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pdfVol. 78
Thursday,
No. 100
May 23, 2013
Part II
Securities and Exchange Commission
sroberts on DSK5SPTVN1PROD with PROPOSALS
17 CFR Parts 240, 242, and 249
Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation
SBSR and Certain Rules and Forms Relating to the Registration of
Security-Based Swap Dealers and Major Security-Based Swap Participants;
Proposed Rule
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Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 240, 242, and 249
[Release No. 34–69490; File Nos. S7–02–
13; S7–34–10; S7–40–11]
RIN 3235–AL25
Cross-Border Security-Based Swap
Activities; Re-Proposal of Regulation
SBSR and Certain Rules and Forms
Relating to the Registration of
Security-Based Swap Dealers and
Major Security-Based Swap
Participants
Securities and Exchange
Commission.
ACTION: Proposed rules; proposed
interpretations.
sroberts on DSK5SPTVN1PROD with PROPOSALS
AGENCY:
SUMMARY: The Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
is publishing for public comment
proposed rules and interpretive
guidance to address the application of
the provisions of the Securities
Exchange Act of 1934, as amended
(‘‘Exchange Act’’), that were added by
Subtitle B of Title VII of the Dodd-Frank
Wall Street Reform and Consumer
Protection Act (‘‘Dodd-Frank Act’’), to
cross-border security-based swap
activities. Our proposed rules and
interpretive guidance address the
application of Subtitle B of Title VII of
the Dodd-Frank Act with respect to each
of the major registration categories
covered by Title VII relating to market
intermediaries, participants, and
infrastructures for security-based swaps,
and certain transaction-related
requirements under Title VII in
connection with reporting and
dissemination, clearing, and trade
execution for security-based swaps. In
this connection, we are re-proposing
Regulation SBSR and certain rules and
forms relating to the registration of
security-based swap dealers and major
security-based swap participants. The
proposal also contains a proposed rule
providing an exception from the
aggregation requirement, in the context
of the security-based swap dealer
definition, for affiliated groups with a
registered security-based swap dealer.
Moreover, the proposal addresses the
sharing of information and preservation
of confidentiality with respect to data
collected and maintained by SDRs. In
addition, the Commission is proposing
rules and interpretive guidance
addressing the policy and procedural
framework under which the
Commission would consider permitting
compliance with comparable regulatory
requirements in a foreign jurisdiction to
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substitute for compliance with
requirements of the Exchange Act, and
the rules and regulations thereunder,
relating to security-based swaps (i.e.,
‘‘substituted compliance’’). Finally, the
Commission is setting forth our view of
the scope of our authority, with respect
to enforcement proceedings, under
Section 929P of the Dodd-Frank Act.
DATES: Submit comments on or before
August 21, 2013.
ADDRESSES: Comments may be
submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s Internet
comment form (http://www.sec.gov/
rules/proposed.shtml);
• Send an email to rulecomments@sec.gov. Please include File
Number S7–02–13, and File Numbers
S7–34–10 (Regulation SBSR) and/or S7–
40–11 (registration of security-based
swap dealers and major security-based
swap participants), as applicable, on the
subject line; or
• Use the Federal eRulemaking Portal
(http://www.regulations.gov). Follow the
instructions for submitting comments.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number S7–02–13, and File Numbers
S7–34–10 (Regulation SBSR) and/or S7–
40–11 (registration of security-based
swap dealers and major security-based
swap participants), as applicable. This
file number should be included on the
subject line if email is used. To help us
process and review your comments
more efficiently, please use only one
method. The Commission will post all
comments on the Commission’s Internet
Web site (http://www.sec.gov/rules/
proposed.shtml). Comments also are
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. All comments
received will be posted without change;
we do not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT:
Matthew A. Daigler, Senior Special
Counsel, at 202–551–5578, Wenchi Hu,
Senior Special Counsel, at 202–551–
6268, Richard E. Grant, Special Counsel,
at 202–551–5914, or Richard Gabbert,
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Special Counsel, at 202–551–7814,
Office of Derivatives Policy, Division of
Trading and Markets, regarding
security-based swap dealers and major
security-based swap participants; Jeffrey
Mooney, Assistant Director, Matthew
Landon, Senior Special Counsel, or
Stephanie Park, Special Counsel, Office
of Clearance and Settlement, Division of
Trading and Markets, at 202–551–5710,
regarding security-based swap clearing
agencies, security-based swap data
repositories, and the security-based
swap clearing requirement; David
Michehl, Senior Counsel, Office of
Market Supervision, Division of Trading
and Markets, at 202–551–5627,
regarding security-based swap reporting;
Leah Mesfin, Special Counsel, at 202–
551–5655, or Michael P. Bradley,
Special Counsel, at 202–551–5594,
Office of Market Supervision, Division
of Trading and Markets, regarding the
trade execution requirement and swap
execution facilities; Securities and
Exchange Commission, 100 F Street NE.,
Washington, DC 20549–7010.
SUPPLEMENTARY INFORMATION: The
Commission is proposing new rules and
interpretive guidance under the
Exchange Act relating to the application
of Subtitle B of Title VII of the DoddFrank Act to cross-border activities and
re-proposing Regulation SBSR and
certain rules and forms relating to the
registration of security-based swap
dealers and major security-based swap
participants.
The Commission is proposing the
following rules under the Exchange Act:
Rule 0–13 (Substituted Compliance
Request Procedure); Rule 3a67–10
(Foreign Major Security-Based Swap
Participants); Rule 3a71–3 (Cross-Border
Security-Based Swap Dealing Activity);
Rule 3a71–4 (Exception from
Aggregation for Affiliated Groups with
Registered Security-Based Swap
Dealers); Rule 3a71–5 (Substituted
Compliance for Foreign Security-Based
Swap Dealers); Rule 3Ca–3 (Application
of the Mandatory Clearing Requirement
to Cross-Border Security-Based Swap
Transactions); Rule 3Ch–1 (Application
of the Mandatory Trade Execution
Requirement to Cross-Border SecurityBased Swap Transactions); Rule 3Ch–2
(Substituted Compliance for Mandatory
Trade Execution); Rule 13n–4(d)
(Exemption from the Indemnification
Requirement); Rule 13n–12 (Exemption
from Requirements Governing SecurityBased Swap Data Repositories for
Certain Non-U.S. Persons); Rule 18a–
4(e) (Segregation Requirements for
Foreign Security-Based Swap Dealers);
and Rule 18a–4(f) (Segregation
Requirements for Foreign Major
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Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Security-Based Swap Participants). The
Commission also is re-proposing the
following rules and forms: 17 CFR
242.900–242.911 (Regulation SBSR)
(RIN 3235–AK80) and 17 CFR 249.1600
(Form SBSE), 249.1600a (Form SBSE–
A), and 249.1600b (Form SBSE–BD)
(RIN 3235–AL05).
sroberts on DSK5SPTVN1PROD with PROPOSALS
Table of Contents
I. Background
A. The Dodd-Frank Wall Street Reform and
Consumer Protection Act
B. Overview of the Cross-Border Proposal
C. Consultation and Coordination
D. Substituted Compliance
E. Conclusion
II. Overview of the Security-Based Swap
Market and the Legal and Policy
Principles Guiding the Commission’s
Approach to the Application of Title VII
to Cross-Border Activities
A. Overview of the Security-Based Swap
Market
1. Global Nature of the Security-Based
Swap Market
2. Dealing Structures
(a) U.S. Bank Dealer
(b) U.S. Non-Bank Dealer
(c) Foreign Subsidiary Guaranteed by a
U.S. Person
(d) Foreign-Based Dealer
i. Direct Dealing
ii. Intermediation in the United States
3. Clearing Practices
4. Reporting Practices
5. Trade Execution Practices
6. Broad Economic Considerations of
Cross-Border Security-Based Swaps
(a) Major Economic Considerations
(b) Global Nature and Interconnectedness
of the Security-Based Swap Market
(c) Central Clearing
(d) Security-Based Swap Data Reporting
B. Scope of Title VII’s Application to
Cross-Border Security-Based Swap
Activity
1. Commenters’ Views
2. Scope of Application of Title VII in the
Cross-Border Context
(a) Overview and General Approach
(b) Territorial Approach to Application of
Title VII Security-Based Swap Dealer
Registration Requirements
(c) Application of Other Title VII
Requirements to Registered Entities
(d) Application of Title VII Regulatory
Requirements to Transactions of Foreign
Entities Receiving Guarantees From U.S.
Persons
(e) Regulations Necessary or Appropriate
To Prevent Evasion of Title VII
C. Principles Guiding Proposed Approach
to Applying Title VII in the Cross-Border
Context
D. Conclusion
III. Security-Based Swap Dealers
A. Introduction
B. Registration Requirement
1. Introduction
2. Background Discussion Regarding the
Registration of Foreign Brokers and
Dealers
3. Comment Summary
(a) Market Participants
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(b) Foreign Regulators
4. Application of the De Minimis
Exception to Cross-Border SecurityBased Swap Dealing Activity
(a) Meaning of the Term ‘‘Person’’ in the
Security-Based Swap Dealer Definition
(b) Proposed Rule
5. Proposed Definition of ‘‘U.S. Person’’
(a) Introduction
(b) Discussion
i. Natural Persons
ii. Corporations, Organizations, Trusts, and
Other Legal Persons
iii. Accounts of U.S. Persons
iv. International Organizations
(c) Conclusion
6. Proposed Definition of ‘‘Transaction
Conducted Within the United States’’
7. Proposed Treatment of Transactions
With Foreign Branches of U.S. Banks
8. Proposed Rule Regarding Aggregation of
Affiliate Positions
9. Treatment of Inter-Affiliate and
Guaranteed Transactions
10. Comparison With Definition of ‘‘U.S.
Person’’ in Regulation S
C. Regulation of Security-Based Swap
Dealers in Title VII
1. Introduction
2. Comment Summary
3. Title VII Requirements Applicable to
Security-Based Swap Dealers
(a) Transaction-Level Requirements
i. External Business Conduct Standards
ii. Segregation of Assets
(b) Entity-Level Requirements
i. Capital
ii. Margin
iii. Risk Management
iv. Recordkeeping and Reporting
v. Internal System and Controls
vi. Diligent Supervision
vii. Conflicts of Interest
viii. Chief Compliance Officer
ix. Inspection and Examination
x. Licensing Requirements and Statutory
Disqualification
4. Application of Certain Transaction-Level
Requirements
(a) Proposed Rule
(b) Discussion
i. External Business Conduct Standards
a. Foreign Security-Based Swap Dealers
b. U.S. Security-Based Swap Dealers
ii. Segregation Requirements
a. Foreign Security-Based Swap Dealers
b. Non-Cleared Security-Based Swaps
c. Cleared Security-Based Swaps
d. Disclosure
5. Application of Entity-Level Rules
(a) Introduction
(b) Proposed Approach
D. Intermediation
1. Introduction
2. Comment Summary
3. Discussion
E. Registration Application Re-Proposal
1. Introduction
2. Discussion
IV. Major Security-Based Swap Participants
A. Introduction
B. Comment Summary
C. Proposed Approach
1. In General
2. Guarantees
(a) Guarantees Provided by U.S. Persons to
Non-U.S. Persons
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(b) Guarantees Provided by Non-U.S.
Persons to U.S. Persons and Guarantees
Provided by Non-U.S. Persons to NonU.S. Persons
(c) Limited Circumstances Where
Attribution of Guaranteed SecurityBased Swap Positions Does Not Apply
(d) Operational Compliance
3. Foreign Public Sector Financial
Institutions (FPSFIs)
D. Title VII Requirements Applicable to
Major Security-Based Swap Participants
1. Transaction-Level Requirements Related
to Customer Protection
(a) Overview
(b) Proposed Rules
2. Entity-Level Requirements
3. Substituted Compliance
V. Security-Based Swap Clearing Agencies
A. Introduction
B. Proposed Title VII Approach
1. Clearing Agency Registration
(a) Clearing Agencies Acting as CCPs
(b) Proposed Interpretive Guidance
2. Exemption From Registration Under
Section 17A(k)
3. Application of Alternative Standards to
Certain Registrants
VI. Security-Based Swap Data Repositories
A. Introduction
B. Application of the SDR Requirements in
the Cross-Border Context
1. Introduction
2. Comment Summary
3. Proposed Approach
(a) U.S. Persons Performing SDR Functions
Are Required To Register With the
Commission
(b) Interpretive Guidance and Exemption
for Non-U.S. Persons That Perform the
Functions of an SDR Within the United
States
C. Relevant Authorities’ Access to
Security-Based Swap Information and
the Indemnification Requirement
1. Information Sharing Under Sections 21
and 24 of the Exchange Act
2. Comment Summary
3. Proposed Guidance and Exemptive
Relief
(a) Notification Requirement
(b) Determination of Appropriate
Regulators
(c) Option for Exemptive Relief From the
Indemnification Requirement
i. Impact of the Indemnification
Requirement
ii. Proposed Rule 13n–4(d):
Indemnification Exemption
VII. Security-Based Swap Execution
Facilities
A. Introduction
B. Registration of Foreign Security-Based
Swap Markets
C. Registration Exemption for Foreign
Security-Based Swap Markets
VIII. Regulation SBSR—Regulatory Reporting
and Public Dissemination of SecurityBased Swap Information
A. Background
B. Modifications to the Definition of ‘‘U.S.
Person’’
C. Additional Modifications to Scope of
Regulation SBSR
1. Revisions to Proposed Rule 908(a)
2. Revisions to Proposed Rule 908(b)
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D. Modifications to ‘‘Reporting Party’’
Rules and Assigning Duty To Report
E. Other Technical and Conforming
Changes
F. Cross-Border Inter-Affiliate Transactions
G. Foreign Privacy Laws versus Duty To
Report Counterparty ID
H. Foreign Public Sector Financial
Institutions
I. Summary and Additional Request for
Comment
IX. Mandatory Security-Based Swap Clearing
Requirement
A. Introduction
B. Summary of Comments
C. Application of Title VII Mandatory
Clearing Requirements to Cross-Border
Transactions
1. Statutory Framework
2. Proposed Rule
3. Discussion
(a) Security-Based Swap Transactions
Involving U.S. Persons or Non-U.S.
Persons Receiving Guarantees From U.S.
Persons
i. Proposed Rule
ii. Proposed Exception for Certain
Transactions Involving Foreign Branches
of U.S. Banks and Guaranteed Non-U.S.
Persons
(b) Transactions Conducted Within the
United States
i. Proposed Rule
ii. Proposed Exception for Transactions
Conducted Within the United States by
Certain Non-U.S. Persons
X. Mandatory Security-Based Swap Trade
Execution Requirement
A. Introduction
B. Application of the Mandatory Trade
Execution Requirement to Cross-Border
Transactions
1. Statutory Framework
2. Proposed Rule
3. Discussion
(a) Security-Based Swap Transactions
Involving U.S. Persons or Non-U.S.
Persons Receiving Guarantees From U.S.
Persons
i. Proposed Rule
ii. Proposed Exception for Certain
Transactions Involving Foreign Branches
of U.S. Banks and Guaranteed Non-U.S.
Persons
(b) Transactions Conducted Within the
United States
i. Proposed Rule
ii. Proposed Exception for Transactions
Conducted Within the United States by
Certain Non-U.S. Persons
XI. Substituted Compliance
A. Introduction
B. Process for Making Substituted
Compliance Requests
C. Security-Based Swap Dealer
Requirements
1. Proposed Rule—Commission
Substituted Compliance Determinations
2. Discussion
D. Regulatory Reporting and Public
Dissemination
1. General
2. Security-Based Swaps Eligible and Not
Eligible for Substituted Compliance
3. Requests for Substituted Compliance
4. Findings Necessary for Substituted
Compliance
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5. Modification or Withdrawal of
Substituted Compliance Order
6. Regulatory Reporting and Public
Dissemination Considered Together in
the Commission’s Analysis of
Substituted Compliance
E. Clearing Requirement
F. Trade Execution Requirement
XII. Antifraud Authority
XIII. General Request for Comment
A. General Comments
B. Consistency With CFTC’s Cross-Border
Approach
XIV. Paperwork Reduction Act
A. Introduction
B. Re-Proposal of Form SBSE, Form SBSE–
A, and Form SBSE–BD
1. Summary of Collection of Information
2. Proposed Use of Information
3. Respondents
4. Total Initial and Annual Reporting and
Recordkeeping Burdens
(a) Paperwork Burden Associated With
Filing Application Forms
(b) Paperwork Burden Associated With
Amending Schedule F
(c) Paperwork Burden Associated With
Amending Application Forms
5. Request for Comment on Paperwork
Burden Estimates
C. Disclosures by Certain Foreign SecurityBased Swap Dealers and Major SecurityBased Swap Participants
1. Summary of Collection of Information
2. Proposed Use of Information
3. Respondents
4. Total Initial and Annual Reporting
Burdens
5. Request for Comment on Paperwork
Burden Estimates
D. Reliance on Counterparty
Representations Regarding Activity
Within the United States
1. Summary of Collection of Information
2. Proposed Use of Information
3. Respondents
4. Total Initial and Annual Reporting and
Recordkeeping Burdens
5. Request for Comment on Paperwork
Burden Estimates
E. Requests for Cross-Border Substituted
Compliance Determinations
1. Summary of Collection of Information
2. Proposed Use of Information
3. Respondents
4. Total Initial and Annual Reporting and
Recordkeeping Burdens
(a) Proposed Rule 3a71–5
(b) Re-Proposed Rule 242.908(c)(2)(ii) of
Regulation SBSR
(c) Proposed Rule 3Ch–2(c)
F. Reporting and Dissemination of
Security-Based Swap Information
1. Background on the Re-Proposed Rules
2. Modifications to ‘‘Reporting Party’’
Rules
(a) Summary of Collection of Information
(b) Proposed Use of Information
(c) Respondents
(d) Total Initial and Annual Reporting and
Recordkeeping Burdens
i. Baseline Burdens
ii. Re-Proposed Burdens
iii. Summary of Re-Proposed Burdens
iv. Recordkeeping Requirements
(e) Collection of Information Is Mandatory
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(f) Confidentiality
3. Rules 902, 905, 906, 907, and 909
(a) Rule 902
(b) Rule 905
(c) Rule 906
(d) Rule 907
(e) Rule 909
i. Impact of Re-Proposed Rules 902, 905,
906, 907, and 909 on the Commission’s
PRA Analysis
4. Rules 900, 903, 908, 910, and 911
(a) Modification of the Definition of ‘‘U.S.
Person’’
(b) Rule 903
(c) Re-Proposed Rules 908(a) and 908(b)
(d) Rule 910
(e) Rule 911
G. Request for Comments by the
Commission and Director of OMB
XV. Economic Analysis
A. Introduction
B. Economic Baseline
1. Overview
2. Current Security-Based Swap Market
(a) Security-Based Swap Market
Participants
(b) Levels of Security-Based Swap Trading
Activity
(c) Market Participant Domiciles
(d) Level of Current Cross-Border Activity
in Single-Name CDS
(e) Levels of Security-Based Swap Clearing
C. Analysis of Potential Effects on
Efficiency, Competition, and Capital
Formation
1. Introduction
2. Competition
(a) Security-Based Swap Dealers
(b) Security-Based Swap Market
Infrastructure Requirements
i. Registration of Clearing Agencies, SDRs
and SB SEFs
ii. Application of Mandatory Clearing,
Public Dissemination, Regulatory
Reporting, and Trade Execution
Requirements in the Cross-Border
Context
3. Efficiency
4. Capital Formation
D. Economic Analysis of Proposed Rules
Regarding ‘‘Security-Based Swap
Dealers’’ and ‘‘Major Security-Based
Swap Participants’’
1. Programmatic Costs and Benefits
(a) Registration of Security-Based Swap
Dealers and Major Security-Based Swap
Participants
(b) Security-Based Swap Dealers—De
Minimis Exception
(c) Major Security-Based Swap
Participants—‘‘Substantial Position’’ and
‘‘Substantial Counterparty Exposure’’
Thresholds
2. Assessment Costs
(a) Security-Based Swap Dealers—De
Minimis Exception
(b) Major Security-Based Swap
Participants—‘‘Substantial Position’’ and
‘‘Substantial Counterparty Exposure’’
Thresholds
3. Alternatives Considered
(a) De Minimis Exception
i. Alternatives to the Proposed Definition
of U.S. Person
ii. Alternatives to the Proposed Rule
Regarding Application of the De Minimis
Exception
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a. Calculation of U.S. Persons’ Transactions
for De Minimis Exception
b. Calculation of Non-U.S. Persons’
Transactions for De Minimis Exception
(Including Transactions Conducted
Within the United States)
iii. Aggregation of Affiliate Dealing
Activity
(b) Major Security-Based Swap Participants
E. Economic Analysis of the Proposed
Application of the Entity-Level and
Transaction-Level Requirements to
Security-Based Swap Dealers and Major
Security-Based Swap Participants
1. Entity-Level Requirements
2. Transaction-Level Requirements
(a) Proposed Rule 3a71–3(c)—Application
of Customer Protection Requirements
i. Programmatic Benefits and Costs
ii. Assessment Costs
iii. Alternatives
(b) Proposed Rule 18a–4(e)—Application of
Segregation Requirements
i. Programmatic Benefits and Costs
a. Pre-Dodd Frank Segregation Practice
b. Benefits of the Segregation Requirements
c. Costs of the Segregation Requirements
d. Costs and Benefits of Proposed Rules
18a–4(e)(1) and (2) Regarding
Application of Segregation Requirements
to Foreign Security-Based Swap Dealers
e. Costs and Benefits of Proposed Rule
18a–4(e)(3) Regarding Disclosures
ii. Assessment Costs
F. Economic Analysis of Application of
Rules Governing Security-Based Swap
Clearing in Cross-Border Context
1. Programmatic Benefits and Costs
Associated With the Clearing Agency
Registration
(a) Proposed Interpretive Guidance
Regarding Clearing Agency Registration
(b) Proposed Exemption of Foreign
Clearing Agency From Registration
(c) Programmatic Effects of Alternative
Standards
2. Programmatic Benefits and Costs
Associated With the Mandatory Clearing
Requirement of Section 3C(a)(1) of the
Exchange Act
(a) Programmatic Effects of the Mandatory
Clearing Requirement
(b) Programmatic Benefits and Costs of the
Mandatory Clearing Requirement
3. Programmatic Benefits and Costs of
Proposed Rule 3Ca–3
(a) Programmatic Effect of Proposed Rule
3Ca–3
(b) Programmatic Benefits and Costs of
Proposed Rule 3Ca–3
(c) Alternatives
(d) Assessment Costs
G. The Economic Analysis of Application
of Rules Governing Security-Based Swap
Trading in the Cross-Border Context
1. Programmatic Benefits and Costs of the
Proposed Application of the Registration
Requirements of Section 3D of the
Exchange Act to Foreign Security-Based
Swap Markets
(a) Programmatic Benefits
(b) Programmatic Costs
(c) Alternatives
2. Programmatic Benefits and Costs of the
Potential Availability of Exemptive
Relief to Foreign Security-Based Swap
Markets
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(a) Programmatic Benefits
(b) Programmatic Costs
(c) Alternatives
(d) Assessment Costs
3. Programmatic Benefits and Costs
Associated With the Mandatory Trade
Execution Requirement of Section 3C(h)
of the Exchange Act
(a) Programmatic Effect of the Statutory
Mandatory Trade Execution Requirement
(b) Programmatic Benefits of the Statutory
Mandatory Trade Execution Requirement
(c) Programmatic Costs of the Statutory
Mandatory Trade Execution Requirement
4. Programmatic Benefits and Costs of
Proposed Rule 3Ch–1 Regarding
Application of the Mandatory Trade
Execution Requirement in Cross-Border
Context
(a) Programmatic Effect of Proposed Rule
3Ch–1
(b) Programmatic Benefits and Costs of
Proposed Rule 3Ch–1
H. Application of Rules Governing
Security-Based Swap Data Repositories
in Cross-Border Context
1. Benefits and Costs Associated With
Application of the SDR Requirements in
the Cross-Border Context
(a) Benefits of Proposed Approach to SDR
Requirements
i. Programmatic Benefits of Proposed
Guidance Regarding Registration
ii. Programmatic Benefits of the SDR
Exemption
(b) Costs of Proposed Approach to SDR
Requirements
i. Programmatic Costs of the Commission’s
Proposed Approach
ii. Assessment Costs
(c) Alternative to Proposed Approach
2. Relevant Authorities’ Access to SecurityBased Swap Information and the
Indemnification Requirement
(a) Benefits and Costs of Relevant
Authorities’ Access to Security-Based
Swap Data Under the Dodd-Frank Act
i. Benefits of Relevant Authorities’ Access
to Security-Based Swap Data
ii. Costs of Relevant Authorities’ Access to
Security-Based Swap Data
(b) Benefits and Costs of Proposed
Guidance and Exemptive Rule
i. Notification Requirement
ii. Determination of Appropriate Regulators
iii. Exemptive Relief From the
Indemnification Requirement
(c) Alternatives to Proposed Guidance and
Exemptive Relief
i. Notification Requirement
ii. Determination of Appropriate Regulators
iii. Exemptive Relief From the
Indemnification Requirement
3. Economic Analysis of the Re-Proposal of
Regulation SBSR
(a) Modifications to ‘‘Reporting Party’’
Rules and Jurisdictional Reach of
Regulation SBSR—Re-Proposed Rules
901(a) and 908(a)
i. Initial Proposal
a. Programmatic Benefits of Initial Proposal
b. Programmatic Costs of Initial Proposal
ii. Re-Proposal
a. Programmatic Benefits
b. Programmatic Costs
(b) Proposed Modification of the Definition
of ‘‘U.S. Person’’
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(c) Revisions to Proposed Rule 908(b)
i. Initial Proposal
ii. Re-Proposal
a. Programmatic Benefits
b. Programmatic Costs
(d) Other Technical Revisions in ReProposed Regulation SBSR
(e) Aggregate Total Quantifiable Costs
I. Economic Analysis of Substituted
Compliance
1. Programmatic Benefits and Costs
2. Alternatives
3. Assessment Costs
J. General Request for Comments
XVI. Consideration of Impact on the
Economy
XVII. Regulatory Flexibility Act Certification
Statutory Basis and Text of Proposed Rules
Appendix A: Application of Subtitle B of
Title VII in the Cross-Border Context
Table I—Registered U.S. Security-Based
Swap Dealers
Table II—Registered Non-U.S. SecurityBased Swap Dealer with U.S. Guarantee
Table III—Unregistered Non-U.S. Dealer (or
Market Participant) With U.S. Guarantee
Table IV—Registered Non-U.S. SecurityBased Swap Dealer Without U.S.
Guarantee
Table V—Unregistered Non-U.S. Dealer (or
Market Participant) Without U.S.
Guarantee
Appendix B: Registration of Security-Based
Swap Dealers
Appendix C: Re-Proposal of Registration
Forms
Appendix D: List of Commenters
I. Background
The global nature of the securitybased swap market highlights the
critical importance of addressing the
application of the Title VII of the DoddFrank Act 1 (‘‘Title VII’’) to cross-border
activities.2 The Commission has
received numerous inquiries and
comments from market participants,
foreign regulators, and other interested
parties concerning how Title VII and the
Commission’s implementing regulations
thereunder will apply to the crossborder activities of U.S. and non-U.S.
market participants. To respond to these
inquiries and comments, the
Commission is providing our
preliminary views on the application of
Title VII to cross-border security-based
swap activities 3 and non-U.S. persons
1 The Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111–203, 124
Stat. 1376 (2010).
2 Unless otherwise indicated, references to Title
VII of the Dodd-Frank Act in this release are to
Subtitle B of Title VII.
3 Generally, in this release, the application of
Title VII to ‘‘cross-border activities’’ refers to the
application of Title VII to a security-based swap
transaction involving (i) A U.S. person and a nonU.S. person, (ii) two non-U.S. persons where one or
both are located within the United States, or (iii)
two non-U.S. persons conducting a security-based
swap transaction that otherwise occurs in relevant
part within the United States, including by
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that act in capacities regulated under
the Dodd-Frank Act in the proposed
rules and interpretations discussed
below.
CFTC and the Commission (together, the
‘‘Commissions’’) will regulate ‘‘mixed
swaps.’’ 9 Title VII also amends the
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A. The Dodd-Frank Wall Street Reform
and Consumer Protection Act
The Dodd-Frank Act was enacted,
among other reasons, to promote the
financial stability of the United States
by improving accountability and
transparency in the financial system.4
The 2008 financial crisis highlighted
significant issues in the over-thecounter (‘‘OTC’’) derivatives markets,
which have experienced dramatic
growth in recent years 5 and are capable
of affecting significant sectors of the
U.S. economy.6 Title VII of the DoddFrank Act provides for a comprehensive
new regulatory framework for swaps
and security-based swaps, including by:
(i) Providing for the registration and
comprehensive regulation of swap
dealers, security-based swap dealers,
major swap participants, and major
security-based swap participants; (ii)
imposing clearing and trade execution
requirements on swaps and securitybased swaps, subject to certain
exceptions; (iii) creating recordkeeping
and real-time reporting regimes and
public dissemination; and (iv)
enhancing the rulemaking and
enforcement authorities of the
Commission and the Commodity
Futures Trading Commission
(‘‘CFTC’’).7
Specifically, the Dodd-Frank Act
provides that the CFTC will regulate
‘‘swaps,’’ the Commission will regulate
‘‘security-based swaps,’’ 8 and both the
negotiating the terms of the security-based swap
transaction within the United States or where
performance of one or both counterparties under
the security-based swap is guaranteed by a U.S.
person.
4 The Dodd-Frank Act was enacted ‘‘[t]o promote
the financial stability of the United States by
improving accountability and transparency in the
financial system, to end ‘too big to fail’, to protect
the American taxpayer by ending bailouts, to
protect consumers from abusive financial services
practices, and for other purposes.’’ Public Law 111–
203, Preamble.
5 From their beginnings in the early 1980s, the
notional value of these markets grew to
approximately $650 trillion globally by the end of
2011. See Bank for International Settlements,
Statistical Release: OTC Derivatives Statistics at
End–December 2011 (May 2012) at 1, available at:
http://www.bis.org/publ/otc_hy1205.pdf.
6 See Section II.A.6(b), infra.
7 See Public Law 111–203 sections 701–774.
8 The definition of ‘‘security’’ in both the
Exchange Act and the Securities Act of 1933
(‘‘Securities Act’’), 15 U.S.C. 77a et seq., was
amended by the Dodd-Frank Act to include
security-based swaps. Public Law 111–203, Section
761(a)(2) (inserting ‘‘security-based swap’’ after
‘‘security future’’ in Section 3(a)(10) of the
Exchange Act, 15 U.S.C. 78c(a)(10)) and Section
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768(a)(1) (inserting ‘‘security-based swap’’ after
‘‘security future’’ in Section 2(a)(1) of the Securities
Act, 15 U.S.C. 77b(a)(1)). The revision of the
Exchange Act’s definition of ‘‘security’’ raises,
among other things, issues related to the definition
of ‘‘broker’’ in Section 3(a)(4) of the Exchange Act,
15 U.S.C. 78c(a)(4), the definition of ‘‘dealer’’ in
Section 3(a)(5) of the Exchange Act, 15 U.S.C.
78c(a)(5), the exchange registration requirements in
Sections 5 and 6 of the Exchange Act, 15 U.S.C. 78e
and 78f, respectively, and the requirement in
Section 12 of the Exchange Act that securities be
registered before a transaction is effected on a
national securities exchange. See 15 U.S.C. 78l(a).
The Securities Act requires that any offer and sale
of a security must either be registered under the
Securities Act (see Section 5 of the Securities Act,
15 U.S.C. 77e) or made pursuant to an exemption
from registration (see, e.g., Sections 3 and 4 of the
Securities Act, 15 U.S.C. 77c and 77d, respectively).
In addition, the Securities Act requires that any
offer to sell, offer to buy or purchase or sell a
security-based swap to any person who is not an
eligible contract participant (‘‘ECP’’) must be
registered under the Securities Act. See Section 5(e)
of the Securities Act, 15 U.S.C. 77e(e). Because of
the statutory language of Section 5(e), exemptions
from this requirement in Sections 3 and 4 of the
Securities Act are not available. This release does
not address the requirements under Section 5 of the
Securities Act.
The Commission adopted interim final rules that
provide exemptions from certain provisions of the
Securities Act, the Exchange Act, and the Trust
Indenture Act of 1939 (‘‘Trust Indenture Act’’), 15
U.S.C. 77aaa et seq., for those security-based swaps
that prior to July 16, 2011 were ‘‘security-based
swap agreements’’ and are defined as ‘‘securities’’
under the Securities Act and the Exchange Act as
of July 16, 2011 due solely to the provisions of Title
VII of the Dodd-Frank Act. See Exemptions for
Security-Based Swaps, Securities Act Release No.
9231 (July 1, 2011), 76 FR 40605 (July 11, 2011);
see also Extension of Exemptions for SecurityBased Swaps, Securities Act Release No. 9383 (Jan.
29, 2013), 78 FR 7654 (Feb. 4, 2013). The
Commission also issued temporary exemptions
under the Exchange Act regarding certain issues
raised by the inclusion of security-based swaps in
the definition of ‘‘security.’’ See Order Extending
Temporary Exemptions Under the Securities
Exchange Act of 1934 in Connection With the
Revision of the Definition of ‘‘Security’’ To
Encompass Security-Based Swaps, and Request for
Comment, Exchange Act Release No. 68864 (Feb. 7,
2013), 78 FR 10218 (Feb. 13, 2013); see also Order
Granting Temporary Exemptions Under the
Securities Exchange Act of 1934 in Connection
With the Pending Revision of the Definition of
‘‘Security’’ To Encompass Security-Based Swaps,
and Request for Comment, Exchange Act Release
No. 64795 (July 1, 2011) 76 FR 39927 (July 7, 2011).
9 In addition, the Dodd-Frank Act adds to the
Commodity Exchange Act (‘‘CEA’’) and Exchange
Act definitions of the terms ‘‘swap dealer,’’
‘‘security-based swap dealer,’’ ‘‘major swap
participant,’’ and ‘‘major security-based swap
participant,’’ and amends the CEA definition of the
term ‘‘eligible contract participant.’’ These terms are
defined in Sections 721 and 761 of the Dodd-Frank
Act and, with respect to the term ‘‘eligible contract
participant,’’ in Section 1a(18) of the CEA, 7 U.S.C.
1a(18), as redesignated and amended by Section 721
of the Dodd-Frank Act. Section 712(d)(1) of the
Dodd-Frank Act provides that the CFTC and the
Commission, in consultation with the Board of
Governors of the Federal Reserve System, shall
jointly further define the terms ‘‘swap,’’ ‘‘securitybased swap,’’ ‘‘swap dealer,’’ ‘‘security-based swap
dealer,’’ ‘‘major swap participant,’’ ‘‘major security-
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Exchange Act to include many specific
provisions governing security-based
swaps that could apply to cross-border
security-based swap transactions and to
non-U.S. persons who act in capacities
regulated under the Dodd-Frank Act.10
These provisions primarily relate to
Commission oversight of security-based
swap dealers,11 major security-based
based swap participant,’’ ‘‘eligible contract
participant,’’ and ‘‘security-based swap agreement.’’
Further, Section 721(c) of the Dodd-Frank Act
requires the CFTC to adopt a rule to further define
the terms ‘‘swap,’’ ‘‘swap dealer,’’ ‘‘major swap
participant,’’ and ‘‘eligible contract participant,’’
and Section 761(b)(3) of the Dodd-Frank Act
permits the Commission to adopt a rule to further
define the terms ‘‘security-based swap,’’ ‘‘securitybased swap dealer,’’ ‘‘major security-based swap
participant,’’ and ‘‘eligible contract participant,’’
with regard to security-based swaps, for the purpose
of including transactions and entities that have
been structured to evade Title VII or the
amendments made by Title VII.
The Commission and the CFTC jointly adopted
rules and interpretive guidance further defining the
terms ‘‘swap,’’ ‘‘security-based swap,’’ and
‘‘security-based swap agreement,’’ and regulations
regarding mixed swaps. See Further Definition of
‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘SecurityBased Swap Agreement’’; Mixed Swaps; SecurityBased Swap Agreement Recordkeeping, Exchange
Act Release No. 67453 (July 18, 2012), 77 FR 48208
(Aug. 13, 2012) (‘‘Product Definitions Adopting
Release’’). The Commission and the CFTC also
jointly adopted rules further defining the terms
‘‘swap dealer,’’ ‘‘security-based swap dealer,’’
‘‘major swap participant,’’ ‘‘major security-based
swap participant,’’ and ‘‘eligible contract
participant.’’ See Further Definition of ‘‘Swap
Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major
Swap Participant,’’ ‘‘Major Security-Based Swap
Participant’’ and ‘‘Eligible Contract Participant,’’
Exchange Act Release No. 66868 (Apr. 27, 2012), 77
FR 30596 (May 23, 2012) (‘‘Intermediary Definitions
Adopting Release’’).
10 The provisions of the Exchange Act relating to
security-based swaps that were enacted by Title VII
also are referred to herein as ‘‘Title VII
requirements’’ or ‘‘requirements in Title VII.’’
11 See Section 764(a) of the Dodd-Frank Act. The
Commission, jointly with the CFTC, adopted rules
further defining the term ‘‘security-based swap
dealer.’’ See Intermediary Definitions Adopting
Release, 77 FR 30596.
The Commission has proposed rules regarding
the registration and substantive requirements for
security-based swap dealers and major securitybased swap participants. See Proposed Rules
Governing Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and
Major Security-Based Swap Participants and Capital
Requirements for Broker-Dealers, Exchange Act
Release No. 68071 (Oct. 18, 2012) 77 FR 70214
(Nov. 23, 2012) (‘‘Capital, Margin, and Segregation
Proposing Release’’); Registration of Security-Based
Swap Dealers and Major Security-Based Swap
Participants, Exchange Act Release No. 65543 (Oct.
12, 2011) (RIN 3235–AL05), 76 FR 65784 (Oct. 24,
2011) (‘‘Registration Proposing Release’’); Business
Conduct Standards for Security-Based Swap Dealers
and Major Security-Based Swap Participants,
Exchange Act Release No. 64766 (June 29, 2011), 76
FR 42396 (July 18, 2011) (‘‘External Business
Conduct Standards Proposing Release’’); and Trade
Acknowledgment and Verification of SecurityBased Swap Transactions, Exchange Act Release
No. 63727 (Jan. 14, 2011), 76 FR 3859 (Jan. 21,
2011) (‘‘Trade Acknowledgment Proposing
Release’’). The Commission has not yet proposed
rules governing the recordkeeping, reporting, and
notification requirements for security-based swap
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swap participants,12 security-based
swap data repositories (‘‘SDRs’’),13
security-based swap clearing agencies,14
security-based swap execution facilities
(‘‘SB SEFs’’),15 and mandatory securitybased swap reporting and
dissemination,16 clearing,17 and trade
execution.18
B. Overview of the Cross-Border
Proposal
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With limited exceptions, the
Commission has not proposed specific
provisions of rules or forms or provided
guidance regarding the application of
dealers and major security-based swap dealers
pursuant to Section 15F(f) of the Exchange Act, 15
U.S.C. 78o–10(f), as added by Section 764(a) of the
Dodd-Frank Act.
12 See Section 764(a) of the Dodd-Frank Act. The
Commission, jointly with the CFTC, adopted rules
further defining the term ‘‘major security-based
swap participant.’’ See Intermediary Definitions
Adopting Release, 77 FR 30596. In a number of
releases, the Commission also has proposed rules
regarding the registration and substantive
requirements for major security-based swap
participants. See note 11, supra.
13 See Section 763(i) of the Dodd-Frank Act. The
Commission has proposed rules regarding the
registration and regulation of SDRs. See SecurityBased Swap Data Repository Registration, Duties,
and Core Principles, Exchange Act Release No.
63347 (Nov. 19, 2010), 75 FR 77306 (Dec. 10, 2010),
corrected at 75 FR 79320 (Dec. 20, 2010) and 76 FR
2287 (Jan. 13, 2011) (‘‘SDR Proposing Release’’).
14 See Section 763(b) of the Dodd-Frank Act. The
Commission adopted rules regarding the standards
for risk management practices and operations of
registered clearing agencies, including securitybased swap clearing agencies. See Clearing Agency
Standards, Exchange Act Release No. 68080 (Oct.
22, 2012), 77 FR 66220 (Nov. 2, 2012) (‘‘Clearing
Agency Standards Adopting Release’’).
15 See Section 763(c) of the Dodd-Frank Act. The
Commission has proposed rules regarding the
registration and regulation of SB SEFs. See
Registration and Regulation of Security-Based Swap
Execution Facilities, Exchange Act Release No.
63825 (Feb. 2, 2011), 76 FR 10948 (Feb. 29, 2011)
(‘‘SB SEF Proposing Release’’).
16 See Sections 763 and 766 of the Dodd-Frank
Act. The Commission has proposed rules on trade
reporting, data elements, and real-time public
reporting for security-based swaps. See Regulation
SBSR—Reporting and Dissemination of SecurityBased Swap Information, Exchange Act Release No.
63346 (Nov. 19, 2010) (RIN 3235–AK80), 75 FR
75208 (Dec. 2, 2010) (‘‘Regulation SBSR Proposing
Release’’).
17 See Section 763(b) of the Dodd-Frank Act. The
Commission has proposed or adopted rules relating
to the end-user clearing exception and the process
for submitting for review of security-based swaps
for mandatory clearing. See Process for Submissions
for Review of Security-Based Swaps for Mandatory
Clearing and Notice Filing Requirements for
Clearing Agencies; Technical Amendments to Rule
19b–4 and Form 19b–4 Applicable to All SelfRegulatory Organizations, Exchange Act Release
No. 67286 (June 28, 2012), 77 FR 41602 (July 13,
2012) (‘‘Clearing Procedures Adopting Release’’);
End-User Exception to Mandatory Clearing of
Security-Based Swaps (Corrected), Exchange Act
Release No. 63556 (Dec. 15, 2010), 75 FR 79992
(Dec. 21, 2010) (‘‘End-User Exception Proposing
Release’’).
18 See Section 763(b) of the Dodd-Frank Act.
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Title VII to cross-border activities.19
Rather than addressing these issues in a
piecemeal fashion through the various
substantive rulemaking proposals
implementing Title VII, the Commission
instead is addressing the application of
Title VII to cross-border activities
holistically in a single proposing
release.20 This approach provides
market participants, foreign regulators,
and other interested parties with an
opportunity to consider, as an integrated
whole, the Commission’s proposed
approach to the application of Title VII
to cross-border security-based swap
activities and non-U.S. persons that act
in capacities regulated under the DoddFrank Act.21
After providing an overview of the
security-based swap market, the
Commission’s preliminary views on the
scope of application of Title VII to crossborder security-based swap activity, and
the legal and policy principles guiding
the Commission’s approach to the
application of Title VII to cross-border
activities in Section II, we set forth our
proposed approach in the subsequent
sections of the release.
In Sections III and IV, we propose
rules and interpretive guidance
regarding the registration and regulation
of security-based swap dealers and
major security-based swap participants,
including the treatment of foreign
19 The Commission has proposed a rule
addressing the application of the security-based
swap trade reporting requirement to cross-border
transactions and to non-U.S. persons. See
Regulation SBSR Proposing Release, 75 FR 75239–
40, as discussed in Section VIII, infra. The
Commission also has proposed rules imposing
special requirements on ‘‘nonresident securitybased swap dealers,’’ ‘‘nonresident major securitybased swap participants,’’ ‘‘non-resident swap data
repositories,’’ and ‘‘non-resident SB SEFs.’’ See
Registration Proposing Release, 76 FR 65799–801,
as discussed in Section III.E, infra; SDR Proposing
Release, 75 FR 77310, as discussed in Section VI,
infra; and SB SEF Proposing Release, 76 FR 11000–
3, as discussed in Section VII, infra.
20 Tables reflecting the Commission’s proposed
approach as it would apply to security-based swap
transactions between different types of entities are
included in this release as Appendix A. Each table
focuses on a specific type of security-based swap
dealing entity or market participant and sets out the
Title VII requirements that would apply to such
person under different transaction scenarios.
21 Cf. CFTC Proposed Interpretive Guidance and
Policy Statement, Cross-Border Application of
Certain Swaps Provisions of the Commodity
Exchange Act, 77 FR 41214 (July 12, 2012) (‘‘CFTC
Cross-Border Proposal’’); Exemptive Order
Regarding Compliance with Certain Swap
Regulations, 77 FR 41110 (July 12, 2012) (‘‘CFTC
Proposed Cross-Border Exemptive Order’’); Final
Exemptive Order Regarding Compliance with
Certain Swap Regulations, 78 FR 858 (Jan. 7, 2013)
(‘‘Final CFTC Cross-Border Exemptive Order’’);
Further Proposed Guidance Regarding Compliance
With Certain Swap Regulations, 78 FR 909 (Jan. 7,
2013) (‘‘CFTC Further Proposed Guidance’’). In
Section XIII.B below, we solicit general comment
on the differences between our proposed approach
and the CFTC’s proposed approach.
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branches of U.S. banks and the
provision of guarantees in the crossborder context. In connection with this,
we are re-proposing the following rules
and forms: 17 CFR 249.1600 (Form
SBSE), 249.1600a (Form SBSE–A), and
249.1600b (Form SBSE–BD).22
In Sections V–VII, we propose rules
and interpretive guidance regarding the
registration of security-based swap
clearing agencies, SDRs, and SB SEFs,
as well as discuss generally under what
circumstances the Commission would
consider granting exemptions from
registration for these infrastructures. To
facilitate relevant authorities’ access to
security-based swap data collected and
maintained by Commission-registered
SDRs, the Commission also is proposing
interpretive guidance to specify how
SDRs may comply with the notification
requirement in the Exchange Act and
specifying how the Commission
proposes to determine whether a
relevant authority is appropriate for
purposes of receiving security-based
swap data from an SDR.23 In addition,
the Commission is proposing a tailored
exemption from the indemnification
requirement in the Exchange Act.24
In Sections VIII–X, we propose rules
and interpretive guidance regarding the
application of Title VII to cross-border
activities with respect to certain
transactional requirements in
connection with reporting and
dissemination, clearing, and trade
execution for security-based swaps. As
discussed further below, these
requirements apply to persons
independent of their registration status.
In connection with this, we are reproposing the following rules: 17 CFR
242.900–242.911 (Regulation SBSR).25
In Section XI, we set forth a proposed
policy and procedural framework under
which we would consider permitting
compliance with comparable regulatory
requirements in a foreign jurisdiction to
substitute for compliance with certain
requirements of the Exchange Act, and
the rules and regulations thereunder,
relating to security-based swaps (i.e.,
‘‘substituted compliance’’).26 Generally
speaking, the Commission is proposing
a policy and procedural framework that
would allow for the possibility of
substituted compliance in recognition of
22 See Registration Proposing Release, 76 FR
65784, as discussed in Section III.E, infra.
23 See Section VI.C, infra.
24 Id.
25 See Regulation SBSR Proposing Release, 75 FR
75208, as discussed in Section VIII, infra.
26 See Section XI, infra. As discussed in Section
XI, in permitting substituted compliance, the
Commission might use different procedural
approaches depending on the different substantive
requirements that are the subject of the substituted
compliance determinations. See also note 27, infra.
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the potential, in a market as global as
the security-based swap market, for
market participants who engage in
cross-border security-based swap
activity to be subject to conflicting or
duplicative compliance obligations.27 In
addition, the Commission is proposing
a rule that would set forth procedures
for requesting a substituted compliance
determination.
In Section XII, the Commission sets
forth our view of the scope of our
authority, with respect to enforcement
proceedings, under Section 929P of the
Dodd-Frank Act.28 Section XIII sets
forth a general request for comment,
including request for comment on the
consistency of our proposed approach
with the CFTC’s proposed approach to
applying the provisions of the CEA that
were enacted by Title VII in the crossborder context.
Finally, in Section XIV, the
Commission addresses the Paperwork
Reduction Act, and Section XV provides
an economic analysis of the proposed
approach, including a discussion of the
associated costs and benefits of the
proposals discussed in Sections III–XI,
as well as a discussion of issues related
to efficiency, competition, and capital
formation.
Because this release is directly related
to security-based swap data reporting
and dissemination, clearing, and trade
execution, as well as the regulation of
various persons required to register as a
result of amendments made to the
Exchange Act by Title VII, we anticipate
that some of the rules, forms, and
interpretive guidance proposed herein,
and comments received thereon, will be
addressed in the adopting releases
relating to the impacted substantive
rules. In some areas, we may decide to
address comments received on the
proposals contained in this release by
adopting rules in a separate
rulemaking.29
27 Separately, in Sections V–VII below, the
Commission also discusses generally when we
would consider exempting non-resident securitybased swap clearing agencies and SB SEFs that are
subject to comparable, comprehensive supervision
and regulation in their home countries, and certain
SDRs that are non-U.S. persons, from certain
obligations under the Exchange Act, including the
requirement to register.
28 The rules, forms, and interpretive guidance
proposed herein and discussed in Sections II–XI
below relate solely to the applicability of the
registration (and the attendant substantive
regulation) and reporting and dissemination,
clearing, and trade execution requirements in Title
VII, and are not intended to limit or address the
cross-border reach or extraterritorial application of
the antifraud or other provisions of the federal
securities laws.
29 The Commission is not addressing in this
release issues relating to compliance dates of final
rules adopted pursuant to amendments made to the
Exchange Act by Title VII. Compliance issues,
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C. Consultation and Coordination
As discussed more fully below, a
number of market participants, foreign
regulators, and other interested parties
have already provided their views on
the application of Title VII to crossborder activities through both written
comment letters to the Commission and/
or the CFTC and meetings with
Commissioners and Commission staff.30
The Commission has taken the
commenters’ views expressed thus far
into consideration in developing these
proposed rules, forms, and interpretive
guidance.31 In addition, in developing
this proposal, the Commission has, in
compliance with Sections 712(a)(2)32
and 752(a)33 of the Dodd-Frank Act,
consulted and coordinated with the
CFTC, the prudential regulators,34 and
foreign regulatory authorities.
including compliance dates, will be addressed in
connection with the various Title VII final rules.
See Statement of General Policy on the Sequencing
of the Compliance Dates for Final Rules Applicable
to Security-Based Swaps Adopted Pursuant to the
Securities Exchange Act of 1934 and the DoddFrank Wall Street Reform and Consumer Protection
Act, Exchange Act Release No. 67177 (June 11,
2012), 77 FR 35625 (June 14, 2012)
(‘‘Implementation Policy Statement’’). See also
Reopening of Comment Periods for Certain
Rulemaking Releases and Policy Statement
Applicable to Security-Based Swaps Proposed
Pursuant to the Securities Exchange Act of 1934
and the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Exchange Act Release No.
34–69491 (May 1, 2013).
30 The views expressed in comment letters and
meetings are collectively referred to as the views of
‘‘commenters.’’ See Appendix D for a list of
commenters referred to in this release and the
location of their comment letters on the
Commission’s (or the CFTC’s) Web site.
31 In addition, the Commission and the CFTC
held a joint public roundtable regarding the
application of Title VII to cross-border activities.
See Joint Public Roundtable on International Issues
Relating to the Implementation of Title VII of the
Dodd-Frank Wall Street Reform and Consumer
Protection Act, Exchange Act Release No. 64939
(July 21, 2011), 76 FR 44507 (July 26, 2011).
32 Section 712(a)(2) of the Dodd-Frank Act states,
in part, that ‘‘the Securities and Exchange
Commission shall consult and coordinate to the
extent possible with the Commodity Futures
Trading Commission and the prudential regulators
for the purposes of assuring regulatory consistency
and comparability, to the extent possible.’’
33 Section 752(a) of the Dodd-Frank Act states, in
part, that ‘‘[i]n order to promote effective and
consistent global regulation of swaps and securitybased swaps, the Commodity Futures Trading
Commission, the Securities and Exchange
Commission, and the prudential regulators (as that
term is defined in Section 1a(39) of the Commodity
Exchange Act), as appropriate, shall consult and
coordinate with foreign regulatory authorities on
the establishment of consistent international
standards with respect to the regulation (including
fees) of swaps.’’
34 The term ‘‘prudential regulator’’ is defined in
Section 1a(39) of the CEA, 7 U.S.C. 1a(39), and that
definition is incorporated by reference in Section
3(a)(74) of the Exchange Act, 15 U.S.C. 78c(a)(74).
Pursuant to the definition, the Board of Governors
of the Federal Reserve System (‘‘Federal Reserve
Board’’), the Office of the Comptroller of the
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Efforts to regulate the swaps market
are underway not only in the United
States but also abroad. In 2009, leaders
of the Group of 20 (‘‘G20’’)—whose
membership includes the United States,
18 other countries, and the European
Union (‘‘EU’’)—called for global
improvements in the functioning,
transparency, and regulatory oversight
of OTC derivatives markets.
Specifically, the G20 leaders declared
that:
[a]ll standardised OTC derivative contracts
should be traded on exchanges or electronic
trading platforms, where appropriate, and
cleared through central counterparties by
end-2012 at the latest. OTC derivative
contracts should be reported to trade
repositories. Non-centrally cleared contracts
should be subject to higher capital
requirements. We ask the [Financial Stability
Board] and its relevant members to assess
regularly implementation and whether it is
sufficient to improve transparency in the
derivatives markets, mitigate systemic risk
and protect against market abuse.35
In subsequent summits, the G20 leaders
have reiterated their commitment to
OTC derivatives regulatory reform.36
The Commission has participated in
numerous bilateral and multilateral
discussions with foreign regulatory
authorities addressing the regulation of
OTC derivatives.37 Through these
Currency, the Federal Deposit Insurance
Corporation, the Farm Credit Administration, or the
Federal Housing Finance Agency (collectively, the
‘‘prudential regulators’’) is the ‘‘prudential
regulator’’ of a security-based swap dealer if the
entity is directly supervised by that agency.
35 G20 Meeting, Pittsburgh, United States,
September 25, 2009, available at: http://
www.treasury.gov/resource-center/international/g7g20/Documents/pittsburgh_summit_leaders_
statement_250909.pdf.
36 For example, on June 18–19, 2012, the leaders
of the G20 convened in Los Cabos, Mexico, and
reaffirmed their commitments with respect to the
regulation of the OTC derivatives markets. See the
G20 Leaders Declaration (June 2012), para. 39,
available at: http://www.g20.org/documents/.
37 Senior representatives of OTC derivatives
market regulators from G20 jurisdictions have met
on a number of occasions to discuss international
coordination of OTC derivatives regulations. See,
e.g., Joint Press Statement of Leaders on Operating
Principles and Areas of Exploration in the
Regulation of the Cross-Border OTC Derivatives
Market (Dec. 4, 2012), available at: http://
www.sec.gov/news/press/2012/2012-251.htm; Joint
Statement on Regulation of OTC Derivatives
Markets (May 7, 2012), available at: http://
www.sec.gov/news/press/2012/2012-85.htm; and
Joint Statement on Regulation of OTC Derivatives
Markets (Dec. 9, 2011), available at: http://
www.sec.gov/news/press/2011/2011-260.htm . See
also Financial Stability Board (‘‘FSB’’), OTC
Derivatives Market Reforms, Fifth Progress Report
on Implementation (April 15, 2013) (‘‘FSB Progress
Report April 2013’’), at 47, available at: http://
www.financialstabilityboard.org/publications/
r_130415.pdf (noting that SEC staff has regularly
consulted its counterparts in other jurisdictions to
discuss and compare approaches to the application
of Title VII of the Dodd-Frank Act in cross-border
contexts); FSB Progress Report April 2013 at 5 and
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discussions and our participation in
various international task forces and
working groups,38 we have gathered
information about foreign regulatory
reform efforts and have discussed the
possibility of conflicts and gaps, as well
as inconsistencies and duplications,
between U.S. and foreign regulatory
regimes. We have taken these
discussions into consideration in
developing these proposed rules, forms,
and interpretations.
In addition, the Commission and the
CFTC have conducted staff studies to
assess developments in OTC derivatives
regulation abroad. As directed by
Congress in Section 719(c) of the DoddFrank Act, on January 31, 2012, the
Commission and the CFTC jointly
submitted to Congress a ‘‘Joint Report
on International Swap Regulation’’
(‘‘Swap Report’’).39 The Swap Report
discussed swap and security-based
swap regulation and clearinghouse
regulation in the Americas, Asia, and
the European Union, and identified
similarities and differences in
jurisdictions’ approaches to areas of
regulation, as well as other areas of
regulation that could be harmonized.
The Swap Report also identified major
clearinghouses, clearing members, and
regulators in each geographic area and
described the major contracts (including
clearing volumes and notional values),
methods for clearing swaps, and the
systems used for setting margin in each
geographic area.40
45–46 (discussing meetings of the group of market
regulators ‘‘to identify and explore ways to address
issues and uncertainties in the application of rules
in a cross-border context, including options to
address identified conflicts, inconsistencies, and
duplication.’’).
38 The Commission participates in the FSB’s
Working Group on OTC Derivatives Regulation
(‘‘ODWG’’), both on its own behalf and as the
representative of the International Organization of
Securities Commissions (‘‘IOSCO’’), which is cochair of the ODWG. The Commission also serves as
one of the co-chairs of the IOSCO Task Force on
OTC Derivatives Regulation.
39 See CFTC and SEC, Joint Report on
International Swap Regulation (Jan. 31, 2012),
available at: http://www.sec.gov/news/studies/
2012/sec-cftc-intlswapreg.pdf.
40 In addition, Commission and CFTC staff
submitted a joint study to Congress on the
feasibility of requiring the derivatives industry to
adopt standardized computer-readable algorithmic
descriptions which may be used to describe
complex and standardized financial derivatives. See
Joint Study on the Feasibility of Mandating
Algorithmic Descriptions for Derivatives: A Study
by the Staff of the Securities and Exchange
Commission and the Commodity Futures Trading
Commission as Required by Section 719(c) of the
Dodd-Frank Wall Street Reform and Consumer
Protection Act (Apr. 7, 2011), available at: http://
www.sec.gov/news/studies/2011/719b-study.pdf. In
preparing this report, Commission and CFTC staff
coordinated extensively with international financial
institutions and foreign regulators.
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D. Substituted Compliance
As noted above, we recognize the
potential, in a market as global as the
security-based swap market, that market
participants who engage in cross-border
security-based swap activity may be
subject to conflicting or duplicative
compliance obligations. To address this
possibility, we are proposing a
‘‘substituted compliance’’ framework
under which we would consider
permitting compliance with
requirements in a foreign41 regulatory
system to substitute for compliance with
certain requirements of the Exchange
Act relating to security-based swaps,
provided that the corresponding
requirements in the foreign regulatory
system are comparable to the relevant
provisions of the Exchange Act.42 The
availability of substituted compliance
should reduce the likelihood that
market participants would be subject to
potentially conflicting or duplicative
sets of rules.
As discussed more fully below, the
Commission would perform
comparability analysis and make
substituted compliance determinations
with respect to four separate categories
of requirements.43 If, for example, a
foreign regulatory system achieves
comparable regulatory outcomes in
three out of the four categories, then the
Commission would permit substituted
compliance with respect to those three
categories of comparable requirements,
but not for the one, non-comparable
category for which comparable
regulatory outcomes are not achieved. In
other words, we are not proposing an
‘‘all-or-nothing’’ approach. In addition,
in making comparability determinations
within each category of requirements,
the Commission is proposing to take a
holistic approach; that is, we would
ultimately focus on regulatory outcomes
rather than a rule-by-rule comparison.
Substituted compliance therefore
should accept differences between
regulatory regimes when those
41 In this release, the term ‘‘foreign’’ is used
interchangeably with the term ‘‘non-U.S.’’ See, e.g.,
note 372, infra (discussing the definition of ‘‘foreign
security-based swap dealer’’).
42 See Section XI, infra.
43 Specifically, the Commission is proposing to
make substituted compliance determinations with
respect to the following categories of requirements:
(i) Requirements applicable to registered securitybased swap dealers in Section 15F of the Exchange
Act and the rules and regulations thereunder; (ii)
requirements relating to regulatory reporting and
public dissemination of security-based swaps; (iii)
requirements relating to clearing for security-based
swaps; and (iv) requirements relating to trade
execution for security-based swaps. See Section XI,
infra.
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differences nevertheless accomplish
comparable regulatory outcomes.
E. Conclusion
In proposing these rules, forms, and
interpretations, the Commission is
mindful that the security-based swap
market is global in nature and
developed prior to the enactment of the
Dodd-Frank Act.44 There are challenges
involved in imposing a comprehensive
regulatory regime on existing markets,
particularly ones that have not been
subject to the particular regulation that
the Dodd-Frank Act provides. Any rules
and interpretive guidance we adopt
governing the application of Title VII to
cross-border activities could
significantly affect the global securitybased swap market. As discussed
further below, to the extent practicable
and consistent with our statutory
mandate,45 the Commission has
proposed these rules and interpretations
with the intent to achieve the regulatory
benefits intended by the Dodd-Frank
Act and to facilitate a well-functioning
global security-based swap market,
including by taking into account the
impact these proposed rules and
interpretations will have on
counterparty protection, transparency,
systemic risk, liquidity, efficiency, and
competition in the market. In addition,
the Commission is mindful of the fact
that the application of Title VII to crossborder activities raises issues of
potential conflict or overlap with
foreign regulatory regimes. Furthermore,
the Commission is attentive to the fact
that a number of registrants may be
registered with both us and the CFTC.46
The rules and interpretations
proposed today represent the
Commission’s preliminary views
regarding the application of Title VII to
cross-border security-based swap
activities and to non-U.S. persons who
act in capacities regulated under the
Dodd-Frank Act. We note that these
proposed rules and interpretations are
tailored to the unique circumstances of
the security-based swap market, and as
such would not necessarily be
appropriate to apply to the
Commission’s regulation of traditional
securities markets. We also recognize
that there are a number of possible
alternative approaches to applying Title
VII in the cross-border context.
Accordingly, the Commission invites
public comment regarding all aspects of
44 See
Section II, infra.
Section II.C, infra (discussing the
principles guiding proposed approach to applying
Title VII in the cross-border context).
46 All references in this release to an entity that
is ‘‘registered’’ indicate an entity that is registered
with the Commission, unless otherwise indicated.
45 See
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the proposed approach, including each
proposed rule and interpretation
contained herein, and potential
alternative approaches. In particular,
data and comment from market
participants and other interested parties
with respect to the likely effect of each
proposed rule and interpretation
regarding application of a specific Title
VII requirement, and the effect of such
proposed application in the aggregate,
will be particularly useful to the
Commission in evaluating possible
modifications to the proposal and
understanding the consequences of the
substantive rules that have not yet been
adopted under Title VII.
II. Overview of the Security-Based
Swap Market and the Legal and Policy
Principles Guiding the Commission’s
Approach to the Application of Title
VII to Cross-Border Activities
In this section, the Commission
provides a general overview of the
security-based swap market that informs
our proposed implementation of Title
VII, including a description of the
various dealing structures used by U.S.based and foreign-based entities to
conduct their security-based swap
businesses, and existing clearing,
reporting, and trade execution practices.
We also discuss the Commission’s
preliminary views on the scope of
application of Title VII and the
principles guiding our proposed
approach to applying Title VII in the
cross-border context.
A. Overview of the Security-Based Swap
Market
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1. Global Nature of the Security-Based
Swap Market
The security-based swap market is a
global market.47 Security-based swap
business currently takes place across
national borders, with agreements
negotiated and executed between
counterparties often in different
jurisdictions (and at times booked and
risk-managed in still other
jurisdictions).48
The global nature of the securitybased swap market is evidenced by the
47 See, e.g., IIB Letter at 1 (noting the ‘‘truly global
nature of the OTC derivatives market’’); Cleary
Letter IV at 2 (noting that swaps and security-based
swaps trade in a ‘‘unique global market’’); Socie´te´
Ge´ne´rale Letter II at 2 (noting the ‘‘global nature of
the derivatives business’’); see also Bank of
International Settlements (‘‘BIS’’), Committee on the
Global Financial System, No. 46, The macro
financial implications of alternative configurations
for access to central counterparties in OTC
derivatives markets (Nov. 2011) at 1, available at:
http://www.bis.org/publ/cgfs46.pdf (referring to the
‘‘globalized nature of the market, in which a
significant proportion of OTC derivatives trading is
undertaken across borders’’).
48 See, e.g., SIFMA Letter I at 2.
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data available to the Commission.49
Based on market data in the Depository
Trust and Clearing Corporation’s Trade
Information Warehouse (‘‘DTCC–
TIW’’),50 viewed from the perspective of
the domiciles of the counterparties
booking credit default swap (‘‘CDS’’)
transactions, approximately 49% of U.S.
single-name CDS transactions in 2011
were cross-border transactions between
a U.S.-domiciled 51 counterparty and a
foreign-domiciled counterparty 52 and
an additional 44% of such CDS
transactions were between two foreigndomiciled counterparties.53 Thus,
approximately 7% of the U.S. singlename CDS transactions in 2011 were
between two U.S.-domiciled
counterparties.54 These statistics
indicate that cross-border transactions
are the norm, not the exception, in the
security-based swap market.55
Accordingly, the question of how the
Commission is implementing Title VII
with respect to security-based swaps
49 See Section XV.B, infra (discussing in detail
the global nature of the security-based swap
market).
50 The information was made available to the
Commission in accordance with the agreement
between DTCC–TIW and the OTC Derivatives
Regulatory Forum (‘‘ODRF’’).
51 The domicile classifications in DTCC–TIW are
based on the market participants’ own reporting
and may not have been verified. Prior to enactment
of the Dodd-Frank Act, funds and accounts did not
formally report their domicile to DTCC–TIW
because there was no systematic requirement to do
so. After enactment of the Dodd-Frank Act, the
DTCC–TIW has collected the registered office
location of the account or fund. This information
is self-reported on a voluntary basis. It is possible
that some market participants may misclassify their
domicile status because the databases in DTCC–
TIW do not assign a unique legal entity identifier
to each separate entity. Notwithstanding this
limitation, we believe that the cross-border and
foreign activity presented in the analysis by the
Commission’s Division of Risk, Strategy, and
Financial Innovation demonstrates the nature of the
CDS market. See Section XV.B.2.c, infra.
52 DTCC–TIW classified a foreign branch or
foreign subsidiary of a U.S. domiciled entity as
foreign-domiciled. Therefore, CDS transactions with
a foreign-domiciled counterparty include CDS
transactions with a foreign branch or foreign
subsidiary of a U.S.-domiciled entity as
counterparty.
53 Put another way, in 2011, a vast majority
(approximately 93%) of U.S. single-name CDS
transactions directly involved at least one foreigndomiciled counterparty. This observation is based
on the data compiled by the Commission’s Division
of Risk, Strategy, and Financial Innovation on
single-name CDS transactions with U.S. reference
entities from the DTCC–TIW between January 1,
2011, and December 31, 2011. See Section
XV.B.2.d, infra.
54 Id.
55 We note, however, that, in addition to
classifying transactions between a U.S. counterparty
and a foreign branch of a U.S. bank as a crossborder transaction (see note 51, supra), these
statistics characterize as cross-border transactions
those in which all or substantially all of the activity
takes place in the United States and all or much of
the risk of the transactions ultimately is borne by
U.S. persons.
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will, to a large extent, be affected by
how the Commission applies Title VII to
the cross-border transactions that are the
majority of security-based swaps.
2. Dealing Structures
Dealers use a variety of business
models and legal structures to conduct
security-based swap dealing business 56
with counterparties in jurisdictions all
around the world.57 Commenters have
indicated that both U.S.-based and
foreign-based entities use certain
dealing structures for a variety of legal,
tax, strategic, and business reasons that
often pre-date the enactment of the
Dodd-Frank Act.58 Among the reasons
cited for the variety of dealing structures
is the desire of counterparties to reduce
risk and enhance credit protection based
on the particular characteristics of each
entity’s business.59
In this subsection, we describe certain
dealing structures that U.S.-based
entities and foreign-based entities in the
security-based swap market might use.
In each of these dealing structures,
because the booking entity is the
counterparty to the security-based swap
transaction resulting from the dealing
activity (i.e., the principal) and bears the
ongoing risk of performance on the
transaction, we view the booking entity,
and not the intermediary that acts as an
agent on behalf of the booking entity to
originate the transaction, as the dealing
entity.60
(a) U.S. Bank Dealer
A U.S. bank holding company may
use a U.S. subsidiary that is a banking
entity to deal directly with U.S. and
foreign counterparties. Such U.S. bank
dealer may use a sales force in its U.S.
home office to originate security-based
swap transactions in the United States
and use separate sales force in foreign
branches to originate security-based
swap transactions with counterparties
in foreign local markets.61 The resulting
security-based swap transactions may be
56 As used in this release, ‘‘security-based swap
dealing,’’ ‘‘security-based swap dealing activity,’’
‘‘dealing activity,’’ and related concepts have the
meaning described in the Intermediary Definitions
Adopting Release, 77 FR 30596, unless otherwise
indicated in this release.
57 See, e.g., Cleary Letter IV at 5; Davis Polk Letter
I at 2–3; IIB Letter at 7.
58 See, e.g., Cleary Letter at 3.
59 See, e.g., SIFMA Letter at 2.
60 See Intermediary Definitions Adopting Release,
77 FR 30617 n.264 (‘‘A sales force, however, is not
a prerequisite to a person being a security-based
swap dealer. For example, a person that enters into
security-based swaps in a dealing capacity can fall
within the dealer definition even if it uses an
affiliated entity to market and/or negotiate those
security-based swaps (e.g., the person is a booking
entity).’’). See also Section III.D, infra.
61 See Sullivan & Cromwell Letter at 2.
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booked in the home office of the U.S.
bank or in a foreign branch of the
bank.62
(b) U.S. Non-bank Dealer
A U.S.-based holding company may
use a non-bank subsidiary to conduct
security-based swap dealing activity in
the U.S. market and foreign local
markets. The U.S. non-bank dealer may
act as principal to originate and book
transactions in the United States and
use a sales force in the foreign local
markets (e.g., salespersons employed by
its foreign affiliate) as agent to originate
transactions on its behalf, and then
centrally book the resulting transactions
in the U.S. non-bank dealer. In some
situations, such as where the holding
company has rated debt, but the U.S.
non-bank dealer does not, the U.S. nonbank dealer’s performance under
security-based swaps may be supported
by a parental guarantee provided by the
holding company.63 The guarantee
would typically give counterparties to
the U.S. non-bank dealer direct recourse
to the holding company for obligations
owed by such non-bank dealer under
the security-based swaps as though the
guarantor had entered into the
transactions directly with the
counterparties.64
(c) Foreign Subsidiary Guaranteed by a
U.S. Person
A U.S.-based holding company also
may conduct dealing activity in both
U.S. markets and foreign markets out of
a foreign subsidiary.65 The foreign
subsidiary may use a sales force in the
United States (e.g., salespersons
employed by its U.S. affiliate) to
originate security-based swap
transactions with counterparties in the
U.S. markets, or may directly solicit,
negotiate, and execute security-based
swap transactions with counterparties
in the U.S. markets from outside the
United States, and centrally book the
resulting transactions itself. The foreign
subsidiary also may conduct security62 See
id. at 3–4.
Cleary Letter IV at 10 (discussing a U.S.
holding company providing a guarantee of
performance on the obligations of its foreign swap
dealing subsidiary).
64 See Intermediary Definitions Adopting Release,
77 FR 30689. See also Product Definitions Adopting
Release, 77 FR 48227 (stating that the Commission
would consider issues involving cross-border
guarantees of security-based swaps in a separate
release addressing the application of Title VII in the
cross-border context).
65 See, e.g., Sullivan & Cromwell Letter, at 3–4
(stating that Bank of America Corporation,
Citigroup Inc. and JPMorgan Chase & Co. conduct
swap activities overseas through subsidiaries of the
bank holding company, Edge Corporation
subsidiaries of their U.S. banks and non-U.S.
branches of the bank); Cleary Letter IV at 10–11.
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63 See
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based swap dealing activity in various
foreign markets using local salespersons
as agent to originate and centrally book
the resulting security-based swap
transactions itself. In some situations,
such as where the U.S.-based holding
company has rated debt, but the foreign
subsidiary does not, the foreign
subsidiary’s performance under
security-based swaps may be supported
by a parental guarantee provided by the
holding company.66 Such guarantee
would typically give its counterparty
direct recourse to the U.S. parent acting
as guarantor for obligations owed by
such foreign subsidiary under the
security-based swaps. As a result, a
guarantee provided by a U.S. person of
another person’s obligations owed
under a security-based swap transaction
poses the same degree of risk to the
United States as the risk posed by a
transaction entered into directly by such
U.S. person.
In circumstances where a foreign nonbank subsidiary of a U.S. holding
company has sufficient creditworthiness and does not rely on a U.S.
parental guarantee to support its
creditworthiness, the risk of the
security-based swaps entered into by the
foreign subsidiary of a U.S.-based
holding company resides in the foreign
subsidiary outside the United States.
(d) Foreign-Based Dealer
i. Direct Dealing
Foreign-based entities also may use a
number of business models and legal
structures to conduct global securitybased swap dealing activity in both the
U.S. and foreign markets. Like U.S.
dealers, foreign dealers may deal
directly with U.S. counterparties and
non-U.S. counterparties without using
any agents in the local market to
intermediate and book the resulting
transactions in the foreign entities
themselves.67
ii. Intermediation in the United States
Foreign dealers also may use local
personnel with knowledge of and
expertise on the local markets to
intermediate security-based swap
transactions in each local market, for
instance, using salespersons in the
United States to originate security-based
swaps in the U.S. market, and either
book the resulting transactions in an
entity based in the United States (such
as a U.S. affiliate) or centrally book the
66 See
Cleary Letter IV at 10 (discussing a U.S.
holding company providing a guarantee of
performance on the obligations of its foreign swap
dealing subsidiary).
67 See Cleary Letter VI at 3, 13 (discussing direct
dealing by a foreign dealer from abroad); IIB Letter
at 7.
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resulting transactions in a foreign
central booking affiliate.68
Intermediation activity within the
United States on behalf of foreign
entities may occur in two principal legal
structures.
First, foreign dealers that are banking
entities may conduct dealing activity
with U.S. counterparties out of their
U.S. branches. In this structure, a
foreign banking entity may originate and
book transactions in its U.S. branch, or
the U.S. branch may originate
transactions that are booked in the
foreign home office.69
Second, both bank and non-bank
foreign dealers may conduct dealing
activity out of their U.S. subsidiaries.
The U.S. subsidiaries may act as
principal to originate and book securitybased swaps in the United States and
enter into inter-affiliate back-to-back
transactions with the foreign central
booking entity (usually the foreign
parent) for purposes of centralized
booking and centralized risk
management.70 The U.S. subsidiary also
may act as agent to originate securitybased swaps in the United States on
behalf of the foreign entity and the
resulting transactions would be booked
in a centralized foreign booking entity,
usually the foreign parent. In some
situations, such as where the foreignbased entity has rated debt, but the U.S.
subsidiary does not, the U.S.-based
subsidiary’s performance under
security-based swaps that it enters into
as principal may be supported by a
parental guarantee provided by the
foreign-based entity.71
The transactions originated by the
U.S. branch of a foreign bank or a U.S.
subsidiary of a foreign bank or non-bank
entity may not be limited to those with
U.S. counterparties in the U.S. securitybased swap market. Foreign bank or
non-bank entities may utilize their U.S.
branches or U.S. subsidiaries to conduct
dealing activity with, for instance, nonU.S. counterparties located in various
jurisdictions within the same region or
same time zones, such as Canada or
Latin America, and centrally book the
resulting transactions in the home
offices of the foreign entities
themselves. For example, a Canadian
counterparty might enter into a securitybased swap with a non-U.S.-based
dealer that solicits and negotiates the
transaction out of a U.S subsidiary
68 See Cleary Letter IV at 4, 21 (discussing the use
of U.S. affiliate to intermediate) and IIB Letter at 7.
69 See IIB Letter at 8.
70 See Cleary Letter IV at 10 (discussing interaffiliate transactions).
71 See id. (discussing a non-U.S. holding company
providing a guarantee on the obligations of its U.S.
swap dealing subsidiary).
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acting as agent but books the transaction
itself outside the United States.
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3. Clearing Practices
Prior to the enactment of the DoddFrank Act, there was no provision in the
Exchange Act or any other laws in the
United States for the mandatory clearing
of OTC derivatives. Although initiatives
related to central clearing had been
considered before 2008, the 2008
financial crisis brought a new focus on
CDS as a source of systemic risk and
contributed to a more general
recognition that central clearing parties
(‘‘CCPs’’) could play a role in helping to
manage bilateral counterparty credit risk
in OTC CDS.72
In November 2008, the Commission,
in consultation and coordination with
the Federal Reserve Board and the
CFTC, took steps to help facilitate the
prompt development of CCPs for OTC
derivatives.73 Specifically, the
Commission authorized the clearing of
OTC security-based swaps by permitting
certain clearing agencies to clear CDS on
a temporary conditional basis.74 As the
Commission and other regulatory
agencies monitored the activities of
those clearing agencies, a significant
volume of interdealer OTC CDS
72 The President’s Working Group on Financial
Markets made the central clearing of OTC
derivatives a top policy objective in 2008. See
Policy Objectives for the OTC Derivatives Market
(Nov. 14, 2008), available at: http://
www.treasury.gov/resource-center/fin-mkts/
Documents/policyobjectives.pdf; see also Policy
Statement on Financial Market Developments (Mar.
13, 2008), available at: http://www.law.du.edu/
images/uploads/presidents-working-group.pdf; and
Progress Update on March Policy Statement on
Financial Market Developments (Oct. 2008),
available at: http://www.treasury.gov/resourcecenter/fin-mkts/Documents/
q4progress%20update.pdf.
73 On November 14, 2008, the Commission
executed a Memorandum of Understanding with
the Board and the CFTC that established a
framework for consultation and information sharing
on issues related to central counterparties for the
OTC derivatives market. See http://www.sec.gov/
news/press/2008/2008-269.htm.
74 The Commission authorized five entities to
clear CDS. See CDS clearing by ICE Clear Europe
Limited, Exchange Act Release Nos. 60372 (July 23,
2009), 74 FR 37748 (July 29, 2009) and 61973 (Apr.
23, 2010), 75 FR 22656 (Apr. 29, 2010); CDS
clearing by Eurex Clearing AG, Exchange Act
Release Nos. 60373 (July 23, 2009), 74 FR 37740
(July 29, 2009) and 61975 (Apr. 23, 2010), 75 FR
22641 (Apr. 29, 2010); CDS clearing by Chicago
Mercantile Exchange Inc., Exchange Act Release
Nos. 59578 (Mar. 13, 2009), 74 FR 11781 (Mar. 19,
2009), 61164 (Dec. 14, 2009), 74 FR 67258 (Dec. 18,
2009) and 61803 (Mar. 30, 2010), 75 FR 17181 (Apr.
5, 2010); CDS clearing by ICE Clear Credit LLC
(formerly ICE Trust US LLC), Exchange Act Release
Nos. 59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 12,
2009), 61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10,
2009) and 61662 (Mar. 5, 2010), 75 FR 11589 (Mar.
11, 2010); Temporary CDS clearing by LIFFE A&M
and LCH.Clearnet Ltd., Exchange Act Release No.
59164 (Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009)
(‘‘CDS Clearing Exemption Orders’’).
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transactions and a smaller volume of
dealer-to-non-dealer OTC CDS
transactions were centrally cleared on a
voluntary basis.75 The level of voluntary
clearing in swaps and security-based
swaps has steadily increased since that
time. Although the volume of
interdealer CDS cleared to date is quite
large,76 many security-based swap
transactions are still ineligible for
central clearing, and many transactions
in security-based swaps eligible for
clearing at a CCP continue to settle
bilaterally.
Voluntary clearing of security-based
swaps in the United States is currently
limited to CDS products. Central
clearing of security-based swaps began
in March 2009 for index CDS products,
in December 2009 for single-name
corporate CDS products, and in
November 2011 for single-name
sovereign CDS products. At present,
there is no central clearing in the United
States for security-based swaps that are
not CDS products, such as those based
on equity securities. The level of
clearing activity appears to have
steadily increased as more CDS have
become eligible to be cleared.77
4. Reporting Practices
The OTC derivatives markets have
historically been largely opaque.78 With
respect to CDS, for example, the
Government Accountability Office
found in 2009 that ‘‘comprehensive and
consistent data on the overall market
have not been readily available,’’ that
‘‘authoritative information about the
actual size of the CDS market is
generally not available,’’ and that
regulators currently are unable ‘‘to
monitor activities across the market.’’ 79
The reporting of comprehensive OTC
derivative transaction data to trade
repositories is intended to address the
lack of transparency in this market, and
as such it was one of the G20 regulatory
reform commitments previously
discussed.80
The first trade repositories were
established in the mid-2000s.81 The
development of trade repositories for
different asset classes accelerated
following the 2009 G20 commitment in
this area, and as legislative and
regulatory requirements began to be put
in place. As of the end of the first
quarter of 2013, fourteen FSB member
jurisdictions had legislation in place
either requiring reporting of OTC
derivatives contracts or authorizing
regulators to implement such
regulations.82 In addition, as of the date
of publication of the FSB Progress
Report April 2013, eighteen trade
repositories were either registered or in
the process of becoming registered and
twelve were operational, meaning,
typically, that they were at least
accepting transaction reports from more
than one asset class.83
Prior to the Dodd-Frank Act, global
trade repositories had been established
for credit, interest rate, and equity
75 Voluntary CCP clearing grew out of a series of
meetings beginning in September 2005 hosted by
the Federal Reserve Bank of New York with major
market participants and their domestic and
international supervisors for the purpose of
discussing problems in the processing of CDS, and
related risk management and control issues. See
http://www.ny.frb.org/newsevents/news/markets/
2005/an050915.html. In June 2008 the attendees
agreed to an agenda for improvement in the
derivatives market infrastructure that included
‘‘developing a central counterparty for credit
default swaps that, with a robust risk management
regime, can help reduce systemic risk.’’ See http://
www.ny.frb.org/newsevents/news/markets/2008/
ma080609.html; see also https://www.theice.com/
marketdata/reports/ReportCenter.shtml.
76 As of April 19, 2012, ICE Clear Credit had
cleared approximately $15.6 trillion notional
amount of CDS contracts based on indices of
securities and approximately $1.5 trillion notional
amount of CDS contracts based on individual
reference entities or securities. As of April 19, 2012,
ICE Clear Europe had cleared approximately Ö7.2
trillion notional amount of CDS contracts based on
indices of securities and approximately Ö1.2 trillion
notional amount of CDS contracts based on
individual reference entities or securities. See
Clearing Agency Standards Adopting Release, 77 FR
66236 n.184 (citing https://www.theice.com/
marketdata/reports/ReportCenter.shtml).
77 See Section XV.B.2(e), infra.
78 See FSB, Implementing OTC Derivatives
Market Reforms (Oct. 25, 2010) (‘‘FSB October 2010
Report’’), at 11, available at: http://
www.financialstabilityboard.org/publications/
r_101025.pdf.
79 Government Accountability Office, ‘‘Systemic
Risk: Regulatory Oversight and Recent Initiatives to
Address Risk Posed by Credit Default Swaps,’’
GAO–09–397T (Mar. 2009), at 2, 5, 27, available at:
http://www.gao.gov/new.items/d09397t.pdf.
80 See note 35 and accompanying text, supra. See
also SDR Proposing Release, 75 FR 77307 (‘‘Under
the Dodd-Frank Act, SDRs are intended to play a
key role in enhancing transparency in the [securitybased swap] market by retaining complete records
of [security-based swap] transactions, maintaining
the integrity of those records, and providing
effective access to those records to relevant
authorities and the public in line with their
respective information needs. The enhanced
transparency provided by an SDR is important to
help regulators and others monitor the build-up and
concentration of risk exposures in the [securitybased swap] market. Without an SDR, data on
[security-based swap] transactions is dispersed and
not readily available to regulators and others.’’).
81 See Committee on Payment and Settlement
Systems (‘‘CPSS’’) and Technical Committee of
IOSCO, Report on OTC Derivatives Data Reporting
and Aggregation Requirements (Jan. 2012), at 5,
available at: http://www.iosco.org/library/pubdocs/
pdf/IOSCOPD366.pdf (‘‘CPSS–IOSCO Data
Report’’).
82 FSB Progress Report April 2013 at 19.
83 Id. at 20–21, 63–65. Ten trade repositories were
offering trade reporting on interest rate derivatives
transactions; eight were offering trade reporting on
commodity derivative transactions; seven were
offering trade reporting on equity derivatives
transactions; eight were offering trade reporting on
foreign exchange derivative transactions; and seven
were offering trade reporting on credit derivatives.
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derivatives.84 In addition, in June 2010,
the OTC Derivatives Regulators’ Forum
(‘‘ODRF’’) 85 developed indicative
guidance for Warehouse Trust 86 aiming
to identify data that authorities would
expect to request from Warehouse Trust
to carry out their mandates.87
Public availability of trade repository
data varies globally and has changed
significantly over time. For example,
since October 2008, on a weekly basis,
DTCC has published aggregated data via
its Web site.88 More generally, in a
recent FSB survey, all trade repositories
that responded stated that they provide
or intend to provide, transaction data on
OTC derivatives to the public. In some
cases and for some products, trading
information is provided on a real-time
basis. Some trade repositories publicly
84 Pursuant to initiatives led by the OTC
Derivatives Supervisors Group (‘‘ODSG’’), in 2009
the largest OTC derivatives dealers at the global
level committed to reporting all of their CDS trades
to a trade repository. At that time, a trade repository
for credit derivatives was already in existence and
used by the industry. To promote the development
of trade repositories for all interest rate and equity
derivatives, in 2008 and 2009 ISDA sought
proposals for the creation of central trade
repositories for these asset classes. Two entities
were selected to provide trade repository functions
for these asset classes. See FSB October 2010 Report
at 44. The ODSG originated in 2005, when the
Federal Reserve Bank of New York (‘‘New York
Federal Reserve’’) hosted a meeting with
representatives of major OTC derivatives market
participants and their domestic and international
supervisors, including the Commission, in order to
address the emerging risks of inadequate
infrastructure for the rapidly growing market in
credit derivatives. The ODSG is chaired by the New
York Federal Reserve.
85 The ODRF, formed in January 2009, brings
together representatives from central banks,
prudential supervisors, and securities and market
regulators to discuss issues of common interest,
regarding OTC derivatives central counterparties
and trade repositories. The ODRF’s scope and focus
include information sharing/needs and oversight
co-ordination and co-operation.
86 The Warehouse Trust Company LLC
(‘‘Warehouse Trust’’) today provides certain posttrade processing services to DTCC–TIW. DTCC–TIW
provides a centralized electronic trade database for
OTC credit derivatives contracts.
87 See FSB October 2010 Report at 63. Building
on this work, CPSS and IOSCO have published a
consultation paper setting forth more
comprehensive guidance regarding trade
repositories more broadly. The paper provides
guidance to authorities that supervise trade
repositories; regulators, supervisors, resolution
authorities, central banks, and other public-sector
authorities (collectively, ‘‘authorities’’) that request
OTC derivative data from trade repositories; and
trade repositories. This guidance concerns the types
of data to which authorities will typically require
access and possible approaches to addressing
potential constraints and concerns that may prevent
effective access to such data. See CPSS and IOSCO,
Consultative Report on Authorities’ Access to Trade
Repository Data (April 2013), available at: http://
iosco.org/library/pubdocs/pdf/
IOSCOPD408.pdf?v=1.
88 See CPSS–IOSCO Data Report at 45–46.
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disclose only aggregated, end-of-day
information.89
5. Trade Execution Practices
Unlike the markets for cash equity
securities and listed options, the market
for security-based swaps currently is
characterized generally by bilateral
negotiation directly between two
counterparties in the OTC market and is
largely decentralized; many instruments
are individually negotiated and often
customized; and many security-based
swaps are not centrally cleared.90 The
historical one-to-one nature of trade
negotiation in security-based swaps has
fostered various types of trading venues
and execution practices, ranging among
the following:
Bilateral Negotiations
‘‘Bilateral negotiation’’ refers to the
execution practice whereby one party
uses the telephone, email or other
means of communication to directly
contact a potential counterparty to
negotiate and execute a security-based
swap. In bilateral negotiation and
execution, only the two parties to the
transaction are aware of the terms of the
negotiation and the final terms of the
agreement.91
30979
respond to the RFQ with a quote.
Responses to the RFQ are firm. The
requestor then has the opportunity to
review the responses and accept the best
quote. A multi-dealer RFQ platform
provides a certain amount of pricing
information, depending on its
characteristics.93
Central Limit Order Books
A central limit order book system or
similar system refers to a trading system
in which firm bids and offers are posted
for all participants to see, with the
identity of the parties withheld until a
transaction occurs. Bids and offers are
then matched based on price-time
priority or other established parameters
and trades are executed accordingly.
The quotes on a limit order book system
are firm. In general, a limit order book
system provides greater pricing
information than the three platforms
described above because all participants
can view bids and offers before placing
their bids and offers.94 Currently, limit
order books for the trading of securitybased swaps in the United States are
utilized by inter-dealer brokers for
dealer-to-dealer transactions.
Multi-Dealer RFQ Platforms
A multi-dealer RFQ electronic trading
platform refers to a multi-dealer RFQ
system whereby a requester can send an
RFQ to solicit quotes on a certain
security-based swap from multiple
dealers at the same time. After the RFQ
is submitted, the recipients have a
prescribed amount of time in which to
Brokerage Trading
‘‘Brokerage trading’’ refers to an
execution practice used by brokers to
execute security-based swaps on behalf
of customers, often in larger sized
transactions. In such a system, a broker
receives a request from a customer
(which may be a dealer) who seeks to
execute a specific type of security-based
swap. The broker then interacts with
other customers (which may also be
dealers) to fill the request and execute
the transaction. This model often is
used by dealers that seek to transact
with other dealers through the use of an
interdealer broker as an intermediary. In
this model, participants may or may not
be able to see bids and offers of other
participants.95
These various trading venues and
execution practices provide different
degrees of pre-trade pricing information
and different levels of access. The
Commission currently does not have
sufficient information with respect to
the volume of security-based swap
transactions executed across these
different trading venues and execution
practices to evaluate the individual
impact of such venues and practices on
89 See OTC Derivatives Market Reforms, Fourth
Progress Report on Implementation (Oct. 31, 2012)
at 5, available at: http://
www.financialstabilityboard.org/publications/
r_121031a.pdf.
90 See SB SEF Proposing Release, 76 FR 10951.
91 See id.
92 See id. at 10951.
93 For example, to the extent that a RFQ platform
sets limits on the number of dealers to whom a
customer may send an RFQ, the customer’s pretrade transparency is restricted to that number of
quotes it receives in response to its RFQ. See SB
SEF Proposing Release, 76 FR 10952.
94 See id.
95 See id.
Single-Dealer RFQ Platforms
A single-dealer request for quote
(‘‘RFQ’’) platform refers to an electronic
trading platform where a dealer may
post indicative quotes for security-based
swaps in various asset classes that the
dealer is willing to trade. Only the
dealer’s approved customers have
access to the platform. When a customer
wishes to transact in a security-based
swap, the customer requests an
executable quote, the dealer provides
one, and if the customer accepts the
dealer’s quote, the transaction is
executed electronically. This type of
platform generally provides indicative
quotes on a pricing screen, but only
from one dealer to its customers.92
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pricing information available in the
security-based swap market.
6. Broad Economic Considerations of
Cross-Border Security-Based Swaps 96
Our primary economic considerations
for promulgating rules and
interpretations regarding the application
of Title VII to cross-border activities
include the potential risks of securitybased swaps to the U.S. financial
system 97 that could affect financial
stability, the level of transparency and
counterparty protection in the securitybased swap market, the costs to market
participants, and the impact of such
rules and interpretations on liquidity,
efficiency, and competition in the
market. Unlike most other securities
transactions, a security-based swap
gives rise to ongoing obligations
between transaction counterparties
during the life of the transaction. This
means that each counterparty to the
transaction undertakes the obligation to
perform the security-based swap in
accordance with its terms and bears the
counterparty credit risk and market risk
until the transaction is terminated.98
The cross-border rules ultimately
adopted by the Commission could
materially impact the economic effects
of the final Title VII regulatory
requirements.
sroberts on DSK5SPTVN1PROD with PROPOSALS
(a) Major Economic Considerations
In determining how Title VII
requirements should apply to persons
and transactions in the cross-border
context, the Commission is aware of the
potentially significant trade-offs
inherent in our policy decisions. For
example, it is possible that
counterparties excluded from the Title
VII regulatory framework would not,
among other things, receive the same
level of counterparty protection or
impartial access to trading venues and
information as those included in the
Title VII regulatory framework.
However, it is also possible that market
participants excluded from the Title VII
96 See Section XV, infra (providing more detailed
commentary on the economic effects of the
proposed rules, including supporting citations).
97 The Commission generally understands the
‘‘U.S. financial system’’ to include the U.S. banking
system and the U.S. financial markets, including
the U.S. security-based swap market, the traditional
securities markets (e.g., the debt and equity
markets), and the markets for other financial
activities (e.g., lending).
98 See Intermediary Definitions Adopting Release,
77 FR 30616–17 (noting that ‘‘the completion of a
purchase or sale transaction’’ in the secondary
equity or debt markets ‘‘can be expected to
terminate the mutual obligations of the parties,’’
unlike security-based swap transactions, which
often give rise to ‘‘an ongoing obligation to
exchange cash flows over the life of the
agreement’’).
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regulatory framework would face lower
regulatory burdens and lower
compliance costs associated with their
security-based swap activity. Further, it
is possible that these trade-offs could
alter the incentives for individuals to
participate in the security-based swap
market, which may impact the overall
market, affecting its liquidity, as well as
its efficiency and the competitive
dynamics among participants. In
addition, we also recognize that
regulators in other jurisdictions are
currently engaged in implementing their
own regulatory reforms of the OTC
derivatives markets and that our
proposed application of Title VII to
cross-border activities may affect the
policy decisions of these other
regulators as they seek to address
potential conflicts or duplication in the
regulatory requirements that apply to
market participants under their
authority. In proposing our rules and
interpretations in this release, the
Commission has considered the benefits
of the Title VII regulatory framework,
including counterparty protection and
access to information, as well as the
costs of compliance, taking into account
the potential impact of the rules and
interpretations on liquidity, efficiency,
and competition in the security-based
swap market.
Moreover, the costs and benefits of
various Title VII substantive
requirements may not be the same for
each individual market participant,
depending on the role it plays, the
market function it performs, and the
activity it engages in in the securitybased swap market. For example, Title
VII requirements for security-based
swap dealers and major security-based
swap participants may impose
significant costs on persons falling
within the definitions of security-based
swap dealer and major security-based
swap participant that are not borne by
other market participants. The costs of
these requirements may provide
economic incentive for some market
participants falling within the
definitions of security-based swap
dealer and major security-based swap
participant to restructure their securitybased swap business to operate wholly
outside of the Title VII regulatory
framework, exiting the security-based
swap market in the United States and
not transacting with U.S. persons.
Conversely, certain Title VII
requirements may promote financial
stability and increase market
participants’ confidence in entering into
security-based swap transactions.
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(b) Global Nature and
Interconnectedness of the SecurityBased Swap Market
In considering the proposed approach
to the application of the Title VII
requirements, the Commission has been
informed by the analysis of current
market activity described in this
release,99 including the extent of crossborder trading activity in the securitybased swap market.100 The securitybased swap transactions between U.S.and non-U.S. domiciled market
participants provide conduits of risk
into the U.S. financial system, which
could affect the safety and soundness of
the U.S. financial system. Similarly,
such transactions also provide conduits
for liquidity into the U.S. financial
system. As a consequence, changes to
incentives or costs that result from the
application of U.S. regulatory
requirements may have effects on the
liquidity of the global market, as well as
its efficiency and competitive dynamics.
With respect to conduits of risk, one
area of particular concern in the current
security-based swap market is the risks
that arise when a large market
participant becomes financially
distressed, including the potential for
sequential counterparty failure. A
default by one or more security-based
swap dealers or major security-based
swap participants could produce
spillovers or contagion by reducing the
willingness and/or ability of market
participants to extend credit to each
other, and thus could substantially
reduce liquidity and valuations for
particular types of financial
instruments.101
The experience of American
International Group, Inc. (‘‘AIG’’), a
Delaware corporation based in New
York, and its subsidiary, AIG Financial
Products Corp. (‘‘AIG FP’’), a Delaware
corporation based in Connecticut,
during and after the 2008 financial crisis
both illustrates spillovers and contagion
arising from security-based swap
transactions and demonstrates how
cross-border transactions could
contribute to the destabilization of the
99 See Section II.A, supra, and Section XV.B.2,
infra.
100 For example, review of the DTCC–TIW singlename CDS transactions executed in 2011 reveals
that approximately 49% of the U.S. single-name
CDS transactions were between one U.S.-domiciled
counterparty and one foreign-domiciled
counterparty, and 44% of such transactions were
between two foreign-domiciled counterparties. See
Section II.A.1, supra, and Section XV.B.2(d), infra.
101 See, e.g., Markus K. Brunnermeier and Lasse
Heje Pedersen, ‘‘Market Liquidity and Funding
Liquidity,’’ Rev. Financ. Stud. (2009); Denis Gromb
and Dimitri Vayanos, ‘‘A Model of Financial Market
Liquidity,’’ Journal of the European Economic
Association (2010).
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U.S. financial system if the securitybased swap market were not adequately
regulated.102 AIG FP sold extensive
amounts of credit protection in the form
of CDS in the years leading up to the
crisis,103 largely on the strength of AIG’s
AAA rating; AIG FP’s obligations were
guaranteed by its parent AIG.104 AIG
FP’s CDS business reflected the global
nature of the security-based swap
market because, although both AIG and
AIG FP were headquartered in the
United States, much of AIG FP’s CDS
business was run out of its London
office,105 and AIG FP sold credit
protection to counterparties both within
the United States and around the
world.106
As the subprime mortgage market in
the United States collapsed, the ongoing
obligations borne by AIG FP and,
through its guarantees, its parent AIG,
arising from AIG FP’s CDS transactions
produced losses that threatened to
overwhelm both AIG FP and AIG. The
Federal Reserve Bank of New York
established a credit facility to prevent
AIG from collapsing. These funds were
later supplemented by financial support
from the U.S. Treasury and the Federal
Reserve, resulting in over $180 billion
in financial assistance.107
102 More generally, the Lehman Brothers Holding
Inc. bankruptcy offers an example of how risk can
spread across affiliated entities of multinational
financial institutions. See Lehman Brothers
International (Europe) in Administration, Joint
Administrators’ Progress Report for the Period 15
September 2008 to 14 March 2009 (Apr. 14, 2009),
available at: http://www.pwc.co.uk/assets/pdf/lbieprogress-report-140409.pdf (‘‘The global nature of
the Lehman business with highly integrated, trading
and non-trading relationships across the group led
to a complex series of inter-company positions
being outstanding at the date of Administration.
There are over 300 debtor and creditor balances
between LBIE and its affiliates representing $10.5B
of receivables and $11.0B of payables as at 15
September 2008.’’).
103 In 2007, AIG FP’s CDS portfolio reached a
peak of $527 billion. Congressional Oversight Panel,
June Oversight Report, ‘‘The AIG Rescue, Its Impact
on Markets, and the Government’s Exit Strategy,’’
June 2010, at 23, available at: http://www.gpo.gov/
fdsys/pkg/CPRT-111JPRT56698/pdf/CPRT111JPRT56698.pdf (‘‘AIG Report’’).
104 See Intermediary Definitions Adopting
Release, 77 FR 30689 n.1133 (‘‘AIGFP’s obligations
were guaranteed by its highly-rated parent company
. . . an arrangement that facilitated easy money via
much lower interest rates from the public markets,
but ultimately made it difficult to isolate AIGFP
from its parent, with disastrous consequences’’)
(quoting AIG Report at 20).
105 See AIG Report at 18.
106 See Office of the Special Inspector General for
the Troubled Asset Relief Program, Factors
Affecting Efforts to Limit Payments to AIG
Counterparties, at 20 (Nov. 17, 2009) (listing AIG
FP’s CDS counterparties, including a variety of U.S.
and foreign financial institutions), available at:
http://www.sigtarp.gov/Audit%20Reports/Factors_
Affecting_Efforts_to_Limit_Payments_to_AIG_
Counterparties.pdf.
107 See AIG Report at 2.
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As we discuss in more detail below,
security-based swap market regulators
need to take into account the spillover
and contagion effect of security-based
swap risk to avoid overburdening the
financial system. One way to mitigate
the spillover effect of a firm failure is to
impose capital standards that take into
account the security-based swap risk the
firm undertakes while allowing
flexibility in how it conducts securitybased swap business.108 At the same
time, the Commission is mindful that
the application of Title VII prudential
requirements such as capital and margin
impose costs on market participants that
could provide economic incentives to
restructure or separate their securitybased swap activity according to
geographical or jurisdictional regions, or
to engage in less security-based swap
activity, which may reduce the liquidity
or efficiency of the overall market.109
There are circumstances where risk
generated by security-based swaps may
reside in the United States while
conduits of such risk (e.g., securitybased swap transactions or persons
engaged in security-based swap
transactions) could take place or reside
outside the United States or outside the
scope of application of the Title VII
requirements. In these instances, the
Commission has considered the nature
of the risk, the magnitude of the risk,
and the existence of other financial
regulations, such as regulation of
systemically important financial
institutions in Title I and Title II of the
Dodd-Frank Act and banking
regulations.
The Commission is mindful that the
same interconnectedness in the
security-based swap market that may
provide conduits for risk also may mean
that changes to incentives or costs
caused by the application of U.S.
regulatory requirements may have
effects on the liquidity of the global
market, as well as its efficiency and
competitive dynamics. As described
below in Section XV.C, there are a
myriad of paths for liquidity as well as
risk to move throughout the financial
system in this interconnected market. In
addition, differences in regulatory
requirements between the United States
and non-U.S. jurisdictions may also
impact markets by changing the
competitive dynamics currently at play
in the interconnected global market. For
example, as articulated in Section XV.C,
some potential responses by market
participants to the proposed rules and
interpretations in this release may result
108 See Capital, Margin, and Segregation
Proposing Release, 77 FR 70218.
109 See id. at 70303–06.
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in lessened competition in the securitybased swap market within the United
States. Among other considerations,
some entities may determine that the
compliance costs arising from the
requirements of Title VII warrant exiting
the security-based swap market in the
United States and not transacting with
U.S. persons. These exits could result in
higher spreads and affect the ability and
willingness of end users to engage in
security-based swaps.
(c) Central Clearing
Many of the bilateral counterparty
credit risks associated with securitybased swaps can be mitigated by central
clearing. Central clearing of securitybased swaps provides a mechanism for
market participants to engage in
security-based swap activity without
having to assess the creditworthiness of
each counterparty. Clearing of securitybased swaps shifts the counterparty risk
from individual counterparties to CCPs
whose members collectively share the
default risk of all members.110 Central
clearing also requires consistent
application of mark-to-market pricing
and margin requirements, which
standardizes the settling of payment or
collateral delivery resulting from market
movements and minimizes the risk of
clearing member defaults.111
However, central clearing may also
pose risk to financial systems. Because
a CCP necessarily concentrates a large
number of otherwise bilateral contracts
into a single location, a CCP could itself
become systemically important.112
110 See, e.g., Darrell Duffie and Haoxiang Zhu,
‘‘Does a Central Clearing Counterparty Reduce
Counterparty Risk?’’ Stanford University, Working
Paper (2010), available at: http://www.stanford.edu/
∼duffie/DuffieZhu.pdf; Nout Wellink, ‘‘Mitigating
systemic risk in OTC derivatives markets,’’ Banque
de France, Financial Stability Review, No. 14—
Derivatives—Financial innovation and stability
(July 2010), available at: http://www.banquefrance.fr/fileadmin/user_upload/banque_de_france/
publications/Revue_de_la_stabilite_financiere/
etude15_rsf_1007.pdf.
111 See Christopher Culp, ‘‘OTC-Cleared
Derivative: Benefits, Costs, and Implications of the
Dodd-Frank Wall Street Reform and Consumer
Protection Act,’’ Journal of Applied Finance No. 2
(2010), available at: http://www.rmcsinc.com/
articles/OTCCleared.pdf.
112 The Financial Stability Oversight Council
(‘‘FSOC’’) can designate a CCP as systemically
important under Section 804 of the Dodd-Frank
Act. See, e.g., Craig Pirrong, ‘‘Mutualization of
Default Risk, Fungibility, and Moral Hazard: The
Economics of Default Risk Sharing in Cleared and
Bilateral Markets,’’ University of Houston, Working
Paper (2010), available at: http://business.nd.edu/
uploadedFiles/Academic_Centers/
Study_of_Financial_Regulation/
pdf_and_documents/clearing_moral_hazard_1.pdf
(‘‘[c]learing of OTC derivatives has been touted as
an essential component of reforms designed to
prevent a repeat of the financial crisis. A back-tobasics analysis of the economics of clearing suggests
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While a loss by any single member in
excess of its margin posted with the CCP
is likely to be absorbed by the CCP’s risk
capital structure, correlated losses
among many members, such as those
which occurred among many asset
classes during the 2008 financial crisis,
could diminish the effectiveness of the
risk mutualization structure of a CCP. Its
failure could create financial instability
through its members if the members, as
residual obligors to the default related
losses are unable to absorb the resulting
financial impact. Such an outcome
could lead to failure among CCP
member counterparties, particularly
when obligations are sizable, which may
be the case if the members are
themselves systemically important.
Certain aspects of Title VII are
intended to reduce the risk of CCP
failure by promoting sound risk
management practices among registered
clearing agencies, while also providing
open access to market participants.113
Sound risk management practices are
important among both domestic and
foreign CCPs, given the global nature of
CCP membership.114 When a CCP in the
United States has significant number of
foreign members, the CCP and its U.S.domiciled members would be exposed
to the foreign members. Similarly, when
U.S.-domiciled entities are members of
foreign domiciled CCPs, U.S. exposure
to a foreign institution is created that
may be systemically important.
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(d) Security-Based Swap Data Reporting
Certain Title VII requirements are
designed to increase market
transparency for regulators and among
security-based swap market
participants. Requirements of regulatory
reporting are designed to provide
regulators with a broad view of the
market and help monitor pockets of risk
that might not otherwise be observed by
market participants with an incomplete
view of the market. Separately,
requirements of post-trade reporting of
prices in real-time are intended to
promote price discovery and lower the
trading costs by lessening the
information advantage afforded certain
OTC market participants with the
largest order flow. Allowing all market
participants access to more information
that such claims are overstated, and that traditional
OTC mechanisms may be more efficient for some
instruments and some counterparties.’’).
113 See, e.g., Clearing Agency Standards Adopting
Release, 77 FR 66220.
114 Based on the analysis of the member positions
at ICE Clear Credit in the United States by the staff
in the Division of Risk, Strategy and Financial
Innovation, approximately half of the positions at
ICE Clear Credit in the United States are held by
foreign-domiciled dealing entities. See Section
XV.B.2(e), infra.
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about transactions’ prices and sizes
should create a more level playing field
and may promote the efficiency of
exchange or SEF trading of securitybased swaps. In particular, as in other
security markets, quoted bids and offers
should form and adjust according to the
reporting of executed trades. At the
same time, however, we recognize that
increased post-trade transparency also
could impact the liquidity of, and
competition in, the security-based swap
market.115 For example, market
participants may be less willing to
provide liquidity for large, potentially
market-moving trades if the
implementation of the Title VII public
dissemination requirements reveals
private information about future
hedging and inventory needs.
The increased transparency caused by
the Title VII reporting requirements
could be diminished if consistent
reporting requirements are not applied
to transactions across various
jurisdictions and information regarding
security-based swaps taking place in the
global market is not shared among
jurisdictions. For instance, the aggregate
exposures created by a particular
security-based swap or class of securitybased swaps may only be partially
observed if security-based swap
transactions span multiple jurisdictions.
As a result any single regulator may not
have a complete view of the securitybased swap risks and may
underestimate such risks. Separately, if
some regulatory regimes do not require,
or provide for less informative, posttrade reporting rules, then certain
transactions may gravitate to these
jurisdictions so that market participants
can escape reporting their transaction
prices. In both instances the increased
transparency contemplated by the Title
VII reporting requirements may be
diluted.
B. Scope of Title VII’s Application to
Cross-Border Security-Based Swap
Activity
Congress has given the Commission
authority in Title VII to implement a
security-based swap regulatory
framework. In the statutory definitions
and registration requirements for market
intermediaries and participants (i.e.,
security-based swap dealers and major
security-based swap participants) and
security-based swap infrastructures (i.e.,
SDRs, security-based swap clearing
agencies, and SB SEFs), Congress has
identified the types of security-based
swap activity that triggers Title VII
115 See Section XV.C, infra (discussing the effects
of our proposed cross-border approach on
competition, efficiency, and capital formation).
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registration and regulatory requirements
relevant to such persons or the
application of Title VII transaction-level
requirements.
We recognize that applying Title VII
to persons and transactions that fall
within the statutory definitions or
requirements may subject some persons
based outside the United States, or some
transactions arising from activity that
occurs in part inside and in part outside
the United States, to the various
provisions of Title VII. At the same
time, however, the global nature of the
security-based swap market and the
characteristics of the risk associated
with security-based swap activity
suggest that applying Title VII only to
the conduct of persons located within
the United States or to security-based
swap activity occurring entirely within
the United States would exclude from
regulation a significant proportion of
security-based swap activity that occurs
in part inside and in part outside the
United States.116 Our proposed
approach is intended to strike a
reasonable balance in light of the
authority provided by Congress, the
structure of the security-based swap
market, and the transfer of risk within
that market. Accordingly, among other
things, our proposed approach does not
impose Title VII requirements on
persons whose relevant security-based
swap activity occurs entirely outside the
United States and thus likely does not
raise the types of concerns in the U.S.
financial system that would warrant
application of Title VII.
Commenters have raised concerns
about the application of Title VII to
security-based swap activity in the
cross-border context and specifically
about the possibility that the
Commission may apply our securitybased swap regulations to
‘‘extraterritorial’’ conduct. In this
subsection, we discuss commenters’
views regarding the applicability of
Title VII to cross-border security-based
swap activity, explain our proposed
approach to determining whether the
relevant security-based swap activity
takes place, in whole or in part, within
the United States, and interpret what it
means for a person to ‘‘transact a
business in security-based swaps
without the jurisdiction of the United
States’’ as set forth in Section 30(c) of
the Exchange Act (‘‘Section 30(c)’’).117
In subsequent sections of the release, we
discuss in more detail our proposed
116 See Section II.A, supra. We preliminarily
believe that many of the circumstances of concern
also would create the opportunity for evasion of the
Dodd-Frank Act’s regulatory regime. See, e.g., note
558, infra.
117 15 U.S.C. 78dd(c).
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application of Title VII to cross-border
security-based swap activity.
1. Commenters’ Views
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Commenters generally expressed the
view that Section 30(c) restricts the
Commission’s authority to apply Title
VII to ‘‘extraterritorial’’ conduct and
thus, that the Commission follow a
territorial approach in applying Title VII
to cross-border security-based swap
activity. One commenter interpreted
Section 30(c) as prescribing a strictly
territorial approach to the application of
Title VII, arguing that this section
codifies the territorial approach that we
have historically taken in our existing
securities regulations.118 Several
commenters argued that a narrow
interpretation of the ‘‘extraterritorial’’
reach of Title VII was consistent with
both Commission precedent119 and the
Supreme Court’s decision in Morrison v.
National Australia Bank.120
Based on this interpretation of Section
30(c), commenters generally argued that
Title VII does not give the Commission
authority to regulate entities that
transact a business in security-based
swaps outside the United States.121
Some commenters suggested that nonU.S. entities (including affiliates of U.S.
persons) that conduct business entirely
with counterparties outside the United
States should not be required to register
as swap or security-based swap dealers
or comply with Title VII.122 Some of
these commenters also urged the
118 See Cleary Letter IV at 33–36; see also SIFMA
Letter I at 5, 22; Sullivan & Cromwell Letter at 6
(suggesting that Section 30(c) permits
‘‘extraterritorial’’ application of Title VII only to
prevent ‘‘efforts to evade’’ statutory requirements).
119 See, e.g., Sullivan & Cromwell Letter at 11
(stating that the Commission has ‘‘plainly stated
that it uses a territorial approach in applying the
broker-dealer requirements to international
operations’’).
120 130 S.Ct. 2869 (2010). See, e.g., Jones Day
Letter at 7–8 (suggesting that the jurisdictional
limits of Dodd-Frank Act Sections 722 and 772 be
interpreted narrowly in a manner consistent with
the Morrison decision); Cleary Letter IV at 33–6
(arguing against an extraterritorial application of
Title VII); SIFMA Letter I at 5–6; ISDA Letter I at
11.
121 See, e.g., Jones Day Letter at 7–8; Cleary Letter
IV at 33–6; Sullivan & Cromwell Letter at 10–11;
SIFMA Letter I at 5–6; ISDA Letter I at 11.
122 See SIFMA Letter I at 4; see also ISDA Letter
I at 11 (recommending that designation as a dealer
should not be triggered by transactions entered into
with foreign affiliates or branches of a U.S. bank or
with foreign entities whose obligations are
guaranteed by a U.S. person, or by legacy positions
with U.S. counterparties); Davis Polk Letter II at 5–
6 (stating that a foreign entity engaged in swaps
exclusively with foreign counterparties is ‘‘‘without
the jurisdiction of the United States’’’). Similarly,
one commenter recommended that transactions
between two foreign entities should be excluded
from calculations of substantial position for
purposes of the major participant definition.
Canadian MAVs Letter at 7–8.
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Commission not to subject foreign
branches and affiliates of U.S. banks to
Title VII registration requirements to the
extent that they transact solely with
foreign persons.123 Some commenters
urged that, even within a single entity,
only those branches, departments, or
divisions that engage in business within
the United States should be required to
register.124
Commenters generally took the view
that Section 30(c) does not permit the
Commission to apply Title VII to
transactions occurring outside the
United States. Accordingly, commenters
suggested that Section 30(c) restricts the
Commission’s ability to apply Title VII
requirements to the foreign business of
entities that are required to register with
the Commission.125 For example, one
commenter interpreted Section 30(c) to
prohibit application of Title VII to any
of a person’s ‘‘activity’’ or ‘‘business’’
outside the United States, even if that
person otherwise transacts a business in
security-based swaps within the
jurisdiction of the United States.126
Similarly, some commenters
suggested that Section 30(c) prohibits
the application of Title VII to
transactions involving the foreign
affiliates of U.S. persons, on the basis
that such transactions occur ‘‘without
the jurisdiction of the United States’’
when no U.S. person is a counterparty
to the trade.127 One commenter
explained that, because such
transactions involve parties outside the
United States and occur outside the
United States, they are ‘‘removed from
the stream of U.S. commerce.’’ 128
123 See, e.g., Sullivan & Cromwell Letter at 7
(stating that a territorial interpretation of Section
30(c) prevented the Commission from imposing
Title VII requirements on the U.S. banks’ ‘‘Non-U.S.
Operations,’’ defined to include both foreign
affiliates or subsidiaries and foreign branches of
these banks).
124 See, e.g., Cleary Letter IV at 12; see also id.
at 26 (arguing that a non-U.S. branch or affiliate of
a U.S. entity should not be required to register as
a dealer by virtue of its transactions with a non-U.S.
person counterparty); ISDA Letter I at 11 (stating
that a ‘‘branch, division or office of an entity should
be able to be designated as a Dealer without
subjecting the whole entity to regulation’’).
125 See Cleary Letter IV at 11; see also SIFMA
Letter I at 14 (suggesting that Section 30(c)
‘‘provide[s] strong support’’ for not applying Title
VII to transactions between a registered foreign
swap dealer and non-U.S. persons); ISDA Letter I
at 11 (recommending that no Title VII requirements
should apply to transactions between a non-U.S.
entity registered as a dealer and its non-U.S. person
counterparties).
126 See Cleary Letter IV at 12.
127 See SIFMA Letter I at 5–6; see also ISDA
Letter I at 11 (suggesting that dealer-related
requirements of Title VII should not apply to
business with non-U.S. person counterparties,
including foreign affiliates and branches of U.S.
persons).
128 See Sullivan & Cromwell Letter at 9.
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Commenters also generally
recommended a narrower interpretation
of the language in Section 30(c)
permitting the application of Title VII
regulations to persons transacting a
business in security-based swaps
without the jurisdiction of the United
States to the extent that they are doing
so in contravention of rules the
Commission has prescribed as
‘‘necessary or appropriate to prevent the
evasion of any provision of [the
Exchange Act that was added by the
Dodd-Frank Act].’’ Under this view,
Section 30(c) permits ‘‘extraterritorial’’
application of Title VII only to entities
that have themselves engaged in willful
or intentional evasion.129 These
commenters argued that the
longstanding use of foreign branches
and affiliates by security-based swap
market entities demonstrates that these
types of business structures are not
evasive and, therefore, do not fall within
the exception to the limits on the
applicability of Title VII as set forth in
Section 30(c).130
2. Scope of Application of Title VII in
the Cross-Border Context
(a) Overview and General Approach
Section 772(b) of the Dodd-Frank Act
amends Section 30 of the Exchange Act
to provide that ‘‘[n]o provision of [Title
VII] . . . shall apply to any person
insofar as such person transacts a
business in security-based swaps
without the jurisdiction of the United
States,’’ unless that business is
transacted in contravention of rules
prescribed to prevent evasion of Title
VII.131 In so amending Section 30 of the
Exchange Act, Congress directly
appropriated nearly identical language
defining the scope of the Exchange Act’s
application that appears in subsection
(b) of Section 30 of the Exchange Act,132
indicating that Congress intended the
territorial application of Title VII to
entities and transactions in the securitybased swap market to follow similar
principles to those applicable to the
129 See, e.g., id. at 9–10 (suggesting that
‘‘extraterritorial’’ application of Title VII requires an
‘‘intent to evade’’ Title VII).
130 See Cleary Letter IV at 7.
131 See Section 30(c) of the Exchange Act, 15
U.S.C. 78dd(c), added by Section 772(b) of the
Dodd-Frank Act.
132 Section 30(b) of the Exchange Act, 15 U.S.C.
78dd(b), provides that the Exchange Act and related
rules ‘‘shall not apply to any person insofar as he
transacts a business in securities without the
jurisdiction of the United States,’’ unless that
business is transacted in contravention of rules
prescribed as necessary or appropriate to prevent
evasion of the Exchange Act.
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securities market under the Exchange
Act.133
In light of this similar language,
commenters have urged us to follow a
territorial approach in applying Title VII
to cross-border security-based swap
activity.134 We preliminarily agree that
a territorial approach, if properly
tailored to the characteristics of the
security-based swap market, should
help ensure that our regulatory
framework focuses on security-based
swap activity that is most likely to raise
the concerns that Congress intended to
address in Title VII, including the
effects of security-based swap activity
on the financial stability of the United
States, on the transparency of the U.S.
financial system, and on the protection
of counterparties.
We differ from commenters, however,
in our understanding of what a
territorial approach means in the
context of a global security-based swap
market. As noted above, some
commenters suggested that the securitybased swap activity of foreign branches
and affiliates of U.S. persons with nonU.S. persons occurs outside the United
States and has only an indirect
connection with the United States and
that, therefore, subjecting transactions
resulting from that activity to Title VII
would involve extraterritorial
application of the statute.135 Although
we recognize that some of the securitybased swap activity involving these
foreign branches and affiliates occur
outside the United States, we believe
that a properly tailored territorial
approach should look to both the full
range of activities described in the
statutory text as well as to the concerns
that Congress intended Title VII to
address in determining whether the
relevant activity, considered in its
entirety, occurs at least in part within
the United States.136
As noted above, security-based swap
transactions differ from most traditional
securities transactions in that they give
rise to an ongoing obligation between
the counterparties to the trade: the
counterparties bear the risks that result
133 See, e.g., Commodity Futures Trading Comm’n
v. Schor, 478 U.S. 833, 846 (1986) (holding that
‘‘when Congress revisits a statute giving rise to a
longstanding administrative interpretation without
pertinent change, the ‘congressional failure to revise
or repeal the agency’s interpretation is persuasive
evidence that the interpretation is the one intended
by Congress’’’).
134 See, e.g., Cleary Letter IV at 33–37.
135 See, e.g., Cleary Letter IV at 35; ISDA Letter
I at 11; SIFMA Letter I at 5–6; Sullivan & Cromwell
Letter at 11–13.
136 See Morrison, 130 S. Ct. at 2884 (looking to
the ‘‘focus’’ of the relevant statutory provision in
determining whether the statute was being applied
to domestic conduct).
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from those transactions for the duration
of the transactions.137 The Dodd-Frank
Act was enacted, in part, to address the
risks to the financial stability of the
United States posed by entities bearing
such risks, and a territorial approach to
the application of Title VII should be
consistent with achieving these
statutory purposes. A territorial
approach to the application of Title VII
that excluded from the application of
Title VII any activity conducted by the
foreign operations of a U.S. person
where they do business only with nonU.S. counterparties located outside the
United States would likely fail to
achieve the financial stability goals of
Title VII, as such an approach would
not account for the security-based swap
risks that may be borne by entities
located within the United States whose
foreign operations solicit, negotiate, or
execute transactions outside the United
States. In addition, it is not clear that a
different territorial approach that
focused solely on the location of the
entity bearing the risk (and disregarded
whether certain relevant activity,
including execution of the transaction,
occurred within the United States)
would adequately address the DoddFrank Act’s concern with promoting
transparency in the U.S. financial
system and protecting counterparties,
concerns that are likely to be raised by
the solicitation, negotiation, or
execution within the United States,
even if the risk arising from those
security-based swaps transactions is
borne by entities outside the United
States. For example, some transactions
characterized by commenters as
occurring outside the United States,
even with non-U.S. persons, are entered
into by persons located within the
United States and would appear to raise
the same types of risk concerns as
transactions occurring wholly within
the United States.
Similarly, the Commission
preliminarily believes that a territorial
approach should be informed by the text
of the statutory provision that imposes
the registration or other regulatory
requirement.138 Some commenters
suggested, for instance, that a territorial
approach would necessarily exclude
certain foreign operations of U.S.
persons from registration as securitybased swap dealers so long as they did
not enter into security-based swap
transactions with counterparties located
137 See
Section II.A, infra.
Morrison, 130 S. Ct. at 2884 (performing
a textual analysis of Section 10(b) of the Exchange
Act to determine what conduct was relevant in
determining whether the statute was being applied
to domestic conduct).
138 See
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within the United States.139 However, in
this instance, these commenters did not
show how their suggested approach
relates to the statutory definition of
security-based swap dealer or to the
rules and interpretation adopted by the
Commission and the CFTC to further
define ‘‘security-based swap dealer’’ in
the Intermediary Definitions Adopting
Release, including our discussion of
conduct that is indicative of dealing
activity.140 In our preliminary view, we
should identify the activity that the
statutory provision regulates before
reaching a determination of whether
relevant activity is occurring within the
United States.141 Only after we identify
the activity that the statutory provision
regulates would we then be able to
determine whether the conduct at issue
involves activity that the statutory
provision regulates and whether this
conduct occurs within the United
States. To the extent that conduct
involving activity that the statutory
provision regulates occurs within the
United States, application of Title VII to
that conduct would be consistent with
a territorial approach.
(b) Territorial Approach to Application
of Title VII Security-Based Swap Dealer
Registration Requirements
We discuss our application of this
approach with respect to each of the
major Title VII registration categories
and requirements in connection with
reporting, public dissemination,
clearing, and trade execution for
security-based swaps in further detail in
the sections below,142 but for sake of
illustration, we provide a brief overview
of our territorial approach as it applies
to the security-based swap dealer
definition.
Section 3(a)(71) of the Exchange
Act 143 defines security-based swap
dealer as a person that engages in any
of the following types of activity:
(i) Holding oneself out as a dealer in
security-based swaps,
(ii) making a market in security-based
swaps,
(iii) regularly entering into securitybased swaps with counterparties as an
ordinary course of business for one’s
own account,
(iv) engaging in any activity causing
oneself to be commonly known in the
139 See,
e.g., Sullivan & Cromwell Letter at 11.
note 135, supra; see also Intermediary
Definitions Adopting Release, 77 FR 30616–19.
141 See Morrison, 130 S. Ct. at 2884.
142 See Sections III–VII, infra (discussing each
major registration category), and Sections VIII–IX.A,
infra (discussing certain requirements in
connection with reporting and dissemination,
clearing, and trade execution for security-based
swaps).
143 15 U.S.C. 78c(a)(71).
140 See
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trade as a dealer in security-based
swaps.144
We have further interpreted this
definition by jointly adopting
interpretive guidance with the CFTC
that identifies the types of activity that
is relevant in determining whether a
person is a security-based swap
dealer.145 In this interpretive guidance,
we have identified indicia of securitybased swap dealing activity to include
the following activities:
• Providing liquidity to market
professionals or other persons in
connection with security-based swaps,
• seeking to profit by providing
liquidity in connection with securitybased swaps,
• providing advice in connection
with security-based swaps or structuring
security-based swaps,
• having a regular clientele and
actively soliciting clients,
• using inter-dealer brokers, and
• acting as a market maker on an
organized security-based swap exchange
or trading system.146
As the foregoing list of relevant
activities illustrates, both the statutory
text and our interpretation of that text
include within the security-based swap
dealer definition a range of activities.
The broad scope of activities listed
above identifies various characteristics
of dealing activity. Given the risks
associated with dealing activity that the
dealer definition and associated
regulatory framework in Title VII are
intended to address, we preliminarily
believe that a territorial approach
consistent with these statutory purposes
should consider whether the entity
performs any of these indicia of dealing
activity within the United States (even
if some of these indicia also arise in
activity conducted outside the United
States). This type of analysis appears to
us more consistent with the statutory
text and with the Supreme Court’s
approach to statutory analysis in its
decision in Morrison than an approach
that excludes from jurisdiction certain
foreign operations of U.S. persons
transacting with foreign counterparties.
We also believe that our proposed
approach would better help ensure that
our regulatory framework achieves the
various purposes of security-based swap
dealer regulation under Title VII, while
avoiding application of security-based
swap dealer registration to persons
whose dealing activity is unlikely to
raise the types of dealer-specific risks
144 Section 3(a)(71)(A) of the Exchange Act, 15
U.S.C. 78c(a)(71)(A).
145 See
Intermediary Definitions Adopting
Release, 77 FR 30617–18.
146 Id.
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that Title VII dealer registration was
intended to address because it occurs
entirely outside the United States.147
Under our proposed territorial
approach to the security-based swap
dealer definition, as explained further
below, we would require persons
resident or organized in the United
States, or with their principal place of
business in the United States, to count
all of their dealing transactions toward
their de minimis threshold, including
transactions that arise from dealing
activity that occurs in part outside the
United States (for example, because it is
negotiated and executed through that
person’s foreign branch or office).148
An interpretation of Section 30(c) that
advances the view that security-based
swap activity conducted by a U.S.
person through a foreign branch
constitutes activity ‘‘without the
jurisdiction of the United States’’ or that
a transaction arising from such activity
constitutes ‘‘transacting a business in
security-based swaps without the
jurisdiction of the United States’’ for
purposes of Section 30(c) may not fully
account for the statutory definition of
‘‘security-based swap dealer,’’ the
purposes of Title VII, or the global
nature of the security-based swap
market. It does not account for the entire
range of activities performed by entities
active in the security-based swap
market, including security-based swap
dealers, and the relevance of such
activities to the statutory definitions and
requirements, given the purposes of
Title VII, and it would leave
unaddressed significant levels of
activity that poses precisely the sorts of
147 Under our proposed approach to the
application of the de minimis threshold in the
cross-border context, non-U.S. persons that engage
in dealing activity with U.S. persons or otherwise
within the United States at levels below the de
minimis threshold generally would also not be
required to register as security-based swap dealers.
Such entities are engaged in dealing activity within
the United States, and their dealing activity within
the United States may raise certain concerns
addressed by Title VII. However, we preliminarily
believe that, to the extent that this dealing activity
remains at levels below the de minimis threshold,
they should be treated similarly to a U.S. person
that engages in dealing activity at levels below the
de minimis threshold. See Section III.B.4, infra.
Like U.S. entities engaged in dealing activity, they
may be required to register under the aggregation
requirements the Commission and the CFTC
adopted in the Intermediary Definitions Adopting
Release. See Intermediary Definitions Adopting
Release, 77 FR 30631; 17 CFR 240.3a71–2(a)(1).
Under the aggregation requirements we propose
below, even entities with security-based swap
dealing activity at levels below the de minimis
threshold may be required to register if the total
security-based swap dealing activity of affiliates
under common control (excluding the activity of
any registered affiliates that have independent
operations) exceeds the de minimis threshold. See
Section III.B.8, infra.
148 See Section III.B.4, infra.
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risks that Title VII was intended to
address.
In our preliminary view, to the extent
that a U.S. person engages in dealing
activity through a foreign operation that
is part of the U.S. legal person (such as
a foreign branch or office), relevant
activity for purposes of the securitybased swap dealer definition occurs, at
least in part, within the United States
because we believe it is the U.S. entity
as a whole, and not just the foreign
branch or office, that is holding itself
out as a dealer and making a market in
security-based swaps. Moreover, it is
necessarily the U.S. person as a whole
that is seeking to profit by providing
liquidity and engaging in marketmaking in security-based swaps, and it
is the financial resources of the entire
entity that enable it to provide liquidity
and engage in market-making in
connection with security-based swaps.
Its dealing counterparties will look to
the entire U.S. person, and not just the
foreign branch or office, for performance
on the transaction. The entire U.S.
person assumes, and stands behind, the
obligations arising from the resulting
agreement. For these reasons, to the
extent that a dealer resides or is
organized, or has its principal place of
business, within the United States, we
believe that it cannot hold itself out as
a security-based swap dealer, even
through a foreign branch, as anything
other than a single person, given that it
generally could not operate as a dealer
absent the financial and other resources
of the entire U.S. person. Its dealing
activity with all of its counterparties,
including dealing activity conducted
through its foreign branch or office, is
best characterized as occurring, at least
in part, within the United States and
should therefore be counted toward the
entity’s de minimis threshold.
More generally, we preliminarily
believe that transactions that create
ongoing obligations that are borne by a
U.S. person are properly described as
directly occurring within the United
States, particularly given Title VII’s
focus on, among other things,
addressing risks to the financial stability
of the United States.149 Indeed, the
history of AIG FP confirms that such
transactions of U.S. persons can pose
risks to the U.S. financial system even
if they are conducted through foreign
operations. The nature of such risks,
and their role in the financial crisis and
in the enactment of Title VII, suggest
that the statutory framework established
149 As we discuss below, such activity would
include providing guarantees for a foreign entity’s
security-based swap transactions. See Section
II.B.2(d), infra.
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by Congress and the objectives of Title
VII may require a broader analysis than
excluding transactions involving U.S.
persons from the application of Title VII
solely because they are conducted
through operations outside the United
States, while others by the same U.S.
persons occur within the United
States.150
However, we preliminarily believe
that non-U.S. persons engaged in
dealing activity would be required to
count toward their de minimis
thresholds only transactions arising
from their dealing activity with U.S.
persons 151 or dealing activity otherwise
conducted within the United States. In
addition, to the extent that a non-U.S.
person engages in security-based swap
dealing activity within the United
States, we preliminarily believe that
such dealing activity should be counted
toward the non-U.S. person’s de
minimis threshold regardless of whether
its counterparties are U.S. persons.152
This view is consistent with the fact that
such security-based swap activity raises
the types of concerns that the DoddFrank Act was intended to address.
We preliminarily believe that a nonU.S. person not engaged in any securitybased swap activity within the United
States (or engaged only at levels below
the de minimis threshold) is unlikely to
pose the types of concerns within the
U.S. financial system that Title VII
dealer regulation was intended to
address.153 Thus, under our proposed
approach, a non-U.S. person that
engages in dealing activity entirely
outside the United States (i.e., does not
enter into transactions with a U.S.
person or otherwise conduct any part of
its dealing activity within the United
States) would not be required to register
as a security-based swap dealer.154
150 However, for reasons explained below, the
Commission is not proposing to subject the foreign
operations of U.S. persons to certain of the
requirements in Title VII. See, e.g., Sections III.B.7,
III.B.9, VIII.C, IX.C.3(a), and X.B.3(a), infra.
151 However, for reasons explained below, the
Commission is not proposing to require non-U.S.
persons to include transactions with the foreign
branches of U.S. banks in their de minimis
calculations. See Section III.B.7, infra.
152 See Intermediary Definitions Adopting
Release, 77 FR 30617–18.
153 Proposed Rule 3a71–3(b) under the Exchange
Act, as discussed in Section III.B.4, infra. Of course,
the transactions of an entity engaged in securitybased swap dealing activity within the United
States at levels below the de minimis threshold or
in security-based swap activity within the United
States that is not dealing activity may be subject to
other Title VII requirements, as discussed below, or
other provisions of the federal securities laws.
154 This proposed approach to the application of
Title VII security-based swap dealer registration
requirements is not intended to limit or address the
cross-border reach or extraterritorial application of
the antifraud or other provisions of the federal
securities laws.
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(c) Application of Other Title VII
Requirements to Registered Entities
We are proposing to apply the Title
VII requirements associated with
registration (including, among others,
capital and margin requirements and
external business conduct
requirements 155) to the activities of
registered entities to the extent we have
determined that doing so advances the
purposes of Title VII.156 Although some
commenters suggested that a territorial
approach would prohibit the
Commission from applying Title VII to
the foreign security-based swap
activities of even registered entities,
such an interpretation of the application
of Title VII to registered entities is
difficult to reconcile with the statutory
language describing the requirements
applicable to registered security-based
swap dealers, with the text of Section
30(c),157 or with the purposes of Title
VII and the nature of risks in the
security-based swap market as described
above. We have long taken the view that
an entity that has registered with the
Commission subjects itself to the entire
regulatory system governing such
registered entities.158
155 See Section 15F of the Exchange Act, 15
U.S.C. 78o–10.
156 See, e.g., Sections III.C.3 and 4, infra
(discussing requirements applicable to securitybased swap dealers).
157 Section 30(c) prohibits the application of the
Exchange Act only with respect to those persons
that ‘‘transact[] a business in security-based swaps
without the jurisdiction of the United States.’’
Because only security-based swap entities that
transact a business in security-based swaps within
the United States would be required to register
under the approach proposed in this release,
registered entities are not persons that ‘‘transact[] a
business in security-based swaps without the
jurisdiction of the United States.’’
158 See Registration Requirements for Foreign
Broker-Dealers, Exchange Act Release No. 27017
(July 11, 1989), 54 FR 30013, 30016–17 (July 18,
1989) (‘‘Rule 15a–6 Adopting Release’’) (noting that
a foreign registrant is subject to the regulatory
system applicable to such entities); Revision of
Form BD, Exchange Act Release No. 25285 (Jan. 22,
1988) (‘‘It is the Commission’s view that a brokerdealer submits to the Commission’s jurisdiction
when it registers with the Commission.’’); In re
International Paper and Power Co., 4 SEC 873, 876
(1939) (registration with the Commission makes
registrant ‘‘subject to the complete jurisdiction of
the Commission’’). See also Exemption of Certain
Foreign Brokers or Dealers, Exchange Act Release
No. 58047 (June 27, 2008), 73 FR 39182 (July 8,
2008) (‘‘Proposed Amendments to Rule 15a–6’’), at
39182 (describing registration requirements as
applying to the entire foreign entity); In re Ira
William Scott, 53 SEC 862, 866 (1998) (holding that
investment adviser that registers with the
Commission has ‘‘submitted himself to [the
Commission’s] jurisdiction pursuant to the Advisers
Act’’). Cf. In re United Corp., 232 F.2d 601, 606
(1956) (stating that, upon registration as a holding
company, an entity comes within ‘‘the jurisdiction
of the Commission and [is] subject to all
requirements applicable to a registered holding
company’’).
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(d) Application of Title VII Regulatory
Requirements to Transactions of Foreign
Entities Receiving Guarantees From U.S.
Persons
We also are proposing to apply certain
Title VII transaction-level requirements
(e.g., mandatory clearing, reporting and
dissemination, and mandatory trade
execution of security-based swaps) to
certain transactions involving one or
more non-U.S. persons whose
performance under the security-based
swaps is guaranteed by a U.S. person.
We discuss the statutory basis for
applying specific Title VII requirements
to such transactions in the relevant
substantive discussions below.159 In this
subsection, we briefly explain why we
believe that a territorial approach that is
consistent with the purposes and text of
the Dodd-Frank Act supports the
application of Title VII to such
transactions.
In a security-based swap transaction
between two non-U.S. persons where
the performance of at least one side of
the transaction is guaranteed by a U.S.
person, the guarantee gives the
guaranteed entity’s counterparty direct
recourse to the U.S. person for
performance of obligations owed by the
guaranteed entity under the securitybased swap,160 and the U.S. guarantor
exposes itself to the security-based swap
risk as if it were a direct counterparty
to the security-based swap through the
security-based swap activity engaged in
by the guaranteed entity. As a result, the
guarantee creates risk to the U.S.
financial system and counterparties
(including U.S. guarantors) to the same
degree as if the transaction were entered
into directly by a U.S. person. In
addition, in many cases, the
counterparty would not enter into the
transaction (or would not do so on the
same terms) with the guaranteed entity,
and the guaranteed entity would not be
able to engage in any security-based
swaps, absent the presence of the
guarantee. Given that the guarantee is
159 See
Sections VIII–XI, infra.
discussing the application of the major
participant tests to guaranteed positions in the
Intermediary Definitions Adopting Release, the
Commission and the CFTC noted that an entity’s
security-based swap positions are attributed to a
parent, other affiliate, or guarantor for purposes of
the major participant analysis to the extent that the
counterparties to those positions have recourse to
that parent, other affiliate, or guarantor in
connection with the position. Positions are not
attributed in the absence of recourse. See
Intermediary Definitions Adopting Release, 77 FR
30689. As a result, the term ‘‘guarantee’’ as used in
this release refers to a contractual agreement
pursuant to which one party to a security-based
swap transaction has recourse to its counterparty’s
parent, other affiliate, or guarantor with respect to
the counterparty’s obligations owed under the
transaction.
160 In
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provided by a U.S. person and poses
risks to the U.S. financial system, and
considering the reliance by both the
guaranteed entity and its counterparty
on the creditworthiness of the guarantor
in the course of engaging in securitybased swap transactions and for the
duration of the security-based swap, we
preliminarily believe that a transaction
entered into by a non-U.S. person whose
performance under the security-based
swap is guaranteed by a U.S. person is
within the United States by virtue of the
involvement of the U.S. guarantor in the
security-based swap. Therefore, we
preliminarily believe that subjecting
such transactions to Title VII is
consistent with our territorial approach.
(e) Regulations Necessary or
Appropriate to Prevent Evasion of Title
VII
As noted above, several commenters
expressed the view that Section 30(c) of
the Exchange Act restricts the
Commission’s authority to apply
amendments made to the Exchange Act
by Title VII to ‘‘extraterritorial’’
conduct. Section 30(c) provides the
Commission with the express authority
to prescribe rules and regulations for
persons that transact a business in
security-based swaps without the
jurisdiction of the United States to the
extent the Commission determines that
doing so is necessary or appropriate to
prevent evasion. Some commenters
have expressed the view that this
authority extends to ‘‘extraterritorial’’
activity only when such activity is
intended to evade Title VII or to conceal
a domestic violation of Title VII,
suggesting that Section 30(c) prohibits
application of Title VII to transactions
by foreign affiliates or operations
established for a legitimate business
purpose, as the existence of such a
purpose is evidence that the conduct is
not intended to be evasive.161
While recognizing the concerns
expressed by commenters, the
Commission preliminarily believes that
Section 30(c) does not require the
Commission to find actual evasion in
order to invoke our authority to reach
activity ‘‘without the jurisdiction of the
United States.’’ Section 30(c) also does
not require that every particular
application of Title VII to security-based
swap activity ‘‘without the jurisdiction
of the United States’’ address only
business that is transacted in a way that
evades Title VII. Section 30(c)
authorizes the Commission to apply
Title VII to persons transacting a
business ‘‘without the jurisdiction of the
161 See, e.g., Cleary Letter IV at 5–6, 7, 18;
Sullivan & Cromwell Letter at 6–7.
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United States’’ if they violate rules that
the Commission has prescribed as
‘‘necessary or appropriate to prevent the
evasion of any provision’’ of Title VII.
The focus of this provision is not
whether such rules impose Title VII
requirements only on entities engaged
in evasive activity but whether the rules
are generally ‘‘necessary or appropriate’’
to prevent evasion of Title VII. In other
words, Section 30(c) permits the
Commission to impose prophylactic
rules intended to prevent possible
evasion, even if they affect both evasive
and non-evasive conduct. Thus, under
our preliminary proposed interpretation
of Section 30(c), the statute permits us
to prescribe such rules to conduct
without the jurisdiction of the United
States, even if those rules would also
apply to a market participant that has
been transacting business through a preexisting market structure such as a
foreign branch or guaranteed foreign
affiliate established for valid business
purposes, provided the proposed rule or
interpretation is designed to prevent
possible evasive conduct.162
C. Principles Guiding Proposed
Approach to Applying Title VII in the
Cross-Border Context
In considering how to apply Title VII
in the cross-border context, the
Commission has been mindful of the
global nature of the security-based swap
market and the types of risks created by
security-based swap activity to the U.S.
financial system and market
participants, as well as the needs of a
well-functioning security-based swap
market.163 We also have been guided by
the purpose of the Dodd-Frank Act 164
and the applicable requirements of the
Exchange Act, including the following:
• Risk to the U.S. Financial System—
The Dodd-Frank Act was intended to
promote, among other things, the
financial stability of the United States
by limiting/mitigating risks to the
financial system.165
• Transparency—The Dodd-Frank
Act was intended to promote
162 We preliminarily believe that the proposed
rules or interpretations set forth in this release are
not being applied to persons who are ‘‘transact[ing]
a business in security-based swaps without the
jurisdiction of the United States,’’ within the
meaning of Section 30(c). See Section II.B.2(a),
supra. However, as noted below, the Commission
also preliminarily believes that the proposed rules
or interpretations are necessary or appropriate to
help prevent the evasion of the provisions of the
Exchange Act that were added by the Dodd-Frank
Act and prophylactically will help ensure that the
particular purposes of the Dodd-Frank Act
addressed by the rule or interpretation are not
undermined. See, e.g., note 558, infra.
163 See Sections II.A.1–II.A.3, supra.
164 See note 4, supra.
165 See id.
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transparency in the U.S. financial
system.166
• Counterparty Protection—The
Dodd-Frank Act adds provisions to the
Exchange Act relating to counterparty
protection, particularly with respect to
‘‘special entities.’’ 167
• Economic Impacts—The Exchange
Act requires the Commission to
consider the impact of our rulemakings
on efficiency, competition, and capital
formation.168
• Harmonization with Other U.S.
Regulators—In connection with
implementation of Title VII, the Dodd
Frank Act requires the Commission to
consult and coordinate with the CFTC
and prudential regulators to ensure
‘‘regulatory consistency and
comparability, to the extent
possible.’’ 169
• Consistent International
Standards—To promote effective and
consistent global regulation of swaps
and security-based swaps, the DoddFrank Act requires the Commission and
the CFTC to consult and coordinate
with foreign regulatory authorities on
the ‘‘establishment of consistent
international standards’’ with respect to
the regulation of swaps and securitybased swaps.170 In this regard, the
Commission recognizes that regulators
in other jurisdictions are currently
engaged in implementing their own
regulatory reforms of the OTC
derivatives markets and that our
proposed application of Title VII to
cross-border activities may affect the
policy decisions of these other
regulators as they seek to address
potential conflicts or duplication in the
regulatory requirements that apply to
166 See
id.
Section 15F(h) of the Exchange Act, as
added by Section 764(a) of the Dodd-Frank Act, in
particular.
168 Specifically, Section 3(f) of the Exchange Act
provides: ‘‘Whenever pursuant to this title the
Commission is engaged in rulemaking, . . .;
required to consider or determine whether an action
is necessary or appropriate in the public interest,
the Commission shall also consider, in addition to
the protection of investors, whether the action will
promote efficiency, competition, and capital
formation.’’ Section 23(a)(2) of the Exchange Act
also provides: ‘‘The Commission . . ., in making
rules and regulations pursuant to any provisions of
this title, shall consider among other matters the
impact any such rule or regulation would have on
competition. The Commission . . . shall not adopt
any such rule or regulation which would impose a
burden on competition not necessary or appropriate
in furtherance of the purposes of [the Exchange
Act].’’
169 See Section 712(a)(2) of the Dodd-Frank Act.
170 See Section 752(a) of the Dodd-Frank Act. In
this regard, some commenters have encouraged the
Commission to consider international comity when
applying Title VII in the cross-border context. See
note 225, infra.
167 See
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market participants under their
authority.171
• Anti-Evasion—The Dodd-Frank Act
amends the Exchange Act to provide the
Commission with authority to prescribe
rules and regulations as necessary or
appropriate to prevent the evasion of
any provision of the Exchange Act that
was added by the Dodd-Frank Act.172
At times these principles reinforce
one another; at other times they
compete with each other. For instance,
attempts to regulate risk posed to the
United States may, depending on what
is proposed, make it more costly for
U.S.-based firms to conduct securitybased swap business, particularly in
foreign markets, compared to foreign
firms, or could make foreign firms less
willing to deal with U.S. persons. On
the other hand, attempts to provide U.S.
persons greater access to foreign
security-based swap markets may,
depending on what is proposed, fail to
appropriately address the risk posed to
the United States from transactions
conducted outside the United States or
create opportunities for market
participants to evade the application of
Title VII, particularly until such time as
global initiatives to regulate the
derivatives markets are fully enacted
and implemented.
Balancing these sometimes competing
principles is complicated by the fact
that Title VII imposes a new regulatory
regime on a marketplace that already
exists as a functioning, global market.
Title VII establishes reforms that will
have implications for entities that
compete internationally in the global
security-based swap market. As we have
formulated our proposal, we have
generally sought, in accordance with the
statutory factors described above, to
avoid creating opportunities for
regulatory arbitrage or evasion or the
potential for duplicative or conflicting
regulations. We also have considered
the needs for a well-functioning
security-based swap market and for
avoiding disruption that may reduce
liquidity, competition, efficiency,
transparency, or stability in the securitybased swap market.
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D. Conclusion
Consistent with the principles and
requirements outlined above, we are
proposing to structure our
171 For example, subjecting non-U.S. persons to
Title VII may prompt a foreign jurisdiction to
respond by subjecting U.S. persons to the foreign
jurisdiction’s regulatory regime. However,
substituted compliance of the type proposed in this
release or other mechanisms may address potential
conflicts or duplication arising from overlapping
regulatory requirements.
172 See Section 30(c) of the Exchange Act, 15
U.S.C. 78dd(c), as discussed in Section II.B, supra.
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implementation of Title VII around an
approach that focuses on identifying
market participants whose presence or
activity within the United States or
activity involving market participants
within the United States may give rise
to the types of risk to the U.S. financial
system and counterparties that Title VII
seeks to address, as described more fully
below in the subsequent sections of the
release.
Request for Comment
The Commission requests comment
on all aspects of the discussion and
analysis above, including the following:
• Is our understanding of the global
nature of the security-based swap
market accurate? If not, why not? Please
elaborate.
• Is our understanding of the dealing
structures used by U.S. and non-U.S.
persons accurate? If not, why not? Are
there other dealing structures used by
market participants? If so, please
elaborate.
• Is our understanding of clearing,
reporting, and trade execution practices
accurate? If not, why not? Please
elaborate.
• As discussed above in Section
II.B.1, some commenters recommend a
narrower approach to the cross-border
application of Title VII than this
proposal sets forth. We request further
comment on these and any other
potential alternative approaches to
determining the extent to which Title
VII should be applied to cross-border
transactions, non-U.S. persons, and
registered entities.
III. Security-Based Swap Dealers
A. Introduction
Among the market participants
subject to regulation under Title VII as
a result of their security-based swap
activities are security-based swap
dealers.173 As discussed above, a
‘‘security-based swap dealer’’ generally
is defined as any person that (i) Holds
itself out as a dealer in security-based
swaps; (ii) makes a market in securitybased swaps; (iii) regularly enters into
security-based swaps with
counterparties as an ordinary course of
business for its own account; or (iv)
engages in any activity causing the
person to be commonly known in the
trade as a dealer or market maker in
security-based swaps.174 The
Commission, jointly with the CFTC,
173 See Section 764(a) of the Dodd-Frank Act,
codified as Section 15F of the Exchange Act, 15
U.S.C. 78o–10. See also Section IV, infra
(discussing major security-based swap participants).
174 See Section 3(a)(71) of the Exchange Act, 15
U.S.C. 78c(a)(71), as added by Section 761(a) of the
Dodd-Frank Act; see also Section II.B.2(b), supra.
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issued final rules and interpretive
guidance to further define the term
security-based swap dealer,175 including
rules implementing the de minimis
exception.176 As part of these final rules
and interpretive guidance, the
Commission stated that the relevant
statutory provisions suggest that, rather
than focusing solely on the risk these
entities pose to the financial markets,
we should interpret the ‘‘security-based
swap dealer definition in a way that
identifies those persons for which
regulation is warranted either: (i) [D]ue
to the nature of their interactions with
counterparties; or (ii) to promote market
stability and transparency, in light of
the role those persons occupy within
the security-based swap markets.’’ 177
Security-based swap dealers are subject
to a comprehensive regulatory regime
under Title VII. The statutory provisions
added to the Exchange Act by Title VII
are intended to provide for financial
responsibility associated with securitybased swap dealers’ activities (e.g., the
ability to satisfy obligations and the
protection of counterparties’ funds and
assets), and other counterparty
protections, as well as market stability
and transparency.178
By its terms, application of the
security-based swap dealer definition
set forth in Section 3(a)(71) of the
Exchange Act 179 does not depend on
whether a security-based swap dealer or
its counterparty is a U.S. person.180
Rather, the security-based swap dealer
definition encompasses persons engaged
in security-based swap dealing activities
without regard to the geographic
location or legal residence of either the
dealing person or such person’s
counterparties. The Commission did not
provide guidance on the application of
the security-based swap dealer
definition to non-U.S. persons or to U.S.
persons that conduct dealing activities
175 See Intermediary Definitions Adopting
Release, 77 FR 30596; 17 CFR 240.3a71–1.
176 Section 3(a)(71)(D) of the Exchange Act, 15
U.S.C. 78c(a)(71)(D), provides that ‘‘[t]he
Commission shall exempt from designation as a
security-based swap dealer an entity that engages in
a de minimis quantity of security-based swap
dealing in connection with transactions with or on
behalf of its customers. The Commission shall
promulgate regulations to establish factors with
respect to the making of this determination to
exempt.’’ This provision is implemented in Rule
3a71–2 under the Exchange Act (17 CFR 240.3a71–
2), as discussed in the Intermediary Definitions
Adopting Release, 77 FR 30626–43.
177 Intermediary Definitions Adopting Release, 77
FR 30617.
178 See Intermediary Definitions Adopting
Release, 77 FR 30608; see also Section III.C.1, infra
(discussing substantive requirements applicable to
security-based swap dealers).
179 15 U.S.C. 78c(a)(71).
180 See Section 3(a)(71) of the Exchange Act, 15
U.S.C. 78c(a)(71); 17 CFR 240.3a71–1.
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in the cross-border context in either our
proposed or final rules.181 As discussed
above 182 and as further discussed
below, market participants, foreign
regulators, and other interested parties
have raised concerns regarding, among
other things, the application of Title VII
to non-U.S. persons that engage in
security-based swap dealing activity and
U.S. persons who conduct dealing
activities ‘‘outside the United
States.’’ 183
The rules and interpretations
described below represent the
Commission’s proposed approach to
applying the security-based swap dealer
definition to non-U.S. persons and to
U.S. persons who conduct dealing
activities in the cross-border context in
light of the principles discussed
above.184 Our proposal reflects a
particular balancing of these principles,
informed by, among other things, the
particular nature of the security-based
swap market,185 the structure of
security-based swap dealing activity,186
and our experience in applying the
federal securities laws in the crossborder context in the past.187 We
recognize that other approaches are
possible to achieve the goals of the
Dodd-Frank Act, in whole or in part.
Accordingly, we invite comment
regarding all aspects of the proposal
described below, and each proposed
rule and interpretation contained
therein, including potential alternative
approaches. Data and comment from
market participants and other interested
parties regarding the likely effect of each
proposed rule and interpretation and
potential alternative approaches will be
particularly useful to the Commission in
evaluating possible modifications to the
proposal.
B. Registration Requirement
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1. Introduction
In the Intermediary Definitions
Adopting Release, which was adopted
jointly with the CFTC, the Commission
set forth a de minimis threshold of
security-based swap dealing that takes
into account the notional amount of
security-based swap positions
181 See Intermediary Definitions Adopting
Release, 77 FR 30596; Further Definition of ‘‘Swap
Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major
Swap Participant,’’ ‘‘Major Security-Based Swap
Participant’’ and ‘‘Eligible Contract Participant,’’
Exchange Act Release No. 63452 (Dec. 7, 2010), 75
FR 80174 (Dec. 21, 2010) (‘‘Intermediary Definitions
Proposing Release’’).
182 See Section II.B, supra.
183 See Section III.B.3, infra.
184 See Section II.C, supra.
185 See Section II.A, supra.
186 See Section II.A.2, supra.
187 See Section III.B.2, infra.
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connected with a person’s securitybased swap dealing activity over the
prior 12 months.188 When a person
engages in security-based swap dealing
in connection with transactions above
that threshold, such person meets the
definition of a security-based swap
dealer under Section 3(a)(71) of the
Exchange Act,189 and the rules and
regulations thereunder,190 and is
required to register as a security-based
swap dealer with the Commission
pursuant to Section 15F(a)(1) of the
Exchange Act.191
The de minimis exception in Section
3(a)(71) of the Exchange Act is silent on
its application to the cross-border
security-based swap dealing activity of
U.S. persons and non-U.S. persons, and
the Commission did not address this
issue in the Intermediary Definitions
Adopting Release.192 Without additional
Commission guidance, it would be
unclear how persons would be required
to calculate the notional amount of their
security-based swaps for purposes of the
de minimis exception based on their
global book of security-based swap
dealing activity. In addition, as
discussed below, commenters have
188 See Intermediary Definitions Adopting
Release, 77 FR 30626–43. The de minimis threshold
was adopted by the Commission in the
Intermediary Definitions Adopting Release to
implement a statutory exclusion from the securitybased swap dealer definition found in Section
3(a)(71)(D) of the Exchange Act. See note 176,
supra. The de minimis threshold is defined in terms
of a notional amount of security-based swap
positions connected with dealing activity in which
a person engages over the course of the immediately
preceding 12 months. An entity engaged in
security-based swap dealing activity in connection
with security-based swap transactions with or on
behalf of its customers below the de minimis
threshold amount is exempt from designation as a
security-based swap dealer. See Intermediary
Definitions Adopting Release, 77 FR 30626.
189 15 U.S.C. 78c(3)(a)(71).
190 17 CFR 240.3a71–1 and 240.3a71–2.
191 Section 15F(a)(1) of the Exchange Act provides
that ‘‘[i]t shall be unlawful for any person to act as
a security-based swap dealer unless the person is
registered as a security-based swap dealer with the
Commission.’’ 15 U.S.C. 78o–10(a)(1). A person that
engages in security-based swap dealing activity in
connection with transactions with or on behalf of
customers in excess of the de minimis threshold
falls within the security-based swap dealer
definition, and such person must register as a
security-based swap dealer pursuant to Section
15F(a)(1). By contrast, persons that fall within the
statutory definitions of a broker and dealer in
Sections 3(a)(4) and (5) of the Exchange Act, 15
U.S.C. 78c(a)(4) and (a)(5), are required to register
with the Commission only if they make use of the
‘‘mails or any means or instrumentality of interstate
commerce to effect any transactions in, or to induce
or attempt to induce the purchase or sale of, any
security. . . . ’’ Section 15(a)(1) of the Exchange
Act, 15 U.S.C. 78o(a)(1).
192 See Intermediary Definitions Adopting
Release, 77 FR 30628 n.407 (indicating that the
Commission and the CFTC intended to address the
application of the Title VII dealer regime to nonU.S. persons in separate releases).
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raised questions regarding how the de
minimis threshold should be applied in
the cross-border context, expressing
concern that, among other things, if a
non-U.S. person were required to
register as a security-based swap dealer
with the Commission because its
security-based swap dealing activity
exceeded the de minimis threshold, it
might be subject to duplicative and
potentially conflicting requirements by
the Commission and a foreign
jurisdiction.193
Under the Commission’s proposal, as
described more fully in the following
subsections of this release, a non-U.S.
person 194 would be required to register
as a security-based swap dealer with the
Commission pursuant to Section
15F(a)(1) of the Exchange Act 195 if the
notional amount of security-based swap
positions connected with its securitybased swap dealing activity 196 with
U.S. persons (other than with foreign
branches of U.S. banks) 197 or otherwise
conducted within the United States 198
exceeds the de minimis threshold in the
security-based swap dealer
definition.199 Thus, a non-U.S. person
with a global security-based swap
dealing business, but whose positions
connected with its security-based swap
dealing activity with U.S persons (other
than with foreign branches of U.S.
banks) or otherwise conducted within
the United States fall below the de
minimis threshold, would not be
required to register with the
Commission as a security-based swap
dealer.200 A U.S. person, by contrast,
would be required to count all of its
security-based swap transactions
(including transactions conducted
193 See
Section III.B.2, infra.
Rule 3a71–3(a)(7) under the
Exchange Act (defining ‘‘U.S. person’’), as
discussed in Section III.B.5, infra.
195 15 U.S.C. 78o–10(a)(1).
196 See note 188, supra.
197 Proposed Rule 3a71–3(a)(1) under the
Exchange Act (defining ‘‘foreign branch’’), as
discussed in Section III.B.7, infra.
198 Proposed Rule 3a71–3(a)(5) under the
Exchange Act (defining ‘‘transaction conducted
within the United States’’), as discussed in Section
III.B.6, infra. This provision would capture dealing
activity undertaken by non-U.S. persons that are
physically located within the United States, such as
through a U.S. branch of a foreign bank, or through
an agent, such as non-U.S. person’s U.S. subsidiary
or an unaffiliated third party acting on the non-U.S.
person’s behalf. As discussed elsewhere in the
release, foreign security-based swap dealers utilize
these organizational models as part of their global
security-based swap dealing businesses. See Section
II.A.2, supra (discussing dealing structures), and
Section III.D, infra (discussing intermediation).
199 Proposed Rule 3a71–3(b)(1)(ii) under the
Exchange Act.
200 But see Section III.B.9, infra (discussing the
aggregation of affiliate positions).
194 Proposed
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through a foreign branch),201 conducted
in a dealing capacity, toward the de
minimis threshold to determine whether
it would be required to register as a
security-based swap dealer with the
Commission pursuant to Section
15F(a)(1) of the Exchange Act.202
As further discussed below, however,
we are not proposing to require a nonU.S. person engaged in security-based
swap dealing activity to count a
transaction with a non-U.S. person
conducted outside the United States
toward its de minimis threshold, even if
its performance (or the performance of
its counterparty) on the security-based
swap is guaranteed by a U.S. person.203
In addition, in conformity with the
position that the Commissions took in
the Intermediary Definitions Adopting
Release,204 we are not proposing to
require cross-border security-based
swap transactions between majorityowned affiliates to be considered when
determining whether a person is a
security-based swap dealer.205
In the following subsections, we first
briefly discuss the Commission’s
approach to the registration of foreign
brokers and dealers, as background, and
the views of commenters on the
application of Title VII to cross-border
activities, particularly as such views
relate to security-based swap dealing
activity. Then we propose a rule
regarding the application of the de
minimis exception to cross-border
security-based swap dealing activity.206
In order to give further definition to this
proposed rule, we are proposing rules
defining a number of relevant terms,
including ‘‘U.S. person’’ 207 and
201 Proposed Rule 3a71–3(a)(4) under the
Exchange Act (defining ‘‘transaction conducted
through a foreign branch’’), as discussed in Section
III.C.4, infra.
202 Proposed Rule 3a71–3(b)(1)(i) under the
Exchange Act.
203 See Section III.B.8, infra. However, such U.S.
guarantor may become a major security-based swap
participant by virtue of the guarantee it extends on
the performance of the obligations under the
transaction. See Section IV.C.2, infra. In addition,
a security-based swap entered into by a non-U.S.
person whose performance under such securitybased swap is guaranteed by a U.S. person would
be required to be reported and, in certain cases,
publicly disseminated, under re-proposed
Regulation SBSR. See Section VIII.C, infra. Such
security-based swap also may be subject to the
clearing and trade execution requirements in Title
VII. See Sections IX and X, infra.
204 See Intermediary Definitions Adopting
Release, 77 FR 30624–25.
205 See Section III.B.8, infra.
206 Proposed Rule 3a71–3(b) under the Exchange
Act, as discussed in Section III.B.4, infra.
207 Proposed Rule 3a71–3(a)(7) under the
Exchange Act, as discussed in Section III.B.5, infra.
The proposed definition of U.S. person is used not
only in the proposed rule regarding the application
of the de minimis threshold in the cross-border
context, but also in proposed rules discussed in
subsequent sections of the release.
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‘‘transaction conducted within the
United States.’’208 We also are
proposing a rule excluding from a nonU.S. person’s de minimis calculation
security-based swap transactions
entered into, in a dealing capacity, with
a foreign branch of a U.S. bank.209 In
addition, we are proposing a rule
providing an exception from the
aggregation requirement, in the context
of the security-based swap dealer
definition, for affiliated groups with a
registered security-based swap
dealer.210 Finally, we are proposing
interpretive guidance regarding and
requesting comment on the treatment of
inter-affiliate and guaranteed
transactions in the cross-border context
for purposes of the de minimis
threshold.211
2. Background Discussion Regarding the
Registration of Foreign Brokers and
Dealers
Under the Commission’s traditional
approach to the registration of brokers
and dealers under the Exchange Act,
registration and other requirements
generally are triggered by a broker or
dealer physically operating in the
United States, even if such activities are
directed only to non-U.S. persons
outside the United States.212 The
Commission’s territorial approach also
generally requires broker-dealer
registration by foreign brokers or dealers
that, from outside the United States,
208 Proposed Rule 3a71–3(a)(5) under the
Exchange Act, as discussed in Section III.B.6, infra.
Like the proposed definition of U.S. person, the
definition of ‘‘transaction conducted within the
United States’’ is used not only in the proposed rule
regarding the application of the de minimis
threshold in the cross-border context, but also in
proposed rules discussed in subsequent sections of
the release. In general, under the Commission’s
proposal, transactions conducted within the United
States, as defined in the proposed rule, would
trigger certain transaction-level requirements in
Title VII. See Sections VIII–X, infra.
209 Proposed Rule 3a71–3(b)(1)(ii) under the
Exchange Act; see also proposed Rule 3a71–3(a)(1)
under the Exchange Act (defining ‘‘foreign
branch’’), as discussed in Section III.B.7, infra.
210 Proposed Rule 3a71–4 under the Exchange
Act, as discussed in Section III.B.8, infra.
211 See Section III.B.8, infra.
212 See Rule 15a–6 Adopting Release, 54 FR
30016–17 (‘‘As a policy matter, the Commission
now uses a territorial approach in applying the
broker-dealer registration requirements to the
international operations of broker-dealers. Under
this approach, all broker-dealers physically
operating within the United States that effect,
induce, or attempt to induce any securities
transactions would be required to register as brokerdealers with the Commission, even if these
activities were directed only to foreign investors
outside the United States.’’); see also Proposed
Amendments to Rule 15a–6, 73 FR 39182 (‘‘Under
this [territorial] approach, broker-dealers located
outside the United States that induce or attempt to
induce securities transactions with persons in the
United States are required to register with the
Commission, unless an exemption applies’’).
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induce or attempt to induce securities
transactions by persons within the
United States.213 By contrast, the
Commission has not required foreign
entities to register as broker-dealers if
they conduct their ‘‘sales activities’’
entirely outside the United States.214
In addition to our territorial approach
to registration of broker-dealers under
the Exchange Act, the Commission
traditionally has taken an ‘‘entity’’
approach to the application of
regulation to registered brokerdealers.215 Pursuant to this approach,
we have not limited the application of
the Exchange Act, and rules and
regulations thereunder, solely to the
transactions of such entities that result
in the registration requirement. Instead,
we have taken the position that a
registered broker-dealer is generally
subject to registration and consequent
substantive requirements with respect to
all of its securities activity, including
the activity of its branches and offices,
regardless of whether the activity occurs
in the United States or with U.S.
persons.216 For instance, under this
approach, if a foreign broker-dealer is
required to register with the
Commission as a result of conducting
securities activity through a branch in
the United States, the registration
requirements and the regulatory system
governing U.S. broker-dealers, including
capital, margin, and recordkeeping
requirements, would apply to the entire
foreign broker-dealer entity, including
its head office, not just the U.S.
branch.217 By contrast, the Commission
213 See Rule 15a–6 Adopting Release, 54 FR
30016 (‘‘[E]ven if section 30(b) [of the Exchange
Act] were read to incorporate a territorial approach,
the Commission does not believe that section 30(b)
would exempt from broker-dealer registration the
activities suggested by the commenters. In
particular, directed selling efforts to U.S. investors
in the United States hardly could be considered
activities not traversing the U.S. territorial limits. A
broker-dealer operating outside the physical
boundaries of the United States, but using the U.S.
mails, wires, or telephone lines to trade securities
with U.S. persons located in this country, would
not be, in the words of section 30(b), ‘transact[ing]
a business in securities without the jurisdiction of
the United States.’ ’’).
214 See Rule 15a–6 Adopting Release, 54 FR
30016 (citing Exchange Act Release No. 25801, 53
FR 23646 n.9, and accompanying text).
215 See Rule 15a–6 Adopting Release, 54 FR
30017 (‘‘Also, the Commission uses an entity
approach with respect to registered brokerdealers’’); see also Proposed Amendments to Rule
15a–6, 73 FR 39182 (‘‘Because this territorial
approach applies on an entity level, not a branch
level, if a foreign broker-dealer establishes a branch
in the United States, broker-dealer registration
requirements would extend to the entire foreign
broker-dealer entity.’’).
216 As noted above, this is consistent with the
approach we have taken in other contexts under the
federal securities laws. See note 158, supra.
217 See Rule 15a–6 Adopting Release, 54 FR
30017.
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traditionally has not extended our
regulatory oversight of broker-dealers to
the activities of their corporate parents,
subsidiaries, or other affiliates.218
The Commission’s approach to
registration and regulation of foreign
broker-dealers thus extends Commission
oversight to the global activities of nonU.S.-based securities market
intermediaries that are registered
broker-dealers because of their
securities activities with U.S. persons or
that physically operate within the
United States.219 In recognition of the
internationalization of securities
markets, however, the Commission has
used available exemptive authority to
tailor rules and regulations to the
specific circumstances of foreign
markets and market participants. For
example, we used our exemptive
authority under Section 15(a)(2) of the
Exchange Act to adopt Rule 15a–6
under the Exchange Act (‘‘Rule 15a–
6’’),220 which provides limited
exemptions from registration to foreign
brokers or dealers engaging in securities
transactions, or offering to engage in
securities transactions, within the
United States or with U.S. persons,
subject to certain conditions.221
3. Comment Summary
223 See
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As noted above, various commenters
expressed concerns about the
‘‘extraterritorial’’ application of Title
VII, and many of these commenters
expressed particular concerns about the
possible extraterritorial application of
security-based swap dealer regulation
and registration requirements.222 In
addition to concerns described above
regarding the application of Title VII to
218 See id. (‘‘If the foreign broker-dealer
establishes an affiliate in the United States,
however, only the affiliate must be registered as a
broker-dealer; the foreign broker-dealer parent
would not be required to register.’’); see also
Proposed Amendments to Rule 15a–6, 73 FR 39182.
As discussed in Section III.B.89, infra, this is
consistent with the approach that the Commission
is proposing to take in the context of security-based
swap dealer registration.
219 See Rule 15a–6 Adopting Release, 54 FR
30017.
220 17 CFR 240.15a–6.
221 See Rule 15a–6 Adopting Release, 54 FR
30013. As discussed below, some commenters have
suggested that the Commission use an approach
that would be modeled after the approach the
Commission has applied to foreign broker-dealers
in Rule 15a–6 to address issues related to crossborder security-based swap transactions and foreign
security-based swap dealers.
222 See e.g., ACP/AMF Letter, BaFin Letter, Cleary
Letter IV, Davis Polk Letter I, Davis Polk Letter II,
IIB Letter, ISDA Letter I, Japanese Banks Letter,
JFSA Letter I, Newedge Letter, Rabobank Letter,
Socie´te´ Ge´ne´rale Letter I, SIFMA Letter, Socie´te´
Ge´ne´rale Letter II, Sullivan & Cromwell Letter, and
TCX Letter.
20:21 May 22, 2013
Section II.B, supra.
Section II.B, supra; see also ISDA Letter
I at 17 (urging that the new regulations be
implemented so as to not distort the current global
derivatives market that functions ‘‘within a
relatively level international playing field,’’ and
noting that to address concerns related to
competition and conflicts between various
regulators and regulations ‘‘[i]t is imperative that
U.S. and non-U.S. regulators must coordinate
requirements to avoid unintended impediments to,
and fragmentation of, the derivatives markets’’).
225 See, e.g., Davis Polk Letter II at 12
(recommending that in implementing Title VII
regulations, ‘‘the Commissions and the Federal
Reserve should also give effect to the general
jurisdictional limits specified in Sections 722 and
772 of the Dodd-Frank Act in a manner that is
consistent with the principle of international
comity evident in the statute and general legal
principles governing statutory construction
pertaining to extraterritorial and international
matters’’); Socie´te´ Ge´ne´rale Letter I at 8, 11
(recommending U.S. and foreign counterparts to
work toward a memorandum of understanding on
the jurisdictional reach of U.S. and EU derivatives
rules and warning that without cooperation
between the U.S. and foreign regulators the result
could be ‘‘regulatory retaliation’’ whereby ‘‘the
[s]waps market could devolve into regulatory chaos,
thereby increasing systemic risk’’); Newedge Letter
at 10–12 (expressing concern that requiring foreign
firms to register as swaps dealers or major swap
participants in the U.S. ‘‘could result in foreign
regulators taking retaliatory action against U.S.
firms engaging in swap activities with non-U.S.
persons domiciled within their physical borders’’
and that any regulation of foreign firms not
physically present in the United States that are
already subject to foreign regulations is unnecessary
and would violate principles of international
comity).
226 See, e.g., Sullivan & Cromwell Letter at 11
(‘‘The SEC has, in the past, plainly stated that it
uses a territorial approach in applying broker-dealer
224 See
(a) Market Participants
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cross-border security-based swap
activity,223 commenters noted that the
derivatives industry functions in a
global market and that new regulations
pose the potential to disrupt this market
if they do not take into account the
nature of the industry and the
appropriate extraterritorial reach of the
regulations.224 A consistent theme in
many of these comment letters was the
importance of taking into account the
principles of international comity in
limiting the extraterritorial reach of the
proposed rules, including entering into
coordination agreements with our
foreign regulatory counterparts on the
jurisdictional reach of U.S. and foreign
derivatives rules.225
For example, a number of commenters
recommended that the Commission take
a territorial approach in determining
when a person engaging in securitybased swap dealing activity would be
required to register with the
Commission as a security-based swap
dealer, generally recommending
registration of an entity for its securitybased swaps dealing activity from
within the United States or with regard
to its dealings with U.S.
counterparties.226 Several commenters
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further suggested that a non-U.S.
person’s de minimis amount of swap
activities with U.S. persons should not
trigger security-based swap dealer
registration.227 Some commenters
expressed the view that the
Commission’s cross-border framework
should seek to avoid imposing
duplicative regulation and unnecessary
cost on entities that are already
regulated in a foreign jurisdiction.228
Some commenters have suggested that
the Commission use an approach that
would be modeled after the approach
the Commission has applied to foreign
broker-dealers in Rule 15a–6 to address
issues related to cross-border securityregistration requirements to international
operations. Only those broker-dealers who induce,
or attempt to induce, securities transactions with
persons in the United States would be required to
register.’’); MFA Letter II at 15–16 (commenting that
the proposed security-based swap dealer and major
security-based swap participant rules do not appear
to encompass trading outside of the U.S. between
non-U.S. entities or non-U.S. affiliates of U.S.
entities, and adding that the rules also should not
capture the non-U.S. affiliates of U.S. investment
managers that advise offshore funds, or non-U.S.domiciled funds that have U.S. investment
managers but trade in swaps referencing non-U.S.
securities or on a non-U.S. market, considering that
foreign regulators will have jurisdiction over the
non-U.S. activities of U.S. entities); IIB Letter at 9
(urging the Commission to adopt an interpretation
that a ‘‘reference to a U.S. underlier or reference
entity in a swap conducted outside the U.S. [is not]
a sufficient connection to the U.S. to subject either
counterparty to U.S. Swap Dealer registration
requirements’’); Newedge Letter at 2 (suggesting
that foreign entities engaging in swaps transactions
‘‘with US persons should not be required to register
as swaps dealers or major swaps participants in the
US to the extent they are not physically located in
the US and are subject to a comparable regulatory
regime’’).
227 See, e.g., Sullivan & Cromwell Letter at 2, 8
(acknowledging that a foreign entity’s swaps
transactions with U.S. persons in excess of the de
minimis amount, ‘‘if otherwise covered by the
definitions, [should] be required to register’’ as a
swaps entity, but suggesting that swaps activities
with U.S. persons within ‘‘any de minimis amount
authorized by the final rules and in transactions
with their U.S. affiliates for purposes of risk
management’’ should not trigger swaps entity
registration); TCX Letter at 6 (‘‘We are concerned
that, should TCX become subject to swap dealer
registration notwithstanding the arguments
presented above, the de minimis exception as
proposed in the [Intermediary Definitions
Proposing Release] has been drafted too narrowly to
be of any practical use to TCXIM or to any other
similarly-situated offshore entity with limited US
swaps business. In particular, we urge the
Commission to clarify that an offshore entity’s
swaps with US counterparties, excluding non-US
subsidiaries of US entities, must be counted when
determining if the de minimis exemption is
available.’’).
228 See, e.g., IIB Letter at 7 (suggesting that the
‘‘Commissions should establish a framework for
cross-border swap activities that preserves and
leverages the strengths of existing market practices
and home country supervision and regulation’’ and
‘‘avoid a framework that is duplicative, inefficient
(for supervisors and market participants) and would
result in unrealistic extraterritorial supervisory
responsibilities for the Commissions and potential
fragmentation of the derivatives markets’’).
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based swap transactions and foreign
security-based swap dealers.229
For purposes of analyzing the
appropriate definition of U.S. person in
the security-based swap dealer context,
several commenters suggested that the
Commission look to rules adopted
under the Securities Act and adopt a
definition of U.S. person based on
Regulation S under the Securities Act
(‘‘Regulation S’’).230 Some commenters
stated the view that under Regulation S,
only affiliates or branches located
within the United States would be
considered U.S. persons.231 Some
commenters argued that a foreign
affiliate of a U.S. person and non-U.S.
branches of a U.S. bank should be
treated as non-U.S. persons and,
depending on their dealing activity, not
be required to register as security-based
swap dealers because such entities may
not have direct and significant
connection with, or effect on, U.S.
commerce.232 One commenter further
argued that a non-U.S. affiliate of a U.S.
person, in its insolvency, is subject to
separate resolution from its parent, and
thus should be treated as a non-U.S.
entity.233
229 See, e.g., Davis Polk Letter I at 11 n.17 (‘‘This
model is similar to the mode of operation permitted
by Rule 15a–6 under the Securities Exchange Act
of 1934, pursuant to which foreign broker-dealers
interface with U.S. customers under arrangements
with affiliated or non-affiliated broker-dealers
without themselves registering as broker-dealers in
the U.S.’’); Cleary Letter IV at 22 (‘‘Accordingly, as
one alternative, we suggest that the Commissions
adopt an approach that is modeled on the
Commissions’ existing regimes, permitting non-U.S.
swap dealers to transact with U.S. persons without
registering in the U.S. if those transactions are
intermediated by a U.S.-registered swap dealer.
This would be consistent with the approach
adopted by the SEC under Rule 15a–6 and prior
interpretative precedents with respect to non-U.S.
securities dealers.’’).
230 See 17 CFR 230.901(k). See, e.g., Cleary Letter
IV at 2, 6–9; Davis Polk Letter I at note 6.
231 See, e.g., Cleary Letter IV at 7 (stating that
‘‘Regulation S does not include as a ‘U.S. person’
the non-U.S. branch or affiliate of a U.S. or non-U.S.
person; only affiliates or branches located in the
U.S. are covered’’); SIFMA Letter at 5 (stating that
(‘‘It is noteworthy that the Regulation S definition
of U.S. person does not include non-U.S. affiliates
of U.S. persons or non-U.S. branches of a U.S. bank.
. . .’’).
232 See, e.g., Sullivan & Cromwell Letter at 2–3,
6–9 (arguing against the extraterritorial application
to foreign affiliates of a U.S. person, stating that
when a foreign entity’s ‘‘counterparty to a
transaction is a non-U.S. affiliate of a U.S. person,’’
the transactions are ‘‘removed from the U.S. stream
of commerce. As a result, there is no ‘direct’ effect
on U.S. commerce and it is highly unlikely that the
transactions would have any significant effect on
U.S. commerce’’); ISDA Letter I at 11 (stating that
‘‘Non-U.S. entities (including non-U.S. affiliates
and branches of U.S. banks) should not be required
to register as Dealers where they are conducting
business with non-U.S. counterparties.’’).
233 See Cleary Letter IV at 7 (‘‘The non-U.S.
affiliate of a U.S. person is, in its own insolvency
or that of its parent, typically subject to separate
resolution from its parent and other affiliates’’).
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Several commenters stated that a
foreign branch or office of a U.S. person
also should be treated as a non-U.S.
person, despite the fact that, as a few
commenters acknowledged, foreign
branches of U.S. banks are not separate
legal entities from their U.S. head office
and typically are not separately
capitalized, although in some cases they
may be subject to certain local capital or
reserve maintenance requirements.234
Several commenters suggested that
broker-dealer registration, not securitybased swap dealer registration, may be
more appropriate for a U.S. branch,
agency, or affiliate that acts as an agent
of a non-U.S. person for security-based
swaps transactions.235
Several commenters acknowledged
concerns that persons may seek to book
transactions through non-U.S. branches
or subsidiaries in an effort to evade the
requirements of Title VII.236 These
234 See, e.g., Cleary Letter IV at 7 (arguing that
‘‘[a]lthough bank branches are not usually
separately capitalized,’’ they should not be
considered U.S. persons because their operations
are subject to separate local licensing, examination,
and books and records requirements); SIFMA Letter
I at 15 n.37 (‘‘We acknowledge that Title VII capital
requirements cannot be applied at the branch-level
and, therefore, must be applied at the bank level.’’);
Sullivan & Cromwell Letter at 16 (remarking that
‘‘foreign branches have long been allowed to engage
in a wider range of activities than are their U.S.
head offices and have benefitted from the
presumption against applying U.S. law
extraterritorially’’ despite the fact that ‘‘foreign
branches of U.S. banks are not corporate entities
separate and apart from their bank parents’’).
235 See, e.g., IIB Letter at 10 (suggesting that a
U.S.-based person who acts as an agent for a nonU.S. person in soliciting or negotiating securitybased swap transactions with counterparties located
outside of the U.S. should register as a brokerdealer); Rabobank Letter at 3 (recommending that
U.S. affiliates who help to arrange swaps
transactions with U.S. persons should ‘‘register as
futures commissions merchants or introducing
brokers, broker-dealers, or swap dealers depending
upon their respective roles in soliciting
transactions, receiving customer margin, performing
delegated compliance functions, effecting
transactions as an agent on exchanges and swap
execution facilities and in OTC markets, or clearing
customer transactions’’); cf. Newedge Letter at 1–2
(asserting that broker-dealers and foreign entities
subject to comparable regulations who ‘‘engage
principally in customer [security-based] swap
facilitation activities’’ should not be subject to
security-based swap dealer and major securitybased swaps participant registration requirements
because they already are ‘‘subject to stringent rules
relating to capital, risk, margin and other
requirements by virtue of their registration status’’;
and alternatively, suggesting that registrants who
‘‘execute swaps solely in response to customer
orders and that hedge each such transactions
individually . . . should be exempt since, among
other things, their trading poses little or no risk to
themselves, their customers or the markets
generally.’’).
236 See, e.g., Sullivan & Cromwell Letter at 10
(‘‘We understand the concerns that the Commission
may have that persons would seek to book
transactions through non-U.S. branches or
subsidiaries in order to evade the requirements of
the CEA or Exchange Act.’’).
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commenters, however, urged that the
Commissions not seek to address the
potential for evasion through an
overbroad definition of a security-based
swap dealer, noting that there are
legitimate business reasons for
conducting security-based swap
transactions with non-U.S. persons
through non-U.S. operations.237
(b) Foreign Regulators
Foreign regulators have reached out to
the Commission through
correspondence and bilateral and
multilateral discussions to better
understand the approach being
considered by the Commission, to
express concern about the potential
impact of potential approaches on their
markets, and to seek regulatory
coordination.238 One of the principal
concerns of foreign regulators is that the
Commission would require foreign
entities to register with the Commission
and subject them to regulatory
requirements that are duplicative of, or
potentially conflict with, the
requirements imposed by their home
country or host country.239 In their
view, the Commission’s application of
Title VII requirements to foreign entities
in jurisdictions that commit to
developing or have developed similar
OTC derivatives regulations would fail
to acknowledge, under general
principles of international comity, the
effectiveness, suitability, and scope of
foreign regulatory regimes and place
undue regulatory burdens on foreign
237 See, e.g., Sullivan & Cromwell Letter at 9–10
(expressing understanding for the Commissions’
evasion concerns, but noting that U.S. companies
have legitimate business reasons for establishing
their non-U.S. operations, including requirements
in some foreign jurisdictions that only local banks
and local branches of foreign banks may engage in
swap activities); Cleary Letter IV at 5–7 (noting
legitimate business reasons for establishing nonU.S. operations abroad, and stating that the
Commissions ‘‘should not adopt an extraterritorial
regulatory framework premised on the assumption
that activities conducted outside the U.S. will be
undertaken for the purpose of evasion’’).
238 See, e.g., BaFIN Letter at 1–2 (‘‘Close
cooperation of our respective authorities,
accompanied by a Memorandum of Understanding,
might help to establish an adequate regulatory
environment for the swap activities of US and
German entities and to provide the confidence that
the respective national legislation is adequately
recognized and complied with.’’).
239 See, e.g., JFSA Letter I at 1–2 (requesting that
Japanese financial institutions be exempted from
‘‘Swap Dealer’’ and ‘‘Major Swap Participant’’
registration under the Dodd-Frank Act); BaFIN
Letter at 1 (‘‘The obligations for foreign banks
should be proportionate and take into account
equivalent requirements in their home
jurisdiction.’’). See also ECB Letter at 2 (expressing
concern about the ‘‘possible inconsistency between
US and EU legislation with respect to differing rules
on exempting public international institutions . . .
from the clearing and reporting obligation.’’).
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entities that conduct security-based
swap business with U.S. persons.240
Such concerns from foreign regulators
include comments that U.S. regulators
should not ask financial institutions
domiciled in their jurisdictions to
register as security-based swap dealers
because this would create undesirable
redundancies for those financial
institutions that are already regulated in
the foreign jurisdiction.241 Certain
foreign regulators also argued that the
Commission should not regulate foreign
subsidiaries of U.S. security-based swap
dealers because these entities would
already be regulated by a foreign
regulator.242 Some foreign regulators
expressed the expectation that the
Commission would limit the registration
of foreign banks as security-based swap
dealers to operations conducting
activities with U.S. counterparties or
clients and would not apply the
registration and regulation requirements
to foreign banks as a whole.243
4. Application of the De Minimis
Exception to Cross-Border SecurityBased Swap Dealing Activity
The Commission recognizes the
concerns raised by commenters
regarding the potential for imposing
inconsistent or conflicting requirements
on security-based swap dealers with
global operations, as well as their desire
that the Commission take into account
the principles of international comity
when applying Title VII to cross-border
dealing activity. After considering the
goals of the Dodd-Frank Act and the
scope of the provisions of Title VII
covering security-based swap dealers, in
light of the global nature of the securitybased swap market, the various
structures of dealing operations, and the
views of commenters, the Commission
is proposing an approach to the
application of the Title VII registration
requirement to cross-border securitybased swap dealing activity that focuses
on whether dealing conduct occurs with
U.S. persons or otherwise occurs within
the United States.
Specifically, as explained below, the
Commission is proposing to require a
non-U.S. person engaged in securitybased swap dealing activity to register
with the Commission as a securitybased swap dealer pursuant to Section
15F(a)(1) of the Exchange Act 244 if the
notional amount of security-based swap
transactions connected with its dealing
activity with U.S. persons (other than
with foreign branches of U.S. banks) 245
or otherwise conducted within the
United States 246 exceeds the de minimis
threshold in the security-based swap
dealer definition.247 A U.S. person
engaged in security-based swap dealing
activity would be required to count all
security-based swap transactions
connected with its dealing activity
toward the de minimis threshold,
including transactions conducted
through a foreign branch.248
(a) Meaning of the Term ‘‘Person’’ in the
Security-Based Swap Dealer Definition
As a preliminary matter, we note that,
as the Commission discussed in the
Intermediary Definitions Adopting
Release, the term ‘‘person’’ as used in
the security-based swap dealer
definition should be interpreted to refer
to a particular legal person.249
Accordingly, a trading desk,
department, office, branch, or other
discrete business unit that is not a
separately organized legal person would
not be viewed as a security-based swap
dealer (regardless of where located);
rather, the legal person of which it is a
part would be the security-based swap
dealer.250 Similarly, the term ‘‘person’’
244 15
U.S.C. 78o–10(a)(1).
Rule 3a71–3(a)(7) under the
Exchange Act (defining ‘‘U.S. person’’), as
discussed in Section III.B.5, infra; proposed Rule
3a71–3(a)(1) under the Exchange Act (defining
‘‘foreign branch’’), as discussed in Section III.B.7,
infra.
246 Proposed Rule 3a71–3(a)(5) under the
Exchange Act (defining ‘‘transaction conducted
within the United States’’), as discussed in Section
III.B.6, infra.
247 Proposed Rule 3a71–3(b) under the Exchange
Act; see also 17 CFR 240.3a71–2.
248 See id.
249 See Intermediary Definitions Adopting
Release, 77 FR 30624. Section 3(a)(9) of the
Exchange Act defines ‘‘person’’ as ‘‘a natural
person, company, government, or political
subdivision, agency, or instrumentality of a
government.’’ 15 U.S.C. 78c(a)(9); see also proposed
Rule 3a71–3(a)(7) under the Exchange Act (defining
‘‘U.S. person’’), as discussed in Section III.B.5,
infra.
250 This approach is consistent with the
Commission’s discussion in the Intermediary
Definitions Adopting Release regarding the entity245 Proposed
240 See
Asian-Pacific Regulators Letter at 4.
e.g., JFSA Letter I at 1 (‘‘If these
institutions were also to be regulated under US DFA
framework, this will create an undesirable and
redundant effect on these Japanese institutions.’’).
242 See, e.g., ACP/AMF Letter at 1–32 (‘‘[W]e
strongly support . . . a mutual recognition regime
built around an adequate and balanced symmetrical
system taking into account the home and the host
country regulatory regimes. Thus . . . we expect
that [the registration of non-resident entities] will
be limited to activities in relation with US
counterparties and/or clients and will not involve
similar obligations to the financial organizations as
a whole. The obligations for non-resident entities
should indeed be proportionate and take into
[account] equivalent requirements in their home
jurisdiction.’’).
243 See, e.g., BaFIN Letter at 1 (‘‘Without
questioning the registration of foreign banks, I
suppose that such registration will be limited to
activities in relation with US counterparties and/or
clients and will not involve similar obligations to
foreign banks as a whole’’).
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241 See,
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30993
in the Commission’s rules implementing
the de minimis exception should be
interpreted to refer to a particular legal
person.251
Thus, the security-based swap dealer
definition would apply to the particular
legal person performing the dealing
activity, even if that person’s dealing
activity is limited to a trading desk or
discrete business unit.252 The
presumption is that a person who falls
within the security-based swap dealer
definition is a dealer with regard to all
of its security-based swap activities.253
As a result, a legal person with a branch,
agency, or office that is engaged in
dealing activity in connection with
transactions above the de minimis
threshold would be required to register
as a security-based swap dealer, even if
the legal person’s dealing activity were
limited to such branch, agency, or
office. By contrast, each affiliate of a
security-based swap dealer would need
to separately consider whether it falls
within the de minimis exception if that
affiliate engages in security-based swap
dealing activity.254
(b) Proposed Rule
We are proposing a rule identifying
the types of security-based swap
transactions that should be included in
level designation of security-based swap dealers. 77
FR 30624. It also generally is consistent with the
Commission’s traditional entity approach to the
registration of broker-dealers, as discussed in
Section III.B.2, supra.
251 See 17 CFR 240.3a71–2; proposed Rule 3a71–
3(b) under the Exchange Act.
252 Within an affiliated group of companies, only
those legal persons that engage in dealing activities
will be designated as dealers; that designation will
not be imputed to other non-dealer affiliates or to
the group as a whole. A single affiliate group may
have multiple swap or security-based swap dealers.
See Intermediary Definitions Adopting Release, 77
FR 30624–25. But see Section III.B.8, infra
(discussing aggregation).
253 The definition of security-based swap dealer
provides that a person may be designated as a
security-based swap dealer for a single type or class
or category of security-based swaps or activity, and
not others. See Section 3(a)(71)(B) of the Exchange
Act, 15 U.S.C. 78c(71)(B); 17 CFR 240.3a71–1(c) (‘‘A
person that is a security-based swap dealer in
general shall be deemed to be a security-based swap
dealer with respect to each security-based swap it
enters into, regardless of the type, class, or category
of the security-based swap or the person’s activities
in connection with the security-based swap, unless
the Commission limits the person’s designation as
a security-based swap dealer to specified types,
classes, or categories of security-based swaps or
specified activities of the person in connection with
security-based swaps.’’). See note 588, infra.
Although the Commission is not proposing to
designate non-U.S. persons as security-based swap
dealers in a limited capacity, the Commission’s
proposed approach would limit the application of
certain transaction-level requirements to the ‘‘U.S.
Business’’ of foreign security-based swap dealers.
See Section III.C.4, infra.
254 See Section III.B.8, infra (discussing interaffiliate transactions), and Section III.B.8, infra
(discussing aggregation).
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a person’s calculation of the notional
amount of security-based swap
transactions connected with dealing
activity for purposes of determining
whether the de minimis exception
excludes that dealer from the securitybased swap dealer definition.255 The
proposed rule confirms that all of a U.S.
person’s security-based swap
transactions conducted in a dealing
capacity would count toward its de
minimis threshold, wherever those
transactions are solicited, negotiated,
executed, or booked.256 Although we
recognize that some commenters have
suggested that the Commission should
not require U.S. persons to include
positions connected with dealing
activity conducted through foreign
branches in calculating the amount of
their dealing activity,257 we are not
proposing to adopt this approach. The
security-based swap dealing activity of
a foreign branch is activity of the U.S.
legal person regardless of the role
played by the foreign branch or the
location of the security-based swap
dealing activity. We believe that any
dealing activity undertaken by a U.S.
person occurs at least in part within the
United States and therefore warrants
application of Title VII, regardless of
where particular dealing activity in
connection with the transactions is
conducted.258 The security-based swap
dealing activity of a U.S. person creates
risk to the U.S. person and to the U.S.
financial system, because the risk of
such transactions ultimately is borne by
the U.S. person, even if the transactions
in connection with that dealing activity
are conducted in part outside the United
255 Proposed Rule 3a71–3(b) under the Exchange
Act. Appendix B to this release contains a table that
identifies whether a potential security-based swap
dealer would be required to count a transaction
with a specific type of counterparty toward its de
minimis threshold. The table in Appendix B is only
a summary of the rules and interpretations
proposed in this release that is provided for ease of
reference; it does not supersede, and should be read
in conjunction with, the proposed rules and
interpretations.
256 Proposed Rule 3a71–3(b)(1)(i) under the
Exchange Act. As noted above, as used in this
release, ‘‘security-based swap dealing,’’ ‘‘securitybased swap dealing activity,’’ ‘‘dealing activity,’’
and related concepts have the meanings described
in the Intermediary Definitions Adopting Release,
77 FR 30596, unless otherwise indicated in this
release. Such dealing activity is normally carried
out through interactions with counterparties or
potential counterparties, which includes
solicitation, negotiation, or execution of a securitybased swap.
257 See, e.g., Sullivan and Cromwell Letter, at 9–
11.
258 See notes 231 and 234, supra. As noted in
Section II.A.3 above, the security-based swap
transactions of U.S. persons, wherever entered into,
give rise to ongoing obligations that may affect the
financial stability of the United States and thus
present the type of risk that Title VII was intended
to address.
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States, and because the U.S. person is
part of the U.S. financial system.259 To
achieve the purposes of Title VII,
including the reduction of systemic risk,
we preliminarily believe that U.S.
persons that engage in security-based
swap dealing activity through foreign
branches should be subject to the
regulatory framework for dealers
established by Congress in Title VII,
even if they deal exclusively with nonU.S. persons.
By contrast, a non-U.S. person would
be required to consider only the
security-based swap transactions
connected with its dealing activity with
U.S. persons (other than foreign
branches of U.S. banks) 260 or otherwise
conducted within the United States 261
for purposes of the de minimis
exception.262 Under this proposed
approach, a non-U.S. person would be
required to calculate its security-based
swap position for purposes of the de
minimis threshold by adding together
the notional amount of transactions
connected with dealing activity with
U.S. persons (other than foreign
branches of U.S. banks) 263 or otherwise
conducted within the United States.264
259 These risk concerns may be greater for
uncleared security-based swap than for cleared
security-based swaps where the U.S. person would
not retain the credit risk of its counterparty;
however, cleared security-based swaps still
represent an importation of risk into the U.S.
financial system when entered into by U.S. persons
because in the context of cleared security-based
swaps, the U.S. persons would be exposed to the
credit, financial, and operational risks of the
clearing agency.
260 Proposed Rule 3a71–3(a)(7) under the
Exchange Act (defining ‘‘U.S. person’’), as
discussed in Section III.B.5; proposed Rule 3a71–
3(a)(1) under the Exchange Act (defining ‘‘foreign
branch’’), as discussed in Section III.B.7, infra.
261 Proposed Rule 3a71–3(a)(5) under the
Exchange Act (defining ‘‘transaction conducted
within the United States’’), as discussed in Section
III.B.6, infra. Proposed Rule 3a71–3(a)(9) under the
Exchange Act defines ‘‘United States’’ as ‘‘the
United States of America, its territories and
possessions, any States of the United States, and the
District of Columbia.’’ The proposed definition of
‘‘United States’’ is consistent with the definition of
that term in other contexts in the federal securities
laws. See, e.g., 17 CFR 230.902(l); 17 CFR 240.15a–
6(b)(6).
262 Proposed Rule 3a71–3(b)(1)(ii) under the
Exchange Act.
263 See Section III.B.7, infra (discussing the
exception from the de minimis threshold for
transactions by foreign dealers with foreign
branches of U.S. banks).
264 Proposed Rule 3a71–3(b)(1)(ii) under the
Exchange Act. For purposes of the de minimis
threshold, the U.S. person-status of a non-U.S.
person’s counterparty would be relevant only at the
time of a transaction that arises out of the non-U.S.
person’s dealing activity. Any change in a
counterparty’s U.S. person status after the
transaction is executed would not affect that
transaction’s treatment for purposes of the de
minimis exception, though it would affect the
treatment of any subsequent dealing transactions
with that counterparty. See also Product Definitions
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As a result, a foreign entity with a global
security-based swap dealing business,
but whose transactions connected with
its dealing activity with U.S. persons
(other than foreign branches of U.S.
banks) or otherwise conducted within
the United States fall under the de
minimis threshold, would not fall
within the security-based swap dealer
definition and, therefore, would not be
required to register as a security-based
swap dealer.265
This approach to the de minimis
exception for non-U.S. persons engaged
in cross-border dealing activity
preliminarily appears to us to focus
appropriately on a non-U.S. person’s
security-based swap dealing activity in
the United States. In addition, this
proposed approach, when combined
with our broader approach to the
registration and regulation of foreign
security-based swap dealers, appears to
us to appropriately focus our oversight
on those non-U.S. persons engaged in
security-based swap dealing activities
that most directly impact the U.S.
security-based swap market and U.S.
financial system and that, therefore,
warrant the application of the
provisions of Title VII covering securitybased swap dealers.266
Adopting Release, 77 FR 48286 (‘‘If the material
terms of a Title VII instrument are amended or
modified during its life based on an exercise of
discretion and not through predetermined criteria
or a predetermined self-executing formula, the
Commissions view the amended or modified Title
VII instrument as a new Title VII instrument’’).
265 See 17 CFR 240.3a71–2(a). The Commission
notes that, to the extent that a non-U.S. person does
not conduct dealing activity within the United
States or with U.S. persons (or to the extent that the
volume of positions connected with such dealing
activity does not exceed the de minimis threshold
discussed below), it would not be required to
register with the Commission as a security-based
swap dealer under Section 15F(a)(1) of the
Exchange Act regardless of the volume of nondealing security-based swap transactions it has
within the United States or with U.S. persons. See
Intermediary Definitions Adopting Release, 77 FR
30631. Such an entity still would be subject to the
major security-based swap participant thresholds
with respect to its non-dealing security-based swap
transactions. However, once a non-U.S. person’s
transactions with U.S. persons (other than foreign
branches of U.S. banks) or otherwise conducted
within the United States involve dealing activity
that exceeds the de minimis threshold, that person
would be required to register as a security-based
swap dealer and would be subject to the statutory
requirements applicable to security-based swap
dealers for all of its security-based swap
transactions. See Intermediary Definitions Adopting
Release, 77 FR 30645.
266 The Commission understands that entities
such as foreign central banks, international
financial institutions, multilateral development
banks, and sovereign wealth funds (‘‘SWFs’’)
(together, ‘‘foreign public sector financial
institutions’’ or ‘‘FPSFIs’’) rarely enter into securitybased swap transactions in a dealing capacity. As
such, we believe that the proposed approach
outlined in this release would sufficiently address
the dealer registration concerns of these entities.
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The Commission is not proposing, as
some commenters have suggested, an
approach modeled on Rule 15a–6(a)(3),
which would permit non-U.S. persons
to conduct security-based swap dealing
activity with U.S. persons without
registering with the Commission if such
dealing activity were intermediated by a
registered security-based swap
dealer.267 The Commission
preliminarily believes that such an
approach would not address the risk to
the U.S. financial system by dealing
activity of non-U.S. persons within the
United States or with U.S. persons. As
a dealer, the non-U.S. person would be
the party to the security-based swap
transaction and, therefore, the party that
bears the financial risk of such
transaction and whose financial
integrity is of primary concern to the
Commission. This concern is
heightened by the fact, noted above,
that, unlike most other securities
transactions, security-based swap
transactions give rise to ongoing
obligations between the transaction
counterparties.268 Under the alternative
suggested, the important financial
responsibility requirements that Title
VII imposes on security-based swap
dealers would not apply to the non-U.S.
person with respect to that transaction.
Instead, the intermediating registered
security-based swap dealer would be
subject to the financial responsibility
rules with respect to the transaction, but
since it would not be a party to, and
would not bear the financial risk of, the
security-based swap transaction, it
would not bear the ongoing financial
risk of such transaction. As a result, the
financial responsibility requirements
imposed on the intermediating dealer
would not address the dealing risk
posed by the non-U.S. person in this
context.269
sroberts on DSK5SPTVN1PROD with PROPOSALS
Request for Comment
The Commission requests comment
on all aspects of the proposed rule
The Commission is soliciting comment on whether
our proposal sufficiently addresses the concerns of
FPSFIs and whether our understanding of the
security-based swap activity of such entities is
accurate. See also Section III.B.5(b)iv, infra
(discussing international organizations).
267 See note 229, supra.
268 See Section II.A.3, supra.
269 The Commission also is not proposing a
dealer-to-dealer exception modeled on Rule 15a–
6(a)(4)(i) (providing that a foreign broker or dealer
shall be exempt from the registration requirements
of Section 15(a)(l) or 15B(a)(l) of the Exchange Act
to the extent that the foreign broker or dealer effects
transactions in securities with or for, or induces or
attempts to induce the purchase or sale of any
security by ‘‘[a] registered broker or dealer, whether
the registered broker or dealer is acting as principal
for its own account or as agent for others, or a bank
acting in a broker or dealer capacity as permitted
by U.S. law’’).
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regarding the application of the de
minimis exception to U.S. persons and
non-U.S. persons, including the
following:
• Should the proposed rule limit the
de minimis test to the notional amount
of a U.S. person’s positions connected
with its dealing activity involving
transactions with other U.S. persons or
otherwise conducted within the United
States? For example, should the
proposed rule be altered to provide that
U.S. banks would not include the
notional amount of transactions
connected with the dealing activity of
their foreign branches in the de minimis
calculation, rather than counting these
transactions against the de minimis
threshold as required under the
proposed approach? Why or why not?
• Should the proposed rule require
non-U.S. persons to count transactions
with the foreign branches of U.S. banks
towards their de minimis calculations?
Why or why not?
• Should the proposed rule follow an
approach modeled on Rule 15a–6(a)(3),
which would permit non-U.S. persons
to conduct security-based swap dealing
activity within the United States
without registering with the
Commission if those transactions were
intermediated by a registered U.S.
security-based swap dealer? If so, what
compliance obligations, if any, should
the unregistered non-U.S. person be
subject to? What obligations should the
U.S. security-based swap dealer be
subject to with respect to such
intermediated transactions, particularly
with respect to capital, margin, and
segregation requirements? How would
this approach deal with risk concerns,
especially with any security-based
swaps not subject to clearing?
• Should the proposed rule follow an
approach modeled on Rule 15a–
6(a)(4)(i), which would permit non-U.S.
persons to conduct security-based swap
dealing activity within the United States
without registering with the
Commission if those transactions were
with a registered U.S. security-based
swap dealer? If so, what conditions, if
any, should the Commission impose on
such an exception?
• Should non-U.S. persons acting in a
dealing capacity be required to count
transactions entered into with registered
security-based swap dealers toward
their de minimis threshold? Why or why
not? If non-U.S. persons are not required
to count security-based swap
transactions, conducted in a dealing
capacity, with registered security-based
swap dealers, should U.S. persons be
required to count security-based swap
transactions, conducted in a dealing
capacity, with registered security-based
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swap dealers? If not, why not? If so,
why?
• The CFTC has proposed an
interpretation that would require a nonU.S. person to consider the aggregate
notional value of its swap dealing
transactions (or any swap dealing
transactions of its affiliates under
common control) where the non-U.S.
person’s obligations are guaranteed by a
U.S. person.270 Should the proposed
rule require a non-U.S. person whose
security-based swap transactions are
guaranteed by a U.S. person to count all
of its security-based swap dealing
transactions that are guaranteed by a
U.S. person toward the de minimis
threshold, even if they are not entered
into with U.S. persons or otherwise
conducted within the United States?
• Should the proposed rule require
counting against the de minimis
threshold the notional amount of a nonU.S. person’s transactions entered into
in its dealing capacity within the United
States or with a U.S. person? Should a
non-U.S. person be required instead to
aggregate the total worldwide notional
amount of its security-based swap
transactions entered into in a dealing
capacity, regardless of the geographic
location of the dealing activity or the
counterparty’s status as a U.S. person if
it engages in any dealing transactions
with U.S. persons? Why or why not?
• What circumstances, if any, would
justify requiring a non-U.S. person to
register with the Commission if its
dealing activity arising from its
transactions with non-U.S. persons
outside the United States would exceed
the de minimis threshold if it had been
conducted within the United States or
with U.S. persons but the non-U.S.
person enters into transactions within
the United States or with U.S. persons
solely in a non-dealing capacity?
• What circumstances would justify
following a different territorial approach
that would treat transactions connected
with the dealing activity conducted by
a U.S. person through its foreign
locations with non-U.S. persons as
outside the United States and not
required to be counted against such U.S.
person’s de minimis threshold?
• Does the Commission’s proposed
approach adequately address the
concerns of FPSFIs? Is our
understanding of the security-based
swap activity of FPSFIs accurate? If not,
please explain.
• What would be the market impact
of the proposed approach to apply the
de minimis exception in the crossborder context? How would the
proposed application of the de minimis
270 See
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exception to U.S. persons and non-U.S.
persons affect the competitiveness of
U.S. entities in the global marketplace
(both in the United States as well as in
foreign jurisdictions)? Would the
proposed approach place any market
participants at a competitive
disadvantage or advantage? If so, please
explain. Would the proposed approach
be a more general burden on
competition? If so, please explain. What
other measures should the Commission
consider to implement the de minimis
exception? What would be the market
impacts and competitiveness effects of
alternatives to the proposed approach
discussed in this release?
5. Proposed Definition of ‘‘U.S. Person’’
sroberts on DSK5SPTVN1PROD with PROPOSALS
Introduction
The proposed rule defining ‘‘U.S.
person’’ would identify a person’s status
as a U.S. person for purposes of
applying the calculation for the de
minimis exception in the cross-border
context.271 The proposed definition of
U.S. person generally follows an
approach to defining U.S. person similar
to that used by the Commission in other
contexts.272 Specifically, the proposed
rule would define U.S. person to mean
any of the following:
• Any natural person resident in the
United States;
• Any partnership, corporation, trust,
or other legal person organized or
incorporated under the laws of the
United States 273 or having its principal
271 Proposed Rule 3a71–3(a)(7) under the
Exchange Act. The definition of ‘‘U.S. person’’ also
is used in other proposed rules and interpretive
guidance discussed below. See Sections IV–XI,
infra.
272 See, e.g., Regulation S Adopting Release, 55
FR 18308 (‘‘The Regulation adopted today is based
on a territorial approach to Section 5 of the
Securities Act.’’). Although the proposed rule
generally follows the same approach as Regulation
S, the Commission preliminarily believes that it is
necessary to depart from Regulation S in certain
respects. See Section III.B.10, infra (comparing the
proposed definition of ‘‘U.S.’’ person with the
definition of ‘‘U.S. person’’ in Regulation S).
Notably, neither the Exchange Act nor Rule 15a–6
contains a definition of U.S. person.
The proposed definition of U.S. person is similar
to the definition of U.S. person that the CFTC staff
provided its October 12, 2012 no-action letter. See
Time-Limited No-Action Relief: Swaps Only With
Certain Persons to be Included in Calculation of
Aggregate Gross Notional Amount for Purposes of
Swap Dealer De Minimis Exception and Calculation
of Whether a Person is a Major Swap Participant
(Oct. 12, 2012), available at: http://www.cftc.gov/
ucm/groups/public/@lrlettergeneral/documents/
letter/12-22.pdf; see also Final CFTC Cross-Border
Exemptive Order, 78 FR 862 (indicating that for
purposes of its temporary conditional relief the
CFTC is taking a similar approach to the U.S.
person definition as that set forth in the October 12,
2012 no-action letter).
273 Proposed Rule 3a71–3(a)(9) under the
Exchange Act defines ‘‘United States’’ as ‘‘the
United States of America, its territories and
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place of business in the United States;
or
• Any account (whether discretionary
or non-discretionary) of a U.S.
person.274
The proposed rule also would provide
that the term ‘‘U.S. person’’ would not
include the following international
organizations: The International
Monetary Fund (‘‘IMF’’), the
International Bank for Reconstruction
and Development, the Inter-American
Development Bank, the Asian
Development Bank, the African
Development Bank, the United Nations,
and their agencies and pension plans,
and any other similar international
organizations, their agencies and
pension plans.275
We preliminarily believe that the
proposed definition of U.S. person
would achieve three objectives
necessary to effective application of
Title VII in the cross-border context.
First, it would identify those types of
individuals or entities that, by virtue of
their location within the United States
or their legal or other relationship with
the United States, are likely to impact
the U.S. market even if they transact
with security-based swap dealers that
are not U.S. persons.276 Second, it
would identify those types of
individuals or entities that, by virtue of
their location within the United States
or their legal or other relationship with
the United States, are part of the U.S.
security-based swap market and should
receive the protections of Title VII.
Third, it would permit us to identify
dealing entities that most likely would
be active in the U.S. security-based
swap market and whose dealing activity
most likely would pose a risk to the U.S.
financial system by virtue of their
counterparties’ resident or domicile
status.
Because of the nature of the risks
posed by security-based swaps, which
are borne by the entire corporate entity
even if the transaction is entered into by
a specific trading desk, office, or branch
of such entity, consistent with the
Commission’s approach to the meaning
of ‘‘person’’ in the security-based swap
dealer definition, as discussed above,
possessions, any States of the United States, and the
District of Columbia.’’
274 Proposed Rule 3a71–3(a)(7)(i) under the
Exchange Act.
275 Proposed Rule 3a71–3(a)(7)(ii) under the
Exchange Act.
276 As noted in Section II.A.3 above, the securitybased swap transactions of U.S. persons give rise to
ongoing liability that is borne by a person located
within the United States and thus are likely to pose
the types of financial stability risks to U.S. financial
system that Title VII was intended to address. The
security-based swap activity of U.S. persons occurs,
at least in part, within the United States.
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we are proposing to define the term
‘‘U.S. person’’ to include the entire
entity, including its branches and
offices that may be located in a foreign
jurisdiction.277 Thus, under this
approach, the term ‘‘U.S. person’’ would
be interpreted to include any foreign
trading desk, office, or branch of an
entity that is organized under U.S. law
or whose principal place of business is
located in the United States.278
(b) Discussion
i. Natural Persons
Under the proposed rule, any natural
person resident in the United States
would be a U.S. person, regardless of
that individual’s citizenship status.279
Individuals resident abroad, on the
other hand, would not be treated as U.S.
persons, even if they possess U.S.
citizenship.280 We preliminarily believe
that natural persons residing within the
United States who engage in securitybased swap transactions may raise the
types of concerns intended to be
addressed by Title VII, including those
related to transparency and customer
protection.281 We also note that this
approach is generally consistent with
the approach we have taken in prior
rulemakings relating to the cross-border
application of certain similar regulatory
requirements.282 Moreover, any risk to
such person arising from its securitybased swap activity may manifest itself
most directly within the United States,
where a significant portion of its
commercial and legal relationships exist
because that is where its residency is
(unlike a U.S. citizen resident abroad).
ii. Corporations, Organizations, Trusts,
and Other Legal Persons
Under the proposed rule, any
partnership, corporation, trust, or other
legal person organized or incorporated
under the laws of the United States 283
or having as its principal place of
business in the United States would be
a U.S. person.284 We have previously
looked to an entity’s place of
277 See
Section III.B.4(a), supra.
278 Id.
279 Proposed Rule 3a71–3(a)(7)(i)(A) under the
Exchange Act.
280 This proposed approach to treating natural
persons as U.S. persons based on residency, rather
than citizenship, differs from the proposed
approach to legal entities, such as partnerships and
corporations, discussed below.
281 See note 4, supra.
282 See Rule 15a–6 Adopting Release, 54 FR
30017 (providing that foreign broker-dealers
soliciting U.S. investors abroad generally would not
be subject to registration requirements with the
Commission).
283 Proposed Rule 3a71–3(a)(9) under the
Exchange Act (defining ‘‘United States’’).
284 Proposed Rule 3a71–3(a)(7)(i)(B) under the
Exchange Act.
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organization or incorporation to
determine whether it is a U.S. person in
adopting rules under the federal
securities laws,285 and we preliminarily
believe that it is also appropriate to do
so in the context of Title VII. We
preliminarily believe that the decision
of a corporation, trustee, or other entity
to organize under the laws of the United
States indicates a degree of involvement
in the U.S. economy or legal system that
warrants ensuring that its security-based
swap activity is subject to the
requirements of Title VII.286
Similarly, we believe that the
proposed definition should ensure that
Title VII applies to entities that are
organized or incorporated in a
jurisdiction outside the United States if
they have their principal place of
business in the United States.287 Any
risk to such entities arising from their
security-based swap activity is likely to
manifest itself most directly within the
United States, where a significant
portion of their commercial and legal
relationships would be likely to exist.
Moreover, focusing exclusively on
whether an entity is organized or
incorporated in the United States could
encourage some entities that are
currently organized or incorporated in
the United States to incorporate in a
non-U.S. jurisdiction to avoid the costs
of complying with Title VII while
maintaining their principal place of
business—and thus in all likelihood, the
risks arising from their security-based
swap transactions—within the United
States. To prevent this possibility, we
are proposing to define ‘‘U.S. person’’ to
include entities that are organized or
incorporated abroad but have their
principal place of business within the
United States.288
285 See Regulation S Adopting Release, 55 FR
18316.
286 Under this prong of the proposed rule,
‘‘special entities,’’ as defined in Section
15F(h)(2)(C) of the Exchange Act, would be U.S.
persons because they are legal persons organized
under the laws of the United States. Section
15F(h)(2)(C) of the Exchange Act defines the term
‘‘special entity’’ as ‘‘(i) a Federal agency; (ii) a State,
State agency, city, county, municipality, or other
political subdivision of a State; (iii) any employee
benefit plan, as defined in Section 3 of the
Employee Retirement Income Security Act of 1974,
29 U.S.C. 1002; (iv) any governmental plan, as
defined in Section 3 of the Employee Retirement
Income Security Act of 1974, 29 U.S.C. 1002; or (v)
any endowment, including an endowment that is an
organization described in Section 501(c)(3) of the
Internal Revenue Code of 1986.’’ 15 U.S.C. 78o–
10(h)(2)(C).
287 For example, a business may be incorporated
under the laws of a foreign jurisdiction but
nonetheless have its business operations, including
its home office, in the United States.
288 As discussed in Section III.B.6 below, the
Commission also is proposing to require non-U.S.
persons that conduct security-based swap
transactions within the United States, in a dealing
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An entity’s status as a U.S. person
under the proposed rule would be
determined at the legal entity-level and
thus apply to the entire legal entity,
including any foreign operations that
are part of the U.S. legal entity.289
Consistent with this entity-level
approach, a foreign branch, agency, or
office of a U.S. person would be treated
as a U.S. person under the proposed
definition.290 As the Commission noted
in proposing Regulation SBSR,
‘‘[b]ecause a branch or office has no
separate legal existence under corporate
law, the branch or office would be an
integral part of the U.S. person
itself.’’ 291 In other words, because a
branch or office is merely an extension
of the head office, not a separately
incorporated or organized legal entity,
we preliminarily believe that it lacks the
legal independence to be considered a
non-U.S. person for purposes of Title
VII if its head office is a U.S. person. We
preliminarily believe a wholesale
exclusion from the requirements of Title
VII for a foreign branch, agency, or
office of a U.S. person is not warranted
with respect to its security-based swap
transactions because the legal
obligations and economic risks
associated with the transactions directly
affect a U.S. person, of which the
branch, agency, or office is merely a
part.
Under the proposed definition, the
status of an entity as a U.S. person
would have no bearing on whether
separately incorporated or organized
legal entities in its affiliated corporate
group are U.S. persons. Accordingly, a
foreign subsidiary of a U.S. person
capacity, to count such transactions toward their de
minimis threshold. In addition, the Commission is
proposing to subject security-based swap
transactions that are conducted within the United
States to certain transaction-level requirements in
Title VII in connection with reporting and
dissemination, clearing, and trade execution. See
Sections VIII–X, infra.
289 In principle, Regulation S looks to the location
of the branch rather than the jurisdiction in which
the entity is organized or incorporated in
determining whether the branch is a U.S. person.
See 17 CFR 230.902(k)(1)(v) and (2)(v). Thus, under
Regulation S, the foreign branch of a U.S. bank is
not treated as a U.S. person while the U.S. branch
of a foreign bank is treated as a U.S. person. Under
subsection (a)(7)(ii) of proposed Rule 3a71–3 under
the Exchange Act, the foreign branch of a U.S. bank
would be treated as part of a U.S. person. See
Section III.B.10, infra (discussing the proposed
definition of ‘‘U.S. person’’ with the definition of
‘‘U.S. person’’ in Regulation S).
290 Proposed Rule 3a71–3(a)(7) under the
Exchange Act.
291 See Regulation SBSR Proposing Release, 75 FR
75240 (‘‘The Commission intends for this proposed
definition [of U.S. person] to include branches and
offices of U.S. persons’’). The Commission is reproposing Regulation SBSR in this release,
including its definition of U.S. person. See Section
VIII, infra.
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30997
would not be a U.S. person by virtue of
its relationship with its U.S. parent.
Similarly, a foreign entity with a U.S.
subsidiary would not be a U.S. person
simply by virtue of its relationship with
its U.S. subsidiary.292 The Commission
preliminarily believes that it is
appropriate to treat each affiliate
separately because of the distinct legal
status of each of the affiliates.293
iii. Accounts of U.S. Persons
Consistent with the proposed
definition’s focus on the location of the
person bearing the actual risk arising
from the security-based swap
transaction, the proposed definition of
U.S. person would include any accounts
(whether discretionary or not) of U.S.
persons.294 Such accounts would be
U.S. persons regardless of whether the
entity at which the account is held or
maintained is a U.S. person. Conversely,
accounts of non-U.S. persons would not
be U.S. persons solely because they are
held by a U.S. financial institution or
other entity that is itself a U.S.
person.295 In our view, the purposes of
Title VII require that its provisions
apply to the person that actually bears
the risks arising from the security-based
swap transaction.296 For this reason, we
preliminarily believe that the status of
accounts, wherever located, should turn
on whether any owner of the account is
itself a U.S. person,297 and not on the
status of the fiduciary or other person
managing the account, the discretionary
or non-discretionary nature of the
292 See
Section III.B.8, infra.
see Section III.B.8, infra (discussing the
aggregation of affiliate positions for purposes of the
de minimis calculation).
294 Proposed Rule 3a71–3(a)(7)(i)(C) under the
Exchange Act.
295 An account of a non-U.S. person and,
therefore, not a ‘‘U.S. person’’ under proposed Rule
3a71–3(a)(7) under the Exchange Act, may
nevertheless engage in ‘‘transactions conducted
within the United States,’’ as defined in proposed
Rule 3a71–3(a)(5) under the Exchange Act. For
example, if a non-U.S. person executes a securitybased swap from an office located in the United
States that security-based swap would be a
‘‘transaction conducted within the United States’’
even though neither party would be a ‘‘U.S.
person.’’ Similarly, if a non-U.S. person solicits a
counterparty within the United States to enter into
a security-based swap transaction, that transaction
would be a ‘‘transaction conducted within the
United States,’’ regardless of whether both
counterparties were non-U.S. persons. See Section
III.B.6, infra.
296 The same approach would apply to an account
of a partnership, corporation, trust, or other legal
person (e.g., a fund or a special-purpose investment
vehicle) to enter into a security-based swap. If the
partnership, corporation, trust, or other legal person
were a U.S. person, the account would be a U.S.
person.
297 For purposes of this definition, the term
‘‘account’’ includes both discretionary accounts and
non-discretionary accounts. See proposed Rule
3a71–3(a)(7)(i)(C) under the Exchange Act.
293 But
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account, or the status of the entity at
which the account is held or
maintained.298 Thus any account of a
U.S. person would be a U.S. person for
purposes of Title VII.
iv. International Organizations
In addition to identifying the persons
that fall within the U.S. person
definition, the proposed rule also
provides a list of specific international
organizations that do not fall within
such definition.299 This list includes
‘‘the International Monetary Fund, the
International Bank for Reconstruction
and Development, the Inter-American
Development Bank, the Asian
Development Bank, the African
Development Bank, the United Nations,
and their agencies and pension plans,
and any other similar international
organizations, their agencies and
pension plans.’’ 300 Although these
organizations may have headquarters in
the United States, the Commission
preliminarily believes that most of their
membership and financial activity are
outside the United States. Thus, based
on the nature of these entities as
international organizations the
Commission is proposing not to treat
them as U.S. persons for purposes of
Title VII.301
(c) Conclusion
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In short, by following a territorial
approach, the Commission preliminarily
believes that the proposed definition of
U.S. person describes the types of
individuals and entities residing,
organized, or conducting business
within the United States, and the types
of accounts that should be designated as
U.S. persons for purposes of the
proposed rule regarding application of
298 This proposed approach is consistent with the
treatment of managed accounts in the context of the
major security-based swap participant definition,
whereby the swap or security-based swap positions
in client accounts managed by asset managers or
investment advisers are not attributed to such
entities for purposes of the major participant
definitions, but rather are attributed to the
beneficial owners of such positions based on where
the risk associated with those positions ultimately
lies. See Intermediary Definitions Adopting Release,
77 FR 30690.
299 Proposed Rule 3a71–3(a)(7)(ii) under the
Exchange Act.
300 Id.
301 Regulation S also specifies that these
international organizations are not considered U.S.
persons, but Regulation S also considers affiliates
of such organizations to be non-U.S. persons. See
17 CFR 230.902(k)(2)(vi). The Commission is
soliciting comment on whether affiliates of such
organizations should be treated as non-U.S. persons
under proposed Rule 3a71–3(a)(7) under the
Exchange Act. Currently, under the proposed rule,
an affiliate of one of these international
organizations would have to separately consider its
U.S. person-status.
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the de minimis exception to securitybased swap dealers.302
Request for Comment
The Commission requests comment
on all aspects of the proposed definition
of ‘‘U.S. person,’’ including the
following:
• Does the proposed definition of
‘‘U.S. person’’ appropriately address the
concerns of security-based swap dealer
regulation under Title VII?
• Does the proposed definition
appropriately identify all individuals or
entities that should be designated as
U.S. persons? Is the proposed definition
too narrow or too broad? Why? Do the
proposed criteria for determining
whether an entity is a U.S. person
effectively describe the types of
counterparties that are relevant to
identifying the transactions a securitybased swap dealer must count when
calculating its de minimis threshold for
purposes of determining whether it is
required to register as a security-based
swap dealer and comply with the
requirements of Title VII? Does the
proposed definition appropriately
identify the types of entities that should
be entitled to the protections afforded to
counterparties of security-based swap
dealers under Title VII?
• Does the proposed definition
appropriately treat natural persons
residing in the United States as U.S.
persons? Should certain categories of
persons residing in the United States be
excluded from the definition of U.S.
person? Should certain categories of
persons (such as U.S. citizens or
permanent residents) residing abroad be
included in the definition of U.S.
person? Please explain why excluding
or including particular categories of
natural persons would be consistent
with and further the objectives of dealer
regulation under Title VII.
• Is the proposed approach to the
U.S. person status of natural persons
based on residency, rather than
citizenship, appropriate? In particular,
is the proposed approach to natural
persons, which differs from the
proposed approach to legal entities,
such as partnerships and corporations,
appropriate in light of the fact that, as
the Commission understands, natural
persons rarely enter into security-based
swaps?
• Does incorporation or organization
under the laws of the United States
appropriately define the types of entities
(both for-profit and non-profit) that
should be treated as U.S. persons under
302 As discussed below, the proposed definition is
used in other proposed rules and interpretive
guidance in the release. See Sections IV–XI, infra.
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Title VII? Is it appropriate to define an
entity as a U.S. person if it has its
principal place of business in the
United States, even if it is incorporated
or organized under the laws of a foreign
jurisdiction? Why or why not?
• Does the proposed rule adequately
address the risk of evasion or avoidance
of Title VII requirements? Are there
entities incorporated or organized under
foreign law that should be defined as a
U.S. person under the proposed rule
that are not currently so defined? For
example, should an entity incorporated
or organized under foreign law but
whose security-based swap transactions
are guaranteed by a U.S. person be
defined as a U.S. person? Why or why
not? Should a foreign entity that
conducts security-based swap dealing
activity predominantly with U.S.
persons or within the United States be
defined as a U.S. person? If so, why?
• Is it appropriate to determine the
U.S. person status of a corporation or
organization on an entity-wide basis?
Why or why not? Should foreign
branches, offices, or agencies of U.S.
persons be U.S. persons? Why or why
not? What distinguishes transactions
mediated or entered into by a foreign
branch of a U.S. bank from transactions
entered into by the head office of such
U.S. bank for purposes of Title VII
regulation?
• What, if any, competitive concerns
would be raised by defining foreign
branches, offices, or agencies of U.S.
persons as non-U.S. persons? Please
explain the mechanism of any
competitive effects. For example, would
particular business structures become
unworkable under this approach and
what would be the relevant impact? If
so, please explain possible alternatives
and their relative competitiveness.
• Should the proposed rule include
within the definition of U.S. person
foreign affiliates of U.S. persons?
Should other factors be taken into
account in determining the status of
such affiliated entities, such as, for
example, whether performance on the
security-based swap obligations of the
foreign entity is guaranteed by a U.S.
affiliate? Should a foreign entity with
performance on its security-based swap
obligations guaranteed by a U.S.
affiliate, where such foreign entity’s
security-based swap dealing activity is
conducted predominantly or exclusively
with non-U.S. persons, be included
within the definition of U.S. person?
Why or why not?
• Should a foreign branch of a U.S.
parent, including a foreign branch of a
U.S. bank, be included in the definition
of ‘‘U.S. person’’ for all purposes under
Title VII? Why or why not?
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• Should a majority-owned
subsidiary of a U.S. parent, regardless of
whether the subsidiary has financial
guarantees from the U.S. parent, be
included in the definition of ‘‘U.S.
person’’ for purposes of Title VII? Why
or why not?
• Should an account of one U.S.
person and one or more non-U.S.
persons be treated as a U.S. person?
Should the Commission instead
establish a de minimis threshold
amount or otherwise allows some U.S.
person ownership without triggering
U.S. person status for the account? If so,
how?
• The CFTC has proposed a definition
of U.S. person that would include a
legal entity that is directly or indirectly
majority-owned by one or more U.S.
persons and in which such person(s)
bears unlimited responsibility for the
obligations and liabilities of the legal
entity (other than a limited liability
company or limited liability partnership
where partners have limited
liability).303 Should the Commission
adopt a similar approach? If so, why?
How should majority ownership be
determined? Is majority ownership the
appropriate test? If not, should some
other percentage test be used (e.g., 25%
or some other measure of control)? Are
there operational or other difficulties in
implementing such an approach?
• Should entities, whatever their
place of domicile, that guarantee the
performance of U.S. person
counterparties to security-based swaps
themselves be deemed U.S. persons?
Why or why not? How would treating
such indirect counterparties to securitybased swaps as U.S. persons affect the
application of Title VII rules?
• Is the proposed definition’s focus
on the status of the person bearing the
actual risk in the transaction (e.g.,
looking at the status of the account
owner rather than the person with
authority to direct the investment
decisions) appropriate in determining
whether the person is a U.S. person?
• The CFTC has proposed a definition
of U.S. person that would include any
pension plan for the employees, officers
or principals of a legal entity with its
principal place of business inside the
United States. Should the Commission
adopt a similar approach? If so, what
categories of entities would or would
not be U.S. persons when compared to
the Commission’s proposed approach?
How is including or excluding such
entities, as applicable, from the
definition of U.S. person consistent with
303 See
and in furtherance of the objectives of
Title VII?
• Does the proposed rule
appropriately address the treatment of
certain international organizations with
respect to the definition of U.S. person?
Should any or all of the organizations
specifically identified in the proposed
rule be treated as U.S. persons? If so,
why? Are there other similarly situated
international organizations that should
also be explicitly excluded from the
U.S. person definition? Should the
affiliates of international organizations
be treated as non-U.S. persons, even if
organized under U.S. law? If so, why? If
not, why not?
• Should the proposed definition
expressly exclude from the definition of
U.S. person any other entity or category
of entities? If so, which ones and why?
• The CFTC has proposed a definition
of U.S. person that would include any
commodity pool, pooled account, or
collective investment vehicle (whether
or not it is organized or incorporated in
the United States) of which a majority
ownership is held, directly or indirectly,
by a U.S. person. Should the
Commission adopt a similar definition
that includes any investment fund,
commodity pool, pooled account, or
collective investment vehicle of which a
majority ownership is held by one or
more U.S. persons, even if such entity
is not incorporated or organized under
the laws of the United States, or does
not have its principal place of business
in the United States? If so, why and how
should majority ownership be
determined? Is majority ownership the
appropriate test? If not, should some
other percentage test be used (e.g., 25%
or some other measure of control)? Are
there operational or other difficulties in
implementing such an approach?
• The CFTC has proposed a definition
of U.S. person that would include any
commodity pool, pooled account, or
collective investment vehicle the
operator of which would be required to
register as a commodity pool operator
under the CEA.304 Should the
Commission adopt a similar definition
that includes any investment fund,
commodity pool, pooled account, or
collective investment vehicle the
operator of which would be required to
register as a commodity pool operator
under the CEA or an investment adviser
under the Investment Advisers Act of
1940 (‘‘Investment Advisers Act’’)? If so,
why?
• Should the definition of U.S. person
specifically address the status of estates,
which is specifically addressed in
CFTC Further Proposed Guidance, 78 FR
304 See
912.
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Regulation S? 305 If so, please explain
the types of security-based swap
transaction such entities typically
engage in and describe any problems
created by the proposed definition of
U.S. person relative to the goals of Title
VII.
• The CFTC has proposed a definition
of U.S. person that would include any
estate or trust, the income of which is
subject to U.S. income tax regardless of
source. Should the Commission adopt a
similar approach? If so, why?
• Should the Commission define the
term ‘‘principal place of business’’ for
purposes of the proposed definition of
‘‘U.S. person’’? If so, should the
Commission define ‘‘principal place of
business’’ as the location of the
personnel who direct, control, or
coordinate the security-based swap
activities of the entity? 306 If no, how
should the Commission define it?
6. Proposed Definition of ‘‘Transaction
Conducted Within the United States’’
We are proposing a definition of
‘‘transaction conducted within the
United States’’ to identify security-based
swap transactions that involve activities
in the United States that the
Commission preliminarily believes
would warrant requiring a non-U.S.
person to count such transactions
toward its de minimis threshold in the
security-based swap dealer
definition.307 Under the proposed rule,
‘‘transaction conducted within the
United States’’ would be defined to
mean any ‘‘security-based swap
transaction that is solicited, negotiated,
executed, or booked within the United
States, by or on behalf of either
counterparty to the transaction,
regardless of the location, domicile, or
residence status of either counterparty
305 See Section III.B.10, infra (discussing the
definition of ‘‘U.S. person’’ in Regulation S).
306 This focus would be generally consistent with
the focus of the definition of ‘‘principal office and
place of business’’ in the Investment Advisers Act,
where it is defined as ‘‘the executive office of the
investment adviser from which the officers,
partners, or managers of the investment adviser
direct, control, and coordinate the activities of the
investment adviser.’’ 17 CFR 275.222–1(b).
307 Proposed Rule 3a71–3(a)(5) under the
Exchange Act. The proposed definition of
‘‘transaction conducted within the United States’’
also is used in other places in the release in the
context of our proposed application of Title VII
requirements in the cross-border context. See
Sections VIII–X, infra. The proposed definition of
‘‘transaction conducted within the United States,’’
and related discussion in this release, is not
intended to apply outside of the scope of the
proposals set forth in this release, unless otherwise
indicated. Accordingly, it thus does not affect other
rights or obligations of parties under the Exchange
Act or the federal securities laws generally.
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to the transaction.’’ 308 It would not,
however, include a transaction
conducted through a foreign branch of
a U.S. bank, for reasons discussed
below.309
As noted above, dealing activity is
normally carried out through
interactions with counterparties or
potential counterparties that include
solicitation, negotiation, execution, or
booking of a security-based swap.310
Engaging in any of these activities
within the United States, as part of
dealing activity, would involve a level
of involvement in a security-based swap
transaction that the Commission
believes should require such transaction
to count toward a potential securitybased swap dealer’s de minimis
threshold. The proposed rule, therefore,
is designed to identify for market
participants the key aspects of a
security-based swap transaction that the
Commission believes should trigger
security-based swap dealer registration
requirements.
By contrast, we are not proposing to
include either submitting a transaction
for clearing in the United States or
reporting a transaction to an SDR in the
United States as activity that would
cause a transaction to be conducted
within the United States under the
proposed rule, nor are we proposing to
treat activities related to collateral
management (e.g., exchange of margin
payments) that may occur in the United
States or involve U.S. banks or
custodians as activity conducted within
the United States for these purposes. We
recognize that submission of a
transaction for clearing to a CCP located
in the United States poses risk to the
U.S. financial system, and collateral
management plays a vital role in an
entity’s financial responsibility program
and risk management. However, we
preliminarily believe that none of these
308 Proposed Rule 3a71–3(a)(5)(i) under the
Exchange Act. The use of the term ‘‘counterparty’’
in the proposed rule is intended to refer to the
direct counterparty to the security-based swap
transaction, not a party that provides a guarantee on
the performance of the direct counterparty to the
transaction. See Section VIII.A, infra
(distinguishing between direct and indirect
counterparties).
309 Proposed Rule 3a71–3(a)(4)(ii) under the
Exchange Act. See proposed Rule 3a71–3(a)(4)
under the Exchange Act (defining ‘‘transaction
conducted through a foreign branch’’), as discussed
in Section III.B.7, infra.
310 See Section II.B.2(b), supra. More generally,
solicitation, negotiation, execution, and booking are
activities that represent key stages in a potential or
completed security-based swap transaction. As
discussed below, transactions conducted within the
United States, regardless of whether in a dealing or
non-dealing capacity, would generally be subject to
requirements relating to reporting and
dissemination, clearing, and trade execution. See
Sections VIII–X, infra.
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activities, by themselves, involves
activities conducted between a potential
dealer and its counterparty that may be
characterized as dealing activity,
although clearing and collateral
management services may be offered in
conjunction with dealing activity.
Under the rule adopted by the
Commission, jointly with the CFTC, a
potential security-based swap dealer is
required to consider the security-based
swap positions ‘‘connected with’’ the
dealing activity in which the potential
dealer—or any other entity controlling,
controlled by or under common control
with the potential dealer—engages over
the course of the immediately preceding
12 months (or following the effective
date of final rules implementing Section
3(a)(68) of the Exchange Act, 15 U.S.C.
78c(a)(68), if that period is less than 12
months).311 By incorporating the
definition of a ‘‘transaction conducted
within the United States’’ into the
proposed rule applying the de minimis
exception in the cross-border context,312
the Commission is proposing that nonU.S. persons engaged in cross-border
dealing activity include in their de
minimis calculations any security-based
swap transaction that is connected
with 313 an entity’s dealing activity with
another non-U.S. person if a U.S. branch
or office of either counterparty, or an
associated person 314 of either
counterparty—including any affiliate
and any associated person of any
affiliate, or a third party agent, located
within the United States—is directly
involved in the transaction. Thus, a
non-U.S. person engaged in securitybased swap dealing activity would be
required to count toward its de minimis
threshold any dealing transaction
entered into with another non-U.S.
person that was conducted in the
United States, whether the transaction
falls within the ‘‘conducted within the
United States’’ definition through such
non-U.S. person’s own activity (or that
of an agent within the United States), or
that of its non-U.S. person counterparty
(or such counterparty’s agent).315
Similarly, if any transaction connected
with a non-U.S. person’s dealing
activity is executed within the United
States, the non-U.S. person would be
required to count that transaction
toward its de minimis threshold.316
We recognize that many of a non-U.S.
person’s transactions conducted within
the United States that arise out of its
dealing activity may also be transactions
with U.S. persons, and thus would
already be counted for purposes of the
de minimis threshold. However,
requiring non-U.S. persons to include in
their de minimis calculations only
transactions with U.S. person
counterparties would enable such
persons to engage in significant amounts
of security-based swap dealing activity
within the United States without
Commission oversight as a securitybased swap dealer, so long as the
dealing activity were limited to nonU.S. persons.317 This would be the case
if the potential dealer operated out of a
branch, office, or affiliate, or utilized a
third-party agent acting on its behalf
within the United States, or merely
directed its dealing activity to non-U.S.
persons that themselves operate out of
the United States, either through
branches, office, or affiliates, or by
utilizing third party agents.318 The
Commission preliminarily does not
believe that this would be consistent
with the purposes of the Dodd-Frank
Act, which is intended, in part, to
promote accountability and
transparency in the U.S. security-based
swap market.319
First, we preliminarily believe that
when a non-U.S. person engages in
dealing activity with another non-U.S.
person from within the United States
either through an agent, branch, or
office, or otherwise engages in securitybased swap dealing activity within the
United States (such as by soliciting
persons within the United States from
outside the United States), the
solicitation, negotiation, or execution
activity that occurs within the United
States constitutes dealing activity that is
described by the security-based swap
dealer definition.320 This is the case
even where such transaction is
316 See
311 See
17 CFR 240.3a71–2(a)(1).
312 See proposed Rule 3a71–3(b) under the
Exchange Act.
313 The de minimis exception threshold is
computed based on the notional amount of an
entity’s security-based swap positions, connected
with its dealing activity, not transactions that are
merely solicited. See Intermediary Definitions
Adopting Release, 77 FR 30630.
314 See Section 3(a)(70) of the Exchange Act, 15
U.S.C. 78c(a)(70) (defining ‘‘person associated with
a security-based swap dealer or major securitybased swap participant’’); see also note 472, infra.
315 See Proposed Rule 3a71–3(b)(1)(ii) under the
Exchange Act.
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id.
317 Depending
on the nature of the activity and
the person located in the United States engaging in
the activity, such person may need to register with
the Commission as a broker-dealer under Section
15(a)(1) of the Exchange Act, 15 U.S.C. 78o(a)(1).
318 The Commission is not distinguishing, for
purposes of the proposed rule, whether a potential
dealer or its counterparty is operating out of a
branch, an office, an affiliate, or utilizes a thirdparty agent to act on its behalf. We are, however,
soliciting comment on whether there is a basis for
drawing distinctions in this area and look forward
to receiving commenters’ views.
319 See note 97, supra.
320 See Section II.B.2(b), supra.
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ultimately booked by the two non-U.S.
entities outside the United States.
Second, most market participants,
including non-U.S. persons, entering
into a security-based swap transaction
with a security-based swap dealer,
particularly through personnel located
in the United States, could reasonably
expect to be entitled to the customer
protections of Title VII because of Title
VII’s role in setting the standards for the
U.S. security-based swap market and the
market participant’s decision to engage
in a transaction within that market.321
Given the Commission’s responsibility
in Title VII to regulate the U.S. securitybased swap market, as well as
reasonable market expectations and the
risk of creating confusion among market
participants,322 we preliminarily do not
believe that it is appropriate to diverge
from our traditional approach to the
regulation of broker-dealers by
establishing a regulatory regime for the
security-based swap market that would
allow non-U.S. persons to engage in
unregulated dealing activity within the
United States, either when it acts
through U.S. branches, office, or agents
or it solicits, negotiates, or executes
transactions with non-U.S. persons that
themselves are operating out of the
United States.
Moreover, suppose non-U.S. persons
were not required to register when
engaging in security-based swap dealing
activity within the United States with
other non-U.S. persons. Non-U.S.
persons seeking to negotiate securitybased swap transactions using
personnel in the United States may
choose to enter into security-based swap
321 The Commission previously has noted the role
that the location of the dealer plays in setting
expectations regarding the legal protections
available in transactions with that dealer. See Rule
15a–6 Adopting Release, 54 FR 30017 (noting that
a U.S. citizen residing abroad who seeks out
transactions with foreign broker-dealers would not
generally expect U.S. securities laws to apply to the
transaction); Regulation S Adopting Release, 55 FR
18310 (noting the expectation that a buyer outside
the United States who purchases securities offered
outside the United States is aware that ‘‘the
transaction is not subject to registration under the
Securities Act’’). See also Cleary Letter IV at 17 (‘‘As
both Commissions have consistently recognized in
the past, the non-U.S. counterparty in . . .
transactions [with a non-U.S. branch or affiliate of
a U.S. person] conducted abroad have no
expectation of protection under U.S. law’’); Davis
Polk Letter II at 20 (‘‘Finally, the non-U.S.
counterparty would not reasonably expect the swap
[with a foreign bank swap dealer] to be subject to
Title VII’s requirements’’).
322 See Rui Albequerque and Neng Wang,
‘‘Agency Conflicts, Investment and Asset Pricing,’’
Journal of Finance, Vol. 63, No. 1 (2008) (discussing
the effect of customer protection on prices) and
Rafael La Porta, Florencio Lopez-de-Silanes, Andrei
Shleifer, and Robert Vishny, ‘‘Investor Protection
and Corporate Valuation,’’ Journal of Finance, Vol.
57, No. 3 (2002) (discussing the effect of customer
protection on prices).
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transactions with such unregistered
non-U.S. persons rather than with a U.S.
person to avoid the application of Title
VII. In this way, customers may choose
to forego the protections of Title VII in
order to achieve potential cost savings.
This could limit the access of U.S.
persons engaged in dealing activity
within the United States to non-U.S.
persons, as well as more generally
limiting the ability of U.S. persons to
access liquidity in the security-based
swap market. Accordingly, the
Commission is proposing that a nonU.S. person would be required to count
its security-based swap transactions
conducted within the United States (as
well as its transactions with U.S.
persons) that arise out of its dealing
activity to determine whether the
notional amount of its dealing
transactions exceeds the de minimis
threshold. This would have the effect of
subjecting both non-U.S. persons
engaged in dealing activity within the
United States and U.S. persons engaged
in dealing activity within the United
States to the same set of rules, thus
providing their counterparties the same
set of protections.
Finally, although the proposed rule
reflects the importance of ensuring that
neither non-U.S. person counterparty is
engaged in the relevant activities within
the United States for purposes of this
definition, we also recognize the
operational difficulties that could arise
in investigating the activities of a
counterparty to ensure compliance with
the rule. As a result, we are
preliminarily proposing to allow parties
to rely on a representation received from
a counterparty indicating that a given
transaction ‘‘is not solicited, negotiated,
executed, or booked within the United
States by or on behalf of such
counterparty.’’ 323 A party may rely on
such a representation by its
counterparty unless the party knows
that the representation is not
accurate.324 The Commission
323 Proposed Rule 3a71–3(a)(5)(iii) under the
Exchange Act.
324 Id. Cf. Exemptions for Advisers to Venture
Capital Funds, Private Fund Advisers With Less
Than $150 Million in Assets Under Management,
and Foreign Private Advisers, Advisers Act Release
No. 3222 (June 22, 2011), 76 FR 39646, 39676 (July
6, 2011) (‘‘if an adviser reasonably believes that an
investor is not ‘in the United States,’ the adviser
may treat the investor as not being ‘in the United
States’’’). We are proposing to use a knowledge
standard rather than a reasonable belief standard
with respect to transactions conducted within the
United States between non-U.S. person
counterparties due to the fact that this definition
applies to both counterparties to a transaction, thus
each counterparty has an incentive to ensure the
accuracy of its representation. In addition, the
proposed ‘‘actual knowledge’’ standard and related
discussion in this release are not intended to apply
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preliminarily believes that this would
address whatever operational
difficulties parties may have in
determining whether or not their
counterparty is conducting a transaction
within the United States.
Request for Comment
The Commission requests comment
on all aspects of the proposed rule
regarding registration by non-U.S
persons who engage in dealing activity
within the United States, including the
following:
• Should non-U.S. persons be
required to register by virtue of engaging
in security-based swap dealing activity
within the United States, even if none
of this dealing activity is directed to, or
otherwise involves, U.S. persons? Why
or why not?
• Does the proposed approach
appropriately impose the dealer
registration requirement on non-U.S.
persons based on their dealing activities
conducted within the United States?
Should a non-U.S. person be required to
register as a security-based swap dealer
if it enters into, or offers to enter into,
security-based swap transactions that
are transactions conducted within the
United States if such non-U.S. person’s
dealing activity is limited to its foreign
business? What about if the non-U.S.
person engages in non-U.S. dealing
activity, but also enters into transactions
with U.S. persons in a non-dealing
capacity?
• What, if any, market-transparency
or counterparty-protection issues would
be likely to arise if non-U.S. persons
were not required to register if they
engaged in dealing activity solely with
non-U.S. persons from within the
United States?
• What, if any, competition issues
would be likely to arise if non-U.S.
persons were not required to register if
they engaged in dealing activity solely
with non-U.S. persons from within the
United States?
• Is the proposed approach toward
determining whether dealing activity is
conducted within the United States
appropriate? Does the proposed rule
identify appropriate factors in
determining whether a transaction has
been conducted within the United
States? If not, what factors should be
modified, removed, or added?
• Is the proposed identification of
activities appropriate in the context of
determining whether a security-based
swap is a transaction conducted within
outside the scope of the proposals set forth in this
release. Accordingly, it does not affect the standard
for reliance on representations with respect to other
rights or obligations of persons under the Exchange
Act or the federal securities law generally.
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the United States? If not, which
activities should the Commission
consider as key evidence of a
transaction that is conducted within the
United States?
• Is direct participation by a branch,
agency, office, or associated person,
including any affiliate and any
associated person of any affiliate, within
the United States an appropriate
element for identifying whether a
security-based swap transaction is a
transaction conducted within the
United States? Are there functions
routinely performed by these entities
that should not trigger a registration
requirement, even if performed within
the United States?
• Is the direct participation of a thirdparty agent an appropriate element for
identifying whether a security-based
swap transaction is a transaction
conducted within the United States? If
not, why not?
• From an operational perspective,
what, if any, changes to policies and
procedures would be required to
identify transactions conducted within
the United States under the proposed
approach? What changes would be
required, for example, to monitor
circumstances that would prevent a
party from relying on representations?
• Does the proposed rule
appropriately identify the range of
security-based swap activities (i.e.,
solicitation, negotiation, execution, and
booking) that should be considered in
determining whether dealing activity is
conducted within the United States? If
not, what activities should be excluded
or included? Why?
• Should a transaction entered into
by a non-U.S. person in its capacity as
a dealer be treated as dealing activity
conducted within the United States if it
is executed on an SB SEF, submitted to
an SDR, or cleared by a security-based
swap clearing agency physically located
within the United States, even if no
other activity related to the transaction
were conducted within the United
States?
• Should the Commission allow
parties to rely on representations from
their counterparties regarding
compliance with the definition of
‘‘transaction conducted within the
United States’’? Are there alternatives to
relying on representations to ensure
compliance? Should parties be required
to exercise reasonable standards of care
and due diligence?
• Is the standard used for the
proposed ability to rely on a
representation appropriate? Should
another standard of knowledge be used?
If so, what standard would be more
appropriate for this purpose?
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• The CFTC has proposed an
interpretation that does not consider
whether swap dealing activity is
conducted inside or outside the United
States when determining whether the de
minimis threshold is met.325 Should the
Commission adopt this approach? If yes,
please address the effect of both
approaches on customer protection,
market transparency, competition, and
capital formation in the U.S. securitybased swap market.
• What would be the market impact
of the proposed approach to
determining whether dealing activity
occurred within the United States? How
would the proposed approach affect the
competitiveness of U.S. entities in the
global marketplace (both in the United
States as well as in foreign
jurisdictions)? Would the proposed
approach place any market participants
at a competitive disadvantage or
advantage? If so, please explain. Would
the proposed approach be a more
general burden on competition? If so,
please explain. What other measures
should the Commission consider to
implement the proposed approach?
What would be the market impacts and
competitiveness effects of alternatives to
the proposed approach discussed in this
release?
7. Proposed Treatment of Transactions
With Foreign Branches of U.S. Banks
As noted above, under the proposed
rule, a non-U.S. person would not be
required to count toward the de minimis
threshold in the security-based swap
dealer definition its transactions with
the foreign branch of a U.S. bank.326 For
purposes of this proposed approach,
and as described more fully below,
325 See CFTC Cross-Border Proposal, 77 FR
41219–20.
326 Proposed Rule 3a71–3(b)(1)(ii) under the
Exchange Act. Section 716 of the Dodd-Frank Act
(commonly known as the ‘‘Push-Out Rule’’)
prohibits the provision of certain types of ‘‘Federal
assistance’’ to certain swap and security-based swap
dealers and major swap and security-based swap
participants referred to as ‘‘swaps entities,’’ subject
to certain exceptions. In addition, Section 619 of
the Dodd-Frank Act (commonly referred to as the
‘‘Volcker Rule’’) adds a new Section 13 to the Bank
Holding Company Act of 1956 (‘‘BHC Act’’) (to be
codified at 12 U.S.C. 1851) that generally prohibits
any banking entity from engaging in proprietary
trading or from acquiring or retaining an ownership
interest in, sponsoring, or having certain
relationships with a hedge fund or private equity
fund (‘‘covered fund’’), subject to certain
exemptions. See Prohibitions and Restrictions on
Proprietary Trading and Certain Interests in, and
Relationships With, Hedge Funds and Private
Equity Funds, Exchange Act Release No. 66057
(Oct. 12, 2011), 76 FR 68846 (Nov. 7, 2011). Both
the Push-Out Rule and the Volcker Rule will
potentially limit the ability of U.S. banks to conduct
security-based swap activity.
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‘‘foreign branch’’ would be defined as
any branch of a U.S. bank if:
• The branch is located outside the
United States;
• The branch operates for valid
business reasons;
and
• The branch is engaged in the
business of banking and is subject to
substantive banking regulation in the
jurisdiction where located.327
We preliminarily believe that these
factors are appropriate for determining
which entities fall within the definition
of a foreign branch for purposes of this
proposed approach due to their focus on
the physical location of the branch and
the nature of the branch’s business and
regulation in a foreign jurisdiction.
Requiring the branch to be located
outside the United States is consistent
with the goal of the proposed rule,
which is to identify security-based swap
activity that is not conducted within the
United States. Requiring the branch to
be operated for valid business purposes
and to be engaged in the business of
banking and subject to substantive
banking regulation in a foreign
jurisdiction is intended to help ensure
that U.S. banks are not able to take
advantage of the proposed rule by
setting up offshore operations to evade
the application of Title VII.
In order for a transaction to be a
‘‘transaction conducted through a
foreign branch,’’ and therefore excluded
from a non-U.S. person’s de minimis
threshold calculation,328 the foreign
branch must be the named counterparty
to the transaction 329 and the transaction
must not be solicited, negotiated, or
executed by a person within the United
States on behalf of the foreign branch or
its counterparty.330 To the extent that
the transaction is conducted within the
327 Proposed Rule 3a–71–3(a)(1) under the
Exchange Act. We are not proposing to include
‘‘agencies’’ within the definition of ‘‘foreign
branch’’ as such term is used in connection with
our treatment of transactions with foreign branches
of U.S. banks. We recognize that Regulation S
groups agencies and branches together in defining
the term U.S. person. See 17 CFR 230.902(k)(1)(v),
(2)(v). However, as discussed in Section III.B.10
below, although certain aspects of Regulation S may
be useful in the context of security-based swaps,
Title VII and Regulation S are tailored to serve
different objectives. In particular, the common
treatment of agencies and branches under
Regulation S does not compel us to similarly group
agencies and branches for purposes of our treatment
of transactions with foreign branches of U.S. banks
given the fact that the term ‘‘agency’’ does not have
any operative meaning with respect to the foreign
operations of U.S. banks.
328 Proposed Rules 3a71–3(b)(1)(ii) and (2)(ii)
under the Exchange Act.
329 Proposed Rule 3a71–3(a)(4)(i)(A) under the
Exchange Act.
330 Proposed Rule 3a71–3(a)(4)(i)(B) under the
Exchange Act.
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United States, as described in the
immediately preceding section (whether
on behalf of the U.S. bank to which the
branch belongs or of the foreign
counterparty), the non-U.S. person
would be required to count such
transaction arising out of its dealing
activity toward its de minimis threshold
for purposes of determining whether it
is required to register as a security-based
swap dealer.331
We believe that counting transactions
with a foreign branch toward the de
minimis threshold would be consistent
with the view that a foreign branch of
a U.S. bank is part of a U.S. person
within the proposed definition.332 We
also recognize that such transactions
pose risk to the U.S. financial system. At
the same time, however, we believe that
imposing registration requirements on
non-U.S. persons solely by virtue of
their transactions with foreign branches
of U.S. banks could limit the access of
U.S. banks to non-U.S. counterparties
when they conduct their foreign
security-based swap dealing activity
through foreign branches because nonU.S. persons may not be willing to enter
into transactions with them in order to
avoid being required to register as a
security-based swap dealer.333 We have
preliminary concluded that not
requiring such transactions to be
counted toward the foreign
counterparty’s de minimis threshold for
purposes of the security-based swap
dealer registration requirement would
minimize this disparate treatment while
ensuring that transactions involving
foreign branches of U.S. banks remain
subject to certain Title VII requirements
(as described below).334
331 See
Section III.B.6, supra.
Section III.B.5, supra.
333 See, e.g., Sullivan and Cromwell Letter at 14
(‘‘The jurisdictional scope of the swaps entity
definitions is critical to the ability of U.S. banking
organizations to maintain their competitive position
in foreign marketplaces. Imposing the regulatory
regime of Title VII on their Non-U.S. Operations
would place them at a disadvantage to their foreign
bank competitors because the Non-U.S. Operations
would be subject to an additional regulatory regime
which their foreign competitors would not.’’);
Cleary IV at 7 (‘‘Subjecting such non-U.S. branches
and affiliates to U.S. requirements could effectively
preclude them from, or significantly increase the
cost of, managing their risk in the local financial
markets, since local financial institutions may be
required to comply with Dodd-Frank to provide
those services’’).
334 See Section III.C, infra. Provided the
transaction is not a transaction conducted within
the United States under proposed Rule 3a71–3(a)(5)
under the Exchange Act, the Commission also is not
proposing to require non-U.S. persons to count
transactions with a non-U.S. person toward their de
minimis threshold even if the non-U.S. person’s
performance on the security-based swap is
guaranteed by a U.S. person. See Section III.B.9,
infra.
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332 See
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Finally, although the proposed rule
reflects the importance of ensuring that
neither counterparty is operating from
within the United States for purposes of
conducting a transaction through a
foreign branch, we also recognize the
operational difficulties that could arise
in investigating the activities of a
counterparty to ensure compliance with
the rule. As a result, we are proposing
to allow parties to rely on a
representation received from a
counterparty indicating that ‘‘no person
within the United States is directly
involved in soliciting, negotiating,
executing, or booking’’ a given
transaction on behalf of the
counterparty.335 A party may rely on
such a representation by its
counterparty unless the party knows
that the representation is not accurate.
The Commission preliminarily believes
that this would address whatever
operational difficulties parties may have
in determining whether or not their
counterparty is conducting a transaction
conducted through a foreign branch.
Request for Comment
The Commission requests comment
on all aspects of the proposed treatment
of transactions with foreign branches of
U.S. persons for purposes of the de
minimis exception, including the
following:
• Would the proposed approach
reduce the effectiveness of customer
protections or any other provisions of
Title VII? If so, how should these
concerns be balanced against the
competitiveness concerns identified as
part of the rationale behind the
proposed approach?
• Does the proposed approach
appropriately address the potential for
disparate competitive impacts related to
the application of the de minimis
exception to dealers operating out of
foreign branches? If not, how might the
Commission more effectively address
these concerns?
• Does the proposed approach
provide an advantage to U.S. banks
engaging in security-based swap dealing
activity through foreign branches? Are
there competitiveness concerns raised
by this approach for entities (either
banks or nonbanks) that do not utilize
the branch model? Are there
competitiveness concerns for non-U.S.
persons, including non-U.S. persons
whose performance under securitybased swaps is guaranteed by a U.S.
person? If so, what are they?
• Should the Commission allow
parties to rely on representations from
335 Proposed Rule 3a71–3(a)(4)(ii) under the
Exchange Act; see also Section III.B.6, supra.
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31003
their counterparties regarding
compliance with the definition of
‘‘transaction conducted through a
foreign branch’’? Should the
Commission separately allow parties to
rely on representations from their
counterparties regarding status under
the ‘‘foreign branch’’ definition?
• Is the standard used for the
proposed ability to rely on a
representation appropriate? Should
another standard of knowledge be used?
If so, what standard would be more
appropriate for this purpose?
• Should the definition of a ‘‘foreign
branch’’ be broadened to include
‘‘agencies’’ of U.S. banks in addition to
branches? If so, what rationale justifies
the inclusion of agencies? In particular,
what are the similarities (or differences)
in the legal status and regulatory
treatment of the foreign branches and
foreign agencies of U.S. banks that
would warrant similar treatment? How
do foreign agencies of U.S. banks differ
from foreign offices of U.S. persons that
are not banks?
• How might the proposed approach
to the foreign branches of U.S. banks be
impacted by the Volcker Rule and the
Push-Out Rule? How might securitybased swap dealers alter their business
practices in response to the Volcker
Rule and the Push-Out Rule? Should the
proposed approach to the foreign
branches of U.S. banks be altered to
account for these changes to business
practice?
• What would be the market impact
of the proposed treatment of
transactions with foreign branches of
U.S. banks? How would the proposed
approach affect the competitiveness of
U.S. entities in the global marketplace
(both in the United States as well as in
foreign jurisdictions)? Would the
proposed approach place any market
participants at a competitive
disadvantage or advantage? If so, please
explain. Would the proposed approach
be a more general burden on
competition? If so, please explain. What
other measures should the Commission
consider to implement the proposed
approach? What would be the market
impacts and competitiveness effects of
alternatives to the proposed approach
discussed in this release?
8. Proposed Rule Regarding Aggregation
of Affiliate Positions
One key issue related to our proposed
approach to the de minimis exception,
both in the cross-border context and
domestically, is the aggregation of
transactions connected with the dealing
activity of an affiliate. In the
Intermediary Definitions Adopting
Release, the Commission and the CFTC
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jointly stated that the notional
thresholds in the de minimis exception
encompass swap and security-based
swap dealing positions entered into by
an affiliate controlling, controlled by, or
under common control with the person
at issue.336 The Commission and the
CFTC further noted that for these
purposes, control would be interpreted
to mean the possession, direct or
indirect, of the power to direct or cause
the direction of the management and
policies of a person, whether through
the ownership of voting securities, by
contract or otherwise.337 This
aggregation of affiliate positions was
deemed necessary to prevent persons
from avoiding dealer regulation by
dividing up dealing activity in excess of
the notional thresholds among multiple
affiliates.338
The Commission is proposing a rule
that would describe how this
aggregation requirement would apply to
U.S. persons and non-U.S. persons
engaged in cross-border security-based
swap dealing activity, as well as to U.S.
persons engaged in purely domestic
transactions.339 As set forth in the
Intermediary Definitions Adopting
Release, the affiliate aggregation
principle requires that a person
aggregate the entire security-based swap
dealing activity of any of its affiliates,
without distinguishing whether the
dealing positions are entered into by
U.S. person affiliates or non-U.S. person
affiliates, and without distinguishing
whether the dealing positions are
entered into with U.S. persons or nonU.S. persons.340 The proposed rule takes
an approach that generally is consistent
with the affiliate aggregation
interpretive guidance jointly adopted by
the Commission and the CFTC to
require a person to aggregate all of the
security-based swap dealing positions
entered into by its U.S. person
affiliates,341 except that it excludes from
such aggregation the positions of an
affiliate that is a registered securitybased swap dealer, under certain
336 See Intermediary Definitions Adopting
Release, 77 FR 30631; 17 CFR 240.3a71–2(a)(1).
337 See Intermediary Definitions Adopting
Release, 77 FR 30631 n.437.
338 See Intermediary Definitions Adopting
Release, 77 FR 30631.
339 Proposed Rule 3a71–4 under the Exchange
Act.
340 See Intermediary Definitions Adopting
Release, 77 FR 30631 n.438 (explaining that the
Commission intended to address the application of
the aggregation principle to non-U.S. persons in a
separate release); 17 CFR 240.3a71–2(a)(1).
341 Proposed Rule 3a71–3(b)(2)(i) under the
Exchange Act. The proposed rule also clarifies that
only a person directly engaged in dealing activity
that is required to be counted toward such person’s
de minimis threshold would be required to
aggregate the dealing activity of its affiliates.
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conditions.342 The proposed rule also
provides that such aggregation must
include any security-based swap
transactions of such person’s non-U.S.
person affiliates that would be required
to be counted by such affiliates toward
their respective de minimis thresholds
in accordance with the proposed
approach described above (i.e., a nonU.S. person affiliate would be required
to calculate its security-based swap
transactions connected with dealing
activity conducted with U.S. persons
(other than foreign branches of U.S.
banks) or otherwise conducted within
the United States).343
The proposed rule similarly provides
that the affiliate aggregation principle
also would apply to non-U.S. persons
that engage in transactions in a dealing
capacity with U.S. persons (other than
foreign branches of U.S. banks) or
otherwise within the United States. In
determining whether its dealing activity
exceeds the de minimis threshold, a
non-U.S. person must aggregate the
amount of its own transactions
connected with its dealing activity with
U.S. persons (other than foreign
branches) or otherwise conducted
within the United States with the
amount of any security-based swap
transactions connected with the dealing
activity conducted by its affiliates,
whether U.S. persons or non-U.S.
persons, that such affiliates would be
required to count toward their
respective de minimis thresholds in
accordance with the proposed approach
described above 344 (other than the
transactions of affiliates that are
registered security-based swap
dealers).345 Transactions of affiliates
that are themselves non-U.S. persons
with other non-U.S. persons (or foreign
branches of U.S. banks) outside the
United States would not need to be
aggregated for purposes of the de
minimis exception.346
Thus, the Commission’s proposal
would require aggregation of the amount
of dealing transactions of all affiliates,
both U.S. persons and non-U.S. persons,
other than registered security-based
342 Proposed
Rule 3a71–4 under the Exchange
Act.
343 See Section III.B.4(b), supra; see also proposed
Rule 3a71–3(b)(2)(ii) under the Exchange Act.
344 See Section III.B.4(b), supra. A U.S. person
affiliate would be required to calculate all of its
security-based swap transactions connected with its
dealing activity and a non-U.S.-person affiliate
would be required to calculate its security-based
swap transactions connected with its dealing
activity with U.S. persons (other than foreign
branches of U.S. banks) or otherwise conducted
within the United States.
345 Proposed Rules 3a71–3(b)(2)(i) and (ii) and
proposed Rule 3a71–4 under the Exchange Act.
346 Id.
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swap dealers. We believe that the
Commission’s proposed approach
implements the de minimis exception in
a manner that is consistent with the
Dodd-Frank Act’s focus on the U.S.
security-based swap market.347 The
proposed approach reflects the fact that
all of a U.S. affiliate’s security-based
swap dealing transactions impact the
U.S. financial system, regardless of
whether such entity’s counterparties are
located in the United States or abroad.
The same is not true of non-U.S.
affiliates, however, because the securitybased swap transactions entered into by
a non-U.S. affiliate with other non-U.S.
persons outside the United States would
not impact the U.S. financial system to
the same extent as transactions with
U.S. persons. Thus, because the
statutory focus is on the U.S. securitybased swap market, we preliminarily
believe it is appropriate to distinguish
between U.S. and non-U.S. affiliates
based on the disparate impact of their
security-based swap dealing
transactions on the U.S. financial
system when determining which
dealing transactions should be
aggregated for purposes of the de
minimis threshold. This further suggests
that we should aggregate the dealing
positions of both U.S. and non-U.S.
person affiliates that are not already
registered security-based swap dealers,
in accordance with the rule and
guidance described in the following
paragraph regarding aggregation of the
positions of registered dealers, with the
goal of capturing all dealing transactions
that warrant imposing dealer
registration and regulation348 and
minimizing the opportunity for a person
to evasively engage in large amounts of
dealing activity.349 As a result, where
the aggregate security-based swap
dealing activity of an affiliated group,
calculated as described above, exceeds
the de minimis threshold, then each
affiliate within such group that engages
in the security-based swap dealing
activity included in such aggregation
calculation would be required to register
with the Commission as a securitybased swap dealer, subject to the
exception described below.
The Commission also is proposing a
rule to address the affiliate aggregation
of dealing positions for purposes of the
de minimis threshold where one or
more affiliates within a corporate group
are registered with the Commission as
347 See
Subtitle B of Title VII of the Dodd-Frank
Act.
348 See
note 4, supra.
Intermediary Definitions Adopting
Release, 77 FR 30631.
349 See
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security-based swap dealers.350 Under
the proposed approach, a person
calculating the amount of its securitybased swap positions for purposes of the
de minimis threshold would not need to
include in such calculation the securitybased swap transactions of an affiliate
controlling, controlled by, or under
common control with the person if such
affiliate is registered with the
Commission as a security-based swap
dealer.351 The application of this
proposed rule would be limited to
circumstances where a person’s
security-based swap activities are
operationally independent from those of
its registered security-based swap dealer
affiliate. For purposes of this proposed
rule, the security-based swap activities
of two affiliates would be considered
operationally independent if the two
affiliated persons maintained separate
sales and trading functions, operations
(including separate back offices), and
risk management with respect to any
security-based swap dealing activity
conducted by either affiliate that is
required to be counted against their
respective de minimis thresholds. If any
of these functions were jointly
administered by the two affiliates, or
were managed at a central location
within the affiliates’ corporate group
(e.g., at the entity serving as the central
booking entity) with respect to any
security-based swap dealing activity
conducted by either affiliate that is
required to be counted against their
respective de minimis thresholds, then
an unregistered person would not be
able to exclude the security-based swap
dealing activities of its registered
security-based swap dealer affiliate
under the proposed rule.
Absent the proposed exclusion of the
dealing positions of a registered
security-based swap dealer affiliate in
the proposed rule, any affiliate of a
registered security-based swap dealer
that engaged in security-based swap
dealing activity with U.S. persons or
within the United States would be
required to aggregate the dealing
positions of the registered securitybased swap dealer with its own dealing
positions for purposes of the de minimis
threshold. Given that a registered
security-based swap dealer would
presumably conduct relevant securitybased swap dealing positions in excess
of the de minimis threshold over the
course of the immediately preceding 12
months, all persons affiliated with a
registered security-based swap dealer
that engaged in any level of security350 Proposed
Request for Comment
The Commission requests comment
on all aspects of the proposed rule
regarding the aggregation of affiliate
positions, including the following:
• Should the Commission permit
affiliated persons to exclude the
security-based swap dealing positions of
affiliated registered security-based swap
dealers from their de minimis
calculations, as proposed? Why or why
not?
• Would permitting affiliated entities
to exclude the security-based swap
dealing positions of registered securitybased swap dealers from their de
minimis calculations undermine any of
the Title VII protections associated with
security-based swap dealer registration
and regulation? If so, please explain.
Should the Commission further explain
what ‘‘operationally independent’’
means? If so, what should the
Commission consider?
Rule 3a71–4 under the Exchange
Act.
352 See Intermediary Definitions Adopting
Release, 77 FR 30631.
351 Id.
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based swap dealing activity that is
required to be counted against the de
minimis threshold would necessarily be
required to register with the
Commission as security-based swap
dealers because of the affiliate
aggregation principle. We preliminarily
do not believe that this outcome would
be consistent with the statutory purpose
of the de minimis exception, because it
would prevent all affiliates of a
registered dealer from taking advantage
of the exception, even those engaged in
a minimal amount of dealing activity
relevant to Title VII dealer registration
and regulation. We also do not believe
that this scenario raises the concerns
about evasion that underlie the de
minimis affiliate aggregation rule jointly
adopted by the Commission and the
CFTC in the Intermediary Definitions
Adopting Release, given that this
proposed rule would apply only where
a corporate group already included a
registered dealer subject to Commission
oversight, and the dealing positions of
all commonly controlled unregistered
affiliates in the corporate group would
still be aggregated for purposes of the de
minimis threshold.352 For these reasons,
we believe that it is appropriate not to
include the security-based swap dealing
positions of registered security-based
swap dealers in the de minimis
calculations of their commonly
controlled affiliates provided that their
security-based swap dealing activities
that are relevant to the de minimis
calculation are operationally
independent of the registered securitybased swap dealer affiliates.
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31005
• Should the Commission permit
affiliated entities to exclude the
security-based swap dealing positions of
operationally independent affiliates
from their de minimis calculations, even
if such affiliates are not registered
security-based swap dealers?
• The CFTC has adopted temporary
conditional relief that would permit a
non-U.S. person to exclude from its de
minimis calculation the security-based
swap dealing positions of an affiliated
non-U.S. person that is registered as a
swap dealer and not guaranteed by a
U.S. person with respect to its swap
obligations.353 Should the Commission
adopt a similar interpretation to permit
a non-U.S. person (but not a U.S.
person) to exclude the dealing positions
of its affiliated registered non-U.S.
security-based swap dealer (but not the
dealing positions of its affiliated
registered U.S. security-based swap
dealer)? Should the Commission
condition such exclusion on the
affiliated registered security-based swap
dealer not being guaranteed by a U.S.
person? If so, please describe the likely
economic effects of providing different
exclusions from the affiliate aggregation
principle for U.S. and non-U.S. securitybased swap dealers and how the
Commission should best address them.
• The CFTC has also proposed an
interpretation that would permit nonU.S. persons engaged in dealing activity
with U.S. persons to aggregate the
notional amounts of security-based
swap dealing transactions by their nonU.S. affiliates separately from any
dealing activity performed by their U.S.
affiliates.354 Should the Commission
adopt a similar approach? If so, please
explain how this approach is consistent
with the de minimis threshold and the
rationale provided for the affiliate
aggregation principle in the
Intermediaries Definitions Adopting
Release. In addition, please describe the
likely economic effects of providing an
effectively higher de minimis threshold
for corporate groups that engage in
dealing activity with U.S. persons or
within the United States through
affiliates located in the United States
and in foreign jurisdictions.
• What would be the market impact
of the proposed approach to aggregation
of affiliate positions? How would the
proposed approach affect the
competitiveness of U.S. entities in the
global marketplace (both in the United
353 See Final CFTC Cross-Border Exemptive
Order, 78 FR 868.
354 See CFTC Cross-Border Proposal, 77 FR
41219–20; see also Final CFTC Cross-Border
Exemptive Order, 78 FR 867–68 (providing
temporary conditional relief from the CFTC’s de
minimis aggregation requirements).
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States as well as in foreign
jurisdictions)? Would the proposed
approach place any market participants
at a competitive disadvantage or
advantage? If so, please explain. Would
the proposed approach be a more
general burden on competition? If so,
please explain. What other measures
should the Commission consider to
implement the proposed approach?
What would be the market impacts and
competitiveness effects of alternatives to
the proposed approach discussed in this
release?
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9. Treatment of Inter-Affiliate and
Guaranteed Transactions
Consistent with the approach taken in
the Intermediary Definitions Adopting
Release, the Commission is proposing
that cross-border security-based swap
transactions between majority-owned
affiliates would not need to be
considered when determining whether a
person is a security-based swap
dealer.355 Thus, a non-U.S. person
engaged in dealing activity outside the
United States would not be required to
register as a security-based swap dealer
simply by virtue of entering into
security-based swap transactions with
its majority-owned U.S. affiliate, even if
such inter-affiliate security-based swaps
were back-to-back transactions (i.e., the
foreign subsidiary was acting as a
‘‘conduit’’ for the U.S. person).
Similarly, a U.S. person would not be
required to register as a security-based
swap dealer as a result of back-to-back
transactions with a non-U.S. person
subsidiary that acts as a conduit for
such U.S. person.356 Instead, as
proposed, there must be an independent
basis for requiring a person to register as
a security-based swap dealer that is
unrelated to its inter-affiliate
transactions.357
355 See 17 CFR 240.3a71–1(d), as discussed in the
Intermediary Definitions Adopting Release, 77 FR
30624–25. For the purposes of this rule, which was
adopted in the Intermediary Definitions Adopting
Release, counterparties are considered majorityowned affiliates if one party directly or indirectly
owns a majority interest in the other, or if a third
party directly or indirectly owns a majority interest
in both, based on the right to vote or direct the vote
of a majority of a class of voting securities of an
entity, the power to sell or direct the sale of a
majority of a class of voting securities of an entity,
or the right to receive upon dissolution or the
contribution of a majority of the capital of a
partnership. See 17 CFR 240.3a71–1(d)(2).
356 This approach differs from the treatment of
conduit entities in the CFTC Cross-Border Proposal.
Under the CFTC Cross-Border Proposal, a U.S.
entity may be required to register as a swap dealer
as a result of its inter-affiliate swap transactions
with an affiliated foreign dealer if the foreign dealer
is acting as a conduit by transferring swaps to the
U.S. entity through back-to-back transactions. See
CFTC Cross-Border Proposal, 77 FR 41222.
357 Proposed Rule 3a71–4 under the Exchange
Act.
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Furthermore, the Commission is
proposing not to require a non-U.S.
person that receives a guarantee from a
U.S. person of its performance on
security-based swaps with non-U.S.
persons outside the United States to
count its dealing transactions with those
non-U.S. persons toward the de minimis
threshold as a U.S. person would be
required to do.358 We believe that the
primary risk related to these
transactions is the risk posed to the
United States via the guarantee from a
U.S. person, not the dealing activity
occurring between two non-U.S. persons
outside the United States. As a result,
we do not believe that the risk posed by
the existence of the U.S. guarantee
would be better addressed through
requiring non-U.S. persons receiving
such guarantees to register with the
Commission as security-based swap
dealers. One way that the accumulation
of risk resulting from security-based
swap positions is addressed in Title VII
is through the major security-based
swap participant registration category.
We preliminarily believe that the risk
associated with guarantees by U.S.
persons of the performance on securitybased swap obligations of non-U.S.
persons may be best addressed through
the application of principles of
attribution in the major security-based
swap participant definition described in
the Intermediary Definitions Adopting
Release.359 We preliminarily believe
that use of the major security-based
swap participant definition to address
the risks posed to the United States as
a result of guarantees by U.S. persons
effectively deals with the specific
regulatory concerns posed by the risks
these guarantees present to the U.S.
financial system and is consistent with
the regulatory framework set forth in the
Dodd-Frank Act.360
The Commission also is proposing not
to require a foreign dealer to count
security-based swap transactions with
non-U.S. persons that receive guarantees
from U.S. persons toward the de
minimis threshold. The Commission
notes that, in many respects, the risk
created for U.S. persons and the U.S.
358 This approach differs from the treatment of
guaranteed entities in the CFTC Cross-Border
Proposal. Under the CFTC Cross-Border Proposal, a
non-U.S. person that receives a guarantee from a
U.S. person would be required to count all of its
swap dealing transactions against the de minimis
threshold. See CFTC Cross-Border Proposal, 77 FR
41221.
359 See Intermediary Definitions Adopting
Release, 77 FR 30688–89; Section V.C.2(a), infra.
360 See, e.g., Section IV, infra; see also Bank
Holding Company Act of 1956 (12 U.S.C. 1841, et
seq.); Title I of the Dodd-Frank Act (concerning
regulation of certain nonbank financial companies
and bank holding companies that pose a threat to
the financial stability of the United States).
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financial system in these transactions is
the same as the risk posed if the U.S.
person who provides the guarantee had
entered into transactions directly with
non-U.S. persons. The U.S. guarantor
would be held responsible to settle
those obligations, thus maintaining
similar liability as though the U.S.
person had entered into security-based
swap transactions directly with a nonU.S person. The Commission
preliminarily believes that the risk
posed to the U.S. markets by non-U.S.
persons engaged in dealing activity with
non-U.S. persons outside the United
States whose performance under
security-based swaps is guaranteed by a
U.S. person can be best addressed
through the major security-based swap
participant definition and requirements
applicable to major security-based swap
participants, as the risks to the United
States appear to arise only from the
resulting positions and not the dealing
activity as such.
Finally, as discussed below, the
Commission is proposing to subject a
security-based swap transaction
between two non-U.S. persons where at
least one of the persons receives a
guarantee on the performance of its
obligations from a U.S. person to the
regulatory reporting requirement (but
not, in some cases, to real-time public
reporting).361 If the proposed approach
is adopted, the Commission would gain
an understanding of market
developments in this area as a result of
the proposed de minimis exception.
Request for Comment
The Commission requests comment
on all aspects of the proposed treatment
of inter-affiliate and guaranteed
transactions, including the following:
• Should the Commission revise our
proposed approach to inter-affiliate
transactions to require those
transactions to be considered when
determining whether a person is a
security-based swap dealer? If so, why?
• If the Commission determines not
to exclude inter-affiliate transactions
from security-based swap dealing
activity in the cross-border context, how
could such a decision be reconciled
with the exclusion for inter-affiliate
transactions provided in the
Intermediary Definitions Adopting
Release? Should the Commission and
the CFTC jointly reconsider the
approach to inter-affiliate transactions
provided in the Intermediary
Definitions Adopting Release?
361 See Section VIII, infra. Under proposed
Regulation SBSR, inter-affiliate transactions would
be subject to reporting and dissemination
requirements. See id.
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• Should the Commission require the
registration of non-U.S. dealers that
receive guarantees on the performance
of their security-based swap obligations
from U.S. persons based on their
transactions with non-U.S. persons as
well as U.S. persons? Why or why not?
Should the U.S. guarantor be viewed as
engaging indirectly in dealing activity
through its affiliate and, therefore,
required to register as a security-based
swap dealer if the security-based swap
transactions in connection with its
dealing activity exceed the de minimis
threshold? Should there be a concern
that the U.S. guarantor is using the nonUS affiliate to evade the requirements of
Title VII?
• Does the proposed approach to
guarantees effectively address concerns
related to the risk posed to the U.S.
financial system resulting from
guarantees by U.S. persons of securitybased swap dealing activity by non-U.S.
persons?
• Are there competitiveness concerns
related to the proposed approach to
guarantees with regard to U.S. entities
that engage in non-U.S. security-based
swap dealing activity through business
models that do not rely on guarantees of
non-U.S. persons, such as those that
operate through foreign branches?
• The CFTC has proposed an
interpretation that would subject an
entity that operates a ‘‘central booking
system’’ where swaps are booked into a
single legal entity, to any applicable
swap dealer registration requirement as
if it had entered into such swaps
directly, irrespective of whether such
entity is a U.S. person or whether the
booking entity is a counterparty to the
swap or enters into the swap indirectly
through a back-to-back swap or other
arrangement with its affiliate or
subsidiary.362 Should the Commission
adopt a similar approach? If so, please
describe how such a decision could be
reconciled with the exclusion for interaffiliate transactions provided in the
Intermediary Definitions Adopting
Release.
• What would be the market impact
of the proposed approach to interaffiliate and guaranteed transactions?
How would the application of the
proposed approach affect the
competitiveness of U.S. entities in the
global marketplace (both in the United
States as well as in foreign
jurisdictions)? Would the proposed
approach place any market participants
at a competitive disadvantage or
advantage? If so, please explain. Would
the proposed approach be a more
362 See CFTC Cross-Border Proposal, 77 FR
41221–22.
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general burden on competition? If so,
please explain. What other measures
should the Commission consider to
implement the proposed approach?
What would be the market impacts and
competitiveness effects of alternatives to
the proposed approach discussed in this
release?
10. Comparison With Definition of ‘‘U.S.
Person’’ in Regulation S
In proposing an entity-based approach
to the definition of a U.S. person, we
have declined to follow the suggestions
by some commenters that we adopt the
definition of ‘‘U.S. person’’ used in
Regulation S, which among other things
expressly excludes from the definition
of ‘‘U.S. person’’ agencies or branches of
U.S. persons located outside the United
States.363 Although we recognize that
the Regulation S definition of U.S.
person has the advantage of familiarity
for many market participants,
Regulation S addresses specific policy
concerns that are different from those
addressed by Title VII.364 Specifically,
the definition of U.S. person in
Regulation S was adopted in the context
of providing an ‘‘issuer safe harbor’’
from the registration requirements of
Section 5 of the Securities Act, which
was intended ‘‘to ensure that the
[unregistered] securities offered [abroad]
come to rest offshore.’’ 365 In that
context, providing a safe harbor based in
part on the location of the person,
branch, or office making the investment
decision is consistent with the goals of
that regulatory framework, which
363 See, e.g., Cleary Letter IV at 2 (‘‘The Agencies
should adopt a consistent definition of ‘U.S. person’
based on SEC Regulation S for purposes of
analyzing whether a transaction involving one or
more such persons may be subject to the provisions
of Dodd-Frank.’’); Davis Polk I at 6 n.6 (‘‘We
propose that the term ‘U.S. counterparty’ be defined
in the same way as the term ‘U.S. person’ in Rule
902(k) of the SEC’s Regulation S under the
Securities Act, 17 CFR 230.902(k). This established
definition is familiar to countless financial market
professionals. Following the ‘U.S. person’ definition
in Regulation S, rather than creating an entirely
new definition, would avoid confusion and also
provide consistency of application and legal
certainty for a financial institution that offers a
security and a swap to the same customer, which
is common.’’); SIFMA Letter I at 5 (‘‘To determine
whether a party to a swap is a ‘U.S. person,’ the
Commissions should rely on the existing definition
of that term contained in Rule 902(k) of the SEC’s
Regulation S. This established, workable definition
is familiar to regulators and market participants
alike, and would provide legal certainty. It is
noteworthy that the Regulation S definition of U.S.
person does not include non-U.S. affiliates of U.S.
persons or non-U.S. branches of a U.S. bank and
generally excludes collective investment vehicles
established outside the United States with U.S.
investors.’’) (footnotes omitted); see also Section
III.B.5(c), supra.
364 See 17 CFR 230.901(k); see also Regulation S
Adopting Release, 55 FR 18306.
365 Regulation S Adopting Release, 55 FR 18307.
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31007
include protecting the integrity of the
registration requirements applicable to
securities publicly offered in the United
States under the Securities Act. The
Regulation S definition of ‘‘U.S. person’’
reflects this policy judgment.
We preliminarily believe that the
definition of U.S. person in Title VII
should encompass, for example, not
only a person that has its place of
residence or legal organization within
the United States, but also its principal
place of business within the United
States, as the security-based swap
activities of such entities are likely to
manifest themselves most directly
within the United States, where the
majority of their commercial, legal, and
financial relationships would be likely
to exist because that is where their
business principally occurs.366
Similarly, we preliminarily believe
that the definition of U.S. person in
Title VII should include accounts of a
U.S. person, regardless of whether the
account is a discretionary account or is
held by a dealer or other person that is
not resident in the United States,
because the U.S. person bears the direct
risk of transactions in the account,
regardless of where the investment
decision is made.367 Moreover, we are
proposing that an entity’s U.S.-person
status would apply to the entity as a
whole, since the risks related to the
concerns of Title VII are borne by the
entire entity and not just by the specific
business unit (or branch or office)
engaged in security-based swap
activity.368 With its exclusions for
certain foreign branches and agencies of
U.S. persons from the definition of
‘‘U.S. person,’’ Regulation S would not
address the entity-wide nature of the
risks that Title VII seeks to address.369
The Commission preliminarily
believes that adopting the definition of
‘‘U.S. person’’ in Regulation S without
significant modifications would not
achieve the goals of Title VII. As
discussed above, we are instead
proposing a definition of U.S. person
that focuses primarily on the location of
the person bearing the direct risk of the
transaction. Regulation S, with its focus
on the person making the investment
decision (rather than the person actually
366 See proposed Rule 3a71–3(a)(7)(i)(B) under the
Exchange Act; Section III.B.5(b)ii, supra.
367 See proposed Rule 3a71–3(a)(7)(i)(C) under the
Exchange Act; Section III.B.5(b)iii, supra.
368 See Section III.B.5(a), supra.
369 Under Regulation S, the foreign branch of a
U.S. bank is not treated as a U.S. person while the
U.S. branch of a foreign bank is treated as a U.S.
person. By contrast, under proposed Rule 3a71–
3(a)(7)(i)(B) under the Exchange Act, the foreign
branch of a U.S. bank would be treated as part of
a U.S. person while the U.S. branch of a foreign
bank would be treated as a non-U.S. person.
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bearing the risk), would not necessarily
capture the entity that actually bears the
risks arising from security-based swap
transactions that Title VII seeks to
address.370
In light of the specific objectives of
Title VII, the Commission preliminarily
believes that a definition of U.S. person
specifically tailored to the regulatory
objectives it is meant to serve, as
described above, is appropriate.371
Request for Comment
sroberts on DSK5SPTVN1PROD with PROPOSALS
The Commission requests comment
on all aspects of the proposed definition
of U.S. person, including the following:
• Should the Commission adopt the
definition of U.S. person in Regulation
S? If so, how should the Commission
reconcile the objectives of Title VII with
the objectives that Regulation S is meant
to serve?
• Should the Commission include all
U.S. citizens in the definition of U.S.
person, regardless of a person’s
residence or domicile?
• Should the Commission include
within the definition of U.S. person
entities and accounts where the
discretion to enter into security-based
swaps resides with a U.S. person? To
what extent would this approach
produce a result that differs from the
current approach reflected in the
proposed rule and the definitions of
‘‘security-based swap dealer’’ and
‘‘major security-based swap
participant’’?
370 Rather than creating a U.S. person definition
specifically tailored to Title VII, the Commission
could have proposed a modified version of
Regulation S. However, significantly modifying the
definition of ‘‘U.S. person’’ in Regulation S to
accommodate the objectives of Title VII would
largely eliminate the benefits associated with
adopting a consistent and well-established
regulatory standard.
371 See Section III.B.3(b)(4), infra. The
Commission notes that it took a different approach
to the definition of U.S. person and activity in the
United States in connection with the Commission’s
exemption from registration for foreign private
advisers. See Exemptions for Advisers to Venture
Capital Funds, Private Fund Advisers With Less
Than $150 Million in Assets Under Management,
and Foreign Private Advisers, Advisers Act Release
No 3222, 76 FR 39646 (July 6, 2011) (the ‘‘Foreign
Private Adviser Exemption’’). The Foreign Private
Adviser Exemption defines certain terms in the
statutory definition of ‘‘foreign private adviser’’
(added by Section 402 of the Dodd-Frank Act and
codified at section 202(a)(30) of the Investment
Advisers Act) by incorporating the definition of a
‘‘U.S. person’’ and ‘‘United States’’ under
Regulation S. As discussed in this subsection, the
Commission preliminarily believes that it would be
inappropriate to follow the approach in Regulation
S in its entirety with respect to the cross-border
regulation of security-based swaps, although it may
be appropriate in the context of the Foreign Private
Adviser Exemption given the similar policy
objectives with Regulation S.
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C. Regulation of Security-Based Swap
Dealers in Title VII
I. Introduction
To help address the potential effects
of registration, and attendant regulatory
requirements, on foreign security-based
swap dealers 372 with global securitybased swap businesses and U.S.
security-based swap dealers 373 that
engage in security-based swap dealing
activity through foreign branches that
also may be subject to registration or
regulation in foreign jurisdictions, the
Commission is proposing not to apply
the external business conduct standards
and segregation requirements in Title
VII to the Foreign Business 374 of such
registered foreign security-based swap
dealers and registered U.S. securitybased swap dealers that engage in
dealing activity through foreign
branches with non-U.S. persons and
foreign branches of U.S. banks.375 In
addition, while we are not proposing a
rule to limit the application of entitylevel requirements in Title VII to foreign
security-based swap dealers, we are
proposing to establish a policy and
procedural framework under which the
Commission would permit substituted
compliance in some circumstances by
registered foreign security-based swap
dealers with certain Title VII
requirements specifically applicable to
security-based swap dealers.376
372 Proposed Rule 3a71–3(a)(8) under the
Exchange Act defines ‘‘U.S. security-based swap
dealer’’ as a security-based swap dealer, as defined
in Section 3(a)(71) of the Exchange Act, 15 U.S.C.
78c(a)(71), and the rules and regulations
thereunder, that is a U.S. person, as defined in
proposed Rule 3a71–3(a)(7) under the Exchange
Act. Proposed Rule 3a71–3(a)(3) under the
Exchange Act defines ‘‘foreign security-based swap
dealer’’ as a security-based swap dealer, as defined
in Section 3(a)(71) of the Exchange Act, and the
rules and regulations thereunder, that is not a U.S.
security-based swap dealer.
373 See note 372, supra.
374 As discussed below, proposed Rule 3a71–
3(a)(2) under the Exchange Act defines ‘‘Foreign
Business’’ as meaning the security-based swap
transactions of foreign security-based swap dealers
and U.S. security-based swap dealers ‘‘other than
the U.S. Business of such entities.’’ ‘‘U.S. Business’’
is defined in proposed Rule 3a71–3(a)(6) under the
Exchange Act, with respect to a foreign securitybased swap dealer, as (i) any transaction entered
into, or offered to be entered into, by or on behalf
of such foreign security-based swap dealer, with a
U.S. person (other than with a foreign branch); or
(ii) any transaction conducted within the United
States; and, with respect to a U.S. security-based
swap dealer, as any transaction by or on behalf of
such U.S. security-based swap dealer, wherever
entered into or offered to be entered into, other than
a transaction conducted through a foreign branch,
as defined in proposed Rule 3a71–3(a)(4), with a
non-U.S. person or another foreign branch. See
Section III.C.4, infra.
375 Proposed Rule 3a71–3(b) under the Exchange
Act.
376 Proposed Rule 3a71–5 under the Exchange
Act, as discussed in Section XI, infra.
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In the following sections, we discuss
the views of commenters, describe the
transaction-level and entity-level
requirements specifically applicable to
security-based swap dealers in Title VII,
and discuss the proposed application of
transaction-level and entity-level
requirements to registered securitybased swap dealers in the cross-border
context.
2. Comment Summary
Various foreign dealers expressed
their views about the application of the
Dodd-Frank Act requirements to their
derivatives businesses. A number of
them expressed concern that if the
Commission applies security-based
swap dealer regulations, not only to
entities conducting business from
within the United States, but also to
foreign-domiciled entities, it could
effectively prevent foreign dealers from,
among other things, managing their
global security-based swap business out
of a centralized booking entity (i.e., the
entity that acts as principal—the named
counterparty—to a security-based swap
transaction), which they maintain has
many advantages for foreign dealers and
their clients, including more efficient
counterparty netting, greater
transparency, greater financial
counterparty financial strength, and
operational efficiencies.377 One
commenter cautioned that if the
regulations lead foreign dealers to create
‘‘fragmented booking structures’’ to
avoid duplicative and conflicting
regulatory regimes, it could harm U.S.
consumers through increased
transaction costs with foreign dealers.378
Many commenters suggested that to
preserve a registration framework that
would allow foreign dealers to continue
to book their global security-based swap
business out of a central non-U.S. entity,
the Commission should use our limited
designation authority under the DoddFrank Act’s swap dealer definition to
designate and regulate only specific
activities and particular branches or
agencies of foreign banks that transact
377 See, e.g., Socie
´ te´ Ge´ne´rale Letter I at 3
(‘‘Overall, the advantages of carrying out Swap
transactions in and with a foreign bank with a
consolidated booking structure help control risk
significantly . . . . We believe it would be sensible
for the Commissions to craft regulations that do not
discourage foreign banks such as SG from
registering as Swap Dealers.’’); Davis Polk Letter I
at 2, 5 (‘‘We believe operating and managing a
global swaps business out of a single booking entity
presents many advantages from the perspective of
foreign banks, customers and supervisors.’’).
378 See ISDA Letter I at 10 (warning that ‘‘U.S.
counterparties will . . . face increased costs and
decreased liquidity if U.S. regulation forces nonU.S. SDs to create fragmented booking structures to
avoid duplicative and conflicting regulatory
regimes’’).
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with U.S. customers, without subjecting
the whole entity or its other branches to
regulation.379
In addition, various commenters
suggested a variety of operational
models through which foreign dealers
could operate in the U.S. security-based
swap market, generally premising the
proposed registration and regulatory
regime on the notion that home country
supervision should apply to entity-level
regulations (e.g., capital, risk
management, and conflicts of interest),
while Title VII transaction-level
regulations should apply only to
security-based swaps involving a U.S.
counterparty.380 A number of
commenters emphasized that
transaction-level requirements should
not apply to security-based swaps
entered into between foreign
counterparties.381 Other commenters
remarked that if the Commission
regulates both the U.S.-facing business
(i.e., transactions with U.S. persons) and
the foreign-facing business (i.e.,
transactions with non-U.S. persons) of
U.S. security-based swap dealers, but
only the U.S.-facing business of foreign
security-based swap dealers, then U.S.
firms would be at a competitive
disadvantage vis-a`-vis their foreign
counterparts with respect to
379 See, e.g., IIB Letter at 11 (pointing out that
Section 3(a)(71) of the Exchange Act, as amended
by the Dodd-Frank Act, provides for limited
designation as a security-based swap dealer ‘‘for a
single type or single class . . . of activities, and not
for other types, classes, of . . . activities,’’ and
recommending that the Commissions designate as
a Swap Dealer only the particular U.S. or non-U.S.
branch or agency of the foreign bank involved in
the execution of swaps with U.S. customers’’);
Rabobank Letter at 2 (recommending that to
preserve ‘‘the benefits of the centralized booking
model, a non-U.S. branch of a foreign bank should
register as a swap dealer solely with respect to its
swap dealing activities with U.S. persons. Under
this scenario, Title VII’s transaction-level rules
would apply only to the non-U.S. branch’s swap
dealing activities with U.S. persons and would not
apply to its other activities or to the swap activities
of other parts of the foreign bank’’).
380 See, e.g., Davis Polk Letter II at 4–20
(recommending reliance on comprehensive home
country requirements such as capital, margin,
conflicts of interest, risk management, and limited
recordkeeping requirements for entity-level
regulations if certain standards are met, and
recommending the application of Title VII
transaction-level rules to a swap dealer’s swap
dealing activities with U.S. persons).
381 See, e.g., Sullivan & Cromwell Letter at 14–15
(asserting that subjecting foreign entities to
transaction-level requirements on foreign
transactions would likely lead to a competitive
disadvantage, because other foreign ‘‘banking
organizations that are not so burdened by such dual
and potentially conflicting requirements would be
able to provide a wider range of services . . .,
which may cause customers to migrate away from’’
those foreign operations, which would limit their
ability to manage, transfer, and reduce systemic
risk).
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transactions with foreign
counterparties.382
Several commenters further expressed
concern that a requirement for foreign
persons to register with the Commission
as security-based swap dealers could be
particularly problematic in the case of
capital requirements, where foreign
security-based swap dealers already
would be subject to their home
country’s prudential requirements.
These commenters favored deferring to
foreign regulators the regulation and
supervision of entity-level requirements
when a foreign security-based swap
dealer is subject to comprehensive and
comparable home country regulation.383
One commenter recommended a
comparability standard whereby the
Federal Reserve and the Commission
determine comparability even when a
home country regulator does not require
margin for non-cleared security-based
swaps, if the home country’s capital
regime takes into account functionally
equivalent capital charges.384 Several
commenters recommended that, for
monitoring purposes, U.S. regulators
could rely on information-sharing
arrangements with home regulators
regarding foreign swap transactions and
activities.385 A few commenters argued
that U.S. regulators should not have
examination authority over foreign swap
transactions and activities located
outside the United States, and suggested
that the Commissions obtain any
necessary information about U.S. swap
transactions and activities from U.S.
382 See, e.g., SIFMA Letter I at 11 (remarking that
‘‘U.S. swap dealers also may be at a competitive
disadvantage relative to non-U.S. entities if U.S.
swap dealers must comply with U.S. rules when
dealing with a non-U.S. counterparty in a
jurisdiction that does not have similar rules, for
example, if the foreign rules do not mandate margin
requirements for non-cleared swaps’’).
383 See, e.g., Financial Services Roundtable Letter
at 25 (suggesting that the Commissions should defer
to foreign prudential regulators with regard to
entity-level requirements such as capital and
margin, when they are deemed consistent with U.S.
standards); Davis Polk Letter I at 3–4 (emphasizing
the importance of relying on home country
regulation for entity-level rules such as capital,
margin, conflicts of interest, risk management, and
limited recordkeeping requirements).
384 See Davis Polk Letter II at 13–15
(recommending a comparability standard that
‘‘focuses on the similarities in regulatory objectives
as opposed to identity of technical rules,’’ whereby
the Federal Reserve, as the prudential regulator,
could determine comparability even when a home
country regulator does not require margin for noncleared swaps, if ‘‘the capital regime in such home
country is determined to take account appropriately
of unmargined or undermargined swaps by
imposing additional capital charges’’).
385 See, e.g., Davis Polk Letter I at 9 (stating that
‘‘[w]here information is required from the foreign
bank swap dealer, U.S. regulators should seek to
rely upon regulatory examinations by home country
regulators, and information sharing arrangements’’).
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affiliates of the foreign security-based
swap dealer.386
3. Title VII Requirements Applicable to
Security-Based Swap Dealers
Certain Title VII requirements
specifically applicable to security-based
swap dealers apply at a transaction
level, that is, to security-based swap
transactions with specific
counterparties. Examples of transactionlevel requirements in Title VII
principally include requirements
relating to external business conduct
standards such as the requirement that
a security-based swap dealer or major
security-based swap participant verify
that any counterparty meets the
eligibility standards for an eligible
contract participant 387 and
requirements relating to segregation of
assets held as collateral in securitybased swap transactions.388 Other
requirements apply to security-based
swap dealers at an entity level, that is,
to the dealing entity as a whole.
Examples of entity-level requirements
include, among others, requirements
relating to capital,389 risk management
procedures,390 recordkeeping and
reporting,391 supervision,392 and
designation of a chief compliance
officer.393 Some requirements can be
considered both entity-level and
transaction-level requirements. For
instance, the margin requirement in
Section 15F(e) of the Exchange Act can
be considered both an entity-level
requirement because margin affects the
financial soundness of an entity and a
transaction-level requirement because
margin calculation is based on
particular transactions (i.e., an entity
386 See, e.g., Socie
´ te´ Ge´ne´rale Letter I at 12
(recommending that a foreign dealer based outside
the U.S. with no U.S. nexus ‘‘should be ‘ringfenced’ and outside the scope of the Commissions’
examination and regulatory authority,’’ but
allowing for a limited examination of a foreign
bank’s U.S. facing business concerning its clearing,
trade execution, and capital rules, through its U.S.
domiciled agent who ‘‘would facilitate this
examination by making all necessary information
available directly to the Commissions’’).
387 See, e.g., Section 15F(h)(3)(A) of the Exchange
Act, 15 U.S.C. 78o–10(h)(3)(A). See generally
Section 15F(h) (discussing external business
conduct standards). However, requirements under
Section 15F(h)(1), which address fraud, supervision
and adherence to position limits, apply at the entity
level.
388 See Section 3E of the Exchange Act, 15 U.S.C.
78c–5.
389 See Section 15F(e) of the Exchange Act, 15
U.S.C. 78o–10(e).
390 See Section 15F(j)(2) of the Exchange Act, 15
U.S.C. 78o–10(j)(2).
391 See Section 15F(k) of the Exchange Act, 15
U.S.C. 78o–10(k).
392 See Section 15F(h)(1)(B) of the Exchange Act,
15 U.S.C. 78o–10(h)(1)(B).
393 See Section 15F(k) of the Exchange Act, 15
U.S.C. 78o–10(k).
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calculates margin based on the market
value of specific transactions or on a
portfolio basis).394
Below, we describe in more detail
various transaction-level and entitylevel requirements in Title VII
applicable to security-based swap
dealers.395
(a) Transaction-Level Requirements
In general, transaction-level
requirements primarily focus on
protecting counterparties by requiring
security-based swap dealers to, among
other things, provide certain disclosures
to counterparties, adhere to certain
standards of business conduct, and
segregate customer funds, securities,
and other assets. The following briefly
describes the most significant
transaction-level requirements
applicable to security-based swap
dealers in Title VII.
i. External Business Conduct Standards
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Section 15F(h) of the Exchange Act
requires the Commission to adopt rules
specifying external business conduct
standards for security-based swap
dealers in their dealings with
counterparties,396 including
counterparties that are ‘‘special
entities.’’ 397 Congress granted the
Commission broad authority to
promulgate business conduct
requirements, as the Commission
determines to be appropriate in the
public interest, for the protection of
394 See Section 15F(e) of the Exchange Act, 15
U.S.C. 78o–10(e). To take another example, the
requirement that security-based swap dealers
implement conflict-of-interest systems and
procedures relating to security-based swaps in
Section 15F(j)(5) of the Exchange Act, 15 U.S.C.
78o–10(j)(5), is transactional in the sense that
potential conflicts of interest relate to particular
security-based swap transactions. At the same time,
however, it also is an entity-level requirement
because implementing such systems and
procedures would require, among other things, a
security-based swap dealer to establish structural
and institutional safeguards to wall off the activities
of persons within the firm relating to research or
analysis of the price or market for any securitybased swap. See External Business Conduct
Standards Proposing Release, 76 FR 42420.
395 For purposes of this discussion, we are
addressing only requirements applicable to
security-based swap dealers in Sections 3E and 15F
of the Exchange Act, 15 U.S.C. 78c–5 and 78o–10,
and the rules and regulations thereunder. Title VII
requirements relating to regulatory reporting and
public dissemination, clearing, and trade execution
are discussed in Sections VIII–X below.
396 Section 15F(h)(6) of the Exchange Act, 15
U.S.C. 78o–10(h)(6), directs the Commission to
prescribe rules governing external business conduct
standards for security-based swap dealers. Section
15F(h) of the Exchange Act, 15 U.S.C. 78o–10(h),
also generally authorizes and requires the
Commission to adopt rules for major security-based
swap participants. See Section IV, infra.
397 Section 15F(h)(2)(C) of the Exchange Act, 15
U.S.C. 78o–10(h)(2)(C). See note 286, supra.
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investors or otherwise in furtherance of
the purposes of the Exchange Act.398
These standards, as described in
Section 15F(h)(3) of the Exchange Act,
must require security-based swap
dealers to: (i) Verify that a counterparty
meets the eligibility standards for an
ECP; (ii) disclose to the counterparty
material information about the securitybased swap, including material risks
and characteristics of the security-based
swap, and material incentives and
conflicts of interest of the security-based
swap dealer in connection with the
security-based swap; and (iii) provide
the counterparty with information
concerning the daily mark for the
security-based swap. Section 15F(h)(3)
also directs the Commission to establish
a duty for security-based swap dealers
to communicate information in a fair
and balanced manner based on
principles of fair dealing and good faith.
In addition, Section 15F(h)(4) of the
Exchange Act requires that a securitybased swap dealer that ‘‘acts as an
advisor to a special entity’’ must act in
the ‘‘best interests’’ of the special entity
and undertake ‘‘reasonable efforts to
obtain such information as is necessary
to make a reasonable determination’’
that a recommended security-based
swap is in the best interests of the
special entity.399 Section 15F(h)(5)
requires that security-based swap
dealers that enter into, or offer to enter
into, security-based swaps with a
special entity comply with any duty
established by the Commission that
requires a security-based swap dealer to
have a ‘‘reasonable basis’’ for believing
that a special entity has an
‘‘independent representative’’ that
meets certain criteria and undertakes a
duty to act in the ‘‘best interests’’ of the
special entity.
The Commission has proposed Rules
15Fh–1 through 15Fh–6 under the
Exchange Act to implement the business
conduct requirements described
above.400 In addition to external
business conduct standards expressly
addressed by Title VII, the Commission
398 See Section 15F(h)(3)(D) of the Exchange Act,
15 U.S.C. 78o–10(h)(3)(D) (‘‘[b]usiness conduct
requirements adopted by the Commission shall
establish such other standards and requirements as
the Commission may determine are appropriate in
the public interest, for the protection of investors,
or otherwise in furtherance of the purposes of this
Act’’). See also Section 15F(h)(1)(D) of the Exchange
Act (requiring that security-based swap dealers to
comply as well with ‘‘such business conduct
standards . . . as may be prescribed by the
Commission by rule or regulation that relate to . . .
such other matters as the Commission determines
to be appropriate’’).
399 See External Business Conduct Standards
Proposing Release, 76 FR 42423–25.
400 See External Business Conduct Standards
Proposing Release, 76 FR 42396.
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has proposed certain other business
conduct requirements for security-based
swap dealers that the Commission
preliminarily believed would further the
principles that underlie the Dodd-Frank
Act. These rules would, among other
things, impose certain ‘‘know your
counterparty’’ and suitability
obligations on security-based swap
dealers, as well as restrict security-based
swap dealers from engaging in certain
‘‘pay to play’’ activities.401
ii. Segregation of Assets
Segregation requirements are
designed to identify and protect
customer property held by a securitybased swap dealer as collateral in order
to facilitate the prompt return of the
property to customers or counterparties
in a liquidation proceeding of such
security-based swap dealer.402
Segregation not only protects
counterparties who are customers of a
security-based swap dealer but also
facilitates orderly liquidation of a
security-based swap dealer and
minimizes the disruption to and impact
on the U.S. security-based swap market
and the U.S. financial system overall
caused by insolvency and liquidation of
a security-based swap dealer.
Section 3E of the Exchange Act
provides the Commission with
rulemaking authority to prescribe
segregation requirements for securitiesbased swap dealers that receive assets
from, for, or on behalf of a counterparty
to margin, guarantee, or secure a
security-based swap transaction.403
Section 3E(c) provides the Commission
with rulemaking authority to prescribe
how any margin received by a securitybased swap dealer with respect to
cleared security-based swap
transactions may be maintained,
accounted for, treated and dealt with by
the security-based swap dealer.404 In
addition, Section 3E(g) extended the
customer protections of the U.S.
Bankruptcy Code to counterparties of a
security-based swap dealer with respect
to cleared security-based swaps, and
with respect to non-cleared securitybased swaps, if there is a customer
protection requirement under Section
15(c)(3) or a segregation requirement
401 See External Business Conduct Standards
Proposing Release, 76 FR 42399–400; proposed
Rules 15Fh–3(e) (‘‘know your counterparty’’),
15Fh–3(f) (‘‘suitability’’), and 15Fh–6 (‘‘pay to
play’’) under the Exchange Act.
402 Proposed Rule 18a–4 under the Exchange Act,
as discussed in Section II.C. of the Capital, Margin,
and Segregation Proposing Release, 77 FR 70274.
403 See Section 3E of the Exchange Act, 15 U.S.C.
78c–5.
404 See Section 3E(c)(2) of the Exchange Act, 15
U.S.C. 78c–5(c)(2).
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prescribed by the Commission.405 The
Commission has proposed Rule 18a–4
under the Exchange Act to establish
segregation requirements for securitybased swap dealers with respect to both
cleared and non-cleared security-based
swap transactions.406 The provisions of
proposed Rule 18a–4 were modeled on
the broker-dealer customer protection
rule and take into account the
characteristics of security-based
swaps.407
(b) Entity-Level Requirements
Entity-level requirements in Title VII
primarily address concerns relating to
the security-based swap dealer as a
whole, with a particular focus on safety
and soundness of the entity to reduce
systemic risk in the U.S. financial
system.408 The most significant entitylevel requirements, as discussed below,
are capital and margin requirements.
Certain other entity-level requirements
relate to the capital and margin
requirements because, at their core, they
relate to how the firm identifies and
manages its risk exposure arising from
its activities (e.g., risk management
requirements). Given their functions,
these entity-level requirements would
be applied under our proposal on a
firm-wide basis to address risks to the
security-based swap dealer as a whole.
i. Capital
The Commission is required to
establish minimum requirements
relating to capital for security-based
swap dealers for which there is not a
prudential regulator (‘‘nonbank securitybased swap dealers’’).409 The prudential
regulators are required to establish
requirements relating to capital for bank
security-based swap dealers.410 Some
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405 See
Section 3E(g) of the Exchange Act, 15
U.S.C. 78c–5(g); Capital, Margin, and Segregation
Proposing Release, 77 FR 70275.
406 Proposed Rule 18a–4 under the Exchange Act,
as discussed in the Capital, Margin, and Segregation
Proposing Release, 77 FR 70274–88.
407 17 CFR 240.15c3–3. See Capital, Margin, and
Segregation Proposing Release, 77 FR 70276.
408 For example, Section 15F(e)(3) of the
Exchange Act provides that the requirements
relating to capital and margin imposed by the
Commission pursuant to Section 15F(e)(2) shall
help ensure the safety and soundness of the
security-based swap dealer and be appropriate for
the risk associated with the non-cleared securitybased swaps held as a security-based swap dealer
in order ‘‘[t]o offset the greater risk to the securitybased swap dealer . . . and the financial system
arising from the use of security-based swaps that are
not cleared.’’
409 See Section 15F(e)(1)(B) of the Exchange Act,
15 U.S.C. 78o–10(e)(1)(B); note 34, supra
(discussing the term ‘‘prudential regulator’’).
410 See Section 15F(e)(1)(A) of the Exchange Act,
15 U.S.C. 78o–10(e)(1)(A); see also Prudential
Regulators Proposed Rule, Margin and Capital
Requirements for Covered Swap Entities, 76 FR
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security-based swap dealers may also be
registered as swap dealers with the
CFTC. The CFTC is required to establish
capital requirements for nonbank swap
dealers.411 The prudential regulators are
required to establish capital
requirements for bank swap dealers.412
The objective of the Commission’s
proposed capital rule for security-based
swap dealers is the same as the
Commission’s capital rule for brokerdealers; specifically, to ensure that the
entity maintains at all times sufficient
liquid assets to (i) promptly satisfy its
liabilities—the claims of customers,
creditors, and other security-based swap
dealers, and (ii) provide a cushion of
liquid assets in excess of liabilities to
cover potential market, credit, and other
risks.413
As noted above, the Commission’s
proposed capital rules focus on the
liquid assets of a nonbank securitybased swap dealer available to satisfy its
liabilities or cover its risks in a
liquidation scenario. This focus on
liquid assets would distinguish the
Commission’s capital rules applicable to
security-based swap dealers from those
applicable to banks, which generally
include a more permissive list of assets
that may be taken into account for
purposes of capital calculations.414 The
difference in approach between the
capital rules applicable to nonbank
dealers and bank dealers is supported
by certain operational, policy, and legal
differences between nonbank securitybased swap dealers and bank securitybased swap dealers.415 Notably, existing
capital standards for banks and broker27564 (May 11, 2011) (‘‘Prudential Regulator
Margin and Capital Proposal’’).
411 See Section 4s(e)(1)(B) of the CEA, 7 U.S.C.
6s(e)(1)(B), as added by Section 731 of the DoddFrank Act; see also CFTC Proposed Rule, Capital
Requirements of Swap Dealers and Major Swap
Participants, 76 FR 27802 (May 12, 2011) (‘‘CFTC
Capital Proposal’’).
412 See Section 4s(e)(1)(A) of the CEA, 7 U.S.C.
6s(e)(1)(A); see also Prudential Regulator Margin
and Capital Proposal, 76 FR 27564.
413 See Capital, Margin, and Segregation
Proposing Release, 77 FR 70218 (‘‘[T]he capital and
other financial responsibility requirements for
broker-dealers generally provide a reasonable
template for crafting the corresponding
requirements for nonbank [security-based swap
dealers]. For example, among other considerations,
the objectives of capital standards for both types of
entities are similar.’’).
414 See, e.g., Basel Committee on Banking
Supervision (‘‘BCBS’’), Basel III: International
framework for liquidity risk measurement,
standards and monitoring for banks (Dec. 2010)
(‘‘Basel III’’), available at: http://www.bis.org/publ/
bcbs188.pdf.
415 See Capital, Margin, and Segregation
Proposing Release, 77 FR 70218. In this release, the
Commission discussed the operational, policy, and
legal differences between banks and nonbank
entities for distinguishing the Commission’s capital
rules from those applicable to bank security-based
swap dealers.
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31011
dealers reflect, in part, differences in
their funding models and access to
certain types of financial support, and
we expect that those same differences
also will exist between bank securitybased swap dealers and nonbank
security-based swap dealers. For
example, banks obtain funding through
customer deposits and can generally
obtain liquidity through the Federal
Reserve’s discount window to meet
their obligations,416 whereas brokerdealers and nonbank security-based
swap dealers cannot.417 Thus all of a
nonbank entity’s counterparty
obligations must be met through the
nonbank entity’s own liquid assets. For
these reasons, the Commission’s
proposed capital standard for nonbank
security-based swap dealers is a net
liquid assets test modeled on the brokerdealer capital standard in Rule 15c3–1
under the Exchange Act.418
ii. Margin
Margin may be viewed as an entitylevel requirement given its effect on the
financial soundness of an entity, as well
as a transaction-level requirement due
to the fact that margin is calculated
based on particular transactions and
positions. Although margin is calculated
based on individual transactions, the
cumulative effect of collecting margin
from counterparties is to protect an
entity from the default of its
counterparties. Given the emphasis
placed on the financial soundness of
security-based swap dealers in Title
VII,419 we believe that margin should be
treated as an entity-level requirement
for purposes of implementing Title VII
in the cross-border context.
We recognize that this approach
differs from the approach to margin
416 Depository institutions that maintain
transaction accounts or non-personal time deposits
subject to reserve requirements are eligible to
borrow funds from the Federal Reserve’s discount
window, such as commercial banks, thrift
institutions, and U.S. branches and agencies of
foreign banks. See Regulation D, 12 CFR part 204.
417 Under the segregation requirements in Rule
15c3–3 under the Exchange Act and proposed Rule
18a–4 under the Exchange Act, broker-dealers and
security-based swap dealers are not permitted to
rehypothecate customer assets to finance their
business activity. Thus, they cannot use customer
assets as a source of funding, whereas banks are in
the business of investing customer deposits (subject
to banking regulations).
418 Id.
419 See, e.g., Section 15F(e)(3)(A)(i) of the
Exchange Act, 15 U.S.C. 78o–10(e)(3)(A)(i) (stating
that Title VII’s capital and margin requirements are
intended to ‘‘help ensure the safety and soundness
of the security-based swap dealer or major securitybased swap participant’’). In setting capital and
margin requirements for security-based swap
dealers and major security-based swap participants,
the Commission’s goal is to help ensure the safety
and soundness of these entities because of their
connection to the U.S. financial system.
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proposed by the CFTC in its crossborder guidance, which focused on the
transaction-by-transaction nature of
margin and thus treated it as a
transaction-level requirement.420
However, we preliminarily believe that
treating margin as an entity-level
requirement is consistent with the role
margin plays as part of an integrated
program of financial responsibility
requirements, along with the capital
standards and segregation requirements,
that are intended to enhance the
financial integrity of security-based
swap dealers.421 The margin
requirements proposed by the
Commission are intended to work in
tandem with the capital requirements to
strengthen the financial system by
reducing the potential for default to an
acceptable level and limiting the
amount of leverage that can be
employed by security-based swap
dealers and other market
participants.422 For example, the capital
requirements proposed by the
Commission take into account whether
a security-based swap is cleared or noncleared, the amount of margin collateral
imposed by registered clearing agencies
with respect to cleared security-based
swaps, and the circumstances where
non-cleared security-based swaps are
excepted from the margin collection
requirements imposed by the
Commission, and would impose a
capital charge in certain cases for
uncollateralized or insufficiently
collateralized exposures arising from
cleared or non-cleared security-based
swaps in order to account for the
counterparty default risk that is not
adequately addressed by margin
collateral.423 We preliminarily do not
believe that margin would effectively
fulfill its purpose as part of a
comprehensive financial responsibility
program for non-bank security-based
swap dealers if the Commission were to
treat margin solely as a transaction-level
requirement.
The division of regulatory
responsibilities related to margin
requirements in Title VII mirrors that of
the capital requirements discussed
above. As with capital, the Commission
is required to establish minimum
requirements relating to initial and
variation margin on all security-based
swaps that are not cleared by a
registered clearing agency for nonbank
420 See
CFTC Cross-Border Proposal, 77 FR 41226.
Capital, Margin, and Segregation
Proposing Release, 77 FR 70303 and 70259.
422 See id. at 70304.
423 See id. at 70245–46.
421 See
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security-based swap dealers.424 The
prudential regulators are required to
establish requirements relating to
margin for bank security-based swap
dealers.425 Security-based swap dealers
that are also registered as swap dealers
with the CFTC also would be subject to
CFTC requirements for nonbank swap
dealers with respect to initial and
variation margin requirements on all
swaps that are not cleared by a
registered derivatives clearing
organization.426
The objective of the margin
requirements for security-based swap
dealers is to offset the greater risk to the
security-based swap dealer and the
financial system arising from the use of
security-based swaps that are not
cleared.427 Margin serves as a buffer in
the event a counterparty fails to meet an
obligation to the security-based swap
dealer and the security-based swap
dealer must liquidate the assets posted
by the counterparty to satisfy the
obligation.428 More generally, under
Title VII, the Commission is specifically
required to set both capital and margin
requirements for nonbank securitybased swap dealers that (i) help ensure
the safety and soundness of the nonbank
security-based swap dealer and (ii) are
appropriate for the risk associated with
the non-cleared swaps held as a
security-based swap dealer.429
Pursuant to Section 15F(e) of the
Exchange Act, the Commission has
proposed Rule 18a–3 to establish margin
requirements for nonbank securitybased swap dealers with respect to noncleared security-based swaps.430
424 See Sections 15F(e)(1)(B) and (2)(B) of the
Exchange Act, 15 U.S.C. 78o–10(e)(1)(B) and (2)(B).
425 See Section 15F(e)(1)(A) of the Exchange Act,
15 U.S.C. 78o–10(e)(1)(A); see also Prudential
Regulator Margin and Capital Proposal, 76 FR
27564.
426 See Section 4s(e)(1)(B) of the CEA, 7 U.S.C.
6s(e)(1)(B), as added by Section 731 of the DoddFrank Act; see also CFTC Proposed Rule, Margin
Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants, 76 FR 23732
(Apr. 28, 2011) (‘‘CFTC Margin Proposal’’). The
CFTC also has adopted segregation requirements for
cleared swaps and proposed segregation
requirements for non-cleared swaps. See Protection
of Cleared Swaps Customer Contracts and
Collateral; Conforming Amendments to the
Commodity Broker Bankruptcy Provisions, 77 FR
6336 (Feb. 7, 2012) (‘‘CFTC Segregation for Cleared
Swaps Final Release’’); Protection of Collateral of
Counterparties to Uncleared Swaps; Treatment of
Securities in a Portfolio Margining Account in a
Commodity Broker Bankruptcy, 75 FR 75432 (Dec.
3, 2010) (‘‘CFTC Segregation for Uncleared Swaps
Proposing Release’’).
427 See Section 15F(e)(3)(A) of the Exchange Act,
15 U.S.C. 78o–10(e)(3)(A).
428 See Capital, Margin, and Segregation
Proposing Release, 77 FR 70259.
429 See Sections 15F(e)(3)(A)(i) and (ii) of the
Exchange Act, 15 U.S.C. 78o–10(e)(3)(A)(i) and (ii).
430 See Capital, Margin, and Segregation
Proposing Release, 77 FR 70257–74.
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Proposed Rule 18a–3 is based on the
margin rules applicable to brokerdealers.431 The goal of modeling
proposed Rule 18a–3 on the brokerdealer margin rules is to promote
consistency with existing rules and to
facilitate the portfolio margining of
security-based swaps with other types of
securities.432 Proposed Rule 18a–3 is
intended to form part of an integrated
program of financial responsibility
requirements, along with the proposed
capital and segregation standards.433
The Commission preliminarily
believes that it is necessary to treat
margin as an entity-level requirement
applicable to all of a dealer’s securitybased swap transactions in order to
effectively address the Dodd-Frank Act
requirements for setting margin. We
preliminarily believe that treating
margin solely as a transaction-level
requirement, and applying margin
requirements differently to a securitybased swap dealer’s U.S. Business and
Foreign Business,434 would not
adequately further the goals of using
margin to ensure the safety and
soundness of security-based swap
dealers because it could result in
security-based swap dealers with global
businesses collecting significantly less
collateral than would otherwise be
required to the extent that they are not
required by local law to collect margin
from their counterparties. Further,
separately applying margin in this way
would force those counterparties
entering into transactions that constitute
the U.S. Business of a dealer to bear a
greater burden in ensuring the safety
and soundness of such dealer than
counterparties that are part of the
dealer’s Foreign Business.435 We thus
preliminarily believe that it is
431 See id. at 70259. Broker-dealers are subject to
margin requirements in Regulation T promulgated
by the Federal Reserve (12 CFR 220.1–220.132), in
rules promulgated by the self-regulatory
organizations (‘‘SROs’’) (see, e.g., Rules 4210–4240
of the Financial Industry Regulatory Authority
(‘‘FINRA’’)), and with respect to security futures, in
rules jointly promulgated by the Commission and
the CFTC (17 CFR 242.400–242.406).
432 See Capital, Margin, and Segregation
Proposing Release, 77 FR 70259.
433 Id.
434 See proposed Rule 3a71–3(a)(2) under the
Exchange Act (defining ‘‘Foreign Business’’).
435 Although we do not believe that it is
appropriate to distinguish between the geographic
locations of counterparties when applying the
margin requirement, we recognize that it may be
appropriate, in certain circumstances, to distinguish
between types of counterparties in applying margin
based on such factors as the risk they pose to
dealers and the policy goal of promoting liquidity
in dealers. See Capital, Margin, and Segregation
Proposing Release, 77 FR 70265–68 (proposing to
exclude both transactions with commercial end
users and those with other dealers from certain
margin requirements applicable to security-based
swap dealers).
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appropriate to treat margin as an entitylevel requirement applicable to the
security-based swap transactions of
registered security-based swap dealers
regardless of the location of their
counterparties. As noted below, the
Commission is soliciting comment on
this approach.
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iii. Risk Management
Registered security-based swap
dealers are required to establish robust
and professional risk management
systems adequate for managing their
day-to-day business.436 The
Commission has proposed that nonbank
security-based swap dealers would be
required to comply with existing Rule
15c3–4 under the Exchange Act.437 This
rule, originally adopted for OTC
derivative dealers, requires firms subject
to its provisions to establish, document,
and maintain a comprehensive system
of internal risk management controls to
assist in managing the risks associated
with its business activities, including
market, credit, leverage, liquidity, legal,
and operational risks.438 These various
risks arise from both the U.S. Business
and Foreign Business of a global
security-based swap dealer. A risk
management system limited in scope to
cover only one type of business, or
limited to certain security-based swap
transactions, would not effectively
control the risks undertaken by a
security-based swap dealer because the
risks stemming from business outside
the scope of such risk management
system could still negatively impact the
dealer. As a result, we preliminarily
believe that it is necessary to treat risk
management requirements as entitylevel requirements in order to place risk
controls over the entire security-based
swap business, thus effectively
addressing the Dodd-Frank Act
requirements for managing risk within
security-based swap dealers.
Rule 15c3–4 identifies a number of
qualitative factors that would need to be
a part of the risk management controls
of a nonbank security-based swap
dealer. For example, a nonbank
security-based swap dealer would need
to have a risk control unit that reports
directly to senior management and is
436 See Section 15F(j)(2) of the Exchange Act, 15
U.S.C. 78o–10(j)(2).
437 See proposed new paragraph (a)(10)(ii) of Rule
15c3–1 under the Exchange Act (17 CFR 240.15c3–
1); paragraph (g) of proposed new Rule 18a–1 under
the Exchange Act. See also 17 CFR 240.15c3–4;
Capital, Margin, and Segregation Proposing Release,
77 FR 70250–51. The Commission has not proposed
rules relating to risk management for bank securitybased swap dealers.
438 See OTC Derivatives Dealers, Exchange Act
Release No. 40594 (Oct. 23, 1998), 63 FR 59362
(Nov. 3, 1998).
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independent from business trading
units, and it would be required to
separate duties between personnel
responsible for entering into a
transaction and those responsible for
recording the transaction in the books
and records of the firm.439 In addition,
the Commission is authorized to adopt
rules governing documentation
standards of security-based swap
dealers for timely and accurate
confirmation, processing, netting,
documentation, and valuation of
security-based swaps.440 Pursuant to
this authority, the Commission has
proposed rules regarding trade
acknowledgement and verification
related to security-based swap
transactions.441
iv. Recordkeeping and Reporting
Registered nonbank security-based
swap dealers are required to keep books
and records in such form and manner
and for such period as may be
prescribed by the Commission by rule or
regulation; registered bank securitybased swap dealers are required to keep
books and records of all activities
related to their ‘‘business as a securitybased swap dealer’’ in such form and
manner and for such period as may be
prescribed by the Commission.442
Registered security-based swap dealers
also are required to make such reports
as are required by the Commission
regarding the transactions and positions,
and financial condition of the
registrant.443
In addition, security-based swap
dealers are required to maintain daily
trading records of the security-based
swaps they enter into.444 Security-based
swap dealers also are required to
disclose to the Commission and the
prudential regulators information
concerning: (i) Terms and conditions of
their security-based swaps; (ii) securitybased swap trading operations,
mechanisms, and practices; (iii)
financial integrity protections relating to
security-based swaps; and (iv) other
information relevant to their trading in
security-based swaps.445
439 See 17 CFR 240.15c3–4(c), as discussed in the
Capital, Margin, and Segregation Proposing Release,
77 FR 70250.
440 See Section 15F(i) of the Exchange Act, 15
U.S.C. 78o–10(i).
441 See Trade Acknowledgement Proposing
Release, 76 FR 3859.
442 See Sections 15F(f)(1)(B)(i) and (ii) of the
Exchange Act, 15 U.S.C. 78o–10(f)(1)(B)(i) and (ii).
443 See Section 15F(f)(1)(A) of the Exchange Act,
15 U.S.C. 78o–10(f)(1)(A).
444 See Section 15F(g) of the Exchange Act, 15
U.S.C. 78o–10(g).
445 See Section 15F(j)(3) of the Exchange Act, 15
U.S.C. 78o–10(j)(3).
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Each of these types of records is an
important part of the Commission’s
oversight of our registrants because it
provides the Commission with vital
information regarding such entities. If
the Commission’s information were
limited in scope to cover only one type
of business, or limited to only certain
security-based swap activities, the
Commission would not be able to
effectively regulate our registered
security-based swap dealers because it
would not have a full picture of the
business of such registrants. As a result,
we preliminarily believe that it is
necessary to treat recordkeeping and
reporting as entity-level requirements in
order to provide the Commission with
the information necessary to regulate
registered security-based swap dealers
and thus effectively address the DoddFrank Act requirements for maintaining
books and records.
The Commission has not yet proposed
rules regarding the recordkeeping and
reporting requirements under Section
15F of the Exchange Act and solicits
comment regarding the application of
recordkeeping and reporting
requirements in the cross-border
context.
v. Internal System and Controls
Security-based swap dealers are
required to establish and enforce
systems and procedures to obtain any
information that is necessary to perform
any of the functions that are required
under Section 15F(j) of the Exchange
Act 446 and to provide this information
to the Commission, or the responsible
prudential regulator, upon request.447
The Commission has proposed a rule
that would require a registered securitybased swap dealer to establish policies
and procedures that are reasonably
designed to comply with its
responsibilities under Section 15F(j) of
the Exchange Act.448
Many of the functions required under
Section 15F(j) of the Exchange Act are
446 15 U.S.C. 78o–10(j). These functions include
monitoring of applicable position limits under
Section 15F(j)(1) of the Exchange Act, 15 U.S.C.
78o–10(j)(1); establishment of risk management
procedures under Section 15F(j)(2) of the Exchange
Act, 15 U.S.C. 78o–10(j)(2); disclosure of general
information to the Commission and prudential
regulators under Section 15F(j)(3) of the Exchange
Act, 15 U.S.C. 78o–10(j)(3); establishment of
policies and procedures to avoid conflicts of
interest under Section 15F(j)(5) of the Exchange
Act, 15 U.S.C. 78o–10(j)(5); and avoidance of any
actions that result in an unreasonable restraint of
trade or place any material anticompetitive burden
on trading or clearing under Section 15F(j)(6) of the
Exchange Act, 15 U.S.C. 78o–10(j)(6).
447 See Section 15F(j)(4) of the Exchange Act, 15
U.S.C. 78o–10(j)(4).
448 See proposed Rule 15Fh–3(h)(2)(iv) under the
Exchange Act, as discussed in the External Business
Conduct Standards Proposing Release, 76 FR 42420.
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entity-level in nature (e.g., risk
management procedures 449 and
conflicts of interest 450). As a result, we
preliminarily believe that the
requirement to establish and enforce
systems and procedures to obtain any
information that is necessary to perform
these functions cannot be effectively
implemented unless it also is treated as
an entity-level requirement, or else it
would not cover the full scope of the
requirements under Section 15F(j) of the
Exchange Act to which it applies.
vi. Diligent Supervision
The Commission is authorized under
the Dodd-Frank Act to adopt rules
requiring diligent supervision of the
business of security-based swap
dealers.451 The Commission has
proposed a rule that would establish
supervisory obligations and that would
incorporate principles from Section
15(b) of the Exchange Act and existing
SRO rules.452 Among other things,
under proposed Rule 15Fh–3(h), a
security-based swap dealer would be
required to establish, maintain, and
enforce a system to supervise, and
would be required to supervise
diligently, its business and its
associated persons, with a view to
preventing violations of applicable
federal securities laws, and the rules
and regulations thereunder, relating to
its business as a security-based swap
dealer.453 The rule proposed by the
Commission also would establish
certain minimum requirements relating
to the supervisory systems that are
prescriptive in nature, that is, they
would impose specific obligations on
security-based swap dealers.454
As previously noted, the purpose of
diligent supervision requirements is to
prevent violations of applicable federal
securities laws, and the rules and
regulations thereunder, relating to an
entity’s business as a security-based
swap dealer. An entity’s business as a
security-based swap dealer is not
limited to either its Foreign Business or
its U.S. Business, but rather is
comprised of its entire global securitybased swap dealing activity. As a result,
449 See
Section III.C.3(b)iii, supra.
Section III.C.3(b)vii, infra.
451 See Section 15F(h)(1)(B) of the Exchange Act,
15 U.S.C. 78o–10(h)(1)(B).
452 Proposed Rule 15Fh–3(h) under the Exchange
Act, as discussed in the External Business Conduct
Standards Proposing Release, 76 FR 42419–21.
453 Proposed Rule 15Fh–3(h)(1) under the
Exchange Act, as discussed in the External Business
Conduct Standards Proposing Release, 76 FR
42419–21.
454 Proposed Rule 15Fh–3(h)(2) under the
Exchange Act, as discussed in the External Business
Conduct Standards Proposing Release, 76 FR
42419–21.
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450 See
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we preliminarily believe that it is
necessary to treat diligent supervision as
an entity-level requirement applicable
to all of a dealer’s security-based swap
transactions in order to effectively
address the Dodd-Frank Act
requirements for diligent supervision.
We believe that treating diligent
supervision solely as a transaction-level
requirement, and applying supervisory
requirements differently to a securitybased swap dealer’s U.S. Business and
Foreign Business, would not further the
Dodd-Frank Act goal of establishing
effective supervisory systems for
security-based swap dealers.
vii. Conflicts of Interest
Section 15F(j)(5) of the Exchange Act
requires security-based swap dealers to
implement conflict-of-interest systems
and procedures. Such policies and
procedures must establish structural
and institutional safeguards to ensure
that the activities of any person within
the firm relating to research or analysis
of the price or market for any securitybased swap, or acting in the role of
providing clearing activities, or making
determinations as to accepting clearing
customers are separated by appropriate
informational partitions within the firm
from the review, pressure, or oversight
of persons whose involvement in
pricing, trading, or clearing activities
might potentially bias their judgment or
supervision, and contravene the core
principles of open access and the
business conduct standards addressed
in Title VII.455 The Commission has
proposed a rule that would require a
security-based swap dealer to establish
policies and procedures that are
reasonably designed to comply with its
responsibilities under Section
15F(j)(5).456
The Commission preliminarily
believes that it is necessary to treat
conflicts of interest as an entity-level
requirement applicable to all of a
dealer’s security-based swap
transactions in order to effectively
address the Dodd-Frank Act
requirements for setting systems and
procedures to prevent conflicts of
interest from biasing the judgment or
supervision of security-based swap
dealers. We believe that treating
conflicts of interest solely as a
transaction-level requirement, and
applying the required structural and
institutional safeguards differently to a
455 See Section 15F(j)(5) of the Exchange Act, 15
U.S.C. 78o–10(j)(5), as discussed in the External
Business Conduct Standards Proposing Release, 76
FR 42420.
456 Proposed Rule 15Fh–3(h)(2)(iv) under the
Exchange Act, as discussed in the External Business
Conduct Standards Proposing Release, 76 FR 42420.
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security-based swap dealer’s U.S.
Business and Foreign Business, would
not further the goals of preventing
conflicts of interest from influencing the
security-based swap dealing activities of
registered security-based swap dealers
because such safeguards would only be
in place for a portion of a security-based
swap dealer’s activities.
viii. Chief Compliance Officer
Registered security-based swap
dealers are required to designate a chief
compliance officer who reports directly
to the board of directors or to the senior
officer of the security-based swap
dealer.457 The chief compliance officer’s
responsibilities include reviewing and
ensuring compliance of the securitybased swap dealer with applicable
requirements in the Exchange Act and
the rules and regulations thereunder,
resolution of conflicts of interest,
administration of business conduct
policies and procedures, and
establishment of procedures for the
remediation of noncompliance
issues.458 The chief compliance officer
also is required to prepare and sign a
report that contains a description of the
security-based swap dealer’s
compliance with applicable
requirements in the Exchange Act, and
the rules and regulations thereunder,
and each of the security-based swap
dealer’s policies and procedures.459 The
Commission has proposed a rule to
implement these statutory requirements
relating to the designation and functions
of a chief compliance officer.460
As noted above, part of the chief
compliance officer’s responsibilities,
under the proposed rule, include
establishing, maintaining, and
reviewing policies and procedures
reasonably designed to ensure
compliance with applicable
requirements in the Exchange Act and
the rules and regulations thereunder.461
Many of Title VII requirements, such as
those applicable to security-based swap
dealers that are described in this
section, apply at the entity level. As a
result, we preliminarily believe that it is
necessary to treat the chief compliance
officer as an entity-level requirement
applicable to all of a dealer’s security457 See Section 15F(k) of the Exchange Act, 15
U.S.C. 78o–10(k).
458 See Section 15F(k)(2) of the Exchange Act, 15
U.S.C. 78o–10(k)(2).
459 See Section 15F(k)(3) of the Exchange Act, 15
U.S.C. 78o–10(k)(3).
460 Proposed Rule 15Fk–1 under the Exchange
Act, as discussed in the External Business Conduct
Standards Proposing Release, 76 FR 42435–38.
461 See Proposed Rule 15Fk–1(b)(2) under the
Exchange Act, as discussed in the External Business
Conduct Standards Proposing Release, 76 FR
42435–36.
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based swap business in order to
effectively address the Dodd-Frank Act
requirements for the chief compliance
officer. We believe that treating the chief
compliance officer solely as a
transaction-level requirement, and
applying the chief compliance officer
requirements differently to a securitybased swap dealer’s U.S. Business and
Foreign Business, would be unworkable
given the chief compliance officer’s
oversight responsibilities over entitylevel requirements and thus would not
further the goals of establishing the
chief compliance officer role for
security-based swap dealers.
ix. Inspection and Examination
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Registered bank and nonbank
security-based swap dealers are
obligated to keep their books and
records required pursuant to
Commission rules and regulations open
to inspection and examination by any
representative of the Commission.462
The Commission has proposed a rule
that would require, among other things,
‘‘nonresident security-based swap
dealers’’ that are required to register
with the Commission to appoint and
identify to the Commission an agent in
the United States (other than the
Commission or a Commission member,
official, or employee) for service of
process.463 In addition, the proposed
rule would require that a nonresident
security-based swap dealer certify that
the firm can, as a matter of law, provide
the Commission with prompt access to
its books and records and can, as a
matter of law, submit to onsite
inspection and examination by the
Commission.464 The proposed rule also
would require that the nonresident
security-based swap dealer provide the
Commission with an opinion of counsel
concurring that the firm can, as a matter
of law, provide the Commission with
prompt access to its books and records
and can, as a matter of law, submit to
462 See Section 15F(f)(1)(C) of the Exchange Act,
15 U.S.C. 78o–10(f)(1)(C). Registered bank securitybased swap dealers are only required to keep the
books and records associated with the activities
related to their security-based swap dealing
business, as prescribed by the Commission, and to
make these books and records available for
inspection by any representative of the
Commission. See id.
463 Proposed Rule 15Fb2–4 under the Exchange
Act, as discussed in the Registration Proposing
Release, 76 FR 65799. For a description of the term
‘‘nonresident security-based swap dealer’’ as
defined in proposed Rule 15Fb2–4(a) under the
Exchange Act, including how that definition differs
from the definition of the term ‘‘foreign securitybased swap dealer’’ as proposed in this release, see
note 579 above.
464 Proposed Rule 15Fb2–4 under the Exchange
Act, as discussed in the Registration Proposing
Release, 76 FR 65800.
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onsite inspection and examination by
the Commission.465
In proposing this rule, the
Commission stated that it preliminarily
believed that the nonresident securitybased swap certification and supporting
opinion of counsel were important to
confirm that each registered nonresident
security-based swap dealer has taken
the necessary steps to be in the position
to provide the Commission with prompt
access to its books and records and to
be subject to inspection and
examination by the Commission.466 To
effectively fulfill our regulatory
oversight responsibilities with respect to
nonresident security-based swap dealers
registered with it, the Commission
stated that it must have access to those
entities’ records and the ability to
examine them. The Commission
recognized, however, that certain
foreign jurisdictions may have laws that
complicate the ability of financial
institutions, such as nonresident
security-based swap dealers located in
their jurisdictions, to share and/or
transfer certain information including
personal financial data of individuals
that the financial institutions come to
possess from third persons (e.g.,
personal data relating to the identity of
market participants or their
customers).467 The Commission further
stated that the required certification and
opinion of counsel regarding the
nonresident security-based swap
dealer’s ability to provide prompt access
to books and records and to be subject
to inspection and examination would
allow the Commission to better evaluate
a nonresident security-based swap
dealer’s ability to meet the requirements
of registration and ongoing
supervision.468
The Commission’s inspection and
examination authority is vital to our
oversight of registered security-based
swap dealers. If the Commission’s
inspection and examination were
limited in scope to cover only one type
of business, or limited to only certain
security-based swap activities, the
Commission would not be able to
effectively regulate our registered
security-based swap dealers because it
would not have a full picture of the
business of such registrants. As a result,
we preliminarily believe that it is
necessary to treat inspection and
examination requirements as entitylevel in order to provide the
465 Proposed Rule 15Fb2–4 under the Exchange
Act, as discussed in the Registration Proposing
Release, 76 FR 65799–801.
466 See Registration Proposing Release, 76 FR
65800.
467 Id.
468 Id.
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31015
Commission with the information and
access necessary to regulate registered
security-based swap dealers.
x. Licensing Requirements and Statutory
Disqualification
The Commission has not proposed
any licensing requirements for
associated persons of registered
security-based swap dealers, that are
specifically related to their securitybased swap dealing activities. However,
the Commission has proposed a rule
that would require security-based swap
dealers (and major security-based swap
participants) to certify that no person
associated with such entities who
effects or is involved in effecting
security-based swaps on their behalf is
subject to statutory disqualification, as
defined in Section 3(a)(39) of the
Exchange Act.469 This proposed rule
relates to paragraph (b)(6) of Section 15F
of the Exchange Act,470 which generally
prohibits security-based swap dealers
(and major security-based swap
participants) from permitting any of
their associated persons 471 who are
subject to a ‘‘statutory disqualification’’
to effect or be involved in effecting 472
security-based swaps on behalf of such
entities if the security-based swap
dealer (or major security-based swap
participant) knew, or in the exercise of
469 15 U.S.C. 78c(a)(39). See proposed Rule
15Fb6–1 under the Exchange Act, as discussed in
the Registration Proposing Release, 76 FR 65795.
470 15 U.S.C. 78o–10(b)(6).
471 Section 3(a)(70) of the Exchange Act, 15 U.S.C.
78c(a)(70), generally defines the term ‘‘person
associated with’’ a security-based swap dealer or
major security-based swap participant (‘‘SBS
Entity’’) to include: (i) any partner, officer, director,
or branch manager of an SBS Entity (or any person
occupying a similar status or performing similar
functions); (ii) any person directly or indirectly
controlling, controlled by, or under common
control with an SBS Entity; or (iii) any employee
of an SBS Entity. However, it generally excludes
persons whose functions are solely clerical or
ministerial.
472 As stated in the Registration Proposing
Release, ‘‘[t]he Commission believes that associated
persons ‘involved in effecting’ security-based swaps
would include, but not be limited to, persons
involved in drafting and negotiating master
agreements and confirmations, persons
recommending security-based swap transactions to
counterparties, persons on a trading desk actively
involved in effecting security-based swap
transactions, persons pricing security-based swap
positions and managing collateral for the [securitybased swap dealer or major security-based swap
participant], and persons assuring that the [securitybased swap dealer’s or major security-based swap
participant’s] security-based swap business operates
in compliance with applicable regulations. In short,
the term would encompass persons engaged in
functions necessary to facilitate the [security-based
swap dealer’s or major security-based swap
participant’s] security-based swap business.’’
Registration Proposing Release, 76 FR 65795 n. 56.
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reasonable care should have known, of
the statutory disqualification.473
The Commission preliminarily
believes that it is necessary to treat
requirements related to licensing and
statutory disqualification as entity-level
requirements applicable to all of a
dealer’s security-based swap business in
order to effectively address the
Exchange Act’s statutory
disqualification provision. We believe
that treating licensing requirements and
statutory disqualification solely as
transaction-level requirements, and
applying the statutory disqualification
differently to a security-based swap
dealer’s U.S. Business and Foreign
Business, would not further the goals of
preventing statutorily disqualified
persons from effecting security-based
swaps on behalf of registered securitybased swap dealers because such
disqualifications would only be in place
for a portion of a security-based swap
dealer’s activities.
4. Application of Certain TransactionLevel Requirements 474
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(a) Proposed Rule
The Commission is proposing a rule
that would provide that a registered
foreign security-based swap dealer and
a foreign branch of a registered U.S.
security-based swap dealer, with respect
to their Foreign Business, shall not be
subject to the requirements relating to
external business conduct standards
described in Section 15F(h) of the
Exchange Act,475 and the rules and
regulations thereunder, other than the
rules and regulations prescribed by the
Commission pursuant to Section
15F(h)(1)(B).476
The proposed rule would define
‘‘Foreign Business’’ as security-based
swap transactions entered into, or
offered to be entered into, by or on
behalf of a foreign security-based swap
dealer or a U.S. security-based swap
dealer that do not include its U.S.
Business.477 The proposed rule would
define ‘‘U.S. Business’’ as:
473 See Registration Proposing Release, 76 FR
65795.
474 For purposes of this discussion, we are
addressing only requirements applicable to
security-based swap dealers in Sections 3E and 15F
of the Exchange Act, 15 U.S.C. 78c–5 and 78o–10,
and the rules and regulations thereunder. Title VII
requirements relating to reporting and
dissemination, clearing, and trade execution are
discussed in Sections VIII–X, infra.
475 15 U.S.C. 78o–10(h).
476 Proposed Rule 3a71–3(c) under the Exchange
Act. The approach under the proposed rule does
not affect applicability of the general antifraud
provisions of the federal securities laws to the
activity of a foreign security-based swap dealer. See
Section XII, infra.
477 Proposed Rule 3a71–3(a)(2) under the
Exchange Act.
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• With respect to a foreign securitybased swap dealer, (i) any transaction
entered into, or offered to be entered
into, by or on behalf of such foreign
security-based swap dealer, with a U.S.
person (other than with a foreign
branch), or (ii) any transaction
conducted within the United States; 478
and
• With respect to a U.S. securitybased swap dealer, any transaction by or
on behalf of such U.S. security-based
swap dealer, wherever entered into or
offered to be entered into, other than a
transaction conducted through a foreign
branch with a non-U.S. person or
another foreign branch.479
Whether the activity occurred within
the United States or with a U.S. person
for purposes of identifying whether
security-based swap transactions are
part of a U.S. Business or Foreign
Business would turn on the same factors
used to determine whether a foreign
security-based swap dealer is engaging
in dealing activity within the United
States or with U.S. persons, as discussed
above.480 The proposed rule provides
that a U.S. security-based swap dealer
would be considered to have conducted
a security-based swap transaction
through a foreign branch if:
• The foreign branch is the
counterparty to such security-based
swap transaction; and
• No person within the United States
is directly involved in soliciting,
negotiating, or executing the securitybased swap transaction on behalf of the
foreign branch or its counterparty.481
As discussed above,482 the proposed
rule would define ‘‘foreign branch’’ as
any branch of a U.S. bank if:
• The branch is located outside the
United States;
• The branch operates for valid
business reasons; and
• The branch is engaged in the
business of banking and is subject to
478 Proposed Rule 3a71–3(a)(6) under the
Exchange Act. A person that meets the securitybased swap dealer definition is a dealer with regard
to all of its security-based swap activities, not just
its dealing activities. See Intermediary Definitions
Adopting Release, 77 FR 30645. Accordingly, a
foreign security-based swap dealer’s U.S. Business
would not be limited only to transactions arising
from its dealing activity, but rather would include
all types of security-based swap activity.
479 Proposed Rule 3a71–3(a)(6) under the
Exchange Act.
480 See Section III.B.6, supra (discussing the
proposed definition of ‘‘transaction conducted
within the United States’’).
481 Proposed Rule 3a71–3(a)(4) under the
Exchange Act. See also proposed Rule 3a71–
3(a)(5)(ii) under the Exchange Act (providing that
the definition of ‘‘transaction conducted within the
United States’’ shall not include a transaction
conducted through a foreign branch).
482 See Section III.B.7, supra.
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substantive banking regulation in the
jurisdiction where located.483
All other requirements in Section 15F
of the Exchange Act, and the rules and
regulations thereunder, would apply to
both U.S. and foreign security-based
swap dealers registered with the
Commission, although the Commission
is proposing to establish a policy and
procedural framework under which it
would consider permitting substituted
compliance for foreign security-based
swap dealers (but not for U.S. securitybased swap dealers that conduct dealing
activity through foreign branches) under
certain circumstances, as discussed
below.484
The Commission also is proposing a
rule that would provide that a foreign
security-based swap dealer would not
be required to comply with the
segregation requirements set forth in
Section 3E of the Exchange Act, and the
rules and regulations thereunder, with
respect to security-based transactions
with non-U.S. person counterparties in
certain circumstances.485 Specifically,
the Commission is proposing a rule that
would provide the following:
• With respect to non-cleared
security-based swap transactions:
Æ A registered foreign security-based
swap dealer that is a registered brokerdealer would be subject to the
requirements relating to segregation of
assets held as collateral set forth in
Section 3E of the Exchange Act, and
rules and regulations thereunder, with
respect to assets collected from, for, or
on behalf of any counterparty to margin
a non-cleared security-based swap
transaction.
Æ a registered foreign security-based
swap dealer that is not a registered
broker-dealer would be subject to the
requirements relating to segregation of
assets held as collateral set forth in
Section 3E of the Exchange Act, and
Rules 18a–4(a)–(d), solely with respect
to assets collected from, for, or on behalf
of a counterparty that is a U.S. person
to margin a non-cleared security-based
swap transaction. The special account
maintained by a registered foreign
security-based swap dealer that is not a
registered broker-dealer in accordance
with proposed Rule 18a–4(c) would be
required to be designated for the
exclusive benefit of U.S. person
security-based swap customers.486
• With respect to cleared securitybased swap transactions:
483 Proposed Rule 3a71–3(a)(1) under the
Exchange Act.
484 See Section XI.C, infra.
485 Proposed Rule 18a–4(e) under the Exchange
Act.
486 Proposed Rule 18a–4(e)(1) under the Exchange
Act.
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Æ A registered foreign security-based
swap dealer that is not a foreign bank
with a branch or agency in the United
States and is a registered broker-dealer
shall be subject to the requirements
relating to segregation of assets held as
collateral set forth in Section 3E of the
Exchange Act, and rules and regulations
thereunder, with respect to assets
collected from, for, or on behalf of any
counterparty to margin a cleared
security-based swap transaction.
Æ a registered foreign security-based
swap dealer that is not a foreign bank
with a branch or agency in the United
States and that is not a registered
broker-dealer shall be subject to the
requirements relating to segregation of
assets held as collateral set forth in
Section 3E of the Exchange Act, and
Rules 18a–4(a)–(d), only if such
registered foreign security-based swap
dealer accepts any assets from, for, or on
behalf of a counterparty that is a U.S.
person to margin, guarantee, or secure a
cleared security-based swap
transaction.487
Æ a registered foreign security-based
swap dealer that is a foreign bank with
a branch or agency in the United States
would be subject to the requirements
relating to segregation of assets held as
collateral set forth in Section 3E of the
Exchange Act, and Rules 18a–4(a)–
(d),488 solely with respect to assets
collected from a counterparty that is a
U.S. person to margin a cleared securitybased swap transaction. The special
account maintained by a registered
foreign security-based swap dealer that
is a foreign bank with a branch or
agency in the United States in
accordance with proposed Rule 18a–4(c)
would be required to be designated for
the exclusive benefit of U.S. person
security-based swap customers.489
In addition, a registered foreign
security-based swap dealer would be
required to disclose to its counterparty
the potential treatment of the assets
segregated by such registered foreign
security-based swap dealer pursuant to
Section 3E of the Exchange Act, and
rules and regulations thereunder, in
insolvency proceedings under the U.S.
bankruptcy law and applicable foreign
insolvency laws.490
487 Proposed Rule 18a–4(e)(2)(ii) under the
Exchange Act.
488 See Capital, Margin, and Segregation
Proposing Release, 77 FR 70274–88 (proposing
Rules 18a–4(a)–(d) under the Exchange Act).
489 Proposed Rule 18a–4(e)(2)(i) under the
Exchange Act.
490 Proposed Rule 18a–4(e)(3) under the Exchange
Act.
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(b) Discussion
i. External Business Conduct Standards
a. Foreign Security-Based Swap Dealers
The Commission preliminarily
believes it is appropriate not to impose
on foreign security-based swap dealers
the external business conduct standards
in Section 15F(h) (other than rules and
requirements prescribed by the
Commission pursuant to Section
15F(h)(1)(B)) of the Exchange Act, and
the rules and regulations thereunder,
described in the proposed rule,491 with
respect to their Foreign Business,
because these requirements relate
primarily to customer protection. The
Dodd-Frank Act’s counterparty
protection mandate focuses on the
United States and the U.S. markets.492
In addition, we preliminarily believe
that foreign counterparties typically
would not expect to receive the
customer protections of Title VII when
dealing with a foreign security-based
swap dealer outside the United States.
At the same time, our proposed
approach would preserve customer
protections for U.S. counterparties that
would expect to benefit from the
protection afforded to them by Title VII
of the Dodd-Frank Act.
Therefore, the Commission
preliminarily believes that requiring
foreign security-based swap dealers to
comply with the external business
conduct standards requirement with
respect to their security-based swap
transactions conducted outside the
United States with non-U.S. persons (or
with foreign branches of U.S. banks)
would not advance this statutory
purpose. Although this approach
represents a departure from the entity
approach the Commission has
traditionally taken in the regulation of
foreign broker-dealers, as discussed
above, whereby the Commission applies
our regulations to the entire global
business of a registered broker-dealer,
we preliminarily believe this departure
is appropriate in the context of a global
security-based swap market in order to
create a regulatory framework that
provides effective protections for
counterparties that are U.S. persons
while recognizing the role of foreign
regulators in non-U.S. markets.
The Commission also preliminarily
believes that this approach addresses
many of the concerns raised by
commenters, including foreign
regulators, concerning the potential
application of Title VII to transactions
between registered foreign security491 Proposed
Rule 3a71–3(c) under the Exchange
Act.
492 See
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31017
based swap dealers and non-U.S.
counterparties. In addition, this
approach is consistent with the
reasonable expectations of U.S. person
counterparties, who would expect to
receive the protection of external
business conduct standards and
conflicts of interest requirements when
dealing with a foreign security-based
swap dealer within the United States.493
The Commission’s proposed approach
to external business conduct standards
would not except foreign security-based
swap dealers from the rules and
requirements prescribed by the
Commission pursuant to Section
15F(h)(1)(B) of the Exchange Act with
respect to their Foreign Business.494
Section 15F(h)(1)(B) requires securitybased swap dealers to conform with
such business conduct standards
relating to diligent supervision as the
Commission shall prescribe.495 The
Commission preliminarily believes that
it is not appropriate to except foreign
security-based swap dealers from
compliance with such requirements.
Because registered foreign securitybased swap dealers would be subject to
a number of obligations under the
federal securities laws with respect to
their security-based swap business, the
Commission preliminarily believes that
having systems in place reasonably
designed to ensure diligent supervision
would be an important aspect of their
compliance with the federal securities
laws. However, as discussed below, the
Commission is proposing to permit
substituted compliance with the diligent
supervision requirement in Section
15F(h)(1)(B), and the rules and
regulations thereunder, by foreign
security-based swap dealers.496 The
Commission preliminarily believes that
foreign security-based swap dealers
subject to regulation in a foreign
jurisdiction are very likely to be subject
to diligent supervision requirements
and to the extent that such requirements
are comparable to Commission
requirements, we would consider
permitting substituted compliance, as
discussed below.497
The Commission is proposing to
except foreign security-based swap
dealers from complying with the rules
and regulations that the Commission
may prescribe pursuant to Section
15F(h)(1)(A) or (C) of the Exchange
493 See
note 321, supra.
Rule 3a71–3(c) under the Exchange
494 Proposed
Act.
495 15 U.S.C. 78o–10(h)(1)(B). See Section
III.C.3(b)vi, supra (discussing the diligent
supervision requirements).
496 See Section XI.C, infra.
497 See id.
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Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Act.498 Section 15F(h)(1)(A) requires
security-based swap dealers to conform
with such business conduct standards
relating to fraud, manipulation, and
other abusive practices involving
security-based swaps (including
security-based swaps that are offered
but not entered into) as prescribed by
the Commission. Section 15F(h)(1)(C)
requires security-based swap dealers to
adhere to rules and regulations
prescribed by the Commission with
respect to applicable position limits.
The Commission has not engaged in
rulemaking pursuant to these
provisions.499 If the Commission does
propose rules pursuant to these
provisions in the future, the
Commission would consider, at that
time, whether it would be appropriate to
subject foreign security-based swap
dealers to such requirements with
respect to their Foreign Business.
b. U.S. Security-Based Swap Dealers
The Commission preliminarily
believes it is appropriate not to subject
U.S. security-based swap dealers to the
external business conduct standards in
Section 15F(h) (other than Section
15F(h)(1)(B)) of the Exchange Act, and
the rules and regulations thereunder, as
specified in the proposed rule, with
respect to security-based swap
transactions conducted through their
foreign branches outside the United
States with non-U.S. counterparties,
because such requirements relate
primarily to customer protection
requirements. The Dodd-Frank Act
generally is concerned with the
protection of U.S. markets and
participants in those markets.500
Therefore, we preliminarily believe that
subjecting U.S. security-based swap
dealers to the Title VII customer
protection requirements with respect to
their security-based swap transactions
conducted through their foreign
branches outside the United States
(even though the transactions may pose
risk to the U.S. financial system) with
non-U.S. persons would produce little
498 15
U.S.C. 78o–10(h)(1)(A) and (C).
the Commission has not proposed
rules under Section 15F(h)(1)(A) of the Exchange
Act, the Commission has proposed new Rule 9j–1
under the Exchange Act, which is intended to
prevent fraud, manipulation, and deception in
connection with the offer, purchase, or sale of any
security-based swap, the exercise of any right or
performance of any obligation under a securitybased swap, or the avoidance of such exercise or
performance. See Prohibition Against Fraud,
Manipulation, and Deception in Connection with
Security-Based Swaps, Exchange Act Release No.
63236 (Nov. 3, 2010), 75 FR 68560 (Nov. 8, 2010).
The Commission’s view of its antifraud
enforcement authority in the cross-border context is
described in further detail in Section XI below.
500 See note 4, supra.
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499 Although
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or no benefit to U.S. market
participants. Although this approach
would represent a departure from the
entity approach the Commission has
traditionally taken in the regulation of
broker-dealers, whereby the
Commission applies our regulations to
the entire global business of a registered
broker-dealer, we preliminarily believe
it is appropriate in the context of a
global security-based swap market in
order to develop a national regulatory
framework that provides effective
protections for counterparties who are
U.S. persons while recognizing the role
of foreign regulators in non-U.S.
markets.
The Commission also preliminarily
believes that this approach would help
address the potential application of
duplicative and conflicting regulatory
requirements to security-based swap
transactions between the foreign
branches of registered U.S. bank
security-based swap dealers and nonU.S. counterparties. In addition, the
Commission preliminarily believes this
approach is consistent with the
reasonable expectations of foreign
counterparties, who would not
necessarily expect to receive the
protections of Title VII when dealing
with a foreign branch of a U.S. bank
outside the United States, even if it is
registered as a security-based swap
dealer with the Commission.501
The purpose of the proposed
provision defining when a securitybased swap transaction would be
considered to have been conducted
through a foreign branch is intended to
prevent U.S. security-based swap
dealers from using the proposed rule to
evade the application of Title VII.502
Requiring that the foreign branch be the
named counterparty to the securitybased swap transaction and that no
person within the United States be
directly involved in soliciting,
negotiating, or executing the securitybased swap transaction on behalf of the
foreign branch or its counterparty is
intended to help ensure that the
security-based swap transaction occurs
outside the United States, even though
the Commission recognizes that the risk
of the transaction would ultimately be
borne by the U.S. security-based swap
dealer, of which the foreign branch is
merely a part.503 The U.S. securitybased swap dealer would still be subject
501 See note 321, supra. The proposed definition
of foreign branch is the same as discussed above.
See proposed Rule 3a71–3(a)(1) under the Exchange
Act, as discussed in Section III.B.7, supra.
502 Proposed Rule 3a71–3(a)(4) under the
Exchange Act.
503 Proposed Rule 3a71–3(a)(4)(i) under the
Exchange Act.
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to the entity-level requirements
described above intended to address the
risk the transactions pose to the U.S.
financial system.
ii. Segregation Requirements
The segregation requirements set forth
in Section 3E of the Exchange Act, and
rules and regulations thereunder, are
closely tied to U.S. bankruptcy laws.504
Subchapter III of Chapter 7, Title 11 of
the United States Code (the
‘‘stockbroker liquidation
provisions’’) 505 provides special
protections for ‘‘customers’’ of
stockbrokers. Among other protections,
‘‘customers’’ share ratably with other
customers ahead of virtually all other
creditors in the ‘‘customer property’’
held by the failed stockbroker.506 The
Dodd-Frank Act contains provisions
designed to ensure that cash and
securities held by a security-based swap
dealer relating to security-based swaps
will be deemed customer property
under the stockbroker liquidation
provisions.507 In particular, Section
3E(g) of the Exchange Act 508 provides,
among other things, that a securitybased swap shall be considered to be a
‘‘security’’ as such term is used in
section 101(53A)(B) 509 and the
stockbroker liquidation provisions.
Section 3E(g) also provides that an
account that holds a security-based
swap shall be considered to be a
‘‘securities account’’ as that term is
defined in the stockbroker liquidation
provisions.510 In addition, Section 3E(g)
provides that the terms ‘‘purchase’’ and
‘‘sale’’ as defined in Sections 3(a)(13)
and (14) of the Exchange Act,
respectively, shall be applied to the
terms ‘‘purchase’’ and ‘‘sale’’ as used in
the stockbroker liquidation
504 See Capital, Margin, and Segregation
Proposing Release, 77 FR 70274–78 (discussing the
customer protection treatment provided by
proposed Rules 18a–4(a)–(d) in the stockbroker
liquidation provisions in the U.S. Bankruptcy
Code).
505 See 11 U.S.C. 741–53.
506 See 11 U.S.C. 752.
507 See Public Law 111–203 section 763(d),
adding Section 3E(g) to the Exchange Act, 15 U.S.C.
78c–5(g).
508 See 15 U.S.C. 78c–5(g).
509 See 11 U.S.C. 101(53A)(B). Section 101(53A)
of the U.S. Bankruptcy Code defines a
‘‘stockbroker’’ to mean a person—(A) with respect
to which there is a customer, as defined in section
741, subchapter III of chapter 7, title 11, United
States Code (the definition section of the
stockbroker liquidation provisions); and (B) that is
engaged in the business of effecting transactions in
securities—(i) for the account of others; or (ii) with
members of the general public, from or for such
person’s own account. See 11 U.S.C. 101(53A).
510 See 15 U.S.C. 78c–5(g) and 11 U.S.C. 741.
There is not a definition of ‘‘securities account’’ in
11 U.S.C. 741. The term ‘‘securities account’’ is
used in 11 U.S.C. 741(2) and (4) in defining the
terms ‘‘customer’’ and ‘‘customer property.’’
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provisions.511 Finally, Section 3E(g)
provides that the term ‘‘customer’’ as
defined in the stockbroker liquidation
provisions excludes any person to the
extent the person has a claim based on
a non-cleared security-based swap
transaction except to the extent of any
margin delivered to or by the customer
with respect to which there is a
customer protection requirement under
Section 15(c)(3) of the Exchange Act or
a segregation requirement.512
The provisions of Section 3E(g) of the
Exchange Act apply the customer
protection elements of the stockbroker
liquidation provisions to cleared
security-based swaps, including related
collateral, and, if subject to customer
protection requirements under Section
15(c)(3) of the Exchange Act or a
segregation requirement prescribed by
the Commission, to collateral delivered
as margin for non-cleared security-based
swaps.513 The Commission has
proposed Rule 18a–4(a)–(d) to establish
segregation requirements for securitybased swap dealers with respect to
cleared and non-cleared security-based
swaps pursuant to Section 3E of the
Exchange Act and pursuant to Section
15(c)(3) of the Exchange Act 514 with
respect to security-based swap dealers
that are broker-dealers.515
Specifically, proposed Rule 18a–4(b)
requires a security-based swap dealer to
promptly obtain and thereafter maintain
physical possession or control of all
excess securities collateral carried for
the accounts of security-based swap
customers. Such possession or control
requirement is designed to ensure the
securities held for the accounts of
511 See also 15 U.S.C. 78c–5(g) and 11 U.S.C. 741–
753. Section 3(a)(13) of the Exchange Act, as
amended by Section 761(a) of the Dodd-Frank Act,
defines the term ‘‘purchase’’ to mean, in the case
of security-based swaps, the execution, termination
(prior to its scheduled maturity date), assignment,
exchange, or similar transfer or conveyance of, or
extinguishing of rights or obligations under, a
security-based swap, as the context may require.
See 15 U.S.C. 3(a)(13). Section 3(a)(14) of the
Exchange Act, as amended by Section 761(a) of the
Dodd-Frank Act, defines the term ‘‘sale’’ to mean,
in the case of security-based swaps, the execution,
termination (prior to its scheduled maturity date),
assignment, exchange, or similar transfer or
conveyance of, or extinguishing of rights or
obligations under, a security-based swap, as the
context may require. See 15 U.S.C. 3(a)(14).
512 See 15 U.S.C. 78c–5(g) and 11 U.S.C. 741(2).
513 See 15 U.S.C. 78c–5(g) and 11 U.S.C. 741–53.
514 15 U.S.C. 78o(c)(3).
515 See proposed Rules 18a–4(a)–(d) under the
Exchange Act and Section 3E of the Exchange Act,
15 U.S.C. 78c–5. See also the Capital, Margin, and
Segregation Proposing Release, 77 FR 70278–88, for
detailed descriptions and discussions of the
proposed segregation requirements for securitybased swaps in proposed Rules 18a–4(a), (b), and
(c) under the Exchange Act and special provisions
for non-cleared security-based swaps in proposed
Rule 18a–4(d) under the Exchange Act.
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security-based swap customers are
under the control of the security-based
swap dealer and, therefore, readily
available to be returned to securitybased swap customers. Proposed Rule
18a–4(c) requires a security-based swap
dealer to maintain a special account for
the exclusive benefit of security-based
swap customers and have on deposit in
that account at all times an amount of
cash or qualified securities determined
by computing the net amount of credits
owed to customers.516 The objective of
the possession or control and special
account requirements in proposed Rule
18a–4 is to facilitate the prompt return
of ‘‘customer property’’ to securitybased swap customers either before or
during a liquidation proceeding if the
firm fails. In the event of a failure of the
security-based swap dealer, customers
would share the ‘‘customer property’’
ratably with other customers and ahead
of virtually all other creditors.517 In
addition, with respect to non-cleared
security-based swaps, proposed Rule
18a–4(d) requires a security-based swap
dealer to provide the notice required
under Section 3E(f)(1)(A) of the
Exchange Act 518 to a counterparty in
writing prior to the execution of the first
non-cleared security-based swap
transaction with such counterparty. If a
counterparty to a non-cleared securitybased swap elects to segregate funds or
other property with a third-party
custodian pursuant to Section 3E(f) of
the Exchange Act or elects not to require
the omnibus segregation of funds or
other property pursuant to proposed
Rule 18a–4(c), the security-based swap
dealer must obtain an agreement from
such counterparty to subordinate all
claims against the security-based swap
dealer to the claims of security-based
swap customers of such security-based
swap dealer.519
516 See
proposed Rule 18a–4(c) and the related
discussion in the Capital, Margin, and Segregation
Proposing Release, 77 FR 70277.
517 See the stockbroker liquidation provisions in
the U.S. Bankruptcy Code, 11 U.S.C. 741–53.
518 15 U.S.C. 78c–5(f)(1)(A).
519 See proposed Rules 18a–4(d)(1) and (d)(2)(i)
and (ii) under the Exchange Act, as discussed in the
Capital, Margin, and Segregation Proposing Release,
77 FR 70287–88. If a non-cleared security-based
swap counterparty elects to segregate funds or other
property with a third-party custodian, the
subordination agreement would be conditioned on
the counterparty’s funds and other property
segregated at a third-party custodian not being
included in the bankruptcy estate of the securitybased swap dealer. If the election is not effective in
keeping the counterparty’s assets bankruptcy
remote, then the counterparty should be treated as
a security-based swap customer with a pro rata
priority claim to customer property. See proposed
Rule 18a–4(d)(2)(i) under the Exchange Act. If a
non-cleared security-based swap counterparty
elects not to segregate any assets at all, the securitybased swap dealer would need to obtain an
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31019
As proposed in the Capital, Margin
and Segregation Proposing Release, the
segregation requirements in proposed
Rule 18a–4(a)–(d) do not distinguish
between U.S. security-based swap
dealers and foreign security-based swap
dealers or between U.S. person and nonU.S. person security-based swap
counterparties, and do not address
application of the segregation
requirements in the cross-border
context. The Commission preliminarily
believes that the Dodd-Frank Act’s
mandate to promote financial stability,
improve accountability, and protect
counterparties focuses territorially on
the United States and the U.S. securitybased swap market 520 and, therefore, is
not proposing any changes with respect
to U.S. security-based swap dealers to
the segregation requirements already
proposed.521 The Commission’s
proposed approach to application of
segregation requirements to foreign
security-based swap dealers intends to
protect U.S. person counterparties and
minimize the impact of a failed securitybased swap dealer on the U.S. financial
system generally and the U.S. securitybased swap market in particular.
a. Foreign Security-Based Swap Dealers
As stated above, Section 3E(g) extends
the customer protection provided by the
stockbroker liquidation provisions of
the U.S. Bankruptcy Code to cleared
security-based swaps and non-cleared
security-based swaps in different ways.
In addition, a foreign security-based
swap dealer may not be subject to the
stockbroker liquidation provisions if it
is a foreign bank with a branch or
agency in the United States.522 Such
foreign security-based swap dealer’s
insolvency and liquidation would be
subject to banking regulations.523 On the
unconditional subordination agreement from the
counterparty that waives segregation altogether. See
proposed Rule 18a–4(d)(2)(ii) under the Exchange
Act.
520 See note 4, supra.
521 See proposed Rules 18a–4(a)–(d) under the
Exchange Act and Section 3E of the Exchange Act,
15 U.S.C. 78c–5. See also the Capital, Margin, and
Segregation Proposing Release, 77 FR 70278–88.
522 See Section 109(b) of the U.S. Bankruptcy
Code, 11 U.S.C. 109(b) (providing that a person may
be a debtor under chapter 7 of the U.S. Bankruptcy
Code only if such person is not, among other things,
a bank or similar institution which is an insured
bank as defined in Section 3(h) of the Federal
Deposit Insurance Act, or a foreign bank that has
a branch or agency (as defined in Section 1(b) of
the International Banking Act of 1978) in the United
States).
523 See 12 U.S.C. 1821–25. Whereas insured
deposit institutions would be resolved under the
Federal Deposit Insurance Act, uninsured U.S.
branches of foreign banks would be resolved under
either relevant state statutes, in the case of
uninsured state branches, or the International
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other hand, if a foreign security-based
swap dealer is not a foreign bank with
a branch or agency in the United States,
it may be subject to the stockbroker
liquidation provisions 524 in a
stockbroker liquidation proceeding in a
U.S. bankruptcy court. Moreover, if a
foreign security-based swap dealer is a
registered broker-dealer, it is a member
of the Securities Investor Protection
Corporation (‘‘SIPC’’) 525 and is subject
to segregation requirements under
Section 15(c)(3) of the Exchange Act,526
and rules and regulations thereunder.527
Such a foreign security-based swap
dealer would be subject to the
liquidation proceeding under the
Securities Investor Protection Act of
1970 (the ‘‘SIPA’’).528 Therefore, we
propose an approach that would apply
the segregation requirements to a foreign
security-based swap dealer depending
on whether it holds assets to secure
cleared security-based swap
transactions or non-cleared securitybased swap transactions and whether
such foreign security-based swap dealer
is a registered broker-dealer, a foreign
bank with a branch or agency in the
United States, or neither of the above.529
Banking Act, in the case of uninsured federal
branches.
524 See note 522, supra.
525 We recognize that a very limited number of
registered foreign broker-dealers who do not
conduct securities business in the United States and
do not hold U.S. person customers’ funds are not
members of SIPC.
526 15 U.S.C. 78o(c)(3).
527 See Rule 15c3–3 under the Exchange Act, 17
CFR 240.15c3–3.
528 See 15 U.S.C. 78aaa et seq.
529 We preliminarily believe that the proposed
approach with respect to the segregation
requirements set forth in Section 3E of the
Exchange Act, and rules and regulations
thereunder, is not being applied to persons who are
‘‘transact[ing] a business in security-based swaps
without the jurisdiction of the United States,’’
within the meaning of Section 30(c). See Section
II.B.2(a), supra. However, the Commission also
preliminary believes that the proposed approach
with respect to the segregation requirements is
necessary or appropriate to help prevent the
evasion of the particular provisions of the Exchange
Act that were added by the Dodd-Frank Act that are
being implemented by the proposed approach and
prophylactically will help ensure that the purposes
of those provisions of the Dodd-Frank Act are not
undermined. See Section II.B.2(e), supra; see also
Section II.B.2(c), supra.
For example, if the segregation requirements do
not apply to the entire business of a registered
foreign security-based swap dealer that is a
registered broker-dealer, or do not apply to assets
received from non-U.S. person customers to secure
cleared security-based swaps by a registered foreign
security-based swap dealer that is not a registered
broker-dealer (and is not a foreign bank with a
branch or agency in the United States) if such
foreign security-based swap dealer also receives
assets from a U.S. person customer to secure clear
security-based swaps, then U.S. security-based
swap dealers would have an incentive to evade the
full application of the segregation requirements by
moving their operations outside the United States.
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We recognize that a foreign securitybased swap dealer may not be subject to
the stockbroker liquidation provisions
and its insolvency or liquidation
proceeding in the United States may be
administered under SIPA or banking
regulations concurrently with other
potential insolvency proceedings
outside the United States under
applicable foreign insolvency laws.
Therefore, the effectiveness of the
segregation requirements with respect to
a foreign security-based swap dealer in
practice may depend on many factors,
including the type and objectives of the
insolvency or liquidation proceeding
and how the U.S. Bankruptcy Code,
SIPA, banking regulations and
applicable foreign insolvency laws are
interpreted by the U.S. bankruptcy
court, SIPC, Federal Deposit Insurance
Corporation and relevant foreign
authorities.
b. Non-Cleared Security-Based Swaps
i. Foreign Security-Based Swap Dealer
That Is a Registered Broker-Dealer
With respect to non-cleared securitybased swaps, the Commission proposes
to apply segregation requirements
differently to foreign security-based
swap dealers depending on whether
they also are registered broker-dealers.
Specifically, the Commission proposes
to require a foreign security-based swap
dealer that is a registered broker-dealer
to segregate margin received from all
counterparties to secure non-cleared
security-based swap transactions, in
accordance with Section 3E of the
Exchange Act, and rules and regulations
thereunder.530
If a foreign security-based swap dealer
is a registered broker-dealer, it already
would: (i) be subject to the customer
protection requirements under Section
In this event, these security-based swap dealers
could use the assets collected from the non-U.S.
person counterparties for their own business
purposes, and the assets segregated (i.e., assets
posted by U.S. person customers) could be
insufficient to satisfy the combined priority claims
of both U.S. person and non-U.S. person customers,
potentially resulting in losses to U.S. person
customers in contravention of the purposes of the
customer protection framework established by the
Dodd-Frank Act. See discussions of application of
the segregation requirements to a foreign securitybased swap dealer that is a registered broker-dealer
with respect to non-cleared security-based swaps in
Section III.C.4(b)ii.b.i, application of the segregation
requirements to a foreign security-based swap
dealer that is a registered broker-dealer with respect
to cleared security-based swaps in Section
III.C.4(b)ii.c.i, and application of the segregation
requirements to a foreign security-based swap
dealer that is not a registered broker-dealer and is
not a foreign bank with a branch or agency in the
United States in Section III.C.4(b)ii.c.ii above.
530 See proposed Rule 18a–4(e)(1)(i) under the
Exchange Act.
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15(c)(3) of the Exchange Act,531 and
rules and regulations thereunder,
including Rule 15c3–3 if it carries
customer securities and cash; (ii) be
required to maintain possession or
control of customer securities and
maintain cash or qualified securities in
a special reserve account if it carries
customer securities and cash; and (iii) if
it is a member of SIPC, be liquidated in
a formal proceeding under the SIPA.532
Rule 15c3–3 under Section 15(c)(3) of
the Exchange Act provides customer
protection and defines ‘‘customer’’
broadly to include any person from
whom or on whose behalf a broker or
dealer has received or acquired or holds
funds or securities for the account of
that person.533 Therefore, if a foreign
security-based swap dealer that is a
registered broker-dealer receives
collateral from a non-cleared securitybased swap counterparty, such
counterparty would be a ‘‘customer’’
and is afforded customer protection
with respect to such collateral under
Rule 15c3–3. As stated above, Section
3E(g) extends ‘‘customer’’ status to noncleared security-based swap
counterparties to the extent of any
margin delivered to or by the
counterparties with respect to which
there is a customer protection
requirement under Section 15(c)(3).534
Therefore, non-cleared security-based
swap counterparties of a foreign
security-based swap dealer that is a
registered broker-dealer are ‘‘customers’’
within the meaning of the stockbroker
liquidation provisions.535
As such, if the Commission does not
require a foreign security-based swap
dealer that is a registered broker-dealer
to segregate all counterparties’ assets
posted to secure non-cleared securitybased swaps, in a SIPA liquidation
531 15
U.S.C. 78o(c)(3).
Capital, Margin, and Segregation
Proposing Release, 77 FR 70276–77 (discussing the
broker-dealer segregation rule—Rule 15c3–3 under
the Exchange Act, 17 CFR 240.15c3–3).
533 See Rule 15c3–3(a)(1) under the Exchange Act,
17 CFR 240.15c3–3(a)(1).
534 See Section 3E(g) of the Exchange Act, 15
U.S.C. 78c–5(g) (‘‘The term ‘customer’, as defined
in section 741 of title 11, United States Code,
excludes any person, to the extent that such person
has a claim based on any . . . non-cleared securitybased swap except to the extent of any margin
delivered to or by the customer with respect to
which there is a customer protection requirement
under section 15(c)(3) or a segregation
requirement.’’).
535 A non-cleared security-based swap
counterparty may waive its pro rata priority claim
on customer property with other customers by
executing a conditional subordination agreement
pursuant to proposed Rule 18a–4(d)(i) under the
Exchange Act to affirmatively elect individual
segregation, or by executing an unconditional
subordination agreement pursuant to proposed Rule
18a–4(d)(ii) under the Exchange Act to affirmatively
waive segregation altogether.
532 See
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proceeding of such foreign securitybased swap dealer and broker-dealer,536
the pool of assets segregated pursuant to
Rule 15c3–3 and proposed Rule 18a–4
may be insufficient to satisfy the
combined claims of all customers,
resulting in losses to all customers.
Therefore, the Commission proposes to
subject a foreign security-based swap
dealer that is a registered broker-dealer
to the segregation requirements set forth
in Section 3E of the Exchange Act, and
rules and regulations thereunder,
relating to assets received from all
counterparties held as collateral to
secure non-cleared security-based swap
transactions.
ii. Non-Cleared Security-Based Swaps—
Foreign Security-Based Swap Dealer
That is Not a Registered Broker-Dealer
sroberts on DSK5SPTVN1PROD with PROPOSALS
If a foreign security-based swap dealer
is not a registered broker-dealer, its noncleared security-based swap
counterparties would be ‘‘customers’’
under the stockbroker liquidation
provisions only to the extent that there
is a segregation requirement prescribed
by the Commission.537 The Commission
proposes to subject such foreign
security-based swap dealer to the
segregation requirements set forth in
Section 3E of the Exchange Act, and
rules and regulations thereunder, solely
with respect to non-cleared securitybased swaps with U.S. person
counterparties.538 This approach would
provide U.S. person counterparties
‘‘customer’’ status under the stockbroker
liquidation provisions and their assets
would be segregated for their exclusive
benefit. Non-U.S. person counterparties
would not be ‘‘customers’’ and would
not have ‘‘customer’’ status with respect
to the segregated assets. As stated above,
the Commission preliminarily believes
that the objective of the Dodd-Frank Act
is to protect U.S. counterparties and to
minimize disruption to the U.S.
financial system caused by a securitybased swap dealer’s failure. Therefore,
the Commission preliminarily believes
that the proposed approach would
achieve the benefit intended by the
segregation requirements set forth in
Section 3E of the Exchange Act, and
rules and regulations thereunder.
The Commission recognizes that a
foreign security-based swap dealer that
536 In very limited circumstances where a foreign
security-based swap dealer that is a registered
broker-dealer is not a SIPC member, it would
potentially be liquidated pursuant to the
stockbroker liquidation provisions in a U.S.
bankruptcy court.
537 See Section 3E(g) of the Exchange Act, 15
U.S.C. 78c–5(g).
538 See proposed Rule 18a–4(e)(1)(ii) under the
Exchange Act.
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is not a broker-dealer but is a foreign
bank with a branch or agency (as
defined in Section 1(b) of the
International Banking Act of 1978) 539 in
the United States may not be eligible to
be liquidated pursuant to the
stockbroker liquidation provisions.540
Such foreign security-based swap
dealer’s insolvency proceeding in the
United States would be administered
under banking regulations.541
Nevertheless, the Commission
preliminarily believes that imposing
segregation requirements on such
foreign security-based swap dealer
when it receives collateral from U.S.
person counterparties would reduce the
likelihood of U.S. person counterparties
incurring losses by helping identify U.S.
customers’ assets in an insolvency
proceeding of such foreign securitybased swap dealer in the United States
and would potentially minimize
disruption to the U.S. security-based
swap market, thereby producing
potential benefits to the U.S. financial
system and U.S. counterparties that are
consistent with the objectives of the
Dodd-Frank Act.
c. Cleared Security-Based Swaps
In applying the segregation
requirements to a foreign security-based
swap dealer with respect to cleared
security-based swap transactions, the
Commission also proposes to
distinguish among: (1) a foreign
security-based swap dealer that is a
registered broker-dealer; (2) a foreign
security-based swap dealer that is not a
registered broker-dealer and is not a
foreign bank with a branch or agency in
the United States; and (3) a foreign
security-based swap dealer that is a
foreign bank with a branch or agency in
the United States. In the following
paragraphs, we will discuss how we
propose to apply the segregation
requirements to foreign security-based
swap dealers in each of these categories
with respect to assets held by them as
collateral to secure cleared securitybased swaps.
539 See Sections 1(b)(1), (3), and (7) of the
International Banking Act of 1978, 12 U.S.C.
3101(b)(1), (3) and (7), for definitions of ‘‘agency,’’
‘‘branch,’’ and ‘‘foreign bank.’’
540 See Section 109(b)(3)(B) of the U.S.
Bankruptcy Code, 11 U.S.C. 109(b)(3)(B).
541 See 12 U.S.C. 1821–25. Whereas insured
deposit institutions would be resolved under the
Federal Deposit Insurance Act, uninsured U.S.
branches of foreign banks would be resolved under
either relevant state statutes, in the case of
uninsured state branches, or the International
Banking Act, in the case of uninsured federal
branches.
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31021
i. Foreign Security-Based Swap Dealer
That Is a Registered Broker-Dealer
The proposed rule would apply
segregation requirements to a foreign
security-based swap dealer that is a
registered broker-dealer with respect to
assets received from all counterparties
to secure cleared security-based
swaps.542 As stated above, Section 3E(g)
of the Exchange Act extends customer
protection under the stockbroker
liquidation provisions to all cleared
security-based swap counterparties and
to all non-cleared security-based swap
counterparties, with respect to which
there is a customer protection
requirement under Section 15(c)(3) of
the Exchange Act.543 Therefore, all
security-based swap counterparties of a
foreign security-based swap dealer that
is a registered broker-dealer are
customers under the stockbroker
liquidation provisions.544 In the absence
of a Commission requirement that a
foreign security-based swap dealer that
is a registered broker-dealer segregate all
cleared security-based swap
counterparties’ collateral, if such an
entity were liquidated pursuant to SIPA,
the amount of assets segregated could be
less than the combined priority claims
of all security-based swap customers,
potentially resulting in losses to
customers. Therefore, the Commission
proposes to subject a foreign securitybased swap dealer who is a registered
broker-dealer to segregation
requirements set forth in Section 3E of
the Exchange Act, and rules and
regulations thereunder, with respect to
assets received from all counterparties
to secure cleared security-based swaps.
ii. Foreign Security-Based Swap Dealer
That Is Not a Registered Broker-Dealer
and Is Not a Foreign Bank With Branch
or Agency in the United States
If a foreign security-based swap dealer
is not a registered broker-dealer and is
not a foreign bank that has a branch or
agency (as defined in Section 1(b) of the
International Banking Act of 1978) in
the United States, such foreign securitybased swap dealer may be eligible to be
542 Proposed Rule 18a–4(e)(2)(i) under the
Exchange Act.
543 See Section III.C.4(b)ii.b, supra.
544 A non-cleared security-based swap
counterparty would be a customer of a foreign
security-based swap dealer that is a registered
broker-dealer and have a pro rata priority claim to
customer property under the stockbroker
liquidation provisions unless it affirmatively waives
segregation altogether by executing an
unconditional subordination agreement pursuant to
proposed Rule 18a–4(d)(ii) under the Exchange Act,
or elects individual segregation pursuant to Section
3E(f) of the Exchange Act by executing a
conditional subordination agreement pursuant to
proposed Rule 18a–4(d)(i) under the Exchange Act.
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a debtor under Chapter 7 of the U.S.
Bankruptcy Code and may therefore be
subject to the stockbroker liquidation
provisions in the U.S. Bankruptcy
Code.545 As stated above, Section 3E(g)
of the Exchange Act provides
‘‘customer’’ status to all counterparties
to cleared security-based swaps, making
no distinction between U.S. customers
or counterparties and non-U.S. person
customers or counterparties.546
Therefore, in the case where such
foreign security-based swap dealer
receives any assets from, for, or on
behalf of a U.S. person customer to
margin, guarantee, or secure securitybased swaps, if the Commission were to
apply the segregation requirements only
to assets posted by U.S. person
customers but not to assets posted by
non-U.S. person customers, in a
stockbroker liquidation proceeding of
such foreign security-based swap dealer,
the assets segregated (i.e., assets posted
by U.S. person customers) could be
insufficient to satisfy the combined
priority claims of both U.S person and
non-U.S. person customers, potentially
resulting in losses to U.S. person
customers. As stated above, the
Commission preliminarily believes that
Section 3E intends to provide customer
protection to U.S. person counterparties
and apply segregation requirements in a
way that would protect the U.S.
financial system and counterparties in
the United States. Therefore, the
Commission proposes to apply
segregation requirements described in
Section 3E of the Exchange Act, and the
rules and regulations thereunder, to a
foreign security-based swap dealer that
is not a registered broker-dealer and is
not a foreign bank with a branch or
agency in the United States with respect
to assets received from both U.S. person
counterparties and non-U.S. person
counterparties if such foreign securitybased swap dealer receives collateral
from U.S. person counterparties to
secure security-based swaps.547
provisions of the U.S. Bankruptcy
Code 548 and its insolvency proceeding
in the United States would be
administered under banking
regulations.549 Consistent with the
objective of protecting U.S. person
counterparties, the Commission is
proposing that such foreign securitybased swap dealer shall be subject to the
segregation requirements set forth in
Section 3E of the Exchange Act, and the
rules and regulations thereunder, with
respect to any assets received from, for
or on behalf of a counterparty who is a
U.S. person to margin, guarantee, or
secure a cleared security-based swap,
but shall not be required to segregate
assets received from, for or on behalf of
all other counterparties to margin,
guarantee, or secure a cleared securitybased swap.550 The special account
maintained by the foreign securitybased swap dealer shall be designated
for the exclusive benefit of U.S. person
security-based swap customers. The
Commission preliminarily believes that
imposing segregation requirements on
such foreign security-based swap dealer
when it receives collateral from U.S.
person counterparties would reduce the
likelihood of U.S. person counterparties
incurring losses by helping identify U.S.
customers’ assets in an insolvency
proceeding of such foreign securitybased swap dealer in the United States
and would potentially minimize
disruption to the U.S. security-based
swap market, thereby producing
potential benefits to the U.S. financial
system and U.S. counterparties that are
consistent with the objectives of the
Dodd-Frank Act. For the same reason,
the Commission preliminarily does not
believe that extending segregation
requirements and customer protection
to such foreign security-based swap
dealer’s transactions with non-U.S.
persons would advance the purposes of
the Dodd-Frank Act.
iii. Foreign Security-Based Swap Dealer
That is Not a Registered Broker-Dealer
and is a Foreign Bank With Branch or
Agency in the United States
In addition to the proposed rules
described above relating to application
of the segregation requirements to
foreign security-based swap dealers, the
Commission also is proposing to require
foreign security-based swap dealers to
Finally, if a foreign security-based
swap dealer is not a registered brokerdealer and is a foreign bank that has a
branch or agency in the United States,
it is not eligible to be a debtor under
Chapter 7 and will therefore not be
subject to the stockbroker liquidation
545 See Section 109(b) of the U.S. Bankruptcy
Code, 11 U.S.C. 109(b).
546 See 15 U.S.C. 78c–5(g) and 11 U.S.C. 741(2).
547 Proposed Rule 18a–4(e)(2)(ii) under the
Exchange Act.
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d. Disclosure
548 See Section 109(b) of the U.S. Bankruptcy
Code, 11 U.S.C. 109(b).
549 See 12 U.S.C. 1821–25. Whereas insured
deposit institutions would be resolved under the
Federal Deposit Insurance Act, uninsured U.S.
branches of foreign banks would be resolved under
either relevant state statutes, in the case of
uninsured state branches, or the International
Banking Act, in the case of uninsured federal
branches.
550 Proposed Rule 18a–4(e)(2)(iii) under the
Exchange Act.
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make certain disclosures.551 Since the
treatment of the special account under
Sections 3E(b) and (g) or individually
segregated assets pursuant to Section
3E(f) of the Exchange Act in insolvency
proceedings of a foreign security-based
swap dealer may vary depending on the
status of the foreign security-based swap
dealer and the insolvency proceedings
such foreign security-based swap dealer
is subject to, the Commission proposes
to require a foreign security-based swap
dealer to disclose to each counterparty
that is a U.S. person, prior to accepting
any assets from, for, or on behalf of such
counterparty to margin, guarantee, or
secure a security-based swap, the
potential treatment of the assets
segregated by such foreign securitybased swap dealer pursuant to Section
3E of the Exchange Act, and the rules
and regulations thereunder, in
insolvency proceedings relating to such
foreign security-based swap dealer
under U.S. bankruptcy law and
applicable foreign insolvency laws.
Pursuant to this proposed rule, the
Commission intends to require that a
foreign security-based swap dealer
disclose whether it is subject to the
segregation requirement set forth in
Section 3E of the Exchange Act, and the
rules and regulations thereunder, with
respect to the assets collected from the
U.S. person counterparty who will
receive the disclosure, whether the
foreign security-based swap dealer
could be subject to the stockbroker
liquidation provisions in the U.S.
Bankruptcy Code, whether the
segregated assets could be afforded
customer property treatment under the
U.S. bankruptcy law, and any other
relevant considerations that may affect
the treatment of the assets segregated
under Section 3E of the Exchange Act in
insolvency proceedings of a foreign
security-based swap dealer.552 Since the
proposed rule regarding application of
the segregation requirements in the
cross-border context is designed to
advance the goals of protecting U.S.
person counterparties, the Commission
believes that such disclosure would
enhance U.S. person counterparty
protection and the objectives that
segregation requirements intend to
achieve in the context of cross-border
security-based swap dealing.
Request for Comment
The Commission requests comment
on all aspects of the proposed rule
regarding the application of transaction551 Proposed
Rule 18a–4(e)(3) under the Exchange
Act.
552 Proposed
Rule 18a–4(e)(3) under the Exchange
Act.
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level requirements relating to customer
protection and segregation, including
the following:
• What, if any, are the likely
competitive effects, within the U.S.
security-based swap market and among
U.S. security-based swap dealers, of the
proposed approach for foreign securitybased swap dealers? Please describe the
specific nature of any such effects.
• Should a foreign security-based
swap dealer automatically be eligible for
the proposed approach by virtue of
being a nonresident entity?
Alternatively, should the Commission
consider other factors, such as the share
of the foreign security-based swap
dealer’s business that constitutes U.S.
Business, in determining how to apply
transaction-level requirements?
• From an operational perspective,
what types of internal controls would be
necessary to identify Foreign Business
and U.S. Business and ensure that the
foreign security-based swap dealer
complies with the external business
conduct standards with respect to its
U.S. Business? Should U.S. Business be
generally defined with reference to the
type of activity that, if performed in a
dealing capacity, triggers the registration
requirement?
• Does the proposed approach
appropriately classify entity-level and
transaction-level requirements? Does it
appropriately identify those transactionlevel requirements that relate to the
operation of the security-based swap
dealer on an entity level? If not, please
identify those requirements that should
be classified differently and how doing
so is consistent with the goals of Title
VII.
• To what extent would foreign
security-based swap dealers in various
jurisdictions be prohibited from
complying, under local law, with the
Commission’s requirements to provide
the Commission with prompt access to
their books and records and to submit
to onsite inspection and examination by
the Commission? If there are limitations,
what are they, and under what
circumstances would they arise? Are
there other entity-level requirements
that foreign security-based swap dealers
would not be permitted to comply with
under local law? If so, what are they?
• Should the external business
conduct rules apply in transactions
between a registered non-U.S. securitybased swap dealer and foreign branches
of a U.S. bank?
• Should the external business
conduct rules apply in transactions
between a registered non-U.S. securitybased swap dealer and non-U.S. persons
with U.S. guarantees in transactions
outside the United States?
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• Does the proposed application of
the business conduct standards in the
cross-border context appropriately
implement the business conduct
standards as described in Section 15F(h)
of the Exchange Act?
• As described above, the
Commission does not, at this time,
propose to apply the business conduct
standards in Section 15F(h) of the
Exchange Act, and the rules and
regulations thereunder (other than the
rules and regulations relating to diligent
supervision prescribed by the
Commission pursuant to Section
15F(h)(1)(B)), to the Foreign Business of
registered security-based swap dealers.
Should such standards apply to the
Foreign Business of registered securitybased swap dealers? Would such
application of business conduct
standards further the goals of Title VII
of the Dodd-Frank Act?
• Should the Commission apply rules
and regulations pursuant to Section
15F(h)(1)(A) of the Exchange Act
relating to fraud, manipulation, and
other abusive practices involving
security-based swaps (including
security-based swaps that are offered
but not entered into) to the Foreign
Business of registered foreign securitybased swap dealers?
• Should the Commission apply rules
and regulations pursuant to Section
15F(h)(1)(C) of the Exchange Act
relating to position limits to the Foreign
Business of foreign security-based swap
dealers?
• Should the proposed rule relating to
conflicts of interest set forth in Section
15F(j)(5) of the Exchange Act apply to
both the U.S. Business and Foreign
Business of security-based swap
dealers?
• Does the proposed approach
appropriately treat the rules and
regulations prescribed by the
Commission relating to diligent
supervision pursuant to Section
15F(h)(1)(B) as entity-level requirements
applicable to both the U.S. Business and
the Foreign Business of foreign securitybased swap dealers? Why or why not?
• Is it appropriate that the proposed
rule does not apply future rules and
regulations that the Commission may
prescribe pursuant to Section
15F(h)(1)(A) of the Exchange Act
relating to fraud, manipulation, and
other abusive practices involving
security-based swaps (including
security-based swaps that are offered
but not entered into) to the Foreign
Business of foreign security-based swap
dealers? Why or why not?
• Is it appropriate that the proposed
rule does not apply future rules and
regulations that the Commission may
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prescribe pursuant to Section
15F(h)(1)(C) of the Exchange Act
relating to position limits to the Foreign
Business of foreign security-based swap
dealers? Why or why not?
• Does the proposed approach
appropriately treat the requirements
relating to conflicts of interest set forth
in Section 15F(j)(5) of the Exchange Act
as entity-level requirements applicable
to both the U.S. Business and Foreign
Business of foreign security-based swap
dealers? If not, please identify any
requirements that should not be applied
to a foreign security-based swap dealer
and explain how such an approach
would be consistent with the goals of
Title VII. Please identify what the costs
or operational challenges would be, if
any, for a registered security-based swap
dealer to establish conflict-of-interest
systems and procedures that would
apply to its U.S. Business but not its
Foreign Business.
• Does the proposed approach
appropriately implement the
requirements relating to segregation of
assets held as collateral in Section 3E of
the Exchange Act, and rules and
regulations thereunder, in light of
various statuses of foreign securitybased swap dealers?
• Should the Commission apply
segregation requirements to a foreign
security-based swap dealer that is not
subject to the stockbroker liquidation
provisions in the U.S. Bankruptcy Code?
If not, what are the reasons for not
applying segregation requirements? If
the segregation requirements do not
apply, how would the objective of
customer protection be achieved?
• Should the Commission adopt the
disclosure requirement with respect to
foreign security-based swap dealers?
Why or why not? Is the proposed
disclosure requirement feasible? What
would the difficulties be in complying
with the proposed disclosure
requirement?
• The CFTC has proposed an
interpretation that would effectively
treat a non-U.S. person whose
obligations are guaranteed by a U.S.
person as a U.S. person for purposes of
determining whether a swap between it
and a non-U.S. swap dealer or major
swap participant would be subject to
transaction-level requirements as
interpreted by the CFTC to include,
without limitation, margin and
segregation requirements, reporting,
clearing, and trade execution.553 Should
the Commission adopt a similar
approach? What would be the effects on
efficiency, competition and capital
553 See CFTC Cross-Border Proposal, 77 FR
41228–29.
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formation in the event that there are
overlapping or duplicative requirements
across multiple jurisdictions?
• In addition, the CFTC has proposed
an interpretation that includes a
description of a ‘‘conduit affiliate’’ that
includes: (1) a non-U.S. person that is
majority-owned, directly or indirectly,
by a U.S. person where (2) the non-U.S.
person regularly enters into swaps with
one or more U.S. affiliates or
subsidiaries of the U.S. person, and (3)
the financial statements of the non-U.S.
person are included in the consolidated
financial statements of the U.S.
person.554 Conduit affiliates would be
subject to transaction-level requirements
as if they were U.S. persons. Should the
Commission consider a similar
approach?
• The CFTC’s proposed interpretation
would subject foreign branches of U.S.based bank swap dealers and major
swap participants to the CFTC’s entitylevel requirements and transaction-level
requirements (other than external
business conduct standards for swaps
with non-U.S. persons), provided that
foreign branches would be eligible for a
limited exception in emerging markets
where foreign regulations are not
comparable.555 Should the Commission
consider a similar approach? If so,
please explain how such an approach
would be consistent with the goals of
Title VII.
• What would be the market impact
of the proposed approach to application
of the transaction-level requirements
relating to customer protection and
segregation? How would the proposed
application of transaction-level
requirements affect the competitiveness
of U.S. entities in the global marketplace
(both in the United States as well as in
foreign jurisdictions)? Would the
proposed approach place any market
participants at a competitive
disadvantage or advantage? If so, please
explain. Would the proposed approach
be a more general burden on
competition? If so, please explain. What
other measures should the Commission
consider to implement the transactionlevel requirements? What would be the
market impacts and competitiveness
effects of alternatives to the proposed
approach discussed in this release?
sroberts on DSK5SPTVN1PROD with PROPOSALS
5. Application of Entity-Level Rules
(a) Introduction
As noted above, by their very nature,
entity-level requirements apply to the
operation of a security-based swap
dealer as a whole. The Commission
recognizes that the capital, margin, and
554 See
555 See
id. at 41229.
id. at 41230–31.
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other entity-level requirements that it
adopts could have a substantial impact
on international commerce and the
relative competitive position of
intermediaries operating in various, or
multiple, jurisdictions. In particular, if
these requirements are substantially
more or less stringent than
corresponding requirements, if any, that
apply to intermediaries operating in
security-based swap markets outside the
United States, depending on how the
rules are written, these differences
could impact the ability of firms based
in the United States to participate in
non-U.S. markets, access to U.S. markets
by foreign-based firms, and how and
whether international firms make use of
global ‘‘booking entities’’ to centralize
risks related to security-based swaps,
among other possible impacts. These
issues have been the focus of numerous
comments to the Commission and other
regulators, as discussed above, as well
as Congressional inquiries and other
public dialogue.
(b) Proposed Approach
The Commission is not proposing to
provide specific relief for foreign
security-based swap dealers from Title
VII entity-level requirements, although,
as discussed in Section XI below, under
a Commission substituted compliance
determination, a foreign security-based
swap dealer would be able to satisfy
relevant Title VII entity-level
requirements by substituting
compliance with corresponding
requirements under a foreign regulatory
system.556 The Commission
preliminarily believes that entity-level
requirements are core requirements of
the Commission’s responsibility to
ensure the safety and soundness of
registered security-based swap
dealers.557 The Commission
preliminarily believes that it would not
be consistent with this mandate to
provide a blanket exclusion to foreign
security-based swap dealers from entitylevel requirements applicable to such
entities.558
556 See
Section XI, infra.
note 419, supra.
558 We preliminarily believe that the proposed
approach with respect to entity-level requirements
is not being applied to persons who are
‘‘transact[ing] a business in security-based swaps
without the jurisdiction of the United States,’’
within the meaning of Section 30(c) of the Exchange
Act. See Section II.B.2(a), supra. However, the
Commission also preliminarily believes that the
proposed approach with respect to entity-level
requirements is necessary or appropriate to help
prevent the evasion of the particular provisions of
the Exchange Act that were added by the DoddFrank Act that are being implemented by the
proposed approach and prophylactically will help
ensure that the purposes of those provisions of the
557 See
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For example, capital requirements
play an essential role in ensuring the
safety and soundness of security-based
swap dealers. As discussed above, the
Commission’s proposed capital rules for
nonbank security-based swap dealers
are modeled on the net liquid assets test
found in the capital requirements
applicable to broker-dealers.559 We
believe that this capital standard is
necessary to ensure the safety and
soundness of nonbank security-based
swap dealers, and thus we are not
proposing to exclude foreign nonbank
security-based swap dealers from our
capital rules. In addition, we believe
that the capital, margin, and other
entity-level requirements proposed and
adopted by the Commission work
together to provide a comprehensive
regulatory scheme that is vital for
ensuring the safety and soundness of
registered security-based swap dealers,
and that the benefits of Title VII’s entitylevel requirements are equally
important to both foreign and U.S.
dealers registered with the Commission.
As a result, we are not proposing to
provide specific relief from individual
entity-level requirements for foreign
dealers.
We do, however, recognize the
concerns raised by commenters
regarding the application of entity-level
requirements to foreign security-based
swap dealers.560 We preliminarily
believe that these concerns are largely
addressed through the Commission’s
overall proposed approach to
substituted compliance in the context of
Title VII, which is discussed in detail in
Section XI below. In general, the
Commission is proposing a framework
under which it may permit a registered
foreign security-based swap dealer (or
class thereof) to satisfy the capital,
margin, and other requirements in
Section 15F of the Exchange Act, and
the rules and regulations thereunder, by
Dodd-Frank Act are not undermined. See Section
II.B.2(e), supra; see also Section II.B.2(c), supra.
For example, if entity-level requirements do not
apply to the entire business of a registered foreign
security-based swap dealer, then U.S. securitybased swap dealers would have an incentive to
evade the full application of the entity-level
requirements by moving their operations outside
the United States. In this event, assuming the scope
of the security-based swap dealers dealing activity
remained unchanged, the risk presented by the
entity to its U.S. counterparties and the U.S.
financial system would remain unchanged. If, for
instance, Title VII margin requirements did not
apply to the entire entity, these entities could
accumulate risk through their non-U.S. dealing
activity and transmit that risk to U.S. counterparties
in contravention of the purposes of the financial
responsibility framework established by the DoddFrank Act. See Section III.C.3(b)ii, supra.
559 See Section III.C.3(b)i, supra.
560 See, e.g., Davis Polk Letter II at 4–20; Sullivan
& Cromwell Letter at 14–15.
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complying with the corresponding
requirements established by its foreign
financial regulatory authority,561 subject
to certain conditions.562 We
preliminarily believe that providing
foreign security-based swap dealers
with the possibility of substituted
compliance in this way will help
address concerns related to
competitiveness and overlapping
regulations related to entity-level
requirements, while still ensuring that
registered foreign security-based swap
dealers are subject to appropriate
regulatory oversight.
Request for Comment
The Commission requests comment
on all aspects of the proposed
interpretive guidance regarding the
proposed provision of substituted
compliance for certain requirements in
Section 15F of the Exchange Act for
foreign security-based swap dealers,
including the following:
• What types of conflicts might a
foreign security-based swap dealer face
if subjected to capital requirements in
more than one jurisdiction? In what
situations would compliance with more
than one capital requirement be difficult
or impossible?
• Should the Commission provide
specific relief to foreign security-based
swap dealers with respect to entity-level
requirements? If so, please indicate the
specific relief that should be provided
and the rationale for providing such
relief.
• Would the provision of relief from
entity-level requirements undermine the
Commission’s efforts to set capital
requirements to ensure the safety and
soundness of security-based swap
sroberts on DSK5SPTVN1PROD with PROPOSALS
561 Section
3(a)(52) of the Exchange Act, 15 U.S.C.
78c(a)(52), defines ‘‘foreign financial regulatory
authority’’ as ‘‘any (A) foreign securities authority,
(B) other governmental body or foreign equivalent
of a self-regulatory organization empowered by a
foreign government to administer or enforce its laws
relating to the regulation of fiduciaries, trusts,
commercial lending, insurance, trading in contracts
of sale of a commodity for future delivery, or other
instruments traded on or subject to the rules of a
contract market, board of trade, or foreign
equivalent, or other financial activities, or (C)
membership organization a function of which is to
regulate participation of its members in activities
listed above.’’ The term ‘‘foreign securities
authority’’ is defined in Section 3(a)(50) of the
Exchange Act as ‘‘any foreign government, or any
governmental body or regulatory organization
empowered by a foreign government to administer
or enforce its laws as they relate to securities
matters.’’
562 Proposed Rule 3a71–5 under the Exchange
Act. As discussed in Section II.C.3(b) above, the
Commission has authority to establish capital and
margin requirements only for registered nonbank
security-based swap dealers. For treatment of the
capital and margin requirements for foreign bank
security-based swap dealers, see Prudential
Regulator Margin and Capital Proposal, 76 FR
27564.
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dealers, as required by Section
15F(e)(2)(C) of the Exchange Act? Why
or why not?
• Should the Commission treat
margin as an entity-level requirement or
a transaction-level requirement? If only
a transaction-level requirement, why?
• Should the Commission consider
providing relief for foreign securitybased swap dealers from the statutory
disqualification requirement in Section
15F(b)(6) of the Exchange Act with
respect to their transactions with nonU.S. persons? For example, should the
Commission permit associated persons
of a foreign security-based swap dealer
that are subject to a statutory
disqualification to conduct securitybased swap activity with non-U.S.
persons outside the United States? If so,
why?
• The CFTC has proposed an
interpretation that categorizes certain
entity-level requirements and
transaction-level requirements
differently when compared to the
Commission’s proposed approach.563
For example, the CFTC has proposed
classifying margin requirements
applicable to uncleared swaps as a
transaction-level requirement, where the
Commission has proposed categorizing
margin as an entity-level requirement.
Should the Commission adopt portions
of the CFTC’s approach to
categorization? If so, which
requirements should be re-categorized
and why?
• What would be the market impact
of the proposed approach to applying
entity-level requirements to registered
foreign security-based swap dealers?
How would the proposed application of
the entity-level requirements affect the
competitiveness of U.S. entities in the
global marketplace (both in the United
States as well as in foreign
jurisdictions)? Would the proposed
approach place any market participants
at a competitive disadvantage or
advantage? If so, please explain. Would
the proposed approach be a more
general burden on competition? If so,
please explain. What other measures
should the Commission consider to
implement the entity-level
requirements? What would be the
market impacts and competitiveness
effects of alternatives to the proposed
approach discussed in this release?
D. Intermediation
1. Introduction
Security-based swap dealers currently
use a variety of business models and
legal structures to do business with
563 See CFTC Cross-Border Proposal, 77 FR
41223–27.
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customers in jurisdictions around the
world. For instance, many securitybased swap dealers with global
businesses use local personnel to
provide security-based swap services to
customers in a particular jurisdiction
while booking transactions originated
from multiple jurisdictions in a single
entity (i.e., a centralized booking
model). Some security-based swap
dealers also use unique organizational
structures to provide local customers
with access to market or product
specialists in other jurisdictions. As
discussed below, commenters have
indicated that, in the U.S. market, these
scenarios are particularly prevalent in
the case of foreign security-based swap
dealers seeking access to U.S. customers
or providing non-U.S. customers with
expertise from employees located in the
United States.564
In the following discussion, we briefly
describe comments received regarding
various intermediation models.
Throughout this release we use the term
‘‘intermediation’’ generally to refer to
origination activity (e.g., solicitation and
negotiation of transactions) in
connection with a security-based swap
transaction.
2. Comment Summary
Commenters stated that foreign
security-based swap dealers use
different types of business models to
service U.S. customers and provide their
global customer base with specialized
information, while at the same time
reducing both customer costs and entity
risks through centralized netting and
risk management of their global
security-based swap businesses.565 In
564 See, e.g., IIB Letter at 15 (‘‘Perhaps more
commonly, a foreign bank may transact in swaps as
a dealer with U.S. customers through a separate
U.S. branch, agency, or affiliate that intermediates
the transactions as agent for the foreign bank. This
is often because, to facilitate strong relationships
with U.S. customers, the personnel who solicit and
negotiate with U.S. customers and commit a foreign
bank to swaps are located in the U.S.’’).
565 See, e.g., IIB Letter at 6 (‘‘Globally, there are
a number of paradigms under which swap activity
is conducted. To achieve the benefits of reduced
risk and increased liquidity and efficiency
associated with netting and margining on a
portfolio basis, foreign banks (like their U.S.
domestic counterparts) typically seek to transact
with swap counterparties globally, to the extent
feasible, through a single, highly creditworthy
entity. In many cases, however, the personnel who
have relationships with U.S. customers or who
manage the market risk of the foreign bank’s swap
portfolio are located regionally, outside the
jurisdiction in which the foreign bank is domiciled.
In some cases, entities other than the foreign bank
(such as a U.S. branch, agency, or affiliate) transact
with local customers in order to satisfy unique
customer documentation, insolvency, tax,
regulatory, or other considerations.); Davis Polk
Letter I at 2–3 (suggesting that ‘‘operating and
managing a global swaps business out of a single
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support of these perceived benefits,
commenters have urged the Commission
not to apply Title VII to cross-border
transactions in a way that would either
prohibit or disincentivize the existing
security-based swap dealing business
models of foreign security-based swap
dealers.566
A number of commenters
recommended that a foreign dealer that
engages in security-based swap
transactions with U.S. counterparties,
but only through U.S. registered swap or
security-based swap dealers, should not
be subject to security-based swap dealer
registration.567 One commenter stated
that in such situations, the Commission
should either not require security-based
swap dealer registration of the non-U.S.
security-based swap dealer at all, or
require a limited registration, whereby
the non-U.S. security-based swap dealer
would be subject to only capital and
related prudential requirements and be
permitted to rely on comparable home
country regulation.568 In situations
where a foreign security-based swap
dealer uses a U.S. domiciled subsidiary
or affiliate as its agent to solicit and
booking entity presents many advantages from the
perspective of foreign banks, customers and
supervisors,’’ including reduction in system risk,
maximization of benefits of counterparty netting for
customers, and consolidated supervision); Cleary IV
at 3–4 (stating that the represented firms ‘‘conduct
their swap dealing businesses through a variety of
structures, based on multiple and in many cases
interdependent legal, strategic and business
considerations that pre-date Dodd-Frank,’’ and
urging the Commissions to address a number of
‘‘common cross-border transaction structures’’).
566 See, e.g., IIB Letter at 6–7 (‘‘[T]he
Commissions should establish a framework for
cross-border swap activities that preserves and
leverages the strengths of existing market practices
and home country supervision and regulation.’’);
Cleary IV at 3–4 (urging the Commissions to give
consideration to a number of common cross-border
transaction structures in deciding how to
implement Title VII).
567 See, e.g., Financial Services Roundtable Letter
at 25 (suggesting that ‘‘entities that would meet the
definition of ‘swap dealer’ based on their non-U.S.
activity, but that act in the U.S. only on an
intermediated basis through a regulated U.S. swap
dealer, should not be subject to U.S. regulation’’);
Davis Polk Letter II at 4, 7 (discussing reasons to
exclude dealing activities with U.S.-registered swap
dealers, including because ‘‘a swap between a
foreign dealer and a U.S. registered swap dealer
would be already subject to Title VII by the virtue
of the latter’s involvement’’).
568 See Cleary Letter IV at 3–4 (recommending
that the Commission either adopt an approach
similar to the broker-dealer registration regime,
‘‘under which a non-U.S. swap dealer transacting
with U.S. persons . . . intermediated by an
affiliated U.S.-registered swap dealer’’ would not
have to register as a swap dealer or a major swap
participant, or adopt a limited registration approach
whereby ‘‘the non-U.S. swap dealer would be
subject to U.S. swap dealer registration and
regulation solely with respect to the capital and
related prudential requirements relevant to its
status as a swap counterparty, which requirements
could be satisfied through compliance with
comparable home country requirements’’).
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negotiate the terms of security-based
swap transactions, several commenters
suggested that the Commission allow for
a bifurcated registration and regulation
framework allowing the foreign
security-based swap dealer to comply
with Title VII’s requirements by
registering both the foreign dealer and
its agent in limited capacities and
allocating the compliance
responsibilities between the two
entities.569 Other commenters remarked
that the foreign security-based swap
dealer should remain ultimately
responsible for ensuring compliance
with all the applicable Title VII
requirements whether or not the
regulated activities were carried out by
the foreign security-based swap dealer
or its agent.570
3. Discussion
The Commission is not at this time
proposing any specific rules regarding
security-based swap dealing activities
undertaken through intermediation. At
the same time, we recognize the
importance of intermediation,
particularly with respect to foreign
security-based swap dealers accessing
U.S. customers or product specialists
located in the United States. Based on
the Commission’s experience in the
securities markets, we expect that many
foreign security-based swap dealers will
operate within the U.S. market by
utilizing their U.S. affiliates or other
569 See, e.g., Socie
´ te´ Ge´ne´rale Letter I at 4–6
(suggesting a bifurcated registration model allowing
foreign banks to centrally book their U.S. swap and
security-based swap business with a registered
‘‘Foreign Swap Dealer’’ who is responsible for
obligations associated with a booking entity (e.g.,
complying with capital requirements), while
complying with most of Title VII’s regulations
through a U.S. domiciled, registered ‘‘Non-Booking
Swap Dealer’’); and Davis Polk Letter II at 4–22
(proposing two registration scenarios, including one
that would require a foreign bank to register with
the Commission solely as a booking center for
security-based swap transactions, while a U.S.
affiliate of a foreign bank would also register with
the Commission, and the foreign bank’s obligations
under Title VII would be divided between the two
registered entities).
570 See, e.g., Cleary Letter IV at 12 (recommending
a limited designation registration whereby ‘‘the
branch, department or division of a registrant
involved in the regulated swap activity should be
responsible for compliance with Dodd-Frank’s
requirements,’’ but allowing for the outsourcing of
‘‘performance (but not responsibility for due
performance) of those requirements to a U.S.
affiliate that is registered as an introducing broker,
futures commission merchant (‘‘FCM’’) and/or
securities broker-dealer’’); Rabobank Letter at 3
(suggesting that ‘‘the non-U.S. branch registrant
would use one or more U.S. affiliates as agents in
arranging swaps with U.S. persons and would be
permitted to delegate certain compliance functions
to its U.S. affiliates, although such delegation
would not relieve the non-U.S. branch registrant of
its ultimate compliance responsibilities’’).
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U.S. entities as agents 571 in the United
States, while booking transactions
facilitated by such U.S. personnel in a
central booking entity located abroad.
We preliminarily believe that the
approach proposed in this release for
the cross-border regulation of securitybased swap dealing activity will not
impede the use of these types of
intermediation business models by
foreign security-based swap dealers.
More specifically, we believe that the
Commission’s proposed approach to the
application of transaction-level
requirements related to Foreign
Business 572 and proposed framework
for substituted compliance on entitylevel requirements 573 should help to
address commenter concerns that a
foreign security-based swap dealer
engaging in Foreign Business would be
subject to potentially duplicative and
conflicting transaction-level
requirements in a foreign jurisdiction
with respect to its Foreign Business.
While the foreign security-based swap
dealer would remain responsible for
ensuring that all relevant Title VII
requirements applicable to a given
security-based swap transaction are
fulfilled, the dealer and its agent(s) may
choose to allocate the specific
responsibilities such as taking
responsibility that all U.S. external
571 The Commission previously proposed new
Rule 15Fh–2(d), which would provide that the term
‘‘security-based swap dealer’’ would include, where
relevant, an ‘‘associated person’’ of the securitybased swap dealer. See External Business Conduct
Standards Proposing Release, 76 FR 42402. Section
3(a)(70) of the Exchange Act, as added by Section
761(a)(6), defines the term ‘‘person associated with
a security-based swap dealer or major securitybased swap participant’’ as ‘‘(i) any partner, officer,
director, or branch manager of such security-based
swap dealer or major security-based swap
participant (or any person occupying a similar
status or performing similar functions); (ii) any
person directly or indirectly controlling, controlled
by, or under common control with such securitybased swap dealer or major security-based swap
participant; or (iii) any employee of such securitybased swap dealer or major security-based swap
participant.’’ The term does not include, however,
any person associated with a security-based swap
dealer or major security-based swap participant
‘‘whose functions are solely clerical or ministerial.’’
See id.
As the Commission noted, to the extent that a
security-based swap dealer acts through, or by
means of, an associated person of that securitybased swap dealer, the associated person must
comply as well with the applicable business
conduct standards. See External Business Conduct
Standards Proposing Release, 76 FR 42402–3. In
support of this position, the Commission cited
Section 20(b) of the Exchange Act, which provides
that ‘‘[i]t shall be unlawful for any person, directly
or indirectly, to do any act or thing which it would
be unlawful for such person to do under the
provisions of this title or any rule or regulation
thereunder through or by means of any other
person.’’
572 See Section III.C.4, supra.
573 See Section III.C.5, supra, and Section XI,
infra.
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business conduct requirements are
complied with, margin is collected and
segregated, and required trading records
are maintained and available, to be
undertaken by each entity depending on
the intermediation model it adopts.574
Further, although a foreign securitybased swap dealer could use an entity
that is not a security-based swap dealer
to act as its agent, the foreign securitybased swap dealer would nonetheless be
responsible for ensuring compliance
with all the requirements applicable to
security-based swap dealers under Title
VII (and the federal securities laws)
whether or not the regulated activities
were carried out by the foreign securitybased swap dealer or its non-securitybased swap dealer agent.575
sroberts on DSK5SPTVN1PROD with PROPOSALS
Request for Comment
The Commission requests comment
on all aspects of the proposed approach
to intermediation. In addition, the
Commission requests comment in
response to the following questions:
• Should the Commission revise our
proposed approach to address directly
the concerns of entities using the
intermediation model to access the U.S.
market? If so, what type of approach
should the Commission use to address
these concerns consistent with the
protection of counterparties’ interests
and the purposes of Title VII?
• Should the Commission adopt a
model on intermediation similar to the
approach laid out in Rule 15a–6(a)(3)
(17 CFR 240.15a–6(a)(3)) governing
foreign broker-dealers, which would
permit non-U.S. persons to conduct
security-based swap dealing activity
within the United States without
registering with the Commission if those
transactions were intermediated by a
registered U.S. security-based swap
dealer? If so, how would it work in the
security-based swap context, and how
would it address Title VII policy
concerns?
• What would be the market impact
of the proposed approach to
intermediation? How would the
application of the proposed approach to
intermediation affect the
competitiveness of U.S. entities in the
574 The agent, in these circumstances, would need
to consider whether it separately would need to
register as a security-based swap dealer (if, for
example, the agent acted as principal in a securitybased swap with the counterparty, and then entered
into a back-to-back transaction with the booking
entity), a broker (e.g., by soliciting or negotiating the
terms of security-based swap transactions), or other
regulated entity. Further, the allocation of functions
between a foreign security-based swap dealer and
a U.S. agent would not affect the aggregation
calculation for determining whether the foreign
security-based swap dealer exceeded the de
minimis threshold. See Section III.B.3(c), supra.
575 See note 574, supra.
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global marketplace (both in the United
States as well as in foreign
jurisdictions)? Would the proposed
approach place any market participants
at a competitive disadvantage or
advantage? If so, please explain. Would
the proposed approach be a more
general burden on competition? If so,
please explain. What other measures
should the Commission consider to
implement the proposed approach to
intermediation? What would be the
market impacts and competitiveness
effects of alternatives to the proposed
approach discussed in this release?
E. Registration Application Re-Proposal
1. Introduction
As discussed in Section XI.C below,
the Commission is proposing a rule that
would create a framework under which
the Commission would consider
permitting a foreign security-based swap
dealer, where appropriate, to rely on a
substituted compliance determination
by the Commission with respect to
certain of the requirements in Section
15F of the Exchange Act and the rules
and regulations thereunder.576 In
discussing the application of this
proposed framework below, the
Commission indicated that certain
entity-level requirements under Section
15F of the Exchange Act may be
candidates for substituted compliance
determinations.577
The Commission preliminarily
believes that the most appropriate time
for a foreign security-based swap dealer
to notify the Commission of its intention
to avail itself of an existing substituted
compliance determination 578 would be
at the time the foreign security-based
swap dealer files an application to
register with the Commission as a
security-based swap dealer.579 As part
576 Proposed
Rule 3a71–3(c) under the Exchange
Act.
577 See
Section III.C.5, supra.
Commission is proposing to establish a
separate process whereby foreign security-based
swap dealers may request that the Commission
make a substituted compliance determination with
respect to a particular foreign jurisdiction. See
Section XI, infra.
579 The Commission’s Registration Proposing
Release does not use the term ‘‘foreign securitybased swap dealer,’’ but rather references a
‘‘nonresident security-based swap dealer.’’
Proposed Rule 15Fb2–4(a) under the Exchange Act
defines the term ‘‘nonresident security-based swap
dealer’’ as a security-based swap dealer that is
incorporated or organized any place that is not in
the United States or that has its principal place of
business in any place not in the United States. See
Registration Proposing Release, 76 FR 65799–801.
The definition of ‘‘nonresident security-based
swap dealer’’ in proposed Rule 15Fb2–4(a) is
similar to, but potentially broader than, the
definition of ‘‘foreign security-based swap dealer’’
in proposed Rule 3a71–3(a)(3) under the Exchange
Act because it uses ‘‘or’’ instead of ‘‘and’’ in the
578 The
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31027
of its application, the foreign securitybased swap dealer would already be
providing the Commission with detailed
information in support of its
application. The intent of a foreign
security-based swap dealer to avail itself
of a previously granted substituted
compliance determination would be
relevant to the Commission’s review of
such application because it would
impact how the Commission will
conduct oversight of the security-based
swap dealer. In addition, if a securitybased swap dealer determines, after it
registered with the Commission, that it
intends to rely on a substituted
compliance determination, proposed
Rule 15Fb2–3 would require that it
promptly update its application.580
Accordingly, the Commission
preliminarily believes it is appropriate
to require foreign security-based swap
dealers to provide additional
information in their applications for
registration as security-based swap
dealers, as described below.
The Commission previously proposed
Form SBSE, Form SBSE–A, and Form
SBSE–BD for the purpose of registering
security-based swap dealers and major
security-based swap participants.581 All
of these forms are generally based on
Form BD, which is the consolidated
form used by broker-dealers to register
definition. As a result, proposed Rule 15Fb2–4(a)
would treat a U.S. corporation as a nonresident
person if its principal place of business were
outside the United States, whereas proposed Rule
3a71–3(a)(3) would not treat such an entity as a U.S.
security-based swap dealer and, therefore, it would
not be able to avail itself of substituted compliance
determinations applicable to foreign security-based
swap dealers.
The Commission preliminarily believes that
defining the term ‘‘foreign security-based swap
dealer’’ more narrowly for purposes of the
proposals in this release is appropriate because
proposed Rule 15Fb2–4(a) uses the term
‘‘nonresident security-based swap dealer’’ only for
determining whether a nonresident security-based
dealer would be required to appoint an agent for
service of process in the United States and provide
assurance that the Commission would have prompt
access to books and records in the foreign
jurisdiction. In proposed Rule 3a71–3(a)(3), by
contrast, the definition of ‘‘foreign security-based
swap dealer’’ would be used to determine who
would be eligible to take advantage of the proposed
substituted compliance framework, as well as how
customer protection and segregation requirements
would be applied. The Commission does not
believe that it is appropriate to treat an entity as a
foreign security-based swap dealer for these
purposes if its principal place of business were
outside the United States but it were incorporated
in the United States, because of its connection to
the U.S. security-based swap market. Nonetheless,
the Commission would still want the assurances
required of a ‘‘nonresident security-based swap
dealer’’ described above, even if the dealer is
incorporated in the United States but has a
principal place of business outside the United
States.
580 See Registration Proposing Release, 76 FR
65822.
581 See id. at 65784.
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with the Commission, states, and
SROs.582 Forms SBSE–A and SBSE–BD
are shorter forms that have been
modified to provide a more streamlined
application process for entities that are
registered or registering with the CFTC
or registered or registering with the
Commission as a broker-dealer.583 Each
of these forms is designed to be used to
gather information concerning a
registrant’s business operations to
facilitate the Commission’s initial
registration decisions, as well as
ongoing examination and monitoring of
registration.’’ 584 While the Commission
received four comments on the
Registration Proposing Release, only one
specifically expressed views on the
Forms SBSE, SBSE–A, and SBSE–BD.585
2. Discussion
To address the Commission’s
proposed rule regarding substituted
compliance, the Commission is reproposing Forms SBSE, SBSE–A, and
SBSE–BD to add two questions to Form
SBSE and Form SBSE–A, add one
question to all three Forms, and to
modify Schedule F to all the Forms. In
addition, we are proposing one new
instruction to the Forms, which is
unrelated to substituted compliance, to
clarify that if an application is not filed
properly or completely, it may be
delayed or rejected.586 Key differences
from the originally proposed forms are
discussed more fully below. The
Commission is not proposing to modify
or eliminate any of the other Forms, or
any of the rules, proposed in the
Registration Proposing Release.
Re-proposed Forms SBSE and SBSE–
A would include two new questions,
question 3 (which has three parts) and
question 6.587 The new question 3.A.
582 See
id. at 65802.
id. at 65804–5.
584 See id. at 65802.
585 See SIFMA Letter II. SIFMA indicated that it
appreciated ‘‘the Commission’s attempts to
minimize registration burdens by aligning its
proposed registration requirements for SBSDs and
MSBSPs with those the CFTC is proposing for swap
dealers and major swap participants as well as by
creating a streamlined registration process for
entities already registered with the Commission or
the CFTC,’’ and was ‘‘generally pleased that the
Commission elected to make its existing brokerdealer registration forms the basis for its proposed
registration requirements for SBSDs and MSBSPs’’
because ‘‘[m]arket participants are familiar with
these requirements and may, in some cases, be
registering broker-dealers as SBSDs.’’ However,
SIFMA did object to ‘‘several of the required
disclosures on proposed Form SBSE,’’ which are
substantially similar to disclosures required on
Form BD, which it claimed would ‘‘impose
significant burdens on registrants.’’
586 See Instruction B.1.b. on Forms SBSE, SBSE–
A, and SBSE–BD.
587 The Commission is not proposing to add these
questions to the Form SBSE–BD, because that form
is only applicable to entities that are already
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583 See
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would ask whether an applicant is a
foreign security-based swap dealer that
intends to work with the Commission
and its primary regulator to have the
Commission determine whether the
requirements of its primary regulator’s
regulatory system are comparable to the
Commission’s, or avail itself of a
substituted compliance determination
previously granted by the Commission
with respect to the requirements of
Section 15F of the Exchange Act and the
rules and regulations thereunder. If the
applicant responds in the affirmative to
either part of the question, new question
3.B. would require that the applicant
identify the foreign financial regulatory
authority that serves as the applicant’s
primary regulator and for which the
Commission has made, or may make, a
substituted compliance determination.
If the applicant indicates that it is
relying on a previously granted
substituted compliance determination,
new question 3.C. would require the
applicant to describe how it satisfies
any conditions the Commission may
have placed on the use of such
substituted compliance determination.
New question 3 would elicit basic
information from an applicant to inform
the Commission with respect to its
intent to rely upon a substituted
compliance determination.
New question 6 would ask whether
the applicant is a U.S. branch of a nonresident entity. If the applicant responds
in the affirmative, the applicant would
need to identify the non-resident entity
and its location. This question would
provide the Commission with
information regarding whether the firm
would be subject to the rules of the
foreign regulator or the rules of one of
the U.S. banking regulators, which
would, in turn, elicit which rules may
be applicable to the entity’s U.S.
security-based swap business.
Re-proposed Forms SBSE and SBSE–
A would also include new question 17,
which would be identified as new
question 15 in re-proposed Form SBSE–
BD. This new question would ask if the
applicant is registered with or subject to
the jurisdiction of a foreign financial
regulatory authority. If the applicant
answered this question in the
affirmative, it would be directed to
provide additional information on
Schedule F as discussed below. This
question would apply to all applicants,
not just foreign security-based swap
registered as broker-dealers. These firms would not
be eligible to rely on a substituted compliance
determination because the substituted compliance
determination only is with respect to the
requirements in Section 15F of the Exchange Act,
not the requirements in the Exchange Act to which
registered broker-dealers are subject.
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applicants, and would provide the
Commission with information regarding
other regulatory schemes that may be
applicable to an applicant.
The proposed revisions to Schedule F
would divide Schedule F into two
sections. Section I would include the
full text of the originally proposed
Schedule F. Section II would elicit
additional information regarding foreign
regulators with which the applicant may
be registered or that otherwise have
jurisdiction over the applicant.
The Commission preliminarily
believes that modifying Forms SBSE,
SBSE–A, and SBSE–BD (including the
changes to Schedule F), as described
above, would be appropriate because it
would provide foreign security-based
swap dealers with a convenient and
cost-effective way of informing the
Commission of their intention to rely on
or seek a substituted compliance
determination, as discussed above. In
addition, we believe these modifications
to our original proposal would provide
the Commission with additional
information necessary to make a
determination as to whether it is
appropriate to grant or institute
proceedings to deny registration to a
person applying to become a nonresident security-based swap dealer.
Request for Comment
The Commission requests comment
on all aspects of the proposed
modifications and additions to proposed
Forms SBSE, SBSE–A and SBSE–BD
(including the proposed changes to
Schedule F). The Commission also
specifically requests comment on the
following:
• Please explain whether Form SBSE
and Form SBSE–A are the appropriate
places to identify whether an entity is
intending to rely on a substituted
compliance determination. If not, please
explain why and what other method of
notifying the Commission might be
appropriate as well as when such
notification to the Commission should
be required to be made.
• Please explain whether Forms
SBSE, SBSE–A, and SBSE–BD (and
Schedule F) are the appropriate places
to identify whether an entity is subject
to oversight by a foreign regulator, and
if so, which regulators. If so, why? If
not, why not?
• Should any additional questions be
added to Form SBSE to elicit
information related to a registrant’s
reliance on a substituted compliance
determination?
• Should any additional questions be
added to Form SBSE–A to elicit
information related to a registrant’s
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reliance on a substituted compliance
determination?
• Should Form SBSE–BD also be
modified to include any of the
additional questions the Commission is
proposing to include in re-proposed
Form SBSE or Form SBSE–A? If so,
which questions and why?
• The Commission previously
indicated in the Intermediary
Definitions Adopting Release that it
would consider applications for limited
purpose designations from the major
security-based swap participant and
security-based swap dealer definitions
under Rules 3a67–1(b) and 3a71–1(c)
under the Exchange Act, respectively,588
and requested comment on this topic in
the Registration Proposing Release.589
Since that time, we have adopted and
proposed, both jointly with the CFTC
and individually, various rules that
further clarify the regulations that will
be applicable to security-based swap
dealers,590 and today we propose a
substituted compliance framework to
potentially address the concerns of
588 As we noted in the Intermediary Definitions
Adopting Release, 77 FR 30643–46 and 30696–97,
the Commission will consider limited designation
applications on an individual basis through
analysis of the unique circumstances of each
applicant, given that the types of entities that
engage in security-based swap transactions are
diverse and their organization and activities are
varied. Any particular limited designation
application will be analyzed in light of the unique
circumstances presented by the applicant, and must
demonstrate full compliance with the requirements
that apply to the type, class, or category of securitybased swap, or the activities involving securitybased swaps, that fall within the security-based
swap dealer or major security-based swap
participant designation. A key challenge that any
applicant for a limited purpose designation will
face is the need to demonstrate that the applicant
can comply with the statutory and regulatory
requirements applicable to security-based swap
dealers or major security-based swap participants
while subject to a limited designation. Regardless
of the type of limited designation being requested,
the Commission will not designate a person as a
security-based swap dealer or major security-based
swap participant in a limited capacity unless it can
demonstrate that it can fully comply with the
applicable requirements.
589 See Registration Proposing Release, 76 FR
65795. The Commission received one comment on
this topic, from SIFMA (see note 585, supra).
SIFMA indicated that it ‘‘SIFMA strongly believes
that the Commission should allow for limited SBSD
or MSBSP registration along a number of
dimensions.’’ For instance, SIFMA suggested that
the Commission allow entities to separately register
individual trading desks, allow an entity to register
as an SBSD in one class or type of security-based
swap but not another (e.g., ‘‘an entity that acts as
a dealer in single-name credit default swaps but not
total return swaps on single securities should be
able to register as an SBSD in the former but not
the latter’’), and ‘‘allow entities to register as an
SBSD or MSBSP for their activities with U.S.
persons, keeping activities with non-U.S. persons
outside the scope of registration and related
regulation.’’
590 See, e.g., the Product Definitions Adopting
Release, 77 FR 48208, and the Capital, Margin, and
Segregation Proposing Release, 77 FR 70214.
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foreign security-based swap dealers.
Given these developments, are there any
situations addressed by previous
comments where limited registration
designation would no longer be
appropriate? Are there any situations,
addressed by previous comments or
otherwise, where a limited registration
designation may be appropriate for
security-based swap dealers? If so, in
what situations would a limited
registration designation be warranted,
and how should the registration forms
be amended to facilitate such limited
registration? If not, why not?
which generally focuses on a person’s
activities and how it holds itself out to
the market. The amount or significance
of those activities is relevant only in the
context of the de minimis exception.594
As a result, we believe that the crossborder issues that are raised by the
definition of major security-based swap
participant differ from those raised by
the definition of security-based swap
dealer. The application of the major
security-based swap participant
definition to cross-border activities was
not addressed in the Intermediary
Definitions Adopting Release.595
IV. Major Security-Based Swap
Participants
B. Comment Summary
A variety of commenters provided
their views on the application of the
major security-based swap participant
definition and its related thresholds in
the cross-border context, generally
suggesting that the major participant
tests focus on the systemic risk that an
entity’s swap transactions poses to the
U.S. market.596 Commenters further
suggested that major security-based
swap participant threshold calculations
should exclude security-based swap
transactions that do not involve a U.S.
counterparty.597 Several FPSFIs further
A. Introduction
Title VII defines a new type of entity
regulated by the Commission, the
‘‘major security-based swap
participant.’’ 591 The statutory definition
of major security-based swap participant
encompasses persons whose securitybased swap activities do not cause them
to be dealers, but nonetheless could
pose a high degree of risk to the U.S.
financial system generally.592 This term
was further defined in the Intermediary
Definitions Adopting Release, focusing
on the potential market impact and risks
associated with a person’s securitybased swap positions.593 In this respect,
the major security-based swap
participant definition differs from the
security-based swap dealer definition,
591 See Section 3(a)(67) of Exchange Act, 15
U.S.C. 78c(a)(67), as added by Section 761(a) of the
Dodd-Frank Act.
592 As discussed in the Intermediary Definitions
Adopting Release, the tests of the major securitybased swap participant definition use terms—
particularly ‘‘systemically important,’’
‘‘significantly impact the financial system’’ or
‘‘create substantial counterparty exposure’’—that
denote a focus on entities that pose a high degree
of risk through their security-based swap activities.
See Intermediary Definitions Adopting Release, 77
FR 30661 n.761. In addition, the link between the
major participant definitions and risk was
highlighted during the congressional debate on the
statute. See 156 Cong. Rec. S5907 (daily ed. July 15,
2010).
593 See Intermediary Definitions Adopting
Release, 77 FR 30661. Under Rule 3a67–1 under the
Exchange Act, 17 CFR 240.3a67–1, a major securitybased swap participant is any entity that maintains
security-based swap positions exceeding one of the
following three thresholds: (1) $1 billion current
uncollateralized exposure or $2 billion combined
current uncollateralized exposure and potential
future exposure in a major category of securitybased swaps (excluding certain hedging positions);
(2) $2 billion current uncollateralized exposure or
$4 billion combined current uncollateralized
exposure and potential future exposure in all
security-based swaps; or (3) highly leveraged
financial entities with $1 billion current
uncollateralized exposure or $2 billion combined
current uncollateralized exposure and potential
future exposure in a major category of securitybased swaps. See Intermediary Definitions
Adopting Release, 77 FR 30751–54.
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594 See Intermediary Definitions Adopting
Release, 77 FR 30661.
595 The Commission indicated that the crossborder application of the major security-based swap
participant definition would be addressed in a
separate release. See Intermediary Definitions
Adopting Release, 77 FR 30692 n.1181.
596 See, e.g., Financial Services Roundtable Letter
at 25 (stating that ‘‘non-US entities should not be
subject to regulation as major participants unless
their activities in US markets exceed the relevant
thresholds, even if their aggregate global activity
would exceed those thresholds’’ and warning that
‘‘the regulatory burden is sufficiently high that such
entities may choose to exit the US markets, or deny
US market participants access to non-US markets,
rather than submit to regulation’’); APG Asset
Management Letter at 4 (recommending that the
thresholds be amended to exclude from the
computations the outward credit exposures of the
computing party to non-U.S. persons, and
supporting the CFTC’s statement in its proposed
registration release that the major participant
analysis should be focused on an entity’s activities
with U.S. counterparties or using U.S. mails or
instrumentalities); and AIMA Letter at 4–5
(suggesting that in the case of managed funds, only
U.S. funds or funds otherwise regulated in the U.S.
should be subject to potential major participant
designation).
597 See, e.g., Jones Day Letter at 7–8
(recommending that ‘‘[f]oreign swap transactions
not involving a U.S. counterparty, i.e., between two
foreign counterparties[,] are more appropriately the
province of the supervisory authorities in the
relevant non-U.S. jurisdiction and should,
therefore, be excluded from calculations of
substantial swap positions’’); Milbank Tweed Letter
at 3 (‘‘Clearly, the thresholds should not be applied
to a non-U.S. participant’s transactions with all of
its counterparties. Equally, all transactions with
U.S. counterparties can reasonably be included. To
take account of transactions with non-U.S.
counterparties that might meet the ‘direct and
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requested specific exclusions from the
major security-based swap participant
definition, suggesting that as a matter of
comity, swap transactions involving
foreign central banks as a
counterparty,598 international financial
institutions, and/or foreign SWFs
should be excluded from the major
participant definitions.599
Certain entities managed or controlled
by foreign governments also have asked
for exemptions or exclusions from
Commission registration or the DoddFrank Act’s substantive requirements.
For example, SWFs commented that
they believe SWFs should be excluded
from the definition of major securitybased swap participant and thus the
related regulatory obligations.600 These
entities argued that the Commission
should not subject SWFs to registration
requirements based on principles of
international comity and cooperation
and noted that SWFs are typically
subject to comparable home country
supervision that would render SEC
regulation largely duplicative. They also
argued that excluding SWFs from the
major security-based swap participant
definition would not increase systemic
risks given that SWFs make long-term
investments across diverse asset classes,
use swaps or security-based swaps to
hedge portfolio risks rather than
generate returns, and are more likely to
ensure that risk management measures
are in place because of SWFs’
heightened concerns regarding
reputational risk.601
Another entity, which operates with
an explicit government guarantee of its
swap and security-based swap
obligations, argued that it should be
excluded from the major participant
definition due to its lack of risk to the
significant connection’ standard, we suggest the
Commissions consider including only those
transactions by a potential non-U.S. major swap
participant that are with non-U.S. registered swap
dealers or non-U.S. registered major swap
participants.’’).
598 For this purpose, we consider the Bank for
International Settlements, in which the Federal
Reserve and foreign central banks are members, to
be a foreign central bank. See http://www.bis.org/
about/orggov.htm.
599 See, e.g., Norges Bank Letter at 4–5
(recommending exemptions for foreign
governments and their agencies); KfW letter at 8
(FPSFIs); World Bank Group Letter II at 1–2
(multilateral development institutions); China
Investment Letter at 2 (SWFs); and GIC Letter at 2,
5–6 (SWFs).
600 See China Investment Letter at 2–4 (further
explaining that exempting SWFs from the definition
of MSBSP would not result in reduced
transparency, given that the SWF would still have
to comply with a number of other Dodd-Frank Act
requirements) and GIC Letter at 2, 5–6.
601 See China Investment Letter at 3–4 and GIC
Letter at 3.
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market resulting from this government
support.602
C. Proposed Approach
In light of the comments received on
the application of the major securitybased swap participant definition in the
cross-border context and the principles
discussed above,603 the Commission is
proposing a rule and interpretive
guidance regarding the application of
the major security-based swap
participant definition to cross-border
activities.
1. In General
The Commission is proposing a rule
under which a U.S. person would
consider all security-based swap
transactions entered into by it, while a
non-U.S. person would consider only
transactions entered into with U.S.
persons,604 when determining whether
the person falls within the major
security-based swap participant
definition.605 Under this proposed
approach, a non-U.S. person would
calculate its security-based swap
positions under the three prongs of the
major security-based swap participant
definition 606 based solely on its
transactions with U.S. persons
(including foreign branches of U.S.
banks). All security-based swap
transactions by a non-U.S. person with
other non-U.S. person counterparties,
regardless of whether they are
conducted within the United States or
whether the non-U.S. person
counterparties are guaranteed by a U.S.
person, would be excluded from the
major security-based swap participant
analysis.
The proposed rule would use the
same definition of ‘‘U.S. person’’ as
proposed in the context of foreign
security-based swap dealer
registration.607 As previously discussed,
this definition generally follows a
territorial approach to defining U.S.
person.608 The proposed approach to
the U.S. person definition is intended to
identify individuals or legal persons
that, by virtue of their location within
602 See
KfW Letter at 8.
Section II.C, supra.
604 Proposed Rule 3a67–10(a)(2) under the
Exchange Act (defining the term ‘‘U.S. person’’ by
cross-reference to the definition of U.S. person in
proposed Rule 3a71–3(a)(7) under the Exchange
Act, as discussed in Section III.B.5, supra).
605 Proposed Rule 3a67–10(c) under the Exchange
Act.
606 See Rule 3a67–1 under the Exchange Act, 17
CFR 240.3a67–1; see also note 593, supra.
607 Proposed Rule 3a67–10(a)(2) under the
Exchange Act; see also proposed Rule 3a71–3(a)(7)
under the Exchange Act, as discussed in Section
III.B.5, supra.
608 See Section III.B.5, supra, (discussing the
definition of ‘‘U.S. person’’).
603 See
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the United States or their legal or other
relationship with the United States, are
likely to impact the U.S. financial
market and the U.S. financial system.609
Therefore, we preliminarily believe that
requiring a non-U.S. person to take into
account its security-based swap
positions with U.S. persons, as
proposed to be defined, for purposes of
the major security-based swap
participant definition would provide an
appropriate indication of the degree of
default risk posed by such non-U.S.
person’s security-based swap positions
to the U.S. financial system, which we
view as the focus of the major securitybased swap participant definition.610
Consistent with the rules further
defining the definition of major
security-based swap participant adopted
in the Intermediary Definitions
Adopting Release, such risk to the U.S.
financial system would be measured by
calculating such non-U.S. person’s
aggregate outward exposures 611 to U.S.
persons (that is, what such non-U.S.
person owes, or potentially could owe,
on its security-based swaps with U.S.
persons).612 If such non-U.S. person’s
aggregate outward exposures to U.S.
persons exceed one of the thresholds set
forth in the rules further defining
‘‘major security-based swap
609 Id.
610 See Section 3(a)(67) of Exchange Act, 15
U.S.C. 78c(a)(67). In particular, one of the
thresholds of the statutory definition of major
security-based swap participant focuses on the
serious adverse effects on the financial stability of
the U.S. banking system or financial markets as a
result of substantial counterparty exposure created
by a person’s security-based swap positions. See
Section 3(a)(67)(A)(ii)(II) of the Exchange Act, 15
U.S.C. 78c(a)(67)(A)(ii)(II). In addition, Section
3(a)(67)(B) of the Exchange Act requires the
Commission to define the term ‘‘substantial
position’’ in Sections 3(a)(67)(A)(ii)(I) and (III) of
the Exchange Act at the threshold that the
Commission determines to be prudent for the
effective monitoring, management, and oversight of
entities that are systemically important or can
significantly impact the financial system of the
United States. See Section 3(a)(67)(B) of the
Exchange Act, 15 U.S.C. 78c(a)(67)(B).
611 See Intermediary Definitions Adopting
Release, 77 FR 30666–71; Rules 3a67–3(b) and (c)
under the Exchange Act, 17 CFR 240.3a67–3(b) and
(c).
612 The determination of whether a security-based
swap transaction must be included in a non-U.S.
person’s major security-based swap participant
calculation is based on the U.S. person status of the
non-U.S. person’s counterparty to such transaction,
regardless of whether the counterparty is a securitybased swap dealer, end user, CCP, or other market
participant. For example, where a non-U.S. person
enters into a security-based swap transaction with
a security-based swap dealer, and that transaction
is submitted for clearing and novated from the
dealer to a CCP, the non-U.S. person would look to
the U.S. person status of the CCP that became its
counterparty as a result of such novation when
determining whether the transaction must be
included in such non-U.S. person’s major securitybased swap participant calculation.
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participant,’’ 613 the non-U.S. person
would be required to register as a major
security-based swap participant.
Given the focus of the major securitybased swap participant definition on the
degree of risk to the U.S. financial
system,614 the Commission
preliminarily believes that the location
in which security-based swap
transactions are conducted is not
relevant to the calculation of a person’s
security-based swap positions for
purposes of determining such person’s
status as a major security-based swap
participant. Such an approach would
differ from the approach we are
proposing with respect to the securitybased swap dealer definition, where we
would count transactions connected
with security-based swap dealing
activity conducted within the United
States toward a potential security-based
swap dealer’s de minimis threshold
even if the transactions were with nonU.S. persons.615 This difference in
approach is driven by the different
focuses of the statutory definitions of
the terms security-based swap dealer
and major security-based swap
participant. While the statutory major
security-based swap participant
definition is focused specifically on
risk,616 the statutory security-based
swap dealer definition is focused on, in
addition to risk, the nature of the
activities undertaken by an entity, its
interactions with counterparties, and its
role within the security-based swap
market.617 These different statutory
emphases lead us to treat major
security-based swap participants
differently from security-based swap
dealers with respect to whether
activities conducted within the United
States should be counted toward their
respective thresholds.
In addition, as stated above, the U.S.
person definition applies to the entire
entity, including its branches and
offices that may be located in a foreign
jurisdiction.618 Therefore, under the
proposed approach, a non-U.S. person
would need to include its security-based
swap transactions with foreign branches
of U.S. banks when calculating its
security-based swap positions for
purposes of the major security-based
swap participant definition.
Some commenters on the CFTC CrossBorder Proposal have suggested that a
613 See Rule 3a67–3 and Rule 3a67–5 under the
Exchange Act, 17 CFR 240.3a67–3 and 17 CFR
240.3a67–5 (defining ‘‘substantial position’’ and
‘‘substantial counterparty exposure’’).
614 See note 610, supra.
615 See Section III.B.6, supra.
616 See note 610, supra.
617 See note 177 and accompanying text, supra.
618 See Section III.B.5, supra.
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non-U.S. person should be allowed to
exclude swap transactions with foreign
branches of U.S. banks for purposes of
determining whether it is a major swap
participant because otherwise non-U.S.
persons would have a strong incentive
to limit or even stop trading with U.S.
banks that operate outside the United
States via foreign branches.619 We are
mindful of these concerns. However,
because foreign branches are not
separate legal persons,620 the
Commission believes that the potential
losses that a U.S. bank would suffer due
to a non-U.S. person counterparty’s
default, and the potential impact on the
U.S. banking system and the U.S.
financial system generally, would not
differ depending on whether the nonU.S. person counterparty entered into
the security-based swap with the home
office of the U.S. bank or with a foreign
branch of the U.S. bank. Therefore, the
Commission preliminarily believes that
it is appropriate to require a non-U.S.
person to include its security-based
swap transactions with foreign branches
of U.S. banks for purposes of
determining its major security-based
swap participant status.
By contrast, the Commission
preliminarily believes that a non-U.S.
person (the ‘‘potential non-U.S. person
major security-based swap participant’’)
does not need to include its securitybased swap transactions with non-U.S.
person counterparties in determining
whether it is a major security-based
swap participant. As stated above, the
focus of the major security-based swap
participant definition is on the degree of
risk posed by a person’s security-based
swap positions to the U.S. financial
system.621 In the case of transactions
with non-U.S. person counterparties,
the risk that a potential non-U.S. person
major security-based swap participant
will not pay what it owes (or potentially
could owe) under its security-based
swaps to its non-U.S. counterparties is
not transmitted directly and fully to the
U.S. financial system in the way that
such risk would be transmitted if the
potential non-U.S. person major
security-based swap participant engaged
in security-based swap transactions
with U.S. person counterparties.
Instead, the non-U.S. person
counterparties bear the direct and full
risk of loss.622 We recognize that there
e.g., Citigroup Letter at 3.
Section III.B.5, supra.
621 See note 610, supra.
622 This is the case even if the non-U.S. person
counterparties’ obligations under the security-based
swaps with the potential non-U.S. person major
security-based swap participant are guaranteed by
a U.S. person. As discussed in more detail below,
the Commission proposes to address the risk posed
31031
may be indirect spillover effects related
to the security-based swap positions
arising from the activity conducted by a
potential non-U.S. person major
security-based swap participant and a
non-U.S. person counterparty (e.g., a
U.S. person that has an ownership
interest in such a non-U.S. person
counterparty would potentially face
losses on the value of its investment in
such a non-U.S. person counterparty
due to failure of the potential non-U.S.
person major security-based swap
participant), but the Commission
preliminarily believes that the major
security-based swap participant tests do
not need to address the potential
indirect spillover risk to the U.S.
financial system from foreign
investments by U.S. persons in non-U.S.
persons, or other non-security-based
swap activities by U.S. persons with
non-U.S. persons.623
The Commission recognizes that this
proposed approach results in different
treatment of U.S. and non-U.S. persons
under the major security-based swap
participant definition (i.e., a non-U.S.
person would consider its securitybased swap transactions with only U.S.
persons, while a U.S. person would
consider all of its security-based swap
transactions). However, the Commission
preliminarily believes that this
approach is appropriate in light of the
focus in the major security-based swap
participant definition on the U.S.
financial system. More specifically, the
need for separate analysis of U.S. and
non-U.S. entities results from the fact
that all of a U.S. person’s security-based
swap transactions are part of and create
risk to the U.S. financial system,
regardless of whether such entity’s
counterparties are U.S. persons or nonU.S. persons. The same is not true of
non-U.S. persons, however, because the
security-based swap transactions
entered into by a non-U.S. person with
other non-U.S. persons are not
fundamentally part of the U.S. financial
system, while such non-U.S. person’s
security-based swap transactions with
U.S. persons would directly impact the
U.S. financial system. Thus, we
preliminarily believe that the statutory
major security-based swap participant
definition’s focus on the U.S. financial
system, justifies treating U.S. and nonU.S. persons differently for purposes of
the major participant analysis based on
619 See,
620 See
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by a non-U.S. person’s security-based swap
positions guaranteed by a U.S. person to the U.S.
financial system through its treatment of guarantees
for purposes of the major security-based swap
participant definition. See Section IV.C.2(a), infra.
623 The Commission preliminarily believes that
such risk is more appropriately addressed under
Titles I and II of the Dodd-Frank Act.
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the disparate impacts of their securitybased swap transactions on the U.S.
financial system.
We recognize that a non-U.S. person’s
transactions with other non-U.S. person
counterparties could still have an
impact on the U.S. financial system,
including where those transactions
threatened the financial integrity of a
non-U.S. person counterparty and such
person had significant security-based
swap positions with U.S. persons.
However, the amount of risk the nonU.S. person poses to the U.S. financial
system would most directly stem from
the size of its direct positions with U.S.
persons. As a result, the Commission
preliminarily believes it is appropriate
to limit the international application of
the major security-based swap
participant definition to a non-U.S.
person’s security-based swaps entered
into with U.S. persons.
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2. Guarantees
The application of the major securitybased swap participant definition to
security-based swap positions
guaranteed by a parent, other affiliate, or
guarantor raises unique issues in the
cross-border context. These issues were
not addressed in the Intermediary
Definitions Adopting Release.624
As a general principle, the
Commission and the CFTC did note in
the Intermediary Definitions Adopting
Release that an entity’s security-based
swap positions are attributed to a
parent, other affiliate, or guarantor for
purposes of the major participant
analysis to the extent that the
counterparties to those positions have
recourse to that parent, other affiliate, or
guarantor in connection with the
position.625 Positions are not attributed
in the absence of recourse.626 The
Commission and the CFTC further
stated that attribution of these positions
624 In the Intermediary Definitions Adopting
Release, the Commissions stated they intended to
address guarantees provided to non-U.S. entities,
and guarantees by non-U.S. holding companies, in
separate releases. See Intermediary Definitions
Adopting Release, 77 FR 30689 n.1134. In this
release, we are not altering the interpretive
approach with respect to the attribution of
guarantees that was adopted by the Commissions in
the Intermediary Definitions Adopting Release, but
rather we are proposing an interpretive approach
that would apply the principles adopted in the
Intermediary Definitions Adopting Release in the
cross-border context.
625 See Intermediary Definitions Adopting
Release, 77 FR 30689, and the accompanying note
1132 on that page.
626 See id. As indicated in note 160 above, the
term ‘‘guarantee’’ as used in this release refers to a
contractual agreement pursuant to which one party
to a security-based swap transaction has recourse to
its counterparty’s parent, other affiliate, or
guarantor with respect to the counterparty’s
obligations owed under the transaction.
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for purposes of the major participant
definitions is intended to reflect the risk
focus of the major participant
definitions by providing that entities
will be regulated as major participants
when they pose a high level of risk in
connection with the swap and securitybased swap positions they guarantee.
The application of these general
principles in the cross-border context is
discussed below, including the
attribution of guaranteed security-based
swap positions to U.S. persons and nonU.S. persons, respectively, when they
provide guarantees on performance of
the security-based swap obligations of
other persons, the limited circumstances
where attribution of guaranteed
security-based swap positions is not
required, and operational compliance.
(a) Guarantees Provided by U.S. Persons
to Non-U.S. Persons
One cross-border issue that arises
from the general approach to guarantees
set forth in the Intermediary Definitions
Adopting Release is how the attribution
of guarantees for purposes of the major
security-based swap participant
definition would apply to a guarantee
provided by a U.S. person for
performance on the obligations of a nonU.S. person, such as a U.S. holding
company providing a guarantee on the
obligations of a foreign subsidiary. As
noted in the Intermediary Definitions
Adopting Release, the attribution of
guaranteed positions for purposes of the
major participant definitions is intended
to reflect the risk that a guarantor might
pose to, and the systemic impact of such
risk may impose on, the U.S. financial
system as a result of the guarantees that
it provides.627 The Commission
preliminarily believes that these risk
concerns are the same when U.S.
persons act as guarantors for foreign
persons regardless of whether the
underlying security-based swap
transactions that they guarantee are
entered into with U.S. persons or nonU.S. persons, given that the risk borne
by the U.S. person guarantor would not
be impacted by the status of the
guaranteed non-U.S. person’s
counterparty as either a U.S. person or
non-U.S. person. As a result, the
Commission is proposing that, other
than in the limited circumstances
described below,628 all security-based
swaps entered into by a non-U.S. person
and guaranteed by a U.S. person be
attributed to such U.S. person guarantor
for purposes of determining such U.S.
627 See
id.
Section IV.C.2(c), infra (discussing the
limited circumstances where attribution of
guaranteed security-based swap positions to the
guarantor would not apply).
628 See
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person guarantor’s major security-based
swap participant status, regardless of
whether the underlying transaction was
entered into with a U.S. person
counterparty or non-U.S. person
counterparty.629
(b) Guarantees Provided by Non-U.S.
Persons to U.S. Persons and Guarantees
Provided by Non-U.S. Persons to NonU.S. Persons
Another cross-border issue related to
the Commission’s approach to the
attribution of guarantees is how
guarantees provided by non-U.S.
persons are treated for purposes of the
major security-based swap participant
definition. As previously noted, the
statutory major security-based swap
participant definition’s focus on the
accumulation of security-based swap
risk by non-U.S. persons is primarily
centered on the impact such risk could
have on the U.S. financial system.630
Where a non-U.S. person provides a
guarantee on performance of the
security-based swap obligations of a
U.S. person (e.g., a non-U.S. holding
company providing a guarantee on
performance of the obligations owed by
its U.S. subsidiary under security-based
swaps entered into by the U.S.
subsidiary), the counterparties of such
U.S. person would be taking the credit
risk of the non-U.S. person guarantor as
well as the U.S. person. If the non-U.S.
person guarantor defaults, the full
amount of risk accumulated under the
guaranteed U.S. person’s security-based
swap positions would impact the U.S.
financial system. As a result, subject to
the limited circumstances described in
the Intermediary Definitions Adopting
Release,631 a non-U.S. person providing
629 In all circumstances where a U.S. person
guarantor is required to attribute to itself all
security-based swap transactions entered into by
the guaranteed non-U.S. person, the guaranteed
non-U.S. person would still be required to consider
those security-based swap transactions that it enters
into with U.S. person counterparties for purposes
of determining whether it is a major security-based
swap participant pursuant to the proposed Rule
3a67–10(c)(2) under the Exchange Act. See Section
IV.C.1, supra (discussing proposed Rule 3a67–10(c)
under the Exchange Act). Once the guaranteed nonU.S. person becomes a major security-based swap
participant and registers with the Commission, the
U.S. guarantor would no longer be required to
attribute to itself the security-based swap positions
entered into by the guaranteed non-U.S. person. See
Intermediary Definitions Adopting Release, 77 FR
30689. This same result would also occur where a
guaranteed non-U.S. person becomes subject to
capital regulation by the Commission or the CFTC
(e.g., a registered major swap participant, swap
dealer, security-based swap dealer, futures
commission merchant, or broker-dealer). See id.
630 See note 610, supra.
631 See Intermediary Definitions Adopting
Release, 77 FR 30730 (discussing the limited
circumstances where attribution of guaranteed
security-based swap positions of a U.S. person to
the guarantor would not apply).
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a guarantee on performance of the
security-based swap obligations of a
U.S. person would attribute to itself all
of the U.S. person’s security-based swap
positions that are guaranteed by the
non-U.S. person guarantor for purposes
of determining the non-U.S. person
guarantor’s major security-based swap
participant status.632
By contrast, where a non-U.S. person
provides a guarantee on performance of
the security-based swap obligations of
another non-U.S. person (e.g., a nonU.S. holding company providing a
guarantee on performance of the
obligations owed by its non-U.S.
subsidiary under security-based swaps
entered into by the non-U.S. subsidiary),
the ultimate counterparty credit risk
associated with the transaction would
generally reside outside of the United
States with the non-U.S. guarantor. In
this scenario, the potential impact on
the U.S. financial system would be
limited to transactions entered into by
the guaranteed non-U.S. person with
U.S. person counterparties. Therefore,
the Commission preliminarily believes
that, other than in the limited
circumstances described below,633
where a non-U.S. person guarantees
performance on the security-based swap
transactions of another non-U.S. person,
the non-U.S. guarantor need only
attribute to itself such guaranteed
security-based swap transactions
entered into with U.S. person
counterparties for purposes of
determining its major security-based
swap participant status.634
(c) Limited Circumstances Where
Attribution of Guaranteed SecurityBased Swap Positions Does Not Apply
In addition to setting forth general
principles regarding the attribution of
guaranteed swap or security-based swap
632 See
note 629, supra.
Section IV.C.2(c), infra (discussing the
limited circumstances where attribution of
guaranteed security-based swap positions of a nonU.S. person to the guarantor would not apply).
634 Where a non-U.S. person guarantor is required
to attribute to itself the security-based swap
positions entered into by a non-U.S. person that are
guaranteed by the first non-U.S. person, the
guaranteed non-U.S. person also would be required
to consider all security-based swap transactions
entered into by itself with U.S. person
counterparties for purposes of determining its major
security-based swap participant status in
accordance with proposed Rule 3a67–10(c)(2) under
the Exchange Act. See Section IV.C.1, supra
(discussing proposed Rule 3a67–10(c) under the
Exchange Act). Once the guaranteed non-U.S.
person becomes a major security-based swap
participant and registers with the Commission, the
non-U.S. guarantor would no longer be required to
attribute to itself the security-based swap positions
entered into by the guaranteed non-U.S. person. See
Intermediary Definitions Adopting Release, 77 FR
30689.
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633 See
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positions to the guarantor for the major
participant definitions, the Intermediary
Definitions Adopting Release also
provided interpretive guidance related
to the limited circumstances under
which attribution of guaranteed swap or
security-based swap positions is not
required.635 Specifically, it stated that
even in the presence of a guarantee, it
is not necessary to attribute a person’s
swap or security-based swap positions
to a parent or other guarantor if the
person already is subject to capital
regulation by the Commission or the
CFTC (i.e., swap dealers, security-based
swap dealers, major swap participants,
major security-based swap participants,
FCMs, and broker-dealers) or if the
person is a U.S. entity regulated as a
bank in the United States.636 In
providing this interpretive guidance, the
Commission and the CFTC explained
that the positions of those regulated
entities already will be subject to capital
and other requirements, making it
unnecessary to separately address, via
major participant regulations, the risks
associated with guarantees of those
positions of a regulated entity.637
The Intermediary Definitions
Adopting Release did not address the
application of the interpretive guidance
regarding attribution of guaranteed
positions where a guarantee is provided
to support a non-U.S. person’s
performance on the obligations under
security-based swaps in the cross-border
context. The Commission preliminarily
believes that the interpretation jointly
adopted by the Commission and the
CFTC in the Intermediary Definitions
Adopting Release regarding securitybased swap positions of a person subject
to capital regulation by the CFTC or the
Commission should equally apply to a
non-U.S. person whose security-based
swap positions are guaranteed by
another person. Therefore, the
Commission is proposing to interpret
that it is not necessary to attribute a
non-U.S. person’s security-based swap
positions to a parent or other guarantor
if such non-U.S. person already is
subject to capital regulation by the
Commission or the CFTC (i.e., swap
dealers, security-based swap dealers,
major swap participants, major securitybased swap participants, FCMs and
broker-dealers).
In addition, in the cross-border
context and with respect to a non-U.S.
635 See Intermediary Definitions Adopting
Release, 77 FR 30689.
636 Id. This interpretive guidance applies to both
U.S. persons and non-U.S. persons that are subject
to registration and regulation in the enumerated
categories.
637 See Intermediary Definitions Adopting
Release, 77 FR 30689.
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31033
person, if such non-U.S. person is not
subject to capital regulation by the
Commission or the CFTC, consistent
with the rationale for the approach to
attribution of security-based swap
positions of a person that is a U.S. entity
regulated as a bank in the United States,
it would not be necessary to attribute
such non-U.S. person’s security-based
swap positions to its guarantor if such
non-U.S. person is subject to capital
standards that are consistent with the
capital standards such non-U.S. person
would have been subject to if such nonU.S. person were a bank subject to the
prudential regulators’ capital regulation.
Therefore, the Commission
preliminarily believes that it is not
necessary to attribute such non-U.S.
person’s security-based swap positions
to its guarantor for purposes of
determining the guarantor’s major
security-based swap participant status,
if such non-U.S. person is subject to
capital standards adopted by its home
country supervisor that are consistent in
all respects with the Capital Accord of
the Basel Committee on Banking
Supervision (the ‘‘Basel Accord’’).638
This proposed approach also is
consistent with the capital standards
proposed by the prudential regulators
for a foreign bank that is a swap dealer,
major swap participant, security-based
swap dealer or major security-based
swap participant, which require such
foreign bank to comply with regulatory
capital rules already made applicable to
such foreign bank as part of the existing
prudential regulatory regime.639 The
Commission preliminarily believes that
security-based swap positions of a nonU.S. person subject to foreign regulatory
capital requirements consistent with the
Basel Accord would be subject to riskbased capital requirements that take into
account the unique risks (including the
638 This is consistent with the capital standards
of the prudential regulators with respect to foreign
banks that are bank holding companies subject to
the Federal Reserve Board of Governors’
supervision. See § 225.2(r)(3) of the Regulation Y
(‘‘For purposes of determining whether a foreign
banking organization qualifies under paragraph
(r)(1) of this section: (A) A foreign banking
organization whose home country supervisor . . .
has adopted capital standards consistent in all
respects with the Capital Accord of the Basle
Committee on Banking Supervision (Basle Accord)
may calculate its capital ratios under the home
country standard . . .’’), 12 CFR 225.2(r)(3).
639 See Prudential Regulator Margin and Capital
Proposal, 76 FR 27582 (‘‘The proposed rule
generally requires a covered swap entity to comply
with regulatory capital rules already made
applicable to that covered swap entity as part of its
prudential regulatory regime. . . . In the case of a
foreign bank or the U.S. branch or agency of a
foreign bank, the capital rules that are made
applicable to such covered entity pursuant to
§ 225.2(r)(3) of the Board’s Regulation Y, 12 CFR
225.2(r)(3) . . .’’).
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credit risk, market risk, and other risks)
arising from security-based swap
transactions, in such a way as to make
it unnecessary to separately address, via
major security-based swap participant
regulation, the risks associated with
guarantees of those security-based swap
positions.
(d) Operational Compliance
Finally, the Commission believes that
it is necessary to provide interpretive
guidance regarding operational
compliance and the special issues that
may result from the attribution of
security-based swap positions to a
parent or guarantor. As the Commission
and the CFTC noted in the Intermediary
Definitions Adopting Release, these
include issues regarding the application
of the transaction-focused requirements
applicable to registered major
participants (e.g., certain requirements
related to trading records and
transaction confirmations), given that
the entity that is the direct counterparty
to the swap or security-based swap may
be better positioned to comply with
those requirements.640 In the
Intermediary Definitions Adopting
Release, the Commission and the CFTC
stated that ‘‘an entity that becomes a
major participant by virtue of swaps or
security-based swaps directly entered
into by others must be responsible for
compliance with all applicable major
participant requirements with respect to
those swaps or security-based swaps
(and must be liable for failures to
comply), but may delegate operational
compliance with transaction-focused
requirements to entities that directly are
party to the transactions. The entity that
is the major participant, however,
cannot delegate compliance duties with
the entity-level requirements applicable
to major participants (e.g., requirements
related to registration and capital).’’ 641
The Commission preliminarily
believes that the same approach should
apply in the cross-border context when
the guarantor and the guaranteed person
are located in different jurisdictions
(e.g., U.S. holding companies that act as
guarantors of the security-based swap
obligations of their non-U.S. dealing
subsidiaries). In each case, the major
security-based swap participant may
delegate compliance duties for
transaction-focused requirements to the
entities that are counterparties to the
transactions, but the major securitybased swap participant would remain
responsible for ensuring that the Title
VII requirements applicable to such
640 Intermediary Definitions Adopting Release, 77
FR 30689.
641 Id.
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transactions are fulfilled. However,
major security-based swap participants
must comply with all relevant entitylevel requirements themselves that are
not transaction-focused, such as
registration and capital. Entity-level
requirements that have a transaction
focus, such as margin, may be delegated
to the guaranteed entities that directly
are party to the transactions. However,
the major security-based swap
participants would remain responsible
for ensuring compliance with these
requirements.
3. Foreign Public Sector Financial
Institutions (FPSFIs)
The proposed approach to the crossborder application of the major securitybased swap participant definition
described above provides a general
framework for applying the definition to
non-U.S. persons. That framework does
not separately address questions raised
by commenters regarding how the major
security-based swap participant
definition applies to FPSFIs.
Specifically, some commenters
requested explicit exclusions from the
major security-based swap participant
definition for these types of entities.642
We note that FPSFIs encompass a
wide range of institutions and
organizations, ranging from divisions of
foreign central banks, to international
financial institutions established under
treaties, to multilateral development
banks formed, owned, and controlled by
sovereign members, to sovereign wealth
funds and other investment
corporations owned by foreign
governments. Some FPSFIs’ obligations
are guaranteed or backed by foreign
governments; others may not be. The
purposes and activities of these
institutions and organizations vary. For
example, some FPSFIs (such as the Bank
for International Settlements) provide
banking services to foreign central banks
who are their members. Some FPSFIs
provide credits and grants to promote
economic development in developing
countries (e.g., multilateral development
banks) or distribute funds of regional
recovery programs to promote regional
economies (e.g., KfW for the European
Recovery Program). Other FPSFIs
conduct investment activities around
the world and their exclusive customers
are the foreign governments to which
they are linked. Depending on their
purposes and activities, FPSFIs may
engage in different types of swaps or
security-based swaps to various degrees,
although the Commission is not aware
of data reflecting the nature and amount
of such transactions across the FPSFI
642 See
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population. One commenter stated that
it enters into swaps to manage interest
rates and foreign exchange risks but
does not use swaps to generate
returns.643
Several commenters requested that
FPSFIs be excluded from the major
security-based swap participant
definition. They provided various
reasons and basis to support their
requests. Some FPSFIs commented that
they are subject to exceptionally high
risk controls and have extremely strong
capital bases and therefore pose no risk
to systemic stability.644 Others argued
that they already are subject to
comparable or comprehensive
substantive regulation of their
respective governments in their home
countries and therefore, subjecting them
to the major security-based swap
participant regulation would create
regulatory duplication or conflicts.645
One FPSFI argued that it only conducts
swap activities with dealers, which
would be regulated under Title VII, and
therefore it is not necessary to subject it
to duplicative regulation and
supervision.646 Another FPSFI, which
operates with an explicit government
guarantee of its swap and security-based
swap obligations, argued that it should
be excluded from the major participant
definition due to its lack of risk to the
market resulting from this government
support.647 Intergovernmental
organizations, such as multilateral
development banks, argued that
multilateral development institutions
are never subject to national regulations
and their privileges and immunities
should be fully respected.648
After considering the concerns of
these commenters, we recognize that
FPSFIs raise unique and complex issues
because of the diversity of the special
purposes they are serving, their differing
governance structures and sources of
financial strength, and their
supranational, intergovernmental, or
sovereign nature. The Commission also
recognizes that we have received
relatively little information from
commenters regarding the types, levels,
and natures of security-based swap
activity that FPSFIs regularly engage in
(although some information has been
643 See China Investment Letter at 3–4. Cf. World
Bank Letter II states that ‘‘not all multilateral
development banks use derivatives in their
development operations, or do so only on a limited
basis.’’ See World Bank Letter II at 1 n.1.
644 See BIS Letter II at 3 and World Bank Letter
I at 7.
645 See GIC Letter at 3–4 and KfW Letter at 3 and
8.
646 See China Investment Letter at 3–4.
647 See KfW Letter at 8.
648 See World Bank Letter II at 2–3.
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received regarding their swap
transactions) and that, consequently, the
Commission has comparatively little
basis on which to understand their roles
in the security-based swap markets and,
as appropriate, exclude them from the
major security-based swap participant
definition. Therefore, we are not
proposing to specifically address the
treatment of FPSFIs at this time. Instead,
we are soliciting comment to help
determine the basis on which it may be
appropriate to exclude FPSFIs from the
proposed rule regarding application of
the major security-based swap
participant definition to non-U.S.
persons. In particular, we invite public
comment regarding the types, levels,
and nature of the security-based swap
activity that various types of FPSFIs
may engage in on a regular basis, the
roles of FPSFIs in the security-based
swap market, the mitigating factors and
reasons that FPSFIs may not pose
systemic risk as a result of their
security-based swap activity, and
whether it would be more appropriate
for the Commission to address FPSFI
concerns on an individual basis. We
also request considerations,
information, and data regarding
potential definitions of a FPSFI for
purposes of the major security-based
swap definition. Responses that are
supported by empirical data and
analysis are encouraged in assisting the
Commission in considering whether
excluding FPSFIs from the definition of
the major security-based swap
participant is warranted.
D. Title VII Requirements Applicable to
Major Security-Based Swap Participants
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1. Transaction-Level Requirements
Related to Customer Protection
(a) Overview
As previously noted, the Dodd-Frank
Act is generally concerned with the
protection of the U.S. financial system
and counterparties in the U.S. securitybased swap market.649 This general
principle is particularly relevant to the
customer protection, including
segregation, requirements in Title VII,
which are focused on the protection of
the counterparties or customers of
security-based swap dealers. As a result,
the Commission preliminarily believes
that it is not necessary to the objective
of Title VII to subject foreign major
security-based swap participants to
certain of the customer protection
requirements in Title VII with respect to
their transactions with non-U.S.
persons. Accordingly, the Commission
is proposing rules that would identify
649 See
note 4, supra.
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specific transaction-level requirements
that would not apply to foreign major
security-based swap participants with
respect to their transactions with nonU.S. persons.
(b) Proposed Rules
The proposed rules would provide
that foreign major security-based swap
participants would not be subject, solely
with respect to their transactions with
non-U.S. persons, to certain of the
transaction-level requirements that
apply to major security-based swap
participants.650 Specifically, under the
proposed rules registered foreign major
security-based swap participants would
not have to comply with business
conduct standards as described in
Section 15F(h) of the Exchange Act, and
the rules and regulations thereunder,
other than the rules and regulations
prescribed by the Commission relating
to diligent supervision pursuant to
Section 15F(h)(1)(B) 651 and the rules
and regulations thereunder, with respect
to their transactions with non-U.S.
persons.652 In addition, under the
proposed rules, registered foreign major
security-based swap participants that
are not registered broker-dealers would
not have to comply with requirements
related to the segregation of assets held
as collateral in Section 3E of the
Exchange Act and the rules and
regulations thereunder with respect to
their transactions with non-U.S.
persons.653
Our rationale for this proposed
approach to the application of
transaction-level requirements for
foreign major security-based swap
participants is substantially the same as
that discussed previously in the context
of foreign security-based swap
dealers.654 This rationale includes our
650 Proposed Rule 3a67–10(b) and proposed Rule
18a–4(f) under the Exchange Act.
651 15 U.S.C. 78o–10(h)(1)(B).
652 See Section III.C.3(a)(i), supra. As discussed
previously, Section 15F(h)(1)(B) requires securitybased swap dealers to conform with such business
conduct standards relating to diligent supervision
as the Commission shall prescribe.
653 See proposed Rule 18a–4(f) under the
Exchange Act.
654 See generally Section III.C.4(b), supra. In
addition, all ‘‘nonresident major security-based
swap participants,’’ as defined in proposed Rule
15Fb2–4(a) under the Exchange Act, would be
required: (1) To appoint and identify to the
Commission an agent in the United States (other
than the Commission or a Commission member,
official or employee) for service of process; (2) to
certify that the firm can, as a matter of law, provide
the Commission with prompt access to its books
and records and can, as a matter of law, submit to
onsite inspection and examination by the
Commission; and (3) to provide the Commission
with an opinion of counsel concurring that the firm
can, as a matter of law, provide the Commission
with prompt access to its books and records and
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31035
belief that applying these customer
protections and segregation
requirements to security-based swap
transactions with non-U.S. persons
outside the United States would not
advance the objectives of Title VII to
protect the U.S. financial system or U.S.
counterparties. At the same time, this
approach would preserve customer
protections for U.S. person
counterparties who would expect to
benefit from the protections afforded by
Title VII.
(2) Entity-Level Requirements
Entity-level requirements in Title VII
primarily address concerns relating to
the major security-based swap
participant as a whole, with a particular
focus on safety and soundness of the
entity to reduce systemic risk in the U.S.
financial system. The most significant
entity-level requirements are capital and
margin requirements. Because these
requirements address the financial,
operational, and business integrity of
the entity engaged in security-based
swap activity, the Commission
preliminarily believes that a registered
foreign major security-based swap
participant should be required to adhere
to these standards. As noted above,
other requirements that the Commission
believes should apply at the entity,
rather than the transactional, level
include, but are not limited to, risk
management procedures, books and
records requirements, conflicts of
interest systems and procedures, and
designation of a chief compliance
officer.655 These entity-level
requirements ensure the safety and
soundness of the entire registrant and
are thus distinguishable from the
transaction-level requirements
discussed above, which apply to
transactions with individual
counterparties and thus may be applied
differently based on the U.S. person
status of a counterparty.
3. Substituted Compliance
The Commission is not proposing, at
this time, to establish a policy and
procedural framework under which we
would consider permitting compliance
by a foreign major security-based swap
participant with comparable regulatory
requirements in a foreign jurisdiction to
substitute for compliance with
requirements of the Exchange Act, and
the rules and regulations thereunder,
applicable to major security-based swap
can, as a matter of law, submit to onsite inspection
and examination by the Commission. See proposed
Rule 15Fb2–4(b) under the Exchange Act, as
discussed in the Registration Proposing Release, 76
FR 65799–801.
655 See Section III.C.3(b), supra.
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participants, as it is proposing to do for
foreign security-based swap dealers.656
Unlike foreign security-based swap
dealers whose primary businesses are in
securities, security-based swaps, swaps,
banking and other financial and
investment banking activities, the nonU.S. persons that may need to register
as nonbank major security-based swap
participants may engage in a diverse
range of business activities different
from, and broader than, the activities
conducted by broker-dealers or securitybased swap dealers (otherwise they may
be required to register as a securitybased swap dealer and/or broker-dealer)
or the activities conducted by banks. For
example, as stated in the Capital,
Margin and Segregation Proposing
Release, persons that may need to
register as nonbank major security-based
swap participants may engage in
commercial activities that require them
to have substantial fixed assets to
support manufacturing and/or result in
them having significant assets
comprised of unsecured receivables.657
Therefore, it is not clear what types of
entity-level regulatory oversight, if any,
especially with respect to capital and
margin, a foreign major security-based
swap participant would be subject to in
the foreign regulatory system.
Accordingly, in light of the limited
information currently available to us
regarding what types of foreign entities
may become major security-base swap
participants, if any, and the foreign
regulation of such entities, we are not,
at this time, proposing to extend the
proposed policy and procedural
framework for substituted compliance to
foreign major-security-based swap
participants. Nevertheless, we will
continue to consider the
appropriateness of permitting
substituted compliance for major
security-based swap participants in light
of comments received on this proposal
and market developments more
generally and will consider what further
steps to take, if any, at adoption. In this
regard, we request considerations,
information, and data regarding
potential foreign major security-based
swap participants. Responses that are
supported by empirical data and
analysis are encouraged in assisting the
Commission in considering whether
permitting substituted compliance by
foreign major security-based swap
participants would be warranted.
656 See
Section XI.C, infra.
Capital, Margin, and Segregation
Proposing Release, 77 FR 70315.
657 See
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Request for Comment
The proposed rules and
interpretations regarding the application
of the major security-based swap
participant definition and transactionlevel and entity-level requirements to
registered major security-based swap
participants discussed above represent
the Commission’s preliminary views.
The Commission seeks comment on the
proposed rules and interpretations in all
aspects. Interested persons are
encouraged to provide supporting data
and analysis and, when appropriate,
suggest modifications to proposed rule
text and interpretations. Responses that
are supported by data and analysis
provide great assistance to the
Commission in considering the
practicality and effectiveness of the
proposed application as well as
considering the benefits and costs of
proposed requirements. In addition, the
Commission seeks comment on the
following specific questions:
• Should the major security-based
swap participant definition focus only
on a non-U.S. person’s security-based
swap transactions entered into with U.S.
persons, or should the major securitybased swap participant definition
incorporate some or all of a non-U.S.
person’s other security-based swap
transactions? Which transactions? For
example, should a non-U.S. person
include security-based swap
transactions with non-U.S. person
counterparties guaranteed by U.S.
persons in such non-U.S. person’s major
security-based swap participant
calculation? Why or why not?
• Should the proposed approach
toward determining whether a non-U.S.
person should count its security-based
swap transactions that are cleared
through CCPs be adopted? Why or why
not? Should the Commission adopt a
different approach to the treatment of
security-based swap transactions
cleared through CCPs for purposes of
the cross-border application of the major
security-based swap participant test? If
so, how should cleared transactions be
treated for purposes of the cross-border
application of the major security-based
swap participant test?
• Should a non-U.S. person be
permitted to exclude its security-based
swap transactions entered into with
foreign branches of U.S. banks from the
calculation for purposes of determining
whether it is a major security-based
swap participant? Why? If a non-U.S.
person’s security-based swaps with
foreign branches of U.S. banks are not
required to be considered in
determining such non-U.S. person’s
major security-based swap participant
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status, how should the risk (in terms of
outward exposures) that such non-U.S.
person poses to U.S. banks be
addressed?
• Should the Commission permit a
non-U.S. person to exclude from its
major security-based swap participant
calculations its security-based swap
positions arising from transactions with
the foreign branches of U.S. banks if
such non-U.S. person is subject to
capital standards adopted by its home
country supervisor that are consistent in
all respect with the Basel Accord? Are
there other conditions or standards the
Commission should consider that a nonU.S. person may satisfy or comply with
that should allow a non-U.S. person to
exclude its security-based swap
positions arising from transactions with
foreign branches of U.S. banks from its
major security-based swap participant
calculation?
• Are there competitiveness concerns
related to the proposed different
treatment of U.S. persons and non-U.S.
persons for purposes of calculating their
status under the major security-based
swap participant definition? If so, what
are these concerns, and how should
they be addressed?
• Should the proposed approach
towards the attribution of security-based
swap positions guaranteed by U.S.
persons and non-U.S. persons be
altered? What justifications would
support an alternate approach?
• Should the Commission adopt the
proposed approach to the attribution of
guaranteed security-based swap
positions whereby the positions of
guaranteed entities subject to capital
standards adopted by its home country
supervisor that are consistent in all
respects with the Basel Accord would
not need to be attributed? Is Basel
Accord capital standard an appropriate
standard for determining whether it is
not necessary to attribute guaranteed
security-based swap positions to a
guarantor, or should another standard
be used? Is this proposed standard clear,
or is additional guidance necessary? In
addition to the proposed capital
standard, should the Commission’s
approach to the attribution of
guaranteed security-based swap
positions also include a requirement
that the guaranteed entities be subject to
effective capital oversight by its home
country supervisor as determined by the
Commission in order not to attribute the
guaranteed security-based swap
positions to the guarantor?
• Are there FPSFIs that would fall
within the definition of major securitybased swap participant based on the
proposed rules and interpretive
guidance? If so, should the Commission
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provide relief to such FPSFIs? If so,
what type of relief, what types of
entities should be eligible for such
relief, and what factors would justify
such relief? Would it be more
appropriate for the Commission to
address these concerns on an individual
basis?
• Should the Commission adopt the
proposed approach to the application of
certain customer protection
requirements and segregation
requirements to foreign major securitybased swap participants with respect to
their transactions with non-U.S.
persons? If so, are there other
transaction-level requirements that
should be included within this
proposed approach?
• Should substituted compliance be
provided to foreign major security-based
swap participants with respect to entitylevel requirements? Transaction-level
requirements? If so, how should the
Commission make such a
determination? In particular, what
standard should be used for determining
whether existing regulation merits a
substituted compliance determination?
• What would be the market impact
of the proposed approach to major
security-based swap participants? How
would the application of the proposed
approach affect the competitiveness of
U.S. entities in the global marketplace
(both in the United States as well as in
foreign jurisdictions)? Would the
proposed approach place any market
participants at a competitive
disadvantage or advantage? If so, please
explain. Would the proposed approach
be a more general burden on
competition? If so, please explain. What
other measures should the Commission
consider to implement the proposed
approach to major security-based swap
participants? What would be the market
impacts and competitiveness effects of
alternatives to the proposed approach
discussed in this release?
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V. Security-Based Swap Clearing
Agencies
A. Introduction
Title VII of the Dodd-Frank Act adds
a number of provisions to the Exchange
Act relating to the registration and
regulation of clearing agencies that
provide clearance and settlement
services for security-based swaps.658
Such provisions augment the
Commission’s existing authority to
register and regulate clearing agencies in
Section 17A of the Exchange Act.659 In
particular, Section 17A(g) of the
658 See
659 See
Section 763(b) of the Dodd-Frank Act.
15 U.S.C 78q–1 and 17 CFR 240.17Ab2–
1.
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Exchange Act, as added by Section
763(b) of the Dodd-Frank Act, requires
clearing agencies that use interstate
commerce to perform the functions of a
clearing agency with respect to securitybased swaps to register with the
Commission.660 Section 17A(k) of the
Exchange Act, as added by Section
763(b) of the Dodd-Frank Act, provides
the Commission with authority to
exempt a security-based swap clearing
agency from registration if the
Commission determines that the
clearing agency is subject to
comparable, comprehensive supervision
and regulation by the CFTC or the
appropriate government authorities in
the home country of the clearing
agency.661 The Dodd-Frank Act also
added provisions to Section 17A of the
Exchange Act relating to voluntary
clearing agency registration and the
establishment of clearing agency
standards.662 Finally, Section 17A(j)
requires the Commission to adopt rules
governing persons that are registered as
clearing agencies for security-based
swaps.663
Because of the global nature of the
security-based swap market, the
Commission recognizes that there may
be some uncertainty regarding when a
foreign security-based swap clearing
agency 664 that provides central
counterparty (‘‘CCP’’) services 665 for
660 15 U.S.C. 78q–1(g). Note that Section 929W of
the Dodd-Frank Act added another subsection (g) to
Section 17A of the Exchange Act. The subsection
(g) added by Section 763(b) of the Dodd-Frank Act
is the focus of the discussion in this section.
661 15 U.S.C. 78q–1(k). The exemptive authority
contained in Section 17A(k) of the Exchange Act
only pertains to clearing agencies that would be
required to register under Section 17A of the
Exchange Act for the clearing of security-based
swaps. It does not alter the Commission’s existing
exemptive authority found in Section 17A(b)(1) and
Section 36 of the Exchange Act.
662 Section 17A(h) of the Exchange Act, as added
by Section 763(b) of the Dodd-Frank Act, permits
a person, in certain cases, to voluntarily register as
a clearing agency with the Commission. 15 U.S.C.
78q–1(h). Section 17A(i) of the Exchange Act, as
added by Section 763(b) of the Dodd-Frank Act,
requires security-based swap clearing agencies to
comply with standards established by the
Commission. 15 U.S.C. 78q–1(i).
663 15 U.S.C. 78q–1(j).
664 In using the terms ‘‘foreign’’ and ‘‘nonresident’’ in connection with a security-based swap
clearing agency, the Commission means a securitybased swap clearing agency that is not a U.S.
person, as that term is defined in proposed Rule
3a71–3(a)(7) under the Exchange Act, as discussed
in Section III.B.5, supra. In this regard, the
Commission notes that legal persons that have their
principal place of business in the United States
would be considered ‘‘U.S. persons’’ under the
proposed definition regardless of their place of
incorporation or organization. See proposed Rule
3a71–3(a)(7)(i)(B) under the Exchange Act.
665 As discussed more fully below, generally
speaking, a CCP is an entity that interposes itself
between the counterparties to a securities
transaction. See 17 CFR 240.17Ad–22(a)(1).
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security-based swaps would be required
to register with the Commission as a
clearing agency. Accordingly, we are
proposing interpretive guidance
regarding the application of the
registration requirement in Section
17A(g) of the Exchange Act for securitybased swap clearing agencies that act as
CCPs.666 We also address our exemptive
authority under Section 17A(k) to
exempt a foreign security-based swap
clearing agency from the registration
requirement in Section 17A(g).667 In
addition, we discuss the potential
application of alternative standards to
certain foreign clearing agency
registrants.
The proposed interpretation
discussed below represents the
Commission’s preliminary views
regarding the application of the
registration requirement in Section
17A(g) for security-based swap clearing
agencies acting as CCPs in the crossborder context. Our proposal reflects a
balancing of the principles described
above, including, in particular, the goal
of the Dodd-Frank Act to address the
risk to the U.S. financial system.668 We
666 In this section, the Commission is proposing
interpretive guidance only regarding the registration
requirement in Section 17A(g) of the Exchange Act
as it applies to clearing agencies that provide CCP
services. The Commission is not addressing the
registration requirement in Section 17A(b) of the
Exchange Act, which was unchanged by the DoddFrank Act. The Commission also is not addressing
the registration of clearing agencies that provide
other types of services for security-based swaps and
other securities. Elsewhere, the Commission has
provided a temporary exemption from the clearing
agency registration requirements to clearing
agencies that provide non-CCP types of clearance
and settlement services for security-based swaps.
See Order Pursuant to Section 36 of the Securities
Exchange Act of 1934 Granting Temporary
Exemptions from Clearing Agency Registration
Requirements under Section 17A(b) of the Exchange
Act for Entities Providing Certain Clearing Services
for Security-Based Swaps, Exchange Act Release
No. 64796 (July 1, 2011). Accordingly, the
Commission expects to address clearing agencies
that provide non-CCP services in a future release.
667 The Commission also has adopted final rules
to exempt transactions by CCPs in security-based
swaps from all provisions of the Securities Act,
other than the anti-fraud provisions in Section
17(a), as well as from Exchange Act registration
requirements and provisions of the Trust Indenture
Act. See Exemptions for Security-Based Swaps
issued by Certain Clearing Agencies, Securities Act
Release No. 9308 (Mar. 30, 2012), 77 FR 20536 (Apr.
5, 2012). The exemption is conditioned on the CCP
being registered or exempt from registration with
the Commission, on the determination that the
security-based swap is required to be cleared or that
the CCP is permitted to clear it pursuant to its rules,
that the security-based swap is sold only to an ECP,
and that certain information be made available to
a counterparty or to the public.
668 See Section II.C, supra. In addition, as noted
above, to promote effective and consistent global
regulation of swaps and security-based swaps, the
Dodd-Frank Act requires the Commission and the
CFTC to consult and coordinate with foreign
regulatory authorities on the ‘‘establishment of
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recognize, however, that the proposed
interpretation represents one of a
number of possible alternative
approaches in applying Title VII in the
cross-border context. Accordingly, the
Commission invites comment regarding
all aspects of the proposal discussed
below, including potential alternative
approaches. Responses that are
supported by data and analysis provide
great assistance to the Commission in
considering the practicality and
effectiveness of the proposed
application as well as considering the
benefits and costs of proposed
requirements.
B. Proposed Title VII Approach
1. Clearing Agency Registration
Section 17A(g) of the Exchange Act,
entitled ‘‘Registration Requirement,’’
provides that ‘‘[i]t shall be unlawful for
a clearing agency, unless registered with
the Commission, directly or indirectly
to make use of the mails or any means
or instrumentality of interstate
commerce to perform the functions of a
clearing agency with respect to a
security-based swap.’’ 669 The
Commission preliminarily believes that
Title VII was intended to apply to
clearing agencies that perform clearing
agency functions within the United
States, regardless of their principal
place of business or their place of
incorporation or organization.670 For
reasons discussed below, the proposed
interpretive guidance would provide
that a security-based swap clearing
agency performs the functions of a CCP
within the United States if it has a U.S.
person as a member.
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(a) Clearing Agencies Acting as CCPs
Clearing agencies are broadly defined
under the Exchange Act and undertake
a variety of functions.671 One such
consistent international standards’’ with respect to
the regulation of swaps and security-based swaps.
Public Law 111–203 section 752(a).
669 15 U.S.C. 78q–1(g).
670 See Section II.B, supra.
671 Section 3(a)(23)(A) of the Exchange defines the
term ‘‘clearing agency’’ to mean any person who: (i)
acts as an intermediary in making payments or
deliveries or both in connection with transactions
in securities; (ii) provides facilities for comparison
of data respecting the terms of settlement of
securities transactions, to reduce the number of
settlements of securities transactions, or for the
allocation of securities settlement responsibilities;
(iii) acts as a custodian of securities in connection
with a system for the central handling of securities
whereby all securities of a particular class or series
of any issuer deposited within the system are
treated as fungible and may be transferred, loaned,
or pledged by bookkeeping entry, without physical
delivery of securities certificates (such as a
securities depository); or (iv) otherwise permits or
facilitates the settlement of securities transactions
or the hypothecation or lending of securities
without physical delivery of securities certificates
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function is to act as a CCP,672 which is
an entity that interposes itself between
the counterparties to a securities
transaction. For example, when a
security-based swap contract between
two counterparties that are members of
a CCP is executed and submitted for
clearing, it is typically replaced by two
new contracts—separate contracts
between the CCP and each of the two
original counterparties. At that point,
the original counterparties are no longer
counterparties to each other. Instead,
each acquires the CCP as its
counterparty, and the CCP assumes the
counterparty credit risk of each of the
original counterparties that are members
of the CCP. Structured and operated
appropriately, CCPs may improve the
management of counterparty risk and
may provide additional benefits such as
multilateral netting of trades.673
Although technology and risk
management practices frequently
change and vary from CCP to CCP, the
following are some of the functions
performed by the subset of clearing
agencies that are CCPs: 674
• The extinguishing of a securitybased swap contract between two
counterparties and the associated
novation of it with two new contracts
between the CCP and each of the two
original counterparties;
• The assumption of counterparty
credit risk of members of the CCP
through the novated security-based
swap contracts;
• The calculation and collection of
initial and variation margin during the
life of the security-based swap contract;
• The determination of settlement
obligations under a security-based swap
contract;
• The determination of a default
under a security-based swap contract;
(such as a securities depository). 15 U.S.C.
78c(a)(23)(A).
672 See Clearing Agency Standards Adopting
Release, 77 FR 66221 n.17 (‘‘[a]n entity that acts as
a CCP for securities transactions is a clearing agency
as defined in the Exchange Act and is required to
register with the Commission’’).
673 See id.
674 The Commission does not believe that the
opening and maintenance of bank accounts or
investment accounts in the United States by a CCP
that are not directly accessible by members of a
security-based swap clearing agency constitutes the
performance of functions of a CCP for these
purposes. See, e.g., Exchange Act Release No. 39643
(Feb. 11, 1998), 63 FR 8232, 8234 (Feb. 18, 1998)
(discussing a foreign unregistered clearing agency’s
use of a U.S. depository, which did not in and of
itself trigger the registration requirement). In
addition, the Commission does not believe that the
use of U.S.-based persons to perform services on
behalf of a CCP in the ordinary course of business
that do not involve clearing agency functions (e.g.,
financial guaranties, banking services, or payroll
operations) constitutes the performance of functions
of a clearing agency.
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• The collection of funds from
members for contributions to a clearing
fund;
• The implementation of a losssharing arrangement among members to
respond to a member insolvency or
default; and
• The multilateral netting of
trades.675
In performing these functions, CCPs
help facilitate over-the-counter trading,
and trading on exchanges and other
platforms, through the assumption of
counterparty risk by the CCP from the
original counterparties. During times of
market stress, a CCP would mitigate the
potential for a market participant’s
failure to be transmitted to other market
participants, and would increase
transparency of the risks borne by its
members, as well as confidence of the
market participants in the performance
of their transactions.676
Furthermore, the agreements among
members and between members and a
CCP play a key role in the CCP’s
performance of the functions of a
clearing agency. The Exchange Act
permits clearing agencies to deny
membership if a person does not meet
a clearing agency’s financial
responsibility, operational capacity,
experience and competence
standards.677 In a scenario where risk is
mutualized under loss-sharing
arrangements, the strength of the CCP
hinges upon the strength of its members.
The legal arrangements between a CCP
and its members are of significant
importance to the operational resilience
of the CCP itself.
675 See, e.g., CDS Clearing Exemption Orders,
note 74, supra.
676 See Report of the Senate Committee on
Banking, Housing, and Urban Affairs regarding The
Restoring American Financial Stability Act of 2010,
S. Rep. No. 111–176 at 31 (stating that by
‘‘mandating the use of central clearinghouses,
institutions would become much less
interconnected, mitigating risk and increasing
transparency.’’). At the same time, concentrating
risk from several counterparties into a CCP could
actually introduce risks through the prospect of
moral hazard, such as if the costs of imprudent
decisions by one clearing member were shifted to
other clearing members or to the general public
through bail-out of a CCP. See, e.g., Craig Pirrong,
‘‘Mutualization of Default Risk, Fungibility, and
Moral Hazard: The Economics of Default Risk
Sharing in Cleared and Bilateral Markets,’’
University of Houston, Working Paper (2010),
available at: http://business.nd.edu/uploadedFiles/
Academic_Centers/Study_of_Financial_Regulation/
pdf_and_documents/clearing_moral_hazard_1.pdf.
Such cost-shifting mechanisms might induce
members to take on more risk than they otherwise
would in a bilateral setting.
677 See, e.g., 15 U.S.C. 78q–1(b)(4); see also 17
CFR 240.17Ad–22(d)(2) (requiring registered
clearing agencies to establish, implement, maintain,
and enforce written policies and procedures
reasonably designed to require participants to meet
certain operational capacity standards).
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(b) Proposed Interpretive Guidance
The Commission is proposing
interpretive guidance that a securitybased swap clearing agency performing
the functions of a CCP within the
United States would be required to
register pursuant to Section 17A(g) of
the Exchange Act.678 In our preliminary
view, a foreign security-based swap
clearing agency that provides CCP
services, as described above, to a
member that is a U.S. person for
security-based swaps would be
performing the functions of a CCP
within the United States and, therefore,
would be required to register pursuant
to Section 17A(g) of the Exchange Act.
The Commission preliminarily believes
that such an approach is consistent with
the Dodd-Frank Act’s goal of reducing
systemic risk in the U.S. financial
system.679 Foreign security-based swap
clearing agencies that provide CCP
services to U.S. members could pose a
risk to the United States due to the risk
mutualization among members of these
clearing agencies.680 Further, the more
complete information about
relationships between security-based
swap market participants that
registration would provide to regulators
and the marketplace may help reduce
the risk of crises.681 Accordingly, to
address the risk to the U.S. financial
system posed by foreign security-based
swap clearing agencies with U.S.
members, the Commission preliminarily
is proposing to require foreign securitybased swap clearing agencies that
provide CCP services to U.S. members
to register pursuant to Section 17A(g) of
the Exchange Act.
The Commission anticipates,
however, that some U.S. persons may
choose to clear transactions at a foreign
security-based swap clearing agency on
an indirect basis through a
correspondent clearing arrangement
with a non-U.S. member of the clearing
agency.682 We preliminarily do not
678 15
U.S.C. 78q–1.
note 4, supra.
680 See, e.g., Clearing Agency Standards Adopting
Release, 77 FR 66267 (stating that ‘‘[a]ll clearing
agencies that act as CCPs in the United States
collect contributions from their members to
guaranty funds or clearing funds for the
mutualization of losses under extreme but plausible
market scenarios’’).
681 See note 676, supra.
682 Traditionally, the Commission has required
registration (or an exemption from registration) as
a clearing agency if a foreign clearing agency
provides services for U.S. securities directly to U.S.
persons. The Commission has not viewed
intermediated access by U.S. persons to a foreign
clearing agency’s services (for example, through a
foreign broker) as sufficiently direct to trigger
registration requirements. See Proposed
Amendments to Rule 15a–6, 73 FR 39198
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679 See
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believe that such a correspondent
clearing arrangement of a U.S. person
with a non-U.S. person member alone
would cause the foreign security-based
swap clearing agency to be required to
register with the Commission because
the clearing agency’s business is
conducted directly with its member
firms, which in this example would be
located outside of the United States.
Correspondent clearing arrangements do
not pose the same type of direct risk to
the U.S. financial system that foreign
security-based swap clearing agencies
with U.S. members pose because
customers, unlike clearing agency
members, do not take mutual
responsibility for the obligations of the
clearing agency.683
2. Exemption from Registration under
Section 17A(k)
Section 17A(k) of the Exchange Act,
as added by Section 763(b) of the DoddFrank Act, provides that the
Commission may grant a conditional or
unconditional exemption from clearing
agency registration for the clearing of
security-based swaps if the Commission
determines that the clearing agency is
subject to comparable, comprehensive
supervision and regulation by the CFTC
or the appropriate government
authorities in the home country of the
clearing agency.684
The Commission preliminarily
believes that it may be appropriate to
consider an exemption as an alternative
to registration in circumstances where
the clearing agency is subject to
comparable, comprehensive supervision
and regulation by appropriate
government authorities in the home
country of the clearing agency, and the
nature of the clearing agency’s activities
and performance of functions within the
United States suggest that registration is
not necessary to achieve the
Commission’s regulatory objectives.
Exemptions that are carefully targeted
could help to improve clearing agency
supervision overall by allowing the
Commission to devote resources most
efficiently where U.S. interests are more
directly implicated, while reducing
duplication of efforts in areas where its
interests are aligned with those of other
regulators. Section 17A(k) further
provides that any such exemption may
(summarizing the Commission’s position taken in
past exemptive orders).
683 As noted above, the interpretation proposed
here applies solely to the registration requirement
in Section 17A(g) of the Exchange Act with respect
to clearing agencies that provide CCP services for
security-based swaps; it does not change the
Commission’s interpretation of Section 17A(b) of
the Exchange Act. See note 666, supra.
684 15 U.S.C. 78q–1(k).
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31039
be subject to appropriate conditions that
may include, but are not limited to,
requiring the clearing agency to be
available for inspection by the
Commission and to make available all
information requested by the
Commission.685
The Commission is not at this point
specifying how such determinations
might be made. The Commission notes
that market structure and clearing
agency supervision and regulation vary
in other jurisdictions, and these
variances in combination would affect
the Commission’s ability to make a
determination under Section 17A(k) of
the Exchange Act in a particular case, as
well as the conditions that would be
applied to any exemption. In addition to
these factors, differences among
individual clearing agencies on matters
such as organizational governance, rules
for members, and risk management
procedures would inform individual
exemption determinations.
3. Application of Alternative Standards
to Certain Registrants
In addition, the Commission may
consider, as an alternative to an
exemption from registration, proposing
rules that are specific to foreign-based
CCPs that are registered with the
Commission under Section 17A(g). We
believe that this approach is
contemplated by Section 17A(i) of the
Exchange Act, which permits the
Commission to adopt rules for registered
CCPs that clear security-based swaps
and conform our regulatory standards
and supervisory practices to reflect
evolving United States and international
standards.686 This approach may be
particularly appropriate where the
Commission determines not to grant a
general exemption from registration
under Section 17A(k) of the Exchange
Act, based on consideration of the
factors described above, but where
consistency with some regulatory
standards suggests that a targeted
regulatory approach may be warranted.
685 Id.
686 Specifically, Section 17A(i) of the Exchange
Act, entitled ‘‘Standards for Clearing Agencies
Clearing Security-Based Swap Transactions’’: (i)
Requires registered clearing agencies that clear
security-based swaps to comply with such
standards that the Commission may establish by
rule; (ii) contemplates that the Commission may
conform such standards or its oversight practices to
reflect evolving United States and international
standards; and (iii) except where the Commission
determines otherwise by rule or regulation,
confirms that a clearing agency shall have
reasonable discretion in establishing the manner in
which it complies with any such standards. 15
U.S.C. 78q–1(i).
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Request for comment
The Commission requests comment
on all aspects of the proposed
interpretation, including the following:
• Should performing the functions of
a CCP for only one U.S. person member
of the CCP warrant requiring a foreign
security-based swap clearing agency to
register with the Commission? If not,
why not? Further, are there other kinds
of activities in the United States or
outside the United States that would
warrant requiring a CCP to be
registered? If so, what are they?
• To what extent might the proposed
approach create incentives for foreign
CCPs to restrict access to U.S. person
members? Please explain.
• Are there any other circumstances
where a foreign security-based swap
CCP should be required to register with
the Commission? For example, is there
a circumstance where a CCP that has no
U.S. members but clears security-based
swaps with a U.S. security as an
underlying security should be required
to register with the Commission as a
clearing agency? Similarly, is there a
circumstance where a CCP that has no
U.S. members and does not conduct
activities within the United States but
that clears security-based swaps for the
U.S. customers of its members should be
required to register with the
Commission as a clearing agency?
Would the provision of omnibus or
individual segregation of U.S. customer
funds affect this analysis? Why or why
not? Should a security-based swap CCP
that relies on a financial guaranty of a
U.S. person in allowing a non-U.S.
person to become a member be required
to register with the Commission? If not,
why not?
• How will Commission registration
of, exemption from registration for, or
promulgation of alternative standards
applicable to registered foreign securitybased swap CCPs affect the central
clearing of security-based swaps? How
would it affect the management of
counterparty credit risk? How would it
affect systemic risk? What impact would
it have on the continued development of
the global security-based swap market?
• What factors should the
Commission consider in determining
whether a foreign security-based swap
CCP is subject to comparable,
comprehensive supervision and
regulation by appropriate government
authorities in the home country of the
CCP? What level of similarity should be
required in order for a home country
supervision and regulatory framework
to be considered comparable and
comprehensive when compared to that
of the United States?
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• How should the Commission
determine the home country of a CCP
for purposes of Section 17A(k) of the
Exchange Act? Should it be the country
in which the CCP is incorporated or
organized or the country in which it
conducts the principal amount of its
clearance and settlement activities?
• What other facts and circumstances
should the Commission review in
determining whether an exemption may
be granted under Exchange Act Section
17A(k)? What terms and conditions
should be required in connection with
an exemption from registration? For
example, should the Commission
consider whether a jurisdiction has
implemented any international
standards, such as the CPSS–IOSCO
Principles for Financial Market
Infrastructures in its regulatory
framework? 687 In addition, should the
existence of a cooperative agreement
with the home country be a factor?
• What would be the market impact
of the proposed approach to the
registration of foreign CCPs? How would
the application of the proposed
approach affect the competitiveness of
U.S. entities in the global marketplace
(both in the United States as well as in
foreign jurisdictions)? Would the
proposed approach place any market
participants at a competitive
disadvantage or advantage? If so, please
explain. Would the proposed approach
be a more general burden on
competition? If so, please explain. What
other measures should the Commission
consider to implement the proposed
approach? What would be the market
impacts and competitiveness effects of
alternatives to the proposed approach
discussed in this release?
VI. Security-Based Swap Data
Repositories
A. Introduction
Under the Dodd-Frank Act, SDRs are
intended to play a key role in enhancing
transparency in the security-based swap
market by retaining complete records of
security-based swap transactions,
maintaining the integrity of those
records, and providing effective access
to those records to relevant authorities
and the public consistent with their
respective information needs.688 Title
VII provides the Commission with
authority to adopt rules governing
SDRs.689 Using this authority, the
687 See CPSS–IOSCO, Principles for Financial
Market Infrastructures (Apr. 2012) (‘‘FMI
Principles’’), available at: http://www.bis.org/publ/
cpss101a.pdf.
688 See SDR Proposing Release, 75 FR 77307.
689 See Section 13(n)(9) of the Exchange Act, 15
U.S.C. 78m(n)(9), as added by Section 763(i) of the
Dodd-Frank Act.
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Commission has proposed rules
governing the SDR registration process,
duties, and core principles, including
duties related to data maintenance and
access by relevant authorities and those
seeking to use the SDR’s repository
services.690
As noted above, the security-based
swap market is global in scope and
transactions often involve
counterparties in different
jurisdictions.691 The Commission
recognizes that, as a result, there may be
uncertainty regarding the application of
Section 13(n) of the Exchange Act 692
and the rules and regulations
thereunder (collectively, ‘‘SDR
Requirements’’).693 In addition, the
Commission is concerned that an overly
broad application of the SDR
Requirements may unnecessarily restrict
global regulators’ access to, and sharing
of, security-based swap data in various
jurisdictions and present difficulties in
enhancing transparency in the global
security-based swap market.694 To
address these concerns, and as
explained more fully below, the
Commission is proposing to limit the
application of the SDR Requirements to
certain persons that perform the
functions of an SDR, including
proposing a new rule to provide nonU.S. persons performing the functions of
an SDR within the United States with
exemptive relief from the SDR
Requirements. In addition, to facilitate
relevant authorities’ access to securitybased swap data collected and
maintained by Commission-registered
SDRs, the Commission is proposing
interpretive guidance to specify how
SDRs may comply with the notification
requirement set forth in Section
13(n)(5)(G) of the Exchange Act 695 and
previously proposed Rule 13n–4(b)(9)
thereunder. The Commission also is
specifying how the Commission
proposes to determine whether a
relevant authority is appropriate for
purposes of receiving security-based
swap data from an SDR. In addition, the
Commission is proposing a new rule to
provide SDRs with exemptive relief
from the indemnification requirement
690 See
SDR Proposing Release, 75 FR 77306.
Section II.A, supra.
692 15 U.S.C. 78m(n)(9), as added by Section
763(i) of the Dodd-Frank Act.
693 See Section 13(n) of the Exchange Act, 15
U.S.C. 78m(n), as added by Section 763(i) of the
Dodd-Frank Act, and proposed Rules 13n–1 to 13n–
11 under the Exchange Act.
694 Cf. Socie
´ te´ Ge´ne´rale Letter I at 2 (suggesting
that U.S. and EU regulators limit their jurisdiction
to the part of the security-based swap business that
they can most practically regulate, even if they have
jurisdiction over a broader range of that business).
695 15 U.S.C. 78m(n)(5)(G), as added by Section
763(i) of the Dodd-Frank Act.
691 See
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set forth in Section 13(n)(5)(H)(ii) of the
Exchange Act 696 and previously
proposed Rule 13n–4(b)(10) thereunder.
In formulating this proposal, the
Commission has sought to balance the
policy considerations discussed
above 697 and the particular concerns
related to security-based swap reporting
discussed below. The Commission
recognizes that other approaches may
exist in achieving the mandate of the
Dodd-Frank Act, in whole or in part.
Accordingly, the Commission invites
comment regarding all aspects of the
proposal described below, including
potential alternative approaches. Data
and comment from market participants
and other interested parties regarding
the likely effect of the Commission’s
proposed rules and interpretative
guidance as well as potential alternative
approaches will be particularly useful to
the Commission in evaluating possible
modifications to the proposal.
B. Application of the SDR Requirements
in the Cross-Border Context
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1. Introduction
Section 3(a)(75) of the Exchange Act
defines a ‘‘security-based swap data
repository’’ to mean ‘‘any person that
collects and maintains information or
records with respect to transactions or
positions in, or the terms and conditions
of, security-based swaps entered into by
third parties for the purpose of
providing a centralized recordkeeping
facility for security-based swaps.’’ 698
Section 13(n)(1) of the Exchange Act
provides that ‘‘[i]t shall be unlawful for
any person, unless registered with the
Commission, directly or indirectly, to
make use of the mails or any means or
instrumentality of interstate commerce
to perform the functions of a securitybased swap data repository.’’ 699
Although the Commission has
previously proposed a rule governing
the registration process for SDRs,700
which includes requirements for ‘‘nonresident security-based swap data
repositor[ies],’’ 701 the Commission has
696 15 U.S.C. 78m(n)(5)(H)(ii), as added by Section
763(i) of the Dodd-Frank Act.
697 See Section II.C, supra (discussing principles
guiding the Commission’s proposed approach to
applying Title VII in the cross-border context).
698 15 U.S.C. 78c(a)(75), as added by Section
761(a) of the Dodd-Frank Act.
699 15 U.S.C. 78m(n)(1), as added by Section
763(i) of the Dodd-Frank Act.
700 See proposed Rule 13n–1 under the Exchange
Act.
701 See proposed Rule 13n–1(a)(2) under the
Exchange Act, which defines ‘‘non-resident
security-based swap data repository’’ (hereinafter
‘‘non-resident SDR’’) as ‘‘(i) [i]n the case of an
individual, one who resides in or has his principal
place of business in any place not in the United
States; (ii) [i]n the case of a corporation, one
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not explicitly explained under what
circumstances in the cross-border
context would a person performing the
functions of an SDR be required to
register with the Commission pursuant
to Section 13(n)(1) of the Exchange
Act 702 and previously proposed Rule
13n–1 thereunder, and to comply with
the other SDR Requirements.703 As
discussed further below, the
Commission is proposing interpretative
guidance to discuss such circumstances
and a new rule to provide exemptive
relief from the SDR Requirements.
2. Comment Summary
The Commission received several
comment letters concerning the
registration and regulation of SDRs in
the cross-border context. As a general
matter, commenters suggested that the
Commission should apply principles of
international comity.704
In addition, two commenters
expressed concerns about the potential
impact of duplicative registration
incorporated in or having its principal place of
business in any place not in the United States; or
(iii) [i]n the case of a partnership or other
unincorporated organization or association, one
having its principal place of business in any place
not in the United States.’’ Proposed Rule 13n–1(g)
under the Exchange Act would require any nonresident SDR applying for registration with the
Commission to certify and provide an opinion of
counsel that it can, as a matter of law, provide the
Commission with prompt access to its books and
records and submit to onsite inspection and
examination by the Commission.
702 15 U.S.C. 78m(n)(1), as added by Section
763(i) of the Dodd-Frank Act.
703 In addition to the SDR Requirements, the
Commission has proposed, and is re-proposing in
this release, Regulation SBSR, which, if adopted as
re-proposed, would impose certain obligations on
SDRs registered with the Commission. See Section
VIII, infra. In a separate proposal relating to
implementation of Section 763(i) of the Dodd-Frank
Act (adding Exchange Act Section 13(n)(5)(E), 15
U.S.C. 78m(n)(5)(E)), the Commission has proposed
rules that would require SDRs registered with the
Commission to collect data related to monitoring
the compliance and frequency of end-user clearing
exemption claims. See End-User Exception
Proposing Release, 75 FR 79992. Because these
proposed rules and regulations, on their face, apply
only to Commission-registered SDRs, the
Commission preliminarily believes that these
requirements, if adopted as proposed, would not
apply to unregistered SDRs, including those that
avail themselves of the SDR Exemption, discussed
below.
704 See DTCC Letter III at 3 (urging the
Commission, in its regulation of SDRs, to aim for
regulatory comity); Davis Polk Letter I at 7
(recommending that the Commission work with
foreign authorities to permit SDRs in all major
jurisdictions to register with the appropriate
regulators in each jurisdiction); see also Socie´te´
Ge´ne´rale Letter I at 2 (suggesting that the
Commission consider international comity and
public policy goals of derivatives regulation to limit
its regulation of swap business); ISDA/SIFMA
Letter I at 18 (‘‘The Commission should consult
with foreign regulators before establishing the extraterritorial scope of the rules promulgated under
Title VII.’’).
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31041
requirements imposed on SDRs.705
Specifically, one of these commenters
remarked that the Commission’s
previously proposed rules governing
SDRs ‘‘would seem to force a nonresident SDR to be subject to multiple
regimes and to the jurisdiction of
several authorities’’ and that the SDR
Proposing Release made no ‘‘reference
to equivalency of regulatory regimes or
cooperation with the authorities of the
country of establishment of the nonresident SDRs.’’ 706 To address this
concern, the commenter suggested that
the Commission adopt a regime under
which foreign SDRs would be deemed
to comply with the SDR Requirements
if the laws and regulations of the
relevant foreign jurisdiction were
equivalent to those of the Commission
and an MOU has been entered into
between the Commission and the
relevant foreign authority.707 The
commenter noted that the recommended
‘‘regime would have the following
advantages: (i) facilitating cooperation
among authorities from different
jurisdictions; (ii) ensuring the mutual
recognition of [SDRs]; and (iii)
establishing convergent regulatory and
supervisory regimes which is necessary
in a global market such as the OTC
derivatives one.’’ 708
Recognizing that some SDRs would
function solely outside of the United
States and, therefore, would be
regulated by an authority in another
jurisdiction, commenters suggested
possible approaches to the SDR
registration regime. One commenter, for
example, believed that ‘‘a non-U.S. SDR
should not be subject to U.S. registration
so long as it collects and maintains
information from outside the U.S., even
if such information is collected from
non-U.S. swap dealer or [major securitybased swap participant] registrants.’’ 709
Another commenter supported ‘‘crossregistration’’ of SDRs, whereby SDRs in
all major jurisdictions may register with
the appropriate regulators in each
jurisdiction.710
3. Proposed Approach
In light of the concerns raised by
commenters and the policy
705 See
Cleary Letter IV at 31; ESMA Letter.
Letter at 1.
707 See id. at 2.
708 Id.
709 See Cleary Letter IV at 31.
710 Davis Polk Letter I at 7 (‘‘Cross-registration of
SDRs is not only necessary given the global nature
of the swaps market, it also reduces duplicative
data reporting. Cross-registration would also
facilitate the creation of uniform reporting rules and
procedures that would enable easy comparison of
transaction data from different jurisdictions.’’).
706 ESMA
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considerations discussed above,711 the
Commission is proposing (i) interpretive
guidance regarding the application of
the SDR Requirements to U.S. persons
that perform the functions of an SDR;
and (ii) interpretive guidance regarding
the application of the SDR
Requirements to non-U.S. persons that
perform the functions of an SDR within
the United States and a new rule
providing exemptive relief from the SDR
Requirements for such non-U.S.
persons, subject to a condition.
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(a) U.S. Persons Performing SDR
Functions Are Required to Register With
the Commission
Consistent with the approach taken
elsewhere in this release,712 the
Commission preliminarily believes that
any U.S. person 713 that performs the
functions of an SDR 714 would be
required to register with the
Commission pursuant to Section
13(n)(1) of the Exchange Act 715 and
previously proposed Rule 13n–1
thereunder. The Commission
preliminarily believes that requiring
U.S. persons that perform the functions
of an SDR to register with the
Commission and comply with the SDR
Requirements, as well as other
requirements applicable to SDRs
registered with the Commission,716 is
necessary to achieve the policy
objectives of Title VII.717 Requiring U.S.
persons that perform the functions of an
SDR to be operated in a manner
711 See Section II.C, supra (discussing principles
guiding the Commission’s proposed approach to
applying Title VII in the cross-border context).
712 See Section V.B, supra, and Section VII.B,
infra.
713 Under this proposed interpretation, the term
‘‘U.S. person’’ would have the same meaning as set
forth in proposed Rule 3a71–3(a)(7) under the
Exchange Act, as discussed in Section III.B.5, supra.
As a practical matter, the Commission preliminarily
believes that all non-resident SDRs would likely be
non-U.S. persons given the similar distinguishing
factors in the definitions of ‘‘non-resident securitybased swap data repository’’ and ‘‘non-U.S.
person.’’
714 Generally speaking, the Commission
preliminarily believes that the ‘‘functions of a
security-based swap data repository’’ include, at a
minimum, the core services or functions that are
embedded in the statutory definition of a ‘‘securitybased swap data repository.’’ See Section 3(a)(75) of
the Exchange Act, 15 U.S.C. 78c(a)(75), as added by
Section 761(a) of the Dodd-Frank Act (defining
‘‘security-based swap data repository’’ to mean ‘‘any
person that collects and maintains information or
records with respect to transactions or positions in,
or the terms and conditions of, security-based
swaps entered into by third parties for the purpose
of providing a centralized recordkeeping facility for
security-based swaps’’).
715 15 U.S.C. 78m(n)(1), as added by Section
763(i) of the Dodd-Frank Act.
716 See note 703, supra.
717 See Section II.C, supra (discussing principles
guiding the Commission’s proposed approach to
applying Title VII in the cross-border context).
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consistent with the Title VII regulatory
framework and subject to the
Commission’s oversight, would, among
other things, help ensure that relevant
authorities are able to monitor the buildup and concentration of risk exposure in
the security-based swap market, reduce
operational risk in that market, and
increase operational efficiency.718 As
the Commission noted in the SDR
Proposing Release, SDRs themselves are
subject to certain operational risks that
may impede the ability of SDRs to meet
these goals,719 and the Title VII
regulatory framework is intended to
address these risks.
(b) Interpretive Guidance and
Exemption for Non-U.S. Persons That
Perform the Functions of an SDR Within
the United States
In the context of the cross-border
reporting of security-based swap data,
the Commission recognizes that some
uncertainty may arise regarding when
the SDR Requirements, and other
requirements applicable to SDRs
registered with the Commission,720
apply to non-U.S. persons that perform
the functions of an SDR. The
Commission preliminarily believes that
a non-U.S. person that performs the
functions of an SDR within the United
States would be required to register with
the Commission, absent an
exemption.721
In order to provide legal certainty to
market participants and address
concerns raised by commenters, and
consistent with the proposed
interpretive guidance discussed above,
the Commission is proposing, pursuant
to our authority under Section 36 of the
718 See SDR Proposing Release, 75 FR 77307
(‘‘The enhanced transparency provided by an SDR
is important to help regulators and others monitor
the build-up and concentration of risk exposures in
the [security-based swap] market . . . . In addition,
SDRs have the potential to reduce operational risk
and enhance operational efficiency in the [securitybased swap] market.’’).
719 See id. (‘‘The inability of an SDR to protect the
accuracy and integrity of the data that it maintains
or the inability of an SDR to make such data
available to regulators, market participants, and
others in a timely manner could have a significant
negative impact on the [security-based swap]
market. Failure to maintain privacy of such data
could lead to market abuse and subsequent loss of
liquidity.’’).
720 See note 703, supra.
721 See Section 13(n)(1) of the Exchange Act, 15
U.S.C. 78m(n)(1), as added by Section 763(i) of the
Dodd-Frank Act (requiring persons that, directly or
indirectly, make use of the mails or any means or
instrumentality of interstate commerce to perform
the functions of an SDR, to register with the
Commission). The Commission recognizes that
some non-U.S. persons that perform the functions
of an SDR may do so entirely outside the United
States and thus are not required to register with the
Commission.
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Exchange Act,722 an exemption from the
SDR Requirements for non-U.S. persons
that perform the functions of an SDR
within the United States, subject to a
condition. Specifically, the Commission
is proposing Rule 13n–12 (‘‘SDR
Exemption’’), which states as follows:
‘‘A non-U.S. person 723 that performs the
functions of a security-based swap data
repository within the United States shall
be exempt from the registration and
other requirements set forth in Section
13(n) of the [Exchange] Act . . . and the
rules and regulations thereunder,
provided that each regulator with
supervisory authority over such nonU.S. person has entered into a
supervisory and enforcement
memorandum of understanding (‘MOU’)
or other arrangement with the
Commission that addresses the
confidentiality of data collected and
maintained by such non-U.S. person,
access by the Commission to such data,
and any other matters determined by the
Commission.’’ 724
The Commission preliminarily
believes that a non-U.S. person would
be performing ‘‘the functions of a
security-based swap data repository
within the United States’’ if, for
example, it enters into contracts, such as
user or technical agreements, with a
U.S. person to enable the U.S. person to
report security-based swap data to such
non-U.S. person. As another example, a
non-U.S. person would be performing
‘‘the functions of a security-based swap
data repository within the United
States’’ if it has operations in the United
States, such as maintaining securitybased swap data on servers physically
located in the United States, even if its
principal place of business is not in the
United States.725 Given the constant
722 Section 36 of the Exchange Act authorizes the
Commission to conditionally or unconditionally
exempt any person, security, or transaction, or any
class or classes of persons, securities, or
transactions, from certain provisions of the
Exchange Act or certain rules or regulations
thereunder, by rule, regulation, or order, to the
extent that such exemption is necessary or
appropriate in the public interest, and is consistent
with the protection of investors. 15 U.S.C. 78mm.
723 Proposed Rule 13n–12(a)(1) under the
Exchange Act defines ‘‘non-U.S. person’’ to mean
any person that is not a U.S. person. Proposed Rule
13n–12(a)(2) under the Exchange Act defines ‘‘U.S.
person’’ by cross-reference to the definition of ‘‘U.S.
person’’ in re-proposed Rule 3a71–3(a)(7) under the
Exchange Act, as discussed in Section III.B.5 above.
724 Proposed Rule 13n–12(b) under the Exchange
Act.
725 The Commission notes that if a person
performing the functions of an SDR has operations
in the United States to the extent that such
operations constitute a principal place of business,
then the person would fall within the proposed
definition of ‘‘U.S. person.’’ As proposed, the term
‘‘U.S. person’’ includes a partnership, corporation,
trust, or other legal person having its principal
place of business in the United States. See Section
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innovation in the market and the factspecific nature of the determination, it
is not possible to provide here a
comprehensive discussion of every
activity that would constitute a non-U.S.
person performing ‘‘the functions of a
security-based swap data repository
within the United States.’’
The Commission preliminarily
believes that the SDR Exemption is
necessary or appropriate in the public
interest, and consistent with the
protection of investors. Because the
reporting requirements of Title VII and
re-proposed Regulation SBSR can be
satisfied only if a security-based swap
transaction is reported to an SDR that is
registered with the Commission,726 the
Commission preliminarily believes that
the primary reason for a person subject
to the reporting requirements of Title
VII and re-proposed Regulation SBSR to
report a security-based swap transaction
to an SDR that is not registered with the
Commission would likely be to satisfy
reporting obligations that it or its
counterparty has under foreign law.
Such person would still be required to
fulfill its reporting obligations under
Title VII and re-proposed Regulation
SBSR by reporting its security-based
swap transaction to an SDR registered
with the Commission, absent other relief
from the Commission,727 even if the
transaction were also reported to a nonU.S. person that relies on the SDR
Exemption. The Commission
preliminarily believes that this
proposed approach to the SDR
Requirements appropriately would
balance the Commission’s interest in
having access to security-based swap
data involving U.S. persons, while
addressing commenters’ concerns
regarding the potential for duplicative
III.B.5(b)ii, supra. As a result, under the
interpretation proposed in Section VI.B.3(a) above,
such person would be required to register as an SDR
with the Commission.
726 The Commission notes that a non-U.S. person
that performs the functions of an SDR may choose
to register with the Commission as an SDR to enable
that person to accept data from persons that are
reporting a security-based swap pursuant to the
reporting requirements of Title VII and re-proposed
Regulation SBSR. See 15 U.S.C. 78m(m)(1)(G) and
78m–1(a)(1), as added by Sections 763(i) and 766(a)
of the Dodd-Frank Act and Section VIII, infra
(discussing re-proposed Regulation SBSR). The
Commission may consider also granting, pursuant
to its authority under Section 36 of the Exchange
Act, 15 U.S.C. 78mm, exemptions to such non-U.S.
person that registers with the Commission from
certain of the SDR Requirements on a case-by-case
basis. In determining whether to grant such an
exemption, the Commission may consider, among
other things, whether there are overlapping
requirements in the Exchange Act and applicable
foreign law.
727 See discussion of Regulation SBSR in Section
VIII, infra, and discussion of substituted
compliance in Section XI.D, infra.
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regulatory requirements 728 as well as
furthering the goals of the Dodd-Frank
Act.
The SDR Exemption would be subject
to the condition that each regulator with
supervisory authority over the non-U.S.
person that performs the functions of an
SDR within the United States enters into
a supervisory and enforcement MOU or
other arrangement with the
Commission, as specified in proposed
Rule 13n–12(b) under the Exchange Act.
The Commission anticipates that in
determining whether to enter into such
an MOU or other arrangement with a
relevant authority, the Commission
would consider whether the relevant
authority would keep data collected and
maintained by the non-U.S. person that
performs the functions of an SDR within
the United States confidential 729 and
whether the Commission would have
access to data collected and maintained
by such non-U.S. person.730 The
Commission anticipates that it would
consider other matters, including, for
example, whether the relevant authority
agrees to provide the Commission with
reciprocal assistance in securities
matters within the Commission’s
jurisdiction and whether a supervisory
and enforcement MOU or other
arrangement would be in the public
interest.731 The Commission
preliminarily believes that, in lieu of
requiring non-U.S. persons that perform
the functions of an SDR within the
United States to register with the
Commission, the condition in the SDR
Exemption is appropriate to address the
Commission’s interest in having access
to security-based swap data involving
728 See Section VI.B.2, supra (summarizing
comment letters concerning the registration of SDRs
in the cross-border context).
729 The Commission contemplates that the
relevant authority would keep data collected and
maintained by such non-U.S. person confidential in
a manner that is consistent with Section 24 of the
Exchange Act and Rule 24c–1 thereunder. See 15
U.S.C. 78x and 17 CFR 240.24c–1.
730 The Commission contemplates that the
Commission’s access to data collected and
maintained by such non-U.S. person would be in
a manner that is consistent with Section 13(n)(5)(D)
of the Exchange Act and previously proposed Rule
13n–4(b)(5) thereunder. See 15 U.S.C. 78m(n)(5)(D),
as added by Section 763(i) of the Dodd-Frank Act.
731 The Commission has previously entered
numerous cooperative agreements with foreign
authorities. See Cooperative Arrangements with
Foreign Regulators, available at: http://
www.sec.gov/about/offices/oia/
oia_cooparrangements.shtml. Based on the
Commission’s experience with negotiating MOUs
and other agreements with foreign authorities, the
Commission believes that the MOU or agreement
described in proposed Rule 13n–12(b) could, in
many cases, be negotiated in a timely manner based
on existing confidentiality and information sharing
agreements so that the exemptive relief provided
under proposed Rule 13n–12(b) would be available
before the registration of an SDR seeking to claim
the exemption would be required.
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31043
U.S. persons and U.S. market
participants that is maintained by nonU.S. persons that perform the functions
of an SDR within the United States and
protecting the confidentiality of such
security-based swap data involving U.S.
persons and U.S. market participants.
Request for comment
The Commission requests comment
on all aspects of the Commission’s
proposed interpretive guidance and the
SDR Exemption, including the
following:
• Is the Commission’s proposed
interpretive guidance and the SDR
Exemption appropriate and sufficiently
clear? Why or why not? Do you agree
with the Commission’s proposed
interpretive guidance and SDR
Exemption? Is it overly broad or
narrow? If so, why? Is there a better
alternative?
• Under the Commission’s proposed
interpretive guidance and SDR
Exemption, will SDRs be subject to
duplicative regulatory requirements? If
so, will the Commission’s proposed
interpretive guidance and SDR
Exemption reduce the costs of
compliance with duplicative regulatory
requirements? Why or why not?
• How may the Commission’s
proposed interpretive guidance and SDR
Exemption affect the duplicative
reporting of security-based swap data?
Would the Commission’s ability to
exercise oversight of our registrants be
compromised if it did not have the
ability to learn and/or obtain all
security-based swap data from non-U.S.
persons that perform the functions of an
SDR within the United States that have
chosen not to register with the
Commission and that are not subject to
a substituted compliance order? Why or
why not?
• Are there any circumstances where
a U.S. person performing the functions
of an SDR should not be required to
register with the Commission? If so,
what are those circumstances?
• Should the Commission require all
non-U.S. persons that perform the
functions of an SDR within the United
States to register with the Commission?
Why or why not?
• Non-U.S. persons that perform the
functions of an SDR within the United
States may rely on the SDR Exemption.
Are there any circumstances where nonU.S. persons that perform the functions
of an SDR within the United States
should be required to register with the
Commission? If so, what are those
circumstances? Do any of the following
facts and circumstances, either
individually or in combination, warrant
requiring non-U.S. persons that perform
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the functions of an SDR within the
United States to register with the
Commission: maintaining securitybased swap data pertaining to a U.S.
person or U.S. financial product;
facilitating or supporting in the United
States the submission of security-based
swap data by U.S. persons; having any
operations within the United States;
entering into contracts, such as user or
technical agreements, in order to accept
security-based swap data from U.S.
persons? If so, which one(s) and why?
If not, why not? What types of activities
and SDR functions performed within
the United States do not warrant
requiring a non-U.S. person that
performs the functions of an SDR within
the United States to be registered with
the Commission? What if, for example,
a non-U.S person that performs the
functions of an SDR within the United
States accepts only data from persons
that are ‘‘U.S. persons’’ solely because
they are foreign branches of U.S.
persons?
• Does the proposed definition of
‘‘U.S. person’’ or ‘‘non-U.S. person’’ in
the SDR Exemption need to be clarified
or modified? If so, which terms and how
should they be defined?
• Do you agree with the proposed
condition in the SDR Exemption? Why
or why not? Should the condition
include additional requirements? If so,
what requirements would be
appropriate? Are the Commission’s
estimates of the time required to
establish an MOU reasonable? Why or
why not? Should the condition apply
only to certain non-U.S. persons that
perform the functions of an SDR within
the United States? Please explain.
Should the condition apply if, for
example, the only connection to the
United States by a non-U.S. person that
performs the functions of an SDR within
the United States is that it maintains a
back-up server physically located in the
United States? Should the condition
apply only to non-U.S. persons that
perform the functions of an SDR within
the United States that collect securitybased swap data from a reporting side
that includes at least one counterparty
that is a U.S. person?
• Do you believe that most, if not all,
non-U.S. persons that perform the
functions of an SDR within the United
States will maintain at least some
security-based swap data involving U.S.
persons or U.S. market participants?
Why or why not?
• Is the Commission’s reference in the
SDR Exemption to a ‘‘non-U.S. person
that performs the functions of a
security-based swap data repository’’
sufficiently clear? If not, what is a better
alternative? Should the Commission
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replace, for example, ‘‘non-U.S. person’’
with ‘‘non-resident security-based swap
data repository,’’ as defined in
previously proposed Rule 13n–1(a)(2)
under the Exchange Act, instead? Why
or why not? Are there circumstances
that would be covered by using ‘‘nonU.S. person that performs the functions
of a security-based swap data
repository’’ in the SDR Exemption
rather than using ‘‘non-resident
security-based swap data repository that
performs the functions of a securitybased swap data repository’’ in the SDR
Exemption, and vice versa? If so, what
circumstances and does it matter for
practical purposes?
• Is the SDR Exemption’s reference to
‘‘within the United States’’ sufficiently
clear? What are the implications of this
reference in the SDR Exemption?
• Are there any other factors that the
Commission should consider in our
interpretive guidance or the SDR
Exemption, but that are not addressed
above? If so, please explain.
• What would be the market impact
of proposed approach to the registration
of SDRs? How would the application of
proposed approach affect the
competitiveness of U.S. entities in the
global marketplace (both in the United
States as well as in foreign
jurisdictions)? Would the proposed
approach place any market participants
at a competitive disadvantage or
advantage? If so, please explain. Would
the proposed approach be a more
general burden on competition? If so,
please explain. What other measures
should the Commission consider to
implement the proposed approach?
What would be the market impacts and
competitiveness effects of alternatives to
the proposed approach discussed in this
release?
C. Relevant Authorities’ Access to
Security-Based Swap Information and
the Indemnification Requirement
Section 13(n)(5)(G) of the Exchange
Act 732 and previously proposed Rule
13n–4(b)(9) thereunder provide that an
SDR shall on a confidential basis,
pursuant to Section 24 of the Exchange
Act, and the rules and regulations
thereunder, upon request, and after
notifying the Commission of the request
(‘‘Notification Requirement’’), make
available all data obtained by the SDR,
including individual counterparty trade
and position data, to each appropriate
prudential regulator, the Financial
Stability Oversight Council, the CFTC,
the Department of Justice, the Federal
Deposit Insurance Corporation and any
732 15 U.S.C. 78m(n)(5)(G), as added by Section
763(i) of the Dodd-Frank Act.
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other person that the Commission
determines to be appropriate, including,
but not limited to, foreign financial
supervisors (including foreign futures
authorities), foreign central banks, and
foreign ministries. Further, Section
13(n)(5)(H) of the Exchange Act 733 and
previously proposed Rule 13n–4(b)(10)
provide that before sharing information
with any entity described in Section
13(n)(5)(G) 734 or previously proposed
Rule 13n–4(b)(9),735 respectively, an
SDR must obtain a written agreement
from the entity stating that the entity
shall abide by the confidentiality
requirements described in Section 24 of
the Exchange Act,736 and the rules and
regulations thereunder, relating to the
information on security-based swap
transactions that is provided; in
addition, the entity shall agree to
indemnify the SDR and the Commission
for any expenses arising from litigation
relating to the information provided
under Section 24 of the Exchange
Act 737 and the rules and regulations
thereunder (‘‘Indemnification
Requirement’’).
The Commission believes that the
goals of Sections 13(n)(5)(G) and
13(n)(5)(H) of the Exchange Act 738 are,
among other things, to obligate SDRs to
make available security-based swap
information to relevant authorities and
maintain the confidentiality of such
information. More broadly, the goal of
the Dodd-Frank Act is, among other
things, to promote the financial stability
of the U.S. by improving accountability
and transparency in the financial
system.739
As discussed further below, the
Commission recognizes that the
Indemnification Requirement raises a
number of concerns, including, among
other things, the inability of certain
relevant authorities to provide, as a
matter of law or practice, an open-ended
indemnification agreement and the
possibility of security-based swap data
being fragmented among trade
repositories globally if foreign
authorities establish trade repositories
733 15 U.S.C. 78m(n)(5)(H), as added by Section
763(i) of the Dodd-Frank Act.
734 15 U.S.C. 78m(n)(5)(G), as added by Section
763(i) of the Dodd-Frank Act.
735 Proposed Rules 13n–4(b)(9) and (10)
essentially repeat the requirements of Sections
13(n)(5)(G) and (H) of the Exchange Act,
respectively, with the exception of the addition in
proposed Rule 13n–4(b)(9) of the Federal Deposit
Insurance Corporation to the relevant authorities
specified in Section 13(n)(5)(G) of the Exchange
Act.
736 15 U.S.C. 78x.
737 Id.
738 15 U.S.C. 78m(n)(5)(G) and (H), as added by
Section 763(i) of the Dodd-Frank Act.
739 See note 4, supra.
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in their jurisdictions to ensure access to
data that they need to perform their
regulatory mandates and legal
responsibilities.740
In this section, the Commission will
first describe the alternatives to the
Notification Requirement and
Indemnification Requirement that were
discussed in the SDR Proposing Release.
The Commission will then summarize
the comments received, primarily in
response to the SDR Proposing Release.
Finally, the Commission will discuss
our proposed interpretive guidance
regarding relevant authorities’ access to
security-based swap information and
our proposed exemptive relief from the
Indemnification Requirement.
1. Information Sharing Under Sections
21 and 24 of the Exchange Act
In the SDR Proposing Release, the
Commission highlighted two alternative
ways for relevant authorities to obtain
data maintained by SDRs directly from
the Commission (rather than directly
from SDRs) without providing an
indemnification agreement.741
Specifically, the Commission noted that
there is existing independent authority
in the Exchange Act for certain domestic
and foreign authorities to obtain data
maintained by SDRs directly from the
Commission (rather than directly from
SDRs) pursuant to Sections 21(a) and
24(c) of the Exchange Act 742 in certain
circumstances and without application
of the Indemnification Requirement.743
Section 21(a)(2) of the Exchange
Act 744 provides that the Commission
may provide assistance to a foreign
securities authority. The term ‘‘foreign
securities authority’’ is broadly defined
in Section 3(a)(50) of the Exchange
Act 745 to include ‘‘any foreign
government, or any governmental body
or regulatory organization empowered
by a foreign government to administer
or enforce its laws as they relate to
securities matters.’’ The Commission
740 See
Section VI.C.3(c), infra.
SDR Proposing Release, 75 FR 77319.
742 15 U.S.C. 78u(a) and 15 U.S.C. 78x(c).
743 Section 13(n)(5)(H) of the Exchange Act, 15
U.S.C. 78m(n)(5)(H), as added by Section 763(i) of
the Dodd-Frank Act. See SDR Proposing Release, 75
FR 77319. The Indemnification Requirement does
not apply to requests for information made
pursuant to Sections 21(a) and 24(c) of the
Exchange Act. Further, since relevant authorities
requesting information under these provisions
would go directly to the Commission, the
Notification Requirement would also be
inapplicable. Thus, these requirements would not
apply to requests by relevant authorities for
security-based swap data when the Commission is
exercising its independent statutory authority to
assist relevant authorities pursuant to Section 21(a)
or 24(c) of the Exchange Act.
744 15 U.S.C. 78u(a)(2).
745 15 U.S.C. 78c(a)(50).
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741 See
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may provide assistance under Section
21(a)(2) of the Exchange Act 746 to the
foreign securities authority in
connection with an investigation being
conducted by the foreign securities
authority to determine whether any
person has violated, is violating, or is
about to violate any laws or rules
relating to securities matters that the
authority administers or enforces.
Section 21(a)(2) further provides that, as
part of this assistance, the Commission
may conduct an investigation to collect
information and evidence pertinent to
the foreign securities authority’s request
for assistance.747 The Commission
believes that Section 21(a)(2) provides
the Commission with independent
authority to assist foreign securities
authorities in certain circumstances by,
for example, collecting security-based
swap data from an SDR and providing
such authorities with the data.
Pursuant to Section 24(c) of the
Exchange Act 748 and Rule 24c–1
thereunder,749 the Commission may
share nonpublic information 750 in our
possession with, among others, any
‘‘federal, state, local, or foreign
government, or any political
subdivision, authority, agency or
instrumentality of such government . . .
[or] a foreign financial regulatory
authority.’’ 751 Because the Exchange
Act provides the Commission with the
statutory authority to share information
in our possession with other authorities,
the Commission is of the view that if
security-based swap transaction data is
in our possession, then it may share this
information with other authorities. In
746 15
U.S.C. 78u(a)(2).
21(a)(2) of the Exchange Act requires
that, in considering whether to provide assistance
to a foreign securities authority, the Commission
determine whether the requesting authority has
agreed to provide reciprocal assistance in securities
matters to the United States, and whether
compliance with the request would prejudice the
public interest of the United States.
748 15 U.S.C. 78x(c).
749 17 CFR 240.24c–1.
750 Under Rule 24c–1 under the Exchange Act, the
term ‘‘nonpublic information’’ means ‘‘records, as
defined in Section 24(a) of the [Exchange] Act, and
other information in the Commission’s possession,
which are not available for public inspection and
copying.’’ 17 CFR 240.24c–1.
751 Section 3(a)(52) of the Exchange Act defines
‘‘foreign financial regulatory authority’’ to mean
‘‘any (A) foreign securities authority, (B) other
governmental body or foreign equivalent of a selfregulatory organization empowered by a foreign
government to administer or enforce its laws
relating to the regulation of fiduciaries, trusts,
commercial lending, insurance, trading in contracts
of sale of a commodity for future delivery, or other
instruments traded on or subject to the rules of a
contract market, board of trade, or foreign
equivalent, or other financial activities, or (C)
membership organization a function of which is to
regulate participation of its members in activities
listed above.’’ 15 U.S.C. 78c(a)(52).
747 Section
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31045
this regard, the Commission notes that
the indemnification requirement set
forth in Section 13(n)(5)(H)(ii) of the
Exchange Act 752 does not apply to the
Commission, and would be inapplicable
to the Commission’s provision of
security-based swap data to relevant
authorities pursuant to our independent
authority in Section 24(c) of the
Exchange Act.753
2. Comment Summary
Four commenters submitted
comments relating to relevant
authorities’ access to security-based
swap information, three of which were
in response to the SDR Proposing
Release and one of which was in
response to a joint public roundtable
regarding the cross-border application of
Title VII held by the Commission and
the CFTC on August 1, 2011.754
Commenters were generally supportive
of relevant authorities having access to
security-based swap data maintained by
SDRs when such access is within the
scope of the authorities’ mandate, but
these commenters expressed particular
concerns relating to the Indemnification
Requirement and relevant authorities’
unfettered access to security-based swap
data.
As a general matter, one commenter
stated that an SDR should be able to
provide: (i) Enforcement authorities
with necessary trading information; (ii)
regulatory agencies with counterpartyspecific information about systemic risk
based on trading activity; (iii) aggregate
trade information on market-wide
activity and aggregate gross and net
open interest for publication; and (iv)
real-time reporting from SB SEFs and
bilateral counterparties and related
dissemination.755 The same commenter
supported relevant authorities’ access to
reports from SDRs that are scheduled on
a regular basis or triggered by certain
events, and believed that the
Commission’s regulatory model
regarding regulatory access should be
‘‘location agnostic, without preferential
access for [a] prudential regulator,
except to perform its prudential
duties.’’ 756 The commenter also
believed that ‘‘it is important to preserve
[the] spirit of cooperation and
coordination between regulators around
the world’’ in the context of ensuring
752 15
U.S.C. 78m(n)(5)(H)(ii).
U.S.C. 78x(c).
754 See Cleary Letter IV at 30–31; DTCC Letter I
at 2 and III at 22–23; ESMA Letter at 2; MFA Letter
I at 3.
755 DTCC Letter IV at 5.
756 DTCC Letter III at 12.
753 15
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global regulators’ access to securitybased swap data.757
Two commenters concurred with the
Commission’s statements in the SDR
Proposing Release that relevant
authorities will likely be unable to agree
to provide SDRs and the Commission
with indemnification, as required by
Section 13(n)(5)(H)(ii) of the Exchange
Act prior to receiving security-based
swap data maintained by SDRs.758 One
of these commenters described the
Indemnification Requirement as
contravening the purpose of SDRs by
diminishing transparency if regulators
are not allowed to have ready access to
information and thereby jeopardizing
market stability.759 Specifically, the
commenter believed that the
Indemnification Requirement should
not apply where relevant authorities are
carrying out their regulatory
responsibilities, in accordance with
international agreements and while
maintaining the confidentiality of data
provided to them.760 Recognizing that
the Indemnification Requirement is
mandated by the Dodd-Frank Act,
however, the commenter suggested that
in order to ensure consistent application
of the requirement and to ‘‘minimize
any disruption to the global repository
framework,’’ the Commission should
provide model indemnification
language for all SDRs to use.761 Further,
the commenter believed that ‘‘any
indemnity should be limited in scope to
minimize the potential reduction in
value of registered SDRs to the
regulatory community.’’ 762
In discussing the Indemnification
Requirement, another commenter
reiterated the notion that relevant
authorities must ensure the
confidentiality of security-based swap
data provided to them.763 The
757 Id. at 12 (discussing the spirit of cooperation
and coordination between regulators in the context
of implementation of guidance provided by the
ODRF regarding global regulators’ access to
security-based swap data maintained by a trade
repository in the United States).
758 See DTCC Letter I at 3; Cleary Letter IV at 31;
see also SDR Proposing Release, 75 at 77318–19
(‘‘With respect to the indemnification provision, the
Commission understands that regulators may be
legally prohibited or otherwise restricted from
agreeing to indemnify third parties, including SDRs
as well as the Commission. The indemnification
provision could chill requests for access to data
obtained by SDRs, thereby hindering the ability of
others to fulfill their regulatory mandates and
responsibilities.’’).
759 See DTCC Letter I at 3 (discussing how the
Indemnification Requirement would result in the
reduction of information accessible to regulators on
a timely basis and would greatly diminish
regulators’ ability to carry out oversight functions).
760 DTCC Letter III at 12.
761 Id.
762 Id.
763 ESMA Letter at 2.
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commenter believed that the
Indemnification Requirement
‘‘undermines the key principle of trust
according to which exchange of
information [among relevant authorities]
should occur.’’ 764 Thus, the commenter
recommended that the Commission’s
rules help streamline the
Indemnification Requirement for an
‘‘efficient exchange of information.’’ 765
One commenter voiced concerns
about unfettered access to securitybased swap information by regulators,
including foreign financial supervisors,
foreign central banks, and foreign
ministries, beyond their regulatory
authority and mandate.766 This
commenter was concerned that the
statutory language incorporated in
previously proposed Rule 13n–4(b)(9),
which provides that in addition to the
entities specifically listed in the rule, an
SDR could make available data to ‘‘any
other person that the Commission
determines to be appropriate,’’ is vague
and could result in an SDR providing
access to persons without proper
authority.767 The commenter suggested
that the Commission adopt an approach
similar to the CFTC’s proposed Rule
49.17(d),768 and that the Commission
and the CFTC ‘‘endeavor to adopt
similar procedures to control regulator
requests for security-based swap
information.’’ 769
3. Proposed Guidance and Exemptive
Relief
Consistent with the goals of the DoddFrank Act 770 and the purposes of
SDRs,771 and after considering the
764 Id.
765 Id.
766 MFA
Letter I at 3.
at 4.
768 As adopted, CFTC Rule 49.17(d) requires any
‘‘Appropriate Domestic Regulator’’ or ‘‘Appropriate
Foreign Regulator’’ requesting access to swap data
obtained and maintained by a swap data repository
to first file a request for access with the swap data
repository and certify the statutory authority for
such request. The swap data repository then must
promptly notify the CFTC of such request and the
swap data repository subsequently would provide
access to the requested swap data. CFTC Rule
49.17(b)(1) defines ‘‘Appropriate Domestic
Regulator’’ and CFTC Rule 49.17(b)(2) provides that
‘‘Appropriate Foreign Regulators’’ are those that
have an existing memorandum of understanding
with the CFTC or otherwise as determined through
an application process. See CFTC Final Rule, Swap
Data Repositories: Registration Standards, Duties
and Core Principles, 76 FR 54538 (Sept. 1, 2011)
(‘‘CFTC SDR Adopting Release’’).
769 MFA Letter I at 4.
770 Dodd-Frank Act, Public Law 111–203 at
Preamble (goals include promoting ‘‘the financial
stability of the United States by improving
accountability and transparency in the financial
system’’).
771 See SDR Proposing Release, 75 FR 77307
(stating that ‘‘SDRs are intended to play a key role
in enhancing transparency in the [security-based
767 Id.
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comments received to date, the
Commission is proposing additional
guidance regarding relevant authorities’
access to security-based swap
information and proposing exemptive
relief from the Indemnification
Requirement. For the reasons discussed
further below, the Commission
preliminarily believes that our proposed
guidance and exemption from the
Indemnification Requirement is
necessary or appropriate to, among
other things, further the goals of the
Dodd-Frank Act and the purposes of
SDRs while preserving the
confidentiality of the security-based
swap information maintained by SDRs,
as necessary. The Commission also
preliminarily believes that our proposed
guidance and exemption will, as one
commenter suggested, help provide for
an ‘‘efficient exchange of
information.’’ 772
(a) Notification Requirement
Section 13(n)(5)(G) of the Exchange
Act requires an SDR, upon request, to
‘‘make available all data obtained by the
SDR, including individual counterparty
trade and position data,’’ to certain
specified relevant authorities, as well as
‘‘other persons that the Commission
determines to be appropriate.’’ 773
However, the SDR may make such data
available only ‘‘after notifying the
Commission of the request.’’ 774 The
Commission preliminarily believes that
an SDR can fulfill its obligation to notify
‘‘the Commission of the request’’ under
Section 13(n)(5)(G) of the Exchange
Act 775 and previously proposed Rule
13n–4(b)(9) by notifying the
Commission, upon the initial request for
security-based swap data by a relevant
authority, of the request for securitybased swap data from the SDR, and
maintaining records of the initial
request and all subsequent requests.776
swap] market by . . . providing effective access to
[security-based swap transaction] records to
relevant authorities. . . .’’).
772 See ESMA Letter at 2.
773 Section 13(n)(5)(G) of the Exchange Act, 15
U.S.C. 78m(n)(5)(G), as added by Section 763(i) of
the Dodd-Frank Act (specifying each appropriate
prudential regulator, the Financial Stability
Oversight Council, the CFTC, and the Department
of Justice); see also proposed Rule 13n–4(b)(9)
under the Exchange Act (adding the Federal Deposit
Insurance Corporation).
774 Section 13(n)(5)(G) of the Exchange Act, 15
U.S.C. 78m(n)(5)(G), as added by Section 763(i) of
the Dodd-Frank Act; see also proposed Rule 13n–
4(b)(9) under the Exchange Act.
775 15 U.S.C. 78m(n)(5)(G), as added by Section
763(i) of the Dodd-Frank Act.
776 Pursuant to previously proposed Rule 13n–
7(b) under the Exchange Act, the SDR would be
required to maintain records of the initial request
and all subsequent requests, including details of
any on-line access by relevant authorities to
security-based swap data maintained by the SDR,
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The Commission would consider the
notice provided and records maintained
as satisfying the Notification
Requirement.777 The Commission
preliminarily believes that this
approach is an efficient way for an SDR
to satisfy its statutory notification
obligation.778
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(b) Determination of Appropriate
Regulators
Section 13(n)(5)(G) of the Exchange
Act requires an SDR, upon request, to
‘‘make available all data obtained by the
[SDR], including individual
counterparty trade and position data,’’
to certain specified relevant authorities,
as well as ‘‘each appropriate prudential
regulator’’ and ‘‘other persons that the
Commission determines to be
appropriate,’’ including, but not limited
to, foreign financial supervisors
(including foreign futures authorities),
foreign central banks, and foreign
ministries.779 The Commission
contemplates that a relevant authority
will be able to request that the
Commission make a determination that
the relevant authority is appropriate for
requesting security-based swap data
from an SDR. The Commission
preliminarily believes that it will make
such a determination through the
issuance of a Commission order.
In making such a determination, the
Commission expects that we would
consider a variety of factors, and our
order may include, among other things,
conditions on determining that a
by such relevant authority. See proposed Rule 13n–
7(b) under the Exchange Act (requiring, among
other things, keeping at least one copy of all
documents required under the Exchange Act and
records made or received by the SDR in the course
of its business as such for not less than five years,
and promptly furnishing such documents to any
representative of the Commission upon request).
777 One commenter stated that ‘‘regulators want
direct electronic access to data in SDRs where that
data is needed to fulfill regulatory responsibilities’’
rather than access ‘‘by request, with notice to
another regulatory authority.’’ See DTCC Letter III
at 11–12. The Commission preliminarily believes
that SDRs can provide direct electronic access to
relevant authorities under its interpretation. In such
a case, the SDR would have to provide the
Commission with actual notification upon the
initial time that the relevant authority accesses the
SDR’s security-based swap data, and retain records
of any electronic access by the relevant authority.
778 As discussed in the SDR Proposing Release, an
SDR must keep its notifications to the Commission
and requests by relevant authorities confidential.
See SDR Proposing Release, 75 FR 77318. Failure
by an SDR to treat such notifications and requests
confidential could render ineffective or could have
adverse effects on the underlying basis for the
requests. See id. If, for example, a regulatory use of
the data is improperly disclosed, such disclosure
could possibly signal a pending investigation or
enforcement action, which could have detrimental
effects. See id.
779 15 U.S.C. 78m(n)(5)(G), as added by Section
763(i) of the Dodd-Frank Act. See also proposed
Rule 13n–4(b)(9) under the Exchange Act.
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relevant authority is appropriate for
purposes of receiving security-based
swap data directly from SDRs. The
Commission preliminarily believes that
such determination will likely be
conditioned on a supervisory and
enforcement MOU or other arrangement
between the Commission and the
relevant authority.780 Given the
necessity of maintaining the
confidentiality of the proprietary and
highly sensitive data maintained by an
SDR, such an MOU or arrangement 781
would be designed to protect the
confidentiality of the security-based
swap data provided to the relevant
authority by an SDR.782 The
Commission anticipates that in
determining whether to enter into such
an MOU or other arrangement with a
relevant authority, the Commission may
consider whether, among other things,
the relevant authority needs securitybased swap information from an SDR to
fulfill its regulatory mandate or legal
responsibilities and the relevant
authority agrees to protect the
confidentiality of the security-based
swap information provided to it. The
Commission preliminarily believes that
this MOU or arrangement could also
satisfy the condition in proposed Rule
13n–4(d)(3) for an SDR to avail itself of
the Indemnification Exemption, which
is discussed below.783
In addition, the Commission
preliminarily believes that in making
the determination, it would be
reasonable for the Commission to
consider whether the relevant authority
has a legitimate need for access to the
security-based swaps maintained by an
SDR in order to help safeguard such
information.784 Confirming that the
relevant authority has a legitimate need
could reduce the risk of unauthorized
disclosure, misappropriation, or misuse
of security-based swap data. In this
regard, the Commission would be
furthering the objectives of the DoddFrank Act, which created a number of
protections for proprietary and highly
sensitive data, including ‘‘individual
counterparty trade and position data,’’
maintained by an SDR.785 The
Commission, therefore, preliminarily
believes that a reasonable approach for
our determination of an appropriate
authority is for the Commission to
consider the scope of the relevant
authority’s regulatory mandate and legal
responsibilities. The Commission
preliminarily believes that our
consideration of these factors will
further the Dodd-Frank Act’s objective
to safeguard security-based swap data
and should address a commenter’s
concerns over unfettered access to such
proprietary data.786 The Commission
also anticipates considering, among
other things, whether the relevant
authority agrees to provide the
Commission with reciprocal assistance
in securities matters within the
Commission’s jurisdiction, and whether
such a determination would be in the
public interest. The Commission may
take into account any other factors as
the Commission determines are
appropriate in making our
determination.
In addition, the Commission
preliminarily believes that it is not
necessary to prescribe by rule—as one
commenter suggested 787—a specific
process such as the one proposed by the
780 Similarly, the CFTC requires ‘‘appropriate
foreign regulator[s]’’ to have an MOU or similar
type of arrangement with the CFTC or, as
determined by the CFTC on a case-by-case basis.
CFTC Rule 49.17(b)(2), 17 CFR 49.17(b)(2).
781 This MOU or other arrangement is separate
from the written agreement under Section
13(n)(5)(H)(i) of the Exchange Act and previously
proposed Rule 13n–4(b)(10) thereunder, both of
which require the SDR to receive a written
agreement from each relevant authority pertaining
to the confidentiality of the security-based swap
transaction information that is provided by the
SDR. The MOU or other arrangement is between the
Commission and the relevant authority, whereas the
written agreement is between the SDR and the
relevant authority.
782 The CFTC requires certain foreign regulators
‘‘to provide sufficient facts and procedures to
permit the [CFTC] to analyze whether the [foreign
regulator] employs appropriate confidentiality
procedures and to satisfy itself that the information
will be disclosed only as permitted by Section 8(e)
of the [Commodity Exchange Act].’’ CFTC Rule
49.17(b)(2), 17 CFR 49.17(b)(2). The Commission
expects that the relevant authority will need to
provide to the Commission similar information
before the Commission will enter into the MOU or
other arrangement.
783 See Section VI.C.3(c), infra.
784 See MFA Letter I at 3 (voicing concerns about
unfettered access to security-based swap
information by regulators, including foreign
financial supervisors, foreign central banks, and
foreign ministries, beyond their regulatory authority
and mandate).
785 See Section 13(n)(5)(G) of the Exchange Act,
15 U.S.C. 78m(n)(5)(G), as added by Section 763(i)
of the Dodd-Frank Act (directing SDRs to provide
data, including individual counterparty trade and
position data, on a confidential basis only to
circumscribed list of authorities or other persons
that the Commission determines to be appropriate);
Section 13(n)(5)(H)(i) of the Exchange Act, 15
U.S.C. 78m(n)(5)(H)(i), as added by Section 763(i)
of the Dodd-Frank Act (requiring that, prior to an
SDR sharing such information, the SDR must
receive a written agreement from each entity stating
that the entity shall abide by certain confidentiality
requirements); and Section 13(n)(5)(F) of the
Exchange Act, 15 U.S.C. 78m(n)(5)(F), as added by
Section 763(i) of the Dodd-Frank Act (requiring
SDRs to maintain the privacy of any and all
security-based swap transaction information that
they receive from a security-based swap dealer,
counterparty, or any other registered entity).
786 See MFA Letter I at 3.
787 See MFA Letter I at 4 (suggesting that the
Commission adopt an approach similar to the
CFTC’s proposed Rule 49.17(d)).
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CFTC 788 that sets forth criteria for
relevant authorities and the SDR to use
in order to facilitate relevant authorities’
access to security-based swap data
maintained by the SDR. The
Commission preliminarily believes that
our determination of an appropriate
authority, pursuant to the process
described above, represents a reasonable
approach to provide appropriate access
by relevant authorities, while at the
same time providing safeguards against
access by persons without proper
authority.789 The Commission also
preliminarily believes that SDRs should
have the flexibility to consider whether
to provide relevant authorities with
access to requested security-based swap
data.790 The Commission preliminarily
believes that a specific rule that
delineates a process governing relevant
authorities’ access requests, as suggested
by the commenter, would limit the
flexibility of SDRs in considering
whether to provide relevant authorities
with access to requested security-based
swap data.
The Commission contemplates that,
in our sole discretion, we would
determine whether to grant or deny a
request for a determination that the
relevant authority is appropriate for
purposes of requesting security-based
swap data from an SDR.791 In addition,
the Commission could revoke our
determination at any time.792 For
788 See CFTC Notice of Proposed Rulemaking:
Swap Data Repositories, 75 FR 80898 (Dec. 23,
2010). The CFTC has since adopted CFTC Rule
49.17(d), 17 CFR 49.17(d), which does not include
several of its proposed requirements, such as
requiring relevant authorities to detail the basis for
their requests. See CFTC SDR Adopting Release, 76
FR 54538.
789 See MFA Letter I at 4 (voicing concern that
vague standard could result in an SDR providing
access to persons without proper authority).
790 The Commission preliminarily believes that
an SDR’s consideration of whether to provide
relevant authorities with access to requested
security-based swap data is implicitly subsumed in
an SDR’s statutory duty to maintain the privacy of
security-based swap information that it receives.
See Section 13(n)(5)(F) of the Exchange Act, 15
U.S.C. 78m(n)(5)(F), as added by Section 763(i) of
the Dodd-Frank Act; see also proposed Rule 13n–
4(b)(8) under the Exchange Act (requiring SDRs to
maintain the privacy of any and all security-based
swap transaction information that the SDR receives
from a security-based swap dealer, counterparty, or
certain registered entity) and proposed Rule 13n–
9 under the Exchange Act (requiring an SDR to
protect the privacy of security-based swap
transaction information that the SDR receives by,
among other things, establishing safeguards,
policies, and procedures that are reasonably
designed to protect such information and that
address, without limitation, the SDR limiting access
to confidential information, material, nonpublic
information, and intellectual property).
791 The Commission may issue a determination
order that is for a limited time.
792 As a general matter, the Commission provides
a list of MOUs and other arrangements on its Web
site, which is one way for an SDR to monitor and
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example, the Commission may revoke a
determination or request additional
information from a relevant authority to
support continuation of the
determination if a relevant authority
fails to keep confidential security-based
swap data provided to it by an SDR.
(c) Option for Exemptive Relief from the
Indemnification Requirement
i. Impact of the Indemnification
Requirement
As noted above, Section 13(n)(5)(G) of
the Exchange Act 793 and previously
proposed Rule 13n–4(b)(9) thereunder
provide that an SDR shall on a
confidential basis, pursuant to Section
24 of the Exchange Act, and the rules
and regulations thereunder, upon
request, and after notifying the
Commission of the request, make
available all data obtained by the SDR
to each appropriate prudential regulator,
the Financial Stability Oversight
Council, the CFTC, the Department of
Justice, the Federal Deposit Insurance
Corporation and any other person that
the Commission determines to be
appropriate. Section 13(n)(5)(H)(ii) of
the Exchange Act requires that before an
SDR shares security-based swap
information with a relevant authority
requesting such information from the
SDR, the relevant authority must ‘‘agree
to indemnify the security-based swap
data repository and the Commission for
any expenses arising from litigation
relating to the information provided
under section 24 [of the Exchange
Act].’’ 794 Based on the Commission’s
understanding that certain relevant
authorities may be unable to agree to
indemnify any SDR and the
Commission, the Commission
preliminarily believes that the
Indemnification Requirement could
significantly frustrate the purpose of
Section 13(n)(5)(G) of the Exchange
Act 795 by preventing SDRs from making
available security-based swap
information to relevant authorities.
As stated in the SDR Proposing
Release, ‘‘under the Dodd-Frank Act,
SDRs are intended to play a key role in
enhancing transparency in the [securitybased swap] market by retaining
complete records of [security-based
swap] transactions, maintaining the
determine whether a relevant authority has entered
into an applicable MOU or other arrangement. The
MOUs and other arrangements can be found at the
following link: http://www.sec.gov/about/offices/
oia/oia_cooparrangements.shtml.
793 15 U.S.C. 78m(n)(5)(G), as added by Section
763(i) of the Dodd-Frank Act.
794 15 U.S.C. 78m(n)(5)(H)(ii), as added by Section
763(i) of the Dodd-Frank Act.
795 15 U.S.C. 78m(n)(5)(G), as added by Section
763(i) of the Dodd-Frank Act.
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integrity of those records, and providing
effective access to those records to
relevant authorities and the public in
line with their respective information
needs.’’ 796 Commenters 797 as well as
relevant authorities, however, have
expressed concerns about how the
Indemnification Requirement would
contravene the purposes of the DoddFrank Act, and more specifically, the
statutory purposes of SDRs.798 The
Commission preliminarily believes that
the Indemnification Requirement
should not be applied rigidly so as to
frustrate such purposes.
Specifically, the Commission
recognizes that certain domestic
authorities, including some of those
expressly identified in Section
13(n)(5)(G) of the Exchange Act 799 and
the Commission, cannot, as a matter of
law, provide an open-ended
indemnification agreement. For
example, the Antideficiency Act
prohibits certain U.S. federal agencies
from obligating or expending federal
funds in advance or in excess of an
appropriation, apportionment, or certain
administrative subdivisions of those
funds (e.g., through an unlimited or
unfunded indemnification).800
Similarly, the Commission understands
that foreign authorities may also be
prohibited under applicable foreign
laws from satisfying the Indemnification
Requirement.801 As such, the
Commission agrees with three
commenters’ views that the
Indemnification Requirement could
hinder the ability of relevant authorities
796 SDR
Proposing Release, 75 FR 77307.
e.g., Cleary Letter IV at 31 (‘‘[T]he
indemnification requirement could be a significant
impediment to effective regulatory coordination,
since non-US regulators may establish parallel
requirements for U.S. regulators to access swap data
reported in their jurisdictions.’’); DTCC Letter I at
3 (discussing how the Indemnification Requirement
would result in the reduction of information
accessible to regulators on a timely basis and would
greatly diminish regulators’ ability to carry out
oversight functions); ESMA Letter at 2 (noting that
the Indemnification Requirement ‘‘undermines the
key principle of trust according to which exchange
of information [among relevant authorities] should
occur’’).
798 See, e.g., DTCC Letter IV at 5 (noting that SDRs
should be able to provide, among other things,
enforcement authorities with necessary trading
information and regulatory agencies with certain
counterparty-specific information). As stated above,
the Commission believes that the goal of Sections
13(n)(5)(G) and 13(n)(5)(H) of the Exchange Act is,
among other things, to obligate SDRs to make
available security-based swap information to
relevant authorities, provided that the
confidentiality of the information is preserved.
799 15 U.S.C. 78m(n)(5)(G), as added by Section
763(i) of the Dodd-Frank Act.
800 31 U.S.C. 1341, 1517(a).
801 See Cleary Letter IV at 31; DTCC Letter I at 3;
ESMA Letter at 2.
797 See,
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to fulfill their regulatory mandates and
legal responsibilities.802
Moreover, the Commission
understands from foreign authorities
that their regulatory regimes will require
them to have direct access to data
maintained by trade repositories,
including SDRs registered with the
Commission, in order to fulfill their
regulatory mandates and legal
responsibilities.803 Many foreign
regulators 804 and market participants
have indicated, however, that because
foreign authorities cannot, as a matter of
law or practice, comply with the
Indemnification Requirement, the
practical effect of having an open-ended
indemnification requirement may be the
fragmentation of security-based swap
data across multiple SDRs, as foreign
authorities establish trade repositories
in their jurisdictions to ensure access to
data that they need to perform their
regulatory mandates and legal
responsibilities.805 Such fragmentation
may lead to duplicative reporting
requirements in multiple jurisdictions,
higher reporting costs for market
participants, and less transparency in
the security-based swap market.806 In
light of these concerns, the Commission
preliminarily believes that an
exemption from the Indemnification
Requirement may be necessary or
appropriate, as a practical matter, to
minimize fragmentation of securitybased swap data that could otherwise be
802 See Cleary Letter IV at 31; DTCC Letter I at 3;
ESMA Letter at 2.
803 For example, in the case of Europe, under
European Market Infrastructure Regulation
(‘‘EMIR’’), trade repositories established in third
countries that provide services to entities
established in the European Union must apply for
recognition by ESMA, which conditions its
approval on, among other things, ‘‘[European]
Union authorities, including ESMA, hav[ing]
immediate and continuous access’’ to information
in such trade repositories. Regulation No. 648/2012
of the European Parliament and of the Council of
4 July 2012 on OTC derivatives, central
counterparties and trade repositories, 2012 O.J. (L
201) 1, 49.
804 See CFTC and SEC, Joint Report on
International Swap Regulation (Jan. 31, 2012)
(noting that the indemnification provisions have
‘‘caused concern among foreign regulators, some of
which have expressed unwillingness to register or
recognize [a swap data repository] unless [they are]
able to have direct access to necessary information’’
and that foreign regulators ‘‘are considering the
imposition of a similar requirement that would
restrict the CFTC’s and SEC’s access to information
at [trade repositories] abroad’’).
805 See Section XV.H.2(b)iii, infra (discussing the
potential effects of fragmentation of security-based
swap data among trade repositories across multiple
jurisdictions).
806 See, e.g., Cleary Letter IV at 31 (The
Indemnification Requirement ‘‘could be a
significant impediment to effective regulatory
coordination, since non-U.S. regulators may
establish parallel requirements for U.S. regulators to
access swap data reported in their jurisdictions’’).
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consolidated and reduce duplicative
reporting requirements.807
ii. Proposed Rule 13n–4(d):
Indemnification Exemption
The Commission is proposing,
pursuant to our authority under Section
36 of the Exchange Act,808 a tailored
exemption from the Indemnification
Requirement. To avoid a result that
could significantly frustrate the purpose
of Section 13(n)(5)(G) and the purpose
of SDRs, the Commission preliminarily
believes that the Indemnification
Exemption is necessary or appropriate
in the public interest, and is consistent
with the protection of investors,809
particularly given that the exemption is
narrowly tailored and could be applied
in only limited circumstances.
Specifically, the Commission is
proposing Rule 13n–4(d)
(‘‘Indemnification Exemption’’), which
states as follows: ‘‘A registered securitybased swap data repository is not
required to comply with the
indemnification requirement set forth in
Section 13(n)(5)(H)(ii) of the [Exchange]
Act and [Rule 13n–4(b)(9) thereunder]
with respect to disclosure of securitybased swap information by the securitybased swap data repository if: (1) [a]n
entity described in [Rule 13n–4(b)(9)]
requests security-based swap
information from the security-based
swap data repository to fulfill a
regulatory mandate and/or legal
responsibility of the entity; (2) [t]he
request of such entity pertains to a
person or financial product subject to
the jurisdiction, supervision, or
oversight of the entity; and (3) [s]uch
entity has entered into a supervisory
and enforcement memorandum of
understanding or other arrangement
with the Commission that addresses the
confidentiality of the security-based
swap information provided and any
other matters as determined by the
Commission.’’
In proposing the Indemnification
Exemption, the Commission is mindful
of the comments received. The
Commission intends for the
Indemnification Exemption to—as one
commenter suggested—‘‘preserve [the]
807 The Commission preliminarily believes that
the Indemnification Requirement does not apply
when an SDR is registered with the Commission
and is also registered or licensed with a foreign
authority and that authority is obtaining securitybased swap information directly from the SDR
pursuant to that foreign authority’s regulatory
regime.
808 15 U.S.C. 78mm (providing the Commission
with general exemptive authority * * * ‘‘to the
extent that such exemption is necessary or
appropriate in the public interest, and is consistent
with the protection of investors’’).
809 15 U.S.C. 78mm.
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31049
spirit of cooperation and coordination
between regulators around the world’’
in the context of ensuring global
regulators’ access to security-based
swap data.810 By identifying specific
conditions that are applicable to
requests by any relevant authority, the
Commission also intends for the
Indemnification Exemption to be—as
one commenter suggested—‘‘location
agnostic,’’ 811 whereby relevant
authorities are treated similarly
regardless of whether they are domestic
authorities or foreign authorities.812 In
addition, the Indemnification
Exemption is consistent with one
commenter’s suggestion that the
Commission should not apply the
Indemnification Requirement where
relevant authorities are carrying out
their regulatory responsibilities, in
accordance with international
agreements and while maintaining the
confidentiality of data provided to
them.813 In order for an SDR to share
security-based swap information with a
relevant authority without an
indemnification agreement, the three
proposed conditions specified in the
Indemnification Exemption, as
discussed further below, must be met.
First, the relevant authority’s request
for security-based swap information
from an SDR must be for the purpose of
fulfilling the relevant authority’s
regulatory mandate and/or legal
responsibility. The Commission
preliminarily believes that this
condition is aligned with the DoddFrank Act’s requirements to protect
security-based swap information,
including proprietary and highly
sensitive data, maintained by an SDR
from unauthorized disclosure,
misappropriation, or misuse of securitybased swap information.814 In
810 See DTCC Letter III at 12 (discussing
implementation of guidance provided by the ODRF
regarding global regulators’ access to security-based
swap data maintained by a trade repository in the
United States).
811 See DTCC Letter III at 12 (suggesting that the
Commission’s regulatory model regarding
regulatory access should be ‘‘location agnostic’’).
812 The Commission intends for the
Indemnification Exemption to provide relief for
both foreign authorities and domestic authorities
that require access to security-based swap data
maintained by SDRs in order to fulfill a regulatory
mandate or legal responsibility. The Commission
preliminarily believes that an SDR may rely on the
Indemnification Exemption in connection with
requests from relevant authorities, including SROs,
registered futures associations, and international
financial institutions.
813 See DTCC Letter III at 12.
814 See Section 13(n)(5)(F) of the Exchange Act,
15 U.S.C. 78m(n)(5)(F), as added by Section 763(i)
of the Dodd-Frank Act (requiring SDRs to maintain
the privacy of any and all security-based swap
transaction information that they receive from a
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particular, the Commission
preliminarily believes that this
condition is consistent with an SDR’s
statutory duty to maintain the privacy of
security-based swap information that it
receives.815 In complying with its duty
to maintain the privacy of securitybased swap information, an SDR would
need to determine when it can or cannot
provide security-based swap
information to others. The Commission
preliminarily believes that, for the
limited purposes of satisfying the
Indemnification Exemption, it is
appropriate for the SDR to include in its
consideration of whether to provide
security-based swap information to
relevant authorities whether a relevant
authority’s specific request for securitybased swap information is indeed
within its regulatory mandate or legal
responsibilities before the SDR provides
the information to the relevant
authority.816 Finally, the Commission
notes that establishing such a condition
in the Indemnification Exemption is
consistent with guidelines that one
commenter indicated that it followed on
a voluntary basis in providing relevant
authorities with access to security-based
swap information.817
security-based swap dealer, counterparty, or any
other registered entity); Section 13(n)(5)(G) of the
Exchange Act, 15 U.S.C. 78m(n)(5)(G), as added by
Section 763(i) of the Dodd-Frank Act (directing
SDRs to provide data, including individual
counterparty trade and position data, on a
confidential basis only to circumscribed list of
authorities or other persons that the Commission
determines to be appropriate); and Section
13(n)(5)(H)(i) of the Exchange Act, 15 U.S.C.
78m(n)(5)(H)(i), as added by Section 763(i) of the
Dodd-Frank Act (requiring that, prior to an SDR
sharing such information, the SDR must receive a
written agreement from each entity stating that the
entity shall abide by certain confidentiality
requirements).
815 See Section 13(n)(5)(F) of the Exchange Act,
15 U.S.C. 78m(n)(5)(F), as added by Section 763(i)
of the Dodd-Frank Act; see also proposed Rule 13n–
4(b)(8) under the Exchange Act (requiring SDRs to
maintain the privacy of any and all security-based
swap transaction information that the SDR receives
from a security-based swap dealer, counterparty, or
certain registered entity) and proposed Rule 13n–
9 under the Exchange Act (requiring an SDR to
protect the privacy of security-based swap
transaction information that the SDR receives by,
among other things, establishing safeguards,
policies, and procedures that are reasonably
designed to protect such information and that
address, without limitation, the SDR limiting access
to confidential information, material, nonpublic
information, and intellectual property).
816 The Commission preliminarily believes that in
complying with an SDR’s statutory privacy duty,
the SDR has the flexibility to consider whether to
provide relevant authorities with access to
requested security-based swap data and will most
likely decide that it is reasonable to consider
whether a relevant authority’s request for securitybased swap information is within its regulatory
mandate or legal responsibilities before the SDR
provides the information.
817 See DTCC Letter III at 12 (stating that it
‘‘routinely provides [swap] transaction data to U.S.
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Second, the relevant authority’s
request must pertain to a person or
financial product subject to that
authority’s jurisdiction, supervision, or
oversight. If, for instance, the relevant
authority requests information on a
security-based swap that pertains to a
counterparty or underlier that is subject
to the authority’s jurisdiction,
supervision, or oversight, then this
condition to the Indemnification
Exemption would be satisfied. The
Commission preliminarily believes that
the person or financial product need not
be registered or licensed with the
authority in order for this condition to
be satisfied. Similar to the first
condition of the Indemnification
Exemption, the Commission
preliminarily believes that this
condition is aligned with the DoddFrank Act’s requirements to protect
security-based swap information,
including proprietary and highly
sensitive data, maintained by an SDR
from unauthorized disclosure,
misappropriation, or misuse of securitybased swap information.818 In
particular, the Commission
preliminarily believes that the second
condition is consistent with an SDR’s
statutory duty to maintain the privacy of
security-based swap information that it
receives.819 In complying with its duty
to maintain the privacy of securitybased swap information, an SDR would
need to determine when it can or cannot
provide security-based swap
information to others. The Commission
preliminarily believes that, for the
limited purposes of satisfying the
Indemnification Exemption, it is
appropriate for the SDR to include in its
consideration of whether to provide
security-based swap information to
regulators (and . . . routinely provides data related
to [swap] transactions in the U.S. by U.S. persons
on European underlyings to European regulators),
as contemplated by the ODRF’’ guidelines that
provide guidance on relevant authorities’
information needs and level of access to data); see
also DTCC Letter IV at 7–8.
818 See Sections 13(n)(5)(F), (G), and (H)(i) of the
Exchange Act, 15 U.S.C. 78m(n)(5)(F), (G), and
(H)(i), as added by Section 763(i) of the Dodd-Frank
Act.
819 See Section 13(n)(5)(F) of the Exchange Act,
15 U.S.C. 78m(n)(5)(F), as added by Section 763(i)
of the Dodd-Frank Act; see also proposed Rule 13n–
4(b)(8) under the Exchange Act (requiring SDRs to
maintain the privacy of any and all security-based
swap transaction information that the SDR receives
from a security-based swap dealer, counterparty, or
certain registered entity) and proposed Rule 13n–
9 under the Exchange Act (requiring an SDR to
protect the privacy of security-based swap
transaction information that the SDR receives by,
among other things, establishing safeguards,
policies, and procedures that are reasonably
designed to protect such information and that
address, without limitation, the SDR limiting access
to confidential information, material, nonpublic
information, and intellectual property).
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relevant authorities whether a relevant
authority’s specific request pertains to a
person or financial product that is
subject to the authority’s jurisdiction,
supervision, or oversight. 820 Finally, the
Commission notes that establishing
such a condition in the Indemnification
Exemption is consistent with guidelines
that one commenter indicated that it
followed on a voluntary basis in
providing relevant authorities with
access to security-based swap
information.821
Third, the requesting relevant
authority must enter into a supervisory
and enforcement MOU or other
arrangement with the Commission that
addresses the confidentiality of the
security-based swap information
provided and any other matters as
determined by the Commission.822 For
those entities not expressly identified in
Section 13(n)(5)(G) of the Exchange
Act 823 or the rules thereunder, such an
MOU or other arrangement can be
entered into during the Commission’s
determination process, as discussed in
Section VI.C.3(b) above. On the other
hand, entities expressly identified in
Section 13(n)(5)(G) of the Exchange Act
and the rules thereunder, which are not
subject to the Commission’s process to
determine appropriate regulators, would
need to enter into such an MOU or other
arrangement to satisfy this condition of
the Indemnification Exemption. The
Commission anticipates that in
determining whether to enter into such
a supervisory and enforcement MOU or
other arrangement with a relevant
authority, the Commission will consider
whether, among other things, the
820 The Commission preliminarily believes that in
complying with an SDR’s statutory privacy duty,
the SDR has the flexibility to consider whether to
provide relevant authorities with access to
requested security-based swap data and will most
likely decide that it is reasonable to consider
whether a relevant authority’s request for securitybased swap information pertains to a person or
financial product that is subject to the authority’s
jurisdiction, supervision, or oversight before the
SDR provides the information.
821 See DTCC Letter III at 12 (stating that it
‘‘routinely provides [swap] transaction data to U.S.
regulators (and . . . routinely provides data related
to [swap] transactions in the U.S. by U.S. persons
on European underlyings to European regulators),
as contemplated by the ODRF’’ guidelines that
provide guidance on relevant authorities’
information needs and level of access to data); see
also DTCC Letter IV at 7–8.
822 As a general matter, the Commission provides
a list of MOUs and other arrangements on its Web
site, which is one way for an SDR to monitor and
determine whether a relevant authority has entered
into an applicable MOU or other arrangement for
purposes of satisfying the third condition of the
Indemnification Exemption. The MOUs and other
arrangements can be found at the following link:
http://www.sec.gov/about/offices/oia/
oia_cooparrangements.shtml.
823 15 U.S.C. 78m(n)(5)(G), as added by Section
763(i) of the Dodd-Frank Act.
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relevant authority needs security-based
swap information from an SDR to fulfill
its regulatory mandate or legal
responsibilities; the relevant authority
agrees to protect the confidentiality of
the security-based swap information
provided to it; the relevant authority
agrees to provide the Commission with
reciprocal assistance in securities
matters within the Commission’s
jurisdiction; and a supervisory and
enforcement MOU or other arrangement
would be in the public interest.
The Commission preliminarily
believes that the third condition in the
Indemnification Exemption is—as one
commenter suggested—an effective way
to streamline the Indemnification
Requirement for an ‘‘efficient exchange
of information.’’ 824 The Commission
also preliminarily believes that the third
condition in the Indemnification
Exemption is appropriate to help protect
the confidentiality of the security-based
swap data provided to relevant
authorities, and also to further the
purposes of the Dodd-Frank Act. In this
regard, the Commission preliminarily
believes that where a relevant authority
cannot agree to indemnification, a
supervisory and enforcement MOU or
other arrangement, which a relevant
authority can legally enter into, may be
a reasonable alternative because, similar
to an indemnification agreement, a
supervisory and enforcement MOU or
other arrangement would serve as
another mechanism to protect the
confidentiality of security-based swap
data provided to a relevant authority by
committing the authority to maintain
such confidentiality.825 In light of the
confidentiality agreement required
under Section 13(n)(5)(H)(i) of the
Exchange Act and previously proposed
Rule 13n–4(b)(10) 826 as well as the
importance of maintaining good
relations and trust among relevant
authorities, the Commission also
824 See ESMA Letter at 2 (recommending an MOU
between the Commission and relevant authorities to
address duplicative regulatory regimes and
facilitate cooperation among authorities from
different jurisdictions).
825 See 15 U.S.C. 8325(a), as added by Section 752
of the Dodd-Frank Act (providing that the
Commission and foreign regulators ‘‘may agree to
such information-sharing arrangements as may be
deemed to be necessary or appropriate in the public
interest . . . .’’).
826 As stated above, the MOU or other
arrangement is separate from the written agreement
under Section 13(n)(5)(H)(i) of the Exchange Act
and previously proposed Rule 13n–4(b)(9)
thereunder stating that the relevant authority shall
abide by the confidentiality requirements described
in Section 24 of the Exchange Act relating to the
information on security-based swap transactions
that is provided by the SDR. The MOU or other
arrangement is between the Commission and the
relevant authority, whereas the written agreement is
between the SDR and the relevant authority.
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preliminarily believes that a relevant
authority will have strong incentives to
take reasonable measures and
precautions to comply with its
obligation to protect the confidentiality
of the security-based swap information
received from an SDR. In lieu of
providing an indemnification
agreement, a supervisory and
enforcement MOU or other arrangement
would provide an SDR and the
Commission with an additional layer of
protection in maintaining the
confidentiality of security-based swap
information shared by the SDR.827
For the reasons stated above, the
Commission preliminarily believes that
the Indemnification Exemption is a
reasonable alternative to the
Indemnification Requirement. The
Commission recognizes, however, that a
supervisory and enforcement MOU or
other arrangement would not
necessarily provide SDRs that invoke
the exemption with the same level of
protection that an indemnification
agreement would provide (i.e., coverage
for any expenses arising from litigation
relating to information provided to a
relevant authority) and thus, an SDR
may prefer the benefits of the
Indemnification Requirement rather
than rely on the Indemnification
Exemption. Therefore, under the
Commission’s proposed exemption, an
SDR would have the option to require
an indemnification agreement from a
relevant authority should the SDR
choose to do so rather than rely on the
Indemnification Exemption.
The Commission expects that where
an SDR seeks to obtain an
indemnification agreement from a
relevant authority, the SDR should
negotiate in good faith an
indemnification agreement. In this
regard, the Commission agrees with one
commenter’s view that ‘‘any indemnity
should be limited in scope’’ 828 and
expects that an SDR will not
unreasonably hinder the ability of
relevant authorities to obtain securitybased swap information from the
SDR.829 Regarding the same
commenter’s suggestion that the
Commission provide model
827 The Commission notes that the MOU or other
arrangement would not constitute a waiver on the
part of the Commission or SDR to pursue legal
action against a relevant authority and liability, if
any, will be determined in accordance with
applicable law. The Commission also does not
interpret the indemnification as extending to an
SDR’s own wrongful acts.
828 See DTCC Letter III at 12.
829 For example, the Commission does not expect
that an indemnification agreement would include a
provision requiring a relevant authority to
indemnify the SDR from the SDR’s own wrongful
or negligent acts.
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indemnification language,830 the
Commission does not believe that it is
appropriate to prescribe by rule specific
language that an SDR would be required
to use when requesting indemnification
from relevant authorities. Because such
language could vary on a case-by-case
basis depending on various factors, such
as the laws applicable to the relevant
authority, the Commission preliminarily
believes that it is appropriate to allow
for flexibility in negotiation of an
indemnification agreement.
Request for comment
The Commission requests comment
on all aspects of the proposed guidance,
interpretation, and the Indemnification
Exemption, including the following:
• Is the Commission’s proposed
interpretation of the Notification
Requirement appropriate and
sufficiently clear? Why or why not? Is
it overly broad or narrow? If so, why?
Does the Commission’s proposed
interpretation provide the Commission
with sufficient information to fulfill our
responsibilities?
• Should the Commission require
SDRs to provide the Commission with
actual notice of all of requests for
security-based swap data by relevant
authorities? Why or why not? If so, what
should such notice include? Why?
• What would be the advantage of
requiring SDRs to provide actual notice
to the Commission of requests for
security-based swap data by relevant
authorities before making the data
available to the relevant authorities?
• With regard to the Notification
Requirement, should the Commission
adopt a rule that is consistent with the
approach taken by the CFTC in its Rule
49.17(d)(4), 17 CFR 49.17(d)(4), which
requires a swap data repository to
promptly notify the CFTC regarding any
request received by an appropriate
foreign or domestic regulator to gain
access to the swap data maintained by
such swap data repository? Why or why
not?
• Should the Commission provide an
exemption from the Notification
Requirement similar to the
Indemnification Exemption? Why or
why not? For example, should proposed
Rule 13n–4(d) be revised to begin with
‘‘[a] registered security-based swap data
repository is not required to comply
with the notification requirements set
forth in Section 13(n)(5)(G) of the Act
and paragraph (b)(9) of this section and
the indemnification requirement set
forth in Section 13(n)(5)(H)(ii) of the Act
and paragraph (b)(10) of this
section . . .’’? Why or why not?
830 See
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• Should the Commission propose a
rule with regard to the application of the
Notification Requirement? Why or why
not? If so, what should the rule
stipulate?
• In determining whether a person is
appropriate to obtain security-based
swap data from SDRs, should the
Commission establish the process set
forth in this release for persons to
request a Commission determination?
Why or why not? Should the
Commission make such a determination
by order? Why or why not? Should the
Commission delegate this determination
to the staff? Why or why not?
• In determining whether a person is
appropriate to obtain security-based
swap data from SDRs, should the
Commission require a supervisory and
enforcement MOU or other
arrangement? Why or why not? If so,
what matters should be addressed in the
MOU or other arrangement? What
factors should the Commission take into
consideration when determining
whether to enter into an MOU or other
arrangement with the person?
• In determining whether a person is
appropriate to obtain security-based
swap data from SDRs, does the
Commission need to understand the
scope of a relevant authority’s
regulatory mandate or legal
responsibilities? Why or why not? What
other factors should the Commission
take into account in making such a
determination?
• Should the Commission’s process
for determining whether a person is
appropriate to obtain security-based
swap data from SDRs be memorialized
in a rule? If so, what should the rule
stipulate?
• Should the Commission require by
rule or in our determination orders that
SDRs not provide relevant authorities
with access to security-based swap data
beyond their regulatory mandates or
legal responsibilities? Why or why not?
Should the Commission adopt a process
such as the one adopted by the CFTC in
its Rule 49.17(d), 17 CFR 49.17(d),
which requires certain regulators
seeking to gain access to the swap data
maintained by a swap data repository to
certify that they are acting within the
scope of their jurisdiction?
• Are there any reasons why the
Commission should determine a person
appropriate to obtain security-based
swap data from one or more SDRs, but
not all SDRs? If so, what are they?
• Should the Commission, when it
determines that a person is appropriate
to obtain security-based swap data from
SDRs, include limitations on such
determination? Why or why not? For
example, should the Commission limit
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the determination to a certain period of
time or to certain individual persons at
a relevant authority?
• Under what circumstances should
the Commission be able to revoke our
determination order? Under what
circumstances would it be appropriate
for the Commission to request a relevant
authority to provide additional
information in order to maintain such a
determination?
• Should the Commission provide
additional clarification with respect to
how parties comply with the
confidentiality requirements in Section
24 of the Exchange Act? In what aspect
would clarification be helpful?
• Is the Commission’s proposed
interpretation of the Indemnification
Requirement appropriate and
sufficiently clear? Should the
Commission interpret the
Indemnification Requirement more
broadly or narrowly? If so, explain.
• Should the Commission interpret
the Indemnification Requirement to be
limited to the liability that a relevant
authority otherwise would have to an
SDR pursuant to the laws applicable to
that relevant authority, such as the
Federal Tort Claims Act, which is
applicable to domestic authorities?
• Is the Commission’s
Indemnification Exemption appropriate
and sufficiently clear? If not, what
would be a better alternative? Please
also explain the costs and benefits of
any alternative, including how the
alternative would be consistent with
and further the goals of Title VII.
• Is the Indemnification Exemption
overly broad or narrow? If so, what
would be a better alternative? Please
also explain the costs and benefits of
any alternative, including how the
alternative would be consistent with
and further the goals of Title VII.
• Are there ways to narrowly tailor
the Indemnification Exemption further
without hindering a relevant authority’s
ability to obtain security-based swap
data information from SDRs?
• Should the SDRs have the option to
require a relevant authority to provide
an indemnification agreement even if
the three conditions in the
Indemnification Exemption can be
satisfied? Why or why not? Does
providing SDRs with such an option
raise any competiveness concerns?
• If the Commission were to modify
the Indemnification Exemption so that
SDRs do not have the option to require
an indemnification agreement pursuant
to Section 13(n)(5)(H)(ii) of the
Exchange Act even if the three
conditions in the exemption are
satisfied, would this be appropriate and
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consistent with the Indemnification
Requirement?
• What is the likelihood of an SDR
not availing itself of the Indemnification
Exemption even if the three conditions
are met? Are there any measures that the
Commission should take to address or
mitigate this scenario? Are there any
restrictions that the Commission should
impose on an SDR that requires an
indemnification agreement even if it can
avail itself of the Indemnification
Exemption?
• Should an SDR be required to make
and keep records of its decision to rely
on the Indemnification Exemption?
• Are the Indemnification Exemption
and the Commission’s proposed
interpretive guidance sufficient to
address the possibility that SDRs may be
registered with ESMA and national
regulators at the European Union (‘‘EU’’)
member state level will obtain securitybased swap information from ESMA?
Are there any regulatory regime or
circumstances that the Commission
should take into consideration that is
not addressed by the Indemnification
Exemption or the Commission’s
interpretive guidance? Please explain.
• Will organizations such as FINRA
and other self-regulatory organizations,
the National Futures Association, the
IMF, and the International Bank for
Reconstruction and Development be
able to meet the three conditions of the
Indemnification Exemption? Why or
why not? If not, should the
Indemnification Exemption be modified
to explicitly exempt such organizations
from the Indemnification Requirement?
Why or why not? If so, which
organizations and why?
• Does the Indemnification
Exemption adequately address the
concerns of relevant authorities with
respect to the Indemnification
Requirement? Are there any
circumstances that would warrant an
exemption from the Indemnification
Requirement, but that would not satisfy
all the conditions in the Indemnification
Exemption? If so, how could the
Indemnification Exemption be modified
and narrowly tailored to capture such
circumstances so as not to have the
effect of nullifying the Indemnification
Requirement?
• Is it appropriate to provide SDRs
with the flexibility to determine, on a
case-by-case basis, whether a relevant
authority that is requesting securitybased swap information is acting within
the scope of its regulatory mandate or
legal responsibilities? Why or why not?
• Should the Commission impose any
additional requirements on SDRs to
confirm that a relevant authority is
requesting security-based swap
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information for the purpose of fulfilling
its regulatory mandate or legal
responsibilities? For example, should
the Commission prescribe, as a
condition in the Indemnification
Exemption, that the SDR obtain a
written confirmation from the
requesting relevant authority that it is
acting within its regulatory mandate or
legal responsibilities?
• Should the Commission impose any
additional requirements on SDRs to
confirm that a relevant authority is
requesting security-based swap
information that pertains to a person or
financial product subject to the
jurisdiction, supervision, or oversight of
the authority? For example, should the
Commission prescribe, as a condition in
the Indemnification Exemption, that the
SDR obtain a written confirmation from
the requesting relevant authority that its
request pertains to a person or financial
product subject to the jurisdiction,
supervision, or oversight of the
authority?
• Would an MOU between the
Commission and a relevant authority in
lieu of an indemnification agreement
provide protection of security-based
swap information shared with the
relevant authority comparable to that of
an indemnification agreement? If not,
why not?
• Should the Commission specify in
the Indemnification Exemption any
other matters that may be in a
supervisory and enforcement MOU or
other arrangement? If so, what?
• On January 25, 2012, the European
Commission proposed reforms to
strengthen online privacy rights and to
modernize the principles set forth in the
EU’s 1995 Data Protection Directive
(‘‘EU Directive’’) to protect personal
data. Will the EU Directive affect the
ability of SDRs to provide securitybased swap data to other relevant
authorities, including the Commission?
If so, please explain. Will the EU
Directive affect the ability of the EU and
its member countries to provide
reciprocal assistance in securities
matters, as contemplated by the
supervisory and enforcement MOU or
other arrangement discussed above? If
so, please explain.
• Should the Commission impose any
additional conditions in the
Indemnification Exemption? If so, what?
Are there any conditions in the
Indemnification Exemption that the
Commission should not require? If so,
what conditions and why?
• For the purpose of satisfying the
Indemnification Exemption, should an
SDR be required to maintain policies
and procedures setting forth how to
determine (i) whether security-based
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swap information being requested is
needed to fulfill a regulatory mandate
and/or legal responsibility of the
requesting entity, (ii) whether a relevant
authority’s requests pertain to a person
or financial product subject to the
authority’s jurisdiction, supervision, or
oversight, or (iii) whether the requesting
relevant authority has entered into a
supervisory and enforcement MOU or
other arrangement with the
Commission? To the extent such
policies and procedures require each
requesting relevant authority to provide
a written representation with respect to
one or more of the conditions in the
Indemnification Exemption, should
such written representations be
considered sufficient to satisfy the
relevant conditions in the
Indemnification Exemption?
• Are there better ways that the
Commission could address the
Indemnification Requirement besides
the Indemnification Exemption that
would be consistent with and further
the goals of Title VII? Please explain the
costs and benefits of any alternative.
• What is the likely impact of the
Indemnification Exemption on the
security-based swap market? Would the
Indemnification Exemption potentially
promote or impede the establishment of
SDRs?
• Is the Commission’s proposed
interpretation of how the
Indemnification Requirement applies to
SDRs dually registered with the
Commission and a foreign regulator
appropriate and sufficiently clear? If
not, why not? Should the Commission
apply the Indemnification Requirement
when an SDR is registered with the
Commission and is also registered or
licensed with a foreign authority and
that foreign authority is obtaining
information from the SDR pursuant to
its regulatory regime? Why or why not?
Should there be any additional
conditions in such instances? If so, what
conditions and why?
• Should the Commission provide
guidance on what it means for a ‘‘person
or financial product’’ to be ‘‘subject to
[an] authority’s jurisdiction,
supervision, or oversight’’? Why or why
not?
• What would be the market impact
of the proposed approach to providing
an exemption from the Indemnification
Requirement? How would the proposed
application of the Indemnification
Requirement, including the proposed
exemption, affect the competitiveness of
U.S. entities in the global marketplace
(both in the United States as well as in
foreign jurisdictions)? Would the
proposed approach place any market
participants at a competitive
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31053
disadvantage or advantage? If so, please
explain. Would the proposed approach
be a more general burden on
competition? If so, please explain. What
other measures should the Commission
consider to implement the
Indemnification Requirement? What
would be the market impacts and
competitiveness effects of alternatives to
the proposed approach discussed in this
release?
VII. Security-Based Swap Execution
Facilities
A. Introduction
As discussed throughout this release,
the market for security-based swaps is
global in scope, with transactions in
security-based swaps often involving
counterparties in different jurisdictions.
The Commission recognizes that, as a
result, there may be uncertainty
regarding the application of our
proposed SB SEF registration
requirements for a security-based swap
market whose principal place of
business is outside of the United States.
The Commission believes, therefore,
that guidance and clarification on the
application of our proposed registration
requirements would be useful with
respect to security-based swap markets
operating in the cross-border context.
Under the Dodd-Frank Act, new
Section 3D(a)(1) of the Exchange Act
provides that ‘‘no person may operate a
facility for the trading or processing of
security-based swaps, unless the facility
is registered as a security-based swap
execution facility or as a national
securities exchange under this
section.’’ 831 In our release proposing
rules governing SB SEFs,832 the
Commission expressed the view that the
registration requirement of Section
3D(a)(1) would apply only to a facility
that meets the definition of ‘‘securitybased swap execution facility’’ in
Section 3(a)(77) of the Exchange Act.833
The SB SEF Proposing Release,
however, did not explicitly address the
circumstances under which a foreign 834
831 15
U.S.C. 78c–4(a)(1).
SB SEF Proposing Release, 76 FR 10948.
The proposed rules governing SB SEFs are
contained in proposed Regulation SB SEF.
833 See SB SEF Proposing Release, 76 FR 10949
n.10. Section 3(a)(77) of the Exchange Act defines
‘‘security-based swap execution facility’’ to mean ‘‘a
trading system or platform in which multiple
participants have the ability to execute or trade
security-based swaps by accepting bids and offers
made by multiple participants in the facility or
system, through any means of interstate commerce,
including any trading facility, that (A) facilitates the
execution of security-based swaps between persons
and (B) is not a national securities exchange.’’ 15
U.S.C. 78c(a)(77).
834 In using the terms ‘‘foreign’’ and ‘‘nonresident’’ in connection with a security-based swap
832 See
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security-based swap market would be
required to register with the
Commission under Section 3D of the
Exchange Act.835 As discussed below,
the Commission herein proposes to
interpret when the registration
requirements of Section 3D of the
Exchange Act would apply to a foreign
security-based swap market.836 The
Commission also discusses below the
circumstances under which it may
consider granting an exemption from
registration for a foreign security-based
swap market.
The proposed interpretations
described below represent the
Commission’s proposed approach to
applying the SB SEF registration
requirements to foreign security-based
swap markets. We recognize that other
approaches may achieve the goals of the
Dodd-Frank Act, in whole or in part.
Accordingly, we invite comment
regarding all aspects of the proposal
described below, and each proposed
interpretation contained therein,
including potential alternative
approaches. Data and comment from
market participants and other interested
parties regarding the likely effect of each
proposed interpretation and potential
alternative approaches would be
particularly useful to the Commission in
evaluating modifications to the
proposals.
sroberts on DSK5SPTVN1PROD with PROPOSALS
B. Registration of Foreign SecurityBased Swap Markets
As noted above, in our SB SEF
Proposing Release, the Commission
expressed the view that the registration
requirement of Section 3D(a)(1) would
apply only to a facility that meets the
definition of ‘‘security-based swap
execution facility’’ in Section 3(a)(77) of
the Exchange Act.837 A ‘‘security-based
swap execution facility’’ is defined as ‘‘a
trading system or platform in which
multiple participants have the ability to
execute or trade security-based swaps
by accepting bids and offers made by
multiple participants in the facility or
market, the Commission intends that these terms
refer to a security-based swap market that is not a
U.S. person.
835 In the SB SEF Proposing Release, the
Commission contemplated that non-resident
persons may apply for registration as a SB SEF. In
this regard, the Commission proposed Rule 801(f)
of Regulation SB SEF, which would require any
non-resident person applying for registration as a
SB SEF to certify and provide an opinion of counsel
that it can, as a matter of law, provide the
Commission with prompt access to its books and
records and submit to onsite inspection and
examination by representatives of the Commission.
See SB SEF Proposing Release, 76 FR 11001.
836 Entities that do not meet the definition of SB
SEF may nonetheless be required to register in
another capacity under the Exchange Act.
837 See note 833 and accompanying text, supra.
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system, through any means of interstate
commerce, including any trading
facility, that (A) facilitates the execution
of security-based swaps between
persons and (B) is not a national
securities exchange.’’ 838
As outlined further below, the
Commission preliminarily believes that,
when evaluating whether a foreign
security-based swap market would have
to register under Section 3D(a)(1),
activities by the foreign security-based
swap market that provide U.S. persons,
or non-U.S. persons located in the
United States, the ability to directly
execute or trade security-based swaps
on the foreign security-based swap
market or facilitate the execution or
trading of security-based swaps by U.S.
persons, or non-U.S. persons located in
the United States, on the foreign
security-based swap market should be
considered.839 The Commission also
preliminarily believes that, if a foreign
security-based swap market takes
affirmative actions to induce the
execution or trading of security-based
swaps on its market by U.S. persons, or
non-U.S. persons located in the United
States, including by inducing such
execution or trading through marketing
its services relating to the ability to
execute or trade security-based swaps
on its market to U.S. persons, or nonU.S. persons located in the United
States, or otherwise initiating contact
with such persons for the purpose of
inducing such execution or trading,
then those activities could be viewed as
facilitating the execution or trading of
security-based swaps on its market and
could cause the foreign security-based
swap market to fall within the scope of
the registration requirements of Section
3D of the Exchange Act.
The Commission believes that it
would be useful to provide some
discussion of the types of activities that
it preliminarily believes would place a
foreign security-based swap market
within the scope of Section 3D of the
Exchange Act under the Commission’s
proposed interpretation. Given the
constant innovation of trading
mechanisms and methods, as well as
technological and communication
developments, however, it would not be
possible to provide a comprehensive,
final discussion of every activity for
which a foreign security-based swap
market would be considered to be
providing U.S. persons or non-U.S.
persons located in the United States the
ability to execute or trade security-based
838 15
U.S.C. 78c(a)(77).
id. Non-U.S. persons located in the United
States could include, for example, U.S. branches of
foreign entities.
839 See
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swaps, or to be facilitating the execution
or trading of security-based swaps, on
its market, thereby triggering the
requirement to register as a SB SEF
under Section 3D(a)(1).
The Commission preliminarily
believes that when a foreign securitybased swap market provides U.S.
persons, or non-U.S. persons located in
the United States, with the direct ability
to trade or execute security-based swaps
on the foreign security-based swap
market by accepting bids and offers
made by one or more participants on the
foreign security-based swap market,
then such market would be required to
register as a SB SEF. The Commission
notes that a foreign security-based swap
market could grant such direct access to
U.S. persons, and non-U.S. persons
located in the United States, through a
variety of means, such as (i) providing
proprietary electronic screens, market
terminals, monitors or other devices for
trading security-based swaps on its
market; (ii) granting direct electronic
access to the foreign security-based
swap market’s trading system or
network, including by providing data
feeds or codes for use with software
operated through the computer of a U.S.
person, or non-U.S. person located in
the United States, or by allowing such
persons to access the foreign securitybased swap market through third-party
service vendors or public networks
(such as the Internet); or (iii) allowing
its members or participants to provide
U.S. persons or non-U.S. persons
located in the United States with direct
electronic access to trading in securitybased swaps on the foreign securitybased swap market.
The Commission also preliminarily
believes that, if a foreign security-based
swap market were to grant membership
or participation in the foreign securitybased swap market to U.S. persons, or
non-U.S. persons located in the United
States, which would provide such
persons with the ability to directly
execute or trade security-based swaps
by accepting bids and offers made by
one or more participants on the foreign
security-based swap market, then such
market would be required to register as
a SB SEF.
Although the Commission
preliminarily believes that the foregoing
activities are the types of activities that
would warrant application of the
registration requirement of Section 3D,
the Commission emphasizes that these
activities are not intended to be an
exclusive or exhaustive discussion of all
the activities that could trigger the
registration requirements of Section 3D
by a foreign security-based swap market.
In addition, as trading and
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communication mechanisms and
methods evolve, other activities that aim
at providing U.S. persons, or non-U.S.
persons located in the United States, the
ability to directly execute or trade
security-based swaps by accepting bids
and offers made by multiple
participants on a foreign security-based
swap market, or that aim to facilitate the
execution or trading of security-based
swaps by U.S. persons or non-U.S.
persons located in the United States on
a trading platform or system operated by
a foreign security-based swap market,
could cause a foreign security-based
swap market to fall within the ambit of
the registration requirements of Section
3D.840
The Commission anticipates that
some U.S. persons or non-U.S. persons
located in the United States may choose
to transact on a foreign security-based
swap market on an indirect basis
through a non-U.S. person that is not
located in the United States and that is
a member or participant of a foreign
security-based swap market. The
Commission preliminarily believes that,
to the extent that the U.S. person, or
non-U.S. person located in the United
States, initiates the contact and the
foreign security-based swap market does
not attempt to solicit such business,
such a transaction would not on its own
warrant requiring the foreign securitybased swap market to register under
Section 3D of the Exchange Act.841
However, as discussed above, to the
extent that a foreign security-based
swap market initiates contacts with U.S.
persons or non-U.S. persons located in
the United States to induce or facilitate
the execution or trading of securitybased swaps by such persons on its
market, such activity would trigger the
requirement to register under Section
3D.842
The Commission also anticipates that,
given the global nature of the securitybased swap business, a foreign securitybased swap market could, at some point,
seek to enter into a business
combination with a registered SB SEF.
Under the Commission’s proposed
interpretation, such business
combination also could trigger the
registration requirements of Section 3D
of the Exchange Act for the foreign
security-based swap market, depending
on the nature and extent of integration
of the entities’ operations and activities.
In this regard, the Commission’s
experience in recent years with national
securities exchanges that have engaged
in cross-border combinations may be
illustrative for these purposes. Several
national securities exchanges in recent
years have entered into transactions to
combine under common ownership
with certain non-U.S. markets, such as
NYSE Group, Inc.’s transaction with
Euronext N.V. to form NYSE Euronext
in 2007; 843 Eurex Frankfurt AG’s
acquisition of the International
Securities Exchange, LLC in 2007; 844
and The Nasdaq Stock Market, Inc.’s
transaction with Borse Dubai Limited to
form NASDAQ OMX Group, Inc. in
2008.845 In each case, the U.S. and the
foreign markets, under their respective
parent companies, generally have
continued to operate as separate legal
entities, maintained separate liquidity
pools in their respective jurisdictions
without integrating trading interest
among markets under common
ownership, and continued to be
regulated subject to their own home
country’s requirements. Similarly, a
registered SB SEF and a foreign
security-based swap market could come
under common ownership but continue
to be separate legal entities, maintain
separate liquidity pools for their
security-based swap businesses without
integrating trading interest among
affiliated markets, and be separately
regulated in their own home
jurisdictions. However, if a registered
SB SEF and foreign security-based swap
market were to integrate their securitybased swap trading facilities, for
example, by the foreign security-based
swap market providing direct access to
the SB SEF’s participants, or by the
foreign security-based swap market and
the registered SB SEF integrating their
liquidity pools,846 under the
840 In the alternative, the foreign security-based
swap market could elect to apply for registration as
a national securities exchange. See 15 U.S.C. 78f.
841 The U.S. person or non-U.S. person located in
the United States may, however, be required to
register as a broker under Section 15(a)(1) of the
Exchange Act. See 15 U.S.C. 78o(a)(1).
842 For example, if a foreign security-based swap
market were to allow its members or participants
to provide U.S. persons, or non-U.S. persons
located in the United States with direct electronic
access to trading in security-based swaps on the
foreign security-based swap market, this access
would be considered direct access by a U.S. person,
or a non-U.S. person located in the United States
and, as noted above, would require the foreign
security-based swap market to register.
843 See Exchange Act Release No. 55293 (Feb. 14,
2007), 72 FR 8033 (Feb. 22, 2007).
844 See Exchange Act Release No. 56955 (Dec. 13,
2007), 72 FR 71979 (Dec. 19, 2007).
845 See Exchange Act Release No. 57099 (Jan. 4,
2008), 73 FR 1901 (Jan. 10, 2008).
846 An integrated trading pool for security-based
swaps would indicate that there is a unitary market
for the security-based swaps. In such a scenario,
persons with direct access to or membership in the
registered SB SEF effectively would have the same
direct access or membership privileges in the
foreign security-based swap market by virtue of
their access to the integrated trading pool, and thus
would have the ability to directly execute or trade
security-based swaps on the foreign security-based
swap market.
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Commission’s proposed interpretation,
such actions would trigger the
registration requirements of Section 3D
of the Exchange Act for the foreign
security-based swap market because the
market would then be operating a
facility for trading security-based swaps
within the United States.
C. Registration Exemption for Foreign
Security-Based Swap Markets
The prior section discusses when a
foreign security-based swap market
would be required to register as a SB
SEF under Section 3D of the Exchange
Act. The Commission recognizes,
however, that the security-based swap
market is global in nature and therefore
one or more foreign security-based swap
markets may seek relief from the
Commission to allow some of the
activities discussed above that would
trigger the SB SEF registration
requirement to continue without the
foreign security-based swap market
having to register as a SB SEF under
Section 3D of the Exchange Act.
Following the publication of the SB
SEF Proposing Release, the Commission
received comments from the public
expressing concerns about the
implications of the proposed rules and
the requirements of Section 3D of the
Exchange Act for foreign security-based
swap markets and the global markets for
security-based swaps generally.847
Several commenters urged the
Commission to work with foreign
regulators to develop harmonized rules
for the trading of security-based
swaps.848 Some commenters believed
that harmonization or flexibility with
regard to foreign security-based swap
markets would help reduce the risk of
regulatory arbitrage.849 One commenter
stated that such harmonization would
reduce the burdens of duplicative or
conflicting requirements that could be
faced by security-based swap markets
operating in multiple jurisdictions.850
Although a number of foreign
jurisdictions are in the process of
developing standards for the regulation
of security-based swaps and securitybased swap markets, at this time few
foreign jurisdictions have enacted
legislation or adopted standards for the
regulation of security-based swap
847 See, e.g., Thomson Letter at 3–4, Blackrock
Letter at 12–13, Bloomberg Letter at 6–7, ISDA/
SIFMA II Letter at 2, WMBAA Letter at 10–11,
Cleary Letter III at 4, and Cleary Letter IV at 5, 13.
848 See Thomson Letter, BlackRock Letter, ISDA/
SIFMA Letter II, and WMBAA Letter.
849 See Thomson Letter, Bloomberg Letter, and
WMBAA Letter.
850 See Bloomberg Letter.
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markets.851 The Commission, however,
is in discussions with its foreign
counterparts to explore steps toward
harmonizing standards for such
regulation in the future.852 In the
meantime, the Commission is
considering how best to address
commenters’ concerns about the risks of
regulatory arbitrage and duplicative
regulatory burdens on security-based
swap markets that operate on a crossborder basis, in a manner consistent
with the requirements of the DoddFrank Act and the federal securities
laws generally.
The Commission preliminarily
believes that it may be appropriate to
consider an exemption as an alternative
approach to SB SEF registration
depending on the nature or scope of the
foreign security-based swap market’s
activities in, or the nature or scope of
the contacts the foreign security-based
swap market has with, the United
States. Exemptions that are carefully
tailored to achieve the objectives of
Section 3D could help to improve
security-based swap market supervision
overall by allowing the Commission to
focus our resources on areas where it
has a substantial interest, while
reducing duplication of efforts in areas
where our interests are aligned with
those of other regulators.
The Commission could exempt from
the registration requirements of Section
3D a foreign security-based swap market
that is subject to comparable,
comprehensive supervision and
regulation under appropriate
governmental authorities in its home
country.853 The availability of such an
exemption could serve to reduce any
potential duplicative regulatory burdens
faced by security-based swap markets
that operate on a cross-border basis and
that otherwise would be required to
register both in the United States and in
a non-U.S. jurisdiction.
Before the Commission would
consider issuing an exemption from the
registration requirements of Section 3D
for a particular foreign security-based
swap market, the Commission could
consider whether the foreign securitybased swap market is subject to
851 See FSB Progress Report April 2013 at 1
(‘‘While progress has been made in moving [OTC
derivatives] markets towards centralized
infrastructure, less than half of the FSB member
jurisdictions currently have legislative and
regulatory frameworks in place to implement the
G20 commitments and there remains significant
scope for increases in trade reporting, central
clearing and exchange and electronic platform
trading in global OTC derivatives markets.’’).
852 See Section I.C, supra.
853 Any such exemption would be issued by order
pursuant to the Commission’s authority under
Section 36 of the Exchange Act. 15 U.S.C. 78mm.
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comparable, comprehensive supervision
and regulation by the appropriate
governmental authorities in its home
country, as compared to the supervision
and regulation of SB SEFs under the
Dodd-Frank Act and the Commission’s
implementing regulations. This process
could include a review of the foreign
jurisdiction’s laws, rules, regulatory
standards and practices governing the
foreign security-based swap market and
would entail consultation and
cooperation with the foreign securitybased swap market’s home country
governmental authorities.
The Commission expects that any
such registration exemption could be
subject to appropriate conditions that
could include, but not be limited to,
requiring a foreign security-based swap
market to certify that it would provide
the Commission with prompt access to
its books and records, including, for
example, data relating to orders, quotes,
and transactions, as well as provide an
opinion of counsel that, as a matter of
law, it is able to provide such access.
The Commission also could require, as
a condition to receiving an exemption
from registration, that a foreign securitybased swap market would appoint an
agent for service of process in the
United States who is not an employee
or official of the Commission. These
potential conditions would be
consistent with the proposed
requirements for non-resident registered
SB SEFs 854 and would allow the
Commission to exercise, as necessary or
appropriate, supervisory oversight of a
foreign security-based swap market that
receives an exemption from Section
3D’s registration requirements. The
Commission also could require that,
before issuing an exemption from
registration, the Commission and the
appropriate financial regulatory
authority or authorities in the foreign
security-based swap market’s home
jurisdiction enter into a MOU that
addresses the oversight and supervision
of that market.
In certain cases, the Commission also
could require, as a condition to granting
such an exemption, that a foreign
security-based swap market meet some
of the requirements applicable to
registered SB SEFs. Such a condition
may be useful where the Commission is
unable to make a determination
regarding the broader comparability of
the home jurisdiction’s regulation and
supervision, but where there is
comparability with respect to some of
the requirements applicable to
registered SB SEFs and to a foreign
854 See SB SEF Proposing Release, 76 FR 11001,
proposed Rule 801(f), and proposed Form SB SEF.
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security-based swap market (or class of
security-based swap markets) in its
home country. Therefore, the terms and
conditions of any exemption that the
Commission may grant to a foreign
security-based swap market (or class of
security-based swap markets) could
depend on the degree to which the
foreign jurisdiction’s laws, rules,
regulatory standards, and practices
governing security-based swaps
‘‘compare’’ to those of the United States.
In considering the above, the
Commission may consider any
requirements of the home country that
would conflict with the requirements
applicable to SB SEFs under the DoddFrank Act. For example, Section 3D of
the Exchange Act seeks to ensure fair
and open access to SB SEFs by requiring
that a SB SEF establish and enforce
rules that include means to provide
market participants with impartial
access to the market.855 The
Commission also could consider
whether a home country regulator
imposes a regulation or policy limiting
fair and open access to its securitybased swap markets.
The Commission notes that securitybased swap market structure and
security-based swap market supervision
and regulation could vary in other
jurisdictions and could affect the
Commission’s ability to make a
comparability determination. In
addition, such differences in
supervision and regulation would
necessitate that each exemption request
be reviewed on a jurisdiction-byjurisdiction basis by the Commission.
The conditions to any such exemption
also would be based on the differences
in the market structure and supervisory
regime in the jurisdiction under
consideration in comparison to U.S.
oversight of SB SEFs.
As noted above, few foreign
jurisdictions have adopted a
comprehensive framework for the
regulation of security-based swap
markets and the Commission has not yet
adopted rules governing SB SEFs. Thus,
the Commission believes that it is
premature to specify the precise criteria
that the Commission may use for our
evaluation and comparison of the
regulatory and supervision programs for
foreign security-based swap markets,
should the Commission choose to
consider exempting from registration as
a SB SEF a foreign security-based swap
market that becomes subject to
regulation in its home country at a
future date. Nonetheless, the
Commission believes that it is useful
now to elicit comment from interested
855 15
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persons regarding our proposed
approach, should it choose to consider
providing such an exemption.
The Commission preliminarily
believes that the proposed approach,
which may condition any exemption for
a foreign security-based swap market on
the existence of comparable,
comprehensive supervision and
regulation under the appropriate
financial regulatory authority or
authorities in the foreign security-based
swap market’s home country, should
provide comparable regulatory oversight
and supervision as that afforded by the
Commission’s regulation and
supervision of SB SEFs. The standard of
‘‘comparability’’ discussed above should
allow the Commission sufficient
flexibility to make exemption
determinations based on the similarity
of the requirements and practices of the
foreign jurisdiction’s regulatory program
governing security-based swaps. In this
regard, the Commission preliminarily
believes that the comparability standard
could extend not only to the written
laws and rules of the foreign
jurisdiction, but also to the
jurisdiction’s comprehensive
supervision and regulation of its
security-based swap markets, including
the jurisdiction’s oversight of its
markets and enforcement of its laws and
rules. The breadth of the proposed
comparability standard (i.e., to consider
actual practices as well as written laws
and rules) could help ensure that the
regulatory protections provided in the
foreign jurisdiction’s security-based
swap markets are substantially realized
by sufficiently vigorous supervision and
enforcement.
Finally, as discussed below,856 the
Commission proposes to permit
substituted compliance, under certain
circumstances, with respect to the
mandatory trade execution requirement
in Section 3C(h)(1) of the Exchange Act,
if the Commission finds that a foreignbased security-based swap market (or
class of security-based swap markets) is
subject to comparable, comprehensive
supervision and regulation by a foreign
financial regulatory authority in such
foreign jurisdiction.857 While the
proposed comparability standard for our
granting an exemption from SB SEF
registration could be similar to the
proposed comparability standard for a
substituted compliance determination
with respect to the mandatory trade
execution requirement, which is
discussed below, the factors that the
Commission could find relevant to a
856 See
857 See
Section XI.F, infra.
proposed Rule 3Ch–2 under the Exchange
Act.
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whether those activities would trigger
Section 3D registration requirements? If
so, please describe those activities in
detail. Are there specific items set forth
in the non-exhaustive discussion of the
types of activities noted above or any
other specific activities engaged in by
foreign security-based swap markets
that should not trigger Section 3D
registration requirements? If so,
commenters should describe those
activities in detail and explain their
rationale. Does the proposed
interpretation regarding the application
of Section 3D and the proposed nonexhaustive discussion of the types of
activities provide sufficient guidance for
a foreign security-based swap market to
assess whether it would have to register,
or seek an exemption from registration,
Request for Comment
as a SB SEF? If not, what kind of further
The Commission generally requests
guidance would be helpful for making
comment on the discussion regarding
that determination? Does the proposed
SB SEFs, including the following:
approach provide sufficient guidance to
• The Commission requests comment a foreign security-based swap market
on all aspects of our discussion
that may seek an exemption? If not,
regarding when a foreign security-based what kind of further guidance would be
swap market would be required to
helpful?
register as a SB SEF under Section 3D
• The Commission seeks comment on
and on the non-exhaustive discussion of the appropriateness of the proposed
the types of activities, noted above, that interpretation that the registration
would trigger registration of the foreign
requirements of Section 3D should be
security-based swap market as a SB SEF. triggered by certain activities directed at
The Commission also requests comment ‘‘U.S. persons, or non-U.S. persons
on all aspects of our proposal to
located in the United States.’’ Are the
consider requests for an exemption from categories of persons captured by this
SB SEF registration for a foreign
proposed approach too broad? Too
security-based swap market under
narrow? Please specify and explain. For
certain circumstances.
example, foreign branches would be
• The Commission seeks commenters’ included by the proposed approach,
views on the potential impact of
such that a foreign security-based swap
applying the proposed SB SEF
market’s provision of direct access or
registration requirements to foreign
participation in its market to a foreign
security-based swap markets that engage branch, or activities facilitating
in activities that would require such
execution or trading of security-based
markets to register as a SB SEF. Are
swaps on its market by such a foreign
there aspects of the proposed SB SEF
branch, would trigger the Section 3D
rules and registration requirements that
registration requirement. Do
present issues for foreign security-based commenters agree with this approach? If
swap markets that would be required to not, why not? What would be a better
approach? If so, how so?
register as a SB SEF? If so, please
• The Commission requests comment
explain in detail.
on what would be the appropriate
• The Commission requests
commenters’ views on whether the non- circumstances under which the
Commission should consider granting
exhaustive discussion of the types of
an exemption from the registration
activities, noted above, which would
requirements of Section 3D. Should the
trigger the application of Section 3D
Commission consider granting an
registration requirements to a foreign
exemption from registration for a foreign
security-based swap market, is
appropriate to aid foreign security-based security-based swap market when the
swap markets in assessing whether they nature or scope of its activities in the
United States are limited? If so, why? Or
would be required to register as a SB
should the Commission also consider
SEF. Are there other activities that
granting an exemption for a foreign
foreign security-based swap markets
security-based swap market when the
currently engage in that should be
nature or scope of its activities in the
evaluated for consideration as to
United States are more extensive? Why
858 See 15 U.S.C. 78c–4.
or why not? What would be the
859 See 15 U.S.C. 78c–3(h)(1).
advantages and disadvantages of either
comparability determination with
respect to SB SEF registration would not
necessarily be the same factors that it
would consider when making a
comparability determination with
respect to mandatory trade execution.
This is because Section 3D of the
Exchange Act is focused on the
registration of SB SEFs and compliance
by registered SB SEFs with the 14
enumerated core principles governing
SB SEFs,858 whereas Section 3C(h)(1) of
the Exchange Act is focused on the
circumstances where execution of a
security-based swap on a SB SEF (or an
exchange) is required.859 However, the
Commission solicits comment on the
appropriateness or feasibility of our
proposed approach.
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approach? What would be the
appropriate criteria for the Commission
to apply when it considers whether to
grant an exemption from the registration
requirements of Section 3D? Please
specify and explain.
• The Commission seeks comment on
whether the proposed standard of
comparability is an appropriate
standard for the Commission to
determine whether to grant an
exemption from Section 3D’s
registration requirements for a foreign
security-based swap market. Should a
different standard be used? If so, what
should be the standard and why?
Should it be stricter or more lenient
than the proposed standard? If it should
be stricter or more lenient, in what
respects and in what manner? Why or
why not? As proposed, when making a
comparability determination, the
Commission would look not just at the
rules of a foreign jurisdiction, but also
at the comprehensiveness of the
supervision and regulation by the
appropriate governmental authorities of
that jurisdiction. Is the Commission’s
holistic approach to making a
comparability determination
appropriate? Why or why not? Comment
also is requested regarding whether the
Commission should put in place a more
detailed standard for granting an
exemption, for example, by providing
specific criteria that the Commission
would look to in determining whether
there is comparable, comprehensive
regulation and supervision of a foreign
security-based swap market by the
appropriate financial regulatory
authority or authorities in the home
country. If so, what criteria should the
Commission include and why?
Commenters also are requested to
explain how the Commission should
develop such criteria in the absence of
existing regulations in other
jurisdictions at the present time. Are
there specific procedures or
comparability considerations that
commenters believe that the
Commission would find useful to
incorporate in our proposed exemption
approach at this time? If so, please
describe. What would be the advantages
of adopting such measures now? What
would be the disadvantages of adopting
such measures now?
• The Commission solicits comment
on the appropriateness or feasibility of
distinguishing between the
comparability determination for
purposes of an exemption from
registration as a SB SEF and for
purposes of substituted compliance for
the mandatory trade execution
requirement. Should the Commission
consider the same factors in making a
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comparability determination for
mandatory trade execution and a
comparability determination for SB SEF
registration? If so, what factors would be
relevant and appropriate to both
determinations? Please describe. What
factors, if any, would only be relevant
or appropriate to a comparability
determination for SB SEF registration or
a comparability determination for
mandatory trade execution,
respectively? Please describe.
• The Commission seeks comment on
the proposed process for granting an
exemption from Section 3D’s
registration requirements for a foreign
security-based swap market. Is the
process explained in a sufficiently clear
manner? Does the process provide
foreign security-based swap markets
with an efficient method for obtaining
exemptions? If not, what aspects of the
process would be burdensome for
foreign security-based swap markets?
Are there other ways to streamline the
exemption process? Please describe.
• What would be the market impact
of the proposed approach to the
registration of foreign security-based
swap markets? How would the proposed
application of the SB SEF registration
requirement affect the competitiveness
of U.S. entities in the global marketplace
(both in the United States as well as in
foreign jurisdictions)? Would the
proposed approach place any market
participants at a competitive
disadvantage or advantage? If so, please
explain. Would the proposed approach
be a more general burden on
competition? If so, please explain. What
other measures should the Commission
consider to implement the proposed
approach to the registration of foreign
security-based swap markets? What
would be the market impacts and
competitiveness effects of alternatives to
the proposed approach discussed in this
release?
VIII. Regulation SBSR—Regulatory
Reporting and Public Dissemination of
Security-Based Swap Information
A. Background
Section 13A(a)(1) of the Exchange
Act 860 provides that all security-based
swaps that are not accepted for clearing
shall be subject to regulatory reporting.
Section 13(m)(1)(G) of the Exchange
Act 861 provides that each security-based
swap (whether cleared or uncleared)
shall be reported to a registered SDR,
and Section 13(m)(1)(C) of the Exchange
Act 862 generally provides that
transaction, volume, and pricing data of
860 15
U.S.C. 78m–1(a)(1).
U.S.C. 78m(m)(1)(G).
862 15 U.S.C. 78m(m)(1)(C).
861 15
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all security-based swaps shall be
publicly disseminated in real time,
except in the case of block trades.863 On
November 19, 2010, the Commission
proposed Regulation SBSR to
implement these requirements.864
Rule 908 of Regulation SBSR as
initially proposed was designed to
clarify the application of Regulation
SBSR to cross-border security-based
swaps. Proposed Rule 908(a) would
require a security-based swap to be
reported and publicly disseminated if
the security-based swap: (i) Has at least
one counterparty that is a U.S. person;
(ii) was executed in the United States or
through any means of interstate
commerce; or (iii) was cleared through
a registered clearing agency having its
principal place of business in the
United States. Proposed Rule 908(b)
provided that, notwithstanding any
other provision of Regulation SBSR, no
counterparty to a security-based swap
would incur any obligation under
Regulation SBSR unless it is: (i) A U.S.
person; (ii) a counterparty to a securitybased swap executed in the United
States or through any means of
interstate commerce; or (iii) a
counterparty to a security-based swap
cleared through a clearing agency
having its principal place of business in
the United States. Thus, under the
Commission’s initial proposal, a
security-based swap—wherever it is
executed or cleared—would be required
to be reported pursuant to Regulation
SBSR if at least one counterparty were
a U.S. person. Furthermore, a securitybased swap—even if both counterparties
were non-U.S. persons—would be
required to be reported if the securitybased swap were executed in the United
States or through any means of
interstate commerce, or cleared through
a clearing agency having its principal
place of business in the United States.
Rule 901(a)(1), as initially proposed,
also provided that, where only one
counterparty to a security-based swap is
a U.S. person, the U.S. person would be
the ‘‘reporting party’’ (i.e., the party that
incurs the duty to report the securitybased swap pursuant to Regulation
SBSR). Rule 901(a)(3), as initially
proposed, provided that, where neither
863 Section 13(m)(1)(E) of the Exchange Act, 15
U.S.C. 78(m)(1)(E), provides that, with respect to
cleared security-based swaps, the rule promulgated
by the Commission related to public dissemination
shall contain provisions that ‘‘specify the criteria
for determining what constitutes a large notional
security-based swap transaction (block trade) for
particular market and contracts’’ and ‘‘specify the
appropriate time delay for reporting large notional
security-based swap transactions (block trades) to
the public.’’
864 See Regulation SBSR Proposing Release, 75 FR
75208.
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counterparty to a security-based swap
that must be reported is a U.S. person,
the counterparties must select which of
them would be the reporting party.
To date, the Commission has received
48 comment letters specifically in
response to proposed Regulation SBSR,
many of which raised issues relating to
the cross-border aspects of the proposal.
The Commission has received other
letters that, while not specifically
referencing proposed Regulation SBSR,
raised cross-border issues that are
germane to proposed Regulation
SBSR.865 In response to these
comments—which are described further
herein—and upon further consideration
of issues related to cross-border
security-based swap transactions across
all of the various areas of Title VII, the
Commission is proposing various
modifications to proposed Regulation
SBSR, particularly Rule 908 thereof,
which address cross-border
transactions.
One significant modification being
proposed here would take into account
situations in which a U.S. person,
although not a ‘‘direct counterparty,’’ as
defined below, to a security-based swap,
guarantees the performance of one of the
direct counterparties. As discussed
above,866 the Commission is proposing
to apply various Title VII provisions to
the security-based swap transactions of
non-U.S. persons that are guaranteed by
U.S. persons—including the regulatory
reporting and public dissemination
requirements of Regulation SBSR, as
discussed below.867 A second
significant modification is to propose a
‘‘substituted compliance’’ regime. As
explained in more detail below, the
Commission is now proposing a
framework that would allow certain
Title VII requirements to be satisfied by
compliance with the rules of a foreign
jurisdiction rather than the specific
requirements under U.S. rules. Below,
the Commission describes the
circumstances under which compliance
with the rules of such a foreign
jurisdiction could, under re-proposed
Regulation SBSR, be ‘‘substituted’’ for
compliance with the specific regulatory
reporting and public dissemination
requirements of Regulation SBSR.868
A number of new definitions are
being added to re-proposed Rule 900 in
light of the changes being proposed.869
865 All
such letters are cited in Appendix D.
Section II.B.2(d), supra.
867 See Sections VIII.C and VIII.D, infra.
868 See Section XI.D, infra.
869 In some cases, a definition used in Rule 900
would cross-reference a term defined elsewhere in
the Commission’s Title VII rules. In other cases, a
definition might be specific to Regulation SBSR and
866 See
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For example, new paragraph (g) of Rule
900 would define the term
‘‘counterparty’’ to mean ‘‘a person that
is a direct counterparty or indirect
counterparty of a security-based swap.’’
A direct counterparty would be ‘‘a
person that enters directly with another
person into a contract that constitutes a
security-based swap.’’ An indirect
counterparty would be ‘‘a person that
guarantees the performance of a direct
counterparty to a security-based swap or
that otherwise provides recourse to the
other side for the failure of the direct
counterparty to perform any obligation
under the security-based swap.’’
Although a guarantor is not a direct
counterparty to the security-based swap,
the duties to be performed under the
security-based swap, and thus the risks
associated with the security-based swap,
ultimately fall to the guarantor.870
Therefore, the Commission
preliminarily believes that it is
appropriate to deem a guarantor to be a
counterparty to the security-based swap
for purposes of the regulatory reporting
requirements of Title VII and the rules
proposed thereunder. As discussed in
detail below, the concept of ‘‘reporting
party’’ used in Regulation SBSR as
initially proposed would be replaced by
the newly proposed term ‘‘reporting
side,’’ to reflect the fact that reporting
obligations could attach to both direct
and indirect counterparties.871
The Commission has received and
continues to consider comments on the
Regulation SBSR Proposing Release that
address areas other than those relating
to cross-border security-based swap
activity. In this release, the Commission
is re-proposing only changes relating to
cross-border security-based swap
activity, technical and conforming
changes necessitated by these larger
revisions, and certain other minor
changes that would help to clarify these
re-proposed revisions (such as
numbering each definition in reproposed Rule 900, so that each defined
term can more readily be identified).
Changes to Regulation SBSR in other
not be used elsewhere in the Commission’s Title VII
rules.
870 See Section II.B.2(d), supra.
871 Re-proposed Rule 900(ee) would define ‘‘side’’
as ‘‘a direct counterparty and any indirect
counterparty that guarantees the direct
counterparty’s performance of any obligation under
a security-based swap.’’ Re-proposed Rule 900(cc)
would define ‘‘reporting side’’ as ‘‘the side of a
security-based swap having the duty to report
information in accordance with [Regulation SBSR]
to a security-based swap data repository, or if there
is no security-based swap data repository that
would receive the information, to the Commission.’’
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31059
areas could, if appropriate, be addressed
in a future release.872
Regulation SBSR, as re-proposed
today, represents the Commission’s
preliminary views regarding the
application of Title VII’s provisions
relating to regulatory reporting and
public dissemination of cross-border
security-based swap transactions, and
how those provisions would apply to
non-U.S. persons who act in capacities
regulated under the Dodd-Frank Act.
The Commission invites comment
regarding all aspects of the approaches
taken by the Commission and each
provision of re-proposed Regulation
SBSR, including potential alternative
approaches. In particular, data and
comment from market participants and
other interested parties regarding the
likely effect of each re-proposed rule
regarding application of a specific Title
VII requirement, the effect of such
proposed application in the aggregate,
and potential alternative approaches
will be particularly useful to the
Commission in evaluating possible
modifications to re-proposed Regulation
SBSR.
B. Modifications to the Definition of
‘‘U.S. Person’’
Rule 900 of re-proposed Regulation
SBSR contains a revised definition of
‘‘U.S. person.’’ As initially proposed,
‘‘U.S. person’’ was defined as ‘‘a natural
person that is a U.S. citizen or U.S.
resident or a legal person that is
organized under the corporate laws of
any part of the United States or has its
principal place of business in the
United States.’’ Two persons who
commented specifically on the
Regulation SBSR proposal 873 argued
that ‘‘U.S. person’’ as used in the
Commission’s Title VII rules should
have the same definition as in
Regulation S.874
Proposed Regulation SBSR was the
only one of the Commission’s proposals
for implementing Title VII to propose to
use and define the term ‘‘U.S. person.’’
Because the Commission is now
addressing cross-border issues across
multiple Title VII rules, the Commission
has given further thought to the
definition of ‘‘U.S. person’’ as initially
872 For example, the Commission in the
Regulation SBSR Proposing Release did not propose
how to define a ‘‘block trade.’’ As noted in
Regulation SBSR Proposing Release, the
Commission intends to do so in a separate proposal.
See Regulation SBSR Proposing Release, 75 FR
75228.
873 See Cleary Letter III at 2, 6–9; Davis Polk
Letter I at note 6 (arguing that using the existing
Regulation S definition, rather than creating a new
definition, ‘‘would avoid confusion and also
provide consistency of application’’).
874 17 CFR 230.901 to 230.905.
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proposed in Regulation SBSR. The
Commission now believes that using a
single definition of ‘‘U.S. person’’ in all
Title VII rulemaking would promote
consistency and transparency in
understanding and complying with
these various rules. However, as
described above,875 the Commission
preliminarily believes that the
Regulation S definition of ‘‘U.S. person’’
is not appropriate for Title VII rules.
Proposed Rule 900(pp) would define
‘‘U.S. person’’ to have the same meaning
as in proposed Rule 3a71–3(a)(7) under
the Exchange Act.876
Under both the proposed and reproposed definitions of ‘‘U.S. person,’’ a
natural person resident in the United
States would be a U.S. person, as would
a legal person that is organized or
incorporated under the laws of the
United States or having its principal
place of business in the United States.
Furthermore, under both definitions, a
foreign branch of a U.S. person would
not be recognized as having an existence
separate from the U.S. person.877 The
proposed rule also would cover
partnerships, trusts, and other legal
persons, as set forth in proposed Rule
3a71–3(a)(7) under the Exchange Act.
The re-proposed definition of ‘‘U.S.
person’’ also would clarify certain
situations that were not specifically
addressed in the initial proposal. For
example, the initially proposed
definition of ‘‘U.S. person’’ did not
address whether—and, if so, when—an
account would be considered a U.S.
person. The re-proposed definition
would provide that an account, whether
discretionary or non-discretionary, of a
U.S. person would be a U.S. person.
New paragraph (q) of re-proposed
Rule 900 would define the term ‘‘nonU.S. person’’ as a person that is not a
U.S. person.
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Request for Comment
The Commission requests comment
on all aspects of the re-proposed
definition of ‘‘U.S. person’’ in
Regulation SBSR. In particular:
• Should the definition of ‘‘U.S.
person’’ in Regulation SBSR be
consistent with that proposed for the
Commission’s other Title VII rules? Why
or why not? If so, what should that
definition be and why? Would having a
875 See
Section III.B.10, supra.
Section III.B.5, supra.
877 See Regulation SBSR Proposing Release, 75 FR
75240 (‘‘The Commission intends for this proposed
definition [of U.S. person] to include branches and
offices of U.S. persons’’). See also Section
III.B.5(b)ii, supra (proposing that an entity’s status
as a U.S. person would be determined at the legalentity level and thus apply to the entire legal entity,
including any foreign operations such as branches
that are part of the U.S. legal entity).
876 See
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different definition of ‘‘U.S. person’’ in
Regulation SBSR create ambiguity or
conflict with other Title VII rules being
issued by the Commission? If not, why
not?
C. Additional Modifications to Scope of
Regulation SBSR
1. Revisions to Proposed Rule 908(a)
Rule 908(a), as initially proposed,
provided that a security-based swap
would be subject to regulatory reporting
and public dissemination under
Regulation SBSR if the security-based
swap: (i) Has at least one counterparty
that is a U.S. person; (ii) is executed in
the United States or through any means
of interstate commerce; or (iii) is cleared
through a registered clearing agency
having its principal place of business in
the United States. Thus, Rule 908(a), as
originally proposed, would not impose
reporting or public dissemination
requirements in connection with a
security-based swap solely because the
obligations of one of the direct
counterparties is guaranteed by a U.S.
person. As noted above, the re-proposed
definition of ‘‘U.S. person’’—like the
initially proposed definition—would
not treat a direct counterparty that is
guaranteed by a U.S. person as itself,
solely due to the existence of the
guarantee, a U.S. person. However, as
noted below, the Commission is
concerned about instances where—
because of a guarantee extended by a
U.S. person—the risk of a transaction
resides in the United States, even if the
direct counterparties of the transaction
are domiciled outside the United States.
Thus, upon further consideration, the
Commission is now proposing to apply
Title VII’s regulatory reporting
requirements to security-based swaps
having at least one counterparty,
whether direct or indirect, that is a U.S.
person.
Guarantees provided by U.S. persons
to their foreign affiliates or other nonU.S. persons could have the effect of
concentrating significant risks within
the United States that may rise to the
systemic level. If a U.S. person
guarantees the performance of a nonU.S. person, the financial resources of
that U.S. person could be called upon to
satisfy the contract. This activity is
capable of posing risks to the stability of
the U.S. financial system. The
Commission preliminarily believes that,
if it does not require regulatory
reporting of security-based swaps that
are guaranteed by U.S. persons, in
addition to security-based swaps having
a U.S. person direct counterparty, the
Commission and other federal financial
regulators would be less likely to detect
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the build-up of potentially significant
risks within individual institutions or
more widespread systemic risks to the
U.S. financial system. The Dodd-Frank
Act is intended to promote the financial
stability of the United States by, among
other things, reducing risks to the U.S.
financial system by allowing regulators
better access to necessary market
data.878
In addition, the Commission is now
proposing to require regulatory
reporting of all security-based swaps
entered into by non-U.S. person
security-based swap dealers and major
security-based swaps participants,
wherever they may be executed.879 This
is a change from how the initial
proposal applied to a security-based
swap executed by a non-U.S. person
security-based swap dealer or major
security-based swap participant. Under
the initial proposal, such a securitybased swap would not be required to be
reported solely based on an entity’s
status as a security-based swap dealer or
major security-based swap participant,
unless the security-based swap was
executed in the United States or through
any means of interstate commerce, or
was cleared by a clearing agency having
its principal place of business in the
United States.
A non-U.S. person security-based
swap dealer or major security-based
swap participant generally would be
subject to all rules applicable to
security-based swap dealers or major
security-based swaps participants,
regardless of its principal place of
business or where it is organized.880
Having access to all of the securitybased swap transactions entered into by
a security-based swap dealer or major
security-based swap participant is an
important aspect of understanding its
compliance with the applicable Title VII
requirements, including without
limitation, compliance with the capital,
margin, and other applicable entitylevel and transaction-level
requirements. The Commission notes
that Section 15F(f)(1)(a) of the Exchange
Act provides that each registered
security-based swap dealer and major
878 See, e.g., S. Comm. on Banking, Hous., &
Urban Affairs, The Restoring American Financial
Stability Act of 2010, S. Rep. No. 111–176, at 32
(‘‘As a key element of reducing systemic risk and
protecting taxpayers in the future, protections must
include comprehensive regulation and rules for
how the OTC derivatives market operates.
Increasing the use of central clearinghouses,
exchanges, appropriate margining, capital
requirements, and reporting will provide safeguards
for American taxpayers and the financial system as
a whole’’) (emphasis added); note 4, supra.
879 See re-proposed Rule 908(a)(1)(iii) of
Regulation SBSR.
880 See Sections III.C and IV.D, supra.
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security-based swap participant shall
make such reports as are required by the
Commission, by rule or regulation,
regarding the transactions and financial
condition of the registered securitybased swap dealer or major securitybased swap participant.881 Therefore,
the Commission is now proposing to
require that all security-based swaps of
all security-based swap dealers and
major security-based swap participants,
regardless of where such security-based
swaps are executed or where these
entities have their principal place of
business or are organized, be subject to
regulatory reporting to a registered
SDR.882
To reflect these changes and to
reincorporate other provisions that are
not being substantially revised, the
Commission is re-proposing Rule 908(a)
as follows. The rule would be divided
into two subparagraphs, (1) and (2),
which would address regulatory
reporting and public dissemination,
respectively. Specifically, re-proposed
Rule 908(a)(1) would provide that a
security-based swap transaction would
be subject to regulatory reporting if:
(i) The security-based swap is a
transaction conducted within the
United States;
(ii) There is a direct or indirect
counterparty that is a U.S. person on
either side of the transaction;
(iii) There is a direct or indirect
counterparty that is a security-based
swap dealer or major security-based
swap participant on either side of the
transaction; or
(iv) The security-based swap is
cleared through a clearing agency
having its principal place of business in
the United States.
Re-proposed Rule 908(a)(1)(i) would
preserve the principle from the original
proposal that a security-based swap
would be subject to regulatory reporting
if it is executed in the United States.883
As noted above,884 the concept of a
security-based swap transaction being
solicited, negotiated, executed, or
booked in the United States has been
881 15 U.S.C. 78o–8(f)(1)(A). The Commission
further notes that Section 15F(f)(2) of the Exchange
Act, 15 U.S.C. 78o–8(f)(2), requires the Commission
to ‘‘adopt rules governing reporting and
recordkeeping for security-based swap dealers and
major security-based swap participants.’’
882 As discussed below, however, the Commission
is proposing that certain security-based swaps of
non-U.S. person security-based swap dealers and
major security-based swap participants would not
be subject to public dissemination. In addition,
certain security-based swaps that would otherwise
be subject to regulatory reporting and public
dissemination under Regulation SBSR could qualify
for substituted compliance. See Section XI.D, infra.
883 See Rule 908(a)(2) of Regulation SBSR, as
originally proposed.
884 See Section III.B.6, supra.
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integrated into the new term
‘‘transaction conducted within the
United States,’’ which also is being used
in other Title VII proposals of the
Commission. Proposed Rule 3a71–
3(a)(5) under the Exchange Act would
define ‘‘transaction conducted within
the United States’’ as ‘‘a security-based
swap transaction that is solicited,
negotiated, executed, or booked within
the United States, by or on behalf of
either counterparty to the transaction,
regardless of the location, domicile, or
residence status of either counterparty
to the transaction.’’ 885
The Commission received no
comments that specifically addressed
our use of the phrase ‘‘through any
means of interstate commerce’’ in three
places in Regulation SBSR, as initially
proposed.886 However, upon further
consideration, the Commission is
concerned that this language could
unduly require a security-based swap to
be reported if it had only the slightest
connection with the United States.
Therefore, the Commission has decided
to delete the phrase ‘‘through any means
of interstate commerce’’ from reproposed Regulation SBSR. Instead, the
Commission is proposing to require
reporting of a security-based swap that
falls within the definition of
‘‘transaction conducted within the
United States,’’ which would describe
more precisely the nature of the
activities in the United States that could
result in a security-based swap
becoming subject to Regulation SBSR.
The Commission generally believes that
security-based swaps that are solicited,
negotiated, executed, or booked within
the United States—by or on behalf of
either counterparty to the transaction,
and regardless of the location, domicile,
or residence status of either
counterparty to the transaction—
generally should be subject to
Regulation SBSR.
Re-proposed Rule 908(a)(1)(ii)—
which would require regulatory
reporting of any security-based swap if
there is a direct or indirect counterparty
that is a U.S. person on either side of the
transaction—embodies the principle in
the initial proposal that a security-based
swap, wherever executed, must be
reported if it has at least one
counterparty that is a U.S. person. This
revised prong, however, also would
apply the reporting requirement to any
security-based swap, wherever
885 See
note 308, supra (explaining that the word
‘‘counterparty’’ as used within this term has the
same meaning as ‘‘direct counterparty’’ in reproposed Rule 900(j) of Regulation SBSR).
886 See Rules 900 (definition of ‘‘participant’’),
908(a), and 908(b) of Regulation SBSR, as initially
proposed.
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31061
executed, that has at least one indirect
counterparty 887 that is a U.S. person,
even when no direct counterparty is a
U.S. person. The original proposal,
because it did not include guarantors as
counterparties, would not have required
regulatory reporting in such case. As
discussed above, the Commission now
preliminarily believes that—to satisfy
Congressional intent that security-based
swaps be subject to regulatory reporting,
thereby informing the Commission and
other financial regulators of potential
systemic risks—any security-based swap
having at least one direct counterparty
that is a U.S. person should be reported.
The Commission also preliminarily
believes that, because guarantees
extended by U.S. persons create risk to
the U.S. financial system, regulatory
reporting of security-based swaps
should extend to any security-based
swap transaction in which one or both
direct counterparties is guaranteed by a
U.S. person. In the absence of regulatory
reporting of such security-based swaps,
the Commission’s ability to detect and
analyze potentially significant sources
of risk to the U.S. financial system could
be limited.
Re-proposed Rule 908(a)(1)(iii) would,
for reasons described above, require
regulatory reporting of any securitybased swap executed by a securitybased swap dealer or major securitybased swap participant, regardless of the
entity’s place of domicile and regardless
of the place of execution.
Re-proposed Rule 908(a)(1)(iv) would
preserve the principle from the original
proposal that a security-based swap
would be subject to regulatory reporting
if it is cleared through a clearing agency
having its principal place of business in
the United States.888 As noted in the
Regulation SBSR Proposing Release, the
Commission preliminarily believes that,
if a security-based swap is cleared by a
clearing agency having its principal
place of business in the United States,
U.S. regulators should have access to
information regarding the security-based
swap through a registered SDR.889 This
approach is premised on the view that,
when a security-based swap is cleared
through a clearing agency, the initial
transaction is novated and two new
transactions take its place, with the
clearing agency becoming the seller to
the buyer and the buyer to the seller. If
the clearing agency is located within the
887 ‘‘Indirect counterparty’’ would be defined as
‘‘a guarantor of a direct counterparty’s performance
of any obligation under a security-based swap.’’ See
re-proposed Rule 900(o) of Regulation SBSR.
888 See Rule 908(a)(3) of Regulation SBSR, as
originally proposed.
889 See Regulation SBSR Proposing Release, 75 FR
75240.
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United States, the new transactions
necessarily would be executed within
the United States.890
While subparagraph (1) of reproposed Rule 908(a) would address
when a security-based swap would be
subject to regulatory reporting,
subparagraph (2) would address when a
security-based swap would be subject to
public dissemination. Re-proposed Rule
908(a)(2) would provide that a securitybased swap shall be subject to public
dissemination if:
(i) The security-based swap is a
transaction conducted within the
United States;
(ii) There is a direct or indirect
counterparty that is a U.S. person on
each side of the transaction;
(iii) At least one direct counterparty is
a U.S. person (except in the case of a
transaction conducted through a foreign
branch 891);
(iv) One side includes a U.S. person
and the other side includes a non-U.S.
person that is a security-based swap
dealer; or
(v) The security-based swap is cleared
through a clearing agency having its
principal place of business in the
United States.
The Commission notes that Section
13(m)(1)(B) of the Exchange Act 892
‘‘authorize[s] the Commission to make
security-based swap transaction and
pricing data available to the public in
such form and at such times as the
Commission determines appropriate to
enhance price discovery.’’ Re-proposed
Rule 908(a)(2) reflects the Commission’s
revised preliminary determination
regarding an appropriate way to
enhance price discovery in the U.S.
market for security-based swaps. As
noted below, since issuing the
Regulation SBSR Proposing Release, the
Commission has obtained and analyzed
more extensive data regarding the
overlap between the U.S. market and the
global market for security-based
swaps.893 These data suggest that a vast
majority of security-based swap
transactions directly involved at least
one non-U.S. domiciled counterparty.894
Furthermore, these transactions
frequently may be conducted with one
direct counterparty located in one
890 See id. (noting that the concept of being
‘‘executed in the United States or through any
means of interstate commerce’’ includes being
cleared through a clearing agency having its
principal place of business in the United States).
891 The term ‘‘foreign branch’’ would be defined
in re-proposed Rule 900(n) of Regulation SBSR to
cross-reference the definition in proposed Rule
3a71–3(a)(1) under the Exchange Act. See Section
III.B.7, supra, for a definition of that term.
892 15 U.S.C. 78m(m)(1)(B).
893 See Section XIV.F.2(d)ii, infra.
894 See Section II.A.1, supra.
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jurisdiction with the other direct
counterparty located in another
jurisdiction, further suggesting that no
easy distinction can be made between
the U.S. market and foreign or global
markets. The Commission is concerned
that limiting the application of Title
VII’s public dissemination requirement
only to transactions that are wholly
conducted within the United States or
to transactions where both direct
counterparties are U.S. persons would
significantly reduce the potential
benefits of post-trade transparency in
the security-based swap market. The
Commission stated in the Regulation
SBSR Proposing Release that, ‘‘[b]y
reducing information asymmetries, posttrade transparency has the potential to
lower transaction costs, improve
confidence in the market, encourage
participation by a larger number of
market participants, and increase
liquidity in the [security-based swap]
market.’’ 895 The Commission also noted
that, ‘‘[i]n other markets, greater posttrade transparency has increased
competition among market participants
and reduced transaction costs.’’ 896
Re-proposed Rule 908(a)(2) eliminates
use of the term ‘interstate commerce’’
and instead incorporates the new
concept of ‘‘transaction conducted
within the United States,’’ which is
being used throughout the
Commission’s proposed Title VII crossborder rules, to help delineate precisely
the types of security-based swap
transactions that would be subject to
public dissemination under Regulation
SBSR. Furthermore, re-proposed Rule
908(a)(2) is designed to achieve the goal
of improving the transparency, fairness,
and efficiency of the U.S. security-based
swap market, as reflected in Section
13(m)(1)(B) of the Exchange Act. Reproposed Rule 908(a)(2) also is
designed, as far as practicable, to
minimize competitive disparities that
might result under the proposed public
dissemination regime, as well as to
minimize incentives for market
participants to structure their operations
for the purpose of evading Regulation
SBSR.897 Each individual subparagraph
895 Regulation SBSR Proposing Release, 75 FR
75224.
896 Id. at 75225 (citing studies of the impact of
TRACE (Trade Reporting and Compliance Engine)
on the corporate bond market).
897 We preliminarily believe that the proposed
approach with respect to regulatory reporting and
public dissemination is not being applied to
persons who are ‘‘transact[ing] a business in
security-based swaps without the jurisdiction of the
United States,’’ within the meaning of Section 30(c).
See Sections II.B.2(a)–II.B.2(d), supra. However, the
Commission also preliminarily believes that the
proposed approach with respect to regulatory
reporting and public dissemination is necessary or
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of re-proposed Rule 908(a)(2) is
discussed below.
Re-proposed Rule 908(a)(2)(i), similar
to re-proposed Rule 908(a)(1)(i),
generally would preserve the principle
from the original proposal that a
security-based swap would be subject to
public dissemination if it were executed
in the United States.898 That concept
has been integrated into the new term
‘‘transaction conducted within the
United States,’’ which also is being used
in the Commission’s other Title VII
proposals.
Re-proposed Rule 908(a)(2)(ii) would
provide that a security-based swap
would be subject to public
dissemination if there is a direct or
indirect counterparty that is a U.S.
person on each side of the transaction.
Under the initial proposal, a securitybased swap involving two non-U.S.
person direct counterparties, but where
each direct counterparty is guaranteed
by a U.S. person, would not be required
to be publicly disseminated. The
Commission now preliminarily believes
that, where U.S. persons have an
interest on both sides of the transaction,
even if indirectly, the transaction
generally should be viewed as part of
the U.S. security-based swap market
and, as such, should be subject to Title
VII’s public dissemination requirement.
Moreover, to the extent that U.S.
persons might be incented to structure
their trading operations through
guaranteed foreign subsidiaries to avoid
public dissemination that otherwise
would apply to trades executed between
U.S. person direct counterparties, the
Commission seeks to minimize that
incentive by re-proposing Rule
908(a)(2)(ii) to require public
dissemination of a security-based swap
transaction if a U.S. person is present on
appropriate to help prevent the evasion of the
particular provisions of the Exchange Act that were
added by the Dodd-Frank Act that are being
implemented by the approach and prophylactically
will help ensure that the purposes those provisions
of the Dodd-Frank Act are not undermined. See
Section II.B.2(e), supra; see also Section II.B.2(d),
supra.
For example, if the reporting requirements do not
apply to transactions among non-U.S. persons that
receive guarantees from U.S. persons and foreign
branches of U.S. banks, then U.S. persons would
have an incentive to evade the reporting
requirements by conducting transactions with other
U.S. persons through guaranteed foreign affiliates or
foreign branches. Altering the form of the
transaction in this manner would allow U.S.
persons to continue to avail themselves of
transparency in the U.S. security-based swap
market while themselves evading the requirements
intended to enhance that transparency, even though
the substance of the transaction remains
unchanged.
898 See Rule 908(a)(2) of Regulation SBSR, as
originally proposed. See also Regulation SBSR
Proposing Release, 75 FR 75239–40.
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each side, whether directly or
indirectly.
Re-proposed Rule 908(a)(2)(iii) would
provide that a security-based swap
would be subject to public
dissemination if at least one direct
counterparty is a U.S. person (except in
the case of a transaction conducted
through a foreign branch 899). This prong
generally reincorporates the original
proposal’s approach that a securitybased swap executed anywhere in the
world and having just one U.S. person
counterparty would be subject to public
dissemination. The Commission
generally believes that a security-based
swap transaction having even just one
U.S. person direct counterparty
generally should be viewed as part of
the U.S. security-based swap market
and, as such, should be subject to Title
VII’s public dissemination requirement.
The Commission preliminarily believes
that the benefits of requiring public
dissemination of all security-based
swaps involving at least one U.S. person
direct counterparty would inure to other
U.S. persons that transact in the same or
similar instruments.
However, re-proposed Rule
908(a)(2)(iii) would provide a limited
exception to the general rule that any
transaction involving a U.S. person
direct counterparty would be subject to
public dissemination; re-proposed Rule
908(a)(2)(iii) would not apply if the
transaction is conducted through a
foreign branch.900 The Commission is
concerned that, if it did not take this
approach, non-U.S. market participants
might avoid entering into security-based
swaps with the foreign branches of U.S.
banks so as to avoid their security-based
swaps being publicly disseminated. The
Commission notes that registration with
the local regulatory authority to engage
in banking business is inherent in the
proposed definition of ‘‘foreign branch.’’
This approach would restrict the
proposed exception to public
dissemination for transactions
conducted through a foreign branch.901
899 The term ‘‘transaction conducted through a
foreign branch’’ would be defined in re-proposed
Rule 900(hh) of Regulation SBSR to cross-reference
the definition of that term in proposed Rule 3a71–
3(a)(4) under the Exchange Act, as discussed in
Section III.B.7 above.
900 However, a security-based swap having a
direct counterparty that is a foreign branch could
be subject to public dissemination for other
reasons—e.g., if the transaction included a U.S.
person on the other side. See re-proposed Rule
908(a)(2)(ii) of Regulation SBSR.
901 Thus, for example, a security-based swap
involving a U.S. person that sends staff to a foreign
country to negotiate and execute the transaction but
does not have a recognized foreign branch in that
country would be required to be publicly
disseminated, and would not qualify for the
proposed exclusion in re-proposed Rule
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The Commission further notes that the
proposed exclusion for transactions
conducted through a foreign branch is
equivalent to the proposed approach for
transactions conducted by foreign
affiliates that are guaranteed by a U.S.
person. In the case of a security-based
swap transaction executed outside the
United States between a non-U.S.
person and either the guaranteed foreign
affiliate or the foreign branch of the U.S.
bank, re-proposed Rule 908(a)(2) would
not require public dissemination of the
transaction. Re-proposed Rule
908(a)(2)(iii) would not require public
dissemination if the transaction were
conducted through a foreign branch. Reproposed Rule 908(a)(2)(ii) would not
require public dissemination if the only
U.S. person involved in the transaction
were the U.S. person providing the
guarantee.
Re-proposed Rule 908(a)(2)(iv) would
provide that a security-based swap
would be subject to public
dissemination if one side includes a
U.S. person and the other side includes
a non-U.S. person that is a securitybased swap dealer, as defined in Section
3(a)(71) of the Exchange Act and the
rules and regulations thereunder. The
Commission notes that re-proposed Rule
908(a)(2)(ii) would require public
dissemination of a transaction if both
sides include a U.S. person. Under reproposed Rule 908(a)(2)(iv), however,
public dissemination would be required
when only one side includes a U.S.
person, provided the other side includes
a non-U.S. person security-based swap
dealer. The Commission preliminarily
believes that both types of transaction
generally should be considered part of
the U.S. security-based swap market
and, as such, should be subject to Title
VII’s public dissemination requirement.
As the Commission has previously
stated, post-trade transparency of
security-based swap transactions would
reduce information asymmetries and
could have the potential to lower
transaction costs, improve confidence in
the market, encourage participation by a
larger number of market participants,
and increase liquidity in the securitybased swap market.902 Post-trade
transparency of security-based swap
transactions also has the potential to
improve valuation models and thereby
contribute to more efficient capital
allocation.903 The Commission
preliminarily believes that not
subjecting transactions between U.S.
908(a)(2)(iii) for transactions conducted through a
foreign branch.
902 See Regulation SBSR Proposing Release, 75 FR
75267.
903 See id. at 75267–68.
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persons (whether directly or indirectly)
or between a U.S. person and a non-U.S.
person security-based swap dealer to
post-trade transparency would
undermine these goals. The fact that
both sides of the transaction include a
U.S. person, or that one side includes a
U.S. person and the other side includes
a person that conducts enough U.S.
business to warrant requiring it to
register with the Commission, suggests
that they are engaging in the types of
transactions that might be engaged in by
other U.S. persons or others who are
required to register with the
Commission. Furthermore, in the
absence of re-proposed Rule
908(a)(2)(iv), a non-U.S. person securitybased swap dealer could encourage
foreign affiliates that are guaranteed by
a U.S. parent to transact business with
it outside the United States in order to
evade the public dissemination
requirement.904 If re-proposed Rule
908(a)(2)(iv) applied, all transactions
between a security-based swap dealer
(regardless of whether it is a U.S.
person) and a U.S. person (whether as
a direct or indirect counterparty), would
be required to be publicly disseminated,
regardless of where such transactions
are conducted. Finally, the Commission
notes that Section 13(m)(1)(D) of the
Exchange Act gives the Commission
authority to require registered entities—
such as security-based swap dealers—
regardless of whether or not they are
U.S. persons, to publicly disseminate
security-based swap transaction and
pricing data.
However, the Commission notes that
re-proposed Rule 908(a)(2) would not
require public dissemination of a
security-based swap transacted outside
the United States between two non-U.S.
persons that are security-based swap
dealers (assuming that neither side is
guaranteed by a U.S. person). Non-U.S.
person security-based swap dealers are
likely to have significant operations in
foreign security-based swap markets. A
transaction between two such non-U.S.
person security-based swap dealers
conducted outside the United States is
less likely than a transaction conducted
within the United States or a transaction
904 The Commission notes that re-proposed Rule
908(a)(2)(iii) of Regulation SBSR would require
public dissemination if only one direct
counterparty is a U.S. person, regardless of the
status, nationality, or place of domicile of the other
direct counterparty. Thus, re-proposed Rule
908(a)(2)(iii) already would require public
dissemination in the case of a security-based swap
between a non-U.S. person security-based swap
dealer and a U.S. person direct counterparty. Reproposed Rule 908(a)(2)(iv) of Regulation SBSR
would, in addition, require public dissemination in
the case of a security-based swap between a nonU.S. person security-based swap dealer and a U.S.
person indirect counterparty.
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involving a U.S. person on the other
side to affect the U.S. security-based
swap market. Therefore, the
Commission is not proposing to require
public dissemination of transactions
conducted outside the United States
between two non-U.S. person securitybased swap dealers.
Re-proposed Rule 908(a)(2)(v) would
preserve the principle from the original
proposal that a security-based swap
would be subject to public
dissemination if it is cleared through a
clearing agency having its principal
place of business in the United
States.905 As noted in the Regulation
SBSR Proposing Release, the
Commission preliminarily believes that,
if non-U.S. persons determined to clear
a security-based swap transaction
through a clearing agency having its
principal place of business in the
United States, this suggests that the
clearing agency has made the securitybased swap eligible for clearing because
at least some U.S. counterparties might
wish to trade the security-based swap as
well.906 The Commission preliminarily
believes, therefore, that requiring public
dissemination of the security-based
swap transaction would promote price
discovery for market participants in the
United States and elsewhere.907
A security-based swap transaction
would need to meet only one prong of
re-proposed Rule 908(a)(2) to trigger the
public dissemination requirement. For
example, assume a security-based swap
is solicited, negotiated, executed, and
cleared in London between (A) the
London branch of a U.S. financial
institution and (B) a London-based firm
(i.e., a non-U.S. person) that has
registered with the Commission as a
security-based swap dealer. Reproposed Rule 908(a)(2)(i) would not
apply, because the transaction is not
conducted within the United States. Reproposed Rule 908(a)(2)(v) would not
apply, because the security-based swap
is not cleared in the United States. Reproposed Rule 908(a)(2)(ii) would not
apply, because there is not a direct or
indirect counterparty that is a U.S.
person on both sides of the transaction.
Re-proposed Rule 908(a)(2)(iii) would
not apply because neither side includes
a direct counterparty that is a U.S.
person that would trigger public
dissemination; here, the U.S. person
direct counterparty is acting through a
foreign branch, which is carved out of
re-proposed Rule 908(a)(2)(iii).
905 See Rule 908(a)(3) of Regulation SBSR, as
originally proposed.
906 See Regulation SBSR Proposing Release, 75 FR
75240.
907 See id.
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However, this transaction would be
subject to public dissemination under
re-proposed Rule 908(a)(2)(iv): one side
includes a U.S. person (in this case, the
London branch of the U.S. bank) and the
other side includes a non-U.S. person
security-based swap dealer. The result
would be the same if, instead of a
London branch of a U.S. financial
institution, one of the direct
counterparties were the London-based
affiliate of a U.S. person that guarantees
the performance of the London
subsidiary (i.e., the transaction is
between, on one side, a security-based
swap dealer and, on the other side, an
indirect counterparty that is a U.S.
person).
Request for Comment
The Commission requests comment
on all aspects of the re-proposed Rule
908(a), including the following:
• Do you agree with the approach
taken in re-proposed Rule 908(a) that a
security-based swap should be subject
to regulatory reporting and public
dissemination regardless of the
nationality or place of domicile of the
counterparties if it is a transaction
conducted in the United States? Why or
why not? Do you agree with the
Commission’s use of the term
‘‘transaction conducted within the
United States’’ in re-proposed Rule 908?
Why or why not?
• Do you agree with the approach
taken in re-proposed Rule 908(a) that a
security-based swap cleared through a
clearing agency having its principal
place of business in the United States
should be subject to the regulatory
reporting and public dissemination
requirements? Why or why not?
• Do you agree with the
Commission’s general approach of
treating guarantors as counterparties for
purposes of security-based swap trade
reporting requirements? Why or why
not? Do you believe that a securitybased swap should be subject to
regulatory reporting solely because one
side includes a guarantor that is a U.S.
person? Why or why not? Would the
Commission’s ability to exercise
prudential and regulatory oversight of
the securities markets be compromised
if it did not have the ability to learn
about all security-based swap positions
held by U.S. persons, including
guarantors? Why or why not?
• Do you believe that a security-based
swap should be subject to regulatory
reporting solely because one side
includes a security-based swap dealer or
major security-based swap participant,
regardless of the nationality or place of
domicile of that entity? Why or why
not? Would the Commission’s ability to
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exercise prudential and regulatory
oversight of entities registered with it be
compromised if it did not have the
ability to learn about all security-based
swap positions held by such entities?
Why or why not?
• In general, do you agree with how
re-proposed Rule 908(a) would apply to
security-based swaps entered into by
non-U.S. person security-based swap
dealers and major security-based swap
participants? Why or why not?
• Do you agree with the requirement,
in re-proposed Rule 908(a)(2)(ii), that a
security-based swap should be subject
to public dissemination if there is a
direct or indirect counterparty that is a
U.S. person on each side of the
transaction? Why or why not? What
would be the benefits of requiring
public dissemination in this scenario?
What would be the costs? Please be
specific.
• Do you agree with the requirement,
in re-proposed Rule 908(a)(2)(iii), that a
security-based swap should be subject
to public dissemination if at least one
direct counterparty is a U.S. person,
even if the transaction is not conducted
within the United States? Why or why
not? What would be the benefits of
requiring public dissemination in this
scenario? What would be the costs?
Please be specific. Do you agree with the
exception to this general rule for
transactions conducted through a
foreign branch of a U.S. person? Why or
why not? Should the exception be
limited to foreign branches? Why or
why not? Are there any alternatives that
the Commission should consider? If so,
what are they?
• Do you agree with the requirement,
in re-proposed Rule 908(a)(2)(iv), that
would provide that a security-based
swap, even if not a transaction
conducted within the United States,
would be subject to public
dissemination if one side includes a
U.S. person and the other side includes
a non-U.S. person security-based swap
dealer? Why or why not? What would
be the benefits of requiring public
dissemination in this scenario? What
would be the costs? Please be specific.
• Should the Commission require
public dissemination of security-based
swaps cleared by any clearing agency
registered with the Commission, even if
its principal place of business is outside
the United States? Why or why not?
• In general, do you agree the
distinctions drawn in the scenarios set
forth in re-proposed Rule 908(a)
regarding which security-based swaps
would be subject to the regulatory
reporting and public dissemination?
Why or why not?
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2. Revisions to Proposed Rule 908(b)
In the initial proposal, the
Commission explained when duties
would be imposed on non-U.S. person
counterparties of security-based swaps
when some connection to the United
States might be present. Rule 908(b), as
initially proposed, provided that no
duties would be imposed on a
counterparty unless one of the following
conditions were true:
• The counterparty is a U.S. person;
• The security-based swap is
executed in the United States or through
any means of interstate commerce; or
• The security-based swap is cleared
through a clearing agency having its
principal place of business in the
United States.
Under the initial proposal, if none of
these conditions were true, a foreign
counterparty ‘‘would not become a
‘participant’ of an SDR and would not
become subject to proposed Regulation
SBSR’’ 908—even if the security-based
swap itself and its counterparty were
subject to Regulation SBSR.
In light of other revisions being made
to Regulation SBSR discussed above, the
Commission is now proposing several
conforming revisions to proposed Rule
908(b). First, consistent with the other
revisions described above, Rule 908(b)
is being re-proposed to account for the
possibility that a non-U.S. person
security-based swap dealer or major
security-based swap participant could
incur a duty to report. Second,
consistent with the broader conceptual
framework set forth in this release, the
‘‘interstate commerce clause,’’ used in
the initial proposal to describe a
security-based swap that may generate
reporting duties for counterparties
under Regulation SBSR,909 is being
replaced with the new concept of a
‘‘transaction conducted within the
United States’’ that is being used
throughout the Commission’s proposed
cross-border rules.910 Therefore, reproposed Rule 908(b) would provide
that a direct or indirect counterparty to
a security-based swap would not incur
any obligation under Regulation SBSR
unless the counterparty were:
• A U.S. person;
• A security-based swap dealer or
major security-based swap participant;
or
908 Regulation SBSR Proposing Release, 75 FR
75240.
909 See Rule 908(b)(2) of Regulation SBSR, as
originally proposed.
910 See Section III.B.6, supra (discussing the
proposed definition of ‘‘transaction conducted
within the Unites States’’).
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• A counterparty to a transaction
conducted within the United States.911
Request for Comment
The Commission requests comment
on all aspects of the re-proposed Rule
908(b), including the following:
• Do you agree with the removal of
the ‘‘interstate commerce clause’’
contained in Rules 908(a)(2) and
908(b)(2), as originally proposed, and its
replacement with the new concept of
‘‘transaction conducted within the
United States’’? Does this new concept
provide additional clarity? If not, what
alternative formulations of the concept
should the Commission consider, and
why? Please be specific.
D. Modifications to ‘‘Reporting Party’’
Rules and Assigning Duty To Report
The Commission also is re-proposing
aspects of Regulation SBSR that would
specify who must report the securitybased swap. Rule 900, as initially
proposed, would define ‘‘reporting
party’’ as ‘‘the counterparty to a
security-based swap with the duty to
report information in accordance with
[Regulation SBSR] to a registered
security-based swap data repository, or
if there is no registered security-based
swap data repository that would receive
the information, to the Commission.’’
Because the Commission is now
proposing to extend the reporting
requirement to security-based swaps
executed outside the United States if the
performance of one or both direct
counterparties under the security-based
swap is guaranteed by a U.S. person,912
the Commission also is re-proposing the
rules that would assign the duty to
911 In addition, the Commission is re-proposing
the definition of the term ‘‘participant’’ in Rule 900
to make changes conforming to re-proposed Rule
908(b) of Regulation SBSR. The term ‘‘participant’’
was designed to include any counterparty to a
security-based swap that might incur duties under
Regulation SBSR. Rule 906(a) of Regulation SBSR,
as proposed and re-proposed, would impose certain
duties on participants other than those required to
initially report the transaction. The originally
proposed definition of ‘‘participant’’ would track
proposed Rule 908(b) and include a U.S. person
that is a counterparty to a security-based swap that
is required to be reported to a registered SDR, or
a non-U.S. person that is a counterparty to a
security-based swap that is: (i) Required to be
reported to a registered SDR; or (ii) executed in the
United States or through any means of interstate
commerce, or cleared through a clearing agency
having its principal place of business in the United
States. As re-proposed, ‘‘participant’’ would be
defined simply as ‘‘a person that is a counterparty
to a security-based swap that meets the criteria of
[Rule 908(b)].’’ This would include both direct and
indirect counterparties.
912 The Commission notes that, under both the
initial and current proposals, security-based swaps
would be subject to Regulation SBSR if they are
executed within the United States, regardless of
who the counterparties are or whether they are
guaranteed by U.S. persons.
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report in a number of ways. Overall,
these revisions are designed to assign
the responsibility to report a securitybased swap transaction to persons that
the Commission preliminarily believes
have greater capacity to fulfill that
responsibility, and in a manner
consistent with the reporting hierarchy
set forth in Section 13A(a)(3) of the
Exchange Act.913
First, the Commission is revising the
proposed term ‘‘reporting party’’ to
‘‘reporting side.’’ A ‘‘side’’ would be
defined in new paragraph (ee) of reproposed Rule 900 to mean ‘‘a direct
counterparty and any indirect
counterparty.’’ ‘‘Reporting side’’ would
be defined as ‘‘the side of a securitybased swap having the duty to report
information in accordance with
§§ 242.900–911 to a registered securitybased swap data repository, or if there
is no registered security-based swap
data repository that would receive the
information, to the Commission.’’ Under
this formulation, if a side has the duty
to report a security-based swap
transaction, any counterparty on that
side—direct or indirect—would have
responsibility for carrying out the
reporting obligation. The Commission
preliminarily believes that it would be
impractical and unnecessarily
complicated to attempt to assign the
reporting duty to either the direct or
indirect counterparty specifically, and is
instead proposing to assign the duty to
the side jointly.914
Furthermore, the Commission is
revising our proposed approach to
assigning the reporting duty to
minimize consideration of the domicile
of the counterparties, and to focus more
on their status (i.e., whether or not a
counterparty is a security-based swap
dealer or major security-based swap
participant). The initial proposal laid
out three scenarios for assigning the
reporting duty: Both direct
counterparties are U.S. persons, only
one direct counterparty is a U.S. person,
and neither direct counterparty is a U.S.
913 15 U.S.C. 78m–1(a)(3). Section 13A(a)(3) of the
Exchange Act assigns to specific kinds of
counterparties the duty to report uncleared
security-based swaps to an SDR or to the
Commission.
914 The Commission anticipates that the direct
counterparty and any indirect counterparty on the
reporting side would decide which of them would
carry out the duty to report the transaction.
Alternately, the direct and indirect counterparties
on the reporting side could elect to have a third
party carry out the duty to report on their behalf,
although the direct and indirect counterparties on
the reporting side—not the agent—would incur
legal liability for the agent’s failure to report the
transaction in a timely and complete manner.
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person.915 The definition of ‘‘U.S.
person’’—as proposed and reproposed—does not include a securitybased swap dealer or major securitybased swap participant that is organized
under the laws of a foreign jurisdiction
and has its principal place of business
outside the United States, even though
it is a security-based swap dealer or
major security-based swap participant
under Title VII. Thus, under the initial
proposal, for a security-based swap
between (A) an end user or other
counterparty that is a U.S. person and
is not a security-based swap dealer or
major security-based swap participant (a
‘‘non-registered U.S. counterparty’’) and
(B) a security-based swap dealer or
major security-based swap participant
that is a non-U.S. person, the nonregistered U.S. counterparty would have
been the reporting party.
Several commenters argued that this
requirement would unfairly place the
reporting burden on the non-registered
U.S. counterparty. These commenters
generally argued that, due to their status
as security-based swap dealers and
major security-based swap participants,
even security-based swap dealers and
major security-based swap participants
that are not U.S. persons have greater
technological capability than nonregistered U.S. counterparties to carry
out the reporting function.916 These
commenters generally maintained that
non-registered U.S. counterparties
would incur significant costs to build
the systems necessary to report securitybased swaps.917 Certain commenters
noted the unequal treatment and
potential consequences that could result
if non-registered U.S. counterparties
incurred the reporting obligation for
security-based swaps that they entered
into with non-U.S. security-based swap
dealers and non-U.S. major security915 See Rules 901(a)(1), (2), and (3) of Regulation
SBSR, as originally proposed. See also Regulation
SBSR Proposing Release, 75 FR 75211.
916 See DTCC I at 8; ICI Letter at 5 (stating that
security-based swap dealers are the only market
participants that currently have the standardization
necessary to report the required security-based
swap data); ISDA/SIFMA Letter I at 19; SIFMA
Letter I at 3 (arguing that an end user should not
incur higher transaction costs or potential legal
liabilities depending on the domicile of its
counterparty); Vanguard Letter at 6 (stating that
non-U.S. security-based swap dealers and major
security-based swap participants would be more
likely to have appropriate systems in place to
facilitate reporting).
917 See DTCC I at 27; ICI Letter at 5 (stating that
investment funds would incur significant costs to
build the necessary systems); Vanguard Letter at 6
(stating that end users would be required to commit
significant capital and resources to build out their
reporting systems). See also MarkitSERV Letter I at
9 (suggesting that, in light of capacity and resource
constraints, a non-registered U.S. counterparty
would seek to delegate any reporting obligations).
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based swap participants.918 One
commenter specifically recommended
that security-based swap dealers and
major security-based swap participants
that are not U.S. persons be subject to
the same regulatory reporting
responsibilities as security-based swap
dealers and major security-based swap
participants that are U.S. persons, when
transacting with non-registered U.S.
counterparties.919
The Commission generally agrees
with these arguments. The Commission
preliminarily believes that non-U.S.
person security-based swap dealers and
major security-based swap participants,
like U.S. person security-based swap
dealers and major security-based swap
participants, have greater technological
capability than non-registered U.S.
persons to carry out the reporting
function. Furthermore, the Commission
preliminarily sees no reason not to
assign the duty to report to non-U.S.
person security-based swap dealers and
major security-based swap participants
in appropriate circumstances. Although
such entities are not U.S. persons, the
fact that they are security-based swap
dealers and major security-based swap
participants necessarily implies that
they have substantial contacts with the
U.S. security-based swap market and
thus could incur significant regulatory
duties arising from their U.S. business.
Accordingly, the Commission is reproposing Rule 901(a) to provide that a
security-based swap dealer or major
security-based swap participant that is
not a U.S. person could incur the duty
to report a security-based swap in
various cases. Re-proposed Rule 901(a)
now provides as follows:
• If both sides of the security-based
swap include a security-based swap
dealer, the sides would be required to
select the reporting side.
• If only one side of the securitybased swap includes a security-based
swap dealer, that side would be the
reporting side.
• If both sides of the security-based
swap include a major security-based
swap participant, the sides would be
required to select the reporting side.
• If one side of the security-based
swap includes a major security-based
swap participant and the other side
includes neither a security-based swap
918 See ISDA/SIFMA Letter I at 19 (requiring end
users to report could result in end users declining
to trade with non-U.S. security-based swap dealers,
which could increase systemic risk by decreasing
liquidity and further concentrating the U.S.
security-based swap market); Cleary Letter II at 18
(requiring end users to report could result in their
declining to trade with non-U.S. security-based
swap dealers, thereby potentially reducing price
competition).
919 See SIFMA Letter I at 2.
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dealer nor a major security-based swap
participant, the side including the major
security-based swap participant would
be reporting side.
• If neither side of the security-based
swap includes a security-based swap
dealer or major security-based swap
participant: (i) if both sides include a
U.S. person or neither side includes a
U.S. person, the sides would be required
to select the reporting side; and (ii) if
only one side includes a U.S. person,
that side would be the reporting side.
Re-proposed Rule 901(a)(2) would
preserve the reporting hierarchy of
proposed Rule 901(a), while
additionally taking into account the
possibility that a direct counterparty to
a security-based swap might have a
guarantor that is better suited for
carrying out the reporting duty. Thus,
the newly proposed approach set forth
in re-proposed Rule 901(a) looks to the
status of each person on a side (i.e.,
whether it is a security-based swap
dealer or major security-based swap
participant), not the status of only the
direct counterparties. Under the initial
proposal, if a non-U.S. person were a
direct counterparty to a security-based
swap executed outside the United
States, that non-U.S. person would
under no circumstances have had a duty
to report the security-based swap, even
if it were guaranteed by a U.S. person
or if it were a security-based swap
dealer or major security-based swap
participant. The Commission is now
proposing to refocus the reporting duty
primarily on the status of the
counterparties, rather than on their
nationality or place of domicile.
Under re-proposed Rule 901(a), the
only time that the domicile of the
counterparties could determine who
must report is if neither side includes a
security-based swap dealer or major
security-based swap participant. In such
case, if one side includes a U.S. person
while the other side does not, the side
with the U.S. person would be the
reporting side. Similar to the initial
proposal, however, if both sides include
a U.S. person or neither side includes a
U.S. person, the sides would be required
to select the reporting side.
These proposed revisions to
Regulation SBSR are designed to more
efficiently align the duty to report with
the entities that the Commission
preliminarily believes are best suited to
carrying out that duty. The Commission
has previously noted that it
‘‘understands that many reporting
parties already have established
linkages to entities that may register as
SDRs, which could significantly reduce
the out-of-pocket costs associated with
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establishing the reporting function.’’ 920
These proposed revisions also are
designed to minimize the burdens faced
by non-registered U.S. counterparties
that might enter into security-based
swaps with non-U.S. person securitybased swap dealers or major securitybased swap participants, as well as to
clarify and simplify the reporting rules
more generally.
The following examples explain the
operation of re-proposed Rule 901(a).
• Example 1. A non-registered U.S.
counterparty executes a security-based
swap with a security-based swap dealer
that is a non-U.S. person. Neither side
has a guarantor. The security-based
swap dealer would be the reporting
side.
• Example 2. Same facts as Example
1, except that the non-registered U.S.
counterparty is guaranteed by a
security-based swap dealer. Because
both sides include a person that is a
security-based swap dealer, the sides
would be required to select which is the
reporting side.
• Example 3. A security-based swap
is executed in London between a foreign
subsidiary of a U.S. person and a French
hedge fund. The performance of the
foreign subsidiary is guaranteed by its
U.S. parent, a major security-based swap
participant. The side consisting of the
major security-based swap participant
and its foreign subsidiary would be the
reporting side.
• Example 4. The New York branch
of a German bank executes, in New
York, a security-based swap with the
New York branch of a Brazilian bank.
Neither foreign bank is a security-based
swap dealer or a major security-based
swap participant and neither direct
counterparty is guaranteed by a U.S.
person. The sides must select which
would be the reporting side.
• Example 5. A U.S. hedge fund
executes a security-based swap in
London with a foreign bank that is
registered as a dealer in its home
jurisdiction, but is not a security-based
swap dealer or major security-based
swap participant under Title VII.
Neither direct counterparty is
guaranteed by a U.S. person. The U.S.
hedge fund would be the reporting side,
because its side includes the only U.S.
person.
Request for Comment
The Commission generally requests
comment on all aspects of issues
regarding cross-border inter-affiliate
transactions, including the following:
920 Regulation SBSR Proposing Release, 75 FR
75265.
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• Do you agree with the proposed
definitions for ‘‘counterparty,’’ ‘‘direct
counterparty,’’ and ‘‘indirect
counterparty’’? Why or why not?
• Do you agree with the new
proposed definitions of ‘‘side’’ and
‘‘reporting side’’? Why or why not? If
you disagree with these proposed
definitions, what alternative
formulations should the Commission
consider, and why?
• Do you believe that the re-proposed
provisions would appropriately reduce
the potential reporting burdens of nonregistered U.S. counterparties? Why or
why not?
• Do you agree with the shifting of
reporting burdens as detailed in reproposed Rule 901(a)? Why or why not?
Do you believe it is appropriate to
require a security-based swap dealer or
major security-based swap participant
that is not a U.S. person to incur the
duty to report a security-based swap?
Why or why not?
• Should re-proposed Rule 901(a)
focus only on the status of the direct
counterparties (i.e., whether or not they
are security-based swap dealers or major
security-based swap participants) rather
than also taking into account the status
of any indirect counterparties? Why or
why not?
• Do you agree, as provided in reproposed Rule 901(a), that the domicile
of the counterparties should determine
who must report only if neither side
includes a security-based swap dealer or
major security-based swap participant?
Why or why not?
• Do you believe that Rule 901(a), as
re-proposed, would more efficiently
align the burdens of reporting with the
entities having the greatest
technological capability to carry out the
reporting function? If not, how could
the Commission more efficiently align
the burdens of reporting with the
operational capabilities of securitybased swap counterparties? Please be
specific.
• Are the examples provided
sufficiently clear to inform entities of
their reporting obligations? Would
additional examples be helpful? If so,
please provide specific examples that
should be addressed by the
Commission.
E. Other Technical and Conforming
Changes
In connection with the new
provisions of re-proposed Regulation
SBSR discussed above, the Commission
is proposing to make various minor
technical and conforming changes to
other parts of the regulation. These
changes are described below.
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31067
Rule 902(a), as initially proposed,
would require a registered SDRs to
publicly disseminate a transaction
report of any security-based swap
immediately upon receipt of
information about the security-based
swap, except in the case of a block
trade. Re-proposed Rule 908, however,
contemplates situations where a
security-based swap would be required
to be reported to a registered SDR but
not publicly disseminated.921 Therefore,
the Commission is re-proposing Rule
902(a) to provide that a registered SDR
would not have an obligation to
publicly disseminate a transaction
report for any such security-based swap.
Similarly, Rule 910(b)(4), as initially
proposed, would provide that, in Phase
4 of the Regulation SBSR compliance
schedule, ‘‘[a]ll security-based swaps
reported to the registered security-based
swap data repository shall be subject to
real-time public dissemination as
specified in § 242.902.’’ As noted above,
under the re-proposal of Rule 908,
certain security-based swaps would be
subject to regulatory reporting but not
public dissemination requirements.
Therefore, the Commission is reproposing Rule 910(b)(4) to provide
that, ‘‘All security-based swaps received
by the registered security-based swap
data repository shall be treated in a
manner consistent with §§ 242.902,
242.905, and 242.908.’’ 922
In addition, the Commission is
proposing certain changes to proposed
Rules 901(c) and 901(d), which address
the data elements to be reported to a
registered SDR, to reflect that, under the
re-proposal, certain security-based
swaps may be subject to regulatory
reporting but not public dissemination.
Rule 901(c), as initially proposed, was
titled ‘‘Information to be reported in real
time.’’ Under Rule 902(a), as originally
proposed, the registered SDR to which
such information was reported would be
required to promptly disseminate to the
public such information (except in the
921 This could occur in the case of a securitybased swap between (i) a foreign branch of a U.S.
bank, a non-U.S. person security-based swap dealer,
or a non-U.S. person that has a guarantee from a
U.S. person, and (ii) a non-U.S. person that is not
guaranteed by a U.S. person; and further provided
that neither side solicits, negotiates, executes,
books, or submits to clear the transaction within the
United States. See Section VIII.C, supra.
922 Re-proposed Rules 902 and 908 of Regulation
SBSR, when read together, would provide that
certain security-based swaps reported to a
registered SDR would not be publicly disseminated.
The Commission also is adding the reference to
Rule 905 here to provide that, after Phase 4, a
registered SDR must publicly disseminate not only
initial transaction reports (consistent with reproposed Rules 902 and 908), but also corrected
transaction reports (consistent with re-proposed
Rule 905).
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case of a block trade). However, the
Commission preliminarily believes that,
if a security-based swap were subject to
regulatory reporting but not public
dissemination, there is no need to
require that information about the
security-based swap be reported in real
time. Therefore, the introductory
language to Rule 901(c) is being reproposed as follows: ‘‘For any securitybased swap that must be publicly
disseminated pursuant to §§ 242.902
and 242.908 and for which it is the
reporting side, the reporting side shall
report the following information in real
time. If a security-based swap is
required by §§ 242.901 and 242.908 to
be reported but not publicly
disseminated, the reporting side shall
report the following information no later
than the time that the reporting side is
required to comply with paragraph (d)
of this section.’’ In addition, reproposed Rule 901(c) would be retitled
‘‘Primary trade information,’’ thus
eliminating the reference to real-time
reporting—since the information
required to be reported under Rule
901(c) would no longer in all cases be
required to be reported in real time.
Furthermore, re-proposed Rule 901(d)
would be retitled ‘‘Secondary trade
information.’’ 923
The Commission also is re-proposing
Rule 905(b)(2) to clarify that, if a
registered SDR receives corrected
information relating to a previously
submitted transaction report, it would
be required to publicly disseminate a
corrected transaction report only if the
initial security-based swap were subject
to public dissemination.924
Rule 901(c)(10), as initially proposed,
provided that the following data
element would be required to be
reported: ‘‘If both counterparties to a
security-based swap are security-based
swap dealers, an indication to that
effect.’’ As the Commission stated in the
Regulation SBSR Proposing Release:
‘‘Prices of transactions involving a
dealer and a non-dealer are typically
‘all-in’ prices that include a mark-up or
mark-down, while interdealer
transaction prices typically do not.
Thus, the Commission believes that
requiring an indication of whether a
[security-based swap] was an interdealer
transaction or a transaction between a
923 In the original proposal, Rule 901(d) of
Regulation SBSR was titled ‘‘Additional
information that must be reported.’’ This additional
information would be for regulatory purposes only
and would not be publicly disseminated.
924 Re-proposed Rule 905(b)(2) of Regulation
SBSR also substitutes the word ‘‘counterparties’’—
which is a defined term in Regulation SBSR—for
the word ‘‘parties,’’ which was used in the initial
proposal but was not a defined term.
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dealer and a non-dealer counterparty
would enhance transparency by
allowing market participants to more
accurately assess the reported price for
a [security-based swap].’’ 925 The
Commission is now re-proposing Rule
901(c)(10) as follows: ‘‘If both sides of
the security-based swap include a
security-based swap dealer, an
indication to that effect.’’ The reproposed rule would clarify that a
security-based swap dealer might be a
direct or indirect counterparty to a
security-based swap. The Commission
continues to believe that, in either case,
a security-based swap having a securitybased swap dealer on each side could,
all other things being equal, be priced
differently than a security-based swap
having a security-based swap dealer on
only one side. Therefore, the
Commission continues to believe that
the existence of a security-based swap
dealer on each side should be reported
to the registered SDR and made known
to the public.
The Commission is re-proposing Rule
901(d)(1)(ii) to require reporting of the
broker ID, desk ID, and trader ID, as
applicable, only of the direct
counterparty on the reporting side. The
Commission preliminarily believes that
it would be impractical and unnecessary
to report such data elements with
respect to an indirect counterparty, as
such elements might not be applicable
to an indirect counterparty.926
Similarly, Rule 901(d)(1)(iii) is being reproposed to require reporting of a
description of the terms and
contingencies of the payment streams
only of each direct counterparty to the
other. The Commission is including the
word ‘‘direct’’ to avoid extending Rule
901(d)(1)(iii) to indirect counterparty
relationships, where payments generally
would not flow to or from an indirect
counterparty.
Proposed Rule 901(e) set forth
provisions for reporting life cycle events
of a security-based swap. The basic
approach set forth in proposed Rule
901(e) was that, generally, the original
reporting party of the initial transaction
would have the responsibility to report
any subsequent life cycle event; this
approach remains unchanged in the reproposal. However, if the life cycle
event were an assignment or novation
that removed the original reporting
party, either the new counterparty or the
original counterparty would have to be
the reporting party. Further, Rule 901(e),
925 Regulation SBSR Proposing Release, 75 FR
75214.
926 An indirect counterparty typically would not
have a desk or trader involved in the transaction,
or engage the services of a broker, in the same
manner as a direct counterparty.
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as initially proposed, would provide
that the new counterparty would be the
reporting party if it were a U.S. person,
whereas the other counterparty would
be the new reporting party if the new
counterparty were not a U.S. person.
However, as discussed above, the
Commission is now proposing the
concept of a ‘‘reporting side,’’ which
would include the direct and any
indirect counterparty. Further, as
discussed above, the Commission is
proposing that non-U.S. person securitybased swap dealers or major securitybased swap participants would, in
certain instances, incur a duty to report.
Thus, the Commission is re-proposing
Rule 901(e) to provide that the duty to
report would switch to the other side
only if the new side did not include a
U.S. person (as in the originally
proposed rule) or a security-based swap
dealer or major security-based swap
participant (references to which are
being added to Rule 901(e)). The
Commission preliminarily believes that,
if the new side includes a security-based
swap dealer or major security-based
swap participant, the new side should
retain the duty to report. This approach
is designed to align reporting duties
with the market participants that the
Commission preliminarily believes are
better suited to carrying them out
because non-U.S. person security-based
swap dealers and major security-based
swap participants likely have already
taken significant steps to establish and
maintain the systems, processes and
procedures, and staff resources
necessary to report security-based swaps
currently.927
Request for Comment
The Commission generally requests
comment on all aspects of all the
technical and conforming changes in reproposed Regulation SBSR, including
the following:
• Do you disagree with any of the
technical and conforming changes in the
re-proposed rules? If so, why?
• Do you agree with the proposed
change to Rule 902(a) which provides
that a registered SDR would not have an
obligation to publicly disseminate a
transaction report for any security-based
swap that is required to be reported but
not publically disseminated? Why or
why not?
• Do you agree with the proposed
change to Rule 910(b)(4) that would
remove the requirement that ‘‘[a]ll
security-based swaps reported to the
registered security-based swap data
927 See Section VIII.D, supra (explaining rationale
for proposing to align reporting duties with greater
capability to carry out such duties).
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repository [] be subject to real-time
public dissemination as specified in
§ 242.902’’ and replace it with the
requirement that ‘‘[a]ll security-based
swaps received by the registered
security-based swap data repository []
be treated in a manner consistent with
§§ 242.902, 242.905, and 242.908’’? Are
there any alternative formulations of the
re-proposed rule text that the
Commission should consider? If so,
what are they? Please be specific.
• Do you agree with the proposed
changes to the data elements initially
contained in proposed Rules 901(c) and
901(d)? Specifically, do you agree with
the reformulation of the introductory
language contained in re-proposed Rule
901(c) to reflect situations in which a
security-based swap could be subject to
regulatory reporting but not public
dissemination? Why or why not? Do you
agree with the retitling of re-proposed
Rule 901(c) to ‘‘Primary trade
information’’ to eliminate the reference
to real-time reporting? Why or why not?
• Do you agree with the proposed
change to re-proposed Rule 905(b)(2) to
clarify that, if a registered SDR receives
corrected information relating to a
previously submitted transaction report,
it would be required to publicly
disseminate a corrected transaction
report only if the initial security-based
swap were subject to public
dissemination? Why or why not?
• Do you agree with the proposed
change to re-proposed Rule 901(c)(10) to
clarify that a security-based swap dealer
might be a direct or indirect
counterparty to a security-based swap?
Why or why not?
• Do you agree with the proposed
change to re-proposed Rule 901(d)(1)(ii)
to require the reporting of the broker ID,
desk ID, and trader ID only of the direct
counterparty on the reporting side? Why
or why not? Similarly, do you agree
with the requirement in re-proposed
Rule 901(d)(1)(iii) for reporting of a
description of the terms and
contingencies of the payment streams
only of each direct counterparty to the
other in order to avoid extending the
rule to indirect counterparty
relationships? Why or why not?
• Do you agree with the proposed
change to re-proposed Rule 901(e) to
provide that the duty to report would
switch to the other side only if the new
side did not include a U.S. person or a
security-based swap dealer or major
security-based swap participant? Why
or why not?
• Are there any other technical and
conforming changes that the
Commission should make to reproposed Regulation SBSR?
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F. Cross-Border Inter-Affiliate
Transactions
31069
Act 934 generally provides that
transaction, volume, and pricing data of
security-based swaps shall be publicly
Commenters raised concerns about
disseminated. With respect to regulatory
applying Title VII reporting or
reporting of cross-border inter-affiliate
dissemination requirements to crosssecurity-based swaps, the Commission
border inter-affiliate security-based
preliminarily believes that regulators
928
swaps.
One commenter argued that,
should have ready access to information
for a foreign entity registered as a bank
about the precise legal entities that hold
holding company and subject to the
risk positions in all security-based
consolidated supervision of the Federal
swaps. While it is true that the Federal
Reserve, the reporting of inter-affiliate
Reserve or perhaps other regulators
transactions would be superfluous
might exercise consolidated supervision
because the Federal Reserve has ‘‘ample over a group, this might not provide
authority to monitor transactions among regulators with current and specific
affiliates.’’ 929 The second commenter
information about security-based swap
expressed concern about duplicative or
positions taken by the group’s
conflicting regulation of inter-affiliate
subsidiaries. As a result, it would likely
transactions. It stated that, for example,
be more difficult for the Commission to
inter-affiliate security-based swaps
conduct general market analysis or
‘‘could be required to be publicly
surveillance of market behavior, and
reported in multiple jurisdictions, even
could create particular problems during
though they are not suitable for
a crisis situation when having accurate
930
reporting in any jurisdiction.’’
A
and timely information about specific
third commenter argued that interrisk exposures could be crucial.
affiliate security-based swaps
Therefore, the Commission continues to
generally—not referencing cross-border
believe that each cross-border interinter-affiliate transactions in
affiliate security-based swap that
particular—should not be subject to
otherwise satisfies any of the criteria in
public dissemination requirements,
re-proposed Rule 908(a)(1) should be
stating that ‘‘public reporting could
subject to regulatory reporting.
confuse market participants with
With respect to public dissemination
irrelevant information and raise the
of cross-border inter-affiliate transaction
costs to corporate groups of managing
data, the Commission preliminarily
risk internally.’’ 931
believes that the analysis of this issue in
The Commission preliminarily
the cross-border context is in many
believes that regulatory reporting and
ways similar to the analysis of
public dissemination serve different
dissemination of inter-affiliate
purposes and, while these two
transaction data in the domestic context.
requirements are related, their
In particular, many of the issues raised
application to cross-border inter-affiliate by commenters with respect to the
transactions should be considered
public dissemination of inter-affiliate
separately. The Commission notes that
transactions generally appear to be
the statutory provisions that require
relevant whether a transaction is
regulatory reporting and public
conducted within the United States or
dissemination of security-based swap
conducted on a cross-border basis.
transactions state that ‘‘each’’ securityThese general issues include a concern
based swap shall be reported; these
about information distortion, market
statutory provisions do not by their
confusion, and interference with
terms distinguish such reporting based
internal risk management of a corporate
on particular characteristics (such as
group.
being negotiated at arm’s length).
First, commenters stated that interSection 13A(a)(1) of the Exchange
affiliate transactions—whether crossAct 932 provides that each security-based border or not—are typically risk
swap that is not accepted for clearing
transfers with no market impact. They
shall be subject to regulatory reporting.
believe that the market-facing
Section 13(m)(1)(G) of the Exchange
transactions already would have been
Act 933 provides that each security-based publicly reported, so requiring that
swap (whether cleared or uncleared)
inter-affiliate transactions also be
shall be reported to a registered SDR,
publically reported would duplicate
and Section 13(m)(1)(C) of the Exchange information already known to the
public. The commenters express the
928 See Japanese Banks Letter at 5; Multiple
concern that such ‘‘double counting’’
Associations Letter IV at 11–12.
would distort information that is critical
929 Japanese Banks Letter at 5.
for price discovery and measuring
930 Multiple Associations Letter IV at 16.
liquidity, the depth of trading, and
931 Cleary Letter II at 17–18.
932 15
933 15
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U.S.C. 78m(m)(1)(G).
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934 15
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exposure to swaps in the market.935
They also believe that it would distort
the establishment of regulatory
thresholds and analysis, as well as
enforcement activities that require an
accurate assessment of the swaps
market.936
Second, commenters stated that
affiliates often enter into an interaffiliate transaction on terms linked to
an external trade being hedged, which
they are concerned could create
confusion in the market if publicly
reported. If markets move because of the
external trade before the inter-affiliate
transaction is entered into on a SEF or
reported as an off-exchange trade,
market participants could misconstrue
the market’s true direction and depth
simply because of the disconnect in
timing between the two offsetting
trades.937
Third, commenters stated that public
dissemination of inter-affiliate
transactions could interfere with the
internal risk management practices of a
corporate group. For example, one
entity in a group may be better
positioned to take on a certain type of
risk, even though another entity must,
for unrelated reasons, actually enter into
the transaction with an external
counterparty. Public disclosure of a
transaction between affiliates could
prompt other market participants to act
in a way that would prevent the
corporate group from following through
with its risk management strategy by, for
instance, causing adverse price
movements in the market that the riskcarrying affiliate would use to hedge.938
Beyond these concerns regarding the
public dissemination of inter-affiliate
transactions, commenters addressing the
public reporting of cross-border interaffiliate transactions focused more
generally on duplicative and conflicting
regulations. Using public dissemination
as an example, one commenter stated
that inter-affiliate security-based swaps
‘‘could be required to be publicly
reported in multiple jurisdictions, even
though they are not suitable for
reporting in any jurisdiction.’’ 939
However, the Commission is not aware
of any commenter proposing a treatment
of cross-border inter-affiliate
transactions under public dissemination
requirements that differs substantively
from proposals for the treatment of other
inter-affiliate transactions.
The Commission has considered the
issues raised by these commenters both
935 See
Multiple Associations Letter IV at 11–12.
936 See id.
937 See id. at 12.
938 Cleary Letter II at 17.
939 See note 930, supra.
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with respect to inter-affiliate
transactions generally and in the crossborder context. The common thread of
the issues identified by commenters to
date is that public dissemination should
not be required for a security-based
swap that is undertaken to transfer the
risk of an initial security-based swap
(between X and Y) to an affiliate (i.e.,
from X to XA) because it would have no
price discovery value or could even give
market observers a false understanding
of the nature of the transaction.940 The
Commission acknowledges that the
initial security-based swap between X
and Y likely would have more price
discovery value than the subsequent
inter-affiliate transaction between X to
XA, all else being equal. In this
hypothetical, the initial transaction
presumably represents the mutual
agreement of parties operating on an
arm’s-length basis to execute a trade at
a particular price, while the latter
transaction generally would not involve
negotiation of the terms, particularly as
regards to price. It may not follow,
however, that the subsequent interaffiliate transaction would have no price
discovery value whatsoever, particularly
in a cross-border context where multiple
public dissemination requirements may
be involved. Arguing that an interaffiliate security-based swap has no
price discovery value appears to
presuppose that the initial, arm’s-length
security-based swap had been publicly
disseminated. This could be the case if
the initial security-based swap were
subject to the rules of a jurisdiction
having public dissemination
requirements.941 However, if the initial
security-based swap had not been
publicly disseminated, public
dissemination of the cross-border interaffiliate transaction, assuming it were
subject to Rule 908(a)(2) of re-proposed
Regulation SBSR,942 might be the only
way for the market to obtain any pricing
information about the series of
transactions. These circumstances could
be present if the initial security-based
swap were not subject to the rules of a
jurisdiction having public
dissemination requirements. In this
case, public dissemination of the crossborder inter-affiliate transaction,
assuming it were subject to Rule
940 See Cleary Letter II at 17–18; Multiple
Associations Letter IV at 16.
941 See Multiple Associations Letter IV at 12
(‘‘The market-facing swaps already will have been
reported and therefore, to require that inter-affiliate
swaps also be reported will duplicate
information’’).
942 Re-proposed Rule 908(a)(2) of Regulation
SBSR would describe when a cross-border securitybased swap would be subject to public
dissemination.
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908(a)(2) of re-proposed Regulation
SBSR,943 might be the only way for the
market to obtain any pricing
information about the series of
transactions.
As described above, commenters also
raised a general concern about the
potential for duplicative and conflicting
regulation of cross-border inter-affiliate
transactions. The Commission is
sensitive to these concerns both
generally and in the context of public
dissemination.944 The treatment of these
issues in connection with public
dissemination is not dissimilar to their
treatment in other contexts under Title
VII, including the context of regulatory
reporting. Accordingly, the Commission
preliminarily believes that the concern
expressed by the commenters should be
addressed by the proposed substituted
compliance policy and framework
discussed in detail below, as well as
when the Commission considers the
adopting release for public
dissemination, which the Commission
anticipates will address the issue of
dissemination of inter-affiliate
transactions.945
In light of these considerations, the
Commission preliminarily believes that
cross-border inter-affiliate securitybased swaps should not be excluded
from the public dissemination
requirements to the extent that interaffiliate security-based swaps are not
excluded as a general matter. The
Commission preliminarily believes that
the considerations regarding whether or
not to exclude inter-affiliate crossborder security-based swaps from public
dissemination on the grounds that they
could be misleading or have no price
discovery value are similar to the
considerations regarding whether or not
to exclude inter-affiliate security-based
swaps generally. Similarly, the
Commission preliminarily believes that
any steps short of exclusion that could
be taken to maximize the price
discovery value that inter-affiliate crossborder security-based swaps may have
(while minimizing any concern that
they might mislead the market) are
similar to the steps that could be taken
with respect to inter-affiliate securitybased swaps generally. Although the
Commission is not in this release reproposing any provisions of Regulation
SBSR regarding the public
dissemination of inter-affiliate security943 See
id.
944 Duplicative
and conflicting regulation is one
of the considerations the Commission takes into
account in proposing the approach to application of
Title VII requirements to security-based swap
transactions in the cross-border context. See Section
II.C, supra.
945 See Section XI, infra.
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based swaps generally (whether or not
cross-border),946 as previously stated,
the Commission invites public comment
on whether there are specific concerns
or reasons to support different treatment
or analysis of public dissemination of
cross-border inter-affiliate transactions
from the treatment or analysis of the
same issue in the domestic context, and,
in particular, why cross-border interaffiliate transactions may not be suitable
for public dissemination.
For example, the concerns about the
potentially limited price discovery
value of inter-affiliate security-based
swaps may be able to be addressed
through the public dissemination of
relevant data that may be indicative of
such limitations, rather than
suppressing these transactions entirely.
In the Regulation SBSR Proposing
Release, the Commission proposed to
require a registered SDR to ‘‘publicly
disseminate a transaction report of a
security-based swap immediately upon
receipt of information about the
security-based swap from a reporting
party.’’ 947 As the Commission noted in
the Regulation SBSR Proposing Release,
‘‘[t]he transaction report that is
disseminated would be required to
consist of all the information reported
by the reporting party pursuant to
proposed Rule 901(c).’’ 948 One of the
data elements enumerated in proposed
Rule 901(c) would be ‘‘[i]f applicable, an
indication that the transaction does not
accurately reflect the market.’’ 949 Such
data element should send a message to
the market that the transaction was not
conducted at arm’s length on the open
market.950 Market participants could
take such information into account
when interpreting or analyzing the
946 See Regulation SBSR Proposing Release, 75 FR
75215 (proposing that inter-affiliate security-based
swaps should not be suppressed from the public
data feed, but rather should be disseminated and
appropriately tagged).
947 See Rule 902(a) of Regulation SBSR, as
originally proposed. If the SDR were closed when
the reporting party submitted its transaction report,
the SDR would be required to publicly disseminate
the transaction report immediately upon reopening. See id.
948 Regulation SBSR Proposing Release, 75 FR
75228.
949 Rule 901(c)(11) of Regulation SBSR, as
originally proposed.
950 The Commission preliminarily disagrees with
the commenter that argued that ‘‘inclusion of these
swaps in swaps market data will distort the
establishment of position limits, analysis of open
interest, determinations of block trade thresholds
and performance of other important regulatory
analysis, functions and enforcement activities that
require an accurate assessment of the swaps
market.’’ Multiple Associations Letter IV at 11–12.
Security-based swaps that have been appropriately
marked as inter-affiliate transactions also could be
excluded from certain aggregated market data,
depending on the purpose for which those data are
being used.
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publicly-disseminated inter-affiliate
transaction pricing information.
As noted above, one commenter
expressed concern that public
dissemination of an inter-affiliate
transaction could interfere with the
internal risk management of a corporate
group by causing adverse price
movements in the market that the riskcarrying affiliate might use to hedge.
The commenter did not explain why the
corporate group might be unable or
might choose not to hedge the risk when
the initial transaction is executed, or
why the impact of the public
dissemination of the subsequent interaffiliate transaction might be different
from the impact of the public
dissemination of the initial transaction.
The Commission preliminarily believes
that, assuming that the corporate group
does not hedge at the time the initial
transaction was executed, a concern
about the potential impact of public
dissemination of the inter-affiliate
transaction on the ability to hedge the
position would be similar to the concern
that commenters have expressed
generally about public dissemination of
block trades.951 This concern about a
potential impact of the public
dissemination—either of the original
transaction or the subsequent interaffiliate transaction—may be addressed
by delayed dissemination instead of
suppressing dissemination of these
transactions entirely. The broader issue
of how to treat block trades, including
how to define what is a block trade, is
one that the Commission continues to
evaluate. In addition, public
dissemination of relevant data
indicating the inter-affiliate nature of
the transaction separately may help
address concerns about potential impact
on markets on which a hedge might if
occur if such markets are made aware
that there may be special considerations
that should be taken into account when
assessing the extent to which the
transaction may reflect the current
market.
Regulation SBSR would require
registered SDRs, in their policies and
procedures, to enumerate the specific
data elements of a security-based swap
or life cycle event that would be
951 Specifically, if the corporate group hedges the
initial transaction at the time of execution, there
would appear to be no need to hedge at the time
of the inter-affiliate transaction, and thus no
concern about the impact of the dissemination of
the inter-affiliate transaction on the market in
which the hedge is put on. Furthermore, if the
corporate group chooses not hedge the position
until the time of the inter-affiliate transaction, the
Commission questions why the concern about the
impact of the disclosure of that transaction would
be different than a concern about the dissemination
of the original transaction.
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required to be reported, and to specify
one or more acceptable data formats,
connectivity requirements, and other
protocols for submitting information.952
The Commission itself did not propose
to specify each data element that would
have to be reported, but instead
identified broad categories of
information that must be reported.953
Furthermore, the Commission initially
proposed to require, in Rule 907(a)(4),
that a registered SDR have policies and
procedures ‘‘[d]escribing how reporting
parties shall report and, consistent with
the enhancement of price discovery,
how the registered security-based swap
data repository shall publicly
disseminate . . . security-based swap
transactions that do not involve an
opportunity to negotiate any material
terms, other than the counterparty; and
any other security-based swap
transactions that, in the estimation of
the registered security-based swap data
repository, do not accurately reflect the
market.’’ 954 However, the Commission
invites public comment on whether
concerns about the inter-affiliate
security-based swaps not accurately
reflecting the market can be addressed
in the policies and procedures of
registered SDRs that would be required
under re-proposed Rule 907(a)(4).
For example, such policies and
procedures could be designed to
maximize the price discovery value of
cross-border (or other) inter-affiliate
security-based swaps and to minimize
their ability to mislead. These policies
and procedures could require not only
that reporting sides mark whether a
security-based swap is an inter-affiliate
transaction, but also whether the initial
security-based swap was executed in a
jurisdiction with public dissemination
requirements.955 Further, these policies
and procedures also could require the
reporting side to indicate the
approximate time when the initial
952 See Rules 907(a)(1) and 907(a)(2) of Regulation
SBSR, as originally proposed.
953 For example, the Commission proposed to
require the reporting of ‘‘[i]nformation that
identifies the security-based swap instrument’’—see
Rule 901(c)(2) of Regulation SBSR, as originally
proposed—but did not specify the exact manner in
which such information must be reported, instead
proposing to allow SDRs discretion to set such
specifications in their policies and procedures.
However, the Commission did propose to require
reporting of certain discrete data elements. See, e.g.,
Rule 901(d)(vi) of Regulation SBSR (requiring
reporting of the name of the clearing agency, if the
security-based swap will be cleared).
954 Rule 907(a)(4) of Regulation SBSR, as
originally proposed.
955 This could be either the United States or
another jurisdiction that imposes post-trade
transparency requirements similar to those in reproposed Regulation SBSR.
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security-based swap was executed.956
This would permit market observers to
gauge how much price discovery value
to assign to the price provided in the
inter-affiliate security-based swap
transaction report that would be
publicly disseminated under Rule 902
of re-proposed Regulation SBSR.
Information about an initial trade done
less than 24 hours before (obtained
indirectly from the later-appearing trade
report of the inter-affiliate cross-border
security-based swap) could have
significant price discovery value, while
information from an initial trade
executed over a week before could, all
things being equal, have less.957 The
Commission invites public comment on
these approaches to the treatment of
inter-affiliate security-based swaps
generally, as well as their relative
advantages and disadvantages. In
particular, the Commission invites
public comment on how these
approaches would affect the internal
risk management practices of a
corporate group. In addition, as
previously stated, the Commission
invites public comment on whether
there are specific concerns or reasons to
support different treatment or analysis
of public dissemination of cross-border
inter-affiliate transactions from the
treatment or analysis of the same issue
in the domestic context.
Request for Comment
The Commission generally requests
comment on all aspects of issues
regarding cross-border inter-affiliate
security-based swaps, including the
following:
• Do you believe that cross-border
inter-affiliate security-based swaps
should be excluded from the regulatory
reporting requirements of Regulation
SBSR? If so, under what circumstances
should such security-based swaps be
excluded, and why? What would be the
harm of having such inter-affiliate
security-based swaps reported to a
registered SDR? What are the risks of
not requiring regulatory reporting of
inter-affiliate security-based swaps?
• Do you believe that cross-border
inter-affiliate security-based swaps
should be analyzed differently from
domestic inter-affiliate security-based
swaps? Why or why not?
• Do you believe that cross-border
inter-affiliate security-based swaps
956 For example, there could be indicators for the
initial security-based swap having been executed
within the past 24 hours, between one and seven
days before, or longer than seven days before.
957 However, even information about a trade done
over a week ago (or more) could have price
discovery value for security-based swap
instruments that trade infrequently.
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should be excluded from the public
dissemination requirements of
Regulation SBSR? Why or why not?
What are the risks or benefits of not
requiring public dissemination of interaffiliate security-based swaps? How
should the Commission balance these
risks and benefits?
• Does your view about public
dissemination for cross-border interaffiliate security-based swaps change
depending on whether an initial, arm’slength security-based swap was
executed and publicly disseminated in
a jurisdiction having public
dissemination requirements? Why or
why not? On what basis could or should
the Commission exclude the crossborder inter-affiliate security-based
swap from the public dissemination
requirements if the initial, arm’s-length
security-based swap was executed and
publicly disseminated in a jurisdiction
having no public dissemination
requirements, or public dissemination
requirements that are not comparable to
those in the United States?
• Does your view on the application
of regulatory reporting and public
dissemination requirements to interaffiliate security-based swaps change if
the affiliates are subject to consolidated
supervision? If so, please explain.
• Can you suggest any additions to
the policies and procedures of registered
SDRs that could maximize the price
discovery value, and minimize any
potentially misleading aspects, of public
trade reports of cross-border interaffiliate security-based swaps? If so,
what are they? Should the Commission
more clearly specify in Rule 907(a)(4)
how inter-affiliate security-based swaps
should be publicly disseminated so as to
maximize their price discovery value
and minimize their potential for
misleading market observers? If so,
how?
• Do you have any other concerns
about public dissemination of crossborder inter-affiliate security-based
swaps so long as they are appropriately
marked?
G. Foreign Privacy Laws Versus Duty To
Report Counterparty ID
Rule 901(d), as initially proposed, set
forth the data elements that would
constitute the required regulatory report
of a security-based swap (i.e.,
information for use only by regulators
that would not be included in the
publicly disseminated report). One such
element is the ‘‘participant ID’’ of the
counterparty.958 The Title VII
958 See Rule 901(d)(1)(i) of Regulation SBSR, as
initially proposed. See also Regulation SBSR
Proposing Release, 75 FR 75217.
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provisions relating to security-based
swap trade reporting and proposed
Regulation SBSR that would implement
those provisions contemplate only one
counterparty to a security-based swap
having a duty to report. However, the
Commission preliminarily believes that
being able to assess the positions and
behavior of both counterparties to the
security-based swap would facilitate our
ability to carry out our regulatory duties
for market oversight.959 Because only
one party would be required to report,
the only way to obtain the identity of
the non-reporting party counterparty
would be to require the reporting party
to disclose its counterparty’s identity.960
Three comments on proposed
Regulation SBSR cautioned that U.S.
persons may be restricted from
complying with such a requirement in
cases where a security-based swap is
executed outside the United States.961
One commenter stated that the London
branch of a U.S. person would need its
counterparty’s consent to identify that
959 U.S. regulators have a strong interest in being
able to monitor the risk exposures of U.S. persons,
particularly those involved in the security-based
swap market, as the failure or financial distress of
a U.S. person could impact other U.S. persons and
the U.S. economy as a whole. U.S. regulators also
have an interest in obtaining information about
non-U.S. counterparties that enter into securitybased swaps with U.S. persons, as the ability of
such non-U.S. counterparties to perform their
obligations under those security-based swaps could
impact the financial soundness of U.S. persons. See,
e.g., S. Comm. on Banking, Hous., & Urban Affairs,
The Restoring American Financial Stability Act of
2010, S. Rep. No. 111–176, at 32 (‘‘As a key element
of reducing systemic risk and protecting taxpayers
in the future, protections must include
comprehensive regulation and rules for how the
OTC derivatives market operates. Increasing the use
of central clearinghouses, exchanges, appropriate
margining, capital requirements, and reporting will
provide safeguards for American taxpayers and the
financial system as a whole.’’) (emphasis added).
960 Once the identity of the opposite counterparty
to a security-based swap is known by a registered
SDR, the SDR would be required to obtain certain
additional information from that counterparty. See
proposed Rule 906(a), which is not being revised by
this re-proposal.
961 In addition, two comments on the
Commission’s interim final temporary rule on the
reporting of security-based swaps entered into
before July 21, 2010, Securities Exchange Act
Release No. 63094 (Oct. 13, 2010), 75 FR 64643
(Oct. 20, 2010), made similar points. See Deutsche
Bank Letter at 5 (‘‘In some cases, dissemination or
disclosure of [counterparty] information could lead
to severe civil or criminal penalties for those
required to submit information to an SDR pursuant
to the Interim Final Rules. These concerns are
particularly pronounced because of the expectation
that Reportable Swap data will be reported, on a
counterparty identifying basis, to SDRs, which will
be non-governmental entities, and not directly to
the Commissions.’’); ISDA Letter II at 6 (‘‘In many
cases, counterparties to cross-border security-based
swap transactions will face significant legal and
reputational obstacles to the reporting of such
information. Indeed, disclosure of such information
may lead to civil penalties in some jurisdictions
and even criminal sanctions in other
jurisdictions.’’).
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party under U.K. law.962 The
commenter added that, under French
law, consent is required each time a
report is made identifying the
counterparty, and this restriction cannot
be resolved by changes to the firm’s
terms of business.963 Another
commenter urged the Commission to
‘‘consider carefully and provide for
consistency with, foreign privacy laws,
some of which carry criminal penalties
for wrongful disclosure of
information,’’964 but did not provide
further detail. A third commenter
argued that allowing substituted
compliance when both parties are not
domiciled in the United States could
avoid problems with foreign privacy
laws conflicting with U.S. reporting
requirements.965
The Commission seeks to understand
more precisely if—and, if so, how—
requiring a counterparty to report the
transaction pursuant to Regulation
SBSR (including disclosure of the
counterparty’s identity to a registered
SDR) might cause it to violate local law
in a foreign jurisdiction where it
operates. Before determining whether
any exception to reporting the
counterparty’s identity might be
necessary or appropriate, the
Commission seeks to obtain additional
information about any such foreign
privacy laws.
Request for Comment
The Commission generally requests
comment on all aspects of issues
relating to foreign privacy laws with
respect to proposed Regulation SBSR,
including the following:
• What jurisdictions have laws that
might affect a reporting side’s ability to
report the participant ID of its
counterparty? Please cite and describe
specifically for each such law: To whom
such restrictions would apply and
under what circumstances; how the law
might restrict reporting (e.g., what data
elements that otherwise would be
required to be reported under
Regulation SBSR would be restricted);
whether any exceptions under the law,
particularly but not limited to consent
provisions and provisions relating to
compliance with applicable law, might
be available to a reporting side that
otherwise would be required to comply
with re-proposed Rule 901(d)(1)(i), or
explain why none of the exceptions
would be available.
• If no such exceptions are available
under the local law and you believe that
962 See
DTCC Letter II at 21.
id.
964 ISDA/SIFMA Letter I at 20.
965 See Cleary Letter II at 17–18.
963 See
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an exception by rule from re-proposed
Rule 901(d)(1)(i) would be appropriate,
how should that exception be crafted?
Please suggest appropriate rule text.
• How, if at all, would a substituted
compliance regime for regulatory
reporting avoid problems with foreign
privacy laws? Would the Commission
and other U.S. financial regulators be
able to obtain information about
security-based swap counterparties from
foreign trade repositories or foreign
regulatory authorities to which such
transactions had been reported?
H. Foreign Public Sector Financial
Institutions
Six commenters expressed concern
about applying the requirements of Title
VII to the activities of FPSFIs, such as
foreign central banks and multilateral
development banks.966 One commenter,
the European Central Bank (‘‘ECB’’),
noted that security-based swaps entered
into by the Federal Reserve Banks are
excluded from the CEA’s definition of
‘‘swap’’ 967 and that the functions of
foreign central banks and the Federal
Reserve are broadly comparable. The
ECB argued, therefore, that securitybased swaps entered into by foreign
central banks should likewise be
excluded from the definition of
‘‘swap.’’ 968 A second commenter, the
World Bank (representing the
International Bank for Reconstruction
and Development, the International
Finance Corporation, and other
multilateral development institutions of
which the United States is a member)
also argued generally that the term
‘‘swap’’ should be defined to exclude
any transaction involving a multilateral
development bank.969 The World Bank
further noted that the EMIR—which is
intended to serve as the E.U.
counterpart to Title VII of the DoddFrank Act—would expressly exclude
multilateral development banks from its
coverage.970
966 See BIS Letter passim; CEB at 2, 4; ECB Letter
passim; ECB Letter II passim; EIB Letter passim;
Nordic Investment Bank Letter at 1; World Bank
Letter II passim.
967 Section 1a(47)(B)(ix) of the CEA excludes from
the definition of swap any agreement, contract, or
transaction a counterparty of which is a Federal
Reserve Bank, the Federal Government, or a Federal
agency that is expressly backed by the full faith and
credit of the United States. A security-based swap
includes any swap, as defined in the CEA, that is
based on, among other things, a narrow-based index
or a single security or loan. See Section 3(a)(68) of
the Exchange Act, 15 U.S.C. 78c3(a)(68). See also
Product Definitions Adopting Release, 77 FR 48208.
968 See ECB Letter I at 2; ECB Letter II at 2. See
also EIB Letter at 1; Nordic Development Bank at
1.
969 See World Bank Letter II at 6–7.
970 See id. at 4. See also EIB Letter at 7 (‘‘As a
matter of comity, actions by U.S. financial
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31073
The ECB and BIS stated that foreign
central banks enter into security-based
swaps solely in connection with their
public mandates, which require them to
act confidentially in certain
circumstances.971 The ECB argued in
particular that public disclosure of its
market activities could compromise its
ability to take necessary actions and
‘‘could cause signaling effects to other
market players and finally hinder the
policy objectives of such actions.’’ 972
Another commenter, the Council of
Europe Development Banks (‘‘CEB’’),
while opposing application of Title VII
requirements to multilateral
development banks generally, did not
object to the CFTC and SEC preserving
their authority over certain aspects of
swaps activity, including reporting
requirements.973 Similarly, the World
Bank believed that the definition of
‘‘swap’’ could be qualified by a
requirement that counterparties would
treat such transactions as swaps solely
for reporting purposes.974
The Commission preliminarily
believes that security-based swaps to
which an FPSFI is a counterparty
(‘‘FPSFI trades’’) should not, for that fact
alone, be exempt from regulatory
reporting.975 Under Regulation SBSR, as
initially proposed, an FPSFI trade
would be required to be reported to a
registered SDR if the counterparty were
a U.S. person. The Commission
continues to believe that, if an FPSFI
executes a security-based swap with a
counterparty that is a U.S. person, the
security-based swap should be subject
regulators should be consistent with the laws of
other jurisdictions that provide exemption from
national regulation for government-owned
multinational developments such as the [EIB]’’).
971 See BIS Letter at 4–5; ECB Letter I at 3.
972 ECB Letter I at 3. See also ECB Letter II at 2.
973 See CEB Letter at 4. However, the CEB did not
state a view as to whether FPSFI trades should be
subject to post-trade transparency.
974 See World Bank Letter II at 7.
975 The Commission notes that all FPSFIs, even
FPSFIs that are based in the United States, would
be deemed non-U.S. persons under the
Commission’s Title VII rules. See proposed Rule
3a71–3(a)(7)(ii) (‘‘The term ‘U.S. person’ does not
include the International Monetary Fund, the
International Bank for Reconstruction and
Development, the Inter-American Development
Bank, the Asian Development Bank, the African
Development Bank, the United Nations, and their
agencies, affiliates, and pension plans, and any
other similar international organizations, their
agencies, affiliates, and pension plans’’). See also
Section III.B.5, supra (discussing proposed
definition of ‘‘U.S. person’’). As with any other
security-based swap transaction having a direct
counterparty that is a non-U.S. person, a transaction
involving an FPSFI as a direct counterparty would
be subject to Regulation SBSR’s regulatory reporting
requirements only if it met one of the conditions in
re-proposed Rule 908(a)(1), and would be subject to
Regulation SBSR’s public dissemination
requirements only if it met one of the conditions in
re-proposed Rule 908(a)(2).
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to regulatory reporting. Under reproposed Regulation SBSR, an FPSFI
trade also would be required to be
reported if the counterparty were a nonU.S. person security-based swap dealer
or major security-based swap
participant. In either case, without a
regulatory report of such security-based
swaps, the Commission would have an
incomplete view of the risk positions
held by security-based swap market
participants that are U.S. persons or
registered with the Commission.
Regulatory reporting of such securitybased swaps, despite the fact that an
FPSFI is a counterparty, would facilitate
the Commission’s ability to carry out
our regulatory oversight responsibilities
with respect to registered entities and
the security-based swap market. The
Commission notes that this approach
was endorsed by two commenters.976
Furthermore, the Commission
believes that, at this time, a sufficient
basis does not exist to support an
exemption from public dissemination
for FPSFI trades. The Commission
preliminarily understands that FPSFI
participation in the security-based swap
market—rather than the swap market
generally—may be limited. Comments
submitted by FPSFIs generally were
addressed to both the Commission and
the CFTC and addressed participation in
the swap market generally; it is unclear
the extent to which these comments
should be read to apply to the securitybased swap market.977 Furthermore, to
the extent that FPSFI trades are subject
to public dissemination under
Regulation SBSR (e.g., because the
direct counterparty is a U.S. person
other than a foreign branch of a U.S.
bank), such trades could provide useful
price discovery information to other
market participants.
The Commission is seeking more
information with respect to the basis for
the claim that public dissemination of
FPSFI trades, as contemplated by reproposed Regulation SBSR, would
‘‘hinder the policy objectives’’ 978 of
FPSFIs. The Commission notes that
proposed Regulation SBSR contains
provisions relating to public
dissemination that are designed to
protect the identity of security-based
swap counterparties 979 and prohibit a
registered SDR (with respect to
976 See CEB Letter at 4; World Bank Letter II at
7 (stating that, although swaps involving FPSFIs as
counterparties generally should be exempt from the
definition of ‘‘swap,’’ they should be treated as
swaps solely for reporting purposes).
977 But see BIS Letter at 3 (stating that the BIS
generally does not transact security-based swaps
such as credit default swaps or equity derivatives).
978 ECB Letter I at 3.
979 See Rule 902(c)(1), as initially proposed.
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uncleared security-based swaps) from
disclosing the business transactions and
market positions of any person.980
Furthermore, to the extent that an FPSFI
trade is small enough not to constitute
a block trade, the Commission questions
the extent to which market observers
would be able to distinguish the trade
as having been conducted by an FPSFI.
Given these provisions of Regulation
SBSR, which are designed to prevent
adverse market impacts due to
disclosure of a counterparty’s identity or
the public dissemination of a block
trade, the Commission preliminarily
does not see a basis to exempt FPSFI
trades from public dissemination.
However, the Commission is open to
receiving further information that might
support an exemption.
Request for Comment
As noted above, certain FPSFI
commenters stated that carrying out
their policy mandates would require
confidentiality in certain
circumstances.981 The Commission
seeks additional information to assist
our analysis of this issue, and requests
answers to the following questions. In
responding, please focus on the
security-based swap market, not the
market for other swaps. In addition,
commenters are requested to answer
only with respect to security-based
swap activity that would be subject to
Regulation SBSR, and not with respect
to activity that, because of the place
where the transaction is conducted or
the nationality of the counterparties,
would not be subject to Regulation
SBSR in any case:
• How many FPSFIs engage in
security-based swap activity with U.S.
persons? How active are they in the
security-based swap market generally?
• What policy goals might an FPSFI
be attempting to carry out by
participating in the security-based swap
market?
• What trading strategies might an
FPSFI conduct in the security-based
swap market?
• Are there any characteristics of
FPSFI activity in the security-based
swap market that could make it easier
for market observers to detect an FPSFI
as a counterparty, or that could make it
easier to detect an FPSFI’s business
transactions or market positions? If so,
are there steps the Commission could
take to minimize such information
leakage short of suppressing all FPSFI
trades from public dissemination? If so,
what are they?
980 See
981 See
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• Do FPSFIs typically trade
standardized or more bespoke securitybased swap instruments? If the former,
would market observers be less likely to
detect the participation of an FPSFI in
the security-based swap market?
• What sizes do FPSFIs typically
transact in? Does the size impact any
concerns with publicly disseminating
FPSFI trades? If so, how? Could the
concerns of FPSFIs be addressed by
crafting appropriate block thresholds
and dissemination delays rather than by
suppressing all FPSFI trades from
public dissemination? Why or why not?
• Do you believe that FPSFI trades
should be included in public
dissemination? Why or why not? To
what extent, and how, would price
transparency and market efficiency be
affected if FPSFI trades were suppressed
from public dissemination?
I. Summary and Additional Request for
Comment
The provisions of re-proposed
Regulation SBSR discussed above
represent the Commission’s preliminary
views regarding the application of Title
VII’s provisions relating to regulatory
reporting and public dissemination of
security-based swap transactions in the
cross-border context. This re-proposal
reflects a particular balancing of the
principles and applicable requirements
described above,982 informed by, among
other things, the particular nature of the
security-based swap market, the
structure of security-based swap dealing
activity, and the Commission’s
experience in applying the federal
securities laws in the cross-border
context. The Commission recognizes
that other approaches are possible and
might more effectively achieve the goals
of the Dodd-Frank Act, in whole or in
part. Accordingly, the Commission
invites comment regarding all aspects of
re-proposed Regulation SBSR, and each
re-proposed rule contained therein,
including potential alternative
approaches. Data and comment from
market participants and other interested
parties regarding the likely effect of each
re-proposed rule and potential
alternative approaches will be
particularly useful to the Commission in
evaluating possible modifications to the
proposals.
The Commission requests comment
on any other cross-border issues relating
to regulatory reporting and public
dissemination of security-based swaps
that may not have been addressed
above. In particular, the Commission
requests comment on how the
Commission’s re-proposal addressing
982 See
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cross-border issues related to regulatory
reporting and public dissemination
might differ from the CFTC’s crossborder guidance on these matters.983 For
example, the CFTC Cross-Border
Proposal provides that a swap between
two unregistered non-U.S. persons, each
of which is guaranteed by a U.S. person,
would not be subject to regulatory
reporting or public dissemination
requirements.984 The Commission, on
the other hand, is proposing that a
security-based swap between two such
direct counterparties would be subject to
both regulatory reporting and public
dissemination requirements.985
Furthermore, the CFTC Cross-Border
Proposal provides that a swap between,
on one side, an unregistered non-U.S.
person that is guaranteed by a U.S.
person and, on the other side, an
unregistered non-U.S. person that is not
guaranteed by a U.S. person also would
not be subject to regulatory reporting or
public dissemination requirements.986
The Commission is proposing that a
security-based swap between two such
direct counterparties would be subject
to regulatory reporting 987 (but, in
accord with the CFTC’s proposal, not
subject to public dissemination). Please
describe any other differences that you
believe might exist and what would be
the impact of any such differences.
In addition, the Commission requests
comment on the market impact of the
approach to re-proposed Regulation
SBSR. For example, how would the
application of re-proposed Regulation
SBSR affect the competitiveness of U.S.
entities in the global marketplace (both
in the United States as well as in foreign
jurisdictions)? Would re-proposed
Regulation SBSR place any market
participants at a competitive
disadvantage or advantage? If so, please
explain. Would re-proposed Regulation
SBSR be a more general burden on
competition? If so, please explain. What
other measures should the Commission
consider to implement re-proposed
Regulation SBSR?
IX. Mandatory Security-Based Swap
Clearing Requirement
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A. Introduction
Section 3C(a)(1) of the Exchange Act
provides that it ‘‘shall be unlawful for
any person to engage in a security-based
swap unless that person submits such
983 See
note 21, supra.
CFTC Cross-Border Proposal, 77 FR
41237–38.
985 See re-proposed Rules 908(a)(1)(ii) and
908(a)(2)(ii) of Regulation SBSR.
986 See CFTC Cross-Border Proposal, 77 FR
41237–38.
987 See re-proposed Rule 908(a)(1)(ii) of
Regulation SBSR.
984 See
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security-based swap for clearing to a
clearing agency that is registered under
[the Exchange] Act or a clearing agency
that is exempt from registration under
[the Exchange] Act if the security-based
swap is required to be cleared.’’ 988 In
this section, we are proposing a rule to
specify when persons engaging in crossborder security-based swap transactions
would be required to comply with a
mandatory clearing determination.989
Consistent with the approach we have
taken elsewhere in this release,990 the
proposed rule is designed in general to
help ensure that the mandatory clearing
requirement applies to persons that
engage in security-based swap
transactions within the United States
and who may pose financial or
operational risk to the U.S. financial
system that may be mitigated by
requiring transactions to be centrally
cleared.991 The proposed rule also is
988 15 U.S.C. 78c–3(a)(1). Section 3C of the
Exchange Act further requires the Commission to
review each security-based swap (or any group,
category, type, or class of security-based swaps) to
make a determination that such security-based
swap (or group, category, type, or class of securitybased swap) should be required to be cleared. 15
U.S.C. 78c–3(b). The Commission has adopted final
rules regarding process for submissions for review
of security-based swaps for mandatory clearing and
notice filing requirements for clearing agencies. See
Clearing Procedures Adopting Release, 77 FR
41602. The proposed application of the mandatory
clearing requirement in the cross-border context
does not address, in any respect, our obligation to
review security-based swaps and make mandatory
clearing determinations under Section 3C(b) of the
Exchange Act.
989 The mandatory clearing requirement in
Section 3C(a)(1) of the Exchange Act will not apply
unless and until the Commission makes a
determination that a security-based swap is
required to be cleared, and the Commission has not
yet made any such determinations. In addition, the
registration requirement for security-based swap
clearing agencies in Section 17A(g) of the Exchange
Act is not yet effective because further rulemaking
is required regarding registration of and standards
for security-based swap clearing agencies. See 15
U.S.C. 78q-1(i) and (j). The Commission recently
adopted rules to establish minimum requirements
for registered clearing agency risk management
practices and operations. The rules identify certain
minimum standards for all clearing agencies,
including clearing agencies that clear security-based
swaps. See Clearing Agency Standards Adopting
Release, 77 FR 66220. The Commission continues
to consider additional standards for adoption,
including standards for confidentiality of trading
information, conflicts of interest, and members of
clearing agency boards of directors or committees,
as outlined in the proposing release for clearing
agency standards. See Exchange Act Release No.
64017 (Mar. 3, 2011), 76 FR 14472 (Mar. 16, 2011).
Any new rules governing security-based swap
clearing agencies could also affect counterparties
that are required to clear security-based swaps.
990 See, e.g., Section V, supra (discussing the
registration requirement in Section 17A(g) of the
Exchange Act for security-based swap clearing
agencies); see also the general discussion of the
Commission’s approach to applying Title VII to
cross-border activities in Section II.B, supra.
991 See Testimony Regarding Reducing Risks and
Improving Oversight in the OTC Credit Derivatives
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designed to help avoid limiting the
access of U.S. persons that conduct
security-based swap activity through
foreign branches or guaranteed non-U.S.
persons to foreign security-based swap
markets. To address concerns regarding
the clearance and settlement of securitybased swaps subject to the mandatory
clearing requirement, as well as the
potential for conflicting mandatory
clearing requirements in different
jurisdictions, we discuss under what
circumstances the Commission would
permit substituted compliance with the
mandatory clearing requirement in
Section XI.E below.992
Our proposed approach reflects a
particular balancing of the principles
discussed above.993 We recognize that
other approaches may achieve the goals
of the Dodd-Frank Act and Section 17A
of the Exchange Act, in whole or in part.
Accordingly, we invite comment
regarding all aspects of the proposed
rule described here, including potential
alternative approaches. Data and
comment from market participants and
other interested parties regarding the
likely effect of the proposed rule and of
potential alternative approaches will be
particularly useful to the Commission in
Market Before the Subcomm. on Secs., Ins., & Inv.,
of the S. Comm. on Banking, Hous., & Urban
Affairs, 110th Cong. (2008) (statement of James A.
Overdahl, Chief Economist, Commission), available
at: http://www.sec.gov/news/testimony/2008/
ts070908jao.htm (‘‘The 1975 Amendments [to the
Exchange Act] were in direct response to the
Paperwork Crisis of the late 1960’s that nearly
brought the securities industry to a standstill and
directly or indirectly resulted in the failure of large
numbers of broker-dealers. The causes of the
Paperwork Crisis are similar to the issues that we
have been trying to resolve in the OTC derivatives
market. The crisis resulted from a combination of
sharply increased volume and inattention to
securities processing. As a result, the industry’s
clearance and settlement procedures were
inefficient and lacked automation, thus implicating
the finances of the securities firms. Today, almost
forty years later, increasing automation in the
processing of OTC derivatives transactions is one of
the key goals of the OTC confirmations initiative,
in which the Commission is a very active
participant . . .’’); see also CPSS, New
Developments in Clearing and Settlement
Arrangements for OTC Derivatives, at 9, 39 (Mar.
2007), available at: http://www.bis.org/publ/
cpss77.pdf (noting ‘‘increasing concern about the
size and rapid growth of confirmation backlogs for
credit derivatives’’ and the growing importance of
‘‘operational reliability’’ to ‘‘safe and efficient
clearing and settlement’’ as the ‘‘market
infrastructure moves further in the direction of
centralised processing of trades and post-trade
events’’).
992 Under the Commission’s proposal, substituted
compliance may be permitted for cross-border
security-based swap transactions subject to the
mandatory clearing requirement in Section 3C(a)(1)
of the Exchange Act to enable counterparties to
clear and settle such transactions at a clearing
agency that is neither registered with the
Commission nor exempt from registration, under
certain conditions. See Section XI.E, infra.
993 See Section II.C, supra.
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evaluating potential modifications to the
proposal.
B. Summary of Comments
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The Commission has published
several rulemaking proposals under
Title VII of the Dodd-Frank Act that
relate to clearing security-based
swaps.994 The Commission solicited
public comment on each of these
proposals. The Commission also
solicited public comment on regulatory
initiatives under the Dodd-Frank Act
related to clearing security-based
swaps.995 Generally, these commenters
requested that the Commission take
actions to limit duplicative or
conflicting regulations with respect to
clearing security-based swaps.996
994 See Exchange Act Release Nos. 63556 (Dec. 15,
2010), 75 FR 79992 (Dec. 21, 2010) (proposing a
rule governing the end-user exception to the
mandatory clearing requirement); 63107 (Oct. 14,
2010), 75 FR 65881 (Oct. 26, 2010) (proposing
Regulation MC which would in part set ownership
limitations and governance requirements for
clearing agencies); see also notes 988 and 989,
supra (discussing final rules adopted in the
Clearing Procedures Adopting Release and rules
proposed and adopted relating to clearing agency
standards).
995 See Exchange Act Release Nos. 63435 (Dec. 6,
2010), 75 FR 76705 (Dec. 9, 2010) (joint roundtable
with CFTC regarding capital and margin
requirements); 63112 (Oct. 15, 2010), 75 FR 64710
(Oct. 20, 2010) (joint roundtable with CFTC
regarding issues related to clearing); 62864 (Sept. 8,
2010), 75 FR 55574 (Sept. 13, 2010) (joint
roundtable with CFTC regarding swap execution
facilities); 62725 (Aug. 16, 2010), 75 FR 51305 (Aug.
19, 2010) (joint roundtable with CFTC regarding
governance and conflicts of interest).
996 See, e.g., Davis Polk Letter I at 8 (‘‘First,
requiring foreign swap transactions to be cleared
through a U.S.-regulated clearinghouse may conflict
with any applicable foreign law that requires such
transactions to be cleared at a home country (nonU.S.) clearinghouse. Second, such an approach
would also legally compel a disproportionate
amount of global swaps clearing to be conducted
through U.S.-regulated clearinghouses. Third, such
a requirement would also concentrate risk that is
non-U.S. (because the transactions are with nonU.S. persons) in the U.S.-regulated clearinghouses,
which would cause them and the U.S. financial
system to bear additional non-U.S. risks.’’); Davis
Polk Letter II at 21–22 (proposing rule
modifications that ‘‘would avoid imposing
unnecessarily duplicative and inconsistent clearing
and trade reporting obligations on swap dealers and
their counterparties’’); Cleary Letter IV at 27 (noting
swaps between non-U.S. persons ‘‘are, in many
cases, likely to be subject to local clearing
requirements (which may (practically or legally)
require use of a local clearing organization and so,
in some cases, could conflict with Dodd-Frank’s
clearing requirement)’’); Japanese Banks Letter at 4
(‘‘We believe that future Japanese regulation of
swap activities of Japanese banks will render
regulation of such banks subject to Title VII
superfluous at best and potentially subject such
banks to inconsistent regulations under U.S. and
Japanese law.’’); Multiple Associations Letter I at 9–
10 (‘‘We believe that [the Commission] and other
U.S. regulatory agencies should anticipate where
the rulemaking may overlap, and possibly conflict,
and make every effort to actively coordinate with
each other and with foreign regulators both as to
harmonizing the substance of related regulations
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Two commenters highlighted the
global nature of the security-based swap
market and raised concerns about the
possible effect of foreign regulations on
U.S. participants in the security-based
swap market.997 These commenters
requested that U.S. and foreign
regulators identify possible areas where
rulemaking may overlap or conflict and
actively coordinate to harmonize both
the substance of related regulations and
the timing of their implementation.998
The commenters argued that, without
such coordination, ‘‘the development of
the swap markets will be vulnerable to
false starts, significant revisions and
inefficiencies, and possible regulatory
arbitrage across, or the flight to, other
jurisdictions.’’ 999
Commenters representing several
foreign banks requested that the
Commission adopt implementing
regulations under the Dodd-Frank Act
‘‘that enable and encourage foreign
banks engaged in swap dealing activities
to book their swaps businesses in a
single well-capitalized, highly rated
foreign-based banking institution.’’ 1000
These commenters did not comment
specifically on the proposed rules, but
rather argued in favor of a regulatory
framework that relies on home country
supervision where regulations operate at
the entity level, and that relies on Title
VII of the Dodd-Frank Act with respect
to ‘‘U.S. swap transactions,’’ where
regulations operate at the transaction
level.1001 In particular, these entities
believe that the mandatory clearing
requirement should not apply to
‘‘foreign swap transactions’’ (i.e.,
transactions they defined as not
involving a U.S. counterparty) or, more
broadly, to transactions that a
counterparty thereto is required to
submit for clearing pursuant to foreign
law.1002
and the timing of their implementation. Otherwise,
the development of the Swap markets will be
vulnerable to false starts, significant revisions and
inefficiencies, and possible regulatory arbitrage
across, or the flight to, other jurisdictions.’’);
Multiple Associations Letter II at 2 (stating that it
is ‘‘essential that rules be appropriately tailored,
work in tandem, and avoid unduly impairing
market liquidity or adversely impacting investors’’
and that [i]t is not enough to phase-in
implementation if the final rules themselves are
unworkable or in conflict’’).
997 See Multiple Associations Letter I at 9 (‘‘[I]t is
unclear to what extent foreign regulation, in
addition to regulation by the Commissions, may
affect U.S. Swap market participants.’’); Multiple
Associations Letter II at 1 (noting that ‘‘an iterative
approach to rulemaking has been taken when rules
have an unusually large impact on market structure
and participants’’).
998 Multiple Associations Letter I at 9.
999 Id. at 9–10.
1000 See Davis Polk Letter I at 2.
1001 Id.
1002 Id.; Cleary Letter IV at 27.
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Commenters representing foreign
financial institutions submitted a
second, supplemental comment letter to
elaborate on the above comments.1003 In
this letter, these commenters requested
that the Commission modify the
proposed definition of ‘‘security-based
swap dealer’’ to make clear that ‘‘a
security-based swap which is required
to be cleared under foreign law
(including by virtue of the fact that any
counterparty thereto is required under
foreign law to submit the same for
clearing) is not required to be cleared
under the [Dodd-Frank] Act.’’ 1004
Moreover, commenters representing
Japan’s three largest bank groups
requested that the Commission ‘‘adopt
implementing regulations under the
Dodd-Frank Act with the effect that
Japanese banks, including their U.S.
branches, are not made subject to the
application of Title VII
requirements.’’ 1005 Should the
Commission not take such action, these
commenters requested that the
regulations issued pursuant to Title VII:
(i) Not apply to transactions between
affiliates of a bank group regulated as a
bank holding company 1006 and (ii) not
apply to ‘‘a foreign dealer’’—particularly
one that is ‘‘subject to comprehensive
home country regulation’’—with respect
to transactions entered into by the
foreign dealer with a U.S.-based dealer
regulated as a swap dealer or securitybased swap dealer pursuant to Title
VII.1007
In addition, multiple commenters
endorsed the use of mandatory clearing
generally to further the goals of the
Dodd-Frank Act. One commenter
described mandatory clearing as ‘‘the
centerpiece of reform embodied in Title
VII of the Dodd-Frank Act’’ that,
accordingly, should be subject to ‘‘only
a very few, narrow, and limited
exceptions.’’ 1008 Another commenter
similarly urged the Commission to
‘‘prioritize the finalization and
implementation of clearing-related
rules.’’ 1009 Another stated that the
Commission’s ‘‘top priority should be to
1003 See
Davis Polk Letter II.
at 4–5.
1005 See Japanese Banks Letter at 4.
1006 Id.
1007 Id. at 5.
1008 Better Markets Letter at 10.
1009 Citadel Letter at 2 (further noting that
‘‘anything less needlessly inhibits transparency and
competition in the SB swaps markets and will leave
US financial markets vulnerable, damage American
competitiveness, and weaken our long-term
prospects for sound economic growth’’); see also
MFA Letter IV at 4 (urging the Commission to
prioritize clearing rules to ‘‘lay the regulatory
groundwork for more informed implementation’’ of
other final rules planned under the Dodd-Frank
Act).
1004 Id.
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implement requirements that reduce
systemic risk, such as the use of
centralized Swap clearinghouses.’’ 1010
C. Application of Title VII Mandatory
Clearing Requirements to Cross-Border
Transactions
1. Statutory Framework
By its terms, the mandatory clearing
requirement in Section 3C(a)(1) of the
Exchange Act applies to any person that
‘‘engage[s] in a security-based swap . . .
if the security-based swap is required to
be cleared.’’ 1011 We are proposing to
apply the statutory language ‘‘engage in
a security-based swap’’ to mean any
transaction in which a U.S. person is a
counterparty 1012 to a security-based
swap or guarantees the performance of
a non-U.S. person under a securitybased swap because of the involvement
of a U.S. person in the transaction.1013
We also are proposing to apply the
statutory language ‘‘engage in a securitybased swap’’ to include any transaction
in which a person performs any of the
activities that are key stages in a
security-based swap transaction (i.e.,
solicitation, negotiation, execution, or
booking of the transaction) 1014 within
the United States. As we noted above,
a ‘‘transaction conducted within the
United States,’’ as defined in proposed
Rule 3a71–3(a)(5), includes soliciting,
negotiating, executing, or booking a
security-based swap transaction.1015
Accordingly, subject to certain statutory
exceptions 1016 and certain other
1010 Multiple
Associations Letter I at 2.
3C(a)(1) of the Exchange Act, 15
U.S.C. 78c–3(a)(1).
1012 The use of the term ‘‘counterparty’’ in the
proposed rule is intended to refer to the direct
counterparty to the security-based swap transaction,
not a party that provides a guarantee on the
performance of the direct counterparty under the
security-based swap. As discussed in Section VIII.C,
supra, re-proposed Rules 900(j) and (o) under the
Exchange Act would define the term ‘‘direct
counterparty’’ as ‘‘a person that enters directly with
another person into a contract that constitutes a
security-based swap,’’ and an ‘‘indirect
counterparty’’ as ‘‘a person that guarantees the
performance of a direct counterparty to a securitybased swap or that otherwise provides recourse to
the other side for the failure of the direct
counterparty to perform any obligation under the
security-based swap.’’
1013 See Section II.B.2(d), supra (discussing the
Commission’s treatment of guarantees).
1014 As noted above, solicitation, negotiation,
execution, and booking are activities that represent
key stages in a potential or completed securitybased swap transaction. See note 310 and
accompanying text, supra. Persons that conduct any
of these activities would be considered to be
‘‘engaged in a security-based swap’’ under the
Commission’s proposed interpretation.
1015 See Section III.B.6, supra.
1016 The Exchange Act provides an exception
from the mandatory clearing requirement in
connection with security-based swaps that involve
persons that are not financial entities and that use
the security-based swaps to hedge or mitigate
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exceptions described below,1017 we are
proposing to apply the mandatory
clearing requirement to any person that
engages in a security-based swap
transaction in which at least one of the
counterparties to the transaction is a
U.S. person or a non-U.S. person whose
performance under the security-based
swap is guaranteed by a U.S. person, or
if the transaction is a ‘‘transaction
conducted within the United States,’’ as
defined in proposed Rule 3a71–3(a)(5)
under the Exchange Act.1018
We preliminarily believe our
proposed approach to the mandatory
clearing requirement, including the
interpretation of the statutory language
discussed above and further discussed
below, is consistent with the purposes
of the mandatory clearing requirement
in Section 3C(a)(1) of the Exchange Act.
The Dodd-Frank Act is intended to
promote the financial stability of the
United States by, among other things,
reducing risks to the U.S. financial
system by ensuring that, whenever
possible and appropriate, derivatives
contracts are centrally cleared rather
than traded exclusively in the OTC
market.1019 In making our mandatory
clearing determination, the Commission
is required to take into account certain
factors, including, among other things,
‘‘the availability of rule framework,
capacity, operational expertise and
resources, and credit support
infrastructure’’ in clearing agencies to
support clearing of the product in
commercial risk. See Section 3C(g) of the Exchange
Act, 15 U.S.C. 78c–3(g). The Exchange Act also
provides exemptions from the clearing requirement
for security-based swaps entered into prior to the
enactment of the Dodd-Frank Act, and for securitybased swaps entered into prior to the application
of the clearing requirement, so long as those
instruments are reported to a registered SDR. See
Sections 3C(e)(1) and (f)(1) of the Exchange Act, 15
U.S.C. 78c–3(e)(1) and (f)(1) (pre-enactment
security-based swaps); Sections 3C(e)(2) and (f)(2)
of the Exchange Act, 15 U.S.C. 78c–3(e)(2) and (f)(2)
(post-enactment security-based swaps entered into
prior to the application of the clearing requirement).
1017 See Sections IX.C.3(a)ii and IX.C.3(b)ii, infra.
1018 Proposed Rule 3Ca–3(a) under the Exchange
Act.
1019 See, e.g., S. Comm. on Banking, Hous., &
Urban Affairs, The Restoring American Financial
Stability Act of 2010, S. Rep. No. 111–176, at 32
(‘‘As a key element of reducing systemic risk and
protecting taxpayers in the future, protections must
include comprehensive regulation and rules for
how the OTC derivatives market operates.
Increasing the use of central clearinghouses,
exchanges, appropriate margining, capital
requirements, and reporting will provide safeguards
for American taxpayers and the financial system as
a whole.’’); id. at 34 (‘‘Some parts of the OTC market
may not be suitable for clearing and exchange
trading due to individual business needs of certain
users. Those users should retain the ability to
engage in customized, uncleared contracts while
bringing in as much of the OTC market under the
centrally cleared and exchange-traded framework as
possible.’’).
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question, and ‘‘the effect on the
mitigation of systemic risk.’’ 1020 The
Commission preliminarily believes that
the proposed approach generally would
help to ensure that the goals of the
Dodd-Frank Act to increase the use of
available centralized market
infrastructures to reduce operational
risks and mitigate systemic risk are
achieved,1021 while not unnecessarily
limiting the access of U.S. persons that
conduct security-based swap activity
through foreign branches or guaranteed
non-U.S. persons to foreign securitybased swap markets.
2. Proposed Rule
In light of the interpretation of the
statutory language ‘‘engage in a securitybased swap’’ and the policy concerns
discussed above, we are proposing a
rule that would apply the mandatory
clearing requirement to a person that
engages in a security-based swap
transaction if a counterparty to the
transaction is (i) a U.S. person or (ii) a
non-U.S. person whose performance
under the security-based swap is
guaranteed by a U.S. person.1022 We
also are proposing a rule that would
apply the mandatory clearing
requirement to a person that engages in
a security-based swap transaction if
such transaction is a ‘‘transaction
conducted within the United States,’’ as
defined in proposed Rule 3a71–3(a)(5)
under the Exchange Act.1023 To limit
1020 Section 3C(b)(4)(B) of the Exchange Act, 15
U.S.C. 78c–3(b)(4)(B).
1021 The purpose of central clearing is to mitigate
counterparty credit risk by shifting that risk from
individual counterparties to CCPs, thereby helping
protect counterparties from each other’s potential
failures. Central clearing also requires that mark-tomarket pricing and margin requirements be applied
in a consistent manner. CCPs generally use liquid
margin collateral to manage the risk of a CCP
member’s failure, and rely on their margin
calculations and their access to that liquid collateral
to protect against sudden movements in market
prices, including movements in market value after
a counterparty’s default. A CCP that stands between
counterparties for OTC derivatives is generally
perceived to decrease systemic risk. Further, the use
of CCPs may lead to standardization of contracts
and processes, which improve market efficiency
and reduce the operational risks attributable to
human and processing errors. See, e.g., Wellink,
supra note 110, at 132–33; Culp, supra note 111,
at 15–16; Manmohan Singh, ‘‘Collateral, Netting
and Systemic Risk in the OTC Derivatives Market,’’
IMF Working Paper (2010), at 9–13, available at:
http://www.imf.org/external/pubs/ft/wp/2010/
wp1099.pdf.
1022 Proposed Rule 3Ca–3(a)(1) under the
Exchange Act. Under proposed Rule 3Ca–3(c) under
the Exchange Act, the term ‘‘U.S. person’’ would
have the same meaning as set forth in proposed
Rule 3a71–3(a)(7) under the Exchange Act, as
discussed in Section III.B.5, supra.
1023 Proposed Rule 3Ca–3(a)(2) under the
Exchange Act. Under proposed Rule 3Ca–3(c) under
the Exchange Act, the term ‘‘transaction conducted
within the United States’’ would have the same
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the scope of the proposal, we are
proposing exceptions to the mandatory
clearing requirement in the following
two scenarios:
• If the security-based swap
transaction is not a ‘‘transaction
conducted within the United States,’’
the proposed rule would not apply the
mandatory clearing requirement if one
counterparty to the transaction is (i) a
foreign branch of a U.S. bank 1024 or (ii)
a non-U.S. person whose performance
under the security-based swap is
guaranteed by a U.S. person,1025 and if
the other counterparty to the transaction
is a non-U.S. person (i) whose
performance under the security-based
swap is not guaranteed by a U.S. person
and (ii) who is not a foreign securitybased swap dealer.1026
• If the security-based swap
transaction is a ‘‘transaction conducted
within the United States,’’ the proposed
rule would not apply the mandatory
clearing requirement if (i) neither
counterparty to the transaction is a U.S.
person; (ii) neither counterparty’s
performance under the security-based
swap is guaranteed by a U.S. person;
and (iii) neither counterparty to the
transaction is a foreign security-based
swap dealer.1027
We discuss below the proposed rule
regarding the application of the
mandatory clearing requirement in more
detail.
meaning as set forth in proposed Rule 3a71–3(a)(5)
under the Exchange Act, as discussed in Section
III.B.5, supra.
1024 Under proposed Rule 3Ca–3(c) under the
Exchange Act, the term ‘‘foreign branch’’ would
have the same meaning as set forth in proposed
Rule 3a71–3(a)(1) under the Exchange Act. See
discussion in Section III.B.7, supra. A securitybased swap transaction conducted through a foreign
branch, as defined in proposed Rule 3a71–3(a)(4)
under the Exchange Act, would be specifically
excluded from the proposed definition of
‘‘transaction conducted within the United States.’’
See proposed Rule 3a71–3(a)(5)(ii) under the
Exchange Act.
1025 A security-based swap transaction involving
a non-U.S. person whose performance under the
security-based swap is guaranteed by a U.S. person
would not be a ‘‘transaction conducted within the
United States’’ by virtue of the guarantee alone
under proposed Rule 3a71–3(a)(5) under the
Exchange Act, unless the transaction is solicited,
negotiated, executed, or booked within the United
States. We would consider such transaction to be
engaged in within the United States, however, by
virtue of the guarantee from the U.S. person, who
acts as an ‘‘indirect counterparty’’ to the
transaction. See note 1012, supra.
1026 Proposed Rule 3Ca–3(b)(1) under the
Exchange Act. Proposed Rule 3Ca–3(c) defines the
term ‘‘foreign security-based swap dealer’’ by crossreference to the definition of that term in proposed
Rule 3a71–3(a)(3) of the Exchange Act (defining
‘‘foreign security-based swap dealer’’ to mean ‘‘a
security-based swap dealer, as defined in section
3(a)(71) of the [Exchange] Act (15 U.S.C. 78c(a)(71)),
and the rules and regulations thereunder, that is not
a U.S. person’’).
1027 Proposed Rule 3Ca–3(b)(2) under the
Exchange Act.
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3. Discussion
(a) Security-Based Swap Transactions
Involving U.S. Persons or Non-U.S.
Persons Receiving Guarantees From U.S.
Persons
i. Proposed Rule
The proposed rule would apply the
mandatory clearing requirement in
Section 3C(a)(1) of the Exchange Act,
and the rules and regulations
thereunder, to a person that engages in
a security-based swap transaction if a
counterparty to the transaction is (i) a
U.S. person or (ii) a non-U.S. person
whose performance under the securitybased swap is guaranteed by a U.S.
person,1028 subject to certain
exceptions.1029
As discussed above,1030 a U.S. person
that is a counterparty to a security-based
swap transaction bears the ongoing risk
of the transaction. It is the financial
resources of that U.S. person that will be
called upon in performing any
obligations pursuant to that transaction,
and this activity is capable of posing
risks to the stability of the U.S. financial
system. Because these obligations and
risks reside in the United States, the
Commission preliminarily believes that
when a U.S. person is a counterparty to
a security-based swap transaction, such
person necessarily engages in a securitybased swap within the United States
and, therefore, would be subject to the
mandatory clearing requirement in
Section 3C(a)(1) of the Exchange Act
and the rules and regulations
thereunder.
In the case of a non-U.S. person
guaranteed by a U.S. person (‘‘U.S.
guarantor’’), the guarantee provides the
counterparty of the guaranteed entity
direct recourse to the U.S. guarantor
with respect to any obligations owed by
the guaranteed entity under the
security-based swap, and the U.S.
guarantor exposes itself to the securitybased swap risk as if it were a direct
counterparty 1031 to the security-based
swap through the security-based swap
activity engaged in by the guaranteed
entity. In many cases, the counterparty
would not enter into the transaction (or
would not do so on the same terms)
with the guaranteed entity, and the
guaranteed entity would not be able to
engage in any security-based swaps,
without the guarantee. Given the
reliance by both the guaranteed entity
and its counterparty on the
1028 Proposed Rules 3Ca–3(a)(1)(i) and (ii) under
the Exchange Act.
1029 Proposed Rule 3Ca–3(b) under the Exchange
Act.
1030 See Section II.A.6, supra.
1031 See note 1012, supra.
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creditworthiness of the guarantor in the
course of engaging in security-based
swap transactions and for the duration
of the transaction, we preliminarily
believe that a security-based swap
transaction in which one of the
counterparties is a non-U.S. person
whose performance under a securitybased swap is guaranteed by a U.S.
person is a transaction that is engaged
in within the United States by virtue of
the involvement of the U.S. guarantor in
the security-based swap.1032 Our
proposed rule, therefore, would subject
transactions involving at least one
counterparty whose performance under
the security-based swap is guaranteed
by a U.S. person to the mandatory
clearing requirement,1033 subject to
certain exceptions discussed below.1034
We recognize that this proposed
approach would subject certain
security-based swap transactions with
non-U.S. persons to the mandatory
clearing requirement if a U.S. person is
a counterparty to the transaction (e.g.,
U.S. dealer to foreign dealer
transactions). We preliminarily believe
that such an approach is appropriate, as
a significant proportion of the risk borne
by U.S. persons, and, therefore, the risk
to the U.S. financial system as a result
of the U.S. persons’ security-based swap
activity, arises from transactions entered
into with non-U.S. persons.1035 Even
where a U.S person’s security-based
swap activity occurs in part outside the
United States (e.g., the transaction is
negotiated or executed outside the
United States), this activity may pose
risk to the U.S. financial system because
security-based swap transactions give
rise to ongoing obligations on the part
of the U.S. person and credit risk
exposures to its non-U.S. counterparties.
Therefore, subjecting a transaction in
which a U.S. person is a counterparty to
the transaction to the mandatory
clearing requirement would further the
purposes of Title VII by ensuring that
security-based swaps involving persons
whose security-based swap activities
create risk that Title VII is intended to
address would be centrally cleared
through a CCP.1036
1032 See
note 1025, supra.
Rule 3Ca–3(a)(1)(ii) under the
Exchange Act.
1034 Proposed Rule 3Ca–3(b) under the Exchange
Act.
1035 See Section II.A.6, supra.
1036 We preliminarily believe that the proposed
approach to the mandatory clearing requirement is
not being applied to persons who are ‘‘transact[ing]
a business in security-based swaps without the
jurisdiction of the United States,’’ within the
meaning of Section 30(c). See Section II.B.2(b),
supra. However, the Commission also preliminarily
believes that the proposed approach to the
mandatory clearing requirement is necessary or
1033 Proposed
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ii. Proposed Exception for Certain
Transactions Involving Foreign
Branches of U.S. Banks and Guaranteed
Non-U.S. Persons
The Commission is proposing an
exception from the mandatory clearing
requirement described above for certain
transactions that involve foreign
branches of a U.S. bank or guaranteed
non-U.S. persons, provided the
transactions are not conducted within
the United States. Specifically, under
the proposed rule, the mandatory
clearing requirement would not apply to
a security-based swap transaction if one
counterparty to the transaction is a
foreign branch of a U.S. bank 1037 or a
non-U.S. person whose performance
under the security-based swap is
guaranteed by a U.S. person and if the
other counterparty to the transaction is
a non-U.S. person (i) whose
performance under the security-based
swap is not guaranteed by a U.S. person
and (ii) who is not a foreign securitybased swap dealer.1038 Such exception
would not apply if the security-based
swap transaction were a transaction
conducted within the United States, as
defined in proposed Rule 3a71–3(a)(5)
under the Exchange Act.1039
Without such an exception, U.S.
persons conducting security-based swap
activity out of foreign branches or
guaranteed non-U.S. persons may have
less access to foreign security-based
swap markets because non-U.S. person
counterparties may be less willing to
enter into security-based swap
transactions with them if such
transactions are subject to a mandatory
clearing requirement. We recognize that
imposing the mandatory clearing
requirement on a foreign branch of a
U.S. bank or on a non-U.S. person
whose performance under a securityappropriate to help prevent the evasion of the
particular provisions of the Exchange Act that were
added by the Dodd-Frank Act that are being
implemented by the approach and prophylactically
will help ensure that the purposes of those
provisions of the Dodd-Frank Act are not
undermined. See Section II.B.2(e), supra; see also
Section II.B.2(d), supra.
For example, if the mandatory clearing
requirement does not apply to transactions among
non-U.S. persons that receive guarantees from U.S.
persons and foreign branches of U.S. banks, then
U.S. persons would have an incentive to conduct
transactions with other U.S. persons through
guaranteed foreign affiliates or foreign branches to
avoid the mandatory clearing requirement, even
though altering the form of the transactions would
not alter the substance of the risk to U.S. markets
that the Dodd-Frank Act was enacted to address and
thus could undermine the purposes of the DoddFrank Act. See Section II.A.6, supra.
1037 See note 1024, supra.
1038 Proposed Rule 3Ca–3(b)(1) under the
Exchange Act. See note 1026, supra.
1039 Proposed Rule 3Ca–3(b)(1) under the
Exchange Act.
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based swap is guaranteed by a U.S.
person would be consistent with the
view that a foreign branch of a U.S. bank
is part of a U.S. person 1040 and that a
U.S. guarantor is an indirect
counterparty 1041 to the transaction
entered into by the guaranteed non-U.S.
person. We also recognize that such
transactions pose risk to the U.S.
financial system. At the same time,
however, imposing the mandatory
clearing requirement on U.S. persons
that conduct their foreign security-based
swap dealing activity through foreign
branches or guaranteed non-U.S.
persons, without any exceptions, could
put such U.S. persons at a significant
competitive disadvantage to non-U.S.
persons who conduct security-based
swap business in the same foreign local
market and thereby limit the access of
such U.S. persons to foreign securitybased swap markets.1042 After balancing
the various policy considerations,
including the Dodd-Frank Act’s goal of
mitigating risk to the U.S. financial
system, we have preliminarily
concluded that the proposed exception
from the mandatory clearing
requirement for transactions by U.S.
persons conducting security-based swap
activity out of foreign branches or
guaranteed non-U.S. persons with nonU.S. persons whose performance under
the security-based swap is not
guaranteed by a U.S. person is
appropriate, provided that it is not a
transaction conducted within the
United States.1043
This exception from the mandatory
clearing requirement would not apply
under the proposed rule, however,
when the non-U.S. person counterparty
of the foreign branch of the U.S. bank
or the guaranteed non-U.S. person is a
foreign security-based swap dealer.1044
1040 See
Section III.B.5, supra.
note 1012, supra.
1042 See, e.g., Sullivan & Cromwell Letter at 14
(‘‘The jurisdictional scope of the swaps entity
definitions is critical to the ability of U.S. banking
organizations to maintain their competitive position
in foreign marketplaces. Imposing the regulatory
regime of Title VII on their Non-U.S. Operations
would place them at a disadvantage to their foreign
bank competitors because the Non-U.S. Operations
would be subject to an additional regulatory regime
which their foreign competitors would not.’’);
Cleary Letter IV at 7 (‘‘Subjecting such non-U.S.
branches and affiliates to U.S. requirements could
effectively preclude them from, or significantly
increase the cost of, managing their risk in the local
financial markets, since local financial institutions
may be required to comply with Dodd-Frank to
provide those services.’’).
1043 In this regard, we note that such transaction
may be subject to a mandatory clearing requirement
in a foreign jurisdiction. See Section XI.E, infra
(discussing substituted compliance).
1044 Proposed Rule 3Ca–3(b)(1)(ii)(B) under the
Exchange Act. Like U.S. persons conducting
security-based swap activity out of foreign branches
1041 See
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31079
As discussed above, a non-U.S. person
would be required to register as a
foreign security-based swap dealer if its
transactions with U.S. persons or
otherwise conducted within the United
States, connected with its dealing
capacity, exceed the de minimis
threshold in the security-based swap
dealer definition.1045 Thus, a foreign
security-based swap dealer would
necessarily have a significant
connection with the U.S. security-based
swap market. As a result, the
Commission preliminarily believes that
it is not appropriate to provide an
exception for U.S. persons conducting
security-based swap activity out of
foreign branches or guaranteed non-U.S.
persons when they enter into securitybased swaps with foreign security-based
swap dealers.
We are not proposing to provide an
exception from mandatory clearing for
U.S. persons generally, however,
although we recognize that such
exception could increase access to
foreign security-based swap markets for
all U.S. persons. The Commission
preliminarily believes that such a broad
exception to the mandatory clearing
requirement, in a market as global as the
security-based swap market,1046 would
undermine the goal of the mandatory
clearing requirement to reduce financial
risk to the U.S. financial system. In light
of the statutory goal, we preliminarily
do not believe that the benefit of
providing U.S. persons greater access to
foreign security-based swap markets
warrants expanding the exception
beyond the scope we are proposing
here. In this regard, we also note that a
uniform mandatory clearing
requirement for all U.S. persons other
than foreign branches and guaranteed
non-U.S. persons should facilitate the
development of central clearing
infrastructures and encourage the
standardization of contract terms.1047
or guaranteed non-U.S. persons, a foreign securitybased swap dealer would not be subject to the
mandatory clearing requirement when it engages in
a security-based swap transaction with a non-U.S.
person, provided neither party’s performance under
the security-based swap is guaranteed by a U.S.
person and the transaction is not conducted within
the United States. Such a transaction would not be
captured by proposed Rule 3Ca–3(a) under the
Exchange Act (and, therefore, it is not necessary for
such transaction to be included as an exception in
paragraph (b) of Rule 3Ca–3).
1045 See Section III.B.4, supra.
1046 See Section II.A.1, supra (discussing the
global nature of the security-based swap market).
1047 See, e.g., note 991, supra. A robust
infrastructure for clearing of security-based swaps
should reduce operational risks resulting from
backlogs and processing errors. See FMI Principles
at 20, 94 (describing operational risk as the ‘‘risk
that deficiencies in information systems or internal
processes, human errors, management failures, or
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(b) Transactions Conducted Within the
United States
i. Proposed Rule
Under the proposed rule, a securitybased swap transaction that is a
‘‘transaction conducted within the
United States,’’ as defined in proposed
Rule 3a71–3(a)(5) under the Exchange
Act, would be subject to the mandatory
clearing requirement.1048 The
Commission preliminarily believes that
engaging in a security-based swap
includes the performance by a person of
any of the activities that represent key
stages in a security-based swap
transaction, including solicitation,
negotiation, execution, or booking of a
security-based swap transaction. As we
have noted above, a ‘‘transaction
conducted within the United States,’’ as
defined in proposed Rule 3a71–3(a)(5),
includes soliciting, negotiating,
executing, or booking a security-based
swap transaction.1049 Accordingly, we
preliminarily would interpret engaging
in a security-based swap within the
United States to encompass the same
types of activities that characterize a
transaction conducted within the
United States, as that term is defined in
proposed Rule 3a71–3(a)(5).1050
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ii. Proposed Exception for Transactions
Conducted Within the United States by
Certain Non-U.S. Persons
The Commission recognizes that
transactions between two non-U.S.
persons whose performances under a
security-based swap are not guaranteed
by a U.S. person do not pose the same
risk to the U.S. financial system that is
posed by transactions with U.S. person
counterparties or transactions in which
a U.S. person provides a guarantee. In
particular, while the operational risks
associated with the transaction may
reside in the United States and would
potentially be reduced by required use
of the central market infrastructure
available to clear the products in
question, we preliminarily believe that
because the financial risks of the
transaction would reside with non-U.S.
persons outside the United States, it is
not necessary to apply the mandatory
clearing requirement to a transaction
between two non-U.S. persons solely
because the transaction is a ‘‘transaction
conducted within the United States’’ as
disruptions from external events will result in the
reduction, deterioration, or breakdown of services’’
and noting that operational risks ‘‘can be a source
of systemic risk.’’).
1048 Proposed Rule 3Ca–3(a)(2) under the
Exchange Act.
1049 See Section III.B.6, supra.
1050 Proposed Rule 3Ca–3(a)(2) under the
Exchange Act.
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defined in proposed Rule 3a71–3(a)(5)
under the Exchange Act. Accordingly,
the Commission is proposing an
exception from the mandatory clearing
requirement for security-based swap
transactions that are ‘‘transactions
conducted within the United States’’
when no counterparty to the transaction
is (i) a U.S. person; (ii) a non-U.S.
person whose performance under the
security-based swap is guaranteed by a
U.S. person; or (iii) a foreign securitybased swap dealer.1051
The Commission preliminarily
believes it is appropriate to limit the
exception from the mandatory clearing
requirement when one or both of the
non-U.S. person counterparties is a
foreign security-based swap dealer.
Non-U.S. persons whose transactions
arising from dealing activity with U.S.
persons or otherwise conducted within
the United States exceed the de minimis
threshold in the security-based swap
dealer definition have a sufficient
connection to the U.S. security-based
swap market to lead the Commission to
preliminarily conclude that it would not
be appropriate to except transactions
involving them from the mandatory
clearing requirement when they conduct
security-based swap transactions within
the United States. Permitting non-U.S.
persons to engage in security-based
swap transactions within the United
States with foreign security-based swap
dealers without being subject to the
mandatory clearing requirement would
potentially limit the access of U.S.
persons to foreign security-based swap
markets because non-U.S. persons
seeking to engage in security-based
swaps within the United States may
prefer to engage in security-based swaps
with foreign security-based swap
dealers rather than U.S. persons to avoid
the mandatory clearing requirement.
Request for Comment
The Commission seeks comment on
the proposed rule in all aspects. In
addition, the Commission seeks
comment on the following specific
questions:
• Should the mandatory clearing
requirement apply to all transactions
conducted by a U.S. person, including
transactions conducted out of a foreign
branch, or by a guaranteed non-U.S.
person? Why or why not? Should the
mandatory clearing requirement apply
to such transactions unless, for example,
they are conducted in a foreign regime
that has a mandatory clearing regime
that is comparable to the mandatory
clearing regime under the Dodd-Frank
Act? In assessing comparability under
1051 Id.
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this approach, to what extent should
results of mandatory clearing
determinations under the foreign regime
be taken into account? Should the
determinations with respect to ‘‘local’’
products be viewed differently than
products that are subject to mandatory
clearing determinations in one or more
other jurisdictions, i.e., ‘‘global’’
products? Would some other standard
for assessing a foreign regime in these
circumstances be appropriate?
• Is the proposed approach overbroad or over-narrow? If so, why?
Should a security-based swap that is
required to be cleared under foreign law
not be required to be cleared pursuant
to Section 3C, as some commenters
stated? If so, why?
• When the conduct occurring in the
United States is limited only to
negotiating or soliciting a transaction,
does the transaction carry risk into the
U.S. financial system? If not, is
application of the mandatory clearing
requirement to such transactions
appropriate?
• How should the Commission weigh
the operational risks that arise from
requiring mandatory clearing? To what
extent do the exceptions to the
mandatory clearing requirement
undermine the development of a central
clearing infrastructure that will facilitate
the prompt and accurate clearance and
settlement of security-based swaps? Are
persons excepted from the mandatory
clearing requirement likely to develop
the same operational capacity and
safeguards to facilitate clearing as
persons not excepted? If not, to what
extent does this increase operational
risk to the national system for clearance
and settlement? To what extent, if any,
should the exceptions to the mandatory
clearing requirement be limited to
minimize operational risks and market
risks that may be experienced in the
United States?
• Are there other rationales besides
risk mitigation that justify imposing the
mandatory clearing requirement? If so,
what are they and why? Do these
alternative rationales support a different
application of the requirement to U.S.
persons and non-U.S. persons? As
regards foreign branches of U.S. banks?
As regards non-U.S. persons who
receive guarantees from U.S. persons
and non-U.S. persons who do not
receive guarantees from U.S. persons?
As regards security-based swap dealers?
• How should the mandatory clearing
requirement treat members of clearing
agencies registered with the
Commission? For instance, to what
extent should the mandatory clearing
requirement apply to members of
clearing agencies registered with the
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Commission if the member is not a U.S.
person, does not have its performance
guaranteed by a U.S. person, is not a
security-based swap dealer, or is not
conducting the transaction within the
United States? Please be specific.
• How should the mandatory clearing
requirement treat counterparties who
are swap dealers? For instance, should
non-U.S. persons who are swap dealers
and whose performance under the swap
is not guaranteed by a U.S. person be
excepted from the mandatory clearing
requirement in any circumstances? If so,
under what circumstances? How should
other financial entities be treated? How
should major swap participants and
major security-based swap participants
be treated under the proposed rule?
Should they be excepted from the
mandatory clearing requirement, in
certain circumstances, as we have
proposed?
• Are the proposed exceptions from
the mandatory clearing requirement
appropriate? Should other transactions
also be excepted? If so, which? Should
other categories of persons also be
excepted? If so, whom?
• Should any transactions conducted
within the United States be subject to
any exception from the mandatory
clearing requirement? If so, why? For
instance, should a transaction between
two non-U.S. persons neither of whom
is guaranteed by a U.S. person and
neither of whom are security-based
swap dealers, as excepted from the
mandatory clearing requirement under
proposed Rule 3Ca–3(b)(2), be subject to
mandatory clearing? If so, why?
• Should any transactions where one
counterparty is a U.S. person be subject
to an exception from the mandatory
clearing requirement? If so, which
transactions and why? For instance,
should transactions not conducted in
the United States in which one
counterparty is a foreign branch of a
U.S. bank be subject to any exceptions,
such as the exception in proposed Rule
3Ca–3(b)(1)?
• To what extent might the
exceptions described in proposed Rule
3Ca–3(b) create competitive disparity
between similarly situated persons
competing in the same market? For
instance, for transactions conducted
within the United States, to what extent,
if any, might proposed Rule 3Ca–3(b)(2)
create competitive disparity between
U.S. persons and non-U.S. persons? For
transactions not conducted within the
United States, to what extent, if any,
might proposed Rule 3Ca–3(b)(1) create
competitive disparity between
counterparties who are security-based
swap dealers and foreign branches of
U.S. banks?
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• Should the Commission impose any
conditions to the exceptions from the
mandatory clearing requirement? What
conditions would be appropriate?
• If the proposed rule overlaps with
a foreign mandatory clearing
requirement, in what ways are the
requirements likely to conflict? What
would be the effects on efficiency,
competition and capital formation in the
event that there are overlapping or
duplicative mandatory clearing
requirements or varying exceptions to
such requirements across multiple
jurisdictions?
• What provisions of Section 3C, or
the Exchange Act and rules thereunder
generally, would a counterparty be
unable to comply with if the securitybased swap transaction was subject to
more than one mandatory clearing
requirement? What categories of
transactions are likely to be subject to
such multiple mandatory clearing
requirements? To what extent, if any,
would a counterparty’s membership in
a clearing agency that clears securitybased swaps affect the likelihood that
multiple mandatory clearing
requirements would apply to a securitybased swap transaction? To what extent,
if any, would a guaranteed non-U.S.
person be subject to multiple mandatory
clearing requirements? To what extent,
if any, does the home country of the
reference entity under a security-based
swap affect the likelihood that multiple
mandatory clearing requirements would
apply to the transaction? Does proposed
Rule 3Ca–3 provide sufficient regulatory
guidance regarding such transactions?
Why or why not?
• What would be the market impact
of proposed Rule 3Ca–3? How would
the proposed application of the
mandatory clearing requirement affect
the competitiveness of U.S. entities in
the global marketplace (both in the
United States as well as in foreign
jurisdictions)? Would the proposed rule
place any market participants at a
competitive disadvantage or advantage?
If so, please explain. Would the
proposed rule be a more general burden
on competition? If so, please explain.
What other measures should the
Commission consider to implement the
mandatory clearing requirement? What
would be the market impacts and
competitiveness effects of alternatives to
the proposed approach discussed in this
release?
X. Mandatory Security-Based Swap
Trade Execution Requirement
A. Introduction
Section 3C(h)(1) of the Exchange Act
requires, with respect to transactions
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involving security-based swaps subject
to the clearing requirement in Section
3C(a)(1) of the Exchange Act, that
counterparties execute such transactions
on an exchange or a security-based swap
execution facility that is registered
under Section 3D of the Exchange Act
or exempt from registration under
Section 3D(e) of the Exchange Act (the
‘‘mandatory trade execution
requirement’’).1052 Section 3C(h) thus
provides that security-based swap
transactions subject to the mandatory
trade execution requirement cannot be
executed on an OTC basis, but must
instead be executed on an exchange or
security-based swap execution facility
that is registered or exempt from
registration under the Exchange Act,
unless an exception applies.1053 As
such, the mandatory trade execution
requirement is important in helping to
bring the trading of security-based
swaps onto transparent, regulated
markets, from more opaque OTC
markets.1054
Because transactions in security-based
swaps are often conducted globally with
counterparties and intermediaries from
multiple jurisdictions,1055 we recognize
uncertainty may exist regarding how to
apply the mandatory trade execution
requirement to cross-border securitybased swap transactions.1056 The
1052 15
U.S.C. 78c–3(h)(1).
U.S.C. 78c–3(h). Section 3C(h)(2) of the
Exchange Act provides two exceptions to
compliance with the mandatory trade execution
requirement: (i) If no exchange or security-based
swap execution facility makes the security-based
swap available to trade; or (ii) if the security-based
swap transaction is subject to the clearing exception
under Section 3C(g) of the Exchange Act. 15 U.S.C.
78c–3(h)(2). In this release, we are not addressing
either of these exceptions, as they pertain to
whether a particular security-based swap is subject
to the mandatory trade execution requirement. Our
focus here is on the obligations of the
counterparties to a transaction involving a securitybased swap that is subject to the mandatory
execution requirement where neither of these
exceptions applies.
1054 See SB SEF Proposing Release, 76 FR 10949
(‘‘The current market for [security-based] swaps is
opaque, with little, if any, pre-trade transparency
(the ability of market participants to see trading
interest prior to a trade being executed) or posttrade transparency (the ability of market
participants to see transaction information after a
trade is executed). A key goal of the Dodd-Frank
Act is to bring trading of [security-based] swaps
onto regulated markets . . . .’’).
1055 See Section II.A.1, supra.
1056 One commenter, writing on behalf of a group
of various market participants, asked for clear
guidance regarding the application of the
mandatory trade execution requirement for crossborder transactions in security-based swaps. See
Cleary Letter III and Cleary Letter IV. The
commenter recommended that the mandatory trade
execution requirement should only apply to
transactions where at least one counterparty is a
U.S. person. See Cleary Letter IV at 27. This
commenter also argued that the mandatory trade
1053 15
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Commission is proposing Rule 3Ch–1
under the Exchange Act to specify the
applicability of the mandatory trade
execution requirement with respect to
cross-border security-based swap
transactions. Our proposed approach
follows the territorial approach
described above 1057 and imposes the
mandatory trade execution requirement
on transactions that would be subject to
the mandatory clearing requirement 1058
unless they qualify for an exception.1059
We discuss substituted compliance with
the mandatory trade execution
requirement in Section XI.F below.1060
We recognize that other approaches
are possible to achieve the goals of the
Dodd-Frank Act, in whole or in part.
Accordingly, we invite comment
regarding all aspects of the proposal
described below, including potential
alternative approaches. Data and
comment from market participants and
other interested parties regarding the
likely effect of the proposed rule and
potential alternative approaches will be
particularly useful to the Commission in
evaluating possible modifications to the
proposal.
B. Application of the Mandatory Trade
Execution Requirement to Cross-Border
Transactions
sroberts on DSK5SPTVN1PROD with PROPOSALS
1. Statutory Framework
Section 3C(h) of the Exchange Act
provides that if a transaction is subject
to the mandatory clearing requirement,
counterparties shall execute the
transaction on an exchange or on a
registered or exempt SB SEF, unless an
exception applies.1061 Section 3C(a)(1)
of the Exchange Act provides that it
shall be unlawful for any person ‘‘to
engage in a security-based swap unless
that person submits such security-based
swap for clearing . . . if the securitybased swap is required to be
cleared.’’ 1062 As discussed above, we
are proposing to apply the statutory
mandatory clearing requirement to any
person who engages in a security-based
execution requirement should not apply to
transactions involving two non-U.S. persons that
utilize U.S. persons to carry out the transaction. We
discuss this comment below.
1057 See, e.g., Section VII, supra (discussing the
registration of foreign security-based swap markets);
see also the general discussion of the Commission’s
territorial approach in Section II.B, supra.
1058 See Section IX, supra (discussing the scope
of the mandatory clearing requirement).
1059 See note 1053, supra.
1060 Under the Commission’s proposal,
substituted compliance would be permitted for
certain cross-border security-based swap
transactions that would be subject to the mandatory
trade execution requirement in Section 3C(h) of the
Exchange Act and the rules and regulations
thereunder. See discussion in Section XI.F, infra.
1061 See 15 U.S.C. 78c–3(h).
1062 See 15 U.S.C. 78c–3(a)(1).
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swap transaction within the United
States.1063 We preliminarily believe
that, to the extent that a cross-border
transaction is subject to the mandatory
clearing requirement under the
proposed approach described above, it
also would be subject to the mandatory
trade execution requirement unless it
qualifies for an exception.1064 This
approach is consistent with the
statutory framework of Title VII of the
Dodd-Frank Act, because a securitybased swap transaction first must be
subject to the mandatory clearing
requirement before the counterparties to
the transaction must comply with the
mandatory trade execution requirement,
unless an exception to the mandatory
trade execution requirement applies.
Thus, to the extent that we are
proposing not to apply the mandatory
clearing requirement to a particular
transaction, the mandatory trade
execution requirement would not apply
to such transaction.
2. Proposed Rule
Consistent with our proposed rule
applying the mandatory clearing
requirement 1065 and our general
approach in applying Title VII in the
cross-border context,1066 the
Commission is proposing Rule 3Ch–1
under the Exchange Act. Under the
proposed rule, the mandatory trade
execution requirement would apply to
any person that engages in a securitybased swap transaction in which at least
one of the counterparties to the
transaction is (i) a U.S. person 1067 or (ii)
a non-U.S. person whose performance
under the security-based swap is
guaranteed by a U.S. person.1068 We
also are proposing to apply the
mandatory trade execution requirement
to any person that engages in a securitybased swap if such transaction is a
1063 In Section IX above, the Commission
proposes Rule 3Ca–3 under the Exchange Act.
Subject to certain exceptions, proposed Rule 3Ca–
3 would apply the mandatory clearing requirement
to any person that engages in a security-based swap
transaction in which at least one of the
counterparties to the transaction is a U.S. person or
a non-U.S. person whose performance under the
security-based swap is guaranteed by a U.S. person,
or if the transaction is a ‘‘transaction conducted
within the United States,’’ as defined in proposed
Rule 3a71–3(a)(5) under the Exchange Act. See
Section IX.C, supra, and Section III.B.6, supra
(discussing proposed Rule 3a71–3(a)(5)).
1064 See note 1053, supra.
1065 See proposed Rule 3Ca–3 under the Exchange
Act.
1066 See Section II.B, supra.
1067 Under proposed Rule 3Ch–1(c) under the
Exchange Act, the term ‘‘U.S. person’’ would have
the same meaning as set forth in proposed Rule
3a71–3(a)(7) under the Exchange Act, as discussed
in Section III.B.5 below.
1068 Proposed Rule 3Ch–1(a)(1) under the
Exchange Act.
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‘‘transaction conducted within the
United States,’’ as defined in proposed
Rule 3a71–3(a)(5) under the Exchange
Act.1069
To limit the scope of the proposal, we
are proposing exceptions to the
mandatory trade execution requirement
in the following two scenarios: 1070
• If the security-based swap
transaction is not a ‘‘transaction
conducted within the United States,’’
the proposed rule would not apply the
mandatory trade execution requirement
if one counterparty to the transaction is
(i) a foreign branch of a U.S. bank 1071
or (ii) a non-U.S. person whose
performance under the security-based
swap is guaranteed by a U.S. person,1072
and if the other counterparty to the
transaction is a non-U.S. person (i)
whose performance under the securitybased swap is not guaranteed by a U.S.
person and (ii) who is not a foreign
security-based swap dealer.1073
• If the security-based swap
transaction is a ‘‘transaction conducted
within the United States,’’ the proposed
rule would not apply the mandatory
trade execution requirement if (i)
neither counterparty to the transaction
1069 Proposed Rule 3Ch–1(a)(2) under the
Exchange Act.
1070 Consistent with our intent to apply the
mandatory trade execution requirement in the same
way as the mandatory clearing requirement, these
exceptions are identical to the exceptions from the
mandatory clearing requirement. See proposed Rule
3Ca–3(b) under the Exchange Act, as discussed in
Section IX, supra.
1071 Under proposed Rule 3Ch–1(c) under the
Exchange Act, the term ‘‘foreign branch’’ would
have the same meaning as set forth in proposed
Rule 3a71–3(a)(1) under the Exchange Act. See
discussion in Section III.B.7, supra. A securitybased swap transaction conducted through a foreign
branch, as defined in proposed Rule 3a71–3(a)(4)
under the Exchange Act, would be specifically
excluded from the proposed definition of
‘‘transaction conducted within the United States.’’
See proposed Rule 3a71–3(5)(ii) under the
Exchange Act, as discussed in Section III.B.6, supra.
1072 A security-based swap transaction involving
a non-U.S. person whose performance under the
security-based swap is guaranteed by a U.S. person
would not be a ‘‘transaction conducted within the
United States’’ by virtue of the guarantee alone
because providing a guarantee on a transaction is
not one of the factors that would cause a transaction
to be a transaction conducted within the United
States under proposed Rule 3a71–3(a)(5) under the
Exchange Act. We would consider such transaction
to be engaged in within the United States, however,
by virtue of the guarantee from the U.S. person,
who acts as an ‘‘indirect counterparty’’ to the
transaction.
1073 Proposed Rule 3Ch–1(b)(1) under the
Exchange Act. Proposed Rule 3Ch–1(c) under the
Exchange Act defines the term ‘‘foreign securitybased swap dealer’’ by cross-reference to the
definition of that term in proposed Rule 3a71–
3(a)(3) of the Exchange Act (defining ‘‘foreign
security-based swap dealer’’ to mean ‘‘a securitybased swap dealer, as defined in section 3(a)(71) of
the [Exchange] Act (15 U.S.C. 78c(a)(71)), and the
rules and regulations thereunder, that is not a U.S.
person’’).
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is a U.S. person; (ii) neither
counterparty’s performance under the
security-based swap is guaranteed by a
U.S. person; and (iii) neither
counterparty to the transaction is a
foreign security-based swap dealer.1074
We discuss below the proposed rule
regarding the application of the
mandatory trade execution requirement
in more detail.
regulated markets.1078 Therefore, by
applying the mandatory trade execution
requirement to transactions in which
U.S. persons are counterparties or
provide guarantees of the performance
of non-U.S. persons under a securitybased swap, the proposed rule would
further the goals of the Dodd-Frank Act
to improve the transparency of the U.S.
financial system.1079
3. Discussion
In considering how to apply the
mandatory trade execution requirement,
we have relied primarily on the express
statutory relationship between the
mandatory clearing requirement and the
mandatory trade execution requirement.
The statutory text, in our view, indicates
that Congress viewed the clearing and
trade execution requirements as
complementary, since a security-based
swap transaction that is subject to the
mandatory clearing requirement is
subject to the mandatory trade
execution requirement, absent
circumstances that trigger one of the
exceptions to the mandatory trade
execution requirement. In the following,
we discuss the proposed rule regarding
the application of the mandatory trade
execution requirement in more detail.
ii. Proposed Exception for Certain
Transactions Involving Foreign
Branches of U.S. Banks and Guaranteed
Non-U.S. Persons
Consistent with the Commission’s
proposed approach to the mandatory
clearing requirement discussed
above,1080 the Commission is proposing
an exception from the mandatory trade
execution requirement described above
for certain transactions that involve
foreign branches of U.S. banks or
guaranteed non-U.S. persons, provided
the transactions are not conducted
within the United States. Specifically,
under proposed Rule 3Ch–1(b)(1), the
mandatory trade execution requirement
would not apply to a security-based
swap transaction if one counterparty to
the transaction is (i) a foreign branch of
a U.S. bank 1081 or (ii) a non-U.S. person
whose performance under the securitybased swap is guaranteed by a U.S.
person and if the other counterparty to
the transaction is a non-U.S. person (i)
whose performance under the securitybased swap is not guaranteed by a U.S.
sroberts on DSK5SPTVN1PROD with PROPOSALS
(a) Security-Based Swap Transactions
Involving U.S. Persons or Non-U.S.
Persons Receiving Guarantees From U.S.
Persons
i. Proposed Rule
The proposed rule would apply the
mandatory trade execution requirement
to transactions in which one of the
counterparties is (i) a U.S. person or (ii)
a non-U.S. person whose performance
under the security-based swap is
guaranteed by a U.S. person,1075 subject
to certain exceptions.1076 We
preliminarily believe that applying the
mandatory trade execution requirement
to transactions in which U.S. persons
are counterparties or provide guarantees
of the performance of non-U.S. persons
under a security-based swap would be
consistent with the purposes of the
Dodd-Frank Act to improve
transparency in the U.S. financial
system.1077 As noted above, the
mandatory trade execution requirement
in Title VII is critical to this goal
because this requirement is designed
promote the trading of security-based
swap transactions on transparent,
1074 Proposed Rule 3Ch–1(b)(2) under the
Exchange Act.
1075 Proposed Rules 3Ch–1(a)(1)(i) and (ii) under
the Exchange Act.
1076 Proposed Rule 3Ch–1(b) under the Exchange
Act. See also note 1053, supra.
1077 See Section II.B.2(d), supra (discussing
guarantees in the cross-border context).
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1078 See
note 1054, supra.
preliminarily believe that the proposed
approach with respect to the mandatory trade
execution requirements is not being applied to
persons who are ‘‘transact[ing] a business in
security-based swaps without the jurisdiction of the
United States,’’ within the meaning of Section 30(c).
See Section II.B.2(b), supra. However, the
Commission also preliminarily believes that the
proposed approach with respect to the mandatory
trade execution requirements is necessary or
appropriate to help prevent the evasion of the
particular provisions of the Exchange Act that were
added by the Dodd-Frank Act that are being
implemented by the approach and prophylactically
will help ensure that the purposes of those
provisions of the Dodd-Frank Act are not
undermined. See Section II.B.2(e), supra; see also
Section II.B.2(d), supra.
For example, if the mandatory trade execution
requirement does not apply to a transaction among
non-U.S. persons that receive guarantees from U.S.
persons and foreign branches of U.S. banks, then
U.S. persons would have an incentive to evade the
mandatory trade execution requirement by
conducting transactions with other U.S. persons
through guaranteed foreign affiliates or foreign
branches. Altering the form of the transaction in
this manner would allow U.S. persons to continue
to avail themselves of transparency in the U.S.
security-based swap market while evading the
requirements intended to enhance that
transparency, even though the substance of the
transaction remains unchanged. See note 1054 and
accompanying text, supra.
1080 See Section IX, supra.
1081 See note 1071, supra.
1079 We
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31083
person and (ii) who is not a foreign
security-based swap dealer.1082 Such
exception would not apply if the
security-based swap transaction were a
transaction conducted within the
United States, as defined in proposed
Rule 3a71–3(a)(5) under the Exchange
Act.1083
The Commission preliminarily
believes that imposing the mandatory
trade execution requirement on all
security-based swap transactions in
which a U.S. person is a counterparty or
in which a U.S. person provides a
guarantee to a non-U.S. person
counterparty may adversely affect the
ability of U.S. persons to access foreign
security-based swap markets because
non-U.S. persons may be less willing to
enter into transactions with them if such
transactions are subject to the
mandatory trade execution requirement.
Accordingly, we are proposing an
exception from the mandatory trade
execution requirement for transactions
in which a counterparty to the
transaction is a foreign branch of a U.S.
bank or a non-U.S. person who receives
a guarantee from a U.S. person on its
performance under the security-based
swap and the other counterparty is a
non-U.S. person whose performance
under the security-based swap is not
guaranteed by a U.S. person and who is
not a foreign security-based swap
dealer.1084
We recognize that imposing the
mandatory trade execution requirement
on a foreign branch of a U.S. bank or on
a non-U.S. person whose performance
under a security-based swap is
guaranteed by a U.S. person would be
consistent with the view that a foreign
branch of a U.S. bank is part of a U.S.
person 1085 and that a U.S. guarantor is
an indirect counterparty 1086 to the
transaction entered into by the
guaranteed non-U.S. person. We also
recognize that subjecting such
transactions to the mandatory trade
execution requirement could help to
bring the trading of security-based
swaps onto transparent, regulated
markets, from more opaque OTC market.
At the same time, however, imposing
the mandatory trade execution
requirement on U.S. persons that
conduct their foreign security-based
swap dealing activity through foreign
branches or guaranteed non-U.S.
persons, without any exceptions, could
put such U.S. persons at a significant
1082 Proposed Rule 3Ch–1(b)(1) under the
Exchange Act. See also note 1073, supra.
1083 Proposed Rule 3Ch–1(b)(1) under the
Exchange Act.
1084 Id.
1085 See Section III.B.5, supra.
1086 See note 1012, supra.
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competitive disadvantage to non-U.S.
persons who conduct security-based
swap business in the same foreign local
market and thereby limit the access of
such U.S. persons to foreign securitybased swap markets. After balancing the
various policy considerations, including
the Dodd-Frank Act’s goal of promoting
trading on transparent, regulated
markets, we have preliminarily
concluded that the proposed exception
from the mandatory trade execution
requirement for transactions by U.S.
persons conducting security-based swap
activity out of foreign branches, or
transactions by guaranteed non-U.S.
persons, with non-U.S. persons whose
performance under the security-based
swap is not guaranteed by a U.S. person
(and who is not a foreign security-based
swap dealer) is appropriate, provided
that it is not a transaction conducted
within the United States.
This exception from the mandatory
trade execution requirement would not
apply under the proposed rule,
however, when the non-U.S. person
counterparty of the foreign branch of the
U.S. bank or the guaranteed non-U.S.
person is a foreign security-based swap
dealer.1087 The reason for this proposed
carve-out from the exception from the
mandatory trade execution requirement
is similar to the reason discussed above
in the context of the mandatory clearing
requirement. Because a foreign securitybased swap dealer would necessarily
have a significant connection with the
U.S. security-based swap market
because its dealing activity with U.S.
persons or within the United States
would trigger registration requirements,
we preliminarily believe it is not
appropriate to provide an exception for
U.S. persons conducting security-based
swap activity out of foreign branches or
for guaranteed non-U.S. persons when
they enter into security-based swaps
with foreign security-based swap
dealers.
sroberts on DSK5SPTVN1PROD with PROPOSALS
(b) Transactions Conducted Within the
United States
i. Proposed Rule
Under the proposed rule, a securitybased swap transaction that is a
transaction conducted within the
United States, as defined in proposed
Rule 3a71–3(a)(5) under the Exchange
Act, would be subject to the mandatory
trade execution requirement.1088 As we
have noted above, a ‘‘transaction
conducted within the United States,’’ as
defined in proposed Rule 3a71–3(a)(5),
1087 Proposed Rule 3Ch–1(b)(1)(ii)(B) under the
Exchange Act.
1088 Proposed Rule 3Ch–1(a)(2) under the
Exchange Act.
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includes soliciting, negotiating,
executing, or booking a security-based
swap transaction.1089 The Commission
believes that applying the mandatory
trade execution requirement to a
security-based swap transaction when
the activities that are key stages in that
transaction are conducted within the
United States furthers a goal of the
mandatory trade execution requirement,
namely, to bring the trading of securitybased swaps within the United States
onto regulated markets, unless an
exception applies. Furthermore, such an
approach is consistent with our
proposed approach to the mandatory
clearing requirement discussed
above.1090
ii. Proposed Exception for Transactions
Conducted Within the United States by
Certain Non-U.S. Persons
We recognize that one commenter has
recommended that transactions between
two non-U.S. persons that utilize U.S.
agents should not be subject to the
mandatory trade execution
requirement.1091 The commenter noted
that it is common for non-U.S. persons
to utilize U.S. agents because of their
expertise in the relevant market (such as
in the case of a swap with an underlying
U.S. security) or because of logistical
matters (such as the time zones in
which the parties conduct business).1092
The commenter argued that applying
the mandatory trade execution
requirement to these transactions could
curtail the use of U.S. agents to
negotiate trades and encourage
personnel in the United States to
relocate elsewhere.1093
Consistent with our proposed
approach to applying the mandatory
clearing requirement to transactions
conducted within the United States by
non-U.S. persons, the Commission is
proposing an exception from the
mandatory trade execution requirement
for security-based swap transactions
that are transactions conducted within
the United States when no counterparty
to the transaction is (i) a U.S. person; (ii)
a non-U.S. person whose performance
under the security-based swap is
1089 See
Section III.B.6, supra.
discussed above, the statutory language
for the mandatory clearing requirements apply to
any person that ‘‘engages in a security-based swap,’’
which the Commission proposes to interpret to
include any transaction in which a person performs
any of the activities that are key stages in a securitybased swap transaction (i.e., solicitation,
negotiation, execution, or booking of the
transaction). See Section IX.C, supra; see also
Section 3C(a)(1) of the Exchange Act.
1091 See Cleary Letter IV at 27–28.
1092 See id.
1093 See id.
1090 As
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guaranteed by a U.S. person; or (iii) a
foreign security-based swap dealer.1094
The Commission preliminarily
believes that it is appropriate to limit
the exception from the mandatory trade
execution requirement when one or
both of the non-U.S. person
counterparties is a foreign securitybased swap dealer. Non-U.S. persons
whose transactions arising from dealing
activity with U.S. persons or otherwise
conducted within the United States
exceed the de minimis threshold in the
security-based swap dealer definition
have a sufficient connection to the U.S.
security-based swap market to lead the
Commission to preliminarily conclude
that it would not be appropriate to
except transactions involving them from
the mandatory trade execution
requirement when they conduct
security-based swap transactions within
the United States. Permitting non-U.S.
persons to engage in security-based
swap transactions within the United
States with foreign security-based swap
dealers without being subject to the
mandatory trade execution requirement
would potentially limit the access of
U.S. persons to foreign security-based
swap markets because non-U.S. persons
seeking to engage in security-based
swaps within the United States may
prefer to engage in security-based swaps
with foreign security-based swap
dealers rather than U.S. persons to avoid
the mandatory trade execution
requirement.
Request for Comment
The Commission seeks comment on
all aspects of proposed Rule 3Ch–1,
including the following:
• Should the mandatory trade
execution requirement apply to all
transactions conducted by a U.S.
person, including transactions
conducted out of a foreign branch of a
U.S. bank or a non-U.S. person whose
performance under a security-based
swap is guaranteed by a U.S. person?
Why or why not?
• Is it appropriate for the application
of the mandatory trade execution
requirement in the cross-border context
to follow our approach to the mandatory
clearing requirement? If not, why not?
What alternative approach would better
suit the relationship between these two
requirements under the statute? Please
explain.
• Is the proposed rule appropriate
and sufficiently clear? Should
additional details be included as to any
aspect of the proposed rule? If so, what
additional details should be provided
and why?
1094 Proposed
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• As discussed above, under
proposed Rule 3Ch–1(a), the mandatory
trade execution requirement would
apply to a person that engages in a
security-based swap transaction if such
person is a U.S. person, such person is
a non-U.S. person whose performance
under such security-based swap
transaction is guaranteed by a U.S.
person, or such security-based swap
transaction is a transaction conducted
within the United States. Are the
circumstances in which the Commission
proposes to apply the mandatory trade
execution requirement sufficiently
clear? If not, why not? Are these the
appropriate circumstances in which to
apply the mandatory trade execution
requirement? If not, why not? Are there
additional types of counterparties or
security-based swap transactions to
which the mandatory trade execution
requirement should be applied? If so,
who or what are they, and why? Are
there types of counterparties or securitybased swap transactions that should not
be covered by the proposed rule? If so,
why not?
• Would the proposed rule apply the
mandatory trade execution requirement
in ways that appropriately promote the
goals of Title VII? Would any objectives
of Title VII be hindered by applying the
mandatory trade execution requirement
as proposed? Would there be any
regulatory gaps created by the proposed
rule? Please provide detail.
• By requiring transactions conducted
within the United States to be subject to
the mandatory trade execution
requirement, would the proposed rule
appropriately create competitive parity
between U.S. and non-U.S. persons that
act as intermediaries within the United
States to conduct transactions in
security-based swaps? Why or why not?
Please explain. Please provide specific
recommendations and explain how any
recommended approach would better
promote competition than the proposed
rule. More generally, should securitybased swap transactions be subject to
the mandatory trade execution
requirement solely because a transaction
was solicited or negotiated within the
United States?
• Under proposed Rule 3Ch–1(b),
certain security-based swap transactions
by foreign branches and guaranteed
non-U.S. persons that are not conducted
within the United States would be
excluded from the mandatory trade
execution requirement. The
Commission generally solicits
comments on the appropriateness of
excluding the security-based swap
transactions described in proposed Rule
3Ch–1(b) from the application of the
mandatory trade execution requirement.
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Should additional types of transactions
be excluded from the application of the
mandatory trade execution requirement?
Should some or all of the transactions
covered by proposed Rule 3Ch–1(b) not
be excluded? If so, in either case, please
explain why. Does proposed Rule 3Ch–
1(b) appropriately balance the
competitiveness of U.S. persons in the
global security-based swaps market and
the goals of Title VII? If not, how could
this balance be better achieved? Should
proposed Rule 3Ch–1(b) also apply to
non-U.S. persons that are security-based
swap dealers? Why or why not?
• What would be the market impact
of proposed Rule 3Ch–1? How would
the proposed application of the
mandatory trade execution requirement
affect the competitiveness of U.S.
entities in the global marketplace (both
in the United States as well as in foreign
jurisdictions)? Would the proposed rule
place any market participants at a
competitive disadvantage or advantage?
If so, please explain. Would the
proposed rule be a more general burden
on competition? If so, please explain.
Would any burdens on competition be
effectively mitigated by the proposed
exception to mandatory trade execution
in proposed Rule 3Ch–1(b)? Please
explain. What other measures should
the Commission consider to implement
the mandatory trade execution
requirement? What would be the market
impacts and competitiveness effects of
alternatives to the proposed approach
discussed in this release?
XI. Substituted Compliance
A. Introduction
As noted above, we are proposing to
establish a policy and procedural
framework pursuant to rules under the
Exchange Act in which the Commission
would consider permitting compliance
with comparable regulatory
requirements in a foreign jurisdiction to
substitute for compliance with
requirements in the Exchange Act, and
rules and regulations thereunder,
relating to security-based swaps (i.e.,
substituted compliance). As proposed,
under a Commission substituted
compliance determination, a person
would be able to satisfy relevant
requirements in the Exchange Act, and
the rules and regulations thereunder, by
substituting compliance with
corresponding requirements under a
foreign regulatory system. A person
relying on a substituted compliance
determination still would be subject to
the particular Exchange Act requirement
that is the subject of the substituted
compliance determination, but would
be permitted to comply with such
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requirement in an alternative fashion.
Failure of a person to comply with the
applicable foreign regulatory
requirements would mean that such
person would be in violation of the
requirements in the Exchange Act.
The Commission is proposing to
consider making substituted compliance
determinations with respect to four
distinct categories of requirements, each
of which raises separate issues and will
be discussed separately below. These
categories are as follows: (i)
Requirements applicable to registered
security-based swap dealers in Section
15F of the Exchange Act and the rules
and regulations thereunder; (ii)
requirements relating to regulatory
reporting and public dissemination of
information on security-based swaps;
(iii) requirements relating to clearing for
security-based swaps; and (iv)
requirements relating to trade execution
for security-based swaps.
With respect to each of these
categories of requirements, the
Commission is proposing a
‘‘comparability’’ standard as the basis
for making a substituted compliance
determination. Generally, the
Commission would endeavor to take a
holistic approach in making substituted
compliance determinations—that is, we
would ultimately focus on regulatory
outcomes as a whole with respect to the
requirements within the same category
rather than a rule-by-rule comparison.
As noted above,1095 efforts to regulate
the derivatives market are underway,
not only in the United States, but also
in other jurisdictions. Since their 2009
statement, the G20 leaders have
reiterated their commitment to OTC
derivatives regulatory reform. And, as
described above,1096 the Commission
has participated in numerous bilateral
and multilateral discussions with
foreign regulatory authorities addressing
the regulation of OTC derivatives and
foreign regulatory reform efforts. We
recognize that foreign regulatory
systems differ in their approaches to
achieving particular regulatory
outcomes, and that foreign regulatory
requirements may differ from those
ultimately adopted by the Commission,
but may nonetheless achieve regulatory
outcomes comparable with the
regulatory outcomes of the relevant
provisions of the Exchange Act added
by Title VII of the Dodd-Frank Act. In
addition, we recognize that different
regulatory systems may be able to
achieve some or all of those regulatory
outcomes by using more—or fewer—
specific requirements than the
1095 See
Section I.C., supra.
1096 Id.
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Commission. For example, under
certain circumstances, a foreign
regulatory system may be able to
achieve one of those regulatory
outcomes in the absence of one or more
specific requirements that the
Commission has implemented under a
particular set of provisions of the DoddFrank Act.
Accordingly, we do not envision that
the Commission, in making a
comparability determination, would
look to whether a foreign jurisdiction
has implemented specific rules and
regulations that are comparable to rules
and regulations adopted by the
Commission. Rather, the Commission
would determine whether the foreign
regulatory system in a particular area,
taking into consideration any relevant
principles, regulations, or rules in other
areas of the foreign regulatory system to
the extent they are relevant to the
analysis, achieves regulatory outcomes
that are comparable to the regulatory
outcomes of the relevant provisions of
the Exchange Act. If it does, the
Commission preliminarily believes that
a comparability determination would be
appropriate, notwithstanding
differences in or the absence of specific
requirements of particular regulatory
provisions.
In addition, the Commission
recognizes that other regulatory systems
are informed by the business and market
practices present in the foreign
jurisdictions where those systems apply,
and that such practices may differ in
certain respects from practices
described in this release. More broadly,
other regulatory systems are informed
by the characteristics of the markets for
which they were designed, including
the number and nature of their market
participants to which they apply. In
making a comparability determination,
the Commission recognizes that it may
need to take into account such practices
and characteristics in understanding the
design and application of another
regulatory system and whether and how
it may achieve regulatory outcomes
comparable to the regulatory outcomes
of the relevant provisions of the
Exchange Act.
As explained below, how the
Commission would find a foreign
regulatory system ‘‘comparable’’ would
vary depending on the category of
requirements. Because the Commission
is proposing to make substituted
compliance determinations with respect
to each of the aforementioned categories
of requirements, it is possible that a
foreign regulatory system would be
comparable with respect to some, but
not all, categories of requirements. For
instance, a foreign regulatory system
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may impose requirements on non-U.S.
dealers that achieve regulatory
outcomes comparable to the
requirements applicable to registered
security-based swap dealers in Section
15F of the Exchange Act, but the same
foreign regulatory system may not
achieve comparable regulatory
outcomes regarding public reporting of
trade information for security-based
swaps. Similarly, a foreign regulatory
system may impose requirements on
clearing agencies that achieve regulatory
outcomes comparable to the
requirements applicable to registered
security-based swap clearing agencies
under Section 17A of the Exchange Act,
but may not provide for comparable
regulation of SB SEFs. By assessing each
of these categories separately, the
Commission would have the flexibility
to make a substituted compliance
determination with respect to one
category of requirements but not
another. However, the Commission
would also retain the flexibility to
consider the extent to which principles,
regulations, or rules in one category may
bear on a determination with respect to
another category. Such an approach also
would allow substituted compliance in
certain categories to address
competition and market efficiency
concerns when a foreign regime is not
comparable across the full range of Title
VII policy objectives.
In addition, as described below, in
making substituted compliance
determinations, the Commission would
consider a variety of factors that the
Commission deems appropriate,
including the nature of the global
security-based swap market and the
scope and objectives of the relevant
foreign regulatory requirements. As part
of this holistic review, the Commission
would consider the various ways in
which a foreign regulatory system
achieves its overall goals and purposes,
including those undertaken in response
to the G20 commitments. As noted
above, the Commission would also
consider the extent to which applicable
principles, regulations, or rules in one
category may bear on a determination
with respect to another category. In
addition, the Commission recognizes
that our proposed application of Title
VII to cross-border activities may affect
the policy decisions of these other
regulators as they seek to address
potential conflicts or duplication in the
regulatory requirements that apply to
market participants under their
authority.
More specifically, the proposed policy
and procedural framework for
substituted compliance recognizes the
potential, in a market as global as the
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security-based swap market, for market
participants who engage in cross-border
security-based swap activity to be
subject to conflicting or duplicative
compliance obligations. As a result of
the efforts to implement the G20
commitments in various jurisdictions
described above, in some cases of crossborder activity, market participants may
be subject to compliance obligations in
a foreign jurisdiction that are similar to
those imposed by the Exchange Act. The
proposed framework would allow the
Commission to provide for substituted
compliance to address the effect of
conflicting or duplicative regulations on
competition and market efficiency and
to facilitate a well-functioning global
security-based swap market. In other
cases, however, market participants may
not be subject to conflicting or
duplicative regulation because the
foreign jurisdiction has not enacted
comprehensive regulation of the
security-based swap markets or is still
in the process of implementing
regulatory reforms that have been
enacted. It also may be that the foreign
jurisdiction’s regulation does not apply
to the market participant or entity or the
foreign jurisdiction has established
regulations that differ, in material
respects, from requirements in the
Exchange Act (e.g., requirements
relating to real-time public reporting)
and do not achieve comparable
regulatory outcomes. In such cases,
there would be less justification for
allowing substituted compliance.
One alternative to making substituted
compliance determinations by looking
at separate categories of requirements
would be to provide substituted
compliance across the entire set of
security-based swap requirements with
respect to regimes that have
implemented regulations consistent
with the overall objectives of the G20
commitments. Preliminarily, however,
we believe that making substituted
compliance determinations on a regimewide basis would be unworkable in
light of the Commission’s responsibility
to implement the specific statutory
provisions of the Exchange Act added
by Title VII of the Dodd-Frank Act.
While these provisions of the Exchange
Act are consistent with the G20
commitments, they also contain
provisions designed to achieve
particular regulatory outcomes that may
not be part of another jurisdiction’s
regulatory system. Thus, while the
Commission would certainly consider
the broader regulatory landscape in a
foreign jurisdiction—including its
approach to the G20 commitments—
before making a substituted compliance
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determination, the Commission would
also need to consider the particular
regulatory outcomes achieved under the
Exchange Act provisions added by Title
VII of the Dodd-Frank Act.
In the following, we propose rules
and interpretive guidance addressing
the policy and procedural framework
under which we would consider
permitting compliance with comparable
regulatory requirements in a foreign
jurisdiction to substitute for compliance
with requirements of the Exchange Act,
and the rules and regulations
thereunder, relating to security-based
swaps, with respect to each of the
aforementioned categories of
requirements.
Request for Comment
The Commission requests comment
on all aspects of our general approach
to substituted compliance, including the
following questions:
• Should the Commission make
substituted compliance determinations
on a regime-wide basis for a jurisdiction
rather than with respect to categories of
requirements? If so, should the finding
that the regulatory outcomes of a foreign
regulatory system are not comparable
with respect to the regulatory outcomes
of one category of the Exchange Act
requirements cause the Commission to
find the entire foreign regulatory regime
to be not comparable as a whole? More
specifically, under a regime-wide
approach, how should the Commission
make substituted compliance
determinations with respect to foreign
regulatory systems that do not achieve
regulatory outcomes comparable to the
regulatory outcomes with respect to
certain categories of the Exchange Act
requirements, taking into account the
Commission’s responsibility and
statutory authority to implement the
requirements of the Exchange Act added
by Title VII of the Dodd-Frank Act?
• Should the Commission take into
consideration the various ways in which
a foreign regulatory system achieves its
overall goals and purposes that are
consistent with the G20 commitments in
making a substituted compliance
determination with respect a category of
the Exchange Act requirements added
by Title VII of the Dodd-Frank Act? Why
or why not?
• Should the Commission take a more
granular approach to substituted
compliance determinations, for
example, conducting a rule-by-rule or
requirement-by-requirement
comparison? Why or why not?
• Should the Commission identify
more or less categories in our framework
for substituted compliance? If so, how
should those categories be demarcated?
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B. Process for Making Substituted
Compliance Requests
The Commission is proposing to
amend our Rules of General Application
to establish procedures pursuant to
which it would consider applications
for substituted compliance
determinations with respect to each of
the aforementioned categories of
requirements.1097 These procedures are
similar to those now used by the
Commission in considering exemptive
order applications under Section 36 of
the Exchange Act.1098 All supporting
documentation submitted pursuant to
the proposed amendment would be
made public.
Specifically, the proposed
amendment would add new Rule 0–13
under the Exchange Act setting forth the
general procedures for submission of
requests for substituted compliance
determinations. These procedures
include the requirement that all
applications for substituted compliance
determinations must be in writing in the
form of a letter, must include any
supporting documents necessary to
make the application complete, and
otherwise must comply with 17 CFR
240.0–3 (Filing of Material with the
Commission).1099 All applications must
be submitted to the Office of the
Secretary of the Commission, and may
be submitted either electronically 1100 or
in paper format.1101 In addition, all
filings and supporting documentation
filed pursuant to this proposed rule
must be in the English language.1102 If
an application is incomplete, the
Commission may request that the
application be withdrawn unless the
applicant can justify, based on all the
facts and circumstances, why
supporting materials have not been
1097 Proposed
Rule 0–13 under the Exchange Act.
17 CFR 240.0–12. Cf. 17 CFR 30.10
(Petitions for Exemptions), including Appendices A
and C (CFTC’s procedures for application by foreign
persons with respect to foreign futures and foreign
options transactions).
1099 Proposed Rule 0–13(a) under the Exchange
Act. In 17 CFR 240.0–3, the Commission sets forth
general procedures for filing materials with the
Commission.
1100 Proposed Rule 0–13(b) under the Exchange
Act.
1101 Proposed Rule 0–13(d) under the Exchange
Act.
1102 Proposed Rule 0–13(c) under the Exchange
Act. If a filing or submission filed pursuant to this
rule requires the inclusion of a document that is in
a foreign language, a party must submit instead a
fair and accurate English translation of the entire
foreign language document. A party may submit a
copy of the unabridged foreign language document
when including an English translation of a foreign
language document in a filing or submission filed
pursuant to this rule. A party must provide a copy
of any foreign language document upon the request
of Commission staff. Id.
1098 See
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31087
submitted and undertakes to submit
promptly the omitted materials.1103
The Commission would not consider
hypothetical or anonymous requests for
a substituted compliance order.1104
Consistent with this position, every
application (electronic or paper) must
contain the name, address, telephone
number, and email address of each
applicant and the name, address,
telephone number, and email address of
a person to whom any questions
regarding the application should be
directed.1105 In addition, each applicant
must provide the Commission with any
supporting documentation it believes
necessary for the Commission to make
the requested substituted compliance
determination, including information
regarding applicable requirements
established by the foreign financial
regulatory authority or authorities, as
well as the methods used by the foreign
financial regulatory authority or
authorities to monitor compliance with,
and enforce, such requirements.1106
Applicants also should cite to and
discuss applicable precedent related to
a substituted compliance
determination.1107 Any amendments to
an application would be required to be
prepared and submitted as set forth in
the proposed procedures and marked to
show what changes were made.1108
Under the proposed rule, after the
filing of an application for a substituted
compliance determination is complete,
Division of Trading and Markets staff
would review the application and make
a recommendation to the
Commission.1109 After consideration of
the recommendation by the
Commission, the Commission’s Office of
the Secretary would issue an
appropriate response and would notify
the applicant.1110 As part of our review,
the Commission may, in our sole
discretion, schedule a hearing on the
1103 Proposed
Rule 0–13(a) under the Exchange
Act.
1104 Proposed
Rule 0–13(e) under the Exchange
Act.
1105 Id.
1106 Id.
1107 Id.
1108 Proposed
Rule 0–13(f) under the Exchange
Act.
1109 As with other matters, the Division of
Trading and Markets would work with the Office
of General Counsel, the Division of Risk, Strategy,
and Financial Innovation, the Office of
International Affairs, the Office of Compliance
Inspections and Examinations, and the Division of
Enforcement, as well as other divisions and offices
within the Commission, in reviewing and making
a recommendation regarding substituted
compliance determinations.
1110 Proposed Rule 0–13(g) under the Exchange
Act.
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matter addressed by the application.1111
The Commission also may, in our sole
discretion, choose to publish in the
Federal Register a notice that the
application has been submitted which
invites public comment on the
application.1112 Requestors may,
however, seek confidential treatment of
their applications for substituted
compliance determinations.1113
The Commission preliminarily
believes that these proposed procedures
would provide sufficient guidance
regarding the process whereby persons
may seek to make a request for a
substituted compliance determination
with respect to each of the categories of
requirements, as described more fully
below.
Request for Comment
The Commission seeks comment on
all aspects of the proposed rule,
including the following:
• Do the proposed procedures give
sufficient guidance to persons regarding
the procedures for making a substituted
compliance determination? If not, why
not? What other procedures should the
Commission adopt?
• Should the substituted compliance
framework contemplate foreign
regulatory authorities, rather than or in
addition to market participants,
submitting substituted compliance
determination requests? Why or why
not?
C. Security-Based Swap Dealer
Requirements
1. Proposed Rule—Commission
Substituted Compliance Determinations
The Commission is proposing a rule
that would establish a framework in
which the Commission may make a
substituted compliance determination
permitting a foreign security-based swap
dealer that is registered with the
Commission to satisfy requirements in
Section 15F of the Exchange Act, and
the rules and regulations thereunder, by
complying with the corresponding rules
and regulations established in a foreign
1111 Proposed
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Act.
1112 Proposed Rule 0–13(h) under the Exchange
Act. The notice would provide that any person may,
within the period specified therein, submit to the
Commission any information that relates to the
Commission action requested in the application.
The notice also would indicate the earliest date on
which the Commission would take final action on
the application, but in no event would such action
be taken earlier than 25 days following publication
of the notice in the Federal Register. Id.
1113 Proposed Rule 0–13(a) under the Exchange
Act. Requests for confidential treatment would be
permitted to the extent provided under 17 CFR
200.81. Id.
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jurisdiction.1114 Specifically, the
proposed rule would provide that the
Commission may, conditionally or
unconditionally, by order, make a
substituted compliance determination
with respect to a foreign financial
regulatory system that compliance with
specified requirements under such
foreign financial regulatory system by a
registered foreign security-based swap
dealer (or class thereof) 1115 may satisfy
the corresponding requirements in
Section 15F of the Exchange Act, and
the rules and regulations thereunder,
that would otherwise apply to such
foreign security-based swap dealer (or
class thereof).1116 The proposed
framework would permit the
Commission to make a substituted
compliance determination only if we
find that the requirements of such
foreign financial regulatory system are
comparable to otherwise applicable
requirements, taking into account
factors that the Commission determines
appropriate, such as, for example, the
scope and objectives of the relevant
foreign regulatory requirements, as well
as the effectiveness of the supervisory
compliance program administered, and
the enforcement authority exercised, by
a foreign financial regulatory authority
or authorities in such system to support
its oversight of such foreign securitybased swap dealer (or any class
thereof).1117
In making a substituted compliance
determination, as noted above, the
Commission’s determination would
focus on the similarities in regulatory
objectives, rather than requiring that the
foreign jurisdiction’s rules be identical.
Depending on our assessment of the
comparability of the foreign regulatory
1114 Proposed
Rule 3a71–5 under the Exchange
Act.
1115 The Commission is proposing a framework
under which it may consider making substituted
compliance determinations applicable to bona fide
foreign security-based swap dealers. This proposed
approach would not extend to entities organized
outside of the United States for the purpose of
evading U.S. regulation. The Commission would
consider a variety of factors to confirm the bona fide
nature of a foreign security-based swap dealer for
these purposes, including the location of
management and risk controls related to such
entity’s security-based swap dealing activities and
the nature of the counterparties.
1116 Proposed Rule 3a71–5(a)(1) under the
Exchange Act.
1117 Proposed Rule 3a71–5(a)(2)(i) under the
Exchange Act. In assessing oversight, the
Commission would consider not only overall
oversight activities, but also oversight specifically
directed at conduct and activity that would be
relevant to the substituted compliance
determination. For example, it would be difficult
for the Commission to make a comparability
determination if oversight is directed solely at the
local activities of foreign security-based swap
dealers, as opposed to the cross-border activities of
such dealers.
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regime, the Commission could
condition the substituted compliance
determination by limiting it to a
particular class or classes of registrants
in the foreign jurisdiction.1118 For
instance, if the foreign jurisdiction
imposes different levels of supervisory
oversight with respect to classes of
entities conducting security-based swap
dealing activity, the Commission could
limit a substituted compliance
determination to permit only certain
classes of supervised foreign securitybased swap dealers to rely on a
substituted compliance determination.
The Commission would determine what
conditions are appropriate on a case-bycase basis.
The proposed rule would require that,
before making a substituted compliance
determination, the Commission must
have entered into a supervisory and
enforcement MOU or other arrangement
with the appropriate financial
regulatory authority or authorities in
that jurisdiction addressing oversight
and supervision of applicable securitybased swap dealers subject to the
substituted compliance
determination.1119 Through such MOU
or other arrangement, the Commission
and the foreign financial regulatory
authority or authorities would express
their commitment to cooperate with
each other to fulfill their respective
regulatory mandates.
Although we intend generally to take
a category-by-category approach to
substituted compliance, under the
proposed rule, the Commission could
make a substituted compliance
determination with respect to one Title
VII requirement applicable to registered
security-based swap dealers but not
another.1120 However, consistent with
our category-by-category approach, we
believe that certain requirements are
interrelated such that the Commission
would expect to make a substituted
compliance determination for the entire
group of related requirements. For
example, the core entity-level
requirements relate to the regulation of
an entity’s capital and margin. But
certain other entity-level requirements
(such as risk management, general
recordkeeping and reporting, and
diligent supervision) are so
1118 Proposed Rule 3a71–5(a)(1) under the
Exchange Act (permitting the Commission to make
the substituted compliance determination
‘‘conditionally or unconditionally’’).
1119 Proposed Rule 3a71–5(a)(2)(ii) under the
Exchange Act. The Commission expects that any
existing supervisory or enforcement MOU or other
arrangement would need to be re-negotiated during
the substituted compliance determination process
to reflect the particulars of a determination.
1120 Proposed Rule 3a71–5(a) under the Exchange
Act.
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interconnected with capital and margin
oversight that we would expect to make
substituted compliance determinations,
where warranted with regard to capital
and margin rules, on the entire package
of entity-level regulations.
The proposed rule also would permit
the Commission, on our own initiative,
to modify the terms of, or withdraw, a
substituted compliance determination
for a particular foreign jurisdiction, after
appropriate notice and opportunity for
comment.1121 For instance, due to
changes in the foreign regulatory
regime, or a failure of a foreign regulator
to exercise its supervisory or
enforcement authority in an effective
manner, the Commission may determine
to modify the terms of, or withdraw, a
previous substituted compliance
determination. The Commission also
would have the ability to periodically
review the substituted compliance
determinations it has granted and
decide whether the substituted
compliance determination should
continue to apply.
In addition, the proposed rule would
permit a foreign security-based swap
dealer to rely on an applicable
substituted compliance determination
by the Commission with regard to a
particular jurisdiction to satisfy the
specified requirements in Section 15F of
the Exchange Act, and the rules and
regulations thereunder, as applicable, by
complying with the corresponding
requirements established in the foreign
jurisdiction.1122 The proposed rule
would require a foreign security-based
swap dealer relying on a substituted
compliance determination to satisfy the
conditions of the Commission’s
substituted compliance
determination.1123
Finally, the proposed rule would
address the situation in which a foreign
security-based swap dealer seeks to rely
on the rules and regulations of a foreign
jurisdiction to satisfy Commission
requirements but the Commission has
not previously made a substituted
compliance determination with respect
to that jurisdiction. In such a case, the
proposed rule would permit the foreign
security-based swap dealer, or a group
of foreign security-based swap dealers,
to request pursuant to the procedures
set forth in proposed Rule 0–13 under
the Exchange Act, that the Commission
make a substituted compliance
determination for the foreign
jurisdiction with respect to specified
1121 Proposed Rule 3a71–5(a)(4) under the
Exchange Act.
1122 Proposed Rule 3a71–5(b) under the Exchange
Act.
1123 Proposed Rule 3a71–5(b)(2) under the
Exchange Act.
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requirements in Section 15F of the
Exchange Act.1124 The proposed rule
would require that the foreign securitybased swap dealer (or foreign securitybased swap dealers) be directly
supervised by one or more financial
regulatory authorities in that
jurisdiction with respect to
requirements similar to those in Section
15F of the Exchange Act, and the rules
and regulations thereunder,1125 and
provide the certification and opinion of
counsel as described in proposed Rule
15Fb2–4(c) under the Exchange Act.1126
Although the request for a substituted
compliance determination could come
from a particular foreign security-based
swap dealer or group of dealers, the
Commission would make such a
determination, under the proposed rule,
on a class or jurisdiction basis,
depending on the regulator(s) and the
foreign regulatory regime (rather than on
a firm-by-firm basis).1127 As a result,
once the Commission has made a
substituted compliance determination
with respect to a particular foreign
jurisdiction, it would apply to every
foreign security-based swap dealer in
the specified class or classes registered
and regulated in that jurisdiction,
subject to the conditions specified in the
Commission’s substituted compliance
order.
The proposed rule would not provide
for substituted compliance with respect
to registration requirements described in
Sections 15F(a)–(d) of the Exchange Act
and the rules and regulations
thereunder.1128 As an initial matter, the
1124 Proposed Rule 3a71–5(c)(1) under the
Exchange Act.
1125 Proposed Rule 3a71–5(c)(2)(i) under the
Exchange Act.
1126 Proposed Rule 3a71–5(c)(2)(ii) under the
Exchange Act. Proposed Rule 15Fb2–4 under the
Exchange Act, as discussed in the Registration
Proposing Release, 76 FR 65799–801, would require
that a nonresident security-based swap dealer
provide the Commission with an opinion of counsel
concurring that the firm can, as a matter of law,
provide the Commission with prompt access to its
books and records and can, as a matter of law,
submit to onsite inspection and examination by the
Commission. See Section III.C.3(b)ix, supra. The
Commission preliminarily believes that, before a
foreign security-based swap dealer should be
permitted to make a substituted compliance
request, it should assure the Commission that it can
provide the Commission with prompt access to
books and records and submit to onsite inspection
and examination because we expect that access to
books and records and the ability to inspect and
examine a foreign security-based swap dealer will
be essential conditions of any substituted
compliance determination.
1127 Proposed Rule 3a71–5(a) under the Exchange
Act. Because, under the proposed approach, all
requests for substituted compliance determinations
must come directly from a foreign security-based
swap dealer, foreign financial regulatory authorities
may not themselves request such a determination.
1128 Proposed Rule 3a71–5(a)(3) under the
Exchange Act.
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registration process serves two
important notice functions for the
Commission. First, it is through the
submission of a registration application
that security-based swap dealers notify
the Commission that they are engaged in
dealing activity in excess of the de
minimis threshold. Second, the
registration application process is how
foreign security-based swap dealers
notify the Commission that they intend
to seek or to rely on an existing
substituted compliance
determination.1129 In addition to these
key notice functions, the registration
process provides the Commission with
information that is essential to the
Commission’s ability to provide
effective oversight of foreign securitybased swap dealers, particularly for
those relying on substituted compliance
determinations to satisfy their
obligations under Section 15F
requirements.1130 As a result, we are not
proposing to allow substituted
compliance for the registration
requirements in Section 15F of the
Exchange Act.
2. Discussion
The goal of the proposed rule is to
increase the efficiency of the securitybased swap market and promote
competition by helping to avoid
subjecting foreign security-based swap
dealers to potentially conflicting or
duplicative compliance obligations,
while still achieving the policy
objectives of Title VII of the Dodd-Frank
Act. The Commission preliminarily
believes that the proposed rule, by
requiring that a substituted compliance
determination be made on a class or
jurisdictional basis and that a foreign
jurisdiction’s requirements be
comparable to otherwise applicable U.S.
requirements, is consistent with this
goal.
1129 See Section III.E, supra (discussing the
process by which foreign security-based swap
dealers would be required to notify the Commission
of their reliance on substituted compliance
determinations).
1130 As part of the registration process,
nonresident security-based swap dealers must (i)
appoint an agent for service of process in the United
States, (ii) furnish the Commission with the identity
and address of its agent for services of process, (iii)
certify that the firm can, as a matter of law, provide
the Commission with prompt access to its books
and records and can, as a matter of law, submit to
onsite inspection and examination by the
Commission, and (iv) provide the Commission with
an opinion of counsel concurring that the firm can,
as a matter of law, provide the Commission with
prompt access to its books and records and can, as
a matter of law, submit to onsite inspection and
examination by the Commission. See proposed Rule
15Fb2–4 under the Exchange Act, as discussed in
the Registration Proposing Release, 77 FR 65799–
801
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In addition, the Commission
preliminarily believes that such an
approach is consistent with the global
nature of the security-based swap
market and may be less disruptive of
entity business arrangements than not
permitting substituted compliance. At
the same time, the Commission
recognizes that U.S. security-based swap
dealers may be put at a competitive
disadvantage with their foreign
counterparts if they are subject to, for
example, more stringent capital or
margin requirements than foreign
security-based swap dealers. For
instance, all other things being equal, a
foreign security-based swap dealer that
is subject to lower capital requirements
would be able to enter into a securitybased swap with a customer at a more
competitive price than a U.S. securitybased swap dealer that is subject to a
higher capital requirement. Of course,
more stringent capital or margin
requirements could equally be viewed
as a source of competitive advantage,
with counterparties having greater
confidence in the financial stability of
U.S. counterparties.
One alternative to the proposed
approach would be to impose uniform
compliance on all registered securitybased swap dealers rather than
permitting substituted compliance for
registered foreign security-based swap
dealers. If the Commission were to
adopt a uniform approach to the
application of Section 15F requirements
to registered U.S. and foreign securitybased swap dealers without allowing for
substituted compliance, foreign
security-based swap dealers may find
that complying with the Commission’s
capital, margin, and other entity-level
rules would subject them to duplicative
or conflicting requirements and may put
them at a competitive disadvantage as a
result.
As discussed above, the Dodd-Frank
Act divides the entity-level regulatory
oversight of security-based swap dealers
between the Commission and prudential
regulators.1131 This statutory division of
authority means that the Commission is
not responsible for the capital and
margin regulation of bank securitybased swap dealers and, therefore, does
not have the authority to make
substituted compliance determinations
in those areas for dealers that are banks.
As a result, the Commission’s provision
of substituted compliance for capital
and margin requirements only would
extend to nonbank security-based swap
dealers, whereas the Commission’s
substituted compliance determinations
for all other entity-level requirements
1131 See
Section III.C.3(b), supra.
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would apply to both bank and nonbank
security-based swap dealers.
In addition to this statutory limitation
on the Commission’s ability to provide
for substituted compliance in certain
areas, the Commission also may
consider the rationale for different
capital treatment of banks and nonbanks
in the United States. As discussed
above, the Commission’s proposed
capital rules for nonbank security-based
swap dealers differ from those that
would be applicable to bank dealers as
proposed by the prudential regulators in
that the Commission’s proposed capital
standards are principally focused on the
retention of highly liquid assets that can
be distributed to customers.1132
Assuming that the Commission adopts
capital standards for nonbank securitybased swap dealers as proposed, the
Commission’s comparability
determinations regarding entity-level
requirements would likely analyze
separately the capital treatment of
nonbank entities in jurisdictions that do
not impose a comparable net liquid
assets test. In performing such an
analysis, the Commission would take
into account the other principles, rules,
and regulations of the foreign
jurisdiction that may be relevant to the
analysis. It also would consider whether
nonbank dealers in that jurisdiction are
permitted to hold more illiquid assets as
regulatory capital compared to the
assets permitted to be held under the
capital rules adopted by the
Commission and, if so, whether
nonbank dealers in that jurisdiction
have access to sufficient liquidity at the
entity level to support the liabilities
they incur out of their business
activity.1133 Similarly, the Commission
would need to consider the impact of
any reduced liquidity associated with
the application of foreign capital
standards on the ability of nonbank
dealers in such jurisdiction to wind
down operations quickly and distribute
assets to customers.1134 As this example
illustrates, however, even when
separately analyzing capital
requirements, the Commission’s focus
would remain on ensuring not that the
foreign jurisdiction has identical rules
but on ensuring that a foreign
jurisdiction that applies capital rules
that do not impose a comparable net
liquid assets test to nonbank securitybased swap dealers can achieve the
regulatory outcomes comparable to
1132 See
Section III.C.3(b)(1), supra.
Capital, Margin, and Segregation
Proposing Release, 77 FR 70304.
1134 See id.
1133 See
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those intended under the Dodd-Frank
Act.
Similarly, consistent with our
category-based approach, the
Commission’s comparability
determination with respect to the
requirements set forth in Section 15F of
the Exchange Act generally would not
depend on the comparability of the
goals achieved by foreign jurisdiction’s
capital and margin requirements taken
alone but also would, in light of the
interconnectedness of capital and
margin with related entity-level
requirements, take into account
regulatory outcomes of other aspects of
the jurisdiction’s requirements.
Although we believe that capital and
margin requirements are at the core of
a robust internal risk controls system at
a firm, equally foundational to the
financial integrity of a firm are effective
internal risk management procedures
and the effectiveness of other relevant
foreign regulatory requirements that are
connected to an entity’s financial
integrity. As noted above, the
Commission is proposing to permit
substituted compliance, not only with
capital and margin requirements, but
also with such other related entity-level
requirements as the Commission finds
appropriate.1135 The Commission
preliminarily believes that this
approach to substituted compliance in
the context of entity-level requirements
will benefit foreign security-based swap
dealers by allowing them to comply,
where possible, with a single set of
entity-level requirements where a
substituted compliance determination is
deemed appropriate, while ensuring
that all registered security-based swap
dealers are subject to robust entity-level
oversight.
Request for Comment
The Commission requests comment
on all aspects of the proposed rule
establishing a policy and procedural
framework for making substituted
compliance determinations for
registered foreign security-based swap
dealers, including the following:
• What, if any, are the likely
competitive effects, within the U.S.
security-based swap market and among
U.S. security-based swap dealers, of the
proposed approach for application of
substituted compliance for foreign
security-based swap dealers? Please
describe the specific nature of any such
effects.
• The Commission generally solicits
comments on the appropriateness and
clarity of the proposed rule. Should
1135 See
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additional details be included regarding
any aspects of the proposed rule?
• As discussed above, in making a
substituted compliance determination,
the Commission would ultimately focus
on the comparability of regulatory
outcomes rather than a rule-by-rule
comparison. Is this holistic approach to
making a substituted compliance
determination appropriate? If not, why
not?
• Is the comparability standard
appropriate and sufficiently clear?
Should additional detail be provided as
to what would and would not satisfy
this standard? If so, what additional
detail should be provided? Should a
different standard be used? If so, what
should be the standard and why?
• As discussed above, in making a
substituted compliance determination,
the Commission would consider factors
such as the scope and objectives of the
relevant foreign regulatory
requirements, as well as the
effectiveness of the supervisory
compliance program administered, and
the enforcement authority exercised.
Are these factors appropriate? Are the
enumerated factors too broad or too
narrow? What other factors should the
Commission consider?
• When assessing the effectiveness of
a foreign jurisdiction’s supervisory
compliance program should the
Commission consider factors such as the
existence of a dedicated examination
program, the expertise of examiners, the
existence of a risk monitoring
framework and an examination plan,
and the existence of a disciplinary
program to enforce compliance with
laws? Similarly, when assessing the
effectiveness of a foreign jurisdiction’s
enforcement program, should the
Commission consider factors such as
whether the program is actively
administered, resourced, and
transparent?
• As discussed above, the
Commission could condition a
substituted compliance determination
by limiting it to a particular class or
classes of registrants in the foreign
jurisdiction, in which case the
Commission would determine what
conditions are appropriate on a case-bycase basis. What, if any, are the
competitive effects of the proposed
approach with respect to conditional
substituted compliance determinations?
• As discussed above, the proposed
rule permits the Commission, on our
own initiative, to modify or withdraw a
substituted compliance determination
for a particular foreign jurisdiction, after
appropriate notice and opportunity for
comment. In the event that the
Commission determines that a previous
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substituted compliance determination
needs to be further conditioned or even
withdrawn, how much advance notice
would be sufficient to permit market
participants to adjust their activities to
reflect the modification or withdrawal?
For example, would 60 days be
appropriate? Should the opportunity for
comment be made public? Why or why
not?
• Should a review period or ‘‘sunset
provision’’ to revisit a previous
substituted compliance determination
be required? If so, what should the
appropriate time period be for such
review period or sunset provision?
• Should the ability of a foreign
security-based swap dealer to take
advantage of substituted compliance be
conditioned on it not transacting with
certain classes of U.S. counterparties,
such as persons that do not meet the
definition of qualified institutional
buyer, as defined in Securities Act Rule
144A (17 CFR 230.144A(a)(1)) (‘‘QIB’’),
or some other threshold, such as
qualified investor, as defined in Section
3(a)(54) of the Exchange Act? Would
such counterparties be less able to
appreciate the differences between
engaging in security-based swap
transactions with a security-based
dealer subject to relevant provisions of
Title VII versus a security-based swap
dealer complying with comparable
foreign regulations than a QIB or
qualified investor? Would such an
approach result in meaningful
safeguards that would justify adopting
such an approach? Is the use of such a
substituted compliance regime likely to
have a disparate impact on any
particular class of counterparties? What
are the potential advantages or
disadvantages (including in terms of
risk, competition, and counterparty
protection) to counterparties, foreign
security-based swap dealers, and U.S.
security-based swap dealers in
restricting the use of substituted
compliance to transactions involving
certain classes of U.S. counterparties?
• As discussed above, the proposed
rule permits a foreign security-based
swap dealer or group of foreign securitybased swap dealers to submit a request
that the Commission make a substituted
compliance determination for the
foreign jurisdiction with respect to
specified requirements in Section 15F of
the Exchange Act. Is the proposed
procedure for submitting such requests
sufficiently clear? Should additional
details be included regarding any
aspects of the proposed procedure?
• Do the proposed substituted
compliance rules appropriately reflect
the goal to increase the efficiency of the
security-based swap market and
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31091
promote competition by avoiding (as
appropriate) subjecting foreign securitybased swap dealers to potentially
conflicting or duplicative compliance
obligations? Would it be more
appropriate to make substituted
compliance determinations on a firmby-firm basis rather than a class or
jurisdictional basis? If so, why?
• Should entity-level requirements be
treated separately for purposes of
substituted compliance determinations,
or should they be considered as a
package of regulations?
• Should the Commission permit
substituted compliance with respect to
external business conduct standards in
Section 15F(h) of the Exchange Act and
the rules and regulations thereunder?
Would allowing substituted compliance
impair the Commission’s ability to
enforce the business conduct standards
that the Dodd-Frank Act added to the
Exchange Act?
• Should the Commission permit
substituted compliance in transactions
between registered non-U.S. dealers and
U.S. persons?
• Should the Commission permit
substituted compliance in transactions
by registered non-U.S. dealers within
the United States?
• Would allowing substituted
compliance impair the Commission’s
ability to enforce the business conduct
standards that the Dodd-Frank Act
added to the Exchange Act relating to
counterparty protection, particularly
with respect to ‘‘special entities’’?
• Should the Commission not permit
substituted compliance with respect to
the conflicts of interest duties described
in Section 15F(j)(5) of the Exchange Act
and the rules and regulations
thereunder? Why or why not? In
particular, would allowing substituted
compliance with respect to these
requirements impair the Commission’s
ability to enforce these counterparty
protections that the Dodd-Frank added
to the Exchange Act? Why or why not?
Should the foreign dealing subsidiaries
of U.S. parents be allowed to take
advantage of substituted compliance for
entity-level requirements if they engage
in U.S. Business?
• Should there be a threshold
requirement that foreign security-based
swap dealers engage in a predominately
foreign business in order to rely on
substituted compliance? If so, how
should the ‘‘predominantly foreign
business’’ threshold be measured?
Should it be based on the relative
notional amount of the security-based
swap business of foreign security-based
swap dealers with U.S. persons
compared to the notional amount of
their security-based swap business with
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non-U.S. persons? If so, what should the
threshold be (e.g., 80% Foreign Business
by notional amount? More than 50%?)?
• Should the Commission consider
providing substituted compliance
determinations related to capital
regulation in jurisdictions that apply
Basel-based capital standards to
nonbank security-based swap dealers?
Why or why not?
• In what ways are Basel-based
capital standards as applied to nonbank
security-based swap dealers consistent
with the Commission’s own capital
standards for nonbank security-based
swap dealers? In what ways are they
inconsistent?
• While the Commission is
determining whether to make an initial
set of substituted compliance
determinations, should the Commission
delay compliance with the requirements
of the Exchange Act, and the rules and
regulations thereunder, relating to
security-based swap dealers for foreign
security-based swap dealers? Are there
some requirements that would be
appropriate for delayed compliance? If
so, please specify which ones and
explain why. Are there other regulatory
or market interests that the Commission
should consider in determining the
scope of the delayed compliance
provision? If so, please describe those
interests and how the proposed rule
should address them.
• What would be the market impact
of the proposed policy and procedural
framework for making substituted
compliance determinations for
registered foreign security-based swap
dealers? How would the application of
the proposed policy and procedural
framework affect the competitiveness of
U.S. entities in the global marketplace
(both in the United States as well as in
foreign jurisdictions)? Would the
proposed approach place any market
participants at a competitive
disadvantage or advantage? If so, please
explain. Would the proposed approach
be a more general burden on
competition? If so, please explain. What
other measures should the Commission
consider to implement the proposed
policy and procedural framework? What
would be the market impacts and
competitiveness effects of alternatives to
the proposed approach discussed in this
release?
• Should the Commission permit
substituted compliance in transactions
between registered non-U.S. dealers and
U.S. persons?
• Should the Commission permit
substituted compliance in transactions
by registered non-U.S. dealers within
the United States?
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D. Regulatory Reporting and Public
Dissemination
As initially proposed, Regulation
SBSR did not contemplate that the
reporting and public dissemination
requirements associated with crossborder security-based swaps could be
satisfied by complying with the rules of
a foreign jurisdiction instead of U.S.
rules. Thus, counterparties to a securitybased swap would be required to
comply with proposed Regulation SBSR
even if the security-based swap also
was, for example, reported to a foreign
data repository or a foreign regulatory
authority.
In response to this proposed
approach, several commenters stated
that requiring counterparties to report
cross-border security-based swaps in
more than one jurisdiction could result
in duplicative or inconsistent reporting,
unnecessary expense and administrative
burden, and potential conflicts with
another jurisdiction’s confidentiality
requirements.1136 Commenters
suggested various ways to address these
issues. Some recommended generally
that the Commission coordinate our
trade reporting regime with those of
other jurisdictions.1137 Two commenters
urged regulators to encourage the
development of a single, global trade
repository for each asset class.1138 One
of these commenters also stated that, in
the absence of a global trade repository,
regulators should implement
internationally compatible reporting
systems so that cross-border securitybased swaps would not have to be
reported twice.1139 Another commenter
suggested that the Commission define
the term ‘‘security-based swap’’ to
exclude a transaction that is reported to
a non-U.S. trade repository, which
would have the effect of eliminating any
U.S. reporting requirement because the
transaction would not be a securitybased swap.1140 Several commenters
1136 See, e.g., AIMA Letter at 6; DTCC Letter II at
21; ISDA/SIFMA Letter I at 18. While not
specifically addressing reporting requirements,
another commenter believed generally that the U.S.
branches of Japanese banks should not be subject
to Title VII requirements, because such banks will
be subject to comprehensive regulation under
Japanese law. See Japanese Banks Letter at 4
(arguing that application of Title VII would be
‘‘superfluous at best’’ and could subject foreign
banks to potentially inconsistent requirements).
1137 See AIMA Letter at 6; ISDA/SIFMA Letter I
at 18 (urging the Commission to ‘‘consult with
foreign regulators before establishing the extraterritorial scope of the rules promulgated under
Title VII’’); Markit Letter III at 2 (arguing that the
SEC and CFTC should ‘‘harmonize their regulations
with those of international regulators to the extent
possible’’).
1138 See AIMA Letter at 6; ISDA Letter at 14.
1139 See ISDA Letter at 13.
1140 See Davis Polk Letter II at 21.
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recommended that the Commission
refrain from imposing any reporting
requirements on security-based swaps
that are reported pursuant to
comparable rules of another
jurisdiction.1141
The Commission is sympathetic to the
desire to avoid redundant or conflicting
reporting requirements, to the extent
consistent with applicable statutory
requirements. The Commission
participates in a number of international
organizations and initiatives that seek to
coordinate regulation of the global OTC
derivatives market, and the Commission
staff has engaged in ongoing bilateral
discussions with a number of foreign
regulators on the subject of cross-border
security-based swap activity. The
Commission preliminarily believes that
regulatory reporting of security-based
swap transaction data is crucial to allow
it and other regulators more effectively
to carry out their statutorily assigned
functions, which include the assessment
of systemic risks.1142 In addition, the
Commission preliminarily believes that
public dissemination generally would
increase efficiency and price
competition in the security-based swap
market.1143 The Commission
preliminarily believes, therefore, that
our own efforts to promote these goals
should be implemented as quickly as
practicable.
It is possible that other jurisdictions
will implement reporting and
dissemination regimes for securitybased swap transactions that are
comparable to the one set forth in Title
VII and Regulation SBSR. In
anticipation of that possibility, the
Commission is now proposing rules
regarding substituted compliance
relating to regulatory reporting and
public dissemination of security-based
swaps, which are described below.
1. General
Proposed Rule 908(c)(2)(i) would
provide that the Commission could,
conditionally or unconditionally, by
1141 See, e.g., Cleary Letter II at 17; Davis Polk
Letter I at 2 (urging the Commission to implement
Title VII in a way that relies on home country
supervision), 7 (arguing that a transaction required
to be reported to a foreign trade repository should
not also be required to be reported to an SDR);
Davis Polk Letter II at 21–22; ISDA Letter at 14
(stating that, in the absence of a single international
trade repository, regulators should recognize trade
repositories in other jurisdictions); Socie´te´ Ge´ne´rale
Letter I at 11 (recommending deference to foreign
regulators that have a comparable regulatory
scheme).
1142 See Regulation SBSR Proposing Release, 75
FR 75262–64.
1143 See Regulation SBSR Proposing Release, 75
FR 75280–82 (discussing anticipated impact of
proposed Regulation SBSR on efficiency,
competition, and capital formation).
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order, make a substituted compliance
determination with respect to regulatory
reporting and public dissemination in a
foreign jurisdiction if such foreign
jurisdiction imposes a comparable
system for the regulatory reporting and
public dissemination of all securitybased swaps.
Section 13A(a)(1) of the Exchange
Act 1144 provides that all security-based
swaps that are not accepted for clearing
shall be subject to regulatory reporting.
Section 13(m)(1)(G) of the Exchange
Act 1145 provides that each securitybased swap (whether cleared or
uncleared) shall be reported to a
registered SDR, and Section 13(m)(1)(C)
of the Exchange Act 1146 generally
provides that transaction, volume, and
pricing data of all security-based swaps
shall be publicly disseminated.
However, these statutory provisions do
not address whether, or the extent to
which, these requirements should apply
to cross-border security-based swaps.
Reporting security-based swap
transactions pursuant to the regimes of
both the United States and a foreign
jurisdiction could be duplicative and
potentially burdensome. Re-proposed
Rule 908(c)(2)(i) would provide
generally that compliance with a
comparable system of a foreign
jurisdiction for the regulatory reporting
and public dissemination of all securitybased swaps could, if certain conditions
are met, be substituted for compliance
with U.S. rules to satisfy the goals and
objectives of these Title VII
requirements.
2. Security-Based Swaps Eligible and
Not Eligible for Substituted Compliance
The Commission preliminarily
believes that, if a foreign jurisdiction
applies a comparable system for the
regulatory reporting and public
dissemination of an entity’s securitybased swaps, it would be appropriate
not to apply the U.S. requirements in
addition to the requirements of that
foreign jurisdiction. Where the
Commission has found that a foreign
jurisdiction’s reporting and public
dissemination requirements are
comparable to those implemented by
the Commission, we expect to make a
substituted compliance determination
with respect to such jurisdiction for
these requirements. The Commission is
re-proposing Rule 908(c)(1) to provide
that compliance with the regulatory
reporting and public dissemination
requirements in Sections 13(m) and 13A
of the Exchange Act, and the rules and
1144 15
U.S.C. 78m–1(a)(1).
U.S.C. 78m(m)(1)(G).
1146 15 U.S.C. 78m(m)(1)(C).
1145 15
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regulations thereunder, may be satisfied
by compliance with the rules of a
foreign jurisdiction that is the subject of
a substituted compliance order issued
by the Commission, provided that, with
respect to at least one of the direct
counterparties to the security-based
swap:
(i) Such counterparty is either a nonU.S. person or a foreign branch; and
(ii) No person within the United
States is directly involved in executing,
soliciting, or negotiating the terms of the
security-based swap on behalf of such
counterparty.
The Commission preliminarily
believes that, if at least one direct
counterparty to a security-based swap is
a non-U.S. person (even if the non-U.S.
person is a security-based swap dealer
or major security-based swap
participant, or is guaranteed by a U.S.
person) and no person within the
United States is directly involved in
executing, soliciting, or negotiating the
terms of the security-based swap on
behalf of that counterparty, the securitybased swap should be eligible for
substituted compliance with respect to
regulatory reporting and public
dissemination. Thus, substituted
compliance with respect to regulatory
reporting and public dissemination
could apply even in the instance of a
security-based swap with a direct
counterparty that is operating from
within the United States, so long as the
other direct counterparty is a non-U.S.
person and no person within the United
States is directly involved in executing,
soliciting, or negotiating the terms of the
security-based swap on behalf of that
non-U.S. person. This approach is
designed to limit disincentives for nonU.S. persons to transact security-based
swaps with U.S. persons by allowing
compliance with the rules of a foreign
jurisdiction to be substituted for
compliance with U.S. rules when the
non-U.S. person transacts with a U.S.
person.
The Commission also preliminarily
believes that the approach proposed
above with respect to non-U.S. persons
should be extended to the foreign
branches of U.S. banks. As a result, we
are proposing to allow the possibility of
substituted compliance with respect to
regulatory reporting and public
dissemination if at least one
counterparty of a security-based swap is
the foreign branch of a U.S. bank, as
long as no person within the United
States is directly involved in executing,
soliciting, or negotiating the terms of the
security-based swap on behalf of such
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foreign branch.1147 This approach is
designed to promote access of foreign
branches of U.S. banks to the local
markets in which those branches are
located. Assume, for example, that a
substituted compliance determination
with respect to regulatory reporting and
public dissemination applied to a
foreign jurisdiction and a transaction
involved, on one side, a local, non-U.S.
person market participant, and the
security-based swap is required to be
reported and publicly disseminated
under the rules of that foreign
jurisdiction regardless of whether the
counterparty on the other side is a local
dealer or a foreign branch of a U.S.
bank. If substituted compliance with
respect to regulatory reporting and
public dissemination were in effect, the
fact that the foreign branch is a
counterparty would not cause the
transaction to have to be reported
pursuant to U.S. rules in addition to the
foreign jurisdiction’s rules.
Consistent with the factors described
above, the Commission preliminarily
believes that certain kinds of securitybased swaps should not be eligible for
substituted compliance with respect to
regulatory reporting and public
dissemination, even if they might be
subject to reporting and public
dissemination requirements in a foreign
jurisdiction.1148 As noted above, reproposed Rule 908(c)(1) would provide
that a security-based swap would be
eligible for substituted compliance with
respect to regulatory reporting and
public dissemination where both of the
following conditions apply to at least
one direct counterparty to the
transaction: (i) such counterparty is
either a non-U.S. person or a foreign
branch; and (ii) the security-based swap
transaction is not solicited, negotiated,
or executed by a person within the
United States on behalf of such
counterparty. Thus, a security-based
swap between two U.S. persons would
not be eligible for substituted
compliance with respect to regulatory
reporting and public dissemination,
even if the security-based swap were
solicited, negotiated, and executed
outside the United States.1149
1147 See Section III.B.6, supra (discussing the
definition of ‘‘foreign branch’’ in proposed Rule
3a71–3(a)(1) under the Exchange Act).
1148 If the rules of a foreign jurisdiction would not
apply to the security-based swap, there would be
no need to consider the possibility of substituted
compliance, because there would be no foreign
rules that could substitute for the applicable U.S.
rules.
1149 This assumes that neither U.S. person is
acting through a foreign branch. If either U.S.
person were acting through a foreign branch, the
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Furthermore, re-proposed Rule
908(c)(1) would not allow for the
possibility of substituted compliance
with respect to regulatory reporting and
public dissemination if both direct
counterparties (or their agents)—
regardless of place of domicile—solicit,
negotiate, or execute a security-based
swap from within the United States. The
Commission preliminarily believes that
U.S. rules for regulatory reporting and
public dissemination should apply to
transactions where all or the major part
of actions associated with the securitybased swap, on both sides of the
transaction, are performed within the
United States.
The following examples explain the
operation of re-proposed Rule 908(c)(1).
In all examples, assume that the
Commission has issued a substituted
compliance order with respect to
regulatory reporting and public
dissemination that applies to the foreign
jurisdiction:
• Example 1. A bank in country X—
solely through personnel located in
country X—executes a security-based
swap over the phone with a U.S. person
located in New York, and no person
within the United States is directly
involved in soliciting, negotiating, or
executing the terms of the securitybased swap on behalf of the foreign
bank. The security-based swap is not
cleared. The security-based swap would
be eligible for substituted compliance,
regardless of whether the foreign bank is
registered in any capacity with the
Commission.
• Example 2. A foreign branch of a
U.S. bank located in country X executes
a security-based swap over the phone
with a U.S. person located in New York.
The foreign branch uses staff located
solely in country X to solicit, negotiate,
and execute the security-based swap.
The security-based swap is not cleared.
The security-based swap would be
eligible for substituted compliance.
• Example 3. Two foreign branches of
U.S. banks, both located in country X,
execute a security-based swap in
country X. The security-based swap
transaction is not solicited, negotiated,
or executed by a person within the
United States on behalf of either
counterparty. The security-based swap
would be eligible for substituted
compliance.
• Example 4. Two New York
branches of foreign banks execute a
security-based swap. Persons acting on
behalf of each bank are located within
the United States and are involved in
soliciting, negotiating, and executing the
security-based swap between those U.S. persons
would be eligible for substituted compliance.
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terms of the security-based swap. The
security-based swap would not be
eligible for substituted compliance.
• Example 5. Same facts as Example
4, except that one foreign bank, instead
of soliciting, negotiating, or executing
the security-based swap using persons
associated with its New York branch,
uses only persons located in its home
office to perform such functions. The
security-based swap would be eligible
for substituted compliance.
• Example 6. A foreign subsidiary
(C1) of a U.S. person executes a
security-based swap with a U.S. person
(C2). No person within the United States
solicits, negotiates, or executes the
security-based swap on behalf of the
foreign subsidiary C1. The securitybased swap would be eligible for
substituted compliance, regardless of
the location of persons who executed,
solicited, or negotiated the securitybased swap on behalf of the U.S. person
C2, and regardless of whether the
foreign subsidiary C1 is guaranteed by a
U.S. person.
3. Requests for Substituted Compliance
Proposed Rule 908(c)(2)(ii) would
provide that any person that executes a
security-based swap that would, in the
absence of a substituted compliance
order, be required to be reported
pursuant to Regulation SBSR may file
an application, pursuant to the
procedures set forth in proposed Rule
0–13,1150 requesting that the
Commission make a substituted
compliance determination regarding
regulatory reporting and public
dissemination with respect to a foreign
jurisdiction the rules of which also
would require reporting and public
dissemination of the security-based
swap. Proposed Rule 908(c)(2)(ii) would
further provide that such application
shall include the reasons therefor and
such other information as the
Commission may request. The
Commission would consider those
reasons as well as information derived
from other sources in considering
whether to grant a substituted
compliance order with respect to
regulatory reporting and public
dissemination.
4. Findings Necessary for Substituted
Compliance
Re-proposed Rule 908(c)(2)(iii) would
provide that, in making a substituted
compliance determination with respect
to a foreign jurisdiction, the
Commission shall take into account
such factors as the Commission
determines are appropriate, such as the
1150 See
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scope and objectives of the relevant
foreign regulatory requirements, as well
as the effectiveness of the supervisory
compliance program administered, and
the enforcement authority exercised, by
the foreign financial regulatory
authority to support oversight of its
regulatory reporting and public
dissemination system for security-based
swaps. Furthermore, the Commission
would not make a substituted
compliance determination with respect
to regulatory reporting and public
dissemination unless the Commission
found that:
(A) The data elements that are
required to be reported pursuant to the
rules of the foreign jurisdiction are
comparable to those required to be
reported pursuant to § 242.901;
(B) The rules of the foreign
jurisdiction require the security-based
swap to be reported and publicly
disseminated in a manner and a
timeframe comparable to those required
by §§ 242.900–911;
(C) The Commission has direct
electronic access 1151 to the securitybased swap data held by a trade
repository or foreign regulatory
authority to which security-based swaps
are reported pursuant to the rules of that
foreign jurisdiction; and
(D) Any trade repository or foreign
regulatory authority in the foreign
jurisdiction that receives and maintains
required transaction reports of securitybased swaps pursuant to the laws of that
foreign jurisdiction is subject to
requirements regarding data collection
and maintenance; systems capacity,
resiliency, and security; and
recordkeeping that are comparable to
the requirements imposed on SDRs by
sections 240.13n–5 to 240.13n–7 of the
Exchange Act.
As noted above, the Commission
preliminarily believes that compliance
with a foreign jurisdiction’s rules for
reporting and public dissemination of
security-based swaps should be a
substitute for compliance with the U.S.
rules only when the foreign jurisdiction
has a reporting and public
dissemination regime comparable to
that of the United States. Thus, reproposed Rule 908(c)(2)(iii)(A) would
provide that the data elements required
to be reported pursuant to the rules of
the foreign jurisdiction must be
comparable to those required to be
reported pursuant to Rule 901 of
Regulation SBSR. If the data elements
required by the foreign jurisdiction were
1151 New paragraph (k) of re-proposed Rule 900
would define the term ‘‘direct electronic access’’ to
have the same meaning as in proposed Rule 13n–
4(a)(5) under the Exchange Act, as proposed in the
SDR Proposing Release, 75 FR 77318.
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not comparable, certain important data
elements about a security-based swap
might not be captured by the foreign
trade repository or foreign regulatory
authority.
Furthermore, re-proposed Rule
908(c)(2)(iii)(B) would provide that the
rules of the foreign jurisdiction must
require security-based swaps to be
reported and publicly disseminated in a
manner and a timeframe comparable to
those required by Regulation SBSR. The
Commission preliminarily believes that,
given the Title VII requirements that all
security-based swaps be reported to an
SDR and that all security-based swaps
be publicly disseminated in real time
(except for block trades), allowing
substituted compliance with the rules of
a foreign jurisdiction that has standards
significantly different from those in the
United States would run counter to the
objectives and requirements of Title VII.
Thus, for example, the Commission
would not, under re-proposed Rule
908(c), permit substituted compliance
with respect to regulatory reporting and
public dissemination if the foreign
jurisdiction did not (among other
things) impose public dissemination
requirements on a trade-by-trade basis;
dissemination of trade information on
an aggregate basis would not be
sufficient. Furthermore, the Commission
would not permit substituted
compliance under re-proposed Rule
908(c) with respect to regulatory
reporting and public dissemination if
security-based swaps of non-block size
were publicly disseminated in other
than real time, as required under
Section 763 of the Dodd-Frank Act.
Re-proposed Rule 908(c)(2)(iii)(C)
would also provide that, to grant a
substituted compliance order with
respect to regulatory reporting and
public dissemination, the Commission
must have direct electronic access to the
security-based swap data held by a trade
repository or foreign regulatory
authority to which security-based swaps
are reported pursuant to the rules of that
foreign jurisdiction. This requirement
stems from the fact that the regulatory
reporting provisions of Title VII are
premised on the idea that the
Commission will have direct electronic
access to all the reported data. Not
having direct electronic access could
reduce the Commission’s ability to
effectively and efficiently monitor the
U.S. security-based swap market and
provide timely and complete data to
other U.S. financial regulatory agencies.
Thus, the Commission preliminarily
believes that direct electronic access to
the foreign trade repository or foreign
regulatory authority to which securitybased swap transactions are reported in
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the foreign jurisdiction should be a
prerequisite to issuing a substituted
compliance order with respect to
regulatory reporting and public
dissemination applying to that
jurisdiction.
An alternative to this proposed
requirement would be to permit
substituted compliance with respect to
regulatory reporting and public
dissemination if, instead, there existed
an information-sharing agreement
between the Commission and an
appropriate body in the foreign
jurisdiction that would permit the
Commission to request and obtain
transaction information from the foreign
trade repository or foreign regulatory
authority that otherwise would be
reported to a registered SDR pursuant to
Regulation SBSR. The Commission
preliminarily believes, however, that it
would be more appropriate to require
direct electronic access to such data
before allowing substituted compliance
with respect to regulatory reporting and
public dissemination. Without direct
electronic access, the Commission could
face substantial delays before a foreign
entity, even acting expeditiously, could
compile a substantial volume of data
relating to a substantial volume of
transactions. Delays in obtaining such
data could compromise the ability of the
Commission to supervise security-based
swap market participants, and to share
information with other U.S. financial
regulators, in a timely fashion.
Re-proposed Rule 908(c)(2)(iii)(D)
would provide that, to grant a
substituted compliance order regarding
regulatory reporting and public
dissemination, the Commission must be
able to find that any trade repository or
foreign regulatory authority in the
foreign jurisdiction that receives and
maintains transaction reports of
security-based swaps pursuant to the
laws of that foreign jurisdiction is
subject to requirements regarding data
collection and maintenance; systems
capacity, resiliency, and security; and
recordkeeping that are comparable to
the requirements that the Commission
would impose on SDRs. The
Commission has proposed certain
requirements for SDRs relating to data
collection and maintenance; 1152
systems capacity, resiliency, and
security; 1153 and recordkeeping.1154
These requirements are designed,
among other things, to enhance the
ability of SDRs to effectively receive and
1152 See
proposed Rule 13n–5 under the Exchange
Act.
1153 See
proposed Rule 13n–6 under the Exchange
Act.
1154 See
proposed Rule 13n–7 under the Exchange
maintain security-based swap
transaction data that are reported to
them. Without appropriate system
security, for example, the data held by
an SDR could be destroyed or rendered
unusable by a hacker attack or computer
virus. Therefore, the Commission
preliminarily believes that, to allow
substituted compliance for regulatory
reporting and public dissemination with
respect to a foreign jurisdiction, any
entity in that foreign jurisdiction that is
required to receive and maintain
security-based swap transaction data
should be required to have comparable
protections.
Re-proposed Rule 908(c)(2)(iv) would
specify that, before issuing a substituted
compliance order pursuant to this
section, the Commission shall have
entered into a supervisory and
enforcement MOU or other arrangement
with the relevant foreign financial
regulatory authority or authorities under
such foreign financial regulatory system
addressing oversight and supervision of
the applicable security-based swap
market under the substitute compliance
determination.
5. Modification or Withdrawal of
Substituted Compliance Order
Re-proposed Rule 908(c)(2)(v) would
provide that the Commission may, on
our own initiative, modify or withdraw
a substituted compliance order with
respect to regulatory reporting and
public dissemination in a foreign
jurisdiction, at any time, after
appropriate notice and opportunity for
comment. Such a modification or
withdrawal could result from a situation
where, after the Commission issues an
order recognizing the reporting and
public dissemination regime of a foreign
jurisdiction as eligible for substituted
compliance, the basis for that order
ceases to be true. For example, if the
foreign jurisdiction did not sufficiently
enforce its reporting and public
dissemination rules, compliance with
the foreign rules might no longer be
deemed an effective substitute for
compliance with the U.S. rules.
Therefore, the Commission
preliminarily believes that it would be
appropriate to establish a mechanism
whereby it could, at any time and on
our own initiative, modify or withdraw
a previously issued substituted
compliance order with respect to
regulatory reporting and public
dissemination, after appropriate notice
and opportunity for comment.
Act.
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6. Regulatory Reporting and Public
Dissemination Considered Together in
the Commission’s Analysis of
Substituted Compliance
The Commission has considered, but
has determined not to propose, treating
regulatory reporting and public
dissemination separately for purposes of
allowing substituted compliance. Under
such an approach, for example, the
Commission could allow substituted
compliance for regulatory reporting
with respect to a particular foreign
jurisdiction without permitting
substituted compliance for public
dissemination. The Commission
preliminarily believes that this
approach would not implement Title
VII’s regulatory reporting and public
dissemination requirements as
effectively as considering these
requirements together for purposes of
analyzing requests for substituted
compliance determinations.
One example of a potential problem
with viewing these two requirements
separately relates to the public
dissemination of security-based swap
transaction information. If the
Commission were to permit substituted
compliance for regulatory reporting but
not for public dissemination, certain
transactions could be reported to a
foreign trade repository in lieu of an
SDR that is registered with the
Commission. However, the Commission
has proposed that registered SDRs
would be the entities charged with
publicly disseminating information
about security-based swap transactions.
A registered SDR could carry out that
function only if data about individual
transactions are reported to it. If data
about certain transactions were reported
instead to a foreign trade repository, it
would be impractical if not impossible
for the SDR to publicly disseminate data
about those transactions. The
Commission also preliminarily believes
that it would be impractical and unduly
complicated to devise an alternate
method for public dissemination of such
transactions that did not involve
registered SDRs.1155 The Commission
preliminarily concludes, therefore, that
transactions should be required to be
reported to a registered SDR even if
there are comparable foreign rules that
1155 A reporting side could be required to report
to a registered SDR the data elements required by
re-proposed Rule 901(c), which are those that
would be publicly disseminated, but not be
required to report the elements required by reproposed Rule 901(d), which are the additional
elements required for regulatory reporting.
However, reporting the transaction to both a
registered SDR and to a foreign trade repository
(which it would be required to do by the rules of
the foreign jurisdiction) would negate the effect of
the substituted compliance order.
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would provide for reporting of such
transactions to a foreign trade
repository, unless the foreign rules also
provide for public dissemination of
such transactions in a manner
comparable to Regulation SBSR. In such
case, the Commission could, under reproposed Rule 908(c), issue a
substituted compliance order for both
regulatory reporting and public
dissemination with respect to that
foreign jurisdiction.
The Commission notes that, under reproposed Rules 908(a) and 908(b),
certain security-based swap transactions
would be subject to regulatory reporting
but not public dissemination. The
Commission also has considered, but
has determined not to propose, treating
regulatory reporting and public
dissemination separately for purposes of
allowing substituted compliance with
respect to such transactions, even
though Regulation SBSR would not
require public dissemination of such
transactions in any case. The
Commission preliminarily believes that
this approach could introduce
unnecessary operational complexity for
cross-border market participants and
might yield few if any efficiency gains.
Assume that a foreign branch of a U.S.
bank is operating in a jurisdiction where
a substituted compliance order were in
effect for transactions that otherwise
would be required to be reported but not
publicly disseminated. With each
transaction, the foreign branch would be
required to determine whether the
transaction was such that regulatory
reporting but not public dissemination
would be required under Regulation
SBSR, in which case substituted
compliance could apply and the
transaction could instead be reported to
the foreign trade repository, or whether
both regulatory reporting and public
dissemination would be required under
Regulation SBSR, in which case
substituted compliance would not apply
and the transaction would be required
to be reported to a registered SDR. The
determination of the appropriate place
to send the trade report would depend
on the nature of the counterparty.1156
While market participants could be
1156 For example, if the foreign branch transacted
with another foreign branch of a U.S. bank or with
a non-U.S. person that was guaranteed by a U.S.
person, the transaction would be subject to public
dissemination (see re-proposed Rule 908(b)(2)(ii))
and substituted compliance would not apply. Thus,
the transaction would have to be reported to an SDR
registered with the Commission. However, if the
foreign branch transacted outside the United States
with a non-U.S. person that was not guaranteed by
a U.S. person, public dissemination would not be
required under Regulation SBSR. See re-proposed
Rule 908(b)(2). Therefore, the transaction could be
reported instead to the foreign trade repository.
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expected to develop the appropriate
compliance systems to report through
the appropriate channel depending on
the circumstances, the Commission
preliminarily sees only limited benefit
to requiring market participants to do
so. The Commission preliminarily
believes instead that it would be simpler
to permit substituted compliance for a
foreign jurisdiction only when that
foreign jurisdiction has rules for
regulatory reporting and public
dissemination that are comparable to
Regulation SBSR. This approached is
designed to minimize the necessity of
determining, on a transaction-bytransaction basis, which jurisdiction’s
rules would apply.
Request for Comment
The Commission is re-proposing
Regulation SBSR in a manner that
would set forth when a security-based
swap generally would be required to be
reported and publicly disseminated, and
when reporting and dissemination
requirements could be satisfied by
substituting compliance with the rules
of a foreign jurisdiction for compliance
with U.S. rules. The public is invited to
comment on all aspects of these
proposed rules. In particular, the
Commission invites responses to the
following questions about our proposed
rules relating to substituted compliance:
• Should the Commission make
determinations of substituted
compliance for regulatory reporting
separately from public dissemination?
Why or why not? If so, how could a
security-based swap transaction be
publicly disseminated if substituted
compliance were in effect for regulatory
reporting but not for public
dissemination?
• Do you believe the Commission, as
proposed in Rule 908(c)(2)(i), should
have the ability to conditionally or
unconditionally, by order, make a
substituted compliance determination
with respect to regulatory reporting and
public dissemination in a foreign
jurisdiction if such foreign jurisdiction
imposes a comparable system for the
regulatory reporting and public
dissemination of all security-based
swaps? Why or why not? Should the
Commission allow for substituted
compliance determinations under more
limited circumstances? Why or why
not? Under what other circumstances
should the Commission consider
substituted compliance? Please be
specific.
• How should the Commission
evaluate whether a foreign system is
‘‘comparable’’ for purposes of regulatory
reporting and public dissemination?
Please be specific.
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• The Commission stated that our
approach is designed to put the foreign
branches of U.S. banks on a level
playing field with non-U.S. persons in
foreign jurisdictions where those
branches are located. Do you believe
that the proposed formulation would
accomplish this goal? Why or why not?
How should the Commission restructure
re-proposed Rule 908(c)(1) to
accomplish this goal? Please be specific.
• Do you believe that the examples
provided adequately describe the
situations under which security-based
swap transactions should and should
not be eligible for substituted
compliance? Why or why not? What
additional situations should the
Commission consider? Please be
specific.
• Do you agree with the Commission
proposal, in re-proposed Rule
908(c)(2)(ii), that any person that
executes security-based swaps that
would be required to be reported to
Regulation SBSR be eligible to file an
application requesting substituted
compliance? Why or why not? Should
any other entities (i.e., foreign regulators
or industry associations) be eligible to
file such an application? Why or why
not?
• Do you agree with the factors the
Commission would take into account
when making a substituted compliance
determination? Why or why not? What
additional factors should the
Commission take into account? Should
a trade repository be subject to
requirements that are comparable to all
of Section 13(n) of the Exchange Act
and the rules and regulations
thereunder as a condition to a
substituted compliance determination?
• Do you agree with the proposed
findings that the Commission would be
required to make pursuant to reproposed Rule 908(c)(2)(iii)? Why or
why not? Are there any other findings
the Commission should be required to
make? Please be specific.
• Do you agree, as detailed in reproposed Rule 908(c)(2)(iv), that the
Commission should have the ability, on
our own initiative, to modify or
withdraw a substituted compliance
order at any time, after appropriate
notice and opportunity for comment?
Why or why not?
• The Commission is not at this time
proposing that a duty to report and
publicly disseminate a security-based
swap would depend on the domicile of
the issuer of the loan or security
underlying the security-based swap.
Should the Commission’s rules for
reporting and public dissemination take
this factor into consideration? Why or
why not?
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• If a foreign jurisdiction has some
form of public dissemination but the
Commission does not believe that the
foreign jurisdiction’s rules are
comparable to those of the United States
to allow substituted compliance with
respect to regulatory reporting and
public dissemination, what would be
the effect of having transaction reports
of security-based swaps publicly
disseminated in multiple jurisdictions?
Do you believe that situation would
impact price discovery or the market for
such security-based swaps generally? If
so, how, to what extent, and why? If not,
why not? How practical would it be,
and what would be the cost, for private
actors to consolidate transaction reports
of those security-based swaps emanating
from potentially multiple feeds across
multiple jurisdictions?
• Should the Commission permit
substituted compliance with respect to
regulatory reporting and public
dissemination even if it does not have
direct electronic access to the securitybased swaps transactions reported to the
foreign trade repository or foreign
regulatory authority? If yes, how could
the Commission ensure that it has
timely access to the security-based swap
transaction data held by the foreign
entity that otherwise would have been
reported pursuant to Regulation SBSR?
If there were delays associated with
obtaining data from the foreign entity,
how long could those delays be for
substituted compliance to still be
appropriate? In addition to delays, do
you foresee any other potential obstacles
to the Commission obtaining this
information from foreign entities?
• The Commission’s re-proposed
rules relating to substituted compliance
for regulatory reporting and public
dissemination requirements differ in
certain respects from the CFTC’s crossborder guidance. For example, the CFTC
guidance provides that a swap between
a U.S. person swap dealer and a nonU.S. person guaranteed by a U.S. person
would be subject to public
dissemination requirements, and that
these requirements could not be
satisfied through substituted
compliance.1157 The Commission, on
the other hand, is proposing that public
dissemination of a security-based swap
between two such direct counterparties
could be satisfied by substituted
compliance (assuming that no person is
soliciting, negotiating, or executing the
security-based swap within the United
States on behalf of the non-U.S. person
that is guaranteed by a U.S. person).1158
1157 See
1158 See
77 FR 41237.
re-proposed Rule 908(c)(1) of Regulation
SBSR.
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Please describe any other differences
that you believe might exist and what
would be the impact of any such
differences.
• When making a comparability
determination, the Commission would
look not just at the rules of a foreign
jurisdiction, but also at the
comprehensiveness of the supervision
and regulation by the appropriate
governmental authorities of that
jurisdiction. When assessing the
effectiveness of a foreign jurisdiction’s
supervisory compliance program,
should the Commission consider factors
such as the existence of a dedicated
examination program, the expertise of
examiners, the existence of a risk
monitoring framework and an
examination plan; and the existence of
a disciplinary program to enforce
compliance with laws? Similarly, when
assessing the effectiveness of a foreign
jurisdiction’s enforcement program,
should the Commission consider factors
such as whether the program is actively
administered, resourced, and
transparent?
• Is the Commission’s holistic
approach to making a comparability
determination appropriate? Why or why
not? Are there specific procedures or
comparability considerations that would
be useful for the Commission to
incorporate in our proposed substituted
compliance approach? If so, please
describe. What would be the advantages
of adopting such measures now? What
would be the disadvantages of adopting
such measures now?
• What would be the market impact
of proposed approach to substituted
compliance for regulatory reporting and
public dissemination? How would the
proposed approach affect the
competitiveness of U.S. entities in the
global marketplace (both in the United
States as well as in foreign
jurisdictions)? Would the proposed
approach place any market participants
at a competitive disadvantage or
advantage? If so, please explain. Would
the proposed approach be a more
general burden on competition? If so,
please explain. What other measures
should the Commission consider to
implement the proposed approach?
What would be the market impacts and
competitiveness effects of alternatives to
the proposed approach discussed in this
release?
• In making substituted compliance
determinations for reporting, should the
Commission require direct electronic
access to data maintained at foreign
SDRs or should we only require an
information sharing arrangement? Why
or why not?
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E. Clearing Requirement
Section 3C(a)(1) of the Exchange Act
requires a security-based swap that is
subject to the mandatory clearing
requirement to be cleared at a clearing
agency that is either registered with the
Commission or exempt from
registration.1159 The Commission
recognizes, however, that in some
circumstances counterparties may seek
to clear security-based swaps subject to
mandatory clearing at a clearing agency
that is neither registered with the
Commission nor exempt from
registration, which would fail to satisfy
the Title VII mandatory clearing
requirement. This scenario may occur
where counterparties seek either due to
their own preference or regulatory
requirements in a foreign jurisdiction to
clear a transaction through a clearing
agency that does not have any U.S.
members and does not clear transactions
conducted within the United States,
because this type of clearing agency
would not be required to register with
the Commission or obtain an exemption
from registration under the
Commission’s proposed interpretation
of the clearing agency registration
requirement in Section 17A(g),
discussed in Section V above.
In recognition of this situation and the
potential for duplicative or conflicting
clearing requirements, the Commission
preliminarily believes that it would be
appropriate in certain circumstances to
permit substituted compliance in this
area. Specifically, the Commission is
proposing to use our authority, under
Section 36 of the Exchange Act,1160 to
exempt persons from the clearing
mandate in Section 3C of the Exchange
Act if a relevant transaction is submitted
to a foreign clearing agency that is the
subject of a substituted compliance
determination by the Commission.
Because such clearing agencies would
not be engaged in activities that trigger
the registration requirement, such
substituted compliance determination
1159 If a counterparty qualifies for the end-user
clearing exception, then the security-based swap
would not be required to be cleared unless the end
user elects that it be cleared. See 15 U.S.C. 78c–
3(g)(2) (providing that application of the exception
is solely at the discretion of the counterparty to
security-based swaps that meets the conditions of
the exception in Section 3C(g)(1) of the Exchange
Act).
1160 See 15 U.S.C. 78mm. Section 36 of the
Exchange Act provides that, subject to certain
exceptions, the Commission ‘‘by rule, regulation, or
order may conditionally or unconditionally exempt
any person, security, or transaction, or any class or
classes of person, securities, or transactions from
any provision or provisions of [the Exchange Act]
or of any rule or regulation thereunder, to the extent
that such exemption is necessary or appropriate in
the public interest and is consistent with the
protection of investors.’’
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would not be subject to the procedure
outlined in Section 17A(k) to obtain an
exemption from clearing agency
registration, but would instead be
considered in the context of an
exemption from the clearing mandate.
We preliminarily believe that providing
substituted compliance in this area
could help to facilitate the clearance
and settlement of cross-border securitybased swaps, while also promoting
compliance with clearing mandates.
Under the proposed approach, upon
the Commission’s issuance of an order
making a substituted compliance
determination with respect to a
particular foreign clearing agency, a
counterparty to a security-based swap
transaction that is subject to the
mandatory clearing requirement would
be able to rely on the Commission’s
substituted compliance determination to
satisfy the mandatory clearing
requirement by clearing such
transaction on the specified foreign
clearing agency.
The Commission’s proposed approach
to substituted compliance for clearing
would be limited to foreign clearing
agencies that have no U.S. person
members or activities in the United
States. A foreign clearing agency that
meets these two threshold requirements
could initiate the process of making a
substituted compliance determination
by filing an application, pursuant to the
procedures set forth in proposed Rule
0–13,1161 requesting that the
Commission make a substituted
compliance determination. Such
application would need to include the
reasons therefor and such other
documentation as the Commission may
request. To provide the Commission
with enough information to make a
substituted compliance determination,
the application would have to include
sufficiently comprehensive information
regarding the clearing agency and the
foreign regime such that the
Commission has an adequate basis to
make the substituted compliance
determination.
In making a substituted compliance
determination, the Commission expects
that our review in such cases would
include seeking appropriate assurances
from the foreign clearing agency
regarding the absence of U.S. person
members and relevant activity in the
United States, including the volume of
clearing activity originating in the
United States. In addition, the review
would look at the scope and objectives
of the applicable foreign jurisdiction’s
regulatory requirements, as well as the
effectiveness of the supervisory
1161 See
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compliance program administered, and
the enforcement authority exercised, by
the relevant foreign financial regulatory
authority or authorities to support the
oversight of such clearing agency. Thus,
the Commission’s determination would
take into account a foreign jurisdiction’s
overall regulatory framework, and
would focus on the similarity of
regulatory objectives in addition to the
presence or absence of similar rules. We
expect that our review of substituted
compliance applications in this area
would be aided by the resources
available to the Commission as a result
of cooperative relationships with other
authorities that we expect would allow
us to assess the risk characteristics of
such foreign clearing agencies on an
ongoing basis.1162
Subsequent to making a substituted
compliance determination, the
Commission would be able to modify or
withdraw, at any time, an order
containing such determination, after
appropriate notice and opportunity for
comment. This would allow the
Commission to take action in the event
that a foreign clearing agency, for any
reason, is no longer suitable for
substituted compliance.
The Commission’s proposed approach
to substituted compliance with respect
to the mandatory clearing requirement
differs from other Title VII categories
where substituted compliance would be
permitted in that we are not proposing
a specific rule related to substituted
compliance. We preliminarily do not
believe that a rule is necessary in the
clearing space, although we are
soliciting comment on the issue in the
request for comments below. This belief
1162 See, e.g., FMI Principles, note 687, supra.
Systemically important payment systems, central
securities depositories, securities settlement
systems, central counterparties and trade
repositories (‘‘Financial Market Infrastructures’’) are
expected to observe the standards as soon as
possible, and CPSS and IOSCO members are
seeking to adopt the standards in their respective
jurisdictions by the end of 2012. CPSS and IOSCO
have also proposed assessment methodologies to
oversee implementation of the FMI Principles,
including self-assessments and external
assessments, such as those conducted by the
International Monetary Fund and the World Bank
under the Financial Sector Assessment Program.
See CPSS and Technical Committee of IOSCO,
Assessment Methodology for the Principles for
FMIs and the Responsibilities of Authorities (April
2012), available at: http://www.bis.org/publ/
cpss101b.pdf. In addition, CPSS and the Technical
Committee of IOSCO proposed a disclosure
framework to ensure that disclosures made by FMIs
are clear and comprehensive. See CPSS and
Technical Committee of IOSCO, Disclosure
Framework for Financial Market Infrastructures
(April 2012), available at: http://www.bis.org/publ/
cpss101c.pdf. Finally, see Basel III for a discussion
of the preferential capital treatment that exposures
to a central counterparty will receive if such central
counterparty is supervised in a manner consistent
with the FMI Principles.
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stems in part from the fact that we do
not expect a large number of requests for
substituted compliance in this area due
to the small number of security-based
swap clearing agencies in the market. In
addition, the Title VII clearing agency
registration regime already contains a
category of exempt security-based swap
clearing agencies, and clearing securitybased swaps through these entities
satisfies the mandatory clearing
requirement. As a result, we
preliminarily believe that the proposed
approach to substituted compliance in
this area, whereby we are proposing a
policy and procedural framework for the
use of our exemptive authority in
Section 36 of the Exchange Act, is
sufficient to promote Title VII’s clearing
mandate while addressing the
regulatory complexities that stem from
the global scope of the security-based
swaps market.
sroberts on DSK5SPTVN1PROD with PROPOSALS
Request for comment
The Commission requests comment
on all aspects of the proposed
interpretation, including the following:
• Is substituted compliance related to
the mandatory clearing requirement in
Section 3C(a)(1) of the Exchange Act
needed to prevent conflict with
mandatory clearing requirements under
foreign law? If so, is the proposed
approach to substituted compliance
sufficient to address the potential
conflicts?
• Should the Commission apply
Section 17A(k) of the Exchange Act
under such circumstances to exempt
particular foreign security-based swap
clearing agencies to permit such
clearing agencies to be used by
counterparties subject to the mandatory
clearing requirement in Section 3C(a)(1)
of the Exchange Act? Are investor
protection considerations sufficiently
addressed if transactions are permitted
to be cleared on a CCP that is not
registered or exempt from registration?
What conditions would need to be
included to ensure the policy goals in
the Dodd-Frank Act regarding central
clearing are fulfilled? Should the
conditions identified in Section 17A(k)
that the clearing agency be available for
inspection by the Commission and make
available information requested by the
Commission apply? Why or why not?
• Should the Commission codify the
proposed approach to substituted
compliance in the mandatory clearing
space? Or is the proposed approach’s
reliance on the Commission’s exemptive
authority in Section 36 of the Exchange
Act, and the procedures set forth in
proposed Rule 0–13, sufficient? Why or
why not?
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• Are the conditions limiting the
potential availability of substituted
compliance to foreign clearing agencies
that have no U.S. persons as members
or activities in the United States
appropriate? Are there other approaches
that the Commission should consider?
Should the Commission only consider a
foreign clearing agency’s CCP activities
with regard to securities based swaps, or
all type securities, in making a
substituted compliance determination?
• What would be the market impact
of the proposed approach to substituted
compliance for the mandatory clearing
requirement? How would the proposed
approach affect the competitiveness of
U.S. entities in the global marketplace
(both in the United States as well as in
foreign jurisdictions)? Would the
proposed approach place any market
participants at a competitive
disadvantage or advantage? If so, please
explain. Would the proposed approach
be a more general burden on
competition? If so, please explain. What
other measures should the Commission
consider to implement the proposed
approach? What would be the market
impacts and competitiveness effects of
alternatives to the proposed approach
discussed in this release?
F. Trade Execution Requirement
Under the Commission’s proposal,
substituted compliance would be
permitted for certain cross-border
security-based swap transactions that
would be subject to the mandatory trade
execution requirement of Section 3C(h)
of the Exchange Act. Specifically, under
proposed Rule 3Ch–2(b)(1), the
Commission could, conditionally or
unconditionally, by order, make a
substituted compliance determination
with respect to a foreign jurisdiction to
permit a person subject to the
mandatory trade execution requirement
to execute such transaction, or have
such transaction executed on their
behalf, on a security-based swap market
(or class of markets) that is neither
registered under the Exchange Act nor
exempt from registration under the
Exchange Act if the Commission
determines that such security-based
swap market (or class of markets) is
subject to comparable, comprehensive
supervision and regulation by a foreign
financial regulatory authority or
authorities in such foreign jurisdiction.
Upon the Commission’s issuance of an
order making a substituted compliance
determination with respect to a
particular foreign jurisdiction under
proposed Rule 3Ch–2(b), a counterparty
to a security-based swap transaction that
is subject to the mandatory trade
execution requirement would be able to
PO 00000
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31099
rely on the substituted compliance
determination by the Commission to
satisfy the mandatory trade execution
requirement by executing such
transaction on a security-based swap
market in such foreign jurisdiction, if
such security-based swap market is
covered by, or is in a class of markets
that is covered by, the Commission’s
order.1163
Only transactions that meet the
requirements of proposed Rule 3Ch–
2(a), however, would be eligible for
substituted compliance with respect to
the mandatory trade execution
requirement. Specifically, with respect
to a foreign security-based swap market
(or class of markets) for which the
Commission has made a substituted
compliance determination pursuant to
proposed Rule 3Ch–2(b)(1), substituted
compliance would only be available for
security-based swap transactions where
both of the following conditions apply
to at least one counterparty to the
transaction: (i) the counterparty is either
a non-U.S. person or foreign branch of
a U.S. bank;1164 and (ii) the securitybased swap transaction is not solicited,
negotiated, or executed by a person
within the United States on behalf of
such counterparty.
Proposed Rule 3Ch–2(a) is designed to
extend the availability of substituted
compliance only to security-based
transactions where one counterparty to
the transaction is not acting directly or
through an agent within the United
States. The Commission preliminarily
believes that transactions in which both
counterparties utilize a U.S. person to
act on their behalf to execute, solicit, or
negotiate the transaction should not be
eligible for substituted compliance and
that it is appropriate to apply the
mandatory trade execution requirement
of Section 3C(h) of the Exchange Act to
these transactions, and not foreign law.
This approach should help mitigate any
potential competitive advantage that
non-U.S. intermediaries operating
within the United States may have over
U.S. intermediaries when facilitating
security-based swap transactions on
behalf of non-U.S. persons. It also
should promote regulatory parity for
U.S. and non-U.S. counterparties when
they enter into security-based swap
transactions within the United States.
The Commission, however, solicits
comments on this approach.
1163 Proposed
Rule 3Ch–2(a) under the Exchange
Act.
1164 Under proposed Rule 3Ch–1(c) under the
Exchange Act, the term ‘‘foreign branch’’ would
have the same meaning as set forth in proposed
Rule 3a71–3(a)(1) under the Exchange Act. See
Section III.B.7, supra.
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By contrast, for transactions involving
at least one counterparty that is a
foreign branch or a non-U.S. person and
for which no person within the United
States is directly involved in executing,
soliciting or negotiating the transaction
on behalf of such non-U.S. person or
foreign branch, the Commission
preliminarily believes that such
transactions should be eligible for
substituted compliance in the foreign
jurisdiction. The Commission believes
that limiting eligibility for substituted
compliance to such cross-border
security-based swap transactions would
promote the Title VII goals of
transparency, access, competition, and
anti-manipulation with respect to
transactions that impact U.S. markets
and market participants, and address
the regulatory complexities that stem
from the global scope of the securitybased swaps market.
Under proposed Rule 3Ch–2(b)(2), in
making a substituted compliance
determination, the Commission would
take into account such factors as the
Commission determines are appropriate,
such as the scope and objectives of the
applicable foreign jurisdiction’s
regulatory requirements, as well as the
effectiveness of the supervisory
compliance program administered, and
the enforcement authority exercised, by
the relevant foreign financial regulatory
authority or authorities to support the
oversight of such security-based swap
market (or class of markets). Thus, the
Commission’s determination would take
into account a foreign jurisdiction’s
overall regulatory framework, and
would focus on the similarity of
regulatory objectives in addition to the
presence or absence of similar rules. In
addition, in making a substituted
compliance determination with respect
to a foreign jurisdiction, the
Commission’s determination could be
with respect to a single security-based
swap market within such jurisdiction,
or a class of security-based swap
markets within the jurisdiction. For
instance, if a foreign jurisdiction
imposes different levels of supervisory
oversight with respect to different
classes or categories of security-based
swap markets, the Commission could
apply a substituted compliance
determination to an entire class of
security-based swap markets in the
foreign jurisdiction, enabling each
security-based swap market of that class
within such jurisdiction to rely on the
substituted compliance determination.
Furthermore, under proposed Rule
3Ch–2(b)(3) under the Exchange Act,
before issuing a substituted compliance
order pursuant to proposed Rule 3Ch–
2(b)(1) under the Exchange Act, the
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Commission would be required to have
entered into a supervisory and
enforcement MOU or other arrangement
with the relevant foreign financial
regulatory authority or authorities
addressing oversight and supervision of
the security-based swap market (or class
of markets) under the substituted
compliance determination.
Under proposed Rule 3Ch–2(b)(4)
under the Exchange Act, the
Commission also would be able to
modify or withdraw, at any time, an
order containing a substituted
compliance determination, after
appropriate notice and opportunity for
comment. This would allow the
Commission to take action in the event
that a security-based swap market (or
class of markets), for any reason, is no
longer suitable for substituted
compliance.
The Commission notes that the factors
the Commission would consider in
making a substituted compliance
determination with respect to
mandatory trade execution would not
necessarily be the same factors that the
Commission would find relevant to a
comparability determination for
purposes of an exemption from
registration as a SB SEF.1165 The
Commission preliminarily believes that
possible factors, among others, it could
consider when assessing the
effectiveness of a foreign jurisdiction’s
supervisory compliance program may
include the existence of a dedicated
examination program; examiners with
proper expertise; the existence of a risk
monitoring framework and an
examination plan; and a disciplinary
program to enforce compliance with
laws. The Commission, for example,
could find the presence or absence of
certain regulatory requirements in a
particular foreign jurisdiction to be
more relevant to a determination of
whether a security-based swap market
in that foreign jurisdiction should be
exempt from registration as a SB SEF
than to a substituted compliance
determination with respect to
mandatory trade execution.
Accordingly, the Commission
preliminarily believes that allowing
substituted compliance with respect to
mandatory trade execution for a foreign
security-based swap market (or class of
markets) would not necessarily result in
a determination to exempt that foreign
market (or class of markets) from
registration as a SB SEF. However, the
Commission generally solicits
comments on the appropriateness or
feasibility of this approach.
1165 See
PO 00000
Section VII.C, supra.
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Proposed Rule 3Ch–2(c) under the
Exchange Act provides that one or more
security-based swap markets could
initiate the process of making a
substituted compliance determination
by filing an application, pursuant to the
procedures set forth in proposed Rule
0–13,1166 requesting that the
Commission make a substituted
compliance determination. Such
application would need to include the
reasons therefor and such other
documentation as the Commission may
request. To provide the Commission
with enough information to make a
substituted compliance determination,
the application would have to include
sufficiently comprehensive information
regarding the security-based swap
market and the foreign regime such that
the Commission has an adequate basis
to make the substituted compliance
determination set forth in proposed
Rule 3Ch–2(b) under the Exchange Act.
Request for Comment
The Commission seeks comment on
all aspects of proposed Rule 3Ch–2,
including the following:
• The Commission generally solicits
comments on the appropriateness and
clarity of the proposed rule. Should
additional details be included as to any
aspect of this proposed rule? If so, for
what aspects of the proposed rule would
additional details be useful and why?
• As discussed above, under
proposed Rule 3Ch–2(a) under the
Exchange Act, substituted compliance
would be permitted only for securitybased swap transactions that have at
least one counterparty that is a non-U.S.
person or a foreign branch and the
security-based swap transaction is not
solicited, negotiated, or executed by a
person within the United States on
behalf of such counterparty. The
Commission generally solicits
comments on the appropriateness of
permitting substituted compliance for
the transactions described in proposed
Rule 3Ch–2(a). Is the Commission’s
approach to defining the transactions
that qualify for substituted compliance
appropriate? If not, why not? Should
some or all of the transactions described
by the proposed rule not be eligible for
substituted compliance? Should
additional transactions not covered by
the proposed rule be eligible for
substituted compliance? In either case,
please describe the transactions that
should be eligible or ineligible for
substituted compliance and provide the
rationale for each.
• Does the proposed substituted
compliance rule appropriately promote
1166 See
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the statutory objectives of the
mandatory trade execution requirement,
as well as the goal of international
coordination? If not, how could this be
better achieved? Would the objectives of
Title VII be hindered by permitting
persons to seek substituted compliance
for the eligible transactions? If so, how?
• What is the likelihood that crossborder transactions would be subject to
the mandatory trade execution
requirements of foreign jurisdictions
that conflict with the mandatory trade
execution requirement of Section 3C(h)
of the Exchange Act? For such
transactions, would the complications
stemming from such conflicting
mandatory trade execution requirements
be adequately addressed by permitting
substituted compliance for the
transactions described in the proposed
rule? If not, why not? Please describe
the complications, if any, that might
still ensue even with substituted
compliance. Would any conflicts likely
arise for security-based swaps
transactions not covered by the
proposed substituted compliance rule?
If so, please describe those conflicts and
how they would arise.
• Under proposed Rule 3Ch–2(b)(1),
under the Exchange Act, the
Commission may permit substituted
compliance with respect to the
mandatory trade execution requirement
if a security-based swap market (or class
of markets) is subject to comparable,
comprehensive supervision and
regulation by the relevant foreign
financial regulatory authority or
authorities. Is this comparability
standard appropriate and sufficiently
clear? Should additional detail be
provided as to what would and would
not satisfy this standard? If so, what
additional detail should be provided?
Should a different standard be used? If
so, what should be the standard and
why?
• In making a substituted compliance
determination, under proposed Rule
3Ch–2(b)(2) under the Exchange Act, the
Commission would consider such
factors it determines are appropriate,
such as the factors enumerated in
proposed Rule 3Ch–2(b)(2) under the
Exchange Act. Are these factors
appropriate to such a determination?
Are the enumerated factors too broad?
Too narrow? Please explain. Should
certain of these factors not be
considered or should certain additional
factors be enumerated in the proposed
rule?
• As discussed above, in making a
substituted compliance determination,
the Commission would focus on the
similarity of regulatory objectives in
addition to the presence or absence of
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similar rules. Is this holistic approach to
making a substituted compliance
determination appropriate? Why or why
not? If not, what approach should the
Commission take and why?
• As discussed above, the
Commission preliminarily believes that
the factors relevant to the Commission’s
substituted compliance determination
for mandatory trade execution purposes
would not necessarily be the same as
the factors that the Commission would
find relevant to a comparability
determination for purposes of an
exemption from registration as a
security-based swap execution facility.
The Commission generally solicits
comments on the appropriateness of
distinguishing the two determinations.
Should the Commission consider the
same factors in making a substituted
compliance determination for
mandatory trade execution and a
comparability determination with
respect to an exemption from
registration as a security-based swap
execution facility? If not, what factors
would be relevant and appropriate to
both determinations? Please describe.
What factors would only be relevant or
appropriate to a substituted compliance
determination for mandatory trade
execution or a comparability
determination for an exemption from
registration as a security-based swap
execution facility, respectively? Please
describe.
• Under proposed Rule 3Ch–2(c)
under the Exchange Act, one or more
security-based swap markets may file an
application with the Commission to
request that the Commission make a
substituted compliance determination
with respect to the mandatory trade
execution requirement. Should persons
other than security-based swap markets
be permitted to file such substituted
compliance applications? Why or why
not? If so, what other types of persons
should be permitted to file such
applications? Please explain.
• What would be the market impact
of proposed Rule 3Ch–2? How would
the application of the proposed rule
affect the competitiveness of U.S.
entities in the global marketplace (both
in the United States as well as in foreign
jurisdictions)? Would the proposed rule
place any market participants at a
competitive disadvantage or advantage?
If so, please explain. Would the
proposed rule be a more general burden
on competition? If so, please explain.
What other measures should the
Commission consider to implement the
proposed approach? What would be the
market impacts and competitiveness
effects of alternatives to the proposed
approach discussed in this release?
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31101
Antifraud Authority
The provisions of the proposed rules
and interpretive guidance, discussed
above, relate solely to the applicability
of the registration and mandatory
reporting, clearing, and trade execution
requirements under Title VII. The
proposed rules and interpretive
guidance do not limit the cross-border
reach of the antifraud or other
provisions of the federal securities laws
to these entities.
In Section 929P(b) of the Dodd-Frank
Act, Congress added provisions to the
federal securities laws confirming the
Commission’s broad cross-border
antifraud authority. Congress enacted
Section 929P(b) in response to the
Supreme Court’s decision in Morrison v.
National Australia Bank,1167 which
created uncertainty about the
Commission’s cross-border enforcement
authority under the antifraud provisions
of the federal securities laws. Prior to
Morrison, the federal courts of appeals
for nearly four decades had construed
the antifraud provisions to reach crossborder securities frauds when the fraud
either involved significant conduct
within the United States causing injury
to overseas investors, or had substantial
foreseeable effects on investors or
markets within the United States.1168
With respect to the Commission’s
enforcement authority, Section 929P(b)
codified the court of appeals’ prior
interpretation both as to the scope of the
antifraud provisions’ cross-border reach
and the nature of the inquiry as one of
subject-matter jurisdiction.1169
1167 See 130 S. Ct. 2869, 2888 (2010) (holding in
a Section 10(b) class action that ‘‘it is . . . only
transactions in securities listed on domestic
exchanges, and domestic transactions in other
securities, to which § 10(b) applies’’).
1168 See, e.g., Schoenbaum v. Firstbrook, 405 F.2d
200, 206 (2d Cir. 1968), modified on other grounds,
405 F.2d 215 (1968) (en banc).
1169 See 156 Cong. Rec. H5237 (daily ed. June 30,
2010) (statement of Rep. Kanjorski, author of
Section 929P(b)) (‘‘In the case of Morrison v.
National Australia Bank, the Supreme Court last
week held that section 10(b) of the Exchange Act
applies only to transactions in securities listed on
United States exchanges and transactions in other
securities that occur in the United States. In this
case, the Court also said that it was applying a
presumption against extraterritoriality. This bill’s
provisions concerning extraterritoriality, however,
are intended to rebut that presumption by clearly
indicating that Congress intends extraterritorial
application in cases brought by the SEC or the
Justice Department. Thus, the purpose of the
language of section 929P(b) of the bill is to make
clear that in actions and proceedings brought by the
SEC or the Justice Department, the specified
provisions of the Securities Act, the Exchange Act
and the Investment Advisers Act may have
extraterritorial application, and that extraterritorial
application is appropriate, irrespective of whether
the securities are traded on a domestic exchange or
the transactions occur in the United States, when
the conduct within the United States is significant
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Specifically, the Commission’s
antifraud enforcement authority under
Section 17(a) of the Securities Act and
the antifraud provisions of the Exchange
Act—including Sections 9(j) and 10(b)—
extends to ‘‘(1) conduct within the
United States that constitutes significant
steps in furtherance of [the antifraud
violation], even if the securities
transaction occurs outside the United
States and involves only foreign
investors,’’ and ‘‘(2) conduct occurring
outside the United States that has a
foreseeable substantial effect within the
United States.’’ 1170 Similarly, the
Commission’s enforcement authority
under Section 206 of the Investment
Advisers Act applies broadly to reach
‘‘(1) conduct within the United States
that constitutes significant steps in
furtherance of the violation, even if the
violation is committed by a foreign
adviser and involves only foreign
investors,’’ and ‘‘(2) conduct occurring
outside the United States that has a
foreseeable substantial effect within the
United States.’’ 1171
The Commission’s broad antifraud
enforcement authority reflects the strong
interest of the United States in applying
the antifraud provisions to cross-border
frauds that implicate U.S. territory, U.S.
markets, U.S. investors or other U.S.
market participants, or other U.S.
interests.1172 Doing so is necessary to
ensure honest securities markets and
high ethical standards in the U.S.
securities industry, and thereby to
promote confidence in our securities
markets among both domestic and
foreign investors. Cross-border
application of the antifraud provisions
is also critical for the protection of U.S.
investors from securities frauds
executed outside of the United States,
but that threaten to produce, foreseeably
do produce, or were otherwise intended
to produce effects upon U.S. markets,
U.S. investors or other U.S. market
participants, or other U.S. interests.
or when conduct outside the United States has a
foreseeable substantial effect within the United
States.’’). See also 156 Cong. Rec. S5915–16 (daily
ed. July 15, 2010) (statement of Senator Reed).
1170 Section 22 of the Securities Act, 15 U.S.C.
77v(a); Section 27 of the Exchange Act, 15 U.S.C.
78aa.
1171 Section 214 of the Investment Advisers Act,
15 U.S.C. 80b–14.
1172 See generally Restatement (Third) of Foreign
Relations Law of the United States section 402
(1987), stating that ‘‘the United States has authority
to prescribe law with respect to . . . conduct that,
wholly or in substantial part, takes place within its
territory; the status of persons, or interests in things,
present within its territory’’ and ‘‘conduct outside
its territory that has or is intended to have
substantial effect within its territory’’).
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XIII. General Request for Comment
A. General Comments
In responding to the specific requests
for comment above, interested persons
are encouraged to provide supporting
data and analysis and, when
appropriate, suggest modifications to
proposed rule text. Responses that are
supported by data and analysis provide
great assistance to the Commission in
considering the practicality and
effectiveness of proposed new
requirements as well as assessing the
benefits and costs of proposed
requirements. In addition, commenters
are encouraged to identify in their
responses a specific request for
comment by indicating the section
number of the release.
The Commission also seeks comment
on the proposals as a whole. In
particular, the Commission seeks
comment on the following questions:
• How would the proposals integrate
with provisions in other Titles and
Subtitles of the Dodd-Frank Act and any
domestic or global regulations or
proposed regulations under those other
Titles and Subtitles of the Dodd-Frank
Act? For example, the Commission
invites comment on how certain aspects
of the proposals, such as registration
and regulation of foreign security-based
swap dealers and major security-based
swap participants, and application of
the transaction-level requirements,
would integrate with regulation of
systemically important financial
institutions in Title I of the Dodd-Frank
Act, regulation of registered brokerdealers and investment advisers,
regulation of bank holding companies in
the Bank Holding Company Act, and
regulation of global systemically
important financial institutions in other
jurisdictions.
• For what aspects of the proposal
should the Commission consider
invoking our authority under Section
30(c) of the Exchange Act to prevent
evasion? Please explain.
B. Consistency with CFTC’s CrossBorder Approach
The CFTC has proposed interpretative
guidance and a policy statement
describing the cross-border application
of certain swaps provisions of the CEA
that were enacted by Title VII, and the
CFTC’s regulations promulgated
thereunder.1173 Specifically, the
1173 The CFTC’s guidance interprets Section 2(i)
of the Commodity Exchange Act (‘‘CEA’’), as
revised by Section 722(d) of the Dodd-Frank Act.
Section 2(i) provides that Title VII’s provisions
relating to swaps, ‘‘(including any rule prescribed
or regulation promulgated under that Act), shall not
apply to activities outside the United States unless
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proposal addresses the registration
requirement for swap dealers and major
swap participants that are not U.S.
persons, the application of Title VII
requirements appurtenant to such
registered entities, and the application
of the clearing, trade execution, and
certain reporting provisions under the
CEA to cross-border swap transactions
involving counterparties that are not
swap dealers or major swap
participants.
Understanding that the Commission
and the CFTC regulate different
products, participants, and markets, and
have different statutory authority, and
thus, appropriately may take different
approaches to various issues, we
nevertheless are guided by the objective
of establishing consistent and
comparable requirements to U.S. market
participants. Accordingly, we request
comments generally on (i) the impact of
any differences between the
Commission and CFTC approaches to
the application of Title VII to crossborder activities, including the
application of registration requirements
and the substantive requirements of
Title VII, (ii) whether the Commission’s
proposed application of Title VII in the
cross-border context should be modified
to conform to the proposals made by the
CFTC, and (iii) whether any crossborder interpretations proposed by the
CFTC, but not proposed by the
Commission (whether as interpretations
or rules), should be adopted by the
Commission.
XIV. Paperwork Reduction Act
A. Introduction
The Paperwork Reduction Act of 1995
(‘‘PRA’’) 1174 imposes certain
requirements on Federal agencies in
connection with their conducting or
sponsoring any ‘‘collection of
information.’’ 1175 An agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless it displays a
currently valid control number. In
addition, 44 U.S.C. 3507(a)(1)(D)
provides that before adopting (or
revising) a collection of information
requirement, an agency must, among
other things, publish a notice in the
Federal Register stating that the agency
has submitted the proposed collection
those activities—(1) have a direct and significant
connection with activities in, or effect on,
commerce of the United States; or (2) contravene
such rules or regulations as the Commission may
prescribe or promulgate as are necessary or
appropriate to prevent the evasion of any provision
of this Act that was enacted by the [Dodd-Frank
Act].’’
1174 44 U.S.C. 3501 et seq.
1175 44 U.S.C. 3502(3).
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of information to the Office of
Management and Budget (‘‘OMB’’) and
setting forth certain required
information, including: (1) A title for the
collection of information; (2) a summary
of the collection of information; (3) a
brief description of the need for the
information and the proposed use of the
information; (4) a description of the
likely respondents and proposed
frequency of response to the collection
of information; (5) an estimate of the
paperwork burden that shall result from
the collection of information; and (6)
notice that comments may be submitted
to the agency and director of OMB.1176
Certain provisions of proposed Rule
3a71–3, proposed Rule 3a71–5,
proposed Rule 3Ch–2, re-proposed
Forms SBSE, SBSE–A, and SBSE–BD,
proposed Rule 18a–4, and re-proposed
Rules 242.900 through 242.911 of
Regulation SBSR contain ‘‘collection of
information requirements’’ within the
meaning of the PRA. Accordingly, the
Commission is submitting these
requirements to OMB for review in
accordance with 44 U.S.C. 3507 and 5
CFR 1320.11. The title of these
collections are [‘‘Registration Rules for
Security-Based Swap Entities,’’
‘‘Disclosures by Certain Foreign
Security-Based Swap Dealers and Major
Security-Based Swap Participants,’’
‘‘Reliance on Counterparty
Representations Regarding Activity
Within the United States,’’ ‘‘Requests for
Cross-Border Substituted Compliance
Determinations,’’ and ‘‘Reporting and
Dissemination of Security-Based Swap
Information.’’] We are applying for OMB
Control Numbers for the collections
listed above in accordance with 44
U.S.C. 3507(j) and 5 CFR 1320.13.
described in more detail below.1178 The
Commission is not proposing to amend
any of the other Forms, or any of the
rules, proposed in the Registration
Proposing Release. The burden
estimates described below are designed
to update our burden estimates for
proposed Forms SBSE and SBSE–A to
account for the revisions we are
proposing to those two re-proposed
forms. For information regarding the
other burdens associated with proposed
Rules 15Fb1–1 through 15Fb6–1 and
Forms SBSE, SBSE–A, SBSE–BD, SBSE–
C, and SBSE–W, please refer to the
Registration Proposing Release.1179
Pursuant to paragraph (a) of proposed
Rule 15Fb2–1, each SBS Entity would
be required to file an application to
register with the Commission.1180 The
Commission sought to reduce burdens
and costs associated with the
application process by providing
alternate registration forms for certain
types of SBS Entities (including Forms
SBSE–A and SBSE–BD). Each SBS
Entity would only need to research,
complete, and file one of the proposed
Forms.
Proposed Rule 15Fb2–3 would require
that SBS Entities promptly amend their
applications if they find that the
information contained therein has
become inaccurate.1181 While SBS
Entities may need to update their Forms
periodically, each firm would only need
to amend that aspect of the Form that
has become inaccurate.
Proposed Rules 15Fb1–1 through
15Fb6–1 and re-proposed Forms SBSE,
SBSE–A, and SBSE–BD would require
that each respondent retain certain
records and information for three
years.1182
B. Re-proposal of Form SBSE, Form
SBSE–A, and Form SBSE–BD
2. Proposed Use of Information
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1. Summary of Collection of Information
On October 24, 2011, the Commission
proposed Rules 15Fb1–1 through
15Fb6–1 and Forms SBSE, SBSE–A,
SBSE–BD, SBSE–C, and SBSE–W to
facilitate registration of, certification by,
and withdrawal of SBS Entities, as
required by Section 15F of the Exchange
Act.1177 In light of the Commission’s
proposed rules regarding substituted
compliance, the Commission is reproposing Forms SBSE, SBSE–A, and
SBSE–BD to add three questions to
Form SBSE and Form SBSE–A, one
question to Form SBSE–BD, and to
amend Schedule F to those Forms as
1176 44 U.S.C. 3507(a)(1)(D) (internal formatting
omitted); see also 5 CFR 1320.5(a)(1)(iv).
1177 See Registration Proposing Release, 76 FR
65784.
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Re-proposed Forms SBSE, SBSE–A,
and SBSE–BD, as applicable, are
applications through which SBS Entities
would register with the Commission.
Information collected through these reproposed Forms SBSE, SBSE–A, and
SBSE–BD would allow the Commission
to determine whether applicants meet
the standards for registration, including
provisions regarding substituted
compliance, and would help the
Commission to fulfill our oversight
responsibilities.
1178 See Proposed Rule 3a71–5(c) under the
Exchange Act; see also Section III.C, supra. The
Commission is not proposing any changes to Form
SBSE–BD, Form SBSE–C, or Form SBSE–W.
1179 See Registration Proposing Release, 76 FR
65807.
1180 Id. at 65820–21.
1181 Id. at 65822.
1182 See id. at 65821.
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The Commission intends to make the
information collected pursuant to
proposed Rule 15Fb1–1 through 15Fb6–
1 and re-proposed Forms SBSE, SBSE–
A, and SBSE–BD public.
Any collections of information
required pursuant to proposed Rules
15Fb1–1 through 15Fb6–1 and reproposed Forms SBSE, SBSE–A, and
SBSE–BD would be mandatory to
permit the Commission to determine
whether applicants meet the standards
for registration, and to fulfill our
oversight responsibilities.
3. Respondents
In the Intermediary Definitions
Adopting Release and Registration
Proposing Release the Commission staff
estimated, based on data obtained from
DTCC and conversations with market
participants, that approximately 50
entities would fit within the definition
of a security-based swap dealer.1183 The
Commission staff also estimated in the
Registration Proposing Release that up
to five entities fit within the definition
of major security-based swap
participant.1184 The Commission sought
comment on the reasonableness and
accuracy of our estimates, but received
no comments regarding these estimates.
Of the 55 entities likely to be either
security-based swap dealers or major
security-based swap participants, the
Commission staff estimates that 18
entities will be registered foreign
security-based swap dealers, as defined
in proposed Rule 3a71–3(a)(3) or foreign
major security-based swap participants,
as defined in proposed Rule 3a67–
10(a)(1) (collectively, ‘‘Nonresident SBS
Entities’’).1185 The Commission staff
expects that most registered
Nonresident SBS Entities will be based
in one of a small number of non-U.S.
jurisdictions; however, the Commission
understands that approximately 19
jurisdictions are in the process of
developing regulations and/or
infrastructure for swaps, security-based
1183 See Intermediary Definitions Adopting
Release, 77 FR 30725; Registration Proposing
Release, 76 FR 65808; see also Trade
Acknowledgment Proposing Release, 76 FR 3868;
External Business Conduct Standards Proposing
Release, 76 FR 46668.
1184 See Registration Proposing Release, 76 FR
65821; see also Intermediary Definitions Proposing
Release, 75 FR 80209 n.188; Trade
Acknowledgment Proposing Release, 76 FR 3868;
External Business Conduct Standards Proposing
Release, 76 FR 46668.
1185 While the Commission estimated in the
Registration Proposing Release that 22 non-resident
entities would likely register with the Commission
as SBS Entities (see Registration Proposing Release,
76 FR 65807–12), our estimates have changed based
on the staff’s further analysis of the cross-border
issues and likely respondents.
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swaps, and other OTC derivatives.1186
In addition, the Commission anticipates
that a small number of security-based
swap market participants could be
based in other jurisdictions. As a result,
the Commission staff estimate that
cross-border issues may arise in
connection with security-based swap
market participants and transactions in
and between up to 30 discrete
jurisdictions.1187
In the Registration Proposing Release,
Commission staff further estimated,
based on its experience and
understanding of the swap and securitybased swap markets that of the firms
that may register as SBS Entities,
approximately 35 also will register with
the CFTC as swap dealers or major swap
participants, approximately 16 would
also be registered with the Commission
as broker-dealers, and approximately 4
firms not otherwise registered with the
CFTC or the Commission will seek to
become an SBS Entity.1188 The
Commission sought comment on the
reasonableness and accuracy of our
estimates, but has received no
comments regarding these estimates to
date.
The Commission again seeks
comment on the reasonableness and
accuracy of our estimates as to the
number of participants in the securitybased swap market that will be required
to register with the Commission through
the use of re-proposed Forms SBSE,
SBSE–A, and SBSE–BD, including the
number of registered foreign securitybased swap dealers. The Commission
also seeks comment on our estimate of
the number of jurisdictions with
security-based swap participants or
infrastructure that may transact with or
be used by U.S.-regulated entities.
1186 See FSB Progress Report April 2013. These 19
jurisdictions are: Argentina, Australia, Brazil,
Canada, China, the European Union, Hong Kong,
India, Indonesia, Japan, Mexico, the Republic of
Korea, Russia, Saudi Arabia, Singapore, South
Africa, Switzerland, Turkey, and the United States.
See also notes 35 and 36, supra.
1187 The European Union is regulating OTC
derivatives reporting, clearing, and bilateral risk
management on a pan-European basis. Accordingly,
the Commission may treat the European Union as
a single jurisdiction for purposes of certain crossborder issues. However, the Commission notes that
there may be variation between individual
European countries even within this consolidated
approach (e.g., privacy laws or supervisory
oversight or enforcement may differ in various
European countries).
1188 See External Business Conduct Standards
Proposing Release, 76 FR 46668.
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4. Total Initial and Annual Reporting
and Recordkeeping Burdens
(a) Paperwork Burden Associated With
Filing Application Forms
As indicated in the Registration
Proposing Release, proposed Rule
15Fb2–1 would require that each SBS
Entity register with the Commission by
filing an application on Form SBSE,
Form SBSE–A, or Form SBSE–BD, as
appropriate. Each SBS Entity would
only need to research, complete, and file
one form.1189 The Commission is not
proposing to amend this rule, but is reproposing the Forms that would be filed
to facilitate registration. The
modifications to re-proposed Forms
SBSE, SBSE–A, and SBSE–BD would
add two questions to Form SBSE and
Form SBSE–A, add one question to all
three Forms, and would modify
Schedule F to all the Forms.
The Commission staff does not
believe that the addition of these
questions will significantly increase the
burdens associated with the filing of
these forms. In the Registration
Proposing Release, the Commission staff
estimated that approximately four firms
would need to register using proposed
Form SBSE and that the total paperwork
burden associated with filing each
proposed Form SBSE (including the
Schedules 1190 and disclosure reporting
pages (‘‘DRPs’’)) would be
approximately 40 hours for each firm
that would use this Form.1191 The
Commission staff acknowledged that it
is likely that the time necessary to
complete these forms would vary
depending on the nature and
complexity of an entity’s business.1192
The Commission staff believes, based on
its experience with Form BD, that the
addition of three new questions to Form
SBSE included in the re-proposed Form
SBSE could increase the amount of time
it would take for an SBS Entity to
complete this form by about two hours.
Thus, the Commission staff estimates
that it would take all 4 SBS Entities who
may use Form SBSE to register with the
Commission a total of approximately
168 hours to register using re-proposed
Form SBSE.1193 As each SBS Entity
would only be required to file 1
complete form once, this would be a
one-time burden associated with
registration 1194 (the burden associated
1189 Id.
at 65820–21.
Schedule G (which we are not
proposing to amend) and Schedule F (which is
dealt with separately below).
1191 Registration Proposing Release, 76 FR 65808.
1192 Id.
1193 42 hours * 4 firms = 168 hours.
1194 While it is possible that another firm may
choose to register as an SBS Entity at some future
1190 Except
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with amendments to the form are
discussed below).
As proposed, Form SBSE–A contains
fewer questions than the proposed Form
SBSE and is available only to firms that
are (or will be) familiar with the
registration process because they are
registered (or will be registering) with
the CFTC as a swap dealer or major
swap participant. As a result, the
Commission staff estimated in the
Registration Proposing Release that it
would take SBS Entities filing proposed
Form SBSE–A approximately 80% of
the time that it would take for an
unregistered entity to research,
complete, and file proposed Form SBSE
(including the Schedules and DRPs).1195
Accordingly, the Commission staff
estimated that the total paperwork
burden associated with filing each
proposed Form SBSE–A across 35 firms
would be approximately 32 hours for
each firm who would use this Form.1196
The Commission staff believes, based on
its experience with Form BD, that the
addition of 3 new questions to Form
SBSE–A included in the re-proposed
Form SBSE–A could increase the
amount of time it would take for an SBS
Entity to complete this form by about
two hours. Thus, the Commission staff
estimates that it would take all 35 SBS
Entities who may use Form SBSE–A to
register with the Commission a total of
approximately 1,190 hours to register
using re-proposed Form SBSE–A.1197 As
each SBS Entity would only be required
to file 1 complete form once, this would
be a one-time burden associated with
registration 1198 (the burden associated
with amendments to the form are
discussed below).
As proposed, Form SBSE–BD contains
fewer questions than both the proposed
Form SBSE and Form SBSE–A and is
available only to firms that are (or will
time, we presently estimate for purposes of this
PRA that no additional firms will register in the
next three years. This is because the Dodd-Frank
Act imposed regulation on an existing industry and
we expect those industry participants presently
engaged in this business to either register when the
rules become effective or decide to withdraw from
this business. In addition, the costs to start-up an
SBS Entity will likely be high, which may
discourage new entrants. Finally, as the
Commission has not yet promulgated rules to
register or regulate these entities and we have no
experience with the registration trends of SBS
Entities over time, any estimate regarding the
number of possible new entrants over time would
be speculative.
1195 Registration Proposing Release, 76 FR 65808.
This estimate assumes that an entity that is familiar
with an analogous registration process would
require approximately 20% less time to complete
Form SBSE–A compared to an unregistered entity
completing Form SBSE.
1196 Id.
1197 34 hours * 35 firms = 1,190 hours.
1198 See note 1194, supra.
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be) familiar with the registration process
because they are registered (or will be
registering) with the Commission as a
broker-dealer. As a result, the
Commission staff estimated in the
Registration Proposing Release that it
would take SBS Entities filing proposed
Form SBSE–BD approximately 25% of
the time that it would take for an
unregistered entity to research,
complete, and file proposed Form SBSE
(including the Schedules and DRPs).1199
Accordingly, the Commission staff
estimated that the total paperwork
burden associated with filing each
proposed Form SBSE–BD across sixteen
firms would be approximately ten hours
for each firm that would use this
Form.1200 The Commission staff
believes, based on its experience with
Form BD, that the addition of one new
question to Form SBSE–BD included in
the re-proposed Form SBSE–BD could
increase the amount of time it would
take for an SBS Entity to complete this
form by about one half hour. Thus, the
Commission staff estimates that it
would take all sixteen SBS Entities that
may use Form SBSE–BD to register with
the Commission a total of approximately
168 hours to register using re-proposed
Form SBSE–BD.1201 As each SBS Entity
would only be required to file one
complete form once, this would be a
one-time burden associated with
registration1202 (the burden associated
with amendments to the form are
discussed below).
(b) Paperwork Burden Associated With
Amending Schedule F
As indicated in the Registration
Proposing Release, proposed Rule
15Fb2–4 would require that each
nonresident SBS Entity file an
additional schedule (Schedule F) with
its Form SBSE, Form SBSE–A, or Form
SBSE–BD, as appropriate, to identify its
U.S. agent for service of process and to
certify that the firm can, as a matter of
law, provide the Commission with
access to its books and records and can,
as a matter of law, submit to onsite
inspection and examination by the
Commission.1203 The Commission is not
proposing to amend this rule, but is reproposing Schedule F. The
modifications to re-proposed Schedule
F would divide Schedule F into two
sections. Section I would include the
full text of the originally proposed
Schedule F. Section II would elicit
additional information regarding foreign
1199 Registration
Proposing Release, 76 FR 65808.
1200 Id.
(c) Paperwork Burden Associated With
Amending Application Forms
As discussed in the Registration
Proposing Release, proposed Rule
15Fb2–3 would require that SBS
Entities amend their applications if they
find that information contained in a
prior filing has become inaccurate.1207
The Commission is not proposing to
amend this rule; however, the addition
of three questions to proposed Forms
SBSE and SBSE–A, the addition of one
question to Form SBSE–BD, and the
revisions to Schedule F would provide
additional information that could
change over time and require
amendment of these Forms. As
indicated in the Registration Proposing
Release, the staff does not expect that
the requirement to amend these Forms
would impose a significant burden
because each SBS Entity would have
already completed proposed Forms
SBSE, SBSE–A, or SBSE–BD, as
applicable, and would only need to
1204 Id.
at 65811.
hours * 18 Non-resident SBS Entities =
1205 11⁄2;
1201 101⁄2;
hours * 16 firms = 168 hours.
note 1194, supra.
1203 Registration Proposing Release, 76 FR 65822.
1202 See
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regulators with which the applicant may
be registered or that otherwise have
jurisdiction over the applicant.
The Commission staff does not
believe that the addition of this new
Section would significantly increase the
burdens associated with the filing of
Schedule F because information
regarding the foreign regulators with
jurisdiction over the entity should be
known and readily available. In the
Registration Proposing Release, the
Commission staff estimated, based on its
experience relative to the securities
industry and Form BD, that the average
time necessary for each Nonresident
SBS Entity to complete and file
Schedule F would be approximately one
hour.1204 The Commission staff
believes, based on its experience with
Form BD, that adding the new section
to Schedule F could increase the
amount of time it would take for an SBS
Entity to complete this form by about
one-half hour. Thus, the Commission
staff estimates that it would take all 18
Non-resident SBS Entities who may use
Schedule F to register with the
Commission a total of approximately 27
hours complete Schedule F.1205 As each
SBS Entity would only be required to
file Schedule F once, this would be a
one-time burden associated with
registration1206 (the burden associated
with amendments to the form—
including the schedules—are discussed
below).
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27 hours.
1206 See note 1194, supra.
1207 Registration Proposing Release, 76 FR 65809.
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amend those aspects of the Forms that
may become inaccurate. In the
Registration Proposing Release, the staff
estimated, based on the number of
amendments the Commission receives
annually on Form BD, that each SBS
Entity would file approximately three
amendments annually.1208 The staff also
estimated in the Registration Proposing
Release that, although the time
necessary to file an amendment to
proposed Forms SBSE, SBSE–A, or
SBSE–BD, as applicable, would vary
depending on the nature and
complexity of the amendment, the
Commission staff estimates the average
total annual burden associated with
amending proposed Forms SBSE, SBSE–
A, and SBSE–BD would be
approximately one hour for each
amendment.1209 The staff does not
believe the addition of 3 questions
included in each of re-proposed Forms
SBSE and SBSE–A, the addition of one
new question to re-proposed Form
SBSE–BD, and the revision of Schedule
F would increase either the number of
amendments each firm may be required
to file or the amount of time it would
take for a firm to file an amendment.1210
Thus we continue to believe the annual
burden for associated with Rule 15Fb2–
3 would be approximately 165
hours.1211
As indicated in the Registration
Proposing Release, the collection of
information relating to Forms SBSE,
SBSE–A, SBSE–BD and Schedule F
would be mandatory, and the
Commission intends to make the
information provided through these
forms and Schedule F public.
5. Request for Comment on Paperwork
Burden Estimates
The Commission seeks comment on
the paperwork burdens associated with
proposed Rules 15Fb1–1 through
15Fb6–1 and re-proposed Forms SBSE,
SBSE–A, and SBSE–BD, as applicable.
• What burdens, if any, would
respondents incur with respect to
system design, programming, expanding
systems capacity, and establishing
compliance programs to comply with reproposed Forms SBSE, SBSE–A, and
SBSE–BD, as applicable?
1208 Id.
1209 Id.
1210 The estimated number of amendments filed
by each SBS Entity in the Registration Proposing
Release was based on the number of amendments
to Form BD filed annually by broker-dealers. See
Registration Proposing Release, 76 FR 65809. We
did not base our estimate on a comparison of the
number or content of the questions, because we
have no data upon which to base that type of
estimate and we believe it would be too speculative.
1211 1 hour * 3 amendments per year * 55 SBS
Entities = 165 hours.
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• Is it likely that SBS Entities would
complete re-proposed Forms SBSE,
SBSE–A, and SBSE–BD, as applicable,
themselves or is it more likely that they
would obtain assistance in completing
these forms from some outside entity
(e.g., outside counsel)? If an SBS Entity
obtains assistance in completing the
forms from an outside entity, what type
of entity may be utilized and what may
the relative costs to employ such an
entity for this purpose be?
• The Commission estimates that no
new SBS Entities will register after year
1 because the security-based swap
market is already well-developed and
because of potentially significant
barriers to entry for prospective market
participants. Is this estimate accurate? If
not, how many SBS Entities will register
after year 1?
• Would there be different or
additional paperwork burdens
associated with the collection of
information under re-proposed Forms
SBSE, SBSE–A, and SBSE–BD, as
applicable, that a respondent does not
currently undertake in the ordinary
course of business that the Commission
has failed to identify? If so, please both
describe and quantify any additional
burden(s).
C. Disclosures by Certain Foreign
Security-Based Swap Dealers and Major
Security-Based Swap Participants
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1. Summary of Collection of Information
A registered foreign security-based
swap dealer must disclose to any
counterparty that is a U.S. person, prior
to accepting any assets from, for, or on
behalf of such counterparty to margin,
guarantee, or secure a security-based
swap, the potential treatment of any
assets segregated by the registered
foreign security-based swap dealer
pursuant to Exchange Act Section 3E in
an insolvency proceeding under U.S.
bankruptcy law and any applicable
foreign insolvency laws.1212
2. Proposed Use of Information
The required disclosures would give
U.S. counterparties important
information regarding the treatment of
their collateral and the role of U.S. and
foreign law in any insolvency
proceedings. The Commission
preliminarily believes that this
information would promote
transparency and help counterparties in
fully assessing the risks associated with
their transactions. Moreover, without
these disclosures, the Commission
preliminarily believes that there is a risk
that some U.S. counterparties could
1212 Proposed Rule 18a–4(e)(3) under the
Exchange Act.
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assume, incorrectly, that any securitybased swap transaction with a registered
foreign security-based swap dealer or
major security-based swap participant is
automatically and fully subject to Title
VII and other potentially applicable U.S.
laws (e.g., U.S. bankruptcy law). These
disclosures would make such confusion
less likely and, as a result, help to
ensure that U.S. counterparties conduct
appropriate due diligence when
transacting with foreign security-based
swap dealers.
The disclosures required pursuant to
proposed Rule 18a–4(e) under the
Exchange Act would be mandatory for
all registered foreign security-based
swap dealers that enter into securitybased swaps with counterparties that
are not U.S. persons.
Registered foreign security-based
swap dealers are required to disclose
information pursuant to proposed Rule
18a–4(e) to their U.S. counterparties.
Therefore, the Commission would not
typically receive confidential
information as a result of this collection
of information. However, to the extent
that the Commission receives
confidential information pursuant to
proposed Rule 18a–4(e) through our
examination and oversight program, an
investigation, or some other means,
such information would be kept
confidential, subject to the provisions of
applicable law.1213
3. Respondents
As discussed in Section B.3 above, the
Commission staff estimates that there
will be 18 Nonresident SBS Entities and
that most of these firms will be based in
one of a small number of non-U.S.
jurisdictions.1214 In addition, the
Commission staff anticipates that a
small number of security-based swap
market participants could be based in
other jurisdictions.1215 As a result, the
Commission staff estimates that crossborder issues may arise in connection
with security-based swap market
participants and transactions in and
between up to 30 discrete
jurisdictions.1216
1213 See, e.g., 5 U.S.C. 552 (Exemption 4 of the
Freedom of Information Act provides an exemption
for ‘‘trade secrets and commercial or financial
information obtained from a person and privileged
or confidential.’’ 5 U.S.C. 552(b)(4). Exemption 8 of
the Freedom of Information Act provides an
exemption for matters that are ‘‘contained in or
related to examination, operating, or condition
reports prepare by, or on behalf of, or for the use
of an agency responsible for the regulation or
supervision of financial institutions.’’ 5 U.S.C.
552(b)(8)).
1214 See Section XIV.B.3, supra.
1215 Id.
1216 Id.
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4. Total Initial and Annual Reporting
Burdens
The estimates in this section reflect
the Commission’s experience with
burden estimates for similar disclosure
requirements and our staff’s discussions
with market participants.1217 Pursuant
to proposed Rule18a–4(e)(3), registered
foreign security-based swap dealers
would be required to provide
disclosures to their U.S. counterparties.
The Commission believes that, in most
cases, these disclosures would be made
through amendments to the registered
foreign security-based swap dealer’s
existing trading documentation. Because
these disclosures relate to new
regulatory requirements, the
Commission anticipates that all
registered foreign security-based swap
dealers would need to incorporate new
language into their existing trading
documentation with U.S.
counterparties. Disclosure of the
potential treatment of segregated assets
in insolvency proceedings under U.S.
bankruptcy law and foreign insolvency
laws pursuant to proposed Rule 18a–
4(e)(3) would likely vary depending on
the counterparty’s jurisdiction.
Accordingly, the Commission expects
that these disclosures often may need to
be tailored to address the particular
circumstances of each trading
relationship. However, in some cases,
trade associations or industry working
groups may be able to develop standard
disclosure forms that can be adopted by
foreign security-based swap dealers
with little or no modification. In either
case, the paperwork burden associated
with developing new disclosure
language and incorporating this
language into a registered foreign
security-based swap dealer’s trading
documentation will vary depending on:
(1) the number of non-U.S.
counterparties with whom the registered
foreign security-based swap dealer
trades; (2) the number of jurisdictions
represented by the registered foreign
security-based swap dealer’s
counterparties; and (3) the availability
of standardized disclosure language. To
the extent standardized disclosures
become available, the paperwork burden
on registered foreign security-based
swap dealers would be limited to
amending existing trading
1217 See External Business Conduct Standards
Proposing Release, 76 FR 42396; see also Disclosure
of Accounting Policies for Derivative Financial
Instruments and Derivative Commodity Instruments
and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in
Derivative Financial Instruments, Other Financial
Instruments and Derivative Commodity
Instruments, Securities Act Release No. 7386 (Jan.
31, 1997), 62 FR 6044 (Feb. 10, 1997).
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documentation to incorporate the
standardized disclosures. Conversely,
more time will be necessary where a
greater degree of customization is
required to develop the required
disclosures and incorporate this
language into existing documentation.
The Commission estimates the
maximum total paperwork burden
associated with developing new
disclosure language would be
approximately 2,700 hours, plus $2.1
million for all 18 foreign security-based
swap dealers and 30 jurisdictions.1218
This estimate assumes little or no
reliance on standardized disclosure
language. In addition, the Commission
estimates the total paperwork burden
associated with incorporating new
disclosure language into each foreign
security-based swap dealer’s trading
documentation would be approximately
9,000 hours for all 18 foreign securitybased swap dealers.1219
The Commission expects that the
majority of the paperwork burden
associated with the new disclosure
requirements will be experienced
during the first year as language is
developed, whether by individual
foreign security-based swap dealers or
through collaborative efforts, and
trading documentation is amended.
After the new disclosure language is
developed and incorporated into trading
documentation, the Commission
believes that the ongoing burden
associated with proposed Rule 18a–4(e)
would be limited to periodically
updating the disclosures to reflect
changes in the applicable law or to
incorporate new jurisdictions with
security-based swap counterparties. The
Commission estimates that this ongoing
paperwork burden would not exceed
100 hours per year for all 18 foreign
security-based swap dealers
(approximately 5 hours per foreign
security-based swap dealer per year).
1218 The Commission staff estimates the total
paperwork burden associated with developing new
disclosure language for each foreign security-based
swap dealer would be 150 hours of in-house
counsel time (5 hours of in-house counsel time *
up to 30 potential jurisdictions), plus $120,000
(based on 10 hours of outside counsel time * $400
* up to 30 potential jurisdictions).
1219 The Commission staff estimate that the
average Nonresident SBS Entity will have 50 active
non-U.S. counterparties. Accordingly, the
Commission staff estimates the cost of incorporating
new disclosure language into the trading
documentation of an average foreign security-based
swap participant would be 500 hours per foreign
security-based swap participant (based on 10 hours
of in-house counsel time * 50 active non-U.S.
counterparties).
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5. Request for Comment on Paperwork
Burden Estimates
receiving the representation knows that
it is not accurate.1221
The Commission seeks comment on
the paperwork burdens associated with
proposed Rule18a–4(e).
• Is it likely that foreign securitybased swap participants will have more
than 50 active non-U.S. counterparties?
• In how many discrete jurisdictions
do most foreign security-based swap
participants have counterparties?
• In general, is the proposed
collection of information necessary for
the proper performance of the
Commission’s functions? Will the
proposed collection of information have
practical utility to the Commission and
Commission staff?
• Are the Commission’s estimates of
the paperwork burden of the proposed
collection accurate?
• Is the Commission’s estimate of the
expected ongoing burden associated
with updating and maintaining the
disclosures in proposed Rule 18a–4(e)
reasonable? If not, why?
• Are there ways for the Commission
to enhance the quality, utility, and
clarity of the information collected? Are
there ways for the Commission to
minimize the paperwork burden of the
proposed collection of information (e.g.,
through the use of automated collection
techniques or other forms of information
technology)? If so, please describe.
2. Proposed Use of Information
Under the proposed rules, certain
Title VII requirements would not apply
to cross-border transactions conducted
through a foreign branch of a U.S. bank
where the foreign branch is the named
counterparty to the transaction and no
person within the United States is
directly involved in soliciting,
negotiating, or executing the securitybased swap on behalf of the foreign
branch or its counterparty. For example,
under the proposed rules, a non-U.S.
person would not be required to count
toward the de minimis threshold in the
security-based swap dealer definition its
transactions with the foreign branch of
a U.S. bank. Conversely, certain Title
VII requirements would apply to
transactions conducted within the
United States, even if both
counterparties are non-U.S. persons.
The Commission acknowledges that
verifying whether a security-based swap
falls within the definition of a
‘‘transaction conducted through a
foreign branch’’ or a ‘‘transaction
conducted within the United States’’
could require significant due diligence.
The Commission preliminarily believes
that the representations described in
proposed Rule 3a71–3(a)(4)(ii) and
proposed Rule 3a71–3(a)(5)(ii) would
mitigate the operational difficulties that
could arise in connection with
investigating the activities of a
counterparty to ensure compliance with
the corresponding rules.
The representations described in
proposed Rule 3a71–3(a)(4)(ii) and
proposed Rule 3a71–3(a)(5)(ii) would be
provided voluntarily by the
counterparties to certain security-based
swap transactions; therefore, the
Commission would not typically receive
confidential information as a result of
this collection of information. However,
to the extent that the Commission
receives confidential information
described in proposed Rule 3a71–
3(a)(4)(ii) or proposed Rule 3a71–
3(a)(5)(iii) through our examination and
oversight program, an investigation, or
some other means, such information
would be kept confidential, subject to
the provisions of applicable law.1222
D. Reliance on Counterparty
Representations Regarding Activity
Within the United States
1. Summary of Collection of Information
When determining whether a
security-based swap is a ‘‘transaction
conducted through a foreign branch,’’ as
defined in proposed Rule 3a71–3(a)(4)(i)
under the Exchange Act, a party may
rely on a representation from its
counterparty indicating that ‘‘no person
within the United States is directly
involved in soliciting, negotiating, or
executing’’ the transaction on behalf of
the counterparty, unless the party
receiving the representation knows that
it is not accurate.1220 Similarly, when
determining whether a security-based
swap is a ‘‘transaction conducted within
the United States,’’ as defined in
proposed Rule 3a71–3(a)(5)(i), a party
may rely on a representation from its
counterparty indicating that the
transaction ‘‘is not solicited, negotiated,
executed, or booked within the United
States by or on behalf of such
counterparty,’’ unless the party
1220 Proposed Rule 3a71–3(a)(4)(ii) under the
Exchange Act.
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1221 Proposed Rule 3a71–3(a)(5)(ii) under the
Exchange Act.
1222 See, e.g., 5 U.S.C. 552 (Exemption 4 of the
Freedom of Information Act provides an exemption
for ‘‘trade secrets and commercial or financial
information obtained from a person and privileged
or confidential.’’ 5 U.S.C. 552(b)(4). Exemption 8 of
the Freedom of Information Act provides an
exemption for matters that are ‘‘contained in or
related to examination, operating, or condition
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3. Respondents
Based on our understanding of the
OTC derivatives markets, including the
size of the market, the number of
counterparties that are active in the
market, and how market participants
currently structure security-based swap
transactions, the Commission
preliminarily estimates that 50 entities
may include a representation that a
security-based swap is a ‘‘transaction
conducted through a foreign branch’’ in
their trading relationship
documentation (e.g., the schedule to a
master agreement). Similarly, the
Commission preliminarily estimates
that 250 entities may include a
representation that a security-based
swap is not a ‘‘transaction conducted
within the United States.’’ 1223
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4. Total Initial and Annual Reporting
and Recordkeeping Burdens
The estimates in this section reflect
the Commission’s experience with
burden estimates for similar
requirements and our discussions with
market participants.1224 Pursuant to
proposed Rules 3a71–3(a)(4)(ii) and
3a71–3(a)(5)(iii), parties to securitybased swaps would be permitted to rely
on certain representations from their
counterparties when determining
whether a transaction falls within the
definition of a ‘‘transaction conducted
through a foreign branch’’ or a
‘‘transaction conducted within the
United States.’’ The Commission
preliminarily believes that, in most
cases, these representations would be
made through amendments to the
parties’ existing trading documentation
(e.g., the schedule to a master
agreement).1225 Because these
representations relate to new regulatory
requirements, the Commission
anticipates that counterparties may elect
to develop and incorporate these
representations in trading
documentation soon after the effective
reports prepare by, or on behalf of, or for the use
of an agency responsible for the regulation or
supervision of financial institutions.’’ 5 U.S.C.
552(b)(8)).
1223 For a more detailed discussion, see
discussion of the number of market participants
that may be reporting counterparties in Section
XIV.F.2.d.ii, infra.
1224 See External Business Conduct Standards
Proposing Release, 76 FR 42396.
1225 The Commission preliminarily believes that
because trading relationship documentation is
established between two counterparties, whether
one or both counterparties is able to represent that
it is entering into a ‘‘transaction conducted through
a foreign branch’’ or a ‘‘transaction conducted
within the United States’’ would not change on a
transaction-by-transaction basis and, therefore, such
representations would generally be made in the
schedule to a master agreement, rather than in
individual confirmations.
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date of the Commission’s security-based
swap regulations, rather than
incorporating specific language on a
transactional basis. The Commission
believes that parties would be able to
adopt, where appropriate, standardized
language across all of their securitybased swap trading relationships. This
language may be developed by
individual firms or through a
combination of trade associations and
industry working groups.
The Commission estimates the
maximum total paperwork burden
associated with developing new
representations would be, for each
entity, no more than approximately
three to five hours, plus between $1,200
and $2,000 for the services of outside
professionals, for a maximum of
approximately 1,500 hours and
$600,000 across all security-based swap
counterparties.1226 This estimate
assumes little or no reliance on
standardized disclosure language. In
addition, the Commission estimates the
total paperwork burden associated with
incorporating new disclosure language
would be no more than approximately
three to five hours per counterparty, for
a maximum of approximately 15,000
hours across all applicable securitybased swap counterparties.1227
The Commission expects that the
majority of the burden associated with
the new disclosure requirements will be
experienced during the first year as
language is developed and trading
documentation is amended. After the
new representations are developed and
incorporated into trading
documentation, the Commission
believes that the annual paperwork
burden associated with this requirement
would be no more than approximately
10 hours per counterparty for verifying
representations with existing
1226 Because the representations will be short and
based on facts that should be known and readily
available to the entity making the representation,
the Commission staff estimates the paperwork
burden associated with developing new
representations would range from three to five
hours of in-house counsel time, plus $1,200 to
2,000 for the services of outside professionals
(based on three to five hours of outside counsel
time * $400)). The Commission staff estimates that
the burden for counterparties that only require one
of the two representations would be at the lower
end of this range.
1227 The Commission staff estimates that the
average security-based swap counterparty
(including security-based swap dealers and buyside counterparties) will have no more than 10
active counterparties able to represent that a
transaction is conducted through a foreign branch,
not conducted within the United States, or both.
Accordingly, the Commission staff estimates the
total burden associated with incorporating new
disclosure language into the relevant trading
documentation would be 15,000 hours (based on
five hours per counterparty * 300 respondents * 10
applicable security-based swap counterparties).
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counterparties and onboarding new
counterparties, for a maximum of
approximately 3,000 hours across all
applicable security-based swap
counterparties.1228
5. Request for Comment on Paperwork
Burden Estimates
The Commission seeks comment on
the paperwork burdens associated with
proposed Rules 3a71–3(a)(4)(ii) and
3a71–3(a)(5)(ii).
• Are the Commission’s estimates of
the numbers of market participants that
will include a representation that a
security-based swap is a ‘‘transaction
conducted through a foreign branch’’ or
not a ‘‘transaction conducted within the
United States’’ reasonable? Are these
estimates likely to become incorrect as
a result of changes in the OTC
derivatives markets? If so, how?
• Is the Commission’s estimate that a
representation that a security-based
swap is a ‘‘transaction conducted
through a foreign branch’’ or not a
‘‘transaction conducted within the
United States’’ will be made in a
schedule to a master agreement rather
than in individual confirmations
reasonable? If not, where will these
representations be made?
• In general, is the proposed
collection of information necessary for
the proper performance of the
Commission’s functions? Will the
proposed collection of information have
practical utility to the Commission and
Commission staff?
• Are the Commission’s estimates of
the paperwork burden of the proposed
collection accurate?
• Is the Commission’s estimate of the
cost of outside counsel reasonable?
• Are there ways for the Commission
to enhance the quality, utility, and
clarity of the information collected? Are
there ways for the Commission to
minimize the paperwork burden of the
proposed collection of information (e.g.,
through the use of automated collection
techniques or other forms of information
technology)? If so, please describe.
E. Requests for Cross-Border Substituted
Compliance Determinations
1. Summary of Collection of Information
The Commission is proposing to
apply various Title VII provisions to
SBS Entities and related market
infrastructures on a cross-border basis.
However, as noted above, the
Commission would permit, in
appropriate circumstances, compliance
1228 The Commission staff estimates that this
burden would consist of 10 hours of in-house
counsel time for each security-based swap market
participant.
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with comparable regulatory
requirements in a foreign jurisdiction to
substitute for compliance with certain
requirements of the Exchange Act, and
rules and regulations thereunder,
relating to security-based swaps. As
proposed, the Commission would
consider making substituted compliance
determinations with respect to four
distinct categories of rules: (1)
requirements applicable to registered
foreign security-based swap dealers
under Section 15F of the Exchange Act
and the rules and regulations
thereunder pursuant to proposed Rule
3a71–5(c) under the Exchange Act; (2)
requirements relating to regulatory
reporting and public dissemination of
security-based swaps pursuant to reproposed Rule 242.908(c)(2)(ii) of
Regulation SBSR; (3) requirements
relating to clearing for security-based
swaps; 1229 and (4) requirements relating
to trade execution for security-based
swaps pursuant to proposed Rule 3Ch–
2(c) under the Exchange Act.
Requests for a substituted compliance
determination would come from
registered foreign security-based swap
dealers or other persons.1230 However,
under the proposed rules noted above,
the Commission would make any
determinations with respect to
particular requirements on a class or
jurisdiction basis, depending on the
specific characteristics of the foreign
regulatory regime, rather than on a firmby-firm basis.1231 Once the Commission
has made a substituted compliance
determination, other similarly situated
market participants would be able to
rely on that determination to the extent
applicable and subject to any
corresponding conditions. Accordingly,
the Commission expects that requests
for a substituted compliance
determination would be made only
where an entity seeks to rely on
particular requirements of a foreign
jurisdiction that have not previously
been the subject of a substituted
compliance request. The Commission
believes that this approach would
substantially reduce the burden
associated with requesting substituted
1229 The Commission is not proposing a rule
regarding the substituted compliance process for
the mandatory clearing requirement. See Section
XI.E, supra.
1230 As discussed above, the Commission is not
proposing to permit substituted compliance for
registered foreign major security-based swap
participants.
1231 Requests for substituted compliance
determinations under proposed Rule 3a71–5(c)
under the Exchange Act must come directly from
a foreign security-based swap dealer (or a group of
such dealers); foreign financial regulatory
authorities may not request such a determination.
Proposed Rule 3a71–5(c) under the Exchange Act.
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compliance determinations for an entity
that relies on a previously issued
determination, and, therefore,
complying with the Commission’s rules
and regulations more generally.1232
When applying for a substituted
compliance determination under one of
the proposed rules, an entity would be
required to provide the Commission
with any supporting documentation as
the Commission may request, in
addition to information that the entity
believes is necessary for the
Commission to make a determination,
such as information demonstrating that
the requirements applied in the foreign
jurisdiction are comparable to the
Commission’s and describing the
methods used by relevant foreign
financial regulatory authorities to
monitor compliance with those
requirements. A foreign security-based
swap dealer (or a group of foreign
security-based swap dealers of the same
class) seeking a substituted compliance
determination with respect to one or
more requirements in Section 15F of the
Exchange Act and the rules and
regulations thereunder also must
demonstrate that it is directly
supervised by the foreign financial
regulatory authority (with respect to
requirements relating to the applicable
requirements in Section 15F of the
Exchange Act) and provide the
certification and opinion of counsel, as
described in Rule 15Fb2–4(c).1233
The Commission is proposing that
applicants follow the procedures set
forth in proposed Rule 0–13 under the
Exchange Act for an application
requesting a substituted compliance
determination.1234
2. Proposed Use of Information
The Commission would use the
information collected pursuant to
proposed Rule 3a71–5(c) under the
Exchange Act to evaluate requests for
substituted compliance with respect to
requirements applicable to registered
security-based swap dealers (or classes
thereof) under Section 15F of the
Exchange Act and the rules and
regulations thereunder. The
Commission would use the information
collected pursuant to re-proposed Rule
242.908(c)(2)(ii) of Regulation SBSR to
evaluate requests for substituted
compliance with regard to requirements
applicable to regulatory reporting and
public dissemination of security-based
1232 The paperwork burden associated with
requesting substituted compliance determinations
is discussed in detail in Section XIV.E.4 below.
1233 Proposed Rule 3a71–5(c); see also Section
XIV.B, supra.
1234 See Section XI.B, supra (discussing proposed
Rule 0–13 under the Exchange Act).
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31109
swaps. Finally, the Commission would
use the information collected pursuant
to proposed Rule 3Ch–2(c) under the
Exchange Act to evaluate requests for
substituted compliance with regard to
requirements relating to trade execution
for security-based swaps.
The requests for substituted
compliance determinations in proposed
Rule 3a71–5, re-proposed Rule
242.908(c)(2)(ii), and proposed Rule
3Ch–2(c) under the Exchange Act are
required when a person seeks a
substituted compliance determination.
The Commission intends to make
public the information submitted to it
pursuant to any request for a substituted
compliance determination under
proposed Rules 3a71–(5), re-proposed
Rule 242.908(c)(2)(ii), and proposed
Rule 3Ch–2(c) under the Exchange Act,
including supporting documentation
provided by the requesting party.
3. Respondents
As discussed in Section XIV.B.3
above, the Commission preliminarily
estimates that there will be 22
Nonresident SBS Entities and that most
of these firms will be based in one of a
small number of non-U.S.
jurisdictions.1235 In addition, the
Commission staff anticipates that a
small number of security-based swap
market participants could be based in
other jurisdictions.1236 As a result, the
Commission staff estimates that requests
for substituted compliance
determinations may arise in connection
with security-based swap market
participants and transactions in and
between up to 30 discrete
jurisdictions.1237
4. Total Initial and Annual Reporting
and Recordkeeping Burdens
Proposed Rule 3a71–5 under the
Exchange Act, proposed Rule 3Ch–2(c)
under the Exchange Act, and reproposed Rule 242.908(c)(2)(ii) of
Regulation SBSR would require
submission of certain information to the
Commission to the extent entities elect
to request a substituted compliance
determination with respect to one or
more areas where the Commission has
issued rules under the Dodd-Frank Act.
(a) Proposed Rule 3a71–5
Proposed Rule 3a71–5(c) under the
Exchange Act would apply only to
registered foreign security-based swap
dealers (or classes thereof) that request
a substituted compliance determination
with regard to one or more requirements
1235 See
Section XIV.B.3, supra.
1236 Id.
1237 Id.
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in Section 15F of the Exchange Act and
the rules and regulations thereunder. As
discussed above, in connection with
each request, a registered foreign
security-based swap dealer would be
required to provide the Commission
with any supporting documentation it
believes necessary for the Commission
to make a determination that its foreign
financial regulatory authority or
authorities have established
requirements that are comparable to
requirements otherwise applicable to a
U.S. security-based swap dealer. Among
other things, a foreign security-based
swap dealer would be required to
provide the Commission with
information regarding applicable
requirements established by the foreign
financial regulatory authority or
authorities, as well as the methods used
by the foreign financial regulatory
authority or authorities to monitor
compliance with these rules. All such
supporting documentation would be
made public.1238
A registered foreign security-based
swap dealer would not be required to
make a request with respect to rules and
regulations of a foreign jurisdiction that
have previously been the subject of a
substituted compliance determination.
Given that only a relatively small
number of jurisdictions have substantial
OTC derivatives markets and are
implementing OTC derivatives reforms,
the Commission estimates that it will
receive no more than 50 requests for
substituted compliance determinations
pursuant to proposed Rule 3a71–5.1239
This estimate accounts for the fact that
the Commission may receive multiple
requests from each jurisdiction (e.g.,
separate requests from bank and
nonbank entities).1240 Because the
Commission preliminarily expects that
registered foreign security-based swap
dealers will seek to rely on substituted
compliance upon registration, the
Commission believes that these requests
will be made during the first year
following the effective date.1241
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1238 See
Section XIV.B, supra.
1239 See Section XIV.B.3, supra.
1240 The Commission preliminarily estimates that
is may receive requests for substituted compliance
determinations for up to 30 different jurisdictions.
In approximately two-thirds of those jurisdictions,
the Commission preliminarily estimates that it may
receive requests from more than one type of market
participant (e.g., a bank and a non-bank securitybased swap dealer).
1241 For purposes of this estimate, the
Commission has assumed that proposed Rules
3a71–3 and 3a71–5 will be implemented
contemporaneously. If the Commission requires
registration before certain substituted compliance
determinations are finalized, the Commission staff
may receive requests for substituted compliance
determinations pursuant to proposed Rule 3a71–5
after the first year following the effective date.
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The Commission staff estimates that
the total paperwork burden associated
with preparing and submitting a request
for a substituted compliance
determination pursuant to proposed
Rule 3a71–5(c) would be approximately
4,000 hours, plus $4 million for the
services of outside professionals for all
50 requests.1242 These total costs
include all collection burdens
associated with the proposed rule,
including burdens associated with
analyzing and comparing the regulatory
requirements of the foreign jurisdiction
with the requirements in Section 15F of
the Exchange Act and the rules and
regulations thereunder.
(b) Re-proposed Rule 242.908(c)(2)(ii) of
Regulation SBSR
Re-proposed Rule 242.908(c)(2)(ii) of
Regulation SBSR would apply to any
person that requests a substituted
compliance determination with respect
to a foreign jurisdiction’s rules regarding
regulatory reporting and public
dissemination of security-based swaps.
In connection with each request, the
requesting party would be required to
provide the Commission with any
supporting documentation that the
entity believes is necessary for the
Commission to make a determination,
including information demonstrating
that the requirements applied in the
foreign jurisdiction are comparable to
the Commission’s and describing the
methods used by relevant foreign
financial regulatory authorities to
monitor compliance with those
requirements.1243 The Commission
preliminarily estimates that the total
paperwork burden associated with
submitting a request for a substituted
compliance determination with respect
to regulatory reporting and public
dissemination would be approximately
1,120 hours, plus $1,120,000 for 14
requests.1244 This estimate includes all
collection burdens associated with the
request, including burdens associated
1242 The Commission staff estimates that the
paperwork burden associated with making each
substituted compliance request pursuant to
proposed Rule 3a71–5 would be approximately 80
hours of in-house counsel time, plus $80,000 for the
services of outside professionals (based on 200
hours of outside counsel time * $400). The
paperwork burden associated with the opinion of
counsel referenced in proposed Rule 3a71–5 is
discussed in the Registration Proposing Release in
connection with proposed Rule 15Fb2–4(c). See
Registration Proposing Release, 76 FR 65811.
1243 See Section VIII.C, supra.
1244 The Commission staff estimates that the
paperwork burden associated with making a
substituted compliance request pursuant to reproposed Rule 242.908(c)(2)(ii) of Regulation SBSR
would be approximately 80 of in-house counsel
time, plus $80,000 for the services of outside
professionals (based on 200 hours of outside
counsel time * $400).
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with analyzing whether the regulatory
requirements of the foreign jurisdiction
impose a comparable, comprehensive
system for the regulatory reporting and
public dissemination of all securitybased swaps. Furthermore, this estimate
assumes that each request would be
prepared de novo, without any benefit
of prior work on related subjects. The
Commission notes, however, that as
such requests are developed with
respect to certain jurisdictions, the cost
of preparing such requests with respect
to other foreign jurisdictions could
decrease.
Because only a small number of
jurisdictions have substantial OTC
derivatives markets and are
implementing OTC derivatives reforms,
the Commission preliminarily estimates
that it would receive approximately 10
requests in the first year for substituted
compliance determinations with respect
to regulatory reporting and public
dissemination pursuant to re-proposed
Rule 242.908(c)(2)(ii) of Regulation
SBSR. Assuming 10 requests in the first
year, the Commission staff estimates an
aggregated burden for the first year
would be 800 hours, plus $800,000 for
the services of outside professionals.1245
The Commission preliminarily
estimates that it would receive 2
requests for substituted compliance
determinations pursuant to re-proposed
Rule 242.908(c)(2)(ii) in each
subsequent year. Assuming the same
approximate time and costs, the
aggregate burden for each year following
the first year would be up to 160 hours
of company time and $160,000 for the
services of outside professionals.1246
(c) Proposed Rule 3Ch–2(c)
Finally, proposed Rule 3Ch–2(c)
under the Exchange Act would apply to
any person who requests a substituted
compliance determination with respect
to the rules of a foreign jurisdiction
relating to trade execution for securitybased swaps. In connection with each
request, the requesting party would be
required to provide the Commission
1245 The Commission staff estimates that the
paperwork burden associated with making a
substituted compliance request pursuant to reproposed Rule 242.908(c)(2)(ii) of Regulation SBSR
would be up to approximately 800 hours (80 hours
of in-house counsel time * 10 respondents), plus
$800,000 for the services of outside professionals
(based on 200 hours of outside counsel time * $400
* 10 respondents).
1246 The Commission staff estimates that the
paperwork burden associated with making a
substituted compliance request pursuant to reproposed Rule 242.908(c)(2)(ii) of Regulation SBSR
would be up to approximately 160 hours (80 hours
of in-house counsel time * two respondents) + plus
$160,000 for the services of outside professionals
(based on 200 hours of outside counsel time * $400
* two respondents).
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with certain supporting information.1247
However, a person would not be
required to make a request with respect
to rules and regulations of a foreign
jurisdiction related to trade execution
that have previously been the subject of
a substituted compliance determination.
As discussed above, because only a
relatively small number of jurisdictions
have substantial OTC derivatives
markets and are implementing OTC
derivatives reforms, the Commission
estimates that it will receive no more
than 25 requests for substituted
compliance determinations pursuant to
proposed Rule 3Ch–2(c).1248 Moreover,
because market participants will likely
seek to rely on substituted compliance
upon registration, the Commission
believes that many of these requests will
be made during the first year following
the effective date. However, because
some jurisdictions may not fully
implement their trade execution
requirements in the immediate future,
the Commission staff estimates that it
may receive requests for substituted
compliance determinations pursuant to
proposed Rule 3Ch-2(c) for several years
following the effective date.1249
The Commission preliminarily
believes that the total paperwork burden
associated with preparing and
submitting a request for a substituted
compliance determination pursuant to
proposed Rule 3Ch–2(c) will be 2,000
hours and associated costs of $2 million
for the services of outside professionals,
including attorneys.1250 These total
costs include all collection burdens
associated with the proposed rule,
including burdens associated with
analyzing whether the regulatory
requirements of the foreign jurisdiction
impose a comparable, comprehensive
system for the regulatory reporting and
1247 See
Section XIV.E.1, supra.
Section XIV.B.3, supra. The Commission
notes that it may not receive requests for substituted
compliance determinations pursuant to proposed
Rule 3Ch-2(c) from every jurisdiction will have a
security-based swap market that is potentially
eligible for such a determination.
1249 The Commission notes that certain
jurisdictions may implement OTC derivatives
reforms incrementally. Accordingly, the
Commission’s estimates in this section are based on
the assumption that certain jurisdictions may
implement trade execution requirements later in
time than other OTC derivatives reforms (e.g.,
dealer regulation, reporting, and mandatory clearing
requirements).
1250 The Commission staff estimates that the
paperwork burden associated with making each
substituted compliance request pursuant to
proposed Rule 3Ch–2(c) would be approximately
2,000 hours of in-house counsel time (80 hours *
25 respondents), plus $2,000,000 for the services of
outside professionals (based on 200 hours of
outside counsel time * $400 * 25 respondents).
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1248 See
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public dissemination of all securitybased swaps.
Assuming 17 requests in the first year,
the Commission staff estimates an
aggregated burden for the first year
would be 1,360 hours, plus
approximately $1,360,000 for the
services of outside professionals.1251
The Commission preliminarily
estimates that it would receive 4
requests for substituted compliance
determinations pursuant to re-proposed
Rule 3Ch–2(c) in each subsequent year.
Assuming the same approximate time
and costs, the aggregate burden for each
year following the first year would be
up to 320 hours of company time and
$320,000 for the services of outside
professionals.1252
Request for Comment
The Commission seeks comment on
the paperwork burdens associated with
proposed Rules 3a71–5(c) under the
Exchange Act, re-proposed Rule
242.908(c)(2)(ii) of Regulation SBSR,
and proposed Rule 3Ch–2(c) under the
Exchange Act.
• Are the Commission’s estimates of
the numbers of substituted compliance
determinations reasonable? Are these
estimates likely to become incorrect as
a result of changes in the OTC
derivatives markets? If so, how?
• In general, is the proposed
collection of information necessary for
the proper performance of the
Commission’s functions? Will the
proposed collection of information have
practical utility to the Commission and
Commission staff?
• Are the Commission’s estimates of
the paperwork burden of the proposed
collection accurate? Is the Commission’s
estimate of the cost of outside counsel
reasonable?
• Are there ways for the Commission
to enhance the quality, utility, and
clarity of the information collected? Are
there ways for the Commission to
minimize the paperwork burden of the
proposed collection of information (e.g.,
through the use of automated collection
1251 The Commission staff estimates that the
paperwork burden associated with making a
substituted compliance request pursuant to
proposed Rule 3Ch–2(c) would be up to
approximately 1,360 hours (80 hours of in-house
counsel time * 17 respondents), plus approximately
$1,360,000 for the services of outside professionals
(based on 200 hours of outside counsel time * $400
* 17 respondents).
1252 The Commission staff estimates that the
paperwork burden associated with making a
substituted compliance request pursuant to
proposed Rule 3Ch–2(c) would be up to
approximately 320 hours (80 hours of in-house
counsel time * four respondents), plus $320,000 for
the services of outside professionals (based on 200
hours of outside counsel time * $400 * four
respondents).
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31111
techniques or other forms of information
technology)? If so, please describe.
F. Reporting and Dissemination of
Security-Based Swap Information
1. Background on the Re-proposed Rules
The Commission is re-proposing
Regulation SBSR to address a number of
cross-border issues, many of which were
discussed in comments to the crossborder provisions of the initial proposal.
The changes made between the
proposed and re-proposed versions of
Regulation SBSR, and the Commission’s
preliminary estimates of the paperwork
burdens that would result from reproposed Regulation SBSR, are
described below.
2. Modifications to ‘‘Reporting Party’’
Rules
Proposed Rule 901 of Regulation
SBSR, as amended herein, contains
‘‘collection of information
requirements’’ within the meaning of
the PRA. The title of this collection is
‘‘Rule 901—Reporting Obligations.’’
(a) Summary of Collection of
Information
Under Rule 901(a), as initially
proposed, a non-U.S. person securitybased swap dealer or major securitybased swap participant might incur the
duty to report only if the security-based
swap was executed in the United States
or through any means of interstate
commerce, or was cleared through a
clearing agency having its principal
place of business in the United States.
If a non-U.S. person security-based
swap dealer or major security-based
swap participant entered into a swap
with an unregistered U.S. person, the
unregistered U.S. person would have
incurred the duty to report. As set forth
in more detail above, the Commission is
re-proposing Rule 901(a) to provide that
a security-based swap dealer or major
security-based swap participant that is
not a U.S. person could incur the duty
to report a security-based swap in
various cases. Re-proposed Rule 901(a)
now provides as follows:
• If both sides of the security-based
swap include a security-based swap
dealer, the sides would be required to
select the reporting side.
• If only one side of the securitybased swap includes a security-based
swap dealer, that side would be the
reporting side.
• If both sides of the security-based
swap include a major security-based
swap participant, the sides would be
required to select the reporting side.
• If one side of the security-based
swap includes a major security-based
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swap participant and the other side
includes neither a security-based swap
dealer nor a major security-based swap
participant, the side including the major
security-based swap participant would
be reporting side.
• If neither side of the security-based
swap includes a security-based swap
dealer or major security-based swap
participant: (i) If both sides include a
U.S. person or neither side includes a
U.S. person, the sides would be required
to select the reporting side; and (ii) If
only one side includes a U.S. person,
that side would be the reporting side.
In addition, in re-proposed Rule 901,
the Commission is proposing certain
technical or conforming changes.
Specifically, the Commission is
proposing certain changes to proposed
Rules 901(c) and 901(d), which address
the data elements to be reported to a
registered SDR, to reflect that, under the
re-proposal, certain security-based
swaps might be subject to regulatory
reporting but not public dissemination.
Rule 901(c), as initially proposed, was
titled ‘‘Information to be reported in real
time.’’ Under Rule 902(a), as originally
proposed, the registered SDR to which
such information was reported would be
required to promptly disseminate to the
public such information (except in the
case of a block trade). However, the
Commission preliminarily believes that,
if a security-based swap were subject to
regulatory reporting but not public
dissemination, there is no need to
require that information about the
security-based swap be reported in real
time. Therefore, the introductory
language to Rule 901(c) is being reproposed as follows: ‘‘For any securitybased swap that must be publicly
disseminated pursuant to §§ 242.902
and 242.908 and for which it is the
reporting side, the reporting side shall
report the following information in real
time. If a security-based swap is
required by §§ 242.901 and 242.908 to
be reported but not publicly
disseminated, the reporting side shall
report the following information no later
than the time that the reporting side is
required to comply with paragraph (d)
of this section.’’ In addition, reproposed Rule 901(c) would be retitled
‘‘Primary trade information,’’ thus
eliminating the reference to real-time
reporting—since the information
required to be reported under Rule
901(c) would no longer in all cases be
required to be reported in real time.
Furthermore, re-proposed Rule 901(d)
would be retitled ‘‘Secondary trade
information.’’
Rule 901(c)(10), as initially proposed,
provided that the following data
element would be required to be
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reported: ‘‘If both counterparties to a
security-based swap are security-based
swap dealers, an indication to that
effect.’’ As the Commission stated in the
Regulation SBSR Proposing Release:
‘‘Prices of transactions involving a
dealer and a non-dealer are typically
‘all-in’ prices that include a mark-up or
mark-down, while interdealer
transaction prices typically do not.
Thus, the Commission believes that
requiring an indication of whether a
[security-based swap] was an interdealer
transaction or a transaction between a
dealer and a non-dealer counterparty
would enhance transparency by
allowing market participants to more
accurately assess the reported price for
a [security-based swap].’’1253 The
Commission is now re-proposing Rule
901(c)(10) as follows: ‘‘If both sides of
the security-based swap include a
security-based swap dealer, an
indication to that effect.’’ The reproposed rule clarifies that a securitybased swap dealer might be a direct or
indirect counterparty to a security-based
swap. The Commission continues to
believe that, in either case, a securitybased swap having a security-based
swap dealer on each side could, all
other things being equal, be priced
differently than a security-based swap
having a security-based swap dealer on
only one side. Therefore, the
Commission continues to believe that
the existence of a security-based swap
dealer on each side should be reported
to the registered SDR and made known
to the public.
The Commission is re-proposing Rule
901(d)(1)(ii) to require reporting of the
broker ID, desk ID, and trader ID, as
applicable, only of the direct
counterparty on the reporting side. The
Commission preliminarily believes that
it would be impractical and unnecessary
to report such data elements with
respect to an indirect counterparty, as
such elements might not be applicable
to an indirect counterparty. Similarly,
Rule 901(d)(1)(iii) is being re-proposed
to require reporting of a description of
the terms and contingencies of the
payment streams only of each direct
counterparty to the other. The
Commission is including the word
‘‘direct’’ to avoid extending Rule
901(d)(1)(iii) to indirect counterparty
relationships, where payments might
not (except in unusual circumstances)
flow to or from an indirect counterparty.
Proposed Rule 901(e) set forth
provisions for reporting life cycle events
of a security-based swap. The basic
approach set forth in proposed Rule
901(e) was that, generally, the original
reporting party of the initial transaction
would have the responsibility to report
any subsequent life cycle event; this
approach remains unchanged in the reproposal. However, if the life cycle
event were an assignment or novation
that removed the original reporting
party, either the new counterparty or the
original counterparty would have to be
the reporting party. Further, Rule 901(e),
as initially proposed, would provide
that the new counterparty would be the
reporting party if it were a U.S. person,
whereas the other counterparty would
be the new reporting party if the new
counterparty were not a U.S. person.
However, as discussed above, the
Commission is now proposing the
concept of a ‘‘reporting side,’’ which
would include the direct and any
indirect counterparty. Further, as
discussed above, the Commission is
proposing that non-U.S. person securitybased swap dealers or major securitybased swap participants would, in
certain instances, incur a duty to report.
Thus, the Commission is re-proposing
Rule 901(e) to provide that the duty to
report would switch to the other side
only if the new side did not include a
U.S. person (as in the originally
proposed rule) or a security-based swap
dealer or major security-based swap
participant (references to which are
being added to Rule 901(e)). The
Commission preliminarily believes that,
if the new side includes a registered
person such as a security-based swap
dealer or major security-based swap
participant, the new side should retain
the duty to report. This approach is
designed to align reporting duties with
the market participants that the
Commission preliminarily believes are
better suited to carrying them out
because non-U.S. security-based swap
dealers and major security-based swap
participants likely have already taken
significant steps to establish and
maintain the systems, processes and
procedures, and staff resources
necessary to report security-based swaps
currently.1254
Aside from some technical changes to
the titles of Rules 901(c) and (d) and to
the introductory language to Rule 901(c)
noted above, the Commission is not
proposing to add or delete any data
elements from Rules 901(c) and 901(d).
Therefore, no revisions to the
Commission’s paperwork estimates are
being made to increase or decrease
paperwork burdens because of more or
fewer required data elements to be
reported. However, other changes to the
1253 See Regulation SBSR Proposing Release, 75
FR 75214.
1254 See note 913 and accompanying text, supra;
see also 15 U.S.C. 78m–1(a)(3).
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(d) Total Initial and Annual Reporting
and Recordkeeping Burdens
paperwork burdens initially proposed
for Rule 901 are necessitated by the
other changes to the proposed rule
noted above.
(b) Proposed Use of Information
As described by the Commission in
the Regulation SBSR Proposing Release,
the security-based swap transaction
information required to be reported
pursuant to re-proposed Rule 901 would
be used by SDRs, market participants,
the Commission, and other regulators.
The information reported by reporting
parties pursuant to re-proposed Rule
901 would be used by SDRs to publicly
disseminate real-time reports of
security-based swap transactions, as
well as to offer a resource for regulators
to obtain detailed information about the
security-based swap market. Market
participants would use the public
market data feed, among other things, to
assess the current market for securitybased swaps and to mark their own
positions. The Commission and other
regulators would use information about
security-based swap transactions
reported to and held by SDRs to monitor
and assess prudential and systemic
risks, as well as to examine for improper
behavior and to take enforcement
actions, as appropriate.
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(c) Respondents
Re-proposed Rule 901(a) would
designate which side of a security-based
swap transaction would be the reporting
side.1255 In the Regulation SBSR
Proposing Release, the Commission
stated our preliminary belief that up to
1,000 entities could incur duties to
report transactions under proposed Rule
901(a), and that it was reasonable to use
the figure of 1,000 respondents for
estimating collection of information
burdens under the PRA.1256 As
discussed in more detail below, the
Commission now preliminarily
estimates there would be 300
respondents to re-proposed Rule 901.
In the Regulation SBSR Proposing
Release, the Commission noted that
proposed Rule 901 would impose
certain duties on SDRs. The
Commission preliminarily estimated
that the number of SDRs would not
exceed 10. The Commission continues
to believe that it is reasonable to use 10
as an estimate of the number of SDRs for
the purpose of estimating collection of
information burdens for re-proposed
Regulation SBSR.
1255 See
Section VIII.D, supra (discussing the use
of the term ‘‘reporting side’’).
1256 See Regulation SBSR Proposing Release, 75
FR 75247.
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i. Baseline Burdens
In the Regulation SBSR Proposing
Release, the Commission estimated that
respondents would face 3 categories of
burdens to comply with proposed Rule
901. First, each entity that would incur
a duty to report security-based swap
transactions pursuant to Regulation
SBSR would have to develop an internal
order and trade management system
(‘‘OMS’’) capable of capturing the
relevant transaction information.
Second, each reporting party would
have to implement a reporting
mechanism. Third, each reporting party
would have to establish an appropriate
compliance program and support for the
operation of the OMS and reporting
mechanism. In the Regulation SBSR
Proposing Release, the Commission
preliminarily estimated that the initial,
aggregate annualized burden associated
with proposed Rule 901 would be 1,438
hours per reporting party—for a total of
1,438,300 hours for all reporting
parties—in order to develop an OMS,
implement a reporting mechanism, and
establish an appropriate compliance
program and support system.1257 The
Commission preliminarily estimated
that the ongoing aggregate annualized
burden associated with proposed Rule
901 would be 731 hours per reporting
party, for a total of 731,300 hours for all
reporting parties.1258 The Commission
further estimated that the initial
aggregate annualized dollar cost burden
on reporting parties associated with
Rule 901 would be $201,000 per
reporting party, for a total of
$201,000,000 for all reporting
parties.1259
ii. Re-Proposed Burdens
For the reasons discussed above, the
Commission now believes that it is
appropriate to re-propose those aspects
of Regulation SBSR that would set out
who must report security-based swaps.
First, the Commission is proposing to
redefine the counterparties to a securitybased swap. Specifically,
‘‘counterparty’’ would be defined as ‘‘a
direct or indirect counterparty of a
security-based swap.’’ Re-proposed Rule
900 would define ‘‘direct counterparty’’
as ‘‘a person that enters directly with
another person into a contract that
constitutes a security-based swap’’ and
1257 See
id. at 75250.
id.
1259 See id. The Commission notes that the
Regulation SBSR Proposing Release incorrectly
stated this total as $301,000 per reporting party. The
correct number is $201,000 per reporting party
($200,000 + $1,000).
31113
‘‘indirect counterparty’’ as ‘‘a person
that guarantees the performance of a
direct counterparty to a security-based
swap or that otherwise provides
recourse to the other side for the failure
of the direct counterparty to perform
any obligation under the security-based
swap.’’ Second, proposed Rule 900
would revise the term ‘‘reporting party’’
to ‘‘reporting side’’ and would further
define ‘‘reporting side’’ as ‘‘the side of
a security-based swap having the duty
to report information in accordance
with re-proposed rules 242.900–911 of
Regulation SBSR to a registered
security-based swap data repository, or
if there is no registered security-based
swap data repository that would receive
the information, to the Commission.’’
‘‘Side’’ would be defined as ‘‘a direct
counterparty and any indirect
counterparty that guarantees the direct
counterparty’s performance of any
obligation under a security-based
swap.’’
As re-proposed, Rule 901(a) would
provide that a security-based swap
dealer or major security-based swap
participant that is not a U.S. person
could incur the duty to report a
security-based swap in various cases, as
detailed above. The Commission
preliminarily believes that no aspect of
the re-proposal would significantly
affect the burdens that an entity with a
duty to report would incur to establish
the systems, policies and procedures,
and staff resources necessary to comply
with Regulation SBSR. Therefore, the
Commission is not revising these initial
infrastructure-related burdens on a perentity basis.
However, the Commission is revising
our initial estimate of the total
infrastructure-related burdens of reproposed Rule 901(a) due to a reduction
in the estimate of the number of
reporting counterparties. In the
Regulation SBSR Proposing Release, the
Commission stated our preliminary
belief that up to 1,000 respondents
could be reporting parties under
proposed Rule 901(a), and that it was
reasonable to use the figure of 1,000
respondents for estimating collection of
information burdens under the PRA.1260
Since issuing the Regulation SBSR
Proposing Release, the Commission has
obtained additional and more granular
data regarding participation in the
security-based swap market from
DTCC–TIW. These historical data
suggest that approximately 30
counterparties—which are likely to be
1258 See
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1260 See Regulation SBSR Proposing Release, 75
FR 75247. The Commission did not receive any
comments related to its preliminary belief that up
to 1,000 respondents could be reporting parties
under proposed Rule 901(a) of Regulations SBSR.
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required to register with the
Commission as security-based swap
dealers—account for the vast majority of
recent security-based swap transactions
and transaction reports. These data
further suggest that there are only a
limited number of security-based swap
transactions that do not include at least
one of these larger counterparties on
either side. In other words, the vast
majority of recent transactions have
included a larger counterparty that
reports the transaction currently, and
that would likely be required to report
a similar transaction in the future.
In addition, the Commission is
attempting in re-proposed Regulation
SBSR to further align reporting
obligations to larger market participants
that are better able to bear them. As a
result of all of these factors, and to the
extent that recent security-based swap
market activity may be indicative of
future activity, the Commission
preliminarily believes that the more
appropriate estimate of reporting
counterparties is 300, 700 fewer than in
the original proposal.1261 This revised
estimate continues to include some
smaller counterparties to security-based
swaps that would incur a reporting
duty, but many fewer than estimated in
the PRA of the initial Regulation SBSR
proposal.
As a result of the revision to the
number of reporting counterparties, the
Commission preliminarily believes that
the one-time burdens of Regulation
SBSR could decrease by 1,006,600
aggregated hours and $140,700,000.1262
In addition, the Commission
preliminarily believes that the annual
ongoing burden of Regulation SBSR
1261 The Commission is basing this new estimate
on CDS data from the DTCC–TIW, but not from data
from data repositories for other security-based swap
asset classes, which are not currently available to
the Commission. The Commission preliminarily
believes that entities that are likely to incur
obligations to report security-based swaps in other
asset classes are already likely to be reporting CDS
transactions to DTCC–TIW. The Commission also
preliminarily believes that, to avoid duplicative
compliance costs, such entities are likely to
leverage their existing infrastructure for reporting
CDS transactions to carry out reporting obligations
for other asset classes, even though these other asset
classes might be booked in different affiliated
entities. The Commission preliminarily estimates
that these other security-based swap asset classes
consist of less than one-fifth of the overall securitybased swap market. Therefore, the Commission
preliminarily believes that reporting counterparties
across all security-based swap asset classes should
not exceed the estimate of 300 derived from the
DTCC–TIW CDS data. See note 1301, infra.
1262 The Commission estimates: ((1,000 reporting
parties ¥ 300 reporting sides) * 1,438 hours) =
1,006,600 burden reduction for all reporting
counterparties. The Commission estimates: ((1,000
reporting parties ¥300 reporting sides) * $201,000)
= $140,700,000 burden reduction for all reporting
counterparties.
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could decrease by 511,700 aggregated
hours and $140,700,000.1263 The
Commission seeks comment on and data
to quantify these potential cost
reductions.
Although re-proposed Rule 901(a)
could result in a significant reduction in
aggregate costs due to reduction in the
number of reporting counterparties that
would be required to establish the
systems, policies and procedures, and
staff resources to carry out the reporting
function, the Commission preliminarily
believes that there may be a slight
increase in burden for certain individual
reporting counterparties due to a reallocation of reportable security-based
swap transactions among those
reporting counterparties that continue to
be covered. Specifically, small
unregistered counterparties that may
have been required to report a small
number of security-based swaps under
the original proposal would be less
likely to incur the reporting duty under
re-proposed Rule 901(a). Thus, the
counterparties that would continue to
have the reporting duty under reproposed Rule 901(a), primarily
security-based swap dealers and major
security-based swap participants, would
likely incur the reporting duty for most
of these transactions. Consequently, reproposed Rule 901(a) could result in
each reporting counterparty being
required to report, on average, a larger
percentage of the total security-based
swap transactions than envisioned
under the original proposal. In the
Regulation SBSR Proposing Release, the
Commission estimated that, collectively,
the reporting parties would spend
77,300 hours reporting specific securitybased swap transactions to a registered
SDR, as required by proposed Rule
901.1264 Nonetheless, as explained
below, the Commission’s estimate of the
anticipated number of security-based
swap transactions to be reported
pursuant to Regulation SBSR is being
revised significantly downward.
In the Regulation SBSR Proposing
Release, the Commission preliminarily
1263 The Commission estimates: ((1,000 reporting
parties ¥ 300 reporting sides) * 731 hours) =
511,700 burden reduction for all reporting
counterparties. The Commission estimates: ((1,000
reporting parties ¥ 300 reporting sides) * $201,000)
= $140,700,000 burden reduction for all reporting
counterparties.
1264 See Regulation SBSR Proposing Release, 75
FR 75248–49. In arriving at this figure, the
Commission preliminarily estimated that 1,000
reporting parting would be responsible for reporting
15,458,824 security-based swap transactions. The
Commission further estimated that each transaction
would take 0.005 hours to report for a total burden
of 77,300 hours, or 77.3 burden hours per reporting
party. The Commission preliminarily believes that
the hourly burden of reporting individual securitybased swap transactions would not change.
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estimated that 15.5 million securitybased swap transactions per year would
be required to be reported.1265 In
addition to revising our estimate of the
number of reporting sides from 1,000 to
300, as discussed above, the
Commission is now also revising our
estimate of the number of reportable
security-based swap transactions
covered by re-proposed Regulation
SBSR, for the following reasons. First,
the Commission notes that the
Regulation SBSR Proposing Release
inadvertently overstated the number of
historical security-based swap
transactions such that the number of
security-based swap transactions based
on data available at the time of the
Regulation SBSR Proposing Release
should have been stated as
approximately 2,200,000.1266 Second,
since issuing the Regulation SBSR
Proposing Release, the Commission has
obtained additional and more granular
data regarding participation in the credit
default swap market from DTCC–TIW.
These more recent data further suggest
that the Commission initially
overestimated both the number of
reporting counterparties and the number
of security-based swap transactions that
would be reportable to DTCC–TIW. As
a result, the Commission now estimates
that 300 reporting sides would be
required to report approximately 5
million new security-based swaps and
life cycle events (collectively,
‘‘reportable events’’) under re-proposed
Regulation SBSR per year.1267
1265 See Regulation SBSR Proposing Release, 75
FR 75248.
1266 See id. at 75248 nn. 182–85 and
accompanying text. Specifically, in the SBSR
Proposing Release, the Commission misinterpreted
weekly CDS volume data as daily volume data.
Based on the weekly data available at the time, a
more accurate estimate for the number of CDS
transactions per year would have been 1,872,000.
This number is based on the following: (36,000
(estimated CDS transactions per week) * 52 (weeks/
year)) = 1,872,000 CDS transactions/year. Based on
the Commission’s preliminary assumption in the
SBSR Proposing Release that CDS transactions
represent approximately eight- to nine-tenths of all
security-based swap transactions, a more accurate
estimate for the number of security-based swap
transactions per year would have been 2,202,353.
This number was based on the following: (1,872,000
(number of CDS transactions per year)/0.85) =
2,202,353 security-based swap transactions/year.
1267 The Commission now estimates that singlename CDS transactions for 2012 were
approximately 4 million transactions. The data
studied by the Commission cover CDS transactions,
which the Commission continues to preliminarily
believe account for approximately eight- to ninetenths of the security-based swap market. As a
result, and to the extent that recent security-based
swap market activity may be indicative of future
activity, the Commission preliminarily estimates
that 300 reporting sides will have the duty to report
5 million security-based swap transactions (i.e.,
4,000,000/0.82 = 4,878,049 reportable events). See
also note 1641, infra.
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The Commission notes that the
change in the estimate of the number of
reportable events per year since the
initial proposal of Regulation SBSR
from more than 2,000,000 to
approximately 5 million may be due to
better and more precise data available
from the industry on the scope, size,
and composition of the security-based
swap market. As a result, and to the
extent that the available data regarding
recent security-based swap market
activity may be indicative of future
activity, the Commission now
preliminarily believes that a more
appropriate estimate of the number of
reportable events would be
approximately 5 million per year.
The Commission preliminarily
believes that, once a respondent’s
reporting infrastructure and compliance
systems are in place, the burden of
reporting a single reportable event
would be de minimis when compared to
the burdens of establishing the reporting
infrastructure and compliance
systems.1268 The Commission now
preliminarily estimates that re-proposed
Regulation SBSR would result in total
burden hours of 5,080 attributable to the
reporting to security-based swap data
repositories all reportable events over
the course of a year.1269 The
Commission preliminarily believes that
many reportable events would be
reported through electronic means and
that the ratio of electronic reporting to
manual reporting is likely to increase
over time. The Commission further
preliminarily believes that the bulk of
the burden hours estimated above
would be attributable to manually
reported transactions. Thus, reporting
counterparties that capture and report
transactions electronically would likely
incur bear fewer burden hours than
those reporting counterparties that
capture and report transactions
manually.
that re-proposed Regulation SBSR
would impose an estimated total firstyear burden of approximately 1,444
hours 1270 per reporting counterparty for
a total first-year burden of 433,200
hours for all reporting
counterparties.1271 The Commission
preliminarily estimates that re-proposed
Regulation SBSR would impose ongoing
annualized aggregate burdens of
approximately 737 hours 1272 per
reporting counterparty for a total
aggregate annualized cost of 221,100
hours for all reporting
counterparties.1273 The Commission
further estimates that re-proposed
Regulation SBSR would impose initial
and ongoing annualized dollar cost
burdens of $201,000 per reporting
counterparty, for total aggregate initial
and ongoing annualized dollar cost
burdens of $60,300,000.1274
The Commission does not
preliminarily believe that the proposed
changes to Regulation SBSR would have
any material impact on SDRs not
discussed in Regulation SBSR, as
originally proposed. The changes
discussed herein do not impact the
previously estimated burdens for SDRs.
The Commission preliminarily believes
that re-proposed Rule SBSR would not
result in the registration of additional
SDRs, and would not require existing
SDRs to bear the burden of connecting
to additional reporting counterparties.
SDRs would already be required under
proposed Regulation SBSR to have
established mechanisms to receive and
process security-based swap transaction
reports, and none of the costs identified
in the Regulation SBSR Proposing
Release relating to SDRs were
dependent upon the number of securitybased swap transactions or the number
of reporting counterparties.
iii. Summary of Re-Proposed Burdens
Based on the foregoing, the
Commission preliminarily estimates
1270 The Commission derived its estimate from
the following: (1,438 (Regulation SBSR Proposing
Release estimated total burden)¥77.3 (Regulation
SBSR Proposing Release estimated transaction
reporting burden) + 83.3 (revised estimated
transaction reporting burden)) = 1,444 hours. See
Section XIV.F.2(d)ii.
1271 The Commission derived its estimate from
the following: (1,444 * 300 reporting counterparties)
= 433,200 hours.
1272 The Commission derived its estimate from
the following: (731 (Regulation SBSR Proposing
Release estimated total burden)¥77.3 (Regulation
SBSR Proposing Release estimated transaction
reporting burden) + 83.3 (revised estimated
transaction reporting burden)) = 737 hours. See
Section XIV.F.2(d)ii, infra.
1273 The Commission derived its estimate from
the following: (737 * 300 reporting counterparties)
= 221,000 hours.
1274 The Commission derived its estimate from
the following: ($201,000 * 300 reporting
counterparties) = $60,300,000.
1268 In the Regulation SBSR Proposing Release,
the Commission preliminarily estimated that
reporting specific security-based swap transactions
to a registered SDR would impose an annual
aggregate cost of approximately $5,400,000. See
Regulation SBSR Proposing Release, 75 FR 75265.
The Commission further estimated that Regulation
SBSR would impose an aggregate total first-year
cost of approximately $1,039,000,000 and an
ongoing annualized aggregate cost of approximately
$703,000,000. See id. at 75280.
1269 The Commission estimates: ((5 million *
0.005)/(300 reporting sides)) = 83.3 burden hours
per reporting side or 25,000 total burden hours.
Since the number of respondents would decline
from 1,000 reporting parties to 300 reporting sides,
the transaction based reporting burden would be
concentrated among fewer respondents.
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31115
iv. Recordkeeping Requirements
Concurrently with proposed
Regulation SBSR, the Commission
issued the SDR Proposing Release,
which includes (among other things)
recordkeeping requirements for
security-based swap transaction data
received by a registered SDR pursuant to
proposed Regulation SBSR. Specifically,
proposed Rule 13n–5(b)(4) under the
Exchange Act would require a registered
SDR to maintain the transaction data
that it collects for not less than five
years after the applicable security-based
swap expires, and historical positions
and historical market values for not less
than five years.1275 Accordingly,
security-based swap transaction reports
received by a registered SDR pursuant to
proposed Rule 901 would be required to
be retained by the registered SDR for not
less than five years.
(e) Collection of Information Is
Mandatory
Each collection of information
discussed above would be a mandatory
collection of information.
(f) Confidentiality
Re-proposed Rule 901(a) would not
affect the confidentiality of responses to
the collection of information provided
under Rule 901 of Regulation SBSR as
originally proposed. As described in the
Regulation SBSR Proposing Release,
information collected pursuant to
proposed Rule 901(c) would be widely
available to the public to the extent it is
incorporated into security-based swap
transaction reports that are publicly
disseminated by a registered SDR
pursuant to proposed Rule 902. A
registered SDR, pursuant to Sections
13(n)(5) of the Exchange Act and
proposed Rule 13n–9 thereunder, would
be under an obligation to maintain the
confidentiality of any information
reported pursuant to proposed Rule
901(d) of Regulation SBSR. To the
extent that the Commission receives
confidential information pursuant to
this collection of information, such
information would be kept confidential,
subject to the provisions of applicable
law.
Request for Comment
The Commission requests public
comment on our analysis of burdens
associated with re-proposed Rule 901(a)
and proposed Rule 901 generally. The
Commission also seeks comment on the
following:
• Would re-proposed Rule 901(a)
impose burdens on parties additional to
those imposed by Rule 901, as originally
1275 See
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proposed? If so, what are these
additional burdens? Please describe
fully and quantify to the extent possible.
• Would re-proposed Rule 901(a)
reduce overall burdens by aligning the
security-based swap transaction
reporting obligation with those market
participants better able to carry out the
reporting function? Why or why not?
• Are there any methods to enhance
Rule 901 while minimizing the overall
burdens associated with that rule?
• Would re-proposed Rule 901(a)
reduce the total number of entities
potentially subject to the reporting
requirements? Is the Commission’s
revised estimate of 300 reporting sides
reasonable?
• Would re-proposed Rule 901(a)
have any impact on the burden imposed
on SDRs? Are those costs dependent
upon the number of reporting
counterparties or the number of
transactions submitted to SDRs?
3. Rules 902, 905, 906, 907, and 909
Regulation SBSR, as originally
proposed, contained certain proposed
rules, each of which was considered a
‘‘collection of information’’ within the
meaning of the PRA, but that now either
remains unchanged—or contains only
technical, or conforming changes—as a
result of re-proposed SBSR.
sroberts on DSK5SPTVN1PROD with PROPOSALS
(a) Rule 902
In the Regulation SBSR Proposing
Release, the Commission stated our
preliminary belief that certain
provisions of proposed Rule 902
contained ‘‘collection of information
requirements’’ within the meaning of
the PRA.1276 As such, the Commission
preliminarily estimated certain burdens
resulting from the proposed rule.1277
As set forth in more detail above, the
Commission is now proposing technical
or conforming revisions to proposed
Rule 902.
Rule 902(a), as initially proposed,
would require a registered SDR to
publicly disseminate a transaction
report of any security-based swap
immediately upon receipt of
information about the security-based
swap, except in the case of a block
trade. Re-proposed Rule 908, however,
contemplates situations where a
security-based swap would be required
to be reported to a registered SDR but
not publicly disseminated.1278
Therefore, the Commission is reproposing Rule 902(a) to provide that a
registered SDR would not have an
1276 See Regulation SBSR Proposing Release, 75
FR 75251.
1277 See id. at 75251–52.
1278 See Section VIII.C, supra.
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obligation to publicly disseminate a
transaction report for any such securitybased swap.
(b) Rule 905
In the Regulation SBSR Proposing
Release, the Commission stated our
preliminary belief that certain
provisions of proposed Rule 905
contained ‘‘collection of information
requirements’’ within the meaning of
the PRA.1279 As such, the Commission
preliminarily estimated certain burdens
resulting from the proposed rule.1280
As set forth in more detail in Section
VIII above, in re-proposed Regulation
SBSR, the Commission has proposed
technical or conforming revisions to
proposed Rule 905. Rule 905(b)(2) is
being re-proposed to clarify that, if a
registered SDR receives corrected
information relating to a previously
submitted transaction report, it would
be required to publicly disseminate a
corrected transaction report only if the
initial security-based swap were subject
to public dissemination.1281 In addition,
re-proposed Rule 905 conforms the rule
language to incorporate the use of the
term ‘‘side.’’
(c) Rule 906
In the Regulation SBSR Proposing
Release, the Commission stated our
preliminary belief that certain
provisions of proposed Rule 906
contained ‘‘collection of information
requirements’’ within the meaning of
the PRA.1282 As such, the Commission
preliminarily estimated certain burdens
on reporting parties and SDRs resulting
from the proposed rule.1283
As set forth in more detail above, the
Commission is now proposing technical
revisions to proposed Rule 906. Reproposed Rule 906 conforms the rule
language to incorporate the use of the
term ‘‘side.’’
(d) Rule 907
In the Regulation SBSR Proposing
Release, the Commission stated our
preliminary belief that certain
provisions of proposed Rule 907
contained ‘‘collection of information
requirements’’ within the meaning of
the PRA.1284 As such, the Commission
1279 See Regulation SBSR Proposing Release, 75
FR 75254.
1280 See id. at 75254–56.
1281 Re-proposed Rule 905(b)(2) of Regulation
SBSR also substitutes the word ‘‘counterparties’’—
which is a formally defined term in the regulation—
for the word ‘‘parties,’’ which was used in the
initial proposal but was not a formally defined
term.
1282 See Regulation SBSR Proposing Release, 75
FR 75256.
1283 See id. at 75256–58.
1284 See id. at 75258.
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preliminarily estimated certain burdens
on reporting parties and SDRs resulting
from the proposed rule.1285
As set forth in more detail above, the
Commission is now proposing technical
or conforming revisions to proposed
Rule 907. Re-proposed Rule 907(a)(6)
would require a registered SDR to
establish and maintain written policies
and procedures ‘‘[f]or periodically
obtaining from each participant
information that identifies the
participant’s ultimate parent(s) and any
other participant(s) which the
counterparty is affiliated, using ultimate
parent IDs and participant IDs’’
(emphasis added). The Commission
now is re-proposing Rule 907(a)(6) with
the word ‘‘participant’’ in place of the
word ‘‘counterparty.’’ Re-proposed Rule
907 also conforms the rule language to
incorporate the use of the term ‘‘side.’’
(e) Rule 909
In the Regulation SBSR Proposing
Release, the Commission stated our
preliminary belief that certain
provisions of proposed Rule 909
contained ‘‘collection of information
requirements’’ within the meaning of
the PRA.1286 As such, the Commission
preliminarily estimated certain burdens
SDRs resulting from the proposed
rule.1287
i. Impact of Re-Proposed Rules 902, 905,
906, 907, and 909 on the Commission’s
PRA Analysis
Since re-proposed Rules 902, 905,
906, 907, and 909 of Regulations SBSR
either remain unchanged from the
Regulation SBSR Proposing Release or
contain only technical or conforming
changes, the Commission preliminarily
believes that our original PRA analysis,
as set forth in the Regulation SBSR
Proposing Release, continues to apply.
The Commission preliminarily believes
that our original analysis does not
require revision, in part, because the
burdens described in the Regulation
SBSR Proposing Release are not
dependent upon the number of
respondents or the number of securitybased swap transactions that would be
reported to a registered SDR. In
addition, the Commission preliminarily
believes that the burdens described in
relation to Rule 906 would not change
because the number of reports required
under and the universe of respondents
subject to Rule 906 would not change.
Furthermore, the Commission
preliminarily believes that these reproposed rules would not result in a
1285 See
id. at 75258–60.
id. at 75260.
1287 See id. at 75260–61.
1286 See
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change in the Commission’s original
estimate of SDRs.
The Commission requests public
comment on our analysis of burdens
associated with these re-proposed rules,
and whether re-proposed Rule 902, 905,
906, 907, or 909 would impose any
collection of information requirements
that the Commission has not
considered. If so, please describe them.
4. Rules 900, 903, 908, 910, and 911
Regulation SBSR, as originally
proposed, contained certain proposed
rules that were not considered a
‘‘collection of information’’ within the
meaning of the PRA.
(a) Modification of the Definition of
‘‘U.S. Person’’
In the Regulation SBSR Proposing
Release, the Commission stated our
belief that proposed Rule 900, since it
contains only definitions of relevant
terms, would not be a ‘‘collection of
information’’ within the meaning of the
PRA.1288 Rule 900 of re-proposed
Regulation SBSR contains a revised
definition of ‘‘U.S. person’’ that crossreferences proposed Rule 3a71–3(a)(7)
under the Exchange Act. Re-proposed
Rule 900 also contains definitions for
new terms such as ‘‘side,’’ ‘‘reporting
side,’’ and ‘‘direct electronic access.’’
The Commission continues to believe
that, because Rule 900 contains only
definitions of relevant terms, it would
not be a ‘‘collection of information’’
within the meaning of the PRA.
sroberts on DSK5SPTVN1PROD with PROPOSALS
(b) Rule 903
In the Regulation SBSR Proposing
Release, the Commission stated our
belief that proposed Rule 903 would not
be a ‘‘collection of information’’ within
the meaning of the PRA because the rule
would merely permit reporting parties
and SDRs to use codes in place of
certain data elements, subject to certain
conditions.1289 Re-proposed Rule 903
conforms the rule language to
incorporate the use of the term ‘‘side.’’
Because these are only technical
changes to the proposed rule, the
Commission continues to believe that
re-proposed Rule 903 would not be a
‘‘collection of information’’ within the
meaning of the PRA.
(c) Re-proposed Rules 908(a) and 908(b)
Rule 908(a), as initially proposed,
provided that a security-based swap
would be subject to regulatory reporting
and public dissemination under
Regulation SBSR if the security-based
swap: (1) has at least one counterparty
1288 See
1289 See
id. at 75246.
id. at 75252–53.
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that is a U.S. person; (2) is executed in
the United States or through any means
of interstate commerce; or (3) is cleared
through a registered clearing agency
having its principal place of business in
the United States. Thus, original Rule
908(a) would not impose reporting
requirements in connection with a
security-based swap solely because one
of the counterparties were guaranteed
by a U.S. person or were a non-U.S.
person security-based swap dealer or
major security-based swap participant.
The Commission stated our
preliminary belief that proposed Rule
908 would not be a ‘‘collection of
information’’ within the meaning of the
PRA, as the rule merely described the
jurisdictional reach of proposed
Regulation SBSR.
As set forth in more detail above, the
Commission now believes that, where a
security-based swap is executed outside
the United States by a non-U.S. person
direct counterparty but performance of
any duties under that security-based
swap is guaranteed by a U.S. person, the
security-based swap should be subject
to Title VII regulatory reporting
requirements.1290 In addition, a
security-based swap dealer or major
security-based swap participant that is a
non-U.S. person would, under Rule
908(a) of re-proposed Regulation SBSR,
be required to report a security-based
swap executed outside the United States
with a non-U.S. person counterparty
(assuming no guarantee extended by a
U.S. person).
Re-proposed Rule 908(a) is now
divided into subparagraphs (1) and (2),
which address regulatory reporting and
public dissemination, respectively. The
Commission also is re-proposing Rule
908(a) to require reporting and public
dissemination in certain cases not
required by the original proposal, and to
make certain other changes described
above (such as eliminating the
‘‘interstate commerce clause’’). Because
re-proposed Rule 908(a) continues
merely to describe the situations to
which proposed Regulation SBSR
would apply, the Commission continues
to believe that re-proposed Rule 908(a)
would not be a ‘‘collection of
information’’ within the meaning of the
PRA. However, to the extent that
additional types of security-based swaps
would be subject to regulatory reporting
and public dissemination under reproposed Regulation than under the
initial proposal, the additional burdens
1290 However, as discussed above, the
Commission preliminarily believes that certain of
these cross-border security-based swaps need not be
subject to Title VII’s public dissemination
requirements. See Section VIII.C.1, supra.
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on respondents are considered under reproposed Rule 901 above.
Rule 908(b), as initially proposed,
described when duties would be
imposed on foreign counterparties of
security-based swaps when some
connections to the United States might
be present. Rule 908(b), as initially
proposed, provided that no duties
would be imposed on a counterparty
unless one of the following conditions
were true: (1) the counterparty is a U.S.
person; (2) the security-based swap is
executed in the United States or through
any means of interstate commerce; or (3)
the security-based swap is cleared
through a clearing agency having its
principal place of business in the
United States.
The Commission stated our
preliminary belief that proposed Rule
908 would not be a ‘‘collection of
information’’ within the meaning of the
PRA, as the rule merely described the
jurisdictional reach of proposed
Regulation SBSR.
As set forth in more detail above, the
Commission is proposing several
technical revisions to proposed Rule
908(b). Specifically, Rule 908(b) is being
revised to account for the possibility
that a non-U.S. person registered with
the Commission as a security-based
swap dealer or major security-based
swap participant could incur a duty to
report. Moreover, the ‘‘interstate
commerce clause’’ is being replaced
with the new concept of a ‘‘transaction
conducted within the United States.’’
Since re-proposed Rule 908(b)
continues merely to describe the
jurisdictional reach of Regulation SBSR,
the Commission continues to believe
that re-proposed Rule 908(b) would not
be a ‘‘collection of information’’ within
the meaning of the PRA. However, the
Commission notes that re-proposed Rule
908(b) could result in a non-U.S. person
security-based swap dealer or major
security-based swap participant
incurring a duty to report. To the extent
that this could result in a change in the
number of reporting counterparties,
such burdens are considered in
connection with re-proposed Rule 901
above.
The Commission requests public
comment on our analysis of burdens
associated with re-proposed Rules
908(a) and 908(b) generally. In
particular:
• Would re-proposed Rules 908(a)
and 908(b) impose any collection of
information requirements that the
Commission has not considered? If so,
please describe.
Re-proposed Rule 908 contains a new
subparagraph (c), dealing with
substituted compliance, a subject that
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was not addressed in the original
proposal. The PRA analysis for reproposed Rule 908(c) is provided
elsewhere, together with the PRA
analysis of the substituted compliance
provisions of the other Title VII
proposed rules described in this
release.1291
now proposing technical revisions to
proposed Rule 911. Re-proposed Rule
911 conforms the rule language to
incorporate the use of the term ‘‘side.’’
The Commission continues to believe
that re-proposed Rule 911 would not be
a ‘‘collection of information’’ within the
meaning of the PRA.
(d) Rule 910
As originally proposed, the
Commission stated our belief that
proposed Rule 910 would not be a
‘‘collection of information’’ within the
meaning of the PRA, as it merely
describes when a registered SDR and its
participants would be required to
comply with the various parts of
proposed Regulation SBSR, and would
not create any additional collection of
information requirements.
As set forth in more detail above, the
Commission is now proposing
technical, or conforming revisions to
proposed Rule 910. Rule 910(b)(4), as
originally proposed, would provide that,
in Phase 4 of the Regulation SBSR
compliance schedule, ‘‘[a]ll securitybased swaps reported to the registered
security-based swap data repository
shall be subject to real-time public
dissemination as specified in
§ 242.902.’’ As noted above, under reproposed Rule 908, certain securitybased swaps would be subject to
regulatory reporting but not public
dissemination requirements. Therefore,
the Commission is re-proposing Rule
910(b)(4) to provide that, ‘‘All securitybased swaps received by the registered
security-based swap data repository
shall be treated in a manner consistent
with §§ 242.902, 242.905, and 242.908.’’
Re-proposed Rule 910 also conforms the
rule language to incorporate the use of
the term ‘‘side.’’
The Commission continues to believe
that re-proposed Rule 910 would not be
a ‘‘collection of information’’ within the
meaning of the PRA.
G. Request for Comments by the
Commission and Director of OMB
Pursuant to 44 U.S.C. 3505(c)(2)(B),
the Commission solicits comment to:
1. Evaluate whether the proposed
collection of information is necessary
for the proper performance of our
functions, including whether the
information shall have practical utility;
2. Evaluate the accuracy of our
estimate of the burden of the proposed
collection of information;
3. Determine whether there are ways
to enhance the quality, utility, and
clarity of the information to be
collected; and
4. Evaluate whether there are ways to
minimize the burden of collection of
information on those who are to
respond, including through the use of
automated collection techniques or
other forms of information technology.
Persons submitting comments on the
collection of information requirements
should direct them to the Office of
Management and Budget, Attention:
Desk Officer for the Securities and
Exchange Commission, Office of
Information and Regulatory Affairs,
Washington, DC 20503, and should also
send a copy of their comments to
Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090, with reference to File
Number S7–02–13, and File Numbers
S7–34–10 (Regulation SBSR) and/or S7–
40–11 (registration of security-based
swap dealers and major security-based
swap participants), as applicable.
Requests for materials submitted to
OMB by the Commission with regard to
this collection of information should be
in writing, with reference to File
Number S7–02–13, and File Numbers
S7–34–10 (Regulation SBSR) and/or S7–
40–11 (registration of security-based
swap dealers and major security-based
swap participants), as applicable, and be
submitted to the Securities and
Exchange Commission, Office of FOIA/
PA Operations, 100 F Street NE.,
Washington, DC 20549–2736. As OMB
is required to make a decision
concerning the collections of
information between 30 and 60 days
after publication, a comment to OMB is
best assured of having its full effect if
OMB receives it within 30 days of
publication.
(e) Rule 911
Rule 911, as originally proposed,
would restrict the ability of a reporting
party to report a security-based swap to
one registered SDR rather than another,
but would not otherwise create any
duties or impose any collection of
information requirements beyond those
already required by proposed Rule 901.
Therefore, the Commission stated our
belief that proposed Rule 911 would not
be a ‘‘collection of information’’ within
the meaning of the PRA.1292 As set forth
in more detail above, the Commission is
1291 See
1292 See
Section XIV.E.4, supra.
Regulation SBSR Proposing Release, 75
FR 75261.
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XV. Economic Analysis
A. Introduction
The Commission is sensitive to the
economic consequences and effects,
including costs and benefits, of our
rules. In proposing the rules and
interpretations in this release, the
Commission has been mindful of the
economic consequences of the decisions
it makes regarding the scope of
application of the Title VII requirements
to cross-border activities pursuant to the
proposed rules. The Commission has
taken into account the costs and benefits
associated with applying the Title VII
regulatory requirements to cross-border
transactions and market participants
who would be required to register
pursuant to these proposed rules and
interpretations, as well as the costs
associated with determining whether
Title VII applies to a specific person or
transaction, which we refer to as direct
assessment costs these rules and
interpretations would impose on market
participants, if adopted as proposed.
Some of these economic consequences
and effects stem from statutory
mandates, while others are affected by
the discretion we exercise in
implementing the mandates. Further,
Section 3(f) of the Exchange Act
requires the Commission, whenever we
engage in rulemaking pursuant to the
Exchange Act and are required to
consider or determine whether an action
is necessary or appropriate in the public
interest, to consider, in addition to the
protection of investors, whether the
action will promote efficiency,
competition, and capital formation.1293
In addition, Section 23(a)(2) of the
Exchange Act requires the Commission,
when making rules under the Exchange
Act, to consider the impact such rules
would have on competition. Section
23(a)(2) also prohibits the Commission
from adopting any rule that would
impose a burden on competition not
necessary or appropriate in furtherance
of the purposes of the Exchange Act.1294
The Commission requests comment on
all aspects of the economic analysis of
the proposed rules, including their costs
and benefits, as well as any effect these
rules may have on competition,
efficiency, and capital formation.
As stated above, the Commission is
proposing rules and interpretations
regarding the application of Title VII to
cross-border activities holistically in a
single proposing release to provide
market participants, foreign regulators,
and other interested parties with an
opportunity to consider, as an integrated
1293 15
1294 15
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U.S.C. 78w(a)(2).
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whole, the Commission’s proposed
approach to the application of various
Title VII requirements to cross-border
security-based swap transactions and to
persons whose cross-border securitybased swap activity is regulated under
Title VII.1295
In analyzing the economic
consequences and effects of the rules
and interpretations proposed in this
release, the Commission has been
guided by the objectives of the DoddFrank Act to mitigate risks to the U.S.
financial system, promote counterparty
protection, increase swap market
transparency, and facilitate financial
stability. We have also taken into
account the importance of maintaining
a well-functioning security-based swap
market. In evaluating these rules the
Commission has considered the
importance of avoiding unnecessary
market disruption, and preserving
market participants’ access to liquidity
irrespective of geography. This analysis
also reflects the importance of
regulatory harmonization and
maintaining consistent international
standards. In this regard, we recognize
that regulators in other jurisdictions are
currently engaged in implementing their
own regulatory reforms of the OTC
derivatives markets and that our
proposed application of Title VII to
cross-border activities may affect the
policy decisions of these other
regulators as they seek to address
potential conflicts or duplication in the
regulatory requirements that apply to
market participants under their
authority.
In addition, the Commission is aware
of the development of OTC derivatives
regulatory reform in other jurisdictions.
In particular, the EU and certain other
G20 members have taken various steps
to develop and implement new
regulations with respect to OTC
derivatives.1296 Moreover, market
participants, foreign regulators, and
other interested parties have provided
views on the application of Title VII
requirements to cross-border activities
through both written comment letters to
the Commission and/or the CFTC and
meetings with Commissioners and
Commission staff.1297 These
developments, comments, and
discussions have been informative in
the Commission’s consideration of our
proposed approach to the application of
Title VII in the cross-border context and
the economic consequences of the
proposed rules and interpretations.
1295 See
Section I, supra.
Section I and notes 35–35, supra.
1297 See Section I and notes 24–25, supra.
1296 See
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B. Economic Baseline
1. Overview
To assess the economic impact of the
proposed rules described in this release,
the Commission is using as our baseline
the security-based swap market as it
exists at the time of this proposal,
including applicable rules adopted by
the Commission but excluding the rules
and interpretations proposed here. The
analysis incorporates the statutory and
regulatory provisions that currently
govern the security-based swap market
pursuant to the Dodd-Frank Act. Many
of the resulting costs and benefits are
difficult to quantify with any degree of
certainty, especially as the practices of
market participants are expected to
evolve and adapt to changes in
technology and market developments.
In assessing the economic impact of
the rules, we refer to the broader costs
and benefits associated with the
application of the proposed rules and
interpretations as ‘‘programmatic’’ costs
and benefits. These include the costs
and benefits of applying the substantive
Title VII requirements to transactions by
market participants active in the crossborder context, as well as to the
functions performed by infrastructure
participants (clearing agencies, SDRs,
and SB SEFs) in the global securitybased swap market. In several places we
also consider how the programmatic
costs and benefits might change when
comparing the proposed approach to the
other alternatives suggested by industry
comment letters and the other
regulators. Our analysis also considers
‘‘assessment costs.’’
Our analysis also recognizes that
certain market participants may be
subject to Title VII requirements under
the proposed rules and interpretations
while potentially also being subject to
another set of foreign regulatory
requirements. Concurrent, and
potentially duplicative or conflicting,
regulatory requirements could be
imposed on persons because of their
resident or domicile status or because of
the place their security-based swap
transactions are conducted. In certain
circumstances, the Commission is
proposing to consider permitting
substituted compliance subject to
certain conditions. In determining
whether to propose rules that would
permit market participants to seek
substituted compliance determinations
for particular requirements in certain
circumstances, the Commission has
considered the programmatic benefits
intended by the specific Title VII
requirements with respect to which
substituted compliance may be
permitted, the programmatic costs
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31119
associated with such Title VII
requirements when they become fully
effective, and the relevant assessment
costs.1298
The proposed rules and
interpretations reflect the Commission’s
preliminary determination regarding
which participants and transactions in
the security-based swap market warrant
regulation under Title VII, and in
making this determination, we have
focused on whether a market participant
is incorporated or resident, or has its
principal place of business, within the
United States and whether a transaction
occurs within the United States. The
economic impact of these proposed
rules and interpretations will occur
predominantly through the application
in a cross-border context of the
substantive requirements outlined in
other releases, without, as a general
matter, altering the nature of those
substantive requirements.1299 We have
already analyzed many of the costs and
benefits of the proposed substantive
requirements in separate proposing and
adopting releases. As a result, the
following analysis focuses on the
economic impacts and trade-offs of
application of these substantive
requirements in a cross-border context,
that is, the economic implications of the
decisions to include certain persons that
reside or are organized (or have their
principal place of business), or
transactions that occur, within the
United States within the scope of Title
VII and the economic effects arising
from that inclusion.
To the extent that future adopting
releases implementing the substantive
requirements under Title VII reflect
substantive changes to the proposals,
those releases will incorporate the
1298 The Commission is proposing to permit
market participants to seek a substituted
compliance determination in connection with
certain requirements—it has not yet made any such
specific determinations. The Commission does not
believe it is possible at this point to estimate the
number of such determinations that it is likely to
make for any given set of requirements, as such
estimate would depend on information that is
generally not yet available. However, the maximum
programmatic benefits and costs associated with
substituted compliance could occur in
circumstances where the Commission grants every
substituted compliance request. This does not in
any way indicate that the Commission will make
any number of substituted compliance
determinations. Accordingly, the following analysis
does not assume that such substituted compliance
will be allowed. Where appropriate, however, we
do discuss the economic implications if such
substituted compliance were ultimately to be
allowed.
1299 We recognize that we are re-proposing
Regulation SBSR in this release, which would have
an impact on the security-based swap reporting
obligations beyond the cross-border context, and we
discuss these effects in our economic analysis of the
re-proposal below.
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relevant economic analysis. We also
expect that our respective adopting
releases for each of these substantive
areas will discuss the economic
consequences of the final substantive
rules together with our final rules on the
application of those rules in the crossborder context.
2. Current Security-Based Swap Market
Our analysis of the state of the current
security-based swap market is based on
data obtained from DTCC–TIW,
especially data regarding the activity of
market participants in the single-name
credit default swap (or CDS) market
during the years of 2008 to 2011.
Because of the lack of market data in the
context of total return swaps on equity
and debt, we do not have the same
amount of information regarding those
products (or other products that are
security-based swaps) as we have in
connection with the present market for
single-name CDS. With the exception of
the analysis regarding the level of
security-based swap clearing, we did
not consider data regarding index credit
default swaps for purposes of the
analysis below. The data for index CDS
encompasses both broad-based security
indices and narrow-based security
indices, and ‘‘security-based swap’’ in
relevant part encompasses swaps based
on single securities or on narrow-based
security indices.1300 We previously
noted that the definition of securitybased swaps is not limited to singlename CDS but we believed that the
single-name CDS data are sufficiently
representative of the market to help
inform the analysis of the state of the
current security-based swap market.1301
We believe that the data underlying
our analysis here provide reasonably
comprehensive information regarding
the single-name CDS transactions and
composition of the single-name CDS
market participants. In our analysis of
market participants and their domiciles
in subsections (a) and (c) below, we base
our analysis on firms and accounts that
have engaged in one or more trades with
a U.S.-person counterparty or involving
a U.S. reference entity according to data
obtained from DTCC–TIW. Our analysis
of trading activity in the security-based
swap market in subsections (b) and (d)
focuses on transactions involving a
single-name CDS referencing a U.S.
entity (‘‘U.S. single-name CDS’’). We
note that the data available to us from
DTCC–TIW do not encompass those
CDS transactions that both: (i) do not
involve U.S. counterparties; and (ii) are
based on non-U.S. reference entities.
Notwithstanding this limitation, we
preliminarily believe that the DTCC–
TIW data provides sufficient
information to identify the types of
market participants active in the
security-based swap market and the
general pattern of deal flow within that
market.
(a) Security-Based Swap Market
Participants
Although most security-based swap
activity is concentrated among a
relatively small number of dealer
entities,1302 there are thousands of
security-based swap market
participants, including, but not limited
to, investment companies, pension
funds, private (hedge) funds, sovereign
entities, and industrial companies.1303
In the analysis below, we observe that
most end users of security-based swaps
do not engage directly in the trading of
swaps, but use dealers, banks, or
investment advisers as agents to
establish their positions. Based on an
analysis of the counterparties to trades
reported to the DTCC–TIW, there were
1,489 entities 1304 engaged in trading of
single-name CDS shortly after the
enactment of the Dodd-Frank Act. Table
1, below, highlights that nearly threequarters of these entities (DTCC-defined
‘‘firms’’ shown in DTCC–TIW, which we
refer to here as ‘‘transacting agents’’)
were identified as investment advisers,
of which 40% (30% of all transacting
agents) were registered investment
advisers under the Investment Advisers
Act.1305 Although investment advisers
comprise the vast majority of transacting
agents, the transactions they executed
account for only 10.2% of all singlename CDS trading activity reported to
the DTCC–TIW, measured by number of
transaction-sides (each transaction has
two transaction sides, i.e., two
transaction counterparties). The vast
majority of transactions (83.7%)
measured by number of transactionsides were executed by ISDA-recognized
dealers.1306
TABLE 1—NUMBER OF TRANSACTING AGENTS BY COUNTERPARTY TYPE AND THE FRACTION OF TOTAL TRADING ACTIVITY,
FROM NOVEMBER, 2006 THROUGH OCTOBER, 2010, REPRESENTED BY EACH COUNTERPARTY TYPE
Transacting agents
Number
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Investment advisers .....................................................................................................................
—SEC registered .........................................................................................................................
Banks ...........................................................................................................................................
1300 See Section 3(a)(68)(A) of the Exchange Act,
15 U.S.C. 78c(a)(68)(A).
1301 According to data published by BIS, the
global notional amount outstanding in equity
forwards and swaps as of June 2012 was $1.88
trillion. The notional amount outstanding in singlename CDS was approximately $15.57 trillion, in
multi-name index CDS was approximately $9.73
trillion, and in multi-name, non-index CDS was
approximately $1.63 trillion. See Semi-annual OTC
derivatives statistics at end-June 2012 (Nov. 2012),
Table 19, available at: http://www.bis.org/statistics/
otcder/dt1920a.pdf. For the purposes of this
analysis, we assume that multi-name index CDS are
not narrow-based index CDS and therefore, do not
fall within the security-based swap definition. See
Section 3(a)(68)(A) of the Exchange Act; see also the
Product Definitions Adopting Release, 77 FR 48208.
We also assume that all instruments reported as
equity forwards and swaps are security-based
swaps, potentially resulting in underestimation of
the proportion of the security-based swap market
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represented by single-name CDS. Therefore, singlename CDS appear to constitute roughly 82% of the
security-based swap market. Although the BIS data
reflects the global OTC derivatives market, and not
just the U.S. market, we have no reason to believe
that these ratios differ significantly in the U.S.
market.
1302 See Intermediary Definitions Adopting
Release, 77 FR 30636–37, 30740, and the
accompanying notes 485 and 1573.
1303 Staff of the Division of Risk, Strategy, and
Financial Innovation review of DTCC-defined
‘‘firms’’ shown in DTCC–TIW as transaction
counterparties.
1304 The 1,489 entities included all DTCC-defined
‘‘firms’’ shown in DTCC–TIW as transaction
counterparties that report at least one transaction to
DTCC–TIW as of October, 2010. The staff in the
Division of Risk, Strategy, and Financial Innovation
classified these firms that are shown as transaction
counterparties by machine matching names to
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1,099
446
239
Percent
73.8
30.0
16.1
Transaction
share
(percent)
10.2
5.3
4.9
known third-party databases and by manual
classification. Manual classification included
searching the EDGAR and Bloomberg databases, the
SEC’s Investment Adviser Public Disclosure
database, and the firm’s public Web site or the
public Web site of the account represented by the
firm. The staff also referred to ISDA protocol
adherence letters available on the ISDA Web site.
All but 52 of the 1,489 DTCC-defined ‘‘firms’’ were
identified and classified.
1305 As identified through matches to Form ADV.
1306 For the purpose of this analysis, the ISDArecognized dealers are those defined as G14 by
ISDA. See http://www.isda.org/c_and_a/pdf/ISDAOperations-Survey-2010.pdf. G14 refers to JP
Morgan Chase NA (and Bear Stearns), Morgan
Stanley, Bank of America NA (and Merrill Lynch),
Goldman Sachs, Deutsche Bank AG, Barclays
Capital, Citigroup, UBS, Credit Suisse AG, RBS
Group, BNP Paribus, HSBC Bank, Lehman Brothers,
and Socie´te´ Ge´ne´rale.
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TABLE 1—NUMBER OF TRANSACTING AGENTS BY COUNTERPARTY TYPE AND THE FRACTION OF TOTAL TRADING ACTIVITY,
FROM NOVEMBER, 2006 THROUGH OCTOBER, 2010, REPRESENTED BY EACH COUNTERPARTY TYPE—Continued
Transacting agents
Number
Transaction
share
(percent)
Percent
Pension Funds .............................................................................................................................
Insurance Companies ..................................................................................................................
ISDA-Recognized Dealers ...........................................................................................................
Other ............................................................................................................................................
23
22
16
90
1.5
1.5
1.1
6.0
0.0
0.3
83.7
0.8
Total ......................................................................................................................................
1,489
100.0
100.0
The staff’s further analysis of the
‘‘accounts’’ in DTCC–TIW shows that
transaction agents classified in Table 1
represent over 8,500 accounts and funds
who are the principal risk holders of the
transactions. Table 2, below, classifies
these ‘‘accounts’’ or principal risk
holders by their counterparty type and
whether they are represented by a
registered or unregistered investment
adviser.1307 For instance, 239 banks in
Table 1 allocated transactions to 353
accounts, of which 29 were represented
by investment advisers and 324 were
represented directly by banks, while 16
ISDA-recognized dealers in Table 1
allocated transactions to 69 accounts.
Among the accounts, there are over
1,400 Dodd-Frank Act-defined special
entities and 482 investment companies
registered under the Investment
Company Act of 1940.1308 Private funds
comprise the largest type of account
holders that we were able to classify,
and although not verified through a
recognized database, most of the funds
we were not able to classify appear to
be private funds. The data analyzed here
largely predate the effectiveness of our
rules implementing the Dodd-Frank
Act’s requirement that previously
exempt advisers to hedge funds and
certain other private investment funds
register with the Commission.1309
TABLE 2—THE NUMBER AND PERCENTAGE OF ACCOUNT HOLDERS—BY TYPE—WHO PARTICIPATE IN THE SECURITYBASED SWAP MARKET THROUGH A REGISTERED INVESTMENT ADVISER, AN UNREGISTERED INVESTMENT ADVISER, OR
DIRECTLY AS A TRANSACTING AGENT, FROM NOVEMBER 2006 THROUGH OCTOBER 2010
Account holders by type
Represented by
a registered
investment
adviser
Represented by
an unregistered
investment adviser
Private Funds .....................................................................................
DFA Special Entities ..........................................................................
Registered Investment Companies ...................................................
Banks (non G14) ...............................................................................
Insurance Companies ........................................................................
ISDA-recognized Dealers ..................................................................
Foreign Sovereigns ............................................................................
Non-financial Corporations ................................................................
Finance Companies ...........................................................................
Other/unclassified ..............................................................................
2,154
1,474
482
353
192
69
53
37
7
3,746
952 44%
1,359 92%
477 99%
25
7%
145 76%
0 0%
35 66%
26 70%
1 14%
2,522 67%
1,202 56%
46
3%
5
1%
4
1%
19 10%
0
0%
6 11%
1
3%
0
0%
1,158 31%
All ................................................................................................
8,567
5,542
2,441
(b) Levels of Security-Based Swap
Trading Activity
CDS contracts make up the vast
majority of security-based swap
products and most are written on
corporate issuers, corporate securities,
sroberts on DSK5SPTVN1PROD with PROPOSALS
Number
1307 Unregistered investment advisers include all
investment advisers not registered under the
Investment Advisers Act, and may include
investment advisers registered with a state or a
foreign authority.
1308 There remain 3,746 DTCC ‘‘accounts’’
unclassified by type. Although unclassified, each
was manually reviewed to verify that it was not
likely to be a special entity within the meaning of
the Dodd-Frank Act and instead was likely to be an
entity such as a corporation, an insurance company,
or a bank.
1309 See Rules Implementing Amendments to the
Investment Advisers Act of 1940, Investment
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65%
28%
Participant is
transacting
agent 1310
0
0%
69
5%
0
0%
324
92%
28
15%
69 100%
12
23%
10
27%
6
86%
66
2%
584
7%
sovereign countries, or sovereign debt
(reference entities and reference
securities).1311 Figure 1 below describes
the percentage of global, notional
transaction volume 1312 in U.S. singlename CDS reported to the DTCC–TIW
between January 2008 and December
2011, separated by whether transactions
are between two ISDA-recognized
dealers (interdealer transactions) or
whether a transaction has at least one
non-dealer counterparty.
Advisers Act Release No. 3221 (June 22, 2011), 76
FR 42950 (July 19, 2011).
1310 This column reflects the number of
participants who are also trading on their own
accounts.
1311 See Intermediaries Adopting Release, 77 FR
30636 n.476. See also Chen, Kathryn, Michael
Flemming, John Jackson, Ada Li, and Asani Sarkar,
‘‘An Analysis of CDS Transactions: Implications for
Public Reporting,’’ Federal Reserve Bank of New
York Staff Report, No. 517 (Sep. 2011)
(decomposing single-name CDS contracts into
corporate, sovereign, and other).
1312 This volume includes all price-forming CDS
transactions (trades, assignments, and terminations)
on U.S.-based reference entities reported to the
DTCC–TIW during calendar years 2008 through
2011, including those executed between two foreign
counterparties. ‘‘Price-forming transactions’’
include all new transactions, assignments,
modifications to increase the notional amounts of
previously executed transactions, and terminations
of previously executed transactions. Transactions
terminated, transactions entered into in connection
with a compression exercise, and expiration of
contracts at maturity are not considered priceforming and are therefore excluded, as are
replacement trades and all bookkeeping-related
trades.
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Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
The level of trading activity with
respect to U.S. single-name CDS in
terms of notional volume has declined
from more than $5 trillion in 2008 to
less than $2.5 trillion in 2011. The start
of this decline predates the enactment of
the Dodd-Frank Act and the rules
proposed thereunder. For the purpose of
establishing an economic baseline, this
seems to indicate that CDS market
demand shrank prior to the enactment
of the Dodd-Frank Act, and therefore the
causes of trading volume declines may
be independent of those related to the
development of security-based swap
market regulation. If the security-based
swap market experiences further
declines in trading activity, it would be
difficult to isolate the effects of the
newly-developed security-based swap
market regulation and to identify
whether the changes in trading activity
are due to natural market forces or the
anticipation of (or reaction to) proposed
(or adopted) Title VII requirements.
Although notional volume had
declined over the past four years, the
percentage of interdealer transactions
has remained fairly constant, at a little
more than 80% of the total notional
volume. This is consistent with the
83.7% of transactions involving ISDArecognized dealers on one side of the
transactions executed from November
2006 through October 2010 as shown in
Table 1.
(c) Market Participant Domiciles
recorded by the DTCC–TIW.1314 Since
the enactment of Dodd-Frank Act, there
has been a significant shift in reported
domiciles, with far fewer funds and
accounts reporting a U.S. domicile.
Figure 2, left, shows that more than twothirds of funds and accounts in
existence as of October of 2010 reported
a U.S. domicile.1315 Figure 2, right,
reports the domicile of the more than
2,600 new funds and accounts that were
allocated trades reported to the DTCC–
TIW for the first time since October
2010. For these funds and accounts,
only 43% report a registered office
location in the United States, a decline
of 25 percentage points. While the
fraction of foreign domiciled funds
increases by nine percentage points,
most of the shift in domicile is a result
of funds and accounts reporting a
foreign registered office location while
being managed by an adviser in the
United States, or a result of accounts of
foreign branches of U.S. banks or
subsidiaries of U.S. entities, an increase
from 3% prior to the enactment of the
Dodd-Frank Act to 19% after the
enactment of the Dodd-Frank Act.1316
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In analyzing data to identify an
economic baseline of trading activity for
purposes of this proposal, we found that
there has been a distinct shift in country
of domicile since the enactment of the
Dodd-Frank Act. Prior to the enactment
of the Dodd-Frank Act, the majority of
the funds and accounts 1313 that were
allocated CDS transactions reported to
the DTCC–TIW were domiciled within
the United States, according to selfreported registered office location
1313 The DTCC accounts are not the same as
entities. One entity may have multiple accounts
and, depending on where accounts are located, may
report multiple domicile locations. For example, a
bank may have one DTCC account for its U.S.
headquarters and one DTCC account for one of its
foreign branches. The self-reported registered office
location for the U.S. headquarters account is
different from that for the foreign branch account.
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1314 Following the Warehouse Trust Guidance on
CDS data access (see text accompanying notes 83–
85, supra), the DTCC–TIW surveyed market
participants, asking for the physical address
associated with each of their accounts (i.e., where
the account is incorporated as a legal entity). This
is designated the registered office location. For
purposes of this discussion, we have assumed that
the registered office location reflects the place of
domicile for the fund or account.
1315 When the fund does not report a registered
office location, we assume that the settlement
country reported by the investment adviser or
parent entity to the fund or account is the place of
domicile.
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1316 In these instances, the fund or account lists
a non-U.S. registered office location while the
investment adviser, U.S. bank, or U.S. parent lists
the United States as its settlement country.
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31122
While it is likely that some of the shift
in domicile is in reaction to
development of the new Title VII
regulatory regime, with many funds
shifting their registered office locations
offshore in anticipation of potential
future compliance costs and burdens,
some of the activity could be attributed
to more precise reporting of domicile by
funds and accounts relative to
information that was on record for older
funds and accounts. In particular, prior
to the enactment of the Dodd-Frank Act,
funds and accounts did not formally
report their domicile because there was
no systematic requirement to do so.
Since Dodd-Frank Act enactment, the
DTCC–TIW has collected the account or
fund registered office location, which is
self-reported and voluntary.1317 Among
funds and accounts that signed up for
DTCC–TIW services for the first time
after October 2010, most have selfreported domiciles that are outside the
United States (57% of first-time DTCC–
TIW users), but a sizeable proportion of
these are managed from within the
United States (19% of all first-time
DTCC–TIW users).
(d) Level of Current Cross-Border
Activity in Single-Name CDS
only 7% of the global transaction
volume by notional volume in 2011 was
between two U.S.-domiciled
counterparties, compared to 49%
entered into between one U.S.domiciled counterparty and a foreigndomiciled counterparty and 44%
entered into between two foreigndomiciled counterparties (see figure 3).
When the domicile locations of DTCC–
TIW accounts are defined according to
the domicile of their ultimate parent,
headquarters or home office (e.g.,
classifying a foreign bank branch or
foreign subsidiary of a U.S. entity as
domiciled in the United States), the
fraction of transactions entered into
between two U.S.-domiciled
counterparties increases to 25%, and to
57% for transactions entered into
between a U.S.-domiciled counterparty
and a foreign-domiciled counterparty.
is defined as the ‘‘place of organization of the legal
entity.’’ DTCC, ‘‘Multifund User Agreement Form &
Key Contacts,’’ at 5, available at: http://
www.dtcc.com/customer/membership/derivserv/
derivserv.php.
About half of the trading activity in
U.S. single-name CDS reflected in the
set of data we analyzed was between
counterparties domiciled in the United
States and counterparties domiciled
abroad. When counterparty domicile is
based on the registered office
location 1318 of the DTCC–TIW accounts,
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31123
1317 SEC
Staff discussions with DTCC.
collects certain information from
its users, including registered office location, which
1318 DTCC–TIW
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By either definition of domicile, the
data indicate that a large fraction of U.S.
single-name CDS transaction volume is
entered into between counterparties
domiciled in two different jurisdictions
or between counterparties domiciled
outside the United States. For the
purpose of establishing an economic
baseline, this observation indicates that
a large fraction of security-based swap
activity would be affected by the scope
of any cross-border approach we could
propose to take in applying the Title VII
requirements. The large fraction of U.S.
single-name CDS transactions between
U.S.-domiciled and foreign-domiciled
counterparties also highlights the extent
to which security-based swap activity
transfers risk across geographical
boundaries. Moreover, the legal
domicile of a counterparty may not
represent the only location of risk.
sroberts on DSK5SPTVN1PROD with PROPOSALS
(e) Levels of Security-Based Swap
Clearing
Although no mandatory clearing
regime yet exists, a substantial
1319 See note 1312, supra. Transactions reported
to the DTCC–TIW used for this analysis reflect all
global activity, including transactions between two
foreign counterparties. See Clearing Procedures
Adopting Release, 77 FR 41636–37.
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proportion of single name CDS and
index CDS are cleared on a voluntary
basis. Voluntary clearing of securitybased swaps in the United States is
currently limited to CDS products,
including single-name CDS and index
CDS. At present, there is no central
clearing in the United States for
security-based swaps that are not CDS
products.
The analysis below is based on
information reported by ICE Clear Credit
on its public Web site and is based on
price-forming transactions,1319 which
includes the clearing of transactions on
the same day as the transaction was
executed as well as the clearing of
transactions submitted for clearing on a
retroactive basis. The data presented
here do not include transactions that
result from the compression 1320 of
transactions previously submitted for
clearing.
Figure 4 shows that index CDS in U.S.
names account for the bulk of current
voluntary clearing activity. The
proportion of transactions in names
accepted for clearing that are ultimately
cleared also appears to be higher in
index CDS in U.S. names than in singlename CDS referencing U.S. corporate
issuers or securities. In calendar years
2010 and 2011, Figure 4 indicates that
90% of the total notional volume of
transactions is in index names that are
accepted for clearing as of the end of
each calendar year and that cleared
index transactions correspond to more
than 50% of the total notional volume
during the same period. By contrast, the
figure suggests that the proportion of
transactions in single-name corporate
CDS referencing names that were
accepted for clearing was only 33% of
the total single-name CDS during 2011,
with cleared transactions during the
same year totaling only 25% of all the
single-name CDS executed during the
same period.
1320 In compression, counterparties agree to
terminate or change the notional amount of some
or all of their outstanding contracts and replace any
terminated contracts with new contracts.
Compression reduces counterparties’ gross notional
amount, while leaving their net notional amount
unchanged. Transactions entered into in connection
with a compression exercise are not considered
price-forming and are therefore excluded from the
analysis here.
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31125
While a large fraction of CDS trading
activity continues to settle bilaterally,
particularly in light of limited eligibility
to clear among market participants,
clearing activity has steadily increased
alongside the Title VII rulemaking
process, and in advance of mandatory
clearing requirements.1321 Figure 5
shows that member positions at ICE
Clear Credit in the United States are
roughly half held by foreign-domiciled
dealing members.1322 Hence, there is
considerable credit exposure between
ICE Clear Credit and these foreigndomiciled clearing members, in both
directions.
1321 See Clearing Procedures Adopting Release, 77
FR 41636–38.
1322 Positions represent each side of an original
swap contract such that the aggregated numbers
reported here are twice the amount of the notional
exposure from the original contract.
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31126
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C. Analysis of Potential Effects on
Efficiency, Competition, and Capital
Formation
1. Introduction
In developing our approach to the
application of Title VII to cross-border
activities, we have focused on meeting
the goals of Title VII, including the
promotion of the financial stability of
the United States by improving
accountability and transparency in the
U.S. financial system, the reduction of
systemic risk, and the protection of
counterparties to security-based
swaps.1323 We also have sought to take
into account a range of principles
relevant to regulation of this market, as
described above.1324 As reflected in our
discussion of the various policy choices
we are proposing above 1325 and of the
potential costs and benefits associated
with our proposed approach in the
economic analyses below,1326 we also
have considered effects on competition,
efficiency, and capital formation.1327
In this section, we focus particularly
on these effects. Given the complexity
and inter-relatedness of the potential
effects of the proposed rules—both on a
rule-by-rule basis and taken together as
a whole—on the market for securitybased swaps, we provide a framework
for a general analysis of the effects of the
proposed rules on competition,
efficiency, and capital formation. We
then use this framework to engage in an
analysis of the possible effects of our
proposed approach.
In developing the general analytical
framework for considering the effects of
our proposed cross-border approach on
competition, efficiency, and capital
formation, we have noted certain
distinct analytical issues. First, various
proposed rules may give rise to similar
or overlapping effects. Second, each
proposed rule or interpretation is a
component of the Title VII regulatory
framework and operates in tandem with
1323 See
note 4, supra.
Section II.C, supra.
1325 See Sections III–XI, supra.
1326 See Sections XV.D–I, infra.
1327 As noted above, Section 3(f) of the Exchange
Act requires that whenever pursuant to the
Exchange Act the Commission is engaged in
rulemaking and is required to consider or determine
whether an action is necessary or appropriate in the
public interest, the Commission shall consider, in
addition to the protection of investors, whether the
action will promote efficiency, competition, and
capital formation. 15 U.S.C. 78c(f). In addition,
Section 23(a)(2) of the Exchange Act requires the
Commission, when making rules under the
Exchange Act, to consider the impact such rules
would have on competition and prohibits the
Commission from adopting any rule that would
impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the
Exchange Act. 15 U.S.C. 78w(a)(2).
sroberts on DSK5SPTVN1PROD with PROPOSALS
1324 See
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the other Title VII components to form
a comprehensive regulatory regime. To
the extent that the proposed rules
interact with each other, it is
appropriate to broaden the analysis
beyond a single rule. For example,
although each of the rules and
interpretations regarding registration of
security-based swap dealers and the
application of the public dissemination,
regulatory reporting, mandatory
clearing, and mandatory trade execution
requirements in the cross-border context
serve distinct regulatory purposes,1328
together they may have combined
effects on dealer participation in the
U.S. security-based swap market and on
the ability of certain market participants
to access other parts of the global
security-based swap market.
The analytical framework we
establish here for considering the effects
of our proposed approach to analyzing
effects related to competition,
efficiency, and capital formation is
premised upon our understanding of the
existing state of the security-based swap
market. Two important features of the
security-based swap market inform our
analysis.
First, the security-based swap market
is global in nature, and dealers and
other market participants are highly
interconnected within this global
market. While most end users have only
a few counterparties, dealers can have
hundreds of counterparties, consisting
of both end users and other dealers.1329
This interconnectedness provides a
myriad of paths for liquidity and risk to
move throughout the financial system.
As a result, it can be difficult to attribute
liquidity and risk to a particular entity.
The interconnected nature of the global
security-based swap market contributes
to an increased potential for sequential
counterparty failures, liquidity shocks,
and market dislocation during times of
financial market stress.1330
1328 For example, registration of security-based
swap dealers is intended, among other things, to
increase the safety and soundness of security-based
swap dealers and improve the stability of the U.S.
financial system, while application of the public
dissemination and mandatory trade execution
requirements in the cross-border context are
intended, among other things, to increase the
transparency of the U.S. security-based swap
market.
1329 See Section XV.B.2(a), supra (discussing
current security-based swap market participants). In
addition, based on an analysis of 2011 transaction
data by staff in the Division of Risk, Strategy, and
Financial Innovation, the entities recognized by
ISDA as dealers had on average 292 counterparties,
with a minimum of 17 and a maximum of 695. All
other entities (i.e., those more likely to be end
users), averaged 4 counterparties, with a minimum
of 1 and a maximum of 52.
1330 ‘‘Rethinking the financial network,’’ speech
by Andrew G. Haldane, Executive Director for
Financial Stability at the Bank of England,
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In other words, the failure of one firm
can have consequences beyond the firm
itself, and the loss of trading confidence
and willingness to trade in one market
can have consequences beyond the
firm’s home jurisdiction or market. If
firms consider the implications of
security-based swap activity only on
their own operations, without
considering aggregate financial sector
risk, including lack of liquidity and
market disruption or the possibility of
spillover effects, the financial system
may end up bearing more risk than the
aggregate capital of the intermediaries in
the system can support and may cease
to function normally.1331
Second, the security-based swap
market developed as an over-thecounter market, without transparent
pricing or volume information.1332 In
markets without transparent pricing,
access to information confers a
competitive advantage. Within the
security-based swap market, large
dealers and other large market
participants with a large share of order
flow have an informational advantage
over smaller dealers and end users who
observe a smaller subset of the market.
Greater private order flow enables better
assessment of current market values that
dealers may use to extract rents from
counterparties who are less
informed.1333 End users are aware of
this information asymmetry, and certain
end users—particularly larger entities
who transact with many dealers—may
be able to obtain access to competitive
pricing. Typically, however, the value of
private information will be captured by
those who have the information—in this
case, predominantly dealers who
observe the greatest order flow.
In sum, the security-based swap
market is a global market characterized
delivered to Financial Student Association,
Amsterdam (Apr. 28, 2009), available at: http://
www.bis.org/review/r090505e.pdf?frames=0.
1331 See Viral V. Acharya, Lasse H. Pedersen,
Thomas Philippon, and Matthew Richardson,
‘‘Measuring Systemic Risk’’ (May 2010), available
at: http://vlab.stern.nyu.edu/public/static/SRv3.pdf. The authors use a theoretical model of the
banking sector to show that, unless the external
costs of their trades are considered, financial
institutions will have an incentive to take risks that
are borne by the aggregate financial sector). Under
this theory, in the context of Title VII, the relevant
external cost is systemic risk (i.e., the potential for
risk spillovers and sequential counterparty failure),
leading to an aggregate systemic capital shortfall
and breakdown of financial intermediation in the
financial sector.
1332 See SB SEF Proposing Release, 76 FR 10949.
1333 Martin D. D. Evans and Richard K. Lyons,
‘‘Exchange Rate Fundamentals and Order Flow,’’
NBER Working Paper No. 13151 (June 2007),
available at: http://128.97.165.17/media/files/
evans_lyons.pdf. Using data on end-user currency
trades, the authors find evidence that transaction
flows forecast future macro variables such as output
growth, money growth, and inflation.
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by a high level of interconnectedness
and spillover risk and by significant
information asymmetries that result
from the opacity of the OTC market. The
global nature of this market, combined
with the interconnectedness of market
participants, means that it is difficult to
isolate risk and liquidity problems to
one geographical segment of the market,
or to one asset class. Because U.S.
market participants and transactions
regulated under Title VII are a subset of
the overall global security-based swap
market, concerns surrounding these
types of spillovers are part of the
framework in which we analyze the
competitive effects of our proposed
rules and interpretations.
The interconnectedness of this market
also highlights the need for coordination
among international regulators.1334
Because liquidity and risk spillovers,
even from entities that engage in
security-based swap activity entirely
outside the United States, have the
potential to put the U.S. market at risk,
consistent regulation of the securitybased swap market across jurisdictions
may be necessary to effectively reduce
those risks. However, the regulatory
developments in various jurisdictions
are not necessarily consistent in pace
and scope, which may result in certain
types of risks being addressed in
different ways.
In our assessment of the economic
effects of the proposed rules and
interpretations, we also are mindful that
these differences in scope and timing
may affect the behavior of some market
participants. In particular, the United
States being first-mover in many areas of
security-based swap market regulation
presents unique challenges to
maintaining high regulatory standards
and avoiding disruptions in the global
security-based swap market.
We also recognize that regulations
designed to mitigate systemic risk and
improve transparency can impose a
barrier to entry and access for foreign
participants, which could have an effect
on liquidity in the security-based swap
market. For example, regulatory
requirements in the U.S. that conflict
with foreign laws may preclude foreign
entities from participating in U.S.
markets. We also recognize that
regulators in other jurisdictions are
currently engaged in implementing their
own regulatory reforms of the OTC
derivatives markets and are faced with
a similar tradeoff between preserving
market access and reducing risks to
1334 The Commission has entered into bilateral
and multilateral discussions with foreign regulatory
authorities concerning the regulation of OTC
derivatives. See Section I and notes 34 and 35,
supra.
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their financial systems. Our proposed
application of Title VII to cross-border
activities may affect the policy decisions
of these other regulators as they seek to
address this tradeoff under their
authority.
Regulatory differences among
jurisdictions in the global security-based
swap markets driven by lack of
coordination could create incentives for
business restructuring solely for the
purposes of operating outside of Title
VII regulation. Furthermore, barriers to
market access may produce competitive
distortions and lead to fragmented
markets.1335 We also note that the
potential effects of our proposed
application of Title VII in the crossborder context on competitive frictions
and market fragmentation would be
moderated or amplified by the
substantive requirements ultimately
adopted by the Commission. The
Commission is reopening the comment
periods for our outstanding rulemaking
releases that concern security-based
swaps and security-based swap market
participants and were proposed
pursuant to certain provisions of the
Exchange Act, as amended by Title VII
of the Dodd-Frank Act.1336
2. Competition
The proposed rules and
interpretations discussed in this release
will likely affect competition in the U.S.
security-based swap market and
potentially change the set of available
counterparties that would compete for
business and provide liquidity to U.S.
market participants. Some of these
proposed rules and interpretations will
likely enhance competition and
participation in the U.S. market, as
application of Title VII requirements to
entities that are engaged in securitybased swap activity conducted with
U.S. persons or otherwise conducted
within the United States will likely
promote safety and soundness,
transparency, and competition within
the U.S. security-based swap market and
the U.S. financial system as a whole. At
the same time, these proposed rules and
interpretations may impose certain costs
1335 See, e.g., Arnoud W.A. Boot, Silva Dezelan,
and Todd T. Milbourn, ‘‘Regulatory Distortions in
a Competitive Financial Services Industry,’’ J. of
Fin. Serv. Res., Vol. 17, No. 1 (2000) (showing that,
in a simple industrial organization model of bank
lending, a change in the cost of capital resulting
from regulation results in a greater loss of profits
when regulated banks face competition from nonregulated banks than when regulations apply
equally to all competitors). See also Victor
Fleischer, ‘‘Regulatory Arbitrage,’’ 89 Tex. L. Rev.
227 (Mar. 4, 2010) (discussing how, when certain
firms are able to choose their regulatory structure,
regulatory burdens are shifted onto those entities
that cannot engage in regulatory arbitrage).
1336 See note 29, supra.
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31127
or other burdens that may reduce the
level of competition in this market.
Assessing the net effect of these
proposed rules and interpretations on
competition is particularly complicated
in the cross-border context. As already
noted, cross-border activity involving
market participants domiciled in
different jurisdictions accounts for the
vast majority of transactions in the
security-based swap market. U.S.
persons routinely enter into securitybased swap transactions with market
participants located in other
jurisdictions or have operations outside
the United States that engage in
security-based swap activity; similarly,
non-U.S. persons routinely enter into
transactions with U.S. persons and
maintain operations within the United
States. The global nature of the market
and of market participants’ operations
may lead to differences in the
application of Title VII to firms active in
the global security-based swap market
and may create incentives for firms to
restructure their operations to minimize
contact with the United States that
would be less likely in a less global
market.
In our preliminary view, there are
three key factors that will contribute to
the effects our proposed cross-border
rules and interpretations will have on
competition in the security-based swap
market: (1) how Title VII requirements
apply to U.S. persons and non-U.S.
persons when they transact securitybased swaps within the United States;
(2) how these requirements apply to
U.S. persons and non-U.S. persons
when they transact security-based
swaps outside the United States; and (3)
whether the regulatory requirements
that foreign jurisdictions impose on U.S.
persons and non-U.S. persons are
comparable to those that we are
proposing in this release. In addition, as
noted above, the magnitude of any
competitive effects flowing from our
proposed application of the Title VII
requirements described in this release
will also be determined by the
substantive rules we ultimately adopt to
implement Title VII.
For example, in response to our
proposal to impose Title VII
requirements on non-U.S. persons that
engage in security-based swap activity
with U.S. persons or within the United
States, some non-U.S. persons may seek
to restructure their operations to
minimize their contact with the United
States in an effort to avoid having to
comply with Title VII; some non-U.S.
persons may determine to exit the U.S.
market entirely. Similarly, to the extent
that our proposed rules treat the foreign
business of U.S. persons and non-U.S.
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persons differently from their U.S.
business, these entities may have
incentives to restructure their business
to separate their foreign and U.S.
operations. Both of these potential
responses to our proposal may result in
lessened competition in the securitybased swap market within the United
States. The decision to restructure and
move operations outside the United
States does not necessarily indicate
reduction of the exposures of the U.S.
financial system to systemic risk if, for
example, the foreign operations are
supported by a guarantee provided by a
U.S. person, which provides a path for
the transmission of risk to transmit to
the United States.
The competitive effects of our
proposal will also be affected by
whether entities potentially subject to
Title VII are also subject to similar
regulations in foreign jurisdictions
when they transact security-based
swaps or perform infrastructure
functions in the security-based swap
market, and, if so, whether those
regulations are inconsistent with, or
duplicative of applicable Title VII
regulations. Many other jurisdictions are
implementing reforms of the OTC
derivatives market (including those
products defined as security-based
swaps within the United States), but
this regulation can be expected to
develop along different timelines and
impose different substantive
requirements.
To the extent that these timelines or
requirements are different, market
participants may have the opportunity
to take advantage of these differences by
making strategic choices, at least in the
short term, with respect to their
transaction counterparties and operating
business models. For example, at a
larger scale, firms may choose whether
to withdraw from, or participate in the
U.S. security-based swap market. This
may change the number of participants
in the U.S. market and could have a
direct impact on competition in the U.S.
market. In addition, differences in
regulatory requirements may make it
difficult for U.S. dealers to provide
competitive spreads relative to foreign
dealers. While we do not anticipate that
this disadvantage would cause U.S.
dealers to exit foreign markets, it could
have a direct effect on competition in
foreign markets unless U.S. dealers
restructure their business to conduct
foreign transactions through
subsidiaries that satisfy the
requirements to be considered non-U.S.
persons.
In developing the approach we are
proposing in this release, we have
considered the potential for competitive
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distortions as a result of these
inconsistencies. At the same time, the
Commission believes that, while the
potential of regulatory arbitrage is real,
the effects of these strategic choices may
be mitigated to some extent as regulators
in other jurisdictions implement the
G20 commitments.1337 Efforts are
underway to achieve robust derivatives
market regulation, including regulations
of the security-based swap markets, in
various jurisdictions.1338 As
jurisdictions progress toward full
implementation of the G20
commitments, competitive distortions
should decline to some extent, blunting
the incentives for this type of strategic
behavior.
(a) Security-Based Swap Dealers
Our proposed approach would
generally apply dealer registration and
other Title VII requirements to entities
that conduct dealing activity with U.S.
persons 1339 or in the United States.1340
Because the full range of Title VII
requirements are applied generally to
activity in the United States regardless
of the counterparty’s U.S.-person
status,1341 persons choosing to transact
a security-based swap in the United
States may have no incentive to favor a
non-U.S. counterparty over a U.S.
counterparty.1342
At the same time, some entities may
determine that the compliance costs
arising from the requirements of Title
VII warrant exiting the security-based
swap market in the United States. NonU.S. persons may find this option more
1337 See
note 32 and accompanying text, supra.
e.g., Joint Press Statement of Leaders on
Operating Principles and Areas of Exploration in
the Regulation of the Cross-Border OTC Derivatives
Market, available at: http://www.sec.gov/news/
press/2012/2012–251.htm.
1339 See the proposed definition of ‘‘U.S. person’’
in proposed Rule 3a71–3(a)(7) under the Exchange
Act.
1340 See the proposed definition of ‘‘transaction
conducted within the United States’’ in proposed
Rule 3a71–3(a)(5) under the Exchange Act.
1341 See the proposed de minimis rule in
proposed Rule 3a71–3(b) under the Exchange Act,
the proposed application of the mandatory clearing
requirement to cross-border security-based swap
transactions in proposed Rule 3Ca–3, as discussed
in Section IX above; the proposed application of the
mandatory trade execution requirement to crossborder security-based swap transactions in
proposed Rule 3Ch–1, as discussed in Section X
above; and the proposed application of the
regulatory reporting and public dissemination
requirements in proposed Rule 908 of Regulation
SBSR, as discussed in Section VIII above.
1342 This is in general the case, however,
proposed Rules 3Ca–3(b) and 3Ch–1(b) would not
apply the mandatory clearing and mandatory trade
execution requirements to transactions between two
non-U.S. persons who are not security-based swap
dealers and whose performances under securitybased swaps are not guaranteed by a U.S. person,
even though such transactions are conducted in the
United States.
1338 See,
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attractive than U.S. persons because
they may find it easier to structure their
foreign business so as to prevent it from
falling within the scope of Title VII. To
the extent that entities engaged in
dealing activity exit the U.S. securitybased swap market, the level of
competition in the market may decline.
These exits could result in higher
spreads and affect the ability and
willingness of end users to engage in
security-based swaps.1343
We noted in the Intermediary
Definitions Adopting Release that the
registration requirement would impose
dealer registration costs on entities that
engage in the bulk of dealing activity in
the market, while the de minimis
threshold would allow persons who
account for a small portion of dealing
activity to avoid incurring these costs to
obtain what would likely be
comparatively modest benefits, given
the small size of these dealers.1344 We
noted in that release that the de minimis
threshold may mitigate some of the
potential competitive burdens that
could fall on entities engaged in a
smaller amount of dealing activity
without leaving an undue amount of
dealing activity outside of the ambit of
dealer regulation.1345
In the cross-border context, the
proposed de minimis exception 1346
could reduce the number of entities
likely to exit the U.S. market because it
would enable an established foreign
entity to transact a de minimis amount
of security-based swap dealing activity
in the U.S. market before it determines
whether to expand its U.S. business 1347
and become a registered security-based
swap dealer. However, since the ability
of smaller entities to access the U.S.
security-based swap market without
registration would be limited to
conducting dealing activity below the
de minimis threshold, these entities
1343 Barclay, Michael, William G. Christie, Jeffrey
H. Harris, Eugene Kandel and Paul H. Schultz,
‘‘Effects of Market Reform on the Trading Costs and
Depths of Nasdaq Stocks,’’ Journal of Finance, Vol.
54, No. 1 (Feb. 1999) (measuring the impact of rules
designed to enhance public competition with
Nasdaq dealers, and observing evidence of lower
quoted and effective spreads without adverse effects
on market quality).
1344 See Intermediary Definitions Adopting
Release, 77 FR 30741.
1345 See id.
1346 The proposed application of the de minimis
exception would allow a U.S. and foreign dealing
entity to conduct dealing activity in the U.S.
security-based swap market without registering as
a security-based swap dealer so long as their trailing
12-month notional volume of transactions with U.S.
persons and transactions conducted within the
United States in its dealing capacity is below the
de minimis threshold. See proposed Rule 3a71–3(b)
under the Exchange Act.
1347 See proposed Rule 3a71–3(a)(6) under the
Exchange Act.
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would have an incentive to curtail their
security-based swap dealing activity
with U.S. persons as they approach the
de minimis threshold to avoid having to
register as a dealer. To the extent that
such entities choose to operate in the
U.S. market at levels below the de
minimis threshold, the net effect on
competition of their decision to remain
in the U.S. market is likely to be small
and unlikely to deter the accumulation
of market power by a relatively smaller
number of large dealing entities than are
currently active in the U.S. market.
On the other hand, Title VII
regulatory requirements may allow
registered dealers to credibly signal high
quality, better risk management, and
better counterparty protection relative to
unregistered dealers that compete for
the same order flow. End users in the
U.S. market may be willing to pay
higher prices for higher-quality services
from registered entities.1348 These
regulatory benefits could mitigate the
competitive burdens imposed by the
proposed cross-border rules and
substantive Title VII requirements
applicable to registered security-based
swap dealers by, for example reducing
incentives for firms to exit the market.
The proposed approach to application
of Title VII requirements to dealing
activities outside the United States may
also have distinct competitive effects
that interact with the effects just
described. Because we are proposing to
take a different approach to the
application of Title VII to dealing
activity outside the United States from
the application of Title VII to dealing
activity in the United States, certain
dealing entities may have incentives to
restructure their existing dealing
business 1349 in order to prevent all or
part of their security-based swap
business from becoming subject to Title
1348 Cf. Carl Shapiro, ‘‘Investment, Moral Hazard,
and Occupational Licensing,’’ The Review of
Economic Studies, Vol. 53, No. 5 (1986) (using a
theoretical model to show ‘‘that licensing and
certification tend to benefit consumers who value
quality highly at the expense of those who do not’’).
Oren Fuerst, ‘‘A Theoretical Analysis of the Investor
Protection Regulations Argument for Global Listing
of Stocks,’’ Working Paper (1998) (using a
theoretical model of the listing decision to show
how managers of high quality firms signal their
quality more effectively in a strict regulatory
regime). Craig Doidge, G. Andrew Karolyi and Rene
M. Stulz, ‘‘Why are Foreign Firms Listed in the U.S.
Worth More?’’ Journal of Financial Economics, Vol.
71, Issue 2 (2004) (hypothesizing that firms crosslisted in the United States are better able to take
advantage of growth opportunities, and finding that
‘‘expected sales growth is valued more highly for
firms listed in the U.S. and that this effect is greater
for firms from countries with poorer investor
rights’’).
1349 See Section II.A.2, supra (describing the
dealing structures used by dealing entities to
conduct global security-based swap business).
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VII. For example, a foreign dealing
entity conducting its U.S. Business 1350
in excess of the de minimis threshold
may be motivated to separate its U.S.
Business from its Foreign Business into
two or more distinct entities.1351 Such
a firm may conduct U.S. Business and
Foreign Business through two separate
entities and confine its U.S. Business in
an entity registered as security-based
swap dealer, potentially allowing the
firm to insulate its Foreign Business
from Title VII requirements.
Alternatively, some foreign dealing
entities may choose to exit the U.S.
market entirely.
Similarly, application of the
transaction-level requirements for
public dissemination, mandatory
clearing, and mandatory trade execution
may generally be triggered, in part, by
the choice of non-U.S. persons to
conduct security-based swap
transactions within the United
States.1352 This may give foreign
security-based swap dealers and other
market participants an incentive to
restructure their operations or otherwise
avoid using an agent in the United
States to conduct security-based swap
transactions in order to avoid the
transaction-level requirements.1353
For example, a foreign security-based
swap dealer operating within the United
States whose performance under
security-based swaps are not guaranteed
by a U.S. person (‘‘foreign nonguaranteed security-based swap dealer’’)
would be required to comply with the
mandatory clearing requirement with
respect to a security-based swap with a
non-U.S. person counterparty whose
security-based swap transaction is not
guaranteed by a U.S. person (‘‘non-U.S.
non-guaranteed counterparty’’).
However, the same security-based swap
between a foreign non-guaranteed
security-based swap dealer and a non1350 See proposed Rule 3a71–3(a)(6) under the
Exchange Act.
1351 See proposed Rule 3a71–3(a)(2) under the
Exchange Act.
1352 This is in general the case, however,
proposed Rules 3Ca-3(b) and 3Ch-1(b) would not
apply the mandatory clearing and mandatory trade
execution requirements to transactions between two
non-U.S. persons who are not security-based swap
dealers and whose performances under securitybased swaps are not guaranteed by a U.S. person,
even though such transactions are conducted in the
United States.
1353 This is especially the case with respect to the
public dissemination requirement; however, with
respect to mandatory clearing and mandatory trade
execution requirements, this incentive would not
exist with respect to a non-U.S. person who is not
a security-based swap dealer and whose
performance under security-based swaps is not
guaranteed by a U.S. person, if such non-U.S.
person transacts with another non-U.S. person that
is not a security-based swap dealer and is not
guaranteed by a U.S. person. See note 1352, supra.
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U.S. non-guaranteed counterparty
would not be subject to mandatory
clearing if the transaction were
conducted outside the United States.
Therefore, foreign non-guaranteed
security-based swap dealers and nonU.S. non-guaranteed counterparties may
be motivated to avoid using their U.S.
operations, such as a sales and trading
desk in the United States, to conduct
security-based swaps with nonguaranteed non-U.S. counterparties in
order to avoid application of the
mandatory clearing, public
dissemination, and trade execution
requirements under Title VII. They may
be further motivated to move part of
their operations, such as the sales and
trading desk in the United States that
currently conducts security-based swaps
with non-guaranteed non-U.S.
counterparties to a location outside the
United States.
These potential restructurings may
impact competition in the U.S. market.
On one hand, the ability to restructure
one’s business rather than exit the U.S.
market entirely to avoid application of
Title VII to an entity’s non-U.S.
operations may reduce the number of
entities that exit the market, thus
mitigating the negative effects on
competition described above. On the
other hand, U.S. end users may find that
the only foreign security-based swap
dealers that are willing to deal with
them are those whose security-based
swap business is sufficiently large to
afford the costs of restructuring and of
registration as well as the ensuing
compliance costs associated with
applicable Title VII requirements. To
the extent that smaller dealers continue
to have an incentive to exit the market,
the overall level of competition in the
market may decline.
Moreover, regardless of the response
of dealers to our proposed approach, we
cannot preclude the possibility that
large end users in the United States who
have the resources to restructure their
business also may pursue restructuring
and move part of their business offshore
in order to transact with dealers outside
the reach of Title VII. This may reduce
liquidity within the U.S. market and
provide additional incentives for U.S.
persons and non-U.S. persons to shift a
higher proportion of their security-based
swap business off-shore, further
reducing the level of competition within
the United States. In this scenario, the
competitive frictions caused by the
application, in the cross-border context,
of a de minimis threshold for dealing
activity may affect the ability of small
end users of security-based swaps to
access the security-based swap market
more than large ones, as smaller end
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users are less likely to have the
resources that would enable or justify a
restructuring of their business.
To reduce the likelihood of market
fragmentation and increase U.S.
persons’ access to foreign markets, we
are proposing not to require non-U.S.
persons to count transactions with
foreign branches of U.S. banks toward
their de minimis threshold if the
transactions are conducted outside the
United States.1354 We preliminarily
believe that this would reduce the
incentives of non-U.S. person dealers to
avoid engaging in security-based swap
dealing activity with foreign branches of
U.S. banks. In addition, we are
proposing not to apply certain marketwide transaction-level requirements
(i.e., mandatory clearing, public
dissemination, and mandatory trade
execution requirements) to foreign
branches and non-U.S. persons whose
performance under security-based swap
transactions is guaranteed by a U.S.
person, when foreign branches and
guaranteed non-U.S. persons transact
with non-U.S. persons whose
performance under security-based swap
transactions is not guaranteed by a U.S.
person and who are not registered
security-based swap dealers. This
approach to transaction-level
requirements reduces the likelihood of
conflicting regulations for foreign
branches of U.S. banks and guaranteed
non-U.S. persons operating in foreign
jurisdictions as these jurisdictions adopt
regulatory requirements for securitybased swap participants.
Finally, our proposed cross-border
approach includes a substituted
compliance policy framework that
allows market participants to request
substituted compliance. Substituted
compliance, if granted, would allow
certain security-based swap transactions
or participants to satisfy their
compliance obligations with respect to
the applicable Title VII requirements by
complying with the rules of a foreign
jurisdiction. This should reduce market
participants’ compliance costs by
reducing the effects of duplicative
regulation. Substituted compliance
could encourage foreign firms’
participation in the U.S. market and
U.S. firms’ access to the global market.
This might result in increased
competition between both U.S. and
foreign intermediaries without
compromising the regulatory benefits
intended by the applicable Title VII
requirements.
Conflicting regulations may impose a
legal barrier to entry that goes beyond
1354 See proposed Rule 3a71–3(b) under the
Exchange Act.
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firms’ willingness to participate in U.S.
markets as a result of duplicative
compliance costs. In these cases,
substituted compliance determinations
may remove this legal barrier, even if
offered conditionally, and allow market
participants to more easily access U.S.
markets. This may also facilitate U.S.
participants’ access to foreign liquidity.
Access to more liquidity providers and
infrastructure services, as well as the
general benefits of increased market
participation, should promote
competition in the security-based swap
market.
The overall effects of the proposed
approach described in this release on
competition among dealing entities in
the U.S. security-based swap market
will depend on the way market
participants respond to these different
elements of our proposal. For example,
suppose the proposed application of the
security-based swap dealer registration
requirement increases concentration
among security-based swap dealers
providing services to U.S. end users.
Application of market-wide transactionlevel requirements that facilitate
competition (as discussed further
below) may offset any competitive
effects caused by increased
concentration. Fewer dealing entities
may lead to decreased competition and
wider spreads in the security-based
swap market; however, implementation
of the public dissemination and
mandatory trade execution requirements
would increase pre-trade and post-trade
transparency, making it more difficult
for dealing entities to post wider
spreads.1355
i. Registration of Clearing Agencies,
SDRs and SB SEFs
The Commission has considered the
effects of the proposed application in
the cross-border context, of the
registration requirements with respect to
clearing agencies, SDRs, and SB SEFs on
competition in the U.S. security-based
swap market.
The proposed approach to applying
the registration requirements with
respect to security-based swap market
infrastructures is based on whether a
CCP, a data repository, or a securitybased swap trading facility has
performed the type of activity in the
United States or with respect to U.S.
persons that constitutes clearing
services, data repository services, or
trading facility services within the
meaning of the Exchange Act that would
trigger the registration requirement. One
of the indicators of performing securitybased swap infrastructure services in
the United States is to provide such
services to a U.S. person. In the case of
clearing services, this would include
accepting a U.S. person as a member of
a CCP. Similar to our analysis of the
effects of the proposed application of
the security-based swap dealer
registration requirement on competition
in the cross-border context, we are
mindful that the proposed approach
would directly affect the total number of
clearing agencies, SDRs, and SB SEFs
that would be required to register with
the Commission. Registration would
trigger certain Title VII requirements,
which would entail compliance costs.
Certain CCPs, data repositories, or
security-based swap trading facilities
may choose to withdraw from the U.S.
market to avoid registration.
However, the burden on competition
imposed by the proposed approach to
infrastructure registration requirements
would likely be less acute than the
security-based swap dealer registration
requirement. Clearing, trade reporting,
and execution on trading platforms are
relatively recent services for the
security-based swap market, and only a
limited number of CCPs, trade
repositories, and execution facilities
currently perform these services 1356 and
may therefore be required to register
under the Dodd-Frank Act. In addition,
the proposed interpretation with respect
to availability of an exemption from
registration for foreign SB SEFs should
reduce or eliminate the duplicative
regulatory costs for foreign SB SEFs
subject to comparable regulatory
requirements and increase the
likelihood that foreign SB SEFs will
enter the United States, which, in turn,
would increase competition.
Nonetheless, the proposed application
of Title VII regulation in the crossborder context generates competitive
frictions similar to those discussed
above in the context of dealers. Broadly,
providers of security-based swap
infrastructure may seek to limit their
exposure to the U.S. portion of the
market in order to avoid Title VII
1355 Michael A. Goldstein, Edith S. Hotchkiss, and
Erik R. Sirri, ‘‘Transparency and Liquidity: A
Controlled Experiment on Corporate Bonds,’’
Review of Financial Studies, Vol. 20, No. 2 (2007)
(using a controlled experiment in the BBB bond
market to show how, in some cases, spreads on
newly post-trade transparent bonds decline relative
to bonds that remain opaque).
1356 See Clearing Agency Standards Adopting
Release, 77 FR 66258 (estimating that between
seven and 10 entities would be likely to register as
CCPs); SDR Proposing Release, 75 FR 77347 n.207
(estimating that 10 entities would be likely to
register as SDRs); SB SEF Proposing Release, 76 FR
11023 (estimating that up to 20 entities could seek
to register as SB SEFs).
(b) Security-Based Swap Market
Infrastructure Requirements
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regulation. For example, a foreign CCP
that does not otherwise perform clearing
services in the United States may refuse
to accept U.S. persons as members to
avoid registration and compliance costs,
which would limit U.S. persons’ access
to foreign clearing services to
correspondent arrangements. Similar
arguments apply to U.S. persons’ access
to execution venues and data
repositories.
The Commission also has considered
the ways in which the structure of the
market for infrastructure services may
affect the benefits that flow from certain
Title VII regulations. Providing
incentives for entry of SDRs could result
in fragmentation of regulatory data
across multiple repositories, which
would complicate oversight of the
security-based swap market and require
that regulators take additional steps to
consolidate data sets.1357 In this release,
the Commission has proposed the
availability of conditional exemptive
relief for non-U.S. persons performing
SDR functions that potentially reduces
the number of SDRs that would receive
regulatory data.1358 thnsp; Further, the
proposed indemnification exemption
may discourage the establishment of
SDRs on jurisdictional lines.1359
Similarly, a single CCP serving the
entire security-based swap market may
result in more effective netting of
offsetting positions among members,
potentially reducing aggregate
counterparty risk borne by the CCP and
making risk management less costly.1360
Indeed, high fixed costs and low
variable costs associated with the
provision of clearing services may
contribute to a natural monopoly in this
market. A second benefit of a single CCP
is that it would preclude the possibility
that risk management standards could
erode as CCPs compete for clearing
business. However, if the market
evolves so that a single CCP emerges, it
could require additional regulatory
monitoring to address issues associated
with natural monopolies.1361
These arguments are less clear in the
case of SB SEFs. Evidence from equity
1357 See
Section VI.B, supra.
Section XV.H.1(a)(ii), infra.
1359 See Section XV.H.2, infra.
1360 See Craig Pirrong, ‘‘The Economics of Central
Clearing: Theory and Practice,’’ ISDA Discussion
Papers Series, No. 1 (2011). Concentration of risk
in a CCP can itself also become a source of systemic
risk. See Section II.A.6.(c), supra.
1361 See, e.g., Section 17A(b)(3)(D) of the
Exchange Act, 15 U.S.C. 78q–1(b)(3)(D) (requiring
that the rules of a ‘‘clearing agency provide for the
equitable allocation of reasonable dues, fees, and
other charges among its participants’’). See also
Kenneth Train, ‘‘Optimal Regulation: The Economic
Theory of Natural Monopoly,’’ Cambridge: The MIT
Press (1991) (discussing price regulation of natural
monopolies).
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1358 See
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markets seems to indicate benefits from
both consolidation and
fragmentation.1362 On the one hand,
some research supports the conclusion
that consolidation of order flow onto a
small number of trading venues may
facilitate efficient matching between
supply and demand, reduce price
volatility within the trading venue,1363
and reduce spreads.1364 On the other
hand, other researchers have found that
the competitive effects flowing from
multiple trading venues can outweigh
the effects of fragmentation, resulting in
more efficient pricing and narrower
spreads.1365
The Commission has considered the
above effects and proposed a crossborder approach that would require a
CCP or execution facility to register if it
performs clearing agency function in the
United States or operates a facility for
the trading or processing of securitybased swaps in the United States or
with respect to U.S. persons. Similarly,
the Commission has proposed an
approach that would require a trade
repository to register if it performs SDR
functions within the United States. The
Commission preliminarily believes that
this approach would promote
transparency, improve systemic risk
management, and allow better
regulatory oversight, which in turn,
would encourage broader market
participation in the U.S. security-based
swap market.
ii. Application of Mandatory Clearing,
Public Dissemination, Regulatory
Reporting, and Trade Execution
Requirements in the Cross-Border
Context
The proposed application of the
market-wide transaction-level
requirements to cross-border activities
may have significant effects on
competition in the U.S. security-based
swap market. As noted above, the
Commission is proposing an approach
that would generally apply Title VII
1362 See Haim Mendelson, ‘‘Consolidation,
Fragmentation and Market Performance,’’ Journal of
Financial and Quantitative Analysis, Vol. 22, Issue
2 (1987) (using a theoretical model to examine the
tradeoffs between consolidation and fragmentation).
See also James L. Hamilton, ‘‘Marketplace
Fragmentation, Competition, and the Efficiency of
the Stock Exchange,’’ Journal of Finance, Vol. 34,
Issue 1 (1979) (examining data from the NYSE and
showing that off-board trading that competes with
specialists tends to reduce spreads more than the
fragmentation of trade tends to increase them).
1363 See Mendelson, note 1362, supra.
1364 See Pankaj Jain, ‘‘Institutional Design and
Liquidity at Stock Exchanges around the World,’’
Working Paper (2003). Using data on institutional
features of stock exchanges around the world, the
author observes that consolidated order flow is
associated with lower spreads.
1365 See Hamilton, note 1362, supra.
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transaction-level requirements evenly to
persons who conduct security-based
swap activity with U.S. persons or
within the United States.1366 Because
these requirements are generally applied
evenly and expansively in the United
States, a foreign person who wishes to
avoid clearing, public dissemination, or
pre-trade transparency requirements
would have to avoid either transacting
with U.S. persons or involving a U.S.
person as agent in negotiating,
soliciting, or executing security-based
swap transactions on its behalf within
the United States.1367
Notwithstanding a possible reduction
in competition, the Commission
believes that these market-wide
transaction-level requirements should
be applied to such transactions because
they reduce systemic risk, promote
transparency, and improve regulatory
oversight. All of these contribute to the
integrity and efficiency of the U.S.
security-based swap market and should
increase competition among those who
choose to participate under Title VII.
The proposed cross-border approach
would generally not apply the marketwide transaction-level requirements to
foreign branches and non-U.S. persons
whose performance under securitybased swap transactions is guaranteed
by a U.S. person, when foreign branches
and guaranteed non-U.S. persons
transact with non-U.S. persons whose
performance under security-based swap
transactions is not guaranteed by a U.S.
person and who are not registered
security-based swap dealers. As stated
in the competition analysis with respect
to security-based swap dealers,1368 this
proposed approach would facilitate
U.S.-based dealing entities’ access to
foreign markets and help prevent market
fragmentation. However, the guarantees
provided by U.S. persons remain a
conduit for systemic risk to be
transmitted to the United States.
However, the Commission is mindful
that, in the near term and until full
implementation of transparency
requirements in the other jurisdictions
that are comparable to the U.S. marketwide transaction-level requirements, if
1366 See the proposed definition of ‘‘transaction
conducted within the United States’’ in proposed
Rule 3a71–3(a)(5) under the Exchange Act and
notes 1340 and 1341 above.
1367 However, with respect to the mandatory
clearing and mandatory trade execution
requirements, transactions between two non-U.S.
persons whose performance of obligations under
security-based swaps is not guaranteed by U.S.
persons and who are not security-based swap
dealers would not be subject to mandatory clearing
and mandatory trade execution even though these
transactions are conducted within the United
States. See proposed Rules 3Ca–3 and 3Ch–1 under
the Exchange Act.
1368 See Section XV.C.2(a), supra.
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any part of the global market is left
opaque without either public
dissemination or pre-trade transparency,
there may be opportunities for market
participants to restructure and move
their transactions to the OTC part of the
global market. The value of
transparency in the U.S. market would
be reduced to the extent that liquidity
migrates to less-transparent
jurisdictions.
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3. Efficiency
As noted above, in proposing the
rules and interpretations discussed in
this release, we are required to consider
whether these actions would promote
efficiency. In significant part, the effects
of our proposed cross-border approach
on efficiency are linked to the effects on
competition. Minimizing impediments
to access to the security-based swaps
not only promotes competition, but also
encourages participants to express their
true valuation for security-based swaps
and, as a result, is expected to promote
efficiency. Generally, rules and
interpretations that delineate an
appropriate scope of application of the
Title VII requirements can be expected
to promote the efficient allocation of
risk, capital, and other resources by
facilitating price discovery and reducing
costs associated with dislocations in the
market for security-based swaps.
The proposed application of Title VII
rules to cross-border transactions
potentially increases the volume of
transactions that will take place on
transparent venues. For example, while
the proposed rules allow exceptions to
the mandatory trade execution
requirement for certain transactions
involving a foreign branch of a U.S.
bank or a guaranteed non-U.S. person as
one counterparty, these exceptions do
not apply when a foreign security-based
swap dealer is the other counterparty to
the transactions, and such transactions
would be exposed to pre-trade
transparency on SB SEFs or exchanges.
As stated above, the OTC security-based
swap market is characterized by search
frictions and asymmetric
information.1369 Currently, in order to
trade, market participants must contact
intermediaries on a bilateral basis to
locate counterparties. Intermediaries
may capture these search costs by
behaving less competitively. Searchbased inefficiencies in the bilateral OTC
market manifest explicitly in the costs
of matching with counterparties and are
implicit in the somewhat wider spreads
that dealers might quote as a strategic
1369 See
SB SEF Proposing Release, 76 FR 10949.
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response to customer search costs.1370
In addition, large intermediaries who
observe vast volumes of order flows
from the breadth of their customer base
have an informational advantage over
customers or small dealers who observe
less order flow. This means that end
users potentially face adverse selection
in addition to search costs which may
reduce their willingness to participate
in the security-based swap market even
when they might benefit from increased
risk-sharing.
In markets with impartial access, such
as those characterized by our proposed
regime for SB SEFs, participants would
face lower search costs when they
decide to enter or exit a security-based
swap position. Moreover, access to the
security-based swap market would be
available to more participants,
increasing the likelihood of efficient
reallocation of risks carried by securitybased swap contracts.1371 At the same
time, pre- and post-trade transparency
requirements under Title VII reduce
dealers’ ability to benefit from private
information that comes from observing
order flow.1372 This change may
increase the willingness of market
participants to lay off risks they are
relatively less-equipped to bear.
Increased liquidity in a transparent
security-based swap market should
facilitate price discovery.1373
Increased price efficiency in the
security-based swap market, in turn,
produces important externalities.
1370 See Darrell Duffie, Nicolae Garleanu, and
Lasse Heje Pedersen, ‘‘Over-the-Counter Markets,’’
Econometrica, Vol. 73, Issue 6 (2005) (using a
theoretical model of an over-the-counter market to
show a reduction in spreads when investors have
easier access to multiple counterparties).
1371 See John Cochrane, Asset Pricing, Princeton
University Press, Princeton, NJ (2001). Chapter 3
discusses the role of securities markets, new
securities, and financial innovation in allowing
individuals to share and diversify risks.
1372 We recognize that intermediaries’
informational advantage may not be completely
eliminated by the mandatory trade execution and
public dissemination requirements. For example,
intermediaries would have the advantage of seeing
order flows or inquiries that are not ultimately
executed and disseminated. In addition, the
executing intermediary still has informational
advantage from knowing the counterparty’s
identity, and intermediaries may know about an
order or inquiry before anyone else in the market.
1373 See Terrence Hendershott and Charles M.
Jones, ‘‘Island Goes Dark: Transparency,
Fragmentation, and Regulation,’’ Review of
Financial Studies, Vol. 18, No. 3 (2005) (showing
that a decrease in limit order book transparency on
Island was followed by substantial price discovery
movement from the ETF market to the futures
market). See also Bengt Holmstrom and Jean Tirole,
‘‘Market Liquidity and Performance Monitoring,’’
Journal of Political Economy, Vol. 101, No. 4 (1993)
(using a theoretical model to show how increased
liquidity can increase the marginal value of
information and the informativeness of stock
prices).
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Transparency in the security-based
swap market could result in more
accurate valuation of security-based
swaps generally, as all market
participants would have the benefit of
knowing how counterparties to a
security-based swap valued the securitybased swap at a specific moment in
time.1374 Especially with complex
instruments, investment decisions
generally are predicated on a significant
amount of due diligence to value the
instrument properly. A post-trade
transparency system permits other
market participants to derive at least
some informational benefit from
obtaining the views of the two
counterparties who traded that
instrument. Finally, central clearing of
security-based swaps could make it
easier for market participants who
observe prices to disentangle the default
risk of counterparties from the
fundamental risks priced into the
underlying contract. This has the benefit
of enhancing the incremental price
discovery already associated with the
transparency requirements.
Better valuations could have a
significant impact on efficiency and
capital allocation. In particular, under
the pre-trade and post-trade
transparency regimes contemplated by
Title VII, persons outside the securitybased swap market could use
information produced and aggregated by
the security-based swap market as an
input to both real investment decisions
as well as financial investments in
related markets for equity and debt.1375
By helping asset valuations move closer
to their fundamental values,
transparency encourages efficient
capital allocation.1376
In the cross-border context, our
proposed approach generally applies the
full range of Title VII requirements
(including mandatory clearing,
regulatory reporting, public
dissemination, and mandatory trade
execution requirements) to transactions
with U.S. persons and transactions
conducted within the United States,1377
with the objective of promoting
1374 See Regulation SBSR Proposing Release, 75
FR 75281.
1375 See Philip Bond, Alex Edmans, and Itay
Goldstein, ‘‘The Real Effects of Financial Markets,’’
Annual Review of Financial Economics, Vol. 4 (Oct.
2012) (reviewing the theoretical literature on the
feedback between financial market price and the
real economy). See also Sugato Chakravarty,
Huseyin Gulen, and Stewart Mayhew, ‘‘Informed
Trading in Stock and Option Markets,’’ Journal of
Finance, Vol. 59, No. 3 (2004) (estimating that the
proportion of information about underlying stocks
revealed first in option markets ranges from 10 to
20 percent).
1376 See Regulation SBSR Proposing Release, 75
FR 75281.
1377 See note 1367, supra.
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transparency and efficiency in the U.S.
security-based swap market. For
example, as noted above,1378 the
Commission is re-proposing certain
provisions of Regulation SBSR to,
among other things, extend the scope of
security-based swaps that would be
subject to regulatory reporting and
public dissemination. As a result of the
re-proposal, more transactions with a
nexus to the United States would be
reported to SDRs and thus would be
made available to regulators.1379
Furthermore, by possessing more
comprehensive data on security-based
swap transactions, regulators will be
able to observe pockets of risk in the
global marketplace that heretofore
would not have been accessible to them.
Early awareness of such risks provided
by access to such data may enable
regulators to respond by taking actions
to mitigate the potential impact of such
risks on the market, which could in turn
prevent the deterioration of market
conditions that could result if such risks
remain hidden.
Besides impacts on price efficiency
and the efficient allocation of capital,
the Commission also has considered
more generally the impact of the rules
and interpretations in this release on the
efficient use of resources. In our reproposal of Regulation SBSR, the
Commission is revising our approach to
assigning the reporting duty to place
less emphasis on the domicile of the
counterparties, and to focus more on
their status (i.e., whether or not a
counterparty is a security-based swap
dealer or major security-based swap
participant).1380 We preliminarily
believe that the revisions in the reproposal reallocate the reporting burden
to those entities that face a relatively
lower cost of reporting, thus promoting
efficiency. These revisions are designed
to assign the responsibility to report a
security-based swap transaction to
persons that the Commission
preliminarily believes are more easily
able to fulfill that responsibility, and in
a manner consistent with the reporting
hierarchy set forth in Section 13A(a)(3)
of the Exchange Act.1381 In addition, the
1378 See
Section VIII, supra.
to corresponding impacts on the market
not realized under Rule 908(a) as originally
proposed, under the re-proposal, security-based
swap transactions executed outside the United
States by a non-U.S. person direct counterparty but
performance of which is guaranteed by a U.S.
person would now be subject to regulatory
reporting.
1380 See Section VIII, supra (describing the
Regulation SBSR re-proposal).
1381 15 U.S.C. 78m–1(a)(3). Section 13A(a)(3) of
the Exchange Act assigns to specific kinds of
counterparties the duty to report uncleared
security-based swaps to an SDR or to the
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Commission expects any transaction
reporting systems implemented by
security-based swap dealers and major
security-based swap participants to be
automated.
However, we recognize that certain
aspects of our proposal may reduce
efficiency in the U.S. security-based
swap market. Increasing market
transparency, in some instances, may
cause certain market participants to
abstain from trading that would
otherwise be efficient. For example,
market participants might be less
willing to trade on centralized,
transparent markets if it means exposing
their trading strategies to their
competitors.1382
Further, as we noted in our
competition analysis, various
jurisdictions are developing
transparency rules at different paces. If
stringent regulation under Title VII
results in less access for U.S. persons to
foreign segments of the security-based
swap market, opportunities for efficient
risk-sharing may correspondingly
decline. Furthermore, to the extent that
we have implemented the transparency
requirements and the other jurisdictions
have not (or to the extent that the scope
of the transparency requirement among
various jurisdictions is not comparable),
market participants may have an
incentive to restructure their business in
order to move transactions to opaque
corners of the global security-based
swap market.
If such restructuring results in a large
and opaque market outside the reach of
Title VII at the expense of liquidity in
a transparent market regulated under
Title VII, the efficiency benefits of Title
VII would be undermined, in terms of
price efficiency, efficient risk-sharing,
and the efficient allocation of capital
across real and financial assets.
Commission. The Commission previously noted
that it ‘‘understands that many reporting parties
already have established linkages to entities that
may register as [SDRs], which could significantly
reduce the out-of-pocket costs associated with
establishing the reporting function.’’ See Regulation
SBSR Proposing Release, 75 FR 75249 n. 193. The
Commission preliminarily believes that the
additional cost for non-U.S. person security-based
swap dealers and major security-based swap
participants absorbing the costs of reporting these
additional transactions should be de minimis, since
these larger market participants have likely already
taken significant steps to establish and maintain the
systems, processes, and procedures, and have likely
devoted staff resources to report security-based
swaps currently to existing data repositories. See
Section XV.H.3(a)(ii), infra.
1382 See, e.g., Ananth Madhavan, et al., ‘‘Should
Securities Markets Be Transparent?’’ J. of Fin.
Markets, Vol. 8 (2005) (finding that an increase in
pre-trade price transparency leads to lower liquidity
and higher execution costs, because limit-order
traders are reluctant to submit orders given that
their orders essentially represent free options to
other traders).
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Moreover, insofar as the types of
restructuring contemplated above
purely constitute attempts at regulatory
arbitrage, they represent a use of
resources that could potentially be put
to more productive uses. In addition,
the effect of the proposed application of
the Title VII requirements described in
this release on efficiency also would be
affected by the substantive rules we
ultimately adopted to implement the
relevant Title VII requirements.
In the cross-border context, we try to
strike a balance between promoting
efficiency in the U.S. security-based
swap market and mitigating potential
disruptions to other parts of the global
market by including certain carve-outs
in our proposed application of marketwide transaction-level requirements.1383
These exceptions are designed to enable
foreign branches and foreign affiliates
whose performance under securitybased swaps is guaranteed by a U.S.
person to maintain access to other parts
of the global security-based swap
markets when they transact with nonU.S. persons whose performance under
security-based swaps is not guaranteed
by a U.S. person. This should help
ensure that U.S. banks operating
through foreign branches and foreign
affiliates of U.S. persons are able to
continue to access global liquidity.
However, as stated in our analysis of
competition effects, the tradeoff is that
the guarantees provided by U.S. persons
represent a conduit for systemic risk to
flow to the United States.
By seeking to minimize, where
appropriate, interruption to existing
relationships of U.S. banks and foreign
affiliates of U.S. persons with foreign
market participants, the Commission’s
proposed cross-border approach could
help preserve existing conduits for
global risk-sharing. We considered this
benefit and the efficiency costs that may
result because these transactions are not
occurring in the transparent market
envisioned under Title VII.
Finally, recognizing that the U.S.
security-based swap market is an
integral part of the global security-based
swap market, the Commission has
proposed exemptive relief from
registration for foreign SB SEFs and
SDRs in certain cases. The
Commission’s proposal to consider an
exemption from SB SEF registration for
foreign security-based swap markets
may facilitate the consolidation of
global order flow onto certain particular
trading venues for security-based swap
contracts written on certain reference
1383 See proposed Rule 3Ca–3(b), proposed Rule
3Ch–1(b), and re-proposed Rule 908(a)(2) under the
Exchange Act.
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entities. The Commission believes this
may promote participation in the
transparent market and, in turn, market
efficiency, without sacrificing the
benefits of requiring SB SEF
registration.
The proposed exemptive relief for
non-U.S. persons performing the
functions of SDRs within the United
States would allow non-U.S. persons to
continue to receive data reported
pursuant to the reporting requirements
of a foreign jurisdiction without
registering with the Commission as an
SDR, subject to a condition that would
help ensure that the confidentiality of
the data and Commission access to data
is maintained. The potential for
exemptive relief from SDR registration
requirements might reduce the incentive
for market participants to restructure
their operations to avoid triggering
registration requirements.1384 Further,
the potential for an Indemnification
Exception, proposed in this release,
could reduce the potential for SDRs to
be established along purely
jurisdictional lines.1385
Similarly, the proposed cross-border
approach permits substituted
compliance in certain circumstances if
the Commission determines that the
applicable foreign regulatory
requirements are comparable to the
related Title VII requirements. By
allowing certain security-based swap
transactions or participants to satisfy
their compliance obligations with
respect to the applicable Title VII
requirements by complying with the
rules of a foreign jurisdiction,
duplicative compliance costs could be
reduced and compliance burdens
minimized. This could allow securitybased swap counterparties to operate
more efficiently, as by allocating
resources to other activities, such as
improving operational efficiency or
engaging in other investment activity.
Therefore, the possibility of substituted
compliance would encourage foreign
firms’ participation in the U.S. market
and would help preserve U.S. firms’
access to the other parts of the global
market, while helping to ensure that
substantially equivalent regulatory
benefits are generated by meeting
foreign regulatory standards comparable
to Title VII.
(4) Capital Formation
The Commission preliminarily
believes that many aspects of the
proposed cross-border approach are
likely to promote capital formation. As
1384 See
1385 See
Section XV.H.1(b)(i), infra.
Section XV.H.2, infra.
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mentioned above,1386 a security-based
swap market with pre-trade and posttrade price transparency, and enhanced
regulatory oversight may facilitate entry
by a wide range of market participants
seeking to engage in a broad range of
hedging and trading activities. However,
we recognize that, to the extent that
Title VII imposes barriers to entry and
access, or results in market
fragmentation, it may impair capital
formation and result in a redistribution
of capital across jurisdictional
boundaries.
As stated above, pre- and post-trade
transparency should result in more
accurate valuation, which should
promote efficient allocation of
capital.1387 In general, market
participants benefit from knowing how
counterparties to a security-based swap
transaction value the security-based
swap at a specific moment in time;
information revealed through pre- and
post-trade transparency allows market
participants to derive more-informed
assessments with respect to asset
valuations, leading to more efficient
capital allocation. This should be true
for the underlying assets as well. That
is, information learned from securitybased swap quoting and trading
provides signals not only about securitybased swap valuation, but also about the
value of the reference assets underlying
the swap. Similarly, we expect pre- and
post-trade transparency to benefit the
real economy as well. Transparent
prices provide better signals about the
quality of a business investment,
promoting capital formation in the real
economy by helping managers to make
more-informed decisions and making it
easier for firms to obtain financing for
new business opportunities.1388
Furthermore, as discussed above, our
proposed cross-border approach strives
to address the disruptions that
implementation of Title VII may cause
to the foreign branch of U.S. banks and
foreign affiliates of U.S. persons by
proposing certain exceptions to the
application of the de minimis exception
to security-based swap dealer
registration1389 and the market-wide
transaction-level requirements.1390 We
preliminarily believe that by doing so,
our proposed cross-border approach to
1386 See Section XV.C.3, supra (discussing the
effects of our proposed cross-border approach on
efficiency).
1387 See id.
1388 See Bond, et al. and Chakravarty, et al., note
1211, supra.
1389 See proposed Rule 3a71–3(b), proposed Rule
3Ca-3(b), proposed Rule 3Ch-1(b), and re-proposed
Rule 908(a)(2) under the Exchange Act. See also
Section XV.C.3, supra (discussing the effects of our
proposed cross-border approach on efficiency).
1390 See Sections VIII.C, IX.C, and X.B.3, supra.
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application of the Title VII
requirements, as a whole, would
address the disruptions to the global
security-based swap market. Integrated
markets provide more risk-sharing
opportunities, which encourages
efficient risk-sharing and capital
allocation; the more integrated U.S.
participants are into the global securitybased swap market, the more access,
liquidity, and participation we would
expect to see in both the U.S. securitybased swap market and the global
security-based swap market as a whole.
Similarly, the proposed policy
framework of substituted compliance
should encourage foreign firms’
participation in the U.S. security-based
swap market and facilitate U.S. firms’
access to the other parts of the global
market while helping to ensure that the
regulatory benefits of the applicable
Title VII requirements are achieved by
requiring the related foreign regulatory
standards to be comparable to the
requirements of Title VII. Substituted
compliance is designed to accommodate
the global nature of the security-based
swap market and, therefore, should
similarly help the security-based swap
market continue to integrate various
segments or subparts of the markets. As
stated above, the integration of the U.S.
market into the global market should
encourage efficient global risk-sharing,
which should, in turn, potentially free
up more capital for investment in real
assets.
Request for Comment
The Commission generally requests
comment about our preliminary analysis
of the effects of our proposal on
efficiency, competition, and capital
formation. In particular, the
Commission requests comment on any
effect the proposed rules, rule
amendments, and interpretations may
have on efficiency, competition, and
capital formation, including the
competitive or anticompetitive effects
the proposed rule may have on market
participants.
D. Economic Analysis of Proposed Rules
Regarding ‘‘Security-Based Swap
Dealers’’ and ‘‘Major Security-Based
Swap Participants’’
To promote the goals of reduced risk,
increased transparency, and improved
market integrity in the financial system,
Title VII of the Dodd-Frank Act requires,
among other things, registration and
regulation of security-based swap
dealers and major security-based swap
participants. The Commission and the
CFTC jointly adopted final rules in 2012
to further define ‘‘security-based swap
dealer’’ and ‘‘major security-based swap
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participant.’’ 1391 Of particular
importance is the de minimis exception
to dealing activity, which excepts a
dealer in security-based swaps from the
definition and designation of ‘‘securitybased swap dealer’’ if the notional
amount of its dealing activity in the
trailing 12-month period is below a
particular threshold. As discussed in the
Intermediary Definitions Adopting
Release, the costs and benefits of the
dealer and participant definitions fall
into two categories. First, there are costs
and benefits associated with identifying
a subset of current and future market
participants as either security-based
swap dealers or major security-based
swap participants (i.e., the assessment
costs). Second, there are costs and
benefits associated with subjecting that
subset to a complete, fully effective
complement of Title VII statutory and
regulatory requirements (i.e., the
programmatic costs and benefits).
In the Intermediary Definitions
Adopting Release, the Commission
estimated that, out of more than 1,000
entities engaged in CDS activity
worldwide in 2011, 166 had worldwide
CDS activity at a level high enough such
that they would perform the dealertrader analysis prescribed under the
security-based swap dealer definition.
Furthermore, based on an analysis of
trading activity using DTCC–TIW data,
the Commission estimated that, based
on their global trading volumes,
potentially 50 of these entities would
exceed the de minimis threshold and
thus ultimately have to register as
security-based swap dealers. Similarly,
based on position data from DTCC–TIW,
the Commission estimated that, based
on positions arising from their
worldwide CDS activity, as many as 12
entities would perform substantial
position and substantial counterparty
exposure tests prescribed under the
major security-based swap participant
definition.
These estimates represent a baseline
against which the Commission can
analyze the costs and benefits of the
proposed application of the
intermediary definitions to cross-border
activities. More specifically, because the
proposed cross-border rules would
allow non-U.S. persons to exclude from
the de minimis and major participant
thresholds certain transactions and
positions with non-U.S. counterparties,
the ultimate number of entities that
would exceed the dealer de minimis or
the major participant thresholds will
likely be lower than estimated in the
Intermediary Definitions Adopting
1391 See Intermediary Definitions Adopting
Release, 77 FR 30596.
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Release, and this decline will have a
corresponding impact on the
programmatic costs and benefits
associated with these definitions. On
the other hand, the cross-border rules
are likely to increase assessment costs,
as certain non-U.S. persons may need to
determine which transactions and
positions may be excluded from the
thresholds. These costs and benefits are
discussed more fully below.
1. Programmatic Costs and Benefits
(a) Registration of Security-based Swap
Dealers and Major Security-Based Swap
Participants
Title VII requires the registration of
security-based swap dealers and major
security-based swap participants in
accordance with rules promulgated by
the Commission.1392 The Commission
proposed rules and forms to facilitate
registration of security-based swap
dealers and major security-based swap
participants in the Registration
Proposing Release.1393 In that release,
the Commission provided an economic
analysis relating to the proposed
registration requirements and forms.1394
As discussed in more detail therein, the
Commission expects that dealers
engaging in security-based swap activity
exceeding the de minimis amount will
incur costs associated with
registration.1395 In addition, persons
who are not security-based swap dealers
but hold substantial security-based
swap positions that create an especially
high level of risk that could have
systemic impact on the U.S. financial
system will incur costs associated with
registration as a major securities-based
swap participant.1396 Registration will
provide the Commission with
information regarding security-based
swap dealers and major security-based
swap participants, which will enable
the Commission to oversee these
registered entities with respect to their
security-based swap activity and
oversee compliance with the substantive
requirements applicable to them. The
Commission believes that the revisions
included in re-proposed Forms SBSE,
SBSE–A, and SBSE–BD would not
1392 See Section 15F(b)(5) of the Exchange Act, 15
U.S.C. 78o–10(b)(5).
1393 See Registration Proposing Release, 76 FR
65784.
1394 Id. at 65812–19.
1395 In the Registration Proposing Release, the
Commission described the costs we expect securitybased swap dealers and major security-based swap
participants to incur in connection with completing
and filing forms, providing related certifications,
addressing additional requirements in connection
with associated persons, as well as certain
additional costs. See Registration Proposing
Release, 76 FR 65812–19.
1396 Id.
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31135
significantly impact our analysis of the
costs and benefits of the rules and forms
to facilitate registration of securitybased swap dealers and major securitybased swap participants.
(b.) Security-Based Swap Dealers—De
Minimis Exception
Title VII requires entities engaged in
security-based swap dealing activity to
register as security-based swap dealers
unless such transactions constitute only
‘‘a de minimis quantity of security-based
swap dealing’’ and the dealer, therefore,
is sufficiently small not to warrant
regulation as a security-based swap
dealer.1397 The statutory de minimis
exception is silent on its application to
the cross-border security-based swap
dealing activity of U.S. persons and
non-U.S. persons, and the Commission
did not address this issue in the
Intermediary Definitions Adopting
Release. The Commission proposes Rule
3a71–3(b) under the Exchange Act in
this release to address this issue.
Proposed Rule 3a71–3(b)(1) under the
Exchange Act sets forth the application
of the de minimis exception to the
activities of U.S. persons and non-U.S.
persons, describing which securitybased swap transactions conducted in a
dealing capacity should be counted for
purposes of the de minimis exception.
Because proposed Rule 3a71–3(b)(1)
under the Exchange Act would exclude
certain transactions from the de minimis
calculation and thereby may allow
certain entities to remain below the de
minimis threshold, it affects the
programmatic benefits and costs of
security-based swap dealer regulation
under Title VII,1398 as these
programmatic costs depend on the
number of persons that will ultimately
be required to register as security-based
swap dealers as well as the substantive
requirements that are to be adopted in
connection with the security-based
swap dealer regime.
This does not mean, however, that
there would be a one-to-one relationship
between the exclusion of any particular
person as a security-based swap dealer
as a result of the de minimis exception
and any change in the programmatic
benefits and costs that would be
associated with the non-regulation of
that person. In other words, although
Proposed Rule 3a71–3(b)(1) may allow
certain entities to remain below the de
minimis threshold, it does not follow
that the programmatic costs and benefits
will change by an amount proportional
1397 See Section III.C.3(b)(2), supra; see also
Section 3(a)(71)(D) of the Exchange Act, 15 U.S.C.
78c(a)(71)(D), and 17 CFR 240.3a71–2.
1398 See Intermediary Definitions Adopting
Release, 77 FR 30596.
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to the volume of those entities’ dealing
activity. As the Commission explained
in the Intermediary Definitions
Adopting Release, some of the costs and
benefits of regulating an intermediary
may be fixed, while other costs and
benefits of regulation may be variable,
depending on a particular person’s
security-based swap dealing activity.1399
For example, the programmatic benefits
associated with the registration and
regulation of persons engaged in
security-based swap dealing activity—in
other words, the expected mitigation of
risks to the stability and transparency of
the U.S. financial system and to the
protection of counterparties in the
United States—will likely vary
depending on the type and nature of
those persons’ dealing activity.
Estimating the de minimis exception’s
effects on the programmatic costs and
benefits (through including or excluding
any particular person within the
intermediary definition) will be further
complicated by the other proposed rules
regarding application of the entity-level
and transaction-level requirements, as
discussed more fully below.
Given the same limitations on our
ability to conduct a quantitative
assessment of the programmatic costs
and benefits associated with
intermediary definitions as stated in the
Intermediary Definitions Adopting
Release,1400 we believe the methodology
1399 See id. at 30724 (‘‘Some of the costs of
regulating a particular person as a dealer or major
participants, such as costs of registration, may
largely be fixed. At the same time, other costs
associated with regulating that person as a dealer
or major participant (e.g., costs associated with
margin and capital requirements) may be variable,
reflecting the level of the person’s security-based
swap activity. Similarly, the regulatory benefits that
would arise from deeming that person to be a dealer
or major participant (e.g., benefits associated with
increased transparency and efficiency, and reduced
risks faced by customers and counterparties),
although not quantifiable, may be expected to be
variable in a way that reflects the person’s securitybased swap activity.’’).
1400 The limitations stated in the Intermediary
Definitions Adopting Release are those related to (i)
the data available to us and (ii) the set of data we
use to draw inferences from in order to estimate the
number of dealers. See Section XV.B, supra.
With respect to the availability of data, we have
taken into account data obtained from DTCC–TIW,
especially data regarding the activity of participants
in the single-name credit default swap market. See
Intermediary Definitions Adopting Release, 77 FR
30635. We also have considered more limited
publicly available data regarding equity swaps. Id.
at 30636 n.476, and 30637 n.485. The lack of market
data is significant in the context of total return
swaps on equity and debt. We do not have the same
amount of information regarding those products as
we have in connection with the present market for
single name CDS. Id. at 30724 n.1456. We did not
consider data regarding index CDS for purposes of
the economic analysis of the security-based swap
dealer definition because the data for index CDS
encompasses both broad-based security indices and
narrow-based security indices, and ‘‘security-based
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used in the Intermediary Definitions
Adopting Release is appropriate and
potentially most illustrative in
demonstrating our consideration of
programmatic costs and benefits
associated with proposed Rule 3a71–
3(b) under the Exchange Act regarding
application of the de minimis exception
in the definition of security-based swap
dealer.
In the Intermediary Definitions
Adopting Release, we sought to identify
a subset of entities that appear to be the
types of entities for which the statutory
requirements of Title VII were created
based on the volume of their dealing
activity. We then sought to adopt
definitions that would capture these
entities, as Title VII required us to do,
without imposing the costs of Title VII
on those entities for which regulation
currently may not be justified in light of
those purposes. In developing Rule
3a71–2, which establishes the de
minimis threshold for security-based
swap dealers, we took into account data
regarding the security-based swap
market and especially data regarding the
activity—including activity that may be
swap’’ in relevant part encompasses swaps based on
single securities or on narrow-based security
indices. See Section 3(a)(68)(A) of the Exchange
Act, 15 U.S.C. 78c(a)(68)(A); see also Intermediary
Definitions Adopting Release, 77 FR 30635 n.472.
We noted that the definition of security-based
swaps is not limited to single-name CDS but we
believed that the single-name CDS data are
sufficiently representative of the market to help
inform the analysis. See Section XV.B.2 and note
1278, supra, and accompanying text.
With respect to the dataset we use, we have
based, in part, our economic analysis of the
security-based swap dealer definition on certain
data addressed by an analysis regarding the market
for single-name CDS performed by the SEC’s
Division of Risk, Strategy, and Financial Innovation
made available to the public. See ‘‘Information
regarding activities and positions of participants in
the single-name credit default swap market’’ (Mar.
15, 2012), available at: http://www.sec.gov/
comments/s7-39-10/s73910-154.pdf (‘‘CDS Data
Analysis’’). As stated in the Intermediary
Definitions Adopting Release, we believe that the
data underlying the CDS Data Analysis provides
reasonably comprehensive information regarding
the CDS activities and positions of U.S. market
participants, but we noted that the data does not
encompass those CDS that both: (i) do not involve
U.S. counterparties; and (ii) are based on non-U.S.
reference entities. We also noted that the CDS Data
Analysis contains transactions reflecting both
dealing activity and non-dealing activity, including
transactions by persons who may engage in no
dealing activity whatsoever. Id. at 30635–36.
We also recognized in the Intermediary
Definitions Adopting Release, and in our discussion
of the limitations of this data above, that the CDS
Data Analysis may be imperfect as a tool for
identifying dealing activity, given that the presence
or absence of dealing activity ultimately turns upon
the relevant facts and circumstances of an entity’s
security-based swap transactions, as informed by
the dealer-trader distinction. Nonetheless, various
criteria used in the CDS Data Analysis appear to be
useful for identifying apparent dealing activity in
the absence of full analysis of the relevant facts and
circumstances. Id. at 30636.
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suggestive of dealing behavior—of
participants in the single-name CDS
market.1401 Based on the CDS Data
Analysis,1402 we estimated in the
economic analysis of the de minimis
exception to the dealer definition in the
Intermediary Definitions Adopting
Release that 50 or fewer entities
ultimately may have to register as
security-based swap dealers.1403
In developing proposed Rule 3a71–
3(b), we have applied a methodology
and analytical framework similar to that
employed in the Intermediary
Definitions Adopting Release to ensure
that our proposed cross-border approach
captures only those entities that we
believe are likely, because activity
relevant to the statutory dealer
definition as interpreted in the
Intermediary Definitions Adopting
Release occurs with U.S. persons or
otherwise within the United States, to
raise the types of concerns with respect
to the U.S. financial system that Title
VII was intended to address, including
stability, transparency, and counterparty
protection. We continue to believe that
entities engaged in such activity at
levels above the de minimis threshold
may be expected to raise these concerns
and, therefore, warrant regulation under
Title VII as security-based swap dealers.
Conversely, we do not believe that
entities engaged in dealing activity
wholly outside the United States
directly raise these types of concerns
with respect to the U.S. financial
system, and our proposed approach
would not require non-U.S. persons
engaged in dealing activity wholly
1401 See Intermediary Definitions Adopting
Release, 77 FR 30635.
1402 See CDS Data Analysis.
1403 See Intermediary Definitions Adopting
Release, 77 FR 30725 and n.1457. We stated that
this estimate of 50 security-based swap dealers that
would be required to register was a ‘‘conservative’’
estimate. See id. In establishing the de minimis
threshold in that release, we analyzed the
percentage of the market activity that would likely
be attributable to registered security-based swap
dealers under various thresholds and various
screens designed to identify entities that are
engaged in dealing activity. See Intermediary
Definitions Adopting Release, 77 FR 30636; CDS
Data Analysis at 8–21. Our analysis placed
particular weight on the screen that identified
entities that engaged in security-based swap
transactions with three or more counterparties that
themselves were not identified as dealers by ISDA.
See Intermediary Definitions Adopting Release, 77
FR 30636. Twenty-eight firms and corporate groups
satisfied this criterion, and 25 of these entities also
engaged in trading activity over the $3 billion
threshold. See id. Based on this analysis, together
with our expectation that some of the included
corporate groups would register more than a single
security-based swap dealer and that new entrants
may be likely to enter the market, we estimated that
as many as 50 entities would ultimately be required
to register as a security-based swap dealer. See
Intermediary Definitions Adopting Release, 77 FR
30725 n.1457.
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outside the United States to register as
security-based swap dealers.
We recognize that security-based
swap activity outside the United States,
including the activity of foreign persons
that engage in security-based swap
dealing activity wholly outside the
United States, may affect the U.S.
financial system either because the
foreign person’s positions are
guaranteed by a U.S. person or through
risk spillover effects that may arise
from, for example, counterparty
defaults, asset fire sales, capital
shortfalls, and asymmetric information
about the positions of unregistered
persons active in the global network of
security-based swap market
participants. However, to the extent that
the risks presented by an entity engaged
in security-based swap dealing activity
to the U.S. financial system arise solely
from such guarantees or from these
spillover effects, rather than from the
entity engaging in relevant activity
within the United States, we
preliminarily do not believe that Title
VII dealer registration provides the
appropriate mechanism for addressing
these risks.
As we have already discussed, we
believe that Title VII’s dealer
registration requirements are intended
to apply to those entities that pose risks
to the U.S. financial system or to
counterparties in the United States or to
the transparency of the U.S. financial
market by virtue of their dealing activity
within the United States. To the extent
that an entity engaged in dealing
activity wholly outside the United
States poses risks to the U.S. financial
system, we preliminarily believe that
subjecting it to dealer registration and
the related requirements would not
generate the types of programmatic
benefits that Title VII dealer regulation
is intended to produce, as the dealing
activity of such entity poses risks to
counterparties outside the United
States.
Our proposed Rule 3a71–3 identifies
the types of transactions that U.S.
persons and non-U.S. persons engaged
in dealing activity within the United
States, and that may therefore be
expected to raise Title VII concerns,
must count toward their de minimis
threshold. As described above,1404
because dealing activity engaged in by
U.S. persons generally involves activity
within the United States and results in
risks being borne by a person within the
United States, proposed Rule 3a71–
3(b)(1)(i) would require U.S. persons to
count toward their de minimis threshold
all transactions that they enter into in a
dealing capacity, regardless of the
location or U.S.-person status of the
counterparty, including any such
transactions that the dealing entity
conducts through a foreign branch.
Similarly, as we discuss above, because
security-based swap dealing activity
conducted entirely outside the United
States with non-U.S. persons will
generally not give rise to the concerns
addressed by security-based swap dealer
regulation under Title VII within the
United States, proposed Rule 3a71–
3(b)(1)(ii) would require non-U.S.
persons to include in their de minimis
calculation only those transactions
arising out of their dealing activity with
U.S. persons or otherwise conducted
within the United States.
As discussed above, our proposed
rule allows non-U.S. persons to exclude
transactions with foreign branches of
U.S. banks from their de minimis
threshold, if those transactions are
conducted outside the United States.1405
Although requiring non-U.S. persons to
count these transactions toward the de
minimis threshold would be consistent
with the view that a foreign branch is
part of a U.S. person, we are proposing
not to require non-U.S. persons to count
these transactions. As noted above,
since U.S. banks are U.S. persons
subject to certain exemptions, foreign
branches that engage in security-based
swap activity will generally be subject
to applicable provisions of Title VII
(e.g., mandatory clearing, mandatory
trade execution, public dissemination,
and SDR reporting requirements)
regardless of whether their non-U.S.
person counterparty is a registered
security-based swap dealer. If a foreign
branch engages in security-based swap
activity in a dealing capacity with nonU.S. persons outside the United States
exceeding the de minimis level, the
bank (including the foreign branch) will
be required to register as a securitybased swap dealer and the entire bank
will be subject to the entity-level and
transaction-level requirements
discussed above.1406
The security-based swap transactions
excepted from the de minimis
calculation of non-U.S. persons take
place outside the United States.
Requiring non-U.S. persons to count
these transactions occurring in their
foreign local markets could discourage
non-U.S. persons from transacting with
foreign branches, which could increase
the likelihood of market disruption and
fragmentation, including liquidity and
order flow fragmentation, while
decreasing the ability of U.S. banks to
1405 See
1404 See
Section III.B.3, supra.
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PO 00000
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Sections III.C.3 and 4, supra.
Frm 00171
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31137
access foreign markets and foreign
liquidity. Therefore, we preliminarily
believe that the proposed approach to
excepting non-U.S. persons’
transactions with foreign branches
outside the U.S. from the de minimis
calculation would have the benefit of
minimizing disruption to U.S. banks’
access to foreign markets without
significantly diminishing the benefits
that flow from Title VII dealer
regulation and the proposed application
of the de minimis exception in the
cross-border context.
As stated above, the most significant
programmatic effects of the de minimis
exception result from how it changes
the number of entities that are required
to register as security-based swap
dealers. We preliminarily believe that
under our proposed Rule 3a71–3(b)
under the Exchange Act, the number of
entities that may have to register with
the Commission may be somewhat
smaller than the upper bound of 50 that
we estimated in the Intermediary
Definitions Adopting Release and in any
case should not exceed that previous
estimate of 50 or fewer entities.1407 The
1407 See note 1218, supra. After further
experience with the data used in the CDS Data
Analysis, we have estimated the trading activity
and number of counterparties of firms within a
corporate group, which allows us to conduct a more
granular analysis of the potential number of entities
that will be required to register as security-based
swap dealers. In the CDS Data Analysis, we
estimated that 28 entities and corporate groups had
three or more counterparties that are not ISDA
dealers and that 25 of these entities had trailing
notional transactions exceeding $3 billion. See CDS
Data Analysis at 14. Under our refined approach,
which identifies the number of entities within a
corporate group that may have to register, we
estimate that 46 individual firms have three or more
non-ISDA-dealer counterparties; of these, we
estimate that 31 firms also engaged in a total of $3
billion in worldwide security-based swap dealing
activity during 2011. Of these firms, we estimate
that 27 also engaged in at least $3 billion of
security-based swap activity during 2011 that these
entities would be required to count toward their de
minimis threshold under proposed Rule 3a71–3(b).
We further estimate that the aggregation
requirement for unregistered dealers may result in
an additional two firms being required to register,
for a total of 29 security-based swap dealers based
on the current structure of the security-based swap
market.
We continue to believe that an estimate of 50 or
fewer entities that would be required to register
with the Commission as security-based swap
dealers is reasonable in light of this analysis. As
explained in note 1403 above, our estimate of as
many as 50 potential registrants was consistent with
our analysis showing 25 entities that had both three
or more non-ISDA-dealer counterparties and $3
billion or more in trailing notional security-based
swap transactions and our recognition of the
potential for growth in the security-based swap
market, for new entrants into the dealing space, and
the possibility that some corporate groups may
register more than one entity. Because our current
estimate of 29 firms that may be required to register
as security-based swap dealers includes individual
entities within corporate groups (rather than
Continued
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entities that are not captured under our
proposed approach would be those that
engage in security-based swap dealing
activity entirely (or almost entirely)
with non-U.S. persons outside the
United States.
We recognize that the U.S. market
participants and transactions regulated
under Title VII are a subset of the
overall global security-based swap
market and that there may be spillover
risks arising from a foreign entity’s
dealing activity outside the United
States. This spillover risk has the
potential to affect the U.S. financial
system either through that foreign
entity’s transactions with foreign
entities, which, in turn, transact with
U.S. persons (and may, as a result, be
registered security-based swap dealers
or major security-based swap
participants) or through membership in
a clearing agency which may be
providing CCP services in the United
States or have a U.S. person as a
clearing member. We have considered
these spillover risks in connection with
discussing the effects of our proposed
cross-border approach on efficiency,
competition, and capital formation.1408
(c) Major Security-Based Swap
Participants—‘‘Substantial Position’’
and ‘‘Substantial Counterparty
Exposure’’ Thresholds
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Title VII requires a person with a
‘‘substantial position’’ or ‘‘substantial
counterparty exposure’’ in securitybased swaps to register as a major
security-based swap participant. As
described in the Intermediary
Definitions Adopting Release, the
substantial position and substantial
counterparty exposure tests prescribed
by Rules 3a67–3 and 3a67–5 under the
Exchange Act seek to capture persons
whose security-based swap positions
pose sufficient risk to counterparties
and the markets generally, thus,
warranting regulation as a major
security-based swap participant.1409
Furthermore, based on a review of
notional positions maintained in 2011
by entities with single-name CDS
positions, the Commission estimated
treating corporate groups as a single entity), it
accounts for the possibility that some corporate
groups may register more than one security-based
swap dealer. It also accounts for the likely results
of our proposed aggregation requirement. Further
allowing for the possibility of additional new
entrants and growth in the security-based swap
market, while also recognizing the possibility that
our analysis overestimates the volume of dealing
activity (and thus likely dealers), we think that our
analysis in this release remains consistent with our
earlier estimate of 50 or fewer entities.
1408 See Section XV.C.1, supra.
1409 See Intermediary Definitions Adopting
Release, 77 FR 30727.
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that approximately 12 entities may
reasonably find it necessary to engage in
the requisite calculations, and that the
number of major security-based swap
participants likely will be fewer than
five.1410
As proposed, Rule 3a67–10(c) under
the Exchange Act provides that when
determining whether a non-U.S. person
falls within the major security-based
swap participant definition, only
transactions entered into with a U.S.
person 1411 as the counterparty would be
considered.1412 Under this proposed
rule, a non-U.S. person would calculate
its security-based swap positions under
the major security-based swap
definition based solely on its securitybased swap transactions with U.S.
persons as counterparties (including
foreign branches of U.S. banks), and all
security-based swap transactions with
non-U.S. persons would be excluded
from the analysis. We recognize that
there may be indirect spillover risks to
the U.S. financial system resulting from
the security-based swap positions
entered into by non-U.S. persons with
other non-U.S. person counterparties,
but we preliminarily believe that such
indirect risk may be more appropriately
regulated by the foreign regulatory
authorities with responsibilities for such
non-U.S. persons. Similar to the de
minimis exception to dealer designation
and registration, the most significant
programmatic effects of the application
in the cross-border context of the major
participant thresholds flow from the
number of entities that will fall within
the definition of major security-based
swap participant given a particular
threshold. Because non-U.S. persons
must count only transactions with U.S.
counterparties toward the substantial
position and substantial counterparty
exposure thresholds, the final number of
registered major participants may be
lower than the preliminary upper bound
of five estimated in the Intermediary
Definitions Adopting Release.
We also are proposing interpretive
guidance regarding the attribution of
guaranteed positions for purposes of the
major security-based swap participant
calculation. In the Intermediary
Definitions Adopting Release, we
provided interpretive guidance that
requires a person that guarantees or
otherwise provides direct recourse to an
affiliate or guaranteed entity’s securitybased swap counterparties to include
1410 Id.
at 30734.
proposed rule uses the same definition
of ‘‘U.S. person’’ as developed in the context of
foreign security-based swap dealer registration. See
Section III.B.5, supra.
1412 Proposed Rule 3a67–10(c) under the
Exchange Act.
1411 The
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those transactions in its own major
participant calculations.1413 We are
proposing further guidance in this
release regarding the application of this
interpretation in the cross-border
context. As proposed, this guidance
would require U.S. persons that
guarantee the obligations of a non-U.S.
person’s security-based swap
transactions to count those transactions
in their major participant calculations.
Our proposed guidance also would
require a non-U.S. person to include in
its calculations transactions of a U.S.
person that it guarantees and
transactions entered into by a non-U.S.
person with U.S. persons that it
guarantees. A non-U.S. person would
not include in its calculation
transactions it guarantees that are
entered into by a non-U.S. person with
another non-U.S. person.
We preliminarily believe that this
guidance identifies the guaranteed
security-based swap positions that are
likely to pose risks to the U.S. financial
system. Title VII envisions the
establishment of a comprehensive
regulatory regime that will identify,
monitor, and mitigate risks to the U.S.
financial system and protect
counterparties in security-based swap
transactions. Our proposed application
of the major securities-based swap
participant calculation in the crossborder context, and related guidance, is
designed to include only those market
participants whose security-based swap
activity may directly affect the U.S.
financial system in a manner relevant to
the concerns of Title VII.
With respect to U.S. persons that
provide a guarantee, our proposed
interpretive guidance confirms that they
must include in their major securitybased swap participant calculations all
security-based swap transactions that
they guarantee, regardless of the U.S.person status of the guaranteed person
or the status of the counterparty to the
transaction. Such interpretation is
consistent with the rules and
interpretations adopted in the
Intermediary Definitions Adopting
Release. We recognize that attributing
security-based swap positions to the
person guaranteeing another person’s
security-based swap transactions may
increase the number of major
participants and therefore affect the
programmatic benefits discussed above.
As stated in the Intermediary Definition
Adopting Release, we do not currently
possess data relating to the existence of
guarantees of the security-based swap
positions of other parties and thus
1413 See Intermediary Definitions Adopting
Release, 77 FR 30689.
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cannot reasonably estimate the number
of additional entities that may be
brought within the ambit of major
security-based swap participant
regulation by virtue of the interpretation
related to guarantees.1414 However, to
the extent that a guarantee provided by
a U.S. person of the security-based swap
positions of another person, whether
such other person is a U.S. person or a
non-U.S. person, creates the level of
exposure—and corresponding risk to the
U.S. guarantor and the U.S. financial
system—that warrants regulation under
Title VII, it would appear inconsistent
with the purposes of the statute not to
attribute all of the security-based swap
positions guaranteed by a U.S. person to
such U.S. person and subject such U.S.
person to major participant
regulation.1415
Our proposed interpretive guidance
regarding guarantees provided by nonU.S. persons also is likely to have no
effect on the programmatic costs and
benefits of major security-based swap
participant regulation. The proposed
guidance would allow non-U.S. persons
to exclude security-based swap
positions guaranteed by them from their
major security-based swap participant
calculations if the security-based swaps
giving rise to the positions are entered
into by a non-U.S. person with another
non-U.S. person. By contract, non-U.S.
persons would be required to include
security-based swap positions
guaranteed by them in their major
security-based swap participant
calculations if the security-based swaps
are entered into by a non-U.S. person
with a U.S. person. To the extent that
any non-U.S. persons who guarantees
security-based swap positions with U.S.
persons that do not rise to the major
security-based swap participant
thresholds, they are unlikely to pose the
types of risks addressed by the major
security-based swap participant
definition, and, as a result, not requiring
them to register should not reduce the
programmatic benefits that the major
security-based swap participant
definition was intended to achieve.
As stated above, we do not currently
possess data relating to the existence of
guarantees of the security-based swap
positions of other parties and thus
cannot reasonably estimate the number
of additional entities that may be
brought within the ambit of major
security-based swap participant
regulation by virtue of the interpretation
related to guarantees. However, any
non-U.S. person that is required to
1414 See Intermediary Definitions Adopting
Release, 77 FR 30730.
1415 Id.
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register under our proposed approach
because of guarantees extended to U.S.
persons or to non-U.S. persons that have
positions arising from transactions with
U.S. persons would have security-based
swap exposures of the nature and size
that would raise concerns that the major
security-based swap participant
requirements established by Title VII
were intended to address. We therefore
preliminarily believe that the
registration of such persons as major
security-based swap participants would
increase the programmatic benefits of
our rule by ensuring that the risks
presented by such entities to the U.S.
financial system and U.S. counterparties
to such transactions are regulated under
the framework established by Title VII.
Imposing Title VII on such entities
would also increase programmatic costs,
as such entities would be required to
comply with the substantive
requirements of Title VII.
Moreover, where a non-U.S. person’s
home country supervisor has adopted
capital standards consistent in all
respects with the Capital Accord of the
Basel Committee on Banking
Supervision (Basel Accord), to the
extent that such non-U.S. person’s
security-based swap positions are
guaranteed, we preliminarily believe
that it is not necessary to attribute such
guaranteed security-based swap
positions to the guarantor, regardless of
the guarantor’s U.S.-person status. To
the extent that this proposed
interpretive guidance reduces the
number of entities that would be
required to register as major securitybased swap participants as estimated in
the Intermediary Definitions Adopting
Release, we preliminarily believe that it
would not significantly reduce the
programmatic benefits expected under
Title VII because the risk arising from
the guaranteed security-based swap
positions posed to the United States,
and that Title VII was intended to
address, would be addressed by the
foreign regulation of the non-U.S.
person’s capital that is consistent with
the Basel Accord. At the same time,
excluding such entities from the
definition of major security-based swap
participant would further reduce the
programmatic costs associated with the
various requirements that apply to
major security-based swap participants.
2. Assessment Costs
(a) Security-Based Swap Dealers—De
Minimis Exception
Because proposed Rule 3a71–3(b)
explains how the dealer de minimis
exception adopted in Rule 3a71–
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31139
2(a)(1) 1416 should be applied to crossborder dealing activity, the analysis of
the assessment costs relating to the
proposed Rule 3a71–3(b) is closely
related to the analysis of the assessment
costs relating to the dealer
determination described in the
Intermediary Definitions Adopting
Release.1417 Our proposed approach to
the de minimis calculation in the crossborder context would require potential
registrants that are non-U.S. persons, in
assessing the applicability of Title VII’s
dealer registration and regulation
requirements, to apply the new
definitions of ‘‘U.S. person,’’
‘‘transactions conducted within the
United States,’’ and ‘‘transactions
conducted through a foreign branch,’’
which are used in Proposed Rule 3a71–
3(b) of the Exchange Act to identify
transactions that should be included in
the de minimis calculation given the
purposes of Title VII. Our proposed
approach would also allow non-U.S.
persons to exclude from this assessment
and the de minimis calculation securitybased swap transactions with a foreign
branch of a U.S. bank, which would
require them to make a separate
determination that a particular
counterparty satisfies the definition of
‘‘foreign branch.’’
As noted in the Intermediary
Definitions Adopting Release, some
market participants whose securitybased swap activities exceed, or are not
materially below, the de minimis
threshold may be expected to incur
assessment costs in connection with the
dealer analysis.1418 In the Intermediary
Definitions Adopting Release, we
estimated that 123 entities out of over
1,000 entities (U.S. and non-U.S.) that
engaged in single-name CDS
transactions in 2011 had more than $3
billion in single-name CDS transactions
over the previous 12 months.1419 We
also assumed that the 43 entities that
engaged in security-based swap activity
during the trailing 12-month period
totaling between $2 and $3 billion
notional may opt to engage in the dealer
analysis out of an abundance of caution
or to meet internal compliance
requirements, leading to a total of 166
entities.1420 We concluded that this
1416 17
CFR 240.3a71–2(a)(1).
Intermediary Definitions Adopting
Release, 77 FR 30731–32.
1418 Id. at 30731. These assessment costs include
costs associated with analyzing an entity’s securitybased swap activities to determine whether those
activities constitute dealing activity and the costs of
monitoring the volume of dealing activity against
the de minimis threshold.
1419 Intermediary Definitions Adopting Release,
77 FR 30731–32.
1420 Id.
1417 See
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estimate of 166 entities represented a
potential upper bound for the total
assessment costs arising from securitybased swap dealer determinations.1421
To the extent that all of these entities
retain outside counsel to analyze their
status under the security-based swap
dealer definition, including the de
minimis exception, we estimated that
the assessment costs may approach $4.2
million.1422
In considering the assessment costs
associated with the proposed Rule
3a71–3(b), we hold the same
expectation as we noted in the
Intermediary Definitions Adopting
Release that market participants
generally would be aware of the
notional amount of their activity
involving security-based swaps as a
matter of good business practice.
However, as discussed below, proposed
Rule 3a71–3(b) introduces a few
variables that may result in higher
overall assessment costs associated with
the dealer registration analysis for
certain non-U.S. persons that may result
in different aggregate assessment costs
for all entities performing this dealer
analysis from the figure that we
estimated in the Intermediary
Definitions Adopting Release.
Because non-U.S. persons would be
required to count toward the dealer de
minimis threshold only those
transactions they enter into, in a dealing
capacity, with U.S. persons (other than
foreign branches of U.S. banks) or
otherwise conducted within the United
States, we believe that such persons
would likely implement systems to
identify transactions that involve U.S.
persons or that are conducted within the
United States 1423 and monitor the
notional amount of dealing activity
reflected in such transactions.1424 We
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1421 Id.
1422 Id. We estimated that the per-entity cost of
the dealer analysis would be approximately
$25,000. Our estimate of aggregate industry-wide
costs of $4.2 million reflects the costs that may be
incurred by all 166 entities. See id.
1423 See proposed Rule 3a71–3(a)(5) under the
Exchange Act. ‘‘Transactions conducted within the
United States’’ refers to security-based swap
transactions that are solicited, negotiated, or
executed within the United States.
1424 Given the ability of non-U.S. persons under
our proposed rule to exclude certain transactions
from their de minimis calculation, we expect that
potentially all 166 of the entities identified in our
Intermediary Definitions Adopting Release as likely
to perform the dealer analysis may engage in
analysis to determine whether they are U.S.
persons. Because our proposed definition of U.S.
person is relatively straightforward to apply, we
believe that any market participant should be able
readily to identify its U.S.-person status by referring
to its residence status, its principal place of
business, or its organizational documents. To the
extent that an entity seeks the assistance of outside
counsel, we expect that the cost of this analysis will
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preliminarily believe that the costs of
establishing a system capable of
identifying the volume of transactions
with U.S. persons or within the United
States should be similar to the costs
estimated in the Intermediary
Definitions Adopting Release for a
system to monitor positions for
purposes of the major security-based
swap participant thresholds because
such a system would involve
monitoring the total volume of an
entity’s dealing transactions in a system
capable of flagging those transactions
that involve U.S. persons or otherwise
occur within the United States. We
preliminarily believe that this system
would have similar functionality and
requirements to the system that
potential major security-based swap
participants would be likely to adopt in
order to track their exposures for
purposes of the major security-based
swap participant thresholds. In the
Intermediary Definitions Adopting
Release, we noted that entities
establishing such a system would likely
incur one-time programming costs of
$15,287 and ongoing annual systems
costs of $17,040.1425
be encompassed in the $25,000 in assessment costs
that we have estimated in the Intermediary
Definitions Adopting Release. See Intermediary
Definitions Adopting Release, 77 FR 30732.
1425 In the Intermediary Definitions Adopting
Release, we estimated that the one-time
programming costs of $13,692 per entity and annual
ongoing assessment costs of $15,268. See
Intermediary Definitions Adopting Release, 77 FR
30734–35 and accompanying text (providing an
explanation of the methodology used to estimate
these costs). The hourly cost figures in the
Intermediary Definitions Adopting Release for the
positions of Compliance Attorney, Compliance
Manager, Programmer Analyst, and Senior Internal
Auditor were based on data from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2010. For purposes of the cost
estimates in this release, we have updated these
figures with more recent data as follows: the figure
for a Compliance Attorney is $310/hour, the figure
for a Compliance Manager is $269/hour, the figure
for a Programmer Analyst is $234/hour, and the
figure for a Senior Internal Auditor is $217/hour,
each from SIFMA’s Management & Professional
Earnings in the Securities Industry 2011, modified
by SEC staff to account for an 1800-hour work-year
and multiplied by 5.35 to account for bonuses, firm
size, employee benefits, and overhead. We also
have updated the Intermediary Definitions
Adopting Release’s $464/hour figure for a Chief
Financial Officer, which was based on 2011 data.
Using the consumer price index to make an
inflation adjustment to this figure, we have
multiplied the 2011 estimate by 1.02 and arrived at
a figure of $473/hour for a Chief Financial Officer
in 2012. Incorporating these new cost figures, the
updated one-time programming costs based upon
our assumptions regarding the number of hours
required in the Intermediary Definitions Adopting
Release would be $15,287 per entity, i.e.,
(Compliance Attorney at $310 per hour for 2 hours)
+ (Compliance Manager at $269 per hour for 8
hours) + (Programmer Analyst at $234 per hour for
40 hours) + (Senior Internal Auditor at $217 per
hour for 8 hours) + (Chief Financial Officer at $473
per hour for 3 hours) = $15,287, and the annual
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The Commission preliminarily
believes that market participants would
also incur costs arising from the need to
identify and maintain records
concerning the U.S.-person status of
their counterparties and the location of
their transactions. We anticipate that
potential dealers are likely to request
representations from their transaction
counterparties to determine the
counterparties’ U.S.-person status and
whether the transaction was conducted
within the United States. Therefore, the
Commission preliminarily believes that
the assessment costs associated with
determining the status of counterparties
and the location of transactions should
be primarily one-time costs of
establishing a practice or compliance
procedure of requesting and collecting
representations from trading
counterparties and maintaining the
representations collected as part of the
recordkeeping procedures and limited
ongoing costs associated with requesting
and collecting representations. The
Commission preliminarily believes that
such one-time costs would be
approximately $15,160.1426 The
Commission preliminarily believes that
requesting and collecting
representations would be part of the
standardized transaction process
reflected in the policies and procedures
described above regarding securitybased swap sales and trading practices
and should not result in separate
assessment costs.1427
The Commission also considers it
likely that market participants will
implement modifications to the system
described above to monitor counterparty
status for purposes of future trading of
ongoing costs would be $17,040 per entity, i.e.,
((Senior Internal Auditor at $217 per hour for 16
hours) + Compliance Attorney at $310 per hour for
4 hours) + (Compliance Manager at $269 per hour
for 4 hours) + (Chief Financial Officer at $473 per
hour for 4 hours) + (Programmer Analyst at $234
per hour for 40 hours) = $17,040.
1426 This estimate is based on estimated 40 hours
of in-house legal or compliance staff’s time to
establish a procedure of requesting and collecting
representations from trading counterparties, taking
into account that such representation may be built
into form of standardized trading documentation.
Based upon data from SIFMA’s Management &
Professional Earnings in the Securities Industry
2012 (modified by the Commission staff to account
for an 1800-hour-work-year and multiplied by 5.35
to account for bonuses, firm size, employee
benefits, and overhead), the staff estimates that the
average national hourly rate for an in-house
attorney is $379.
1427 There will be ongoing costs associated with
processing representations received from
counterparties, including additional due diligence
and verification to the extent that a counterparty’s
representation is contrary to or inconsistent with
the knowledge of the collecting party. The
Commission believes that these would be
compliance costs encompassed within
programmatic costs associated with the securitybased swap dealer definition.
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security-based swaps. The Commission
preliminarily believes that there would
be one-time programming costs
associated with the system
implementation by market participants
to maintain a record of counterparty
status for purposes of performing the
dealer de minimis calculation and
estimates such programming costs to be
$12,870.1428
Based on the foregoing discussion, the
Commission estimates the total one-time
per-entity costs for non-U.S. persons
engaged in dealing activity within the
United States associated with the de
minimis calculation would be
$43,317.1429 Estimated annual ongoing
costs would be $17,040. Based on
available data provided by the DTCC–
TIW, we preliminarily believe that as
many as 70 of the firms with over $2
billion in total worldwide notional
trading activity in single-name CDS
during 2011 may be non-U.S. persons
under our proposed rule and thus will
likely incur these costs. Assuming that
each of these 70 entities perceived the
need to monitor the status of its
counterparties and the location of its
transactions to perform the dealer de
minimis calculation, we preliminarily
believe that the total annual one-time
industry-wide costs associated with
establishing such systems would
amount to $3,032,190. Total annual
ongoing costs would amount to
$1,192,800.
In addition to assessment costs
discussed above associated with
determining the volume of U.S.-facing
transactions, market participants would
also incur assessment costs relating to
performing the analysis as to whether
1428 This is based on an estimate of the time
required for a programmer analyst to modify the
software to track the U.S. person status of a
counterparty and to record and classify whether a
transaction is a transaction conducted within the
United States, including consultation with internal
personnel, and an estimate of the time such
personnel would require to ensure that these
modifications conformed to proposed definitions of
U.S. person and transaction conducted within the
United States. Using the estimated hourly costs
described above, we estimate the costs as follows:
(Compliance Attorney at $310 per hour for 2 hours)
+ (Compliance Manager at $269 per hour for 4
hours) + (Programmer Analyst at $234 per hour for
40 hours) + (Senior Internal Auditor at $217 per
hour for 4 hours) + (Chief Financial Officer at $473
per hour for 2 hours) = $12,870. See note 1425,
supra (for source of the estimated per hour costs).
1429 The estimated one-time costs of $43,317
represent the costs for programming a system to
monitor the dealing activity of a non-U.S. person
($15,287), the costs for programming a system to
monitor the U.S.-person status of its counterparties
and the location of its dealing activity ($12,870),
and the costs for establishing a practice or
compliance procedure of requesting and collecting
representations from trading counterparties and
maintaining the representations collected as part of
the recordkeeping procedures ($15,160).
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certain security-based swaps involve
dealing activity. At the same time, some
non-U.S. persons that establish such
systems may be expected to forgo the
costs of performing the dealing activity
analysis. As noted above, we assumed
in the Intermediary Definitions
Adopting Release that only entities with
more than $2 billion in security-based
swap transactions over the previous 12
months would be likely to engage in the
full dealer analysis. We believe that it
similarly is unlikely that non-U.S.
persons with less than $2 billion in
U.S.-facing security-based swap
transactions over the previous 12
months would engage in the dealer
analysis. Available data from the Trade
Information Warehouse shows that 39 of
these 70 non-U.S. persons had total
U.S.-facing security-based swap
transactions under $2 billion in 2011.
We preliminarily believe that, under our
proposed rule, these entities would not
engage in the full dealer analysis and
thus would not be likely to incur the
$25,000 in assessment costs described
in the Intermediary Definitions
Adopting Release, reducing the
estimated assessment costs in that
release by approximately $975,000. The
combined effect of our proposed rule on
non-U.S. persons, therefore, should
result in a net increase in assessment
costs over those estimated in the
Intermediary Definitions Adopting
Release of approximately
$2,057,190.1430
1430 As noted above, in the Intermediary
Definitions Adopting Release, we estimated total
annual one-time industry-wide costs associated
with the dealer analysis to be $4.2 million. See note
1422, supra. According to the analysis above, nonU.S. persons are likely to incur additional annual
one-time industry-wide costs of $3,032,190
associated with new systems to monitor the volume
of dealing activity, while annual one-time industrywide costs associated with the dealing activity
analysis may decline by $975,000. We therefore
estimate the annual one-time industry-wide costs
associated with the dealer analysis for both U.S.
persons and non-U.S. persons to be $6,257,190
($4,200,000 + $3,032,190¥$975,000 = $6,257,190),
or $2,057,190 more than our initial estimate of $4.2
million.
We have not separately estimated the assessment
costs that market participants may incur associated
with identifying the special entity status of their
counterparties. The Intermediary Definitions
Adopting Release noted that the de minimis
threshold for dealing activity involving special
entities would cause market participants to incur
costs independent of those associated with the
general de minimis threshold based on the CDS
Data Analysis, which showed that all entities
engaged in security-based swap transactions with
special entities appeared to also engage in more
than $8 billion in security-based swap transactions
in 2011. See CDS Data Analysis at 21 n.8 and
Intermediary Definitions Adopting Release, 77 FR
30732 n.1510.
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(b) Major Security-Based Swap
Participants—‘‘Substantial Position’’
and ‘‘Substantial Counterparty
Exposure’’ Thresholds
Proposed Rule 3a67–10(c) and the
proposed interpretive guidance
regarding the attribution of guaranteed
positions, which is discussed below,
together identify the security-based
swap positions that entities would be
required to include in determining
whether they exceed the major securitybased swap participant thresholds that
were established in the Intermediary
Definitions Adopting Release. We
preliminarily believe that entities that
perceive the need to perform the
threshold calculations associated with
the major security-based swap
definition will incur only relatively
minor incremental costs to those
described in the Intermediary
Definitions Adopting Release as a result
of our proposed rule and interpretive
guidance applying these thresholds in
the cross-border context.
In the Intermediary Definitions
Adopting Release, we estimated that
certain market participants could be
expected to incur costs in connection
with the determination of whether they
have a ‘‘substantial position’’ in
security-based swaps or pose
‘‘substantial counterparty exposure’’ in
connection with security-based swaps
in connection with their determination
as to whether or not they are a major
security-based swap participant.1431
Based on the data available at that
time, we estimated that as many as 12
entities might perceive the need to
perform these calculations, given the
size of their security-based swap
positions.1432 We further estimated that
each of these entities would likely incur
annual one-time costs of $15,287 and
ongoing annual costs of $17,040 in
monitoring these positions and
performing the necessary
calculations.1433
Our proposal would require non-U.S.
persons to include in these calculations
only transactions they enter into
directly with, or that they guarantee,
that involve U.S.-person counterparties.
As noted above, Proposed Rule 3a67–
10(c) would require a non-U.S. person
that performs the major security-based
swap participant calculation to identify
the U.S.-person status of its
counterparties. Our proposed
interpretive guidance would further
clarify that a non-U.S. person must
1431 See Intermediary Definitions Adopting
Release, 77 FR 30734–36.
1432 See Intermediary Definitions Adopting
Release, 77 FR 30734.
1433 See note 1425, supra.
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include in its calculation all
transactions of other entities that it
guarantees where a U.S. person has
direct recourse to the non-U.S. person
performing the major security-based
swap participant calculation.1434 A nonU.S. person performing this calculation
would therefore be required to identify
the U.S.-person status of its
counterparties, and the counterparties of
transactions it guarantees, and monitor
the positions arising from transactions
involving U.S. person as counterparties.
The Commission preliminarily
believes that market participants would
request representations from their
transaction counterparties to determine
the U.S. person status of their
counterparties. Therefore, the
Commission preliminarily believes that
the one-time assessment costs
associated with the counterparty status
should be limited to the costs of
establishing a practice or compliance
procedure or requesting and collecting
representations from trading
counterparties and maintaining the
representations collected as part of the
recordkeeping procedures. The
Commission preliminarily believes that
such assessment costs would be
approximately $15,160.1435
The Commission also considers it
likely that market participants will
1434 Our proposed interpretive guidance also
would clarify that U.S. persons performing the
major security-based swap participant calculation
must include all positions entered into by other
parties where it guarantees the transaction. Because
this interpretive guidance would not change the
scope of the transactions that a U.S. person must
consider in performing this calculation, we do not
expect it to have any effect on the assessment costs
incurred by such persons.
1435 This estimate is based on estimated 40 hours
of in-house legal or compliance staff’s time to
establish a procedure of requesting and collecting
representations from trading counterparties, taking
into account that such representation may be built
into form of standardized trading documentation.
Based upon data from SIFMA’s Management &
Professional Earnings in the Securities Industry
2012 (modified by the SEC staff to account for an
1800-hour-work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits,
and overhead), the staff estimates that the average
national hourly rate for an in-house attorney is
$379.
Similar to our analysis of the assessment costs
associated with the de minimis exception relating
to the definition of the security-based swap dealer,
we preliminarily believe that requesting and
collecting representations would be part of the
standardized transaction process reflected in the
policies and procedures described above regarding
security-based swap sales and trading practices.
There would be ongoing costs associated with
processing representations received from
counterparties, including additional due diligence
and verification to the extent that a counterparty’s
representation is contrary to or inconsistent with
the knowledge of the collecting party. The
Commission believes that these costs would be
compliance costs encompassed within
programmatic costs associated with the major
security-based swap participant definition.
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implement systems to keep track of
counterparty status for purposes of
future trading of security-based swaps.
The Commission preliminarily believes
that there would be one-time
programming costs associated with the
system implementation by market
participants to maintain a record of
counterparty status for purposes of
assessing the major security-based swap
participant status and estimates such
programming costs to be $12,870.1436
Therefore, the Commission estimates
the total one-time costs per entity
associated with the proposed Rule
3a67–10(c) and the interpretive
guidance regarding guarantee could be
$28,030.1437 This is in addition to the
estimate of ongoing annual costs of
$17,040 associated with performing the
major security-based swap participant
threshold calculations and the one-time
programming costs of $15,287 related to
establishing an automated system or
modifying the existing automated
system to perform the major participant
threshold calculations as described in
the Intermediary Definitions Adopting
Release.1438
Request for Comment
The Commission generally requests
comment about our preliminary
estimates of the number and
composition of dealing entities and
major participants that may be required
to register as security-based swap
dealers as a result of the proposed
application of the de minimis exception
in the cross-border context. The
Commission also requests comments
about our estimates of the effect of our
proposed approach on programmatic
costs and benefits and assessment costs.
The Commission requests that
1436 This is based on an estimate of the time
required for a programmer analyst to modify the
software to track the U.S. person status of a
counterparty and to record and classify whether a
transaction is a transaction conducted within the
United States, including consultation with internal
personnel, and an estimate of the time such
personnel would require to ensure that these
modifications conformed to proposed definitions of
U.S. person and transaction conducted within the
United States. Using the estimated hourly costs
described above, we estimate the costs as follows:
(Compliance Attorney at $310 per hour for 2 hours)
+ (Compliance Manager at $269 per hour for 4
hours) + (Programmer Analyst at $234 per hour for
40 hours) + (Senior Internal Auditor at $217 per
hour for 4 hours) + (Chief Financial Officer at $473
per hour for 2 hours) = $12,870. For the source of
the estimated per hour costs. See note 1263, supra.
1437 The $28,030 per entity cost is derived from
$15,160 cost of establishing a written compliance
policy and procedures regarding obtaining
counterparty representations and plus $12,870 onetime programming cost relating to system
implementation to maintain counterparties
representations and track the U.S. person status of
each counterparty in the system.
1438 See note 1433, supra.
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commenters provide data and sources of
data to support any comments.
• Are the Commission’s estimates
regarding the number of U.S.-person
and non-U.S. persons active as dealers
in security-based swaps, both in the
United States and worldwide, and the
number of these that engage in securitybased swap dealing transactions above
the de minimis threshold reasonable in
light of the proposed rule?
• Are the Commission’s estimates of
assessment costs associated with the
dealer registration analysis, including
the costs associated with the
determination of the status of
counterparties as U.S. persons, non-U.S.
persons, foreign branches and the costs
associated with the determination of
transactions conducted within the
United States reasonable?
• Are the Commission’s estimates of
the number of U.S. persons and nonU.S. persons whose security-based swap
positions may rise to the major securitybased swap participant level reasonable,
both in the United States and
worldwide?
• Are the Commission’s estimates of
the number of U.S. persons and nonU.S. persons whose security-based swap
positions may be attributed to other
persons because of guarantees and
whether such attribution may result in
such persons becoming major securitybased swap participants reasonable?
• Is the Commission’s estimate that
the revisions included in re-proposed
Form SBSE and re-proposed Form
SBSE–A would not significantly impact
the costs and benefits associated with
the rules and forms to facilitate
registration accurate?
• Has the Commission accurately
explained the relationship between the
proposed application of the dealer de
minimis threshold (including the
definition of U.S. person) and the
programmatic effects and the
programmatic costs and benefits of our
dealer definition?
• Has the Commission appropriately
accounted for the programmatic benefits
and costs of subjecting (or not
subjecting) certain entities to the
security-based swap dealer or major
security-based swap participant
requirements under the proposed
approach?
• Does the Commission’s analysis of
the proposed treatment of non-U.S.
persons who are guaranteed by U.S.
persons adequately reflect the expected
programmatic costs and benefits
associated with this treatment?
• Has the Commission properly
analyzed the programmatic costs and
benefits associated with requiring U.S.
persons to include dealing activity
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conducted through a foreign branch in
their dealer de minimis calculations?
• Has the Commission properly
analyzed the programmatic costs and
benefits associated with permitting nonU.S. persons not to count dealing
transactions with a foreign branch
toward their de minimis threshold?
• Is the Commission’s estimate of the
assessment costs associated with
determining whether one falls within
the security-based swap dealer or major
security-based swap participant
definitions accurate? Do the
Commission’s estimates reflect
reasonable assumptions about the types
of systems that would be necessary to
perform the required analyses?
• Does the Commission’s estimate of
assessment costs appropriately reflect
the cost to an entity of determining its
U.S.-person status? Does it
appropriately reflect the cost of
determining whether its counterparty is
a U.S. person or is engaging in a
transaction conducted within the
United States?
• Has the Commission accurately
estimated the costs associated with
identifying and maintaining records
concerning the U.S.-person status of
counterparties and the location of
transactions?
3. Alternatives Considered
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(a) De Minimis Exception
As stated above, market participants,
foreign regulators and other interested
parties have provided views on the
application of Title VII requirements in
the cross-border context through written
comment letters (on other proposed
rulemakings by the Commission and on
the cross-border interpretive guidance
proposed by the CFTC) and meetings
with the Commission and our staff.1439
In particular, commenters have
provided their views on how the term
‘‘U.S. person’’ should be defined and
how the de minimis exception in the
security-based swap dealer definition
should be applied in the cross border
context.1440 These comments have been
informative in the Commission’s
development of our proposed approach
to the application of the de minimis
exception in the cross-border context,
and our understanding of the economic
consequences of the proposed U.S.
person definition and the proposed de
minimis exception. In this section, we
briefly describe our analysis of the
economic impact of these alternative
1439 See
Section I, supra.
e.g., Cleary Letter IV at 2, 6–9; Davis Polk
Letter I at 6 n.6.
1440 See,
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approaches suggested by the
commenters.
i. Alternatives to the Proposed
Definition of U.S. Person
The proposed definition of U.S.
person plays a central role in the
application of Title VII in the crossborder context. It directly affects the
number of entities that will have to
register as security-based swap dealers:
A potential security-based swap dealer
performing its de minimis calculation
must first determine its own U.S.-person
status and then, if it is a non-U.S.
person, identify the U.S.-person status
of its counterparties in transactions
arising out of its dealing activity.1441 We
also propose to use the U.S. person
definition in determining the
applicability of certain transaction-level
requirements under Title VII.1442 As a
result, the U.S. person definition in the
proposed rule directly affects the scope
of the application of Title VII
requirements to the cross-border
security-based swap market and, in
particular, the number of entities that
will be required to register as securitybased swap dealers.1443
As explained above, our proposed
definition of U.S. person is designed to
identify those market participants
whose security-based swap activity may
be particularly likely to affect the U.S.
market in a manner relevant to the
concerns of Title VII or that may
warrant the protections of Title VII. In
our view, the security-based swap
activity of a person that has its place of
residence, incorporation, or its principal
place of business within the United
States may be particularly likely to
warrant the application of Title VII
because its security-based swap activity
is likely to result in risks being borne by
the person within the United States or
because its activity raises other concerns
that Title VII is intended to address,
such as the stability or transparency of
the U.S. financial system or the
protection of counterparties. Consistent
with this view, we have proposed a
definition of U.S. person that looks to
the location of the person’s residence,
1441 See proposed Rule 3a71–3(b) under the
Exchange Act, as discussed in Section III.B.3, supra.
1442 See Sections VIII—X, supra (discussing the
application of the reporting and public
dissemination of security-based swap information,
mandatory clearing, and mandatory trade execution
requirements). As further discussed in these
sections, the U.S. person definition plays a
significant role in determining whether a particular
transaction is subject to transaction-level
requirements.
1443 See Section XV.C.1, supra (discussing
economic analysis of the proposed de minimis
exception).
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31143
incorporation, or principal place of
business.
In developing our proposed definition
of U.S. person, we have considered two
alternative definitions: One suggested
by commenters, and one proposed by
the CFTC in its own cross-border
guidance proposal.1444 In the discussion
that follows, we briefly describe these
alternatives and the related benefits and
costs. A more in-depth analysis of the
programmatic costs and benefits of these
alternatives will continue in the
following sections, in which we analyze
the role that these definitions play in
the specific application of our proposed
approach to the de minimis calculations
to different types of entities.
Several commenters suggested that we
consider the definition of U.S. person
found in Regulation S of the Securities
Act, noting that at least some market
participants would find the definition
familiar and easy to apply.1445 As
explained above, we declined to take
this approach because we believe that
the U.S. person definition in Regulation
S addresses specific concerns associated
with the offshore offering of
unregistered securities that are different
from the concerns of Title VII.1446
Regulation S, among other things,
provides safe harbors for offshore
offerings of unregistered securities, and
a central concern of Regulation S is
ensuring that unregistered securities
offered abroad do not come to rest
within the United States.1447 Given this
concern, the definition of U.S. person
used in the Regulation S safe harbors
appropriately focuses on the location of
the person making the decision to
purchase unregistered securities.1448
On the other hand, as already noted,
Title VII addresses the potential impact
of swap and security-based swap
transactions on the stability of the U.S.
financial system, market transparency,
and counterparty protection.1449 In this
1444 See, e.g., Cleary Letter IV at 2; SIFMA Letter
at 5; see also CFTC Cross-Border Proposal, 77 FR
41218) (discussing the definition of U.S. person
proposed by the CFTC).
1445 See SIFMA Letter at 5. Regulation S provides,
among other things, certain safe harbors regarding
registration requirements as they relate to the
offshore offering of securities. See Offshore Offers
and Sales, Final Rules, 55 FR 18306 (May 2, 1990).
Under Regulation S, an entity’s U.S.-person status
is a relevant factor in determining whether certain
of the safe harbors are available to a specific
offering or sale of securities. See 17 CFR 230.902(o)
(defining ‘‘U.S. person’’).
1446 See Section III.B.4, supra.
1447 See Regulation S Adopting Release, 55 FR
18308. Whether securities come to rest in the
United States or abroad is relevant to whether the
interests served by the registration requirement are
affected by the securities offering.
1448 See 17 CFR 230.902(o).
1449 See note 4, supra.
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context and in light of the nature of the
risk arising from such transactions, the
location of the person making the
decision to enter into a security-based
swap appears to us to be less relevant
than the location of the person bearing
the risk of the transaction. For example,
as discussed further below, if the
definition of U.S. person in Regulation
S were used to determine whether a
potential security-based swap dealer
should be registered or whether a
security-based swap should be subject
to Title VII transaction-level
requirements, a dealer may not be
required to register as a security-based
swap dealer based on its dealing activity
conducted through its foreign branch,
despite the fact that such transactions
generally create the same risks for the
dealing entity as any other securitybased swap activity that it conducts
directly from its headquarters.
Excluding foreign branches from the
definition of U.S. person could result in
U.S. banks engaging in significant levels
of security-based swap dealing activity,
and bearing the risk of such activity,
entirely outside the requirements of
Title VII, including the registration
requirements. This result would reduce
the programmatic benefits that the Title
VII security-based swap dealer
definition or the security-based swap
dealer registration requirement is
intended to achieve, which are to
subject to regulation those dealing
entities that we believe are likely, by
virtue of engaging in dealing activity
within the United States, to pose risk to
the U.S. financial system that Title VII
was intended to regulate.1450 Therefore,
the definition of U.S. person in
Regulation S, with its focus on the
location of the person making the
investment decision and not on the
person bearing the risk of the
transaction, is ill-suited to address these
types of concerns.
We also considered the interpretation
of U.S. person proposed by the CFTC in
its cross-border interpretive
guidance.1451 The CFTC definition
resembles our proposed definition in
many respects, as it also focuses on the
location of the person bearing the risk
of the transaction. However, we have
declined to include in our proposed
definition certain categories of entities
1450 Similarly, under the definition of U.S. person
in Regulation S, certain dealers may not be required
to register as a security-based swap dealer based on
their dealing activity with an investment manager
located outside the United States who manages a
discretionary account on behalf of a U.S. person,
even though the resulting transactions are with that
U.S. person and that U.S. person bears the risk
arising out of that transaction.
1451 See CFTC Cross-Border Proposal, 77 FR
41218.
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(or their equivalent in the security-based
swap market) that the CFTC has defined
as U.S. persons. Most significant of
these are (i) entities ‘‘in which the direct
or indirect owners thereof are
responsible for the liabilities of such
entity and one or more of such owners
is a U.S. person’’; (ii) certain investment
vehicles, wherever organized or
incorporated, ‘‘of which a majority
ownership is held, directly or indirectly,
by a U.S. person;’’ and (iii) certain
investment vehicles ‘‘the operator of
which would be required to register as
a commodity pool operator with the
CFTC.’’ 1452 The Commission has
preliminarily determined not to include
within the definition of ‘‘U.S. person’’
any entity that is not resident,
organized, or incorporated within the
United States or does not have its
principal place of business in the
United States, regardless of any
ownership interest by a U.S. person.
We are proposing this approach
because we preliminarily believe that
Title VII is primarily concerned about
security-based swap activity that raises
the types of concerns—including the
stability of the U.S. financial system,
swap market transparency, and
counterparty protection—within the
United States that Title VII was
intended to address.1453 If U.S. residents
or U.S.-based entities suffer losses from
their investments in investment vehicles
or their investments in entities
organized, incorporated, or having the
principal place of business located
outside the United States, such losses
are generally limited to their
investments in the form of equity or
debt securities. Such investment risks
are not related to security-based swaps,
and the protection of U.S. investors with
respect to investments in equity, debt
securities, or investment vehicles, as
well as investment management or
investment advisory activity, is
addressed by other provisions of U.S.
securities law pertaining to issuances
and offerings of equity or debt
securities.
Therefore, the Commission does not
believe that it would advance the
programmatic benefits of Title VII to
include foreign entities or foreign
investment vehicles in the U.S. person
definition because U.S.-based entities or
U.S. residents own them or because a
1452 Id.
1453 See Section III.B.3, supra. As noted above, we
do not believe that Title VII’s security-based swap
dealer registration requirements are the appropriate
mechanism for addressing the potential for
spillover effects caused by non-U.S. persons that
engage in security-based swap dealing activity or
other security-based swap activity wholly outside
the United States.
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U.S.-based entity is responsible for the
foreign entities’ liabilities (as proposed
by the CFTC). Furthermore, given our
focus on reducing risk to, and
promoting transparency in, the U.S.
security-based swap market, we do not
think the U.S.-person status of a
commodity pool operator or fund
adviser (as opposed to the fund actually
entering into the transaction) is in itself
relevant in determining whether
security-based swap activity occurs
within the United States and should
therefore be subject to the full range of
Title VII requirements because those
entities do not bear the risk of the
transactions.1454
Finally, the Commission preliminarily
believes that the alternative definition of
U.S. person in Regulation S and the
definition of U.S. person proposed by
the CFTC would likely cause potential
security-based swap dealers and end
users to incur higher assessment costs.
For example, Regulation S classifies
accounts differently depending on
whether they are discretionary or nondiscretionary,1455 while our proposed
definition would focus on the status of
the counterparty to a security-based
swap transaction.1456 The Regulation S
definition specifies the U.S. person
status of more types of entities than
does our proposed definition and would
introduce a level of complexity into the
definition that is not relevant to the
purposes of Title VII. Similarly, the
CFTC’s proposed interpretation likely
would increase assessment costs
compared to our proposed definition by,
for example, requiring investment funds
or their counterparties to determine the
U.S.-person status of the direct and
indirect owners of such funds. It may be
operationally costly and otherwise
impracticable to identify the indirect
ownership of an investment vehicle
given the legal structure of the
1454 We also note that, to the extent that the
commodity pool operator or fund advisor enters
into a security-based swap transaction that is
conducted within the United States, Title VII would
generally apply to that transaction. See proposed
Rule 3a71–3(a)(5) under the Exchange Act (defining
‘‘transaction conducted within the United States’’),
as discussed in Section III.B.5, supra. However,
proposed Rules 3Ca–3(b)(2) and 3Ch–1(b)(2) would
not apply the mandatory clearing and mandatory
trade execution requirements to transactions
between two non-U.S. persons who are not securitybased swap dealers and whose performances under
security-based swaps are not guaranteed by a U.S.
person, even though such transactions are
conducted in the United States.
1455 Cf. 17 CFR 230.902(o)(1)(vi), (vii) (defining
certain types of accounts to be U.S. persons) with
17 CFR 230.902(o)(2) (defining certain types of
accounts not to be U.S. persons).
1456 Proposed Rule 3a71–3(a)(7)(iii) under the
Exchange Act (defining an account as a U.S. person
by looking at the status of the account holder or
owner), as discussed in Section III.B.4, supra.
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investment vehicle and the beneficial
ownership in book-entry form, and it is
unnecessary as those entities bear risks
only to the amount of their investment
(as opposed to the open-ended risks that
can be associated with security-based
swap positions). We expect that this
complexity could significantly raise
assessment costs for market
participants.
Based on the above, we preliminarily
believe that our proposed definition
appropriately focuses on the types of
entities that are likely to be actively
engaged in the security-based swap
market and on the specific categories of
such entities whose security-based swap
activity has the potential to impact the
U.S. financial system. We do not believe
that following either the Regulation S
approach or the CFTC’s proposed
interpretation would achieve the
benefits of Title VII. We also believe that
either approach would result in higher
assessment costs.1457
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ii. Alternatives to the Proposed Rule
Regarding Application of the De
Minimis Exception
As described above, our proposal also
includes a proposed rule regarding the
application of the de minimis exception
in the cross-border context.1458 This
rule prescribes how a person’s
transactions arising out of its dealing
activity must be included in its de
minimis calculation, depending on
whether it is a U.S. person or non-U.S.
person. The definition of U.S. person,
described above, is central to this rule,
as it is used to identify both the status
of the person engaged in security-based
swap dealing activity and, with respect
to a non-U.S. person engaged in dealing
activity, the status of its counterparties
in transactions connected to dealing
activity.
In this section, we will describe
certain alternatives to our proposed
application of the de minimis exception
and explain how these alternatives
would have affected the programmatic
costs and benefits of Title VII. Some of
these alternatives have been considered
in our discussions of the U.S. person
definition.
a. Calculation of U.S. Persons’
Transactions for De Minimis Exception
Our proposed approach would require
a U.S. person to count toward the de
1457 We
will discuss the relative costs and
benefits of these alternatives in more detail in the
context of our analysis of alternatives to proposed
rules that use the U.S. person definition in the
following sections.
1458 See Proposed Rule 3a71–3(b) under the
Exchange Act, as discussed in Section III.B.3, supra.
See also 17 CFR 240.3a71–2.
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minimis threshold all transactions it
enters into in a dealing capacity,
including those it conducts through a
foreign branch, regardless of the
location of the counterparty to the
transaction.1459 Some commenters
suggested that the Commission lacks the
authority to subject the dealing activity
of a foreign branch of a U.S. bank to
Title VII, including our registration
requirements, to the extent that it does
business only with counterparties that
are not U.S. persons outside the United
States.1460 As noted above, commenters
generally took the view that the
Commission should consider using the
Regulation S definition of U.S. person
for purposes of applying the de minimis
exception in the cross border context, as
Regulation S specifically excludes from
its definition of U.S. person foreign
branches of U.S. banks.1461 Presumably,
under the approach suggested by some
commenters, the headquarters of a U.S.
bank would be designated a U.S. person,
whereas each of its foreign branches
would be classified as a separate nonU.S. person for purposes of Title VII.
For the reasons already noted
above,1462 we are not proposing to
follow this approach. Because of the
nature of the risks posed by securitybased swaps, which are borne by the
entire legal entity even if the transaction
is entered into by a foreign branch of
such entity, consistent with the
Commission’s approach to the meaning
of ‘‘person’’ in the security-based swap
dealer definition, as discussed
above,1463 we are proposing to define
the term ‘‘U.S. person’’ to include the
entire entity, including its foreign
branches. In addition, such separation is
inconsistent with the focus in Title VII
on the effect of a person’s dealing
activity on the U.S. financial system,
including the risks such person bears as
a result of its dealing activity. Although
we recognize that certain U.S.-based
banks have chosen to conduct some or
all of their foreign security-based swap
business through foreign branches,1464
we preliminarily believe that, given
Title VII’s goal of addressing potential
dealing risk to the U.S. financial system
caused by security-based swap dealing
activity, the de minimis exception
should apply to all security-based swap
dealing activity of a person that has its
principal place of business within, or is
1459 See proposed Rule 3a71–3(b)(1)(i) under the
Exchange Act, as discussed in Section III.B.3, supra.
1460 See, e.g., Sullivan & Cromwell Letter at 2.
1461 See notes 218 and 219, supra.
1462 See Section III.B.3, supra
1463 See Section III.B.4, supra.
1464 See Sections II.A.2 and III.B.6, supra
(discussing the dealing structures used by U.S.based entities).
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31145
incorporated or organized within, the
United States, regardless of which part
of such person carries out such dealing
activity wherever its counterparties are
located, even if elements of that activity
occur outside the United States.
We preliminarily believe that the
alternative approach suggested by
commenters could reduce the
programmatic benefits of security-based
swap dealer registration under Title VII
and the ensuing substantive
requirements applicable to registered
security-based swap dealers if the de
minimis calculation for U.S. persons
engaged in dealing activity does not
include the entire volume of such
persons’ dealing activity. Drawing a
distinction between the branches, desks,
or offices of a U.S. person and the entity
as a whole would be inconsistent with
the fact that the U.S. person as a whole
bears the risk of all security-based swap
transactions that it enters into,
including those transactions conducted
through a foreign branch or office with
non-U.S. person counterparties located
outside the United States.1465
Even if the headquarters of a U.S.
bank were already registered by virtue
of its own security-based swap dealing
activity in the United States, the
commenters’ suggested approach would
presumably allow the same bank,
through its foreign branches, to engage
in unlimited dealing activity with nonU.S. persons outside the United States
without registering those branches.1466
We do not view such disparate
regulatory treatment of two parts of the
same legal entity to be consistent with
the purposes of Title VII, particularly
given that this approach would appear
to place entirely outside the scope of
regulation under Title VII transactions
that pose risks to a U.S. bank that are
indistinguishable from those arising
from transactions done directly from the
home office of that bank.1467 We believe
that excluding transactions conducted
through foreign branches from the de
minimis calculations would not achieve
the programmatic benefits intended by
1465 See Section II.A.3, supra (discussing the
example of AIG FP).
1466 For example, treating the branch differently
may remove the branch entirely from Title VII’s
rules. This could prevent regulation of capital
adequacy and other risk mitigating requirements,
even though all of the risk from the transaction is
residing within the entity as a whole, creating risk
for the U.S. financial system.
1467 Security-based swap activity conducted
through a foreign branch poses risks to the entire
entity to which the branch belongs that are
generally indistinguishable from those posed by
security-based swap activity conducted through an
office. The experience of AIG FP demonstrates that
the security-based swap activity of a foreign office
can lead to the default of the entire entity. See
Section II.A.3, supra.
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the Title VII requirements because it
would leave unaddressed risks
associated with security-based swap
dealing activity that occurs within the
United States and therefore raises the
types of concerns with respect to the
U.S. market that Title VII’s dealer
requirements were intended to address.
b. Calculation of Non-U.S. Persons’
Transactions for De Minimis Exception
(including transactions conducted
within the United States)
Our proposed application of the de
minimis exception to non-U.S. persons
engaged in security-based swap dealing
activity would require them to include
in their de minimis calculations any
transactions with U.S. persons or any
transactions otherwise conducted
within the United States, to the extent
they are entered into in a dealing
capacity. Given the focus on Title VII on
the stability and transparency of the
U.S. financial system and the protection
of counterparties,1468 we preliminarily
believe that it is appropriate to require
non-U.S. persons that engage in dealing
activity within the United States and
therefore are likely to raise these types
of concerns to count such dealing
activity toward their de minimis
thresholds. To the extent that the
aggregate notional amount of
transactions arising from a non-U.S.
person’s dealing activity involving U.S.
persons or otherwise conducted within
the United States exceeds the de
minimis threshold in the trailing 12month period, we would require a nonU.S. person to register as a securitybased swap dealer.
In developing our proposed
application of the de minimis threshold
to non-U.S. persons, we have
considered alternatives suggested by
commenters or proposed by the CFTC.
We declined to incorporate these
alternatives into our approach.
Some commenters suggested that a
non-U.S. person that engages in dealing
activity with U.S.-person counterparties
through an affiliated U.S. intermediary
should be permitted to register in a
limited capacity or should not be
required to register as a security-based
swap dealer.1469 Specifically, some
commenters suggested that the
Commission adopt an approach that is
modeled on the Commissions’ existing
regimes, permitting non-U.S. securitybased swap dealers to transact with U.S.
persons without registering in the
United States if those transactions are
1468 Pub. L. No. 111–203 Preamble. See Section I
and note 4, supra.
1469 See, e.g., Socie
´ te´ Ge´ne´rale Letter II; Cleary
Letter IV.
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intermediated by a U.S.-registered
security-based swap dealer.1470
We preliminarily believe that the
above alternative suggested by
commenters would potentially reduce
the programmatic benefits intended by
Title VII. To the extent that a non-U.S.
person engages in security-based swap
dealing entirely with U.S. persons or
within the United States, that person’s
security-based swap activity raises the
concerns that security-based swap
dealer regulation under Title VII intends
to address: First, the entity’s dealing
activity raises customer protection
concerns, which the external business
conduct standards and segregation
requirements of Title VII are intended to
address; second, the entity’s dealing
activity raises financial responsibility
concerns, which Title VII’s entity-level
requirements applicable to registered
security-based swap dealers are
intended to address; finally, the entity’s
dealing activity raises transparency,
regulatory oversight, counterparty risk
and systemic risk concerns, which Title
VII intends to address through its
regulatory reporting, public reporting,
mandatory clearing, and mandatory
trade execution requirements. Although
the Commission recognizes that some of
these concerns might be addressed by
regulating the intermediary, as in the
broker-dealer context, we preliminarily
believe that only if the non-U.S. person
dealer itself is subject to Title VII would
it be possible to address the entire range
of concerns that Title VII dealer
regulation is intended to address.1471
The CFTC has proposed that non-U.S.
persons that are guaranteed by U.S.
persons be required to include in their
de minimis calculation all transactions
carried out in a dealing capacity with
any counterparty, wherever that
counterparty is located, just as a U.S.
person acting in a dealing capacity
would be required to do.1472 As
discussed above, the Commission
recognizes that such guarantees of the
1470 See, e.g., Davis Polk Letter I at 11 n.17 (‘‘This
model is similar to the mode of operation permitted
by Rule 15a–6 under the Securities Exchange Act
of 1934, pursuant to which foreign broker-dealers
interface with U.S. customers under arrangements
with affiliated or non-affiliated broker-dealers
without themselves registering as broker-dealers in
the U.S.’’); Cleary Letter IV at 22 (‘‘Accordingly, as
one alternative, we suggest that the Commissions
adopt an approach that is modeled on the
Commissions’ existing regimes, permitting non-U.S.
swap dealers to transact with U.S. persons without
registering in the U.S. if those transactions are
intermediated by a U.S.-registered swap dealer.
This would be consistent with the approach
adopted by the SEC under Rule 15a–6 and prior
interpretative precedents with respect to non-U.S.
securities dealers.’’).
1471 See Section III.B.4, supra.
1472 See CFTC Cross-Border Proposal, 77 FR
41221.
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security-based swap transactions of nonU.S. persons may pose risk to the U.S.
financial system; however, the
Commission does not believe that the
security-based swap dealer regulation in
Title VII is the appropriate vehicle for
regulating the dealing activity of nonU.S. persons occurring outside the
United States with other non-U.S.
persons.1473 As discussed above, the
Commission preliminarily believes that
the risk posed to the U.S. markets by the
dealing activity of non-U.S. persons
outside the United States whose
performance under security-based
swaps is guaranteed by a U.S. person
does not necessarily raise the full range
of concerns that Title VII dealer
regulation is intended to address. Such
activity may give rise to security-based
swap positions that raise concerns
within the United States that are
relevant to the purposes of Title VII if
those positions are large enough to
affect the stability of the institution
providing the guarantee and potentially
the stability of the U.S. financial system
more generally. This risk, however,
arises from attribution of security-based
swap positions to the guarantor due to
the guarantee rather than the dealing
activity per se. In these circumstances,
we preliminarily believe that the risks
relating to these positions warrant
registration only to the extent that the
positions exceed the thresholds
established for major security-based
swap participant registration.1474
In light of the foregoing, we do not
believe that requiring a non-U.S. person
that is guaranteed by a U.S. person to
count every transaction entered into in
a dealing capacity toward its de minimis
threshold and to register as a securitybased swap dealer even if it engaged in
no dealing activity with U.S. persons or
otherwise within the United States
would materially increase the
programmatic benefits of the dealer
registration requirements. Although it is
likely that such an approach would
cause more entities to register as dealers
than does our proposed approach, to the
extent that these entities were required
to register as security-based swap
dealers even though they engaged in
dealing activity only with non-U.S.
persons outside the United States, we
preliminarily believe that this
alternative would impose programmatic
costs on these entities without a
corresponding increase of the
programmatic benefits to the U.S.
security-based swap markets that are
intended by the security-based swap
dealer requirements in Title VII, as we
1473 See
Section III.B.7, supra.
1474 Id.
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do not believe that the dealing activity
of such persons (to the extent that it
involves only non-U.S. counterparties
outside the United States) raises the
types of concerns within the United
States that Title VII dealer registration
was intended to address.
Another alternative to our proposed
approach would be not to require nonU.S. persons that engage in dealing
activity with other non-U.S. persons
through transactions conducted within
the United States to include such
transactions in their de minimis
calculations.1475 As noted above, Title
VII is intended to promote
accountability and transparency in the
U.S. financial system,1476 and to do so,
it is necessary to ensure that securitybased swap dealing activity that occurs
within the United States is subjected to
the requirements of Title VII,1477
including those related to external
business conduct protections and other
transaction-level requirements. Even if a
non-U.S. person located outside the
United States is engaging in dealing
activity with non-U.S. persons located
in the United States, it is, among other
things, providing liquidity in the U.S.
security-based swap market and thus
engaging in dealing activity within the
United States. Excluding such dealing
activity from Title VII would reduce the
programmatic benefits of security-based
swap dealer regulation because it would
reduce the transparency of the U.S.
market and deprive counterparties
within the United States of the
protections of Title VII. We recognize
that the ultimate programmatic benefits
discussed here associated with the
application of the security-based swap
dealer regulation in the cross-border
context would be affected by the
substantive rules adopted by the
Commission. The Commission is
reopening the comment periods for our
outstanding rulemaking releases that
concern security-based swaps and
security-based swap market participants
and were proposed pursuant to certain
provisions of the Exchange Act, as
amended by Title VII of the Dodd-Frank
Act.
iii. Aggregation of Affiliate Dealing
Activity
Our proposed rule regarding the
application of the de minimis exception
in the cross-border context also requires
1475 The
CFTC’s proposed guidance does not
trigger application of Title VII requirements based
on the location of the security-based swap activity.
1476 See Section II, supra.
1477 See proposed Rule 3a71–3(a)(5) under the
Exchange Act (defining ‘‘transaction conducted
within the United States’’), as discussed in Section
III.B.5, supra.
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a U.S. person who enters into securitybased swap transactions in a dealing
capacity, or non-U.S. person who enters
into security-based swap transactions
with U.S. persons or transactions
conducted within the United Sates in a
dealing capacity, to count toward such
person’s de minimis threshold certain
transactions of its affiliates. Specifically,
such persons would be required to
include in the de minimis calculation
the notional amount of (1) the
transactions entered into in a dealing
capacity by all of their commonly
controlled affiliates who are U.S.
persons and (2) the transactions with
U.S. persons or transactions conducted
within the United States entered into in
a dealing capacity by all of its
commonly controlled affiliates who are
non-U.S. persons. However, such
calculation would exclude any affiliate
that is a registered security-based swap
dealer if such person who relies on the
de minimis exception maintains
separate operations independent of any
affiliate who is a registered securitybased swap dealer and does not involve,
or act in concert with, any affiliate that
is a registered security-based swap
dealer in any stage of a security-based
swap transaction that arises out of its
dealing activity.1478
In developing this rule, we considered
the approach proposed by the CFTC,
which we understand to permit nonU.S. persons to aggregate only the
transactions carried out in a dealing
capacity by their commonly controlled
affiliates that are also non-U.S. persons,
rather than including all such
transactions by all commonly controlled
affiliates, wherever located. As noted
above,1479 we declined to follow the
CFTC’s proposal in part out of concern
that doing so could confer competitive
advantages on affiliated corporate
groups that engage in security-based
swap dealing activity through both U.S.
and foreign affiliates by allowing them
to operate with an effective de minimis
threshold twice higher than the
threshold applicable to security-based
swap dealers operating solely within the
United States or solely in one or more
foreign-based affiliates.
We recognize that our approach may
require some persons to register that
might not be required to register under
the CFTC’s approach and thus would
1478 See proposed Rule 3a71 under the Exchange
Act. This approach is consistent with the
aggregation requirement described in the
Intermediary Definitions Release. See Intermediary
Definitions Release, 77 FR 30631 (requiring
aggregation of dealing activity by commonly
controlled affiliates for purposes of de minimis
calculation).
1479 See Section III.B.4.(c), supra.
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31147
impose programmatic costs on those
entities that they might not otherwise
incur. It may also require more firms to
engage in assessment, as even those
with activity levels far below the
threshold will probably perform these
calculations, if they are part of a larger
corporate family with a number of
security-based swap dealers. However,
we believe that those corporate groups
operating a centralized booking model
or centralized risk management should
be able to have the central booking
entity or central risk management
location perform the de minimis
aggregation calculation for the entire
corporate group. For purposes of this
analysis, we have assumed that
corporate groups are likely to perform
such assessments centrally.1480
We preliminarily conclude that our
proposed application of the aggregation
requirement to the de minimis
calculation in the cross-border context
is appropriate in light of the purposes of
Title VII and of dealer regulation in
particular. The aggregation requirement
is designed to discourage evasion of the
dealer registration requirement by a
corporate group by engaging in large
volumes of dealing activity through
multiple affiliates, none of which
engages in activity exceeding the de
minimis threshold.1481 Therefore, we
have preliminarily determined that a
corporate group’s dealing activity
should be considered as a whole.
Similarly, to be entitled to rely on the
de minimis exception, an unregistered
affiliate within a corporate group must
have an independent operation separate
from any affiliate who is a registered
security-based swap dealer and must
not act in concert with the registered
affiliate in any stage of a security-based
swap transaction. The Commission
preliminarily believes that this
requirement would have the benefit of
preventing evasion.
(b) Major Security-Based Swap
Participants
Several commenters suggested that
foreign government-related entities,
such as sovereign wealth funds and
multilateral development institutions,
1480 We understand, based on comment letters
and our staff’s discussion with market participants,
that many market participants keep a global swap
book and operate a central booking model. See, e.g.,
Cleary Letter I at 9. If this is not the case with
respect to a particular market participant, then the
number of entities that need to perform the de
minimis calculation would increase. The
Commission currently does not have available
information with respect to the number of market
participants active in the security-based swap
market that utilize a central booking model.
1481 See Intermediary Definitions Release, 77 FR
30631.
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should be excluded from the major
security-based swap participant
definition.1482 By potentially capturing
fewer major security-based swap
participants, this alternative approach
would correspondingly decrease the
programmatic costs and benefits
associated with Title VII regulation of
major security-based swap participants.
We preliminarily believe that securitybased swap transactions entered into by
these types of foreign governmentrelated entities with U.S. persons pose
the same risks to the U.S. security-based
swap markets as transactions entered
into by entities that are not foreigngovernment related. Moreover, as noted
above,1483 based upon our conversations
with market participants we understand
that foreign government-related entities
rarely enter into security-based swap
transactions (as opposed to other types
of swap transactions) in amounts that
would trigger the obligation to register
as a major security-based swap
participant. Therefore, we preliminarily
believe that the proposed approach
considering only security-based swap
transactions entered into with a U.S.
person as counterparty in determining a
non-U.S. person’s status as a major
security-based swap participant,
regardless of whether such non-U.S.
person is a foreign government-related
entity, is more appropriately tailored to
the objectives of Title VII.
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Request for Comment
The Commission requests comments
on all aspects of the economic analysis
of the alternatives to the proposed
definition of U.S. person, the proposed
application of the de minimis exception
and the proposed application of the
major security-based swap participant
definition in the cross-border context.
The Commission requests that
commenters provide data and sources of
data to support any comments. In
addition, the Commission requests
commenters’ views on the following:
• Has the Commission appropriately
considered the costs and benefits
associated with adopting the definition
of U.S. person found in Regulation S? If
not, please explain why and provide
information on how such costs and
benefits should be assessed.
• Has the Commission appropriately
considered the costs and benefits
associated with adopting the same
definition of U.S. person as proposed by
the CFTC? If not, please explain why
and provide information on how such
costs and benefits should be assessed.
1482 See
1483 See
note 382, supra.
Section IV.C.3, supra.
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• Has the Commission appropriately
considered the costs and benefits
associated with adopting a rule to
permit foreign branches of U.S. banks to
exclude transactions conducted through
a foreign branch from their de minimis
calculations? If not, please explain why
and provide information on how such
costs and benefits should be assessed.
• Has the Commission appropriately
considered the costs and benefits
associated with not requiring a non-U.S.
person to count its transactions
conducted within the United States
with non-U.S. persons towards its de
minimis threshold? If not, please
explain why and provide information
on how such costs and benefits should
be assessed.
• Has the Commission appropriately
considered the costs and benefits
associated with requiring a non-U.S.
person whose performance under
security-based swaps is guaranteed by a
U.S. person to count all transactions
connected to its security-based swap
dealing activity toward its de minimis
threshold, even though such non-U.S.
person only conducts dealing activity
with non-U.S. persons outside the
United States? If not, please explain
why and provide information on how
such costs and benefits should be
assessed.
• Has the Commission appropriately
considered the costs and benefits
associated with the proposed rule
regarding aggregation of security-based
swap transactions entered into in a
dealing capacity by a person and its
affiliates under common control and
requiring that such aggregated notional
amount be included in such person’s de
minimis calculation? If not, please
explain why and provide information
on how such costs and benefits should
be assessed. Should the Commission
require operational independence, from
the cost and benefit point of view, as a
condition to excluding transactions of
an affiliate that is a registered securitybased swap dealer from a person’s de
minimis calculation?
• Has the Commission appropriately
considered the costs and benefits
associated with excluding foreign
government-related entities, such as
sovereign wealth funds and multilateral
development institutions, from the
definition of major security-based swap
participant? If not, please explain why
and provide information on how such
costs and benefits should be assessed.
• Should the Commission take into
account the potential impact of the
Push-Out Rule and the Volcker Rule in
considering the approach to application
of the Title VII requirements to foreign
branches of the U.S. banks? For
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example, what would the costs and
benefits be with respect to requiring
foreign branches of U.S. banks to
include transaction conducted through a
foreign branch in its de minimis
calculation, or requiring a non-U.S.
person to include its transactions with
foreign branches in its major securitybased swap participant calculation, after
taking into account the effects of the
Push-Out Rule and the Volcker Rule on
U.S. banks? Please explain how such
costs and benefits should be assessed.
E. Economic Analysis of the Proposed
Application of the Entity-Level and
Transaction-Level Requirements to
Security-Based Swap Dealers and Major
Security-Based Swap Participants
As stated above, persons who fall
within the statutory definitions of
security-based swap dealer and major
security-based swap participant, as
further defined by the rules adopted in
the Intermediary Definition Adopting
Release, will be required to register with
the Commission and comply with a host
of ensuing substantive requirements.1484
These requirements include entity-level
requirements 1485 and transaction-level
requirements 1486 set forth in Sections
15F and 3E of the Exchange Act and
rules and regulations thereunder.1487
1. Entity-Level Requirements
Section 764(a) of the Dodd Frank Act
adds a new Section 15F(e) to the
Exchange Act, which imposes capital
and margin requirements on securitybased swap dealers and major securitybased swap participants.1488 These
requirements are designed to reduce the
probability of these institutions’ failure,
mitigate the consequences of these
institutions failures, protect customer
assets, and contribute to the stability of
the security-based swap market in
particular and the U.S. financial system
more generally.1489 The benefits of the
capital and margin requirements for
security-based swap dealers are
expected to include enhancing
protection of customer assets and
mitigation of the consequences of a firm
failure, while allowing security-based
swap dealers appropriate flexibility in
how they conduct their security-based
swaps business.1490 Similarly, the
1484 See
Section XV.D.1, supra.
Section III.C.3(a), supra.
1486 See Section III.C.3(b), supra.
1487 See Section 15F of the Exchange Act, 15
U.S.C. 78o-8, and Section 3E of the Exchange Act,
15 U.S.C. 78c–4.
1488 See Section 15F(e) of the Exchange Act, 15
U.S.C. 78o–10(e).
1489 See Capital, Margin, and Segregation
Proposing Release, 77 FR 70218 and 70303.
1490 See id. at 70218.
1485 See
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benefits of the capital and margin
requirements for major security-based
swap participants are expected to
include neutralization of the credit risk
between a major security-based swap
participant and a counterparty, which
would lessen the impact on the
counterparty if the major security-based
swap participant failed.1491 We believe
the capital and margin requirements
strengthen the financial system by
reducing the potential for defaults by
entities engaging in security-based swap
activity and mitigating the impact of
such defaults, including the adverse
spillover or contagion effect of a default
by security-based swap dealers and
major security-based swap
participants.1492
In addition, registered security-based
swap dealers and major security-based
swap participants are required to
establish robust risk management
systems adequate for managing their
day-to-day business,1493 keep books and
records and maintain daily trading
records of the security-based swaps they
enter into,1494 establish internal systems
and controls,1495 diligently supervise
the security-based swap business,1496
designate a chief compliance officer,1497
and keep books and records open to
inspection and examination by the
Commission.1498
The programmatic costs and benefits
associated with the entity-level
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1491 Id.
1492 These spillover effects could create instability
for the financial markets more generally, such as by
limiting the willingness of market participants to
extend credit to each other, and thus substantially
reduce liquidity and valuations for particular types
of financial instruments. See, e.g., Markus K.
Brunnermeier and Lasse Heje Pedersen, ‘‘Market
Liquidity and Funding Liquidity,’’ Review of
Financial Studies (2009); Denis Gromb and Dimitri
Vayanos, ‘‘A Model of Financial Market Liquidity,’’
Journal of the European Economic Association
(2010).
1493 See Section 15F(j)(2) of the Exchange Act, 15
U.S.C. 78o–10(j)(2); see also Section III.C.3(b)(3),
supra.
1494 See Sections 15F(f) and (g) of the Exchange
Act, 15 U.S.C. 78o–10(f) and (g); see also Section
III.C.3(b)(4), supra.
1495 See Sections 15F(j)(3) and (4) of the Exchange
Act, 15 U.S.C. 78o–10(j)(3) and (4); Section
III.C.3(b)(5), supra. See also proposed Rule 15Fh–
3(i)(2)(iv) under the Exchange Act.
1496 See Section 15F(h)(1)(B) of the Exchange Act,
15 U.S.C. 78o–10(h)(1)(B). The Commission has
proposed a rule that would establish supervisory
obligations that incorporates principles from
Section 15(b) of the Exchange Act and existing SRO
rules. Proposed Rule 15fh–3(i) under the Exchange
Act, as discussed in the External Business Conduct
Standards Proposing Release, 76 FR 42419–21. See
also Section IIIC.3(b)(6), supra.
1497 See Section 15F(k) of the Exchange Act, 15
U.S.C. 78o–10(k); see also Section III.C.3(b)(7),
supra.
1498 See Section 15F(l)(C) of the Exchange Act, 15
U.S.C. 78o–10(l)(C); see also Section III.C.3(b)(8),
supra.
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requirements applicable to securitybased dealers and major security-based
swap participants under Title VII are (or
will be) addressed in more detail in
connection with the applicable
rulemakings implementing Title VII.1499
With respect to the application of the
entity-level requirements in the crossborder context, as stated above, the
Commission preliminarily believes that
it would be consistent with the objective
of Title VII to ensure the safety and
soundness of registered security-based
swap dealers 1500 to require foreign
security-based swap dealers to comply
with the entity-level requirements.1501
Similarly, the Commission preliminarily
does not believe that foreign major
security-based swap participants should
be excluded from the application of any
entity-level requirements.1502 However,
the Commission recognizes the concerns
raised by commenters regarding the
possibility that foreign security-based
swap dealers may be subject to
conflicting or duplicative regulatory
requirements and proposes to mitigate
the costs associated with the potential
duplicative compliance obligations
through the Commission’s proposed
approach to substituted compliance.1503
We have considered the effect of the
proposed rules regarding substituted
compliance on its effect on efficiency,
competition and capital formation
above 1504 and will discuss the
economic considerations of the
proposed rules regarding substituted
compliance more fully below.1505
Alternative
The CFTC proposed to treat Title VII
margin requirements with respect to
non-cleared swaps as transaction-level
requirements and would not apply the
margin requirements to foreign nonbank swap dealers (including foreign
affiliates of U.S. persons regardless of
whether such foreign affiliates’
performance obligations under swaps
are guaranteed by U.S. persons) when
they transact swaps with non-U.S.
person counterparties whose
1499 See, e.g., Capital, Margin, and Segregation
Proposing Release, 77 FR 70214.
1500 See Section 15F(e)(3)(A) of the Exchange Act,
15 U.S.C. 78o–8(e)(3)(A) (‘‘To offset the greater risk
to the security-based swap dealer . . . and the
financial system arising from the use of securitybased swaps that are not cleared, the requirements
imposed under paragraph (2) shall—(i) help ensure
the safety and soundness of the security-based swap
dealer . . . .’’).
1501 See Section III.C.5, supra.
1502 Id.
1503 See Section XI, supra (discussing the
Commission’s overall proposed approach to
substituted compliance in the context of Title VII).
1504 See Section XV.C, supra.
1505 See Section XV.I, infra.
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31149
performance obligations under the
swaps are not guaranteed by U.S.
persons.1506 The prudential regulators’
margin proposal does not apply Title VII
margin requirements to a foreign
covered swap entity 1507 with respect to
foreign non-cleared swaps or foreign
non-cleared security-based swaps.1508 In
practice, the Commission’s proposed
treatment of the margin requirements as
an entity-level requirement differs from
the CFTC’s and the Prudential
regulators’ proposals in that non-bank
foreign security-based swap dealers
(regardless of whether their performance
of obligations under security-based
swaps are guaranteed by U.S. persons)
would be subject to the margin
requirements with respect to their
transactions with non-U.S. person
counterparties whose performance
obligations under the security-based
swaps are not guaranteed by U.S.
persons.
The Commission could have taken the
CFTC’s approach to treat margin
requirements as transaction-level
requirements by proposing not to apply
margin to non-bank foreign securitybased swap dealers with respect to their
transactions with non-U.S. person
counterparties whose performance
obligations under the security-based
swaps are not guaranteed by U.S.
persons. We also could have taken the
prudential regulators’ approach by
proposing not to apply margin to foreign
non-bank security-based swap dealers
1506 See CFTC Cross-Border Proposal, 77 FR
41226, 41228, and 41237.
1507 A ‘‘foreign covered swap entity’’ is defined as
any entity prudentially regulated by the prudential
regulators and required to register as a swap dealer,
major swap participant, security-based swap dealer
or major security-based swap participant under
section 4s of the Commodity Exchange Act or
section 15F of the Exchange Act that (i) is not a
company organized under the laws of the United
States or any State; (ii) is not a branch or office of
a company organized under the laws of the United
States or any State; (iii) is not a U.S. branch, agency
or subsidiary of a foreign bank; and (iv) is not
controlled, directly or indirectly, by a company that
is organized under the laws of the United States or
any State. See Prudential Regulator Margin and
Capital Proposal, 76 FR 27581.
1508 A ‘‘foreign non-cleared swap or foreign noncleared security-based swap’’ is defined as a noncleared swap or non-cleared security-based swap
with respect to which: (i) The counterparty to the
foreign covered swap entity is not a company
organized under the laws of the United States or
any State, not a branch or office of a company
organized under the laws of the United States or
any State, and not a person resident in the United
States; and (ii) performance of the counterparty’s
obligations to the foreign covered swap entity under
the swap or security-based swap has not been
guaranteed by an affiliate of the counterparty that
is a company organized under the laws of the
United States or any State, a branch of a company
organized under the laws of the United States or
any State, or a person resident in the United States.
See Prudential Regulator Margin and Capital
Proposal, 76 FR 27581.
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that are not controlled by a U.S. person
with respect to their transactions with
non-U.S. person counterparties whose
performance obligations under the
security-based swaps are not guaranteed
by U.S. persons. Either approach would
not treat margin as an entity-wide
requirement.
The Dodd-Frank Act seeks to address
the counterparty credit risk exposures
arising from OTC derivatives by, among
other things, imposing mandatory
clearing and margin requirements for
non-cleared security-based swaps.1509
The margin requirements established by
the Commission with respect to noncleared security-based swaps will
operate in tandem with mandatory
clearing provisions in the Dodd-Frank
Act.1510 Registered clearing agencies
that operate as CCPs manage credit and
other risks through a range of controls
and methods, including prescribed
margin rules for their participants.1511
Thus, the mandatory clearing
requirements in effect will establish
margin requirements for cleared
security-based swaps and, thereby,
complement the margin requirements
for non-cleared security-based swaps
established by the Commission and the
prudential regulators.1512
In addition, margin requirements,
along with the capital standards and
segregation requirements, are an integral
part of the proposed financial
responsibility requirements for securitybased swap dealers that are intended to
enhance the financial integrity of these
entities.1513 The margin requirements
proposed by the Commission are
intended to work in tandem with the
capital requirements to strengthen the
financial system by reducing the
potential for default to an acceptable
1509 See Capital, Margin, and Segregation
Proposing Release, 77 FR 70258; see also Section
3C(a)(1) and Section 15F(e)(1) of the Exchange Act,
15 U.S.C. 78c–3(a)(1) and 78o–10(e)(1).
1510 See Section 3C(a)(1) of the Exchange Act, 15
U.S.C. 78c–3(a)(1) (requiring that security-based
swaps must be cleared through a registered clearing
agency unless an exception to mandatory clearing
exists).
1511 See Clearing Agency Standards Adopting
Release, 77 FR 66230–32.
1512 See Capital, Margin, and Segregation
Proposing Release, 77 FR 70259; see also Prudential
Regulator Margin and Capital Proposal, 76 FR
27567 (‘‘In the derivatives clearing process, central
counterparties (CCPs) manage the credit risk
through a range of controls and methods, including
a margining regime that imposes both initial margin
and variation margin requirements on parties to
cleared transactions. Thus, the mandatory clearing
requirement established by the Dodd-Frank Act for
swaps and security-based swaps will effectively
require any party to any transaction subject to the
clearing mandate to post initial and variation
margin to the CCP in connection with that
transaction.’’).
1513 See Capital, Margin, and Segregation
Proposing Release, 77 FR 70303 and 70259.
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level and limiting the amount of
leverage that can be employed by
security-based swap dealers and other
market participants.1514 For example,
with respect to cleared security-based
swaps, for which margin requirements
will not be established by the
Commission, the Commission proposed
a capital charge that would apply if a
nonbank security-based swap dealer
collects margin collateral from a
counterparty in an amount that is less
than the deduction that would apply to
the security-based swap if it was a
proprietary position of the non-bank
security-based swap dealer.1515 In
addition, the Commission proposed
capital charges to address exceptions
from the margin collection requirements
with respect to non-cleared securitybased swaps, as an alternative to margin
collateral by requiring a non-bank
security-based swap dealer to hold
sufficient net capital to enable it to
withstand losses if a counterparty
defaults.1516
In the context of the statutory
framework and the Commission’s
proposed financial responsibility
program for non-bank security-based
swap dealers, if the Commission were to
treat margin as a transaction-level
requirement and apply margin to certain
non-cleared transactions but not others,
any credit risk of such other
transactions that are not collateralized
by mutually agreed contractual
arrangement between a security-based
swap dealer and its counterparty would
need to be addressed by imposing
capital charges, which would increase
the amount of net capital a non-bank
security-based swap dealer is required
to set aside. While the increased liquid
capital would provide an additional
buffer for a non-bank security-based
swap dealer to withstand losses
resulting from a default of its
counterparties, it also would increase
business costs. Depending on the size of
a foreign security-based swap dealers’
foreign business that is not
collateralized, the size of the increased
amount of the capital charge may be
very large. As discussed in the Capital,
Margin, and Segregation Proposing
Release, if security-based swap dealers
are required to maintain an excessive
amount of capital, that amount may
result in certain costs for the markets
and the financial system, including the
potential for the reduced availability of
security-based swaps for market
participants who would otherwise use
such transactions to hedge the risks of
id. at 70304.
id. at 70245–46.
1516 See id. at 70246.
their business, or engage in other
activities that would promote capital
formation.1517 End users also may incur
increased transaction costs in
connection with the increased capital
charges as security-based swap dealers
are likely to pass on the financial
burden of any increased capital
requirements to customers.1518 If the
transaction costs are too high, end users
may seek other cheaper alternatives,
such as cleared security-based swaps or
voluntary collateral posting to reduce
transaction pricing, or they may decide
not to transact security-based swaps at
all.
In the cross-border context, the
Commission is proposing not to apply
the mandatory clearing requirement to
transactions between a foreign securitybased swap dealer and non-U.S. person
counterparties whose performance
obligations under security-based swaps
are not guaranteed by U.S. persons.
Therefore, a foreign security-based swap
dealer’s exposure to counterparty credit
risk arising from its transactions with
these non-U.S. person counterparties
would not be addressed by the Title VII
mandatory clearing requirement. If
margin requirements do not apply to
these transactions, the counterparty
credit risk arising from such
transactions may be left
uncollateralized. In the event that nonU.S. counterparties experience financial
difficulties, and the foreign securitybased swap dealer’s uncollateralized
exposures to such counterparties have
grown exponentially due to severe
market movement, the uncollateralized
foreign credit exposures may jeopardize
the safety and soundness of the foreign
security-based swap dealer, whose
failure would have negative impact on
the U.S. security-based swap market and
present risk to the U.S. financial system.
Such uncollateralized credit risk could
be addressed by imposing capital
charges under the Commission’s
proposed capital rule, but taking this
approach would result in increased
costs and higher barrier for new foreign
entrants into the U.S. security-based
swap market. To mitigate the cost of
increased capital charges, a foreign
security-based swap dealer may choose
to enter into credit support
arrangements and request some or all
counterparties to post collateral. This
would be particularly the case when a
foreign security-based swap dealer is
transacting in a foreign market where
collateral posting is a common market
practice to manage counterparty credit
risk or in a foreign jurisdiction that
1514 See
1515 See
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1517 See
id. at 70306.
1518 Id.
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imposes margin requirements because
the foreign security-based swap dealer
would encounter less resistance to
posting margin from foreign
counterparties. To the extent that the
costs of capital charges drive foreign
security-based swap dealers to
voluntarily collateralize their exposures
to counterparty credit risks, the
differences in the economic
consequences between treating margin
as an entity-level requirement as
opposed to a transaction-level
requirement would narrow.
By contrast, under the proposed
approach, the counterparty credit
exposures arising from a foreign nonbank security-based swap dealers
transactions with non-U.S. persons
whose performance of obligations under
non-cleared security-based swaps are
not guaranteed by U.S. persons would
be collateralized but the collateral
would not be segregated.1519 The
collateral received would protect the
foreign security-based swap dealer
against the default risk of the foreign
counterparty and reduce the probability
of the failure of the foreign securitybased swap dealer and the spillover and
contagion risk of a foreign
counterparty’s default that may impact
the U.S. financial system. In addition,
such collateral could finance the
business needs of the foreign securitybased swap dealer and increase its
liquidity. The Commission
preliminarily believes that the proposed
treatment of margin as an entity-level
requirement would generate the benefit
of offsetting the greater risk to the
foreign security-based swap dealer and
the U.S. financial system arising from
the use of non-cleared security-based
swaps and help ensure the safety and
soundness of the security-based swap
dealers 1520 without imposing excessive
capital charges at the same time, which
may raise the barrier for foreign dealers
to enter the U.S. security-based swap
market. The proposed treatment of
margin also may increase funds
available to finance a foreign securitybased swap dealer’s business activity,
which would decrease the borrowing
needs and lower the costs of business.
Commenters raised concerns about
the potential costs and burdens of
1519 A foreign security-based swap dealer that is
not a registered broker-dealer would not be required
to segregate assets held as collateral received from
a non-U.S. person counterparty with respect to noncleared security-based swap transactions. A foreign
security-based swap dealer that is a registered
broker-dealer would be required to segregate margin
collateral received from all counterparties. See
proposed Rule 18a–4(e)(1) under the Exchange Act
and discussion in Section III.C.4(b).ii, supra.
1520 See Section 15F(e)(3)(A) of the Exchange Act,
15 U.S.C. 78o–10(e)(3)(A).
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applying duplicative margin collection
requirements to foreign transactions.1521
The Commission preliminarily believes
that the costs of complying with
duplicative margin requirements can be
addressed by the proposed substituted
compliance framework. As stated in our
cost and benefit analysis with respect to
substituted compliance below, the
Commission preliminarily believes that
substituted compliance would not
substantially change the programmatic
benefits intended by the entity-level
requirements in Section 15F of the
Exchange Act, including margin
requirements; however, to the extent
that substituted compliance eliminates
duplicative compliance costs, registered
foreign security-based swap dealers that
are eligible for a substituted compliance
determination may incur lower
programmatic costs associated with
implementation or compliance with the
specified Title VII requirements
(including margin requirements).1522
Request for Comment
The Commission requests comments
on all aspects of the economic analysis
of the alternatives to the proposed
definition of U.S. person, the proposed
application of the de minimis exception
and the proposed application of the
major security-based swap participant
definition in the cross-border context.
The Commission requests that
commenters provide data and sources of
data to support any comments. In
addition, the Commission requests
commenters’ views on particular issues
below. Responses that are supported by
empirical data and analysis provide
great assistance to the Commission in
considering the economic consequences
of the proposed treatment of certain
requirements as entity-level and other
requirements as transaction-level
requirements.
• Has the Commission appropriately
considered the costs and benefits
associated with an approach that would
treat all the requirements set forth in
Section 15F of the Exchange Act, and
rules and regulations thereunder, as
entity-level requirements and apply
them on an entity-wide basis, except for
the external business conduct standards
and segregation requirements? Has the
Commission appropriately estimated the
costs and benefits associated with
requiring a foreign security-based swap
dealer to conform its capital and risk
management practices to the rules
1521 See Cleary Letter IV at 18 (‘‘If non-U.S.
margin requirements are essentially the same, or are
merely different, but not significantly different, it is
not obvious how the Agencies could justify their
proposal or ex ante cost-benefit analysis.’’)
1522 See Section XV.I, infra.
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31151
proposed by the Commission? If not,
please explain why and provide
information on how such costs and
benefits should be assessed.
• Are there any requirements that are
treated as entity-level in the
Commission’s cross-border proposal
that should be treated as transactionlevel requirements from the cost and
benefit point of view? If so, please
explain how such treatment would
affect the costs and benefits of the
proposed approach.
• Has the Commission appropriately
considered the costs and benefits
associated with treating margin as an
entity-level requirement, taking into
account the interplay between the
minimum capital requirement and
margin requirement? If not, please
explain why and provide information
on how such costs and benefits should
be assessed. What would be the
economic impact of treating margin as
an entity-level requirement? Should the
Commission adopt the CFTC’s approach
by treating margin as a transaction-level
requirement, given the costs and
benefits of this alternative? Should the
Commission adopt the prudential
regulators’ approach to exclude certain
foreign security-based swaps from
application of the margin requirement,
given the costs and benefits of this
alternative?
2. Transaction-Level Requirements
With respect to the application of
these transaction-level requirements to
security-based swap dealers active in
the cross-border context, the
Commission proposes Rule 3a71–3(c)
under the Exchange Act regarding
application of customer protection
requirements to security-based swap
dealers,1523 Rule 18a–4(e) regarding
application of segregation requirements
to foreign security-based swap
dealers,1524 Rule 3a67–10(b) regarding
application of customer protection
requirements to foreign major securitybased swap participants,1525 and Rule
18a–4(f) regarding application of
segregation requirements to foreign
major security-based swap
participants.1526 In the following
sections, we discuss the economic
considerations of these proposed rules
regarding application of transaction1523 See proposed Rule 3a71–3(c) under the
Exchange Act, as discussed in Section III.C.4(b).i,
supra.
1524 See proposed Rule 18a–4(e) under the
Exchange Act, as discussed in Section III.C.4(b).ii,
supra.
1525 See proposed Rule 3a67–10(b) under the
Exchange Act, as discussed in Section IV.D.1(b),
supra.
1526 Id.
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level requirements to security-based
swap dealers or major security-based
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context.
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(a) Proposed Rule 3a71–3(c)—
Application of Customer Protection
Requirements
Title VII imposes certain external
business conduct requirements on
registered security-based swap dealers
that govern their interactions with
counterparties to security-based swap
transactions.1527 These provisions are
intended to protect the counterparties of
registered dealers in such transactions
by ensuring that security-based swap
dealers, among other things, provide
adequate disclosures to their
counterparties about the risks of the
transaction.1528
Proposed Rule 3a71–3(c) provides
that registered security-based swap
dealers, with respect to their Foreign
Business, shall not be subject to the
requirements relating to business
conduct standards described in Section
15F(h) of the Exchange Act, and the
rules and regulations thereunder, other
than Section 15F(h)(1)(B) of the
Exchange Act, and the rules and
regulations thereunder. We are
proposing to define ‘‘Foreign Business’’
as security-based swap transactions
entered into, or offered to be entered
into, by or on behalf of a foreign
security-based swap dealer or a U.S.
security-based swap dealer in a dealing
capacity that are not its ‘‘U.S.
Business.’’ 1529
‘‘U.S. Business’’ would be defined
separately for foreign security-based
swap dealers and U.S. security-based
swap dealers. With respect to a foreign
security-based swap dealer, ‘‘U.S.
Business’’ would include any
transaction entered into, or offered to be
entered into, by or on behalf of such
foreign security-based swap dealer, with
a U.S. person (other than a foreign
branch), or any transaction conducted
within the United States.1530 With
respect to a U.S. security-based swap
dealer, ‘‘U.S. Business’’ would include
any transaction by or on behalf of the
U.S. security-based swap dealer,
wherever entered into or offered to be
entered into, other than a transaction
conducted through a foreign branch
with a non-U.S. person or another
1527 See Sections 15F(h) and 15F(j)(5) of the
Exchange Act.
1528 See Section III.C.3(a)i, supra.
1529 Proposed Rule 3a71–3(a)(2) under the
Exchange Act, as discussed in Section III.C.4.(a),
supra.
1530 Proposed Rule 3a71–3(a)(6)(i) under the
Exchange Act, as discussed in Section III.C.4.(a),
supra.
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foreign branch.1531 With the exception
of the exclusion of transactions
conducted through a foreign branch
from the definition of a U.S. securitybased swap dealer’s U.S. Business, these
definitions closely track the application
of the de minimis exception to the
transactions of U.S. persons and nonU.S. persons under proposed Rule
3a71–3(b) under the Exchange Act.
Moreover, whether a transaction occurs
within the United States or with a U.S.
person, which are key elements of the
Foreign Business and U.S. Business
definitions, would turn on the same
factors that are used to determine
whether the de minimis exception
applies to the security-based swap
activity of a non-U.S. person engaged in
dealing activity.1532
In the External Business Conduct
Standards Proposing Release, we have
considered the expected benefits and
costs of the proposed rules regarding
external business conduct standards as
they apply to dealers generally, and we
expect to discuss the benefits and costs
associated with the final rules in our
adopting release. In the proposing
release, we noted that these rules may
be expected to benefit security-based
swap dealers and other market
participants in a number of ways. For
example, the requirement for securitybased swap dealers to provide a daily
mark should enable counterparties to
have a clearer picture of their
relationship with security-based swap
dealers, including by providing a
meaningful reference point for
calculating variation margin.1533
Similarly, our proposed rules regarding
security-based swap dealers’ obligations
to know their counterparties may be
expected to help ensure that securitybased swap dealers recommend only
transactions that are appropriate to the
needs and resources of their
counterparties.1534 Proposed rules
regarding the standards of conduct in
transactions involving special entities
should likewise help ensure that such
business is awarded on the merits of the
transaction.1535
We also noted that the proposed
external business conduct rules would
1531 Proposed Rule 3a71–3(a)(6)(ii) under the
Exchange Act, as discussed in Section III.C.4.(a),
supra.
1532 See proposed Rule 3a71–3(b)(1)(i) under the
Exchange Act (identifying transactions that U.S.
persons and non-U.S. persons must include in their
de minimis calculations); proposed Rule 3a71–
3(a)(2) under the Exchange Act (defining ‘‘Foreign
Business’’); proposed Rule 3a71–3(a)(6) under the
Exchange Act (defining ‘‘U.S. Business’’).
1533 External Business Conduct Standards
Proposing Release, 76 FR 42449.
1534 See id. at 42450.
1535 See id. at 42450.
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be likely to impose certain costs on
security-based swap dealers and other
market participants. For example, they
would require security-based swap
dealers to make various disclosures and
establish systems for monitoring
compliance with these
requirements.1536
Because this proposing release does
not change the substantive external
business conduct requirements but only
potentially reduces the number of
registered security-based swap dealers
and the number of transactions
involving registered security-based
swap dealers that would be subject to
the external business conduct
requirements, our discussion below
focuses on how proposed Rule 3a71–
3(c) affects the scope of application of
these rules. This change in scope will
directly affect the resulting
programmatic benefits and costs. We
also discuss the assessment costs
associated with distinguishing Foreign
Business from U.S. Business.
i. Programmatic Benefits and Costs
Our proposed rules may affect the
programmatic costs and benefits
associated with requirements regarding
external business conduct standards in
two ways. First, we are proposing rules
regarding application of the de minimis
exception in the cross-border context
that may be expected to reduce the
number of non-U.S. persons that would
otherwise be required to register as
security-based swap dealers.1537
Because the business conduct and
conflict-of-interest rules apply only to
registered dealers, reducing the number
of registered dealers would reduce the
number of entities required to comply
with these dealer-specific rules. Second,
we are proposing not to require foreign
or U.S. security-based swap dealers to
comply with requirements relating to
external business conduct standards
with respect to their Foreign Business,
which would reduce the proportion of
registered dealers’ transactions that are
required to comply with these rules. We
preliminarily believe that these
proposed rules will not significantly
affect the programmatic benefits of the
rules but should reduce programmatic
costs that they impose on market
participants.
As already noted, Title VII is
concerned directly with risk to the U.S.
financial system, transparency, and the
protection of investors,1538 and we
preliminarily believe that our proposed
1536 See
id. at 42443–448.
proposed Rule 3a71–3(b) under the
Exchange Act, as discussed in Section III.B.3, supra.
1538 See note 4, supra.
1537 See
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approach to applying requirements
related to external business conduct
standards is consistent with these goals.
As noted above in our discussion of the
programmatic costs and benefits
associated with our application of the
de minimis exception in the crossborder context, we believe that our
proposed approach to the de minimis
calculation appropriately identifies
those entities whose dealing activity
poses the type of stability, transparency,
and counterparty-protection concerns
that Title VII is intended to address.1539
To the extent that the number of entities
required to comply with these
requirements relating to external
business conduct standards decline
because the number of registered foreign
security-based swap dealers declines,
we do not believe that there will be a
significant change in programmatic
benefits, as foreign security-based swap
dealers whose transactions with U.S.
persons and transaction conducted
within the United States falls below the
de minimis threshold raise concerns no
different from those posed by U.S.
security-based swap dealers whose
security-based swap activity falls below
the threshold. We see no reason,
therefore, for treating these two types of
entities differently.
We also preliminarily believe that our
proposal not to require compliance with
these requirements with respect to
Foreign Business, even if a securitybased swap dealer is registered, will
have an insignificant effect, if any, on
programmatic benefits and should
reduce programmatic costs. We
recognize that our proposed rule would
not require foreign and U.S. securitybased swap dealers to comply with
these rules with respect to a significant
proportion of their transactions.
However, because Title VII is directed to
the promoting the stability of the U.S.
financial system and protecting
counterparties, we do not believe that
this proposed approach would reduce
the programmatic benefits of our
regulatory framework, given that such
transactions, including any customerfacing activity, occur entirely or in
significant part outside the United
States where the parties typically do not
expect U.S. customer-protection
requirements to apply. At the same
time, our definition of U.S. Business
should ensure that registered dealers are
required to comply with these
requirements in their transactions with
those counterparties that are entitled to
protection in light of the purposes of
Title VII or that reasonably expect to be
1539 See
Section III.B.4, supra.
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protected in their dealings with
registered security-based swap dealers.
We preliminarily believe that our
proposed approach will reduce
programmatic costs for registered
security-based swap dealers generally in
proportion to their relative volume of
Foreign Business, although certain of
the costs associated with policies and
procedures established to comply with
these requirements are likely to remain
fairly constant to the extent that a
security-based swap dealer has any U.S.
Business. Permitting security-based
swap dealers to enter into transactions
arising out of their Foreign Business
without complying with these
requirements should reduce the costs of
compliance with Title VII for such
registered security-based swap dealers
and reduce the competitive effects of the
Title VII dealer requirements by
reducing unnecessary disparities
between registered and unregistered
security-based swap dealers in their
foreign business.
ii. Assessment Costs
The assessment costs associated with
the proposed rules regarding these
requirements would primarily flow from
the determination of whether a given
transaction is part of a registered
security-based swap dealer’s U.S.
Business or its Foreign Business. Both
for U.S. and foreign security-based swap
dealers, ‘‘U.S. Business’’ is defined to
capture largely the same transactions
that these entities are required to
calculate in determining whether they
are required to register as security-based
swap dealers.1540 Because of this
overlap with the information needed to
perform the de minimis calculation, the
incremental costs of these
determinations for registered securitybased swap dealers should be minimal.
We preliminarily believe that a
registered foreign security-based swap
dealer would not incur additional
assessment costs above those already
incurred in establishing and
maintaining a system to identify and
monitor the status of its counterparties
and transactions for purposes of the de
minimis calculation, as described
above.1541
U.S. security-based swap dealers
would likely not have incurred these
types of systems costs in performing the
de minimis calculation because our
proposed approach would require U.S.
1540 The sole exception is that, for U.S. securitybased swap dealers, transactions conducted through
a foreign branch, which would be counted toward
the U.S. person’s de minimis threshold, would not
be treated as U.S. Business for purposes of applying
the external business conduct requirements.
1541 See Section XV.D.2, supra.
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persons to count all of their dealing
transactions toward their de minimis
threshold. However, U.S. security-based
swap dealers who conduct some or all
of their security-based swap business
through foreign branches and seek to
rely on the Foreign Business exception
to the external business conduct
requirement would likely establish a
similar system to identify such
transactions. We believe that the costs of
such a system would closely track the
costs associated with the systems that
non-U.S. persons are likely to establish
to perform the dealer de minimis
calculation and to determine whether a
foreign security-based swap dealer must
comply with Title VII external business
conduct requirements, as described
above, as U.S. security-based swap
dealers conducting business through a
foreign branch will also need to classify
their counterparties and transactions in
order to determine whether external
business conduct requirements
apply.1542 Based on a review of DTCC–
TIW data relating to single-name credit
default swap activity in 2011, there
were no more than five U.S. securitybased swap dealers that conducted
dealing activity through foreign
branches. Assuming that all such
entities elected to establish a system to
identify their Foreign Business, the total
assessment costs associated with our
proposed rule would be approximately
$85,200 in one-time annual
programming costs and $76,435 in
ongoing annual costs.1543
iii. Alternatives
The Commission’s proposed approach
to the application of the requirements
relating to external business conduct
standards is similar to the CFTC’s
proposed approach in certain aspects
but differs from the CFTC’s proposed
approach in other aspects. With respect
to U.S. security-based swap dealers,
both the Commission’s and the CFTC’s
proposed approaches would not apply
the requirements relating to external
business conduct standards to such U.S.
security-based swap dealers’
transactions conducted through a
foreign branch outside the United States
with non-U.S. person
counterparties.1544 On the other hand,
1542 See
Section XV.D.2(a), supra.
noted above in connection with the
calculation of the de minimis threshold by foreign
security-based swap dealers, we estimate the perentity one-time annual programming costs to total
approximately $17,040 and the per-entity ongoing
annual costs to total $15,287. See note 1425, supra.
1544 See CFTC Cross-Border Proposal, 77 FR
41230 and the text accompanying note 116.
However, the CFTC’s cross-border proposal did not
address whether external business conduct
1543 As
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Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
with respect to foreign security-based
swap dealers, the Commission’s
proposed approach would apply the
requirements relating to external
business conduct standards to such
foreign security-based swap dealers’
transactions conducted within the
United States with all counterparties
and transactions conducted outside the
United States with foreign branches
while the CFTC’s proposed approach
would not apply external business
conduct standards to non-U.S. swap
dealers’ swap transactions with nonU.S. person counterparties even though
such transactions are conducted within
the United States.1545
The Commission could have proposed
an approach to the application of the
external business conduct standards
that is the same as the CFTC’s but
instead, is proposing a territorial
approach with a focus on counterparty
protection in the United States. The
Commission preliminarily believes that
imposing external business conduct
standards on U.S. security-based swap
dealers with respect to their transactions
conducted outside the United States
through foreign branches would cause
U.S. security-based swap dealers to
incur compliance costs with respect to
their foreign business 1546 conducted
through foreign branches, which would
not be incurred by foreign securitybased swap dealers when foreign
security-based swap dealers conduct
security-based swap transactions
outside the United States in foreign
markets.
The Commission recognizes that nonbank U.S. security-based swap dealers
who do not conduct transactions
through foreign branches would be
subject to the external business conduct
standards with respect to all
transactions, including transactions
with non-U.S. persons. The Commission
preliminarily believes that, unlike U.S.
security-based swap dealers who are
banks and conduct foreign business
through their foreign branches, a nonbank U.S. security-based swap dealer
may conduct dealing activity with nonU.S. persons directly from its U.S.
location or from its foreign offices that
may not have separate operations that
are subject to substantive local financial
regulation and may not operate for valid
business reasons. Therefore,
transactions conducted by a non-bank
standards would apply to transactions conducted
through a foreign branch or agency of a U.S.
security-based swap dealer within the United States
where the counterparty is a non-U.S. person.
1545 See CFTC Cross-Border Proposal, 77 FR
41229 and 41237.
1546 See proposed Rule 3a71–3(a)(2) and the
discussion in Section III.C.4(a), supra.
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U.S. security-based swap dealer with
non-U.S. persons are an inseparable part
of such non-bank dealer’s security-based
swap business. Consistent with our
traditional entity approach to the
regulation of broker-dealers, the
Commission preliminarily believes that
it is appropriate to apply the external
business conduct standards to a nonbank U.S. security-based swap dealer
with respect to all transactions. To the
extent that non-bank U.S. security-based
swap dealers conduct dealing activity
with non-U.S. persons through foreign
affiliates, the proposed approach to
application of the external business
conduct standards would not impose
burdens on non-bank U.S. securitybased swap dealers’ activity in the
foreign security-based swap markets and
would achieve the benefits of protecting
investors from abusive financial services
practices in the United States. The
Commission requests comments on the
costs and benefits associated with the
proposed application of external
business conduct standards to U.S.
security-based swap dealers and
whether the proposed approach would
burden bank and non-bank U.S.
security-based swap dealers’ foreign
dealing business.
With respect to foreign security-based
swap dealers, the Commission proposes
to apply the external business conduct
standards to their transactions with nonU.S. persons if such transactions are
conducted within the United States. As
stated above, the proposed approach to
application of the external business
conduct standards to transactions
conducted within the United States
would generate the benefit of protecting
investors from abusive financial services
practices. To permit registered foreign
security-based swap dealers not to
comply with the external business
conduct standards when they conduct
transactions in the United States with
non-U.S. person may not adequately
prevent abusive financial services
practices in the U.S. security-based
swap market and would permit double
standards in security-based swap
dealings in the United States. Therefore,
the Commission preliminarily believes
that the proposed territorial approach
with a focus on counterparty protection
in the United States is appropriate.
Request for Comment
• The Commission requests data to
assess the costs and benefits of the
proposed rule regarding application of
external business conduct standards
described above. Specifically, the
Commission requests comment on (1)
whether the proposed rule not to require
a registered U.S. bank security-based
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Fmt 4701
Sfmt 4702
swap dealer and foreign security-based
swap dealer to comply with the external
business conduct standards with respect
to its foreign business would
compromise counterparty protection
from abusive financial services practices
in the United States; (2) whether the
proposed rule to require a registered
non-bank U.S. security-based swap
dealer to comply with the external
business conduct standards with respect
to all transactions regardless of whether
the counterparties are U.S. persons or
non-U.S. persons would affect its
foreign dealing business; and (3) the
Commission’s estimate of the
assessment costs with respect to the
proposed rule. Commenters should
provide an assessment of these costs
and benefits, as well as any costs and
benefits not already defined, that may
result from the adoption of the proposed
rule. Commenters should provide
analysis and empirical data to support
their views on the costs and benefits
associated with the proposals.
(b) Proposed Rule 18a–4(e)—
Application of Segregation
Requirements
i. Programmatic Benefits and Costs
a. Pre-Dodd Frank Segregation Practice
Segregation is intended to protect
customer assets by ensuring that cash
and securities that a registered securitybased swap dealer holds for securitybased swap customers are isolated from
the proprietary assets of the securitybased swap dealer and identified as
property of such customers.1547
Customer assets related to OTC
derivatives are currently not
consistently segregated from dealer
proprietary assets in today’s OTC
derivatives markets.1548 With respect to
non-cleared derivatives, available
information suggests that there is no
uniform segregation practice but that
collateral for most accounts is not
segregated.1549 In the absence of a
1547 See Section III.C.4.(b)(2), supra. See also
Capital, Margin, and Segregation Proposing Release
77 FR 70274.
1548 See ISDA Margin Survey 2012. See also
Capital, Margin, and Segregation Proposing Release,
77 FR 70325.
1549 See generally ISDA Margin Survey 2012.
According to this survey, where an independent
amount (initial margin) is collected, ISDA members
reported that most (approximately 72.2%) was
commingled with variation margin and not
segregated, and only 4.8% of the amount received
was segregated with a third party custodian. The
survey also notes that while the holding of the
independent amounts and variation margin together
continues to be the industry standard both
contractually and operationally, it is interesting to
note that the ability to segregate has been made
increasingly available to counterparties over the
past three years on a voluntary basis, and has led
to 26% of independent amount received and 27.8%
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segregation requirement, the likelihood
that security-based swap customers
would suffer losses upon a securitybased swap dealer’s default may be
substantially higher than may be
expected if security-based swap dealers
are subject to such a requirement.1550
b. Benefits of the Segregation
Requirements
Segregation requirements would limit
the potential losses for security-based
swap customers if a registered securitybased swap dealer fails.1551 The extent
to which assets are in fact protected by
proposed Rule 18a–4(a)–(d) would
depend on how effective they are in
practice in allowing assets to be readily
returned to customers.1552 In the crossborder context, the effectiveness of the
segregation requirement with respect to
foreign security-based swap dealers in
practice may depend on many factors,
including the type and objective of the
insolvency or liquidation proceeding
and how the U.S. Bankruptcy Code,
SIPA, banking regulations, and
applicable foreign insolvency laws are
interpreted by the U.S. bankruptcy
court, SIPC, Federal Deposit Insurance
Corporation, and relevant foreign
authorities. In the Capital, Margin, and
Segregation Proposing Release, we
stated that it would be difficult to
measure the benefits of the segregation
requirements proposed by the
Commission under Section 3E of the
Exchange Act;1553 however, we believe
that Rule 15c3–3, the existing
segregation rule for broker-dealers,
would provide a reasonable template for
crafting the segregation requirements for
security-based swap dealers.1554 The
ensuing increased confidence of market
participants when transacting in
security-based swaps, as compared to
the OTC derivatives market as it exists
today, should increase the desire to
trade security-based swaps and
generally benefit market
participants.1555
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c. Costs of the Segregation Requirements
Segregation requirements also will
impose certain costs on registered
of independent amount delivered being segregated
in some respects. See ISDA Margin Survey 2012 at
10. See also Capital, Margin, and Segregation
Proposing Release, 77 FR 70325.
1550 See Capital, Margin, and Segregation
Proposing Release, 77 FR 70325.
1551 Id.; see also CFTC and Commission,
Statement on MF Global about the deficiencies in
customer futures segregated accounts held at the
firm (Oct. 31, 2011).
1552 See Capital, Margin, and Segregation
Proposing Release, 77 FR 70325.
1553 Id.
1554 Id.
1555 Id. at 70326.
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security-based swap dealers as well as
other market participants. The costs
associated with individual account
segregation include fees charged by
custodians to monitor individual
account assets and to account for
potential legal risks and liabilities of
custodians to account beneficiaries or
dealers, as well as operational costs to
account for collateral on an individual
customer basis.1556 The costs associated
with omnibus segregation would
include operational costs and increase
in costs of funds to dealers due to
inability to use customer funds,1557
compared to the baseline today that
dealers in general do not segregate
customer collateral for security-based
swaps, and to the extent collateral is
segregated, it is not done so on the terms
that would be required by the
segregation rules proposed by the
Commission in the Capital, Margin, and
Segregation Proposing Release.1558 The
operational costs include costs to
establish qualifying bank accounts and
to perform the calculations required to
determine the amount that is required at
any one time to be maintained in the
reserve account.1559 The increase in
costs of funds to the extent that
collateral a dealer holds that could
otherwise be rehypothecated to finance
business activity would no longer be
permitted for that purpose could equal
the borrowing costs of the dealer. The
extent of the increase of cost of funds to
dealers would depend on how much
collateral associated with security-based
swaps and held by dealers today
1556 In the Capital, Margin, and Segregation
Proposing Release, we stated that a commenter to
the CFTC raised concerns with the length of time
and the costs to comply with an individual
segregation mandate. Specifically, the commenter
raised concerns regarding the number of collateral
arrangements that would be required. The
commenter estimated, based on discussion with its
members, that ‘‘a rough estimate of the time it
would take to establish the necessary collateral
arrangements is 1 year and eleven months, with an
associated cost of $141.8 million, per covered swap
entity.’’ See Capital, Margin, and Segregation
Proposing Release 77 FR 70326.
1557 See Capital, Margin, and Segregation
Proposing Release 77 FR 70326, citing SIFMA/ISDA
Comment Letter to the Prudential Regulators
(‘‘First, because the collateral cannot be
rehypothecated, and because the collateral amounts
will be very large, CSEs will be limited to investing
very large amounts of eligible collateral in assets
that generate low returns.’’).
1558 See proposed Rules 18a–4(a)–(d) under the
Exchange Act and Capital, Margin, and Segregation
Proposing Release 77 FR 70274–78.
1559 See section V.C. of the Capital, Margin, and
Segregation Proposing Release for a discussion of
implementation costs. In cases where an SBSD is
jointly registered as a broker-dealer, the costs of
adapting existing systems to account for securitybased swap transactions may not be material in
light of the similarities between the systems and
procedures required by Rule 15c3–3 and those that
would be required by proposed Rules 18a–4(a)–(d).
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Fmt 4701
Sfmt 4702
31155
consists of initial margin that they can
rehypothecate, i.e., that is not now
segregated as would be required under
the new Rules 18a–4(a)–(d) proposed by
the Commission in the Capital, Margin
and Segregation Proposing Release.1560
The Commission currently does not
have sufficient information to quantify
the increase of costs of funds to dealers
as a result of the proposed segregation
requirement and seeks comment on the
impact of the proposed application of
segregation requirements on the
increase of costs of funds.1561
d. Costs and Benefits of Proposed Rules
18a–4(e)(1) and (2) Regarding
Application of Segregation
Requirements to Foreign Security-Based
Swap Dealers
Proposed Rules 18a–4(e)(1) and (2)
would not apply segregation
requirements to a foreign security-based
swap dealer in certain circumstances.
Specifically, with respect to non-cleared
security-based swap transactions, a
foreign security-based swap dealer that
is not a broker-dealer would not be
subject to the segregation requirements
set forth in Section 3E of the Exchange
Act and paragraphs (a)–(d) of the
proposed Rule 18a–4 with respect to
margin received from non-U.S. person
counterparties.1562 Therefore, under the
proposed Rule 18a–4(e)(1)(ii), non-U.S.
person counterparties to non-cleared
security-based swaps with a registered
foreign security-based swap dealer that
is not a registered broker-dealer would
not be ‘‘customers’’ of such registered
foreign security-based swap dealer and
would not be given the preferred
priority status with respect to the
segregated assets in the omnibus
account maintained by such foreign
security-based swap dealer in a
stockbroker liquidation proceeding
1560 See Capital, Margin, and Segregation
Proposing Release, 77 FR 70326. See also
Manmohan Singh, ‘‘Velocity of Pledged Collateral:
Analysis and Implications,’’ IMF Working Paper
(Nov. 2011), available at: http://
nowandfutures.com/large/
VelocityOfPledgedCollateral-wp11256(imf).pdf;
Manmohan Singh and James Aitken, ‘‘The (sizable)
Role of Rehypothecation in the Shadow Banking
System,’’ IMF Working Paper (July 2010), available
at: http://www.imf.org/external/pubs/ft/wp/2010/
wp10172.pdf.
1561 The amount of initial margin collateral
associated with security-based swaps posted to and
held by dealers today that they can rehypothecate
is unknown to the Commission.
1562 See proposed Rule 18a–4(e)(1)(ii) under the
Exchange Act. A foreign security-based swap dealer
that is a broker-dealer shall be subject to the
segregation requirements set forth in Section 3E of
the Exchange Act and paragraphs (a)–(d) of the
proposed Rule 18a–4 with respect to margin
received from any counterparties. See proposed
Rule 18a–4(e)(1)(i) under the Exchange Act.
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Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
under the U.S. Bankruptcy Code.1563
With respect to a registered foreign
security-based swap dealer that is not a
foreign bank with a branch or agency in
the United States and is not a registered
broker-dealer, the proposed Rule 18a–
4(e)(2)(ii) would subject such foreign
security-based swap dealer to the
segregation requirements with respect to
any assets posted by a non-U.S. person
counterparty to secure a cleared
security-based swap transaction only if
such foreign security-based swap dealer
accepts any assets from, for, or on behalf
of a U.S. person counterparty to secure
a security-based swap.1564 The proposed
Rule 18a–4(e)(2)(iii) would not subject a
registered foreign security-based swap
dealer that is a foreign bank with a
branch or agency in the United States to
the segregation requirements with
respect to any assets posted by a nonU.S. person counterparty to a securitybased swap transaction.1565
As stated above, the proposed Rules
18a–4(e)(1) and (2) regarding
application of the segregation
requirements to foreign security-based
swap dealers would focus on applying
the segregation requirements to provide
customer protection to U.S. person
counterparties and would not extend
the same customer protection to nonU.S. person counterparties unless not
doing so would result in losses to U.S.
person counterparties.1566 To the extent
that a foreign security-based swap
dealer would not be subject to the
segregation requirements, the
programmatic benefits described above,
such as prompt return of customer
assets and limiting the potential losses
for security-based swap customers in
the event of a failure of a registered
security-based swap dealer, would not
be extended to non-U.S. person
counterparties. In addition, the benefits
of potential increased confidence of
market participants when transacting in
security-based swaps, as brought about
by the segregation requirements, would
not occur in the markets where such
foreign security-based swap dealer
transacts with non-U.S. person
counterparties.
There also would be corresponding
decrease in costs as a result of the
1563 See
Section III.C.4.(b)(2), supra.
proposed Rule 18a–4(e)(2)(ii) under the
Exchange Act. A registered foreign security-based
swap dealer that is a registered broker-dealer shall
be subject to the segregation requirements set forth
in Section 3E of the Exchange Act and paragraphs
(a)–(d) of the proposed Rule 18a–4 under the
Exchange Act with respect to margin received from
any counterparties. See proposed Rule 18a–
4(e)(2)(i) under the Exchange Act.
1565 See proposed Rule 18a–4(e)(2)(iii) under the
Exchange Act.
1566 See Section III.C.4.(b)(2), supra.
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1564 See
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proposed Rule 18a–4(e)(1)(ii) not
requiring a foreign security-based swap
dealer that is not a registered brokerdealer to segregate assets collected from
non-U.S. person counterparties as
collateral to secure non-cleared securitybased swaps. A foreign security-based
swap dealer would not need to provide
notice required pursuant to Section
3E(f)(1)(A) of the Exchange Act to a nonU.S. person counterparty with respect to
the right to elect individual account
segregation.1567 This would save
operational costs to account for
collateral on an individual customer
basis and save fees charged by
custodians as described above.1568 A
foreign security-based swap dealer that
is not a registered broker-dealer also
would have cost-savings associated with
omnibus segregation, including less
operational cost (such as the cost to
perform the calculations required to
determine the amount that is required at
any one time to be maintained in the
reserve account) as described above, and
may be able to rehypothecate non-U.S.
person counterparty’s assets to finance
its business activity, which would result
in borrowing cost savings. The extent of
these cost savings would depend on
how much collateral posted by non-U.S.
person counterparties and held by
dealers today to secure security-based
swaps consisting of margin that is
available for dealers to use (i.e., that is
not now segregated).
The Commission preliminarily
believes that the above decreases in
benefits and costs as a result of the
proposed Rule 18a–4(e)(1) and (2) are
not those programmatic benefits and
costs intended by the segregation
requirements set forth in Section 3E of
the Exchange Act, and the rules and
regulations thereunder. Such decreases
reflect the exclusion of foreign securitybased swap dealers (that are not
registered broker-dealers) from the
segregation requirements when they
transact with non-U.S. persons in the
foreign markets, which we believe is
consistent with the objective of the
1567 See Section 3E(f)(1)(A) of the Exchange Act,
15 U.S.C. 78c–5(f), and proposed Rule 18a–4(d)(1)
under the Exchange Act.
1568 Although the segregation requirements with
respect to non-cleared security-based swaps
described in Section 3E(f) and the proposed Rule
18a–4(a)–(d) would not apply to a foreign securitybased swap dealer when such foreign securitybased swap dealer transacts with a non-U.S. person
counterparty, proposed Rule 18a–4(e)(1) does not
prevent parties from making segregation
arrangements by contractual agreement under
applicable local law. If parties were to make
segregation arrangements, certain benefits and costs
would arise; however, these benefits and costs
would be outside the Title VII regulatory regime
and would not be attributable to the Title VII
regulatory regime.
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Dodd-Frank Act to protect the U.S.
markets and participants in those
markets.1569
e. Costs and Benefits of Proposed Rule
18a–4(e)(3) Regarding Disclosures
There would be new costs and
benefits associated with compliance
with the segregation requirements for
foreign security-based swap dealers due
to the disclosures requirements in the
proposed Rule 18a–4(e)(3). Specifically,
proposed Rule 18a–4(e)(3) would
require a registered foreign securitybased swap dealer to disclose to its
counterparty that is a U.S. person the
potential treatment of the assets
segregated by such registered foreign
security-based swap dealer pursuant to
Section 3E of the Exchange Act, and the
rules and regulations thereunder, in
insolvency proceedings under U.S.
bankruptcy law and any applicable
foreign insolvency laws. Such
disclosure shall include whether the
foreign security-based swap dealer is
subject to the segregation requirement
set forth in Section 3E of the Exchange
Act, and the rules and regulations
thereunder, with respect to the assets
collected from the U.S. person
counterparty who will receive the
disclosure, whether the foreign securitybased swap dealer could be subject to
the stockbroker liquidation provisions
in the U.S. Bankruptcy Code, whether
the segregated assets could be afforded
customer property treatment under the
U.S. bankruptcy law, and any other
relevant considerations that may affect
the treatment of the assets segregated
under Section 3E of the Exchange Act in
insolvency proceedings of the foreign
security-based swap dealer. The
Commission preliminarily believes that
such disclosure would greatly benefit
U.S. person counterparties and assist
them in evaluating the legal risk in
respect of posting collateral to a foreign
security-based swap dealer and the
likely treatment of their assets held as
collateral in the event of insolvency or
liquidation of the foreign security-based
swap dealer whom they transact with
and post collateral to.
With respect to costs, the Commission
preliminarily believes that a foreign
security-based swap dealer should be
able to include such disclosure in the
credit support agreement pursuant to
which assets would be posted to margin,
guarantee, or secure a security-based
swap transaction. The costs associated
with such disclosure may include legal
costs related to consulting bankruptcy
counsels, both U.S. counsel and relevant
foreign counsel, in respect of the
1569 See
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potential treatment of the segregated
assets under U.S. bankruptcy law and
applicable foreign insolvency laws, the
costs of drafting such disclosure, and
the costs of updating such disclosure
whenever there is a material change of
U.S. bankruptcy law or applicable
foreign laws that may render the prior
disclosure inaccurate or misleading. The
Commission preliminarily estimates
that the average costs associated with
such disclosure would be less than
$2,000,000 and a narrow range could be
between $760,000 and $920,000.1570
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ii. Assessment Costs
The assessment cost associated with
proposed Rule 18a–4(e)(1) and (2)
should primarily be related to inquiries
about a counterparty’s U.S. person
status, whether a security-based swap is
a cleared or non-cleared transaction,
whether the foreign security-based swap
dealer is a registered broker-dealer,
whether the foreign security-based swap
dealer, whether the foreign securitybased swap dealer has a branch or
agency in the United States, and
whether the foreign security-based swap
dealer accepts any assets from, or on
behalf of, a U.S. person counterparty to
security a security-based swap, in order
to determine whether a transaction
1570 This estimate is based on staff experience in
undertaking legal analysis of U.S. bankruptcy law
treatment of customer assets held by broker-dealers
and assumes that foreign security-based swap
dealers would seek outside legal counsel to prepare
the disclosures described in proposed Rule 18a–
4(e)(3) and that the legal analysis of the treatment
of customer property under a complex foreign
insolvency law regime may cost $50,000 per entity
and the same legal analysis under a less complex
foreign insolvency law regime or the U.S.
bankruptcy law regime may cost $30,000 per entity.
We recognize that the complexity of the insolvency
laws relating to liquidation of a foreign securitybased swap dealer may vary greatly, and that we do
not have insight into various insolvency law
regimes such that we could reasonably determine
what insolvency law regime may be considered
more or less complex for these purposes. Thus,
based on our understanding of the U.S. bankruptcy
law analysis relating to liquidation of a brokerdealer, taking into account the potential application
of various foreign insolvency laws, we believe that
an average of the costs associated with more
complex and less complex insolvency law regimes
equaling $40,000 per entity could reasonably
approximate the average costs for a foreign securitybased swap dealer to prepare the disclosures
required in proposed Rule 18a–4(e)(3). We have
estimated that the total number of dealers that may
be required to register under the proposed de
minimis rule is 50 or fewer entities, and if the
criterion of three or more non-ISDA dealer
counterparties is applied to the analysis, we
estimated that the total number of dealers that may
be required to register is between 27 and 31. See
Section XV.D.1(b), supra. Out of these dealers, we
estimated that the number of non-U.S. domiciled
dealers is between 19 and 23. Therefore, the
aggregate costs of the disclosure requirement could
be $2,000,000 ($40,000 * 50) or less with a narrow
range from $760,000 ($40,000 * 19) to $920,000
($40,000 * 23).
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would be subject to the segregation
requirements. A security-based swap
dealer should know whether it is a
registered broker-dealer and whether a
particular transaction is submitted for
clearing and should not incur any
assessment costs relating to determining
whether a transaction is cleared or noncleared security-based swap. A foreign
security-based swap dealer may need to
make an internal inquiry as to whether
it has a branch or agency in the United
States and whether it accepts collateral
from, or on behalf of, a U.S. person
counterparty. Such inquiry should be a
factual inquiry involving consulting the
corporate secretary, in-house attorney or
compliance manager without the need
for further research and, therefore, the
cost of such inquiry should be minimal.
The Commission preliminarily believes
that the costs associated with inquiring
about a counterparty’s U.S. person
status should be subsumed in the
assessment costs of the de minimis rule
and the requirements relating to the
external business conduct standards
since a security-based swap dealer only
needs to inquire about a counterparty’s
U.S. person status and implement
systems to record and track the
counterparty status once in order to
assess and comply with all the Title VII
requirements that depend on such
factual inquiry. Therefore, the
Commission preliminarily believes that
the assessment costs associated with
proposed Rules 18a–4(e)(1) and (2)
alone should be minimal.
The assessment cost associated with
the disclosures in proposed Rule 18a–
4(e)(3) would be related to inquiries
about a counterparty’s U.S. person
status, which also would be subsumed
in the assessment costs associated with
proposed Rules relating to the de
minimis exception and the requirements
relating to the external business conduct
standards.
Request for Comment
• Is it appropriate, from the cost and
benefit point of view, not to require
foreign security-based swap dealers to
comply with the segregation
requirements when they transact with
non-U.S. person counterparties? Are
there other costs and benefits not
mentioned above? Specifically, the
Commission requests comment on (1)
whether the proposed approach to
application of the segregation
requirements to foreign security-based
swap dealers based on their status as a
broker-dealer, foreign security-based
swap dealer that is a bank with a branch
or agency in the United States, or
foreign security-based swap dealer that
is not a broker-dealer and is not a bank
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with a branch or agency in the United
States would generate the benefit of
effectively administering the segregation
requirement in practice and protecting
U.S. counterparties, (2) the costs of
custodian fees, the operation costs and
the costs associated with increased costs
of funds due to inability to use customer
asserts as a result of a foreign securitybased swap dealer being required to
comply with the segregation
requirements, (3) the costs of preparing
the disclosures required in proposed
Rule 18a–4(e)(3) and (4) the assessment
costs associated with the proposed Rule
18a–4(e).
• Is it appropriate, from the cost and
benefit point of view, to require a
foreign security-based swap dealer to
disclose potential treatment of the assets
segregated by such foreign securitybased swap dealer in insolvency
proceedings under U.S. bankruptcy law
and any applicable foreign insolvency
laws? Are there other costs and benefits
not mentioned above?
• Is it appropriate, from the cost and
benefit point of view, to require a
foreign security-based swap dealer to
disclose to its non-U.S. person
counterparty that it is not subject to the
segregation requirements and that funds
or property provided by such non-U.S.
person counterparty would not be
treated as ‘‘customer property’’ as that
term is defined in 11 U.S.C. 741?
F. Economic Analysis of Application of
Rules Governing Security-Based Swap
Clearing in Cross-Border Context
The Dodd-Frank Act amends the
Exchange Act to require central clearing
of security-based swaps that the
Commission determines should be
cleared,1571 and it directs entities that
perform clearing agency functions for
security-based swaps to register with the
Commission.1572 In this section, we first
discuss the costs and benefits resulting
from clearing agency registration and
then consider the costs and benefits
associated with the proposed rule
regarding application of the clearing
agency registration requirement to
foreign clearing agencies. Following
this, we discuss the costs and benefits
that result from requiring security-based
swap market participants to centrally
clear transactions and then examine the
trade-offs associated with the proposed
rule implementing the mandatory
clearing requirement in the cross-border
context.
1571 See Section 3C(a)(1) of the Exchange Act, 15
U.S.C. 78c–3(a)(1).
1572 See Section 17A(g) of the Exchange Act, 15
U.S.C. 78q–1(g).
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1. Programmatic Benefits and Costs
Associated With the Clearing Agency
Registration
(a) Proposed Interpretive Guidance
Regarding Clearing Agency Registration
(i) Current State of Clearing Agency
Registration
At present, voluntary clearing of
security-based swaps in the United
States is limited to CDS products.1573 It
began in December of 2008, when the
Commission acted to facilitate the
clearing of OTC security-based swaps by
permitting five clearing agencies,
including three foreign clearing
agencies,1574 to clear CDS on a
temporary, conditional basis.1575 In
each instance, these clearing agencies
wanted to perform clearing functions
with respect to CDS in the United States
by providing CCP services directly to
U.S. persons.1576 The temporary
exemptive orders granted to four of
these clearing agencies (including two
foreign clearing agencies) were extended
until July 16, 2011.1577 Title VII of the
Dodd-Frank Act provides that (1) a
depository institution that cleared
swaps as a multilateral clearing
organization prior to the date of
enactment of the Dodd-Frank Act or (2)
a derivatives clearing organization
registered with the CFTC that cleared
swaps pursuant to an exemption from
registration as a clearing agency prior to
the date of enactment of the Dodd-Frank
Act is deemed registered as a clearing
agency for the purposes of clearing
security-based swaps (‘‘Deemed
Registered Provision’’).1578 The Deemed
1573 See
Section XV.B.2(e), supra.
three foreign clearing agencies are ICE
Clear Europe Limited, Eurex Clearing AG, and
LIFFE A&M and LCH Clearnet Ltd. See note 74,
supra.
1575 See note 74, supra.
1576 Id.
1577 See Exchange Act Release Nos. 63389 (Nov.
29, 2010), 75 FR 75520 (Dec. 3, 2010) (order
extending temporary conditional exemptions in
connection with request on behalf of ICE Clear
Europe, Limited), 63390 (Nov. 29, 2010), 75 FR
75518 (Dec. 3, 2010), (order extending temporary
conditional exemptions in connection with request
on behalf of Eurex Clearing AG), 63388 (Nov. 29,
2010), 75 FR 75522 (Dec. 3, 2010) (order extending
temporary conditional exemptions in connection
with request on behalf of Chicago Mercantile
Exchange, Inc.), and 63387 (Nov. 29, 2010) 75 FR
75502 (Dec. 3, 2010) (order extending and
modifying temporary exemptions in connection
with request of ICE Trust US LLC); LIFFE A&M and
LCH.Clearnet Ltd. allowed their order to lapse
without seeking renewal.
1578 See 15 U.S.C. 78q–1(l). Under this Deemed
Registered Provision, a clearing agency will be
required to comply with all requirements of the
Exchange Act, and the rules thereunder, applicable
to registered clearing agencies to the extent it clears
security-based swaps after the effective date of the
Deemed Registered Provision, including, for
example, the obligation to file proposed rule
changes under Section 19(b) of the Exchange Act.
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1574 These
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Registered Provision, along with other
general provisions under Title VII of the
Dodd-Frank Act, became effective on
July 16, 2011.1579 As a result, three
clearing agencies, i.e., ICE Clear Europe,
Limited, ICE Clear Credit LLC (formerly
ICE Trust US LLC), and Chicago
Mercantile Exchange Inc., which were
performing CCP functions with respect
to CDS in the United States, were
deemed registered with the Commission
on July 16, 2011.1580
(ii) Programmatic Effect of the Proposed
Interpretive Guidance
As stated above,1581 the Commission
is proposing interpretive guidance that
a clearing agency performing the
functions of a CCP for security-based
swaps within the United States would
be required to register pursuant to
Section 17A(g) of the Exchange Act.1582
Under this proposed interpretive
guidance, a registration requirement
pursuant to Section 17A(g) of the
Exchange Act would apply only to
clearing agencies that provide CCP
services directly to a U.S. person with
respect to security-based swaps, since
these entities would be performing the
functions of a CCP within the United
States. Three clearing agencies currently
provide CCP services directly to U.S.
persons with respect to swaps and
security-based swaps.1583 All of these
three clearing agencies are registered
with the Commission under the Deemed
Registered Provision. Therefore, the
proposed interpretation would not
increase the number of domestic or
foreign clearing agencies required to
register with the Commission until new
clearing agencies desire to enter the U.S.
market to provide CCP services directly
to U.S. persons with respect to securitybased swaps.
1579 See Section 774 of the Dodd-Frank Act
(stating, ‘‘[u]nless otherwise provided, the
provisions of this subtitle shall take effect on the
later of 360 days after the date of the enactment of
this subtitle or, to the extent a provision of this
subtitle requires a rulemaking, not less than 60 days
after publication of the final rule or regulation
implementing such provision of this subtitle.’’).
1580 Eurex Clearing AG did not meet the criteria
in the Deemed Registered Provision and is not
currently providing CCP services in the United
States with respect to security-based swaps. See,
e.g., Order Granting Temporary Exemptions Under
the Securities Exchange Act of 1934 in Connection
with the Pending Revision of the Definition of
‘‘Security’’ to Encompass Security-Based Swaps,
and Request for Comment, Exchange Act Release
No. 64795 (July 1, 2011) at n. 76.
1581 See Section V, supra.
1582 15 U.S.C. 78q–1(g).
1583 See Clearing Agency Standards Adopting
Release, 77 FR 66265. These three clearing agencies
are ICE Clear Europe, Limited, ICE Clear Credit
LLC, and Chicago Mercantile Exchange, Inc.
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(iii) Costs and Benefits of the Proposed
Interpretive Guidance
The Commission has considered the
costs and benefits associated with the
clearing agency registration requirement
in Section 17A(g) of the Exchange
Act 1584 in the cross-border context
through the lens of a key Title VII goal:
systemic risk mitigation. We discuss
below the costs and benefits of the
proposed interpretive guidance by
looking at the role of the clearing agency
in the security-based swap market and
how clearing agencies transfer financial
risks.
The proposed interpretive guidance
regarding clearing agency registration
would generate significant
programmatic benefits. These benefits
are tied to mandatory clearing. As
explained below, clearing agency
registration promotes sound
management of the counterparty risk
concentrated in CCPs, the importance of
which is magnified by the application of
a mandatory clearing requirement.
Registration would provide standards
for CCPs’ management of financial risks,
including counterparty credit risk, legal
risk and liquidity risk. Mandatory
clearing of security-based swaps is one
means by which Title VII of the DoddFrank Act seeks to reduce systemic risk
in the U.S. financial system. Under Title
VII, security-based swaps, ‘‘whenever
possible and appropriate,’’ 1585 shall be
centrally cleared through a clearing
agency that is registered or exempt from
registration under the Exchange Act.1586
In a world of bilateral transactions in
which each counterparty bears the other
counterparty’s credit risk, a large
counterparty who transacts with many
other counterparties and cumulates
significant security-based swap
positions may pose systemic risk when
its failure would generate sequential
counterparty defaults.1587
1584 15
U.S.C. 78q–1(g).
e.g., S. Comm. on Banking, Hous., &
Urban Affairs, The Restoring American Financial
Stability Act of 2010, S. Rep. No. 111–176, at 32
(‘‘As a key element of reducing systemic risk and
protecting taxpayers in the future, protections must
include comprehensive regulation and rules for
how the OTC derivatives market operates.
Increasing the use of central clearinghouses,
exchanges, appropriate margining, capital
requirements, and reporting will provide safeguards
for American taxpayers and the financial system as
a whole.’’); id. at 34 (‘‘Some parts of the OTC market
may not be suitable for clearing and exchange
trading due to individual business needs of certain
users. Those users should retain the ability to
engage in customized, uncleared contracts while
bringing in as much of the OTC market under the
centrally cleared and exchange-traded framework as
possible.’’).
1586 See 15 U.S.C. 78c–3(a)(1).
1587 See Craig Pirrong, ‘‘The Economics of Central
Clearing: Theory and Practice,’’ ISDA Discussion
1585 See,
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Central clearing through a CCP
generally reduces counterparty risk by
interposing a CCP as counterparty to all
cleared transactions.1588 Where
security-based swaps are subject to a
mandatory clearing requirement the role
of the CCP becomes even more critical,
as the volume of positions in which the
CCP is interposed and becomes the
central counterparty will likely
increase.1589
While central clearing may make
sequential counterparty defaults less
likely, it does not eliminate systemic
risk. CCPs concentrate counterparty
risk.1590 CCPs manage and reduce such
concentrated risk by applying mark-tomarket pricing and margin requirements
to cleared transactions in a consistent
manner 1591 and through netting (i.e., by
reducing the amounts of funds or other
assets that must be exchanged at
settlement).1592 In the event of a
clearing member’s default in which the
losses exceed the collateral posted to the
CCP and other available funds, residual
losses will be mutualized among the
other non-defaulting members.1593 By
placing members under financial strain,
mutualization may strain the entire
financial system and create systemic
impact.1594 Even in the absence of this
feature of CCPs, the default of a CCP has
Papers Series, No. 1 (2011), at 6 (‘‘Widespread
defaults on derivatives contracts may harm more
than the counterparties on the defaulted contracts.
The losses suffered by the victims of the original
defaults may be so severe as to force those victims
into financial distress, which harms those who have
entered into financial contracts with them—
including their creditors, and the counterparties to
derivatives on which they owe money. Such a
cascade of defaults can result in a systemic
financial crisis.’’).
1588 See Clearing Agency Standards Adopting
Release, 77 FR 66264 (‘‘Central clearing facilitates
the management of counterparty credit risk among
dealers and other institutions by shifting that risk
from individual counterparties to CCPs, thereby
helping protect counterparties from each other’s
potential failures and preventing the buildup of risk
in such entities, which could be systemically
important.’’).
1589 See Clearing Procedures Adopting Release, 77
FR 41638.
1590 See Clearing Agency Standards Adopting
Release, 77 FR 66264–65 (stating that ‘‘a CCP also
concentrates risks and responsibility for risk
management in the CCP.’’).
1591 See Culp, supra note 111. See also Clearing
Agency Standards Adopting Release, 77 FR 66264.
1592 See e.g., Duffie and Zhu, supra note 110; see
also Clearing Agency Standards Adopting Release,
77 FR 66264.
1593 See Risk Management Supervision of
Designated Clearing Entities (July 2011), Report by
the Board of Governors of the Federal Reserve
System, Securities and Exchange Commission and
Commodity Futures Trading Commission to the
Senate Committees on Banking, Housing, and
Urban Affairs and Agriculture in fulfillment of
Section 813 of Title VIII of the Dodd-Frank Act, at
12.
1594 See Craig Pirrong, ‘‘The Economics of Central
Clearing: Theory and Practice,’’ ISDA Discussion
Papers Series, No. 1 (2011), at 34–35.
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the potential to harm the market in all
financial instruments cleared by that
CCP, creating liquidity constraints with
respect to such financial instruments in
the market. Such liquidity constraints
would affect all parties transacting in
such instruments.1595
Given the mutualization of losses, a
CCP’s concentration of risk, and its
responsibility for risk management, the
effectiveness of a CCP’s risk controls
and the adequacy of its financial
resources are critical aspects of the
infrastructure of the market it serves.1596
Registration and clearing agency
standards are designed to address these
considerations.
The Commission preliminarily
believes its interpretation that a clearing
agency that provides CCP services for
security-based swaps directly to U.S.
persons must register pursuant to
Section 17A(g) of the Exchange Act 1597
generates the benefits of protecting the
U.S. financial system against systemic
risk that may arise from central clearing
functions performed in the United
States. In the case of a foreign clearing
agency that provides CCP services
directly to U.S. persons, the
Commission preliminarily believes that
requiring such foreign clearing agency
to register with the Commission and
comply with the Commission’s
regulatory regime for security-based
swap clearing would generate the key
benefit of reducing the magnitude of any
systemic risk flowing into or within the
United States originating in the
activities of other members of a clearing
agency.
Specifically, the clearing agency
standards would provide the minimum
standards for CCPs’ management of
financial risks, including counterparty
credit risk, legal risk, and liquidity risk.
For example, the clearing agency
standards established by the
Commission are designed to minimize
the CCPs’ credit risk by, among other
things, establishing eligibility standards
for clearing members and requiring
registered clearing agencies to measure
their credit exposures on a daily basis.
The Commission’s clearing agency
standards also require a registered
clearing agency that acts as a CCP to
collect initial and variation margin from
1595 Id. See also Risk Management Supervision of
Designated Clearing Entities (July 2011), Report by
the Board of Governors of the Federal Reserve
System, Securities and Exchange Commission and
Commodity Futures Trading Commission to the
Senate Committees on Banking, Housing, and
Urban Affairs and Agriculture in fulfillment of
Section 813 of Title VIII of the Dodd-Frank Act, at
8–9.
1596 See Clearing Agency Standards Adopting
Release, 77 FR 66265.
1597 15 U.S.C. 78q–1(g).
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31159
members, and maintain sufficient
financial resources to withstand, at a
minimum, a default by the participant
family to which it has the largest
exposure in extreme but plausible
market conditions and, with respect to
a registered clearing agency acting as a
CCP for security-based swaps, maintain
additional financial resources sufficient
to withstand, at a minimum, a default
by the two participant families to which
it has the largest exposures in extreme
but plausible market conditions.1598 The
benefits and costs of the clearing agency
standards have been discussed in detail
in the Clearing Agency Standards
Adopting Release.1599 The proposed
interpretive guidance does not change
the benefits associated with the
substantive registration requirement and
clearing agency standards. The aggregate
programmatic benefits of the proposed
interpretive guidance would flow from
its programmatic effect on the number
of clearing agencies registered as
discussed above.
The proposed interpretive guidance
would also entail certain costs, such as
direct registration and compliance costs
on CCPs.1600 The proposed interpretive
guidance does not change the costs
associated with the substantive
registration requirement and clearing
agency standards. As with the
programmatic benefits, the aggregate
programmatic costs of the proposed
interpretive guidance would flow from
its programmatic effect on the number
of clearing agencies registered as
discussed above.
(iv) Assessment Costs
A clearing agency would incur
assessment costs to determine whether
it would be required to register by
determining whether it provides CCP
services directly to a U.S. person. Such
determination may be made as part of
its clearing membership application
approval process. As part of the
membership application, a prospective
clearing member would be required to
provide corporate organization
documents, such as certificates of
incorporation or articles of organization,
which would enable the clearing agency
1598 See 17 CFR 240.17Ad–22(b)(3); see also
Clearing Agency Standards Adopting Release, 77 FR
66234–35 and 66274–75.
1599 See Section V Economic analysis of the
Clearing Agency Standards Adopting Release, 77 FR
66263–84.
1600 The Commission previously estimated the
costs for each registered clearing agency associated
with compliance with clearing agency standards
adopted in the Clearing Agency Standards Adopting
Release could total approximately $3.7 million in
initial costs and $10.1 million in annual ongoing
costs. See Clearing Agency Standards Adopting
Release, 77 FR 66273.
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to determine whether a prospective
clearing member is a U.S. person. Since
corporate organization documents are
part of the clearing membership
application package,1601 the
Commission preliminarily believes that
the assessment costs associated with the
proposed interpretive guidance should
be minimal.
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(v) Alternatives
An alternative to the proposed
interpretive guidance would be to
require a clearing agency to register if
such clearing agency provides CCP
services to non-U.S. intermediaries that
have U.S. persons as customers. Such an
alternative would focus on the fact that
intermediaries, whose financial stress or
failure would mostly likely affect the
U.S. financial system, are exposed to the
risk of CCPs, and also transmit that risk
to their U.S. customers. However, the
Commission believes that the risk
exposure that a U.S. customer could
incur under its contractual agreements
with an intermediary is generally much
lower than the risk exposure a U.S.
member could incur under a
membership agreement with a CCP
because a customer is only risking up to
the full amount of property entrusted to
an intermediary, but is not under any
obligation to perform under the
contractual agreements that the
intermediary enters into with third
parties. Consequently, if a clearing
agency provides CCP services to an
intermediary that has a U.S. person as
a customer, the ripple effect of the
failure of such clearing agency on the
U.S. financial system may not rise to the
systemic level.
Alternatively, the Commission could
have proposed to require a clearing
agency to register if such clearing
agency has a member whose obligations
under the clearing membership
agreement are guaranteed by a U.S.
person. The Commission recognizes that
guarantees may expose the U.S.
guarantor to the performance obligations
under the clearing membership
agreement and represent conduits
through which the risks associated with
foreign CCP default may transfer to the
U.S. financial system. A non-U.S.
member of a foreign CCP will still
participate in loss mutualization in the
event of member default. In the
presence of a guarantee, the losses
associated with mutualization may flow
back to the guarantor.
1601 See, e.g., Clearing membership Application
Instructions and Forms, ICE Clear U.S., Inc. (Aug.
2012), available at: https://www.theice.com/
publicdocs/clear_us/
Clear_US_Member_Application.pdf.
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However, the Commission
preliminarily believes that interpreting a
U.S. person providing a guarantee to a
non-U.S. clearing member with respect
to obligations under a clearing
membership agreement as an indication
of the clearing agency providing CCP
services to a U.S. person may lead to a
result that is over-inclusive with respect
to the statutory clearing agency
registration requirement. A U.S. person
could guarantee its foreign affiliate’s
obligations under a clearing
membership agreement with a foreign
clearing agency that does not provide
CCP services to any U.S. persons.
Therefore, as a matter of policy, the
Commission declines to propose such
alternative interpretation at this time.
Finally, the Commission is not
proposing to apply clearing agency
registration requirements to a clearing
agency solely based on a U.S. domicile
of the clearing agency. The Commission
believes that the domicile location of a
clearing agency is not a sufficient
indicator of whether a CCP is
performing the functions of a CCP in the
United States and the transmission of
systemic risk across borders by
providing CCP services directly to U.S.
persons.
(b) Proposed Exemption of Foreign
Clearing Agency From Registration
As discussed above, the Commission
preliminarily believes that it may be
appropriate to consider an exemption as
an alternative to application of the
registration requirement to a foreign
clearing agency in circumstances where
the foreign clearing agency is subject to
comparable, comprehensive supervision
and regulation by appropriate
government authorities in its home
country, and the nature of the clearing
agency’s activities and performance of
functions within the United States
suggest that registration is not necessary
to achieve the Commission’s regulatory
objectives.
The Commission preliminarily
believes that the benefits of considering
such exemption would be to increase
the range of registered and exempt
clearing agencies that could be used to
satisfy the mandatory clearing
requirement. Since the exemption
would be considered in circumstances
where the foreign clearing agency is
subject to comparable, comprehensive
supervision and regulation in its home
country, the Commission preliminarily
believes that such exemption would not
compromise the programmatic benefits
of the mandatory clearing requirement
and at the same time may decrease the
costs to market participants associated
with the mandatory clearing
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requirement. In addition, to the extent
that the exemption eliminates or
decreases duplicative compliance costs,
a foreign clearing agency eligible for the
exemption may incur lower
programmatic costs associated with
implementation of, or compliance with,
the clearing agency registration
requirements and clearing agency
standards than it would otherwise incur
without the option of the proposed
exemption.
On the other hand, in the case of an
exemption order granted with
Commission-imposed conditions, it is
possible that the programmatic costs
may increase because market
participants would be required to incur
costs to satisfy these conditions.
However, the proposed availability of an
exemption from registration may enable
a foreign clearing agency that would,
due to conflicting local laws, otherwise
not be able to provide CCP services to
U.S. market participants in the absence
of an exemption. In such cases, an
exemption with Commission-imposed
conditions may increase the number of
clearing agencies in the U.S. securitybased swap market, contributing to the
programmatic benefits and costs that
flow from the clearing agency
registration requirement.
(c) Programmatic Effects of Alternative
Standards
As stated above,1602 Section 17A(i) of
the Exchange Act permits the
Commission to adopt rules for registered
clearing agencies that clear securitybased swaps and conform its regulatory
standards and supervisory practices to
reflect evolving United States and
international standards.
The Commission preliminarily
believes that this approach may be
appropriate where the Commission
determines not to grant a general
exemption from registration under
Section 17A(k) of the Exchange Act, but
where consistency with some regulatory
standards suggests that a targeted
regulatory approach is warranted. To
avoid compromising the benefits of
clearing agency registration discussed
above, the Commission would consider
the costs and benefits of applying such
alternative standards when it
contemplates such an action. The
Commission preliminarily believes that
the alternative standards approach
could provide great flexibility for the
Commission to promote a great range of
registered and exempt clearing agencies
for market participants to satisfy the
mandatory clearing requirement without
compromising the benefit of clearing
1602 See
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agency registration by considering the
adoption of targeted standards when
warranted by the circumstances.
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2. Programmatic Benefits and Costs
Associated With the Mandatory Clearing
Requirement of Section 3C(a)(1) of the
Exchange Act
Prior to the Dodd-Frank Act, ICE Clear
Credit and ICE Clear Europe engaged in
credit default swap clearing activities
pursuant to exemptive orders issued by
the Commission.1603 In part, the
exemptive orders were conditioned on
those CCPs making certain information
available to the Commission, including
risk assessment reports and information
regarding future changes to risk
management practices.1604
Following the Dodd-Frank Act
becoming effective, ICE Clear Credit and
ICE Clear Europe were deemed to be
registered with the Commission in July
2011 as clearing agencies for securitybased swaps.1605 ICE Clear Credit began
clearing corporate single-name credit
default swaps in December 2009,1606
and, as of December 14, 2012, had
cleared a total $1.8 trillion gross
notional of single-name credit default
swaps on 153 North American corporate
reference entities.1607 ICE Clear Europe
began clearing credit default swaps on
1603 See, e.g., Exchange Act Release No. 59527
(Mar. 6, 2009), 74 FR 10791 (Mar. 12, 2009) (‘‘ICE
Clear Credit Exemptive Order’’); Exchange Act
Release No. 60372 (July 23, 2009), 74 FR 37748
(July 29, 2009) (‘‘ICE Clear Europe Exemptive
Order’’). In connection with those orders,
Commission staff considered a number of aspects of
those CCPs’ clearing practices, including, inter alia,
their risk management methodologies.
1604 See ICE Clear Credit Exemptive Order, supra
note 1603, at 10799; ICE Clear Europe Exemptive
Order, supra note 1603, at 37756–57.
1605 Section 17A(l) of the Exchange Act provides
in relevant part that a derivative clearing
organization registered with the CFTC that clears
security-based swaps would be deemed to be
registered as a clearing agency under section 17A
if, prior to the enactment of the Dodd-Frank Act, it
cleared swaps pursuant to an exemption from
registration as a clearing agency.
Both ICE Clear Credit and ICE Clear Europe also
are registered with the CFTC as Designated Clearing
Organizations.
1606 See Exchange Act Release No. 61662 (Mar. 5,
2010), 75 FR 11589, 11591 (Mar. 11, 2010)
(discussing ICE Clear Credit’s CDS clearing
activities as of March 2010).
ICE Clear Credit (then known as ICE US Trust
LLC) began clearing index-based CDS in March
2009. See Exchange Act Release No. 59527 (Mar. 6,
2009), 74 FR 10791 (Mar. 12, 2009) (order granting
temporary exemptions under the Exchange Act on
behalf of ICE US Trust LLC).
1607 ICE Clear Credit also has cleared a total of
$19.1 trillion gross notional on 59 index CDS as of
December 14, 2012. See ICE Clear Credit, Volume
of ICE CDS Clearing, available at: https://
www.theice.com/clear_credit.jhtml.
In addition to clearing single-name CDS on North
American corporate reference entities, ICE Clear
Credit also clears CDS on certain non-U.S.
sovereign entities, and on certain indices based on
North American reference entities.
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single-name corporate reference entities
in December 2009,1608 and, as of
December 14, 2012, had cleared a total
Ö1.5 trillion in gross notional of singlename credit default swaps on 121
European corporate reference
entities.1609 The level of clearing
activity appears to have steadily
increased as more CDS have become
eligible to be cleared.1610 To date, all of
ICE Clear Credit’s and ICE Clear
Europe’s security-based swap clearing
activity has involved proprietary
transactions between clearing
members.1611
The economic effects of mandatory
clearing may be expected to vary
depending on the scope of the
requirement and the financial
instruments subject to mandatory
clearing. Within the subset of
instruments that could be subject to a
mandatory clearing requirement, a
broader clearing mandate may be
expected generally to lead to more
effective risk mitigation, but it may also
increase costs to market participants.
The ultimate economic impact of the
mandatory clearing requirement in part
will be affected by the total set of
security-based swaps that will be
subject to mandatory clearing, following
Commission determinations pursuant to
Section 3C(b) of the Exchange Act.1612
1608 See Exchange Act Release No. 61973 (Apr.
23, 2010), 75 FR 22656, 22657 (Apr. 29, 2010)
(discussing ICE Clear Europe’s CDS clearing activity
as of April 2010).
ICE Clear Europe commenced clearing indexbased CDS in July 2009. See Exchange Act Release
No. 60372 (July 23, 2009), 74 FR 37748 (July 29,
2009) (order granting temporary exemptions under
the Exchange Act on behalf of ICE Clear Europe).
1609 ICE Clear Europe also has cleared a total of
Ö9.7 trillion in gross notional on 44 index-based
CDS. See ICE Clear Europe, Volume of ICE CDS
Clearing, available at: https://www.theice.com/
clear_credit.jhtml.
Aside from clearing single-name CDS on
European corporate reference entities, ICE Clear
Europe also clears CDS on indices based on
European reference entities, as well as futures and
instruments on OTC energy and emissions markets.
1610 See Clearing Procedures Adopting Release, 77
FR 41636–38 (discussing the steady increase in the
volume of cleared CDS transactions).
1611 For purposes of the discussion here, ‘‘clearing
members,’’ ‘‘clearing participants,’’ and similar
terms encompass market participants that are
approved by a clearing agency to become the
clearing agency’s counterparty when a single-name
CDS is cleared.
1612 15 U.S.C. 78c–3(b). Section 3C(b) of the
Exchange Act includes two mandatory clearing
determination review processes. One is
Commission-initiated review and the other is a
swaps submissions review processes. The
mandatory clearing determinations to be made by
the Commission would have impact on the
economic consequences of the mandatory clearing
requirement. For example, with respect to singlename CDS on certain corporate entities that have
high notional size outstanding but are not currently
cleared on a voluntary basis, the determination of
clearing of these single-name credit default swaps
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Accordingly, this section does not
seek to address the full range of
economic consequences of the
mandatory clearing requirement and the
proposed application of mandatory
clearing in the cross-border context that
may result from the Commission’s
determination to require certain
security-based swap transactions to be
subject to mandatory clearing. Instead,
this section contains two subsections.
The first discusses programmatic effects
of the mandatory clearing requirement
and the second discusses costs and
benefits that result from the mandatory
clearing requirement generally. We
consider these programmatic costs and
benefits through analyzing the potential
programmatic effects of mandatory
clearing based on the data of voluntary
clearing activity available to us and the
assumptions stated below.
(a) Programmatic Effects of the
Mandatory Clearing Requirement
As stated above, voluntary clearing of
security-based swaps in the United
Sates is currently limited to the CDS
products cleared by ICE Clear Credit
and ICE Clear Europe.1613 The level of
clearing activity appears to have
steadily increased over time as more
products have become eligible to be
cleared.1614 The notional volume of
cleared transactions reported by ICE
Clear Credit for U.S.-index CDS
products in 2009, 2010 and 2011
represented approximately 32%, 54%
and 57% of the total notional volume of
the U.S.-index CDS market, and the
notional volume of cleared transactions
reported by ICE Clear Credit for singlename CDS products referencing U.S.
corporate in 2009, 2010 and 2011
represented approximately 0%, 16%
and 25% of the total notional volume of
the single-name U.S. corporate CDS
market.1615 These figures were
would have impact on the volume of security-based
swap transactions subject to mandatory clearing.
1613 See the discussion of levels of security-based
swap clearing in Section XV.B.2(e) above. See also
Clearing Procedures Adopting Release, 77 FR 41636
(noting that central clearing of security-based swaps
began in March 2009 for index-based CDS products,
in December 2009 for single-name CDS products on
corporate reference entities, and in November 2011
for single-name CDS products on sovereign
reference entities; also noting that at present, there
is no central clearing in the United States for
security-based swaps that are not CDS products,
such as those based on equity securities).
1614 See Clearing Procedures Adopting Release, 77
FR 41636–38 (discussing the steady increase in the
volume of cleared CDS transactions).
1615 These figures are based on information
regarding names accepted for clearing reported by
ICE Clear Credit on its public Web site and are
calculated based on ‘‘price forming transactions’’
submitted to the DTCC–TIW. See Section XV.B.2(e),
supra. These figures include the clearing of trades
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calculated based on price-forming
transactions submitted to the DTCC–
TIW.1616
Our prior analysis of the level of
clearing activity also demonstrated
steady increases of CDS transaction
volume in names accepted for clearing
over time.1617 Such analysis compared
two measures of transaction volumes in
names accepted for clearing within a
year and across years and showed the
increase in percentage from 2009 to
2011 in the volume of new transactions
in names that have ‘‘accepted for
clearing’’ status. See Table 1 below.
TABLE 1—CLEARED TRADES AND ACCEPTED TRADES AS A PERCENTAGE OF GROSS NOTIONAL TRANSACTION VOLUME
U.S.-Index CDS
2009
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Notional volume ($ billions) .............................................
Percentage of Notional in Names Accepted for Clearing.
—at calendar year end .............................................
—at time of trade execution .....................................
Cleared transactions: % of total notional volume ............
2010
Single Name U.S. Corporate CDS
2011
2009
2010
2011
10,400
8,900
9,900
4,100
3,900
2,800
88%
55%
32%
90%
87%
54%
91%
91%
57%
1%
0%
0%
23%
16%
16%
33%
29%
25%
such difference marks a shift in existing
market clearing practices, the
mandatory clearing determination could
potentially have a material economic
impact.1621
Although data suggested that clearing
of security-based swaps has been
increasing, significant segments of the
security-based swap market remain
uncleared.1618 Due in part to this data,
the Commission recognized in the
Clearing Procedures Adopting Release
that mandatory clearing determinations
made pursuant to Section 3C(a)(1) of the
Exchange Act 1619 could alter current
clearing practices at the time such
determinations are made. One potential
consequence of mandatory clearing
determinations that require mandatory
clearing for certain security-based swaps
could be a higher level of clearing for
security-based swaps than would take
place under a voluntary system.1620
Where the amount of clearing taking
place under a voluntary system is
significantly different from the level of
clearing that would take place if trading
in a product were mandatory and where
(b) Programmatic Benefits and Costs of
the Mandatory Clearing Requirement
A key benefit of mandatory clearing is
reduction of counterparty credit risk. In
a regime with central clearing, the CCP
is the counterparty to all trades. Central
clearing mitigates counterparty credit
risk among dealers and other
institutions by shifting that risk from
individual counterparties to CCPs,
thereby helping protect counterparties
from sequential default. CCPs require
that members apply mark-to-market
pricing and margin requirements in a
consistent manner, and generally use
liquid margin collateral to manage the
risk of a member’s failure. Accordingly,
where CCPs operate under high
standards relating to risk management,
counterparty credit risk can be lower
than in a regime without CCPs where
counterparties can engage only in
bilateral netting and face margin
requirements that may vary significantly
between transactions.1622
Although central clearing reduces
counterparty risk, it is less certain
whether a mandatory requirement to
centrally clear security-based swap
transactions reduces the overall risks to
the financial system. Some have
expressed the view that central clearing
should be imposed wherever possible to
help control systemic risk; others, by
contrast, have contended that
concentrating the default risk of
numerous counterparties within a single
CCP (or within a small number of CCPs)
could introduce new risks.1623 For
on the same day the trade was executed as well as
the clearing of trades entered into in prior years and
submitted for clearing on retroactive basis. These
figures do not include trades that resulted from the
compression of trades previously submitted for
clearing. See id. The CME Group also clears index
CDS products and has reported clearing $144
billion in gross notional volumes of transactions
since inception, with $21 billion in open interest
as of the end of 2011. See CME Group, Cleared OTC
Credit Default Swaps, available at: http://
www.cmegroup.com/trading/cds/. These volumes
are small relative to total market activity and are not
included in the calculation of notional volume of
cleared index CDS in 2011 performed by the
Commission staff in the Clearing Procedures
Adopting Release. See Clearing Procedures
Adopting Release, 77 FR 41636.
1616 See Section XV.B.2(e) and note 1615, supra.
1617 See Clearing Procedures Adopting Release, 77
FR 41637–38. The analysis there presents two
measures with respect to transaction volume
accepted for clearing (which ultimately may have
been cleared or uncleared). The first measure
includes all transaction volume in names accepted
for clearing at any time during the calendar year,
whether or not a trade was accepted for clearing at
the time of its execution. The calculation of this
measure was performed by staff in the Division of
Risk, Strategy, and Financial Innovation by totaling
the sum of price forming transactions reported to
DTCC–TIW in the calendar year for index-based
and single-name corporate CDS products that match
the list of names accepted for clearing at ICE Clear
Credit during the same period. See ICE Clear Credit,
Clearing Eligible Products, available at: https://
www.theice.com/publicdocs/clear_credit/
ICE_Clear_Credit_Clearing_Eligible_Products.xls.
The second measure includes only transaction
volume in names accepted for clearing at the time
of trade execution. The calculation of this measure
was performed by staff in the Division of Risk,
Strategy, and Financial Innovation by totaling the
sum of price forming transactions reported to
DTCC–TIW in the calendar year for index-based
and single-name corporate CDS products that match
the list of names accepted for clearing at ICE Clear
Credit, including only those transactions executed
following the accepted for clearing date reported by
ICE Clear Credit. This measure accounts for the fact
that, although transactions executed in names prior
to the name being accepted for clearing can be
cleared later in the same calendar year through a
process referred to as ‘‘backloading,’’ names
accepted for clearing towards the end of the year
allow less time for this to occur. Backloading refers
to the submission for clearing of pre-existing
bilateral trades that were not submitted for clearing
on the date of the transaction. See Clearing
Procedures Adopting Release, 77 FR 41637–38.
1618 Because clearing is voluntary, counterparties
to the transaction have no obligation to clear and
may elect not to do so for various individual
reasons. Further, if the counterparties choose to
transact in a reference entity that is accepted for
clearing in a currency other than U.S. dollars, the
transaction is no longer eligible for clearing. In
addition, because clearing was performed
exclusively on a backloading basis prior to April
2011, some transactions have not been cleared
because they may have been subject to portfolio
compression or otherwise terminated prior to when
the option to submit the transactions for clearing
became available. See Clearing Procedures
Adopting Release, 77 FR 41638.
1619 15 U.S.C. 78c–3(a)(1).
1620 See Clearing Procedures Adopting Release, 77
FR 41638.
1621 Id.
1622 See note 1021, supra.
1623 See Craig Pirrong, Mutualization of Default
Risk, Fungibility, and Moral Hazard: The
Economics of Default Risk Sharing in Cleared and
Bilateral Markets, at 5 (Univ. of Houston Working
Paper, 2010), available at: http://business.nd.edu/
uploadedFiles/Academic_Centers/
Study_of_Financial_Regulation/
pdf_and_documents/clearing_moral_hazard_1.pdf
(‘‘Clearing of OTC derivatives has been touted as an
essential component of reforms designed to prevent
a repeat of the financial crisis. A back-to-basics
analysis of the economics of clearing suggests that
such claims are overstated, and that traditional OTC
mechanisms may be more efficient for some
instruments and some counterparties.’’); see also
Derivatives Clearinghouses: Opportunities and
Challenges: Hearing Before the Subcomm. on Secs.,
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instance, those expressing concern
about the systemic effects of central
clearing state that risk sharing between
members of a CCP may encourage
excessive risk taking because the costs
of imprudent decisions by one clearing
member are borne by other clearing
members. This moral hazard concern
may be exacerbated to the extent that
CCPs are viewed as too important to fail
and thus would likely be subject to
bailout remedies that would benefit all
CCP members.1624
While lower counterparty credit risk
benefits the financial system as a whole,
it can also make hedging less expensive
for market participants. An environment
in which central clearing is common
may see increased participation, greater
liquidity, and more efficient risk sharing
that promotes capital formation. There
also are circumstances under which
central clearing can increase
participation costs for certain
participants. In certain cases where
counterparties to a security-based swap
transaction are exposed to one another
in multiple asset markets, they may face
lower costs by bilaterally clearing new
contracts against existing exposures
instead of clearing through a central
counterparty.1625
Mandatory clearing can play an
important role in developing a strong
infrastructure for central clearing.1626
For instance, mandatory clearing
reduces operational risk by promoting
the standardization of contract terms.
Standardization can simplify the
valuation of security-based swaps,
increase the liquidity of security-based
swaps contracts, and promote
competition. Standardized contract
terms help avoid inefficiencies in
contracting that result from human and
processing errors. Standardized terms
also facilitate the development of
infrastructure technologies that facilitate
the prompt and accurate clearance and
settlement of security-based swaps.1627
Mandatory clearing may also have the
Ins., & Inv., of the S. Comm. on Banking, Hous., &
Urban Affairs, 112th Cong. 21, 49 (2011) (statement
of Chester S. Spatt, Professor of Finance, Carnegie
Mellon Univ.) (stating that ‘‘[t]he clearinghouse is
subject to considerable moral hazard and systemic
risk’’ in part because ‘‘there is a strong incentive for
market participants to trade with weak
counterparties’’ and noting that ‘‘it is unclear
whether the extent of use of clearinghouses will
ultimately lead to a reduction in systemic risk in
the event of a future crisis.’’).
1624 See Pirrong, note 1623, supra, at 5 (‘‘Risk
sharing through a clearinghouse makes the balance
sheets of the clearinghouse members public goods,
and encourages excessive risk taking. That is, the
clearing mechanism is vulnerable to moral
hazard.’’).
1625 Duffie and Zhu, supra note 110, at 74–95.
1626 See note 991 and accompanying text, supra.
1627 See id.
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effect of reducing total transaction costs
by eliminating obscured margin-related
pricing that customers may otherwise
incur in connection with non-cleared
instruments. As with standardization,
this would promote inter-dealer
competition. However, dealers may take
other actions to offset lost revenues
resulting from the shift from noncleared to cleared instruments. Separate
from these considerations, several
analyses have been conducted
suggesting that mandatory clearing
would increase the overall margin costs
associated with security-based swap
transactions compared to the margin
market participants would post in the
absence of a clearing requirement,
though the estimates of the aggregate
cost to market participants vary
widely.1628
1628 See Manmohan Singh, Collateral, Netting and
System Risk in the OTC Derivatives Market (IMF
Working Paper, 2010), available at: http://
www.imf.org/external/pubs/ft/wp/2010/wp1099.pdf
(concluding that the initial margin requirements for
the central clearing of approximately two-thirds of
the then estimated $36 trillion notional market for
credit default swaps would amount to $40 to $80
billion, likely closer to $80 billion due to the
increased jump risk associated with single-name
credit default swaps even if portfolio compression
is available); Daniel Heller & Nicholas Vause,
Collateral Requirements for Mandatory Central
Clearing of Over-the-Counter Derivatives (BIS
Working Paper No. 373, Mar. 2012), available at:
http://www.bis.org/publ/work373.pdf (concluding
that margin required to clear multi-name and
single-name credit default swaps held by the largest
14 derivative dealers would vary depending on
market volatility, requiring $10 billion of collateral
in a low volatility market, $51 billion in medium
volatility, and $107 billion in high volatility; further
stating that with the inclusion of non-dealer
positions, margin requirements would amount to
$36 billion in a low volatility market, $219 billion
in medium volatility and $425 billion in high
volatility; study assumed the existence of one
centralized clearing entity, which produced an
estimated 25 percent savings compared to a market
with multiple regional clearing agencies, where the
benefits of portfolio margining would be limited);
Che Sidanius & Filip Zikes, OTC Derivatives
Reform and Collateral Demand Impact, (Bank of
England Fin. Stability Paper No. 18, Oct. 2012),
available at: http://www.bankofengland.co.uk/
publications/Documents/fsr/fs_paper18.pdf
(estimating an incremental increase in total initial
margin for central clearing of credit default swaps
between $78 billion and $156 billion, assuming that
80 percent of credit default swaps are cleared and
netting is achieved between 90 and 95 percent
while noting that the presence and extent of
portfolio margining available could affect the
analysis); IMF, Safe Assets: Financial System
Cornerstone, Global Financial Stability Report
(April 2012), available at: http://www.imf.org/
external/pubs/ft/gfsr/2012/01/pdf/c3.pdf
(estimating incremental initial margin and
guarantee fund contributions for central clearing of
over-the-counter derivatives will amount to
between $100 billion and $200 billion, and may be
higher if mutual recognition is not common among
CCPs); see also Letter from Robert Pickel, Chief
Executive Officer, ISDA, and Kenneth Bentsen,
EVP, Public Policy and Advocacy, SIFMA, to David
Stawick, Secretary, CFTC, at 35–37, Sept. 14, 2012
(estimating that the initial margin call for all swap
products would be $193 billion to financial entities
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31163
On the other hand, mandatory
clearing of certain security-based swaps
may reduce the use of security-based
swaps to manage the risks associated
with other financial products or
commercial activity. This could occur if
margin requirements prove too
burdensome and make cleared
transactions expensive relative to
alternative means of risk management.
3. Programmatic Benefits and Costs of
Proposed Rule 3Ca–3
As discussed above, the Commission
is proposing Rule 3Ca–3 to apply the
mandatory clearing requirement of
Section 3C(a)(1) of the Exchange Act 1629
to cross-border security-based swap
transactions. Proposed Rule 3Ca–3(a)
specifies the security-based swap
transactions to which the mandatory
clearing requirement would apply, and
proposed Rule 3Ca–3(b) carves out
certain security-based swap transactions
from application of the mandatory
clearing requirement.1630
Specifically, under proposed Rule
3Ca–3(a), the mandatory clearing
requirement would apply to a person
that engages in a security-based swap
transaction if such person engages in a
security-based swap transaction in the
United States. The Commission would
view a person to be engaging in a
security-based swap transaction in the
United States if a security-based swap
transaction involves (i) a counterparty
that is a U.S. person; (ii) a counterparty
that is a non-U.S. person whose
performance under such security-based
swap transaction is guaranteed by a U.S.
person (hereinafter referred to as a
‘‘guaranteed non-U.S. person’’); or (iii)
such security-based swap transaction is
a transaction conducted within the
United States.1631 Under proposed Rule
3Ca–3(b), the mandatory clearing
requirement would not apply to (i) a
security-based swap transaction
described in proposed Rule 3Ca–3(a)
that is not a transaction conducted
within the United States if (x) one
counterparty is a foreign branch or a
guaranteed non-U.S. person and (y) the
other counterparty to the transaction is
and $428 billion to dealers, and that variation
margin calls would total $320 billion to financial
entities and $80 billion to dealers, further noting
that anywhere from $20 to $228 billion in
additional liquidity would be necessary to meet the
variation margin calls).
1629 15 U.S.C. 78c–3(a)(1).
1630 This is similar to the proposed approach for
the mandatory trade execution requirement. See
Section XV.G.4, infra.
1631 See proposed Rule 3Ca–3(a) under the
Exchange Act. The terms ‘‘transaction conducted
within the United States’’ and ‘‘U.S. person’’ would
have the meanings set forth in proposed Rules
3a71–3(a)(5) and (7) under the Exchange Act.
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a non-U.S. person whose performance
under the security-based swap is not
guaranteed by a U.S. person (hereinafter
referred to as ‘‘non-guaranteed non-U.S.
persons’’) and who is not a foreign
security-based swap dealer as defined in
proposed Rule 3a71–3(a)(3) under the
Exchange Act, and would not apply to
(ii) a security-based swap transaction
described in proposed Rule 3Ca–3(a)
that is a transaction conducted within
the United States if (x) both
counterparties to the transaction are
non-guaranteed non-U.S. persons and
(y) neither counterparty to the
transaction is a foreign security-based
swap dealer, as defined in proposed
Rule 3a71–3(a)(3) under the Exchange
Act.1632
Therefore, proposed Rule 3Ca–3(a)
and proposed Rule 3Ca–3(b) apply the
mandatory clearing requirement to
security-based swap transactions in the
cross-border context based on the U.S.person status of a counterparty, the
existence of a guarantee provided by a
U.S. person, the registered securitybased swap dealer status of a non-U.S.
person counterparty, and the location
where the transaction is conducted.
Taken together, proposed Rules 3Ca–
3(a) and 3Ca–3(b) would not apply the
mandatory clearing requirement to (i)
transactions conducted outside the
United States between two
counterparties who are non-guaranteed
non-U.S. persons, (ii) transactions
conducted outside the United States
between a foreign branch or a
guaranteed non-U.S. person, and a
counterparty who is a non-guaranteed
non-U.S. person and is not a foreign
security-based swap dealer, and (iii)
transactions conducted within the
United States between two
counterparties who are non-guaranteed
non-U.S. persons and are not foreign
security-based swap dealers.
The Commission preliminarily
believes that the combined effect of the
proposed Rules 3Ca–3(a) and (b)
described above would be that nonguaranteed non-U.S. persons who are
not security-based swap dealers may
engage in security-based swap
transactions with each other both within
and without the United States without
being subject to the Commission’s
mandatory clearing requirement. These
non-guaranteed non-U.S. persons that
are not security-based swap dealers may
include non-U.S. persons that are swap
dealers, major swap participants, major
security-based swap participants,
commodity pools, private funds,
employee benefit plans, or persons
1632 See proposed Rule 3Ca–3(b) under the
Exchange Act.
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predominantly engaged in activities that
are banking or financial in nature, as
defined in Section 4(k) of the Bank
Holding Company Act of 1956.1633 Such
non-U.S. persons would also be able to
engage in security-based swap
transactions without being subject to the
mandatory clearing requirement when
the transaction is conducted outside the
United States with U.S. persons that are
foreign branches of U.S. banks or
guaranteed non-U.S. persons or
transacting with a foreign security-based
swap dealer whose performance under
security-based swaps is not guaranteed
by a U.S. person.1634 As discussed
below,1635 the Commission
preliminarily believes that the exclusion
of transactions between two nonguaranteed non-U.S. persons who are
not foreign security-based swap dealers
could potentially reduce the aggregate
programmatic costs associated with the
mandatory clearing requirement.
However, these non-guaranteed nonU.S. persons, despite their status of not
being foreign security-based swap
dealers, may be financial entities that
play significant roles in the U.S. or a
foreign financial system and their
failure may present spillover effect on
the stability of the U.S. financial system
and security-based swap market.
(a) Programmatic Effect of Proposed
Rule 3Ca–3
It is not possible to quantify the
potential programmatic effect of
proposed Rule 3Ca–3 on the future
volume of security-based swap
transactions when the mandatory
clearing requirement becomes effective
partly because the Commission has not
made any mandatory clearing
determinations, partly because the
Commission has yet to finalize the enduser exception to the mandatory
clearing requirement,1636 and partly
because we do not know future trading
volumes of security-based swaps.
However, the Commission has
examined the data available to it to
1633 12
U.S.C. 1843(k).
addition, transactions that are subject to
the mandatory clearing requirement by operation of
the proposed Rule 3Ca–3(a) and (b) may be
excepted from the mandatory clearing requirement
if the end-user exception is applicable. See Section
3C(g)(1) of the Exchange Act, 15 U.S.C. 78c–3(g)(1).
Therefore, the combined effects of the proposed
Rule 3Ca–3 may be affected by the implementation
of the end-user exception to the mandatory clearing
requirement. The Commission has proposed, but
not yet adopted, Rule 3Cg–1 under the Exchange
Act regarding the end-user exception to mandatory
clearing of security-based swaps. See End-User
Exception Proposing Release, 75 FR 79992.
1635 See Section XV.F.3(b), infra (discussing the
programmatic benefits and costs of proposed Rule
3Ca–3).
1636 See id.
1634 In
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analyze the potential programmatic
effects of proposed Rule 3Ca–3. In
particular, the Commission has tried to
analyze the effects of proposed Rule
3Ca–3 by looking at the portion of
single-name U.S. reference CDS
transactions that may provide an
indication of the size of the securitybased swap market that may be
included in or excluded from the
application of the mandatory clearing
requirement as a result of proposed Rule
3Ca–3.
A limitation we face when analyzing
the data in order to estimate the size of
the security-based swap market that
may be affected by proposed Rule 3Ca–
3 is that the domicile classifications in
the DTCC–TIW database are not
identical to the counterparty status or
transaction status, both of which are
described in proposed Rules 3Ca–3(a)
and (b) and would trigger application of,
or an exception from, the mandatory
clearing requirement. Although the
information provided by the data in the
DTCC–TIW does not allow us to identify
the existence of a guarantee provided by
a U.S. person with respect to a
counterparty to a transaction or the
location where the transaction is
conducted, the Commission
nevertheless preliminarily believes that
the approach taken below would
provide the best available estimate of
the size of the security-based swap
market that could be included in or
excluded from the application of the
mandatory clearing requirement by
proposed Rule 3Ca–3.
As a starting point, the Commission
has examined all transactions in singlename CDS during 2011 1637 and
estimated that the notional amount of
single-name CDS transactions executed
during 2011 is $2,400 billion.1638
1637 For purposes of analyzing the programmatic
effect of proposed Rule 3Ca–3, we do not consider
historical data regarding the U.S. index-based CDS
transactions. The statutory definition of securitybased swap in relevant part includes swaps based
on single securities or on narrow-based security
indices. See Section 3(a)(68)(A) of the Exchange
Act, 15 U.S.C. 78c(a)(68)(A). The historical data
regarding the U.S. index-based CDS transactions
encompass broad-based index CDS transactions that
do not fall within the definition of security-based
swaps.
1638 This estimate is based on the calculation by
staff of the Division of Risk, Strategy and Financial
Innovation of all price-forming DTCC–TIW singlename CDS transactions that are based on North
American corporate reference entities, U.S.
municipal reference entities, U.S. loans or
mortgage-backed securities (‘‘MBS’’), using ISDA
North American documentation, ISDA U.S. Muni
documentation, or other standard ISDA
documentation for North American Loan CDS and
CDS on MBS, and are denominated in U.S. dollars
and executed in 2011. Price-forming transactions
include all new transactions, assignments,
modifications to increase the notional amounts of
previously executed transactions, and terminations
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Proposed Rule 3Ca–3(a) provides that
the mandatory clearing requirement
shall apply to a security-based swap
transaction if (i) a counterparty to the
transaction is a U.S. person or a nonU.S. person whose performance under
the security-based swap is guaranteed
by a U.S. person or (ii) such transaction
is a transaction conducted within the
United States. In applying proposed
Rule 3Ca–3(a) to the $2,400 billion
single-name CDS transactions executed
in 2011, the Commission uses account
holders and their domicile information
in the DTCC–TIW database to determine
the status of the counterparties.1639
Because the Commission’s proposed
definition of ‘‘U.S. person’’ is based
primarily on the place of organization or
principal place of business of a legal
person and a legal person’s principal
place of business and place of
organization are usually in the same
country, the Commission believes that
the domicile of a legal person is a
reliable indicator of such person’s U.S.person status. In addition, based on the
Commission’s understanding that the
security-based swap transactions of
of previously executed transactions. Transactions
terminated, transactions entered into in connection
with a compression exercise, and expiration of
contracts at maturity are not considered priceforming and are therefore excluded, as are
replacement trades and all bookkeeping-related
trades. See note 1312, supra.
This figure differs from the single-name CDS
notional volume calculated in the Clearing
Procedures Adopting Release, $2,800 billion, by
$400 billion. See Clearing Procedures Adopting
Release, 77 FR 41638; see also Section XV.F.2(a)
(discussing the programmatic effects of the
mandatory clearing requirement), supra. This
difference is primarily a result of removing the
notional amount of security-based swap
terminations in 2011 from the set of $2,800 billion
price-forming transactions.
1639 For purposes of the analysis here, the
determination of an account holder’s domicile is
based on the ‘‘registered office location’’ and the
‘‘settlement location’’ self-reported by account
holders in DTCC–TIW. The registered office
location typically represents the place of
organization or principal place of business of a
DTCC–TIW account holder. The settlement location
may represent the parent, headquarter, or home
office of a DTCC–TIW account holder. Staff in the
Division of Risk, Strategy, and Financial Innovation
has consistently observed that DTCC–TIW recorded
the place of organization of an account holder that
is a foreign subsidiary of a U.S. person or a foreign
branch as such account holder’s registered office
location and the parent location or headquarter of
the foreign branch (i.e., the United States) as such
account holder’s settlement location. For purposes
of identifying a counterparty’s U.S. person status in
the analysis here, staff in the Division of Risk,
Strategy, and Financial Innovation uses the
registered office location in DTCC–TIW as the
domicile for a foreign subsidiary of a U.S. person
and the settlement office location in DTCC–TIW as
the domicile for a foreign branch. It is possible that
some market participants may misclassify their
‘‘registered office location’’ and the ‘‘settlement
location’’ because the databases in DTCC–TIW do
not assign a unique legal entity identifier to each
separate entity.
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foreign subsidiaries of U.S. entities,
unless sufficiently capitalized to have
their own independent credit ratings,
are generally guaranteed by the most
creditworthy U.S.-based entity within
the corporate group, i.e., the U.S. parent,
the Commission preliminarily believes
that it is reasonable to assume that
foreign subsidiaries of U.S.-domiciled
entities are non-U.S. persons whose
performance under security-based swap
transactions is guaranteed by a U.S.
person. Finally, the DTCC–TIW data do
not provide sufficient information for us
to identify whether a transaction was
conducted in the United States. Solely
for purposes of this analysis, we have
assumed that transactions involving a
U.S.-domiciled counterparty (excluding
a foreign branch) or a U.S. foreign
branch counterparty were conducted in
the United States.1640
Based on these assumptions, we
estimate that the subset of the singlename U.S. reference CDS market that
includes a U.S.-domiciled counterparty
(excluding a foreign branch of a U.S.
bank), a foreign subsidiary of a U.S.domiciled entity, or a U.S. branch of a
foreign bank as a counterparty is $1,900
billion notional amount of single-name
U.S. reference CDS transactions.1641 The
Commission preliminarily believes that
this figure provides an indicative level
of the single-name U.S. reference CDS
activity, which may present an
indicative size of the security-based
swap market, that could become subject
to mandatory clearing under proposed
Rule 3Ca–3(a) when the requirement
becomes effective.1642 In addition, we
1640 Since the origination location of a transaction
is not available in DTCC–TIW, the Commission
recognizes that its analysis here may undercount
transactions conducted within the United States
because some transactions may be solicited,
negotiated, or executed within the United States by
an agent other than U.S. branches of foreign banks
(such as a non-U.S. person counterparty using an
unaffiliated third-party agent).
1641 Such $1,900 billion estimate does not capture
transactions between two non-U.S. domiciled
counterparties involving an agent to solicit,
negotiate and execute security-based swaps in the
United States and therefore, may be an
underestimate of the aggregate notional amount of
the single-name U.S. reference CDS transactions
that may be included in the application of the
mandatory clearing requirement under proposed
Rule 3Ca–3(a) because of the assumption we make
herein regarding transactions conducted within the
United States. By the same token, the difference
between the $1,900 billion subset included in the
application of the mandatory clearing requirement
under proposed Rule 3Ca–3(a) and the $2,400
billion total single-name U.S. reference CDS
transactions (i.e., $500 billion or 20.8% of the
$2,400 billion) may represent an overestimate of
single-name U.S. reference CDS transactions in
notional amount that are not included in the
application of the mandatory clearing requirement
under proposed Rule 3Ca–3(a).
1642 The Commission recognizes that the securitybased swap market includes single-name CDS, CDS
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31165
recognize that the level of the securitybased swap activity that could become
subject to mandatory clearing under
proposed Rule 3Ca–3(a) may be affected
by the final rules adopted by the
Commission regarding the end-user
exception to mandatory clearing of
security-based swaps.1643
Next, we apply proposed Rule 3Ca–
3(b) to the transactions described above
in order to estimate the portion of the
single-name U.S. reference CDS activity,
which may present an indicative size of
the security-based swap market, that
would not be subject to the mandatory
clearing requirement under the
proposed rule. We restate the
assumptions described above with
respect to the counterparty status of a
U.S. person and a non-U.S. person
whose performance under securitybased swap transactions is guaranteed
by a U.S. person, and the assumption
with respect to a transaction conducted
within the United States. In addition,
because of a lack of information about
the location of transactions, solely for
assessing the effect of proposed Rule
3Ca–3(b)(i), we have assumed that
transactions between a counterparty that
is a foreign branch or foreign subsidiary
of a U.S.-domiciled entity and another
counterparty that is a foreign-domiciled
entity that is not a subsidiary of a U.S.domiciled entity or an ISDA-recognized
dealer are not transactions conducted
within the United States; and solely for
assessing the effect of proposed rule
3Ca–3(b)(ii), we have assumed that
transactions conducted between two
foreign-domiciled counterparties that
are not ISDA-recognized dealers and are
not foreign subsidiaries of U.S.domiciled entities are conducted within
the United States. These assumptions
likely overestimate the notional volume
carved-out by proposed Rule 3Ca–3(b).
With respect to the counterparty status
as a registered security-based swap
dealer, we recognize that as yet there are
no dealers designated as security-based
swap dealers and subject to the
registration requirement. Solely for
purposes of this analysis, we have
assumed that those counterparties to
based on narrow-based indices, and other non-CDS
security-based swaps, primary examples of which
are equity swaps and total return swaps based on
single equities or narrow-based indices of equities.
As previously stated, we believe that the singlename CDS data are sufficiently representative of the
security-based swap market as roughly 82% of the
security-based swap market, as measured on a
notional basis, appears likely to be single-name
CDS. See Section XV.B.2 and the text
accompanying note 1301, supra.
1643 Solely for purposes of this analysis, we
assume that the end-user exception is not available
for transactions included in the indicative volume
estimated here.
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CDS transactions that were ISDA
recognized dealers 1644 would be
required to register as security-based
swap dealers.
Based on the above assumptions, we
have estimated that approximately 2.1%
of the total notional amount 1645 of
single-name U.S. reference CDS
transactions executed in 2011, would be
excluded from the scope of the
application of the mandatory clearing
requirement by proposed Rule 3Ca–3(b).
Therefore, we preliminarily believe that
22.9% of the total size of the singlename U.S. reference CDS transactions in
2011 presents an indicative size of the
U.S. security-based swap market that
could be excluded from the application
of the mandatory clearing requirement
under proposed Rule 3Ca–3.1646
The Commission preliminarily
believes that this estimate provides the
best available proxy for the overall
programmatic effect of the application
of the mandatory clearing requirement
in the cross-border context in terms of
the portion of the single-name U.S.
reference CDS activity that may be
included or excluded in the scope of the
application of the mandatory clearing
requirement, given the data limitations
1644 See
note 1306, supra.
on calculations by staff of the Division
of Risk, Strategy, and Financial Innovation applying
the criteria provided in proposed Rule 3Ca–3(b) and
the assumptions stated herein, approximately $51
billion in notional amount, constituting
approximately 2.1% of the total notional amount,
of single-name U.S. reference CDS transactions
executed in 2011 would be excluded from the
application of the mandatory clearing requirement.
Because of the assumptions we make herein
regarding transactions conducted within the United
States and transactions conducted outside the
United States, the 2.1% may be an overestimate of
the aggregate notional amount of the single-name
U.S. reference CDS transactions that may be
excluded from the application of the mandatory
clearing requirement under proposed Rule 3Ca–3(b)
under the Exchange Act.
1646 The 22.9% estimate is the sum of the 20.8%
estimate of the single-name U.S. reference CDS
transactions excluded from mandatory clearing
under proposed Rule 3Ca–3(a) and the 2.1%
estimate of the single-name U.S. reference CDS
transactions excluded from mandatory clearing
under proposed Rule 3Ca–3(b). The Commission
reiterates that both 20.8% and 2.1% may
overestimate the size of the single-name U.S.
reference CDS transactions excluded from the
application of the mandatory clearing requirement
under proposed Rules 3Ca–3(a) and (b).
In addition, as stated above, this calculation is
conducted using U.S. reference single-name CDS
transaction data in 2011. See the text accompanying
notes 1637 and 1787, supra. The Commission
recognizes that the same calculation could generate
a different result if both U.S. reference and non-U.S.
reference single-name CDS transaction data were
used. However, with respect to non-U.S. reference
single-name CDS transaction data, the Commission
currently does not have access to the part of such
data in DTCC–TIW regarding non-U.S. reference
single-name CDS transactions that do not involve a
U.S. counterparty on either side of the transaction.
See Section XV.B.2, supra.
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1645 Based
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and the underlying assumptions
described above.1647 The Commission is
mindful that the above analysis
represents only an indicative estimate of
the portion of the single-name U.S.
reference CDS activity, which may
present an indicative size of the
security-based swap market, that may be
included or excluded from the scope of
the application of the mandatory
clearing requirement as a result of the
proposed Rule 3Ca–3. The Commission
also recognizes that the above analysis
represents an extrapolation from the
limited data that is currently available
to the Commission.
(b) Programmatic Benefits and Costs of
Proposed Rule 3Ca–3
The Commission’s approach to
application of the mandatory clearing
requirement generally focuses on any
person engaging in a security-based
swap in the United States. As stated
above, the Commission would
preliminarily interpret the statutory
language ‘‘engage in a security-based
swap’’ to include transactions in which
a counterparty performs any of the
functions that are central to carrying out
a security-based swap transaction (i.e.,
solicitation, negotiation, execution, or
booking of the transaction) within the
United States. The Commission
proposes to interpret that a transaction
in which one of the counterparties is a
U.S. person is a security-based swap in
the United States. The Commission also
is proposing to interpret the statutory
language ‘‘engage in a security-based
swap’’ to include transactions in which
a U.S. person provides a guarantee on a
non-U.S. person’s performance under a
security-based swap because of the
involvement of the U.S. person in the
transaction. Therefore, the Commission
is proposing a rule that would apply the
mandatory clearing requirements to a
security-based swap if (i) a counterparty
to the security-based swap transaction is
(x) a U.S. person or (y) a non-U.S.
person counterparty whose performance
of obligations under the security-based
swap is guaranteed by a U.S. person, or
(ii) such transaction is a transaction
conducted within the United States,
subject to certain exceptions.
Economically, a U.S. person’s
security-based swap activity poses risk
to the U.S. financial system because
security-based swap transactions give
rise to ongoing obligations on the part
of the U.S. person and at the same time
the U.S. person is exposed to the credit
risk of its non-U.S. counterparties.
1647 The Commission reiterates that the
assumptions made here are solely for purposes of
this economic analysis.
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Similarly, a guarantee provided by a
U.S. person gives the counterparty of
the guaranteed entity direct recourse to
the U.S. guarantor with respect to any
obligations owed by the guaranteed
entity under the security-based swap.
As a result, the U.S. guarantor exposes
itself to the security-based swap risk as
if it were a direct counterparty.
Therefore, the Commission
preliminarily believes that U.S. persons
and non-U.S. person whose
performance in security-based swap
transactions is guaranteed by U.S.
persons serve as major conduits of
systemic risk to the U.S. financial
system, and therefore, transactions
involving U.S. persons and non-U.S.
persons whose performance under
security-based swaps are guaranteed by
U.S. persons should fall within the
scope of application of the mandatory
clearing requirement, regardless of
where the security-based swap activity
takes place.
On the other hand, as previously
discussed,1648 the Commission has
acknowledged that subjecting U.S.
persons and non-U.S. persons whose
performance in security-based swap
transactions is guaranteed by U.S.
persons to these requirements may have
key consequences for competition,
liquidity, and efficiency, and for U.S.
persons’ access to the foreign securitybased swap market.
To the extent that foreign law does
not subject participants in the foreign
security-based swap market to
mandatory clearing or impose margin
requirements on non-cleared securitybased swaps equivalent to margin that
would be required by CCPs, this
requirement under Title VII may make
it more costly for non-U.S. persons to
transact with U.S. person and
guaranteed non-U.S. person
counterparties because these
transactions may be subject to higher
margin requirements imposed by CCPs
than under foreign law. This may make
it difficult for U.S. persons and
guaranteed non-U.S. persons to access
foreign markets and liquidity provided
by non-guaranteed non-U.S. persons,
and could generate incentives for U.S.
persons and guaranteed non-U.S.
persons to restructure their securitybased swap businesses to fall outside
the scope of Title VII. In such instances,
the incentive to restructure operations
may decrease if foreign jurisdictions
impose margin requirements on noncleared security-based swaps. If these
margin requirements on non-cleared
security-based swaps are economically
equivalent to or higher than CCP margin
1648 See
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requirements for cleared security-based
swaps, restructuring operations would
provide few private benefits for market
participants.
The Commission preliminarily
believes that the carve-out in Rule 3Ca–
3(b)(1) excludes from the mandatory
clearing requirement those transactions
involving foreign branches and
guaranteed non-U.S. persons who are
most likely to engage in transactions
under foreign law. Such a carve-out
reduces potential disruption to the
foreign business of U.S. persons and
guaranteed non-U.S. persons in the
foreign security-based swap market.1649
These benefits come at the cost of
increased systemic risk. The
counterparty risk associated with noncleared transactions that involve foreign
branches and guaranteed non-U.S.
persons is ultimately borne by the U.S.
financial system.
The incremental increase in systemic
risk would likely be small, since the
carve-out in proposed Rule 3Ca–3(b)(1)
does not apply to security-based swap
dealers. Moreover, as mentioned before,
the magnitude of these risks may be
further reduced by subjecting noncleared security-based swap positions to
margin requirements that are
economically equivalent to margin
requirements imposed by a CCP.
However, the transactions carved-out by
proposed Rule 3Ca–3(b)(1) remain a
route over which systemic risk may
enter the United States from abroad.
In addition, the Commission
recognizes that, in the case of
counterparty risk and central clearing,
the location of a transaction is not
necessarily a proxy for the U.S. market’s
exposure to counterparty risk. As a
result, proposed Rule 3Ca–3(b)(2) would
except transactions conducted within
the United States between two non-U.S.
persons who are not security-based
swap dealers and whose performance
under security-based swap transactions
are not guaranteed by U.S. persons. The
Commission preliminarily believes that
such an exception could potentially
reduce the aggregate programmatic costs
associated with the mandatory clearing
requirement to non-U.S. participants
that engage in security-based swap
transactions within the United States.
The Commission recognizes that nonguaranteed non-U.S. persons who are
not foreign security-based swap dealers
may include financial entities that are
systemically important, such as major
swap participants or major securitybased swap participants, or otherwise
play an important role in the U.S. or a
foreign financial system or the
1649 See
Section XV.C, supra.
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derivatives market, such as swap
dealers, commodity pools, private
funds, or banking entities that are
financial holding companies. The
failure of such financial entities,
although they are non-guaranteed nonU.S. persons, may have spillover effects
on the U.S. financial system. Such
spillover effects may be mitigated by the
capital and margin requirements
imposed on swap dealers, major swap
participants, or major security-based
swap participants, the prudential
regulators’ supervision under banking
regulations, the Employee Retirement
Income Security Act of 1974 1650 or
other applicable law and regulations.
On the other hand, the Commission
also preliminarily believes that the
proposed application of the mandatory
clearing requirement in the cross-border
context would still mitigate the U.S.
financial system’s exposure to systemic
risk since the carve-out in proposed
Rule 3Ca–3(b)(2) would not apply to
participants that are registered securitybased swap dealers and those that carry
U.S. guarantees on their performance in
security-based swap transactions. The
Commission has separately considered
the potential implications of this
exception on competition and efficiency
in the security-based swap market.1651
Specifically, the Commission
preliminarily believes that imposing
mandatory clearing on U.S. persons,
guaranteed non-U.S. persons and
foreign security-based swap dealers
when they conduct security-based
swaps in the United States will mitigate
the counterparty credit risk among
trading counterparties and increase
confidence in trading security-based
swaps, thereby increasing competition
in the U.S. security-based swap market.
(c) Alternatives
The Commission has considered
several alternatives in proposing Rule
3Ca–3. First, commenters proposed an
alternative framework in which
transactions that are ‘‘required to be
cleared under foreign law’’ not be
‘‘required to be cleared under [Title
VII].’’ 1652 Commenters noted, for
example, that conflicts may arise
between Title VII and ‘‘foreign laws that
require swaps to be cleared through
local clearinghouses.’’ 1653 Another
comment stated that mandatory clearing
‘‘is not necessary to protect U.S.
financial institutions, markets or
customers’’ where mandatory clearing
requirements are imposed by foreign
1650 28
U.S.C. 1002, et seq.
Section XV.C, supra.
1652 Davis Polk Letter II at 21.
1653 Id. at 22 n.92.
1651 See
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law because ‘‘the risks associated with
such transactions reside in the relevant
foreign central clearing
counterparty.’’ 1654
The Commission preliminarily
believes that the commenters’ proposed
approach to the mandatory clearing of
cross-border security-based swap
transactions would not sufficiently
address the risk to the U.S. financial
system posed by transactions being
conducted by non-U.S. persons,1655 and
accordingly seeks comment on whether
this preliminary assessment is correct.
Whether a security-based swap
transaction that is cleared under foreign
law represents a risk to the U.S.
financial system depends upon whether
the foreign jurisdiction has a robust
legal framework for the regulation of,
and maintains adequate regulatory
oversight over, CCPs. Although the
Commission recognizes that this
alternative may reduce costs to
counterparties, the Commission cannot
at this time assess the quality of
regulation of foreign CCPs. Rather than
categorically exclude from the scope of
the proposed rule any transaction
required to be cleared under foreign
law, the Commission preliminarily
believes that such transactions should
be captured by the rule to further the
purposes of Title VII to, among other
things, mitigate systemic risk.
Determinations regarding substituted
compliance and determinations
imposing mandatory clearing could
address whether and when to include or
exclude transactions from the
mandatory clearing requirement based
on the particular characteristics of the
foreign regulatory regime,
counterparties, or swap instruments in
question.
Second, the Commission could have
proposed to apply the mandatory
clearing requirement in the same way as
the CFTC’s proposed interpretive
guidance. The CFTC would apply the
mandatory clearing requirement to a
transaction conducted outside the
United States between a foreign branch
and a non-guaranteed non-U.S. person.
Although we recognize that the
guarantees provided by U.S. persons
remain a conduit for systemic risk to be
transmitted to the United States, the
Commission preliminarily believes that
subjecting such a transaction to
mandatory clearing would impede the
ability of U.S.-based dealing entities to
1654 Davis
Polk Letter I at 8.
Commission notes that commenters’
concerns regarding a potential conflict arising
between foreign law requirements that securitybased swaps be cleared locally and Title VII are, in
part, also addressed by the registration regime for
clearing agencies proposed in Section V.B above.
1655 The
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access foreign markets and potentially
promote market fragmentation.
Finally, and in lieu of the proposed
rule, the Commission could have
proposed Rule 3Ca–3(a) only to apply
the mandatory clearing requirement
contained in Section 3C(a)(1) of the
Exchange Act, without also proposing
the carve-out in proposed Rule 3Ca–
3(b). The Commission preliminarily
believes, however, that proposed Rule
3Ca–3(a), acting alone, does not
sufficiently account for the proposed
approach’s potential effect on
competition between security-based
swap market participants, as required
under Section 3C(b)(4) of the Exchange
Act.1656 As discussed above, market
participants seeking to avoid clearing of
cross-border security-based swaps may
avoid doing business with members of
clearing agencies registered with the
Commission, U.S. persons who provide
guarantees on performance under such
swaps, or the foreign branches of U.S.
persons, to avoid being subject to the
mandatory clearing requirement. This
may also create dislocations in the
security-based swap market, reducing
the anticipated risk-sharing benefits of
clearing. As mentioned above, the
Commission preliminarily believes that
these benefits would come at the cost of
increased risk that counterparty failures
in foreign jurisdictions generate losses
to U.S. financial market participants
engaging in uncleared security-based
swap transactions under Rule 3Ca–3(b).
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(d) Assessment Costs
The assessment costs associated with
proposed Rule 3Ca–3 would be
primarily related to identification of
counterparty status and where the
transaction was conducted in order to
determine whether the mandatory
clearing requirement would apply. The
same assessment would be performed
not only in connection with the
proposed application of the mandatory
clearing requirement in the cross-border
context but also in connection with
proposed application of the SDR
reporting,1657 real-time reporting,1658
and mandatory trade execution
requirements 1659 in the cross-border
1656 See 15 U.S.C. 78c–3(b)(4) (requiring the
Commission, in considering whether to impose a
mandatory clearing requirement for security-based
swaps, to consider, among other factors, the ‘‘effect
on competition’’).
1657 See proposed Rule 908(a) under the Exchange
Act, as discussed in Section VIII.C.1, supra, and
Section XV.H.3(a), infra.
1658 See proposed Rule 908(b) under the Exchange
Act, as discussed in Section VIII.C.2, supra, and
Section XV.H.3(c), infra.
1659 See proposed Rule 3Ch–1 under the
Exchange Act, as discussed in Section X.B, supra,
and Section XV.G.4, infra.
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context, and therefore, would be part of
overall Title VII compliance costs.
We preliminarily believe that market
participants would request
representations from their transaction
counterparties to determine the U.S.person status of their counterparties. In
addition, if the transaction is guaranteed
by a U.S. person, the guarantee would
be part of the trading documentation,
and therefore the existence of the
guarantee would be a readily
ascertainable fact. Similarly, market
participants would be able to rely on
their counterparty’s representation as to
whether a transaction is solicited,
negotiated or executed by a person
within the United States.1660 Therefore,
the Commission preliminarily believes
that the assessment costs associated
with proposed Rule 3Ca–3 should be
limited to the costs of establishing a
compliance policy and procedure for
requesting and collecting
representations from trading
counterparties and maintaining the
representations collected as part of the
recordkeeping procedures. The
Commission preliminarily believes that
such assessment costs would be
approximately $15,160.1661 The
Commission preliminarily believes that
requesting and collecting
representations would be part of the
standardized transaction process
reflected in the policies and procedures
regarding security-based swap sales and
trading practices and should not result
in separate assessment costs.1662
We also consider the likelihood that
market participants may implement
systems to maintain information about
counterparty status for purposes of
future trading of security-based swaps
that are similar to, if not the same as, the
systems implemented by market
participants for purposes of assessing
security-based swap dealer or major
security-based swap participant status.
As stated above, we estimated that
market participants that perceived the
need to perform the security-based swap
dealer assessment or major securitybased swap participant calculations
would incur one-time programming
costs of 12,870.1663 Therefore, the
Commission estimates the total one-time
costs per entity associated with
proposed Rule 3Ca–3 could be
$28,030.1664 To the extent that market
participants have incurred costs relating
to similar or the same assessments with
respect to counterparty status and
location of the transactions for other
Title VII requirements, their assessment
costs with respect to proposed Rule
3Ca–3 may be less.
1660 See proposed Rules 3a71–3(a)(4)(ii) and
(a)(5)(ii) under the Exchange Act, as discussed in
Section III.B.6, supra.
1661 This estimate is based on an estimated 40
hours of in-house legal or compliance staff’s time
to establish a procedure of requesting and collecting
representations from trading counterparties, taking
into account that such representation may be built
into the form of standardized trading
documentation. Based upon data from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2012 (modified by the SEC staff
to account for an 1800-hour-work year and
multiplied by 5.35 to account for bonuses, firm size,
employee benefits, and overhead), the staff
estimates that the average national hourly rate for
an in-house attorney is $379.
1662 There will be ongoing costs associated with
processing representations received from
counterparties, including additional due diligence
and verification to the extent that a counterparty’s
representation is contrary to or inconsistent with
the knowledge of the collecting party. The
Commission believes that these would be
compliance costs encompassed within the
programmatic costs associated with substituted
compliance.
1663 This is based on an estimate of the time
required for a programmer analyst to modify the
software to track the U.S.-person status of a
counterparty and to record and classify whether a
transaction is a transaction conducted within the
United States, including consultation with internal
personnel, and an estimate of the time such
personnel would require to ensure that these
modifications conformed to proposed definitions of
U.S. person and transaction conducted within the
United States. Using the estimated hourly costs
described above, we estimate the costs as follows:
(Compliance Attorney at $310 per hour for 2 hours)
+ (Compliance Manager at $269 per hour for 4
hours) + (Programmer Analyst at $234 per hour for
40 hours) + (Senior Internal Auditor at $217 per
hour for 4 hours) + (Chief Financial Officer at $473
per hour for 2 hours) = $12,870. For the source of
the estimated per hour costs. See note 1425, supra.
1664 The $28,030 per entity cost is derived from
a $15,160 cost of establishing a written compliance
policy and procedures regarding obtaining
counterparty representations plus a $12,870 onetime programming cost relating to system
implementation to maintain counterparties
representations and track the counterparty status in
the system.
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Request for Comment
The costs and benefits of the proposed
rule discussed above represent the
Commission’s preliminary view
regarding the mandatory clearing
requirement in the cross-border context.
The Commission seeks comment on the
proposed rule in all aspects. Interested
persons are encouraged to provide
supporting data and analysis and, when
appropriate, suggest modifications to
proposed rule text and interpretations.
Responses that are supported by data
and analysis provide great assistance to
the Commission in considering the
benefits and costs of proposed
requirements, as well as considering the
practicality and effectiveness of the
proposed application. In addition, the
Commission seeks comment on the
following specific questions:
• Are there any benefits and costs not
discussed herein? If so, please identify,
discuss, analyze, and supply relevant
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data, information, or statistics regarding
any such costs or benefits?
• Are the benefits and costs discussed
herein accurate? If not, how can the
Commission most accurately assess the
benefits and costs arising from the
mandatory clearing requirement and the
proposed rule?
• Are there quantifiable costs
associated with either the mandatory
clearing requirement generally or the
proposed rule specifically that have not
been addressed and should be? If so,
identify and describe them as
thoroughly as possible, using relevant
data and statistics where available.
• To what extent, if any, do the
benefits and costs change when
comparing the application of mandatory
clearing to security-based swap
transactions occurring within the
United States and outside the United
States? Is there relevant data not
considered here that would assist the
Commission in assessing such
potentially disparate benefits and costs?
If so, supply the relevant data,
information, or statistics.
• To what extent, if any, do the
benefits and costs change when
considering the application of
mandatory clearing of security-based
swap transactions to a U.S. person in
comparison to a guaranteed non-U.S.
person? To a non-guaranteed non-U.S.
person? To a foreign branch? To a
counterparty that is a security-based
swap dealer? Would the benefits and
costs differ significantly if we applied
mandatory clearing requirements to a
person who is a member of a registered
clearing agency? Is there relevant data
not considered here that would assist
the Commission in assessing such
disparate costs and benefits? If so,
supply the relevant data, information, or
statistics.
• (i) The CFTC has proposed to apply
the mandatory clearing requirement to
all transactions entered into by U.S.based swap dealers, including foreign
branches and transactions entered into
by foreign affiliates of U.S. persons or
non-U.S.-based swap dealer with U.S.
persons or non-U.S. persons guaranteed
by U.S. persons, without differentiating
where the swap transactions are
conducted within the United States or
outside the United States. Should the
Commission adopt the CFTC’s approach
to application of the mandatory clearing
requirement in the cross-border context
from the cost and benefit perspective?
What are the cost and benefit
considerations associated with taking
the CFTC’s approach? (ii) The
Commission’s proposed approach to
application of the mandatory clearing
requirement differentiates transactions
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conducted within the United States and
transactions conducted outside the
United States. Is such differentiation
appropriate from the cost and benefit
perspective? Has the Commission
appropriately considered the costs and
benefits associated with such
differentiation? (iii) Are there any other
approaches to application of the
mandatory clearing requirement that the
Commission should consider adopting
from a cost and benefit perspective?
• To what extent, if any, should the
Commission consider the characteristics
of the underlying reference entity in
assessing the benefits and costs flowing
from the mandatory clearing
requirement? Are there any other
characteristics of a security-based swap
transaction not discussed here that
might affect an assessment of the
benefits and costs of imposing a
mandatory clearing requirement?
• Has the Commission appropriately
considered the benefits and costs of the
alternative approaches discussed above
for application of the mandatory
clearing requirement in the cross-border
context? In answering this question,
consider addressing whether the
Commission has appropriately valued
the benefits and costs of possible
duplicative clearing requirements and
whether the Commission has
appropriately valued the benefits and
costs of creating overlap in the
regulatory regimes of the United States
and a foreign regulator. Also consider
whether the Commission has
appropriately valued the benefits and
costs of the possible effects on the
competitiveness of persons subject to
the mandatory clearing requirement and
those persons carved out or otherwise
excluded from the requirement.
G. The Economic Analysis of
Application of Rules Governing
Security-Based Swap Trading in the
Cross-Border Context
A key goal of the Dodd-Frank Act is
to increase the transparency and
oversight of the OTC derivatives market
by, among other things, bringing trading
of security-based swaps onto regulated
markets.1665 Section 763 of the DoddFrank Act amends the Exchange Act by
adding a mandatory trade execution
requirement 1666 and various new
statutory provisions governing SB
SEFs.1667 Specifically, Section 3D(a)(1)
of the Exchange Act states that no
person may operate a facility for the
1665 See
Public Law 111–203, preamble.
Public Law 111–203, section 763 (adding
Section 3C(h) of the Exchange Act).
1667 See Public Law 111–203, section 763 (adding
Sections 3C and 3D of the Exchange Act).
1666 See
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31169
trading or processing of security-based
swaps, unless the facility is registered as
a SB SEF or as a national securities
exchange under that section.1668 In
addition, Section 3C(h)(1) of the
Exchange Act requires, with respect to
transactions involving security-based
swaps subject to the mandatory clearing
requirement of Section 3C(a)(1) of the
Exchange Act, that counterparties
execute such transactions on an
exchange or a SB SEF that is registered
under Section 3D of the Exchange Act
or is exempt from registration under
Section 3D(e) of the Exchange Act,1669
subject to the exceptions set forth in
Section 3C(h)(2) of the Exchange
Act.1670
This portion of the economic analysis
addresses the programmatic benefits
and costs associated with these statutory
requirements and their proposed
application in the cross-border context.
Specifically, this section addresses the
programmatic benefits and costs of: (1)
the Commission’s proposed
interpretation of the application of the
registration requirements of Section 3D
of the Exchange Act to foreign securitybased swap markets; (2) the potential
availability to foreign security-based
swap markets of exemptive relief from
the registration requirements; (3) the
mandatory trade execution requirement
of Section 3C(h) of the Exchange Act;
and (4) proposed Rule 3Ch–1 regarding
application of the mandatory trade
execution requirement in the crossborder context.
1668 See Public Law 111–203, section 763(a)
(adding Section 3D(a)(1) of the Exchange Act). The
Commission views this requirement as applying
only to facilities that meet the definition of
‘‘security-based swap execution facility’’ in Section
3(a)(77) under the Exchange Act. See SB SEF
Proposing Release, 76 FR 10949 n.10.
1669 See 15 U.S.C. 78c–3(h)(1). Section 3D(e) of
the Exchange Act states that the Commission may
exempt, conditionally or unconditionally, a SB SEF
from registration under Section 3D if the
Commission finds that the facility is subject to
comparable, comprehensive supervision and
regulation on a consolidated basis by the CFTC. 15
U.S.C. 78c–4(e).
1670 Section 3C(h)(2) provides two exceptions to
compliance with the mandatory trade execution
requirement: (i) if no exchange or SB SEF makes the
security-based swap available to trade; or (ii) for
security-based swap transactions subject to the
clearing exception under Section 3C(g) of the
Exchange Act. See 15 U.S.C. 78c–3(h)(2). Securitybased swaps that are not subject to the mandatory
trade execution requirement would not have to be
traded on a registered SB SEF and could be traded
in the OTC market for security-based swaps. See SB
SEF Proposing Release, 76 FR 10949 n.10.
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1. Programmatic Benefits and Costs of
the Proposed Application of the
Registration Requirements of Section 3D
of the Exchange Act to Foreign SecurityBased Swap Markets
As discussed above, the Commission
has proposed herein to interpret when
the registration requirements of Section
3D of the Exchange Act 1671 would
apply to a foreign security-based swap
market.1672 The Commission is
endeavoring to draw the appropriate
lines for the application of those
requirements to foreign security-based
swap markets when they act in
capacities that meet the definition of
‘‘security-based swap execution facility’’
under the Dodd-Frank Act.1673 As stated
above, not all foreign security-based
swap markets would be subject to the
registration requirements of Section 3D
of the Exchange Act and the rules
proposed thereunder. The Commission
preliminarily believes that only those
foreign security-based swap markets
that engage in certain activities with
respect to U.S. persons, or non-U.S.
persons located in the United States,
would be subject to the registration
requirements.1674
The Commission preliminarily
believes that the lines the Commission
is proposing to draw with respect to the
application of Section 3D’s registration
requirements in the cross border context
would result in programmatic benefits
for the U.S. security-based swap market
as a whole that are intended by Title
VII, i.e., increased pre-trade
transparency, increased competition,
and improved oversight.1675 The
Commission also is mindful, however,
that certain costs would be associated
with our proposal. The Commission’s
consideration and discussion of the
programmatic benefits and costs of the
formation and registration of a SB SEF
in the SB SEF Proposing Release did not
differentiate between domestic and
1671 15
U.S.C. 78c–4.
Section VII.B., supra. A foreign securitybased swap market that would be subject to the
registration requirement of Section 3D of the
Exchange Act also would be subject to the proposed
registration rules for SB SEFs, if adopted. See SB
SEF Proposing Release, 76 FR 10949.
1673 See Public Law 111–203, section 761(a)
(adding Section 3(a)(77) of the Exchange Act to
define ‘‘security-based swap execution facility,’’ 15
U.S.C. 78c(a)(77)). Entities that do not meet the
definition of SB SEF may nonetheless be required
to register in another capacity under the Exchange
Act.
1674 See Section VII.B, supra, for the nonexhaustive discussion of activities that the
Commission preliminarily believes would warrant
the application of the SB SEF registration
requirements to a foreign security-based swap
market.
1675 See SB SEF Proposing Release, 76 FR 11036–
38.
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1672 See
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foreign security-based swap markets.
The Commission notes, however, that
the SB SEF Proposing Release
contemplated that foreign securitybased swap markets would seek to
register as SB SEFs and proposed
certain requirements specifically for
non-resident 1676 persons seeking to
register as a SB SEF.1677 The
Commission received no comments on
the SB SEF Proposing Release indicating
that the benefits and costs associated
with SB SEF registration would be
different for foreign and domestic
security-based swap markets.1678
Accordingly, the Commission
preliminarily believes that the
programmatic benefits and costs
associated with a security-based swap
market registered with the Commission
as a SB SEF and subject to the
requirements set forth in Section 3D of
the Exchange Act, and the proposed
rules and regulations thereunder, would
be substantially the same for both a
domestic and a foreign security-based
swap market.1679
(a) Programmatic Benefits
The Commission preliminarily
believes that application of the statutory
registration requirements and
Regulation SB SEF to foreign securitybased swap markets that engage in the
activities noted above with respect to
U.S. persons, or non-U.S. persons
located in the United States,1680 would
generate programmatic benefits similar
to those described in the SB SEF
Proposing Release with respect to the
registration and regulation of SB SEFs,
i.e., enhanced transparency,
competition, and oversight of securitybased swaps,1681 which are discussed
1676 See note 834, supra (noting that usage of the
term ‘‘non-resident,’’ as well as the term ‘‘foreign,’’
in connection with a security-based swap market
refers to a security-based swap market that is not
a U.S. person).
1677 See note 1697, infra, and accompanying text.
1678 In the SB SEF Proposing Release, the
Commission estimated that as many as 20 securitybased swap trading platforms or systems could seek
to register with the Commission as SB SEFs. See SB
SEF Proposing Release, 76 FR 11023. No
commenter indicated that the Commission’s
estimate was erroneous.
1679 A more detailed description of the benefits
and costs associated with the formation and
registration of SB SEFs is set forth in the SB SEF
Proposing Release, 76 FR 11035–48. As set forth in
the Request for Comment section below, the
Commission invites comment on whether the
benefits and costs associated with SB SEF
registration would be the same for domestic and
foreign security-based swap markets.
1680 See Section VII.B, supra.
1681 See SB SEF Proposing Release, 76 FR 11036.
One commenter on the SB SEF Proposing Release
stated that certain benefits would result from the
trading of security-based swaps occurring on SB
SEFs, including narrower bid-ask spreads and lower
transaction costs as a result of increased
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below. The Commission also believes
that our proposed application of the
statutory registration requirements and
Regulation SB SEF to foreign securitybased swap markets is appropriately
tailored to extend these benefits to the
security-based swap activity that is most
likely to raise the concerns that
Congress intended to address in Title
VII.1682 In the Commission’s
preliminary view, a different
application could undermine these
goals. By way of example and without
limitation, if a foreign security-based
swap market could provide proprietary
electronic trading screens for the
execution or trading of security-based
swaps by, or grant membership or
participation in the foreign securitybased swap market to, U.S. persons, or
non-U.S. persons located in the United
States, without being required to register
under Section 3D, there could be
security-based swap trading venues
available to U.S. persons, or non-U.S.
persons located in the United States,
that are not subject to Commission
regulation and oversight. The regulatory
benefits that the Commission believes
Title VII intends to bring to the U.S.
security-based swap market would not
be fully realized in such a scenario.
Improved Transparency. The trading
of security-based swaps on regulated
markets, such as SB SEFs, should help
bring more transparency to the U.S.
marketplace for security-based swaps.
Increased pre-trade transparency should
help alleviate informational
asymmetries that may exist today in the
security-based swap market and allow
an increased number of market
participants to see the trading interest of
other market participants prior to
submitting trades, which should lead to
increased price competition among
market participants.1683 As such, the
Commission preliminarily believes that
proposed Regulation SB SEF should
lead to more efficient pricing in the
security-based swap market,1684 but is
mindful that, under certain
circumstances, pre-trade transparency
also could discourage the provision of
competition and pre-trade price transparency. See
SDMA Letter I at 8–9 and SDMA Letter II at 2; see
also Section XXII, infra.
1682 See Section II.B., supra.
1683 See SB SEF Proposing Release, 76 FR 11036;
see also Ananth Madhavan, ‘‘Market
Microstructure: A Practitioner’s Guide,’’ Fin.
Analysts J., Vol. 58 (2002), at 38 (nondisclosure of
pre-trade price information benefits dealers by
reducing price competition).
1684 See SB SEF Proposing Release, 76 FR 11036;
see also Ekkehart Boehmer, et al., ‘‘Lifting the Veil:
An Analysis of Pre-trade Transparency at the
NYSE,’’ J. of Fin., Vol. LX (2005) (greater pre-trade
price transparency leads to more efficient pricing).
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liquidity by some market participants,
as discussed in more detail below.1685
Improved Competition. The
Commission preliminarily believes that
registration and regulation of SB SEFs,
as described in the SB SEF Proposing
Release, also would foster greater
competition in the trading of securitybased swaps by increasing access to
security-based swap trading venues.1686
The proposed SB SEF rules would
require SB SEFs to permit all eligible
persons that meet the requirements for
becoming participants, as set forth in
the SB SEF’s rules, to become
participants in the SB SEF.1687 The
proposed SB SEF rules would require
each SB SEF to establish fair, objective
and not unreasonably discriminatory
standards for granting impartial access
to trading on the SB SEF.1688 These
proposed requirements are designed to
provide market participants with
impartial access.1689 Having impartial
access should, in turn, promote greater
participation by liquidity providers and
increased competition on each SB
SEF.1690 Impartial access requirements
also should help guard against the
potential for certain participants in a SB
SEF (who also might be owners of the
SB SEF) to seek to limit the number of
other participants in the SB SEF as a
way to reduce competition and increase
their own profits.1691
Improved Oversight. As set forth in
the SB SEF Proposing Release, the
proposed registration rules for SB SEFs
would incorporate the requirement
1685 See SB SEF Proposing Release, 76 FR 11036;
see also Section XV.G.1(b), infra; see also Ananth
Madhavan, et al., ‘‘Should Securities Markets Be
Transparent?’’ J. of Fin. Markets, Vol. 8 (2005)
(finding that an increase in pre-trade price
transparency leads to lower liquidity and higher
execution costs, because limit-order traders are
reluctant to submit orders given that their orders
essentially represent free options to other traders).
1686 See SB SEF Proposing Release, 76 FR 11037–
38.
1687 Id. at 11037. Proposed Rule 809(a) in
Regulation SB SEF would require SB SEFs to permit
a person to become a participant in the SB SEF only
if such person is registered with the Commission as
a security-based swap dealer, major security-based
swap participant, or broker (as defined in Section
3(a)(4) of the Exchange Act, 15 U.S.C. 78c(a)(4)), or
if such person is an eligible contract participant (as
defined in Section 3(a)(65) of the Exchange Act, 15
U.S.C. 78c(a)(65)).
1688 See SB SEF Proposing Release, 76 FR 11037.
1689 Id.; see also Section 3D(d)(2)(B)(i) of the
Exchange Act, 15 U.S.C. 78c–4(d)(2)(B)(i).
1690 See SB SEF Proposing Release, 76 FR 11037;
see also Section XV.C.3, supra (stating that in
markets with impartial access, security-based swaps
would be available to more participants, and that
fair and equal access to security-based swaps not
only promotes competition, but also encourages
participants to express their true valuations for
security-based swaps and lowers search costs for
participants deciding to enter or exit a securitybased swap position).
1691 See SB SEF Proposing Release, 76 FR 11037.
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under the Dodd-Frank Act that a SB
SEF, to be registered and maintain
registration, must comply with the 14
Core Principles governing SB SEFs in
Section 3D(d) of the Exchange Act 1692
(‘‘Core Principles’’) and any requirement
that the Commission may impose by
rule or regulation.1693 The proposed SB
SEF rules and proposed Form SB SEF
are intended to implement the statutory
registration requirements and assist the
Commission in overseeing and
regulating the security-based swap
market.1694 The information to be
provided on proposed Form SB SEF
(and the exhibits thereto) is designed to
enable the Commission to assess
whether an applicant seeking to become
a registered SB SEF has the capacity and
the means to perform the duties of a SB
SEF and to comply with the Core
Principles and other requirements
governing registered SB SEFs.1695 In
addition, the amendments,
supplemental information and notices
that the Commission proposed to
require registered SB SEFs to file
pursuant to Rules 802, 803, and 804 of
proposed Regulation SB SEF are
designed to further the ability of the
Commission to efficiently monitor SB
SEFs’ compliance with the provisions of
the Exchange Act and to oversee the
marketplace for security-based swaps
and, specifically, the trading of securitybased swaps on SB SEFs.1696 Moreover,
as discussed in the SB SEF Proposing
Release, any non-resident persons
seeking to register as a SB SEF must
comply with certain requirements,
including that such non-resident
persons provide assurances that they are
legally permitted to provide the
Commission with prompt access to their
books and records and to be subject to
inspection and examination by the
Commission.1697
Registration and regulation of SB
SEFs would require SB SEFs to
maintain an audit trail and surveillance
systems to monitor trading.1698
1692 15
U.S.C. 78c–4(d).
SB SEF Proposing Release, 76 FR 10949.
1694 See id. at 10949–50.
1695 See proposed Form SB SEF under the
Exchange Act; see also SB SEF Proposing Release,
76 FR 11004–08.
1696 See proposed Rules 802–804 under the
Exchange Act; see also SB SEF Proposing Release,
76 FR 11002–04.
1697 See proposed Rule 801(f) under the Exchange
Act; see also SB SEF Proposing Release, 76 FR
11001.
1698 See proposed Rule 818(c) under the Exchange
Act, which would require each SB SEF to keep
audit trail records relating to all orders, requests for
quotations, responses, quotations, other trading
interest, and transactions that are received by,
originated on, or executed on, the SB SEF; and
proposed Rules 811(j), 813(a)(2) and 813(b) under
the Exchange Act, which would require each SB
1693 See
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Proposed Regulation SB SEF also would
require comprehensive reporting and
recordkeeping by SB SEFs.1699 These
requirements would put in place a
structure that would provide the SB SEF
with information to better enable it to
oversee trading on its market by its
participants, including detecting and
deterring fraudulent and manipulative
acts.1700 The proposed rules for SB SEFs
also would provide the Commission
with greater access to information on
the trading of security-based swaps to
support its responsibilities to oversee
the security-based swap market.1701
Further, the proposed rules for SB SEFs
would enable the Commission to share
that information with other federal
financial regulators, including in
instances of broad market turmoil.1702
Improved regulatory oversight could
encourage participation in the U.S.
security-based swap market by investors
who could benefit from such
participation but currently choose to
avoid transacting in that market in part
because the market is opaque and
largely has not been subject to oversight
by U.S. regulatory authorities. Indeed, to
the extent that market participants
consider a well-regulated market as
significant to their investment
decisions, trust, which is a component
of investor confidence, is improved and
market participants may be more willing
to participate in the U.S. security-based
swap market.1703
(b) Programmatic Costs
Although the Commission believes
that application of the registration
requirements of Section 3D and
proposed Regulation SB SEF to foreign
security-based swap markets would
result in significant benefits to the U.S.
security-based swap market, the
Commission recognizes that foreign
security-based swap markets also would
incur significant costs to comply with
the proposed registration requirements
for foreign security-based swap markets
similar to those that domestic SB SEFs
would incur, as discussed in the
Regulation SB SEF proposal.1704 These
costs are summarized below.
SEF to electronically surveil its market and to
maintain an automated surveillance system; see
also SB SEF Proposing Release, 76 FR 11037–38.
1699 See proposed Rule 818 under the Exchange
Act; see also SB SEF Proposing Release, 76 FR
11037–38.
1700 See SB SEF Proposing Release, 76 FR 11037.
1701 Id.
1702 Id.
1703 See id. at 11037.
1704 See id. 11040–48. A detailed breakdown of
the cost estimates associated with all aspects of SB
SEF formation and compliance with the rules
proposed under proposed Regulation SB SEF are
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SB SEF Formation. According to
industry sources consulted by
Commission staff in connection with the
issuance of the SB SEF Proposing
Release, the monetary cost of forming a
SB SEF is estimated to range from
approximately $15 million to $20
million per SB SEF for the first year of
operation, if an entity were to establish
a SB SEF without the benefit of
modifying an already existing trading
system.1705 The industry sources
consulted by Commission staff
estimated at that time that, for the SB
SEF’s first year of operation, the cost of
software and product development
would range from approximately $6.5
million to $10.5 million per SB SEF.1706
The technological costs would be
expected to decline considerably during
the second and subsequent years of
operation, with an estimated range of $3
million to $4 million per year per SB
SEF.1707
For entities that currently own and/or
operate platforms for the trading of
security-based swaps, the cost of
forming a SB SEF would be more
incremental, given that these entities
already have viable technology that
could be modified to comply with the
requirements that the Commission may
impose for SB SEFs.1708 According to
industry sources consulted by
Commission staff in connection with the
issuance of the SB SEF Proposing
Release, the incremental costs of
enhancing a trading platform to be
compatible with any SB SEF
requirements ultimately established by
the Commission would range from as
low as $50,000 to as much as $3 million
contained in the SB SEF Proposing Release. See id.
Moreover, the Commission notes that it has
received comment letters on those cost estimates.
See MarketAxess Letter and UBS Letter. One
commenter remarked on the cost estimates in the
SB SEF Proposing Release for many of the
individual aspects of SB SEF formation, noting that,
in its view, some cost estimates were high and
others were low. See MarketAxess Letter at 15–17.
The commenter stated that generally the estimates
in the SB SEF Proposing Release were realistic and
that accurate estimates of the true expected costs of
establishing and operating a SB SEF and the hourly
rates relied upon for the estimates were broadly
consistent with industry standards. Id. Another
commenter urged the Commission to consider the
impact of the Regulation SB SEF proposal on
broker-dealers and the potential costs that could
result. See UBS Letter at 3. Neither of these
commenters indicated that the costs associated with
SB SEF formation and registration would be
different for foreign security-based swap markets as
compared to domestic security-based swap markets.
1705 See SB SEF Proposing Release, 76 FR 11041.
1706 Id.
1707 Id.
1708 Id. Several commenters on the SB SEF
Proposing Release that currently operate swap
trading facilities have indicated their intention to
register as SB SEFs. See, e.g., Bloomberg Letter; GFI
Letter; MarketAxess Letter; and Tradeweb Letter.
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per SB SEF, depending on the
enhancements needed to make a
particular platform compatible with the
final Commission rules governing SB
SEFs.1709 As noted in the SB SEF
Proposing Release, the annual ongoing
cost of maintaining the technology and
any improvements is estimated to be in
the range of $2 million to $4 million.1710
In the SB SEF Proposing Release, the
Commission preliminarily estimated
that the cost for an applicant to file
Form SB SEF, including all exhibits
thereto, would be approximately
$675,297 per SB SEF.1711
Complying with Core Principles. As is
also discussed in the SB SEF Proposing
Release, the regulatory requirement that
SB SEFs comply with the statutory Core
Principles would increase the ongoing
regulatory obligations of SB SEFs with
respect to their operations and
oversight.1712 Industry sources
consulted by Commission staff in
connection with the issuance of the SB
SEF Proposing Release estimated that
the cost to a SB SEF to comply with the
rules relating to surveillance and
oversight that they expect the
Commission to propose would be in the
range of $1 million to $3 million
annually, with initial costs likely to be
at the higher end of that range, since a
SB SEF would need to create the
technology necessary to monitor and
surveil its market participants, as well
as establish a rulebook that reflects the
Core Principles and related rules.1713
The ongoing annual compliance costs
estimated by those same industry
sources would be approximately $1
million, which would include the salary
of a Chief Compliance Officer and at
least two junior compliance personnel,
who are expected to be attorneys.1714
Unquantifiable Costs. The
Commission also has considered some
costs relating to registered SB SEFs that
are difficult to quantify precisely.1715
Security-based swaps traded on
registered SB SEFs may be perceived to
be subject to increased costs, monetary
and otherwise. For example, some
industry participants expressed their
belief that any proposed pre-trade
transparency requirement would force
1709 See
SB SEF Proposing Release, 76 FR 11041.
1710 Id.
1711 Id. A more detailed breakdown of the cost
estimates associated with each exhibit to Form SB
SEF, as well as with registration withdrawal and
supplementation, is contained in the SB SEF
Proposing Release. See SB SEF Proposing Release,
76 FR 11041–43.
1712 See SB SEF Proposing Release, 76 FR 11041.
1713 Id.
1714 Id.
1715 These unquantifiable costs are discussed
more fully in the SB SEF Proposing Release. See SB
SEF Proposing Release, 76 FR 11040.
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market participants to reveal valuable
information regarding their trading
interest more broadly than they believed
would be economically prudent, which
in their view could discourage
participation in the security-based swap
market.1716 There are perceived costs
associated with frontrunning, if
customers or dealers were required to
show their trading interest before a trade
is executed.1717 These potential costs of
pre-trade transparency could change
market participants’ trading strategies,
which could result in their working
more orders or finding ways to hide
their interest.1718
If market participants viewed the
Commission’s proposed Regulation SB
SEF as too burdensome with respect to
pre-trade transparency, security-based
swap dealers could be less willing to
supply liquidity for security-based
swaps that trade on SB SEFs, thus
reducing liquidity and competition.1719
On the other hand, if the requirement
with respect to pre-trade transparency
were too loose, the result could be that
there would be no substantive change
from the status quo, and thus no
potential reduction in asymmetric
information, increase in price
competition, or improvement in
executions, beyond the changes in
response to the other requirements of
the Dodd-Frank Act.1720
The import of this concern depends
on the degree of pre-trade transparency
required and the characteristics of the
trading market.1721 The proposed rules
for SB SEFs are intended to provide for
greater pre-trade transparency than
currently exists without requiring pretrade transparency in a manner that
would cause participants to avoid
providing liquidity on SB SEFs.1722
An additional unquantifiable cost
could result if foreign security-based
swap markets perceive the
Commission’s proposed requirements
for SB SEFs as too burdensome or
detrimental to their security-based swap
business. A foreign security-based swap
market that has such a view and that
currently operates in a manner that
would cause it to be subject to the SB
SEF registration requirements could
1716 Id. Several commenters on the SB SEF
Proposing Release expressed concerns about pretrade transparency requirements in the context of
block trades. See ABC Letter at 2, 4–5; MFA Letter
III at 7; ISDA SIFMA Letter II at 7; SIFMA AMG
Letter II at 4–5; Blackrock Letter at 8; Cleary Letter
III at 20; CME Letter at 3–4; Phoenix Letter at 3–
4.
1717 See SB SEF Proposing Release, 76 FR 11040.
1718 Id.
1719 Id.
1720 Id.
1721 Id.
1722 Id.
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31173
decide to restructure its security-based
swap business such that it would not be
subject to the SB SEF registration
requirements. This result could have
several potential negative implications
for participants in the U.S. financial
system such as, among other things,
fewer registered venues on which
security-based swaps could be executed,
less competition between the remaining
SB SEFs, and thus potentially higher
costs for such executions. If
restructuring raises trading costs in the
domestic security-based swap market,
liquidity could flow away from SB SEFs
and U.S. participants could find fewer
trading opportunities and potentially
decreased liquidity in the domestic
security-based swap market.
U.S. persons, or non-U.S. persons
located in the United States, having the
ability to directly execute or trade
security-based swaps on a foreign
security-based swap market that is not
subject to the SB SEF registration
requirements. As discussed above in
this section, the Commission
preliminarily believes that this, in turn,
could result in the intended
programmatic benefits of the SB SEF
registration requirements, i.e., increased
pre-trade transparency, increased
competition, and improved oversight,
not being extended to all of the securitybased swap activity that the
Commission believes is most likely to
raise the concerns that Congress
intended to address in Title VII.1725
and potentially be eligible for an
exemption from that requirement
because the Commission currently has
no basis to determine whether such
foreign security-based swap markets
would be subject to comparable,
comprehensive supervision and
regulation in their home jurisdictions.
Nevertheless, the Commission
believes that certain additional
programmatic benefits and costs could
result specifically from an exempted
foreign security-based swap market not
having to register as a SB SEF under
Section 3D of the Exchange Act while
continuing to serve U.S. security-based
swap market participants. These
additional benefits and costs are
discussed below.
(c) Alternatives
The Commission could have proposed
a different interpretation regarding
registration of foreign security-based
swap markets. For example, the
Commission could have interpreted
Section 3D of the Exchange Act broadly
to apply the registration requirement to
a foreign security-based swap market
that meets the definition of ‘‘securitybased swap execution facility,’’ 1723
regardless of whether such foreign
security-based swap market has engaged
in any of the activities, discussed above,
with respect to U.S. persons, or nonU.S. persons located in the United
States.1724 The Commission
preliminarily believes that, if a foreign
security-based swap market is not
engaging in such activities with respect
to U.S. persons, or non-U.S. persons
located in the United States, then it
would not trigger the registration
requirements under Section 3D of the
Exchange Act.
In addition, the Commission could
have interpreted Section 3D of the
Exchange Act more narrowly than
proposed herein, such that, for example,
the registration requirement would not
apply to a foreign security-based swap
market even if it meets the definition of
‘‘security-based swap execution facility’’
and provides U.S. persons, or non-U.S.
persons located in the United States,
with proprietary electronic trading
screens or similar devices for executing
or trading security-based swaps on its
market. The Commission preliminarily
believes that such a narrow
interpretation would not accommodate
the evolving technological innovation of
electronic trading and the availability of
global access to electronic trading
platforms, and therefore could result in
2. Programmatic Benefits and Costs of
the Potential Availability of Exemptive
Relief to Foreign Security-Based Swap
Markets
As discussed above, the Commission
may consider exempting a foreign
security-based swap market from
registration as a SB SEF under Section
3D of the Exchange Act if the foreign
security-based swap market is subject to
comparable, comprehensive supervision
and regulation by the appropriate
governmental authorities in its home
country.1726 Any foreign security-based
swap market granted such an exemption
would be subject to supervision and
regulation as a registered security-based
swap market in its home jurisdiction
that the Commission has determined to
be comparable to the supervision and
regulation of registered SB SEFs. As a
result, the Commission preliminarily
believes that the programmatic benefits
and costs, as discussed above,1727 that
would result from subjecting registered
SB SEFs to the Commission’s
supervision and regulation also would
be realized by any exempted foreign
security-based swap market because of
the comparable supervision and
regulation of that foreign market by its
home jurisdiction.
While a number of foreign
jurisdictions are in the process of
developing standards for the regulation
of security-based swaps and the
security-based swap market, few foreign
jurisdictions have adopted such
standards as yet.1728 As a result, at this
time, the Commission believes that it
does not have a sufficient basis to
provide an estimate as to how many
foreign security-based swap markets
would be required to register as SB SEFs
(a) Programmatic Benefits
1725 See
1723 See
Section 3(a)(77) of the Exchange Act, 15
U.S.C. 78c(a)(77).
1724 See Section VII.B, supra.
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Section II.B, supra.
Section VII.C, supra.
1727 See Section XV.G.1, supra.
1728 See Section VII.C, supra.
1726 See
PO 00000
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Facilitating Cross Border SecurityBased Swap Transactions. As discussed
above,1729 following the publication of
the SB SEF Proposing Release, the
Commission received comments from
the public expressing concerns about
the requirements and implications of
Section 3D of the Exchange Act and the
Commission’s proposed rules governing
SB SEFs for foreign-security-based swap
markets and the global security-based
swap market generally.1730 Several
commenters urged the Commission to
work with foreign regulators to develop
harmonized rules for the trading of
security-based swaps.1731 As noted
above, the Commission currently is in
discussions with its foreign counterparts
to explore steps toward such
harmonization.1732 The Commission is
proposing, as a means to facilitate crossborder security-based swap transactions,
that it may consider exempting a foreign
security-based swap market from the
registration requirements under Section
3D in the circumstances described
above.1733 The Commission
preliminarily believes that the potential
availability of such an exemption
should provide foreign security-based
swap markets operating in the United
States with appropriate flexibility with
respect to SB SEF registration when
they are subject to comparable,
comprehensive supervision and
regulation in their home markets. In
addition, the Commission preliminarily
1729 Id.
1730 See, e.g., Thomson Letter at 3–4; Blackrock
Letter at 12–13; Bloomberg Letter at 6–7; TradeWeb
Letter at 2; ISDA SIFMA Letter II at 2; WMBAA
Letter at 10–11; Cleary Letter III at 4; and Cleary
Letter IV at 5, 13; see also Section XXII., infra.
1731 See Thomson Letter; BlackRock Letter;
TradeWeb Letter; ISDA SIFMA Letter II; and
WMBAA Letter; see also Section XXI, infra.
1732 See Section VII.C, supra.
1733 Id.
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believes that the programmatic benefits
associated with registration and other
requirements for SB SEFs under Section
3D of the Exchange Act, and rules and
regulations thereunder, would not be
diminished as a result of the proposed
exemptive relief. Therefore, those U.S.
financial system participants that opt to
trade on any exempted foreign securitybased swap market operating in the
United States would remain adequately
protected because such an exempted
foreign market would be subject to
oversight and regulation in a manner
comparable to the Commission’s
proposed requirements for SB SEFs.
Reduction in Programmatic Costs
Associated with Registration. The
Commission preliminarily believes that
the availability of an exemption from SB
SEF registration requirements based on
comparable, comprehensive supervision
and regulation in the foreign securitybased swap market’s home country
could serve to reduce any potentially
duplicative or conflicting regulatory
burdens faced by security-based swap
markets that operate on a cross-border
basis and that otherwise would be
required to register in both their home
country and the United States.
Therefore, to the extent that such
foreign security-based swap markets
would qualify for and pursue such an
exemption, there could be a reduction
in the programmatic costs that those
foreign security-based swap markets
otherwise would incur.
One commenter on the SB SEF
Proposing Release stated that
harmonized rules for trading securitybased swaps would reduce potentially
duplicative or conflicting regulatory
burdens.1734 As noted above, few
foreign jurisdictions have enacted
legislation or adopted standards for the
regulation of security-based swaps
markets, although a number of foreign
jurisdictions are in the process of
developing such standards.1735 As the
process of developing legislation or
regulation regarding security-based
swaps continues in other jurisdictions,
the Commission believes that the
availability of an exemption from the
U.S. registration requirements is a
reasonably designed measure to address
the potential for conflicting or
unnecessarily duplicative regulatory
burdens that could arise from requiring
dual registration in the United States
and in a comparably regulated foreign
jurisdiction.
For example, a foreign security-based
swap market that is registered in a
foreign jurisdiction and that provides
1736 See SB SEF Proposing Release, 76 FR 10967,
10971–73.
1737 See Section VII.C, supra.
1734 See
Bloomberg Letter.
1735 See Section VII.C, supra.
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U.S. persons, or non-U.S. persons
located in the United States, the ability
to execute or trade security-based
swaps, or that facilitates the execution
or trading of security-based swaps, on
its market could be required to incur the
cost of full registration twice—once to
register in the foreign jurisdiction and
once more to register as a SB SEF in the
United States—if there was no
possibility of obtaining an exemption
from the U.S. registration requirements.
As a further example, such a foreign
security-based swap market, as a result
of its registration as a SB SEF, would be
required to establish rules governing the
operation of its trading facility,
including rules specifying trading
procedures to be used in entering and
executing orders traded or posted on the
facility.1736 A conflict could arise if, for
example, the U.S. requirements for SB
SEFs require the foreign market’s
trading rules to allow trading interest in
security-based swaps to be expressed or
responded to in a manner that is
different from, and that makes it
impossible also to comply with, the
foreign jurisdiction’s requirements
regarding trading rules. These examples
are not meant to be exhaustive, but
rather to be illustrative of scenarios
involving potentially conflicting or
unnecessarily burdensome regulation
that foreign security-based swap
markets could face, absent an
exemption. The Commission
preliminarily believes that the
availability of an exemption from
registration as a SB SEF should help
mitigate the potential impact of such
scenarios. At the same time, as
discussed above, the Commission
believes that granting such an
exemption to a foreign security-based
swap market would not reduce the
programmatic benefits achieved by
requiring security-based swap markets
to register as a SB SEF because any
exempted foreign market would be
comparably supervised and regulated by
its home country.
As stated above, few jurisdictions
have adopted standards for the
regulation of security-based swap
markets and therefore the Commission
does not have a sufficient basis to
provide an estimate as to how many
foreign security-based swap markets
would request, and potentially receive,
an exemption from registration.1737 The
Commission preliminarily believes that
the estimate in the SB SEF Proposing
Release of programmatic costs
associated with registration as a SB SEF
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would apply equivalently to a foreign
security-based swap market that is
subject to Section 3D’s registration
requirement.
Any potential exemption from
registration (even though the foreign
security-based swap market would incur
costs associated with compliance with
the comparable regulation in its home
country), could result in minimizing the
burden of the programmatic costs
associated with registration as a SB SEF,
and so these programmatic costs
constitute an upper bound for the
potential cost savings from any such
exemption. However, the Commission is
not able to estimate the aggregate
reduction in programmatic costs that
would be associated with reliance on
any proposed exemption by foreign
security-based swap markets.
(b) Programmatic Costs
Compliance with Potential Conditions
of Exemption. As discussed above, any
grant of an exemption from the SB SEF
registration requirements may be subject
to certain appropriate conditions, which
could include, but not be limited to,
requiring the exempted foreign securitybased swap market to provide the
Commission with prompt access to its
books and records, including, for
example, data related to orders, quotes
and transactions, as well as providing
an opinion of counsel that, as a matter
of law, it is able to provide such
access.1738 The Commission also could
require that the foreign security-based
swap market appoint an agent for
service of process in the United
States.1739
The Commission preliminarily
believes that the costs associated with a
commitment by the foreign securitybased swap market to provide the
Commission with access to books and
records would be part of the
Commission’s $1 million to $3 million
1738 Id.
1739 Id. These potential conditions of an
exemption from SB SEF registration requirements
for a foreign security-based swap market—granting
the Commission access to its books and records,
providing an opinion of counsel that such access
can be granted under the foreign jurisdiction’s law,
and appointing a process agent in the United
States—are proposed requirements of SB SEF
registration. See SB SEF Proposing Release, 76 FR
11000. Thus, a foreign security-based swap market
that is required to register as a SB SEF would incur
the costs associated with complying with these
requirements, which costs are included in the
estimate provided in Section XV.G.1(b) above of the
cost for an applicant to file Form SB SEF, including
all exhibits thereto. See id. at 11016–17, 11041–42.
A foreign security-based swap market that is
granted an exemption from SB SEF registration
requirements also could incur the costs of
complying with these requirements to the extent
that the Commission imposes them as conditions to
the exemption.
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estimate of the annual cost to a SB SEF
to comply with the Commission’s
proposed rules relating to surveillance
and oversight,1740 but would be difficult
to quantify separately at this time. The
foreign security-based swap market
would maintain books and records in
the ordinary course of its business and
in conformance with the requirements
of its appropriate regulatory
authority.1741 If, after issuance of any
such exemptive relief, the Commission
considered it necessary to have access to
the foreign security-based swap market’s
books and records, there would be costs
to the foreign security-based swap
market in granting such access, for
example, in copying the requested
books and records and supplying them
to Commission staff. However, the
circumstances that would prompt any
Commission request for access to the
foreign security-based swap market’s
books and records and the exact scope
of any such request would not be known
at the time the Commission were to
grant an exemption from the
requirements of Section 3D of the
Exchange Act.
The Commission believes that the
costs for a foreign security-based swap
market to appoint an agent for service of
process in the United States would be
minimal in circumstances in which the
foreign security-based swap market has
a subsidiary or staff in the United States
that is capable of receiving service of
process and acting as the foreign
market’s appointed agent. In
circumstances in which a foreign
security-based swap market must
appoint a third party as its process
agent, Commission staff estimates, based
on an industry source that provides
process agent services, that the cost to
do so would be approximately $400 for
the first year and approximately $300
annually thereafter.
The Commission also believes that an
exempted foreign market could incur
costs in complying with any additional
conditions that accompany the grant of
the exemption, but the scope of these
conditions and the costs associated with
them would depend on the specific
circumstances for which the exemption
is granted and could vary from foreign
jurisdiction to foreign jurisdiction. As a
result, the Commission cannot provide
an estimated dollar value of the costs
1740 See note 1713 and accompanying text, supra,;
see also SB SEF Proposing Release, 76 FR 11041.
1741 Prior to the issuance of any exemption the
foreign security-based swap market could, however,
need to incur the cost of obtaining an opinion of
counsel letter stating that it is able to provide access
to its books and records. See Section XV.G.2(d),
infra.
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Jkt 229001
that would be associated with such
additional conditions at this time.
(c) Alternatives
Harmonization with Foreign
Counterparts. Apart from interpreting
Section 3D of the Exchange Act to apply
to foreign security-based swap markets
that engage in certain activities with
respect to U.S. persons or non-U.S.
persons located in the United States,1742
and potentially providing an exemption
from the SB SEF registration
requirements for qualifying foreign
security-based swap markets that are
covered by Section 3D,1743 the
Commission could adopt the approach
of harmonizing our rules with the rules
of foreign jurisdictions. As noted above,
few foreign jurisdictions have enacted
legislation or adopted standards for the
regulation of security-based swaps
markets, although a number of foreign
jurisdictions are in the process of
developing such standards.
Accordingly, the Commission
preliminarily believes that our proposal
to consider exemptive relief from SB
SEF registration for foreign securitybased swap markets that are subject to
comparable, comprehensive supervision
and regulation is a reasonable measure
at this time that acknowledges the crossborder nature of the security-based swap
market.
Not Consider Exemptive Relief. The
Commission could have determined not
to consider making exemptive relief
from Section 3D’s registration
requirements available. In such a
scenario, a foreign security-based swap
market subject to Section 3D’s
registration requirements would be
required to register as a SB SEF—and
incur the costs attendant to such
registration—even if it is subject to
comparable, comprehensive supervision
and regulation in its home jurisdiction.
Moreover, without the availability of an
exemption, the Commission believes
that there would be a greater potential
for such a dually-registered foreign
security-based swap market to face
duplicative or conflicting regulatory
burdens. The Commission preliminarily
believes that considering exemptive
relief is a more cost-effective and, for
the reasons stated above, reasonable
measure given the cross-border nature of
the security-based swap market.
(d) Assessment Costs
A foreign security-based swap market
would incur costs in submitting a
request or application for an exemption
from the SB SEF registration
1742 See
1743 See
PO 00000
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Section VII.C, supra.
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31175
requirement. The Commission estimates
that the costs of submitting such a
request or application would be
approximately $110,320.1744 The use of
internal counsel in lieu of outside
counsel would reduce this estimate.
An additional assessment cost that a
foreign security-based swap market
could incur in connection with
submitting such an exemption request
or application would be obtaining an
opinion of counsel letter stating that the
foreign security-based swap market is
able to give access to its books and
records to the Commission, if the
Commission were to include such a
condition in any exemptive relief. The
Commission estimates that the cost
associated with obtaining such a letter
would be approximately $25,000.1745
1744 The Commission preliminarily believes that
the costs of submitting a request or application for
the proposed exemption would be similar to the
costs associated with submitting a request for a
substituted compliance determination, i.e.,
$110,320. See Section XV.I.3, infra. This estimate is
based on information regarding the average costs
associated with preparing and submitting an
application to the Commission for a Commission
order for exemptive relief under Section 36 of the
Exchange Act in accordance with the procedures set
forth in 17 CFR 240.0–12. The Commission
estimates that preparation of the request would
require approximately 80 hours of in-house counsel
time and 200 hours of outside counsel time. Such
estimate takes into account the time required to
prepare supporting documents necessary for the
Commission to make a substituted compliance
determination, including, without limitation,
information regarding applicable requirements
established by the foreign financial regulatory
authority or authorities, as well as the methods
used by the foreign financial regulatory authority or
authorities to monitor compliance with these rules.
Based upon data from SIFMA’s Management &
Professional Earnings in the Securities Industry
2012 (modified by the SEC staff to account for an
1800-hour-work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits,
and overhead), the staff estimates that the average
national hourly rate for an in-house attorney is
$379. The Commission estimates the costs for
outside legal services to be $400 per hour.
Accordingly, the Commission estimates the cost to
be $110,320 ($30,320 (based on 80 hours of inhouse counsel time * $379) + $80,000 (based on 200
hours of outside counsel time * $400)) to submit a
request for a substituted compliance determination.
1745 This estimate is based on prior Commission
estimates of the cost of obtaining an opinion of
counsel, and assumes that foreign security-based
swap dealers would seek outside legal counsel to
prepare the letter at an hourly rate of $400. See SB
SEF Proposing Release, 76 FR 11025, 11042;
Registration Proposing Release, 76 FR 65811; see
also note 1744, supra. In the SB SEF Proposing
Release, the Commission preliminarily estimated
that the average initial paperwork cost for a nonresident SB SEF to provide an opinion of counsel
that the SB SEF can, as a matter of law, provide the
Commission with access to its books and records
and submit to onsite inspection and examination by
representatives of the Commission would be one
hour and $900 in outside legal costs per nonresident SB SEF. See SB SEF Proposing Release, 76
FR 11025, 11042. In the Registration Proposing
Release, the Commission stated that, upon further
reflection, it believed that a non-resident security-
Continued
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Request for Comment
• Would the benefits and costs
associated with becoming a SB SEF be
the same for domestic and foreign
security-based swap markets? For
example, would the costs of
implementing the systems and other
necessary technology to operate as a SB
SEF be different for foreign securitybased swap markets? To the extent the
benefits or costs of SB SEF registration
would be different for foreign securitybased swap markets as compared to
domestic markets, please identify,
discuss, analyze, and supply relevant
data, information, or statistics regarding
any such different benefits or costs for
foreign security-based swap markets.
• Would the costs associated with
developing the other aspects of the
infrastructure necessary for SB SEFs be
different for foreign security-based swap
markets? If so, please describe such
differences and quantify them to the
extent possible.
• Would the non-infrastructure costs
associated with forming and operating a
SB SEF be different for foreign securitybased swap markets? If so, please
describe such differences and quantify
them.
• Are there any programmatic
benefits and costs associated with the
SB SEF registration requirements or the
proposed availability of an exemption
from those requirements that are not
discussed herein? If so, please identify,
discuss, analyze, and supply relevant
data, information, or statistics regarding
any such costs or benefits.
• Are the programmatic benefits and
costs associated with the SB SEF
registration requirements and the
proposed availability of an exemption
from those requirements that are
discussed herein accurate? If not, how
can the Commission more accurately
estimate these costs?
• Do the benefits of the proposed
availability of an exemption from the SB
SEF registration requirements justify the
costs? Are there quantifiable
programmatic costs associated with the
proposed availability of an exemption
based swap entity would incur, on average,
approximately $25,000 in outside legal costs to
obtain an opinion of counsel that a non-resident
security-based swap entity could provide the
Commission with access to its books and records
and submit to onsite inspection and examination by
the Commission. See Registration Proposing
Release, 76 FR 65811. The Commission
preliminarily believes that an estimate of $25,000
may be the more appropriate estimate of the cost
that a foreign security-based swap market would
incur in obtaining an opinion of counsel from
outside counsel with respect to the ability to grant
the Commission access to books and records given
the research and legal analysis that the Commission
believes would be involved in the preparation of
the opinion.
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from those requirements that should be
addressed? If so, please identify them.
Are there any additional assessment
costs not discussed herein? If so, what
are they and are they quantifiable?
• Do commenters agree with the
preliminary estimates of the assessment
costs relating to the proposed exemption
from the SB SEF registration
requirement? Are the estimated costs a
foreign security-based swap market
would incur in submitting an
application for an exemption from the
SB SEF registration requirements
accurate? If not, how should the
Commission adjust the cost estimate?
Are there other assessment costs not
considered here?
3. Programmatic Benefits and Costs
Associated With the Mandatory Trade
Execution Requirement of Section 3C(h)
of the Exchange Act
Unlike the markets for cash equity
securities and listed options, the market
for security-based swaps currently is
characterized by bilateral negotiation in
the OTC swap market and is largely
decentralized.1746 The lack of uniform
rules concerning the trading of securitybased swaps and the historical one-toone nature of trade negotiation in
security-based swaps has resulted in the
formation of distinct types of trading
venues and execution practices, ranging
from bilateral negotiations carried out
over the telephone,1747 to single-dealer
RFQ platforms,1748 to multi-dealer RFQ
platforms,1749 to central limit order
1746 See
SB SEF Proposing Release, 76 FR 10951.
negotiation’’ refers to the execution
practice whereby one party uses the telephone,
email or other communications to contact directly
a potential counterparty to negotiate and execute a
security-based swap. The bilateral negotiation and
execution practice provides no pre-trade or posttrade transparency because only the two parties to
the transaction are aware of the terms of the
negotiation and the final terms of the agreement.
See SB SEF Proposing Release, 76 FR 10951; see
also Section II.A.5, supra.
1748 A single-dealer RFQ platform refers to an
electronic trading platform where a dealer may post
indicative quotes for security-based swaps in
various asset classes that the dealer is willing to
trade. Only the dealer’s approved customers would
have access to the platform. When a customer
wishes to transact in a security-based swap, the
customer requests an executable quote, the dealer
provides one, and if the customer accepts the
dealer’s quote, the transaction is executed
electronically. This type of platform generally
provides pre-trade transparency in the form of
indicative quotes on a pricing screen, but only from
one dealer to its customer. See SB SEF Proposing
Release, 76 FR 10951; see also Section II.A.5, supra.
1749 A multi-dealer RFQ electronic trading
platform refers to a multi-dealer RFQ system
whereby a requester can send an RFQ to solicit
quotes on a certain security-based swap from
multiple dealers at the same time. After the RFQ is
submitted, the recipients have a prescribed amount
of time in which to respond to the RFQ with a
quote. Responses to the RFQ are firm. The requestor
1747 ‘‘Bilateral
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books,1750 and brokerage trading.1751
These various trading venues and
execution practices provide different
degrees of pre-trade transparency and
different levels of access. While the
Commission currently does not have
sufficient information with respect to
the volume of security-based swap
transactions executed across these
different trading venues and execution
practices, a common thread to these
transactions is that they have all been
executed in the unregulated OTC
derivatives market. Thus, for purposes
of analyzing the economic impact of the
statutory mandatory trade execution
requirement, as well as proposed Rule
3Ch–1, the Commission is starting from
a baseline in which no security-based
swaps are currently traded in the United
States on an exchange or on a system or
platform that otherwise meets the
statutory definition of ‘‘security-based
swap execution facility,’’ the statutory
Core Principles governing SB SEFs, and
the Commission’s proposed
requirements governing SB SEFs, if they
were to be adopted by the
Commission.1752
then has the opportunity to review the responses
and accept the best quote. A multi-dealer RFQ
platform provides a certain degree of pre-trade
transparency, depending on its characteristics. See
SB SEF Proposing Release, 76 FR 10952; see also
Section II.A.5, supra.
1750 A limit order book system or similar system
refers to a trading system in which firm bids and
offers are posted for all participants to see, with the
identity of the parties withheld until a transaction
occurs. Bids and offers are then matched based on
price-time priority or other established parameters
and trades are executed accordingly. The quotes on
a limit order book system are firm. In general, a
limit order book system provides greater pre-trade
transparency than the three platforms described
above because all participants can view bids and
offers before placing their bids and offers. See SB
SEF Proposing Release, 76 FR 10952; see also
Section II.A.5, supra. Currently, limit order books
for the trading of security-based swaps in the
United States are utilized by inter-dealer brokers for
dealer-to-dealer transactions.
1751 ‘‘Brokerage trading’’ refers to an execution
practice used by brokers to execute security-based
swaps on behalf of customers, often in larger sized
transactions. In such a system, a broker receives a
request from a customer (which may be a dealer)
who seeks to execute a specific type of securitybased swaps. The broker then interacts with other
customers to fill the request and execute the
transaction. This model often is used by dealers that
seek to transact with other dealers through the use
of an interdealer broker as an intermediary. In this
model, there may be pre-trade transparency to the
extent that participants are able to see bids and
offers of other participants. See SB SEF Proposing
Release, 76 FR 10952; see also Section II.A.5, supra.
1752 Several commenters on the SB SEF Proposing
Release that currently operate swap trading
facilities have indicated their intention to register
as SB SEFs. See note 1708, supra. The Commission
believes that it is likely that these entities would
have to revise their operations to meet the
definition of ‘‘security-based swap execution
facility,’’ the statutory Core Principles governing SB
SEFs, and the proposed requirements set forth in
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As noted above, this section XV.G.3
addresses the programmatic effect, and
benefits and costs of, the mandatory
trade execution requirement of Section
3C(h) of the Exchange Act generally.
Section XV.G.4 further below addresses
the programmatic effect, and benefits
and costs of, the proposed application of
this requirement to cross-border
security-based swap transactions, as
delineated by proposed Rule 3Ch–1.
The Commission preliminarily believes
that proposed Rule 3Ch–1 is
appropriately tailored to extend the
regulatory benefits intended by the
mandatory trade execution
requirement—i. e., enhanced
transparency and competition, which
are discussed below—to the securitybased swap activity that the
Commission believes is most likely to
raise the concerns that Congress
intended to address in Title VII.1753 In
the Commission’s preliminary view, a
different rule, and in particular a rule
that would not apply the mandatory
trade execution requirement to all such
security-based swap activity, could
undermine these goals.
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(a) Programmatic Effect of the Statutory
Mandatory Trade Execution
Requirement
As discussed above, to increase the
transparency and oversight of the OTC
derivatives market, Section 763(a) of the
Dodd-Frank Act amended the Exchange
Act by adding the mandatory trade
execution requirement of Section
3C(h).1754 Security-based swap
transactions subject to Section 3C(h)’s
mandatory trade execution requirement
cannot be executed over-the-counter,
but instead must be executed on an
exchange or SB SEF that is registered or
exempt from registration under the
Exchange Act, unless an applicable
exception applies.1755 As such, the
mandatory trade execution requirement
is important in helping to bring the
trading of security-based swaps onto
more transparent, regulated markets,
from the unregulated OTC swap
markets.1756
Consequently, the Commission
preliminarily believes that an overall
programmatic—and positive—effect of
the mandatory trade execution
requirement would be the potential for
a large volume of security-based swap
transactions that are currently executed
in the OTC market to become subject to
the SB SEF Proposing Release, if they were to be
adopted by the Commission.
1753 See Sections II.B., supra.
1754 15 U.S.C. 78c–3(h).
1755 Id.
1756 See SB SEF Proposing Release, 76 FR 10949.
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the mandatory trade execution
requirement and, therefore, be required
to be executed on a regulated platform,
such as an exchange or SB SEF.
Moreover, because the programmatic
benefits and costs attendant to the
mandatory trade execution requirement,
which are discussed below, would be
realized for the volume of securitybased swap transactions that are
executed on exchanges or SB SEFs, the
Commission preliminarily believes that
the extent to which those benefits and
costs could be realized may best be
demonstrated by generating an
indicative volume estimate of securitybased swap transactions that may
potentially be subject to the mandatory
trade execution requirement.
As stated above, because the
Commission currently does not have
comprehensive information regarding
the volume of security-based swap
transactions currently executed on
security-based swap trading
platforms,1757 to estimate the volume of
such transactions that could become
subject to the mandatory trade
execution requirement, as a starting
point, the Commission relies on clearing
data for single-name CDS transactions,
which the Commission believes is
currently the best available data for
providing an indicative level of
security-based swap transaction volume
subject to the mandatory trade
execution requirement.1758 The
Commission utilizes this data regarding
single-name CDS transactions to
generate an indicative volume of
security-based swap transactions in the
1757 While several commenters on the SB SEF
Proposing Release that currently operate swap
trading facilities in the OTC market have indicated
their intention to register as SB SEFs, see note 1708,
supra, as is currently the case for the security-based
swap market as a whole, the Commission does not
have comprehensive information regarding the
volume of security-based swap transactions
currently executed on security-based swap trading
platforms.
1758 For purposes of the analysis of the
programmatic effect of the mandatory trade
execution requirement, we do not consider the
historical data regarding the clearing level of U.S.
index CDS transactions. The statutory definition of
security-based swap in relevant part includes swaps
based on single securities or on narrow-based
security-indices. See Section 3(a)(68)(A) of the
Exchange Act, 15 U.S.C.78c(a)(68)(A). The
historical data regarding the clearing level of U.S.
index CDS transactions encompass broad-based
index CDS transactions that do not fall within the
definition of security-based swaps. The
Commission recognizes that the security-based
swap market includes not only single-name CDS,
but also CDS based on narrow-based indices, and
other non-CDS security-based swaps, primary
examples of which are equity swaps and total
return swaps based on single equities or narrowbased indices of equities. As previously stated, we
believe that the single-name CDS data are
sufficiently representative of the security-based
swap market. See note 1301, supra.
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31177
U.S. security-based swap market that
could be subject to the mandatory
clearing requirement of Section 3C(a) of
the Exchange Act.1759 Given that the
mandatory trade execution requirement
of Section 3C(h) of the Exchange
Act 1760 could apply to any securitybased swap that is subject to the
mandatory clearing requirement in
Section 3C(a)(1) of the Exchange
Act,1761 the Commission preliminarily
believes that the volume of single-name
CDS transactions that could be subject
to the mandatory clearing
requirement 1762 presents an indicative
level of the volume of security-based
swap transactions that potentially could
be subject to the mandatory trade
execution requirement if these securitybased swaps are made available to trade
on an exchange or SB SEF.
The Commission notes that it has not
yet determined the criteria for assessing
whether an exchange or SB SEF has
made a security-based swap available to
trade. The Commission, however,
recognizes that the ‘‘made available to
trade’’ determination is an essential
element of the mandatory trade
execution requirement. Any analysis of
the benefits and costs flowing from the
full complement of the mandatory trade
execution requirement, when it is
implemented, would need to take into
consideration the Commission’s
determination of the scope of securitybased swaps that would be ‘‘made
available to trade,’’ as well as the crossborder rules that may be adopted by the
Commission regarding application of
the mandatory trade execution
requirement. As a result, the ‘‘made
available to trade’’ determination, when
made by the Commission, will affect the
ultimate benefits and costs associated
with the mandatory trade execution
requirement discussed in this
release.1763 Solely for purposes of
analyzing herein the volume of securitybased swap transactions that could be
subject to the mandatory trade
execution requirement, the Commission
is assuming that all security-based
1759 See
Section XV.F.3(a), supra.
U.S.C. 78c–3(h).
1761 15 U.S.C. 78c–3(a)(1).
1762 As previously stated, the estimate of the
volume of single-name CDS transactions that could
be subject to the mandatory clearing requirement is
conditioned upon and will be affected by the
mandatory clearing determination and the final
rules regarding the end-user exception to the
mandatory clearing requirement and other
qualification. See Section XV.F.2, supra.
1763 The Commission has indicated its
preliminary view that the decision as to when a
security-based swap would be considered to be
‘‘made available to trade’’ should be made pursuant
to objective measures to be established by the
Commission. See SB SEF Proposing Release, 76 FR
10969.
1760 15
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swaps that would be subject to
mandatory clearing also would be
deemed made available to trade and
hence could be subject to the mandatory
trade execution requirement.
As stated above, due in part to the
data of the level of clearing activity
during the years of 2009 to 2011, the
Commission has recognized that
mandatory clearing determinations
made pursuant to Section 3C(a)(1) of the
Exchange Act could alter current
clearing practices at the time such
determinations are made and potentially
could result in a higher level of clearing
for security-based swaps than would
take place under a voluntary system.1764
Therefore, the Commission
preliminarily estimates that 33% of the
$2,800 billion total gross notional
volume of the total U.S. single-name
CDS market 1765 would provide an
indicative volume of the U.S. singlename CDS transactions that may be
subject to the mandatory clearing
requirement.1766 Because the mandatory
1764 As stated above, due in part to the data of the
level of clearing activity during the years of 2009
to 2011, the Commission has recognized that
mandatory clearing determinations made pursuant
to Section 3C(a)(1) of the Exchange Act, 15 U.S.C.
78c–3(a)(1), could alter current clearing practices at
the time such determinations are made and
potentially could result in a higher level of clearing
for security-based swaps than would take place
under a voluntary system. See Section XV.F.2(a),
supra, and the Clearing Procedures Adopting
Release, 77 FR 41638.
1765 The Commission previously calculated three
measures to represent the clearing level of the U.S.
single-name CDS transactions. The first measure is
the gross notional volume of cleared U.S. singlename CDS transactions reported by ICE Clear Credit
in 2011, which represents approximately 25% of
the total $2,800 billion notional U.S. single-name
CDS market. The second measure is the gross
notional volume of U.S. single-name CDS accepted
for clearing at any time during the calendar year of
2011, which represents approximately 33% of the
total $2,800 billion notional U.S. single-name CDS
market. The third measure is the gross notional
volume of U.S. single-name CDS accepted for
clearing at the time of execution, which represents
approximately 29% of the total $2,800 billion
notional U.S. single-name CDS market. For reasons
stated above, the Commission preliminarily
believes that the highest measure among these three
would provide an indicative volume of the U.S.
single-name CDS transaction that may be subject to
the mandatory clearing requirement. See the text
accompanying Table 1 in Section XV.F.2(a), supra.
1766 The Commission recognizes that, even if a
transaction is determined to be subject to
mandatory clearing, such transaction may be
excepted from clearing pursuant to the end-user
clearing exception under Section 3C(g) of the
Exchange Act. See 15 U.S.C. 78c–3(g). However,
based on the available data, the Commission
estimated that commercial end users that are
eligible for the clearing exception currently
participate in the security-based swap market on a
very limited basis. Data compiled by the
Commission’s Division of Risk, Strategy, and
Financial Innovation on credit default transactions
from the DTCC–TIW between January 1, 2011 and
December 31, 2011 suggest that the total percentage
of trades between buyer and seller principals during
the calendar year 2011 for single name credit
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trade execution requirement of Section
3C(h) of the Exchange Act 1767 could
apply to any security-based swap that is
subject to the mandatory clearing
requirement in Section 3C(a)(1) of the
Exchange Act, subject to the ‘‘made
available to trade’’ determination, this
estimate may provide an indicative
volume of U.S. single-name CDS
transactions that could have been
subject to the ‘‘made available to trade’’
determination in Section 3C(h)(2) of the
Exchange Act (if such determination
had been made in 2011) and, therefore,
subject to the mandatory trade
execution requirement.1768
The Commission is mindful that this
estimate is only an indicative volume of
U.S. single-name CDS transactions that
may be subject to the mandatory trade
execution requirement in Section 3C(h)
of the Exchange Act,1769 as the
Commission currently does not have
reliable information available with
respect to security-based swap
transactions due to the fact that such
transactions are currently executed on
trading platforms that are not exchanges
or SB SEFs. However, the Commission
preliminarily believes that the statutory
mandatory trade execution requirement,
together with the statutory definition of
SB SEF 1770 and the Commission’s
proposed interpretation,1771 when
implemented, could alter existing
security-based swap execution
practices. As more security-based swap
products are determined to be
mandatorily cleared and once the
Commission addresses how to
determine whether such security-based
swaps are made available for trading on
an exchange or SB SEF, the level of
trade execution in security-based swaps
taking place on such exchanges or SB
SEFs should be higher than in the
current trading environment, in which
default swaps was only 0.03% of the total trade
counterparty distribution for non-financial end
users, which are composed of non-financial
companies and family trusts. See Capital, Margin
and Segregation Proposing Release, 77 FR 70302, in
particular, n.960. For purposes of the analysis and
estimate here, we assume that the volume of
transactions subject to the end user clearing
exception under Section 3C(g) of the Exchange Act
is negligible.
1767 15 U.S.C. 78c–3(h).
1768 As stated earlier in this Section XV.G.3(a),
this indicative volume estimate is based on an
assumed scenario in which all mandatorily cleared
security-based swaps are deemed made available to
trade. The Commission reiterates that this
assumption is being made solely for purposes of
analyzing herein the volume of security-based swap
transactions that could be subject to the mandatory
trade execution requirement.
1769 See 15 U.S.C. 78c–3(h).
1770 See Section 3(a)(77) of the Exchange Act, 15
U.S.C. 78c(a)(77).
1771 See SB SEF Proposing Release, 76 FR 10952–
58.
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no security-based swaps are traded on
exchanges or SB SEFs. As a result, the
mandatory trade execution requirement
could have a material programmatic
impact on execution practices in the
U.S. security-based swap market by
increasing the volume of transactions
executed on an exchange or SB SEF.
(b) Programmatic Benefits of the
Statutory Mandatory Trade Execution
Requirement
Given that exchanges and SB SEFs are
the essential infrastructure for
implementing the mandatory trade
execution requirement, there are
additional benefits—separate from the
fact that a large volume of securitybased swap transactions would become
subject to that requirement—flowing
from the mandatory trade execution
requirement that inevitably would
overlap with the benefits associated
with SB SEF registration, as described
in the SB SEF Proposing Release. These
benefits would be realized for the
volume of security-based swap
transactions that become subject to the
mandatory trade execution requirement
and are summarized below.
Increased Pre-Trade Price
Transparency. One of the primary
benefits of the mandatory trade
execution requirement is to bring
increased pre-trade transparency to the
currently opaque security-based swap
market. Increased pre-trade
transparency should: (i) Help reduce
informational asymmetries that may
exist today in the security-based swap
market, often to the benefit of large
dealers who observe order flow; 1772 (ii)
allow an increased number of market
participants to see the trading interest of
other market participants prior to
trading, which should lead to increased
price competition among market
participants; and, in turn, (iii) lead to
more efficient pricing in the securitybased swap market.1773
Impartial Access and Competitive
Security-Based Swaps Market. The
Dodd-Frank Act’s mandate to bring
security-based swaps that are subject to
the mandatory clearing requirement
onto regulated markets, unless the
security-based swap is not made
available to trade, coupled with the
proposed access requirements for SB
SEFs in Regulation SB SEF,1774 should
help foster greater competition in the
trading of security-based swaps by
increasing access to security-based swap
1772 See
Sections XV.C.1, XV.C.2, and XV.C.3,
supra.
1773 See
SB SEF Proposing Release, 76 FR 11036.
proposed Rules 809 and 811(b) under the
Exchange Act; see also SB SEF Proposing Release,
76 FR 10961–62.
1774 See
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trading venues.1775 Such increased
competition could lead to more efficient
pricing in the security-based swap
market.1776
(c) Programmatic Costs of the Statutory
Mandatory Trade Execution
Requirement
The Commission is mindful that
programmatic costs also would be
incurred for security-based swap
transactions that become subject to the
mandatory trade execution
requirement.1777 The Commission
preliminarily believes that there would
be transaction costs, such as fees and
connectivity costs, that trading
counterparties would incur in executing
or trading security-based swaps subject
to the mandatory trade execution
requirement on SB SEFs. The
Commission believes that a potential
increase in transaction costs could
result if the fees and connectivity costs
associated with utilizing SB SEFs to
secure trading interest and execute
security-based swap transactions are
higher than the current fees and costs
associated with such practices in the
OTC market. However, the Commission
currently does not have information
available to estimate the fees and costs
that would be associated with
transacting on SB SEFs, as no registered
SB SEFs currently exist. Likewise,
although unregulated trading venues
exist in today’s OTC derivatives market,
the Commission does not have
information regarding what, if any, fees
and connectivity costs are associated
with transacting on these unregulated
trading venues.
In addition, studies suggest that pretrade transparency can be costly for
block trades as prices are likely to move
adversely if the existence of a large
unexecuted order becomes known.1778
1775 See
SB SEF Proposing Release, 76 FR 11037.
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1776 Id.
1777 The Commission’s consideration of the
programmatic costs associated with setting up a SB
SEF in the SB SEF Proposing Release and further
discussion of such costs in the context of discussing
when the SB SEF registration requirements would
apply to foreign security-based swap markets and
in considering the proposed availability of an
exemption to foreign security-based swap markets
from the registration requirements could be relevant
to the costs associated with the mandatory trade
execution requirement given that security-based
swaps subject to the mandatory trade execution
requirement would be required to be traded on an
exchange or a SB SEF that is registered under
Section 3D of the Exchange Act or is exempt from
such registration. See SB SEF Proposing Release, 76
FR 11040–48; see also Sections XV.G.1 and XV.G.2,
supra.
1778 See SB SEF Proposing Release, 76 FR 11040;
see also Minder Cheng and Ananth Madhavan, ‘‘In
Search of Liquidity: Block Trades in the Upstairs
and Downstairs Markets,’’ Review of Financial
Studies, Vol. 10, No. 1 (1997) (analyzing data from
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As mentioned earlier, pre-trade
transparency could also produce
concerns about information leakage and
frontrunning of trades. These effects
could cause market participants to alter
their trading strategies in order to hide
their interest, potentially reducing
liquidity on SB SEFs.1779
4. Programmatic Benefits and Costs of
Proposed Rule 3Ch–1 Regarding
Application of the Mandatory Trade
Execution Requirement in Cross-Border
Context
As discussed above,1780 the
Commission is proposing Rule 3Ch–1 to
clarify the applicability of the
mandatory trade execution requirement
of Section 3C(h) of the Exchange Act1781
with respect to cross-border transactions
in security-based swaps. Proposed Rule
3Ch–1(a) would identify the
circumstances in which the mandatory
trade execution requirement would
apply, and proposed Rule 3Ch–1(b) then
would carve out certain security-based
swap transactions involving non-U.S.
persons from the mandatory trade
execution requirement.1782
Specifically, under proposed Rule
3Ch–1(a), the mandatory trade
execution requirement would apply to a
person that engages in a security-based
swap transaction if: (1) A counterparty
to the transaction is (i) a U.S. person, or
(ii) a non-U.S. person whose
performance under such security-based
swap transaction is guaranteed by a U.S.
person (‘‘guaranteed non-U.S. person’’);
or (2) such transaction is a transaction
conducted within the United States.1783
Under proposed Rule 3Ch–1(b), the
mandatory trade execution requirement
would not apply to: (1) A security-based
swap transaction described in proposed
Rule 3Ch–1(a) that is not a transaction
equity block trades on components of the Dow
Jones Industrial Average, the authors find that
while the cost reductions for block trades on
NYSE’s ‘‘upstairs’’ market are economically small,
the ‘‘upstairs markets allow trades that may not
otherwise occur’’); Terrence Henderschott and
Ananth Madhavan, ‘‘Click or Call? Auction versus
Search in the Over-the-Counter Market,’’ Working
Paper (2012) (using data from an electronic auction
market, the authors find evidence that, controlling
for venue selection, much of the cost savings from
electronic platforms relative to dealer markets
comes from small trades whereas coefficient
estimates suggest that for large orders, the cost
advantage of electronic auctions relative to the OTC
market may be reversed).
1779 See Section XV.G.1(b), supra.
1780 See Section X, supra.
1781 15 U.S.C. 78c–3(h).
1782 This is identical to the proposed approach for
the mandatory clearing requirement. See Sections
IX and XV.F.3, supra.
1783 See proposed Rule 3Ch–1(a) under the
Exchange Act. The term ‘‘U.S. person’’ and
‘‘transaction conducted within the United States’’
would have the meanings set forth in proposed Rule
3a71–3(a) under the Exchange Act.
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31179
conducted within the United States if (i)
one counterparty is a foreign branch or
a guaranteed non-U.S. person, and (ii)
the other counterparty to the transaction
is a non-U.S. person whose performance
under the security-based swap is not
guaranteed by a U.S. person (hereinafter
referred to as ‘‘non-guaranteed non-U.S.
persons’’) and who is not a foreign
security-based swap dealer; or (2) a
security-based swap transaction
described in proposed Rule 3Ch–1(a)
that is a transaction conducted within
the United States if (i) neither
counterparty to the transaction is a U.S.
person, (ii) neither counterparty’s
performance under the security-based
swap is guaranteed by a U.S. person;
and (iii) neither counterparty to the
transaction is a foreign security-based
swap dealer.1784
Therefore, proposed Rule 3Ch–1(a)
and proposed Rule 3Ch–1(b) apply the
mandatory trade execution requirement
to security-based swap transactions in
the cross-border context based on the
U.S.-person status of a counterparty, the
existence of a guarantee provided by a
U.S. person, the registered securitybased swap dealer status of a
counterparty, and the location where
the transaction is conducted. Taken
together, proposed Rules 3Ch–1(a) and
3Ch–1(b) would not apply the
mandatory trade execution requirement
to: (i) Transactions conducted outside
the United States between two
counterparties who are non-guaranteed
non-U.S. persons, (ii) transactions
conducted outside the United States
between a foreign branch or a
guaranteed non-U.S. person, and
another counterparty who is a nonguaranteed non-U.S. person and is not
a foreign security-based swap dealer,
and (iii) transactions conducted within
the United States between two
counterparties who are non-guaranteed
non-U.S. persons and are not foreign
security-based swap dealers. As stated
above,1785 the Commission
preliminarily believes that proposed
Rule 3Ch–1 is appropriately tailored to
extend the regulatory benefits intended
by the mandatory trade execution
requirement to the security-based swap
activity that the Commission
preliminarily believes is most likely to
raise the concerns that Congress
intended to address in Title VII.1786
The analysis in Section XV.G.4(a)
below utilizes the best available
information with respect to these
criteria to assess the overall
1784 See proposed Rule 3Ch–1(b) under the
Exchange Act.
1785 See Section XV.G.3, supra.
1786 See Section II.B, supra.
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programmatic effect of proposed Rules
3Ch–1(a) and 3Ch–1(b) by estimating
the size of the security-based swap
market that would be subject to the
mandatory trade execution requirement
as a result of proposed Rules 3Ch–1(a)
and 3Ch–1(b). The Commission then
discusses in Section XV.G.4(b) below
the benefits and costs that would flow
from proposed Rule 3Ch–1 regarding
application of the mandatory trade
execution requirement in the cross
border context.
(a) Programmatic Effect of Proposed
Rule 3Ch–1
It is not possible to quantify the
potential programmatic effect of
proposed Rule 3Ch–1 by estimating the
future volume of security-based swap
transactions when the mandatory trade
execution requirement becomes
effective partly because no ‘‘made
available to trade’’ determinations have
been made and partly because we do not
know future trading volumes of
security-based swaps. However, the
Commission has examined the data
available to it to analyze the potential
programmatic effects of proposed Rule
3Ch–1. In particular, the Commission
has tried to analyze the potential effects
of proposed Rule 3Ch–1 by looking at
the portion of the single-name U.S.
reference CDS transactions that may
provide an indication of the size of the
security-based swap market that may be
included in or excluded from the
application of the mandatory trade
execution requirement as a result of
proposed Rule 3Ch–1.
A limitation we face when analyzing
the data in order to estimate the size of
the security-based swap market that
may be affected by proposed Rule 3Ch–
1 is that the domicile classifications in
the DTCC–TIW database are not
identical to the counterparty statuses
that are described in proposed Rules
3Ch–1(a) and 3Ch–1(b), which would
trigger application of, or an exception
from, the mandatory trade execution
requirement. Although the information
provided by the data in the DTCC–TIW
database does not allow us to identify
the existence of a guarantee provided by
a U.S. person with respect to a
counterparty in a transaction, the
registered security-based swap dealer
status of a counterparty, or the location
where the transaction is conducted, the
Commission nevertheless preliminarily
believes that the approach taken below
would provide the best available
estimate of the size of the security-based
swap market that could be included in
or excluded from the mandatory trade
execution requirement by proposed
Rule 3Ch–1.
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As stated above, the commission has
examined all transactions in singlename CDS during 2011 calendar
year 1787 and estimated that the notional
amount of the single-name CDS
transactions executed during the 2011
calendar year is $2,400 billion.1788
Proposed Rule 3Ch–1(a) provides that
the mandatory trade execution
requirement shall apply to a securitybased swap transaction if (1) a
counterparty to the transaction is a U.S.
person or a non-U.S. person whose
performance under the security-based
swap is guaranteed by a U.S. person or
(2) such transaction is a transaction
conducted within the United States. In
applying proposed Rule 3Ch–1(a) to the
$2,400 billion single-name CDS
transactions executed in 2011, the
Commission uses account holders and
their domicile information in the
DTCC–TIW database to determine the
status of the counterparties.1789 Because
the Commission’s proposed definition
of ‘‘U.S. person’’ is based primarily on
the place of organization or principal
place of business of a legal person and
a legal person’s principal place of
business and place of organization are
usually in the same country, the
Commission believes that the domicile
of a legal person is a reliable indicator
of such person’s U.S.-person status. In
addition, based on the Commission’s
understanding that the security-based
swap transactions of foreign subsidiaries
of U.S. entities, unless sufficiently
capitalized to have their own
independent credit ratings, are generally
guaranteed by the most creditworthy
U.S.-based entity within the corporate
group, i.e., the U.S. parent, the
Commission preliminarily believes that
1787 See note 1637, supra, and the accompanying
text in Section XV.F.2(a), supra.
1788 This estimate is based on the calculation by
staff of the Division of Risk, Strategy, and Financial
Innovation of all price-forming DTCC–TIW singlename CDS transactions that are based on North
American corporate reference entities, U.S.
municipal reference entities, U.S. loans or
mortgage-backed securities (‘‘MBS’’), using ISDA
North American documentation, ISDA U.S. Muni
documentation, or other standard ISDA
documentation for North American Loan CDS and
CDS on MBS, and are denominated in U.S. dollars
and executed in 2011. Price-forming transactions
include all new transactions, assignments,
modifications to increase the notional amounts of
previously executed transactions, and terminations
of previously executed transactions. Transactions
terminated, transactions entered into in connection
with a compression exercise, and expiration of
contracts at maturity are not considered priceforming and are therefore excluded, as are
replacement trades and all bookkeeping-related
trades. See notes 1312 and 1638, supra.
1789 See note 1639, supra, in Section XV.F.2(a) for
explanations of the determination of an account
holder’s domicile by the Commission staff in the
Division of Risk, Strategy, and Financial Innovation
using information in the DTCC–TIW.
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it is reasonable to assume that foreign
subsidiaries of U.S.-domiciled entities
are non-U.S. persons whose
performance under security-based swap
transactions is guaranteed by a U.S.
person. Finally, the DTCC–TIW data do
not provide sufficient information for us
to identify whether a transaction was
conducted in the United States. Solely
for purposes of this analysis, we have
assumed that transactions involving a
U.S.-domiciled counterparty (excluding
foreign branch) or a U.S. branch
counterparty were conducted in the
United States.1790
Based on these assumptions, we
estimate that the subset of the size of the
single-name U.S. reference CDS market
that includes a U.S.-domiciled
counterparty (excluding a foreign
branch of a U.S. bank), a foreign
subsidiary of a U.S.-domiciled entity, or
a U.S. branch of a foreign bank as a
counterparty is $1,900 billion notional
amount.1791 The Commission
preliminarily believes that this figure
provides an indicative level of the
single-name U.S. reference CDS activity
that may represent an indicative size of
the security-based swap market that
could become subject to the mandatory
trade execution requirement under
proposed Rule 3Ch–1(a) when the
requirement becomes effective.1792 In
1790 Since the origination location of a transaction
is not available in DTCC–TIW, the Commission
recognizes that its analysis here may undercount
transactions conducted within the United States
because some transactions may be solicited,
negotiated, or executed within the United States by
an agent other than U.S. branches of foreign banks
(such as a non-U.S. person counterparty using an
unaffiliated third-party agent).
1791 Such $1,900 billion estimate does not capture
transactions between two non-U.S. domiciled
counterparties involving an agent to solicit,
negotiate and execute security-based swaps in the
United States and therefore, may be an
underestimate of the aggregate notional amount of
the single-name U.S. reference CDS transactions
that may be included in the application of the
mandatory trade execution requirement under
proposed Rule 3Ch–1(a) because of the assumption
we make herein regarding transactions conducted
within the United States. By the same token, the
difference between the $1,900 billion subset
included in the application of the mandatory trade
execution requirement under proposed Rule 3Ch–
1(a) and the $2,400 billion total single-name U.S.
reference CDS transactions (i.e., $500 billion or
20.8% of the $2,400 billion) may represent an
overestimate of single-name U.S. reference CDS
transactions in notional amount that are not
included in the application of the mandatory trade
execution requirement under proposed Rule 3Ch–
1(a).
1792 The Commission recognizes that the securitybased swap market includes single-name CDS, CDS
based on narrow-based indices, and other non-CDS
security-based swaps, primary examples of which
are equity swaps and total return swaps based on
single equities or narrow-based indices of equities.
As previously stated, we believe that the singlename CDS data are sufficiently representative of the
security-based swap market as roughly 82% of the
security-based swap market, as measured on a
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addition, we recognize that the level of
the security-based swap activity that
could become subject to mandatory
trade execution under proposed Rule
3Ch–1(a) may be affected by the ‘‘made
available to trade’’ determination by the
Commission.1793
Next, we apply proposed Rule 3Ch1(b) to the transactions included in the
analysis described above regarding
proposed Rule 3Ch–1 in order to
estimate the portion of the single-name
U.S. reference CDS activity that may
represent an indicative size of the
security-based swap market that would
not be subject to the mandatory trade
execution requirement under the
proposed rule. We reiterate the
assumptions described above with
respect to the counterparty status of a
U.S. person and a non-U.S. person
whose performance under securitybased swap transactions is guaranteed
by a U.S. person, and the assumption
with respect to a transaction conducted
within the United States. In addition,
because of the lack of information about
the location of transactions, solely for
assessing the effect of proposed Rule
3Ch–1(b)(1), we have assumed that
transactions between a counterparty that
is a foreign branch or foreign subsidiary
of a U.S.-domiciled entity and another
counterparty that is a foreign-domiciled
entity that is not a subsidiary of a U.S.domiciled entity or an ISDA-recognized
dealer are not transactions conducted
within the United States; and solely for
purposes of assessing the effect of
proposed rule 3Ch–1(b)(2), we have
assumed that transactions conducted
between two foreign-domiciled
counterparties that are not ISDArecognized dealers and are not foreign
subsidiaries of U.S.-domiciled entities
are not conducted within the United
States. These assumptions likely result
in an overestimate of the notional
volume carved-out by proposed Rule
3Ch–1(b). With respect to counterparty
status as a registered security-based
swap dealer, we recognize that as yet
there are no dealers designated as
security-based swap dealers and subject
to the registration requirement. Solely
for purposes of this analysis, we have
assumed that those counterparties to
CDS transactions that were ISDA
recognized dealers 1794 would be
required to register as security-based
swap dealers.
Based on the above assumptions, we
have estimated that approximately 2.1%
notional basis, appears likely to be single-name
CDS. See Section XV.B.2 and the text
accompanying note 1301, supra.
1793 See note 1763 and accompanying text, supra.
1794 See note 1306, supra.
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of the total notional amount 1795 of
single-name U.S. reference CDS
transactions executed in 2011 would be
excluded from the application of the
mandatory trade execution requirement
by proposed Rule 3Ch–1(b). Therefore,
we preliminarily believe that 22.9% of
the total size of the single-name U.S.
reference CDS transactions in 2011
presents an indicative size of the U.S.
security-based swap market that could
be excluded from the application of the
mandatory trade execution requirement
under proposed Rule 3Ch–1.1796
The Commission preliminarily
believes that this estimate provides the
best available proxy for the overall
programmatic effect of the application
of the mandatory trade execution
requirement in the cross-border context
in terms of the portion of the singlename U.S. reference CDS market that
may be included in or excluded from
the scope of the application of the
mandatory trade execution requirement,
given the data limitations and the
underlying assumptions described
above.1797 The Commission is mindful
that the above analysis represents only
1795 Based on calculations by the staff of the
Division of Risk, Strategy and Financial Innovation
applying the criteria provided in proposed rule
3Ch–1(b) and the assumptions stated herein,
approximately $51 billion in notional amount,
constituting approximately 2.1% of the total
notional amount, of single-name U.S. reference CDS
transactions executed in 2011 would be excluded
from the application of the mandatory trade
execution requirement. Because of the assumptions
we made herein regarding transactions conducted
within the United States and transactions
conducted outside the United States, the 2.1% may
be an overestimate of the aggregate notional amount
of the single-name U.S. reference CDS transactions
that may be excluded from the application of the
mandatory trade execution requirement under
proposed Rule 3Ch–1(b).
1796 The 22.9% estimate is the sum of the 20.8%
estimate of the single-name U.S. reference CDS
transactions excluded from the mandatory trade
execution requirement under proposed Rule 3Ca–
3(a) and the 2.1% estimate of the single-name U.S.
reference CDS transactions excluded from the
mandatory trade execution requirement under
proposed Rule 3Ca–3(b). The Commission reiterates
that both 20.8% and 2.1% may overestimate the
size of the single-name U.S. reference CDS
transactions excluded from the application of the
mandatory trade execution requirement under
proposed Rules 3Ch–1(a) and (b).
In addition, this calculation is conducted using
U.S. reference single-name CDS transaction data in
2011. See the text accompanying notes 1637 and
1787, supra. The Commission recognizes that the
same calculation could generate a different result if
both U.S. reference and non-U.S. reference singlename CDS transaction data were used. However,
with respect to non-U.S. reference single-name CDS
transaction data, the Commission currently does not
have access to the part of such data in DTCC–TIW
regarding non-U.S. reference single-name CDS
transactions that do not involve a U.S. counterparty
on either side of the transaction. See Section
XV.B.2, supra.
1797 The Commission reiterates that the
assumptions made here are solely for purposes of
this economic analysis.
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an indicative estimate of the portion of
the single-name U.S. reference CDS
activity that may represent an indicative
size of the security-based swap market
that may be included in or excluded
from the application of the mandatory
trade execution requirement as a result
of proposed Rule 3Ch–1. The
Commission also recognizes that the
above analysis represents an
extrapolation from the limited data that
is currently available to the
Commission.
(b) Programmatic Benefits and Costs of
Proposed Rule 3Ch–1
The Commission preliminarily
believes that, in addition to the
programmatic effect of a large volume of
cross-border security-based swap
transactions becoming subject to the
mandatory trade execution requirement
as a result of proposed Rule 3Ch–1,
certain benefits and costs that overlap
with the benefits and costs associated
with SB SEF registration, as described
in the SB SEF Proposing Release, would
flow from proposed Rule 3Ch–1 because
cross-border security-based swaps
covered by proposed Rule 3Ch–1 would
have to be executed or traded on SB
SEFs or exchanges. Indeed, these
benefits and costs would be realized for
the volume of cross-border securitybased swap transactions, estimated in
Section XV.G.4(a) above,1798 that would
be covered by proposed Rule 3Ch–1(a)
(and not excepted by proposed Rule
3Ch–1(b)) and, therefore, subject to the
mandatory trade execution
requirement.1799 These benefits and
costs, which are more fully described in
the SB SEF Proposing Release, are
summarized above.1800
(c) Alternatives
The Commission has considered
alternatives to proposed Rule 3Ch–1.
The Commission could propose to apply
the mandatory trade execution
requirement in the same way as the
CFTC’s proposed interpretive guidance.
1798 See
Section XV.G.4(a), supra.
the extent that the estimated volume of
security-based swap transactions that would be
subject to the cross-border application of the
statutory mandatory trade execution requirement in
proposed Rules 3Ch–1(a) and 3Ch–1(b) (as analyzed
in Section XV.G.4(a) above) differs from the
estimated upper bound volume of the securitybased transactions that would be subject to the
statutory requirement (as set forth in Section
XV.G.3(a) above), such differential reflects the
aggregate programmatic effect of proposed Rules
3Ch–1(a) and 3Ch–1(b), and that the volume of
security-based swap transactions that would be
subject to those proposed cross-border rules is a
subset of the upper bound volume estimate of
transactions subject to the statutory requirement,
which is not limited to the cross-border context.
1800 See Sections XV.G.3(b) and (c), supra.
1799 To
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The major difference between the
CFTC’s proposed application of the
mandatory trade execution requirement
and the Commission’s proposed Rule
3Ch–1 is that the CFTC would apply the
mandatory trade execution requirement
to a transaction conducted outside the
United States between a foreign branch
and a non-guaranteed non-U.S. person.
The Commission preliminarily believes
that subjecting such a transaction to
mandatory trade execution may hinder
a foreign branch’s ability to access the
foreign local market to a degree that fails
to justify the pre-trade transparency
benefits to the U.S. financial market.
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(d) Assessment Costs for Proposed Rule
3Ch–1
The assessment costs associated with
proposed Rule 3Ch–1 would be related
primarily to identification of the
counterparty status and origination
location of the transaction to determine
whether the mandatory trade execution
requirement would apply. The same
assessment would be performed not
only in connection with the proposed
application of the mandatory trade
execution requirement in the cross
border context, but also in connection
with the proposed application of the
reporting,1801 public dissemination,1802
and mandatory clearing 1803
requirements in the cross-border context
and, therefore, would be part of the
overall Title VII compliance costs.
The Commission preliminarily
believes that market participants would
request representations from their
transaction counterparties to determine
the U.S.-person status of their
counterparties. In addition, if the
transaction is guaranteed by a U.S.
person, the guarantee would be part of
the trading documentation and,
therefore, the existence of the guarantee
would be a readily ascertainable fact.
Similarly, market participants would be
able to rely on their counterparties’
representations as to whether a
transaction is solicited, negotiated or
executed by a person within the United
States.1804 Therefore, the Commission
preliminarily believes that the
assessment costs associated with
proposed Rule 3Ch–1 should be limited
to the costs of establishing a compliance
policy and procedure of requesting and
1801 See re-proposed Rule 908(a)(1) under the
Exchange Act, as discussed in Section VIII.C.1,
supra, and Section XV.H, infra.
1802 See re-proposed Rule 908(a)(2) under the
Exchange Act, as discussed in Section VIII.C.1,
supra, and Section XV.H, infra.
1803 See proposed Rule 3Ca–3 under the Exchange
Act, as discussed in Sections IX.C and XV.F, supra.
1804 See proposed Rules 3a71–3(a)(4)(ii) and
(a)(5)(ii), as discussed in Sections III.B.5 and III.B.6,
supra.
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collecting representations from trading
counterparties and maintaining the
collected representations as part of the
market participants’ recordkeeping
procedures. The Commission
preliminarily believes that such
assessment costs would be
approximately $15,160.1805 The
Commission preliminarily believes that
requesting and collecting
representations would be part of the
standardized transaction process
reflected in the policies and procedures
regarding security-based swap sales and
trading practices and should not result
in separate assessment costs.1806
The Commission also considers the
likelihood that market participants may
implement systems to keep track of
counterparty status for purposes of
future trading of security-based swaps
that are similar to, if not the same as, the
systems implemented by market
participants for purposes of assessing
security-based swap dealer or major
security-based swap participant status.
As stated above, the Commission
estimated that market participants that
perceived the need to perform the
security-based swap dealer assessment
or major security-based swap
participant calculations would incur
one-time programming costs of
$12,870.1807 Therefore, the Commission
estimates the total one-time costs per
entity associated with proposed Rule
3Ch–1 could be $28,030.1808 To the
extent that market participants have
incurred costs relating to similar or the
same assessments with respect to
1805 This estimate is based on an estimated 40
hours of in-house legal or compliance staff’s time
to establish a procedure of requesting and collecting
representations from trading counterparties, taking
into account that such representations may be built
into a form of standardized trading documentation.
Based upon data from SIFMA’s Management &
Professional Earnings in the Securities Industry
2012 (modified by the SEC staff to account for an
1800-hour-work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits,
and overhead), the staff estimates that the average
national hourly rate for an in-house attorney is
$379.
1806 There will be ongoing costs associated with
processing representations received from
counterparties, including additional due diligence
and verification to the extent that a counterparty’s
representation is contrary to or inconsistent with
the knowledge of the collecting party. The
Commission believes that these would be
compliance costs encompassed within the
programmatic costs associated with substituted
compliance.
1807 See note 1428, supra. For the source of the
estimated per hour costs, see note 1425, supra.
1808 The estimated $28,030 per-entity cost is the
sum of the estimated $15,160 cost of establishing
written compliance policies and procedures
regarding obtaining counterparty representations
and the estimated $12,870 one-time programming
cost relating to system implementation to maintain
counterparties’ representations and track
counterparty status in the system.
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counterparty status and transaction
location for other Title VII requirements,
their assessment costs with respect to
proposed Rule 3Ch–1 may be less.
Request for Comment
• Are there any benefits and costs not
discussed herein? How would the
benefits and costs affect the various
groups of market participants involved
in the trading of security-based swaps?
To the extent the benefits or costs of
complying with mandatory trade
execution described above are different
for different groups of market
participants, please identify, discuss,
analyze, and supply relevant data,
information, or statistics regarding any
such different benefits or costs.
• Would the benefits of complying
with mandatory trade execution be the
same for foreign and domestic market
participants?
• Would the costs associated with
complying with mandatory trade
execution be the same for domestic and
foreign market participants? If not, how
would they be different and how could
the Commission most accurately
estimate them? For example, would
either domestic or foreign market
participants face higher costs in gaining
access to SB SEFs to comply with the
mandatory trade execution requirement?
Or would the costs be comparable?
• To the extent that the benefits or
costs of complying with mandatory
trade execution would be different for
foreign market participants as compared
to domestic market participants, please
identify, discuss, analyze, and supply
relevant data, information, or statistics
regarding any such different benefits or
costs.
• Are the assessment cost estimates
provided herein appropriate? If not,
how should the estimates be adjusted?
Please provide data and analysis to
support differing cost estimates.
H. Application of Rules Governing
Security-Based Swap Data Repositories
in Cross-Border Context
SDRs are intended to play a critical
role in enhancing transparency in the
security-based swap market, bolstering
market efficiency and liquidity,
promoting standardization, and
reducing systemic risks by serving as
centralized recordkeeping facilities that
collect and maintain information
relating to security-based swap
transactions.1809 More broadly, the goal
1809 See SDR Proposing Release, 75 FR 77354; see
also 156 Cong. Rec. S5920 (daily ed. July 15, 2010)
(statement of Sen. Lincoln) (‘‘These new ‘data
repositories’ will be required to register with the
CFTC and the SEC and be subject to the statutory
duties and core principles which will assist the
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of the Dodd-Frank Act is, among other
things, to promote the financial stability
of the United States by improving
accountability and transparency in the
financial system.1810 In furtherance of
these goals, the Dodd Frank Act
amended the Exchange Act to require
the reporting of security-based swaps
(whether cleared or uncleared) to an
SDR registered with the
Commission,1811 and to require certain
persons that perform the functions of an
SDR to register with the
Commission.1812 SDRs that are
registered with the Commission are
subject to Section 13(n) of the Exchange
Act 1813 and the rules and regulations
thereunder (collectively, ‘‘SDR
Requirements’’), as well as other
requirements applicable to SDRs
registered with the Commission.1814 In
this section, the Commission first
discusses the benefits and costs of the
Commission’s proposed interpretive
guidance regarding the application of
the SDR Requirements and exemption
from the SDR Requirements. The
Commission then discusses the benefits
and costs of the Commission’s proposed
interpretive guidance regarding relevant
authorities’ access to security-based
swap information and exemption from
the statutory indemnification
requirement that could hinder such
access. Finally, the Commission
discusses the benefits and costs
associated with the Commission’s reproposed Regulation SBSR, which sets
forth the reporting obligations of
counterparties to security-based swaps
in the cross-border context.
CFTC and the SEC in their oversight and market
regulation responsibilities.’’).
1810 See Dodd-Frank Act, Public Law 111–203 at
Preamble.
1811 Section 13(m)(1)(G) of the Exchange Act, 15
U.S.C. 78m(m)(1)(G), as added by Section 763(i) of
the Dodd-Frank Act.
1812 Section 3(a)(75) of the Exchange Act, 15
U.S.C. 78c(a)(75), as added by Section 761(a) of the
Dodd-Frank Act (defining a ‘‘security-based swap
data repository’’ to mean ‘‘any person that collects
and maintains information or records with respect
to transactions or positions in, or the terms and
conditions of, security-based swaps entered into by
third parties for the purpose of providing a
centralized recordkeeping facility for security-based
swaps’’) and Section 13(n)(1) of the Exchange Act,
15 U.S.C. 78m(n)(1), as added by Section 763(i) of
the Dodd-Frank Act (providing that it is ‘‘unlawful
for any person, unless registered with the
Commission, directly or indirectly, to make use of
the mails or any means or instrumentality of
interstate commerce to perform the functions of a
security-based swap data repository’’).
1813 15 U.S.C. 78m(n), as added by Section 763(i)
of the Dodd-Frank Act.
1814 See note 703, supra.
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I. Benefits and Costs Associated With
Application of the SDR Requirements in
the Cross-Border Context
(a) Benefits of Proposed Approach to
SDR Requirements
As discussed above,1815 the
Commission proposes that any U.S.
person that performs the functions of an
SDR would be required to register with
the Commission pursuant to Section
13(n)(1) of the Exchange Act 1816 and
previously proposed Rule 13n–1
thereunder. As further discussed
above,1817 the Commission further
proposes that, to the extent that any
non-U.S. person performs the functions
of an SDR within the United States, it
would be required to register with the
Commission pursuant to Section
13(n)(1) of the Exchange Act 1818 and
previously proposed Rule 13n–1
thereunder, absent an exemption. The
Commission also is proposing new Rule
13n–12 under the Exchange Act, which
provides that a non-U.S. person that
performs the functions of an SDR within
the United States is exempt from the
SDR Requirements, provided that each
regulator with supervisory authority
over such non-U.S. person has entered
into a supervisory and enforcement
MOU or other arrangement with the
Commission that addresses the
confidentiality of data collected and
maintained by such non-U.S. person,
access by the Commission to such data,
and any other matters determined by the
Commission (‘‘SDR Exemption’’).1819
The Commission has considered the
benefits and costs associated both with
the Commission’s proposed interpretive
guidance regarding U.S. persons and
non-U.S. persons that would be required
to register with the Commission as an
SDR and with the SDR Exemption in
light of the transparency and other
objectives that the Dodd-Frank Act is
intended to achieve. The Commission
preliminarily believes that our proposed
approach would be consistent with
achieving these intended benefits of the
SDR Requirements, but would avoid
imposing the associated costs of these
requirements on persons whose
registration and regulation may not
significantly advance these benefits.
i. Programmatic Benefits of Proposed
Guidance Regarding Registration
The Commission preliminarily
believes that there are a number of
1815 See
Section VI.B.3(a), supra.
U.S.C. 78m(n)(1), as added by Section
763(i) of the Dodd-Frank Act.
1817 See Section VI.B.3(b), supra.
1818 15 U.S.C. 78m(n)(1), as added by Section
763(i) of the Dodd-Frank Act.
1819 See Section VI.B.3(b), supra.
1816 15
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31183
programmatic benefits to our proposal
to require U.S. persons that perform the
functions of an SDR and non-U.S.
persons that perform the functions of an
SDR within the United States to register
with the Commission and to comply
with the other SDR Requirements. These
requirements are intended to help
ensure that SDRs function in a manner
that will further the transparency and
other goals of the Dodd-Frank Act.1820
The SDR Requirements, including
requirements that SDRs register with the
Commission, retain complete records of
security-based swap transactions,
maintain the integrity and
confidentiality of those records, and
provide effective access to those records
to relevant authorities and the public in
line with their respective information
needs, are intended to help ensure that
the data held by SDRs is reliable and
that the SDRs provide information that
contributes to the transparency of the
security-based swap market while
protecting the confidentiality of
information provided by market
participants.1821
Enhanced transparency should
produce market-wide benefits by, for
example, promoting stability in the
security-based swap market,1822 and it
should indirectly contribute to
improved stability in related financial
markets, including equity and bond
markets.1823 Enhanced transparency in
the security-based swap market would
assist the Commission and other
relevant authorities in fulfilling their
regulatory mandates and legal
responsibilities such as performing
market surveillance and detecting
market manipulation, fraud, and other
market abuses by providing the
Commission and other relevant
authorities with greater access to
security-based swap information.1824
1820 See SDR Proposing Release, 75 FR 77354. See
also Dodd-Frank Act, Public Law 111–203 at
Preamble.
1821 See SDR Proposing Release, 75 FR 77307.
1822 See id. (‘‘SDRs may be especially critical
during times of market turmoil, both by giving
relevant authorities information to help limit
systemic risk and by promoting stability through
enhanced transparency. By enhancing stability in
the [security-based swap] market, SDRs may also
indirectly enhance stability across markets,
including equities and bond markets.’’).
1823 See Darrell Duffie, Ada Li, and Theo Lubke,
‘‘Policy Perspectives of OTC Derivatives Market
Infrastructure,’’ Federal Reserve Bank of New York
Staff Report No. 424 (Jan. 2010, as revised Mar.
2010) (‘‘Transparency can have a calming influence
on trading patterns at the onset of a potential
financial crisis, and thus act as a source of market
stability to a wider range of markets, including
those for equities and bonds’’).
1824 See SDR Proposing Release, 75 FR 77307
(‘‘The enhanced transparency provided by an SDR
is important to help regulators and others monitor
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Increased regulatory effectiveness
should improve the integrity and
transparency of the market and improve
the confidence of market
participants.1825
The Commission preliminarily
believes that requiring U.S. persons
performing the functions of an SDR to
register with the Commission as SDRs
and comply with the SDR
Requirements, as well as other
requirements applicable to SDRs
registered with the Commission,1826
would further the goals of the SDR
Requirements and contribute to
enhanced transparency in the securitybased swap market in the United States.
The Commission preliminarily believes
that U.S. persons performing the
functions of an SDR will play a key role
in ensuring that security-based swap
transactions affecting the transparency
of the security-based swap market
within the United States are reported;
properly maintained; and made
available to the Commission, other
relevant authorities, and the public.1827
Requiring such U.S. persons to comply
with the SDR Requirements would help
ensure that they maintain data and
make it available in a manner that
advances the transparency benefits that
Title VII is intended to produce.
Non-U.S. persons performing the
functions of an SDR within the United
States also may affect the transparency
of the security-based swap market
within the United States, even if
transactions involving U.S. persons or
U.S. market participants are being
reported to such non-U.S. persons in
order to satisfy the reporting
requirements of a foreign jurisdiction
(and not those of Title VII). The
Commission preliminarily believes that,
to the extent that non-U.S. persons are
performing the functions of an SDR
within the United States, they will
likely receive data relating to
transactions involving U.S. persons and
other U.S. market participants. Ensuring
that such data is maintained and made
available in a manner consistent with
the SDR Requirements would likely
contribute to the transparency of the
U.S. market and reduce potential
the build-up and concentration of risk exposures in
the [security-based swap] market.’’); see also DTCC
Letter I at 1 (‘‘A registered SDR should be able to
provide (i) enforcement agents with necessary
information on trading activity; (ii) regulatory
agencies with counterparty-specific information
about systemic risk based on trading activity; (iii)
aggregate trade information for publication on
market-wide activity; and (iv) a framework for realtime reporting from swap execution facilities and
derivatives clearinghouses.’’).
1825 See SDR Proposing Release, 75 FR 77356.
1826 See note 703, supra.
1827 See SDR Proposing Release, 75 FR 77356.
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confusion that may arise from
discrepancies in transaction data due to,
among other things, differences in the
operational standards governing persons
who perform the functions of an SDR in
other jurisdictions (or the absence of
such standards for any such persons
that are not subject to any regulatory
regime). Moreover, given the sensitivity
of reported security-based swap data
and the potential for market abuse and
subsequent loss of liquidity in the event
that a person performing the function of
an SDR within the United States fails to
maintain the privacy of such data,1828
the Commission preliminarily believes
that requiring non-U.S. persons that
perform the functions of an SDR within
the United States to register with the
Commission would help ensure that
data relating to transactions involving
U.S. persons or U.S. market participants
is handled in a manner consistent with
the confidentiality protections
applicable to such data, thereby
reducing the risk both of the loss or
disclosure of proprietary or other
sensitive data and of market abuse
arising from the misuse of such data.
ii. Programmatic Benefits of the SDR
Exemption
As noted above, the Commission is
proposing new Rule 13n–12 under the
Exchange Act to provide an exemption
from the SDR Requirements for non-U.S.
persons that perform the functions of an
SDR within the United States, provided
that each regulator with supervisory
authority over any such non-U.S. person
has entered into a supervisory and
enforcement MOU or other arrangement
with the Commission that addresses the
confidentiality of data collected and
maintained by such non-U.S. person,
access by the Commission to such data,
and any other matters determined by the
Commission.1829
The Commission preliminarily
believes that this SDR Exemption would
not significantly reduce the
programmatic benefits associated with
the SDR Requirements. Although the
proposed approach would potentially
reduce the number of persons
performing the functions of an SDR that
are registered with the Commission,1830
data relating to transactions involving
U.S. persons and U.S. market
1828 See
id. at 77307.
Rule 13n–12(b) under the Exchange
1829 Proposed
Act.
1830 It appears that, as of April 2013, there were
several non-U.S. persons performing the functions
of an SDR or intending to do so in the future. See
FSB Progress Report April 2013 at 20–21, 63–65.
The Commission, however, does not possess data
regarding how many, if any, of these persons
perform the functions of an SDR within the United
States.
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participants would still be required to
be reported, pursuant to Regulation
SBSR, to an SDR registered with the
Commission and subject to all SDR
Requirements, absent other relief from
the Commission.1831
Moreover, the SDR Exemption would
be conditioned on a supervisory and
enforcement MOU or other arrangement
with each regulator with supervisory
authority over the non-U.S. person that
seeks to rely upon the SDR Exemption.
This MOU or arrangement would
address the Commission’s interest in
having access to security-based swap
data involving U.S. persons and other
U.S. market participants that is
maintained by non-U.S. persons that
perform the functions of an SDR within
the United States and in protecting the
confidentiality of such data. Further,
proposed Rule 13n–12 should not
impair the integrity and accessibility of
security-based swap data. The
Commission, therefore, preliminarily
believes that exempting certain non-U.S.
persons performing the functions of an
SDR within the United States, subject to
the condition described above, would
likely not significantly affect the
programmatic benefits that the SDR
Requirements were intended to
achieve.1832
(b) Costs of Proposed Approach to SDR
Requirements
i. Programmatic Costs of the
Commission’s Proposed Approach
Registering with the Commission and
complying with the SDR Requirements
will impose certain costs on an SDR.1833
The Commission’s proposed
interpretive guidance and SDR
Exemption do not change the costs
associated with any particular SDR
Requirement, but the Commission
preliminarily believes that the SDR
Exemption may reduce the costs for
certain non-U.S. persons performing the
functions of an SDR within the United
1831 See discussion of Regulation SBSR in Section
VIII, supra and discussion of substituted
compliance in Section XI, supra.
1832 The Commission also anticipates that nonU.S. persons that avail themselves of the SDR
Exemption would be subject to the regulatory
requirements of one or more foreign jurisdictions.
The SDR Exemption would help ensure that such
persons do not incur costs arising from being
required to comply with duplicative regulatory
regimes while also ensuring, through the condition
that each regulator with supervisory authority enter
into a supervisory and enforcement MOU or other
arrangement with the Commission, that they are
subject to regulatory requirements that would
prevent them from undermining the transparency
and other purposes of the Title VII SDR
Requirements, for example, by failing to protect the
confidentiality of data relating to U.S. persons and
other U.S. market participants.
1833 See SDR Proposing Release, 75 FR 77354–64.
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States without reducing the expected
benefits of the SDR Requirements.1834
The Commission preliminarily believes
that such persons would likely be
performing the functions of an SDR in
order to permit counterparties to satisfy
reporting requirements under foreign
law. An exemption, if available, would
allow these non-U.S. persons to
continue to perform this function within
the United States, potentially reducing
costs to U.S. market participants that
have reporting obligations under foreign
law and reducing the incentive for nonU.S. persons performing the functions of
an SDR within the United States to
restructure their operations to avoid
registration with the Commission.
The Commission recognizes that
making the exemption available subject
to a condition may delay the availability
of the exemption to certain non-U.S.
persons. In some cases, the Commission
may be unable to enter into an MOU or
other arrangement with each regulator
with supervisory authority over a nonU.S. person performing the functions of
an SDR within the United States. The
resulting delay or unavailability of the
exemption may lead some of these nonU.S. persons to exit the U.S. market by,
for example, restructuring their business
so that they perform the functions of an
SDR entirely outside the United States,
potentially resulting in business
disruptions in the security-based swap
market.
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ii. Assessment Costs
Under the Commission’s proposed
approach, non-U.S. persons that
perform the functions of an SDR may be
expected to incur certain assessment
costs related to determining whether
they can rely on the SDR Exemption
and, if not, whether they perform the
functions of an SDR within the United
States.1835
With respect to determining the
availability of the SDR Exemption, the
Commission preliminarily believes that
the costs for a non-U.S. person that
performs the functions of an SDR to
1834 As noted above, the data currently available
to the Commission does not indicate how many
non-U.S. persons performing the functions of an
SDR perform such functions within the United
States. See note 1830, supra. However, even if
counterparties with reporting obligations under
Regulation SBSR reported their transactions to a
non-U.S. person that performs the functions of an
SDR within the United States but is exempt from
registration, they would still be required to report
transactions under Regulation SBSR to an SDR
registered with the Commission.
1835 The Commission recognizes that some nonU.S. persons that perform the functions of an SDR
may do so entirely outside the United States and
thus may determine that they do not need to incur
any assessment costs related to the Commission’s
proposed approach.
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determine whether the condition for the
availability of the SDR Exemption has
been satisfied with respect to it would
arise from confirming whether the
Commission and each regulator with
supervisory authority over such nonU.S. person have entered into a
supervisory and enforcement MOU or
other arrangement. The Commission
preliminarily believes that, given that
this information generally should be
readily available,1836 the cost involved
in making such assessment should not
exceed one hour of in-house counsel’s
time or $379 per person,1837 for an
aggregate one-time cost of $7,580.1838
If the condition for the SDR
Exemption has not been satisfied with
respect to any authority with
supervisory authority over such nonU.S. person, that person may determine
to analyze where it performs its SDR
functions in order to determine whether
it performs such functions within the
United States. This analysis may
involve two separate sets of costs: costs
associated with determining whether it
has entered into contracts, including
user or technical agreements, with a
U.S. person to enable the U.S. person to
report security-based swap data to it,
and costs associated with determining
whether it otherwise performs the
functions of an SDR within the United
States, for example, by maintaining
certain operations within the United
States.
The Commission preliminarily
believes that the assessment costs
associated with determining the U.S.
person status of parties to agreements
with the non-U.S. person that performs
the functions of an SDR should be
primarily one-time costs of establishing
a practice or compliance procedure of
requesting and collecting
representations from the parties to such
1836 As a general matter, the Commission provides
a list of MOUs and other arrangements, which are
available at the following link: http://www.sec.gov/
about/offices/oia/oia_cooparrangements.shtml.
1837 Based upon data from SIFMA’s Management
& Professional Earnings in the Securities Industry
2012 (modified by the SEC staff to account for an
1800-hour-work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits,
and overhead), the staff estimates that the average
national hourly rate for an in-house attorney is
$379.
1838 This total is based on the assumption that as
many as 20 non-U.S. persons that perform the
functions of an SDR would seek outside legal
counsel to determine the nature of any operations
or other activity performed within the United
States. Although there appear to be fewer than 10
such persons that are currently accepting and
reporting on security-based swaps (see FSB Progress
Report April 2013 at 20–21, 63–65), our estimate
that as many as 20 such persons may perform this
analysis is intended to account for the possibility
that new market entrants may seek to provide such
services in the future.
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agreements and maintaining the
representations collected as part of the
recordkeeping procedures and limited
ongoing costs associated with requesting
and collecting representations. The
Commission preliminarily believes that
such one-time per-person costs would
be approximately $15,160,1839 with
aggregate one-time costs of
approximately $303,200.
The assessment costs associated with
determining whether the non-U.S.
person otherwise performs the functions
of an SDR within the United States
would likely involve an analysis of the
location of the non-U.S. person’s
various operations and, with respect to
any operations that occur within the
United States, a determination of
whether such operations constitute the
performance of the functions of an SDR.
The Commission preliminarily believes
that the aggregate one-time costs
associated with this analysis would be
approximately $500,000.1840
(c) Alternative to Proposed Approach
In developing our approach to the
application of the SDR Requirements to
non-U.S. persons that perform the
functions of an SDR, the Commission
considered requiring such persons that
perform the functions of an SDR within
the United States to comply with the
SDR Requirements, including
registering with the Commission, as
well as other requirements applicable to
SDRs registered with the
Commission.1841 In such a scenario, a
non-U.S. person performing the
functions of an SDR within the United
States would be required to register as
an SDR and incur the costs associated
with the SDR Requirements,1842 as well
as other requirements applicable to
SDRs registered with the
Commission.1843 The Commission
preliminarily believes that the marginal
benefit of requiring all non-U.S. persons
that perform the functions of an SDR
within the United States to register with
the Commission, even where similar
objectives could be achieved through an
1839 This estimate is based on estimated 40 hours
of in-house legal or compliance staff’s time to
establish a procedure of requesting and collecting
representations from trading counterparties, taking
into account that such representation may be built
into form of standardized trading documentation.
As noted above, the staff estimates that the average
national hourly rate for an in-house attorney is
$379. See note 1426, supra.
1840 We have estimated that this analysis would
cost an average of $25,000 per person and that as
many as 20 non-U.S. persons may incur such costs.
This estimate is based on staff experience in
undertaking legal analysis of status under federal
securities laws.
1841 See note 703, supra.
1842 See SDR Proposing Release, 75 FR 77354–64.
1843 See note 703, supra.
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exemption conditioned on a supervisory
and enforcement MOU or other
arrangement with each regulatory
authority with supervisory authority
over such non-U.S. persons, would be
insignificant, particularly in light of the
costs that such non-U.S. persons would
incur in complying with the SDR
Requirements, as well as other
requirements applicable to SDRs
registered with the Commission.1844
Request for Comment
The Commission seeks comment on
the proposed interpretive guidance and
SDR Exemption, and alternatives to our
proposed approach, in all aspects.
Interested persons are encouraged to
provide supporting data and analysis
and, when appropriate, suggest
modifications or alternatives to the
proposed interpretive guidance and SDR
Exemption. In addition, the Commission
seeks comment on the specific questions
below.
• Has the Commission appropriately
considered the expected programmatic
benefits of our proposed interpretive
guidance and SDR Exemption? If not,
please explain why and provide
information on how such costs and
benefits should be assessed.
• Are the programmatic benefits and
costs discussed above accurate? If not,
why not? How should the Commission
assess the benefits and costs associated
with our proposed interpretive guidance
and SDR Exemption compared to their
anticipated benefits of increasing
transparency in the security-based swap
market?
• Are there quantifiable
programmatic benefits or costs
associated with the Commission’s
proposed interpretive guidance and the
SDR Exemption that are not discussed
above, but that the Commission should
consider? If so, please identify and
describe them as thoroughly as possible,
using relevant data and statistics where
available.
• Has the Commission appropriately
considered the benefits and costs of the
alternative approach to the
Commission’s proposed interpretive
guidance and SDR Exemption? In
answering this question, consider
addressing whether the Commission has
appropriately considered the benefits
and costs of duplicative regulatory
regimes, including duplicative
requirements governing SDRs.
• How would the Commission’s
proposed interpretive guidance and the
SDR Exemption affect efficiency,
competition, and capital formation,
including the competitive or
1844 See
id.
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anticompetitive effects that such
guidance and exemption may have on
market participants? Are there other
existing or proposed laws, rules, or
regulations affecting SDRs in particular
jurisdictions that affect efficiency,
competition, and capital formation that
the Commission should consider? If so,
please identify and describe these
effects as thoroughly as possible.
• Are there costs in fulfilling the
condition in the SDR Exemption that
the Commission has not discussed
above? If so, what?
• Would the condition requiring a
supervisory and enforcement MOU with
a foreign supervisory regulator impose
costs on non-U.S. persons performing
the functions of an SDR within the
United States? Further, would delay in
entering into a supervisory and
enforcement MOU or other arrangement
(or the inability to enter into such MOU
or arrangement) impose costs on such
non-U.S. persons or market participants
more generally? Would it have adverse
consequences for liquidity in the
security-based swap market?
• Should the Commission consider
other alternatives to our proposed
interpretive guidance and the SDR
Exemption? What would be the benefits
and costs of such alternative
approaches?
2. Relevant Authorities’ Access to
Security-Based Swap Information and
the Indemnification Requirement
One key function that SDRs will
perform is making available to the
Commission and other relevant
authorities information relating to
security-based swap transactions. As
described above,1845 Section 13(n)(5)(G)
of the Exchange Act 1846 and previously
proposed Rule 13n–4(b)(9) thereunder
provide that an SDR shall on a
confidential basis, pursuant to Section
24 of the Exchange Act, and the rules
and regulations thereunder, upon
request, and after notifying the
Commission (‘‘Notification
Requirement’’), make available all data
obtained by the SDR, including
individual counterparty trade and
position data, to certain domestic
authorities and any other person that
the Commission determines to be
appropriate, including, but not limited
to, foreign financial supervisors
(including foreign futures authorities),
foreign central banks, and foreign
ministries. Section 13(n)(5)(H) of the
Exchange Act 1847 and previously
1845 See
Section VI.C., supra.
U.S.C. 78m(n)(5)(G), as added by Section
763(i) of the Dodd-Frank Act.
1847 15 U.S.C. 78m(n)(5)(H), as added by Section
763(i) of the Dodd-Frank Act.
1846 15
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proposed Rule 13n–4(b)(10) further
provide that before sharing information
with any entity described in Section
13(n)(5)(G)1848 or previously proposed
Rule 13n–4(b)(9), respectively, an SDR
must obtain a written agreement from
the entity stating that the entity shall
abide by the confidentiality
requirements described in Section 24 of
the Exchange Act,1849 and the rules and
regulations thereunder, relating to the
information on security-based swap
transactions that is provided; in
addition, the entity shall agree to
indemnify the SDR and the Commission
for any expenses arising from litigation
relating to the information provided
under Section 24 of the Exchange
Act 1850 and the rules and regulations
thereunder (‘‘Indemnification
Requirement’’).
(a) Benefits and Costs of Relevant
Authorities’ Access to Security-Based
Swap Data Under the Dodd-Frank Act
As discussed above,1851 the
Commission believes that Sections
13(n)(5)(G) and 13(n)(5)(H) of the
Exchange Act 1852 are intended to,
among other things, obligate SDRs to
make available security-based swap
information to relevant authorities and
maintain the confidentiality of such
information. More broadly, the DoddFrank Act is intended to, among other
things, promote the financial stability of
the U.S. financial system by improving
accountability and transparency in the
financial system.1853 To the extent that
SDRs fulfill these statutory goals, the
Commission preliminarily believes that
certain benefits and costs will result.
i. Benefits of Relevant Authorities’
Access to Security-Based Swap Data
As discussed below, the Commission
preliminarily believes that there are a
number of benefits associated with
providing relevant authorities with
access to security-based swap data
maintained by SDRs registered with the
Commission (‘‘SDR Data’’).
First, the Commission preliminarily
believes that providing relevant
authorities with such access would
increase transparency in the securitybased swap market, thereby facilitating
oversight of the security-based swap
1848 15 U.S.C. 78m(n)(5)(G), as added by Section
763(i) of the Dodd-Frank Act.
1849 15 U.S.C. 78x.
1850 Id.
1851 See Section VI.C., supra.
1852 15 U.S.C. 78m(n)(5)(G) and (H), as added by
Section 763(i) of the Dodd-Frank Act; see also
proposed Rules 13n–4(b)(9) and (10) under the
Exchange Act.
1853 See Dodd-Frank Act, Public Law 111–203 at
Preamble.
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market. SDRs are expected to retain
complete records of security-based swap
transactions and maintain the integrity
of those records.1854 To the extent that
SDRs provide relevant authorities with
effective access to those records in line
with the respective information needs
arising out of the authorities’ regulatory
mandates and legal responsibilities,
SDRs will play a key role in increasing
transparency in the security-based swap
market. In having such effective access,
these authorities will likely be better
positioned to prevent market
manipulation, fraud, and other market
abuses; monitor the financial
responsibility and soundness of market
participants; perform market
surveillance and macroprudential
(systemic risk) supervision; resolve
issues and positions after an institution
fails; monitor compliance with relevant
regulatory requirements; and respond to
market turmoil.1855
Second, the Commission
preliminarily believes that providing
relevant foreign authorities with access
to SDR Data may minimize
fragmentation of security-based swap
data among trade repositories globally.
If relevant foreign authorities are unable
to access SDR Data, then they may
establish trade repositories in their
jurisdictions to ensure access to data
that they need to perform their
regulatory mandates and legal
responsibilities.1856 By minimizing such
fragmentation, relevant authorities
would likely be able to access,
aggregate, and analyze relevant data
more efficiently, which should, in turn,
enhance regulatory effectiveness.
Third, the Commission preliminarily
believes that providing relevant foreign
1854 See SDR Proposing Release, 75 FR 77307; see
also Section 13(n)(5)(C) of the Exchange Act
(requiring SDRs to maintain security-based swap
data), as added by Section 763(i) of the Dodd-Frank
Act, and proposed Rules 13n–5(b)(3) and (4) under
the Exchange Act (requiring SDRs to establish,
maintain, and enforce policies and procedures
reasonably designed to ensure that transaction data
and positions are accurate and to maintain the
transaction data and positions for specified periods
of time).
1855 See, e.g., SDR Proposing Release, 75 FR
77307, 77356, as corrected at 76 FR 79320 (‘‘The
data maintained by an SDR may also assist
regulators in (i) preventing market manipulation,
fraud, and other market abuses; (ii) performing
market surveillance, prudential supervision, and
macroprudential (systemic risk) supervision; and
(iii) resolving issues and positions after an
institution fails . . . . [I]ncreased transparency on
where exposure to risk reside in financial markets
. . . will allow regulators to monitor and act before
the risks become systemically relevant. Therefore,
SDRs will help achieve systemic risk monitoring.’’).
1856 Cf. Cleary Letter IV at 31 (The
Indemnification Requirement ‘‘could be a
significant impediment to effective regulatory
coordination, since non-U.S. regulators may
establish parallel requirements for U.S. regulators to
access swap data reported in their jurisdictions.’’).
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authorities with access to SDR Data may
reduce costs to market participants by
reducing the potential for duplicative
security-based swap transaction
reporting requirements in multiple
jurisdictions. The Commission
anticipates that relevant foreign
authorities will likely impose their own
reporting requirements on market
participants that fall within their
jurisdiction; given the global nature of
the security-based swap market and the
large number of cross-border
transactions, the Commission recognizes
that it is likely that such transactions
may be subject to the reporting
requirements of at least two
jurisdictions. The Commission
preliminarily believes, however, that if
relevant authorities are able to access
security-based swap data in trade
repositories outside their jurisdiction,
such as SDRs registered with the
Commission, as needed, then relevant
authorities may be more inclined to
permit market participants involved in
such transactions to fulfill their
reporting requirements by reporting the
transactions to a single trade repository,
rather than to separate trade repositories
in each applicable jurisdiction, thereby
potentially reducing market
participants’ compliance costs
associated with establishing multiple
reporting systems to multiple SDRs.
Similarly, market participants would
likely be able to access, aggregate, and
analyze their data more efficiently in a
single trade repository, than if they were
required to report data to separate trade
repositories in each applicable
jurisdiction.
ii. Costs of Relevant Authorities’ Access
to Security-Based Swap Data
The Commission preliminarily
believes that although there are benefits
to SDRs providing access to relevant
authorities to SDR Data, such access
will likely involve certain costs, or more
specifically, risks. For example, the
Commission expects that SDRs will
maintain data that is proprietary and
highly sensitive 1857 and that is subject
to strict confidentiality
requirements.1858 Section 13(n)(5)(G) of
the Exchange Act, however, requires an
SDR to make available data obtained by
the SDR to authorities identified in
Section 13(n)(5)(G) of the Exchange
1857 As the Commission has noted in the SDR
Proposing Release, such data could include
information about a market participant’s trades or
its trading strategy; it may also include nonpublic
personal information. See 75 FR 77339.
1858 See Section 13(n)(5)(F) of the Exchange Act,
15 U.S.C. 78m(n)(5)(F), as added by Section 763(i)
of the Dodd-Frank Act, and proposed Rules 13n–
4(b)(8) and 13n–9 under the Exchange Act.
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31187
Act.1859 Extending access to SDR Data to
anyone, including relevant authorities,
increases the risk of the confidentiality
of SDR Data not being preserved.1860 A
relevant authority’s inability to maintain
the confidentiality of SDR Data could
erode market participants’ confidence in
the integrity of the security-based swap
market, thereby leading to reduced
liquidity in the security-based swap
market, hindering price discovery, and
impeding the capital formation
process.1861
To help mitigate these risks, Sections
13(n)(5)(G) and (H) of the Exchange Act
impose certain conditions on access to
SDR Data by relevant authorities.1862
Specifically, Section 13(n)(5)(G) of the
Exchange Act 1863 limits the authorities
that may access SDR Data to an
enumerated list of domestic authorities
and any other persons, including foreign
authorities, determined by the
Commission to be appropriate and
requires that an SDR notify the
Commission when the SDR receives a
request for SDR Data from an authority.
Section 13(n)(5)(H) of the Exchange
Act 1864 requires that, before an SDR
shares security-based swap information
with a relevant authority, the SDR must
receive a written agreement from a
relevant authority that it will abide by
the confidentiality requirements
described in Section 24 of the Exchange
Act relating to the information provided
by the SDR, and the relevant authority
will agree to indemnify the SDR and the
Commission for any expenses arising
from litigation relating to the
information provided under Section 24
of the Exchange Act.1865
1859 15 U.S.C. 78m(n)(5)(G), as added by Section
763(i) of the Dodd-Frank Act; see also proposed
Rules 13n–4(b)(9) and (b)(10) under the Exchange
Act.
1860 See, e.g., ESMA Letter at 2 (noting that
relevant authorities must ensure the confidentiality
of security-based swap data provided to them).
1861 See SDR Proposing Release, 75 FR 77307,
77334 (‘‘Failure to maintain privacy of [SDR Data]
could lead to market abuse and subsequent loss of
liquidity.’’).
1862 15 U.S.C. 78m(n)(5)(G) and (H), as added by
Section 763(i) of the Dodd-Frank Act; see also
proposed Rules 13n–4(b)(9) and (b)(10) under the
Exchange Act. In addition, Section 13(n)(5)(F) of the
Exchange Act, 15 U.S.C. 78m(n)(5)(F), as added by
Section 763(i) of the Dodd-Frank Act, and proposed
Rules 13n–4(b)(8) and 13n–9 under the Exchange
Act, require SDRs to maintain the privacy of SDR
Data.
1863 15 U.S.C. 78m(n)(5)(G), as added by Section
763(i) of the Dodd-Frank Act; see also proposed
Rule 13n–4(b)(9) under the Exchange Act.
1864 15 U.S.C. 78m(n)(5)(H), as added by Section
763(i) of the Dodd-Frank Act; see also proposed
Rule 13n–4(b)(10) under the Exchange Act.
1865 15 U.S.C. 78m(n)(5)(H), as added by Section
763(i) of the Dodd-Frank Act.
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(b) Benefits and Costs of Proposed
Guidance and Exemptive Rule
As discussed above, the Commission
is (1) proposing interpretive guidance to
specify how SDRs may comply with the
Notification Requirement, (2) specifying
how it proposes to determine whether a
relevant authority is appropriate for
purposes of receiving SDR Data, and (3)
proposing the Indemnification
Exemption.1866 The Commission is
proposing each of these to facilitate
access to SDR Data by relevant
authorities and to enable SDRs to fulfill
their obligations under Sections
13(n)(5)(G) and 13(n)(5)(H) of the
Exchange Act 1867 and previously
proposed Rules 13n–4(b)(9) and 13n–
4(b)(10) in a manner consistent with
relevant authorities’ need to have access
to SDR Data that will enable them to
carry out their regulatory mandates and
legal responsibilities effectively and
efficiently.1868 The Commission
preliminarily believes that our proposed
guidance and the Indemnification
Exemption would help realize the
anticipated benefits of access to SDR
Data by relevant authorities, as
discussed above in Section XV.H.2(a)i,
while at the same time mitigating the
risks and other costs associated with
such access, as discussed above in
Section XV.H.2(a)ii. The Commission
also preliminarily believes that, taken
together, our proposed guidance and the
Indemnification Exemption will enable
the Commission and SDRs to respond
promptly and flexibly to the needs of
relevant authorities.
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i. Notification Requirement
The Commission preliminarily
believes that an SDR can comply with
the Notification Requirement in Section
13(n)(5)(G) of the Exchange Act 1869 and
previously proposed Rule 13n–4(b)(9)
thereunder by notifying the
Commission, upon the initial request for
security-based swap data by a relevant
authority, that such relevant authority
has made a request for security-based
swap data from the SDR, and
maintaining records of the initial
request and all subsequent requests.1870
Under this proposed interpretation,
where an SDR complies with the above,
the Commission will consider the notice
provided and records maintained as
satisfying the Notification Requirement.
1866 See
Section VI.C.3, supra.
1867 15 U.S.C. 78m(n)(5)(G) and (H), as added by
Section 763(i) of the Dodd-Frank Act.
1868 See SDR Proposing Release, 75 FR 77356.
1869 15 U.S.C. 78m(n)(5)(G), as added by Section
763(i) of the Dodd-Frank Act.
1870 See Section VI.C.3(a), supra.
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In the Commission’s preliminary
view, SDRs would be less burdened
under this interpretation of the
Notification Requirement than under an
interpretation that would require SDRs
to provide the Commission with actual
notice of all requests for SDR Data by
relevant authorities because SDRs
would have to actually notify the
Commission only one time for each
relevant authority. The Commission
estimates that approximately 200
relevant authorities may make requests
for SDR Data from SDRs.1871 Based on
the Commission’s experience in making
requests for security-based swap data
from trade repositories, the Commission
estimates that each relevant authority
may make about 12 requests for SDR
Data per year. An alternative
interpretation that would require SDRs
to provide the Commission with actual
notice of all requests for SDR Data by
relevant authorities would naturally
increase the burden on SDRs to notify
the Commission. Therefore, over the
course of a year, under the
Commission’s proposed interpretation
of the Notification Requirement, the
Commission estimates that an SDR
would provide the Commission with
actual notice approximately 200 times,
whereas under an interpretation that
would require SDRs to provide the
Commission with actual notice of all
requests for SDR Data by relevant
authorities, the Commission estimates
that the SDR would provide the
Commission with actual notice
approximately 2400 times. Because
SDRs would be required to provide
actual notification to the Commission
only upon the first request of a relevant
authority, rather than upon every
request, SDRs should be able to respond
to requests for SDR Data by relevant
authorities more promptly and at lower
1871 The Commission preliminarily believes that
each of the entities in the United States that is
specifically listed in Section 13(n)(5)(G) of the
Exchange Act, 15 U.S.C. 78m(n)(5)(G), as added by
Section 763(i) of the Dodd-Frank Act, may request
SDR Data from SDRs. Section 13(n)(5)(G)
specifically lists each appropriate prudential
regulator (which includes the Board of Governors
of the Federal Reserve System, the Office of the
Comptroller of the Currency, the Federal Deposit
Insurance Corporation, the Farm Credit
Administration, and the Federal Housing Finance
Agency), the Financial Stability Oversight Council,
the CFTC, and the Department of Justice. The
Commission also preliminarily expects that certain
SROs and registered futures associations may
request SDR Data from SDRs. Therefore, the
Commission estimates that approximately 10
relevant authorities in the United States may
request SDR Data from SDRs. The Commission also
estimates that each of the G20 countries will have
no more than 10 relevant authorities that may
request SDR Data from SDRs. Thus, the Commission
estimates that there will be a total of no more than
200 relevant domestic and foreign authorities that
may request SDR Data from SDRs.
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cost than requiring SDRs to notify the
Commission of every request.
The Commission’s proposed
interpretation would also minimize an
impediment to relevant authorities’
direct access to SDR Data to fulfill their
regulatory mandates and legal
responsibilities because SDRs would not
be required to provide the Commission
with actual notice of every request prior
to providing access to the requesting
relevant authority. If SDRs had to
actually notify the Commission every
time that a relevant authority requested
access to SDR Data (following the initial
request), this could interfere with the
ability of relevant authorities to obtain
efficiently security-based swap data
from SDRs to fulfill their own regulatory
mandate or legal responsibilities. Such
an impediment could be a factor in
leading certain relevant authorities to
seek to promote the establishment of
trade repositories in their own
jurisdictions, which would lead to
fragmentation of security-based swap
data and SDRs geographically. By
reducing a potential barrier to relevant
authorities’ access to SDR Data and
reducing the likelihood of fragmentation
of data among trade repositories, the
Commission’s proposed interpretation
of the Notification Requirement should
enhance the ability of SDRs to perform
their intended functions and thereby
increase market transparency and
regulatory effectiveness. Because SDRs
would still be required to maintain
records of relevant authorities’ requests
for SDR Data, the proposed
interpretation would also allow the
Commission to obtain this information
as needed.
The Commission is aware that our
proposed interpretation of the
Notification Requirement will not
provide the Commission with actual
notice of all relevant authorities’
requests for SDR Data prior to an SDR
fulfilling such requests. The
Commission preliminarily believes,
however, that the benefits of receiving
such notice does not justify the
additional costs that SDRs would incur
in providing such notice and the
potential delay in relevant authorities
receiving SDR Data that they need to
fulfill their regulatory mandates and
legal responsibilities.
ii. Determination of Appropriate
Regulators
The Commission is proposing an
approach to determining whether an
authority, other than those expressly
identified in Section 13(n)(5)(G) of the
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Exchange Act 1872 and previously
proposed Rule 13n–4(b)(9) thereunder,
should be determined to be appropriate
for purposes of requesting SDR Data. As
described above, the Commission
preliminarily envisions that this process
will involve consideration of, among
other things, the scope of the relevant
authority’s regulatory mandate and legal
responsibilities, the authority’s ability to
provide the Commission with reciprocal
assistance in securities matters within
the Commission’s jurisdiction, and a
supervisory and enforcement MOU or
other arrangement that would be
designed to protect the confidentiality
of any SDR Data provided to the
authority.1873
The Commission preliminarily
believes that our proposed approach has
the benefit of appropriately limiting
access to SDR Data by relevant
authorities in order to seek to protect
the confidentiality of SDR Data.1874 The
Commission expects that relevant
authorities from a wide range of
jurisdictions may seek to obtain a
determination by the Commission that
they may appropriately have access to
SDR Data. Each of these jurisdictions
may have a distinct approach to
supervision, regulation, or oversight of
its financial markets or market
participants and to the protection of
proprietary and other confidential
information. The Commission
preliminarily believes that the process
that it is contemplating has the benefit
of enabling the Commission to
determine whether an authority has a
legitimate interest in the SDR Data,
based on its regulatory mandate or legal
responsibilities, and whether the
authority is capable of protecting the
confidentiality of SDR Data provided to
it. In addition, the Commission
preliminarily believes that this process
will allow the Commission to be able to
revoke its determination in certain
instances, including, for example, if a
relevant authority fails to keep
confidential data that an SDR provides
to the authority.
The Commission also preliminarily
believes that our proposed approach
will reduce the potential for
fragmentation of security-based swap
data among trade repositories because it
will reduce the risks of improper
disclosure, misappropriation, or misuse
of SDR Data. Concerns about these risks
1872 15 U.S.C. 78m(n)(5)(G) (permitting access to
SDR Data by ‘‘any other person that the
Commission determines to be appropriate’’), as
added by Section 763(i) of the Dodd-Frank Act.
1873 See Section VI.C.3(b), supra.
1874 See ESMA Letter at 2 (noting that relevant
authorities must ensure the confidentiality of
security-based swap data provided to them).
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could prompt relevant authorities to
promote the development and
maintenance of SDRs in their own
jurisdictions rather than entrusting data
reported by persons within their
jurisdictions to consolidated trade
repositories. As described above, the
Commission envisions that any
determination order by the Commission
will likely be conditioned on a relevant
authority and the Commission entering
into a supervisory and enforcement
MOU or other arrangement, which will
likely address the confidentiality of SDR
Data obtained by the authority.1875
Because the Commission’s
determination process will likely
address confidentiality concerns, the
Commission preliminarily believes that
our proposed approach would increase
relevant authorities’ confidence in the
preservation of the confidentiality of
SDR Data shared with the authorities’
counterparts in other jurisdictions, and,
in conjunction with the Commission’s
approach to ensuring access to SDR Data
by relevant authorities discussed
above,1876 may reduce incentives for
relevant authorities to seek to promote
the establishment and maintenance of
SDRs in other jurisdictions. If concerns
over confidentiality reduce relevant
authorities’ incentives to promote the
establishment and maintenance of SDRs
in their own jurisdictions and market
participants operating in those
jurisdictions conclude that they may,
under applicable foreign law, use SDRs
registered with the Commission for
reporting purposes and therefore do so,
then the Commission preliminarily
believes that this will improve market
transparency and regulatory efficiency.
Furthermore, the Commission
preliminarily believes that our proposal
represents an efficient approach to the
determination process that will promote
the intended benefits of access by
relevant authorities to SDR Data, as
discussed above in Section XV.H.2(a)i.
The Commission routinely negotiates
MOUs or other arrangements with
foreign authorities in order to secure
mutual assistance or for other purposes,
and the Commission preliminarily
believes that the approach that it is
proposing is generally consistent with
this practice. As such, the Commission
preliminarily believes that the burden of
entering into supervisory and
enforcement MOUs or other
arrangements with relevant authorities
during the Commission’s determination
process will be outweighed by the
benefits to relevant authorities in
gaining access to SDR Data to carry out
1875 See
1876 See
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31189
their regulatory mandates or legal
responsibilities.
iii. Exemptive Relief From the
Indemnification Requirement
Finally, the Commission is proposing
the Indemnification Exemption, which
would provide SDRs registered with the
Commission with the option of
permitting relevant authorities to obtain
SDR Data without agreeing to indemnify
the SDR and the Commission, subject to
three conditions. The first two
conditions would limit the exemption to
(1) requests by a relevant authority for
security-based swap information made
to fulfill a regulatory mandate and/or
legal responsibility of the requesting
authority, and (2) requests pertaining to
a person or financial product subject to
the jurisdiction, supervision, or
oversight of the requesting authority.1877
The third condition would require the
relevant authority to have entered into
a supervisory and enforcement MOU or
other arrangement with the Commission
that addresses the confidentiality of the
security-based swap information
provided and any other matters as
determined by the Commission.1878 The
Commission preliminarily believes that
the benefits of the Indemnification
Exemption would include the benefits
associated with permitting relevant
authorities to access SDR Data, as
discussed in Section XV.H.2(a)i above.
As discussed above, the Commission
preliminarily believes that a rigid
application of the Indemnification
Requirement could prevent some
relevant domestic authorities and some
relevant foreign authorities from
obtaining security-based swap
information from SDRs because they
cannot provide an indemnification
agreement.1879 Effectively prohibiting
access to SDR Data by authorities other
than the Commission would greatly
reduce the ability of an SDR to provide
the market transparency and regulatory
efficiency benefits intended under Title
VII.1880 Although relevant authorities
could obtain SDR Data from the
Commission,1881 it would likely be less
efficient for relevant authorities to do so
than obtaining access to SDR Data
directly from SDRs, particularly in
periods of market stress and particularly
1877 See
Section VI.C.3(c), supra.
id.
1879 See Section VI.C.3(c), supra.
1880 See SDR Proposing Release, 75 FR 77307
(describing expected benefits of SDRs, including the
market transparency benefits of access by
regulators); id. at 77356 (‘‘The ability of the
Commission and other regulators to monitor risk
and detect fraudulent activity depends on having
access to market data.’’).
1881 See Section VI.C.1, supra; see also SDR
Proposing Release, 75 FR 77319.
1878 See
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since SDRs are likely to have expertise
in, and business incentives for,
providing such data to relevant
authorities efficiently.
The Commission also preliminarily
believes that a rigid application of the
Indemnification Requirement could
reduce the amount of data held by SDRs
registered with the Commission, thereby
potentially reducing the usefulness of
such SDRs to relevant authorities and
market participants. To the extent that
relevant foreign authorities are
effectively limited in obtaining SDR
Data, the relevant authorities may seek
to promote the development and
maintenance of SDRs in their own
jurisdictions, which would likely lead
to fragmentation of security-based swap
data among trade repositories in
multiple jurisdictions.1882 Such
fragmentation could result in higher
reporting costs for market
participants,1883 who may be subject to
duplicative security-based swap
transaction reporting requirements in
multiple jurisdictions, and would likely
increase other costs that both relevant
authorities and market participants may
incur, including, for example, their
inability to aggregate data across
multiple SDRs.1884
The Commission preliminarily
believes that, in addition to addressing
the concerns raised by a rigid
1882 Cf. Cleary Letter IV at 31 (The
Indemnification Requirement ‘‘could be a
significant impediment to effective regulatory
coordination, since non-U.S. regulators may
establish parallel requirements for U.S. regulators to
access swap data reported in their jurisdictions.’’).
1883 In the SDR Proposing Release, the
Commission noted that multiple SDRs per asset
class would allow for market competition to
determine how data is collected. 75 FR 77358.
Although the Commission continues to recognize
that multiple SDRs may in some circumstances
increase competition and lower costs associated
with reporting and other Title VII requirements, the
Commission preliminarily believes that
fragmentation of security-based swap data among
trade repositories under the circumstances
described here would not likely increase
competition or reduce costs. In a jurisdictionallyfragmented global market, an increase in the
number of trade repositories in one jurisdiction may
not increase the number of alternative trade
repositories in another jurisdiction to which a
counterparty may report. In such a market,
counterparties to security-based swap transactions
occurring wholly within one jurisdiction would
likely not be free to choose to report to a trade
repository in another jurisdiction to satisfy
applicable reporting requirements. Similarly, crossborder transactions subject to the reporting
requirements of two or more jurisdictions would
likely be required to be reported to trade
repositories in each of the jurisdictions that require
the transactions to be reported.
1884 See SDR Proposing Release, 75 FR 77358. The
costs associated with aggregating the data of
multiple SDRs would likely be significantly higher
under the circumstances described here, as different
jurisdictions are likely to impose different
requirements regarding how data is to be reported
and maintained.
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application of the Indemnification
Requirement, the Indemnification
Exemption is beneficial because it
would mitigate the risks associated with
permitting relevant authorities to obtain
access to SDR Data, as discussed above
in Section XV.H.2(a)ii. The
Indemnification Exemption would be
available only for requests that are
consistent with each requesting
authority’s regulatory mandate or legal
responsibilities and only for SDR Data
pertaining to a person or financial
product subject to the requesting
authority’s jurisdiction, supervision, or
oversight. The Commission
preliminarily believes that these
conditions significantly reduce the
confidentiality concerns relating to
relevant authorities’ access to SDR
Data,1885 as authorities are likely to be
sensitive to the need for confidentiality
of data, particularly if the data pertains
to matters in which they have an
interest, i.e., data within their own
regulatory mandates or legal
responsibilities and to persons and
financial products under their own
jurisdiction, supervision, or oversight.
Similarly, because the Indemnification
Exemption is voluntary, the SDR may
choose not to rely on the
Indemnification Exemption, such as
under circumstances where the risks
associated with providing access to SDR
Data may be unreasonably high—for
example, where a relevant authority has
a previous history of weak protections
for preserving the confidentiality of SDR
Data. Further, even where the SDR opts
to rely on the Indemnification
Exemption, the Commission will have
an opportunity to evaluate the
confidentiality protections provided by
the relevant authority in the context of
negotiations of a supervisory and
enforcement MOU or other
arrangement.1886
The Commission envisions that, to
meet the first two conditions in the
1885 See, e.g., ESMA Letter at 2 (noting that
relevant authorities must ensure the confidentiality
of security-based swap data provided to them).
1886 For the Indemnification Exemption to apply
to the requests of a particular requesting authority,
the Commission would be required to enter into a
supervisory and enforcement MOU or other
arrangement with such authority, which would
enable the Commission to determine, prior to
operation of the Indemnification Exemption, that
the authority has a regulatory mandate or legal
responsibilities to access SDR Data, that it agrees to
protect the confidentiality of any security-based
swap information provided to it, and that it will
provide reciprocal assistance in securities matters
within the Commission’s jurisdiction. See Section
VI.C.3(c), supra. In addition, if an SDR determines
that it would prefer not to invoke the exemption,
it would have the option to require an
indemnification agreement from a relevant
authority that seeks to access SDR Data. See Section
VI.C.3(c), supra.
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Indemnification Exemption, an SDR
may incur costs in determining whether
a relevant authority’s request for data
falls within its regulatory mandate or
legal responsibilities and pertains to a
person or financial product subject to
the authority’s jurisdiction, supervision,
or oversight. The Commission
preliminarily believes, however, that an
SDR’s costs for meeting the first two
conditions in the Indemnification
Exemption would be minimal, if any, in
light of the burden already imposed by
an SDR’s statutory duty to maintain the
privacy of security-based swap
information that it receives.1887 With
respect to the third condition in the
Indemnification Exemption, the
1887 See Section 13(n)(5)(F) of the Exchange Act,
15 U.S.C. 78m(n)(5)(F), as added by Section 763(i)
of the Dodd-Frank Act; see also proposed Rule 13n–
4(b)(8) under the Exchange Act (requiring SDRs to
maintain the privacy of any and all security-based
swap transaction information that the SDR receives
from a security-based swap dealer, counterparty, or
certain registered entity) and proposed Rule 13n–
9 under the Exchange Act (requiring an SDR to
protect the privacy of security-based swap
transaction information that the SDR receives by,
among other things, establishing safeguards,
policies, and procedures that are reasonably
designed to protect such information and that
address, without limitation, the SDR limiting access
to confidential information, material, nonpublic
information, and intellectual property). The
Commission preliminarily believes that in order to
comply with an SDR’s statutory privacy duty, the
SDR will most likely decide that it is reasonable to
consider whether a relevant authority’s request for
security-based swap information is within its
regulatory mandate or legal responsibilities and
pertains to a person or financial product within the
authority’s jurisdiction, supervision, or oversight
before the SDR provides the information. If so, then
the Commission preliminarily believes that the
SDR’s costs for meeting the first two conditions in
the Indemnification Exemption would be minimal,
if any, because these conditions will most likely be
already addressed in the SDR’s policies and
procedures required by previously proposed Rule
13n–9 under the Exchange Act. As discussed in the
SDR Proposing Release, the Commission
anticipated that the primary costs to SDRs for
complying with proposed Rule 13n–9 would be
derived from developing, maintaining, and ensuring
compliance with the required policies and
procedures. 75 FR 77363. Based upon data from
SIFMA’s Management & Professional Earnings in
the Securities Industry 2012 (modified by the SEC
staff to account for an 1800-hour-work-year and
multiplied by 5.35 to account for bonuses, firm size,
employee benefits, and overhead), the Commission
now estimates that the average initial paperwork
cost associated with proposed Rule 13n–9 would be
630 hours and $60,000 in outside legal costs for
each SDR. The Commission also estimates that the
average ongoing paperwork cost would be 180
hours per year for each SDR and that assuming a
maximum of ten SDRs, the aggregate one-time
estimated dollar cost to comply with proposed Rule
13n–9 would be $2,553,000, which is calculated as
follows: ($60,000 for outside legal services +
(Compliance Attorney at $310 per hour for 630
hours)) * 10 registrants = $2,553,000. The
Commission further estimates that the aggregate
ongoing estimated dollar cost per year to comply
with proposed Rule 13n–9 would be $558,000,
which is calculated as follows: (Compliance
Attorney at $310 per hour for 180 hours) * 10
registrants = $558,000.
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Commission preliminarily believes that
the costs for an SDR to confirm whether
the Commission and a relevant
authority have entered into a
supervisory and enforcement MOU or
other arrangement would be minimal
because such information should
generally be readily available.1888
Even if all the conditions in the
Indemnification Exemption are
satisfied, SDRs would have the option to
seek to obtain an indemnification
agreement from a relevant authority.
The Commission recognizes that the
conditions in the Indemnification
Exemption would not necessarily
provide SDRs that invoke the exemption
with the same level of protection that an
indemnification agreement would
provide (i.e., coverage for any expenses
arising from litigation relating to
information provided to a relevant
authority) and thus, SDRs may decide to
weigh the potential risks in not seeking
an indemnification agreement from a
relevant authority with the benefits of
invoking the exemption.
The Commission preliminarily
believes, however, that the conditions in
the exemption would provide an
additional layer of protection of the
confidentiality of SDR Data—albeit
different from the protection provided
by an indemnification agreement—and
that in cases where SDRs choose the
exemption, such SDRs presumably
believe that the benefits of the
exemption, as discussed above, justify
the costs of invoking the exemption.
However, even in cases where the
exemption is not chosen, the availability
of the option is valuable to SDRs
because the exemption would provide
SDRs with an alternative to the
Indemnification Requirement and an
opportunity to choose the lower cost
alternative.
sroberts on DSK5SPTVN1PROD with PROPOSALS
(c) Alternatives to Proposed Guidance
and Exemptive Relief
i. Notification Requirement
The Commission considered requiring
SDRs to provide actual notice to the
Commission of all requests for SDR Data
by relevant authorities prior to SDRs
fulfilling such requests. The
Commission preliminarily believes,
however, that the benefits of receiving
actual notice for each and every request
does not justify the additional costs
imposed on SDRs to provide such notice
and the potential delay in relevant
authorities receiving SDR Data that they
need to fulfill their regulatory mandates
1888 As a general matter, the Commission provides
a list of MOUs and other arrangements, which are
available at the following link: http://www.sec.gov/
about/offices/oia/oia_cooparrangements.shtml.
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and legal responsibilities. The
Commission also preliminarily believes
that our proposed approach is the most
efficient way to interpret the
Notification Requirement and would
allow the Commission access to the
information needed.
ii. Determination of Appropriate
Regulators
The Commission considered
prescribing by rule a specific process to
determine whether a relevant authority
is appropriate for purposes of receiving
security-based swap data directly from
SDRs that would require, for example, a
supervisory and enforcement MOU or
other arrangement.1889 The Commission
preliminarily believes, however, that
such a rule is not necessary because our
process for determining an appropriate
authority provides the Commission and
relevant authorities greater flexibility to
consult on appropriate terms of access
to SDR Data, confidentiality
commitments, and reciprocal access
commitments on a case-by-case basis.
iii. Exemptive Relief From the
Indemnification Requirement
The Commission considered whether
to not propose any exemptive relief
from the Indemnification Requirement.
For the reasons discussed below, the
Commission believes that the
Indemnification Exemption is a better,
and more appropriate, alternative to a
rigid application of the Indemnification
Requirement.1890
The Commission preliminarily
believes that a rigid application of the
Indemnification Requirement may
reduce the expected benefits associated
with relevant authorities’ access to SDR
Data, as discussed in Section XV.H.2(a)i
above. In particular, the Indemnification
Requirement may prevent some relevant
authorities from accessing SDR Data
directly from SDRs registered with the
Commission.1891 Although relevant
authorities could obtain SDR Data from
the Commission,1892 it would likely be
less efficient for relevant authorities to
do so than obtaining SDR Data access
directly from SDRs, particularly in
1889 See, e.g., CFTC Rule 49.17(b), 17 CFR
49.17(b) (requiring ‘‘Appropriate Foreign
Regulators’’ to have an MOU or similar type of
information sharing agreement, or as the CFTC
determines on a case-by-case basis).
1890 See also Section VI.C.3(c), supra (discussing
how a rigid application of the Indemnification
Requirement would frustrate the purposes of the
Dodd-Frank Act).
1891 See, e.g., DTCC Letter I at 3 (discussing how
the Indemnification Requirement would result in
the reduction of information accessible to regulators
on a timely basis and would greatly diminish
regulators’ ability to carry out oversight functions).
1892 See Section VI.C.1, supra; see also SDR
Proposing Release, 75 FR 77319.
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31191
periods of market stress and particularly
since SDRs are likely to have expertise
in, and business incentives for,
providing such data to relevant
authorities efficiently.
Moreover, the inability of relevant
foreign authorities to obtain direct
access to SDR Data from SDRs registered
with the Commission would likely
increase the risk of data fragmentation
among trade repositories, as many
foreign authorities may require
establishment and maintenance of trade
repositories in their jurisdictions if such
authorities determine that they are
unable to satisfy the Indemnification
Requirement; such fragmentation may
lead to higher reporting costs for market
participants and less transparency in the
security-based swap market.1893
The Commission also considered
whether to prescribe additional
conditions in or limitations to the
Indemnification Exemption, but decided
against it. Any additional conditions or
limitations to the Indemnification
Exemption would likely impose
additional costs on SDRs that the
Commission preliminarily believes are
not warranted at this time. The
Commission presently believes that the
Indemnification Exemption strikes the
right balance in furthering the goals of
the Dodd-Frank Act by providing
relevant authorities with access to SDR
Data to fulfill their regulatory mandates
and legal requirements while
incorporating appropriate limitations to
such access to guard against over-broad
or unfettered access to all SDR Data as
well as certain mechanisms to seek to
preserve the confidentiality of the SDR
Data.
Request for Comment
The Commission requests comments
on all aspects of the economic analysis
of our proposed interpretive guidance,
Indemnification Exemption, and
alternatives to our proposed approach.
Interested persons are encouraged to
provide supporting data and analysis
and, when appropriate, suggest
modifications to the Commission’s
proposed interpretive guidance and
Indemnification Exemption. Responses
that are supported by data and analysis
provide great assistance to the
Commission in considering the benefits
and costs of proposed alternatives, as
well as considering the practicality and
effectiveness of the proposed
alternatives. In addition, the
1893 See, e.g., Cleary Letter IV at 31 (The
Indemnification Requirement ‘‘could be a
significant impediment to effective regulatory
coordination, since non-U.S. regulators may
establish parallel requirements for U.S. regulators to
access swap data reported in their jurisdictions.’’).
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Commission requests commenters’
views on the following:
• Has the Commission appropriately
considered the expected programmatic
benefits and costs of our proposed
interpretative guidance and
Indemnification Exemption? If not,
please explain why and provide
information on how such benefits and
costs should be assessed.
• Are the programmatic benefits and
costs discussed above accurate? If not,
why not and how can the Commission
more accurately describe such benefits
and costs?
• Are there quantifiable
programmatic benefits or costs
associated with the Commission’s
proposed interpretive guidance and
Indemnification Exemption that are not
discussed above, but that the
Commission should consider? If so,
please discuss, analyze, and supply
relevant data, information, or statistics
regarding any such benefits or costs. For
example, how many relevant authorities
will likely request SDR Data from SDRs?
What is the average number of requests
for SDR Data that an SDR may receive
from relevant authorities per year?
• Are there costs in fulfilling any of
the conditions in the Indemnification
Exemption that the Commission has not
discussed above? If so, what?
• Do you agree that an SDR’s costs for
meeting the first two conditions in the
Indemnification Exemption would be
minimal, if any, because these
conditions will most likely be already
addressed in the SDR’s policies and
procedures required by previously
proposed Rule 13n-9 under the
Exchange Act? If not, please explain.
• Do SDRs have appropriate
incentives to rely on the
Indemnification Exemption? Are there
circumstances in which an SDR may
rely on an Indemnification Exemption
when it is inappropriate to do so?
Conversely, would SDRs have
incentives to require indemnification
despite the availability of the
Indemnification Exemption? Please
explain.
• What kinds of legal frameworks will
relevant authorities operate under? Will
some relevant authorities operate under
legal frameworks that do not impose
confidentiality restrictions on the use of
data that are comparable to those
governing SDRs and those applicable to
the Commission?
• Do the benefits of the Commission’s
proposed interpretive guidance and
Indemnification Exemption justify the
costs? If not, why not?
• Has the Commission appropriately
considered the benefits and costs of the
alternative approaches to the
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Commission’s interpretive guidance and
Indemnification Exemption? If not, why
not?
3. Economic Analysis of the Re-proposal
of Regulation SBSR
As discussed above, although the
Commission is re-proposing all of
Regulation SBSR, the new elements of
the re-proposal relate directly to crossborder issues, are conforming changes
necessitated by those larger changes, or
are technical changes designed to
facilitate understanding of those other
changes. However, since Regulation
SBSR was proposed but has not yet been
adopted, the discussion below will
include costs and benefits of the initial
proposal from a pre-statutory baseline
and then consider the changes to the
initial assessments of costs and benefits
implied by the re-proposal.
Broadly, the Commission continues to
believe, as described in the Regulation
SBSR Proposing Release, that
Regulation SBSR taken as a whole
would result in improved market
quality, improved risk management,
greater efficiency, and improved
Commission oversight.1894 Today’s reproposal of Regulation SBSR is intended
to further these goals while further
limiting, to the extent practicable, the
overall costs associated with securitybased swap reporting and public
dissemination in cross-border
situations. As described in more detail
below, the proposed revisions were
suggested by many commenters to the
initial proposal and are designed,
among other things, to better align
reporting duties with larger entities that
have greater resources and capability to
report 1895 and to reduce the potential
1894 See Regulation SBSR Proposing Release, 75
FR 75261–62.
1895 See, e.g., SIFMA AMG Letter at 2 (stating
that, due to their commercial interests and
technological expertise, non-U.S. security-based
swap dealers and major security-based swap
participants would be as likely as U.S. securitybased swap dealers and major security-based swap
participants to comply with the reporting
obligations, or would be best positioned to develop
at the lowest cost the necessary technological
infrastructure or relationships with third party
service providers); Vanguard Letter at 6 (stating that
requiring U.S. end users to report security-based
swaps would be costly and burdensome for end
users, particularly for end users that enter into
security-based swaps on an isolated basis);
MarkitSERV Letter I at 9 (noting that, in light of end
users’ resources and the operational and technical
challenges of security-based swap reporting, it will
often be most efficient for a U.S. end user to
delegate reporting to its non-U.S. security-based
swap dealer or major security-based swap
participant counterparty); DTCC Letter II at 27
(stating that the Commission’s failure to encourage
arrangements through which non-U.S. dealers could
submit transaction reports for customers that are
U.S. persons would impose significant burdens and
costs on U.S. money managers, which likely would
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for duplicative reporting.1896 These
revisions should help to maximize the
benefits and minimize the potential
costs of regulatory reporting and public
dissemination of security-based swaps
faced by market participants.
The Commission seeks public
comment on the costs and benefits that
re-proposed Regulation SBSR would
entail. The Commission encourages
commenters to identify, discuss,
analyze, and supply relevant data,
information, or statistics regarding any
such costs or benefits. In particular, the
Commission seeks comment on the
following:
• Taken together, what are the costs
and benefits of re-proposed Regulation
SBSR?
• Would the revisions contained in
re-proposed Regulation SBSR result in
benefits or costs not identified by the
Commission? If so, please describe.
• Has the Commission accurately
identified and described all relevant
benefits and costs associated with reproposed Regulation SBSR?
• Could re-proposed Regulation SBSR
be further enhanced, consistent with the
Dodd-Frank Act, to maximize aggregate
benefits and minimize costs to the
security-based swap market?
(a) Modifications to ‘‘Reporting Party’’
Rules and Jurisdictional Reach of
Regulation SBSR—Re-proposed Rules
901(a) and 908(a)
i. Initial Proposal
Rule 901(a), as initially proposed, set
forth three scenarios for assigning the
duty to report a security-based swap
transaction. Proposed Rule 901(a)(1)
would provide that, where only one
counterparty to a security-based swap is
a U.S. person, the U.S. person would be
the reporting party. Proposed Rule
901(a)(2) would assign reporting
responsibilities as follows:
• With respect to a security-based
swap in which only one counterparty is
a security-based swap dealer or major
be passed to individual investors, pension funds,
and state and local governments); Cleary Letter IV
at 28 (stating that requiring U.S. end users to report
security-based swaps entered into with non-U.S.
security-based swap dealers would be unduly
burdensome for end users and could negatively
impact the competitiveness of affected U.S.
markets); ISDA/SIFMA Letter I at 19 (the end-user
reporting requirement could result in the
inadvertent exclusion of non-U.S. security-based
swap dealers, which could increase systemic risk by
decreasing liquidity and further concentrating the
U.S. security-based swap market); Cleary Letter II at
18 (end users and other unregistered counterparties
might refuse to enter into security-based swaps with
foreign security-based swap dealers or major
security-based swap participants to avoid the costs
of developing the necessary reporting systems,
thereby potentially reducing price competition).
1896 See notes 1136–1141, supra.
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security-based swap participant, the
security-based swap dealer or major
security-based swap participant would
be the reporting party;
• With respect to a security-based
swap in which one counterparty is a
security-based swap dealer and the
other counterparty is a major securitybased swap participant, the securitybased swap dealer would be the
reporting party; and
• With respect to any other securitybased swap not described in the first
two cases, the counterparties to the
security-based swap would select a
counterparty to be the reporting party.
Proposed Rule 901(a)(3), as originally
proposed, would provide that, if neither
party is a U.S. person but the securitybased swap is executed in the United
States or through any means of
interstate commerce, or is cleared
through a clearing agency having its
principal place of business in the
United States, the counterparties to the
security-based swap would be required
to select a counterparty to be the
reporting party.
Rule 908(a), as initially proposed,
would delineate the scope of the
security-based swap market that would
be subject to regulatory reporting and
public dissemination under Regulation
SBSR. Proposed Rule 908(a) provided
that a security-based swap would be
subject to these requirements if the
security-based swap: (1) has at least one
counterparty that is a U.S. person; (2) is
executed in the United States or through
any means of interstate commerce; or (3)
is cleared through a registered clearing
agency having its principal place of
business in the United States. If a
security-based swap met any of the tests
in proposed Rule 908(a), the
counterparties would then look to
proposed Rule 901(a) to determine
which of them would be required to
report the security-based swap. Rule
908(a), as initially proposed, would not
impose reporting requirements in
connection with a security-based swap
solely because one of the counterparties
is guaranteed by a U.S. person.
Rule 902, as initially proposed, would
require the public dissemination of
security-based swaps that met the scope
requirements of proposed Rule 908(a).
Proposed Rule 902(a) set out the core
requirement that a registered SDR,
immediately upon receiving a
transaction report of a security-based
swap, would be required to publicly
disseminate information about that
security-based swap consisting of all the
information reported by the reporting
party pursuant to proposed Rule 901(c),
plus any indicator(s) contemplated by
the registered SDR’s policies and
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procedures that would be required by
proposed Rule 907.1897
a. Programmatic Benefits of Initial
Proposal
The Regulation SBSR Proposing
Release discussed various benefits that
could result from proposed Rule
901.1898 For example, the Commission
anticipated that proposed Rule 901
would provide the Commission with a
better understanding of the securitybased swap market generally, including
the size and scope of that market, as the
Commission would have access to data
held by SDRs.1899 Such access is
designed to promote more effective
systemic regulation, and provide the
Commission with better information to
examine for improper market behavior
and to take enforcement actions.
Furthermore, specifying general types of
information to be reported and publicly
disseminated could increase the
efficiency and level of standardization
in the security-based swap market.
Proposed Rule 901 also could facilitate
the reports about the security-based
swap marketplace that the Commission
is required to provide to Congress.1900
The Commission anticipated that
proposed Rule 901 would likely require
reporting parties to establish and
maintain order management systems
(‘‘OMSs’’) for capturing and transmitting
data about their security-based swap
transactions. Such systems would be
necessary to report data within the
timeframes set forth in proposed Rules
901(c) and 901(d), because it is unlikely
that manual processes could capture
and report in real time the numerous
required data elements relating to a
security-based swaps. There could be
substantial benefits in the form of
reduced operational risk in requiring all
reporting parties to have such
capability, as more timely capture and
storage at firm level of all security-based
1897 Block trades would be subject to special
dissemination rules. Section 13(m)(1)(E) of the
Exchange Act, 15 U.S.C. 78(m)(1)(E), provides that,
with respect to cleared security-based swaps, the
rule promulgated by the Commission related to
public dissemination shall contain provisions that
‘‘specify the criteria for determining what
constitutes a large notional security-based swap
transaction (block trade) for particular market and
contracts’’ and ‘‘specify the appropriate time delay
for reporting large notional security-based swap
transactions (block trades) to the public.’’ The
Commission in the Regulation SBSR Proposing
Release did not propose how to define a ‘‘block
trade.’’ As noted in Regulation SBSR Proposing
Release, the Commission intends to do so in a
separate proposal. See Regulation SBSR Proposing
Release, 75 FR 75228.
1898 See id. at 75262–64.
1899 See, e.g., 15 U.S.C. 78m(n)(5)(D) (requiring
SDRs to provide the Commission with direct
electronic access to their data).
1900 See Section 719 of the Dodd-Frank Act.
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31193
swap transaction information would
support effective risk management.
Counterparties, SDRs, clearing agencies
(in some cases), and regulators would
obtain accurate knowledge of new
security-based swap transactions more
quickly. Reporting parties that obtain
such systems could see additional
benefits in being able to process and
manage risk or to exploit operational
efficiency gains to expand their
participation in the security-based swap
market.
The information reported by reporting
parties pursuant to proposed Rule
901(c) would be used by registered
SDRs to publicly disseminate real-time
reports of security-based swap
transactions under proposed Rule 902.
In the Regulation SBSR Proposing
Release, the Commission highlighted
numerous benefits of the public
dissemination requirement in proposed
Rule 902. Among other things, the
Commission stated that ‘‘[b]y reducing
information asymmetries, post-trade
transparency has the potential to lower
transaction costs, improve confidence in
the market, encourage participation by a
larger number of market participants,
and increase liquidity in the securitybased swap market.’’ 1901 The
Commission noted the opacity of the
current security-based swap market and
stated that ‘‘[m]arket participants, even
dealers, lack an effective mechanism to
learn the prices at which other market
participants transact.’’ 1902 Requiring
prompt dissemination of last-sale
information would provide all market
participants with more extensive and
more accurate information on which to
make trading and valuation
determinations. Moreover, the
Commission noted that post-trade
pricing and volume information ‘‘could
allow valuation models to be adjusted to
reflect how [security-based swap]
counterparties have valued a [securitybased swap] instrument at a specific
moment in time’’ 1903 and that public,
real-time dissemination of last-sale
information ‘‘also could aid dealers in
deriving better quotations, because they
would know the prices at which other
market participants have recently
traded.’’ 1904 Post-trade transparency of
security-based swap transactions also
could improve market participants’
ability to value security-based swaps,
especially in opaque markets or markets
with low liquidity where recent
quotations or last-sale prices may not
1901 See Regulation SBSR Proposing Release, 75
FR 75267.
1902 Id.
1903 Id.
1904 Id.
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exist or, if they do exist, may not be
widely available. Better valuations
could create a benefit in the form of
more efficient capital allocation and
ultimately could reduce systemic
risks.1905
b. Programmatic Costs of Initial
Proposal
The proposed security-based swap
reporting requirements would also
impose initial and ongoing costs on
reporting parties. In the Regulation
SBSR Proposing Release, the
Commission stated our preliminarily
belief that certain of these costs would
be a function of the number of
reportable events 1906 and the data
elements required to be submitted for
each reportable event. The Commission
preliminarily estimated that securitybased swap market participants would
face three categories of costs to comply
with proposed Rule 901. First, each
reporting party would have to develop
an internal OMS capable of capturing
relevant security-based swap transaction
information so that it could be reported.
Second, each reporting party would
have to implement a reporting
mechanism. Third, each reporting party
would have to establish an appropriate
compliance program and support for
operating the OMS and reporting
mechanism.1907 The Commission
preliminarily estimated that up to 1,000
entities could be reporting parties under
proposed Rule 901(a) and that the firstyear aggregate costs associated with
proposed Rule 901 would be $511,013
per reporting party, for a total of
$511,013,000 for all reporting
parties.1908 The Commission
preliminarily estimated that the ongoing
aggregate annualized costs associated
with proposed Rule 901 would be
$316,116 per reporting party, for a total
of $316,116,000 for all reporting
parties.1909 These cost estimates all
relied on the Commission’s preliminary
estimate of 1,000 reporting parties. In
the Regulation SBSR Proposing Release,
the Commission did not break down the
costs of Rule 901 by each paragraph of
Rule 901, but instead calculated costs
arising from proposed Rule 901 as a
whole.
sroberts on DSK5SPTVN1PROD with PROPOSALS
1905 See
id. at 75268.
reportable event would include both an
initial security-based swap transaction, required to
be reported pursuant to proposed Rule 901(b) and
the data elements of which would be set forth in
proposed Rule 901(c), as well as a life cycle event,
the reporting of which is governed by proposed
Rule 901(e). See id. at 75264–66.
1907 See id. at 75264.
1908 See id. at 75266.
1909 See id.
1906 A
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The Commission noted that the costs
associated with required reporting
pursuant to proposed Regulation SBSR
could represent a barrier to entry for
new, smaller firms that might not have
the ability to comply with the proposed
reporting requirements or for whom the
expected benefits of compliance might
not justify the costs of compliance. To
the extent that proposed Regulation
SBSR might deter new firms from
entering the security-based swap
market, this would be a cost of the
proposal and could negatively impact
competition. Nevertheless, the
Commission preliminarily believed that
the proposed reporting requirements
would not impose insurmountable
barriers to entry, as firms that were
reluctant to acquire and build reporting
infrastructure would be able to engage
with third-party service providers that
carry out any reporting duties that they
incurred under Regulation SBSR.1910
In the Regulation SBSR Proposing
Release, the Commission preliminarily
estimated that the initial one-time
aggregate costs for registered SDRs to
develop and implement the systems
needed to disseminate the required
transaction information would be
$40,004,000, which corresponds to
$4,000,400 per SDR. Further, the
Commission preliminarily estimated
that aggregate annual costs on registered
SDRs for systems and connectivity
upgrades associated with real-time
public dissemination would be
$24,002,400, which corresponds to
$2,400,240 per SDR. Overall, the initial
aggregate costs associated with
proposed Rule 901 for all SDRs were
estimated to be $64,006,400, which
corresponds to $6,400,640 per registered
SDR.1911
ii. Re-Proposal
For the reasons discussed above, the
Commission is now re-proposing certain
provisions of Regulation SBSR that
would extend the scope of securitybased swaps that would be subject to
regulatory reporting and public
dissemination and, in some cases, to
shift the duty to report to a different
counterparty. This re-proposal is being
made, in part, to reflect the
Commission’s preliminary belief that in
many cases the reporting and public
dissemination requirements of
Regulation SBSR should extend to
security-based swaps executed outside
the United States but having a U.S.
person as an indirect counterparty. The
Commission also is revising our
approach to assigning the duty to report
1910 See
1911 See
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id. at 75269.
Frm 00228
Fmt 4701
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to minimize consideration of the
domicile of the counterparties, and to
focus more on their registration status
(i.e., whether or not a counterparty is a
security-based swap dealer or major
security-based swap participant).
To facilitate these revisions, the
Commission is proposing to add certain
new terms and definitions and to
redefine other terms contained in Rule
900. First, the Commission is now
proposing to redefine the term
‘‘counterparty’’ as ‘‘a direct or indirect
counterparty of a security-based swap.’’
Re-proposed Rule 900 would define
‘‘direct counterparty’’ as ‘‘a person that
enters directly with another person into
a contract that constitutes a securitybased swap’’ and ‘‘indirect
counterparty’’ as ‘‘a person that
guarantees the performance of a direct
counterparty to a security-based swap or
that otherwise provides recourse to the
other side for the failure of the direct
counterparty to perform any obligation
under the security-based swap.’’
Second, re-proposed Rule 900 would
eliminate the term ‘‘reporting party’’
and replace it with ‘‘reporting side,’’
and define ‘‘reporting side’’ as ‘‘the side
of a security-based swap having the
duty to report information in
accordance with §§ 242.900–911 to a
registered security-based swap data
repository, or if there is no registered
security-based swap data repository that
would receive the information, to the
Commission.’’ ‘‘Side’’ would be defined
as ‘‘a direct counterparty and any
indirect counterparty that guarantees its
performance on the security-based
swap.’’
The Commission’s revisions would
leave much of Rule 901, as initially
proposed, substantially unchanged.
Importantly, the Commission is not
proposing to modify the basic duty to
report security-based swap transactions
to a registered SDR, as set forth in
proposed Rule 901(b). Nor is the
Commission proposing to add, delete, or
substantively change any of the specific
data elements set forth in proposed
Rules 901(c) and 901(d) that reporting
sides would be required to report.1912
Rather, in this re-proposal, the
Commission’s substantive revisions to
Rule 901 occur only in paragraph (a),
which governs who must report
security-based swap transactions. As
described in more detail below, these
changes are intended to better align
reporting duties with larger entities that
have greater resources and capability to
1912 However, re-proposed Rules 901(c) and
901(d) under the Exchange Act include certain
conforming changes due to the use of new and
revised terms in re-proposed Rule 900 under the
Exchange Act.
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report. Specifically, re-proposed Rule
901(a) would provide that a securitybased swap dealer or major securitybased swap participant that is not a U.S.
person could incur the duty to report a
security-based swap in various cases.
Re-proposed Rule 901(a) would now
provide as follows:
• If both sides of the security-based
swap include a security-based swap
dealer, the sides would be required to
select the reporting side.
• If only one side of the securitybased swap includes a security-based
swap dealer, that side would be the
reporting side.
• If both sides of the security-based
swap include a major security-based
swap participant, the sides would be
required to select the reporting side.
• If one side of the security-based
swap includes a major security-based
swap participant and the other side
includes neither a security-based swap
dealer nor a major security-based swap
participant, the side including the major
security-based swap participant would
be reporting side.
• If neither side of the security-based
swap includes a security-based swap
dealer or major security-based swap
participant: (i) If both sides include a
U.S. person or neither side includes a
U.S. person, the sides would be required
to select the reporting side; and (ii) If
only one side includes a U.S. person,
that side would be the reporting side.
In conjunction with the proposed
changes to Rule 901(a), the Commission
also is now proposing to modify Rule
908(a) to extend the reporting
requirement to all security-based swaps
that are guaranteed by a U.S. person and
all security-based swaps of securitybased swap dealers and major securitybased swap participants, regardless of
whether or not they are U.S.
persons.1913 To reflect these changes, reproposed Rule 908(a)(1) would provide
that a security-based swap is subject to
regulatory reporting if:
• The security-based swap is a
transaction conducted within the
United States;
• There is a direct or indirect
counterparty that is a U.S. person on
either side of the transaction;
• There is a direct or indirect
counterparty that is a security-based
swap dealer or major security-based
swap participant on either side of the
transaction; or
• The security-based swap is cleared
through a clearing agency having its
principal place of business in the
United States.
Re-proposed Rule 908(a)(2) would
provide that a security-based swap shall
be subject to public dissemination if:
• The transaction is conducted within
the United States;
• There is a direct or indirect
counterparty that is a U.S. person on
each side of the transaction;
• At least one direct counterparty is
a U.S. person (except in the case of a
transaction conducted through a foreign
branch);
• One side includes a U.S. person and
the other side includes a non-U.S.
person that is a security-based swap
dealer; or
• The security-based swap is cleared
through a clearing agency having its
principal place of business in the
United States.
Taken together, these changes to Rule
901(a) and 908(a) would have the
cumulative effect of substantially
preserving the reporting hierarchy
contemplated in Section 766 of the
Dodd-Frank Act while also taking into
account the existence of indirect
counterparties that could affect how the
reporting duty is allocated. Thus, the
new approach set forth in re-proposed
Rule 901(a) would focus more on the
status of an entity (i.e., whether it is a
security-based swap dealer or major
security-based swap participant), and
less on whether or not the
counterparties are U.S. persons.
Moreover, re-proposed Rule 908(a)(1)
would extend the requirement for
regulatory reporting to all security-based
swaps that are guaranteed by a U.S.
person or executed by security-based
swap dealers and major security-based
swap participants, regardless of whether
or not they are U.S. persons.
As discussed above, the Commission
is re-proposing Rule 902(a) to provide
that certain security-based swaps would
be subject to regulatory reporting but
not publically disseminated. Therefore,
the Commission is re-proposing Rule
902(a) to provide that a registered SDR
would have no obligation to publicly
disseminate a transaction report for any
such security-based swap. The
remainder of Rule 902 is substantively
unchanged.1914 However, as result of
the modifications to Rule 908(a)(2),
certain transactions involving non-U.S.
person security-based swap dealers,
non-U.S. person major swap
participants, and/or U.S. person indirect
counterparties that would not have been
1913 However, the Commission also preliminarily
believes that certain of these security-based swaps
need not be subject to public dissemination. See
Section VIII.C.1, supra.
1914 However, re-proposed Rule 902 under the
Exchange Act includes some conforming changes
due to the use of new and revised terms in reproposed Rule 900 under the Exchange Act.
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31195
subject to public dissemination under
the initial proposal would be required to
be publicly disseminated under reproposed Regulation SBSR.
a. Programmatic Benefits
Re-proposed Rule 901(a) would,
relative to the initial proposal, change
which counterparty to a security-based
swap transaction would be required to
report the transaction in some instances,
as the Commission is refocusing the
reporting duty primarily on the status of
the counterparties, rather than on
whether or not they are U.S. persons.
The remainder of the rule (aside from
technical and conforming changes)
would remain unchanged from the
original proposal. The Commission
preliminarily believes that the benefits
identified in the Regulation SBSR
Proposing Release associated with
proposed Rule 901 would continue to be
applicable to re-proposed Rule 901.
These include providing a means for the
Commission to gain a better
understanding of the security-based
swap market; facilitating public
dissemination of security-based swap
transaction information, thus enabling
market participants and regulatory
authorities to know the current state of
the security-based swap markets and
track those markets over time; and
improving risk management by securitybased swap counterparties, which
would need to capture and store their
transactions in security-based swaps to
facilitate reporting.
The Commission preliminarily
believes that requiring reporting of
security-based swap transactions that
are guaranteed by U.S. persons would
provide benefits beyond those under
Rule 908(a), as originally proposed. As
discussed above, the Commission’s
access to such additional information
could facilitate more thorough and
complete monitoring of individual
security-based swap market participants
and more accurate systemic risk
monitoring across the security-based
swap market. In addition, expanding the
reach of the security-based swap
reporting regime in this manner is
designed to mitigate certain unintended
consequences of the original proposal,
such as market participants shifting
business to other jurisdictions to avoid
reporting obligations.
The Commission preliminarily
believes that the benefits identified in
the Regulation SBSR Proposing Release
associated with proposed Rule 902
would continue to be applicable to reproposed Rule 902. Specifically, the
Commission continues to believe that
post-trade transparency has the
potential to lower transaction costs,
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improve confidence in the market,
encourage participation by a larger
number of market participants, and
increase liquidity in the security-based
swap market.1915 Furthermore, the
Commission continues to believe that
public, real-time dissemination of lastsale information could aid dealers in
deriving better quotations, because they
would know the prices at which other
market participants have recently
traded.1916 In addition, the Commission
continues to believe that requiring
prompt dissemination of last-sale
information would provide all market
participants with more extensive and
more accurate information on which to
make trading and valuation
determinations and could allow
valuation models to be adjusted to
reflect how security-based swap
counterparties have valued a securitybased swap instrument at a specific
moment in time.1917 Such information,
when made publicly available, could
enhance market participants’ ability to
value security-based swaps, especially
in opaque markets or markets with low
liquidity where recent quotations or
last-sale prices may not exist or are not
widely available. Better valuations
could create a benefit in the form of
more efficient capital allocation and
ultimately could help reduce systemic
risks.1918
sroberts on DSK5SPTVN1PROD with PROPOSALS
b. Programmatic Costs
Because the majority of proposed Rule
901 is not being revised and the overall
emphasis of the rule and the majority of
its specific provisions would not change
under the re-proposal, the Commission
preliminarily believes that the
infrastructure-related costs identified in
the Regulation SBSR Proposing Release
associated with proposed Rule 901, on
a per-entity basis, would not change.
These include the costs for each
reporting party: (i) To develop an OMS
capable of capturing relevant securitybased swap transaction information so
that it can be reported; (ii) to implement
a reporting mechanism; and (iii) to
establish an appropriate compliance
program and support for the operation
of the OMS and reporting
mechanism.1919 The bulk of the costs
resulting from Regulation SBSR derive
from the infrastructure-related costs of
1915 See Regulation SBSR Proposing Release, 75
FR 75267.
1916 See id.
1917 See id.
1918 See id. at 75268.
1919 The Commission’s complete assessment of
the costs associated with proposed Rule 901 of
Regulation SBSR is included in Section XIV.B of
the Regulation SBSR Proposing Release. See id. at
75264–66.
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complying with reporting obligations,
which include establishing and
maintaining the systems necessary to
capture, store, and report transaction
information; the establishment and
maintenance of appropriate policies and
procedures; and employing and training
the necessary compliance personnel.1920
The Commission preliminarily
estimated and continues to believe that
the marginal burden of reporting
additional transactions once a
respondent’s reporting infrastructure
and compliance systems are in place
would be de minimis when compared to
the costs of putting those systems in
place. This is because the only
additional costs of reporting an
individual transaction would be
entering the required data elements into
the firm’s OMS, which could
subsequently deliver the required
transaction information to a registered
SDR. In many cases, particularly with
standardized instruments and
instruments traded electronically,
transaction information could be
generated and maintained in electronic
form, which could then be provided to
a registered SDR through wholly
automated processes.
Re-proposed Rule 901(a) is designed
to reduce the number of instances where
a counterparty that is not a securitybased swap dealer or major securitybased swap participant would bear the
responsibility to report a security-based
swap transaction under Regulation
SBSR. In other words, re-proposed Rule
901(a) is designed to assign the
reporting duty to the larger
counterparties that have greater
resources and operational capability to
carry out the reporting function.
Consequently, re-proposed Rule 901(a)
could result in each reporting
counterparty being required to report,
on average, more security-based swap
transactions than envisioned under the
original proposal, although smaller
unregistered counterparties that
previously would have been required to
report a small number of security-based
swap transactions under the original
proposal would, under re-proposed Rule
901(a), be less likely to have to incur
reporting duties under Regulation SBSR,
and thus less likely to have to incur the
initial infrastructure-related costs of
reporting.1921 The counterparties that
1920 See
id. at 75261–80.
Commission notes, however, that nonreporting sides would be required to provide certain
information about a reportable transaction on a nonreal-time basis. See Rule 906(a), as originally
proposed (requiring reporting, if applicable, of
participant ID, broker ID, desk ID, and trader ID).
See also Regulation SBSR Proposing Release, 75 FR
1921 The
PO 00000
Frm 00230
Fmt 4701
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would continue to have the reporting
duty under re-proposed Rule 901(a)—
primarily security-based swap dealers
and major security-based swap
participants—would have the reporting
duty for nearly all security-based swap
transactions. Security-based swap
dealers and major security-based swap
participants, whether or not they are
U.S. persons, typically have greater
resources and operational capability
than non-registered U.S. counterparties
and are likely to already have the
reporting infrastructure, policies and
procedures, and staff that could be
adapted to carry out the reporting
obligations under Regulation SBSR. The
Commission preliminarily agrees with
certain commenters 1922 that basing the
reporting duty primarily on status as a
security-based swap dealer or major
security-based swap participant rather
than on whether or not the entity is a
U.S. person would, in the aggregate,
reduce costs to the security-based swap
market, as discussed in more detail
below.
In addition, in re-proposing Rule
901(a), the Commission is proposing to
revise the term ‘‘reporting party’’ to
‘‘reporting side.’’ Under the re-proposal,
a reporting side could consist of
multiple entities: the direct
counterparty to the transaction and any
guarantor of the direct counterparty.
Although this has the potential to
increase the number of counterparties
that could incur a duty to report—by
placing such duty on both the direct
counterparty and any indirect
counterparty—the Commission
preliminarily believes that this would
not be the result. The Commission
preliminarily believes instead that, in
practice, large groups that engage in
security-based swaps transactions
would likely centralize the reporting
function for all entities within the group
into a single operational unit. Thus,
even if two counterparties on the
reporting side each incurred the legal
duty under re-proposed Rule 901(a) to
report a security-based swap
transaction, only one entity (either one
of the counterparties itself or one of its
affiliates) would in fact carry out the
reporting function.
Although the Commission
preliminarily estimated that there
75221 (discussing rationale for proposed Rule
906(a)).
1922 See, e.g., DTCC I at 8; ICI Letter at 5; Multiple
Firms Letter at 31. See also Vanguard Letter at 6;
Multiple Firms Letter at 28 (stating that requiring
U.S. end users to report security-based swaps
entered into with non-U.S. person security-based
swap dealers would be unduly burdensome for end
users and could negatively impact the
competitiveness of affected U.S. markets).
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would be 1,000 reporting entities,1923
the Commission is now revising that
estimate to 300.1924 In the original
proposal, the Commission preliminarily
estimated that the initial, aggregate
annualized costs associated with
proposed Rule 901 would be $511,013
per reporting party, and that the ongoing
aggregate annualized costs associated
with proposed Rule 901 would be
$316,116 per reporting party.1925 The
Commission continues to preliminarily
believe that these per-respondent costs
are appropriate. Given the same perrespondent costs—but adjusting for the
decreased estimate of the number of
respondents—the Commission now
preliminarily believes that the total onetime costs of re-proposed Rule 901
would be $153,303,900,1926 and the
annual ongoing costs would be
$94,834,800.1927 The Commission seeks
comment on and data to quantify these
estimated costs.
It is possible that certain smaller
market participants that are currently
active in the security-based swap market
could reduce their trading activity or
exit the market completely, if they
believed the compliance costs of reproposed Regulation SBSR to be too
high. This could result in adverse
impacts on competition if there were
fewer participants competing in the
market. However, the Commission
preliminarily believes that this outcome
would be unlikely, given that the reproposal is designed to further limit the
instances where non-registered U.S.
persons would be required to incur the
infrastructure-related costs of reporting.
The Commission preliminarily believes
instead that, by focusing the reporting
duty more on the status and away from
whether or not entities are U.S. persons,
re-proposed Rule 901(a) would lower
the incentive of non-registered U.S.
persons to reduce their participation in
the market out of fear of incurring the
infrastructure-related costs of complying
with Regulation SBSR.
Furthermore, although the
Commission is now proposing to extend
the reach of the security-based swap
reporting requirements, as described in
re-proposed Rule 908(a), to all
transactions guaranteed by a U.S.
person, the Commission preliminarily
believes that this would not result in a
significant increase in the number of
1923 See Regulation SBSR Proposing Release, 75
FR 75247.
1924 See Section XIV.F.2(d)(ii), supra.
1925 See Regulation SBSR Proposing Release, 75
FR 75266.
1926 The Commission estimates: (300 reporting
counterparties) * $511,013) = $153,303,900.
1927 The Commission estimates: (300 reporting
counterparties) * $316,116) = $94,834,800.
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entities that incur reporting duties. The
Commission preliminarily believes that
organizations that operate through
foreign subsidiaries that are guaranteed
by a U.S. parent are likely to be large
financial institutions that already were
included in the Commission’s estimate
of reporting parties in the Regulation
SBSR Proposing Release. Furthermore,
these organizations are the most likely
to have robust risk management systems
that extend across business units and
across geographic boundaries, and likely
already have a presence in the United
States and currently are engaging in
transactions that they are reporting (on
a voluntary basis) to the DTCC–TIW.
Thus, such entities were included in the
Commission’s initial estimate of
reporting parties in the Regulation SBSR
Proposing Release. Re-proposing Rule
908(a) to require non-U.S. person
security-based swap dealers and major
security-based swap participants to
report all of their transactions to a
registered SDR would likely not impose
any additional infrastructure-related
costs beyond those that were already
assessed in the Regulation SBSR
Proposing Release. However, this aspect
of the re-proposal could impose small
additional costs on a per-reporting
entity basis in the form of having to
report additional transactions using that
existing infrastructure.
The Commission notes that there may
be a small number of entities that are in
the business, or contemplate entering
the business, of guaranteeing securitybased swaps. Such entities may not
have been included in the Commission’s
original analysis of potential reporting
parties, because as indirect
counterparties they may not have
appeared in the TIW’s records as
counterparties. Under re-proposed Rule
908, any U.S. person that guarantees a
security-based swap could incur the
duty to report under re-proposed
Regulation SBSR. However, based on
consultation with market participants,
the Commission preliminarily believes
that the net effect on the number of
reporting sides would be de minimis
and would not impact the Commission’s
revised estimate of 300 reporting
counterparties, discussed above. To the
extent that there could be entities that
act only as an indirect counterparty to
security-based swap transactions and
would not otherwise have been required
to report their security-based swap
transactions, the Commission
preliminarily believes that our estimate
takes these entities into account.
In addition, the Commission
preliminarily believes that there may be
a slight increase in costs for those
reporting counterparties that continue to
PO 00000
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31197
incur the reporting duty, as each such
reporting counterparty would be
required to report, on average, a larger
percentage of the total number of
reportable events than under the initial
proposal. Under re-proposed Rule
901(a), smaller unregistered
counterparties that previously would
have been required to report a small
number of security-based swap
transactions under the original proposal
would, under the re-proposal, be less
likely to incur the reporting duty under
re-proposed Rule 901(a). Under reproposed Rules 901(a) and 908(a)(1)(iii),
non-U.S. person security-based swap
dealers and major security-based swap
participants, rather than unregistered
U.S. persons, would have the reporting
duty for most of these transactions.
Nonetheless, under the re-proposal, the
per-transaction reporting cost should
not change from what was originally
proposed. Moreover, the Commission
preliminarily believes that the
additional cost for non-U.S. person
security-based swap dealers and major
security-based swap participants
absorbing the costs of reporting these
additional transactions should be de
minimis, since these larger market
participants have likely already taken
significant steps to establish and
maintain the systems, processes and
procedures, and staff resources to report
security-based swap transactions to
existing data repositories.
In the Regulation SBSR Proposing
Release, the Commission preliminarily
estimated that 1,000 reporting parties
would be required to report
approximately 15.5 million securitybased swap transactions at a total cost,
exclusive of the infrastructure-related
costs, of approximately $5,400,000.1928
The Commission preliminarily believes
that nothing in the re-proposal would
affect the initial estimate of the cost of
an individual reportable event.
However, the Commission now is
revising our assumptions about the
number of reportable events covered by
re-proposed Regulation SBSR. Since
issuing the Regulation SBSR Proposing
Release, the Commission has obtained
additional and more granular data
regarding participation in the securitybased swap market from DTCC–TIW.
These historical data suggest that the
Commission overestimated the number
of security-based swap transactions that
would be subject to regulatory reporting
in the future. As a result, the
Commission now estimates that 300
reporting counterparties would be
required to report approximately 5
1928 See Regulation SBSR Proposing Release, 75
FR 75265.
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million security-based swap
transactions per year.1929
As discussed in the PRA section
above, the Commission now
preliminarily estimates that each
reporting side would incur, on average,
a burden of 83.3 hours per year—not
including any infrastructure-related
costs—to report individual securitybased swap transactions to a registered
SDR.1930 In the Regulation SBSR
Proposing Release, the Commission
estimated that each reporting party
would spend $5,400 to report specific
security-based swap transactions to a
registered SDR as required by proposed
Rule 901.1931 Given the Commission’s
revised estimate of the number of
reportable events per year, the
Commission also now preliminarily
estimates that each reporting side
would, on average, incur costs of $5,630
to report specific security-based swap
transactions and life cycle events to a
registered SDR.1932
The Commission further notes two
factors that could serve to limit the pertransaction costs across all affected
entities. First, to the extent that securitybased swap instruments become more
standardized and trade more frequently
on electronic platforms (rather than
manually), the act of reporting
transactions to a registered SDR should
become less costly. Together, these
trends are likely to reduce the number
of transactions that would necessitate
the manual capture of bespoke data
1929 Data provided by the DTCC–TIW indicate
that there were approximately 4,000,000
transactions in single-name CDS in 2012. The
Commission believes that the single-name CDS data
are sufficiently representative of the security-based
swap market. See Section XV.B.2 and note 1301 and
accompanying text, supra. The Commission
believes that single-name CDS transactions account
for 82% of the security-based swap market. As a
result, the Commission preliminarily estimates that
there were 4.88 million (i.e., 4,000,000/0.82)
security-based swap transactions in 2012, and is
basing its estimate of the future number of
transactions on recent historical activity.
1930 The Commission estimates: (5 million *
0.005)/(300 reporting sides) = 83.3 burden hours per
reporting counterparty, or 25,000 total burden hours
for all reporting counterparties.
1931 See Regulation SBSR Proposing Release, 75
FR 75265. In arriving at this figure, the Commission
preliminarily estimated that 1,000 reporting parties
would be responsible for reporting 15,458,824
security-based swap transactions at a total cost of
approximately $5,400,000. The Commission is not
revising its initial estimate of the average cost of
reporting an individual security-based swap
transactions. However, the Commission now
estimates that approximately 300 reporting sides
will have the duty to report approximately 5
million security-based swap transactions per year.
1932 The Commission estimates: ((Compliance
Clerk (41.7 hours) at $59 per hour) + (Sr. Computer
Operator (41.7 hours) at $76 per hour)) * 300
reporting sides = $1,688,850 for all reporting sides,
or $5,630 per reporting side. See also note 1270,
supra.
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elements, which is likely to take more
time and be more expensive than
electronic capture. Second, the larger
entities that would incur additional
reporting duties under re-proposed
Rules 901(a) and 908(a)(1)(iii)—i.e.,
non-U.S. person security-based swap
dealers and major security-based swap
participants—can benefit from certain
economies of scale in carrying out
reporting duties might elude smaller,
unregistered counterparties. The
Commission preliminarily believes that,
all other things being equal, a larger
reporting counterparty is likely to
handle a greater number of reportable
events, including those requiring
manual data capture, than a smaller
counterparty and thus would develop
greater expertise and greater speed in
reporting transactions. Moreover, a
larger reporting counterparty is likely to
have greater incentive and ability to
develop systems that support the
reporting function, and the fixed cost of
this infrastructure can be spread across
the larger number of transactions
handled by the larger counterparty. The
extent of these effects, however, is
difficult to quantify. The Commission
seeks comments on the extent of these
effects and their impact on average pertransaction reporting costs.
The Commission preliminarily
believes that re-proposed Rule 901(a)
would not increase the previously
estimated costs for registered SDRs. The
Commission preliminarily believes,
rather, that the estimated costs for
registered SDRs might be less than the
original estimate, for two reasons. First,
given that the Commission now
estimates that there would be fewer
entities incurring the duty to report (300
rather than the original estimate of
1,000), there would be fewer entities
that would have to establish linkages to
a registered SDR and thus fewer
relationships for a registered SDR to
manage. Second, given the
Commission’s reduced estimates of the
number of reportable events, the
Commission preliminarily believes that
registered SDRs could face slightly
lower costs because they would have
fewer transactions to process than
originally estimated. The extent of these
effects, however, is difficult to quantify.
The Commission seeks comments on the
extent of these effects and their impact
on average per-transaction costs.
Finally, the Commission has no reason
to believe and sees no reason to expect
that re-proposed Rules 901(a) and
908(a)(1)(iii) would result in the
registration of additional SDRs. Thus,
given any fixed costs than any entity
registering as a registered SDR might
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incur under re-proposed Regulation
SBSR, the Commission is not increasing
our cost estimates to account for a larger
number of entities anticipated to incur
those per-entity costs.
Furthermore, the Commission
preliminarily believes that extending
the scope of transactions that would be
subject to public dissemination, as
reflected in re-proposed Rules 908(a)(2)
and 902(a), would not significantly
increase or decrease the previously
estimated costs for registered SDRs
identified in the Regulation SBSR
Proposing Release. The Commission
preliminarily believes that these
revisions would not result in the
registration of additional SDRs or
require them to bear the costs of
connecting to additional reporting sides.
Even if there would be a slight increase
in the percentage of security-based swap
transactions subject to public
dissemination as a result of the
applicability of the re-proposed
Regulation SBSR to a larger universe of
transactions involving non-U.S. entities
and/or U.S. indirect counterparties,
given the Commission’s reduced
estimates of the overall number of
reportable events,1933 the Commission
now estimates that registered SDRs
would be required to publicly
disseminate fewer transactions than
estimated in the Regulation SBSR
Proposing Release. The Commission
further notes that our original estimate
of the costs of public dissemination was
not calculated on a per-transaction
basis, but represented instead the onetime aggregate estimated costs
associated with development and
implementation of the necessary
infrastructure, as well as the aggregate
annual estimated costs for supporting
and upgrading that infrastructure as
necessary.1934
The Commission continues to believe
that the preliminary estimates contained
in the Regulation SBSR Proposing
Release are valid, and that
implementing and complying with the
real-time public dissemination
requirement of Rule 902 would add
20% to the start-up and ongoing
operational expenses that would
otherwise be required of a registered
SDR.1935 In particular, the Commission
continues to estimate that the initial
one-time aggregate costs for
development and implementation of the
systems needed to disseminate the
required transaction information would
1933 See
1934 See
notes 1267–1268, supra.
Regulation SBSR Proposing Release, 75
FR 75269.
1935 See SDR Proposing Release, 75 FR 77354–64.
See also Regulation SBSR Proposing Release, 75 FR
75269.
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be $40,004,000, which corresponds to
$4,000,400 per registered SDR. Further,
the Commission continues to estimate
that aggregate annual costs for systems
and connectivity upgrades associated
with real-time public dissemination
would be $24,002,400, which
corresponds to $2,400,240 per registered
SDR. Thus the initial aggregate costs
associated with proposed Rule 902 are
estimated to be $64,006,400, which
corresponds to $6,400,640 per registered
SDR.
Request for Comment
The Commission requests comment
on the costs and benefits of re-proposed
Rules 901, 902, and 908(a) discussed
above, as well as any costs and benefits
not already described that could result.
The Commission also requests data to
quantify any potential costs or benefits.
In addition, the Commission requests
comment on the following:
• How can the Commission more
accurately assess the costs and benefits
of re-proposed Rule 901?
• How many entities would be
affected by re-proposed Rule 901? How
many transactions would be subject to
re-proposed Rule 901?
• Are there additional costs involved
in complying with re-proposed Rule 901
that have not been identified? What are
the types and amounts of those costs?
• Do the reporting requirements in reproposed Rule 901(a), by potentially
placing the duty to report upon a
security-based swap dealer or major
security-based swap participant that is
not a U.S. person, mitigate any barrier
to entry that Rule 901, as originally
proposed, might have created? How can
this benefit or reduction in potential
cost be tabulated?
• How should the Commission assess
the benefits and costs associated with
re-proposed Rule 901(a), if any,
compared to the anticipated benefits
from increased transparency to the
security-based swap market from the reproposal?
• Would there be additional benefits
or costs of re-proposed Rule 901, 902,
and 908(a) that have not been
identified?
• Are there methods to minimize the
costs associated with re-proposed Rule
908(a)?
• Would re-proposed Rule 908(a)
create any additional costs not
discussed here? If so, please identify
and quantify these costs.
• Is the Commission’s revised
estimate of the number of transactions
subject to Regulation SBSR accurate? If
not, how many transactions would be
impacted by re-proposed Regulation
SBSR? Please provide detailed
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information on the number and types of
transactions impacted.
• Would re-proposed Rule 902 result
in benefits or costs that the Commission
has not considered? Are the
Commissions estimates of the costs and
benefits of re-proposed Rule 902
accurate? If not, please provide detailed
information identifying and quantifies
the costs and benefits of re-proposed
Rule 902.
(b) Proposed Modification of the
Definition of ‘‘U.S. Person’’
Regulation SBSR, as originally
proposed, would have defined a ‘‘U.S.
person’’ as ‘‘a natural person that is a
U.S. citizen or U.S. resident or a legal
person that is organized under the
corporate laws of any part of the United
States or has its principal place of
business in the United States.’’ In this
re-proposal, the Commission is
proposing a new definition of ‘‘U.S.
person’’ that is consistent with usage in
our other Title VII proposals.1936 The
Commission preliminarily believes that
these Title VII rules would benefit from
having the same terms throughout and
could, therefore, reduce assessment
costs for market participants that might
be subject to the proposed rules.
Furthermore, the Commission
preliminarily believes that the revised
definition of ‘‘U.S. person’’ is intended
to clarify application of Regulation
SBSR and would not significantly
change the number of entities that
would be subject to Regulation SBSR.
The Commission preliminarily believes
that the revised definition of ‘‘U.S.
person’’ would not entail any material
costs to market participants, nor would
it intrinsically impose any obligation or
duty on market participants. Therefore,
the Commission preliminarily believes
that the new definition would not
increase the aggregate compliance costs
of re-proposed Regulation SBSR.
Request for Comment
The Commission requests comment
on the costs and benefits of the reproposed definition of ‘‘U.S. person’’ as
used in re-proposed Regulation SBSR,
and data to support those comments. In
particular, the Commission requests
comment on the following:
• Would the re-proposed definition of
‘‘U.S. person’’ as used in Regulation
SBSR result in any costs or benefits not
discussed here? Please distinguish any
costs and benefits stemming from the reproposed definition itself, rather than
any costs or benefits attributable to
1936 Specifically, the re-proposed definition
provides that the term ‘‘U.S. person’’ would have
the same meaning as set forth in proposed Rule
3a71–3(a)(7) under the Exchange Act.
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31199
other provisions of Regulation SBSR in
which the term appears, such as reproposed Rules 901, 902, and 908(a).
(c) Revisions to Proposed Rule 908(b)
i. Initial Proposal
Rule 908(b), as initially proposed,
attempted to clarify when reporting
duties would be imposed on
counterparties of security-based swaps
that are not U.S. persons when some
connections to the United States might
be present. Proposed Rule 908(b)
provided that no duties would be
imposed on a counterparty unless one of
the following conditions were true:
• The counterparty is a U.S. person;
• The security-based swap is
executed in the United States or through
any means of interstate commerce; or
• The security-based swap is cleared
through a clearing agency having its
principal place of business in the
United States.
ii. Re-proposal
As described above, the Commission
now believes, in light of other revisions
being made to Regulation SBSR, that
certain conforming revisions to Rule
908(b) are appropriate. Specifically,
Rule 908(b) is being re-proposed to
account for the possibility that a nonU.S. person security-based swap dealer
or major security-based swap
participant could incur a duty to report.
In addition, the ‘‘interstate commerce
clause’’ is being replaced with the new
concept of a ‘‘transaction conducted
within the United States.’’
a. Programmatic Benefits
The Commission now preliminarily
believes that there are benefits to
requiring all security-based swap
dealers and major security-based swap
participants, whether or not they are
U.S. persons, to report their securitybased swap transactions pursuant to reproposed Regulation SBSR. Having
access to security-based swaps of all
such entities through data reported to a
registered SDR would give the
Commission greater ability to supervise
such entities and assess the overall
security-based swap market.
Furthermore, requiring all such entities
to report security-based swap
information would help provide the
Commission and other regulators with
detailed, up-to-date information both
about positions of particular entities and
financial groups, as well as positions
held by multiple market participants in
particular instruments.
b. Programmatic Costs
The Commission preliminarily
believes that the revisions to Rule 908(b)
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would not result in any significant
increase in the overall cost of
compliance for affected entities. The
Commission preliminarily believes,
rather, that many unregistered U.S.
persons that participate in the securitybased swap market would face lower
costs, as they could be more likely to
avoid entirely having to incur the
infrastructure-related costs of reporting
security-based swap transactions.
Furthermore, to the extent that non-U.S.
person security-based swap dealers and
major security-based swap participants
would be required to report securitybased swap transactions, such entities
were already included in the estimate of
1,000 reporting parties used in the
Regulation SBSR Proposing Release and
are also included in the new estimate of
300 reporting sides becoming subject to
re-proposed Regulation SBSR. Although
the number of security-based swap
transactions that these reporting sides
would be required to report would
increase, the Commission preliminarily
does not believe that they would be
required to expand their systems
capabilities to account for the additional
transaction volume.
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Request for Comment
The Commission requests comment
on the costs and benefits of re-proposed
Rule 908(b) and data to assess any
potential costs or benefits. In addition,
the Commission requests comment on
the following:
• Would re-proposed Rule 908(b)
result in any benefits or costs that the
Commission has not considered?
• Are there methods to minimize the
costs associated with re-proposed Rule
908(b)?
• Would re-proposed Rule 908(b)
create any additional costs not
discussed here? If so, please identify
and quantify these costs.
(d) Other Technical Revisions in ReProposed Regulation SBSR
In addition to the revisions described
above, the Commission is re-proposing
certain technical or conforming changes
to other rules contained in Regulation
SBSR. Specifically, certain changes are
required to re-proposed Rules 901(c)
and 901(d), which address the data
elements to be reported to a registered
SDR, to reflect the re-proposal’s
approach that certain security-based
swaps may be subject to regulatory
reporting but not public dissemination.
The introductory language to Rule
901(c) is being re-proposed as follows:
‘‘For any security-based swap that must
be publicly disseminated pursuant to
§§ 242.902 and 242.908 and for which it
is the reporting side, the reporting side
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shall report the following information in
real time. If a security-based swap is
required by §§ 242.901 and 242.908 to
be reported but not publicly
disseminated, the reporting side shall
report the following information no later
than the time that the reporting side is
required to comply with paragraph (d)
of this section:’’ Re-proposed Rule
901(c) would be retitled ‘‘Primary trade
information’’—since not all information
reported pursuant to Rule 901(c) would
be required to be provided in real
time—and re-proposed Rule 901(d)
would be retitled ‘‘Secondary trade
information.’’ The Commission also is
re-proposing Rule 901(c)(10) as follows:
‘‘If both sides of the security-based swap
include a security-based swap dealer, an
indication to that effect.’’ The reproposed rule clarifies that a securitybased swap dealer might be a direct or
indirect counterparty to a security-based
swap. Rule 901(d)(1)(ii) is also being reproposed to require reporting of the
broker ID, desk ID, and trader ID, as
applicable, only of the direct
counterparty on the reporting side. Rule
901(d)(1)(iii) is being re-proposed to
require reporting of a description of the
terms and contingencies of the payment
streams only of each direct counterparty
to the other. The word ‘‘direct’’ is
necessary to avoid extending Rule
901(d)(1)(iii) to indirect counterparty
relationships, where payments might
not (except in unusual circumstances)
flow to or from an indirect counterparty.
Additional technical or conforming
revisions include changes to Rule
901(e), which sets forth provisions for
reporting life cycle events of a securitybased swap. The Commission is reproposing Rule 901(e) to provide that
the duty to report would switch to the
other side only if the new side did not
include a U.S. person (as in the
originally proposed rule) or a securitybased swap dealer or major securitybased swap participant (references to
which are being added to Rule 901(e)).
Re-proposed Rule 908 contemplates
situations where a security-based swap
would be required to be reported to a
registered SDR but not publicly
disseminated. Therefore, the
Commission is re-proposing Rule 902(a)
to provide that a registered SDR would
have no obligation to publicly
disseminate a transaction report for any
such security-based swap.
Re-proposed Rules 903, 905, 906, 907,
910, and 911 are each conformed to
incorporate the use of the term ‘‘side,’’
while re-proposed Rules 904, 905, 906,
and 907 each replace ‘‘§§ 242.900
through 242.911’’ with ‘‘§§ 242.900–
911.’’
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Rule 905(b)(2) is being re-proposed to
clarify that, if a registered SDR receives
corrected information relating to a
previously submitted transaction report,
it would be required to publicly
disseminate a corrected transaction
report only if the initial security-based
swap was subject to public
dissemination.
As originally proposed, Rule 907(a)(6)
would require a registered SDR to
establish and maintain written policies
and procedures ‘‘[f]or periodically
obtaining from each participant
information that identifies the
participant’s ultimate parent(s) and any
other participant(s) which the
counterparty is affiliated, using ultimate
parent IDs and participant IDs.’’ The
Commission now is re-proposing Rule
907(a)(6) with the word ‘‘participant’’ in
place of the word ‘‘counterparty.’’
Rule 910(b)(4), as originally proposed,
would provide that, in Phase 4 of the
Regulation SBSR compliance schedule,
‘‘[a]ll security-based swaps reported to
the registered security-based swap data
repository shall be subject to real-time
public dissemination as specified in
§ 242.902.’’ As noted above, certain
security-based swaps would be subject
to regulatory reporting but not public
dissemination. Therefore, the
Commission is re-proposing Rule
910(b)(4) to provide that, ‘‘All securitybased swaps received by the registered
security-based swap data repository
shall be handled consistent with
§§ 242.902, 242.905, and 242.908.’’
Because the changes discussed above
are technical in nature, the Commission
preliminarily believes that they would
not have any significant impact,
negative or positive, on re-proposed
Regulation SBSR. Nonetheless, the
Commission preliminarily believes that,
to the extent these changes clarify the
application of certain aspects of
Regulation SBSR, they could enhance
consistency, reduce potential
uncertainties related to the
interpretation and application of
Regulation SBSR, and thus reduce
assessment costs. The Commission
solicits comment on that preliminary
view.
(e) Aggregate Total Quantifiable Costs
Based on the foregoing, the
Commission preliminarily estimates
that re-proposed Regulation SBSR
would impose an estimated total firstyear cost of approximately $511,243 1937
1937 The Commission derived its estimate from
the following: ($511,013 (per entity total first-year
cost of Regulation SBSR)—($5,400 (entity
transaction reporting cost of Regulation SBSR)—
$5,630 (revised reporting side transaction reporting
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per reporting counterparty for a total
first-year cost of $153,372,900.1938 The
Commission preliminarily estimates
that re-proposed Regulation SBSR
would impose ongoing annualized
aggregate costs of approximately
$316,346 1939 per reporting side, for a
total aggregate annualized cost of
$94,903,800.1940
As noted above, the Commission
preliminarily believes that re-proposed
Regulation SBSR would not
significantly change the costs of
registered SDRs, as estimated in the
Regulation SBSR Proposing Release.
The Commission preliminarily believes
that the revisions contained in reproposed Rules 901, 902, and 908(a)
would not result in the registration of
additional SDRs or require them to bear
the costs of connecting to additional
reporting sides. To the extent that the
re-proposal would assign reporting
responsibilities to fewer respondents,
registered SDRs could face lower costs
to support their connectivity.
In total, the Commission preliminarily
estimates the total first-year cost of reproposed Regulation SBSR to be
$681,307,400.1941 The Commission
preliminarily estimates the total ongoing
annual cost of re-proposed Regulation
SBSR to be $481,935,340.1942 The
compliance costs attributable to reproposed Regulation SBSR could be
significantly reduced to the extent that
foreign jurisdictions are deemed
comparable in a substituted compliance
order, which would enable market
participants to comply with the foreign
jurisdiction’s rules relating to regulatory
reporting and public dissemination and
thus would relieve them of their
cost))) = $511, 243. See notes 1908, 1931, and 1932
and accompanying text, supra.
1938 The Commission derived its estimate from
the following: ($511,243 * 300 reporting sides) =
$153,372,900.
1939 The Commission derived its estimate from
the following: ($316,116 (per entity annualized cost
of Regulation SBSR)—($5,400 (entity transaction
reporting cost of Regulation SBSR)—$5,630 (revised
reporting side transaction reporting cost))) =
$316,346. See notes 1909, 1931, and 1932 and
accompanying text, supra.
1940 The Commission derived its estimate from
the following: ($316,346 * 300 reporting sides) =
$94,903,800.
1941 The Commission derived its estimate from
the following: ($1,038,947,500 (total first-year cost
of Regulation SBSR)—$511,013,000 (Regulation
SBSR Rule 901 first-year costs on reporting parties)
+ $153,372,900 (re-proposed Regulation SBSR Rule
901 first-year costs on reporting sides)) =
$681,372,900.
1942 The Commission derived its estimate from
the following: ($703,147,540 (total ongoing
annualized cost of Regulation SBSR)—$316,116,000
(Regulation SBSR Rule 901 annual ongoing costs on
reporting sides) + $94,903,800 (re-proposed
Regulation SBSR Rule 901 annual ongoing costs on
reporting sides)) = $481,935,340.
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primary obligations—and the associated
costs—under Regulation SBSR.
I. Economic Analysis of Substituted
Compliance
The Commission is proposing a policy
and procedural framework that would
allow for the possibility of substituted
compliance with respect to four
categories of rules in recognition of the
potential, in a market as global as the
security-based swap market, for
security-based swap market participants
to be subject to conflicting or
duplicative compliance obligations.
These four categories are: (i)
Requirements applicable to registered
security-based swap dealers in Section
15F of the Exchange Act and the rules
and regulations thereunder; (ii)
requirements relating to regulatory
reporting and public dissemination of
security-based swaps; (iii) requirements
relating to clearing for security-based
swaps; and (iv) requirements relating to
trade execution for security-based
swaps.1943 Specifically, the Commission
is proposing rules and interpretative
guidance in this release to provide that:
(i) The Commission may, conditionally
or unconditionally, by order, make a
substituted compliance determination
with respect to a foreign regulatory
system that compliance with specific
requirements under such foreign
regulatory system by a registered foreign
security-based swap dealer (or class
thereof) may satisfy the corresponding
requirements in Section 15F of the
Exchange Act,1944 and the rules and
regulations thereunder, that would
otherwise apply to such foreign
security-based swap dealer (or class
thereof); 1945 (ii) the Commission may,
conditionally or unconditionally, by
order, make a substituted compliance
determination regarding regulatory
reporting and public dissemination of
security-based swaps in a foreign
jurisdiction if such foreign jurisdiction’s
requirements for the regulatory
reporting and public dissemination of
security-based swaps are comparable to
otherwise applicable requirements
under Section 13A(a)(1) of the Exchange
Act,1946 Section 13(m)(1)(G) of the
Exchange Act 1947 and Section
13(m)(1)(C) of the Exchange Act,1948 and
the rules and regulations
1943 See Section XI, supra (providing detailed
discussions of substituted compliance).
1944 15 U.S.C. 78o–10.
1945 See proposed Rule 3a71–5 under the
Exchange Act, as discussed in Section XI.C, supra.
1946 15 U.S.C. 78m–1(a)(1).
1947 15 U.S.C. 78m(m)(1)(G).
1948 15 U.S.C. 78m(m)(1)(C).
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31201
thereunder; 1949 (iii) the Commission
may exempt persons from the
mandatory clearing requirement in
Section 3C(a)(1) of the Exchange Act 1950
if the relevant security-based swap
transaction is submitted to a foreign
clearing agency that is the subject of a
substituted compliance determination
by Commission order; 1951 and (iv) the
Commission may, conditionally or
unconditionally, by order, make a
substituted compliance determination
with respect to a foreign jurisdiction to
permit a person subject to the
mandatory trade execution requirement
in Section 3C(h) of the Exchange Act to
execute such transaction, or have such
transaction executed on their behalf, on
a security-based swap market (or class
of markets) that is neither registered
under the Exchange Act nor exempt
from registration under the Exchange
Act if the Commission determines that
such security-based swap market (or
class of markets) is subject to
comparable, comprehensive supervision
and regulation by a foreign financial
regulatory authority or authorities in
such foreign jurisdiction.1952
1. Programmatic Benefits and Costs
The Commission recognizes that the
programmatic costs and benefits of
substituted compliance may vary
depending on the specific nature of a
particular substituted compliance
determination. If the Commission
imposes conditions on a substituted
compliance determination, such
conditions may have effects on the
programmatic costs and benefits. The
proposed rules and interpretive
guidance regarding substituted
compliance described above provide
that the Commission would only make
a determination that substituted
compliance is permitted if the foreign
regulatory system in a particular area,
taking into consideration any relevant
principles, regulations, or rules in other
areas of the foreign regulatory system to
the extent they are relevant to the
analysis, achieves the regulatory
outcomes that are comparable to the
regulatory outcomes of the relevant
provisions of the Exchange Act.
The Commission preliminarily
believes that substituted compliance
would not substantially change the
programmatic benefits intended by the
requirements in Section 15F of the
Exchange Act, the programmatic
benefits intended by the regulatory
1949 See proposed Rule 908(c)(2) under the
Exchange Act, as discussed in Section XI.D, supra.
1950 15 U.S.C 78c–3(a)(1).
1951 See Section XI.E, supra.
1952 See proposed Rule 3Ch–2(b)(1) under the
Exchange Act, as discussed in Section XI.F, supra.
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reporting and public dissemination
requirements in Section 13(m)(1)(G),
Section 13(m)(1)(C), and Section
13A(a)(1) of the Exchange Act, the
programmatic benefits intended by the
mandatory clearing requirement in
Sections 3C(a)(1) of the Exchange Act,
or the programmatic benefits intended
by the mandatory trade execution
requirement set forth in Section 3C(h) of
the Exchange Act. To the extent that
substituted compliance eliminates
duplicative compliance costs, registered
foreign security-based swap dealers or
market participants entering into
security-based swap transactions that
are eligible for substituted compliance
may incur lower programmatic costs
associated with implementation or
compliance with the specified Title VII
requirements than they would otherwise
incur without the option of substituted
compliance available, either because
such registered foreign security-based
swap dealers may have implemented or
begun to implement the foreign
regulatory requirements that are
determined comparable by the
Commission, or because parties to a
security-based swap transaction eligible
for substituted compliance
determination do not need to duplicate
compliance with two sets of comparable
requirements.
In the case of a substituted
compliance determination made with
Commission-imposed conditions in
order to achieve comparable
programmatic benefits intended by the
applicable Title VII requirements, we
cannot preclude the possibility that
substituted compliance may increase
programmatic costs because market
participants would be required to incur
costs to satisfy those conditions. On the
other hand, substituted compliance also
may enable certain foreign market
participants subject to comparable
foreign regulation to enter or stay in the
U.S. security-based swap market. These
are participants that would, due to
conflicting local laws, otherwise not be
able to participate under Title VII
regulation in the absence of substituted
compliance. In such cases, substituted
compliance may either increase the
number of market participants in the
U.S. security-based swap market or
prevent certain existing market
participants from exiting the market,
thereby contributing to the
programmatic benefits and costs that
flow from Title VII requirements.
The decision to request substituted
compliance is purely voluntary. Market
participants would choose to make a
request for a substituted compliance
determination only if, in their own
assessment, compliance with applicable
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requirements under a foreign regulatory
system were less costly than compliance
with both the foreign regulatory regime
and the relevant Title VII requirement.
Even after a substituted compliance
determination is made, market
participants would only choose
substituted compliance if the private
benefits they expect to receive from
participating in U.S. markets exceeds
the private costs they expect to bear,
including any conditions the
Commission may attach to the
substituted compliance determination.
Therefore, the proposed rules regarding
substituted compliance are based on the
consideration that the net programmatic
benefits associated with specific Title
VII requirements could be increased by
the Commission making the substituted
compliance option available. Where
substituted compliance increases the
number of market participants in the
U.S. security-based swap market or
prevents existing participants from
leaving the U.S. security-based swap
market, there may be contributions to
both programmatic benefits and costs
associated with the applicable Title VII
requirements.
2. Alternatives
The Commission could have proposed
that substituted compliance
determinations with respect to
regulatory reporting, public
dissemination and mandatory trade
execution apply to all cross-border
transactions involving at least one
foreign counterparty or foreign branch
of a U.S. bank. However, we propose in
Rule 908(c)(2), the interpretive guidance
regarding substituted compliance with
the mandatory clearing requirement,
and Rule 3Ch–2(b)(1) that substituted
compliance would not be available to a
security-based swap transaction that
involves persons within the United
States in executing, soliciting or
negotiating the terms of such transaction
on both sides of a transaction, even
though at least one counterparty to the
transaction is a non-U.S. person or
foreign branch.1953 In other words, if
both counterparties to a security-based
swap transaction conduct such
transaction within the United States, it
is a transaction in the United States.
One of the primary objectives of making
substituted compliance available to
cross-border security-based swap
transactions is to accommodate the
global nature of the security-based swap
1953 See proposed Rule 908(c)(2) under the
Exchange Act, interpretive guidance regarding
substituted compliance with the mandatory clearing
requirement, and proposed Rule 3Ch–2(b)(1) under
the Exchange Act, as discussed in Section XI.D–
XI.F, supra.
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market and cross-border security-based
swap activity. In circumstances where
both parties to a security-based swap are
transacting in the United States, either
from a U.S. office or U.S. branch, or
using an affiliate or agent, to conduct
the security-based swap, we do not
believe that substituted compliance
would be necessary or appropriate. Both
parties (or their respective agents) to the
transaction are conducting a transaction
in the United States and should be able
to satisfy the applicable Title VII
requirements by reporting the
transaction to a registered SDR or
executing the transaction on a registered
exchange of SB SEF in the United States
without the need to rely on substituted
compliance. In addition, because both
parties (or their respective agents) are
conducting a transaction in the United
States, there is a strong public interest
to subject such transaction to the Title
VII mandatory execution, regulatory
reporting, and public dissemination
requirements. Therefore, the
Commission does not believe that it
would be appropriate to provide
substitute compliance with respect to a
transaction where both parties (or their
agents) conduct the transaction within
the United States.
3. Assessment Costs
The assessment costs associated with
the proposed rules regarding substituted
compliance would, in part, flow from
the assessment of whether a registered
security-based swap dealer is a foreign
security-based swap dealer and whether
a transaction counterparty is a non-U.S.
person or a foreign branch and whether
a transaction involves a person within
the United States in soliciting,
negotiating, or execution. The status of
a foreign security-based swap dealer
would be determined by analyzing the
U.S. person definition, which may be
done by an in-house counsel reviewing
readily ascertainable information, such
as the foreign security-based swap
dealer’s certificate of incorporation or
formation or other internal documents
evidencing residence, place of
incorporation, or principal business
location. The Commission preliminarily
believes that the cost involved in
making such assessment should not
exceed one hour of in-house counsel’s
time or $379.1954
1954 Based upon data from SIFMA’s Management
& Professional Earnings in the Securities Industry
2012 (modified by the SEC staff to account for an
1800-hour-work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits,
and overhead), the staff estimates that the average
national hourly rate for an in-house attorney is
$379.
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The assessment costs associated with
proposed Rule 908(c), proposed
interpretive guidance with respect to
substituted compliance with the
mandatory clearing requirement, and
proposed Rule 3Ch–2(c)(2)(ii) would
involve costs of determining a
transaction counterparty’s U.S. person
status, as well as determining whether
counterparty conducts the securitybased swap in the United States or
involves any persons in the United
States to solicit, negotiate or execute a
security-based swap transaction.
The Commission preliminarily
believes that market participants would
likely incur costs arising from the need
to identify and maintain records
concerning the U.S.-person status of
their counterparties and the location of
their transactions. We anticipate that
potential applicants for substituted
compliance are likely to request
representations from their transaction
counterparties to determine the
counterparties’ U.S.-person status and
whether the transaction was conducted
within the United States. Therefore, the
Commission preliminarily believes that
the assessment costs associated with
determining the status of counterparties
and the location of transactions should
be primarily one-time costs of
establishing a practice or compliance
procedure of requesting and collecting
representations from trading
counterparties and maintaining the
representations collected as part of the
recordkeeping procedures and limited
ongoing costs associated with requesting
and collecting representations.
Consistent with the analysis of the
assessment costs associated with the de
minimis exception relating to the
security-based swap dealer definition
that involves determining the status of
counterparties and the location of
transactions,1955 the Commission
preliminarily believes that such onetime costs would be approximately
$15,160.1956 The Commission
preliminarily believes that requesting
and collecting representations would be
part of the standardized transaction
process reflected in the policies and
1955 See
Section XV.D.2(a), supra.
estimate is based on estimated 40 hours
of in-house legal or compliance staff’s time to
establish a procedure of requesting and collecting
representations from trading counterparties, taking
into account that such representation may be built
into form of standardized trading documentation.
Based upon data from SIFMA’s Management &
Professional Earnings in the Securities Industry
2012 (modified by the SEC staff to account for an
1800-hour-work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits,
and overhead), the staff estimates that the average
national hourly rate for an in-house attorney is
$379.
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1956 This
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procedures regarding security-based
swap sales and trading practices and
should not result in separate assessment
costs.1957 To the extent that market
participants have incurred costs relating
to similar or same assessments with
respect to the counterparty status and
location of the transactions for other
Title VII requirements, their assessment
costs with respect to substituted
compliance may be less.
In addition, a registered securitybased swap dealer or a security-based
swap transaction eligible for a
substituted compliance determination
would incur costs in submitting a
request to the Commission for a
substituted compliance determination.
The Commission preliminarily
estimates the costs of submitting such
request pursuant to proposed Rule
3a71–5(c), proposed Rule 908(c),
proposed interpretive guidance with
respect to substituted compliance with
the mandatory clearing requirement, or
proposed Rule 3Ch–2(c)(2)(ii) would be
approximately $110,320.1958 Once such
1957 There will be ongoing costs associated with
processing representations received from
counterparties, including additional due diligence
and verification to the extent that a counterparty’s
representation is contrary to or inconsistent with
the knowledge of the collecting party. The
Commission believes that these would be
compliance costs encompassed within the
programmatic costs associated with substituted
compliance.
1958 This estimate is based on information
indicating that the average costs associated with
preparing and submitting an application to the
Commission for a Commission order for exemptive
relief under Section 36 of the Exchange Act in
accordance with the procedures set forth in 17 CFR
240.0–12. The Commission recognizes that a
substituted compliance determination request made
pursuant to proposed Rule 3a71–5(c), proposed
Rule 908(c), proposed interpretive guidance with
respect to substituted compliance with the
mandatory clearing requirement, and proposed Rule
3Ch-2(c)(2)(ii) would be made under proposed Rule
0–13 under the Exchange Act, which establishes
procedures similar to those used by the
Commission in considering exemptive order
applications under Section 36 of the Exchange Act.
The staff estimates that costs associated with a
request pursuant to these proposed rules would be
approximately $110,320. The Commission estimates
that preparation of the request would require
approximately 80 hours of in-house counsel time
and 200 hours of outside counsel time. Such
estimate takes into account the time required to
prepare supporting documents necessary for the
Commission to make a substituted compliance
determination, including, without limitation,
information regarding applicable requirements
established by the foreign financial regulatory
authority or authorities, as well as the methods
used by the foreign financial regulatory authority or
authorities to monitor compliance with these rules.
Based upon data from SIFMA’s Management &
Professional Earnings in the Securities Industry
2012 (modified by the SEC staff to account for an
1800-hour-work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits,
and overhead), the staff estimates that the average
national hourly rate for an in-house attorney is
$379. The Commission estimates the costs for
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31203
request is made, however, other market
participants that seek to request a
substituted compliance determination
with respect to the same area of a
foreign regulatory system relevant to the
requirements in Section 15F or
regulatory reporting and public
dissemination, the same foreign clearing
agency, or the same foreign regulatory
regime that a foreign exchange or SB
SEF is subject to, would be able to rely
on the Commission’s substituted
compliance determination. Accordingly,
the assessment costs would only need to
be incurred once with respect to the
same area of a foreign regulatory system
or the same foreign clearing agency.
Request for Comment
The Commission seeks comment on
the costs and benefits associated with
substituted compliance in all aspects.
Responses that are supported by data
and analysis provide great assistance to
the Commission in considering the
benefits and costs of the substituted
compliance policy framework. In
addition, the Commission seeks
comment on the following specific
questions:
• Would substituted compliance
reduce costs associated with the
applicable Title VII requirements?
Would the analysis of the benefits and
costs of substituted compliance differ
between the case of regulatory
duplication or overlap and the case of
regulatory conflict?
• Does a substituted compliance
determination based on comparability
achieve the same benefits intended by
Title VII? Could there be significant
economic consequences if the
Commission permitted substituted
compliance in cases in which the
foreign requirements are not identical,
but, as contemplated, only comparable
to the applicable Title VII requirements?
What would those effects be? In cases
where substituted compliance were
granted but where requirements were
comparable and not identical, are there
certain differences, or types of
differences, in regulation that would
have more significant economic effects
than others? Are there particular areas
of Title VII regulation in which the
effects of differences between
comparable and identical standards
would be more pronounced than in
others?
• Could there be significant economic
consequences, including effects on
outside legal services to be $400 per hour.
Accordingly, the Commission estimates the cost to
be $110,320 ($30,320 (based on 80 hours of inhouse counsel time * $379) + $80,000 (based on 200
hours of outside counsel time * $400)) to submit a
request for a substituted compliance determination.
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competition, if a substituted compliance
determination is made conditionally?
What would those effects be?
• Could market participants be
prompted to restructure in anticipation
of substituted compliance
determinations? What effects on market
structure and competition might result?
Are there other potential spillovers from
strategic restructuring related to
substituted compliance determinations?
• Do commenters agree with the
preliminary estimates of the assessment
costs and the costs to request a
substituted compliance determination
discussed above? Are there any other
assessment costs not considered here?
Specifically, the Commission requests
comment on (i) the assessment costs of
determining whether a market
participant or a transaction is eligible
for substituted compliance, and (ii) the
costs of preparing and submitting a
request for a substituted compliance
determination.
J. General Request for Comments
In responding to the specific requests
above for comment on the economic
effects of our proposed rules, interested
persons are encouraged to provide
supporting data and analysis and, when
appropriate, identify alternative models
for assessing the costs and benefits of
our proposed rules, as well as their
expected effect on efficiency,
competition and capital formation.
Responses that are supported by data
and analysis provide great assistance to
the Commission in considering the
economic effects of proposed new
requirements, including the associated
benefits and costs.
In addition to the specific requests for
comment set forth above, the
Commission also seeks comment on the
expected economic effects of the
interplay between our rules and those
[adopted/proposed] by the CFTC. In
particular, to the extent that the
Commission’s proposed rules and
interpretations take a different approach
from the CFTC’s approach to the
application of Title VII requirements in
the cross-border context, what would be
the economic impact, including the
costs and benefits, of these differences
on market participants and the U.S.
security-based swap market as a whole?
What effect would such differences have
on efficiency, competition and capital
formation in the U.S. security-based
swap market? Commenters should
provide analysis and empirical data to
support their views on the costs,
benefits and other economic effects
associated with the differences between
the Commission’s proposed approach
and the CFTC’s approach.
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The Commission also seeks comment
on the relevant economic considerations
for the Commission if we modify our
proposed approach to conform to the
CFTC’s [proposed/final] guidance.
Similarly, what would the economic
considerations be for the Commission to
adopt any cross-border interpretations
proposed by the CFTC, but not proposed
by the Commission?
XVI. Consideration of Impact on the
Economy
For purposes of the Small Business
Regulatory Enforcement Fairness Act of
1996 (‘‘SBREFA’’)1959 the Commission
must advise the OMB whether the
proposed regulation constitutes a
‘‘major’’ rule. Under SBREFA, a rule is
considered ‘‘major’’ where, if adopted, it
results or is likely to result in: (1) An
annual effect on the economy of $100
million or more (either in the form of an
increase or a decrease); (2) a major
increase in costs or prices for consumers
or individual industries; or (3)
significant adverse effect on
competition, investment or innovation.
If a rule is ‘‘major,’’ its effectiveness will
generally be delayed for 60 days
pending Congressional review.
The Commission requests comment
on the potential impact of these
proposed rules on the economy on an
annual basis, on the costs or prices for
consumers or individual industries, and
on competition, investment, or
innovation. Commenters are requested
to provide empirical data and other
factual support for their view to the
extent possible.
XVII. Regulatory Flexibility Act
Certification
The Regulatory Flexibility Act
(‘‘RFA’’) 1960 requires Federal agencies,
in promulgating rules, to consider the
impact of those rules on small entities.
Section 603(a) of the Administrative
Procedure Act,1961 as amended by the
RFA, generally requires the Commission
to undertake a regulatory flexibility
analysis of all proposed rules, or
proposed rule amendments, to
determine the impact of such
rulemaking on ‘‘small entities.’’ 1962
1959 Public Law 104–121, Title II, 110 Stat. 857
(1996) (codified in various sections of 5 U.S.C., 15
U.S.C. and as a note to 5 U.S.C. 601).
1960 5 U.S.C. 601 et seq.
1961 5 U.S.C. 603(a).
1962 Although Section 601(b) of the RFA defines
the term ‘‘small entity,’’ the statute permits agencies
to formulate their own definitions. The Commission
has adopted definitions for the term ‘‘small entity’’
for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as
relevant to this proposed rulemaking, are set forth
in Rule 0–10 under the Exchange Act, 17 CFR
240.0–10. See Exchange Act Release No. 18451 (Jan.
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Section 605(b) of the RFA 1963 provides
that this requirement shall not apply to
any proposed rule or proposed rule
amendment which, if adopted, would
not have a significant economic impact
on a substantial number of small
entities.
For purposes of Commission
rulemaking in connection with the RFA,
a small entity includes: (1) When used
with reference to an ‘‘issuer’’ or a
‘‘person,’’ other than an investment
company, an ‘‘issuer’’ or ‘‘person’’ that,
on the last day of its most recent fiscal
year, had total assets of $5 million or
less; 1964 or (2) a broker-dealer with total
capital (net worth plus subordinated
liabilities) of less than $500,000 on the
date in the prior fiscal year as of which
its audited financial statements were
prepared pursuant to Rule 17a–5(d)
under the Exchange Act,1965 or, if not
required to file such statements, a
broker-dealer with total capital (net
worth plus subordinated liabilities) of
less than $500,000 on the last day of the
preceding fiscal year (or in the time that
it has been in business, if shorter); and
is not affiliated with any person (other
than a natural person) that is not a small
business or small organization.1966
Under the standards adopted by the
Small Business Administration, small
entities in the finance and insurance
industry include the following: (i) For
entities engaged in credit intermediation
and related activities, entities with $175
million or less in assets; 1967 (ii) for
entities engaged in non-depository
credit intermediation and certain other
activities, entities with $7 million or
less in annual receipts; 1968 (iii) for
entities engaged in financial
investments and related activities,
entities with $7 million or less in
annual receipts; 1969 (iv) for insurance
carriers and entities engaged in related
activities, entities with $7 million or
less in annual receipts; 1970 and (v) for
funds, trusts, and other financial
vehicles, entities with $7 million or less
in annual receipts.1971
Based on feedback from industry
participants and our own information
about the security-based swap markets,
the Commission preliminarily believes
that non-U.S. entities that would be
required to register and be regulated as
28, 1982), 47 FR 5215 (Feb. 4, 1982) (File No. AS–
305).
1963 5 U.S.C. 605(b).
1964 See 17 CFR 240.0–10(a).
1965 17 CFR 240.17a–5(d).
1966 See 17 CFR 240.0–10(c).
1967 See 13 CFR 121.201 (Subsector 522).
1968 See id. at Subsector 522.
1969 See id. at Subsector 523.
1970 See id. at Subsector 524.
1971 See id. at Subsector 525.
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security-based swap dealers and major
security-based swap participants exceed
the thresholds defining ‘‘small entities’’
set out above. Thus, the Commission
preliminarily believes it is unlikely that
the proposed rules regarding registration
of security-based swap dealers and
major security-based swap market
participants would have a significant
economic impact any small entity.
In addition, based on the
Commission’s own information about
the cross-border security-based swap
market, the Commission believes that
only persons or entities with assets
significantly in excess of $5 million
participate in the security-based swap
market, and such persons or entities
would thus not qualify as ‘‘small
entities.’’ Therefore, the Commission
preliminarily believes that the
application of the mandatory clearing
requirement to cross-border securitybased swap transactions is unlikely to
impact any small entities. Moreover, the
Commission preliminarily believes that
the entities likely to register as a
security-based swap clearing agency
located outside the United States are not
likely to qualify as a ‘‘small entity’’ as
defined above. Thus, the Commission
preliminarily believes it is unlikely that
the proposed rules regarding registration
of security-based swap clearing agencies
located outside the United States would
have a significant economic impact any
small entity.
In addition, as discussed in the
Regulation SBSR Proposing Release, the
Commission believes that the number of
security based swap transactions
involving a ‘‘small entity’’ is de
minimis. Therefore, the Commission
preliminarily believes that the
application of the mandatory trade
reporting requirement to cross-border
security-based swap transactions is
unlikely to impact any small entities.
Moreover, the Commission
preliminarily believes that the entities
likely to register as a SDR located
outside the United States are not likely
to qualify as a ‘‘small entity’’ as defined
above. Thus, the Commission
preliminarily believes it is unlikely that
the proposed rules regarding registration
of SDRs located outside the United
States would have a significant
economic impact any small entity.
In addition, based on the
Commission’s own information about
the cross-border security-based swap
market, the Commission preliminarily
believes that the proposed application
of the mandatory trade execution
requirement to cross-border securitybased swap transactions is not likely to
impact any small entities. Moreover, as
discussed in the SB SEF Proposing
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Release, based on our understanding of
the market and conversations with
industry sources, the Commission
preliminarily believes that
approximately 20 SB SEFs could be
subject to the requirements of proposed
Regulation SB SEF. Based on the
Commission’s existing information
about the security-based swap market
and the entities likely to register as SB
SEFs, the Commission preliminarily
believes that the entities likely to
register as SB SEFs would not be
considered small entities. The
Commission preliminarily believes that
most, if not all, of the SB SEFs would
be large business entities or subsidiaries
of large business entities, and that all SB
SEFs would have assets in excess of $5
million and annual receipts in excess of
$7,000,000. Therefore, the Commission
preliminarily believes that none of the
potential SB SEFs would be considered
small entities.
For the foregoing reasons, the
Commission certifies that the proposed
rules would not have a significant
economic impact on a substantial
number of small entities for purposes of
the RFA. The Commission encourages
written comments regarding this
certification. In particular, the
Commission encourages written
comments regarding the Commission’s
preliminary belief that the proposed
application of the mandatory clearing
requirement and the mandatory trade
reporting requirement to cross-border
security-based swap transactions is
unlikely to impact any small entities.
The Commission requests that
commenters describe the nature of any
impact on small entities and provide
empirical data to illustrate the extent of
the impact.
Statutory Basis and Text of Proposed
Rules
Pursuant to the Exchange Act, 15
U.S.C. 78a et seq., and particularly,
Section 3(b), Section 15(d)(1), Section
23(a)(1), Section 30(c) thereof, Sections
712(a)(2), (6), and 761(b) of the DoddFrank Act, the SEC is proposing to
adopt rules 0–13, 3a67–10, 3a71–3,
3a71–4, 3a71–5, 3Ca–3, 3Ch–1, 3Ch–2,
13n–4(d), 13n–12, 18a–4, and 900
through 911, and Forms SBSE, SBSE–A,
and SBSE–BD, under the Exchange Act.
List of Subjects
17 CFR Part 240
Brokers, Confidential business
information, Fraud, Reporting and
recordkeeping requirements, Securities.
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Fmt 4701
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17 CFR Part 242
Brokers, Fraud, Reporting and
recordkeeping requirements, Securities.
17 CFR Part 249
Brokers, Reporting and recordkeeping
requirements, Securities.
Text of Proposed Rules
For the reasons stated in the
preamble, the SEC is proposing to
amend Title 17, Chapter II of the Code
of the Federal Regulations as follows:
PART 240—GENERAL RULES AND
REGULATIONS, SECURITIES
EXCHANGE ACT OF 1934
1. The authority citation for part 240
is amended by adding an authority for
§§ 240.3a67–10, 240.3a71–3, 240.3a71–
4, and 240.3a71–5 in numerical order to
read as follows:
■
Authority: 15 U.S.C. 77c, 77d, 77g, 77j,
77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,
77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f,
78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m,
78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q,
78q–1, 78s, 78u–5, 78w, 78x, 78ll, 78mm,
80a–20, 80a–23, 80a–29, 80a–37, 80b–3, 80b–
4, 80b–11, and 7201 et seq., 12 U.S.C.
5221(e)(3), 15 U.S.C. 8302, and 18 U.S.C.
1350, unless otherwise noted.
*
*
*
*
*
Sections 240.3a67–10, 240.3a71–3,
240.3a71–4, and 240.3a71–5 are also issued
under Public Law 111–203, secs. 712, 761(b),
124 Stat. 1754 (2010).
*
■
*
*
*
*
2. Add § 240.0–13 to read as follows:
§ 240.0–13 Commission procedures for
filing applications to request a substituted
compliance order under the Exchange Act.
(a) The application shall be in writing
in the form of a letter, must include any
supporting documents necessary to
make the application complete, and
otherwise must comply with § 240.0–3.
All applications must be submitted to
the Office of the Secretary of the
Commission. Requestors may seek
confidential treatment of their
applications to the extent provided
under § 200.81 of this chapter. If an
application is incomplete, the
Commission, through the Division of
Trading and Markets, may request that
the application be withdrawn unless the
applicant can justify, based on all the
facts and circumstances, why
supporting materials have not been
submitted and undertakes to submit the
omitted materials promptly.
(b) An applicant may submit a request
electronically. The electronic mailbox to
use for these applications is described
on the Commission’s Web site at
www.sec.gov in the ‘‘Exchange Act
Substituted Compliance Applications’’
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section. In the event electronic
mailboxes are revised in the future,
applicants can find the appropriate
mailbox by accessing the ‘‘Electronic
Mailboxes at the Commission’’ section.
(c) All filings and submissions filed
pursuant to this rule must be in the
English language. If a filing or
submission filed pursuant to this rule
requires the inclusion of a document
that is in a foreign language, a party
must submit instead a fair and accurate
English translation of the entire foreign
language document. A party may submit
a copy of the unabridged foreign
language document when including an
English translation of a foreign language
document in a filing or submission filed
pursuant to this rule. A party must
provide a copy of any foreign language
document upon the request of
Commission staff.
(d) An applicant also may submit a
request in paper format. Five copies of
every paper application and every
amendment to such an application must
be submitted to the Office of the
Secretary at 100 F Street NE.,
Washington, DC 20549–1090.
Applications must be on white paper no
larger than 81⁄2 by 11 inches in size. The
left margin of applications must be at
least 11⁄2 inches wide, and if the
application is bound, it must be bound
on the left side. All typewritten or
printed material must be set forth in
black ink so as to permit photocopying.
(e) Every application (electronic or
paper) must contain the name, address,
telephone number, and email address of
each applicant and the name, address,
telephone number, and email address of
a person to whom any questions
regarding the application should be
directed. The Commission will not
consider hypothetical or anonymous
requests for a substituted compliance
order. Each applicant shall provide the
Commission with any supporting
documentation it believes necessary for
the Commission to make such
determination, including information
regarding applicable requirements
established by the foreign financial
regulatory authority or authorities, as
well as the methods used by the foreign
financial regulatory authority or
authorities to monitor compliance with
such rules. Applicants should also cite
to and discuss applicable precedent.
(f) Amendments to the application
should be prepared and submitted as set
forth in these procedures and should be
marked to show what changes have
been made.
(g) After the filing is complete, the
Division of Trading and Markets will
review the application. Once all
questions and issues have been
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answered to the satisfaction of the
Division of Trading and Markets, the
staff will make an appropriate
recommendation to the Commission.
After consideration of the
recommendation by the Commission,
the Commission’s Office of the Secretary
will issue an appropriate response and
will notify the applicant.
(h) The Commission, in its sole
discretion, may choose to publish in the
Federal Register a notice that the
application has been submitted. The
notice would provide that any person
may, within the period specified
therein, submit to the Commission any
information that relates to the
Commission action requested in the
application. The notice also would
indicate the earliest date on which the
Commission would take final action on
the application, but in no event would
such action be taken earlier than 25
days following publication of the notice
in the Federal Register.
(i) The Commission may, in its sole
discretion, schedule a hearing on the
matter addressed by the application.
■ 3a. Add § 240–3a67–10 to read as
follows:
§ 240.3a67–10 Foreign major securitybased swap participants.
(a) Definitions. As used in this rule,
the following terms shall have the
meanings indicated:
(1) Foreign major security-based swap
participant means a major securitybased swap participant, as defined in
section 3(a)(67) of the Act (15 U.S.C.
78c(a)(67)), and the rules and
regulations thereunder, that is not a U.S.
person.
(2) U.S. person has the meaning set
forth in § 240.3a71–3(a)(7).
(b) Application of customer protection
requirements. A registered foreign major
security-based swap participant shall
not be subject, with respect to its
security-based swap transactions with
counterparties that are not U.S. persons,
to the requirements relating to business
conduct standards described in section
15F(h) of the Act (15 U.S.C. 78o–10(h)),
and the rules and regulations
thereunder, other than rules and
regulations prescribed by the
Commission pursuant to section
15F(h)(1)(B) of the Act (15 U.S.C. 78o–
10(h)(1)(B)).
(c) Application of major securitybased swap participant tests in the
cross-border context. For purposes of
calculating a person’s status as a major
security-based swap participant as
defined in section 3(a)(67) of the Act (15
U.S.C. 78c(a)(67)), and the rules and
regulations thereunder, a person shall
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Fmt 4701
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include the following security-based
swap transactions:
(1) If such person is a U.S. person, all
security-based swap transactions
entered into by such person; or
(2) If such person is a non-U.S.
person, all security-based swap
transactions entered into by such person
with U.S. persons.
■ 3b. Add §§ 240.3a71–3, 240.3a71–
4, and 240.3a71–5 to read as follows:
Sec.
240.3a71–3 Cross-border security-based
swap dealing activity.
240.3a71–4 Exception from aggregation for
affiliated groups with registered securitybased swap dealers.
240.3a71–5 Substituted compliance for
foreign security-based swap dealers.
*
*
*
*
*
§ 240.3a71–3 Cross-border security-based
swap dealing activity.
(a) Definitions. As used in this rule,
the following terms shall have the
meanings indicated:
(1) Foreign branch means any branch
of a U.S. bank if:
(i) The branch is located outside the
United States;
(ii) The branch operates for valid
business reasons; and
(iii) The branch is engaged in the
business of banking and is subject to
substantive banking regulation in the
jurisdiction where located.
(2) Foreign business means securitybased swap transactions that are entered
into, or offered to be entered into, by or
on behalf of, a foreign security-based
swap dealer or a U.S. security-based
swap dealer, other than the U.S.
Business of such person.
(3) Foreign security-based swap dealer
means a security-based swap dealer, as
defined in section 3(a)(71) of the Act (15
U.S.C. 78c(a)(71)), and the rules and
regulations thereunder, that is not a U.S.
person.
(4) Transaction conducted through a
foreign branch—(i) Definition.
Transaction conducted through a
foreign branch means a security-based
swap transaction that is solicited,
negotiated, or executed by a U.S. person
through a foreign branch of such U.S.
person if:
(A) The foreign branch is the
counterparty to such security-based
swap transaction; and
(B) The security-based swap
transaction is not solicited, negotiated,
or executed by a person within the
United States on behalf of the foreign
branch or its counterparty.
(ii) Representations. A person shall
not be required to consider its
counterparty’s activity in connection
with paragraph (a)(4)(i)(B) of this
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section in determining whether a
security-based swap transaction is a
transaction conducted through a foreign
branch if such person receives a
representation from its counterparty that
no person within the United States is
directly involved in soliciting,
negotiating, or executing the securitybased swap transaction on behalf of
such counterparty, unless such person
knows that the representation is not
accurate.
(5) Transaction conducted within the
United States—(i) Definition.
Transaction conducted within the
United States means a security-based
swap transaction that is solicited,
negotiated, executed, or booked within
the United States, by or on behalf of
either counterparty to the transaction,
regardless of the location, domicile, or
residence status of either counterparty
to the transaction.
(ii) Foreign branch exception.
Notwithstanding paragraph (a)(5)(i) of
this section, a transaction conducted
within the United States shall not
include a transaction conducted through
a foreign branch.
(iii) Representations. A person shall
not be required to consider its
counterparty’s activity in connection
with a transaction in determining
whether such transaction is conducted
within the United States if such person
receives a representation from its
counterparty that the transaction is not
solicited, negotiated, executed, or
booked within the United States by or
on behalf of such counterparty, unless
such person knows that the
representation is not accurate.
(6) U.S. business means:
(i) With respect to a foreign securitybased swap dealer:
(A) Any transaction entered into, or
offered to be entered into, by or on
behalf of such foreign security-based
swap dealer, with a U.S. person (other
than with a foreign branch); or
(B) Any transaction conducted within
the United States; and
(ii) With respect to a U.S. securitybased swap dealer, any transaction by or
on behalf of such U.S. security-based
swap dealer, wherever entered into or
offered to be entered into, other than a
transaction conducted through a foreign
branch with a non-U.S. person or
another foreign branch.
(7) U.S. person. (i) Except as provided
in paragraph (a)(7)(ii) of this section,
U.S. person means:
(A) Any natural person resident in the
United States;
(B) Any partnership, corporation,
trust, or other legal person organized or
incorporated under the laws of the
United States or having its principal
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place of business in the United States;
and
(C) Any account (whether
discretionary or non-discretionary) of a
U.S. person.
(ii) The term U.S. person does not
include the International Monetary
Fund, the International Bank for
Reconstruction and Development, the
Inter-American Development Bank, the
Asian Development Bank, the African
Development Bank, the United Nations,
and their agencies and pension plans,
and any other similar international
organizations, their agencies and
pension plans.
(8) U.S. security-based swap dealer
means a security-based swap dealer, as
defined in section 3(a)(71) of the Act (15
U.S.C. 78c(a)(71)), and the rules and
regulations thereunder, that is a U.S.
person.
(9) United States means the United
States of America, its territories and
possessions, any State of the United
States, and the District of Columbia.
(b) Application of de minimis
exception to cross-border dealing
activity. For purposes of calculating the
amount of security-based swap
positions connected with dealing
activity under § 240.3a71–2(a)(1), a
person shall include the following
security-based swap transactions:
(1)(i) If such person is a U.S. person,
all security-based swap transactions
connected with the dealing activity in
which such person engages, including
transactions conducted through a
foreign branch; or
(ii) If such person is a non-U.S.
person, security-based swap
transactions connected with the dealing
activity in which such person engages
that are entered into with a U.S. person
(other than with a foreign branch) or
that are transactions conducted within
the United States; and
(2) If such person engages in
transactions described in paragraph
(b)(1)(i) or (ii) of this section,
(i) All security-based swap
transactions connected with the dealing
activity in which any U.S. person
controlling, controlled by, or under
common control with such person
engages, including transactions
conducted through a foreign branch;
and
(ii) All security-based swap
transactions connected with the dealing
activity in which any non-U.S. person
controlling, controlled by, or under
common control with such person
engages that are entered into with U.S.
persons (other than with a foreign
branch) or that are transactions
conducted within the United States.
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31207
(c) Application of customer protection
requirements. A registered foreign
security-based swap dealer and a
registered U.S. security-based swap
dealer, with respect to their Foreign
Business, shall not be subject to the
requirements relating to business
conduct standards described in section
15F(h) of the Act (15 U.S.C. 78o–10(h)),
and the rules and regulations
thereunder, other than the rules and
regulations prescribed by the
Commission pursuant to section
15F(h)(1)(B) of the Act (15 U.S.C. 78o–
10(h)(1)(B)).
§ 240.3a71–4 Exception from aggregation
for affiliated groups with registered
security-based swap dealers.
Notwithstanding §§ 240.3a71–2(a)(1)
and 240.3a71–3(b)(2), a person shall not
include the security-based swap
transactions of another person
controlling, controlled by, or under
common control with such person
where such other person is registered
with the Commission as a securitybased swap dealer, provided that the
security-based swap dealing activity of
such person is operationally
independent of the security-based swap
dealing activity of such registered
security-based swap dealer.
§ 240.3a71–5 Substituted compliance for
foreign security-based swap dealers.
(a) Determinations—(1) In general.
Subject to paragraph (a)(2) of this
section and except as provided in
paragraph (a)(3) of this section, the
Commission may, conditionally or
unconditionally, by order, make a
determination with respect to a foreign
financial regulatory system that
compliance with specified requirements
under such foreign financial regulatory
system by a registered foreign securitybased swap dealer (or class thereof) may
satisfy the corresponding requirements
in section 15F of the Act (15 U.S.C. 78o10), and the rules and regulations
thereunder, that would otherwise apply
to such foreign security-based swap
dealer (or class thereof).
(2) Standard. The Commission shall
not make a substituted compliance
determination under paragraph (a)(1) of
this section unless the Commission:
(i) Determines that the requirements
of such foreign financial regulatory
system applicable to such foreign
security-based swap dealer (or class
thereof) are comparable to otherwise
applicable requirements, after taking
into account such factors as the
Commission determines are appropriate,
such as the scope and objectives of the
relevant foreign regulatory
requirements, as well as the
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effectiveness of the supervisory
compliance program administered, and
the enforcement authority exercised, by
a foreign financial regulatory authority
or authorities in such system to support
its oversight of such foreign securitybased swap dealer (or class thereof); and
(ii) Has entered into a supervisory and
enforcement memorandum of
understanding or other arrangement
with the relevant foreign financial
regulatory authority or authorities under
such foreign financial regulatory system
addressing oversight and supervision of
applicable security-based swap dealers
under the substituted compliance
determination.
(3) Limitation. The Commission will
not make a substituted compliance
determination under paragraph (a)(1) of
this section with respect to the
requirements relating to the registration
process described in sections 15F(a)
through (d) of the Act (15 U.S.C. 78o–
10(a) through (d)) and the rules and
regulations thereunder.
(4) Withdrawal or modification. The
Commission may, on its own initiative,
by order, modify or withdraw a
substituted compliance determination
under paragraph (a)(1) of this section,
after appropriate notice and opportunity
for comment.
(b) Reliance by foreign security-based
swap dealers. A registered foreign
security-based swap dealer may satisfy
requirements in section 15F of the Act
(15 U.S.C. 78o–10), and the rules and
regulations thereunder, by complying
with corresponding legislative
requirements and rules and regulations
under a foreign financial regulatory
system, provided:
(1) The Commission has made a
substituted compliance determination
pursuant to paragraph (a)(1) of this
section regarding such foreign financial
regulatory system providing that
compliance with specified requirements
under such foreign financial regulatory
system by such registered foreign
security-based swap dealer (or a class of
registered foreign security-based swap
dealers that includes such registered
foreign security-based swap dealer) may
satisfy the corresponding requirements
in section 15F of the Act (15 U.S.C. 78o–
10) and the rules and regulations
thereunder; and
(2) Such registered foreign securitybased swap dealer satisfies any
conditions set forth in a substituted
compliance determination made by the
Commission pursuant to paragraph
(a)(1) of this section.
(c) Requests for determinations. (1) A
foreign security-based swap dealer or
group of foreign security-based swap
dealers of the same class may file an
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application, pursuant to the procedures
set forth in § 240.0–13, requesting that
the Commission make a substituted
compliance determination pursuant to
paragraph (a)(1) of this section, with
respect to one or more requirements in
section 15F of the Act (15 U.S.C. 78o–
10), and the rules and regulations
thereunder, and provide the reasons
therefor and such other supporting
documentation as the Commission may
request.
(2) A foreign security-based swap
dealer or group of foreign security-based
swap dealers may make a request under
paragraph (a)(1) of this section only if
the foreign security-based swap
dealer(s):
(i) Is directly supervised by the
foreign financial regulatory authority or
authorities under the system with
respect to the foreign regulatory
requirements relating to the applicable
requirements in section 15F of the Act
(15 U.S.C. 78o–10) and the rules and
regulations thereunder; and
(ii) Provides the certification and
opinion of counsel as described in
§ 240.15Fb2–4(c).
■ 4. Add § 240.3Ca–3 to read as follows:
§ 240.3Ca–3 Application of the mandatory
clearing requirement to cross-border
security-based swap transactions.
(a) Application. Subject to paragraph
(b) of this section, the clearing
requirement in section 3C(a)(1) of the
Act (15 U.S.C. 78c–3(a)(1)), and the
rules and regulations thereunder, shall
apply to a person that engages in a
security-based swap transaction if:
(1) A counterparty to the transaction
is:
(i) A U.S. person; or
(ii) A non-U.S. person whose
performance under the security-based
swap is guaranteed by a U.S. person; or
(2) Such transaction is a transaction
conducted within the United States.
(b) Exceptions. The clearing
requirement in section 3C(a)(1) of the
Act (15 U.S.C. 78c–3(a)(1)), and the
rules and regulations thereunder, shall
not apply to a transaction described in
paragraph (a) of this section if:
(1) With respect to a security-based
swap transaction that is not a
transaction conducted within the
United States,
(i) One counterparty to the transaction
is:
(A) A foreign branch; or
(B) A non-U.S. person whose
performance under the security-based
swap is guaranteed by a U.S. person;
and
(ii) The other counterparty to the
transaction is a non-U.S. person:
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(A) Whose performance under the
security-based swap is not guaranteed
by a U.S. person; and
(B) Who is not a foreign securitybased swap dealer; or
(2) With respect to a security-based
swap transaction that is a transaction
conducted within the United States,
(i) Neither counterparty to the
transaction is a U.S. person;
(ii) Neither counterparty’s
performance under the security-based
swap is guaranteed by a U.S. person;
and
(iii) Neither counterparty to the
transaction is a foreign security-based
swap dealer.
(c) For purposes of this section, the
terms foreign branch, foreign securitybased swap dealer, transaction
conducted within the United States, and
U.S. person shall have the meanings set
forth in § 240.3a71–3(a).
■ 5. Add an undesignated center
heading following § 240.3Ca–2, and add
§§ 240.3Ch–1 and 240.3Ch–2 to read as
follows:
Trade Execution of Security-Based
Swaps
*
*
*
*
*
Sec.
240.3Ch–1 Application of the mandatory
trade execution requirement to crossborder security-based swap transactions.
240.3Ch–2 Substituted compliance for
mandatory trade execution.
§ 240.3Ch–1 Application of the mandatory
trade execution requirement to crossborder security-based swap transactions.
(a) Application. Subject to paragraph
(b) of this section, the mandatory trade
execution requirement in section 3C(h)
of the Act (15 U.S.C. 78c–3(h)), and the
rules and regulations thereunder, shall
apply to a person that engages in a
security-based swap transaction if:
(1) A counterparty to the transaction
is:
(i) A U.S. person; or
(ii) A non-U.S. person whose
performance under the security-based
swap is guaranteed by a U.S. person; or
(2) Such transaction is a transaction
conducted within the United States.
(b) Exceptions. The mandatory trade
execution requirement in section 3C(h)
of the Act (15 U.S.C. 78c–3(h)), and the
rules and regulations thereunder, shall
not apply to a transaction described in
paragraph (a) of this section if:
(1) With respect to a security-based
swap transaction that is not a
transaction conducted within the
United States,
(i) One counterparty to the transaction
is:
(A) A foreign branch; or
(B) A non-U.S. person whose
performance under the security-based
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swap is guaranteed by a U.S. person;
and
(ii) The other counterparty to the
transaction is a non-U.S. person:
(A) Whose performance under the
security-based swap is not guaranteed
by a U.S. person; and
(B) Who is not a foreign securitybased swap dealer; or
(2) With respect to a security-based
swap transaction that is a transaction
conducted within the United States,
(i) Neither counterparty to the
transaction is a U.S. person;
(ii) Neither counterparty’s
performances under the security-based
swap is guaranteed by a U.S. person;
and
(iii) Neither counterparty to the
transaction is a foreign security-based
swap dealer.
(c) For purposes of this section, the
terms foreign branch, foreign securitybased swap dealer, and transaction
conducted within the United States, and
U.S. person shall have the meanings set
forth in § 240.3a71–3(a).
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§ 240.3Ch–2 Substituted compliance for
mandatory trade execution.
(a) A person that is subject to the
mandatory trade execution requirement
in section 3C(h) of the Act (15 U.S.C.
78c–3(h)), and the rules and regulations
thereunder, with respect to a securitybased swap transaction may execute
such transaction, or have such
transaction executed on its behalf, on a
security-based swap market that is
neither registered under the Act nor
exempt from registration under the Act
if such security-based swap market is
covered by, or is in a class of markets
that is covered by, a Commission order
described in paragraph (b) of this
section, provided that with respect to at
least one of the counterparties to the
transaction:
(1) Such counterparty is either a nonU.S person or a foreign branch; and
(2) The security-based swap
transaction is not solicited, negotiated,
or executed by a person within the
United States on behalf of such
counterparty.
(b)(1) The Commission may,
conditionally or unconditionally, by
order, make a substituted compliance
determination with respect to a foreign
jurisdiction to permit a person subject to
the mandatory trade execution
requirement in section 3C(h) of the Act
(15 U.S.C. 78c–3(h)), and the rules and
regulations thereunder, with respect to
a security-based swap transaction to
execute such transaction, or have such
transaction executed on its behalf, on a
security-based swap market (or class of
markets) if it determines that such
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security-based swap market (or class of
markets) is subject to comparable,
comprehensive supervision and
regulation by the relevant foreign
financial regulatory authority or
authorities in such foreign jurisdiction.
(2) In making a determination under
paragraph (b)(1) of this section, the
Commission shall take into account
such factors as the Commission
determines are appropriate, such as the
scope and objectives of the relevant
foreign regulatory requirements, as well
as the effectiveness of the supervisory
compliance program administered, and
the enforcement authority exercised, by
the relevant foreign financial regulatory
authority or authorities in the foreign
jurisdiction to support the oversight of
the security-based swap market (or class
of markets).
(3) Before issuing a substituted
compliance order pursuant to paragraph
(b)(1) of this section, the Commission
shall have entered into a supervisory
and enforcement memorandum of
understanding or other arrangement
with the relevant foreign regulatory
authority or authorities in the foreign
jurisdiction addressing the oversight
and supervision of the security-based
swap market (or class of markets).
(4) The Commission may, on its own
initiative, modify or withdraw such
order at any time, after appropriate
notice and opportunity for comment.
(c) One or more security-based swap
markets in a foreign jurisdiction may
file an application, in writing, pursuant
to the procedures set forth in § 240.0–
13, requesting that the Commission
make a substituted compliance
determination with respect to such
foreign jurisdiction pursuant to
paragraph (b)(1) of this section. Such
application must include the reasons
therefor and such other documentation
as the Commission may request.
(d) For purposes of this section, the
terms foreign branch and U.S. person
shall have the meanings set forth in
§ 240.3a71–3(a).
■ 6. Add paragraph (d) to § 240.13n–4 as
previously proposed at 75 FR 77367,
Dec. 10, 2010, to read as follows:
§ 240.13n–4 Duties and core principles of
security-based swap data repository.
*
*
*
*
*
(d) Exemption from the
indemnification requirement. A
registered security-based swap data
repository is not required to comply
with the indemnification requirement
set forth in Section 13(n)(5)(H)(ii) of the
Act (15 U.S.C. 78m(n)(5)(H)(ii)) and
paragraph (b)(10) of this section with
respect to disclosure of security-based
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swap information by the security-based
swap data repository if:
(1) An entity described in paragraph
(b)(9) of this section requests securitybased swap information from the
security-based swap data repository to
fulfill a regulatory mandate and/or legal
responsibility of the entity;
(2) The request of such entity pertains
to a person or financial product subject
to the jurisdiction, supervision, or
oversight of the entity; and
(3) Such entity has entered into a
supervisory and enforcement
memorandum of understanding or other
arrangement with the Commission that
addresses the confidentiality of the
security-based swap information
provided and any other matters as
determined by the Commission.
■ 7. Add § 240.13n–12 following
§ 240.13n–11 as previously proposed at
75 FR 77366, Dec. 10, 2010, to read as
follows:
§ 240.13n–12 Exemption from
requirements governing security-based
swap data repositories for certain non-U.S.
persons.
(a) Definitions. For purposes of this
section—
(1) Non-U.S. person means a person
that is not a U.S. person.
(2) U.S. person shall have the same
meaning as set forth in § 240.3a71–
3(a)(7).
(b) A non-U.S. person that performs
the functions of a security-based swap
data repository within the United States
shall be exempt from the registration
and other requirements set forth in
Section 13(n) of the Act (15 U.S.C.
78m(n)), and the rules and regulations
thereunder, provided that each regulator
with supervisory authority over such
non-U.S. person has entered into a
supervisory and enforcement
memorandum of understanding or other
arrangement with the Commission that
addresses the confidentiality of data
collected and maintained by such nonU.S. person, access by the Commission
to such data, and any other matters
determined by the Commission.
■ 8. Add paragraphs (e) and (f) to
§ 240.18a–4 as previously proposed at
77 FR 70350, Nov. 23, 2012, to read as
follows:
§ 240.18a–4 Segregation requirements for
security-based swap dealers and major
security-based swap participants
*
*
*
*
*
(e) Segregation requirements for
foreign security-based swap dealers—(1)
Non-cleared security-based swaps. (i) A
registered foreign security-based swap
dealer (as defined in § 240.3a71–3(a)(3))
that is a registered broker-dealer shall be
subject to the requirements relating to
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segregation of assets held as collateral
set forth in section 3E of the Act (15
U.S.C. 78c–5) and paragraphs (a)
through (d) of this section, with respect
to any assets received from, for, or on
behalf of a counterparty to margin,
guarantee, or secure a non-cleared
security-based swap (including money,
securities, or property accruing to such
counterparty as the result of such a
security-based swap transaction).
(ii) A registered foreign security-based
swap dealer (as defined in § 240.3a71–
3(a)(3)) that is not a registered brokerdealer shall be subject to the
requirements relating to segregation of
assets held as collateral set forth in
section 3E of the Act (15 U.S.C. 78c–5)
and paragraphs (a) through (d) of this
section, with respect to non-cleared
security-based swap transactions, solely
with respect to any assets received from,
for, or on behalf of a counterparty that
is a U.S. person (as defined in
§ 240.3a71–3(a)(7)) to margin, guarantee,
or secure a non-cleared security-based
swap (including money, securities, or
property accruing to such U.S. person
counterparty as the result of such a
security-based swap transaction).
(2) Cleared security-based swaps. (i) A
registered foreign security-based swap
dealer (as defined in § 240.3a71–3(a)(3))
that is a registered broker-dealer shall be
subject to the requirements relating to
segregation of assets held as collateral
set forth in section 3E of the Act (15
U.S.C. 78c–5) and paragraphs (a)
through (d) of this section, with respect
to any assets received from, for, or on
behalf of a counterparty to margin,
guarantee, or secure a cleared securitybased swap (including money,
securities, or property accruing to such
counterparty as the result of such a
security-based swap transaction).
(ii) A registered foreign security-based
swap dealer (as defined in § 240.3a71–
3(a)(3)) that is not a registered brokerdealer and is not a person described in
11 U.S.C. 109(b)(3) shall be subject to
the requirements relating to segregation
of assets held as collateral set forth in
section 3E of the Act (15 U.S.C. 78c–5)
and paragraphs (a) through (d) of this
section, with respect to cleared securitybased swap transactions with any
counterparty if such registered foreign
security-based swap dealer accepts any
assets from, for, or on behalf of a
counterparty that is a U.S. person (as
defined in § 240.3a71–3(a)(7)) to margin,
guarantee, or secure a security-based
swap (including money, securities, or
property accruing to such U.S. person
counterparty as the result of such a
security-based swap).
(iii) A registered foreign securitybased swap dealer (as defined in
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§ 240.3a71–3(a)(3)) that is a person
described in 11 U.S.C. 109(b)(3) shall be
subject to the requirements relating to
segregation of assets held as collateral
set forth in section 3E of the Act (15
U.S.C. 78c–5) and paragraphs (a)
through (d) of this section, with respect
to cleared security-based swap
transactions, solely with respect to any
assets received from, for, or on behalf of
a counterparty who is a U.S. person (as
defined in § 240.3a71–3(a)(7)) to margin,
guarantee, or secure a security-based
swap cleared by or through a clearing
agency (including money, securities, or
property accruing to such U.S. person
counterparty as the result of such a
security-based swap transaction). The
special account maintained by a
registered foreign security-based swap
dealer that is a person described in 11
U.S.C. 109(b)(3) in accordance with
paragraph (c) of this section shall be
designated for the exclusive benefit of
U.S. person security-based swap
customers.
(3) Disclosures. A registered foreign
security-based swap dealer (as defined
in § 240.3a71–3(a)(3)) must disclose to
its counterparty that is a U.S. person,
prior to accepting any assets from, for,
or on behalf of such counterparty to
margin, guarantee, or secure a securitybased swap, the potential treatment of
the assets segregated by such registered
foreign security-based swap dealer
pursuant to section 3E of the Act (15
U.S.C. 78c–5), and the rules and
regulations thereunder, in insolvency
proceedings under U.S. bankruptcy law
and any applicable foreign insolvency
laws. Such disclosure shall include
whether the foreign security-based swap
dealer is subject to the segregation
requirement set forth in Section 3E of
the Act, and the rules and regulations
thereunder, with respect to the assets
collected from the U.S. person
counterparty who will receive the
disclosure, whether the foreign securitybased swap dealer could be subject to
the stockbroker liquidation provisions
in the U.S. Bankruptcy Code, whether
the segregated assets could be afforded
customer property treatment under the
U.S. bankruptcy law, and any other
relevant considerations that may affect
the treatment of the assets segregated
under Section 3E of the Act in
insolvency proceedings of the foreign
security-based swap dealer.
(f) Segregation requirements for
foreign major security-based swap
participants. A registered foreign major
security-based swap participant (as
defined in § 240.3a67–10(a)(1)) that is
not a registered broker-dealer shall not
be subject to the requirements relating
to segregation of assets held as collateral
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set forth in section 3E(f) of the Act (15
U.S.C. 78c–5(f)) and paragraph (d) of
this section, with respect to non-cleared
security-based swap transactions, solely
with respect to any assets received from,
for, or on behalf of a counterparty that
is a not a U.S. person (as defined in
§ 240.3a71–3(a)(7)) to margin, guarantee,
or secure a non-cleared security-based
swap (including money, securities, or
property accruing to such non-U.S.
person counterparty as the result of
such a security-based swap transaction).
PART 242—REGULATIONS M, SHO,
ATS, AC, NMS, AND SBSR AND
CUSTOMER MARGIN REQUIREMENTS
FOR SECURITY FUTURES
9. The authority citation for part 242
continues to read as follows:
■
Authority: 15 U.S.C. 77g, 77q(a), 77s(a),
78b, 78c, 78g(c)(2), 78i(a), 78j, 78k–l(c), 78l,
78m, 78n, 78o(b), 78o(c), 78o(g), 78q(a),
78q(b), 78q(h), 78w(a), 78dd–1, 78mm, 80a–
23, 80a–29, and 80a–37.
10a. Revise the heading of part 242 to
read as set forth above.
■ 10b. Add an undesignated center
heading and revise §§ 242.900 through
242.911 as previously proposed at 75 FR
75283, Dec. 2, 2010, to read as follows:
■
Regulation SBSR—Regulatory
Reporting and Public Dissemination of
Security-Based Swap Information
Sec.
242.900 Definitions
242.901 Reporting obligations.
242.902 Public dissemination of transaction
reports.
242.903 Coded information.
242.904 Operating hours of registered
security-based swap data repositories.
242.905 Correction of errors in securitybased swap information.
242.906 Other duties of participants.
242.907 Policies and procedures of
registered security-based swap data
repositories.
242.908 Cross-border matters.
242.909 Registration of security-based swap
data repository as a securities
information processor.
242.910 Implementation of security-based
swap reporting and dissemination.
242.911 Prohibition during phase-in period.
*
*
*
§ 242.900
*
*
Definitions.
Terms used in §§ 242.900 through
242.911 that appear in Section 3 of the
Exchange Act (15 U.S.C. 78c) have the
same meaning as in Section 3 of the
Exchange Act and the rules or
regulations thereunder. In addition, for
purposes of Regulation SBSR
(§§ 242.900 through 242.911), the
following definitions shall apply:
(a) Affiliate means any person that,
directly or indirectly, controls, is
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controlled by, or is under common
control with, a person.
(b) Asset class means those securitybased swaps in a particular broad
category, including, but not limited to,
credit derivatives, equity derivatives,
and loan-based derivatives.
(c) Block trade means a large notional
security-based swap transaction that
meets the criteria set forth in
§ 242.907(b).
(d) Broker ID means the UIC assigned
to a person acting as a broker for a
participant.
(e) Confirm means the production of
a confirmation that is agreed to by the
parties to be definitive and complete
and that has been manually,
electronically, or, by some other legally
equivalent means, signed.
(f) Control means, for purposes of
§§ 242.900 through 242.911, the
possession, direct or indirect, of the
power to direct or cause the direction of
the management and policies of a
person, whether through the ownership
of voting securities, by contract, or
otherwise. A person is presumed to
control another person if the person:
(1) Is a director, general partner or
officer exercising executive
responsibility (or having similar status
or functions);
(2) Directly or indirectly has the right
to vote 25 percent or more of a class of
voting securities or has the power to sell
or direct the sale of 25 percent or more
of a class of voting securities; or
(3) In the case of a partnership, has
the right to receive, upon dissolution, or
has contributed, 25 percent or more of
the capital.
(g) Counterparty means a person that
is a direct counterparty or indirect
counterparty of a security-based swap.
(h) Derivatives clearing organization
means the same as provided under the
Commodity Exchange Act.
(i) Desk ID means the UIC assigned to
the trading desk of a participant or of a
broker of a participant.
(j) Direct counterparty means a person
that is a primary obligor on a securitybases swap.
(k) Direct electronic access has the
same meaning as in § 240.13n–4(a)(5) of
this chapter.
(l) Effective reporting date, with
respect to a registered security-based
swap data repository, means the date six
months after the registration date.
(m) Exchange Act means the
Securities Exchange Act of 1934 (15
U.S.C. 78a, et seq.), as amended.
(n) Foreign branch has the same
meaning as in § 240.3a71–3(a)(1) of this
chapter.
(o) Indirect counterparty means a
guarantor of a direct counterparty’s
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performance of any obligation under a
security-based swap.
(p) Life cycle event means, with
respect to a security-based swap, any
event that would result in a change in
the information reported to a registered
security-based swap data repository
under § 242.901, including a
counterparty change resulting from an
assignment or novation; a partial or full
termination of the security-based swap;
a change in the cash flows originally
reported; for a security-based swap that
is not cleared, any change to the
collateral agreement; or a corporate
action affecting a security or securities
on which the security-based swap is
based (e.g., a merger, dividend, stock
split, or bankruptcy). Notwithstanding
the above, a life cycle event shall not
include the scheduled expiration of the
security-based swap, a previously
described and anticipated interest rate
adjustment (such as a quarterly interest
rate adjustment), or other event that
does not result in any change to the
contractual terms of the security-based
swap.
(q) Non-U.S. person means a person
that is not a U.S. person.
(r) Parent means a legal person that
controls a participant.
(s) Participant means a person that is
a counterparty to a security-based swap
that meets the criteria of § 242.908(b).
(t) Participant ID means the UIC
assigned to a participant.
(u) Phase-in period means the period
immediately after a security-based swap
data repository has registered with the
Commission during which it is not
required to disseminate security-based
swap data pursuant to an
implementation schedule, as provided
in § 242.910.
(v) Pre-enactment security-based
swap means any security-based swap
executed before July 21, 2010 (the date
of enactment of the Dodd-Frank Act
(Pub. L. 111–203, H.R. 4173)), the terms
of which had not expired as of that date.
(w) Price means the price of a
security-based swap transaction,
expressed in terms of the commercial
conventions used in that asset class.
(x) Product ID means the UIC assigned
to a security-based swap instrument.
(y) Publicly disseminate means to
make available through the Internet or
other electronic data feed that is widely
accessible and in machine-readable
electronic format.
(z) Real time means, with respect to
the reporting of security-based swap
information, as soon as technologically
practicable, but in no event later than 15
minutes after the time of execution of
the security-based swap transaction.
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(aa) Registered security-based swap
data repository means a person that is
registered with the Commission as a
security-based swap data repository
pursuant to section 13(n) of the
Exchange Act (15 U.S.C. 78m(n)) and
any rules or regulations thereunder.
(bb) Registration date, with respect to
a security-based swap data repository,
means the date on which the
Commission registers the security-based
swap data repository, or, if the
Commission registers the security-based
swap data repository before the effective
date of §§ 242.900 through 242.911, the
effective date of §§ 242.900 through
242.911.
(cc) Reporting side means the side of
a security-based swap having the duty
to report information in accordance
with §§ 242.900 through 242.911 to a
registered security-based swap data
repository, or if there is no registered
security-based swap data repository that
would receive the information, to the
Commission.
(dd) Security-based swap instrument
means each security-based swap in the
same asset class, with the same
underlying reference asset, reference
issuer, or reference index.
(ee) Side means a direct counterparty
and any indirect counterparty that
guarantees the direct counterparty’s
performance of any obligation under a
security-based swap.
(ff) Time of execution means the point
at which the counterparties to a
security-based swap become irrevocably
bound under applicable law.
(gg) Trader ID means the UIC assigned
to a natural person who executes
security-based swaps.
(hh) Transaction conducted through a
foreign branch has the same meaning as
in § 240.3a71–3(a)(4) of this chapter.
(ii) Transaction conducted within the
United States has the same meaning as
in § 240.3a71–3(a)(5) of this chapter.
(jj) Transaction ID means the unique
identification code assigned by a
registered security-based swap data
repository to a specific security-based
swap.
(kk) Transitional security-based swap
means a security-based swap executed
on or after July 21, 2010, and before the
effective reporting date.
(ll) Ultimate parent means a legal
person that controls a participant and
that itself has no parent.
(mm) Ultimate parent ID means the
UIC assigned to an ultimate parent of a
participant.
(nn) Unique Identification Code or
UIC means the unique identification
code assigned to a person, unit of a
person, or product by or on behalf of an
internationally recognized standards-
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setting body that imposes fees and usage
restrictions that are fair and reasonable
and not unreasonably discriminatory. If
no standards-setting body meets these
criteria, a registered security-based swap
data repository shall assign all necessary
UICs using its own methodology. If a
standards-setting body meets these
criteria but has not assigned a UIC to a
particular person, unit of a person, or
product, a registered security-based
swap data repository shall assign a UIC
to that person, unit of a person, or
product using its own methodology.
(oo) United States has the same
meaning as in § 240.3a71–3(a)(9) of this
chapter.
(pp) U.S. person has the same
meaning as in § 240.3a71–3(a)(7) of this
chapter.
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§ 242.901
Reporting obligations.
(a) Reporting side. The reporting side
for a security-based swap shall be as
follows:
(1) If both sides of the security-based
swap include a security-based swap
dealer, the sides shall select the
reporting side.
(2) If only one side of the securitybased swap includes a security-based
swap dealer, that side shall be the
reporting side.
(3) If both sides of the security-based
swap include a major security-based
swap participant, the sides shall select
the reporting side.
(4) If one side of the security-based
swap includes a major security-based
swap participant and the other side
includes neither a security-based swap
dealer nor a major security-based swap
participant, the side including the major
security-based swap participant shall be
the reporting side.
(5) If neither side of the security-based
swap includes a security-based swap
dealer or major security-based swap
participant:
(i) If both sides include a U.S. person
or neither side includes a U.S. person,
the sides shall select the reporting side.
(ii) If only one side includes a U.S.
person, that side shall be the reporting
side.
(b) Recipient of security-based swap
information. For each security-based
swap for which it is the reporting side,
the reporting side shall provide the
information required by §§ 242.900
through 242.911 to a registered securitybased swap data repository or, if there
is no registered security-based swap
data repository that would accept the
information, to the Commission.
(c) Primary trade information. For any
security-based swap that must be
publicly disseminated pursuant to
§§ 242.902 and 242.908 and for which it
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is the reporting side, the reporting side
shall report the following information in
real time. If a security-based swap is
required by §§ 242.901 and 242.908 to
be reported but not publicly
disseminated, the reporting side shall
report the following information no later
than the time that the reporting side is
required to comply with paragraph (d)
of this section:
(1) The asset class of the securitybased swap and, if the security-based
swap is an equity derivative, whether it
is a total return swap or is otherwise
designed to offer risks and returns
proportional to a position in the equity
security or securities on which the
security-based swap is based;
(2) Information that identifies the
security-based swap instrument and the
specific asset(s) or issuer(s) of any
security on which the security-based
swap is based;
(3) The notional amount(s), and the
currenc(ies) in which the notional
amount(s) is expressed;
(4) The date and time, to the second,
of execution, expressed using
Coordinated Universal Time (UTC);
(5) The effective date;
(6) The scheduled termination date;
(7) The price;
(8) The terms of any fixed or floating
rate payments, and the frequency of any
payments;
(9) Whether or not the security-based
swap will be cleared by a clearing
agency;
(10) If both sides of the security-based
swap include a security-based swap
dealer, an indication to that effect;
(11) If applicable, an indication that
the transaction does not accurately
reflect the market; and
(12) If the security-based swap is
customized to the extent that the
information provided in paragraphs
(c)(1) through (11) of this section does
not provide all of the material
information necessary to identify such
customized security-based swap or does
not contain the data elements necessary
to calculate the price, an indication to
that effect.
(d) Secondary trade information. (1)
In addition to the information required
under paragraph (c) of this section, for
each security-based swap for which it is
the reporting side, the reporting side
shall report:
(i) The participant ID of each
counterparty;
(ii) As applicable, the broker ID, desk
ID, and trader ID of the direct
counterparty on the reporting side;
(iii) The amount(s) and currenc(ies) of
any up-front payment(s) and a
description of the terms and
contingencies of the payment streams of
each direct counterparty to the other;
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(iv) The title of any master agreement,
or any other agreement governing the
transaction (including the title of any
document governing the satisfaction of
margin obligations), incorporated by
reference and the date of any such
agreement;
(v) The data elements necessary for a
person to determine the market value of
the transaction;
(vi) If the security-based swap will be
cleared, the name of the clearing agency;
(vii) If the security-based swap is not
cleared, whether the exception in
Section 3C(g) of the Exchange Act (15
U.S.C. 78c–3(g)) was invoked;
(viii) If the security-based swap is not
cleared, a description of the settlement
terms, including whether the securitybased swap is cash-settled or physically
settled, and the method for determining
the settlement value; and
(ix) The venue where the securitybased swap was executed.
(2) Any information required to be
reported pursuant to paragraph (d)(1) of
this section must be reported promptly,
but in no event later than:
(i) Fifteen minutes after the time of
execution for a security-based swap that
is executed and confirmed
electronically;
(ii) Thirty minutes after the time of
execution for a security-based swap that
is confirmed electronically but not
executed electronically; or
(iii) Twenty-four hours after the time
of execution for a security-based swap
that is not executed or confirmed
electronically.
(e) Duty to report any life cycle event
of a security-based swap. For any life
cycle event, and any adjustment due to
a life cycle event, that results in a
change to information previously
reported pursuant to paragraph (c), (d),
or (i) of this section, the reporting side
shall promptly provide updated
information reflecting such change to
the entity to which it reported the
original transaction, using the
transaction ID, subject to the following
exceptions:
(1) If a reporting side ceases to be a
counterparty to a security-based swap
due to an assignment or novation, the
new side shall be the reporting side
following such assignment or novation,
if the new side includes a U.S. person,
a security-based swap dealer, or a major
security-based swap participant.
(2) If, following an assignment or
novation, the new side does not include
a U.S. person, a security-based swap
dealer, or a major security-based swap
participant, the other side shall be the
reporting side following such
assignment or novation.
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(f) Time stamping incoming
information. A registered security-based
swap data repository shall time stamp,
to the second, its receipt of any
information submitted to it pursuant to
paragraph (c), (d), (e), or (i) of this
section.
(g) Assigning transaction ID. A
registered security-based swap data
repository shall assign a transaction ID
to each security-based swap.
(h) Format of reported information.
The reporting side shall electronically
transmit the information required under
this section in a format required by the
registered security-based swap data
repository, and in accordance with any
applicable policies and procedures of
the registered security-based swap data
repository.
(i) Reporting of pre-enactment and
transitional security-based swaps. With
respect to any pre-enactment securitybased swap or transitional securitybased swap, the reporting side shall
report all of the information required by
paragraphs (c) and (d) of this section, to
the extent such information is available.
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§ 242.902 Public dissemination of
transaction reports.
(a) General. Unless a security-based
swap is a block trade or a cross-border
security-based swap that is required to
be reported but not publicly
disseminated, a registered securitybased swap data repository shall
publicly disseminate a transaction
report of the security-based swap
immediately upon receipt of
information about the security-based
swap, or upon re-opening following a
period when the registered securitybased swap data repository was closed.
The transaction report shall consist of
all the information reported pursuant to
§ 242.901, plus any indicator or
indicators contemplated by the
registered security-based swap data
repository’s policies and procedures
that are required by § 242.907.
(b) Dissemination of block trades. A
registered security-based swap data
repository shall publicly disseminate a
transaction report of a security-based
swap that constitutes a block trade
immediately upon receipt of
information about the block trade from
the reporting side. The transaction
report shall consist of all the
information reported by the reporting
side pursuant to § 242.901(c), except for
the notional size, plus the transaction ID
and an indicator that the report
represents a block trade. The registered
security-based swap data repository
shall publicly disseminate a complete
transaction report for such block trade
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(including the transaction ID and the
full notional size) as follows:
(1) If the security-based swap was
executed on or after 05:00 UTC and
before 23:00 UTC of the same day, the
transaction report (including the
transaction ID and the full notional size)
shall be disseminated at 07:00 UTC of
the following day.
(2) If the security-based swap was
executed on or after 23:00 UTC and up
to 05:00 UTC of the following day, the
transaction report (including the
transaction ID and the full notional size)
shall be disseminated at 13:00 UTC of
that following day.
(3) Notwithstanding the foregoing, if a
registered security-based swap data
repository is in normal closing hours or
special closing hours at a time when it
would be required to disseminate
information about a block trade
pursuant to this section, the registered
security-based swap data repository
shall instead disseminate information
about the block trade immediately upon
re-opening.
(c) Non-disseminated information. A
registered security-based swap data
repository shall not disseminate:
(1) The identity of either counterparty
to a security-based swap;
(2) With respect to a security-based
swap that is not cleared at a registered
clearing agency and that is reported to
the registered security-based swap data
repository, any information disclosing
the business transactions and market
positions of any person; or
(3) Any information regarding a
security-based swap reported pursuant
to § 242.901(i).
(d) Temporary restriction on other
market data sources. No person other
than a registered security-based swap
data repository shall make available to
one or more persons (other than a
counterparty) transaction information
relating to a security-based swap before
the earlier of 15 minutes after the time
of execution of the security-based swap;
or the time that a registered securitybased swap data repository publicly
disseminates a report of that securitybased swap.
§ 242.903
Coded information.
The reporting side may provide
information to a registered securitybased swap data repository pursuant to
§ 242.901 and a registered securitybased swap data repository may
publicly disseminate information
pursuant to § 242.902 using codes in
place of certain data elements, provided
that the information necessary to
interpret such codes is widely available
on a non-fee basis.
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31213
§ 242.904 Operating hours of registered
security-based swap data repositories.
A registered security-based swap data
repository shall have systems in place to
continuously receive and disseminate
information regarding security-based
swaps pursuant to §§ 242.900 through
242.911, subject to the following
exceptions:
(a) A registered security-based swap
data repository may establish normal
closing hours during periods when, in
its estimation, the U.S. market and
major foreign markets are inactive. A
registered security-based swap data
repository shall provide reasonable
advance notice to participants and to
the public of its normal closing hours.
(b) A registered security-based swap
data repository may declare, on an ad
hoc basis, special closing hours to
perform system maintenance that
cannot wait until normal closing hours.
A registered security-based swap data
repository shall, to the extent reasonably
possible under the circumstances, avoid
scheduling special closing hours during
periods when, in its estimation, the U.S.
market and major foreign markets are
most active; and provide reasonable
advance notice of its special closing
hours to participants and to the public.
(c) During normal closing hours, and
to the extent reasonably practicable
during special closing hours, a
registered security-based swap data
repository shall have the capability to
receive and hold in queue information
regarding security-based swaps that has
been reported pursuant to §§ 242.900
through 242.911.
(d) When a registered security-based
swap data repository re-opens following
normal closing hours or special closing
hours, it shall disseminate transaction
reports of security-based swaps held in
queue, in accordance with the
requirements of § 242.902.
(e) If a registered security-based swap
data repository could not receive and
hold in queue transaction information
that was required to be reported
pursuant to §§ 242.900 through 242.911,
it must immediately upon re-opening
send a message to all participants that
it has resumed normal operations.
Thereafter, any participant that had an
obligation to report information to the
registered security-based swap data
repository pursuant to §§ 242.900
through 242.911, but could not do so
because of the registered security-based
swap data repository’s inability to
receive and hold in queue data, must
immediately report the information to
the registered security-based swap data
repository.
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§ 242.905 Correction of errors in securitybased swap information.
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(a) Duty of counterparties to correct.
Any counterparty to a security-based
swap that discovers an error in
information previously reported
pursuant to §§ 242.900 through 242.911
shall correct such error in accordance
with the following procedures:
(1) If a side that was not the reporting
side for a security-based swap
transaction discovers an error in the
information reported with respect to
such security-based swap, the
counterparty shall promptly notify the
reporting side of the error; and
(2) If the reporting side for a securitybased swap transaction discovers an
error in the information reported with
respect to a security-based swap, or
receives notification from its
counterparty of an error, the reporting
side shall promptly submit to the entity
to which the security-based swap was
originally reported an amended report
pertaining to the original transaction
report. If the reporting side reported the
initial transaction to a registered
security-based swap data repository, the
reporting side shall submit an amended
report to the registered security-based
swap data repository in a manner
consistent with the policies and
procedures contemplated by
§ 242.907(a)(3).
(b) Duty of security-based swap data
repository to correct. A registered
security-based swap data repository
shall:
(1) Upon discovery of the error or
receipt of a notice of the error from the
reporting side, verify the accuracy of the
terms of the security-based swap and,
following such verification, promptly
correct the erroneous information
regarding such security-based swap
contained in its system; and
(2) If such erroneous information
relates to a security-based swap that the
registered security-based swap data
repository previously disseminated and
falls into any of the categories of
information enumerated in § 242.901(c),
publicly disseminate a corrected
transaction report of the security-based
swap promptly following verification of
the trade by the counterparties to the
security-based swap, with an indication
that the report relates to a previously
disseminated transaction.
§ 242.906 Other duties of participants and
guarantors.
(a) Reporting by non-reporting-side. A
registered security-based swap data
repository shall identify any securitybased swap reported to it for which the
registered security-based swap data
repository does not have the participant
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ID and (if applicable) the broker ID, desk
ID, and trader ID of each direct
counterparty. Once a day, the registered
security-based swap data repository
shall send a report to each participant
identifying, for each security-based
swap to which that participant is a
counterparty, the security-based swap(s)
for which the registered security-based
swap data repository lacks participant
ID and (if applicable) broker ID, desk ID,
and trader ID. A participant that
receives such a report shall provide the
missing information to the registered
security-based swap data repository
within 24 hours.
(b) Duty to provide ultimate parent
and affiliate information. Each
participant of a registered security-based
swap data repository shall provide to
the registered security-based swap data
repository information sufficient to
identify its ultimate parent(s) and any
affiliate(s) of the participant that also are
participants of the registered securitybased swap data repository, using
ultimate parent IDs and participant IDs.
A participant shall promptly notify the
registered security-based swap data
repository of any changes to that
information.
(c) Policies and procedures of
security-based swap dealers and major
security-based swap participants. Each
participant that is a security-based swap
dealer or major security-based swap
participant shall establish, maintain,
and enforce written policies and
procedures that are reasonably designed
to ensure that it complies with any
obligations to report information to a
registered security-based swap data
repository in a manner consistent with
§§ 242.900 through 242.911 and the
registered security-based swap data
repository’s applicable policies and
procedures. Each such participant shall
review and update its policies and
procedures at least annually.
§ 242.907 Policies and procedures of
registered security-based swap data
repositories.
(a) General policies and procedures.
With respect to the receipt, reporting,
and dissemination of data pursuant to
§§ 242.900 through 242.911, a registered
security-based swap data repository
shall establish and maintain written
policies and procedures:
(1) That enumerate the specific data
elements of a security-based swap or a
life cycle event that the reporting side
must report, which shall include, at a
minimum, the data elements specified
in § 242.901(c) and (d);
(2) That specify one or more
acceptable data formats (each of which
must be an open-source structured data
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format that is widely used by
participants), connectivity
requirements, and other protocols for
submitting information;
(3) For specifying how reporting sides
are to report corrections to previously
submitted information, making
corrections to information in its records
that is subsequently discovered to be
erroneous, and applying an appropriate
indicator to any transaction report
required to be disseminated by
§ 242.905(b)(2) that the report relates to
a previously disseminated transaction;
(4) Describing how reporting sides
shall report and, consistent with the
enhancement of price discovery, how
the registered security-based swap data
repository shall publicly disseminate,
reports of, and adjustments due to, life
cycle events; security-based swap
transactions that do not involve an
opportunity to negotiate any material
terms, other than the counterparty; and
any other security-based swap
transactions that, in the estimation of
the registered security-based swap data
repository, do not accurately reflect the
market;
(5) For assigning:
(i) A transaction ID to each securitybased swap that is reported to it; and
(ii) UICs established by or on behalf
of an internationally recognized
standards-setting body that imposes fees
and usage restrictions that are fair and
reasonable and not unreasonably
discriminatory (or, if no standardssetting body meets these criteria or a
standards-setting body meets these
criteria but has not assigned a UIC to a
particular person, unit of a person, or
product, using its own methodology);
and
(6) For periodically obtaining from
each participant information that
identifies the participant’s ultimate
parent(s) and any participant(s) with
which the participant is affiliated, using
ultimate parent IDs and participant IDs.
(b) Policies and procedures regarding
block trades. (1) A registered securitybased swap data repository shall
establish and maintain written policies
and procedures for calculating and
publicizing block trade thresholds for
all security-based swap instruments
reported to the registered security-based
swap data repository, in accordance
with the criteria and formula for
determining block size as specified by
the Commission.
(2) Exceptions. Notwithstanding the
above, a registered security-based swap
data repository shall not designate as a
block trade any security-based swap:
(i) That is an equity total return swap
or is otherwise designed to offer risks
and returns proportional to a position in
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the equity security or securities on
which the security-based swap is based;
or
(ii) Contemplated by Section
13(m)(1)(C)(iv) of the Exchange Act ((15
U.S.C. 78m(m)(1)(C)(iv)).
(c) Public availability of policies and
procedures. A registered security-based
swap data repository shall make the
policies and procedures required by
§§ 242.900 through 242.911 publicly
available on its Web site.
(d) Updating of policies and
procedures. A registered security-based
swap data repository shall review, and
update as necessary, the policies and
procedures required by §§ 242.900
through 242.911 at least annually. Such
policies and procedures shall indicate
the date on which they were last
reviewed.
(e) A registered security-based swap
data repository shall have the capacity
to provide to the Commission, upon
request, information or reports related to
the timeliness, accuracy, and
completeness of data reported to it
pursuant to §§ 242.900 through 242.911
and the registered security-based swap
data repository’s policies and
procedures thereunder.
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§ 242.908
Cross-border matters.
(a) Application of Regulation SBSR to
cross-border transactions—(1)
Regulatory reporting. A reporting side
shall report a security-based swap if:
(i) The security-based swap is a
transaction conducted within the
United States;
(ii) There is a direct or indirect
counterparty that is a U.S. person on
either side of the transaction;
(iii) There is a direct or indirect
counterparty that is a security-based
swap dealer or major security-based
swap participant on either side of the
transaction; or
(iv) The security-based swap is
cleared through a clearing agency
having its principal place of business in
the United States.
(2) Public dissemination. A securitybased swap shall be subject to public
dissemination if:
(i) The security-based swap is a
transaction conducted within the
United States;
(ii) There is a direct or indirect
counterparty that is a U.S. person on
each side of the transaction;
(iii) At least one direct counterparty is
a U.S. person (except in the case of a
transaction conducted through a foreign
branch);
(iv) One side includes a U.S. person
and the other side includes a non-U.S.
person that is a security-based swap
dealer; or
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(v) The security-based swap is cleared
through a clearing agency having its
principal place of business in the
United States.
(b) Limitation on counterparty duties.
Notwithstanding any other provision of
§§ 242.900 through 242.911, a
counterparty to a security-based swap
shall not incur any obligation under
§§ 242.900 through 242.911 unless it is:
(1) A U.S. person;
(2) A security-based swap dealer or
major security-based swap participant;
or
(3) A counterparty to a transaction
conducted within the United States.
(c) Substituted compliance—(1)
General. Compliance with the
regulatory reporting and public
dissemination requirements in sections
13(m) and 13A of the Act (15 U.S.C.
78m(m) and 78m–1), and the rules and
regulations thereunder, may be satisfied
by compliance with the rules of a
foreign jurisdiction that is the subject of
a Commission order described in
paragraph (c)(2) of this section,
provided that with respect to at least
one of the direct counterparties to the
security-based swap:
(i) Such counterparty is either a nonU.S. person or a foreign branch; and
(ii) The security-based swap
transaction is not solicited, negotiated,
or executed by a person within the
United States on behalf of such
counterparty.
(2) Procedure. (i) The Commission
may, conditionally or unconditionally,
by order, make a substituted compliance
determination regarding regulatory
reporting and public dissemination of
security-based swaps with respect to a
foreign jurisdiction if that jurisdiction’s
requirements for the regulatory
reporting and public dissemination of
security-based swaps are comparable to
otherwise applicable requirements.
(ii) Any person that executes securitybased swaps that would, in the absence
of a substituted compliance order, be
required to be reported pursuant to
§§ 242.900 through 242.911 may file an
application, pursuant to the procedures
set forth in § 240.0–13 of this chapter,
requesting that the Commission make a
substituted compliance determination
regarding regulatory reporting and
public dissemination with respect to a
foreign jurisdiction the rules of which
also would require reporting and public
dissemination of those security-based
swaps. Such application shall include
the reasons therefor and such other
information as the Commission may
request.
(iii) In making such a substituted
compliance determination, the
Commission shall take into account
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31215
such factors as the Commission
determines are appropriate, such as the
scope and objectives of the relevant
foreign regulatory requirements, as well
as the effectiveness of the supervisory
compliance program administered, and
the enforcement authority exercised, by
the foreign financial regulatory
authority to support oversight of its
regulatory reporting and public
dissemination system for security-based
swaps. The Commission shall not make
such a substituted compliance
determination unless it finds that:
(A) The data elements that are
required to be reported pursuant to the
rules of the foreign jurisdiction are
comparable to those required to be
reported pursuant to § 242.901;
(B) The rules of the foreign
jurisdiction require the security-based
swap to be reported and publicly
disseminated in a manner and a
timeframe comparable to those required
by §§ 242.900 through 242.911;
(C) The Commission has direct
electronic access to the security-based
swap data held by a trade repository or
foreign regulatory authority to which
security-based swaps are reported
pursuant to the rules of that foreign
jurisdiction; and
(D) Any trade repository or foreign
regulatory authority in the foreign
jurisdiction that receives and maintains
required transaction reports of securitybased swaps pursuant to the laws of that
foreign jurisdiction is subject to
requirements regarding data collection
and maintenance; systems capacity,
resiliency, and security; and
recordkeeping that are comparable to
the requirements imposed on securitybased swap data repositories by
§§ 240.13n–5 through 240.13n–7 of this
chapter.
(iv) Before issuing a substituted
compliance order pursuant to this
section, the Commission shall have
entered into a supervisory and
enforcement memorandum of
understanding or other arrangement
with the relevant foreign financial
regulatory authority or authorities under
such foreign financial regulatory system
addressing oversight and supervision of
the applicable security-based swap
market under the substitute compliance
determination.
(v) The Commission may, on its own
initiative, modify or withdraw such
order at any time, after appropriate
notice and opportunity for comment.
§ 242.909 Registration of security-based
swap data repository as a securities
information processor.
A registered security-based swap data
repository shall also register with the
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Commission as a securities information
processor on Form SIP (§ 249.1001 of
this chapter).
sroberts on DSK5SPTVN1PROD with PROPOSALS
§ 242.910 Implementation of securitybased swap reporting and dissemination.
(a) Reporting of pre-enactment
security-based swaps. The reporting
side shall report to a registered securitybased swap data repository any preenactment security-based swaps no later
than January 12, 2012 (180 days after
the effective date of the Dodd-Frank Act
(Pub. L. 111–203, H.R. 4173)).
(b) Phase-in of compliance dates. A
registered security-based swap data
repository and its participants shall be
subject to the following phased-in
compliance schedule:
(1) Phase 1, six months after the
registration date (i.e., the effective
reporting date):
(i) Reporting sides shall report to the
registered security-based swap data
repository any transitional securitybased swaps.
(ii) With respect to any security-based
swap executed on or after the effective
reporting date, reporting sides shall
comply with § 242.901.
(iii) Participants and the registered
security-based swap data repository
shall comply with § 242.905 (except
with respect to public dissemination)
and § 242.906(a) and (b).
(iv) Participants that are securitybased swap dealers or major securitybased swap participants shall comply
with § 242.906(c).
(2) Phase 2, nine months after the
registration date: Wave 1 of public
dissemination—The registered securitybased swap data repository shall comply
with §§ 242.902 and 242.905 (with
respect to public dissemination of
corrected transaction reports) for 50
security-based swap instruments.
(3) Phase 3, 12 months after the
registration date: Wave 2 of public
dissemination—The registered securitybased swap data repository shall comply
with §§ 242.902 and 242.905 (with
respect to public dissemination of
corrected transaction reports) for an
additional 200 security-based swap
instruments.
(4) Phase 4, 18 months after the
registration date: Wave 3 of public
dissemination—All security-based
swaps received by the registered
security-based swap data repository
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dealer or major security-based swap
participant or to amend such an
application for registration by firms
registered or registering with the
Commission as a broker or dealer.
shall be treated in a manner consistent
with §§ 242.902, 242.905, and 242.908.
§ 242.911
period.
Prohibition during phase-in
A reporting side shall not report a
security-based swap to a registered
security-based swap data repository in a
phase-in period described in § 242.910
during which the registered securitybased swap data repository is not yet
required or able to publicly disseminate
transaction reports for that securitybased swap instrument unless:
(a) The security-based swap is also
reported to a registered security-based
swap data repository that is
disseminating transaction reports for
that security-based swap instrument
consistent with § 242.902; or
(b) No other registered security-based
swap data repository is able to receive,
hold, and publicly disseminate
transaction reports regarding that
security-based swap instrument.
PART 249—FORMS, SECURITIES
EXCHANGE ACT OF 1934
11. The authority citation for Part 249
continues to read, in part, as follows:
■
Authority: 15 U.S.C. 78a et seq. and 7201
et seq.; 12 U.S.C. 5461 et seq.; and 18 U.S.C.
1350, unless otherwise noted.
*
*
*
*
*
12. Section 249.1600, § 249.1600a,
and § 249.1600b as previously proposed
to be added at 76 FR 65824, Oct. 24,
2011, are further revised to read as
follows:
■
Subpart Q—Registration of SecurityBased Swap Dealers and Major
Security-Based Swap Participants
Sec.
249.1600 Form SBSE, for application for
registration as a security-based swap
dealer or major security-based swap
participant or to amend such an
application for registration.
249.1600a Form SBSE–A, for application
for registration as a security-based swap
dealer or major security-based swap
participant or to amend such an
application for registration by firms
registered or registering with the
Commodity Futures Trading
Commission as a swap dealer or major
swap participant that are not also
registered or registering with the
Commission as a broker or dealer.
249.1600b Form SBSE–BD, for application
for registration as a security-based swap
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*
*
*
*
*
§ 249.1600 Form SBSE, for application for
registration as a security-based swap
dealer or major security-based swap
participant or to amend such an application
for registration.
This form shall be used for
application for registration as a securitybased swap dealer or major securitybased swap participant by firms that are
not registered with the Commission as
a broker or dealer and that are not
registered or registering with the
Commodity Futures Trading
Commission as a swap dealer or major
swap participant, pursuant to Section
15F(b) of the Securities Exchange Act of
1934 (15 U.S.C. 78o–10(b)) and to
amend such an application for
registration.
§ 249.1600a Form SBSE–A, for application
for registration as a security-based swap
dealer or major security-based swap
participant or to amend such an application
for registration by firms registered or
registering with the Commodity Futures
Trading Commission as a swap dealer or
major swap participant that are not also
registered or registering with the
Commission as a broker or dealer.
This form shall be used instead of
Form SBSE (§ 249.1600) to apply for
registration as a security-based swap
dealer or major security-based swap
participant by firms that are not
registered or registering with the
Commission as a broker or dealer but
that are registered or registering with the
Commodity Futures Trading
Commission as a swap dealer or major
swap participant, pursuant to Section
15F(b) of the Securities Exchange Act of
1934 (15 U.S.C. 78o–10(b)) and to
amend such an application for
registration. An entity that is registered
or registering with the Commission as a
broker or dealer and is also registered or
registering with the Commodity Futures
Trading Commission as a swap dealer or
major swap participant shall apply for
registration as a security-based swap
dealer or major security-based swap
participant on Form SBSE–BD
(§ 249.1600b) and not on this Form
SBSE–A.
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Guide to Reading the Title VII Tables
The following provides a guide to reading
the tables below.
• ‘‘Yes’’—Indicates that the Commission is
proposing to apply a particular transactionlevel requirement in Title VII to a security-
based swap transaction between the dealing
entity identified in row 1 and the transaction
counterparty identified in row 8, or that the
Commission is proposing to apply a
particular entity-level requirement in Title
VII to the dealing entity identified in row 1,
and that substituted compliance would not
be permitted.
• ‘‘No’’—Indicates that the Commission is
not proposing to apply the particular Title
VII requirement.
• ‘‘N/A’’—Indicates that the Title VII
requirement is not applicable because it
applies only to registered security-based
swap dealers.
• ‘‘Substituted Compliance’’ (or ‘‘Sub
Comp’’)—Indicates that the Commission is
proposing to apply the Title VII requirement,
but that we also are proposing to establish a
policy and procedural framework under
which we would consider permitting
compliance with comparable regulatory
requirements in a foreign jurisdiction to
substitute for compliance with requirements
of the Exchange Act, and the rules and
regulations thereunder, relating to securitybased swaps.
• ‘‘Location of Dealer/Agent’’—Refers to
the location of the dealing entity booking the
transaction or its agent.
Æ Table I describes the application of Title
VII to registered U.S. security-based swap
dealers and is divided between securitybased swap transactions that are conducted:
D Other than through a U.S. bank’s foreign
branch (columns 2 through 6); or
D Through a U.S. bank’s foreign branch
(columns 7 through 11).1974
Æ Tables II–V are divided between
transactions in which the dealing entity or its
agent is:
D ‘‘Within the U.S.’’—Indicates that a
person within the United States acting on
behalf of such non-U.S. dealer has solicited,
negotiated, executed, or booked the
transaction within the United States; or
D ‘‘Outside the U.S.’’—Indicates that such
non-U.S. dealer has solicited, negotiated,
executed, and booked the transaction,
without involving any person within the
United States acting on its behalf.1975
• ‘‘Transaction counterparty’’—Refers to
the counterparty with which the dealing
entity (identified in row 1) enters into a
transaction and whose counterparty credit
risk the dealing entity ultimately bears.
Therefore, the transaction counterparty is the
booking location or booking entity of the
trading counterparty with which the dealing
entity transacts. A transaction counterparty
may use personnel or an agent in a different
location than the booking location or booking
entity to negotiate the transaction with the
dealing entity. The five transaction
counterparties identified in the tables are as
follows:
Æ ‘‘U.S. Person (other than Foreign
Branch)’’—Indicates the transaction
counterparty of the dealing entity (identified
in row 1) is a U.S. person (other than a
foreign branch of a U.S. bank);
Æ ‘‘Non-U.S. Person Within the U.S.’’—
Indicates the transaction counterparty of the
dealing entity (identified in row 1) is a nonU.S. person and the security-based swap
transaction is conducted (i.e., solicited,
negotiated, executed, or booked) by or on
behalf of the non-U.S. person transaction
counterparty within the United States. This
includes a non-U.S. person counterparty that
uses its own personnel in its U.S. branch or
office to conduct the transaction or that uses
a U.S. affiliate or third party acting as its
agent to conduct the transaction on its
behalf; 1976
Æ ‘‘Foreign Branch of U.S. Bank’’—
Indicates the transaction counterparty of the
dealing entity (identified in row 1) is a
foreign branch of a U.S. bank and the
security-based swap transaction is conducted
(i.e., solicited, negotiated, executed, and
booked) by or on behalf of such foreign
branch without involving any person within
the United States acting on behalf of the
foreign branch;
Æ ‘‘Non-U.S. Person w/U.S. Guarantee
Outside the U.S.’’—Indicates the transaction
counterparty of the dealing entity (identified
in row 1) is a non-U.S. person whose
performance under the security-based swap
is guaranteed by a U.S. person (the ‘‘U.S.
Guarantor’’) such that its counterparty has
direct recourse to the U.S. Guarantor for
performance of obligations owed by such
non-U.S. person (i.e., the guaranteed entity)
under the security-based swap, and the
security-based swap transaction is conducted
(i.e., solicited, negotiated, executed, and
booked) by or on behalf of such non-U.S.
person counterparty without involving any
person within the United States acting on
behalf of such non-U.S. person; and
Æ ‘‘Non-U.S. Person w/o U.S. Guarantee
Outside the U.S.’’—Indicates the transaction
counterparty of the dealing entity (identified
in row 1) is a non-U.S. person whose
performance under the security-based swap
is not guaranteed by a U.S. person, and the
security-based swap transaction is conducted
(i.e., solicited, negotiated, executed, and
booked), by or on behalf of such non-U.S.
person counterparty, without involving any
person within the United States acting on
behalf of such non-U.S. person.1977
1972 The tables in this appendix are only a
summary of the rules and interpretations proposed
in this release and are provided for ease of
reference. They do not supersede, and should be
read in conjunction with, the proposed rules and
interpretations discussed in the release. All defined
terms used in the tables have the same meaning as
set forth in the release, unless otherwise indicated.
1973 Tables III and V also apply to non-U.S.
dealers and other non-U.S. market participants.
1974 The transactions identified in columns 7 and
8 of Table I are transactions in which a foreign
branch of a U.S. bank is the counterparty to the
transaction, but such transactions would not fall
within the definition of ‘‘transaction conducted
through a foreign branch’’ in proposed Rule 3a71–
3(a)(4) under the Exchange Act.
1975 A transaction in which the non-U.S. dealing
entity and its agent are outside the United States
may still be a ‘‘transaction conducted within the
United States,’’ as defined in proposed Rule 3a71–
3(a)(5) under the Exchange Act. For example, the
non-U.S. dealing entity may direct its solicitation
activity to a U.S. or non-U.S. person counterparty
located within the United States.
1976 If the non-U.S. person transaction
counterparty is a registered security-based swap
dealer, see Table II or IV for application of other
transaction-level requirements. If the non-U.S.
person transaction counterparty is an unregistered
dealer or market participant that receives a U.S.
guarantee, see Table II or III for application of other
transaction-level requirements.
1977 If the non-U.S. person counterparty is a
registered security-based swap dealer, see Table IV
for application of other transaction-level
requirements.
§ 249.1600b Form SBSE–BD, for
application for registration as a securitybased swap dealer or major security-based
swap participant or to amend such an
application for registration by firms
registered or registering with the
Commission as a broker or dealer.
This form shall be used instead of
either Form SBSE (§ 249.1600) or SBSE–
A (§ 249.1600a) to apply for registration
as a security-based swap dealer or major
security-based swap participant solely
by firms registered or registering with
the Commission as a broker or dealer,
pursuant to Section 15F(b) of the
Securities Exchange Act of 1934 (15
U.S.C. 78o–10(b)) and to amend such an
application for registration. An entity
that is registered or registering with the
Commission as a broker or dealer and is
also registered or registering with the
Commodity Futures Trading
Commission as a swap dealer or major
swap participant, the entity shall apply
for registration as a security-based swap
dealer or major security-based swap
participant on this Form SBSE–BD and
not on Form SBSE–A.
Note: The following Appendices will not
appear in the Code of Federal Regulations.
Appendix A: Application of Subtitle B
of Title VII in the Cross-Border Context
The following tables summarize the
Commission’s proposed approach to
applying requirements in Subtitle B of Title
VII of the Dodd-Frank Act in the cross-border
context.1972 Specifically, as explained more
fully in the main body of the release, the
tables show how the entity-level
requirements in Title VII apply to various
dealing entities (identified in row 1 of each
of the tables).1973 The tables also show how
various transaction-level requirements in
Title VII apply to transactions between such
dealing entities and various transaction
counterparties (identified in row 8 of each of
the tables), depending on the location of the
dealer or the dealer’s agent (identified in row
7). For the sake of completeness, these tables
may include transaction scenarios that are
unlikely to occur in practice.
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Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Table I-Registered U.S. Security-Based Swap Dealers
Registered U.S. Security-Based Swap Dealer
Entity-Level Requirements
Capital
SEC or Prudential Regulator
Margin
SEC or Prudential Regulator
Other
SEC
Transaction-Level Requirements
Location of
Dealer
IAgent
Transaction
CounterParty
Other Than Through a U.S. Bank's Foreign Branch
U.S.
Person
(other
than
Foreign
Branch)
NonU.S.
Person
Within
the
U.S.
Foreign
Branch
of U.S.
Bank
Non-U.S.
Person wi
U.S.
Guarantee
Outside the
U.S.
Non-U.S.
Person wlo
U.S.
Guarantee
Outside the
U.S.
Through a U.S. Bank's Foreign Branch
U.S.
Person
(other
than
Foreign
Branch)
NonU.S.
Person
Within
the
U.S.
Foreign
Branch
of U.S.
Bank
Non-U.S.
Person wi
U.S.
Guarantee
Outside the
U.S.
Non-U.S.
Person wlo
U.S.
Guarantee
Outside the
U.S.
Transaction-Level Requirements Applicable to Security-Based Swap Dealers
External
Business
Condnct
Segregation
(Cleared
SBS)
Segregation
(Uncleared
SBS)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Regulatory
Reporting
Yes
Yes
Sub
Comp
Sub Comp
Sub Comp
Sub
Comp
Sub
Comp
Sub
Comp
Sub Comp
Sub Comp
Public
Reporting
Yes
Yes
Sub
Comp
Sub Comp
Sub Comp
Sub
Comp
Sub
Comp
Sub
Comp
SubComp
No
Clearing
Sub
Comp
Sub
Comp
Sub
Comp
Sub Comp
Sub Comp
Sub
Comp
Sub
Comp
Sub
Comp
SubComp
No
Trade
Execution
Yes
Yes
Sub
Comp
Sub Comp
Sub Comp
Sub
Comp
Sub
Comp
Sub
Comp
SubComp
No
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Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Table II-Registered Non-U.S. Security-Based Swap Dealer with U.S. Guarantee
Registered Non-U.S. Security-Based Swap Dealer with U.S. Guarantee
Entity-Level Requirements
Capital
SEC (Substituted Compliance) or Prudential Regulator
Margin
SEC (Substituted Compliance) or Prudential Regulator
Other
SEC (Substituted Compliance)
Transaction-Level Requirements
Location of
Dealer IAgent
Transaction
CounterParty
Outside the U.S.
Within the U.S.
U.S.
Person
(other
than
Foreign
Branch)
NonU.S.
Person
Within
the
U.S.
Foreign
Branch
ofU.S.
Bank
Non-U.S.
Person wi
U.S.
Guarantee
Outside
the U.S.
Non-U.S.
Person w/o
U.S.
Guarantee
Outside
the U.S.
U.S.
Person
(other
than
Foreign
Branch)
NonU.S.
Person
Within
the
U.S.
Foreign
Branch
ofU.S.
Bank
Non-U.S.
Person wi
U.S.
Guarantee
Outside
the U.S.
Non-U.S.
Person
w/o U.S.
Guarantee
Outside
the U.S.
Transaction-Level Requirements Applicable to Security-Based Swap Dealers
External
Business
Conduct
Sub
Comp
Sub
Comp
Sub
Comp
Sub Comp
SubComp
Sub
Comp
Sub
Comp
No
No
No
Segregation
(Cleared SBS)
Yes
See
Release
Yes
See
Release
See
Release
Yes
See
Release
Yes
See
Release
See
Release
Segregation
(Uncleared
SBS)
Yes
See
Release
Yes
See
Release
See
Release
Yes
See
Release
Yes
See
Release
See
Release
Regulatory
Reporting
Yes
Yes
Sub
Comp
SubComp
Sub Comp
Sub
Comp
Sub
Comp
Sub
Comp
Sub Comp
Sub Comp
Public
Reporting
Yes
Yes
Sub
Comp
Sub Comp
Sub Comp
Sub
Comp
Sub
Comp
Sub
Comp
Sub Comp
No
Sub
Comp
Sub
Comp
Sub
Comp
Sub Comp
Sub Comp
Sub
Comp
Sub
Comp
Sub
Comp
Sub Comp
No
Yes
Yes
Sub
Comp
SubComp
Sub Comp
Sub
Comp
Sub
Comp
Sub
Comp
Sub Comp
No
Clearing
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Table III-Unregistered Non-U.S. Dealer (or Market Participant) with u.s. Guarantee
Unregistered Non-U.S. Dealer (or Market Participant) with U.S. Guarantee
Entity-Level Requirements
Capital
N/A
Margin
N/A
Other
N/A
Transaction-Level Requirements
Location of
Dealer
Within the u.s.
Outside the
u.s.
IA2cnt
Transaction
CounterParty
U.S.
Person
(other
than
Foreign
Branch)
NonU.S.
Person
Within
the
U.S.
Foreign
Branch
ofU.S.
Bank
Non-U.S.
Person wi
U.S.
Guarantee
Outside
the U.S.
Non-U.S.
Person
w/o U.S.
Guarantee
Outside
the U.S.
U.S.
Person
(other
than
Foreign
Branch)
NonU.S.
Person
Within
the
U.S.
Foreign
Branch
of U.S.
Bank
Non-U.S.
Person wi
U.S.
Guarantee
Outside
the U.S.
Non-U.S.
Person
w/oU.S.
Guarantee
Outside
the U.S.
Transaction-Level Requirements Applicable to Security-Based Swap Dealers
External
Business
Conduct
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Segregation
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Regulatory
Reporting
Yes
Yes
Sub
Comp
Sub Comp
Sub Comp
Sub
Comp
Sub
Comp
Sub
Comp
Sub Comp
SubComp
Public
Reporting
Yes
Yes
Sub
Comp
Sub Comp
SubComp
Sub
Comp
Sub
Comp
Sub
Comp
Sub Comp
No
Clearing
Sub
Comp
Sub
Comp
Sub
Comp
SubComp
Sub Comp
Sub
Comp
Sub
Comp
Sub
Comp
Sub Comp
No
Trade
Execution
Yes
Yes
Sub
Comp
SubComp
Sub Comp
Sub
Comp
Sub
Comp
Sub
Comp
Sub Comp
No
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31221
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Table IV-Registered Non-U.S. Security-Based Swap Dealer Without U.S. Guarantee
Registered Non-U.S. Security-Based Swap Dealer Without U.S. Guarantee
Entity-Level Requirements
Capital
SEC (Substituted Compliance) or Prudential Regulator
Margin
SEC (Substituted Compliance) or Prudential Regulator
Other
SEC (Substituted Compliance)
Transaction-Level Requirements
Location of
Dealer
Within the U.S.
Outside the U.S.
IAgent
Transaction
ConntcrParty
U.S.
Person
(other
than
Foreign
Branch)
NonU.S.
Person
Within
the U.S.
Foreign
Branch
of U.S.
Bank
Non-U.S.
Person wi
U.S.
Guarantee
Outside
the U.S.
Non-U.S.
Person w/o
U.S.
Guarantee
Outside the
U.S.
U.S.
Person
(other
than
Foreign
Branch)
NonU.S.
Person
Within
the U.S.
Foreign
Branch
of U.S.
Bank
Non-U.S.
Person wi
U.S.
Guarantee
Outside
the U.S.
Non-U.S.
Person w/o
U.S.
Guarantee
Outside the
U.S.
Transaction-Level Requirements Applicable to Security-Based Swap Dealers
External
Business
Conduct
Sub
Comp
Sub
Comp
Sub
Comp
Sub Comp
SubComp
Sub
Comp
Sub
Comp
No
No
No
Segregation
(Cleared
SBS)
Yes
See
Release
Yes
See
Release
See
Release
Yes
See
Release
Yes
Sec
Release
See
Release
Segregation
(Uncleared
SBS)
Yes
See
Release
Yes
See
Release
See
Release
Yes
See
Release
Yes
See
Release
See
Release
Regulatory
Reporting
Yes
Yes
Sub
Comp
Sub Comp
Sub Comp
Sub
Comp
Sub
Comp
Sub
Comp
Sub Comp
Sub Comp
Public
Reporting
Yes
Yes
Sub
Comp
Sub Comp
Sub Comp
Sub
Comp
Sub
Comp
Sub
Comp
Sub Comp
No
Clearing
Sub
Comp
Sub
Comp
Sub
Comp
Sub Comp
Sub Comp
Sub
Comp
Sub
Comp
Sub
Comp
SubComp
No
Trade
Execution
Yes
Yes
Sub
Comp
Sub Comp
Sub Comp
Sub
Comp
Sub
Comp
Sub
Comp
Sub Comp
No
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31222
BILLING CODE 8011–01–C
capacity with the various counterparties
listed along the left hand column of the table
toward its de minimis threshold.
This table shows the Commission’s
proposed approach to applying the de
minimis threshold in the security-based swap
dealer definition in the cross-border
context.1978 Specifically, it indicates whether
a potential security-based swap dealer listed
along the top of the table would be required
to count a transaction conducted in a dealing
1978 This table in this appendix is only a summary
of the rules and interpretations proposed in this
release and is provided for ease of reference. It does
not supersede, and should be read in conjunction
with, the proposed rules and interpretations
discussed in the release. All defined terms used in
this table have the same meaning as set forth in the
release, unless otherwise indicated.
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Appendix B: Registration of SecurityBased Swap Dealers
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Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
31223
Form SBSE–A
Form SBSE–BD
Appendix C: Re-Proposal of
Registration Forms
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Form SBSE
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Form SBSE Instructions
sroberts on DSK5SPTVN1PROD with PROPOSALS
A. General Instructions
1. FORM—Form SBSE is the
Application for Registration as either a
Security-based Swap Dealer or Major
Security-based Swap Participant
(collectively, ‘‘SBS Entities’’). SBS
Entities that are not registered with the
Commission as broker-dealers nor
registered or registering with the
Commodity Futures Trading
Commission (‘‘CFTC’’) as a swap dealer
or major swap participant must file this
form to register with the Securities and
Exchange Commission. An applicant
must also file Schedules A, B, D, E, F,
and G as appropriate. There is no
Schedule C.
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2. ELECTRONIC FILING—The
applicant must file Form SBSE through
the EDGAR system, and must utilize the
EDGAR Filer Manual (as defined in 17
CFR 232. 11) to file and amend Form
SBSE electronically to assure the timely
acceptance and processing of those
filings.1979
3. UPDATING—By law, the applicant
must promptly update Form SBSE
information by submitting amendments
whenever the information on file
becomes inaccurate or incomplete for
1979 As discussed in the release proposing this
Form, the Commission is currently developing a
system to facilitate receipt of applications
electronically. More specific instructions on how to
file this Form may be included in the final version
of the Form.
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any reason [17 CFR 240.15Fb2–2]. In
addition, the applicant must update any
incomplete or inaccurate information
contained on Form SBSE prior to filing
a notice of withdrawal from registration
on Form SBSE–W [17 CFR 15Fb3–2(a)].
4. CONTACT EMPLOYEE—The
individual listed as the contact
employee must be authorized to receive
all compliance information,
communications, and mailings, and be
responsible for disseminating it within
the applicant’s organization.
5. FEDERAL INFORMATION LAW
AND REQUIREMENTS—An agency may
not conduct or sponsor, and a person is
not required to respond to, a collection
of information unless it displays a
currently valid control number. Sections
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31224
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
15F, 17(a) and 23(a) of the Exchange Act
authorize the SEC to collect the
information on this form from
registrants. See 15 U.S.C. §§ 78o–10, 78q
and 78w. Filing of this form is
mandatory; however, the social security
number information, which aids in
identifying the applicant, is voluntary.
The principal purpose of this Form is to
permit the Commission to determine
whether the applicant meets the
statutory requirements to engage in the
security-based swap business. The
Commission maintain[s] a file of the
information on this form and will make
certain information collected via the
form publicly available. Any member of
the public may direct to the
Commission any comments concerning
the accuracy of the burden estimate on
this Form, and any suggestions for
reducing this burden. This collection of
information has been reviewed by the
Office of Management and Budget in
accordance with the clearance
requirements of 44 U.S.C. § 3507. The
information contained in this form is
part of a system of records subject to the
Privacy Act of 1974, as amended. The
Securities and Exchange Commission
has published in the Federal Register
the Privacy Act Systems of Records
Notice for these records.
sroberts on DSK5SPTVN1PROD with PROPOSALS
B. Filing Instructions
1. FORMAT
a. Sections 1–14 must be answered
and all fields requiring a response must
be completed before the filing will be
accepted.
b. Failure to follow instructions or
properly complete the form may result
in the application being delayed or
rejected.
c. Applicant must complete the
execution screen certifying that Form
SBSE and amendments thereto have
been executed properly and that the
information contained therein is
accurate and complete.
d. To amend information, the
applicant must update the appropriate
Form SBSE screens.
e. A paper copy, with original
signatures, of the initial Form SBSE
filing and amendments to Disclosure
Reporting Pages (DRPs) must be retained
by the applicant and be made available
for inspection upon a regulatory request.
2. DISCLOSURE REPORTING PAGE
(DRP)—Information concerning the
applicant or control affiliate that relates
to the occurrence of an event reportable
under Item 12 must be provided on the
applicant’s appropriate DRP.
3. DIRECT AND INDIRECT
OWNERS—Amend the Direct Owners
and Executive Officers screen and the
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Indirect Owners screen when changes in
ownership occur.
The mailing address for questions and
correspondence is:
Explanation of Terms
(The Following Terms are Italicized
Throughout This Form.)
1. General
APPLICANT—The security-based
swap dealer or major security-based
swap participant applying on or
amending this form.
CONTROL—The power, directly or
indirectly, to direct the management or
policies of a company, whether through
ownership of securities, by contract, or
otherwise. Any person that (i) is a
director, general partner or officer
exercising executive responsibility (or
having similar status or functions); (ii)
directly or indirectly has the right to
vote 25% or more of a class of a voting
security or has the power to sell or
direct the sale of 25% or more of a class
of voting securities; or (iii) in the case
of a partnership, has the right to receive
upon dissolution, or has contributed,
25% or more of the capital, is presumed
to control that company.
STATE—Any state of the United
States, the District of Columbia, the
Commonwealth of Puerto Rico, the U.S.
Virgin Islands, any other territory of the
United States, or any subdivision or
regulatory body thereof.
PERSON—An individual,
partnership, corporation, trust, or other
organization.
SELF-REGULATORY
ORGANIZATION (SRO)—Any national
securities or futures exchange,
registered securities or futures
association, registered clearing agency,
or derivatives clearing organization.
SUCCESSOR—The term ‘‘successor’’
is defined to be an unregistered entity
that assumes or acquires substantially
all of the assets and liabilities, and that
continues the business of, a predecessor
security-based swap dealer or major
security-based swap participant that
ceases its security-based swap activities.
[See Exchange Act Rule 15Fb2–5 (17
CFR 240.15Fb2–5]
2. FOR THE PURPOSE OF ITEM 12
AND THE CORRESPONDING
DISCLOSURE REPORTING PAGES
(DRPs)
CHARGED—Being accused of a crime
in a formal complaint, information, or
indictment (or equivalent formal
charge).
CONTROL AFFILIATE—A person
named in Items 10 or 11 as a control
person or any other individual or
organization that directly or indirectly
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31225
controls, is under common control with,
or is controlled by, the applicant,
including any current employee of the
applicant except one performing only
clerical, administrative, support or
similar functions, or who, regardless of
title, performs no executive duties or
has no senior policy making authority.
ENJOINED—Includes being subject to
a mandatory injunction, prohibitory
injunction, preliminary injunction, or a
temporary restraining order.
FELONY—For jurisdictions that do
not differentiate between a felony and a
misdemeanor, a felony is an offense
punishable by a sentence of at least one
year imprisonment and/or a fine of at
least $1,000. The term also includes a
general court martial.
FOUND—Includes adverse final
actions, including consent decrees in
which the respondent has neither
admitted nor denied the findings, but
does not include agreements, deficiency
letters, examination reports, memoranda
of understanding, letters of caution,
admonishments, and similar informal
resolutions of matters.
INVESTMENT OR INVESTMENT–
RELATED—Pertaining to securities,
commodities, banking, savings
association activities, credit union
activities, insurance, or real estate
(including, but not limited to, acting as
or being associated with a broker-dealer,
municipal securities dealer, government
securities broker or dealer, issuer,
investment company, investment
adviser, futures sponsor, bank, securitybased swap dealer, major security-based
swap participant, savings association,
credit union, insurance company, or
insurance agency).
INVOLVED—Doing an act or aiding,
abetting, counseling, commanding,
inducing, conspiring with or failing
reasonably to supervise another in doing
an act.
MINOR RULE VIOLATION—A
violation of a self-regulatory
organization rule that has been
designated as ‘‘minor’’ pursuant to a
plan approved by the SEC or CFTC. A
rule violation may be designated as
‘‘minor’’ under a plan if the sanction
imposed consists of a fine of $2,500 or
less, and if the sanctioned person does
not contest the fine. (Check with the
appropriate self-regulatory organization
to determine if a particular rule
violation has been designated as
‘‘minor’’ for these purposes).
MISDEMEANOR—For jurisdictions
that do not differentiate between a
felony and a misdemeanor, a
misdemeanor is an offense punishable
by a sentence of less than one year
imprisonment and/or a fine of less than
E:\FR\FM\23MYP2.SGM
23MYP2
31226
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
sroberts on DSK5SPTVN1PROD with PROPOSALS
$1,000. The term also includes a special
court martial.
ORDER—A written directive issued
pursuant to statutory authority and
procedures, including orders of denial,
suspension, or revocation; does not
include special stipulations,
undertakings or agreements relating to
payments, limitations on activity or
VerDate Mar<15>2010
20:21 May 22, 2013
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other restrictions unless they are
included in an order.
PROCEEDING—Includes a formal
administrative or civil action initiated
by a governmental agency, selfregulatory organization or a foreign
financial regulatory authority; a felony
criminal indictment or information (or
equivalent formal charge); or a
PO 00000
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misdemeanor criminal information (or
equivalent formal charge). Does not
include other civil litigation,
investigations, or arrests or similar
charges effected in the absence of a
formal criminal indictment or
information (or equivalent formal
charge).
BILLING CODE 8011–01–P
E:\FR\FM\23MYP2.SGM
23MYP2
31227
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
FORMSBSE
Page 1
(Execution Page)
.
Official
Use
Only
Official Use
Uniform Application for Security-based Swap Dealer and Major Security-based
Swap Participant Registration
Date:
SEC Filer No:
Failure to keep this form current and to file accurate supplementary information on a timely basis, or the failure to keep accurate books and
records or otherwise to comply with the provisions of law applying to the conduct of business as an SBS Entity, would violate the Federal
securities laws and may result in disciplinary, administrative, injunctive or criminal action.
WARNING:
INTENTIONAL MISSTATEMENTS OR OMISSIONS OF FACTS MAY CONSTITUTE CRIMINAL VIOLATIONS.
[ 1APPLICATION
1,
[ I AMENDMENT
Exact name, principal business address, mailing address, if different, and telephone number of the applicant:
A
Full name ofthA Ann/iNmt'
I
B,
I
Applicant's CIK # (if any):
Tax Identification No,:
I
C,
I
ThA
(1 )
h/J,~inA.~.~
I
name
' th
'n"t;~
I
I
List on Schedule D, Page 1, Section I any other name by which the applicant conducts business and where it is used,
(2)
D,
I
. primarily conducts business, if different from 1A
If this filing makes a name change on behalf of an applicant. enter the new name and specify whether the change is to the
[ 1applicant's name (1A) or [ 1business name (1C):
Please check above,
I
I
E. Applicant's Main Address: (Do not use a P,O, Box)
Number and Street 1:
Number and Street 2:
I
I
I
State:
City:
I
I
I
ZiplPostal Code:
Country:
I
I
I
I
I
I
Other business locations must be reported on Schedule E, Security-based swap dealers and major security-based swap participants that do not reside in
the United States of America shall designate aU,S, agent for service of process on Schedule F,
F,
Mailing Address, if different:
Number and Street 1:
Number and Street 2:
I
I
City
State:
I
G,
I
I
Business Telephone Number:
H
Website/URL:
I.
Contact Employee:
I
I
Zie/Postal Code:
I
I
I
I
I
I
I
I
Name:
Title:
I
I
I
Number:
I
FmA;1 Arlrlr"""
I
J,
I
Count!}':
I
I
I
Chief Compliance Officer designated by the applicant in accordance with Exchange Act Section 15F(k):
Title:
Name:
I
I
I
Telephone Number:
I
Email Address:
I
I
I
I
EXECUTION:
The applicant consents that service of any civil action brought by or notice of any proceeding before the Securities and Exchange Commission in connection with the applicant's security-based swap
activities, unless the applicant is a nonresident SBS Entity, may be given by registered or certified mail or confirmed telegram to the applicant's contact employee at the main address, or mailing
address if different, given in Items 1E and 1F, If the applicant is a nonresident SBS Entity, it must complete Schedule F to designate a U,S, agent for service of process,
The undersigned certifies that he/she has executed this form on behalf of, and with the authority of, said applicant The undersigned and applicant represent that the information and statements
contained herein, including schedules attached hereto, and other information filed herewith are current, true and complete, The undersigned and applicant further represent that to the extent any
information previously submitted is not amended such information is currently accurate and complete,
I I
I
Date (MM/DDIYYYY)
By:
I
Name of Applicant
I
I
I
I
Name and Title of Person Signing on Applicant's behalf
Signature
This page must always be completed in full.
I
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EP23MY13.012
sroberts on DSK5SPTVN1PROD with PROPOSALS
DO NOT WRITE BELOW THIS LINE - FOR OFFICIAL USE ONLY
31228
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
FORMSBSE
Page 2
2.
3.
Date:
Offi,ciaJ
Use
. . Official Use
.
Applicant Name:
Only
SEC Filer No:
A.
The applicant is registering as a security-based swap dealer:
B.
The applicant is registering as a major security-based swap participant:
[
[ 1 No
Because it: (check all that apply)
[ 1 maintains a substantial security-based swap position
[ 1 is highly leveraged relative to its capital position
[ 1 has substantial counterparty exposure
A.
Is the applicant a foreign security-based swap dealer that intends to:
[
1 Yes
1 Yes
[
1 No
• work with the Commission and its primary regulator to have the Commission determine whether the
requirements of its primary regulator's regulatory system are comparable to the Commission's [ 1Yes
[
1Yes
[
• avail itself of a previously granted substituted compliance determination
[
1No
1No
with respect to the requirements of Section 15F of the Exchange Act of 1934 and the rules and regulations
thereunder?
B.
If "yes" to either of the questions in Item 3.A. above, identify the foreign financial regulatory authority that serves
as the applicant's primary regulator and for which the Commission has made, or may make, a substituted
compliance determination:
C.
If the applicant is relying on a previously granted substituted compliance determination, please describe how the
applicant satisfies any conditions the Commission may have placed on such substituted compliance
determination:
4.
Does the applicant intend to compute capital or margin, or price customer or proprietary positions, using mathematical
[ 1 No
models?
[ 1Yes
5.
Is the applicant subject to regulation by a prudential regulator, as defined in Section 1a(39) of the Commodity Exchange
[ 1 No
Act.
[ 1 Yes
If "yes," identify the prudential regulator:
6.
Is the applicant a U.S. branch of a non-resident entity?
If "yes," identify the non-resident entity and its location:
7.
Briefly describe the applicant's business:
8.
A.
1 Yes
[
1 No
Indicate legal status of the applicant:
[ 1Limited Liability Company [ 1Other (specify)
I
[ 1Corporation
[ 1Partnership
B.
[
I
Month applicant's fiscal Jear ends:
I
Indicate date and place applicant obtained its legal status (i.e., state or country where incorporated, where
partnership agreement was filed, or where applicant entity was formed):
C.
Countr~
State of formation:
I
I
of formation:
I
Date of formation: MM/DDIYYYY
I
I
Is the applicant at the time of this filing succeeding to the business of a currently registered SBS Entity?
If "Yes," complete appropriate items on Schedule 0, Page 1, Section III.
10.
Does the applicant hold or maintain any funds or securities to collateralize counterparty transactions?
'------.
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YES NO
[1 [1
[1 [1
EP23MY13.013
sroberts on DSK5SPTVN1PROD with PROPOSALS
Schedule A and, if applicable, Schedule B must be completed as part of all initial applications.
9.
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
11.
Does the applicant have any arrangement:
A.
With any other person, firm, or organization under which any books or records of the applicant are kept,
maintained, or audited by such other person, firm or organization?
[1 [1
B.
Under which any other person, firm or organization executes, trades, custodies, clears or settles on
behalf of the applicant (including any SRO or swap execution facility in which the applicant is a
member)?
If "Yes" to any part of Item 11, complete appropriate items on Schedule 0, Page 1, Section IV.
[1 [1
12.
13.
31229
Does any person directly or indirectly:
A.
Control the management or policies of the applicant through agreement or otherwise?
B.
Wholly or partially finance the business of the applicant?
Do not answer "Yes" to 128 if the person finances the business of the applicant through: 1) a public
offering of securities made pursuant to the Securities Act of 1933; or 2) credit extended in the ordinary
course of business by suppliers, banks, and others.
If "Yes" to any part of Item 12, complete appropriate items on Schedule 0, Page 1, Section IV.
A.
Directly or indirectly, does the applicant control, is the applicant controlled by, or is the applicant under
common control with, any partnership, corporation, or other organization that is engaged in the securities
or investment advisory business?
If "Yes" to item 13A, complete appropriate items on Schedule 0, Page 2, Section V.
[1 [1
B.
Directly or indirectly, is applicant controlled by any bank holding company or does applicant control, is
applicant controlled by, or is applicant under common control with any bank (as defined in 15 U.S.C.
78c(a)(6)) or any foreign bank?
If "Yes" to item 138, complete appropriate items on Schedule 0, Page 3, Section VI.
[1 [1
[1 [1
[1 [1
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23MYP2
EP23MY13.014
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'----.
31230
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
FORMSBSE
Page 3
Official Use
Applicant Name:
SEC Filer No:
Date:
Offici
al
Use
Only
....
14. Use the appropriate DRP for providing details to "yes" answers to the questions in Item 14. Refer to the Explanation of
Terms section of Form SBSE Instructions for explanations of italicized terms.
A. In the past ten years has the applicant or a control affiliate:
IIJ
(1 )
Been convicted of or pled guilty or nolo contendere ("no contest") in a domestic, foreign or military court to any
felony?
(2)
Been charged with a felony
II::
:::>
CI)
0
.,J
0
!Q
Q
[1 [1
[1 [1
B. In the past ten years has the applicant or a control affiliate:
(1 )
Been convicted of or pled guilty or or nolo contendere ("no contest") in a domestic, foreign or military court to a
misdemeanor involving: investments or an investment-related business, or any fraud, false statements or
omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion, or a conspiracy to
commit any of these offenses?
[1 [1
(2)
Been charged with a misdemeanor specified in 14B(1)?
[1 [1
.,J
~
:l§
II::
0
YES NO
C. Has the U.S. Securities and Exchange Commission or the Commodity Futures Trading Commission ever:
§
Found the applicant or a control affiliate to have made a false statement or omission?
(2)
Found the applicant or a control affiliate to have been involved in a violation of its regulations or statutes?
(3)
Found the applicant or a control affiliate to have been a cause of an investment-related business having its
authorization to do business denied, revoked, or restricted?
(4)
Entered an order against the applicant or a control affiliate in connection with investment-related activity?
(5)
Imposed a civil money penalty on the applicant or a control affiliate, or ordered the applicant or a control affiliate
to cease and desist from any activity?
(1 )
Ever found the applicant or a control affiliate to have made a false statement or omission or been dishonest,
unfair, or unethical?
[1 [1
(2)
Ever found the applicant or a control affiliate to have been involved in a violation of investment-related
regulations or statutes?
[1 [1
(3)
Ever found the applicant or a control affiliate to have been a cause of an investment-related business having its
authorization to do business denied, suspended, revoked or restricted?
[1 [1
(4)
In the past ten years, entered an order against the applicant or a control affiliate in connection with an
investment-related activity?
[1 [1
(5)
Ever denied, suspended, or revoked the applicant's or a control affiliate's registration or license or otherwise, by
order, prevented it from associating with an investment-related business or restricted its activities?
[1 [1
CI)
.,J
0
Q
:c:
0
i::
0
<:(
>-
II::
~
S
:::>
(!)
IIJ
sroberts on DSK5SPTVN1PROD with PROPOSALS
II::
[1 [1
[1 [1
D. Has any other federal regulatory agency, state regulatory agency, or foreign financial regulatory authority:
0
!Q
[1 [1
[1 [1
[1 [1
E. Has any self-regulatory organization:
[1 [1
[1 [1
(1 )
found the applicant or a control affiliate to have made a false statement or omission?
(2)
found the applicant or a control affiliate to have been involved in a violation of its rules (other than a violation
designated as a "minor rule violation" under a plan approved by the U.S. Securities and exchange Commission)?
(3)
found the applicant or a control affiliate to have been the cause of an investment-related business having its
authorization to do business denied, suspended, revoked or restricted?
[1 [1
(4)
Disciplined the applicant or a control affiliate by expelling or suspending it from membership, barring or
suspending its association with other members, or otherwise restricting its activities?
[1 [1
F. Has the applicant's or a control affiliate's authorization to act as an attorney, accountant, or federal contractor ever
been revoked or suspended?
G. Is the applicant or a control affiliate now the subject of any regulatory proceeding that could result in a "yes" answer to
any part of 14C, D, or E?
[1 [1
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[1 [1
EP23MY13.015
IIJ
(1 )
31231
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Offici
FORM.SeSE
Page 4
al
Official Use
Applicant Nanie:
Date:
Use
Only
SEC Fi.lerNo:
.
a:::
(1 )
::;)
(J)
Has any domestic or foreign civil judicial court:
(a)
In the past ten years, enjoined the applicant or a control affiliate in connection with any investmentrelated activity?
(b)
Ever found that the applicant or a control affiliate was involved in a violation of investment-related
statutes or regulations?
(c)
Ever dismissed, pursuant to a settlement agreement, an investment-related civil judicial action brought
against the applicant or control affiliate by a state or foreign financial regulatory authority?
0
-..I
U
2S
-..I
::!;
~
...,
::;)
-..I
S
(2)
C3
~I
I.
~~
it:
[I
[I
[I
[I
[I
[I
[I
[I
[I
[I
[I
[I
In the past ten years has the applicant or a control affiliate ever been a securities firm or a futures firm, or a
control affiliate of a securities firm or a futures firm that:
(1 )
Has been the subject of a bankruptcy petition?
(2)
Has had a trustee appointed or a direct payment procedure initiated under the Securities Investor Protection
Act?
15.
Is the applicant registered with the Commission as an investment adviser or municipal securities advisor or with
the CFTC as a commodity trading adviser?
If "yes," provide all unique identification numbers assigned to the firm relating to this business on Schedule 0,
Page 1, Section II.
[I
[I
16. A.
Does applicant effect transactions in commodity futures, commodities or commodity options as a broker for others
or as a dealer for its own account?
If "yes," provide all unique identification numbers assigned to the firm relating to this business on Schedule 0,
Page 1, Section II.
[I
[I
Does applicant engage in any other investment-related, non-securities business?
If "yes," provide all unique identification numbers assigned to the firm relating to this business and describe each
other business briefly on Schedule 0, Page 1, Section II.
[I
[I
Is the applicant registered with a foreign financial regulatory authority?
If "yes," list all such registrations on Schedule F, Page 1, Section II.
[I
[I
B.
17.
sroberts on DSK5SPTVN1PROD with PROPOSALS
Is the applicant or a control affiliate now the subject of any civil judicial proceeding that could result in a "yes"
answer to any part of 14H(1)?
YES NO
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EP23MY13.016
LU
H.
31232
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Schedule A ()f FORM SaSE
DIRECT OWNERS AND EXECUTIVE
OFFiCeRS
(Answer for Form SBSE Item 8)
·
Official UsE)
Applicant Name:
Date:
SEC FiterNo:
.'
1.
2.
Use Schedule A to provide information on the direct owners and executive officers of the applicant Use Schedule B to provide information on indirect
owners. Complete each column.
List below the names of:
(a)
Each Chief Executive Officer, Chief Financial Officer, Chief Operations Officer, Chief Legal Officer, Chief Compliance Officer, Director, and individuals
with similar status or function;
(b)
In the case of an applicant that is a corporation, each shareholder that directly owns 5% or more of a class of a voting security of the applicant, unless
the applicant is a public reporting company (a company subject to Sections 12 or 15(d) of the Securities Exchange Act of 1934).
Direct owners include any person that owns, beneficially owns, has the right to vote, or has the power to sell or direct the sale of, 5% or more of a class
of a voting security of the applicant. For purposes of this Schedule, a person beneficially owns any securities (i) owned by his/her child, stepchild,
grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law,
sharing the same residence, or (ii) that he/she has the right to acquire, within 60 days, through the exercise of any option, warrant or right to purchase
the security.
(c)
In the case of an applicant that is a partnership, all general partners, and those limited and special partners that have the right to receive upon
dissolution, or have contributed, 5% or more of the partnership's capital; and
(d)
In the case of a trust that directly owns 5% or more of a class of a voting security of the applicant, or that has the right to receive upon dissolution, or
has contributed, 5% or more of the applicant's capital, the trust and each trustee.
(e)
In the case of an applicant that is a Limited Liability Company ("LLC"), (i) those members that have the right to receive upon dissolution, or have
contributed, 5% or more of the LLC's capital, and (ii) if managed by elected managers, all elected managers.
3.
Are there any indirect owners of the applicant required to be reported on Schedule B?
4.
In the "DE/FEII" column, enter "DE" if the owner is a domestic entity, or enter "FE" if owner is an entity incorporated or domiciled in a foreign country, or
enter "I" if the owner is an individual.
5.
Complete the "Title or Status" column by entering board/management titles; status as partner, trustee, sole proprietor, or shareholder; and for shareholders,
the class of securities owned (if more than one is issued).
6.
Ownership Codes are:
NA A -
7.
B C -
less than 5%
5% but less than 10%
0
E
10% but less than 25%
25% but less than 50%
[
-
1 Yes
[
1 No
50% but less than 75%
75% or more
(a)
In the "Control Person" column, enter "Yes" if person has control as defined in the instructions to this form, and enter "No" if the person does not have
control. Note that under this definition most executive officers and all 25% owners, general partners, and trustees would be "control persons"
(b)
In the "PR" column, enter "PR" if the owner is a public reporting company under Sections 12 or 15(d) of the Securities Exchange Act of 1934.
FULL LEGAL NAME
DE/FE/I
Title or Status
(Individuals: Last Name, First Name, Middle Name)
Date Title or
Status
Acquired
Ownership
Code
Control
Person
MM I YYYY
I
CRD and/or lARD No.
and/or foreign business
No. If None,
IRS Tax No.
Official
Use
Only
IPR
I
For individuals not presently registered through CRD or lARD, describe prior investment-related experience
(e.g., for each prior position - employer, job title, and dates of service):
I
I
For individuals not presently registered through CRD or lARD, describe prior investment-related experience
(e.g., for each prior position - employer, job title, and dates of service):
I
I
For individuals not presently registered through CRD or lARD, describe prior investment-related experience
(e.g., for each prior position - employer, job title, and dates of service)
I
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sroberts on DSK5SPTVN1PROD with PROPOSALS
I
For individuals not presently registered through CRD or lARD, describe prior investment-related experience
(e.g., for each prior position - employer, job title, and dates of service):
31233
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
'.
Schedule B of FORM
SaSE
INDIRECT OWNERS
(Answer for Form SBSE Item
Official Use
.'
Applicant Name:
Date:
SEC Filer No:
8)
1.
Use Schedule B to provide information on the indirect owners of the applicant. Use Schedule A to provide information
on direct owners. Complete each column.
2.
With respect to each owner listed on Schedule A, (except individual owners), list below:
(a) In the case of an owner that is a corporation, each of its shareholders that beneficially owns, has the right to vote, or
has the power to sell or direct the sale of, 25% or more of a class of a voting security of that corporation.
For purposes of this Schedule, a person beneficially owns any securities (i) owned by his/her child, stepchild,
grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-inlaw, brother-in-law, or sister-in-law, sharing the same residence, or (ii) that he/she has the right to acquire, within 60
days, through the exercise of any option, warrant or right to purchase the security.
(b) In the case of an owner that is a partnership, all general partners, and those limited and special partners that have
the right to receive upon dissolution, or have contributed, 25% or more of the partnership's capital; and
(c) In the case of an owner that is a trust, the trust and each trustee.
(d) In the case of an owner that is a Limited Liability Company ("llC"), (i) those members that have the right to receive
upon dissolution, or have contributed, 25% or more of the llC's capital, and (ii) if managed by elected managers, all
elected managers.
3.
Continue up the chain of ownership listing all 25% owners at each level. Once a public company (a company subject to
Sections 12 or 15(d) of the Securities Exchange Act of 1934) is reached, no ownership information further up the chain
of ownership need be given.
4.
In the "DE/FEll" column, enter "DE" if the owner is a domestic entity, or enter "FE" if owner is an entity incorporated or
domiciled in a foreign country, or enter "I" if the owner is an individual.
5.
Complete the "Status" column by status as partner, trustee, shareholder, etc., and if shareholder, class of securities
owned (if more than one is issued).
6.
Ownership Codes are:
C - 25% but less than 50%
7.
o-
50% but less than 75%
E - 75% or more
F
-
Other General Partners
(a) In the "Control Person" column, enter "Yes" if person has control as defined in the instructions to this form, and enter
"No" if the person does not have control. Note that under this definition most executive officers and all 25% owners,
general partners, and trustees would be "control persons".
(b) In the "PR" column, enter "PR" if the owner is a public reporting company under Sections 12 or 15(d) of the
Securities Exchange Act of 1934.
DEIFE/I
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Owned
Status
Date Status
Acquired
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Ownership
Code
Control
Person
yyyy
E:\FR\FM\23MYP2.SGM
CRD andlor lARD No. andlor
foreign business No. If None,
IRS Tax No.
PR
23MYP2
Official
Use
Only
EP23MY13.018
FULL LEGAL NAME
(Individuals: Last Name, First Name, Middle
Name)
31234
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Schadula D of FORM SaSE
Page 1
Official Use
AppacantName:~_~ _______~ _______~~__
Officia
fUse
Only
SEG.Filer No: _ _ __
Use Schedule 0 Page 1 to report details for items listed below.
This is an [lINITIAL
Section I
[ l AMENDED detail filing for the Form SBSE items checked below:
Other Business Names
(Check if applicable) [ litem 1C(2)
List each of the "other" names and the staters) orcountry(ies) in which they are used.
1. Name
State/Country
2. Name
State/Country
3. Name
State/Country
4. Name
State/Country
Section II
Other Business
(Check if applicable)[ litem 15 [litem 16A [litem 16B
Applicant must complete a separate Schedule 0 Page 1 for each affirmative response in this section.
Unique Identification Number(s):
Assigning Regulator(s)/Entity(s):
Briefly describe any other investment-related, non-securities business. Use reverse side of this sheet for additional comments if necessary.
Section III
Successions
(Check if applicable) [ litem 9
Date of Succession
Name of Predecessor
MM DO YYYY
IRS Employer Number (if any)
SEC File Number (if any)
Briefly describe details of the succession including any assets or liabilities not assumed by the successor. Use reverse side of this sheet for additional
comments if necessary.
Section IV
(Check one)
Record Maintenance Arrangements / Business Arrangements / Control Persons / Financings
[ l Item 11A
[ litem 11B
[ litem 12A
[ litem 12B
Applicant must complete a separate Schedule 0 Page 1 for each affirmative response in this section including any multiple responses to any item.
Complete the "Effective Date" box with the Month, Day and Year that the arrangement or agreement became effective. When reporting a change or
termination of an arrangement, enter the effective date of the change.
Firm or Organization Name
SEC File, CRD, NFA, lARD, foreign business No.,
and/or CIK Number (if any)
Business Address (Street, City, State/Country, Zip + 4 Postal Code)
Effective Date
Termination Date
MM DO YYYY
I
MM DO YYYY
I
I
/
Individual Name
CRD, NFA, and/or lARD Number (if any)
Business Address (if applicable) (Street, City, State/Country, Zip + 4 Postal Code)
Effective Date
Termination Date
MM DO YYYY
/
MM DO YYYY
/
/
/
Briefly describe the nature of the arrangement with respect to books or records (ITEM 11A); the nature of the execution, trading, custody, clearing or
settlement arrangement (ITEM 11 B);the nature of the control or agreement (ITEM 12A); or the method and amount of financing (ITEM 12B). Use reverse
side of this sheet for additional comments if necessary.
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For ITEM 12A ONLY - If the control person is an individual not presently registered through CRD or lARD, describe prior investment-related experience
(e.g., for each prior position - employer, job title, and dates of service).
31235
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Official
Use
Official Use
Applicant Name:
Schedule 0 of FORM SBSE
Page 2
Only
Date:
SEC Filer No:
..
'
'.
Use this Schedule 0 Page 2 to report details for Item 13A Supply details for all partnerships, corporations, organizations, institutions and individuals necessary to answer each
item completely. Use additional copies of Schedule 0 Page 2 if necessary.
Use the "Effective Date" box to enter the Month, Day, and Year that the affiliation was effective or the date of the most recent change in the affiliation.
[ llNITIAL
This is an
[
1 AMENDED
detail filing for Form SBSE Item 13A
[ l13A Directly or indirectly, does applicant control, is applicant control/ed by. or is applicant under common control with, any partnership, corporation, or other organization that
is engaged in the securities or investment advisory business?
Complete this section for control issues relating to ITEM 13A only.
The details supplied relate to:
1.
Partnership, Corporation, or Organization Name
CRD Number (if any)
I
I
(check only one)
This Partnership, Corporation, or Organization
[
1 controls applicant
[
1 is control/ed by applicant
Business Address (Street, City, State/Country, Zip + 4/Postal Code)
[
1 is under common control with applicant
Effective Date
T enmination Date
MM DO YYYY
MM DO YYYY
I
Is Partnership, Corporation or
Organization a foreign entity"
[
1 Yes
[
If Yes, provide country of domicile
or incorporation"
Check "Yes" or "No" for
activities of this partnership
Corporation, or organization:
1 No
I
I
I
Investment
~
Securities [
1Yes
[
1No
Advisory [ lYes [
1No
Activities:
Activities:
Briefly describe the control relationship. Use reverse side of this sheet for additional comments if necessary.
Partnership, Corporation, or Organization Name
2.
CRD Number (if any)
I
I
(check only one)
This Partnership, Corporation, or Organization
[
1 controls applicant
[
1 is control/ed by applicant
Business Address (Street, City, State/Country, Zip + 4/Postal Code)
[
1 is under common control with applicant
Effective Date
Termination Date
MM DO YYYY
MM DO YYYY
I
Is Partnership, Corporation or
Organization a foreign entity"
[
1 Yes
[
Check "Yes" or "No" for
activities of this partnership
Corporation, or organization:
If Yes, provide country of domicile
or incorporation"
1 No
I
I
I
Investment
~
Securities [
1Yes
[
1No
Activities:
Advisory [ lYes [
Activities:
1No
Briefly describe the control relationship. Use reverse side of this sheet for additional comments if necessary.
3.
Partnership, Corporation, or Organization Name
CRD Number (if any)
I
I
(check only one)
This Partnership, Corporation, or Organization
[
1 controls applicant
[
1 is control/ed by applicant
Business Address (Street, City, State/Country, Zip + 4/Postal Code)
[
1 is under common control with applicant
Effective Date
Termination Date
MM DO YYYY
MM DO YYYY
I
Is Partnership, Corporation Of
Organization a foreign entity"
[
1 Yes
[
If Yes, provide country of domicile
or incorporation"
1 No
Check "Yes" or "No" for
activities of this partnership
Corporation, or organization:
I
I
I
Investment
~
Securities [ lYes [
1No
Activities:
Advisory [ lYes [
Activities:
1No
If applicant has more than 3 organizations to report, complete additional Schedule 0 Page 2s.
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Briefly describe the control relationship. Use reverse side of this sheet for additional comments if necessary.
31236
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
O!fici a
Official Use
Applicant Name:
Schedule D of FORM SBSE
PageS
Date:
~n~;
SEC Filer No:
Use Schedule D Page 3 to report details for Item 13B. Report only new information or changes/updates to previously submitted details, Do not report
previously submitted information, Supply details for all partnerships, corporations, organizations, institutions and individuals necessary to answer each
item completely, Use additional copies of Schedule D Page 3 if necessary.
Use the "Effective Date" box to enter the Month, Day, and Year that the affiliation was effective or the date of the most recent change in the affiliation,
This is an
[
1 INITIAL
[
1 AMENDED
detail filing for Form SBSE Item 13B
[ 1 13B. Directly or indirectly, is applicant controlled by any bank holding company or does applicant control, is applicant controlled by, or is applicant
under common control with any bank (as defined in 15 U.S.C, 78c(a)(6)) or any foreign bank?
-'"
, this section for control issues relating to ITEM 128 only.
Provide the details for each organization or institution that controls the applicant, including each organization or institution in the applicant's chain of
ownership, The details supplied relate to:
1.
I Financial Institution Name
I
CRD Number (if applicable)
Institution Type (e.g., bank holding company, national bank, state member bank of the
Federal Reserve System, state non-member bank, savings bank or association, credit
union, foreign bank)
Business Address (Street, City, State/Country, Zip + 4/Postal Code
Effective Date
MM DD YYYY
I
I
Termination Date
MM DD YYYY
I
I
If foreign, country of domicile or incorporation
Briefly describe the control relationship. Use reverse side of this sheet for additional comments, if necessary.
2.
I Financial Institution Name
I CRD Number (if applicable)
Institution Type (e.g., bank holding company, national bank, state member bank of the
Federal Reserve System, state non-member bank, savings bank or association, credit
union, foreign bank)
Effective Date
I
Termination Date
Business Address (Street, City, State/Country, Zip + 4/Postal Code
MM DD YYYY
I
MM DD YYYY
I
I
If foreign, country of domicile or incorporation
Briefly describe the control relationship. Use reverse side of this sheet for additional comments, if necessary.
3.
I Financial Institution Name
I
CRD Number (if applicable)
Institution Type (e.g., bank holding company, national bank, state member bank of the
Federal Reserve System, state non-member bank, savings bank or association, credit
union, foreign bank)
Business Address (Street, City, State/Country, Zip + 4/Postal Code
Effective Date
MM DD YYYY
Termination Date
MM DD YYYY
I
I
I
I
If foreign, country of domicile or incorporation
Briefly describe the control relationship. Use reverse side of this sheet for additional comments, if necessary.
4.
I Financial Institution Name
I CRD Number (if applicable)
Institution Type (e.g., bank holding company, national bank, state member bank of the
Federal Reserve System, state non-member bank, savings bank or association, credit
union, foreign bank.)
Effective Date
MM DD YYYY
Termination Date
MM DD YYYY
I
I
Business Address (Street, City, State/Country, Zip + 4/Postal Code
I
I
If foreign, country of domicile or incorporation
Briefly describe the control relationship. Use reverse side of this sheet for additional comments, if necessary.
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"","UUV,,'; to report, complete additional Schedule D page 3s.
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sroberts on DSK5SPTVN1PROD with PROPOSALS
If applicant has more than 4 v, "'~, ,,~~,i,
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Schedule E of FORM SeSE
Page 1
31237
Official Use
Applicant Name:
Date:
SEC Filer No:
INSTRUCTIONS
General: Use this schedule to identify other business locations of the applicant. Repeat Items 1-6 for each other business location. Each item
must be completed unless otherwise noted. Use additional copies of this schedule as necessary.
Specific:
Item 1. Specify only one box. Check "Add" when the applicant is filing the initial notice to inform the Commission that it has opened another
business location, "Delete" when the applicant closes another business location, and "Amendment" to indicate any other change to
previously filed information.
Item 2. Complete this item for all entries. Provide the date that the other business location was opened (ADD), closed (DELETE), or the
effective date of the change (AMENDMENT).
Item 3. Complete this item for all entries. A physical location must be included; post office box designations alone are not sufficient.
Item 4. Complete this item only when the applicant changes the address of an existing other business location.
ItemS. If the other business location occupies or shares space on premises within a bank, or other financial institution, enter the name of the
institution in the space provided.
Item 6. Complete this item for all entries. Enter the name of the associated person who is responsible for the operations of, and is physically
at, this location.
1 Add
[
1 Delete
[
1 Amendment
Check only one box:
2.
Effective Date:
3.
Street:
P.O. Box (if applicable), Suite, Floor:
P.O. Box (if applicable), Suite, Floor:
City, State/Country, Zip Code +4/Postal Code:
4.
City, State/Country, Zip Code +4/Postal Code:
[
1 Add
[
1 Delete
S.
Institution Name:
6.
Responsible Associated Person:
1 Amendment
1.
Check only one box:
2.
Effective Date:
3.
Street:
P.O. Box (if applicable), Suite, Floor:
P.O. Box (if applicable), Suite, Floor:
City, State/Country, Zip Code +4/Postal Code:
[
4.
City, State/Country, Zip Code +4/Postal Code:
[
1 Add
[
1 Delete
[
Street:
S.
Institution Name:
6.
Responsible Associated Person:
1 Amendment
1.
Check only one box:
2.
Effective Date:
3.
Street:
P.O. Box (if applicable), Suite, Floor:
P.O. Box (if applicable), Suite, Floor:
City, State/Country, Zip Code +4/Postal Code:
4.
City, State/Country, Zip Code +4/Postal Code:
sroberts on DSK5SPTVN1PROD with PROPOSALS
Street:
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S.
Institution Name:
6.
Responsible Associated Person:
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[
1.
31238
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Schedule F of FORM SeSE
Page 1
Section I
Official Use
Applicant Name: _ _-:-'-_ _ _ _ _-'--:--_ _ _ _~
SEC Filer No:
'--~_ _
Service of Process and Certification Regarding Access to Records
Each nonresident security-based swap dealer and non-resident security-based swap participant shall use Section I to identify its United States
agent for service of process and the certify that it can
(1) provide the Commission with prompt access to its books and records, and
submit to on site inspection and examination by the Commission.
(2)
1.
Service of Process:
A.
Name of United States person applicant designates and appoints as agent for service of process
B.
Address of United States person applicant designates and appoints as agent for service of process
The above identified agent for service of process may be served any process, pleadings, subpoenas, or other papers in
(a) any investigation or administrative proceeding conducted by the Commission that relates to the applicant or about which the applicant
may have information; and
(b) any civil or criminal suit or action or proceeding brought against the applicant or to which the applicant has been joined as defendant
or respondent, in any appropriate court in any place subject to the jurisdiction of any state or of the United States or of any of its
territories or possessions or of the District of Columbia, to enforce the Exchange Act. The applicant has stipulated and agreed that any
such suit, action or administrative proceeding may be commenced by the service of process upon, and that service of an administrative
subpoena shall be effected by service upon the above-named Agent for Service of Process, and that service as aforesaid shall be taken
and held in all courts and administrative tribunals to be valid and binding as if personal service thereof had been made.
2.
Certification regarding access to records:
Applicant can as a matter of law;
(1)
provide the Commission with prompt access to its books and records, and
(2)
submit to onsite inspection and examination by the Commission.
Applicant must attach to this Form SaSE a copy of the opinion of counsel it is required to obtain in accordance with paragraph (c)(2)
or (c)(3) of Exchange Act Rule 15Fb2-4, as appropriate [paragraphs (c)(2) or (c)(3) of 17 CFR 240. 15Fb2-4.
Signature:
Name and Title:
Date:
Section II
Registration with Foreign Financial Regulatory Authorities
Complete this Section for Registration with Foreign Financial Regulatory Authorities relating to ITEM 17. Each security-based swap
dealer and major security-based swap participant that is registered with a foreign financial regulatory authority must list on Section II of this
Schedule F, for each foreign financial regulatory authority with which it is registered, the following information:
1.
English Name of Foreign Financial Regulatory Authority
Foreign Registration No. (if
any)
English Name of Country:
English Name of Foreign Financial Regulatory Authority
Foreign Registration No. (if
any)
English Name of Country:
English Name of Foreign Financial Regulatory Authority
Foreign Registration No. (if
any)
English Name of Country:
3.
If applicant has more than 3 Foreign Financial Regulatory Authorities to report, complete additional Schedule F Page 1s.
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sroberts on DSK5SPTVN1PROD with PROPOSALS
2.
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Schedule G of FORM
SeSE
31239
Official Use
Applicant Name: _ _____,--.......:------SEC Filer No: _ _- -
CERTIFICATION ON STATUTORY Date:~_ _
DISQUALIFICATION
Use Schedule G to certify that none of the applicant's associated persons is subject to statutory disqualification (as that term is
defined in Section 3(a)(39) of the Exchange Act [15 U.S.C. 78c(a)(39)].
Instructions:
This certification must be signed by the applicant's Chief Compliance Officer designated pursuant to Exchange
Act Section 15F(k) or by his or her designee.
For purposes of this Form, the term associated person shall have the meaning as specified in Section 3(a)(70) of
the Exchange Act [15 U.S.C. 78c(a)(70)].
This is a: [ ] CERTIFICATION
[ ] RE-CERTIFICATION
The applicant certifies that it has
(a) performed background checks on all of its associated persons who effect or are involved in effecting, or who will
effect or be involved in effecting, security-based swaps on its behalf, and
(b) determined that no associated person who effects or is involved in effecting, or who will effect or be involved in
effecting, security-based swaps on its behalf is subject to statutory disqualification, as defined in Section 3(a)(39) of
the Securities Exchange Act of 1934 [15 U.S.C. 78c(a)(39)].
Applicant Name:
I Date:
Signature of Chief Compliance Officer or Designee:
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Name of Chief Compliance Officer or Designee:
31240
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
This Disclosure Reporting Page [DRP (SBSE)] is an [ ] INITIAL OR [ ] AMENDED response to report details for affirmative
responses to Items 14A and 148 of Form SBSE;
Check [\I] item(s) being responded to:
14A. In the past ten years has the applicant or a control affiliate:
[ ] (1) Been convicted of or pled guilty or nolo contendere ("no contest") in a domestic, foreign or military court to any
felony?
[ ] (2) Been charged with a felony?
14B. In the past ten years has the applicant or a control affiliate:
[ ] (1) Been convicted of or pled guilty or nolo contendere ("no contest") in a domestic, foreign or military court to a
misdemeanor involving: investments or an investment-related business, or any fraud, false statements or omissions,
wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion, or a conspiracy to commit any of these
offenses?
[ ] (2) Been charged with a misdemeanor specified in 14B(1)?
Use a separate DRP for each event or proceeding. An event or proceeding may be reported for more than one person or entity using one
DRP. File with a completed Execution Page.
Multiple counts of the same charge arising out of the same event(s) should be reported on the same DRP. Unrelated criminal actions,
including separate cases arising out of the same event, must be reported on separate DRPs. Use this DRP to report all charges arising out
of the same event. One event may result in more than one affirmative answer to the above items.
If a control affiliate is an individual or organization registered through the CRD, such control affiliate need only complete Part I of the
applicant's appropriate DRP (SBSE). Details of the event must be submitted on the control affiliate's appropriate DRP (BD) or DRP (U-4).
If a control affiliate is an individual or organization not registered through the CRD, provide complete answers to all the items on the
applicant's appropriate DRP (SBSE). The completion of this DRP does not relieve the control affiliate of its obligation to update its CRD
records.
Applicants must attach a copy of each applicable court document (i. e., criminal complaint, information or indictment as well as judgment of
conviction or sentencing documents) if not previously submitted through CRD (as they could be in the case of a control affiliate registered
through CRD). Documents will not be accepted as disclosure in lieu of answering the questions on this DRP.
PART I
A.
The person(s) or entity(ies) for whom this DRP (SBSE) is being filed is (are):
[
The Applicant
[ ] Applicant and one or more control affiliate(s)
[ ] One or more control affiliate(s)
If this DRP is being filed for a control affiliate, give the full name of the control affiliate below (for individuals, Last name, First name,
Middle name).
If the control affiliate is registered with the CRD, provide the CRD number. If not, indicate "non-registered" by checking the
appropriate checkbox.
Name of Applicant
SBSE DRP - CONTROL AFFILIATE
CRD NUMBER
I
Registered:
[ ] Yes
This Control Affiliate is
[ ] Firm
[ ] Individual
[ ] No
NAME (For individuals, Last, First, Middle)
[ ] This DRP should be removed from the SBS Entity's record because the control affiliate(s) are no longer associated
with the SBS Entity.
B.
If the control affiliate is registered through the CRD, has the control affiliate submitted a DRP (with Form U-4) or DRP (BD) to the
CRD System for the event?
If the answer is "Yes," no other information on this DRP must be provided: If "No," complete Part II.
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sroberts on DSK5SPTVN1PROD with PROPOSALS
[ ] Yes
[ ] No
Note: The completion of this Form does not relieve the control affiliate of its obligation to update its CRD records.
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
31241
CRIMINAL DISCLOSURE REPORTING PAGE (SBSE)
1.
If charge(s) were brought against an organization over which the applicant or control affiliate exercise(d) control: Enter
organization name, whether or not the organization was an investment-related business and the applicant's or control
affiliate's position, title or relationship.
2.
Formal Charge(s) were brought in: (include name of Federal, Military, State or Foreign Court, Location of Court - City
or County and State or Country, Docket/Case number).
3.
Event Disclosure Detail (Use this for both organizational and individual charges.)
A.
Date First Charged (MM/DDIYYYY):
[ ] Exact
[1
Explanation
B.
Event Disclosure Detail (include Charge(s)/Charge Description(s), and for each charge provide: .1. number of
counts, £. felony or misdemeanor, .1. plea for each charge, and 1:. product type if charge is investment-related):
C.
Current status of the Event?
D.
Event Status Date (complete unless status is
Pending) (MM/DDIYYYY):
[ ] Pending
[ ] On Appeal
[1
Final
[ ] Exact
[ ] Explanation
4.
Disposition Disclosure Detail: Include for each charge, A. Disposition Type [e.g., convicted, acquitted, dismissed,
pretrial.], 12.:. Date, C. Sentence/Penalty, D. Duration [if sentence-suspension, probation, etc.], E. Start Date of Penalty,
E. Penalty/Fine Amount and G. Date Paid.
5.
Provide a brief summary of the circumstances leading to the charge(s) as well as the disposition. Include the relevant
dates when the conduct which was the subject of the char(s) occurred. (The information must fit within the space
provided.)
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Ilf not exact, provide explanation:
31242
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
REGULATORY ACTION DISCLOSURE REPORTING PAGE (SBSE)
•
This Disclosure Reporting Page [DRP (SBSE)] is an [
14D, 14E, 14F, or 14G of Form SBSE;
Check
1INITIAL OR [ 1AMENDED response to report details for affirmative responses to Items 14C,
[,J] item(s) being responded to:
14C. Has the U.S. Securities and Exchange Commission or the Commodity Futures Trading Commission ever:
[ 1 (1)
[ 1 (2)
[ 1 (3)
1 (4)
1 (5)
Found the applicant or a control affiliate to have made a false statement or omission?
Found the applicant or a control affiliate to have been involved in a violation of its regulations or statutes?
the applicant or a control affiliate to have been a cause of an investment-related business having its authorization to do business
denied, revoked, or restricted?
Entered an order against the applicant or a control affiliate in connection with investment-related activity?
Imposed a civil money penalty on the applicant or a control affiliate, or ordered the applicant or a control affiliate to cease and desist
from any activity?
14D. Has any other federal regulatory agency, state regulatory agency, or foreign financial regulatory authority:
[ 1 (1)
[ 1 (2)
[ 1 (3)
Ever found the applicant or a control affiliate to have made a false statement or omission or been dishonest, unfair, or unethical?
Ever found the applicant or a control affiliate to have been involved in a violation of investment-related regulations or statutes?
Ever found the applicant or a control affiliate to have been a cause of an investment-related business having its authorization to do
business denied, suspended, revoked or restricted?
1 (4)
[ 1 (5)
In the past ten years, entered an order against the applicant or a control affiliate in connection with an investment-related activity?
Ever denied, suspended, or revoked the applicant's or a control affiliate's registration or license or otherwise, by order, prevented it
from associating with an investment-related business or restricted its activities?
14E. Has any self-regulatory organization or commodities exchange ever:
[ 1 (1)
[ 1 (2)
found the applicant or a control affiliate to have made a false statement or omission?
found the applicant or a control affiliate to have been involved in a violation of its rules (other than a violation deSignated as a "minor
rule violation" under a plan approved by the U.S. Securities and exchange Commission)?
[ 1 (3)
found the applicant or a control affiliate to have been the cause of an investment-related business having its authorization to do
business denied, suspended, revoked or restricted?
[ 1 (4)
Disciplined the applicant or a control affiliate by expelling or suspending it from membership, barring or suspending its association with
other members, or otherwise restricting its activities?
14F. [ ] Has the applicant's or a control affiliate's authorization to act as an attorney, accountant, or federal contractor ever been revoked or
suspended?
14G. [
or E?
1 Is the applicant or a control affiliate now the subject of any regulatory proceeding that could
result in a "yes" answer to any part of 14C, D,
Use a separate DRP for each event or proceeding. An event or proceeding may be reported for more than one person or entity using one DRP. File with a
completed Execution Page.
One event may result in more than one affirmative answer to Items 14C, 14D, 14E, 14F or 14G. Use only one DRP to report details related to the same event. If
an event gives rise to actions by more than one regulator, provide details for each action on a separate DRP.
It is not a requirement that documents be provided for each event or proceeding. Should they be provided, they will not be accepted as disclosure in lieu of
answering the questions on this DRP.
If a control affiliate is an individual or organization registered through the CRD, such control affiliate need only complete Part I of the applicant's appropriate DRP
(SBSE). Details of the event must be submitted on the control affiliate's appropriate DRP (BD) or DRP (U-4). If a control affiliate is an individual or organization
not registered through the CRD, provide complete answers to all the items on the applicant's appropriate DRP (SBSE). The completion of this DRP does not
relieve the control affiliate of its obligation to update its CRD records.
PART I
A.
The person(s) or entity(ies) for whom this DRP is being filed is (are):
[ ] The Applicant
[ ] Applicant and one or more control affiliate(s)
[ ] One or more control affiliate(s)
If this DRP is being filed for a control affiliate, give the full name of the control affiliate below (for individuals, Last name, First name, Middle name).
If the control affiliate is registered with the CRD, provide the CRD number. If not, indicate "non-registered" by checking the appropriate checkbox.
Name of Applicant
SBSE DRP - CONTROL AFFILIATE
This Control Affiliate is
CRD NUMBER
[ ] Firm
[ ] Individual
[ 1 This DRP should be removed from the SBS Entity's record because the control affiliate(s) are no longer associated with the SBS Entity.
If the control affiliate is registered through the CRD, has the control affiliate submitted a DRP (with Form U-4) or DRP (BD) to the CRD System for the
event?
If the answer is "Yes," no other information on this DRP must be provided: If "No," complete Part II.
[ 1 Yes
[1 No
Note: The completion of this Form does not relieve the control affiliate of its obligation to update its CRD records.
VerDate Mar<15>2010
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B.
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
31243
REGULATORY ACTION DISCLOSURE REPORTING PAGE (SBSE)
(continuation)
IIPART II
1.
Regulatory Action initiated by:
[ J SEC
[J Other Federal
[ J State
[ J Foreign
[ J SRO
(Full name of regulator, foreign financial regulatory authority, federal, state or SRO)
2.
Principal Sanction: (check appropriate item)
[ J Civil and Administrative Penalty(ies)/Fine(s)
[ J Bar
[ J Cease and Desist
[ J Disgorgement
[ J Expulsion
[ J Injunction
[ J Censure
[ J Denial
[ J Prohibition
[ J Reprimand
[
[
[
[
[
Restitution
J
J
J
J
J
Revocation
Suspension
Undertaking
Other
Other Sanctions:
3.
Date Initiated (MM/DDIYYYY)
4.
Docket/Case Number:
5.
Control Affiliate Employing Firm when activity occurred which led to the regulatory action (if applicable):
6.
Principal Product Type: (check appropriate item)
than CD(s))
sroberts on DSK5SPTVN1PROD with PROPOSALS
[
[
[
[
[
J
J
J
J
J
CD(s)
Commodity Option(s)
Debt - Asset Backed
Debt - Corporate
Debt - Government
[
[
[
[
[
[
[
[
[
J
J
J
J
J
J
J
J
J
Debt - Municipal
Derivative( s)
Direct Investment(s) - DPP & LP Interest(s)
Equity- OTC
Equity Listed (Common & Preferred Stock)
Futures - Commodity
Futures - Financial
Index Option(s)
[
[
[
[
[
[
[
[
Describe the allegations related to this regulatory action. (The information must fit within the space provided.):
8.
Current Status?
9.
If on appeal, regulatory action appealed to: (SEC, SRO, Federal or State Court) and Date Appeal Filed:
VerDate Mar<15>2010
20:21 May 22, 2013
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Investment Contract(s)
Money Market Fund(s)
Mutual Fund(s)
No Product
Options
Penny Stock(s)
Unit Investment Trust(s)
Other
Insurance
7.
[ J Pending
J
J
J
J
J
J
J
J
[ J On Appeal
PO 00000
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[ 1 Final
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23MYP2
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[ J Annuity(ies) - Fixed
[ J Annuity(ies) - Variable
[ J Banking Products (other
[ J Explanation
[ J Exact
3.
31244
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
REGULATORY ACTION DISCLOSURE REPORTING PAGE (SBSE)
(continuation)
If Final or On Appeal, complete all items below. For Pending Actions, complete Item 13 only.
How was matter resolved: (check appropriate item)
[ 1 Acceptance, Waiver & Consent (AWC)
[ 1 Decision & Order of Offer of Settlement
[ 1 Decision
11.
Resolution Date (MM/DDIYYYY)
12.
A.
Amount "'_ _ __
sroberts on DSK5SPTVN1PROD with PROPOSALS
1 Settled
1 Stipulation and Consent
1 Vacated
[ 1 Exact
[ 1 Explanation
Were any of the following Sanctions Ordered? (Check all appropriate items):
1 Monetary/Fine
13.
[ 1 Consent
[ 1 Dismissed
[ 1 Order
[ 1 Revocation/Expulsion/Denial
1 Disgorgement/Restitution
[ 1 Censure
[ 1 Cease and Desist/Injunction
[1 Bar [1 Suspension
B.
Other Sanctions Ordered:
C.
Sanction Detail: If suspended, enjoined or barred, provide duration including start date and capacities affected
(General Securities Principal, Financial Operations Principal, etc.). If requalification, by exam/retraining was a
condition of the sanction, provide length of time given to re-qualify/retrain, type of exam required and whether
condition has been satisfied. If disposition resulted in a fine, penalty, restitution, disgorgement or monetary
compensation, provide total amount, portion levied against applicant or control affiliate, date paid and if any portion
of penalt was waived.
Provide a brief summary of details related to the action status and (or) disposition and include relevant terms,
conditions and dates. The information must fit within the space rovided.)
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10.
31245
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
CIVIL JUDICIAL ACTION DISCLOSURE REPORTING PAGE SBS
This Disclosure Reporting Page [DRP (BD)] is an [ ] INITIAL OR [ ] AMENDED response to report details for
affirmative responses to Items 14H of Form BD;
Check ["i1 item(s) being responded to:
14H(1) Has any domestic or foreign civil judicial court:
[ ] (a) in the past ten years, enjoined the applicant or a control affiliate in connection with any
investment-related activity?
[ ] (b) ever found that the applicant or a control affiliate was involved in a violation of investment-related
statutes or regulations?
[ ] (c) ever dismissed, pursuant to a settlement agreement, an investment-related civil judicial action
brought against the applicant or a control affiliate by a state or foreign financial regulatory
authority?
14H(2) [ ] Is the applicant or a control affiliate now the subject of any civil judicial proceeding that could result
in a "yes" answer to any part of 14H(1)?
Use a separate DRP for each event or proceeding. An event or proceeding may be reported for more than one person or entity using one
DRP. File with a completed Execution Page.
One event may result in more than one affirmative answer to Items 14H. Use only one DRP to report details related to the same event
Unrelated civil judicial actions must be reported on separate DRPs.
It is not a requirement that documents be provided for each event or proceeding. Should they be provided, they will not be accepted as
disclosure in lieu of answering the questions on this DRP.
If a control affiliate is an individual or organization registered through the CRD, such control affiliate need only complete Part I of the
applicant's appropriate DRP (SBSE). Details of the event must be submitted on the control affiliate's appropriate DRP (BD) or DRP (U-4). If
a control affiliate is an individual or organization not registered through the CRD, provide complete answers to all the items on the applicant's
appropriate DRP (SBSE). The completion of this DRP does not relieve the control affiliate of its obligation to update its CRD records.
PART I
A
The person(s) or entity(ies) for whom this DRP is being filed is (are):
[ ] The Applicant
[ ] Applicant and one or more control affiliate(s)
[ ] One or more control affiliate(s)
If this DRP is being filed for a control affiliate, give the full name of the control affiliate below (for individuals, Last name,
First name, Middle name).
If the control affiliate is registered with the CRD, provide the CRD number. If not, indicate "non-registered" by checking
the appropriate checkbox.
Name of Applicant
DRP SBSE - CONTROL AFFILIATE
CRD NUMBER
This Control Affiliate is
[ ] Firm
[ ] Individual
[ ] This DRP should be removed from the SBS Entity's record because the control affiliate(s) are no longer
associated with the SBS Entity.
B.
If the control affiliate is registered through the CRD, has the control affiliate submitted a DRP (with Form U-4) or BD
DRP to the CRD System for the event?
If the answer is "Yes," no other information on this DRP must be provided: If "No," complete Part II.
[ ] No
Note: The completion of this Form does not relieve the control affiliate of its obligation to update its CRD records.
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sroberts on DSK5SPTVN1PROD with PROPOSALS
[ ] Yes
31246
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
CIVIL JUDICIAL ACTION DISCLOSURE REPORTING PAGE (SeSE)
(continuation)
IIPART II
1.
Court Action initiated by: (Name of regulator, foreign financial regulatory authority, SRO, commodities exchange, agency, firm, private plaintiff, etc.)
2.
Principal Relief Sought: (check appropriate item)
[ J Cease and Desist
[ J Civil Penalty(ies)/Fine(s)
[ J Disgorgement
[ 1 Money Damages (Private/Civil Complaint)
[ J Injunction
[ J Restitution
[ 1 Restraining Order
[ 1 Other _ _ __
Other Relief Sought:
3.
3.
[ J Exact
Filing Date of Court Action (MM/DDIYYYY)
[ 1 Explanation
If not exact, provide explanation:
4.
Principal Product Type: (check appropriate item)
[ 1 Annuity(ies) - Fixed
[ 1 Annuity(ies) - Variable
[ 1 Banking Products (other
than CD(s))
[
[
[
[
[
1 CD(s)
1 Commodity Option(s)
1 Debt - Asset Backed
1 Debt - Corporate
1 Debt - Government
[ 1 Debt - Municipal
[ J Derivative( s)
[ J Direct Investment(s) - DPP & LP Interest(s)
[ J Equity- OTC
[ 1 Equity Listed (Common & Preferred Stock)
[ 1 Futures - Commodity
[ J Futures - Financial
[ J Index Option(s)
[ J Insurance
[
[
[
[
[
[
[
[
1 Investment Contract(s)
1 Money Market Fund(s)
1 Mutual Fund(s)
1 No Product
1 Options
1 Penny Stock(s)
1 Unit Investment Trust(s)
1 Other
Other Product Type:
5.
name of Federal, State or
Docket/Case
Court, Location of Court-
6.
Control Affiliate Employing Firm when activity occurred which led to the civil judicial action (if applicable):
7.
Describe the allegations related to this civil judicial action. (The information must fit within the space provided.):
8.
Current Status?
9.
If on appeal, action appealed to (provide name of court):
10.
If pending, date notice/process was served (MM/DDIYYYY)
[ 1 Pending
[ J On Appeal
[ J Final
Date Appeal Filed (MMIDDIYYYY):
[ 1 Exact
[ 1 Explanation
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sroberts on DSK5SPTVN1PROD with PROPOSALS
If not exact, provide explanation:
31247
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
CIVIL JUDICIAL ACTION DISCLOSURE REPORTING PAGE (SeSE)
(continuation)
If Final or On Appeal, complete all items below. For Pending Actions, complete Item 14 only.
11.
How was matter resolved: (check appropriate item)
[ 1 Consent
[ 1 Dismissed
12.
[ 1 Judgement Rendered
[ 1 Opinion
[ 1 Settled
[ 1 Withdrawn
[ 1 Other _ _ _ _ _ _ _ __
[ 1 Exact
Resolution Date (MM/DDIYYYY)
[ 1 Explanation
If not exact, provide explanation:
Resolution Detail
A.
Were any of the following Sanctions Ordered or Relief Granted? (Check all appropriate items):
1 Monetary/Fine
Amount $_ _ __
sroberts on DSK5SPTVN1PROD with PROPOSALS
14.
[ 1 Revocation/Expulsion/Denial
[ 1 Censure
[
[
1 Disgorgement/Restitution
1 Cease and Desistllnjunction
[1
Bar
[1
Suspension
B.
~~~~~~______________________________________________________________~
C.
Sanction Detail: If suspended, enjoined or barred, provide duration including start date and capacities affected
(General Securities Principal, Financial Operations Principal, etc.). If requalification, by exam/retraining was a
condition of the sanction, provide length of time given to re-qualify/retrain, type of exam required and whether
condition has been satisfied. If disposition resulted in a fine, penalty, restitution, disgorgement or monetary
compensation, provide total amount, portion levied against applicant or control affiliate, date paid and if any portion
of penalt was waived.
Provide a brief summary of details related to action(s), allegation(s), disposition(s), and/or finding(s) disclosed above.
The information must fit within the s ace rovided.
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13.
31248
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
This Disclosure Reporting Page [DRP (SBSE)] is an an [ ] INITIAL OR [ ] AMENDED response to report details for affirmative
responses to Questions 141 on Form SBSE;
Check
['I']
item(s) being responded to:
141 In the past ten years has the applicant or a control affiliate of the applicant ever been a securities firm or a control affiliate
of a securities firm that:
] (1) has been the subject of a bankruptcy petition?
] (2) has had a trustee appointed or a direct payment procedure initiated under the Securities Investor Protection Act?
Use a separate DRP for each event or proceeding. An event or proceeding may be reported for more than one person or entity using one
DRP. File with a completed Execution Page.
It is not a requirement that documents be provided for each event or proceeding. Should they be provided, they will not be accepted as
disclosure in lieu of answering the questions on this DRP.
If a control affiliate is an individual or organization registered through CRD, such control affiliate need only complete Part I of the applicant's
appropriate DRP (SBSE). Details of the event must be submitted on the control affiliate's appropriate DRP (BD) or DRP (U-4). If a control
affiliate is an individual or organization not registered through the CRD, provide complete answers to all the items on the applicant's
appropriate DRP (SBSE). The completion of this DRP does not relieve the control affiliate of its obligation to update its CRD records.
PART I
A.
The person or entity for whom this DRP (SBSE) is being filed is:
] The Applicant
] Applicant and one or more control affiliate(s)
] One or more control affiliate(s)
If this DRP is being filed for a control affiliate, give the full name of the control affiliate below (for individuals, Last name, First
name, Middle name).
If the control affiliate is registered with the CRD, provide the CRD number. If not, indicate "non-registered" by checking the
appropriate checkbox.
Name of Applicant
BD DRP
CONTROL AFFILIATE
I CRD NUMBER
Registered:
This Control Affiliate is
I
Yes
[I
Firm
[I
Individual
[ ] No
NAME (For individuals, Last, First, Middle)
[ ] This DRP should be removed from the SBS Entity's record because the control affiliate(s) are no longer associated
with the SBS Entity.
B.
If the control affiliate is registered through the CRD, has the control affiliate submitted a DRP (with Form U-4) or DRP (BD) to the
CRD System for the event?
If the answer is "Yes," no other information on this DRP must be provided: If "No," complete Part II.
[ ] Yes
[I No
Note: The completion of this Form does not relieve the control affiliate of its obligation to update its CRD records.
PART II
1.
Action Type: (check appropriate item)
[ ] Bankruptcy
[ ] Declaration
[ I
2.
Compromise
[ ] Liquidated
] Receivership
[ ] Other _ _ _ _ _ _ __
Action Date (MM/DDIYYYY)
[ ] Exact
[ ] Explanation
If not exact, provide explanation:
(continued)
If the financial action relates to an organization over which the applicant or the control affiliate exercise( d) control, enter
organization name and the applicant's or control affiliate's position, title or relationship:
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sroberts on DSK5SPTVN1PROD with PROPOSALS
3.
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Was the Organization investment-related?
[1 Yes
[1 No
4.
Court action brought in (Name of Federal, State or Foreign Court), Location of Court (City or County and State or Country),
Docket/Case Number and Bankruptcy Chapter Number (if Federal Bankruptcy Filing):
5.
Is action currently pending?
6.
If not pending, provide Disposition Type: (check appropriate item)
7.
[1 Yes
Direct Payment Procedure
[
Discharged
[
31249
[1 No
1 Dismissed [ 1 Satisfied/Released
1 Dissolved [1 SIPA Trustee Appointed
[ 1 Exact
Disposition Date (MM/DDIYYYY):
[1
Other _ _ _ _ __
1 Explanation
If not exact, provide explanation:
8.
Provide a brief summary of events leading to the action and if not discharged, explain. (The information must fit within the space
provided.):
9.
If a SIPA trustee was appointed or a direct payment procedure was begun, enter the amount paid or agreed to be paid by you; or
the name of the trustee:
Currently open?
[1 Yes
[1 No
Date Direct Payment Initiated/Filed or Trustee Appointed (MM/DDIYYYY): _____ [
1 Exact
[
1 Explanation
If not exact, provide explanation:
Provide details of any status/disposition. Include details of creditors, terms, conditions, amounts due and settlement schedule (if
applicable). (The information must fit within the space provided.)
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sroberts on DSK5SPTVN1PROD with PROPOSALS
10.
31250
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Form SBSE-A
OMB
OMS Number: ..... 3235-_
Expires: ........ Month _,2016
Estimated average burden hours per
response: ....... _ .
per amendment: .... .
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sroberts on DSK5SPTVN1PROD with PROPOSALS
Application for Registration
of Security-based Swap
Dealers and Major Securitybased Swap Participants that
are Registered or Registering
with the Commodity Futures
Trading Commission as a
Swap Dealer or Major Swap
Participant
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
BILLING CODE 8011–01–C
sroberts on DSK5SPTVN1PROD with PROPOSALS
Form SBSE–A Instructions
A. General Instructions
1. FORM—Form SBSE–A is the
Application for Registration as either a
Security-based Swap Dealer or Major
Security-based Swap Participant
(collectively, ‘‘SBS Entities’’) by an
entity that is not registered or registering
with the Commission as a broker-dealer
but is registered or registering with the
Commodity Futures Trading
Commission (‘‘CFTC’’) as a swap dealer
or major swap participant. These SBS
Entities must file this form and a copy
of the Form 7–R they file with the CFTC
(or its designee) to register with the
Securities and Exchange Commission.
An applicant must also file Schedules
A, B, C, F, and G, as appropriate. There
are no Schedules D, or E. An entity that
is registered with the Commission as a
broker-dealer and also is registered or
registering with the Commodity Futures
Trading Commission (‘‘CFTC’’) as a
swap dealer or major swap participant
should file Form SBSE–BD to register
with the Commission as an SBS Entity.
2. ELECTRONIC FILING—This Form
SBSE–A must be filed electronically
with the Commission through the
EDGAR system, and must utilize the
EDGAR Filer Manual (as defined in 17
CFR 232. 11) to file and amend Form
SBSE–A electronically to assure the
timely acceptance and processing of
those filings.1980 Additional documents
shall be attached to this electronic
application.
3. UPDATING—By law, the applicant
must promptly update Form SBSE–A
information by submitting amendments
whenever the information on file
becomes inaccurate or incomplete for
any reason [17 CFR 240.15Fb2–2]. In
addition, the applicant must update any
incomplete or inaccurate information
contained on Form SBSE–A prior to
filing a notice of withdrawal from
registration on Form SBSE–W [17 CFR
15Fb3–2(a)].
4. CONTACT EMPLOYEE—The
individual listed as the contact
employee must be authorized to receive
all compliance information,
communications, and mailings, and be
responsible for disseminating it within
the applicant’s organization.
5. FEDERAL INFORMATION LAW
AND REQUIREMENTS—An agency may
not conduct or sponsor, and a person is
not required to respond to, a collection
1980 As discussed in the release proposing this
Form, the Commission is currently developing a
system to facilitate receipt of applications
electronically. More specific instructions on how to
file this Form may be included in the final version
of the Form.
VerDate Mar<15>2010
20:21 May 22, 2013
Jkt 229001
of information unless it displays a
currently valid control number. Sections
15F, 17(a) and 23(a) of the Exchange Act
authorize the SEC to collect the
information on this form from
registrants. See 15 U.S.C. §§ 78o–10, 78q
and 78w. Filing of this form is
mandatory; however, the social security
number information, which aids in
identifying the applicant, is voluntary.
The principal purpose of this Form is to
permit the Commission to determine
whether the applicant meets the
statutory requirement to engage in the
security-based swap business. The
Commission maintain[s] a file of the
information on this form and will make
certain information collected via the
form publicly available. Any member of
the public may direct to the
Commission any comments concerning
the accuracy of the burden estimate on
this Form, and any suggestions for
reducing this burden. This collection of
information has been reviewed by the
Office of Management and Budget in
accordance with the clearance
requirements of 44 U.S.C. § 3507. The
information contained in this form is
part of a system of records subject to the
Privacy Act of 1974, as amended. The
Securities and Exchange Commission
has published in the Federal Register
the Privacy Act Systems of Records
Notice for these records.
B. Filing Instructions
1. FORMAT
a. Items 1–16 and the accompanying
Schedules and DRP pages must be
answered and all fields requiring a
response must be completed before the
filing will be accepted.
b. Failure to follow instructions or
properly complete the form may result
in the application being delayed or
rejected.
c. Applicant must complete the
execution screen certifying that Form
SBSE–A and amendments thereto have
been executed properly and that the
information contained therein is
accurate and complete.
d. To amend information, the
applicant must update the appropriate
Form SBSE–A screens.
e. A paper copy, with original
signatures, of the initial Form SBSE–A
filing [and amendments to Disclosure
Reporting Pages (DRPs)] must be
retained by the applicant and be made
available for inspection upon a
regulatory request.
2. DISCLOSURE REPORTING PAGE
(DRP)—Information concerning a
principal that relates to the occurrence
of an event reportable in Schedule C
must be provided on the appropriate
DRP.
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31251
The mailing address for questions and
correspondence is:
Explanation of Terms
(The following terms are italicized
throughout this form.)
1. General
Terms used in this Form SBSE–A that
are defined in the form the CFTC
requires that swap dealers and major
swap participants use to apply for
registration with the CFTC shall have
the same meaning as set forth in that
form.
APPLICANT—The security-based
swap dealer or major security-based
swap participant applying on or
amending this form.
CONTROL—The power, directly or
indirectly, to direct the management or
policies of a company, whether through
ownership of securities, by contract, or
otherwise. Any person that (i) is a
director, general partner or officer
exercising executive responsibility (or
having similar status or functions); (ii)
directly or indirectly has the right to
vote 25% or more of a class of a voting
security or has the power to sell or
direct the sale of 25% or more of a class
of voting securities; or (iii) in the case
of a partnership, has the right to receive
upon dissolution, or has contributed,
25% or more of the capital, is presumed
to control that company.
JURISDICTION—A state, the District
of Columbia, the Commonwealth of
Puerto Rico, the U.S. Virgin Islands, or
any subdivision or regulatory body
thereof.
SUCCESSOR—The term ‘‘successor’’
is defined to be an unregistered entity
that assumes or acquires substantially
all of the assets and liabilities, and that
continues the business of, a predecessor
security-based swap dealer or major
security-based swap participants that
ceases its security-based swap activities.
[See Exchange Act Rule 15b2–5 (17 CFR
240.15Fb2–5)]
3. For the Purpose of Schedule C and
the Corresponding Disclosure Reporting
Pages (DRPs)
FOREIGN FINANCIAL
REGULATORY AUTHORITY—Includes
(1) a foreign securities authority; (2)
other governmental body or foreign
equivalent of a self-regulatory
organization empowered by a foreign
government to administer or enforce its
laws relating to the regulation of
financial services industry-related
activities; and (3) a foreign membership
organization, a function of which is to
regulate the participation of its members
in the activities listed above.
E:\FR\FM\23MYP2.SGM
23MYP2
31252
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
sroberts on DSK5SPTVN1PROD with PROPOSALS
FINANCIAL SERVICES INDUSTRYRELATED—Pertaining to securities,
commodities, banking, savings
association activities, credit union
activities, insurance, or real estate
(including, but not limited to, acting as
or being associated with a broker-dealer,
municipal securities dealer, government
securities broker or dealer, issuer,
investment company, investment
adviser, futures sponsor, bank, securitybased swap dealer, major security-based
swap participant, savings association,
credit union, insurance company, or
insurance agency). (This definition is
VerDate Mar<15>2010
20:21 May 22, 2013
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used solely for the purpose of Form
SBSE–A.)
INVOLVED—Doing an act or aiding,
abetting, counseling, commanding,
inducing, conspiring with or failing
reasonably to supervise another in doing
an act.
ORDER—A written directive issued
pursuant to statutory authority and
procedures, including orders of denial,
suspension, or revocation; does not
include special stipulations,
undertakings or agreements relating to
payments, limitations on activity or
other restrictions unless they are
included in an order.
PO 00000
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PROCEEDING—Includes a formal
administrative or civil action initiated
by a governmental agency, selfregulatory organization or a foreign
financial regulatory authority; a felony
criminal indictment or information (or
equivalent formal charge); or a
misdemeanor criminal information (or
equivalent formal charge). Does not
include other civil litigation,
investigations, or arrests or similar
charges effected in the absence of a
formal criminal indictment or
information (or equivalent formal
charge).
BILLING CODE 8011–01–P
E:\FR\FM\23MYP2.SGM
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31253
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Application for. Registration as a Security-based Swap Dealer and
Major Security-based Swap Participant that is Registered or
Registering with the CFTC.as a Swap Dealer or Major Swap
Participant
!=ORMSBSE-A
Page .1
(!'i:xecution Page)
Official
Use
Only
Official Use
Applicant NFANumber:
Dale:
Failure to keep this form current and to file accurate supplementary information on a timely basis, or the failure to keep
accurate books and records or otherwise to comply with the provisions of law applying to the conduct of business as an
SBS Entity, would violate the Federal securities laws and the laws of the jurisdictions and may result in disciplinary,
administrative, injunctive or criminal action.
WARNING:
INTENTIONAL MISSTATEMENTS OR OMISSIONS OF FACTS MAY CONSTITUTE CRIMINAL VIOLATIONS.
[ 1APPLICATION
[ ] AMENDMENT
Exact name, principal business address, mailing address, if different, and telephone number of the applicant:
1.
A. Full name of the applicant:
I
I
B. IRS Empl. Ident. No.:
I
I
Applicant's CIK # (if any):
C. Applicant's NFA 10 #:
I
I
I
I
O. Applicant's Main Address: (Do not use a P.O. Box)
Number and Street 1:
Number and Street 2:
I
I
Cit~:
I
I
I
I
Country:
State:
I
I
Zip/Postal Code:
I
I
I
I
E. Mailing Address, if different:
Number and Street 1:
Number and Street 2:
I
I
City:
State:
I
F.
I
Business Telephone Number:
G Website/URL:
H. Contact Employee:
Name:
I,..
I
Country:
I
I
Code:
I
I
I
I
I
I
I
I
Title:
I
I
Number:
I
Email
I
I.
I
I
I
I
Chief Compliance Officer designated by the applicant in accordance with Exchange Act Section 15F(k):
Name:
Title:
I
I
I
Tele~hone Number:
I
I
I
I
Email Address:
I
EXECUTION:
The applicant consents that service of any civil action brought by or notice of any proceeding before the Securities and Exchange Commission in connection with the applicant's
security-based swap activities, unless the applicant is a nonresident SBS Entity, may be given by registered or certified mail or confirmed telegram to the applicant's contact
employee at the main address, or mailing address if different, given in Items 1E and 1F. If the applicant is a nonresident SBS Entity, it must complete Schedule F to designate a
U.S. agent for service of process.
The undersigned certifies that he/she has executed this form on behalf of, and with the authority of, said applicant. The undersigned and applicant represent that the
information and statements contained herein, including schedules attached hereto, and other information filed herewith are current, true and
The undersigned and
l"f.I,,,~,,,,,",,,l to the ""'''''' a,,]
,previously submitted is
,fI, accurate and complete.
I
I I
Date (MM/DDIYYYY)
By:
I
Name of Applicant
I
I
I
I
Name and Title of Person Signing on Applicant's behalf
Signature
This page must always be completed in full.
I
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sroberts on DSK5SPTVN1PROD with PROPOSALS
DO NOT WRITE BELOW THIS LINE - FOR OFFICIAL USE ONLY
31254
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
FORM .SBSE-A
ApplicCjnl Name:
Page 2
2.
3.
Date:
Official
Official Use
'.
.
Use
Only
Applicant NFA No.:
1 Yes
1 Yes
1 No
A
The applicant is registering as a security-based swap dealer:
B.
The applicant is registering as a major security-based swap participant:
[
[ 1 No
Because it: (check all that apply)
[ 1 maintains a substantial security-based swap position
[ 1 has substantial counterparty exposure
[ 1 is highly leveraged relative to its capital position
A
Is the applicant a foreign security-based swap dealer that intends to:
[
[
• work with the Commission and its primary regulator to have the Commission determine whether the
requirements of its primary regulator's regulatory system are comparable to the Commission's [ 1Yes
[
1Yes
[
[
• avail itself of a previously granted substituted compliance determination
1No
1No
with respect to the requirements of Section 15F of the Exchange Act of 1934 and the rules and regulations
thereunder?
B.
If "yes" to either of the questions in Item 3A above, identify the foreign financial regulatory authority that serves
as the applicant's primary regulator and for which the Commission has made, or may make, a substituted
compliance determination:
C.
If the applicant is relying on a previously granted substituted compliance determination, please describe how the
applicant satisfies any conditions the Commission may have placed on such substituted compliance
determination:
4.
'Does the applicant intend to compute capital or margin, or price customer or proprietary positions, using mathematical
Imodels?
[ 1Yes
[ 1 No
5.
A
The applicant is currently registered with the Commodity Futures Trading Commission as a:
[ 1 Swap Dealer
[ 1 Major Swap Participant
B.
The applicant is registering with the Commodity Futures Trading Commission as a:
[ 1 Swap Dealer
[ 1 Major Swap Participant
Is the applicant a U.S. branch of a non-resident entity?
If "yes," identify the non-resident entity and its location:
7.
Briefly describe the applicant's business:
1 Yes
[
1 No
Is the applicant subject to regulation by a prudential regulator, as defined in Section 1a(39) of the
Commodity Exchange Act. If "yes," identify the prudential regulator:
8.
9.
Is the applicant registered with the Commission as an investment adviser?
Applicant's lARD #:
10. A
Is the applicant registered with the Commodity Futures Trading Commission in any capacity other than
as a swap dealer or major swap participant?
B.
11.
sroberts on DSK5SPTVN1PROD with PROPOSALS
[
If "yes," as a:
[
[
1 Futures Commission Merchant
1 Commodity Pool Operator
[
[
1 Introducing
1 Other:
20:21 May 22, 2013
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[1 [1
[1 [ 1
[1 [1
Broker
Does applicant engage in any other non-securities, financial services industry-related business?
If "yes, " describe each other business briefly on Schedule B, Section I.
VerDate Mar<15>2010
YES NO
E:\FR\FM\23MYP2.SGM
23MYP2
[1 [1
EP23MY13.037
6.
31255
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
12.
Does the applicant hold or maintain any funds or securities to collateralize counterparty transactions?
FORMSBSE-A
Page 3
13.
A.
B.
Official Use
Applicant Name:
Date:
Official
Use
Only
Applicant NFA No,:
Does the applicant have any arrangement:
With any other person, firm, or organization under which any books or records of the applicant are kept,
maintained, or audited by such other person, firm or organization?
[1 [1
Under which such other person, firm or organization executes, trades, custodies, clears or settles on
behalf of the applicant (including any SRO in which the applicant is a member)?
If "yes" to any part of Item 11, complete appropriate items on Schedule B, Section II.
[1 [1
14.
Does any person directly or indirectly control the management or policies of the applicant through
agreement or otherwise?
If "yes," complete appropriate item on Schedule B, Section II.
[1 [1
15.
Does any person directly or indirectly finance (wholly or partially) the business of the applicant?
Do not answer "Yes" to Item 15 if the person finances the business of the applicant through: 1) a public
offering of securities made pursuant to the Securities Act of 1933; or 2) credit extended in the ordinary
course of business by suppliers, banks, and others.
If "yes," complete appropriate item on Schedule B, Section II.
[1 [1
16.
Is the applicant at the time of this filing succeeding to the business of a currently registered SBS Entity?
If "yes," complete appropriate items on Schedule B, Section III.
[1 [1
17.
Is the applicant registered with a foreign financial regulatory authority?
If "yes," list all such registrations on Schedule F, Page 1, Section II.
[1 [1
18.
The applicant has ___ principals who are individuals.
Please list all principals who are individuals on Schedule A.
19.
Does any principal not identified in Item 18 and Schedule A effect, or is any principal not identified in Item 18 and
Schedule A involved in effecting security-based swaps on behalf of the applicant, or will such principals effect or be
involved in effecting such business on the applicant's behalf?
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sroberts on DSK5SPTVN1PROD with PROPOSALS
If "yes, " complete appropriate item on Schedule B, Section IV.
31256
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Schedule A of F.ORM
SBSE
Official Use
Applicant Name:
PRINCIPALS THAT ARE
Date:
INDIVIDUALS
(Answer for Form SBSE-A Item 18)
Applicant NFA No.:
Use Schedule A to identify all principals of the applicant who are individuals.
Complete the "Title or Status" column by entering boardlmanagement titles; status as partner, trustee, sole proprietor, or
shareholder; and for shareholders, the class of securities owned (if more than one is issued).
Ownership Codes are:
NA less than 5%
5% but less than 10%
A FULL LEGAL NAME
B C Title or Status
(Individuals: Last Name, First Name, Middle
Name)
10% but less than 25%
25% but less than 50%
D E -
50% but less than 75%
75% or more
Date Title or
Date Individual Does person
II yes,
have an
include
Status Acquired began working
lor applicant
ownership ownership
interest in
code
yyyy
yyyy the applicant
MM
MM
NFA Identification No., CRD No.
andlor lARD No.
Official
Use
Only
YIN
1.
For individuals not presently registered through NFA, CRD or lARD, describe prior investment-related experience (e.g., for each prior
position - employer, job title, and dates of service):
YIN
2.
For individuals not presently registered through NFA. CRD or lARD. describe prior investment-related experience (e.g , for each prior
position - employer, job title, and dates of service):
YIN
3.
For individuals not presently registered through NFA, CRD or lARD, describe prior investment-related experience (e.g., for each prior
position - employer, job title, and dates of service):
YIN
4.
For individuals not presently registered through NFA, CRD or lARD, describe prior investment-related experience (e.g., for each prior
position - employer, job title, and dates of service):
YIN
5.
For individuals not presently registered through NFA, CRD or lARD, describe prior investment-related experience (e.g., for each prior
position - employer, job title. and dates of service):
YIN
6.
For individuals not presently registered through NFA, CRD or lARD, describe prior investment-related experience (e.g., for each prior
position - employer, job title, and dates of service):
YIN
7.
For individuals not presently registered through NFA, CRD or lARD, describe prior investment-related experience (e.g , for each prior
position - employer, job title, and dates of service):
YIN
8.
For individuals not presently registered through NFA, CRD or lARD, describe prior investment-related experience (e.g , for each prior
position - employer, job title. and dates of service)'
YIN
9.
YIN
10.
For individuals not presently registered through NFA, CRD or lARD, describe prior investment-related experience (e.g., for each prior
position - employer, job title, and dates of service):
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20:21 May 22, 2013
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sroberts on DSK5SPTVN1PROD with PROPOSALS
For individuals not presently registered through NFA, CRD or lARD, describe prior investment-related experience (e.g., for each prior
position - employer, job title, and dates of service):
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Official Use
Applicant Name: --'--_~_ _ _ _~_ _ _ _ _ _ __
Schedule B of FORMSBSE-A
Pag~ 1
31257
Official
Use
Only
Applicant NFA No,: _ _ _-
Use this Schedule B to report details for items listed below, Report only new information or changes/updates to previously submitted details, Do not
repeat previously submitted information,
This is an [lINITIAL
Section I
[1 AMENDED detail filing for the Form SBSE-A items checked below:
Other Business
Item 11: Does applicant engage in any other non-securities, financial services industry-related business?
Assigning Regulator(s)/Entity(s):
Unique Identification Number(s):
Briefly describe any other financial services industry-related, non-securities business in which the applicant is engaged:
Section II
Record Maintenance Arrangements / Business Arrangements / Control Persons / Financings
(Check one)
[1 Item 13A
[ 1 Item 13B
[ 1 Item 14
[ 1 Item 15
Applicant must complete a separate Schedule B Page 1 for each affirmative response in this section including any multiple responses to any item,
Complete the "Effective Date" box with the Month, Day and Year that the arrangement or agreement became effective. When reporting a change or
termination of an arrangement, enter the effective date of the change,
Firm or Organization Name
SEC File, CRD, NFA, lARD, and/or CIK Number (if
any)
Business Address (Street, City, State/Country, Zip + 4 Postal Code)
Effective Date
MM DD YYYY
/ /
Individual Name
CRD, NFA, and/or lARD Number (if any)
Business Address (if applicable) (Street, City, State/Country, Zip + 4 Postal Code)
Effective Date
MM DD YYYY
I
Termination Date
MM DD YYYY
/ /
Termination Date
MM DD YYYY
I I
I
Briefly describe the nature of the arrangement with respect to books or records (ITEM 13A); the nature of the execution, trading, custody, clearing or
settlement arrangement (ITEM 13B); the nature of the control or agreement (ITEM 14); or the method and amount of financing (ITEM 15), Use reverse
side of this sheet for additional comments if necessary.
For ITEM 14 ONLY - If the control person is an individual not presently registered through CRD or lARD, describe prior investment-related experience
(e.g., for each prior position - employer, job title, and dates of service),
Section III
Successions
Item 16: Is the applicant at the time of this filing succeeding to the business of a currently registered SBS Entity?
Date of Succession
MM DD YYYY
Name of Predecessor
SEC File, CRD, NFA, lARD, and/or CIK Number (if any)
IRS Employer Number (if any)
Briefly describe details of the succession including any assets or liabilities not assumed by the successor, Use reverse side of this sheet for additional
comments if necessary.
Section IV
Principals Effecting or Involved in Effecting SBS Business
Item 19: Does any principal not identified in Item 18 and Schedule A effect, or is any principal not identified in Item 15 and Schedule A involved in
effecting security-based swaps on behalf of the applicant, or will such principals effect or be involved in effecting such business on the applicant's
behalf?
For each Principal identified in Section IV, complete Schedule C of the Form SBSE-A and the relevant DRP pages,
1.
Type of Entity (Corp,
Partnership, LLC, etc.)
Name of Principal
SEC File No., CRD, NFA, lARD, CIK
Number, and/or Tax Identification Number
Business Address (Street, City, State/Country, Zip + 4/Postal Code)
1 effects
[1
is involved in effecting security based swaps on behalf of the applicant. (check only one)
Briefly describe the details of the principal's activities relating to its effecting or involvement in effecting security-based swap transactions on behalf of the
applicant:
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sroberts on DSK5SPTVN1PROD with PROPOSALS
This entity [
31258
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Applicant Name:
Schedule B of FORM SB.SE-A
Page 2
Section IV, Continued
Official Use
_---C_--,---'--_ _--'--~-,_ _ _ _ __
Oate: _ _ __
Official
Use
Only:
Applicant NFA No.: _ _~~
Principals Effecting or Involved in Effecting SBS Business
For each Principal identified in Section IV, complete Schedule C of the Form SBSE-A and the relevant DRP pages.
2.
Name of Principal
Type of Entity (Corp,
Partnership, LLC, etc.)
SEC File No., CRD, NFA, lARD, CIK
Number, and/or Tax Identification Number
Business Address (Street, City, State/Country, Zip + 4/Postal Code)
This entity [ ] effects
[ ] is involved in effecting security based swaps on behalf of the applicant (check only one)
Briefly describe the details of the principal's activities relating to its effecting or involvement in effecting security-based swap transactions on behalf of the
applicant:
3.
Name of Principal
Type of Entity (Corp,
Partnership, LLC, etc.)
SEC File No., CRO, NFA, lARD, CIK
Number, and/or Tax Identification Number
Business Address (Street, City, State/Country, Zip + 4/Postal Code)
This entity [ ] effects
[ ] is involved in effecting security based swaps on behalf of the applicant (check only one)
Briefly describe the details of the principal's activities relating to its effecting or involvement in effecting security-based swap transactions on behalf of the
applicant:
4.
Name of Principal
Type of Entity (Corp,
Partnership, LLC, etc.)
SEC File No., CRD, NFA, lARD, CIK
Number, and/or Tax Identification Number
Business Address (Street, City, State/Country, Zip + 4/Postal Code)
This entity [ ] effects
[ ] is involved in effecting security based swaps on behalf of the applicant (check only one)
Briefly describe the details of the principal's activities relating to its effecting or involvement in effecting security-based swap transactions on behalf of the
applicant:
5.
Name of Principal
Type of Entity (Corp,
Partnership, LLC, etc.)
SEC File No., CRD, NFA, lARD, CIK
Number, and/or Tax Identification Number
Business Address (Street, City, State/Country, Zip + 4/Postal Code)
This entity [ ] effects
[ ] is involved in effecting security based swaps on behalf of the applicant (check only one)
Briefly describe the details of the principal's activities relating to its effecting or involvement in effecting security-based swap transactions on behalf of the
applicant:
6.
Type of Entity (Corp,
Partnership, LLC, etc.)
Name of Principal
SEC File No., CRD, NFA, lARD, CIK
Number, and/or Tax Identification Number
Business Address (Street, City, State/Country, Zip + 4/Postal Code)
[ ] is involved in effecting security based swaps on behalf of the applicant (check only one)
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20:21 May 22, 2013
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sroberts on DSK5SPTVN1PROD with PROPOSALS
This entity [ ] effects
Briefly describe the details of the principal's activities relating to its effecting or involvement in effecting security-based swap transactions on behalf of the
applicant:
31259
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Applicant Name:
Schedule C of
FORM S.BSE·A
Page 1
.offici
al
Use
.only
Official Use
Rrincjpaf Name:
Applicqnt NFA No,:
Date:
Use the appropriate DRP for providing details to "yes" answers to the questions in Schedule C. Refer to the Explanation of
Terms section of Form SBSE-A Instructions for explanations of italicized terms.
A
§
CI)
0
..J
0
~
Q
In the past ten years has the principal:
(1 )
(2)
[I
[I
[I
[I
(1 )
Been convicted of or pled guilty or or nolo contendere ("no contest") in a domestic, foreign or military court to a
misdemeanor involving: financial services industry-related business, or any fraud, false statements or omissions,
wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion, or a conspiracy to commit any of
these offenses?
[I
[I
(2)
Been charged with a misdemeanor specified in B(1)?
[I
[I
[I
[I
[I
[I
[I
[I
[I
[I
[I
[I
[I
[I
[I
[I
~
~
Been charged with a felony
YES N.o
B. In the past ten years has the principal:
..J
0
Been convicted of or pled guilty or nolo contendere ("no contest") in a domestic, foreign or military court to any
felony?
C. Has the U.S. Securities and Exchange Commission or the Commodity Futures Trading Commission ever:
~
0
(1 )
Found the principal to have made a false statement or omission?
j:::
0
q:
(2)
Found the principal to have been involved in a violation of its regulations or statutes?
>-lIJ
a: a:
(3)
Found the principal to have been a cause of a financial services industry-related business having its authorization
to do business denied, revoked, or restricted?
(4)
Entered an order against the principal in connection with financial services industry-related activity?
(5)
Imposed a civil money penalty on the principal, or ordered the principal to cease and desist from any activity?
g::;,
q:CI)
... 0
::;''''
(!)o
lIJ!!!
a:Q
D. Has any other federal regulatory agency, state regulatory agency, or foreign financial regulatory authority:
Ever found the principal to have made a false statement or omission or been dishonest, unfair, or unethical?
(2)
Ever found the principal to have been involved in a violation of financial services industry-related regulations or
statutes?
(3)
Ever found the principal to have been a cause of a financial services industry-related business having its
authorization to do business denied, suspended, revoked or restricted?
[I
[I
(4)
In the past ten years, entered an order against the principal in connection with a financial services industryrelated activity?
[I
[I
(5)
Ever denied, suspended, or revoked the principal's registration or license or otherwise, by order, prevented it from
associating with a financial services industry-related business or restricted its activities?
[I
[I
[I
[I
[I
[I
§
CI)
0
..J
0
~
<:
0
j::::
0
E. Has any self-regulatory organization or commodities exchange ever:
«
(1 )
found the principal to have made a false statement or omission?
a::
(2)
found the principal to have been involved in a violation of its rules (other than a violation designated as a "minor
rule violation" under a plan approved by the U.S. Securities and exchange Commission)?
5
(!)
(3)
found the principal to have been the cause of a financial services industry-related business having its
authorization to do business denied, suspended, revoked or restricted?
[I
[I
(4)
Disciplined the principal by expelling or suspending it from membership, barring or suspending its association
with other members, or otherwise restricting its activities?
[I
[I
F. Has the principal's authorization to act as an attorney, accountant, or federal contractor ever been revoked or
suspended?
[I
[I
G. Is the principal now the subject of any regulatory proceeding that could result in a "yes" answer to any part of C, 0, or
E?
[I
[I
>-
:2«
IJJ
sroberts on DSK5SPTVN1PROD with PROPOSALS
a::
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IJJ
(1 )
31260
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Schedule C of
FORMSBSE-A
Page 2
Official Use
Applicant NFA No.:
(1 ) Has any domestic or foreign civil judicial court:
(a) In the past ten years, enjoined the principal in connection with any financial services
industry-related activity?
CI)
0
-.I
(..)
(b) Ever found that the principal was involved in a violation of financial services industry-related
statutes or regulations?
~
-.I
S
g...,
-.I
S
(2)
(3
I.
~~
~~
sroberts on DSK5SPTVN1PROD with PROPOSALS
it
Offi<;:iaf
Use
Only
YES NO
[1 [1
[1 [1
(c) Ever dismissed, pursuant to a settlement agreement, a financial services industry-related
civil judicial action brought against the principal by a state or foreign financial regulatory
authority?
[1 [1
Is the principal now the subject of any civil judicial proceeding that could result in a "yes" answer
to any part of H(1)?
[1 [1
In the past ten years has the principal ever been a securities firm or a principal of a securities firm
that:
(1 ) Has been the subject of a bankruptcy petition?
(2)
VerDate Mar<15>2010
Has had a trustee appointed or a direct payment procedure initiated under the Securities
Investor Protection Act?
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EP23MY13.043
H.
~
::;,
""
Applicant Name:
PnnCfpal Name:
Date: "
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Schedule F of FORM SBSE·A
Official Use
Applicant Name: _ _ _ _ _--,-_ _ _ _ _ _ __
Applicant NFA No,: _ _ __
Date: _ _----'-_
Section I
31261
Service of Process and Certification Regarding Access to Records
Each nonresident security-based swap dealer and non-resident security-based swap participant shall use Schedule F to identify its United
States agent for service of process and the certify that it can
(3) provide the Commission with prompt access to its books and records, and
(4)
1,
submit to onsite inspection and examination by the Commission,
Service of Process:
A
Name of United States person applicant designates and appoints as agent for service of process
B,
Address of United States person applicant designates and appoints as agent for service of process
The above identified agent for service of process may be served any process, pleadings, subpoenas, or other papers in
(a) any investigation or administrative proceeding conducted by the Commission that relates to the applicant or about which the applicant
may have information; and
(b) any civil or criminal suit or action or proceeding brought against the applicant or to which the applicant has been joined as defendant
or respondent, in any appropriate court in any place subject to the jurisdiction of any state or of the United States or of any of its
territories or possessions or of the District of Columbia, to enforce the Exchange Act The applicant has stipulated and agreed that any
such suit, action or administrative proceeding may be commenced by the service of process upon, and that service of an administrative
subpoena shall be effected by service upon the above-named Agent for Service of Process, and that service as aforesaid shall be taken
and held in all courts and administrative tribunals to be valid and binding as if personal service thereof had been made,
2,
Certification regarding access to records:
Applicant can as a matter of law;
(3)
provide the Commission with prompt access to its books and records, and
(4)
submit to onsite inspection and examination by the Commission,
Applicant must attach to this Form SaSE a copy of the opinion of counsel it is required to obtain in accordance with paragraph (c)(2) or
(c)(3) of Exchange Act Rule 15Fb2-4, as appropriate [paragraphs (c)(2) or (c)(3) of 17 CFR 240, 15Fb2-4].
Signature:
Name and Title:
Date:
Section II
Registration with Foreign Financial Regulatory Authorities
Complete this Section for Registration with Foreign Financial Regulatory Authorities relating to ITEM 17. Each security-based swap
dealer and major security-based swap participant that is registered with a foreign financial regulatory authority must list on Section II of this
Schedule F, for each foreign financial regulatory authority with which it is registered, the following information:
1,
English Name of Foreign Financial Regulatory Authority
Foreign Registration No, (if
any)
English Name of Country:
English Name of Foreign Financial Regulatory Authority
Foreign Registration No, (if
any)
English Name of Country:
English Name of Foreign Financial Regulatory Authority
Foreign Registration No, (if
any)
English Name of Country:
2,
If applicant has more than 3 Foreign Financial Regulatory Authorities to report, complete additional Schedule F Page 1s,
VerDate Mar<15>2010
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sroberts on DSK5SPTVN1PROD with PROPOSALS
3,
31262
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Schedule G of FORM
SBSE-A
Official Use
Applicpnt Name:
CERTIFICATION. ON STATUTORY Date:
DISQUALIFICATION .'
.
Applicant NFA No.:
Use Schedule G to certify that none of the applicant's associated persons is subject to statutory disqualification (as that term is
defined in Section 3(a)(39) of the Exchange Act [15 U.S.C. 78c(a)(39)].
Instructions:
This certification must be signed by the applicant's Chief Compliance Officer designated pursuant to Exchange
Act Section 15F(k) or by his or her designee.
For purposes of this Form, the term associated person shall have the meaning as specified in Section 3(a)(70) of
the Exchange Act [15 U.S.C. 78c(a)(70)].
This is a: [ ] CERTIFICATION
[ IRE-CERTIFICATION
The applicant certifies that it has
(c) performed background checks on all of its associated persons who effect or are involved in effecting, or who will
effect or be involved in effecting, security-based swaps on its behalf, and
(d) determined that no associated person who effects or is involved in effecting, or who will effect or be involved in
effecting, security-based swaps on its behalf is subject to statutory disqualification, as defined in Section 3(a)(39) of
the Securities Exchange Act of 1934 [15 U.S.C. 78c(a)(39)].
Applicant Name:
Date:
Signature of Chief Compliance Officer or Designee:
VerDate Mar<15>2010
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sroberts on DSK5SPTVN1PROD with PROPOSALS
Name of Chief Compliance Officer or Designee:
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
31263
CRIMINAL DISCLOSURE REPORTING PAGE SBS
This Disclosure Reporting Page [DRP (SBSE)] is an [ ] INITIAL OR [ ] AMENDED response to report details for
affirmative responses to Items A and B of Schedule C of Form SBSE-A;
Check ['/] item(s) being responded to:
A. In the past ten years has the principal:
[ ] (1) Been convicted of or pled guilty or nolo contendere ("no contest") in a domestic, foreign or military
court to any felony?
[ ] (2) Been charged with a felony?
B. In the past ten years has the principal:
[ ] (1) Been convicted of or pled guilty or or nolo contendere ("no contest") in a domestic, foreign or military
court to a misdemeanor involving: investments or an investment-related business, or any fraud, false
statements or omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion, or a
conspiracy to commit any of these offenses?
[ ] (2) Been charged with a misdemeanor specified in B(1)?
Use a separate DRP for each event or proceeding. An event or proceeding may be reported for more than one person or
entity using one DRP. File with a completed Execution Page.
Multiple counts of the same charge arising out of the same event(s) should be reported on the same DRP. Unrelated
criminal actions, including separate cases arising out of the same event, must be reported on separate DRPs. Use this
DRP to report all charges arising out of the same event. One event may result in more than one affirmative answer to the
above items.
If a principal is an organization registered through the CRD, such principal need only complete Part I of the applicant's
appropriate DRP (SBSE-A). Details of the event must be submitted on the principal's appropriate DRP (BD) or DRP (U-4).
If a principal is an individual or organization not registered through the CRD, provide complete answers to all the items on
the applicant's appropriate DRP (SBSE-A). The completion of this DRP does not relieve the principal of its obligation to
update its CRD records.
Applicants must attach a copy of each applicable court document (i.e., criminal complaint, information or indictment as well
as judgment of conviction or sentencing documents) if not previously submitted through CRD (as they could be in the case
of a control affiliate registered through CRD). Documents will not be accepted as disclosure in lieu of answering the
questions on this DRP.
PART I
A.
If the principal is registered with the CRD, provide the CRD number. If not, indicate "non-registered" by checking the
appropriate checkbox.
Name of Principal
CRD NUMBER
Registered:
[ ] Yes
[ ] No
[ ] This DRP should be removed from the SBS Entity's record because the principal is no longer associated with
the SBS Entity.
B.
If the principal is registered through the CRD, has the principal submitted a DRP (with Form U-4) or DRP (BD) to the
CRD System for the event?
If the answer is "Yes," no other information on this DRP must be provided: If "No," complete Part II.
VerDate Mar<15>2010
20:21 May 22, 2013
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sroberts on DSK5SPTVN1PROD with PROPOSALS
[ ] Yes
[ ] No
Note: The completion of this Form does not relieve the principal of its obligation to update its CRD records.
31264
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
1.
If charge(s) were brought against an organization over which the principal exercise(d) control: Enter organization
name, whether or not the organization was an investment-related business and the principal's position, title or
relationship.
2.
Formal Charge(s) were brought in: (include name of Federal, Military, State or Foreign Court, Location of Court - City
or County and State or Country, Docket/Case number).
3.
Event Disclosure Detail (Use this for both organizational and individual charges.)
A.
Date First Charged (MM/DDNYYY):
B.
Event Disclosure Detail (include Charge(s)/Charge Description(s), and for each charge provide: .:L number of
counts, £. felony or misdemeanor, .1. plea for each charge, and ~ product type if charge is investment-related):
C.
Current status of the Event?
D.
Event Status Date (complete unless status is
Pending) (MM/DDNYYY):
[ ] Exact
[ ] Pending
[ ] On Appeal
[ ] Explanation
[ ] Final
[ ] Exact
[ ] Explanation
4.
Disposition Disclosure Detail: Include for each charge, A. Disposition Type [e.g., convicted, acquitted, dismissed,
pretrial.], B. Date, C. Sentence/Penalty, D. Duration [if sentence-suspension, probation, etc.],
Start Date of Penalty,
E. Penalty/Fine Amount and G. Date Paid.
5.
Provide a brief summary of the circumstances leading to the charge(s) as well as the disposition. Include the relevant
dates when the conduct which was the subject of the char(s) occurred. (The information must fit within the space
provided.)
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CRIMINAL DISCLOSURE REPORTING PAGE (SBSE-A)
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
31265
REGULATORY ACTION DISCLOSURE REPORTING PAGE SBSE
This Disclosure Reporting Page [DRP (SBSE)] is an [ ] INITIAL OR [ ] AMENDED response to report details for affirmative
responses to Items C, D, E, F, or G of Schedule C of Form SBSE-A;
Check [-vJ item(s) being responded to:
C. Has the U.S. Securities and Exchange Commission or the Commodity Futures Trading Commission ever:
[
[
[
[
[
J
J
J
J
J
(1) Found the principal to have made a false statement or omission?
(2) Found the principal to have been involved in a violation of its regulations or statutes?
(3) the principal to have been a cause of an investment-related business having its authorization to do business denied, revoked, or restricted?
(4) Entered an order against the principal in connection with investment-related activity?
(5) Imposed a civil money penalty on the principal, or ordered the principal to cease and desist from any activity?
D. Has any other federal regulatory agency, state regulatory agency, or foreign financial regulatory authority:
] (1) Ever found the principal to have made a false statement or omission or been dishonest, unfair, or unethical?
[ J
[ J
(2) Ever found the principal to have been involved in a violation of investment-related regulations or statutes?
J
[ J
(4) In the past ten years, entered an order against the principal in connection with an investment-related activity?
(3) Ever found the principal to have been a cause of an investment-related business having its authorization to do business denied, suspended, revoked or
restricted?
(5) Ever denied, suspended, or revoked the principal's registration or license or otherwise, by order, prevented it from associating with an investment-related
business or restricted its activities?
E. Has any self-regulatory organization or commodities exchange ever:
[ J (1) found the principal to have made a false statement or omission?
[ J (2) found the principal to have been involved in a violation of its rules (other than a violation designated as a "minor rule violation" under a plan approved by the
U.S. Securities and exchange Commission)?
[ J (3) found the principal to have been the cause of an investment-related business having its authorization to do business denied, suspended, revoked or restricted?
[ J (4) Disciplined the principal by expelling or suspending it from membership, barring or suspending its association with other members, or otherwise restricting its
activities?
F. [ J Has the principal's authorization to act as an attorney, accountant, or federal contractor ever been revoked or suspended?
G. [ J Is the principal now the subject of any regulatory proceeding that could result in a "yes" answer to any part of C, D, or E?
Use a separate DRP for each event or proceeding. An event or proceeding may be reported for more than one person or entity using one
DRP. File with a completed Execution Page.
One event may result in more than one affirmative answer to Items C, 0, E, F or G. Use only one DRP to report details related to the same
event. If an event gives rise to actions by more than one regulator, provide details for each action on a separate DRP.
It is not a requirement that documents be provided for each event or proceeding. Should they be provided, they will not be accepted as
disclosure in lieu of answering the questions on this DRP.
If the principal is an organization registered through the CRD, such principal need only complete Part I of the applicant's appropriate DRP
(SBSE). Details of the event must be submitted on the principal's appropriate DRP (BD) or DRP (U-4). If a principal is an organization not
registered through the CRD, provide complete answers to all the items on the applicant's appropriate DRP (SBSE). The completion of this
DRP does not relieve the prinicipal of its obligation to update its CRD records.
PART I
A.
If the principal is registered with the CRD, provide the CRD number. If not, indicate "non-registered" by checking the
appropriate checkbox.
Name of Principal
Principal's CRD Number
[ 1 Yes [ 1 No
1 This DRP should be removed from the SBS Entity record because the control affiliate(s) are no longer associated
Registered:
with the SBS Entity.
B,
If the principal is registered through the CRD, has the principal submitted a DRP (with Form U-4) or DRP (BD) to the
CRD System for the event?
If the answer is "Yes," no other information on this DRP must be provided: If "No," complete Part II.
[ 1 Yes
[1
No
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sroberts on DSK5SPTVN1PROD with PROPOSALS
Note: The completion of this Form does not relieve the principal of its obligation to update its CRD records.
31266
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
REGULATORY ACTION DISCLOSURE REPORTING PAGE (SBSE-A)
(continuation)
Ilu·,all
1.
Regulatory Action initiated by:
[1 Other Federal
[ 1 State
1 Foreign
[ 1 SRO
(Full name of regulator, foreign financial regulatory authority, federal, state or SRO)
[ 1 SEC
2.
Principal Sanction: (check appropriate item)
[
[
[
[
[
1 Civil and Administrative Penalty(ies)/Fine(s)
1 Bar
1 Cease and Desist
1 Censure
1 Denial
1 Disgorgement
1 Expulsion
1 Injunction
1 Prohibition
1 Reprimand
[
[
[
[
[
[
[
[
[
[
1 Restitution
1 Revocation
1 Suspension
1 Undertaking
1 Other
Other Sanctions:
3.
3.
[ 1 Exact
Date Initiated (MM/DDIYYYY)
[ 1 Explanation
If not exact, provide explanation:
4.
Docket/Case Number:
5.
Principal Employing Firm when activity occurred which led to the regulatory action (if applicable):
6.
Principal Product Type: (check appropriate item)
[ 1 Annuity(ies) - Fixed
[ 1 Annuity(ies) - Variable
[ 1 Banking Products (other
[
[
[
[
[
[
[
[
[
than CD(s))
[ 1 CD(s)
[ 1 Commodity Option(s)
[ 1 Debt - Asset Backed
[ 1 Debt - Corporate
[ 1 Debt - Government
1 Debt - Municipal
1 Derivative( s)
1 Direct Investment(s) - DPP & LP Interest(s)
1 Equity - OTC
1 Equity Listed (Common & Preferred Stock)
1 Futures - Commodity
1 Futures - Financial
1 Index Option(s)
1 Insurance
[ 1 Investment Contract(s)
[ 1 Money Market Fund(s)
[ 1 Mutual Fund(s)
[ 1 No Product
[ 1 Options
[ 1 Penny Stock(s)
[ 1 Unit Investment Trust(s)
[ 1 Other
7.
Describe the allegations related to this regulatory action. (The information must fit within the space provided.):
8.
Current Status?
9.
If on appeal, regulatory action appealed to: (SEC, SRO, Federal or State Court) and Date Appeal Filed:
VerDate Mar<15>2010
22:26 May 22, 2013
[ 1 Pending
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sroberts on DSK5SPTVN1PROD with PROPOSALS
Other Product Type:
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
31267
REGULATORY ACTION DISCLOSURE REPORTING PAGE (SBSE-A)
(continuation)
If Final or On Appeal, complete all items below. For Pending Actions, complete Item 13 only.
10.
How was matter resolved: (check appropriate item)
[ 1 Acceptance, Waiver & Consent (AWC)
[ 1 Decision & Order of Offer of Settlement
[ 1 Decision
11.
[ 1 Consent
[ 1 Dismissed
[ 1 Order
[ 1 Settled
[ 1 Stipulation and Consent
[ 1 Vacated
[ 1 Exact
Resolution Date (MM/DDIYYYY)
[ 1 Explanation
If not exact, provide explanation:
12.
A.
Were any of the following Sanctions Ordered? (Check all appropriate items):
1 Monetary/Fine
Amount $_ _ __
B.
[ 1 Revocation/Expulsion/Denial
1 DisgorgementiRestitution
[ 1 Censure
[ 1 Cease and Desist/Injunction
[1 Bar [1 Suspension
Other Sanctions Ordered:
I
C.
Provide a brief summary of details related to the action status and (or) disposition and include relevant terms,
conditions and dates. (The information must fit within the s ace rovided.)
VerDate Mar<15>2010
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sroberts on DSK5SPTVN1PROD with PROPOSALS
13.
Sanction Detail: If suspended, enjoined or barred, provide duration including start date and capacities affected
(General Securities Principal, Financial Operations Principal, etc.). If requalification, by exam/retraining was a
condition of the sanction, provide length of time given to re-qualify/retrain, type of exam required and whether
condition has been satisfied. If disposition resulted in a fine, penalty, restitution, disgorgement or monetary
compensation, provide total amount, portion levied against principal, date paid and if any portion of penalty was
waived.
31268
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
CIVIL JUDICIAL ACTION DISCLOSURE REPORTING PAGE
This Disclosure Reporting Page [DRP (BD)] is an [ ] INITIAL OR [ ] AMENDED response to report details for
affirmative responses to Item H of Schedule C of Form BD;
Check [v1 item(s) being responded to:
H(1) Has any domestic or foreign civil judicial court:
[ ] (a) in the past ten years, enjoined the principal in connection with any investment-related activity?
[ ] (b) ever found that the principal was involved in a violation of investment-related statutes or
regulations?
[ ] (c) ever dismissed, pursuant to a settlement agreement, an investment-related civil judicial action
brought against the principal by a state or foreign financial regulatory authority?
H(2) [ ] Is the principal now the subject of any civil judicial proceeding that could result in a "yes" answer to any
part of H?
Use a separate ORP for each event or proceeding. An event or proceeding may be reported for more than one person or entity using one
ORP. File with a completed Execution Page.
One event may result in more than one affirmative answer to Item H. Use only one ORP to report details related to the same event.
Unrelated civil judicial actions must be reported on separate ORPs.
It is not a requirement that documents be provided for each event or proceeding. Should they be provided, they will not be accepted as
disclosure in lieu of answering the questions on this ORP.
If a principal is an individual or organization registered through the CRO, such principal need only complete Part I of the applicant's
appropriate ORP (SBSE-A). Oetails of the event must be submitted on the principal's appropriate ORP (BO) or ORP (U-4). If a principal is an
organization not registered through the CRO, provide complete answers to all the items on the applicant's appropriate ORP (SBSE-A). The
completion of this ORP does not relieve the principal of its obligation to update its CRO records.
PART I
A.
If the principal is registered with the CRD, provide the CRD number. If not, indicate "non-registered" by checking the
appropriate checkbox.
Name of Principal
CRD NUMBER
Registered:
[ ] Yes
[ ] No
[ ] This DRP should be removed from the SBS Entity's record because the principal is no longer associated with the
SBS Entity.
B.
If the principal is registered through the CRD, has the principal submitted a DRP (with Form U-4) or DRP (BD) to the
CRD System for the event?
If the answer is "Yes," no other information on this DRP must be provided: If "No," complete Part II.
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20:21 May 22, 2013
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sroberts on DSK5SPTVN1PROD with PROPOSALS
[ ] Yes
[ ] No
Note: The completion of this Form does not relieve the principal of its obligation to update its CRD records.
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
31269
CIVIL JUDICIAL ACTION DISCLOSURE REPORTING PAGE (SeSE-A)
(continuation)
PART II
1.
Court Action initiated by: (Name of regulator, foreign financial regulatory authority, SRO, commodities exchange, agency, firm, private plaintiff, etc.)
2.
Principal Relief Sought: (check appropriate item)
[ 1 Cease and Desist
[ 1 Civil Penalty(ies)/Fine(s)
[ 1 Money Damages (private/Civil Complaint)
[ 1 Restitution
[ 1 Disgorgement
[ 1 Injunction
[ 1 Restraining Order
[ 1 Other _ _ __
Other Relief Sought:
3.
[ 1 Exact
3.
Filing Date of Court Action (MM/DDIYYYY)
4.
Principal Product Type: (check appropriate item)
[ 1 Annuity(ies) - Fixed
[ 1 Annuity(ies) - Variable
[ 1 Banking Products (other
than CD(s))
[
[
[
[
[ 1 CD(s)
[ 1 Commodity Option(s)
[ 1 Debt - Asset Backed
[ 1 Debt - Corporate
[ 1 Debt - Government
[
[
[
[
[
1 Debt - Municipal
1 Derivative( s)
1 Direct Investment(s) - DPP & LP Interest(s)
1 Equity- OTC
1 Equity Listed (Common & Preferred Stock)
1 Futures - Commodity
1 Futures - Financial
1 Index Option(s)
1 Insurance
[ 1 Explanation
1 Investment Contract(s)
1 Money Market Fund(s)
1 Mutual Fund(s)
1 No Product
1 Options
[ 1 Penny Stock(s)
[ 1 Unit Investment Trust(s)
[ 1 Other
[
[
[
[
[
5.
Formal Action was brought in (include name of Federal, State or Foreign Court, Location of Court - City or County and State or Country, Docket/Case
Number):
6.
Control Affiliate Employing Firm when activity occurred which led to the civil judicial action (if applicable):
7.
Describe the allegations related to this civil action. (The information must fit within the space provided.):
8.
Current Status?
9.
If on appeal, action action appealed to (provide name of court):
10.
If pending, date notice/process was served (MM/DDIYYYY)
[ 1 Pending
[ 1 On Appeal
[ 1 Final
Date Appeal Filed (MM/DDIYYYY):
[ 1 Exact
[ 1 Explanation
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If not exact, provide explanation:
31270
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
CIVIL JUDICIAL ACTION DISCLOSURE REPORTING PAGE (SeSE-A)
(continuation)
If Final or On Appeal, complete all items below. For Pending Actions, complete Item 14 only.
11.
How was matter resolved: (check appropriate item)
I
[ I
12.
Consent
Dismissed
I
[ I
Judgement Rendered
Opinion
I
I
Settled
Withdrawn
[ I
[ I
Resolution Date (MM/DDIYYYY)
Other _ _ _ _ _ _ _ __
Exact
[ I
Explanation
If not exact, provide explanation:
13.
Resolution Detail
A.
Were any of the following Sanctions Ordered or Relief Granted? (Check all appropriate items):
I
Monetary/Fine
Amount $_ __
B.
[ I Revocation/Expulsion/Denial
[ I Disgorgement/Restitution
[ I Censure
[ I Cease and Desist/Injunction
[1 Bar [1 Suspension
Other Sanctions:
I
C.
Provide a brief summary of details related to action(s}, allegation(s}, disposition(s}, and/or finding(s} disclosed above.
(The information must fit within the space rovided.)
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20:21 May 22, 2013
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14.
Sanction Detail: If suspended, enjoined or barred, provide duration including start date and capacities affected
(General Securities Principal, Financial Operations Principal, etc.). If requalification, by exam/retraining was a
condition of the sanction, provide length of time given to re-qualify/retrain, type of exam required and whether
condition has been satisfied. If disposition resulted in a fine, penalty, restitution, disgorgement or monetary
compensation, provide total amount, portion levied against prinicpal, date paid and if any portion of penalty was
waived.
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
31271
BANKRUPTCY I SIPC DISCLOSURE REPORTING PAGE SBSE·
This Disclosure Reporting Page [ORP (SBSE)] is an an [ ] INITIAL OR [ ] AMENDED response to report details for
affirmative responses to Questions Ion Schedule C of Form SBSE;
Check
["'1 item(s) being responded to:
I In the past ten years has the principal ever been a securities firm or a control affiliate of a securities firm that:
[ ] (1) has been the subject of a bankruptcy petition?
[ ] (2) has had a trustee appointed or a direct payment procedure initiated under the Securities Investor
Protection Act?
Use a separate ORP for each event or proceeding. An event or proceeding may be reported for more than one person or
entity using one ORP. File with a completed Execution Page.
It is not a requirement that documents be provided for each event or proceeding. Should they be provided, they will not be
accepted as disclosure in lieu of answering the questions on this ORP.
If a principal is an individual or organization registered through CRO, such principal need only complete Part I of the
applicant's appropriate ORP (SBSE-A). Details of the event must be submitted on the principal's appropriate ORP (BO) or
ORP (U-4). If a principal is an organization not registered through the CRO, provide complete answers to all the items on the
applicant's appropriate ORP (SBSE-a). The completion of this ORP does not relieve the prinicpal of its obligation to update its
CRO records.
PART I
A.
If the principal is registered with the CRO, provide the CRO number. If not, indicate "non-registered" by checking the
appropriate checkbox.
Name of Principal
CRO NUMBER
Registered:
[ ] Yes
[ ] No
[ ] This ORP should be removed from the SBS Entity's record because the principal is no longer associated with the
SBS Entity.
B.
If the principal is registered through the CRO, has the principal submitted a ORP (with Form U-4) or ORP (BO) to the
CRO System for the event?
If the answer is "Yes," no other information on this ORP must be provided: If "No," complete Part II.
[ ] Yes
[ ] No
Note: The completion of this Form does not relieve the principal of its obligation to update its CRO records.
PART II
1.
2.
Action Type: (check appropriate item)
[ ] Bankruptcy
[ ] Declaration
[ ] Compromise
[ ] Liquidated
] Receivership
[ ] Other _ _ _ _ _ _ __
Action Date (MM/OOIYYYY)
[ ] Exact
[ ] Explanation
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Ilf not exact, provide explanation:
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Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
BANKRUPTCY I SIPC DISCLOSURE REPORTING PAGE (SBSE-A)
(continuation)
3.
If the financial action relates to an organization over which the applicant or the control affiliate exercise( d) control, enter
organization name and the applicant's or control affiliate's position, title or relationship:
[1
Was the Organization investment-related?
Yes
[1
No
4.
Court action brought in (Name of Federal, State or Foreign Court), Location of Court (City or County and State or Country),
Docket/Case Number and Bankruptcy Chapter Number (if Federal Bankruptcy Filing):
5.
Is action currently pending?
6.
[1
[1
No
If not pending, provide Disposition Type: (check appropriate item)
[ 1 Direct Payment Procedure
[ 1 Discharged
7.
Yes
[
[
1 Dismissed [ 1 Satisfied/Released
1 Dissolved [1 SIPA Trustee Appointed
[ 1 Exact
Disposition Date (MM/DDIYYYY):
[1
Other _ _ _ _ __
1 Explanation
If not exact, provide explanation:
8.
Provide a brief summary of events leading to the action and if not discharged, explain. (The information must fit within the space
provided.):
9.
If a SIPA trustee was appointed or a direct payment procedure was begun, enter the amount paid or agreed to be paid by you; or
the name of the trustee:
Currently open?
[1
Yes
[1
No
Date Direct Payment Initiated/Filed or Trustee Appointed (MM/DDIYYYY): _____ [
1 Exact
[
1 Explanation
If not exact, provide explanation:
Provide details of any status/disposition. Include details of creditors, terms, conditions, amounts due and settlement schedule (if
applicable). (The information must fit within the space provided.)
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10.
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Form SBSE–BD Instructions
sroberts on DSK5SPTVN1PROD with PROPOSALS
A. General Instructions
1. FORM—Form SBSE–BD is the
Application for Registration as either a
Security-based Swap Dealer or Major
Security-based Swap Participant
(collectively, ‘‘SBS Entities’’) by an
entity that is registered or registering
with the Commission as a broker or
dealer. These SBS Entities must file this
form to register with the Securities and
Exchange Commission. An applicant
must also file Schedules F and G, as
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Jkt 229001
appropriate. There are no Schedules A,
B, C, D, or E.
2. DEFINITIONS—Form SBSE–BD
uses the same definitions as in Form
BD.
3. ELECTRONIC FILING—This Form
SBSE–BD must be filed electronically
with the Commission through the
EDGAR system, and must utilize the
EDGAR Filer Manual (as defined in 17
CFR 232.11) to file and amend Form
SBSE–BD electronically to assure the
timely acceptance and processing of
those filings.1981 Additional documents
1981 As discussed in the release proposing this
Form, the Commission is currently developing a
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shall be attached to this electronic
application.
4. UPDATING—By law, the applicant
must promptly update Form SBSE–BD
information by submitting amendments
whenever the information on file
becomes inaccurate or incomplete for
any reason [17 CFR 240.15Fb2–2]. In
addition, the applicant must update any
incomplete or inaccurate information
contained on Form SBSE–BD prior to
filing a notice of withdrawal from
system to facilitate receipt of applications
electronically. More specific instructions on how to
file this Form may be included in the final version
of the Form.
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BILLING CODE 8011–01–C
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sroberts on DSK5SPTVN1PROD with PROPOSALS
registration on Form SBSE–W [17 CFR
15Fb3–2(a)].
5. FEDERAL INFORMATION LAW
AND REQUIREMENTS—An agency may
not conduct or sponsor, and a person is
not required to respond to, a collection
of information unless it displays a
currently valid control number. Sections
15F, 17(a) and 23(a) of the Exchange Act
authorize the SEC to collect the
information on this form from
registrants. See 15 U.S.C. §§ 78o–10, 78q
and 78w. Filing of this form is
mandatory. The principal purpose of
this Form is to permit the Commission
to determine whether the applicant
meets the statutory requirements to
engage in the security-based swap
business. The Commission maintain[s] a
file of the information on this form and
will make certain information collected
via the form publicly available. Any
member of the public may direct to the
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Jkt 229001
Commission any comments concerning
the accuracy of the burden estimate on
this Form, and any suggestions for
reducing this burden. This collection of
information has been reviewed by the
Office of Management and Budget in
accordance with the clearance
requirements of 44 U.S.C. § 3507. The
information contained in this form is
part of a system of records subject to the
Privacy Act of 1974, as amended. The
Securities and Exchange Commission
has published in the Federal Register
the Privacy Act Systems of Records
Notice for these records.
B. Filing Instructions
1. FORMAT
a. Items 1–4 and the accompanying
Schedules must be answered and all
fields requiring a response must be
completed before the filing will be
accepted.
PO 00000
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Fmt 4701
Sfmt 4702
b. Failure to follow instructions or
properly complete the form may result
in the application being delayed or
rejected.
c. Applicant must complete the
execution screen certifying that Form
SBSE–BD and amendments thereto have
been executed properly and that the
information contained therein is
accurate and complete.
d. To amend information, the
applicant must update the appropriate
Form SBSE–BD screens.
e. A paper copy, with original
signatures, of the initial Form SBSE–BD
filing and Schedules must be retained
by the applicant and be made available
for inspection upon a regulatory request.
The mailing address for questions and
correspondence is:
BILLING CODE 8011–01–P
E:\FR\FM\23MYP2.SGM
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31275
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
O~rl
Official Use
Application for Registration as a Seclirity"based Swap Deater an.dMajor
Security-based Swap Participant that is Registered as a Bro/l:er-Oealer
FORM. SSSE-SD
'.
'.
Failure to keep this form current and to file accurate supplementary information on a timely basis, or the failure to keep accurate books and
records or otherwise to comply with the provisions of law applying to the conduct of business as an SBS Entity, would violate the Federal
securities laws and may result in disciplinary, administrative, injunctive or criminal action.
WARNING:
INTENTIONAL MISSTATEMENTS OR OMISSIONS OF FACTS MAY CONSTITUTE CRIMINAL VIOLATIONS.
[ J APPLICATION
1.
[ ] AMENDMENT
Exact name and CRD number of the applicant:
Full name of the applicant:
A
I
B.
I
CRDNo.:
I
I
Website/URL:
Contact Employee:
Name:
C
D.
I
Title:
I
I
I
I
I
I
I
I
, Number:
I
Email Address:
I
3.
I
Chief Compliance Officer designated by the applicant in accordance with Exchange Act Section 15F(k):
Name:
Title:
I
2.
I
Email Address:
Telephone Number:
E.
I
I
I
I
1 Yes
1 No
A
The applicant is registering as a security-based swap dealer:
B.
The applicant is registering as a major security-based swap participant:
[ J Yes
[ J No
Because it: (check all that apply)
[ J maintains a substantial security-based swap position
[ J has substantial counterparty exposure
[ J is highly leveraged relative to its capital position
A
The applicant is presently registered with the Commodity Futures Trading Commission as a:
[ 1 Swap Dealer
[ J Major Swap Participant
B.
The applicant is registering with the Commodity Futures Trading Commission as a:
[ J Swap Dealer
[
[
[ J Major Swap Participant
Is the applicant subject to regulation by a prudential regulator, as defined in Sec. 1a(39) of the Commodity Exchange Act
If "yes," identify the prudential regulator:
[ J Yes
[ J No
4.
Briefly describe the applicant's business:
5.
Is the applicant registered with a foreign financial regulatory authority?
If "yes," list all such registrations on Schedule F, Page 1, Section ll.
I [J
[1
EXECUTION:
The applicant consents that service of any civil action brought by or notice of any proceeding before the Securities and Exchange Commission in connection with the applicant's security-based swap
activities, unless the applicant is a nonresident SBS Entity, may be given by registered or certified mail or confirmed telegram to the applicant's contact employee at the main address, or mailing
address if different, given in Items 1E and 1F. If the applicant is a nonresident SBS Entity, it must complete Schedule F to designate a U.S, agent for service of process,
The undersigned certifies that helshe has executed this form on behalf of, and with the authority of, said applicant. The undersigned and applicant represent that the information and statements
contained herein, including schedules attached hereto, and other information filed herewith are current, true and complete. The undersigned and applicant further represent that to the extent any
information previously submitted is not amended such information is currently accurate and complete,
I
I I
Date (MM/DDIYYYY)
By:
I
Name of Applicant
I
I
Signature
I
I
Name and Title of Person Signing on Applicant's behalf
This page must always be completed in full,
I
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DO NOT WRITE BELOW THIS LINE - FOR OFFICIAL USE ONLY
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Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Schedule Fof FORM SBSE
NONRESIDENT SECURiTY·BASED
SWAP DEALERS AND MAJOR
SECURITY-BASED SWAP
PARTICI~P~A~NT~S~~
Section I
Official Use
Applicant Name: _ _ _ _ _ _ _ _ _.........._ _ __
Firm SEC No.: _ _...,--~
Oate:_-'---------,-_
____L -____________________~______~________~______~____~~~~
Service of Process and Certification Regarding Access to Records
Each nonresident security-based swap dealer and non-resident security-based swap participant shall use Schedule F to identify its United
States agent for service of process and the certify that it can
(1) provide the Commission with prompt access to its books and records, and
(2)
1.
submit to onsite inspection and examination by the Commission.
Service of Process:
A.
Name of United States person applicant designates and appoints as agent for service of process
B.
Address of United States person applicant designates and appoints as agent for service of process
The above identified agent for service of process may be served any process, pleadings, subpoenas, or other papers in
(a) any investigation or administrative proceeding conducted by the Commission that relates to the applicant or about which the applicant
may have information; and
(b) any civil or criminal suit or action or proceeding brought against the applicant or to which the applicant has been joined as defendant
or respondent, in any appropriate court in any place subject to the jurisdiction of any state or of the United States or of any of its
territories or possessions or of the District of Columbia, to enforce the Exchange Act. The applicant has stipulated and agreed that any
such suit, action or administrative proceeding may be commenced by the service of process upon, and that service of an administrative
subpoena shall be effected by service upon the above-named Agent for Service of Process, and that service as aforesaid shall be taken
and held in all courts and administrative tribunals to be valid and binding as if personal service thereof had been made.
2.
Certification regarding access to records:
Applicant can as a matter of law;
(1)
provide the Commission with prompt access to its books and records, and
(2)
submit to onsite inspection and examination by the Commission.
Applicant must attach to this Form SaSE a copy of the opinion of counsel it is required to obtain in accordance with paragraph (c)(2)
or (c)(3) of Exchange Act Rule 15Fb2-4, as appropriate [paragraphs (c)(2) or (c)(3) of 17 CFR 240. 15Fb2-4].
Signature:
Name and Title:
Date:
Section II
Registration with Foreign Financial Regulatory Authorities
Complete this Section for Registration with Foreign Financial Regulatory Authorities relating to ITEM 5. Each security-based swap
dealer and major security-based swap participant that is registered with a foreign financial regulatory authority must list on Section II of this
Schedule F, for each foreign financial regulatory authority with which it is registered, the following information:
1.
English Name of Foreign Financial Regulatory Authority
Foreign Registration No. (if
any)
English Name of Country:
English Name of Foreign Financial Regulatory Authority
Foreign Registration No. (if
any)
English Name of Country:
English Name of Foreign Financial Regulatory Authority
Foreign Registration No. (if
any)
English Name of Country:
2.
If applicant has more than 3 Foreign Financial Regulatory Authorities to report, complete additional Schedule F Page 1s.
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3.
Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Proposed Rules
Appendix D: List of Commenters
sroberts on DSK5SPTVN1PROD with PROPOSALS
Market participants, foreign regulators, and
other interested parties have submitted to the
Commission (and the CFTC) numerous
written comment letters that address the
application of Title VII to cross-border
activities. Because of the interdisciplinary
nature of cross-border issues, these
comments were filed in connection with
several rulemakings and following the joint
public roundtable regarding the application
of Title VII to cross-border activities held by
the Commission and the CFTC on August 1,
2011. The Commission has provided the
legend and table below to facilitate the
public’s ability to access and review these
comment letters.
Abbreviation
Source
Definitions Concept Release
(Advanced Joint Notice of
Proposed Rulemaking or
‘‘ANPR’’).
Study on International Swap
Regulation (‘‘ISR’’).
Definitions Contained in Title VII of Dodd-Frank Wall
Street Reform and Consumer Protection Act.
http://www.sec.gov/comments/s7-16-10/s71610.shtml.
Comments on Acceptance of Public Submissions for a
Study on International Swap Regulation Mandated by
Section 719(c) of the Dodd-Frank Wall Street Reform
and Consumer Protection Act.
SEC Final Rules on the Further Definition of ‘‘Swap
Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major
Swap Participant,’’ ‘‘Major Security-Based Swap Participant’’ and ‘‘Eligible Contract Participant’’.
SEC Proposed Rules on the Registration of SecurityBased Swap Dealers and Major Security-Based
Swap Participants.
SEC Proposed Rules on Regulation SBSR—Reporting
and Dissemination of Security-Based Swap Information.
http://www.sec.gov/comments/4-635/4-635.shtml.
Intermediary Definitions
Adopting Release
(‘‘IDAR’’).
Registration Proposing Release (‘‘RPR’’).
Regulation SBSR Proposing
Release (‘‘RSPR’’).
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http://www.sec.gov/comments/s7-39-10/s73910.shtml.
http://www.sec.gov/comments/s7-40-11/s74011.shtml.
http://www.sec.gov/comments/s7-34-10/s73410.shtml.
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BILLING CODE 8011–01–C
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Abbreviation
Source
Regulation SB SEF Proposing Release
(‘‘PRSBR’’).
Product Definitions (‘‘PD’’) ...
SEC Proposed Rules on the Registration and Regulation of Security-Based Swap Execution Facilities.
http://www.sec.gov/comments/s7-06-11/s70611.shtml.
Product Definitions Contained in Title VII of the DoddFrank Wall Street Reform and Consumer Protection
Act.
Security-Based Swap Dealers and Major SecurityBased Swap Participants: Title VII Provisions of the
Dodd-Frank Wall Street Reform and Consumer Protection Act.
August 1, 2011—Joint Public Roundtable on International Issues Relating to the Implementation of
Title VII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act.
Security-Based Swap Data Repository Registration, Duties, and Core Principles.
CFTC Proposed Rule 75 FR 51429: Definitions Contained in Title VII of Dodd-Frank Wall Street Reform
and Consumer Protection Act.
CFTC Proposed Rule 75 FR 80174: Further Definition
of ‘‘Swap Dealer,’’ ‘‘Security-Based Swap Dealer,’’
‘‘Major Swap Participant,’’ ‘‘Major Security-Based
Swap Participant’’ and ‘‘Eligible Contract Participant’’.
CFTC Proposed Rule 76 FR 29818: Further Definition
of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘SecurityBased Swap Agreement’’; Mixed Swaps; SecurityBased Swap Agreement Recordkeeping.
CFTC Proposed Interpretive Guidance and Policy
Statement 77 FR 41214: Cross-Border Application of
Certain Swaps Provisions of the Commodity Exchange Act.
Interim Final Temporary Rule for Reporting of SecurityBased Swap Transaction Data.
http://www.sec.gov/comments/s7-16-11/s71611.shtml.
SEC Proposed Rules on the End-User Exception to
Mandatory Clearing of Security-Based Swaps.
http://www.sec.gov/comments/s7-43-10/s74310.shtml.
SEC Statement of General Policy on the Sequencing of
the Compliance Dates for Final Rules Applicable to
Security-Based-Swaps Adopted Pursuant to the Securities Exchange Act of 1934 and the Dodd-Frank
Wall Street Reform and Consumer Protection Act.
http://www.sec.gov/comments/s7-05-12/s70512.shtml.
Public Comments on SEC
Regulatory Initiatives
Under the Dodd-Frank Act
(‘‘PC’’).
Roundtable (‘‘T7R’’) .............
SDR Proposing Release
(‘‘SPR’’).
CFTC Title VII Definitions
(‘‘CFTC–D’’).
CFTC Further Definitions of
‘‘Swap Dealer’’ (‘‘FDSD’’).
CFTC Further Definition of
‘‘Swap’’ (‘‘FDS’’).
CFTC Cross-Border Guidance (‘‘CBG’’).
sroberts on DSK5SPTVN1PROD with PROPOSALS
Interim Final Rule on Reporting of Security-Based
Swap Transaction Data
(‘‘IFTR’’).
End-User Exception Proposing Release
(‘‘EUEPR’’).
Sequencing Policy Release
(‘‘SQPR’’).
Below is a list of comment letters that we
considered in this release.
1. ‘‘ABC Letter’’ American Benefits Council,
to Elizabeth M. Murphy, Secretary, SEC
(Apr. 8, 2011) (available in PRSBR)
2. ‘‘ACP/AMF Letter’’ Christian Noyer,
Chairman, Autorite´ de Controle
Prudential and Jean-Pierre Jouyet,
Chairman, Autorite´ des Marche´s
Financiers to Mary Schapiro, Chairman,
SEC (Feb. 11, 2011) (available in IDAR)
3. ‘‘AIMA Letter’’ Mary Richardson,
Director of Regulatory and Tax
Department, Alternative Investment
Management Association to David A.
Stawick, Secretary, CFTC and Elizabeth
M. Murphy, Secretary, SEC (Feb. 22,
2011) (available in IDAR)
4. ‘‘APG Asset Management Letter’’ Guus
Warringa, Chief Counsel, Legal, Tax,
Regulations and Compliance, APG
Algemene Pensioen Groep NV/APG
Asset Management to David A. Stawick,
Secretary, CFTC and Elizabeth M.
Murphy, Secretary, SEC (undated)
(available in IDAR)
5. ‘‘AFGI Letter’’ Bruce Stern, Chairman,
Association of Financial Guaranty
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20:21 May 22, 2013
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Location
http://www.sec.gov/comments/df-title-vii/swap/
swap.shtml.
http://www.sec.gov/comments/4-636/4-636.shtml.
http://www.sec.gov/comments/s7-35-10/s73510.shtml.
http://comments.cftc.gov/PubliPublicCom/
CommentList.aspa?id=759.
http://comments.cftc.gov/PublicComments/
CommentList.aspx?id=933.
http://comments.cftc.gov/PublicComments/
CommentList.aspx?id=1032.
http://comments.cftc.gov/PublicComments/
CommentList.aspx?id=1234.
http://sec.gov/comments/s7-28-10/s72810.shtml.
Insurers (AFGI) to David A. Stawick,
Secretary, CFTC and Elizabeth M.
Murphy, Secretary, SEC (Sept. 19, 2011)
(available in T7R)
6. ‘‘Asian-Pacific Regulators Letter’’ Belinda
Gibson, Deputy Chairman, Australian
Securities and Investments Commission;
Malcolm Edey, Assistant Governor
(Financial System), Reserve Bank of
Australia; Arthur Yuen, Deputy Chief
Executive, Hong Kong Monetary
Authority; Keith Lui, Executive Director,
Supervision of Markets, Securities and
Futures Commission, Hong Kong; Teo
Swee Lian, Deputy Managing Director
(Financial Supervision), Monetary
Authority of Singapore to Gary Gensler,
Chairman, CFTC (Aug. 27, 2012)
(unavailable online)
7. ‘‘BaFin Letter’’ Thomas Happel,
Executive Director for Banking
Supervision, Bundesanstalt fu¨r
Finanzdienstleistungsaufsicht to Mary
Schapiro, Chairman, SEC and Gary
Gensler, Chairman, CFTC (Mar. 25, 2011)
(available in IDAR)
8. ‘‘Better Markets Letter’’ Dennis M.
Kelleher, President & CEO, Stephen W.
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Hall, Securities Specialist, Wallace C.
Turbeville, Derivatives Specialist, Better
Markets, Inc., to Elizabeth M. Murphy,
Secretary, SEC (Feb. 4, 2011) (available
in EUEPR)
9. ‘‘BIS Letter I’’ Gunter Pleines, Head of
Banking, and Diego Devos, General
Counsel, Bank for International
Settlements to Ananda Radhakrishnan,
Director of Clearing and Intermediary
Oversight, CFTC and James Brigagliano,
Deputy Director, Division of Trading and
Markets, SEC (Mar. 18, 2011) (available
in ANPR)
10. ‘‘BIS Letter II’’ Gu¨nter Pleines, Head of
Banking Department, and Diego Devos,
General Counsel, Bank for International
Settlements to David A. Stawick,
Secretary, CFTC, and Elizabeth M.
Murphy, Secretary, SEC (July 20, 2011)
(available in PD)
11. ‘‘BlackRock Letter’’ Joanne Medero,
Richard Prager, and Supurna VedBrat,
BlackRock, Inc. to Elizabeth M. Murphy,
Secretary, SEC (Apr. 4, 2011) (available
in PRSBR)
12. ‘‘Bloomberg Letter’’ Ben Macdonald,
Global Head Fixed Income, Bloomberg
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LP to Elizabeth M. Murphy, Secretary,
SEC (Apr. 4, 2011) (available in PRSBR)
13. ‘‘CEB Letter’’ Jacques Mirante-Pere´,
Chief Financial Officer, and Jan De Bel,
General Counsel, Council of Europe
Development Bank to Elizabeth M.
Murphy, Secretary, SEC, and David A.
Stawick, Secretary, CFTC (July 22, 2011)
(available in PD)
14. ‘‘China Investment Letter’’ Wang Jianxi,
Executive Vice President, China
Investment Corp. to David A. Stawick,
Secretary, CFTC and Elizabeth Murphy,
Secretary, SEC (Feb. 22, 2011) (available
in IDAR)
15. ‘‘Citadel Letter’’ Adam C. Cooper,
Senior Managing Director and Chief
Legal Officer, Citadel LLC, to Elizabeth
M. Murphy, Secretary, SEC (Aug. 13,
2012) (available in SQPR)
16. ‘‘Citigroup Letter’’ James A. Forese,
Chief Executive Officer, Securities &
Banking, Citigroup Inc. to David A.
Stawick, Secretary, CFTC (Aug. 27, 2012)
(available in CBG)
17. ‘‘Cleary Letter I’’ Edward Rosen, Cleary
Gottlieb Steen & Hamilton, LLP to David
A. Stawick, Secretary, CFTC and
Elizabeth M. Murphy, Secretary, SEC
(Sept. 21, 2010) (available in ANPR)
18. ‘‘Cleary Letter II’’ Edward Rosen, Cleary
Gottlieb Steen & Hamilton, LLP, for Bank
of America, BNP Paribas, Citi, Credit
Agricole, Credit Suisse (USA), Deutsche
Bank AG, Morgan Stanley, Nomura
Securities International, Inc., PNC Bank,
National Association, Socie´te´ Ge´ne´rale,
UBS Securities LLC, and Wells Fargo &
Co. to David A. Stawick, Secretary, CFTC
and Elizabeth M. Murphy, Secretary,
SEC (Feb. 14, 2011) (available in RSPR)
19. ‘‘Cleary Letter III’’ Edward J. Rosen,
Partner, Cleary Gottlieb Steen &
Hamilton LLP, for Bank of America,
Merrill Lynch, Barclays Capital, BNP
Paribas, Citi, Cre´dit Agricole Corporate
and Investment Bank, Credit Suisse
Securities (USA), Deutsche Bank AG,
HSBC, Morgan Stanley, Nomura
Securities International, Inc., Socie´te´
Ge´ne´rale, UBS Securities LLC, and Wells
Fargo & Co. to Elizabeth M. Murphy,
Secretary, SEC and David A. Stawick,
Secretary, CFTC (April 5, 2011)
(available in PRSBR)
20. ‘‘Cleary Letter IV’’ Edward Rosen,
Cleary Gottlieb Steen & Hamilton, LLP,
for Bank of America, Barclays Capital,
BNP Paribas, Citi, Credit Agricole, Credit
Suisse (USA), Deutsche Bank AG, HSBC,
Morgan Stanley, Nomura Securities
International, Inc., Socie´te´ Ge´ne´rale, and
UBS Securities LLC to David A. Stawick,
Secretary, CFTC, Elizabeth M. Murphy,
Secretary, SEC, Jennifer J. Johnson,
Secretary, Board of Governors of the
Federal Reserve System, Office of the
Comptroller of the Currency, Robert E.
Feldman, Executive Secretary, Federal
Deposit Insurance Corp., Gary K. Van
Meter, Director, Office of Regulatory
Policy, Farm Credit Administration, and
Alfred Pollard, General Counsel, Federal
Housing Finance Agency (Sept. 20, 2011)
(available in T7R)
21. ‘‘CME Letter’’ Craig S. Donohue, Chief
Executive Officer, CME Group Inc., to
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Elizabeth M. Murphy, Secretary, SEC
(Apr. 4, 2011) (available in PRSBR)
22. ‘‘Davis Polk Letter I’’ Lanny Schwartz,
Arthur Long, Bob Colby, and Courtenay
Myers, Davis Polk & Wardwell, for
Barclays Bank PLC, BNP Paribas S.A.,
Deutsche Bank AG, Royal Bank of
Canada, The Royal Bank of Scotland
Group PLC, Socie´te´ Ge´ne´rale, and UBS
AG to David A. Stawick, Secretary,
CFTC, Elizabeth M. Murphy, Secretary,
SEC, and Jennifer J. Johnson, Secretary,
Board of Governors of the Federal
Reserve System (Jan. 11, 2011) (available
in IDAR)
23. ‘‘Davis Polk Letter II’’ Lanny Schwartz,
Arthur Long, Bob Colby, and Courtenay
Myers, Davis Polk & Wardwell, for
Barclays Bank PLC, BNP Paribas S.A.,
Credit Suisse AG, Deutsche Bank AG,
HSBC, Nomura Securities International,
Inc., Rabobank Nederland, Royal Bank of
Canada, The Royal Bank of Scotland
Group PLC, Socie´te´ Ge´ne´rale, The
Toronto-Dominion Bank, and UBS AG to
David A. Stawick, Secretary, CFTC,
Elizabeth M. Murphy, Secretary, SEC,
and Jennifer J. Johnson, Secretary, Board
of Governors of the Federal Reserve
System (Feb. 17, 2011) (available in
IDAR)
24. ‘‘Deutsche Bank Letter’’ Ernest C.
Goodrich, Jr., Managing Director—Legal
Department, and Marcelo Riffaud,
Managing Director—Legal Department,
Deutsche Bank AG to David A. Stawick,
Secretary, CFTC, Elizabeth M. Murphy,
Secretary, SEC (Nov. 5, 2010) (available
in IFTR)
25. ‘‘DTCC Letter I’’ Larry E. Thompson,
General Counsel, Depository Trust &
Clearing Corporation to Mary Schapiro,
Chairman, SEC and Gary Gensler,
Chairman, CFTC (Nov. 15, 2010)
(available in SPR)
26. ‘‘DTCC Letter II’’ Larry E. Thompson,
General Counsel, Depository Trust &
Clearing Corporation to Elizabeth M.
Murphy, Secretary, SEC (Jan. 18, 2011)
(available in RSPR)
27. ‘‘DTCC Letter III’’ Larry E. Thompson,
General Counsel, Depository Trust &
Clearing Corporation to Elizabeth M.
Murphy, Secretary, SEC (Jan. 24, 2011)
(available in SPR)
28. ‘‘DTCC Letter IV’’ Larry E. Thompson,
General Counsel, Depository Trust &
Clearing Corporation to Mary Schapiro,
Chairman, SEC and Gary Gensler,
Chairman, CFTC (June 3, 2011) (available
in RSPR and SPR)
29. ‘‘ECB Letter I’’ Daniela Russo, Director
General, Directorate General Payments
and Market Infrastructure, and Antonio
Sainz de Vicuna, General Counsel,
European Central Bank to Ananda
Radhakrishnan, Director of Clearing and
Intermediary Oversight, CFTC and James
Brigagliano, Deputy Director, Division of
Trading and Markets, SEC (May 6, 2011)
(available in CFTC–D; not available on
SEC Web site, but accessible via CFTC
Web site)
30. ‘‘ECB Letter II’’ Daniela Russo, Director
General, Directorate General Payments
and Market Infrastructure, European
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Central Bank to Natalie Markman
Radhakrishnan, Office of International
Affairs, CFTC, and Babbak Sabahi, Office
of International Affairs, SEC (Sep. 29,
2011) (available in ISR)
31. ‘‘EDF Letter’’ Eric Dennison, Sr. Vice
President and General Counsel,
Stephanie Miller, Assistant General
Counsel-Commodities, Bill
Hellinghausen, Director of Regulatory
Affairs, EDF Trading North America,
LLC to David A. Stawick, Secretary,
CFTC (Feb. 22, 2011) (available in IDAR)
32. ‘‘EIB Letter’’ A. Querejeta, Secretary
General and General Counsel, and B. de
Mazie`res, Director General, European
Investment Bank to Ananda
Radhakrishnan, Director of Clearing and
Intermediary Oversight, CFTC, and
James Brigagliano, Deputy Director,
Division of Trading and Markets, SEC
(July 22, 2011) (available in PD)
33. ‘‘ESMA Letter’’ Carlos Tavares, ViceChairman, European Securities and
Markets Authority to Mary Schapiro,
Chairman, SEC (Jan. 17, 2011) (available
in SPR)
34. ‘‘European Commission Letter I’’ Michel
Barnier, European Commissioner for
Internal Markets and Services, European
Commission to Mary Schapiro,
Chairman, SEC and Gary Gensler,
Chairman, CFTC (July 19, 2011)
(unavailable online)
35. ‘‘European Commission Letter II’’
Michel Barnier, European Commissioner
for Internal Markets and Services,
European Commission to Mary Schapiro,
Chairman, SEC and Gary Gensler,
Chairman, CFTC (Oct. 24, 2011)
(unavailable online)
36. ‘‘European Financial Markets Letter’’
Antonio Sainz de Vicuna, European
Financial Markets Lawyers Group to
David A. Stawick, Secretary, CFTC and
Elizabeth M. Murphy, Secretary, SEC
(Mar. 24, 2011) (available in PC)
37. ‘‘Financial Services Roundtable Letter’’
Richard M. Whiting, Executive Director
and General Counsel, Financial Services
Roundtable to David A. Stawick,
Secretary, CFTC and Elizabeth M.
Murphy, Secretary, SEC (Feb. 22, 2011)
(available in IDAR)
38. ‘‘GFI Letter’’ Scott Pintoff, General
Counsel, GFI Group Inc., to Elizabeth
Murphy, Secretary, SEC (July 12, 2011)
(available in PRSBR)
39. ‘‘GIC Letter’’ Lee Ming Chua, General
Counsel, Government of Singapore
Investment Corp. Pte Ltd. to David A.
Stawick, Secretary, CFTC and Elizabeth
M. Murphy, Secretary, SEC (Feb. 22,
2011) (available in ANPR)
40. ‘‘ICI Letter’’ Karrie McMillan, General
Counsel, Investment Company Institute
to Elizabeth M. Murphy, Secretary, SEC,
dated (Jan.18, 2011) (available in RSPR)
41. ‘‘IIB Letter’’ Sarah A. Miller, Chief
Executive Officer, Institute of
International Bankers to David A.
Stawick, Secretary, CFTC and Elizabeth
M. Murphy, Secretary, SEC (Jan. 10,
2011) (available in IDAR)
42. ‘‘ISDA Letter I’’ Robert Pickel, Executive
Vice Chairman, International Swaps and
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Derivatives Association, Inc. to David A.
Stawick, Secretary, CFTC and Elizabeth
M. Murphy, Secretary, SEC (Feb. 22,
2011) (available in IDAR)
43. ‘‘ISDA Letter II’’ Robert Pickel,
Executive Vice Chairman, International
Swaps and Derivatives Association, Inc.
to Elizabeth M. Murphy, Secretary, SEC
(Feb. 22, 2011) (available in IFTR)
44. ‘‘ISDA/SIFMA Letter I’’ Robert Pickel,
Executive Vice Chairman, International
Swaps and Derivatives Association, Inc.
and Kenneth Bentsen, Jr. Executive Vice
President, Public Policy and Advocacy,
Securities Industry and Financial
Markets Association to Elizabeth M.
Murphy, Secretary, SEC (Jan. 18, 2011)
(available in RSPR)
45. ‘‘ISDA/SIFMA Letter II’’ Robert Pickel,
Executive Vice Chairman, International
Swaps and Derivatives Association, Inc.
and Kenneth E. Bentsen, Jr., Executive
Vice President, Public Policy and
Advocacy, Securities Industry and
Financial Markets Association to
Elizabeth M. Murphy, Secretary, SEC
(Apr. 4, 2011) (available in PRSBR)
46. ‘‘Japanese Banks Letter’’ Bank of TokyoMitsubishi UFJ, Ltd., Mizuho Corporate
Bank, Ltd., and Sumitomo Mitsui
Banking Corp. to David A. Stawick,
Secretary, CFTC, Elizabeth M. Murphy,
Secretary, SEC, and Jennifer J. Johnson,
Secretary, Board of Governors of the
Federal Reserve System (May 6, 2011)
(available in RSPR)
47. ‘‘JFSA Letter I’’ Katsunori Mikuniya,
Commissioner and Chief Executive,
Financial Services Agency, Government
of Japan to Gary Gensler, Chairman,
CFTC; copy recipients include Chairman
Mary Schapiro and Commissioners Luis
Aguilar, Kathleen Casey, Troy Parades,
and Elisse Walter, SEC (Apr. 1, 2011)
(unavailable online)
48. ‘‘JFSA Letter II’’ Chikahisa Sumi,
Deputy Commissioner for International
Affairs, Financial Services Agency,
Government of Japan to Jill Sommers,
Commissioner, CFTC; copy recipients
include Chairman Mary Schapiro and
Commissioners Luis Aguilar, Kathleen
Casey, Troy Parades, and Elisse Walter,
SEC (June 3, 2011) (unavailable online)
49. ‘‘Jones Day Letter’’ Joel Telpner, Jones
Day to David A. Stawick, Secretary,
CFTC, and Elizabeth M. Murphy,
Secretary, SEC (Feb. 22, 2011) (available
in IDAR)
50. ‘‘KfW Letter’’ Dr. Lutz-Christian Funke,
Sr. Vice President, and Dr. Frank
Czichowski, Sr. Vice President and
Treasurer, KfW Bankengruppe to David
A. Stawick, Secretary, CFTC, and
Elizabeth M. Murphy, Secretary, SEC
(Mar. 20, 2012) (available in PD)
51. ‘‘MFA Letter I’’ Stuart J. Kaswell,
Executive Vice President, Managing
Director, and General Counsel, Managed
Funds Association to David A. Stawick,
Secretary, CFTC, and Elizabeth M.
Murphy, Secretary, SEC (Jan. 24, 2011)
(available in SPR)
52. ‘‘MFA Letter II’’ Stuart J. Kaswell,
Executive Vice President and Managing
Director, General Counsel, Managed
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Funds Association to David A. Stawick,
Secretary, CFTC, and Elizabeth M.
Murphy, Secretary, SEC (Feb. 22, 2011)
(available in IDAR)
53. ‘‘MFA Letter III’’ Stuart J. Kaswell,
Executive Vice President, Managing
Director & General Counsel, Managed
Funds Association, to Elizabeth M.
Murphy, Secretary, SEC (Apr. 4, 2011)
(available in PRSBR)
54. ‘‘MFA Letter IV’’ Stuart J. Kaswell,
Executive Vice President & Managing
Director, General Counsel, Managed
Funds Association to Elizabeth M.
Murphy, Secretary, SEC (Aug. 13, 2012)
(available in SQPR)
55. ‘‘MarketAxess Letter’’ Richard M.
McVey, Chairman and Chief Executive
Officer, MarketAxess Holdings Inc. to
Elizabeth M. Murphy, Secretary, SEC
(April 4, 2011) (available in PRSBR)
56. ‘‘Markit Letter’’ Kevin Gould, President,
Markit North America, Inc. to David A.
Stawick, Secretary, CFTC and Elizabeth
M. Murphy, Secretary, SEC (Sept. 19,
2011) (available in T7R)
57. ‘‘MarkitSERV Letter I’’ Jeff Gooch, Chief
Executive Officer, MarkitSERV to
Elizabeth M. Murphy, Secretary, SEC
(Jan. 24, 2011) (available in RSPR and
SPR)
58. ‘‘MarkitSERV Letter II’’ Jeff Gooch,
CEO, MarkitSERV to David A. Stawick,
Secretary, CFTC, Elizabeth M. Murphy,
Secretary, SEC (Sept. 19, 2011) (available
in T7R)
59. ‘‘Milbank Tweed Letter’’ Winthrop N.
Brown, Milbank, Tweed, Hadley &
McCloy, LLP to David A. Stawick,
Secretary, CFTC, and Elizabeth M.
Murphy, Secretary, SEC (Feb. 22, 2011)
(available in IDAR)
60. ‘‘Multiple Associations Letter I’’
Financial Services Forum, Futures
Industry Association, International
Swaps and Derivatives Association, and
Securities Industry and Financial
Markets Association to David A.
Stawick, Secretary, CFTC, and Elizabeth
M. Murphy, Secretary, SEC (May 4,
2011) (available in ANPR)
61. ‘‘Multiple Associations Letter II’’
Futures Industry Association, the
Financial Services Roundtable, Institute
of International Bankers, Insured
Retirement Institute, International Swaps
and Derivatives Association, Securities
Industry and Financial Markets
Association, and U.S. Chamber of
Commerce to Elizabeth M. Murphy,
Secretary, SEC (May 31, 2011) (available
in ANPR)
62. ‘‘Multiple Associations Letter III’’
Conrad Voldstad, CEO, International
Swaps and Derivatives Association; T.
Timothy Ryan, Jr., President and CEO,
Global Financial Markets Association;
Guido Ravoet, CEO, Alternative
Investment Management Association;
Anthony Belchambers, CEO, Futures and
Options Association; Jane Lowe,
Director, Markets, Investment
Management Association; and Alex
McDonald, CEO, Wholesale Market
Brokers’ Association and London Energy
Brokers’ Association to Michel Barnier,
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Commissioner for the Internal Market
and Services, The European
Commission, and Timothy Geithner,
Secretary, The Department of the
Treasury; copy recipients include
Chairman Mary Schapiro and
Commissioners Luis Aguilar, Kathleen
Casey, Troy Parades, and Elisse Walter,
SEC (July 5, 2011) (available in ISR)
63. ‘‘Multiple Associations Letter IV’’ ABA
Securities Association; American
Council of Life Insurers; Financial
Services Roundtable; Futures Industry
Association; Institute of International
Bankers; International Swaps and
Derivatives Association; and Securities
Industry and Financial Markets
Association to David A. Stawick,
Secretary, CFTC; Elizabeth M. Murphy,
Secretary, SEC; Jennifer J. Johnson,
Secretary, Board of Governors of the
Federal Reserve System; Office of the
Comptroller of the Currency; Robert E.
Feldman, Executive Secretary, Federal
Deposit Insurance Corporation; Alfred
M. Pollard, General Counsel, Federal
Housing Finance Agency; Gary K. Van
Meter, Director, Office of Regulatory
Policy, Farm Credit Administration
(Sept. 8, 2011) (available in ANPR)
64. ‘‘Newedge Letter’’ Gary DeWaal, Senior
Managing Director and General Counsel,
Newedge Group to David A. Stawick,
Secretary, CFTC and Elizabeth M.
Murphy, SEC (Feb. 24, 2011) (available
in IDAR)
65. ‘‘NIB Letter’’ Heikki Cantell, General
Counsel, and Lars Eibeholm, Vice
President, Chief Financial Officer, Head
of Treasury, and Pernelle de Klauman,
Deputy Chief Counsel, Nordic
Investment Bank to David A. Stawick,
Secretary, CFTC and Elizabeth M.
Murphy, Secretary, SEC (Aug. 2, 2011)
(available in PD)
66. ‘‘Norges Bank Letter’’ Yngve Slyngstad,
CEO, and Marius Nygaard Haug, Global
Head of Legal, Norges Bank Investment
Management to David A. Stawick,
Secretary, CFTC and Elizabeth M.
Murphy, Secretary, SEC (Feb. 18, 2011)
(available in IDAR)
67. ‘‘Phoenix Letter’’ Nicholas J. Stephan,
Chief Executive Officer, Phoenix
Partners Group LP, to Elizabeth M.
Murphy, Secretary, SEC (Apr. 4, 2011)
(available in PRSBR)
68. ‘‘Rabobank Letter’’ William R.
Mansfield, Managing Director, Head of
Global Financial Markets Americas,
Rabobank Nederland to David A.
Stawick, Secretary, CFTC, and Jennifer J.
Johnson, Secretary, Board of Governors
of the Federal Reserve System (Apr. 5,
2011) (available in FDSD; not available
on SEC Web site, but accessible via
CFTC Web site)
69. ‘‘SDMA Letter I’’ Michael Hisler, Swaps
& Derivatives Market Association, to
Elizabeth M. Murphy, Secretary, SEC
(Feb. 18, 2012) (available in PRSBR)
70. ‘‘SDMA Letter II’’ Michael Hisler,
Swaps & Derivatives Market Association,
to Elizabeth M. Murphy, Secretary, SEC
(Apr. 21, 2012) (available in PRSBR)
71. ‘‘SIFMA Letter I’’ Kenneth Bentsen,
Executive Vice President, Public Policy
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and Advocacy, Securities Industry and
Financial Markets Association to David
A. Stawick, Secretary, CFTC, Elizabeth
M. Murphy, Secretary, SEC, Jennifer J.
Johnson, Secretary, Board of Governors
of the Federal Reserve System, John
Walsh, Acting Comptroller, Office of the
Comptroller of the Currency,
Administrator of National Banks, Robert
E. Feldman, Executive Secretary, Federal
Deposit Insurance Corp., Edward
DeMarco, Acting Director, Federal
Housing Finance Agency, and Gary Van
Meter, Acting Director, Farm Credit
Administration (Feb. 3, 2011) (available
in IDAR)
72. ‘‘SIFMA Letter II’’ Kenneth E. Bentsen,
Executive Vice President, Public Policy
and Advocacy, Securities Industry and
Financial Markets Association to
Elizabeth M. Murphy, Secretary, SEC
(Dec. 16, 2011) (available in RPR)
73. ‘‘SIFMA AMG Letter I’’ Timothy W.
Cameron, Managing Director, Asset
Management Group, Securities Industry
and Financial Markets Association to
Elizabeth M. Murphy, Secretary, SEC
(Jan. 18, 2011) (available in RSPR)
74. ‘‘SIFMA AMG Letter II’’ Timothy W.
Cameron, Managing Director, Asset
Management Group, Securities Industry
and Financial Markets Association, to
Elizabeth M. Murphy, Secretary, SEC
(Apr. 4, 2011) (available in PRSBR)
75. ‘‘Socie´te´ Ge´ne´rale Letter I’’ Laura J.
Schisgall, Managing Director and Senior
Counsel, Socie´te´ Ge´ne´rale to Ananda
Radhakrishnan, Director of Clearing and
Intermediary Oversight, CFTC, John M.
Ramsay, Deputy Director, Division of
Trading and Markets, SEC, and Mark E.
Van Der Weide, Senior Associate
Director, Division of Supervision and
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Federal Reserve System (Nov. 23, 2010)
(available in PC)
76. ‘‘Socie´te´ Ge´ne´rale Letter II’’ Laura J.
Schisgall, Managing Director and Senior
Counsel, Socie´te´ Ge´ne´rale to David A.
Stawick, Secretary, Commodity Futures
Trading Commission, Elizabeth M.
Murphy, Secretary, SEC (Feb. 18, 2011)
(available in IDAR)
77. ‘‘Sullivan & Cromwell Letter’’ Kenneth
Raisler, Sullivan & Cromwell LLP, on
behalf of Bank of America Corp.,
Citigroup Inc., and JP Morgan Chase &
Co. to David A. Stawick, Secretary,
CFTC, Elizabeth M. Murphy, Secretary,
SEC, and Jennifer J. Johnson, Secretary,
Board of Governors of the Federal
Reserve System (Feb. 22, 2011) (available
in IDAR)
78. ‘‘TCX Letter’’ Joost Zuidberg, Managing
Director, Chief Executive Officer and
Brice Ropion, Director and Chief
Operating Officer, TCX Investment
Management Company B.V. to Marcia
Blase, Counsel, Office of Commissioner
Jill E. Sommers, CFTC (Dec. 15, 2011)
(available in FDSD; not available on SEC
Web site, but accessible via CFTC Web
site)
79. ‘‘Thomson Letter’’ Nancy C. Gardner,
Executive Vice President and General
Counsel, Thomson Reuters Markets to
Elizabeth M. Murphy, Secretary, SEC
(Apr. 4, 2011) (available in PRSBR)
80. ‘‘TradeWeb Letter’’ Lee H. Olesky, Chief
Executive Officer, and Douglas L.
Friedman, General Counsel, Tradeweb
Markets LLC to Elizabeth M. Murphy,
Secretary, SEC (Apr. 4, 2011) (available
in PRSBR)
81. ‘‘UBS Letter’’ David Kelly, Managing
Director, and Paul Hamill, Executive
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Director, UBS Securities LLC, to
Elizabeth M. Murphy, Secretary, SEC
(Nov. 2, 2011) (available in PRSBR)
82. ‘‘Vanguard Letter’’ Gus Sauter,
Managing Director and Chief Investment
Officer, and John Hollyer, Principal and
Head of Risk Management and Strategy
Analysis, Vanguard to Elizabeth M.
Murphy, Secretary, SEC (Jan. 18, 2011)
(available in RSPR)
83. ‘‘WMBAA Letter’’ Stephen Merkel,
Chairman, Shawn Bernardo, Vice
Chairman, Christopher Ferreri, Board
Member, J. Christopher Giancarlo, Board
Member, and Julian Harding, Board
Member, Wholesale Market Brokers’
Association, Americas to Elizabeth M.
Murphy, Secretary, SEC (Apr. 4, 2011)
(available in PRSBR)
84. ‘‘World Bank Letter I’’ John Gandolfo,
Acting Vice President and Treasurer, The
World Bank to Jill Sommers,
Commissioner, CFTC (Apr. 5, 2011)
(available in ANPR)
85. ‘‘World Bank Letter II’’ Vincenzo La Via,
World Bank Group CFO, Anne-Marie
Leroy, Senior Vice President and Group
General Counsel, and Rachel Robbins,
Vice President and General Counsel of
International Finance Corp. to David A.
Stawick, Secretary, CFTC (July 22, 2011)
(available in FDS; not available on SEC
Web site, but accessible via CFTC Web
site)
By the Commission.
Dated: May 1, 2013.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013–10835 Filed 5–22–13; 8:45 am]
BILLING CODE 8011–01–P
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| File Modified | 2013-05-23 |
| File Created | 2013-05-23 |