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



[[Page 30967]]

Vol. 78

Thursday,

No. 100

May 23, 2013

Part II





Securities and Exchange Commission





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17 CFR Parts 240, 242, and 249





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

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

[[Page 30968]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 242, and 249

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


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

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules; proposed interpretations.

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

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

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
     Send an email to rule-comments@sec.gov. Please include 
File Number S7-02-13, and File Numbers S7-34-10 (Regulation SBSR) and/
or S7-40-11 (registration of security-based swap dealers and major 
security-based swap participants), as applicable, on the subject line; 
or
     Use the Federal eRulemaking Portal (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, Special Counsel, at 202-551-7814, Office of 
Derivatives Policy, Division of Trading and Markets, regarding 
security-based swap dealers and major security-based swap participants; 
Jeffrey Mooney, Assistant Director, Matthew Landon, Senior Special 
Counsel, or Stephanie Park, Special Counsel, Office of Clearance and 
Settlement, Division of Trading and Markets, at 202-551-5710, regarding 
security-based swap clearing agencies, security-based swap data 
repositories, and the security-based swap clearing requirement; David 
Michehl, Senior Counsel, Office of Market Supervision, Division of 
Trading and Markets, at 202-551-5627, regarding security-based swap 
reporting; Leah Mesfin, Special Counsel, at 202-551-5655, or Michael P. 
Bradley, Special Counsel, at 202-551-5594, Office of Market 
Supervision, Division of Trading and Markets, regarding the trade 
execution requirement and swap execution facilities; Securities and 
Exchange Commission, 100 F Street NE., Washington, DC 20549-7010.

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

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

Table of Contents

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

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

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

I. Background

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

[[Page 30972]]

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

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

[[Page 30973]]

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

    With limited exceptions, the Commission has not proposed specific 
provisions of rules or forms or provided guidance regarding the 
application of Title VII to cross-border activities.\19\ Rather than 
addressing these issues in a piecemeal fashion through the various 
substantive rulemaking proposals implementing Title VII, the Commission 
instead is addressing the application of Title VII to cross-border 
activities holistically in a single proposing release.\20\ This 
approach provides market participants, foreign regulators, and other 
interested parties with an opportunity to consider, as an integrated 
whole, the Commission's proposed approach to the application of Title 
VII to cross-border security-based swap activities and non-U.S. persons 
that act in capacities regulated under the Dodd-Frank Act.\21\
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    \19\ The Commission has proposed a rule addressing the 
application of the security-based swap trade reporting requirement 
to cross-border transactions and to non-U.S. persons. See Regulation 
SBSR Proposing Release, 75 FR 75239-40, as discussed in Section 
VIII, infra. The Commission also has proposed rules imposing special 
requirements on ``nonresident security-based swap dealers,'' 
``nonresident major security-based swap participants,'' ``non-
resident swap data repositories,'' and ``non-resident SB SEFs.'' See 
Registration Proposing Release, 76 FR 65799-801, as discussed in 
Section III.E, infra; SDR Proposing Release, 75 FR 77310, as 
discussed in Section VI, infra; and SB SEF Proposing Release, 76 FR 
11000-3, as discussed in Section VII, infra.
    \20\ Tables reflecting the Commission's proposed approach as it 
would apply to security-based swap transactions between different 
types of entities are included in this release as Appendix A. Each 
table focuses on a specific type of security-based swap dealing 
entity or market participant and sets out the Title VII requirements 
that would apply to such person under different transaction 
scenarios.
    \21\ Cf. CFTC Proposed Interpretive Guidance and Policy 
Statement, Cross-Border Application of Certain Swaps Provisions of 
the Commodity Exchange Act, 77 FR 41214 (July 12, 2012) (``CFTC 
Cross-Border Proposal''); Exemptive Order Regarding Compliance with 
Certain Swap Regulations, 77 FR 41110 (July 12, 2012) (``CFTC 
Proposed Cross-Border Exemptive Order''); Final Exemptive Order 
Regarding Compliance with Certain Swap Regulations, 78 FR 858 (Jan. 
7, 2013) (``Final CFTC Cross-Border Exemptive Order''); Further 
Proposed Guidance Regarding Compliance With Certain Swap 
Regulations, 78 FR 909 (Jan. 7, 2013) (``CFTC Further Proposed 
Guidance''). In Section XIII.B below, we solicit general comment on 
the differences between our proposed approach and the CFTC's 
proposed approach.
---------------------------------------------------------------------------

    After providing an overview of the security-based swap market, the 
Commission's preliminary views on the scope of application of Title VII 
to cross-border security-based swap activity, and the legal and policy 
principles guiding the Commission's approach to the application of 
Title VII to cross-border activities in Section II, we set forth our 
proposed approach in the subsequent sections of the release.
    In Sections III and IV, we propose rules and interpretive guidance 
regarding the registration and regulation of security-based swap 
dealers and major security-based swap participants, including the 
treatment of foreign branches of U.S. banks and the provision of 
guarantees in the cross-border context. In connection with this, we are 
re-proposing the following rules and forms: 17 CFR 249.1600 (Form 
SBSE), 249.1600a (Form SBSE-A), and 249.1600b (Form SBSE-BD).\22\
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    \22\ See Registration Proposing Release, 76 FR 65784, as 
discussed in Section III.E, infra.
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    In Sections V-VII, we propose rules and interpretive guidance 
regarding the registration of security-based swap clearing agencies, 
SDRs, and SB SEFs, as well as discuss generally under what 
circumstances the Commission would consider granting exemptions from 
registration for these infrastructures. To facilitate relevant 
authorities' access to security-based swap data collected and 
maintained by Commission-registered SDRs, the Commission also is 
proposing interpretive guidance to specify how SDRs may comply with the 
notification requirement in the Exchange Act and specifying how the 
Commission proposes to determine whether a relevant authority is 
appropriate for purposes of receiving security-based swap data from an 
SDR.\23\ In addition, the Commission is proposing a tailored exemption 
from the indemnification requirement in the Exchange Act.\24\
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    \23\ See Section VI.C, infra.
    \24\ Id.
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    In Sections VIII-X, we propose rules and interpretive guidance 
regarding the application of Title VII to cross-border activities with 
respect to certain transactional requirements in connection with 
reporting and dissemination, clearing, and trade execution for 
security-based swaps. As discussed further below, these requirements 
apply to persons independent of their registration status. In 
connection with this, we are re-proposing the following rules: 17 CFR 
242.900-242.911 (Regulation SBSR).\25\
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    \25\ See Regulation SBSR Proposing Release, 75 FR 75208, as 
discussed in Section VIII, infra.
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    In Section XI, we set forth a proposed policy and procedural 
framework under which we would consider permitting compliance with 
comparable regulatory requirements in a foreign jurisdiction to 
substitute for compliance with certain requirements of the Exchange 
Act, and the rules and regulations thereunder, relating to security-
based swaps (i.e., ``substituted compliance'').\26\ Generally speaking, 
the Commission is proposing a policy and procedural framework that 
would allow for the possibility of substituted compliance in 
recognition of

[[Page 30974]]

the potential, in a market as global as the security-based swap market, 
for market participants who engage in cross-border security-based swap 
activity to be subject to conflicting or duplicative compliance 
obligations.\27\ In addition, the Commission is proposing a rule that 
would set forth procedures for requesting a substituted compliance 
determination.
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    \26\ See Section XI, infra. As discussed in Section XI, in 
permitting substituted compliance, the Commission might use 
different procedural approaches depending on the different 
substantive requirements that are the subject of the substituted 
compliance determinations. See also note 27, infra.
    \27\ Separately, in Sections V-VII below, the Commission also 
discusses generally when we would consider exempting non-resident 
security-based swap clearing agencies and SB SEFs that are subject 
to comparable, comprehensive supervision and regulation in their 
home countries, and certain SDRs that are non-U.S. persons, from 
certain obligations under the Exchange Act, including the 
requirement to register.
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    In Section XII, the Commission sets forth our view of the scope of 
our authority, with respect to enforcement proceedings, under Section 
929P of the Dodd-Frank Act.\28\ Section XIII sets forth a general 
request for comment, including request for comment on the consistency 
of our proposed approach with the CFTC's proposed approach to applying 
the provisions of the CEA that were enacted by Title VII in the cross-
border context.
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    \28\ The rules, forms, and interpretive guidance proposed herein 
and discussed in Sections II-XI below relate solely to the 
applicability of the registration (and the attendant substantive 
regulation) and reporting and dissemination, clearing, and trade 
execution requirements in Title VII, and are not intended to limit 
or address the cross-border reach or extraterritorial application of 
the antifraud or other provisions of the federal securities laws.
---------------------------------------------------------------------------

    Finally, in Section XIV, the Commission addresses the Paperwork 
Reduction Act, and Section XV provides an economic analysis of the 
proposed approach, including a discussion of the associated costs and 
benefits of the proposals discussed in Sections III-XI, as well as a 
discussion of issues related to efficiency, competition, and capital 
formation.
    Because this release is directly related to security-based swap 
data reporting and dissemination, clearing, and trade execution, as 
well as the regulation of various persons required to register as a 
result of amendments made to the Exchange Act by Title VII, we 
anticipate that some of the rules, forms, and interpretive guidance 
proposed herein, and comments received thereon, will be addressed in 
the adopting releases relating to the impacted substantive rules. In 
some areas, we may decide to address comments received on the proposals 
contained in this release by adopting rules in a separate 
rulemaking.\29\
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    \29\ The Commission is not addressing in this release issues 
relating to compliance dates of final rules adopted pursuant to 
amendments made to the Exchange Act by Title VII. Compliance issues, 
including compliance dates, will be addressed in connection with the 
various Title VII final rules. See Statement of General Policy on 
the Sequencing of the Compliance Dates for Final Rules Applicable to 
Security-Based Swaps Adopted Pursuant to the Securities Exchange Act 
of 1934 and the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Exchange Act Release No. 67177 (June 11, 2012), 77 
FR 35625 (June 14, 2012) (``Implementation Policy Statement''). See 
also Reopening of Comment Periods for Certain Rulemaking Releases 
and Policy Statement Applicable to Security-Based Swaps Proposed 
Pursuant to the Securities Exchange Act of 1934 and the Dodd-Frank 
Wall Street Reform and Consumer Protection Act, Exchange Act Release 
No. 34-69491 (May 1, 2013).
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C. Consultation and Coordination

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

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

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

[[Page 30975]]

discussions and our participation in various international task forces 
and working groups,\38\ we have gathered information about foreign 
regulatory reform efforts and have discussed the possibility of 
conflicts and gaps, as well as inconsistencies and duplications, 
between U.S. and foreign regulatory regimes. We have taken these 
discussions into consideration in developing these proposed rules, 
forms, and interpretations.
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    \36\ For example, on June 18-19, 2012, the leaders of the G20 
convened in Los Cabos, Mexico, and reaffirmed their commitments with 
respect to the regulation of the OTC derivatives markets. See the 
G20 Leaders Declaration (June 2012), para. 39, available at: 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 45-46 (discussing meetings of 
the group of market regulators ``to identify and explore ways to 
address issues and uncertainties in the application of rules in a 
cross-border context, including options to address identified 
conflicts, inconsistencies, and duplication.'').
    \38\ The Commission participates in the FSB's Working Group on 
OTC Derivatives Regulation (``ODWG''), both on its own behalf and as 
the representative of the International Organization of Securities 
Commissions (``IOSCO''), which is co-chair of the ODWG. The 
Commission also serves as one of the co-chairs of the IOSCO Task 
Force on OTC Derivatives Regulation.
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    In addition, the Commission and the CFTC have conducted staff 
studies to assess developments in OTC derivatives regulation abroad. As 
directed by Congress in Section 719(c) of the Dodd-Frank Act, on 
January 31, 2012, the Commission and the CFTC jointly submitted to 
Congress a ``Joint Report on International Swap Regulation'' (``Swap 
Report'').\39\ The Swap Report discussed swap and security-based swap 
regulation and clearinghouse regulation in the Americas, Asia, and the 
European Union, and identified similarities and differences in 
jurisdictions' approaches to areas of regulation, as well as other 
areas of regulation that could be harmonized. The Swap Report also 
identified major clearinghouses, clearing members, and regulators in 
each geographic area and described the major contracts (including 
clearing volumes and notional values), methods for clearing swaps, and 
the systems used for setting margin in each geographic area.\40\
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    \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 foreign\41\ regulatory system to substitute for compliance with 
certain requirements of the Exchange Act relating to security-based 
swaps, provided that the corresponding requirements in the foreign 
regulatory system are comparable to the relevant provisions of the 
Exchange Act.\42\ The availability of substituted compliance should 
reduce the likelihood that market participants would be subject to 
potentially conflicting or duplicative sets of rules.
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    \41\ In this release, the term ``foreign'' is used 
interchangeably with the term ``non-U.S.'' See, e.g., note 372, 
infra (discussing the definition of ``foreign security-based swap 
dealer'').
    \42\ See Section XI, infra.
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    As discussed more fully below, the Commission would perform 
comparability analysis and make substituted compliance determinations 
with respect to four separate categories of requirements.\43\ If, for 
example, a foreign regulatory system achieves comparable regulatory 
outcomes in three out of the four categories, then the Commission would 
permit substituted compliance with respect to those three categories of 
comparable requirements, but not for the one, non-comparable category 
for which comparable regulatory outcomes are not achieved. In other 
words, we are not proposing an ``all-or-nothing'' approach. In 
addition, in making comparability determinations within each category 
of requirements, the Commission is proposing to take a holistic 
approach; that is, we would ultimately focus on regulatory outcomes 
rather than a rule-by-rule comparison. Substituted compliance therefore 
should accept differences between regulatory regimes when those 
differences nevertheless accomplish comparable regulatory outcomes.
---------------------------------------------------------------------------

    \43\ Specifically, the Commission is proposing to make 
substituted compliance determinations with respect to the following 
categories of requirements: (i) Requirements applicable to 
registered security-based swap dealers in Section 15F of the 
Exchange Act and the rules and regulations thereunder; (ii) 
requirements relating to regulatory reporting and public 
dissemination of security-based swaps; (iii) requirements relating 
to clearing for security-based swaps; and (iv) requirements relating 
to trade execution for security-based swaps. See Section XI, infra.
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E. Conclusion

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

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

[[Page 30976]]

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

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

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

A. Overview of the Security-Based Swap Market

1. Global Nature of the Security-Based Swap Market
    The security-based swap market is a global market.\47\ Security-
based swap business currently takes place across national borders, with 
agreements negotiated and executed between counterparties often in 
different jurisdictions (and at times booked and risk-managed in still 
other jurisdictions).\48\
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    \47\ See, e.g., IIB Letter at 1 (noting the ``truly global 
nature of the OTC derivatives market''); Cleary Letter IV at 2 
(noting that swaps and security-based swaps trade in a ``unique 
global market''); Soci[eacute]t[eacute] G[eacute]n[eacute]rale 
Letter II at 2 (noting the ``global nature of the derivatives 
business''); see also Bank of International Settlements (``BIS''), 
Committee on the Global Financial System, No. 46, The macro 
financial implications of alternative configurations for access to 
central counterparties in OTC derivatives markets (Nov. 2011) at 1, 
available at: 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.
---------------------------------------------------------------------------

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

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

2. Dealing Structures
    Dealers use a variety of business models and legal structures to 
conduct security-based swap dealing business \56\ with counterparties 
in jurisdictions all around the world.\57\ Commenters have indicated 
that both U.S.-based and foreign-based entities use certain dealing 
structures for a variety of legal, tax, strategic, and business reasons 
that often pre-date the enactment of the Dodd-Frank Act.\58\ Among the 
reasons cited for the variety of dealing structures is the desire of 
counterparties to reduce risk and enhance credit protection based on 
the particular characteristics of each entity's business.\59\
---------------------------------------------------------------------------

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

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

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

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

[[Page 30977]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 30978]]

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

    \72\ The President's Working Group on Financial Markets made the 
central clearing of OTC derivatives a top policy objective in 2008. 
See Policy Objectives for the OTC Derivatives Market (Nov. 14, 
2008), available at: 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/resource-center/fin-mkts/Documents/q4progress%20update.pdf.
---------------------------------------------------------------------------

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

    \73\ On November 14, 2008, the Commission executed a Memorandum 
of Understanding with the Board and the CFTC that established a 
framework for consultation and information sharing on issues related 
to central counterparties for the OTC derivatives market. See 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'').
    \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 [euro]7.2 trillion notional amount of CDS contracts 
based on indices of securities and approximately [euro]1.2 trillion 
notional amount of CDS contracts based on individual reference 
entities or securities. See Clearing Agency Standards Adopting 
Release, 77 FR 66236 n.184 (citing https://www.theice.com/marketdata/reports/ReportCenter.shtml).
---------------------------------------------------------------------------

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

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

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

    \78\ See FSB, Implementing OTC Derivatives Market Reforms (Oct. 
25, 2010) (``FSB October 2010 Report''), at 11, available at: 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 
[security-based swap] market by retaining complete records of 
[security-based swap] transactions, maintaining the integrity of 
those records, and providing effective access to those records to 
relevant authorities and the public in line with their respective 
information needs. The enhanced transparency provided by an SDR is 
important to help regulators and others monitor the build-up and 
concentration of risk exposures in the [security-based swap] market. 
Without an SDR, data on [security-based swap] transactions is 
dispersed and not readily available to regulators and others.'').
---------------------------------------------------------------------------

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

    \81\ See Committee on Payment and Settlement Systems (``CPSS'') 
and Technical Committee of IOSCO, Report on OTC Derivatives Data 
Reporting and Aggregation Requirements (Jan. 2012), at 5, available 
at: 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.
---------------------------------------------------------------------------

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

[[Page 30979]]

derivatives.\84\ In addition, in June 2010, the OTC Derivatives 
Regulators' Forum (``ODRF'') \85\ developed indicative guidance for 
Warehouse Trust \86\ aiming to identify data that authorities would 
expect to request from Warehouse Trust to carry out their mandates.\87\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

Multi-Dealer RFQ Platforms
    A multi-dealer RFQ electronic trading platform refers to a multi-
dealer RFQ system whereby a requester can send an RFQ to solicit quotes 
on a certain security-based swap from multiple dealers at the same 
time. After the RFQ is submitted, the recipients have a prescribed 
amount of time in which to respond to the RFQ with a quote. Responses 
to the RFQ are firm. The requestor then has the opportunity to review 
the responses and accept the best quote. A multi-dealer RFQ platform 
provides a certain amount of pricing information, depending on its 
characteristics.\93\
---------------------------------------------------------------------------

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

Central Limit Order Books
    A central limit order book system or similar system refers to a 
trading system in which firm bids and offers are posted for all 
participants to see, with the identity of the parties withheld until a 
transaction occurs. Bids and offers are then matched based on price-
time priority or other established parameters and trades are executed 
accordingly. The quotes on a limit order book system are firm. In 
general, a limit order book system provides greater pricing information 
than the three platforms described above because all participants can 
view bids and offers before placing their bids and offers.\94\ 
Currently, limit order books for the trading of security-based swaps in 
the United States are utilized by inter-dealer brokers for dealer-to-
dealer transactions.
---------------------------------------------------------------------------

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

Brokerage Trading
    ``Brokerage trading'' refers to an execution practice used by 
brokers to execute security-based swaps on behalf of customers, often 
in larger sized transactions. In such a system, a broker receives a 
request from a customer (which may be a dealer) who seeks to execute a 
specific type of security-based swap. The broker then interacts with 
other customers (which may also be dealers) to fill the request and 
execute the transaction. This model often is used by dealers that seek 
to transact with other dealers through the use of an interdealer broker 
as an intermediary. In this model, participants may or may not be able 
to see bids and offers of other participants.\95\
---------------------------------------------------------------------------

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

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

[[Page 30980]]

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

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

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

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

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

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

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

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

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

[[Page 30981]]

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

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

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

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

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

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

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

    \110\ See, e.g., Darrell Duffie and Haoxiang Zhu, ``Does a 
Central Clearing Counterparty Reduce Counterparty Risk?'' Stanford 
University, Working Paper (2010), available at: 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.banque-france.fr/fileadmin/user_upload/banque_de_france/publications/Revue_de_la_stabilite_financiere/etude15_rsf_1007.pdf.
    \111\ See Christopher Culp, ``OTC-Cleared Derivative: Benefits, 
Costs, and Implications of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act,'' Journal of Applied Finance No. 2 (2010), 
available at: http://www.rmcsinc.com/articles/OTCCleared.pdf.
---------------------------------------------------------------------------

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

[[Page 30982]]

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

    \112\ The Financial Stability Oversight Council (``FSOC'') can 
designate a CCP as systemically important under Section 804 of the 
Dodd-Frank Act. See, e.g., Craig Pirrong, ``Mutualization of Default 
Risk, Fungibility, and Moral Hazard: The Economics of Default Risk 
Sharing in Cleared and Bilateral Markets,'' University of Houston, 
Working Paper (2010), available at: 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-to-
basics analysis of the economics of clearing suggests that such 
claims are overstated, and that traditional OTC mechanisms may be 
more efficient for some instruments and some counterparties.'').
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

[[Page 30983]]

application of Title VII to cross-border security-based swap activity.
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    \117\ 15 U.S.C. 78dd(c).
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1. Commenters' Views
    Commenters generally expressed the view that Section 30(c) 
restricts the Commission's authority to apply Title VII to 
``extraterritorial'' conduct and thus, that the Commission follow a 
territorial approach in applying Title VII to cross-border security-
based swap activity. One commenter interpreted Section 30(c) as 
prescribing a strictly territorial approach to the application of Title 
VII, arguing that this section codifies the territorial approach that 
we have historically taken in our existing securities regulations.\118\ 
Several commenters argued that a narrow interpretation of the 
``extraterritorial'' reach of Title VII was consistent with both 
Commission precedent\119\ and the Supreme Court's decision in Morrison 
v. National Australia Bank.\120\
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    \118\ See Cleary Letter IV at 33-36; see also SIFMA Letter I at 
5, 22; Sullivan & Cromwell Letter at 6 (suggesting that Section 
30(c) permits ``extraterritorial'' application of Title VII only to 
prevent ``efforts to evade'' statutory requirements).
    \119\ See, e.g., Sullivan & Cromwell Letter at 11 (stating that 
the Commission has ``plainly stated that it uses a territorial 
approach in applying the broker-dealer requirements to international 
operations'').
    \120\ 130 S.Ct. 2869 (2010). See, e.g., Jones Day Letter at 7-8 
(suggesting that the jurisdictional limits of Dodd-Frank Act 
Sections 722 and 772 be interpreted narrowly in a manner consistent 
with the Morrison decision); Cleary Letter IV at 33-6 (arguing 
against an extraterritorial application of Title VII); SIFMA Letter 
I at 5-6; ISDA Letter I at 11.
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    Based on this interpretation of Section 30(c), commenters generally 
argued that Title VII does not give the Commission authority to 
regulate entities that transact a business in security-based swaps 
outside the United States.\121\ Some commenters suggested that non-U.S. 
entities (including affiliates of U.S. persons) that conduct business 
entirely with counterparties outside the United States should not be 
required to register as swap or security-based swap dealers or comply 
with Title VII.\122\ Some of these commenters also urged the Commission 
not to subject foreign branches and affiliates of U.S. banks to Title 
VII registration requirements to the extent that they transact solely 
with foreign persons.\123\ Some commenters urged that, even within a 
single entity, only those branches, departments, or divisions that 
engage in business within the United States should be required to 
register.\124\
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    \121\ See, e.g., Jones Day Letter at 7-8; Cleary Letter IV at 
33-6; Sullivan & Cromwell Letter at 10-11; SIFMA Letter I at 5-6; 
ISDA Letter I at 11.
    \122\ See SIFMA Letter I at 4; see also ISDA Letter I at 11 
(recommending that designation as a dealer should not be triggered 
by transactions entered into with foreign affiliates or branches of 
a U.S. bank or with foreign entities whose obligations are 
guaranteed by a U.S. person, or by legacy positions with U.S. 
counterparties); Davis Polk Letter II at 5-6 (stating that a foreign 
entity engaged in swaps exclusively with foreign counterparties is 
```without the jurisdiction of the United States'''). Similarly, one 
commenter recommended that transactions between two foreign entities 
should be excluded from calculations of substantial position for 
purposes of the major participant definition. Canadian MAVs Letter 
at 7-8.
    \123\ See, e.g., Sullivan & Cromwell Letter at 7 (stating that a 
territorial interpretation of Section 30(c) prevented the Commission 
from imposing Title VII requirements on the U.S. banks' ``Non-U.S. 
Operations,'' defined to include both foreign affiliates or 
subsidiaries and foreign branches of these banks).
    \124\ See, e.g., Cleary Letter IV at 12; see also id. at 26 
(arguing that a non-U.S. branch or affiliate of a U.S. entity should 
not be required to register as a dealer by virtue of its 
transactions with a non-U.S. person counterparty); ISDA Letter I at 
11 (stating that a ``branch, division or office of an entity should 
be able to be designated as a Dealer without subjecting the whole 
entity to regulation'').
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    Commenters generally took the view that Section 30(c) does not 
permit the Commission to apply Title VII to transactions occurring 
outside the United States. Accordingly, commenters suggested that 
Section 30(c) restricts the Commission's ability to apply Title VII 
requirements to the foreign business of entities that are required to 
register with the Commission.\125\ For example, one commenter 
interpreted Section 30(c) to prohibit application of Title VII to any 
of a person's ``activity'' or ``business'' outside the United States, 
even if that person otherwise transacts a business in security-based 
swaps within the jurisdiction of the United States.\126\
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    \125\ See Cleary Letter IV at 11; see also SIFMA Letter I at 14 
(suggesting that Section 30(c) ``provide[s] strong support'' for not 
applying Title VII to transactions between a registered foreign swap 
dealer and non-U.S. persons); ISDA Letter I at 11 (recommending that 
no Title VII requirements should apply to transactions between a 
non-U.S. entity registered as a dealer and its non-U.S. person 
counterparties).
    \126\ See Cleary Letter IV at 12.
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    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\
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    \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\
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    \129\ See, e.g., id. at 9-10 (suggesting that 
``extraterritorial'' application of Title VII requires an ``intent 
to evade'' Title VII).
    \130\ See Cleary Letter IV at 7.
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2. Scope of Application of Title VII in the Cross-Border Context
(a) Overview and General Approach
    Section 772(b) of the Dodd-Frank Act amends Section 30 of the 
Exchange Act to provide that ``[n]o provision of [Title VII] . . . 
shall apply to any person insofar as such person transacts a business 
in security-based swaps without the jurisdiction of the United 
States,'' unless that business is transacted in contravention of rules 
prescribed to prevent evasion of Title VII.\131\ In so amending Section 
30 of the Exchange Act, Congress directly appropriated nearly identical 
language defining the scope of the Exchange Act's application that 
appears in subsection (b) of Section 30 of the Exchange Act,\132\ 
indicating that Congress intended the territorial application of Title 
VII to entities and transactions in the security-based swap market to 
follow similar principles to those applicable to the

[[Page 30984]]

securities market under the Exchange Act.\133\
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    \131\ See Section 30(c) of the Exchange Act, 15 U.S.C. 78dd(c), 
added by Section 772(b) of the Dodd-Frank Act.
    \132\ Section 30(b) of the Exchange Act, 15 U.S.C. 78dd(b), 
provides that the Exchange Act and related rules ``shall not apply 
to any person insofar as he transacts a business in securities 
without the jurisdiction of the United States,'' unless that 
business is transacted in contravention of rules prescribed as 
necessary or appropriate to prevent evasion of the Exchange Act.
    \133\ See, e.g., Commodity Futures Trading Comm'n v. Schor, 478 
U.S. 833, 846 (1986) (holding that ``when Congress revisits a 
statute giving rise to a longstanding administrative interpretation 
without pertinent change, the `congressional failure to revise or 
repeal the agency's interpretation is persuasive evidence that the 
interpretation is the one intended by Congress''').
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    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.
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    \134\ See, e.g., Cleary Letter IV at 33-37.
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    We differ from commenters, however, in our understanding of what a 
territorial approach means in the context of a global security-based 
swap market. As noted above, some commenters suggested that the 
security-based swap activity of foreign branches and affiliates of U.S. 
persons with non-U.S. persons occurs outside the United States and has 
only an indirect connection with the United States and that, therefore, 
subjecting transactions resulting from that activity to Title VII would 
involve extraterritorial application of the statute.\135\ Although we 
recognize that some of the security-based swap activity involving these 
foreign branches and affiliates occur outside the United States, we 
believe that a properly tailored territorial approach should look to 
both the full range of activities described in the statutory text as 
well as to the concerns that Congress intended Title VII to address in 
determining whether the relevant activity, considered in its entirety, 
occurs at least in part within the United States.\136\
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    \135\ See, e.g., Cleary Letter IV at 35; ISDA Letter I at 11; 
SIFMA Letter I at 5-6; Sullivan & Cromwell Letter at 11-13.
    \136\ See Morrison, 130 S. Ct. at 2884 (looking to the ``focus'' 
of the relevant statutory provision in determining whether the 
statute was being applied to domestic conduct).
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    As noted above, security-based swap transactions differ from most 
traditional securities transactions in that they give rise to an 
ongoing obligation between the counterparties to the trade: the 
counterparties bear the risks that result from those transactions for 
the duration of the transactions.\137\ The Dodd-Frank Act was enacted, 
in part, to address the risks to the financial stability of the United 
States posed by entities bearing such risks, and a territorial approach 
to the application of Title VII should be consistent with achieving 
these statutory purposes. A territorial approach to the application of 
Title VII that excluded from the application of Title VII any activity 
conducted by the foreign operations of a U.S. person where they do 
business only with non-U.S. counterparties located outside the United 
States would likely fail to achieve the financial stability goals of 
Title VII, as such an approach would not account for the security-based 
swap risks that may be borne by entities located within the United 
States whose foreign operations solicit, negotiate, or execute 
transactions outside the United States. In addition, it is not clear 
that a different territorial approach that focused solely on the 
location of the entity bearing the risk (and disregarded whether 
certain relevant activity, including execution of the transaction, 
occurred within the United States) would adequately address the Dodd-
Frank Act's concern with promoting transparency in the U.S. financial 
system and protecting counterparties, concerns that are likely to be 
raised by the solicitation, negotiation, or execution within the United 
States, even if the risk arising from those security-based swaps 
transactions is borne by entities outside the United States. For 
example, some transactions characterized by commenters as occurring 
outside the United States, even with non-U.S. persons, are entered into 
by persons located within the United States and would appear to raise 
the same types of risk concerns as transactions occurring wholly within 
the United States.
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    \137\ See Section II.A, infra.
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    Similarly, the Commission preliminarily believes that a territorial 
approach should be informed by the text of the statutory provision that 
imposes the registration or other regulatory requirement.\138\ Some 
commenters suggested, for instance, that a territorial approach would 
necessarily exclude certain foreign operations of U.S. persons from 
registration as security-based swap dealers so long as they did not 
enter into security-based swap transactions with counterparties located 
within the United States.\139\ However, in this instance, these 
commenters did not show how their suggested approach relates to the 
statutory definition of security-based swap dealer or to the rules and 
interpretation adopted by the Commission and the CFTC to further define 
``security-based swap dealer'' in the Intermediary Definitions Adopting 
Release, including our discussion of conduct that is indicative of 
dealing activity.\140\ In our preliminary view, we should identify the 
activity that the statutory provision regulates before reaching a 
determination of whether relevant activity is occurring within the 
United States.\141\ Only after we identify the activity that the 
statutory provision regulates would we then be able to determine 
whether the conduct at issue involves activity that the statutory 
provision regulates and whether this conduct occurs within the United 
States. To the extent that conduct involving activity that the 
statutory provision regulates occurs within the United States, 
application of Title VII to that conduct would be consistent with a 
territorial approach.
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    \138\ See Morrison, 130 S. Ct. at 2884 (performing a textual 
analysis of Section 10(b) of the Exchange Act to determine what 
conduct was relevant in determining whether the statute was being 
applied to domestic conduct).
    \139\ See, e.g., Sullivan & Cromwell Letter at 11.
    \140\ See note 135, supra; see also Intermediary Definitions 
Adopting Release, 77 FR 30616-19.
    \141\ See Morrison, 130 S. Ct. at 2884.
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(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.
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    \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).
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    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:
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    \143\ 15 U.S.C. 78c(a)(71).
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    (i) Holding oneself out as a dealer in security-based swaps,
    (ii) making a market in security-based swaps,
    (iii) regularly entering into security-based swaps with 
counterparties as an ordinary course of business for one's own account,
    (iv) engaging in any activity causing oneself to be commonly known 
in the

[[Page 30985]]

trade as a dealer in security-based swaps.\144\
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    \144\ Section 3(a)(71)(A) of the Exchange Act, 15 U.S.C. 
78c(a)(71)(A).
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    We have further interpreted this definition by jointly adopting 
interpretive guidance with the CFTC that identifies the types of 
activity that is relevant in determining whether a person is a 
security-based swap dealer.\145\ In this interpretive guidance, we have 
identified indicia of security-based swap dealing activity to include 
the following activities:

    \145\ See Intermediary Definitions Adopting Release, 77 FR 
30617-18.
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     Providing liquidity to market professionals or other 
persons in connection with security-based swaps,
     seeking to profit by providing liquidity in connection 
with security-based swaps,
     providing advice in connection with security-based swaps 
or structuring security-based swaps,
     having a regular clientele and actively soliciting 
clients,
     using inter-dealer brokers, and
     acting as a market maker on an organized security-based 
swap exchange or trading system.\146\
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    \146\ Id.
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    As the foregoing list of relevant activities illustrates, both the 
statutory text and our interpretation of that text include within the 
security-based swap dealer definition a range of activities. The broad 
scope of activities listed above identifies various characteristics of 
dealing activity. Given the risks associated with dealing activity that 
the dealer definition and associated regulatory framework in Title VII 
are intended to address, we preliminarily believe that a territorial 
approach consistent with these statutory purposes should consider 
whether the entity performs any of these indicia of dealing activity 
within the United States (even if some of these indicia also arise in 
activity conducted outside the United States). This type of analysis 
appears to us more consistent with the statutory text and with the 
Supreme Court's approach to statutory analysis in its decision in 
Morrison than an approach that excludes from jurisdiction certain 
foreign operations of U.S. persons transacting with foreign 
counterparties. We also believe that our proposed approach would better 
help ensure that our regulatory framework achieves the various purposes 
of security-based swap dealer regulation under Title VII, while 
avoiding application of security-based swap dealer registration to 
persons whose dealing activity is unlikely to raise the types of 
dealer-specific risks that Title VII dealer registration was intended 
to address because it occurs entirely outside the United States.\147\
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    \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.
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    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\
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    \148\ See Section III.B.4, infra.
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    An interpretation of Section 30(c) that advances the view that 
security-based swap activity conducted by a U.S. person through a 
foreign branch constitutes activity ``without the jurisdiction of the 
United States'' or that a transaction arising from such activity 
constitutes ``transacting a business in security-based swaps without 
the jurisdiction of the United States'' for purposes of Section 30(c) 
may not fully account for the statutory definition of ``security-based 
swap dealer,'' the purposes of Title VII, or the global nature of the 
security-based swap market. It does not account for the entire range of 
activities performed by entities active in the security-based swap 
market, including security-based swap dealers, and the relevance of 
such activities to the statutory definitions and requirements, given 
the purposes of Title VII, and it would leave unaddressed significant 
levels of activity that poses precisely the sorts of risks that Title 
VII was intended to address.
    In our preliminary view, to the extent that a U.S. person engages 
in dealing activity through a foreign operation that is part of the 
U.S. legal person (such as a foreign branch or office), relevant 
activity for purposes of the security-based swap dealer definition 
occurs, at least in part, within the United States because we believe 
it is the U.S. entity as a whole, and not just the foreign branch or 
office, that is holding itself out as a dealer and making a market in 
security-based swaps. Moreover, it is necessarily the U.S. person as a 
whole that is seeking to profit by providing liquidity and engaging in 
market-making in security-based swaps, and it is the financial 
resources of the entire entity that enable it to provide liquidity and 
engage in market-making in connection with security-based swaps. Its 
dealing counterparties will look to the entire U.S. person, and not 
just the foreign branch or office, for performance on the transaction. 
The entire U.S. person assumes, and stands behind, the obligations 
arising from the resulting agreement. For these reasons, to the extent 
that a dealer resides or is organized, or has its principal place of 
business, within the United States, we believe that it cannot hold 
itself out as a security-based swap dealer, even through a foreign 
branch, as anything other than a single person, given that it generally 
could not operate as a dealer absent the financial and other resources 
of the entire U.S. person. Its dealing activity with all of its 
counterparties, including dealing activity conducted through its 
foreign branch or office, is best characterized as occurring, at least 
in part, within the United States and should therefore be counted 
toward the entity's de minimis threshold.
    More generally, we preliminarily believe that transactions that 
create ongoing obligations that are borne by a U.S. person are properly 
described as directly occurring within the United States, particularly 
given Title VII's focus on, among other things, addressing risks to the 
financial stability of the United States.\149\ Indeed, the history of 
AIG FP confirms that such transactions of U.S. persons can pose risks 
to the U.S. financial system even if they are conducted through foreign 
operations. The nature of such risks, and their role in the financial 
crisis and in the enactment of Title VII, suggest that the statutory 
framework established

[[Page 30986]]

by Congress and the objectives of Title VII may require a broader 
analysis than excluding transactions involving U.S. persons from the 
application of Title VII solely because they are conducted through 
operations outside the United States, while others by the same U.S. 
persons occur within the United States.\150\
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    \149\ As we discuss below, such activity would include providing 
guarantees for a foreign entity's security-based swap transactions. 
See Section II.B.2(d), infra.
    \150\ However, for reasons explained below, the Commission is 
not proposing to subject the foreign operations of U.S. persons to 
certain of the requirements in Title VII. See, e.g., Sections 
III.B.7, III.B.9, VIII.C, IX.C.3(a), and X.B.3(a), infra.
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    However, we preliminarily believe that non-U.S. persons engaged in 
dealing activity would be required to count toward their de minimis 
thresholds only transactions arising from their dealing activity with 
U.S. persons \151\ or dealing activity otherwise conducted within the 
United States. In addition, to the extent that a non-U.S. person 
engages in security-based swap dealing activity within the United 
States, we preliminarily believe that such dealing activity should be 
counted toward the non-U.S. person's de minimis threshold regardless of 
whether its counterparties are U.S. persons.\152\ This view is 
consistent with the fact that such security-based swap activity raises 
the types of concerns that the Dodd-Frank Act was intended to address.
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    \151\ However, for reasons explained below, the Commission is 
not proposing to require non-U.S. persons to include transactions 
with the foreign branches of U.S. banks in their de minimis 
calculations. See Section III.B.7, infra.
    \152\ See Intermediary Definitions Adopting Release, 77 FR 
30617-18.
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    We preliminarily believe that a non-U.S. person not engaged in any 
security-based swap activity within the United States (or engaged only 
at levels below the de minimis threshold) is unlikely to pose the types 
of concerns within the U.S. financial system that Title VII dealer 
regulation was intended to address.\153\ Thus, under our proposed 
approach, a non-U.S. person that engages in dealing activity entirely 
outside the United States (i.e., does not enter into transactions with 
a U.S. person or otherwise conduct any part of its dealing activity 
within the United States) would not be required to register as a 
security-based swap dealer.\154\
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    \153\ Proposed Rule 3a71-3(b) under the Exchange Act, as 
discussed in Section III.B.4, infra. Of course, the transactions of 
an entity engaged in security-based swap dealing activity within the 
United States at levels below the de minimis threshold or in 
security-based swap activity within the United States that is not 
dealing activity may be subject to other Title VII requirements, as 
discussed below, or other provisions of the federal securities laws.
    \154\ This proposed approach to the application of Title VII 
security-based swap dealer registration requirements is not intended 
to limit or address the cross-border reach or extraterritorial 
application of the antifraud or other provisions of the federal 
securities laws.
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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\
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    \155\ See Section 15F of the Exchange Act, 15 U.S.C. 78o-10.
    \156\ See, e.g., Sections III.C.3 and 4, infra (discussing 
requirements applicable to security-based swap dealers).
    \157\ Section 30(c) prohibits the application of the Exchange 
Act only with respect to those persons that ``transact[] a business 
in security-based swaps without the jurisdiction of the United 
States.'' Because only security-based swap entities that transact a 
business in security-based swaps within the United States would be 
required to register under the approach proposed in this release, 
registered entities are not persons that ``transact[] a business in 
security-based swaps without the jurisdiction of the United 
States.''
    \158\ See Registration Requirements for Foreign Broker-Dealers, 
Exchange Act Release No. 27017 (July 11, 1989), 54 FR 30013, 30016-
17 (July 18, 1989) (``Rule 15a-6 Adopting Release'') (noting that a 
foreign registrant is subject to the regulatory system applicable to 
such entities); Revision of Form BD, Exchange Act Release No. 25285 
(Jan. 22, 1988) (``It is the Commission's view that a broker-dealer 
submits to the Commission's jurisdiction when it registers with the 
Commission.''); In re International Paper and Power Co., 4 SEC 873, 
876 (1939) (registration with the Commission makes registrant 
``subject to the complete jurisdiction of the Commission''). See 
also Exemption of Certain Foreign Brokers or Dealers, Exchange Act 
Release No. 58047 (June 27, 2008), 73 FR 39182 (July 8, 2008) 
(``Proposed Amendments to Rule 15a-6''), at 39182 (describing 
registration requirements as applying to the entire foreign entity); 
In re Ira William Scott, 53 SEC 862, 866 (1998) (holding that 
investment adviser that registers with the Commission has 
``submitted himself to [the Commission's] jurisdiction pursuant to 
the Advisers Act''). Cf. In re United Corp., 232 F.2d 601, 606 
(1956) (stating that, upon registration as a holding company, an 
entity comes within ``the jurisdiction of the Commission and [is] 
subject to all requirements applicable to a registered holding 
company'').
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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.
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    \159\ See Sections VIII-XI, infra.
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    In a security-based swap transaction between two non-U.S. persons 
where the performance of at least one side of the transaction is 
guaranteed by a U.S. person, the guarantee gives the guaranteed 
entity's counterparty direct recourse to the U.S. person for 
performance of obligations owed by the guaranteed entity under the 
security-based swap,\160\ and the U.S. guarantor exposes itself to the 
security-based swap risk as if it were a direct counterparty to the 
security-based swap through the security-based swap activity engaged in 
by the guaranteed entity. As a result, the guarantee creates risk to 
the U.S. financial system and counterparties (including U.S. 
guarantors) to the same degree as if the transaction were entered into 
directly by a U.S. person. In addition, in many cases, the counterparty 
would not enter into the transaction (or would not do so on the same 
terms) with the guaranteed entity, and the guaranteed entity would not 
be able to engage in any security-based swaps, absent the presence of 
the guarantee. Given that the guarantee is

[[Page 30987]]

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

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

    In considering how to apply Title VII in the cross-border context, 
the Commission has been mindful of the global nature of the security-
based swap market and the types of risks created by security-based swap 
activity to the U.S. financial system and market participants, as well 
as the needs of a well-functioning security-based swap market.\163\ We 
also have been guided by the purpose of the Dodd-Frank Act \164\ and 
the applicable requirements of the Exchange Act, including the 
following:
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    \163\ See Sections II.A.1-II.A.3, supra.
    \164\ See note 4, supra.
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     Risk to the U.S. Financial System--The Dodd-Frank Act was 
intended to promote, among other things, the financial stability of the 
United States by limiting/mitigating risks to the financial 
system.\165\
---------------------------------------------------------------------------

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

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

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

     Counterparty Protection--The Dodd-Frank Act adds 
provisions to the Exchange Act relating to counterparty protection, 
particularly with respect to ``special entities.'' \167\
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    \167\ See Section 15F(h) of the Exchange Act, as added by 
Section 764(a) of the Dodd-Frank Act, in particular.
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     Economic Impacts--The Exchange Act requires the Commission 
to consider the impact of our rulemakings on efficiency, competition, 
and capital formation.\168\
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    \168\ Specifically, Section 3(f) of the Exchange Act provides: 
``Whenever pursuant to this title the Commission is engaged in 
rulemaking, . . .; required to consider or determine whether an 
action is necessary or appropriate in the public interest, the 
Commission shall also consider, in addition to the protection of 
investors, whether the action will promote efficiency, competition, 
and capital formation.'' Section 23(a)(2) of the Exchange Act also 
provides: ``The Commission . . ., in making rules and regulations 
pursuant to any provisions of this title, shall consider among other 
matters the impact any such rule or regulation would have on 
competition. The Commission . . . shall not adopt any such rule or 
regulation which would impose a burden on competition not necessary 
or appropriate in furtherance of the purposes of [the Exchange 
Act].''
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     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\
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    \169\ See Section 712(a)(2) of the Dodd-Frank Act.
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     Consistent International Standards--To promote effective 
and consistent global regulation of swaps and security-based swaps, the 
Dodd-Frank Act requires the Commission and the CFTC to consult and 
coordinate with foreign regulatory authorities on the ``establishment 
of consistent international standards'' with respect to the regulation 
of swaps and security-based swaps.\170\ In this regard, the Commission 
recognizes that regulators in other jurisdictions are currently engaged 
in implementing their own regulatory reforms of the OTC derivatives 
markets and that our proposed application of Title VII to cross-border 
activities may affect the policy decisions of these other regulators as 
they seek to address potential conflicts or duplication in the 
regulatory requirements that apply to

[[Page 30988]]

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

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

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

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

D. Conclusion

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

III. Security-Based Swap Dealers

A. Introduction

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

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

[[Page 30989]]

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

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

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

B. Registration Requirement

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

[[Page 30990]]

through a foreign branch),\201\ conducted in a dealing capacity, toward 
the de minimis threshold to determine whether it would be required to 
register as a security-based swap dealer with the Commission pursuant 
to Section 15F(a)(1) of the Exchange Act.\202\
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    \194\ Proposed Rule 3a71-3(a)(7) under the Exchange Act 
(defining ``U.S. person''), as discussed in Section III.B.5, infra.
    \195\ 15 U.S.C. 78o-10(a)(1).
    \196\ See note 188, supra.
    \197\ Proposed Rule 3a71-3(a)(1) under the Exchange Act 
(defining ``foreign branch''), as discussed in Section III.B.7, 
infra.
    \198\ Proposed Rule 3a71-3(a)(5) under the Exchange Act 
(defining ``transaction conducted within the United States''), as 
discussed in Section III.B.6, infra. This provision would capture 
dealing activity undertaken by non-U.S. persons that are physically 
located within the United States, such as through a U.S. branch of a 
foreign bank, or through an agent, such as non-U.S. person's U.S. 
subsidiary or an unaffiliated third party acting on the non-U.S. 
person's behalf. As discussed elsewhere in the release, foreign 
security-based swap dealers utilize these organizational models as 
part of their global security-based swap dealing businesses. See 
Section II.A.2, supra (discussing dealing structures), and Section 
III.D, infra (discussing intermediation).
    \199\ Proposed Rule 3a71-3(b)(1)(ii) under the Exchange Act.
    \200\ But see Section III.B.9, infra (discussing the aggregation 
of affiliate positions).
    \201\ Proposed Rule 3a71-3(a)(4) under the Exchange Act 
(defining ``transaction conducted through a foreign branch''), as 
discussed in Section III.C.4, infra.
    \202\ Proposed Rule 3a71-3(b)(1)(i) under the Exchange Act.
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    As further discussed below, however, we are not proposing to 
require a non-U.S. person engaged in security-based swap dealing 
activity to count a transaction with a non-U.S. person conducted 
outside the United States toward its de minimis threshold, even if its 
performance (or the performance of its counterparty) on the security-
based swap is guaranteed by a U.S. person.\203\ In addition, in 
conformity with the position that the Commissions took in the 
Intermediary Definitions Adopting Release,\204\ we are not proposing to 
require cross-border security-based swap transactions between majority-
owned affiliates to be considered when determining whether a person is 
a security-based swap dealer.\205\
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    \203\ See Section III.B.8, infra. However, such U.S. guarantor 
may become a major security-based swap participant by virtue of the 
guarantee it extends on the performance of the obligations under the 
transaction. See Section IV.C.2, infra. In addition, a security-
based swap entered into by a non-U.S. person whose performance under 
such security-based swap is guaranteed by a U.S. person would be 
required to be reported and, in certain cases, publicly 
disseminated, under re-proposed Regulation SBSR. See Section VIII.C, 
infra. Such security-based swap also may be subject to the clearing 
and trade execution requirements in Title VII. See Sections IX and 
X, infra.
    \204\ See Intermediary Definitions Adopting Release, 77 FR 
30624-25.
    \205\ See Section III.B.8, infra.
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    In the following subsections, we first briefly discuss the 
Commission's approach to the registration of foreign brokers and 
dealers, as background, and the views of commenters on the application 
of Title VII to cross-border activities, particularly as such views 
relate to security-based swap dealing activity. Then we propose a rule 
regarding the application of the de minimis exception to cross-border 
security-based swap dealing activity.\206\ In order to give further 
definition to this proposed rule, we are proposing rules defining a 
number of relevant terms, including ``U.S. person'' \207\ and 
``transaction conducted within the United States.''\208\ We also are 
proposing a rule excluding from a non-U.S. person's de minimis 
calculation security-based swap transactions entered into, in a dealing 
capacity, with a foreign branch of a U.S. bank.\209\ In addition, we 
are proposing a rule providing an exception from the aggregation 
requirement, in the context of the security-based swap dealer 
definition, for affiliated groups with a registered security-based swap 
dealer.\210\ Finally, we are proposing interpretive guidance regarding 
and requesting comment on the treatment of inter-affiliate and 
guaranteed transactions in the cross-border context for purposes of the 
de minimis threshold.\211\
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    \206\ Proposed Rule 3a71-3(b) under the Exchange Act, as 
discussed in Section III.B.4, infra.
    \207\ Proposed Rule 3a71-3(a)(7) under the Exchange Act, as 
discussed in Section III.B.5, infra. The proposed definition of U.S. 
person is used not only in the proposed rule regarding the 
application of the de minimis threshold in the cross-border context, 
but also in proposed rules discussed in subsequent sections of the 
release.
    \208\ Proposed Rule 3a71-3(a)(5) under the Exchange Act, as 
discussed in Section III.B.6, infra. Like the proposed definition of 
U.S. person, the definition of ``transaction conducted within the 
United States'' is used not only in the proposed rule regarding the 
application of the de minimis threshold in the cross-border context, 
but also in proposed rules discussed in subsequent sections of the 
release. In general, under the Commission's proposal, transactions 
conducted within the United States, as defined in the proposed rule, 
would trigger certain transaction-level requirements in Title VII. 
See Sections VIII-X, infra.
    \209\ Proposed Rule 3a71-3(b)(1)(ii) under the Exchange Act; see 
also proposed Rule 3a71-3(a)(1) under the Exchange Act (defining 
``foreign branch''), as discussed in Section III.B.7, infra.
    \210\ Proposed Rule 3a71-4 under the Exchange Act, as discussed 
in Section III.B.8, infra.
    \211\ See Section III.B.8, infra.
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2. Background Discussion Regarding the Registration of Foreign Brokers 
and Dealers
    Under the Commission's traditional approach to the registration of 
brokers and dealers under the Exchange Act, registration and other 
requirements generally are triggered by a broker or dealer physically 
operating in the United States, even if such activities are directed 
only to non-U.S. persons outside the United States.\212\ The 
Commission's territorial approach also generally requires broker-dealer 
registration by foreign brokers or dealers that, from outside the 
United States, induce or attempt to induce securities transactions by 
persons within the United States.\213\ By contrast, the Commission has 
not required foreign entities to register as broker-dealers if they 
conduct their ``sales activities'' entirely outside the United 
States.\214\
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    \212\ See Rule 15a-6 Adopting Release, 54 FR 30016-17 (``As a 
policy matter, the Commission now uses a territorial approach in 
applying the broker-dealer registration requirements to the 
international operations of broker-dealers. Under this approach, all 
broker-dealers physically operating within the United States that 
effect, induce, or attempt to induce any securities transactions 
would be required to register as broker-dealers with the Commission, 
even if these activities were directed only to foreign investors 
outside the United States.''); see also Proposed Amendments to Rule 
15a-6, 73 FR 39182 (``Under this [territorial] approach, broker-
dealers located outside the United States that induce or attempt to 
induce securities transactions with persons in the United States are 
required to register with the Commission, unless an exemption 
applies'').
    \213\ See Rule 15a-6 Adopting Release, 54 FR 30016 (``[E]ven if 
section 30(b) [of the Exchange Act] were read to incorporate a 
territorial approach, the Commission does not believe that section 
30(b) would exempt from broker-dealer registration the activities 
suggested by the commenters. In particular, directed selling efforts 
to U.S. investors in the United States hardly could be considered 
activities not traversing the U.S. territorial limits. A broker-
dealer operating outside the physical boundaries of the United 
States, but using the U.S. mails, wires, or telephone lines to trade 
securities with U.S. persons located in this country, would not be, 
in the words of section 30(b), `transact[ing] a business in 
securities without the jurisdiction of the United States.' '').
    \214\ See Rule 15a-6 Adopting Release, 54 FR 30016 (citing 
Exchange Act Release No. 25801, 53 FR 23646 n.9, and accompanying 
text).
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    In addition to our territorial approach to registration of broker-
dealers under the Exchange Act, the Commission traditionally has taken 
an ``entity'' approach to the application of regulation to registered 
broker-dealers.\215\ Pursuant to this approach, we have not limited the 
application of the Exchange Act, and rules and regulations thereunder, 
solely to the transactions of such entities that result in the 
registration requirement. Instead, we have taken the position that a 
registered broker-dealer is generally subject to registration and 
consequent substantive requirements with respect to all of its 
securities activity, including the activity of its branches and 
offices, regardless of whether the activity occurs in the United States 
or with U.S. persons.\216\ For instance, under this approach, if a 
foreign broker-dealer is required to register with the Commission as a 
result of conducting securities activity through a branch in the United 
States, the registration requirements and the regulatory system 
governing U.S. broker-dealers, including capital, margin, and 
recordkeeping requirements, would apply to the entire foreign broker-
dealer entity, including its head office, not just the U.S. 
branch.\217\ By contrast, the Commission

[[Page 30991]]

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

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

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

[[Page 30992]]

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

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

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

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

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

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

    Several commenters acknowledged concerns that persons may seek to 
book transactions through non-U.S. branches or subsidiaries in an 
effort to evade the requirements of Title VII.\236\ These commenters, 
however, urged that the Commissions not seek to address the potential 
for evasion through an overbroad definition of a security-based swap 
dealer, noting that there are legitimate business reasons for 
conducting security-based swap transactions with non-U.S. persons 
through non-U.S. operations.\237\
---------------------------------------------------------------------------

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

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

[[Page 30993]]

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

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

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

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

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

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

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

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

[[Page 30994]]

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

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[[Page 30995]]

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

[[Page 30996]]

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

The proposed rule also would provide that the term ``U.S. person'' 
would not include the following international organizations: The 
International Monetary Fund (``IMF''), the International Bank for 
Reconstruction and Development, the Inter-American Development Bank, 
the Asian Development Bank, the African Development Bank, the United 
Nations, and their agencies and pension plans, and any other similar 
international organizations, their agencies and pension plans.\275\
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    \275\ Proposed Rule 3a71-3(a)(7)(ii) under the Exchange Act.
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    We preliminarily believe that the proposed definition of U.S. 
person would achieve three objectives necessary to effective 
application of Title VII in the cross-border context. First, it would 
identify those types of individuals or entities that, by virtue of 
their location within the United States or their legal or other 
relationship with the United States, are likely to impact the U.S. 
market even if they transact with security-based swap dealers that are 
not U.S. persons.\276\ Second, it would identify those types of 
individuals or entities that, by virtue of their location within the 
United States or their legal or other relationship with the United 
States, are part of the U.S. security-based swap market and should 
receive the protections of Title VII. Third, it would permit us to 
identify dealing entities that most likely would be active in the U.S. 
security-based swap market and whose dealing activity most likely would 
pose a risk to the U.S. financial system by virtue of their 
counterparties' resident or domicile status.
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    \276\ As noted in Section II.A.3 above, the security-based swap 
transactions of U.S. persons give rise to ongoing liability that is 
borne by a person located within the United States and thus are 
likely to pose the types of financial stability risks to U.S. 
financial system that Title VII was intended to address. The 
security-based swap activity of U.S. persons occurs, at least in 
part, within the United States.
---------------------------------------------------------------------------

    Because of the nature of the risks posed by security-based swaps, 
which are borne by the entire corporate entity even if the transaction 
is entered into by a specific trading desk, office, or branch of such 
entity, consistent with the Commission's approach to the meaning of 
``person'' in the security-based swap dealer definition, as discussed 
above, we are proposing to define the term ``U.S. person'' to include 
the entire entity, including its branches and offices that may be 
located in a foreign jurisdiction.\277\ Thus, under this approach, the 
term ``U.S. person'' would be interpreted to include any foreign 
trading desk, office, or branch of an entity that is organized under 
U.S. law or whose principal place of business is located in the United 
States.\278\
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    \277\ See Section III.B.4(a), supra.
    \278\ Id.
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(b) Discussion
i. Natural Persons
    Under the proposed rule, any natural person resident in the United 
States would be a U.S. person, regardless of that individual's 
citizenship status.\279\ Individuals resident abroad, on the other 
hand, would not be treated as U.S. persons, even if they possess U.S. 
citizenship.\280\ We preliminarily believe that natural persons 
residing within the United States who engage in security-based swap 
transactions may raise the types of concerns intended to be addressed 
by Title VII, including those related to transparency and customer 
protection.\281\ We also note that this approach is generally 
consistent with the approach we have taken in prior rulemakings 
relating to the cross-border application of certain similar regulatory 
requirements.\282\ Moreover, any risk to such person arising from its 
security-based swap activity may manifest itself most directly within 
the United States, where a significant portion of its commercial and 
legal relationships exist because that is where its residency is 
(unlike a U.S. citizen resident abroad).
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    \279\ Proposed Rule 3a71-3(a)(7)(i)(A) under the Exchange Act.
    \280\ This proposed approach to treating natural persons as U.S. 
persons based on residency, rather than citizenship, differs from 
the proposed approach to legal entities, such as partnerships and 
corporations, discussed below.
    \281\ See note 4, supra.
    \282\ See Rule 15a-6 Adopting Release, 54 FR 30017 (providing 
that foreign broker-dealers soliciting U.S. investors abroad 
generally would not be subject to registration requirements with the 
Commission).
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ii. Corporations, Organizations, Trusts, and Other Legal Persons
    Under the proposed rule, any partnership, corporation, trust, or 
other legal person organized or incorporated under the laws of the 
United States \283\ or having as its principal place of business in the 
United States would be a U.S. person.\284\ We have previously looked to 
an entity's place of

[[Page 30997]]

organization or incorporation to determine whether it is a U.S. person 
in adopting rules under the federal securities laws,\285\ and we 
preliminarily believe that it is also appropriate to do so in the 
context of Title VII. We preliminarily believe that the decision of a 
corporation, trustee, or other entity to organize under the laws of the 
United States indicates a degree of involvement in the U.S. economy or 
legal system that warrants ensuring that its security-based swap 
activity is subject to the requirements of Title VII.\286\
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    \283\ Proposed Rule 3a71-3(a)(9) under the Exchange Act 
(defining ``United States'').
    \284\ Proposed Rule 3a71-3(a)(7)(i)(B) under the Exchange Act.
    \285\ See Regulation S Adopting Release, 55 FR 18316.
    \286\ Under this prong of the proposed rule, ``special 
entities,'' as defined in Section 15F(h)(2)(C) of the Exchange Act, 
would be U.S. persons because they are legal persons organized under 
the laws of the United States. Section 15F(h)(2)(C) of the Exchange 
Act defines the term ``special entity'' as ``(i) a Federal agency; 
(ii) a State, State agency, city, county, municipality, or other 
political subdivision of a State; (iii) any employee benefit plan, 
as defined in Section 3 of the Employee Retirement Income Security 
Act of 1974, 29 U.S.C. 1002; (iv) any governmental plan, as defined 
in Section 3 of the Employee Retirement Income Security Act of 1974, 
29 U.S.C. 1002; or (v) any endowment, including an endowment that is 
an organization described in Section 501(c)(3) of the Internal 
Revenue Code of 1986.'' 15 U.S.C. 78o-10(h)(2)(C).
---------------------------------------------------------------------------

    Similarly, we believe that the proposed definition should ensure 
that Title VII applies to entities that are organized or incorporated 
in a jurisdiction outside the United States if they have their 
principal place of business in the United States.\287\ Any risk to such 
entities arising from their security-based swap activity is likely to 
manifest itself most directly within the United States, where a 
significant portion of their commercial and legal relationships would 
be likely to exist. Moreover, focusing exclusively on whether an entity 
is organized or incorporated in the United States could encourage some 
entities that are currently organized or incorporated in the United 
States to incorporate in a non-U.S. jurisdiction to avoid the costs of 
complying with Title VII while maintaining their principal place of 
business--and thus in all likelihood, the risks arising from their 
security-based swap transactions--within the United States. To prevent 
this possibility, we are proposing to define ``U.S. person'' to include 
entities that are organized or incorporated abroad but have their 
principal place of business within the United States.\288\
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    \287\ For example, a business may be incorporated under the laws 
of a foreign jurisdiction but nonetheless have its business 
operations, including its home office, in the United States.
    \288\ As discussed in Section III.B.6 below, the Commission also 
is proposing to require non-U.S. persons that conduct security-based 
swap transactions within the United States, in a dealing capacity, 
to count such transactions toward their de minimis threshold. In 
addition, the Commission is proposing to subject security-based swap 
transactions that are conducted within the United States to certain 
transaction-level requirements in Title VII in connection with 
reporting and dissemination, clearing, and trade execution. See 
Sections VIII-X, infra.
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    An entity's status as a U.S. person under the proposed rule would 
be determined at the legal entity-level and thus apply to the entire 
legal entity, including any foreign operations that are part of the 
U.S. legal entity.\289\ Consistent with this entity-level approach, a 
foreign branch, agency, or office of a U.S. person would be treated as 
a U.S. person under the proposed definition.\290\ As the Commission 
noted in proposing Regulation SBSR, ``[b]ecause a branch or office has 
no separate legal existence under corporate law, the branch or office 
would be an integral part of the U.S. person itself.'' \291\ In other 
words, because a branch or office is merely an extension of the head 
office, not a separately incorporated or organized legal entity, we 
preliminarily believe that it lacks the legal independence to be 
considered a non-U.S. person for purposes of Title VII if its head 
office is a U.S. person. We preliminarily believe a wholesale exclusion 
from the requirements of Title VII for a foreign branch, agency, or 
office of a U.S. person is not warranted with respect to its security-
based swap transactions because the legal obligations and economic 
risks associated with the transactions directly affect a U.S. person, 
of which the branch, agency, or office is merely a part.
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    \289\ In principle, Regulation S looks to the location of the 
branch rather than the jurisdiction in which the entity is organized 
or incorporated in determining whether the branch is a U.S. person. 
See 17 CFR 230.902(k)(1)(v) and (2)(v). Thus, under Regulation S, 
the foreign branch of a U.S. bank is not treated as a U.S. person 
while the U.S. branch of a foreign bank is treated as a U.S. person. 
Under subsection (a)(7)(ii) of proposed Rule 3a71-3 under the 
Exchange Act, the foreign branch of a U.S. bank would be treated as 
part of a U.S. person. See Section III.B.10, infra (discussing the 
proposed definition of ``U.S. person'' with the definition of ``U.S. 
person'' in Regulation S).
    \290\ Proposed Rule 3a71-3(a)(7) under the Exchange Act.
    \291\ See Regulation SBSR Proposing Release, 75 FR 75240 (``The 
Commission intends for this proposed definition [of U.S. person] to 
include branches and offices of U.S. persons''). The Commission is 
re-proposing Regulation SBSR in this release, including its 
definition of U.S. person. See Section VIII, infra.
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    Under the proposed definition, the status of an entity as a U.S. 
person would have no bearing on whether separately incorporated or 
organized legal entities in its affiliated corporate group are U.S. 
persons. Accordingly, a foreign subsidiary of a U.S. person would not 
be a U.S. person by virtue of its relationship with its U.S. parent. 
Similarly, a foreign entity with a U.S. subsidiary would not be a U.S. 
person simply by virtue of its relationship with its U.S. 
subsidiary.\292\ The Commission preliminarily believes that it is 
appropriate to treat each affiliate separately because of the distinct 
legal status of each of the affiliates.\293\
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    \292\ See Section III.B.8, infra.
    \293\ But see Section III.B.8, infra (discussing the aggregation 
of affiliate positions for purposes of the de minimis calculation).
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iii. Accounts of U.S. Persons
    Consistent with the proposed definition's focus on the location of 
the person bearing the actual risk arising from the security-based swap 
transaction, the proposed definition of U.S. person would include any 
accounts (whether discretionary or not) of U.S. persons.\294\ Such 
accounts would be U.S. persons regardless of whether the entity at 
which the account is held or maintained is a U.S. person. Conversely, 
accounts of non-U.S. persons would not be U.S. persons solely because 
they are held by a U.S. financial institution or other entity that is 
itself a U.S. person.\295\ In our view, the purposes of Title VII 
require that its provisions apply to the person that actually bears the 
risks arising from the security-based swap transaction.\296\ For this 
reason, we preliminarily believe that the status of accounts, wherever 
located, should turn on whether any owner of the account is itself a 
U.S. person,\297\ and not on the status of the fiduciary or other 
person managing the account, the discretionary or non-discretionary 
nature of the

[[Page 30998]]

account, or the status of the entity at which the account is held or 
maintained.\298\ Thus any account of a U.S. person would be a U.S. 
person for purposes of Title VII.
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    \294\ Proposed Rule 3a71-3(a)(7)(i)(C) under the Exchange Act.
    \295\ An account of a non-U.S. person and, therefore, not a 
``U.S. person'' under proposed Rule 3a71-3(a)(7) under the Exchange 
Act, may nevertheless engage in ``transactions conducted within the 
United States,'' as defined in proposed Rule 3a71-3(a)(5) under the 
Exchange Act. For example, if a non-U.S. person executes a security-
based swap from an office located in the United States that 
security-based swap would be a ``transaction conducted within the 
United States'' even though neither party would be a ``U.S. 
person.'' Similarly, if a non-U.S. person solicits a counterparty 
within the United States to enter into a security-based swap 
transaction, that transaction would be a ``transaction conducted 
within the United States,'' regardless of whether both 
counterparties were non-U.S. persons. See Section III.B.6, infra.
    \296\ The same approach would apply to an account of a 
partnership, corporation, trust, or other legal person (e.g., a fund 
or a special-purpose investment vehicle) to enter into a security-
based swap. If the partnership, corporation, trust, or other legal 
person were a U.S. person, the account would be a U.S. person.
    \297\ For purposes of this definition, the term ``account'' 
includes both discretionary accounts and non-discretionary accounts. 
See proposed Rule 3a71-3(a)(7)(i)(C) under the Exchange Act.
    \298\ This proposed approach is consistent with the treatment of 
managed accounts in the context of the major security-based swap 
participant definition, whereby the swap or security-based swap 
positions in client accounts managed by asset managers or investment 
advisers are not attributed to such entities for purposes of the 
major participant definitions, but rather are attributed to the 
beneficial owners of such positions based on where the risk 
associated with those positions ultimately lies. See Intermediary 
Definitions Adopting Release, 77 FR 30690.
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iv. International Organizations
    In addition to identifying the persons that fall within the U.S. 
person definition, the proposed rule also provides a list of specific 
international organizations that do not fall within such 
definition.\299\ This list includes ``the International Monetary Fund, 
the International Bank for Reconstruction and Development, the Inter-
American Development Bank, the Asian Development Bank, the African 
Development Bank, the United Nations, and their agencies and pension 
plans, and any other similar international organizations, their 
agencies and pension plans.'' \300\ Although these organizations may 
have headquarters in the United States, the Commission preliminarily 
believes that most of their membership and financial activity are 
outside the United States. Thus, based on the nature of these entities 
as international organizations the Commission is proposing not to treat 
them as U.S. persons for purposes of Title VII.\301\
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    \299\ Proposed Rule 3a71-3(a)(7)(ii) under the Exchange Act.
    \300\ Id.
    \301\ Regulation S also specifies that these international 
organizations are not considered U.S. persons, but Regulation S also 
considers affiliates of such organizations to be non-U.S. persons. 
See 17 CFR 230.902(k)(2)(vi). The Commission is soliciting comment 
on whether affiliates of such organizations should be treated as 
non-U.S. persons under proposed Rule 3a71-3(a)(7) under the Exchange 
Act. Currently, under the proposed rule, an affiliate of one of 
these international organizations would have to separately consider 
its U.S. person-status.
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(c) Conclusion
    In short, by following a territorial approach, the Commission 
preliminarily believes that the proposed definition of U.S. person 
describes the types of individuals and entities residing, organized, or 
conducting business within the United States, and the types of accounts 
that should be designated as U.S. persons for purposes of the proposed 
rule regarding application of the de minimis exception to security-
based swap dealers.\302\
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    \302\ As discussed below, the proposed definition is used in 
other proposed rules and interpretive guidance in the release. See 
Sections IV-XI, infra.
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Request for Comment
    The Commission requests comment on all aspects of the proposed 
definition of ``U.S. person,'' including the following:
     Does the proposed definition of ``U.S. person'' 
appropriately address the concerns of security-based swap dealer 
regulation under Title VII?
     Does the proposed definition appropriately identify all 
individuals or entities that should be designated as U.S. persons? Is 
the proposed definition too narrow or too broad? Why? Do the proposed 
criteria for determining whether an entity is a U.S. person effectively 
describe the types of counterparties that are relevant to identifying 
the transactions a security-based swap dealer must count when 
calculating its de minimis threshold for purposes of determining 
whether it is required to register as a security-based swap dealer and 
comply with the requirements of Title VII? Does the proposed definition 
appropriately identify the types of entities that should be entitled to 
the protections afforded to counterparties of security-based swap 
dealers under Title VII?
     Does the proposed definition appropriately treat natural 
persons residing in the United States as U.S. persons? Should certain 
categories of persons residing in the United States be excluded from 
the definition of U.S. person? Should certain categories of persons 
(such as U.S. citizens or permanent residents) residing abroad be 
included in the definition of U.S. person? Please explain why excluding 
or including particular categories of natural persons would be 
consistent with and further the objectives of dealer regulation under 
Title VII.
     Is the proposed approach to the U.S. person status of 
natural persons based on residency, rather than citizenship, 
appropriate? In particular, is the proposed approach to natural 
persons, which differs from the proposed approach to legal entities, 
such as partnerships and corporations, appropriate in light of the fact 
that, as the Commission understands, natural persons rarely enter into 
security-based swaps?
     Does incorporation or organization under the laws of the 
United States appropriately define the types of entities (both for-
profit and non-profit) that should be treated as U.S. persons under 
Title VII? Is it appropriate to define an entity as a U.S. person if it 
has its principal place of business in the United States, even if it is 
incorporated or organized under the laws of a foreign jurisdiction? Why 
or why not?
     Does the proposed rule adequately address the risk of 
evasion or avoidance of Title VII requirements? Are there entities 
incorporated or organized under foreign law that should be defined as a 
U.S. person under the proposed rule that are not currently so defined? 
For example, should an entity incorporated or organized under foreign 
law but whose security-based swap transactions are guaranteed by a U.S. 
person be defined as a U.S. person? Why or why not? Should a foreign 
entity that conducts security-based swap dealing activity predominantly 
with U.S. persons or within the United States be defined as a U.S. 
person? If so, why?
     Is it appropriate to determine the U.S. person status of a 
corporation or organization on an entity-wide basis? Why or why not? 
Should foreign branches, offices, or agencies of U.S. persons be U.S. 
persons? Why or why not? What distinguishes transactions mediated or 
entered into by a foreign branch of a U.S. bank from transactions 
entered into by the head office of such U.S. bank for purposes of Title 
VII regulation?
     What, if any, competitive concerns would be raised by 
defining foreign branches, offices, or agencies of U.S. persons as non-
U.S. persons? Please explain the mechanism of any competitive effects. 
For example, would particular business structures become unworkable 
under this approach and what would be the relevant impact? If so, 
please explain possible alternatives and their relative 
competitiveness.
     Should the proposed rule include within the definition of 
U.S. person foreign affiliates of U.S. persons? Should other factors be 
taken into account in determining the status of such affiliated 
entities, such as, for example, whether performance on the security-
based swap obligations of the foreign entity is guaranteed by a U.S. 
affiliate? Should a foreign entity with performance on its security-
based swap obligations guaranteed by a U.S. affiliate, where such 
foreign entity's security-based swap dealing activity is conducted 
predominantly or exclusively with non-U.S. persons, be included within 
the definition of U.S. person? Why or why not?
     Should a foreign branch of a U.S. parent, including a 
foreign branch of a U.S. bank, be included in the definition of ``U.S. 
person'' for all purposes under Title VII? Why or why not?

[[Page 30999]]

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

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

     Should entities, whatever their place of domicile, that 
guarantee the performance of U.S. person counterparties to security-
based swaps themselves be deemed U.S. persons? Why or why not? How 
would treating such indirect counterparties to security-based swaps as 
U.S. persons affect the application of Title VII rules?
     Is the proposed definition's focus on the status of the 
person bearing the actual risk in the transaction (e.g., looking at the 
status of the account owner rather than the person with authority to 
direct the investment decisions) appropriate in determining whether the 
person is a U.S. person?
     The CFTC has proposed a definition of U.S. person that 
would include any pension plan for the employees, officers or 
principals of a legal entity with its principal place of business 
inside the United States. Should the Commission adopt a similar 
approach? If so, what categories of entities would or would not be U.S. 
persons when compared to the Commission's proposed approach? How is 
including or excluding such entities, as applicable, from the 
definition of U.S. person consistent with and in furtherance of the 
objectives of Title VII?
     Does the proposed rule appropriately address the treatment 
of certain international organizations with respect to the definition 
of U.S. person? Should any or all of the organizations specifically 
identified in the proposed rule be treated as U.S. persons? If so, why? 
Are there other similarly situated international organizations that 
should also be explicitly excluded from the U.S. person definition? 
Should the affiliates of international organizations be treated as non-
U.S. persons, even if organized under U.S. law? If so, why? If not, why 
not?
     Should the proposed definition expressly exclude from the 
definition of U.S. person any other entity or category of entities? If 
so, which ones and why?
     The CFTC has proposed a definition of U.S. person that 
would include any commodity pool, pooled account, or collective 
investment vehicle (whether or not it is organized or incorporated in 
the United States) of which a majority ownership is held, directly or 
indirectly, by a U.S. person. Should the Commission adopt a similar 
definition that includes any investment fund, commodity pool, pooled 
account, or collective investment vehicle of which a majority ownership 
is held by one or more U.S. persons, even if such entity is not 
incorporated or organized under the laws of the United States, or does 
not have its principal place of business in the United States? If so, 
why and how should majority ownership be determined? Is majority 
ownership the appropriate test? If not, should some other percentage 
test be used (e.g., 25% or some other measure of control)? Are there 
operational or other difficulties in implementing such an approach?
     The CFTC has proposed a definition of U.S. person that 
would include any commodity pool, pooled account, or collective 
investment vehicle the operator of which would be required to register 
as a commodity pool operator under the CEA.\304\ Should the Commission 
adopt a similar definition that includes any investment fund, commodity 
pool, pooled account, or collective investment vehicle the operator of 
which would be required to register as a commodity pool operator under 
the CEA or an investment adviser under the Investment Advisers Act of 
1940 (``Investment Advisers Act'')? If so, why?
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    \304\ See CFTC Cross-Border Proposal, 77 FR 41218.
---------------------------------------------------------------------------

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

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

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

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

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

[[Page 31000]]

to the transaction.'' \308\ It would not, however, include a 
transaction conducted through a foreign branch of a U.S. bank, for 
reasons discussed below.\309\
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    \307\ Proposed Rule 3a71-3(a)(5) under the Exchange Act. The 
proposed definition of ``transaction conducted within the United 
States'' also is used in other places in the release in the context 
of our proposed application of Title VII requirements in the cross-
border context. See Sections VIII-X, infra. The proposed definition 
of ``transaction conducted within the United States,'' and related 
discussion in this release, is not intended to apply outside of the 
scope of the proposals set forth in this release, unless otherwise 
indicated. Accordingly, it thus does not affect other rights or 
obligations of parties under the Exchange Act or the federal 
securities laws generally.
    \308\ Proposed Rule 3a71-3(a)(5)(i) under the Exchange Act. The 
use of the term ``counterparty'' in the proposed rule is intended to 
refer to the direct counterparty to the security-based swap 
transaction, not a party that provides a guarantee on the 
performance of the direct counterparty to the transaction. See 
Section VIII.A, infra (distinguishing between direct and indirect 
counterparties).
    \309\ Proposed Rule 3a71-3(a)(4)(ii) under the Exchange Act. See 
proposed Rule 3a71-3(a)(4) under the Exchange Act (defining 
``transaction conducted through a foreign branch''), as discussed in 
Section III.B.7, infra.
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    As noted above, dealing activity is normally carried out through 
interactions with counterparties or potential counterparties that 
include solicitation, negotiation, execution, or booking of a security-
based swap.\310\ Engaging in any of these activities within the United 
States, as part of dealing activity, would involve a level of 
involvement in a security-based swap transaction that the Commission 
believes should require such transaction to count toward a potential 
security-based swap dealer's de minimis threshold. The proposed rule, 
therefore, is designed to identify for market participants the key 
aspects of a security-based swap transaction that the Commission 
believes should trigger security-based swap dealer registration 
requirements.
---------------------------------------------------------------------------

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

    By contrast, we are not proposing to include either submitting a 
transaction for clearing in the United States or reporting a 
transaction to an SDR in the United States as activity that would cause 
a transaction to be conducted within the United States under the 
proposed rule, nor are we proposing to treat activities related to 
collateral management (e.g., exchange of margin payments) that may 
occur in the United States or involve U.S. banks or custodians as 
activity conducted within the United States for these purposes. We 
recognize that submission of a transaction for clearing to a CCP 
located in the United States poses risk to the U.S. financial system, 
and collateral management plays a vital role in an entity's financial 
responsibility program and risk management. However, we preliminarily 
believe that none of these activities, by themselves, involves 
activities conducted between a potential dealer and its counterparty 
that may be characterized as dealing activity, although clearing and 
collateral management services may be offered in conjunction with 
dealing activity.
    Under the rule adopted by the Commission, jointly with the CFTC, a 
potential security-based swap dealer is required to consider the 
security-based swap positions ``connected with'' the dealing activity 
in which the potential dealer--or any other entity controlling, 
controlled by or under common control with the potential dealer--
engages over the course of the immediately preceding 12 months (or 
following the effective date of final rules implementing Section 
3(a)(68) of the Exchange Act, 15 U.S.C. 78c(a)(68), if that period is 
less than 12 months).\311\ By incorporating the definition of a 
``transaction conducted within the United States'' into the proposed 
rule applying the de minimis exception in the cross-border 
context,\312\ the Commission is proposing that non-U.S. persons engaged 
in cross-border dealing activity include in their de minimis 
calculations any security-based swap transaction that is connected with 
\313\ an entity's dealing activity with another non-U.S. person if a 
U.S. branch or office of either counterparty, or an associated person 
\314\ of either counterparty--including any affiliate and any 
associated person of any affiliate, or a third party agent, located 
within the United States--is directly involved in the transaction. 
Thus, a non-U.S. person engaged in security-based swap dealing activity 
would be required to count toward its de minimis threshold any dealing 
transaction entered into with another non-U.S. person that was 
conducted in the United States, whether the transaction falls within 
the ``conducted within the United States'' definition through such non-
U.S. person's own activity (or that of an agent within the United 
States), or that of its non-U.S. person counterparty (or such 
counterparty's agent).\315\ Similarly, if any transaction connected 
with a non-U.S. person's dealing activity is executed within the United 
States, the non-U.S. person would be required to count that transaction 
toward its de minimis threshold.\316\
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    \311\ See 17 CFR 240.3a71-2(a)(1).
    \312\ See proposed Rule 3a71-3(b) under the Exchange Act.
    \313\ The de minimis exception threshold is computed based on 
the notional amount of an entity's security-based swap positions, 
connected with its dealing activity, not transactions that are 
merely solicited. See Intermediary Definitions Adopting Release, 77 
FR 30630.
    \314\ See Section 3(a)(70) of the Exchange Act, 15 U.S.C. 
78c(a)(70) (defining ``person associated with a security-based swap 
dealer or major security-based swap participant''); see also note 
472, infra.
    \315\ See Proposed Rule 3a71-3(b)(1)(ii) under the Exchange Act.
    \316\ See id.
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    We recognize that many of a non-U.S. person's transactions 
conducted within the United States that arise out of its dealing 
activity may also be transactions with U.S. persons, and thus would 
already be counted for purposes of the de minimis threshold. However, 
requiring non-U.S. persons to include in their de minimis calculations 
only transactions with U.S. person counterparties would enable such 
persons to engage in significant amounts of security-based swap dealing 
activity within the United States without Commission oversight as a 
security-based swap dealer, so long as the dealing activity were 
limited to non-U.S. persons.\317\ This would be the case if the 
potential dealer operated out of a branch, office, or affiliate, or 
utilized a third-party agent acting on its behalf within the United 
States, or merely directed its dealing activity to non-U.S. persons 
that themselves operate out of the United States, either through 
branches, office, or affiliates, or by utilizing third party 
agents.\318\ The Commission preliminarily does not believe that this 
would be consistent with the purposes of the Dodd-Frank Act, which is 
intended, in part, to promote accountability and transparency in the 
U.S. security-based swap market.\319\
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    \317\ Depending on the nature of the activity and the person 
located in the United States engaging in the activity, such person 
may need to register with the Commission as a broker-dealer under 
Section 15(a)(1) of the Exchange Act, 15 U.S.C. 78o(a)(1).
    \318\ The Commission is not distinguishing, for purposes of the 
proposed rule, whether a potential dealer or its counterparty is 
operating out of a branch, an office, an affiliate, or utilizes a 
third-party agent to act on its behalf. We are, however, soliciting 
comment on whether there is a basis for drawing distinctions in this 
area and look forward to receiving commenters' views.
    \319\ See note 97, supra.
---------------------------------------------------------------------------

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

[[Page 31001]]

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

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

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

[[Page 31002]]

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

[[Page 31003]]

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

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

[[Page 31004]]

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

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

[[Page 31005]]

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

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

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

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

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

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

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

[[Page 31006]]

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

[[Page 31007]]

     Should the Commission require the registration of non-U.S. 
dealers that receive guarantees on the performance of their security-
based swap obligations from U.S. persons based on their transactions 
with non-U.S. persons as well as U.S. persons? Why or why not? Should 
the U.S. guarantor be viewed as engaging indirectly in dealing activity 
through its affiliate and, therefore, required to register as a 
security-based swap dealer if the security-based swap transactions in 
connection with its dealing activity exceed the de minimis threshold? 
Should there be a concern that the U.S. guarantor is using the non-US 
affiliate to evade the requirements of Title VII?
     Does the proposed approach to guarantees effectively 
address concerns related to the risk posed to the U.S. financial system 
resulting from guarantees by U.S. persons of security-based swap 
dealing activity by non-U.S. persons?
     Are there competitiveness concerns related to the proposed 
approach to guarantees with regard to U.S. entities that engage in non-
U.S. security-based swap dealing activity through business models that 
do not rely on guarantees of non-U.S. persons, such as those that 
operate through foreign branches?
     The CFTC has proposed an interpretation that would subject 
an entity that operates a ``central booking system'' where swaps are 
booked into a single legal entity, to any applicable swap dealer 
registration requirement as if it had entered into such swaps directly, 
irrespective of whether such entity is a U.S. person or whether the 
booking entity is a counterparty to the swap or enters into the swap 
indirectly through a back-to-back swap or other arrangement with its 
affiliate or subsidiary.\362\ Should the Commission adopt a similar 
approach? If so, please describe how such a decision could be 
reconciled with the exclusion for inter-affiliate transactions provided 
in the Intermediary Definitions Adopting Release.
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    \362\ See CFTC Cross-Border Proposal, 77 FR 41221-22.
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     What would be the market impact of the proposed approach 
to inter-affiliate and guaranteed transactions? How would the 
application of the proposed approach affect the competitiveness of U.S. 
entities in the global marketplace (both in the United States as well 
as in foreign jurisdictions)? Would the proposed approach place any 
market participants at a competitive disadvantage or advantage? If so, 
please explain. Would the proposed approach be a more general burden on 
competition? If so, please explain. What other measures should the 
Commission consider to implement the proposed approach? What would be 
the market impacts and competitiveness effects of alternatives to the 
proposed approach discussed in this release?
10. Comparison With Definition of ``U.S. Person'' in Regulation S
    In proposing an entity-based approach to the definition of a U.S. 
person, we have declined to follow the suggestions by some commenters 
that we adopt the definition of ``U.S. person'' used in Regulation S, 
which among other things expressly excludes from the definition of 
``U.S. person'' agencies or branches of U.S. persons located outside 
the United States.\363\ Although we recognize that the Regulation S 
definition of U.S. person has the advantage of familiarity for many 
market participants, Regulation S addresses specific policy concerns 
that are different from those addressed by Title VII.\364\ 
Specifically, the definition of U.S. person in Regulation S was adopted 
in the context of providing an ``issuer safe harbor'' from the 
registration requirements of Section 5 of the Securities Act, which was 
intended ``to ensure that the [unregistered] securities offered 
[abroad] come to rest offshore.'' \365\ In that context, providing a 
safe harbor based in part on the location of the person, branch, or 
office making the investment decision is consistent with the goals of 
that regulatory framework, which include protecting the integrity of 
the registration requirements applicable to securities publicly offered 
in the United States under the Securities Act. The Regulation S 
definition of ``U.S. person'' reflects this policy judgment.
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    \363\ See, e.g., Cleary Letter IV at 2 (``The Agencies should 
adopt a consistent definition of `U.S. person' based on SEC 
Regulation S for purposes of analyzing whether a transaction 
involving one or more such persons may be subject to the provisions 
of Dodd-Frank.''); Davis Polk I at 6 n.6 (``We propose that the term 
`U.S. counterparty' be defined in the same way as the term `U.S. 
person' in Rule 902(k) of the SEC's Regulation S under the 
Securities Act, 17 CFR 230.902(k). This established definition is 
familiar to countless financial market professionals. Following the 
`U.S. person' definition in Regulation S, rather than creating an 
entirely new definition, would avoid confusion and also provide 
consistency of application and legal certainty for a financial 
institution that offers a security and a swap to the same customer, 
which is common.''); SIFMA Letter I at 5 (``To determine whether a 
party to a swap is a `U.S. person,' the Commissions should rely on 
the existing definition of that term contained in Rule 902(k) of the 
SEC's Regulation S. This established, workable definition is 
familiar to regulators and market participants alike, and would 
provide legal certainty. It is noteworthy that the Regulation S 
definition of U.S. person does not include non-U.S. affiliates of 
U.S. persons or non-U.S. branches of a U.S. bank and generally 
excludes collective investment vehicles established outside the 
United States with U.S. investors.'') (footnotes omitted); see also 
Section III.B.5(c), supra.
    \364\ See 17 CFR 230.901(k); see also Regulation S Adopting 
Release, 55 FR 18306.
    \365\ Regulation S Adopting Release, 55 FR 18307.
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    We preliminarily believe that the definition of U.S. person in 
Title VII should encompass, for example, not only a person that has its 
place of residence or legal organization within the United States, but 
also its principal place of business within the United States, as the 
security-based swap activities of such entities are likely to manifest 
themselves most directly within the United States, where the majority 
of their commercial, legal, and financial relationships would be likely 
to exist because that is where their business principally occurs.\366\
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    \366\ See proposed Rule 3a71-3(a)(7)(i)(B) under the Exchange 
Act; Section III.B.5(b)ii, supra.
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    Similarly, we preliminarily believe that the definition of U.S. 
person in Title VII should include accounts of a U.S. person, 
regardless of whether the account is a discretionary account or is held 
by a dealer or other person that is not resident in the United States, 
because the U.S. person bears the direct risk of transactions in the 
account, regardless of where the investment decision is made.\367\ 
Moreover, we are proposing that an entity's U.S.-person status would 
apply to the entity as a whole, since the risks related to the concerns 
of Title VII are borne by the entire entity and not just by the 
specific business unit (or branch or office) engaged in security-based 
swap activity.\368\ With its exclusions for certain foreign branches 
and agencies of U.S. persons from the definition of ``U.S. person,'' 
Regulation S would not address the entity-wide nature of the risks that 
Title VII seeks to address.\369\
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    \367\ See proposed Rule 3a71-3(a)(7)(i)(C) under the Exchange 
Act; Section III.B.5(b)iii, supra.
    \368\ See Section III.B.5(a), supra.
    \369\ Under Regulation S, the foreign branch of a U.S. bank is 
not treated as a U.S. person while the U.S. branch of a foreign bank 
is treated as a U.S. person. By contrast, under proposed Rule 3a71-
3(a)(7)(i)(B) under the Exchange Act, the foreign branch of a U.S. 
bank would be treated as part of a U.S. person while the U.S. branch 
of a foreign bank would be treated as a non-U.S. person.
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    The Commission preliminarily believes that adopting the definition 
of ``U.S. person'' in Regulation S without significant modifications 
would not achieve the goals of Title VII. As discussed above, we are 
instead proposing a definition of U.S. person that focuses primarily on 
the location of the person bearing the direct risk of the transaction. 
Regulation S, with its focus on the person making the investment 
decision (rather than the person actually

[[Page 31008]]

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

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

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

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

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

[[Page 31009]]

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

[[Page 31010]]

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

[[Page 31011]]

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

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

[[Page 31012]]

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

[[Page 31013]]

appropriate to treat margin as an entity-level requirement applicable 
to the security-based swap transactions of registered security-based 
swap dealers regardless of the location of their counterparties. As 
noted below, the Commission is soliciting comment on this approach.
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    \434\ See proposed Rule 3a71-3(a)(2) under the Exchange Act 
(defining ``Foreign Business'').
    \435\ Although we do not believe that it is appropriate to 
distinguish between the geographic locations of counterparties when 
applying the margin requirement, we recognize that it may be 
appropriate, in certain circumstances, to distinguish between types 
of counterparties in applying margin based on such factors as the 
risk they pose to dealers and the policy goal of promoting liquidity 
in dealers. See Capital, Margin, and Segregation Proposing Release, 
77 FR 70265-68 (proposing to exclude both transactions with 
commercial end users and those with other dealers from certain 
margin requirements applicable to security-based swap dealers).
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iii. Risk Management
    Registered security-based swap dealers are required to establish 
robust and professional risk management systems adequate for managing 
their day-to-day business.\436\ The Commission has proposed that 
nonbank security-based swap dealers would be required to comply with 
existing Rule 15c3-4 under the Exchange Act.\437\ This rule, originally 
adopted for OTC derivative dealers, requires firms subject to its 
provisions to establish, document, and maintain a comprehensive system 
of internal risk management controls to assist in managing the risks 
associated with its business activities, including market, credit, 
leverage, liquidity, legal, and operational risks.\438\ These various 
risks arise from both the U.S. Business and Foreign Business of a 
global security-based swap dealer. A risk management system limited in 
scope to cover only one type of business, or limited to certain 
security-based swap transactions, would not effectively control the 
risks undertaken by a security-based swap dealer because the risks 
stemming from business outside the scope of such risk management system 
could still negatively impact the dealer. As a result, we preliminarily 
believe that it is necessary to treat risk management requirements as 
entity-level requirements in order to place risk controls over the 
entire security-based swap business, thus effectively addressing the 
Dodd-Frank Act requirements for managing risk within security-based 
swap dealers.
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    \436\ See Section 15F(j)(2) of the Exchange Act, 15 U.S.C. 78o-
10(j)(2).
    \437\ See proposed new paragraph (a)(10)(ii) of Rule 15c3-1 
under the Exchange Act (17 CFR 240.15c3-1); paragraph (g) of 
proposed new Rule 18a-1 under the Exchange Act. See also 17 CFR 
240.15c3-4; Capital, Margin, and Segregation Proposing Release, 77 
FR 70250-51. The Commission has not proposed rules relating to risk 
management for bank security-based swap dealers.
    \438\ See OTC Derivatives Dealers, Exchange Act Release No. 
40594 (Oct. 23, 1998), 63 FR 59362 (Nov. 3, 1998).
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    Rule 15c3-4 identifies a number of qualitative factors that would 
need to be a part of the risk management controls of a nonbank 
security-based swap dealer. For example, a nonbank security-based swap 
dealer would need to have a risk control unit that reports directly to 
senior management and is independent from business trading units, and 
it would be required to separate duties between personnel responsible 
for entering into a transaction and those responsible for recording the 
transaction in the books and records of the firm.\439\ In addition, the 
Commission is authorized to adopt rules governing documentation 
standards of security-based swap dealers for timely and accurate 
confirmation, processing, netting, documentation, and valuation of 
security-based swaps.\440\ Pursuant to this authority, the Commission 
has proposed rules regarding trade acknowledgement and verification 
related to security-based swap transactions.\441\
---------------------------------------------------------------------------

    \439\ See 17 CFR 240.15c3-4(c), as discussed in the Capital, 
Margin, and Segregation Proposing Release, 77 FR 70250.
    \440\ See Section 15F(i) of the Exchange Act, 15 U.S.C. 78o-
10(i).
    \441\ See Trade Acknowledgement Proposing Release, 76 FR 3859.
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iv. Recordkeeping and Reporting
    Registered nonbank security-based swap dealers are required to keep 
books and records in such form and manner and for such period as may be 
prescribed by the Commission by rule or regulation; registered bank 
security-based swap dealers are required to keep books and records of 
all activities related to their ``business as a security-based swap 
dealer'' in such form and manner and for such period as may be 
prescribed by the Commission.\442\ Registered security-based swap 
dealers also are required to make such reports as are required by the 
Commission regarding the transactions and positions, and financial 
condition of the registrant.\443\
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    \442\ See Sections 15F(f)(1)(B)(i) and (ii) of the Exchange Act, 
15 U.S.C. 78o-10(f)(1)(B)(i) and (ii).
    \443\ See Section 15F(f)(1)(A) of the Exchange Act, 15 U.S.C. 
78o-10(f)(1)(A).
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    In addition, security-based swap dealers are required to maintain 
daily trading records of the security-based swaps they enter into.\444\ 
Security-based swap dealers also are required to disclose to the 
Commission and the prudential regulators information concerning: (i) 
Terms and conditions of their security-based swaps; (ii) security-based 
swap trading operations, mechanisms, and practices; (iii) financial 
integrity protections relating to security-based swaps; and (iv) other 
information relevant to their trading in security-based swaps.\445\
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    \444\ See Section 15F(g) of the Exchange Act, 15 U.S.C. 78o-
10(g).
    \445\ See Section 15F(j)(3) of the Exchange Act, 15 U.S.C. 78o-
10(j)(3).
---------------------------------------------------------------------------

    Each of these types of records is an important part of the 
Commission's oversight of our registrants because it provides the 
Commission with vital information regarding such entities. If the 
Commission's information were limited in scope to cover only one type 
of business, or limited to only certain security-based swap activities, 
the Commission would not be able to effectively regulate our registered 
security-based swap dealers because it would not have a full picture of 
the business of such registrants. As a result, we preliminarily believe 
that it is necessary to treat recordkeeping and reporting as entity-
level requirements in order to provide the Commission with the 
information necessary to regulate registered security-based swap 
dealers and thus effectively address the Dodd-Frank Act requirements 
for maintaining books and records.
    The Commission has not yet proposed rules regarding the 
recordkeeping and reporting requirements under Section 15F of the 
Exchange Act and solicits comment regarding the application of 
recordkeeping and reporting requirements in the cross-border context.
v. Internal System and Controls
    Security-based swap dealers are required to establish and enforce 
systems and procedures to obtain any information that is necessary to 
perform any of the functions that are required under Section 15F(j) of 
the Exchange Act \446\ and to provide this information to the 
Commission, or the responsible prudential regulator, upon request.\447\ 
The Commission has proposed a rule that would require a registered 
security-based swap dealer to establish policies and procedures that 
are reasonably designed to comply with its responsibilities under 
Section 15F(j) of the Exchange Act.\448\
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    \446\ 15 U.S.C. 78o-10(j). These functions include monitoring of 
applicable position limits under Section 15F(j)(1) of the Exchange 
Act, 15 U.S.C. 78o-10(j)(1); establishment of risk management 
procedures under Section 15F(j)(2) of the Exchange Act, 15 U.S.C. 
78o-10(j)(2); disclosure of general information to the Commission 
and prudential regulators under Section 15F(j)(3) of the Exchange 
Act, 15 U.S.C. 78o-10(j)(3); establishment of policies and 
procedures to avoid conflicts of interest under Section 15F(j)(5) of 
the Exchange Act, 15 U.S.C. 78o-10(j)(5); and avoidance of any 
actions that result in an unreasonable restraint of trade or place 
any material anticompetitive burden on trading or clearing under 
Section 15F(j)(6) of the Exchange Act, 15 U.S.C. 78o-10(j)(6).
    \447\ See Section 15F(j)(4) of the Exchange Act, 15 U.S.C. 78o-
10(j)(4).
    \448\ See proposed Rule 15Fh-3(h)(2)(iv) under the Exchange Act, 
as discussed in the External Business Conduct Standards Proposing 
Release, 76 FR 42420.
---------------------------------------------------------------------------

    Many of the functions required under Section 15F(j) of the Exchange 
Act are

[[Page 31014]]

entity-level in nature (e.g., risk management procedures \449\ and 
conflicts of interest \450\). As a result, we preliminarily believe 
that the requirement to establish and enforce systems and procedures to 
obtain any information that is necessary to perform these functions 
cannot be effectively implemented unless it also is treated as an 
entity-level requirement, or else it would not cover the full scope of 
the requirements under Section 15F(j) of the Exchange Act to which it 
applies.
---------------------------------------------------------------------------

    \449\ See Section III.C.3(b)iii, supra.
    \450\ See Section III.C.3(b)vii, infra.
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vi. Diligent Supervision
    The Commission is authorized under the Dodd-Frank Act to adopt 
rules requiring diligent supervision of the business of security-based 
swap dealers.\451\ The Commission has proposed a rule that would 
establish supervisory obligations and that would incorporate principles 
from Section 15(b) of the Exchange Act and existing SRO rules.\452\ 
Among other things, under proposed Rule 15Fh-3(h), a security-based 
swap dealer would be required to establish, maintain, and enforce a 
system to supervise, and would be required to supervise diligently, its 
business and its associated persons, with a view to preventing 
violations of applicable federal securities laws, and the rules and 
regulations thereunder, relating to its business as a security-based 
swap dealer.\453\ The rule proposed by the Commission also would 
establish certain minimum requirements relating to the supervisory 
systems that are prescriptive in nature, that is, they would impose 
specific obligations on security-based swap dealers.\454\
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    \451\ See Section 15F(h)(1)(B) of the Exchange Act, 15 U.S.C. 
78o-10(h)(1)(B).
    \452\ Proposed Rule 15Fh-3(h) under the Exchange Act, as 
discussed in the External Business Conduct Standards Proposing 
Release, 76 FR 42419-21.
    \453\ Proposed Rule 15Fh-3(h)(1) under the Exchange Act, as 
discussed in the External Business Conduct Standards Proposing 
Release, 76 FR 42419-21.
    \454\ Proposed Rule 15Fh-3(h)(2) under the Exchange Act, as 
discussed in the External Business Conduct Standards Proposing 
Release, 76 FR 42419-21.
---------------------------------------------------------------------------

    As previously noted, the purpose of diligent supervision 
requirements is to prevent violations of applicable federal securities 
laws, and the rules and regulations thereunder, relating to an entity's 
business as a security-based swap dealer. An entity's business as a 
security-based swap dealer is not limited to either its Foreign 
Business or its U.S. Business, but rather is comprised of its entire 
global security-based swap dealing activity. As a result, we 
preliminarily believe that it is necessary to treat diligent 
supervision as an entity-level requirement applicable to all of a 
dealer's security-based swap transactions in order to effectively 
address the Dodd-Frank Act requirements for diligent supervision. We 
believe that treating diligent supervision solely as a transaction-
level requirement, and applying supervisory requirements differently to 
a security-based swap dealer's U.S. Business and Foreign Business, 
would not further the Dodd-Frank Act goal of establishing effective 
supervisory systems for security-based swap dealers.
vii. Conflicts of Interest
    Section 15F(j)(5) of the Exchange Act requires security-based swap 
dealers to implement conflict-of-interest systems and procedures. Such 
policies and procedures must establish structural and institutional 
safeguards to ensure that the activities of any person within the firm 
relating to research or analysis of the price or market for any 
security-based swap, or acting in the role of providing clearing 
activities, or making determinations as to accepting clearing customers 
are separated by appropriate informational partitions within the firm 
from the review, pressure, or oversight of persons whose involvement in 
pricing, trading, or clearing activities might potentially bias their 
judgment or supervision, and contravene the core principles of open 
access and the business conduct standards addressed in Title VII.\455\ 
The Commission has proposed a rule that would require a security-based 
swap dealer to establish policies and procedures that are reasonably 
designed to comply with its responsibilities under Section 
15F(j)(5).\456\
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    \455\ See Section 15F(j)(5) of the Exchange Act, 15 U.S.C. 78o-
10(j)(5), as discussed in the External Business Conduct Standards 
Proposing Release, 76 FR 42420.
    \456\ Proposed Rule 15Fh-3(h)(2)(iv) under the Exchange Act, as 
discussed in the External Business Conduct Standards Proposing 
Release, 76 FR 42420.
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    The Commission preliminarily believes that it is necessary to treat 
conflicts of interest as an entity-level requirement applicable to all 
of a dealer's security-based swap transactions in order to effectively 
address the Dodd-Frank Act requirements for setting systems and 
procedures to prevent conflicts of interest from biasing the judgment 
or supervision of security-based swap dealers. We believe that treating 
conflicts of interest solely as a transaction-level requirement, and 
applying the required structural and institutional safeguards 
differently to a security-based swap dealer's U.S. Business and Foreign 
Business, would not further the goals of preventing conflicts of 
interest from influencing the security-based swap dealing activities of 
registered security-based swap dealers because such safeguards would 
only be in place for a portion of a security-based swap dealer's 
activities.
viii. Chief Compliance Officer
    Registered security-based swap dealers are required to designate a 
chief compliance officer who reports directly to the board of directors 
or to the senior officer of the security-based swap dealer.\457\ The 
chief compliance officer's responsibilities include reviewing and 
ensuring compliance of the security-based swap dealer with applicable 
requirements in the Exchange Act and the rules and regulations 
thereunder, resolution of conflicts of interest, administration of 
business conduct policies and procedures, and establishment of 
procedures for the remediation of noncompliance issues.\458\ The chief 
compliance officer also is required to prepare and sign a report that 
contains a description of the security-based swap dealer's compliance 
with applicable requirements in the Exchange Act, and the rules and 
regulations thereunder, and each of the security-based swap dealer's 
policies and procedures.\459\ The Commission has proposed a rule to 
implement these statutory requirements relating to the designation and 
functions of a chief compliance officer.\460\
---------------------------------------------------------------------------

    \457\ See Section 15F(k) of the Exchange Act, 15 U.S.C. 78o-
10(k).
    \458\ See Section 15F(k)(2) of the Exchange Act, 15 U.S.C. 78o-
10(k)(2).
    \459\ See Section 15F(k)(3) of the Exchange Act, 15 U.S.C. 78o-
10(k)(3).
    \460\ Proposed Rule 15Fk-1 under the Exchange Act, as discussed 
in the External Business Conduct Standards Proposing Release, 76 FR 
42435-38.
---------------------------------------------------------------------------

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

[[Page 31015]]

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

    \461\ See Proposed Rule 15Fk-1(b)(2) under the Exchange Act, as 
discussed in the External Business Conduct Standards Proposing 
Release, 76 FR 42435-36.
---------------------------------------------------------------------------

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

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

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

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

[[Page 31016]]

reasonable care should have known, of the statutory 
disqualification.\473\
---------------------------------------------------------------------------

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

    The Commission preliminarily believes that it is necessary to treat 
requirements related to licensing and statutory disqualification as 
entity-level requirements applicable to all of a dealer's security-
based swap business in order to effectively address the Exchange Act's 
statutory disqualification provision. We believe that treating 
licensing requirements and statutory disqualification solely as 
transaction-level requirements, and applying the statutory 
disqualification differently to a security-based swap dealer's U.S. 
Business and Foreign Business, would not further the goals of 
preventing statutorily disqualified persons from effecting security-
based swaps on behalf of registered security-based swap dealers because 
such disqualifications would only be in place for a portion of a 
security-based swap dealer's activities.
4. Application of Certain Transaction-Level Requirements \474\
---------------------------------------------------------------------------

    \474\ For purposes of this discussion, we are addressing only 
requirements applicable to security-based swap dealers in Sections 
3E and 15F of the Exchange Act, 15 U.S.C. 78c-5 and 78o-10, and the 
rules and regulations thereunder. Title VII requirements relating to 
reporting and dissemination, clearing, and trade execution are 
discussed in Sections VIII-X, infra.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    The Commission also is proposing a rule that would provide that a 
foreign security-based swap dealer would not be required to comply with 
the segregation requirements set forth in Section 3E of the Exchange 
Act, and the rules and regulations thereunder, with respect to 
security-based transactions with non-U.S. person counterparties in 
certain circumstances.\485\ Specifically, the Commission is proposing a 
rule that would provide the following:
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    \485\ Proposed Rule 18a-4(e) under the Exchange Act.
---------------------------------------------------------------------------

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

[[Page 31017]]

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

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

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

    In addition, a registered foreign security-based swap dealer would 
be required to disclose to its counterparty the potential treatment of 
the assets segregated by such registered foreign security-based swap 
dealer pursuant to Section 3E of the Exchange Act, and rules and 
regulations thereunder, in insolvency proceedings under the U.S. 
bankruptcy law and applicable foreign insolvency laws.\490\
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    \490\ Proposed Rule 18a-4(e)(3) under the Exchange Act.
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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.
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    \491\ Proposed Rule 3a71-3(c) under the Exchange Act.
    \492\ See note 4, supra.
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    Therefore, the Commission preliminarily believes that requiring 
foreign security-based swap dealers to comply with the external 
business conduct standards requirement with respect to their security-
based swap transactions conducted outside the United States with non-
U.S. persons (or with foreign branches of U.S. banks) would not advance 
this statutory purpose. Although this approach represents a departure 
from the entity approach the Commission has traditionally taken in the 
regulation of foreign broker-dealers, as discussed above, whereby the 
Commission applies our regulations to the entire global business of a 
registered broker-dealer, we preliminarily believe this departure is 
appropriate in the context of a global security-based swap market in 
order to create a regulatory framework that provides effective 
protections for counterparties that are U.S. persons while recognizing 
the role of foreign regulators in non-U.S. markets.
    The Commission also preliminarily believes that this approach 
addresses many of the concerns raised by commenters, including foreign 
regulators, concerning the potential application of Title VII to 
transactions between registered foreign security-based swap dealers and 
non-U.S. counterparties. In addition, this approach is consistent with 
the reasonable expectations of U.S. person counterparties, who would 
expect to receive the protection of external business conduct standards 
and conflicts of interest requirements when dealing with a foreign 
security-based swap dealer within the United States.\493\
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    \493\ See note 321, supra.
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    The Commission's proposed approach to external business conduct 
standards would not except foreign security-based swap dealers from the 
rules and requirements prescribed by the Commission pursuant to Section 
15F(h)(1)(B) of the Exchange Act with respect to their Foreign 
Business.\494\ Section 15F(h)(1)(B) requires security-based swap 
dealers to conform with such business conduct standards relating to 
diligent supervision as the Commission shall prescribe.\495\ The 
Commission preliminarily believes that it is not appropriate to except 
foreign security-based swap dealers from compliance with such 
requirements. Because registered foreign security-based swap dealers 
would be subject to a number of obligations under the federal 
securities laws with respect to their security-based swap business, the 
Commission preliminarily believes that having systems in place 
reasonably designed to ensure diligent supervision would be an 
important aspect of their compliance with the federal securities laws. 
However, as discussed below, the Commission is proposing to permit 
substituted compliance with the diligent supervision requirement in 
Section 15F(h)(1)(B), and the rules and regulations thereunder, by 
foreign security-based swap dealers.\496\ The Commission preliminarily 
believes that foreign security-based swap dealers subject to regulation 
in a foreign jurisdiction are very likely to be subject to diligent 
supervision requirements and to the extent that such requirements are 
comparable to Commission requirements, we would consider permitting 
substituted compliance, as discussed below.\497\
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    \494\ Proposed Rule 3a71-3(c) under the Exchange Act.
    \495\ 15 U.S.C. 78o-10(h)(1)(B). See Section III.C.3(b)vi, supra 
(discussing the diligent supervision requirements).
    \496\ See Section XI.C, infra.
    \497\ See id.
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    The Commission is proposing to except foreign security-based swap 
dealers from complying with the rules and regulations that the 
Commission may prescribe pursuant to Section 15F(h)(1)(A) or (C) of the 
Exchange

[[Page 31018]]

Act.\498\ Section 15F(h)(1)(A) requires security-based swap dealers to 
conform with such business conduct standards relating to fraud, 
manipulation, and other abusive practices involving security-based 
swaps (including security-based swaps that are offered but not entered 
into) as prescribed by the Commission. Section 15F(h)(1)(C) requires 
security-based swap dealers to adhere to rules and regulations 
prescribed by the Commission with respect to applicable position 
limits. The Commission has not engaged in rulemaking pursuant to these 
provisions.\499\ If the Commission does propose rules pursuant to these 
provisions in the future, the Commission would consider, at that time, 
whether it would be appropriate to subject foreign security-based swap 
dealers to such requirements with respect to their Foreign Business.
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    \498\ 15 U.S.C. 78o-10(h)(1)(A) and (C).
    \499\ Although the Commission has not proposed rules under 
Section 15F(h)(1)(A) of the Exchange Act, the Commission has 
proposed new Rule 9j-1 under the Exchange Act, which is intended to 
prevent fraud, manipulation, and deception in connection with the 
offer, purchase, or sale of any security-based swap, the exercise of 
any right or performance of any obligation under a security-based 
swap, or the avoidance of such exercise or performance. See 
Prohibition Against Fraud, Manipulation, and Deception in Connection 
with Security-Based Swaps, Exchange Act Release No. 63236 (Nov. 3, 
2010), 75 FR 68560 (Nov. 8, 2010). The Commission's view of its 
antifraud enforcement authority in the cross-border context is 
described in further detail in Section XI below.
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b. U.S. Security-Based Swap Dealers
    The Commission preliminarily believes it is appropriate not to 
subject U.S. security-based swap dealers to the external business 
conduct standards in Section 15F(h) (other than Section 15F(h)(1)(B)) 
of the Exchange Act, and the rules and regulations thereunder, as 
specified in the proposed rule, with respect to security-based swap 
transactions conducted through their foreign branches outside the 
United States with non-U.S. counterparties, because such requirements 
relate primarily to customer protection requirements. The Dodd-Frank 
Act generally is concerned with the protection of U.S. markets and 
participants in those markets.\500\ Therefore, we preliminarily believe 
that subjecting U.S. security-based swap dealers to the Title VII 
customer protection requirements with respect to their security-based 
swap transactions conducted through their foreign branches outside the 
United States (even though the transactions may pose risk to the U.S. 
financial system) with non-U.S. persons would produce little or no 
benefit to U.S. market participants. Although this approach would 
represent a departure from the entity approach the Commission has 
traditionally taken in the regulation of broker-dealers, whereby the 
Commission applies our regulations to the entire global business of a 
registered broker-dealer, we preliminarily believe it is appropriate in 
the context of a global security-based swap market in order to develop 
a national regulatory framework that provides effective protections for 
counterparties who are U.S. persons while recognizing the role of 
foreign regulators in non-U.S. markets.
---------------------------------------------------------------------------

    \500\ See note 4, supra.
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    The Commission also preliminarily believes that this approach would 
help address the potential application of duplicative and conflicting 
regulatory requirements to security-based swap transactions between the 
foreign branches of registered U.S. bank security-based swap dealers 
and non-U.S. counterparties. In addition, the Commission preliminarily 
believes this approach is consistent with the reasonable expectations 
of foreign counterparties, who would not necessarily expect to receive 
the protections of Title VII when dealing with a foreign branch of a 
U.S. bank outside the United States, even if it is registered as a 
security-based swap dealer with the Commission.\501\
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    \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.
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    The purpose of the proposed provision defining when a security-
based swap transaction would be considered to have been conducted 
through a foreign branch is intended to prevent U.S. security-based 
swap dealers from using the proposed rule to evade the application of 
Title VII.\502\ Requiring that the foreign branch be the named 
counterparty to the security-based swap transaction and that no person 
within the United States be directly involved in soliciting, 
negotiating, or executing the security-based swap transaction on behalf 
of the foreign branch or its counterparty is intended to help ensure 
that the security-based swap transaction occurs outside the United 
States, even though the Commission recognizes that the risk of the 
transaction would ultimately be borne by the U.S. security-based swap 
dealer, of which the foreign branch is merely a part.\503\ The U.S. 
security-based swap dealer would still be subject to the entity-level 
requirements described above intended to address the risk the 
transactions pose to the U.S. financial system.
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    \502\ Proposed Rule 3a71-3(a)(4) under the Exchange Act.
    \503\ Proposed Rule 3a71-3(a)(4)(i) under the Exchange Act.
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ii. Segregation Requirements
    The segregation requirements set forth in Section 3E of the 
Exchange Act, and rules and regulations thereunder, are closely tied to 
U.S. bankruptcy laws.\504\ Subchapter III of Chapter 7, Title 11 of the 
United States Code (the ``stockbroker liquidation provisions'') \505\ 
provides special protections for ``customers'' of stockbrokers. Among 
other protections, ``customers'' share ratably with other customers 
ahead of virtually all other creditors in the ``customer property'' 
held by the failed stockbroker.\506\ The Dodd-Frank Act contains 
provisions designed to ensure that cash and securities held by a 
security-based swap dealer relating to security-based swaps will be 
deemed customer property under the stockbroker liquidation 
provisions.\507\ In particular, Section 3E(g) of the Exchange Act \508\ 
provides, among other things, that a security-based swap shall be 
considered to be a ``security'' as such term is used in section 
101(53A)(B) \509\ and the stockbroker liquidation provisions. Section 
3E(g) also provides that an account that holds a security-based swap 
shall be considered to be a ``securities account'' as that term is 
defined in the stockbroker liquidation provisions.\510\ In addition, 
Section 3E(g) provides that the terms ``purchase'' and ``sale'' as 
defined in Sections 3(a)(13) and (14) of the Exchange Act, 
respectively, shall be applied to the terms ``purchase'' and ``sale'' 
as used in the stockbroker liquidation

[[Page 31019]]

provisions.\511\ Finally, Section 3E(g) provides that the term 
``customer'' as defined in the stockbroker liquidation provisions 
excludes any person to the extent the person has a claim based on a 
non-cleared security-based swap transaction except to the extent of any 
margin delivered to or by the customer with respect to which there is a 
customer protection requirement under Section 15(c)(3) of the Exchange 
Act or a segregation requirement.\512\
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    \504\ See Capital, Margin, and Segregation Proposing Release, 77 
FR 70274-78 (discussing the customer protection treatment provided 
by proposed Rules 18a-4(a)-(d) in the stockbroker liquidation 
provisions in the U.S. Bankruptcy Code).
    \505\ See 11 U.S.C. 741-53.
    \506\ See 11 U.S.C. 752.
    \507\ See Public Law 111-203 section 763(d), adding Section 
3E(g) to the Exchange Act, 15 U.S.C. 78c-5(g).
    \508\ See 15 U.S.C. 78c-5(g).
    \509\ See 11 U.S.C. 101(53A)(B). Section 101(53A) of the U.S. 
Bankruptcy Code defines a ``stockbroker'' to mean a person--(A) with 
respect to which there is a customer, as defined in section 741, 
subchapter III of chapter 7, title 11, United States Code (the 
definition section of the stockbroker liquidation provisions); and 
(B) that is engaged in the business of effecting transactions in 
securities--(i) for the account of others; or (ii) with members of 
the general public, from or for such person's own account. See 11 
U.S.C. 101(53A).
    \510\ See 15 U.S.C. 78c-5(g) and 11 U.S.C. 741. There is not a 
definition of ``securities account'' in 11 U.S.C. 741. The term 
``securities account'' is used in 11 U.S.C. 741(2) and (4) in 
defining the terms ``customer'' and ``customer property.''
    \511\ See also 15 U.S.C. 78c-5(g) and 11 U.S.C. 741-753. Section 
3(a)(13) of the Exchange Act, as amended by Section 761(a) of the 
Dodd-Frank Act, defines the term ``purchase'' to mean, in the case 
of security-based swaps, the execution, termination (prior to its 
scheduled maturity date), assignment, exchange, or similar transfer 
or conveyance of, or extinguishing of rights or obligations under, a 
security-based swap, as the context may require. See 15 U.S.C. 
3(a)(13). Section 3(a)(14) of the Exchange Act, as amended by 
Section 761(a) of the Dodd-Frank Act, defines the term ``sale'' to 
mean, in the case of security-based swaps, the execution, 
termination (prior to its scheduled maturity date), assignment, 
exchange, or similar transfer or conveyance of, or extinguishing of 
rights or obligations under, a security-based swap, as the context 
may require. See 15 U.S.C. 3(a)(14).
    \512\ See 15 U.S.C. 78c-5(g) and 11 U.S.C. 741(2).
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    The provisions of Section 3E(g) of the Exchange Act apply the 
customer protection elements of the stockbroker liquidation provisions 
to cleared security-based swaps, including related collateral, and, if 
subject to customer protection requirements under Section 15(c)(3) of 
the Exchange Act or a segregation requirement prescribed by the 
Commission, to collateral delivered as margin for non-cleared security-
based swaps.\513\ The Commission has proposed Rule 18a-4(a)-(d) to 
establish segregation requirements for security-based swap dealers with 
respect to cleared and non-cleared security-based swaps pursuant to 
Section 3E of the Exchange Act and pursuant to Section 15(c)(3) of the 
Exchange Act \514\ with respect to security-based swap dealers that are 
broker-dealers.\515\
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    \513\ See 15 U.S.C. 78c-5(g) and 11 U.S.C. 741-53.
    \514\ 15 U.S.C. 78o(c)(3).
    \515\ See proposed Rules 18a-4(a)-(d) under the Exchange Act and 
Section 3E of the Exchange Act, 15 U.S.C. 78c-5. See also the 
Capital, Margin, and Segregation Proposing Release, 77 FR 70278-88, 
for detailed descriptions and discussions of the proposed 
segregation requirements for security-based swaps in proposed Rules 
18a-4(a), (b), and (c) under the Exchange Act and special provisions 
for non-cleared security-based swaps in proposed Rule 18a-4(d) under 
the Exchange Act.
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    Specifically, proposed Rule 18a-4(b) requires a security-based swap 
dealer to promptly obtain and thereafter maintain physical possession 
or control of all excess securities collateral carried for the accounts 
of security-based swap customers. Such possession or control 
requirement is designed to ensure the securities held for the accounts 
of security-based swap customers are under the control of the security-
based swap dealer and, therefore, readily available to be returned to 
security-based swap customers. Proposed Rule 18a-4(c) requires a 
security-based swap dealer to maintain a special account for the 
exclusive benefit of security-based swap customers and have on deposit 
in that account at all times an amount of cash or qualified securities 
determined by computing the net amount of credits owed to 
customers.\516\ The objective of the possession or control and special 
account requirements in proposed Rule 18a-4 is to facilitate the prompt 
return of ``customer property'' to security-based swap customers either 
before or during a liquidation proceeding if the firm fails. In the 
event of a failure of the security-based swap dealer, customers would 
share the ``customer property'' ratably with other customers and ahead 
of virtually all other creditors.\517\ In addition, with respect to 
non-cleared security-based swaps, proposed Rule 18a-4(d) requires a 
security-based swap dealer to provide the notice required under Section 
3E(f)(1)(A) of the Exchange Act \518\ to a counterparty in writing 
prior to the execution of the first non-cleared security-based swap 
transaction with such counterparty. If a counterparty to a non-cleared 
security-based swap elects to segregate funds or other property with a 
third-party custodian pursuant to Section 3E(f) of the Exchange Act or 
elects not to require the omnibus segregation of funds or other 
property pursuant to proposed Rule 18a-4(c), the security-based swap 
dealer must obtain an agreement from such counterparty to subordinate 
all claims against the security-based swap dealer to the claims of 
security-based swap customers of such security-based swap dealer.\519\
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    \516\ See proposed Rule 18a-4(c) and the related discussion in 
the Capital, Margin, and Segregation Proposing Release, 77 FR 70277.
    \517\ See the stockbroker liquidation provisions in the U.S. 
Bankruptcy Code, 11 U.S.C. 741-53.
    \518\ 15 U.S.C. 78c-5(f)(1)(A).
    \519\ See proposed Rules 18a-4(d)(1) and (d)(2)(i) and (ii) 
under the Exchange Act, as discussed in the Capital, Margin, and 
Segregation Proposing Release, 77 FR 70287-88. If a non-cleared 
security-based swap counterparty elects to segregate funds or other 
property with a third-party custodian, the subordination agreement 
would be conditioned on the counterparty's funds and other property 
segregated at a third-party custodian not being included in the 
bankruptcy estate of the security-based swap dealer. If the election 
is not effective in keeping the counterparty's assets bankruptcy 
remote, then the counterparty should be treated as a security-based 
swap customer with a pro rata priority claim to customer property. 
See proposed Rule 18a-4(d)(2)(i) under the Exchange Act. If a non-
cleared security-based swap counterparty elects not to segregate any 
assets at all, the security-based swap dealer would need to obtain 
an unconditional subordination agreement from the counterparty that 
waives segregation altogether. See proposed Rule 18a-4(d)(2)(ii) 
under the Exchange Act.
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    As proposed in the Capital, Margin and Segregation Proposing 
Release, the segregation requirements in proposed Rule 18a-4(a)-(d) do 
not distinguish between U.S. security-based swap dealers and foreign 
security-based swap dealers or between U.S. person and non-U.S. person 
security-based swap counterparties, and do not address application of 
the segregation requirements in the cross-border context. The 
Commission preliminarily believes that the Dodd-Frank Act's mandate to 
promote financial stability, improve accountability, and protect 
counterparties focuses territorially on the United States and the U.S. 
security-based swap market \520\ and, therefore, is not proposing any 
changes with respect to U.S. security-based swap dealers to the 
segregation requirements already proposed.\521\ The Commission's 
proposed approach to application of segregation requirements to foreign 
security-based swap dealers intends to protect U.S. person 
counterparties and minimize the impact of a failed security-based swap 
dealer on the U.S. financial system generally and the U.S. security-
based swap market in particular.
---------------------------------------------------------------------------

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

[[Page 31020]]

other hand, if a foreign security-based swap dealer is not a foreign 
bank with a branch or agency in the United States, it may be subject to 
the stockbroker liquidation provisions \524\ in a stockbroker 
liquidation proceeding in a U.S. bankruptcy court. Moreover, if a 
foreign security-based swap dealer is a registered broker-dealer, it is 
a member of the Securities Investor Protection Corporation (``SIPC'') 
\525\ and is subject to segregation requirements under Section 15(c)(3) 
of the Exchange Act,\526\ and rules and regulations thereunder.\527\ 
Such a foreign security-based swap dealer would be subject to the 
liquidation proceeding under the Securities Investor Protection Act of 
1970 (the ``SIPA'').\528\ Therefore, we propose an approach that would 
apply the segregation requirements to a foreign security-based swap 
dealer depending on whether it holds assets to secure cleared security-
based swap transactions or non-cleared security-based swap transactions 
and whether such foreign security-based swap dealer is a registered 
broker-dealer, a foreign bank with a branch or agency in the United 
States, or neither of the above.\529\
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    \522\ See Section 109(b) of the U.S. Bankruptcy Code, 11 U.S.C. 
109(b) (providing that a person may be a debtor under chapter 7 of 
the U.S. Bankruptcy Code only if such person is not, among other 
things, a bank or similar institution which is an insured bank as 
defined in Section 3(h) of the Federal Deposit Insurance Act, or a 
foreign bank that has a branch or agency (as defined in Section 1(b) 
of the International Banking Act of 1978) in the United States).
    \523\ See 12 U.S.C. 1821-25. Whereas insured deposit 
institutions would be resolved under the Federal Deposit Insurance 
Act, uninsured U.S. branches of foreign banks would be resolved 
under either relevant state statutes, in the case of uninsured state 
branches, or the International Banking Act, in the case of uninsured 
federal branches.
    \524\ See note 522, supra.
    \525\ We recognize that a very limited number of registered 
foreign broker-dealers who do not conduct securities business in the 
United States and do not hold U.S. person customers' funds are not 
members of SIPC.
    \526\ 15 U.S.C. 78o(c)(3).
    \527\ See Rule 15c3-3 under the Exchange Act, 17 CFR 240.15c3-3.
    \528\ See 15 U.S.C. 78aaa et seq.
    \529\ We preliminarily believe that the proposed approach with 
respect to the segregation requirements set forth in Section 3E of 
the Exchange Act, and rules and regulations thereunder, is not being 
applied to persons who are ``transact[ing] a business in security-
based swaps without the jurisdiction of the United States,'' within 
the meaning of Section 30(c). See Section II.B.2(a), supra. However, 
the Commission also preliminary believes that the proposed approach 
with respect to the segregation requirements is necessary or 
appropriate to help prevent the evasion of the particular provisions 
of the Exchange Act that were added by the Dodd-Frank Act that are 
being implemented by the proposed approach and prophylactically will 
help ensure that the purposes of those provisions of the Dodd-Frank 
Act are not undermined. See Section II.B.2(e), supra; see also 
Section II.B.2(c), supra.
    For example, if the segregation requirements do not apply to the 
entire business of a registered foreign security-based swap dealer 
that is a registered broker-dealer, or do not apply to assets 
received from non-U.S. person customers to secure cleared security-
based swaps by a registered foreign security-based swap dealer that 
is not a registered broker-dealer (and is not a foreign bank with a 
branch or agency in the United States) if such foreign security-
based swap dealer also receives assets from a U.S. person customer 
to secure clear security-based swaps, then U.S. security-based swap 
dealers would have an incentive to evade the full application of the 
segregation requirements by moving their operations outside the 
United States. In this event, these security-based swap dealers 
could use the assets collected from the non-U.S. person 
counterparties for their own business purposes, and the assets 
segregated (i.e., assets posted by U.S. person customers) could be 
insufficient to satisfy the combined priority claims of both U.S. 
person and non-U.S. person customers, potentially resulting in 
losses to U.S. person customers in contravention of the purposes of 
the customer protection framework established by the Dodd-Frank Act. 
See discussions of application of the segregation requirements to a 
foreign security-based swap dealer that is a registered broker-
dealer with respect to non-cleared security-based swaps in Section 
III.C.4(b)ii.b.i, application of the segregation requirements to a 
foreign security-based swap dealer that is a registered broker-
dealer with respect to cleared security-based swaps in Section 
III.C.4(b)ii.c.i, and application of the segregation requirements to 
a foreign security-based swap dealer that is not a registered 
broker-dealer and is not a foreign bank with a branch or agency in 
the United States in Section III.C.4(b)ii.c.ii above.
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    We recognize that a foreign security-based swap dealer may not be 
subject to the stockbroker liquidation provisions and its insolvency or 
liquidation proceeding in the United States may be administered under 
SIPA or banking regulations concurrently with other potential 
insolvency proceedings outside the United States under applicable 
foreign insolvency laws. Therefore, the effectiveness of the 
segregation requirements with respect to a foreign security-based swap 
dealer in practice may depend on many factors, including the type and 
objectives of the insolvency or liquidation proceeding and how the U.S. 
Bankruptcy Code, SIPA, banking regulations and applicable foreign 
insolvency laws are interpreted by the U.S. bankruptcy court, SIPC, 
Federal Deposit Insurance Corporation and relevant foreign authorities.
b. Non-Cleared Security-Based Swaps
i. Foreign Security-Based Swap Dealer That Is a Registered Broker-
Dealer
    With respect to non-cleared security-based swaps, the Commission 
proposes to apply segregation requirements differently to foreign 
security-based swap dealers depending on whether they also are 
registered broker-dealers. Specifically, the Commission proposes to 
require a foreign security-based swap dealer that is a registered 
broker-dealer to segregate margin received from all counterparties to 
secure non-cleared security-based swap transactions, in accordance with 
Section 3E of the Exchange Act, and rules and regulations 
thereunder.\530\
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    \530\ See proposed Rule 18a-4(e)(1)(i) under the Exchange Act.
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    If a foreign security-based swap dealer is a registered broker-
dealer, it already would: (i) be subject to the customer protection 
requirements under Section 15(c)(3) of the Exchange Act,\531\ and rules 
and regulations thereunder, including Rule 15c3-3 if it carries 
customer securities and cash; (ii) be required to maintain possession 
or control of customer securities and maintain cash or qualified 
securities in a special reserve account if it carries customer 
securities and cash; and (iii) if it is a member of SIPC, be liquidated 
in a formal proceeding under the SIPA.\532\ Rule 15c3-3 under Section 
15(c)(3) of the Exchange Act provides customer protection and defines 
``customer'' broadly to include any person from whom or on whose behalf 
a broker or dealer has received or acquired or holds funds or 
securities for the account of that person.\533\ Therefore, if a foreign 
security-based swap dealer that is a registered broker-dealer receives 
collateral from a non-cleared security-based swap counterparty, such 
counterparty would be a ``customer'' and is afforded customer 
protection with respect to such collateral under Rule 15c3-3. As stated 
above, Section 3E(g) extends ``customer'' status to non-cleared 
security-based swap counterparties to the extent of any margin 
delivered to or by the counterparties with respect to which there is a 
customer protection requirement under Section 15(c)(3).\534\ Therefore, 
non-cleared security-based swap counterparties of a foreign security-
based swap dealer that is a registered broker-dealer are ``customers'' 
within the meaning of the stockbroker liquidation provisions.\535\
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    \531\ 15 U.S.C. 78o(c)(3).
    \532\ See Capital, Margin, and Segregation Proposing Release, 77 
FR 70276-77 (discussing the broker-dealer segregation rule--Rule 
15c3-3 under the Exchange Act, 17 CFR 240.15c3-3).
    \533\ See Rule 15c3-3(a)(1) under the Exchange Act, 17 CFR 
240.15c3-3(a)(1).
    \534\ See Section 3E(g) of the Exchange Act, 15 U.S.C. 78c-5(g) 
(``The term `customer', as defined in section 741 of title 11, 
United States Code, excludes any person, to the extent that such 
person has a claim based on any . . . non-cleared security-based 
swap except to the extent of any margin delivered to or by the 
customer with respect to which there is a customer protection 
requirement under section 15(c)(3) or a segregation requirement.'').
    \535\ A non-cleared security-based swap counterparty may waive 
its pro rata priority claim on customer property with other 
customers by executing a conditional subordination agreement 
pursuant to proposed Rule 18a-4(d)(i) under the Exchange Act to 
affirmatively elect individual segregation, or by executing an 
unconditional subordination agreement pursuant to proposed Rule 18a-
4(d)(ii) under the Exchange Act to affirmatively waive segregation 
altogether.
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    As such, if the Commission does not require a foreign security-
based swap dealer that is a registered broker-dealer to segregate all 
counterparties' assets posted to secure non-cleared security-based 
swaps, in a SIPA liquidation

[[Page 31021]]

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

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

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

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

    The Commission recognizes that a foreign security-based swap dealer 
that is not a broker-dealer but is a foreign bank with a branch or 
agency (as defined in Section 1(b) of the International Banking Act of 
1978) \539\ in the United States may not be eligible to be liquidated 
pursuant to the stockbroker liquidation provisions.\540\ Such foreign 
security-based swap dealer's insolvency proceeding in the United States 
would be administered under banking regulations.\541\ Nevertheless, the 
Commission preliminarily believes that imposing segregation 
requirements on such foreign security-based swap dealer when it 
receives collateral from U.S. person counterparties would reduce the 
likelihood of U.S. person counterparties incurring losses by helping 
identify U.S. customers' assets in an insolvency proceeding of such 
foreign security-based swap dealer in the United States and would 
potentially minimize disruption to the U.S. security-based swap market, 
thereby producing potential benefits to the U.S. financial system and 
U.S. counterparties that are consistent with the objectives of the 
Dodd-Frank Act.
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    \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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c. Cleared Security-Based Swaps
    In applying the segregation requirements to a foreign security-
based swap dealer with respect to cleared security-based swap 
transactions, the Commission also proposes to distinguish among: (1) a 
foreign security-based swap dealer that is a registered broker-dealer; 
(2) a foreign security-based swap dealer that is not a registered 
broker-dealer and is not a foreign bank with a branch or agency in the 
United States; and (3) a foreign security-based swap dealer that is a 
foreign bank with a branch or agency in the United States. In the 
following paragraphs, we will discuss how we propose to apply the 
segregation requirements to foreign security-based swap dealers in each 
of these categories with respect to assets held by them as collateral 
to secure cleared security-based swaps.
i. Foreign Security-Based Swap Dealer That Is a Registered Broker-
Dealer
    The proposed rule would apply segregation requirements to a foreign 
security-based swap dealer that is a registered broker-dealer with 
respect to assets received from all counterparties to secure cleared 
security-based swaps.\542\ As stated above, Section 3E(g) of the 
Exchange Act extends customer protection under the stockbroker 
liquidation provisions to all cleared security-based swap 
counterparties and to all non-cleared security-based swap 
counterparties, with respect to which there is a customer protection 
requirement under Section 15(c)(3) of the Exchange Act.\543\ Therefore, 
all security-based swap counterparties of a foreign security-based swap 
dealer that is a registered broker-dealer are customers under the 
stockbroker liquidation provisions.\544\ In the absence of a Commission 
requirement that a foreign security-based swap dealer that is a 
registered broker-dealer segregate all cleared security-based swap 
counterparties' collateral, if such an entity were liquidated pursuant 
to SIPA, the amount of assets segregated could be less than the 
combined priority claims of all security-based swap customers, 
potentially resulting in losses to customers. Therefore, the Commission 
proposes to subject a foreign security-based swap dealer who is a 
registered broker-dealer to segregation requirements set forth in 
Section 3E of the Exchange Act, and rules and regulations thereunder, 
with respect to assets received from all counterparties to secure 
cleared security-based swaps.
---------------------------------------------------------------------------

    \542\ Proposed Rule 18a-4(e)(2)(i) under the Exchange Act.
    \543\ See Section III.C.4(b)ii.b, supra.
    \544\ A non-cleared security-based swap counterparty would be a 
customer of a foreign security-based swap dealer that is a 
registered broker-dealer and have a pro rata priority claim to 
customer property under the stockbroker liquidation provisions 
unless it affirmatively waives segregation altogether by executing 
an unconditional subordination agreement pursuant to proposed Rule 
18a-4(d)(ii) under the Exchange Act, or elects individual 
segregation pursuant to Section 3E(f) of the Exchange Act by 
executing a conditional subordination agreement pursuant to proposed 
Rule 18a-4(d)(i) under the Exchange Act.
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ii. Foreign Security-Based Swap Dealer That Is Not a Registered Broker-
Dealer and Is Not a Foreign Bank With Branch or Agency in the United 
States
    If a foreign security-based swap dealer is not a registered broker-
dealer and is not a foreign bank that has a branch or agency (as 
defined in Section 1(b) of the International Banking Act of 1978) in 
the United States, such foreign security-based swap dealer may be 
eligible to be

[[Page 31022]]

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

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

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

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

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

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

[[Page 31023]]

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

[[Page 31024]]

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

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

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

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

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

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

     What would be the market impact of the proposed approach 
to application of the transaction-level requirements relating to 
customer protection and segregation? How would the proposed application 
of transaction-level requirements affect the competitiveness of U.S. 
entities in the global marketplace (both in the United States as well 
as in foreign jurisdictions)? Would the proposed approach place any 
market participants at a competitive disadvantage or advantage? If so, 
please explain. Would the proposed approach be a more general burden on 
competition? If so, please explain. What other measures should the 
Commission consider to implement the transaction-level requirements? 
What would be the market impacts and competitiveness effects of 
alternatives to the proposed approach discussed in this release?
5. Application of Entity-Level Rules
(a) Introduction
    As noted above, by their very nature, entity-level requirements 
apply to the operation of a security-based swap dealer as a whole. The 
Commission recognizes that the capital, margin, and other entity-level 
requirements that it adopts could have a substantial impact on 
international commerce and the relative competitive position of 
intermediaries operating in various, or multiple, jurisdictions. In 
particular, if these requirements are substantially more or less 
stringent than corresponding requirements, if any, that apply to 
intermediaries operating in security-based swap markets outside the 
United States, depending on how the rules are written, these 
differences could impact the ability of firms based in the United 
States to participate in non-U.S. markets, access to U.S. markets by 
foreign-based firms, and how and whether international firms make use 
of global ``booking entities'' to centralize risks related to security-
based swaps, among other possible impacts. These issues have been the 
focus of numerous comments to the Commission and other regulators, as 
discussed above, as well as Congressional inquiries and other public 
dialogue.
(b) Proposed Approach
    The Commission is not proposing to provide specific relief for 
foreign security-based swap dealers from Title VII entity-level 
requirements, although, as discussed in Section XI below, under a 
Commission substituted compliance determination, a foreign security-
based swap dealer would be able to satisfy relevant Title VII entity-
level requirements by substituting compliance with corresponding 
requirements under a foreign regulatory system.\556\ The Commission 
preliminarily believes that entity-level requirements are core 
requirements of the Commission's responsibility to ensure the safety 
and soundness of registered security-based swap dealers.\557\ The 
Commission preliminarily believes that it would not be consistent with 
this mandate to provide a blanket exclusion to foreign security-based 
swap dealers from entity-level requirements applicable to such 
entities.\558\
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    \556\ See Section XI, infra.
    \557\ See note 419, supra.
    \558\ We preliminarily believe that the proposed approach with 
respect to entity-level requirements is not being applied to persons 
who are ``transact[ing] a business in security-based swaps without 
the jurisdiction of the United States,'' within the meaning of 
Section 30(c) of the Exchange Act. See Section II.B.2(a), supra. 
However, the Commission also preliminarily believes that the 
proposed approach with respect to entity-level requirements is 
necessary or appropriate to help prevent the evasion of the 
particular provisions of the Exchange Act that were added by the 
Dodd-Frank Act that are being implemented by the proposed approach 
and prophylactically will help ensure that the purposes of those 
provisions of the Dodd-Frank Act are not undermined. See Section 
II.B.2(e), supra; see also Section II.B.2(c), supra.
    For example, if entity-level requirements do not apply to the 
entire business of a registered foreign security-based swap dealer, 
then U.S. security-based swap dealers would have an incentive to 
evade the full application of the entity-level requirements by 
moving their operations outside the United States. In this event, 
assuming the scope of the security-based swap dealers dealing 
activity remained unchanged, the risk presented by the entity to its 
U.S. counterparties and the U.S. financial system would remain 
unchanged. If, for instance, Title VII margin requirements did not 
apply to the entire entity, these entities could accumulate risk 
through their non-U.S. dealing activity and transmit that risk to 
U.S. counterparties in contravention of the purposes of the 
financial responsibility framework established by the Dodd-Frank 
Act. See Section III.C.3(b)ii, supra.
---------------------------------------------------------------------------

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

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

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

[[Page 31025]]

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

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

Request for Comment
    The Commission requests comment on all aspects of the proposed 
interpretive guidance regarding the proposed provision of substituted 
compliance for certain requirements in Section 15F of the Exchange Act 
for foreign security-based swap dealers, including the following:
     What types of conflicts might a foreign security-based 
swap dealer face if subjected to capital requirements in more than one 
jurisdiction? In what situations would compliance with more than one 
capital requirement be difficult or impossible?
     Should the Commission provide specific relief to foreign 
security-based swap dealers with respect to entity-level requirements? 
If so, please indicate the specific relief that should be provided and 
the rationale for providing such relief.
     Would the provision of relief from entity-level 
requirements undermine the Commission's efforts to set capital 
requirements to ensure the safety and soundness of security-based swap 
dealers, as required by Section 15F(e)(2)(C) of the Exchange Act? Why 
or why not?
     Should the Commission treat margin as an entity-level 
requirement or a transaction-level requirement? If only a transaction-
level requirement, why?
     Should the Commission consider providing relief for 
foreign security-based swap dealers from the statutory disqualification 
requirement in Section 15F(b)(6) of the Exchange Act with respect to 
their transactions with non-U.S. persons? For example, should the 
Commission permit associated persons of a foreign security-based swap 
dealer that are subject to a statutory disqualification to conduct 
security-based swap activity with non-U.S. persons outside the United 
States? If so, why?
     The CFTC has proposed an interpretation that categorizes 
certain entity-level requirements and transaction-level requirements 
differently when compared to the Commission's proposed approach.\563\ 
For example, the CFTC has proposed classifying margin requirements 
applicable to uncleared swaps as a transaction-level requirement, where 
the Commission has proposed categorizing margin as an entity-level 
requirement. Should the Commission adopt portions of the CFTC's 
approach to categorization? If so, which requirements should be re-
categorized and why?
---------------------------------------------------------------------------

    \563\ See CFTC Cross-Border Proposal, 77 FR 41223-27.
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     What would be the market impact of the proposed approach 
to applying entity-level requirements to registered foreign security-
based swap dealers? How would the proposed application of the entity-
level requirements affect the competitiveness of U.S. entities in the 
global marketplace (both in the United States as well as in foreign 
jurisdictions)? Would the proposed approach place any market 
participants at a competitive disadvantage or advantage? If so, please 
explain. Would the proposed approach be a more general burden on 
competition? If so, please explain. What other measures should the 
Commission consider to implement the entity-level requirements? What 
would be the market impacts and competitiveness effects of alternatives 
to the proposed approach discussed in this release?

D. Intermediation

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

[[Page 31026]]

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

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

[[Page 31027]]

business conduct requirements are complied with, margin is collected 
and segregated, and required trading records are maintained and 
available, to be undertaken by each entity depending on the 
intermediation model it adopts.\574\
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    \574\ The agent, in these circumstances, would need to consider 
whether it separately would need to register as a security-based 
swap dealer (if, for example, the agent acted as principal in a 
security-based swap with the counterparty, and then entered into a 
back-to-back transaction with the booking entity), a broker (e.g., 
by soliciting or negotiating the terms of security-based swap 
transactions), or other regulated entity. Further, the allocation of 
functions between a foreign security-based swap dealer and a U.S. 
agent would not affect the aggregation calculation for determining 
whether the foreign security-based swap dealer exceeded the de 
minimis threshold. See Section III.B.3(c), supra.
---------------------------------------------------------------------------

    Further, although a foreign security-based swap dealer could use an 
entity that is not a security-based swap dealer to act as its agent, 
the foreign security-based swap dealer would nonetheless be responsible 
for ensuring compliance with all the requirements applicable to 
security-based swap dealers under Title VII (and the federal securities 
laws) whether or not the regulated activities were carried out by the 
foreign security-based swap dealer or its non-security-based swap 
dealer agent.\575\
---------------------------------------------------------------------------

    \575\ See note 574, supra.
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Request for Comment
    The Commission requests comment on all aspects of the proposed 
approach to intermediation. In addition, the Commission requests 
comment in response to the following questions:
     Should the Commission revise our proposed approach to 
address directly the concerns of entities using the intermediation 
model to access the U.S. market? If so, what type of approach should 
the Commission use to address these concerns consistent with the 
protection of counterparties' interests and the purposes of Title VII?
     Should the Commission adopt a model on intermediation 
similar to the approach laid out in Rule 15a-6(a)(3) (17 CFR 240.15a-
6(a)(3)) governing foreign broker-dealers, which would permit non-U.S. 
persons to conduct security-based swap dealing activity within the 
United States without registering with the Commission if those 
transactions were intermediated by a registered U.S. security-based 
swap dealer? If so, how would it work in the security-based swap 
context, and how would it address Title VII policy concerns?
     What would be the market impact of the proposed approach 
to intermediation? How would the application of the proposed approach 
to intermediation affect the competitiveness of U.S. entities in the 
global marketplace (both in the United States as well as in foreign 
jurisdictions)? Would the proposed approach place any market 
participants at a competitive disadvantage or advantage? If so, please 
explain. Would the proposed approach be a more general burden on 
competition? If so, please explain. What other measures should the 
Commission consider to implement the proposed approach to 
intermediation? What would be the market impacts and competitiveness 
effects of alternatives to the proposed approach discussed in this 
release?

E. Registration Application Re-Proposal

1. Introduction
    As discussed in Section XI.C below, the Commission is proposing a 
rule that would create a framework under which the Commission would 
consider permitting a foreign security-based swap dealer, where 
appropriate, to rely on a substituted compliance determination by the 
Commission with respect to certain of the requirements in Section 15F 
of the Exchange Act and the rules and regulations thereunder.\576\ In 
discussing the application of this proposed framework below, the 
Commission indicated that certain entity-level requirements under 
Section 15F of the Exchange Act may be candidates for substituted 
compliance determinations.\577\
---------------------------------------------------------------------------

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

[[Page 31028]]

with the Commission, states, and SROs.\582\ Forms SBSE-A and SBSE-BD 
are shorter forms that have been modified to provide a more streamlined 
application process for entities that are registered or registering 
with the CFTC or registered or registering with the Commission as a 
broker-dealer.\583\ Each of these forms is designed to be used to 
gather information concerning a registrant's business operations to 
facilitate the Commission's initial registration decisions, as well as 
ongoing examination and monitoring of registration.'' \584\ While the 
Commission received four comments on the Registration Proposing 
Release, only one specifically expressed views on the Forms SBSE, SBSE-
A, and SBSE-BD.\585\
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    \581\ See id. at 65784.
    \582\ See id. at 65802.
    \583\ See id. at 65804-5.
    \584\ See id. at 65802.
    \585\ See SIFMA Letter II. SIFMA indicated that it appreciated 
``the Commission's attempts to minimize registration burdens by 
aligning its proposed registration requirements for SBSDs and MSBSPs 
with those the CFTC is proposing for swap dealers and major swap 
participants as well as by creating a streamlined registration 
process for entities already registered with the Commission or the 
CFTC,'' and was ``generally pleased that the Commission elected to 
make its existing broker-dealer registration forms the basis for its 
proposed registration requirements for SBSDs and MSBSPs'' because 
``[m]arket participants are familiar with these requirements and 
may, in some cases, be registering broker-dealers as SBSDs.'' 
However, SIFMA did object to ``several of the required disclosures 
on proposed Form SBSE,'' which are substantially similar to 
disclosures required on Form BD, which it claimed would ``impose 
significant burdens on registrants.''
---------------------------------------------------------------------------

2. Discussion
    To address the Commission's proposed rule regarding substituted 
compliance, the Commission is re-proposing Forms SBSE, SBSE-A, and 
SBSE-BD to add two questions to Form SBSE and Form SBSE-A, add one 
question to all three Forms, and to modify Schedule F to all the Forms. 
In addition, we are proposing one new instruction to the Forms, which 
is unrelated to substituted compliance, to clarify that if an 
application is not filed properly or completely, it may be delayed or 
rejected.\586\ Key differences from the originally proposed forms are 
discussed more fully below. The Commission is not proposing to modify 
or eliminate any of the other Forms, or any of the rules, proposed in 
the Registration Proposing Release.
---------------------------------------------------------------------------

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

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

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

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

[[Page 31029]]

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

A. Introduction

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

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

[[Page 31030]]

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

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

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

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

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

[[Page 31031]]

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

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

    \614\ See note 610, supra.
    \615\ See Section III.B.6, supra.
    \616\ See note 610, supra.
    \617\ See note 177 and accompanying text, supra.
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    In addition, as stated above, the U.S. person definition applies to 
the entire entity, including its branches and offices that may be 
located in a foreign jurisdiction.\618\ Therefore, under the proposed 
approach, a non-U.S. person would need to include its security-based 
swap transactions with foreign branches of U.S. banks when calculating 
its security-based swap positions for purposes of the major security-
based swap participant definition.
---------------------------------------------------------------------------

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

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

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

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

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

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

[[Page 31032]]

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

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

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

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

[[Page 31033]]

a guarantee on performance of the security-based swap obligations of a 
U.S. person would attribute to itself all of the U.S. person's 
security-based swap positions that are guaranteed by the non-U.S. 
person guarantor for purposes of determining the non-U.S. person 
guarantor's major security-based swap participant status.\632\
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    \630\ See note 610, supra.
    \631\ See Intermediary Definitions Adopting Release, 77 FR 30730 
(discussing the limited circumstances where attribution of 
guaranteed security-based swap positions of a U.S. person to the 
guarantor would not apply).
    \632\ See note 629, supra.
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    By contrast, where a non-U.S. person provides a guarantee on 
performance of the security-based swap obligations of another non-U.S. 
person (e.g., a non-U.S. holding company providing a guarantee on 
performance of the obligations owed by its non-U.S. subsidiary under 
security-based swaps entered into by the non-U.S. subsidiary), the 
ultimate counterparty credit risk associated with the transaction would 
generally reside outside of the United States with the non-U.S. 
guarantor. In this scenario, the potential impact on the U.S. financial 
system would be limited to transactions entered into by the guaranteed 
non-U.S. person with U.S. person counterparties. Therefore, the 
Commission preliminarily believes that, other than in the limited 
circumstances described below,\633\ where a non-U.S. person guarantees 
performance on the security-based swap transactions of another non-U.S. 
person, the non-U.S. guarantor need only attribute to itself such 
guaranteed security-based swap transactions entered into with U.S. 
person counterparties for purposes of determining its major security-
based swap participant status.\634\
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    \633\ See Section IV.C.2(c), infra (discussing the limited 
circumstances where attribution of guaranteed security-based swap 
positions of a non-U.S. person to the guarantor would not apply).
    \634\ Where a non-U.S. person guarantor is required to attribute 
to itself the security-based swap positions entered into by a non-
U.S. person that are guaranteed by the first non-U.S. person, the 
guaranteed non-U.S. person also would be required to consider all 
security-based swap transactions entered into by itself with U.S. 
person counterparties for purposes of determining its major 
security-based swap participant status in accordance with proposed 
Rule 3a67-10(c)(2) under the Exchange Act. See Section IV.C.1, supra 
(discussing proposed Rule 3a67-10(c) under the Exchange Act). Once 
the guaranteed non-U.S. person becomes a major security-based swap 
participant and registers with the Commission, the non-U.S. 
guarantor would no longer be required to attribute to itself the 
security-based swap positions entered into by the guaranteed non-
U.S. person. See Intermediary Definitions Adopting Release, 77 FR 
30689.
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(c) Limited Circumstances Where Attribution of Guaranteed Security-
Based Swap Positions Does Not Apply
    In addition to setting forth general principles regarding the 
attribution of guaranteed swap or security-based swap positions to the 
guarantor for the major participant definitions, the Intermediary 
Definitions Adopting Release also provided interpretive guidance 
related to the limited circumstances under which attribution of 
guaranteed swap or security-based swap positions is not required.\635\ 
Specifically, it stated that even in the presence of a guarantee, it is 
not necessary to attribute a person's swap or security-based swap 
positions to a parent or other guarantor if the person already is 
subject to capital regulation by the Commission or the CFTC (i.e., swap 
dealers, security-based swap dealers, major swap participants, major 
security-based swap participants, FCMs, and broker-dealers) or if the 
person is a U.S. entity regulated as a bank in the United States.\636\ 
In providing this interpretive guidance, the Commission and the CFTC 
explained that the positions of those regulated entities already will 
be subject to capital and other requirements, making it unnecessary to 
separately address, via major participant regulations, the risks 
associated with guarantees of those positions of a regulated 
entity.\637\
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    \635\ See Intermediary Definitions Adopting Release, 77 FR 
30689.
    \636\ Id. This interpretive guidance applies to both U.S. 
persons and non-U.S. persons that are subject to registration and 
regulation in the enumerated categories.
    \637\ See Intermediary Definitions Adopting Release, 77 FR 
30689.
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    The Intermediary Definitions Adopting Release did not address the 
application of the interpretive guidance regarding attribution of 
guaranteed positions where a guarantee is provided to support a non-
U.S. person's performance on the obligations under security-based swaps 
in the cross-border context. The Commission preliminarily believes that 
the interpretation jointly adopted by the Commission and the CFTC in 
the Intermediary Definitions Adopting Release regarding security-based 
swap positions of a person subject to capital regulation by the CFTC or 
the Commission should equally apply to a non-U.S. person whose 
security-based swap positions are guaranteed by another person. 
Therefore, the Commission is proposing to interpret that it is not 
necessary to attribute a non-U.S. person's security-based swap 
positions to a parent or other guarantor if such non-U.S. person 
already is subject to capital regulation by the Commission or the CFTC 
(i.e., swap dealers, security-based swap dealers, major swap 
participants, major security-based swap participants, FCMs and broker-
dealers).
    In addition, in the cross-border context and with respect to a non-
U.S. person, if such non-U.S. person is not subject to capital 
regulation by the Commission or the CFTC, consistent with the rationale 
for the approach to attribution of security-based swap positions of a 
person that is a U.S. entity regulated as a bank in the United States, 
it would not be necessary to attribute such non-U.S. person's security-
based swap positions to its guarantor if such non-U.S. person is 
subject to capital standards that are consistent with the capital 
standards such non-U.S. person would have been subject to if such non-
U.S. person were a bank subject to the prudential regulators' capital 
regulation. Therefore, the Commission preliminarily believes that it is 
not necessary to attribute such non-U.S. person's security-based swap 
positions to its guarantor for purposes of determining the guarantor's 
major security-based swap participant status, if such non-U.S. person 
is subject to capital standards adopted by its home country supervisor 
that are consistent in all respects with the Capital Accord of the 
Basel Committee on Banking Supervision (the ``Basel Accord'').\638\ 
This proposed approach also is consistent with the capital standards 
proposed by the prudential regulators for a foreign bank that is a swap 
dealer, major swap participant, security-based swap dealer or major 
security-based swap participant, which require such foreign bank to 
comply with regulatory capital rules already made applicable to such 
foreign bank as part of the existing prudential regulatory regime.\639\ 
The Commission preliminarily believes that security-based swap 
positions of a non-U.S. person subject to foreign regulatory capital 
requirements consistent with the Basel Accord would be subject to risk-
based capital requirements that take into account the unique risks 
(including the

[[Page 31034]]

credit risk, market risk, and other risks) arising from security-based 
swap transactions, in such a way as to make it unnecessary to 
separately address, via major security-based swap participant 
regulation, the risks associated with guarantees of those security-
based swap positions.
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    \638\ This is consistent with the capital standards of the 
prudential regulators with respect to foreign banks that are bank 
holding companies subject to the Federal Reserve Board of Governors' 
supervision. See Sec.  225.2(r)(3) of the Regulation Y (``For 
purposes of determining whether a foreign banking organization 
qualifies under paragraph (r)(1) of this section: (A) A foreign 
banking organization whose home country supervisor . . . has adopted 
capital standards consistent in all respects with the Capital Accord 
of the Basle Committee on Banking Supervision (Basle Accord) may 
calculate its capital ratios under the home country standard . . 
.''), 12 CFR 225.2(r)(3).
    \639\ See Prudential Regulator Margin and Capital Proposal, 76 
FR 27582 (``The proposed rule generally requires a covered swap 
entity to comply with regulatory capital rules already made 
applicable to that covered swap entity as part of its prudential 
regulatory regime. . . . In the case of a foreign bank or the U.S. 
branch or agency of a foreign bank, the capital rules that are made 
applicable to such covered entity pursuant to Sec.  225.2(r)(3) of 
the Board's Regulation Y, 12 CFR 225.2(r)(3) . . .'').
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(d) Operational Compliance
    Finally, the Commission believes that it is necessary to provide 
interpretive guidance regarding operational compliance and the special 
issues that may result from the attribution of security-based swap 
positions to a parent or guarantor. As the Commission and the CFTC 
noted in the Intermediary Definitions Adopting Release, these include 
issues regarding the application of the transaction-focused 
requirements applicable to registered major participants (e.g., certain 
requirements related to trading records and transaction confirmations), 
given that the entity that is the direct counterparty to the swap or 
security-based swap may be better positioned to comply with those 
requirements.\640\ In the Intermediary Definitions Adopting Release, 
the Commission and the CFTC stated that ``an entity that becomes a 
major participant by virtue of swaps or security-based swaps directly 
entered into by others must be responsible for compliance with all 
applicable major participant requirements with respect to those swaps 
or security-based swaps (and must be liable for failures to comply), 
but may delegate operational compliance with transaction-focused 
requirements to entities that directly are party to the transactions. 
The entity that is the major participant, however, cannot delegate 
compliance duties with the entity-level requirements applicable to 
major participants (e.g., requirements related to registration and 
capital).'' \641\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

[[Page 31035]]

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

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

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

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

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

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

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

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

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

[[Page 31036]]

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

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

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

[[Page 31037]]

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

V. Security-Based Swap Clearing Agencies

A. Introduction

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

[[Page 31038]]

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

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

    \669\ 15 U.S.C. 78q-1(g).
    \670\ See Section II.B, supra.
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(a) Clearing Agencies Acting as CCPs
    Clearing agencies are broadly defined under the Exchange Act and 
undertake a variety of functions.\671\ One such function is to act as a 
CCP,\672\ which is an entity that interposes itself between the 
counterparties to a securities transaction. For example, when a 
security-based swap contract between two counterparties that are 
members of a CCP is executed and submitted for clearing, it is 
typically replaced by two new contracts--separate contracts between the 
CCP and each of the two original counterparties. At that point, the 
original counterparties are no longer counterparties to each other. 
Instead, each acquires the CCP as its counterparty, and the CCP assumes 
the counterparty credit risk of each of the original counterparties 
that are members of the CCP. Structured and operated appropriately, 
CCPs may improve the management of counterparty risk and may provide 
additional benefits such as multilateral netting of trades.\673\
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    \671\ Section 3(a)(23)(A) of the Exchange defines the term 
``clearing agency'' to mean any person who: (i) acts as an 
intermediary in making payments or deliveries or both in connection 
with transactions in securities; (ii) provides facilities for 
comparison of data respecting the terms of settlement of securities 
transactions, to reduce the number of settlements of securities 
transactions, or for the allocation of securities settlement 
responsibilities; (iii) acts as a custodian of securities in 
connection with a system for the central handling of securities 
whereby all securities of a particular class or series of any issuer 
deposited within the system are treated as fungible and may be 
transferred, loaned, or pledged by bookkeeping entry, without 
physical delivery of securities certificates (such as a securities 
depository); or (iv) otherwise permits or facilitates the settlement 
of securities transactions or the hypothecation or lending of 
securities without physical delivery of securities certificates 
(such as a securities depository). 15 U.S.C. 78c(a)(23)(A).
    \672\ See Clearing Agency Standards Adopting Release, 77 FR 
66221 n.17 (``[a]n entity that acts as a CCP for securities 
transactions is a clearing agency as defined in the Exchange Act and 
is required to register with the Commission'').
    \673\ See id.
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    Although technology and risk management practices frequently change 
and vary from CCP to CCP, the following are some of the functions 
performed by the subset of clearing agencies that are CCPs: \674\
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    \674\ The Commission does not believe that the opening and 
maintenance of bank accounts or investment accounts in the United 
States by a CCP that are not directly accessible by members of a 
security-based swap clearing agency constitutes the performance of 
functions of a CCP for these purposes. See, e.g., Exchange Act 
Release No. 39643 (Feb. 11, 1998), 63 FR 8232, 8234 (Feb. 18, 1998) 
(discussing a foreign unregistered clearing agency's use of a U.S. 
depository, which did not in and of itself trigger the registration 
requirement). In addition, the Commission does not believe that the 
use of U.S.-based persons to perform services on behalf of a CCP in 
the ordinary course of business that do not involve clearing agency 
functions (e.g., financial guaranties, banking services, or payroll 
operations) constitutes the performance of functions of a clearing 
agency.
---------------------------------------------------------------------------

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

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

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[[Page 31039]]

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

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

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

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

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

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

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[[Page 31040]]

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

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

VI. Security-Based Swap Data Repositories

A. Introduction

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

[[Page 31041]]

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

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

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

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

[[Page 31042]]

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

[[Page 31043]]

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

[[Page 31044]]

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

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

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

[[Page 31045]]

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

[[Page 31046]]

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

[[Page 31047]]

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

[[Page 31048]]

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

[[Page 31049]]

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

[[Page 31050]]

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

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

    Third, the requesting relevant authority must enter into a 
supervisory and enforcement MOU or other arrangement with the 
Commission that addresses the confidentiality of the security-based 
swap information provided and any other matters as determined by the 
Commission.\822\ For those entities not expressly identified in Section 
13(n)(5)(G) of the Exchange Act \823\ or the rules thereunder, such an 
MOU or other arrangement can be entered into during the Commission's 
determination process, as discussed in Section VI.C.3(b) above. On the 
other hand, entities expressly identified in Section 13(n)(5)(G) of the 
Exchange Act and the rules thereunder, which are not subject to the 
Commission's process to determine appropriate regulators, would need to 
enter into such an MOU or other arrangement to satisfy this condition 
of the Indemnification Exemption. The Commission anticipates that in 
determining whether to enter into such a supervisory and enforcement 
MOU or other arrangement with a relevant authority, the Commission will 
consider whether, among other things, the

[[Page 31051]]

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

[[Page 31052]]

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

[[Page 31053]]

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

VII. Security-Based Swap Execution Facilities

A. Introduction

    As discussed throughout this release, the market for security-based 
swaps is global in scope, with transactions in security-based swaps 
often involving counterparties in different jurisdictions. The 
Commission recognizes that, as a result, there may be uncertainty 
regarding the application of our proposed SB SEF registration 
requirements for a security-based swap market whose principal place of 
business is outside of the United States. The Commission believes, 
therefore, that guidance and clarification on the application of our 
proposed registration requirements would be useful with respect to 
security-based swap markets operating in the cross-border context.
    Under the Dodd-Frank Act, new Section 3D(a)(1) of the Exchange Act 
provides that ``no person may operate a facility for the trading or 
processing of security-based swaps, unless the facility is registered 
as a security-based swap execution facility or as a national securities 
exchange under this section.'' \831\ In our release proposing rules 
governing SB SEFs,\832\ the Commission expressed the view that the 
registration requirement of Section 3D(a)(1) would apply only to a 
facility that meets the definition of ``security-based swap execution 
facility'' in Section 3(a)(77) of the Exchange Act.\833\ The SB SEF 
Proposing Release, however, did not explicitly address the 
circumstances under which a foreign \834\

[[Page 31054]]

security-based swap market would be required to register with the 
Commission under Section 3D of the Exchange Act.\835\ As discussed 
below, the Commission herein proposes to interpret when the 
registration requirements of Section 3D of the Exchange Act would apply 
to a foreign security-based swap market.\836\ The Commission also 
discusses below the circumstances under which it may consider granting 
an exemption from registration for a foreign security-based swap 
market.
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    \831\ 15 U.S.C. 78c-4(a)(1).
    \832\ See SB SEF Proposing Release, 76 FR 10948. The proposed 
rules governing SB SEFs are contained in proposed Regulation SB SEF.
    \833\ See SB SEF Proposing Release, 76 FR 10949 n.10. Section 
3(a)(77) of the Exchange Act defines ``security-based swap execution 
facility'' to mean ``a trading system or platform in which multiple 
participants have the ability to execute or trade security-based 
swaps by accepting bids and offers made by multiple participants in 
the facility or system, through any means of interstate commerce, 
including any trading facility, that (A) facilitates the execution 
of security-based swaps between persons and (B) is not a national 
securities exchange.'' 15 U.S.C. 78c(a)(77).
    \834\ In using the terms ``foreign'' and ``non-resident'' in 
connection with a security-based swap market, the Commission intends 
that these terms refer to a security-based swap market that is not a 
U.S. person.
    \835\ In the SB SEF Proposing Release, the Commission 
contemplated that non-resident persons may apply for registration as 
a SB SEF. In this regard, the Commission proposed Rule 801(f) of 
Regulation SB SEF, which would require any non-resident person 
applying for registration as a SB SEF to certify and provide an 
opinion of counsel that it can, as a matter of law, provide the 
Commission with prompt access to its books and records and submit to 
onsite inspection and examination by representatives of the 
Commission. See SB SEF Proposing Release, 76 FR 11001.
    \836\ Entities that do not meet the definition of SB SEF may 
nonetheless be required to register in another capacity under the 
Exchange Act.
---------------------------------------------------------------------------

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

B. Registration of Foreign Security-Based Swap Markets

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

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

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

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

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

[[Page 31055]]

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

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

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

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

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

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

C. Registration Exemption for Foreign Security-Based Swap Markets

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

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

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

[[Page 31056]]

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

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

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

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

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

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

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

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

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

[[Page 31057]]

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

[[Page 31058]]

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

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

A. Background

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

[[Page 31059]]

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

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

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

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

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

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

    The Commission has received and continues to consider comments on 
the Regulation SBSR Proposing Release that address areas other than 
those relating to cross-border security-based swap activity. In this 
release, the Commission is re-proposing only changes relating to cross-
border security-based swap activity, technical and conforming changes 
necessitated by these larger revisions, and certain other minor changes 
that would help to clarify these re-proposed revisions (such as 
numbering each definition in re-proposed Rule 900, so that each defined 
term can more readily be identified). Changes to Regulation SBSR in 
other areas could, if appropriate, be addressed in a future 
release.\872\
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    \872\ For example, the Commission in the Regulation SBSR 
Proposing Release did not propose how to define a ``block trade.'' 
As noted in Regulation SBSR Proposing Release, the Commission 
intends to do so in a separate proposal. See Regulation SBSR 
Proposing Release, 75 FR 75228.
---------------------------------------------------------------------------

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

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

    Rule 900 of re-proposed Regulation SBSR contains a revised 
definition of ``U.S. person.'' As initially proposed, ``U.S. person'' 
was defined as ``a natural person that is a U.S. citizen or U.S. 
resident or a legal person that is organized under the corporate laws 
of any part of the United States or has its principal place of business 
in the United States.'' Two persons who commented specifically on the 
Regulation SBSR proposal \873\ argued that ``U.S. person'' as used in 
the Commission's Title VII rules should have the same definition as in 
Regulation S.\874\
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    \873\ See Cleary Letter III at 2, 6-9; Davis Polk Letter I at 
note 6 (arguing that using the existing Regulation S definition, 
rather than creating a new definition, ``would avoid confusion and 
also provide consistency of application'').
    \874\ 17 CFR 230.901 to 230.905.
---------------------------------------------------------------------------

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

[[Page 31060]]

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

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

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

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

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

C. Additional Modifications to Scope of Regulation SBSR

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

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

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

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

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

[[Page 31061]]

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

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

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

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

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

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

[[Page 31062]]

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

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

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

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

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

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

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

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

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

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

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

[[Page 31063]]

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

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

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

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

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

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

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

[[Page 31064]]

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

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

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

[[Page 31065]]

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

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

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

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

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

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

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

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

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

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

[[Page 31066]]

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

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

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

[[Page 31067]]

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

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

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

E. Other Technical and Conforming Changes

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

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

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

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

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

[[Page 31068]]

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

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

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

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

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

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

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

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

[[Page 31069]]

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

F. Cross-Border Inter-Affiliate Transactions

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

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

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

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

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

[[Page 31070]]

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

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

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

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

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

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

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

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

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

    \940\ See Cleary Letter II at 17-18; Multiple Associations 
Letter IV at 16.
    \941\ See Multiple Associations Letter IV at 12 (``The market-
facing swaps already will have been reported and therefore, to 
require that inter-affiliate swaps also be reported will duplicate 
information'').
    \942\ Re-proposed Rule 908(a)(2) of Regulation SBSR would 
describe when a cross-border security-based swap would be subject to 
public dissemination.
    \943\ See id.
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    As described above, commenters also raised a general concern about 
the potential for duplicative and conflicting regulation of cross-
border inter-affiliate transactions. The Commission is sensitive to 
these concerns both generally and in the context of public 
dissemination.\944\ The treatment of these issues in connection with 
public dissemination is not dissimilar to their treatment in other 
contexts under Title VII, including the context of regulatory 
reporting. Accordingly, the Commission preliminarily believes that the 
concern expressed by the commenters should be addressed by the proposed 
substituted compliance policy and framework discussed in detail below, 
as well as when the Commission considers the adopting release for 
public dissemination, which the Commission anticipates will address the 
issue of dissemination of inter-affiliate transactions.\945\
---------------------------------------------------------------------------

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

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

[[Page 31071]]

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

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

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

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

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

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

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

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

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

[[Page 31072]]

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

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

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

G. Foreign Privacy Laws Versus Duty To Report Counterparty ID

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

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

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

[[Page 31073]]

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

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

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

H. Foreign Public Sector Financial Institutions

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

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

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

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

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

[[Page 31074]]

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

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

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

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

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

Request for Comment
    As noted above, certain FPSFI commenters stated that carrying out 
their policy mandates would require confidentiality in certain 
circumstances.\981\ The Commission seeks additional information to 
assist our analysis of this issue, and requests answers to the 
following questions. In responding, please focus on the security-based 
swap market, not the market for other swaps. In addition, commenters 
are requested to answer only with respect to security-based swap 
activity that would be subject to Regulation SBSR, and not with respect 
to activity that, because of the place where the transaction is 
conducted or the nationality of the counterparties, would not be 
subject to Regulation SBSR in any case:
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    \981\ See BIS Letter at 5; ECB Letter at 3.
---------------------------------------------------------------------------

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

I. Summary and Additional Request for Comment

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

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

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

[[Page 31075]]

cross-border issues related to regulatory reporting and public 
dissemination might differ from the CFTC's cross-border guidance on 
these matters.\983\ For example, the CFTC Cross-Border Proposal 
provides that a swap between two unregistered non-U.S. persons, each of 
which is guaranteed by a U.S. person, would not be subject to 
regulatory reporting or public dissemination requirements.\984\ The 
Commission, on the other hand, is proposing that a security-based swap 
between two such direct counterparties would be subject to both 
regulatory reporting and public dissemination requirements.\985\ 
Furthermore, the CFTC Cross-Border Proposal provides that a swap 
between, on one side, an unregistered non-U.S. person that is 
guaranteed by a U.S. person and, on the other side, an unregistered 
non-U.S. person that is not guaranteed by a U.S. person also would not 
be subject to regulatory reporting or public dissemination 
requirements.\986\ The Commission is proposing that a security-based 
swap between two such direct counterparties would be subject to 
regulatory reporting \987\ (but, in accord with the CFTC's proposal, 
not subject to public dissemination). Please describe any other 
differences that you believe might exist and what would be the impact 
of any such differences.
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    \983\ See note 21, supra.
    \984\ See CFTC Cross-Border Proposal, 77 FR 41237-38.
    \985\ See re-proposed Rules 908(a)(1)(ii) and 908(a)(2)(ii) of 
Regulation SBSR.
    \986\ See CFTC Cross-Border Proposal, 77 FR 41237-38.
    \987\ See re-proposed Rule 908(a)(1)(ii) of Regulation SBSR.
---------------------------------------------------------------------------

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

IX. Mandatory Security-Based Swap Clearing Requirement

A. Introduction

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

    \988\ 15 U.S.C. 78c-3(a)(1). Section 3C of the Exchange Act 
further requires the Commission to review each security-based swap 
(or any group, category, type, or class of security-based swaps) to 
make a determination that such security-based swap (or group, 
category, type, or class of security-based swap) should be required 
to be cleared. 15 U.S.C. 78c-3(b). The Commission has adopted final 
rules regarding process for submissions for review of security-based 
swaps for mandatory clearing and notice filing requirements for 
clearing agencies. See Clearing Procedures Adopting Release, 77 FR 
41602. The proposed application of the mandatory clearing 
requirement in the cross-border context does not address, in any 
respect, our obligation to review security-based swaps and make 
mandatory clearing determinations under Section 3C(b) of the 
Exchange Act.
    \989\ The mandatory clearing requirement in Section 3C(a)(1) of 
the Exchange Act will not apply unless and until the Commission 
makes a determination that a security-based swap is required to be 
cleared, and the Commission has not yet made any such 
determinations. In addition, the registration requirement for 
security-based swap clearing agencies in Section 17A(g) of the 
Exchange Act is not yet effective because further rulemaking is 
required regarding registration of and standards for security-based 
swap clearing agencies. See 15 U.S.C. 78q-1(i) and (j). The 
Commission recently adopted rules to establish minimum requirements 
for registered clearing agency risk management practices and 
operations. The rules identify certain minimum standards for all 
clearing agencies, including clearing agencies that clear security-
based swaps. See Clearing Agency Standards Adopting Release, 77 FR 
66220. The Commission continues to consider additional standards for 
adoption, including standards for confidentiality of trading 
information, conflicts of interest, and members of clearing agency 
boards of directors or committees, as outlined in the proposing 
release for clearing agency standards. See Exchange Act Release No. 
64017 (Mar. 3, 2011), 76 FR 14472 (Mar. 16, 2011). Any new rules 
governing security-based swap clearing agencies could also affect 
counterparties that are required to clear security-based swaps.
    \990\ See, e.g., Section V, supra (discussing the registration 
requirement in Section 17A(g) of the Exchange Act for security-based 
swap clearing agencies); see also the general discussion of the 
Commission's approach to applying Title VII to cross-border 
activities in Section II.B, supra.
    \991\ See Testimony Regarding Reducing Risks and Improving 
Oversight in the OTC Credit Derivatives Market Before the Subcomm. 
on Secs., Ins., & Inv., of the S. Comm. on Banking, Hous., & Urban 
Affairs, 110th Cong. (2008) (statement of James A. Overdahl, Chief 
Economist, Commission), available at: 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.
---------------------------------------------------------------------------

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

[[Page 31076]]

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

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

B. Summary of Comments

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

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

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

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

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

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

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

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

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

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

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

[[Page 31077]]

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

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

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

1. Statutory Framework
    By its terms, the mandatory clearing requirement in Section 
3C(a)(1) of the Exchange Act applies to any person that ``engage[s] in 
a security-based swap . . . if the security-based swap is required to 
be cleared.'' \1011\ We are proposing to apply the statutory language 
``engage in a security-based swap'' to mean any transaction in which a 
U.S. person is a counterparty \1012\ to a security-based swap or 
guarantees the performance of a non-U.S. person under a security-based 
swap because of the involvement of a U.S. person in the 
transaction.\1013\ We also are proposing to apply the statutory 
language ``engage in a security-based swap'' to include any transaction 
in which a person performs any of the activities that are key stages in 
a security-based swap transaction (i.e., solicitation, negotiation, 
execution, or booking of the transaction) \1014\ within the United 
States. As we noted above, a ``transaction conducted within the United 
States,'' as defined in proposed Rule 3a71-3(a)(5), includes 
soliciting, negotiating, executing, or booking a security-based swap 
transaction.\1015\ Accordingly, subject to certain statutory exceptions 
\1016\ and certain other exceptions described below,\1017\ we are 
proposing to apply the mandatory clearing requirement to any person 
that engages in a security-based swap transaction in which at least one 
of the counterparties to the transaction is a U.S. person or a non-U.S. 
person whose performance under the security-based swap is guaranteed by 
a U.S. person, or if the transaction is a ``transaction conducted 
within the United States,'' as defined in proposed Rule 3a71-3(a)(5) 
under the Exchange Act.\1018\
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    \1011\ Section 3C(a)(1) of the Exchange Act, 15 U.S.C. 78c-
3(a)(1).
    \1012\ The use of the term ``counterparty'' in the proposed rule 
is intended to refer to the direct counterparty to the security-
based swap transaction, not a party that provides a guarantee on the 
performance of the direct counterparty under the security-based 
swap. As discussed in Section VIII.C, supra, re-proposed Rules 
900(j) and (o) under the Exchange Act would define the term ``direct 
counterparty'' as ``a person that enters directly with another 
person into a contract that constitutes a security-based swap,'' and 
an ``indirect counterparty'' as ``a person that guarantees the 
performance of a direct counterparty to a security-based swap or 
that otherwise provides recourse to the other side for the failure 
of the direct counterparty to perform any obligation under the 
security-based swap.''
    \1013\ See Section II.B.2(d), supra (discussing the Commission's 
treatment of guarantees).
    \1014\ As noted above, solicitation, negotiation, execution, and 
booking are activities that represent key stages in a potential or 
completed security-based swap transaction. See note 310 and 
accompanying text, supra. Persons that conduct any of these 
activities would be considered to be ``engaged in a security-based 
swap'' under the Commission's proposed interpretation.
    \1015\ See Section III.B.6, supra.
    \1016\ The Exchange Act provides an exception from the mandatory 
clearing requirement in connection with security-based swaps that 
involve persons that are not financial entities and that use the 
security-based swaps to hedge or mitigate commercial risk. See 
Section 3C(g) of the Exchange Act, 15 U.S.C. 78c-3(g). The Exchange 
Act also provides exemptions from the clearing requirement for 
security-based swaps entered into prior to the enactment of the 
Dodd-Frank Act, and for security-based swaps entered into prior to 
the application of the clearing requirement, so long as those 
instruments are reported to a registered SDR. See Sections 3C(e)(1) 
and (f)(1) of the Exchange Act, 15 U.S.C. 78c-3(e)(1) and (f)(1) 
(pre-enactment security-based swaps); Sections 3C(e)(2) and (f)(2) 
of the Exchange Act, 15 U.S.C. 78c-3(e)(2) and (f)(2) (post-
enactment security-based swaps entered into prior to the application 
of the clearing requirement).
    \1017\ See Sections IX.C.3(a)ii and IX.C.3(b)ii, infra.
    \1018\ Proposed Rule 3Ca-3(a) under the Exchange Act.
---------------------------------------------------------------------------

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

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

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

[[Page 31078]]

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

    \1022\ Proposed Rule 3Ca-3(a)(1) under the Exchange Act. Under 
proposed Rule 3Ca-3(c) under the Exchange Act, the term ``U.S. 
person'' would have the same meaning as set forth in proposed Rule 
3a71-3(a)(7) under the Exchange Act, as discussed in Section 
III.B.5, supra.
    \1023\ Proposed Rule 3Ca-3(a)(2) under the Exchange Act. Under 
proposed Rule 3Ca-3(c) under the Exchange Act, the term 
``transaction conducted within the United States'' would have the 
same meaning as set forth in proposed Rule 3a71-3(a)(5) under the 
Exchange Act, as discussed in Section III.B.5, supra.
---------------------------------------------------------------------------

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

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

    \1027\ Proposed Rule 3Ca-3(b)(2) under the Exchange Act.
---------------------------------------------------------------------------

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

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

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

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

    \1031\ See note 1012, supra.
    \1032\ See note 1025, supra.
    \1033\ Proposed Rule 3Ca-3(a)(1)(ii) under the Exchange Act.
    \1034\ Proposed Rule 3Ca-3(b) under the Exchange Act.
---------------------------------------------------------------------------

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

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

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[[Page 31079]]

ii. Proposed Exception for Certain Transactions Involving Foreign 
Branches of U.S. Banks and Guaranteed Non-U.S. Persons
    The Commission is proposing an exception from the mandatory 
clearing requirement described above for certain transactions that 
involve foreign branches of a U.S. bank or guaranteed non-U.S. persons, 
provided the transactions are not conducted within the United States. 
Specifically, under the proposed rule, the mandatory clearing 
requirement would not apply to a security-based swap transaction if one 
counterparty to the transaction is a foreign branch of a U.S. bank 
\1037\ or a non-U.S. person whose performance under the security-based 
swap is guaranteed by a U.S. person and if the other counterparty to 
the transaction is a non-U.S. person (i) whose performance under the 
security-based swap is not guaranteed by a U.S. person and (ii) who is 
not a foreign security-based swap dealer.\1038\ Such exception would 
not apply if the security-based swap transaction were a transaction 
conducted within the United States, as defined in proposed Rule 3a71-
3(a)(5) under the Exchange Act.\1039\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

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

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

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

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

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[[Page 31080]]

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

    \1048\ Proposed Rule 3Ca-3(a)(2) under the Exchange Act.
    \1049\ See Section III.B.6, supra.
    \1050\ Proposed Rule 3Ca-3(a)(2) under the Exchange Act.
---------------------------------------------------------------------------

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

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

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

[[Page 31081]]

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

X. Mandatory Security-Based Swap Trade Execution Requirement

A. Introduction

    Section 3C(h)(1) of the Exchange Act requires, with respect to 
transactions involving security-based swaps subject to the clearing 
requirement in Section 3C(a)(1) of the Exchange Act, that 
counterparties execute such transactions on an exchange or a security-
based swap execution facility that is registered under Section 3D of 
the Exchange Act or exempt from registration under Section 3D(e) of the 
Exchange Act (the ``mandatory trade execution requirement'').\1052\ 
Section 3C(h) thus provides that security-based swap transactions 
subject to the mandatory trade execution requirement cannot be executed 
on an OTC basis, but must instead be executed on an exchange or 
security-based swap execution facility that is registered or exempt 
from registration under the Exchange Act, unless an exception 
applies.\1053\ As such, the mandatory trade execution requirement is 
important in helping to bring the trading of security-based swaps onto 
transparent, regulated markets, from more opaque OTC markets.\1054\
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    \1052\ 15 U.S.C. 78c-3(h)(1).
    \1053\ 15 U.S.C. 78c-3(h). Section 3C(h)(2) of the Exchange Act 
provides two exceptions to compliance with the mandatory trade 
execution requirement: (i) If no exchange or security-based swap 
execution facility makes the security-based swap available to trade; 
or (ii) if the security-based swap transaction is subject to the 
clearing exception under Section 3C(g) of the Exchange Act. 15 
U.S.C. 78c-3(h)(2). In this release, we are not addressing either of 
these exceptions, as they pertain to whether a particular security-
based swap is subject to the mandatory trade execution requirement. 
Our focus here is on the obligations of the counterparties to a 
transaction involving a security-based swap that is subject to the 
mandatory execution requirement where neither of these exceptions 
applies.
    \1054\ See SB SEF Proposing Release, 76 FR 10949 (``The current 
market for [security-based] swaps is opaque, with little, if any, 
pre-trade transparency (the ability of market participants to see 
trading interest prior to a trade being executed) or post-trade 
transparency (the ability of market participants to see transaction 
information after a trade is executed). A key goal of the Dodd-Frank 
Act is to bring trading of [security-based] swaps onto regulated 
markets . . . .'').
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    Because transactions in security-based swaps are often conducted 
globally with counterparties and intermediaries from multiple 
jurisdictions,\1055\ we recognize uncertainty may exist regarding how 
to apply the mandatory trade execution requirement to cross-border 
security-based swap transactions.\1056\ The

[[Page 31082]]

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

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

1. Statutory Framework
    Section 3C(h) of the Exchange Act provides that if a transaction is 
subject to the mandatory clearing requirement, counterparties shall 
execute the transaction on an exchange or on a registered or exempt SB 
SEF, unless an exception applies.\1061\ Section 3C(a)(1) of the 
Exchange Act provides that it shall be unlawful for any person ``to 
engage in a security-based swap unless that person submits such 
security-based swap for clearing . . . if the security-based swap is 
required to be cleared.'' \1062\ As discussed above, we are proposing 
to apply the statutory mandatory clearing requirement to any person who 
engages in a security-based swap transaction within the United 
States.\1063\ We preliminarily believe that, to the extent that a 
cross-border transaction is subject to the mandatory clearing 
requirement under the proposed approach described above, it also would 
be subject to the mandatory trade execution requirement unless it 
qualifies for an exception.\1064\ This approach is consistent with the 
statutory framework of Title VII of the Dodd-Frank Act, because a 
security-based swap transaction first must be subject to the mandatory 
clearing requirement before the counterparties to the transaction must 
comply with the mandatory trade execution requirement, unless an 
exception to the mandatory trade execution requirement applies. Thus, 
to the extent that we are proposing not to apply the mandatory clearing 
requirement to a particular transaction, the mandatory trade execution 
requirement would not apply to such transaction.
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    \1061\ See 15 U.S.C. 78c-3(h).
    \1062\ See 15 U.S.C. 78c-3(a)(1).
    \1063\ In Section IX above, the Commission proposes Rule 3Ca-3 
under the Exchange Act. Subject to certain exceptions, proposed Rule 
3Ca-3 would apply the mandatory clearing requirement to any person 
that engages in a security-based swap transaction in which at least 
one of the counterparties to the transaction is a U.S. person or a 
non-U.S. person whose performance under the security-based swap is 
guaranteed by a U.S. person, or if the transaction is a 
``transaction conducted within the United States,'' as defined in 
proposed Rule 3a71-3(a)(5) under the Exchange Act. See Section IX.C, 
supra, and Section III.B.6, supra (discussing proposed Rule 3a71-
3(a)(5)).
    \1064\ See note 1053, supra.
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2. Proposed Rule
    Consistent with our proposed rule applying the mandatory clearing 
requirement \1065\ and our general approach in applying Title VII in 
the cross-border context,\1066\ the Commission is proposing Rule 3Ch-1 
under the Exchange Act. Under the proposed rule, the mandatory trade 
execution requirement would apply to any person that engages in a 
security-based swap transaction in which at least one of the 
counterparties to the transaction is (i) a U.S. person \1067\ or (ii) a 
non-U.S. person whose performance under the security-based swap is 
guaranteed by a U.S. person.\1068\ We also are proposing to apply the 
mandatory trade execution requirement to any person that engages in a 
security-based swap if such transaction is a ``transaction conducted 
within the United States,'' as defined in proposed Rule 3a71-3(a)(5) 
under the Exchange Act.\1069\
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    \1065\ See proposed Rule 3Ca-3 under the Exchange Act.
    \1066\ See Section II.B, supra.
    \1067\ Under proposed Rule 3Ch-1(c) under the Exchange Act, the 
term ``U.S. person'' would have the same meaning as set forth in 
proposed Rule 3a71-3(a)(7) under the Exchange Act, as discussed in 
Section III.B.5 below.
    \1068\ Proposed Rule 3Ch-1(a)(1) under the Exchange Act.
    \1069\ Proposed Rule 3Ch-1(a)(2) under the Exchange Act.
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    To limit the scope of the proposal, we are proposing exceptions to 
the mandatory trade execution requirement in the following two 
scenarios: \1070\
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    \1070\ Consistent with our intent to apply the mandatory trade 
execution requirement in the same way as the mandatory clearing 
requirement, these exceptions are identical to the exceptions from 
the mandatory clearing requirement. See proposed Rule 3Ca-3(b) under 
the Exchange Act, as discussed in Section IX, supra.
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     If the security-based swap transaction is not a 
``transaction conducted within the United States,'' the proposed rule 
would not apply the mandatory trade execution requirement if one 
counterparty to the transaction is (i) a foreign branch of a U.S. bank 
\1071\ or (ii) a non-U.S. person whose performance under the security-
based swap is guaranteed by a U.S. person,\1072\ and if the other 
counterparty to the transaction is a non-U.S. person (i) whose 
performance under the security-based swap is not guaranteed by a U.S. 
person and (ii) who is not a foreign security-based swap dealer.\1073\
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    \1071\ Under proposed Rule 3Ch-1(c) under the Exchange Act, the 
term ``foreign branch'' would have the same meaning as set forth in 
proposed Rule 3a71-3(a)(1) under the Exchange Act. See discussion in 
Section III.B.7, supra. A security-based swap transaction conducted 
through a foreign branch, as defined in proposed Rule 3a71-3(a)(4) 
under the Exchange Act, would be specifically excluded from the 
proposed definition of ``transaction conducted within the United 
States.'' See proposed Rule 3a71-3(5)(ii) under the Exchange Act, as 
discussed in Section III.B.6, supra.
    \1072\ A security-based swap transaction involving a non-U.S. 
person whose performance under the security-based swap is guaranteed 
by a U.S. person would not be a ``transaction conducted within the 
United States'' by virtue of the guarantee alone because providing a 
guarantee on a transaction is not one of the factors that would 
cause a transaction to be a transaction conducted within the United 
States under proposed Rule 3a71-3(a)(5) under the Exchange Act. We 
would consider such transaction to be engaged in within the United 
States, however, by virtue of the guarantee from the U.S. person, 
who acts as an ``indirect counterparty'' to the transaction.
    \1073\ Proposed Rule 3Ch-1(b)(1) under the Exchange Act. 
Proposed Rule 3Ch-1(c) under the Exchange Act defines the term 
``foreign security-based swap dealer'' by cross-reference to the 
definition of that term in proposed Rule 3a71-3(a)(3) of the 
Exchange Act (defining ``foreign security-based swap dealer'' to 
mean ``a security-based swap dealer, as defined in section 3(a)(71) 
of the [Exchange] Act (15 U.S.C. 78c(a)(71)), and the rules and 
regulations thereunder, that is not a U.S. person'').
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     If the security-based swap transaction is a ``transaction 
conducted within the United States,'' the proposed rule would not apply 
the mandatory trade execution requirement if (i) neither counterparty 
to the transaction

[[Page 31083]]

is a U.S. person; (ii) neither counterparty's performance under the 
security-based swap is guaranteed by a U.S. person; and (iii) neither 
counterparty to the transaction is a foreign security-based swap 
dealer.\1074\
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    \1074\ Proposed Rule 3Ch-1(b)(2) under the Exchange Act.
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We discuss below the proposed rule regarding the application of the 
mandatory trade execution requirement in more detail.
3. Discussion
    In considering how to apply the mandatory trade execution 
requirement, we have relied primarily on the express statutory 
relationship between the mandatory clearing requirement and the 
mandatory trade execution requirement. The statutory text, in our view, 
indicates that Congress viewed the clearing and trade execution 
requirements as complementary, since a security-based swap transaction 
that is subject to the mandatory clearing requirement is subject to the 
mandatory trade execution requirement, absent circumstances that 
trigger one of the exceptions to the mandatory trade execution 
requirement. In the following, we discuss the proposed rule regarding 
the application of the mandatory trade execution requirement in more 
detail.
(a) Security-Based Swap Transactions Involving U.S. Persons or Non-U.S. 
Persons Receiving Guarantees From U.S. Persons
i. Proposed Rule
    The proposed rule would apply the mandatory trade execution 
requirement to transactions in which one of the counterparties is (i) a 
U.S. person or (ii) a non-U.S. person whose performance under the 
security-based swap is guaranteed by a U.S. person,\1075\ subject to 
certain exceptions.\1076\ We preliminarily believe that applying the 
mandatory trade execution requirement to transactions in which U.S. 
persons are counterparties or provide guarantees of the performance of 
non-U.S. persons under a security-based swap would be consistent with 
the purposes of the Dodd-Frank Act to improve transparency in the U.S. 
financial system.\1077\ As noted above, the mandatory trade execution 
requirement in Title VII is critical to this goal because this 
requirement is designed promote the trading of security-based swap 
transactions on transparent, regulated markets.\1078\ Therefore, by 
applying the mandatory trade execution requirement to transactions in 
which U.S. persons are counterparties or provide guarantees of the 
performance of non-U.S. persons under a security-based swap, the 
proposed rule would further the goals of the Dodd-Frank Act to improve 
the transparency of the U.S. financial system.\1079\
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    \1075\ Proposed Rules 3Ch-1(a)(1)(i) and (ii) under the Exchange 
Act.
    \1076\ Proposed Rule 3Ch-1(b) under the Exchange Act. See also 
note 1053, supra.
    \1077\ See Section II.B.2(d), supra (discussing guarantees in 
the cross-border context).
    \1078\ See note 1054, supra.
    \1079\ We preliminarily believe that the proposed approach with 
respect to the mandatory trade execution requirements is not being 
applied to persons who are ``transact[ing] a business in security-
based swaps without the jurisdiction of the United States,'' within 
the meaning of Section 30(c). See Section II.B.2(b), supra. However, 
the Commission also preliminarily believes that the proposed 
approach with respect to the mandatory trade execution requirements 
is necessary or appropriate to help prevent the evasion of the 
particular provisions of the Exchange Act that were added by the 
Dodd-Frank Act that are being implemented by the approach and 
prophylactically will help ensure that the purposes of those 
provisions of the Dodd-Frank Act are not undermined. See Section 
II.B.2(e), supra; see also Section II.B.2(d), supra.
    For example, if the mandatory trade execution requirement does 
not apply to a transaction among non-U.S. persons that receive 
guarantees from U.S. persons and foreign branches of U.S. banks, 
then U.S. persons would have an incentive to evade the mandatory 
trade execution requirement by conducting transactions with other 
U.S. persons through guaranteed foreign affiliates or foreign 
branches. Altering the form of the transaction in this manner would 
allow U.S. persons to continue to avail themselves of transparency 
in the U.S. security-based swap market while evading the 
requirements intended to enhance that transparency, even though the 
substance of the transaction remains unchanged. See note 1054 and 
accompanying text, supra.
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ii. Proposed Exception for Certain Transactions Involving Foreign 
Branches of U.S. Banks and Guaranteed Non-U.S. Persons
    Consistent with the Commission's proposed approach to the mandatory 
clearing requirement discussed above,\1080\ the Commission is proposing 
an exception from the mandatory trade execution requirement described 
above for certain transactions that involve foreign branches of U.S. 
banks or guaranteed non-U.S. persons, provided the transactions are not 
conducted within the United States. Specifically, under proposed Rule 
3Ch-1(b)(1), the mandatory trade execution requirement would not apply 
to a security-based swap transaction if one counterparty to the 
transaction is (i) a foreign branch of a U.S. bank \1081\ or (ii) a 
non-U.S. person whose performance under the security-based swap is 
guaranteed by a U.S. person and if the other counterparty to the 
transaction is a non-U.S. person (i) whose performance under the 
security-based swap is not guaranteed by a U.S. person and (ii) who is 
not a foreign security-based swap dealer.\1082\ Such exception would 
not apply if the security-based swap transaction were a transaction 
conducted within the United States, as defined in proposed Rule 3a71-
3(a)(5) under the Exchange Act.\1083\
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    \1080\ See Section IX, supra.
    \1081\ See note 1071, supra.
    \1082\ Proposed Rule 3Ch-1(b)(1) under the Exchange Act. See 
also note 1073, supra.
    \1083\ Proposed Rule 3Ch-1(b)(1) under the Exchange Act.
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    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\
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    \1084\ Id.
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    We recognize that imposing the mandatory trade execution 
requirement on a foreign branch of a U.S. bank or on a non-U.S. person 
whose performance under a security-based swap is guaranteed by a U.S. 
person would be consistent with the view that a foreign branch of a 
U.S. bank is part of a U.S. person \1085\ and that a U.S. guarantor is 
an indirect counterparty \1086\ to the transaction entered into by the 
guaranteed non-U.S. person. We also recognize that subjecting such 
transactions to the mandatory trade execution requirement could help to 
bring the trading of security-based swaps onto transparent, regulated 
markets, from more opaque OTC market. At the same time, however, 
imposing the mandatory trade execution requirement on U.S. persons that 
conduct their foreign security-based swap dealing activity through 
foreign branches or guaranteed non-U.S. persons, without any 
exceptions, could put such U.S. persons at a significant

[[Page 31084]]

competitive disadvantage to non-U.S. persons who conduct security-based 
swap business in the same foreign local market and thereby limit the 
access of such U.S. persons to foreign security-based swap markets. 
After balancing the various policy considerations, including the Dodd-
Frank Act's goal of promoting trading on transparent, regulated 
markets, we have preliminarily concluded that the proposed exception 
from the mandatory trade execution requirement for transactions by U.S. 
persons conducting security-based swap activity out of foreign 
branches, or transactions by guaranteed non-U.S. persons, with non-U.S. 
persons whose performance under the security-based swap is not 
guaranteed by a U.S. person (and who is not a foreign security-based 
swap dealer) is appropriate, provided that it is not a transaction 
conducted within the United States.
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    \1085\ See Section III.B.5, supra.
    \1086\ See note 1012, supra.
---------------------------------------------------------------------------

    This exception from the mandatory trade execution requirement would 
not apply under the proposed rule, however, when the non-U.S. person 
counterparty of the foreign branch of the U.S. bank or the guaranteed 
non-U.S. person is a foreign security-based swap dealer.\1087\ The 
reason for this proposed carve-out from the exception from the 
mandatory trade execution requirement is similar to the reason 
discussed above in the context of the mandatory clearing requirement. 
Because a foreign security-based swap dealer would necessarily have a 
significant connection with the U.S. security-based swap market because 
its dealing activity with U.S. persons or within the United States 
would trigger registration requirements, we preliminarily believe it is 
not appropriate to provide an exception for U.S. persons conducting 
security-based swap activity out of foreign branches or for guaranteed 
non-U.S. persons when they enter into security-based swaps with foreign 
security-based swap dealers.
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    \1087\ Proposed Rule 3Ch-1(b)(1)(ii)(B) under the Exchange Act.
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(b) Transactions Conducted Within the United States
i. Proposed Rule
    Under the proposed r