility's self-
certification of a new product; to publish notice on the Commission's
website of a 30-day period for public comment; and to withdraw the stay
or notify the security-based swap execution facility that the
Commission objects to the proposed certification.\770\
---------------------------------------------------------------------------

\770\ See 17 CFR 200.30-3(a)(96), as adopted herein.
---------------------------------------------------------------------------

With respect to certain Commission actions related to voluntary
submission of new products by an SBSEF under Rule 805, the Division
Director has delegated authority: to notify the submitting SBSEF that a
submission for a new product does not comply with paragraph (a) of Rule
805; to make the SBSEF's submission publicly available on the
Commission's website; to extend by an additional 45 days the period for
consideration of a new product voluntarily submitted by an SBSEF if the
product raises novel or complex issues that require additional time to
analyze, and to notify the SBSEF of the same; to issue an extension of
such longer period as to which the SBSEF agrees in writing; to approve
a proposed new product and provide notice of the approval to the SBSEF;
to notify the SBSEF that the Commission will not, or is unable to,
approve the product, and to specify the nature of the issues raised and
the specific provision of the SEA or the Commission's rules thereunder,
that the product violates, appears to violate, or potentially violates
but which cannot be ascertained from the submission.\771\
---------------------------------------------------------------------------

\771\ See 17 CFR 200.30-3(a)(97), as adopted herein.
---------------------------------------------------------------------------

C. Delegated Authority Related to New Rules or Rule Amendments Proposed
by an SBSEF

With respect to certain Commission actions related to proposed
rules or rule amendments proposed by an SBSEF under Rule 806, the
Division Director will have delegated authority: to notify the
submitting SBSEF that a submission for a new rule or rule amendment
does not comply with paragraph (a) of Rule 806; to make the SBSEF's
submission publicly available on the Commission's website; to extend by
an additional 45 days the period for consideration of a proposed rule
or rule amendment voluntarily submitted by an SBSEF if the proposed
rule or rule amendment raises novel or complex issues that require
additional time to review or is of major economic significance, the
submission is incomplete, or the requester does not respond completely
to the Commission questions in a timely manner, and to notify the SBSEF
of the same; to issue an extension of such longer period as to which
the SBSEF agrees in writing; to approve a proposed rule or rule
amendment and provide notice of the approval to the SBSEF; to notify
the SBSEF that the Commission will not, or is unable to, approve the
new rule or rule amendment, and to specify the nature of the issues
raised and the specific provisions of the SEA or the Commission's rules
thereunder, including the form or content requirements of Rule 806,
with which the new rule or rule amendment is inconsistent or appears to
be inconsistent; and to approve a proposed rule or a rule amendment,
including changes to terms and conditions of a product, on an expedited
basis under such conditions as shall be specified in the written
notification.\772\
---------------------------------------------------------------------------

\772\ See 17 CFR 200.30-3(a)(98), as adopted herein.
---------------------------------------------------------------------------

In addition, the Division Director has delegated authority to
undertake certain Commission actions related to proposed rules or rule
amendments self-certified by an SBSEF under Rule 807. Specifically, the
Division Director has delegated authority: to make publicly available
on the Commission's website a security-based swap execution facility's
filing of new rules and rule amendments pursuant to the self-
certification procedures of Rule 807; to stay for a period of up to 90
days the effectiveness of an SBSEF's self-certification of a new rule
or rule amendment; to publish notice on the Commission's website of a
30-day period for public comment; and to withdraw the stay or notify
the security-based swap execution facility that the Commission objects
to the proposed certification.\773\
---------------------------------------------------------------------------

\773\ See 17 CFR 200.30-3(a)(99), as adopted herein.
---------------------------------------------------------------------------

D. Delegated Authority Related To Request for Joint Interpretation

With respect to a request by an SBSEF, the Commission, or the CFTC,
for a joint interpretation of whether a proposed product is a swap,
security-based swap, or mixed swap under existing SEA Rule 3a68-2, as
contemplated by Rule 809, the Division Director has delegated authority
to provide written notice to an SBSEF of a stay or tolling pending
issuance of a joint interpretation.\774\
---------------------------------------------------------------------------

\774\ See 17 CFR 200.30-3(a)(100), as adopted herein.
---------------------------------------------------------------------------

E. Delegated Authority Related to SBSEF Submissions Contemplated by
Rule 811

With respect to information relating to SBSEF compliance under Rule
811, the Division Director has delegated authority: to request pursuant
to Rule 811(a) that an SBSEF file with the Commission information
related to its business as a security-based swap execution facility,
and to specify the form, manner, and timeframe for the filing; to
request pursuant to Rule 811(b) that an SBSEF file with the Commission
a written demonstration that it is in compliance with one or more Core
Principles or with its other obligations under the SEA or the
Commission's rules thereunder and to specify the form, manner, and
timeframe for such a filing; to specify, pursuant to Rule 811(c)(2),
the form and manner of the notification required pursuant to Rule
811(c)(1) by an SBSEF of any

[[Page 87236]]

transaction involving the direct or indirect transfer of 50 percent or
more of the equity interest in the security-based swap execution
facility, and to request supporting documentation of the transaction;
to specify the form and manner of the certification required pursuant
to Rule 811(c)(4) that an SBSEF meets all of the requirements of
section 3D of the SEA and the Commission rules thereunder; and to
specify the form and manner of the submission by an SBSEF of documents
filed in any material legal proceeding to which the security-based swap
execution facility is a party or its property or assets is subject, as
specified in Rule 811(d)(1), or in any material legal proceeding
instituted against any officer, director, or other official of the
SBSEF from conduct in such person's capacity as an official of the
SBSEF, as specified in Rule 811(d)(2), and to request further
documents.\775\
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\775\ See 17 CFR 200.30-3(a)(101), as adopted herein.
---------------------------------------------------------------------------

F. Delegated Authority Related to Information Sharing

With respect to certain Commission actions related to information
sharing under Rule 822, the Division Director has delegated authority
to require that an SBSEF provide information in its possession to the
Commission and to specify the form and manner of that provision, and to
require an SBSEF share information with other regulatory organizations,
data repositories, and third-party data reporting services as necessary
and appropriate to fulfill the SBSEF's regulatory and reporting
responsibilities.\776\
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\776\ See 17 CFR 200.30-3(a)(102), as adopted herein.
---------------------------------------------------------------------------

G. Delegated Authority Related to Commission Review Proceedings

With respect to Commission review proceedings for final
disciplinary actions taken by an SBSEF, for denials or conditionings of
membership, and for limitations or denials of access, the General
Counsel has delegated authority: to determine that an application for
review has been abandoned and then to issue an order dismissing the
application; to determine applications to stay Commission orders
pending appeal of those orders to the federal courts and to determine
application to vacate such stays; to grant or deny requests for oral
argument before the Commission; and to determine whether to lift the
automatic stay of a disciplinary sanction imposed by an SBSEF.\777\
---------------------------------------------------------------------------

\777\ See 17 CFR 200.30-14(4) through (5) and (7) through (8),
as adopted herein.
---------------------------------------------------------------------------

XVI. Compliance Schedule

In the Proposing Release, the Commission stated that it intended to
include a compliance schedule along with any final rules, and it sought
public comment to assist it in developing an appropriate compliance
schedule.\778\ The Commission received several comments.
---------------------------------------------------------------------------

\778\ See Proposing Release, supra note 1, 87 FR at 28937.
---------------------------------------------------------------------------

One commenter agrees that SEF operators can leverage their
experience with SEF registration and operation in order to comply with
any final SBSEF rules, but states that creating and maintaining a new
platform, regardless of any similarities to existing systems, will
inevitably require substantial time and resources to ensure
operational, technical, and regulatory compliance. This commenter
suggests that the Commission provide a compliance timeline of at least
12 months following the effective date of any final rules.\779\
---------------------------------------------------------------------------

\779\ See Tradeweb Letter, supra note 18, at 6-7.
---------------------------------------------------------------------------

Another commenter states that, while substantial harmonization
should lower compliance and operations costs by allowing SBSEFs and
market participants to use their existing procedures and systems, it is
still important to allow sufficient lead time for potential SBSEFs and
market participants to come into compliance with the new regulatory
framework. The commenter states that existing SEFs will need to make
certain technological changes to their platform to conform to the new
rules and that additional time will be required for testing, finalizing
a new rulebook, and putting in place the requisite agreements with
SBSEF clients. This commenter states that the Commission should set a
compliance date that is at least 18 months from the date of
effectiveness of any final rule.\780\
---------------------------------------------------------------------------

\780\ See Bloomberg Letter, supra note 18, at 21.
---------------------------------------------------------------------------

One commenter states that, absent a phased-in implementation
approach, the SBS market could suffer from significant disruptions.
Therefore, this commenter states, the Commission should provide
``phased-in compliance'' with the required methods of execution,
whereby a MAT SBS product may be executed on an SBSEF via any method of
execution until such time as it is determined through notice and
comment that an appropriate level of liquidity exists to enable an
order book or RFQ-to-3 system. This commenter states that, when
considering the lack of liquidity in SBS products, pre-trade price
transparency via the proposed RFQ-to-3 requirement could negatively
affect liquidity provision for end-users because, if clients are
required to show their hand to three liquidity providers, it may lead
to information leakage and an inability to hedge their risks through
SBS markets. This is particularly so, the commenter says, because there
are only a relatively small number of active dealers for many SBS
products.\781\
---------------------------------------------------------------------------

\781\ See ISDA-SIFMA Letter, supra note 18, at 6.
---------------------------------------------------------------------------

This commenter further states that an RFQ-to-3 requirement would
also be problematic for SBS equities, where current execution processes
are very different from their swaps counterpart, and where common
trading practices and counterparty exchanges would not be possible on
an RFQ-to-3 or order book system. The commenter states that it has
compared the credit swaps activity that occurred on-venue in 2012
(before the CFTC trade execution requirement became effective) with the
credit SBS activity that occurs on venue today. The commenter reports
that the result is that 48.2% of AMRS CDX trading client volume was on-
venue in 2012, while only 4.9% of AMRS SNCDS trading client volume
occurred on-venue in 2022 (up to the date of the commenter's letter).
The commenter states that this shows that the swaps market was much
more ready for the implementation of the trade execution requirement
than the credit SBS market is today.\782\
---------------------------------------------------------------------------

\782\ See id.
---------------------------------------------------------------------------

The Commission agrees that some period of time will be required for
would-be SBSEFs not only to register with the Commission, but also to
create a new platform; put in place policies, procedures, and
arrangements to ensure operational, technical and regulatory
compliance; establish its own rules; and put in place the requisite
agreements with SBSEF clients. The Commission does not agree, however,
with the comment that a separate, ``phased-in'' compliance schedule
should be put in place for the required methods of execution and that
the Commission should engage in future notice and comment before
applying the required methods of execution to SBS that have been made
available to trade. First, no SBS are currently subject to a clearing
determination, so it would not be possible for any SBSEF to make an SBS
available to trade and subject it to the required methods of execution.
Second, as discussed above, before an SBS becomes subject to the trade
execution requirement, the Commission would have had multiple
opportunities to consider the trading characteristics of the SBS.\783\
Even after the Commission has made a clearing determination with

[[Page 87237]]

respect to an SBS, to make that SBS ``available to trade,'' an SBSEF
would, under Rule 816(a)(1), have to make a filing with the Commission
under Rule 806 or Rule 807--both of which would allow the Commission to
find that a filing was not consistent with the requirements of the SEA
or Regulation SE.\784\ This filing would, under Rule 816(b), have to
address, as appropriate, a number of relevant factors, including
whether there are ready and willing buyers and sellers; the frequency
or size of transactions; the trading volume; the number and types of
market participants; the bid/ask spread; and the usual number of
resting firm or indicative bids and offers. And a national securities
exchange that wished to make an SBS ``available to trade'' would have
to file a rule change under Rule 19b-4,\785\ and that proposed rule
change would be subject to Commission review for compliance with the
requirements of the SEA. Therefore, the Commission is not adopting a
separate, ``phased-in'' compliance schedule for the required methods of
execution.
---------------------------------------------------------------------------

\783\ See supra notes 181-185 and accompanying text.
\784\ See supra sections IV.A and B.
\785\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

Further, with respect to commenters who proposed specific
timeframes for implementation (e.g., 12 months or 18 months), the
Commission's proposed compliance schedule is better designed to
facilitate timely and achievable implementation of Regulation SE
because it reflects that the entities that are likely to register as
SBSEFs have been accustomed to operating SBS trading platforms pursuant
to exemptive relief granted by the Commission.\786\ Thus, it is
appropriate to provide these entities with a reasonable period of
time--through a compliance schedule tied to the completion of the steps
required for registration as an SBSEF--to come into compliance with the
requirements of Regulation SE. Further, because most, if not all,
entities that seek to register as SBSEFs will be CFTC-registered SEFs--
and because the Commission has sought to harmonize both the
registration form and exhibits for SBSEFs and the substance of the
rules applicable to SBSEFs with the CFTC regulations applicable to
SEFs--the entities seeking to register as SBSEFs will be able to
complete the each of the steps necessary for registration in the
allotted periods.
---------------------------------------------------------------------------

\786\ See supra section XII.
---------------------------------------------------------------------------

Therefore, the Commission is adopting the following compliance
schedule for Regulation SE. The SBSEF rules shall become effective 60
days after the date of publication in the Federal Register (``Effective
Date''). Once Regulation SE has become effective, any entity that meets
the definition of SBSEF may file an application to register with the
Commission on Form SBSEF at any time after the Effective Date.\787\ As
discussed above,\788\ the Temporary SBSEF Exemptions will expire 180
days after the Effective Date for any entity that has not filed an
application to register with the Commission on Form SBSEF. Thus, an
entity that meets the definition of SBSEF and engages in such
activities but fails to submit an application on Form SBSEF by 180 days
after the Effective Date would be in violation of the registration
requirement of Rule 803. For an entity that has submitted an
application on Form SBSEF by 180 days after the Effective Date, the
exemptive relief relating to SBSEF registration would expire 240 days
after the Effective Date, except with respect to an entity whose
application on Form SBSEF is complete (having responded to requests by
the Commission's staff for revisions or amendments) within 240 days of
the Effective Date. An entity that has submitted an application within
180 days of the Effective Date and whose application is complete within
240 days of the Effective Date will continue to benefit from the
exemption from registration until 30 days after the Commission acts to
approve or disapprove the application on Form SBSEF.
---------------------------------------------------------------------------

\787\ Once Regulation SE has become effective, applications for
exemptions under Rule 833 may also be submitted. See supra section
VII.B (discussing cross-border exemptions for foreign trading venues
and relating to the trade execution requirement).
\788\ See supra section XII (discussing the rescission of
exemptive relief).
---------------------------------------------------------------------------

XVII. Economic Analysis

A. Introduction

To increase the transparency and oversight of the OTC derivatives
market,\789\ Title VII of the Dodd-Frank Act requires the Commission to
undertake a number of rulemakings to implement the regulatory framework
for SBS that is set forth in the legislation, including among other
things, (1) the registration and regulation \790\ of SBSEFs; and (2)
mitigating conflicts of interest with respect to SBSEFs, SBS exchanges,
and SBS clearing agencies. To satisfy these statutory mandates, the
Commission is adopting Regulation SE and associated forms under section
3D of the SEA that would create a regime for the registration and
regulation of SBSEFs and address other issues relating to SBS execution
generally.\791\ One of the rules being adopted as part of Regulation
SE, Rule 834, implements section 765 of the Dodd-Frank Act, which is
intended to mitigate conflicts of interest at SBSEFs and SBS exchanges.
Other rules being adopted as part of Regulation SE address the cross-
border application of the SEA's trading venue registration requirements
and the trade execution requirement for SBS.
---------------------------------------------------------------------------

\789\ See Public Law 111-203 Preamble.
\790\ The regulation of SBSEFs includes, among other things,
requiring SBSEFs to comply with the Core Principles set forth in
section 3D(d) of the SEA. See supra section VI.
\791\ Among other things, the Commission is adopting Form SBSEF
for persons seeking to register with the Commission as an SBSEF and
a submission cover sheet and instructions to be used in rule and
product filings made by SBSEFs.
---------------------------------------------------------------------------

In addition, the Commission is amending existing Rule 3a1-1 under
the SEA to exempt, from the SEA definition of ``exchange,'' registered
SBSEFs that provide a market place for no securities other than SBS,
and certain registered clearing agencies. The Commission is also
adopting new Rule 15a-12 under the SEA that, while affirming that an
SBSEF also would be a broker under the SEA, would exempt a registered
SBSEF from certain broker requirements. The Commission is also adopting
certain new rules and amendments to its Rules of Practice to allow
persons who are aggrieved by certain actions by an SBSEF to apply for
review by the Commission.
Currently, SBS trade in the OTC market, rather than on regulated
trading venues. The existing market for SBS is opaque, with little, if
any, pre-trade transparency. With limited transparency, the information
asymmetry between liquidity providers (i.e., SBS dealers) and end users
could be significant. Specifically, liquidity providers may observe
information about the trading process (e.g., trading interest, quotes,
order flows, and trades) that end users typically cannot observe. The
SBS market also is decentralized such that market participants incur
search costs to locate other market participants in order to trade.
While the SBS market is decentralized, it also is interconnected
and global in scope.\792\ SBS dealers can have hundreds of
counterparties, consisting of end users and other SBS dealers. Trading
venues may serve hundreds of end user and SBS dealer participants. SBS
transactions arranged, negotiated, or executed by personnel located in
the U.S. may involve wholly foreign counterparties. Furthermore, U.S.
persons may choose to trade SBSs on foreign venues, which are subject
to

[[Page 87238]]

OTC derivatives regulations imposed by local regulatory authorities.
---------------------------------------------------------------------------

\792\ See also section VII.A supra and XVII.B.2 infra
(discussing the global nature of the SBS market).
---------------------------------------------------------------------------

The adopted rules and amendments will affect SBSEFs, SBS exchanges,
foreign SBS trading venues, and ECPs (i.e., SBS dealers and end
users).\793\ In addition, the adopted rules and amendments will affect
entities that act as third-party service providers to SBSEFs.
---------------------------------------------------------------------------

\793\ Only ECPs are eligible to trade on an SBSEF, and retail
investors would have access to an SBS only after an SBS exchange has
filed a proposed rule change with the Commission under Rule 19b-4,
17 CFR 240.19b-4, to amend its rules to permit the listing of a
registered SBS, with that proposed rule change being published for
public comment. See supra note 103.
---------------------------------------------------------------------------

The Commission is mindful of the economic effects, including the
costs and benefits, of the adopted rules and amendments. Section 3(f)
of the SEA, 15 U.S.C. 78c(f), directs the Commission, when engaging in
rulemaking where it is required to consider or determine whether an
action is necessary or appropriate in the public interest, to consider,
in addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation. In addition,
section 23(a)(2) of the SEA, 15 U.S.C. 78w(a)(2), requires the
Commission, when making rules under the SEA, to consider the impact
that the rules would have on competition, and prohibits the Commission
from adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the SEA.
The analysis below addresses the likely economic effects of the
adopted rules and amendments, including their anticipated and estimated
benefits and costs and their likely effects on efficiency, competition,
and capital formation. The Commission also discusses the potential
economic effects of certain alternatives to the approaches taken in
this release. The Commission received a number of comments related to
various aspects of the economic analysis in the Proposing Release. The
Commission has considered and responds to these comments in the
sections that follow.

B. Economic Baseline

1. Existing Regulatory Framework
The economic analysis appropriately considers existing regulatory
requirements, including recently adopted rules, as part of its economic
baseline against which the costs and benefits of the adopted rules and
amendments are measured.\794\ The analysis includes provisions of the
SEA, as amended by the Dodd-Frank Act, that currently govern the SBS
market, and rules adopted by the Commission thereunder, including in
the Intermediary Definitions Adopting Release,\795\ the Cross-Border
Adopting Release,\796\ the SDR Rules and Core Principles Adopting
Release,\797\ the Regulation SBSR Adopting Release I,\798\ the
Registration Adopting Release,\799\ the ANE Adopting Release,\800\ the
Business Conduct Adopting Release,\801\ the Trade Acknowledgement and
Verification Adopting Release,\802\ the Regulation SBSR Adopting
Release II,\803\ the Rule of Practice 194 Adopting Release,\804\ the
Capital, Margin, and Segregation Adopting Release,\805\ the
Recordkeeping and Reporting Adopting Release,\806\ the Risk Mitigation
Adopting Release,\807\ the Cross-Border Amendments Adopting
Release,\808\ and the Clearing Exemption Adopting Release.\809\ The
baseline also includes the Temporary SBSEF Exemptions \810\ and the
CFTC rules that apply to CFTC-registered SEFs.
---------------------------------------------------------------------------

\794\ See, e.g., Nasdaq v. SEC, 34 F.4th 1105, 1111-15 (D.C.
Cir. 2022). This approach also follows SEC staff guidance on
economic analysis for rulemaking. See Staff's ``Current Guidance on
Economic Analysis in SEC Rulemaking'' (Mar. 16, 2012), available at
https://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf (``The economic
consequences of proposed rules (potential costs and benefits
including effects on efficiency, competition, and capital formation)
should be measured against a baseline, which is the best assessment
of how the world would look in the absence of the proposed
action.''); Id. at 7 (``The baseline includes both the economic
attributes of the relevant market and the existing regulatory
structure.''). The best assessment of how the world would look in
the absence of the proposed or final action typically does not
include recently proposed actions, because doing so would improperly
assume the adoption of those proposed actions.
\795\ See Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant,'' SEA
Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012)
(``Intermediary Definitions Adopting Release'').
\796\ See Application of ``Security-Based Swap Dealer'' and
``Major Security-Based Swap Participant'' Definitions to Cross-
Border Security-Based Swap Activities, SEA Release No. 72472 (June
25, 2014), 79 FR 47278 (Aug. 12, 2014) (``Cross-Border Adopting
Release'').
\797\ See Security-Based Swap Data Repository Registration,
Duties, and Core Principles, SEA Release No. 74246 (Feb. 11, 2015),
80 FR 14438 (Mar. 19, 2015) (``SDR Rules and Core Principles
Adopting Release'').
\798\ See Regulation SBSR Adopting Release I, supra note 140.
\799\ See Registration Process for Security-Based Swap Dealers
and Major Security-Based Swap Participants, SEA Release No. 75611
(Aug. 5, 2015), 80 FR 48964 (Aug. 14, 2015) (``Registration Adopting
Release'').
\800\ See Security-Based Swap Transactions Connected with a Non-
U.S. Person's Dealing Activity That Are Arranged, Negotiated, or
Executed By Personnel Located in a U.S. Branch or Office or in a
U.S. Branch or Office of an Agent; Security-Based Swap Dealer De
Minimis Exception, SEA Release No. 77104 (Feb. 10, 2016), 81 FR 8598
(Feb. 19, 2016) (``ANE Adopting Release'').
\801\ See Business Conduct Standards Release, supra note 101.
\802\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, SEA Release No. 78011 (June 8, 2016), 81 FR
39808 (June 17, 2016) (``Trade Acknowledgment and Verification
Adopting Release'').
\803\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, SEA Release No. 78321 (July 14,
2016), 81 FR 53546 (Aug. 12, 2016) (``Regulation SBSR Adopting
Release II'').
\804\ See Applications by Security-Based Swap Dealers or Major
Security-Based Swap Participants for Statutorily Disqualified
Associated Persons To Effect or Be Involved in Effecting Security-
Based Swaps, SEA Release No. 84858 (Dec. 19, 2018), 84 FR 4906 (Feb.
19, 2019) (``Rule of Practice 194 Adopting Release'').
\805\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital and Segregation Requirements for Broker-
Dealers, SEA Release No. 86175 (June 21, 2019), 84 FR 43872 (Aug.
22, 2019) (``Capital, Margin, and Segregation Adopting Release'').
\806\ See Recordkeeping and Reporting Adopting Release, supra
note 704.
\807\ See Risk Mitigation Techniques for Uncleared Security-
Based Swaps, SEA Release No. 87782 (Dec. 18, 2019), 85 FR 6359 (Feb.
4, 2020) (``Risk Mitigation Adopting Release'').
\808\ See Cross-Border Application of Certain Security-Based
Swap Requirements, SEA Release No. 87780 (Dec. 18, 2019), 85 FR 6270
(Feb. 4, 2020) (``Cross-Border Amendments Adopting Release'').
\809\ See Exemption from the Definition of ``Clearing Agency''
for Certain Activities of Security-Based Swap Dealers and Security-
Based Swap Execution Facilities, SEA Release No. 90667 (Dec. 16,
2020), 86 FR 7637 (Feb. 1, 2021) (``Clearing Exemption Adopting
Release'').
\810\ See supra section III and note 46.
---------------------------------------------------------------------------

2. Security-Based Swap Data, Market Participants, Dealing Structures,
Levels of Security-Based Swap Trading Activity, and Market Participant
Domiciles
Final SBS Entity registration rules have been adopted and
compliance was required as of November 1, 2021.\811\ As of September
28, 2023, there were 51 entities registered with the Commission as SBS
dealers, and no entity registered as a major SBS participant.\812\ One
commenter asserts that not all registered SBS dealers are consistently
active in trading SBS. Trading activity in the SBS markets tends to be
more concentrated among a subset of such registered SBS

[[Page 87239]]

dealers, which increases liquidity concerns in these markets.\813\
---------------------------------------------------------------------------

\811\ See Key Dates for Registration of Security-Based Swap
Dealers and Major Security-Based Swap Participants, available at
https://www.sec.gov/page/key-dates-registration-security-based-swap-dealers-and-major-security-based-swap-participants.
\812\ See List of Registered Security-Based Swap Dealers and
Major Security-Based Swap Participants, available at https://www.sec.gov/files/list-sbsds-msbsps-9-28-2023-locked-final.xlsx
(providing the list of registered SBS dealers and major SBS
participants that was updated as of Sept. 28, 2023).
\813\ See ISDA-SIFMA Letter, supra note 18, at 2 n.5.
---------------------------------------------------------------------------

Market participants such as SBS dealers and major SBS participants
were required to report security-based swap transactions to registered
security-based swap data repositories (``SBSDRs'') pursuant to
Regulation SBSR beginning on November 8, 2021.\814\
---------------------------------------------------------------------------

\814\ See SEC Approves Registration of First Security-Based Swap
Data Repository; Sets the First Compliance Date for Regulation SBSR,
available at https://www.sec.gov/news/press-release/2021-80.
---------------------------------------------------------------------------

The Commission uses information reported pursuant to Regulation
SBSR to two registered SBSDRs--Depository Trust & Clearing Corporation
Data Repository (``DDR'') and ICE Trade Vault (``ITV'')--to describe
the baseline.\815\ Table 1 shows that U.S. security-based swaps market
activity is split across three asset classes: credit, equity, and
interest rate.\816\ Based on information reported to DDR, as of
November 25, 2022, there were approximately 523,000, 3.4 million, and
5,700 active security-based swaps in the credit, equity, and interest
rate asset classes, respectively. The gross notional amounts
outstanding in the credit, equity, and interest rate asset classes were
respectively, approximately $2.8, $3.6, and $0.18 trillion.\817\ Based
on information reported to ITV, as of November 25, 2022, there were
approximately 155,000 active credit security-based swaps with gross
notional amount outstanding of approximately $1.9 trillion.
---------------------------------------------------------------------------

\815\ DDR operates as a registered SBSDR for security-based swap
transactions in the credit, equity, and interest rate derivatives
asset classes. ITV operates as a registered SBSDR for security-based
swap transactions in the credit derivatives asset class. See
Security-Based Swap Data Repositories; DTCC Data Repository (U.S.)
LLC; Order Approving Application for Registration as a Security-
Based Swap Data Repository, Exchange Act Release No. 91798 (May 7,
2021), 86 FR 26115 (May 12, 2021); Security-Based Swap Data
Repositories; ICE Trade Vault, LLC; Order Approving Application for
Registration as a Security-Based Swap Data Repository, Exchange Act
Release No. 92189 (June 16, 2021), 86 FR 32703 (June 22, 2021). The
statistics presented herein are based on the Report on Security-
Based Swaps Pursuant to section 13(m)(2) of the Securities Exchange
Act of 1934, that the Commission issued on Mar. 20, 2023 and is
available at https://www.sec.gov/files/report-security-based-swaps-032023.pdf (``SBS Report'').
\816\ In this release, interest-rate security-based swaps refer
to non-CDS debt security-based swaps, which are primarily total
return swaps that replicate the payoff of a bond or a narrow index
of bonds, where the buyer usually pays either a fixed or floating
benchmark rate to the seller in exchange for the total return of the
bond or the narrow index of bonds. These swaps are a subset of over-
the-counter derivatives in the interest-rate asset class.
\817\ Active security-based swaps are those that have been
neither terminated nor reached their scheduled maturity and are
therefore open positions as of Nov. 25, 2022. Gross notional amount
outstanding represents the total outstanding notional value of
active, market-facing security-based swaps on Nov. 25, 2022.
Security-based swaps are considered to be ``market-facing'' when
they are executed at arms-length between third parties. While a
reporting party is only required to report a transaction to one
SBSDR--either DDR or ITV--some uncleared security-based swaps in DDR
also appear in ITV. As of Nov. 25, 2022, there were 605 active
credit security-based swaps in ITV that were reported as uncleared
(0.4% of the 154,903 active credit security-based swaps in ITV). The
605 active credit security-based swaps had a gross notional
outstanding of $4.73 billion (0.3% of the approximately $1,900
billion gross notional outstanding of all active credit security-
based swaps in ITV). These statistics provide an upper bound of the
overlap between ITV and DDR and indicate that the overlap is very
limited in scope. See SBS Report, supra note 815, at 4, 10.
---------------------------------------------------------------------------

Table 1 also shows that U.S. SBS market participants trade a
variety of security-based swaps in each of the three asset classes.
Based on information reported to DDR, as of November 25, 2022, for
active credit security-based swaps, single-name corporate CDS
constitute the largest product type, with approximately 364,000 active
CDS and $1.6 trillion gross notional amount outstanding. The second
largest active credit security-based swaps product type consists of
single-name sovereign CDS, with approximately 94,000 active CDS and
$0.9 trillion gross notional amount outstanding.
For active equity security-based swaps, equity portfolio swaps
constitute the largest product type, with approximately 2.3 million
active equity portfolio swaps and $1.7 trillion gross notional amount
outstanding. The second largest active equity security-based swaps
product type consists of equity swaps, with approximately 492,000
active equity swaps and $1.2 trillion gross notional amount
outstanding.\818\
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\818\ An equity swap references a single underlier while an
equity portfolio swap involves a portfolio wrapper under which
multiple swaps can be traded with operational efficiency. See ISDA,
Central Clearing in the Equity Derivatives Market: An ISDA Study
(June 2014) at 10, available at https://www.isda.org/a/6PDDE/central-clearing-in-the-eqd-market-final.pdf; ISDA Taxonomy 2.0--
Finalized, ISDA.org (Sept. 4, 2019), available at https://www.isda.org/a/o1MTE/ISDA-Taxonomy_EQ-CR-FX-IR_v2.0__3-_September_2019-FINAL.xls.
---------------------------------------------------------------------------

In the interest rate asset class, exotics constitute the largest
product type, with approximately $0.1 trillion gross notional amount
and 4,400 active exotic swaps outstanding.
Based on information reported to ITV, as of November 25, 2022,
active credit security-based swaps fall into two product types. Single-
name corporate CDS constitute the largest product type, with
approximately 135,000 active CDS and $1.3 trillion gross notional
amount outstanding. The second largest active credit security-based
swaps product type consists of single-name sovereign CDS, with
approximately 20,000 active CDS and $0.5 trillion gross notional amount
outstanding.

Table 1--Gross Notional Amount And Active Security-Based Swaps Outstanding on Nov. 25, 2022, Categorized by
Asset Class and Product Classification a
----------------------------------------------------------------------------------------------------------------
Gross notional
amount Active
SBSDR Asset class Product type outstanding security-based
(millions of swap count
USD)
----------------------------------------------------------------------------------------------------------------
DDR............................... Credit............... Index................ 44,407 2,992
Single-Name: 1,556,315 364,465
Corporate.
Single-Name: 900,072 93,807
Sovereign.
Total Return Swap \b\ 156,849 49,867
Other \c\............ 122,970 12,081
-------------------------------
Total............... 2,780,613 523,212
Equity............... Portfolio Swap....... 1,688,672 2,266,706
Swap................. 1,183,279 491,508
Contract For 398,952 642,965
Difference.
Option............... 6,915 1,281
Forward.............. 5,663 1,393

[[Page 87240]]

Other \d\............ 330,136 41,115
-------------------------------
Total............... 3,613,617 3,444,968
Interest Rate........ Exotic............... 153,306 4,419
Forward.............. 23,818 1,164
Other \e\............ 868 122
-------------------------------
Total............... 177,992 5,705
-------------------------------
ITV............................... Credit............... Single-Name: 1,348,002 134,741
Corporate.
Single-Name: 544,414 20,162
Sovereign.
Total............... 1,892,416 154,903
----------------------------------------------------------------------------------------------------------------
\a\ For cleared security-based swaps in DDR, this table incorporates only one of the two security-based swaps
that result from the clearing process. For ITV, this table incorporates all of the cleared security-based
swaps.
\b\ As a general matter, total return swaps include non-CDS debt-based security swaps, equity-based security
swaps, and mixed swaps. Counterparties in the total return swaps market use the contracts to obtain exposure,
usually leveraged, to the total economic performance of a security or index and benefit from not having to own
the security itself. Market participants, such as mutual funds, hedge funds, and endowments, use total return
swaps to obtain exposure in markets where they would face difficulties purchasing or selling the underlying
security (e.g., a market participant may find it difficult to buy a foreign company's security or locate a
security to sell short) while taking advantage of the capital efficiencies of not holding the security in
their inventories.
\c\ Includes the following products reported to SBSDRs: exotic, index tranche, swaptions, and other single-name
(e.g., asset-backed, loan, and municipal security-based swaps).
\d\ ``Other'' is a category in the DDR Equity Product ID field. All Product ID categories are listed in the
table.
\e\ Includes the following products reported to SBSDRs: inflation, debt option, and cross-currency.

Table 2 shows that both SBS Entities and non-SBS Entities
participate in all three asset classes in the U.S. security-based swap
market. Based on information reported to DDR, as of November 25, 2022,
SBS Entities and non-SBS Entities had, respectively, entered into
approximately 813,000 and 234,000 active credit security-based
swaps.\819\ The gross notional amounts outstanding of the active credit
security-based swaps held by SBS Entities and non-SBS Entities were,
respectively, approximately $4.4 and $1.2 trillion.
---------------------------------------------------------------------------

\819\ For cleared security-based swaps where at least one
counterparty is an SBS Entity, Table 2 reflects the security-based
swaps entered into by each of the original counterparties, but does
not include the positions of the clearing agencies themselves. For
uncleared security-based swaps, Table 2 reflects the security-based
swaps entered into by each of the original counterparties. See SBS
Report, supra note 815, at 5.
---------------------------------------------------------------------------

In the equity asset class, SBS Entities and non-SBS Entities had,
respectively, entered into approximately 4.0 million and 2.9 million
active equity security-based swaps. The gross notional amounts
outstanding of the active equity security-based swaps held by SBS
Entities and non-SBS Entities were, respectively, approximately $4.5
and $2.7 trillion.
In the interest rate asset class, SBS Entities and non-SBS Entities
had, respectively, entered into approximately 6,200 and 5,200 active
interest rate security-based swaps. The gross notional amounts
outstanding of the active interest rate security-based swaps held by
SBS Entities and non-SBS Entities were, respectively, approximately
$0.2 and $0.1 trillion.
Based on information reported to ITV, as of November 25, 2022, SBS
Entities and non-SBS Entities had, respectively, entered into
approximately 123,000 and 33,000 active credit security-based swaps.
The gross notional amounts outstanding of the active credit security-
based swaps held by SBS Entities and non-SBS Entities were,
respectively, approximately $1.6 and $0.3 trillion.

Table 2--Gross Notional Amount and Active Security-Based Swaps Outstanding on Nov. 25, 2022, Categorized by
Asset Class and Registrant Type a
----------------------------------------------------------------------------------------------------------------
Gross notional
amount Active
SBSDR Asset class Registrant type outstanding security-based
(millions of swap count
USD)
----------------------------------------------------------------------------------------------------------------
DDR............................... Credit............... Total................ 5,561,226 1,046,424
SBS Entities........ 4,403,130 812,647
Other............... 1,158,096 233,777
Equity............... Total................ 7,227,234 6,889,936
SBS Entities........ 4,490,592 4,013,393
Other............... 2,736,642 2,876,543
Interest Rate........ Total................ 355,984 11,410
SBS Entities........ 210,663 6,214
Other............... 145,321 5,196
ITV............................... Credit............... Total................ 1,897,249 155,578
SBS Entities........ 1,632,251 122,831

[[Page 87241]]

Other............... 264,998 32,747
----------------------------------------------------------------------------------------------------------------
\a\ For cleared security-based swaps where at least one counterparty is an SBS Entity, Table 2 reflects the
security-based swaps entered into by each of the original counterparties, but does not include the positions
of the clearing agencies themselves. For uncleared security-based swaps, Table 2 reflects the security-based
swaps entered into by each of the original counterparties.

In addition to information reported to registered SBSDRs, the
Commission also uses nonpublic data from the DTCC Derivatives
Repository Limited Trade Information Warehouse (``DTCC-TIW'') to
describe the baseline, specifically the single-name CDS market. DTCC-
TIW provided data regarding the activity of market participants in the
single-name CDS market during the period from November 2006 to
September 2022.\820\ The Commission acknowledges that limitations in
the data constrain the extent to which it is possible to quantitatively
characterize the security-based swap market.\821\
---------------------------------------------------------------------------

\820\ DTCC-TIW provided weekly positions and monthly transaction
files for single-name and index-based CDS that had been received
voluntarily from market participants. These data cover all positions
and transactions where one of the counterparties is a U.S. entity or
the reference entity is a U.S. entity, with status as a U.S. entity
determined by DTCC-TIW. In DTCC-TIW, the Commission observes end of
week CDS positions for all U.S. entities, foreign counterparties to
a U.S. entity, or foreign counterparties trading a CDS referencing a
U.S. underlying entity. The DTCC-TIW data have limitations. The data
do not address two foreign counterparties with CDS referencing
foreign underlying entities. In addition, the DTCC-TIW data do not
provide any intra-weekly CDS position information, nor any
information on the underlying security holdings of reference
entities. The Commission had used DTCC-TIW data in prior
rulemakings, most recently in Prohibition Against Fraud,
Manipulation, or Deception in Connection with Security-Based Swaps;
Prohibitions Against Undue Influence over Chief Compliance Officers,
SEA Release No. 97656 (June 7, 2023), 88 FR 42546 (June 30, 2023).
\821\ See supra note 820 (discussing DTCC-TIW data limitations).
The Commission also relies on qualitative information regarding
market structure and evolving market practices provided by
commenters and the knowledge and expertise of Commission staff.
---------------------------------------------------------------------------

Firms that act as SBS dealers \822\ play a central role in the
single-name CDS market. Based on an analysis of single-name CDS data in
DTCC-TIW in the 12-month period from October 2021 to September 2022,
accounts of registered SBS dealer firms intermediated transactions with
a gross notional amount of approximately $1.7 trillion, with
approximately 66% of the gross notional intermediated by the top five
SBS dealer accounts.
---------------------------------------------------------------------------

\822\ Dealers are generally persons engaged in the business of
buying and selling securities for their own account, through a
broker or otherwise. 15 U.S.C. 78c(a)(5). SEA Rule 3a71-1 defines
the term security-based swap dealer. 17 CFR 240.3a71-1.
---------------------------------------------------------------------------

These SBS dealers transact with hundreds or thousands of
counterparties. One SBS dealer (when accounts are sorted by number of
counterparties) transacted with over a thousand counterparty accounts,
consisting of both other SBS dealers and non-SBS dealers. The next 13%
of SBS dealers each transacted with 500 to 1,000 counterparty accounts;
the following 21% of SBS dealers each transacted with 100 to 500
counterparty accounts; and 64% of SBS dealers each transacted security-
based swaps with fewer than 100 counterparty accounts in the 12-month
period from October 2021 to September 2022. The median number of
counterparty accounts across SBS dealers is 18 (the mean is
approximately 172). Non-SBS dealer counterparties transacted almost
exclusively with these SBS dealers. The median non-SBS dealer
counterparty transacted with one SBS dealer account (with an average of
approximately 1.8 SBS dealer accounts) in the 12-month period from
October 2021 to September 2022.
Non-SBS dealer single-name CDS market participants include, but are
not limited to, investment companies, pension funds, private funds,
sovereign entities, and industrial companies. The Commission observes
that most users of CDS that are not SBS dealers do not engage in
trading directly, but trade through banks, investment advisers, or
other types of firms, which are collectively referred to as transacting
agents, consistent with DTCC-TIW terminology.\823\ Based on an analysis
of DTCC-TIW data, there were 2,397 transacting agents that engaged
directly in trading between November 2006 and September 2022.\824\
---------------------------------------------------------------------------

\823\ Transacting agents participate directly in the single-name
CDS market, without relying on an intermediary, on behalf of their
principals. For example, a university endowment may hold a position
in a single-name CDS that is established by an investment adviser
that transacts on the endowment's behalf. In this case, the
university endowment is a principal that uses the investment adviser
as its transacting agent.
\824\ These 2,397 transacting agents, which are presented in
more detail in Table 3 below, include all DTCC-defined ``firms''
shown in DTCC-TIW as transaction counterparties that report at least
one transaction to DTCC-TIW as of Sep. 2022. The staff in the
Division of Economic and Risk Analysis classified these transacting
agents by matching names, automatically or manually, to third-party
databases. See, e.g., ANE Adopting Release, 81 FR 8602, at n.43.
Manual classification was based in part on searches of the EDGAR and
Bloomberg databases, the SEC's Investment Adviser Public Disclosure
database (available at https://adviserinfo.sec.gov/), and a firm's
public website or the public website of the account represented by a
firm. The staff also matched names using International Swaps and
Derivatives Association (ISDA) protocol adherence letters available
on the ISDA website. See ISDA, Small Bang Protocol List of Adhering
Parties, available at https://www.isda.org/traditional-protocol/small-bang-protocol/adhering-parties/; ISDA, Small Bang Protocol
List of Adhering Parties, https://www.isda.org/traditional-protocol/big-bang-protocol/adhering-parties/.
---------------------------------------------------------------------------

As shown in Table 3 below, approximately 79% of these transacting
agents were identified as investment advisers, of which approximately
40% (about 32% of all transacting agents) were registered as investment
advisers under the Investment Advisers Act.\825\ Although investment
advisers were the vast majority of transacting agents, the transactions
they executed account for only 15% of all single-name CDS trading
activity reported to DTCC-TIW, measured by number of transaction-sides
(each transaction has two transaction sides, i.e., two transaction
counterparties). The vast majority of transactions (81.3%) measured by
number of transaction-sides were executed by ISDA-recognized SBS
dealers.
---------------------------------------------------------------------------

\825\ See 15 U.S.C. 80b-1 through 80b-21. The staff in the
Division of Economic and Risk Analysis determined whether an entity
is an SEC registered investment adviser using the Investment Adviser
Public Disclosure website. See supra note 824.

[[Page 87242]]

Table 3--The Number of Transacting Agents by Counterparty Type and the Fraction of Total Trading Activity, From
Nov. 2006 Through Sep. 2022, Represented by Each Counterparty Type
----------------------------------------------------------------------------------------------------------------
Transaction
Transacting agents Number Percent share
(percent)
----------------------------------------------------------------------------------------------------------------
Investment Advisers............................................. 1,891 78.9 15.0
--SEC registered................................................ 762 31.8 10.0
Banks (non-ISDA-recognized SBS dealers)......................... 279 11.6 3.3
Pension Funds................................................... 31 1.3 0.1
Insurance Companies............................................. 49 2.0 0.2
ISDA-Recognized SBS Dealers \a\................................. 17 0.7 81.3
Other \b\....................................................... 130 5.4 0.2
-----------------------------------------------
Total....................................................... 2,397 100.0 100
----------------------------------------------------------------------------------------------------------------
\a\ For the purpose of this analysis, the ISDA-recognized SBS dealers are those identified by ISDA as belonging
to the G14 or G16 dealer group during the period. See, e.g., ISDA, 2010 ISDA Operations Benchmarking Survey
(2010), available at https://www.isda.org/a/5eiDE/isda-operations-survey-2010.pdf.
\b\ This category excludes clearing counterparties (CCPs). Same-day cleared trades are recorded in the DTCC
dataset as two clearing legs, each between a CCP (ICE Clear Credit, ICE Clear Europe, and LCH.Clearnet) and
the original counterparty in the underlying trade. As these are not price-forming trades, the counts in the
last column of the table are adjusted to reflect the original counterparties, excluding a CCP. Though original
counterparties cannot be paired up to same-day cleared trades, to adjust for same-day clearing each leg
against the CCP is counted as one half of a transaction and the notional amount of the trade is halved as
well.

Principal holders of CDS risk exposure are represented by
``accounts'' in DTCC-TIW.\826\ The staff's analysis of these accounts
in DTCC-TIW shows that the 2,397 transacting agents classified in Table
3 represent 16,061 principal risk holders. Table 4 below classifies
these principal risk holders by their counterparty type and whether
they are represented by a registered or unregistered investment
adviser.\827\ For instance, banks in Table 3 allocated transactions
across 375 accounts, of which 35 were represented by investment
advisers. In the remaining instances, banks traded for their own
accounts. Meanwhile, ISDA-recognized SBS dealers in Table 3 allocated
transactions across 104 accounts. Private funds are the largest type of
account holders that the Commission was able to classify.\828\
---------------------------------------------------------------------------

\826\ ``Accounts'' as defined in the DTCC-TIW context are not
equivalent to ``accounts'' in the definition of ``U.S. person'' in
SEA Rule 3a71-3(a)(4)(i)(C). They also do not necessarily represent
separate legal persons. One entity or legal person might have
multiple accounts. For example, a bank may have one DTCC-TIW account
for its U.S. headquarters and one DTCC-TIW account for one of its
foreign branches.
\827\ Unregistered investment advisers include all investment
advisers not registered under the Investment Advisers Act and might
include investment advisers registered with a state or a foreign
authority, as well as investment advisers that are exempt reporting
advisers under section 203(l) or 203(m) of the Investment Advisers
Act.
\828\ Most of the funds that could not be classified appear to
be private funds. For the purposes of this discussion, ``private
fund'' encompasses various unregistered investment vehicles,
including hedge funds, private equity funds, and venture capital
funds. There remain over almost 7,000 DTCC-TIW accounts unclassified
by type. Although unclassified, Commission staff manually reviewed
each account to verify that it was not likely to be a special entity
under SEA Rule 15Fh-2(d) and instead was likely to be an entity such
as a corporation, an insurance company, or a bank.

Table 4--The Number and Percentage of Account Holders--by Type--Who Participate in the SBS Market Through a Registered Investment Adviser, an
Unregistered Investment Adviser, or Directly as a Transacting Agent, From Nov. 2006 Through Sep. 2022
--------------------------------------------------------------------------------------------------------------------------------------------------------
Represented by a Represented by an Participant is a
registered investment unregistered investment transacting agent \a\
Account holders by type Number adviser adviser -------------------------
----------------------------------------------------
(percent) (percent) (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Private Funds................................................ 4,816 2,486 52 2,271 47 59 1
DFA Special Entities......................................... 1,631 1,565 96 44 3 22 1
Registered Investment Companies.............................. 1,454 1,367 94 83 6 4 0
Banks (non-ISDA-recognized SBS dealers)...................... 375 26 7 9 2 340 91
Insurance Companies.......................................... 356 219 62 49 14 88 25
ISDA-Recognized SBS Dealers.................................. 104 0 0 0 0 104 100
Foreign Sovereigns........................................... 98 71 72 7 7 20 20
Non-Financial Corporations................................... 129 96 74 10 8 23 18
Finance Companies............................................ 62 46 74 0 0 16 26
Other/Unclassified........................................... 7,036 4,262 61 2,477 35 297 4
--------------------------------------------------------------------------------------------------------------------------------------------------------
All.......................................................... 16,061 10,138 63 4,950 31 973 6
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ This column reflects the number of participants who are also trading for their own accounts.

As depicted in Figure 1 below, domiciles of new accounts
participating in the single-name CDS market have shifted over time. It
is unclear whether these shifts represent changes in the types of
participants active in this market, changes in reporting, or changes in
transaction volumes in CDS referencing particular underliers. For
example, the percentage of new entrants that are foreign accounts
increased from 24.4% in the first quarter of 2008 to approximately 53%
in the third quarter of 2022, which might reflect an increase in
participation by foreign account holders in the single-name CDS market,
though the total number of new entrants that are foreign accounts
decreased from

[[Page 87243]]

112 in the first quarter of 2008 to 62 in the third quarter of
2022.\829\ Additionally, the percentage of the subset of new entrants
that are foreign accounts managed by U.S. persons increased from 4.6%
in the first quarter of 2008 to 5.2% in the third quarter of 2022, and
the absolute number changed from 21 to 6, which also might reflect more
specifically the flexibility with which market participants can
restructure their market participation in response to regulatory
intervention, competitive pressures, and other incentives.\830\ At the
same time, apparent changes in the percentage of new accounts with
foreign domiciles might also reflect improvements in reporting by
market participants to DTCC-TIW, an increase in the percentage of
transactions between U.S. and non-U.S. counterparties, and/or increased
transactions in single-name CDS on U.S. reference entities by foreign
persons.\831\
---------------------------------------------------------------------------

\829\ These estimates were calculated by Commission staff using
DTCC-TIW data.
\830\ See Charles Levinson, U.S. banks moved billions in trades
beyond the CFTC's reach, Reuters (Aug. 21, 2015) (retrieved from
Factiva database). The estimates of 21 and 6 were calculated by
Commission staff using DTCC-TIW data.
\831\ See supra note 820 (discussing the single-name CDS
transactions that are in the DTCC-TIW data).
[GRAPHIC] [TIFF OMITTED] TR15DE23.000

Figure 2 below describes the percentage of global, notional
transaction volume in North American corporate single-name CDS reported
to DTCC-TIW between January 2011 and September 2022, separated by
whether transactions are between two ISDA-recognized SBS dealers
(``interdealer transactions'') or whether a transaction has at least
one non-SBS dealer counterparty. Figure 2 also shows that the portion
of the notional volume of North American corporate single-name CDS
represented by interdealer transactions has remained fairly constant
through 2015, before falling from approximately 68% in 2015 to under
40% in 2022. This change corresponds to the availability of clearing to
non-SBS dealers. Interdealer transactions continue to represent a
significant fraction of trading activity, even as notional volume has
declined over the past 12 years,\832\ from just

[[Page 87244]]

under $2 trillion in 2011 to less than $500 billion in 2022.
---------------------------------------------------------------------------

\832\ The start of this decline predates the enactment of the
Dodd-Frank Act and the proposal of rules thereunder.
[GRAPHIC] [TIFF OMITTED] TR15DE23.001

The high level of interdealer trading activity reflects the central
position of a small number of SBS dealers, each of which intermediates
trades with many hundreds of counterparties. While the Commission is
unable to quantify the current level of trading costs for single-name
CDS, these SBS dealers appear to enjoy market power as a result of
their small number and the large proportion of order flow that they
intermediate.
As shown in Figure 3 below, half of the trading activity in North
American corporate single-name CDS was between counterparties domiciled
in the United States and counterparties domiciled abroad. Using the
self-reported registered office location of the DTCC-TIW accounts as a
proxy for domicile, the Commission estimates that only 13% of the
global transaction volume by notional volume between January 2008 and
September 2022 was between two U.S.-domiciled counterparties, compared
to 50% entered into between one U.S.-domiciled counterparty and a
foreign-domiciled counterparty, and 37% entered into between two
foreign-domiciled counterparties.\833\
---------------------------------------------------------------------------

\833\ For purposes of this discussion, the Commission has
assumed that the registered office location reflects the place of
domicile for the fund or account, but this domicile does not
necessarily correspond to the location of an entity's sales or
trading desk. See ANE Adopting Release, 81 FR at 8607 n.83.
---------------------------------------------------------------------------

If the Commission instead considers the number of cross-border
transactions from the perspective of the domicile of the corporate
group (e.g., by classifying a foreign bank branch or foreign subsidiary
of a U.S. entity as domiciled in the United States), the percentages
shift significantly. Under this approach, the fraction of transactions
entered into between two U.S.-domiciled counterparties increases to 36%
and remains at 50% for transactions entered into between a U.S.-
domiciled counterparty and a foreign-domiciled counterparty.\834\ By
contrast, the proportion of activity between two foreign-domiciled
counterparties drops from 37% to 14%. This change in

[[Page 87245]]

respective shares based on different classifications suggests that the
activity of foreign subsidiaries of U.S. firms and foreign branches of
U.S. banks accounts for a higher percentage of SBS activity than U.S.
subsidiaries of foreign firms and U.S. branches of foreign banks. It
also demonstrates that financial groups based in the United States are
involved in an overwhelming majority (approximately 86%) of all
reported transactions in North American corporate single-name CDS.
---------------------------------------------------------------------------

\834\ These estimates do not indicate the fraction of North
American corporate single-name CDS transactions that would be
subject to the trade execution requirement, if it were in force for
such transactions. In particular, if the trade execution requirement
were in force for North American corporate single-name CDS, a
foreign subsidiary of a U.S. entity transacting in such CDS would
only be subject to the trade execution requirement if the U.S.
parent provides a guarantee to the foreign subsidiary.
---------------------------------------------------------------------------

Financial groups based in the United States are also involved in a
majority of interdealer transactions in North American corporate
single-name CDS. Of the transactions on North American corporate
single-name CDS between two ISDA-recognized SBS dealers and their
branches or affiliates over the 12-month period from October 2021 to
September 2022, 80.7% of transaction notional volume involved at least
one account of an entity with a U.S. parent.\835\ In addition, a
majority of North American corporate single-name CDS transactions occur
in the interdealer market or between SBS dealers and foreign non-SBS
dealers, with the remaining portion of the market consisting of
transactions between SBS dealers and U.S.-person non-SBS dealers.
Specifically, 86% of North American corporate single-name CDS
transactions involved either two ISDA-recognized SBS dealers or an
ISDA-recognized SBS dealer and a foreign non-SBS dealer. Approximately
14% of such transactions involved an ISDA-recognized SBS dealer and a
U.S.-person non-SBS dealer.
---------------------------------------------------------------------------

\835\ Since the Commission is unable to pair up the same-day
cleared trades, this 80.7% estimate is based on bilateral trades
that were not same-day cleared in the 12-month period from Oct. 2021
to Sept. 2022.
[GRAPHIC] [TIFF OMITTED] TR15DE23.002

3. Other Markets and Regulatory Frameworks
The numerous financial markets are integrated, often attracting the
same market participants that trade across corporate bond, swap, and
SBS markets, among others.\836\ This is notwithstanding the fact that
the SBS market is a small fraction of the swap market \837\ and the
single-name CDS market, which falls under SEC jurisdiction, is slightly
smaller than the index CDS market, which falls under CFTC
jurisdiction.\838\ For example, persons who register as SBS dealers and
major SBS participants are likely also to be engaged in swap activity.
In part, this overlap reflects the relationship between single-name CDS
contracts, which are SBS, and index CDS contracts, which may be swaps
or SBS. A single-name CDS contract covers default events for a single
reference entity or reference security. Index CDS contracts and related
products make payouts contingent on the default of index components and
allow participants in these instruments to gain exposure to the credit
risk of the basket of reference entities that comprise the index, which
is a function of the credit risk of the index components. A default
event for a reference entity that is an

[[Page 87246]]

index component will result in payoffs on both single-name CDS written
on the reference entity and index CDS written on indices that contain
the reference entity. Because of this relationship between the payoffs
of single-name CDS and index CDS products, the prices of these products
depend upon one another,\839\ creating hedging opportunities across
these markets.
---------------------------------------------------------------------------

\836\ See Rule 194 Proposing Release, 80 FR at 51711.
\837\ See ISDA-SIFMA Letter, supra note 18, at 2 (agreeing with
the Commission's statement in the Proposing Release that the SBS
market is a small fraction of the swap market).
\838\ As of Nov. 25, 2022, the SBS market had a gross notional
amount outstanding of approximately $8.5 trillion (see supra section
I and section XVII.B.2, Table 1), while the swap market (comprising,
for purposes of this discussion, swaps in the interest rate, credit,
and foreign-exchange asset classes) had a gross notional amount
outstanding of approximately $352 trillion. See supra section I. The
gross notional amount outstanding in single-name CDS (both corporate
and sovereign) was approximately $4.3 trillion (see supra section
XVII.B.2, Table 1), while the gross notional amount outstanding in
index CDS (including index CDS tranches) was approximately $4.5
trillion. Data on gross notional amount outstanding in index CDS is
from CFTC Swaps Report, available at https://www.cftc.gov/MarketReports/SwapsReports/L3Grossexp.html (accessed on Sept. 27,
2023).
\839\ ``Correlation'' typically refers to linear relationships
between variables; ``dependence'' captures a broader set of
relationships that may be more appropriate for certain swaps and
SBS. See, e.g., George Casella & Roger L. Berger, Statistical
Inference 171 (2nd ed. 2002).
---------------------------------------------------------------------------

These hedging opportunities mean that participants that are active
in one market are likely to be active in the other. Commission staff
analysis of approximately 3,829 DTCC-TIW accounts that participated in
the market for single-name CDS in the 12-month period from October 2021
to September 2022 revealed that approximately 2,836 of those accounts,
or 74%, also participated in the market for index CDS. Of the accounts
that participated in both markets, data regarding transactions in these
12 months suggest that, conditional on an account transacting in
notional volume of index CDS in the top third of accounts, the
probability of the same account landing in the top third of accounts in
terms of single-name CDS notional volume is approximately 53%; by
contrast, the probability of the same account landing in the bottom
third of accounts in terms of single-name CDS notional volume is only
12%. As a result of cross-market participation, informational
efficiency, pricing, and liquidity may spill over across markets.\840\
---------------------------------------------------------------------------

\840\ See Business Conduct Standards Release, supra note 101, 81
FR at 30108; Christopher L. Culp, Andria van der Merwe, & Bettina J.
Starkle, Single-name Credit Default Swaps: A Review of the Empirical
Academic Literature 71-85 (ISDA Study, Sept. 2016), available at
https://www.isda.org/a/KSiDE/single-name-cdsliterature-review-culp-van-der-merwe-staerkleisda.pdf; Patrick Augustin, Marti G.
Subrahmanyam, Dragon Y. Tang, & Sarah Q. Wang, Credit Default Swaps:
Past, Present, and Future, 8 Ann. Rev. Fin. Econ. 175 (2016).
---------------------------------------------------------------------------

Of the 51 registered SBS dealers, 44 are dually registered with the
CFTC as swap dealers and are therefore subject to CFTC requirements for
entities registered with the CFTC as swap dealers. Further, of the 51
registered SBS dealers, 30 have a prudential regulator.
4. Number of Entities That Likely Will Register as SBSEFs
Entities that will seek to register with the Commission as SBSEFs
are likely to be SEFs that are active in the index CDS market. Three
commenters are generally supportive of this belief, stating that the
entities most likely to register as SBSEFs are those that are already
registered with the CFTC as SEFs.\841\ No commenters express
disagreement with this belief. Currently, 24 SEFs are registered with
the CFTC.\842\ Of these SEFs, seven list index CDS for trading.\843\ If
these SEFs were to list single-name CDS or other SBS for trading, they
would be required to register as SBSEFs with the Commission. In 2022,
index CDS volume on U.S. SEFs was distributed as follows: one SEF had
the largest share of index CDS volume (in notional amount) at $10.6
trillion (68%); one SEF had the second largest share at $3.4 trillion
(22%); and the remaining 10% of volume was shared among four other
SEFs.\844\ The number of SBSEF registrants most likely falls between
two and seven, but there is uncertainty around the upper end of this
estimate. The likely number of SBSEF registrants is five.
---------------------------------------------------------------------------

\841\ See ICE Letter, supra note 18, at 1-2; ICI Letter, supra
note 18, at 1; Tradeweb Letter, supra note 18, at 1-2.
\842\ See CFTC, Swap Execution Facilities (registered)
(retrieved June 28, 2023), available at https://www.cftc.gov/IndustryOversight/IndustryFilings/SwapExecutionFacilities?Status=Registered&Date_From=&Date_To=&Show_All=0.
\843\ For purposes of this discussion, options on index CDS and
index CDS tranches are included as part of index CDS. For SEFs that
list index CDS for trading, see BGC Derivative Markets, L.P.
Contract Specifications (Oct. 31, 2022), available at https://www.bgcsef.com/wp-content/uploads/2022/11/BGC-SEF-Contract-Specifications_10-31-22.pdf; Bloomberg SEF LLC Rulebook (Dec. 5,
2022), available at https://assets.bbhub.io/professional/sites/10/BSEF-Effective-Rulebook.pdf; GFI Swaps Exchange: Products & Contract
Specifications, GFI Group, available at https://www.gfigroup.com/markets/gfi-sef/products/; ICE Swap Trade, LLC, Swap Execution
Facility Rulebook Version: 2.42 (effective May 8, 2023), available
at https://www.theice.com/publicdocs/swap_trade/Rulebook.pdf; TW SEF
LLC, Swap Execution Facility Rules (effective Jan. 6, 2023),
available at https://www.tradeweb.com/48ceb9/globalassets/our-businesses/market-regulation/sef-rulebook-jan-2023/tw-sef-rulebook-1.6.23.pdf; Tradition SEF, Appendix B to Tradition SEF Rulebook:
Credit Product Listing, available at https://www.traditionsef.com/assets/regulatory/Rulebook-Appendix-B-TSEF-Rulebook-6-02-2023.pdf;
tpSEF Inc., tpSEF Inc. Rulebook Appendix B: tpSEF Inc. Swap
Specifications (effective Mar. 7, 2023), available at https://www.tullettprebon.com/swap_execution_facility/documents/tpSEF%20-%20Rulebook%20-%20Appendix%20B%20-%20Swap%20Specifications.pdf?2023411.
\844\ Index CDS volume traded on SEFs is from Futures Industry
Association's SEF Tracker. See SEF Tracker Historical Volume, FIA,
available at https://www.fia.org/monthly-volume.
---------------------------------------------------------------------------

5. SBS Trading on Platforms
By analyzing SBS transactions reported to registered SBSDRs,\845\
the Commission has estimated the extent of SBS trading on platforms. Of
the new transactions in credit SBS executed between November 8, 2021,
and December 2, 2022, 14,163 were executed on platforms (2% of all new
transactions in credit SBS). During the same period, 329 new
transactions in equity SBS were executed on platforms (less than 0.01%
of all new transactions in equity SBS), while one new transaction in
interest rate SBS was executed on a platform (0.01% of all new
transactions in interest rate SBS). These observations suggest that the
vast majority of SBS trading continues to be conducted bilaterally in
the OTC market.
---------------------------------------------------------------------------

\845\ The estimates presented in this section differ from those
presented in the Proposing Release, supra note 1, 87 FR at 28946,
because of a number of reasons. First, staff from the Division of
Economic and Risk Analysis derived the estimates presented herein
using reports of SBS transactions executed between Nov. 8, 2021, and
Dec. 2, 2022, whereas in the Proposing Release, the staff used
reports of SBS transactions executed between Nov. 8, 2021, and Feb.
28, 2022. Second, the staff implemented additional filters to the
reports of SBS transactions to (1) more accurately identify and
exclude from the analysis those SBS transactions that arise from the
allocation of an executed bunched order; (2) exclude potentially
erroneous reports (e.g., SBS transactions with extremely large or
small notional amount or SBS transactions with improperly sequenced
timestamps); (3) identify the current version of a given report; and
(4) exclude duplicate reports.
---------------------------------------------------------------------------

The Commission identified 18 platforms on which new SBS
transactions were executed between November 8, 2021, and December 2,
2022. Of these 18 platforms, 14 are foreign SBS trading venues and four
are U.S. SBS trading venues. Of the four U.S. SBS trading venues, two
are CFTC-registered SEFs and two are affiliated with CFTC-registered
SEFs. Of the new transactions in credit SBS executed between November
8, 2021, and December 2, 2022, 710 were executed on non-U.S. platforms
and involved at least one counterparty that is a U.S. person or a non-
U.S. person whose performance under the SBS is guaranteed by a U.S.
person (0.1% of all new transactions in credit SBS). During the same
period, 241 new transactions in equity SBS were executed on a non-U.S.
platform and involved at least one counterparty that is a U.S. person
or a non-U.S. person whose performance under the SBS is guaranteed by a
U.S. person (less than 0.01% of all new transactions in equity SBS
transactions).\846\
---------------------------------------------------------------------------

\846\ The one new transaction in interest rate SBS, discussed
earlier in this section, was executed on a U.S. platform.
---------------------------------------------------------------------------

One commenter states that only a minority of SEFs currently offer
trading in SBS and SEFs that do offer trading in SBS estimate that they
have approximately 50 or fewer trades per day in SBS.\847\ As discussed
earlier, the Commission identified two CFTC-registered SEFs on which
new SBS

[[Page 87247]]

transactions were executed between November 8, 2021, and December 2,
2022. During this period, one CFTC-registered SEF had on average 2.4
new SBS transactions executed per day, while the other CFTC-registered
SEF had on average 2.8 new SBS transactions executed per day. These
estimates are broadly consistent with the commenter's estimate.
---------------------------------------------------------------------------

\847\ See ISDA-SIFMA Letter, supra note 18, at 2.
---------------------------------------------------------------------------

6. Global Regulatory Efforts
In 2009, the G20 leaders--whose membership includes the United
States, 18 other countries, and the European Union--addressed global
improvements in the OTC derivatives market. They expressed their view
on a variety of issues relating to OTC derivatives contracts.\848\ In
subsequent summits, the G20 leaders have returned to OTC derivatives
regulatory reform and reaffirmed their goal of completing such
reform.\849\
---------------------------------------------------------------------------

\848\ See G20, Leaders' Statement: The Pittsburgh Summit (Sept.
24-25, 2009) at para. 13.
\849\ See, e.g., G20, Osaka Summit Declaration (June 28-29,
2019) at para. 19; Rome Summit Declaration (Oct. 30-31, 2021) at
para. 40.
---------------------------------------------------------------------------

Foreign legislative and regulatory efforts have generally focused
on five areas: (1) moving standardized OTC derivatives onto organized
trading platforms; (2) requiring central clearing of OTC derivatives;
(3) requiring post-trade reporting of transaction data to trade
repositories; (4) establishing or enhancing capital requirements for
non-centrally cleared OTC derivatives transactions; and (5)
establishing or enhancing margin and other risk mitigation requirements
for non-centrally cleared OTC derivatives transactions. The rules being
adopted in this release concern the registration and regulation of
SBSEFs, a type of organized trading platform.
As of the end of 2022, platform trading requirements were in force
in 12 foreign jurisdictions while seven jurisdictions were in the
process of proposing legislation or rules to implement platform trading
requirements.\850\ Eight foreign jurisdictions have made determinations
with respect to the specific OTC derivatives that are required to be
traded on platforms.\851\
---------------------------------------------------------------------------

\850\ Apart from the 12 foreign jurisdictions, the United States
is considered to have platform trading requirements in place based
on the CFTC's implementation of platform trading requirements. See
FSB, OTC Derivatives Market Reforms: Implementation Progress in 2022
Tables 1 & K (Nov. 7, 2022), available at https://www.fsb.org/wp-content/uploads/P071122.pdf (describing progress made towards
implementing platform trading requirements in 2022) and FSB, OTC
Derivatives Market Reforms: 2019 Progress Report on Implementation
Table A (Oct. 15, 2019), available at https://www.fsb.org/2019/10/otc-derivatives-market-reforms-2019-progress-report-on-implementation/ (discussing the CFTC's implementation of platform
trading requirements).
\851\ These jurisdictions are China (bond forwards; certain
currency forwards, options, and swaps); the European Union (certain
index CDS and certain IRS denominated in Euro); India (certain
overnight index swaps); Indonesia (equity and commodity derivative
products); Japan (selected Yen-denominated IRS); Mexico (certain
Peso-denominated IRS); Singapore (certain IRS denominated in Euro,
U.S. dollar, and British pound); and United Kingdom (certain index
CDS and certain IRS denominated in Euro and certain IRS denominated
in British pound). See FSB, 2019 Progress Report (Table R); FSB,
Implementation Progress in 2022 (footnote 12), supra note 850, and
Financial Conduct Authority, Register of derivatives subject to the
trading obligation under article 28 of UK MiFIR (July 24, 2023),
available at https://register.fca.org.uk/servlet/servlet.FileDownload?file=0150X000006gbbG. In its 2022 report, see
supra note 850, the FSB noted no change in status in the
implementation of platform trading requirements since its 2019
report.
---------------------------------------------------------------------------

7. Trading Models
Unlike the markets for cash equity securities and listed options,
the market for SBS currently is characterized by bilateral negotiation
in the OTC swap market; is largely decentralized; has many non-
standardized instruments; and has many SBS that are not centrally
cleared. The lack of uniform rules concerning the trading of SBS and
the one-to-one nature of trade negotiation in SBS has resulted in
different models for the trading of these securities, ranging from
bilateral negotiations carried out over the telephone, to RFQ systems
(e.g., single-dealer and multi-dealer RFQ platforms), request-for-
stream protocol, and limit order books outside the United States, as
more fully described below. The use of electronic media to execute
transactions in SBS varies greatly across trading models, with some
models being highly electronic whereas others rely almost exclusively
on non-electronic means such as the telephone. The reasons for use of,
or lack of use of, electronic media vary from such factors as user
preference to limitations in the existing infrastructure of certain
trading platforms. The description below of the ways in which SBS may
be traded is based in part on discussions with market participants and
incorporates comments received on the Proposing Release.
The Commission uses the term ``bilateral negotiation'' to refer to
the model whereby one party uses the telephone, email, or other
communications to contact directly a potential counterparty to
negotiate an SBS transaction. Once the terms are agreed, the SBS
transaction is executed and the terms are memorialized.\852\ In a
bilateral negotiation, there might be no pre-trade or post-trade
transparency available to the market because only the two parties to
the transaction are aware of the terms of the negotiation and the final
terms of the agreement. Further, no terms of the proposed transaction
are firm until the transaction is executed. However, reputational costs
generally serve as a deterrent to either party's failing to honor any
quoted terms. Dealer-to-customer bilateral negotiation currently is
used for all SBS asset classes, and particularly for trading in less
liquid SBS, in situations where the parties prefer a privately
negotiated transaction, such as for a large notional transaction, or in
other circumstances in which it is not cost-effective for a party to
the trade to use one of the execution methods described below.
---------------------------------------------------------------------------

\852\ See, e.g., Trade Acknowledgement and Verification Adopting
Release, supra note 802, 81 FR at 39809.
---------------------------------------------------------------------------

One commenter elaborates on this model of trading, focusing
specifically on dealer-to-client trading in the SBS market.\853\
According to this commenter, at the moment, dealer-to-client trading in
security-based swaps is largely opaque and fragmented, with most
executions arising out of one-to-one private negotiations. When
engaging with clients, liquidity providers typically provide
``indicative'' quotes (as opposed to firm binding quotes), inviting
interested clients to follow-up bilaterally in order to obtain an
executable price for a specific instrument.\854\ Given that these
executable prices are often only then honored at that exact moment in
time, clients are unable to effectively put liquidity providers in
competition and have little to no pre-trade transparency regarding
other available prices in the market.\855\ Instead clients face the
choice of either accepting the first executable price received or
starting over with a new one-to-one negotiation, where pricing could
move against the client as its trading interest is sequentially
disclosed to additional market participant.\856\ The commenter states
that this opaque and fragmented execution process impairs client access
to best execution by denying clients the ability to effectively compare
and evaluate the quality of prices.\857\
---------------------------------------------------------------------------

\853\ See Citadel Letter, supra note 18, at 8.
\854\ Id.
\855\ Id.
\856\ Id.
\857\ Id.
---------------------------------------------------------------------------

Another model for the trading of SBS is the RFQ system. An RFQ
system typically allows market participants to obtain quotes for a
particular SBS by simultaneously sending messages to one or more
potential respondents (SBS

[[Page 87248]]

dealers).\858\ The initiating participant is typically required to
provide information related to the request in a message, which may
include the name of the initiating participant, SBS identifier, side,
and size. SBS dealers that observe the initiating participant's request
have the option to respond to the request with a price quote.\859\
These respondents are often, though not always, pre-selected. The
initiating participant can then select among the respondents by either
accepting one of multiple responses or rejecting all responses, usually
within a ``good for'' time period. After the initiating participant and
a respondent agree on the terms of the trade, the trade will then
proceed to post-trade processing.
---------------------------------------------------------------------------

\858\ See Lynn Riggs, Esen Onur, David Reiffen, and Haoxiang
Zhu, Swap Trading After Dodd-Frank: Evidence from Index CDS, 137 J.
Financial Economics 857 (2020) (finding that, in the index CDS
market, an initiating participant is more likely to send RFQs to its
relationship dealers, i.e., its clearing members or dealers with
whom it has traded more actively in the recent past).
\859\ See id. (finding that, in the index CDS market, a dealer's
response rate to an RFQ declines with the number of dealers included
in the RFQ).
---------------------------------------------------------------------------

RFQ systems provide a certain degree of pre-trade transparency in
that the initiating participant can observe the quotes it receives (if
any) in response to its RFQ. The number of quotes received depends, in
part, on the number of respondents that are invited to participate in
the RFQ. As the Commission discussed elsewhere, several factors may
influence the number of respondents that are invited to participate in
an RFQ.\860\ First, the RFQ system itself may limit the total number of
respondents that can be selected for a single RFQ, typically to five
counterparties. This limitation may encourage SBS dealers to respond to
RFQs, since it reduces the number of other SBS dealers they would
compete with in any give request session. Second, the initiating
participant may have an incentive to limit the degree of information
leakage. If the trade the initiating participant is seeking to complete
with the help of the RFQ is not completely filled in that one session,
and other participants know this, quotes the initiating participant
receives elsewhere may be affected, including in subsequent RFQ
sessions. Third, respondents and initiators both have an incentive to
limit price impact because of the expense it will add to the offsetting
trade that must follow. Specifically, an SBS dealer who takes a
position to fill a customer order through an RFQ will often
subsequently offset that position in the interdealer market. If a large
number of SBS dealers are invited to participate in an RFQ, this would
lead to widespread knowledge that the SBS dealer with the winning bid
will now try to offset that position, which could impact the prices
available to that dealer in the interdealer market.
---------------------------------------------------------------------------

\860\ See Amendments to Exchange Act Rule 3b-16 Regarding the
Definition of ``Exchange''; Regulation ATS for ATSs That Trade U.S.
Government Securities, NMS Stocks, and Other Securities; Regulation
SCI for ATSs That Trade U.S. Treasury Securities and Agency
Securities SEA Release No. 94062 (Jan. 26, 2022), 87 FR 15496 (Mar.
18, 2022) (``ATS-G Proposal''), section VIII.B.1.a therein.
---------------------------------------------------------------------------

Two commenters describe the ``request-for-stream'' trading
protocol, which allows liquidity providers to stream firm prices on
trading platforms such as those run by SEFs.\861\ These firm prices are
not required to be communicated to clients sending an RFQ on these
trading platforms.
---------------------------------------------------------------------------

\861\ See Citadel Letter, supra note 18, at 13; MFA Letter,
supra note 18, at 8. See also supra section V.E.1(b)(iii). See also
Lynn Riggs, Esen Onur, David Reiffen, and Haoxiang Zhu, Swap Trading
After Dodd-Frank: Evidence from Index CDS, 137 J. Financial
Economics 857 (2020) (documenting that this trading protocol--also
referred to as ``request for streaming''--is one of the trading
protocols used in the trading of index CDS on SEFs).
---------------------------------------------------------------------------

A fourth model for the trading of SBS is a limit order book system
or similar system, which the Commission understands is not yet in
operation for the trading of SBS in the United States.\862\ Today,
securities and futures exchanges in the United States display a limit
order book in which firm bids and offers are posted for all
participants to see, with the identity of the parties withheld until a
transaction occurs.\863\ Bids and offers are then matched based on
price-time priority or other established parameters and trades are
executed accordingly. The quotes on a limit order book system are firm.
In general, a limit order book system also provides greater pre-trade
transparency than the models described above, because participants can
view bids and offers before placing their bids and offers. However,
broadly communicating trading interest, particularly about a large
trade, might increase hedging costs, and thus costs to investors, as
reflected in the prices from the SBS dealers. The system can also
provide post-trade transparency, to the extent that participants can
see the terms of executed transactions.
---------------------------------------------------------------------------

\862\ With respect to swaps traded on CFTC-registered SEFs, CFTC
regulation Sec. 37.9(a) provides that Required Transactions that
are not block trades must generally be executed via an order book or
RFQ system. CFTC regulations Sec. Sec. 37.9(d) and (e) contain
exceptions to the Sec. 37.9(a) execution requirements for certain
package transactions and error trades, respectively. See supra
section V.E.
\863\ Under CFTC rules applicable to the swaps markets, Sec.
37.9(f) prohibits the practice of post-trade name give-up for swaps
that are executed, pre-arranged, or pre-negotiated anonymously on or
pursuant to the rules of a SEF and intended to be cleared, subject
to an exception related to certain package transactions. See supra
section V.E (discussing Rule 815).
---------------------------------------------------------------------------

The models described above represent broadly the types of trading
of SBS in the OTC market today. These examples may not represent every
method in existence today, but the discussion above is intended to give
an overview of the models without providing the nuances of each
particular type.

C. Benefits and Costs

The Commission's consideration of the benefits and costs of the
adopted rules and amendments takes into account the connection between
the trade execution requirement and the mandatory clearing requirement
mandated by Congress. Specifically, the Dodd-Frank Act amended the SEA
to require, among other things, the following with respect to SBS
transactions: (1) transactions in SBS must be cleared through a
clearing agency if they are required to be cleared; \864\ and (2) if
the SBS is subject to the clearing requirement, the transaction must be
executed on an exchange or on an SBSEF registered under section 3D of
the SEA or an SBSEF exempt from registration under section 3D(e) of the
SEA, unless no SBSEF or exchange makes such SBS available for trading
or the SBS is subject to the clearing exception in section 3C(g) of the
SEA.\865\ The benefits and costs associated with the trade execution
requirement will not materialize unless and until the Commission makes
mandatory clearing determinations, i.e., determining what SBS
transactions must be cleared by a clearing agency.
---------------------------------------------------------------------------

\864\ See Public Law 111-203, 763(a) (adding section 3C(a)(1) of
the SEA).
\865\ See id. See also Public Law 111-203, 761(a) (adding
section 3(a)(77) of the SEA to define the term ``security-based swap
execution facility'').
---------------------------------------------------------------------------

The general approach to finalizing requirements relating to SBS
execution could mitigate costs associated with the adopted rules and
amendments. As discussed in section I, the Commission's approach is to
harmonize as closely as practicable with analogous CFTC rules for SEFs,
unless a reason exists to do otherwise in a particular area. Based on
the Commission's belief that SBSEF registrants likely would be
registered SEFs that have established systems and policies and
procedures to comply with CFTC rules, the Commission's general approach
potentially will result in compliance costs for registered SBSEFs that
are lower than compliance costs that would have resulted had the
Commission chosen not to harmonize its approach as closely as
practicable

[[Page 87249]]

with analogous CFTC rules for SEFs.\866\ Several commenters state that
the Commission's general approach would mitigate costs for registered
SBSEFs and SBS market participants.\867\
---------------------------------------------------------------------------

\866\ In section XVIII infra, for purposes of the PRA, the
Commission estimates burdens applicable to a stand-alone SBSEF.
However, the Commission anticipates that most if not all SBSEFs will
be dually registered with the CFTC as SEFs, and thus will already be
complying with relevant CFTC rules that have analogs to rules
contained within Regulation SE. Therefore, the Commission's burden
estimates may be larger for stand-alone SBSEF than may exist in
practice, considering the effect of overlapping CFTC rules.
\867\ See Bloomberg Letter, supra note 18, at 2, 10, 18; ICE
Letter, supra note 18, at 2; ISDA-SIFMA Letter, supra note 18, at 2;
SIFMA AMG Letter, supra note 18, at 5; Tradeweb Letter, supra note
18, at 1-2.
---------------------------------------------------------------------------

In assessing the economic impact of the adopted rules and
amendments, the Commission considers the broader costs and benefits
associated with the application of the adopted rules and amendments,
including the costs and benefits of applying the substantive Title VII
requirements to the trading of SBS.\868\ The Commission's analysis also
considers ``assessment'' costs--i.e., those that arise from current and
future market participants expending resources to assess how they will
be affected by Regulation SE, and could incur expenses in making this
assessment even if they ultimately are not subject to rules for which
they made an assessment.
---------------------------------------------------------------------------

\868\ In certain prior Title VII releases, the Commission had
referred to such costs and benefits as programmatic costs and
benefits. See, e.g., Regulation SBSR Adopting Release I, supra note
140.
---------------------------------------------------------------------------

Many of the benefits and costs discussed below are difficult to
quantify. These benefits and costs would depend on how potential SBSEFs
and their prospective members respond to the adopted rules and
amendments. If potential SBSEFs perceive the costs associated with
operating registered SBSEFs to be high, such that few or no entities
come forward to register as SBSEFs, there could be no triggering of the
trade execution requirement, which depends on MAT determinations made
by registered SBSEFs (or exchanges). Under this scenario, the future
state of the SBS market likely will not differ from the current
baseline and the potential costs and benefits discussed below will not
materialize. An alternative scenario is that prospective SBSEFs
perceive the costs associated with operating registered SBSEFs to be
high but nevertheless register as SBSEFs because they expect to be able
to pass on such costs to their members to help maintain the commercial
viability of operating a registered SBSEF. MAT determinations by
registered SBSEFs will move trading of the products covered by the
determinations onto SBSEFs, which can generate benefits and costs
associated with increased pre-trade transparency, in addition to
benefits and costs associated with the operation of regulated markets.
A third possibility is that entities come forward to register as SBSEFs
because they perceive the associated costs of operating SBSEFs to be
low in light of the close harmonization of Regulation SE with analogous
CFTC SEF rules. If these registered SBSEFs do not make MAT
determinations and thus do not trigger the trade execution requirement,
the benefits and costs associated with increased pre-trade transparency
likely will not arise. If SBSEF trading is limited because of an
absence of MAT determinations, the benefits and costs associated with
the operation of regulated markets potentially will be limited as well.
A fourth possibility is that entities do come forward to register as
SBSEFs because they perceive the associated costs of operating SBSEFs
to be low and these registered SBSEFs make MAT determinations and
trigger the trade execution requirement. Under this scenario, the
benefits and costs associated with increased pre-trade transparency and
regulated markets likely will arise. The Commission does not have the
data to determine which of the above possibilities will prevail
following the adoption of the rules and amendments considered herein.
The Commission has attempted to quantify economic effects where
possible, but much of the discussion of economic effects is necessarily
qualitative.
1. Overarching Benefits of the Rules and Amendments
Broadly, the Commission anticipates that the new rules and
amendments may bring several overarching benefits to the SBS market.
Improved Transparency. The final rules would enable the Commission
to obtain information about SBSEFs, thereby facilitating the
Commission's oversight of these entities.\869\
---------------------------------------------------------------------------

\869\ For example, Rule 826, among other things, requires an
SBSEF to maintain records of its business activities (including a
complete audit trail) for a period of five years and report to the
Commission such information as the Commission determines to be
necessary or appropriate for performing the duties of the Commission
under the SEA. See infra this section for a discussion of how
Regulation SE would provide the means for the Commission to gain
better insight into and oversight of SBSEFs and the SBS market.
---------------------------------------------------------------------------

In addition, the requirements relating to pre-trade transparency
would increase pre-trade transparency in the market for SBS.\870\
Increased pre-trade price transparency should allow an increased number
of market participants to better see the trading interest of other
market participants prior to trading, which should lead to increased
price competition among market participants.\871\ The requirements with
respect to pre-trade price transparency should lead to more efficient
pricing in the SBS market.\872\
---------------------------------------------------------------------------

\870\ Rules 803(a)(2) and (3) require an SBSEF to offer, at a
minimum, an order book for SBS trading, subject to certain
exceptions related to package transactions. Rule 815(a) requires SBS
transactions subject to the trade execution requirement to be
executed using either an order book or via an RFQ-to-3 system. Rule
816 sets forth the process by which an SBSEF would subject an SBS to
the trade execution requirement. Rule 817 informs market
participants of the date on which the trade execution requirement
for a particular SBS commences. Rule 832 describes those cross-
border SBS transactions that would be subject to the trade execution
requirement.
\871\ See, e.g., Ananth Madhavan, Market Microstructure: A
Practitioner's Guide, 58 Fin. Analysts J., at 38 (2002)
(nondisclosure of pre-trade price information benefits dealers by
reducing price competition).
\872\ See, e.g., Ekkehart Boehmer, et al., Lifting the Veil: An
Analysis of Pre-trade Transparency at the NYSE, 60 J. Fin. 783
(2005) (greater pre-trade price transparency leads to more efficient
pricing).
---------------------------------------------------------------------------

Evidence from the swap market suggests that an increase in pre-
trade transparency is associated with improved liquidity and reduced
transaction costs.\873\ The Commission is not aware of any difference
between the swap market and the SBS market that would cause the
empirical findings regarding the impact of pre-trade price transparency
on liquidity and transaction costs not to carry over into the SBS
market, when implemented. The Commission is mindful that, under certain
circumstances, pre-trade price transparency could also discourage the
provision of liquidity by some market participants.\874\ However,
having two

[[Page 87250]]

execution methods for Required Transactions (limit order book and RFQ-
to-3) would provide market participants with flexibility in the degree
of pre-trade transparency they wish to employ. Using RFQ-to-3, a market
participant could choose to reveal its trading interest to no more than
three market participants; using a limit order book, the market
participant would reveal its trading interest to all other market
participants that have access to the same limit order book, which may
exceed three market participants. The flexibility in the degree of pre-
trade transparency should diminish potential concerns associated with
the exposure of pre-trade trading interest.
---------------------------------------------------------------------------

\873\ See Evangelos Benos, Richard Payne, and Michalis Vasios,
Centralized Trading, Transparency, and Interest Rate Swap Market
Liquidity: Evidence from the Implementation of the Dodd-Frank Act,
55 J. Fin. and Quantitative Analysis 159 (2020) (finding, among
other things, that imposition of the CFTC's trade execution
requirement improved the liquidity of IRS that were subject to the
requirement, and that the liquidity improvement was associated with
more intense competition between swap dealers); Y.C. Loon and
Zhaodong (Ken) Zhong, Does Dodd-Frank Affect OTC Transaction Costs
and Liquidity? Evidence from Real-Time CDS Trade Reports, 119 J.
Fin. Econ. 645 (2016) (finding that index CDS transactions executed
on SEFs have lower transaction costs and improved liquidity than
index CDS transactions executed bilaterally).
\874\ See, e.g., Ananth Madhavan, et al., Should Securities
Markets Be Transparent?, 8 J. Fin. Markets 265 (2005) (finding that
an increase in pre-trade price transparency leads to lower liquidity
and higher execution costs, because limit-order traders are
reluctant to submit orders given that their orders essentially
represent free options to other traders).
---------------------------------------------------------------------------

Two commenters agree that the proposal would increase transparency
in the SBS market.\875\ One of these commenters believes that the
introduction of multilateral trading protocols would increase pre-trade
transparency and competition, which should improve liquidity
conditions, reduce transaction costs, and facilitate execution quality
analysis, as clients will be able to put liquidity providers in direct
competition.\876\
---------------------------------------------------------------------------

\875\ See Bloomberg Letter, supra note 18, at 1; Citadel Letter,
supra note 18, at 8.
\876\ See Citadel Letter, supra note 18, at 8.
---------------------------------------------------------------------------

One commenter believes that proposed Rule 819(c) would help ensure
that investment advisers to regulated funds will be able to participate
on SBSEFs, accessing the pricing and other market information that may
be available on SBSEF, which would increase transparency in the
derivatives market.\877\ The Commission agrees that Rule 819(c), by
requiring an SBSEF to provide any ECP with impartial access to its
market(s) and market services, would help ensure that ECPs, including
investment advisers, are able to access pricing and other market
information on SBSEFs thereby increasing transparency in the SBS
market.
---------------------------------------------------------------------------

\877\ See ICI Letter, supra note 18, at 11 n.6.
---------------------------------------------------------------------------

Improved oversight of trading. Regulation SE requires, among other
things, that SBSEFs maintain an audit trail and automated trade
surveillance system; conduct real-time market monitoring; establish and
enforce rules for information collection; and comply with reporting and
recordkeeping requirements.\878\ These requirements are designed to
provide an SBSEF with sufficient information to oversee trading on its
market, including detecting and deterring abusive trading practices.
Additionally, an SBSEF shall permit trading only in SBS that are not
readily susceptible to manipulation \879\ and adopt rules that are
reasonably designed to allow the SBSEF to intervene as necessary to
maintain markets with fair and orderly trading and to prevent or
address manipulation or disruptive trading practices.\880\
---------------------------------------------------------------------------

\878\ See Rules 819, 821, 822, and 826.
\879\ See Rule 820.
\880\ See Rule 824(b)(1).
---------------------------------------------------------------------------

This framework could enhance investor protection and increase
confidence in a well-regulated market among SBS market participants,
which could in turn make them more willing to increase their
participation or entice new participants. An increase in participation
in the SBS market would, all else being equal, benefit the SBS market
as a whole. Further, to the extent that market participants utilize SBS
to better manage their risk with respect to a position in underlying
securities or assets, their participation in the SBS market could
impact their willingness to participate in the underlying asset
markets. Thus, Regulation SE could benefit the securities markets
overall by encouraging a more efficient, and potentially higher, level
of capital investment.
Improved access and competition. Currently, the SBS market is
dominated by a small group of SBS dealers.\881\ A mandatory clearing
determination by the Commission, followed by a MAT determination by one
or more SBSEFs or exchanges, should help foster greater competition in
the trading of SBS by promoting greater order interaction and
increasing access to and participation on SBSEFs. The final rules
provide a framework for allowing a number of trading venues to register
as SBSEFs and thus more effectively compete for business in SBS.
Furthermore, Rule 827 is designed to promote competition generally by
prohibiting an SBSEF from adopting any rules or taking any actions that
unreasonably restrain trade or imposing any material anticompetitive
burden on trading or clearing.
---------------------------------------------------------------------------

\881\ See supra section XVII.B.2.
---------------------------------------------------------------------------

Rule 819(c), among other things, requires an SBSEF to provide any
ECP with impartial access to its market(s) and market services. Rule
819(c)(4), Rule 819(g)(14), along with the new rules and amendments to
the Commission's Rules of Practice allow persons who are aggrieved by a
final disciplinary action, a final action with respect to a denial or
conditioning of membership, or a final action with respect to a denial
or limitation of access by an SBSEF to file an application for review
by the Commission in a timely manner.\882\ These rules and amendments
are designed to improve access to, foster confidence in, and provide
for the oversight of SBSEF functions by creating a procedure for making
appeals to the Commission.
---------------------------------------------------------------------------

\882\ See Rules 819(c)(4) and 819(g)(14); Rules 442 and 443;
amendments to Rules 101, 202, 210, 401, 450, and 460. Rule 442(b),
among other things, clarifies that the 30-day period for filing an
application for review will not be extended absent a showing of
extraordinary circumstances, which is intended to encourage parties
to act timely in seeking review.
---------------------------------------------------------------------------

Taken together, these rules and amendments should foster greater
access to SBSEFs by SBS market participants, which in turn could
promote greater participation by liquidity providers on SBSEFs.
Increased participation on SBSEFs could increase competition in
liquidity provision and lower trading costs, which may lead to
increased participation in the SBS market. One commenter agrees that
Rule 819(c), in particular, would increase competition in the SBS
market. The commenter further states that the rule would increase
liquidity, efficiency, and fairness in the SBS market.\883\ The
Commission agrees that Rule 819(c), together with the other rules
described earlier, could increase competition in the SBS market,
specifically competition in liquidity provision as discussed above. To
the extent that increased competition in liquidity provision lowers
bid-offer spreads and transaction costs, liquidity and efficiency in
the SBS market would increase. Rule 819(c), by requiring an SBSEF to
provide any ECP with impartial access to its market(s) and market
services, would help ensure that all ECPs will receive the same
treatment with respect to access to the SBSEF's market(s) and market
services and thus help to increase fairness in the SBS market.
---------------------------------------------------------------------------

\883\ See ICI Letter, supra note 18, at 2.
---------------------------------------------------------------------------

Two commenters believe that Proposed Rule 815(f), which is designed
to prohibit post-trade name give up for an SBS that is executed
anonymously on an SBSEF and intended to be cleared, would increase
participation on SBSEFs and in turn increase competition, liquidity,
and efficiency.\884\ One of these commenters also believes the proposed
rule would increase fairness in the SBS markets.\885\
---------------------------------------------------------------------------

\884\ See id.; SIFMA AMG Letter, supra note 18, at 11.
\885\ See ICI Letter, supra note 18, at 2.
---------------------------------------------------------------------------

Rules 815(f) and 815(g) could generate such beneficial effects. The
practice of post-trade name give-up increases the risk of information
leakage and can

[[Page 87251]]

deter participation by liquidity seekers on SBSEFs. By prohibiting such
a practice for an SBS that is executed anonymously on an SBSEF and
intended to be cleared, Rule 815(f) would reduce the risk of
information leakage and encourage more liquidity seekers to participate
on SBSEFs. Further, by helping to protect the anonymity of market
participants, Rule 815(f) could encourage a more diverse set of market
participants to transact in anonymous order books.
Rule 815(g) specifies that SBSEFs shall establish and enforce rules
that provide that a security-based swap that is intended to be cleared
at the time of the transaction, but is not accepted for clearing at a
registered clearing agency, shall be void ab initio. The rule would
ensure that a trade that is rejected for clearing would not become a
bilateral transaction, in which case the counterparties would have to
divulge their identities. As such, the rule would reduce the risk of
information leakage and protect the anonymity of market participants
for SBS that is executed anonymously and intended to be cleared, but is
nonetheless rejected for clearing. This in turn could increase
participation on SBSEFs by liquidity seekers and those wishing to
transact in anonymous order books, similar to Rule 815(f).
Increased participation by liquidity seekers on SBSEFs could in
turn increase participation by liquidity providers and promote
competition in liquidity provision. Greater participation in anonymous
order books also could promote competition in liquidity provision if
erstwhile liquidity seekers choose to provide liquidity in competition
with SBS dealers in these order books. To the extent that increased
competition in liquidity provision lowers bid-offer spreads and
transaction costs, liquidity and efficiency in the SBS market would
increase.
By helping to protect the anonymity of those that transact in
anonymous order books, the rule would deprive SBS dealers of a means of
deterring access to and participation in such order books by buy-side
market participants.\886\ Thus, Rule 815(g) could help promote a level
playing field by ensuring that both buy-side market participants and
dealers can participate in these order books.
---------------------------------------------------------------------------

\886\ See Citadel Letter, supra note 18, at 11 (stating that
PTNGU, by revealing counterparty identities, can be used as a
policing mechanism by dealers to deter buy-side access and
participation).
---------------------------------------------------------------------------

Regulation SE would promote competition among entities that act as
third-party service providers to SBSEFs. Rule 819(c) would, among other
things, require an SBSEF to provide any independent software vendor
with impartial access to its market(s) and market services. The rule
would provide a level playing field to software vendors with respect to
access to SBSEFs and promote competition among these vendors as they
vie for an SBSEF's business. Rule 819(e) would permit an SBSEF to
contract with a registered futures association, a DCM, a national
securities exchange, a national securities association, or another
SBSEF for the provision of services to assist in complying with the SEA
and Commission rules thereunder, as approved by the Commission. By
permitting an SBSEF to choose from a range of regulatory services
providers, Rule 819(e) could promote competition among regulatory
services providers. To the extent that increased competition among
independent software vendors and regulatory services providers
incentivizes them to offer cheaper, higher quality services to SBSEFs
thereby lowering their costs, market participants that are SBSEF
members could benefit to the extent the SBSEFs pass on the cost savings
in the form of lower fees to their members. Lower fees for SBSEF
members would help reduce the overall costs of trading on SBSEFs and
increase the efficiency of SBS trading.
Improved Commission oversight. One of the goals of the Dodd-Frank
Act is to increase regulatory oversight of SBS trading relative to the
existing OTC SBS market.\887\ Regulation SE would provide the means for
the Commission to gain better insight into and oversight of SBSEFs and
the SBS market by, among other things, allowing the Commission to
review new rules, rule amendments, and product listings by SBSEFs \888\
and to obtain other relevant information from SBSEFs.\889\
---------------------------------------------------------------------------

\887\ See Public Law 111-203, Preamble.
\888\ See Rules 804, 805, 806, and 807.
\889\ See Rule 811.
---------------------------------------------------------------------------

Additionally, Rule 826(b) requires every SBSEF to keep full,
complete, and systematic records of all activities relating to its
business with respect to SBS. In addition, Rule 819(f) requires an
SBSEF to capture and retain a full audit trail of activity on its
facility. The records required to be kept by an SBSEF would help the
Commission to determine whether an SBSEF is operating in compliance
with the SEA and the Commission's rules thereunder. The audit trail
data required to be captured and retained would facilitate the ability
of the SBSEF and the Commission to carry out their respective
obligations under the SEA, by facilitating the detection of abusive or
manipulative trading activity, allowing reconstructions of activity on
the SBSEF, and generally understanding the causes of both specific
trading events and general market activity.
Furthermore, Rule 835 requires an SBSEF to provide the Commission
notice of a final disciplinary action, a final action with respect to a
denial or conditioning of membership, or a final action with respect to
a denial or limitation of access, which facilitates the Commission's
review of the SBSEF's disciplinary process and exercise of its
regulatory powers, providing the Commission an additional tool to carry
out its oversight responsibilities. Rule 813 provides for Commission
oversight of SBSEFs in their use of information collected for
regulatory purposes and is designed to deter the misappropriation or
misuse of such information. Rule 824(c) requires an SBSEF to, among
other things, promptly notify the Commission of its exercise of
emergency authority and provide information related to the use of that
authority. The registration requirements and related Form SBSEF, and
the CCO's annual compliance report, which are further discussed below,
would also help the Commission with its oversight responsibilities.
Improved automation. To comply with Regulation SE's requirements
relating to recordkeeping and surveillance, an SBSEF potentially would
need to invest in and develop automated technology systems to store,
monitor, and communicate a variety of trading data, including orders,
RFQs, RFQ responses, and quotations.\890\ The final rules should
promote increased automation in the SBS market, although CFTC-
registered SEFs that plan to register as SBSEFs are already deploying
automated systems that could be supplemented to support an SBS
business. In addition, the automation and systems development
associated with the regulation of SBSEFs could provide SBS market
participants with new platforms and tools to execute and process
transactions in SBS more rapidly and at a lower expense per
transaction. Such increased efficiency could enable members of the
SBSEF to handle increased volumes of SBS with greater efficiency and
timeliness.
---------------------------------------------------------------------------

\890\ See Rules 819(d)(4) and 826.
---------------------------------------------------------------------------

2. Benefits Associated With Specific Rules
In addition to the broad benefits that the Commission anticipates
as a result of the rules and amendments adopted in

[[Page 87252]]

this release, individual rules could bring particular benefits to the
SBS market.\891\ These include the following:
---------------------------------------------------------------------------

\891\ Unless otherwise stated, quantified benefits in this
section are adjusted for CPI inflation using data published by the
Bureau of Labor Statistics. See CPI Inflation Calculator, U.S.
Bureau of Labor Statistics, available at https://www.bls.gov/data/inflation_calculator.htm.
---------------------------------------------------------------------------

Registration requirements and Form SBSEF. SBSEF registration is
required under the Dodd-Frank Act.\892\ Rule 818(a) incorporates the
requirement under the Dodd-Frank Act that an SBSEF, in order to be
registered and maintain registration, must comply with the Core
Principles in section 3D(d) of the SEA and the Commission's rules
thereunder. The registration process described in Rule 803 implements
this statutory requirement and assists the Commission in overseeing and
regulating the SBS market. The information to be provided on Form SBSEF
is designed to enable the Commission to assess whether an applicant has
the capacity and the means to perform the duties of an SBSEF and to
comply with the Core Principles and other requirements imposed on
SBSEFs. Rule 803 is closely modelled on analogous CFTC registration
requirements for SEFs. The choice to align the Commission's
registration requirements for SBSEFs with the CFTC's requirements for
SEFs is designed to achieve the abovementioned benefits while imposing
only marginal costs on SBSEF registrants, who likely are SEFs. Finally,
Rule 814(a) helps provide regulatory certainty for an entity that
operates both an exchange and an SBSEF by clarifying that such an
entity is required to separately register the two facilities pursuant
to section 6 of the SEA and Rule 803, respectively.
---------------------------------------------------------------------------

\892\ See SEA section 3D(a)(1), 15 U.S.C. 78c-4(a)(1).
---------------------------------------------------------------------------

Exemptions (Rule 833, Rule 816(e), amendments to Rule 3a1-1, and
Rule 15a-12). Rule 833 is designed to preserve access to foreign
markets by ``covered persons'' (as defined in Rule 832). As discussed
in section XVII.B.2, an analysis of SBS transaction data indicates that
certain trades executed on foreign SBS trading venues involve at least
one counterparty that is a covered person. Absent the rule, these
trading venues might elect to avoid having members that are covered
persons if those venues do not wish to register with the Commission in
some capacity (such as an exchange or SBSEF). In addition, covered
persons will not be permitted to execute SBS that are subject to the
trade execution requirement on these venues if the venues do not
register with the Commission in some capacity (such as an exchange or
SBSEF) or obtain an appropriate exemption. This would limit access to
foreign SBS trading venues by covered persons, potentially making it
harder for them to locate counterparties and obtain liquidity for SBS
that trade on those venues. This in turn could increase their trading
costs because they might spend more time and effort to locate
counterparties or because they have less bargaining power relative to
the remaining pool of potential counterparties with which they could
trade. To the extent that a foreign SBS trading venue can obtain a Rule
833(a) exemption, it could continue to provide members that are covered
persons with access to and liquidity on its market. Furthermore, a Rule
833(b) exemption would allow covered persons to continue accessing
foreign SBS trading venues to execute SBS that are subject to the SEA's
trade execution requirement.
Currently, all trading venues that trade SBS--whether domestic or
foreign--are exempt from having to register as a national securities
exchange or SBSEF on account of the SBS trading business. This
exemption expires when the Commission's rules for registering and
regulating SBSEFs come into force.\893\ Thus, removal of the existing
exemption restores the status quo ante, where the SEA itself, as
amended by the Dodd-Frank Act, requires entities meeting the definition
of ``security-based swap execution facility'' or ``exchange'' and
falling within the territorial jurisdiction of the SEA to register with
the Commission. By offering foreign SBS trading venues the possibility
of an exemption from the definitions of ``security-based swap execution
facility'' and ``exchange'' as well as from section 3D(a)(1) of the
SEA, Rule 833(a) allows foreign SBS trading venues to operate in
conditions similar to the current baseline (if the Commission
ultimately grants an exemption under Rule 833(a)).
---------------------------------------------------------------------------

\893\ See supra section III.
---------------------------------------------------------------------------

Paragraph (a)(4) of Rule 3a1-1 provides that an entity that has
registered with the Commission as an SBSEF and provides a market place
for no securities other than SBS will not fall within the definition of
``exchange'' and thus will not be subject to the requirement in section
5 of the SEA to register as a national securities exchange (or obtain a
low-volume exemption). The benefit of the amendment is to clarify to
prospective SBSEF applicants that, if they register with the Commission
as SBSEFs, they will not face duplicative registration and regulatory
requirements as exchanges. In addition, paragraph (a)(5) of Rule 3a1-1
codifies a series of exemptions that the Commission has granted over
several years to SBS clearing agencies that operate ``forced trading''
sessions to support end-of-day valuations of SBS. Because the amendment
is intended to codify existing exemptions, any associated economic
effects would be minimal.
New Rule 15a-12 is designed to minimize overlapping compliance
burdens for SBSEFs, which are also brokers under the SEA, that restrict
their activity to engaging in the business of operating an SBSEF (and
no other broker activities). Absent the rule, such SBSEFs (defined as
``SBSEF-Bs'' for purposes of Rule 15a-12) will need to register as
SBSEFs and be subject to the SBSEF regulatory regime, in addition to
registering as brokers and being subject to the broker regulatory
regime. Rule 15a-12 allows an SBSEF-B to satisfy the requirement to
register as a broker by registering as an SBSEF under Rule 803 and
exempts an SBSEF-B from SIPA and other broker requirements, except for
sections 15(b)(4), 15(b)(6), and 17(b) of the SEA. As a result of the
rule, SBSEF-Bs could avoid incurring duplicative and unnecessary
compliance burdens. Each SBSEF-B could save an estimated $345,826 in
initial broker registration costs \894\ and $62,878 in annual ongoing
costs of meeting broker registration requirements.\895\ In deriving
these estimates, the Commission assumes that the activities an SBSEF-B
performs to register and maintain registration as a broker do not
overlap with those that it performs to register and maintain
registration as an SBSEF-B. If there is an overlap in such activities,
the estimated cost savings could be smaller. Each SBSEF-B could save an
estimated $821 in ongoing costs associated with satisfying broker
minimum capital

[[Page 87253]]

requirements.\896\ The estimated aggregate initial and annual ongoing
savings are $1,729,130 and $318,495, respectively.\897\
---------------------------------------------------------------------------

\894\ The Commission previously estimated that an entity would
incur costs of $301,400 to register as a broker-dealer and become a
member of a national securities association. See Cross-Border
Amendments Adopting Release, 85 FR at 6312. Adjusted for inflation
through Dec. 2022, these costs are $345,826.
\895\ The Commission previously estimated that an entity would
incur ongoing annual costs of $54,800 to maintain broker-dealer
registration and membership of a national securities association.
See Cross-Border Amendments Adopting Release, 85 FR 6312. Adjusted
for inflation through Dec. 2022, these costs are $62,878. The
estimation of ongoing annual costs is based on the assumption that
the entity would use existing staff to perform the functions of the
registered broker-dealer and would not incur incremental costs to
hire new staff. To the extent that the entity chooses to hire new
staff, the ongoing annual costs would likely be higher.
\896\ Absent the rule, an SBSEF-B would comply with the minimum
net capital requirement of $5,000 for a registered broker-dealer
because it would not receive, owe, or hold customer funds or
securities; carry customer accounts; and engage in certain other
activities. See Rule 15c3-1(a)(2)(vi) under the SEA, 17 CFR
240.15c3-1(a)(2)(vi). The Commission estimates the cost of capital
using the annual stock returns on a value-weighted portfolio of
financial stocks from 1988 to 2022 (see Kenneth French, 48 Industry
Portfolios, available at https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/ftp/48_Industry_Portfolios_CSV.zip (accessed on
May 18, 2023). These returns were averaged to arrive at an estimate
of 16.41%. The cost of capital = 16.41% x $5,000 = $820.50 or
approximately $821.
\897\ The Commission estimates the number of SBSEF-Bs as the
number of entities that likely will register as SBSEFs. See supra
section XVII.B.4. Aggregate initial savings = $345,826 x 5 (number
of SBSEF-Bs) = $1,729,130. Aggregate annual ongoing savings =
($62,878 + $821) x 5 (number of SBSEFs) = $318,495.
---------------------------------------------------------------------------

Rule and product filings. Rules 806 and 807 set forth alternative
filing processes for a new rule or rule amendment of a registered
SBSEF, and Rules 804 and 805 set forth alternative filing processes for
an SBSEF to file an SBS product that it wishes to list. Rule 810 would
address new product filings by an entity that has applied for SBSEF
registration but has not yet been registered, or by a dormant SBSEF
seeking reinstatement of its registration. The self-certification
processes of Rules 804 and 807 require SBSEFs to include a
certification that the product, rule, or rule amendment, as the case
may be, complies with the SEA and Commission rules thereunder.\898\ The
information to be provided by the SBSEF under Rules 804, 805, and 810
will further the ability of the Commission to obtain information
regarding SBS that an SBSEF intends to list on its market. The rules
will assist the Commission in overseeing and regulating the trading of
SBS and to help ensure that SBSEFs operate in compliance with the SEA.
---------------------------------------------------------------------------

\898\ See Rules 804(a)(3)(iv) and 807(a)(6)(iv).
---------------------------------------------------------------------------

In addition, Rule 806(a)(5), which requires an SBSEF to explain the
anticipated benefits and potential anticompetitive effects on market
participants of a proposed new rule or rule amendment, potentially
could help foster a competitive SBS market because it could prompt
SBSEFs to consider the positive as well as negative aspects of their
proposed rules or rule amendments with respect to competition. Rule 808
is designed to facilitate the public's ability to obtain information
from SBSEF applications as well as rule and product filings. Rule
808(a) specifies the parts of an SBSEF application that the Commission
shall make publicly available unless confidential treatment is obtained
pursuant to SEA Rule 24b-2. Rule 808(b) provides that the Commission
shall make an SBSEF's rule and product filings publicly available
unless confidential treatment is obtained pursuant to SEA Rule 24b-2.
Rule 808(c) provides that the terms and conditions of a product
submitted to the Commission pursuant to any of Rules 804 through 807
shall be made publicly available at the time of submission unless
confidential treatment is obtained pursuant to SEA Rule 24b-2.
Rule 809 provides a mechanism for the staying of a product
certification or the tolling of a review period for a filing by an
SBSEF relating to a product while the appropriate jurisdictional
classification of that product is determined. The rule is designed to
provide regulatory certainty for SBSEFs and market participants who may
be interested in trading products whose classification as an SBS
subject to SEC jurisdiction or a swap subject to CFTC jurisdiction is
unclear. In particular, Rule 809 would help ensure that determinations
regarding whether the SEC or CFTC appropriately has jurisdiction over a
product are made before the product is traded.
The Commission's election to model Rules 804 through 810 closely on
analogous rules in part 40 of the CFTC's rules that apply to SEFs (and
other registered entities) is designed to promote efficiency. Utilizing
the same processes for rule and product filings, with which dually
registered SEF/SBSEFs are familiar, would impose only minimal burdens
on such entities while obtaining the similar regulatory benefits as the
CFTC rules. In some cases, where a new rule or rule amendment affects
both the swap and SBS business of a dually registered entity, the same
or a very similar filing could be made to each of the CFTC and SEC, in
lieu of having to make different filings to support the same rule
change.
Chief Compliance Officer. Rule 831, among other things, requires
the CCO of an SBSEF to submit an annual compliance report to the
Commission. The report will assist the Commission in carrying out its
oversight of the SBSEFs and the SBS market by providing the Commission
with information about the compliance activities of SBSEFs.
Furthermore, by requiring an SBSEF to designate an individual as the
CCO and making the CCO responsible for ensuring compliance with the SEA
and the Commission's rules thereunder, Rule 831 would promote
regulatory compliance on SBSEFs and the SBS market generally.\899\ This
in turn would further the goal of moving SBS trading away from opaque
and unregulated OTC markets and onto transparent and regulated markets
by promoting effective regulation of the latter.
---------------------------------------------------------------------------

\899\ The SBSEF remains responsible for establishing and
administering required policies and procedures. See supra section
VI.N.
---------------------------------------------------------------------------

Conflicts of Interest. Rule 831, among other things, requires the
CCO to resolve material conflicts of interest that may arise in
consultation with the governing board or the senior officers of the
SBSEF.\900\ Rule 828(a) requires an SBSEF to establish and enforce
rules to minimize conflicts of interest in its decision-making process
and establish a process for resolving the conflicts of interest. Rule
828(b) would require an SBSEF to comply with the requirements of Rule
834, which is designed to implement section 765 of the Dodd-Frank Act
with respect to SBSEFs and SBS exchanges. Rule 834, among other things,
imposes a 20% cap on the voting interest held by an individual member
of an SBSEF or SBS exchange, mitigates conflicts of interest in the
disciplinary process of an SBSEF or SBS exchange, sets forth certain
minimum requirements for the composition of the governing board of an
SBSEF or SBS exchange, sets forth reporting requirements related to
governing board elections, and addresses the avoidance of conflicts of
interest in the execution of regulatory functions by an SBSEF or SBS
exchange.\901\
---------------------------------------------------------------------------

\900\ See Rules 831(a)(2)(iii) and (h)(2).
\901\ See Rules 834(b) to (g).
---------------------------------------------------------------------------

The rules would mitigate conflicts of interest between an SBSEF or
SBS exchange and its members as discussed in section VIII. Relative to
the bilateral OTC SBS market, SBSEFs and SBS exchanges promote
competition between liquidity providers, potentially forcing them to
lower their prices for supplying liquidity (e.g., narrowing bid-ask
spread) and reducing their profits from liquidity provision. However,
if SBS dealers or major SBS participants were able to restrict access
to such venues by, for example, exercising their voting interest in an
SBSEF or SBS exchange, they could stifle competition in SBSEFs and SBS
exchanges and preserve their profits from liquidity provision.
Regulation SE, by mitigating such conflicts of interest could help
ensure access to SBSEFs and SBS exchanges and in turn increase
competition in liquidity provision and lower transaction costs. Rules
834(e), (f), and (g) also may promote good governance at SBSEFs and SBS
exchanges. To the extent that improved

[[Page 87254]]

governance result in more effective oversight by SBSEFs and SBS
exchanges of their markets, market participants may benefit. These
benefits could be limited to the extent that prospective SBSEFs and SBS
exchanges already have rules in place that comply with the rules.
Structured Data Requirements. Rule 825(c)(3) requires an SBSEF to
publish a Daily Market Data Report on its website without charge or
usage restrictions and in a downloadable and machine-readable format
using the most recent version of the associated XML schema and PDF
renderer as published on the Commission's website.\902\ Requiring the
Daily Market Data Report to be provided in a structured, machine-
readable data language (using a Commission-created XML schema) will
facilitate the use of the price, trading volume, and other trading data
on the report by end users such as SBS market participants and market
observers. By including a structured data requirement, the information
in the report will be made available in a consistent and openly
accessible manner that will allow for automatic processing by software
applications, thus enabling search capabilities and statistical and
comparative analyses across SBSEFs and date ranges.\903\ This will
ensure that SBS market participants and market observers seeking to use
the data will not have to spend time manually collecting and entering
the data into a format that allows for analysis.
---------------------------------------------------------------------------

\902\ See Rule 825(c)(3).
\903\ In addition, the associated PDF renderer will provide
users with a human-readable document for those who prefer to review
manually individual reports, while still providing a uniform
presentation.
---------------------------------------------------------------------------

One commenter stated that using custom XML rather than Inline XBRL
``would essentially require re-creating what XBRL already offers'' and
that the use of custom XML ``would result in added costs for all
stakeholders, reduced efficiencies in adapting to changes, and the
inability to commingle datasets.'' \904\ The Daily Market Data Report,
which includes the trade count, the total notional amount traded, and
the opening and closing price, is well-suited for custom XML as the
information would easily fit within a table and the use of custom XML
would make the file size of the document smaller than would be the case
with Inline XBRL, which helps to reduce operating system overhead.
Posting the Daily Market Data Report would not impose significant costs
to prospective and actual SBSEFs due to the limited extent and
complexity of the required data points to be reported, and because
SBSEFs are already required to use structured data to fulfill their
reporting requirements under Regulation SBSR \905\ and therefore would
have relevant systems in place to structure and publicly disseminate
other SBS trading information.\906\ While the use of custom XML will
make it more difficult for data users to aggregate and compare the data
points on the Daily Market Data Report with data points in other Inline
XBRL datasets in an efficient manner, the streamlined schema and
reduced file size justify that drawback.
---------------------------------------------------------------------------

\904\ See XBRL US Letter, supra note 718, at 2.
\905\ See 17 CFR 242.907(a)(2) (requiring information to be
submitted to SDRs in an ``open-source structured data format that is
widely used by participants'').
\906\ See infra section XVII.C.3 for a discussion of the
specific content of the Daily Market Data Report and how it differs
from the SBS transaction reports disseminated under Regulation SBSR.
---------------------------------------------------------------------------

Regulation SE requires SBSEFs to file disclosures required under
various provisions in the EDGAR system using structured (machine-
readable) data languages.\907\ Requiring a centralized filing location
and a machine-readable data language for these disclosures will
facilitate access, retrieval, analysis, and comparison of the disclosed
information across different SBSEFs and time periods by the Commission
and the public, thus potentially augmenting the informational benefits
of the various disclosure requirements discussed herein. Also, because
EDGAR provides basic technical validation capabilities, the use of
EDGAR could reduce the incidence of technical errors (e.g., letters
instead of numbers in a field requiring only numbers) and thereby
improve the quality of the structured disclosures.
---------------------------------------------------------------------------

\907\ This includes the documents required under: Rule
803(b)(1)(i) and (3) (filings of, and amendments to, specified
exhibits in a Form SBSEF application); Rules 803(e) and 803(f)
(requests to withdraw or vacate an application for registration);
Rule 829(g)(6) (submission to the Commission of reports related to
financial resources and related documentation); and Rule 831(j)(2)
(submission to the Commission of the annual compliance report of the
SBSEF's CCO). See supra section XIII.A.
---------------------------------------------------------------------------

The structured data requirements under Regulation SE will
facilitate access to the structured information in the filings,
enabling Commission staff to perform more efficient retrieval,
aggregation, and comparison across different SBSEFs and time periods,
as compared to an unstructured PDF, HTML, or ASCII format requirement.
The functionality enabled by a machine-readable data requirement will
allow staff to better utilize the structured information in Regulation
SE filings to ensure compliance with the SEA and rules and regulations
thereunder applicable to SBSEFs (e.g., by enabling efficient staff
identification of material changes to compliance policies or material
non-compliance matters to gauge the soundness of SBSEF compliance
programs), thus ultimately furthering the Commission's mission of
maintaining fair, orderly, and efficient markets.
In a change from the proposal, Regulation SE will require some of
the structured disclosures to be filed in custom XML rather than Inline
XBRL.\908\ Because both custom XML and Inline XBRL are structured data
languages that result in machine-readable disclosures, the
aforementioned benefits would apply in both cases. Inline XBRL
specifically provides the ability to tag detailed facts within
narrative text blocks, and is thus well-suited to accommodate many
disclosures required under proposed Regulation SE, several of which
require extended narrative discussions (e.g., the chief compliance
officer's report required under Rule 831).\909\ In addition, certain
required disclosures consist of financial information (e.g., the
financial statements of the SBSEF required under Exhibit I to Form
SBSEF), and Inline XBRL is designed specifically for the accurate
capture and communication of financial information, among other uses. A
benefit specific to custom XML disclosures is that EDGAR can create
fillable web forms allowing SBSEFs, at their option, to input their
disclosures manually and have EDGAR convert them into the specific
custom XML data language, removing the need for SBSEFs to structure the
disclosures in the custom XML data language themselves. This added
flexibility may ease compliance burdens for any SBSEFs that choose to
use the fillable web form.
---------------------------------------------------------------------------

\908\ The custom XML requirements apply to information required
under Rules 803(e) and (f) regarding withdrawal or vacation
applications; the Form SBSEF Cover Sheet; and Exhibits A, B, G, M,
N, and T to Form SBSEF. The Inline XBRL requirements apply to
information required under Rules 829 and 831 regarding financial
resources reports and CCO compliance reports, respectively; and
Exhibits C through F, H through L, and P through S to Form SBSEF.
See supra section XIII.A. See also supra notes 724-726 and
accompanying text (discussing the final rule text revisions that
implement the reduced scope of Inline XBRL requirements for Form
SBSEF).
\909\ See Rule 831.
---------------------------------------------------------------------------

One commenter noted that an Inline XBRL requirement for the
proposed disclosures would allow financial identification and textual
data in both a human- and machine-readable format consistently in a
fashion that would allow Form SBSEF data to be commingled with other
SEC-reported datasets.\910\ While we generally agree that Inline XBRL
provides such benefits

[[Page 87255]]

related to data use, the greater compliance flexibility afforded by
custom XML merits using custom XML for the specified disclosures.
---------------------------------------------------------------------------

\910\ See XBRL US Letter, supra note 718, at 2.
---------------------------------------------------------------------------

In another change from the proposal, where Regulation SE requires
copies of existing documents (e.g., copies of manuals, contracts,
organizational documents) to be attached to filings, those copies will
be filed as unstructured PDF attachments.\911\ The absence of
structuring requirements for these documents will further reduce
compliance burdens on SBSEFs, and although the content of those copies
will not be machine-readable, we do not believe the informational
benefits associated with having such documents in structured form would
be significant enough to merit requiring SBSEFs to retroactively
structure such existing documents. In addition, filings related to new
SBSEF rules and products under Rules 804 through 807 and 816 will be
filed as unstructured documents through the EFFS system rather than
through EDGAR. As noted by one commenter, the absence of structuring
requirements for these filings will similarly reduce compliance burdens
on SBSEFs.\912\
---------------------------------------------------------------------------

\911\ This includes attached copies of existing documents
required under Exhibits A, G, I, M, N, and O to Form SBSEF. See
supra section XIII.A. See also supra notes 724-726 and accompanying
text (discussing the final rule text revisions that implement the
reduced scope of Inline XBRL requirements for Form SBSEF).
\912\ See Bloomberg Letter, supra note 18, at 20. See also supra
notes 730-733 (discussing the final rule text revisions that
implement the requirement for SBSEFs to file rule and product
filings in unstructured format using the EFFS system).
---------------------------------------------------------------------------

3. Costs
Although Regulation SE would benefit the SBS market, the Commission
recognizes that Regulation SE also would entail certain costs.\913\
Some costs are difficult to precisely quantify and are discussed below.
The Commission is mindful that any rules it may adopt with respect to
SBSEFs under the Dodd-Frank Act may impact the incentives of market
participants with respect to where and how they trade SBS. If the rules
adopted by the Commission are, or are perceived to be, too costly for
trading venues to comply with, fewer entities than expected may seek to
register as SBSEFs, which would not further the goal of moving a
greater percentage of SBS trading from opaque and unregulated OTC
markets to transparent and regulated trading venues. In addition, if
the rules for trading on an SBSEF are perceived as too burdensome by
market participants, SBS trading may continue in the OTC market absent
a mandatory clearing determination and a triggering of the mandatory
trade execution requirement, thus frustrating the goals of the Dodd-
Frank Act.\914\ Even if the trade execution requirement is triggered
for an SBS, market participants that wish to avoid being subject to the
requirement may do so by strategically choosing the location of the
desk executing a trade in that SBS.\915\ At the same time, if the rules
relating to SBSEFs are too lenient, they may have little or no impact
on the market structure and surveillance of the SBS market relative to
the status quo, which could result in the loss of many of the benefits
discussed above and fail to achieve the goals of the Dodd-Frank Act.
---------------------------------------------------------------------------

\913\ Unless otherwise stated, quantified costs in this section
are adjusted for CPI inflation using data published by the Bureau of
Labor Statistics. See CPI Inflation Calculator, U.S. Bureau of Labor
Statistics, available at https://www.bls.gov/data/inflation_calculator.htm.
\914\ See supra section XVII.C (noting that the benefits and
costs associated with the trade execution requirement would not
materialize unless and until the Commission makes a mandatory
clearing determination).
\915\ See Citadel Letter, supra note 18, at 16.
---------------------------------------------------------------------------

In addition, SBS traded on SBSEFs may be perceived to be subject to
increased costs, monetary and otherwise. For example, the requirements
related to pre-trade transparency could cause market participants to
reveal valuable economic information regarding their trading interest
more broadly than they may believe would be economically prudent and
could discourage participation in the SBS market. An additional impact
of pre-trade transparency is perceived costs associated with front-
running, if customers or SBS dealers are required to show their trading
interest before a trade is executed. These potential costs of pre-trade
transparency may change market participants' trading strategies, which
could result in them working more orders or finding ways to attempt to
hide their interest.\916\ These potential costs would likely vary based
on the notional size of the SBS transaction and, in particular, would
likely be greater for market participants engaging in SBS trades of a
larger notional size.\917\ If market participants view Regulation SE as
too burdensome with respect to pre-trade transparency, SBS dealers may
be less willing to supply liquidity for SBS that trade on SBSEFs or
exchanges, thus adversely affecting liquidity and competition. However,
such effects could be mitigated by Rules 815(d)(2) and Rules 815(d)(3)
that provide an exception for certain package transactions that allows
for flexible methods of execution for what would be otherwise Required
Transactions.\918\
---------------------------------------------------------------------------

\916\ See, e.g., Ananth Madhavan, Market Microstructure: A
Survey, J. of Fin. Markets, Vol. 3 (2000).
\917\ The potential costs associated with SBS trades of a larger
notional size could be affected by a definition of ``block trade''
that includes a block trade threshold that market participants could
rely on for the exception from the Required Transaction requirement
in Rule 815(a)(2). As discussed in section V.E.1(c)(i), supra, a
block-trade exception for SBSs subject to the trade-execution
requirement, provided that ``block trade'' is appropriately defined
for those SBSs, can help ensure that large trades are not
significantly more difficult and costly to execute because of the
risks posed by information leakage and the potential for adverse
price movement, which could significantly impair liquidity in the
markets for those SBSs.
\918\ See Rule 815(d)(2) and Rule 815(d)(3). Neither an SBS that
is intended to be cleared (even if it is not required to be cleared)
nor a swap subject to a CFTC trade execution requirement would
create an exception from required methods of execution for a
Required Transaction that is part of the same package.
---------------------------------------------------------------------------

On the other hand, if the requirements with respect to pre-trade
transparency bring about only a marginal increase in pre-trade
transparency, the result could be that there would be no substantive
change from the status quo, including no benefits of alleviating
informational asymmetries, increasing price competition, and supplying
better executions beyond the changes in response to the other
requirements of the Dodd-Frank Act. This actual impact would depend on
the degree of pre-trade transparency required and the characteristics
of the trading market. The rules are intended to provide for greater
pre-trade transparency than currently exists without requiring pre-
trade transparency in a manner that would cause participants to avoid
providing liquidity on SBSEFs.
There would be transaction costs, such as fees and connectivity
costs, that trading counterparties would incur in executing or trading
SBS subject to the trade execution requirement on SBSEFs. Likewise,
although unregulated trading venues exist in today's OTC derivatives
market, the Commission does not have information regarding what, if
any, fees and connectivity costs are associated with transacting on
these unregulated trading venues. In the Proposing Release, the
Commission invited comment on the likely fees and costs associated with
transacting on SBSEFs as well as fees and costs associated with
transacting on unregulated trading venues that exist in today's OTC
derivatives market. Commenters did not provide estimates of likely fees
and costs associated with transacting on SBSEFs or fees and costs
associated with transacting on unregulated trading venues.
As discussed in section XVII.B, prospective SBSEF registrants are
likely

[[Page 87256]]

to be CFTC-registered SEFs that are active in the index CDS market.
Because the final rules are harmonized as closely as practicable with
analogous CFTC rules for SEFs, unless a reason exists to do otherwise
in a particular area, much of the systems, policies, and procedures
that are used to support SEF trading also could be used to support
SBSEF trading. The prospective SBSEF registrants likely would incur
marginal costs associated with listing SBS products on their venues
\919\ and making limited changes to their systems, policies, and
procedures to comply with SEC rules that differ slightly from analogous
CFTC rules. The Commission estimates the one-time costs associated with
such changes to systems, policies, and procedures would range between
$26,393 and $1,583,550 per SBSEF and between $131,965 and $7,917,750 in
the aggregate, depending on the changes needed. These cost ranges
reflect significant uncertainties about the extent of changes that
different registrants might need. The annual ongoing costs of
maintaining the technology (e.g., ensuring any necessary technological
updates and improvements are made) and applying the technology to
ongoing compliance requirements are estimated to be in the range of
$1,055,700 to $2,111,400 per SBSEF and in the range of $5,278,500 to
$10,557,000 in the aggregate.\920\
---------------------------------------------------------------------------

\919\ See infra section XVII.C.3(c) (discussing the costs that
these entities might incur to list SBS products).
\920\ In the Proposing Release, the Commission estimated that
the one-time costs associated with changes to systems, policies, and
procedures would range between $25,000 and $1.5 million per SBSEF,
depending on the changes needed. The Commission estimated the annual
ongoing costs to be between $1 million and $2 million. See Proposing
Release, supra note 1, 87 FR at 28953. Adjusting for inflation in
2022, the Commission now estimates that the one-time costs
associated with changes to systems, policies, and procedures would
range between $25,000 x 1.0557 (CPI inflation adjustment for 2022) =
$26,392.50 or approximately $26,393 and $1.5 million x 1.0557 (CPI
inflation adjustment for 2022) = $1,583,550 per SBSEF, depending on
the changes needed. In the aggregate, the one-time costs associated
with changes to systems, policies, and procedures would range
between $26,393 x 5 SBSEFs = $131,965 and $1,583,550 x 5 SBSEFs =
$7,917,750, depending on the changes needed. Adjusting for inflation
in 2022, the Commission now estimates the annual ongoing costs per
SBSEF to be between $1 million x 1.0557 (CPI inflation adjustment
for 2022) = $1,055,700 and $2 million x 1.0557 (CPI inflation
adjustment for 2022) = $2,111,400. In the aggregate, the annual
ongoing costs would be between $1,055,700 x 5 SBSEFs = $5,278,500
and $2,111,400 x 5 SBSEFs = $10,557,000. One commenter states that
any potential differences between SEC rules and analogous CFTC rules
would require SBSEF registrants to devote resources toward assessing
the potential gaps and consequences of regulatory divergence. See
Bloomberg Letter, supra note 18, at 10. Such costs would be part of
the one-time costs associated with changes to systems, policies, and
procedures. It is possible that SBSEF registrants might incur
additional costs toward assessing the potential gaps and
consequences of regulatory divergence. In that case, the one-time
costs associated with changes to systems, policies, and procedures
could be higher than the Commission's estimates.
---------------------------------------------------------------------------

Several commenters agree that the Commission's general approach to
finalizing requirements relating to SBS execution would mitigate costs
for registered SBSEFs.\921\
---------------------------------------------------------------------------

\921\ See supra section XVII.C and note 867.
---------------------------------------------------------------------------

One commenter is concerned that Rule 816 as proposed would permit
SBSEFs to make an SBS available to trade even absent objective evidence
of a sufficiently liquid trading market.\922\ According to the
commenter, requiring SBS with insufficient liquidity to be traded via
an order book or an RFQ system would raise a significant risk of
revealing investment advisers' sensitive portfolio management
strategies.\923\ Such information leakage could lead to front-running
of funds' trades and to other abusive trading practices that would
negatively affect the pricing of SBS and of other related instruments,
resulting in higher investment costs for investment advisers' clients,
including funds and their investors.\924\ The Commission agrees that an
inappropriate MAT determination such as the one described by the
commenter could result in higher investment costs for investment
advisers' clients by increasing the risk of information leakage, front-
running, and other abusive trading practices. Regulation SE as adopted
would address concerns related to inappropriate MAT determinations. As
discussed in section V.F.2, the Commission will have the opportunity to
review all SBSEF MAT determinations, whether they are self-certified or
voluntarily filed for Commission approval, to consider whether those
determinations are adequately supported by evidence and consistent with
the SEA and the rules thereunder, including the six factors to be
considered for MAT determinations under Rule 816(b).\925\ In the
absence of such evidence, the Commission can decline to approve or can
stay and then object to a MAT petition, which will ultimately allow the
Commission to prevent an inappropriate MAT determination from taking
effect.
---------------------------------------------------------------------------

\922\ See ICI Letter, supra note 18, at 5.
\923\ See id. at 6.
\924\ Id.
\925\ These six factors are: (1) whether there are ready and
willing buyers and sellers; (2) the frequency or size of
transactions; (3) the trading volume; (4) the number and types of
market participants; (5) the bid/ask spread; or (6) the usual number
of resting firm or indicative bids and offers. See Rule 816(b).
---------------------------------------------------------------------------

One commenter states that requiring a fund to disclose its trading
interest in an SBS of a large notional size to multiple participants--
via an order book or an RFQ system--would enable opportunistic market
participants to piece together information about the fund's holdings or
investment strategy and lead to front-running of those potential
trades.\926\ The Commission agrees that requiring a fund to disclose
its trading interest in an SBS of a large notional size to multiple
participants via an order book or an RFQ system could impose costs
associated with information leakage and front-running. However, these
costs have to be considered in light of the benefits of increased pre-
trade transparency: increased price competition, increased price
efficiency, improved liquidity, and reduced transaction costs.\927\ By
adopting two execution methods for Required Transactions (limit order
book and RFQ-to-3), market participants have flexibility in the degree
of pre-trade transparency they wish to employ, which should diminish
potential concerns associated with the exposure of pre-trade trading
interest. Further, a market participant that wishes to engage in
Permitted Transactions of a large notional size can choose any method
of execution that is offered by an SBSEF and is not restricted to using
a limit order book or RFQ-to-3. For these transactions, any costs
associated with information leakage and front-running likely would not
be different from those costs that would prevail under the baseline.
---------------------------------------------------------------------------

\926\ See ICI Letter, supra note 18, at 11.
\927\ See supra section XVII.C.1 (discussing the benefits of
increased pre-trade transparency).
---------------------------------------------------------------------------

One commenter states that Proposed Rule 834 would have the effect
of prohibiting certain SBSEF participants from having common ownership
and control as the SBSEF. The commenter is concerned that the proposed
rule would prevent prospective SBSEFs that are CFTC-registered SEFs
from onboarding their affiliated introducing brokers because doing so
would exceed the ownership and voting caps set forth in Proposed Rule
834(b).\928\ Another commenter is concerned that the rule's 20%
ownership cap would limit access to capital and act as barriers to
entry for SBSEF and SBS exchanges.\929\ Observing that the CFTC did not
adopt rules analogous to Proposed Rule 834, the commenters suggest that
the proposed rule, if adopted, would be a fundamental departure from
the CFTC's rules, minimizing many of the other

[[Page 87257]]

benefits of a harmonized regime, and thwart efforts to smoothly
implement Regulation SE.\930\ One commenter further states that some
CFTC registered SEFs, which are prospective SBSEFs, might have to
review their ownership and governance structure and, possibly, amend
their organization.\931\
---------------------------------------------------------------------------

\928\ See WMBAA Letter, supra note 18, at 2.
\929\ See SIFMA AMG Letter, supra note 18, at 12.
\930\ See id.; WMBAA Letter, supra note 18, at 3.
\931\ See WMBAA Letter, supra note 18, at 3.
---------------------------------------------------------------------------

In response to these concerns, the Commission is adopting Rule
834(b)(3), which provides an exemption from the ownership and voting
caps for an SBSEFs that has mitigated the potential conflict of
interest with respect to compliance with the rules of the SBSEF by
entering into an agreement with a registered futures association or a
national securities association for the provision of regulatory
services that encompass, at a minimum, real-time monitoring under Rule
819(d)(5) and investigations and investigation reports under Rule
819(d)(6). This exemption should address concerns regarding certain
SBSEF participants not being able to have common ownership and control
as the SBSEF (provided these appropriate conditions are met); the
onboarding of affiliated introducing brokers by certain prospective
SBSEFs; access to capital and entry barriers; and potential disruption
or delays to the implementation of Regulation SE.
With respect to the Daily Market Data Report required by Proposed
Rule 825, one commenter states that the Daily Market Data Report would
require inappropriate and detrimental disclosures that would undermine
the Commission's goal of fostering a competitive and efficient market
for SBS trading. This commenter states that there are significant
differences in the information required to be reported under the SEC
and CFTC regimes. The commenter states that Proposed Rule 825(c)(1)
increases the burden on SBSEFs compared to SEFs by requiring additional
information regarding sale and offer prices, as well as qualitative
descriptions of certain data that are reported.\932\
---------------------------------------------------------------------------

\932\ See MFA Letter, supra note 18, at 13.
---------------------------------------------------------------------------

This commenter further states that the Commission's proposal does
not address why the CFTC's approach would not be acceptable in the
context of SBSEFs and does not justify the increased operational costs
to SBSEFs (which will ultimately be passed on to members). The
commenter also states that the Commission has not considered the costs
and potential for duplicative requirements in the context of Regulation
SBSR reporting requirements. The commenter concludes that, in sum, the
Daily Market Data Report is overly granular and duplicative, is
unnecessary for transparency purposes, and could negatively impact the
market and market participants. The commenter states that the
Commission should therefore remove the Daily Market Data Report in
favor of harmonizing with the analogous CFTC rules and that, if the
Commission does not eliminate the Daily Market Data Report requirement
altogether, it should adopt additional masking protections for trades,
specifically with respect to block trades. Failure to do so, the
commenter states, would cause inappropriate and detrimental disclosures
and would ``negate the benefits that the rule purports to achieve by
exempting block trades from clearing [sic] requirements.'' \933\
---------------------------------------------------------------------------

\933\ See id. Regulation SE does not address any exemption from
clearing requirements.
---------------------------------------------------------------------------

As discussed in Section IV.H, many of the reporting requirements of
the Daily Market Data Report under Proposed Rule 825 are closely
aligned with the data required to be disclosed on a daily basis by SEFs
under Sec. 16.01 of the CFTC's rule. Further, the Commission is
modifying Proposed Rule 825 to resolve the two differences between the
proposed Daily Market Data Report and the existing CFTC reporting
scheme under Sec. 16.01: (1) that the Daily Market Data Report would
include the number of block trades executed; \934\ and (2) that the
Daily Market Data Report would be posted on the SBSEF's website no
later than the beginning of trading on the next business day,\935\
while the information required by Sec. 16.01 must be made public no
later than the next business day.\936\
---------------------------------------------------------------------------

\934\ See Proposed Rule 825(c)(1)(iii).
\935\ See Proposed Rule 825(c)(4).
\936\ See 17 CFR 16.01(e). The Commission views the requirement
to keep each Daily Market Data Report on an SBSEF's website for one
year, see Proposed Rule 825(c)(5), as a small additional burden for
an SBSEF and does not view it as a significant departure from
harmonization with the CFTC's SEF regime.
---------------------------------------------------------------------------

Rule 825(c)(1), as adopted, does not require the disclosure of the
number of block trades.\937\ Further, Rule 825(c)(4), as adopted,
requires the publication of the Daily Market Data Report ``as soon as
reasonably practicable on the next business day after the day to which
the information pertains, but in no event later than 7 a.m. on the next
business day.'' With these modifications, the data called for by Rule
825(c)(1) is consistent with the required daily disclosures for SEFs.
These modifications should help address concerns regarding increased
burden on SBSEFs compared to SEFs, increased operational costs to
SBSEFs, the Daily Market Data Report being overly granular, and
negative impact on the market and market participants. The fact that
Rule 825(c)(1), as adopted, does not require the disclosure of the
number of block trades would obviate the need to adopt masking
protections for block trades and address the commenter's concern about
inappropriate and detrimental disclosures that would adversely affect
competition and efficiency in the SBS market. To the extent that the
disclosure of the number of block trades prompts market prices to move
against the dealers that facilitated such block trades thereby raising
their hedging costs, dealers could raise the price of liquidity
provision (e.g., by widening the bid-ask spread) charged to market
participants, increase transaction costs, and reduce the efficiency of
SBS trading. To the extent that the cost of transacting block trades
increases, market participants may choose to exit the SBS market and
trade alternative securities. This in turn could reduce participation
and competition in the SBS market. Rule 825(c)(1), by not requiring the
disclosure of the number of block trades, should mitigate these
potential adverse effects on competition and efficiency in the SBS
market.
---------------------------------------------------------------------------

\937\ The Commission is also, pursuant to its determination not
to adopt a definition of ``block trade'' at this time, deleting the
words ``including block trades but'' from the text of paragraph
(c)(i) and (ii) of Rule 825, and is adding the words ``after such
time as the Commission adopts a definition of `block trade' '' to
paragraph (c)(iii) of Rule 825 (formerly paragraph (c)(iv) of
Proposed Rule 825) which will have no effect on the requirement as
compared to the proposed rule. See supra section VI.H.
---------------------------------------------------------------------------

With respect to the concern that the Daily Market Data Report is
duplicative of Regulation SBSR and unnecessary for transparency
purposes, the former performs a function that is different from the
reporting and public dissemination of SBS transactions required by
Regulation SBSR.\938\ The Daily Market Data Report would consolidate
trading information by venue and provide useful summary information
about SBS trading on an SBSEF for all market participants without
requiring them to incur costs to collect, process, and aggregate
information from individual reports of SBS transactions that are
executed on an SBSEF and publicly disseminated pursuant to Regulation
SBSR. In addition, the Daily Market Data Report provides information
regarding trading on an SBSEF that is not available in the SBS
transaction reports that are publicly disseminated pursuant to
Regulation SBSR. Among other things, the Daily Market Data Report would
provide the

[[Page 87258]]

opening and closing price; the price that is used for settlement
purposes, if different from the closing price; the lowest price of a
sale or offer, whichever is lower; the highest price of a sale or bid,
whichever is higher; the method used by the SBSEF in determining
nominal prices and settlement prices; and a description of the manner
in which discretion is used to determine the opening and/or closing
ranges or the settlement prices.\939\ Further, because the transaction
reports for credit SBS are permitted to be capped at a notional volume
of $5 million,\940\ market participants would be unable to glean the
information provided by the Daily Market Data Report--which would
publish daily total notional volumes based on uncapped transaction
amounts--from the individual reports of SBS transactions under
Regulation SBSR. Thus, the Daily Market Data Report would provide
market participants, at little to no cost, with information about
pricing and trading volume for SBS on SBSEFs that goes beyond the
information that could be obtained from SBS transaction reports that
are publicly disseminated pursuant to Regulation SBSR.
---------------------------------------------------------------------------

\938\ See 17 CFR 242.900 et seq.
\939\ See Rules 825(c)(1)(iv) through (vi) and 825(c)(2).
\940\ See 2019 Cross-Border Adopting Release, supra note 218, 85
FR at 6347 (providing no-action relief with respect to Rule 902 of
Regulation SBSR, 17 CFR 242.902, for reports of credit SBS
transaction disseminated with a capped size of $5 million).
---------------------------------------------------------------------------

Several commenters are concerned that Proposed Rule 832(b)(3),
which would apply the trade execution requirement to ANE transactions,
could create complexities,\941\ prompt market participants and
platforms to develop costly infrastructure to avoid engaging in ANE
transactions,\942\ confuse market participants and platforms and reduce
market participation.\943\ One commenter asks the Commission to be
mindful of whether CFTC-registered SEFs would be forced to change their
rules in order comply with the new proposed SBSEF rules.\944\ With
respect to the concern that CFTC-registered SEFs might be forced to
change their rules because of the Commission's ANE approach for SBSEFs,
foreign trading venues that have already received exemptive relief from
the CFTC for swaps trading where robust regulatory regimes may exist
with requirements comparable to those applicable to SBS transactions in
the United States might seek and obtain exemptive relief under Rule
833(b). If exempted under Rule 833(b), trading of SBS on such foreign
trading venues would not require CFTC-registered SEFs to change their
rules.\945\ Similarly, for SBS transactions that the Commission exempts
from the trade execution requirement based on an application submitted
under Rule 833(b), the concerns expressed by commenters regarding
complexities and costs would no longer be applicable. The effect of
such exemptions would likely result in SBS transactions in foreign
jurisdictions with what may be considered robust regulatory regimes to
be exempt from the Commission's trade execution requirement and, in
practice, have similar treatment of transactions on applicable foreign
trading venues as the CFTC. This should address concerns about
confusion among market participants and platforms in foreign
jurisdictions; the regulatory certainty provided by the exemptions
should help to mitigate any adverse effects on market participation and
obviate the need to develop costly infrastructure to avoid engaging in
ANE transactions.
---------------------------------------------------------------------------

\941\ See SIFMA AMG Letter, supra note 18, at 11.
\942\ See ISDA-SIFMA Letter, supra note 18, at 12.
\943\ See Tradeweb Letter, supra note 18, at 4-5.
\944\ See SIFMA AMG Letter, supra note 18, at 11.
\945\ See supra notes 624-627 and accompanying text.
---------------------------------------------------------------------------

Several commenters are concerned that many foreign SBS trading
venues would not be able to obtain a Rule 833(b) exemption because they
believe the rule would require foreign jurisdictions to require RFQ-to-
3 and order book methods of execution, while hardly any foreign
jurisdictions have identical requirements, with some jurisdictions not
requiring SBS to be traded on an organized trading venue.\946\ These
commenters believe that the inability of foreign trading venues to
obtain a Rule 833(b) exemption would result in various negative
consequences: increased costs; disruption and fragmentation of the SBS
markets; reduced liquidity and participation in the SBS markets;
impaired risk transfer, risk management, and price formation; and
increased systemic risk.\947\
---------------------------------------------------------------------------

\946\ See supra note 599; Bloomberg Letter, supra note 18, at 6,
19; ICE Letter, supra note 18, at 4; ISDA-SIFMA Letter, supra note
18, at 14; Tradeweb Letter, supra note 18, at 6.
\947\ See supra note 602-607 and accompanying text.
---------------------------------------------------------------------------

The Commission acknowledges the concerns raised by commenters,
which appear to emanate from commenters' interpretation--and
misunderstanding--of what would be required in order to receive a Rule
833(b) exemption. Specifically, several commenters interpret the rule
and the Commission's discussion of the rule in the Proposing Release to
mean that a foreign SBS trading venue must have RFQ-to-3 and an order
book for Required Transactions in order for transactions on that venue
to qualify for a Rule 833(b) exemption.\948\ As discussed in Section
VII.B, the proposed rule would not require foreign SBS trading venues
to have RFQ-to-3 and an order book in order for the Commission to
consider their SBS executions for an exemption under Rule 833(b).
Neither the text of Rule 833(b) nor the Commission's description of
Rule 833(b) states that a limit order book or an RFQ-to-3 system is
required to receive a Rule 833(b) exemption.\949\ There may be foreign
SBS trading venues--many of which have already received exemptive
relief from the CFTC for swaps trading \950\--that may be appropriate
candidates for exemptive relief, that are subject to what may be
considered robust regulatory regimes for SBS trading. With respect to
such foreign SBS trading venues, the Commission encourages market
participants to submit a request for exemptive relief under final Rule
833(b) if they seek to be exempt from the Commission's trade execution
requirement for their SBS transactions. This discussion should address
concerns about the potential unavailability of a Rule 833(b) exemption
to SBS foreign trading venues and the negative consequences that could
arise if SBS foreign trading venues are unable to obtain a Rule 833(b)
exemption.
---------------------------------------------------------------------------

\948\ See supra notes 597-599 and accompanying text.
\949\ In the Proposing Release, the Commission stated its
preliminary belief that ``the use of single-dealer platforms to
discharge any mandatory trading execution requirement'' would not
meet the proposed rule's requirements. See Proposing Release, supra
note 1, 87 FR at 28925.
\950\ See supra note 626.
---------------------------------------------------------------------------

We detail below cost estimates for specifics parts of the adopted
rules. Many of these cost estimates are based on the PRA estimates of
costs and burdens from section XVIII.\951\
---------------------------------------------------------------------------

\951\ In section XVIII infra, for purposes of the PRA, the
Commission estimates burdens applicable to a stand-alone SBSEF.
However, most if not all SBSEFs will be dually registered with the
CFTC as SEFs and thus will already be complying with relevant CFTC
rules that have analogs to rules in Regulation SE. Therefore, the
Commission's burden estimates are greater for stand-alone SBSEFs
than may actually take place for those already registered with the
CFTCs because of the effect of the CFTC's corresponding rules.
---------------------------------------------------------------------------

(a) Registration Requirements for SBSEFs and Form SBSEF
The registration provisions would impose costs on entities that
seek registration as SBSEFs. The Commission estimates that initial
filings on Form SBSEF by prospective SBSEFs seeking to register with
the Commission

[[Page 87259]]

pursuant to Rule 803 would result in aggregate initial costs of
$100,300 for prospective SBSEFs.\952\
---------------------------------------------------------------------------

\952\ $100,300 = 1,475 burden hours x $68/hour blended hourly
rate. The $68/hour blended hourly rate is the $59/hour blended
hourly rate computed by the CFTC and adjusted for CPI inflation
through Dec. 2022. The CFTC used the blended hourly wage to estimate
PRA costs associated with part 37. See infra section XVIII.D.2(a);
OMB, Supporting Statement for New and Revised Information
Collections: Core Principles and Other Requirements for Swap
Execution Facilities, OMB Control Number 3038-0074, Attachment A
(July 7, 2021), available at https://omb.report/icr/202107-3038-004/doc/113431800.pdf.
---------------------------------------------------------------------------

(b) Ongoing Compliance With Other Requirements That Are Similar to the
Remainder of Part 37
As discussed in section XVIII.D.2.b, the Commission estimates the
aggregate annual paperwork burden for SBSEFs to comply with all of the
SBSEF rules that have analogs in part 37 to be 1935 hours.\953\ These
burdens are estimated to impose aggregate ongoing annual costs of
$131,580 on SBSEFs.\954\
---------------------------------------------------------------------------

\953\ See infra section XVIII.D.2(b). This estimate excludes the
paperwork burdens associated with registration requirements for
SBSEFs and Form SBSEF and provisions of certain rules to be
discussed subsequently.
\954\ $131,580 = 1,935 burden hours x $68/hour blended hourly
rate. See supra note 952 (derivation of the $68/hour blended hourly
rate).
---------------------------------------------------------------------------

(c) Rule and Product Filing Processes for SBSEFs
The Commission estimates that the aggregate ongoing annual costs
incurred by all SBSEFs to prepare and submit rule and product filings
under Rules 804, 805, 806, and 807 (including the cover sheet) would be
$33,000.\955\
---------------------------------------------------------------------------

\955\ $33,000 = 300 hours x $110/hour blended hourly rate. The
$110/hour blended hourly rate is the $96.26/hour blended hourly rate
computed by the CFTC and adjusted for CPI inflation through Dec.
2022. The CFTC used the blended hourly rate to estimate PRA costs
associated with part 40. See infra section XVIII.D.3(a); OMB,
Supporting Statement for Information Collection Renewal: OMB Control
Number 3038-0093, Attachment A (July 10, 2020), available at https://omb.report/icr/202005-3038-001/doc/101274002.pdf. The platform ID
requirement on the submission cover sheet would not impose burdens
for obtaining a platform ID, because an SBSEF (whether registered or
exempt) is already required under Rule 903(a) of Regulation SBSR to
obtain an LEI to identify itself as its platform ID. See supra
section IV.E and n.140.
---------------------------------------------------------------------------

(d) Rules 809, 811, 819, 826, 829, 833, 834, and 835
The Commission estimates the aggregate ongoing annual costs
incurred by SBSEFs to comply with Rule 809 would be $604.\956\
---------------------------------------------------------------------------

\956\ $604 = 1.25 hours x $483/hour national hourly rate for an
attorney. The per-hour figure for an attorney is from SIFMA's
Management and Professional Earnings in the Securities Industry--
2013, as modified by Commission staff to adjust for inflation
(through Dec. 2022) and to account for an 1,800-hour work-year, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead. See infra section XVIII.D.3(b)(ii);
Supporting Statement for the Paperwork Reduction Act New Information
Collection Submission for Rule 3a68-2 (Interpretation of Swaps,
Security-Based Swaps, and Mixed Swaps) and Rule 3a68-4(c) (Process
for Determining Regulatory Treatment for Mixed Swaps), OMB Control
Number 3235-0685, Supporting Statement A (Dec. 23, 2021), available
at https://omb.report/icr/202112-3235-018/doc/117438500.pdf.
---------------------------------------------------------------------------

The Commission estimates the aggregate ongoing annual costs
incurred by SBSEFs to comply with requests for documents or information
pursuant to Rule 811(d) would be $88.\957\
---------------------------------------------------------------------------

\957\ $88 = 1.25 hour x $70/hour hourly rate for a financial
manager. The $70/hour hourly rate is the $65/hour hourly rate
computed by the CFTC and adjusted for CPI inflation through Dec.
2022. The CFTC used the hourly rate to estimate PRA costs associated
with part 1.6. See infra section XVIII.D.4(a); OMB, Supporting
Statement for New and Revised Information Collections: OMB Control
Number 3038-0033 (Oct. 29, 2021), available at https://omb.report/icr/202110-3038-001/doc/115991000.pdf.
---------------------------------------------------------------------------

The Commission estimates the aggregate ongoing annual costs
incurred by SBSEFs to comply with Rule 819(i) would be $27,142.\958\
---------------------------------------------------------------------------

\958\ $27,142 = 399.15 hours x $68/hour blended hourly rate. The
burdens associated with this rule are not different from burdens
associated with rules that have part 37 analogs. Thus, it would be
appropriate to apply the $68/hour blended hourly rate to estimate
the paperwork related costs associated with this rule. See infra
section XVIII.D.4(c). See also supra note 952 (derivation of the
$68/hour blended hourly rate).
---------------------------------------------------------------------------

The Commission estimates the aggregate ongoing annual costs
incurred by SBSEFs to comply with Rule 819(j) would be $1,208.\959\
---------------------------------------------------------------------------

\959\ $1,208 = 2.5 hours x $483/hour national hourly rate for an
attorney. See infra section XVIII.D.4. See also supra note 956
(derivation of the national hourly rate for an attorney).
---------------------------------------------------------------------------

The Commission estimates the aggregate ongoing annual costs
incurred by SBSEFs to update information required by Rule 826(f) would
be $162.\960\ The Commission estimates that interested parties would
incur aggregate one-time costs of $115,920 in the first year and
$77,280 in each subsequent year to submit exemption requests under one
or both paragraphs of Rule 833.\961\
---------------------------------------------------------------------------

\960\ $162 = 2 hours x $81/hour national hourly rate for a
compliance clerk. See infra section XVIII.D.4(f). The per-hour
figure for a compliance clerk is from SIFMA's Office Salaries in the
Securities Industry--2013, as modified by Commission staff to adjust
for inflation (through Dec. 2022) and to account for an 1,800-hour
work-year, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits, and overhead.
\961\ First year costs: $115,920 = 240 hours x $483/hour
national hourly rate for an attorney. Costs in each subsequent year:
$77,280 = 160 hours x $483/hour national hourly rate for an
attorney. See infra section XVIII.D.5(a). See also supra note 956
(derivation of the national hourly rate for an attorney).
---------------------------------------------------------------------------

The Commission estimates that SBSEFs and SBS exchanges would incur
aggregate one-time costs of $50,880 associated with drafting and
implementing rules to comply with Rules 834(b) and (c).\962\
---------------------------------------------------------------------------

\962\ $50,880 = 120 hours x $424/hour national hourly rate for a
compliance attorney. The estimate of 120 burden hours is based on
the Commission's estimate that five SBSEFs and three SBS exchanges
will incur paperwork burdens associated with Rules 834(b) and (c).
See infra section XVIII.D.4(g). The per-hour figure for a compliance
attorney is from SIFMA's Management and Professional Earnings in the
Securities Industry--2013, as modified by Commission staff to adjust
for inflation (through Dec. 2022) and to account for an 1,800-hour
work-year, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits, and overhead.
---------------------------------------------------------------------------

The Commission estimates that SBSEFs and SBS exchanges would incur
aggregate ongoing annual costs of $680 to comply with Rules 834(d),
834(e), and 834(f).\963\
---------------------------------------------------------------------------

\963\ $680 = 10 hours x $68/hour blended hourly rate. Further,
the costs incurred by SBSEFs = 5 (number of SBSEFs) x 1.25 hours per
SBSEF x $68/hour blended hourly rate = $425. The burdens associated
with this rule are not different from burdens associated with rules
that have part 37 analogs. Thus, it is appropriate to apply the $68/
hour blended hourly rate to estimate the paperwork related costs
associated with this rule. See infra section XVIII.D.4(g). See also
supra note 952 (derivation of the $68/hour blended hourly rate).
---------------------------------------------------------------------------

The Commission estimates that SBSEFs and SBS exchanges would incur
aggregate one-time costs of $1,088 to comply with Rule 834(g).\964\
---------------------------------------------------------------------------

\964\ $1,088 = 16 hours x $68/hour blended hourly rate. The
burdens associated with this rule are not different from burdens
associated with rules that have part 37 analogs. Thus, it is
appropriate to apply the $68/hour blended hourly rate to estimate
the paperwork related costs associated with this rule. See infra
section XVIII.D.4(g). See also supra note 952 (derivation of the
$68/hour blended hourly rate).
---------------------------------------------------------------------------

The Commission estimates that SBSEFs would incur aggregate ongoing
annual costs of $21,735 to comply with Rule 835.\965\
---------------------------------------------------------------------------

\965\ $21,735 = 45 hours x $483/hour national hourly rate for an
attorney. See infra section XVIII.D.5(b). See also supra note 956
(derivation of the national hourly rate for an attorney).
---------------------------------------------------------------------------

SBSEFs likely would incur costs to comply with the financial
resources requirement of Rule 829(b). Assuming that SBSEFs satisfy this
requirement by holding financial resources in the form of their own
capital pursuant to Rule 829(c)(1), the Commission estimates that
SBSEFs would incur an aggregate annual cost of capital of $35,436.\966\

[[Page 87260]]

SBSEFs could lower this cost if their capital consists of financial
assets that generate a return that would serve to offset the cost of
capital. However, this cost mitigation is potentially limited by Rule
829(d), which would require an SBSEF to include among the financial
resources it holds a certain amount of unencumbered, liquid financial
assets (i.e., cash and/or highly liquid securities),\967\ that tend to
generate little or no return.
---------------------------------------------------------------------------

\966\ The Commission estimates the financial resources that
SBSEFs would need to hold pursuant to Rule 829(b) as their projected
operating costs. See Rule 829(b). Further, the Commission estimates
SBSEFs' projected operating costs as the sum of the aggregate
ongoing annual costs incurred by SBSEFs to comply with Regulation
SE. Thus, SBSEFs' estimated projected operating costs = $131,580
(ongoing compliance with other requirements that are similar to the
remainder of part 37) + $33,000 (rule and product filing processes
by SBSEFs) + $604 (Rule 809) + $88 (Rule 811(d)) + $27,142 (Rule
819(i)) + $1,208 (Rule 819(j)) + $162 (Rule 826(f)) + $425 (Rules
834(d), (e), and (f)) + $21,735 (Rule 835) = $215,943. Thus, the
Commission estimates that SBSEFs would hold $215,943 in the form of
their own capital to comply with Rule 829(b). The Commission
estimates SBSEFs' cost of capital to be 16.41%. See supra note 896
(describing how the cost of capital is estimated). SBSEFs' aggregate
annual cost of capital = $215,943 x 16.41% = $35,436. The Commission
acknowledges that there is uncertainty associated with this
estimate. The estimate does not account for the fact that SBSEFs may
use reasonable discretion in determining the methodologies used to
calculate projected operating costs and wind down costs, pursuant to
Rule 829(e). Depending on how SBSEFs exercise this reasonable
discretion, the resulting methodologies could yield projected
operating costs and in turn, required financial resources, that may
be higher or lower than the Commission's estimate.
\967\ The CFTC's experience overseeing SEFs would appear to
support the belief that SBSEFs would hold unencumbered, liquid
financial assets rather than obtain a line of credit to comply with
Rule 829(d). In a previous rulemaking, the CFTC noted that most SEFs
satisfy the liquidity requirement of Sec. 37.1303 (the analog of
Rule 829(d)) through maintaining liquid assets rather than obtaining
a line of credit. See CFTC, Swap Execution Facilities, 86 FR 9224,
9242 n.247 (Feb. 11, 2021) (``2021 SEF Amendments Adopting
Release'').
---------------------------------------------------------------------------

(e) Assessment Costs
The Commission estimates that 86 entities likely would incur
assessment costs as a result of Rule 832, based on a staff analysis of
counterparties to U.S. single-name CDS for the 12-month period from
October 2021 to September 2022. Such costs would be related primarily
to the identification of the counterparty status and origination
location of the transaction to determine whether the trade execution
requirement would apply. Market participants would request
representations from their transaction counterparties to determine the
U.S.-person status of their counterparties. In addition, if the
transaction is guaranteed by a U.S. person, the guarantee would be part
of the trading documentation and, therefore, the existence of the
guarantee would be a readily ascertainable fact. Similarly, market
participants would be able to rely on their counterparties'
representations as to whether a transaction is arranged, negotiated, or
executed by a person within the United States. Therefore, the
assessment costs associated with Rule 832 should be limited to the
costs of establishing a compliance policy and procedure of requesting
and collecting representations from trading counterparties and
maintaining the collected representations as part of the market
participants' recordkeeping procedures. Such assessment costs would be
approximately $19,320 per entity.\968\ Requesting and collecting
representations would be part of the standardized transaction process
reflected in the policies and procedures regarding SBS transactions and
trading practices and should not result in separate assessment costs.
---------------------------------------------------------------------------

\968\ $19,320 = 40 hours x $483/hour national hourly rate for an
attorney. This estimate is based on an estimated 40 hours of in-
house legal or compliance staff's time to establish a procedure of
requesting and collecting representations from trading
counterparties, taking into account that such representations may be
built into a form of standardized trading documentation. See supra
note 956 (derivation of the national hourly rate for an attorney).
---------------------------------------------------------------------------

The Commission also considers the likelihood that market
participants could implement systems to keep track of counterparty
status for purposes of future trading of SBS that are similar to, if
not the same as, the systems implemented by market participants for
purposes of assessing SBS dealer or major SBS participant status.
Implementation of such a system would involve one-time programming
costs of $15,758 per entity.\969\ Therefore, the Commission estimates
the total one-time costs per entity associated with Rule 832 could be
$35,078 and the aggregate one-time costs could be $3,016,708.\970\ To
the extent that market participants have incurred costs relating to
similar or the same assessments with respect to counterparty status and
transaction location for other Title VII requirements, their assessment
costs with respect to Rule 832 may be less.
---------------------------------------------------------------------------

\969\ This is based on an estimate of the time required for a
programmer analyst to modify the software to track the covered
person status of a counterparty, including consultation with
internal personnel, and an estimate of the time such personnel would
require to ensure that these modifications conformed to the
definition of ``covered person'' (as defined in Rule 832). $15,758 =
(2 hours x $424/hour national hourly rate for a compliance attorney)
+ (4 hours x $360/hour national hourly rate for a compliance
manager) + (40 hours x $280/hour national hourly rate for a
programmer analyst) + (4 hours x $266/hour national hourly rate for
a senior internal auditor) + (2 hours x $603/hour rate for a Chief
Financial Officer). The per-hour figures for compliance attorney,
compliance manager, programmer analyst, and senior internal auditor
are from SIFMA's Management & Professional Earnings in the
Securities Industry--2013, as modified by Commission staff to adjust
for inflation (through Dec. 2022) and to account for an 1,800-hour
work-year, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits, and overhead. The hourly rate for a Chief
Financial Officer is the $473 hourly rate for the same position used
in the Cross-Border Adopting Release (see 78 FR 31140 n.1425) and
adjusted for inflation through Dec. 2022.
\970\ Total one-time costs per entity = $19,320 (compliance
policy and procedure) + $15,758 (systems) = $35,078. Aggregate one-
time costs = 86 entities x $35,078 = $3,016,708.
---------------------------------------------------------------------------

(f) Structured Data and Electronic Filing Costs
As mentioned previously, the Commission will require many of the
disclosures required under Regulation SE to be provided via EDGAR in a
structured data language. SBSEFs will likely incur limited costs to
comply with the proposed requirement in Rule 825(c)(3) to publish Daily
Market Data Reports using the most recent versions of the associated
XML schema and PDF renderer as published on the Commission's website.
Because SBSEFs are required to use structured data to fulfill their
reporting requirements under Regulation SBSR, the compliance cost
associated with the Rule 825(c)(3) requirement will be limited to the
cost prospective SBSEF registrants will incur to update their systems
to incorporate the Commission's XML schema for Daily Market Data
Reports.\971\ Such costs are included among the costs for prospective
SBSEF registrants in making limited changes to their systems, policies,
and procedures to comply with proposed SEC rules that differ slightly
from analogous CFTC rules, as discussed in further detail above.\972\
---------------------------------------------------------------------------

\971\ See 17 CFR 242.907(a)(2) (requiring information to be
submitted to SDRs in an ``open-source structured data format that is
widely used by participants'').
\972\ See supra note 920 and accompanying text.
---------------------------------------------------------------------------

With respect to the Inline XBRL requirements for various
disclosures required under Regulation SE, SBSEFs will incur initial
Inline XBRL implementation costs (such as the cost of training in-house
staff to prepare filings in Inline XBRL, and the cost to license Inline
XBRL filing preparation software from vendors) and ongoing Inline XBRL
compliance burdens that will result from the tagging requirements,
because prospective SBSEF registrants are not currently subject to
Inline XBRL requirements. The custom XML requirements under Regulation
SE will not impose these costs on SBSEFs, because SBSEFs will have the
option of complying with those requirements by completing a fillable
web form rather than structuring the disclosures in custom XML
themselves. Also, as discussed in greater detail below, the Inline XBRL
implementation costs could be mitigated to some extent, because six of
the seven SEFs that list index CDS for trading (i.e., the pool of
likely SBSEF applicants) have parent or affiliate entities that make
filings in Inline XBRL, which raises the

[[Page 87261]]

possibility that some (if not most) SBSEFs might be able to take
advantage of the knowledge of Inline XBRL possessed by their parent or
affiliate entities.
Further, the compliance costs associated with the structured data
requirements, as adjusted for inflation, will likely decrease over
time. SBSEFs will likely comply with structuring requirements more
efficiently after gaining experience over repeated filings, though such
an effect will likely be diminished for affected entities that already
have experience structuring similar data in other documents. Third-
party vendors of structured data compliance software or services may
decrease the prices of their products over time; the XBRL compliance
costs reported in the 2018 AICPA survey of smaller operating companies
reflect such a trend, as they represented a 45% decline in average cost
and a 69% decline in median cost from 2014.\973\
---------------------------------------------------------------------------

\973\ AICPA, XBRL Costs for Small Companies Have Declined 45%
since 2014 (2018), available at https://us.aicpa.org/content/dam/aicpa/interestareas/frc/accountingfinancialreporting/xbrl/downloadabledocuments/xbrl-costs-for-small-companies.pdf. This
survey was limited to operating companies, and was conducted before
the transition from XBRL to Inline XBRL and the implementation of
cover page tagging requirements for periodic reports.
---------------------------------------------------------------------------

In addition to costs associated with structured data requirements,
because prospective SBSEF registrants are not currently subject to
EDGAR requirements, hey will incur a one-time compliance burden of
submitting a Form ID as required by Rule 10(b) of Regulation S-T.\974\
The aforementioned costs are included among the costs for prospective
SBSEF registrants in making limited changes to their systems, policies,
and procedures to comply with proposed SEC rules that differ slightly
from analogous CFTC rules, as discussed in further detail above.\975\
---------------------------------------------------------------------------

\974\ See 17 CFR 232.10(b).
\975\ See supra note 920 and accompanying text.
---------------------------------------------------------------------------

As noted above, we are requiring SBSEFs to submit rule and product
filings in unstructured format using EFFS, rather than structuring the
filings and submitting them via EDGAR.\976\ As a result of this change
from the proposal, SBSEFs will not incur the compliance costs
associated with applying Inline XBRL tags to their rule and product
filings. We agree with one commenter who noted that an Inline XBRL
requirement would cause SBSEFs to incur related compliance costs,
although we do not agree that such costs would be so substantial as to
serve as a potential market entry deterrent, or would create an unlevel
playing field whereby national securities exchanges would have a
competitive advantage over SBSEFs due to these discrepant costs.
Rather, we are requiring rule and product filings to be filed through
EFFS in unstructured format, because we believe the alleviation of
compliance burdens resulting from the absence of a structuring
requirement merits the lesser volume of machine-readable data,
especially in light of the significant volume of structured SBSEF data
available pursuant to other Regulation SE provisions.
---------------------------------------------------------------------------

\976\ See supra section XVII.C.2.
---------------------------------------------------------------------------

D. Effects on Efficiency, Competition, and Capital Formation

The new rules and amendments would likely affect competition,
capital formation, and efficiency in various ways discussed below.
1. Competition
As discussed earlier, currently, the SBS market is dominated by a
small group of SBS dealers.\977\ A mandatory clearing determination by
the Commission, followed by a MAT determination by one or more SBSEFs,
should help foster greater competition in the trading of SBS by
promoting greater order interaction and increasing participation on
SBSEFs. The final rules provide a framework for allowing a number of
trading venues to register as SBSEFs and thus more effectively compete
for business in SBS. Furthermore, Rule 827 is designed to promote
competition generally by prohibiting an SBSEF from adopting any rules
or taking any actions that unreasonably restrain trade or impose any
material anticompetitive burden on trading or clearing. Additionally,
rules that improve access to SBSEFs by market participants (e.g., Rule
819(c)) could increase participation and competition in liquidity
provision in the SBS market.\978\ Rules that improve regulatory
oversight, market integrity, and market predictability on SBSEFs and
rules that reduce the risk of trading disruption on SBSEFs likely would
increase market participants' confidence in the soundness of
SBSEFs.\979\ To the extent that greater confidence in the soundness of
SBSEFs increases participation by liquidity providers on SBSEFs,
competition in liquidity provision could increase. To the extent that
increased competition in liquidity provision reduces the price of
liquidity provision (e.g., bid-ask spread), market participants could
benefit in terms of lower transaction costs.
---------------------------------------------------------------------------

\977\ See supra section XVII.B.2.
\978\ See supra sections XVII.C.1 (discussing improved access
and competition as an overarching benefit of the rules and
amendments) and XVII.C.2 (discussing how rules that mitigate
conflicts of interest between an SBSEF or SBS exchange and its
members could help ensure access to SBSEFs and SBS exchanges and in
turn increase competition in liquidity provision and lower
transaction costs).
\979\ See infra section XVII.D.2.
---------------------------------------------------------------------------

Rules 815(f) and 815(g), by reducing the risk of information
leakage and protecting market participants' anonymity for an SBS that
is anonymously executed on an SBSEF and intended to be cleared, could
increase participation on SBSEFs. This in turn could increase
competition in liquidity provision, liquidity, and efficiency in the
SBS market.\980\
---------------------------------------------------------------------------

\980\ See supra section XVII.C.1 (discussing improved access and
competition as an overarching benefit).
---------------------------------------------------------------------------

Rule 806(a)(5), which requires an SBSEF to explain the anticipated
benefits and potential anticompetitive effects on market participants
of a proposed new rule or rule amendment, potentially could help foster
a competitive SBS market because it could prompt SBSEFs to consider the
positive as well as negative aspects of their proposed rules or rule
amendments with respect to competition.\981\
---------------------------------------------------------------------------

\981\ See supra section XVII.C.2 (discussing benefits associated
with rule and product filings).
---------------------------------------------------------------------------

As discussed earlier, Rules 819(c) and 819(e) would promote
competition among entities that act as third-party service providers to
SBSEFs. To the extent that increased competition among third-party
service providers incentivizes them to offer cheaper, higher quality
services to SBSEFs thereby lowering their costs, market participants
that are SBSEF members could benefit if the SBSEFs pass on the cost
savings in the form of lower fees to their members.\982\ Lower fees for
SBSEF members would help reduce the overall costs of trading on SBSEFs
and increase the efficiency of SBS trading.
---------------------------------------------------------------------------

\982\ See supra section XVII.C.1 (discussing improved access and
competition as an overarching benefit).
---------------------------------------------------------------------------

2. Capital Formation
Regulation SE could promote capital formation by helping to improve
regulatory oversight, market integrity, and market predictability.
Regulation SE requires, among other things, that SBSEFs maintain an
audit trail and automated trade surveillance system; conduct real-time
market monitoring; establish and enforce rules for information
collection; and comply with reporting and recordkeeping requirements.
These requirements are designed to provide an SBSEF with sufficient
information to oversee trading on its market, including detecting and

[[Page 87262]]

deterring abusive trading practices.\983\ The audit trail and
recordkeeping and reporting requirements, by providing the Commission
access to information about SBSEFs, will increase the Commission's
ability to assess risks in the SBS market and to oversee the market,
which all else being equal should reduce the amount of risky or abusive
behavior in the SBS market.\984\ Further, Rule 831, the requirements
relating to the CCO, would promote regulatory compliance on SBSEFs and
the SBS market generally.\985\ In addition, Regulation SE provides for
various safeguards to help promote market integrity, including Rule
819(c) relating to impartial access to the SBSEF \986\ and Rule 830
relating to systems safeguards. Rule 812(a) would help to improve
predictability in the market by providing that a transaction entered
into on or pursuant to the rules of an SBSEF shall not be void,
voidable, subject to rescission, otherwise invalidated, or rendered
unenforceable as a result of a violation by the SBSEF of the provisions
of section 3D of the SEA or the Commission's rules thereunder. Any
resulting increase in regulatory oversight, market integrity, and
market predictability likely would increase market participants'
confidence in the soundness of SBSEFs, which in turn could spill over
into increased confidence in the soundness of the SBS market more
broadly. Such increased confidence could lead to the greater use of
SBS, particularly those traded on SBSEFs, by corporate entities to
hedge their business risks and investors to hedge their portfolio risks
with respect to positions in underlying securities. To the extent that
corporate entities can improve their hedging efficiency with SBS, they
may divert resources from precautionary savings into productive assets,
thereby promoting capital formation. To the extent that investors can
improve their hedging efficiency with SBS, they may be more willing to
invest in the underlying securities, which should facilitate capital
raising and formation by issuers. Therefore, the adopted rules would
help encourage capital formation.
---------------------------------------------------------------------------

\983\ See Rules 819, 821, 822, 826 and supra section XVII.C.1
(discussing improved oversight of trading by SBSEFs as an
overarching benefit of the rules and amendments).
\984\ See supra section XVII.C.1 (discussing improved Commission
oversight as an overarching benefit of the rules and amendments).
\985\ See supra section XVII.C.2 (discussing the benefits
associated with Rule 831).
\986\ See supra note 978.
---------------------------------------------------------------------------

Also, by reducing the risk of trading disruptions on SBSEFs, Rules
829 and 830 could increase market participants' confidence in the
soundness of SBSEFs, which in turn could lead to the greater use of SBS
traded on SBSEFs thereby promoting capital formation as discussed
above.
3. Efficiency
The general approach of harmonizing as closely as practicable with
analogous CFTC rules for SEFs, unless a reason exists to do otherwise
in a particular area, likely will generate cost efficiencies and
reduced burdens for SBSEF registrants that likely would be registered
SEFs that have established systems and policies and procedures to
comply with CFTC rules.\987\ Further, increased competition among
third-party service providers, as a result of Rules 819(c) and 819(e),
could lower SBSEFs' costs and bring about greater efficiency in their
operation and SBS trading.\988\
---------------------------------------------------------------------------

\987\ For example, the Commission's election to model Rules 804
through 810 closely on analogous rules in part 40 of the CFTC's
rules that apply to SEFs (and other registered entities) would
impose minimal burdens on dually registered SEF/SBSEFs while
obtaining similar regulatory benefits as the CFTC rules. In some
cases, where a new rule or rule amendment affects both the swap and
SBS business of a dually registered entity, the same or a very
similar filing could be made to each of the CFTC and SEC, in lieu of
having to make different filings to support the same rule change.
See supra section XVII.C.2 (discussing the benefits associated with
rule and product filings).
\988\ See supra section XVII.D.1.
---------------------------------------------------------------------------

The automation and systems development associated with the
regulation of SBSEFs could provide SBS market participants with new
platforms and tools to execute and process transactions in SBS more
rapidly and at a lower expense per transaction. Such increased
efficiency could enable members of the SBSEF to handle increased
volumes of SBS with greater efficiency and timeliness.\989\
---------------------------------------------------------------------------

\989\ See supra section XVII.C.1 (discussing improved automation
as an overarching benefit of the rules and amendments).
---------------------------------------------------------------------------

The requirements with respect to pre-trade price transparency could
lead to more efficient pricing in the SBS market. The rules are
designed to increase pre-trade price transparency for SBS, which should
aid market participants in evaluating current market prices for SBS,
thereby furthering more efficient price discovery. Increased pre-trade
price transparency, coupled with increased competition in liquidity
provision as discussed above,\990\ could decrease the spread in quoted
prices and lead to higher efficiency in the trading of SBS.
---------------------------------------------------------------------------

\990\ See supra section XVII.D.1.
---------------------------------------------------------------------------

The Commission recognizes the possibility that pre-trade price
transparency could cause market participants to reveal more information
about trading interest than they believe would be economically
desirable. If market participants consider that pre-trade price
transparency requirements are too burdensome and choose not to
participate in the market, market efficiency could be reduced insofar
as these market participants forgo any potential economic benefits that
may have resulted from transacting in the SBS market. However, several
factors mitigate such concerns. First, pursuant to Rule 815(c)(2), an
SBSEF may offer any execution method for Permitted Transactions. Thus,
a market participant engaging in a Permitted Transaction may choose to
use an execution method that reveals the desired, or at least
preferred, amount of information about trading interest. Second,
pursuant to Rule 815(a)(2), an SBSEF will be required to offer two
execution methods for Required Transactions (limit order book and RFQ-
to-3). Thus, market participants have flexibility in the degree of pre-
trade transparency they wish to employ, which should attenuate
potential concerns associated with revealing too much information about
trading interest.\991\ Rules 829 and 830 may reduce the risk of trading
disruptions on SBSEFs that may otherwise prevent market participants
from impounding information into SBS prices through market activity
(e.g., order submission), and thus could improve the price efficiency
in the SBS market.
---------------------------------------------------------------------------

\991\ See supra section XVII.C.1 (discussing the different
degrees of pre-trade transparency associated with limit order book
and RFQ-to-3).
---------------------------------------------------------------------------

E. Reasonable Alternatives

The Commission considered a number of alternatives when finalizing
the rules and amendments in this release.
1. Abbreviated Registration Procedures for CFTC-Registered SEFs
Several commenters suggest that the Commission provide abbreviated
registration procedures for CFTC-registered SEFs either by using the
Commission's exemptive authority to provide a streamlined registration
process for such applicants \992\ or by permitting such applicants to
register utilizing their current documentation filed pursuant to the
requirements of Form SEF with an accompanying addendum reflecting only
those changes necessary to fulfill the specific requirements of
proposed Regulation

[[Page 87263]]

SE, in lieu of filing a new Form SBSEF.\993\ Some of these commenters
believe that a streamlined registration process would ease the burden
of new requirements imposed on potential dual-registrants, be more
efficient, lower registration costs, encourage the entry of market
participants, and expedite the establishment and operation of
SBSEFs.\994\ The Commission acknowledges that the alternative could
potentially have such beneficial effects. However, the adopted approach
is preferable to the alternative. As a general matter, the SBSEF
registration process is intended for all applicants. While entities
that will seek to register as SBSEFs are likely to be CFTC-registered
SEFs,\995\ the registration process should nevertheless address the
possibility that some applicants might not be CFTC-registered SEFs.
Requiring all applicants to follow the same registration process will
provide a level playing field for all applicants by avoiding conferring
a competitive advantage on applicants that are CFTC-registered SEFs.
This in turn may encourage the entry of additional market participants.
As discussed in section III.A.2., the adopted approach supports
consistency in the review by the Commission and its staff of
applications for registration of SBSEFs and avoids introducing bias or
prejudice into the Commission's review. Such consistency could in turn
increase the efficiency of the review process and help expedite the
establishment and operation of SBSEFs.
---------------------------------------------------------------------------

\992\ See SIFMA AMG Letter, supra note 18, at 5; Bloomberg
Letter, supra note 18, at 11; WMBAA Letter, supra note 18, at 3; ICE
Letter, supra note 18, at 5.
\993\ See ICE Letter, supra note 18, at 5.
\994\ See SIFMA AMG Letter, supra note 18, at 5; Bloomberg
Letter, supra note 18, at 11; WMBAA Letter, supra note 18, at 3.
\995\ See supra section XVII.B.4.
---------------------------------------------------------------------------

2. Shorten Review Period for Self-Certified Product Listing
In connection with the ten-business-day review period under
Proposed Rule 804(a)(2), two commenters recommend a shorter review
period of one business day to harmonize with the CFTC's approach.\996\
Alternatively, one of the commenters suggests a two-business-day review
period.\997\ According to these commenters, a shorter review period
will allow market operators to meet participants' demands to transact
on regulated platforms in a reasonable period of time; accommodate
participants' needs to hedge risk in a timely manner; and increase the
competitive benefit and innovation incentive to SBSEFs to develop new
products by making it less attractive for other SBSEFs to list ``look
alike'' products. In finalizing Rule 804(a)(2), the Commission has
considered the trade-off between the benefits of a shorter review
period as described by the commenters and the benefits of having
sufficient time to review a new product filing and to issue a stay if
warranted. The ten-business-day review period set forth in final Rule
804(a)(2) strikes an appropriate balance between these sets of
benefits. To the extent that the ten-business-day review period limits
market operators' ability to meet participants' demands to transact on
regulated platforms in a reasonable period of time, that limitation is
appropriate in light of the benefits of having sufficient time to
review a new product filing and to issue a stay if warranted. While a
shorter review period may accommodate market participants' need to
hedge risk in a timely manner, these market participants also could
hedge their risk during the ten-business-day review period, albeit in
the OTC SBS market. The Commission does not believe the additional
hedging benefit, if any, associated with a shorter review period is
sufficient to justify adopting this alternative. Rule 804 may not
necessarily limit the competitive benefit and innovation incentive to
SBSEFs to develop new products. SBSEFs that wish to list ``look alike''
products also will face a ten-business-day review period if they list
such products pursuant to Rule 804.\998\ Thus, such SBSEFs will lag
behind the SBSEF that first lists a given SBS, which could capture a
significant portion, if not most, of the revenues associated with the
trading of that product. Even if the 10-day review period were to
reduce the first-to-market competitive advantage of an SBSEF that first
lists a given SBS, the extent of such an advantage may vary
considerably based on other factors in the SBSEF market. Ultimately,
the need for the Commission to have sufficient time to review a new
product before it is listed and thereby help ensure it meets regulatory
requirements aimed to protect investors and support fair and efficient
markets justifies this potential competitive effect. Accordingly, the
adopted approach is preferable to the alternative.
---------------------------------------------------------------------------

\996\ See WMBAA Letter, supra note 18, at 4; ICE Letter, supra
note 18, at 2.
\997\ See WMBAA Letter, supra note 18, at 4.
\998\ In this context, SBSEFs that wish to list products
expeditiously likely will not choose to list them pursuant to Rule
805, which requires a 45-day review period that could be extended
for an additional 45 days. See Rules 805(c) and (d).
---------------------------------------------------------------------------

3. Incorporate CFTC's Impartial Access Requirement Guidance
Several commenters urge the Commission to incorporate the CFTC's
impartial access requirement guidance with respect to access to SBSEFs
into the text of Rule 819. According to these commenters, such an
alternative would provide market participants with guidance and clarity
regarding how Proposed Rule 819(c) will be interpreted and applied in
practice. The commenters believe that the alternative would increase
competition, transparency, and liquidity in the SBS markets; lower
transaction costs through increased competition; and result in greater
market-led innovation in the SBS markets.\999\ The Commission
acknowledges that the alternative could have beneficial effects on
competition, transaction costs, transparency, liquidity, and innovation
as the commenters asserts. However, the alternative raises several
concerns. First, if, in the future, the CFTC's impartial access
requirement guidance were to be modified, the regulatory regime for
SEFs might differ from that for SBSEFs. This in turn could limit
harmonization with the CFTC's regulatory regime and potentially
increase compliance burdens for market participants if they have to
comply with different requirements for SEFs and SBSEFs.
---------------------------------------------------------------------------

\999\ See Bloomberg Letter, supra note 18, at 3, 16; Citadel
Letter, supra note 18, at 6-7; MFA Letter, supra note 18, at 2, 9-
11; SIFMA AMG Letter, supra note 18, at 4.
---------------------------------------------------------------------------

Second, as discussed in section VI.B.3 above, efforts to undermine
the principle of impartial access may take myriad forms over time. It
is preferable to emphasize the principle of impartial access in the
rule text as an affirmative requirement with which to comply. The
adopted approach would incentivize SBSEFs to constantly review their
practices to ensure compliance with the principle of impartial access.
The Commission also considered the alternative of incorporating into
the text of Rule 819 a non-exclusive list of the means that may violate
the principle of impartial access. This alternative would raise the
same concerns discussed above.
The adopted approach may nevertheless generate the beneficial
effects suggested by the commenters. Rule 819(c) is broad enough to
permit market participants to use the same practices that they are
using pursuant to the CFTC guidance. Consistent with the Commission's
belief that prospective SBSEF registrants are likely to be CFTC-
registered SEFs that are active in the index CDS market,\1000\
prospective SBSEF registrants likely will use the systems, policies,
and procedures that were created to comply with the CFTC

[[Page 87264]]

guidance to comply with Rule 819(c) in order to limit their compliance
burdens. The Commission is adopting Rule 815(g), which specifies that
SBSEFs shall establish and enforce rules that provide that a security-
based swap that is intended to be cleared at the time of the
transaction, but is not accepted for clearing at a registered clearing
agency, shall be void ab initio. This rule would obviate the need for
breakage agreements for SBS that are intended to be cleared, one of the
items prohibited by the CFTC's guidance.\1001\ As discussed in section
XVII.C, Regulation SE may bring several benefits to the SBS market
including, among other things, increased competition,\1002\
transparency, and liquidity; reduced transaction costs; \1003\ and
market innovation in the form of new platforms and tools to execute and
process SBS transactions more efficiently.\1004\ In light of the above,
the adopted approach is preferable to the alternative.
---------------------------------------------------------------------------

\1000\ See supra section XVII.B.
\1001\ See Division of Clearing and Risk, Division of Market
Oversight and Division of Swap Dealer and Intermediary Oversight
Guidance on Application of Certain Commission Regulations to Swap
Execution Facilities, CFTC (Nov. 14, 2013), n.3, available at
https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/dmostaffguidance111413.pdf.
\1002\ See supra sections XVII.C.1 (discussing improved access
and competition as an overarching benefit of the rules and
amendments) and XVII.D.1 (discussing how the new rules and
amendments would likely affect competition).
\1003\ See supra section XVII.C.1 (discussing improved
transparency, increased liquidity, and reduced transaction costs as
overarching benefits of the rules and amendments).
\1004\ See supra section XVII.C.1 (discussing improved
automation as an overarching benefit of the rules and amendments).
---------------------------------------------------------------------------

4. Harmonize With CFTC's STP Requirements
In connection with Proposed Rule 823, several commenters recommend
that the Commission harmonize with CFTC's STP requirements by
establishing STP standards, incorporating relevant CFTC guidance, and
prohibiting breakage agreements for SBS that are intended to be
cleared.\1005\ The commenters suggest the alternative could reduce
market, credit, and operational risks; facilitate hedging activity;
avoid complexity and costs; increase competition; promote trading on
SBSEFs and electronic trading; and increase transparency, liquidity,
and fairness in the SBS markets.\1006\ The Commission acknowledges that
the alternative could have beneficial effects as suggested by the
commenters. However, the alternative raises several concerns. First,
if, in the future, the CFTC's staff guidance were to be modified, the
regulatory regime for SEFs might differ from that for SBSEFs. This in
turn could limit harmonization with the CFTC's regulatory regime and
potentially increase compliance burdens for market participants if they
have to comply with different requirements for SEFs and SBSEFs. Second,
the timeframes for a clearinghouse to accept or reject a trade for
clearing set forth in the CFTC staff guidance could become outdated
with advances in technology.\1007\ If that were to occur, changing
those timeframes would be more difficult if they were included as part
of Regulation SE, or even as Commission guidance included as part of
this release. Any delays in changing those timeframes could mean that
market participants would not be able to benefit from any reductions in
market, credit, and operational risks associated with the technological
advances that render obsolete the timeframes set forth in the CFTC
staff guidance.
---------------------------------------------------------------------------

\1005\ See Citadel Letter, supra note 18, at 6; MFA Letter,
supra note 18, at 11-12; SIFMA AMG Letter, supra note 18, at 9.
\1006\ See Citadel Letter, supra note 18, at 5; MFA Letter,
supra note 18, at 12; SIFMA AMG Letter, supra note 18, at 9.
\1007\ CFTC staff guidance on STP states that ``[derivatives
clearing organizations] clearing swaps that are executed
competitively on or subject to the rules of a . . . SEF and are
accepting or rejecting trades within 10 seconds after submission are
compliant with the timing standard of Regulation 39.12(b)(7).'' See
CFTC 2013 STP Guidance, supra note 273.
---------------------------------------------------------------------------

The adopted approach may nevertheless generate the beneficial
effects suggested by the commenters. As discussed in section VI.F.3,
Rule 823(c) is broad enough to permit market participants to use the
same practices that they are using pursuant to the CFTC guidance.
Consistent with the Commission's belief that prospective SBSEF
registrants are likely to be CFTC-registered SEFs that are active in
the index CDS market,\1008\ prospective SBSEF registrants likely will
use the systems, policies, and procedures that were created to comply
with the CFTC guidance to comply with Rule 823(c) in order to limit
their compliance burdens. Further, to comply with the impartial access
requirements of Rule 819(c), registered SBSEFs would, among other
things, avoid acts that purposefully delay clearing submission in order
to favor certain market participants over others. Lastly, the
Commission is adopting Rule 815(g), which specifies that SBSEFs shall
establish and enforce rules that provide that a security-based swap
that is intended to be cleared at the time of the transaction, but is
not accepted for clearing at a registered clearing agency, shall be
void ab initio. This rule would obviate the need for breakage
agreements for SBS that are intended to be cleared. Accordingly, the
adopted approach is preferable to the alternative.
---------------------------------------------------------------------------

\1008\ See supra section XVII.B.
---------------------------------------------------------------------------

5. No Block Trade Exception
In finalizing Regulation SE, the Commission considered the
alternative of not adopting a block trade exception from the Required
Transaction requirement in Rule 815(a)(2) for credit SBS. This
alternative could extend the benefits of increased pre-trade
transparency \1009\ to SBS transactions of a larger notional size.
However, this alternative would deviate from the CFTC's approach to
block trades and thus reduce harmonization with the CFTC regime for
swaps. In addition, as one commenter expressed, under this alternative,
market participants would have difficulty executing, or would be unable
to execute, large bona fide trades, since they would be required to do
so only through the order book. This would increase the cost of trading
and hedging, the commenter says, which could reduce participation in
certain markets, resulting in less liquidity and increased
volatility.\1010\ This commenter asserts that exempting block trades
from order book and RFQ execution requirements is critical to the
functioning of the SBS markets, particularly to execute large trades
without affecting price.\1011\ Another commenter states that the
proposed exception for block trades would provide flexibility for
market participants executing SBS transactions of a significantly large
size and mitigate the risks of information leakage and impairment of
market liquidity.\1012\ Another commenter agrees with the Proposing
Release's assessment that the block exception to the required methods
of execution balances the promotion of price competition and all-to-all
trading against the potential costs to the market participants who wish
to trade large orders, the importance of which they note is more acute
in the SBS market, which is a smaller and less liquid market than the
swap market.\1013\
---------------------------------------------------------------------------

\1009\ See supra section XVII.C.1 (discussing that increased
pre-trade transparency could increase price competition and price
efficiency; improve liquidity; reduce transaction costs; and
facilitate execution quality analysis).
\1010\ See MFA Letter, supra note 18, at 5-6.
\1011\ Id.
\1012\ See ICI Letter, supra note 18, at 10.
\1013\ See Bloomberg Letter, supra note 18, at 14.
---------------------------------------------------------------------------

The Commission agrees with commenters that a block-trade exception
is appropriate for credit SBS, not only to maintain harmonization with
the CFTC regime for swaps but also to

[[Page 87265]]

facilitate trading of credit SBS. This approach, which is consistent
with the approach of the CFTC for swaps, will be especially important
in the smaller, less liquid credit SBS markets if and when a clearing
determination has been made for one or more SBS. A block-trade
exception for credit SBSs subject to the trade-execution requirement,
provided that ``block trade'' is appropriately defined for those SBSs,
can help ensure that large trades are not significantly more difficult
and costly to execute because of the risks posed by information leakage
and the potential for adverse price movement, which could significantly
impair liquidity in the markets for those SBSs.
Accordingly, the adopted approach is preferable to the alternative.
6. Adopting Proposed Block Trade Definition Now
In finalizing Regulation SE, the Commission considered the
alternative of adopting the proposed definition of ``block trade''
under Rule 802. For the third prong of the ``block trade'' definition,
the Commission proposed that the SBS be based on a single credit
instrument (or issuer of credit instruments) or a narrow-based index of
credit instruments (or issuers of credit instruments) having a notional
size of $5 million or greater.\1014\
---------------------------------------------------------------------------

\1014\ See Proposing Release, supra note 1, 87 FR at 28896.
---------------------------------------------------------------------------

As discussed earlier,\1015\ a number of commenters raise concerns
that the proposed $5 million block-trade threshold for all credit SBSs
would not be sufficiently tailored to the unique and varying trading
and risk characteristics of the full range of credit SBS, creating the
potential for the adverse market risks that commenters point out may
arise from having a one-size-fits-all block threshold.
---------------------------------------------------------------------------

\1015\ See supra section V.E.1(c)(ii) and Citadel Letter, supra
note 18, at 9; ICI Letter, supra note 18, at 10-12; MFA Letter,
supra note 18, at 5-8; SIFMA AMG Letter, supra note 18, at 10; ISDA-
SIFMA Letter, supra note 18, at 7-9.
---------------------------------------------------------------------------

As discussed above, the Commission acknowledges these commenters'
concerns. Further, unless and until the Commission has made a mandatory
clearing determination regarding an SBS, it is not necessary to define
a block-trade threshold for SBS, and it would be appropriate for the
Commission to identify a block-trade threshold in the future after
considering credit SBS transaction data and credit SBS markets at that
time. In addition, the Commission agrees with commenters that
additional consideration of credit SBS transaction data would help the
Commission determine the appropriate block-trade threshold for credit
SBS products, including whether different thresholds should apply to
different types or groups of SBS. The Commission also agrees with
commenters that the credit SBS markets are likely to evolve over time
and that analysis of market data continues to be an important aspect of
setting appropriate thresholds for both block trades and credit SBS
public trade reporting.\1016\
---------------------------------------------------------------------------

\1016\ See supra note 219.
---------------------------------------------------------------------------

Therefore, as discussed above, the Commission is not adopting the
proposed definition of ``block trade'' under Proposed Rule 802, or any
other block-trade threshold. Instead, Rule 802 will include a note that
a definition of ``block trade'' has not yet been adopted. This would
allow the Commission to identify a block-trade threshold in the future
after considering credit SBS transaction data and the evolution of the
credit SBS markets. In light of the above, the adopted approach is
preferable to the alternative.
7. Block Trade Definition for Equity SBS
In finalizing Regulation SE, the Commission considered the
alternative of adopting a definition of ``block trade'' applicable to
equity SBS. One commenter suggests that the alternative would
facilitate timely and efficient executions of equity SBS thereby
supporting risk management activities, encourage the use of equity SBS
for legitimate business purposes, including hedging, and facilitate
capital formation.\1017\ Another commenter argues that the alternative
would avoid information leakage regarding a market participant's
investment strategies.\1018\
---------------------------------------------------------------------------

\1017\ See MFA Letter, supra note 18, at 6-7.
\1018\ See ICI Letter, supra note 18, at 12-13.
---------------------------------------------------------------------------

The Commission acknowledges that the alternative could have
beneficial effects as suggested by the commenters. However, as
discussed in section V.E.1(c)(iii), an inappropriate block trade
threshold for equity SBSs could create incentives for market
participants to trade equity SBS over cash equities, listed equity
options, and equity swaps. The Commission is concerned, in particular,
that a shift in trading activity away from cash equities and listed
equity options towards equity SBS could generate several adverse
effects. First, such a shift in trading activity could reduce
participation in the cash equities and listed equity options markets,
including participation by liquidity providers. Reduced participation
by liquidity providers could reduce competition in liquidity provision
in these markets, which in turn could increase trading costs and
decrease liquidity. Trading in these markets could become less
efficient because of increased trading costs and decreased liquidity.
Second, to the extent that trading becomes more costly in the cash
equities and listed equity options markets, trading in these markets
could be reduced, which could impede the incorporation of new
information into the prices of cash equities and listed equity options
through trading. This in turn could reduce price efficiency in the cash
equities and listed equity options markets. Third, decreased liquidity
in the cash equities market could raise the cost of capital for cash
equities,\1019\ which in turn could discourage firms from issuing cash
equity securities to finance investment projects and reduce capital
formation.
---------------------------------------------------------------------------

\1019\ See, e.g., Viral V. Acharya and Lasse Heje Pedersen,
Asset Pricing With Liquidity Risk, 77 J. Fin. Econ. 375 (2005) and
Yakov Amihud, Illiquidity and Stock Returns: Cross-Section and Time-
Series Effects, 5 J. Fin. Markets 31 (2002) (suggesting that the
expected return of a stock, or cash equity security, increases as
its liquidity decreases. To the extent that a cash equity security's
expected return measures the cost of capital associated with cash
equity financing, the cited research suggests that when a cash
equity security's liquidity decreases, its cost of capital may
increase.).
---------------------------------------------------------------------------

The adopted approach may nevertheless generate the beneficial
effects suggested by the commenters. Regulation SE would increase pre-
trade price transparency and competition in liquidity provision, which
could decrease the spread in quoted prices and lead to higher
efficiency in the trading of SBS.\1020\ In addition, the automation and
systems development associated with the regulation of SBSEFs could
provide SBS market participants with new platforms and tools to execute
and process transactions in SBS more rapidly and at a lower expense per
transaction. Such increased efficiency could enable members of the
SBSEF to handle increased volumes of SBS with greater efficiency and
timeliness.\1021\ Further, increased competition among third-party
service providers, as a result of Rules 819(c) and 819(e), could lower
SBSEFs' costs and bring about greater efficiency in their operation and
SBS trading.\1022\
---------------------------------------------------------------------------

\1020\ See supra section XVII.D.3.
\1021\ Id.
\1022\ Id.
---------------------------------------------------------------------------

As discussed in section XVII.D.2, Regulation SE could improve
regulatory oversight, market integrity, and market predictability,
which could lead to the greater use of SBS (including equity SBS) and
promote capital formation.

[[Page 87266]]

Also, by reducing the risk of trading disruptions on SBSEFs, Rules 829
and 830 could increase market participants' confidence in the soundness
of SBSEFs, which in turn could lead to the greater use of SBS traded on
SBSEFs thereby promoting capital formation.\1023\
---------------------------------------------------------------------------

\1023\ See supra section XVII.D.2.
---------------------------------------------------------------------------

Regulation SE would address concerns about information leakage in
various ways. First, pursuant to Rule 815(c)(2), an SBSEF may offer any
execution method for Permitted Transactions. Thus, a market participant
engaging in a Permitted Transaction (e.g., a large trade in equity SBS)
may choose to use an execution method that reveals the desired, or at
least preferred, amount of information about trading interest. Second,
pursuant to Rule 815(a)(2), an SBSEF will be required to offer two
execution methods for Required Transactions (limit order book and RFQ-
to-3). Thus, market participants have flexibility in the degree of pre-
trade transparency they wish to employ, which should attenuate
potential concerns associated with revealing too much information about
trading interest.\1024\
---------------------------------------------------------------------------

\1024\ See supra sections XVII.D.3 and XVII.C.1 (discussing the
different degrees of pre-trade transparency associated with limit
order book and RFQ-to-3).
---------------------------------------------------------------------------

In addition, until the Commission has made a clearing determination
with respect to equity SBS, equity SBS will be able to trade OTC, just
as their underlying cash equities can trade OTC. Moreover, before
making a clearing determination for an equity SBS--which would create
the circumstances in which equity SBS might be MAT and therefore
subject to the trade-execution requirement--the Commission would have
the opportunity to solicit and consider additional public comment on
the effect of such a determination, including comment with respect to
the concerns commenters have raised to date regarding, among other
things, timely and efficient executions, hedging, and capital
formation.
In light of the above, the adopted approach is preferable to the
alternative.
8. Alternatives to Rule 833
In finalizing Rule 833, the Commission considered alternative
approaches suggested by commenters. Four commenters suggest that the
Commission grant automatic exemptions for foreign trading venues that
are currently exempt under the CFTC's rules.\1025\ One commenter
suggests the Commission grant an exemption from the trade execution
requirement if the SBS transaction at issue is subject to mandatory
trading in another jurisdiction.\1026\
---------------------------------------------------------------------------

\1025\ See Bloomberg Letter, supra note 18, at 7, 18; ICE
Letter, supra note 18, at 5; ISDA-SIFMA Letter, supra note 18, at
15; Tradeweb Letter, supra note 18, at 6.
\1026\ ISDA-SIFMA Letter, supra note 18, at 15.
---------------------------------------------------------------------------

With respect to these alternatives, the Commission is concerned
that granting automatic exemptions would not afford the Commission the
opportunity to appropriately consider the relevant facts and
circumstances in support of a finding that an exemption is necessary or
appropriate in the public interest and consistent with the protection
of investors. Further, to the extent that there are certain CFTC exempt
foreign trading venues that do not intend to offer trading in SBS, it
is unclear how the Commission's granting of an automatic exemption to
these venues would benefit market participants that wish to trade SBS
on regulated platforms. In light of the above, the adopted approach is
preferable to these alternatives.
9. Alternatives From Proposal
The Commission also considered certain alternatives discussed in
the Proposing Release: (1) not harmonizing Regulation SE with analogous
CFTC rules; (2) harmonizing the third prong of the definition of
``block trade'' with the third prong of the CFTC definition of ``block
trade''; (3) requiring SBSEFs to submit the information in the Daily
Market Data Report directly to the Commission; (4) requiring an
exemption order under Rule 833(a) to apply to a foreign trading venue
only if it traded SBS and no other types of securities; (5) applying
the revocation provisions of Rule 3a1-1(b) to SBSEFs and clearing
agencies that are covered by paragraphs (a)(4) and (a)(5), respectively
of Rule 3a1-1; and (6) not exempting SBSEF-Bs from section 17(a) of the
SEA.\1027\ With respect to the alternative of not harmonizing
Regulation SE with analogous CFTC rules, commenters generally agreed
with the Commission's approach vis-[agrave]-vis this alternative. The
Commission did not receive comments addressing the other alternatives
and continues to believe that its approach with respect to these
alternatives is appropriate, and believes the rules as adopted are
preferable to these alternatives.
---------------------------------------------------------------------------

\1027\ See Proposing Release, supra note 1, 87 FR at 28956-57.
---------------------------------------------------------------------------

10. Structured Disclosure Alternative
The Commission also considered the alternative of requiring, as
proposed, Inline XBRL for all SBSEF filings other than Daily Market
Data Reports under Rule 825. However, limiting the scope of Inline XBRL
requirements under Regulation SE will ease compliance burdens for
SBSEFs while maintaining a significant level of machine-readability for
SBSEF data available to market participants and public data users as
well as Commission staff. Some of the disclosures proposed with Inline
XBRL structuring will still be structured in the final rule, but with a
custom XML requirement rather than an Inline XBRL requirement. This
will allow SBSEFs to, at their option, input those disclosures into
fillable web forms rather than structure the disclosures in the custom
XML data language themselves, thereby providing greater flexibility to
SBSEFs and potentially easing compliance burdens. For copies of
existing documents attached to Form SBSEF, and for rule and product
filings that were proposed with an Inline XBRL requirement will instead
be filed in unstructured formats. Given the reduced compliance burdens
on SBSEFs resulting from a more limited scope of Inline XBRL
requirements, the adopted rules are preferable to the
alternative.\1028\
---------------------------------------------------------------------------

\1028\ See supra section XVII.C.3(f).
---------------------------------------------------------------------------

XVIII. Paperwork Reduction Act

Certain provisions of the rules in Regulation SE contain new
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act of 1995 (``PRA'').\1029\ The Commission
published a notice requesting comment on these collections \1030\ and
submitted the proposed collection of information to the Office of
Management and Budget (``OMB'') for review in accordance with 44 U.S.C.
3507 and 5 CFR 1320.11. The title of the new collection of information
is Regulation SE, and OMB Control Number 3235-0793 has been assigned.
As adopted, Regulation SE creates a regime for the registration and
regulation of SBSEFs and addresses other issues relating to SBS
execution.
---------------------------------------------------------------------------

\1029\ 44 U.S.C. 3501 et seq.
\1030\ See Proposing Release, 87 FR at 28958-69.
---------------------------------------------------------------------------

In addition, the Commission is amending Rule 3a1-1 under the SEA to
exempt a registered SBSEF from the statutory definition of
``exchange.'' Furthermore, the Commission is adopting new Rule 15a-12
under the SEA that, while affirming that an SBSEF would also be a
broker under the SEA, would exempt a registered SBSEF from certain
broker requirements under the SEA.
Regulation SE includes rules regarding the registration of a
prospective SBSEF on Form SBSEF, the

[[Page 87267]]

filing of new or amended rules or new products with the Commission, and
rules implementing the Core Principles for SBSEFs under section 3D(d)
of the SEA.\1031\ An agency may not conduct or sponsor, and a person is
not required to respond to, a collection of information unless it
displays a currently valid OMB control number.
---------------------------------------------------------------------------

\1031\ 15 U.S.C. 78c-4(d). As adopted, Regulation SE contains 36
separately designated rules (800 to 835, inclusive), which (if
adopted) would be located in 17 CFR 242; a Form SBSEF (with
instructions); and a submission cover sheet (with instructions). If
adopted, the form and the submission cover sheet would be located in
17 CFR 249.
---------------------------------------------------------------------------

A. Summary of Collection of Information

The rules and rule amendments contained in Regulation SE include a
collection of information within the meaning of the PRA for SBSEFs that
are required to comply with Regulation SE and file a Form SBSEF with
the Commission for registration as an SBSEF and, among other things,
submit certain filings to the Commission pursuant to Rules 804-807 with
respect to new products and proposed rule changes. In addition, Rule
833 includes a collection of information within the meaning of the PRA
for persons that wish to seek an exemption order under that rule, and
Rule 834 includes a collection of information within the meaning of the
PRA for SBS exchanges (in addition to SBSEFs). The Commission generally
is adopting Regulation SE as proposed, except for certain sections that
have been modified in response to comments received. The modified Rules
that have associated paperwork burdens are Rules 804, 815, 819, 825,
and 834. Each of these modifications and their impact on the paperwork
burden are described in more detail below.
Many of the rules that constitute Regulation SE are modeled after
analogous CFTC rules, with only minor edits to reflect differences
between the statutory regimes of the two agencies. Entities that are
most likely to register with the Commission as SBSEFs are those already
registered with the CFTC as SEFs. Such entities have made substantial
investments in systems, policies, and procedures to comply with and
adapt to the regulatory system developed by the CFTC. Harmonization
will allow these dually registered entities to utilize their existing
systems, policies, and procedures to comply with the Commission's SBSEF
rules, and SEF members would likely face only marginal additional
burdens to trade SBS as well as swaps on those SEF/SBSEFs. In light of
these factors, the Commission has based many of its paperwork burden
estimates on CFTC burden estimates calculated for analogous CFTC rules.
The CFTC estimated PRA burdens by aggregating the burdens produced
by a group of related rules, as explained more fully in section XX(D)
below. In most cases, the Commission has modeled its methodology,
assumptions, and calculations on those used by the CFTC with respect to
its SEF regulations, while making adjustments that reflect differences
between the scale of the market for swaps relative to the market for
SBS--for example, the estimated number of SBSEFs, number of SBS market
participants, and number of SBS transactions--as necessary. The
Commission received no comments on its proposed PRA methodology,
assumptions, calculations, and estimates, and such an approach
continues to be appropriate. As noted above, almost all of the burden
estimates are based on CFTC estimates that have been approved by OMB.
The CFTC estimates that serve as the basis for the Commission's
estimates have not changed since the Proposing Release has been
published, with the exception of one estimate for Rule 811(d).
Consequently, the Commission continues to estimate the burdens as those
set forth in the Proposing Release, except for one adjustment to match
a subsequent adjustment in the CFTC estimate relevant to Rule 811(d).
As explained in more detail below, for rules that have been modified
that contain associated paperwork burdens, the modifications do not
result in any change in paperwork burden.
The following is a summary of the rules contained in Regulation
SE.\1032\ The paperwork burdens associated with each rule in Regulation
SE are discussed in section XX(D) below.
---------------------------------------------------------------------------

\1032\ See supra section II.A (discussing Rule 800); section
II.B (discussing Rule 801); section II.C (discussing Rule 802);
section III.A (discussing the registration provisions contained in
Rule 803); section III.B (discussing Form SBSEF); section IV.A
(discussing Rule 804); section IV.B (discussing Rule 805); section
IV.C (discussing Rule 806); section IV.D (discussing Rule 807);
section IV.GIV.F (discussing Rule 808); section IV.G (discussing
Rule 809); section IV.H (discussing Rule 810); section V.A
(discussing Rule 811); section V.B (discussing Rule 812); section
V.C (discussing Rule 813); section V.D (discussing Rule 814);
section V.E (discussing Rule 815); section V.F (discussing Rule
816); section V.G (discussing Rule 817); section VI.A (discussing
Rule 818); section VI.B (discussing Rule 819); section VI.C
(discussing Rule 820); section VI.D (discussing Rule 821); section
VI.E (discussing Rule 822); section VI.F (discussing Rule 823);
section VI.G (discussing Rule 824); section VI.H (discussing Rule
825); section VI.I (discussing Rule 826); section VI.J (discussing
Rule 827); section VI.K (discussing Rule 828); section VI.L
(discussing Rule 829); section VI.M (discussing Rule 830); section
VI.N (discussing Rule 831); section VII.A (discussing Rule 832);
section VII.B (discussing Rule 833); section VIII (discussing Rule
834); section IX (discussing the notice required by Rule 835);
section X (discussing amendments to Rule 3a1-1); section XI
(discussing proposed Rule 15a-12); section XIV (discussing new rules
and amendments to the Commission's Rules of Practice).

------------------------------------------------------------------------
Paperwork
Rule No. and title Overview of rule burden created?
------------------------------------------------------------------------
800--Scope.................... States that the No.
provisions of this
section shall apply
to every SBSEF that
is registered or is
applying to become
registered as an
SBSEF under section
3D of the SEA.
801--Applicable provisions.... Requires an SBSEF to No.
comply with all
applicable Commission
rules, including any
related definitions
and cross-referenced
sections.
802--Definitions.............. Definitions........... No.
803--Requirements and Sets out a process for Yes.
procedures for registration. registering with the
Commission as an
SBSEF, including the
submission of Form
SBSEF.
804--Listing products for Procedures by which an Yes.\a\
trading by certification. SBSEF, via self-
certification, may
list a product for
trading.
805--Voluntary submission of Procedures for Yes.
new products for Commission voluntary submission
review and approval. of new products for
Commission review and
approval.
806--Voluntary submission of Procedures for Yes.
rules for Commission review voluntary submission
and approval. of new rules or rule
amendments for
Commission review and
approval.

[[Page 87268]]

807--Self-certification of Procedures by which an Yes.
rules. SBSEF can implement a
new rule or rule
amendment via self-
certification.
808--Availability of public Sets out the No.
information. information that will
be made public with
respect to
applications to
become an SBSEF as
well as filings
relating to rules and
products.
809--Staying of certification Provides for a stay of Yes.
and tolling of review period a product
pending jurisdictional certification or
determination. tolling of a review
period for a product
where it is unclear
whether the product
should be classified
as an SBS under the
jurisdiction of the
SEC or a swap under
the jurisdiction of
the CFTC pending the
issuance of a joint
interpretation by the
SEC and CFTC
clarifying which
agency has
jurisdiction over the
product.
810--Product filings by SBSEFs Provides that an Yes.
that are not yet registered applicant for
and by dormant SBSEFs. registration as an
SBSEF may submit for
Commission review and
approval an SBS's
terms and conditions
or rules prior to
listing the product
as part of its
application for
registration.
811--Information relating to Provides that an SBSEF Yes.
SBSEF compliance. shall submit
information to the
Commission that the
Commission requests,
including
demonstrations that
the SBSEF is in
compliance with one
or more Core
Principles,
notification of a
transfer 50% or more
of the equity
interest in the
SBSEF, and
information about
pending legal
proceedings.
812--Enforceability........... Provides that a Yes.
transaction entered
into on or pursuant
to the rules of an
SBSEF shall not be
void, voidable,
subject to
rescission, otherwise
invalidated, or
rendered
unenforceable because
of a violation by the
SBSEF of section 3D
of the SEA or the
Commission's rules
thereunder; also
requires an SBSEF to
provide each
counterparty to a
transaction on the
SBSEF with a written
record of all the
terms of the
transaction that were
agreed to on the
SBSEF.
813--Prohibited use of data Provides that an SBSEF No.
collected for regulatory shall not use for
purposes. business or marketing
purposes any
proprietary data or
personal information
that it collects or
receives, from or on
behalf of any person,
for the purpose of
fulfilling its
regulatory
obligations, without
such person's
consent; also
requires the SBSEF
not to condition
access to its markets
on such consent and
provide that the
SBSEF may, where
necessary for
regulatory purposes,
share such data or
information with
other registered
SBSEFs or exchanges.
814--Entity operating both a Provides that an No.
national securities exchange entity that intends
and SBSEF. to operate both a
national securities
exchange and an SBSEF
shall separately
register the two
facilities pursuant
to section 6 of the
SEA and Rule 803,
respectively; also
provides that a
national securities
exchange shall, to
the extent that the
exchange also
operates an SBSEF and
uses the same
electronic trade
execution system,
identify whether
electronic trading of
SBS is taking place
on or through the
national securities
exchange or the SBSEF.
815--Methods of execution for Provides that a Yes.
Required and Permitted Required Transaction
Transactions. must be executed on
an SBSEF through an
order book or RFQ
system, whereas a
Permitted Transaction
can be executed in
any manner; also
requires an SBSEF to
maintain rules and
procedures that
facilitate the
resolution of error
trades and that an
SBSEF shall not
generally disclose
the identity of a
counterparty to an
SBS that is executed
anonymously and
intended to be
cleared.
816--Trade execution Sets out a process and Yes.
requirement and exemptions standards for an
therefrom. SBSEF to MAT an SBS;
also establishes
certain exemptions
from the trade
execution requirement.
817--Trade execution Provides that an SBS No.
compliance schedule. transaction shall be
required to be
executed on an SBS
exchange or SBSEF
upon the later of a
determination by the
Commission that the
SBS is required to be
cleared and 30 days
after a MAT
determination
submission or
certification for
that SBS is approved
or certified,
respectively.
818--Core Principle 1 Requires a registered Yes.
(Compliance with Core SBSEF to comply with
Principles). the SEA's Core
Principles for SBSEFs.

[[Page 87269]]

819--Core Principle 2 Requires a registered Yes.
(Compliance with rules). SBSEF to establish,
comply with, and
enforce its own
rules--including
rules regarding
market access; rules
governing trading,
trade processing, and
participation that
will deter abuses;
rules governing the
operation of the
SBSEF; and rules to
capture and retain an
audit trail--and have
the capacity to
detect, investigate,
and enforce those
rules; also requires
an SBSEF to establish
rules that generally
prohibit employees
from trading any
covered interest or
disclosing any
material, non-public
information obtained
as a result of their
employment by the
SBSEF; also requires
an SBSEF to maintain
in effect rules that
render a person
ineligible to serve
on the SBSEF's
disciplinary
committees,
arbitration panels,
oversight panels, or
governing board who
has been found to
have committed
enumerated offenses.
820--Core Principle 3 (SBS not Requires an SBSEF to Yes.
readily susceptible to permit trading only
manipulation). in SBS that are not
readily susceptible
to manipulation.
821--Core Principle 4 Requires an SBSEF to Yes.
(Monitoring of trading and establish and enforce
trade processing). rules detailing
trading and trade
processing
procedures, and to
monitor trading and
market activity to
prevent manipulation,
price distortion, and
delivery or
settlement
disruptions; also
requires an SBSEF to
demonstrate that it
has access to
sufficient
information to assess
whether trading on
its market or in the
underlying assets or
indexes is being used
to affect prices on
its market.
822--Core Principle 5 (Ability Requires an SBSEF to Yes.
to obtain information). establish and enforce
rules that would
allow it to obtain
any information
necessary to comply
with section 3D of
the SEA and to
provide that
information to the
Commission on request.
823--Core Principle 6 Requires an SBSEF to Yes.
(Financial integrity of establish and enforce
transactions). rules for ensuring
the financial
integrity of SBS on
its facility,
including the
clearance and
settlement of the
SBS; also requires
that SBS that are
required to be
cleared shall be
cleared by a
registered clearing
agency (or a clearing
agency that has
obtained an exemption
from clearing agency
registration to
provide central
counterparty services
for SBS), that the
SBSEF provide for
minimum financial
standards for its
members, and that the
SBSEF monitor its
members for
compliance with those
standards.
824--Core Principle 7 Requires an SBSEF to Yes.
(Emergency authority). adopt rules to
provide for the
exercise of emergency
authority, in order
for the SBSEF to
maintain fair and
orderly trading and
prevent or address
manipulation or
disruptive trading
practices.
825--Core Principle 8 (Timely Requires an SBSEF to Yes.
publication of trading make public timely
information). information on price,
trading volume, and
other trading data on
SBS transactions, as
required by
Regulation SBSR, and
to publish on its
website a Daily
Market Data Report.
826--Core Principle 9 Sets forth Yes.
(Recordkeeping and reporting). recordkeeping and
reporting obligations
for SBSEFs and
requires an SBSEF to
maintain, for a
period of five years
and in a form and
manner acceptable to
the Commission,
records of all
activities relating
to the business of
the facility,
including a complete
audit trail,.
827--Core Principle 10 Provides that, unless No.
(Antitrust considerations). necessary or
appropriate to
achieve the purposes
of the SEA, an SBSEF
shall not adopt any
rules or take any
actions that result
in any unreasonable
restraint of trade or
impose any material
anticompetitive
burden on trading or
clearing.
828--Core Principle 11 Requires an SBSEF to Yes.
(Conflicts of interest). establish and enforce
rules to minimize
conflicts of interest
in its decision-
making process and to
establish a process
for resolving such
conflicts.
829--Core Principle 12 Requires an SBSEF to Yes.
(Financial resources). have adequate
financial,
operational, and
managerial resources
to discharge its
responsibilities;
would also set forth
the standards used to
calculate the
adequacy of such
resources and require
certain reports to
the Commission.

[[Page 87270]]

830--Core Principle 13 (System Requires an SBSEF to Yes.
safeguards). establish and
maintain a program of
automated systems and
risk analysis to
identify and minimize
sources of
operational risk,
through the
development of
appropriate controls
and procedures; would
also require an SBSEF
to establish and
maintain emergency
procedures, backup
facilities, and a
plan for disaster
recovery; conduct
periodic tests to
verify those
resources are
sufficient; and
notify the Commission
promptly of any cyber
incidents and
material planned
changes to the
SBSEF's systems
safeguards.
831--Core Principle 14 Requires an SBSEF to Yes.
(Designation of CCO). designate a CCO and
set forth regulatory
and reporting
obligations for the
CCO.
832--Cross-border mandatory Explains when the No.
trade execution. SEA's trade execution
requirement applies
to a cross-border SBS
transaction.
833--Cross-border exemptions.. Provides for a process Yes.
by which the
Commission, upon
making the requisite
findings, could grant
exemptions from the
SEA definitions of
``exchange,''
``security-based swap
execution facility,''
and ``broker'' and
exempt cross-border
SBS from the SEA's
trade execution
requirement.
834--Mitigation of conflicts Provides that each Yes.
of interest of SBSEFs and SBS SBSEF and SBS
exchanges. exchange must create
and maintain rules to
mitigate conflicts of
interest between
SBSEFs and SBS
exchanges and their
members, including by
prohibiting members
from owning 20% or
more of the voting
securities of an
SBSEF or SBS exchange
(with certain
exceptions), and from
exercising
disproportionate
influence in
disciplinary
proceedings; would
also require each
SBSEF and SBS
exchange to submit to
the Commission after
every governing board
election a list of
each governing
board's members, the
groups they
represent, and how
the composition of
the board complies
with the requirements
of Rule 834.
835--Notice to Commission by Provides that, if an Yes.
SBSEF of final disciplinary SBSEF issues a final
action or denial or disciplinary action
limitation of access. against a member,
denies or conditions
membership, or denies
or limits access of a
person to any
services offered by
the SBSEF, the SBSEF
shall file a notice
of such action with
the Commission within
30 days and serve a
copy on the affected
person.
3a1-1--proposed amendments.... Exempts from the SEA No.
definition of
``exchange'' a
registered SBSEF that
provides a market
place for no
securities other than
SBS, and an entity
that has registered
with the Commission
as a clearing agency
and limits its
exchange functions to
operation of a
trading session that
is designed to
further the accuracy
of end-of-day
valuations.
15a-12--Exemption for certain Exempts a registered No.
SBSEFs from certain broker SBSEF from certain
requirements. broker requirements
while affirming that
an SBSEF is a broker
under the SEA.
Rules and amendments to the New rules and No **.
Commission's Rules of amendments to the
Practice. Rules of Practice to
allow persons who are
aggrieved by a final
disciplinary action,
a denial or
conditioning of
membership, or a
denial or limitation
of access by an SBSEF
to seek an
application for
review by the
Commission.
Amendments to Delegations of Amendments to No **.
Authority in Rules 30-3 and Commission's rules
30-14. delegating authority
to the Division
Director and to the
General Counsel in
order to delegate
authority to take
actions necessary to
carry out the rules
under Regulation SE
and to facilitate the
operation of the
regulatory structure
created in Regulation
SE.
------------------------------------------------------------------------
** The Commission finds, in accordance with section 553(b)(3)(A) of the
Administrative Procedure Act (``APA''), 5 U.S.C. 553(b)(3)(A), that
the revisions to the Commission's Rules of Practice, as well as the
amendments to the Commission's delegations of authority to the
Director of Trading and Markets pursuant to 17 CFR 200.30-3 and to the
General Counsel pursuant to 17 CFR 200.30-14, relate solely to agency
organization, procedure, or practice. They are therefore not subject
to the provisions of the APA requiring notice, opportunity for public
comment, and publication. To the extent that these rules relate to
agency information collections during the conduct of administrative
proceedings, they are exempt from review under the PRA.
Notwithstanding this finding, the Commission published certain
proposed changes to the Commission's Rules of Practice for notice and
comment in the Proposing Release but received no specific comments
pertaining to them. See supra section XIV.

B. Proposed Use of Information

1. Registration Requirements and Form SBSEF
Regulation SE imposes various requirements relating to SBSEF
registration, which are set forth in Rule 803.\1033\
---------------------------------------------------------------------------

\1033\ See, e.g., Proposed Rule 803(b)(1) (requiring an entity
that wishes to register with the Commission as an SBSEF to submit a
Form SBSEF).
---------------------------------------------------------------------------

The information collected pursuant to these adopted rules will
enhance the ability of the Commission to determine whether to approve
the registration of an entity as an SBSEF; to monitor and oversee
SBSEFs; to determine whether

[[Page 87271]]

SBSEFs initially comply, and continue to operate in compliance, with
the SEA, including the Core Principles applicable to SBSEFs; to carry
out its statutorily mandated oversight functions; and to maintain
accurate and updated information regarding SBSEFs. Because the
registration information will be publicly available, except to the
extent that a request for confidential treatment is granted, it could
also be useful to an SBSEF's members, other market participants, other
regulators, and the public generally.
2. Requirements for SBSEFs To Establish Rules
Various provisions of Regulation SE require SBSEFs to establish
certain rules, policies, and procedures to comply with applicable
requirements of the SEA and the Commission's rules thereunder.\1034\
The rules also will help an SBSEF's members to understand and comply
with the rules of the SBSEF.
---------------------------------------------------------------------------

\1034\ See, e.g., Proposed Rule 819(a)(2) (requiring an SBSEF to
establish and enforce trading, trade processing, and participation
rules).
---------------------------------------------------------------------------

3. Reporting Requirements for SBSEFs
Various provisions of Regulation SE require SBSEFs and certain
other persons to submit reports or provide specified information.\1035\
This information will generally be used by the Commission in its
oversight of SBSEFs and the SBS markets; certain of the information to
be collected could be used by market participants to confirm their SBS
transactions.
---------------------------------------------------------------------------

\1035\ See, e.g., Proposed Rule 829 (requiring an SBSEF,
quarterly or upon Commission request, to provide the Commission a
report that includes the amount of financial resources necessary to
meet the requirements of Rule 829).
---------------------------------------------------------------------------

4. Recordkeeping Required Under Regulation SE
Regulation SE requires an SBSEF to keep specified records.\1036\
The audit trail information required to be maintained under Regulation
SE will aid the SBSEF in detecting and deterring fraudulent and
manipulative acts with respect to trading on its market, as well as
help the SBSEF to fulfill the statutory requirement in Core Principle 4
that an SBSEF monitor trading in SBS, including through comprehensive
and accurate trade reconstructions. In addition, Commission access to
these records will provide a valuable tool to help the Commission carry
out its oversight responsibility over SBSEFs and the SBS markets in
general.
---------------------------------------------------------------------------

\1036\ See Proposed Rule 826 (requiring an SBSEF to maintain
records of all activities relating to the business of the facility,
including a complete audit trail, and to report information to the
Commission upon request).
---------------------------------------------------------------------------

5. Timely Publication of Trading Information Requirement for SBSEFs
Regulation SE imposes certain publication burdens on SBSEFs in Rule
825.\1037\
---------------------------------------------------------------------------

\1037\ See Proposed Rule 825 (requiring an SBSEF to make
publicly available a ``Daily Market Data Report'').
---------------------------------------------------------------------------

The requirement contained in Rule 825 that an SBSEF have the
capacity to electronically capture, transmit, and disseminate
information on price, trading volume, and other trading data on all SBS
executed on or through the SBSEF will assist the SBSEF in carrying out
its regulatory responsibilities under the SEA and enable the SBSEF to
comply with reasonable requests to provide information to others.
Furthermore, Rule 825 requires an SBSEF to publish a Daily Market Data
Report that is designed to provide market observers with a daily
snapshot of market activity on the SBSEF.
6. Rule Filing and Product Filing Processes for SBSEFs
Regulation SE establishes various filing requirements applicable to
SBSEFs. Rules 804 and 805 provide mechanisms for an SBSEF to submit
filings for new products that it seeks to list either through a self-
certification process or by voluntarily requesting Commission approval,
respectively. Rules 806 and 807 require an SBSEF to submit new rule or
rule amendments either through a self-certification process or by
voluntarily requesting Commission approval, respectively.
Rule 808 addresses the public availability of certain information
in an application to register as an SBSEF and SBSEF filings made under
the self-certification procedures or pursuant to Commission review and
approval. Rule 809 establishes procedures for addressing a situation
where an SBSEF wishes to list a product and it is unclear whether that
product is an SBS or swap (i.e., whether it properly falls under the
jurisdiction of the SEC or the CFTC). Rule 810 provides that an
applicant for registration as an SBSEF may submit for Commission review
and approval an SBS's terms and conditions or rules prior to listing
the product as part of its application for registration.
The information collected under Rules 804 and 805 will help the
Commission assess whether an SBS listed by an SBSEF complies with
relevant provisions of the SEA. In addition, this information will
assist the Commission in overseeing the SBSEF's compliance with its
regulatory obligations generally and to learn about developments in the
SBS product market. Rules 804 and 805 also provide a mechanism whereby
market participants, other SBSEFs, other regulators, and the public
generally could learn what products an SBSEF intends to list and to
obtain information regarding such products.
The information collected under Rules 806 and 807 will help the
Commission assess whether a new rule or rule amendment of an SBSEF
complies with relevant provisions of the SEA and assist the Commission
in overseeing the SBSEF's compliance with its regulatory obligations
generally. Rules 806 and 807 also provide a mechanism whereby an
SBSEF's members (and prospective members) could learn what new rules or
rule amendments the SBSEF intends to apply in its market.
The information collected under Rules 809 and 810 will help the
Commission assess an SBSEF's compliance with relevant provisions of the
SEA and assist the Commission in overseeing the SBSEF's compliance with
its regulatory obligations. This information also will be useful to the
SBSEF's members, because they would be subject to such new or amended
rules or products and thus would have an interest in learning about
those rules or products. Other market participants, other SBSEFs, and
other regulators, as well as the public generally, may find information
about proposed new or amended rules or products useful.
7. Requirements Relating to the CCO
Regulation SE includes Rule 831 that would set out requirements
relating to an SBSEF's CCO.
The information that will be collected under Rule 831 will help
ensure compliance by SBSEFs with relevant provisions of the SEA and
assist the Commission in overseeing SBSEFs generally. The Commission
could use the annual compliance report to help it evaluate whether an
SBSEF is carrying out its statutorily mandated regulatory obligations
and, among other things, to discern the scope of any denials of access
or refusals to grant access by the SBSEF and to obtain information on
the status of the SBSEF's regulatory compliance program. The SBSEF's
fourth-quarter financial report will provide the Commission with
important information on the financial health of the SBSEF.

[[Page 87272]]

8. Surveillance Systems Requirements for SBSEFs
The rules that require an SBSEF to maintain surveillance systems
and to monitor trading \1038\ are designed to promote compliance by an
SBSEF with its obligations under the SEA to oversee trading on its
market, and to prevent manipulation and other unlawful activity or
disruption of its market.
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\1038\ See, e.g., Proposed Rule 819(d)(3) (requiring an SBSEF to
establish and maintain sufficient compliance staff and resources to
ensure that it can conduct effective audit trail reviews, trade
practice surveillance, market surveillance, and real-time market
monitoring).
---------------------------------------------------------------------------

C. Respondents

The respondents subject to the collection of information burdens
associated with Regulation SE are: (1) SBSEFs (and entities wishing to
register with the Commission as SBSEFs); (2) in the case of Rule 833,
persons that seek an exemption order under that rule; and (3) in the
case of Rule 834, SBS exchanges.
Currently there are no registered SBSEFs. Based on the number of
SEFs registered with the CFTC that trade index CDS (the closest analog
to single-name CDS, which is likely to be the product most frequently
traded on SEC-registered SBSEFs), as well as general industry
information, the Commission preliminarily estimated that five entities
will seek to register as SBSEFs and thus become subject to the
collection of information requirements of these rules.\1039\ The
Commission did not receive comments about its estimate of the number of
SBSEF registrants, and its initial estimate continues to be reasonable.
---------------------------------------------------------------------------

\1039\ See Proposing Release, supra note 1, 87 FR at 28963.
---------------------------------------------------------------------------

The Commission preliminarily estimated that three persons would
request exemption orders under one or both paragraphs of Rule
833.\1040\ The CFTC has granted three exemptions similar to those
contemplated by Rule 833,\1041\ which suggests that the number of
jurisdictions having organized trading venues for swap and SBS products
that overlap with products traded on similar venues in the United
States is not large. The Commission did not receive comments about its
estimate of the number of persons requesting exemption orders under
Rule 833, and its initial estimate continues to be reasonable.
---------------------------------------------------------------------------

\1040\ Id. The Commission anticipates that such persons could
include foreign SBS trading venues, foreign authorities that license
and regulate those trading venues, or covered persons (as defined in
Rule 832) who are members of such trading venues.
\1041\ See also supra note 626 (discussing a CFTC staff no-
action letter addressing certain UK swap trading facilities).
---------------------------------------------------------------------------

The Commission preliminarily estimated that three entities will
operate as SBS exchanges.\1042\ These are likely to be existing
national securities exchanges that, in the future, seek to list SBS and
thereby become SBS exchanges. The Commission did not receive comments
about its estimate of the number of SBS exchanges, and its initial
estimate continues to be reasonable.
---------------------------------------------------------------------------

\1042\ See Proposing Release, supra note 1, 87 FR at 28963.
---------------------------------------------------------------------------

The Commission considered whether any provision of proposed
Regulation SE would impose any burdens (as defined in the PRA) on SBSEF
members but received no comments on this point and continues to
estimate that the provisions of Regulation SE would not impose PRA
burdens on SBSEF members.

D. Total Annual Reporting and Recordkeeping Burden

1. Overview
The CFTC, based on its experience in developing rules for SEFs and
regulating the SEF market, has over the years developed, refined, and
received approval from OMB for paperwork burden hours estimates, both
for SEF rules directly as well as for ancillary rules on which various
rules in Regulation SE are modeled.\1043\ Those estimates are presented
in the form of aggregate totals for compliance with:
---------------------------------------------------------------------------

\1043\ See Core Principles and Other Requirements for Swap
Execution Facilities (May 17, 2013), 78 FR 33476, 33548-49 (June 4,
2013) (Final Rule PRA for CFTC part 37); Swap Execution Facility
Requirements (Nov. 27, 2020), 85 FR 82313, 82324 (Dec. 18, 2020)
(Final Rule PRA for 17 CFR 36.1); Core Principles and Other
Requirements for Swap Execution Facilities: OMB Control Number 3038-
0074 Supporting Statements (last updated July 26, 2021), available
at https://omb.report/omb/3038-0074 (PRA Supporting Statements for
CFTC Core Principles for SEFs, 17 CFR 36.1); Provisions Common to
Registered Entities (July 19, 2011), 76 FR 44776, 44789-90 (July 27,
2011) (Final Rule PRA for CFTC part 40); part 40, Provisions Common
to Registered Entities: OMB Control Number 3038-0093 Supporting
Statements (last updated Feb. 4, 2021), available at https://omb.report/omb/3038-0093 (PRA Supporting Statements for CFTC part
40, 17 CFR 36.1); Notification of Pending Legal Proceedings: OMB
Control Number 3038-0033 Supporting Statements (last updated Oct.
29, 2021), available at https://omb.report/omb/3038-0033 (PRA
Supporting Statements for 17 CFR 1.60(a), (c), and (e)); Adaptation
of Regulations To Incorporate Swaps (Oct. 16, 2012), 77 FR 66288,
66306-08 (Nov. 2, 2012) (Final Rule PRA for 17 CFR 1.59 and
1.37(c)); Recordkeeping (May 23, 2017), 82 FR 24479, 24485 (May 30,
2017) (Final Rule PRA for 17 CFR 1.31); Adaptation of Regulations to
Incorporate Swaps-Exclusion of Utility Operations-Related Swaps with
Utility Special Entities from De Minimis Threshold: OMB Control
Number 3038-0090 Supporting Statements (last updated July 1, 2020),
available at https://omb.report/omb/3038-0090 (PRA Supporting
Statements for 17 CFR 1.31, 1.37(c), 1.59, and 1.67); Service on
Self-Regulatory Organization Governing Boards or Committees by
Persons with Disciplinary Histories (Feb. 27, 1990), 55 FR 7884,
7890 (Mar. 6, 1990) (Final Rule PRA for 17 CFR 1.63); Final Rule and
Rule Amendments Concerning Composition of Various Self-Regulatory
Organization Governing Boards and Major Disciplinary Committees
(June 29, 1993), 58 FR 37644, 37653 (July 13, 1993) (Final Rule PRA
forSec. 1.64); Voting by Interested Members of Self-Regulatory
Organization Governing Boards and Committees (Dec. 23, 1998), 64 FR
16, 22 (Jan. 4, 1999) (Final Rule PRA for 17 CFR 1.69); Rules
Pertaining to Contract Markets and Their Members: OMB Control Number
3038-0022 Supporting Statements (last updated Dec. 21, 2010),
available at https://omb.report/omb/3038-0022 (PRA Supporting
Statements for 17 CFR 1.63, 1.64, and 1.69); Swap Data Recordkeeping
and Reporting Requirements (Dec. 20, 2011), 77 FR 2136, 2171-76
(Jan. 13, 2012) (Final Rule PRA for 17 CFR 45.2); Swap Data
Recordkeeping and Reporting Requirements: OMB Control Number 3038-
0096 Supporting Statements (last updated Mar. 16, 2021), available
at https://omb.report/omb/3038-0096 (PRA Supporting Statements for
17 CFR 45.2); Repeal of the Exempt Commercial Market and Exempt
Board of Trade Exemptions (Sept. 28, 2015), 80 FR 59575, 59576 (Oct.
2, 2015) (Final Rule PRA for 17 CFR 15.05).
---------------------------------------------------------------------------

Part 37 of the CFTC regulations regarding initial
registration requirements applicable to SEFs;
Part 37 regarding other requirements applicable to SEFs,
including the statutory Core Principles;
Part 40 of the CFTC regulations regarding requirements
applicable to SEFs (and other CFTC-registered entities); and
17 CFR 1.60(a), 1.60(c), 1.60(e), 36.1, 1.59, 1.63, 1.67,
15.05, 1.37(c), 1.64, and 1.69 regarding requirements applicable to
SEFs (and other CFTC-registered entities).
The rules applicable to SBSEFs are, with limited exceptions
discussed above, substantively similar to those applicable to SEFs.
Therefore, the Commission is basing its estimates for the paperwork
burdens for SBSEFs on the CFTC's paperwork burden calculations for
analogous rules that apply to SEFs, which have been approved by
OMB.\1044\ However, in certain cases, the paperwork burdens estimated
by the CFTC are scaled down for SBSEFs to account for the likelihood
that there will be fewer SBSEFs than SEFs and that the SBS business of
dually registered SEF/SBSEFs is likely to be smaller than the swap
business.
---------------------------------------------------------------------------

\1044\ Rule 835, which requires SBSEFs to file with the
Commission notices of final disciplinary actions and denials and
limitations of access, is not based on a CFTC rule but rather on an
existing Commission rule that imposes a similar filing requirement
on SROs. Therefore, the Commission is utilizing the burden estimates
in its rulemaking for SROs to estimate the burdens of this rule for
SBSEFs.
---------------------------------------------------------------------------

Although there are minor differences between the CFTC rules and the
Commission rules being adopted, the Commission does not need to

[[Page 87273]]

substantially deviate from the CFTC's estimates of aggregated burden
hours for compliance (beyond scaling back the CFTC's estimates to
account for the smaller number of SBSEFs, and the smaller size of the
SBS market relative to the swaps market). These minor differences
between the CFTC's existing rules for SEFs and the Commission's rules
for SBSEFs are prompted, in some cases, by minor differences between
the statutory provisions that apply to SEFs under the CEA and the
statutory provisions that apply to SBSEFs under the SEA, and, in other
cases, by differences between the swaps market and SBS market. In
either case, however, the Commission anticipates that the burdens on
SBSEFs would be substantially similar to the burdens set out in the
CFTC estimates, which serve as the basis for the Commission's
estimates.\1045\ Furthermore, basing the burden estimates for SBSEFs on
the CFTC's estimates for SEFs would be more accurate than using burden
hours estimates for any other entity that the Commission currently
regulates (e.g., national securities exchanges) because SBSEFs share
many more similarities with SEFs than they do with any other SEC-
registered entities.
---------------------------------------------------------------------------

\1045\ When the CFTC adopted the SEF rules in 2013, the CFTC
took a similar approach to burden hours estimation. The CFTC relied
on the aggregate burden hours for three types of entities that it
regulated (DCMs, derivatives transaction execution facilities, and
certain exempt commercial markets) and applied those burden hours to
SEFs unadjusted, even though there are differences between the
regulations that govern SEFs and those that govern the other
entities. The CFTC noted that those entities, like SEFs, were
subject to certain statutory Core Principles and rules thereunder,
and that, despite variations in the applicable regulations, it was
still appropriate to use the average aggregate burden number for
those entities as the estimate for SEFs without adjustment. See
CFTC, Core Principles and Other Requirements for Swap Execution
Facilities, 78 FR at 33548-51.
---------------------------------------------------------------------------

The Commission anticipates that most if not all entities that seek
to register with the Commission as SBSEFs will also register, or will
already be registered, with the CFTC as SEFs. With a few exceptions,
the rules being adopted by the Commission are adapted from existing
rules of the CFTC. With these rules, the Commission intends to obtain
comparable regulatory benefits as the CFTC rules while imposing only
marginal additional burdens on SEF/SBSEFs. However, for purposes of its
PRA analysis, the Commission will estimate the burdens as if a
respondent were subject only to the Commission's rules.\1046\
---------------------------------------------------------------------------

\1046\ However, there may be instances in which a rule would
require an SBSEF to generate the same paperwork that is already
being created pursuant to a CFTC rule. In such cases, compliance
with the existing CFTC requirement would satisfy the SEC
requirement, and in reality there would be few or de minimis burdens
imposed on dually registered SEF/SBSEFs.
---------------------------------------------------------------------------

The burden hours discussed below represent annual/ongoing burdens,
with three exceptions that represent initial, one-time burdens:
registration burdens for SBSEFs under Rule 803, exemption requests
regarding foreign SBS trading venues under Rule 833, and certain rules
under Rules 834(b) and (c).
The Commission requested comments on its entire proposed approach
to estimating burden hours and received no comment.\1047\ The
Commission continues to estimate the burdens at the levels set forth in
the Proposing Release. Therefore, for any provision that the Commission
is adopting as proposed, it is not changing its preliminary estimate,
except in one instance to account for an update in an estimate by the
CFTC that the Commission is using to base its burden estimates.\1048\
For any provision that the Commission is modifying from the proposal,
as discussed in more detail below, the Commission estimates that the
modification would result in no change in the burden estimate compared
to the proposal.
---------------------------------------------------------------------------

\1047\ See Proposing Release, supra note 1, 87 FR at 28969.
\1048\ As discussed below, the Commission has revised its burden
estimate for Rule 811(d) due to a corresponding revision by the CFTC
of its analogous rule.
---------------------------------------------------------------------------

2. Aggregate Burdens for Rules Modeled After CFTC Part 37 Rules
(a) Registration Requirements for SBSEFs and Form SBSEF
A submission by an entity wishing to register with the Commission
as an SBSEF would be required to be made on Form SBSEF, pursuant to
Rule 803, on a one-time basis. The Commission estimates that five
entities initially would seek to register with the Commission as
SBSEFs. The Commission estimates the burdens of Rule 803 and Form SBSEF
to be per respondent and aggregate of 295 and 1,475 hours,
respectively. These entities would incur initial, one-time burdens,
because once an entity is registered as an SBSEF, its registration
obligations are complete. The Commission's estimate regarding the
initial burden that an entity would incur to file a Form SBSEF is
informed by the estimates made by the CFTC for the completion of Form
SEF and compliance with Sec. 37.3 of the CFTC regulations (which
governs registration of SEFs). Form SBSEF requests almost exactly the
same information as required by Form SEF, and Rule 803 is substantially
similar to Sec. 37.3. The CFTC has estimated that the initial
compliance burden associated with its registration requirements in
Sec. 37.3 and Form SEF to be 295 hours per SEF applicant.\1049\ For
purposes of calculating burden hours, the CFTC considered the entire
SEF application process to constitute a single information collection;
the Commission is utilizing the same approach for SBSEFs. SBSEFs would
likely prepare Form SBSEF internally.
---------------------------------------------------------------------------

\1049\ See OMB, Supporting Statement for New and Revised
Information Collections: Core Principles and Other Requirements for
Swap Execution Facilities, OMB Control Number 3038-0074, Attachment
A (July 7, 2021), available at https://omb.report/icr/202107-3038-004/doc/113431800.pdf.
---------------------------------------------------------------------------

(b) Ongoing Compliance With Other Requirements That Are Similar to the
Remainder of Part 37
The Commission estimates the aggregate ongoing annual hour burden
for compliance with all of the SBSEF rules that have analogs in part 37
to be 1,935 hours.\1050\ The CFTC has estimated that the compliance
burden for all of the sections of part 37 combined, other than the
initial burden of 295 hours per SEF for registration-related compliance
discussed above, to be an ongoing annual burden of 387 hours per
SEF.\1051\ With the exception of Sec. 37.600, which implements a CEA
Core Principle for SEFs relating to position limits that is not present
in the SEA, every other section of part 37 has an analog in proposed
Regulation SE that is substantively similar.\1052\ Therefore, the
aggregate CFTC estimate of 387 hours per SEF per year serves as a
reasonable estimate for the annual hourly burden on each SBSEF.
---------------------------------------------------------------------------

\1050\ 1,935 hours = 387 hours (annual burden per respondent) x
5 (number of respondents).
\1051\ See OMB, Supporting Statement for New and Revised
Information Collections, OMB Control Number 3038-0074, at 8
(estimating that on a net basis the total burden hours imposed on
each SEF will be 387 hours).
\1052\ As discussed previously, the Commission proposed to
incorporate portions of the CFTC guidance into certain rules in
Regulation SE. The Commission is now adopting those portions of the
CFTC guidance as proposed into the rules of Regulation SE. The CFTC
guidance clarifies portions of its rules by suggesting means for
compliance and does not fundamentally alter those rules. When the
CFTC adopted this guidance into its regulations, it did not alter
its burden hours estimate. See, e.g., 2021 SEF Amendments Adopting
Release. Therefore, no adjustments to the CFTC estimates, on which
the Commission is basing its own estimates, would be appropriate
despite adapting that guidance into the Commission's rules.
---------------------------------------------------------------------------

As noted above, the Commission is adopting Rule 815 and 819 as
proposed, except that it is: (1) removing the proposed definition of a
``Block Trade'', a term used in Rule 815, from Rule 802 and reserving
that definition; (2) modifying Rule 815(d)(2) and (d)(3) to

[[Page 87274]]

narrow the scope of the package-transaction exception to the method of
execution requirements of Rule 815; (3) adding section (g) to Rule 815
to specify that a security-based swap that is intended to be cleared at
the time of the transaction, but is not accepted for clearing at a
registered clearing agency, shall be void ab initio; (4) amending Rule
819(e) to permit SBSEFs to contract with DCMs for the provision of
services to assist in complying with the SEA and Commission rules
thereunder, as approved by the Commission; (5) adding sections (c)(4)
and (g)(14) to Rule 819 to address Commission review of: (i) denial or
limitation of access to any service or denial or conditioning of
membership by an SBSEF and (ii) disciplinary sanctions imposed by an SB
SEF; and (6) removing certain mentions of block trades in various
places throughout Rule 819 because as mentioned above, a definition of
that term has not been adopted. Although these changes may have a
practical impact on respondents' SBS trading activity, the Commission
estimates that they do not increase or decrease the burden hours for
compliance with the Core Principles that are similar to the remainder
of part 37. The changes simply: (1) make modifications to accommodate
reserving the definition for a block trade; (2) narrow the scope of an
exception relating to package-transactions; (3) automatically declare
trades intended to be cleared but not accepted for clearing to be void
ab initio; (4) permit SBSEFs to contract with DCMs for certain
services; and (5) address Commission review of certain actions taken by
SBSEFs. None of these changes requires additional record-keeping or
reporting burdens (or results in a decrease in record-keeping and
reporting obligations). Therefore, the Commission estimates that the
per-respondent or aggregate totals of 387 hours and 1,935 hours,
respectively.
In addition, the Commission is modifying Rule 825 to make changes
to what type of information is required to be submitted in and timing
of publication of the daily market data report and to remove certain
mentions of block trades because that term will not be defined in
Regulation SE at this time. Rule 825 will not require the disclosure of
the number of block trades and will require publication of the report
as soon as reasonably practicable on the next business day but no later
than 7 a.m. (rather than before the beginning of trading) and several
mentions of block trades in Rule 825(c) have been removed. Not
requiring the disclosure of the number of block trades will have a
negligible impact on the reporting burden of preparing the daily market
data report. Rule 825 requires the report to contain numerous items.
The Commission estimates that eliminating block trades from one of the
required items (trade count) will reduce the hours burden for compiling
the report by a negligible amount. Similarly, changing the timing of
the publication of the report will have no impact on burden hours. The
Commission estimates that it will not require a greater or fewer number
of hours to compile the report as a result of the change in timing for
publication as it is the same report that is being compiled. Therefore,
the Commission continues to estimate a per-respondent and aggregate
totals of 387 hours and 1,935 hours, respectively.
As discussed in more detail below, certain SBSEF rules being
adopted in Regulation SE are derived from other parts of the CFTC's
rules (e.g., part 40) and the burdens for those rules will be based on
the appropriate burden hours of the corresponding CFTC part. For
reference, the following table lists all sections of part 37 and the
corresponding SBSEF rule. Please see above for more detailed
descriptions of a particular SBSEF rule.

------------------------------------------------------------------------
Analogous SBSEF
Rule # (387
aggregate burden
hours per SBSEF
not including Rule
CFTC part 37 section (387 803 (registration)
aggregate burden hours per SEF Topic and certain other
not including Sec. 37.3 rules not modeled
(registration) on part 37 rules
(discussed
separately in the
following
sections)
------------------------------------------------------------------------
37.1............................ Scope............. 800.
37.2............................ Applicable 801.
provisions.
37.4............................ Procedures for 810.
listing products.
37.5............................ Compliance........ 811.
37.6............................ Enforceability.... 812.
37.7............................ Prohibited use of 813.
data.
37.8............................ Entities operating 814.
as SEFs and DCMs.
37.9............................ Methods of 815.
execution.
37.10........................... Process to make 816.
swaps available
for trade.
37.11........................... Reserved section.. not applicable.
37.12........................... Trade execution 817.
compliance
schedule.
37.100.......................... CP 1 (compliance 818 (CP1).
with Core
Principles).
37.200 through 37.206........... CP 2 (compliance 819 (CP2).
with rules).
37.300 through 37.301........... CP 3 820 (CP3).
(manipulation).
37.400 through 37.408........... CP 4 (monitoring 821 (CP4).
of trading and
trade processing).
37.500 through 37.504........... CP 5 (ability to 822 (CP5).
obtain
information).
37.600 through 37.601........... CP 6 (position no equivalent
limits). requirement in
the SEA; CP
numbering
diverges after
this point.
37.700 through 37.703........... CP 7 (financial 823 (CP6).
integrity of
transactions).
37.800 through 37.801........... CP 8 (emergency 824 (CP7).
authority).
37.900 through 37.901........... CP 9 (publication 825 (CP 8).
of trading
information).
37.1000 through 37.1001......... CP 10 826 (CP 9).
(recordkeeping
and reporting).
37.1100 through 37.1101......... CP 11 (anti-trust) 827 (CP10).
37.1200......................... CP 12 (conflicts 828 (CP 11).
of interest).
37.1300 through 37.1307......... CP 13 (financial 829 (CP 12).
resources).
37.1400 through 37.1401......... CP 14 (system 830 (CP 13).
safeguards).
37.1500 through 1501............ CP 15 (CCO)....... 831 (CP 14).
Appendix A (Form SEF)........... Form SEF.......... Form SBSEF \a\.
Appendix B...................... Guidance relating guidance
to Core incorporated
Principles. throughout rules
818 through 831.
------------------------------------------------------------------------
\a\ The burdens of registering using Form SBSEF are discussed in the
previous section.

[[Page 87275]]

3. Aggregate Burdens for Rules Modeled on CFTC Part 40 Rules
A number of rules contained in Regulation SE are modeled on rules
in part 40 of the CFTC's rules, including Sec. Sec. 40.2 (Listing
products for trading by certification), 40.3 (Voluntary submission of
new products for Commission review and approval), 40.5 (Voluntary
submission of rules for Commission review and approval), and 40.6
(Self-certification of rules). The Commission is adopting Rules 804,
805, 806, and 807--which are closely modeled on Sec. Sec. 40.2, 40.3,
40.5, and 40.6, respectively--in order to harmonize with the procedures
that the CFTC applies to SEFs with respect to establishing new rules
and listing products. In addition, Rule 808 is modeled after Sec. 40.8
and provides that certain information in a Form SBSEF application or a
rule or product filing would be made publicly available, unless
confidential treatment is obtained pursuant to Rule 24b-2. Rule 809 is
loosely modeled after Sec. 40.12 and sets forth a mechanism for a
tolling of the period for consideration of a product pending the
issuance by the SEC and the CFTC of joint interpretation clarifying
which agency has jurisdiction over the product.
(a) Rule and Product Filing Processes for SBSEFs
Rules 804 and 805 require an SBSEF to submit filings for new
products that it seeks to list. Under Rules 806 and 807, an SBSEF is
required to submit rule filings for new rules or rule amendments,
including changes to a product's terms or conditions. The Commission's
estimate regarding the burdens that an SBSEF would incur to comply with
the rule and product filing processes in Rules 804, 805, 806, and 807
is informed by the estimates made by the CFTC for compliance with
Sec. Sec. 40.2, 40.3, 40.5, and 40.6, the burden hours for which have
been approved by OMB.\1053\ The Commission is estimating a total of
five SBSEF respondents. The Commission estimates that the aggregate
ongoing annual hourly burden for all SBSEFs to prepare and submit rule
and product filings under Rules 804, 805, 806, and 807 (including the
cover sheet \1054\) would be 300 hours.
---------------------------------------------------------------------------

\1053\ See 75 FR 67282 (Nov. 2, 2010) (CFTC proposal to amend 17
CFR 40.2 through 40.5); OMB, Supporting Statement for Information
Collection Renewal: OMB Control Number 3038-0093, Attachment A (July
10, 2020), available at https://omb.report/icr/202005-3038-001/doc/101274002.pdf (noting the estimated average number of hours to
burden hours report is 2 hours, and the number of annual responses
from each entity is 100).
\1054\ Each of the filings that is required by Rules 804 through
807 would have to include a submission cover sheet that is modeled
on the cover sheet and instructions used by SEFs in conjunction with
analogous filings with the CFTC, with the submitting entity checking
the appropriate box to indicate which type of the filing it is
making. Any burden hours attributable to a respondent completing
this cover sheet, which is an integral part of the filing, are not
estimated separately from the paperwork burden of the substantive
filing. Instead, they are contained within the aggregate burden
hours estimate for rule and product filings pursuant to Rules 804
through 807, which are based upon the CFTC's estimates. See supra
note 1053.
---------------------------------------------------------------------------

Based on the CFTC's experience with SEFs, the Commission estimates
that on average an SBSEF would incur an ongoing annual burden of 2
hours of work per rule or product filing. Although the CFTC estimated
an average of 100 responses per year per respondent,\1055\ an estimate
of 30 responses is appropriate given the more limited scope of the SBS
market, as opposed to the swaps market. This would result in a total
estimated ongoing annual burden of 60 hours per respondent \1056\ and
300 hours for all the respondents annually.\1057\
---------------------------------------------------------------------------

\1055\ See supra note 1053.
\1056\ 60 hours = 30 (number of responses per year per
respondent) x 2 hours (burden per response).
\1057\ 300 hours = 60 hours (annual burden per respondent
pursuant to Rules 804, 805, 806, and 807) x 5 (number of
respondents).
---------------------------------------------------------------------------

As noted above, the Commission is stating in this release that,
where a respondent is seeking to list a new category of product of
which there would be multiple specific products based on different
underlying securities, separate submissions under Rule 804 with respect
to each underlying security would not be required, but the submission
made would have to address why each of the included underlying
securities meets the relevant standards required by Regulation SE.
``Blanket'' certifications--e.g., a single submission for all equity
total return security-based swaps to be listed--would not meet the
requirements of Rule 804. This flexibility does not result in any
increase or decrease in estimated burden hours. Any time savings from
the ability to combine submissions under Rule 804 is likely to be
substantially, if not fully, offset by the burden of drafting the
explanation of why each of the included underlying securities meets the
relevant standards required by Regulation SE. Therefore, the changes do
not increase or decrease the burden hours for compliance with the rules
pertaining to new product filings under Rules 804 and 805. Indeed, as
described above, the per-respondent estimate for the requirements
related to the rule and product filing processes of 60 hours was an
estimate informed by the CFTC's similar provisions and was meant to
encompass the combined burdens that an SBSEF would incur to comply with
the rule and product filing processes in Rules 804, 805, 806, and 807.
Therefore, the Commission continues to estimate the per-respondent and
aggregate totals to be 60 hours and 300 hours, respectively.
(b) Burdens Related to Rules Modeled After Other Part 40 Rules
(i) Rule 802
Certain definitions contained in Rule 802 are modeled after
provisions of part 40. These definitions do not result in any paperwork
burden.
(ii) Rule 809
Rule 809 is loosely modeled on Sec. 40.12 of the CFTC's rules and
would apply when an SBSEF wishes to list a product and it is unclear
whether the product should be classified as an SBS subject to the
jurisdiction of the SEC or a swap subject to the jurisdiction of the
CFTC. Rule 809 provides that a product certification made by an SBSEF
pursuant to Rule 804 shall be stayed, or the review period for a
product that has been submitted for Commission approval by an SBSEF
pursuant to Rule 805 shall be tolled, upon a request, made pursuant to
Rule 3a68-2 under the SEA \1058\ by the SBSEF, the SEC, or the CFTC,
for a joint interpretation of whether the product is a swap, SBS, or
mixed swap.
---------------------------------------------------------------------------

\1058\ 17 CFR 240.3a68-2.
---------------------------------------------------------------------------

Rule 809 itself does not include a process for determining whether
the SEC or CFTC has jurisdiction over a product. Rule 809 would enable
the SEC to stay or toll the product filing while the SEC and CFTC
consider a joint interpretation under existing SEA Rule 3a68-2, the
burden hours of which have already been approved by OMB.\1059\ The only
burden imposed on an SBSEF under Rule 809 would be checking a box on
the submission cover sheet when the SBSEF intends to request a joint
interpretation from the Commission and the CFTC pursuant to SEA Rule
3a68-2.\1060\ The Commission estimates that

[[Page 87276]]

each such request would impose a burden of 0.25 hours. Furthermore, the
Commission estimates that each SBSEF would make one such request per
year.\1061\ Accordingly, the aggregate ongoing annual burden for all
SBSEFs to comply with Rule 809 would be 1.25 hours.\1062\ This work,
should it be required, is likely to be conducted internally.
---------------------------------------------------------------------------

\1059\ OMB recently approved an extension without change of the
collection for Rule 3a68-2. See Supporting Statement for the
Paperwork Reduction Act New Information Collection Submission for
Rule 3a68-2 (Interpretation of Swaps, Security-Based Swaps, and
Mixed Swaps) and Rule 3a68-4(c) (Process for Determining Regulatory
Treatment for Mixed Swaps), OMB Control Number 3235-0685, Supporting
Statement A (Dec. 23, 2021), available at https://omb.report/icr/202112-3235-018/doc/117438500.pdf.
\1060\ See supra section IV.E.
\1061\ The establishment of a registration regime and listing
procedures for SBSEFs could affect the distribution, but likely not
the total number, of requests for joint interpretations under Rule
3a68-2 of the SEA. SBS products may be developed in the bilateral
market before they are listed on SBSEFs, and there are incentives to
resolving jurisdictional issues before they can develop traction in
the market. Accordingly, requests for a joint interpretation under
Rule 3a68-2 could occur before such products are listed by an SBSEF,
and such requests are already considered in the approved PRA burden
estimates for Rule 3a68-2.
\1062\ 1.25 hours = 1 (number of responses per year per
respondent) x 0.25 hours (burden per response) x 5 (number of
respondents).
---------------------------------------------------------------------------

4. Aggregate Burdens for Rules Modeled After CFTC Rules Other Than
Parts 37 and 40
Adopted rules similar to rules of the CFTC other than part 37 and
part 40 are Rules 811(d), 816(e), 819(h), 819(i), 819(j), 819(k),
826(f), and 834. These rules generate various categories of burdens for
SBSEFs or market participants.
(a) Rule 811(d)
Section 1.60 of the CFTC's rules requires a SEF to provide the CFTC
with copies of any legal proceeding to which it is a party, or to which
its property or assets is subject.
Paragraph (d) of Rule 811 adapts paragraphs (a), (c), and (e) of
Sec. 1.60 to apply to SBSEFs. Paragraph (d)(1) requires an SBSEF to
provide the Commission a copy of the complaint, any dispositive or
partially dispositive decision, any notice of appeal filed concerning
such decision, and such further documents as the Commission may
thereafter request filed in any material legal proceeding to which the
SBSEF is a party or to which its property or assets are subject.
Paragraph (d)(2) requires an SBSEF to provide notices of similar
actions against any officer, director, or other official of the SBSEF
from conduct in such person's capacity as an official of the SBSEF
alleging violations of certain enumerated actions.
The Commission estimates that an SBSEF would provide the
information required by Rule 811(d) once per year, and that each
submission would take 0.25 hours. Thus, the Commission estimates that
the aggregate ongoing annual burden for all SBSEFs to comply with
requests for documents or information pursuant to Rule 811(d) would be
1.25 hours.\1063\ The Commission is basing its estimate on the CFTC
estimate included in its submission to OMB for Sec. 1.60 of the CFTC's
rules, for which the CFTC estimated that each of the 97 entities to
which the rule applies makes, on average, one submission of documents
to the Commission per year. The CFTC further estimated that the time
required to prepare one submission is approximately 0.25 hour, totaling
24.25 hours (97 x 0.25) annually.\1064\
---------------------------------------------------------------------------

\1063\ 1 (number of responses per year per respondent) x 0.25
hours (burden per response) x 5 (number of respondents) = 1.25 hour.
\1064\ See OMB, Supporting Statement for New and Revised
Information Collections: OMB Control Number 3038-0033 (Oct. 29,
2021), available at https://omb.report/icr/202110-3038-001/doc/115991000.pdf.
---------------------------------------------------------------------------

For PRA purposes, it is reasonable to apply the CFTC's approach to
Rule 811(d).\1065\ This work, should it be required, is likely to be
conducted internally.
---------------------------------------------------------------------------

\1065\ In its preliminary estimates, the Commission based its
burden hour calculations upon CFTC 2018 submission to OMB. The
Commission is now updating the numbers to reflect numbers from the
2021 submission to OMB. The result is the per response burden has
increased from .2 hours to .25 hours. See OMB, Supporting Statement
for New and Revised Information Collections: OMB Control Number
3038-0033 (Oct. 29, 2021), available at https://omb.report/icr/202110-3038-001/doc/115991000.pdf.
---------------------------------------------------------------------------

(b) Rule 819(h)
Paragraph (h) of Rule 819 generally prohibits persons who are
employees of an SBSEF, or who otherwise might have access to
confidential information because of their role with the SBSEF, from
improperly utilizing that information. Rule 819(h) is modeled on Sec.
1.59 of the CFTC's rules. The Commission does not estimate that this
rule would result in a paperwork burden.
(c) Rule 819(i)
Paragraph (i) of Rule 819 bars persons with specified disciplinary
histories from serving on the governing board or committees of an SBSEF
and impose certain other duties on the SBSEF associated with that
fundamental requirement. Rule 819(i) is modeled on Sec. 1.63 of the
CFTC's rules.
The Commission estimates that an SBSEF would provide the
information required by Rule 819(i) once per year, and that each
submission would take 79.83 hours. Thus, the Commission estimates that
the aggregate ongoing annual burden for all SBSEFs to comply with Rule
819(i) would be 399.15 hours.\1066\ The Commission is basing this
estimate on the estimate the CFTC included in its submission to OMB for
its adoption of Sec. 1.63, where the CFTC estimated that each
respondent would make, on average, one such submission to the CFTC per
year. The CFTC further estimated that the time required to prepare one
submission is approximately 79.83 hours.\1067\
---------------------------------------------------------------------------

\1066\ 1 (number of responses per year per respondent) x 79.83
hours (burden per response) x 5 (number of respondents) = 399.15
hours.
\1067\ See CFTC, Service on Self-Regulatory Organization
Governing Boards or Committees by Persons with Disciplinary
Histories (Feb. 27, 1990), 55 FR 7884, 7890 (Mar. 6, 1990) (final
rule PRA for Sec. 1.63).
---------------------------------------------------------------------------

For PRA purposes, it is reasonable to apply the CFTC's approach to
Rule 819(i), and this work is likely to be conducted internally.
(d) Rule 819(j)
Paragraph (j) of Rule 819 is modeled on Sec. 1.67 of the CFTC's
rules. Rule 819(j)(1) provides that, upon any final disciplinary action
in which an SBSEF finds that a member has committed a rule violation
that involved a transaction for a customer, whether executed or not,
and that resulted in financial harm to the customer, the SBSEF must
promptly provide written notice of the disciplinary action to the
member.
The Commission estimates that an SBSEF would need 0.5 hours to
prepare a notice and provide it to a member. This estimate is based on
a previous Commission estimate for the time that it would take to
prepare and submit a simple notice.\1068\ The Commission estimates that
these notices would occur once per year at each SBSEF, resulting in an
aggregate ongoing annual burden to comply with Rule 819(j) of 2.5
hours.\1069\ This work, should it be required, is likely to be
conducted internally.
---------------------------------------------------------------------------

\1068\ Rule 819(j) does not address any of the requirements or
process concerning taking final disciplinary actions; it merely
requires that a notice be provided. A provision of Regulation SCI,
Rule 1000(b)(4)(i), also requires providing a simple notice and the
Commission estimated that it would take 0.5 hours to prepare and
such a notice. See Regulation Systems Compliance and Integrity;
Final Rule, SEA Release No. 73639 (Nov. 19, 2014), 79 FR 72251,
72381 (Dec. 5, 2014).
\1069\ 2.5 hours (0.5 hours of in-house counsel time) x (1
responses per year) x (5 respondents). The once per year estimate is
based on a previous CFTC estimate included in its submission to OMB
for Sec. 1.67 along with other rules.
---------------------------------------------------------------------------

(e) Rule 819(k)
Paragraph (k) of Rule 819 requires non-U.S. persons who trade on an
SBSEF to have an agent for service process, which could be an agent of
its own choosing or, by default, the SBSEF.

[[Page 87277]]

Rule 819(k) is modeled on provisions of Sec. 15.05 of the CFTC's rules
that apply to SEFs. The Commission does not estimate that this rule
would result in a paperwork burden.
(f) Rule 826(f)
Rule 826(f) is modeled on Sec. 1.37(c) and requires an SBSEF to
keep a record in permanent form, which shall show the true name,
address, and principal occupation or business of any non-U.S. member
that executes transactions on the SBSEF and must, upon request, provide
to the Commission information regarding the name of any person
guaranteeing such transactions or exercising any control over the
trading of such non-U.S. member.
The Commission estimates that each SBSEF would need to update
information required by Rule 826(f) once per year and that each
submission would take 0.4 hours. Thus, the Commission estimates that
the aggregate ongoing annual burden for all SBSEFs to comply with
requests for documents or information pursuant to Rule 826(f) would be
2 hours.\1070\ The Commission is basing its estimate on the estimate
included by the CFTC in its submission to OMB regarding Sec. 1.37(c),
where the CFTC estimated that it would take a SEF 0.4 hours to prepare
each record in accordance with Sec. 1.37(c).
---------------------------------------------------------------------------

\1070\ 1 (number of responses per year per respondent) x 0.40
hours (burden per response) x 5 (number of respondents) = 2 hours.
---------------------------------------------------------------------------

For PRA purposes, it is reasonable to apply the CFTC's approach to
Rule 826(f). This work, should it be required, is likely to be
conducted internally.
(g) Rule 834
Rule 834 of Regulation SE implements section 765 of the Dodd-Frank
Act with respect to SBSEFs and SBS exchanges and, in addition, adapt
certain CFTC rules that are designed to mitigate conflicts of interest
at SEFs (and other CFTC-registered entities). Rule 834 provides that
each SBSEF and SBS exchange must create and maintain rules to mitigate
conflicts of interest between SBSEFs and SBS exchanges and their
members, including by prohibiting members from owning 20% or more of
the voting rights of an SBSEF or SBS exchange and from exercising
disproportionate influence in disciplinary proceedings. Rule 834 also
requires each SBSEF and SBS exchange to submit to the Commission after
every governing board election a list of each governing board's
members, the groups they represent, and how the composition of the
board complies with the requirements of Rule 834. Establishing such
rules and submitting such lists to the Commission would result in a
paperwork burden for SBSEFs and SBS exchanges.
The Commission estimates that Rules 834(b) and (c) together would
have an initial, one-time paperwork burden of 15 hours per entity
associated with drafting and implementing any such rules, for an
aggregate one-time paperwork burden of 120 hours.\1071\ Rules 834(b)
and (c) are substantially similar to Proposed Rule 702(c) of Regulation
MC.\1072\ In its PRA analysis for Proposed Rule 702(c), the Commission
estimated that there would be a one-time paperwork burden of 15 hours
per entity associated with drafting and implementation of any such
rules by each SBSEF or SBS exchange.\1073\ While the Commission is
modifying Rule 834(b) to provide an exception to the 20% restriction
mentioned above to SBSEFs that have entered into an agreement with a
registered futures association or a national securities association for
the provision of certain specified regulatory services, the Commission
does not estimate that this exception would result in a change in
burden hours for compliance with Rule 834(b). The modification does not
affect the information collection under this rule, as it does not
involve any record keeping, reporting, or third-party disclosure
obligations. Therefore, the Commission is not altering its estimate of
15 hours per entity for Rule 834(b).\1074\
---------------------------------------------------------------------------

\1071\ 1 (number of responses per respondent) x 15 hours (burden
per response) x 8 (5 SBSEFs + 3 SBS exchanges) = 120 hours. Rule
834(a) contains defined terms and would not result in a paperwork
burden.
\1072\ Regulation MC Proposal, supra note 21, 75 FR at 65916.
\1073\ Id.
\1074\ See supra section VIII.B for discussion of the 20%
restriction.
---------------------------------------------------------------------------

Additionally, the Commission estimates that Rule 834(d), Rule
834(e), and Rule 834(f), combined, would result in an aggregate ongoing
annual paperwork burden of 10 hours.\1075\ Rules 834(d), (e), and (f)
are substantially similar to Proposed Rule 702(h) in Regulation MC in
2010 \1076\ and CFTC Sec. 1.64(c)(4), CFTC Sec. 1.64(b), and CFTC
Sec. 1.64(d), respectively. The Commission is basing its estimate on
the CFTC's estimate that Rules 1.41(d),\1077\ 1.63, 1.64, and 1.67
would result in an average annual paperwork burden of 1.25 hours per
response that was included in its submission to OMB.\1078\
---------------------------------------------------------------------------

\1075\ 10 hours = 1 (number of responses per respondent) x 1.25
hours (burden per response) x 8 (number of SBSEF + SBS exchange
respondents).
\1076\ Regulation MC Proposal, supra note 21, 75 FR at 65932.
\1077\ While Sec. 1.41(d) created an exemption from the
requirements of section 5a(a)(12)(A) of the CEA for contract market
rules not related to terms and conditions, the CFTC did not break
out the portion of the burden hours for which this amendment is
responsible. Therefore, to be conservative, the Commission is
including it in its estimate for the burden hours of Rules 834(d),
(e), and (f).
\1078\ See 58 FR 37644, 37653.
---------------------------------------------------------------------------

The Commission estimates that Rule 834(g) would have an aggregate
ongoing annual burden of 16 hours.\1079\ Rule 834(g) is substantially
similar to Sec. 1.69 of the CFTC's rules, and the Commission is basing
its estimate on the CFTC's estimate for Sec. 1.69 of 2 hours per
response that was included in its submission to OMB.\1080\
---------------------------------------------------------------------------

\1079\ 16 hours = 1 (number of responses per respondent) x 2
hours (burden per response) x 8 (number of SBSEF + SBS exchange
respondents).
\1080\ See 64 FR at 16, 22.
---------------------------------------------------------------------------

The Commission does not estimate that Rule 834(h) would result in a
paperwork burden not already included in the above estimates. Rule
834(h) incorporates into a single rule the requirements for an SBSEF to
file rules to comply with Rule 834. As it has already described the
paperwork burdens of Rules 834(b) through (g), the Commission does not
estimate that Rule 834(h) would result in a separate paperwork burden
not already included above. Thus, the total aggregate ongoing annual
burden is estimated at 26 hours.\1081\
---------------------------------------------------------------------------

\1081\ 26 hours = 10 hours (from the second sentence of Rules
834(d), 834(e), and 834(f)) + 16 hours (from Rule 834(g)) + 0 hours
(from Rule 834(h).
---------------------------------------------------------------------------

5. Miscellaneous Burdens
(a) Rule 833
Rule 833 describes how exemptions could be obtained for foreign SBS
trading venues from the SEA definitions of ``exchange,'' ``security-
based swap execution facility,'' and ``broker'' and how SBS executed on
a foreign trading venue could become exempt from the SEA's trade
execution requirement. Based on the CFTC's experience in the SEF
market,\1082\ the Commission estimates that there would be three
requests for an exemption order under either or both paragraphs (a) and
(b) of Rule 833 in the first year and two requests in each subsequent
year; and that each submission would require an initial, one-time
burden of 80 hours. Once an exemption has been granted to an applicant,
no further action would be required. The Commission estimates the
burden to submit an exemption request under one or both paragraphs of
Rule 833 would be 240 hours in the first

[[Page 87278]]

year \1083\ and 160 hours in each subsequent year.\1084\
---------------------------------------------------------------------------

\1082\ See supra text accompanying note 1041.
\1083\ 240 hours (80 hours of in-house counsel time) x (3
respondents).
\1084\ 160 hours (80 hours of in-house counsel time) x (2
respondents). This estimate is informed by Rule 908(c) of the
Commission's Regulation SBSR, which sets forth the requirements
surrounding requests under which regulatory reporting and public
dissemination of SBS transactions can be satisfied by complying with
the rules of a foreign jurisdiction rather than the parallel rules
applicable in the United States. The materials necessary to support
such a request under Rule 908(c) are broadly similar to the
materials necessary to support a request for an exemption order
under one or both paragraphs of Rule 833. The Commission estimated
that the burden of a request under Rule 908(c) would be 80 hours of
in-house counsel time; therefore, the Commission estimates that
burden for submitting documents and information in support of a
request for an exemption order under Rule 833 would be the same.
---------------------------------------------------------------------------

(b) Rule 835
Rule 835 provides that, if an SBSEF issues a final disciplinary
action against a member, takes final action with respect to a denial or
conditioning membership, or takes final action with respect to a denial
or limitation of access of a person to any services offered by the
SBSEF, the SBSEF shall file a notice of such action with the Commission
within 30 days and serve a copy on the affected person.
The Commission estimates that it would take 0.5 hours to prepare
this notice and provide it to the Commission and the affected person.
This estimate is based on a previous Commission estimate for the time
that it would take to prepare and submit a simple notice.\1085\ The
Commission estimates that it would take an additional 0.25 hours to
create and serve a copy of that notice on the affected person. The
Commission estimates that these notices would occur once per month at
each SBSEF, resulting in an aggregate annual burden to comply with Rule
835 of 45 hours.\1086\ This work, should it be required, is likely to
be conducted internally.
---------------------------------------------------------------------------

\1085\ A provision of Regulation SCI, Rule 1000(b)(4)(i), also
requires providing a simple notice and the Commission estimated that
it would take 0.5 hours to prepare and such a notice. See Regulation
Systems Compliance and Integrity; Final Rule, SEA Release No. 73639
(Nov. 19, 2014), 79 FR 72251, 72381 (Dec. 5, 2014).
\1086\ 45 hours (0.75 hours of in-house counsel time) x (12
responses per year) x (5 respondents).
---------------------------------------------------------------------------

6. Total Paperwork Burden Under Proposed Regulation SE
Based on the foregoing, the Commission estimates that the total
one-time burden for all SBSEFs, persons that seek an exemption order
under Rule 833, and SBS exchanges combined pursuant to the requirements
under Regulation SE is equal to 1,995 hours. The Commission estimates
that annual ongoing burden for all SBSEFs, persons that seek an
exemption order under Rule 833, and SBS exchanges combined pursuant to
the requirements under Regulation SE is equal to 2,712.15 hours.

Summary of Aggregate Burden Hours
----------------------------------------------------------------------------------------------------------------
Burden hours
Rule or provision per One-time or ongoing Respondents Total hours
respondent
----------------------------------------------------------------------------------------------------------------
Registration (Rule 803, Form SBSEF). 295 One-Time............... 5 1,475
Rules modeled on CFTC part 37 (other 387 Ongoing................ 5 1,935
than registration).
Rule and product filing processes 60 Ongoing................ 5 300
(Rules 804 through 807).
809................................. 0.25 Ongoing................ 5 1.25
811(d).............................. 0.25 Ongoing................ 5 1.25
819(i).............................. 79.83 Ongoing................ 5 399.15
819(j).............................. 0.5 Ongoing................ 5 2.5
826(f).............................. 0.4 Ongoing................ 5 2
833................................. 80 One-Time............... \a\ 3 and 2 240 and 160
834(b) through (c).................. 15 One-Time............... 8 120
834(d) through (g).................. 3.25 Ongoing................ 8 26
835................................. 9 Ongoing................ 5 45
----------------------------------------------------------------------------------------------------------------
\a\ Three respondents in the first year and then two each subsequent year.

E. Collection of Information is Mandatory

The collections of information imposed on SBSEFs throughout
Regulation SE is mandatory for registered SBSEFs. The collection of
information with respect to Rule 833 is mandatory for persons that seek
an exemption order under Rule 833. The collection of information with
respect to Rule 834 is mandatory for SBS exchanges.

F. Responses to Collection of Information Will Not Be Confidential

The collection of information required under Regulation SE would
generally not be kept confidential, unless confidential treatment is
requested and granted by the Commission pursuant to Rule 24b-2 under
the SEA.

G. Retention Period of Recordkeeping Requirements

Although recordkeeping and retention requirements have not yet been
established for SBSEFs, the Commission is authorized to adopt such
rules under section 3D of the SEA. Rule 826 under Regulation SE
implements section 3D(d)(9) of the SEA to require an SBSEF to maintain
records, for a minimum of five years, of all activities relating to the
business of the SBSEF, including a complete audit trail.

XIX. Regulatory Flexibility Certification

The Regulatory Flexibility Act (``RFA'') \1087\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) of the Administrative Procedure
Act,\1088\ as amended by the RFA, generally requires the Commission to
undertake a final regulatory flexibility analysis of rules it is
adopting, unless the Commission certifies that the rules would not have
a significant impact on a substantial number of ``small entities.''
\1089\ Section 605(b) of the RFA states that this requirement shall not
apply to any proposed rule or proposed rule amendment which, if
adopted,

[[Page 87279]]

would not have a significant economic impact on a substantial number of
small entities.\1090\ In the Proposing Release, the Commission
certified, pursuant to section 605(b) of the RFA, that that the
proposed rules, form, and cover sheet under Regulation SE and the
related rules and rule amendments, if adopted, would not have a
significant economic impact on a substantial number of small entities
for purposes of the RFA.\1091\ The Commission solicited but did not
receive any comments on the certification as it related to the entities
impacted by Regulation SE. The Commission's analysis of the existing
information relating to entities subject to Regulation SE, for purposes
of the RFA, is discussed below.
---------------------------------------------------------------------------

\1087\ 5 U.S.C. 601 et seq.
\1088\ 5 U.S.C. 603(a).
\1089\ Although section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
``small entity'' for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as relevant to this
rulemaking, are set forth in Rule 0-10 under the SEA, 17 CFR 240.0-
10. See SEA Release No. 18452 (Jan. 28, 1982), 47 FR 5215 (Feb. 4,
1982) (File No. AS-305).
\1090\ See 5 U.S.C. 605(b).
\1091\ See Proposing Release, supra note 1, 87 FR at 28969-70.
---------------------------------------------------------------------------

A. SBSEFs

Most of Regulation SE, and the related rules and rule amendments,
apply to registered SBSEFs (or entities that are seeking to register
with the Commission as SBSEFs). In the Dodd-Frank Act, Congress defined
SBSEFs as a new type of trading venue for SBS and mandated the
registration of these entities. Based on its understanding of the
market, and review of and consultation with industry sources, the
Commission estimates that five entities will seek to register as SBSEFs
and thus would be subject to Regulation SE and the related rules and
rule amendments.
For purposes of Commission rulemaking in connection with the FRFA,
a small entity includes: (1) when used with reference to an ``issuer''
or a ``person,'' other than an investment company, an ``issuer'' or
``person'' that, on the last day of its most recent fiscal year, had
total assets of $5 million or less; \1092\ or (2) a broker-dealer with
total capital (net worth plus subordinated liabilities) of less than
$500,000 on the date in the prior fiscal year as of which its audited
financial statements were prepared pursuant to Rule 17a-5(d) under the
SEA,\1093\ or, if not required to file such statements, a broker-dealer
with total capital (net worth plus subordinated liabilities) of less
than $500,000 on the last business day of the preceding fiscal year (or
in the time that it has been in business, if shorter); and is not
affiliated with any person (other than a natural person) that is not a
small business or small organization.\1094\ Under the standards adopted
by the Small Business Administration (``SBA''), entities in financial
investments and related activities \1095\ are considered small entities
if they have $41.5 million or less in annual receipts.
---------------------------------------------------------------------------

\1092\ See 17 CFR 240.0-10(a).
\1093\ 17 CFR 240.17a-5(d).
\1094\ See 17 CFR 240.0-10(c).
\1095\ These entities would include firms involved in investment
banking and securities dealing; securities brokerage; commodity
contracts dealing; commodity contracts brokerage; securities and
commodity exchanges; portfolio management; investment advice; trust,
fiduciary and custody activities; miscellaneous intermediation; and
miscellaneous financial investment activities. See SBA's Table of
Small Business Size Standards, Subsector 523.
---------------------------------------------------------------------------

Most, if not all, SBSEFs would be large business entities or
subsidiaries of large business entities, and that every SBSEF (or its
parent entity) would have assets in excess of $5 million (or in the
case of a broker-dealer, total capital of less than $500,000) and
annual receipts in excess of $41,500,000. Therefore, for purposes of
the RFA none of the potential SBSEFs would be considered small
entities.

B. Persons Requesting an Exemption Order Pursuant to Rule 833

Rule 833 describes how foreign SBS trading venues could become
exempt from the SEA definitions of ``exchange,'' ``security-based swap
execution facility,'' and ``broker'' and how SBS executed on a foreign
trading venue could become exempt from the SEA's trade execution
requirement. Based on the fact that the CFTC has granted similar
exemptions with respect to three foreign jurisdictions,\1096\ the
Commission estimates that there would be three requests under one or
both paragraphs of Rule 833 in the first year and two in each
subsequent year. These requests would likely be submitted by foreign
SBS trading venues, foreign authorities that license and regulate those
trading venues, or covered persons (as defined in Rule 832) who are
members of such trading venues.
---------------------------------------------------------------------------

\1096\ See supra text accompanying note 1041.
---------------------------------------------------------------------------

Based on the Commission's existing information about the SBS
market, the Commission estimates that for purposes of the FRFA no
person likely to request an exemption order pursuant to Rule 833 would
be considered a small entity. The Commission estimates that most, if
not all, of the persons requesting exemptions would be large business
entities or subsidiaries of large business entities, and on its own, or
through its parent entity, would have assets in excess of $5 million
(or in the case of a broker-dealer, total capital of less than
$500,000) and annual receipts in excess of $41,500,000. Therefore, the
Commission estimates that for purposes of the RFA they would not be
considered small entities.

C. SBS Exchanges

Certain rules under Regulation SE apply to SBS exchanges.
Currently, there are no SBS exchanges. However, the Commission
estimates that there could be up to three entities that would be
considered SBS exchanges and would thus be subject to certain
requirements of Regulation SE.
For purposes of Commission rulemaking in connection with the RFA, a
small entity includes, when used with reference to an exchange, an
exchange that has been exempted from the reporting requirements of Rule
601 of Regulation NMS \1097\ and is not affiliated with any person
(other than a natural person) that is not a small business or small
organization.\1098\ Under the standards adopted by the SBA, entities
involved in financial investments and related activities \1099\ are
considered small entities if they have $41.5 million or less in annual
receipts.
---------------------------------------------------------------------------

\1097\ 17 CFR 242.601.
\1098\ See 17 CFR 240.0-10(e).
\1099\ These entities would include firms involved in investment
banking and securities dealing, securities brokerage, commodity
contracts dealing, commodity contracts brokerage, securities and
commodity exchanges, miscellaneous intermediation, portfolio
management, investment advice, trust, fiduciary and custody
activities, and miscellaneous financial investment activities. See
SBA's Table of Small Business Size Standards, Subsector 523.
---------------------------------------------------------------------------

Based on these definitions and the Commission's existing
information about national securities exchanges, for purposes of the
RFA the entities likely to be considered SBS exchanges would not be
considered small entities. Under the standard requiring exemption from
the reporting requirements of Rule 601 under the SEA, none of the
exchanges subject to Regulation SE is a ``small entity'' for the
purposes of the RFA. In addition, the Commission estimates that any SBS
exchange would have annual receipts in excess of $41,500,000.
Therefore, for purposes of the RFA, no potential SBS exchange would be
considered small entities.

D. Certification

For the foregoing reasons, the Commission certifies, pursuant to
section 605(b) of Title 5 of the U.S. Code, that the rules, form, and
cover sheet under Regulation SE and the related rules and rule
amendments will not have a significant economic impact on a substantial
number of small entities.

XX. Other Matters

If any of the provisions of these rules, or the application thereof
to any person or circumstance, is held to be invalid, such invalidity
shall not affect other

[[Page 87280]]

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,\1100\ 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).
---------------------------------------------------------------------------

\1100\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

Statutory Authority

Pursuant to the SEA (particularly sections 3(b), 3C, 3D, and 36
thereof, 15 U.S.C. 78c, 78c-3, 78c-4, and 78mm, respectively) and the
Dodd-Frank Act (particularly section 765 thereof, 15 U.S.C. 8343), the
Commission is amending Sec. Sec. 201.101, 201.202, 201.210, 201.401,
201.450, 201.460, 232.405, and 240.3a1-1 of chapter II of title 17 of
the Code of Federal Regulations and is adopting new Sec. Sec. 201.442,
201.443, 240.15a-12, and 242.800 through 242.835, as set forth below.

List of Subjects

17 CFR Part 200

Organization; Conduct and Ethics; and Information and Requests.

17 CFR Part 201

Administrative practice and procedure.

17 CFR Part 232

Administrative practice and procedure, Confidential business
information, Incorporation by reference, Reporting and recordkeeping
requirements, Securities.

17 CFR Part 240

Brokers, Dealers, Registration, Securities.

17 CFR 242 and 249

Brokers, Security-based swap execution facilities, Reporting and
recordkeeping requirements.

For the reasons stated in the preamble, the Commission is amending
title 17, chapter II of the Code of the Federal Regulations as follows:

PART 200--ORGANIZATION; CONDUCT AND ETHICS; INFORMATION AND
REQUESTS

0
1. The authority citation for part 200 continues to read as follows:

Authority: 5 U.S.C. 552, 552a, 552b, and 557; 11 U.S.C. 901 and
1109(a); 15 U.S.C. 77c, 77e, 77f, 77g, 77h, 77j, 77o, 77q, 77s, 77u,
77z-3, 77ggg(a), 77hhh, 77sss, 77uuu, 78b, 78c(b), 78d, 78d-1, 78d-
2, 78e, 78f, 78g, 78h, 78i, 78k, 78k-1, 78l, 78m, 78n, 78o, 78o-4,
78q, 78q-1, 78w, 78t-1, 78u, 78w, 78ll(d), 78mm, 78eee, 80a-8, 80a-
20, 80a-24, 80a-29, 80a-37, 80a-41, 80a-44(a), 80a-44(b), 80b-3,
80b-4, 80b-5, 80b-9, 80b-10(a), 80b-11, 7202, and 7211 et seq.; 29
U.S.C. 794; 44 U.S.C. 3506 and 3507; Reorganization Plan No. 10 of
1950 (15 U.S.C. 78d); sec. 8G, Pub. L. 95-452, 92 Stat. 1101 (5
U.S.C. App.); sec. 913, Pub. L. 111-203, 124 Stat. 1376, 1827; sec.
3(a), Pub. L. 114-185, 130 Stat. 538; E.O. 11222, 30 FR 6469, 3 CFR,
1964-1965 Comp., p. 36; E.O. 12356, 47 FR 14874, 3 CFR, 1982 Comp.,
p. 166; E.O. 12600, 52 FR 23781, 3 CFR, 1987 Comp., p. 235;
Information Security Oversight Office Directive No. 1, 47 FR 27836;
and 5 CFR 735.104 and 5 CFR parts 2634 and 2635, unless otherwise
noted.

Subpart A--Organization and Program Management

0
2. Amend Sec. 200.30-3 by adding paragraphs (a)(95) through (102) to
read as follows:

Sec. 200.30-3 Delegation of authority to Director of Division of
Trading and Markets.

* * * * *
(a) * * *
(95) Pursuant to Sec. Sec. 242.803 and 242.808(a) and (b) of this
chapter (Rules 803 and 808(a) and (b)):
(i) To publish notice on the Commission's website of a completed
application (``Form SBSEF''), to register as a security-based swap
execution facility;
(ii) To make available on the Commission's website certain
specified parts of a Form SBSEF;
(iii) To notify the applicant that its application is incomplete
and will not be deemed to have been submitted for purposes of the
Commission's review;
(iv) To request from the applicant any additional information and
documentation necessary to review an application;
(v) To notify the applicant that its application is materially
incomplete and to specify the deficiencies in the application, for
purposes of staying the 180-day period for Commission review of the
Form SBSEF; and
(vi) Upon receipt of a request submitted in good form by a
security-based swap execution facility for vacation of its
registration, to issue an order vacating the security-based swap
execution facility's registration and to send a copy of the request and
its order to all other security-based swap execution facilities,
national securities exchanges that trade security-based swaps, and
registered clearing agencies that clear security-based swaps.
(96) Pursuant to Sec. Sec. 242.804(c)(1) and (2) and 242.808(b) of
this chapter:
(i) To make publicly available on the Commission's website a
security-based swap execution facility's filing of new products
pursuant to the self-certification procedures of Sec. 242.804 of this
chapter;
(ii) To stay for a period of up to 90 days the effectiveness of a
security-based swap execution facility's self-certification of a new
product;
(iii) To publish notice on the Commission's website of a 30-day
period for public comment; and
(iv) To withdraw the stay or notify the security-based swap
execution facility that the Commission objects to the proposed
certification.
(97) Pursuant to Sec. Sec. 242.805(b) through (e) and 242.808(b)
of this chapter:
(i) To make publicly available on the Commission's website a
security-based swap execution facility's filing of new products for
Commission review and approval pursuant to Sec. 242.805 of this
chapter (Rule 805);
(ii) To notify the submitting security-based swap execution
facility that a submission for a new product does not comply with
paragraph (a) of Sec. 242.805 of this chapter (Rule 805);
(iii) To extend by an additional 45 days the period for
consideration of a new product voluntarily submitted by a security-
based swap execution facility to the Commission for approval, if the
product raises novel or complex issues that require additional time to
analyze, and to notify the security-based swap execution facility of
the extension within the initial 45-day review period and briefly
describe the nature of the specific issue(s) for which additional time
for review is required;
(iv) To extend the period for consideration of a new product
voluntarily submitted by a security-based swap execution facility to
the Commission for approval by such longer period as to which the
security-based swap execution facility agrees in writing;
(v) To approve a proposed new product and provide notice of the
approval to the security-based swap execution facility;
(vi) To notify the security-based swap execution facility that the
Commission will not, or is unable to, approve the product, and to
specify the nature of the issues raised and the specific provision of
the Act or the Commission's rules thereunder, including the form or
content requirements Sec. 242.805(a) of this chapter, that the product
violates, appears to violate, or potentially violates but which cannot
be ascertained from the submission.
(98) Pursuant to Sec. Sec. 242.806(b) through (e) and 242.808(b)
of this chapter:
(i) To make publicly available on the Commission's website a
security-based

[[Page 87281]]

swap execution facility's filing of new rules and rule amendments for
Commission review and approval pursuant to Sec. 242.806(a) of this
chapter;
(ii) To notify the submitting security-based swap execution
facility that a submission for a new rule or rule amendment does not
comply with Sec. 242.806(a) of this chapter;
(iii) To extend by an additional 45 days the period for
consideration of a new rule or rule amendment voluntarily submitted by
a security-based swap execution facility to the Commission, if the
proposed rule or rule amendment raises novel or complex issues that
require additional time to review or is of major economic significance,
the submission is incomplete, or the requester does not respond
completely to the Commission questions in a timely manner, and to
notify the security-based swap execution facility of the extension
within the initial 45-day review period and briefly describe the nature
of the specific issue(s) for which additional time for review is
required;
(iv) To extend the period for consideration of a new rule amendment
voluntarily submitted by a security-based swap execution facility to
the Commission for approval by such longer period as to which the
security-based swap execution facility agrees in writing;
(v) To approve a proposed rule or rule amendment and provide notice
of the approval to the security-based swap execution facility;
(vi) To notify a security-based swap execution facility that the
Commission will not, or is unable to, approve the new rule or rule
amendment and to specify the nature of the issues raised and the
specific provision of the Act or the Commission's rules thereunder,
including the form or content requirements of this section, with which
the new rule or rule amendment is inconsistent or appears to be
inconsistent with the Act or the Commission's rules thereunder,
including the form or content requirements of Rule 806, with which the
new rule or rule amendment is inconsistent or appears to be
inconsistent; and
(vii) To approve a proposed rule or a rule amendment, including
changes to terms and conditions of a product, on an expedited basis
under such conditions as shall be specified in the written
notification.
(99) Pursuant to Sec. Sec. 242.807(c) and 242.808(b) of this
chapter:
(i) To make publicly available on the Commission's website a
security-based swap execution facility's filing of new rules and rule
amendments pursuant to the self-certification procedures of Sec.
242.807 of this chapter;
(ii) To stay for a period of up to 90 days the effectiveness of a
security-based swap execution facility's self-certification of a new
rule or rule amendment;
(iii) To publish notice on the Commission's website of a 30-day
period for public comment; and
(iv) To withdraw the stay or notify the security-based swap
execution facility that the Commission objects to the proposed
certification.
(100) Pursuant to Sec. Sec. 242.809 of this chapter, to provide
written notice to a security-based swap execution facility of a stay or
tolling pending issuance of a joint interpretation upon request for a
joint interpretation of whether a proposed product is a swap, security-
based swap, or mixed swap made pursuant to Sec. 240.3a68-2 of this
chapter by the security-based swap execution facility, the Commission,
or the Commodity Futures Trading Commission.
(101) Pursuant to Sec. 242.811 of this chapter:
(i) To request pursuant Sec. 242.811(a) of this chapter that a
security-based swap execution facility file with the Commission
information related to its business as a security-based swap execution
facility, and to specify the form, manner, and timeframe for the filing
by the security-based swap execution facility;
(ii) To request pursuant to Sec. 242.811(b) of this chapter that a
security-based swap execution facility file with the Commission a
written demonstration, containing supporting data, information, and
documents, that it is in compliance with one or more Core Principles or
with its other obligations under the Act or the Commission's rules
thereunder, to specify the Core Principles and other obligations under
the Act or the Commission's rules that the security-based swap
execution facility's filing must address, and to specify the form,
manner, and timeframe for the security-based swap execution facility's
filing;
(iii) To specify, pursuant to Sec. 242.811(c)(2) of this chapter,
the form and manner of the notification required pursuant to Sec.
242.811(c)(1) of this chapter by a security-based swap execution
facility of any transaction involving the direct or indirect transfer
of 50 percent or more of the equity interest in the security-based swap
execution facility, and to request supporting documentation of the
transaction;
(iv) To specify the form and manner of the certification required
pursuant to Sec. 242.811(c)(4) of this chapter; and
(v) To specify the form and manner of the submission by a security-
based swap execution facility of documents filed in any material legal
proceeding to which the security-based swap execution facility is a
party or its property or assets is subject, as specified in Sec.
242.811(d)(1) of this chapter, or in any material legal proceeding
instituted against any officer, director, or other official of the
security-based swap execution facility from conduct in such person's
capacity as an official of the security-based swap execution facility,
as specified in Sec. 242.811(d)(2) of this chapter, and to request
further documents.
(102) Pursuant to Sec. 242.822 of this chapter (Rule 822), to
require that a security-based swap execution provide information in its
possession to the Commission and to specify the form and manner of that
provision, and to require a security-based swap execution facility to
share information with other regulation organizations, data
repositories, and third-party data reporting services as necessary and
appropriate to fulfill the security-based swap execution facility's
regulatory and reporting responsibilities.
* * * * *

0
3. Amend Sec. 200.30-14 by revising paragraphs (h)(4), (h)(5), (h)(7),
and (h)(8) to read as follows:

Sec. 200.30-14 Delegation of authority to the General Counsel.

* * * * *
(h) * * *
(4) With respect to proceedings conducted under sections 19(d),
(e), and (f) of the Securities Exchange Act of 1934, 15 U.S.C. 78s(d),
(e), and (f), Title I of the Sarbanes-Oxley Act of 2002, 15 U.S.C.
7211-7219, and Sec. 201.442 of this chapter (Rule 442 of the
Commission's Rules of Practice) to determine that an application for
review under any of those sections has been abandoned, under the
provisions of'Sec. 201.420, Sec. 201.440, or Sec. 201.442 of this
chapter (Rule 420, Rule 440, or Rule 442 of the Commission's Rules of
Practice), or otherwise, and accordingly to issue an order dismissing
the application.
(5) With respect to proceedings conducted pursuant to the
Securities Exchange Act of 1934, 15 U.S.C. 78a et seq., the Investment
Company Act of 1940, 15 U.S.C. 80a-1 et seq., the Investment Advisers
Act of 1940, 15 U.S.C. 80b-1 et seq., the provisions of Sec.
201.102(e) or Sec. 201.442 of this chapter (Rule 102(e) or Rule 442 of
the Commission's Rules of Practice), and

[[Page 87282]]

Title I of the Sarbanes-Oxley Act of 2002, 15 U.S.C. 7211-7219, to
determine applications to stay Commission orders pending appeal of
those orders to the federal courts and to determine application to
vacate such stays.
* * * * *
(7) In connection with Commission review of actions taken by self-
regulatory organizations pursuant to sections 19(d), (e), and (f) of
the Securities Exchange Act of 1934, 15 U.S.C. 78s(d), (e), and (f), by
the Public Company Accounting Oversight Board pursuant to Title I of
the Sarbanes-Oxley Act of 2002, 15 U.S.C. 7211-7219, or by a security-
based swap execution facility pursuant to Sec. 201.442 of this chapter
(Rule 442 of the Commission's Rules of Practice) to grant or deny
requests for oral argument in accordance with the provisions of Sec.
201.451 of this chapter (Rule 451 of the Commission's Rules of
Practice).
(8) In connection with Commission review of actions taken by the
Public Company Accounting Oversight Board pursuant to Title I of the
Sarbanes-Oxley Act of 2002, 15 U.S.C. 7211-7219, or by a security-based
swap execution facility pursuant to Sec. 201.442 of this chapter (Rule
442 of the Commission's Rules of Practice), to determine whether to
lift the automatic stay of a disciplinary sanction.
* * * * *

PART 201--RULES OF PRACTICE

0
4. The general authority citation for part 201 continues to read as
follows:

Authority: 15 U.S.C. 77s, 77sss, 78w, 78x, 80a-37, and 80b-11;
5 U.S.C. 504(c)(1).
* * * * *

Subpart D--Rules of Practice

0
5. The authority citation subpart D is revised to read as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77h-1, 77j, 77s, 77u, 77sss,
78c(b), 78d-1, 78d-2, 78l, 78m, 78n, 78o(d), 78o-3, 78o-10(b)(6),
78s, 78u-2, 78u-3, 78v, 78w, 80a-8, 80a-9, 80a-37, 80a-38, 80a-39,
80a-40, 80a-41, 80a-44, 80b-3, 80b-9, 80b-11, 80b-12, 7202, 7215,
and 7217.

0
6. Amend Sec. 201.101 by adding paragraph (a)(9)(ix) to read as
follows:

Sec. 201.101 Definitions.

(a) * * *
(9) * * *
(ix) By the filing, pursuant to Sec. 201.442, of an application
for review of a determination of a security-based swap execution
facility;
* * * * *

0
7. Amend Sec. 201.202 by revising paragraph (a) to read as follows:

Sec. 201.202 Specification of procedures by parties in certain
proceedings.

(a) Motion to specify procedures. In any proceeding other than an
enforcement or disciplinary proceeding, a proceeding to review a
determination by a self-regulatory organization pursuant to Sec. Sec.
201.420 and 201.421, a proceeding to review a determination of the
Board pursuant to Sec. Sec. 201.440 and 201.441, or a proceeding to
review a determination by a security-based swap execution facility
pursuant to Sec. Sec. 201.442 and 201.443, a party may, at any time up
to 20 days prior to the start of a hearing, make a motion to specify
the procedures necessary or appropriate for the proceeding with
particular reference to:
(1) Whether there should be an initial decision by a hearing
officer;
(2) Whether any interested division of the Commission may assist in
the preparation of the Commission's decision; and
(3) Whether there should be a 30-day waiting period between the
issuance of the Commission's order and the date it is to become
effective.
* * * * *

0
8. Amend Sec. 201.210 by revising the paragraph (a) heading, (a)(1),
paragraph (b) heading, (b)(1), and paragraph (c) introductory text to
read as follows:

Sec. 201.210 Parties, limited participants and amici curiae.

(a) Parties in an enforcement or disciplinary proceeding, a
proceeding to review a self- regulatory organization determination, a
proceeding to review a Board determination, or a proceeding to review a
determination by a security-based swap execution facility. (1)
Generally. No person shall be granted leave to become a party or a non-
party participant on a limited basis in an enforcement or disciplinary
proceeding, a proceeding to review a determination by a self-
regulatory organization pursuant to Sec. Sec. 201.420 and 201.421, a
proceeding to review a determination by the Board pursuant to
Sec. Sec. 201.440 and 201.441, or a proceeding to review a
determination by a security-based swap execution facility pursuant to
Sec. Sec. 201.442 and 201.443, except as authorized by paragraph (c)
of this section.
* * * * *
(b) Intervention as party. (1) Generally. In any proceeding, other
than an enforcement proceeding, a disciplinary proceeding, a proceeding
to review a self-regulatory determination, a proceeding to review a
Board determination, or a proceeding to review a security-based swap
execution facility determination, any person may seek leave to
intervene as a party by filing a motion setting forth the person's
interest in the proceeding. No person, however, shall be admitted as a
party to a proceeding by intervention unless it is determined that
leave to participate pursuant to paragraph (c) of this section would be
inadequate for the protection of the person's interests. In a
proceeding under the Investment Company Act of 1940, any representative
of interested security holders, or any other person whose participation
in the proceeding may be in the public interest or for the protection
of investors, may be admitted as a party upon the filing of a written
motion setting forth the person's interest in the proceeding.
* * * * *
(c) Leave to participate on a limited basis. In any proceeding,
other than an enforcement proceeding, a disciplinary proceeding, a
proceeding to review a self-regulatory determination, a proceeding to
review a Board determination, or a proceeding to review a security-
based swap execution facility determination, any person may seek leave
to participate on a limited basis as a non-party participant as any
matter affecting the person's interests:
* * * * *

0
9. Amend Sec. 201.401 by adding paragraph (f) to read as follows:

Sec. 201.401 Consideration of stays.

* * * * *
(f) Lifting of stay of action by a security-based swap execution
facility. (1) Availability. Any person aggrieved by a stay of action by
a security-based swap execution facility entered in accordance with
Sec. 201.442(c) may make a motion to lift the stay. The Commission
may, at any time, on its own motion determine whether to lift the
automatic stay.
(2) Summary action. The Commission may lift a stay summarily,
without notice and opportunity for hearing.
(3) Expedited consideration. The Commission may expedite
consideration of a motion to lift a stay of action by a security-based
swap execution facility, consistent with the Commission's other
responsibilities. Where consideration is expedited, persons opposing
the lifting of the stay may file a statement in opposition within two
days of service of the motion requesting lifting of the stay unless the
Commission, by written order, shall specify a different period.

0
10. Add Sec. 201.442 to read as follows:

[[Page 87283]]

Sec. 201.442 Appeal of determination by security-based swap execution
facility.

(a) Application for review; when available. An application for
review by the Commission may be filed by any person who is aggrieved by
a determination of a security-based swap execution facility with
respect to any:
(1) Final disciplinary action, as defined in Sec. 240.835(b)(1) of
this chapter;
(2) Final action with respect to a denial or conditioning of
membership, as defined in Sec. 240.835(b)(2) of this chapter; or
(3) Final action with respect to a denial or limitation of access
to any service offered by the security-based swap execution facility,
as defined in Sec. 240.835(b)(2) of this chapter.
(b) Procedure. An aggrieved person may file an application for
review with the Commission pursuant to Sec. 201.151 within 30 days
after the notice filed with the Commission pursuant to Sec. 242.835 of
this chapter by the security-based swap execution facility of the
determination is received by the aggrieved person. The Commission will
not extend this 30-day period, absent a showing of extraordinary
circumstances. This section is the exclusive remedy for seeking an
extension of the 30-day period. The aggrieved person shall serve the
application on the security-based swap execution facility at the same
time. The application shall identify the determination complained of,
set forth in summary form a statement of alleged errors in the action
and supporting reasons therefor, and state an address where the
applicant can be served. The application should not exceed two pages in
length. If the applicant will be represented by a representative, the
application shall be accompanied by the notice of appearance required
by Sec. 201.102(d). Any exception to an action not supported in an
opening brief that complies with Sec. 201.450(b) may, at the
discretion of the Commission, be deemed to have been waived by the
applicant.
(c) Stay of determination. Filing an application for review with
the Commission pursuant to paragraph (b) of this section operates as a
stay of the security-based swap execution facility's determination,
unless the Commission otherwise orders either pursuant to a motion
filed in accordance with Sec. 201.401(f) or upon its own motion.
(d) Certification of the record; service of the index. Within 14
days after receipt of an application for review, the security-based
swap execution facility shall certify and file electronically in the
form and manner specified by the Office of the Secretary one unredacted
copy of the record upon which it took the complained-of action.
(1) The security-based swap execution facility shall file
electronically with the Commission one copy of an index of such record
in the form and manner specified by the Commission and shall serve one
copy of the index on each party. If such index contains any sensitive
personal information, as defined in paragraph (d)(2) of this section,
the security-based swap execution facility also shall file
electronically with the Commission one redacted copy of such index,
subject to the requirements of paragraph (d)(2) of this section.
(2) Sensitive personal information includes a Social Security
number, taxpayer identification number, financial account number,
credit card or debit card number, passport number, driver's license
number, State-issued identification number, home address (other than
city and State), telephone number, date of birth (other than year),
names and initials of minor children, as well as any unnecessary health
information identifiable by individual, such as an individual's medical
records. Sensitive personal information shall not be included in, and
must be redacted or omitted from, all filings.
(i) Exceptions. The following information may be included and is
not required to be redacted from filings:
(A) The last four digits of a financial account number, credit card
or debit card number, passport number, driver's license number, and
State-issued identification number;
(B) Home addresses and telephone numbers of parties and persons
filing documents with the Commission; and
(C) Business telephone numbers.
(ii) [Reserved]
(e) Certification. Any filing made pursuant to this section, other
than the record upon which the action complained of was taken, must
include a certification that any information described in paragraph
(d)(2) of this section has been omitted or redacted from the filing.

0
11. Add Sec. 201.443 to read as follows:

Sec. 201.443 Commission consideration of security-based swap
execution facility determinations.

(a) Commission review other than pursuant to an application for
review. The Commission may, on its own initiative, order review of any
determination by a security-based swap execution facility that could be
subject to an application for review pursuant to Sec. 201.442(a)
within 40 days after the security-based swap execution facility
provided notice to the Commission thereof.
(b) Supplemental briefing. The Commission may at any time before
issuing its decision raise or consider any matter that it deems
material, whether or not raised by the parties. The Commission will
give notice to the parties and an opportunity for supplemental briefing
with respect to issues not briefed by the parties where the Commission
believes that such briefing could significantly aid the decisional
process.

0
12. Amend Sec. 201.450, by:
0
a. Redesignating paragraphs (a)(2)(iv) and (a)(2)(v) as paragraphs
(a)(2)(v) and (a)(2)(vi); and
0
b. Adding new paragraph (a)(2)(iv).
The addition reads as follows:

Sec. 201.450 Briefs filed with the Commission.

(a) * * *
(2) * * *
(iv) Receipt by the Commission of an index to the record of a
determination by a security-based swap execution facility filed
pursuant to Sec. 201.442(d).
* * * * *

0
13. Amend Sec. 201.460 by adding paragraph (a)(4) to read as follows:

Sec. 201.460 Record before the Commission.

* * * * *
(a) * * *
(4) In a proceeding for final decision before the Commission
reviewing a determination of a security-based swap execution facility,
the record shall consist of:
(i) The record certified pursuant to Sec. 201.442(d) by the
security-based swap execution facility;
(ii) Any application for review; and
(iii) Any submissions, moving papers, and briefs filed on appeal or
review.
* * * * *

PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR
ELECTRONIC FILINGS

0
14. The general authority citation for part 232 continues to read as
follows:

Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3,
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c),
80a-8, 80a-29, 80a-30, 80a-37, 80b-4, 80b-6a, 80b-10, 80b-11, 7201
et seq.; and 18 U.S.C. 1350, unless otherwise noted.
* * * * *

0
15. Amend Sec. 232.405 by:
0
a. Revising the introductory text, paragraphs (a)(2), (a)(3)(i)
introductory text, (a)(3)(ii), (a)(4), and (b)(5) introductory text;
0
b. Adding paragraph (b)(5)(ii); and
0
c. Revising Note 1 to Sec. 232.405.

[[Page 87284]]

The revisions and addition read as follows:

Sec. 232.405 Interactive Data File submissions.

This section applies to electronic filers that submit Interactive
Data Files. Section 229.601(b)(101) of this chapter (Item 601(b)(101)
of Regulation S-K), General Instruction F of Sec. 249.311 (Form 11-K),
paragraph (101) of Part II--Information Not Required to be Delivered to
Offerees or Purchasers of Form F-10 (Sec. 239.40 of this chapter),
Sec. 240.13a-21 of this chapter (Rule 13a-21 under the Exchange Act),
paragraph 101 of the Instructions as to Exhibits of Form 20-F (Sec.
249.220f of this chapter), paragraph B.(15) of the General Instructions
to Form 40-F (Sec. 249.240f of this chapter), paragraph C.(6) of the
General Instructions to Form 6-K (Sec. 249.306 of this chapter), Sec.
240.17Ad-27(d) of this chapter (Rule 17Ad-27(d) under the Exchange
Act), Note D.5 of Sec. 240.14a-101 of this chapter (Rule 14a-101 under
the Exchange Act), Item 1 of Sec. 240.14c-101 of this chapter (Rule
14c-101 under the Exchange Act), General Instruction I of Sec. 249.333
of this chapter (Form F-SR), General Instruction C.3.(g) of Form N-1A
(Sec. Sec. 239.15A and 274.11A of this chapter), General Instruction I
of Form N-2 (Sec. Sec. 239.14 and 274.11a-1 of this chapter), General
Instruction C.3.(h) of Form N-3 (Sec. Sec. 239.17a and 274.11b of this
chapter), General Instruction C.3.(h) of Form N-4 (Sec. Sec. 239.17b
and 274.11c of this chapter), General Instruction C.3.(h) of Form N-6
(Sec. Sec. 239.17c and 274.11d of this chapter), General Instruction
2.(l) of Form N-8B-2 (Sec. 274.12 of this chapter), General
Instruction 5 of Form S-6 (Sec. 239.16 of this chapter), General
Instruction C.4 of Form N-CSR (Sec. Sec. 249.331 and 274.128 of this
chapter), Sec. Sec. 242.829 and 831 of this chapter (Rules 829 and 831
of Regulation SE), and the Registration Instructions to Form SBSEF
(Sec. 249.1701 of this chapter) specify when electronic filers are
required or permitted to submit an Interactive Data File (Sec.
232.11), as further described in note 1 to this section. This section
imposes content, format, and submission requirements for an Interactive
Data File, but does not change the substantive content requirements for
the financial and other disclosures in the Related Official Filing
(Sec. 232.11).
(a) * * *
(2) Be submitted only by an electronic filer either required or
permitted to submit an Interactive Data File as specified by Sec.
229.601(b)(101) of this chapter (Item 601(b)(101) of Regulation S-K),
Instruction F of Form 11-K (Sec. 249.311 of this chapter), paragraph
(101) of Part II--Information Not Required to be Delivered to Offerees
or Purchasers of Form F-10 (Sec. 239.40 of this chapter), Sec.
240.13a-21 of this chapter (Rule 13a-21 under the Exchange Act),
paragraph 101 of the Instructions as to Exhibits of Form 20-F (Sec.
249.220f of this chapter), paragraph B.(15) of the General Instructions
to Form 40-F (Sec. 249.240f of this chapter), paragraph C.(6) of the
General Instructions to Form 6-K (Sec. 249.306 of this chapter), Sec.
240.17Ad-27(d) of this chapter (Rule 17Ad-27(d) under the Exchange
Act), Note D.5 of Sec. 240.14a-101 of this chapter (Rule 14a-101 under
the Exchange Act), Item 1 of Sec. 240.14c-101 of this chapter (Rule
14c-101 under the Exchange Act), General Instruction I to Form F-SR
(Sec. 249.333 of this chapter), General Instruction C.3.(g) of Form N-
1A (Sec. Sec. 239.15A and 274.11A of this chapter), General
Instruction I of Form N-2 (Sec. Sec. 239.14 and 274.11a-1 of this
chapter), General Instruction C.3.(h) of Form N-3 (Sec. Sec. 239.17a
and 274.11b of this chapter), General Instruction C.3.(h) of Form N-4
(Sec. Sec. 239.17b and 274.11c of this chapter), General Instruction
C.3.(h) of Form N-6 (Sec. Sec. 239.17c and 274.11d of this chapter),
General Instruction 2.(l) of Form N-8B-2 (Sec. 274.12 of this
chapter), General Instruction 5 of Form S-6 (Sec. 239.16 of this
chapter), General Instruction C.4 of Form N-CSR (Sec. Sec. 249.331 and
274.128 of this chapter), Sec. Sec. 242.829 and 242.831 of this
chapter (Rules 829 and 831 of Regulation SE), and the Registration
Instructions to Form SBSEF (Sec. 249.1701 of this chapter), as
applicable;
* * * * *
(3) * * *
(i) If the electronic filer is not a management investment company
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et
seq.), a separate account as defined in section 2(a)(14) of the
Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment
Company Act of 1940, a business development company as defined in
section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(48)), a unit investment trust as defined in Section 4(2) of the
Investment Company Act of 1940 (15 U.S.C. 80a-4), or a clearing agency
that provides a central matching service, or is subject to Sec. Sec.
242.800 through 242.835 (Regulation SE), and is not within one of the
categories specified in paragraph (f)(1)(i) of this section, as partly
embedded into a filing with the remainder simultaneously submitted as
an exhibit to:
* * * * *
(ii) If the electronic filer is a management investment company
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et
seq.), a separate account (as defined in section 2(a)(14) of the
Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment
Company Act of 1940, a business development company as defined in
section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(48)), a unit investment trust as defined in Section 4(2) of the
Investment Company Act of 1940 (15 U.S.C. 80a-4), or a clearing agency
that provides a central matching service, or is subject to Sec. Sec.
242.800 through 242.835 (Regulation SE), and is not within one of the
categories specified in paragraph (f)(1)(ii) of this section, as partly
embedded into a filing with the remainder simultaneously submitted as
an exhibit to a filing that contains the disclosure this section
requires to be tagged; and
(4) Be submitted in accordance with the EDGAR Filer Manual and, as
applicable, Item 601(b)(101) of Sec. 229.601(b)(101) of this chapter
(Regulation S-K), General Instruction F of Form 11-K (Sec. 249.311 of
this chapter), paragraph (101) of Part II--Information Not Required to
be Delivered to Offerees or Purchasers of Form F-10 (Sec. 239.40 of
this chapter), Sec. 240.13a-21 of this chapter (Rule 13a-21 under the
Exchange Act), paragraph 101 of the Instructions as to Exhibits of Form
20-F (Sec. 249.220f of this chapter), paragraph B.(15) of the General
Instructions to Form 40-F (Sec. 249.240f of this chapter), paragraph
C.(6) of the General Instructions to Form 6-K (Sec. 249.306 of this
chapter), Sec. 240.17Ad-27(d) of this chapter (Rule 17Ad-27(d) under
the Exchange Act), Note D.5 of Sec. 240.14a-101 of this chapter (Rule
14a-101 under the Exchange Act), Item 1 of Sec. 240.14c-101 of this
chapter (Rule 14c-101 under the Exchange Act), General Instruction I to
Form F-SR (Sec. 249.333 of this chapter), General Instruction C.3.(g)
of Form N-1A (Sec. Sec. 239.15A and 274.11A of this chapter), General
Instruction I of Form N-2 (Sec. Sec. 239.14 and 274.11a-1 of this
chapter), General Instruction C.3.(h) of Form N-3 (Sec. Sec. 239.17a
and 274.11b of this chapter), General Instruction C.3.(h) of Form N-4
(Sec. Sec. 239.17b and 274.11c of this chapter), General Instruction
C.3.(h) of Form N-6 (Sec. Sec. 239.17c and 274.11d of this chapter),
Instruction 2.(l) of Form N-8B-2 (Sec. 274.12 of this chapter);
General Instruction 5 of Form S-6 (Sec. 239.16 of this chapter);
General Instruction C.4 of Form N-CSR (Sec. Sec. 249.331 and 274.128
of this chapter), Sec. Sec. 242.829 and 831 of this chapter

[[Page 87285]]

(Rules 829 and 831 of Regulation SE), and the Registration Instructions
to Form SBSEF (Sec. 249.1701 of this chapter), as applicable.
(b) * * *
(5) If the electronic filer is a clearing agency that provides a
central matching service, or is subject to Sec. Sec. 242.800 through
242.835 (Regulation SE), an Interactive Data File must consist only of
a complete set of information for all corresponding data in the Related
Official Filing, no more and no less, as follows:
* * * * *
(ii) For electronic filers subject to Regulation SE, the content of
documents required to be filed electronically under Sec. Sec. 242.829
and 242.831 of this chapter (Rules 829 and 831 of Regulation SE); and
the Registration Instructions to Sec. 249.1701 of this chapter (Form
SBSEF), as applicable.
* * * * *

Note 1 to Sec. 232.405: Section 229.601(b)(101) of this chapter
(Item 601(b)(101) of Regulation S-K) specifies the circumstances
under which an Interactive Data File must be submitted and the
circumstances under which it is permitted to be submitted, with
respect to Sec. 239.11 of this chapter (Form S-1), Sec. 239.13 of
this chapter (Form S-3), Sec. 239.25 of this chapter (Form S-4),
Sec. 239.18 of this chapter (Form S-11), Sec. 239.31 of this
chapter (Form F-1), Sec. 239.33 of this chapter (Form F-3), Sec.
239.34 of this chapter (Form F-4), Sec. 249.310 of this chapter
(Form 10-K), Sec. 249.308a of this chapter (Form 10-Q), and Sec.
249.308 of this chapter (Form 8-K). General Instruction F of Sec.
249.311 of this chapter (Form 11-K) specifies the circumstances
under which an Interactive Data File must be submitted, and the
circumstances under which it is permitted to be submitted, with
respect to Form 11-K. Paragraph (101) of Part II--Information not
Required to be Delivered to Offerees or Purchasers of Sec. 239.40
of this chapter (Form F-10) specifies the circumstances under which
an Interactive Data File must be submitted and the circumstances
under which it is permitted to be submitted, with respect to Form F-
10. Paragraph 101 of the Instructions as to Exhibits of Sec.
249.220f of this chapter (Form 20-F) specifies the circumstances
under which an Interactive Data File must be submitted and the
circumstances under which it is permitted to be submitted, with
respect to Form 20-F. Paragraph B.(15) of the General Instructions
to Sec. 249.240f of this chapter (Form 40-F) and Paragraph C.(6) of
the General Instructions to Sec. 249.306 of this chapter (Form 6-K)
specify the circumstances under which an Interactive Data File must
be submitted and the circumstances under which it is permitted to be
submitted, with respect to Sec. 249.240f of this chapter (Form 40-
F) and Sec. 249.306 of this chapter (Form 6-K). Section 240.17Ad-
27(d) of this chapter (Rule 17Ad-27(d) under the Exchange Act)
specifies the circumstances under which an Interactive Data File
must be submitted with respect the reports required under Rule 17Ad-
27. Note D.5 of Sec. 240.14a-101 of this chapter (Schedule 14A) and
Item 1 of Sec. 240.14c-101 of this chapter (Schedule 14C) specify
the circumstances under which an Interactive Data File must be
submitted with respect to Schedules 14A and 14C. Section 240.13a-21
of this chapter (Rule 13a-21 under the Exchange Act) and General
Instruction I to Sec. 249.333 of this chapter (Form F-SR) specify
the circumstances under which an Interactive Data File must be
submitted, with respect to Form F-SR. Sec. Sec. 242.829 and 242.831
of this chapter (Rules 829 and 831 of Regulation SE) and the
Registration Instructions to Sec. 249.1701 of this chapter (Form
SBSEF), as applicable, specify the circumstances under which an
Interactive Data File must be submitted with respect to filings made
under Regulation SE.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934

0
16. The general authority citation for part 240 continues to read as
follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78j-4, 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, 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; and 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
17. Amend Sec. 240.3a1-1 by:
0
a. Removing the word ``or'' from the end of paragraph (a)(2);
0
b. Removing the period from the end of paragraph (a)(3) and adding a
semicolon in its place;
0
c. Adding paragraphs (a)(4) and (5); and
0
d. Revising paragraph (b) introductory text.
The additions and revisions read as follows:

Sec. 240.3a1-1 Exemption from the definition of ``Exchange'' under
section 3(a)(1) of the Act.

* * * * *
(a) * * *
(4) Has registered with the Commission as a security-based swap
execution facility pursuant Sec. 242.803 of this chapter and provides
a market place or facilities for no securities other than security-
based swaps; or
(5) Has registered with the Commission as a clearing agency
pursuant to section 17A of the Act (15 U.S.C. 78q-1) and limits its
exchange functions to operation of a trading session that is designed
to further the accuracy of end-of-day valuations of security-based
swaps.
(b) Notwithstanding paragraphs (a)(1) through (3) of this section,
an organization, association, or group of persons shall not be exempt
under this section from the definition of ``exchange,'' if:
* * * * *

0
18. Add Sec. 240.15a-12 to read as follows:

Sec. 240.15a-12 Exemption for certain security-based swap execution
facilities from certain broker requirements.

(a) For purposes of this section, an SBSEF-B means a security-based
swap execution facility that does not engage in any securities activity
other than facilitating the trading of security-based swaps on or
through the security-based swap execution facility.
(b) An SBSEF-B that registers with the Commission pursuant to Sec.
242.803 of this chapter shall be deemed also to have registered with
the Commission pursuant to sections 15(a) and (b) of the Act (15 U.S.C.
78o(a)(1) and (b)).
(c) Except as provided in paragraph (d) of this section, an SBSEF-B
shall be exempt from any provision of the Act or the Commission's rules
thereunder applicable to brokers that, by its terms, requires,
prohibits, restricts, limits, conditions, or affects the activities of
a broker, unless such provision specifies that it applies to a
security-based swap execution facility.
(d) Notwithstanding paragraph (c) of this section, the following
provisions of the Act and the Commission's rules thereunder shall apply
to an SBSEF-B:
(1) Section 15(b)(4) of the Act (15 U.S.C. 78o(b)(4));
(2) Section 15(b)(6) of the Act (15 U.S.C. 78o(b)(6)); and
(3) Section 17(b) of the Act (15 U.S.C. 78q(b)).
(e) An SBSEF-B shall be exempt from the Securities Investor
Protection Act.

PART 242--REGULATIONS M, SHO, ATS, AC, NMS, SE, AND SBSR, AND
CUSTOMER MARGIN REQUIREMENTS FOR SECURITY FUTURES

0
19. The authority citation for part 242 is revised to read as follows:

Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78c-4,
78g(c)(2), 78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c),
78o(g), 78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-
29, 80a-37, and 8343.

0
20. The heading for part 242 is revised to read as set forth above.

0
21. Add Sec. Sec. 242.800 through 242.835 to read as follows:

[[Page 87286]]

Regulation SE--Registration and Regulation of Security-Based Swap
Execution Facilities

Sec.
* * * * *
242.800 Scope.
242.801 Applicable provisions.
242.802 Definitions.
242.803 Requirements and procedures for registration.
242.804 Listing products for trading by certification.
242.805 Voluntary submission of new products for Commission review
and approval.
242.806 Voluntary submission of rules for Commission review and
approval.
242.807 Self-certification of rules.
242.808 Availability of public information.
242.809 Stay of certification and tolling of review period pending
jurisdictional determination.
242.810 Product filings by security-based swap execution facilities
that are not yet registered and by dormant security-based swap
execution facilities.
242.811 Information relating to security-based swap execution
facility compliance.
242.812 Enforceability.
242.813 Prohibited use of data collected for regulation purposes.
242.814 Entity operating both a national securities exchange and
security-based swap execution facility.
242.815 Methods of execution for Required and Permitted
Transactions.
242.816 Trade execution requirement and exemptions therefrom.
242.817 Trade execution compliance schedule.
242.818 Core Principle 1--Compliance with core principles.
242.819 Core Principle 2--Compliance with rules.
242.820 Core Principle 3--Security-based swaps not readily
susceptible to manipulation.
242.821 Core Principle 4--Monitoring of trading and trade
processing.
242.822 Core Principle 5--Ability to obtain information.
242.823 Core Principle 6--Financial integrity of transactions.
242.824 Core Principle 7--Emergency authority.
242.825 Core Principle 8--Timely publication of trading information.
242.826 Core Principle 9--Recordkeeping and reporting.
242.827 Core Principle 10--Antitrust considerations.
242.828 Core Principle 11--Conflicts of interest.
242.829 Core Principle 12--Financial resources.
242.830 Core Principle 13--System safeguards.
242.831 Core Principle 14--Designation of chief compliance officers.
242.832 Application of the trade execution requirement to cross-
border security-based swap transactions.
242.833 Cross-border exemptions.
242.834 Mitigation of conflicts of interest of security-based swap
execution facilities and certain exchanges.
242.835 Notice to Commission by security-based swap execution
facility of final disciplinary action or denial or limitation of
access.

Sec. 242.800 Scope.

The provisions of Sec. Sec. 242.800 through 242.835 shall apply to
every security-based swap execution facility that is registered or is
applying to become registered as a security-based swap execution
facility under section 3D of the Securities Exchange Act (``Act'').

Sec. 242.801 Applicable provisions.

A security-based swap execution facility shall comply with the
requirements of Sec. Sec. 242.800 through 242.835 and all other
applicable Commission rules, including any related definitions and
cross- referenced sections.

Sec. 242.802 Definitions.

The following terms, and any other terms defined within Sec. Sec.
242.800 through 242.835, are defined as follows solely for purposes of
Sec. Sec. 242.800 through 242.835:
Business day means the intraday period of time starting at 8:15
a.m. and ending at 4:45 p.m. eastern standard time or eastern daylight
saving time, whichever is currently in effect in Washington, DC, on all
days except Saturdays, Sundays, and Federal holidays in Washington, DC.
Committee member means a member, or functional equivalent thereof,
of any committee of a security-based swap execution facility.
Correcting trade means a trade executed and submitted for clearing
to a registered clearing agency with the same terms and conditions as
an error trade other than any corrections to any operational or
clerical error and the time of execution.
Disciplinary committee means any person or committee of persons, or
any subcommittee thereof, that is authorized by a security-based swap
execution facility or SBS exchange to issue disciplinary charges, to
conduct disciplinary proceedings, to settle disciplinary charges, to
impose disciplinary sanctions, or to hear appeals thereof in cases
involving any violation of the rules of the security-based swap
execution facility or SBS exchange, except those cases where the person
or committee is authorized summarily to impose minor penalties for
violating rules regarding decorum, attire, the timely submission of
accurate records for clearing or verifying each day's transactions, or
other similar activities.
Dormant product means:
(1) Any security-based swap listed on security-based swap execution
facility that has no open interest and in which no trading has occurred
for a period of 12 complete calendar months following a certification
to, or approval by, the Commission; provided, however, that no
security-based swap initially and originally certified to, or approved
by, the Commission within the preceding 36 complete calendar months
shall be considered to be a dormant product;
(2) Any security-based swap of a dormant security-based swap
execution facility; or
(3) Any security-based swap not otherwise a dormant product that a
security-based swap execution facility self-declares through
certification to be a dormant product.
Dormant rule means:
(1) Any rule of a security-based swap execution facility which
remains unimplemented for 12 consecutive calendar months following a
certification with, or an approval by, the Commission; or
(2) Any rule or rule amendment of a dormant security-based swap
execution facility.
Dormant security-based swap execution facility means a security-
based swap execution facility on which no trading has occurred for the
previous 12 consecutive calendar months; provided, however, that no
security-based swap execution facility shall be considered to be a
dormant security-based swap execution facility if its initial and
original Commission order of registration was issued within the
preceding 36 consecutive calendar months.
Electronic trading facility means a trading facility that operates
by means of an electronic or telecommunications network and maintains
an automated audit trail of bids, offers, and the matching orders or
the execution of transactions on the facility.
Emergency means any occurrence or circumstance that, in the opinion
of the governing board of a security-based swap execution facility, or
a person or persons duly authorized to issue such an opinion on behalf
of the governing board of the security-based swap execution facility
under circumstances and pursuant to procedures that are specified by
rule, requires immediate action and threatens or may threaten such
things as the fair and orderly trading in, or the liquidation of or
delivery pursuant to, any security-based swaps, including:

[[Page 87287]]

(1) Any manipulative or attempted manipulative activity;
(2) Any actual, attempted, or threatened corner, squeeze,
congestion, or undue concentration of positions;
(3) Any circumstances which may materially affect the performance
of security-based swaps or transactions, including failure of the
payment system or the bankruptcy or insolvency of any market
participant;
(4) Any action taken by any governmental body, or any other
security-based swap execution facility, market, or facility which may
have a direct impact on trading or clearing and settlement; and
(5) Any other circumstance which may have a severe, adverse effect
upon the functioning of the security-based swap execution facility.
Employee means any person hired or otherwise employed on a salaried
or contract basis by a security-based swap execution facility, but does
not include:
(1) Any governing board member compensated by the security-based
swap execution facility solely for governing board activities; or
(2) Any committee member compensated by a security-based swap
execution facility solely for committee activities; or
(3) Any consultant hired by a security-based swap execution
facility.
Error trade means any trade executed on or subject to the rules of
a security-based swap execution facility that contains an operational
or clerical error.
Governing board means the board of directors of a security-based
swap execution facility, or for a security-based swap execution
facility whose organizational structure does not include a board of
directors, a body performing a function similar to a board of
directors.
Governing board member means a member, or functional equivalent
thereof, of the governing board of a security-based swap execution
facility.
Member, with respect to a national securities exchange, has the
same meaning as in section 3(a)(3) of the Act. Member, with respect to
a security-based swap execution facility, means an individual,
association, partnership, corporation, or trust owning or holding a
membership in, admitted to membership representation on, or having
trading privileges on the security-based swap execution facility.
Non-U.S. member means a member of a security-based swap execution
facility that is not a U.S. person.
Offsetting trade means a trade executed and submitted for clearing
to a registered clearing agency with terms and conditions that
economically reverse an error trade that was accepted for clearing.
Order book means an electronic trading facility, a trading
facility, or a trading system or platform in which all market
participants in the trading system or platform have the ability to
enter multiple bids and offers, observe or receive bids and offers
entered by other market participants, and transact on such bids and
offers.
Oversight panel means any panel, or any subcommittee thereof,
authorized by a security-based swap execution facility or security-
based swap exchange (``SBS exchange'') to recommend or establish
policies or procedures with respect to the surveillance, compliance,
rule enforcement, or disciplinary responsibilities of the security-
based swap execution facility or SBS exchange.
Records has the meaning as in section 3(a)(37) of the Act (15
U.S.C. 78c(a)(37)).
Rule means any constitutional provision, article of incorporation,
bylaw, rule, regulation, resolution, interpretation, stated policy,
advisory, terms and conditions, trading protocol, agreement, or
instrument corresponding thereto, including those that authorize a
response or establish standards for responding to a specific emergency,
and any amendment or addition thereto or repeal thereof, made or issued
by a security-based swap execution facility or by the governing board
thereof or any committee thereof, in whatever form adopted.
SBS exchange means a national securities exchange that posts or
makes available for trading security-based swaps.
Security-based swap execution facility has the same meaning as in
section 3(a)(77) of the Act (15 U.S.C. 78c(a)(77)) but does not include
an entity that is registered with the Commission as a clearing agency
pursuant to section 17A of the Act (15 U.S.C. 78q-1) and limits its
security-based swap execution facility functions to operation of a
trading session that is designed to further the accuracy of end-of-day
valuations.
Senior officer means the chief executive officer or other
equivalent officer of a security-based swap execution facility.
Terms and conditions means any definition of the trading unit or
the specific asset underlying a security-based swap, description of the
payments to be exchanged under a security-based swap, specification of
cash settlement or delivery standards and procedures, and establishment
of buyers' and sellers' rights and obligations under the security-based
swap. Terms and conditions of a security-based swap include provisions
relating to the following:
(1) Identification of the major group, category, type, or class in
which the security-based swap falls (such as a credit or equity
security-based swap) and of any further sub-group, category, type, or
class that further describes the security-based swap;
(2) Notional amounts, quantity standards, or other unit size
characteristics;
(3) Any applicable premiums or discounts for delivery of a non-par
product;
(4) Trading hours and the listing of security-based swaps;
(5) Pricing basis for establishing the payment obligations under,
and mark-to-market value of, the security-based swap including, as
applicable, the accrual start dates, termination, or maturity dates,
and, for each leg of the security-based swap, the initial cash flow
components, spreads, and points, and the relevant indexes, prices,
rates, coupons, or other price reference measures;
(6) Any price limits, trading halts, or circuit breaker provisions,
and procedures for the establishment of daily settlement prices;
(7) Payment and reset frequency, day count conventions, business
calendars, and accrual features;
(8) If physical delivery applies, delivery standards and
procedures, including fees related to delivery or the delivery process,
alternatives to delivery, and applicable penalties or sanctions for
failure to perform;
(9) If cash-settled, the definition, composition, calculation, and
revision of the cash settlement price, and the settlement currency;
(10) Payment or collection of option premiums or margins;
(11) Option exercise price, if it is constant, and method for
calculating the exercise price, if it is variable;
(12) Threshold prices for an option, the existence of which is
contingent upon those prices;
(13) Any restrictions or requirements for exercising an option; and
(14) Life cycle events.
Trading facility. (1) In general. The term trading facility means a
person or group of persons that constitutes, maintains, or provides a
physical or electronic facility or system in which multiple
participants have the ability to execute or trade agreements,
contracts, or transactions:
(i) By accepting bids or offers made by other participants that are
open to multiple participants in the facility or system; or

[[Page 87288]]

(ii) Through the interaction of multiple bids or multiple offers
within a system with a pre- determined non-discretionary automated
trade matching and execution algorithm.
(2) Exclusions. (i) The term trading facility does not include:
(A) A person or group of persons solely because the person or group
of persons constitutes, maintains, or provides an electronic facility
or system that enables participants to negotiate the terms of and enter
into bilateral transactions as a result of communications exchanged by
the parties and not from interaction of multiple bids and multiple
offers within a predetermined, nondiscretionary automated trade
matching and execution algorithm;
(B) A government securities dealer or government securities broker,
to the extent that the dealer or broker executes or trades agreements,
contracts, or transactions in government securities, or assists persons
in communicating about, negotiating, entering into, executing, or
trading an agreement, contract, or transaction in government securities
(as the terms government securities dealer, government securities
broker, and government securities are defined in section 3(a) of the
Act); or
(C) A facility on which bids and offers, and acceptances of bids
and offers effected on the facility, are not binding.
(ii) Any person, group of persons, dealer, broker, or facility
described in paragraphs (2)(i)(A) through (C) of this definition of
trading facility is excluded from the meaning of the term ``trading
facility'' without any prior specific approval, certification, or other
action by the Commission.
(3) Special rule. A person or group of persons that would not
otherwise constitute a trading facility shall not be considered to be a
trading facility solely as a result of the submission to a registered
clearing agency of transactions executed on or through the person or
group of persons.
U.S. person has the same meaning as in Sec. 240.3a71-3(a)(4) of
this chapter.
Note 1 to Sec. 242.802. The Commission has not yet adopted a
definition of ``block trade.''

Sec. 242.803 Requirements and procedures for registration.

(a) Requirements for registration. (1) Any person operating a
facility that offers a trading system or platform in which more than
one market participant has the ability to execute or trade security-
based swaps with more than one other market participant on the system
or platform shall register the facility as a security-based swap
execution facility under this section or as a national securities
exchange pursuant to section 6 of the Act.
(2) A security-based swap execution facility shall, at a minimum,
offer an order book.
(3) A security-based swap execution facility is not required to
provide an order book under this section for transactions defined in
Sec. 242.815(d)(2), (3), and (4) except that a security-based swap
execution facility must provide an order book under this section for
Required Transactions that are components of transactions defined in
Sec. 242.815(d)(2), (3), and (4) when such Required Transactions are
not executed as components of transactions defined in Sec.
242.815(d)(2), (3), and (4).
(b) Procedures for full registration. (1) Request to register. An
entity requesting registration as a security-based swap execution
facility shall:
(i) File electronically a complete Form SBSEF (referenced in Sec.
249.1701), or any successor forms, and all information and
documentation described in such forms with the Commission using the
EDGAR system and, for the information specified in the Registration
Instructions to Form SBSEF, as an Interactive Data File in accordance
with Sec. 232.405 of this chapter; and
(ii) Provide to the Commission, upon the Commission's request, any
additional information and documentation necessary to review an
application.
(2) Request for confidential treatment. (i) An applicant requesting
registration as a security-based swap execution facility shall identify
with particularity any information in the application that will be
subject to a request for confidential treatment pursuant to Sec.
240.24b-2 of this chapter.
(ii) As set forth in Sec. 242.808, certain information provided in
an application shall be made publicly available.
(3) Amendment of application prior to full registration. An
applicant amending a pending application for registration as a
security-based swap execution facility or requesting an amendment to an
order of registration shall file an amended application electronically
with the Commission using the EDGAR system and, for the information
specified in the Registration Instructions to Form SBSEF, as an
Interactive Data File in accordance with Sec. 232.405 of this chapter.
(4) Effect of incomplete application. If an application is
incomplete pursuant to paragraph (b)(1) of this section, the Commission
shall notify the applicant that its application will not be deemed to
have been submitted for purposes of the Commission's review.
(5) Commission review period. The Commission shall approve or deny
an application for registration as a security-based swap execution
facility within 180 days of the filing of the application. If the
Commission notifies the person that its application is materially
incomplete and specifies the deficiencies in the application, the
running of the 180-day period shall be stayed from the time of such
notification until the application is resubmitted in completed form,
provided that the Commission shall have not less than 60 days to
approve or deny the application from the time the application is
resubmitted in completed form.
(6) Commission determination. (i) The Commission shall issue an
order granting registration upon a Commission determination, in its own
discretion, that the applicant has demonstrated compliance with the Act
and the Commission's rules applicable to security-based swap execution
facilities. If deemed appropriate, the Commission may issue an order
granting registration subject to conditions.
(ii) The Commission may issue an order denying registration upon a
Commission determination, in its own discretion, that the applicant has
not demonstrated compliance with the Act and the Commission's rules
applicable to security-based swap execution facilities. If the
Commission denies an application, it shall specify the grounds for the
denial.
(c) Reinstatement of dormant registration. A dormant security-based
swap execution facility may reinstate its registration under the
procedures of paragraph (b) of this section. The applicant may rely
upon previously submitted materials if such materials accurately
describe the dormant security-based swap execution facility's
conditions at the time that it applies for reinstatement of its
registration.
(d) Request for transfer of registration. (1) A security-based swap
execution facility seeking to transfer its registration from its
current legal entity to a new legal entity as a result of a corporate
change shall file a request for approval to transfer such registration
with the Commission in the form and manner specified by the Commission.
(2) A request for transfer of registration shall be filed no later
than three months prior to the anticipated corporate change; or in the
event that the security-based swap execution facility could not have
known of the anticipated change three months prior

[[Page 87289]]

to the anticipated change, as soon as it knows of such change.
(3) The request for transfer of registration shall include the
following:
(i) The underlying agreement that governs the corporate change;
(ii) A description of the corporate change, including the reason
for the change and its impact on the security-based swap execution
facility, including its governance and operations, and its impact on
the rights and obligations of members;
(iii) A discussion of the transferee's ability to comply with the
Act, including the core principles applicable to security-based swap
execution facilities and the Commission's rules thereunder;
(iv) The governing documents of the transferee, including, but not
limited to, articles of incorporation and bylaws;
(v) The transferee's rules marked to show changes from the current
rules of the security-based swap execution facility;
(vi) A representation by the transferee that it:
(A) Will be the surviving entity and successor-in-interest to the
transferor security-based swap execution facility and will retain and
assume, without limitation, all of the assets and liabilities of the
transferor;
(B) Will assume responsibility for complying with all applicable
provisions of the Act and the Commission's rules thereunder;
(C) Will assume, maintain, and enforce all rules implementing and
complying with the core principles applicable to security-based swap
execution facilities, including the adoption of the transferor's
rulebook, as amended in the request, and that any such amendments will
be submitted to the Commission pursuant to Sec. 242.806 or Sec.
242.807;
(D) Will comply with all regulatory responsibilities except if
otherwise indicated in the request, and will maintain and enforce all
regulatory programs; and
(E) Will notify members of all changes to the transferor's rulebook
prior to the transfer and will further notify members of the concurrent
transfer of the registration to the transferee upon Commission approval
and issuance of an order permitting this transfer.
(vii) A representation by the transferee that upon the transfer:
(A) It will assume responsibility for and maintain compliance with
core principles for all security-based swaps previously made available
for trading through the transferor, whether by certification or
approval; and
(B) None of the proposed rule changes will affect the rights and
obligations of any member.
(4) Upon review of a request for transfer of registration, the
Commission, as soon as practicable, shall issue an order either
approving or denying the request.
(e) Request for withdrawal of application for registration. An
applicant for registration as a security-based swap execution facility
may withdraw its application submitted pursuant to paragraph (b) of
this section by filing a withdrawal request electronically with the
Commission using the EDGAR system. Withdrawal of an application for
registration shall not affect any action taken or to be taken by the
Commission based upon actions, activities, or events occurring during
the time that the application was pending with the Commission.
(f) Request for vacation of registration. A security-based swap
execution facility may request that its registration be vacated by
filing a vacation request electronically with the Commission using the
EDGAR system at least 90 days prior to the date that the vacation is
requested to take effect. Upon receipt of such request, the Commission
shall promptly order the vacation to be effective upon the date named
in the request and send a copy of the request and its order to all
other security-based swap execution facilities, SBS exchanges, and
registered clearing agencies that clear security-based swaps. Vacation
of registration shall not affect any action taken or to be taken by the
Commission based upon actions, activities, or events occurring during
the time that the security-based swap execution facility was registered
by the Commission. From and after the date upon which the vacation
became effective the said security-based swap execution facility can
thereafter be registered again by applying to the Commission in the
manner provided in paragraph (b) of this section for an original
application.

Sec. 242.804 Listing products for trading by certification.

(a) General. A security-based swap execution facility must comply
with the submission requirements of this section prior to listing a
product for trading that has not been approved under Sec. 242.805 or
that remains a dormant product subsequent to being submitted under this
section or approved under Sec. 242.805. A submission shall comply with
the following conditions:
(1) The security-based swap execution facility has filed its
submission electronically with the Commission using the EFFS system;
(2) The Commission has received the submission by the open of
business on the business day that is 10 business days preceding the
product's listing; and
(3) The submission includes:
(i) A copy of the submission cover sheet in accordance with the
instructions therein;
(ii) A copy of the product's rules, including all rules related to
its terms and conditions;
(iii) The intended listing date;
(iv) A certification by the security-based swap execution facility
that the product to be listed complies with the Act and the
Commission's rules thereunder;
(v) A concise explanation and analysis of the product and its
compliance with applicable provisions of the Act, including core
principles, and the Commission's rules thereunder. This explanation and
analysis shall either be accompanied by the documentation relied upon
to establish the basis for compliance with applicable law, or
incorporate information contained in such documentation, with
appropriate citations to data sources;
(vi) A certification that the security-based swap execution
facility posted a notice of pending product certification with the
Commission and a copy of the submission, concurrent with the filing of
a submission with the Commission, on the security-based swap execution
facility's website. Information that the security-based swap execution
facility seeks to keep confidential may be redacted from the documents
published on the security-based swap execution's website but must be
republished consistent with any determination made pursuant to Sec.
240.24b-2 of this chapter; and
(vii) A request for confidential treatment, if appropriate, as
permitted under Sec. 240.24b-2 of this chapter.
(b) Additional information. If requested by Commission staff, a
security-based swap execution facility shall provide any additional
evidence, information, or data that demonstrates that the security-
based swap meets, initially or on a continuing basis, the requirements
of the Act or the Commission's rules or policies thereunder.
(c) Stay of certification of product. (1) General. The Commission
may stay the certification of a product submitted pursuant to paragraph
(a) of this section by issuing a notification informing the security-
based swap execution facility that the Commission is staying the
certification of the product on the

[[Page 87290]]

grounds that the product presents novel or complex issues that require
additional time to analyze, the product is accompanied by an inadequate
explanation, or the product is potentially inconsistent with the Act or
the Commission's rules thereunder. The Commission will have an
additional 90 days from the date of the notification to conduct the
review.
(2) Public comment. The Commission shall provide a 30-day comment
period within the 90-day period in which the stay is in effect, as
described in paragraph (c)(1) of this section. The Commission shall
publish a notice of the 30-day comment period on the Commission's
website. Comments from the public shall be submitted as specified in
that notice.
(3) Expiration of a stay of certification of product. A product
subject to a stay pursuant to this paragraph shall become effective,
pursuant to the certification, at the expiration of the 90-day review
period described in paragraph (c)(1) of this section, unless the
Commission withdraws the stay prior to that time, or the Commission
notifies the security-based swap execution facility during the 90-day
time period that it objects to the proposed certification on the
grounds that the product is inconsistent with the Act or the
Commission's rules.

Sec. 242.805 Voluntary submission of new products for Commission
review and approval.

(a) Request for approval. A security-based swap execution facility
may request that the Commission approve a new or dormant product prior
to listing the product for trading, or if a product was initially
submitted under Sec. 242.804, subsequent to listing the product for
trading. A submission requesting approval shall:
(1) Be filed electronically with the Commission using the EFFS
system;
(2) Include a copy of the submission cover sheet in accordance with
the instructions therein;
(3) Include a copy of the rules that set forth the security-based
swap's terms and conditions;
(4) Include an explanation and analysis of the product and its
compliance with applicable provisions of the Act, including the core
principles and the Commission's rules thereunder. This explanation and
analysis shall either be accompanied by the documentation relied upon
to establish the basis for compliance with the applicable law, or
incorporate information contained in such documentation, with
appropriate citations to data sources;
(5) Describe any agreements or contracts entered into with other
parties that enable the security-based swap execution facility to carry
out its responsibilities;
(6) Include, if appropriate, a request for confidential treatment
as permitted under Sec. 240.24b-2 of this chapter;
(7) Certify that the security-based swap execution facility posted
a notice of its request for Commission approval of the new product and
a copy of the submission, concurrent with the filing of a submission
with the Commission, on the security-based swap execution facility's
website. Information that the security-based swap execution facility
seeks to keep confidential may be redacted from the documents published
on the security-based swap execution facility's website but must be
republished consistent with any determination made pursuant to Sec.
240.24b-2 of this chapter; and
(8) Include, if requested by Commission staff, additional evidence,
information, or data demonstrating that the security-based swap meets,
initially or on a continuing basis, the requirements of the Act, or
other requirement for registration under the Act, or the Commission's
rules or policies thereunder. The security-based swap execution
facility shall submit the requested information by the open of business
on the date that is two business days from the date of request by
Commission staff, or at the conclusion of such extended period agreed
to by Commission staff after timely receipt of a written request from
the security-based swap execution facility.
(b) Standard for review and approval. The Commission shall approve
a new product unless the terms and conditions of the product violate
the Act or the Commission's rules thereunder.
(c) Forty-five-day review. A product submitted for Commission
approval under this paragraph shall be deemed approved by the
Commission 45 days after receipt by the Commission, or at the
conclusion of an extended period as provided under paragraph (d) of
this section, unless notified otherwise within the applicable period,
if:
(1) The submission complies with the requirements of paragraph (a)
of this section; and
(2) The submitting security-based swap execution facility does not
amend the terms or conditions of the product or supplement the request
for approval, except as requested by the Commission or for correction
of typographical errors, renumbering, or other non-substantive
revisions, during that period. Any voluntary, substantive amendment by
the security-based swap execution facility will be treated as a new
submission under this section.
(d) Extension of time. The Commission may extend the 45-day review
period in paragraph (c) of this section for:
(1) An additional 45 days, if the product raises novel or complex
issues that require additional time to analyze, in which case the
Commission shall notify the security-based swap execution facility
within the initial 45-day review period and shall briefly describe the
nature of the specific issue(s) for which additional time for review is
required; or
(2) Any extended review period to which the security-based swap
execution facility agrees in writing.
(e) Notice of non-approval. The Commission, at any time during its
review under this section, may notify the security-based swap execution
facility that it will not, or is unable to, approve the product. This
notification will briefly specify the nature of the issues raised and
the specific provision of the Act or the Commission's rules thereunder,
including the form or content requirements of paragraph (a) of this
section, that the product violates, appears to violate, or potentially
violates but which cannot be ascertained from the submission.
(f) Effect of non-approval. (1) Notification to a security-based
swap execution facility under paragraph (e) of this section of the
Commission's determination not to approve a product does not prejudice
the security-based swap execution facility from subsequently submitting
a revised version of the product for Commission approval, or from
submitting the product as initially proposed pursuant to a supplemented
submission.
(2) Notification to a security-based swap execution facility under
paragraph (e) of this section of the Commission's refusal to approve a
product shall be presumptive evidence that the security-based swap
execution facility may not truthfully certify under Sec. 242.804 that
the same, or substantially the same, product does not violate the Act
or the Commission's rules thereunder.

Sec. 242.806 Voluntary submission of rules for Commission review and
approval.

(a) Request for approval of rules. A security-based swap execution
facility may request that the Commission approve a new rule, rule
amendment, or dormant rule prior to implementation of the rule, or if
the request was initially submitted under Sec. 242.806 or Sec.
242.807, subsequent to implementation of the rule. A request for
approval shall:

[[Page 87291]]

(1) Be filed electronically with the Commission using the EFFS
system;
(2) Include a copy of the submission cover sheet in accordance with
the instructions therein;
(3) Set forth the text of the rule or rule amendment (in the case
of a rule amendment, deletions and additions must be indicated);
(4) Describe the proposed effective date of the rule or rule
amendment and any action taken or anticipated to be taken to adopt the
proposed rule by the security-based swap execution facility or by its
governing board or by any committee thereof, and cite the rules of the
security-based swap execution facility that authorize the adoption of
the proposed rule;
(5) Provide an explanation and analysis of the operation, purpose,
and effect of the proposed rule or rule amendment and its compliance
with applicable provisions of the Act, including the core principles
relating to security-based swap execution facilities and the
Commission's rules thereunder and, as applicable, a description of the
anticipated benefits to market participants or others, any potential
anticompetitive effects on market participants or others, and how the
rule fits into the security-based swap execution facility's framework
of regulation;
(6) Certify that the security-based swap execution facility posted
a notice of the pending rule with the Commission and a copy of the
submission, concurrent with the filing of a submission with the
Commission, on the security-based swap execution facility's website.
Information that the security-based swap execution facility seeks to
keep confidential may be redacted from the documents published on the
security-based swap execution facility's website but must be
republished consistent with any determination made pursuant to Sec.
240.24b-2 of this chapter;
(7) Provide additional information which may be beneficial to the
Commission in analyzing the new rule or rule amendment. If a proposed
rule affects, directly or indirectly, the application of any other rule
of the security-based swap execution facility, the pertinent text of
any such rule must be set forth and the anticipated effect described;
(8) Provide a brief explanation of any substantive opposing views
expressed to the security-based swap execution facility by governing
board or committee members, members of the security-based swap
execution facility, or market participants that were not incorporated
into the rule, or a statement that no such opposing views were
expressed; and
(9) As appropriate, include a request for confidential treatment as
permitted under Sec. 240.24b-2 of this chapter.
(b) Standard for review and approval. The Commission shall approve
a new rule or rule amendment unless the rule or rule amendment is
inconsistent with the Act or the Commission's rules thereunder.
(c) Forty-five-day review. A rule or rule amendment submitted for
Commission approval under paragraph (a) of this section shall be deemed
approved by the Commission 45 days after receipt by the Commission, or
at the conclusion of such extended period as provided under paragraph
(d) of this section, unless the security-based swap execution facility
is notified otherwise within the applicable period, if:
(1) The submission complies with the requirements of paragraph (a)
of this section;
(2) The security-based swap execution facility does not amend the
proposed rule or supplement the submission, except as requested by the
Commission, during the pendency of the review period, other than for
correction of typographical errors, renumbering, or other non-
substantive revisions. Any amendment or supplementation not requested
by the Commission will be treated as the submission of a new filing
under this section.
(d) Extension of time for review. The Commission may further extend
the review period in paragraph (c) of this section for:
(1) An additional 45 days, if the proposed rule or rule amendment
raises novel or complex issues that require additional time for review
or is of major economic significance, the submission is incomplete, or
the requestor does not respond completely to Commission questions in a
timely manner, in which case the Commission shall notify the submitting
security-based swap execution facility within the initial 45-day review
period and shall briefly describe the nature of the specific issues for
which additional time for review shall be required; or
(2) Any period, beyond the additional 45 days provided in paragraph
(d)(1) of this section, to which the security-based swap execution
facility agrees in writing.
(e) Notice of non-approval. Any time during its review under this
section, the Commission may notify the security-based swap execution
facility that it will not, or is unable to, approve the new rule or
rule amendment. This notification will briefly specify the nature of
the issues raised and the specific provision of the Act or the
Commission's rules thereunder, including the form or content
requirements of this section, with which the new rule or rule amendment
is inconsistent or appears to be inconsistent with the Act or the
Commission's rules thereunder.
(f) Effect of non-approval. (1) Notification to a security-based
swap execution facility under paragraph (e) of this section does not
prevent the security-based swap execution facility from subsequently
submitting a revised version of the proposed rule or rule amendment for
Commission review and approval or from submitting the new rule or rule
amendment as initially proposed in a supplemented submission. The
revised submission will be reviewed without prejudice.
(2) Notification to a security-based swap execution facility under
paragraph (e) of this section of the Commission's determination not to
approve a proposed rule or rule amendment shall be presumptive evidence
that the security-based swap execution facility may not truthfully
certify the same, or substantially the same, proposed rule or rule
amendment under Sec. 242.807(a).
(g) Expedited approval. Notwithstanding the provisions of paragraph
(c) of this section, changes to a proposed rule or a rule amendment,
including changes to terms and conditions of a product that are
consistent with the Act and the Commission's rules thereunder, may be
approved by the Commission at such time and under such conditions as
the Commission shall specify in the written notification; provided,
however, that the Commission may, at any time, alter or revoke the
applicability of such a notice to any particular product or rule
amendment.

Sec. 242.807 Self-certification of rules.

(a) Required certification. A security-based swap execution
facility shall comply with the following conditions prior to
implementing any rule--other than a rule delisting or withdrawing the
certification of a product with no open interest and submitted in
compliance with paragraphs (a)(1), (2), and (6) of this section--that
has not obtained Commission approval under Sec. 242.806, or that
remains a dormant rule subsequent to being submitted under this section
or approved under Sec. 242.806.
(1) The security-based swap execution facility has filed its
submission electronically with the Commission using the EFFS system.
(2) The security-based swap execution facility has provided a
certification that

[[Page 87292]]

it posted a notice of pending certification with the Commission and a
copy of the submission, concurrent with the filing of a submission with
the Commission, on the security-based swap execution facility's
website. Information that the security-based swap execution facility
seeks to keep confidential may be redacted from the documents published
on the security-based swap execution facility's website, but it must be
republished consistent with any determination made pursuant to Sec.
240.24b-2 of this chapter.
(3) The Commission has received the submission not later than the
open of business on the business day that is 10 business days prior to
the security-based swap execution facility's implementation of the rule
or rule amendment.
(4) The Commission has not stayed the submission pursuant to Sec.
242.807(c).
(5) A new rule or rule amendment that establishes standards for
responding to an emergency shall be submitted pursuant to Sec.
242.807(a). A rule or rule amendment implemented under procedures of
the governing board to respond to an emergency shall, if practicable,
be filed with the Commission prior to implementation or, if not
practicable, be filed with the Commission at the earliest possible time
after implementation, but in no event more than 24 hours after
implementation. Any such submission shall be subject to the
certification and stay provisions of paragraphs (b) and (c) of this
section.
(6) The rule submission shall include:
(i) A copy of the submission cover sheet in accordance with the
instructions therein (in the case of a rule or rule amendment that
responds to an emergency, ``Emergency Rule Certification'' should be
noted in the description section of the submission cover sheet);
(ii) The text of the rule (in the case of a rule amendment,
deletions and additions must be indicated);
(iii) The date of intended implementation;
(iv) A certification by the security-based swap execution facility
that the rule complies with the Act and the Commission's rules
thereunder;
(v) A concise explanation and analysis of the operation, purpose,
and effect of the proposed rule or rule amendment and its compliance
with applicable provisions of the Act, including core principles
relating to security-based swap execution facilities and the
Commission's rules thereunder;
(vi) A brief explanation of any substantive opposing views
expressed to the security-based swap execution facility by governing
board or committee members, members of the security-based swap
execution facility, or market participants, that were not incorporated
into the rule, or a statement that no such opposing views were
expressed; and
(vii) As appropriate, a request for confidential treatment pursuant
to the procedures provided in Sec. 240.24b-2 of this chapter.
(7) The security-based swap execution facility shall provide, if
requested by Commission staff, additional evidence, information, or
data that may be beneficial to the Commission in conducting a due
diligence assessment of the filing and the security-based swap
execution facility's compliance with any of the requirements of the Act
or the Commission's rules or policies thereunder.
(b) Review by the Commission. The Commission shall have 10 business
days to review the new rule or rule amendment before the new rule or
rule amendment is deemed certified and can be made effective, unless
the Commission notifies the security-based swap execution facility
during the 10-business-day review period that it intends to issue a
stay of the certification under paragraph (c) of this section.
(c) Stay. (1) Stay of certification of new rule or rule amendment.
The Commission may stay the certification of a new rule or rule
amendment submitted pursuant to paragraph (a) of this section by
issuing a notification informing the security-based swap execution
facility that the Commission is staying the certification of the rule
or rule amendment on the grounds that the rule or rule amendment
presents novel or complex issues that require additional time to
analyze, the rule or rule amendment is accompanied by an inadequate
explanation, or the rule or rule amendment is potentially inconsistent
with the Act or the Commission's rules thereunder. The Commission will
have an additional 90 days from the date of the notification to conduct
the review.
(2) Public comment. The Commission shall provide a 30-day comment
period within the 90-day period in which the stay is in effect, as
described in paragraph (c)(1) of this section. The Commission shall
publish a notice of the 30-day comment period on the Commission
website. Comments from the public shall be submitted as specified in
that notice.
(3) Expiration of a stay of certification of new rule or rule
amendment. A new rule or rule amendment subject to a stay pursuant to
this paragraph shall become effective, pursuant to the certification,
at the expiration of the 90-day review period described in paragraph
(c)(1) of this section, unless the Commission withdraws the stay prior
to that time, or the Commission notifies the security-based swap
execution facility during the 90-day time period that it objects to the
proposed certification on the grounds that the proposed rule or rule
amendment is inconsistent with the Act or the Commission's rules
thereunder.
(d) Notification of rule amendments. Notwithstanding the rule
certification requirement of paragraph (a) of this section, a security-
based swap execution facility may place the following rules or rule
amendments into effect without certification to the Commission if the
following conditions are met:
(1) The security-based swap execution facility provides to the
Commission at least weekly a summary notice of all rule amendments made
effective pursuant to this paragraph during the preceding week. Such
notice must be labeled ``Weekly Notification of Rule Amendments'' and
need not be filed for weeks during which no such actions have been
taken. One copy of each such submission shall be furnished
electronically using the EFFS system; and
(2) The rule governs:
(i) Non-substantive revisions. Corrections of typographical errors,
renumbering, periodic routine updates to identifying information about
the security-based swap execution facility, and other such non-
substantive revisions of a product's terms and conditions that have no
effect on the economic characteristics of the product;
(ii) Fees. Fees or fee changes, other than fees or fee changes
associated with market making or trading incentive programs, that:
(A) Total $1.00 or more per contract, and
(B) Are established by an independent third party or are unrelated
to delivery, trading, clearing, or dispute resolution.
(iii) Survey lists. Changes to lists of banks, brokers, dealers, or
other entities that provide price or cash market information to an
independent third party and that are incorporated by reference as
product terms;
(iv) Approved brands. Changes in lists of approved brands or
markings pursuant to previously certified or Commission approved
standards or criteria;
(v) Trading months. The initial listing of trading months, which
may qualify for implementation without notice pursuant to paragraph
(d)(3)(ii)(F) of this section, within the currently established cycle
of trading months; or

[[Page 87293]]

(vi) Minimum tick. Reductions in the minimum price fluctuation (or
``tick'').
(3) Notification of rule amendments not required. Notwithstanding
the rule certification requirements of paragraph (a) of this section, a
security-based swap execution facility may place the following rules or
rule amendments into effect without certification or notice to the
Commission if the following conditions are met:
(i) The security-based swap execution facility maintains
documentation regarding all changes to rules; and
(ii) The rule governs:
(A) Transfer of membership or ownership. Procedures and forms for
the purchase, sale, or transfer of membership or ownership, but not
including qualifications for membership or ownership, any right or
obligation of membership or ownership, or dues or assessments;
(B) Administrative procedures. The organization and administrative
procedures of a security-based swap execution facility's governing
bodies such as a governing board, officers, and committees, but not
voting requirements, governing board, or committee composition
requirements or procedures, decision-making procedures, use or
disclosure of material non-public information gained through the
performance of official duties, or requirements relating to conflicts
of interest;
(C) Administration. The routine daily administration, direction,
and control of employees, requirements relating to gratuity and similar
funds, but not guaranty, reserves, or similar funds; declaration of
holidays; and changes to facilities housing the market, trading floor,
or trading area;
(D) Standards of decorum. Standards of decorum or attire or similar
provisions relating to admission to the floor, badges, or visitors, but
not the establishment of penalties for violations of such rules;
(E) Fees. Fees or fee changes, other than fees or fee changes
associated with market making or trading incentive programs, that:
(1) Are less than $1.00; or
(2) Relate to matters such as dues, badges, telecommunication
services, booth space, real-time quotations, historical information,
publications, software licenses, or other matters that are
administrative in nature; and
(F) Trading months. The initial listing of trading months which are
within the currently established cycle of trading months.

Sec. 242.808 Availability of public information.

(a) The Commission shall make publicly available on its website the
following parts of an application to register as a security-based swap
execution facility, unless confidential treatment is obtained pursuant
to Sec. 240.24b-2 of this chapter:
(1) Transmittal letter and first page of the application cover
sheet;
(2) Exhibit C;
(3) Exhibit G;
(4) Exhibit L; and
(5) Exhibit M.
(b) The Commission shall make publicly available on its website,
unless confidential treatment is obtained pursuant to Sec. 240.24b-2
of this chapter, a security-based swap execution facility's filing of
new products pursuant to the self-certification procedures of Sec.
242.804, new products for Commission review and approval pursuant to
Sec. 242.805, new rules and rule amendments for Commission review and
approval pursuant to Sec. 242.806, and new rules and rule amendments
pursuant to the self-certification procedures of Sec. 242.807.
(c) The terms and conditions of a product submitted to the
Commission pursuant to Sec. 242.804, 242.805, 242.806, or 242.807
shall be made publicly available at the time of submission unless
confidential treatment is obtained pursuant to Sec. 240.24b-2 of this
chapter.

Sec. 242.809 Staying of certification and tolling of review period
pending jurisdictional determination.

(a) A product certification made by a security-based swap execution
facility pursuant to Sec. 242.804 shall be stayed, or the review
period for a product that has been submitted for Commission approval by
a security-based swap execution facility pursuant to Sec. 242.805
shall be tolled, upon request for a joint interpretation of whether the
product is a swap, security-based swap, or mixed swap made pursuant to
Sec. 240.3a68-2 of this chapter by the security-based swap execution
facility, the Commission, or the Commodity Futures Trading Commission.
(b) The Commission shall provide the security-based swap execution
facility with a written notice of the stay or tolling pending issuance
of a joint interpretation.
(c) The stay shall be withdrawn, or the approval review period
shall resume, if a joint interpretation finding that the Commission has
jurisdiction over the product is issued.

Sec. 242.810 Product filings by security-based swap execution
facilities that are not yet registered and by dormant security-based
swap execution facilities.

(a) An applicant for registration as a security-based swap
execution facility may submit a security-based swap's terms and
conditions prior to listing the product as part of its application for
registration.
(b) Any security-based swap terms and conditions or rules submitted
as part of a security-based swap execution facility's application for
registration shall be considered for approval by the Commission at the
time the Commission issues the security-based swap execution facility's
order of registration.
(c) After the Commission issues the order of registration, the
security-based swap execution facility shall submit a security-based
swap's terms and conditions, including amendments to such terms and
conditions, new rules, or rule amendments pursuant to the procedures in
Sec. Sec. 242.804, 242.805, 242.806, and 242.807.
(d) Any security-based swap terms and conditions or rules submitted
as part of an application to reinstate the registration of a dormant
security-based swap execution facility shall be considered for approval
by the Commission at the time the Commission approves the reinstatement
of registration of the dormant security-based swap execution facility.

Sec. 242.811 Information relating to security-based swap execution
facility compliance.

(a) Request for information. Upon the Commission's request, a
security-based swap execution facility shall file with the Commission
information related to its business as a security-based swap execution
facility in the form and manner, and within the timeframe, specified by
the Commission.
(b) Demonstration of compliance. Upon the Commission's request, a
security-based swap execution facility shall file with the Commission a
written demonstration, containing supporting data, information, and
documents, that it is in compliance with one or more core principles or
with its other obligations under the Act or the Commission's rules
thereunder, as the Commission specifies in its request. The security-
based swap execution facility shall file such written demonstration in
the form and manner, and within the timeframe, specified by the
Commission.
(c) Equity interest transfer. (1) Equity interest transfer
notification. A security-based swap execution facility shall file with
the Commission a notification of any transaction involving the direct
or

[[Page 87294]]

indirect transfer of 50 percent or more of the equity interest in the
security-based swap execution facility. The Commission may, upon
receiving such notification, request supporting documentation of the
transaction.
(2) Timing of notification. The equity interest transfer notice
described in paragraph (c)(1) of this section shall be filed with the
Commission in a form and manner specified by the Commission at the
earliest possible time, but in no event later than the open of business
10 business days following the date upon which the security-based swap
execution facility enters into a firm obligation to transfer the equity
interest.
(3) Rule filing. Notwithstanding the foregoing, if any aspect of an
equity interest transfer described in paragraph (c)(1) of this section
requires a security-based swap execution facility to file a rule, the
security-based swap execution facility shall comply with the applicable
rule filing requirements of Sec. 242.806 or Sec. 242.807.
(4) Certification. Upon an equity interest transfer described in
paragraph (c)(1) of this section, the security-based swap execution
facility shall file with the Commission, in a form and manner specified
by the Commission, a certification that the security-based swap
execution facility meets all of the requirements of section 3D of the
Act and the Commission rules thereunder, no later than two business
days following the date on which the equity interest of 50 percent or
more was acquired.
(d) Pending legal proceedings. (1) A security-based swap execution
facility shall submit to the Commission a copy of the complaint, any
dispositive or partially dispositive decision, any notice of appeal
filed concerning such decision, and such further documents as the
Commission may thereafter request filed in any material legal
proceeding to which the security-based swap execution facility is a
party or its property or assets is subject.
(2) A security-based swap execution facility shall submit to the
Commission a copy of the complaint, any dispositive or partially
dispositive decision, any notice of appeal filed concerning such
decision, and such further documents as the Commission may thereafter
request filed in any material legal proceeding instituted against any
officer, director, or other official of the security-based swap
execution facility from conduct in such person's capacity as an
official of the security-based swap execution facility and alleging
violations of:
(i) The Act or any rule, regulation, or order under the Act;
(ii) The constitution, bylaws, or rules of the security-based swap
execution facility; or
(iii) The applicable provisions of State law relating to the duties
of officers, directors, or other officials of business organizations.
(3) All documents required by this paragraph (d) to be submitted to
the Commission shall be submitted electronically in a form and manner
specified by the Commission within 10 days after the initiation of the
legal proceedings to which they relate, after the date of issuance, or
after receipt by the security-based swap execution facility of the
notice of appeal, as the case may be.
(4) For purposes of this paragraph (d), a ``material legal
proceeding'' includes but is not limited to actions involving alleged
violations of the Act or the Commission rules thereunder. However, a
legal proceeding is not ``material'' for the purposes of this rule if
the proceeding is not in a Federal or State court or if the Commission
is a party.

Sec. 242.812 Enforceability.

(a) A transaction entered into on or pursuant to the rules of a
security-based swap execution facility shall not be void, voidable,
subject to rescission, otherwise invalidated, or rendered unenforceable
as a result of a violation by the security-based swap execution
facility of the provisions of section 3D of the Act or the Commission's
rules thereunder.
(b) A security-based swap execution facility shall, as soon as
technologically practicable after the time of execution of a
transaction entered into on or pursuant to the rules of the facility,
provide a written record to each counterparty of all of the terms of
the transaction that were agreed to on the facility, which shall
legally supersede any previous agreement regarding such terms.

Sec. 242.813 Prohibited use of data collected for regulatory
purposes.

A security-based swap execution facility shall not use for business
or marketing purposes any proprietary data or personal information it
collects or receives, from or on behalf of any person, for the purpose
of fulfilling its regulatory obligations; provided, however, that a
security-based swap execution facility may use such data or information
for business or marketing purposes if the person from whom it collects
or receives such data or information clearly consents to the security-
based swap execution facility's use of such data or information in such
manner. A security-based swap execution facility shall not condition
access to its market(s) or market services on a person's consent to the
security-based swap execution facility's use of proprietary data or
personal information for business or marketing purposes. A security-
based swap execution facility, where necessary for regulatory purposes,
may share such data or information with one or more security-based swap
execution facilities or national securities exchanges registered with
the Commission.

Sec. 242.814 Entity operating both a national securities exchange and
security-based swap execution facility.

(a) An entity that intends to operate both a national securities
exchange and a security-based swap execution facility shall separately
register the two facilities pursuant to section 6 of the Act and Sec.
242.803, respectively.
(b) A national securities exchange shall, to the extent that the
exchange also operates a security-based swap execution facility and
uses the same electronic trade execution system for listing and
executing trades of security-based swaps on or through the exchange and
the facility, identify whether electronic trading of such security-
based swaps is taking place on or through the national securities
exchange or the security-based swap execution facility.

Sec. 242.815 Methods of execution for Required and Permitted
Transactions.

(a) Execution methods for Required Transactions. (1) Required
Transaction means any transaction involving a security-based swap that
is subject to the trade execution requirement in section 3C(h) of the
Act.
(2) Execution methods. (i) Each Required Transaction that is not a
block trade shall be executed on a security-based swap execution
facility in accordance with one of the following methods of execution,
except as provided in paragraph (d) or (e) of this section:
(A) An order book; or
(B) A request-for-quote system that operates in conjunction with an
order book.
(ii) In providing either one of the execution methods set forth in
paragraph (a)(2)(i)(A) or (B) of this section, a security-based swap
execution facility may for purposes of execution and communication use
any means of interstate commerce, including, but not limited to, the
mail, internet, email, and telephone, provided that the chosen
execution method satisfies the requirements for order books in Sec.
242.802 of this chapter or in paragraph (a)(3) of this section for
request-for-quote systems.

[[Page 87295]]

(3) Request-for-quote system means a trading system or platform in
which a market participant transmits a request for a quote to buy or
sell a specific instrument to no less than three market participants in
the trading system or platform, to which all such market participants
may respond. The three market participants shall not be affiliates of
or controlled by the requester and shall not be affiliates of or
controlled by each other. A security-based swap execution facility that
offers a request-for-quote system in connection with Required
Transactions shall provide the following functionality:
(i) At the same time that the requester receives the first
responsive bid or offer, the security-based swap execution facility
shall communicate to the requester any firm bid or offer pertaining to
the same instrument resting on any of the security-based swap execution
facility's order books;
(ii) The security-based swap execution facility shall provide the
requester with the ability to execute against such firm resting bids or
offers along with any responsive orders; and
(iii) The security-based swap execution facility shall ensure that
its trading protocols provide each of its market participants with
equal priority in receiving requests for quotes and in transmitting and
displaying for execution responsive orders.
(b) Time delay requirement for Required Transactions on an order
book. (1) Time delay requirement. With regard to Required Transactions,
a security-based swap execution facility shall require that a broker or
dealer who seeks to either execute against its customer's order or
execute two of its customers' orders against each other through the
security-based swap execution facility's order book, following some
form of pre-arrangement or pre-negotiation of such orders, be subject
to at least a 15-second time delay between the entry of those two
orders into the order book, such that one side of the potential
transaction is disclosed and made available to other market
participants before the second side of the potential transaction,
whether for the broker's or dealer's own account or for a second
customer, is submitted for execution.
(2) Adjustment of time delay requirement. A security-based swap
execution facility may adjust the time period of the 15-second time
delay requirement described in paragraph (b)(1) of this section, based
upon a security-based swap's liquidity or other product-specific
considerations; however, the time delay shall be set for a sufficient
period of time so that an order is exposed to the market and other
market participants have a meaningful opportunity to execute against
such order.
(c) Execution methods for Permitted Transactions. (1) Permitted
Transaction means any transaction not involving a security-based swap
that is subject to the trade execution requirement in section 3C(h) of
the Act.
(2) Execution methods. A security-based swap execution facility may
offer any method of execution for each Permitted Transaction.
(d) Exceptions to required methods of execution for package
transactions. (1) For purposes of this paragraph, a package transaction
consists of two or more component transactions executed between two or
more counterparties where:
(i) At least one component transaction is a Required Transaction;
(ii) Execution of each component transaction is contingent upon the
execution of all other component transactions; and
(iii) The component transactions are priced or quoted together as
one economic transaction with simultaneous or near-simultaneous
execution of all components.
(2) A Required Transaction that is executed as a component of a
package transaction that includes a component security-based swap that
is subject exclusively to the Commission's jurisdiction, but is not
subject to the clearing requirement under section 3C of the Act and is
not intended to be cleared, may be executed on a security-based swap
execution facility in accordance with paragraph (c)(2) of this section
as if it were a Permitted Transaction;
(3) A Required Transaction that is executed as a component of a
package transaction that includes a component that is not a security-
based swap may be executed on a security-based swap execution facility
in accordance with paragraph (c)(2) of this section as if it were a
Permitted Transaction. This provision shall not apply to:
(i) A Required Transaction that is executed as a component of a
package transaction in which all other non-security-based swap
components are U.S. Treasury securities;
(ii) A Required Transaction that is executed as a component of a
package transaction in which all other non-security-based swap
components are contracts for the purchase or sale of a commodity for
future delivery;
(iii) A Required Transaction that is executed as a component of a
package transaction in which all other non-security-based swap
components are agency mortgage-backed securities;
(iv) A Required Transaction that is executed as a component of a
package transaction that includes a component transaction that is the
issuance of a bond in a primary market; and
(v) A Required Transaction that is executed as a component of a
package transaction in which all other non-security-based swap
components are swaps that are subject to a trade execution requirement
under 17 CFR 37.9.
(4) A Required Transaction that is executed as a component of a
package transaction that includes a component security-based swap that
is not exclusively subject to the Commission's jurisdiction may be
executed on a security-based swap in accordance with paragraph (c)(2)
of this section as if it were a Permitted Transaction.
(e) Resolution of operational and clerical error trades. (1) A
security-based swap execution facility shall maintain rules and
procedures that facilitate the resolution of error trades. Such rules
shall be fair, transparent, and consistent; allow for timely
resolution; require members to provide prompt notice of an error
trade--and, as applicable, offsetting and correcting trades--to the
security-based swap execution facility; and permit members to:
(i) Execute a correcting trade, in accordance with paragraph (c)(2)
of this section, regardless of whether it is a Required or Permitted
Transaction, for an error trade that has been rejected from clearing as
soon as technologically practicable, but no later than one hour after a
registered clearing agency provides notice of the rejection; or
(ii) Execute an offsetting trade and a correcting trade, in
accordance with paragraph (c)(2) of this section, regardless of whether
it is a Required or Permitted Transaction, for an error trade that was
accepted for clearing as soon as technologically practicable, but no
later than three days after the error trade was accepted for clearing
at a registered clearing agency.
(2) If a correcting trade is rejected from clearing, then the
security-based swap execution facility shall not allow the
counterparties to execute another correcting trade.
(f) Counterparty anonymity. (1) Except as otherwise required under
the Act or the Commission's rules thereunder, a security-based swap
execution facility shall not directly or indirectly, including through
a third-party service provider, disclose the identity of a counterparty
to a security-based swap that is executed

[[Page 87296]]

anonymously and intended to be cleared.
(2) A security-based swap execution facility shall establish and
enforce rules that prohibit any person from directly or indirectly,
including through a third-party service provider, disclosing the
identity of a counterparty to a security-based swap that is executed
anonymously and intended to be cleared.
(3) For purposes of paragraphs (f)(1) and (2) of this section,
``executed anonymously'' shall include a security-based swap that is
pre-arranged or pre-negotiated anonymously, including by a member of
the security-based swap execution facility.
(4) For a package transaction that includes a component transaction
that is not a security-based swap intended to be cleared, disclosing
the identity of a counterparty shall not violate paragraphs (f)(1) or
(2) of this section. For purposes of this paragraph (f), a ``package
transaction'' consists of two or more component transactions executed
between two or more counterparties where:
(i) Execution of each component transaction is contingent upon the
execution of all other component transactions; and
(ii) The component transactions are priced or quoted together as
one economic transaction with simultaneous or near-simultaneous
execution of all components.
(g) Transactions not accepted for clearing. A security-based swap
execution facility shall establish and enforce rules that provide that
a security-based swap that is intended to be cleared at the time of the
transaction, but is not accepted for clearing at a registered clearing
agency, shall be void ab initio.

Sec. 242.816 Trade execution requirement and exemptions therefrom.

(a) General. (1) Required submission. A security-based swap
execution facility that makes a security-based swap available to trade
in accordance with paragraph (b) of this section, shall submit to the
Commission its determination with respect to such security-based swap
as a rule, pursuant to the procedures under Sec. 242.806 or Sec.
242.807.
(2) Listing requirement. A security-based swap execution facility
that makes a security-based swap available to trade must demonstrate
that it lists or offers that security-based swap for trading on its
trading system or platform.
(b) Factors to consider. To make a security-based swap available to
trade for purposes of section 3C(h) of the Act, a security-based swap
execution facility shall consider, as appropriate, the following
factors with respect to such security-based swap:
(1) Whether there are ready and willing buyers and sellers;
(2) The frequency or size of transactions;
(3) The trading volume;
(4) The number and types of market participants;
(5) The bid/ask spread; or
(6) The usual number of resting firm or indicative bids and offers.
(c) Applicability. Upon a determination that a security-based swap
is available to trade on a security-based swap execution facility or
national securities exchange, all other security-based swap execution
facilities and SBS exchanges shall comply with the requirements of
section 3C(h) of the Act in listing or offering such security-based
swap for trading.
(d) Removal. The Commission may issue a determination that a
security-based swap is no longer available to trade upon determining
that no security-based swap execution facility or SBS exchange lists
such security-based swap for trading.
(e) Exemptions to trade execution requirement. (1) A security-based
swap transaction that is executed as a component of a package
transaction that also includes a component transaction that is the
issuance of a bond in a primary market is exempt from the trade
execution requirement in section 3C(h) of the Act. For purposes of
paragraph (e) of this section, a package transaction consists of two or
more component transactions executed between two or more counterparties
where:
(i) At least one component transaction is subject to the trade
execution requirement in section 3C(h) of the Act;
(ii) Execution of each component transaction is contingent upon the
execution of all other component transactions; and
(iii) The component transactions are priced or quoted together as
one economic transaction with simultaneous or near-simultaneous
execution of all components.
(2) Section 3C(h) of the Act does not apply to a security-based
swap transaction that qualifies for an exception under section 3C(g) of
the Act, or any exemption from the clearing requirement that is granted
by the Commission, for which the associated requirements are met.
(3)(i) Section 3C(h) of the Act does not apply to a security-based
swap transaction that is executed between counterparties that qualify
as ``eligible affiliate counterparties,'' as defined below.
(ii) For purposes of this paragraph (e)(3), counterparties will be
``eligible affiliate counterparties'' if:
(A) One counterparty, directly or indirectly, holds a majority
ownership interest in the other counterparty, and the counterparty that
holds the majority interest in the other counterparty reports its
financial statements on a consolidated basis under Generally Accepted
Accounting Principles or International Financial Reporting Standards,
and such consolidated financial statements include the financial
results of the majority-owned counterparty; or
(B) A third party, directly or indirectly, holds a majority
ownership interest in both counterparties, and the third party reports
its financial statements on a consolidated basis under Generally
Accepted Accounting Principles or International Financial Reporting
Standards, and such consolidated financial statements include the
financial results of both of the counterparties.
(iii) For purposes of this paragraph (e)(3), a counterparty or
third party directly or indirectly holds a majority ownership interest
if it directly or indirectly holds a majority of the equity securities
of an entity, or the right to receive upon dissolution, or the
contribution of, a majority of the capital of a partnership.

Sec. 242.817 Trade execution compliance schedule.

(a) A security-based swap transaction shall be subject to the
requirements of section 3C(h) of the Act upon the later of:
(1) A determination by the Commission that the security-based swap
is required to be cleared as set forth in section 3C(a) or any later
compliance date that the Commission may establish as a term or
condition of such determination or following a stay and review of such
determination pursuant to section 3C(c) of the Act and Sec. 240.3Ca-1
of this chapter thereunder; and
(2) Thirty days after the available-to-trade determination
submission or certification for that security-based swap is,
respectively, deemed approved under Sec. 242.806 or deemed certified
under Sec. 242.807.
(b) Nothing in this section shall prohibit any counterparty from
complying voluntarily with the requirements of section 3C(h) of the Act
sooner than as provided in paragraph (a) of this section.

[[Page 87297]]

Sec. 242.818 Core Principle 1--Compliance with core principles.

(a) In general. To be registered, and maintain registration, as a
security-based swap execution facility, the security-based swap
execution facility shall comply with the core principles described in
section 3D of the Act, and any requirement that the Commission may
impose by rule or regulation.
(b) Reasonable discretion of security-based swap execution
facility. Unless otherwise determined by the Commission, by rule or
regulation, a security-based swap execution facility described in
paragraph (a) of this section shall have reasonable discretion in
establishing the manner in which it complies with the core principles
described in section 3D of the Act.

Sec. 242.819 Core Principle 2--Compliance with rules.

(a) General. A security-based swap execution facility shall:
(1) Establish and enforce compliance with any rule established by
such security-based swap execution facility, including the terms and
conditions of the security-based swaps traded or processed on or
through the facility, and any limitation on access to the facility;
(2) Establish and enforce trading, trade processing, and
participation rules that will deter abuses and have the capacity to
detect, investigate, and enforce those rules, including means to
provide market participants with impartial access to the market and to
capture information that may be used in establishing whether rule
violations have occurred; and
(3) Establish rules governing the operation of the facility,
including rules specifying trading procedures to be used in entering
and executing orders traded or posted on the facility.
(b) Operation of security-based swap execution facility and
compliance with rules. (1) A security-based swap execution facility
shall establish rules governing the operation of the security-based
swap execution facility, including, but not limited to, rules
specifying trading procedures to be followed by members when entering
and executing orders traded or posted on the security-based swap
execution facility.
(2) A security-based swap execution facility shall establish and
impartially enforce compliance with the rules of the security-based
swap execution facility, including, but not limited to:
(i) The terms and conditions of any security-based swaps traded or
processed on or through the security-based swap execution facility;
(ii) Access to the security-based swap execution facility;
(iii) Trade practice rules;
(iv) Audit trail requirements;
(v) Disciplinary rules; and
(vi) Mandatory trading requirements.
(c) Access requirements. (1) Impartial access to markets and market
services. A security-based swap execution facility shall provide any
eligible contract participant and any independent software vendor with
impartial access to its market(s) and market services, including any
indicative quote screens or any similar pricing data displays, provided
that the facility has:
(i) Criteria governing such access that are impartial, transparent,
and applied in a fair and non-discriminatory manner;
(ii) Procedures whereby eligible contract participants provide the
security-based swap execution facility with written or electronic
confirmation of their status as eligible contract participants, as
defined by the Act and Commission rules thereunder, prior to obtaining
access; and
(iii) Comparable fee structures for eligible contract participants
and independent software vendors receiving comparable access to, or
services from, the security-based swap execution facility.
(2) Jurisdiction. Prior to granting any eligible contract
participant access to its facilities, a security-based swap execution
facility shall require that the eligible contract participant consent
to its jurisdiction.
(3) Limitations on access. A security-based swap execution facility
shall establish and impartially enforce rules governing any decision to
allow, deny, suspend, or permanently bar an eligible contract
participant's access to the security-based swap execution facility,
including when a decision is made as part of a disciplinary or
emergency action taken by the security-based swap execution facility.
(4) Commission review with respect to a denial or limitation of
access to any service or a denial or conditioning of membership. (i) In
general. An application for review by the Commission may be filed by
any person who is aggrieved by a determination of a security-based swap
execution facility with respect to any final action with respect to a
denial or limitation of access to any service offered by the security-
based swap execution facility or any final action with respect to a
denial or conditioning of membership, as defined in Sec. 242.835(b)(2)
of this chapter (Rule 835(b)(2)), in accordance with Sec. 201.442 of
this chapter (Rule of Practice 442).
(ii) Standard to govern Commission review. In reviewing such a
determination, if the Commission finds that the specific grounds on
which such denial, limitation, or conditioning is based exist in fact,
that such denial, limitation, or conditioning is in accordance with the
rules of the security-based swap execution facility, and that such
rules are, and were applied in a manner, consistent with the purposes
of the Exchange Act, the Commission, by order, shall dismiss the
proceeding. If the Commission does not make any such finding or if it
finds that such denial, limitation, or conditioning imposes any burden
on competition not necessary or appropriate in furtherance of the
purposes of the Exchange Act, the Commission, by order, shall set aside
the action of the security-based swap execution facility and require it
to admit such person to membership or participation or grant such
person access to services offered by the security-based swap execution
facility.
(d) Rule enforcement program. A security-based swap execution
facility shall establish and enforce trading, trade processing, and
participation rules that will deter abuses and it shall have the
capacity to detect, investigate, and enforce those rules.
(1) Abusive trading practices prohibited. A security-based swap
execution facility shall prohibit abusive trading practices on its
markets by members. A security-based swap execution facility that
permits intermediation shall prohibit customer-related abuses
including, but not limited to, trading ahead of customer orders,
trading against customer orders, accommodation trading, and improper
cross trading. Specific trading practices that shall be prohibited
include front-running, wash trading, pre-arranged trading (except for
transactions approved by or certified to the Commission pursuant Sec.
242.806 or Sec. 242.807, respectively), fraudulent trading, money
passes, and any other trading practices that a security-based swap
execution facility deems to be abusive. A security-based swap execution
facility shall also prohibit any other manipulative or disruptive
trading practices prohibited by the Act or by the Commission pursuant
to Commission regulation.
(2) Capacity to detect and investigate rule violations. A security-
based swap execution facility shall have arrangements and resources for
effective enforcement of its rules. Such arrangements shall include the
authority to collect information and documents on both a routine and
non-routine basis, including the authority to examine

[[Page 87298]]

books and records kept by the security-based swap execution facility's
members and by persons under investigation. A security-based swap
execution facility's arrangements and resources shall also facilitate
the direct supervision of the market and the analysis of data collected
to determine whether a rule violation has occurred.
(3) Compliance staff and resources. A security-based swap execution
facility shall establish and maintain sufficient compliance staff and
resources to ensure that it can conduct effective audit trail reviews,
trade practice surveillance, market surveillance, and real-time market
monitoring. The security-based swap execution facility's compliance
staff shall also be sufficient to address unusual market or trading
events as they arise, and to conduct and complete investigations in a
timely manner, as set forth in paragraph (d)(6) of this section.
(4) Automated trade surveillance system. A security-based swap
execution facility shall maintain an automated trade surveillance
system capable of detecting potential trade practice violations. The
automated trade surveillance system shall load and process daily orders
and trades no later than 24 hours after the completion of the trading
day. The automated trade surveillance system shall have the capability
to detect and flag specific trade execution patterns and trade
anomalies; compute, retain, and compare trading statistics; reconstruct
the sequence of market activity; perform market analyses; and support
system users to perform in-depth analyses and ad hoc queries of trade-
related data.
(5) Real-time market monitoring. A security-based swap execution
facility shall conduct real-time market monitoring of all trading
activity on its system(s) or platform(s) to identify any market or
system anomalies. A security-based swap execution facility shall have
the authority to adjust trade prices or cancel trades when necessary to
mitigate market disrupting events caused by malfunctions in its
system(s) or platform(s) or errors in orders submitted by members. Any
trade price adjustments or trade cancellations shall be transparent to
the market and subject to standards that are clear, fair, and publicly
available.
(6) Investigations and investigation reports. (i) Procedures. A
security-based swap execution facility shall establish and maintain
procedures that require its compliance staff to conduct investigations
of possible rule violations. An investigation shall be commenced upon
the receipt of a request from Commission staff or upon the discovery or
receipt of information by the security-based swap execution facility
that indicates a reasonable basis for finding that a violation may have
occurred or will occur.
(ii) Timeliness. Each compliance staff investigation shall be
completed in a timely manner. Absent mitigating factors, a timely
manner is no later than 12 months after the date that an investigation
is opened. Mitigating factors that may reasonably justify an
investigation taking longer than 12 months to complete include the
complexity of the investigation, the number of firms or individuals
involved as potential wrongdoers, the number of potential violations to
be investigated, and the volume of documents and data to be examined
and analyzed by compliance staff.
(iii) Investigation reports when a reasonable basis exists for
finding a violation. Compliance staff shall submit a written
investigation report for disciplinary action in every instance in which
compliance staff determines from surveillance or from an investigation
that a reasonable basis exists for finding a rule violation. The
investigation report shall include the reason the investigation was
initiated; a summary of the complaint, if any; the relevant facts;
compliance staff's analysis and conclusions; and a recommendation as to
whether disciplinary action should be pursued.
(iv) Investigation reports when no reasonable basis exists for
finding a violation. If after conducting an investigation, compliance
staff determines that no reasonable basis exists for finding a rule
violation, it shall prepare a written report including the reason the
investigation was initiated; a summary of the complaint, if any; the
relevant facts; and compliance staff's analysis and conclusions.
(v) Warning letters. The rules of a security-based swap execution
facility may authorize its compliance staff to issue a warning letter
to a person or entity under investigation or to recommend that a
disciplinary panel take such an action. No more than one warning letter
may be issued to the same person or entity found to have committed the
same rule violation within a rolling 12-month period.
(e) Regulatory services provided by a third party. (1) Use of
regulatory service provider permitted. A security-based swap execution
facility may choose to contract with a registered futures association
(under section 17 of the Commodity Exchange Act), a board of trade
designated as a contract market (under section 5 of the Commodity
Exchange Act), a national securities exchange, a national securities
association, or another security-based swap execution facility (each a
``regulatory service provider''), for the provision of services to
assist in complying with the Act and Commission rules thereunder, as
approved by the Commission. A security-based swap execution facility
that chooses to contract with a regulatory service provider shall
ensure that such provider has the capacity and resources necessary to
provide timely and effective regulatory services, including adequate
staff and automated surveillance systems. A security-based swap
execution facility shall at all times remain responsible for the
performance of any regulatory services received, for compliance with
the security-based swap execution facility's obligations under the Act
and Commission rules thereunder, and for the regulatory service
provider's performance on its behalf.
(2) Duty to supervise regulatory service provider. A security-based
swap execution facility that elects to use the service of a regulatory
service provider shall retain sufficient compliance staff to supervise
the quality and effectiveness of the regulatory services provided on
its behalf. Compliance staff of the security-based swap execution
facility shall hold regular meetings with the regulatory service
provider to discuss ongoing investigations, trading patterns, market
participants, and any other matters of regulatory concern. A security-
based swap execution facility shall also conduct periodic reviews of
the adequacy and effectiveness of services provided on its behalf. Such
reviews shall be documented carefully and made available to the
Commission upon request.
(3) Regulatory decisions required from the security-based swap
execution facility. A security-based swap execution facility that
elects to use the service of a regulatory service provider shall retain
exclusive authority in all substantive decisions made by its regulatory
service provider, including, but not limited to, decisions involving
the cancellation of trades, the issuance of disciplinary charges
against members, and denials of access to the trading platform for
disciplinary reasons. A security-based swap execution facility shall
document any instances where its actions differ from those recommended
by its regulatory service provider, including the reasons for the
course of action recommended by the regulatory service provider and the
reasons why the security-based swap execution facility chose a
different course of action.

[[Page 87299]]

(f) Audit trail. A security-based swap execution facility shall
establish procedures to capture and retain information that may be used
in establishing whether rule violations have occurred.
(1) Audit trail required. A security-based swap execution facility
shall capture and retain all audit trail data necessary to detect,
investigate, and prevent customer and market abuses. Such data shall be
sufficient to reconstruct all indications of interest, requests for
quotes, orders, and trades within a reasonable period of time and to
provide evidence of any violations of the rules of the security-based
swap execution facility. An acceptable audit trail shall also permit
the security-based swap execution facility to track a customer order
from the time of receipt through execution on the security-based swap
execution facility.
(2) Elements of an acceptable audit trail program. (i) Original
source documents. A security-based swap execution facility's audit
trail shall include original source documents. Original source
documents include unalterable, sequentially identified records on which
trade execution information is originally recorded, whether recorded
manually or electronically. Records for customer orders (whether
filled, unfilled, or cancelled, each of which shall be retained or
electronically captured) shall reflect the terms of the order, an
account identifier that relates back to the account's owner(s), the
time of order entry, and the time of trade execution. A security-based
swap execution facility shall require that all orders, indications of
interest, and requests for quotes be immediately captured in the audit
trail.
(ii) Transaction history database. A security-based swap execution
facility's audit trail program shall include an electronic transaction
history database. An adequate transaction history database shall
include a history of all indications of interest, requests for quotes,
orders, and trades entered into a security-based swap execution
facility's trading system or platform, including all order
modifications and cancellations. An adequate transaction history
database shall also include:
(A) All data that are input into the trade entry or matching system
for the transaction to match and clear;
(B) The customer type indicator code; and
(C) Timing and sequencing data adequate to reconstruct trading.
(iii) Electronic analysis capability. A security-based swap
execution facility's audit trail program shall include electronic
analysis capability with respect to all audit trail data in the
transaction history database. Such electronic analysis capability shall
ensure that the security-based swap execution facility has the ability
to reconstruct indications of interest, requests for quotes, orders,
and trades, and identify possible trading violations with respect to
both customer and market abuse.
(iv) Safe-storage capability. A security-based swap execution
facility's audit trail program shall include the capability to safely
store all audit trail data retained in its transaction history
database. Such safe-storage capability shall include the capability to
store all data in the database in a manner that protects it from
unauthorized alteration, as well as from accidental erasure or other
loss. Data shall be retained in accordance with the recordkeeping
requirements of Sec. 242.826 (Core Principle 9).
(3) Enforcement of audit trail requirements. (i) Annual audit trail
and recordkeeping reviews. A security-based swap execution facility
shall enforce its audit trail and recordkeeping requirements through at
least annual reviews of all members and persons and firms subject to
the security-based swap execution facility's recordkeeping rules to
verify their compliance with the security-based swap execution
facility's audit trail and recordkeeping requirements. Such reviews
shall include, but are not limited to, reviews of randomly selected
samples of front-end audit trail data for order routing systems; a
review of the process by which user identifications are assigned and
user identification records are maintained; a review of usage patterns
associated with user identifications to monitor for violations of user
identification rules; and reviews of account numbers and customer type
indicator codes in trade records to test for accuracy and improper use.
(ii) Enforcement program required. A security-based swap execution
facility shall establish a program for effective enforcement of its
audit trail and recordkeeping requirements. An effective program shall
identify members, persons, and firms subject to the security-based swap
execution facility's recordkeeping rules that have failed to maintain
high levels of compliance with such requirements, and impose meaningful
sanctions when deficiencies are found. Sanctions shall be sufficient to
deter recidivist behavior. No more than one warning letter shall be
issued to the same person or entity found to have committed the same
violation of audit trail or recordkeeping requirements within a rolling
12-month period.
(g) Disciplinary procedures and sanctions. A security-based swap
execution facility shall establish trading, trade processing, and
participation rules that will deter abuses and have the capacity to
enforce such rules through prompt and effective disciplinary action,
including suspension or expulsion of members that violate the rules of
the security-based swap execution facility.
(1) Enforcement staff. (i) A security-based swap execution facility
shall establish and maintain sufficient enforcement staff and resources
to effectively and promptly prosecute possible rule violations within
the disciplinary jurisdiction of the security-based swap execution
facility.
(ii) The enforcement staff of a security-based swap execution
facility shall not include members or other persons whose interests
conflict with their enforcement duties.
(iii) A member of the enforcement staff shall not operate under the
direction or control of any person or persons with trading privileges
at the security-based swap execution facility.
(iv) The enforcement staff of a security-based swap execution
facility may operate as part of the security-based swap execution
facility's compliance department.
(2) Disciplinary panels. A security-based swap execution facility
shall establish one or more disciplinary panels that are authorized to
fulfill their obligations under the rules of this section. Disciplinary
panels shall meet the composition requirements of Sec. 242.834(d), and
shall not include any members of the security-based swap execution
facility's compliance staff or any person involved in adjudicating any
other stage of the same proceeding.
(3) Notice of charges. If compliance staff authorized by a
security-based swap execution facility or disciplinary panel thereof
determines that a reasonable basis exists for finding a violation and
adjudication is warranted, it shall direct that the person or entity
alleged to have committed the violation be served with a notice of
charges. A notice of charges shall adequately state the acts, conduct,
or practices in which the respondent is alleged to have engaged; state
the rule or rules alleged to have been violated (or about to be
violated); advise the respondent that it is entitled, upon request, to
a hearing on the charges; and prescribe the period within which a
hearing on the charges may be requested. If the rules of the security-
based swap execution facility so provide, a notice may also advise:

[[Page 87300]]

(i) That failure to request a hearing within the period prescribed
in the notice, except for good cause, may be deemed a waiver of the
right to a hearing; and
(ii) That failure to answer or to deny expressly a charge may be
deemed to be an admission of such charge.
(4) Right to representation. Upon being served with a notice of
charges, a respondent shall have the right to be represented by legal
counsel or any other representative of its choosing in all succeeding
stages of the disciplinary process, except by any member of the
security-based swap execution facility's governing board or
disciplinary panel, any employee of the security-based swap execution
facility, or any person substantially related to the underlying
investigations, such as a material witness or respondent.
(5) Answer to charges. A respondent shall be given a reasonable
period of time to file an answer to a notice of charges. The rules of a
security-based swap execution facility governing the requirements and
timeliness of a respondent's answer to a notice of charges shall be
fair, equitable, and publicly available.
(6) Admission or failure to deny charges. The rules of a security-
based swap execution facility may provide that, if a respondent admits
or fails to deny any of the charges, a disciplinary panel may find that
the violations alleged in the notice of charges for which the
respondent admitted or failed to deny any of the charges have been
committed. If the security-based swap execution facility's rules so
provide, then:
(i) The disciplinary panel may impose a sanction for each violation
found to have been committed;
(ii) The disciplinary panel shall promptly notify the respondent in
writing of any sanction to be imposed and shall advise the respondent
that the respondent may request a hearing on such sanction within the
period of time, which shall be stated in the notice; and
(iii) The rules of a security-based swap execution facility may
provide that, if a respondent fails to request a hearing within the
period of time stated in the notice, the respondent will be deemed to
have accepted the sanction.
(7) Denial of charges and right to hearing. Where a respondent has
requested a hearing on a charge that is denied, or on a sanction set by
the disciplinary panel, the respondent shall be given an opportunity
for a hearing in accordance with the rules of the security-based swap
execution facility.
(8) Settlement offers. (i) The rules of a security-based swap
execution facility may permit a respondent to submit a written offer of
settlement at any time after an investigation report is completed. The
disciplinary panel presiding over the matter may accept the offer of
settlement, but may not alter the terms of a settlement offer unless
the respondent agrees.
(ii) The rules of a security-based swap execution facility may
provide that, in its discretion, a disciplinary panel may permit the
respondent to accept a sanction without either admitting or denying the
rule violations upon which the sanction is based.
(iii) If an offer of settlement is accepted, the panel accepting
the offer shall issue a written decision specifying the rule violations
it has reason to believe were committed, including the basis or reasons
for the panel's conclusions, and any sanction to be imposed, which
shall include full customer restitution where customer harm is
demonstrated, except where the amount of restitution or to whom it
should be provided cannot be reasonably determined. If an offer of
settlement is accepted without the agreement of the enforcement staff,
the decision shall adequately support the disciplinary panel's
acceptance of the settlement. Where applicable, the decision shall also
include a statement that the respondent has accepted the sanctions
imposed without either admitting or denying the rule violations.
(iv) The respondent may withdraw its offer of settlement at any
time before final acceptance by a disciplinary panel. If an offer is
withdrawn after submission, or is rejected by a disciplinary panel, the
respondent shall not be deemed to have made any admissions by reason of
the offer of settlement and shall not be otherwise prejudiced by having
submitted the offer of settlement.
(9) Hearings. A security-based swap execution facility shall adopt
rules that provide for the following minimum requirements for any
hearing:
(i) The hearing shall be fair, shall be conducted before members of
the disciplinary panel, and shall be promptly convened after reasonable
notice to the respondent. A security-based swap execution facility need
not apply the formal rules of evidence for a hearing; nevertheless, the
procedures for the hearing may not be so informal as to deny a fair
hearing;
(ii) No member of the disciplinary panel for the hearing may have a
financial, personal, or other direct interest in the matter under
consideration;
(iii) In advance of the hearing, the respondent shall be entitled
to examine all books, documents, or other evidence in the possession or
under the control of the security-based swap execution facility. The
security-based swap execution facility may withhold documents that are
privileged or constitute attorney work product; were prepared by an
employee of the security-based swap execution facility but will not be
offered in evidence in the disciplinary proceedings; may disclose a
technique or guideline used in examinations, investigations, or
enforcement proceedings; or disclose the identity of a confidential
source;
(iv) The security-based swap execution facility's enforcement and
compliance staffs shall be parties to the hearing, and the enforcement
staff shall present their case on those charges and sanctions that are
the subject of the hearing;
(v) The respondent shall be entitled to appear personally at the
hearing, to cross-examine any persons appearing as witnesses at the
hearing, to call witnesses, and to present such evidence as may be
relevant to the charges;
(vi) The security-based swap execution facility shall require
persons within its jurisdiction who are called as witnesses to
participate in the hearing and produce evidence. The security-based
swap execution facility shall make reasonable efforts to secure the
presence of all other persons called as witnesses whose testimony would
be relevant. The rules of a security-based swap execution facility may
provide that a sanction may be summarily imposed upon any person within
its jurisdiction whose actions impede the progress of a hearing; and
(vii) If the respondent has requested a hearing, a copy of the
hearing shall be made and shall become a part of the record of the
proceeding. The record shall not be required to be transcribed unless:
(A) The transcript is requested by Commission staff or the
respondent;
(B) The decision is appealed pursuant to the rules of the security-
based swap execution facility; or
(C) The decision is reviewed by the Commission pursuant to Sec.
201.442 of this chapter. In all other instances, a summary record of a
hearing is permitted.
(10) Decisions. Promptly following a hearing conducted in
accordance with the rules of the security-based swap execution
facility, the disciplinary panel shall render a written decision based
upon the weight of the evidence contained in the record of the
proceeding and shall provide a copy to the respondent. The decision
shall include:

[[Page 87301]]

(i) The notice of charges or a summary of the charges;
(ii) The answer, if any, or a summary of the answer;
(iii) A summary of the evidence produced at the hearing or, where
appropriate, incorporation by reference of the investigation report;
(iv) A statement of findings and conclusions with respect to each
charge and a complete explanation of the evidentiary and other basis
for such findings and conclusions with respect to each charge;
(v) An indication of each specific rule that the respondent was
found to have violated; and
(vi) A declaration of all sanctions imposed against the respondent,
including the basis for such sanctions and the effective date of such
sanctions.
(11) Emergency disciplinary actions. (i) A security-based swap
execution facility may impose a sanction, including suspension, or take
other summary action against a person or entity subject to its
jurisdiction upon a reasonable belief that such immediate action is
necessary to protect the best interest of the market place.
(ii) Any emergency disciplinary action shall be taken in accordance
with a security-based swap execution facility's procedures that provide
for the following:
(A) If practicable, a respondent should be served with a notice
before the action is taken, or otherwise at the earliest possible
opportunity. The notice shall state the action, briefly state the
reasons for the action, and state the effective time and date, and the
duration of the action.
(B) The respondent shall have the right to be represented by legal
counsel or any other representative of its choosing in all proceedings
subsequent to the emergency action taken. The respondent shall be given
the opportunity for a hearing as soon as reasonably practicable and the
hearing shall be conducted before the disciplinary panel pursuant to
the rules of the security-based swap execution facility.
(C) Promptly following the hearing, the security-based swap
execution facility shall render a written decision based upon the
weight of the evidence contained in the record of the proceeding and
shall provide a copy to the respondent. The decision shall include a
description of the summary action taken; the reasons for the summary
action; a summary of the evidence produced at the hearing; a statement
of findings and conclusions; a determination that the summary action
should be affirmed, modified, or reversed; and a declaration of any
action to be taken pursuant to the determination, and the effective
date and duration of such action.
(12) Right to appeal. The rules of a security-based swap execution
facility may permit the parties to a proceeding to appeal promptly an
adverse decision of a disciplinary panel in all or in certain classes
of cases. Such rules may require a party's notice of appeal to be in
writing and to specify the findings, conclusions, or sanctions to which
objection are taken. If the rules of a security-based swap execution
facility permit appeals, then both the respondent and the enforcement
staff shall have the opportunity to appeal and:
(i) The security-based swap execution facility shall establish an
appellate panel that is authorized to hear appeals. The rules of the
security-based swap execution facility may provide that the appellate
panel may, on its own initiative, order review of a decision by a
disciplinary panel within a reasonable period of time after the
decision has been rendered;
(ii) The composition of the appellate panel shall be consistent
with Sec. 242.834(d) and shall not include any members of the
security-based swap execution facility's compliance staff or any person
involved in adjudicating any other stage of the same proceeding. The
rules of a security-based swap execution facility shall provide for the
appeal proceeding to be conducted before all of the members of the
appellate panel or a panel thereof;
(iii) Except for good cause shown, the appeal or review shall be
conducted solely on the record before the disciplinary panel, the
written exceptions filed by the parties, and the oral or written
arguments of the parties; and
(iv) Promptly following the appeal or review proceeding, the
appellate panel shall issue a written decision and shall provide a copy
to the respondent. The decision issued by the appellate panel shall
adhere to all the requirements of paragraph (g)(10) of this section to
the extent that a different conclusion is reached from that issued by
the disciplinary panel.
(13) Disciplinary sanctions. (i) In general. All disciplinary
sanctions imposed by a security-based swap execution facility or its
disciplinary panels shall be commensurate with the violations committed
and shall be clearly sufficient to deter recidivism or similar
violations by other members. All disciplinary sanctions, including
sanctions imposed pursuant to an accepted settlement offer, shall take
into account the respondent's disciplinary history. In the event of
demonstrated customer harm, any disciplinary sanction shall also
include full customer restitution, except where the amount of
restitution or to whom it should be provided cannot be reasonably
determined.
(ii) Summary fines for violations of rules regarding timely
submission of records. A security-based swap execution facility may
adopt a summary fine schedule for violations of rules relating to the
failure to timely submit accurate records required for clearing or
verifying each day's transactions. A security-based swap execution
facility may permit its compliance staff, or a designated panel of
security-based swap execution facility officials, to summarily impose
minor sanctions against persons within the security-based swap
execution facility's jurisdiction for violating such rules. A security-
based swap execution facility's summary fine schedule may allow for
warning letters to be issued for first-time violations or violators. If
adopted, a summary fine schedule shall provide for progressively larger
fines for recurring violations.
(14) Commission review of a disciplinary sanction. (i) In general.
An application for review by the Commission may be filed by any person
who is aggrieved by a determination of a security-based swap facility
with respect to any final disciplinary action, as defined in Sec.
242.835(b)(1) of this chapter (Rule 835(b)(1)), in accordance with
Sec. 201.442 of this chapter (Rule of Practice 442).
(ii) Standard to govern Commission review. (A) In reviewing such a
determination, if the Commission finds that such person has engaged in
such acts or practices, or has omitted such acts, as the security-based
swap execution facility has found him to have engaged in or omitted,
that such acts or practices, or omissions to act, are in violation of
the Exchange Act, the rules or regulations thereunder, or the rules of
the security-based swap execution facility, and that such provisions
are, and were applied in a manner, consistent with the purposes of
Exchange Act, the Commission, by order, shall so declare and, as
appropriate, affirm the sanction imposed by the security-based swap
execution facility, modify the sanction in accordance with paragraph
(C) of this subsection, or remand to the security-based swap execution
facility for further proceedings; or
(B) if the Commission does not make any such finding it shall, by
order, set aside the sanction imposed by the security-based swap
execution facility

[[Page 87302]]

and, if appropriate, remand to the security-based swap execution
facility for further proceedings.
(C) If the Commission, having due regard for the public interest
and the protection of investors, finds that a sanction imposed by a
security-based swap execution facility upon such person imposes any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act or is excessive or oppressive, the
Commission may cancel, reduce, or require the remission of such
sanction.
(h) Activities of security-based swap execution facility's
employees, governing board members, committee members, and consultants.
(1) Definitions. The following definitions shall apply only in this
paragraph (h):
(i) Covered interest, with respect to a security-based swap
execution facility, means:
(A) A security-based swap that trades on the security-based swap
execution facility;
(B) A security of an issuer that has issued a security that
underlies a security-based swap that is listed on that facility; or
(C) A derivative based on a security that falls within paragraph
(h)(1)(i)(B) of this section.
(ii) Pooled investment vehicle means an investment company
registered under the Investment Company Act of 1940 in which no covered
interest constitutes more than 10 percent of the investment company's
assets.
(2) Required rules. A security-based swap execution facility must
maintain in effect rules which have been submitted to the Commission
pursuant to Sec. 242.806 or Sec. 242.807 that, at a minimum, prohibit
an employee of the security-based swap execution facility from:
(i) Trading, directly or indirectly, any covered interest; and
(ii) Disclosing to any other person any material, non-public
information which such employee obtains as a result of their employment
at the security-based swap execution facility, where such employee has
or should have a reasonable expectation that the information disclosed
may assist another person in trading any covered interest; provided,
however, that such rules shall not prohibit disclosures made in the
course of an employee's duties, or disclosures made to another
security-based swap execution facility, court of competent
jurisdiction, or representative of any agency or department of the
Federal or State government acting in their official capacity.
(3) Possible exemptions. A security-based swap execution facility
may adopt rules, which must be submitted to the Commission pursuant to
Sec. 242.806 or Sec. 242.807, which set forth circumstances under
which exemptions from the trading prohibition contained in paragraph
(h)(2)(i) of this section may be granted; such exemptions are to be
administered by the security-based swap execution facility on a case-
by-case basis. Specifically, such circumstances may include:
(i) Participation by an employee in a pooled investment vehicle
where the employee has no direct or indirect control with respect to
transactions executed for or on behalf of such vehicle;
(ii) Trading by an employee in a derivative based on a pooled
investment vehicle that falls within paragraph (h)(3)(i) of this
section;
(iii) Trading by an employee in a derivative based on an index in
which no covered interest constitutes more than 10 percent of the
index; and
(iv) Trading by an employee under circumstances enumerated by the
security-based swap execution facility in rules which the security-
based swap execution facility determines are not contrary to applicable
law, the public interest, or just and equitable principles of trade.
(4) Prohibited conduct. (i) No employee, governing board member,
committee member, or consultant of a security-based swap execution
facility shall:
(A) Trade for such person's own account, or for or on behalf of any
other account, in any covered interest on the basis of any material,
non-public information obtained through special access related to the
performance of such person's official duties as an employee, governing
board member, committee member, or consultant; or
(B) Disclose for any purpose inconsistent with the performance of
such person's official duties as an employee, governing board member,
committee member, or consultant any material, non-public information
obtained through special access related to the performance of such
duties.
(ii) No person shall trade for such person's own account, or for or
on behalf of any other account, in any covered interest on the basis of
any material, non-public information that such person knows was
obtained in violation of this paragraph (h)(4) from an employee,
governing board member, committee member, or consultant.
(i) Service on security-based swap execution facility governing
boards or committees by persons with disciplinary histories. (1) A
security-based swap execution facility shall maintain in effect rules
which have been submitted to the Commission pursuant to Sec. 242.806
or Sec. 242.807 that render a person ineligible to serve on its
disciplinary committees, arbitration panels, oversight panels, or
governing board who:
(i) Was found within the prior three years by a final decision of a
security-based swap execution facility, a self-regulatory organization,
an administrative law judge, a court of competent jurisdiction, or the
Commission to have committed a disciplinary offense;
(ii) Entered into a settlement agreement with a security-based swap
execution facility, a court of competent jurisdiction, or the
Commission within the prior three years in which any of the findings
or, in the absence of such findings, any of the acts charged included a
disciplinary offense;
(iii) Currently is suspended from trading on any security-based
swap execution facility, is suspended or expelled from membership with
a self-regulatory organization, is serving any sentence of probation,
or owes any portion of a fine imposed pursuant to:
(A) A finding by a final decision of a security-based swap
execution facility, a self-regulatory organization, an administrative
law judge, a court of competent jurisdiction, or the Commission that
such person committed a disciplinary offense; or
(B) A settlement agreement with a security-based swap execution
facility, a court of competent jurisdiction, or the Commission in which
any of the findings or, in the absence of such findings, any of the
acts charged included a disciplinary offense;
(iv) Currently is subject to an agreement with the Commission, a
security-based swap execution facility, or a self-regulatory
organization not to apply for registration with the Commission or
membership in any self-regulatory organization;
(v) Currently is subject to or has had imposed on him or her within
the prior three years a Commission registration revocation or
suspension in any capacity for any reason, or has been convicted within
the prior three years of any felony; or
(vi) Currently is subject to a denial, suspension, or
disqualification from serving on a disciplinary committee, arbitration
panel, or governing board of any security-based swap execution facility
or self-regulatory organization.
(2) No person may serve on a disciplinary committee, arbitration
panel, oversight panel or governing

[[Page 87303]]

board of a security-based swap execution facility if such person is
subject to any of the conditions listed in paragraphs (i)(1)(i) through
(vi) of this section.
(3) A security-based swap execution facility shall submit to the
Commission a schedule listing all those rule violations which
constitute disciplinary offenses and, to the extent necessary to
reflect revisions, shall submit an amended schedule within 30 days of
the end of each calendar year. A security-based swap execution facility
shall maintain and keep current the schedule required by this section,
and post the schedule on the security-based swap execution facility's
website so that it is in a public place designed to provide notice to
members and otherwise ensure its availability to the general public.
(4) A security-based swap execution facility shall submit to the
Commission within 30 days of the end of each calendar year a certified
list of any persons who have been removed from its disciplinary
committees, arbitration panels, oversight panels, or governing board
pursuant to the requirements of this section during the prior year.
(5) Whenever a security-based swap execution facility finds by
final decision that a person has committed a disciplinary offense and
such finding makes such person ineligible to serve on that security-
based swap execution facility's disciplinary committees, arbitration
panels, oversight panels, or governing board, the security-based swap
execution facility shall inform the Commission of that finding and the
length of the ineligibility in a form and manner specified by the
Commission.
(6) For purposes of this paragraph:
(i) Arbitration panel means any person or panel empowered by a
security-based swap execution facility to arbitrate disputes involving
the security-based swap execution facility's members or their
customers.
(ii) Disciplinary offense means:
(A) Any violation of the rules of a security-based swap execution
facility, except a violation resulting in fines aggregating to less
than $5,000 within a calendar year involving:
(1) Decorum or attire;
(2) Financial requirements; or
(3) Reporting or recordkeeping;
(B) Any rule violation which involves fraud, deceit, or conversion
or results in a suspension or expulsion;
(C) Any violation of the Act or the Commission's rules thereunder;
or
(D) Any failure to exercise supervisory responsibility when such
failure is itself a violation of either the rules of the security-based
swap execution facility, the Act, or the Commission's rules thereunder.
(E) A disciplinary offense must arise out of a proceeding or action
which is brought by a security-based swap execution facility, the
Commission, any Federal or State agency, or other governmental body.
(iii) Final decision means:
(A) A decision of a security-based swap execution facility which
cannot be further appealed within the security-based swap execution
facility, is not subject to the stay of the Commission or a court of
competent jurisdiction, and has not been reversed by the Commission or
any court of competent jurisdiction; or
(B) Any decision by an administrative law judge, a court of
competent jurisdiction, or the Commission which has not been stayed or
reversed.
(j) Notification of final disciplinary action involving financial
harm to a customer.
(1) Upon any final disciplinary action in which a security-based
swap execution facility finds that a member has committed a rule
violation that involved a transaction for a customer, whether executed
or not, and that resulted in financial harm to the customer:
(i) The security-based swap execution facility shall promptly
provide written notice of the disciplinary action to the member; and
(ii) The security-based swap execution facility shall have
established a rule pursuant to Sec. 242.806 or Sec. 242.807 that
requires a member that receives such a notice to promptly provide
written notice of the disciplinary action to the customer, as disclosed
on the member's books and records.
(2) A written notice required by paragraph (j)(1) of this section
must include the principal facts of the disciplinary action and a
statement that the security-based swap execution facility has found
that the member has committed a rule violation that involved a
transaction for the customer, whether executed or not, and that
resulted in financial harm to the customer.
(3) Solely for purposes of this paragraph (j):
(i) Customer means a person that utilizes an agent in connection
with trading on a security-based swap execution facility.
(ii) Final disciplinary action means any decision by or settlement
with a security-based swap execution facility in a disciplinary matter
which cannot be further appealed at the security-based swap execution
facility, is not subject to the stay of the Commission or a court of
competent jurisdiction, and has not been reversed by the Commission or
any court of competent jurisdiction.
(k) Designation of agent for non-U.S. member. (1) A security-based
swap execution facility that admits a non-U.S. person as a member shall
be deemed to be the agent of the non-U.S. member with respect to any
security-based swaps executed by the non-U.S. member. Service or
delivery of any communication issued by or on behalf of the Commission
to the security-based swap execution facility shall constitute valid
and effective service upon the non-U.S. member. The security-based swap
execution facility which has been served with, or to which there has
been delivered, a communication issued by or on behalf of the
Commission to a non-U.S. member shall transmit the communication
promptly and in a manner which is reasonable under the circumstances,
or in a manner specified by the Commission in the communication, to the
non-U.S. member.
(2) It shall be unlawful for a security-based swap execution
facility to permit a non-U.S. member to execute security-based swaps on
the facility unless the security-based swap execution facility prior
thereto informs the non-U.S. member in writing of the requirements of
this section.
(3) The requirements of paragraphs (k)(1) and (2) of this section
shall not apply if the non-U.S. member has duly executed and maintains
in effect a written agency agreement in compliance with this paragraph
with a person domiciled in the United States and has provided a copy of
the agreement to the security-based swap execution facility prior to
effecting any transaction on the security-based swap execution
facility. This agreement must authorize the person domiciled in the
United States to serve as the agent of the non-U.S. member for purposes
of accepting delivery and service of all communications issued by or on
behalf of the Commission to the non-U.S. member and must provide an
address in the United States where the agent will accept delivery and
service of communications from the Commission. This agreement must be
filed with the Commission by the security-based swap execution facility
prior to permitting the non-U.S. member to effect any transactions in
security-based swaps. Such agreements shall be filed in a manner
specified by the Commission.
(4) A non-U.S. member shall notify the Commission immediately if
the written agency agreement is terminated, revoked, or is otherwise no
longer in effect. If the security-based swap execution facility knows
or should

[[Page 87304]]

know that the agreement has expired, been terminated, or is no longer
in effect, the security-based swap execution facility shall notify the
Commission immediately.

Sec. 242.820 Core Principle 3--Security-based swaps not readily
susceptible to manipulation.

The security-based swap execution facility shall permit trading
only in security-based swaps that are not readily susceptible to
manipulation.

Sec. 242.821 Core Principle 4--Monitoring of trading and trade
processing.

(a) General. The security-based swap execution facility shall:
(1) Establish and enforce rules or terms and conditions defining,
or specifications detailing:
(i) Trading procedures to be used in entering and executing orders
traded on or through the facilities of the security-based swap
execution facility; and
(ii) Procedures for trade processing of security-based swaps on or
through the facilities of the security-based swap execution facility;
and
(2) Monitor trading in security-based swaps to prevent
manipulation, price distortion, and disruptions of the delivery or cash
settlement process through surveillance, compliance, and disciplinary
practices and procedures, including methods for conducting real-time
monitoring of trading and comprehensive and accurate trade
reconstructions.
(b) Market oversight obligations. A security-based swap execution
facility shall:
(1) Collect and evaluate data on its members' market activity on an
ongoing basis in order to detect and prevent manipulation, price
distortions, and, where possible, disruptions of the physical-delivery
or cash-settlement process;
(2) Monitor and evaluate general market data in order to detect and
prevent manipulative activity that would result in the failure of the
market price to reflect the normal forces of supply and demand;
(3) Demonstrate an effective program for conducting real-time
monitoring of trading for the purpose of detecting and resolving
abnormalities. A security-based swap execution facility shall employ
automated alerts to detect abnormal price movements and unusual trading
volumes in real time and instances or threats of manipulation, price
distortion, and disruptions on at least a T + 1 basis. The T + 1
detection and analysis should incorporate any additional data that
becomes available on a T + 1 basis, including the trade reconstruction
data;
(4) Demonstrate the ability to comprehensively and accurately
reconstruct daily trading activity for the purpose of detecting
instances or threats of manipulation, price distortion, and
disruptions; and
(5) Have rules in place that allow it to intervene to prevent or
reduce market disruptions. Once a threatened or actual disruption is
detected, the security-based swap execution facility shall take steps
to prevent the market disruption or reduce its severity.
(c) Monitoring of physical-delivery security-based swaps. For
physical-delivery security-based swaps, the security-based swap
execution facility shall demonstrate that it:
(1) Monitors a security-based swap's terms and conditions as they
relate to the underlying asset market; and
(2) Monitors the availability of the supply of the asset specified
by the delivery requirements of the security-based swap.
(d) Additional requirements for cash-settled security-based swaps.
(1) For cash-settled security-based swaps, the security-based swap
execution facility shall demonstrate that it monitors the pricing of
the reference price used to determine cash flows or settlement.
(2) For cash-settled security-based swaps listed on the security-
based swap execution facility where the reference price is formulated
and computed by the security-based swap execution facility, the
security-based swap execution facility shall demonstrate that it
monitors the continued appropriateness of its methodology for deriving
that price and shall promptly amend any methodologies that result, or
are likely to result, in manipulation, price distortions, or market
disruptions, or impose new methodologies to resolve the threat of
disruptions or distortions.
(3) For cash-settled security-based swaps listed on the security-
based swap execution facility where the reference price relies on a
third-party index or instrument, including an index or instrument
traded on another venue, the security-based swap execution facility
shall demonstrate that it monitors for pricing abnormalities in the
index or instrument used to calculate the reference price and shall
conduct due diligence to ensure that the reference price is not
susceptible to manipulation.
(e) Ability to obtain information. (1) A security-based swap
execution facility shall demonstrate that it has access to sufficient
information to assess whether trading in security-based swaps listed on
its market, in the index or instrument used as a reference price, or in
the underlying asset for its listed security-based swaps is being used
to affect prices on its market. The security-based swap execution
facility shall demonstrate that it can obtain position and trading
information directly from members that conduct substantial trading on
its facility or through an information-sharing agreement with other
venues or a third-party regulatory service provider. If the position
and trading information is not available directly from its members but
is available through information-sharing agreements with other trading
venues or a third-party regulatory service provider, the security-based
swap execution facility should cooperate in such information-sharing
agreements.
(2) A security-based swap execution facility shall have rules that
require its members to keep records of their trading, including records
of their activity in the underlying asset, and related derivatives
markets, and make such records available, upon request, to the
security-based swap execution facility or, if applicable, to its
regulatory service provider and the Commission. The security-based swap
execution facility may limit the application of this requirement to
only those members that conduct substantial trading on its facility.
(f) Risk controls for trading. A security-based swap execution
facility shall establish and maintain risk control mechanisms to
prevent and reduce the potential risk of market disruptions, including,
but not limited to, market restrictions that pause or halt trading
under market conditions prescribed by the security-based swap execution
facility. Such risk control mechanisms shall be designed to avoid
market disruptions without unduly interfering with that market's price
discovery function. The security-based swap execution facility may
choose from among controls that include: pre-trade limits on order
size, price collars or bands around the current price, message
throttles, daily price limits, and intraday position limits related to
financial risk to the clearing member, or design other types of
controls, as well as clear error-trade and order-cancellation policies.
Within the specific array of controls that are selected, the security-
based swap execution facility shall set the parameters for those
controls, so that the specific parameters are reasonably likely to
serve the purpose of preventing market disruptions and price
distortions.
(g) Trade reconstruction. A security-based swap execution facility
shall have the ability to comprehensively and accurately reconstruct
all trading on its facility. All audit-trail data and reconstructions
shall be made available

[[Page 87305]]

to the Commission in a form, manner, and time that is acceptable to the
Commission.
(h) Regulatory service provider. A security-based swap execution
facility shall comply with the rules in this section through a
dedicated regulatory department or by contracting with a regulatory
service provider pursuant to Sec. 242.819(e).

Sec. 242.822 Core Principle 5--Ability to obtain information.

(a) General. The security-based swap execution facility shall:
(1) Establish and enforce rules that will allow the facility to
obtain any necessary information to perform any of the functions
described in section 3D of the Act;
(2) Provide the information to the Commission on request; and
(3) Have the capacity to carry out such international information-
sharing agreements as the Commission may require.
(b) Establish and enforce rules. A security-based swap execution
facility shall establish and enforce rules that will allow the
security-based swap execution facility to have the ability and
authority to obtain sufficient information to allow it to fully perform
its operational, risk management, governance, and regulatory functions
and any requirements under this section, including the capacity to
carry out international information-sharing agreements as the
Commission may require.
(c) Collection of information. A security-based swap execution
facility shall have rules that allow it to collect information on a
routine basis, allow for the collection of non-routine data from its
members, and allow for its examination of books and records kept by
members on its facility.
(d) Provide information to the Commission. A security-based swap
execution facility shall provide information in its possession to the
Commission upon request, in a form and manner specified by the
Commission.
(e) Information-sharing agreements. A security-based swap execution
facility shall share information with other regulatory organizations,
data repositories, and third-party data reporting services as required
by the Commission or as otherwise necessary and appropriate to fulfill
its regulatory and reporting responsibilities. Appropriate information-
sharing agreements can be established with such entities, or the
Commission can act in conjunction with the security-based swap
execution facility to carry out such information sharing.

Sec. 242.823 Core Principle 6--Financial integrity of transactions.

(a) General. The security-based swap execution facility shall
establish and enforce rules and procedures for ensuring the financial
integrity of security-based swaps entered on or through the facilities
of the security-based swap execution facility, including the clearance
and settlement of security-based swaps pursuant to section 3C(a)(1) of
the Act.
(b) Required clearing. Transactions executed on or through the
security-based swap execution facility that are required to be cleared
under section 3C(a)(1) of the Act or are voluntarily cleared by the
counterparties shall be cleared through a registered clearing agency or
a clearing agency that has obtained an exemption from clearing agency
registration to provide central counterparty services for security-
based swaps.
(c) General financial integrity. A security-based swap execution
facility shall provide for the financial integrity of its transactions:
(1) By establishing minimum financial standards for its members,
which shall, at a minimum, require that each member qualify as an
eligible contract participant;
(2) For transactions cleared by a registered clearing agency:
(i) By ensuring that the security-based swap execution facility has
the capacity to route transactions to the registered clearing agency in
a manner acceptable to the clearing agency for purposes of clearing;
and
(ii) By coordinating with each registered clearing agency to which
it submits transactions for clearing, in the development of rules and
procedures to facilitate prompt and efficient transaction processing.
(d) Monitoring for financial soundness. A security-based swap
execution facility shall monitor its members to ensure that they
continue to qualify as eligible contract participants.

Sec. 242.824 Core Principle 7--Emergency authority.

(a) The security-based swap execution facility shall adopt rules to
provide for the exercise of emergency authority, in consultation or
cooperation with the Commission, as is necessary and appropriate,
including the authority to liquidate or transfer open positions in any
security-based swap or to suspend or curtail trading in a security-
based swap.
(b) To comply with this core principle, a security-based swap
execution facility shall adopt rules that are reasonably designed to:
(1) Allow the security-based swap execution facility to intervene
as necessary to maintain markets with fair and orderly trading and to
prevent or address manipulation or disruptive trading practices,
whether the need for intervention arises exclusively from the security-
based swap execution facility's market or as part of a coordinated,
cross-market intervention;
(2) Have the flexibility and independence to address market
emergencies in an effective and timely manner consistent with the
nature of the emergency, as long as all such actions taken by the
security-based swap execution facility are made in good faith to
protect the integrity of the markets;
(3) Take market actions as may be directed by the Commission,
including, in situations where a security-based swap is traded on more
than one platform, emergency action to liquidate or transfer open
interest as directed, or agreed to, by the Commission or the
Commission's staff;
(4) Include procedures and guidelines for decision-making and
implementation of emergency intervention that avoid conflicts of
interest;
(5) Include alternate lines of communication and approval
procedures to address emergencies associated with real-time events; and
(6) Allow the security-based swap execution facility, to address
perceived market threats, to impose or modify position limits, impose
or modify price limits, impose or modify intraday market restrictions,
impose special margin requirements, order the liquidation or transfer
of open positions in any contract, order the fixing of a settlement
price, extend or shorten the expiration date or the trading hours,
suspend or curtail trading in any contract, transfer customer contracts
and the margin, or alter any contract's settlement terms or conditions,
or, if applicable, provide for the carrying out of such actions through
its agreements with its third-party provider of clearing or regulatory
services.
(c) A security-based swap execution facility shall promptly notify
the Commission of its exercise of emergency authority, explaining its
decision-making process, the reasons for using its emergency authority,
and how conflicts of interest were minimized, including the extent to
which the security-based swap execution facility considered the effect
of its emergency action on the underlying markets and on markets that
are linked or referenced to the contracts traded on its facility,
including similar

[[Page 87306]]

markets on other trading venues. Information on all regulatory actions
carried out pursuant to a security-based swap execution facility's
emergency authority shall be included in a timely submission of a
certified rule pursuant to Sec. 242.807.

Sec. 242.825 Core Principle 8--Timely publication of trading
information.

(a)(1) The security-based swap execution facility shall make public
timely information on price, trading volume, and other trading data on
security-based swaps to the extent prescribed by the Commission.
(2) The security-based swap execution facility shall be required to
have the capacity to electronically capture and transmit and
disseminate trade information with respect to transactions executed on
or through the facility.
(b) A security-based swap execution facility shall report security-
based swap transaction data as required by Sec. Sec. 242.900 through
242.909 (Regulation SBSR).
(c) A security-based swap execution facility shall make available a
``Daily Market Data Report'' containing the information required in
paragraphs (c)(1) and (2) of this section in a manner and timeframe
required by this section.
(1) Contents. The Daily Market Data Report of a security-based swap
execution facility for a business day shall contain the following
information for each tenor of each security-based swap traded on that
security-based swap execution facility during that business day:
(i) The trade count (excluding error trades, correcting trades, and
offsetting trades);
(ii) The total notional amount traded (excluding error trades,
correcting trades, and offsetting trades);
(iii) The total notional amount of block trades, after such time as
the Commission adopts a definition of ``block trade'' in Sec. 242.802
of this chapter (Rule 802);
(iv) The opening and closing price;
(v) The price that is used for settlement purposes, if different
from the closing price; and
(vi) The lowest price of a sale or offer, whichever is lower, and
the highest price of a sale or bid, whichever is higher, that the
security-based swap execution facility reasonably determines accurately
reflects market conditions. Bids and offers vacated or withdrawn shall
not be used in making this determination. A bid is vacated if followed
by a higher bid or price and an offer is vacated if followed by a lower
offer or price.
(2) Additional information. A security-based swap execution
facility must record the following information with respect to
security-based swaps on that reporting market:
(i) The method used by the security-based swap execution facility
in determining nominal prices and settlement prices; and
(ii) If discretion is used by the security-based swap execution
facility in determining the opening and/or closing ranges or the
settlement prices, an explanation that certain discretion may be
employed by the security-based swap execution facility and a
description of the manner in which that discretion may be employed.
Discretionary authority must be noted explicitly in each case in which
it is applied (for example, by use of an asterisk or footnote).
(3) Form of publication. A security-based swap execution facility
shall publicly post the Daily Market Data Report on its website:
(i) In a downloadable and machine-readable format using the most
recent versions of the associated XML schema and PDF renderer as
published on the Commission's website;
(ii) Without fees or other charges;
(iii) Without any encumbrances on access or usage restrictions; and
(iv) Without requiring a user to agree to any terms before being
allowed to view or download the Daily Market Data Report, such as by
waiving any requirements of this paragraph (c)(3). Any such waiver
agreed to by a user shall be null and void.
(4) Timing of publication. A security-based swap execution facility
shall publish the Daily Market Data Report on its website as soon as
reasonably practicable on the next business day after the day to which
the information pertains, but in no event later than 7 a.m. on the next
business day.
(5) Duration. A security-based swap execution facility shall keep
each Daily Market Data Report available on its website in the same
location as all other Daily Market Data Reports for no less than one
year after the date of first publication.

Sec. 242.826 Core Principle 9--Recordkeeping and reporting.

(a) In general. (1) A security-based swap execution facility shall:
(i) Maintain records of all activities relating to the business of
the facility, including a complete audit trail, in a form and manner
acceptable to the Commission for a period of five years; and
(ii) Report to the Commission, in a form and manner acceptable to
the Commission, such information as the Commission determines to be
necessary or appropriate for the Commission to perform the duties of
the Commission under the Act.
(2) The Commission shall adopt data collection and reporting
requirements for security-based swap execution facilities that are
comparable to corresponding requirements for clearing agencies and
security-based swap data repositories.
(b) Required records. A security-based swap execution facility
shall keep full, complete, and systematic records, together with all
pertinent data and memoranda, of all activities relating to its
business with respect to security-based swaps. Such records shall
include, without limitation, the audit trail information required under
Sec. 242.819(f) and all other records that a security-based swap
execution facility is required to create or obtain under Sec. Sec.
242.800 through 242.835 (Regulation SE).
(c) Duration of retention. (1) A security-based swap execution
facility shall keep records of any security-based swap from the date of
execution until the termination, maturity, expiration, transfer,
assignment, or novation date of the transaction, and for a period of
not less than five years, the first two years in an easily accessible
place, after such date.
(2) A security-based swap execution facility shall keep each record
other than the records described in paragraph (c)(1) of this section
for a period of not less than five years, the first two years in an
easily accessible place, from the date on which the record was created.
(d) Record retention. (1) A security-based swap execution facility
shall retain all records in a form and manner that ensures the
authenticity and reliability of such records in accordance with the Act
and the Commission's rules thereunder.
(2) A security-based swap execution facility shall, upon request of
any representative of the Commission, promptly furnish to the
representative legible, true, complete, and current copies of any
records required to be kept and preserved pursuant to this section.
(3)(i) An electronic record shall be retained in a form and manner
that allows for prompt production at the request of any representative
of the Commission.
(ii) A security-based swap execution facility maintaining
electronic records shall establish appropriate systems and controls
that ensure the authenticity and reliability of electronic records,
including, without limitation:
(A) Systems that maintain the security, signature, and data as
necessary to ensure the authenticity of

[[Page 87307]]

the information contained in electronic records and to monitor
compliance with the Act and the Commission's rules thereunder;
(B) Systems that ensure that the security-based swap execution
facility is able to produce electronic records in accordance with this
section, and ensure the availability of such electronic records in the
event of an emergency or other disruption of the security-based swap
execution facility's electronic record retention systems; and
(C) The creation and maintenance of an up-to-date inventory that
identifies and describes each system that maintains information
necessary for accessing or producing electronic records.
(e) Record examination. All records required to be kept by a
security-based swap execution facility pursuant to this section are
subject to examination by any representative of the Commission pursuant
to section 17(b) of the Act (15 U.S.C. 78q).
(f) Records of non-U.S. members. A security-based swap execution
facility shall keep a record in permanent form, which shall show the
true name, address, and principal occupation or business of any non-
U.S. member that executes transactions on the facility. Upon request,
the security-based swap execution facility shall provide to the
Commission information regarding the name of any person guaranteeing
such transactions or exercising any control over the trading of such
non-U.S. member.

Sec. 242.827 Core Principle 10--Antitrust considerations.

Unless necessary or appropriate to achieve the purposes of the Act,
the security-based swap execution facility shall not:
(a) Adopt any rules or take any actions that result in any
unreasonable restraint of trade; or
(b) Impose any material anticompetitive burden on trading or
clearing.

Sec. 242.828 Core Principle 11--Conflicts of interest.

(a) The security-based swap execution facility shall:
(1) Establish and enforce rules to minimize conflicts of interest
in its decision-making process; and
(2) Establish a process for resolving the conflicts of interest.
(b) A security-based swap execution facility shall comply with the
requirements of Sec. 242.834.

Sec. 242.829 Core Principle 12--Financial resources.

(a) In general. (1) The security-based swap execution facility
shall have adequate financial, operational, and managerial resources to
discharge each responsibility of the security-based swap execution
facility, as determined by the Commission.
(2) The financial resources of a security-based swap execution
facility shall be considered to be adequate if the value of the
financial resources:
(i) Enables the organization to meet its financial obligations to
its members notwithstanding a default by a member creating the largest
financial exposure for that organization in extreme but plausible
market conditions; and
(ii) Exceeds the total amount that would enable the security-based
swap execution facility to cover the operating costs of the security-
based swap execution facility for a one-year period, as calculated on a
rolling basis.
(b) General requirements. A security-based swap execution facility
shall maintain financial resources on an ongoing basis that are
adequate to enable it to comply with the core principles set forth in
section 3D of the Act and any applicable Commission rules. Financial
resources shall be considered adequate if their value exceeds the total
amount that would enable the security-based swap execution facility to
cover its projected operating costs necessary for the security-based
swap execution facility to comply with section 3D of the Act and
applicable Commission rules for a one-year period, as calculated on a
rolling basis pursuant to paragraph (e) of this section.
(c) Types of financial resources. Financial resources available to
satisfy the requirements of this section may include:
(1) The security-based swap execution facility's own capital,
meaning its assets minus its liabilities calculated in accordance with
generally accepted accounting principles in the United States; and
(2) Any other financial resource deemed acceptable by the
Commission.
(d) Liquidity of financial resources. The financial resources
allocated by a security-based swap execution facility to meet the
ongoing requirements of paragraph (b) of this section shall include
unencumbered, liquid financial assets (i.e., cash and/or highly liquid
securities) equal to at least the greater of three months of projected
operating costs, as calculated on a rolling basis, or the projected
costs needed to wind down the security-based swap execution facility's
operations, in each case as determined under paragraph (e) of this
section. If a security-based swap execution facility lacks sufficient
unencumbered, liquid financial assets to satisfy its obligations under
this section, the security-based swap execution facility may satisfy
this requirement by obtaining a committed line of credit or similar
facility in an amount at least equal to such deficiency.
(e) Computation of costs to meet financial resources requirement.
(1) A security-based swap execution facility shall, each fiscal
quarter, make a reasonable calculation of its projected operating costs
and wind-down costs in order to determine its applicable obligations
under this section. The security-based swap execution facility shall
have reasonable discretion in determining the methodologies used to
compute such amounts.
(i) Calculation of projected operating costs. A security-based swap
execution facility's calculation of its projected operating costs shall
be deemed reasonable if it includes all expenses necessary for the
security-based swap execution facility to comply with the core
principles set forth in section 3D of the Act and any applicable
Commission rules, and if the calculation is based on the security-based
swap execution facility's current level of business and business model,
taking into account any projected modification to its business model
(e.g., the addition or subtraction of business lines or operations or
other changes), and any projected increase or decrease in its level of
business over the next 12 months. A security-based swap execution
facility may exclude the following expenses (``excludable expenses'')
from its projected operating cost calculations:
(A) Costs attributable solely to sales, marketing, business
development, product development, or recruitment and any related
travel, entertainment, event, or conference costs;
(B) Compensation and related taxes and benefits for personnel who
are not necessary to ensure that the security-based swap execution
facility is able to comply with the core principles set forth in
section 3D of the Act and any applicable Commission rules;
(C) Costs for acquiring and defending patents and trademarks for
security-based swap execution facility products and related
intellectual property;
(D) Magazine, newspaper, and online periodical subscription fees;
(E) Tax preparation and audit fees;
(F) The variable commissions that a voice-based security-based swap
execution facility may pay to its trading specialists, calculated as a
percentage of transaction revenue generated by the

[[Page 87308]]

voice-based security-based swap execution facility; and
(G) Any non-cash costs, including depreciation and amortization.
(ii) Prorated expenses. A security-based swap execution facility's
calculation of its projected operating costs shall be deemed reasonable
if an expense is prorated and the security-based swap execution
facility:
(A) Maintains sufficient documentation that reasonably shows the
extent to which an expense is partially attributable to an excludable
expense;
(B) Identifies any prorated expense in the financial reports that
it submits to the Commission pursuant to paragraph (g) of this section;
and
(C) Sufficiently explains why it prorated any expense. Common
allocation methodologies that may be used include actual use,
headcount, or square footage. A security-based swap execution facility
may provide documentation, such as copies of service agreements, other
legal documents, firm policies, audit statements, or allocation
methodologies to support its determination to prorate an expense.
(iii) Expenses allocated among affiliates. A security-based swap
execution facility's calculation of its projected operating costs shall
be deemed reasonable if it prorates any shared expense that the
security-based swap execution facility pays for, but only to the extent
that such shared expense is attributable to an affiliate and for which
the security-based swap execution facility is reimbursed. To prorate a
shared expense, the security-based swap execution facility shall:
(A) Maintain sufficient documentation that reasonably shows the
extent to which the shared expense is attributable to and paid for by
the security-based swap execution facility and/or affiliated entity.
The security-based swap execution facility may provide documentation,
such as copies of service agreements, other legal documents, firm
policies, audit statements, or allocation methodologies, that
reasonably shows how expenses are attributable to, and paid for by, the
security-based swap execution facility and/or its affiliated entities
to support its determination to prorate an expense;
(B) Identify any shared expense in the financial reports that it
submits to the Commission pursuant to paragraph (g) of this section;
and
(C) Sufficiently explain why it prorated the shared expense.
(2) Notwithstanding any provision of paragraph (e)(1) of this
section, the Commission may review the methodologies and require
changes as appropriate.
(f) Valuation of financial resources. No less than each fiscal
quarter, a security-based swap execution facility shall compute the
current market value of each financial resource used to meet its
obligations under this section. Reductions in value to reflect market
and credit risk (``haircuts'') shall be applied as appropriate.
(g) Reporting to the Commission. (1) Each fiscal quarter, or at any
time upon Commission request, a security-based swap execution facility
shall provide a report to the Commission that includes:
(i) The amount of financial resources necessary to meet the
requirements of this section, computed in accordance with the
requirements of paragraph (e) of this section, and the market value of
each available financial resource, computed in accordance with the
requirements of paragraph (f) of this section; and
(ii) Financial statements, including the balance sheet, income
statement, and statement of cash flows of the security-based swap
execution facility.
(A) The financial statements shall be prepared in accordance with
generally accepted accounting principles in the United States, prepared
in English, and denominated in U.S. dollars.
(B) The financial statements of a security-based swap execution
facility that is not domiciled in the United States, and is not
otherwise required to prepare financial statements in accordance with
generally accepted accounting principles in the United States, may
satisfy the requirement in paragraph (g)(1)(ii)(A) of this section if
such financial statements are prepared in accordance with either
International Financial Reporting Standards issued by the International
Accounting Standards Board, or a comparable international standard as
the Commission may otherwise accept in its discretion.
(2) The calculations required by this paragraph (g) shall be made
as of the last business day of the security-based swap execution
facility's applicable fiscal quarter.
(3) With each report required under paragraph (g) of this section,
the security-based swap execution facility shall also provide the
Commission with sufficient documentation explaining the methodology
used to compute its financial requirements under this section. Such
documentation shall:
(i) Allow the Commission to reliably determine, without additional
requests for information, that the security-based swap execution
facility has made reasonable calculations pursuant to paragraph (e) of
this section; and
(ii) Include, at a minimum:
(A) A total list of all expenses, without any exclusion;
(B) All expenses and the corresponding amounts, if any, that the
security-based swap execution facility excluded or prorated when
determining its operating costs, calculated on a rolling basis,
required under this section, and the basis for any determination to
exclude or prorate any such expenses;
(C) Documentation demonstrating the existence of any committed line
of credit or similar facility relied upon for the purpose of meeting
the requirements of this section (e.g., copies of agreements
establishing or amending a credit facility or similar facility); and
(D) All costs that a security-based swap execution facility would
incur to wind down its operations, the projected amount of time for any
such wind-down period, and the basis of its determination for the
estimation of its costs and timing.
(4) The reports and supporting documentation required by this
section shall be filed not later than 40 calendar days after the end of
the security-based swap execution facility's first three fiscal
quarters, and not later than 90 calendar days after the end of the
security-based swap execution facility's fourth fiscal quarter, or at
such later time as the Commission may permit, in its discretion, upon
request by the security-based swap execution facility.
(5) A security-based swap execution facility shall provide notice
to the Commission no later than 48 hours after it knows or reasonably
should know that it no longer meets its obligations under paragraphs
(b) and (d) of this section.
(6) A security-based swap execution facility shall provide the
report and documentation required by this section to the Commission
electronically using the EDGAR system as an Interactive Data File in
accordance with Sec. 232.405 of this chapter.

Sec. 242.830 Core Principle 13--System safeguards.

(a) In general. The security-based swap execution facility shall:
(1) Establish and maintain a program of risk analysis and oversight
to identify and minimize sources of operational risk, through the
development of appropriate controls and procedures, and automated
systems, that:
(i) Are reliable and secure; and
(ii) Have adequate scalable capacity;
(2) Establish and maintain emergency procedures, backup facilities,
and a plan for disaster recovery that allow for:
(i) The timely recovery and resumption of operations; and

[[Page 87309]]

(ii) The fulfillment of the responsibilities and obligations of the
security-based swap execution facility; and
(3) Periodically conduct tests to verify that the backup resources
of the security-based swap execution facility are sufficient to ensure
continued:
(i) Order processing and trade matching;
(ii) Price reporting;
(iii) Market surveillance; and
(iv) Maintenance of a comprehensive and accurate audit trail.
(b) Requirements. (1) A security-based swap execution facility's
program of risk analysis and oversight with respect to its operations
and automated systems shall address each of the following categories of
risk analysis and oversight:
(i) Enterprise risk management and governance. This category
includes, but is not limited to: Assessment, mitigation, and monitoring
of security and technology risk; security and technology capital
planning and investment; governing board and management oversight of
technology and security; information technology audit and controls
assessments; remediation of deficiencies; and any other elements of
enterprise risk management and governance included in generally
accepted best practices.
(ii) Information security. This category includes, but is not
limited to, controls relating to: Access to systems and data (including
least privilege, separation of duties, account monitoring, and
control); user and device identification and authentication; security
awareness training; audit log maintenance, monitoring, and analysis;
media protection; personnel security and screening; automated system
and communications protection (including network port control, boundary
defenses, and encryption); system and information integrity (including
malware defenses and software integrity monitoring); vulnerability
management; penetration testing; security incident response and
management; and any other elements of information security included in
generally accepted best practices.
(iii) Business continuity-disaster recovery planning and resources.
This category includes, but is not limited to: Regular, periodic
testing and review of business continuity-disaster recovery
capabilities; the controls and capabilities described in paragraphs
(b)(3) and (10) of this section; and any other elements of business
continuity-disaster recovery planning and resources included in
generally accepted best practices.
(iv) Capacity and performance planning. This category includes, but
is not limited to: Controls for monitoring the security-based swap
execution facility's systems to ensure adequate scalable capacity
(including testing, monitoring, and analysis of current and projected
future capacity and performance, and of possible capacity degradation
due to planned automated system changes); and any other elements of
capacity and performance planning included in generally accepted best
practices.
(v) Systems operations. This category includes, but is not limited
to: System maintenance; configuration management (including baseline
configuration, configuration change and patch management, least
functionality, and inventory of authorized and unauthorized devices and
software); event and problem response and management; and any other
elements of system operations included in generally accepted best
practices.
(vi) Systems development and quality assurance. This category
includes, but is not limited to: Requirements development; pre-
production and regression testing; change management procedures and
approvals; outsourcing and vendor management; training in secure coding
practices; and any other elements of systems development and quality
assurance included in generally accepted best practices.
(vii) Physical security and environmental controls. This category
includes, but is not limited to: Physical access and monitoring; power,
telecommunication, and environmental controls; fire protection; and any
other elements of physical security and environmental controls included
in generally accepted best practices.
(2) In addressing the categories of risk analysis and oversight
required under paragraph (b)(1) of this section, a security-based swap
execution facility shall follow generally accepted standards and best
practices with respect to the development, operation, reliability,
security, and capacity of automated systems.
(3) A security-based swap execution facility shall maintain a
business continuity-disaster recovery plan and business continuity-
disaster recovery resources, emergency procedures, and back-up
facilities sufficient to enable timely recovery and resumption of its
operations and resumption of its ongoing fulfillment of its
responsibilities and obligations as a security-based swap execution
facility following any disruption of its operations. Such
responsibilities and obligations include, without limitation: Order
processing and trade matching; transmission of matched orders to a
registered clearing agency for clearing, where appropriate; price
reporting; market surveillance; and maintenance of a comprehensive
audit trail. A security-based swap execution facility's business
continuity-disaster recovery plan and resources generally should enable
resumption of trading and clearing of security-based swaps executed on
or pursuant to the rules of the security-based swap execution facility
during the next business day following the disruption. A security-based
swap execution facility shall update its business continuity-disaster
recovery plan and emergency procedures at a frequency determined by an
appropriate risk analysis, but at a minimum no less frequently than
annually.
(4) A security-based swap execution facility satisfies the
requirement to be able to resume its operations and resume its ongoing
fulfillment of its responsibilities and obligations during the next
business day following any disruption of its operations by maintaining
either:
(i) Infrastructure and personnel resources of its own that are
sufficient to ensure timely recovery and resumption of its operations
and resumption of its ongoing fulfillment of its responsibilities and
obligations as a security-based swap execution facility following any
disruption of its operations; or
(ii) Contractual arrangements with other security-based swap
execution facilities or disaster recovery service providers, as
appropriate, that are sufficient to ensure continued trading and
clearing of security-based swaps executed on the security-based swap
execution facility, and ongoing fulfillment of all of the security-
based swap execution facility's responsibilities and obligations with
respect to such security-based swaps, in the event that a disruption
renders the security-based swap execution facility temporarily or
permanently unable to satisfy this requirement on its own behalf.
(5) A security-based swap execution facility shall notify
Commission staff promptly of all:
(i) Electronic trading halts and material system malfunctions;
(ii) Cyber-security incidents or targeted threats that actually or
potentially jeopardize automated system operation, reliability,
security, or capacity; and
(iii) Activations of the security-based swap execution facility's
business continuity-disaster recovery plan.

[[Page 87310]]

(6) A security-based swap execution facility shall provide
Commission staff timely advance notice of all material:
(i) Planned changes to automated systems that may impact the
reliability, security, or adequate scalable capacity of such systems;
and
(ii) Planned changes to the security-based swap execution
facility's program of risk analysis and oversight.
(7) As part of a security-based swap execution facility's
obligation to produce books and records in accordance with Sec.
242.826 (Core Principle 9), the security-based swap execution facility
shall provide to the Commission the following system-safeguards-related
books and records, promptly upon the request of any Commission
representative:
(i) Current copies of its business continuity-disaster recovery
plans and other emergency procedures;
(ii) All assessments of its operational risks or system safeguards-
related controls;
(iii) All reports concerning system safeguards testing and
assessment required by this chapter, whether performed by independent
contractors or by employees of the security-based swap execution
facility; and
(iv) All other books and records requested by Commission staff in
connection with Commission oversight of system safeguards pursuant to
the Act or Commission rules, or in connection with Commission
maintenance of a current profile of the security-based swap execution
facility's automated systems.
(v) Nothing in paragraph (b)(7) of this section shall be
interpreted as reducing or limiting in any way a security-based swap
execution facility's obligation to comply with Sec. 242.826 (Core
Principle 9).
(8) A security-based swap execution facility shall conduct regular,
periodic, objective testing and review of its automated systems to
ensure that they are reliable, secure, and have adequate scalable
capacity. A security-based swap execution facility shall also conduct
regular, periodic testing and review of its business continuity-
disaster recovery capabilities. Such testing and review shall include,
without limitation, all of the types of testing set forth in this
paragraph (b)(8).
(i) Definitions. As used in this paragraph (b)(8):
Controls means the safeguards or countermeasures employed by the
security-based swap execution facility to protect the reliability,
security, or capacity of its automated systems or the confidentiality,
integrity, and availability of its data and information, and to enable
the security-based swap execution facility to fulfill its statutory and
regulatory responsibilities.
Controls testing means assessment of the security-based swap
execution facility's controls to determine whether such controls are
implemented correctly, are operating as intended, and are enabling the
security-based swap execution facility to meet the requirements of this
section.
Enterprise technology risk assessment means a written assessment
that includes, but is not limited to, an analysis of threats and
vulnerabilities in the context of mitigating controls. An enterprise
technology risk assessment identifies, estimates, and prioritizes risks
to security-based swap execution facility operations or assets, or to
market participants, individuals, or other entities, resulting from
impairment of the confidentiality, integrity, and availability of data
and information or the reliability, security, or capacity of automated
systems.
External penetration testing means attempts to penetrate the
security-based swap execution facility's automated systems from outside
the systems' boundaries to identify and exploit vulnerabilities.
Methods of conducting external penetration testing include, but are not
limited to, methods for circumventing the security features of an
automated system.
Internal penetration testing means attempts to penetrate the
security-based swap execution facility's automated systems from inside
the systems' boundaries, to identify and exploit vulnerabilities.
Methods of conducting internal penetration testing include, but are not
limited to, methods for circumventing the security features of an
automated system.
Security incident means a cybersecurity or physical security event
that actually jeopardizes or has a significant likelihood of
jeopardizing automated system operation, reliability, security, or
capacity, or the availability, confidentiality or integrity of data.
Security incident response plan means a written plan documenting
the security-based swap execution facility's policies, controls,
procedures, and resources for identifying, responding to, mitigating,
and recovering from security incidents, and the roles and
responsibilities of its management, staff, and independent contractors
in responding to security incidents. A security incident response plan
may be a separate document or a business continuity-disaster recovery
plan section or appendix dedicated to security incident response.
Security incident response plan testing means testing of a
security-based swap execution facility's security incident response
plan to determine the plan's effectiveness, identify its potential
weaknesses or deficiencies, enable regular plan updating and
improvement, and maintain organizational preparedness and resiliency
with respect to security incidents. Methods of conducting security
incident response plan testing may include, but are not limited to,
checklist completion, walk-through or table-top exercises, simulations,
and comprehensive exercises.
Vulnerability testing means testing of a security-based swap
execution facility's automated systems to determine what information
may be discoverable through a reconnaissance analysis of those systems
and what vulnerabilities may be present on those systems.
(ii) Vulnerability testing. A security-based swap execution
facility shall conduct vulnerability testing of a scope sufficient to
satisfy the requirements set forth in paragraph (b)(10) of this
section.
(A) A security-based swap execution facility shall conduct such
vulnerability testing at a frequency determined by an appropriate risk
analysis.
(B) Such vulnerability testing shall include automated
vulnerability scanning, which shall follow generally accepted best
practices.
(C) A security-based swap execution facility shall conduct
vulnerability testing by engaging independent contractors or by using
employees of the security-based swap execution facility who are not
responsible for development or operation of the systems or capabilities
being tested.
(iii) External penetration testing. A security-based swap execution
facility shall conduct external penetration testing of a scope
sufficient to satisfy the requirements set forth in paragraph (b)(10)
of this section.
(A) A security-based swap execution facility shall conduct such
external penetration testing at a frequency determined by an
appropriate risk analysis.
(B) A security-based swap execution facility shall conduct external
penetration testing by engaging independent contractors or by using
employees of the security-based swap execution facility who are not
responsible for development or operation of the systems or capabilities
being tested.
(iv) Internal penetration testing. A security-based swap execution
facility shall conduct internal penetration testing of a scope
sufficient to satisfy the

[[Page 87311]]

requirements set forth in paragraph (b)(10) of this section.
(A) A security-based swap execution facility shall conduct such
internal penetration testing at a frequency determined by an
appropriate risk analysis.
(B) A security-based swap execution facility shall conduct internal
penetration testing by engaging independent contractors, or by using
employees of the security-based swap execution facility who are not
responsible for development or operation of the systems or capabilities
being tested.
(v) Controls testing. A security-based swap execution facility
shall conduct controls testing of a scope sufficient to satisfy the
requirements set forth in paragraph (b)(10) of this section.
(A) A security-based swap execution facility shall conduct controls
testing, which includes testing of each control included in its program
of risk analysis and oversight, at a frequency determined by an
appropriate risk analysis. Such testing may be conducted on a rolling
basis.
(B) A security-based swap execution facility shall conduct controls
testing by engaging independent contractors or by using employees of
the security-based swap execution facility who are not responsible for
development or operation of the systems or capabilities being tested.
(vi) Security incident response plan testing. A security-based swap
execution facility shall conduct security incident response plan
testing sufficient to satisfy the requirements set forth in paragraph
(b)(10) of this section.
(A) A security-based swap execution facility shall conduct such
security incident response plan testing at a frequency determined by an
appropriate risk analysis.
(B) A security-based swap execution facility's security incident
response plan shall include, without limitation, the security-based
swap execution facility's definition and classification of security
incidents, its policies and procedures for reporting security incidents
and for internal and external communication and information sharing
regarding security incidents, and the hand-off and escalation points in
its security incident response process.
(C) A security-based swap execution facility may coordinate its
security incident response plan testing with other testing required by
this section or with testing of its other business continuity-disaster
recovery and crisis management plans.
(D) A security-based swap execution facility may conduct security
incident response plan testing by engaging independent contractors or
by using employees of the security-based swap execution facility.
(vii) Enterprise technology risk assessment. A security-based swap
execution facility shall conduct enterprise technology risk assessment
of a scope sufficient to satisfy the requirements set forth in
paragraph (b)(10) of this section.
(A) A security-based swap execution facility shall conduct
enterprise technology risk assessment at a frequency determined by an
appropriate risk analysis. A security-based swap execution facility
that has conducted an enterprise technology risk assessment that
complies with this section may conduct subsequent assessments by
updating the previous assessment.
(B) A security-based swap execution facility may conduct enterprise
technology risk assessments by using independent contractors or
employees of the security-based swap execution facility who are not
responsible for development or operation of the systems or capabilities
being assessed.
(9) To the extent practicable, a security-based swap execution
facility shall:
(i) Coordinate its business continuity-disaster recovery plan with
those of its members that it depends upon to provide liquidity, in a
manner adequate to enable effective resumption of activity in its
markets following a disruption causing activation of the security-based
swap execution facility's business continuity-disaster recovery plan;
(ii) Initiate and coordinate periodic, synchronized testing of its
business continuity- disaster recovery plan with those of members that
it depends upon to provide liquidity; and
(iii) Ensure that its business continuity-disaster recovery plan
takes into account the business continuity-disaster recovery plans of
its telecommunications, power, water, and other essential service
providers.
(10) The scope for all system safeguards testing and assessment
required by this section shall be broad enough to include the testing
of automated systems and controls that the security-based swap
execution facility's required program of risk analysis and oversight
and its current cybersecurity threat analysis indicate is necessary to
identify risks and vulnerabilities that could enable an intruder or
unauthorized user or insider to:
(i) Interfere with the security-based swap execution facility's
operations or with fulfillment of its statutory and regulatory
responsibilities;
(ii) Impair or degrade the reliability, security, or adequate
scalable capacity of the security-based swap execution facility's
automated systems;
(iii) Add to, delete, modify, exfiltrate, or compromise the
integrity of any data related to the security-based swap execution
facility's regulated activities; or
(iv) Undertake any other unauthorized action affecting the
security-based swap execution facility's regulated activities or the
hardware or software used in connection with those activities.
(11) Both the senior management and the governing board of a
security-based swap execution facility shall receive and review reports
setting forth the results of the testing and assessment required by
this section. A security-based swap execution facility shall establish
and follow appropriate procedures for the remediation of issues
identified through such review, as provided in paragraph (b)(12) of
this section, and for evaluation of the effectiveness of testing and
assessment protocols.
(12) A security-based swap execution facility shall identify and
document the vulnerabilities and deficiencies in its systems revealed
by the testing and assessment required by this section. The security-
based swap execution facility shall conduct and document an appropriate
analysis of the risks presented by such vulnerabilities and
deficiencies, to determine and document whether to remediate or accept
the associated risk. When the security-based swap execution facility
determines to remediate a vulnerability or deficiency, it must
remediate in a timely manner given the nature and magnitude of the
associated risk.

Sec. 242.831 Core Principle 14--Designation of chief compliance
officer.

(a)(1) In general. Each security-based swap execution facility
shall designate an individual to serve as a chief compliance officer.
(2) Duties. The chief compliance officer shall:
(i) Report directly to the board or to the senior officer of the
facility;
(ii) Review compliance with the core principles in this subsection;
(iii) In consultation with the board of the facility, a body
performing a function similar to that of a board, or the senior officer
of the facility, resolve any conflicts of interest that may arise;
(iv) Be responsible for establishing and administering the policies
and procedures required to be established pursuant to this section;
(v) Ensure compliance with the Act and the rules and regulations
issued

[[Page 87312]]

under the Act, including rules prescribed by the Commission pursuant to
section 3D of the Act;
(vi) Establish procedures for the remediation of noncompliance
issues found during compliance office reviews, look backs, internal or
external audit findings, self-reported errors, or through validated
complaints; and
(vii) Establish and follow appropriate procedures for the handling,
management response, remediation, retesting, and closing of
noncompliance issues.
(3) Annual reports. (i) In general. In accordance with rules
prescribed by the Commission, the chief compliance officer shall
annually prepare and sign a report that contains a description of:
(A) The compliance of the security-based swap execution facility
with the Act; and
(B) The policies and procedures, including the code of ethics and
conflict of interest policies, of the security-based swap execution
facility.
(ii) [Reserved]
(4) Requirements. The chief compliance officer shall:
(i) Submit each report described in paragraph (a)(3) of this
section with the appropriate financial report of the security-based
swap execution facility that is required to be submitted to the
Commission pursuant to this section; and
(ii) Include in the report a certification that, under penalty of
law, the report is accurate and complete.
(b) Authority of chief compliance officer. (1) The position of
chief compliance officer shall carry with it the authority and
resources to develop, in consultation with the governing board or
senior officer, the policies and procedures of the security-based swap
execution facility and enforce such policies and procedures to fulfill
the duties set forth for chief compliance officers in the Act and the
Commission's rules thereunder.
(2) The chief compliance officer shall have supervisory authority
over all staff acting at the direction of the chief compliance officer.
(c) Qualifications of chief compliance officer. (1) The individual
designated to serve as chief compliance officer shall have the
background and skills appropriate for fulfilling the responsibilities
of the position.
(2) No individual that would be disqualified from serving on a
security-based swap execution facility's governing board or committees
pursuant to the criteria set forth in Sec. 242.819(i) may serve as a
chief compliance officer.
(3) In determining whether the background and skills of a potential
chief compliance officer are appropriate for fulfilling the
responsibilities of the role of the chief compliance officer, a
security-based swap execution facility has the discretion to base its
determination on the totality of the qualifications of the potential
chief compliance officer, including, but not limited to, compliance
experience, related career experience, training, potential conflicts of
interest, and any other relevant factors to the position.
(d) Appointment and removal of chief compliance officer. (1) Only
the governing board or the senior officer may appoint or remove the
chief compliance officer.
(2) The security-based swap execution facility shall notify the
Commission within two business days of the appointment or removal,
whether interim or permanent, of a chief compliance officer.
(e) Compensation of the chief compliance officer. The governing
board or the senior officer shall approve the compensation of the chief
compliance officer.
(f) Annual meeting with the chief compliance officer. The chief
compliance officer shall meet with the governing board or senior
officer of the security-based swap execution facility at least
annually.
(g) Information requested of the chief compliance officer. The
chief compliance officer shall provide any information regarding the
regulatory program of the security-based swap execution facility as
requested by the governing board or the senior officer.
(h) Duties of chief compliance officer. The duties of the chief
compliance officer shall include, but are not limited to, the
following:
(1) Overseeing and reviewing compliance of the security-based swap
execution facility with section 3D of the Act and the Commission rules
thereunder;
(2) Taking reasonable steps, in consultation with the governing
board or the senior officer of the security-based swap execution
facility, to resolve any material conflicts of interest that may arise,
including, but not limited to:
(i) Conflicts between business considerations and compliance
requirements;
(ii) Conflicts between business considerations and the requirement
that the security-based swap execution facility provide fair, open, and
impartial access as set forth in Sec. 242.819(c); and
(iii) Conflicts between a security-based swap execution facility's
management and members of the governing board;
(3) Establishing and administering written policies and procedures
reasonably designed to prevent violations of the Act and the rules of
the Commission;
(4) Taking reasonable steps to ensure compliance with the Act and
the rules of the Commission;
(5) Establishing procedures reasonably designed to handle, respond,
remediate, retest, and resolve noncompliance issues identified by the
chief compliance officer through any means, including any compliance
office review, look-back, internal or external audit finding, self-
reported error, or validated complaint;
(6) Establishing and administering a compliance manual designed to
promote compliance with the applicable laws, rules, and regulations and
a written code of ethics for the security-based swap execution facility
designed to prevent ethical violations and to promote honesty and
ethical conduct by personnel of the security-based swap execution
facility;
(7) Supervising the regulatory program of the security-based swap
execution facility with respect to trade practice surveillance; market
surveillance; real-time market monitoring; compliance with audit trail
requirements; enforcement and disciplinary proceedings; audits,
examinations, and other regulatory responsibilities (including taking
reasonable steps to ensure compliance with, if applicable, financial
integrity, financial reporting, sales practice, recordkeeping, and
other requirements); and
(8) Supervising the effectiveness and sufficiency of any regulatory
services provided to the security-based swap execution facility by a
regulatory service provider in accordance with Sec. 242.819(e).
(i) Preparation of annual compliance report. The chief compliance
officer shall, not less than annually, prepare and sign an annual
compliance report that covers the prior fiscal year. The report shall,
at a minimum, contain:
(1) A description and self-assessment of the effectiveness of the
written policies and procedures of the security-based swap execution
facility, including the code of ethics and conflict of interest
policies, to reasonably ensure compliance with the Act and applicable
Commission rules;
(2) Any material changes made to compliance policies and procedures
during the coverage period for the report and any areas of improvement
or recommended changes to the compliance program;

[[Page 87313]]

(3) A description of the financial, managerial, and operational
resources set aside for compliance with the Act and applicable
Commission rules;
(4) Any material non-compliance matters identified and an
explanation of the corresponding action taken to resolve such non-
compliance matters; and
(5) A certification by the chief compliance officer that, to the
best of their knowledge and reasonable belief, and under penalty of
law, the annual compliance report is accurate and complete in all
material respects.
(j) Submission of annual compliance report and related matters. (1)
Furnishing the annual compliance report prior to submission to the
Commission. Prior to submission to the Commission, the chief compliance
officer shall provide the annual compliance report for review to the
governing board or, in the absence of a governing board, to the senior
officer. Members of the governing board and the senior officer shall
not require the chief compliance officer to make any changes to the
report.
(2) Submission of annual compliance report to the Commission. The
annual compliance report shall be submitted electronically to the
Commission using the EDGAR system as an Interactive Data File in
accordance with Sec. 232.405 of this chapter not later than 90
calendar days after the end of the security-based swap execution
facility's fiscal year. The security-based swap execution facility
shall concurrently file the annual compliance report with the fourth-
quarter financial report pursuant to Sec. 242.829(g).
(3) Amendments to annual compliance report. (i) Promptly upon
discovery of any material error or omission made in a previously filed
annual compliance report, the chief compliance officer shall file an
amendment with the Commission to correct the material error or
omission. The chief compliance officer shall submit the amended annual
compliance report to the governing board, or in the absence of a
governing board, to the senior officer, pursuant to paragraph (j)(1) of
this section.
(ii) An amendment shall contain the certification required under
paragraph (i)(5) of this section.
(4) Request for extension. A security-based swap execution facility
may request an extension of time to file its annual compliance report
from the Commission. Reasonable and valid requests for extensions of
the filing deadline may be granted at the discretion of the Commission.
(k) Recordkeeping. A security-based swap execution facility shall
maintain all records demonstrating compliance with the duties of the
chief compliance officer and the preparation and submission of annual
compliance reports consistent with Sec. 242.826 (Core Principle 9).

Sec. 242.832 Application of the trade execution requirement to cross-
border security-based swap transactions.

(a) The trade execution requirement set forth in section 3C(h) of
the Act shall not apply in connection with a security-based swap unless
at least one counterparty to the security-based swap is a ``covered
person'' as defined in paragraph (b) of this section.
(b) A ``covered person'' means, with respect to a particular
security-based swap, any person that is:
(1) A U.S. person;
(2) A non-U.S. person whose performance under a security-based swap
is guaranteed by a U.S. person; or
(3) A non-U.S. person who, in connection with its security-based
swap dealing activity, uses U.S. personnel located in a U.S. branch or
office, or personnel of an agent of such non-U.S. person located in a
U.S. branch or office, to arrange, negotiate, or execute a transaction.

Sec. 242.833 Cross-border exemptions.

(a) Exemptions for foreign trading venues for security-based swaps.
An application for an order for exemptive relief under section 36(a)(1)
of the Act (15 U.S.C. 78mm(a)(1)) relating to the registration status
under the Act of a foreign trading venue for security-based swaps that
has one or more members who are covered persons, as defined in Sec.
242.832, with respect to security-based swaps transacted on that venue
may state that the application also is submitted pursuant to this
paragraph (a). In such case, the Commission will consider the
submission as an application to exempt the foreign trading venue, with
respect to its providing a market place for security-based swaps, from:
(1) The definition of ``exchange'' in section 3(a)(1) of the Act
(15 U.S.C. 78c(a)(1));
(2) The definition of ``security-based swap execution facility'' in
section 3(a)(77) of the Act (15 U.S.C. 78c(a)(77));
(3) The definition of ``broker'' in section 3(a)(4) of the Act (15
U.S.C. 78c(a)(4)); and
(4) Section 3D(a)(1) of the Act (15 U.S.C. 78c-4(a)(1)).
(b) Exemptions relating to the trade execution requirement. (1) An
application for an order for exemptive relief under section 36(a)(1) of
the Act (15 U.S.C. 78mm(a)(1)) relating to the application of the trade
execution requirement in section 3C(h) of the Act (15 U.S.C. 78c-3(h))
to security-based swaps executed on a foreign trading venue, may state
that the application also is submitted pursuant to this paragraph (b).
(2) When considering an application under section 36 of the Act (15
U.S.C. 78mm) and this paragraph (b), the Commission may consider:
(i) The extent to which the security-based swaps traded in the
foreign jurisdiction covered by the request are subject to a trade
execution requirement comparable to that in section 3C(h) of the Act
(15 U.S.C. 78c-3(h)) and the Commission's rules thereunder;
(ii) The extent to which trading venues in the foreign jurisdiction
covered by the request are subject to regulation and supervision
comparable to that under the Act, including section 3D of the Act (15
U.S.C. 78c-4), and the Commission's rules thereunder;
(iii) Whether the foreign trading venue or venues where covered
persons, as defined in Sec. 242.832, intend to trade security-based
swaps have received an exemption order contemplated by paragraph (a) of
this section; and
(iv) Any other factor that the Commission believes is relevant for
assessing whether the exemption is in the public interest and
consistent with the protection of investors.

Sec. 242.834 Mitigation of conflicts of interest of security-based
swap execution facilities and certain exchanges.

(a) Definitions. For purposes of this section:
Family relationship of a person means the person's spouse, former
spouse, parent, stepparent, child, stepchild, sibling, stepbrother,
stepsister, grandparent, grandchild, uncle, aunt, nephew, niece, or in-
law.
Major disciplinary committee means a committee of persons who are
authorized by a security-based swap execution facility to conduct
disciplinary hearings, to settle disciplinary charges, to impose
disciplinary sanctions, or to hear appeals thereof in cases involving
any violation of the rules of the security-based swap execution
facility except those which:
(i) Are related to decorum or attire, financial requirements, or
reporting or recordkeeping; and
(ii) Do not involve fraud, deceit, or conversion.
Member's affiliated firm is a firm in which the member is a
principal or an employee.

[[Page 87314]]

Named party in interest means a person or entity that is identified
by name as a subject of any matter being considered by a governing
board, disciplinary committee, or oversight panel.
Significant action includes any of the following types of actions
or rule changes by a security-based swap execution facility or SBS
exchange that can be implemented without the Commission's prior
approval:
(i) Any actions or rule changes which address an emergency; and
(ii) Any changes in margin levels that are designed to respond to
extraordinary market conditions such as an actual or attempted corner,
squeeze, congestion, or undue concentration of positions, or that
otherwise are likely to have a substantial effect on prices in any
contract traded or cleared at such security-based swap execution
facility or SBS exchange; but does not include any rule not submitted
for prior Commission approval because such rule is unrelated to the
terms and conditions of any security-based swap traded at such
security-based swap execution facility or SBS exchange.
(b) Ownership and voting limitations. Each security-based swap
execution facility and SBS exchange shall not permit any of its
members, either alone or together with any officer, principal, or
employee of the member, to:
(1) Own, directly or indirectly, 20 percent or more of any class of
voting securities or of other voting interest in the security-based
swap execution facility or SBS exchange; or
(2) Directly or indirectly vote, cause the voting of, or give any
consent or proxy with respect to the voting of, any interest that
exceeds 20 percent of the voting power of any class of securities or of
other ownership interest in the security-based swap execution facility
or SBS exchange.
(3) The ownership and voting limitations in paragraphs (b)(1) and
(2) of this section shall not apply to an SBSEF that has, pursuant to
Sec. 242.819(e), entered into an agreement with a registered futures
association or a national securities association for the provision of
regulatory services that encompass, at a minimum, real-time market
monitoring under Sec. 242.819(d)(5) and investigations and
investigation reports under Sec. 242.819(d)(6).
(c) Enforcement of limitations. The rules of each security-based
swap execution facility and SBS exchange must be reasonably designed,
and have an effective mechanism, to:
(1) Deny effect to the portion of any voting interest held by a
member in excess of the limitations in paragraph (b) of this section;
(2) Compel a member who possesses a voting interest in excess of
the limitations in paragraph (b) of this section to divest enough of
that voting interest to come within those limitations; and
(3) Obtain information relating to its ownership and voting
interests owned or controlled, directly or indirectly, by its members.
(d) Disciplinary committees and hearing panels. Each security-based
swap execution facility and SBS exchange shall ensure that its
disciplinary processes preclude any member, or group or class of its
members, from dominating or exercising disproportionate influence on
the disciplinary process. Each major disciplinary committee or hearing
panel thereof shall include sufficient different groups or classes of
its members so as to ensure fairness and to prevent special treatment
or preference for any person or member in the conduct of the
responsibilities of the committee or panel.
(e) Governing board composition. Each security-based swap execution
facility and SBS exchange shall ensure that:
(1) Twenty percent or more of the persons who are eligible to vote
routinely on matters being considered by the governing board (excluding
those members who are eligible to vote only in the case of a tie vote
by the governing board) are:
(i) Knowledgeable of security-based swap trading or financial
regulation, or otherwise capable of contributing to governing board
deliberations;
(ii) Not members of the security-based swap execution facility or
SBS exchange;
(iii) Not salaried employees of the security-based swap execution
facility or SBS exchange;
(iv) Not primarily performing services for the security-based swap
execution facility or SBS exchange in a capacity other than as a member
of the governing board; and
(v) Not officers, principals, or employees of a firm which holds a
membership at the security-based swap execution facility or SBS
exchange, either in its own name or through an employee on behalf of
the firm; and
(2) The membership of the governing board includes a diversity of
groups or classes of its members. The security-based swap execution
facility or SBS exchange must be able to demonstrate that the board
membership fairly represents the diversity of interests at such
security-based swap execution facility or SBS exchange and is otherwise
consistent with the composition requirements of this section.
(f) Providing information about the board to the Commission. Each
security-based swap execution facility and SBS exchange shall submit to
the Commission, within 30 days after each governing board election, a
list of the governing board's members, the groups or classes of its
members that they represent, and how the composition of the governing
board otherwise meets the requirements of this section.
(g) Voting by interested members of governing boards and various
committees of security-based swap execution facilities and SBS
exchanges. (1) Rules required. Each security-based swap execution
facility and SBS exchange shall maintain in effect rules to address the
avoidance of conflicts of interest in the execution of its regulatory
functions. Such rules must provide for the following:
(i) Relationship with named party in interest. (A) Nature of
relationship. A member of a governing board, disciplinary committee, or
oversight panel of a security-based swap execution facility or SBS
exchange must abstain from such body's deliberations and voting on any
matter involving a named party in interest where such member:
(1) Is a named party in interest;
(2) Is an employer, employee, or fellow employee of a named party
in interest;
(3) Has any other significant, ongoing business relationship with a
named party in interest, not including relationships limited to
executing security-based swaps opposite of each other or to clearing
security-based swaps through the same clearing member; or
(4) Has a family relationship with a named party in interest.
(B) Disclosure of relationship. Prior to the consideration of any
matter involving a named party in interest, each member of a governing
board, disciplinary committee, or oversight panel of a security-based
swap execution facility or SBS exchange must disclose to the
appropriate staff of the security-based swap execution facility or SBS
exchange whether they have one of the relationships listed in paragraph
(g)(1)(i)(A) of this section with a named party in interest.
(C) Procedure for determination. Each security-based swap execution
facility and SBS exchange must establish procedures for determining
whether any member of its governing board, disciplinary committees, or
oversight

[[Page 87315]]

committees is subject to a conflicts restriction in any matter
involving a named party in interest. Taking into consideration the
exigency of the committee action, such determinations should be based
upon:
(1) Information provided by the member pursuant to paragraph
(g)(1)(i)(B) of this section; and
(2) Any other source of information that is held by and reasonably
available to the security-based swap execution facility or SBS
exchange.
(ii) Financial interest in a significant action. (A) Nature of
interest. A member of the governing board, disciplinary committee, or
oversight panel of a security-based swap execution facility or SBS
exchange must abstain from such body's deliberations and voting on any
significant action if the member knowingly has a direct and substantial
financial interest in the result of the vote based upon either exchange
or non-exchange positions that could reasonably be expected to be
affected by the action.
(B) Disclosure of interest. Prior to the consideration of any
significant action, each member of a governing board, disciplinary
committee, or oversight panel of a security-based swap execution
facility or SBS exchange must disclose to the appropriate staff of the
security-based swap execution facility or SBS exchange the position
information referred to in paragraph (g)(1)(ii)(C) of this section that
is known to them. This requirement does not apply to members who choose
to abstain from deliberations and voting on the subject significant
action.
(C) Procedure for determination. Each security-based swap execution
facility and SBS exchange must establish procedures for determining
whether any member of its governing board, disciplinary committees, or
oversight committees is subject to a conflicts restriction under this
section in any significant action. Such determination must include a
review of any positions, whether maintained at that security-based swap
execution facility, SBS exchange, or elsewhere, held in the member's
personal accounts or the proprietary accounts of the member's
affiliated firm that the security-based swap execution facility or SBS
exchange reasonably expects could be affected by the significant
action.
(D) Bases for determination. Taking into consideration the exigency
of the significant action, such determinations should be based upon:
(1) Information provided by the member with respect to positions
pursuant to paragraph (f)(2)(ii)(B) of this section; and
(2) Any other source of information that is held by and reasonably
available to the security-based swap execution facility or SBS
exchange.
(iii) Participation in deliberations. (A) Under the rules required
by this section, a governing board, disciplinary committee, or
oversight panel of a security-based swap execution facility or SBS
exchange may permit a member to participate in deliberations prior to a
vote on a significant action for which they otherwise would be required
to abstain, pursuant to paragraph (g)(1)(ii) of this section, if such
participation would be consistent with the public interest and the
member recuses from voting on such action.
(B) In making a determination as to whether to permit a member to
participate in deliberations on a significant action for which they
otherwise would be required to abstain, the deliberating body shall
consider the following factors:
(1) Whether the member's participation in deliberations is
necessary for the deliberating body to achieve a quorum in the matter;
and
(2) Whether the member has unique or special expertise, knowledge,
or experience in the matter under consideration.
(C) Prior to any determination pursuant to paragraph (g)(1)(iii)(A)
of this section, the deliberating body must fully consider the position
information which is the basis for the member's direct and substantial
financial interest in the result of a vote on a significant action
pursuant to paragraph (g)(1)(ii) of this section.
(iv) Documentation of determination. The governing boards,
disciplinary committees, and oversight panels of each security-based
swap execution facility and SBS exchange must reflect in their minutes
or otherwise document that the conflicts determination procedures
required by this section have been followed. Such records also must
include:
(A) The names of all members who attended the meeting in person or
who otherwise were present by electronic means;
(B) The name of any members who voluntarily recused themselves or
were required to abstain from deliberations and/or voting on a matter
and the reason for the recusal or abstention, if stated; and
(C) Information on the position information that was reviewed for
each member.
(h) Rules required. (1) A security-based swap execution facility
shall maintain in effect rules to comply with this section that have
been submitted to the Commission pursuant to Sec. 242.806 or Sec.
242.807.
(2) An SBS exchange shall maintain in effect rules to comply with
this section that have been submitted to the Commission pursuant to
Sec. 240.19b-4 of this chapter.

Sec. 242.835 Notice to Commission by security-based swap execution
facility of final disciplinary action or denial or limitation of
access.

(a) If a security-based swap execution facility issues a final
disciplinary action against a member, or takes final action with
respect to a denial or conditioning membership, or takes final action
with respect to a denial or limitation of access of a person to any
services offered by the security-based swap execution facility, the
security-based swap execution facility shall file a notice of such
action with the Commission within 30 days and serve a copy on the
affected person.
(b) For purposes of paragraph (a) of this section:
(1) A disciplinary action shall not be considered ``final'' unless:
(i) The affected person has exhausted their administrative remedies
at the security-based swap execution facility; and
(ii) The disciplinary action is not a summary action permitted
under Sec. 242.819(g)(13)(ii).
(2) A disposition of a matter with respect to a denial or
conditioning of membership, or a denial or limitation of access shall
not be considered ``final'' unless such person has exhausted their
administrative remedies at the security-based swap execution facility
with respect to such matter.
(c) A notice required by paragraph (a) of this section shall
provide the following information:
(1) The name of the member and its last known address, as reflected
in the security-based swap execution facility's records;
(2) The name of the person, committee, or other organizational unit
of the security-based swap execution facility that initiated the
disciplinary action or access restriction;
(3) In the case of a final disciplinary action:
(i) A description of the acts or practices, or omissions to act,
upon which the sanction is based, including, as appropriate, the
specific rules that the security-based swap execution facility has
found to have been violated;
(ii) A statement describing the respondent's answer to the charges;
and
(iii) A statement of the sanction imposed and the reasons therefor;
(4) In the case of a final action with respect to a denial or
conditioning of

[[Page 87316]]

membership, or a denial or limitation of access:
(i) The financial or operating difficulty of the member or
prospective member (as the case may be) upon which the security-based
swap execution facility determined that the member or prospective
member could not be permitted to do, or continue to do, business with
safety to investors, creditors, other members, or the security-based
swap execution facility;
(ii) The pertinent failure to meet qualification requirements or
other prerequisites for membership or access and the basis upon which
the security-based swap execution facility determined that the person
concerned could not be permitted to have membership or access with
safety to investors, creditors, other members, or the security-based
swap execution facility; or
(iii) The default of any delivery of funds or securities to a
clearing agency by the member;
(5) The effective date of the final disciplinary action, or final
action with respect to a denial or conditioning of membership, or a
denial or limitation of access; and
(6) Any other information that the security-based swap execution
facility may deem relevant.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
22. The general authority citation for part 249 continues to read in
part as follows:

Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C.
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111-203, 124
Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309 (2012);
Sec. 107, Pub. L. 112-106, 126 Stat. 313 (2012), Sec. 72001, Pub. L.
114-94, 129 Stat. 1312 (2015), and secs. 2 and 3, Pub. L. 116-222,
134 Stat. 1063 (2020), unless otherwise noted.
* * * * *

0
23. Add subpart R to read as follows:

Subpart R--Forms for Registration of, and Filings by, Security-
Based Swap Execution Facilities

Sec.
249.1701 Form SBSEF.
249.1702 Security-Based Swap Execution Facility Cover Sheet.

Sec. 249.1701 Form SBSEF, for application for registration as a
security-based swap execution facility or to amend such application or
registration.

This form shall be used for application for registration as a
security-based swap execution facility, pursuant to section 3D of the
Securities Exchange Act of 1934 (15 U.S.C. 78c-4) and Sec. 242.803 of
this chapter, or to amend such application or registration.

Sec. 249.1702 Submission cover sheet, for rule and product
submissions.

This submission cover sheet shall be used by registered security-
based swap execution facilities for making submissions pursuant to
Sec. Sec. 242.804 through 242.807, 242.809, and 242.816).

0
24. Add Form SBSEF (referenced in Sec. 249.1701).

Note: Form SBSEF is attached as Appendix A to this document.
Form SBSEF will not appear in the Code of Federal Regulations.

0
25. Add Security-Based Swap Execution Facility Submission Cover Sheet
(referenced in Sec. 249.1702).

Note: Security-Based Swap Execution Facility Submission Cover
Sheet is attached as Appendix B to this document. The Security-Based
Swap Execution Facility Submission Cover Sheet will not appear in
the Code of Federal Regulations.

By the Commission.

Dated: November 2, 2023.
J. Matthew DeLesDernier,
Deputy Secretary.

Note: The following appendices will not appear in the Code of
Federal Regulations.

Appendix A--Form SBSEF

BILLING CODE 8011-01-P

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[FR Doc. 2023-24587 Filed 12-14-23; 8:45 am]
BILLING CODE 8011-01-C

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