[Federal Register Volume 76, Number 14 (Friday, January 21, 2011)]
[Proposed Rules]
[Pages 3859-3874]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-1218]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-63727; File No. S7-03-11]
RIN 3235-AK91


Trade Acknowledgment and Verification of Security-Based Swap 
Transactions

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: In accordance with Section 764(a) of Title VII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act of 2010 (``Dodd-
Frank Act''), the Securities and Exchange Commission (``Commission'') 
is proposing rule 15Fi-1 under the Securities Exchange Act of 1934 
(``Exchange Act''), 15 U.S.C. 78a et seq., which would require 
security-based swap dealers and major security-based swap participants 
to provide trade acknowledgments and to verify those trade 
acknowledgments in security-based swap transactions.

DATES: Comments should be received on or before February 22, 2011.

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 e-mail to [email protected]. Please include 
File

[[Page 3860]]

Number S7-03-11 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 S7-03-11. This file number 
should be included on the subject line if e-mail 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 
are also available for website 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 a.m. and 3 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: Joseph Furey, Assistant Chief Counsel; 
Darren Vieira, Special Counsel; or Ignacio Sandoval, Attorney, at (202) 
551-5550, Office of Chief Counsel, Division of Trading and Markets, 
Securities and Exchange Commission, 100 F Street, NE., Washington, DC 
20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is proposing rule 15Fi-1 
pursuant to Section 15F of the Exchange Act.\1\
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    \1\ 15 U.S.C. 78o-8.
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I. Background

    Section 764 of the Dodd-Frank Act,\2\ enacted on July 21, 2010, 
added Section 15F to the Exchange Act.\3\ Among other things, Section 
15F requires security-based swap (``SBS'') dealers and major SBS 
participants (collectively, ``SBS Entities'') to register with the 
Commission, and directs the Commission to prescribe rules applicable to 
SBS Entities.
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    \2\ Public Law 111-203, 124 Stat. 1376 (2010).
    \3\ 15 U.S.C. 78o-8.
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    Section 15F(i)(1) of the Exchange Act provides that SBS Entities 
must ``conform with such standards as may be prescribed by the 
Commission, by rule or regulation, that relate to timely and accurate 
confirmation, processing, netting, documentation, and valuation of all 
security-based swaps.'' Section 15F(i)(2) of the Exchange Act provides 
that the Commission must adopt rules governing documentation standards 
for SBS Entities. Proposed rule 15Fi-1 would prescribe standards 
related to timely and accurate confirmation and documentation of SBS, 
as further described below.
    Market participants currently issue a ``trade acknowledgment'' 
(sometimes referred to by industry participants as a ``draft 
confirmation'' or an ``alleged trade'') to memorialize the economic and 
related terms of an SBS transaction, regardless of the means by which 
the transaction was executed. If an SBS transaction is not reduced to 
writing, a court may have to supply contract terms upon which there was 
no previous agreement. For this reason, prudent practice requires that, 
after coming to an agreement on the terms of a transaction, the parties 
document the transaction in a complete and definitive written record so 
there is legal certainty about the terms of their agreement in case 
those terms are later disputed. Therefore, industry best practices 
incorporate a process by which the parties verify that the trade 
acknowledgment accurately reflects the terms of their trade.\4\ This 
process, through which one party acknowledges an SBS transaction and 
its counterparty verifies it, is the confirmation process, which 
results in the issuance of a confirmation that reflects the terms of 
the contract between the parties.\5\ This confirmation includes any 
transaction-specific modifications to master agreements between the 
parties that might apply to the transaction, such as the International 
Swaps and Derivatives Association (``ISDA'') Master Agreement and 
Schedule. A confirmation is thus a written or electronic record of an 
SBS transaction that has been sent by one party and verified by the 
other where that record has been manually, electronically, or by some 
other legally equivalent means, signed by the receiving counterparty.
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    \4\ See Part II.D, below, for a discussion of verification.
    \5\ Confirmations may also be used by SBS Entities to make 
certain disclosures, or to disclaim certain obligations, to a 
counterparty. Required disclosures by an SBS Entity will be 
addressed separately in proposed ``external business conduct'' rules 
for SBS Entities.
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    In the past few years, market participants and regulators have paid 
particular attention to the timely confirmation of SBS transactions. 
The Government Accountability Office has found that, since 2002, the 
trading volume of SBS such as credit derivatives has expanded rapidly, 
causing stresses on the operational infrastructure of market 
participants, which in turn caused the participants' back office 
systems to fail for a period of time to confirm the increased volume of 
trades.\6\ The GAO viewed the lack of automation and the purported 
assignment of positions by transferring parties to third parties 
without notice to their counterparties as the primary factors 
contributing to this backlog.\7\ The GAO found that if new transactions 
are left unconfirmed, there is no definitive written record of the 
contract terms. Thus, in the event of a dispute, the terms of the 
agreement must be reconstructed from other evidence, such as e-mail 
trails or recorded trader conversations. The GAO noted that this 
process is cumbersome and may not be wholly accurate. Moreover, if 
purported transfers of SBS transactions are made without giving notice 
to the remaining parties and obtaining their consent, disputes may 
arise as to which parties are entitled to the benefits and subject to 
the burdens of the transaction. The GAO found that these circumstances 
created significant legal and operational risk for market 
participants.\8\ These risks, as well as other operational issues 
associated with the over-the-counter derivatives market, have been the 
focus of reports and recommendations by the President's Working 
Group,\9\ and of ongoing efforts led by the Federal Reserve Bank of New 
York (``FRBNY'') to enhance operational capacity in the over-the-
counter derivatives market and improve operational performance, by 
increasing automation, promoting timely confirmation of trades, and 
ending practices such as the purported unilateral transferring of SBS 
transactions.\10\
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    \6\ U.S. Government Accountability Office (``GAO''), Credit 
Derivatives: Confirmation Backlogs Increased Dealers' Operational 
Risks, But Were Successfully Addressed After Joint Regulatory 
Action, GAO-07-716 (2007) at pages 3-4 (``GAO Confirmation 
Report''). As of September 2005, the accumulated backlog of 
unconfirmed over-the-counter credit derivatives trades was 150,000.
    \7\ Several factors reduced the risk of unconfirmed trades due 
to unilateral assignment, including: (1) The tendency for end-users 
to assign contracts to dealers who were generally more credit-worthy 
than the end-user; (2) dealers refusing to release posted collateral 
until the dealer verified the assignment, and; (3) a novation 
protocol in the ISDA Master Agreement that required counterparties 
to obtain the written consent of their counterparties before 
assigning a trade. Id at pages 17-18.
    \8\ Id. at pages 12-15.
    \9\ See, e.g., Press Release, President's Working Group on 
Financial Markets, Progress Summary on OTC Derivatives Operational 
Improvements (November 2008).
    \10\ See, e.g,. FRBNY, Summary of OTC Derivatives Commitments 
(March 1, 2010).

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[[Page 3861]]

    To promote the efficient operation of the SBS market, and to 
facilitate market participants' management of their SBS-related risk, 
the Commission is proposing a confirmation process in rule 15Fi-1. The 
proposed rule will govern the delivery of SBS trade acknowledgments and 
the verification of those trade acknowledgments, as described more 
fully below. In developing this proposed rule, the Commission has 
consulted with other financial regulators, including the Commodity 
Futures Trading Commission and the Board of Governors of the Federal 
Reserve System.
    The Commission understands that proposed rule 15Fi-1, as well as 
other proposals that the Commission may consider in the coming months 
to implement the Dodd-Frank Act, if adopted, could significantly 
affect--and be significantly affected by--the nature and scope of the 
security-based swaps market in a number of ways. For example, the 
Commission recognizes that if the measures it adopts are too onerous 
for existing participants or new entrants, they could hinder the 
further development of a market for SBS by unduly discouraging 
participation by SBS Entities. On the other hand, if the Commission 
adopts rules that are too permissive, they may not adequately protect 
investor interests or promote the purposes of the Exchange Act. We also 
are aware that the further development of the SBS market may require 
the Commission to revise its confirmation standards for SBS 
transactions. We urge commenters, as they review our proposal, to 
consider generally the role that regulation may play in fostering or 
limiting the development of the market for SBS (or the role that market 
developments may play in changing the nature and implications of 
regulation) and specifically to focus on this issue with respect to the 
proposed trade acknowledgment and verification rule for SBS Entities.

II. Discussion of the Proposed Rule

    Proposed Exchange Act rule 15Fi-1 would require SBS Entities to 
provide to their counterparties a trade acknowledgment, to provide 
prompt verification of the terms provided in a trade acknowledgment of 
transactions from other SBS Entities, and to establish, maintain, and 
enforce policies and procedures that are reasonably designed to obtain 
prompt verification of the terms provided in a trade acknowledgment. We 
are proposing to define several key terms in the rule to have the 
meaning that we believe is commonly attributed to those terms by 
industry participants. Thus, as discussed above, we propose to define 
the term ``trade acknowledgment'' to mean a written or electronic 
record of an SBS transaction sent by one party to the other.\11\ As 
used in the proposed rule, the term ``verification'' would mean the 
process by which a trade acknowledgment has been manually, 
electronically, or by some other legally equivalent means, signed by 
the receiving counterparty.\12\ Thus, a ``confirmed'' SBS transaction 
would mean a transaction in which the parties have produced a trade 
acknowledgment that is agreed to by both parties and that has been 
verified.\13\
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    \11\ See proposed Rule 15Fi-1(a)(10).
    \12\ See proposed Rule 15Fi-1(a)(13).
    \13\ See proposed Rule 15Fi-1(a)(4).
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    Proposed rule 15Fi-1 would require certain SBS Entities that 
purchase or sell any SBS to provide an electronic trade acknowledgment 
to the applicable counterparty containing certain required 
information--discussed in Part II.C, below--within the prescribed 
timeframe. By requiring counterparties to provide trade acknowledgments 
of and to verify SBS transactions in a timely way, proposed rule 15Fi-1 
is intended to promote the principles of Exchange Act Section 
15F(i)(1).
Request for Comment
    The Commission requests comment on all aspects of the proposed 
definitions of trade acknowledgment, verification and confirmation.

A. Trade Acknowledgment Requirement

1. Events Triggering the Trade Acknowledgment Obligation
    Proposed rule 15Fi-1(b) would require an SBS Entity that purchases 
or sells any security-based swap to provide a trade acknowledgment to 
its counterparty. The terms ``purchase'' and ``sale'' are defined in 
Section 3(a) of the Exchange Act.\14\ As amended by the Dodd-Frank Act, 
those definitions as applied to SBS transactions include any 
``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.'' 
\15\ Because the rule would apply solely to an SBS Entity that 
``purchases'' or ``sells'' an SBS, the proposed rule would be 
effectively limited to ``principal transactions'' in which the SBS 
Entity is a counterparty to the transaction and is acting for its own 
account.
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    \14\ 15 U.S.C. 78c(a)
    \15\ Dodd-Frank Act Sections 761(a)(3) and (4), amending 
Exchange Act Sections 3(a)(13) and (14), respectively; 15 U.S.C. 
78c(a)(13) and (14).
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Request for Comment
    The Commission requests comment on all aspects of the proposal as 
to the events that would trigger an obligation to provide a trade 
acknowledgment.
    1. Are there circumstances, other than purchases or sales of SBS, 
when SBS Entities should be required to provide SBS trade 
acknowledgments to their counterparties?
    2. What are the current market practices with respect to confirming 
SBS transactions?
    3. How would current industry practices for confirming transactions 
be affected by the proposed rule?
    4. How should policies and procedures to verify trade 
acknowledgments differ from current market practices, if at all?
    5. What are the advantages or disadvantages of the proposed rule 
compared to current market practices? What additional costs would these 
differences entail?
    6. Do participants currently have operations and/or departments in 
place to comply with the proposed requirements?
    7. Do the benefits of promptly providing a trade acknowledgment 
justify the additional costs, and, if not, why not?
    8. Many, if not most, types of securities transactions are complete 
upon settlement of the trade (usually shortly following execution), and 
the purchaser and seller have no continuing obligations to one another. 
In contrast, parties to SBS transactions have ongoing obligations to 
each other that could continue for years, depending on the term of the 
SBS transaction. The Commission has proposed to require parties to SBS 
transactions to report to an SBS data repository certain life-cycle 
events, some of which are included in the definition of purchase and 
sale and some of which, like corporate actions (e.g., mergers, 
dividends, stock splits, or bankruptcy), are not.\16\ The Commission 
understands that some parties may agree to notification upon life-cycle 
events, and that certain vendors track some of this information with 
regard to securities underlying certain credit default swaps. The 
Commission also notes that exchanges and other industry utilities 
currently publish similar information (e.g., ex-dividend dates, 
bankruptcies) with respect to the cash

[[Page 3862]]

and derivatives markets. Should the Commission also require delivery of 
a trade acknowledgment and verification of any types of corporate 
actions? To what extent is it the industry custom currently to require 
notification to be provided about changes or life-cycle events in the 
security, loan, or narrow-based index that underlies an SBS? Should the 
proposed rule require trade acknowledgments for these changes or 
events?
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    \16\ See Regulation SBSR--Reporting and Dissemination of 
Security-Based Swap Information, Exchange Act Release No. 63346 
(Nov. 19, 2010), 75 FR 75207 (Dec. 2, 2010) (``SBSR Proposing 
Release'').
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    9. Should the proposed rule require different procedures for 
terminations than for other purchases and sales? What are the current 
practices with respect to sending notices of termination? What 
information should be provided in an acknowledgment of a termination?
2. Who provides the trade acknowledgment?
    The Commission proposes using Section 13A(a)(3) of the Exchange Act 
as a model to determine which counterparty is responsible for providing 
the trade acknowledgment in the transaction. Section 13A(a)(1) provides 
that each SBS that is not accepted for clearing by a clearing agency or 
derivatives clearing organization must be reported to a swap data 
repository or to the Commission.\17\ Section 13A(a)(3) specifies which 
party is obligated to make such reports--an SBS dealer, a major SBS 
participant, or a counterparty to the transaction--and it does not 
require both parties to report the same transaction.\18\ Generally, 
Section 13A(a)(3) places the reporting burden on the party that is 
expected to transact in SBS more frequently. Similarly, the Commission 
proposes requiring only a single trade acknowledgment in any 
transaction, and requiring that, in a transaction to which an SBS 
Entity is a party, the party responsible for providing the trade 
acknowledgment would be determined in the same manner as the party 
responsible for reporting the transaction to an SBS data repository or 
to the Commission. Therefore in a transaction where only one 
counterparty is an SBS dealer or major SBS participant, the SBS dealer 
or major SBS participant would be responsible for providing the trade 
acknowledgment. In a transaction between an SBS dealer and a major SBS 
participant, the SBS dealer would be responsible for providing the 
trade acknowledgment. In a transaction where both parties are SBS 
dealers, or both parties are major SBS participants, the counterparties 
would be responsible for selecting which party must provide the trade 
acknowledgment.\19\
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    \17\ 15 U.S.C. 78m-1(a)(1).
    \18\ 15 U.S.C. 78m-1(a)(3).
    \19\ The Commission considered requiring all SBS Entities to 
provide SBS trade acknowledgments in each transaction to which they 
are a party, but preliminarily has determined not to propose this 
approach. Under that approach, in a situation where only one party 
is an SBS Entity, that party would provide the trade acknowledgment 
to its counterparty. In effect, this is similar to how broker-
dealers are required to provide confirmations to their customers 
under Exchange Act rule 10b-10. However, the customers are under no 
obligation pursuant to rule 10b-10 to confirm their transactions 
with broker-dealers. In situations where both parties were SBS 
Entities, each party would cross-acknowledge the transaction by 
providing a duplicate trade acknowledgment to the other party. 
However, requiring cross-acknowledgment could be needlessly 
burdensome and may interfere with more efficient means of 
acknowledging transactions. Additionally, legal uncertainty could 
result if for some reason the trade acknowledgments did not match 
and neither party noticed or challenged the discrepancy.
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    Although the responsible counterparty would have the obligation to 
provide the trade acknowledgment, that counterparty could use a third-
party to fulfill this obligation. The Commission expects that many 
transactions will be confirmed by ``matching services'' provided 
through a clearing agency.\20\ We use matching service in this release 
to refer only to services through which two parties enter a new 
transaction.
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    \20\ Under the proposed rule, the term ``clearing agency'' would 
mean a clearing agency registered pursuant to section 17A of the 
Exchange Act, 15 U.S.C. 78q-1. See proposed Rule 15Fi-1(a)(3). A 
clearing agency that captures trade information regarding a 
securities transaction and performs an independent comparison of 
that information which results in the issuance of legally binding 
matched terms to the transaction is providing matching services. 
See, also, Exchange Act Release No. 39829 (April 6, 1998), 63 FR 
17943 (April 13, 1998) (File No. S7-10-98) (``A vendor that provides 
a matching service will actively compare trade and allocation 
information and will issue the affirmed confirmation that will be 
used in settling the transaction.'').
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    A clearing agency is providing matching services if it captures 
trade information regarding a securities transaction, performs an 
independent comparison of that information, and issues a confirmation 
\21\ of the transaction. The Commission believes that the use of 
clearing agencies' matching services would promote the principles of 
Exchange Act Section 15F(i), and the Commission wishes to encourage SBS 
Entities to use these matching services. Accordingly, paragraph (b)(2) 
of the proposed rule would provide that an SBS Entity will have 
satisfied its requirement to provide a trade acknowledgment if a 
clearing agency, through its facilities, produces a confirmation of the 
SBS transaction.\22\
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    \21\ ``Confirmation'' means a trade acknowledgment that has been 
subject to verification. See proposed Rule 15Fi-1(a)(4).
    \22\ In the course of clearing and settling SBS transactions, 
clearing agencies would need much or all of the information that is 
required on a trade acknowledgment, and therefore, the clearing 
agency would have in place systems to receive and process the 
information on a trade acknowledgment. The Commission notes that 
clearing agencies must: register with the Commission and submit 
their rules for review and approval by the Commission; meet minimum 
standards of care; have the capacity to enforce their rules and 
discipline their participants; and have chief compliance officers to 
oversee compliance with their statutory and regulatory obligations. 
The Commission believes that clearing agencies are thus equipped to 
manage the operations necessary to provide trade acknowledgments in 
the course of their work clearing and settling SBS transactions.
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    A clearing agency may also serve as a central clearing counterparty 
(``CCP'') in SBS transactions. In a CCP arrangement, if the original 
counterparties to a bilateral SBS transaction are clearing members, 
they novate their bilateral trade to the clearing agency (acting as a 
CCP). In such a novation to a CCP, each counterparty terminates its 
contract with the other and enters into a new contract on identical 
terms with the CCP. In this way, the CCP becomes buyer to one 
counterparty and seller to the other.\23\ The novation would constitute 
a purchase from or a sale to the clearing agency. While the purchase or 
sale would require a trade acknowledgment under paragraph (b)(1) of the 
proposed rule, paragraph (b)(2) of the proposed rule would permit the 
CCP to satisfy the SBS Entity's obligation to provide a trade 
acknowledgment to its counterparty, both for the initial bilateral 
transaction between an SBS Entity and its counterparty that are 
clearing members, and for the subsequent purchases or sales that result 
from the novation to the CCP.
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    \23\ See Exchange Act Release No. 59527 (Mar. 6, 2009).
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Request for Comment
    The Commission solicits comment on all aspects of the allocation of 
responsibility between the parties for providing the trade 
acknowledgment.
    10. Does the proposed rule appropriately allocate the 
responsibility to provide a trade acknowledgment?
    11. Would permitting the parties to agree which party would provide 
a trade acknowledgment in all transactions, instead of only in 
transactions between two SBS dealers or two major SBS participants, be 
preferable?
    12. Should the rule require each SBS Entity that is a party to an 
SBS transaction to provide a trade acknowledgment to its counterparty?
    13. Should the rule allow persons other than clearing agencies, 
such as

[[Page 3863]]

SBS execution facilities, to provide trade acknowledgments on behalf of 
SBS Entities?
    14. Does the description of the use of matching services, above, 
accurately describe current market practice, including market practice 
in such forums as the inter-dealer market? If not, what current 
practices are not encompassed by the description?
    15. Should clearing agencies be permitted to provide trade 
acknowledgments on behalf of SBS Entities in transactions where the 
clearing agency was not responsible for clearing the transaction 
through a matching process? If so, under what conditions?

B. Time To Provide a Trade Acknowledgment

    The Commission believes that confirming SBS transactions shortly 
after execution should help to promote the stability of the SBS market 
by preventing documentation backlogs from creating uncertainty over SBS 
Entities' exposure to SBS.\24\ There will be a lag between the time 
when an SBS is executed (i.e., the point at which both parties become 
irrevocably bound to a transaction under applicable law),\25\ and when 
the transaction is confirmed (i.e., when a trade acknowledgment of the 
transaction is provided and verified). Requiring prompt provision of 
trade acknowledgments of electronically executed or processed SBS 
transactions should help SBS Entities to submit timely and accurate 
reports with respect to those transactions to SBS data repositories. 
However, the Commission believes that the goal of promptly providing 
trade acknowledgments must be tempered by the difficulty of achieving 
that goal, particularly for customized agreements that are not executed 
or processed \26\ electronically.
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    \24\ The term ``execution'' would mean the point at which the 
parties become irrevocably bound to a transaction under applicable 
law. See proposed Rule 15Fi-1(a)(6).
    \25\ In the SBS context, an oral agreement over the telephone 
will create an enforceable contract, and the time of execution will 
be when the parties to the telephone call agree to the material 
terms.
    \26\ The term ``processed electronically,'' with respect to an 
SBS transaction, would mean entered into a security-based swap 
dealer or major security-based swap participant's computerized 
processing systems after execution to facilitate clearance and 
settlement. See proposed Rule 15Fi-1(a)(9). A clearing agency may 
process electronically its members' SBS transactions, as discussed 
further below.
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    Promptly providing a trade acknowledgment would assure that the 
parties know the terms of their executed agreement.\27\ Accordingly, 
the Commission proposes that the maximum times for providing a trade 
acknowledgment of SBS transactions would vary depending upon whether 
transactions are electronically executed or electronically processed, 
but would not exceed 24 hours following execution. The Commission 
preliminarily believes that the prescribed times should be sufficient 
for SBS Entities to provide trade acknowledgments without permitting 
unnecessary delay. Specifically, proposed rule 15Fi-1(c)(1) would 
require any SBS transaction to be confirmed promptly, but in any event:
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    \27\ Promptly acknowledging a transaction would also enable 
parties to comply with the required time within which data must be 
reported to an SBS data repository. See SBSR Proposing Release, note 
16 supra.
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     For any transaction that has been executed and processed 
electronically, a trade acknowledgment must be provided within 15 
minutes of execution.
     For any transaction that is not electronically executed, 
but that will be processed electronically, a trade acknowledgment must 
be provided within 30 minutes of execution.
     For any transaction that the SBS Entity cannot process 
electronically, a trade acknowledgment must be provided within 24 hours 
following execution.
    The Commission encourages SBS Entities to minimize the number of 
manual transactions processed, and to process electronically all SBS 
transactions if it is reasonably practicable to do so. However, the 
Commission understands that an SBS Entity may have the ability to 
process electronically only certain SBS transactions. For example, an 
SBS Entity may have the ability to process electronically certain 
standardized SBS transactions in certain asset classes, or transactions 
that it executes on an exchange or SBS execution facility, but may lack 
the ability to process electronically SBS transactions in other asset 
classes or that are executed by other means.\28\ The Commission also 
understands that an SBS Entity's ability to process a transaction 
electronically may be limited by its counterparty's abilities. For 
example, an SBS Entity may have the ability to clear an SBS transaction 
through a matching facility, but if its counterparty lacks access to 
the matching facility, it would need to process transactions with that 
counterparty through non-computerized means.
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    \28\ Transactions in non-standardized SBS that are individually 
negotiated and contain unique terms, or transactions effected 
telephonically and processed manually might fall into this category.
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    Thus, proposed rule 15Fi-1(c)(2) would require an SBS Entity to 
process electronically an SBS transaction if the SBS Entity has the 
ability to do so. In other words, an SBS Entity could not delay 
providing a trade acknowledgment by choosing to process a transaction 
by non-electronic means. The Commission preliminarily believes that 
requiring SBS Entities to acknowledge trades as promptly as they are 
able to do so would promote the purposes of Exchange Act Section 15Fi-
1.
Request for Comment
    The Commission solicits comment on all aspects of the proposed time 
to provide a trade acknowledgment, and the requirement for SBS Entities 
to process electronically all transactions for which they have the 
ability.
    16. What is the current industry practice with respect to the time 
necessary to confirm trades, and does the operational infrastructure of 
SBS Entities makes providing a trade acknowledgment within 24 hours of 
execution for manual trades feasible?
    17. Should the proposed rule require an SBS Entity to provide a 
trade acknowledgment more quickly, particularly for transactions that 
are executed or processed electronically?
    18. Would the proposed rule provide sufficient time for SBS 
Entities to provide trade acknowledgments to their counterparties?
    19. Is there currently a backlog in confirming trades, and if so, 
would the proposed rule encourage confirming trades and reduce the 
backlog? Are there other procedures that would reduce any backlog of 
unconfirmed trades?
    20. Are there circumstances in which certain terms included on a 
trade acknowledgment would not be agreed by the parties within 24 hours 
of execution? If so, please explain why parties may not be able to 
agree on such terms within 24 hours of the execution of the SBS 
transaction. How should an inability to obtain agreement on such 
contract terms within 24 hours of execution, when it happens, be 
handled?
    21. How should the proposed rule address terms required to be on 
the trade acknowledgment that are not known on the date of execution?
    22. How should the proposed rule address transactions between an 
SBS Entity and a fund manager or other agent, where the allocation of 
the trade to the fund manager's or agent's accounts is not determined 
by the fund manager or agent until sometime after execution? Should a 
delay in providing a trade acknowledgment be permitted

[[Page 3864]]

under these circumstances? If so, how long a delay should be permitted?
    23. Should the proposed rule require SBS Entities that have the 
ability to process transactions electronically do so in all situations? 
Are there circumstances when an SBS Entity would have the ability to 
process a transaction electronically but should not be required to do 
so?
    24. How often do trade acknowledgments contain inaccurate 
information and what are the most common errors? What procedures are 
currently in place to correct those errors?

C. Form and Content of Trade Acknowledgments

    Paragraph (d) of proposed rule 15Fi-1 would require the trade 
acknowledgments to be provided through any electronic means that 
provide reasonable assurance of delivery and a record of transmittal. 
The Commission believes that electronic delivery of SBS trade 
acknowledgments would promote the timely provision of trade 
acknowledgments, in accordance with Exchange Act Section 15F(i) of the 
Exchange Act. The proposed rule would provide flexibility for SBS 
Entities to determine the specific electronic means by which they will 
comply.
    The Commission anticipates that clearing agencies may be 
instrumental in delivering trade acknowledgments and verifying SBS 
transactions for their members, but that the roles played by individual 
clearing agencies may vary. For example, as discussed in Part II.A 
above, clearing agencies may provide matching services in which they 
perform independent comparisons of each security-based swap transaction 
participant's trade data regarding the terms of settlement of the 
transaction that result in the issuance of legally binding matched 
terms to the transactions. Paragraph (b)(2) of the proposed rule would 
permit clearing agencies to provide trade acknowledgments on behalf of 
SBS Entities; however, SBS Entities would not be limited to using 
clearing agencies to provide trade acknowledgments electronically. SBS 
Entities may also provide trade acknowledgments through a mutually 
agreed upon electronic standard, such as a messaging system that uses 
Financial products Markup Language (commonly known as FpML). SBS 
Entities may also continue to rely on facsimile transmission or e-mail 
to provide trade acknowledgments. The Commission understands these 
means of providing trade acknowledgments may be particularly necessary 
when engaging in SBS transactions with counterparties that rarely buy 
or sell SBS and that consequently do not have the means to receive 
trade acknowledgments otherwise.
    Providing trade acknowledgments exclusively by mail or overnight 
courier would not satisfy the requirements of the proposed rule. These 
delayed means of communication do not appear to promote the principles 
of Exchange Act Section 15F(i). Moreover, as discussed in Part II.E 
below, an SBS Entity must establish, maintain, and enforce policies and 
procedures to obtain prompt verification of the terms included in each 
trade acknowledgment it provides. This requirement does not appear 
compatible with processes to provide trade acknowledgments that rely on 
delayed means of communication.
    Paragraph (d) of proposed rule 15Fi-1 would require trade 
acknowledgments to contain a minimum of 22 items of information, all 
but one of which is identical to the items that SBS Entities would be 
required to report to an SBS data repository pursuant to the rules the 
Commission has separately proposed in Regulation SBSR.\29\ We proposed 
to require the information in Regulation SBSR, in part, to facilitate 
regulatory oversight and monitoring of the SBS market by providing 
comprehensive information regarding SBS transactions and trading 
activity.\30\ The Commission believes that counterparties to an SBS 
transaction would benefit from receiving a trade acknowledgment that is 
similarly comprehensive. In addition, by requiring essentially the same 
information to be included on a trade acknowledgment as is reported to 
an SBS data repository, the proposed rule should allow SBS Entities to 
use systems and databases designed to comply with Regulation SBSR to 
also comply with rule 15Fi-1 under the Exchange Act, which would reduce 
the burden of complying with proposed rule 15Fi-1.
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    \29\ See SBSR Proposing Release, note 16 supra.
    \30\ Id.
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    The specific items that SBS Entities would provide in a trade 
acknowledgment under the proposed rule include: (1) The asset class 
\31\ of the security-based swap and, if the security-based swap is an 
equity derivative, whether it is a total return swap or is otherwise 
designed to offer risks and returns proportional to a position in the 
equity security or securities on which the security-based swap is 
based; (2) information that identifies the security-based swap 
instrument and the specific asset(s) or issuer of a security on which 
the security-based swap is based; (3) the notional amount(s), and the 
currenc(ies) in which the notional amount(s) is expressed; (4) the date 
and time, to the second, of execution, expressed using Coordinated 
Universal Time (UTC); (5) the effective date; (6) the scheduled 
termination date; (7) the price; \32\ (8) the terms of any fixed or 
floating rate payments, and the frequency of any payments; (9) whether 
the security-based swap will be cleared by a clearing agency; (10) if 
both counterparties to a security-based swap are security-based swap 
dealers, an indication to that effect; (11) if the transaction involved 
an existing security-based swap, an indication that the transaction did 
not involve an opportunity to negotiate a material term of the 
contract, other than the counterparty; (12) if the security-based swap 
is customized to the extent that the information provided in items (1) 
through (11) does not provide all of the material information necessary 
to identify such customized security-based swap or does not contain the 
data elements necessary to calculate the price, an indication to that 
effect; (13) the participant ID of each counterparty; (14) as 
applicable, the broker ID, desk ID, and trader ID of the reporting 
party; \33\ (15) the amount(s) and currenc(ies) of any up-front 
payment(s) and a description of the terms and contingencies of the 
payment streams of

[[Page 3865]]

each counterparty to the other; (16) the title of any master agreement, 
or any other agreement governing the transaction (including the title 
of any document governing the satisfaction of margin obligations), 
incorporated by reference and the date of any such agreement; (17) the 
data elements necessary for a person to determine the market value of 
the transaction; (18) if the security-based swap will be cleared, the 
name of the clearing agency; (19) if the security-based swap is not 
cleared, whether the exception in Section 3C(g) of the Exchange Act was 
invoked; \34\ (20) if the security-based swap is not cleared, a 
description of the settlement terms, including whether the security-
based swap is cash-settled or physically settled, and the method for 
determining the settlement value; (21) the venue where the security-
based swap was executed; and (22) if the transaction is to be cleared, 
any additional information that is required for the transaction to be 
cleared by a clearing agency.
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    \31\ The term ``asset class'' means those security-based swaps 
in a particular broad category, including, but not limited to, 
credit derivatives, equity derivatives, and loan-based derivatives. 
See proposed Rule 15Fi-1(a)(1).
    \32\ The term ``price'' means the price of a security-based swap 
transaction, expressed in terms of the commercial conventions used 
in that asset class. See proposed Rule 15Fi-1(a)(8).
    \33\ Proposed Rule 15Fi-1(a) includes definitions for ``unique 
identification code,'' ``broker ID,'' ``desk ID,'' ``participant 
ID,'' and ``trader ID.'' Proposed Rule 15Fi-1(a)(12) defines 
``unique identification code'' or ``UIC'' as the unique 
identification code assigned to a person, unit of a person, or 
product by or on behalf of an internationally recognized standards-
setting body that imposes fees and usage restrictions that are fair 
and reasonable and not unreasonably discriminatory. If no standards-
setting body meets these criteria, a registered security-based swap 
data repository shall assign all necessary UICs using its own 
methodology. If a standards-setting body meets these criteria but 
has not assigned a UIC to a particular person, unit of a person, or 
product, a registered security-based swap data repository shall 
assign a UIC to that person, unit of a person, or product using its 
own methodology. ``Broker ID'' is a UIC assigned to a person acting 
as a broker for a participant. Proposed Rule 15Fi-(1)(a)(2). ``Desk 
ID'' is a UIC assigned to the trading desk of a participant or of a 
broker of a participant. Proposed Rule 15Fi-1(a)(5). ``Participant 
ID'' is a UIC assigned to a participant. Proposed Rule 15Fi-1(a)(7). 
``Trader ID'' is a UIC assigned to a natural person who executes 
security-based swaps. Proposed Rule 15Fi-1(a)(11). The definitions 
of UIC, broker ID, desk ID, participant ID, and trader ID are 
identical to the definitions of the same terms the Commission has 
proposed in Regulation SBSR, and parties would use the same IDs for 
purposes of both rules. See SBSR Proposing Release, note 16 supra.
    \34\ Section 3C(g) of the Exchange Act provides certain 
exceptions from the general requirement of Section 3C(a)(1) of the 
Exchange Act that an SBS be submitted to a registered clearing 
agency or a clearing agency that is exempt from registration.
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    The first 21 items are identical to the items that would be 
reported to an SBS data repository under proposed Regulation SBSR. In 
addition, if a transaction is to be cleared, proposed rule 15Fi-
1(d)(22) would require SBS Entities to include on a trade 
acknowledgment any additional information that a clearing agency 
requires to clear the transaction. The Commission has oversight 
authority over clearing agencies, including the ability to approve or 
disapprove all proposed rules and rule changes.\35\ These proposed 
rules and rule changes are also published for public notice and 
comment. The Commission preliminarily believes that additional 
information that is significant to a clearing agency would also be 
significant to a counterparty, and thus should be included in the trade 
acknowledgment. An SBS Entity that is a clearing agency participant 
would be required to comply with (and therefore to know) the clearing 
agency's requirements because it is obligated to comply with the 
clearing agency's rules. If a clearing agency participant acting on 
behalf of an SBS Entity submits a transaction to a clearing agency, the 
participant would have to obtain the necessary information from the SBS 
Entity.
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    \35\ See Exchange Act Section 19(b). Section 3(a)(26) of the 
Exchange Act defines ``self-regulatory organization'' to include a 
registered clearing agency.
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Request for Comment
    The Commission requests comment on all aspects of the proposal as 
to the form and content of the trade acknowledgment.
    25. Is it feasible to require trade acknowledgments to be provided 
electronically?
    26. Would the requirement for electronic trade acknowledgment 
unduly restrict the types of SBS transactions that SBS Entities may 
enter into or the persons that may be their counterparties?
    27. Would permitting non-electronic means of providing trade 
acknowledgments further the Commission's objective to promote the 
timely and accurate confirmation, processing, netting, documentation, 
and valuation of all SBS?
    28. What systems are used to provide confirmations today?
    29. Should the proposed rule require SBS Entities to use other 
systems, such as electronic messaging systems that rely on machine 
readable structured data (and therefore lend themselves to automated 
trade processing) or some other process, to provide trade 
acknowledgments? If so, please describe those systems.
    30. Should we consider any enhancements to current market 
practices?
    31. Would permitting trade acknowledgments to be provided by 
facsimile or e-mail create problems or raise issues, and would the 
benefits of permitting acknowledgments to be provided by facsimile or 
e-mail outweigh those problems or issues?
    32. Would the requirement for trade acknowledgments to be provided 
through electronic means that provide reasonable assurance of delivery 
and a record of transmittal create difficulties for participants, for 
example, because some counterparties are unable to receive trade 
acknowledgments electronically, or because electronic trade 
acknowledgment is not feasible for transactions in certain asset 
classes?
    33. Can the Commission's objective to promote the timely provision 
of trade acknowledgments be achieved if SBS Entities provide trade 
acknowledgments by non-electronic means, such as mail or overnight 
courier, and if so, how?
    34. Should the proposed rule allow clearing agencies to use methods 
other than confirmation by matching or comparison to provide trade 
acknowledgments on behalf of SBS Entities?
    35. Is there additional information that the proposed rule should 
require to be included on a trade acknowledgment?
    36. Does the proposed rule require any information that is 
unnecessary?
    37. The Commission has proposed that the trade acknowledgment 
contain a minimum of 22 items of information. In light of the purpose 
of the rule, should the Commission simply require instead that the 
trade acknowledgment must evidence the entire agreement of the parties? 
For example, the Commission could require a trade acknowledgment to 
include: (a) ``All of the terms an SBS transaction''; (b) ``all of the 
material terms of an SBS transaction''; (c) ``all terms that the 
parties have agreed to at the time of execution''; (d) ``all terms that 
are necessary for the parties to have a complete and definitive 
agreement''; or (e) ``all the terms necessary to fully and completely 
describe the transaction.'' Which of these alternatives is best, and 
why? Would it be clear how to comply with any or all of these possible 
alternatives? If not, why not? Would certain terms used in these 
alternative requirements require further definition, such as ``complete 
and definitive,'' or ``fully and completely''? If so, what terms would 
require further definition, and how should they be defined? Would the 
alternative requirements encompass transaction terms that would 
otherwise not be included on a trade acknowledgment as required by the 
proposed rule and the enumerated items specified therein? If so, what 
additional transaction terms would be required? What would be the costs 
and benefits or disadvantages of such a principles-based requirement?
    38. Please propose any alternative standards to those described in 
question 38 the Commission should consider, discuss what additional 
information would be required under your alternatives, and the costs 
and benefits and the advantages and disadvantages of your proposed 
standards.
    39. Should the Commission require markup/markdown disclosure or 
expected profitability/loss on a trade acknowledgment? If so, why, and 
if not, why not? How should SBS Entities calculate markup/markdown or 
expected profitability/loss? What would be the best evidence of the 
prevailing market price for a SBS transaction from which a markup or 
markdown could be calculated? Should the prevailing market price be 
based on a dealer's contemporaneous cost, its cost to hedge the 
transaction, or a dealer's sale to another SBS dealer or major SBS 
participant? Should there be any

[[Page 3866]]

distinction between inter-dealer transactions and transactions between 
a dealer and a non-dealer? Are SBS dealers and/or major SBS 
participants acting as market makers?
    40. The Commission understands that some SBS agreements may receive 
credit support from a guarantor or other credit support provider who 
agrees to satisfy a party's payment or margin obligations in the event 
of default. Should the trade acknowledgment include the legal name of 
or other information about the guarantor or credit support provider?
    41. How does price differ, if at all, from market value?
    42. Should the Commission require that a trade acknowledgment 
include in all cases the material information necessary to identify the 
SBS or the data elements necessary to calculate its price (rather than 
the proposal in paragraph (d)(12))?
    43. Should the Commission require that a trade acknowledgment 
include in all cases the material information necessary to determine 
required upfront payments and any future cash flows (rather the 
proposal in paragraph (d)(12))?
    44. Do parties typically provide the material information necessary 
to identify the SBS or the data elements necessary to calculate its 
price in a trade acknowledgment or confirmation? Are there any SBS 
transactions, such as highly customized SBS transactions, for which it 
would be difficult to provide this information? If so, please describe 
these transactions and the information that parties would be challenged 
to provide.
    45. Section 3C(g)(1) of the Exchange Act provides an exception for 
certain counterparties from the mandatory clearing requirement in 
Exchange Act Section 3C(a)(1). In order to qualify for the exception, 
counterparties would need to comply with the Commission's rules and 
regulations, which may require that counterparties provide additional 
information to the Commission, such as how a counterparty invoking the 
clearing exception generally expects to meet its financial obligations 
associated with an SBS or the title of any agreements in place between 
the SBS Entity and the counterparty that would support such 
counterparty's financial obligations. Should the trade acknowledgment 
include such additional information that a counterparty may need to 
provide to the Commission? Should the trade acknowledgment include such 
additional information that a counterparty may need to provide to the 
Commission to support that it is not a financial entity and is using 
the SBS to hedge or mitigate commercial risk?
    46. The Commission also considered proposing a requirement that 
parties use master confirmation agreements for complex products when 
such agreements are in widespread use.\36\ If the parties have entered 
into a master confirmation agreement, the transaction-specific 
confirmations may be less detailed because the confirmation would not 
repeat the standard terms included in the master confirmation 
agreement. The Commission believes that the use of master confirmation 
agreements reduces transaction costs, improves liquidity, and speeds 
back-office processing in the markets in which they are adopted, and 
therefore encourages their use. However, the Commission believes that 
it would be difficult for SBS Entities to determine whether a master 
confirmation agreement is ``in widespread use'' and therefore required 
to be used. The Commission solicits comment on whether to require the 
use of master confirmation agreements in markets in which they are 
widespread, and how the Commission and SBS Entities could determine 
whether master confirmation agreements are in widespread use.
---------------------------------------------------------------------------

    \36\ Master confirmation agreements are agreements that 
incorporate by reference standardized agreements (such as the 1992 
or 2002 ISDA Master Agreement) that allow parties to agree on most 
standard terms to be incorporated by reference into a complex trade 
and then execute individual transactions by agreeing on a small 
subset of economic terms.
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 D. Trade Verification

    As part of the trade verification process, paragraph (e)(1) of 
proposed rule 15Fi-1 would require an SBS Entity to establish, 
maintain, and enforce reasonable written policies and procedures to 
obtain the prompt verification of trade acknowledgments. The Commission 
preliminarily believes this requirement will induce SBS Entities to 
minimize the number of unverified trade acknowledgments, and thereby 
reduce the operational risk and uncertainty associated with unverified 
SBS transactions.
    Verifying a transaction would require the SBS Entity responsible 
for providing the trade acknowledgment to obtain manually, 
electronically, or by some other legally equivalent means, the 
signature of its counterparty on the trade acknowledgment.\37\ 
Verifying trades may be done through a process in which the 
counterparty affirms the transaction terms after reviewing a trade 
acknowledgment sent by the first party. The counterparty may also 
dispute the terms of the transaction (often referred to as a ``DK'' of 
the transaction, short for ``don't know''). Verifying or disputing the 
transaction may be done by fax or electronically, where the first party 
transmits a trade acknowledgment to its counterparty, after which the 
counterparty--electronically, manually, or by some other legally 
equivalent method--either signs and returns the trade acknowledgment to 
verify the transaction, or notifies the counterparty that it rejects 
the terms. By promoting prompt verification, the proposed rule is 
designed to minimize the operational risk and uncertainty associated 
with SBS transactions for which trade acknowledgments have not been 
verified.
---------------------------------------------------------------------------

    \37\ See Proposed Rule 15Fi-1(a)(13).
---------------------------------------------------------------------------

    Pursuant to paragraph (e)(2) of the rule, cleared transactions 
would be verified in accordance with the process prescribed by the 
registered clearing agency through which the transaction will be 
cleared. The Commission expects that clearing agencies will adopt rules 
to obtain the signature of a counterparty on a trade acknowledgment as 
part of their verification procedures. In electronically processed 
transactions, the clearing agency could obtain counterparties' 
signatures electronically or by other means. As noted above, the 
Commission has authority over registered clearing agencies, including 
the authority to review and approve or disapprove all proposed rules 
and rule changes.\38\ The Commission would, therefore, be able to 
review any proposed rules and rule changes concerning verification of 
trade acknowledgments to determine whether the rules or rule changes 
are consistent with the purposes of proposed rule 15Fi-1.
---------------------------------------------------------------------------

    \38\ See Exchange Act Sec. 19(b).
---------------------------------------------------------------------------

    For SBS transactions that are not subject to clearing, paragraph 
(e)(1) of the proposed rule would require SBS Entities to establish 
their own trade verification processes. For example, an SBS Entity 
could establish, maintain, and enforce policies and procedures under 
which it will only deal with a counterparty that agrees to timely 
review any trade acknowledgment to ensure that it accurately describes 
their agreed upon transaction, and sign and return the trade 
acknowledgment as evidence of the verification. SBS Entities' policies 
and procedures for verification could also include using a third-party 
matching service.\39\
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    \39\ As described in Part A.2. above, each counterparty could 
submit the SBS terms to an agreed-upon matching service operated by 
a registered clearing agency. The matching service would then 
compare the submitted transaction terms. If the submitted SBS terms 
agreed, the transaction would be verified; otherwise, the matching 
service would notify the counterparties of the discrepancies, and 
the counterparties would have the opportunity to resolve them.

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[[Page 3867]]

    Paragraph (e)(2) of the proposed rule would provide that, in any 
SBS transaction to be cleared through a clearing agency, an SBS 
Entity's compliance with the verification process prescribed by the 
clearing agency satisfies the verification requirements of subparagraph 
(e)(1) with respect to the transaction. Therefore, an SBS Entity would 
not need to separately verify a transaction with another SBS Entity 
cleared through a clearing agency. Additionally, an SBS Entity would 
not be required to have separate written policies and procedures that 
are reasonably designed to obtain prompt verification of the terms of a 
trade acknowledgment if the SBS Entity enters a cleared transaction 
with a non-SBS Entity, and the SBS Entity complies with the clearing 
agency's verification process.
    Paragraph (e)(3) of the proposed rule would require SBS Entities to 
promptly verify the accuracy of, or dispute with their counterparties, 
the terms of trade acknowledgments they receive pursuant to the 
proposed rule. This requirement is intended to reduce the incidence of 
unverified SBS transactions, thereby reducing the operational risk for 
SBS Entities.
Request for Comment
    The Commission solicits comment on all aspects of the proposed 
requirement that SBS Entities verify trade acknowledgments they 
receive, and establish, maintain, and enforce written policies and 
procedures to obtain the prompt verification of the terms of executed 
SBS transactions.
    47. Should the proposed rule set time limits within which trade 
acknowledgments must be verified by SBS Entities? For example, should 
the proposed rule require SBS Entities to verify or dispute a trade 
acknowledgment within 24 or 48 hours of provision of the trade 
acknowledgment? Should SBS Entities be required to verify or dispute a 
trade acknowledgment more quickly for SBS transactions that are 
executed electronically or processed electronically than for other 
transactions?
    48. What additional steps could the Commission take to promote 
verification of SBS transactions?
    49. Should the Commission give more guidance in the types of 
policies and procedures it expects SBS Entities to adopt that would be 
``reasonably designed to obtain prompt verification of the terms of a 
trade acknowledgment''?
    50. Are there other ways in which SBS participants currently 
evidence their agreement to an SBS transaction besides manual or 
electronic signature of a trade acknowledgment that we should consider?
    51. The proposed rule requires that parties obtain ``verification'' 
of the trade acknowledgment, which would be defined to mean manual or 
electronic signature of the trade acknowledgment by the receiving 
party. Is this definition sufficient? Does this definition differ from 
current market practice, and if so, how?
    52. Are there other processes currently in place that would not fit 
within this definition of ``verification'' that we should consider?
    53. Although the Commission believes that matching services are an 
effective way to verify SBS transactions, and increase the efficiency 
of the SBS settlement process, the Commission has not proposed 
requiring SBS Entities to submit their trades to a matching service. 
The Commission is concerned that the variety of SBS transactions may 
make it unlikely that matching services would be able to verify all 
transactions, and the Commission questions whether all SBS Entities' 
counterparties would be members or participants (or eligible to be 
members or participants) in a matching service. Therefore, a 
requirement to submit all trades to a matching service could limit both 
the types of transactions and the counterparties in the SBS market. We 
request comment on the mandatory use of matching services. Would a 
requirement to use matching services limit the types of SBS 
transactions or counterparties in the market? How could the Commission 
mitigate those effects?

E. Exemption From Rule 10b-10

    Proposed paragraph (f) of rule 15Fi-1 would provide an exemption 
from the requirements of rule 10b-10 under the Exchange Act for SBS 
Entities that confirm their SBS transactions in compliance with 
proposed rule 15Fi-1.\40\ Rule 10b-10 generally requires that broker-
dealers effecting securities transactions on behalf of customers, 
provide to their customers, at or before completion of the securities 
transaction, a written notification containing certain basic 
transaction terms.\41\
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    \40\ 17 CFR 240.10b-10.
    \41\ Examples of transaction terms included on a rule 10b-10 
confirmation include: The date of the transaction; the identity, 
price, and number of shares bought or sold; the capacity of the 
broker-dealer; the dollar or yield at which a transaction in a debt 
security was effected, and under specified circumstances, the 
compensation paid to the broker-dealer by the customer or other 
parties. Id.
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    The Dodd-Frank Act amended the Exchange Act definition of 
``security'' to include any ``security-based swap.'' \42\ Consequently, 
SBS, as securities, are fully subject to the Federal securities laws 
and regulations, including, rule 10b-10.\43\ The Commission anticipates 
that some SBS Entities may also be registered broker-dealers. 
Therefore, in the absence of an exemption, an SBS Entity that is also a 
broker or dealer would be required to comply with both rule 10b-10 and 
proposed rule 15Fi-1. This could be duplicative and overly burdensome.
---------------------------------------------------------------------------

    \42\ Dodd-Frank Act Sec. 761(a)(2) (codified at Exchange Act 
Section 3(a)(10)).
    \43\ The Commission will discuss further the implications of 
defining ``security'' to include security-based swaps on the 
requirement for brokers and dealers to register with its proposed 
rules for SBS Entity registration.
---------------------------------------------------------------------------

    The proposed exemption in paragraph (f) would apply solely to 
transactions in SBS in which an SBS Entity is also a broker or a 
dealer, and would not apply to a transaction by a broker-dealer that is 
not also an SBS Entity. In other words, a broker-dealer that is not an 
SBS Entity would continue to comply with rule 10b-10 to the extent that 
it effects transactions in SBS with customers.
    As noted in Part A.1 above, because the proposed rule would apply 
solely to an SBS Entity that ``purchases'' or ``sells'' an SBS, it is 
effectively limited to principal transactions in which the SBS Entity 
is a counterparty to the transaction and is acting for its own account. 
Thus, the proposed exemption in paragraph (f) would also apply solely 
to principal transactions. The Commission recognizes that some SBS 
Entities may also engage in SBS brokerage or agency transactions.\44\ 
Any broker acting as an agent in an SBS transaction, regardless of 
whether it is also registered as an SBS Entity, would continue to be 
required to comply with Rule 10b-10.\45\
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    \44\ An SBS Entity's agency activities would be done pursuant to 
its broker-dealer registration under Section 15(b) of the Exchange 
Act. 15 U.S.C. 78o(b).
    \45\ This would include, at a minimum, disclosure of: The date 
of the transaction; the identity, price and number of units (or the 
principal amount) bought or sold, and the time of the transaction or 
the fact that it will be furnished upon written request (17 CFR 
240.10b-10(a)(1)); that they are acting in an agent capacity (17 CFR 
240.10b-10(a)(2)); and, under specified circumstances, the amount of 
remuneration to be received by the broker from the customer, and 
whether the broker is receiving any other remuneration in connection 
with the transaction (17 CFR 240.10b-10(a)(2)(i)(B) and (D)).

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[[Page 3868]]

Request for Comment
    The Commission solicits comment on all aspects of the proposed 
exemption from rule 10b-10 for SBS Entities that provide a trade 
acknowledgment pursuant to proposed rule 15Fi-1(f).
    54. Is the proposed exemption from rule 10b-10 necessary or 
appropriate?
    55. Is additional interpretive guidance regarding rule 10b-10 
necessary?

III. Implementation Timeframes

    The Commission proposes that the rule be effective 60 days after 
publication of the final rule in the Federal Register.
Request for Comment
    The Commission solicits comment on all aspects of the 
implementation time frame for proposed rule 15Fi-1.
    56. Would the proposed time frame provide sufficient time for SBS 
Entities to comply with the rule?
    57. Should the implementation time be coordinated with the 
implementation timeframes for proposed Regulation SBSR?

IV. Paperwork Reduction Act

    Certain provisions of the proposed rule would result in 
``collection of information requirements'' within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA'').\46\ The Commission is 
therefore submitting proposed rule 15Fi-1 to the Office of Management 
and Budget (``OMB'') for review in accordance with 44 U.S.C. 3507 and 5 
CFR 1320.11. Compliance with the collection of information requirements 
would be mandatory. An agency may not conduct or sponsor, and a person 
is not required to respond to, a collection of information unless it 
displays a currently valid control number.
---------------------------------------------------------------------------

    \46\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

A. Summary of Collection of Information

    As discussed above, Exchange Act Section 15F(i)(1) provides that 
SBS Entities ``shall conform with such standards as may be prescribed 
by the Commission, by rule or regulation, that relate to timely and 
accurate confirmation, processing, netting, documentation, and 
valuation of all security-based swaps.'' \47\ Section 15F(i)(2) of the 
Exchange Act further provides that the Commission must adopt rules 
governing documentation standards for SBS Entities. Accordingly, 
proposed rule 15Fi-1 would adopt documentation standards for the timely 
and accurate acknowledgment and verification of SBS transactions by SBS 
Entities. The proposed rule contains six paragraphs: (a) Definitions of 
relevant terms; (b) the trade acknowledgment obligations of specific 
SBS Entities; (c) the prescribed time frames under which a trade 
acknowledgment must be sent; (d) the form and content requirements of 
the trade acknowledgment; (e) an SBS Entities' verification 
obligations; and (f) a limited exemption for brokers from the 
requirements of Exchange Act Rule 10b-10.\48\
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 78o-8.
    \48\ 17 CFR 240.10b-10.
---------------------------------------------------------------------------

    Under paragraph (b)(1) of proposed rule 15Fi-1, sending an SBS 
trade acknowledgment would be the obligation of a particular SBS Entity 
(i.e., an SBS dealer or major-SBS participant) depending on whether the 
SBS Entity and its counterparty are SBS dealers or major SBS 
participants and/or any agreements between the counterparties that 
delineate the trade acknowledgment responsibility. Paragraph (b)(2) of 
the proposed rule however, would provide that SBS Entities will satisfy 
this requirement to the extent that an SBS transaction is cleared 
through the facilities of clearing agency that matches or compares the 
terms of the transaction. Regardless of how the trade acknowledgment 
obligation is satisfied however, a trade acknowledgment would be 
required to be provided within 15 minutes, 30 minutes or 24 hours 
following execution, depending on whether the transaction is executed 
and/or processed electronically.\49\
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    \49\ Under proposed Rule 15Fi-1(c)(1)(i), any transaction that 
is executed and processed electronically would have to be 
acknowledged within 15 minutes of execution. Transactions that are 
not electronically executed but processed electronically would have 
to be acknowledged within 30 minutes of execution. See proposed Rule 
15Fi-1(c)(1)(ii). Finally, proposed Rule 15Fi-1(c)(1)(ii) would 
require that all other transactions be acknowledged within 24 hours 
of execution. Proposed paragraph (c)(2) of the rule however, would 
require that transactions be processed electronically if the 
counterparties have the ability to do so. As the market for 
derivatives develops further however, the Commission believes that 
most SBS transactions will be processed electronically.
---------------------------------------------------------------------------

    Paragraph (d) of proposed rule 15Fi-1 would require that trade 
acknowledgments be provided through electronic means and lists the 22 
data elements that must be included on each confirmation.\50\ Paragraph 
(e)(1) of proposed rule 15Fi-1 would require SBS Entities to establish, 
maintain, and enforce policies and procedures reasonably designed to 
obtain prompt verification of SBS trade acknowledgments. If a 
transaction is cleared through a clearing agency, paragraph (e)(2) of 
the proposed rule would also require SBS Entities to comply with the 
clearing agency's verification procedures. Regardless of the method of 
transmittal, when an SBS Entity receives a trade acknowledgment, 
pursuant to paragraph (e)(3) of the proposed rule, it must promptly 
verify the accuracy of the trade acknowledgment or dispute the terms 
with its counterparty. Paragraph (a) of the proposed rule would define 
relevant terms and would not be a ``collection of information'' within 
the meaning of the PRA. Similarly, paragraph (f) is an exemptive 
provision and would not be a collection of information.
---------------------------------------------------------------------------

    \50\ See proposed Rule 15Fi-1(d) (1) through (22). See also 
discussion in Section II.C. supra.
---------------------------------------------------------------------------

B. Proposed Use of Information

    The trade acknowledgment and verification requirements of proposed 
rule 15Fi-1 would apply to both types of SBS Entities depending on 
whether the entity and its counterparty are SBS dealers or major SBS 
participants and on any agreements between counterparties addressing 
the obligation to send a trade acknowledgment. Generally, the 
transaction details that would be provided in a proposed rule 15Fi-1 
trade acknowledgment would serve as a written record by which the 
counterparties to a transaction memorialize the economic and related 
terms of a transaction. In effect, the trade acknowledgment would 
reflect the contract entered into between the counterparties. In 
addition, proposed rule 15Fi-1's verification requirements are intended 
to assure that the written record of the transaction (i.e. the trade 
acknowledgment) accurately reflects the terms of the transaction as 
understood by the respective counterparties. In situations where an SBS 
Entity is provided a trade acknowledgment that is not an accurate 
reflection of the agreement, proposed rule 15Fi-1 would require the SBS 
Entity to dispute the terms of the transaction.

C. Respondents

    Proposed rule 15Fi-1 would only apply to SBS Entities, that is to 
SBS dealers and major SBS participants, both of which would be 
registered with the Commission. Based on the Commission staff's 
discussions with industry participants and incorporated in our other 
Dodd-Frank Act related rulemaking, we preliminarily believe that 
approximately 50 entities may fit within the definition of SBS dealer, 
and up to five entities may fit within the definition of major SBS 
participant. Thus, approximately 55 entities may be required to 
register with the Commission as SBS Entities and thus,

[[Page 3869]]

would be subject to the trade acknowledgment provision and verification 
requirements of proposed rule 15Fi-1.\51\
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    \51\ We note that many clearing agencies already have facilities 
that would permit SBS Entities to acknowledge and verify SBS 
transactions in addition to other services provided by the clearing 
agency.
---------------------------------------------------------------------------

D. Total Initial and Annual Reporting and Recordkeeping

    Pursuant to proposed rule 15Fi-1, all SBS transactions would have 
to be acknowledged and verified through the methods and by the 
timeframes prescribed in the proposed rule. Collectively, paragraphs 
(b), (c), (d) and (e) of proposed rule 15Fi-1 identify the information 
that is to be included in a trade acknowledgment; the party responsible 
for sending the trade acknowledgment; the permissible methods for 
sending the trade acknowledgment; and criteria for verifying the terms 
of a trade acknowledgment. According to the Depository Trust and 
Clearing Corporation (``DTCC''), there are on average 36,000 single-
name credit-default swap (``CDS'') transactions per day,\52\ resulting 
in a total number of 13,140,000 CDS transactions per year. The 
Commission preliminarily believes that CDSs represent 85% of all SBS 
transactions.\53\ Assuming that at least one SBS Entity is a party to 
every SBS transaction, the Commission preliminarily estimates that the 
total number of SBS transactions that would be subject to proposed 
15Fi-1 on an annual basis would be approximately 15,460,000 which is an 
average of 281,091 transactions per SBS Entity per year.\54\
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    \52\ See, e.g., http://www.dtcc.com/products/derivserv/data_table_iii.php (weekly data as updated by DTCC).
    \53\ The Commission's estimate is based on internal analysis of 
available SBS market data. The Commission is seeking comment about 
the overall size of the SBS market.
    \54\ These figures are based on the following: [13,140,000/0.85] 
= 15,458,824, or approximately 15,460,000. (15,460,000 estimated SBS 
transactions)/(55 SBS Entities) = 281,091 SBS transactions per SBS 
Entity per year. The Commission understands that many of these 
transactions may arise from previously executed SBS transactions.
---------------------------------------------------------------------------

    Based on discussions with industry participants, the Commission 
estimates that approximately 99 percent, or 15,305,400 
transactions,\55\ are processed electronically, meaning that these 
transactions are either cleared through the facilities of a clearing 
agency,\56\ or processed through an SBS Entity's internal electronic 
systems. The Commission believes that the remaining one percent of SBS 
transactions, or 154,600 transactions,\57\ are currently not processed 
electronically, but are acknowledged and verified through other means, 
such as e-mail, facsimile or other similar means.\58\
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    \55\ 15,460,000 SBS transactions x .99 = 15,305,400 
transactions.
    \56\ See discussion in Part II.A.2 supra.
    \57\ 15,460,000 SBS transactions x .01 = 154,600 transactions.
    \58\ We note that proposed rule 15Fi-1(c)(2) would require that 
SBS transactions be processed electronically if the acknowledging 
entity has the ability to do so. As noted above, the Commission 
believes that as this market develops further, fewer SBS Entities 
will lack the ability to process SBS transactions electronically. 
See also note 50 supra.
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    As discussed above, the Commission believes that most transactions 
will be electronically executed and cleared through the facilities of a 
clearing agency. The Commission understands that the clearing of SBS 
transactions through the facilities of a clearing agency generally 
includes the matching and verification of such transactions. The 
Commission has taken this process into account in paragraph (b)(2) of 
proposed rule 15Fi-1, which provides that SBS Entities will satisfy the 
requirement to provide a trade acknowledgment if a clearing agency 
produces a confirmation through its facilities. Nevertheless, the 
Commission believes that it will be necessary for SBS Entities, if they 
have not already done so, to develop computerized systems for inputting 
the terms of an SBS transaction and then transmitting that data to the 
relevant clearing agency for electronic processing.
    The Commission also believes that such computerized systems will 
necessarily have to be programmed so that SBS transactions that are not 
electronically processed through the facilities of a clearing agency 
can be processed internally. Indeed, it is the Commission's 
understanding, through publicly available information and discussions 
with industry participants, that many SBS Entities may already have 
these types of systems in place.
    Because this information is anecdotal, for the purposes of the PRA, 
the Commission assumes that most SBS Entities do not currently have the 
platforms necessary for processing, acknowledging, and verifying SBS 
transactions electronically, whether internally or by transmitting the 
necessary data packages to the facilities of a clearing agency for 
processing. Therefore, the Commission believes that SBS Entities will 
have to develop internal order and trade management systems (``OMS'') 
that will be connected or linked to the facilities of a clearing agency 
and that will also be able to process SBS transactions internally if 
necessary.\59\ The Commission believes that those systems will also 
have front-office and back-office linkages that will permit the front 
office to input SBS transaction details \60\ and to send these updates 
in real-time or near real-time to the back-office so that complete 
packages of information can be sent to the clearing agency for 
electronic processing and timely acknowledgment, or in the alternative, 
so that the relevant SBS Entity can itself electronically process the 
transaction and send the required trade acknowledgment.
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    \59\ The Commission believes that systems for acknowledging and 
verifying SBS transactions will likely be an additional 
functionality of an OMS that SBS Entities would have to use to 
report SBS transactions to an SBS data repository. See SBSR 
Proposing Release, note 16 supra.
    \60\ The Commission understands that in some instances, 
additional transaction details may have to be entered post-execution 
but prior to processing. In the industry, this process generally 
referred to as ``enrichment.''
---------------------------------------------------------------------------

    Based on our staff's discussions with industry participants and 
incorporated in our other Commission rulemaking related to the Dodd-
Frank Act,\61\ the Commission preliminarily estimates that the 
development of an OMS by SBS Entities for electronic processing of SBS 
transactions with the capabilities described above would impose a one-
time aggregate burden of approximately 19,525 hours, or 355 burden 
hours per SBS Entity.\62\ This estimate assumes that SBS Entities will 
not have to develop an entirely new OMS but rather, would leverage 
existing trading and processing platforms and adapt those systems to 
satisfy the functionalities described above. In addition, the 
Commission further preliminarily estimates that proposed rule 15Fi-1 
would impose an ongoing annual hour burden of approximately 23,980 
hours or 436 hours per SBS Entity.\63\ This estimate would include day-
to-day technical support of the OMS, as well as the

[[Page 3870]]

amortized annual burden associated with system or platform upgrades and 
periodic implementation of significant updates based on new technology, 
products, or both.
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    \61\ See SBSR Proposing Release, note 16 supra, at Section 
XIII.B.4.a.
    \62\ This estimate is based on Commission staff discussions with 
market participants and is calculated as follows: [((Sr. Programmer 
at 160 hours) + (Sr. Systems Analyst at 160 hours) + (Compliance 
Manager at 10 hours) + (Director of Compliance at 5 hours) + 
(Compliance Attorney at 20 hours)) x 55 (SBS Entities)] = 19,525 
burden hours at 355 hours per SBS Entity. The Commission understands 
that many SBS Entities may already have computerized systems in 
place for electronically processing SBS transactions, whether 
internally or through a clearing agency. This may result in lesser 
burdens for those parties.
    \63\ This estimate is based on Commission staff discussions with 
market participants and is calculated as follows: [((Sr. Programmer 
at 32 hours) + (Sr. Systems Analyst at 32 hours) + (Compliance 
Manager at 60 hours) + (Compliance Clerk at 240 hours) + (Director 
of Compliance at 24 hours) + (Compliance Attorney at 48 hours)) x 
(55 SBS Entities)] = 23.980 burden hours, or 436 hours per SBS 
Entity.
---------------------------------------------------------------------------

    In addition, pursuant to paragraph (e)(1) of proposed rule 15Fi-1, 
SBS Entities must establish, maintain, and enforce written policies and 
procedures reasonably designed to obtain prompt verification of 
transaction terms. While the cost of these policies and procedures will 
vary, the Commission estimates that such policies and procedures would 
require an average of 80 hours per respondent to initially prepare and 
implement, with a total initial burden of 4,400 hours for all 
respondents.\64\ Once these policies and procedures are established, 
the Commission estimates that it will take an average 40 hours annually 
to maintain these policies and procedures per respondent, with a total 
estimated average annual burden of 2,200 hours for all respondents.\65\
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    \64\ This estimate is based on Commission staff discussions with 
market participants and is calculated as follows: [(Compliance 
Attorney at 40 hours) (Director of Compliance at 20 hours) + (Deputy 
General Counsel at 20 hours) x (55 SBS Entities)] = 4,400 burden 
hours, or 80 hours per SBS Entity.
    \65\ This estimate is based on Commission staff discussions with 
market participants and is calculated as follows: [(Compliance 
Attorney at 20 hours) (Director of Compliance at 10 hours) + 
(General Counsel at 10 hours) x (55 SBS Entities)] = 2,200 burden 
hours, or 40 hours per SBS Entity.
---------------------------------------------------------------------------

E. Recordkeeping Requirements

    Pursuant to amendments to the Exchange Act from Title VII of the 
Dodd-Frank Act, the Commission plans to propose separate rules for SBS 
transactions that include, among other things, recordkeeping and 
transaction reporting requirements. Because a trade acknowledgment will 
serve as a written record of the transaction, the information required 
by proposed Rule 15Fi-1 would be required to be maintained by an SBS 
Entity subject to those rules. This requirement will be subject to a 
separate PRA submission under that rulemaking.

F. Collection of Information Is Mandatory

    Each collection of information discussed above would be a mandatory 
collection of information.

G. Will responses of collection of information be kept confidential?

    By its terms, information collected pursuant to proposed rule 15Fi-
1 will not be available to the public. Under other rules proposed by 
the Commission, however, most, if not all, of the information required 
to be included in a trade acknowledgment, as described in paragraph (d) 
of the proposed rule, will be otherwise publicly available. In 
particular, under proposed Regulation SBSR,\66\ SBS Entities would be 
required to report SBS transaction details to a SBS data repository 
that will in turn, publicly disseminate SBS transaction data. To the 
extent however, that the Commission receives confidential information 
pursuant to this collection of information that is otherwise not 
publicly available, that information will be kept confidential, subject 
to the provisions of the Freedom of Information Act.
---------------------------------------------------------------------------

    \66\ See SBSR Proposing Release, note 16 supra.
---------------------------------------------------------------------------

H. Request for Comment

    The Commission requests comment on all aspects of its burden 
estimates. The Commission also solicits comment as follows:
    58. Is the proposed collection of information necessary for the 
performance of the functions of the agency? Would the information have 
a practical utility?
    59. How accurate are the Commission's preliminary estimates of the 
burdens of the proposed collection of information associated with 
proposed rule 15Fi-1? How many entities would incur collection of 
information burdens pursuant to rule 15Fi-1?
    60. Would SBS Entities incur any additional burdens associated with 
designing, creating and implementing a system for the processing, 
acknowledgment and verification of SBS transactions pursuant to 
proposed rule 15Fi-1?
    61. Would there be different or additional burdens associated with 
the collection of information under proposed rule 15Fi-1 that an SBS 
Entity would not undertake in the ordinary course of business?
    62. Are there additional burdens that the Commission has not 
addressed in its preliminary burden estimates?
    63. Are there ways to enhance the quality, utility and clarity of 
the information to be collected?
    64. Are there ways to minimize the burden of collection of 
information on those who would be required to respond, including 
through the use of automated collection techniques or other forms of 
information technology?
    65. What entities may be subject to proposed rule 15Fi-1? Would 
specific classes of entities be impacted? How many entities would be 
impacted? Will any entity or class of entities be impacted differently 
than others?

V. Cost-Benefit Analysis

    The Dodd-Frank Act was enacted, in part, to promote the financial 
stability of the United States by improving accountability and 
transparency in the financial system.\67\ Title VII of the Dodd-Frank 
Act designates the Commission to oversee the SBS markets and develop 
appropriate regulations. In furtherance of this goal, the Dodd-Frank 
Act added Section 15F(i) to the Exchange Act, which requires SBS 
Entities to ``conform with such standards as may be prescribed by the 
Commission, by rule or regulation, that relate to timely and accurate 
confirmation, processing, netting, documentation, and valuation of all 
security-based swaps,'' and provides that the Commission must adopt 
rules governing those documentation standards. Accordingly, proposed 
rule 15Fi-1 would provide these documentation standards with respect to 
the timely and accurate provision of trade acknowledgments and 
verification of SBS transactions by SBS Entities.
---------------------------------------------------------------------------

    \67\ See Public Law 111-203 Preamble.
---------------------------------------------------------------------------

    The market for OTC derivatives, which has been described as 
opaque,\68\ has grown exponentially in recent years \69\ and is capable 
of affecting significant sectors of the U.S. economy. One of the 
primary goals of Title VII of the Dodd-Frank Act is to increase the 
transparency and efficiency of the OTC derivatives market and to reduce 
the potential for counterparty and systemic risk.\70\ With respect to 
the confirmation of OTC derivatives transactions, the GAO noted that 
the trading volume of credit derivatives, such as SBS, had expanded so 
rapidly that the operational infrastructure and confirmation practices 
of many SBS Entities had failed to keep pace with the increased

[[Page 3871]]

volume.\71\ In particular, the GAO noted, among other things, that the 
lack of automated systems for confirming and verifying the terms of SBS 
transactions contributed to a significant backlog of unconfirmed 
transactions, which in turn created significant legal and operation 
risk for market participants.\72\ As a result, these risks and other 
operational issues associated with OTC derivatives have been the focus 
of reports and recommendations by the President's Working Group,\73\ 
and of ongoing efforts to by the FRBNY \74\ to enhance operational 
systems in the OTC market, including the reduction of confirmation 
backlogs and the timely provision of confirmations and verification of 
transactions in OTC derivatives.
---------------------------------------------------------------------------

    \68\ With respect to CDSs, for example, the GAO found 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.'' GAO, ``Systemic Risk: Regulatory Oversight and Recent 
Initiatives to Address Risk Posed by Credit Default Swaps,'' GAO-09-
397T (March 2009), at 2, 5, 27.
    \69\ The Bank for International Settlements semi-annual reports 
on the swap markets summarizes developments in the OTC derivatives 
markets. The report breaks down trading volumes and other statistics 
for various classes of derivatives, including credit default swaps, 
interest rate and foreign exchange derivatives, and equity and 
commodity derivatives. The report covers derivatives trading within 
the G10 countries. The most recent report, available at http://www.bis.org/statistics/derstats.htm, covers the period through the 
last quarter of 2009.
    \70\ See ``Financial Regulatory Reform--A New Foundation: 
Rebuilding Financial Supervision and Regulation,'' U.S. Department 
of the Treasury, at 47-48 (June 17, 2009).
    \71\ See GAO Confirmation Report, supra, note 6 and accompanying 
text.
    \72\ Id. at pages 12-15.
    \73\ See, e.g., Press Release, President's Working Group on 
Financial Markets, Progress Summary on OTC Derivatives Operational 
Improvements (November 2008).
    \74\ See, note 10, supra.
---------------------------------------------------------------------------

    Proposed rule 15Fi-1 would prescribe standards for the 
documentation and timely provision of SBS trade acknowledgments and the 
verification of such trade acknowledgments. More specifically, proposed 
Rule 15Fi-1 would require SBS Entities to provide a trade 
acknowledgment of an SBS transaction within 15 minutes, 30 minutes or 
24 hours following execution of the transactions, depending on whether 
the transaction is executed and/or processed electronically.\75\ In 
addition, the proposed rule would require SBS Entities to include 
specified information in the trade acknowledgment,\76\ to verify 
transactions with other SBS Entities, and to establish, maintain, and 
enforce reasonable written policies and procedures for verifying the 
transaction terms. The proposed rule would require most SBS 
transactions to be processed and acknowledged electronically if the SBS 
Entity has the ability to do so, but also would provide that many of 
the requirements of the rule can be satisfied through the facilities of 
the clearing agency that clears an SBS transaction.
---------------------------------------------------------------------------

    \75\ See note 49 supra.
    \76\ See note 50 supra. See also proposed Rule 15Fi-1(c)(1).
---------------------------------------------------------------------------

A. Benefits

    The Commission believes that proposed rule 15Fi-1 would yield 
substantial benefits to the SBS market and address many of the concerns 
noted by the GAO regarding the timely and accurate acknowledgment of 
OTC derivatives transactions. In particular, by requiring SBS Entities 
to timely provide trade acknowledgments and verify SBS transactions and 
to use electronic means when possible, the Commission is addressing the 
concern raised by the GAO regarding the legal and operational risks 
associated with confirmation backlogs in the OTC derivatives markets. 
In particular, the GAO noted in its report that the lack of automation 
was a significant contributor to confirmation backlogs.\77\ The 
Commission believes that requiring SBS transactions to be processed 
electronically would help reduce what the GAO described as the 
operational and legal risks accompanying unconfirmed derivatives 
transactions. In addition, the Commission believes that permitting SBS 
Entities to rely on the facilities of a clearing agency to satisfy 
their requirements under the proposed rule will encourage these 
entities to use clearing agency facilities, thereby promoting 
efficiency and automation in this market.
---------------------------------------------------------------------------

    \77\ See GAO Confirmation Report, supra note 6.
---------------------------------------------------------------------------

B. Costs

    Proposed rule 15Fi-1 would impose initial and ongoing costs on SBS 
Entities. The Commission believes that these costs will be a function 
of number of SBS transactions entered into by SBS Entities, whether SBS 
Entities have the ability to electronically process SBS transactions, 
and whether SBS Entities will enter into SBS transactions that can be, 
and are, cleared by a clearing agency.
    The Commission obtained information from publicly available sources 
and consulted with industry participants in an effort to quantify the 
number of aggregate SBS transactions on an annual basis. According to 
the DTCC, there are on average 36,000 single-name CDS transactions per 
day,\78\ resulting in a total number of 13,140,000 CDS transactions per 
year. The Commission preliminarily believes that CDSs represent 85% of 
all SBS transactions.\79\ Therefore, the Commission preliminarily 
believes that there will be a total of approximately 15,460,000 SBS 
transactions entered into each year. Assuming that at least one SBS 
Entity is a party to every SBS transaction, the Commission 
preliminarily estimates that the total number of SBS transactions that 
would be subject to proposed 15Fi-1 on an annual basis would be 
approximately 15,460,000 which is an average of 281,091 transactions 
per SBS Entity per year.\80\
    To fulfill the proposed rule's requirements, the Commission 
believes that SBS Entities would have to develop an OMS with portals to 
relevant clearing agencies and real-time or near real-time linkages 
between an SBS Entity's front and back-office operations. The 
development of an OMS would have to occur regardless of whether an SBS 
transaction is, or can be, cleared by a clearing agency.
---------------------------------------------------------------------------

    \78\ See, e.g., http://www.dtcc.com/products/derivserv/data_table_iii.php (weekly data as updated by DTCC).
    \79\ The Commission's estimate is based on internal analysis of 
available SBS market data. The Commission is seeking comment about 
the overall size of the SBS market.
    \80\ These figures are based on the following: [13,140,000/0.85] 
= 15,458,424, or approximately 15,460,000. (15,460,000 estimated SBS 
transactions)/(55 SBS Entities) = 309,200 SBS transactions per SBS 
Entity per year. The Commission understands that many of these 
transactions may arise from previously executed SBS transactions.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that an SBS Entity's 
development of an OMS that achieves compliance with proposed rule 15Fi-
1 would impose a one-time aggregate cost of $3,665,750,\81\ or 
approximately $66,650 per SBS Entity. This estimate includes the 
development of an OMS that leverages off of an SBS Entity's existing 
front-office and back-office operational platforms. The Commission 
further preliminarily estimates that the requirements of proposed rule 
15Fi-1 would impose an ongoing annual aggregate cost of $4,022,920, or 
approximately $73,144 per SBS Entity.\82\ This estimate would include 
day-to-day technical supports of the OMS, as well as an estimate of the 
amortized annual burden associated with system or platform upgrades and 
periodic ``re-platforming'' (i.e., implementing significant updates 
based on new technology, products or both). In addition, the Commission 
estimates that the development and implementation of written policies 
and procedures as required under paragraph (e)(1) of the proposed rule 
would impose initial costs of $1,754,500, or

[[Page 3872]]

approximately $31,900 per SBS Entity.\83\ Once established, the 
Commission estimates that it would cost respondents approximately 
$877,250 per year, or $15,950 per respondent,\84\ to update and 
maintain these policies and procedures.
---------------------------------------------------------------------------

    \81\ This estimate is based on the following: [((Sr. Programmer 
(160 hours) at $285 per hour) + (Sr. Systems Analyst (160 hours) at 
$251 per hour) + (Compliance Manager (10 hours) at $294 per hour) + 
(Director of Compliance (5 hours) at $426 per hour) + (Compliance 
Attorney (20 hours) at $291 per hour) x (50 SBS Entities)] = 
$3,665,750 or $66,650 per SBS Entity. The Commission understands 
that many SBS Entities may already have computerized systems in 
place for electronically processing SBS transactions, whether 
internally or through a clearing agency.
    \82\ This estimate is based on Commission staff discussions with 
market participants and is calculated as follows: [((Sr. Programmer 
(32 hours) at $285 per hour) + (Sr. Systems Analyst (32 hours) at 
$251 per hour) + (Compliance Manager (60 hours) at $294 per hour) + 
(Compliance Clerk (240 hours) at $59 per hour) + (Director of 
Compliance (24 hours) at $426 per hour) + (Compliance Attorney (48 
hours) at $291 per hour) x (55 SBS Entities)] = $4,022,920 burden 
hours, or $73,144 per SBS Entity.
    \83\ This estimate comes from Commission staff experience 
regarding the development of policies and procedures and is 
calculated as follows: [(Compliance Attorney (40 hours) at $294 per 
hour) + (Director of Compliance (20 hours) at $426 per hour) + 
(Deputy General Counsel (20 hours) at $581 per hour) x (55 SBS 
Entities)] = $1,754,500 total, or $31,900 per SBS Entity.
    \84\ This estimate comes from Commission staff experience 
regarding the development of policies and procedures and is 
calculated as follows: [(Compliance Attorney (20 hours) at $294 per 
hour) + (Director of Compliance (10 hours) at $426 per hour) + 
(Deputy General Counsel (10 hours) at $581 per hour) x (55 SBS 
Entities)] = $877,250 total, or $15,950 per SBS Entity.
---------------------------------------------------------------------------

    In sum, the Commission estimates that the initial cost of complying 
with proposed rule 15Fi-1 will be $5,417,500 for all respondents, or 
$98,500 per SBS Entity.\85\ The Commission estimates that total ongoing 
costs to respondents would be $4,900,170 for all respondents, or 
$89,094 per SBS Entity.\86\
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    \85\ ($3,665,750 initial cost for developing OMS) + ($1,754,500 
for developing policies and procedures) = $5,417,500 for all 
respondents. ($5,417,500/505 Respondents) = $98,500 per SBS Entity.
    \86\ ($4,022,920 ongoing cost for maintaining OMS) + ($877,250 
for maintaining policies and procedures) = $4,900,170 for all 
respondents. ($4,900,170/55 Respondents) = $89,094 per SBS Entity.
---------------------------------------------------------------------------

C. Request for Comment

    The Commission requests comment on the costs and benefits of 
proposed rule 15Fi-1 discussed above, as well as any costs and benefits 
not already described that could result. In addition, the Commission 
requests comment on the following:
    66. How can the Commission accurately estimate the costs and 
benefits of the proposed rule?
    67. What are the costs currently borne by SBS Entities that would 
be subject to proposed rule 15Fi-1 with respect to the acknowledgment 
and verification of SBS transactions?
    68. How many entities would be subject to the proposed rule? How 
transactions would be subject to the proposed rule?
    69. Are there additional costs involved in complying with the rule 
that have not been identified? What are the types, and amounts, of the 
costs?
    70. Would the obligations imposed on SBS Entities by proposed rule 
15Fi-1 be a significant enough barrier to cause some firms not to enter 
the SBS market? If so, how many firms might decline to enter the 
market? How could the cost of their not entering the market be 
measured? How should the Commission weigh those costs, if any, against 
the anticipated benefits from reducing legal and operational risk to 
SBS Entities from the proposal, as discussed above?
    71. Would there be additional benefits from the proposed rule that 
have not been identified?

VI. Consideration of Burden on Competition and Promotion of Efficiency, 
Competition, and Capital Formation

    Exchange Act Section 3(f) requires the Commission, when engaging in 
rulemaking that requires it to consider whether an action is necessary 
or appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action would promote efficiency, 
competition, and capital formation. In addition, Section 23(a)(2) of 
the Exchange Act requires the Commission, when making rules under the 
Exchange Act, to consider the impact of those rules on competition. 
Section 23(a)(2) also prohibits the Commission from adopting any rule 
that would impose a burden on competition not necessary or appropriate 
in furtherance of the purposes of the Exchange Act.
    The Commission preliminarily believes that the documentation 
standards for the provision of trade acknowledgments and verification 
of SBS transactions, as required by the Dodd-Frank Act and implemented 
by proposed rule 15Fi-1, would promote efficiency, competition, and 
capital formation by encouraging SBS Entities to automate their systems 
for SBS transactions, providing further incentive for SBS Entities to 
clear SBS transactions through clearing agencies' automated facilities, 
thus lowering transaction costs, and helping alleviate the legal and 
operational risks encountered by SBS Entities when SBS transactions are 
otherwise confirmed through manual methods.
    The Commission's experience with the acknowledgment and 
verification of other types of securities is that the timely resolution 
of disputes regarding the terms of a transaction are more efficiently 
handled near in time to when the transaction took place. Timely 
acknowledgment and verification of SBS transactions will provide 
counterparties with the appropriate means by which to evaluate their 
own risk exposures in a timely manner, thereby enabling them to more 
quickly and efficiently determine whether and how to deploy capital in 
other asset classes. In addition, the Commission believes that 
competition will be promoted because market participants would be 
encouraged to enter into SBS transactions with SBS Entities whose 
automated operations reduce the amount of time it takes to confirm the 
terms of a trade. In particular, the Commission believes that the need 
for speed and efficiency in today's capital markets would encourage 
market participants in general, and SBS Entities in particular, to 
provide quicker and more efficient process for confirming SBS 
transactions because counterparties to an SBS transaction must not only 
concern themselves with the SBS transaction, but also the underlying 
reference security that itself is subject to rapid market movements.

VII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''), the Commission must advise the OMB whether 
the proposed regulation constitutes a ``major'' rule. Under SBREFA, a 
rule is considered ``major'' when, if adopted, it results or is likely 
to result in: (1) An annual effect on the economy of $100 million or 
more (either in the form of an increase or a decrease); (2) a major 
increase in costs or prices for consumers or individual industries; or 
(3) significant adverse effect on competition, investment or 
innovation. If a rule is ``major,'' its effectiveness will generally be 
delayed for 60 days pending Congressional review.
    The Commission requests comment on the potential impact of proposed 
rule 15Fi-1 on the economy on an annual basis, on the costs or prices 
for consumers or individual industries, and on competition, investment, 
or innovation. Commenters are requested to provide empirical data and 
other factual support for their view to the extent possible.

VIII. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') requires Federal agencies, 
in promulgating rules, to consider the impact of those rules on small 
entities. Section 603(a) of the Administrative Procedure Act, as 
amended by the RFA, generally requires the Commission to undertake a 
regulatory flexibility analysis of all proposed rules, or proposed rule 
amendments, to determine the impact of such rulemaking on ``small 
entities.'' Section 605(b) of the RFA states that this requirement 
shall not apply to any proposed rule or proposed rule amendment which, 
if adopted, would not have a significant economic impact

[[Page 3873]]

on a substantial number of small entities.
    For purposes of Commission rulemaking in connection with the RFA, a 
small entity includes: (1) When used with reference to an ``issuer'' or 
a ``person,'' other than an investment company, an ``issuer'' or 
``person'' that, on the last day of its most recent fiscal year, had 
total assets of $5 million or less; or (2) a broker-dealer with total 
capital (net worth plus subordinated liabilities) of less than $500,000 
on the date in the prior fiscal year as of which its audited financial 
statements were prepared pursuant to Rule 17a-5(d) under the Exchange 
Act, or, if not required to file such statements, a broker-dealer with 
total capital (net worth plus subordinated liabilities) of less than 
$500,000 on the last day of the preceding fiscal year (or in the time 
that it has been in business, if shorter); and is not affiliated with 
any person (other than a natural person) that is not a small business 
or small organization.
    Based on our staff's discussions with SBS market participants, the 
Commission preliminarily believes that the majority of SBS transactions 
have at least one counterparty that is either a SBS dealer or major SBS 
participant, and that these entities--whether registered broker-dealers 
or not--would exceed the thresholds defining ``small entities'' set out 
above. Accordingly, neither of these types of entities would likely 
qualify as small entities for purposes of the RFA. Moreover, even in 
situations in which one of the counterparties to a SBS is not covered 
by these definitions, the Commission preliminarily does not believe 
that any such entities would be ``small entities'' as defined in 
Commission Rule 0-10. Industry participants have indicated to our staff 
that only persons or entities with assets significantly in excess of $5 
million participate in the SBS market. For example, as stated in a 
current survey conducted by Office of the Comptroller of the Currency, 
99.9% of CDS positions by U.S. commercial banks and trusts are held by 
those with assets over $10 billion.\87\ Given the magnitude of this 
figure, and the fact that it so far exceeds $5 million, the Commission 
preliminarily believes that the vast majority of, if not all, SBS 
transactions do not involve small entities for purposes of the RFA.
---------------------------------------------------------------------------

    \87\ See Office of the Comptroller of the Currency, ``Quarterly 
Report on Bank Trading and Derivatives Activities Second Quarter 
2010'' (2010).
---------------------------------------------------------------------------

    In addition, the Commission preliminarily believes that the 
entities likely to register as SBS Entities would not be small 
entities. Industry participants have indicated to our staff that most 
if not all of the registered SBS Entities would be part of large 
business entities, and that all registered SBS Entities would have 
assets exceeding $5 million and total capital exceeding $500,000. 
Therefore, the Commission preliminarily believes that none of the SBS 
Entities would be small entities.
    On this basis, the Commission preliminarily believes that the 
number of SBS transactions involving a small entity as that term is 
defined for purposes of the RFA would be de minimis. Moreover, the 
Commission does not believe that any aspect of proposed rule 15Fi-1 
would be likely to alter the type of counterparties presently engaging 
in SBS transactions. Therefore, the Commission preliminarily does not 
believe that proposed rule 15Fi-1 would impact any small entities.
    For the foregoing reasons, the Commission certifies that proposed 
Rule 15Fi-1 would not have a significant economic impact on a 
substantial number of small entities for purposes of the RFA. The 
Commission encourages written comments regarding this certification. 
The Commission requests that commenters describe the nature of any 
impact on small entities, indicate whether they believe that SBS 
Entities are unlikely to be small entities, and provide empirical data 
to support their responses.

IX. Statutory Basis and Text of Proposed Amendments

    The Commission is proposing to adopt Rule 15Fi-1 pursuant to 
Section 15F of the Exchange Act, as amended.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities, Security-
based swaps, Security-based swap dealers, Major security-based swap 
participants.

    In accordance with the foregoing, the Securities and Exchange 
Commission is proposing to amend Title 17, chapter II of the Code of 
Federal Regulations as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The general authority citation for Part 240 is revised to read 
as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78o-4, 78o-8, 78p, 78q, 
78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 
80b-3, 80b-4, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350, and 12 
U.S.C. 5221(e)(3) unless otherwise noted.
* * * * *
    2. Add an undesignated center heading following Sec.  240.15Cc1-1 
and add Sec.  240.15Fi-1 to read as follows:

Registration and Regulation of Security-Based Swap Dealers and Major 
Security-Based Swap Participants


Sec.  240.15Fi-1  Acknowledgment and verification of security-based 
swap transactions.

    (a) Definitions. For the purposes of this section:
    (1) The term asset class means those security-based swaps in a 
particular broad category, including, but not limited to, credit 
derivatives, equity derivatives, and loan-based derivatives.
    (2) The term broker ID means the UIC assigned to a person acting as 
a broker for a participant.
    (3) The term clearing agency means a clearing agency registered 
pursuant to section 17A of the Securities Exchange Act of 1934 (15 
U.S.C. 78q-1).
    (4) The term confirmation means a trade acknowledgment that has 
been subject to verification.
    (5) The term desk ID means the UIC assigned to the trading desk of 
a participant or of a broker of a participant.
    (6) The term execution means the point at which the parties become 
irrevocably bound to a transaction under applicable law.
    (7) The term participant ID means the UIC assigned to a 
participant.
    (8) The term price means the price of a security-based swap 
transaction, expressed in terms of the commercial conventions used in 
that asset class.
    (9) The term processed electronically means entered into a 
security-based swap dealer or security-based swap participant's 
computerized processing systems to facilitate clearance and settlement.
    (10) The term trade acknowledgment means a written or electronic 
record of a security-based swap transaction sent by one party to the 
other.
    (11) The term trader ID means the UIC assigned to a natural person 
who executes security-based swaps.
    (12) The term unique identification code or UIC means the unique 
identification code assigned to a person, unit of a person, or product 
by or on behalf of an internationally recognized standards-setting body 
that imposes fees and usage restrictions that are fair and reasonable 
and not unreasonably discriminatory. If no standards-setting body meets 
these criteria, a registered security-based swap data repository shall 
assign all necessary UICs using its own methodology. If a standards-
setting body meets these criteria but has not

[[Page 3874]]

assigned a UIC to a particular person, unit of a person, or product, a 
registered security-based swap data repository shall assign a UIC to 
that person, unit of a person, or product using its own methodology.
    (13) The term verification means the process by which a trade 
acknowledgment has been manually, electronically, or by some other 
legally equivalent means, signed by the receiving counterparty.
    (b) Trade acknowledgment requirement. (1) In any transaction in 
which a security-based swap dealer or major security-based swap 
participant purchases from or sells to any counterparty a security-
based swap, a trade acknowledgment must be provided by:
    (i) The security-based swap dealer, if the transaction is between a 
security-based swap dealer and a major security-based swap participant;
    (ii) The security-based swap dealer or major security-based swap 
participant, if only one counterparty in the transaction is a security-
based swap dealer or major security-based swap participant; or
    (iii) The counterparty that the counterparties have agreed will 
provide the trade acknowledgment in any transaction other than one 
described in paragraph (b)(1)(i) or (ii) of this section.
    (2) A security-based swap dealer or major security-based swap 
participant will have satisfied the requirements of paragraph (b)(1) of 
this section if a clearing agency through its facilities produces a 
confirmation of each security-based swap transaction.
    (c) Prescribed time. (1) Any trade acknowledgment required by 
paragraph (b) of this section must be provided promptly, but in any 
event:
    (i) For any transaction that has been executed and processed 
electronically, within 15 minutes of execution;
    (ii) For any transaction that is not executed electronically, but 
that will be processed electronically, within 30 minutes of execution; 
or
    (iii) For any transaction that cannot be processed electronically 
by the security-based swap dealer or security-based swap participant, 
within 24 hours following execution.
    (2) A transaction must be processed electronically if the security-
based swap dealer or major security-based swap participant has the 
ability to do so.
    (d) Form and content of trade acknowledgment. Any trade 
acknowledgment required in paragraph (b) of this section must be 
provided through electronic means that provide reasonable assurance of 
delivery and a record of transmittal, and must disclose:
    (1) The asset class of the security-based swap and, if the 
security-based swap is an equity derivative, whether it is a total 
return swap or is otherwise designed to offer risks and returns 
proportional to a position in the equity security or securities on 
which the security-based swap is based;
    (2) Information that identifies the security-based swap instrument 
and the specific asset(s) or issuer of a security on which the 
security-based swap is based;
    (3) The notional amount(s), and the currenc(ies) in which the 
notional amount(s) is expressed;
    (4) The date and time, to the second, of execution expressed using 
Coordinated Universal Time (UTC);
    (5) The effective date;
    (6) The scheduled termination date;
    (7) The price;
    (8) The terms of any fixed or floating rate payments, and the 
frequency of any payments;
    (9) Whether or not the security-based swap will be cleared by a 
clearing agency;
    (10) If both counterparties to a security-based swap are security-
based swap dealers, an indication to that effect;
    (11) If the transaction involved an existing security-based swap, 
an indication that the transaction did not involve an opportunity to 
negotiate a material term of the contract, other than the counterparty;
    (12) If the security-based swap is customized to the extent that 
the information provided in paragraphs (d)(1) through (11) of this 
section does not provide all of the material information necessary to 
identify such customized security-based swap or does not contain the 
data elements necessary to calculate the price, an indication to that 
effect;
    (13) The participant ID of each counterparty;
    (14) As applicable, the broker ID, desk ID, and trader ID of the 
reporting party;
    (15) The amount(s) and currenc(ies) of any up-front payment(s) and 
a description of the terms and contingencies of the payment streams of 
each counterparty to the other;
    (16) The title of any master agreement, or any other agreement 
governing the transaction (including the title of any document 
governing the satisfaction of margin obligations), incorporated by 
reference and the date of any such agreement;
    (17) The data elements necessary for a person to determine the 
market value of the transaction;
    (18) If the security-based swap will be cleared, the name of the 
clearing agency;
    (19) If the security-based swap is not cleared, whether the 
exception in Section 3C(g) of the Exchange Act (15 U.S.C. 78c-3(g)) was 
invoked;
    (20) If the security-based swap is not cleared, a description of 
the settlement terms, including whether the security-based swap is 
cash-settled or physically settled, and the method for determining the 
settlement value;
    (21) The venue where the security-based swap was executed; and
    (22) If the transaction is to be cleared, any additional 
information that is required for the transaction to be cleared by a 
clearing agency.
    (e) Trade verification. (1) A security-based swap dealer or major 
security-based swap participant must establish, maintain, and enforce 
written policies and procedures that are reasonably designed to obtain 
prompt verification of the terms of a trade acknowledgment provided 
pursuant to paragraph (b) of this section.
    (2) In any security-based swap transaction to be cleared through a 
clearing agency, a security-based swap dealer or major security-based 
swap participant must comply with the verification process prescribed 
by the clearing agency. Such compliance shall satisfy the requirements 
of paragraph (e)(1) of this section with respect to the transaction.
    (3) A security-based swap dealer or major security-based swap 
participant must promptly verify the accuracy of, or dispute with its 
counterparty, the terms of a trade acknowledgment it receives pursuant 
to paragraph (b) of this section.
    (f) Exemption from Sec.  240.10b-10. A security-based swap dealer 
or major security-based swap participant who is also a broker or dealer 
and who complies with paragraph (b) of this section with respect to a 
security-based swap transaction is exempt from the requirements of 
Sec.  240.10b-10 of this chapter with respect to the security-based 
swap transaction.

    Dated: January 14, 2011.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-1218 Filed 1-20-11; 8:45 am]
BILLING CODE 8011-01-P