[Federal Register Volume 87, Number 91 (Wednesday, May 11, 2022)]
[Proposed Rules]
[Pages 28872-29016]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-07850]
[[Page 28871]]
Vol. 87
Wednesday,
No. 91
May 11, 2022
Part II
Securities and Exchange Commission
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17 CFR Parts 201, 232, 240, et al.
Rules Relating to Security-Based Swap Execution and Registration and
Regulation of Security-Based Swap Execution Facilities; Proposed Rule
Federal Register / Vol. 87 , No. 91 / Wednesday, May 11, 2022 /
Proposed Rules
[[Page 28872]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 201, 232, 240, 242, and 249
[Release No. 34-94615; File No. S7-14-22]
RIN 3235-AK93
Rules Relating to Security-Based Swap Execution and Registration
and Regulation of Security-Based Swap Execution Facilities
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule; withdrawal of proposed rules.
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SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') is proposing a set of rules (``Regulation SE'') and
forms under the Securities Exchange Act of 1934 (``SEA'') that would
create a regime for the registration and regulation of security-based
swap execution facilities (``SBSEFs'') and address other issues
relating to security-based swap (``SBS'') execution generally. One of
the rules being proposed as part of Regulation SE would implement part
of the Dodd-Frank Act, which is intended to mitigate conflicts of
interest at SBSEFs and national securities exchanges that trade SBS
(``SBS exchanges''). Other rules being proposed as part of Regulation
SE would address the cross-border application of the SEA's trading
venue registration requirements and the trade execution requirement for
SBS. In addition, the Commission is proposing to amend an existing rule
to exempt, from the SEA definition of ``exchange,'' certain registered
clearing agencies as well as registered SBSEFs that provide a market
place only for SBS. The Commission also is proposing a new rule that,
while affirming that an SBSEF would be a broker under the SEA, would
exempt a registered SBSEF from certain broker requirements. Finally,
the Commission is proposing certain new rules and amendments to its
Rules of Practice to allow persons who are aggrieved by certain actions
by an SBSEF to apply for review by the Commission. The Commission also
is withdrawing all previously proposed rules regarding these subjects.
DATES: Comments should be received on or before June 10, 2022. As of
May 11, 2022, the SEC is withdrawing or partially withdrawing the
following previously proposed rules (see SUPPLEMENTARY INFORMATION for
details): SEA Release No. 63825 (76 FR 10948, published on February 28,
2011); SEA Release No. 63107 (75 FR 65581, published on October 26,
2010); and SEA Release No. 69490 (78 FR 30968, published on May 23,
2013).
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/submitcomments.htm); or
Send an email to [email protected]. Please include
File No. S7-14-22 on the subject line.
Paper Comments
Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-14-22. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method of submission. The Commission will post all
comments on the Commission's internet website (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. Operating conditions may limit access to the
Commission's public reference room. All comments received will be
posted without change. Persons submitting comments are cautioned that
the Commission does not redact or edit personal identifying information
from comment submissions. You should submit only information that you
wish to make publicly available.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Michael Gaw, Assistant Director, at
(202) 551-5602; David Liu, Special Counsel, at (312) 353-6265; Leah
Mesfin, Special Counsel, at (202) 551-5655; Michou Nguyen, Special
Counsel, at (202) 551-7768; Geoffrey Pemble, Special Counsel, at (202)
551-5628; or Mark Sater, Counsel, at (202) 551-4729; all of whom are in
the Division of Trading and Markets, Securities and Exchange
Commission, 100 F Street, NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is proposing new 17 CFR
242.800 through 242.835 to create a regime for the registration and
regulation of SBSEFs and address other issues relating to SBS execution
generally. Regulation SE would consist of 17 CFR 242.800 through
242.835 (proposed Rules 800 through 835). Key rules within Regulation
SE would include Rule 803, which would establish a process for SBSEF
registration; Rules 804 to 810, which would establish procedures for
rule and product filings by SBSEFs; Rule 815, which would establish
permissible execution methods for SBS that are subject to the SEA's
trade execution requirement; Rule 816, which would set out a procedure
for SBSEFs to make an SBS available to trade and establish certain
exemptions from the trade execution requirement; Rules 818 to 831,
which would implement the 14 Core Principles for SBSEFs set forth in
section 3D(d) of the SEA; Rules 832 to 833, which would address cross-
border matters; and Rule 834, which would impose requirements
addressing conflicts of interest involving SBSEFs and SBS exchanges, as
required by section 765 of the Dodd-Frank Act.
In addition to the rules described above, the Commission is also
proposing 17 CFR 249.2001 (Form SBSEF), which is the form that an
entity would use to register with the Commission as an SBSEF; 17 CFR
249.2002 (a submission cover sheet), which would be required to
accompany filings with the Commission made by SBSEFs for rule and rule
amendments and for product listings; amendments to 17 CFR 232.405 (Rule
405 of Regulation S-T) to require various SBSEF filings to be provided
in Inline eXtensible Business Reporting Language (``Inline XBRL''), a
structured data language; amendments to 17 CFR 240.3a1-1 (Rule 3a1-1
under the SEA) to exempt from the SEA definition of ``exchange''
certain registered clearing agencies as well as registered SBSEFs that
provide a market place only for SBS; 17 CFR 240.15a-12 (Rule 15a-12
under the SEA) that, while affirming that an SBSEF also would be a
broker under the SEA, would exempt a registered SBSEF from certain
broker requirements; to sunset an existing exemption from the
requirement to register as a clearing agency for an entity performing
the functions of an SBSEF but that is not yet registered as such; and
certain new rules and amendments to 17 CFR part 201
[[Page 28873]]
(the Commission's Rules of Practice) to allow persons who are aggrieved
by certain actions by an SBSEF to apply for review by the Commission.
The Commission also is withdrawing all previously proposed rules,
rule amendments, and interpretations regarding these subjects in view
of the length of time that has passed since they were issued and
significant changes to the swap and SBS markets that have taken place
during that time.
Table of Contents
I. Background
II. Relation to the SEF Market
III. Approach to the Commission's Proposed Requirements Relating to
Security-Based Swap Execution
IV. Introductory Provisions of Regulation SE
A. Rule 800--Scope
B. Rule 801--Applicable Provisions
C. Rule 802--Definitions
V. Registration of SBSEFs
A. Rule 803--Requirements and Procedures for Registration
B. Form SBSEF
C. Abbreviated Registration Procedures for CFTC-Registered SEFs
VI. Rule and Product Filings by SBSEFs
A. Rule 804--Listing Products for Trading by Certification
B. Rule 805--Voluntary Submission of New Products for Commission
Review and Approval
C. Rule 806--Voluntary Submission of Rules for Commission Review
and Approval
D. Rule 807--Self-Certification of Rules
E. Submission Cover Sheet and Instructions
F. Rule 808--Availability of Public Information
G. Rule 809--Staying of Certification and Tolling of Review
Period Pending Jurisdictional Determination
H. Rule 810--Product Filings by SBSEFs That Are Not Yet
Registered and by Dormant SBSEFs
VII. Miscellaneous Requirements
A. Rule 811--Information Relating to SBSEF Compliance
1. Harmonization With Sec. 37.5
2. Harmonization With Sec. 1.60
B. Rule 812--Enforceability
C. Rule 813--Prohibited Use of Data Collected for Regulatory
Purposes
D. Rule 814--Entity Operating Both a National Securities
Exchange and SBSEF
E. Rule 815--Methods of Execution for Required and Permitted
Transactions
F. Rule 816--Trade Execution Requirement and Exemptions
Therefrom
1. Process for an SBSEF To Make an SBS Product Available To
Trade
2. Exemptions From Trade Execution Requirement
G. Rule 817--Trade Execution Compliance Schedule
VIII. Implementation of Core Principles
A. Rule 818--Core Principle 1--Compliance With Core Principles
B. Rule 819--Core Principle 2--Compliance With Rules
1. Rules Modelled on Subpart C of Part 37
2. Provisions of Rule 819 Adapted From Other SEF Requirements
a. Rule 819(h)--Activities of SBSEF's Employees, Governing Board
Members, Committee Members, and Consultants
b. Rule 819(i)--Service on SBSEF Governing Boards or Committees
by Persons With Disciplinary Histories
c. Rule 819(j)--Notification of Final Disciplinary Action
Involving Financial Harm to a Customer
d. Rule 819(k)--Designation of Agent for Non-U.S. Member
C. Rule 820--Core Principle 3--SBS Not Readily Susceptible to
Manipulation
D. Rule 821--Core Principle 4--Monitoring of Trading and Trade
Processing
E. Rule 822--Core Principle 5--Ability To Obtain Information
F. Rule 823--Core Principle 6--Financial Integrity of
Transactions
G. Rule 824--Core Principle 7--Emergency Authority
H. Rule 825--Core Principle 8--Timely Publication of Trading
Information
I. Rule 826--Core Principle 9--Recordkeeping and Reporting
J. Rule 827--Core Principle 10--Antitrust Considerations
K. Rule 828--Core Principle 11--Conflicts of Interest
L. Rule 829--Core Principle 12--Financial Resources
M. Rule 830--Core Principle 13--System Safeguards
N. Rule 831--Core Principle 14--Designation of Chief Compliance
Officer
IX. Cross-Border Rules
A. Rule 832--Cross-Border Mandatory Trade Execution
B. Rule 833--Cross-Border Exemptions
1. Exemptions for Foreign SBS Trading Venues
2. Exemptions Relating to the Trade Execution Requirement
X. Rule 834--Implementation of Section 765 of the Dodd-Frank Act and
Governance of SBSEFs and SBS Exchanges
XI. Rule 835--Notice to Commission by SBSEF of Final Disciplinary
Action, Denial or Conditioning of Membership, or Denial or
Limitation of Access
XII. Amendments to Existing Rule 3a1-1 Under the SEA--Exemptions
From the Definition of ``Exchange''
XIII. Rule 15a-12--SBSEFs as Registered Brokers; Relief From Certain
Broker Requirements
XIV. Proposed Sunsetting of Temporary Exemption From SEA Definition
of ``Clearing Agency'' for Unregistered SBSEFs
XV. Electronic Filings Under Regulation SE
XVI. Amendments to Commission's Rules of Practice for Appeals of
SBSEF Actions
A. Amendment to Rule 101
B. Amendment to Rule 202
C. Amendment to Rule 210
D. Amendment to Rule 401
E. Rule 442--Right to Appeal
F. Rule 443--Sua Sponte Review by Commission
G. Amendment to Rule 450
H. Amendment to Rule 460
I. Request for Comment
XVII. Conclusion
XVIII. Compliance Schedule
XIX. Economic Analysis
A. Introduction
B. Economic Baseline
1. Available Data From the SBS Market
2. SBS Market Activity and Participants
a. SBS Entities
b. Other SBS Market Participants
c. SBS Market Participant Domiciles
3. Distribution of Rransaction Size
4. Other Markets and Regulatory Frameworks
5. Number of Entities That Likely Will Register as SBSEFs
6. SBS Trading on Platforms
7. Global Regulatory Efforts
8. Trading Models
C. Benefits, Costs, and Reasonable Alternatives
1. Overarching Benefits of the Proposal
2. Benefits Associated With Specific Proposed Rules
3. Costs
a. Registration Requirements for SBSEFs and Form SBSEF
b. Ongoing Compliance With Other Requirements That Are Similar
to the Remainder of Part 37
c. Rule and Product Filing Processes for SBSEFs
d. Proposed Rules 809, 811, 819, 826, 833, 834, and 835
e. Assessment Costs
f. Structured Data Costs
4. Reasonable Alternatives
D. Effects on Efficiency, Competition, and Capital Formation
1. Competition
2. Capital Formation
3. Efficiency
E. Request for Comment
XX. Paperwork Reduction Act
A. Summary of Collection of Information
B. Proposed Use of Information
1. Registration Requirements and Form SBSEF
2. Requirements for SBSEFs To Establish Rules
3. Reporting Requirements for SBSEFs
4. Recordkeeping Required Under Regulation SE
5. Timely Publication of Trading Information Requirement for
SBSEFs
6. Rule Filing and Product Filing Processes for SBSEFs
7. Requirements Relating to the CCO
8. Surveillance Systems Requirements for SBSEFs
C. Respondents
D. Total Annual Reporting and Recordkeeping Burden
1. Overview
2. Aggregate Burdens for Rules Modelled After CFTC Part 37 Rules
a. Registration requirements for SBSEFs and Form SBSEF
b. Ongoing Compliance With Other Requirements That Are Similar
to the Remainder of Part 37
3. Aggregate Burdens for Rules Modelled on CFTC Part 40 Rules
a. Rule and Product Filing Processes for SBSEFs
b. Burdens Related to Rules Modelled After Other Part 40 Rules
i. Rule 802
[[Page 28874]]
ii. Rule 809
4. Aggregate Burdens for Rules Modelled After CFTC Rules Other
Than Parts 37 and 40
a. Rule 811(d)
b. Rule 819(h)
c. Rule 819(i)
d. Rule 819(j)
e. Rule 819(k)
f. Rule 826(f)
g. Rule 834
5. Miscellaneous Burdens
a. Rule 833
b. Rule 835
6. Total Paperwork Burden Under Proposed Regulation SE
E. Collection of Information Is Mandatory
F. Responses to Collection of Information Will Not Be
Confidential
G. Retention Period of Recordkeeping Requirements
H. Request for Comment
XXI. Regulatory Flexibility Certification
A. SBSEFs
B. Persons Requesting an Exemption Order Pursuant to Rule 833
C. SBS Exchanges
D. Certification
XXII. Consideration of Impact on Economy
Statutory Authority
I. Background
Section 3D of the SEA,\1\ enacted as part of Title VII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank
Act''),\2\ provides for the registration and regulation of SBSEFs.
Section 3D(a)(1) provides that no person may operate a facility for the
trading or processing of SBS, unless the facility is registered as an
SBSEF or as a national securities exchange. Section 3D(d) enumerates 14
Core Principles with which SBSEFs must comply.\3\ Section 3D(f)
requires the Commission to prescribe rules governing the regulation of
SBSEFs.
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\1\ 15 U.S.C. 78c-4. In this release, the Commission is defining
the Securities Exchange Act as the ``SEA'' to distinguish it from
the Commodity Exchange Act (``CEA'').
\2\ Public Law 111-203, H.R. 4173, section 763(c).
\3\ See infra section VIII (listing the Core Principles).
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Section 765 of the Dodd-Frank Act directs the Commission to adopt
rules to mitigate conflicts of interest with respect to clearing
agencies that clear SBS (``SBS clearing agencies''), SBSEFs, and
national securities exchanges that post or make available for trading
SBS (``SBS exchanges''). In October 2010, the Commission published for
comment proposed Regulation MC to implement section 765.\4\
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\4\ Ownership Limitations and Governance Requirements for
Security-Based Swap Clearing Agencies, Security-Based Swap Execution
Facilities, and National Securities Exchanges With Respect to
Security-Based Swaps Under Regulation MC, SEA Release No. 63107
(October 14, 2010), 75 FR 65882 (October 26, 2010) (``Regulation MC
Proposal'').
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In February 2011, the Commission published for comment: (1)
Proposed Regulation SBSEF that would govern the registration and
regulation of SBSEFs, including rules to implement the 14 Core
Principles and rules requiring SBSEFs to submit filings with the
Commission to list SBS and to establish or amend rules; (2) proposed
Form SBSEF for an entity to register with the Commission as an SBSEF;
(3) a proposed interpretation of the definition of ``security-based
swap execution facility''; and (4) proposed exemptions for registered
SBSEFs relating to their status also as ``exchanges'' and ``brokers.''
\5\ On May 23, 2013, the Commission issued a proposing release to
address various cross-border aspects of its proposed Title VII rules
\6\--which included a proposed rule on the application of Title VII's
``trade execution requirement'' \7\ to cross-border SBS transactions
and a proposed interpretation of when the SBSEF registration
requirements would apply to a foreign venue that trades SBS (a
``foreign SBS trading venue'') \8\--and reopened the comment period for
various proposed rulemaking releases and policy statements under Title
VII, including the 2011 SBSEF Proposal.\9\
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\5\ Registration and Regulation of Security-Based Swap Execution
Facilities, SEA Release No. 63825 (February 2, 2011), 76 FR 10948
(February 28, 2011) (``2011 SBSEF Proposal'').
\6\ Cross-Border Security-Based Swap Activities; Re-Proposal of
Regulation SBSR and Certain Rules and Forms Relating to the
Registration of Security-Based Swap Dealers and Major Security-Based
Swap Participants, SEA Release No. 69490 (May 1, 2013), 78 FR 30968
(May 23, 2013) (``Cross-Border Proposing Release'').
\7\ The ``trade execution requirement'' as used with respect to
SBS refers to a provision mandated by Title VII and set forth in
section 3C(h) of the SEA that requires a transaction involving an
SBS that is subject to the clearing requirement of section 3C to be
executed on a national securities exchange, a registered SBSEF, or
an SBSEF that is exempt from registration under section 3D(e) of the
SEA. See infra note 106 and accompanying text. A similar provision
regarding swaps is set forth in section 2(h)(8) of the CEA.
\8\ See id., 78 FR at 31053-58 (discussing potential exemptions
for foreign SBS trading venues) and 31081-85 (discussing a proposed
rule to address the application of the trade execution requirement
to cross-border SBS transactions).
\9\ Reopening of Comment Periods for Certain Proposed Rulemaking
Releases and Policy Statements applicable to Security-Based Swaps,
SEA Release No. 69491 (May 1, 2013), 78 FR 30800 (May 23, 2013)
(``Reopening of Comment Periods Release'').
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In view of the passage of time since these earlier proposals were
issued and the significant market and regulatory developments affecting
swaps and SBS over those years, the Commission is issuing this new
proposal relating to the registration and regulation of SBSEFs and to
SBS execution generally. Accordingly, the Regulation MC Proposal, the
2011 SBSEF Proposal, and the elements of the Cross-Border Proposing
Release relating to the trade execution requirement and the
registration status of foreign SBS trading venues are withdrawn. The
proposed rules discussed below supersede all previous Commission
proposals on these subjects.\10\
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\10\ The Commission notes, however, that Rule 834 of proposed
Regulation SE would implement section 765 only with respect to
SBSEFs and SBS exchanges.
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II. Relation to the SEF Market
The economic baseline for establishing a registration and
regulatory regime for SBSEFs and SBS execution generally has changed
considerably since the Commission issued the 2011 SBSEF Proposal. In
June 2013, the Commodity Futures Trading Commission (``CFTC'') adopted
rules (in 17 CFR chapter I) under Title VII of the Dodd-Frank Act for
swap execution facilities (``SEFs'').\11\ The swap market has grown and
matured within the framework established by the CFTC's rules. In 2018,
the CFTC proposed to make fundamental changes to the SEF regulatory
structure.\12\ However, according to the CFTC, ``[s]everal commenters
expressed concern over the magnitude of changes'' in the proposal.\13\
In 2021, the CFTC ultimately declined to finalize the 2018 SEF Proposal
and elected instead ``to improve the SEF framework through targeted
rulemakings that address distinct issues.''\14\ Accordingly, the CFTC
withdrew the unadopted portions of its 2018 proposal.\15\ Currently,
the CFTC has no proposals outstanding to further amend its SEF rules.
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\11\ See CFTC, Core Principles and Other Requirements for Swap
Execution Facilities, 78 FR 33476 (June 4, 2013) (``2013 CFTC Final
SEF Rules Release''); CFTC, Process for a Designated Contract Market
or Swap Execution Facility To Make a Swap Available to Trade, Swap
Transaction Compliance and Implementation Schedule, and Trade
Execution Requirement Under the Commodity Exchange Act, 78 FR 33606
(June 4, 2013) (``2013 CFTC Final MAT Rules'' and, together with the
2013 CFTC Final SEF Rules Release, the ``2013 CFTC SEF Rules'').
\12\ See CFTC, Swap Execution Facilities and Trade Execution
Requirement, 83 FR 61946 (November 30, 2018) (``2018 SEF
Proposal'').
\13\ CFTC, Swap Execution Facilities and Trade Execution
Requirement--Proposed rule; partial withdrawal, 86 FR 9304, 9304
(February 12, 2021).
\14\ Id.
\15\ See id., 86 FR at 9304-05.
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Because of the close relationship between the swap and SBS markets,
an analysis of swap trading on CFTC-registered SEFs offers insights
into the potential development of SBS trading on SEC-registered
SBSEFs.\16\ Currently,
[[Page 28875]]
there are 20 non-dormant entities registered with the CFTC as SEFs.\17\
In 2021, volume in index credit default swaps (``CDS'') traded on CFTC-
registered SEFs was distributed as follows: One SEF had the largest
share of index CDS volume (in notional amount) at $8 trillion (69%);
one SEF had the second largest share at $2.1 trillion (18%); and the
remaining 13% of volume was shared among five other SEFs.\18\ As
discussed in section XIX below, only a small fraction of SBS trading
occurs on platforms currently. Further, some trading occurs on
platforms that do not include CFTC-registered SEFs.
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\16\ The Commission bases its preliminary analysis on trading of
credit derivatives. Other swap asset classes that trade on SEFs,
such as interest rate swaps (``IRS'') and foreign exchange swaps,
have no analogs in the SBS market. While there are parallels between
the equity swap and equity SBS markets, equity swap trading on SEFs
appears to be minimal.
\17\ See CFTC, Trading Organizations--Swap Execution Facilities
(SEF), https://sirt.cftc.gov/SIRT/SIRT.aspx?Topic=SwapExecutionFacilities (accessed on January 25,
2022).
\18\ See infra note 376 and accompanying text.
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Based on research from publicly available sources as well as
discussions with CFTC-registered SEFs, the Commission understands that
the SBS market--both on organized platforms that are potential SBSEF
registrants and on a purely over-the-counter (``OTC'') basis--is a
small fraction of the overall swap market.\19\ Furthermore, the single-
name CDS market, which falls under SEC jurisdiction, is smaller than
the index CDS market, which falls under CFTC jurisdiction.\20\ Because
the swap markets are larger than the SBS markets, the opportunities for
revenue capture from swap execution are much larger than from SBS
execution. In view of the SBS market's size relative to the swap
market, the Commission is sensitive to the economic impact that its
final rules for SBSEFs could have.
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\19\ See infra note 371 and accompanying text.
\20\ See id.
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The entities that are most likely to register with the Commission
as SBSEFs are those already registered with the CFTC as SEFs.\21\ These
entities have made substantial investments in systems, policies, and
procedures to comply with and adapt to the regulatory system developed
by the CFTC. To the extent that the Commission harmonizes its SBSEF
rules with the CFTC's SEF rules, dually registered entities could
utilize their existing systems, policies, and procedures to comply with
the Commission's SBSEF rules, and SEF market participants would face no
or only incremental changes to trade SBS as well as swaps on those
facilities, and to comply with the Commission's rules regarding SBS
trading. To the extent that the Commission establishes different or
additive requirements, dually registered entities and their market
participants might need to incur costs and burdens to modify their
systems, policies, and procedures to comply with the SEC-specific
rules. As indicated below, the Commission seeks comment on such costs
and burdens in light of the CFTC's SEF rules.\22\ Accordingly, as
discussed below, the Commission is proposing to take the general
approach of harmonizing closely with analogous CFTC SEF rules, except
where differences in the SEC's statutory authority relative to the
CFTC's statutory authority or differences in the SBS market relative to
the swap market necessitate differences between the Commission's rules
and the CFTC's, or where the Commission preliminarily believes that the
benefits of deviating from the CFTC's rules would otherwise justify the
burdens and costs associated with imposing different or additional
requirements than the corresponding CFTC rule. Throughout this release,
the Commission will seek comment on the accuracy of these assumptions.
In particular, the Commission seeks comment on the following:
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\21\ See infra section XIX(B)(5).
\22\ Consider the following example: Sec. 37.1306(a) of the
CFTC's rules (17 CFR 37.1306(a)), which is among the rules that
implements CEA Core Principle 13 (Financial resources), requires a
SEF to submit a financial report to the CFTC every quarter (i.e.,
every three months). To implement the corresponding Core Principle
under the SEA, the Commission could require an SBSEF to file only
three financial reports per year, rather than four. All things being
equal, filing three reports per year is less burdensome than filing
four. But all things are not equal, because of the CFTC's rules. In
this case, requiring new ``off cycle'' reporting by a dually
registered SEF/SBSEF would likely be more burdensome than allowing
the dually registered entity to make the same four filings, on the
same cycle, with both the SEC and CFTC. As discussed later in this
release, the Commission is proposing a rule closely modelled on
Sec. 37.1306(a) that would require the same type of financial
report as the CFTC rule, and for that report to be filed quarterly.
See proposed Rule 829(g).
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1. How many CFTC-registered SEFs do you believe will seek to
register with the Commission as SBSEFs? Please explain.
2. Are there any entities that will seek to register with the
Commission as SBSEFs but not register with the CFTC as SEFs? If so,
please explain and estimate how many.
3. For SEFs that will likely seek registration with the Commission
as SBSEFs, please estimate the size of their swaps business versus the
anticipated size of their SBS business, using any metric(s) that you
believe would be illustrative (e.g., number of products listed, trade
count, aggregate notional size traded, number of counterparties trading
swaps versus SBS, etc.).
4. Please provide any information or market data that you believe
would be illustrative regarding current SBS trading activity on
entities that are not likely to register with the Commission as SBSEFs,
and thus would have to cease SBS trading upon the compliance date of
the Commission's SBSEF rules. Do you believe that this activity would
migrate to registered SBSEFs or would it migrate instead to the
bilateral OTC market?
5. What types of products do you anticipate could be listed by
registered SBSEFs (e.g., CDS on individual corporate bonds, CDS on
individual sovereign bonds, CDS on individual securitized bonds, swaps
on securities options, swaps on narrow-based securities indexes, total
return swaps on individual cash equities or crypto/digital asset
securities, etc.)?
In the remainder of this release, the Commission describes its
proposed registration and regulation regime for SBSEFs and SBS
execution generally, and seeks comment on all aspects of its proposal.
You are invited in particular to provide data and analysis regarding
the economic and Paperwork Reduction Act (``PRA'') implications of this
proposal. For example, the Commission seeks comment on the following:
6. If, in a particular area, the Commission were to harmonize
closely with a CFTC rule, to what extent would this reduce, or perhaps
eliminate entirely, any incremental costs or burdens on dually
registered SEF/SBSEFs and their members?
7. Should the Commission impose any different or additive
requirements? For example, are there any statutory or market
differences that would create benefits from different or additive
requirements? If the Commission imposes different or additive
requirements, what would be the impact on dually registered SEF/SBSEFs
and their members?
8. Are there provisions of the CFTC's rules the Commission should
not incorporate, even if the Commission were to opt for harmonization
with the CFTC's rules in other areas? In other words, are there areas
where not harmonizing with a CFTC rule would reduce burdens on SBSEFs
and/or their members? If so, please explain, with particular regard to
the economic impacts and/or PRA burdens.
9. Do you believe that the Commission should adopt different or
additive requirements for SBSEFs, even if there is no analog to such
provisions in the CFTC's SEF rules? If so, please explain, with
particular regards to the economic impacts and/or PRA burdens. For
example, do you believe that the SEC-specific provision would impose
additional costs or burdens on SBSEFs
[[Page 28876]]
and/or their members that are nevertheless appropriate in view of new
and additional benefits? Or do you believe that an SEC-specific
provision would be appropriate because it would relieve costs or
burdens that are imposed on the swap business by a CFTC rule that is
unnecessary or inappropriate in the SBS market?
10. If the Commission ultimately adopts SBSEF rules that are
closely harmonized with the CFTC's SEF rules, do you believe this could
result in ambiguities or potential conflicts between the SEC's SBSEF
rules and the other SEC rules (pertaining, for example, to exchanges or
alternative trading systems)? If so, please indicate where this might
occur and suggest ways that the Commission could reduce these
ambiguities or potential conflicts.
III. Approach to the Commission's Proposed Requirements Relating to
Security-Based Swap Execution
Most of the rules proposed in this release are designed to
implement provisions of section 3D of the SEA,\23\ which is nearly
identical to section 5h of the CEA.\24\ As described in detail
throughout this release, when the Commission is proposing a rule to
implement a provision of section 3D of the SEA, that rule generally
will harmonize as closely as practicable with the analogous CFTC rule,
unless a reason exists to do otherwise.\25\ Indeed, many of the rules
proposed herein are adapted from the CFTC rules, with only minor
changes to reflect differences in the Commission's statutory authority
(e.g., using the term ``security-based swap'' instead of ``swap,''
cross-referencing provisions of the SEA rather than the CEA, etc.). The
Commission seeks to minimize occasions where differences in the wording
between an SEC and a CFTC rule leads affected persons to believe that
there is a difference in policy outcome, where no difference in outcome
is intended.
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\23\ 15 U.S.C 78c-4.
\24\ 7 U.S.C. 7b-3.
\25\ Other rules, however, are designed to address certain
issues relating to SBSEFs that are specific to the SEA. These
include proposed amendments to existing Rule 3a1-1 under the SEA,
proposed new Rule 15a-12, and various proposed amendments to the
Commission's Rules of Practice.
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In cases where the Commission preliminarily believes that a reason
exists for a proposed SEC rule to differ from an analogous CFTC rule,
that reason is described and alternate rule language is proposed and
explained. Here too, the Commission might be in general agreement with
the policy behind the CFTC's rule, but it might not be practicable to
closely track the CFTC rule language, for reasons that are specific to
each instance and which will be discussed herein.
In proposing these rules, the Commission acknowledges that, in the
abstract, there are a variety of ways of implementing a Core Principle
or other policy goal where the benefits could justify the costs.
Indeed, the Commission's 2011 SBSEF Proposal includes many such
alternate ways that differ from the CFTC's current rules. But the
CFTC's rules for SEF--and swap execution more generally--have
significantly reshaped the swap market, and indirectly the SBS market.
The fundamental principles of the CFTC's regulatory regime for SEFs and
swap execution generally have established the existing environment, and
any rules proposed by the SEC to implement the regulatory regime for
SBSEFs and SBS execution more generally must be considered against the
CFTC's regulatory regime. SEFs and swap market participants have
invested significant resources in systems, policies, and procedures to
comply with the CFTC's SEF rules. The Commission believes that the
CFTC's rules are reasonably designed to implement section 5h of the
CEA, which is nearly identical to section 3D of the SEA, and have been
effective in practice in facilitating fair, transparent, and
competitive trading on SEFs. By proposing similar rules for SEC-
registered SBSEFs, the Commission seeks to obtain comparable regulatory
benefits as the CFTC while minimizing costs imposed on SEF/SBSEFs and
their members to the greatest extent practicable.
The Commission recognizes that an entity might elect to register as
an SBSEF with the SEC but not as a SEF with the CFTC. In such case, an
SEC-only registrant would not have any familiarity with the CFTC's
rules and would not have made any investments in systems, policies, and
procedures to comply with them. Nevertheless, because the Commission
preliminarily believes that most if not all entities that will seek
SBSEF registration with the SEC are or will also be registered as SEFs
with the CFTC, such dual registrants would benefit from harmonized
rules. Furthermore, if the Commission adopts these rules substantially
as proposed, it likely would be unnecessary to establish and apply one
set of rules for dual registrants and a different set for SEC-only
SBSEFs.
Proposed Regulation SE follows the basic structure of part 37 of
the CFTC's rules (17 CFR part 37). In the CFTC's rules, subpart A of
part 37 (General Provisions) consists of Sec. Sec. 37.1 to 37.12.
Subparts B to P of part 37 implement the 15 Core Principles for SEFs
set forth in the CEA and consist of Sec. Sec. 37.100 et seq. to
37.1500 et seq. Proposed Rules 800 to 817 of Regulation SE are modelled
on the ``General Provisions'' in subpart A, while proposed Rules 818 to
831 would implement the 14 Core Principles for SBSEFs set forth in the
SEA. Proposed Rules 832 to 833 address cross-border matters that have
no direct counterpart in the CFTC's rules applicable to SEFs. Proposed
Rule 834 is designed to implement section 765 of the Dodd-Frank Act,
which requires the Commission to adopt rules addressing conflicts of
interest involving SBSEFs and SBS exchanges, as well as to harmonize
with certain of the CFTC's governance rules. Proposed Rule 835 is
designed to facilitate reviews of final disciplinary actions, denials
or conditioning of membership, and denials or limitations of access by
SBSEFs. In addition, the Commission is proposing a new subpart V to
part 249 of the Commission's rules,\26\ entitled ``Forms for use by
security-based swap execution facilities,'' that would include proposed
Sec. 249.2001, setting forth Form SBSEF and its instructions, which
would be used to register with the Commission as an SBSEF; and proposed
Sec. 249.2002, setting forth the submission cover sheet (with
instructions) that would be required to accompany filings with the
Commission made by SBSEFs for rule and rule amendments, product
listings, and determinations to make an SBS available to trade.
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\26\ Part 249 is entitled ``Forms, Securities Exchange Act of
1934.''
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Many parts of proposed Rules 800 to 817 are very similar in
substance to Sec. Sec. 37.1 to 37.12. Other parts of proposed Rules
800 to 817 are derived from CFTC rules that are referenced in subpart A
of part 37 but located outside of part 37. For example, Sec. 37.4 is a
short rule entitled ``Procedures for listing products and implementing
rules.'' Section 37.4 does not itself lay out the specific filing
procedures for new products and new rules, but directs a SEF, after it
has registered with the CFTC, to make such filings pursuant to part 40
(Provisions common to registered entities \27\). Key rules in part 40
include Sec. Sec. 40.2 (Listing products for trading by
certification), 40.3 (Voluntary submission of new products for
Commission review and approval), 40.5 (Voluntary submission of rules
for Commission review and
[[Page 28877]]
approval), and 40.6 (Self-certification of rules).
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\27\ ``Registered entity'' is defined under the CEA to include a
SEF. See 7 U.S.C 1a(40).
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To promote oversight of the SBS market and to assess that SBSEFs
continue to operate in a manner consistent with the SEA, the Commission
preliminarily believes that it would be appropriate to establish
procedures whereby SBSEFs would submit filings to the Commission to
list SBS products and to establish new rules, and that it would be
appropriate to harmonize with the procedures that the CFTC applies to
SEFs. These procedures are well articulated and well understood by
SEFs, and appear to provide an effective process for establishing new
rules and listing products. Therefore, the Commission is proposing
Rules 804, 805, 806, and 807 that are closely modelled on relevant
provisions of Sec. Sec. 40.2, 40.3, 40.5, and 40.6, respectively. To
implement such rules for SBSEFs and the SBS market, the Commission
identifies only those parts of the CFTC rules that are most germane to
the SBS market and adapts the wording accordingly.\28\ In the detailed
discussions of each of these proposed rules, the Commission seeks
comment on whether its proposed rule is appropriately tailored for the
SBS market, particularly for dually registered SEF/SBSEFs that would be
complying with substantially similar filing procedures under CFTC
rules, or whether the proposed rule incorporates a part of the CFTC
rule that is not relevant to the SBS market or should have incorporated
additional or different language that is more relevant.
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\28\ Various provisions of part 40 apply to entities other than
SEFs or relate to trading of products other than swaps. See, e.g.,
Sec. 40.4 (Amendments to terms or conditions of enumerated
agricultural products); Sec. 40.11 (Review of event contracts based
upon certain excluded commodities).
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Regulation SE includes proposed rules modelled on CFTC rules found
in Parts 16, 36, 37, 40, 45, and elsewhere. In some cases, these
disparate CFTC rules from outside part 37 that the Commission is
proposing to adapt into Regulation SE use different terms than in part
37 for what appears to be the same concept. To promote uniformity
within Regulation SE, the Commission is proposing certain definitions
for use throughout the regulation--in a dedicated definitions rule,
proposed Rule 802--that will sometimes require the replacement of a
term used in the CFTC version of a rule with a different, newly defined
term in the proposed SEC version.\29\ Any such changes in defined terms
are noted below. Proposed Rule 802 also includes terms derived from the
SEA and certain SEC rules thereunder.
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\29\ For example, certain CFTC rules that the Commission is
proposing to adapt into Regulation SE utilize the term ``board of
directors,'' while other CFTC rules use the term ``governing
board.'' The Commission is proposing to use the term ``governing
board'' throughout Regulation SE and to define that term in proposed
Rule 802 as the board of directors of an SBSEF, or for an SBSEF
whose organizational structure does not include a board of
directors, a body performing a function similar to a board of
directors. This definition is closely modelled on the definition of
``board of directors'' found in Sec. 37.1501(a) of the CFTC's
rules.
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Part 37 of the CFTC's rules includes an appendix B, which sets out
guidance and acceptable practices for demonstrating compliance with
several of the rules that implement the Core Principles for SEFs. These
provisions are, by their terms, non-binding.\30\ The Commission
preliminarily believes that all of the provisions of Regulation SE
should be enforceable. Therefore, the Commission is proposing to adapt
some of the guidance and acceptable practices found in appendix B as
proposed rule text in Regulation SE. As a result, some of the rules
proposed in Regulation SE are a blend of the CFTC rule text with
language adapted from the guidance and/or acceptable practices.
Instances where this occurs in a particular rule will be noted below.
The Commission requests comment on its overall approach to
incorporating relevant portions of the part 37 guidance and acceptable
practices into Regulation SE, as well as comment on how they are
adapted in specific rules.
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\30\ See appendix B to part 37, introductory paragraph (1)
(``The guidance for the core principle is illustrative only of the
types of matters a swap execution facility may address, as
applicable, and is not intended to be used as a mandatory
checklist'').
---------------------------------------------------------------------------
In various places in the CFTC's SEF rules, the CFTC has delegated
to its staff authority to perform various functions relating to SEFs on
the CFTC's behalf. The Commission has not adapted any of these
provisions into proposed Regulation SE and is not proposing any
delegation-of-authority rules. The Commission may address delegations
of its authority in the adopting release for Regulation SE.
Finally, in developing this proposal, the Commission has consulted
and coordinated with the CFTC and the prudential regulators,\31\ in
accordance with the consultation mandate of the Dodd-Frank Act.\32\ The
Commission also has consulted and coordinated with foreign regulatory
authorities through Commission staff participation in numerous
bilateral and multilateral discussions with foreign regulatory
authorities addressing the regulation of OTC derivatives markets.\33\
Through these multilateral and bilateral discussions and the Commission
staff's participation in various international task forces and working
groups, the Commission has gathered information about foreign
regulatory reform efforts and their effect on and relationship with the
U.S. regulatory regime. The Commission has taken and will continue to
take these discussions into consideration in developing rules, forms,
and interpretations for implementing Title VII of the Dodd-Frank Act.
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\31\ The term ``prudential regulator'' is defined in section
1a(39) of the CEA, 7 U.S.C. 1a(39), and that definition is
incorporated by reference in section 3(a)(74) of the SEA, 15 U.S.C.
78c(a)(74).
\32\ Section 712(a)(2) of the Dodd-Frank Act provides in
relevant part that the Commission shall ``consult and coordinate to
the extent possible with the Commodity Futures Trading Commission
and the prudential regulators for the purposes of assuring
regulatory consistency and comparability, to the extent possible.''
In addition, section 752(a) of the Dodd-Frank Act provides in
relevant part that ``[i]n order to promote effective and consistent
global regulation of swaps and security-based swaps, the Commodity
Futures Trading Commission, the Securities and Exchange Commission,
and the prudential regulators . . . as appropriate, shall consult
and coordinate with foreign regulatory authorities on the
establishment of consistent international standards with respect to
the regulation (including fees) of swaps.''
\33\ The Commission participates in a number of international
bodies working on OTC derivatives reforms. For example, the
Commission is a member of the International Organization of
Securities Commissions (``IOSCO'') and the Commission staff
participates on IOSCO's Committee on Derivatives. In addition, the
Commission is a member of the Regulatory Oversight Committee, which
serves as the international standard-setter for data elements and
identifiers used in the reporting of OTC derivatives transactions.
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IV. Introductory Provisions of Regulation SE
A. Rule 800--Scope
Proposed Rule 800 is based on Sec. 37.1 of the CFTC's rules, which
provides that part 37 applies to every SEF that is registered or
applying to become registered as a SEF under section 5h of the CEA.
Section 37.1 further provides that the rule does not affect the
eligibility of SEFs to operate under the provisions of part 38 or 49 of
the CFTC's rules.
Proposed Rule 800 would provide that the provisions of Regulation
SE would apply to every SBSEF that is registered or is applying to
become registered as an SBSEF under section 3D of the SEA.
B. Rule 801--Applicable Provisions
Proposed Rule 801 is based on Sec. 37.2 of the CFTC's rules, which
provides that a SEF shall comply with the requirements of part 37 and
all other applicable CFTC regulations, including Sec. 1.60 and part 9,
and including any related definitions and cross-referenced
[[Page 28878]]
sections. Proposed Rule 801 would require an SBSEF to comply with the
requirements of Regulation SE and all other applicable Commission
rules, including any related definitions and cross-referenced sections.
C. Rule 802--Definitions
Proposed Rule 802 would set forth definitions of terms that are
used in multiple rules in proposed Regulation SE. The majority of such
terms are adapted from a CFTC rule. Other terms are taken from section
3 of the SEA \34\ or from a Commission rule under the SEA. Where
appropriate, the definition is discussed below in the context of the
proposed rule where it is used.
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\34\ 15 U.S.C. 78c.
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In particular, paragraph (w) of proposed Rule 802 which would
define the term ``security-based swap execution facility'' by cross-
referencing the definition of that term provided in section 3(a)(77) of
the SEA,\35\ but with one carve-out. An entity that is registered with
the Commission as a clearing agency pursuant to section 17A of the SEA
\36\ and limits its SBSEF functions to operation of a trading session
that is designed to further the accuracy of end-of-day valuations would
be exempt from the definition of ``security-based swap execution
facility.'' This provision would codify a series of exemptions granted
by the Commission to SBS clearing agencies that operate ``forced
trading'' sessions.\37\ As part of the clearing and risk management
process, an SBS clearing agency must establish an end-of-day valuation
for any SBS in which any of its members has a cleared position and will
calculate margin based on that variation. Certain SBS clearing agencies
utilize a valuation mechanism whereby they require clearing members to
submit indicative quotes for those SBS products, and can require them
to trade as a way to promote accurate quote submissions. The precise
means by which the clearing agency matches quotes from different
clearing members could cause the clearing agency to fall within the SEA
definition of ``exchange.'' The Commission previously has found that it
was necessary or appropriate in the public interest and consistent with
the protection of investors to exempt clearing agencies that engage in
this activity from the definition of ``exchange.'' \38\ The Commission
is now proposing to codify this exemption with respect to the both
exchange and SBSEF registration.
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\35\ 15 U.S.C. 78c(a)(77).
\36\ 15 U.S.C. 78q-1.
\37\ See, e.g., Order Granting Temporary Exemptions Under the
Securities Exchange Act of 1934 in Connection With Request on Behalf
of ICE U.S. Trust LLC Related to Central Clearing of Credit Default
Swaps, and Request for Comments, SEA Release No. 59527 (March 6,
2009), 74 FR 10791, 10796 (March 12, 2009) (providing, inter alia,
an exemption from sections 5 and 6 of the SEA because ``ICE Trust
will periodically require ICE Trust Participants to execute certain
CDS trades at the applicable end-of-day settlement price. Requiring
ICE Trust Participants to trade CDS periodically in this manner is
designed to help ensure that such submitted prices reflect each ICE
Trust Participant's best assessment of the value of each of its open
positions in Cleared CDS on a daily basis, thereby reducing risk by
allowing ICE Trust to impose appropriate margin requirements'');
Order Extending and Modifying Temporary Exemptions Under the
Securities Exchange Act of 1934 in Connection With Request of
Chicago Mercantile Exchange Inc. Related to Central Clearing of
Credit Default Swaps, and Request for Comments, SEA Release No.
61164 (December 14, 2009), 74 FR 67258, 67262 (December 18, 2009)
(providing, inter alia, an exemption from sections 5 and 6 of the
SEA because, ``[a]s part of the CDS clearing process, CME will
periodically require CDS clearing members to trade at prices
generated by their indicative settlement prices where those
indicative settlement prices generate crossed bids and offers,
pursuant to CME's price quality auction methodology'').
\38\ See id.
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The Commission preliminarily believes that it is necessary or
appropriate in the public interest, and is consistent with the
protection of investors, to exempt a registered clearing agency from
the definition of ``security-based swap execution facility'' that
utilizes a forced trading functionality for SBS. Such an entity would
continue to be registered as a clearing agency and subject to the
requirements of section 17A of the SEA. Furthermore, a registered
clearing agency is a self-regulatory organization (``SRO''); therefore,
all of its rules--including those governing the forced trading
session--would have to be submitted to the Commission pursuant to
section 19 of the SEA. The Commission preliminarily believes,
therefore, that codification of the exemption from the definitions of
``exchange'' and ``security-based swap execution facility'' would
preserve the status quo and eliminate a largely duplicative and
unnecessary set of regulatory requirements. This exemption would cover
only the forced-trading functionality of an SBS clearing agency; any
other exchange or SBSEF activity in which a clearing agency might
engage could subject the clearing agency to the SEA provisions and the
Commission's rules thereunder applying to exchanges or SBSEFs.
The Commission seeks comment on the following:
11. Do you believe that any definitions in proposed Rule 802 should
be revised or clarified? If so, please indicate which one(s) and
provide any suggested revisions or clarifications.
12. Are there any terms used in proposed Regulation SE that are not
defined in proposed Rule 802 but which you believe should be defined?
If so, which term(s) and how would you define them?
13. Do you agree with the proposed definition of ``security-based
swap execution facility''? In particular, do you believe that
registered clearing agencies that operate forced trading sessions for
SBS should be exempted from the definition of ``security-based swap
execution facility'' entirely? Or do you believe instead that such
entities should fall within the definition of ``security-based swap
execution facility'' but be exempted from some or all registration and
regulatory requirements that otherwise would apply to SBSEFs? Why?
V. Registration of SBSEFs
Section 3D(a)(1) of the SEA \39\ provides that no person may
operate a facility for the trading or processing of SBS \40\ unless the
facility is registered as an SBSEF or as a national securities
exchange. After issuing the 2011 SBSEF Proposal, the Commission granted
temporary exemptions pursuant to section 36(a)(1) of the SEA \41\ to
entities that meet the definition of ``security-based swap execution
facility'' from having to register with the Commission as an SBSEF or
national securities exchange (``Temporary SBSEF Exemptions'').\42\ The
Temporary SBSEF Exemptions will expire on the
[[Page 28879]]
compliance date for the Commission's final SBSEF rules.\43\
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\39\ 15 U.S.C. 78c-4(a)(1).
\40\ The term ``security-based swap'' is defined in section
3(a)(68) of the SEA, 15 U.S.C. 78c(a)(68), to include, among other
things, a swap that is based on a single security or loan, including
any interest therein or on the value thereof. A single security
could include, for example, a cash equity, a crypto/digital asset
security, or a security option.
\41\ 15 U.S.C. 78mm(a)(1).
\42\ See SEA Release No. 64678 (June 15, 2011), 76 FR 36287
(June 22, 2011) (temporarily exempting entities that meet the
definition of ``security-based swap execution facility'' from the
requirement to register with the Commission as an SBSEF) (``June
2011 Exemptive Order''); SEA Release No. 64795 (July 1, 2011), 76 FR
39927 (July 7, 2011) (temporarily exempting entities that meet the
definition of ``security-based swap execution facility'' from
exchange registration and other requirements of sections 5 and 6 of
the SEA) (``July 2011 Exemptive Order''). An entity that meets the
definition of ``security-based swap execution facility'' is required
to register as an SBSEF under section 3D of the SEA or as an
exchange under sections 5 and 6 of the SEA. But because the
Commission has not yet adopted final rules relating to SBSEFs, such
entities cannot yet register with the Commission as SBSEFs. The
Temporary SBSEF Exemptions allow such entities to continue trading
SBS without needing to register either as SBSEFs or national
securities exchanges before the compliance date of the SBSEF
registration rules.
\43\ See June 2011 Exemptive Order, 76 FR at 36293, 36306; July
2011 Exemptive Order, 76 FR at 39934, 39939. The July 2011 Exemptive
Order also provided an exemption from the broker registration
requirements of section 15(a)(1) of the SEA, 15 U.S.C. 78o(a)(1),
and other requirements of the SEA and the Commission's rules
thereunder that apply to a broker, solely in connection with broker
activities involving SBS (the ``Broker Exemptions''). The Broker
Exemptions generally expired on October 6, 2021; however, because an
entity that meets the definition of ``security-based swap execution
facility'' also would also meet the definition of ``broker'' in
section 3(a)(4) of the SEA, 15 U.S.C. 78c(a)(4), the Commission
extended the Broker Exemptions solely for persons acting as an SBSEF
until the expiration of the Temporary SBSEF Exemptions (i.e., the
compliance date for the Commission's final SBSEF rules). See SEA
Release No. 87005 (September 19, 2019), 84 FR 68550, 68602 (December
16, 2019).
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A. Rule 803--Requirements and Procedures for Registration
Rule 803 of Regulation SE is closely modelled on Sec. 37.3 of the
CFTC's rules and would set forth a process for registration with the
Commission as an SBSEF.
Section 37.3(a)(1) provides that any person operating a facility
that offers a trading system or platform in which more than one market
participant has the ability to execute or trade swaps with more than
one other market participant on the system or platform shall register
the facility as a swap execution facility under this part or as a
designated contract market (``DCM'') under part 38 of this chapter.
Paragraph (a)(1) of proposed Rule 803 would track the language of Sec.
37.3(a)(1) closely, except that a person meeting these criteria would
be directed to register the facility under relevant provisions of the
SEA rather than the CEA (i.e., to register as an SBSEF under proposed
Rule 803 or as a national securities exchange pursuant to section 6 of
the SEA).
A person that registers with the Commission as a national
securities exchange pursuant to section 6 of the SEA does not fall
within the statutory definition of ``security-based swap execution
facility'' \44\ and thus would not need to register as an SBSEF under
proposed Rule 803. Furthermore, as discussed below,\45\ a person that
registers as an SBSEF under proposed Rule 803 and provides a market
place for no securities other than SBS would be exempt from the
definition of ``exchange'' \46\ and would not need to register as such
pursuant to section 6 of the SEA. The SEA definitions of ``exchange''
and ``security-based swap execution facility'' overlap substantially.
The Commission preliminarily believes that it is appropriate to subject
a trading venue for SBS to only one regulatory regime. Thus, under
proposed Regulation SE, if a trading venue for SBS elects to register
as a national securities exchange, it would not fall within the
statutory definition of ``security-based swap execution facility'' and
would not have to register as an SBSEF.\47\ If a trading venue for SBS
elects to register as an SBSEF under proposed Rule 803 and provides a
market place for no securities other than SBS, it would not--pursuant
to a proposed amendment to Rule 3a1-1--fall within the statutory
definition of ``exchange'' and would not have to register as an
exchange.
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\44\ See section 3(a)(77) of the SEA, 15 U.S.C. 78c(a)(77)
(defining ``security-based swap execution facility'' as ``a trading
system or platform in which multiple participants have the ability
to execute or trade security-based swaps by accepting bids and
offers made by multiple participants in the facility or system,
through any means of interstate commerce, including any trading
facility that . . . is not a national securities exchange''
(emphasis added).
\45\ See infra section XII (discussing proposed paragraph (a)(4)
of SEA Rule 3a1-1).
\46\ 15 U.S.C. 78c(a)(1) (defining ``exchange'' as ``any
organization, association, or group of persons, whether incorporated
or unincorporated, which constitutes, maintains, or provides a
market place or facilities for bringing together purchasers and
sellers of securities or for otherwise performing with respect to
securities the functions commonly performed by a stock exchange as
that term is generally understood, and includes the market place and
the market facilities maintained by such exchange'').
\47\ However, a national securities exchange could elect to
operate an SBSEF and separately register that SBSEF with the
Commission. See section 3D(c) of the SEA, 15 U.S.C. 78c-4(c);
proposed Rule 814.
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Section 37.3(a)(2) of the CFTC's rules sets out the minimum trading
functionality that must be offered by a SEF. A SEF must, at a minimum,
offer an ``order book.'' Section 37.3(a)(3) defines ``order book'' to
mean an electronic trading facility, as that term is defined in section
1a(16) of the CEA; a trading facility, as that term is defined in
section 1a(51) of the CEA; or a trading system or platform in which all
market participants in the trading system or platform have the ability
to enter multiple bids and offers, observe or receive bids and offers
entered by other market participants, and transact on such bids and
offers.
Paragraph (a)(2) of proposed Rule 803, like Sec. 37.3(a)(2), would
require an SBSEF, at a minimum, to offer an order book. The Commission
is proposing, like Sec. 37.3(a)(3), to define ``order book'' in Rule
802 to mean an electronic trading facility, a trading facility, or a
trading system or platform in which all market participants in the
trading system or platform have the ability to enter multiple bids and
offers, observe or receive bids and offers entered by other market
participants, and transact on such bids and offers. Section 37.3(a)(3)
defines ``trading facility'' and ``electronic trading facility'' by
cross-referencing definitions of those terms in the CEA. Rather than
cross-referencing the CEA, the Commission is proposing instead to adapt
the CEA definitions of those terms directly into Rule 802.\48\ The
Commission preliminarily believes that it should harmonize as closely
as possible with the CFTC on foundational terms such as ``trading
facility,'' ``electronic trading facility,'' and ``order book'' because
the CFTC's reliance on these terms over several years has created
understanding of what type of functionality a SEF must offer. The
Commission seeks to avoid a scenario where differences with the CFTC
regarding these key definitions results in an entity's functionality
being allowed under one agency's regime but disallowed under the
other's.
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\48\ See proposed Rule 802.
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Under Sec. 37.3(a)(4), a SEF is not required to provide an order
book for certain package transactions, although the SEF must provide an
order book for a Required Transaction \49\ when such Required
Transaction is not executed as part of a package transaction. Paragraph
(a)(3) of proposed Rule 803 is closely modelled on Sec. 37.3(a)(4) and
would provide a narrow exception to allow an SBSEF not to offer an
order book for the SBS component(s) of a package transaction that
contains a mix of products that both are and are not subject to the
trade execution requirement.
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\49\ As discussed below in section VII(E), the Commission is
proposing to incorporate into Regulation SE the concepts of
``Required Transaction'' and ``Permitted Transaction'' in a manner
closely modelled on the CFTC's use of those terms. A Required
Transaction would be a transaction involving an SBS that is subject
to the trade execution requirement.
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Paragraph (b) of proposed Rule 803 is closely modelled on Sec.
37.3(b) and would set out procedures for full registration of an SBSEF.
Paragraph (b)(1), like Sec. 37.3(b)(1), would provide that an
applicant requesting registration must:
(i) File electronically a complete Form SBSEF or any successor
forms, and all information and documentation described in such forms
with the Commission using the EDGAR system as an Interactive Data File
in accordance with Rule 405 of Regulation S-T; and
(ii) Provide to the Commission, upon the Commission's request, any
additional information and documentation necessary to review an
application.
Paragraph (b)(2) of proposed Rule 803, like Sec. 37.3(b)(2), would
provide that an
[[Page 28880]]
applicant requesting registration as an SBSEF must identify with
particularity any information in the application that will be subject
to a request for confidential treatment pursuant to Rule 24b-2 under
the SEA.\50\ Paragraph (b)(2) also would provide that, as set forth in
proposed Rule 808, certain information provided in an application shall
be made publicly available.
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\50\ Section 37.3(b)(2), like many other provisions in the
CFTC's SEF rules, states that a request for confidential treatment
for parts of a required filing shall be made pursuant to Sec. 145.9
of the CFTC's rules, which contains the CFTC's substantive
requirements for requests for confidential treatment. Rather than
adapting Sec. 145.9 into proposed Regulation SE, the Commission
instead is proposing that confidential treatment requests arising
from SBSEF matters would be made and adjudicated pursuant to SEA
Rule 24b-2, 17 CFR 240.24b-2. The Commission preliminarily believes
that it is not necessary or appropriate to establish and utilize one
set of procedures to handle confidential treatment requests made by
SBSEFs while utilizing a different set of procedures for all other
persons who request confidential treatment from the Commission under
the SEA.
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Paragraph (b)(3) of proposed Rule 803 would address amendments to
the SBSEF registration application. Like Sec. 37.3(b)(3), proposed
Rule 803(b)(3) would provide that an applicant amending a pending
application or requesting an amendment to an order of registration
shall file an amended application electronically with the Commission
using the EDGAR system as an Interactive Data File in accordance with
Rule 405 of Regulation S-T. Subsequent to being registered, an SBSEF
would be required to submit rule and product filings under Rule 806 or
807, as well as provide other updates as may be required pursuant to
other rules for SBSEFs.
Paragraph (b)(4) of proposed Rule 803 would address the effect of
an incomplete application. Like Sec. 37.3(b)(4), proposed Rule
803(b)(4) would provide that, if an application is incomplete, the
Commission shall notify the applicant that its application will not be
deemed to have been submitted for purposes of the Commission's review.
Paragraph (b)(5) of proposed Rule 803 would establish the
Commission review period for an application to register as an SBSEF.
Proposed Rule 803(b)(5) is closely modelled on Sec. 37.3(b)(5) and
would require the Commission to approve or deny an application for
registration as an SBSEF within 180 days of the filing of the
application. Proposed Rule 803(b)(5) would further provide that, if the
Commission notifies the person that its application is materially
incomplete and specifies the deficiencies in the application, the
running of the 180-day period would be stayed from the time of such
notification until the application is resubmitted in completed form. In
such case, the Commission would have not less than 60 days to approve
or deny the application from the time the application is resubmitted in
completed form.
Paragraph (b)(6)(i) of proposed Rule 803, like Sec. 37.3(b)(6)(i),
would provide that the Commission shall issue an order granting
registration upon a Commission determination, in its own discretion,
that the applicant has demonstrated compliance with the SEA and the
Commission's rules applicable to SBSEFs. Paragraph (b)(6)(i) would
allow the Commission to issue an order granting registration, subject
to conditions. Paragraph (b)(6)(ii) of proposed Rule 803, modelled on
Sec. 37.3(b)(6)(ii), would provide that the Commission may issue an
order denying registration upon a Commission determination, in its own
discretion, that the applicant has not demonstrated compliance with the
SEA and the Commission's rules applicable to SBSEFs. If the Commission
denies an application under proposed Rule 803(b)(6)(ii), it would be
required to specify the grounds for the denial.
Paragraph (c) of Sec. 37.3, which allows the CFTC to grant SEFs
temporary registration under certain conditions, was adopted with a
sunset provision that generally terminated the applicability of the
paragraph two years after it became effective in August 2013.\51\
Because this provision is now obsolete, the Commission is not proposing
an equivalent provision in Regulation SE.
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\51\ See Sec. 37.3(c)(5). Notwithstanding the general sunset
provision, SEFs that applied for temporary registration before the
termination date were permitted to continue operating if they had
not yet been either granted or denied full registration by that
date. See id.
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Paragraph (c) of proposed Rule 803, like Sec. 37.3(d), would
address reinstatement of a dormant registration. Proposed Rule 803(c)
would provide that a dormant SBSEF \52\ may reinstate its registration
under the procedures of proposed Rule 803(b). Proposed Rule 803(c)
would further provide that the applicant may rely upon previously
submitted materials if such materials accurately describe the dormant
SBSEF's conditions at the time that it applies for reinstatement of its
registration.
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\52\ See proposed Rule 802 (defining ``dormant security-based
swap execution facility'' to mean ``a security-based swap execution
facility on which no trading has occurred for the previous 12
consecutive calendar months; provided, however, that no security-
based swap execution facility shall be considered to be a dormant
security-based swap execution facility if its initial and original
Commission order of registration was issued within the preceding 36
consecutive calendar months''). This proposed definition is modelled
on the definition of ``dormant swap execution facility'' found in
Sec. 40.1(f).
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Paragraph (d) of proposed Rule 803, like Sec. 37.3(e), would set
out procedures for an SBSEF to request a transfer of registration.
Paragraph (d)(1), which is closely modelled on Sec. 37.3(e)(1), would
provide that an SBSEF seeking to transfer its registration from its
current legal entity to a new legal entity as a result of a corporate
change shall file a request for approval to transfer such registration
with the Commission in the form and manner specified by the Commission.
Paragraph (d)(2), modelled on Sec. 37.3(e)(2), would provide that a
request for transfer of registration shall be filed no later than three
months prior to the anticipated corporate change; or in the event that
the SBSEF could not have known of the anticipated change three months
prior to the anticipated change, as soon as it knows of such change.
Paragraph (d)(3) of proposed Rule 803, like Sec. 37.3(e)(3), would
require an SBSEF's request for transfer of registration to include the
following:
The underlying agreement that governs the corporate
change;
A description of the corporate change, including the
reason for the change and its impact on the SBSEF, including its
governance and operations, and its impact on the rights and obligations
of members; \53\
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\53\ Here, and at several other places in Sec. 37.3(e)(3), the
CFTC uses the term ``market participants'' rather than ``members.''
However, there are other places in the CFTC's rules that are being
adapted by the Commission into proposed Regulation SE that use the
term ``member'' synonymously with ``market participant.'' When the
context suggests that a rule is addressing participants of a
particular SBSEF market, rather than market participants in the
abstract, the Commission is proposing to use the term ``member''
throughout Regulation SE.
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A discussion of the transferee's ability to comply with
the SEA, including the core principles applicable to SBSEFs and the
Commission's rules thereunder;
The governing documents of the transferee, including, but
not limited to, articles of incorporation and bylaws;
The transferee's rules marked to show changes from the
current rules of the SBSEF;
A representation by the transferee that it:
[cir] Will be the surviving entity and successor-in-interest to the
transferor SBSEF and will retain and assume, without limitation, all of
the assets and liabilities of the transferor;
[cir] Will assume responsibility for complying with all applicable
[[Page 28881]]
provisions of the SEA and the Commission's rules thereunder;
[cir] Will assume, maintain, and enforce all rules implementing and
complying with the core principles applicable to SBSEFs, including the
adoption of the transferor's rulebook, as amended in the request, and
that any such amendments will be submitted to the Commission pursuant
to proposed Rules 806 or 807;
[cir] Will comply with all regulatory responsibilities \54\ except
if otherwise indicated in the request, and will maintain and enforce
all regulatory programs; and
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\54\ The equivalent provision in Sec. 37.3(e)(3)(vi)(D)
requires a representation from the transferee that it ``[w]ill
comply with all self-regulatory responsibilities except if otherwise
indicated in the request, and will maintain and enforce all self-
regulatory programs'' (emphasis added). SBSEFs are not SROs under
the SEA and therefore do not have self-regulatory responsibilities
or self-regulatory programs.
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[cir] Will notify members of all changes to the transferor's
rulebook prior to the transfer and will further notify members of the
concurrent transfer of the registration to the transferee upon
Commission approval and issuance of an order permitting this transfer.
A representation by the transferee that upon the transfer:
[cir] It will assume responsibility for and maintain compliance
with core principles for all SBS previously made available for trading
through the transferor, whether by certification or approval; and
[cir] None of the proposed rule changes will affect the rights and
obligations of any member.
Paragraph (d)(4) of proposed Rule 803, modelled on Sec.
37.3(e)(4), would provide that, upon review of a request for transfer
of registration, the Commission, as soon as practicable, shall issue an
order either approving or denying the request.
Paragraph (e) of proposed Rule 803, like Sec. 37.3(f), would
provide that an applicant for registration as an SBSEF may withdraw its
application by filing a withdrawal request electronically with the
Commission using the EDGAR system as an Interactive Data File in
accordance with Rule 405 of Regulation S-T.\55\ Proposed Rule 803(e)
would further provide that withdrawal of an application for
registration shall not affect any action taken or to be taken by the
Commission based upon actions, activities, or events occurring during
the time that the application was pending with the Commission.
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\55\ 17 CFR 232.405. The proposed electronic filing requirement
discussed above does not appear in the CFTC version of this
provision. The Commission is adding this specification to implement
the Inline XBRL and EDGAR electronic filing requirements for certain
documents required by proposed Regulation SE. See infra section XV.
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Paragraph (f) of proposed Rule 803, like Sec. 37.3(g), would
provide that an SBSEF may request that its registration be vacated by
filing a vacation request electronically with the Commission using the
EDGAR system and must be provided as an Interactive Data File in
accordance with Rule 405 of Regulation S-T at least 90 days prior to
the date that the vacation is requested to take effect. Section 37.3(g)
provides that a registration may be vacated under section 7 of the CEA.
Since the Commission does not operate under the CEA, the Commission is
proposing to adapt relevant language from section 7 of the CEA directly
into proposed Rule 803(f). Thus, proposed Rule 803(f) would continue as
follows, with language taken from section 7 italicized and language
taken from Sec. 37.3(g) in regular text: ``Upon receipt of such
request, the Commission shall promptly order the vacation to be
effective upon the date named in the request and send a copy of the
request and its order to all other security-based swap execution
facilities, SBS exchanges, and registered clearing agencies that clear
security-based swaps. Vacation of registration shall not affect any
action taken or to be taken by the Commission based upon actions,
activities, or events occurring during the time that the security-based
swap execution facility was registered by the Commission. From and
after the date upon which the vacation became effective the said
security-based swap execution facility can thereafter be registered
again by applying to the Commission in the manner provided in paragraph
(b) of this section for an original application.''
The Commission seeks comment on the following:
14. Do you believe in general that the Commission should closely
harmonize the rules for SBSEF registration with the CFTC's rules for
SEF registration? Why or why not?
15. In particular, do you agree with the language that the
Commission is proposing to adapt from Sec. 37.3 (Requirements and
procedures for registration) into Rule 803? If not, what language would
you delete or revise, and why?
16. Do you believe that the Commission should harmonize the
application procedures and timeframes in proposed Rule 803 with Sec.
37.3 of the CFTC's rules? Why or why not? Are there aspects of Sec.
37.3 that you believe are not necessary or appropriate to incorporate
into Rule 803? If so, please describe. Are there different or
additional requirements that the Commission should include in Rule 803
that are not included in Sec. 37.3? If so, please describe.
17. Do you believe that any provisions of Sec. 37.3(c) relating to
temporary registration are still relevant and should be adapted into
Rule 803? If so, which provisions and why?
18. Do you believe in general that proposed Rule 803 should include
provisions relating to vacation of an SBSEF registration? If so, do you
agree with the specific language adapted by the Commission from section
7 of the CEA and Sec. 37.3(g) into proposed Rule 803(f)? If not, how
would you revise that language?
B. Form SBSEF
As new Sec. 249.2001, the Commission is proposing Form SBSEF, the
application form for an entity to register with the Commission as an
SBSEF. The proposed form would also be used for submitting any updates,
corrections, or supplemental information to a pending application for
registration. Proposed Form SBSEF is closely modelled on the CFTC's
Form SEF for entities that seek to register with the CFTC as SEFs, with
only minor changes to remove the concept of post-registration
amendments, as the proposed rule would not require any amendments to
Form SBSEF post-registration. The exhibits being proposed along with
Form SBSEF are very similar to the exhibits in Form SEF. Like with Form
SEF, each applicant submitting a Form SBSEF would be required to
provide the Commission with documents and descriptions pertaining to
its business organization, financial resources, and compliance program,
including various documents describing the applicant's legal and
financial status. An applicant would be required to disclose any
affiliates and provide a brief description of the nature of the
affiliation, and submit copies of any agreements between the SBSEF and
third parties that would assist the applicant in complying with its
duties under the SEA. In addition, an applicant would be required to
demonstrate operational capability through documentation, including
technical manuals and third-party service provider agreements.
Under proposed Rule 803(b)(1), an applicant for SBSEF registration
would be required to complete Form SBSEF and provide, upon the
Commission's request, any additional necessary information and
documentation in order review the application. The determination as to
when an application submission is complete would be at the sole
discretion of the Commission. The Commission would review Form SBSEF
[[Page 28882]]
and, at the conclusion of its review, by order either: (i) Grant
registration; (ii) deny the application for registration; or (iii)
grant registration subject to certain conditions. After an applicant is
granted registration, any updates or amendments to the information
contained in its Form SBSEF by an active SBSEF would be required to be
submitted as rules or rule amendments under proposed Rule 806 or 807 or
as may be required by other rules in Regulation SE.
The CFTC's process for registering SEFs appears well understood by
the industry and well designed for being adapted to the SBS market.
Therefore, the Commission is using the CFTC's process as a basis for
its own process for registering SBSEFs. Assuming that most if not all
SBSEFs will be dually registered as SEFs, the Commission preliminarily
believes that it is not necessary to require the same registrant to
provide relevant information in one manner to the Commission if the
CFTC requires it in a different manner.
The Commission seeks comment on the following:
19. Are there parts of Form SEF that you believe are not necessary
or appropriate to incorporate into Form SBSEF? If so, please describe.
20. Are there different or additional requirements that the
Commission should include in Form SBSEF that are not included in Form
SEF? If so, please describe. What would be the benefits and costs of
requiring that information in Form SBSEF that is not required by the
CFTC in Form SEF?
C. Abbreviated Registration Procedures for CFTC-Registered SEFs
Many of the entities that will seek registration with the
Commission as SBSEFs are already registered with the CFTC as SEFs.
Entities that seek dual registration presumably see efficiencies in
utilizing the same systems, policies, and procedures to trade both
swaps and SBS. As noted throughout this release, the Commission seeks
to harmonize the SBSEF regulatory regime as closely as practicable with
the CFTC's SEF regulatory regime, achieving similar regulatory benefits
as the CFTC regime while imposing only marginal costs on dually-
registered SEF/SBSEFs and their members. If the Commission ultimately
adopts SBSEF rules that are closely harmonized with those of the CFTC,
SEFs that seek dual registration with the SEC would likely need to make
only minor adjustments to their rules and trading procedures to support
trading of SBS in addition to the trading of swaps. The Commission
preliminarily believes that whether an entity is registered as a SEF
and in good standing with the CFTC is relevant when considering its
application to register as an SBSEF, and that an abbreviated
registration for CFTC-registered SEFs is appropriate. Furthermore, the
Commission is preliminarily considering that, after adopting final
rules establishing a registration process for SBSEFs, it could exercise
its exemptive authority under section 36(a)(1) of the SEA \56\ to relax
or eliminate entirely certain of the registration requirements for
entities that are already registered as SEFs with the CFTC.
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\56\ 15 U.S.C. 78mm(a)(1).
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The Commission seeks comment on the following:
21. Do you believe in general that the Commission should utilize
its authority under section 36(a)(1) of the SEA to establish an
abbreviated procedure for entities wishing to register as SBSEFs that
are already registered with the CFTC as SEFs? Why or why not?
22. If so, what registration requirements should the Commission
relax or eliminate entirely for entities seeking dual registration?
VI. Rule and Product Filings by SBSEFs
Unlike section 19(b) of the SEA,\57\ which sets out a process
whereby national securities exchanges and other SROs submit filings to
the Commission to add, delete, or amend rules (including rules to list
products), section 3D of the SEA \58\ does not set out an equivalent
process for SBSEFs. It can be expected, however, that an SBSEF will
seek to change its rules over time in order, for example, to implement
new trading methodologies and to expand its product offerings, with the
intent to make its market more attractive to participants. The
Commission preliminarily believes, therefore, that some review process
is necessary to assess whether such changes to an SBSEF's rules and
product offerings are consistent with section 3D of the SEA and the
Commission's rules thereunder. The Commission preliminarily believes
that the CFTC's filing procedures are an appropriate model on which to
base its own filing procedures. Furthermore, because of the likelihood
that most if not all SBSEFs will be dually registered with the CFTC as
SEFs and that many rule changes for a dual registrant will affect both
its SBS and swap trading businesses, close harmonization with the
CFTC's filing procedures would allow a dual registrant to make a
similar filing to each agency, allowing each agency to carry out its
oversight functions while minimizing the burdens on dual registrants.
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\57\ 15 U.S.C. 78s(b).
\58\ 15 U.S.C. 78c-4.
---------------------------------------------------------------------------
Parts 37 and 40 of the CFTC's rules set out processes whereby SEFs
may establish or amend rules and list products. In short, these
processes allow a SEF to voluntarily submit a rule, rule amendment, or
new product for CFTC review and approval, or to ``self-certify'' that a
rule, rule amendment, or new product meets applicable standards under
the CEA and the CFTC's rules thereunder without obtaining CFTC
approval, although the CFTC retains the ability, in certain
circumstances, to stay the self-certification for further review before
it may become effective. Using its general authority to impose any
requirement on SBSEFs and to prescribe rules governing the regulation
of SBSEFs,\59\ the Commission is proposing to establish similar filing
processes for registered SBSEFs in proposed Rules 804 to 810 of
Regulation SE.
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\59\ See 15 U.S.C. 78c-4(d)(1)(A)(ii) (requiring an SBSEF, to be
registered and to maintain registration, to comply with any
requirement that the Commission may impose by rule or regulation);
15 U.S.C. 78c-4(f) (directing the Commission to prescribe rules
governing the regulation of SBSEFs).
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A. Rule 804--Listing Products for Trading by Certification
Proposed Rule 804 is modelled on Sec. 40.2 of the CFTC's rules and
would set forth procedures by which an SBSEF may list a product via
certification.
Sec. 40.2(a) specifies the filing requirements for DCMs and SEFs
to certify a product for listing. Paragraph (a) of proposed Rule 804
would adapt these requirements for SBSEFs, with one exception, as
explained in the next paragraph. Paragraph (a)(1) of proposed Rule 804
would require an SBSEF to file its submission electronically with the
Commission using the EDGAR system as an Interactive Data File in
accordance with Rule 405 of Regulation S-T.
Paragraph (a)(2) of proposed Rule 804 would provide that the
Commission must receive the submission by the open of business on the
business day that is ten business days preceding the product's listing.
By contrast, the parallel provision in Sec. 40.2(a) provides that a
DCM or SEF must file the self-certification only one business day
before listing the product.\60\ The Commission preliminarily believes
that a ten-business-day review period for self-certified SBS products
before they can be listed strikes a reasonable balance between allowing
SBSEFs to bring new products to market quickly while affording the
Commission staff a
[[Page 28883]]
reasonable period in which to assess them prior to listing. The
Commission is concerned that one business day would not provide the SEC
staff sufficient time to review a new product, especially a novel or
complex product that might be difficult to analyze. As discussed below,
the Commission is proposing that it could stay a product for reasons
similar to those in the CFTC's stay provision. If a product does
warrant a stay, the Commission also would need sufficient time to go
through the administrative steps of formally issuing the stay. The
proposed ten-business-day review period for self-certified products
accords with the CFTC's ten-business-day review period for self-
certified rules,\61\ which the Commission is proposing to replicate in
Rule 807(a)(3).\62\
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\60\ See Sec. 40.2(a)(2) (one of the conditions for a valid
self-certification of a product is that the CFTC has received the
submission by the open of business on the business day preceding the
product's listing).
\61\ See Sec. 40.6(a)(3) (one of the conditions for a valid
self-certification of a rule or rule amendment is that the CFTC has
received the submission not later than the open of business on the
business day that is ten business days prior to the registered
entity's implementation of the rule or rule amendment).
\62\ See infra section VI(D).
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Paragraph (a)(3) of proposed Rule 804 would require a self-
certification to include:
(1) A copy of the submission cover sheet; \63\
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\63\ The Commission is proposing, in new Sec. 249.2002, a
submission cover sheet (with instructions) that is closely modelled
on the CFTC's submission cover sheet.
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(2) A copy of the product's rules, including all rules related to
its terms and conditions;
(3) The intended listing date;
(4) A certification by the SBSEF that the product to be listed
complies with the SEA and the Commission's rules thereunder;
(5) A concise explanation and analysis of the product and its
compliance with applicable provisions of the SEA, including core
principles, and the Commission's rules thereunder. This explanation and
analysis shall either be accompanied by the documentation relied upon
to establish the basis for compliance with applicable law, or
incorporate information contained in such documentation, with
appropriate citations to data sources;
(6) A certification that the SBSEF posted a notice of pending
product certification with the Commission and a copy of the submission,
concurrent with the filing of a submission with the Commission, on the
SBSEF's website; \64\ and
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\64\ Under proposed Rule 804(a)(3)(vi), information that the
SBSEF seeks to keep confidential could be redacted from the
documents published on the SBSEF's website but would have to be
republished consistent with any determination made by the Commission
pursuant to SEA Rule 24b-2.
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(7) A request for confidential treatment, if appropriate, as
permitted pursuant to SEA Rule 24b-2.\65\
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\65\ Section 40.2(a)(3) instructs filers to make any request for
confidential treatment pursuant to Sec. 40.8 of the CFTC's rules,
which in turn cross-references Sec. 145.9. The Commission is
proposing instead to direct filers to make any request for
confidential treatment pursuant to existing SEA Rule 24b-2. See
supra note 50.
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Paragraph (b) of proposed Rule 804, modelled on Sec. 40.2(b),
would provide that, if requested by Commission staff, an SBSEF shall
provide any additional evidence, information, or data that demonstrates
that the SBS meets, initially or on a continuing basis, the
requirements of the SEA or the Commission's rules or policies
thereunder.
Section 40.2(c) provides that the CFTC may stay the listing of a
contract pursuant to paragraph (a) of this section during the pendency
of CFTC proceedings for filing a false certification or during the
pendency of a petition to alter or amend the contract terms and
conditions pursuant to section 8a(7) of the CEA. The SEA does not
include the CEA's provisions regarding altering or amending the terms
and conditions of an SBS listed by an SBSEF like the authority granted
to the CFTC with respect to products listed by SEFs, such that the
Commission would be able to stay the listing of an SBS that it believes
may be inconsistent with the SEA, pending proceedings to exercise that
authority. Nor are proceedings for false certification of an SBS
contemplated by the SEA. For this reason, in lieu of harmonizing with
Sec. 40.2(c), the Commission is proposing, in Rule 804(c), a provision
that would allow the Commission to stay the certification of a new
product in the same manner that proposed Rule 807(c)--which, as
described below, is itself based on Sec. 40.6(c) of the CFTC rules--
would allow the Commission to stay the self-certifications of a new
rule or rule amendment.\66\
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\66\ The Commission also is not proposing to adapt--either in
Rule 807 or here in Rule 804--Sec. 40.6(c)(4), which relates to
rules already implemented and permits the CFTC to stay the
effectiveness of such rules during the pendency of proceedings for
filing a false certification or of a petition to alter or amend the
rule pursuant to section 8a(7) of the CEA.
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Thus, paragraph (c)(1) of proposed Rule 804 would provide that the
Commission may stay the certification of a new product by issuing a
notification informing the SBSEF that the Commission is staying the
certification on the grounds that the product presents novel or complex
issues that require additional time to analyze, is accompanied by an
inadequate explanation, or is potentially inconsistent with the SEA or
the Commission's rules thereunder. Under paragraph (c)(1), the
Commission would have an additional 90 days from the date of the
notification to conduct the review. Paragraph (c)(2) would require the
Commission to provide a 30-day comment period during that 90 days, and
to publish a notice of the 30-day comment period on the Commission's
website. Comments from the public could be submitted as specified in
that notice. Paragraph (c)(3) would provide that the product that had
been stayed would become effective, pursuant to the certification, at
the expiration of the 90-day review period, unless the Commission
withdraws the stay prior to that time, or the Commission notifies the
SBSEF during the 90-day time period that it objects to the proposed
certification on the grounds that the proposed product is inconsistent
with the SEA or the Commission's rules.
Paragraph (d) of Sec. 40.2 provides that a DCM or SEF may submit a
class certification of swaps based on an ``excluded commodity,'' \67\
subject to certain conditions. The proposed rules do not provide for
class certification of any SBS although, as noted below, the Commission
seeks commenters' views on whether the concept of class certification
would be appropriate for SBSEFs.
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\67\ See section 1a(19) of the CEA, 7 U.S.C. 1a(19) (defining
``excluded commodity'').
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The Commission preliminarily believes that proposed Regulation SE
should allow SBSEFs to introduce new SBS products to their market
places as speedily as practicable while affording the Commission an
effective mechanism to assess their consistency with section 3D of the
SEA. The Commission preliminarily believes that the CFTC's self-
certification procedures are well articulated and well understood by
SEFs, and that harmonizing with these procedures for new product
filings by SBSEF would yield comparable regulatory benefits while
minimizing burdens on SBSEFs. At the same time, the Commission
preliminarily believes that, for the reasons noted above, a ten-
business-day pre-listing review period is more appropriate than a one-
business-day review period for self-certified SBS products.
The Commission seeks comment on the following:
23. Do you believe in general that Regulation SE should include a
rule that allows SBSEFs to list products for trading by certification?
Why or why not?
[[Page 28884]]
24. In particular, should the Commission establish a procedure for
listing SBS products for trading by certification by harmonizing
closely with Sec. 40.2 of the CFTC's rules? Why or why not?
25. Do you agree with the ten-business-day pre-listing review
period for self-certified products in proposed Rule 804(a)(2) instead
of the CFTC's one-business-day review period? Why or why not? What
economic harm might an SBSEF and/or its members suffer if the
Commission ultimately adopted a review period other than one business
day? If you believe that the Commission should adopt a review period of
greater than one day (but other than ten), please explain.
26. Do you believe that the Commission should adapt the concept of
class certification from Sec. 40.2(d) into proposed Rule 804? Why or
why not? If so, how do you believe a ``class'' should be defined for
purposes of listing SBS products on an SBSEF? Should there be any
conditions for class certification? If so, what conditions and why?
27. Are there any provisions of proposed Rule 804 that the
Commission has adapted from Sec. 40.2 that you believe would be
inappropriate, or would not create any benefit, in a Commission rule to
establish procedures for SBSEFs to list SBS products for trading by
certification? If so, please identify any such provision, explain why
it would be inappropriate or unnecessary for SBSEFs, and what economic
benefit that you believe would result from omitting it from the
Commission's final rule.
28. Do you believe that proposed Rule 804(c), relating to stays of
product certifications, mirroring the Commission's proposed provisions
relating to stays of self-certifications of new rules, is appropriate
and workable? Why or why not? If not, what alternatives, if any, should
be considered to enable the Commission to stay product certifications
that it believes pose issues with respect to consistency with the SEA?
B. Rule 805--Voluntary Submission of New Products for Commission Review
and Approval
Proposed Rule 805 is closely modelled on Sec. 40.3 of the CFTC's
rules and would set forth procedures by which an SBSEF may voluntarily
submit new SBS products for Commission review and approval.
Section 40.3(a) provides that a SEF or DCM may request the CFTC to
approve a new or dormant product prior to listing it for trading, and
sets out the filing requirements. Paragraph (a) of proposed Rule 805
would adapt these requirements for SBSEFs. First, an SBSEF would be
required to file its submission electronically with the Commission
using the EDGAR system as an Interactive Data File in accordance with
Rule 405 of Regulation S-T. The filing also would have to include a
copy of the submission cover sheet, a copy of the rules that set forth
the terms and conditions of the SBS to be listed, and an explanation
and analysis of the product and its compliance with applicable
provisions of the SEA, including the Core Principles and the
Commission's rules thereunder.\68\ The submission also would have to
describe any agreements or contracts entered into with other parties
that enable the SBSEF to carry out its responsibilities.
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\68\ This explanation and analysis would have to either be
accompanied by the documentation relied upon to establish the basis
for compliance with the applicable law, or incorporate information
contained in such documentation, with appropriate citations to data
sources.
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Furthermore, paragraph (a) of proposed Rule 805, modelled on Sec.
40.3(a), would require the SBSEF to include, if requested by Commission
staff, additional evidence, information, or data demonstrating that the
SBS meets, initially or on a continuing basis, the requirements of the
SEA, or other requirement for registration under the SEA, or the
Commission's rules or policies thereunder. The SBSEF would be required
to submit the requested information by the open of business on the date
that is two business days from the date of request by Commission staff,
or at the conclusion of such extended period agreed to by Commission
staff after timely receipt of a written request from the SBSEF.
Paragraph (a) of proposed Rule 805, like Sec. 40.3(a), would permit
the submitting SBSEF to include a request for confidential treatment
regarding portions of its application.\69\ Finally, paragraph (a) of
proposed Rule 805, like Sec. 40.3(a), would require the SBSEF to
certify that it posted a notice of its request for Commission approval
of the new product and a copy of the submission, concurrent with the
filing of a submission with the Commission, on the SBSEF's website.\70\
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\69\ Section 40.3(a), like Sec. 40.2(a)(3), instructs filers to
make any request for confidential treatment pursuant to Sec. 40.8
of the CFTC's rules, which in turn cross-references Sec. 145.9. As
noted previously, the Commission proposes instead to direct filers
to make any request for confidential treatment pursuant to SEA Rule
24b-2. See supra note 50.
\70\ Information that the SBSEF seeks to keep confidential could
be redacted from the documents published on the SBSEF's website but
would have to be republished consistent with any determination made
by the Commission pursuant to SEA Rule 24b-2.
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Paragraph (a) of proposed Rule 805 would omit two provisions in
Sec. 40.3(a). First, Sec. 40.3(a)(6) requires the submitting entity
to include the certifications required in Sec. 41.22 for product
approval of a commodity that is a security future or a security futures
product, as defined in sections 1a(44) or 1a(45) of the CEA,
respectively. The Commission is not adapting this provision into
proposed Regulation SE because it pertains to security futures and
security futures products, not to swaps or SBS. Second, Sec.
40.3(a)(8) requires the submitting entity to include a filing fee. The
Commission is not proposing to charge SBSEFs filing fees for submitting
new product proposals.
Paragraph (b) of proposed Rule 805, like Sec. 40.3(b), would
provide that the Commission shall approve a new product unless the
terms and conditions of the product violate the SEA or the Commission's
rules thereunder.
Paragraph (c) of proposed Rule 805, modelled on Sec. 40.3(c),
would provide that a product submitted for Commission approval under
Rule 805 shall be deemed approved by the Commission 45 days after
receipt by the Commission, or at the conclusion of an extended period
as provided under proposed Rule 805(d), unless notified otherwise
within the applicable period, if the submission complies with the
requirements of Rule 805(a) and the SBSEF does not amend the terms or
conditions of the product or supplement the request for approval,
except as requested by the Commission or for correction of
typographical errors, renumbering, or other non-substantive revisions,
during that period. Paragraph (c) also would provide that any
voluntary, substantive amendment by the SBSEF would be treated as a new
submission under Rule 805.
Paragraph (d) of proposed Rule 805, modelled on Sec. 40.3(d),
would provide that the Commission may extend the 45-day review period
in paragraph (c) for an additional 45 days, if the product raises novel
or complex issues that require additional time to analyze, in which
case the Commission shall notify the SBSEF within the initial 45-day
review period and briefly describe the nature of the specific issue(s)
for which additional time for review is required. Paragraph (d) also
would provide that the Commission may extend the 45-day review period
for any length of time to which the SBSEF agrees in writing.
Paragraph (e) of proposed Rule 805 would provide that the
Commission, at any time during its review, may notify the SBSEF that it
will not, or is unable to, approve the product. This notification would
have to briefly specify the nature of the issues raised and the
specific provision of the SEA or
[[Page 28885]]
the Commission's rules thereunder, including the form or content
requirements of proposed Rule 805(a), that the product violates,
appears to violate, or potentially violates but which cannot be
ascertained from the submission. Paragraph (f) of proposed Rule 805,
like Sec. 40.3(f), would provide that such notification of the
Commission's determination not to approve a product does not prejudice
the SBSEF from subsequently submitting a revised version of the product
for Commission approval, or from submitting the product as initially
proposed pursuant to a supplemented submission. Furthermore, such
notification would be presumptive evidence that the entity may not
truthfully certify under proposed Rule 804 that the same, or
substantially the same, product does not violate the SEA or the
Commission's rules thereunder.
The Commission preliminarily believes that it is reasonable and
appropriate to supplement the product certification procedures in
proposed Rule 804 by also including in Regulation SE, as proposed Rule
805, procedures for voluntary submission of new products for Commission
review and approval. The Commission preliminarily believes that
providing this approval process, as the CFTC does, can be valuable to
an SBSEF seeking the Commission's concurrence that a new product is in
compliance with the SEA prior to listing it. The Commission
preliminarily believes that the CFTC's procedures in this regard are
well articulated and well understood by SEFs, and that closely
harmonizing with these procedures would yield comparable regulatory
benefits while minimizing burdens on SBSEFs.\71\
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\71\ The Commission does not discount the possibility that an
entity might elect to register as an SBSEF with the SEC but not as a
SEF with the CFTC. In such case, the SEC-only registrant would not
have any familiarity with the CFTC's rules and filing procedures.
Nevertheless, because the Commission preliminarily believes that
most if not all entities that will seek SBSEF registration with the
SEC are or will also be registered as SEFs with the CFTC, such dual
registrants would benefit from harmonized procedures. Furthermore,
if the Commission ultimately adopts these procedures substantially
as proposed, it likely would be unnecessary to establish and apply
one set of procedures for dual registrants and a different set for
SEC-only SBSEFs.
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The Commission requests comment on the following:
29. Do you believe in general that Regulation SE should include a
rule setting forth procedures for an SBSEF to voluntarily submit new
SBS products for Commission review and approval? Why or why not?
30. In particular, should the Commission adopt procedures for
voluntary submission of new SBS products for Commission review and
approval by harmonizing closely with Sec. 40.3 of the CFTC's rules?
Why or why not?
31. Are there any provisions of Sec. 40.3 that are adapted into
proposed Rule 805 that you believe would be inappropriate, or would not
create any benefit, in a Commission rule applying to SBSEFs? If so,
please identify any such provision, explain why it would be
inappropriate or unnecessary for SBSEFs, and what economic benefit that
you believe would result from omitting it from the Commission's final
rule.
C. Rule 806--Voluntary Submission of Rules for Commission Review and
Approval
Proposed Rule 806 is closely modelled on Sec. 40.5 of the CFTC's
rules and would set forth procedures by which an SBSEF may voluntarily
submit rules, rule amendments, or dormant rules for Commission review
and approval.
Section 40.5(a) provides that a registered entity, including a SEF,
may request that the CFTC approve a new rule, rule amendment, or
dormant rule and sets out the filing requirements. Paragraph (a) of
proposed Rule 805 would adapt these requirements for SBSEFs. First, an
SBSEF would be required to file its submission electronically with the
Commission using the EDGAR system as an Interactive Data File in
accordance with Rule 405 of Regulation S-T. The filing also would have
to include a copy of the submission cover sheet and set forth the text
of the rule or rule amendment (in the case of a rule amendment,
deletions and additions must be indicated). Further, the SBSEF would be
required to describe the proposed effective date of the rule or rule
amendment and any action taken or anticipated to be taken to adopt the
proposed rule by the SBSEF or by its governing board or by any
committee thereof, and cite the rules of the SBSEF that authorize the
adoption of the proposed rule. The SBSEF also would be required to
provide an explanation and analysis of the operation, purpose, and
effect of the proposed rule or rule amendment and its compliance with
applicable provisions of the SEA, including the core principles
relating to SBSEFs and the Commission's rules thereunder, and, as
applicable, a description of the anticipated benefits to market
participants or others, any potential anticompetitive effects on market
participants or others, and how the rule fits into the SBSEF's
framework of regulation.
Moreover, the SBSEF would be required to provide additional
information which may be beneficial to the Commission in analyzing the
new rule or rule amendment. If a proposed rule affects, directly or
indirectly, the application of any other rule of the SBSEF, the
pertinent text of any such rule would have to be set forth and the
anticipated effect described. The SBSEF also would be required to
provide a brief explanation of any substantive opposing views expressed
to the SBSEF by governing board or committee members, members of the
SBSEF, or market participants that were not incorporated into the rule,
or a statement that no such opposing views were expressed.
The SBSEF could request confidential treatment for portions of its
submission, as permitted by SEA Rule 24b-2. Finally, the SBSEF would
have to certify that it posted a notice of the pending rule with the
Commission and a copy of the submission, concurrent with the filing of
a submission with the Commission, on the SBSEF's website.\72\
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\72\ Information that the SBSEF seeks to keep confidential could
be redacted from the documents published on the SBSEF's website, but
would have to be republished consistent with any determination made
pursuant to SEA Rule 24b-2.
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Paragraph (b) of proposed Rule 806, modelled on Sec. 40.5(b),
would provide that the Commission shall approve a new rule or rule
amendment unless the rule or rule amendment is inconsistent with the
SEA or the Commission's rules thereunder. Paragraph (c) of proposed
Rule 806, like Sec. 40.5(c), would provide that a rule or rule
amendment submitted for Commission approval under Rule 806 shall be
deemed approved by the Commission 45 days after receipt by the
Commission, or at the conclusion of such extended period as provided
under paragraph (d) of this section, unless the SBSEF is notified
otherwise within the applicable period, if the submission complies with
the requirements of proposed Rule 806(a) and the SBSEF does not amend
the proposed rule or supplemented the submission, except as requested
by the Commission, during the pendency of the review period, other than
for correction of typographical errors, renumbering, or other non-
substantive revisions. Paragraph (c) also would provide that any
amendment or supplementation not requested by the Commission would be
treated as the submission of a new filing under Rule 806.
Paragraph (d) of proposed Rule 806, modelled on Sec. 40.5(d),
would provide that the Commission may further extend the review period
in paragraph (c) for an additional 45 days, if the proposed rule
[[Page 28886]]
or rule amendment raises novel or complex issues that require
additional time for review or is of major economic significance, the
submission is incomplete, or the requestor does not respond completely
to Commission questions in a timely manner, in which case the
Commission shall notify the submitting SBSEF within the initial 45-day
review period and shall briefly describe the nature of the specific
issues for which additional time for review shall be required.
Paragraph (d) also would allow an extension to which the SBSEF agrees
in writing.
Paragraph (e) of proposed Rule 806, like Sec. 40.5(e), would
provide that, at any time during its review, the Commission may notify
the SBSEF that it will not, or is unable to, approve the new rule or
rule amendment. This notification would have to briefly specify the
nature of the issues raised and the specific provision of the SEA or
the Commission's rules thereunder, including the form or content
requirements of proposed Rule 806, with which the new rule or rule
amendment is inconsistent or appears to be inconsistent with the SEA or
the Commission's rules thereunder. Paragraph (f) of proposed Rule 806,
like Sec. 40.5(f), would provide that such notification to an SBSEF
would not prevent the SBSEF from subsequently submitting a revised
version of the proposed rule or rule amendment for Commission review
and approval or from submitting the new rule or rule amendment as
initially proposed in a supplemented submission. Paragraph (f) would
further provide that the revised submission would be reviewed without
prejudice. Finally, paragraph (f) would provide that such notification
to an SBSEF of the Commission's determination not to approve a proposed
rule or rule amendment shall be presumptive evidence that the SBSEF may
not truthfully certify the same, or substantially the same, proposed
rule or rule amendment under proposed Rule 807(a).
Paragraph (g) of proposed Rule 806, like Sec. 40.5(g), would
provide that, notwithstanding Rule 806(c), changes to a proposed rule
or a rule amendment, including changes to terms and conditions of a
product that are consistent with the SEA and the Commission's rules
thereunder, may be approved by the Commission at such time and under
such conditions as the Commission shall specify in the written
notification; provided, however, that the Commission may, at any time,
alter or revoke the applicability of such a notice to any particular
product or rule amendment.
The Commission preliminarily believes that Regulation SE should
afford the Commission a means for assessing whether SBSEF rules and
rule amendments are consistent with section 3D of the SEA, and that it
is appropriate to achieve this aim by aligning closely with the CFTC's
process for voluntary rule-approval submission in Sec. 40.5. The
CFTC's procedures are well articulated and well understood by SEFs, and
closely harmonizing with these procedures should yield comparable
regulatory benefits while minimizing burdens on SBSEFs. As with the
process for seeking Commission approval of new products, the Commission
preliminarily believes that providing a process for voluntarily seeking
Commission approval of rules, rule amendments, and dormant rules--as
the CFTC does--can be valuable to an SBSEF seeking the Commission's
concurrence that the rule change is consistent with the SEA prior to
implementing it. Moreover, for dually registered SEF/SBSEFs, it is
likely that certain rules will apply to member behavior generally--and
not to one product market (e.g., swaps or SBS) exclusively--and so will
have to be filed with both the SEC and CFTC. Closely harmonizing the
SEC's filing procedures with Sec. 40.5 would allow dually registered
entities to submit the same (or substantially the same) filing to both
agencies for review and approval. The Commission preliminarily believes
that it is not necessary to require SBSEFs to make a substantially
different type of filing to the SEC than to the CFTC for the same
underlying rule.
The Commission seeks comment on the following:
32. Do you believe in general that Regulation SE should include a
rule establishing procedures for an SBSEF to voluntarily submit rules
and rule amendments for Commission review and approval? Why or why not?
33. In particular, should the Commission adopt procedures for
voluntary submission of rules and rule amendments for Commission review
and approval by harmonizing closely with Sec. 40.5 of the CFTC's
rules? Why or why not?
34. Are there any provisions of Sec. 40.5 that are adapted into
proposed Rule 806 that you believe would be inappropriate, or would not
create any benefit, in a Commission rule applying to SBSEFs? If so,
please identify any such provision, explain why it would be
inappropriate or unnecessary for SBSEFs, and what economic benefit that
you believe would result from omitting it from the Commission's final
rule.
D. Rule 807--Self-Certification of Rules
Proposed Rule 807 is closely modelled on Sec. 40.6 of the CFTC's
rules and would set forth procedures by which an SBSEF may self-certify
changes to its rules. Paragraph (a) of proposed Rule 807, modelled on
Sec. 40.6(a), would set forth the conditions that an SBSEF must comply
with before implementing a rule or rule amendment via self-
certification. Like Sec. 40.6(a), proposed Rule 807(a) would permit an
SBSEF to implement a rule or rule amendment without obtaining the
Commission's prior approval under Rule 806, but only if it ``self-
certifies'' the rule or rule amendment in compliance with the
conditions set forth in Rule 807. Rule 807(a) also would permit an
SBSEF to self-certify a rule or rule amendment that the Commission had
previously approved under Rule 806, or that the SBSEF had previously
self-certified under this Rule 807, but that in the interim had become
a dormant rule (i.e., unimplemented for 12 consecutive calendar
months).\73\
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\73\ Also like Sec. 40.6(a), proposed Rule 807(a) would include
an exception that would allow an SBSEF to implement a certain kind
of rule without having to comply with the full set of conditions set
forth in paragraphs (a)(1) through (8) of proposed Rule 807, the
details of which are discussed below. Specifically, the exception
would provide that, when submitting a rule delisting or withdrawing
the certification of a product with no open interest, an SBSEF would
be required only to meet the conditions of paragraphs (a)(1),
(a)(2), and (a)(6) of proposed Rule 807. The introductory language
being proposed by the Commission in paragraph (a) of proposed Rule
807 generally tracks the language of Sec. 40.6(a), with slight
changes for clarity. However, proposed Rule 807(a) would not include
an equivalent of the reference in Sec. 40.6(a) to submissions under
Sec. 40.10, which concerns only systemically important derivatives
clearing organizations and thus are not relevant to SBSEFs.
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Paragraph (a)(1) of proposed Rule 807 would require the SBSEF to
file its submission electronically with the Commission using the EDGAR
system as an Interactive Data File in accordance with Rule 405 of
Regulation S-T. Paragraph (a)(2) would require the SBSEF to provide a
certification that the SBSEF posted a notice of the self-certification
with the Commission and a copy of the submission, concurrent with the
filing of a submission with the Commission, on the SBSEF's website.\74\
Paragraph (a)(3) would provide that the Commission must have received
the submission not later than the open of business on the business day
that is ten business days before the SBSEF's implementation of the rule
or rule amendment. Paragraph (a)(4) would
[[Page 28887]]
provide that the SBSEF may not implement the rule or rule amendment if
the Commission has stayed it pursuant to proposed Rule 807(c),
discussed below.
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\74\ Information that the SBSEF seeks to keep confidential could
be redacted from the documents published on the SBSEF's website but
must be republished consistent with any determination made pursuant
to SEA Rule 24b-2.
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Section 40.6(a)(5) sets forth an additional condition that the rule
or rule amendment is not a rule or rule amendment of a DCM that
materially changes a term or condition of a contract for future
delivery of an agricultural commodity enumerated in section 1a(4) of
the CEA or an option on such a contract or commodity in a delivery
month having open interest. Because this provision applies to DCMs that
trade contracts for future delivery of agricultural commodities, it is
not germane to the SBS markets; therefore, the Commission is not
adapting this condition into proposed Rule 807.
Section 40.6(a)(6) sets out procedures for emergency rule
certifications, which the Commission is proposing to adapt into
paragraph (a)(5) of Rule 807. Paragraph (a)(5)(i) would require a new
rule or rule amendment that establishes standards for responding to an
emergency \75\ to be submitted pursuant to Rule 807(a). Paragraph
(a)(5)(ii) would provide that a rule or rule amendment implemented
under procedures of the governing board to respond to an emergency
shall, if practicable, be filed with the Commission prior to
implementation or, if not practicable, be filed with the Commission at
the earliest possible time after implementation, but in no event more
than 24 hours after implementation. In addition, paragraph (a)(5)(ii)
would provide that any such submission be subject to the certification
and stay provisions of proposed Rules 807(b) and (c), described below.
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\75\ See Sec. 40.1(h) (defining ``emergency'' as ``any
occurrence or circumstance that, in the opinion of the governing
board of a registered entity, or a person or persons duly authorized
to issue such an opinion on behalf of the governing board of a
registered entity under circumstances and pursuant to procedures
that are specified by rule, requires immediate action and threatens
or may threaten such things as the fair and orderly trading in, or
the liquidation of or delivery pursuant to, any agreements,
contracts, swaps or transactions or the timely collection and
payment of funds in connection with clearing and settlement by a
derivatives clearing organization''). The definition goes on to list
a series of circumstances that are deemed emergencies under the
definition. The Commission is proposing a definition of
``emergency'' in proposed Rule 802 that is adapted from Sec.
40.1(h).
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Paragraph (a)(6) of proposed Rule 807, modelled on Sec.
40.6(a)(7), would set out the required elements for a rule submission
under Rule 807. These requirements would include a copy of the
submission cover sheet (in the case of a rule or rule amendment that
responds to an emergency, ``Emergency Rule Certification'' should be
noted in the description section of the submission cover sheet); the
text of the rule (in the case of a rule amendment, deletions and
additions must be indicated); the date of intended implementation; a
certification by the SBSEF that the rule complies with the SEA and the
Commission's rules thereunder; a concise explanation and analysis of
the operation, purpose, and effect of the proposed rule or rule
amendment and its compliance with applicable provisions of the SEA,
including Core Principles relating to SBSEFs and the Commission's rules
thereunder; and a brief explanation of any substantive opposing views
expressed to the SBSEF by governing board or committee members, members
of the SBSEF, or market participants, that were not incorporated into
the rule, or a statement that no such opposing views were expressed.
Paragraph (a)(6)(vii) also would permit the SBSEF to request
confidential treatment for portions of its submission.\76\
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\76\ Section 40.6(a)(7)(vii) directs the submitting entity to
follow the procedures in Sec. 40.8 when making a request for
confidential treatment, which in turn cross-references Sec. 145.9.
As noted previously, the Commission proposes instead to direct
filers to make any request for confidential treatment pursuant to
SEA Rule 24b-2. See supra note 50.
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Paragraph (a)(7) of proposed Rule 807, like Sec. 40.6(a)(8), would
require an SBSEF to provide, if requested by Commission staff,
additional evidence, information, or data that may be beneficial to the
Commission in conducting a due diligence assessment of the filing and
the SBSEF's compliance with any of the requirements of the SEA or the
Commission's rules or policies thereunder.
Paragraph (b) of proposed Rule 807, modelled on Sec. 40.6(b),
would give the Commission ten business days to review the new rule or
rule amendment before it is deemed certified and can be made effective,
unless the Commission notifies the SBSEF during that ten-business-day
review period that it intends to issue a stay of the certification
under proposed Rule 807(c).
Paragraph (c)(1) of proposed Rule 807, modelled on Sec.
40.6(c)(1), would provide that the Commission may stay the
certification of a new rule or rule amendment by issuing a notification
informing the SBSEF that the Commission is staying the certification on
the grounds that it presents novel or complex issues that require
additional time to analyze, is accompanied by an inadequate
explanation, or is potentially inconsistent with the SEA or the
Commission's rules thereunder. In addition, paragraph (c)(1) would
afford the Commission an additional 90 days from the date of the
notification to conduct the review.
Paragraph (c)(2) of proposed Rule 807, modelled on Sec.
40.6(c)(2), would require the Commission to provide a 30-day comment
period within the 90-day period in which the stay is in effect. The
Commission would be required to publish a notice of the 30-day comment
period on the Commission's internet website, and comments from the
public could be submitted as specified in that notice.
Paragraph (c)(3) of proposed Rule 807, modelled on Sec.
40.6(c)(3), would provide that the new rule or rule amendment subject
to the stay shall become effective, pursuant to the certification, at
the expiration of the 90-day review period, unless the Commission
withdraws the stay prior to that time, or the Commission notifies the
SBSEF during the 90-day period that it objects to the proposed
certification on the grounds that the proposed rule or rule amendment
is inconsistent with the SEA or the Commission's rules thereunder.
Section 40.6(c)(4), relating to rules or rule amendments already
implemented by a SEF (as opposed to rules or rule amendments that are
the subject of a new submission) provides: ``The Commission may stay
the effectiveness of an implemented rule during the pendency of
Commission proceedings for filing a false certification or during the
pendency of a petition to alter or amend the rule pursuant to section
8a(7) of the Act. The decision to stay the effectiveness of a rule in
such circumstances shall not be delegable to any employee of the
Commission.'' As previously noted,\77\ the SEA does not provide the
Commission explicit authority to alter or amend the terms and
conditions of an SBS like the authority granted to the CFTC with
respect to swaps, and does not contemplate proceedings for a false
certification. Hence the Commission is not proposing a provision
corresponding to Sec. 40.6(c)(4).\78\
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\77\ See supra note 66 and accompanying text.
\78\ See id.
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Section 40.6(d) of the CFTC's rules allows a registered entity to
place certain rules or rule amendments into effect even without a self-
certification, if certain enumerated conditions are met. Certain types
of these rules or rule amendments must be disclosed on a
[[Page 28888]]
``Weekly Notification of Rule Amendments,'' pursuant to Sec.
40.6(d)(1) and (2), while others can be put into effect without any
notification to the CFTC at all, pursuant to Sec. 40.6(d)(3).
Paragraph (d) of proposed Rule 807, modelled on Sec. 40.6(d), would
provide that certain kinds of rules or rule amendments may be put into
effect by an SBSEF without certification to the Commission if similar
enumerated conditions are met. Some would be subject to a Weekly
Notification of Rule Amendments, which is closely modelled on the CFTC
notification; others would not be subject to any notification
requirement.
Under paragraph (d)(2) of proposed Rule 807, the following types of
rules could be put into effect by an SBSEF without self-certification,
so long as they are disclosed on the Weekly Notice of Rule Amendments:
Non-substantive revisions. Corrections of typographical
errors, renumbering, periodic routine updates to identifying
information about the SBSEF, and other such non-substantive revisions
of a product's terms and conditions that have no effect on the economic
characteristics of the product;
Fees. Fees or fee changes, other than fees or fee changes
associated with market making or trading incentive programs, that total
$1.00 or more per contract, and are established by an independent third
party or are unrelated to delivery, trading, clearing, or dispute
resolution.
Survey lists. Changes to lists of banks, brokers, dealers,
or other entities that provide price or cash market information to an
independent third party and that are incorporated by reference as
product terms;
Approved brands. Changes in lists of approved brands or
markings pursuant to previously certified or Commission approved
standards or criteria;
Trading months. The initial listing of trading months,
which may qualify for implementation without notice, within the
currently established cycle of trading months; or
Minimum tick. Reductions in the minimum price fluctuation
(or `tick').
Under paragraph (d)(3)(ii) of proposed Rule 807, the following
types of rules could be put into effect by an SBSEF without self-
certification and without having to be disclosed on the Weekly Notice
of Rule Amendments:
Transfer of membership or ownership. Procedures and forms
for the purchase, sale, or transfer of membership or ownership, but not
including qualifications for membership or ownership, any right or
obligation of membership or ownership, or dues or assessments;
Administrative procedures. The organization and
administrative procedures of governing bodies such as a governing
board, officers, and committees, but not voting requirements, governing
board, or committee composition requirements or procedures, decision-
making procedures, use or disclosure of material non-public information
gained through the performance of official duties, or requirements
relating to conflicts of interest;
Administration. The routine daily administration,
direction, and control of employees, requirements relating to gratuity
and similar funds, but not guaranty, reserves, or similar funds;
declaration of holidays; and changes to facilities housing the market,
trading floor, or trading area;
Standards of decorum. Standards of decorum or attire or
similar provisions relating to admission to the floor, badges, or
visitors, but not the establishment of penalties for violations of such
rules;
Fees. Fees or fee changes, other than fees or fee changes
associated with market making or trading incentive programs that are
less than $1.00 or relate to matters such as dues, badges,
telecommunication services, booth space, real-time quotations,
historical information, publications, software licenses, or other
matters that are administrative in nature.
Trading months. The initial listing of trading months
which are within the currently established cycle of trading months.
Paragraphs (d)(2) and (3) of proposed Rule 807, which enumerate the
types of rule and rule amendments that an SBSEF could put into effect
without a self-certification, are adapted from the types of rules
enumerated in Sec. 40.6(d)(2) and (3). However, the Commission is not
adapting into proposed Rules 807(d)(2) and (d)(3) the other types of
rules enumerated in Sec. 40.6(d)(2) and (3).\79\
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\79\ These rules pertain to products that are only distantly
related, if at all, to the types of products that are likely to
trade on SBSEFs. See Sec. 40.6(d)(2)(ii) (delivery standards set by
third parties); Sec. 40.6(d)(2)(iii) (index products); Sec.
40.6(d)(2)(iv) (option contract terms); Sec. 40.6(d)(2)(viii)
(delivery facilities and delivery service providers); Sec.
40.6(d)(3)(ii)(F) (securities indexes); Sec. 40.6(d)(3)(ii)(G)
(option contract term).
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The Commission preliminarily believes that Regulation SE should
afford the Commission a mechanism to assess new SBSEF rules and rule
amendments for consistency with section 3D of the SEA, and to permit
SBSEFs to submit new rules and rule amendments using a self-
certification process closely aligned with the Sec. 40.6. The CFTC's
procedures are well articulated and well understood by SEFs, and
closely harmonizing with these procedures should yield comparable
regulatory benefits while minimizing burdens on SBSEFs. It is likely
that certain rules of dually registered SEF/SBSEFs will apply to member
behavior generally--and not to one product market (e.g., swaps or SBS)
exclusively--and so will have to be filed with both the SEC and CFTC.
Closely harmonizing the SEC's filing procedures with the CFTC's would
allow dually registered entities to submit the same (or substantially
the same) filing to both agencies for review. The Commission
preliminarily believes that it is not necessary to require SBSEFs to
make a substantially different type of filing to the SEC than to the
CFTC for the same underlying rule.
The Commission requests comment on the following:
35. Do you believe in general that Regulation SE should include a
rule establishing procedures for an SBSEF to establish rules via self-
certification? Why or why not?
36. In particular, should the Commission adopt procedures for self-
certification of rules by harmonizing closely with Sec. 40.6 of the
CFTC's rules? Why or why not?
37. Are there any provisions of Sec. 40.6 that are adapted into
proposed Rule 807 that you believe would be inappropriate, or would not
create any benefit, in a Commission rule applying to SBSEFs? If so,
please identify any such provision, explain why it would be
inappropriate or unnecessary for SBSEFs, and what economic benefit that
you believe would result from omitting it from the Commission's final
rule.
38. Do you disagree with the specific language that the Commission
is proposing? If so, what revisions to the language would you suggest?
39. Do you agree with the proposed list of the types of rules and
rule amendments that the Commission would allow an SBSEF to make
effective without a self-certification? Are there any types that you
believe should be added to that list? If so, which types and why? Are
there any types that you believe should be removed from that list? If
so, which types and why?
E. Submission Cover Sheet and Instructions
As new Sec. 249.2002, the Commission is proposing a submission
cover sheet and instructions that an SBSEF would be required to use in
conjunction with
[[Page 28889]]
filings submitted pursuant to proposed Rules 804 through 807, 809, and
816. These are modelled on the cover sheet and instructions used by
SEFs in conjunction with their analogous filings with the CFTC.\80\
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\80\ The CFTC cover sheet and instructions, found in appendix D
to part 40 of the CFTC's rules, are designed for rule and product
filings from a wider range of registered entities than just SEFs,
and thus include entries that are omitted from the Commission's
proposed adaptation.
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The same cover sheet and instructions would be used for a new rule,
rule amendment, or new product filing, with the SBSEF checking the
appropriate box to indicate which of these types the filing represents.
The SBSEF also would be required to check boxes to indicate whether the
submission was seeking approval by the Commission or whether it was
being filed as a certification by the SBSEF; and to identify the
specific provision in the Commission's rules pursuant to which the
filing was being submitted. The submission cover sheet also would
include a box that the SBSEF would check if it intends to submit a
request for a joint interpretation from the Commission and the CFTC
regarding whether the product is a swap, an SBS, or mixed swap pursuant
to SEA Rule 3a68-2.\81\ Finally, the cover sheet would include a check
box by which an SBSEF could indicate that it was requesting
confidential treatment of materials in the submission.
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\81\ Proposed Rule 809 would provide that a product filing will
be stayed or tolled, as applicable, if such a request for a joint
interpretation is made by the SBSEF, the SEC, or the CFTC. See infra
section VI(G).
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The cover sheet would divide the rules and rule amendment filings
into two categories: One for general rules of the SBSEF and the other
for rules relating to the terms and conditions of a product. Additional
boxes would need to be checked if a filing under the terms-and-
conditions category concerned specifically a determination by the SBSEF
that a particular SBS was now to be considered MAT (``made-available-
to-trade''); \82\ or if the filing concerned the delisting of an SBS
with no open interest.\83\ The cover sheet would need to be used in
conjunction with the weekly notifications that SBSEFs would be required
to file pursuant to Rule 807(d) for certain changes that do not need to
be approved or certified, as discussed above.
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\82\ See infra section VII(F).
\83\ See supra note 73.
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Paragraph (a) of the submission cover sheet instructions would
provide that a properly completed submission cover sheet must accompany
all rule and product submissions submitted electronically to the
Commission by an SBSEF, using the EDGAR system and must be provided as
an Interactive Data File in accordance with Rule 405 of Regulation S-T.
Per paragraph (a), a properly completed submission cover sheet would
include all of the following:
1. The name and platform ID of the SBSEF.\84\
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\84\ ``Platform ID'' is a term utilized in Regulation SBSR, 17
CFR 242.900 et seq., and means the unique identification code
(``UIC'') assigned to a platform on which an SBS is executed. See 17
CFR 242.900(w). The term ``platform'' includes an SBSEF. See Rule
900(v), 17 CFR 242.900(v). A registered SBSEF is required by Rule
903(a) of Regulation SBSR, 17 CFR 242.903(a), to use as its platform
ID an identifier issued by an internationally recognized standards-
setting system (``IRSS'') if the IRSS meets enumerated criteria and
has therefore been recognized by the Commission pursuant to Rule
903(a). This identification requirement stems from a registered
SBSEF's status as a ``participant'' of a registered SDR under Rule
900(u), 17 CFR 242.900(u), because the term ``participant'' includes
a ``platform,'' as defined in Rule 900(v), 17 CFR 242.900(v), that
incurs reporting duties under Rule 901(a), 17 CFR 242.901(a).
Currently, the Global Legal Entity Identifier System (``GLEIS'') is
the only IRSS that has been recognized by the Commission under Rule
903(a). See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, SEA Release No. 74244 (February 11,
2015), 80 FR 14564, 14631-32 (March 19, 2015) (``Regulation SBSR
Adopting Release I''). Therefore, LEIs issued through the GLEIS are
currently the only allowable platform IDs that may be used by
registered SBSEFs.
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2. The date of the filing.
3. An indication as to whether the filing is a new rule, rule
amendment, or new product.
4. For rule filings, the rule number(s) being adopted or, in the
case of rule amendments, the number of the rule(s) being modified.
5. For rule or rule amendment filings, a description of the new
rule or rule amendment, including a discussion of its expected impact
on the SBSEF, its members, and the overall market. The instructions
will state that the narrative should describe the substance of the
submission with enough specificity to characterize all material aspects
of the filing.
Paragraph (b) of the proposed submission cover sheet instructions
would state that a submission must comply with all applicable filing
requirements for proposed rules, rule amendments, or products, and that
the filing of the submission cover sheet would not obviate the SBSEF's
responsibility to comply with applicable filing requirements.
Paragraph (c) of the proposed submission cover sheet would state
that checking the box marked ``confidential treatment requested'' would
not obviate the submitter's responsibility to comply with all
applicable requirements for requesting confidential treatment under SEA
Rule 24b-2 and would not substitute for notice or full compliance with
such requirements.
The Commission contemplates establishing a system for electronic
completion of the cover sheet and attachment of the submissions
required by proposed Rules 804, 805, 806, 807, and 809, and will advise
affected persons regarding its use by public announcement in advance of
the effective date of these rules.
The Commission seeks comment on the following:
40. Do you agree in general that the submission cover sheet and
instructions for SBSEF filings should be harmonized with the CFTC's?
Why or why not?
41. Do you agree with the specific language proposed in the cover
sheet and instructions? If not, how should the language be revised? Is
there any information not included in the proposed cover sheet and
instructions that you believe should be included?
42. Do you agree with the requirement for an SBSEF to report its
platform ID on the cover sheet? Should the disclosure of standard
identifiers such as the LEI, the Financial Instrument Global Identifier
(``FIGI''), and the Unique Product Identifier (``UPI'') be included in
an SBSEF's other reporting obligations under the proposed rules?
43. Are any of the instructions in the submission cover sheet
unclear? If so, what matters do you believe require clarification?
F. Rule 808--Availability of Public Information
Section 40.8 of the CFTC's rules is entitled ``Availability of
public information.'' Sec. 40.8(a) provides that any part of an
application to register as a SEF (among other CFTC-registered entities)
that is not covered by a request for confidential treatment will be
made publicly available. Section 40.8(a) also sets out the sections of
an application to register as a SEF that shall be made publicly
available. Section 40.8(c) \85\ provides that rule and new product
filings by a SEF, whether made under the self-certification procedures
or pursuant to CFTC review and approval, will be treated as public
information unless accompanied by a request for confidential treatment.
Section 40.8(c) includes procedures for such requests for confidential
treatment. Section 40.8(d) provides that CFTC staff will not consider
confidential treatment requests for information that is required to be
made public under the CEA, and that the terms and conditions of a
product
[[Page 28890]]
submitted to the CFTC shall be made publicly available at the time of
submission.
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\85\ Section 40.8(b) has no text and is marked ``reserved.''
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Proposed Rule 808 is closely modelled on Sec. 40.8. Section
40.8(a) does not provide a list of the exhibits required to be made
public, but rather refers to a general description of items required to
be made public. For purposes of clarity and ease of reference, however,
the Commission is proposing to list the specific corresponding exhibits
in proposed Rule 808 that would be made publicly available. Therefore,
paragraph (a) of proposed Rule 808 would provide that the Commission
shall make publicly available on its website the following parts of an
application to register as an SBSEF, unless confidential treatment is
obtained pursuant to SEA Rule 24b-2: the transmittal letter and first
page of the application cover sheet; Exhibit C; Exhibit G; Exhibit L;
and Exhibit M.
Paragraph (b) of proposed Rule 808, adapted from Sec. 40.8(c),
would provide that the Commission shall make publicly available on its
website, unless confidential treatment is obtained pursuant to SEA Rule
24b-2,\86\ an SBSEF's filing of new products pursuant to the self-
certification procedures of proposed Rule 804, new products for
Commission review and approval pursuant to proposed Rule 805, new rules
and rule amendments for Commission review and approval pursuant to
proposed Rule 806, and new rules and rule amendments pursuant to the
self-certification procedures of proposed Rule 807. Paragraph (c),
adapted from Sec. 40.8(d), would provide that the terms and conditions
of a product submitted to the Commission pursuant to any of proposed
Rules 804 through 807 shall be made publicly available at the time of
submission unless confidential treatment is obtained pursuant to SEA
Rule 24b-2.
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\86\ An application for confidential treatment shall contain,
among other things, a statement of the grounds of objection
referring to, and containing an analysis of, the applicable
exemption(s) from disclosure under the Freedom of Information Act,
and a justification of the period of time for which confidential
treatment is sought. See 17 CFR 240.24b-2(b)(2)(ii).
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The Commission preliminarily believes that it would be appropriate
to include in proposed Regulation SE a rule similar to Sec. 40.8 that
would clarify how SBSEFs may request confidential treatment for their
filings, and what information contained in those filings would be
publicly available by the Commission. The Commission preliminarily
believes that the items enumerated in proposed Rule 808 are not of the
type that typically would constitute confidential information.
The Commission requests comment on the following:
44. Do you believe in general that Regulation SE should include a
rule modelled on Sec. 40.8? Why or why not?
45. In particular, do you agree with the specific language proposed
by the Commission to adapt Sec. 40.8 into proposed Rule 808? If not,
how would you revise that language?
46. Are there any provisions of Sec. 40.8 that are adapted into
proposed Rule 808 that you believe would be inappropriate, or would not
create any benefit, in a Commission rule applying to SBSEFs? If so,
please identify any such provision, explain why it would be
inappropriate or unnecessary for SBSEFs, and what economic benefit that
you believe would result from omitting it from the Commission's final
rule.
47. Do you prefer the Commission's proposed approach of listing
specific exhibits or the CFTC's approach of providing in the rule only
a general description of items required to be made public? If the
former, are there any additional exhibits that you believe should be
enumerated in Rule 808 that should be made publicly available? If so,
which exhibits and why?
G. Rule 809--Staying of Certification and Tolling of Review Period
Pending Jurisdictional Determination
Section 40.12 of the CFTC's rules is entitled ``Staying of
certification and tolling of review period pending jurisdictional
determination'' and reflects the process described in section 718 of
the Dodd-Frank Act, which is entitled ``Determining Status of Novel
Derivative Products.'' Section 718 of the Dodd-Frank Act sets forth a
mechanism for addressing a situation where a person wishes to list or
trade a novel derivative product that may have elements of both
securities and contracts of sale of a commodity for future delivery (or
options on such contracts or options on commodities)--i.e., it is
unclear whether the product is a security under the jurisdiction of the
SEC or a future under the jurisdiction of the CFTC. Section 718(a)
provides that the SEC or the CFTC may request that the other agency
issue a determination as to the classification of that product, and
section 718(b) provides that the CFTC and SEC may petition for the
judicial review of any such determination. Section 40.12 provides that
if a SEF (among other registered entities) certifies, submits for
approval, or otherwise files a proposal to list or trade such a novel
derivative product, the product certification shall be stayed or the
approval review period shall be tolled until a final determination
order is issued under section 718.
Proposed Rule 809 is loosely modelled on Sec. 40.12, but modified
to focus on the products and jurisdictional problems that are more
likely to be relevant to SBSEFs. An SBSEF might seek to list a product
where it is unclear whether the product is a swap or an SBS. While
section 718 of the Dodd-Frank Act addresses situations where it is
unclear if a product is a security or a future, the SEC and the CFTC
have adopted separate rules--SEA Rule 3a68-2 and Sec. 1.8,
respectively--governing requests for interpretation regarding a product
that might be an SBS, a swap, or a mixed swap. Accordingly, the
Commission believes that it would be appropriate for proposed Rule 809
to reflect the process set forth in SEA Rule 3a68-2. Nonetheless, the
objective of proposed Rule 809 would be consistent with the objective
of Sec. 40.12--to provide for a stay or tolling of a product filing
where it is unclear whether the product is under the jurisdiction of
the SEC or the CFTC.
Paragraph (a) of proposed Rule 809, modelled on Sec. 40.12(b),
would provide that a product certification made by an SBSEF pursuant to
proposed Rule 804 shall be stayed, or the review period for a product
that has been submitted for Commission approval by an SBSEF pursuant to
proposed Rule 805 shall be tolled, upon request for a joint
interpretation of whether the product is a swap, SBS, or mixed swap
made pursuant to Rule 3a68-2 under the SEA \87\ by the SBSEF, the SEC,
or the CFTC. Paragraph (b) is modelled on Sec. 40.12(b)(1) and would
require the SEC to provide the SBSEF with a written notice of the stay
or tolling pending issuance of a joint interpretation by the SEC and
CFTC. Paragraph (c) is modelled on Sec. 40.12(b)(2) and would provide
that the stay shall be withdrawn, or the approval review period shall
resume, if a joint interpretation finding that the SEC has jurisdiction
over the product is issued.
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\87\ 17 CFR 240.3a68-2.
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The Commission preliminarily believes that it is appropriate for
Regulation SE to include a mechanism for the staying or tolling of a
filing by an SBSEF where it is unclear whether the product is a swap or
an SBS--should an SBSEF ever seek to list such a product. Although
proposed Rule 809 would deviate from Sec. 40.12 in that it would apply
where it is unclear whether a product is swap or an SBS, rather than
where it is unclear whether
[[Page 28891]]
the product is a security or a future, the Commission preliminarily
believes that modifying the scope of proposed Rule 809, in relation to
Sec. 40.12, would appropriately address the jurisdictional questions
that are more likely to arise from a product listed by an SBSEF.
The Commission seeks comment on the following:
48. Do you believe in general that Regulation SE should include a
rule setting out a procedure for staying a product certification or
tolling a product review period if a request for a joint interpretation
regarding the classification of the product is made pursuant to SEA
Rule 3a68-2? Why or why not?
49. In particular, do you agree with the specific language proposed
by the Commission to adapt Sec. 40.12 into proposed Rule 809? If not,
how would you revise that language?
50. Do you agree that Rule 809 should apply to a product that might
be an SBS or a swap, rather than to a product that might be a security
or a future? Why or why not?
51. Are there any provisions of Sec. 40.12 that are adapted into
proposed Rule 809 that you believe would be inappropriate, or would not
create any benefit, in a Commission rule applying to SBSEFs? If so,
please identify any such provision, explain why it would be
inappropriate or unnecessary for SBSEFs, and what economic benefit that
you believe would result from omitting it from the Commission's final
rule.
H. Rule 810--Product Filings by SBSEFs That Are Not Yet Registered and
by Dormant SBSEFs
Part 37 directs SEFs to submit product filings via self-
certification or for CFTC review and approval, using Sec. 40.2 or
Sec. 40.3, respectively. However, these sections cannot be utilized by
an entity that has submitted an application for SEF registration but
has not yet been registered, or by a dormant SEF that has submitted an
application to reinstate its registration. Under Sec. 37.4, either
entity may submit a swap's terms and conditions before being registered
or having its registration reinstated, and the CFTC will consider the
swap listing request as part of the application for registration or
reinstatement, respectively.
Proposed Rule 810 is closely modelled on Sec. 37.4. Paragraph (a)
of proposed Rule 810 is closely modelled on Sec. 37.4(a) and would
provide that an applicant for registration as an SBSEF may submit an
SBS's terms and conditions prior to listing the product as part of its
application for registration. Paragraph (b) is closely modelled on
Sec. 37.4(b) and would provide that any SBS terms and conditions or
rules submitted as part of an application for registration shall be
considered for approval by the Commission at the time the Commission
issues the SBSEF's order of registration. Paragraph (c) is closely
modelled on Sec. 37.4(c) and would provide that, after the Commission
issues the order of registration, the SBSEF shall submit an SBS's terms
and conditions, including amendments to such terms and conditions, new
rules, or rule amendments pursuant to the procedures in proposed Rules
804 to 807. Paragraph (d) is closely modelled on Sec. 37.4(d), would
provide that any SBS terms and conditions or rules submitted as part of
an application to reinstate the registration of a dormant SBSEF shall
be considered for approval by the Commission at the time the Commission
approves the reinstatement of registration of the dormant SBSEF.
The Commission preliminarily believes that it is appropriate for
Regulation SE to include provisions that address new products submitted
as part of an SBSEF registration by an entity that has not yet been
registered, or by a dormant SBSEF seeking reinstatement of its
registration, and that these provisions should align with the CFTC's
provisions as closely as possible.
The Commission seeks comment on the following:
52. Do you believe in general that Regulation SE should include a
rule setting out how dormant SBSEFs and applicants for SBSEF
registration can submit new products? Why or why not?
53. In particular, do you agree with the specific language proposed
by the Commission to adapt Sec. 37.4 into proposed Rule 810? If not,
how would you revise that language?
54. Are there any provisions of Sec. 37.4 that are adapted into
proposed Rule 810 that you believe would be inappropriate, or would not
create any benefit, in a Commission rule applying to SBSEFs? If so,
please identify any such provision, explain why it would be
inappropriate or unnecessary for SBSEFs, and what economic benefit that
you believe would result from omitting it from the Commission's final
rule.
VII. Miscellaneous Requirements
Sections 37.5 to 37.12 of the CFTC's rules impose miscellaneous
requirements on SEFs. The Commission seeks to impose similar
requirements on SBSEFs in proposed Rules 811 to 817 of Regulation SE.
A. Rule 811--Information Relating to SBSEF Compliance
1. Harmonization With Sec. 37.5
Paragraphs (a) to (c) of proposed Rule 811 are modelled on Sec.
37.5, which is entitled ``Information regarding swap execution facility
compliance.'' Section 37.5 provides that the CFTC may request various
types of information from a SEF, and that the SEF must supply the
information to the CFTC in a form and manner specified by the CFTC.
Paragraph (a) of Sec. 37.5 requires a SEF, at the CFTC's request, to
provide information related to its business as a SEF. Paragraph (b)
states that a SEF may be required to provide a written demonstration,
containing supporting data, information, and documents that it is in
compliance with one or more core principles or with its other
obligations under the CEA. Paragraph (c) sets out procedures for a SEF
to notify the CFTC of any transfer of 50% or more of the equity
interest in the SEF.
Proposed Rules 811(a) to (c) are closely modelled on Sec. 37.5.
Paragraph (a) of proposed Rule 811 is closely modelled on Sec. 37.5(a)
and would provide that, upon the Commission's request, an SBSEF shall
file with the Commission information related to its business as an
SBSEF in the form and manner, and within the timeframe, specified by
the Commission. Paragraph (b) is closely modelled on Sec. 37.5(b) and
would provide that, upon the Commission's request, an SBSEF shall file
with the Commission a written demonstration, containing supporting
data, information, and documents, that it is in compliance with one or
more Core Principles or with its other obligations under the SEA or the
Commission's rules thereunder, as the Commission specifies in its
request. Also, under proposed Rule 811(b), the SBSEF would be required
to file such written demonstration in the form and manner, and within
the timeframe, specified by the Commission.
Paragraph (c)(1) of proposed Rule 811 is closely modelled on Sec.
37.5(c)(1) and would provide that an SBSEF shall file with the
Commission a notification of any transaction involving the direct or
indirect transfer of 50% or more of the equity interest in the SBSEF.
Also, under proposed Rule 811(c)(1), the Commission could, upon
receiving such notification, request supporting documentation of the
transaction. Paragraph (c)(2) is closely modelled on Sec. 37.5(c)(2)
and would provide that the equity interest transfer notice shall be
filed with the Commission in a form and manner specified by the
Commission at the earliest possible time, but in no
[[Page 28892]]
event later than the open of business ten business days following the
date upon which the SBSEF enters into a firm obligation to transfer the
equity interest. Paragraph (c)(3) is closely modelled on Sec.
37.5(c)(3), would provide that, notwithstanding the foregoing, if any
aspect of an equity interest transfer requires an SBSEF to file a rule,
the SBSEF shall comply with the applicable rule filing requirements of
proposed Rule 806 or 807.
Paragraph (c)(4) of proposed Rule 811 is closely modelled on Sec.
37.5(c)(4) and would provide that, upon a transfer of an equity
interest of 50% or more in an SBSEF, the SBSEF shall file with the
Commission, in a form and manner specified by the Commission, a
certification that the SBSEF meets all of the requirements of section
3D of the SEA and the Commission rules thereunder, no later than two
business days following the date on which the equity interest of 50% or
more was acquired.
The Commission preliminarily believes that it is appropriate for
Regulation SE to include provisions requiring an SBSEF to provide the
Commission with the information described above. Information about its
business as an SBSEF and transfers of 50% of its equity would promote
understanding of its operations and ownership, which should facilitate
oversight of the SBSEF; therefore, the Commission preliminarily
believes that it should, similar to the CFTC, clarify that it may
request such information from an SBSEF. In addition, should questions
about compliance arise, the Commission should be able to obtain from an
SBSEF supporting data, information, and documents that the SBSEF is in
compliance with relevant obligations under the SEA. By modelling its
proposed requirements on existing CFTC rules, the Commission seeks to
obtain comparable regulatory benefits while imposing only marginal
additional burdens on dually registered entities that are already
subject to similar obligations.
The Commission requests comment on the following:
55. Do you believe in general that Regulation SE should include a
rule that would require an SBSEF to provide the Commission with
information about its business or its compliance with the SEA, as well
as information regarding transfers of 50% or more of its equity
interest? Why or why not?
56. In particular, do you agree with the specific language proposed
by the Commission to adapt Sec. 37.5 into proposed Rule 811? If not,
how would you revise that language?
57. Are there any provisions of Sec. 37.5 that are adapted into
proposed Rule 811 that you believe would be inappropriate, or would not
create any benefit, in a Commission rule applying to SBSEFs? If so,
please identify any such provision, explain why it would be
inappropriate or unnecessary for SBSEFs, and what economic benefit that
you believe would result from omitting it from the Commission's final
rule.
2. Harmonization With Sec. 1.60
Paragraph (d) of proposed Rule 811 is not modelled on Sec. 37.5
but rather on Sec. 1.60 of the CFTC's rules, which is entitled
``Pending legal proceedings.'' Because it is conceptually similar to
Sec. 37.5 in that it requires another type of information relevant to
the regulatory oversight of a SEF, the Commission is proposing to adapt
this provision into Rule 811.
Section 1.60 requires a SEF (among other entities) to provide the
CFTC with copies of any legal proceeding to which it is a party, or to
which its property or assets is subject. Paragraph (d) of proposed Rule
811 would adapt paragraphs (a), (c), and (e) of Sec. 1.60 to apply to
SBSEFs.\88\
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\88\ Paragraphs (b) and (d) of Sec. 1.60 apply to futures
commission merchants and do not appear germane to SEFs or SBSEFs.
Therefore, the Commission is not adapting these paragraphs into
proposed Rule 811(d).
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Paragraph (d)(1) of proposed Rule 811 is closely modelled on Sec.
1.60(a) and would provide that an SBSEF shall submit to the Commission
a copy of the complaint, any dispositive or partially dispositive
decision, any notice of appeal filed concerning such decision, and such
further documents as the Commission may thereafter request filed in any
material legal proceeding to which the SBSEF is a party or its property
or assets is subject. Paragraph (d)(2) is closely modelled on Sec.
1.60(c) and would provide that an SBSEF shall submit to the Commission
a copy of the complaint, any dispositive or partially dispositive
decision, any notice of appeal filed concerning such decision, and such
further documents as the Commission may thereafter request filed in any
material legal proceeding instituted against any officer, director, or
other official of the SBSEF from conduct in such person's capacity as
an official of the SBSEF and alleging violations of the SEA or any
rule, regulation, or order thereunder; the constitution, bylaws, or
rules of the SBSEF; or the applicable provisions of State law relating
to the duties of officers, directors, or other officials of business
organizations.
Paragraph (d)(3) of proposed Rule 811 is loosely modelled on Sec.
1.60(e) and would provide that documents required by Rule 811(d) to be
submitted to the Commission shall be submitted electronically in a form
and manner specified by the Commission within ten days after the
initiation of the legal proceedings to which they relate, after the
date of issuance, or after receipt by the SBSEF of the notice of
appeal, as the case may be.\89\
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\89\ Section 1.60(e) requires relevant documents to be ``mailed
via first-class or submitted by other more expeditious means.''
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Paragraph (d)(4) of proposed Rule 811 is closely modelled on the
final two sentences of Sec. 1.60(e) and would provide that, for
purposes of Rule 811(d), a ``material legal proceeding'' includes but
is not limited to actions involving alleged violations of the SEA or
the Commission rules thereunder, and that a legal proceeding is not
``material'' for the purposes of Rule 811 if the proceeding is not in a
Federal or State court or if the Commission is a party.
The Commission preliminarily believes that, to properly oversee an
SBSEF, the Commission needs to be aware of any pending legal
proceedings involving the SBSEF or any officer, director, or other
official of the SBSEF from conduct in such person's capacity as an
official of the SBSEF. The Commission preliminarily believes,
furthermore, that Sec. 1.60 provides an established and well
understood mechanism for obtaining this information, and therefore is
using Sec. 1.60 as the model for proposed Rule 811(d).
The Commission seeks comment on the following:
58. Do you believe in general that Regulation SE should include a
rule that would require an SBSEF to provide the Commission with
information about its pending legal proceedings? Why or why not?
59. In particular, do you agree with the specific language proposed
by the Commission to adapt Sec. 1.60 into proposed Rule 811? If not,
how would you revise that language?
60. Are there any provisions of Sec. 1.60 that are adapted into
proposed Rule 811 that you believe would be inappropriate, or would not
create any benefit, in a Commission rule applying to SBSEFs? If so,
please identify any such provision, explain why it would be
inappropriate or unnecessary for SBSEFs, and what economic benefit that
you believe would result from omitting it from the Commission's final
rule.
[[Page 28893]]
B. Rule 812--Enforceability
Section 37.6(a) of the CFTC's rules provides that a transaction
entered into on or pursuant to the rules of a SEF shall not be void,
voidable, subject to rescission, otherwise invalidated, or rendered
unenforceable as a result of a violation by the SEF of the Core
Principles or the part 37 rules thereunder. Section 37.6(a) also
provides generally that such a transaction would not be void or
voidable as a result of a CFTC or other proceeding to alter or
supplement a rule, term, or trading rule or procedure. Section 37.6(b)
requires a SEF to provide each counterparty to a transaction that is
entered into on or pursuant to the rules of the SEF with a written
record of all of the terms of the transaction which shall legally
supersede any previous agreement and serve as a confirmation of the
transaction. Furthermore, under Sec. 37.6(b), the confirmation of all
terms of the transaction must take place at the same time as execution,
provided that specific customer identifiers for accounts included in
bunched orders need not be included in confirmations if certain
conditions are met.
Proposed Rule 812 generally is modelled on Sec. 37.6, but omits
certain of its detailed provisions. Paragraph (a) of proposed Rule 812,
which is based on Sec. 37.6(a)(1), would provide that a transaction on
or pursuant to the rules of an SBSEF cannot be invalidated as a result
of a violation by the SBSEF of section 3D of the SEA or the
Commission's rules thereunder.\90\ An SBS executed on an SBSEF should
not be invalidated by the SBSEF's violation of any of the securities
laws, given that swaps executed on SEFs are afforded the same legal
certainty under Sec. 37.6(a).
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\90\ The Commission is not adapting into proposed Rule 812
paragraphs (a)(2) and (a)(3) of Sec. 37.6, which provide that a
transaction on a SEF may not be invalidated by CFTC proceedings that
alter or supplement SEF rules, terms, and conditions, because the
Commission has no authority in the SEA analogous to the CFTC's
authority under section 8a(7) of the CEA to conduct such
proceedings. See supra note 66 and accompanying text.
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Paragraph (b) of proposed Rule 812 is modelled on the first
sentence of Sec. 37.6(b) and would provide that an SBSEF shall, as
soon as technologically practicable after the time of execution of a
transaction entered into on or pursuant to the rules of the facility,
provide a written record to each counterparty of all of the terms of
the transaction that were agreed to on the facility, which shall
legally supersede any previous agreement regarding such terms. The
Commission preliminarily believes that it would be appropriate to
require an SBSEF to inform counterparties as soon as technologically
practicable after they have effected a trade on or pursuant the rules
of the SBSEF, and to provide them with a written record of the terms to
which they have agreed. The Commission also preliminarily believes that
it would be appropriate to require that this written record legally
supersede any previous agreement regarding the terms that were agreed
to on the SBSEF. The Commission recognizes, however, that there may be
other terms of an uncleared SBS transaction that are specified in one
or more agreements previously negotiated between the counterparty pair
(relating, e.g., to credit support). Because agreements between
counterparty pairs likely are not known or easily obtained by an SBSEF,
the Commission is not including a requirement that the SBSEF provide a
written record of any such terms.\91\
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\91\ Section 37.6(b) requires a SEF to provide a written record
of ``all of the terms of the transaction which shall legally
supersede any previous agreement and serve as a confirmation of the
transaction.'' In the adopting release for the final part 37 rules,
the CFTC explained that, with respect to uncleared swaps, a SEF
could satisfy this requirement by incorporating by reference terms
set forth in agreements previously negotiated by the counterparties,
provided that such agreements had been submitted to the SEF ahead of
execution. See 2013 CFTC Final SEF Rules Release, 78 FR at 33491, n.
195. The CFTC staff has provided no-action relief with respect to
the confirmation requirements for uncleared swaps in response to
assertions by industry participants that it is impracticable for a
SEF to satisfy the written confirmation requirements by
incorporating by reference terms from previously negotiated
agreements between the counterparties if the SEF must receive copies
of such agreements prior to execution. See CFTC No Action Letter 17-
17 (March 24, 2017) (issued by the CFTC's Division of Market
Oversight). In so doing, the CFTC staff indicated that it was
continuing to assess confirmation requirements, including
establishing a permanent solution to the issues raised. Given these
circumstances, the Commission preliminarily believes that it is
appropriate to require an SBSEF to provide counterparties with a
written record of only those terms that are agreed to on the SBSEF.
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The Commission seeks comment on the following:
61. Do you believe in general that Regulation SE should include a
rule regarding enforceability of contracts entered into on an SBSEF
that is modelled on Sec. 37.6? Why or why not?
62. In particular, do you agree with the specific language proposed
by the Commission to adapt Sec. 37.6 into proposed Rule 812? If not,
how would you revise that language?
63. Are there any provisions of Sec. 37.6 that the Commission is
proposing to adapt into Rule 812 that you believe would be
inappropriate, or fail to create any benefit, in a Commission rule
applicable to SBSEFs? If so, please identify any such provision,
explain why it would be inappropriate or unnecessary for SBSEFs, and
what economic benefit that you believe would result from omitting it
from the Commission's final rule.
64. Do you believe that any of the provisions of Sec. 37.6 for
which the Commission has not proposed an analog warrant inclusion? If
so, which one(s) and why?
65. Rule 15Fi-2(f)(1) under the SEA \92\ provides SBS dealers and
major SBS participants with an exception from the trade acknowledgment
and verification requirements for SBS transactions ``executed on [an
SBSEF] or national securities exchange, provided that the rules,
procedures or processes of the [SBSEF] or national securities exchange
provide for the acknowledgment and verification of all terms of the
security-based swap transaction no later than the time required by
[Rule 15Fi-2(b) and (d)(2)]'' (emphasis added). Proposed Rule 812(b)
would require an SBSEF to provide a written record only of the terms of
the transaction that are agreed to on the SBSEF. As a result, if the
Commission were to adopt Rule 812(b) substantially as proposed, the
exception in Rule 15Fi-2(f)(1) would not be available where the
counterparty pair has agreed to other terms of the SBS transaction away
from the SBSEF. Do you agree with this result? If not, how would an
SBSEF be able to provide a record of all terms of an SBS transaction
effected on or pursuant to the rules of the SBSEF when there are one or
more pre-existing agreements between the counterparty pair where the
counterparties agree to additional terms?
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\92\ 17 CFR 240.15Fi-2(f)(1).
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C. Rule 813--Prohibited Use of Data Collected for Regulatory Purposes
Section 37.7 of the CFTC's rules provides that a SEF shall not use
for business or marketing purposes any proprietary data or personal
information that it collects or receives from or on behalf of any
person for the purpose of fulfilling its regulatory obligations. The
SEF may use data or information for business or marketing purposes if
the person consents, but the SEF may not condition access to the SEF on
the person's providing such consent. Finally, Sec. 37.7 provides that
a SEF, where necessary for regulatory purposes, may share such data or
information with another SEF or a DCM.
Proposed Rule 813 is modelled on Sec. 37.7. Persons who trade on
an SBSEF may have to provide proprietary data or
[[Page 28894]]
personal information to the SBSEF from time to time to allow the SBSEF
to carry out its regulatory obligations. The Commission preliminarily
believes, in general, that an SBSEF using that information for business
or marketing purposes would be a misappropriation, because the SBSEF's
powers to compel production of that information by its members is for
regulatory purposes, not for the benefit of the SBSEF's business
interests. While a member of the SBSEF could consent to the SBSEF using
this information for business or marketing purposes, the Commission
preliminarily believes that access to the SBSEF should not be
conditioned on such consent being given. The Commission preliminarily
believes that Sec. 37.7 is well understood by market participants and
well designed for adaptation to the SBS market to deter such
misappropriation. Therefore, the Commission preliminarily believes that
close harmonization with Sec. 37.7 is appropriate.
The Commission seeks comment on the following:
66. Do you believe in general that Regulation SE should include a
rule that prohibits an SBSEF from using for business or marketing
purposes any proprietary data or personal information that it collects
or receives from or on behalf of any person for the purpose of
fulfilling its regulatory obligations? Why or why not?
67. In particular, do you agree with the specific language proposed
by the Commission to adapt Sec. 37.7 into proposed Rule 813? If not,
how would you revise that language?
68. Are there any provisions of Sec. 37.7 that are adapted into
proposed Rule 813 that you believe would be inappropriate, or would not
create any benefit, in a Commission rule applying to SBSEFs? If so,
please identify any such provision, explain why it would be
inappropriate or unnecessary for SBSEFs, and what economic benefit that
you believe would result from omitting it from the Commission's final
rule.
D. Rule 814--Entity Operating Both a National Securities Exchange and
SBSEF
Section 37.8 of the CFTC's rules applies to a board of trade that
operates both a DCM and a SEF. Paragraph (a) of Sec. 37.8 requires the
board of trade to separately register the DCM and the SEF with the CFTC
under the respective rules for each type of market. Paragraph (b)
requires a board of trade that operates both types of market and that
uses the same electronic trade execution system for executing and
trading swaps on both markets to clearly identify to market
participants whether an execution of a swap took place on the DCM or on
the SEF.
Proposed Rule 814 is modelled on Sec. 37.8. Paragraph (a) of
proposed Rule 814 would provide that an entity intending to operate
both a national securities exchange and an SBSEF shall separately
register the two facilities pursuant to section 6 of the SEA and Rule
803 thereunder. Paragraph (b), although adapted generally from Sec.
37.8(b), draws its specific language from section 3D(c) of the SEA.\93\
Section 3D(c) contemplates that a single entity may operate both a
national securities exchange and an SBSEF, and would provide that a
national securities exchange shall, to the extent that the exchange
also operates an SBSEF and uses the same electronic trade execution
system for listing and executing trades of SBS on or through the
exchange and the facility, identify whether electronic trading of SBS
is taking place on or through the national securities exchange or the
SBSEF. Proposed Rule 814(b) copies section 3D(c) of the SEA verbatim.
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\93\ 15 U.S.C. 78c-4(c).
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The Commission preliminarily believes that it is appropriate for
proposed Regulation SE to include a rule that clarifies the
registration status of an entity that operates both an exchange and an
SBSEF, and that broadly parallels Sec. 37.8.
The Commission seeks comment on the following:
69. Do you believe in general that Regulation SE should include a
rule that clarifies the registration status of an entity that operates
both an exchange and an SBSEF? Why or why not?
70. In particular, do you agree with the specific language proposed
by the Commission in Rule 814? If not, how would you revise that
language?
71. Do you believe that more detailed rules are necessary to
address the extent to which an entity should keep separate its exchange
and its SBSEF or, conversely, areas where overlapping functionality or
personnel should expressly be allowed? If so, please discuss.
E. Rule 815--Methods of Execution for Required and Permitted
Transactions
A key goal of the Dodd-Frank Act is to bring trading of swaps and
SBS onto regulated markets, as reflected in the statutory requirements
for mandatory clearing and mandatory trade execution of certain swap
and SBS products.\94\ If the relevant agency makes a mandatory clearing
determination regarding a product, the product becomes subject to
mandatory trade execution if at least one DCM/exchange or SEF/SBSEF
makes the product ``available to trade.'' The legislative history of
the Dodd-Frank Act indicates that exchange trading is a mechanism to
``provide pre- and post-trade transparency for end users, market
participants, and regulators.'' \95\ Exchange trading also enhances
market efficiency by allowing multiple market participants the
opportunity to compete for individual transactions on price, in
contrast to the bilateral, dealer-driven market that prevailed before
the Dodd-Frank Act.\96\ The Dodd-Frank Act does not require, however,
that all products be subject to mandatory clearing and/or mandatory
trade execution, and does not impose any execution requirements for
transactions in such products. Section 37.9 of the CFTC's rules
addresses these issues using the concepts of ``Required Transaction''
and ``Permitted Transaction.'' The Commission is proposing Rule 815 of
Regulation SE to adapt Sec. 37.9 for SBSEFs.
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\94\ See 7 U.S.C. 2(h)(1)(A) (mandatory clearing for swaps) and
2(h)(8) (mandatory trade execution for swaps); 15 U.S.C. 78c-3(a)(1)
(mandatory clearing for SBS) and 78c-3(h) (mandatory trade execution
for SBS). The heads of the Group of Twenty countries (``G20'') have
also emphasized the importance of exchange-trading of OTC
derivatives, noting in 2009 that ``[a]ll standardized OTC derivative
contracts should be traded on exchanges or electronic trading
platforms, where appropriate, and cleared through central
counterparties by end-2012 at the latest.'' See G20, Leaders'
Statement: The Pittsburgh Summit (September 24-25, 2009) at p. 9.
\95\ S. Rep. No. 111-176, at 34 (2010). See also Mark Jickling &
Kathleen Ann Ruane, ``The Dodd-Frank Wall Street Reform and Consumer
Protection Act: Title VII, Derivatives,'' Cong. Research Serv.,
R41398, at 7 (August 30, 2010) (explaining that the goal of the
trade execution requirement is to promote pre-trade price
transparency).
\96\ See id. at 34 (quoting Stanford University Professor Darrel
Duffie: ``The relative opaqueness of the OTC market implies that
bid/ask spreads are in many cases not being set as competitively as
they would be on exchanges. This entails a loss in market
efficiency''). See also id. (quoting International Risk Analytics
co-founder Christopher Whalen: ``The absence of an exchange trading
mandate provides `supra normal returns paid to the dealers in the
closed OTC derivatives market [and] are effectively a tax on other
market participants, especially investors who trade on open, public
exchanges'').
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Section 37.9(a) defines a ``Required Transaction'' as any
transaction involving a swap that is subject to the trade execution
requirement in section 2(h)(8) of the CEA, subject to certain
exceptions. Section 37.9(c) defines a ``Permitted Transaction'' as the
obverse of a Required Transaction: Any transaction involving a swap
that is not subject to the CEA's trade execution requirement. Section
37.9(c) provides that a SEF may offer any method of execution for a
Permitted Transaction.
[[Page 28895]]
In addition, Sec. 37.9(a) provides that a Required Transaction that is
not a block trade must generally be executed by a SEF using an order
book \97\ or a request-for-quote (``RFQ'') system.\98\
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\97\ Section 37.9(a)(2)(i)(A) defines ``order book'' by cross-
referencing to Sec. 37.3(a)(3) for a definition of ``order book,''
which in turn relies on cross-references to other provisions of the
CEA for the embedded terms ``trading facility'' and ``electronic
trading facility.''
\98\ Section 37.9(a)(3) defines ``request for quote system'' as
a trading system or platform in which a market participant transmits
a request for a quote to buy or sell a specific instrument to no
less than three market participants in the trading system or
platform, to which all such market participants may respond. Sec.
37.9(a)(3) further provides that, to meet the definition, the three
market participants shall not be affiliates or controlled by the
requester, and shall not be affiliates of or controlled by each
other.
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Under Sec. 37.9(a)(3), a SEF that offers an RFQ system in
connection with a Required Transaction must, at the same time that the
requester receives the first responsive bid or offer, communicate to
the requester any firm bid or offer pertaining to the same instrument
resting on any of the SEF's order books. In addition, the SEF must
provide the requester with the ability to execute against such firm
resting bids or offers along with any responsive orders. Finally, the
SEF must ensure that its trading protocols provide each of its market
participants with equal priority in receiving requests for quotes and
in transmitting and displaying for execution responsive orders.
Section 37.9(b) establishes a time-delay requirement for a Required
Transaction on an order book. Under the rule, a SEF must require that a
broker or dealer who seeks to either execute against its customer's
order or to execute two of its customers' orders against each other
through the SEF's order book (following some form of pre-arrangement or
pre-negotiation of such orders) be subject to at least a 15-second time
delay between the entry of those two orders into the order book, such
that one side of the potential transaction is disclosed and made
available to other market participants before the second side of the
potential transaction, whether for the broker's or dealer's own account
or for the second customer, is submitted for execution.\99\
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\99\ Section 37.9(b) permits a SEF to adjust the time-delay
requirement to something other than 15 seconds, based on a swap's
liquidity or other product-specific considerations. However, any
such adjustment must still be for a sufficient length so that an
order is exposed to the market and other market participants have a
meaningful opportunity to execute against it.
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Paragraphs (a) through (c) of proposed Rule 815 are modelled on
paragraphs (a) through (c) of Sec. 37.9. Proposed Rule 815(a)(1),
based on Sec. 37.9(a)(1), would define ``Required Transaction'' as
``any transaction involving a security-based swap that is subject to
the trade execution requirement in section 3C(h) of the Act.'' Proposed
Rule 815(a)(2), based on Sec. 37.9(a)(2), would specify execution
methods for Required Transactions. Proposed Rule 815(a)(3), based on
Sec. 37.9(a)(3), would define an RFQ system as ``a trading system or
platform in which a market participant transmits a request for a quote
to buy or sell a specific instrument to no less than three market
participants in the trading system or platform, to which all such
market participants may respond'' and specify other requirements for an
RFQ system to be recognized as such under the rule. The three market
participants could not be affiliates of or controlled by the requester
and shall not be affiliates of or controlled by each other. Also, an
SBSEF that offers an RFQ system in connection with a Required
Transaction would be required, at the same time that the requester
receives the first responsive bid or offer, to communicate to the
requester any firm bid or offer pertaining to the same SBS resting on
any of the SBSEF's order books. In addition, the SBSEF would be
required to provide the requester with the ability to execute against
such firm resting bids or offers along with any responsive orders.
Finally, the SBSEF would be required to ensure that its trading
protocols provide each of its members with equal priority in receiving
requests for quotes and in transmitting and displaying for execution
responsive orders.
Paragraph (b) of proposed Rule 815 is modelled on Sec. 37.9(b) and
would provide for a time delay requirement for Required Transactions on
an order book. Section 37.9(b) recognizes that there are situations
where a broker or dealer might seek to trade against a customer order
(a ``facilitation cross'') or cross two customer orders (a ``customer
cross'') where the product being traded is subject to mandatory trade
execution. Under Sec. 37.9(b), the broker or dealer must expose
customer orders on the SEF order book for a required minimum period so
that other market participants have the opportunity to offer a better
price than the broker or dealer had intended for the cross. Proposed
Rule 815(b) closely follows the order-handling requirements of Sec.
37.9(b) for facilitation and customer crosses that are Required
Transactions.
The Commission preliminarily believes that the CFTC's rules
relating to Required Transactions are reasonably designed to promote
price competition in products that are subject to the trade execution
requirement. The Commission recognizes that, when considering rules for
SBS that are subject to mandatory clearing and mandatory trade
execution, additional or different criteria could plausibly achieve the
goal of promoting price competition. It is debatable, for example,
whether slightly different standards--such as RFQ-to-4 or RFQ-to-2 in
lieu of RFQ-to-3, or a 30-second book-exposure requirement instead of
15 seconds--might promote these ends more effectively. However, the
Commission's determination to propose rules that are closely modelled
on those in Sec. 37.9 reflects the baseline established by the CFTC
rules. Most if not all SBSEFs will be dually registered with the CFTC
as SEFs, and most if not all market participants in the SBS market will
likely be participants in the swap market. The Commission appreciates
that different or additive requirements--particularly for the key
concept of a ``Required Transaction''--could introduce complexity and
confusion if one set of trading protocols applied to Required
Transactions for SBS but different protocols--ones that have been
understood and utilized for many years--applied to Required
Transactions for swap transactions.
Under both the CEA and SEA, Core Principle 2 requires a SEF/SBSEF
to specify trading procedures to be used in entering and executing
orders on the facility, including block trades.\100\ The CFTC
implements this provision by excepting block trades from the required
execution methods in Sec. 37.9(a)(2). That rule cross-references Sec.
43.2, which defines the term ``block trade'' for purposes of public
dissemination of swap transactions.
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\100\ 15 U.S.C. 78c-4(d)(2)(C); 7 U.S.C. 7b-3(f)(2)(C).
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The Commission preliminarily believes that it should adopt an
approach to block trades in Regulation SE that closely aligns with the
approach taken by the CFTC. The purpose of having a block exception to
the required methods of execution is to balance the promotion of price
competition and all-to-all trading against the potential costs to
market participants who wish to trade large orders. Forcing a market
participant who seeks liquidity to expose a large order to a SEF/SBSEF
order book or to utilize RFQ-to-3 could cause the market to move
against the liquidity requester before it can obtain an execution.
Under the CFTC's rules, a block trade in a product that is subject to
mandatory trade execution may be traded on-SEF using flexible means of
execution on the SEF's non-order-book trading system or platform, or
away from a SEF's trading system or platform,
[[Page 28896]]
provided that it is executed pursuant to the SEF's rules and
procedures.
Proposed Rule 815(a)(2) would exclude block trades from the
required execution methods using language closely modelled on Sec.
37.9(a)(2). The Commission also preliminary believes that it should
align the definition of ``block trade'' in proposed Regulation SE as
closely as possible to the CFTC's definition. Therefore, the proposed
definition--located in proposed Rule 802 of Regulation SE--is based on
the four-pronged definition found in Sec. 43.2(a), but with one
modification. The third prong of the CFTC definition characterizes a
block trade in a particular swap as having ``a notional or principal
amount at or above the appropriate minimum block size applicable to
such swap.'' Appendix F to the CFTC's part 43 divides swap asset
classes into a number of categories, and sets forth a minimum block
size threshold to each category. SBS are not within the CFTC's
jurisdiction, so the CFTC has never considered what an appropriate
minimum block size threshold would be for any SBS asset class. In this
respect, there is no threshold for the SEC to harmonize with, so the
Commission is proposing to establish a threshold tailored specifically
for the SBS market.
For the third prong of the ``block trade'' definition, the
Commission is proposing that the SBS is based on a single credit
instrument (or issuer of credit instruments) or a narrow-based index of
credit instruments (or issuers of credit instruments) having a notional
size of $5 million or greater. The Commission previously employed a $5
million block threshold for credit SBS as a condition to one prong of
its no-action statement regarding Regulation SBSR.\101\ In imposing
that condition, the Commission noted that the Financial Industry
Regulatory Authority (``FINRA'') applies a $5 million cap when
disseminating transaction reports of economically similar cash debt
securities.\102\
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\101\ See SEA Release No. 87780 (December 18, 2019), 85 FR 6270,
6347 (February 4, 2020) (``ANE Adopting Release and No-Action
Statement'') (stating, in relevant part, that there would not be a
basis for a Commission enforcement action if ``a registered SDR does
not disseminate an SBS transaction in a manner consistent with Rule
902 [of Regulation SBSR] but instead disseminates (or does not
disseminate), the SBS transaction in a manner consistent with part
43 of the CFTC's swap reporting rules in force at the time of the
transaction, provided that for an SBS based on a single credit
instrument or a narrow-based index of credit instruments having a
notional size of $5 million or greater, the registered SDR that
receives the report of the SBS transaction does not utilize any
capping or bucketing convention under part 43 of the CFTC's swap
reporting rules but instead disseminates a capped size of $5 million
(e.g., `$5MM+' or similar) in lieu of the true notional size'').
\102\ See id. at n. 768 (citing FINRA Regulatory Notice 12-39,
available at https://www.finra.org/rules-guidance/notices/12-39).
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The proposed definition of ``block trade'' in Rule 802 does not
include any equity SBS. In this regard, the Commission's approach
follows the CFTC's; appendix F to the CFTC's part 43 does not include a
block threshold for any type of equity swap. Accordingly, no equity
swap may qualify for the exception to required means of execution for
block trades provided in Sec. 37.9(a)(2), and no equity SBS could
qualify for the exception to required means of execution for block
trades in proposed Rule 815(a)(2).
Paragraphs (d) and (e) of Sec. 37.9 provide additional exceptions
that allow for flexible methods of execution for what would otherwise
be Required Transactions. The Commission would include similar
exceptions in proposed Rules 815(d) and (e).
Paragraph (d) of Sec. 37.9 allows for flexible methods of
execution for package transactions that meet certain enumerated
criteria. Sec. 37.9(d)(1) defines ``package transaction'' as two or
more component transactions executed between two or more counterparties
where at least one component is a Required Transaction, execution of
each component is contingent upon the execution of all other
components, and the component transactions are priced or quoted
together as one economic transaction with simultaneous (or near-
simultaneous) execution of all components. Section 37.9(d)(2) provides
that a Required Transaction that is executed as a component of a
package transaction that includes a component swap that is subject
exclusively to the CFTC's jurisdiction, but is not subject to mandatory
clearing, may be executed on a SEF using any method of execution as if
it were a Permitted Transaction. Section 37.9(d)(3) provides that a
Required Transaction that is executed as a component of a package
transaction that includes a component that is not a swap may be
executed on a SEF using any method of execution as if it were a
Permitted Transaction. Section 37.9(d)(3) further states that this
general exception, which allows flexible means of execution for certain
package transactions, shall not apply to a Required Transaction that is
executed as a component of a package transaction in which all other
non-swap components are U.S. Treasury securities; a Required
Transaction that is executed as a component of a package transaction in
which all other non-swap components are contracts for the purchase or
sale of a commodity for future delivery; a Required Transaction that is
executed as a component of a package transaction in which all other
non-swap components are agency mortgage-backed securities; or a
Required Transaction that is executed as a component of a package
transaction that includes a component transaction that is the issuance
of a bond in a primary market.
Proposed Rule 815(d) is closely modelled on Sec. 37.9(d) and is
designed to balance the goal of promoting transparency in the SBS
market through required methods of execution against the market
efficiency of allowing multiple instruments to trade as a package using
flexible methods of execution.\103\ A rule that was too lenient could
subvert the goal of promoting transparency and competition through all-
to-all trading, while a rule that was too strict could cause market
participants to break the package into its individual components,
thereby increasing transaction costs and reducing the economic purpose
and efficiency of the package transaction. The Commission preliminarily
believes that the CFTC has struck an appropriate balance between these
competing policy goals in Sec. 37.9(d), and is therefore proposing to
align its own rule closely with the CFTC's. The Commission recognizes,
however, that the kinds of packages described in Sec. 37.9(d)(3) might
be used only in the swap market and might not be utilized in the SBS
market. The Commission seeks comment on that matter below.
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\103\ To the extent that counterparties may be facilitating a
package transaction that involves a ``swap,'' as defined in section
1(a)(47) of the CEA, 7 U.S.C. 1a(47), or any contract for the
purchase or sale of a commodity for future delivery (or option on
such a contract), or any component agreement, contract, or
transaction over which the Commission does not have exclusive
jurisdiction, the Commission does not opine on whether such activity
complies with other applicable law and regulations.
---------------------------------------------------------------------------
Section 37.9(e) sets out procedures for resolution of operational
and clerical error trades, which could be for swaps that otherwise
would be subject to required means of execution. Section 37.9(e)(1)
defines the terms ``correcting trade,'' ``error trade,'' and
``offsetting trade'' that are used in the rule. Section 37.9(e)(2)
requires a SEF to maintain rules and procedures that facilitate the
resolution of error trades and sets forth certain requirements designed
to promote resolution in a fair, transparent, and consistent manner. As
their names suggest, these types of trades are necessary to reverse
errors. They are not conducted for the purpose of competitive price
discovery and thus
[[Page 28897]]
the pre-trade transparency goals for SEF/SBSEF trading are not
implicated.
Proposed Rule 815(e) is modelled on Sec. 37.9(e), although
definitions of the terms ``correcting trade,'' ``error trade,'' and
``offsetting trade'' would be included in proposed Rule 802 rather than
in proposed Rule 815(e).\104\ A fair and orderly market needs rules to
address error trades when they occur, and such rules should be fair,
transparent, and consistent. The market might need to make correcting
trades or offsetting trades to reverse the effect of the original error
trade. The CFTC's rules for addressing error trades are well
articulated and well understood by the market, so the Commission
preliminarily believes that they serve as an appropriate model for the
Commission's rules. Furthermore, because most if not all SBSEFs also
will be registered with the CFTC as SEFs, close harmonization in this
regard would allow dually registered entities to employ the same
procedures for addressing error trades, whether they arise in the
context of swap trading or SBS trading.
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\104\ See proposed Rule 802 (defining ``correcting trade'' as a
trade executed and submitted for clearing to a registered clearing
agency with the same terms and conditions as an error trade other
than any corrections to any operational or clerical error and the
time of execution; defining ``error trade'' as any trade executed on
or subject to the rules of an SBSEF that contains an operational or
clerical error; and defining ``offsetting trade'' as a trade
executed and submitted for clearing to a registered clearing agency
with terms and conditions that economically reverse an error trade
that was accepted for clearing). These proposed definitions are
modelled on the definitions of the same terms in Sec. 37.9(e)(1).
---------------------------------------------------------------------------
Section 37.9(f) addresses counterparty anonymity and is widely
referred to as the prohibition on ``post-trade name give-up.'' Section
37.9(f) generally prohibits any person, directly or indirectly
(including through a third-party service provider), from disclosing the
identity of a counterparty to a swap that is executed anonymously on a
SEF and intended to be cleared, and requires the SEF to establish and
maintain rules to that effect. Section 37.9(f) provides that ``executed
anonymously'' as used in the rule includes a swap that is pre-arranged
or pre-negotiated anonymously, including by a SEF participant. Finally,
Sec. 37.9(f) provides that, where a package transaction includes a
component swap that is not intended to be cleared, disclosing the
identity of a counterparty would not violate Sec. 37.9.
Proposed Rule 815(f) is modelled on Sec. 37.9(f). The Commission
preliminarily agrees with the CFTC that prohibiting post-trade name
give-up is reasonably necessary to facilitate and promote trading on
SEFs.\105\ The practice of requiring disclosure of one counterparty's
name to the other counterparty (i.e., ``name give-up'') increases the
risk of information leakage and can deter participation by liquidity
seekers on SEFs and SBSEFs. The Commission preliminarily believes, like
the CFTC, that prohibiting post-trade name give-up will promote pre-
trade price transparency by encouraging a greater number, and a more
diverse set, of market participants to anonymously post bids and offers
on regulated markets. Therefore, the Commission preliminarily that it
should incorporate the same prohibition into Regulation SE.
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\105\ CFTC, Post Trade Name Give-Up on Swap Execution
Facilities, 85 FR 44693, 44695 (July 24, 2020).
---------------------------------------------------------------------------
The Commission seeks comment on the following:
72. Do you believe in general that the CFTC's concepts of
``Required Transactions'' and ``Permitted Transactions'' should be
incorporated into proposed Regulation SE? Why or why not?
73. In particular, do you believe that the execution methods set
forth in Sec. 37.9 for Required Transactions are appropriate for
SBSEFs and the SBS market? Why or why not? Do you observe differences
between swap and SBS products that warrant different or additional
criteria for Required Transactions on SBSEFs? If so, please describe
those differences, and suggest and justify any different execution
methods for Required Transactions in SBS that you believe appropriate.
74. Do you believe that proposed Rule 815 should harmonize with the
CFTC rule for handling facilitation and customer crosses in products
subject to the trade execution requirement? Why or why not? If not,
please suggest and justify any different order-handling requirements
that you believe appropriate.
75. Do you agree in general with excepting block trades from the
required methods of execution? Why or why not?
76. Do you agree in general with the Commission's proposed approach
of adapting the CFTC definition of ``block trade'' from Sec. 43.2 for
SBSEFs? Why or why not?
77. Do you agree in particular with the $5 million prong of the
SEC's proposed definition of ``block trade''? Why or why not? Do you
believe that a threshold other than $5 million would be appropriate? If
so, what numerical threshold and why? Do you believe that there should
be different thresholds for different asset classes (or sub-asset
classes)? If so, please discuss.
78. Do you believe in general that the Commission, like the CFTC in
Sec. 37.9(d), should allow for flexible means of execution for an SBS
subject to the trade execution requirement when it is part of a package
trade? Why or why not?
79. If so, do you believe that the exceptions to required methods
of execution for package transactions set forth in proposed Rule 815(d)
are appropriate? Why or why not? Are there aspects of the CFTC's
criteria that are not relevant for the SBS market and should be
omitted? If so, which provision(s) and why? Are there different types
of packages that involve SBS that are not prevalent in the swap market
that should be incorporated into the SEC's exceptions? If so, please
describe these packages and suggest an appropriate way to characterize
them in Rule 815(d).
80. Do you agree with how the Commission is proposing to harmonize
with the Sec. 37.9(d)(3)'s ``exceptions to the exception'' for package
trades in proposed Rule 815(d)(3)? Why or why not? Are the kinds of
packages described in Sec. 37.9(d)(3) unique to the swap market? If
there are other types of package transactions involving SBS that you
believe should be subject to required means of execution despite
allowing other types of packages to use flexible means of execution,
please describe these types of packages and explain why you believe
they should nevertheless be subject to required means of execution.
81. Do you believe in general that the Commission, like the CFTC in
Sec. 37.9(e), should allow for flexible means of execution for
products that otherwise would be subject to the trade execution
requirement when an SBSEF is performing a correcting, error, or
offsetting trade? Why or why not?
82. If so, do you believe that the SEC's proposed definitions for
these terms, which are closely modelled on the CFTC's definitions, are
appropriate? Why or why not? If not, what alternative definition(s)
would you suggest, and why?
83. Do you agree in general that the SEC rules for SBSEFs, like the
CFTC rules for SEFs, should prohibit post-trade name give-up? Why or
why not? If so, do you agree with the manner in which the Commission is
proposing to implement it (i.e., close harmonization with Sec.
37.9(f))? Why or why not?
[[Page 28898]]
F. Rule 816--Trade Execution Requirement and Exemptions Therefrom
Section 3C of the SEA \106\ sets out a procedure whereby an SBS
becomes subject to mandatory clearing. Section 3C(h) of the SEA
provides that, if a transaction involving an SBS is subject to the
mandatory clearing requirement, the counterparties shall execute the
transaction on an exchange, on an SBSEF registered under section 3D of
the SEA, or on an SBSEF that is exempt from registration under section
3D(e) of the SEA, unless no exchange or SBSEF makes the SBS available
to trade or if the SBS transaction is subject to an exception from the
clearing requirement under section 3C(g) of the SEA. This obligation
under section 3C(h) is commonly referred to as the ``trade execution
requirement.'' Proposed Rule 816 of Regulation SE would establish
procedures for an SBSEF to make an SBS available to trade (assuming it
is also subject to the clearing requirement), thereby activating the
trade execution requirement with respect to that SBS. Proposed Rule 816
also would include three proposed exemptions from the trade execution
requirement.
---------------------------------------------------------------------------
\106\ 15 U.S.C. 78c-3.
---------------------------------------------------------------------------
1. Process for an SBSEF To Make an SBS Product Available To Trade
Paragraphs (a) through (d) of proposed Rule 816 are modelled on
Sec. 37.10 of the CFTC's rules and would establish a process whereby
an SBS product is ``made available to trade'' (``MAT'') by an SBSEF. An
SBSEF may list an SBS that is subject to mandatory clearing, but
listing the product does not by itself subject the product to the trade
execution requirement in section 3C(h) of the SEA. Only if a product
that is subject to mandatory clearing is listed and MAT would the SBS
then become subject to the trade execution requirement. A MAT
determination would have to be made and filed by an SBSEF pursuant to
proposed Rule 816 to trigger the trade execution requirement, similar
to the MAT process of Sec. 37.10.
Paragraph (a)(1) of proposed Rule 816, like Sec. 37.10(a)(1),
would provide that an SBSEF that makes an SBS available to trade in
accordance with paragraph (b) of this section, must submit to the
Commission its determination with respect to such SBS as a rule,
pursuant to the procedures under proposed Rule 806 or 807. Paragraph
(a)(2), modelled on Sec. 37.10(a)(2), would provide that an SBSEF that
makes an SBS available to trade must demonstrate that it lists or
offers that SBS for trading on its trading system or platform.
Paragraph (b) of proposed Rule 816 would set out the factors that
an SBSEF must consider when making a MAT determination for an SBS
product. Proposed Rule 816(b) would incorporate the same six factors
enumerated in Sec. 37.10(b): (1) Whether there are ready and willing
buyers and sellers; (2) The frequency or size of transactions; (3) The
trading volume; (4) The number and types of market participants; (5)
The bid/ask spread; and (6) The usual number of resting firm or
indicative bids and offers.
Paragraph (c) of proposed Rule 816, modelled on Sec. 37.10(c),
would provide that, upon a determination that an SBS is MAT on an SBSEF
or SBS exchange,\107\ all other SBSEFs and SBS exchanges shall comply
with the requirements of section 3C(h) of the SEA in listing or
offering such SBS for trading. Paragraph (d) of proposed Rule 816, like
Sec. 37.10(d), would provide that the Commission may issue a
determination that an SBS is no longer MAT upon determining that no
SBSEF or SBS exchange lists such SBS for trading.
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\107\ An SBS exchange, like all national securities exchanges,
must submit any rule change--including a rule change to list a new
derivative securities product and/or to MAT an SBS product--pursuant
to SEA Rule 19b-4, 17 CFR 240.19b-4. The Commission is not proposing
to establish a new procedure for SBS exchanges to list or MAT SBS
products.
---------------------------------------------------------------------------
The Commission preliminarily believes that it is appropriate for
Regulation SE to establish a mechanism whereby an SBSEF can MAT an SBS
product, and that this mechanism should align with the CFTC's as
closely as possible. The CFTC's procedures are well articulated and
well understood by SEFs, so the Commission preliminarily believes that
closely harmonizing with these procedures would yield comparable
regulatory benefits while minimizing burdens on SBSEFs. In particular,
the Commission preliminarily believes that the criteria for MAT
consideration are equally applicable to the SEF and SBSEF markets, and
thus the Commission is not proposing any different or additional
criteria that would have to be considered by an SBSEF when it wishes to
MAT an SBS product.
The Commission seeks comment on the following:
84. Do you believe in general that Regulation SE should establish a
process whereby an SBSEF can MAT an SBS product that harmonizes closely
with Sec. 37.10? Why or why not?
85. In particular, do you object to any of the specific language
choices made to adapt Sec. 37.10 into proposed Rules 816(a) to (d)? If
so, what alternative language would you suggest?
86. Are there any provisions of Sec. 37.10 that are adapted into
proposed Rules 816(a) to (d) that you believe would be inappropriate,
or would not create any benefit, in a Commission rule applying to
SBSEFs? If so, please identify any such provision, explain why it would
be inappropriate or unnecessary for SBSEFs, and what economic benefit
that you believe would result from omitting it from the Commission's
final rule.
2. Exemptions From Trade Execution Requirement
Paragraph (e) of proposed Rule 816 has no analog in Sec. 37.10,
but instead is adapted from Sec. 36.1, which sets out certain
exemptions from the trade execution requirement. The exemptions
incorporated into Sec. 36.1 result from the CFTC's many years of
experience in administering the CEA's trade execution requirement. The
Commission preliminarily believes that it should borrow from the CFTC's
experience and incorporate the same exemptions into Regulation SE.
Paragraph (e)(1) of proposed Rule 816, modelled on Sec. 36.1(a),
would provide that an SBS transaction that is executed as a component
of a package transaction that also includes a component transaction
that is the issuance of a bond in a primary market is exempt from the
trade execution requirement in section 3C(h) of the SEA. In addition,
paragraph (e)(1), like Sec. 36.1(a), would provide that, for purposes
of paragraph (e), a package transaction would consist of two or more
component transactions executed between two or more counterparties
where at least one component transaction is subject to the trade
execution requirement in section 3C(h) of the SEA; execution of each
component transaction is contingent upon the execution of all other
component transactions; and the component transactions are priced or
quoted together as one economic transaction with simultaneous or near-
simultaneous execution of all components.
For the same reasons identified by the CFTC,\108\ the Commission,
pursuant to section 36(a)(1) of the SEA,\109\ preliminarily believes
that it is necessary or appropriate in the public interest, and is
consistent with the
[[Page 28899]]
protection of investors, to exempt SBS from the trade execution
requirement in section 3C(h) of the SEA if the criteria in proposed
Rule 816(e)(1) are met.
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\108\ See CFTC, Swap Execution Facility Requirements, 85 FR
82313, 82320 (December 18, 2020).
\109\ 15 U.S.C. 78mm(a)(1).
---------------------------------------------------------------------------
Section 36.1(b) provides that section 2(h)(8) of the CEA does not
apply to a swap transaction that qualifies for the exception under
section 2(h)(7) of the CEA or an exception or exemption under part 50
of the CFTC's rules, and for which the associated requirements are
met.\110\ The Commission is proposing to adapt Sec. 36.1(b) as
paragraph (e)(2) of proposed Rule 816, to provide that section 3C(h) of
the SEA does not apply to an SBS transaction that qualifies for an
exception \111\ under section 3C(g) of the SEA, or any exemption from
the clearing requirement that is granted by the Commission, for which
the associated requirements are met.\112\ Unlike the CFTC, the
Commission does not have a specific rule to cite to regarding
exemptions from the clearing requirement, so proposed Rule 816(e)(2)
would refer only generally to such exemptions.
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\110\ By its terms, section 2(h)(8) of the CEA provides that the
trade execution requirement does not apply to swaps that are
excepted from the clearing requirement pursuant to section 2(h)(7)
of the CEA. However, when adopting Sec. 36.1(b), the CFTC noted
that it also has adopted exemptions from the clearing requirement
pursuant to other statutory authority (i.e., its exemptive authority
under CEA section 4(c)). See CFTC, Exemptions From Swap Trade
Execution Requirement, 86 FR 8993, 8995 (February 11, 2021) (``CFTC
Swap Trade Execution Exemptions Release'') (discussing exemptions
relating to cooperatives and inter-affiliate swaps).
\111\ The Commission notes that section 3C(g) of the SEA is
entitled ``Exceptions,'' not ``Exemptions.''
\112\ As with section 2(h)(8) of the CEA, section 3C(h) of the
SEA provides that the trade execution requirement does not apply to
SBS that are excepted from the clearing requirement pursuant to
section 3C(g) of the SEA. However, the Commission could, like the
CFTC, grant exemptions from the clearing requirement pursuant to
other statutory authority, such as section 36 of the SEA.
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When adopting Sec. 36.1(b), the CFTC found that exempting swaps
that qualified for an exemption from or exception to the clearing
requirement was consistent with its authority under section 4(c) of the
CEA.\113\ The CFTC also noted Congress's intent to link the clearing
requirement with the trade execution requirement, so that a swap that
was exempted or excepted from the former also should be exempted from
the latter.\114\ For the same reasons identified by the CFTC, the
Commission, pursuant to section 36(a)(1) of the SEA, preliminarily
believes that it is necessary or appropriate in the public interest,
and is consistent with the protection of investors, to exempt an SBS
from the trade execution requirement in section 3C(h) of the SEA if the
SBS qualifies for an exception under section 3C(g) of the SEA, or
benefits from any exemption from the clearing requirement that is
granted by the Commission, for which the associated requirements are
met.
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\113\ See CFTC, Swap Trade Execution Exemptions Release, 86 FR
at 8996.
\114\ See id.
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Section 36.1(c) provides that section 2(h)(8) of the CEA does not
apply to a swap transaction that is executed between counterparties
that have eligible affiliate counterparty status pursuant to paragraph
(a) of Sec. 50.52 of the CFTC's rules, which provides an exception
from the clearing requirement for inter-affiliate swaps, subject to
conditions. Counterparties to a swap that have eligible affiliate
counterparty status may rely on the Sec. 36.1(c) even if they clear
the swap transaction. The Commission is proposing to adapt Sec.
36.1(c) as paragraph (e)(3) of proposed Rule 816 to provide that
section 3C(h) of the SEA does not apply to an SBS transaction that is
executed between counterparties that qualify as ``eligible affiliate
counterparties.'' Since the Commission does not have an equivalent to
Sec. 50.52 to reference, the Commission is proposing instead to define
the term ``eligible affiliate counterparties'' directly in proposed
Rule 816(e)(3).
Counterparties would be ``eligible affiliate counterparties'' for
purposes of proposed Rule 816(e)(3) if: (i) One counterparty, directly
or indirectly, holds a majority ownership interest in the other
counterparty, and the counterparty that holds the majority interest in
the other counterparty reports its financial statements on a
consolidated basis under Generally Accepted Accounting Principles or
International Financial Reporting Standards, and such consolidated
financial statements include the financial results of the majority-
owned counterparty; or (ii) a third party, directly or indirectly,
holds a majority ownership interest in both counterparties, and the
third party reports its financial statements on a consolidated basis
under Generally Accepted Accounting Principles or International
Financial Reporting Standards, and such consolidated financial
statements include the financial results of both of the counterparties.
In addition, for purposes of proposed Rule 816(e)(3), a counterparty or
third party directly or indirectly would hold a majority ownership
interest if it directly or indirectly holds a majority of the equity
securities of an entity, or the right to receive upon dissolution, or
the contribution of, a majority of the capital of a partnership. These
definitions closely are modelled on the equivalent definitions used in
Sec. 50.52, which are incorporated into Sec. 36.1(c).
When adopting Sec. 36.1(c), the CFTC noted that it was codifying
previously issued no-action relief.\115\ The CFTC also stated that
these transactions are not intended to be arm's-length, market-facing,
or competitively executed under any circumstance, irrespective of the
type of swap involved. Therefore, these transactions would not
contribute to the price discovery process if executed on a SEF or
DCM.\116\ The CFTC recognized the efficiency benefits associated with
entering into inter-affiliate swaps via internal processes and
acknowledged that applying the trade execution requirement to such
transactions could inhibit affiliated counterparties from efficiently
executing these types of transactions for risk management, operational,
and accounting purposes.\117\ The CFTC concluded, therefore, that--as
with the exemptions set forth in Sec. 36.1(a) and (b)--granting an
exemption from the trade execution requirement for swap transactions
that are executed between counterparties that have eligible affiliate
counterparty status was consistent with its exemptive authority under
the CEA, regardless of whether the swap is submitted to clearing.\118\
For the same reasons identified by the CFTC, the Commission, pursuant
to section 36(a)(1) of the SEA, preliminarily believes that it is
appropriate to exempt from the trade execution requirement an SBS that
is executed between counterparties that qualify as eligible affiliate
counterparties, even if the counterparties clear the SBS transaction.
The Commission also preliminarily believes that it is appropriate in
the public interest to adapt into proposed Rule 816 the definition of
``eligible affiliate counterparties'' used in the CFTC's rules because
this term is generally well understood by market participants.
Furthermore, the Commission preliminarily believes that market
participants should be permitted to apply the same standard for
determining whether an inter-affiliate swap or SBS will be exempt from
the trade execution requirement.
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\115\ See id. at 8997.
\116\ See id.
\117\ See id.
\118\ See id. at 8998.
---------------------------------------------------------------------------
The Commission seeks comment on the following:
87. Do you believe in general that Regulation SE should incorporate
similar exemptions from the trade
[[Page 28900]]
execution requirement that the CFTC provides in Sec. 36.1? Why or why
not?
88. In particular, do you object to any of the specific language
choices made to adapt Sec. 36.1 into proposed Rule 816(e)? If so, what
alternative language would you suggest?
89. Do you believe that the exemption in proposed Rule 816(e)(1) is
even necessary? In other words, do market participants engage in
package transactions involving SBS and new issuance bonds of the type
described in Sec. 36.1(a), or do these types of packages involve only
IRS and thus would not be applicable to the SBS market?
90. Are there any other provisions of Sec. 36.1 that are adapted
into proposed Rule 816(e) that you believe would be inappropriate, or
would not create any benefit, in a Commission rule applying to SBSEFs?
If so, please identify any such provision, explain why it would be
inappropriate or unnecessary for SBSEFs, and what economic benefit that
you believe would result from omitting it from the Commission's final
rule.
91. Are there any types of SBS that you believe should be exempt
from the trade execution requirement that have no analog in the swap
market and thus are not reflected in the CFTC's list of exemptions to
the CEA trade execution requirement in Sec. 36.1? If so, please
describe and justify any potential exemptions that you believe should
be added to proposed Rule 816(e).
G. Rule 817--Trade Execution Compliance Schedule
Proposed Rule 817 is modelled on Sec. 37.12 of the CFTC's rules,
which is designed to inform market participants of the precise date on
which the trade execution requirement for a particular product
commences. Section 37.12(a) provides that a swap becomes subject to the
trade execution requirement upon the later of the applicable deadline
established under the compliance schedule provided under Sec. 50.25(b)
or 30 days after the available-to-trade determination submission or
certification for that swap is, respectively, deemed approved under
Sec. 40.5 or deemed certified under Sec. 40.6.
The Commission does not have a close equivalent to Sec. 50.25(b).
However, Rule 3Ca-1 under the SEA \119\ provides that the Commission
may determine, following a submission from a clearing agency, that an
SBS (or a group, category, type, or class of SBS) must be cleared. This
determination could follow a stay of the clearing requirement for
additional review. Accordingly, paragraph (a) of proposed Rule 817
would provide that an SBS transaction shall be subject to the
requirements of section 3C(h) of the SEA upon the later of (1) a
determination by the Commission that the SBS is required to be cleared
as set forth in section 3C(a) or any later compliance date that the
Commission may establish as a term or condition of such determination
or following a stay and review of such determination pursuant to
section 3C(c) of the SEA and Rule 3Ca-1 thereunder; and (2) 30 days
after the available-to-trade determination submission or certification
for that SBS is, respectively, deemed approved under Rule 806 or deemed
certified under Rule 807.
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\119\ 17 CFR 240.3Ca-1.
---------------------------------------------------------------------------
Paragraph (b) of proposed Rule 817, modelled on Sec. 37.12(b),
would provide that a counterparty may voluntarily comply with the trade
execution requirement sooner than required by paragraph (a).
The Commission seeks comment on the following:
92. Do you believe in general that Regulation SE should include a
trade execution compliance schedule similar to that in Sec. 37.12? Why
or why not?
93. In particular, do you agree with the language that the
Commission is proposing to adapt from Sec. 37.12 into Rule 817? If
not, what alternative language would you suggest, and why?
VIII. Implementation of Core Principles
Section 3D(d) of the SEA \120\ sets forth 14 Core Principles with
which SBSEFs must comply. These provisions, with one exception,
correspond to the 15 Core Principles for SEFs set forth in section
5h(f) of the CEA.\121\
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\120\ 15 U.S.C. 78c-4(d).
\121\ Compare 7 U.S.C. 7b-3(f) (enumerating 15 Core Principles
for SEFs) with 15 U.S.C. 78c-4(d) (enumerating 14 Core Principles
for SBSEFs). CEA Core Principle 6 for SEFs (Position Limits or
Accountability) has no analog in the SEA, so the numbering of the
subsequent Core Principles between the two statutes differs by one.
------------------------------------------------------------------------
Core principle title CEA No. SEA No.
------------------------------------------------------------------------
Compliance with Core Principles......... 1 1
Compliance with Rules................... 2 2
(Security-Based) Swaps Not Readily 3 3
Susceptible to Manipulation............
Monitoring of Trading and Trade 4 4
Processing.............................
Ability to Obtain Information........... 5 5
Position Limits or Accountability....... 6 n/a
Financial Integrity of Transactions..... 7 6
Emergency Authority..................... 8 7
Timely Publication of Trading 9 8
Information............................
Recordkeeping and Reporting............. 10 9
Antitrust Considerations................ 11 10
Conflicts of Interest................... 12 11
Financial Resources..................... 13 12
System Safeguards....................... 14 13
Designation of Chief Compliance Officer. 15 14
------------------------------------------------------------------------
The Commission preliminarily believes generally that it would be
appropriate to closely harmonize with the CFTC rules that implement the
SEF Core Principles, although there are some instances where close
harmonization is not practicable. Where there are substantive
differences between an existing CFTC rule and an SEC-proposed rule, the
Commission will note and discuss the proposed difference and seek
comment. The Commission also will note when there is not, or at least
not intended to be, a difference between the SEC rule and the analogous
CFTC rule.
Part 37 of the CFTC's rules includes an appendix B, setting forth
``Guidance on, and Acceptable Practices in, Compliance with Core
Principles.'' The introduction to appendix B provides that the guidance
for the Core Principle is illustrative only and ``is not intended to be
used as a mandatory checklist.''
[[Page 28901]]
Where the CFTC includes guidance and/or accepted practices pertaining
to a Core Principle for SEFs, the Commission will explain how (if at
all) the Commission proposes to incorporate the substance of these
statements into Regulation SE.
A. Rule 818--Core Principle 1--Compliance With Core Principles
Core Principle 1 \122\ requires an SBSEF, to be registered and
maintain registration as an SBSEF, to comply with the Core Principles
and any requirement that the Commission may impose by rule or
regulation. Core Principle 1 also provides that an SBSEF shall have
reasonable discretion in establishing the manner in which it complies
with the Core Principles. CEA Core Principle 1 \123\ is substantively
identical.
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\122\ Section 3D(d)(1) of the SEA, 15 U.S.C. 78c-4(d)(1).
\123\ 7 U.S.C. 7b-3(f)(1).
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The CFTC implemented Core Principle 1 for SEFs in subpart B of part
37. Section 37.100 repeats the statutory text of SEF Core Principle 1.
There are no other rules in subpart B. Proposed Rule 818 also would
repeat the statutory text of the Core Principle.
The Commission seeks comment on the following:
94. Do you agree with how the Commission is proposing to implement
SEA Core Principle 1? Why or why not?
B. Rule 819--Core Principle 2--Compliance With Rules
Core Principle 2 \124\ requires an SBSEF to establish and enforce
compliance with any rule that is established by the SBSEF, including
the terms and conditions of the SBS that it trades or processes, and
any limitation on access to the SBSEF. It further requires the SBSEF to
establish and enforce trading, trade processing, and participation
rules that will deter abuses, and to have the capacity to detect,
investigate, and enforce those rules, including the means to provide
market participants with impartial access to the market and to capture
information that may be used in establishing whether rule violations
have occurred. Finally, Core Principle 2 requires an SBSEF to establish
rules governing the operation of the facility, including rules
specifying trading procedures to be used in entering and executing
orders traded or posted on the facility, including block trades. Core
Principle 2 for SEFs \125\ is substantively identical, except that it
includes an additional paragraph requiring a SEF to provide in its
rules that, when a swap dealer or major swap participant enters into or
facilitates a swap that is subject to the mandatory clearing
requirement, the swap dealer or major swap participant shall be
responsible for compliance with the trade execution requirement.\126\
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\124\ Section 3D(d)(2) of the SEA, 15 U.S.C. 78c-4(d)(2).
\125\ 7 U.S.C. 7b-3(f)(2).
\126\ See 7 U.S.C. 7b-3(f)(2)(D).
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1. Rules Modelled on Subpart C of Part 37
The CFTC implemented Core Principle 2 for SEFs in subpart C of part
37. Section 37.200 of subpart C repeats the statutory text of CEA Core
Principle 2, including the paragraph not present in SEA Core Principle
2 pertaining to swaps subject to the mandatory clearing requirement.
Section 37.201 requires a SEF to establish rules governing the
operation of the facility, including, but not limited to, rules
specifying trading procedures to be followed by members and market
participants when entering and executing orders traded or posted on the
SEF. Section 37.201 also requires a SEF to establish and impartially
enforce compliance with the SEF's rules, including, but not limited to
the terms and conditions of any swaps traded or processed on or through
the SEF, access to the SEF, trade practice rules, audit trail
requirements, disciplinary rules, and mandatory trading requirements.
Section 37.202 imposes access requirements on SEFs. Section
37.202(a) requires a SEF to provide any eligible contract participant
(``ECP'') and any independent software vendor with impartial access to
its market(s) and market services, including any indicative quote
screens or any similar pricing data displays. Furthermore, the SEF must
have criteria governing access that are impartial, transparent, and
applied in a fair and nondiscriminatory manner; procedures whereby ECPs
provide the SEF with written or electronic confirmation of their status
as ECPs before obtaining access; and comparable fee structures for ECPs
and independent software vendors receiving comparable access to, or
services from, the SEF. Section 37.202(b) requires a SEF, before
granting any ECP access to its facilities, to require that the ECP
consent to its jurisdiction. Section 37.202(c) requires the SEF to
establish and impartially enforce rules governing any decision to
allow, deny, suspend, or permanently bar access to the SEF, including
when such decisions are made as part of a disciplinary or emergency
action taken by the SEF.
Section 37.203 requires a SEF to establish and enforce trading,
trade processing, and participation rules that will deter abuses and to
have the capacity to detect, investigate, and enforce those rules.
Section 37.203 includes lengthy and detailed provisions relating to
that goal. Section 37.203(a) requires a SEF to prohibit, among other
things, front-running, wash trading, pre-arranged trading (except for
block trades), fraudulent trading, money passes, and any other trading
practices that the SEF deems to be abusive. Section 37.203(b) requires
the SEF to have arrangements and resources to collect information and
documents on both a routine and non-routine basis, including the
authority to examine books and records kept by the SEF's members.
Section 37.203(c) requires the SEF to have sufficient compliance staff
and resources to ensure that it can conduct effective audit trail
reviews, trade practice surveillance, market surveillance, and real-
time market monitoring. Section 37.203(d) requires the SEF to maintain
an automated trade surveillance system capable of detecting potential
trade practice violations, and imposes certain performance requirements
on that system. Section 37.203(e) requires the SEF to conduct real-time
market monitoring of all trading activity to identify any market or
system anomalies, and to have the authority to adjust trade prices or
cancel trades when necessary to mitigate market disrupting events
caused by system malfunctions. Section 37.203(f) requires the SEF to
establish and maintain procedures that require its compliance staff to
conduct investigations of possible rule violations and imposes various
requirements relating to those investigations.
Section 37.204 allows a SEF to contract with a regulatory services
provider to assist in complying with the supervisory functions noted
above. Section 37.204 also imposes requirements on the SEF's
relationship with the regulatory services provider and provides that
the SEF must retain exclusive authority in all substantive decisions
made by its regulatory service provider, including decisions involving
the cancellation of trades, the issuance of disciplinary charges
against members or market participants, and denials of access.
Section 37.205 requires a SEF to capture and retain all audit trail
data necessary to detect, investigate, and prevent customer and market
abuses. Such data shall be sufficient to reconstruct all indications of
interest, requests for quotes, orders, and trades within a reasonable
period of time and to provide evidence of any violations of the rules
of the swap execution facility.
[[Page 28902]]
Section 37.205 includes lengthy and detailed provisions relating to the
elements of an acceptable audit trail program, requirements for the
transaction history database, electronic analysis capability, and safe
storage capability. Furthermore, Sec. 37.205 requires a SEF to enforce
its audit trail and recordkeeping requirements through at least annual
reviews of all members to verify their compliance, and to establish a
program for effective enforcement of its audit trail and recordkeeping
requirements. An effective program must identify members subject to the
SEF's recordkeeping rules that have failed to maintain high levels of
compliance with such requirements, and impose meaningful sanctions when
deficiencies are found.
Section 37.206 requires a SEF to establish trading, trade
processing, and participation rules that will deter abuses and have the
capacity to enforce such rules through prompt and effective
disciplinary action, including suspension or expulsion of members or
market participants that violate the SEF's rules. Accordingly, Sec.
37.206 requires the SEF to establish disciplinary panels and procedures
for disciplinary hearings that meet certain enumerated requirements,
and provides that disciplinary sanctions imposed by the SEF shall be
commensurate with the violations committed and shall be clearly
sufficient to deter recidivism or similar violations by other market
participants.
Appendix B to part 37 includes detailed guidance to facilitate
compliance with the rules that implement CEA Core Principle 2. The
guidance addresses, for example, the use of warning letters by SEF
compliance staff, potential conflicts of interest of the SEF's
enforcement staff, the serving of notices of charges, a respondent's
right to representation, providing sufficient time to answer a charge,
consequences of a respondent admitting to or failing to deny a charge,
right to a hearing, settlement offers, right of appeal and appeal
procedures, final decisions, summary fines for violations of rules
relating to the failure to timely submit accurate records required for
clearing or verifying each day's transactions, and emergency
disciplinary actions.
Proposed Rule 819 would implement Core Principle 2 and is adapted
from subpart C of part 37. Paragraph (a) of proposed Rule 819, like
Sec. 37.200, would repeat the statutory text of Core Principle 2.
Paragraph (b) is closely modelled on Sec. 37.201 and would require an
SBSEF to specify trading procedures (including for block trades, if
offered) and to establish and impartially enforce compliance with the
rules of the SBSEF.
Paragraph (c) of proposed Rule 819 is closely modelled on Sec.
37.202 and would require an SBSEF to provide any ECP and any
independent software vendor with impartial access to its market(s) and
market services, including any indicative quote screens or any similar
pricing data displays. An SBSEF also would be required, among other
things, to establish comparable fee structures for ECPs and independent
software vendors receiving comparable access to, or services from the
SBSEF, and to establish and impartially enforce rules governing any
decision to allow, deny, suspend, or permanently bar an ECP's access to
the SBSEF, including when a decision is made as part of a disciplinary
or emergency action taken by the SBSEF.
Paragraph (d) of proposed Rule 819 is closely modelled on Sec.
37.203. Paragraph (d)(1) of proposed Rule 819 would require an SBSEF to
prohibit abusive trading practices generally, enumerating certain
practices in particular.\127\ Paragraph (d)(2) would require an SBSEF
to have arrangements and resources for effective enforcement of its
rules, including the authority to collect information and documents on
both a routine and non-routine basis and to supervise its market to
determine whether a rule violation has occurred. Paragraph (d)(3) would
require an SBSEF to establish and maintain sufficient compliance staff
and resources to ensure that it can conduct effective audit trail
reviews, trade practice surveillance, market surveillance, and real-
time market monitoring. Paragraph (d)(4) would require an SBSEF to
maintain an automated trade surveillance system that meets certain
criteria. Paragraph (d)(5) would require real-time market monitoring of
all trading activity on the SBSEF. The SBSEF also would be required to
adjust trade prices or cancel trades when necessary to mitigate market
disrupting events caused by malfunctions in its system(s) or
platform(s) or errors in orders submitted by members. Paragraph (d)(6)
is modelled on Sec. 37.203(f), again using the same structure and rule
text. Like Sec. 37.203(f), proposed Rule 819(d)(6) would address
investigations and investigation reports and includes provisions
relating to procedures, timeliness, when a reasonable basis does or
does not exist for finding a violation, and warning letters.\128\
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\127\ To promote uniformity throughout proposed Regulation SE,
the Commission believes that it is appropriate to denote all persons
who have a right to participate in an SBSEF's market as ``members.''
Section 37.203(a) provides that a SEF shall prohibit abusive trading
practices on its markets by members and market participants. The
equivalent provision in proposed Rule 819(d) would provide that an
SBSEF shall prohibit abusive trading practices on its markets by
members (without reference to ``market participants'').
\128\ Proposed Rule 819(d)(6)(v) would provide that the rules of
an SBSEF may authorize its compliance staff to issue a warning
letter to a person or entity under investigation or to recommend
that a disciplinary panel take such an action, and that no more than
one warning letter could be issued to the same person or entity
found to have committed the same rule violation within a rolling 12-
month period. The first provision is derived from the CFTC's
guidance pertaining to CEA Core Principle 2 for SEFs; the second
provision is from the text of Sec. 37.203(f)(5).
---------------------------------------------------------------------------
Paragraph (e) of proposed Rule 819 is modelled on Sec. 37.204 and
would allow an SBSEF to contract with a regulatory services provider.
If it does so, the SBSEF would have to ensure that such provider has
the capacity and resources necessary to provide timely and effective
regulatory services, retain sufficient compliance staff to supervise
the quality and effectiveness of the regulatory services provided on
its behalf, hold regular meetings with the regulatory service provider,
and conduct periodic reviews of the adequacy and effectiveness of
services provided on its behalf. The SBSEF would at all times remain
responsible for the performance of any regulatory services received and
retain exclusive authority in all substantive decisions made by its
regulatory service provider. Proposed Rule 819(e)(1) makes a slight
modification to Sec. 37.204(a)'s list of entities that can serve as a
regulatory service provider.\129\
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\129\ Under Sec. 37.204(a), a regulatory services provider for
a SEF can be a registered futures association, FINRA, or ``another
registered entity.'' ``Registered entity'' is a term of art in the
CEA that does not exist in the SEA. Therefore, the Commission is
proposing instead that a regulatory services provider for an SBSEF
can be a registered futures association (under section 17 of the
CEA), a national securities exchange, a national securities
association (which would include FINRA), or another SBSEF.
---------------------------------------------------------------------------
Paragraph (f) of proposed Rule 819 is modelled on Sec. 37.205,
using the same paragraph structure and rule text. Paragraph (f) would
require an SBSEF to capture and retain all audit trail data necessary
to detect, investigate, and prevent customer and market abuses and
impose other requirements on the SBSEF's audit trail pertaining to the
records that must be kept, electronic analysis capability, safe-storage
capability, and enforcement of the audit trail requirements.
Paragraph (g) of proposed Rule 819 is based on Sec. 37.206 and
would generally track all of its rule text, but includes additional
language derived from the
[[Page 28903]]
appendix B guidance that is interwoven throughout. In converting the
guidance to proposed rule text, the Commission preliminarily believes
that grouping conceptually related items together would yield the most
coherent and readable ruleset, instead of incorporating the guidance
into a stand-alone section of the rules. Accordingly, paragraph
(g)(1)(i) of proposed Rule 819 is taken from Sec. 37.206(a) and would
require an SBSEF to establish and maintain sufficient enforcement staff
and resources to effectively and promptly prosecute possible rule
violations within the disciplinary jurisdiction of the SBSEF.
Paragraphs (g)(1)(ii) through (iv) are taken from the appendix B
guidance and would provide, respectively, that:
The enforcement staff of an SBSEF shall \130\ not include
members or other persons whose interests conflict with their
enforcement duties.
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\130\ In this bullet and the next bullet, the word used in the
corresponding CFTC guidance was ``should'' but the Commission is
proposing the word ``shall'' in both places to convert the guidance
into an enforceable rule.
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A member of the enforcement staff shall not operate under
the direction or control of any person or persons with trading
privileges at the SBSEF.
The enforcement staff of an SBSEF may operate as part of
the SBSEF's compliance department.
Paragraph (g)(2) of proposed Rule 819 is modelled on Sec.
37.206(b) and would require an SBSEF to establish one or more
disciplinary panels that are authorized to fulfill their obligations
under Rule 819. Section 37.206(b) provides that disciplinary panels
must meet the composition requirements of part 40. To help ensure
fairness and prevent special treatment or preference of any person or
member and to provide for consistency of the makeup of members of SBSEF
major disciplinary committees and hearing panels, the Commission is
proposing instead to require the disciplinary panels established under
proposed Rule 819(g)(2) to meet the composition requirements of
proposed Rule 834(d), which would apply to each major disciplinary
committee and hearing panel of an SBSEF.\131\
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\131\ Proposed Rule 834(d) would require each SBSEF and SBS
exchange to ensure that its disciplinary processes preclude any
member, or group or class of its members, from dominating or
exercising disproportionate influence on the disciplinary process,
and that each major disciplinary committee or hearing panel include
sufficient different groups or classes of its members so as to
ensure fairness and to prevent special treatment or preference for
any person or member in the conduct of the responsibilities of the
committee or panel. See infra section X.
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Paragraphs (g)(3) through (8) of proposed Rule 819 have no parallel
in Sec. 37.206 itself, but derive from the guidance in appendix B
pertaining to Sec. 37.206, following the paragraph structure and
wording of the guidance closely. Paragraph (g)(3) would impose
procedural requirements relating to the notice of charges made to a
respondent. Paragraph (g)(4) would provide that a respondent has a
right to representation. Paragraph (g)(5) would provide that a
respondent must be given adequate time to respond to any charges.
Paragraph (g)(6) would state that the rules of an SBSEF may provide
that, if a respondent admits or fails to deny any of the charges, a
disciplinary panel may find that the violations alleged in the notice
of charges have been committed. Paragraph (g)(6) would further state
that, if the SBSEF's rules so provide, then: (i) The disciplinary panel
may impose a sanction for each violation found to have been committed;
(ii) The disciplinary panel shall promptly notify the respondent in
writing of any sanction to be imposed and shall advise the respondent
that the respondent may request a hearing on such sanction within the
period of time, which shall be stated in the notice; and (iii) The
rules of the SBSEF may provide that, if a respondent fails to request a
hearing within the period of time stated in the notice, the respondent
will be deemed to have accepted the sanction.
Paragraph (g)(7) of proposed Rule 819 would provide that, where a
respondent has requested a hearing on a charge that is denied, or on a
sanction set by the disciplinary panel, the respondent shall be given
an opportunity for a hearing in accordance with the rules of the
security-based swap execution facility. Paragraph (g)(8) would address
settlement offers.
Paragraph (g)(9) of proposed Rule 819 returns to the text of Sec.
37.206(c) for provisions regarding hearings. Paragraph (g)(9)(i) is
modelled on Sec. 37.206(c)(1) and would require an SBSEF to have rules
requiring a hearing to be fair, conducted before members of the
disciplinary panel, and promptly convened after reasonable notice to
the respondent. The Commission is proposing an additional provision,
which derives from the guidance, that an SBSEF need not apply the
formal rules of evidence for a hearing; nevertheless, the procedures
for the hearing may not be so informal as to deny a fair hearing.
Paragraphs (g)(9)(ii) through (vi) of proposed Rule 819 are also
adapted from the guidance. Paragraph (g)(9)(ii) would bar a member of
the disciplinary panel for the hearing from having a financial,
personal, or other direct interest in the matter under consideration.
Paragraph (g)(9)(iii) would address the respondent's access to evidence
in the SBSEF's possession. Paragraph (g)(9)(iv) would provide that the
SBSEF's enforcement and compliance staffs shall \132\ be parties to the
hearing, and the enforcement staff shall present their case on those
charges and sanctions that are the subject of the hearing. Paragraph
(g)(9)(v) would provide that the respondent shall be entitled to appear
personally at the hearing, to cross-examine any persons appearing as
witnesses at the hearing, to call witnesses, and to present such
evidence as may be relevant to the charges. Paragraph (g)(9)(vi) would
provide that the SBSEF shall require persons within its jurisdiction
who are called as witnesses to participate in the hearing and produce
evidence.
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\132\ The CFTC's guidance in appendix B that is adapted into
paragraphs (g)(9)(ii) through (vi) of proposed Rule 819 uses the
word ``should'' here and in other similar instances. The Commission
is proposing to use the word ``shall'' in such instances instead.
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Paragraph (g)(9)(vii) of proposed Rule 819 is modelled on the text
of Sec. 37.206(c)(2) and would require that, if the respondent has
requested a hearing, a copy of the hearing shall be made and shall
become a part of the record of the proceeding. Paragraph (g)(9)(vii)
would not require the record to be transcribed unless the transcript is
requested by Commission staff or the respondent, the decision is
appealed pursuant to the rules of the SBSEF, or the decision is
reviewed by the Commission pursuant to Sec. 201.442.\133\ In all other
instances, a summary record of a hearing is permitted.
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\133\ See infra section XVI(E) (discussing proposed Rule 442,
which would establish the right to appeal to the Commission certain
actions taken by an SBSEF, and setting out certain procedural
matters relating to any such appeal).
---------------------------------------------------------------------------
Paragraph (g)(10) of proposed Rule 819 is modelled on Sec.
37.206(d) and would provide that, promptly following a hearing
conducted in accordance with the rules of the SBSEF, the disciplinary
panel shall render a written decision based upon the weight of the
evidence contained in the record of the proceeding and shall provide a
copy to the respondent. The written decision would have to include six
enumerated elements, all of which are closely modelled on those in
Sec. 37.206(d).
Paragraph (g)(11) of proposed Rule 819 would address emergency
disciplinary actions and is drawn from the appendix B guidance. It
would provide that an SBSEF may impose a sanction, including
suspension, or take other summary action against a person
[[Page 28904]]
or entity subject to its jurisdiction upon a reasonable belief that
such immediate action is necessary to protect the best interest of the
market place. Furthermore, any emergency disciplinary action would have
to be taken in accordance with an SBSEF's procedures that provide for
notice (if practicable), rights for representation in all proceedings,
an opportunity for a hearing as soon as reasonably practicable, and the
rendering of a written decision promptly following the hearing based
upon the weight of the evidence contained in the record. Proposed Rule
819(g)(11) seeks to balance the need to allow an SBSEF to take summary
action against the need to afford due process to respondents.\134\
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\134\ Compare proposed Rule 819(g)(11)(i) (allowing an SBSEF to
impose a sanction, including suspension, or take other summary
action against a person or entity subject to its jurisdiction upon a
reasonable belief that such immediate action is necessary to protect
the best interest of the market place) with proposed Rule
819(g)(11)(ii)(A) (providing that, if practicable, a respondent
should be served with a notice before the action is taken, or
otherwise at the earliest possible opportunity).
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Paragraph (g)(12) of proposed Rule 819 also is drawn from the
appendix B guidance and provides that, if the rules of the SBSEF permit
appeals,\135\ the SBSEF shall establish an appellate panel that is
authorized to hear appeals. The composition of the panel would have to
be consistent with proposed Rule 834(d) \136\ and could not include any
members of the SBSEF's compliance staff or any person involved in
adjudicating any other stage of the same proceeding. Promptly following
the appeal or review proceeding, the appellate panel would be required
to issue a written decision and to provide a copy to the respondent.
---------------------------------------------------------------------------
\135\ Neither Sec. 37.206 or the associated guidance from
appendix B requires a SEF to allow appeals. The guidance states,
rather, that a SEF's rules ``may permit'' appeals and includes
certain procedural requirements only if the rules of a swap
execution facility permit appeals. The Commission is adhering to
this permissive approach in this proposal but seeks comment on
whether the final rules should require an SBSEF to create an appeals
procedure.
\136\ See supra note 131.
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Paragraph (g)(13) of proposed Rule 819 is adapted partly from Sec.
37.206(e) and partly from the appendix B guidance. Paragraph (g)(13)(i)
is drawn from Sec. 37.206(e) and would provide that all disciplinary
sanctions imposed by an SBSEF or its disciplinary panels shall be
commensurate with the violations committed and shall be clearly
sufficient to deter recidivism or similar violations by other members.
All disciplinary sanctions, including sanctions imposed pursuant to an
accepted settlement offer, would be required to take into account the
respondent's disciplinary history. In the event of demonstrated
customer harm, any disciplinary sanction would also be required to
include full customer restitution, except where the amount of
restitution or to whom it should be provided cannot be reasonably
determined. Paragraph (g)(13)(i) is adapted from the guidance and would
allow an SBSEF to adopt a summary fine schedule for violations of rules
relating to the failure to timely submit accurate records required for
clearing or verifying each day's transactions.
The Commission preliminarily believes that combining text from
Sec. 37.206 with the associated guidance from appendix B provides a
logical set of procedures for addressing Core Principle 2 (Compliance
with Rules), from requirements relating to enforcement staff generally
(proposed Rule 819(g)(1)); to the composition of disciplinary panels
and notices of charges (proposed Rules 819(g)(1) and (g)(2)); to rights
to representation (proposed Rule 819(g)(4)), answer to charges and
admission or failure to deny charges (proposed Rules 819(g)(5) and
(g)(6)), denial of charges and right to a hearing (proposed Rule
819(g)(7)), settlement offers (proposed Rule 819(g)(8)); and, finally,
hearings (proposed Rule 819(g)(9)), decisions (proposed Rule
819(g)(10)), emergency disciplinary actions (proposed Rule 819(g)(11)),
right to appeal (proposed Rule 819(g)(12)), and disciplinary sanctions
(proposed Rule 819(g)(13)).
The Commission recognizes that a set of rules that govern
compliance and enforcement matters for SBSEFs could, in the abstract,
differ in a number of details from the rules adopted by the CFTC in
subpart C of part 37 and still plausibly satisfy the requirements of
Core Principle 2. However, in light of the baseline set by the CFTC's
rules, the Commission is concerned that implementing rules for SBSEFs
having major or even minor differences with the rules applicable to
SEFs could increase compliance costs and cause confusion for dually
registered SEF/SBSEFs and market participants. This would particularly
be the case if a potential violation involved a rule that was not
specific to the swap or SBS market, but rather involved member conduct
generally. No regulatory purpose would be served if the SEF/SBSEF had
to pursue one cause of action against a member pursuant to a CFTC rule
and a slightly different cause of action pursuant to an SEC rule, for
the same underlying facts.
The Commission seeks comment on the following:
95. Do you agree generally with the manner in which the Commission
is proposing to implement Core Principle 2? Why or why not?
96. In particular, do you agree with the proposed access
requirements in Rule 819(c)? Why or why not? Do you see differences
between the swap and SBS markets that warrant different requirements
for access to a SEF than to an SBSEF? If so, please describe.
97. Do you see differences between the swap and SBS markets that
warrant different audit trail requirements or trade surveillance
capability for SBSEFs than for SEFs? If so, please describe.
98. Do you believe that SBSEFs, like SEFs, should be able to
utilize regulatory service providers? What entities currently serve as
regulatory service providers for SEFs? Do you believe that the types of
regulatory service providers that could be utilized by SBSEFs under
proposed Rule 819(e)(1) are appropriate? If not, what other regulatory
service providers should be permitted?
99. Do you agree with how the Commission is proposing to implement
requirements for disciplinary procedures and sanctions in proposed Rule
819(g)? Why or why not?
100. In particular, do you agree with the manner in which the
Commission is proposing to incorporate significant portions of the
appendix B guidance into proposed Rule 819(g)? Why or why not? Are
there provisions from the guidance that the Commission is proposing to
incorporate that you believe should be revised or omitted entirely? If
so, please describe. Are there provisions from the guidance that the
Commission has not proposed to incorporate but that you believe should
be incorporated? If so, please describe.
101. Do existing SEFs treat the appendix B guidance as if it were
mandatory? By converting the non-binding guidance applicable to SEFs
into formal rules that would apply to SBSEFs, would dually registered
entities be compelled to deviate from their present practices? If so,
please describe.
102. Do you believe that proposed Rule 819(g)(12) should be revised
to require an SBSEF to permit appeals of enforcement decisions to an
appellate panel established by the SBSEF, despite the fact that neither
subpart C of part 37 nor the CFTC's associated guidance requires
appeals? Why or why not?
2. Provisions of Rule 819 Adapted From Other SEF Requirements
Proposed Rule 819 includes four paragraphs--(h), (i), (j), and
(k)--that are not derived from subpart C of part 37,
[[Page 28905]]
which directly implements CEA Core Principle 2, or from the associated
guidance in appendix B to part 37. Instead, these four paragraphs are
modelled on requirements for SEFs located in other parts of the CFTC's
rules. Because these requirements fall under the general heading of
``Compliance with Rules,'' the Commission is proposing them as part of
Rule 819, which implements SEA Core Principle 2.
a. Rule 819(h)--Activities of SBSEF's Employees, Governing Board
Members, Committee Members, and Consultants
Paragraph (h) of proposed Rule 819 generally would prohibit persons
who are employees of an SBSEF, or who otherwise might have access to
confidential information because of their role with the SBSEF, from
improperly utilizing that information. Proposed Rule 819(h) is modelled
on Sec. 1.59 of the CFTC's rules, which requires an SRO (which term,
under Sec. 1.3 of the CFTC regulations, includes a SEF) to place
restrictions on trading by its governing board members, committee
members, consultants, and employees and to prohibit any such person
from disclosing any material, non-public information obtained as a
result of their official duties with the SRO.
In particular, Sec. 1.59(b)(1)(i) requires an SRO to maintain in
effect rules that, at a minimum, prohibit employees of the SRO from
trading, directly or indirectly, in:
Any ``commodity interest'' \137\ traded on or cleared by
the employing contract market, SEF, or clearing organization;
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\137\ See Sec. 1.59(a)(8) (defining ``commodity interest'' to
mean ``any commodity futures, commodity option or swap contract
traded on or subject to the rules of a contract market, a swap
execution facility or linked exchange, or cleared by a derivatives
clearing organization, or cash commodities traded on or subject to
the rules of a board of trade which has been designated as a
contract market'').
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Any ``related commodity interest''; \138\
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\138\ See Sec. 1.59(a)(9) (defining ``related commodity
interest'' to mean ``any commodity interest which is traded on or
subject to the rules of a contract market, swap execution facility,
linked exchange, or other board of trade, exchange, or market, or
cleared by a derivatives clearing organization, other than the self-
regulatory organization by which a person is employed, and with
respect to which: (i) such employing self-regulatory organization
has recognized or established intermarket spread margins or other
special margin treatment between that other commodity interest and a
commodity interest which is traded on or subject to the rules of the
employing self-regulatory organization; or (ii) such other self-
regulatory organization has recognized or established intermarket
spread margins or other special margin treatment with another
commodity interest as to which the person has access to material,
nonpublic information'').
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A commodity interest traded on a contract market or SEF or
cleared by a DCO other than the employing SRO if the employee has
access to material, non-public information concerning such commodity
interest;
A commodity interest traded on or cleared by a ``linked
exchange'' if the employee has access to material, non-public
information concerning such commodity interest.
The Commission is proposing to adapt Sec. 1.59(b)(1) into
Regulation SE in a simplified way. The Commission preliminarily
believes that, in the SBS market, the policy goals of the rule can be
achieved without the complexities of the CFTC definitions of
``commodity interest'' and ``related commodity interest.'' Paragraph
(h)(2)(i) of proposed Rule 819 would require an SBSEF to maintain in
effect rules that, at a minimum, prohibit an employee of the SBSEF from
trading, directly or indirectly, any ``covered interest.'' Proposed
Rule (h)(1)(i) would define ``covered interest'' to mean, with respect
to an SBSEF: An SBS that trades on the SBSEF; a security of an issuer
that has issued a security that underlies an SBS that is listed on the
SBSEF; or a derivative based on a security that falls within the
immediately preceding prong. The Commission preliminarily believes that
the opportunity to observe order submission and trading in an SBS on an
SBSEF could yield material non-public information about the future
performance not just of that SBS, but of all securities issued by that
entity. The single-name CDS market, in particular, is a market for
assessing the creditworthiness of particular issuers. Non-public
information derived from activity on the SBSEF pertaining to the
market's assessment of an issuer's creditworthiness is likely to be
material to the markets for that issuer's cash securities as well as to
markets for derivatives based on the issuer's cash securities (e.g.,
single-stock options).
Paragraph (h)(2)(ii), modelled on Sec. 1.59(b)(1)(ii), would
prohibit an SBSEF employee from disclosing to any other person any
material non-public information which such employee obtains as a result
of their employment at the SBSEF, and where such employee has or should
have a reasonable expectation that the information disclosed may assist
another person in trading any covered interest. In addition, paragraph
(h)(2)(ii), like Sec. 1.59(b)(1)(ii), would provide an exception for
disclosures made in the course of an employee's duties, or disclosures
made to another SBSEF, court of competent jurisdiction, or
representative of any agency or department of the Federal or State
government acting in their official capacity.
Paragraph (h)(3) of Rule 819, modelled on Sec. 1.59(b)(2), would
allow an SBSEF to adopt rules setting forth circumstances under which
exemptions from the employee trading prohibition may be granted. In
particular, paragraph (h)(3) would include the following possible
carve-outs from the employee trading prohibition: (1) Participation by
an employee in a ``pooled investment vehicle'' where the employee has
no direct or indirect control with respect to transactions executed for
or on behalf of such vehicle; (2) trading by an employee in a
derivative based on such a pooled investment vehicle; (3) trading by an
employee in a derivative based on an index in which no covered interest
constitutes more than 10% of the index; and (4) trading by an employee
under circumstances enumerated in rules which the SBSEF determines are
not contrary to applicable law, the public interest, or just and
equitable principles of trade. The first and the fourth carve-outs
listed above are comparable to those listed in Sec. 1.59(b)(2). The
Commission is proposing to include the second and third carve-outs to
permit an SBSEF employee to trade derivatives that provide indirect
exposure to a covered interest where the exposure to the covered
interest is sufficiently diluted. In such cases, it would be unlikely
that the employee would be using material non-public information about
the covered interest to gain an unfair advantage when trading the
derivative.
The Commission is proposing to depart from the CFTC definition of
``pooled investment vehicle'' \139\ to adapt it for the SBS and
securities markets. Proposed Rule (h)(1)(ii) would define ``pooled
investment vehicle'' to mean an investment company registered under the
Investment Company Act of 1940 in which no covered interest constitutes
more than 10% of the investment company's assets. Thus, under this
definition, if an SBSEF were to list a single-name CDS on company XYZ,
a ``pooled investment vehicle'' would include a broad-based mutual fund
or ETF that contains a security issued by company XYZ, assuming that
[[Page 28906]]
the XYZ security does not exceed 10% of the fund's holdings. The
proposed 10% limit on a covered interest's composition of the fund is
designed to permit SBSEF employees to trade most index-based mutual
funds and ETFs that contain covered interests, except those where a
component of the fund becomes sufficiently large that material non-
public information about an issuer derived from activity on the SBSEF
could provide an unfair advantage to an SBSEF employee when trading
that fund.
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\139\ See Sec. 1.59(a)(10) (defining ``pooled investment
vehicle'' to mean ``a trading vehicle organized and operated as a
commodity pool within the meaning of Sec. 4.10(d) of this chapter,
and whose units of participation have been registered under the
Securities Act of 1933, or a trading vehicle for which Sec. 4.5 of
this chapter makes available relief from regulation as a commodity
pool operator, i.e., registered investment companies, insurance
company separate accounts, bank trust funds, and certain pension
plans'').
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Finally, the Commission notes that, under proposed Rule 819(h)(3)--
as with Sec. 1.59(b)(2)--the exemptions from the trading restrictions
would not be automatically available to SBSEF employees. Proposed Rule
819(h)(3) still would require the SBSEF to adopt rules that set forth
circumstances under which exemptions from the trading prohibition may
be granted. Furthermore, proposed Rule 819(h)(3), which is modelled on
Sec. 1.59(b)(2), would state that any exemption must be administered
by the SBSEF ``on a case-by-case basis.''
Paragraph (h)(4) of proposed Rule 819, like Sec. 1.59(d),\140\
would address prohibited conduct not just of employees of an SBSEF, but
also of governing board members, committee members, and consultants of
the SBSEF. Paragraph (h)(4)(i)(A) is modelled on Sec. 1.59(d)(1)(i)
and would prohibit any employee, governing board member, committee
member, or consultant of the SBSEF from trading for such person's own
account, or for or on behalf of any other account, in any covered
interest on the basis of any material, non-public information obtained
through special access related to the performance of such person's
official duties as an employee, governing board member, committee
member, or consultant. Paragraph (h)(4)(i)(B), modelled on Sec.
1.59(d)(1)(ii), would prohibit any employee, governing board member,
committee member, or consultant of the SBSEF from disclosing for any
purpose inconsistent with the performance of such person's official
duties as an employee, governing board member, committee member, or
consultant any material, non-public information obtained through
special access related to the performance of such duties. Paragraph
(h)(4)(ii), modelled on Sec. 1.59(d)(2), would provide that no person
shall trade for such person's own account, or for or on behalf of any
other account, in any covered interest on the basis of any material,
non-public information that such person knows was obtained in violation
of paragraph (h)(4) of this section from an employee, governing board
member, committee member, or consultant.
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\140\ Section 1.59(c) applies only to national futures
associations and is not considered here.
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The Commission preliminarily believes that persons who have
professional duties with an SBSEF should not trade on material non-
public information derived from the SBSEF or improperly disclose that
information to third parties, and therefore that harmonizing with the
comparable CFTC rule as closely as practicable, taking into account the
difference in products subject to the respective jurisdictions of the
SEC and CFTC, is an appropriate means of furthering that policy goal.
If the Commission adopts Rule 819(h) in substantially the same form as
proposed herein, dually registered SEF/SBSEFs would be able to utilize
the same rules and procedures for complying with Rule 819(h) as they do
for Sec. 1.59. The Commission recognizes that the scope of assets
under restriction would differ in Rule 819(h) than in Sec. 1.59, as
reflected in the SEC's use of the term ``covered interest'' rather than
``commodity interest'' in the analogous CFTC provisions, as well as the
significant differences in the potential exemptions from the trading
restriction (including in the ``pooled investment vehicle''
definition). Nevertheless, SBS are different from swaps, so the
material non-public information that can be obtained from observing
order submission and SBS trading on an SBSEF is different from the
material non-public information that can be obtained from observing
order submission and swap trading on a SEF. The Commission
preliminarily believes, therefore, that it is appropriate for Rule
819(h) to utilize a definition of ``covered interest'' to denote the
scope of the trading restrictions in the proposed rule--and a
definition of ``pooled investment vehicle'' to denote the scope of one
of the potential exemptions from those restrictions--that is customized
for the SBS and securities markets.
The Commission seeks comment on the following:
103. Do you believe in general that the Commission should
incorporate into Regulation SE a rule that restricts how persons with
official duties at an SBSEF may utilize information that they obtain in
the course of their official duties? Why or why not?
104. Do you agree with the specific language proposed by the
Commission to adapt Sec. 1.59 into proposed Rule 819(h)? If not, how
would you revise the proposed rule?
105. In particular, do you agree with the Commission's proposed
definition of ``covered interest''? Why or why not? Do you believe that
the term ``covered interest'' should be expanded to include securities
underlying an index swap and other securities issued by an issuer whose
securities underlie an index swap that trade on a dually registered
SEF/SBSEF? Why or why not?
106. Do you agree with the proposed potential exemptions from the
trading restrictions in proposed Rule 819(h)(3)? For example, do you
believe in general that an SBSEF should be permitted to allow its
employees, governing board members, committee members, and consultants
to hold covered interests through pooled investment vehicles? Why or
why not?
107. Do you agree with the Commission's proposed definition of
``pooled investment vehicle''? Why or why not? Do you agree with the
Commission's proposed requirement that no covered interest may
constitute more than 10% of the pooled investment vehicle? Why or why
not? If you believe another threshold would be more appropriate, please
justify that threshold.
108. Are there additional provisions of Sec. 1.59 that the
Commission has omitted but which you believe should be incorporated
into Regulation SE? If so, which provisions and why?
b. Rule 819(i)--Service on SBSEF Governing Boards or Committees by
Persons With Disciplinary Histories
Paragraph (i) of proposed Rule 819 would bar persons with specified
disciplinary histories from serving on the governing board or
committees of an SBSEF and impose certain other duties on the SBSEF
associated with that fundamental requirement. Proposed Rule 819(i) is
modelled on Sec. 1.63 of the CFTC's rules, which imposes similar
requirements in connection with SROs (which term, under the CEA,
includes SEFs).
Section 1.63(b) requires each SRO to maintain in effect rules that
render a person ineligible to serve on its disciplinary committees,
arbitration panels, oversight panels, or governing board \141\ who
meets any of six enumerated criteria. These criteria generally relate
to a disciplinary offense having been committed by that person within
the past three years. While
[[Page 28907]]
Sec. 1.63(b) requires the SRO to implement rules imposing a bar, Sec.
1.63(c) in addition imposes a bar on such persons directly, stating
that no person may serve on a disciplinary committee, arbitration
panel, oversight panel or governing board of an SRO if such person is
subject to any of the conditions listed in Sec. 1.63(b). Section
1.63(d) requires an SRO to maintain, keep current, and provide to the
CFTC and the public a list of the rule violations which constitute
disciplinary offenses that would trigger the bar in Sec. 1.63. Section
1.63(e) requires an SRO to submit to the CFTC, within 30 days of the
end of each calendar year, a certified list of any persons who have
been removed from its disciplinary committees, arbitration panels,
oversight panels, or governing board pursuant to Sec. 1.63 during the
prior year.
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\141\ Section 1.63 uses the term ``governing board'' throughout.
Certain other CFTC rules that the Commission is proposing to adapt
into Regulation SE use ``board of directors'' to denote the same
concept. As noted above, the Commission is proposing to utilize the
term ``governing board'' throughout Regulation SE, even when the
parallel CFTC rule on which an SEC rule is based uses ``board of
directors.'' See supra note 29.
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Paragraph (i) of proposed Rule 819 is closely modelled on Sec.
1.63. Paragraph (i)(1), like Sec. 1.63(b), would require an SBSEF to
maintain rules \142\ that render a person ineligible to serve on its
disciplinary committees,\143\ arbitration panels, oversight
panels,\144\ or governing boards who falls into any of six enumerated
criteria, all of which are modelled closely on the criteria in Sec.
1.63(b).\145\ Paragraph (i)(2), modelled on Sec. 1.63(c), would impose
a direct bar on any person from serving on a disciplinary committee,
arbitration panel, oversight panel, or governing board of an SBSEF who
meets any of the six criteria enumerated in proposed Rule 819(i)(1).
Paragraph (i)(3), modelled on Sec. 1.63(d), would require an SBSEF to
submit to the Commission a schedule listing the rule violations which
constitute disciplinary offenses that would trigger the bar and, to the
extent necessary to reflect revisions, would have to submit an amended
schedule within 30 days of the end of each calendar year. The SBSEF
would be required to maintain and keep current this schedule and post
it on its website so that it is in a public place designed to provide
notice to members and otherwise ensure its availability to the general
public. Paragraph (i)(4), like Sec. 1.63(e), would require an SBSEF to
submit to the Commission within 30 days of the end of each calendar
year a certified list of any persons who have been removed from its
disciplinary committees, arbitration panels, oversight panels, or
governing board pursuant to Rule 819(i) during the prior year.
Paragraph (i)(5), modelled on Sec. 1.63(f), would provide that,
whenever an SBSEF finds by final decision that a person has committed a
disciplinary offense and such finding makes such person ineligible to
serve on that SBSEF's disciplinary committees, arbitration panels,
oversight panels, or governing board, the SBSEF shall inform the
Commission of that finding and the length of the ineligibility, in a
form and manner specified by the Commission.
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\142\ Section 1.63(b), in relevant part, requires a SEF to
maintain rules that have been submitted to the Commission pursuant
to section 5c(c) of the CEA and part 40 of the CFTC's rules. As
noted above, the Commission is proposing to adapt Sec. Sec. 40.5
(Voluntary submission of rules for Commission review and approval)
and 40.6 (Self-certification of rules) into proposed Rules 806 and
807, respectively. Therefore, proposed Rule 819(i)(1) would require
an SBSEF to maintain in effect rules which have been submitted to
the Commission pursuant to Rules 806 or 807.
\143\ Proposed Rule 802 would define ``disciplinary committee''
as any person or committee of persons, or any subcommittee thereof,
that is authorized by an SBSEF or SBS exchange to issue disciplinary
charges, to conduct disciplinary proceedings, to settle disciplinary
charges, to impose disciplinary sanctions, or to hear appeals
thereof in cases involving any violation of the rules of the SBSEF
or SBS exchange, except those cases where the person or committee is
authorized summarily to impose minor penalties for violating rules
regarding decorum, attire, the timely submission of accurate records
for clearing or verifying each day's transactions, or other similar
activities. The CFTC rules contain two slightly different
definitions of ``disciplinary committee'' that appear in Sec.
1.63(a)(2) and Sec. 1.69(a)(1), respectively. Because the
definition in Sec. 1.69(a)(1) is more comprehensive, the Commission
is modelling its proposed definition of ``disciplinary committee''
on Sec. 1.69(a)(1) rather than on Sec. 1.63(a)(2). The Commission
is locating the definition in proposed Rule 802, since the term is
used by multiple rules in Regulation SE.
\144\ Proposed Rule 802 would define ``oversight panel'' as any
panel, or any subcommittee thereof, authorized by an SBSEF or SBS
exchange to recommend or establish policies or procedures with
respect to the surveillance, compliance, rule enforcement, or
disciplinary responsibilities of the SBSEF or SBS exchange. The
CFTC's definitions of ``oversight panel'' are contained in Sec.
1.63(a)(4) and Sec. 1.69(a)(4), respectively. Because the
definition in Sec. 1.69(a)(4) is more comprehensive, the Commission
is modelling its proposed definition of ``oversight panel'' on Sec.
1.69(a)(4) rather than on Sec. 1.63(a)(4). As with the definition
of ``disciplinary committee,'' the Commission is locating the
definition of ``oversight panel'' in proposed Rule 802, since the
term is used by multiple rules in Regulation SE.
\145\ Section 1.63(b)(5) provides that one criterion for the bar
would be that the person in question is subject to or has had
imposed on him within the prior three years a CFTC registration
revocation or suspension in any capacity for any reason, or has been
convicted within the prior three years of any of the felonies listed
in section 8a(2)(D)(ii) through (iv) of the CEA. Since the SEC is
not subject to the CEA and cannot cross-reference those provisions,
the Commission is proposing for the equivalent criterion in Rule
819(i)(1)(v) that a person would be barred for having been convicted
within the prior three years of any felony, without limitation on
the type of felony.
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Paragraph (i)(6) of proposed Rule 819(i) would define the terms
``arbitration panel,'' ``disciplinary offense,'' and ``final decision''
which are used in proposed Rule 819(i).\146\ These definitions are
closely modelled on those provided in Sec. 1.63(a).\147\
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\146\ Proposed Rule 819(i)(6)(i) would define ``arbitration
panel'' as any person or panel empowered by an SBSEF to arbitrate
disputes involving the SBSEF's members or their customers. Proposed
Rule 819(i)(6)(ii) would define ``disciplinary offense'' as: Any
violation of the rules of an SBSEF, except a violation resulting in
fines aggregating to less than $5,000 within a calendar year
involving decorum or attire, financial requirements, or reporting or
recordkeeping; any rule violation which involves fraud, deceit, or
conversion or results in a suspension or expulsion; any violation of
the SEA or the Commission's rules thereunder; or any failure to
exercise supervisory responsibility when such failure is itself a
violation of either the rules of the SBSEF, the SEA, or the
Commission's rules thereunder. Proposed Rule 819(i)(6)(iii) would
define ``final decision'' as a decision of an SBSEF which cannot be
further appealed within the SBSEF, is not subject to the stay of the
Commission or a court of competent jurisdiction, and has not been
reversed by the Commission or any court of competent jurisdiction;
or any decision by an administrative law judge, a court of competent
jurisdiction, or the Commission which has not been stayed or
reversed.
\147\ Since these terms are used only in proposed Rule 819(i)
and not elsewhere in Regulation SE, the Commission is defining them
in proposed Rule 819(i) and not the omnibus definitions rule in
Regulation SE (Rule 802).
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The Commission preliminarily believes that it is appropriate to bar
persons with inappropriate disciplinary histories from serving on the
disciplinary committees, arbitration panels, oversight panels, or
governing board of an SBSEF, and that closely modelling a rule in
Regulation SE on Sec. 1.63 would be an appropriate means of furthering
that policy goal. The requirements of Sec. 1.63 should be well
understood by SEFs, who have been complying with them for several
years, and incorporating similar requirements into Regulation SE should
impose few if any additional costs on dually registered SEF/SBSEFs. The
Commission preliminarily believes, in particular, that establishing
criteria for the bar that are as similar as possible to the CFTC's
criteria would avoid a situation where a person is ineligible under one
agency's rules to serve on a disciplinary committee, arbitration panel,
oversight panel, or the governing board, but would be eligible under
the other agency's rules.
The Commission seeks comment on the following:
109. Do you believe in general that Regulation SE should include a
rule that prohibits persons having an inappropriate disciplinary
history from serving on the disciplinary committees, arbitration
panels, oversight panels, or governing board of an SBSEF? Why or why
not?
110. In particular, do you agree with the specific language
proposed by the Commission to adapt Sec. 1.63 into proposed Rule
819(i)? If not, how would you revise the rule?
[[Page 28908]]
111. Are there additional provisions of Sec. 1.63 that the
Commission has not adapted into proposed Rule 819(i) but which you
believe should be incorporated? If so, which provisions and why?
112. Proposed Rule 819(i)(1)(iv) would require an SBSEF to have
rules that render a person ineligible to serve on its disciplinary
committees, arbitration panels, oversight panels, or governing board if
that person is subject to an agreement with the Commission, an SBSEF,
or an SRO not to apply for registration with the Commission or
membership in any SRO. Should similar agreements with any other types
of entities be included in the ineligibility provision of proposed Rule
819(i)(1)(iv)? For example, should registered futures associations such
as the NFA be included in this list? Why or why not?
c. Rule 819(j)--Notification of Final Disciplinary Action Involving
Financial Harm to a Customer
Paragraph (j) of proposed Rule 819 is a modified version of Sec.
1.67 of the CFTC's rules. Section 1.67(b) provides, in relevant part,
that upon any final disciplinary action \148\ in which a contract
market or SEF finds that a member has committed a rule violation that
involved a transaction for a customer,\149\ whether executed or not,
and that resulted in harm to the customer, the contract market or SEF
must promptly provide notice of the disciplinary action to the futures
commission merchant or other registrant. The futures commission
merchant or other registrant that receives the notice must promptly
provide written notice of the disciplinary action to the customer as
disclosed on its books and records. Such written notice must include
the principal facts of the disciplinary action and a statement that the
contract market or SEF has found that the member has committed a rule
violation that involved a transaction for the customer, whether
executed or not, and that resulted in financial harm to the customer.
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\148\ See Sec. 1.67(a) (defining ``final disciplinary action''
as any decision by or settlement with a contract market or swap
execution facility in a disciplinary matter which cannot be further
appealed at the contract market or swap execution facility, is not
subject to the stay of the Commission or a court of competent
jurisdiction, and has not been reversed by the Commission or any
court of competent jurisdiction).
\149\ See Sec. 1.3 (defining ``customer'' as any person who
uses a futures commission merchant, introducing broker, commodity
trading advisor, or commodity pool operator as an agent in
connection with trading in any commodity interest; Provided,
however, an owner or holder of a proprietary account as defined in
this section shall not be deemed to be a customer within the meaning
of section 4d of the CEA, the regulations that implement sections 4d
and 4f of the CEA and Sec. 1.35, and such an owner or holder of
such a proprietary account shall otherwise be deemed to be a
customer within the meaning of the CEA and Sec. Sec. 1.37 and 1.46
and all other sections of these rules, regulations, and orders which
do not implement sections 4d and 4f of the CEA).
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Paragraph (j)(1) of proposed Rule 819 is designed to replicate for
SBSEFs the fundamental duty of Sec. 1.67 and would provide that, upon
any final disciplinary action in which an SBSEF finds that a member has
committed a rule violation that involved a transaction for a customer,
whether executed or not, and that resulted in financial harm to the
customer, the SBSEF must promptly provide written notice of the
disciplinary action to the member. In addition, the SBSEF would be
required to have established a rule pursuant to Rule 806 or 807 that
requires a member that receives such a notice to promptly provide that
notice to the customer, as disclosed on the member's books and
records.\150\ Paragraph (j)(2) would provide that the written notice
must include the principal facts of the disciplinary action and a
statement that the SBSEF has found that the member has committed a rule
violation that involved a transaction for the customer, whether
executed or not, and that resulted in financial harm to the customer.
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\150\ The provision on which proposed Rule 819(j)(1)(i)(B) is
based, Sec. 1.67(b)(1)(ii), requires a futures commission merchant
or other registrant that receives such a notice to forward it to the
injured customer. Because of differences in the respective agencies'
statutory authority, the Commission is proposing to require the
SBSEF to establish a rule that requires the relevant member to
forward the notice, not to propose a Commission rule that would
impose such a duty on the member directly.
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Paragraph (j)(3) of proposed Rule 819 would provide definitions for
two terms used in Rule 819(j). The proposed definition for ``final
disciplinary action'' is closely modelled on the CFTC's definition in
Sec. 1.67(a).\151\ The proposed definition of ``customer'' is only
loosely modelled on the definition of ``customer'' provided in Sec.
1.3, which includes complexities deriving from the CEA that the
Commission does not believe are necessary or appropriate to adapt into
a rule that applies to SBSEFs.\152\ The Commission is proposing to
define ``customer'' in proposed Rule 819(j)(3)(i) as a person that
utilizes an agent in connection with trading on an SBSEF.
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\151\ See proposed Rule 819(j)(3)(ii) (defining ``final
disciplinary action'' as any decision by or settlement with an SBSEF
in a disciplinary matter which cannot be further appealed at the
SBSEF, is not subject to the stay of the Commission or a court of
competent jurisdiction, and has not been reversed by the Commission
or any court of competent jurisdiction).
\152\ The Commission notes, finally, that the definitions of
``customer'' and ``final disciplinary action'' would apply only
within proposed Rule 819(j), so they are not included in the omnibus
definitions rule for proposed Regulation SE (Rule 802).
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The Commission preliminarily believes that, if an SBSEF member
commits a rule violation that involved a transaction for the customer
and financial harm to the customer results, the customer should be
apprised of that fact. The Commission preliminarily believes,
therefore, that closely modelling a rule in Regulation SE on Sec. 1.67
would be an appropriate means of furthering that policy goal. The
requirements of Sec. 1.67 should be well understood by SEFs, who have
been complying with them for several years, and incorporating similar
requirements into Regulation SE should impose lower compliance costs on
dually registered SEF/SBSEFs.
The Commission seeks comment on the following:
113. Do you believe in general that Regulation SE should include a
rule designed to provide a customer of an SBSEF member notice if the
member commits a violation of an SBSEF rule that results in harm to the
customer? Why or why not?
114. In particular, do you agree with the specific language
proposed by the Commission to adapt Sec. 1.67 into proposed Rule
819(j)? If not, how would you revise that language?
115. Do you agree with the proposed definition of ``customer'' in
proposed Rule 819(j)? If not, how would you revise it?
d. Rule 819(k)--Designation of Agent for Non-U.S. Member
Paragraph (k) of proposed Rule 819 would require non-U.S. persons
who trade on an SBSEF to have an agent for service process, which could
be an agent of its own choosing or, by default, the SBSEF. Proposed
Rule 819(k) is modelled on Sec. 15.05(i) of the CFTC's rules, which
concerns the designation of agents for foreign persons participating on
``reporting markets,'' a category in the CFTC's rules that includes
SEFs.\153\ With respect to SEFs, Sec. 15.05(i) provides that a SEF
that permits a foreign trader to effect contracts, agreements, or
transactions on the SEF shall be deemed to be the agent of the foreign
trader with respect to any such contracts, agreements, or transactions
executed by the foreign trader. Sec. 15.05(i) further provides that
service or delivery of any communication issued by or on behalf
[[Page 28909]]
of the CFTC to the SEF shall constitute valid and effective service
upon the foreign trader, and that a SEF that has been served with, or
to which there has been delivered, a communication issued by or on
behalf of the CFTC to a foreign trader shall transmit the communication
promptly and in a manner which is reasonable under the circumstances,
or in a manner specified by the CFTC in the communication, to the
foreign trader.
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\153\ A ``reporting market'' is defined in Sec. 15.00(q) to
mean a DCM or registered entity under section 1a(40) of the CEA. The
term ``registered entity'' as defined in section 1a(40) of the CEA
includes SEFs, among other entities.
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Paragraph (i)(1) of Sec. 15.05 provides, with respect to SEFs,
that it shall be unlawful for a SEF to permit a foreign trader to
effect contracts on the SEF unless the SEF has informed the foreign
trader of the requirements of Sec. 15.05. Paragraph (i)(2) of Sec.
15.05 permits a foreign trader to appoint its own agent for service of
process if it provides a copy of the agency agreement to the SEF, and
the SEF files the agreement with the CFTC. Paragraph (i)(3) of Sec.
15.05 provides that the foreign trader would have to notify the CFTC
immediately if that agreement is no longer in effect.
Paragraph (k)(1) of proposed Rule 819 is modelled on Sec. 15.05(i)
and would provide that an SBSEF that admits a non-U.S. person as a
member shall be deemed to be the agent of the ``non-U.S. member'' \154\
with respect to any SBS executed by the non-U.S. member. Under proposed
Rule 819(k)(1), service or delivery of any communication issued by or
on behalf of the Commission to the SBSEF shall constitute valid and
effective service upon the non-U.S. member. If an SBSEF is served with
a communication issued by or on behalf of the Commission to a non-U.S.
member, the SBSEF would be required to transmit the communication to
the non-U.S. member. Paragraph (k)(2) of proposed Rule 819 is modelled
on Sec. 15.05(i)(1) and would provide that it shall be unlawful for an
SBSEF to permit a non-U.S. member to execute SBS transactions on the
facility unless the SBSEF informs the non-U.S. member in writing of the
requirements of proposed Rule 819(k).
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\154\ ``Non-U.S. member'' would be a defined term in proposed
Rule 819(k) that does not appear in Sec. 15.05 of the CFTC's rules
but which, the Commission preliminarily believes, appropriately
conveys the meaning of the CFTC rule for purposes of SBSEFs in
proposed Rule 819(k). A foreign trader that executes contracts on a
trading platform such as an SBSEF must be a member of that platform.
Therefore, to promote uniformity throughout Regulation SE, the
Commission is using the term ``member'' for this concept.
Furthermore, the Commission has defined the term ``U.S. person'' for
purposes of the cross-border application of its Title VII rules--see
Rule 3a71-3(a)(4), Sec. 240.3a71-3(a)(4) --and thus is proposing to
define ``non-U.S. member'' in Rule 802 as ``a member of a security-
based swap execution facility that is not a U.S. person.''
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Paragraph (k)(3) of proposed Rule 819 is modelled on Sec.
15.05(i)(2) and would permit a non-U.S. member of an SBSEF to utilize
an agent for service of process other than the SBSEF. The non-U.S.
member would have to provide a copy of its agreement with the alternate
agent to the SBSEF, and the SBSEF would then have to file the agreement
with the Commission, before executing any transaction on the SBSEF.
Paragraph (k)(4) of proposed Rule 819, modelled on Sec. 15.05(i)(3),
would require the non-U.S. member to notify the Commission if the
agency agreement is no longer in effect.
The Commission preliminarily believes that, for an SBSEF to have an
effective regulatory program and thereby comply with Core Principle 2
(Compliance with Rules), the SBSEF must have jurisdiction over all of
its members, including members who are not U.S. persons. Proposed Rule
819(k) would further an SBSEF's ability to ensure compliance by its
non-U.S. members with its rules by requiring each non-U.S. member of
the SBSEF to have an agent for service of process, whether an agent of
its own choosing that has been disclosed to the SBSEF and the
Commission or, as a default, the SBSEF itself. This would eliminate any
question of how to provide valid notice to a non-U.S. member of any
proceedings involving potential rule violations.
The Commission preliminarily believes that the CFTC has adequately
addressed these concerns with Sec. 15.05(i), and therefore that
proposed Rule 819 should include provisions adapted from Sec. 15.05(i)
for application to SBSEFs. If the Commission ultimately adopts Rule
819(k) in the same or similar form as it is proposed, non-U.S. members
of dually registered SEF/SBSEFs that trade both swaps and SBS should
already be in compliance with these requirements.
The Commission seeks comment on the following:
116. Do you believe in general that Regulation SE should include a
provision making an SBSEF the default agent for service of process for
its non-U.S. members? Why or why not?
117. Do you agree with the specific language proposed by the
Commission to adapt Sec. 15.05(i) into proposed Rule 819(k)? If not,
how would you revise the rule?
118. Are there additional provisions of Sec. 15.05 that the
Commission has omitted but which you believe should be incorporated
into proposed Rule 819(k)? If so, which provisions and why?
119. Do you anticipate that SBSEFs will have any non-U.S. members?
Do you believe that proposed Rule 819(k) will even be necessary?
120. Do you agree with the proposed definition of ``non-U.S.
member'' in Rule 802? If not, how would you revise it?
C. Rule 820--Core Principle 3--SBS Not Readily Susceptible to
Manipulation
Core Principle 3 \155\ provides that an SBSEF may permit trading
only in SBS that are not readily susceptible to manipulation. CEA Core
Principle 3 for SEFs is substantively identical.\156\
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\155\ Section 3D(d)(3) of the SEA, 15 U.S.C. 78c-4(d)(3).
\156\ See section 5h(f)(3) of the CEA, 7 U.S.C. 7b-3(f)(3).
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The CFTC implemented Core Principle 3 in subpart D of part 37.
Section 37.300 of subpart D repeats the statutory text of CEA Core
Principle 3. Sec. 37.301 provides that, for a SEF to demonstrate its
compliance with the core principle, it must, at the time it submits a
new swap contract pursuant to part 40, provide the applicable
information as set forth in appendix C to part 38 (Demonstration of
Compliance That a Contract is not Readily Susceptible to
Manipulation).\157\ Section 37.301 also states that a SEF may refer to
the guidance provided in appendix B of part 37, which provides in
relevant part that, when identifying a reference price, a SEF should
either calculate its own reference price using suitable and well-
established acceptable methods or carefully select a reliable third-
party index.
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\157\ Appendix C to part 38 provides, inter alia, that careful
consideration should be given to the potential for manipulation or
distortion of the cash settlement price of a swap, as well as the
reliability of that price as an indicator of cash market values.
Appropriate consideration also should be given to the commercial
acceptability, public availability, and timeliness of the price
series that is used to calculate the cash settlement price.
Documentation demonstrating that the settlement price index is a
reliable indicator of market values and conditions and is highly
regarded by industry/market agents should be provided. Such
documentation may take on various forms, including carefully
documented interviews with principal market trading agents, pricing
experts, marketing agents, etc. Appropriate consideration also
should be given to the commercial acceptability, public
availability, and timeliness of the price series that is used to
calculate the cash flows of the swap.
---------------------------------------------------------------------------
Proposed Rule 820 would implement Core Principle 3. Although, like
Sec. 37.300, proposed Rule 820 repeats the statutory text of the Core
Principle, the Commission preliminarily believes that it is not
necessary or appropriate to harmonize with the CFTC guidance
[[Page 28910]]
referenced in Sec. 37.301, as this guidance was developed for products
other than SBS.
The Commission seeks comment on the following:
121. Do you agree with how the Commission is proposing to implement
Core Principle 3? Why or why not? If not, what other rules would you
suggest?
D. Rule 821--Core Principle 4--Monitoring of Trading and Trade
Processing
Core Principle 4 \158\ requires an SBSEF to establish and enforce
rules or terms and conditions defining or specifications detailing: (1)
Trading procedures to be used in entering and executing orders traded
on or through the facilities of the SBSEF; and (2) procedures for trade
processing of SBS on or through the facilities of the SBSEF. Core
Principle 4 also requires an SBSEF to monitor trading in SBS to prevent
manipulation, price distortion, and disruptions of the delivery or cash
settlement process through surveillance, compliance, and disciplinary
practices and procedures, including methods for conducting real-time
monitoring of trading and comprehensive and accurate trade
reconstructions. CEA Core Principle 4 for SEFs \159\ is substantively
identical.
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\158\ Section 3D(d)(4) of the SEA, 15 U.S.C. 78c-4(d)(4).
\159\ Section 5h(f)(4) of the CEA, 7 U.S.C. 7b-3(f)(4).
---------------------------------------------------------------------------
The CFTC implemented Core Principle 4 in subpart E of part 37.
Section 37.401 of subpart E provides that a SEF must collect and
evaluate data on its market participants' market activity; demonstrate
an effective program for conducting real-time monitoring to detect and
resolve abnormalities; demonstrate the ability to comprehensively and
accurately reconstruct daily trading; and demonstrate that it has
access to sufficient information to assess whether trading in the swaps
on its market, in the index or instruments used as a reference price,
or other underlying instruments is being used to affect prices on its
market. Sections 37.402 and 37.403 impose additional requirements for
physical-delivery swaps and cash-settled swaps, respectively. Section
37.404(a) requires a SEF to demonstrate that it has access to
sufficient information to assess whether trading in swaps listed on its
market, in the index or instrument used as a reference price, or in the
underlying commodity for its listed swaps is being used to affect
prices on its market. Section 37.404(b) requires a SEF to have rules
that require its market participants to keep records of their trading,
including records of their activity in the index or instrument used as
a reference price, the underlying commodity, and related derivatives
markets, and make such records available, upon request, to the SEF or,
if applicable, to its regulatory service provider, and the CFTC.
Section 37.405 requires a SEF to establish and maintain risk control
mechanisms to prevent and reduce the potential risk of market
disruptions, including, but not limited to, market restrictions that
pause or halt trading under market conditions prescribed by the SEF.
Section 37.406 requires a SEF to have the ability to reconstruct all
trading on its facility, and requires that all audit-trail data and
reconstructions shall be made available to the CFTC in a form, manner,
and time that is acceptable to the CFTC. Section 37.407 requires a SEF
to comply with subpart E of part 37 through a dedicated regulatory
department or by contracting with a regulatory services provider.
Section 37.408 provides that SEFs may refer to the guidance in appendix
B to part 37 to demonstrate compliance with subpart E of part 37.\160\
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\160\ The guidance pertaining to Core Principle 4 has
subsections entitled ``general requirements,'' ``physical-delivery
swaps,'' ``cash-settled swaps,'' ``ability to obtain information,''
and ``risk controls for trading.''
---------------------------------------------------------------------------
Proposed Rule 821 would implement Core Principle 4 and is closely
modelled on the rules in subpart E of part 37. The Commission
preliminarily believes that the CFTC has implemented Core Principle 4
for SEFs in an appropriate way, and that closely harmonizing with the
CFTC rule would yield comparable regulatory benefits while imposing
only marginal additional costs. The Commission does not observe any
differences between the swap and SBS markets sufficient to warrant a
different approach to how a SEF/SBSEF should monitor trading and trade
processing.
As noted above, the Commission preliminarily believes, in
attempting to harmonize with the CFTC's regulatory regime for SEFs,
that it would be preferable to adapt the CFTC's guidance and acceptable
practices from appendix B to part 37 into formal rules, where
appropriate. Although the Commission considered proposing a stand-alone
rule that adapts the guidance pertaining to Core Principle 4, the
Commission is proposing instead to weave concepts--and, in some cases,
specific language--from the guidance together with the CFTC's original
rule text, as the guidance itself follows the structure of the rule.
The Commission illustrates its approach in the following proposed
rules, where the analogous CFTC rule language is in plain text and
language adapted from the guidance is italicized:
Proposed Rule 821(b)(3): An SBSEF shall: ``Demonstrate an
effective program for conducting real-time monitoring of trading for
the purpose of detecting and resolving abnormalities. A security-based
swap execution facility shall employ automated alerts to detect
abnormal price movements and unusual trading volumes in real time and
instances or threats of manipulation, price distortion, and disruptions
on at least a T+1 basis. The T+1 detection and analysis should
incorporate any additional data that becomes available on a T+1 basis,
including the trade reconstruction data.''
Proposed Rule 821(d)(2): ``For cash-settled security-based
swaps listed on the security-based swap execution facility where the
reference price is formulated and computed by the security-based swap
execution facility, the security-based swap execution facility shall
demonstrate that it monitors the continued appropriateness of its
methodology for deriving that price and shall promptly amend any
methodologies that result, or are likely to result, in manipulation,
price distortions, or market disruptions, or impose new methodologies
to resolve the threat of disruptions or distortions.''
Proposed Rule 821(d)(3): ``For cash-settled security-based
swaps listed on the security-based swap execution facility where the
reference price relies on a third-party index or instrument, including
an index or instrument traded on another venue, the security-based swap
execution facility shall demonstrate that it monitors for pricing
abnormalities in the index or instrument used to calculate the
reference price and shall conduct due diligence to ensure that the
reference price is not susceptible to manipulation.''
Proposed Rule 821(e)(1): ``A security-based swap execution
facility shall demonstrate that it has access to sufficient information
to assess whether trading in security-based swaps listed on its market,
in the index or instrument used as a reference price, or in the
underlying asset for its listed security-based swaps is being used to
affect prices on its market. The security-based swap execution facility
shall demonstrate that it can obtain position and trading information
directly from members that conduct substantial trading on its facility
or through an information-sharing agreement with other venues or a
third-party regulatory service provider. If the position and trading
information is not available
[[Page 28911]]
directly from its members but is available through information-sharing
agreements with other trading venues or a third-party regulatory
service provider, the security-based swap execution facility should
cooperate in such information-sharing agreements.''
Proposed Rule 821(e)(2): ``A security-based swap execution
facility shall have rules that require its members to keep records of
their trading, including records of their activity in the underlying
asset, and related derivatives markets, and make such records
available, upon request, to the security-based swap execution facility
or, if applicable, to its regulatory service provider and the
Commission. The security-based swap execution facility may limit the
application of this requirement to only those members that conduct
substantial trading on its facility.''
Proposed Rule 821(f): ``A security-based swap execution
facility shall establish and maintain risk control mechanisms to
prevent and reduce the potential risk of market disruptions, including,
but not limited to, market restrictions that pause or halt trading
under market conditions prescribed by the security-based swap execution
facility. Such risk control mechanisms shall be designed to avoid
market disruptions without unduly interfering with that market's price
discovery function. The security-based swap execution facility may
choose from among controls that include: pre-trade limits on order
size, price collars or bands around the current price, message
throttles, daily price limits, and intraday position limits related to
financial risk to the clearing member, or design other types of
controls, as well as clear error-trade and order-cancellation policies.
Within the specific array of controls that are selected, the security-
based swap execution facility shall set the parameters for those
controls, so that the specific parameters are reasonably likely to
serve the purpose of preventing market disruptions and price
distortions.''
The Commission also is proposing a stand-alone provision derived
from the appendix B guidance as Rule 821(b)(5), which would provide
than an SBSEF must have rules in place that allow it to intervene to
prevent or reduce market disruptions. Once a threatened or actual
disruption is detected, the security-based swap execution facility
shall take steps to prevent the market disruption or reduce its
severity.
Finally, in several instances in subpart E of part 37, the CFTC
uses the term ``commodity'' with respect to the swap underlier. In
proposed Rule 821, the Commission is proposing instead to use the more
generic term ``asset'' to refer to the underlier.
The Commission seeks comment on the following:
122. Do you agree in general with the Commission's approach to
implementing Core Principle 4? Why or why not? In particular, do agree
with how the Commission is proposing to adapt the CFTC guidance on Core
Principle 4 by converting appropriate parts of it into a formal rule?
Why or why not?
123. In particular, is there any language that the Commission is
proposing to adapt from subpart E of part 37 into proposed Rule 821
that you believe is not appropriate? If so, how would you revise it?
124. Are there any aspects of proposed Rule 821 that derive from
the guidance that you believe are inappropriate for the Commission to
incorporate into its own rules, or that you believe the Commission is
proposing to incorporate inappropriately? If so, please discuss.
125. Are there any aspects of the CFTC's guidance that you believe
should also be incorporated into the SEC rule but are not present in
proposed Rule 821? If so, please describe.
E. Rule 822--Core Principle 5--Ability To Obtain Information
Core Principle 5 \161\ requires an SBSEF to establish and enforce
rules that will allow the SBSEF to obtain any necessary information to
perform any of the functions described in the Core Principles, provide
the information to the Commission on request, and have the capacity to
carry out such international information-sharing agreements as the
Commission may require. CEA Core Principle 5 for SEFs \162\ is
substantively identical.
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\161\ Section 3D(d)(5) of the SEA, 15 U.S.C. 78c-4(d)(5).
\162\ Section 5h(f)(5) of the CEA, 7 U.S.C. 7b-3(f)(5).
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The CFTC implemented Core Principle 5 in subpart F of part 37.
Section 37.500 of subpart F repeats the statutory text of Core
Principle 5. Section 37.501 requires a SEF to establish and enforce
rules that will allow the SEF to have the ability and authority to
obtain sufficient information to allow it to fully perform its
operational, risk management, governance, and regulatory functions and
any requirements under the rule, including the capacity to carry out
international information-sharing agreements as the Commission may
require. Section 37.502 requires a SEF to have rules that allow it to
collect information on a routine basis, allow for the collection of
non-routine data from its market participants, and allow for its
examination of books and records kept by the market participants on its
facility. Section 37.503 requires a SEF to provide information in its
possession to the CFTC upon request, in a form and manner that the CFTC
approves. Section 37.504 requires a SEF to share information with other
regulatory organizations, data repositories, and third-party data
reporting services as required by the CFTC or as otherwise necessary
and appropriate to fulfill its self-regulatory and reporting
responsibilities. Section 37.504 further provides that appropriate
information-sharing agreements can be established with such entities or
the CFTC can act in conjunction with the SEF to carry out such
information sharing.
Proposed Rule 822 would implement Core Principle 5 and is
substantively identical to subpart F of part 37. Paragraph (a) of
proposed Rule 822 repeats the statutory text of Core Principle 5.
Paragraph (b), modelled on Sec. 37.501, would require that an SBSEF
establish and enforce rules that will allow the SBSEF to have the
ability and authority to obtain sufficient information to allow it to
fully perform its operational, risk management, governance, and
regulatory functions and any requirements under Regulation SE.
Paragraph (c), like Sec. 37.502, would require an SBSEF to have rules
that allow it to collect information on a routine basis, allow for the
collection of non-routine data from its members, and allow for its
examination of books and records kept by members on its facility.\163\
Paragraph (d), like Sec. 37.503, would require that an SBSEF provide
information in its possession to the Commission upon request, in a form
and manner specified by the Commission. Finally, paragraph (e), like
Sec. 37.504, would require an SBSEF to share information with other
regulatory organizations, data repositories, and third-party data
reporting services as required by the Commission or as otherwise
necessary and appropriate to fulfill its regulatory and reporting
responsibilities, and that appropriate information-sharing agreements
can be established with such entities, or the Commission can act in
conjunction with the SBSEF to carry out such information sharing.
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\163\ While Sec. 37.502 of subpart F uses the term ``market
participant,'' proposed Rule 822 substitutes the term ``member'' in
these places, since the rule pertains to market participants who are
acting as members of the SEF/SBSEF. See supra note 53.
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[[Page 28912]]
The Commission preliminarily believes that closely harmonizing with
the CFTC's rules associated with CEA Core Principle 5 would
appropriately implement SEA Core Principle 5. By harmonizing with the
CFTC's approach, a SEF/SBSEF could have the same information-collection
rules and information-sharing agreements. The Commission could thus
obtain comparable regulatory benefits while imposing few if any
additional costs on SEF/SBSEFs.
The Commission seeks comment on the following:
126. Do you agree generally with how the Commission is proposing to
implement Core Principle 5? Why or why not?
127. In particular, do you believe that closely harmonizing with
subpart F of the CFTC's rules is appropriate? Why or why not? If not,
please identify any provision(s) in the CFTC rules that you believe
should not be adapted for SBSEFs and explain your reasoning.
F. Rule 823--Core Principle 6--Financial Integrity of Transactions
SEA Core Principle 6 \164\ requires an SBSEF to establish and
enforce rules and procedures for ensuring the financial integrity of
SBS entered on or through the facilities of the SBSEF, including the
clearance and settlement of SBS pursuant to section 3C(a)(1) of the
SEA.\165\ CEA Core Principle 7 for SEFs \166\ is substantively
identical to SEA Core Principle 6.
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\164\ Section 3D(d)(6) of the SEA, 15 U.S.C. 78c-4(d)(6).
\165\ 15 U.S.C. 78c-3(a)(1). See supra note 94 and accompanying
text (discussing mandatory clearing provisions).
\166\ Section 5h(f)(7) of the CEA, 7 U.S.C. 7b-3(f)(7).
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The CFTC implemented CEA Core Principle 7 in subpart H of part 37.
Section 37.700 of subpart H repeats the statutory text of Core
Principle 7. Section 37.701 provides that transactions executed on or
through the SEF that are required to be cleared or are voluntarily
cleared by the counterparties shall be cleared through a registered or
exempt DCO. Section 37.702 requires a SEF to provide for the financial
integrity of its transactions by establishing minimum financial
standards for its members, which shall at a minimum require members to
be ECPs. Section 37.702 further requires a SEF to provide for the
financial integrity of its transactions by ensuring that the SEF, for
transactions cleared by a DCO, has the capacity to route transactions
to the DCO in a manner acceptable to the DCO; and by coordinating with
each DCO to which it submits transactions for clearing in the
development of rules and procedures to facilitate prompt and efficient
transaction processing. Section 37.703 requires a SEF to monitor its
members to ensure that they continue to qualify as ECPs.
Proposed Rule 823 would implement SEA Core Principle 6 and is
substantively identical to subpart H of part 37. Paragraph (a) of
proposed Rule 823 repeats the statutory text of the Core Principle.
Paragraph (b), like Sec. 37.701, would require that transactions
executed on or through the SBSEF that are required to be cleared under
section 3C(a)(1) of the SEA or are voluntarily cleared by the
counterparties shall be cleared through a registered clearing agency
\167\ or a clearing agency that has obtained an exemption from clearing
agency registration to provide central counterparty services for SBS.
Paragraph (c), like Sec. 37.702, would require an SBSEF to provide for
the financial integrity of its transactions by establishing minimum
financial standards for its members, which shall, at a minimum, require
that each member qualify as an ECP. In addition, for transactions
cleared by a registered clearing agency, an SBSEF must provide for the
financial integrity of its transactions by ensuring that it has the
capacity to route transactions to the registered clearing agency in a
manner acceptable to the clearing agency for purposes of clearing, and
by coordinating with each registered clearing agency to which it
submits transactions for clearing, in the development of rules and
procedures to facilitate prompt and efficient transaction processing.
Finally, paragraph (d), like Sec. 37.703, would require that an SBSEF
monitor its members to ensure that they continue to qualify as ECPs.
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\167\ While subpart H of part 37 uses the term ``derivatives
clearing organization,'' proposed Rule 823 substitutes the term
``registered clearing agency'' in these places, the analogous term
under the SEA.
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The Commission preliminarily believes that closely harmonizing with
the CFTC's rules associated with CEA Core Principle 7 would
appropriately implement SEA Core Principle 6. By harmonizing with the
CFTC's approach, a SEF/SBSEF could have the same financial standards
and requirements for its members, and develop the same processes for
submitting swaps and SBS for clearing, thus promoting efficiency among
its respective SEF and SBSEF operations. The Commission could thus
obtain comparable regulatory benefits while imposing few if any
additional costs on SEF/SBSEFs.
The Commission seeks comment on the following:
128. Do you agree generally with how the Commission is proposing to
implement Core Principle 6? Why or why not?
129. In particular, do you believe that closely harmonizing with
subpart H of the CFTC's rules is appropriate? Why or why not? If not,
please identify any provision(s) in the CFTC rules that you believe
should not be adapted for SBSEFs and explain your reasoning.
130. Are there any differences in the SBS market relative to the
swap market that warrant imposing different or additive requirements
with respect to the rules for implementing SEA Core Principle 6? If so,
please explain.
G. Rule 824--Core Principle 7--Emergency Authority
SEA Core Principle 7 \168\ requires an SBSEF to adopt rules to
provide for the exercise of emergency authority, in consultation or
cooperation with the Commission, as is necessary and appropriate,
including the authority to liquidate or transfer open positions in any
SBS or to suspend or curtail trading in an SBS. CEA Core Principle 8
for SEFs \169\ is substantively identical.
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\168\ Section 3D(d)(7) of the SEA, 15 U.S.C. 78c-4(d)(7).
\169\ Section 5h(f)(8) of the CEA, 7 U.S.C. 7b-3(f)(8).
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The CFTC implemented Core Principle 8 for SEFs in subpart I of part
37. Section 37.800 of subpart I repeats the statutory text of the Core
Principle. Section 37.801 provides that a SEF ``may refer'' to the
guidance in appendix B to part 37 ``to demonstrate to the Commission
compliance with [Core Principle 8].'' Paragraph (a)(1) of that guidance
states that a SEF should have rules that authorize it to take certain
actions in the event of an emergency. Furthermore, a SEF should have
the authority to intervene as necessary to maintain markets with fair
and orderly trading and to prevent or address manipulation or
disruptive trading practices, whether the need for intervention arises
exclusively from the SEF's market or as part of a coordinated, cross-
market intervention. A SEF should have the flexibility and independence
to address market emergencies in an effective and timely manner
consistent with the nature of the emergency, as long as all such
actions taken by the SEF are made in good faith to protect the
integrity of the markets. However, the SEF should also have rules that
allow it to take market actions as may be directed by the CFTC.
Additionally, in situations where a swap is traded on
[[Page 28913]]
more than one platform, emergency action to liquidate or transfer open
interest shall be as directed, or agreed to, by the CFTC or its staff.
The SEF's rules should include procedures and guidelines for decision-
making and implementation of emergency intervention that avoid
conflicts of interest, and include alternate lines of communication and
approval procedures to address emergencies associated with real time
events. To address perceived market threats, the SEF should have rules
that allow it to take emergency actions, including imposing or
modifying position limits, imposing or modifying price limits, imposing
or modifying intraday market restrictions, imposing special margin
requirements, ordering the liquidation or transfer of open positions in
any contract, ordering the fixing of a settlement price, extending or
shortening the expiration date or the trading hours, suspending or
curtailing trading in any contract, transferring customer contracts and
the margin, or altering any contract's settlement terms or conditions,
or, if applicable, providing for the carrying out of such actions
through its agreements with its third-party provider of clearing or
regulatory services.
Paragraph (a)(2) of the guidance provides that a SEF should
promptly notify the CFTC of its exercise of emergency action,
explaining its decision-making process, the reasons for using its
emergency authority, and how conflicts of interest were minimized,
including the extent to which the SEF considered the effect of its
emergency action on the underlying markets and on markets that are
linked or referenced to the contracts traded on its facility, including
similar markets on other trading venues. Furthermore, information on
all regulatory actions carried out pursuant to a SEF's emergency
authority should be included in a timely submission of a certified rule
pursuant to part 40.
Proposed Rule 824 would implement SEA Core Principle 7 and is
closely modelled on subpart I of part 37 and the guidance for CEA Core
Principle 8 in appendix B to part 37. Paragraph (a) of proposed Rule
824 would repeat the statutory text of the Core Principle. Paragraph
(b) of proposed Rule 824 would incorporate much of the language in
paragraph (a)(1) of the CFTC's guidance on CEA Core Principle 8. Under
paragraph (b), an SBSEF would be required to adopt rules that are
reasonably designed to:
(1) Allow the SBSEF to intervene as necessary to maintain markets
with fair and orderly trading and to prevent or address manipulation or
disruptive trading practices, whether the need for intervention arises
exclusively from the SBSEF's market or as part of a coordinated, cross-
market intervention;
(2) Have the flexibility and independence to address market
emergencies in an effective and timely manner consistent with the
nature of the emergency, as long as all such actions taken by the SBSEF
are made in good faith to protect the integrity of the markets;
(3) Take market actions as may be directed by the Commission,
including, in situations where an SBS is traded on more than one
platform, emergency action to liquidate or transfer open interest as
directed, or agreed to, by the Commission or the Commission's staff;
(4) Include procedures and guidelines for decision-making and
implementation of emergency intervention that avoid conflicts of
interest;
(5) Include alternate lines of communication and approval
procedures to address emergencies associated with real-time events;
(6) Allow the SBSEF, to address perceived market threats, to impose
or modify position limits, impose or modify price limits, impose or
modify intraday market restrictions, impose special margin
requirements, order the liquidation or transfer of open positions in
any contract, order the fixing of a settlement price, extend or shorten
the expiration date or the trading hours, suspend or curtail trading in
any contract, transfer customer contracts and the margin, or alter any
contract's settlement terms or conditions, or, if applicable, provide
for the carrying out of such actions through its agreements with its
third-party provider of clearing or regulatory services.
Paragraph (c) of proposed Rule 824 is based on paragraph (a)(2) of
the CFTC's guidance on CEA Core Principle 8 and would require an SBSEF
to promptly notify the Commission of its exercise of emergency action,
explaining its decision-making process, the reasons for using its
emergency authority, and how conflicts of interest were minimized,
including the extent to which the SBSEF considered the effect of its
emergency action on the underlying markets and on markets that are
linked or referenced to the contracts traded on its facility, including
similar markets on other trading venues. In addition, proposed Rule
824(c) would require information on all regulatory actions carried out
pursuant to an SBSEF's emergency authority to be included in a timely
submission of a certified rule pursuant to Rule 807.
The Commission preliminarily believes that adapting the CFTC's
guidance associated with CEA Core Principle 8 into proposed Rule 824
would appropriately implement SEA Core Principle 7. In particular, the
Commission preliminarily agrees with the CFTC's principles-based
approach to emergency situations, requiring SEF/SBSEFs to establish
rules ex ante that generally would facilitate emergency actions but
providing flexibility and independence with regard to specific actions
that might be necessary. The Commission also preliminarily believes, as
reflected in proposed Rule 824(c), that an SBSEF that exercises its
emergency authority should be required to promptly notify the
Commission of such exercise and to explain the basis for its actions.
By harmonizing with the CFTC's approach, the Commission's intent is
that, in many or even all instances, the SEF/SBSEF could file the same
information regarding the situation to both agencies, rather than
having to prepare one submission for the SEC and a different submission
for the CFTC.
The Commission seeks comment on the following:
131. Do you agree generally with the Commission's approach to
implementing SEA Core Principle 7? Why or why not?
132. In particular, do you agree with how the Commission is
proposing to adapt the guidance from appendix B to part 37 regarding
CEA Core Principle 8? Is there language adapted from the guidance into
proposed Rule 824 that you believe should be omitted or revised? If so,
please describe.
H. Rule 825--Core Principle 8--Timely Publication of Trading
Information
SEA Core Principle 8 \170\ requires an SBSEF to make public timely
information on price, trading volume, and other trading data on SBS to
the extent prescribed by the Commission, and to have the capacity to
electronically capture and transmit and disseminate trade information
with respect to transactions executed on or through the facility. CEA
Core Principle 9 \171\ is substantively identical to SEA Core Principle
8.
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\170\ Section 3D(d)(8) of the SEA, 15 U.S.C. 78c-4(d)(8).
\171\ Section 5h(f)(9) of the CEA, 7 U.S.C. 7b-3(f)(9).
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The CFTC implemented CEA Core Principle 9 in subpart J of part 37.
Section 37.900 of subpart J repeats the statutory language of the Core
Principle. Sec. 37.901 provides that, with respect to swaps traded on
or through a SEF, the
[[Page 28914]]
SEF shall report specified swap data as provided in parts 43 and 45 of
the CFTC's rules. Section 37.901 also requires the SEF to comply with
part 16 of the CFTC's rules, which requires a ``reporting market''
(which term includes a SEF) to provide certain reports to the CFTC
regarding trading activity on the SEF and to make certain of that
information publicly available without charge.
Proposed Rule 825 would implement SEA Core Principle 8 and is
closely modelled on subpart J of part 37. Paragraph (a) of proposed
Rule 825, like Sec. 37.900, repeats the statutory language of the Core
Principle. While Sec. 37.901 provides that a SEF shall report swap
transaction data pursuant to Parts 43 and 45 of the CFTC's rules,
paragraph (b) of proposed Rule 825 would direct SBSEFs to report SBS
transaction data in a manner specified in the SEC's Regulation
SBSR.\172\
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\172\ Section 13(m)(1) of the SEA, 15 U.S.C. 78m(m)(1),
authorizes the Commission to make SBS transaction, volume, and
pricing data available to the public in such form and at such times
as the Commission determines appropriate to enhance price discovery.
The Commission has adopted rules relating to the reporting and
public dissemination of SBS transaction and pricing data as
Regulation SBSR. Rule 901(a)(1) of Regulation SBSR, 17 CFR
242.901(a)(1), imposes certain reporting duties on SBSEFs.
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In addition, the Commission preliminarily believes that it would be
appropriate to incorporate requirements for SBSEFs that are modelled on
the requirements for SEFs in the CFTC's part 16. Unlike part 16,
however, the Commission is not proposing to require SBSEFs to submit
any information directly to the Commission.\173\ Rather, the Commission
is proposing in paragraph (c) of Rule 825 to require only the
publication, on an SBSEF's website, of a ``Daily Market Data Report.''
The data fields that the Commission is proposing to require for the
Daily Market Data Report approximate, although they are not the same
as, those required by part 16. The Commission preliminarily believes
that the differences in the product markets (i.e., SBS vs. swaps and
futures products) necessitate certain adaptations in the data fields so
as to render the reports published by SBSEFs meaningful to SBS market
participants and market observers.
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\173\ Contra Sec. 16.00(a) (requiring a reporting market to
submit clearing member reports to the CFTC for each business day).
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Under proposed Rule 825(c)(1), the Daily Market Data Report for a
business day would be required to contain the following information for
each tenor of each SBS traded on that SBSEF during that business day:
(i) The trade count (including block trades but excluding error
trades, correcting trades, and offsetting trades);
(ii) The total notional amount traded (including block trades but
excluding error trades, correcting trades, and offsetting trades
\174\);
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\174\ Each of these terms is defined in proposed Rule 802 and
also used in proposed Rule 815.
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(iii) The number of block trades;
(iv) The total notional amount of block trades;
(v) The opening and closing price;
(vi) The price that is used for settlement purposes, if different
from the closing price; and
(vii) The lowest price of a sale or offer, whichever is lower, and
the highest price of a sale or bid, whichever is higher, that the SBSEF
reasonably determines accurately reflects market conditions. Bids and
offers vacated or withdrawn shall not be used in making this
determination. A bid is vacated if followed by a higher bid or price
and an offer is vacated if followed by a lower offer or price.
Paragraph (c)(2) of proposed Rule 825 would require an SBSEF to
provide certain explanatory information regarding data presented on the
Daily Market Data Report:
(i) The method used by the SBSEF in determining nominal prices and
settlement prices; and
(ii) If discretion is used by the SBSEF in determining the opening
and/or closing ranges or the settlement prices, an explanation that
certain discretion may be employed by the SBSEF and a description of
the manner in which that discretion may be employed. Discretionary
authority would have to be noted explicitly in each case in which it is
applied (for example, by use of an asterisk or footnote).
Paragraph (c)(3) of proposed Rule 825 would set out various
requirements regarding the form and manner by which an SBSEF makes
available its Daily Market Data Report. Paragraph (c)(3)(i) would
require the SBSEF to post on its website its Daily Market Data Report
in a downloadable and machine-readable format using the most recent
versions of the associated XML schema and PDF renderer as published on
the Commission's website. This proposed requirement is similar to
existing Commission requirements for broker-dealer reports on order
routing and execution \175\ and is designed to allow the Daily Market
Data Report to be automatically recognized and processed by a variety
of software applications, thus making it immediately available for
users to search, aggregate, compare, and analyze.\176\ This should
enable SBS market participants and other market observers to obtain
timely and consistent information on price, trading volume, and other
SBSEF trading data in a manner that would facilitate search
capabilities, and statistical and comparative analyses across SBSEFs
and date ranges. In addition, requiring SBSEFs to use a PDF renderer as
specified by the Commission would provide a corresponding human-
readable version of the machine-readable data, allowing end users
without access to analytical software to read the disclosed
information.
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\175\ See 17 CFR 242.606.
\176\ XML (eXtensible Markup Language) is an open standard that
defines, or ``tags,'' data using standard definitions. The tags
establish a consistent structure of identity and context, which
allows for automatic recognition and processing by software
applications.
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Paragraph (c)(3)(ii) of proposed Rule 825 would require the SBSEF
to make available its Daily Market Data Report without fees or other
charges. Paragraph (c)(3)(iii) would prohibit the SBSEF from imposing
any encumbrances on access or usage restrictions with respect to the
Daily Market Data Report. Paragraph (c)(3)(iv) would prohibit the SBSEF
from requiring a user to agree to any terms before being allowed to
view or download the Daily Market Data Report, such as by waiving any
requirements of proposed Rule 825(c)(3). Paragraph (c)(3)(iv) would
further provide that any such waiver agreed to by a user would be null
and void.\177\ The Commission preliminarily believes that proposed Rule
825(c)(3) could be subverted if an SBSEF could, for example, require
that users--as a condition to viewing or downloading the Daily Market
Data Report--waive any of the protections afforded under proposed Rule
825(c)(3).
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\177\ The presence of any such waiver requirements on a click-
through screen could chill use of the Daily Market Data Report,
because the user would be compelled to agree to the waiver even to
view the report. The Commission recognizes that individual users may
not have the time or the incentive to contest the appropriateness of
any such waiver provisions in order to secure access. Proposed Rule
825(c)(3)(iv) is designed to assure such users that, even if an
SBSEF were to insist on the waiver click-through as a condition of
access, users would not in fact be sacrificing their ability to use
the data free of charges and usage restrictions because the waiver
would be null and void.
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Proposed Rule 825(c)(3) is designed to promote wide use of the SBS
trading information contained in the Daily Market Data Report by
prohibiting an SBSEF from imposing any financial, legal, or operational
burdens on that use. The approach taken in proposed Rule 825(c)(3) is
similar to the approach taken by the Commission in Regulation SBSR,
which uses the term ``widely
[[Page 28915]]
accessible'' \178\ to prohibit registered SDRs from charging fees for
or imposing usage restrictions on the SBS transaction data that they
are required to publicly disseminate under Regulation SBSR.\179\ When
adopting the definition of ``widely accessible,'' the Commission noted
that a registered SDR has a monopoly position over the SBS transaction
information that it publicly disseminates and stated that ``there would
be no other source from which the user could freely obtain this
transaction information.'' \180\ The Commission preliminarily believes
that a registered SBSEF is similarly situated, because it is the sole
source of information about SBS trading activity on its market. The
Commission also stated that the prohibition on usage restrictions
encompasses an SDR-imposed restriction on bulk redistribution by third
parties of the regulatorily mandated transaction data that the
registered SDR publicly disseminates.\181\ For the same reasons, the
proposed prohibition against an SBSEF imposing any usage restrictions
on its Daily Market Data Report necessarily would encompass a
prohibition on bulk redistribution of the Daily Market Data Report or
any information contained therein. The Commission seeks to encourage
market observers to access the Daily Market Data Report and scrub,
reconfigure, aggregate, analyze, repurpose, or otherwise add value to
the information contained in the report as they see fit.
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\178\ See Rule 900(tt) of Regulation SBSR, 17 CFR 242.900(tt)
(defining ``widely accessible'').
\179\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, SEA Release No. 78321 (July 14,
2016), 81 FR 53546, 53586-89 (August 12, 2016) (``Regulation SBSR
Adopting Release II'').
\180\ Id. at 53587.
\181\ Id. (stating that: ``The Commission continues to believe
that allowing unencumbered redistribution best serves the policy
goals of wide availability of the data and minimization of
information asymmetries in the [SBS] market. Because the Commission
is prohibiting registered SDRs from imposing a restriction on bulk
redistribution, third parties . . . will be able to take in the full
data set and scrub, reconfigure, aggregate, analyze, repurpose, or
otherwise add value to those data, and potentially sell that value-
added product to others'').
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Paragraph (c)(4) of proposed Rule 825 would require the SBSEF to
publish the Daily Market Data Report on its website no later than the
SBSEF's commencement of trading on the next business day after the day
to which the information pertains. Proposed Rule 825(c)(4) is designed
to require an SBSEF to provide its market data in a timely fashion so
that it can be assessed and utilized by the next business day. Finally,
paragraph (c)(5) would require the SBSEF to keep each Daily Market Data
Report available on its website in the same location as all other Daily
Market Data Reports for no less than one year after the date of first
publication. Proposed Rule 825(c)(5) is designed to allow market
observers to consult a reasonable number of previous reports on the
SBSEF's website; the reports would be of less utility if an SBSEF could
take down reports shortly after they are posted.
The Commission seeks comment on the following:
133. Do you agree in general with the Commission's approach for
implementing SEA Core Principle 8? Why or why not?
134. Do you agree with the adaptions that the Commission is
proposing to the CFTC's part 16 for inclusion in proposed Rule 825(c)?
In particular, do you concur with the Commission's proposal to require
only the Daily Market Data Report (to be published on the SBSEF's
website) and not to require any daily reports to the Commission? Why or
why not? If not, what market data do you believe should be reported
directly to the Commission, and why?
135. Do you agree with the fields proposed by the Commission for
the Daily Market Data Report in paragraphs (c)(1) and (2) of proposed
Rule 825? If not, which fields do you believe are not appropriate, and
why?
136. Do you believe that any of the fields should be defined
differently or more precisely? If so, please explain.
137. Do you believe that the Commission should require additional
fields? If so, what fields and why?
138. Do you agree with the proposed requirement in Rule 825(c)(3)
that the Daily Market Data Report should be available free of charge
and without usage restrictions or encumbrances? Why or why not? Are
there any clarifications that you would recommend to help promote free
and unencumbered access to and use of the Daily Market Data Report and
any information contained therein? If so, please discuss.
139. Do you agree with the proposed requirement that the Daily
Market Data Report should be made available in a downloadable and
machine-readable format using the most recent version of the associated
XML schema and PDF renderer as published on the Commission's website?
Why or why not? Is there some other format that the Commission should
require? If so, what format and why?
140. Do you agree with the proposed requirement in Rule 825(c)(4)
that an SBSEF must publish the Daily Market Data Report on its website
no later than the SBSEF's commencement of trading on the next business
day after the day to which the information pertains? Why or why not?
What is the current practice for the approximate time of day at which
CFTC reporting markets make available their daily market data?
141. Do you agree with the proposed requirement in Rule 825(c)(5)
that an SBSEF keep each Daily Market Data Report available on its
website in the same location as all other Daily Market Data Reports for
no less than one year after the date of first publication? Why or why
not? Do you believe that a longer or shorter period would be
appropriate? If so, please explain.
I. Rule 826--Core Principle 9--Recordkeeping and Reporting
SEA Core Principle 9 \182\ sets forth recordkeeping and reporting
obligations for SBSEFs. Core Principle 9 requires an SBSEF to maintain
records of all activities relating to the business of the facility,
including a complete audit trail, in a form and manner acceptable to
the Commission for a period of five years. The Core Principle further
requires an SBSEF to report to the Commission, in a form and manner
acceptable to the Commission, such information as the Commission
determines to be necessary or appropriate for the Commission to perform
its duties. Finally, under Core Principle 9, the Commission must adopt
data collection and reporting requirements for SBSEFs that are
comparable to requirements for clearing agencies and SBS data
repositories.\183\ CEA Core Principle 10 for SEFs, although it includes
an additional clause not present in the equivalent SEA Core Principle
9,\184\ is substantively identical.
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\182\ Section 3D(d)(9) of the SEA, 15 U.S.C. 78c-4(d)(9).
\183\ As discussed below in this section, the Commission is
proposing Rule 826 to require an SBSEF to maintain records of all
activities relating to the business of the SBSEF for a period of not
less than five years. Similarly, Rule 17a-1 under the SEA, 17 CFR
240.17a-1, requires a clearing agency to keep and preserve one copy
of all documents made or received in the course of its business and
conduct of its self-regulatory activities for a period of not less
than five years. In addition, Rule 13n-7(b) under the SEA, 17 CFT
240.13n-7(b), requires an SBS data repository to keep and preserve a
copy of all documents made or received by it in the course of its
business for at least five years.
\184\ CEA Core Principle 10 includes a clause stating that a SEF
shall keep any records relating to certain swaps open to inspection
and examination by the SEC. See 7 U.S.C. 7b-3(f)(10)(A)(iii).
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The CFTC implemented Core Principle 10 for SEFs in subpart K of
part 37. Section 37.1000 of subpart K repeats the statutory language of
the Core Principle. Section 37.1001 requires a SEF to maintain records
of all
[[Page 28916]]
activities relating to the business of the facility, in a form and
manner acceptable to the CFTC, for a period of at least five years, and
that a SEF shall maintain such records, including a complete audit
trail for all swaps executed on or subject to the rules of the SEF,
investigatory files, and disciplinary files. Section 37.1001 does not
itself set forth detailed record retention requirements. Instead, Sec.
37.1001 directs SEFs to maintain the required records in accordance
with Sec. 1.31 and part 45 of the CFTC's rules.
Section 1.31 imposes on ``records entities'' (which term includes
SEFs) various requirements relating to record retention and production.
Section 1.31(a) sets out definitions of terms used throughout Sec.
1.31. Section 1.31(b) sets out the duration of retention for different
types of records. In particular, a records entity must keep regulatory
records of any swap from the date that the regulatory record was
created until at least five years after the termination, maturity,
expiration, transfer, assignment, or novation of such swap. Section
1.31(c) sets out the required form and manner of retention. Section
1.31(d) provides that a records entity must, at its own expense,
produce or make regulatory records accessible for inspection to CFTC
staff or to the U.S. Department of Justice, and includes other details
regarding production requests.
Section 45.2 imposes various recordkeeping, retention, and
retrieval requirements applicable to SEFs (among others) to support
trade reporting. Section 45.2(a), among other things, requires a SEF to
keep all records required by part 37. Section 45.2(c) sets out a record
retention requirement.\185\ Section 45.2(d) imposes requirements on the
form of retention. Sec. 45.2(e) imposes requirements on record
retrievability. Section 45.2(h) \186\ imposes requirements for record
inspection; in particular, all records required to be kept by Sec.
45.2 shall be open to inspection upon request by any representative of
the CFTC, the U.S. Department of Justice, the SEC, or by any
representative of a prudential regulatory as authorized by the CFTC.
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\185\ See 7 CFR 45.2(c) (``All records required to be kept
pursuant to this section shall be retained with respect to each swap
throughout the life of the swap and for a period of at least five
years following the final termination of the swap''). Section
45.2(b) imposes duties on certain swap counterparties and is not
germane to SEFs; therefore, the Commission is not considering
adapting it into proposed Rule 826.
\186\ Section 45.2(f) and (g) are marked as ``reserved.''
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To implement SEA Core Principle 9, the Commission is proposing Rule
826, which would roughly approximate Sec. Sec. 1.31 and 45.2 while
also drawing on concepts from the books and records requirements
applicable to brokers, SEC-registered SROs, and other SEC-registered
entities.\187\
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\187\ See infra section XIII (discussing in the context of
proposed new Rule 15a-12 that an SBSEF registered with the
Commission is also a registered broker and, as such, is subject to
the SEA's recordkeeping and reporting requirements applicable to
brokers).
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Paragraph (a) of proposed Rule 826 repeats the statutory text of
the Core Principle. Paragraph (b) would require an SBSEF to keep full,
complete, and systematic records,\188\ together with all pertinent data
and memoranda, of all activities relating to its business with respect
to SBS. Under paragraph (b), such records would be required to include,
without limitation, the audit trail information required under proposed
Rule 819(f) and all other records that an SBSEF is required to create
or obtain under Regulation SE.
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\188\ While Sec. 1.31(a) defines the terms ``regulatory
records'' and ``electronic regulatory records'' and utilizes them
throughout Sec. 1.31, the Commission is utilizing instead the term
``records,'' which is defined in section 3(a)(37) of the SEA, 15
U.S.C. 78c(a)(37). In doing so, the Commission seeks to avoid any
ambiguities or inconsistencies that could arise by using variants of
a term that is defined in the Commission's governing statute. The
Commission is including a definition of ``records'' in proposed Rule
802 that cross-references section 3(a)(37) of the SEA.
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Paragraph (c) of proposed Rule 826 would require an SBSEF to keep
records of any SBS from the date of execution until the termination,
maturity, expiration, transfer, assignment, or novation date of the
transaction, and for a period of not less than five years, the first
two years in an easily accessible place, after such date. Paragraph (c)
also would require an SBSEF to keep each record (other than a record of
an SBS noted in the previous sentence) for a period of not less than
five years, the first two years in an easily accessible place, from the
date on which the record was created. The proposed five-year retention
requirements are consistent with section 3D(d) of the SEA \189\ and are
modelled on the requirements for SEFs in Sec. Sec. 1.31 and 45.2. The
proposed requirement that the records be kept ``in an easily accessible
place'' for the first two years derives from an analogous requirement
in the Commission's principal books and records rule for exchange
members, brokers, and dealers.\190\
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\189\ See 15 U.S.C. 78c-4(d)(9)(A)(i) (requiring an SBSEF to
``maintain records of all activities relating to the business of the
facility, including a complete audit trail, in a form and manner
acceptable to the Commission, for a period of five years'')
(emphasis added).
\190\ See Rule 17a-4(b) under the SEA, 17 CFR 240.17a-4(b).
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Paragraph (d)(1) of proposed Rule 826 would require an SBSEF to
retain all records in a form and manner that ensures the authenticity
and reliability of such records in accordance with the Act and the
Commission's rules thereunder. Paragraph (d)(2) would require an SBSEF,
upon request of any representative of the Commission, to promptly \191\
furnish to the representative legible, true, complete, and current
copies of any records required to be kept and preserved under Rule 826.
Paragraph (d)(3) would provide that an electronic record shall be
retained in a form and manner that allows for prompt production at the
request of any representative of the Commission. Paragraph (d)(3) also
would include provisions modelled on Sec. 1.31(c)(2) requiring an
SBSEF that maintains electronic records to establish appropriate
systems and controls that ensure the authenticity and reliability of
electronic records, including, without limitation:
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\191\ In this context, ``prompt'' or ``promptly'' means making
reasonable efforts to produce records that are requested by the
staff during an examination without delay. The Commission believes
that, in many cases, an SBSEF could, and therefore would be required
to, furnish records immediately or within a few hours of a request.
An SBSEF should produce records within 24 hours unless there are
unusual circumstances.
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(A) Systems that maintain the security, signature, and data as
necessary to ensure the authenticity of the information contained in
electronic records and to monitor compliance with the SEA and the
Commission's rules thereunder;
(B) Systems that ensure that the SBSEF is able to produce
electronic records in accordance with Rule 826, and ensure the
availability of such electronic records in the event of an emergency or
other disruption of the SBSEF's electronic record retention systems;
and
(C) The creation and maintenance of an up-to-date inventory that
identifies and describes each system that maintains information
necessary for accessing or producing electronic records.
Sections 1.31 and 43.2 include provisions that govern inspection
and production of records. While the Commission believes that its rules
for SBSEFs also should address those topics, the Commission does not
believe that adapting a CFTC rule would be the most appropriate way to
do so. Paragraph (e) of proposed Rule 826 would provide instead that,
because a registered SBSEF is also a registered broker, all records
required to be kept by an SBSEF pursuant to Rule 826 would
[[Page 28917]]
be subject to examination by any representative of the Commission
pursuant to section 17(b) of the SEA. As noted above, section 17(b) is
the source of the Commission's examination authority for registered
brokers (among other types of registered entities). Proposed Rule
826(e) is designed only to remind SBSEFs of this statutory authority
and does not seek to limit or expand that authority using the
Commission's powers over SBSEFs in section 3D of the SEA.
Proposed Rule 826 includes a paragraph (f) that is not modelled on
any provision of Sec. 1.31 or 43.2, but rather on Sec. 1.37(c) of the
CFTC's rules, which provides: ``Each designated contract market and
swap execution facility shall keep a record in permanent form, which
shall show the true name, address, and principal occupation or business
of any foreign trader executing transactions on the facility or
exchange. In addition, upon request, a designated contract market or
swap execution facility shall provide to the Commission information
regarding the name of any person guaranteeing such transactions or
exercising any control over the trading of such foreign trader.''
Proposed Rule 826(f) is modelled closely on Sec. 1.37(c), except that
it uses the term ``non-U.S. member'' rather than ``foreign trader.''
\192\
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\192\ Since a ``foreign trader'' in Sec. 1.37(c) is executing
transactions on the SEF, it must be a member of the SEF. Because the
term ``member'' is used elsewhere in the CFTC rules pertaining to
SEFs, the Commission is proposing to use the term ``member''
throughout Regulation SE and would define ``member'' in Rule 802.
The term ``non-U.S. member,'' also found in proposed Rule 802, would
be defined as ``a member of a security-based swap execution facility
that is not a U.S. person.''
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The recordkeeping and reporting requirements proposed in Rule 826
are designed to be generally consistent with the requirements
applicable to SEFs and with the Commission's requirements under section
17(a) of the SEA. The Commission preliminarily believes that proposed
Rule 826 would therefore achieve similar regulatory benefits as the
CFTC rules applicable to SEFs while imposing only marginal costs, since
dually registered SEF/SBSEFs are familiar with the CFTC requirements
and have invested in systems, policies, and procedures to comply with
them. The Commission intends that the same systems, policies, and
procedures could be used to comply with parallel SEC requirements.
The Commission seeks comment on the following:
142. Do you agree in general with the Commission's approach to
implementing SEA Core Principle 9? Why or why not?
143. Do you believe that the Commission should subject registered
SBSEFs to section 17(a) of the SEA and the Commission's rules
thereunder? Why or why not? If not, are there nevertheless specific
provisions of the Commission's rules under section 17(a) that you
believe should nevertheless be incorporated into Rule 826 using the
Commission's statutory authority over SBSEFs in section 3D of the SEA?
If so, which provision(s) and why?
144. Are there any provisions of proposed Rule 826 that are
significantly different from, or even in conflict with, any
recordkeeping requirements imposed on SEFs by any CFTC rule? If so,
please discuss and suggest how you would resolve any such conflict.
145. Are there any provisions of Sec. 1.31 or Sec. 45.2 that the
Commission has not proposed to incorporate into proposed Rule 826 that
you believe should be applied to SBSEFs? If so, which provision(s) and
why?
146. Are there any recordkeeping provisions elsewhere in the CFTC
rules that the Commission has not proposed to incorporate into proposed
Rule 826 that you believe should be applied to SBSEFs? If so, which
provision(s) and why?
147. Do you believe that the Commission should adapt Sec. 1.37
into proposed Rule 826(f)? Why or why not? Do you believe that the
Commission's proposed term ``non-U.S. member'' used in Rule 826(f) is
an appropriate substitute for ``foreign trader'' used in Sec. 1.37?
Why or why not?
J. Rule 827--Core Principle 10--Antitrust Considerations
SEA Core Principle 10 \193\ provides that, unless necessary or
appropriate to achieve the purposes of the SEA, an SBSEF shall not: (1)
Adopt any rules or take any actions that result in any unreasonable
restraint of trade, or (2) impose any material anticompetitive burden
on trading or clearing. CEA Core Principle 11 \194\ is substantively
identical.
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\193\ Section 3D(d)(10) of the SEA, 15 U.S.C. 78c-4(d)(10).
\194\ Section 5h(f)(11) of the CEA, 7 U.S.C. 7b-3(f)(11).
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The CFTC implemented CEA Core Principle 11 in subpart L of part 37.
Section 37.1100 of subpart L repeats the statutory text of Core
Principle 11. Section 37.1101 provides that a SEF ``may refer'' to the
guidance in appendix B to part 37 to demonstrate compliance with Core
Principle 11. The guidance states that an entity seeking registration
as a SEF may request that the CFTC consider, under the provisions of
section 15(b) of the CEA,\195\ any of the entity's rules--including
trading protocols or policies, and including both operational rules and
the terms or conditions of products listed for trading--at the time of
registration or thereafter. The guidance further states that the CFTC
intends to apply CEA section 15(b) to its consideration of issues under
CEA Core Principle 11 in a manner consistent with that previously
applied to contract markets.
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\195\ 7 U.S.C. 19(b) (providing that the CFTC shall take into
consideration the public interest to be protected by the antitrust
laws and endeavor to take the least anticompetitive means of
achieving the objectives of this chapter of the CEA, as well as the
policies and purposes of this chapter of the CEA, in issuing any
order or adopting any CFTC rule or regulation (including any
exemption), or in requiring or approving any bylaw, rule, or
regulation of a contract market or registered futures association).
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Proposed Rule 827 would implement SEA Core Principle 10 and, like
Sec. 37.1100, reiterates the statutory text of the Core Principle. The
Commission is not adapting the guidance from appendix B pertaining to
CEA Core Principle 11 into a proposed rule.\196\
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\196\ The guidance in appendix B of part 37 pertaining to CEA
Core Principle 10 for SEFs states: ``An entity seeking registration
as a [SEF] may request that the [CFTC] consider under the provisions
of section 15(b) of the [CEA], any of the entity's rules, including
trading protocols or policies, and including both operational rules
and the terms or conditions of products listed for trading, at the
time of registration or thereafter. The [CFTC] intends to apply
section 15(b) of the [CEA] to its consideration of issues under this
core principle in a manner consistent with that previously applied
to contract markets.'' Section 15(b) of the CEA, 7 U.S.C. 19(b)
states: ``The [CFTC] shall take into consideration the public
interest to be protected by the antitrust laws and endeavor to take
the least anticompetitive means of achieving the objectives of this
chapter, as well as the policies and purposes of this chapter, in
issuing any order or adopting any [CFTC] rule or regulation
(including any exemption under section 6(c) or 6c(b) of this title),
or in requiring or approving any bylaw, rule, or regulation of a
contract market or registered futures association established
pursuant to section 21 of this title.'' The Commission does not
believe that it is appropriate to adapt this guidance into a rule
that applies to SBSEFs because the SEA (which applies to SBSEFs)
does not have a provision that is closely comparable to section
15(b) of the CEA (which applies to SEFs). Furthermore, the guidance
pertaining to CEA Core Principle 10 for SEFs sets out only a general
approach to how the CFTC addresses antitrust issues applying to SEFs
and does not include provisions that can readily be adapted into
rule text.
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The Commission seeks comment on the following:
148. Do you agree with how the Commission is proposing to implement
SEA Core Principle 10? Why or why not?
[[Page 28918]]
K. Rule 828--Core Principle 11--Conflicts of Interest
SEA Core Principle 11 \197\ requires an SBSEF to establish and
enforce rules to minimize conflicts of interest in its decision-making
process and to establish a process for resolving the conflicts of
interest. CEA Core Principle 12 \198\ is substantively identical.
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\197\ Section 3D(d)(11) of the SEA, 15 U.S.C. 78c-4(d)(11).
\198\ 7 U.S.C. 7b-3(f)(12).
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The CFTC implemented CEA Core Principle 12 in subpart M of part 37.
Section 37.1200 of subpart M repeats the statutory text of Core
Principle 12. There are no other provisions in subpart M, nor is there
any guidance or acceptable practices associated with Core Principle 12
in appendix B to part 37.\199\
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\199\ The CFTC has proposed additional rules regarding the
mitigation of conflicts of interest but has not adopted any such
rules. See CFTC, Requirements for Derivatives Clearing
Organizations, Designated Contract Markets, and Swap Execution
Facilities Regarding the Mitigation of Conflicts of Interest, 75 FR
63732 (October 18, 2010); CFTC, Governance Requirements for
Derivatives Clearing Organizations, Designated Contract Markets, and
Swap Execution Facilities; Additional Requirements Regarding the
Mitigation of Conflicts of Interest, 76 FR 722 (January 6, 2011).
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Proposed Rule 828 would implement SEA Core Principle 11. Paragraph
(a) of proposed Rule 828, like Sec. 37.1200, repeats the statutory
text of the Core Principle. Paragraph (b) would direct an SBSEF to
comply with the requirements of proposed Rule 834, which, as discussed
below, would implement section 765 of the Dodd-Frank Act for both
SBSEFs and SBS exchanges.\200\
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\200\ See infra section X.
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The Commission seeks comment on the following:
149. Do you agree with how the Commission is proposing to implement
SEA Core Principle 11 in Rule 828? Why or why not?
150. The Commission is proposing to subject SBS exchanges and
SBSEFs to the same conflicts-of-interest requirements, in Rule 834.
Therefore, proposed Rule 828 cross-references proposed Rule 834 rather
than enumerating conflicts-of-interest requirements for SBSEFs separate
from those for SBS exchanges. Do you believe that this is an
appropriate way to structure the proposed rules? Why or why not? Are
there any conflicts-of-interest requirements that you believe should be
applied to SBSEFs but not to SBS exchanges? If so, what requirement(s)
and why?
L. Rule 829--Core Principle 12--Financial Resources
SEA Core Principle 12 \201\ has a paragraph (A) that requires an
SBSEF to have adequate financial, operational, and managerial resources
to discharge each responsibility of the SBSEF, as determined by the
Commission. Paragraph (B) of SEA Core Principle 12 provides that the
financial resources of an SBSEF shall be considered to be adequate if
the value of the financial resources: (i) Enables the organization to
meet its financial obligations to its members and participants
notwithstanding a default by the member or participant creating the
largest financial exposure for that organization in extreme but
plausible market conditions; and (ii) exceeds the amount that would
enable the SBSEF to cover operating costs of the SBSEF for a one-year
period, as calculated on a rolling basis. CEA Core Principle 13 for
SEFs \202\ is substantively identical with respect to paragraphs (A)
and (B)(ii) of SEA Core Principle 12, but lacks an equivalent to
paragraph (B)(i) of SEA Core Principle 12.
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\201\ Section 3D(d)(12) of the SEA, 15 U.S.C. 78c-4(d)(12).
\202\ Section 5h(f)(13) of the CEA, 7 U.S.C. 7b-3(f)(13).
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The CFTC implemented CEA Core Principle 13 for SEFs in subpart N of
part 37. Section 37.1300 of subpart N repeats the statutory text of CEA
Core Principle 13. Section 37.1301 provides that financial resources
shall be considered adequate if their value exceeds the total amount
that would enable a SEF to cover its projected operating costs
necessary for the SEF to comply with section 5h of the CEA and
applicable CFTC regulations for a one-year period, calculated on a
rolling basis. Section 37.1302 describes the types of financial
resources that may satisfy the requirements of Sec. 37.1301. Section
37.1303 provides that the financial resources allocated by the SEF to
meet the financial resources requirements shall include unencumbered,
liquid financial assets equal to at least the greater of three months
of projected operating costs or the projected costs needed to wind down
the SEF's operations. If a SEF lacks sufficient unencumbered, liquid
financial assets, it may satisfy this obligation by obtaining a
committed line of credit in an amount at least equal to the deficiency.
Section 37.1304 requires a SEF, each fiscal quarter, to make a
reasonable calculation of its projected operating costs and wind-down
costs in order to determine its applicable obligations under this
section. It further provides that the SEF shall have reasonable
discretion in determining the methodology used to compute such amounts,
provided that the CFTC may review the methodology and require changes
as appropriate. Section 37.1305 provides that, no less than each fiscal
quarter, a SEF must compute the current market value of each financial
resource used to meet its obligations under Sec. Sec. 37.1301 and
37.1303 and that reductions in value to reflect market and credit risk
(``haircuts'') shall be applied as appropriate.
Section 37.1306 addresses reporting to the CFTC. Paragraph (a) of
Sec. 37.1306 provides that, each fiscal quarter, or at any time upon
CFTC request, a SEF shall report the amount of financial resources
necessary to meet the requirements of Sec. Sec. 37.1301 and 37.1303
and the market value of each financial resource available, and provide
the CFTC with financial statements, including the balance sheet, income
statement, and statement of cash flows of the SEF, prepared in
accordance with U.S. generally acceptable accounting principles
(``GAAP''). Paragraph (a) further provides that the financial
statements of a SEF that is not domiciled in the United States and is
not otherwise required to prepare financial statements in accordance
with U.S. GAAP may instead prepare its financial statements in
accordance with either International Financial Reporting Standards
issued by the International Accounting Standards Board or a comparable
international standard as the CFTC may otherwise accept in its
discretion. Paragraph (b) provides that the calculations required under
paragraph (a) shall be made as of the last business day of the SEF's
fiscal quarter. Paragraph (c) requires the SEF to provide the CFTC with
sufficient documentation to explain its methodology for computing its
financial requirements under Sec. Sec. 37.1301 and 37.1303. Further,
paragraph (c) of Sec. 37.1306 requires that the documentation must
allow the CFTC to reliably determine, without additional requests for
information, that the SEF has made reasonable calculations pursuant to
Sec. 37.1304. Paragraph (d) of Sec. 37.1306 provides that these
reports and supporting documentation shall be filed within 40 calendar
days of the end of the SEF's first three fiscal quarters, and within 90
calendar days of the end of the SEF's fourth fiscal quarter, or at such
later time as the CFTC may permit. Paragraph (e) requires a SEF to
provide notice to the CFTC no later than 48 hours after it knows or
reasonably should know that it no longer meets its
[[Page 28919]]
obligations under Sec. Sec. 37.1301 and 37.1303.
Proposed Rule 829 would implement SEA Core Principle 12 and is
based closely on subpart N of part 37.\203\ Because this Core Principle
relates to the business operations of the trading venue, very few
modifications are necessary to adapt the CFTC rule to apply to SBSEFs.
Therefore, proposed Rule 829 is closely modelled on the rules in
subpart N.
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\203\ However, paragraph (a)(2)(i) of proposed Rule 829 would
include the additional language in SEA Core Principle 12 that is not
present in CEA Core Principle 13. As noted above, this language
relates to an SBSEF meeting financial obligations to members and
participants notwithstanding a default by the member or participant
creating the largest financial exposure for the SBSEF in extreme but
plausible market conditions.
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However, one slight difference in the rule text stems from the
Commission's global approach to adapting the CFTC's guidance and
acceptable practices from appendix B to part 37 into formal rules,
where appropriate. Although the Commission considered proposing a
separate rule that adapts the guidance in appendix B pertaining to CEA
Core Principle 13, the Commission is proposing instead to weave the
concepts and some of the specific language from the CFTC guidance
relating to financial resources into paragraph (e) of proposed Rule
829, as the guidance relates only to that portion of the proposed rule.
Proposed Rule 829(e) begins by incorporating the provisions of Sec.
37.1304 regarding computation of costs to meet the financial resources
requirement. Proposed Rule 829(e) then appends language based on the
CFTC guidance concerning the following topics, all of which relate to
computation of costs: (i) Reasonableness of calculating projected
operating costs and what may be excluded from such calculation; (ii)
proration of expenses; and (iii) allocation of expenses among
affiliates.
Another non-substantive difference between proposed Rule 829 and
subpart N of part 37 is the requirement in proposed Rule 829(g)(6) for
an SBSEF to submit reports and documentation to the Commission using
the EDGAR system as an Interactive Data File, in accordance with Rule
405 of Regulation S-T. The Commission is proposing this requirement
here and in other locations to implement the Inline XBRL and EDGAR
electronic filing requirements for various documents that would have to
be provided to the Commission under proposed Regulation SE.
The Commission preliminarily believes that the CFTC has implemented
its equivalent Core Principle in an appropriate way, and that closely
harmonizing with the CFTC rule would provide comparable regulatory
benefits while imposing only marginal additional costs. Given that most
if not all entities that will seek to register with the SEC as SBSEFs
are already registered with the CFTC as SEFs, these entities already
have in place the processes and controls to designed to comply with
subpart N. Furthermore, the Commission recognizes that the swap
business of a dually registered SEF/SBSEF is likely to be much larger
than its SBS business. Therefore, the greatest risk to a dually
registered entity is likely to arise from the swap business rather than
the SBS business, so it would be logical for the SEC to defer to the
CFTC's approach for ensuring that SEFs have adequate financial
resources. Different or additive requirements imposed by the SEC could
increase costs for SEF/SBSEFs while generating benefits that are
marginal at best. The Commission does not observe any differences in
the SBS market relative to the swap market that warrant imposing
different or additive financial resource requirements on SBSEFs.
The Commission seeks comment on the following:
151. Do you agree in general with the Commission's approach to
implementing SEA Core Principle 12? Why or why not?
152. In particular, do you agree with how the Commission is
proposing to adapt the language of subpart N of part 37 into proposed
Rule 829? If not, how would you revise that language?
153. How does the anticipated size of the SBS trading business on
dually registered SEF/SBSEFs relative to the size of swap trading
business affect your view of the financial resource requirements that
the SEC should impose on dually registered entities? Do you agree that
there would be only marginal additional costs imposed on dually
registered entities to provide the same financial information at the
same times to both the SEC and CFTC (pursuant to proposed Rule 829 and
subpart N, respectively)? Why or why not?
154. Are there provisions of subpart N that the SEC should not
incorporate, even if you believe that the SEC should harmonize with the
majority of subpart N? In other words, are there areas where omitting a
subpart N provision would reduce burdens on SBSEFs and/or their members
without lessening any regulatory benefits? If so, please explain, with
particular regard to the economic impacts and/or PRA burdens.
155. Should the Commission adopt different or additive financial
resource requirements for SBSEFs, even if there are no analogous
provisions in subpart N? If so, please explain, with particular regards
to the economic impacts and/or PRA burdens. For example, do you believe
that the SEC-specific provision would impose additional costs or
burdens on SBSEFs and/or their members that are nevertheless
appropriate in view of new and additional benefits? Or do you believe
that the SEC-specific provision would be appropriate because it would
relieve costs or burdens that are imposed on SEFs by subpart N that, in
your view, are unnecessary or inappropriate for SBSEFs?
156. Do you agree with how the Commission is proposing to adapt the
CFTC guidance pertaining to its equivalent Core Principle by converting
it into formal rule text? Why or why not? Would adapting the CFTC
guidance into the Commission's rules necessitate any changes in how
financial resources are calculated?
M. Rule 830--Core Principle 13--System Safeguards
Paragraph (A) of SEA Core Principle 13 \204\ provides that an SBSEF
must establish and maintain a program of risk analysis and oversight to
identify and minimize sources of operational risk, through the
development of appropriate controls and procedures, and automated
systems, that are reliable and secure and that have adequate scalable
capacity. Paragraph (B) requires that an SBSEF also must establish and
maintain emergency procedures, backup facilities, and a plan for
disaster recovery that allow for the timely recovery and resumption of
operations; and the fulfillment of the responsibilities and obligations
of the SBSEF. Finally, paragraph (C) of SEA Core Principle 13 requires
an SBSEF to periodically conduct tests to verify that the backup
resources of the SBSEF are sufficient to ensure continued order
processing and trade matching; price reporting; market surveillance;
and maintenance of a comprehensive and accurate audit trail. CEA Core
Principle 14 \205\ is substantively identical to SEA Core Principle 13.
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\204\ Section 3D(d)(13)(A) of the SEA, 15 U.S.C. 78c-4(d)(13).
\205\ Section 5h(f)(14) of the CEA, 7 U.S.C. 7b-3(f)(14).
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Subpart O of part 37 is entitled ``System Safeguards'' and
implements CEA Core Principle 14. Section 37.1400 of subpart O repeats
the statutory text of the Core Principle. Sec. 37.1401 sets forth
detailed requirements for a SEF to comply with the Core Principle.
[[Page 28920]]
Paragraph (a) of Sec. 37.1401 requires a SEF's program of risk
analysis and oversight to address enterprise risk management and
governance, information security, business continuity-disaster recovery
planning and resources, capacity and performance planning, systems
operations, systems development and quality assurance, and physical
security and operational controls. Paragraph (b) provides that, in
addressing the categories of risk analysis and oversight required under
paragraph (a), a SEF shall follow generally accepted standards and best
practices with respect to the development, operation, reliability,
security, and capacity of automated systems. Paragraph (c) requires a
SEF to maintain a business continuity-disaster recovery plan and
business continuity-disaster recovery resources, emergency procedures,
and backup facilities that satisfy several enumerated criteria.
Paragraph (d) explains how a SEF that is not determined by the CFTC to
be a critical financial market may satisfy its requirement to be able
to resume its operations and resume its ongoing fulfillment of its
responsibilities and obligations during the next business day following
any disruption of its operations.
Paragraph (e) of Sec. 37.1401 requires a SEF to notify the CFTC
promptly of all electronic trading halts and material system
malfunctions; cyber security incidents or targeted threats that
actually or potentially jeopardize automated system operation,
reliability, security, or capacity; and activations of SEF's business
continuity-disaster recovery plan. Paragraph (f) requires the SEF to
provide CFTC staff timely advance notice of all material planned
changes to automated systems that may impact the reliability, security,
or adequate scalable capacity of such systems; and planned changes to
the SEF's program of risk analysis and oversight. Paragraph (g) sets
forth recordkeeping requirements related to the SEF's system
safeguards. Paragraph (h) requires the SEF to conduct testing and
review of its automated systems and business continuity-disaster
recovery capabilities and provides several definitions for terms used
in paragraph (h). Paragraph (h) also requires the SEF to conduct
``vulnerability testing,'' ``external penetration testing,'' ``internal
penetration testing,'' ``controls testing,'' ``security incident
response plan testing,'' and ``enterprise technology risk assessment''
subject to various enumerated criteria.
Paragraph (i) of Sec. 37.1401 provides that the SEF, to the extent
practicable, shall coordinate its business continuity-disaster recovery
plan with those of the market participants that it depends upon to
provide liquidity, in a manner adequate to enable effective resumption
of activity in its markets following a disruption causing activation of
the SEF's business continuity-disaster recovery plan. Paragraph (i)
also requires the SEF to initiate and coordinate periodic, synchronized
testing of its business continuity-disaster recovery plan with those of
the market participants it depends upon to provide liquidity; and to
ensure that its business continuity-disaster recovery plan takes into
account the business continuity-disaster recovery plans of its
telecommunications, power, water, and other essential service
providers.
Paragraph (j) of Sec. 37.1401 provides that part 40 of the CFTC's
rules shall govern the obligations of those registered entities that
the CFTC has determined to be critical financial markets, with respect
to maintenance and geographic dispersal of disaster recovery resources
sufficient to meet a same-day recovery time objective in the event of a
wide-scale disruption. Paragraph (k) sets forth criteria for the scope
for all system safeguard testing and assessment required under the
rule. Paragraph (l) requires that both the senior management and the
board of directors of the SEF shall receive and review reports setting
forth the results of the testing and assessment required by the rule.
Paragraph (m) requires the SEF to identify and document the
vulnerabilities and deficiencies in its systems revealed by testing and
assessment, conduct and document an appropriate analysis of the risks
presented by such vulnerabilities and deficiencies, and remediate in a
timely manner given the nature and magnitude of the associated risk.
Proposed Rule 830 is closely modelled on subpart O of part 37 of
the CFTC's rules, except in one aspect. Subpart O includes language
relating to ``critical financial markets,'' \206\ which is a
designation applied by the CFTC to certain of its registrants that
would subject them to more stringent requirements, although the CFTC
has not yet adopted any such requirements.\207\ A similar concept in
the SEC's rules is ``SCI entity.'' \208\ When adopting Regulation SCI,
the Commission considered whether it should apply Regulation SCI to
SBSEFs, among other entities, and determined not to do so.\209\ Because
SBSEFs are not SCI entities and the corresponding CFTC rule has not
imposed additional requirements on critical financial markets, the
Commission preliminarily believes that it is not necessary or
appropriate to adapt into Rule 830 the language of subpart O applicable
to critical financial markets.\210\
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\206\ See Sec. 37.1401(c) (providing that SEFs determined by
the CFTC to be critical financial markets are subject to more
stringent requirements); Sec. 37.1401(d); Sec. 37.1401(j)
(providing that part 40 governs the obligations of registered
entities that the CFTC has determined to be critical financial
markets, with respect to maintenance and geographic dispersal of
disaster recovery resources sufficient to meet a same-day recovery
time objective in the event of a wide-scale disruption).
\207\ The provisions in subpart O relating to ``critical
financial markets'' reference Sec. 40.9 of the CFTC's rules, which
is marked as ``Reserved.''
\208\ See Rule 1000 of Regulation SCI (defining ``SCI entity'').
In November 2014, the Commission adopted Regulation Systems
Compliance and Integrity (``SCI'') to strengthen the technology
infrastructure of the U.S. securities markets, reduce the occurrence
of systems issues in those markets, improve their resiliency when
technological issues arise, and establish an updated and formalized
regulatory framework, thereby helping to ensure more effective
Commission oversight of such systems. See Regulation Systems
Compliance and Integrity, SEA Release No. 73639 (November 19, 2014),
79 FR 72252 (December 5, 2014).
\209\ See id., 79 FR at 72363-64 (reviewing comments received
regarding the potential application of Regulation SCI to SBSEFs,
among others).
\210\ The Commission also notes that, while subpart O frequently
uses the term ``market participant,'' proposed Rule 830 substitutes
the term ``member'' in these places, since the rule pertains to
market participants who are engaging as members of the SEF/SBSEF.
See supra note 53.
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The Commission preliminarily believes that subpart O is reasonably
designed to promote SEF operational capability, and that the most
appropriate way to implement SEA Core Principle 13 would be to closely
harmonize with the CFTC's rules that implement the corresponding Core
Principle. As with SEA Core Principle 12 (Financial resources), the
Commission recognizes that the swap business of a dually registered
SEF/SBSEF is likely to be much larger than its SBS business. Therefore,
the greatest operational risk to a dually registered entity is likely
to arise from the swap business rather than the SBS business, so it
would be logical for the SEC to defer to the CFTC's approach for
ensuring that SEFs have adequate system safeguards and business
continuity protocols. Different or additive requirements imposed by the
SEC could increase costs for SEF/SBSEFs while generating benefits that
are marginal at best. The Commission does not observe any differences
in the SBS market relative to the swap market that warrant imposing
different or additive operational capability requirements on SBSEFs.
[[Page 28921]]
The Commission seeks comment on the following:
157. Do you agree in general with how the Commission is proposing
to implement SEA Core Principle 13 in proposed Rule 830? Why or why
not?
158. In particular, do you believe that close harmonization with
subpart O of the CFTC's rules is appropriate? If not, is there another
framework for system safeguards that would be more appropriate for
SBSEFs? What would be the economic impact of the SEC adopting different
or additive system safeguard requirements in the case of dually
registered SEF/SBSEFs?
159. As noted above,\211\ the Commission previously determined not
to subject SBSEFs to Regulation SCI. Do you see any changes in the SBS
market that should cause the Commission to revisit that decision?
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\211\ See supra note 209 and accompanying text.
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160. Do you believe it is appropriate to omit from Rule 830 the
provisions of subpart O relating to critical financial markets? Why or
why not?
161. Are there provisions of subpart O that the SEC should not
incorporate, even if the SEC opts to harmonize with most of subpart O?
In other words, are there areas where omitting a subpart O provision
would reduce burdens on SBSEFs and/or their members without lessening
any regulatory benefits? If so, please explain, with particular regard
to the economic impacts and/or PRA burdens.
162. Should the Commission adopt different or additive system
safeguard requirements for SBSEFs, even if there is no analog to such
provisions in subpart O? If so, please explain, with particular regards
to the economic impacts and/or PRA burdens. For example, do you believe
that the SEC-specific provision would impose additional costs or
burdens on SBSEFs and/or their market participants that are
nevertheless appropriate in view of new and additional benefits? Or do
you believe that the SEC-specific provision would be appropriate
because it would relieve costs or burdens that are imposed on SEFs by
subpart O that, in your view, are unnecessary or inappropriate for
SBSEFs?
N. Rule 831--Core Principle 14--Designation of Chief Compliance Officer
SEA Core Principle 14 \212\ requires each registered SBSEF to
designate a chief compliance officer (``CCO''), and requires the CCO to
review the SBSEF's compliance with the Core Principles, resolve
conflicts of interest, be responsible for establishing and
administering policies and procedures required under the Core
Principles, establish procedures for the remediation of noncompliance,
prepare and sign an annual report that describes the SBSEF's
compliance, certify that the report is accurate and complete, and
submit the report to the Commission. CEA Core Principle 15 for SEFs
\213\ is substantively identical.
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\212\ Section 3D(d)(14) of the SEA, 15 U.S.C. 78c-4(d)(14).
\213\ Section 5h(f)(15) of the CEA, 7 U.S.C. 7b-3(f)(15).
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The CFTC implemented CEA Core Principle 15 in subpart P of part 37.
Section 37.1500 of subpart P repeats the statutory text of CEA Core
Principle 15. Section 37.1501(a) sets forth definitions for the terms
``board of directors'' and ``senior officer.'' Section 37.1501(b)(1)
provides that the position of CCO shall carry with it the authority and
resources to develop, in consultation with the board of directors or
senior officer, and enforce the SEF's policies and procedures, and that
the CCO shall have supervisory authority over all staff acting at the
direction of the CCO. Section 37.1501(b)(2) through (4) include
provisions relating to the qualifications of the CCO, appointment and
removal of the CCO, and compensation of the CCO. Section 37.1501(b)(5)
through (6) state that the CCO must meet with the SEF's board of
directors or senior officer at least annually, and the CCO must provide
any information regarding the SEF's self-regulatory program as
requested by the board of directors or the senior officer.
Section 37.1501(c) sets out the duties of the CCO, including
overseeing and reviewing the SEF's compliance with the Core Principles;
taking reasonable steps, in consultation with the board of directors or
senior officer, to resolve any material conflicts of interest;
establishing and administering written policies and procedures
reasonably designed to prevent violations of the CEA and the rules of
the CFTC; taking reasonable steps to ensure compliance with the CEA and
CFTC rules; establishing procedures reasonably designed to handle,
respond, remediate, retest, and resolve noncompliance issues identified
by the CCO; establishing and administering a compliance manual and a
written code of ethics for the SEF; supervising the self-regulatory
program of the SEF with respect to trade practice surveillance, market
surveillance, real-time market monitoring, compliance with audit trail
requirements, enforcement and disciplinary proceedings, audits,
examinations, and other regulatory responsibilities; and supervising
the effectiveness and sufficiency of any regulatory services provided
to the SEF by a regulatory service provider.
Section 37.1501(d) requires the CCO to prepare and sign an annual
compliance report that covers the prior fiscal year. The report must
contain, at a minimum: A description and self-assessment of the
effectiveness of the SEF's written policies and procedures, code of
ethics, and conflict of interest policies; any material changes made to
compliance policies and procedures during the coverage period for the
report and any areas of improvement or recommended changes to the
compliance program; a description of the financial, managerial, and
operational resources set aside for compliance with the CEA and
applicable CFTC regulations; any material non-compliance matters
identified and an explanation of the corresponding action taken to
resolve them; and CCO certification that the annual compliance report
is accurate and complete.
Section 37.1501(e) requires the CCO to provide the annual
compliance report to the SEF's board of directors or a senior officer
for review before submitting it to the CFTC, and the board or the
senior office may not require the CCO to make any changes to the
report. Section 37.1501(e) further provides that the annual compliance
report shall be submitted electronically to the CFTC not later than 90
calendar days after the end of the SEF's fiscal year and concurrently
with the fourth-quarter financial report pursuant to Sec. 37.1306.
Section 37.1501(e) also addresses amendments to and requests for
extensions for the annual compliance report.
Section 37.1501(f) requires the SEF to maintain all records
demonstrating compliance with the duties of the CCO and the preparation
and submission of annual compliance report, consistent with Sec. Sec.
37.1000 and 37.1001. Finally, appendix B to part 37 includes
``acceptable practices'' regarding the qualifications of a CCO and the
SEF's discretion in choosing one, as well as the need to be vigilant
regarding conflicts of interest when appointing a CCO.
Proposed Rule 831 would implement SEA Core Principle 14 and is
closely modelled on subpart P of part 37, with two minor substantive
exceptions.\214\
[[Page 28922]]
The first relates to disqualification of the CCO. Section
37.1501(b)(2)(ii) states: ``No individual disqualified from
registration pursuant to sections 8a(2) or 8a(3) of the [CEA] may serve
as a chief compliance officer.'' The Commission preliminarily believes
that SBSEFs, like SEFs, should be subject to a rule setting out
criteria for disqualification of the CCO. However, the SEC cannot
cross-reference provisions of the CEA, since the CEA does not apply to
SBSEFs. The Commission consulted Sections 8a(2) and 8a(3) of the
CEA,\215\ but believes they are not easily adaptable into a rule
applicable to SBSEFs and their CCOs. The Commission is proposing
instead, in Rule 831(c)(2), that no individual that would be
disqualified from serving on an SBSEF's governing board \216\ or
committees pursuant to the criteria set forth in Sec. 242.819(i) may
serve as the CCO. As noted above,\217\ the disqualification criteria in
proposed Rule 819(i) are adapted from Sec. 1.63 of the CFTC's rules.
Second, the Commission has adapted the acceptable practices pertaining
to CEA Core Principle 15 into paragraph (c) of proposed Rule 831.\218\
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\214\ In addition, the requirement in proposed Rule 831 that the
CCO's annual compliance report be submitted electronically to the
Commission, based on Sec. 37.1501(e)(2), includes an added clause
to provide that the submission must be made using the EDGAR system
and must be provided as an Interactive Data File in accordance with
Rule 405 of Regulation S-T, in conformance with other rules in
Regulation SE requiring electronic submissions. See proposed Rule
831(j)(2); supra note 55.
\215\ 7 U.S.C. 12a(2) and 12a(3).
\216\ The Commission notes that subpart P uses the term ``board
of directors,'' while the Commission is proposing to use the term
``governing board'' instead throughout proposed Regulation SE. See
supra note 29.
\217\ See supra section VIII(B)(2)(b).
\218\ Proposed Rule 831(c) provides that, in determining whether
the background and skills of a potential CCO are appropriate for
fulfilling the responsibilities of the role of the CCO, an SBSEF has
the discretion to base its determination on the totality of the
qualifications of the potential CCO, including, but not limited to,
compliance experience, related career experience, training,
potential conflicts of interest, and any other relevant factors.
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The Commission preliminarily believes that the CFTC has implemented
CEA Core Principle 14 for SEFs in an appropriate way, and that closely
harmonizing with subpart P of part 37 would yield comparable regulatory
benefits while imposing only marginal additional costs. The Commission
recognizes that the swap business of a dually registered SEF/SBSEF is
likely to be much larger than its SBS business. Therefore, the greatest
compliance risks to a dually registered entity are likely to arise from
the swap business rather than the SBS business, so it would be logical
for the SEC to harmonize with the CFTC's rules regarding the CCO. There
are strong economic incentives for a dually registered entity to
appoint the same individual to serve as the CCO for both the swap and
SBS businesses, and for the CCO to carry out their functions under a
similar set of rules. Different or additive requirements imposed by the
SEC could increase costs for SEF/SBSEFs while generating benefits that
are marginal at best. The Commission does not observe any differences
in the SBS market relative to the swap market that warrant imposing
different or additive CCO requirements on SBSEFs relating to the CCO.
The Commission seeks comment on the following:
163. Do you agree in general with how the Commission is proposing
to implement SEA Core Principle 14? Why or why not?
164. In particular, do you agree that close harmonization with
subpart P is appropriate? Are there provisions of subpart P that the
SEC should not incorporate, even if the SEC opts to harmonize with most
of subpart P? In other words, are there areas where omitting a subpart
P provision would reduce burdens on SBSEFs and/or their members without
lessening any regulatory benefits? If so, please explain, with
particular regard to the economic impacts and/or PRA burdens.
165. Should the Commission adopt different or additive CCO
requirements for SBSEFs, even if there is no analog to such provisions
in subpart P? If so, please explain, with particular regards to the
economic impacts and/or PRA burdens. For example, do you believe that
the SEC-specific provision would impose additional costs or burdens on
SBSEFs and/or their members that are nevertheless appropriate in view
of new and additional benefits? Or do you believe that the SEC-specific
provision would be appropriate because it would relieve costs or
burdens that are imposed on SEFs by subpart P that, in your view, are
unnecessary or inappropriate for SBSEFs?
166. Do you agree with how the Commission is proposing to adapt the
acceptable practices from appendix B relating to CEA Core Principle 15
into proposed Rule 831(c)? Why or why not?
167. Do you agree with proposed Rule 831(c)(2) using a cross-
reference to proposed Rule 819(i) to incorporate disqualification
criteria for the CCO? Why or why not? If not, what alternate standard
would you suggest for the disqualification criteria, and why?
IX. Cross-Border Rules
A. Rule 832--Cross-Border Mandatory Trade Execution
As noted above,\219\ section 3C(h) of the SEA provides that an SBS
that is subject to mandatory clearing can become subject to the trade
execution requirement.\220\ The trade execution requirement, like other
provisions of the SEA, is subject to jurisdictional constraints which
are particularly germane in light of the global nature of the SBS
market, where there is frequent interaction among counterparties
domiciled in different jurisdictions. Proposed Rule 832 of Regulation
SE is designed to address when the SEA's trade execution requirement
applies to a cross-border SBS transaction.
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\219\ See supra note 106 and accompanying text.
\220\ Even if an SBS is subject to mandatory clearing, it will
not be subject to the trade execution requirement if no exchange or
SBSEF makes the SBS available to trade or the SBS is subject to an
exception from the clearing requirement under section 3C(g) of the
SEA. In addition, as discussed above in section VII(F)(2), proposed
Rule 816(e) would provide certain additional exemptions from the
trade execution requirement.
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Paragraph (a) of proposed Rule 832 would provide that the trade
execution requirement set forth in section 3C(h) of the SEA shall not
apply to an SBS unless at least one counterparty to the SBS is a
``covered person'' as defined in paragraph (b). Paragraph (b) of
proposed Rule 832 would define the term ``covered person,'' with
respect to a particular security-based swap, as any person that is a
U.S. person; a non-U.S. person whose performance under an SBS is
guaranteed by a U.S. person; or a non-U.S. person who, in connection
with its SBS dealing activity, uses U.S. personnel located in a U.S.
branch or office, or personnel of an agent of such non-U.S. person
located in a U.S. branch or office, to arrange, negotiate, or execute a
transaction.\221\
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\221\ The proposed term ``covered person'' is designed to apply
on a transaction-by-transaction basis. In other words, if a non-U.S.
person were guaranteed by a U.S. person on a specific SBS or
utilized U.S. personnel in connection with its dealing activities to
arrange, negotiate, or execute a specific SBS, that person would be
a covered person with respect to that SBS, but not necessarily with
respect to other SBS. Because domicile is generally static, a person
who is a U.S. person would be a covered person with respect to all
of its SBS transactions.
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Thus, a particular SBS would fall within the jurisdictional reach
of section 3C(h) of the SEA if at least one side had a connection to
the United States of a type specified in paragraph (b)(1), (2), or (3)
of proposed Rule 832. The trade execution requirement would not apply
to an SBS transaction--even if the SBS were subject to mandatory
clearing and MAT--if neither side had a connection to the United States
of a type specified in proposed Rule 832.
Proposed Rule 832 is consistent with the Commission's territorial
approach to applying Title VII requirements in other contexts. The
Commission previously has stated that Title VII requirements
[[Page 28923]]
``apply to all SBS transactions that exist in whole or in part within
the United States, unless an exception applies.'' \222\ Relevant
activity need not occur wholly within the United States or solely
between U.S. persons in order for Title VII requirements to apply.\223\
For example, under Rule 908(a)(1) of Regulation SBSR,\224\ the Title
VII requirements for regulatory reporting and public dissemination
apply to an SBS transaction even if only one counterparty to the
transaction is a U.S. person. As the Commission previously stated,
``any security-based swap executed by a U.S. person exists at least in
part within the United States.'' \225\ This is true even if a
transaction is effected through the foreign branch of a U.S. person,
because ``a foreign branch has no separate existence from the U.S.
person itself.'' \226\
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\222\ Regulation SBSR Adopting Release I, 80 FR at 14652
(discussing cross-border application of Title VII requirements for
regulatory reporting and public dissemination of SBS transactions).
\223\ See SEA Release No. 72472 (June 25, 2014), 79 FR 47278,
47286 (``Cross-Border Adopting Release'') (stating that applying
Title VII only to persons incorporated, organized, or established
within the United States or only to SBS activity occurring entirely
within the United States would inappropriately exclude from
regulation a majority of SBS activity that involves U.S. persons or
otherwise involves conduct within the United States, even though
such activity raises the types of concerns that the Commission
believed Congress intended to address through Title VII).
\224\ 17 CFR 242.908(a)(1).
\225\ Regulation SBSR Adopting Release I, 80 FR at 14652.
\226\ Id. See also Cross-Border Adopting Release, 79 FR at 47289
(discussing the Commission's rationale for viewing a foreign branch
of an SBS dealer as an integral part of the SBS dealer).
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The Commission also has found it consistent with the territorial
approach to apply Title VII requirements where one counterparty of an
SBS transaction is a non-U.S. person whose performance under an SBS is
guaranteed by a U.S. person.\227\ As the Commission stated when
applying this criterion to Title VII reporting: ``A security-based swap
with a U.S.-person indirect counterparty [i.e., guarantor] is
economically equivalent to a security-based swap with a U.S.-person
direct counterparty, and both kinds of security-based swaps exist, at
least in part, within the United States . . . [T]he presence of a U.S.
guarantor facilitates the activity of the non-U.S. person who is
guaranteed and, as a result, the security-based swap activity of the
non-U.S. person cannot reasonably be isolated from the U.S. person's
activity in providing the guarantee.'' \228\
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\227\ See, e.g., Regulation SBSR Adopting Release I, 80 FR at
14653. See also Cross-Border Adopting Release, 79 FR at 47290 (``the
guarantee provided by a U.S. person poses risk to U.S. persons and
potentially to the U.S. financial system, and both the non-U.S.
person whose dealing activity is guaranteed and its counterparty
rely on the creditworthiness of the U.S. guarantor when entering
into a security-based swap transaction and for the duration of the
security-based swap. The economic reality of this transaction, even
though entered into by a non-U.S. person, is substantially
identical, in relevant respects, to a transaction entered into
directly by a U.S. person. Accordingly, in our view, it is
consistent with both the statutory text and with the purposes of the
statute to identify such transactions as occurring within the United
States for purposes of Title VII'').
\228\ Regulation SBSR Adopting Release I, 80 FR at 14653. In
addition, section 30(c) of the SEA, 15 U.S.C. 78dd(c), authorizes
the Commission to apply Title VII requirements to persons
transacting a business ``without the jurisdiction of the United
States'' if they contravene rules that the Commission has prescribed
as ``necessary or appropriate to prevent the evasion of any
provision'' of Title VII. For the reasons described above, the
Commission does not believe that applying the trade execution
requirement to non-U.S. persons whose performance under an SBS is
guaranteed by a U.S. person would cause the trade execution
requirement to apply to persons that are ``transact[ing] a business
in security-based swaps without the jurisdiction of the United
States.'' The Commission nonetheless preliminarily believes that
applying the trade execution requirement to such persons is also
necessary or appropriate as a prophylactic measure to help prevent
the evasion of the provisions of the SEA that were added by the
Dodd-Frank Act, and thus help prevent the relevant purposes of the
Dodd-Frank Act from being undermined. See Cross-Border Adopting
Release, 79 FR at 47291-92 (interpreting the anti-evasion provisions
of SEA section 30(c)). Without this rule, U.S. persons could have an
incentive to evade the trade execution requirement by engaging in
SBS via a guaranteed affiliate, while the economic reality of
transactions arising from that activity--including the risks these
transactions introduce to the U.S. market--would be no different in
most respects than transactions entered into directly by U.S.
persons.
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Finally, the Commission also has found it consistent with the
territorial approach to apply Title VII requirements where one
counterparty is a non-U.S.-person who, in connection with its SBS
dealing activity, uses U.S. personnel located in a U.S. branch or
office, or personnel of an agent of such non-U.S. person located in a
U.S. branch or office, to arrange, negotiate, or execute (``ANE'') the
transaction. As the Commission previously stated when applying the ANE
criterion to Title VII requirements for regulatory reporting and public
dissemination: ``when a foreign dealing entity uses U.S. personnel to
arrange, negotiate, or execute a transaction in a dealing capacity,
that transaction occurs at least in part within the United States and
is relevant to the U.S. security-based swap market.'' \229\ Declining
to apply Title VII requirements to SBS transactions of foreign dealing
entities that use U.S. personnel to engage in ANE transactions would
allow such entities ``to exit the Title VII regulatory regime without
exiting the U.S. market.'' \230\
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\229\ Regulation SBSR Adopting Release II, 81 FR at 53591. See
also SEA Release No. 87780 (December 18, 2019), 85 FR 6270, 6271-76
(February 4, 2020) (discussing other Title VII rules that
incorporate ANE criteria and providing guidance on the meaning of
the terms ``arranged'' and ``negotiated'' for purposes of these
rules).
\230\ Regulation SBSR Adopting Release II, 81 FR at 53591. The
Commission does not believe that applying the trade execution
requirement to persons that satisfy the ANE criterion would cause
the trade execution requirement to apply to persons that are
``transact[ing] a business in security-based swaps without the
jurisdiction of the United States,'' within the meaning of section
30(c) of the SEA. See supra note 228. The Commission also believes
that applying the trade execution requirement to such persons is
necessary or appropriate as a prophylactic measure to help prevent
the evasion of the provisions of the SEA that were added by the
Dodd-Frank Act, and thus help prevent the relevant purposes of the
Dodd-Frank Act from being undermined. Without this rule, non-U.S.
persons could retain the benefits of operating in the United States
while avoiding compliance with the trade execution requirement.
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The Commission recognizes the difficulties that can arise when a
binary requirement, such as the trade execution requirement, applies in
two separate jurisdictions. In other words, if the counterparties to a
cross-border SBS are subject to a trade execution requirement under the
rules of each of their jurisdictions, the counterparties could violate
the rules of one jurisdiction by executing the SBS in one jurisdiction
but not the other, or in a manner that is consistent with the rules of
one jurisdiction but potentially not of the other jurisdiction. The
following section, regarding proposed Rule 833, will discuss conditions
for allowing an SBS to trade on foreign venues not registered with the
Commission, notwithstanding the SBS being subject to the SEA's trade
execution requirement and proposed Rule 832.
The Commission seeks comment on the following:
168. Of the SBS products that, in your view, are plausible
candidates for mandatory clearing and mandatory trade execution under
the SEA, how frequently do these products trade on foreign SBS trading
venues? Do you believe that the SBS market is sufficiently regionalized
such that cross-border application of the trade execution requirement
might not be a significant issue?
169. Do you believe that the proposed text of Rule 832 is
sufficiently clear? If not, what aspects do you believe require
clarification?
B. Rule 833--Cross-Border Exemptions
1. Exemptions for Foreign SBS Trading Venues
As noted above in discussing proposed Rule 832, the swap and SBS
markets are global in nature, and counterparties domiciled in different
jurisdictions frequently trade with each
[[Page 28924]]
other.\231\ Proposed Rule 832 is designed to answer the question of
when the trade execution requirement would apply to an individual
cross-border SBS transaction. There might be instances where covered
persons (as defined in proposed Rule 832) wish to be members of a
foreign trading venue for SBS (a ``foreign SBS trading venue''). Having
members who are covered persons, as defined in Rule 832, with respect
to SBS transacted on that venue, whether or not the SBS that they trade
are subject to the SEA's trade execution requirement, could require the
foreign SBS trading venue to register with the Commission as a national
securities exchange or SBSEF.\232\ In addition, because a foreign SBS
trading venue would be facilitating the execution of SBS between
persons, the foreign SBS trading venue also might be required to
register with the Commission as a broker.\233\
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\231\ See supra section IX(A).
\232\ See 15 U.S.C. 78c-4(a)(1) (stating that no person may
operate a facility for the trading or processing of SBS, unless the
facility is registered as an SBSEF or national securities exchange).
\233\ A ``broker'' is generally defined as a person engaged in
the business of effecting transactions in securities for the account
of others. See section 3(a)(4) of the SEA, 15 U.S.C. 78c(a)(4).
Section 15(a)(1) of the SEA, 15 U.S.C. 78o(a)(1), generally provides
that it shall be unlawful for any broker to make use of the mails or
any means or instrumentality of interstate commerce to effect any
transactions in, or to induce or attempt to induce the purchase or
sale of, any security unless such broker is registered in accordance
with SEA section 15(b). See also infra section XIII (discussing
proposed new Rule 15a-12).
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A foreign SBS trading venue with members who are covered persons,
as defined in Rule 832, with respect to SBS transacted on that venue
and that wishes to avoid having to register in one or more of these
capacities could request that the Commission grant it an exemption
under section 36(a)(1) of the SEA \234\ by submitting an application
pursuant to SEA Rule 0-12.\235\ Proposed Rule 833(a) would provide that
such an application, relating to the status of the foreign SBS trading
venue under the SEA, may state that the application also is submitted
pursuant to Rule 833(a).\236\ In such case, the Commission would
consider the submission as an application to exempt the foreign SBS
trading venue, with respect to its providing a market place for SBS,
from the definition of ``exchange'' in section 3(a)(1) of the SEA;
\237\ the definition of ``security-based swap execution facility'' in
section 3(a)(77) of the SEA; \238\ the definition of ``broker'' in
section 3(a)(4) of the SEA; \239\ and section 3D(a)(1) of the SEA.\240\
Because a foreign SBS trading venue that obtains an order under SEA
section 36 and proposed Rule 833(a) \241\ would be exempt from these
definitions and from section 3D(a)(1) of the SEA, the foreign SBS
trading venue would not be required to register with the Commission as
a national securities exchange, SBSEF, or broker, or comply with other
requirements applicable to such entities under the SEA or Commission
rules thereunder.\242\
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\234\ 15 U.S.C. 78mm(a)(1).
\235\ 17 CFR 240.0-12 (setting forth procedures for filing
applications for orders for exemptive relief under section 36 of the
SEA).
\236\ An application for an exemption under proposed Rule 833(a)
could be submitted by a foreign SBS trading venue itself or another
interested party. For example, a financial regulatory authority in a
foreign jurisdiction could submit an application under proposed Rule
833(a) on behalf of one or more SBS trading venues licensed and
regulated in that jurisdiction.
\237\ 15 U.S.C. 78c(a)(1).
\238\ 15 U.S.C. 78c(a)(77).
\239\ 15 U.S.C. 78c(a)(4).
\240\ 15 U.S.C. 78c-4(a)(1) (stating that no person may operate
a facility for the trading or processing of SBS, unless the facility
is registered as an SBSEF or national securities exchange).
\241\ For the remainder of this discussion, an exemption under
SEA section 36 and Rule 833(a) will be referred to simply as a
``Rule 833(a) exemption.'' In addition, the Commission will use the
term ``trading venue covered by an exemption order under Rule 833''
(or a similar formulation) rather than ``exempt exchange,'' ``exempt
SBSEF'' or ``exempt broker'' because, pursuant to an exemption
granted under proposed Rule 833(a), the covered trading venue would
no longer be an exchange, SBSEF, or broker (as defined by the SEA).
\242\ However, as discussed further below, the Rule 833(a)
exemption is designed to address only activities related to
providing a market place for SBS. An entity that engages in other
SBS-related activity or any activity involving non-SBS securities
would need other authority under the SEA.
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Under section 5h(g) of the CEA,\243\ the CFTC may exempt,
conditionally or unconditionally, a SEF from registration if the CFTC
finds that the SEF is subject to comparable, comprehensive supervision
and regulation on a consolidated basis by the SEC, a prudential
regulator, or the appropriate governmental authorities in the home
country of the facility. The CFTC has exercised this authority to grant
exemptions from SEF registration to swap trading venues in the European
Union, Japan, and Singapore.\244\
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\243\ 7 U.S.C. 7b-3(g).
\244\ See https://www.cftc.gov/International/ForeignMarketsandProducts/ExemptSEFs (listing all exemption orders
issued by the CFTC under section 5h(g) of the CEA and subsequent
amendments to those orders).
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Proposed Rule 833(a) would set forth how interested parties could
make similar requests for exemptive relief with respect to foreign SBS
trading venues. For example, Rule 833(a) lists four separate provisions
of the SEA that the Commission believes generally would have to be
addressed in an exemption request relating to a foreign SBS trading
venue's status under the SEA. A foreign SBS trading venue that was
exempted solely from section 3D(a)(1) of the SEA, for example, might
still be subject to various requirements under the SEA by virtue of
falling within one or more of the above-noted definitions.\245\ The
exemptive framework set out in proposed Rule 833(a) is designed to
avoid this result.
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\245\ Furthermore, section 5 of the SEA generally prohibits any
broker, dealer, or exchange from using U.S. jurisdictional means to
effect or report a transaction in a security on an exchange, unless
the exchange is registered as a national securities exchange or has
received a low-volume exemption from registration as a national
securities exchange. See 15 U.S.C. 78e. Absent an exemption from the
definition of ``exchange,'' this provision would apply to a foreign
SBS trading venue (and brokers and dealers who are members of that
trading venue) to the extent that it uses U.S. jurisdictional means.
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As with applications for other exemptive relief under section 36 of
the SEA, an applicant requesting a Rule 833(a) exemption would be
required to submit a complete application pursuant to SEA Rule 0-12. To
issue a Rule 833(a) exemption, like any other exemption issued pursuant
to section 36, the Commission would be required to find that the
exemption is necessary or appropriate in the public interest, and
consistent with the protection of investors.\246\ As contemplated by
section 36(a)(1), the Commission may subject a Rule 833(a) exemption to
any conditions that it deems appropriate.
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\246\ See 15 U.S.C. 78mm(a)(1). Unlike the CFTC which has
exemptive authority under section 5h(g) of the CEA, the Commission
would not be required to find that the foreign trading venue is
subject to comparable, comprehensive supervision and regulation by a
U.S. or foreign regulator.
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Proposed Rule 833(a) is designed to address only activities
relating to providing a market place for SBS and would not extend to
trading in any other type of security or to other activities with
respect to SBS.\247\ A foreign SBS trading venue covered by an
exemption order under Rule 833(a) might offer trading in other types of
securities; however, the exemption order would permit covered persons
to trade only SBS on that trading venue without causing the trading
venue to have to register with the Commission as an exchange or SBSEF.
The exemption order would not address any registration obligations that
might arise from any other type of exchange activity by the foreign
trading venue.\248\
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\247\ For example, although a foreign trading venue covered by a
Rule 833(a) exemption would be exempt from the definition of
``broker,'' that exemption would extend only to the operation of a
market place for SBS and would not permit the foreign trading venue
to otherwise act as a securities broker using U.S. jurisdictional
means.
\248\ The Commission considered the alternative of requiring
that a Rule 833(a) exemption could apply to a foreign SBS trading
venue only if it traded SBS and no other type of security. The
Commission preliminarily believes, however, that this alternative is
unnecessary. Other jurisdictions might have market structures where
it is common to trade SBS and other types of securities on the same
trading venue. The Commission preliminarily believes that it would
be inequitable to disqualify such jurisdictions ex ante from
qualifying for a Rule 833(a) exemption. Nevertheless, a foreign SBS
trading venue that benefits from a Rule 833(a) exemption and that
offers trading in both SBS and non-SBS securities would have to take
appropriate steps to prevent covered persons from trading non-SBS
securities on that trading venue, because the Rule 833(a) exemption
would not cover the trading activity in non-SBS securities.
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[[Page 28925]]
The Commission also emphasizes that a Rule 833(a) exemption would
not have any impact on section 6(l) of the SEA,\249\ which makes it
unlawful for any person to effect a transaction in an SBS with or for a
person that is not an ECP, unless such transaction is effected on a
national securities exchange registered pursuant to section 6(b) of the
SEA. Because a foreign SBS trading venue covered by a Rule 833(a)
exemption would not be registered as a national securities exchange,
the foreign SBS trading venue would not be permitted to effect SBS
transactions with or for a covered person that is not an ECP.
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\249\ 15 U.S.C. 78f(l).
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2. Exemptions Relating to the Trade Execution Requirement
Proposed Rule 833(b) would address requests for exemptive relief
relating to the application of the trade execution requirement under
section 3C(h) of the SEA to transactions executed on a foreign SBS
trading venue. Pursuant to section 3C(h) of the SEA, an SBS that is
subject to the trade execution requirement must be executed on an
exchange, on an SBSEF registered under section 3D of the SEA, or on an
SBSEF that is exempt from registration under section 3D(e) of the
SEA.\250\ As a result, a covered person (as defined in proposed Rule
832) would not be permitted to execute an SBS that is subject to the
trade execution requirement on a foreign SBS trading venue unless that
venue has registered with the Commission as a national securities
exchange or an SBSEF, or has received an exemption under section 3D(e)
of the SEA.
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\250\ Section 3D(e) of the SEA gives the Commission authority to
exempt an SBSEF from registration if it is subject to comparable,
comprehensive supervision and regulation by the CFTC. See 15 U.S.C.
78c-4(e).
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A covered person seeking to execute such an SBS on a foreign SBS
trading venue that does not fall within one of these categories could
request that the Commission grant an exemption from this requirement
under section 36(a)(1) of the SEA by submitting an application, as with
Rule 833(a), pursuant to SEA Rule 0-12. Proposed Rule 833(b)(1) would
provide that such an application, relating to the application of the
trade execution requirement to SBS executed on a foreign SBS trading
venue, may state that the application also is submitted pursuant to
proposed Rule 833(b).\251\ Proposed Rule 833(b) is intended to clarify
how interested parties could make requests for exemptive relief from
the trade execution requirement for SBS traded on one or more foreign
SBS trading venues.\252\
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\251\ For the remainder of this discussion, an exemption under
SEA section 36 and Rule 833(b) will be referred to simply as a
``Rule 833(b) exemption.''
\252\ An SBS can be subject to the SEA's trade execution
requirement only if it first becomes subject to the clearing
requirement in section 3C(h) of the SEA, 15 U.S.C. 78c-3(h). A Rule
833(b) exemption would not have any impact on this clearing
requirement, unless otherwise explicitly addressed in the exemption
order.
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To issue a Rule 833(b) exemption, like with any other section 36
exemption, the Commission would be required to find that the exemption
is necessary or appropriate in the public interest, and consistent with
the protection of investors. Furthermore, as contemplated by section
36(a)(1), the Commission may subject a Rule 833(b) exemption to any
conditions that it deems appropriate.
Proposed Rule 833(b)(2) would provide that, in considering whether
to issue a Rule 833(b) exemption, the Commission may consider: (i) The
extent to which the SBS traded in the foreign jurisdiction covered by
the request are subject to a trade execution requirement comparable to
that in section 3C(h) of the SEA and the Commission's rules thereunder;
(ii) the extent to which trading venues in the foreign jurisdiction
covered by the request are subject to regulation and supervision
comparable to that under the SEA, including section 3D of the SEA, and
the Commission's rules thereunder; (iii) whether the foreign trading
venue or venues where covered persons intend to trade SBS have received
an exemption order contemplated by proposed Rule 833(a); and (iv) any
other factor that the Commission believes is relevant for assessing
whether the exemption is in the public interest and consistent with the
protection of investors.
The first factor listed above is intended to highlight the
Commission's preliminary belief that, to grant an exemption from the
SEA's trade execution requirement to allow SBS subject to that
requirement to trade in a foreign jurisdiction on one or more venues
not registered with the Commission, there should be a comparable trade
execution requirement in that jurisdiction. As part of any analysis
regarding the comparability of the trade execution requirement, the
Commission could consider not only whether the relevant SBS must be
executed on a trading venue in the foreign jurisdiction, but also the
permissible execution means for mandatory trade execution in the
foreign jurisdiction. In general, the Commission preliminarily believes
that a trade execution requirement in a foreign jurisdiction would not
be comparable to the trade execution requirement under the SEA if the
foreign jurisdiction's rules did not require SBS products subject to
that requirement to be executed through means comparable to Required
Transactions as described in proposed Rule 815 (e.g., if the foreign
jurisdiction allowed the use of single-dealer platforms to discharge
any mandatory trading execution requirement in that jurisdiction).
Under the second factor listed above, the Commission could consider
whether the trading venues in the foreign jurisdiction are subject to
regulation and supervision comparable to that under the SEA, including
section 3D of the SEA and the Commission's rules thereunder. The
Commission preliminarily believes that the goals of Title VII regarding
trade execution \253\ could be subverted if it were to allow covered
persons to trade SBS subject to the SEA's trade execution requirement
on foreign trading venues that are not subject to rules designed to
foster comparable levels of pre- and post-trade transparency, access,
and liquidity.
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\253\ See supra notes 94-96 and accompanying text.
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The Commission also believes that it would be important to consider
whether the foreign trading venue or venues where covered persons
intend to trade SBS have received an exemption order contemplated by
proposed Rule 833(a). The fact that covered persons are executing SBS
on a foreign trading venue typically would require the venue to
register with the Commission as a national securities exchange or
SBSEF.\254\
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\254\ A request for an exemption under proposed Rule 833(a)
could be submitted at the same time--and by the same person(s)--as a
request for an exemption under proposed Rule 833(b). For example, a
financial regulatory authority in a foreign jurisdiction could
combine a request for an exemption under proposed Rule 833(a) on
behalf of one or more SBS trading venues licensed and regulated in
that jurisdiction with a request for an exemption under proposed
Rule 833(b) that would allow covered persons to trade on those
venues SBS that would, absent an exemption, be subject to the SEA's
trade execution requirement.
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Finally, the fourth factor listed above would emphasize that these
[[Page 28926]]
considerations are not exhaustive. The Commission may consider any
other factor that it believes is relevant for assessing whether the
Rule 833(b) exemption is in the public interest and consistent with the
protection of investors.
The Commission seeks comment on the following:
170. Do you believe in general that the Commission should establish
a rule for granting exemptions regarding a foreign SBS trading venue's
status under the SEA and mandatory trade execution of cross-border SBS
transactions? Why or why not?
171. Do you disagree with any of the specific language proposed in
Rule 833? If so, how would you revise it?
172. Do you expect that there are foreign SBS trading venues that
would seek an exemption under proposed Rule 833(a)? If so, how many?
173. Do you agree with the factors that the Commission is proposing
to consider for a Rule 833(b) exemption? Are there are any that you
would eliminate or revise? If so, which ones and why? Are there any
criteria that you believe should be added? If so, what and why?
174. Are there any conditions or limitations that should be
included in the rule? If so, what conditions or limitations would you
suggest, and why?
X. Rule 834--Implementation of Section 765 of the Dodd-Frank Act and
Governance of SBSEFs and SBS Exchanges
Section 765(a) of the Dodd-Frank Act \255\ provides in relevant
part that, to mitigate conflicts of interest, the Commission ``shall
adopt rules which may include numerical limits on the control of, or
the voting rights with respect to'' any clearing agency that clears
SBS, or on the control of any SBSEF or SBS exchange by certain bank
holding companies, certain nonbank financial companies, an affiliate of
such a bank holding company or nonbank financial company, an SBS
dealer, major SBS participant, or person associated with an SBS dealer
or major SBS participant. Section 765(b) states that the purpose of the
statutory provision is ``to improve the governance of, or to mitigate
systemic risk, promote competition, or mitigate conflicts of interest
in connection with'' an SBS dealer or major SBS participant's conduct
of business with, a clearing agency, SBSEF, or SBS exchange and in
which such SBS dealer or major SBS participant ``has a material debt or
equity investment.'' Finally, section 765(c) provides in relevant part
that, in adopting rules pursuant to section 765, the Commission shall
consider any conflicts of interest arising from the amount of equity
owned by a single investor, the ability to vote, cause the vote of, or
withhold votes entitled to be cast on any matters by the holders of the
ownership interest.
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\255\ 15 U.S.C. 8343.
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In 2010, the Commission proposed Regulation MC to implement section
765.\256\ In view of the significant amount of time that has elapsed
and the significant evolution in the swap and SBS markets since the
proposal of Regulation MC, the Commission hereby withdraws that
proposal. The Commission is now proposing Rule 834 of Regulation SE to
implement section 765 of the Dodd-Frank Act with respect to SBSEFs and
SBS exchanges.
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\256\ See Ownership Limitations and Governance Requirements for
Security-Based Swap Clearing Agencies, Security-Based Swap Execution
Facilities, and National Securities Exchanges With Respect to
Security-Based Swaps Under Regulation MC, SEA Release No. 63107
(October 14, 2010), 75 FR 65882 (October 26, 2010).
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The Commission, in accordance with section 765 of the Dodd-Frank
Act, has reviewed the potential for conflicts of interest arising from
an SBS dealer or major SBS participant having voting rights in an SBSEF
or SBS exchange in which it is a member. The Commission preliminarily
believes that, to satisfy the requirements of section 765, it is
appropriate to impose a cap on the size of the voting rights that an
individual member of an SBSEF or SBS exchange may own or direct.
Accordingly, paragraph (b) of proposed Rule 834 would bar an SBSEF or
SBS exchange from permitting any of its members, either alone or
together with any officer, principal, or employee of the member, to:
(1) Own, directly or indirectly, 20% or more of any class of voting
securities or of other voting interest in the SBSEF or SBS exchange; or
(2) Directly or indirectly vote, cause the voting of, or give any
consent or proxy with respect to the voting of, any interest that
exceeds 20% of the voting power of any class of securities or of other
ownership interest in the SBSEF or SBS exchange.
The 20% cap in proposed Rule 834(b) attempts to balance competing
policy interests. On the one hand, execution venues need capital,
expertise, and liquidity to establish and grow. Historically, market
participants who become members of an execution venue are a source of
all three components, and any person contributing capital to a new
venture might reasonably expect to have a voting interest commensurate
with the amount of capital contributed. The Commission considered
proposing a cap in voting interest below 20%, but preliminarily
believes that too low of a cap, even if imposed in the name of
eliminating conflicts of interest, could have the unintended effect of
retarding the development of execution venues for SBS altogether, if
market participants who become members have no (or substantially
limited) ability to vote their equity interest.
On the other hand, allowing a member of an SBSEF or SBS exchange
too large of a voting interest could undermine the public policy
benefits of having transparent, fair, and regulated markets for the
trading of SBS. A member of an SBSEF or SBS exchange with a
sufficiently large voting interest could exercise undue influence over
the rules and policies applicable to members, the venue's access
criteria, decisions regarding access, and disciplinary matters, among
other things. In particular, members who are SBS dealers and conduct a
significant amount of business in the bilateral OTC market have
incentives to restrict the scope of SBS that an SBSEF or SBS exchange
makes eligible for trading. Trading in a market with robust order
competition and pre-trade transparency reduces search costs for end
users and liquidity seekers, and reduces the information and bargaining
asymmetry of end users and liquidity seekers relative to SBS dealers.
An SBS dealer with a large voting interest in an SBSEF or SBS exchange,
if it perceived that trading on the regulated venue was diminishing the
rents obtained from its bilateral OTC business, might seek to utilize
its voting influence in a number of ways to degrade the capability of
the regulated venue, thus making the OTC market by comparison a more
attractive option.
The Commission preliminarily believes that capping a member's
voting interest at 20% strikes a reasonable balance between these
competing interests. It would allow a single member to make an
investment in an SBSEF or SBS exchange significant enough to give it a
20% voting interest, while reserving at least 80% to unrelated parties.
The Commission preliminarily believes that the 20% cap would still
afford an SBS dealer or major SBS participant that has made an
investment in an SBSEF or SBS exchange a reasonable commercial means of
monitoring and protecting that investment. But requiring 80% of the
voting power to reside with unrelated parties would reduce the
likelihood that the large member could tilt the playing
[[Page 28927]]
field in its favor. In proposing this 20% threshold in Rule 834, the
Commission is informed by long experience with handling questions of
member influence over national securities exchanges raised in
applications to register with the Commission on Form 1 and in
governance rule filings made on SEA Form 19b-4.\257\
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\257\ See SEA Release No. 49718 (May 17, 2004), 69 FR 29611,
29624 (May 24, 2004) (approving PCX limitation of trading permit
holder ownership to 20% and stating that ``a member who trades
securities through the facilities of an exchange can have an
ownership interest in the exchange. However, a member's interest
could become so large as to cast doubt on whether the exchange can
fairly and objectively exercise its self-regulatory responsibilities
with respect to that member. A member that also directly or
indirectly controls an exchange might be tempted to exercise that
controlling influence by directing the exchange to refrain from
diligently surveilling the member's conduct or from punishing any
conduct that violates the rules of the exchange or the Federal
securities laws. An exchange also might be reluctant to surveil and
enforce its rules zealously against a member that the exchange
relies on as its largest source of capital''). See also, e.g., SEA
Release No. 85828 (May 10, 2019), 84 FR 21841 (May 15, 2019)
(approving Long Term Stock Exchange's registration as a national
securities exchange with a 20% limit on LTSE ownership by members);
SEA Release No. 62716 (August 13, 2010), 75 FR 51295 (August 19,
2010) (approving BATS-Y Exchange's registration as a national
securities exchange with a 20% limit on exchange ownership by
members); SEA Release No. 49067 (January 13, 2004), 69 FR 2761
(January 20, 2004) (approving a voting collar on members that hold
interests in BOX in excess of 20%); SEA Release No. 54399 (September
1, 2006), 71 FR 53728 (September 12, 2006) (approving ISE's
limitation of a member's ownership interest to 20%).
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Proposed Rule 834(b) would cover both direct and indirect voting
interests. The 20% cap could be circumvented if, for example, a member
placed its voting interest in an SBSEF or SBS exchange of 20% or more
in a shell company or other affiliate and directed how the shell
company or affiliate casts those votes. Accordingly, proposed Rule
834(b) would look through the non-member entities holding interests in
SBSEFs and SBS exchanges to consider whether any member could
indirectly control 20% or more of the voting interest through the non-
member entity having the direct interest. Furthermore, proposed Rule
834(b) would look through the corporate structure of the SBSEF or SBS
exchange to consider whether any member could indirectly have 20% or
more of the voting interest in the underlying trading venue. For
example, an SBSEF or SBS exchange could be wholly owned by a holding
company. In such a case, the voting restriction in proposed Rule 834(b)
would apply to the voting interest in the parent holding company held
by a member of the child SBSEF or SBS exchange, since a direct voting
interest of 20% or more in the parent would equate to an indirect
voting interest of 20% or more in child trading venue.
Similar to its approach to indirect voting interest, proposed Rule
834(b) would aggregate the voting interest of the member itself with
the voting interest held by any officer, principal, or employee of the
member for purposes of determining compliance with the 20% cap. Without
this provision, the member--or an officer, principal, or employee of
the member--could split the voting interest held in the SBSEF or SBS
exchange across multiple persons who would likely be voting that
interest in concert.
Paragraph (c) of proposed Rule 834 would include requirements
designed to reinforce the 20% cap in paragraph (b). Paragraph (c) would
require the rules of each SBSEF and SBS exchange to be reasonably
designed, and have an effective mechanism, to:
(1) Deny effect to the portion of any voting interest held by a
member in excess of the 20% limitation;
(2) Compel a member who possesses a voting interest in excess of
the 20% limitation to divest enough of that voting interest to come
within that limit; and
(3) Obtain information relating to its ownership and voting
interests owned or controlled, directly or indirectly, by its members.
Under paragraph (c)(1) of proposed Rule 834, if a member of an
SBSEF or SBS exchange managed to evade the 20% voting restriction
(e.g., by disguising its voting interest through one or more shell
companies), the SBSEF or SBS exchange would be required to deny the
effect of any part of the vote in excess of the 20% restriction when
the evasion is discovered. This could, in close cases, cause the SBSEF
or SBS exchange to have to reverse the outcome of a vote because of the
invalidation of the part of the vote in excess of the 20% threshold. In
addition, the Commission preliminarily believes--as reflected in
paragraph (c)(2) of proposed Rule 834--that an SBSEF or SBS exchange
should, if it discovers that a member has managed to evade the 20%
voting restriction, compel the member to divest enough of that voting
interest to come within the 20% limit. Finally, the Commission
preliminarily believes--as reflected in paragraph (c)(3) of proposed
Rule 834--that an SBSEF or SBS exchange must have an effective means of
obtaining information about the ownership and voting interests owned or
controlled, directly or indirectly, by its members. Proposed Rule
834(c)(3) is designed to promote compliance with proposed Rule 834(b)
by requiring an SBSEF or SBS exchange to actively obtain information
about the ownership and voting interests owned or controlled, directly
or indirectly, by its members. The Commission preliminarily believes
that ignorance of a member holding a voting interest in excess of the
proposed 20% limitation should not excuse a violation of Rule 834(b).
Furthermore, the information obtained by an SBSEF or SBS exchange under
proposed Rule 834(c)(3) should assist with any remedial actions
necessary under proposed Rules 834(c)(1) and (c)(2).
Paragraph (d) of proposed Rule 834 is designed to mitigate
conflicts of interest in the disciplinary process of an SBSEF or SBS
exchange and would provide as follows: ``Each security-based swap
execution facility and SBS exchange shall ensure that its disciplinary
processes preclude any member, or group or class of its members, from
dominating or exercising disproportionate influence on the disciplinary
process. Each major disciplinary committee or hearing panel thereof
shall include sufficient different groups or classes of its members so
as to ensure fairness and to prevent special treatment or preference
for any person or member in the conduct of the responsibilities of the
committee or panel.'' Proposed Rule 834(d) recognizes that one way that
a conflict of interest could manifest itself is in the disciplinary
process. Therefore, the Commission is proposing, as the first sentence
of proposed Rule 834(d), that each SBSEF and SBS exchange should
``preclude any member, or group or class of its members, from
dominating or exercising disproportionate influence on the disciplinary
process.''
The second sentence of proposed Rule 834(d) is adapted from Sec.
1.64 of the CFTC's rules, which addresses the composition of various
SRO governing boards and major disciplinary committees.\258\ Section
1.64(c)(4) requires an SRO (which term, under the CEA, includes a SEF)
to maintain in effect rules that ``each major disciplinary committee or
hearing panel [of the SRO] include sufficient different membership
interests so as to ensure fairness and to prevent special treatment or
preference for any person in the conduct of a committee's or the
panel's
[[Page 28928]]
responsibilities.'' Proposed Rule 834(d) reflects the Commission's
preliminary belief that an SBSEF or SBS exchange should be mindful of
its different membership interests, and how they are represented on
disciplinary committees and hearing panels in particular matters, to
avoid potential conflicts of interest.
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\258\ Proposed Rule 834(a) would define ``major disciplinary
committee'' as a committee of persons who are authorized by an SBSEF
to conduct disciplinary hearings, to settle disciplinary charges, to
impose disciplinary sanctions, or to hear appeals thereof in cases
involving any violation of the rules of the SBSEF except those which
are related to decorum or attire, financial requirements, or
reporting or recordkeeping and do not involved fraud, deceit, or
conversion.
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To further implement section 765 and promote good governance
generally for SBSEFs and SBS exchanges, the Commission is proposing
additional requirements in Rule 834 that are closely modelled on
Sec. Sec. 1.64 and 1.69 of the CFTC's rules.
Section 1.64(b) requires an SRO to maintain in effect standards and
procedures that ensure that 20% or more of the regular voting members
of the SRO's governing board are persons who are knowledgeable of
futures trading or financial regulation or are otherwise capable of
contributing to governing board deliberations. Section 1.64(b) also
requires an SRO to maintain in effect standards and procedures that
ensure that 20% or more of the regular voting members of the governing
board are not: Members of the SRO; currently salaried employees of the
SRO; primarily performing services for the SRO in a capacity other than
as a member of the SRO's governing board; or officers, principals, or
employees of a firm which holds a membership at the SRO either in its
own name or through an employee on behalf of the firm.
Paragraph (e) of proposed Rule 834 is closely modelled on Sec.
1.64(b). Paragraph (e)(1)(i) would require each SBSEF and SBS exchange
to ensure that 20% or more of the persons who are eligible to vote
routinely on matters being considered by the governing board (excluding
those members who are eligible to vote only in the case of a tie vote
by the governing board) are persons who are knowledgeable of SBS
trading or financial regulation, or otherwise capable of contributing
to governing board deliberations. Paragraphs (e)(1)(ii) through (v) of
proposed Rule 834 are based on four of the prongs in Sec.
1.64(b)(1)(ii) which provide that 20% or more of the persons who are
eligible to vote routinely on matters being considered by the governing
board (excluding those members who are eligible to vote only in the
case of a tie vote by the governing board) must not be: Members of the
SBSEF or SBS exchange; \259\ salaried employees of the SBSEF or SBS
exchange; primarily performing services for the SBSEF or SBS exchange
in a capacity other than as a member of the governing board; or
officers, principals, or employees of a firm which holds a membership
at the SBSEF or SBS exchange, either in its own name or through an
employee on behalf of the firm.
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\259\ Proposed Rule 834(e)(1)(ii), read together with proposed
Rule 834(b), would have the effect of allowing four members of an
SBSEF or SBS exchange to control up to 80% of the voting interest
(assuming that each of the four holds 20%). Under proposed Rule
834(e)(1)(ii), at least 20% of the voting interest would have to be
held by non-members.
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Paragraph (e)(2) of proposed Rule 834, modelled on Sec.
1.64(b)(3), would require each SBSEF and SBS exchange to ensure that
membership of its governing board includes a diversity of groups or
classes of its members.\260\
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\260\ Section 1.64(b)(3) provides in relevant part that the
governing board of an SRO must include ``a diversity of membership
interests.'' Section 1.64(a)(4) provides a definition of
``membership interest'' that lists six classes of members, each of
which is considered a different membership interest. Many of these
specifically enumerated classes--e.g., ``floor traders,'' ``floor
brokers,'' ``futures commission merchants,'' ``producers, consumers,
processors, distributors, and merchandisers of commodities traded on
the particular contract market''--might not be relevant to SBSEFs
and SBS exchanges. Rather than crafting its own definition of
``membership interest,'' the Commission is opting for a principles-
based approach to incorporating Sec. 1.64(b)(3) into Rule 834, by
proposing that an SBSEF or SBS exchange must be able to demonstrate
that the board membership fairly represents the diversity of
interests at such SBSEF or SBS exchange. See proposed Rule
834(e)(2).
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The Commission is not adapting the detailed provisions of Sec.
1.64(c) into proposed Rule 834. However, the key principle of Sec.
1.64(c)--that each major disciplinary committee or hearing panel should
include sufficient different membership interests so as to ensure
fairness and to prevent special treatment or preference in the conduct
of the committee's or panel's responsibilities, which is located in
paragraph Sec. 1.64(c)--is being adapted into proposed Rule 834(d), as
discussed above.
Paragraph (f) of proposed Rule 834 is based closely on Sec.
1.64(d) and would require each SBSEF and SBS exchange to submit to the
Commission, within 30 days after each governing board election, a list
of the governing board's members, the groups or classes of members that
they represent, and how the composition of the governing board
otherwise meets the requirements of Rule 834. This provision would
provide the Commission information to help it assess an SBSEF's
compliance with Rule 834.
Paragraph (g) of proposed Rule 834 is modelled on Sec. 1.69, which
requires an SRO to further address the avoidance of conflicts of
interest in the execution of its self-regulatory functions. Section
1.69(b)(1)(i) requires an SRO to maintain in effect rules that require
a member of its governing board, disciplinary committee, or oversight
panel to abstain from such body's deliberations and voting on any
matter involving a named party in interest, where such member: Is a
named party in interest; is an employer, employee, or fellow employee
of a named party in interest; is associated with a named party in
interest through a ``broker association''; has any other significant,
ongoing business relationship with a named party in interest; or has a
family relationship \261\ with a named party in interest.
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\261\ See proposed Rule 834(a) (defining ``family relationship''
of a person to be person's spouse, former spouse, parent, step-
parent, child, step-child, sibling, step-brother, step-sister,
grandparent, grandchild, uncle, aunt, nephew, niece, or in-law). The
Commission's proposed definition is adapted from the CFTC's
definition of ``family relationship'' in Sec. 1.69(a)(2).
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Section 1.69(b)(1)(ii) requires an SRO to maintain in effect rules
that require each member of its governing board, disciplinary
committee, or oversight panel to disclose to the appropriate SRO staff,
before consideration of any matter involving a named party in interest,
whether the member has one of the relationships listed in Sec.
1.69(b)(1)(i) with a named party in interest. Section 1.69(b)(1)(iii)
requires the SRO to establish procedures for determining whether a
member of its governing board, disciplinary committees, or oversight
committees is subject to a conflicts restriction in any matter
involving a named party in interest.\262\
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\262\ Proposed Rule 834(a) would define ``named party in
interest'' as a person or entity that is identified by name as a
subject of any matter being considered by a governing board,
disciplinary committee, or oversight panel.
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Section 1.69(b)(2)(i) requires a member of the SRO's governing
board, disciplinary committee, or oversight committee to abstain from
such body's deliberations and voting on any significant action, if the
member knowingly has a direct and substantial financial interest in the
result of the vote based upon either exchange or non-exchange positions
that could reasonably be expected to be affected by the action. Section
1.69(b)(2)(ii) requires a member of the SRO's governing board,
disciplinary committee, or oversight committee, before consideration of
any significant action, to disclose to the appropriate SRO staff that
position information, although this requirement does not apply to
members who choose to abstain from deliberations and voting on the
subject significant action. Section 1.69(b)(2)(iii) requires an SRO to
establish procedures for determining whether any member of its
governing
[[Page 28929]]
board, disciplinary committees, or oversight committees is subject to a
conflicts restriction under Sec. 1.69 in any significant action. Such
determination is required to include a review of various types of
positions enumerated in the rule, including: ``Any other types of
positions, whether maintained at that self-regulatory organization or
elsewhere, held in the member's personal accounts or the proprietary
accounts of the member's affiliated firm that the self-regulatory
organization reasonably expects could be affected by the significant
action.'' Section 1.69(b)(2)(iv) sets out the sources that the SRO
should review in determining a member's positions, including a catch-
all provision in paragraph (b)(2)(iv)(C) for ``[a]ny other source of
information that is held by and reasonably available to the self-
regulatory organization.''
Section 1.69(b)(3)(i) provides that an SRO governing board,
disciplinary committee, or oversight panel may permit a member to
participate in deliberations prior to a vote on a significant action
for which that member otherwise would be required to abstain, if such
participation would be consistent with the public interest and the
member recuses from voting on such action. Section 1.69(b)(3)(ii)
requires the deliberating body, when determining whether to permit the
exception contemplated in paragraph (b)(3)(i), to consider whether the
member's participation in deliberations is necessary for the
deliberating body to achieve a quorum in the matter; and whether the
member has unique or special expertise, knowledge, or experience in the
matter under consideration. Section 1.69(b)(3)(iii) requires the
deliberating body also to consider, when determining whether to permit
an exception to ``fully consider the position information which is the
basis for the member's direct and substantial financial interest in the
result of a vote on a significant action.''
Section 1.69(b)(4) requires an SRO's governing board, disciplinary
committees, and oversight panels to reflect in their minutes or
otherwise document that the conflicts determination procedures required
under Sec. 1.69 have been followed. Such records also must include:
The names of all members who attended the meeting in person or who
otherwise were present by electronic means; the name of any member who
voluntarily recused himself or herself or was required to abstain from
deliberations and/or voting on a matter and the reason for the recusal
or abstention, if stated; and information on the position information
that was reviewed for each member.
Proposed Rule 834(g) closely follows the paragraph structure and
language of Sec. 1.69, with a few minor exceptions (beyond modifying
the rule's application to SBSEFs and SBS exchanges, rather than, in the
CFTC original, all SROs). First, paragraph (g)(1)(i)(A) of proposed
Rule 834 is based closely on Sec. 1.69(b)(1)(i) and would set out the
types of relationships with the named party of interest that would
create a conflict of interest for a member of the governing board,
disciplinary committee, or oversight panel. Paragraph (g)(1)(i)(A),
however, would incorporate only four of the five prongs in Sec.
1.69(b)(1)(i).\263\ Second, Sec. 1.69(b)(2)(iii) sets out five types
of financial positions that could be held by a member of the governing
board, disciplinary committee, or oversight panel that an SRO must
review to ascertain if there is a conflicts restriction in a
significant action. Proposed Rule 834(g)(1)(ii)(C) is a simplified
version of Sec. 1.69(b)(2)(iii); it would not include the five prongs
set forth in Sec. 1.69(b)(2)(iii), but rather would incorporate only
the final, catch-all prong (``Such determination must include a review
of any positions, whether maintained at that security-based swap
execution facility, SBS exchange, or elsewhere, held in the member's
personal accounts or the proprietary accounts of the member's
affiliated firm \264\ that the security-based swap execution facility
or SBS exchange reasonably expects could be affected by the significant
action'').\265\ Third, proposed Rule 834(g)(1)(ii)(C) would omit a
requirement in Sec. 1.69(b)(2)(iv) that an SRO, when making a
determination of whether a conflict of interest exists, must take into
consideration ``[t]he most recent large trader reports and clearing
records available to the self-regulatory organization.'' These types of
reports may not be as prevalent in the securities and SBS markets as
the swaps markets. The Commission believes that the final, catch-all
prong in Sec. 1.69(b)(2)(iv)--``Any other source of information that
is held by and reasonably available to the self-regulatory
organization''--would suffice, and is proposing it as Rule
834(g)(1)(ii)(C)(2).
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\263\ The Commission is not proposing to include a prong about
being associated with a named party of interest through a ``broker
association,'' as defined in Sec. 156.1 of the CFTC's rules, as
that concept does not exist under the SEA.
\264\ Proposed Rule 834(a) would define a ``member's affiliated
firm'' as a firm in which the member is a principal or an employee.
\265\ Proposed Rule 834(a) would define ``significant action''
to include several types of actions or rule changes by an SBSEF or
SBS exchange that could be implemented without the Commission's
prior approval related to addressing an emergency and certain
changes in margin levels.
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Proposed Rule 834(h) would require each SBSEF and SBS exchange to
maintain in effect various rules that would be required under proposed
Rule 834. An SBSEF would be required to file such rules under proposed
Rule 806 or 807 of Regulation SE; an SBS exchange would be required to
file such rules under existing SEA Rule 19b-4.\266\ Proposed Rule
834(h) is loosely modelled on various provisions in Sec. Sec. 1.64 and
1.69 providing that the SRO rules required under those CFTC rules must
be filed with the CFTC pursuant to relevant provisions of the CEA and
the CFTC's rules thereunder.
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\266\ 17 CFR 240.19b-4.
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The Commission preliminarily believes that Sec. Sec. 1.64 and 1.69
are reasonably designed to promote good governance of trading venues
and is therefore proposing to adapt them into Rule 834. These CFTC
rules identify various instances of potential conflicts of interest
that might involve a member of the governing board or an important
committee of a SEF, and require proactive measures to address those
conflicts. The Commission preliminarily believes that SBSEFs and SBS
exchanges should have the same types of rules because the same types of
conflicts that arise with SEFs could arise with SBS trading venues.
Furthermore, various provisions of Sec. Sec. 1.64 and 1.69 would
further the policy goals of section 765 of the Dodd-Frank Act. For
example, proposed Rule 834(e)(1)(ii), modelled on Sec.
1.64(b)(1)(ii)(A), would require that at least 20% of the regular
voting members of the governing board of an SBSEF or SBS exchange not
be members, and proposed Rule 834(e)(1)(v), which is modelled on Sec.
1.64(b)(1)(ii)(D), would require that at least 20% of the regular
voting members of the governing board not be persons affiliated with
members. These requirements, by reserving at least 20% of the governing
board's seats for persons not associated with any member of an SBSEF or
SBS exchange, would reduce the possibility that a combination of
members who are SBS dealers or major SBS participants could create a
conflict of interest for the SBSEF or SBS exchange.
In addition, proposed Rule 834(d), which incorporates language from
Sec. 1.64(c), would require each major disciplinary committee or
hearing panel thereof to include sufficient different groups or classes
of its members so as to ensure fairness and to prevent special
treatment or preference for any person or member. The Commission
[[Page 28930]]
preliminarily believes that it is appropriate to impose such a
requirement on SBSEFs and SBS exchanges to further lessen the potential
for members of an SBSEF or SBS exchange who are SBS dealers or major
SBS participants from benefitting from a conflict of interest.
Furthermore, proposed Rule 834(e), which is modelled on Sec. 1.64(d),
would require an SBSEF or SBS exchange to submit to the Commission,
within 30 days after each governing board election, a list of the
governing board's members, the groups or classes of members that they
represent, and how the composition of the governing board otherwise
meets the requirements of Rule 834. Proposed Rule 834(e) is designed to
reinforce the other requirements of the rule by causing each SBSEF and
SBS exchange to actively consider how the composition of its governing
board comports with Rule 834, and to make an accurate representation to
the Commission regarding such compliance.
The Commission preliminarily believes that Sec. 1.69 also includes
provisions that would further the policy goals of section 765 and is,
therefore, proposing to adapt them into Rule 834. Under proposed Rule
834(b), an SBSEF or SBS exchange generally may not permit any member to
hold 20% or more of the voting interest in that trading venue. Nothing
in proposed Rule 834, however, would prohibit a member--including an
SBS dealer or major SBS participant (or a person associated with such a
member, such as a firm principal)--from serving on a governing board,
disciplinary committee, or oversight panel of an SBSEF or SBS exchange.
Section 1.69 is designed to address various types of conflicts of
interest that might involve members of a governing board, disciplinary
committee, or oversight panel. For example, Sec. 1.69 specifies when a
member must abstain from the body's deliberations and voting because
the member has a relationship to the named party in interest or because
the member has ``a direct and substantial financial interest in the
result of the vote.'' Furthermore, Sec. 1.69 requires a member to
disclose its relationships to a named party in interest and provide
position information to the SRO so that the SRO can assess whether the
member has a conflict, and also requires the SRO to follow its own
procedures for determining whether a conflict exists. Because these
provisions further the goals of section 765--to mitigate conflicts of
interest created by an SBS dealer or major SBS participant that holds
an interest in an SBSEF or SBS exchange--and because they are
reasonably designed to promote good governance more generally, the
Commission is proposing to incorporate them into Rule 834.
The Commission recognizes that promulgating rules under section 765
alone will not result in a highly competitive market for SBS. There
could be other ways for anticompetitive forces to impede the growth of
SBS trading on transparent, regulated platforms other than by misuse of
a large voting interest in the trading venue. For example, a large SBS
dealer or coalition of SBS dealers, even absent any voting interest in
any SBSEF or SBS exchange, could threaten to move their business
elsewhere unless given an unfair advantage by the trading venue. A
large SBS dealer or coalition of SBS dealers also could conspire to
shut out end users who sought to trade more actively on these
transparent, regulated venues rather than continuing to trade in the
bilateral OTC markets. The Commission will be alert to any such
anticompetitive practices and consider appropriate prophylactic
measures. At present, the Commission believes that adopting rules under
section 765 is a necessary and appropriate first step to guard against
conflicts of interest arising on SBSEFs and SBS exchanges.
The Commission seeks comment on the following:
175. In general, do you agree with how the Commission is proposing
to implement section 765 of the Dodd-Frank Act? Why or why not?
176. In particular, do you believe that the 20% ownership cap in
proposed Rule 834(b) is appropriate? Why or why not? Do you believe
that a different numerical threshold would be appropriate? If so, what
numerical threshold and why?
177. Do you believe that there are other means (such as ownership
of non-voting equity, holding a sizeable amount of the debt issuance,
etc.) by which an SBS dealer or major SBS participant could exercise an
undue influence over an SBSEF or SBS exchange of which it is a member?
If so, please discuss whether and how these other means should be
incorporated into Rule 834.
178. Do you believe that proposed Rule 834(b) is sufficiently clear
about when a member would be deemed to have an indirect 20% voting
interest in an SBSEF or SBS exchange? If not, please provide other
scenarios where you believe the Commission should offer clarification.
179. Do you agree in general with the Commission's proposal to
adapt the major provisions of Sec. 1.64 into Rule 834? Why or why not?
180. Are there provisions of Sec. 1.64 that the Commission has
incorporated into proposed Rule 834 that you think inappropriate? If
so, what provisions and why?
181. Conversely, are there provisions of Sec. 1.64 that the
Commission has not incorporated into proposed Rule 834 that you think
should be incorporated? If so, what provisions and why? Specifically,
do you believe that the Commission should incorporate a definition of
``membership interest''--as the CFTC does in Sec. 1.64(a)(4)--to more
precisely delineate the different interests that an SBSEF or SBS
exchange should take into account?
182. Do you agree in general with the Commission's proposal to
incorporate the major provisions of Sec. 1.69 into Rule 834? Why or
why not?
183. Are there provisions of Sec. 1.69 that the Commission has
incorporated into proposed Rule 834 that you think inappropriate? If
so, what provisions and why?
184. Do you believe generally that the same rules for mitigating
conflicts of interest should apply to both SBSEFs and SBS exchanges, or
should different restrictions apply to each type of trading venue? If
you believe different restrictions should apply, please explain why and
what different restrictions you believe should be incorporated into
Rule 834?
185. Are there any proposed requirements in Rule 834 that existing
national securities exchanges, which could in the future elect to list
SBS and thereby become SBS exchanges, would find difficult to comply
with? Would any of the requirements proposed in Rule 834 conflict with
their existing rules? If so, please describe.
186. Are there other types of conflict of interest that SBS dealers
and major SBS participants might enjoy as members of an SBSEF or SBS
exchange? If so, discuss how any such conflict could be addressed via
Commission rulemaking.
187. Do you believe that SBS dealers and major SBS participants can
exercise anticompetitive influence over one or more SBSEFs or SBS
exchanges even if not members of those trading venues? If so, what
additional measures would you recommend to combat that anticompetitive
influence?
XI. Rule 835--Notice to Commission by SBSEF of Final Disciplinary
Action, Denial or Conditioning of Membership, or Denial or Limitation
of Access
The Commission is also proposing new Rule 835 to require an SBSEF
to provide the Commission notice of a final disciplinary action, a
final action
[[Page 28931]]
with respect to a denial or conditioning of membership, or a final
action with respect to a denial or limitation of access. Such notice is
designed to ensure that the Commission is kept aware of significant
disciplinary actions, denials or conditionings of membership, or
denials or limitations on access by SBSEFs that could be the subject of
an aggrieved person's request for review by the Commission. The
requirement to provide notice to the Commission also would obligate an
SBSEF to be cognizant of, and make records for, each such instance, and
such records would become a necessary part of the record should the
aggrieved person seek Commission review of the SBSEF's action.
Specifically, paragraph (a) of proposed Rule 835 would provide
that, if an SBSEF issues a final disciplinary action against a member,
or takes a final action with respect to a denial or conditioning of
membership, or a final action with respect to a denial or limitation of
access of a person to any services offered by the SBSEF, the SBSEF
shall file a notice of such action with the Commission within 30 days
and serve a copy on the affected person. Proposed Rule 835(a) uses the
phrase ``final disciplinary action against a member'' (emphasis added)
because an SBSEF may utilize its disciplinary authority under Core
Principle 2 (Compliance with Rules) in section 3D of the SEA \267\ only
with respect to its members; but uses the phrase ``denies or limits
access of a person'' (emphasis added) because the person whose access
is denied or limited might not be a member. For example, a person that
is denied membership by an SBSEF would fall under this category.
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\267\ 15 U.S.C. 78c-4(d)(2).
---------------------------------------------------------------------------
Paragraph (b)(1) of proposed Rule 835 would provide that, for
purposes of paragraph (a), a disciplinary action would not be
considered final unless: (1) The affected person has sought an
adjudication or hearing with respect to the matter, or otherwise
exhausted their administrative remedies at the SBSEF; and (2) the
disciplinary action is not a summary action permitted under proposed
Rule 819(g)(13)(ii).\268\ In addition, paragraph (b)(2) of proposed
Rule 835 would provide that, for purposes of paragraph (a), a
disposition of a matter with respect to a denial or conditioning of
membership, or a denial or limitation of access, would not be
considered final unless such person has sought an adjudication or
hearing, or otherwise exhausted their administrative remedies at the
SBSEF with respect to such matter. The Commission preliminarily
believes that it is appropriate to exclude disciplinary actions that
are summary actions under an SBSEF's summary fine schedule \269\
because the Commission expects such summary actions, if applicable, to
comprise lesser disciplinary actions that do not warrant appeal. The
CFTC has parallel procedures relating to review of SEF disciplinary
actions also excludes summary actions under an SEF's summary fine
schedule.\270\
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\268\ As discussed above, see supra section VIII(B)(1), proposed
Rule 819(g)(13)(ii) would permit an SBSEF to adopt a summary fine
schedule for violations of rules relating to the failure to timely
submit accurate records required for clearing or verifying each
day's transactions, which may be summarily imposed against persons
within the SBSEF's jurisdiction for violating such rules.
Furthermore, an SBSEF's summary fine schedule could allow for
warning letters to be issued for first-time violations or violators.
If adopted, a summary fine schedule would be required by proposed
Rule 819(g)(13)(ii) to provide for progressively larger fines for
recurring violations.
\269\ A summary fine schedule, if an SBSEF elects to adopt one,
would have to be part of the SBSEF's rules, and thus would need to
be submitted to the Commission. See proposed Rule 819(g)(13)(ii).
\270\ See 17 CFR 9.1(b)(2).
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Paragraph (c) of proposed Rule 835 would provide that the notice
required under Rule 835(a) must include the name of the member or the
associated person and last known address, as reflected in the SBSEF's
records, of the member or associated person, as well as the name of the
person, committee, or other organizational unit of the SBSEF that
initiated the disciplinary action or access restriction. In the case of
a final disciplinary action, the notice would be required to include a
description of the acts or practices, or omissions to act, upon which
the sanction is based, including, as appropriate, the specific rules
that the SBSEF has found to have been violated; a statement describing
the respondent's answer to the charges; and a statement of the sanction
imposed and the reasons for such sanction. In the case of a denial or
conditioning of membership or a denial or limitation of access, the
notice would be required to include: The financial or operating
difficulty of the prospective member or member (as the case may be)
upon which the SBSEF determined that the prospective member or member
could not be permitted to do, or continue to do, business with safety
to investors, creditors, other members, or the SBSEF; the pertinent
failure to meet qualification requirements or other prerequisites for
membership or access and the basis upon which the SBSEF determined that
the person concerned could not be permitted to have membership or
access with safety to investors, creditors, other members, or the
SBSEF; or the default of any delivery of funds or securities to a
clearing agency by the member. Finally, the notice must include the
effective date of such final disciplinary action, denials or
conditioning of membership, or denial or limitation of access, as well
as any other information that the SBSEF may deem relevant.
The Commission seeks comment on the following:
188. Do you agree with the proposed definition of ``final
disciplinary action'' in proposed Rule 835? Why or why not? If not, how
would you revise the definition? Do you think it would be appropriate
to exclude disciplinary actions that are summary actions under an
SBSEF's summary fine schedule from such definition? Why or why not?
189. Do you agree with how the proposed rules and rule amendments
address when an aggrieved party may seek Commission review of a denial
or conditioning of membership, or a denial or limitation of access? Why
or why not? If not, how would you revise those provisions?
190. In particular, do the proposed rules contain sufficient detail
to address all types of denials or conditionings of membership or
denials or limitations on access? Are there particular scenarios that
commenters believe the Commission should address in Rule 835? If so,
please describe in detail.
191. Are the contents of the required notice to the Commission in
proposed Rule 835 appropriate? Do you believe these would provide the
Commission with enough detail regarding final disciplinary actions,
denials or conditionings of membership, and denials or limitations on
access? If not, what other information should be required in the
notice?
XII. Amendments to Existing Rule 3a1-1 Under the SEA--Exemptions From
the Definition of ``Exchange''
An entity that meets the definition of ``security-based swap
execution facility'' also would likely meet the definition of
``exchange'' set forth in section 3(a)(1) of the SEA \271\ and the
interpretation of that definition set forth in Rule 3b-16
thereunder.\272\ Thus, absent an exemption, an entity needing to
register with the Commission as an SBSEF also would likely need to
register with the
[[Page 28932]]
Commission as a national securities exchange.\273\ The Commission
previously has stated that it ``believes that Congress specifically
provided a comprehensive regulatory framework for SBSEFs in the [SEA],
as amended by the Dodd Frank Act, and therefore that such entities that
are registered as SBSEFs should not also be required to register and be
regulated as national securities exchanges.'' \274\
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\271\ 15 U.S.C. 78c(a)(1).
\272\ 17 CFR 240.3b-16 (providing that an entity generally is
considered to meet the definition of ``exchange'' if it brings
together the orders for securities of multiple buyers and sellers
and uses established, non-discretionary methods--whether by
providing a trading facility or by setting rules--under which such
orders interact with each other, and the buyers and sellers entering
such orders agree to the terms of a trade).
\273\ See section 3D(a)(1) of the SEA, 15 U.S.C. 78c-4(a)(1)
(``No person may operate a facility for the trading or processing of
security-based swaps, unless the facility is registered as a
security-based swap execution facility or as a national securities
exchange under this section'').
\274\ 2011 SBSEF Proposal, 76 FR at 10958.
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Therefore, the Commission is proposing to exercise its authority
under section 36(a)(1) of the SEA \275\ to exempt an SBSEF from the
definition of ``exchange''--and thus the obligation to register as a
national securities exchange--if it provides a market place solely for
the trading of SBS (and no other securities) and has registered with
the Commission as an SBSEF. To effect this exemption, the Commission is
proposing to amend Rule 3a1-1 under the SEA \276\ by adding new
paragraph (a)(4).\277\
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\275\ 15 U.S.C. 78mm(a)(1).
\276\ 17 CFR 240.3a1-1.
\277\ The amended rule would provide that an organization,
association, or group of persons shall be exempt from the definition
of the term ``exchange'' if such organization, association, or group
of persons has registered with the Commission as an SBSEF pursuant
to Rule 803 and provides a market place for no securities other than
SBS.
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The proposed amendment provides that an entity that has registered
with the Commission as an SBSEF pursuant to proposed Rule 803 and
provides a market place for no securities other than SBS would not fall
within the definition of ``exchange,'' and thus would not be subject to
the requirement in section 5 of the SEA to register as a national
securities exchange or obtain a low-volume exemption. Section 5 also
provides that a broker or dealer may not ``us[e] any facility of an
exchange within or subject to the jurisdiction of the United States to
effect any transaction in a security, or to report any such
transaction, unless such exchange (1) is registered as a national
securities exchange . . . or (2) is exempted from such registration . .
. by reason of the limited volume of transactions effected on such
exchange.'' Brokers and dealers who are members of a registered SBSEF
would not be in violation of section 5 by effecting or reporting any
SBS transactions on that SBSEF, because an SBSEF that qualifies for the
exemption under proposed Rule 3a1-1(a)(4) would not be an exchange
within the meaning of section 5.
In addition, the Commission is proposing a new paragraph (a)(5) to
existing Rule 3a1-1 under the SEA which would provide that an
organization, association, or group of persons shall be exempt from the
definition of the term ``exchange'' if such organization, association,
or group of persons has registered with the Commission as a clearing
agency pursuant to section 17A of the SEA and limits its exchange
functions to operation of a trading session that is designed to further
the accuracy of end-of-day valuations. As noted above, this provision
would codify a series of exemptions that the Commission has granted
over several years to SBS clearing agencies that operate ``forced
trading'' sessions.\278\ As part of the clearing and risk management
processes, an SBS clearing agency must establish an end-of-day
valuation for any SBS in which any of its members has a cleared
position. Certain SBS clearing agencies utilize a valuation mechanism
whereby they require clearing members to submit indicative quotes for
those SBS products, and can require them to trade as a way to promote
accurate submissions. The precise means by which the clearing agency
matches quotes from different clearing members could cause the clearing
agency to fall within the definition of ``exchange'' in section 3(a)(1)
of the SEA. The Commission previously has found that it was necessary
or appropriate in the public interest and consistent with the
protection of investors to exempt clearing agencies that engage in this
activity from the definition of ``exchange.'' \279\ The Commission is
now proposing to codify this exemption. This exemption would cover only
the forced-trading session of an SBS clearing agency; any other
exchange activity that a clearing agency might engage in could remain
subject to the SEA provisions and the Commission's rules thereunder
applying to exchanges.
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\278\ See supra note 37.
\279\ See id.
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Finally, the Commission is proposing to amend the introductory
language of existing paragraph (b) of Rule 3a1-1, which states:
``Notwithstanding paragraph (a) of this rule, an organization,
association, or group of persons shall not be exempt under this rule
from the definition of `exchange' if . . .'' Paragraph (b) then sets
out procedural and substantive criteria for the Commission to retract
an exemption under paragraph (a) of Rule 3a1-1 if an exchange's share
of the market in any one of the specified classes of securities exceeds
a defined threshold. The Commission is proposing to amend the
introductory language of paragraph (b) of Rule 3a1-1 to cover only
paragraphs (a)(1) through (3), not paragraph (a) as a whole.
The changed language is designed to clarify that the retraction
provisions would not apply to organizations, associations, or groups of
persons who fall within proposed Rule 3a1-1(a)(4) or (a)(5). Thus, even
if a registered SBSEF were to grow very large, Rule 3a1-1(b), as
proposed to be amended, would not afford a basis for the Commission to
retract an SBSEF's exemption from the definition of ``exchange'' under
proposed Rule 3a1-1(a)(4), which would force the SBSEF to register as a
national securities exchange (to avoid being a registered exchange).
The Commission preliminarily believes that, in adopting section 3D of
the SEA, Congress gave the Commission a mechanism to regulate SBSEFs of
any size. Nothing in section 3D suggests that, if an SBSEF were to grow
above a certain size, the Commission should be able to withdraw that
entity's ability to operate as an SBSEF and instead compel it to
register as a national securities exchange.
Finally, the Commission preliminarily believes that it is not
necessary to apply the retraction provisions in Rule 3a1-1(b) to
registered clearing agencies that engage in forced trading sessions and
are covered by proposed Rule 3a1-1(a)(5). SBS transactions effected
using this functionality are designed to facilitate the clearance and
settlement process by rendering more accurate the daily valuation that
is used to calculate margin requirements. The entities that utilize
this functionality are already registered with the Commission--as
clearing agencies--and carry out these operations under rules that have
been approved by the Commission. This trading functionality is not
effected for the purpose of conducting open-market transactions between
parties who are seeking to increase or decrease their positions for
investment or hedging purposes. Therefore, the Commission preliminarily
believes that it would not be appropriate to apply the retraction
provisions of Rule 3a1-1(b) to clearing agencies that would be covered
by proposed Rule 3a1-1(a)(5), as this would force these clearing
agencies also to register as national securities exchanges.
The Commission seeks comment on the following:
192. Do you agree in general with the Commission's proposal to
exempt from
[[Page 28933]]
the statutory definition of ``exchange'' any registered SBSEF that
provides a market place for no securities other than SBS and any SBS
clearing agency that engages in forced trading sessions? Why or why
not?
193. Do you agree with the particular language of proposed
paragraphs (a)(4) and (a)(5) of Rule 3a1-1? If not, how would you amend
the language?
194. Do you agree with the Commission's preliminary view, reflected
in the proposed new introductory language to paragraph (b) of Rule 3a1-
1, that entities qualifying for an exemption from the definition of
``exchange'' under proposed paragraphs (a)(4) and (a)(5) of Rule 3a1-1
should not be subject to the retraction provisions of Rule 3a1-1(b)?
Why or why not?
XIII. Rule 15a-12--SBSEFs as Registered Brokers; Relief From Certain
Broker Requirements
An SBSEF, by facilitating the execution of SBS between persons,
also is engaged in the business of effecting transactions in securities
for the account of others and therefore meets the SEA definition of
``broker.'' \280\ Absent an exception or exemption, an SBSEF--in
addition to being subject to the registration and regulatory
requirements for SBSEFs--also would be required to register with the
Commission as a broker pursuant to sections 15(a) and 15(b) of the SEA
\281\ and would be subject to all regulatory requirements applicable to
brokers.\282\ For example, brokers and dealers must comply with a
number of rules that govern their conduct, including those relating to
customer confirmations and disclosure of credit terms in margin
transactions.\283\
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\280\ See section 3(a)(4) of the SEA, 15 U.S.C. 78c(a)(4).
\281\ 15 U.S.C. 78o(a) and 78o(b). Section 15(a)(1) generally
provides that, absent an exception or exemption, a broker or dealer
that uses the mails or any means of interstate commerce to effect
transactions in, or to induce or attempt to induce the purchase or
sale of, any security must register with the Commission. Section
15(b) generally provides the manner of registration of brokers and
dealers and other requirements applicable to registered brokers and
dealers.
\282\ As discussed in note 43 supra, a person that is acting as
a broker solely because it is acting as an SBSEF is currently exempt
from the requirement to register with the Commission as a broker and
the Commission's rules under the SEA that apply to brokers. This
exemption will expire upon the compliance date for the Commission's
final SBSEF rules.
\283\ See 17 CFR 240.10b-10 and 240.10b-16.
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The Commission is proposing a new Rule 15a-12 under the SEA that
would deem registration with the Commission as an SBSEF also to
constitute registration as a broker, and would exempt a registered
SBSEF from many broker requirements in light of the SBSEF regulatory
regime to which it would also be subject.
One statutory provision from which a registered SBSEF would be
exempted is section 17(a) of the SEA,\284\ which requires a registered
broker (among other types of registered entity) to make and keep
records as prescribed by Commission rule. Because SBSEFs are required
to make and keep records as prescribed by Commission rule under section
3D(d)(9) of the SEA, imposing section 17(a) on SBSEFs would be
redundant. By contrast, one statutory provision that would continue to
apply to registered SBSEFs in their dual capacity as registered brokers
would be section 17(b) of the SEA.\285\
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\284\ 15 U.S.C. 78q(a).
\285\ 15 U.S.C. 78q(b) (providing that the records of registered
brokers, among other types of registered entity, are subject to
examination by representatives of the Commission).
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In addition, under section 15(b)(8) of the SEA, it is unlawful for
any registered broker or dealer to effect transactions in securities
unless it is a member of an SRO.\286\ Brokers and dealers also must
comply with a number of financial responsibility regulations, such as
the net capital and customer protection rules.\287\ A registered broker
or dealer also must make and keep current books and records relating to
its business and detailing, among other things, securities
transactions, money balances, and securities positions; keep records
for required periods and furnish copies of those records to the
Commission on request; and file certain financial reports with the
Commission.\288\
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\286\ See 15 U.S.C. 78o(b)(8) and 240.15b9-1.
\287\ See 17 CFR 240.15c3-1 and 240.15c3-3.
\288\ See 17 CFR 240.17a-3, 240.17a-4, and 240.17a-5.
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The Commission preliminarily believes that Congress did not intend
to subject SBSEFs that act only as SBSEFs to a dual regulatory
regime.\289\ Therefore, using its authority under section 36(a)(1) of
the SEA and its authority to establish procedures regarding the
registration of brokers, the Commission is proposing new Rule 15a-12
under the SEA that would allow an SBSEF that is a broker, solely due to
its activity with respect to SBS executed on or through the SBSEF, to
satisfy the requirement to register as a broker by registering as an
SBSEF.\290\ Proposed Rule 15a-12(b) would provide that such an entity,
if it registered as an SBSEF pursuant proposed Rule 803, would be
deemed also to have registered with the Commission pursuant to sections
15(a) and (b) of the SEA. The Commission is not proposing to exempt
SBSEFs from registration as brokers; rather, given the registration and
regulatory requirements being proposed for SBSEFs through Regulation
SE, it is proposing to eliminate a separate registration process for
broker/SBSEFs and much of the additive layer of regulation for brokers
that the Commission preliminarily believes is not necessary in light of
the regulatory regime for SBSEFs.
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\289\ See 2011 SBSEF Proposal, 76 FR at 10959 (noting that this
framework indicates that Congress did not intend for entities that
meet the definition of SBSEF also to be subject to all of the
requirements set forth in the SEA and the rules and regulations
thereunder applicable to brokers).
\290\ A foreign SBS trading venue covered by an exemption under
proposed Rule 833(a) would be exempt from the SEA's definition of
``broker'' and, as a result, would not need rely on proposed Rule
15a-12.
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Proposed Rule 15a-12 could not be utilized by an SBSEF that engaged
in other types of brokerage activity. Paragraph (a) of proposed Rule
15a-12 would define the term ``SBSEF-B'' to mean an SBSEF that does not
engage in any securities activity other than facilitating the trading
of SBS on or through the SBSEF. Thus, an SBSEF that acts as agent to
SBS counterparties or that acts in a discretionary manner with respect
to the execution of SBS transactions, could not avail itself of
proposed Rule 15a-12. Also, if an inter-dealer broker elects not to
separate its inter-dealer broker functions from its SBSEF (by, for
example, housing them in separate legal entities), and instead chooses
to operate the SBSEF in the same legal entity as the inter-dealer
broker, the entity could not avail itself of proposed Rule 15a-12
because it would not be an SBSEF-B under the rule.
Paragraphs (c) to (e) of proposed Rule 15a-12 would set out the
scope of broker requirements from which an SBSEF-B would be exempted
and which broker requirements would continue to apply. Paragraph (c)
would provide that an SBSEF-B would be exempt from any provision of the
SEA or the Commission's rules thereunder applicable to brokers that by
its terms requires, prohibits, restricts, limits, conditions, or
affects the activities of a broker, unless such provision specifies
that it applies to an SBSEF. Paragraph (d) of proposed Rule 15a-12
would provide that, notwithstanding paragraph (c), an SBSEF-B would
still be subject to sections 15(b)(4),\291\ 15(b)(6),\292\ and 17(b) of
the SEA.\293\
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\291\ 15 U.S.C. 78o(b)(4).
\292\ 15 U.S.C. 78o(b)(6).
\293\ 15 U.S.C. 78q(b).
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Sections 15(b)(4) and 15(b)(6) of the SEA serve as the basis for
enforcing the
[[Page 28934]]
Federal securities laws against registered brokers. Section 15(b)(4)
provides that the Commission, upon the making of specified findings,
shall censure; place limitations on the activities, functions, or
operations of; suspend for a period not exceeding 12 months; or revoke
the registration of any broker or dealer. Similarly, section 15(b)(6)
of the SEA requires the Commission, upon the making of specified
findings, to censure, place limitations on, suspend, or bar such person
an associated person. Section 17(b) of the SEA is the legal basis under
which the Commission may examine registered brokers for compliance with
the Federal securities laws. Section 17(b) authorizes the Commission to
conduct reasonable periodic, special, or other examinations of all
records maintained by entities described in section 17(a), including
registered brokers. These examinations may be conducted at any time, or
from time to time, as the Commission deems necessary or appropriate in
the public interest, for the protection of investors, or otherwise in
furtherance of the purposes of the SEA.\294\ Proposed Rule 15a-12 would
specify that these examination and statutory disqualification
provisions pertaining to registered brokers continue to apply, despite
Rule 15a-12 exempting an SBSEF-B from other broker requirements under
the SEA.
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\294\ Id.
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Finally, paragraph (e) of proposed Rule 15a-12 would exempt an
SBSEF-B from the Securities Investor Protection Act (``SIPA''). SIPA
established the Securities Investor Protection Corporation (``SIPC''),
which oversees the liquidation of member firms that close when a member
firm is bankrupt or in financial trouble, and customer assets are
missing.\295\ SIPC protection is funded by assessments made on member
firms.\296\
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\295\ See https://www.sipc.org/about-sipc/sipc-mission (``In a
liquidation under the Securities Investor Protection Act, SIPC and
the court-appointed Trustee work to return customers' securities and
cash as quickly as possible. Within limits, SIPC expedites the
return of missing customer property by protecting each customer up
to $500,000 for securities and cash (including a $250,000 limit for
cash only)'').
\296\ See 15 U.S.C. 78ddd(d).
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Section 2 of SIPA \297\ states that, unless otherwise provided, the
SEA shall apply as if SIPA constituted an amendment to, and was
included as a section of, the SEA. An SBSEF-B, by definition, would
operate only as an SBSEF. The Commission preliminarily believes that it
would not be equitable to require an SBSEF-B to become a member of SIPC
and pay SIPC assessments, since the SBSEF-B would not have brokerage
customers and would not hold any customer funds or securities.
Accordingly, under section 36(a)(1) of the SEA,\298\ the Commission
preliminarily believes that it is necessary or appropriate in the
public interest, and is consistent with the protection of investors, to
exempt SBSEF-Bs from any requirement under SIPA, including the
requirement to pay assessments to the SIPC insurance fund. The
Commission is proposing to codify this exemption as Rule 15a-12(e).
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\297\ 15 U.S.C. 78bbb.
\298\ 15 U.S.C. 78mm(a)(1) (giving the Commission broad
exemptive authority, including the ability to exempt any person or
classes of persons from any provision of the SEA or any rules
thereunder, to the extent that such exemption is necessary or
appropriate in the public interest, and is consistent with the
protection of investors).
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The Commission seeks comment on the following:
195. Do you agree in principle with proposed Rule 15a-12? Why or
why not?
196. Do you agree with the specific language of proposed Rule 15a-
12? If not, how would you revise the rule language, and why?
197. Are there any provisions listed in paragraph (d) of proposed
Rule 15a-12 to which an SBSEF-B should not be subject? If so, what
provisions and why? Are there any other provisions or broker
requirements to which an SBSEF-B should be subject (and thus added to
paragraph (d) of proposed Rule 15a-12)? If so, what provisions or
requirements and why?
198. Do you believe that it is appropriate to exempt SBSEF-Bs from
SIPA, as reflected in proposed Rule 15a-12(e)? Why or why not?
XIV. Proposed Sunsetting of Temporary Exemption From SEA Definition of
``Clearing Agency'' for Unregistered SBSEFs
In 2020, the Commission adopted Rule 17Ad-24 under the SEA \299\ to
exempt from the definition of ``clearing agency'' in section 3(a)(23)
of the SEA \300\ certain entities, including a registered SBSEF, that
would be deemed to be a clearing agency solely by reason of (a)
functions performed by such institution as part of customary dealing
activities or providing facilities for comparison of data respecting
the terms of settlement of securities transactions effected on such
registered SBSEF, respectively; or (b) acting on behalf of a clearing
agency or participant therein in connection with the furnishing by the
clearing agency of services to its participants or the use of services
of the clearing agency by its participants.\301\ In adopting the rule,
the Commission explained that an entity performing such functions that
triggers the requirement to register as a clearing agency--but that is
not yet registered with the Commission as an SBSEF--could rely on a
temporary exemption from the requirement to register as a clearing
agency that the Commission issued in 2011.\302\ The Commission
preliminarily believes that, if it adopts a framework for the
registration of SBSEFs, the 2011 Temporary Exemption would no longer be
necessary because entities carrying out the functions of SBSEFs would
be able to register with the Commission as such, thereby falling within
the exemption from the definition of ``clearing agency'' in existing
Rule 17Ad-24.
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\299\ 17 CFR 240.17Ad-24.
\300\ 15 U.S.C. 78c(a)(23).
\301\ See SEA Release No. 90667 (December 16, 2020), 86 FR 7637
(February 1, 2021).
\302\ See id., 86 FR at 7650; SEA Release No. 64796 (July 1,
2011), 76 FR 39963, 39964 (July 7, 2011) (``2011 Temporary
Exemption'').
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The Commission seeks comment on the following:
199. Should the Commission sunset the 2011 Temporary Exemption to
coincide with the compliance date for Regulation SE, if adopted? If
not, what timeline for sunsetting the 2011 Temporary Exemption would be
appropriate?
XV. Electronic Filings Under Regulation SE
Various provisions of proposed Regulation SE would require
registered SBSEFs (or SBSEF applicants) to file specified information
electronically with the Commission using the Electronic Data Gathering,
Analysis, and Retrieval (``EDGAR'') system in Inline XBRL, a
structured, machine-readable data language. Such provisions include:
Proposed Rule 803(b)(1)(i) and (b)(3), regarding filings
of, and amendments to, a Form SBSEF application.
Proposed Rules 803(e) and 803(f), regarding requests to
withdraw or vacate an application for registration.
Proposed Rule 804(a)(1), regarding filings for listing
products for trading by certification.
Proposed Rule 805(a)(1), regarding filings for voluntary
submission of new products for Commission review and approval.
Proposed Rule 806(a)(1), regarding filings for voluntary
submission of rules for Commission review and approval.
Proposed Rule 807(a)(1), regarding filings for self-
certification of rules.
Proposed Rule 807(d), regarding filings of weekly
notifications to the
[[Page 28935]]
Commission of rules and rule amendments that were not required to be
certified.
Proposed Rule 829(g)(6), regarding submission to the
Commission of reports related to financial resources and related
documentation.
Proposed Rule 831(j)(2), regarding submission to the
Commission of the annual compliance report of SBSEF's CCO.
Requiring SBSEFs to file this information in EDGAR would provide
the Commission and the public with a centralized, publicly accessible
electronic database for the information, thereby facilitating its use.
EDGAR would also enable technical validation of the disclosures, thus
potentially reducing the incidence of non-discretionary errors (e.g.,
including text for a disclosure that should contain only numbers).
Moreover, requiring Inline XBRL tagging of the reported disclosures,
which would specifically comprise Inline XBRL block text tags for any
narrative disclosures, as well as detail tags for individual data
points, would make the disclosures more easily available and accessible
to, and reusable by, market participants and the Commission for
retrieval, aggregation, and comparison across different SBSEFs and time
periods, as compared to an unstructured PDF, HTML, or ASCII format
requirement for the reports.\303\
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\303\ See Release No. 33-10514 (June 28, 2018), 83 FR 40846,
40847 (August 16, 2018). Inline XBRL allows filers to embed XBRL
data directly into an HTML document, eliminating the need to tag a
copy of the information in a separate XBRL exhibit. See id., 83 FR
at 40851.
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The Commission seeks comment on the following:
200. Would EDGAR be an appropriate system for these filings? Or
should the Commission use its Electronic Form Filing System/SRO Rule
Tracking System (``EFFS/SRTS'') or another file transfer system
instead? \304\ Would requiring these materials to be filed in EDGAR,
EFFS/SRTS, or another file transfer system be more beneficial for
SBSEFs and other market participants? If so, why? How would the use of
these different systems impact the usability and accessibility of the
materials for data users? Is there another method of electronic
submission that is preferable? If so, please identify that method, why
you believe it should be used, and the estimated costs of such system
for filers.
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\304\ The Commission's EFFS/SRTS system was not designed to
support filings using an open structured data language such as
Inline XBRL. As a result, requiring registrants to submit filings
via the EFFS/SRTS system may not be compatible with a requirement to
use Inline XBRL or any other open structured data language for the
filings.
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201. Should all filings be made through the same electronic system,
or would different filing systems be appropriate for different types of
filings? If the latter, please discuss.
202. Would Inline XBRL be an appropriate data language for these
filings? Or should the Commission use a different structured data
language? If so, which data language should be required, and why? Would
requiring a different structured data language be more beneficial for
SBSEFs and other market participants? How would the use of a different
data language impact the usability and accessibility of the materials
for data users? What time or expense is associated with your
recommended structured data language? Would a particular structured
data language require any filers or users to license commercial
software they otherwise would not, and, if so, at what expense?
XVI. Amendments to Commission's Rules of Practice for Appeals of SBSEF
Actions
As noted above,\305\ SEA Core Principle 2 directs an SBSEF to
exercise regulatory powers over its market.\306\ Under proposed Rule
819 of Regulation SE, an SBSEF could take a variety of disciplinary
actions against a member that is found to violate the SBSEF's rules,
including fining the member, limiting the member's access, or barring
the member entirely.\307\ SEA Core Principle 2 also requires an SBSEF
to establish rules governing access to its market.\308\ An SBSEF could
apply those rules in such a way as to limit a person's access to the
SBSEF or to deny access entirely. The Commission preliminarily believes
that general principles of due process necessitate an appeals procedure
for final disciplinary actions taken by an SBSEF, for denials or
conditionings of membership, and for limitations or denials of access.
Accordingly, the Commission is proposing a number of amendments to its
Rules of Practice to allow for such appeals, and notes that the CFTC
has similar procedures with respect to SEFs.\309\
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\305\ See supra section VIII(B).
\306\ See, e.g., 15 U.S.C. 78c-4(d)(2)(A) (directing an SBSEF to
``establish and enforce compliance'' with its rules) (emphasis
added); 15 U.S.C. 78c-4(d)(2)(C) (directing an SBSEF to ``establish
and enforce trading, trade processing, and participation rules that
will deter abuses and have the capacity to detect, investigate, and
enforce those rules'') (emphasis added).
\307\ See supra section VIII(B). See also proposed Rule
819(c)(3) (relating to limitations on access, including suspensions
and permanent bars); proposed Rule 819(g) (relating to disciplinary
procedures and sanctions).
\308\ See 15 U.S.C. 78c-4(d)(2)(A)(ii) (directing an SBSEF to
establish and enforce compliance with any rule that imposes any
limitation on access to the facility); 15 U.S.C. 78c-4(d)(2)(B)(i)
(requiring an SBSEF to provide market participants with impartial
access to the market).
\309\ See part 9 of the CFTC's rules (Rules Relating to Review
of Exchange Disciplinary, Access Denial or Other Adverse Actions).
For purposes of part 9, the term ``exchange'' includes a SEF.
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A. Amendment to Rule 101
Existing Rule 101 of the Commission's Rules of Practice \310\ sets
out definitions for several terms used in the Rules of Practice. In
particular, existing Rule 101(a)(9) defines ``proceeding'' with respect
to applications of review of actions by a variety of entities that are
subject to the Commission's jurisdiction. The Commission is proposing a
new paragraph (a)(9)(ix) of Rule 101 that would provide that an
application for a review of a determination (such as a final
disciplinary action or a limitation or denial of access to any service)
by an SBSEF would be a ``proceeding'' and thereby trigger applicability
of the Rules of Practice.
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\310\ 17 CFR 201.101.
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B. Amendment to Rule 202
Existing Rule 202 of the Commission's Rules of Practice \311\
permits a party in certain proceedings before the Commission to make a
motion to specify certain procedures with respect to such proceeding.
Rule 202(a) excludes certain types of proceedings, including
enforcement or disciplinary proceedings, proceedings to review a
determination by an SRO, and proceedings to review a determination of
the PCAOB. Because the Commission is proposing new Rules 442 and 443,
which set out specific procedures with respect to proceedings to review
a determination of an SBSEF,\312\ the Commission is proposing to revise
Rule 202(a) to add such SBSEF-related proceedings to the list of
exclusions.
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\311\ 17 CFR 201.202.
\312\ See infra sections XVI(E) and (F).
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C. Amendment to Rule 210
Existing Rule 210 of the Commission's Rules of Practice \313\ sets
out Commission rules with respect to parties, limited participants, and
amici curiae in various proceedings before the Commission. Paragraph
(a)(1) of Rule 210 states that persons shall not be granted leave to
become a party or non-party participant on a limited basis in an
enforcement or disciplinary proceeding, a proceeding to review a
determination by an SRO, or a proceeding to review a determination by
[[Page 28936]]
the PCAOB, except as authorized by paragraph (c) of Rule 210 (which
permits limited instances in which persons may participate for
Commission disciplinary and enforcement proceedings). Because the
Commission is proposing new Rules 442 and 443, which set out specific
procedures with respect to proceedings to review a determination of an
SBSEF,\314\ the Commission is proposing to revise Rule 210 to exclude
proceedings to review a determination by an SBSEF among those types of
proceedings from which persons may be granted leave to become a party
or a non-party participant on a limited basis.
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\313\ 17 CFR 201.210.
\314\ See infra sections XVI(E) and (F).
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D. Amendment to Rule 401
The Commission is proposing to amend existing Rule 401 of its Rules
of Practice by adding a new paragraph (f). New paragraph (f)(1) of
existing Rule 401 would permit any person aggrieved by a stay of action
by an SBSEF entered in accordance with proposed Rule 442(c) to make a
motion to lift the stay. The Commission could also, at any time, on its
own motion determine whether to lift the automatic stay. New paragraph
(f)(2) would provide that the Commission may lift a stay summarily,
without notice and opportunity for hearing. Finally, new paragraph
(f)(3) would provide that the Commission may expedite consideration of
a motion to lift a stay of action by an SBSEF, consistent with the
Commission's other responsibilities. Where consideration is expedited,
persons opposing the lifting of the stay could file a statement in
opposition within two days of service of the motion requesting lifting
of the stay unless the Commission, by written order, specifies a
different period.
The Commission preliminarily believes that it is appropriate to
allow persons affected by certain stays of action by an SBSEF the
opportunity to make a motion to request the lifting of the stay. As
discussed below, pursuant to proposed Rule 442, an aggrieved person
could file an application for review with the Commission with respect
to a final disciplinary action, a final action with respect to a denial
or conditioning of membership, or a final action with respect to a
denial or limitation of access. The filing of such application would
operate as a stay of the SBSEF's determination. The Commission
preliminarily believes that, because of this automatic stay procedure,
an aggrieved person or the SBSEF itself should be afforded a mechanism
by which it could request the Commission to lift the stay, in addition
to the Commission's ability under proposed Rule 401(f)(2) to lift a
stay summarily, without notice and opportunity of hearing.
E. Rule 442--Right To Appeal
Proposed new Rule 442 \315\ would establish the right to an appeal
to the Commission of certain determinations made by an SBSEF, and set
out certain procedural matters relating to any such appeal. Paragraph
(a) of proposed Rule 442 would provide that an application for review
by the Commission may be filed by any person who is aggrieved by a
determination of an SBSEF with respect to any: (1) Final disciplinary
action, as defined in proposed Rule 835(b)(1); (2) final action with
respect to a denial or conditioning of membership, as defined in
proposed Rule 835(b)(2); or (3) final action with respect to a denial
or limitation of access to any service offered by the SBSEF, as defined
in proposed Rule 835(b)(2). Paragraph (b) of proposed Rule 442 would
set forth the procedure in such cases. Specifically, an aggrieved
person could file an application for review with the Commission
(pursuant to existing Rule 151) within 30 days after the notice filed
by the SBSEF with the Commission pursuant to proposed Rule 835 is
received by the aggrieved person, and must serve the application on the
SBSEF at the same time.\316\ Paragraph (c) of proposed Rule 442 would
provide that filing an application for review with the Commission
pursuant to proposed Rule 835(b) would operate as a stay of the SBSEF's
determination, unless the Commission otherwise orders either pursuant
to a motion filed in accordance with proposed Rule 401(f) or upon its
own motion.\317\ The Commission preliminarily believes that it is
appropriate for the filing of an application for review to operate as
an automatic stay of the SBSEF's determination, because such
determination could have the effect of significantly or even
permanently damaging an aggrieved person's business while the
Commission was conducting a review, which could take substantial time.
In addition, the Commission is proposing in Rule 401(f) a procedure
whereby a person aggrieved by such stay, including the SBSEF, could
request that the Commission lift the stay. The proposed rules also
contain certain requirements relating to certification of the record
and service of the index.\318\ Specifically, within 14 days after
receipt of an application for review, an SBSEF would be required to
certify and file with the Commission one unredacted copy of the record
upon which it took the complained-of action. The SBSEF would be
required to file electronically with the Commission one copy of an
index of such record, and serve one copy of the index on each party,
subject to the requirements in proposed Rule 442(d)(2) relating to
sensitive personal information; if applicable, such filings would have
to be certified that they have complied with such requirements relating
to sensitive personal information. The Commission believes these
requirements are appropriate to ensure that sensitive personal
information is not improperly or inadvertently disseminated by an SBSEF
as part of its filing of the record relating to the appeal review.
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\315\ 17 CFR 201.442.
\316\ Such application would be required to identify the SBSEF's
determination complained of, set forth in summary form a statement
of alleged errors in the action and supporting reasons therefor, and
state an address where the applicant can be served. The application
would be expected not to exceed two pages in length, and the notice
of appearance required by Sec. 201.102(d) would have to accompany
the application if the applicant is to be represented by a
representative. Any exception to an action not supported in an
opening brief that complies with Sec. 201.450(b) could, at the
discretion of the Commission, be deemed to have been waived by the
applicant.
\317\ 17 CFR 201.442(c).
\318\ 17 CFR 201.442(d)-(e).
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F. Rule 443--Sua Sponte Review by Commission
New proposed Rule 443 \319\ would provide that the Commission, on
its own initiative, could order review of any determination by an SBSEF
(which would include a final disciplinary action, a final action with
respect to a denial or conditioning of membership, or a final action
with respect to a denial or limitation of access to any services) that
could be subject to an application for review pursuant to proposed Rule
442(a) within 40 days after the SBSEF filed notice thereof.
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\319\ 17 CFR 201.443.
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Proposed Rule 443 would further provide that the Commission could
at any time before issuing its decision raise or consider any matter
that it deems material, whether or not raised by the parties. If the
Commission did so, under proposed Rule 443 the Commission would give
notice to the parties and an opportunity for supplemental briefing with
respect to issues not briefed by the parties, where the Commission
believes that such briefing could significantly aid the decisional
process. The Commission preliminarily believes that it is appropriate
that it have the ability to review any determination filed by an SBSEF
that could be subject to an application for review under proposed
[[Page 28937]]
Rule 442(a), even without an appeal of such determination by an
aggrieved party, should it believe that further consideration is
warranted. Therefore, the proposed rule would provide the Commission
authority to obtain additional information through supplemental
briefings, as needed.
G. Amendment to Rule 450
Existing Rule 450 of the Commission's Rules of Practice \320\ sets
out requirements for briefs filed with the Commission. Rule 450(a) sets
out a briefing schedule, and paragraph (a)(2) provides that the
briefing schedule order shall be issued within 21 days, or such longer
time as provided by the Commission, of receipt by the Commission of
various types of appeals. The Commission is proposing to amend Rule
450(a)(2) by adding a new paragraph (iv) providing that the 21 days
would be triggered by ``[r]eceipt by the Commission of an index to the
record of a determination by a security-based swap execution facility
filed pursuant to Sec. 201.442(d).''
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\320\ 17 CFR 201.450.
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H. Amendment to Rule 460
Existing Rule 460 of the Commission's Rules of Practice \321\
states that the Commission shall determine each matter on the basis of
the record. Rule 460(a) defines the contents of the record with respect
to various types of action. The Commission is proposing a new paragraph
(a)(4) of Rule 460 that would state that, in a proceeding for a final
decision before the Commission reviewing a determination of an SBSEF,
the record shall consist of: (i) The record certified by the SBSEF
pursuant to Sec. 201.442(d); (ii) any application for review; and
(iii) any submissions, moving papers, and briefs filed on appeal or
review.
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\321\ 17 CFR 201.460.
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I. Request for Comment
The Commission requests comment on all aspects of its proposed
rules and rule amendments to provide for applications for review by the
Commission of an SBSEF's final disciplinary action or denial or
limitation of access. In particular:
203. Do you agree in general that final disciplinary action and
denials or limitations of access by an SBSEF be afforded a review
process under the Commission's Rules of Practice? Why or why not?
204. Should aggrieved parties be permitted to submit a motion for a
stay of an action by an SBSEF under proposed Rule 401(f)? Do you
believe that there may be instances in which a motion for a stay may be
necessary? Why or why not? Are there any particular provisions that
should be added or should not be included in such a process? If so,
please describe.
205. Are the provisions relating to SBSEFs under proposed Rule 442
appropriate? Are there additional requirements that should be included
or items that should be omitted? Are the provisions relating to
sensitive personal information and exceptions under proposed paragraph
(d)(2) appropriate? Why or why not?
206. Is it appropriate for the Commission to be able to review
determinations of an SBSEF sua sponte under proposed Rule 443? Why or
why not?
XVII. Conclusion
The Commission requests comment on all aspects of proposed
Regulation SE, including any provision of a proposed rule about which
the Commission did not ask a specific question above. In addition, the
Commission seeks commenters' views on whether Regulation SE should
address any other aspects of SBSEFs or SBS execution generally where
the Commission has not proposed a specific rule. In particular:
207. Are there any other CFTC rules, or provisions of the CEA
itself, relating to SEFs that you believe should be adapted by the
Commission to apply to SBSEFs? If so, which rules or provisions and
why?
208. Are there any other requirements that the Commission should
apply to SBSEF members, or which the Commission should require SBSEFs
to apply to their members? If so, what requirements and why? What would
be the legal basis for those additional requirements?
XVIII. Compliance Schedule
To facilitate the efficient registration of SBSEFs and compliance
with Regulation SE, the Commission intends to include a compliance
schedule along with any final rules, if adopted. To assist it in
developing an appropriate compliance schedule, the Commission seeks
comment on the following matters:
209. If the Commission were to substantially harmonize its SBSEF
rules and registration procedures with those of the CFTC, as proposed,
how long would respondents need to submit a Form SBSEF to the
Commission after Regulation SE and Form SBSEF are adopted (assuming
that the applicant is not registered as a SEF with the CFTC)?
210. Please provide your view of the optimal compliance schedule(s)
and explain your rationale.
211. Should the compliance date for foreign SBS trading venues that
seek an exemption order under Rule 833(a) coincide with the date by
which SBSEF applicants would have to be registered by the Commission?
If you believe that such foreign SBS trading venues should have a
different compliance date, what date should that be and why?
XIX. Economic Analysis
A. Introduction
To increase the transparency and oversight of the OTC derivatives
market,\322\ Title VII of the Dodd-Frank Act requires the Commission to
undertake a number of rulemakings to implement the regulatory framework
for SBS that is set forth in the legislation, including among other
things, (1) the registration and regulation \323\ of SBSEFs; and (2)
mitigating conflicts of interest with respect to SBSEFs, SBS exchanges,
and SBS clearing agencies. To satisfy these statutory mandates, the
Commission is proposing Regulation SE and associated forms that would
create a regime for the registration and regulation of SBSEFs and
address other issues relating to SBS execution generally.\324\ One of
the rules being proposed as part of Regulation SE, Rule 834, would
implement section 765 of the Dodd-Frank Act, which is intended to
mitigate conflicts of interest at SBSEFs and SBS exchanges. Other rules
being proposed as part of Regulation SE would address the cross-border
application of the SEA's trading venue registration requirements and
the trade execution requirement for SBS.
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\322\ See Public Law 111-203 Preamble.
\323\ The regulation of SBSEFs includes, among other things,
requiring SBSEFs to comply with the Core Principles set forth in
section 3D(d) of the SEA. See supra section VIII.
\324\ Among other things, the Commission is proposing Form SBSEF
for persons seeking to register with the Commission as an SBSEF and
a submission cover sheet and instructions to be used in rule and
product filings made by SBSEFs.
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In addition, the Commission is proposing to amend existing Rule
3a1-1 under the SEA to exempt, from the SEA definition of ``exchange,''
registered SBSEFs that provide a market place for no securities other
than SBS and certain registered clearing agencies. The Commission also
is proposing new Rule 15a-12 under the SEA that, while affirming that
an SBSEF also would be a broker under the SEA, would exempt a
registered SBSEF from certain broker requirements. The Commission also
is proposing certain new rules and amendments to its Rules of Practice
to
[[Page 28938]]
allow persons who are aggrieved by certain determinations by an SBSEF
to apply for review by the Commission. The Commission also is
withdrawing all previously proposed rules regarding these subjects.
Currently, SBS trade in the OTC market, rather than on regulated
markets. The existing market for SBS is opaque, with little, if any,
pre-trade transparency. With limited transparency, the information
asymmetry between liquidity providers (i.e., SBS dealers) and end users
could be significant. Specifically, liquidity providers may observe
information about the trading process (e.g., trading interest, quotes,
order flows, and trades) that end users typically cannot observe. The
SBS market also is decentralized such that market participants incur
search costs to locate other market participants in order to trade.
While the SBS market is decentralized, it also is interconnected
and global in scope.\325\ SBS dealers can have hundreds of
counterparties, consisting of end users and other SBS dealers. Trading
venues may serve hundreds of participants, consisting of SBS dealers
and end users. SBS transactions arranged, negotiated, or executed by
personnel located in the U.S. may involve wholly foreign
counterparties. Furthermore, U.S. persons may choose to trade SBSs on
foreign venues, which are subject to OTC derivatives regulations
imposed by local regulatory authorities.
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\325\ See also section IX(A) supra and XIX(B)(2)(c) infra
(discussing the global nature of the SBS market).
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The Commission is mindful of the economic effects, including the
costs and benefits, of the proposal. Section 3(f) of the SEA, 15 U.S.C.
78c(f), directs the Commission, when engaging in rulemaking where it is
required to consider or determine whether an action is necessary or
appropriate in the public interest, to consider, in addition to the
protection of investors, whether the action will promote efficiency,
competition, and capital formation. In addition, section 23(a)(2) of
the SEA 15 U.S.C. 78w(a)(2), requires the Commission, when making rules
under the SEA, to consider the impact that the rules would have on
competition, and prohibits the Commission from adopting any rule that
would impose a burden on competition not necessary or appropriate in
furtherance of the purposes of the SEA.
The analysis below addresses the likely economic effects of the
proposal, including its anticipated and estimated benefits and costs
and its likely effects on efficiency, competition, and capital
formation. The Commission also discusses the potential economic effects
of certain alternatives to the approaches taken in this release.
B. Economic Baseline
To assess the economic effects of the proposed rules and
amendments, the Commission is using as the baseline the SBS market as
it currently exists, including applicable rules the Commission has
already adopted, but excluding rules the Commission has proposed but
not yet finalized. The analysis includes provisions of the SEA, as
amended by the Dodd-Frank Act, that currently govern the SBS market,
and rules adopted by the Commission thereunder, including in the
Intermediary Definitions Adopting Release,\326\ the Cross-Border
Adopting Release,\327\ the SDR Rules and Core Principles Adopting
Release,\328\ the Regulation SBSR Adopting Release I,\329\ the
Registration Adopting Release,\330\ the ANE Adopting Release,\331\ the
Business Conduct Adopting Release,\332\ the Trade Acknowledgement and
Verification Adopting Release,\333\ the Regulation SBSR Adopting
Release II,\334\ the Rule of Practice 194 Adopting Release,\335\ the
Capital, Margin, and Segregation Adopting Release,\336\ the
Recordkeeping and Reporting Adopting Release,\337\ the Risk Mitigation
Adopting Release,\338\ the Cross-Border Amendments Adopting
Release,\339\ and the Clearing Exemption Adopting Release.\340\ The
baseline also includes the Temporary SBSEF Exemptions \341\ and the
CFTC rules that apply to CFTC-registered SEFs. The following sections
discuss available data from the SBS market; SBS activity and market
participants; distribution of transaction size; other markets and
existing regulatory frameworks; number of entities that likely will
register as SBSEFs; SBS trading on platforms; global regulatory
efforts; and trading models.
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\326\ See Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant,'' SEA
Release No. 66868 (April 27, 2012), 77 FR 30596 (May 23, 2012)
(``Intermediary Definitions Adopting Release'').
\327\ See Application of ``Security-Based Swap Dealer'' and
``Major Security-Based Swap Participant'' Definitions to Cross-
Border Security-Based Swap Activities, SEA Release No. 72472 (June
25, 2014), 79 FR 47278 (August 12, 2014) (``Cross-Border Adopting
Release'').
\328\ See Security-Based Swap Data Repository Registration,
Duties, and Core Principles, SEA Release No. 74246 (February 11,
2015), 80 FR 14438 (March 19, 2015) (``SDR Rules and Core Principles
Adopting Release'').
\329\ See supra note 84.
\330\ See Registration Process for Security-Based Swap Dealers
and Major Security-Based Swap Participants, SEA Release No. 75611
(August 5, 2015), 80 FR 48964 (August 14, 2015) (``Registration
Adopting Release'').
\331\ See Security-Based Swap Transactions Connected with a Non-
U.S. Person's Dealing Activity That Are Arranged, Negotiated, or
Executed By Personnel Located in a U.S. Branch or Office or in a
U.S. Branch or Office of an Agent; Security-Based Swap Dealer De
Minimis Exception, SEA Release No. 77104 (February 10, 2016), 81 FR
8598 (February 19, 2016) (``ANE Adopting Release'').
\332\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, SEA Release No.
77617 (April 14, 2016), 81 FR 29960 (May 13, 2016) (``Business
Conduct Adopting Release'').
\333\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, SEA Release No. 78011 (June 8, 2016), 81 FR
39808 (June 17, 2016) (``Trade Acknowledgment and Verification
Adopting Release'').
\334\ See supra note 229.
\335\ See Applications by Security-Based Swap Dealers or Major
Security-Based Swap Participants for Statutorily Disqualified
Associated Persons To Effect or Be Involved in Effecting Security-
Based Swaps, SEA Release No. 84858 (December 19, 2018), 84 FR 4906-
47 (February 19, 2019) (``Rule of Practice 194 Adopting Release'').
\336\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital and Segregation Requirements for Broker-
Dealers, SEA Release No. 86175 (June 21, 2019), 84 FR 43872 (August
22, 2019) (``Capital, Margin, and Segregation Adopting Release'').
\337\ See Requirements for Security-Based Swap Dealers, Major
Security-Based Swap Participants, and Broker-Dealers; Capital Rule
for Certain Security-Based Swap Dealers, SEA Release No. 87005
(September 19, 2019), 84 FR 68550 (December 16, 2019)
(``Recordkeeping and Reporting Adopting Release'').
\338\ See Risk Mitigation Techniques for Uncleared Security-
Based Swaps, SEA Release No. 87782 (December 18, 2019), 85 FR 6359
(February 4, 2020) (``Risk Mitigation Adopting Release'').
\339\ See Cross-Border Application of Certain Security-Based
Swap Requirements, SEA Release No. 87780 (December 18, 2019), 85 FR
6270 (February 4, 2020) (``Cross-Border Amendments Adopting
Release'').
\340\ See Exemption from the Definition of ``Clearing Agency''
for Certain Activities of Security-Based Swap Dealers and Security-
Based Swap Execution Facilities, SEA Release No. 90667 (December 16,
2020), 86 FR 7637 (February 1, 2021) (``Clearing Exemption Adopting
Release'').
\341\ See supra section V and note 42.
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1. Available Data From the SBS Market
The Commission's understanding of the market is informed, in part,
by available data on SBS transactions, though the Commission
acknowledges that limitations in the data limit the extent to which it
is possible to quantitatively characterize the market.\342\ Since these
data do not cover the entire market, the Commission has analyzed market
activity using a sample of transaction data that includes only certain
segments of the market. The
[[Page 28939]]
Commission believes, however, that the data underlying this analysis
provides reasonably comprehensive information regarding single-name CDS
transactions and the composition of the participants in the single-name
CDS market.
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\342\ The Commission also relies on qualitative information
regarding market structure and evolving market practices provided by
commenters and knowledge and expertise of Commission staff.
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Specifically, the analysis of the current state of the SBS market
is based on data obtained from the DTCC Derivatives Repository Limited
Trade Information Warehouse (``TIW''), especially data regarding the
activity of market participants in the single-name CDS market during
the period from 2008 to 2020. Although SBS are not limited to single-
name CDS,\343\ single-name CDS contracts make up a majority of SBS, and
we believe that the single-name CDS data are sufficiently
representative of the market to inform our analysis of the current SBS
market. According to data published by the Bank for International
Settlements (``BIS''), as of December 2020, the global notional amount
outstanding in single-name CDS was approximately $3.5 trillion,\344\ in
multi-name index CDS was approximately $4.5 trillion, and in multi-
name, non-index CDS was approximately $347 billion.\345\ The total
gross market value outstanding in single-name CDS was approximately $77
billion, and in multi-name CDS instruments was approximately $125
billion.\346\ The global notional amount outstanding in equity forwards
and swaps as of December 2020 was $3.6 trillion, with total gross
market value of $321 billion.\347\
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\343\ The Commission explains below that data related to single-
name CDS provide reasonably comprehensive information for the
purpose of this analysis.
\344\ The global notional amount outstanding represents the
total face amount used to calculate payments under outstanding
contracts. The gross market value is the cost of replacing all open
contracts at current market prices.
\345\ See Global OTC Derivatives Market: Table D5.2 Commodity
Contracts, Credit Default Swap, BIS (updated January 13, 2022),
available at https://stats.bis.org/statx/srs/table/d5.2.
\346\ See id.
\347\ These totals include swaps and SBS, as well as products
that are excluded from the definition of ``swap,'' such as certain
equity forwards. See Global OTC Derivatives Market: Table D5.1
Foreign Exchange, Interest Rate, Equity Linked Contracts, BIS
(updated January 13, 2022), available at https://stats.bis.org/statx/srs/table/d5.1. For the purposes of this analysis, the
Commission assumes that multi-name index CDS are not narrow-based
index CDS and therefore do not fall within the definition of
``security-based swap.'' See 15 U.S.C. 78c(a)(68)(A). See also
Further Definition of ``Swap,'' ``Security-Based Swap,'' and
``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap
Agreement Recordkeeping, 77 FR 48208. The Commission also assumes
that all instruments reported as equity forwards and swaps are SBS,
potentially resulting in underestimation of the proportion of the
SBS market represented by single-name CDS. Therefore, when measured
on the basis of gross notional outstanding, single-name CDS appear
to constitute roughly 49% of the SBS market. Although the BIS data
reflect the global OTC derivatives market and not just the U.S.
market, the Commission has no reason to believe that this ratio
differs significantly in the U.S. market.
---------------------------------------------------------------------------
The data available from TIW does not encompass those CDS
transactions that both: (i) Do not involve U.S. counterparties; \348\
and (ii) are based on non-U.S. reference entities. Notwithstanding this
limitation, the TIW single-name CDS data should provide sufficient
information to permit the Commission to identify the types of market
participants active in the SBS market and the general pattern of
dealing within that market.\349\
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\348\ Following publication of the Warehouse Trust Guidance on
CDS data access, TIW surveyed market participants, asking for the
physical address associated with each of their accounts (i.e., where
the account is organized as a legal entity). This physical address
is designated the registered office location by TIW. When an account
reports a registered office location, the Commission has assumed
that the registered office location reflects the place of domicile
for the fund or account. When an account does not report a
registered office location, the Commission has assumed that the
settlement country reported by the investment adviser or parent
entity to the fund or account is the place of domicile. Thus, for
purposes of this analysis, the Commission has classified accounts as
``U.S. counterparties'' when they have reported a registered office
location in the United States. The Commission notes, however, that
this classification is not necessarily identical in all cases to the
definition of ``U.S. person'' under SEA Rule 3a71-3(a)(4).
\349\ The challenges the Commission faces in estimating measures
of current market activity stem, in part, from the absence of
comprehensive reporting requirements for SBS market participants.
The Commission has adopted rules regarding regulatory reporting and
public dissemination of SBS transactions that are designed, when
fully implemented, to provide the Commission with additional
measures of market activity that will allow the Commission to better
understand and monitor activity in the SBS market. See Regulation
SBSR Adopting Release II, 81 FR at 53545.
---------------------------------------------------------------------------
In addition to the TIW single-name CDS data, the Commission uses
data on SBS transactions reported to registered security-based swap
data repositories (SDRs) to describe the baseline. Beginning on
November 8, 2021, market participants are required to report SBS
transactions to registered SDRs pursuant to Regulation SBSR. The
Commission uses data on SBS transactions in the credit, equity, and
interest rate asset classes that were executed between November 8, 2021
and February 28, 2022 to quantify the extent of SBS trading on
platforms.
2. SBS Market Activity and Participants
a. SBS Entities
Final SBS Entity registration rules have been adopted and
compliance was required as of November 1, 2021.\350\ As of January 3,
2022, 44 entities had registered with the Commission as SBS dealers and
no entity had registered as a major SBS participant.\351\
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\350\ See Key Dates for Registration of Security-Based Swap
Dealers and Major Security-Based Swap Participants, available at:
https://www.sec.gov/page/key-dates-registration-security-based-swap-dealers-and-major-security-based-swap-participants.
\351\ See List of Registered Security-Based Swap Dealers and
Major Security-Based Swap Participants, available at: https://www.sec.gov/files/list_of_sbsds_msbsps-_01-03-2022locked-final.xlsx
(providing the list of registered SBS dealers and major SBS
participants that was updated as of January 3, 2022).
---------------------------------------------------------------------------
Firms that act as SBS dealers play a central role in the SBS
market. Based on an analysis of 2020 single-name CDS data in TIW,
accounts of registered SBS dealer firms intermediated transactions with
a gross notional amount of approximately $1.99 trillion, with
approximately 55% of the gross notional intermediated by the top five
SBS dealer accounts.\352\
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\352\ The Commission staff analysis of TIW transaction records
indicates that approximately 99% of single-name CDS price-forming
transactions in 2020 involved an ISDA-recognized dealer.
---------------------------------------------------------------------------
These SBS dealers transact with hundreds or thousands of
counterparties. Approximately 8% of accounts of SBS dealer firms
observable in TIW have entered into SBS with over 1,000 unique
counterparty accounts as of year-end 2020.\353\ Another 23% of these
accounts transacted with 500 to 1,000 unique counterparty accounts; 38%
transacted with 100 to 500 unique accounts; and 31% of these accounts
intermediated SBS with fewer than 100 unique counterparties in 2020.
The median SBS dealer account transacted with 276 unique accounts (with
an average of approximately 416 unique accounts). Non-SBS dealer
counterparties transacted almost exclusively with these SBS dealers. In
2020, the median non-SBS dealer counterparty transacted with 1.3 SBS
dealer accounts (with an average of approximately 2.5 SBS dealer
accounts).
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\353\ Many dealer entities and financial groups transact through
numerous accounts. Given that individual accounts may transact with
hundreds of counterparties, the Commission may infer that entities
and financial groups may transact with at least as many
counterparties as the largest of their accounts.
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b. Other SBS Market Participants
In addition to SBS dealers, thousands of other participants appear
as counterparties to SBS transactions in our sample, including but not
limited to: Investment companies, pension funds, private funds,
sovereign entities, and industrial companies. The Commission observes
that most non-SBS dealer users of SBS do not engage in trading
directly, but trade through banks, investment advisers, or other
[[Page 28940]]
types of firms acting as SBS dealers or agents. Based on an analysis of
the counterparties to trades reported to the TIW, there are 2,321
entities that engaged directly in trading between November 2006 and
December 2020.\354\
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\354\ These 2,321 entities, which are presented in more detail
in Table 1, include all DTCC-defined ``firms'' shown in TIW as
transaction counterparties that report at least one transaction to
TIW as of December 2020. The staff in the Division of Economic and
Risk Analysis classified these firms, which are shown as transaction
counterparties, by machine matching names to known third-party
databases and by manual classification. See, e.g., ANE Adopting
Release, 81 FR at 8602, at n. 43. Manual classification was based in
part on searches of the EDGAR and Bloomberg databases, the SEC's
Investment Adviser Public Disclosure database, and a firm's public
website or the public website of the account represented by a firm.
The staff also referred to ISDA protocol adherence letters available
on the ISDA website.
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As shown in Table 1 below, close to three-quarters of these
entities (DTCC-defined ``firms'' shown in TIW, which we refer to here
as ``transacting agents'') were identified as investment advisers, of
which approximately 40% (about 32% of all transacting agents) were
registered as investment advisers under the Investment Advisers
Act.\355\ Although investment advisers are the vast majority of
transacting agents, the transactions they executed account for only
14.2% of all single-name CDS trading activity reported to the TIW,
measured by number of transaction-sides (each transaction has two
transaction sides, i.e., two transaction counterparties). The vast
majority of transactions (82.1%) measured by number of transaction-
sides were executed by ISDA-recognized SBS dealers.
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\355\ See 15 U.S.C. 80b1-80b21. Transacting agents participate
directly in the SBS market, without relying on an intermediary, on
behalf of principals. For example, a university endowment might hold
a position in SBS that is established by an investment adviser that
transacts on the endowment's behalf. In this case, the university
endowment is a principal that uses the investment adviser as its
transacting agent.
Table 1--The Number of Transacting Agents by Counterparty Type and the Fraction of Total Trading Activity, From
November 2006 Through December 2020, Represented by Each Counterparty Type
----------------------------------------------------------------------------------------------------------------
Transaction
Transacting agents Number Percent share %
----------------------------------------------------------------------------------------------------------------
Investment Advisers............................................. 1,823 78.5 14.2
--SEC registered................................................ 734 31.6 9.5
Banks........................................................... 274 11.8 3.3
Pension Funds................................................... 30 1.3 0.1
Insurance Companies............................................. 48 2.1 0.2
ISDA-Recognized SBS Dealers \356\............................... 17 0.7 82.1
Other \357\..................................................... 129 5.6 0.2
-----------------------------------------------
Total....................................................... 2,321 100.0 100
----------------------------------------------------------------------------------------------------------------
Principal holders of CDS risk exposure are represented by
``accounts'' in the TIW.\358\ The staff's analysis of these accounts in
TIW shows that the 2,321 transacting agents classified in Table 1
represent 15,187 principal risk holders. Table 2 below classifies these
principal risk holders by their counterparty type and whether they are
represented by a registered or unregistered investment adviser.\359\
For instance, banks in Table 1 allocated transactions across 370
accounts, of which 35 were represented by investment advisers. In the
remaining instances, banks traded for their own accounts. Meanwhile,
ISDA-recognized SBS dealers in Table 1 allocated transactions across
104 accounts. Private funds are the largest type of account holders
that the Commission was able to classify, and although not verified
through a recognized database, most of the funds we were not able to
classify appear to be private funds.\360\
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\356\ For the purpose of this analysis, the ISDA-recognized SBS
dealers are those identified by ISDA as belonging to the G14 or G16
dealer group during the period: J.P. Morgan Chase NA (and Bear
Stearns), Morgan Stanley, Bank of America NA (and Merrill Lynch),
Goldman Sachs, Deutsche Bank AG, Barclays Capital, Citigroup, UBS,
Credit Suisse AG, RBS Group, BNP Paribas, HSBC Bank, Lehman
Brothers, Soci[eacute]t[eacute] G[eacute]n[eacute]rale,
Cr[eacute]dit Agricole, Wells Fargo, and Nomura. See, e.g., ISDA,
2010 ISDA Operations Benchmarking Survey (2010), available at
https://www.isda.org/a/5eiDE/isda-operations-survey-2010.pdf.
\357\ This category excludes clearing counterparties (CCPs).
Same-day cleared trades are recorded in the DTCC dataset as two
clearing legs, each between a CCP (ICE Clear Credit, ICE Clear
Europe, and LCH.Clearnet) and the original counterparty in the
underlying trade. As these are not price-forming trades, the counts
in the last column in Table 1 are adjusted to reflect the original
counterparties, excluding a CCP. Though original counterparties
cannot be paired up to same-day cleared trades, to adjust for same-
day clearing each leg against the CCP is counted as one half of a
transaction and the notional amount of the trade is halved as well.
\358\ ``Accounts'' as defined in the TIW context are not
equivalent to ``accounts'' in the definition of ``U.S. person'' in
SEA Rule 3a71-3(a)(4)(i)(C). They also do not necessarily represent
separate legal persons. One entity or legal person might have
multiple accounts. For example, a bank may have one DTCC account for
its U.S. headquarters and one DTCC account for one of its foreign
branches.
\359\ Unregistered investment advisers include all investment
advisers not registered under the Investment Advisers Act and might
include investment advisers registered with a State or a foreign
authority, as well as investment advisers that are exempt reporting
advisers under section 203(l) or 203(m) of the Investment Advisers
Act.
\360\ For the purposes of this discussion, ``private fund''
encompasses various unregistered investment vehicles, including
hedge funds, private equity funds, and venture capital funds. There
remain over 5,800 DTCC accounts unclassified by type. Although
unclassified, each account was manually reviewed to verify that it
was not likely to be a special entity within the meaning of the
Dodd-Frank Act and instead was likely to be an entity such as a
corporation, an insurance company, or a bank.
[[Page 28941]]
Table 2--The Number and Percentage of Account Holders--by Type--Who Participate in the SBS Market Through a Registered Investment Adviser, an
Unregistered Investment Adviser, or Directly as a Transacting Agent, From November 2006 Through December 2020
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Account holders by type Number Represented by a registered
investment adviser
Represented by an unregistered
investment adviser
Participant is transacting
agent \361\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Private Funds........................... 4,447 2,283 51% 2,089 47% 75 2%
DFA Special Entities.................... 1,542 1,476 96% 43 3% 23 1%
Registered Investment Companies......... 1,382 1,295 94% 82 6% 5 0%
Banks (non-ISDA-recognized SBS dealers). 370 26 7% 9 2% 335 91%
Insurance Companies..................... 341 210 62% 46 13% 85 25%
ISDA-Recognized SBS Dealers............. 104 0 0% 0 0% 104 100%
Foreign Sovereigns...................... 93 67 72% 6 6% 20 22%
Non-Financial Corporations.............. 125 93 74% 10 8% 22 18%
Finance Companies....................... 59 43 73% 0 0% 16 27%
Other/Unclassified...................... 6,724 4,081 61% 2,348 35% 295 4%
---------------------------------------------------------------------------------------------------------------
All................................. 15,187 9,574 63% 4,633 31% 980 6%
--------------------------------------------------------------------------------------------------------------------------------------------------------
c. SBS Market Participant Domiciles
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\361\ This column reflects the number of participants who are
also trading for their own accounts.
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As depicted in Figure 1 below, domiciles of new accounts
participating in the SBS market have shifted over time. It is unclear
whether these shifts represent changes in the types of participants
active in this market, changes in reporting, or changes in transaction
volumes in particular underliers. For example, the percentage of new
entrants that are foreign accounts increased from 24.4% in the first
quarter of 2008 to approximately 50% in the last quarter of 2020, which
might reflect an increase in participation by foreign account holders
in the SBS market, though the total number of new entrants that are
foreign accounts decreased from 112 in the first quarter of 2008 to 38
in the last quarter of 2020.\362\ Additionally, the percentage of the
subset of new entrants that are foreign accounts managed by U.S.
persons increased from 4.6% in the first quarter of 2008 to 11.8% in
the last quarter of 2020, and the absolute number changed from 21 to 9,
which also might reflect more specifically the flexibility with which
market participants can restructure their market participation in
response to regulatory intervention, competitive pressures, and other
incentives.\363\ At the same time, apparent changes in the percentage
of new accounts with foreign domiciles might also reflect improvements
in reporting by market participants to TIW, an increase in the
percentage of transactions between U.S. and non-U.S. counterparties,
and/or increased transactions in single-name CDS on U.S. reference
entities by foreign persons.\364\
---------------------------------------------------------------------------
\362\ These estimates were calculated by Commission staff using
TIW data.
\363\ See Charles Levinson, U.S. banks moved billions in trades
beyond the CFTC's reach, Reuters (August 21, 2015) (retrieved from
Factiva database). The estimates of 21 and 25 were calculated by
Commission staff using TIW data.
\364\ The available data do not include all SBS transactions but
only transactions in single-name CDS that involve either (1) at
least one account domiciled in the United States (regardless of the
reference entity); or (2) single-name CDS on a U.S. reference entity
(regardless of the U.S.-person status of the counterparties).
---------------------------------------------------------------------------
BILLING CODE 8011-01-P
[[Page 28942]]
[GRAPHIC] [TIFF OMITTED] TP11MY22.000
BILLING CODE 8011-01-C
Figure 2 below describes the percentage of global, notional
transaction volume in North American corporate single-name CDS reported
to TIW between January 2011 and December 2020, separated by whether
transactions are between two ISDA-recognized SBS dealers (``interdealer
transactions'') or whether a transaction has at least one non-SBS
dealer counterparty. Figure 2 also shows that the portion of the
notional volume of North American corporate single-name CDS represented
by interdealer transactions has remained fairly constant through 2015,
before falling from approximately 68% in 2015 to under 40% in 2020.
This fall corresponds to the availability of clearing to non-SBS
dealers. Interdealer transactions continue to represent a significant
fraction of trading activity, even as notional volume has declined over
the past ten years,\365\ from just under $2 trillion in 2011 to less
than $500 billion in 2020.\366\
---------------------------------------------------------------------------
\365\ The start of this decline predates the enactment of the
Dodd-Frank Act and the proposal of rules thereunder, which is
important to note for the purpose of understanding the economic
baseline for this rulemaking.
\366\ This estimate is lower than the gross notional amount of
$3.5 trillion noted in section XIX(B)(1), supra, as it includes only
the subset of single-name CDS referencing North American corporate
documentation.
---------------------------------------------------------------------------
[[Page 28943]]
[GRAPHIC] [TIFF OMITTED] TP11MY22.001
The high level of interdealer trading activity reflects the central
position of a small number of SBS dealers, each of which intermediates
trades with many hundreds of counterparties. While the Commission is
unable to quantify the current level of trading costs for single-name
CDS, these SBS dealers appear to enjoy market power as a result of
their small number and the large proportion of order flow that they
privately observe.
Against this backdrop of declining North American corporate single-
name CDS activity, about half of the trading activity in North American
corporate single-name CDS reflected in the set of data that the
Commission analyzed was between counterparties domiciled in the United
States and counterparties domiciled abroad, as shown in Figure 3 below.
Using the self-reported registered office location of the TIW accounts
as a proxy for domicile, the Commission estimates that only 13% of the
global transaction volume by notional volume between 2008 and 2020 was
between two U.S.-domiciled counterparties, compared to 49% entered into
between one U.S.-domiciled counterparty and a foreign-domiciled
counterparty, and 38% entered into between two foreign-domiciled
counterparties.\367\
---------------------------------------------------------------------------
\367\ For purposes of this discussion, the Commission has
assumed that the registered office location reflects the place of
domicile for the fund or account, but the Commission notes that this
domicile does not necessarily correspond to the location of an
entity's sales or trading desk. See ANE Adopting Release, 81 FR at
8607, n. 83.
---------------------------------------------------------------------------
If the Commission instead considers the number of cross-border
transactions from the perspective of the domicile of the corporate
group (e.g., by classifying a foreign bank branch or foreign subsidiary
of a U.S. entity as domiciled in the United States), the percentages
shift significantly. Under this approach, the fraction of transactions
entered into between two U.S.-domiciled counterparties increases to
35%, and to 50% for transactions entered into between a U.S.-domiciled
counterparty and a foreign-domiciled counterparty. By contrast, the
proportion of activity between two foreign-domiciled counterparties
drops from 38% to 15%. This change in respective shares based on
different classifications suggests that the activity of foreign
subsidiaries of U.S. firms and foreign branches of U.S. banks accounts
for a higher percentage of SBS activity than U.S. subsidiaries of
foreign firms and U.S. branches of foreign banks. It also demonstrates
that financial groups based in the United States are involved in an
overwhelming majority (approximately 85%) of all reported transactions
in North American corporate single-name CDS.
Financial groups based in the United States are also involved in a
majority of interdealer transactions in North
[[Page 28944]]
American corporate single-name CDS. Of the 2020 transactions on North
American corporate single-name CDS between two ISDA-recognized SBS
dealers and their branches or affiliates, 81% of transaction notional
volume involved at least one account of an entity with a U.S.
parent.\368\ The Commission notes, in addition, that a majority of
North American corporate single-name CDS transactions occur in the
interdealer market or between SBS dealers and foreign non-SBS dealers,
with the remaining portion of the market consisting of transactions
between SBS dealers and U.S.-person non-SBS dealers. Specifically, 81%
of North American corporate single-name CDS transactions involved
either two ISDA-recognized SBS dealers or an ISDA-recognized SBS dealer
and a foreign non-SBS dealer. Approximately 19% of such transactions
involved an ISDA-recognized SBS dealer and a U.S.-person non-SBS
dealer.
---------------------------------------------------------------------------
\368\ Since the Commission is unable to pair up the same-day
cleared trades, this 81% estimate is based on bilateral trades that
were not same-day cleared.
[GRAPHIC] [TIFF OMITTED] TP11MY22.002
BILLING CODE 8011-01-C
3. Distribution of Transaction Size
In proposing the definition of a block trade, the Commission has
considered the distribution of transaction size in the single-name CDS
market, which the Commission believes is representative of the market
for SBS based on a single credit instrument (or issuer of credit
instruments) or a narrow-based index of credit instruments (or issuers
of credit instruments).\369\ Table 3 reports the total number of newly
initiated price-forming CDS transactions referencing North American
corporate single-name reference entities. The table also reports the
number and percentage of such transactions with a size (notional
amount) of at least $5 million. These statistics are reported for each
year between 2011 and 2020 and for the entire ten-year period.
---------------------------------------------------------------------------
\369\ See proposed Rule 802. In considering a block trade
definition, the Commission also took into consideration that FINRA
applies a $5 million cap when disseminating transaction reports of
economically similar cash debt securities. See supra section VII(E).
---------------------------------------------------------------------------
Overall, the number of newly initiated price-forming transactions
exhibited a declining trend between 2011 and 2020. The number of such
transactions decreased from around 180,000 in 2011 to around 90,000 in
2019, with an uptick to around 127,000 transactions in 2020. The number
of newly initiated price-forming transactions with a notional size of
at least $5 million also exhibits a declining trend between 2011 and
2020, but without an uptick in 2020. As a percentage of all newly
initiated price-forming transactions, those with a notional size of at
least $5 million fell from 88% to 23% between 2011 and 2020.
[[Page 28945]]
Table 3--The Distribution of North American Corporate Single-Name CDS Trade Sizes
----------------------------------------------------------------------------------------------------------------
Number of Percentage of
transactions transactions
Number of with size of with size of
transactions at least $5 at least $5
million million
----------------------------------------------------------------------------------------------------------------
2011............................................................ 180,700 159,061 88
2012............................................................ 165,479 121,151 73
2013............................................................ 130,570 87,515 67
2014............................................................ 127,410 80,122 63
2015............................................................ 107,698 53,991 50
2016............................................................ 97,459 37,273 38
2017............................................................ 80,513 33,695 42
2018............................................................ 88,787 34,840 39
2019............................................................ 89,823 34,811 39
2020............................................................ 127,379 29,354 23
2011-2020....................................................... 1,195,816 671,810 56
----------------------------------------------------------------------------------------------------------------
4. Other Markets and Regulatory Frameworks
The numerous financial markets are integrated, often attracting the
same market participants that trade across corporate bond, swap, and
SBS markets, among others.\370\ This is notwithstanding the fact that
the SBS market is a small fraction of the swap market and the single-
name CDS market, which falls under SEC jurisdiction, is smaller than
the index CDS market, which falls under CFTC jurisdiction.\371\ For
example, persons who register as SBS dealers and major SBS participants
are likely also to be engaged in swap activity. In part, this overlap
reflects the relationship between single-name CDS contracts, which are
SBS, and index CDS contracts, which may be swaps or SBS. A single-name
CDS contract covers default events for a single reference entity or
reference security. Index CDS contracts and related products make
payouts contingent on the default of index components and allow
participants in these instruments to gain exposure to the credit risk
of the basket of reference entities that comprise the index, which is a
function of the credit risk of the index components. A default event
for a reference entity that is an index component will result in
payoffs on both single-name CDS written on the reference entity and
index CDS written on indices that contain the reference entity. Because
of this relationship between the payoffs of single-name CDS and index
CDS products, the prices of these products depend upon one
another,\372\ creating hedging opportunities across these markets.
---------------------------------------------------------------------------
\370\ See Rule 194 Proposing Release, 80 FR at 51711.
\371\ According to data published by BIS, as of December 2020,
the global swap market (comprising, for purposes of this discussion,
IRS, foreign exchange swaps, multi-name index CDS, and commodity
swaps) had a global notional amount outstanding of approximately
$571 trillion, while the global SBS market (comprising, for purposes
of this discussion, single-name equity swaps and forwards and
single-name CDS) had a global notional amount outstanding of
approximately $7.1 trillion. The global notional amount outstanding
in single-name CDS was approximately $3.5 trillion and in multi-name
index CDS was approximately $4.5 trillion. The Commission
preliminarily believes that the relative magnitudes presented by
these statistics for the global OTC derivatives market are also
representative of the U.S. OTC derivatives markets. See Table D5.2,
BIS, supra note 345; Table D5.1, BIS, supra note 347. See also supra
section XIX(B)(1).
\372\ ``Correlation'' typically refers to linear relationships
between variables; ``dependence'' captures a broader set of
relationships that may be more appropriate for certain swaps and
SBS. See, e.g., George Casella & Roger L. Berger, Statistical
Inference 171 (2nd ed. 2002).
---------------------------------------------------------------------------
These hedging opportunities mean that participants that are active
in one market are likely to be active in the other. Commission staff
analysis of approximately 4149 TIW accounts that participated in the
market for single-name CDS in 2020 revealed that approximately 3096 of
those accounts, or 75%, also participated in the market for index CDS.
Of the accounts that participated in both markets, data regarding
transactions in 2020 suggest that, conditional on an account
transacting in notional volume of index CDS in the top third of
accounts, the probability of the same account landing in the top third
of accounts in terms of single-name CDS notional volume is
approximately 61%; by contrast, the probability of the same account
landing in the bottom third of accounts in terms of single-name CDS
notional volume is only 11%. As a result of cross-market participation,
informational efficiency, pricing and liquidity may spill over across
markets.\373\
---------------------------------------------------------------------------
\373\ See Business Conduct Adopting Release, 81 FR at 30108;
Christopher L. Culp, Andria van der Merwe, & Bettina J. Starkle,
Single-name Credit Default Swaps: A Review of the Empirical Academic
Literature 71-85 (ISDA Study, September 2016), available at https://www.isda.org/a/KSiDE/single-name-cdsliterature-review-culp-van-der-merwe-staerkleisda.pdf; Patrick Augustin, Marti G. Subrahmanyam,
Dragon Y. Tang, & Sarah Q. Wang, Credit Default Swaps: Past,
Present, and Future, 8 Ann. Rev. Fin. Econ. 175 (2016).
---------------------------------------------------------------------------
Of the 44 registered SBS dealers, 41 are dually registered with the
CFTC as swap dealers and are therefore subject to CFTC requirements for
entities registered with the CFTC as swap dealers. Further, of the 44
registered SBS dealers, 27 have a prudential regulator.
5. Number of Entities That Likely Will Register as SBSEFs
Entities that will seek to register with the Commission as SBSEFs
are likely to be SEFs that are active in the index CDS market.
Currently, 20 SEFs have permanent or temporary registration with the
CFTC.\374\ Of these SEFs, eight list index CDS for trading.\375\ If
these
[[Page 28946]]
SEFs were to list single-name CDS or other SBS for trading, they would
be required to register as SBSEFs with the Commission. In 2021, index
CDS volume on U.S. SEFs was distributed as follows: One SEF had the
largest share of index CDS volume (in notional amount) at $8 trillion
(69%); one SEF had the second largest share at $2.1 trillion (18%); and
the remaining 13% of volume was shared among the other five SEFs.\376\
The Commission preliminarily believes that the number of SBSEF
registrants most likely falls between two and eight, but acknowledges
uncertainty around the upper end of this estimate. The Commission
preliminarily believes that the likely number of SBSEF registrants
would be five. The Commission invites commenters to provide feedback on
the number of entities that will register as SBSEFs.
---------------------------------------------------------------------------
\374\ See supra note 17.
\375\ For purposes of this discussion, options on index CDS and
index CDS tranches are included as part of index CDS. For SEFs that
list index CDS for trading, see BGC SEF Contract Specifications
(January 21, 2022), available at http://www.bgcsef.com/wp-content/uploads/2022/01/BGC-SEF-Contract-Specifications_01-21-22.pdf;
Bloomberg SEF LLC Rulebook (February 24, 2022), available at https://assets.bbhub.io/professional/sites/10/BSEF-Rulebook.pdf; GFI Swaps
Exchange: Products & Contract Specifications, GFI Group, available
at http://www.gfigroup.com/markets/gfi-sef/products/; ICE Swap
Trade, LLC, Swap Execution Facility Rulebook Version: 2.38
(effective December 15, 2021), available at https://www.theice.com/publicdocs/swap_trade/Rulebook.pdf; Letter from Ron Steinfeld, CCO,
MarketAxess SEF Corp., to CFTC regarding Listing Products for
Trading by Certification Pursuant to CFTC Rule 40.2 (January 13,
2015), available at https://content.marketaxess.com/sites/default/files/marketaxess-sef-product-listing-filing-and-appendices-january-13-2015.pdf; TW SEF LLC, Swap Execution Facility Rules (effective
October 1, 2021), available at https://www.tradeweb.com/4a7851/globalassets/our-businesses/market-regulation/sef-rulebook-oct-1-2021/tw-sef-rulebook_9.17.21.pdf; Category: Rulebook, Tradition SEF,
available at https://www.traditionsef.com/regulatory/filter/rulebook/all/all; tpSEF Inc. rulebook, tpSEF Inc., tpSEF Inc.
Rulebook Appendix B: tpSEF Inc. Swap Specifications (effective July
2, 2021), available at https://www.tullettprebon.com/swap_execution_facility/documents/tpSEF%20-%20Rulebook%20-%20Appendix%20B%20-%20Swap%20Specifications.pdf?20211031.
\376\ Index CDS volume traded on SEFs is from Futures Industry
Association's SEF Tracker. See SEF Tracker Historical Volume, FIA,
available at https://www.fia.org/monthly-volume.
---------------------------------------------------------------------------
6. SBS Trading on Platforms
By analyzing SBS transactions reported to registered SDRs,\377\ the
Commission has obtained a preliminarily estimate of the extent of SBS
trading on platforms. Of the new transactions in credit SBS executed
between November 8, 2021 and February 28, 2022, 6,131 were executed on
platforms (2% of all new transactions in credit SBS transactions).
During the same period, 44 new transactions in equity SBS were executed
on platforms (less than 0.01% of all new transactions in equity SBS
transactions), while no new transactions in interest rate SBS were
executed on platforms. These observations suggest that the vast
majority of SBS trading continues to be conducted bilaterally in the
OTC market. The Commission invites commenters to provide feedback on
the extent of SBS trading on platforms.
---------------------------------------------------------------------------
\377\ Beginning on November 8, 2021, market participants were
required to report SBS transactions to registered SDRs pursuant to
Regulation SBSR.
---------------------------------------------------------------------------
The Commission preliminarily identifies 11 platforms on which new
SBS transactions were executed between November 8, 2021 and February
28, 2022. Of these 11 platforms, ten are foreign SBS trading venues and
one is a U.S. SBS trading venue that is affiliated with a CFTC-
registered SEF. Of the new transactions in credit SBS executed between
November 8, 2021 and February 28, 2022, 2,126 were executed on non-U.S.
platforms and involved at least one counterparty that is a U.S. person
or a non-U.S. person whose performance under the SBS is guaranteed by a
U.S. person (0.7% of all new transactions in credit SBS transactions).
During the same period, 30 new transactions in equity SBS were executed
on a non-U.S. platform and involved at least one counterparty that is a
U.S. person or a non-U.S. person whose performance under the SBS is
guaranteed by a U.S. person (less than 0.01% of all new transactions in
equity SBS transactions).
7. Global Regulatory Efforts
In 2009, the G20 leaders--whose membership includes the United
States, 18 other countries, and the European Union--addressed global
improvements in the OTC derivatives market. They expressed their view
on a variety of issues relating to OTC derivatives contracts.\378\ In
subsequent summits, the G20 leaders have returned to OTC derivatives
regulatory reform and encouraged international consultation in
developing standards for these markets.\379\
---------------------------------------------------------------------------
\378\ See G20, Leaders' Statement: The Pittsburgh Summit
(September 24-25, 2009) at paragraph 13.
\379\ See, e.g., G20, Toronto Summit Declaration (June 27, 2010)
at Annex II paragraph 25; Cannes Summit Final Declaration--Building
Our Common Future: Renewed Collective Action for the Benefit of All
(November 4, 2011) at paragraph 24.
---------------------------------------------------------------------------
Foreign legislative and regulatory efforts have generally focused
on five areas: (1) Moving standardized OTC derivatives onto organized
trading platforms; (2) requiring central clearing of OTC derivatives;
\380\ (3) requiring post-trade reporting of transaction data to trade
repositories; (4) establishing or enhancing capital requirements for
non-centrally cleared OTC derivatives transactions; and (5)
establishing or enhancing margin and other risk mitigation requirements
for non-centrally-cleared OTC derivatives transactions. The rules being
proposed in this release concern the registration and regulation of
SBSEFs, a type of organized trading platform.
---------------------------------------------------------------------------
\380\ See supra note 94.
---------------------------------------------------------------------------
As of the end of 2021, platform trading requirements were in force
in 12 foreign jurisdictions while seven jurisdictions were in the
process of proposing legislation or rules to implement platform trading
requirements.\381\ Seven foreign jurisdictions have made determinations
with respect to the specific OTC derivatives that are required to be
traded on platforms.\382\
---------------------------------------------------------------------------
\381\ Apart from the 12 foreign jurisdictions, the United States
is considered to have platform trading requirements in place based
on the CFTC's implementation of platform trading requirements. See
FSB, OTC Derivatives Market Reforms: Implementation Progress in 2021
Tables 1 & K (December 3, 2021), available at https://www.fsb.org/2021/12/otc-derivatives-market-reforms-implementation-progress-in-2021/ (describing progress made towards implementing platform
trading requirements in 2021); FSB, OTC Derivatives Market Reforms:
2019 Progress Report on Implementation Table A (October 15, 2019),
available at https://www.fsb.org/2019/10/otc-derivatives-market-reforms-2019-progress-report-on-implementation/ (discussing the
CFTC's implementation of platform trading requirements).
\382\ These jurisdictions are China (bond forwards; certain
currency forwards, options, and swaps); the European Union (certain
index CDS; certain IRS denominated in Euro, U.S. dollar, and British
pound); India (certain overnight index swaps); Indonesia (equity and
commodity derivative products); Japan (selected Yen-denominated
IRS); Mexico (certain Peso-denominated IRS); and Singapore (certain
IRS denominated in Euro, US dollar, and British pound). See FSB,
2019 Progress Report, supra note 381, Table R. In its 2021 report,
see supra note 381, the FSB noted no change in status in the
implementation of platform trading requirements, including platform
trading determinations, since its 2019 report.
---------------------------------------------------------------------------
8. Trading Models
Unlike the markets for cash equity securities and listed options,
the market for SBS currently is characterized by bilateral negotiation
in the OTC swap market; is largely decentralized; has many non-
standardized instruments; and has many SBS that are not centrally
cleared. The lack of uniform rules concerning the trading of SBS and
the one-to-one nature of trade negotiation in SBS has resulted in
different models for the trading of these securities, ranging from
bilateral negotiations carried out over the telephone, to RFQ systems
(e.g., single-dealer and multi-dealer RFQ platforms) and central limit
order books outside the United States, as more fully described below.
The use of electronic media to execute transactions in SBS varies
greatly across trading models, with some models being highly electronic
whereas others rely almost exclusively on non-electronic means such as
the telephone. The reasons for use of, or lack of use of, electronic
media vary from such factors as user preference to limitations in the
existing infrastructure of certain trading platforms. The description
below of the ways in which SBS may be traded is based in part on
discussions with market participants. The Commission solicits comments
on the accuracy of this description.
The Commission uses the term ``bilateral negotiation'' to refer to
the model whereby one party uses the telephone, email, or other
communications to contact directly a
[[Page 28947]]
potential counterparty to negotiate an SBS transaction. Once the terms
are agreed, the SBS transaction is executed and the terms are
memorialized.\383\ In a bilateral negotiation, there might be no pre-
trade or post-trade transparency available to the market place because
only the two parties to the transaction are aware of the terms of the
negotiation and the final terms of the agreement. Further, no terms of
the proposed transaction are firm until the transaction is executed.
However, reputational costs generally serve as a deterrent to either
party's failing to honor any quoted terms. Dealer-to-customer bilateral
negotiation currently is used for all SBS asset classes, and
particularly for trading in less liquid SBS, in situations where the
parties prefer a privately negotiated transaction, such as for a large
notional transaction, or in other circumstances in which it is not
cost-effective for a party to the trade to use one of the execution
methods described below.
---------------------------------------------------------------------------
\383\ See, e.g., Trade Acknowledgement and Verification Adopting
Release, 81 FR at 39809.
---------------------------------------------------------------------------
Another model for the trading of SBS is the RFQ system. An RFQ
system typically allows market participants to obtain quotes for a
particular SBS by simultaneously sending messages to one or more
potential respondents (SBS dealers).\384\ The initiating participant is
typically required to provide information related to the request in a
message, which may include the name of the initiating participant, SBS
identifier, side, and size. SBS dealers that observe the initiating
participant's request have the option to respond to the request with a
price quote.\385\ These respondents are often, though not always, pre-
selected. The initiating participant can then select among the
respondents by either accepting one of multiple responses or rejecting
all responses, usually within a ``good for'' time period. After the
initiating participant and a respondent agree on the terms of the
trade, the trade will then proceed to post-trade processing.
---------------------------------------------------------------------------
\384\ See Lynn Riggs, Esen Onur, David Reiffen, and Haoxiang
Zhu, Swap Trading After Dodd-Frank: Evidence from Index CDS, 137 J.
Financial Economics 857 (2020) (finding that, in the index CDS
market, an initiating participant is more likely to send RFQs to its
relationship dealers, i.e., its clearing members or dealers with
whom it has traded more actively in the recent past).
\385\ See id. (finding that, in the index CDS market, a dealer's
response rate to an RFQ declines with the number of dealers included
in the RFQ).
---------------------------------------------------------------------------
RFQ systems provide a certain degree of pre-trade transparency in
that the initiating participant can observe the quotes it receives (if
any) in response to its RFQ. The number of quotes received depends, in
part, on the number of respondents that are invited to participate in
the RFQ. As the Commission discussed elsewhere, several factors may
influence the number of respondents that are invited to participate in
an RFQ.\386\ First, the RFQ system itself may limit the total number of
respondents that can be selected for a single RFQ, typically to five
counterparties. This limitation may encourage SBS dealers to respond to
RFQs, since it reduces the number of other SBS dealers they would
compete with in any give request session. Second, the initiating
participant may have an incentive to limit the degree of information
leakage. If the trade the initiating participant is seeking to complete
with the help of the RFQ is not completely filled in that one session,
and other participants know this, quotes the initiating participant
receives elsewhere may be affected, including in subsequent RFQ
sessions. Third, respondents and initiators both have an incentive to
limit price impact because of the expense it will add to the offsetting
trade that must follow. Specifically, an SBS dealer who takes a
position to fill a customer order through an RFQ will often
subsequently offset that position in the interdealer market. If a large
number of SBS dealers are invited to participate in an RFQ, this would
lead to widespread knowledge that the SBS dealer with the winning bid
will now try to offset that position, which could impact the prices
available to that dealer in the interdealer market.
---------------------------------------------------------------------------
\386\ See Amendments to Exchange Act Rule 3b-16 Regarding the
Definition of ``Exchange''; Regulation ATS for ATSs That Trade U.S.
Government Securities, NMS Stocks, and Other Securities; Regulation
SCI for ATSs That Trade U.S. Treasury Securities and Agency
Securities SEA Release No. 94062 (January 26, 2022), 87 FR 15496
(March 18, 2022) (``ATS-G Proposal''), section VIII(B)(1)(a)
therein.
---------------------------------------------------------------------------
A third model for the trading of SBS is a limit order book system
or similar system, which the Commission understands is not yet in
operation for the trading of SBS in the United States but exists for
the trading of SBS in Europe. Today, securities and futures exchanges
in the United States display a limit order book in which firm bids and
offers are posted for all participants to see, with the identity of the
parties withheld until a transaction occurs.\387\ Bids and offers are
then matched based on price-time priority or other established
parameters and trades are executed accordingly. The quotes on a limit
order book system are firm. In general, a limit order book system also
provides greater pre- trade transparency than the two models described
above, because participants can view bids and offers before placing
their bids and offers. However, broadly communicating trading interest,
particularly about a large trade, might increase hedging costs, and
thus costs to investors, as reflected in the prices from the SBS
dealers. The system can also provide post-trade transparency, to the
extent that participants can see the terms of executed transactions.
---------------------------------------------------------------------------
\387\ Under CFTC rules applicable to the swap market, Sec.
37.9(f) prohibits the practice of post-trade name give-up for swaps
that are executed, pre-arranged, or pre-negotiated anonymously on or
pursuant to the rules of a SEF and intended to be cleared, subject
to an exception related to certain package transactions. See supra
section VII(E) (discussing proposed Rule 815).
---------------------------------------------------------------------------
The three models described above represent broadly the types of
trading of SBS in the OTC market today. These examples may not
represent every method in existence today, but the discussion above is
intended to give an overview of the models without providing the
nuances of each particular type.
C. Benefits, Costs, and Reasonable Alternatives
This section discusses the benefits and costs of the proposal. The
section also discusses a number of alternatives that the Commission
considered when formulating the proposed rules and amendments.
The Commission's consideration of the benefits and costs of the
proposal takes into account the connection between the trade execution
requirement and the mandatory clearing requirement mandated by
Congress. The Dodd-Frank Act amends the SEA to require, among other
things, the following with respect to SBS transactions: (1)
Transactions in SBS must be cleared through a clearing agency if they
are required to be cleared; \388\ and (2) if the SBS is subject to the
clearing requirement, the transaction must be executed on an exchange
or on an SBSEF registered under section 3D of the SEA or an SBSEF
exempt from registration under section 3D(e) of the SEA, unless no
SBSEF or exchange makes such SBS available for trading or the SBS is
subject to the clearing exception in section 3C(g) of the SEA.\389\ The
benefits and costs associated with the trade execution requirement
would not materialize unless and until the Commission makes mandatory
clearing determinations, i.e., determining what
[[Page 28948]]
SBS transactions must be cleared by a clearing agency.
---------------------------------------------------------------------------
\388\ See Public Law 111-203, section 763(a) (adding section
3C(a)(1) of the SEA).
\389\ See Public Law 111-203, section 763(a) (adding section
3C(h) of the SEA). See also Public Law 111-203, section 761(a)
(adding section 3(a)(77) of the SEA to define the term ``security-
based swap execution facility'').
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The Commission preliminarily believes that the general approach to
proposing requirements relating to SBS execution could mitigate costs
associated with the proposal. As discussed in section III, the
Commission's approach is to harmonize as closely as practicable with
analogous CFTC rules for SEFs, unless a reason exists to do otherwise
in a particular area. Based on the Commission's preliminarily belief
that SBSEF registrants likely would be registered SEFs that have
established systems and policies and procedures to comply with CFTC
rules, the Commission's general approach likely would result in
compliance costs for registered SBSEFs that are lower than compliance
costs that would have resulted had the Commission chosen not to follow
the CFTC's approach.\390\
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\390\ In section XX infra, for purposes of the PRA, the
Commission preliminarily estimates burdens applicable to a stand-
alone SBSEF. However, the Commission preliminarily believes that
most if not all SBSEFs will be dually registered with the CFTC as
SEFs, and thus will already be complying with relevant CFTC rules
that have analogs to rules contained within proposed Regulation SE.
Therefore, the Commission's burden estimates may be larger for
stand-alone SBSEF than may exist in practice, considering the effect
of overlapping CFTC rules.
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In assessing the economic impact of the proposed rules, the
Commission considers the broader costs and benefits associated with the
application of the proposed rules, including the costs and benefits of
applying the substantive Title VII requirements to the trading of
SBS.\391\ The Commission's analysis also considers ``assessment''
costs--i.e., those that arise from current and future market
participants expending resources to assess how they will be affected by
Regulation SE, and could incur expenses in making this assessment even
if they ultimately are not subject to rules for which they made an
assessment.
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\391\ In certain prior Title VII releases, the Commission had
referred to such costs and benefits as programmatic costs and
benefits. See, e.g., Regulation SBSR Adopting Release I.
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Many of the benefits and costs discussed below are difficult to
quantify. These benefits and costs would depend on how potential SBSEFs
and their prospective members respond to the proposed rules, if adopted
by the Commission. If potential SBSEFs perceive the costs associated
with operating registered SBSEFs to be high, such that few or no
entities come forward to register as SBSEFs, there could be no
triggering of the trade execution requirement, which depends on MAT
determinations made by registered SBSEFs (or exchanges). Under this
scenario, the future state of the SBS market likely would not differ
from the current baseline and the potential costs and benefits
discussed below would not materialize. An alternative scenario is that
prospective SBSEFs perceive the costs associated with operating
registered SBSEFs to be high but nevertheless register as SBSEFs
because they expect to be able to pass on such costs to their members
to help maintain the commercial viability of operating a registered
SBSEF. MAT determinations by registered SBSEFs would move trading of
the products covered by the determinations onto SBSEFs, which could
generate benefits and costs associated with increased pre-trade
transparency, in addition to benefits and costs associated with the
operation of regulated markets. A third possibility is that entities
come forward to register as SBSEFs because they perceive the associated
costs of operating SBSEFs to be low in light of the close harmonization
of the proposed rules with analogous CFTC SEF rules. If these
registered SBSEFs do not make MAT determinations and thus do not
trigger the trade execution requirement, the benefits and costs
associated with increased pre-trade transparency likely would not
arise. If SBSEF trading is limited because of an absence of MAT
determinations, the benefits and costs associated with the operation of
regulated markets potentially would be limited as well. A fourth
possibility is that entities do come forward to register as SBSEFs
because they perceive the associated costs of operating SBSEFs to be
low and these registered SBSEFs make MAT determinations and trigger the
trade execution requirement. Under this scenario, the benefits and
costs associated with increased pre-trade transparency and regulated
markets likely would arise. The Commission does not have the data to
determine which of the above possibilities will prevail should the
proposed rules be adopted.
The Commission has attempted to quantify economic effects where
possible, but much of the discussion of economic effects is necessarily
qualitative. The Commission requests comment and, with regard to any
comments, such comments are of greatest assistance if they are
accompanied by supporting data and analysis of the issues addressed.
1. Overarching Benefits of the Proposal
Broadly, the Commission anticipates that proposed Regulation SE may
bring several overarching benefits to the SBS market.
Improved Transparency. The proposal would enable the Commission to
obtain information about SBSEFs, thereby facilitating the Commission's
oversight of these entities.\392\
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\392\ For example, proposed Rule 826 would, among other things,
require an SBSEF to maintain records of its business activities
(including a complete audit trail) for a period of five years and
report to the Commission such information as the Commission
determines to be necessary or appropriate for performing the duties
of the Commission under the SEA. See also the discussion below on
how the proposal would provide the means for the Commission to gain
better insight into and oversight of SBSEFs and the SBS market.
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In addition, the proposed requirements relating to pre-trade
transparency would increase pre-trade transparency in the market for
SBS.\393\ Increased pre-trade price transparency should allow an
increased number of market participants to better see the trading
interest of other market participants prior to trading, which should
lead to increased price competition among market participants.\394\ The
Commission preliminarily believes that the proposed requirements with
respect to pre-trade price transparency should lead to more efficient
pricing in the SBS market.\395\
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\393\ Proposed Rules 803(a)(2) and (3) would require an SBSEF to
offer, at a minimum, an order book for SBS trading, subject to
certain exceptions related to package transactions. Proposed Rule
815 would require SBS transactions subject to the trade execution
requirement to be executed using either an order book or via an RFQ-
to-3 system. Proposed Rule 816 would set forth the process by which
an SBSEF would subject an SBS to the trade execution requirement.
Proposed Rule 832 would describe those cross-border SBS transactions
that would be subject to the trade execution requirement.
\394\ See, e.g., Ananth Madhavan, Market Microstructure: A
Practitioner's Guide, Fin. Analysts J., Vol. 58, at 38 (2002)
(nondisclosure of pre-trade price information benefits dealers by
reducing price competition).
\395\ See, e.g., Ekkehart Boehmer, et al., Lifting the Veil: An
Analysis of Pre-trade Transparency at the NYSE, J. Fin., Vol. LX
(2005) (greater pre-trade price transparency leads to more efficient
pricing).
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Evidence from the swap market suggests that an increase in pre-
trade transparency is associated with improved liquidity and reduced
transaction costs.\396\ The Commission is not aware of any difference
between the
[[Page 28949]]
swap market and the SBS market that would cause the empirical findings
regarding the impact of pre-trade price transparency on liquidity and
transaction costs not to carry over into the SBS market, when
implemented. The Commission is mindful that, under certain
circumstances, pre-trade price transparency could also discourage the
provision of liquidity by some market participants.\397\ However, the
Commission preliminarily believes that by proposing two execution
methods for Required Transactions (limit order book and RFQ-to-3),
market participants have flexibility in the degree of pre-trade
transparency they wish to employ, which should attenuate potential
concerns associated with the exposure of pre-trade trading interest.
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\396\ See Evangelos Benos, Richard Payne, and Michalis Vasios,
Centralized Trading, Transparency, and Interest Rate Swap Market
Liquidity: Evidence from the Implementation of the Dodd-Frank Act,
55 J. Fin. and Quantitative Analysis 159 (2020) (finding, among
other things, that imposition of the CFTC's trade execution
requirement improved the liquidity of IRS that were subject to the
requirement, and that the liquidity improvement was associated with
more intense competition between swap dealers); Y.C. Loon and
Zhaodong (Ken) Zhong, Does Dodd-Frank Affect OTC Transaction Costs
and Liquidity? Evidence from Real-Time CDS Trade Reports, 119 J.
Fin. Econ. 645 (2016) (finding that index CDS transactions executed
on SEFs have lower transaction costs and improved liquidity than
index CDS transactions executed bilaterally).
\397\ See, e.g., Ananth Madhavan, et al., Should Securities
Markets Be Transparent?, J. of Fin. Markets, Vol. 8 (2005) (finding
that an increase in pre-trade price transparency leads to lower
liquidity and higher execution costs, because limit-order traders
are reluctant to submit orders given that their orders essentially
represent free options to other traders).
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Improved oversight of trading. Regulation SE would require, among
other things, that SBSEFs maintain an audit trail and automated trade
surveillance system; conduct real-time market monitoring; establish and
enforce rules for information collection; and comply with reporting and
recordkeeping requirements.\398\ These requirements are designed to
provide an SBSEF with sufficient information to oversee trading on its
market, including detecting and deterring abusive trading practices.
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\398\ See proposed Rules 819, 821, 822, and 826.
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This framework could enhance investor protection and increase
confidence in a well-regulated market among SBS market participants,
which could in turn make them more willing to increase their
participation or entice new participants. An increase in participation
in the SBS market would, all else being equal, benefit the SBS market
as a whole. Further, to the extent that market participants utilize SBS
to better manage their risk with respect to a position in underlying
securities or assets, their participation in the SBS market could
impact their willingness to participate in the underlying asset
markets. Thus, the Commission preliminarily believes that the proposal
could benefit the securities markets overall by encouraging a more
efficient, and potentially higher, level of capital investment.
Improved access and competition. Currently, the SBS market is
dominated by a small group of SBS dealers.\399\ A mandatory clearing
determination by the Commission, followed by a MAT determination by one
or more SBSEFs or exchanges, should help foster greater competition in
the trading of SBS by promoting greater order interaction and
increasing access to and participation on SBSEFs. The proposed rules
would provide a framework for allowing a number of trading venues to
register as SBSEFs and thus more effectively compete for business in
SBS. Furthermore, proposed Rule 827 is designed to promote competition
generally by prohibiting an SBSEF from adopting any rules or taking any
actions that unreasonably restrain trade, or imposing any material
anticompetitive burden on trading or clearing. In addition, proposed
Rule 819(c) would, among other things, require an SBSEF to provide any
ECP with impartial access to its market(s) and market services.
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\399\ See supra section XIX(B)(2).
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The proposed new rules and amendments to the Commission's Rules of
Practice would allow persons who are aggrieved by a final disciplinary
action, a final action with respect to a denial or conditioning of
membership, or a final action with respect to a denial or limitation of
access by an SBSEF to seek an application for review by the
Commission.\400\ These proposed rules and amendments are designed to
improve access to SBSEFs by creating a procedure for making appeals to
the Commission, thereby limiting the ability of an SBSEF to make a
disciplinary action, denial or conditioning of membership, or denial or
limitation of access without any recourse by the affected party. Taken
together, these proposed rules and amendments should foster greater
access to SBSEFs by SBS market participants, which in turn could
promote greater participation by liquidity providers on SBSEFs.
Increased participation could increase competition in liquidity
provision and lower trading costs, which may lead to increased
participation in the SBS market.
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\400\ See proposed Rules 442 and 443; proposed amendments to
Rules 101, 202, 210, 401, 450, and 460.
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Improved Commission oversight. One of the goals of the Dodd-Frank
Act is to increase regulatory oversight of SBS trading relative to the
existing OTC SBS market.\401\ The proposal would provide the means for
the Commission to gain better insight into and oversight of SBSEFs and
the SBS market by, among other things, allowing the Commission to
review new rules, rule amendments, and product listings by SBSEFs \402\
and to obtain other relevant information from SBSEFs.\403\
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\401\ See Public Law 111-203, Preamble.
\402\ See proposed Rules 804, 805, 806, and 807.
\403\ See proposed Rule 811.
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Additionally, proposed Rule 826(b) would require every SBSEF to
keep full, complete, and systematic records of all activities relating
to its business with respect to SBS. In addition, proposed Rule 819(f)
would require an SBSEF to capture and retain a full audit trail of
activity on its facility. The records required to be kept by an SBSEF
would help the Commission to determine whether an SBSEF is operating in
compliance with the SEA and the Commission's rules thereunder. The
audit trail data required to be captured and retained would facilitate
the ability of the SBSEF and the Commission to carry out their
respective obligations under the SEA, by facilitating the detection of
abusive or manipulative trading activity, allowing reconstructions of
activity on the SBSEF, and generally understanding the causes of both
specific trading events and general market activity.
Furthermore, proposed Rule 835 would require an SBSEF to provide
the Commission notice of a final disciplinary action, a final action
with respect to a denial or conditioning of membership, or a final
action with respect to a denial or limitation of access, which would
allow the Commission to review the SBSEF's disciplinary process and
exercise of its regulatory powers, providing the Commission an
additional tool to carry out its oversight responsibilities. The
proposed registration requirements and related proposed Form SBSEF, and
the CCO's annual compliance report, which are further discussed below,
would also help the Commission with its oversight responsibilities.
Improved automation. To comply with the requirements of proposed
Regulation SE relating to recordkeeping and surveillance, an SBSEF
potentially would need to invest in and develop automated technology
systems to store, monitor, and communicate a variety of trading data,
including orders, RFQs, RFQ responses, and quotations.\404\ The
proposed rules should promote increased automation in the SBS market,
although CFTC-registered SEFs that plan to register as SBSEFs are
already deploying automated systems that could be supplemented to
support an SBS business. In addition, the automation and systems
development associated with the regulation of SBSEFs could provide SBS
market participants with new platforms and tools to execute and process
[[Page 28950]]
transactions in SBS at a lower expense per transaction. Such increased
efficiency could enable members of the SBSEF to handle increased
volumes of SBS with greater efficiency.
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\404\ See proposed Rules 819(d)(4) and 826.
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2. Benefits Associated With Specific Proposed Rules
In addition to the broad benefits that the Commission anticipates
as a result of proposed Regulation SE, individual rules could bring
particular benefits to the SBS market. These include the following:
Registration requirements and Form SBSEF. SBSEF registration is
required under the Dodd-Frank Act.\405\ Proposed Rule 818(a)
incorporates the requirement under the Dodd-Frank Act that an SBSEF, in
order to be registered and maintain registration, must comply with the
Core Principles in section 3D(d) of the SEA and the Commission's rules
thereunder. The registration process described in proposed Rule 803
would implement this statutory requirement and assist the Commission in
overseeing and regulating the SBS market. The information to be
provided on proposed Form SBSEF is designed to enable the Commission to
assess whether an applicant has the capacity and the means to perform
the duties of an SBSEF and to comply with the Core Principles and other
requirements imposed on SBSEFs. Proposed Rule 803 is closely modelled
on analogous CFTC registration requirements for SEFs. The choice to
align the Commission's registration requirements for SBSEFs with the
CFTC's requirements for SEFs is designed to achieve the abovementioned
benefits while imposing only marginal costs on SBSEF registrants, who
likely are SEFs.
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\405\ See section 3D(a)(1) of the SEA, 15 U.S.C. 78c-4(a)(1).
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Proposed exemptions (proposed Rule 833, proposed Rule 816(e),
proposed amendments to Rule 3a1-1, and proposed Rule 15a-12). Proposed
Rule 833 is designed to preserve access to foreign markets by ``covered
persons'' (as defined in proposed Rule 832). As discussed in section
XIX(B)(6), an analysis of SBS transaction data indicates that certain
trades executed on foreign SBS trading venues involve at least one
counterparty that is a covered person. Absent the proposed rule, these
trading venues might elect to avoid having members that are covered
persons if those venues do not wish to register with the Commission in
some capacity (such as an exchange or SBSEF). In addition, covered
persons would not be permitted to execute SBS that are subject to the
trade execution requirement on these venues if the venues do not
register with the Commission in some capacity (such as an exchange or
SBSEF) or obtain an appropriate exemption. This would limit access to
foreign SBS trading venues by covered persons, potentially making it
harder for them to locate counterparties and obtain liquidity for SBS
that trade on those venues. This in turn could increase their trading
costs, because they might spend more time and effort to locate
counterparties or because they have less bargaining power relative to
the remaining pool of potential counterparties with which they could
trade. To the extent that a foreign SBS trading venue can obtain a Rule
833(a) exemption, it could continue to provide members that are covered
persons with access to and liquidity on its market. Furthermore, a Rule
833(b) exemption would allow covered persons to continue accessing
foreign SBS trading venues to execute SBS that are subject to the SEA's
trade execution requirement.
Currently, all trading venues that trade SBS--whether domestic or
foreign--are exempt from having to register as a national securities
exchange or SBSEF on account of the SBS trading business. This
exemption expires when the Commission's rules for registering and
regulating SBSEFs come into force.\406\ Thus, removal of the existing
exemption would merely restore the status quo ante, where the SEA
itself, as amended by the Dodd-Frank Act, requires entities meeting the
definition of ``security-based swap execution facility'' or
``exchange'' and falling within the territorial jurisdiction of the SEA
to register with the Commission. By offering foreign SBS trading venues
the possibility of an exemption from the definitions of ``security-
based swap execution facility'' and ``exchange'' as well as from
section 3D(a)(1) of the SEA, proposed Rule 833(a) would allow foreign
SBS trading venues to operate in conditions similar to the current
baseline (if the Commission ultimately grants an exemption under Rule
833(a)).
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\406\ See supra section V, note 43.
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Currently, market participants that trade SBS that would be covered
by proposed Rule 816(e) \407\ do not trade these products on registered
exchanges or registered SBSEFs. Proposed Rule 816(e), by providing
exemptions from the trade execution requirement for these SBS, would
preserve the status quo for these SBS.
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\407\ Proposed paragraphs (e)(1), (2), and (3) of Rule 816 would
exempt from the trade execution requirement, respectively: An SBS
transaction that is executed as a component of a package transaction
that also includes a component transaction that is the issuance of a
bond in a primary market; an SBS that qualifies for an exception
under section 3C(g) of the SEA or any exemption from the clearing
requirement that is granted by the Commission, for which the
associated requirements are met; and an SBS transaction that is
executed between counterparties that qualify as ``eligible affiliate
counterparties.''
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Proposed paragraph (a)(4) of Rule 3a1-1 would provide that an
entity that has registered with the Commission as an SBSEF and provides
a market place for no securities other than SBS would not fall within
the definition of ``exchange'' and thus would not be subject to the
requirement in section 5 of the SEA to register as a national
securities exchange (or obtain a low-volume exemption). The Commission
preliminarily believes that the benefit of the proposed amendment would
be to clarify to prospective SBSEF applicants that, if they register
with the Commission as SBSEFs, they would not face duplicative
registration and regulatory requirements as exchanges. In addition,
proposed paragraph (a)(5) of Rule 3a1-1 would codify a series of
exemptions that the Commission has granted over several years to SBS
clearing agencies that operate ``forced trading'' sessions. Because the
proposed amendment is intended to codify existing exemptions, the
Commission preliminarily believes that any associated economic effects
would be minimal.
Proposed new Rule 15a-12 is designed to minimize overlapping
compliance burdens for SBSEFs, which are also brokers under the SEA,
that restrict their activity to engaging in the business of operating
an SBSEF (and no other broker activities). Absent the proposed rule,
such SBSEFs (defined as ``SBSEF-Bs'' for purposes of Rule 15a-12) would
need to register as SBSEFs and be subject to the SBSEF regulatory
regime, in addition to registering as brokers and being subject to the
broker regulatory regime. Proposed Rule 15a-12 would allow an SBSEF-B
to satisfy the requirement to register as a broker by registering as an
SBSEF under proposed Rule 803, and would exempt an SBSEF-B from SIPA
and other broker requirements, except for sections 15(b)(4), 15(b)(6),
and 17(b) of the SEA. As a result of the proposed rule, SBSEF-Bs could
avoid incurring what the Commission preliminarily believes to be
duplicative and unnecessary compliance burdens. Each SBSEF-B could save
an estimated $324,849 in initial broker registration costs \408\ and
[[Page 28951]]
$59,063 in annual ongoing costs of meeting broker registration
requirements.\409\ In deriving these estimates, the Commission assumes
that the activities an SBSEF-B performs to register and maintain
registration as a broker do not overlap with those that it performs to
register and maintain registration as an SBSEF-B. If there is an
overlap in such activities, the estimated cost savings could be
smaller. Each SBSEF-B could save an estimated $823 in ongoing costs
associated with satisfying broker minimum capital requirements.\410\
The estimated aggregate initial and annual ongoing savings are
$1,624,245 and $299,430, respectively.\411\
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\408\ The Commission previously estimated that an entity would
incur costs of $301,400 to register as a broker-dealer and become a
member of a national securities association. See Cross-Border
Amendments Adopting Release, 85 FR at 6312. Adjusted for inflation
through December 2021, these costs are $324,849.
\409\ The Commission previously estimated that an entity would
incur ongoing annual costs of $54,800 to maintain broker-dealer
registration and membership of a national securities association.
See Cross-Border Amendments Adopting Release, 85 FR at 6312.
Adjusted for inflation through December 2021, these costs are
$59,063. The estimation of ongoing annual costs is based on the
assumption that the entity would use existing staff to perform the
functions of the registered broker-dealer and would not incur
incremental costs to hire new staff. To the extent that the entity
chooses to hire new staff, the ongoing annual costs would likely be
higher.
\410\ The Commission preliminarily believes that, absent the
proposed rule, an SBSEF-B would comply with the minimum net capital
requirement of $5,000 for a registered broker-dealer because it
would not receive, owe, or hold customer funds or securities; carry
customer accounts; and engage in certain other activities. See Rule
15c3-1(a)(2)(vi) under the SEA, 17 CFR 240.15c3-1(a)(2)(vi). The
Commission preliminarily estimates the cost of capital using the
annual stock returns on a value-weighted portfolio of financial
stocks from 1986 to 2021 (see website of Professor Ken French,
available at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/ftp/48_Industry_Portfolios_CSV.zip (accessed on March 14, 2022).
These returns were averaged to arrive at an estimate of 16.45%. The
cost of capital = 16.45% x $5,000 = $823.
\411\ The Commission preliminarily estimates the number of
SBSEF-Bs as the number of entities that likely will register as
SBSEFs. See supra section XIX(B)(5). Aggregate initial savings =
$324,849 x 5 (number of SBSEF-Bs) = $1,624,245. Aggregate annual
ongoing savings = ($59,063 + $823) x 5 (number of SBSEFs) =
$299,430.
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Rule and product filings. Proposed Rules 806 and 807 would set
forth alternative filing processes for a new rule or rule amendment of
a registered SBSEF, and proposed Rules 804 and 805 would set forth
alternative filing processes for an SBSEF to file an SBS product that
it wishes to list. Proposed Rule 810 would address new product filings
by an entity that has applied for SBSEF registration but has not yet
been registered, or by a dormant SBSEF seeking reinstatement of its
registration. The self-certification processes of Rules 804 and 807
would require SBSEFs to include a certification that the product, rule,
or rule amendment, as the case may be, complies with the SEA and
Commission rules thereunder.\412\ The information to be provided by the
SBSEF under proposed Rules 804, 805, and 810 would further the ability
of the Commission to obtain information regarding SBS that an SBSEF
intends to list on its market. The proposed rules would assist the
Commission in overseeing and regulating the trading of SBS and to help
ensure that SBSEFs operate in compliance with the SEA.
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\412\ See proposed Rules 804(a)(3)(iv) and 807(a)(6)(iv) .
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In addition, proposed Rule 806(a)(5), which would require an SBSEF
to explain the anticipated benefits and potential anticompetitive
effects on market participants of a proposed new rule or rule amendment
potentially could help foster a competitive SBS market because it could
prompt SBSEFs to consider the positive as well as negative aspects of
their proposed rules or rule amendments. Proposed Rule 808 is designed
to facilitate the public's ability to obtain information from SBSEF
applications as well as rule and product filings. Proposed Rule 808(a)
would specify the parts of an SBSEF application that shall be made
publicly available unless confidential treatment is obtained pursuant
to SEA Rule 24b-2. Proposed Rule 808(b) would provide that an SBSEF's
rule and product filings shall be made publicly available unless
confidential treatment is obtained pursuant to SEA Rule 24b-2. Proposed
Rule 808(c) would provide that the terms and conditions of a product
submitted to the Commission pursuant to any of proposed Rules 804
through 807 shall be made publicly available at the time of submission
unless confidential treatment is obtained pursuant to SEA Rule 24b-2.
Proposed Rule 809 would provide a mechanism for the staying or
tolling of a filing by an SBSEF relating to a product while the
appropriate jurisdictional classification of that product is
determined. The proposed rule is designed to provide regulatory
certainty for SBSEFs and market participants who may be interested in
trading products whose classification as an SBS subject to SEC
jurisdiction or a swap subject to CFTC jurisdiction is unclear. In
particular, proposed Rule 809 would help ensure that determinations
regarding whether the SEC or CFTC appropriately has jurisdiction over a
product are made before the product is traded.
The Commission's election to model proposed Rules 804 through 810
closely on analogous rules in part 40 of the CFTC's rules that apply to
SEFs (and other registered entities) is designed to promote efficiency.
Utilizing the same processes for rule and product filings, with which
dually registered SEF/SBSEFs are familiar, would impose only minimal
burdens on such entities while obtaining the similar regulatory
benefits as the CFTC rules. In some cases, where a new rule or rule
amendment affects both the swap and SBS business of a dually registered
entity, the same or a very similar filing could be made to each of the
CFTC and SEC, in lieu of having to make different filings to support
the same rule change.
Chief Compliance Officer. Proposed Rule 831 would, among other
things, require the CCO of an SBSEF to submit an annual compliance
report and annual financial report to the Commission. These reports
would assist the Commission in carrying out its oversight of the SBSEFs
and the SBS market by providing the Commission with information about
the compliance activities and financial state of SBSEFs. Furthermore,
by requiring an SBSEF to designate an individual as the CCO and making
the CCO responsible for ensuring compliance with the SEA and the
Commission's rules thereunder, proposed Rule 831 would promote
regulatory compliance on SBSEFs and the SBS market generally. This in
turn would further the goal of moving SBS trading away from opaque and
unregulated OTC markets and onto transparent and regulated markets by
promoting effective regulation of the latter.
Conflicts of Interest. Proposed Rule 831 would, among other things,
require the CCO to resolve material conflicts of interest that may
arise in consultation with the governing board or the senior officers
of the SBSEF.\413\ Proposed Rule 828(a) would require an SBSEF to
establish and enforce rules to minimize conflicts of interest in its
decision-making process and establish a process for resolving the
conflicts of interest. Proposed Rule 828(b) would require an SBSEF to
comply with the requirements of proposed Rule 834 which is designed to
implement section 765 of the Dodd-Frank Act with respect to SBSEFs and
SBS exchanges. Proposed Rule 834 would, among other things, impose a
20% cap on the voting interest held by an individual member of an SBSEF
or SBS exchange, mitigate conflicts of interest in the disciplinary
process of an SBSEF or SBS exchange, set forth certain minimum
requirements for the composition of the governing board of an SBSEF or
SBS exchange, set forth
[[Page 28952]]
reporting requirements related to governing board elections, and
address the avoidance of conflicts of interest in the execution of
regulatory functions by an SBSEF or SBS exchange.\414\
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\413\ See proposed Rules 831(a)(2)(iii) and (h)(2).
\414\ See proposed Rules 834(b) to (g).
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The Commission preliminarily believes that the proposed rules would
mitigate conflicts of interest between an SBSEF or SBS exchange and its
members as discussed in section X. Relative to the bilateral OTC SBS
market, SBSEFs and SBS exchanges promote competition between liquidity
providers, potentially forcing them to lower their prices for supplying
liquidity (e.g., narrowing bid-ask spread) and reducing their profits
from liquidity provision. However, if SBS dealers or major SBS
participants were able to restrict access to such venues by, for
example, exercising their voting interest in an SBSEF or SBS exchange,
they could stifle competition in SBSEFs and SBS exchanges and preserve
their profits from liquidity provision. The proposal, by mitigating
such conflicts of interest \415\ could help ensure access to SBSEFs and
SBS exchanges and in turn increase competition in liquidity provision
and lower transaction costs. The Commission preliminarily believes that
proposed Rules 834(e), (f), and (g) also may promote good governance at
SBSEFs and SBS exchanges. To the extent that improved governance result
in more effective oversight by SBSEFs and SBS exchanges of their
markets, market participants may benefit. These benefits could be
limited to the extent that prospective SBSEFs and SBS exchanges already
have rules in place that comply with the proposed rules.
---------------------------------------------------------------------------
\415\ See, e.g., proposed Rule 834(b) (proposing a 20% cap on
the voting interest held by an individual member of an SBSEF or SBS
exchange).
---------------------------------------------------------------------------
Structured Data Requirement. Proposed Rule 825(c)(3) would require
an SBSEF to publish a Daily Market Data Report on its website without
charge or usage restrictions and in a downloadable and machine-readable
format using the most recent version of the associated XML schema and
PDF renderer as published on the Commission's website.\416\ The
Commission preliminarily believes that requiring the Daily Market Data
Report to be provided in a structured, machine-readable format (using a
Commission-created XML schema) would facilitate the use of the price,
trading volume, and other trading data on the report by end users such
as SBS market participants and market observers. By including a
structured data requirement, the information in the report would be
made available in a consistent and openly accessible manner that would
allow for automatic processing by software applications, thus enabling
search capabilities and statistical and comparative analyses across
SBSEFs and date ranges.\417\ Absent a structured data requirement, any
SBS market participants and market observers seeking to use the data
would have to spend time manually collecting and entering the data into
a format that allows for analysis, thus increasing the time needed to
analyze the data and potentially leading to data errors. Alternatively,
data users could choose to subscribe to a service provider specializing
in such a data aggregation and comparison process. Under that scenario,
data users would be unable to access the posted data on as timely a
basis as they would if the disclosures were machine-readable upon
posting, and users would also incur monetary costs in paying for the
aggregated data.
---------------------------------------------------------------------------
\416\ See supra note 392 and accompanying text.
\417\ In addition, the associated PDF renderer would provide
users with a human-readable document for those who prefer to review
manually individual reports, while still providing a uniform
presentation.
---------------------------------------------------------------------------
Proposed Regulation SE would require SBSEFs to file documents
required under various provisions in the EDGAR system using Inline
XBRL, a structured (machine-readable) data language.\418\ Requiring a
centralized filing location and a machine-readable data language for
the filings would facilitate access, retrieval, analysis, and
comparison of the disclosed information across different SBSEFs and
time periods by the Commission and the public, thus potentially
augmenting the informational benefits of the various disclosure
requirements discussed herein. Also, because EDGAR provides basic
technical validation capabilities, the use of EDGAR could reduce the
incidence of technical errors (e.g., letters instead of numbers in a
field requiring only numbers) and thereby improve the quality of the
disclosures.
---------------------------------------------------------------------------
\418\ This includes the documents required under: proposed Rule
803(b)(1)(i) and (3) (filings of, and amendments to, a Form SBSEF
application); proposed Rules 803(e) and 803(f) (requests to withdraw
or vacate an application for registration); proposed Rule 804(a)(1)
(filings for listing products for trading by certification);
proposed Rule 805(a)(1) (filings for voluntary submission of new
products for Commission review and approval); proposed Rule
806(a)(1) (filings for voluntary submission of rules for Commission
review and approval); proposed Rule 807(a)(1) (filings for self-
certification of rules); proposed Rule 807(d) (filings of weekly
notifications to the Commission of rules and rule amendments that
were not required to be certified); proposed Rule 829(g)(6)
(submission to the Commission of reports related to financial
resources and related documentation); proposed Rule 831(j)(2)
(submission to the Commission of the annual compliance report of
SBSEF's CCO). See supra section XV.
---------------------------------------------------------------------------
Unlike the XML schema that would be used for Daily Market Data
Reports, Inline XBRL would provide the ability to tag detailed facts
within narrative text blocks, and is thus likely more well-suited to
accommodate the other filings required under proposed Regulation SE,
many of which require narrative discussions (e.g., the explanation and
analysis of the product and its compliance with applicable provisions
of the SEA for a product filing required under Rule 804).\419\ In
addition, certain proposed SBSEF disclosures consist of financial
information (e.g., the financial statements of the SBSEF required under
Exhibit I to Form SBSEF), and Inline XBRL is designed specifically for
the accurate capture and communication of financial information, among
other uses.\420\
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\419\ See proposed Rule 804(c)(3)(v).
\420\ For example, because Inline XBRL enables the block tagging
of textual narrative disclosures and the individual tagging of
numeric disclosures nested within those textual narrative
disclosures, it facilitates the comprehensive capture and
communication of information contained in notes to financial
statements.
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3. Costs
Although the Commission preliminarily believes that proposed
Regulation SE would benefit the SBS market, the Commission recognizes
that the proposed Regulation SE also would entail certain costs. Some
costs are difficult to precisely quantify and are discussed below. The
Commission is mindful that any rules it may adopt with respect to
SBSEFs under the Dodd-Frank Act may impact the incentives of market
participants with respect to where and how they trade SBS. If the rules
proposed by the Commission are, or are perceived to be, too costly for
trading venues to comply with, fewer entities than expected may seek to
register as SBSEFs, which would not further the goal of moving a
greater percentage of SBS trading from opaque and unregulated OTC
markets to transparent and regulated trading venues. In addition, if
the proposed rules for trading on an SBSEF are perceived as too
burdensome by market participants, SBS trading may continue in the OTC
market absent a mandatory clearing determination and a triggering of
the mandatory trade execution requirement, thus frustrating the goals
of the Dodd-Frank Act.\421\ At the same time, if the proposed rules
relating to
[[Page 28953]]
SBSEFs are too lenient, they may have little or no impact on the market
structure and surveillance of the SBS market relative to the status
quo, which could result in the loss of many of the benefits discussed
above and fail to achieve the goals of the Dodd-Frank Act.
---------------------------------------------------------------------------
\421\ See section XIX(C) (noting that the benefits and costs
associated with the trade execution requirement would not
materialize unless and until the Commission makes mandatory clearing
determinations).
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In addition, SBS traded on SBSEFs may be perceived to be subject to
increased costs, monetary and otherwise. For example, the proposed
requirements related to pre-trade transparency could cause market
participants to reveal valuable economic information regarding their
trading interest more broadly than they may believe would be
economically prudent and could discourage participation in the SBS
market. An additional impact of pre-trade transparency are perceived
costs associated with front running, if customers or SBS dealers are
required to show their trading interest before a trade is executed.
These potential costs of pre-trade transparency may change market
participants' trading strategies, which could result in them working
more orders or finding ways to attempt to hide their interest.\422\ If
market participants view the Commission's proposal as too burdensome
with respect to pre-trade transparency, SBS dealers may be less willing
to supply liquidity for SBS that trade on SBSEFs or exchanges, thus
adversely affecting liquidity and competition. However, such effects
could be mitigated by MAT determinations that would require SBS trading
to occur on SBSEFs or exchanges. On the other hand, if the proposed
requirements with respect to pre-trade transparency are too loose, the
result could be that there would be no substantive change from the
status quo, including no benefits of alleviating informational
asymmetries, increasing price competition, and supplying better
executions beyond the changes in response to the other requirements of
the Dodd-Frank Act. This actual impact would depend on the degree of
pre-trade transparency required and the characteristics of the trading
market. The proposed rules are intended to provide for greater pre-
trade transparency than currently exists without requiring pre-trade
transparency in a manner that would cause participants to avoid
providing liquidity on SBSEFs.
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\422\ See, e.g., Ananth Madhavan, Market Microstructure: A
Survey, J. of Fin. Markets, Vol. 3 (2000).
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The Commission preliminarily believes that there would be
transaction costs, such as fees and connectivity costs, that trading
counterparties would incur in executing or trading SBS subject to the
trade execution requirement on SBSEFs. Likewise, although unregulated
trading venues exist in today's OTC derivatives market, the Commission
does not have information regarding what, if any, fees and connectivity
costs are associated with transacting on these unregulated trading
venues. The Commission invites commenters to provide feedback on the
likely fees and costs associated with transacting on SBSEFs as well as
fees and costs associated with transacting on unregulated trading
venues that exist in today's OTC derivatives market.
As discussed in section XIX(B), the Commission preliminarily
believes that prospective SBSEF registrants are likely to be CFTC-
registered SEFs that are active in the index CDS market. Because the
proposed rules are harmonized as closely as practicable with analogous
CFTC rules for SEFs, unless a reason exists to do otherwise in a
particular area, the Commission preliminarily believes that much of the
systems, policies, and procedures that are used to support SEF trading
also could be used to support SBSEF trading. The prospective SBSEF
registrants likely would incur marginal costs associated with listing
SBS products on their venues \423\ and making limited changes to their
systems, policies, and procedures to comply with proposed SEC rules
that differ slightly from analogous CFTC rules. The Commission
preliminarily estimates the one-time costs associated with such changes
to systems, policies, and procedures would range between $25,000 and
$1.5 million per SBSEF, depending on the changes needed. The annual
ongoing costs of maintaining the technology (e.g., ensuring any
necessary technological updates and improvements are made) and applying
the technology to ongoing compliance requirements are estimated to be
in the range of $1 million to $2 million.\424\ The Commission invites
commenters to provide feedback on the costs that SEFs may incur should
they register as SBSEFs.
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\423\ See infra section XIX(C)(3)(c) (discussing the costs that
these entities might incur to list SBS products).
\424\ In the 2011 SBSEF Proposal, the Commission estimated that
an entity owning or operating a platform for the trading of OTC
derivatives would incur costs of between $50,000 and $3 million to
enhance its platform to be compatible with proposed requirements in
that release. Further, such an entity would incur annual ongoing
costs of between $2 million and $4 million to maintain such
enhancements. See 2011 SBSEF Proposal, 76 FR at 11041. The
Commission is revising these estimates downward by 50%, taking into
account any potential inflationary effects, because harmonizing
proposed Regulation SE closely with CFTC rules likely would reduce
the one-time and annual ongoing costs incurred by SEFs to change
their systems, policies, and procedures to comply with proposed
Regulation SE, if they choose to register as SBSEFs. Therefore, the
Commission preliminarily estimates that the one-time costs
associated with changes to systems, policies, and procedures would
range between $50,000/2 = $25,000 and $3 million/2 = $1.5 million
per SBSEF, depending on the changes needed. The annual ongoing costs
are preliminarily estimated to be between $2 million/2 = $1 million
and $4 million/2 = $2 million.
---------------------------------------------------------------------------
We detail below cost estimates for specifics parts of the proposed
rules. Many of these costs estimates are based on the PRA estimates of
costs and burdens from section XX.\425\
---------------------------------------------------------------------------
\425\ In section XX infra, for purposes of the PRA, the
Commission preliminarily estimates burdens applicable to a stand-
alone SBSEF. However, most if not all SBSEFs will be dually
registered with the CFTC as SEFs and thus will already be complying
with relevant CFTC rules that have analogs to rules proposed in
Regulation SE. Therefore, the Commission's burden estimates are
greater for stand-alone SBSEFs than may exist in practice,
considering the effect of overlapping CFTC rules.
---------------------------------------------------------------------------
a. Registration Requirements for SBSEFs and Form SBSEF
The Commission preliminarily believes that the proposed
registration provisions would impose costs on entities that seek
registration as SBSEFs. The Commission preliminarily estimates that
initial filings on Form SBSEF by prospective SBSEFs seeking to register
with the Commission pursuant to proposed Rule 803 would result in
aggregate initial costs of $94,400 for prospective SBSEFs.\426\
---------------------------------------------------------------------------
\426\ $94,400 = 1,475 burden hours x $64/hour blended hourly
rate. The $64/hour blended hourly rate is the $59/hour blended
hourly rate computed by the CFTC and adjusted for CPI inflation
through December 2021. The CFTC used the blended hourly wage to
estimate PRA costs associated with part 37. See infra section
XX(D)(2)(a); OMB, Supporting Statement for New and Revised
Information Collections: Core Principles and Other Requirements for
Swap Execution Facilities, OMB Control Number 3038-0074, Attachment
A (July 7, 2021), available at https://omb.report/icr/202107-3038-004/doc/113431800.pdf. CPI inflation adjustment is based on data
published by the Bureau of Labor Statistics. See CPI Inflation
Calculator, U.S. Bureau of Labor Statistics, available at https://www.bls.gov/data/inflation_calculator.htm.
---------------------------------------------------------------------------
b. Ongoing Compliance With Other Requirements That Are Similar to the
Remainder of Part 37
As discussed in section XX(D)(2)(b), the Commission preliminarily
estimates the aggregate annual paperwork burden for SBSEFs to comply
with all of the proposed SBSEF rules that have analogs in part 37 to be
1935 hours.\427\ These burdens are estimated to impose
[[Page 28954]]
aggregate ongoing annual costs of $123,840 on SBSEFs.\428\
---------------------------------------------------------------------------
\427\ See infra section XX(D)(2)(b). This estimate excludes the
paperwork burdens associated with registration requirements for
SBSEFs and Form SBSEF and provisions of certain proposed rules to be
discussed subsequently.
\428\ $123,840 = 1,935 burden hours x $64/hour blended hourly
rate. See supra note 426 (derivation of the $64/hour blended hourly
rate).
---------------------------------------------------------------------------
c. Rule and Product Filing Processes for SBSEFs
The Commission preliminarily estimates that the aggregate ongoing
annual costs incurred by all SBSEFs to prepare and submit rule and
product filings under proposed Rules 804, 805, 806, and 807 (including
the cover sheet) would be $31,200.\429\
---------------------------------------------------------------------------
\429\ $31,200 = 300 hours x $104/hour blended hourly rate. The
$104/hour blended hourly rate is the $96.26/hour blended hourly rate
computed by the CFTC and adjusted for CPI inflation through December
2021. The CFTC used the blended hourly rate to estimate PRA costs
associated with part 40. See section XX(D)(3)(a); OMB, Supporting
Statement for Information Collection Renewal: OMB Control Number
3038-0093, Attachment A (July 10, 2020), available at https://omb.report/icr/202005-3038-001/doc/101274002.pdf. CPI inflation
adjustment is based on data published by the Bureau of Labor
Statistics. See U.S. Bureau of Labor Statistics, supra note 426. The
platform ID requirement on the submission cover sheet would not
impose burdens for obtaining a platform ID, because an SBSEF
(whether registered or exempt) is already required under Rule 903(a)
of Regulation SBSR to obtain an LEI to identify itself as its
platform ID. See supra note 84.
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d. Proposed Rules 809, 811, 819, 826, 829, 833, 834, and 835
The Commission preliminarily estimates the aggregate ongoing annual
costs incurred by SBSEFs to comply with proposed Rule 809 would be
$108.\430\
---------------------------------------------------------------------------
\430\ $108 = 1.25 hours x $86/hour hourly rate for a compliance
officer. The $86/hour hourly rate for a compliance officer is the
$70/hour hourly rate for a compliance officer computed by the CFTC
and adjusted for CPI inflation through December 2021. The CFTC used
the hourly rate to estimate PRA costs associated with Sec. 40.12
after which proposed Rule 809 is modelled. See infra section
XX(D)(3)(b)(ii); Revised Supporting Statement for New Information
Collections: part 40, Provisions Common to Registered Entities, OMB
Control Number 3038-AD07, Attachment A (October 14, 2011), available
at: https://omb.report/icr/201203-3038-005/doc/31042501. CPI
inflation adjustment is based on data published by the Bureau of
Labor Statistics. See U.S. Bureau of Labor Statistics, supra note
426.
---------------------------------------------------------------------------
The Commission preliminarily estimates the aggregate ongoing annual
costs incurred by SBSEFs to comply with requests for documents or
information pursuant to proposed Rule 811(d) would be $88.\431\
---------------------------------------------------------------------------
\431\ $88 = 1 hour x $88/hour hourly rate for an attorney. The
$88/hour hourly rate is the $80/hour hourly rate computed by the
CFTC and adjusted for CPI inflation through December 2021. The CFTC
used the hourly rate to estimate PRA costs associated with Part 1.6.
See infra section XX(D)(4)(a); OMB, Supporting Statement for New and
Revised Information Collections: OMB Control Number 3038-0033
(August 23, 2018), available at https://omb.report/icr/201808-3038-004/doc/85625801.pdf. CPI inflation adjustment is based on data
published by the Bureau of Labor Statistics. See U.S. Bureau of
Labor Statistics, supra note 426.
---------------------------------------------------------------------------
The Commission preliminarily estimates the aggregate ongoing annual
costs incurred by SBSEFs to comply with proposed Rule 819(i) would be
$25,546.\432\
---------------------------------------------------------------------------
\432\ $25,546 = 399.15 hours x $64/hour blended hourly rate. The
Commission preliminarily believes that the burdens associated with
this proposed rule are not different from burdens associated with
proposed rules that have part 37 analogs. Thus, the Commission
preliminarily believes that it would be appropriate to apply the
$64/hour blended hourly rate to estimate the paperwork related costs
associated with this proposed rule. See infra section XX(D)(4)(c).
See also supra note 426 (derivation of the $64/hour blended hourly
rate).
---------------------------------------------------------------------------
The Commission preliminarily estimates the aggregate ongoing annual
costs incurred by SBSEFs to comply with proposed Rule 819(j) would be
$1,135.\433\
---------------------------------------------------------------------------
\433\ $1,135 = 2.5 hours x $454/hour national hourly rate for an
attorney. See infra section XX(D)(4)(d). The per-hour figure for an
attorney is from SIFMA's Management and Professional Earnings in the
Securities Industry--2013, as modified by Commission staff to adjust
for inflation (through December 2021) and to account for an 1,800-
hour work-year, and multiplied by 5.35 to account for bonuses, firm
size, employee benefits, and overhead.
---------------------------------------------------------------------------
The Commission preliminarily estimates the aggregate ongoing annual
costs incurred by SBSEFs to update information required by proposed
Rule 826(f) would be $152.\434\ The Commission preliminarily estimates
that interested parties would incur aggregate one-time costs of
$108,960 in the first year and $72,640 in each subsequent year to
submit exemption requests under one or both paragraphs of proposed Rule
833.\435\
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\434\ $152 = 2 hours x $76/hour national hourly rate for a
compliance clerk. See infra section XX(D)(4)(f). The per-hour figure
for a compliance clerk is from SIFMA's Office Salaries in the
Securities Industry--2013, as modified by Commission staff to adjust
for inflation (through December 2021) and to account for an 1,800-
hour work-year, and multiplied by 5.35 to account for bonuses, firm
size, employee benefits, and overhead.
\435\ First year costs: $108,960 = 240 hours x $454/hour
national hourly rate for an attorney. Costs in each subsequent year:
$72,640 = 160 hours x $454/hour national hourly rate for an
attorney. See infra section XX(D)(5)(a). See also supra note 433
(derivation of the national hourly rate for an attorney).
---------------------------------------------------------------------------
The Commission preliminarily estimates that SBSEFs and SBS
exchanges would incur aggregate one-time costs of $47,880 associated
with drafting and implementing rules to comply with proposed Rules
834(b) and (c).\436\
---------------------------------------------------------------------------
\436\ $47,880 = 120 hours x $399/hour national hourly rate for a
compliance attorney. The estimate of 120 burden hours is based on
the Commission's preliminary estimate that five SBSEFs and three SBS
exchanges will incur paperwork burdens associated with proposed
Rules 834(b) and (c). See infra section XX(D)(4)(g). The per-hour
figure for a compliance attorney is from SIFMA's Management and
Professional Earnings in the Securities Industry--2013, as modified
by Commission staff to adjust for inflation (through December 2021)
and to account for an 1,800-hour work-year, and multiplied by 5.35
to account for bonuses, firm size, employee benefits, and overhead.
---------------------------------------------------------------------------
The Commission preliminarily estimates that SBSEFs and SBS
exchanges would incur aggregate ongoing annual costs of $640 to comply
with proposed Rules 834(d), 834(e), and 834(f).\437\
---------------------------------------------------------------------------
\437\ $640 = 10 hours x $64/hour blended hourly rate. Further,
the costs incurred by SBSEFs = 5 (number of SBSEFs) x 1.25 hours per
SBSEF x $64/hour blended hourly rate = $400. The Commission
preliminarily believes that the burdens associated with this
proposed rule are not different from burdens associated with
proposed rules that have part 37 analogs. Thus, the Commission
preliminarily believes that it would be appropriate to apply the
$64/hour blended hourly rate to estimate the paperwork related costs
associated with this proposed rule. See infra section XX(D)(4)(g).
See also supra note 426 (derivation of the $64/hour blended hourly
rate).
---------------------------------------------------------------------------
The Commission preliminarily estimates that SBSEFs and SBS
exchanges would incur aggregate one-time costs of $1,024 to comply with
proposed Rule 834(g).\438\
---------------------------------------------------------------------------
\438\ $1,024 = 16 hours x $64/hour blended hourly rate. The
Commission preliminarily believes that the burdens associated with
this proposed rule are not different from burdens associated with
proposed rules that have part 37 analogs. Thus, the Commission
preliminarily believes that it would be appropriate to apply the
$64/hour blended hourly rate to estimate the paperwork related costs
associated with this proposed rule. See infra section XX(D)(4)(g).
See also supra note 426 (derivation of the $64/hour blended hourly
rate).
---------------------------------------------------------------------------
The Commission preliminarily estimates that SBSEFs would incur
aggregate ongoing annual costs of $20,430 to comply with proposed Rule
835.\439\
---------------------------------------------------------------------------
\439\ $20,430 = 45 hours x $454/hour national hourly rate for an
attorney. See infra section XX(D)(5)(b). See also supra note 433
(derivation of the national hourly rate for an attorney).
---------------------------------------------------------------------------
The Commission preliminarily believes that SBSEFs likely would
incur costs to comply with the financial resources requirement of
proposed Rule 829(b). Assuming that SBSEFs satisfy this requirement by
holding financial resources in the form of their own capital pursuant
to proposed Rule 829(c)(1), the Commission preliminarily estimates that
SBSEFs would incur an aggregate annual cost of capital of $33,377.\440\
SBSEFs could lower this
[[Page 28955]]
cost if their capital consists of financial assets that generate a
return that would serve to offset the cost of capital. However, this
cost mitigation is potentially limited by proposed Rule 829(d), which
would require an SBSEF to include among the financial resources it
holds, a certain amount of unencumbered, liquid financial assets (i.e.,
cash and/or highly liquid securities),\441\ that tend to generate
little or no return.
---------------------------------------------------------------------------
\440\ The Commission preliminarily estimates the financial
resources that SBSEFs would need to hold pursuant to proposed Rule
829(b) as their projected operating costs. See proposed Rule 829(b).
Further, the Commission preliminarily estimates SBSEFs' projected
operating costs as the sum of the aggregate ongoing annual costs
incurred by SBSEFs to comply with proposed Regulation SE. Thus,
SBSEFs' estimated projected operating costs = $123,840 (ongoing
compliance with other proposed requirements that are similar to the
remainder of part 37) + $31,200 (rule and product filing processes
by SBSEFs) + $108 (proposed Rule 809) + $88 (proposed Rule 811(d)) +
$25,546 (proposed Rule 819(i)) + $1,135 (proposed Rule 819(j)) +
$152 (proposed Rule 826(f)) + $400 (proposed Rules 834(d), (e), and
(f)) + $20,430 (proposed Rule 835) = $202,898. Thus, the Commission
preliminarily estimates that SBSEFs would hold $203,221 in the form
of their own capital to comply with proposed Rule 829(b). The
Commission preliminarily estimates SBSEFs' cost of capital using the
annual stock returns on a value-weighted portfolio of financial
stocks from 1986 to 2021. See website of Professor Ken French,
available at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/ftp/48_Industry_Portfolios_CSV.zip (accessed on March 14, 2022).
These returns were averaged to arrive at an estimate of 16.45%.
SBSEFs' aggregate annual cost of capital = $202,898 x 16.45% =
$33,377. The Commission acknowledges that there is uncertainty
associated with this estimate. The estimate does not account for the
fact that SBSEFs may use reasonable discretion in determining the
methodologies used to calculate projected operating costs and wind
down costs, pursuant to proposed Rule 829(e). Depending on how
SBSEFs exercise this reasonable discretion, the resulting
methodologies could yield projected operating costs and in turn,
required financial resources, that may be higher or lower than the
Commission's estimate.
\441\ The CFTC's experience overseeing SEFs would appear to
support the preliminarily belief that SBSEFs would hold
unencumbered, liquid financial assets rather than obtain a line of
credit to comply with proposed Rule 829(d). In a previous
rulemaking, the CFTC noted that most SEFs satisfy the liquidity
requirement of Sec. 37.1303 (the analog of proposed Rule 829(d))
through maintaining liquid assets rather than obtaining a line of
credit. See CFTC, Swap Execution Facilities, 86 FR 9224, 9242, n.
247 (February 11, 2021) (``2021 SEF Amendments Adopting Release'').
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e. Assessment Costs
The Commission preliminarily believes that 87 entities likely would
incur assessment costs as a result of proposed Rule 832, based on an
analysis of counterparties to U.S. single-name CDS. Such costs would be
related primarily to the identification of the counterparty status and
origination location of the transaction to determine whether the trade
execution requirement would apply. The Commission preliminarily
believes that market participants would request representations from
their transaction counterparties to determine the U.S.-person status of
their counterparties. In addition, if the transaction is guaranteed by
a U.S. person, the guarantee would be part of the trading documentation
and, therefore, the existence of the guarantee would be a readily
ascertainable fact. Similarly, market participants would be able to
rely on their counterparties' representations as to whether a
transaction is arranged, negotiated or executed by a person within the
United States. Therefore, the Commission preliminarily believes that
the assessment costs associated with proposed Rule 832 should be
limited to the costs of establishing a compliance policy and procedure
of requesting and collecting representations from trading
counterparties and maintaining the collected representations as part of
the market participants' recordkeeping procedures. The Commission
preliminarily believes that such assessment costs would be
approximately $18,160 per entity.\442\ The Commission preliminarily
believes that requesting and collecting representations would be part
of the standardized transaction process reflected in the policies and
procedures regarding SBS transactions and trading practices and should
not result in separate assessment costs.
---------------------------------------------------------------------------
\442\ $18,160 = 40 hours x $454/hour national hourly rate for an
attorney. This estimate is based on an estimated 40 hours of in-
house legal or compliance staff's time to establish a procedure of
requesting and collecting representations from trading
counterparties, taking into account that such representations may be
built into a form of standardized trading documentation. See supra
note 433 (derivation of the national hourly rate for an attorney).
---------------------------------------------------------------------------
The Commission also considers the likelihood that market
participants could implement systems to keep track of counterparty
status for purposes of future trading of SBS that are similar to, if
not the same as, the systems implemented by market participants for
purposes of assessing SBS dealer or major SBS participant status.
Implementation of such a system would involve one-time programming
costs of $14,802 per entity.\443\ Therefore, the Commission estimates
the total one-time costs per entity associated with proposed Rule 832
could be $32,962 and the aggregate one-time costs could be
$2,867,694.\444\ To the extent that market participants have incurred
costs relating to similar or the same assessments with respect to
counterparty status and transaction location for other Title VII
requirements, their assessment costs with respect to proposed Rule 832
may be less.
---------------------------------------------------------------------------
\443\ This is based on an estimate of the time required for a
programmer analyst to modify the software to track the covered
person status of a counterparty, including consultation with
internal personnel, and an estimate of the time such personnel would
require to ensure that these modifications conformed to the
definition of ``covered person'' (as defined in proposed Rule 832).
$14,802 = (2 hours x $399/hour national hourly rate for a compliance
attorney) + (4 hours x $338/hour national hourly rate for a
compliance manager) + (40 hours x $263/hour national hourly rate for
a programmer analyst) + (4 hours x $250/hour national hourly rate
for a senior internal auditor) + (2 hours x $566/hour rate for a
Chief Financial Officer). The per-hour figures for compliance
attorney, compliance manager, programmer analyst, and senior
internal auditor are from SIFMA's Management & Professional Earnings
in the Securities Industry--2013, as modified by Commission staff to
adjust for inflation (through December 2021) and to account for an
1,800-hour work-year, and multiplied by 5.35 to account for bonuses,
firm size, employee benefits, and overhead. The hourly rate for a
Chief Financial Officer is the $473 hourly rate for the same
position used in the Cross-Border Proposing Release (see 78 FR at
31140, n. 1425) and adjusted for inflation through December 2021.
\444\ Total one-time costs per entity = $18,160 (compliance
policy and procedure) + $14,802 (systems) = $32,962. Aggregate one-
time costs = 87 entities x $32,962 = $2,867,694.
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f. Structured Data Costs
The Commission preliminarily believes that SBSEFs would likely
incur limited costs to comply with the proposed requirement in Rule
825(c)(3) to publish Daily Market Data Reports using the most recent
versions of the associated XML schema and PDF renderer as published on
the Commission's website. Because SBSEFs are required to use a
structured format to fulfill their reporting requirements under
Regulation SBSR, the compliance cost associated with the Rule 825(c)(3)
requirement would be limited to the cost prospective SBSEF registrants
would incur to update their systems to incorporate the Commission's XML
schema for Daily Market Data Reports.\445\ Such costs are included
among the costs for prospective SBSEF registrants in making limited
changes to their systems, policies, and procedures to comply with
proposed SEC rules that differ slightly from analogous CFTC rules, as
discussed in further detail above.\446\
---------------------------------------------------------------------------
\445\ See 17 CFR 242.907(a)(2) (requiring information to be
submitted to SDRs in an ``open-source structured data format that is
widely used by participants'').
\446\ See infra note 424 and accompanying text.
---------------------------------------------------------------------------
With respect to the proposed Inline XBRL requirement for other
documents required under proposed Regulation SE, the Commission
preliminarily believes that SBSEFs would incur initial Inline XBRL
implementation costs (such as the cost of training in-house staff to
prepare filings in Inline XBRL, and the cost to license Inline XBRL
filing preparation software from vendors) and ongoing Inline XBRL
compliance burdens that would result from the proposed tagging
requirement, because prospective SBSEF registrants are not currently
subject to Inline XBRL requirements. Similarly, because prospective
SBSEF registrants are not currently subject to EDGAR requirements, the
Commission preliminarily believes they will incur a one-time compliance
burden of submitting a Form ID as required by
[[Page 28956]]
Rule 10(b) of Regulation S-T.\447\ The aforementioned costs are
included among the costs for prospective SBSEF registrants in making
limited changes to their systems, policies, and procedures to comply
with proposed SEC rules that differ slightly from analogous CFTC rules,
as discussed in further detail above.\448\
---------------------------------------------------------------------------
\447\ See 17 CFR 232.10(b).
\448\ See infra note 424 and accompanying text.
---------------------------------------------------------------------------
4. Reasonable Alternatives
The Commission considered a number of alternatives when formulating
the proposed rules and amendments.
In developing proposed Regulation SE, the Commission considered the
alternative of not harmonizing its rules with analogous CFTC rules. As
discussed in sections II and XIX(B), the entities that are most likely
to register with the Commission as SBSEFs are those already registered
with the CFTC as SEFs. These entities have made substantial investments
in systems, policies, and procedures to comply with and adapt to the
regulatory system developed by the CFTC. Under the proposed approach of
harmonizing with CFTC rules to the extent possible, dually registered
entities could utilize their existing systems, policies, and procedures
to comply with the Commission's SBSEF rules, and SEF market
participants would face no or only incremental changes to trade SBS as
well as swaps on those facilities, and to comply with the Commission's
rules regarding SBS trading. Under the alternative approach whereby the
Commission establishes different or additive requirements, dually
registered entities and their market participants might need to incur
costs and burdens to modify their systems, policies, and procedures to
comply with the SEC-specific rules. Further, proposed requirements that
are significantly different from the rules that apply to the swap
market could cause SEFs to question whether it is economically viable
to enter the SBS market and to register with the Commission as SBSEFs.
The Commission preliminary believes that the proposed approach would
deliver to the SBS market the regulatory benefits generated by the CFTC
regulatory framework and help promote the trading of SBS on regulated
platforms, while imposing only limited costs on SBSEFs. The Commission
preliminarily believes that this trade-off is preferable to the trade-
off associated with the alternative approach.
In formulating the proposed definition of ``block trade,'' the
Commission considered the alternative of harmonizing the third prong of
the proposed definition with the third prong of the CFTC definition of
``block trade.'' The third prong of the CFTC definition characterizes a
block trade in a particular swap as having ``a notional or principal
amount at or above the appropriate minimum block size applicable to
such swap.'' As discussed in section VII(E), because SBS are not within
the CFTC's jurisdiction, the CFTC has never considered what an
appropriate minimum block size threshold would be for any SBS asset
class. There is no CFTC-defined threshold with which to harmonize when
formulating the third prong of the proposed definition of ``block
trade.'' Accordingly, the Commission preliminarily believes that
establishing a threshold tailored specifically for the SBS market is
preferable to the alternative.
In formulating proposed Rule 804(a)(2), the Commission considered
the alternative of proposing a one-business-day review of a self-
certified SBS product before an SBSEF could list the product. This
alternative would harmonize with the parallel provision in Sec.
40.2(a).\449\ The Commission preliminarily believes that a ten-
business-day review period for self-certified SBS products before they
can be listed strikes a reasonable balance between allowing SBSEFs to
bring new products to market quickly while affording the Commission
staff a reasonable period in which to assess them. The proposed ten-
business-day review period for self-certified products also accords
with the CFTC's ten-business-day review period for self-certified
rules,\450\ which the Commission is proposing to replicate in Rule
807(a)(3).\451\ Thus, the Commission preliminarily believes the
proposed approach is preferable to the alternative.
---------------------------------------------------------------------------
\449\ See Sec. 40.2(a)(2) (one condition for a valid self-
certification of a product is that the CFTC has received the
submission by the open of business on the business day preceding the
product's listing).
\450\ See Sec. 40.6(a)(3) (one condition for a valid self-
certification of a rule or rule amendment is that the CFTC has
received the submission not later than the open of business on the
business day that is ten business days prior to the SEF's
implementation of the rule or rule amendment).
\451\ See infra section VI(D).
---------------------------------------------------------------------------
In formulating proposed Rule 825(c), which would require an SBSEF
to publish a ``Daily Market Data Report'' on its website, the
Commission considered the alternative of requiring SBSEFs to submit the
information in such reports directly to the Commission. The Commission
believes that the regulatory data that it is receiving pursuant to
Regulation SBSR would generate the same information as that contained
in such reports. Thus, the Commission preliminarily believes that the
proposed approach is preferable to the alternative because it would
relieve SBSEFs of the need to send daily reports to Commission while
preserving the Commission's ability to be informed about SBSEF market
activity via the regulatory data it receives pursuant to Regulation
SBSR.
The Commission also considered the alternative of requiring a
structured data language other than Inline XBRL for SBSEF filings. For
example, the Commission could create an XML-based data language (i.e.,
an XML schema) specific to SBSEF filings, similar to the XML schema to
be used for Daily Market Data Reports under proposed Rule 825. The
Commission preliminarily believes, however, that Inline XBRL would be
more suitable for SBSEF filings to the Commission. As noted, unlike an
XML schema that would be used under this alternative, Inline XBRL would
provide the ability to tag detailed facts within narrative text blocks,
and is thus likely more well-suited to accommodate the other filings
required under proposed Regulation SE, many of which require narrative
discussions (e.g., the explanation and analysis of the product and its
compliance with applicable provisions of the SEA for a product filing
required under Rule 804). In addition, certain proposed SBSEF
disclosures consist of financial information (e.g., the financial
statements of the SBSEF required under Exhibit I to Form SBSEF), and
Inline XBRL is designed specifically for the accurate capture and
communication of financial information, among other uses.\452\
---------------------------------------------------------------------------
\452\ See supra section XIX(C)(2).
---------------------------------------------------------------------------
Another alternative that the Commission considered is to require
that an exemption order under proposed Rule 833(a) could apply to a
foreign trading venue only if it traded SBS and no other types of
securities. Under this alternative, an exemption order would be
unavailable to a foreign trading venue that trades SBS and other types
of securities. The Commission preliminarily believes, however, that
this alternative is unnecessary. Other jurisdictions might have market
structures where it is common to trade SBS and other types of
securities on the same trading venue. The Commission preliminarily
believes that it would be inequitable to disqualify such jurisdictions
ex ante from qualifying for a Rule 833(a) exemption.
In connection with the proposed amendments to Rule 3a1-1, the
[[Page 28957]]
Commission considered the alternative of applying the retraction
provisions of Rule 3a1-1(b) to SBSEFs and clearing agencies that are
covered by proposed paragraphs (a)(4) and (a)(5), respectively, of Rule
3a1-1. Under this alternative, if a registered SBSEF or a registered
clearing agency were to grow above a certain size, its exemption under
proposed paragraph (a)(4) or (a)(5), respectively, could be retracted,
forcing it to register as a national securities exchange.
The Commission preliminarily believes that, in adopting section 3D
of the SEA, Congress gave the Commission a mechanism to regulate SBSEFs
of any size. Nothing in section 3D suggests that, if an SBSEF were to
grow above a certain size, the Commission should be able to withdraw
that entity's ability to operate as an SBSEF and instead compel it to
register as a national securities exchange. The Commission
preliminarily believes that it is not necessary to apply the retraction
provisions in Rule 3a1-1(b) to registered clearing agencies that engage
in forced trading sessions and are covered by proposed Rule 3a1-
1(a)(5). SBS transactions effected using this functionality are
designed to facilitate the clearance and settlement process, and forced
trading sessions are carried out by registered clearing agencies under
rules that have been approved by the Commission. This trading
functionality is not effected for the purpose of conducting open-market
transactions. Therefore, the Commission preliminarily believes that it
would not be appropriate to apply the retraction provisions of Rule
3a1-1(b) to clearing agencies that would be covered by proposed Rule
3a1-1(a)(5), as this would force these clearing agencies also to
register as national securities exchanges. For the above reasons, the
Commission preliminarily believes that the proposed approach is
preferable to this alternative.
In connection with proposed Rule 15a-12, the Commission considered
the alternative of not exempting SBSEF-Bs from section 17(a) of the
SEA, which requires a registered broker (among other types of
registered entity) to make and keep records as prescribed by Commission
rule.\453\ This approach would subject SBSEF-Bs to the full scope of
the Commission's books and records rules under section 17(a). The
Commission is proposing instead to utilize proposed Rule 15a-12 to
exempt SBSEF-Bs from section 17(a), among other provisions applying to
brokers, and instead to subject SBSEF-Bs to proposed new Rule 826,
which derives its statutory authority from Core Principle 9 in section
3D of the SEA. This approach would allow the Commission to tailor a
books and records rule specifically to the limited business as an
SBSEF-B and to better harmonize with the books and records requirements
of the CFTC to which the SBSEF-B would likely also be subject.
---------------------------------------------------------------------------
\453\ 15 U.S.C. 78q(a).
---------------------------------------------------------------------------
D. Effects on Efficiency, Competition, and Capital Formation
Proposed Regulation SE and the other proposed rules and rule
amendments would likely affect competition, capital formation, and
efficiency in various ways discussed below.
1. Competition
As discussed earlier, currently, the SBS market is dominated by a
small group of SBS dealers.\454\ A mandatory clearing determination by
the Commission, followed by a MAT determination by one or more SBSEFs,
should help foster greater competition in the trading of SBS by
promoting greater order interaction and increasing participation on
SBSEFs. Further, proposed rules that improve access to SBSEFs by market
participants could increase participation and competition in liquidity
provision in the SBS market.\455\ To the extent that increased
competition in liquidity provision reduces the price of liquidity
provision (e.g., bid-ask spread), market participants could benefit in
terms of lower transaction costs.
---------------------------------------------------------------------------
\454\ See supra section XIX(B)(2).
\455\ See supra section XIX(C)(1) (discussing improved access
and competition as an overarching benefit of the proposal).
---------------------------------------------------------------------------
2. Capital Formation
The Commission preliminary believes that the proposal could promote
capital formation by helping to improve regulatory oversight and market
integrity. Regulation SE would require, among other things, that SBSEFs
maintain an audit trail and automated trade surveillance system;
conduct real-time market monitoring; establish and enforce rules for
information collection; and comply with reporting and recordkeeping
requirements.\456\ These requirements are designed to provide an SBSEF
with sufficient information to oversee trading on its market, including
detecting and deterring abusive trading practices.\457\ The proposed
audit trail and recordkeeping and reporting requirements, by providing
the Commission access to information about SBSEFs, would increase the
Commission's ability to assess risks in the SBS market and to oversee
the market, which all else being equal should reduce the amount of
risky or abusive behavior in the SBS market.\458\ Further, proposed
Rule 831, the proposed requirements relating to the CCO, would promote
regulatory compliance on SBSEFs and the SBS market generally.\459\ In
addition, the proposal would provide for various safeguards to help
promote market integrity, including proposed Rule 819(c) relating to
impartial access to the SBSEF \460\ and proposed Rule 830 relating to
systems safeguards. Any resulting increase in regulatory oversight and
market integrity likely would increase market participants' confidence
in the soundness and fairness of SBSEFs, which in turn could spill over
into increased confidence in the soundness and fairness of the SBS
market more broadly. Such increased confidence could lead to the
greater use of SBS, particularly those traded on SBSEFs, by corporate
entities to hedge their business risks and investors to hedge their
portfolio risks with respect to positions in underlying securities. To
the extent that corporate entities can improve their hedging efficiency
with SBS, they may divert resources from precautionary savings into
productive assets, thereby promoting capital formation. To the extent
that investors can improve their hedging efficiency with SBS, they may
be more willing to invest in the underlying securities, which should
facilitate capital raising and formation by issuers. Therefore, the
Commission preliminarily believes that the proposed rules would help
encourage capital formation.
---------------------------------------------------------------------------
\456\ See proposed Rules 819, 821, 822, and 826.
\457\ See supra section XIX(C)(1) (discussing improved oversight
of trading by SBSEFs as an overarching benefit of the proposal).
\458\ See supra section XIX(C)(1) (discussing improved
Commission oversight as an overarching benefit of the proposal).
\459\ See supra section XIX(C)(2) (discussing the benefits
associated with proposed Rule 831).
\460\ See supra note 455.
---------------------------------------------------------------------------
By reducing the risk of trading disruptions on SBSEFs, proposed
Rules 829 and 830 could lead to the greater use of SBS traded on
SBSEFs. This in turn could promote capital formation as discussed
above.
3. Efficiency
The Commission preliminarily believes that the proposed
requirements with respect to pre-trade price transparency could lead to
more efficient pricing in the SBS market. The proposed rules are
designed to increase pre-trade price transparency for SBS, which should
aid market participants in evaluating current market prices for
[[Page 28958]]
SBS, thereby furthering more efficient price discovery. Price
transparency, coupled with increased competition in liquidity provision
as discussed above,\461\ could further decrease the spread in quoted
prices, and thus could lead to higher efficiency in the trading of
these securities.
---------------------------------------------------------------------------
\461\ See supra section XIX(D)(1).
---------------------------------------------------------------------------
The Commission recognizes the possibility that pre-trade price
transparency could cause market participants to reveal more information
about trading interest than they believe would be economically
desirable. If market participants consider that pre-trade price
transparency requirements are too burdensome and choose not to
participate in the market, market efficiency could be reduced insofar
as these market participants forgo any potential economic benefits that
may have resulted from transacting in the SBS market. The Commission
preliminarily believes that several factors mitigate such concerns.
First, pursuant to proposed Rule 815(c)(2), an SBSEF may offer any
execution method for Permitted Transactions. Thus, a market participant
engaging in a Permitted Transaction may choose to use an execution
method that reveals only the desired amount of information about
trading interest. Second, pursuant to proposed Rule 815(a)(2), and as
discussed earlier, an SBSEF would be required to offer two execution
methods for Required Transactions (limit order book and RFQ-to-3).
Thus, market participants have flexibility in the degree of pre-trade
transparency they wish to employ, which should attenuate potential
concerns associated with revealing too much information about trading
interest.
The Commission preliminarily believes that the proposed Rules 829
and 830 may reduce the risk of trading disruptions on SBSEFs that may
otherwise prevent market participants from impounding information into
SBS prices through market activity (e.g., order submission), and thus
could improve the price efficiency in the SBS market.
F. Request for Comment
The Commission is requesting comment regarding the economic
analysis set forth herein. To the extent possible, the Commission
requests that market participants and other commenters provide
supporting data and analysis with respect to the benefits, costs, and
effects on competition, efficiency, and capital formation of adopting
the proposed rules and amendments or any reasonable alternatives. In
addition, the Commission asks commenters to consider the following
questions:
212. What additional qualitative or quantitative information should
the Commission include as part of the baseline for its economic
analysis of the proposed rules and amendments?
213. What additional information can the Commission use to estimate
the costs and benefits of implementing the proposed rules and
amendments?
214. Has the Commission considered all relevant aspects of the
proposed rules and amendments? Has the Commission accurately described
the costs and benefits of the proposed rules and amendments? Why or why
not? Please identify any other benefits associated with the proposed
rules and amendments in detail. Please identify any costs associated
with the proposed rules and amendments that the Commission has not
identified. If possible, please provide quantification or data that
would enable a quantification of such effects.
215. What are the economic effects of the discussed reasonable
alternatives? Are there any additional reasonable alternatives that the
Commission should include? If so, please identify such alternatives and
any economic effects associated with such alternatives. If possible,
please provide data that would enable a quantification of such effects.
216. The Commission preliminarily estimates that five CFTC-
registered SEFs likely would register as SBSEFs. How many entities do
you believe will seek to register with the Commission as SBSEFs? Of
these, how many would be CFTC-registered SEFs seeking to be dually-
registered SEF/SBSEFs and how many would be standalone SBSEFs?
217. Are SBS products being traded on unregistered SBSEFs? If so,
please provide data on (1) the types of SBS that are being traded on
unregistered SBSEFs; and (2) the volume of such SBS that are being
traded on unregistered SBSEFs.
218. Does the Commission's description of SBS trade execution
practices accurately capture the trade execution practices currently
used in the trading of SBS? If not, please identify and describe the
execution practices that are currently used to trade SBS.
219. What costs would CFTC-registered SEFs incur if they elect to
register and operate as SBSEFs under proposed Regulation SE? Would
these entities incur costs associated with the de novo formation of an
SBSEF? Alternatively, would they incur costs associated with listing
SBS products on their venues and making limited changes to their
systems, policies, and procedures to the extent that the proposed rules
differ from analogous CFTC rules? Are there other costs that have not
been identified?
220. What would be the likely fees and costs associated with
transacting on SBSEFs? What are the fees and costs associated with
transacting on unregulated trading venues that exist in today's OTC
derivatives market?
XX. Paperwork Reduction Act
Certain provisions of the proposed rules contain new ``collection
of information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\462\ The Commission is submitting the
proposed collection of information to the Office of Management and
Budget (``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5
CFR 1320.11. The title of the new collection of information is
``Regulation SE.'' As proposed, Regulation SE would create a regime for
the registration and regulation of SBSEFs and address other issues
relating to SBS execution.
---------------------------------------------------------------------------
\462\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
In addition, the Commission is proposing to amend Rule 3a-1 under
the SEA to exempt a registered SBSEF from the statutory definition of
``exchange.'' Furthermore, the Commission is proposing new Rule 15a-12
under the SEA that, while affirming that an SBSEF also would be a
broker under the SEA, would exempt a registered SBSEF from certain
broker requirements under the SEA.
Proposed Regulation SE would include rules regarding the
registration of a prospective SBSEF on Form SBSEF, the filing of new or
amended rules or new products with the Commission, and rules
harmonizing the Commission's SBSEF regime with the CFTC's parallel SEF
regime.\463\ An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless the agency
displays a currently valid OMB control number.
---------------------------------------------------------------------------
\463\ See supra section III. As proposed, Regulation SE contains
36 separately designated rules (800 to 835, inclusive), which (if
adopted) would be located in 17 CFR 242; a Form SBSEF (with
instructions); and a submission cover sheet (with instructions). If
adopted, the form and the submission cover sheet would be located in
17 CFR 249.
---------------------------------------------------------------------------
A. Summary of Collection of Information
The proposed rules and rule amendments would include a collection
of information within the meaning of the PRA for SBSEFs that would be
required to comply with Regulation SE and file a Form SBSEF with the
[[Page 28959]]
Commission. In addition, proposed Rule 833 would include a collection
of information within the meaning of the PRA for persons that wish to
seek an exemption order under that rule, and proposed Rule 834 would
include a collection of information within the meaning of the PRA for
SBS exchanges (in addition to SBSEFs).
Many of the proposed rules that comprise Regulation SE are modelled
after analogous CFTC rules with only minor edits to reflect differences
between the statutory regimes of the two agencies. Entities that are
most likely to register with the Commission as SBSEFs are those already
registered with the CFTC as SEFs. Such entities have made substantial
investments in systems, policies, and procedures to comply with and
adapt to the regulatory system developed by the CFTC. Harmonization
would allow such dually-registered entities to utilize their existing
systems, policies, and procedures to comply with the Commission's SBSEF
rules, and SEF members would likely face only marginal additional
burdens to trade SBS as well as swaps on those SEF/SBSEFs. In light of
these factors, the Commission has based many of its paperwork burden
estimates on CFTC burden estimates calculated for analogous CFTC rules.
The CFTC estimated PRA burdens by aggregating the burdens produced by a
group of related rules, as explained more fully in section XX(D) below.
In most cases, the Commission has modelled its methodology,
assumptions, and calculations on those of the CFTC, while making
adjustments that reflect differences between the scale of the market
for swaps relative to the market for SBS, such as the estimated number
of SBSEFs, number of SBS market participants, and number of SBS
transactions, as necessary.
The following is a summary of the rules contained in proposed
Regulation SE.\464\ The paperwork burdens associated with proposed
Regulation SE are discussed in section XX(D) below.
---------------------------------------------------------------------------
\464\ See supra section IV(A) (discussing proposed Rule 800);
section IV(B) (discussing proposed Rule 801); section IV(C)
(discussing proposed Rule 802); section V(A) (discussing the
registration provisions contained in proposed Rule 803); section
V(B) (discussing Form SBSEF); section VI(A) (discussing proposed
Rule 804); section VI(B) (discussing proposed Rule 805); section
VI(C) (discussing proposed Rule 806); section VI(D) (discussing
proposed Rule 807); section VI(F) (discussing proposed Rule 808);
section VI(G) (discussing proposed Rule 809); section VI(H)
(discussing proposed Rule 810); section VII(A) (discussing proposed
Rule 811); section VII(B) (discussing proposed Rule 812); section
VII(C) (discussing proposed Rule 813); section VII(D) (discussing
proposed Rule 814); section VII(E) (discussing proposed Rule 815);
section VII(F) (discussing proposed Rule 816); section VII(G)
(discussing proposed Rule 817); section VIII(A) (discussing proposed
Rule 818); section VIII(B) (discussing proposed Rule 819); section
VIII(C) (discussing proposed Rule 820); section VIII(D) (discussing
proposed Rule 821); section VIII(E) (discussing proposed Rule 822);
section VIII(F) (discussing proposed Rule 823); section VIII(G)
(discussing proposed Rule 824); section VIII(H) (discussing proposed
Rule 825); section VIII(I) (discussing proposed Rule 826); section
VIII(J) (discussing proposed Rule 827); section VIII(K) (discussing
proposed Rule 828); section VIII(L) (discussing proposed Rule 829);
section VIII(M) (discussing proposed Rule 830); section VIII(N)
(discussing proposed Rule 831); section IX(A) (discussing proposed
Rule 832); section IX(B) (discussing proposed Rule 833); section X
(discussing proposed Rule 834); section XI (discussing the notice
required by proposed Rule 835); section XII (discussing proposed
amendments to Rule 3a1-1); section XIII (discussing proposed Rule
15a-12); section XVI (discussing new rules and proposed amendments
to the Commission's Rules of Practice).
\465\ Each of the filings that would be required by proposed
Rules 804 through 807, 809, and 816 would have to include a
submission cover sheet that is also being proposed herein. Because
the cover sheet is an integral part of the filing--it is the
mechanism whereby an SBSEF would inform the Commission what type of
filing is enclosed--the paperwork burdens for the cover sheet are
not estimated separately from the paperwork burden of the
substantive filing.
----------------------------------------------------------------------------------------------------------------
Proposed rule number and title Overview of proposed rule Paperwork burden created?
----------------------------------------------------------------------------------------------------------------
800--Scope............................. would state that the provisions of this No
section shall apply to every SBSEF that
is registered or is applying to become
registered as an SBSEF under section 3D
of the SEA.
801--Applicable provisions............. would require an SBSEF to comply with all No
applicable Commission rules, including
any related definitions and cross-
referenced sections.
802--Definitions....................... Definitions.............................. No
803--Requirements and procedures for would set out a process for registering Yes
registration. with the Commission as an SBSEF,
including the submission of Form SBSEF.
804--Listing products for trading by procedures by which an SBSEF, via self- Yes \465\
certification. certification, may list a product for
trading.
805--Voluntary submission of new procedures for voluntary submission of Yes
products for Commission review and new products for Commission review and
approval. approval.
806--Voluntary submission of rules for procedures for voluntary submission of Yes
Commission review and approval. new rules or rule amendments for
Commission review and approval.
807--Self-certification of rules....... whereby an SBSEF can implement a new rule Yes
or rule amendment via self-certification.
808--Availability of public information would set out the information that will No
be made public with respect to
applications to become an SBSEF as well
as filings relating to rules and
products.
809--Staying of certification and would provide for a stay of a product Yes
tolling of review period pending certification or tolling of a review
jurisdictional determination. period for a product where it is unclear
whether the product should be classified
as an SBS under the jurisdiction of the
SEC or a swap under the jurisdiction of
the CFTC pending the issuance of a joint
interpretation by the SEC and CFTC
clarifying which agency has jurisdiction
over the product.
810--Product filings by SBSEFs that are would provide that an applicant for Yes
not yet registered and by dormant registration as an SBSEF may submit for
SBSEFs. Commission review and approval an SBS's
terms and conditions or rules prior to
listing the product as part of its
application for registration.
811--Information relating to SBSEF would provide that an SBSEF shall submit Yes
compliance. information to the Commission that the
Commission requests, including
demonstrations that the SBSEF is in
compliance with one or more Core
Principles, notification of a transfer
50% or more of the equity interest in
the SBSEF, and information about pending
legal proceedings.
[[Page 28960]]
812--Enforceability.................... would provide that a transaction entered Yes
into on or pursuant to the rules of an
SBSEF shall not be void, voidable,
subject to rescission, otherwise
invalidated, or rendered unenforceable
because of a violation by the SBSEF of
section 3D of the SEA or the
Commission's rules thereunder; also
would require an SBSEF to provide each
counterparty to a transaction on the
SBSEF with a written record of all the
terms of the transaction that were
agreed to on the SBSEF.
813--Prohibited use of data collected would provide that an SBSEF shall not use No
for regulatory purposes. for business or marketing purposes any
proprietary data or personal information
that it collects or receives, from or on
behalf of any person, for the purpose of
fulfilling its regulatory obligations,
without such person's consent; also
would require the SBSEF not to condition
access to its markets on such consent
and provide that the SBSEF may, where
necessary for regulatory purposes, share
such data or information with other
registered SBSEFs or exchanges.
814--Entity operating both a national would provide that an entity that intends No
securities exchange and SBSEF. to operate both a national securities
exchange and an SBSEF shall separately
register the two facilities pursuant to
section 6 of the SEA and Rule 803,
respectively; also would provide that a
national securities exchange shall, to
the extent that the exchange also
operates an SBSEF and uses the same
electronic trade execution system,
identify whether electronic trading of
SBS is taking place on or through the
national securities exchange or the
SBSEF.
815--Methods of execution for Required would provide that a Required Transaction Yes
and Permitted Transactions. must be executed on an SBSEF through an
order book or RFQ system, whereas a
Permitted Transaction can be executed in
any manner; also would require an SBSEF
to maintain rules and procedures that
facilitate the resolution of error
trades and that an SBSEF shall not
generally disclose the identity of a
counterparty to an SBS that is executed
anonymously and intended to be cleared.
816--Trade execution requirement and would set out a process and standards for Yes
exemptions therefrom. an SBSEF to MAT an SBS; also would
establish certain exemptions from the
trade execution requirement.
817--Trade execution compliance would provide that an SBS transaction No
schedule. shall be required to be executed on an
SBS exchange or SBSEF upon the later of
a determination by the Commission that
the SBS is required to be cleared and 30
days after a MAT determination
submission or certification for that SBS
is approved or certified, respectively.
818--Core Principle 1 (Compliance with would require a registered SBSEF to Yes
Core Principles). comply with the SEA's Core Principles
for SBSEFs.
819--Core Principle 2 (Compliance with would require a registered SBSEF to Yes
rules). establish, comply with, and enforce its
own rules--including rules regarding
market access; rules governing trading,
trade processing, and participation that
will deter abuses; rules governing the
operation of the SBSEF; and rules to
capture and retain an audit trail--and
have the capacity to detect,
investigate, and enforce those rules;
also would require an SBSEF to establish
rules that generally prohibit employees
from trading any covered interest or
disclosing any material, non-public
information obtained as a result of
their employment by the SBSEF; also
would require an SBSEF to maintain in
effect rules that render a person
ineligible to serve on the SBSEF's
disciplinary committees, arbitration
panels, oversight panels, or governing
board who has been found to have
committed enumerated offenses.
820--Core Principle 3 (SBS not readily would require that SBSEF to permit Yes
susceptible to manipulation). trading only in SBS that are not readily
susceptible to manipulation.
821--Core Principle 4 (Monitoring of would require an SBSEF to establish and Yes
trading and trade processing). enforce rules detailing trading and
trade processing procedures, and to
monitor trading and market activity to
prevent manipulation, price distortion,
and delivery or settlement disruptions;
also would require an SBSEF to
demonstrate that it has access to
sufficient information to assess whether
trading on its market or in the
underlying assets or indexes is being
used to affect prices on its market.
822--Core Principle 5 (Ability to would require an SBSEF to establish and Yes
obtain information). enforce rules that would allow it to
obtain any information necessary to
comply with section 3D of the SEA and to
provide that information to the
Commission on request.
823--Core Principle 6 (Financial would require an SBSEF to establish and Yes
integrity of transactions). enforce rules for ensuring the financial
integrity of SBS on its facility,
including the clearance and settlement
of the SBS; also would require that SBS
that are required to be cleared shall be
cleared by a registered clearing agency
(or a clearing agency that has obtained
an exemption from clearing agency
registration to provide central
counterparty services for SBS), that the
SBSEF provide for minimum financial
standards for its members, and that the
SBSEF monitor its members for compliance
with those standards.
824--Core Principle 7 (Emergency would require an SBSEF to adopt rules to Yes
authority). provide for the exercise of emergency
authority, in order for the SBSEF to
maintain fair and orderly trading and
prevent or address manipulation or
disruptive trading practices.
825--Core Principle 8 (Timely would require an SBSEF to make public Yes
publication of trading information). timely information on price, trading
volume, and other trading data on SBS
transactions, as required by Regulation
SBSR, and to publish on its website a
Daily Market Data Report.
[[Page 28961]]
826--Core Principle 9 (Recordkeeping would set forth recordkeeping and Yes
and reporting). reporting obligations for SBSEFs and
require an SBSEF to maintain records of
all activities relating to the business
of the facility, including a complete
audit trail, in a form and manner
acceptable to the Commission for a
period of five years.
827--Core Principle 10 (Antitrust would provide that, unless necessary or No
considerations). appropriate to achieve the purposes of
the SEA, an SBSEF shall not adopt any
rules or take any actions that result in
any unreasonable restraint of trade or
impose any material anticompetitive
burden on trading or clearing.
828--Core Principle 11 (Conflicts of would require an SBSEF to establish and Yes
interest). enforce rules to minimize conflicts of
interest in its decision-making process
and establish a process for resolving
such conflicts.
829--Core Principle 12 (Financial would require an SBSEF to have adequate Yes
resources). financial, operational, and managerial
resources to discharge its
responsibilities; also would set forth
the standards used to calculate the
adequacy of such resources; and require
certain reports to the Commission.
830--Core Principle 13 (System would require an SBSEF to establish and Yes
safeguards). maintain a program of automated systems
and risk analysis to identify and
minimize sources of operational risk,
through the development of appropriate
controls and procedures; also would
require an SBSEF to establish and
maintain emergency procedures, backup
facilities, and a plan for disaster
recovery; conduct periodic tests to
verify those resources are sufficient;
and notify the Commission promptly of
any cyber incidents and material planned
changes to the SBSEF's systems
safeguards.
831--Core Principle 14 (Designation of would require an SBSEF to designate a CCO Yes
CCO). and set forth regulatory and reporting
obligations for the CCO.
832--Cross-border mandatory trade would explain when the SEA's trade No
execution. execution requirement applies to a cross-
border SBS transaction.
833--Cross-border exemptions........... would provide for a process by which the Yes
Commission, upon making the requisite
findings, could grant exemptions from
the SEA definitions of ``exchange,''
``security-based swap execution
facility,'' and ``broker'' and exempt
cross-border SBS from the SEA's trade
execution requirement.
834--Mitigation of conflicts of would provide that each SBSEF and SBS Yes
interest of SBSEFs and SBS exchanges. exchange must create and maintain rules
to mitigate conflicts of interest
between SBSEFs and SBS exchanges and
their members, including by prohibiting
members from owning 20% or more of the
voting securities of an SBSEF or SBS
exchange, and from exercising
disproportionate influence in
disciplinary proceedings; also would
require each SBSEF and SBS exchange to
submit to the Commission after every
governing board election a list of each
governing board's members, the groups
they represent, and how the composition
of the board complies with the
requirements of Rule 834.
835--Notice to Commission by SBSEF of would provide that, if an SBSEF issues a Yes
final disciplinary action or denial or final disciplinary action against a
limitation of access. member, denies or conditions membership,
or denies or limits access of a person
to any services offered by the SBSEF,
the SBSEF shall file a notice of such
action with the Commission within 30
days and serve a copy on the affected
person.
3a1-1 proposed amendments.............. would exempt from the SEA definition of No
``exchange'' a registered SBSEF that
provides a market place for no
securities other than SBS, and an entity
that has registered with the Commission
as a clearing agency and limits its
exchange functions to operation of a
trading session that is designed to
further the accuracy of end-of-day
valuations.
15a-12--Exemption for certain SBSEFs would exempt a registered SBSEF from No
from certain broker requirements. certain broker requirements while
affirming that an SBSEF is a broker
under the SEA.
Proposed rules and amendments to the new rules and amendments to the Rules of No **
Commission's Rules of Practice. Practice to allow persons who are
aggrieved by a final disciplinary
action, a denial or conditioning of
membership, or a denial or limitation of
access by an SBSEF to seek an
application for review by the Commission.
----------------------------------------------------------------------------------------------------------------
** The Commission finds, in accordance with section 553(b)(3)(A) of the Administrative Procedure Act (``APA''),
5 U.S.C. 553(b)(3)(A), that the proposed revisions to the Commission's Rules of Practice relate solely to
agency organization, procedure, or practice. They are therefore not subject to the provisions of the APA
requiring notice, opportunity for public comment, and publication. However, the Commission believes that it
would be useful to publish the rules for notice and comment. To the extent that these rules relate to agency
information collections during the conduct of administrative proceedings, they are exempt from review under
the PRA.
B. Proposed Use of Information
1. Registration Requirements and Form SBSEF
Proposed Regulation SE would impose various requirements relating
to SBSEF registration, which are set forth in proposed Rule 803.\466\
---------------------------------------------------------------------------
\466\ See, e.g., proposed Rule 803(b)(1) (requiring an entity
that wishes to register with the Commission as an SBSEF to submit a
Form SBSEF).
---------------------------------------------------------------------------
The information collected pursuant to these proposed rules would
enhance the ability of the Commission to determine whether to approve
the registration of an entity as an SBSEF; to monitor and oversee
SBSEFs; to determine that SBSEFs initially comply, and continue to
operate in compliance, with the SEA, including the Core Principles
applicable to SBSEFs; to carry out its statutorily mandated oversight
functions; and to maintain accurate and updated information regarding
SBSEFs. Because
[[Page 28962]]
the registration information would be publicly available, it could also
be useful to an SBSEF's members, other market participants, other
regulators, and the public generally.
2. Requirements for SBSEFs To Establish Rules
Various provisions of proposed Regulation SE would require SBSEFs
to establish certain rules, policies, and procedures to comply with
applicable requirements of the SEA and the Commission's rules
thereunder.\467\ The rules also would help an SBSEF's members to
understand and comply with requirements of the SBSEF.
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\467\ See, e.g., proposed Rule 819(a)(2) (requiring an SBSEF to
establish and enforce trading, trade processing, and participation
rules).
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3. Reporting Requirements for SBSEFs
Various provisions of proposed Regulation SE would require SBSEFs
and certain other persons to submit reports or provide specified
information.\468\ This information generally would be used by the
Commission in its oversight of SBSEFs and the SBS markets; certain of
the information to be collected could be used by market participants to
confirm their SBS transactions.
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\468\ See, e.g., proposed Rule 829 (requiring an SBSEF,
quarterly or upon Commission request, to provide the Commission a
report that includes the amount of financial resources necessary to
meet the requirements of Rule 829).
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4. Recordkeeping Required Under Regulation SE
Proposed Regulation SE would require an SBSEF to keep specified
records.\469\ The audit trail information required to be maintained
under proposed Regulation SE would aid the SBSEF in detecting and
deterring fraudulent and manipulative acts with respect to trading on
its market, as well as help it to fulfill the statutory requirement in
Core Principle 4 that an SBSEF monitor trading in SBS, including
through comprehensive and accurate trade reconstructions. In addition,
Commission access to these records would provide a valuable tool to
help the Commission carry out its oversight responsibility over SBSEFs
and the SBS markets in general.
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\469\ See proposed Rule 826 (requiring an SBSEF to maintain
records of all activities relating to the business of the facility,
including a complete audit trail, and to report information to the
Commission upon request).
---------------------------------------------------------------------------
5. Timely Publication of Trading Information Requirement for SBSEFs
Proposed Regulation SE would impose certain publication burdens on
SBSEFs in proposed Rule 825.\470\
---------------------------------------------------------------------------
\470\ See proposed Rule 825 (requiring an SBSEF to make publicly
available a ``Daily Market Data Report'').
---------------------------------------------------------------------------
The requirement contained in proposed Rule 825 that an SBSEF have
the capacity to electronically capture, transmit, and disseminate
information on price, trading volume, and other trading data on all SBS
executed on or through the SBSEF would assist the SBSEF in carrying out
its regulatory responsibilities under the SEA and enable the SBSEF to
comply with reasonable requests to provide information to others.
Furthermore, proposed Rule 825 would require an SBSEF to publish a
Daily Market Data Report that is designed to provide market observers
with a daily snapshot of market activity on the SBSEF.
6. Rule Filing and Product Filing Processes for SBSEFs
Proposed Regulation SE would establish various filing requirements
applicable to SBSEFs. Proposed Rules 804 and 805 would provide
mechanisms for an SBSEF to submit filings for new products that they
seek to list either through a self-certification process or by
voluntarily requesting approval of the Commission, respectively.
Proposed Rules 806 and 807 would require an SBSEF to submit new rule or
rule amendments either through a self-certification process or by
voluntarily requesting approval of the Commission, respectively.
Proposed Rule 808 would address the public availability of certain
information in an application to register as an SBSEF and SBSEF filings
made under the self-certification procedures or pursuant to Commission
review and approval. Proposed Rule 809 would establish procedures for
addressing a situation where an SBSEF wishes to list a product and it
is unclear whether the product is an SBS or swap (i.e., whether it
properly falls under the jurisdiction of the SEC or the CFTC). Proposed
Rule 810 would provide that an applicant for registration as an SBSEF
may submit for Commission review and approval an SBS's terms and
conditions or rules prior to listing the product as part of its
application for registration.
The information that would be collected under proposed Rules 804
and 805 would help the Commission assess whether an SBS listed by an
SBSEF complies with relevant provisions of the SEA. In addition, this
information would assist the Commission in overseeing the SBSEF's
compliance with its regulatory obligations generally and to learn about
developments in the SBS product market. Proposed Rules 804 and 805 also
would provide a mechanism whereby market participants, other SBSEFs,
other regulators, and the public generally could learn what products an
SBSEF intends to list, and to obtain information regarding such
products.
The information that would be collected under proposed Rules 806
and 807 would help the Commission assess whether a new rule or rule
amendment of an SBSEF complies with relevant provisions of the SEA, and
assist the Commission in overseeing the SBSEF's compliance with its
regulatory obligations generally. Proposed Rules 806 and 807 also would
provide a mechanism whereby an SBSEF's members (and prospective
members) could learn what new rules or rule amendments the SBSEF
intends to apply in its market.
The information collected under proposed Rules 809 and 810 would
help the Commission assess an SBSEF's compliance with relevant
provisions of the SEA, and assist the Commission in overseeing the
SBSEF's compliance with its regulatory obligations. This information
also would be useful to the SBSEF's members, because they would be
subject to such new or amended rules or products and thus would have an
interest in learning about those rules or products. Other market
participants, other SBSEFs, and other regulators, as well as the public
generally, may find information about proposed new or amended rules or
products useful.
7. Requirements Relating to the CCO
Proposed Regulation SE includes Rule 831 that would set out
requirements relating to an SBSEF's CCO.
The information that would be collected under proposed Rule 831
would help ensure compliance by SBSEFs with relevant provisions of the
SEA and assist the Commission in overseeing SBSEFs generally. The
Commission could use the annual compliance report to help it evaluate
whether an SBSEF is carrying out its statutorily-mandated regulatory
obligations and, among other things, to discern the scope of any
denials of access or refusals to grant access by the SBSEF and to
obtain information on the status of the SBSEF's regulatory compliance
program. The SBSEF's fourth-quarter financial report would provide the
Commission with important information on the financial health of the
SBSEF.
[[Page 28963]]
8. Surveillance Systems Requirements for SBSEFs
The proposed rules that would require an SBSEF to maintain
surveillance systems and to monitor trading \471\ are designed to
promote compliance by an SBSEF with its obligations under the SEA to
oversee trading on its market, and to prevent manipulation and other
unlawful activity or disruption of its market.
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\471\ See, e.g., proposed Rule 819(d)(3) (requiring an SBSEF to
establish and maintain sufficient compliance staff and resources to
ensure that it can conduct effective audit trail reviews, trade
practice surveillance, market surveillance, and real-time market
monitoring).
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C. Respondents
The respondents subject to the collection of information burdens
associated with proposed Regulation SE would be: (1) SBSEFs (and
entities wishing to register with the Commission as SBSEFs); (2) in the
case of Rule 833, persons that seek an exemption order under that rule;
and (3) in the case of Rule 834, SBS exchanges.
Currently there are no registered SBSEFs. Based on the number of
SEFs registered with the CFTC that trade index CDS (the closest analog
to single-name CDS, which is likely to be the product most frequently
traded on SEC-registered SBSEFs) and general industry information, the
Commission preliminarily estimates that five entities will seek to
register as SBSEFs and thus become subject to the collection of
information requirements of these proposed rules.
The Commission preliminarily estimates that three persons would
request exemption orders under one or both paragraphs \472\ of proposed
Rule 833.\473\ The CFTC has granted three exemptions similar to those
contemplated by proposed Rule 833,\474\ which suggests that the number
of jurisdictions having organized trading venues for swap and SBS
products that overlap with products traded on similar venues in the
United States is not large.
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\472\ See supra note 254.
\473\ The Commission anticipates that such persons could include
foreign SBS trading venues, foreign authorities that license and
regulate those trading venues, or covered persons (as defined in
proposed Rule 832) who are members of such trading venues.
\474\ See supra note 244.
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The Commission preliminarily estimates that three entities will
operate as SBS exchanges. These are likely to be existing national
securities exchanges that, in the future, seek to list SBS and thereby
become SBS exchanges.
The Commission considered whether any provision of proposed
Regulation SE would impose any burdens (as defined in the PRA) on SBSEF
members, but has determined that they would not.
D. Total Annual Reporting and Recordkeeping Burden
1. Overview
The CFTC, based on experience gained in developing rules for SEFs
and regulating the SEF market, over the years has developed, refined,
and received approval from OMB for paperwork burden hours estimates,
both for SEF rules directly as well as for ancillary rules on which
various rules in proposed Regulation SE are modelled.\475\ Those
estimates are presented in the form of aggregate totals for compliance
with:
---------------------------------------------------------------------------
\475\ See Core Principles and Other Requirements for Swap
Execution Facilities (May 17, 2013), 78 FR 33476, 33548-49 (June 4,
2013) (Final Rule PRA for CFTC part 37); Swap Execution Facility
Requirements (November 27, 2020), 85 FR 82313, 82324 (December 18,
2020) (Final Rule PRA for Sec. 36.1); Core Principles and Other
Requirements for Swap Execution Facilities: OMB Control Number 3038-
0074 Supporting Statements (last updated July 26, 2021), available
at https://omb.report/omb/3038-0074 (PRA Supporting Statements for
CFTC Core Principles for SEFs, Sec. 36.1); Provisions Common to
Registered Entities (July 19, 2011), 76 FR 44776, 44789-90 (July 27,
2011) (Final Rule PRA for CFTC part 40); part 40, Provisions Common
to Registered Entities: OMB Control Number 3038-0093 Supporting
Statements (last updated February 24, 2021), available at https://omb.report/omb/3038-0093 (PRA Supporting Statements for CFTC part
40, Sec. 36.1); Notification of Pending Legal Proceedings: OMB
Control Number 3038-0033 Supporting Statements (last updated August
24, 2018), available at https://omb.report/omb/3038-0033 (PRA
Supporting Statements for Sec. Sec. 1.60(a), (c), and (e));
Adaptation of Regulations To Incorporate Swaps (October 16, 2012),
77 FR 66288, 66306-08 (November 2, 2012) (Final Rule PRA for
Sec. Sec. 1.59 and 1.37(c)); Recordkeeping (May 23, 2017), 82 FR
24479, 24485 (May 30, 2017) (Final Rule PRA for Sec. 1.31);
Adaptation of Regulations to Incorporate Swaps-Exclusion of Utility
Operations-Related Swaps with Utility Special Entities from De
Minimis Threshold: OMB Control Number 3038-0090 Supporting
Statements (last updated July 1, 2020), available at https://omb.report/omb/3038-0090 (PRA Supporting Statements for Sec. Sec.
1.31, 1.37(c), 1.59, and 1.67); Service on Self-Regulatory
Organization Governing Boards or Committees by Persons with
Disciplinary Histories (February 27, 1990), 55 FR 7884, 7890 (March
6, 1990) (Final Rule PRA for Sec. 1.63); Final Rule and Rule
Amendments Concerning Composition of Various Self-Regulatory
Organization Governing Boards and Major Disciplinary Committees
(June 29, 1993), 58 FR 37644, 37653 (July 13, 1993) (Final Rule PRA
for Sec. 1.64); Voting by Interested Members of Self-Regulatory
Organization Governing Boards and Committees (December 23, 1998), 64
FR 16, 22 (January 4, 1999) (Final Rule PRA for Sec. 1.69); Rules
Pertaining to Contract Markets and Their Members: OMB Control Number
3038-0022 Supporting Statements (last updated December 21, 2010),
available at https://omb.report/omb/3038-0022 (PRA Supporting
Statements for Sec. Sec. 1.63, 1.64, and 1.69); Swap Data
Recordkeeping and Reporting Requirements (December 20, 2011), 77 FR
2136, 2171-76 (January 13, 2012) (Final Rule PRA for Sec. 45.2);
Swap Data Recordkeeping and Reporting Requirements: OMB Control
Number 3038-0096 Supporting Statements (last updated March 16,
2021), available at https://omb.report/omb/3038-0096 (PRA Supporting
Statements for Sec. 45.2); Repeal of the Exempt Commercial Market
and Exempt Board of Trade Exemptions (September 28, 2015), 80 FR
59575, 59576 (October 2, 2015) (Final Rule PRA for Sec. 15.05).
---------------------------------------------------------------------------
Part 37 of the CFTC regulations regarding initial
registration requirements applicable to SEFs;
Part 37 regarding other requirements applicable to SEFs,
including the statutory Core Principles;
Part 40 of the CFTC regulations regarding requirements
applicable to SEFs (and other CFTC-registered entities); and
Sec. Sec. 1.60(a), 1.60(c), 1.60(e), 36.1, 1.59, 1.63,
1.67, 15.05, 1.37(c), 1.64, and 1.69 regarding requirements applicable
to SEFs (and other CFTC-registered entities).
The rules applicable to SBSEFs would be, with limited exceptions
discussed above, substantively similar to those applicable to SEFs.
Therefore, the Commission is basing its preliminary estimates for the
paperwork burdens for SBSEFs on the CFTC's paperwork burden
calculations for analog rules that apply to SEFs, which have been
approved by OMB.\476\ However, in certain cases, the paperwork burdens
estimated by the CFTC are scaled down for SBSEFs to account for the
likelihood that there will be fewer SBSEFs than SEFs and the SBS
business of dually registered SEF/SBSEFs is likely to be smaller than
the swap business.
---------------------------------------------------------------------------
\476\ Proposed Rule 835, which would require SBSEFs to file with
the Commission notices of final disciplinary actions and denials and
limitations of access, is not based on a CFTC rule but rather on an
existing Commission rule that imposes a similar filing requirement
on SROs. Therefore, the Commission is utilizing the burden estimates
in its rulemaking for SROs to estimate the burdens of this rule for
SBSEFs.
---------------------------------------------------------------------------
Although there are minor differences between the CFTC rules and the
proposed Commission rules, the Commission does not believe it needs to
substantially deviate from the CFTC's estimates of aggregated burden
hours for compliance (beyond scaling back the CFTC's estimates to
account for fewer SBSEFs than SEFs, and the smaller size of the SBS
market relative to the swap market). These minor differences between
the CFTC's existing rules for SEFs and the Commission's proposed rules
for SBSEFs are prompted, in some cases, by minor differences between
the statutory provisions that apply to SEFs under the CEA and the
statutory provisions that apply to SBSEFs under the SEA, or, in other
cases, by differences between the swap market and SBS market. In either
case, however, the Commission preliminarily anticipates that the
burdens on SBSEFs would be substantially similar to the burdens set out
in the CFTC estimates,
[[Page 28964]]
which serve as the basis for the Commission's estimates.\477\
Furthermore, the Commission preliminarily believes that basing the
burden estimates for SBSEFs on the CFTC's estimates for SEFs would be
more accurate than using burden hours estimates for any other entity
that the Commission currently regulates (e.g., national securities
exchanges) because SBSEFs share many more similarities with SEFs than
they do with any other SEC-registered entities.
---------------------------------------------------------------------------
\477\ The Commission notes that, when the CFTC adopted the SEF
rules in 2013, the CFTC took a similar approach to burden hours
estimation. The CFTC relied on the aggregate burden hours for three
types of entities that it regulated (DCMs, derivatives transaction
execution facilities, and certain exempt commercial markets) and
applied those burden hours to SEFs unadjusted, even though there are
differences between the regulations that govern SEFs and those that
govern the other entities. The CFTC noted that those entities, like
SEFs, were subject to certain statutory core principles and rules
thereunder, and despite variations in the applicable regulations, it
was still appropriate to use the average aggregate burden number for
those entities as the estimate for SEFs without adjustment. See
CFTC, Core Principles and Other Requirements for Swap Execution
Facilities, 78 FR at 33548-51.
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The Commission anticipates that most if not all entities that seek
to register with the Commission as SBSEFs will also register, or will
already be registered, with the CFTC as SEFs. With a few exceptions,
the rules being proposed by the Commission are adapted from existing
rules of the CFTC. With these proposed rules, the Commission intends to
obtain comparable regulatory benefits as the CFTC rules while imposing
only marginal additional burdens on SEF/SBSEFs. However, for purposes
of its PRA analysis, the Commission will estimate the burdens as if a
respondent were subject only to the Commission's rules.\478\ The
Commission requests comments on its entire proposed approach to
estimating burden hours.\479\
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\478\ However, the Commission will note instances where a
proposed rule would require an SBSEF to generate the same paperwork
that is already being created pursuant to a CFTC rule. In such
cases, compliance with the existing CFTC requirement would satisfy
the proposed SEC requirement, and in reality there would be few or
perhaps even zero marginal burdens imposed on dually registered SEF/
SBSEFs.
\479\ The burden hours discussed below represent annual/ongoing
burdens, with three exceptions that represent initial, one-time
burdens: registration burdens for SBSEFs under proposed Rule 803,
exemption requests regarding foreign SBS trading venues under
proposed Rule 833, and certain rules under proposed Rules 834(b) and
(c).
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2. Aggregate Burdens for Rules Modelled After CFTC Part 37 Rules
a. Registration Requirements for SBSEFs and Form SBSEF
A submission by an entity wishing to register with the Commission
as an SBSEF would be required to be made on Form SBSEF, pursuant to
proposed Rule 803, on a one-time basis. The Commission preliminarily
estimates that five entities initially would seek to register with the
Commission as SBSEFs. The Commission estimates the burdens of proposed
Rule 803 and Form SBSEF to be 1,475 hours. These entities would incur
initial, one-time burdens, because once an entity is registered as an
SBSEF, its registration obligations are complete. The Commission's
estimate regarding the initial burden that an entity would incur to
file a Form SBSEF is informed by the estimates made by the CFTC for the
completion of Form SEF and compliance with Sec. 37.3 of the CFTC
regulations (which governs registration of SEFs). Proposed Form SBSEF
would request almost exactly the same information as required by Form
SEF. Proposed Rule 803 is substantially similar to Sec. 37.3. The CFTC
has estimated that the initial compliance burden associated with its
registration requirements in Sec. 37.3 and Form SEF to be 295 hours
per SEF applicant.\480\ For purposes of calculating burden hours, the
CFTC considered the entire SEF application process to constitute a
single information collection; the Commission is utilizing the same
approach for SBSEFs. The Commission preliminarily believes that SBSEFs
would prepare Form SBSEF internally. The Commission requests comment on
the accuracy of this estimate.
---------------------------------------------------------------------------
\480\ See OMB, Supporting Statement for New and Revised
Information Collections: Core Principles and Other Requirements for
Swap Execution Facilities, OMB Control Number 3038-0074, Attachment
A (July 7, 2021), available at https://omb.report/icr/202107-3038-004/doc/113431800.pdf.
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b. Ongoing Compliance With Other Requirements That Are Similar to the
Remainder of Part 37
The Commission preliminarily estimates the aggregate ongoing annual
hour burden for compliance with all of the proposed SBSEF rules that
have analogs in part 37 to be 1,935 hours.\481\ The CFTC has estimated
that the compliance burden for all of the sections of part 37 combined,
other than the initial burden of 295 hours per SEF for registration-
related compliance discussed above, to be an ongoing annual burden of
387 hours per SEF.\482\ With exception of Sec. 37.600, which
implements a CEA Core Principle for SEFs relating to position limits
that is not in the SEA, every other section of part 37 has an analog in
proposed Regulation SE that is substantively similar.\483\ Therefore,
the Commission preliminarily estimates that the aggregate CFTC estimate
of 387 hours per SEF per year serves as a reasonable estimate for the
annual hourly burden on each SBSEF.
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\481\ 1,935 hours = 387 hours (annual burden per respondent) x 5
(number of respondents).
\482\ See OMB, Supporting Statement for New and Revised
Information Collections, OMB Control Number 3038-0074, at 8
(estimating that on a net basis the total burden hours imposed on
each SEF will be 387 hours).
\483\ As discussed previously, portions of the CFTC guidance
have been incorporated into certain rules being proposed by the
Commission in Regulation SE. The CFTC guidance clarifies portions of
its rules by suggesting means for compliance and does not
fundamentally alter those rules. Therefore, the Commission believes
that no adjustments to the CFTC estimates, on which the Commission
is basing its own estimates, would be appropriate despite adapting
that guidance into the Commission's proposed rules.
---------------------------------------------------------------------------
As discussed in more detail below, certain SBSEF rules proposed in
Regulation SE are derived from other parts of the CFTC rules (e.g.,
part 40) and the burdens for those section will be based on the
appropriate burden hours of the corresponding CFTC part. For reference,
the following table lists all sections of part 37 and the corresponding
proposed SBSEF rule. Please see above for more detailed descriptions of
a particular proposed SBSEF rule.
------------------------------------------------------------------------
Analogous SBSEF
Rule No. (387
aggregate burden
hours per SBSEF
not including
proposed Rule
CFTC part 37 section (387 803
aggregate burden hours per (registration)
SEF not including Sec. 37.3 Topic and certain
(registration) other rules not
modelled on
part 37 rules
(discussed
separately in
the following
sections)
------------------------------------------------------------------------
37.1.......................... scope................. 800.
37.2.......................... applicable provisions. 801.
37.4.......................... procedures for listing 810.
products.
37.5.......................... compliance............ 811.
[[Page 28965]]
37.6.......................... enforceability........ 812.
37.7.......................... prohibited use of data 813.
37.8.......................... entities operating as 814.
SEFs and DCMs.
37.9.......................... methods of execution.. 815.
37.10......................... process to make swaps 816.
available for trade.
37.11......................... reserved section...... not applicable.
37.12......................... trade execution 817.
compliance schedule.
37.100........................ CP 1 (compliance with 818 (CP1).
Core Principles).
37.200 through 37.206......... CP 2 (compliance with 819 (CP2).
rules).
37.300 through 37.301......... CP 3 (manipulation)... 820 (CP3).
37.400 through 37.408......... CP 4 (monitoring of 821 (CP4).
trading and trade
processing).
37.500 through 37.504......... CP 5 (ability to 822 (CP5).
obtain information).
37.600 through 37.601......... CP 6 (position limits) no equivalent
requirement in
the SEA; CP
numbering
diverges after
this point.
37.700 through 37.703......... CP 7 (financial 823 (CP6).
integrity of
transactions).
37.800 through 37.801......... CP 8 (emergency 824 (CP7).
authority).
37.900 through 37.901......... CP 9 (publication of 825 (CP 8).
trading information).
37.1000 through 37.1001....... CP 10 (recordkeeping 826 (CP 9).
and reporting).
37.1100 through 37.1101....... CP 11 (anti-trust).... 827 (CP10).
37.1200....................... CP 12 (conflicts of 828 (CP 11).
interest).
37.1300 through 37.1307....... CP 13 (financial 829 (CP 12).
resources).
37.1400 through 37.1401....... CP 14 (system 830 (CP 13).
safeguards).
37.1500 through 1501.......... CP 15 (CCO)........... 831 (CP 14).
Appendix A (Form SEF)......... Form SEF.............. Form SBSEF.\484\
Appendix B.................... Guidance relating to guidance
Core Principles. incorporated
throughout
proposed rules
818 through
831.
------------------------------------------------------------------------
3. Aggregate Burdens for Rules Modelled on CFTC Part 40 Rules
---------------------------------------------------------------------------
\484\ The burdens of registering using Form SBSEF are discussed
in the previous section.
---------------------------------------------------------------------------
A number of rules contained in Proposed Regulation SE are modelled
after rules in part 40 of the CFTC's rules, including Sec. Sec. 40.2
(Listing products for trading by certification), 40.3 (Voluntary
submission of new products for Commission review and approval), 40.5
(Voluntary submission of rules for Commission review and approval), and
40.6 (Self-certification of rules). The Commission is proposing Rules
804, 805, 806, and 807--which are closely modelled on Sec. Sec. 40.2,
40.3, 40.5, and 40.6, respectively--in order to harmonize with the
procedures that the CFTC applies to SEFs with respect to establishing
new rules and listing products. In addition, proposed Rule 808 is
modelled after Sec. 40.8 and would provide that certain information in
a Form SBSEF application or a rule or product filing would be made
publicly available, notwithstanding the SBSEF's request for
confidential treatment. Proposed Rule 809 is loosely modelled after
Sec. 40.12 and would set forth a mechanism for a tolling of the period
for consideration of a product pending the issuance by the SEC and the
CFTC of joint interpretation clarifying which agency has jurisdiction
over the product.
a. Rule and Product Filing Processes for SBSEFs
Under proposed Rules 804 and 805, an SBSEF would be required to
submit filings for new products that it seeks to list. Under proposed
Rules 806 and 807, an SBSEF would be required to submit rule filings
for new rules or rule amendments, including changes to a product's
terms or conditions. The Commission's estimate regarding the burdens
that an SBSEF would incur to comply with the proposed rule and product
filing processes in proposed Rules 804, 805, 806, and 807 is informed
by the estimates made by the CFTC for compliance with Sec. Sec. 40.2,
40.3, 40.5, and 40.6, the burden hours for which have been approved by
OMB.\485\ The Commission is estimating a total of five SBSEF
respondents. The Commission preliminarily estimates that the aggregate
ongoing annual hourly burden for all SBSEFs to prepare and submit rule
and product filings under proposed Rules 804, 805, 806, and 807
(including the cover sheet) \486\ would be 300 hours.
---------------------------------------------------------------------------
\485\ See 75 FR 67282 (November 2, 2010) (CFTC proposal to amend
17 CFR 40.2 through 40.5); OMB, Supporting Statement for Information
Collection Renewal: OMB Control Number 3038-0093, Attachment A (July
10, 2020), available at https://omb.report/icr/202005-3038-001/doc/101274002.pdf (noting the estimated average number of hours to
burden hours report is 2 hours, and the number of annual responses
from each entity is 100).
\486\ Each of the filings that would be required by proposed
Rules 804 through 807 would have to include a submission cover sheet
that is modelled on the cover sheet and instructions used by SEFs in
conjunction with analogous filings with the CFTC, with the
submitting entity checking the appropriate box to indicate which
type of the filing it is making. Any burden hours attributable to a
respondent completing this cover sheet, which is an integral part of
the filing, are not estimated separately from the paperwork burden
of the substantive filing. Instead, they are contained within the
aggregate burden hours estimate for rule and product filings
pursuant to proposed Rules 804 through 807, which are based upon the
CFTC's estimates. See supra note 465.
---------------------------------------------------------------------------
Based on the CFTC's experience with SEFs, the Commission estimates
that on average an SBSEF would incur an ongoing annual burden of 2
hours of work per rule or product filing. Although the CFTC estimated
an average of 100 responses per year per respondent,\487\ the
Commission believes that an estimate of 30 responses is appropriate
given the more limited scope of the SBS market, as opposed to the swap
market. This would result in a total estimated ongoing annual burden of
60 hours per respondent \488\ and 300 hours for all the respondents
[[Page 28966]]
annually.\489\ The Commission solicits comments regarding the accuracy
of its estimates.
---------------------------------------------------------------------------
\487\ See id.
\488\ 60 hours = 30 (number of responses per year per
respondent) x 2 hours (burden per response).
\489\ 300 hours = 60 hours (annual burden per respondent
pursuant to proposed Rules 804, 805, 806, and 807) x 5 (number of
respondents).
---------------------------------------------------------------------------
b. Burdens Related to Rules Modelled After Other Part 40 Rules
i. Rule 802
Certain definitions contained in proposed Rule 802 are modelled
after provisions of part 40. These definitions would not result in any
paperwork burden.
ii. Rule 809
Proposed Rule 809 is loosely modelled on Sec. 40.12 of the CFTC's
rules and would apply in situations where an SBSEF wishes to list a
product and it is unclear whether the product should be classified as
an SBS subject to the jurisdiction of the SEC or a swap subject to the
jurisdiction of the CFTC. Proposed Rule 809 would provide that a
product certification made by an SBSEF pursuant to proposed Rule 804
shall be stayed, or the review period for a product that has been
submitted for Commission approval by an SBSEF pursuant to proposed Rule
805 shall be tolled, upon request for a joint interpretation of whether
the product is a swap, SBS, or mixed swap made pursuant to Rule 3a68-2
under the SEA \490\ by the SBSEF, the SEC, or the CFTC.
---------------------------------------------------------------------------
\490\ 17 CFR 240.3a68-2.
---------------------------------------------------------------------------
Proposed Rule 809 itself does not include a process for determining
whether the SEC or CFTC has jurisdiction over a product. Proposed Rule
809 would enable the SEC to stay or toll the product filing while the
SEC and CFTC consider a joint interpretation under existing SEA Rule
3a68-2, the burden hours of which have already been approved by
OMB.\491\ The only burden imposed on an SBSEF under Rule 809 would be
checking a box on the submission cover sheet if the SBSEF intends to
request a joint interpretation from the Commission and the CFTC
pursuant to SEA Rule 3a68-2.\492\ The Commission preliminarily
estimates that each such indication would impose a burden of 0.25
hours. Furthermore, the Commission preliminarily estimates that each
SBSEF would make one such indication per year.\493\ Accordingly, the
aggregate ongoing annual burden for all SBSEFs to comply with Rule 809
would be 1.25 hours.\494\ The Commission believes that this work,
should it be required, would be conducted internally. The Commission
solicits comment as to the accuracy of these estimates.
---------------------------------------------------------------------------
\491\ OMB recently approved an extension without change of the
collection for Rule 3a68-2. See Supporting Statement for the
Paperwork Reduction Act New Information Collection Submission for
Rule 3a68-2 (Interpretation of Swaps, Security-Based Swaps, and
Mixed Swaps) and Rule 3a68-4(c) (Process for Determining Regulatory
Treatment for Mixed Swaps), OMB Control Number 3235-0685, Supporting
Statement A (December 23, 2021), available at https://omb.report/icr/202112-3235-018/doc/117438500.pdf.
\492\ See supra section VI(E).
\493\ The Commission preliminarily believes that the
establishment of a registration regime and listing procedures for
SBSEFs could affect the distribution, but likely not the total
number, of requests for joint interpretations under Rule 3a68-2 of
the SEA. SBS products may be developed in the bilateral market
before they are listed on SBSEFs, and there are incentives to
resolving jurisdictional issues before they can develop traction in
the market. Accordingly, requests for a joint interpretation under
Rule 3a68-2 could occur before such products are listed by an SBSEF,
and such requests are already considered in the approved PRA burden
estimates for Rule 3a68-2.
\494\ 1.25 hours = 1 (number of responses per year per
respondent) x 0.25 hours (burden per response) x 5 (number of
respondents).
---------------------------------------------------------------------------
4. Aggregate Burdens for Rules Modelled After CFTC Rules Other Than
Parts 37 and 40
The proposed rules similar to rules of the CFTC other than part 37
and part 40 are proposed Rules 811(d), 816(e), 819(h), 819(i), 819(j),
819(k), 826(f), and 834. These proposed rules generate various
categories of burdens for SBSEFs or market participants.
a. Rule 811(d)
Section 1.60 of the CFTC's rules requires a SEF to provide the CFTC
with copies of any legal proceeding to which it is a party, or to which
its property or assets is subject.
Paragraph (d) of proposed Rule 811 would adapt paragraphs (a), (c),
and (e) of Sec. 1.60 to apply to SBSEFs. Paragraph (d)(1) would
require an SBSEF to provide the Commission a copy of the complaint, any
dispositive or partially dispositive decision, any notice of appeal
filed concerning such decision, and such further documents as the
Commission may thereafter request filed in any material legal
proceeding to which the SBSEF is a party or its property or assets is
subject. Paragraph (d)(2) would require an SBSEF to provide notices of
similar actions against any officer, director, or other official of the
SBSEF from conduct in such person's capacity as an official of the
SBSEF alleging violations of certain enumerated actions.
The Commission preliminarily estimates that an SBSEF would provide
the information required by proposed Rule 811(d) once per year, and
that each submission would take 0.20 hours. Thus, the Commission
preliminarily estimates that the aggregate ongoing annual burden for
all SBSEFs to comply with requests for documents or information
pursuant to proposed Rule 811(d) would be 1 hour.\495\ The Commission
is basing its estimate on the CFTC estimate included in its submission
to OMB for Sec. 1.60 of the CFTC's rules, for which the CFTC estimated
that each of the 79 entities to which the rule applies makes, on
average, one submission of documents to the Commission per year. The
CFTC further estimated that the time required to prepare one submission
is approximately 0.20 hour, totaling 15.8 hours (79 x 0.20)
annually.\496\
---------------------------------------------------------------------------
\495\ 1 (number of responses per year per respondent) x 0.20
hours (burden per response) x 5 (number of respondents) = 1 hour.
\496\ See OMB, Supporting Statement for New and Revised
Information Collections: OMB Control Number 3038-0033 (August 23,
2018), available at https://omb.report/icr/201808-3038-004/doc/85625801.pdf.
---------------------------------------------------------------------------
For PRA purposes, the Commission preliminarily believes that it is
reasonable to apply the CFTC's approach to proposed Rule 811(d). The
Commission believes that this work, should it be required, would be
conducted internally. The Commission solicits comment as to the
accuracy of these estimates.
b. Rule 819(h)
Paragraph (h) of proposed Rule 819 generally would prohibit persons
who are employees of an SBSEF, or who otherwise might have access to
confidential information because of their role with the SBSEF, from
improperly utilizing that information. Proposed Rule 819(h) is modelled
on Sec. 1.59 of the CFTC's rules. The Commission does not believe that
this proposed rule would result in a paperwork burden.
c. Rule 819(i)
Paragraph (i) of proposed Rule 819 would bar persons with specified
disciplinary histories from serving on the governing board or
committees of an SBSEF, and impose certain other duties on the SBSEF
associated with that fundamental requirement. Proposed Rule 819(i) is
modelled on Sec. 1.63 of the CFTC's rules.
[[Page 28967]]
The Commission preliminarily estimates that an SBSEF would provide
the information required by proposed Rule 819(i) once per year, and
that each submission would take 79.83 hours. Thus, the Commission
preliminarily estimates that the aggregate ongoing annual burden for
all SBSEFs to comply with proposed Rule 819(i) would be 399.15
hours.\497\ The Commission is basing its estimate on the one that the
CFTC included in its submission to OMB for its adoption of Sec. 1.63,
where the CFTC estimated that each respondent would make, on average,
one submission to the CFTC per year. The CFTC further estimated that
the time required to prepare one submission is approximately 79.83
hours.\498\
---------------------------------------------------------------------------
\497\ 1 (number of responses per year per respondent) x 79.83
hours (burden per response) x 5 (number of respondents) = 399.15
hours.
\498\ See CFTC, Service on Self-Regulatory Organization
Governing Boards or Committees by Persons with Disciplinary
Histories (February 27, 1990), 55 FR 7884, 7890 (March 6, 1990)
(final rule PRA for Sec. 1.63).
---------------------------------------------------------------------------
For PRA purposes, the Commission preliminarily believes that it is
reasonable to apply the CFTC's approach to proposed Rule 819(i), and
that this work would be conducted internally. The Commission solicits
comment as to the accuracy of these estimates.
d. Rule 819(j)
Paragraph (j) of proposed Rule 819 is modelled on Sec. 1.67 of the
CFTC's rules. Rule 819(j)(1) would provide that, upon any final
disciplinary action in which an SBSEF finds that a member has committed
a rule violation that involved a transaction for a customer, whether
executed or not, and that resulted in financial harm to the customer,
the SBSEF must promptly provide written notice of the disciplinary
action to the member.
The Commission preliminarily estimates that an SBSEF would need 0.5
hours to prepare a notice and provide it to a member. This estimate is
based on a previous Commission estimate for the time that it would take
to prepare and submit a simple notice.\499\ The Commission estimates
that these notices would occur once per year at each SBSEF, resulting
in an aggregate ongoing annual burden to comply with proposed Rule
819(j) of 2.5 hours.\500\ The Commission believes that this work,
should it be required, would be conducted internally. The Commission
solicits comment as to the accuracy of these estimates.
---------------------------------------------------------------------------
\499\ Proposed Rule 819(j) would not address any of the
requirements or process concerning taking final disciplinary
actions; it merely would require that a notice be provided. A
provision of Regulation SCI, Rule 1000(b)(4)(i), also requires
providing a simple notice and the Commission estimated that it would
take 0.5 hours to prepare and such a notice. See Regulation Systems
Compliance and Integrity; Final Rule, SEA Release No. 73639
(November 19, 2014), 79 FR 72251, 72381 (December 5, 2014).
\500\ 2.5 hours (0.5 hours of in-house counsel time) x (1
responses per year) x (5 respondents). The once per year estimate is
based on a previous CFTC estimate included in its submission to OMB
for Sec. 1.67 along with other rules.
---------------------------------------------------------------------------
e. Rule 819(k)
Paragraph (k) of proposed Rule 819 would require non-U.S. persons
who trade on an SBSEF to have an agent for service process, which could
be an agent of its own choosing or, by default, the SBSEF. Proposed
Rule 819(k) is modelled on provisions of Sec. 15.05 of the CFTC's
rules that apply to SEFs. The Commission does not believe that this
proposed rule would result in a paperwork burden.
f. Rule 826(f)
Proposed Rule 826(f) is modelled on Sec. 1.37(c) and would require
an SBSEF to keep a record in permanent form, which shall show the true
name, address, and principal occupation or business of any non-U.S.
member that executes transactions on the SBSEF and must, upon request,
provide to the Commission information regarding the name of any person
guaranteeing such transactions or exercising any control over the
trading of such non-U.S. member.
The Commission preliminarily estimates that each SBSEF would need
to update information required by Rule 826(f) once per year and that
each submission would take 0.4 hours. Thus, the Commission
preliminarily estimates that the aggregate ongoing annual burden for
all SBSEFs to comply with requests for documents or information
pursuant to proposed Rule 826(f) would be 2 hours.\501\ The Commission
is basing its estimate on the estimate included by the CFTC in its
submission to OMB regarding Sec. 1.37(c), where the CFTC estimated
that it would take a SEF 0.4 hours to prepare each record in accordance
with Sec. 1.37(c).
---------------------------------------------------------------------------
\501\ 1 (number of responses per year per respondent) x 0.40
hours (burden per response) x 5 (number of respondents) = 2 hours.
---------------------------------------------------------------------------
For PRA purposes, the Commission preliminarily believes that it is
reasonable to apply the CFTC's approach to proposed Rule 826(f). The
Commission believes that this work, should it be required, would be
conducted internally. The Commission solicits comment as to the
accuracy of these estimates.
g. Rule 834
Proposed Rule 834 of Regulation SE would implement section 765 of
the Dodd-Frank Act with respect to SBSEFs and SBS exchanges and, in
addition, adapt certain CFTC rules that are designed to mitigate
conflicts of interest at SEFs (and other CFTC-registered entities).
Proposed Rule 834 would provide that each SBSEF and SBS exchange must
create and maintain rules to mitigate conflicts of interest between
SBSEFs and SBS exchanges and their members, including by prohibiting
members from owning 20% or more of the voting rights of an SBSEF or SBS
exchange and from exercising disproportionate influence in disciplinary
proceedings. Proposed Rule 834 also would require each SBSEF and SBS
exchange to submit to the Commission after every governing board
election a list of each governing board's members, the groups they
represent, and how the composition of the board complies with the
requirements of Rule 834. Establishing such rules and submitting such
lists to the Commission would result in a paperwork burden for SBSEFs
and SBS exchanges.
The Commission preliminarily estimates that proposed Rules 834(b)
and (c) together would have an initial, one-time paperwork burden of 15
hours per entity associated with drafting and implementing any such
rules, for an aggregate one-time paperwork burden of 120 hours.\502\
Proposed Rules 834(b) and (c) are substantially similar to proposed
Rule 702(c) of Regulation MC.\503\ In its PRA analysis for proposed
Rule 702(c), the Commission estimated that there would be a one-time
paperwork burden of 15 hours per entity associated with drafting and
implementation of any such rules by each SBSEF or SBS exchange.\504\
---------------------------------------------------------------------------
\502\ 1 (number of responses per respondent) x 15 hours (burden
per response) x 8 (5 SBSEFs + 3 SBS exchanges) = 120 hours.
\503\ Regulation MC Proposal, 75 FR at 65916.
\504\ See id.
---------------------------------------------------------------------------
Additionally, the Commission preliminarily estimates that proposed
Rule 834(d), proposed Rule 834(e), and proposed Rule 834(f), combined,
would result in an aggregate ongoing annual paperwork burden of 10
hours.\505\ Proposed Rules 834(d), (e), and (f) are substantially
similar to proposed Rule 702(h) in Regulation MC in 2010 \506\ and CFTC
Sec. 1.64(c)(4), CFTC Sec. 1.64(b), and CFTC Sec. 1.64(d),
respectively. The Commission is basing its estimate on the
[[Page 28968]]
CFTC's estimate that Rules 1.41(d),\507\ 1.63, 1.64, and 1.67 would
result in an average annual paperwork burden of 1.25 hours per response
that was included in its submission to OMB.\508\
---------------------------------------------------------------------------
\505\ 10 hours = 1 (number of responses per respondent) x 1.25
hours (burden per response) x 8 (number of SBSEF + SBS exchange
respondents).
\506\ Regulation MC Proposal, 75 FR at 65932.
\507\ While Sec. 1.41(d) created an exemption from the
requirements of section 5a(a)(12)(A) of the CEA for contract market
rules not related to terms and conditions, the CFTC did not break
out the portion of the burden hours for which this amendment is
responsible. Therefore, to be conservative, the Commission is
including it in its estimate for the burden hours of proposed Rules
834(d), (e), and (f).
\508\ See 58 FR 37644, 37653.
---------------------------------------------------------------------------
The Commission preliminarily estimates that proposed Rule 834(g)
would have an aggregate ongoing annual burden of 16 hours.\509\
Proposed Rule 834(g) is substantially similar to Sec. 1.69 of the
CFTC's rules, and the Commission is basing its estimate on the CFTC's
estimate for Sec. 1.69 of 2 hours per response that was included in
its submission to OMB.\510\
---------------------------------------------------------------------------
\509\ 16 hours = 1 (number of responses per respondent) x 2
hours (burden per response) x 8 (number of SBSEF + SBS exchange
respondents).
\510\ See 64 FR at 16, 22.
---------------------------------------------------------------------------
The Commission does not believe that proposed Rule 834(h) would
result in a paperwork burden not already included in the above
estimates. Proposed Rule 834(h) collates into a single rule the
requirements for an SBSEF to file rules to comply with proposed Rule
834. As it has already described the paperwork burdens of proposed
Rules 834(b) through (g), the Commission does not believe that proposed
Rule 834(h) would result in a separate paperwork burden not already
included above. Thus, the total aggregate ongoing annual burden is
estimated at 26 hours.\511\
---------------------------------------------------------------------------
\511\ 26 hours = 10 hours (from the second sentence of proposed
Rules 834(d), 834(e), and 834(f)) + 16 hours (from proposed Rule
834(g)) + 0 hours (from proposed Rule 834(h).
---------------------------------------------------------------------------
5. Miscellaneous Burdens
a. Rule 833
Proposed Rule 833 would describe how exemptions could be obtained
for foreign SBS trading venues from the SEA definitions of
``exchange,'' ``security-based swap execution facility,'' and
``broker'' and how SBS executed on a foreign trading venue could become
exempt from the SEA's trade execution requirement. Based on the CFTC's
experience in the SEF market,\512\ the Commission preliminarily
estimates that there would be three requests for an exemption order
under either or both paragraphs (a) and (b) of Rule 833 in the first
year and 2 requests in each subsequent year; and that each submission
would require an initial, one-time burden of 80 hours. Once an
exemption has been granted to an applicant, no further action is
required. The Commission preliminarily estimates the burden to submit
an exemption request under one or both paragraphs of proposed Rule 833
would be 240 hours in the first year \513\ and 160 hours in each
subsequent year.\514\ The Commission solicits comment as to the
accuracy of these estimates.
---------------------------------------------------------------------------
\512\ See supra note 244.
\513\ 240 hours (80 hours of in-house counsel time) x (3
respondents).
\514\ 160 hours (80 hours of in-house counsel time) x (2
respondents). This estimate is informed by Rule 908(c) of the
Commission's Regulation SBSR, which sets forth the requirements
surrounding requests under which regulatory reporting and public
dissemination of SBS transactions can be satisfied by complying with
the rules of a foreign jurisdiction rather than the parallel rules
applicable in the United States. The materials necessary to support
such a request under Rule 908(c) are broadly similar to the
materials necessary to support a request for an exemption order
under one or both paragraphs of proposed Rule 833. The Commission
estimated that the burden of a request under Rule 908(c) would be 80
hours of in-house counsel time; therefore, the Commission
preliminarily estimates that burden for submitting documents and
information in support of a request for an exemption order under
Rule 833 would be the same.
---------------------------------------------------------------------------
b. Rule 835
Proposed Rule 835 would provide that, if an SBSEF issues a final
disciplinary action against a member, takes final action with respect
to a denial or conditioning membership, or takes final action with
respect to a denial or limitation of access of a person to any services
offered by the SBSEF, the SBSEF shall file a notice of such action with
the Commission within 30 days and serve a copy on the affected person.
The Commission preliminarily estimates that it would take 0.5 hours
to prepare this notice and provide it to the Commission and the
affected person. This estimate is based on a previous Commission
estimate for the time that it would take to prepare and submit a simple
notice.\515\ The Commission preliminarily believes that it would take
an additional 0.25 hours to create and serve a copy of that notice on
the affected person. The Commission estimates that these notices would
occur once per month at each SBSEF, resulting in an aggregate annual
burden to comply with proposed Rule 835 of 45 hours.\516\ The
Commission believes that this work, should it be required, would be
conducted internally. The Commission solicits comment as to the
accuracy of these estimates.
---------------------------------------------------------------------------
\515\ A provision of Regulation SCI, Rule 1000(b)(4)(i), also
requires providing a simple notice and the Commission estimated that
it would take 0.5 hours to prepare and such a notice. See Regulation
Systems Compliance and Integrity; Final Rule, SEA Release No. 73639
(November 19, 2014), 79 FR 72251, 72381 (December 5, 2014).
\516\ 45 hours (0.75 hours of in-house counsel time) x (12
responses per year) x (5 respondents).
---------------------------------------------------------------------------
6. Total Paperwork Burden Under Proposed Regulation SE
Based on the foregoing, the Commission preliminarily estimates that
the total one-time burden for all SBSEFs, persons that seek an
exemption order under proposed Rule 833, and SBS exchanges combined
pursuant to the requirements under Regulation SE is equal to 1,995
hours. The Commission preliminarily estimates that annual ongoing
burden for all SBSEFs, persons that seek an exemption order under
proposed Rule 833, and SBS exchanges combined pursuant to the
requirements under Regulation SE is equal to 2,711.9 hours.
---------------------------------------------------------------------------
\517\ Three respondents in the first year and then two each
subsequent year.
Summary of Aggregate Burden Hours
----------------------------------------------------------------------------------------------------------------
Burden hours
Proposed rule or provision per respondent One-time or ongoing Respondents Total hours
----------------------------------------------------------------------------------------------------------------
Registration (Rule 803, Form SBSEF). 295 One-Time.................. 5 1,475
Rules modelled on CFTC part 37 387 Ongoing................... 5 1,935
(other than registration).
Rule and product filing processes 60 Ongoing................... 5 300
(Rules 804 through 807).
809................................. 0.25 Ongoing................... 5 1.25
811(d).............................. 0.2 Ongoing................... 5 1
819(i).............................. 79.83 Ongoing................... 5 399.15
819(j).............................. 0.5 Ongoing................... 5 2.5
826(f).............................. 0.4 Ongoing................... 5 2
833................................. 80 One-Time.................. \517\ 3 & 2 240 & 160
[[Page 28969]]
834(b) through (c).................. 15 One-Time.................. 8 120
834(d) through (g).................. 3.25 Ongoing................... 8 26
835................................. 9 Ongoing................... 5 45
----------------------------------------------------------------------------------------------------------------
E. Collection of Information Is Mandatory
The collections of information imposed on SBSEFs throughout
Regulation SE would be mandatory for registered SBSEFs. The collection
of information with respect to proposed Rule 833 would be mandatory for
persons that seek an exemption order under Rule 833. The collection of
information with respect to proposed Rule 834 would be mandatory for
SBS exchanges.
F. Responses to Collection of Information Will Not Be Confidential
The collection of information required under Regulation SE would
generally not be kept confidential, unless confidential treatment is
requested and granted by the Commission pursuant to Rule 24b-2 under
the SEA.
G. Retention Period of Recordkeeping Requirements
Although recordkeeping and retention requirements have not yet been
established for SBSEFs, the Commission is authorized to adopt such
rules under section 3D of the SEA. Proposed Rule 826 under Regulation
SE would implement section 3D(d)(9) of the SEA to require an SBSEF to
maintain records, for a minimum of five years, of all activities
relating to the business of the SBSEF, including a complete audit
trail.
H. Request for Comment
The Commission solicits comment on all aspects of its PRA estimates
regarding the above, particularly the following:
221. Please provide any data or analysis bearing on whether the
proposed collection of information is necessary for the proper
performance of the functions of the agency, including whether the
information shall have practical utility.
222. Do you believe that the Commission's estimate of the burden of
the proposed collections of information is accurate? Why or why not? If
not, what aspects (in your view) require adjustment? To the extent
possible, please provide data to support your contention.
223. Do you believe that there are ways to enhance the quality,
utility, and clarity of the information proposed to be collected? If
so, please describe.
224. Do you believe that there are ways to minimize the burden of
collection of information on respondents, including through the use of
automated collection techniques or other forms of information
technology? If so, please describe.
225. Do you believe that the proposed rules and amendments would
have any effects on any other collection of information not previously
identified in this section? If so, please describe and quantify to the
extent feasible.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to: (1) Evaluate whether the proposed collection of
information is necessary for the proper performance of the functions of
the Commission, including whether the information will have practical
utility; (2) evaluate the accuracy of the Commission's estimate of the
burden of the proposed collection of information; (3) determine whether
there are ways to enhance the quality, utility, and clarity of the
information to be collected; and (4) determine whether there are ways
to minimize the burden of the collection of information on those who
are to respond, including through the use of automated collection
techniques or other forms of information technology. Persons wishing to
submit comments on the collection of information requirements should
direct them to the OMB Desk Officer for the Securities and Exchange
Commission, [email protected], and should send
a copy to Vanessa A. Countryman, Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090 with reference
to File No. S7-14-22. OMB is required to make a decision concerning the
collection of information between 30 and 60 days after publication;
therefore, a comment to OMB is best assured of having its full effect
if OMB receives it within 30 days of publication. Requests for the
materials submitted to OMB by the Commission with regard to this
collection of information should be in writing, refer to File No. S7-
14-22, and be submitted to the Securities and Exchange Commission,
Office of FOIA Services, 100 F Street NE, Washington, DC 20549-2736. As
OMB is required to make a decision concerning the collection of
information between 30 and 60 days after publication, a comment to OMB
is best assured of having its full effect if OMB receives it within 30
days of publication.
XXI. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act (``RFA'') \518\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) of the Administrative Procedure
Act,\519\ 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.'' \520\ 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 on a substantial number of small entities.\521\
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\518\ 5 U.S.C. 601 et seq.
\519\ 5 U.S.C. 603(a).
\520\ Although section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
``small entity'' for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as relevant to this
proposed rulemaking, are set forth in Rule 0-10 under the SEA, 17
CFR 240.0-10. See SEA Release No. 18452 (January 28, 1982), 47 FR
5215 (February 4, 1982) (File No. AS-305).
\521\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------
A. SBSEFs
Most of proposed Regulation SE, and the related rules and rule
amendments, would apply to registered SBSEFs (or entities that are
seeking to register with the Commission as SBSEFs). In the Dodd-Frank
Act, Congress defined SBSEFs as a new type of trading venue for SBS and
mandated the registration of these entities. Based on its understanding
of the market, and review of and consultation with industry sources,
the Commission preliminarily estimates that five entities will seek to
[[Page 28970]]
register as SBSEFs and thus would be subject to Regulation SE and the
related rules and rule amendments.
For purposes of Commission rulemaking in connection with the 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; \522\ or (2) a broker-dealer with
total capital (net worth plus subordinated liabilities) of less than
$500,000 on the date in the prior fiscal year as of which its audited
financial statements were prepared pursuant to Rule 17a-5(d) under the
SEA,\523\ or, if not required to file such statements, a broker-dealer
with total capital (net worth plus subordinated liabilities) of less
than $500,000 on the last business day of the preceding fiscal year (or
in the time that it has been in business, if shorter); and is not
affiliated with any person (other than a natural person) that is not a
small business or small organization.\524\ Under the standards adopted
by the Small Business Administration (``SBA''), entities in financial
investments and related activities \525\ are considered small entities
if they have $41.5 million or less in annual receipts.
---------------------------------------------------------------------------
\522\ See 17 CFR 240.0-10(a).
\523\ 17 CFR 240.17a-5(d).
\524\ See 17 CFR 240.0-10(c).
\525\ These entities would include firms involved in investment
banking and securities dealing; securities brokerage; commodity
contracts dealing; commodity contracts brokerage; securities and
commodity exchanges; portfolio management; investment advice; trust,
fiduciary and custody activities; miscellaneous intermediation; and
miscellaneous financial investment activities. See SBA's Table of
Small Business Size Standards, Subsector 523.
---------------------------------------------------------------------------
The Commission preliminarily believes that most, if not all, SBSEFs
would be large business entities or subsidiaries of large business
entities, and that every SBSEF (or its parent entity) would have assets
in excess of $5 million and annual receipts in excess of $41,500,000.
Therefore, the Commission preliminarily believes that none of the
potential SBSEFs would be considered small entities.
B. Persons Requesting an Exemption Order Pursuant to Rule 833
Proposed Rule 833 would describe how foreign SBS trading venues
could become exempt from the SEA definitions of ``exchange,''
``security-based swap execution facility,'' and ``broker'' and how SBS
executed on a foreign trading venue could become exempt from the SEA's
trade execution requirement. Based on the fact that the CFTC has
granted similar exemptions with respect to three foreign
jurisdictions,\526\ the Commission preliminarily estimates that there
would be three requests under one or both paragraphs of proposed Rule
833 in the first year and two in each subsequent year. These requests
would likely be submitted by foreign SBS trading venues, foreign
authorities that license and regulate those trading venues, or covered
persons (as defined in proposed Rule 832) who are members of such
trading venues.
---------------------------------------------------------------------------
\526\ See supra note 244.
---------------------------------------------------------------------------
Based on the Commission's existing information about the SBS
market, the Commission preliminarily believes that no person likely to
request an exemption order pursuant to proposed Rule 833 would be
considered a small entity. The Commission preliminarily believes that
most, if not all, of the persons requesting exemptions would be large
business entities or subsidiaries of large business entities, and on
its own, or through its parent entity, would have assets in excess of
$5 million (or in the case of a broker-dealer, total capital of less
than $500,000) and annual receipts in excess of $41,500,000. Therefore,
the Commission preliminarily believes that they would not be considered
small entities.
C. SBS Exchanges
Certain rules under proposed Regulation SE would apply to SBS
exchanges. Currently, there are no SBS exchanges. However, the
Commission preliminarily estimates that there could be up to three
entities would be considered SBS exchanges and would thus be subject to
certain requirements of proposed Regulation SE.
For purposes of Commission rulemaking in connection with the RFA, a
small entity includes, when used with reference to an exchange, an
exchange that has been exempted from the reporting requirements of Rule
601 of Regulation NMS \527\ and is not affiliated with any person
(other than a natural person) that is not a small business or small
organization.\528\ Under the standards adopted by the SBA, entities
involved in financial investments and related activities \529\ are
considered small entities if they have $41.5 million or less in annual
receipts.
---------------------------------------------------------------------------
\527\ 17 CFR 242.601.
\528\ See 17 CFR 240.0-10(e).
\529\ These entities would include firms involved in investment
banking and securities dealing, securities brokerage, commodity
contracts dealing, commodity contracts brokerage, securities and
commodity exchanges, miscellaneous intermediation, portfolio
management, investment advice, trust, fiduciary and custody
activities, and miscellaneous financial investment activities. See
SBA's Table of Small Business Size Standards, Subsector 523.
---------------------------------------------------------------------------
Based on these definitions and the Commission's existing
information about national securities exchanges, the Commission
preliminarily believes that the entities likely to be considered SBS
exchanges would not be considered small entities. Under the standard
requiring exemption from the reporting requirements of Rule 601 under
the SEA, none of the exchanges subject to the proposed Regulation SE is
a ``small entity'' for the purposes of the RFA. In addition, the
Commission preliminarily believes that any SBS exchange would have
annual receipts in excess of $41,500,000. Therefore, the Commission
preliminarily believes that no potential SBS exchange would be
considered small entities.
D. Certification
For the foregoing reasons, the Commission certifies that the
proposed rules, form, and cover sheet under Regulation SE and the
related rules and rule amendments, if adopted, would not have a
significant economic impact on a substantial number of small entities
for purposes of the RFA. The Commission invites commenters to address
whether the proposed rules would have a significant economic impact on
a substantial number of small entities, and, if so, what would be the
nature of any impact on small entities. The Commission requests that
commenters provide empirical data to illustrate the extent of the
impact.
XXII. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, (``SBREFA''),\530\ the Commission requests comment on the
potential effect of the proposed Regulation SE, and related proposed
rules and rule amendments under the SEA, on the United States economy
on an annual basis. The Commission also requests comment on any
potential increases in costs or prices for consumers or individual
industries, and any potential effect on competition, investment, or
innovation. Commenters are requested to provide empirical data and
other factual support for their views to the extent possible.
---------------------------------------------------------------------------
\530\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C., and as a note
to 5 U.S.C. 601).
---------------------------------------------------------------------------
Statutory Authority
Pursuant to the SEA (particularly Sections 3(b), 3C, 3D, and 36
thereof, 15 U.S.C. 78c, 78c-3, 78c-4, and 78mm,
[[Page 28971]]
respectively) and the Dodd-Frank Act (particularly section 765 thereof,
15 U.S.C. 8343), the Commission is proposing to amend Sec. Sec.
201.101, 201.202, 201.210, 201.401, 201.450, 201.460, 232.405, and
240.3a1-1 of chapter II of title 17 of the Code of Federal Regulations
and is proposing new Sec. Sec. 201.442, 201.443, 240.15a-12, and
242.800 through 242.835, as set forth below.
List of Subjects
17 CFR Part 201
Administrative practice and procedure.
17 CFR Part 232
Administrative practice and procedure, Confidential business
information, Incorporation by reference, Reporting and recordkeeping
requirements, Securities.
17 CFR Part 240
Brokers, Dealers, Registration, Securities.
17 CFR 242 and 249
Brokers, Security-based swap execution facilities, Reporting and
recordkeeping requirements.
For the reasons stated in the preamble, the Commission is proposing
to amend title 17, chapter II of the Code of the Federal Regulations as
follows:
PART 201--RULES OF PRACTICE
0
1. The authority citation for part 201, subpart D, is revised to read
as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77h-1, 77j, 77s, 77u,
78c(b), 78c-4, 78d-1, 78d-2, 78l, 78m, 78n, 78o(d), 78o-3, 78s, 78u-
2, 78u-3, 78v, 78w, 77sss, 77ttt, 80a-8, 80a-9, 80a-37, 80a-38, 80a-
39, 80a-40, 80a-41, 80a-44, 80b-3, 80b-9, 80b-11, 80b-12, 7202,
7215, and 7217.
Sec. 201.101 Definitions.
0
2. Amend Sec. 201.101 by adding paragraph (a)(9)(ix) to read as
follows:
* * * * *
(a) * * *
(9) * * *
(ix) By the filing, pursuant to Sec. 201.442, of an application
for review of a determination of a security-based swap execution
facility;
* * * * *
0
3. Amend Sec. 201.202 by revising paragraph (a) to read as follows:
Sec. 201.202 Specification of procedures by parties in certain
proceedings.
(a) Motion to specify procedures. In any proceeding other than an
enforcement or disciplinary proceeding, a proceeding to review a
determination by a self-regulatory organization pursuant to Sec. Sec.
201.420 and 201.421, a proceeding to review a determination of the
Board pursuant to Sec. Sec. 201.440 and 201.441, or a proceeding to
review a determination by a security-based swap execution facility
pursuant to Sec. Sec. 201.442 and 201.443, a party may, at any time up
to 20 days prior to the start of a hearing, make a motion to specify
the procedures necessary or appropriate for the proceeding with
particular reference to:
(1) Whether there should be an initial decision by a hearing
officer;
(2) Whether any interested division of the Commission may assist in
the preparation of the Commission's decision; and
(3) Whether there should be a 30-day waiting period between the
issuance of the Commission's order and the date it is to become
effective.
* * * * *
0
4. Amend Sec. 201.210 by revising the paragraph (a) heading, paragraph
(a)(1), paragraph (b) heading, paragraph (b)(1), and paragraph (c)
introductory text to read as follows:
Sec. 201.210 Parties, limited participants and amici curiae.
(a) Parties in an enforcement or disciplinary proceeding, a
proceeding to review a self-regulatory organization determination, a
proceeding to review a Board determination, or a proceeding to review a
determination by a security-based swap execution facility--(1)
Generally. No person shall be granted leave to become a party or a non-
party participant on a limited basis in an enforcement or disciplinary
proceeding, a proceeding to review a determination by a self-regulatory
organization pursuant to Sec. Sec. 201.420 and 201.421, a proceeding
to review a determination by the Board pursuant to Sec. Sec. 201.440
and 201.441, or a proceeding to review a determination by a security-
based swap execution facility pursuant to Sec. Sec. 201.442 and
201.443, except as authorized by paragraph (c) of this section.
* * * * *
(b) Intervention as party--(1) Generally. In any proceeding, other
than an enforcement proceeding, a disciplinary proceeding, a proceeding
to review a self-regulatory determination, a proceeding to review a
Board determination, or a proceeding to review a security-based swap
execution facility determination, any person may seek leave to
intervene as a party by filing a motion setting forth the person's
interest in the proceeding. No person, however, shall be admitted as a
party to a proceeding by intervention unless it is determined that
leave to participate pursuant to paragraph (c) of this section would be
inadequate for the protection of the person's interests. In a
proceeding under the Investment Company Act of 1940, any representative
of interested security holders, or any other person whose participation
in the proceeding may be in the public interest or for the protection
of investors, may be admitted as a party upon the filing of a written
motion setting forth the person's interest in the proceeding.
* * * * *
(c) Leave to participate on a limited basis. In any proceeding,
other than an enforcement proceeding, a disciplinary proceeding, a
proceeding to review a self-regulatory determination, a proceeding to
review a Board determination, or a proceeding to review a security-
based swap execution facility determination, any person may seek leave
to participate on a limited basis as a non-party participant as any
matter affecting the person's interests:
* * * * *
0
5. Amend Sec. 201.401 by adding paragraph (f) to read as follows:
Sec. 201.401 Consideration of stays.
* * * * *
(f) Lifting of stay of action by a security-based swap execution
facility--(1) Availability. Any person aggrieved by a stay of action by
a security-based swap execution facility entered in accordance with
Sec. 201.442(c) may make a motion to lift the stay. The Commission
may, at any time, on its own motion determine whether to lift the
automatic stay.
(2) Summary action. The Commission may lift a stay summarily,
without notice and opportunity for hearing.
(3) Expedited consideration. The Commission may expedite
consideration of a motion to lift a stay of action by a security-based
swap execution facility, consistent with the Commission's other
responsibilities. Where consideration is expedited, persons opposing
the lifting of the stay may file a statement in opposition within two
days of service of the motion requesting lifting of the stay unless the
Commission, by written order, shall specify a different period.
0
6. Add Sec. 201.442 to read as follows:
Sec. 201.442 Appeal of determination by security-based swap
execution facility.
(a) Application for review; when available. An application for
review by the Commission may be filed by any person who is aggrieved by
a determination of a security-based swap execution facility with
respect to any:
[[Page 28972]]
(1) Final disciplinary action, as defined in Sec. 240.835(b)(1);
(2) Final action with respect to a denial or conditioning of
membership, as defined in Sec. 240.835(b)(2); or
(3) Final action with respect to a denial or limitation of access
to any service offered by the security-based swap execution facility,
as defined in Sec. 240.835(b)(2).
(b) Procedure. An aggrieved person may file an application for
review with the Commission pursuant to Sec. 201.151 within 30 days
after the notice filed with the Commission pursuant to Sec. 242.835 by
the security-based swap execution facility of the determination is
received by the aggrieved person. The aggrieved person shall serve the
application on the security-based swap execution facility at the same
time. The application shall identify the determination complained of,
set forth in summary form a statement of alleged errors in the action
and supporting reasons therefor, and state an address where the
applicant can be served. The application should not exceed two pages in
length. If the applicant will be represented by a representative, the
application shall be accompanied by the notice of appearance required
by Sec. 201.102(d). Any exception to an action not supported in an
opening brief that complies with Sec. 201.450(b) may, at the
discretion of the Commission, be deemed to have been waived by the
applicant.
(c) Stay of determination. Filing an application for review with
the Commission pursuant to paragraph (b) of this section operates as a
stay of the security-based swap execution facility's determination,
unless the Commission otherwise orders either pursuant to a motion
filed in accordance with Sec. 201.401(f) or upon its own motion.
(d) Certification of the record; service of the index. Within 14
days after receipt of an application for review, the security-based
swap execution facility shall certify and file electronically in the
form and manner specified by the Office of the Secretary one unredacted
copy of the record upon which it took the complained-of action.
(1) The security-based swap execution facility shall file
electronically with the Commission one copy of an index of such record
in the form and manner specified by the Commission, and shall serve one
copy of the index on each party. If such index contains any sensitive
personal information, as defined in paragraph (d)(2) of this section,
the security-based swap execution facility also shall file
electronically with the Commission one redacted copy of such index,
subject to the requirements of paragraph (d)(2).
(2) Sensitive personal information includes a Social Security
number, taxpayer identification number, financial account number,
credit card or debit card number, passport number, driver's license
number, State-issued identification number, home address (other than
city and State), telephone number, date of birth (other than year),
names and initials of minor children, as well as any unnecessary health
information identifiable by individual, such as an individual's medical
records. Sensitive personal information shall not be included in, and
must be redacted or omitted from, all filings.
(i) Exceptions. The following information may be included and is
not required to be redacted from filings:
(A) The last four digits of a financial account number, credit card
or debit card number, passport number, driver's license number, and
State-issued identification number;
(B) Home addresses and telephone numbers of parties and persons
filing documents with the Commission; and
(C) Business telephone numbers.
(ii) [Reserved]
(e) Certification. Any filing made pursuant to this section, other
than the record upon which the action complained of was taken, must
include a certification that any information described in paragraph
(d)(2) of this section has been omitted or redacted from the filing.
0
7. Add Sec. 201.443 to read as follows:
Sec. 201.443 Commission consideration of security-based swap
execution facility determinations.
(a) Commission review other than pursuant to an application for
review. The Commission may, on its own initiative, order review of any
determination by a security-based swap execution facility that could be
subject to an application for review pursuant to Sec. 201.442(a)
within 40 days after the security-based swap execution facility
provided notice to the Commission thereof.
(b) Supplemental briefing. The Commission may at any time before
issuing its decision raise or consider any matter that it deems
material, whether or not raised by the parties. The Commission will
give notice to the parties and an opportunity for supplemental briefing
with respect to issues not briefed by the parties where the Commission
believes that such briefing could significantly aid the decisional
process.
0
8. Amend Sec. 201.450, by redesignating paragraphs (a)(2)(iv) and
(a)(2)(v) as paragraphs (a)(2)(v) and (a)(2)(vi) and adding new
paragraph (a)(2)(iv).
The addition reads as follows:
Sec. 201.450 Briefs filed with the Commission.
* * * * *
(a) * * *
(2) * * *
(iv) Receipt by the Commission of an index to the record of a
determination by a security-based swap execution facility filed
pursuant to Sec. 201.442(d).
* * * * *
0
9. Amend Sec. 201.460 by adding paragraph (a)(4) to read as follows:
Sec. 201.460 Record before the Commission.
* * * * *
(a) * * *
(4) In a proceeding for final decision before the Commission
reviewing a determination of a security-based swap execution facility,
the record shall consist of:
(i) The record certified pursuant to Sec. 201.442(d) by the
security-based swap execution facility;
(ii) Any application for review; and
(iii) Any submissions, moving papers, and briefs filed on appeal or
review.
* * * * *
PART 232--GENERAL RULES AND REGULATIONS FOR ELECTRONIC FILINGS
0
10. The general authority citation for part 232 continues to read as
follows:
Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3,
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c),
80a-8, 80a-29, 80a-30, 80a-37, 7201 et seq.; and 18 U.S.C. 1350,
unless otherwise noted.
* * * * *
0
11. Amend Sec. 232.405 by:
0
a. Revising the introductory text and paragraphs (a)(2) and (4);
0
b. Adding paragraph (b)(1)(iii); and
0
c. Revising Note 1 to Sec. 232.405.
The revisions and addition read as follows:
Sec. 232.405 Interactive Data File submissions.
This section applies to electronic filers that submit Interactive
Data Files. Section 229.601(b)(101) of this chapter (Item 601(b)(101)
of Regulation S-K), paragraph (101) of Part II--Information Not
Required to be Delivered to Offerees or Purchasers of Form F-10 (Sec.
239.40 of this chapter), paragraph 101 of the Instructions as to
Exhibits of Form 20-F (Sec. 249.220f of this chapter), paragraph
B.(15) of the General Instructions to Form 40-F (Sec. 249.240f of this
chapter), paragraph C.(6) of the General Instructions to Form 6-K
(Sec. 249.306 of this chapter), General Instruction C.3.(g)
[[Page 28973]]
of Form N-1A (Sec. Sec. 239.15A and 274.11A of this chapter), General
Instruction I of Form N-2 (Sec. Sec. 239.14 and 274.11a-1 of this
chapter), General Instruction C.3.(h) of Form N-3 (Sec. Sec. 239.17a
and 274.11b of this chapter), General Instruction C.3.(h) of Form N-4
(Sec. Sec. 239.17b and 274.11c of this chapter), General Instruction
C.3.(h) of Form N-6 (Sec. Sec. 239.17c and 274.11d of this chapter),
General Instruction C.4 of Form N-CSR (Sec. Sec. 249.331 and 274.128
of this chapter), Rules 803(b)(1)(i), 803(b)(3), 803(e), 804(a)(1),
805(a)(1), 806(a)(1), 807(a)(1), 807(d), 829(g)(6), and 831(j)(2) of
Regulation SE (Sec. Sec. 242.803 through 807, 829, and 831 of this
chapter), Registration Instructions to Form SBSEF (Sec. 249.2001 of
this chapter), and Instruction A to the Security-Based Swap Execution
Facility Submission Cover Sheet (Sec. 249.2002 of this chapter)
specify when electronic filers are required or permitted to submit an
Interactive Data File (Sec. 232.11), as further described in note 1 to
this section. This section imposes content, format, and submission
requirements for an Interactive Data File, but does not change the
substantive content requirements for the financial and other
disclosures in the Related Official Filing (Sec. 232.11).
(a) * * *
(2) Be submitted only by an electronic filer either required or
permitted to submit an Interactive Data File as specified by Sec.
229.601(b)(101) of this chapter (Item 601(b)(101) of Regulation S-K),
paragraph (101) of Part II--Information Not Required to be Delivered to
Offerees or Purchasers of Form F-10 (Sec. 239.40 of this chapter),
paragraph 101 of the Instructions as to Exhibits of Form 20-F (Sec.
249.220f of this chapter), paragraph B.(15) of the General Instructions
to Form 40-F (Sec. 249.240f of this chapter), paragraph C.(6) of the
General Instructions to Form 6-K (Sec. 249.306 of this chapter),
General Instruction C.3.(g) of Form N-1A (Sec. Sec. 239.15A and
274.11A of this chapter), General Instruction I of Form N-2 (Sec. Sec.
239.14 and 274.11a-1 of this chapter), General Instruction C.3.(h) of
Form N-3 (Sec. Sec. 239.17a and 274.11b of this chapter), General
Instruction C.3.(h) of Form N-4 (Sec. Sec. 239.17b and 274.11c of this
chapter), General Instruction C.3.(h) of Form N-6 (Sec. Sec. 239.17c
and 274.11d of this chapter), General Instruction C.4 of Form N-CSR
(Sec. Sec. 249.331 and 274.128 of this chapter), Rules 803(b)(1)(i),
803(b)(3), 803(e), 804(a)(1), 805(a)(1), 806(a)(1), 807(a)(1), 807(d),
829(g)(6), and 831(j)(2) of Regulation SE (Sec. Sec. 242.803 through
242.807, 242.829, and 242.831 of this chapter), Registration
Instructions to Form SBSEF (Sec. 249.2001 of this chapter), and
Instruction A to the Security-Based Swap Execution Facility Submission
Cover Sheet (Sec. 249.2002 of this chapter), as applicable;
* * * * *
(4) Be submitted in accordance with the EDGAR Filer Manual and, as
applicable, Item 601(b)(101) of Regulation S-K (Sec. 229.601(b)(101)
of this chapter), paragraph (101) of Part II--Information Not Required
to be Delivered to Offerees or Purchasers of Form F-10 (Sec. 239.40 of
this chapter), paragraph 101 of the Instructions as to Exhibits of Form
20-F (Sec. 249.220f of this chapter), paragraph B.(15) of the General
Instructions to Form 40-F (Sec. 249.240f of this chapter), paragraph
C.(6) of the General Instructions to Form 6-K (Sec. 249.306 of this
chapter), General Instruction C.3.(g) of Form N-1A (Sec. Sec. 239.15A
and 274.11A of this chapter), General Instruction I of Form N-2
(Sec. Sec. 239.14 and 274.11a-1 of this chapter), General Instruction
C.3.(h) of Form N-3 (Sec. Sec. 239.17a and 274.11b of this chapter),
General Instruction C.3.(h) of Form N-4 (Sec. Sec. 239.17b and 274.11c
of this chapter), General Instruction C.3.(h) of Form N-6 (Sec. Sec.
239.17c and 274.11d of this chapter), General Instruction C.4 of Form
N-CSR (Sec. Sec. 249.331 and 274.128 of this chapter), Rules
803(b)(1)(i), 803(b)(3), 803(e), 804(a)(1), 805(a)(1), 806(a)(1),
807(a)(1), 807(d), 829(g)(6), and 831(j)(2) of Regulation SE
(Sec. Sec. 242.803 through 242.807, 242.829, and 242.831 of this
chapter), Registration Instructions to Form SBSEF (Sec. 249.2001 of
this chapter), or Instruction A to the Security-Based Swap Execution
Facility Submission Cover Sheet (Sec. 249.2002 of this chapter), as
applicable.
(b) * * *
(1) * * *
(iii) For electronic filers subject to Regulation SE (Sec. Sec.
242.800 et seq.), the content of documents required to be filed
electronically under Rules 803(b)(1)(i), 803(b)(3), 803(e), 804(a)(1),
805(a)(1), 806(a)(1), 807(a)(1), 807(d), 829(g)(6), and 831(j)(2) of
Regulation SE (Sec. Sec. 242.803 through 807, 829, and 831 of this
chapter), Registration Instructions to Form SBSEF (Sec. 249.2001 of
this chapter), and Instruction A to the Security-Based Swap Execution
Facility Submission Cover Sheet (Sec. 249.2002 of this chapter), as
applicable.
* * * * *
Note 1 to Sec. 232.405: Section 229.601(b)(101) of this
chapter (Item 601(b)(101) of Regulation S-K) specifies the
circumstances under which an Interactive Data File must be submitted
and the circumstances under which it is permitted to be submitted,
with respect to Sec. 239.11 of this chapter (Form S-1), Sec.
239.13 of this chapter (Form S-3), Sec. 239.25 of this chapter
(Form S-4), Sec. 239.18 of this chapter (Form S-11), Sec. 239.31
of this chapter (Form F-1), Sec. 239.33 of this chapter (Form F-3),
Sec. 239.34 of this chapter (Form F-4), Sec. 249.310 of this
chapter (Form 10-K), Sec. 249.308a of this chapter (Form 10-Q), and
Sec. 249.308 of this chapter (Form 8-K). Paragraph (101) of Part
II--Information not Required to be Delivered to Offerees or
Purchasers of Sec. 239.40 of this chapter (Form F-10) specifies the
circumstances under which an Interactive Data File must be submitted
and the circumstances under which it is permitted to be submitted,
with respect to Form F-10. Paragraph 101 of the Instructions as to
Exhibits of Sec. 249.220f of this chapter (Form 20-F) specifies the
circumstances under which an Interactive Data File must be submitted
and the circumstances under which it is permitted to be submitted,
with respect to Form 20-F. Paragraph B.(15) of the General
Instructions to Sec. 249.240f of this chapter (Form 40-F) and
Paragraph C.(6) of the General Instructions to Sec. 249.306 of this
chapter (Form 6-K) specify the circumstances under which an
Interactive Data File must be submitted and the circumstances under
which it is permitted to be submitted, with respect to Sec.
249.240f of this chapter (Form 40-F) and Sec. 249.306 of this
chapter (Form 6-K). Rules 803(b)(1)(i), 803(b)(3), 803(e),
804(a)(1), 805(a)(1), 806(a)(1), 807(a)(1), 807(d), 829(g)(6), and
831(j)(2) of Regulation SE (Sec. Sec. 242.803 through 242.807,
242.829, and 242.831 of this chapter), Registration Instructions to
Form SBSEF (Sec. 249.2001 of this chapter), and Instruction A to
the Security-Based Swap Execution Facility Submission Cover Sheet
(Sec. 249.2002 of this chapter), as applicable. Section
229.601(b)(101) (Item 601(b)(101) of Regulation S-K), paragraph
(101) of Part II--Information not Required to be Delivered to
Offerees or Purchasers of Form F-10, paragraph 101 of the
Instructions as to Exhibits of Form 20-F, paragraph B.(15) of the
General Instructions to Form 40-F, and paragraph C.(6) of the
General Instructions to Form 6-K all prohibit submission of an
Interactive Data File by an issuer that prepares its financial
statements in accordance with 17 CFR 210.6-01 through 210.6-10
(Article 6 of Regulation S-X). For an issuer that is a management
investment company or separate account registered under the
Investment Company Act of 1940 (15 U.S.C. 80a et seq.) or a business
development company as defined in Section 2(a)(48) of the Investment
Company Act of 1940 (15 U.S.C. 80a-2(a)(48)), General Instruction
C.3.(g) of Form N-1A (Sec. Sec. 239.15A and 274.11A of this
chapter), General Instruction I of Form N-2 (Sec. Sec. 239.14 and
274.11a-1 of this chapter), General Instruction C.3.(h) of Form N-3
(Sec. Sec. 239.17a and 274.11b of this chapter), General
Instruction C.3.(h) of Form N-4 (Sec. Sec. 239.17b and 274.11c of
this chapter), General Instruction C.3.(h) of Form N-6 (Sec. Sec.
239.17c and 274.11d of this chapter), and General Instruction C.4 of
Form N-CSR (Sec. Sec. 249.331 and 274.128 of this chapter), as
applicable, specifies the circumstances under which an Interactive
Data File must be submitted.
* * * * *
[[Page 28974]]
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
12. The general authority citation for part 240 continues to read as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20,
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., and
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350;
Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-106,
sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
0
13. Amend Sec. 240.3a1-1 by adding paragraphs (a)(4) and (5) and
revising paragraph (b) introductory text to read as follows:
Sec. 240.3a1-1 Exemption from the definition of ``exchange'' under
Section 3(a)(1) of the Act.
* * * * *
(a) * * *
(4) Has registered with the Commission as a security-based swap
execution facility pursuant Sec. 242.803 and provides a market place
for no securities other than security-based swaps; or
(5) Has registered with the Commission as a clearing agency
pursuant to section 17A of the Act (15 U.S.C. 78q-1) and limits its
exchange functions to operation of a trading session that is designed
to further the accuracy of end-of-day valuations.
(b) Notwithstanding paragraphs (a)(1) through (a)(3) of this
section, an organization, association, or group of persons shall not be
exempt under this section from the definition of ``exchange,'' if:
* * * * *
0
14. Add Sec. 240.15a-12 to read as follows:
Sec. 240.15a-12 Exemption for certain security-based swap execution
facilities from certain broker requirements.
(a) For purposes of this section, an SBSEF-B means a security-based
swap execution facility that does not engage in any securities activity
other than facilitating the trading of security-based swaps on or
through the security-based swap execution facility.
(b) An SBSEF-B that registers with the Commission pursuant to Sec.
242.803 shall be deemed also to have registered with the Commission
pursuant to sections 15(a) and (b) of the Act (15 U.S.C. 78o(a)(1) and
(b)).
(c) Except as provided in paragraph (d) of this section, an SBSEF-B
shall be exempt from any provision of the Act or the Commission's rules
thereunder applicable to brokers that, by its terms, requires,
prohibits, restricts, limits, conditions, or affects the activities of
a broker, unless such provision specifies that it applies to a
security-based swap execution facility.
(d) Notwithstanding paragraph (c) of this section, the following
provisions of the Act and the Commission's rules thereunder shall apply
to an SBSEF-B:
(1) Section 15(b)(4) of the Act (15 U.S.C. 78o(b)(4));
(2) Section 15(b)(6) of the Act (15 U.S.C. 78o(b)(6)); and
(3) Section 17(b) of the Act (15 U.S.C. 78q(b)).
(e) An SBSEF-B shall be exempt from the Securities Investor
Protection Act.
PART 242--REGULATIONS M, SHO, ATS, AC, NMS, AND SE AND CUSTOMER
MARGIN REQUIREMENTS FOR SECURITY FUTURES
0
15. The general authority citation for part 242 is revised and an
authority citation for Sec. Sec. 242.800 through 242.835 is added to
read as follows:
Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78c-4,
78g(c)(2), 78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c),
78o(g), 78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-
29, 80a-37, and 8343.
* * * * *
Sections 242.800 through 242.835 are also issued under sec. 943,
Pub. L. 111-203, Section 763.
0
16. The heading for part 242 is revised to read as set forth above.
0
17. Sections 242.800 through 242.835 are added to read as follows:
Sec.
* * * * *
242.800 Scope.
242.801 Applicable provisions.
242.802 Definitions.
242.803 Requirements and procedures for registration.
242.804 Listing products for trading by certification.
242.805 Voluntary submission of new products for Commission review
and approval.
242.806 Voluntary submission of rules for Commission review and
approval.
242.807 Self-certification of rules.
242.808 Availability of public information.
242.809 Stay of certification and tolling of review period pending
jurisdictional determination.
242.810 Product filings by security-based swap execution facilities
that are not yet registered and by dormant security-based swap
execution facilities.
242.811 Information relating to security-based swap execution
facility compliance.
242.812 Enforceability.
242.813 Prohibited use of data collected for regulation purposes.
242.814 Entity operating both a national securities exchange and
security-based swap execution facility.
242.815 Methods of execution for Required and Permitted
Transactions.
242.816 Trade execution requirement and exemptions therefrom.
242.817 Trade execution compliance schedule.
242.818 Core Principle 1--Compliance with core principles.
242.819 Core Principle 2--Compliance with rules.
242.820 Core Principle 3--Security-based swaps not readily
susceptible to manipulation.
242.821 Core Principle 4--Monitoring of trading and trade
processing.
242.822 Core Principle 5--Ability to obtain information.
242.823 Core Principle 6--Financial integrity of transactions.
242.824 Core Principle 7--Emergency authority.
242.825 Core Principle 8--Timely publication of trading information.
242.826 Core Principle 9--Recordkeeping and reporting.
242.827 Core Principle 10--Antitrust considerations.
242.828 Core Principle 11--Conflicts of interest.
242.829 Core Principle 12--Financial resources.
242.830 Core Principle 13--System safeguards.
242.831 Core Principle 14--Designation of chief compliance officers.
242.832 Application of the trade execution requirement to cross-
border security-based swap transactions.
242.833 Cross-border exemptions.
242.834 Mitigation of conflicts of interest of security-based swap
execution facilities and certain exchanges.
242.835 Notice to Commission by security-based swap execution
facility of final disciplinary action or denial or limitation of
access.
Sec. 242.800 Scope.
The provisions of this section shall apply to every security-based
swap execution facility that is registered or is applying to become
registered as a security-based swap execution facility under section 3D
of the Securities Exchange Act (the ``Act'').
Sec. 242.801 Applicable provisions.
A security-based swap execution facility shall comply with the
requirements of this section and all other applicable Commission rules,
including any related definitions and cross-referenced sections.
Sec. 242.802 Definitions.
The following terms, and any other terms defined within a rule in
this chapter, are defined as follows solely for purposes of this
chapter:
Block trade means a security-based swap transaction that is subject
to
[[Page 28975]]
public dissemination pursuant to Sec. 242.902 and:
(1) Involves a security-based swap that is listed on a security-
based swap execution facility or national securities exchange;
(2) Is executed on a security-based swap execution facility's
trading system or platform that is not an order book or occurs away
from the security-based swap execution facility's or national
securities exchange's system or platform and is executed pursuant to
the rules and procedures of the security-based swap execution facility
or national securities exchange;
(3) Is a security-based swap based on a single credit instrument
(or issuer of credit instruments) or a narrow-based index of credit
instruments (or issuers of credit instruments) having a notional size
of $5 million or greater; and
(4) Is reported subject to the rules and procedures of the
security-based swap execution facility or national securities exchange.
Business day means the intraday period of time starting at 8:15
a.m. and ending at 4:45 p.m. Eastern Standard Time or Eastern Daylight
Savings Time, whichever is currently in effect in Washington, DC, on
all days except Saturdays, Sundays, and Federal holidays in Washington,
DC.
Committee member means a member, or functional equivalent thereof,
of any committee of a security-based swap execution facility.
Correcting trade means a trade executed and submitted for clearing
to a registered clearing agency with the same terms and conditions as
an error trade other than any corrections to any operational or
clerical error and the time of execution.
Disciplinary committee means any person or committee of persons, or
any subcommittee thereof, that is authorized by a security-based swap
execution facility or SBS exchange to issue disciplinary charges, to
conduct disciplinary proceedings, to settle disciplinary charges, to
impose disciplinary sanctions, or to hear appeals thereof in cases
involving any violation of the rules of the security-based swap
execution facility or SBS exchange, except those cases where the person
or committee is authorized summarily to impose minor penalties for
violating rules regarding decorum, attire, the timely submission of
accurate records for clearing or verifying each day's transactions, or
other similar activities.
Dormant product means:
(1) Any security-based swap listed on security-based swap execution
facility that has no open interest and in which no trading has occurred
for a period of 12 complete calendar months following a certification
to, or approval by, the Commission; provided, however, that no
security-based swap initially and originally certified to, or approved
by, the Commission within the preceding 36 complete calendar months
shall be considered to be a dormant product;
(2) Any security-based swap of a dormant security-based swap
execution facility; or
(3) Any security-based swap not otherwise a dormant product that a
security-based swap execution facility self-declares through
certification to be a dormant product.
Dormant security-based swap execution facility means a security-
based swap execution facility on which no trading has occurred for the
previous 12 consecutive calendar months; provided, however, that no
security-based swap execution facility shall be considered to be a
dormant security-based swap execution facility if its initial and
original Commission order of registration was issued within the
preceding 36 consecutive calendar months.
Dormant rule means:
(1) Any rule of a security-based swap execution facility which
remains unimplemented for 12 consecutive calendar months following a
certification with, or an approval by, the Commission; or
(2) Any rule or rule amendment of a dormant security-based swap
execution facility.
Electronic trading facility means a trading facility that operates
by means of an electronic or telecommunications network and maintains
an automated audit trail of bids, offers, and the matching orders or
the execution of transactions on the facility.
Emergency means any occurrence or circumstance that, in the opinion
of the governing board of a security-based swap execution facility, or
a person or persons duly authorized to issue such an opinion on behalf
of the governing board of the security-based swap execution facility
under circumstances and pursuant to procedures that are specified by
rule, requires immediate action and threatens or may threaten such
things as the fair and orderly trading in, or the liquidation of or
delivery pursuant to, any security-based swaps, including:
(1) Any manipulative or attempted manipulative activity;
(2) Any actual, attempted, or threatened corner, squeeze,
congestion, or undue concentration of positions;
(3) Any circumstances which may materially affect the performance
of security-based swaps or transactions, including failure of the
payment system or the bankruptcy or insolvency of any market
participant;
(4) Any action taken by any governmental body, or any other
security-based swap execution facility, market, or facility which may
have a direct impact on trading or clearing and settlement; and
(5) Any other circumstance which may have a severe, adverse effect
upon the functioning of the security-based swap execution facility.
Employee means any person hired or otherwise employed on a salaried
or contract basis by a security-based swap execution facility, but does
not include:
(1) Any governing board member compensated by the security-based
swap execution facility solely for governing board activities; or
(2) Any committee member compensated by a security-based swap
execution facility solely for committee activities; or
(3) Any consultant hired by a security-based swap execution
facility.
Error trade means any trade executed on or subject to the rules of
a security-based swap execution facility that contains an operational
or clerical error.
Governing board means the board of directors of a security-based
swap execution facility, or for a security-based swap execution
facility whose organizational structure does not include a board of
directors, a body performing a function similar to a board of
directors.
Governing board member means a member, or functional equivalent
thereof, of the governing board of a security-based swap execution
facility.
Member, with respect to a national securities exchange, has the
same meaning as in section 3(a)(3) of the Act. Member, with respect to
a security-based swap execution facility, means an individual,
association, partnership, corporation, or trust owning or holding a
membership in, admitted to membership representation on, or having
trading privileges on the security-based swap execution facility.
Non-U.S. member means a member of a security-based swap execution
facility that is not a U.S. person.
Offsetting trade means a trade executed and submitted for clearing
to a registered clearing agency with terms and conditions that
economically reverse an error trade that was accepted for clearing.
Order book means an electronic trading facility, a trading
facility, or a trading system or platform in which all market
participants in the trading system or platform have the ability to
[[Page 28976]]
enter multiple bids and offers, observe or receive bids and offers
entered by other market participants, and transact on such bids and
offers.
Oversight panel means any panel, or any subcommittee thereof,
authorized by an SBSEF or SBS exchange to recommend or establish
policies or procedures with respect to the surveillance, compliance,
rule enforcement, or disciplinary responsibilities of the SBSEF or SBS
exchange.
Records has the meaning as in section 3(a)(37) of the Act (15
U.S.C. 78c(a)(37)).
Rule means any constitutional provision, article of incorporation,
by-law, rule, regulation, resolution, interpretation, stated policy,
advisory, terms and conditions, trading protocol, agreement, or
instrument corresponding thereto, including those that authorize a
response or establish standards for responding to a specific emergency,
and any amendment or addition thereto or repeal thereof, made or issued
by a security-based swap execution facility or by the governing board
thereof or any committee thereof, in whatever form adopted.
SBS exchange means a national securities exchange that posts or
makes available for trading security-based swaps.
Security-based swap execution facility has the same meaning as in
section 3(a)(77) of the Act (15 U.S.C. 78c(a)(77)) but does not include
an entity that is registered with the Commission as a clearing agency
pursuant to section 17A of the Act (15 U.S.C. 78q-1) and limits its
security-based swap execution facility functions to operation of a
trading session that is designed to further the accuracy of end-of-day
valuations.
Senior officer means the chief executive officer or other
equivalent officer of a security-based swap execution facility.
Terms and conditions means any definition of the trading unit or
the specific asset underlying a security-based swap, description of the
payments to be exchanged under a security-based swap, specification of
cash settlement or delivery standards and procedures, and establishment
of buyers' and sellers' rights and obligations under the security-based
swap. Terms and conditions of a security-based swap include provisions
relating to the following:
(1) Identification of the major group, category, type, or class in
which the security-based swap falls (such as a credit or equity
security-based swap) and of any further sub-group, category, type, or
class that further describes the security-based swap;
(2) Notional amounts, quantity standards, or other unit size
characteristics;
(3) Any applicable premiums or discounts for delivery of a non-par
product;
(4) Trading hours and the listing of security-based swaps;
(5) Pricing basis for establishing the payment obligations under,
and mark-to-market value of, the security-based swap including, as
applicable, the accrual start dates, termination, or maturity dates,
and, for each leg of the security-based swap, the initial cash flow
components, spreads, and points, and the relevant indexes, prices,
rates, coupons, or other price reference measures;
(6) Any price limits, trading halts, or circuit breaker provisions,
and procedures for the establishment of daily settlement prices;
(7) Payment and reset frequency, day count conventions, business
calendars, and accrual features;
(8) If physical delivery applies, delivery standards and
procedures, including fees related to delivery or the delivery process,
alternatives to delivery, and applicable penalties or sanctions for
failure to perform;
(9) If cash-settled, the definition, composition, calculation, and
revision of the cash settlement price, and the settlement currency;
(10) Payment or collection of option premiums or margins;
(11) Option exercise price, if it is constant, and method for
calculating the exercise price, if it is variable;
(12) Threshold prices for an option, the existence of which is
contingent upon those prices;
(13) Any restrictions or requirements for exercising an option; and
(14) Life cycle events.
Trading facility--(1) In general. The term trading facility means a
person or group of persons that constitutes, maintains, or provides a
physical or electronic facility or system in which multiple
participants have the ability to execute or trade agreements,
contracts, or transactions--
(i) By accepting bids or offers made by other participants that are
open to multiple participants in the facility or system; or
(ii) Through the interaction of multiple bids or multiple offers
within a system with a pre-determined non-discretionary automated trade
matching and execution algorithm.
(2) Exclusions. (i) The term trading facility does not include:
(A) A person or group of persons solely because the person or group
of persons constitutes, maintains, or provides an electronic facility
or system that enables participants to negotiate the terms of and enter
into bilateral transactions as a result of communications exchanged by
the parties and not from interaction of multiple bids and multiple
offers within a predetermined, nondiscretionary automated trade
matching and execution algorithm;
(B) A government securities dealer or government securities broker,
to the extent that the dealer or broker executes or trades agreements,
contracts, or transactions in government securities, or assists persons
in communicating about, negotiating, entering into, executing, or
trading an agreement, contract, or transaction in government securities
(as the terms government securities dealer, government securities
broker, and government securities are defined in section 3(a) of the
Act); or
(C) A facility on which bids and offers, and acceptances of bids
and offers effected on the facility, are not binding.
(ii) Any person, group of persons, dealer, broker, or facility
described in paragraphs (z)(2)(i)(A) through (C) is excluded from the
meaning of the term ``trading facility'' for the purposes of this
chapter without any prior specific approval, certification, or other
action by the Commission.
(3) Special rule. A person or group of persons that would not
otherwise constitute a trading facility shall not be considered to be a
trading facility solely as a result of the submission to a registered
clearing agency of transactions executed on or through the person or
group of persons.
U.S. person has the same meaning as in Sec. 240.3a71-3(a)(4).
Sec. 242.803 Requirements and procedures for registration.
(a) Requirements for registration. (1) Any person operating a
facility that offers a trading system or platform in which more than
one market participant has the ability to execute or trade security-
based swaps with more than one other market participant on the system
or platform shall register the facility as a security-based swap
execution facility under this section or as a national securities
exchange pursuant to section 6 of the Act.
(2) Minimum trading functionality. A security-based swap execution
facility shall, at a minimum, offer an order book.
(3) A security-based swap execution facility is not required to
provide an order book under this section for transactions defined in
Sec. 242.815(d)(2),
[[Page 28977]]
(3), and (4) except that a security-based swap execution facility must
provide an order book under this section for Required Transactions that
are components of transactions defined in Sec. 242.815(d)(2), (3), and
(4) when such Required Transactions are not executed as components of
transactions defined in Sec. 242.815(d)(2), (3), and (4).
(b) Procedures for full registration. (1) An entity requesting
registration as a security-based swap execution facility shall:
(i) File electronically a complete Form SBSEF as set forth in Sec.
249.2001, or any successor forms, and all information and documentation
described in such forms with the Commission using the EDGAR system as
an Interactive Data File in accordance with Sec. 232.405; and
(ii) Provide to the Commission, upon the Commission's request, any
additional information and documentation necessary to review an
application.
(2) Request for confidential treatment. (i) An applicant requesting
registration as a security-based swap execution facility shall identify
with particularity any information in the application that will be
subject to a request for confidential treatment pursuant to Sec.
240.24b-2.
(ii) As set forth in Sec. 242.808, certain information provided in
an application shall be made publicly available.
(3) Amendment of application prior to full registration. An
applicant amending a pending application for registration as a
security-based swap execution facility or requesting an amendment to an
order of registration shall file an amended application electronically
with the Commission using the EDGAR system as an Interactive Data File
in accordance with Sec. 232.405.
(4) Effect of incomplete application. If an application is
incomplete pursuant to paragraph (b)(1) of this section, the Commission
shall notify the applicant that its application will not be deemed to
have been submitted for purposes of the Commission's review.
(5) Commission review period. The Commission shall approve or deny
an application for registration as a security-based swap execution
facility within 180 days of the filing of the application. If the
Commission notifies the person that its application is materially
incomplete and specifies the deficiencies in the application, the
running of the 180-day period shall be stayed from the time of such
notification until the application is resubmitted in completed form,
provided that the Commission shall have not less than 60 days to
approve or deny the application from the time the application is
resubmitted in completed form.
(6) Commission determination. (i) The Commission shall issue an
order granting registration upon a Commission determination, in its own
discretion, that the applicant has demonstrated compliance with the Act
and the Commission's rules applicable to security-based swap execution
facilities. If deemed appropriate, the Commission may issue an order
granting registration subject to conditions.
(ii) The Commission may issue an order denying registration upon a
Commission determination, in its own discretion, that the applicant has
not demonstrated compliance with the Act and the Commission's rules
applicable to security-based swap execution facilities. If the
Commission denies an application, it shall specify the grounds for the
denial.
(c) Reinstatement of dormant registration. A dormant security-based
swap execution facility may reinstate its registration under the
procedures of paragraph (b) of this section. The applicant may rely
upon previously submitted materials if such materials accurately
describe the dormant security-based swap execution facility's
conditions at the time that it applies for reinstatement of its
registration.
(d) Request for transfer of registration. (1) A security-based swap
execution facility seeking to transfer its registration from its
current legal entity to a new legal entity as a result of a corporate
change shall file a request for approval to transfer such registration
with the Commission in the form and manner specified by the Commission.
(2) A request for transfer of registration shall be filed no later
than three months prior to the anticipated corporate change; or in the
event that the security-based swap execution facility could not have
known of the anticipated change three months prior to the anticipated
change, as soon as it knows of such change.
(3) The request for transfer of registration shall include the
following:
(i) The underlying agreement that governs the corporate change;
(ii) A description of the corporate change, including the reason
for the change and its impact on the security-based swap execution
facility, including its governance and operations, and its impact on
the rights and obligations of members;
(iii) A discussion of the transferee's ability to comply with the
Act, including the core principles applicable to security-based swap
execution facilities and the Commission's rules thereunder;
(iv) The governing documents of the transferee, including, but not
limited to, articles of incorporation and bylaws;
(v) The transferee's rules marked to show changes from the current
rules of the security-based swap execution facility;
(vi) A representation by the transferee that it:
(A) Will be the surviving entity and successor-in-interest to the
transferor security-based swap execution facility and will retain and
assume, without limitation, all of the assets and liabilities of the
transferor;
(B) Will assume responsibility for complying with all applicable
provisions of the Act and the Commission's rules thereunder;
(C) Will assume, maintain, and enforce all rules implementing and
complying with the core principles applicable to security-based swap
execution facilities, including the adoption of the transferor's
rulebook, as amended in the request, and that any such amendments will
be submitted to the Commission pursuant to Sec. 242.806 or Sec.
242.807;
(D) Will comply with all regulatory responsibilities except if
otherwise indicated in the request, and will maintain and enforce all
regulatory programs; and
(E) Will notify members of all changes to the transferor's rulebook
prior to the transfer and will further notify members of the concurrent
transfer of the registration to the transferee upon Commission approval
and issuance of an order permitting this transfer.
(vii) A representation by the transferee that upon the transfer:
(A) It will assume responsibility for and maintain compliance with
core principles for all security-based swaps previously made available
for trading through the transferor, whether by certification or
approval; and
(B) None of the proposed rule changes will affect the rights and
obligations of any member.
(4) Upon review of a request for transfer of registration, the
Commission, as soon as practicable, shall issue an order either
approving or denying the request.
(e) Request for withdrawal of application for registration. An
applicant for registration as a security-based swap execution facility
may withdraw its application submitted pursuant to paragraph (b) of
this section by filing a withdrawal request electronically with the
Commission using the EDGAR system as an Interactive Data File in
accordance with
[[Page 28978]]
Sec. 232.405. Withdrawal of an application for registration shall not
affect any action taken or to be taken by the Commission based upon
actions, activities, or events occurring during the time that the
application was pending with the Commission.
(f) Request for vacation of registration. A security-based swap
execution facility may request that its registration be vacated by
filing a vacation request electronically with the Commission using the
EDGAR system as an Interactive Data File in accordance with Sec.
232.405 at least 90 days prior to the date that the vacation is
requested to take effect. Upon receipt of such request, the Commission
shall promptly order the vacation to be effective upon the date named
in the request and send a copy of the request and its order to all
other security-based swap execution facilities, SBS exchanges, and
registered clearing agencies that clear security-based swaps. Vacation
of registration shall not affect any action taken or to be taken by the
Commission based upon actions, activities, or events occurring during
the time that the security-based swap execution facility was registered
by the Commission. From and after the date upon which the vacation
became effective the said security-based swap execution facility can
thereafter be registered again by applying to the Commission in the
manner provided in paragraph (b) of this section for an original
application.
Sec. 242.804 Listing products for trading by certification.
(a) General. A security-based swap execution facility must comply
with the submission requirements of this section prior to listing a
product for trading that has not been approved under Sec. 242.805 or
that remains a dormant product subsequent to being submitted under this
section or approved under Sec. 242.805 of this section. A submission
shall comply with the following conditions:
(1) The security-based swap execution facility has filed its
submission electronically with the Commission using the EDGAR system as
an Interactive Data File in accordance with Sec. 232.405;
(2) The Commission has received the submission by the open of
business on the business day that is ten business days preceding the
product's listing; and
(3) The submission includes:
(i) A copy of the submission cover sheet in accordance with the
instructions in Sec. 249.2002;
(ii) A copy of the product's rules, including all rules related to
its terms and conditions;
(iii) The intended listing date;
(iv) A certification by the security-based swap execution facility
that the product to be listed complies with the Act and the
Commission's rules thereunder;
(v) A concise explanation and analysis of the product and its
compliance with applicable provisions of the Act, including core
principles, and the Commission's rules thereunder. This explanation and
analysis shall either be accompanied by the documentation relied upon
to establish the basis for compliance with applicable law, or
incorporate information contained in such documentation, with
appropriate citations to data sources;
(vi) A certification that the security-based swap execution
facility posted a notice of pending product certification with the
Commission and a copy of the submission, concurrent with the filing of
a submission with the Commission, on the security-based swap execution
facility's website. Information that the security-based swap execution
facility seeks to keep confidential may be redacted from the documents
published on the security-based swap execution's website but must be
republished consistent with any determination made pursuant to Sec.
240.24b-2; and
(vii) A request for confidential treatment, if appropriate, as
permitted under Sec. 240.24b-2.
(b) Additional information. If requested by Commission staff, a
security-based swap execution facility shall provide any additional
evidence, information, or data that demonstrates that the security-
based swap meets, initially or on a continuing basis, the requirements
of the Act or the Commission`s rules or policies thereunder.
(c) Stay of certification of product. (1) General. The Commission
may stay the certification of a product submitted pursuant to paragraph
(a) of this section by issuing a notification informing the security-
based swap execution facility that the Commission is staying the
certification of the product on the grounds that the product presents
novel or complex issues that require additional time to analyze, the
product is accompanied by an inadequate explanation, or the product is
potentially inconsistent with the Act or the Commission's rules
thereunder. The Commission will have an additional 90 days from the
date of the notification to conduct the review.
(2) Public comment. The Commission shall provide a 30-day comment
period within the 90-day period in which the stay is in effect, as
described in paragraph (c)(1) of this section. The Commission shall
publish a notice of the 30-day comment period on the Commission's
website. Comments from the public shall be submitted as specified in
that notice.
(3) Expiration of a stay of certification of product. A product
subject to a stay pursuant to this paragraph shall become effective,
pursuant to the certification, at the expiration of the 90-day review
period described in paragraph (c)(1) of this section, unless the
Commission withdraws the stay prior to that time, or the Commission
notifies the security-based swap execution facility during the 90-day
time period that it objects to the proposed certification on the
grounds that the product is inconsistent with the Act or the
Commission's rules.
Sec. 242.805 Voluntary submission of new products for Commission
review and approval.
(a) Request for approval. A security-based swap execution facility
may request that the Commission approve a new or dormant product prior
to listing the product for trading, or if a product was initially
submitted under Sec. 242.804, subsequent to listing the product for
trading. A submission requesting approval shall:
(1) Be filed electronically with the Commission using the EDGAR
system as an Interactive Data File in accordance with Sec. 232.405;
(2) Include a copy of the submission cover sheet in accordance with
the instructions in Sec. 249.2002;
(3) Include a copy of the rules that set forth the security-based
swap's terms and conditions;
(4) Include an explanation and analysis of the product and its
compliance with applicable provisions of the Act, including the core
principles and the Commission's rules thereunder. This explanation and
analysis shall either be accompanied by the documentation relied upon
to establish the basis for compliance with the applicable law, or
incorporate information contained in such documentation, with
appropriate citations to data sources;
(5) Describe any agreements or contracts entered into with other
parties that enable the security-based swap execution facility to carry
out its responsibilities;
(6) Include, if appropriate, a request for confidential treatment
as permitted under Sec. 240.24b-2;
(7) Certify that the security-based swap execution facility posted
a notice of its request for Commission approval
[[Page 28979]]
of the new product and a copy of the submission, concurrent with the
filing of a submission with the Commission, on the security-based swap
execution facility's website. Information that the security-based swap
execution facility seeks to keep confidential may be redacted from the
documents published on the security-based swap execution facility's
website but must be republished consistent with any determination made
pursuant to Sec. 240.24b-2; and
(8) Include, if requested by Commission staff, additional evidence,
information, or data demonstrating that the security-based swap meets,
initially or on a continuing basis, the requirements of the Act, or
other requirement for registration under the Act, or the Commission's
rules or policies thereunder. The security-based swap execution
facility shall submit the requested information by the open of business
on the date that is two business days from the date of request by
Commission staff, or at the conclusion of such extended period agreed
to by Commission staff after timely receipt of a written request from
the security-based swap execution facility.
(b) Standard for review and approval. The Commission shall approve
a new product unless the terms and conditions of the product violate
the Act or the Commission's rules thereunder.
(c) 45-day review. A product submitted for Commission approval
under this paragraph shall be deemed approved by the Commission 45 days
after receipt by the Commission, or at the conclusion of an extended
period as provided under paragraph (d) of this section, unless notified
otherwise within the applicable period, if:
(1) The submission complies with the requirements of paragraph (a)
of this section; and
(2) The submitting security-based swap execution facility does not
amend the terms or conditions of the product or supplement the request
for approval, except as requested by the Commission or for correction
of typographical errors, renumbering, or other non-substantive
revisions, during that period. Any voluntary, substantive amendment by
the security-based swap execution facility will be treated as a new
submission under this section.
(d) Extension of time. The Commission may extend the 45-day review
period in paragraph (c) of this section for:
(1) An additional 45 days, if the product raises novel or complex
issues that require additional time to analyze, in which case the
Commission shall notify the security-based swap execution facility
within the initial 45-day review period and shall briefly describe the
nature of the specific issue(s) for which additional time for review is
required; or
(2) Any extended review period to which the security-based swap
execution facility agrees in writing.
(e) Notice of non-approval. The Commission, at any time during its
review under this section, may notify the security-based swap execution
facility that it will not, or is unable to, approve the product. This
notification will briefly specify the nature of the issues raised and
the specific provision of the Act or the Commission's rules thereunder,
including the form or content requirements of paragraph (a) of this
section, that the product violates, appears to violate, or potentially
violates but which cannot be ascertained from the submission.
(f) Effect of non-approval. (1) Notification to a security-based
swap execution facility under paragraph (e) of this section of the
Commission's determination not to approve a product does not prejudice
the security-based swap execution facility from subsequently submitting
a revised version of the product for Commission approval, or from
submitting the product as initially proposed pursuant to a supplemented
submission.
(2) Notification to a security-based swap execution facility under
paragraph (e) of this section of the Commission's refusal to approve a
product shall be presumptive evidence that the security-based swap
execution facility may not truthfully certify under Sec. 242.804 that
the same, or substantially the same, product does not violate the Act
or the Commission's rules thereunder.
Sec. 242.806 Voluntary submission of rules for Commission review and
approval.
(a) Request for approval of rules. A security-based swap execution
facility may request that the Commission approve a new rule, rule
amendment, or dormant rule prior to implementation of the rule, or if
the request was initially submitted under Sec. 242.806 or 242.807,
subsequent to implementation of the rule. A request for approval shall:
(1) Be filed electronically with the Commission using the EDGAR
system as an Interactive Data File in accordance with Sec. 232.405;
(2) Include a copy of the submission cover sheet in accordance with
the instructions in appendix B to Regulation SE (17 CFR 242.800 through
242.835);
(3) Set forth the text of the rule or rule amendment (in the case
of a rule amendment, deletions and additions must be indicated);
(4) Describe the proposed effective date of the rule or rule
amendment and any action taken or anticipated to be taken to adopt the
proposed rule by the security-based swap execution facility or by its
governing board or by any committee thereof, and cite the rules of the
security-based swap execution facility that authorize the adoption of
the proposed rule;
(5) Provide an explanation and analysis of the operation, purpose,
and effect of the proposed rule or rule amendment and its compliance
with applicable provisions of the Act, including the core principles
relating to security-based swap execution facilities and the
Commission's rules thereunder and, as applicable, a description of the
anticipated benefits to market participants or others, any potential
anticompetitive effects on market participants or others, and how the
rule fits into the security-based swap execution facility's framework
of regulation;
(6) Certify that the security-based swap execution facility posted
a notice of pending rule with the Commission and a copy of the
submission, concurrent with the filing of a submission with the
Commission, on the security-based swap execution facility's website.
Information that the security-based swap execution facility seeks to
keep confidential may be redacted from the documents published on the
security-based swap execution facility's website but must be
republished consistent with any determination made pursuant to Sec.
240.24b-2;
(7) Provide additional information which may be beneficial to the
Commission in analyzing the new rule or rule amendment. If a proposed
rule affects, directly or indirectly, the application of any other rule
of the security-based swap execution facility, the pertinent text of
any such rule must be set forth and the anticipated effect described;
(8) Provide a brief explanation of any substantive opposing views
expressed to the security-based swap execution facility by governing
board or committee members, members of the security-based swap
execution facility, or market participants that were not incorporated
into the rule, or a statement that no such opposing views were
expressed; and
(9) As appropriate, include a request for confidential treatment as
permitted under Sec. 240.24b-2.
(b) Standard for review and approval. The Commission shall approve
a new rule or rule amendment unless the rule or rule amendment is
inconsistent with
[[Page 28980]]
the Act or the Commission's rules thereunder.
(c) 45-day review. A rule or rule amendment submitted for
Commission approval under paragraph (a) of this section shall be deemed
approved by the Commission 45 days after receipt by the Commission, or
at the conclusion of such extended period as provided under paragraph
(d) of this section, unless the security-based swap execution facility
is notified otherwise within the applicable period, if:
(1) The submission complies with the requirements of paragraph (a)
of this section;
(2) The security-based swap execution facility does not amend the
proposed rule or supplement the submission, except as requested by the
Commission, during the pendency of the review period, other than for
correction of typographical errors, renumbering, or other non-
substantive revisions. Any amendment or supplementation not requested
by the Commission will be treated as the submission of a new filing
under this section.
(d) Extension of time for review. The Commission may further extend
the review period in paragraph (c) of this section for:
(1) An additional 45 days, if the proposed rule or rule amendment
raises novel or complex issues that require additional time for review
or is of major economic significance, the submission is incomplete, or
the requestor does not respond completely to Commission questions in a
timely manner, in which case the Commission shall notify the submitting
security-based swap execution facility within the initial 45-day review
period and shall briefly describe the nature of the specific issues for
which additional time for review shall be required; or
(2) Any period, beyond the additional 45 days provided in paragraph
(d)(1) of this section, to which the security-based swap execution
facility agrees in writing.
(e) Notice of non-approval. Any time during its review under this
section, the Commission may notify the security-based swap execution
facility that it will not, or is unable to, approve the new rule or
rule amendment. This notification will briefly specify the nature of
the issues raised and the specific provision of the Act or the
Commission's rules thereunder, including the form or content
requirements of this section, with which the new rule or rule amendment
is inconsistent or appears to be inconsistent with the Act or the
Commission's rules thereunder.
(f) Effect of non-approval. (1) Notification to a security-based
swap execution facility under paragraph (e) of this section does not
prevent the security-based swap execution facility from subsequently
submitting a revised version of the proposed rule or rule amendment for
Commission review and approval or from submitting the new rule or rule
amendment as initially proposed in a supplemented submission. The
revised submission will be reviewed without prejudice.
(2) Notification to a security-based swap execution facility under
paragraph (e) of this section of the Commission's determination not to
approve a proposed rule or rule amendment shall be presumptive evidence
that the security-based swap execution facility may not truthfully
certify the same, or substantially the same, proposed rule or rule
amendment under Sec. 242.807(a).
(g) Expedited approval. Notwithstanding the provisions of paragraph
(c) of this section, changes to a proposed rule or a rule amendment,
including changes to terms and conditions of a product that are
consistent with the Act and the Commission's rules thereunder, may be
approved by the Commission at such time and under such conditions as
the Commission shall specify in the written notification; provided,
however, that the Commission may, at any time, alter or revoke the
applicability of such a notice to any particular product or rule
amendment.
Sec. 242.807 Self-certification of rules.
(a) Required certification. A security-based swap execution
facility shall comply with the following conditions prior to
implementing any rule--other than a rule delisting or withdrawing the
certification of a product with no open interest and submitted in
compliance with paragraphs (a)(1), (2) and (6) of this section--that
has not obtained Commission approval under Sec. 242.806, or that
remains a dormant rule subsequent to being submitted under this section
or approved under Sec. 242.806.
(1) The security-based swap execution facility has filed its
submission electronically with the Commission using the EDGAR system as
an Interactive Data File in accordance with Sec. 232.405 of this
chapter.
(2) The security-based swap execution facility has provided a
certification that it posted a notice of pending certification with the
Commission and a copy of the submission, concurrent with the filing of
a submission with the Commission, on the security-based swap execution
facility's website. Information that the security-based swap execution
facility seeks to keep confidential may be redacted from the documents
published on the security-based swap execution facility's website but
it must be republished consistent with any determination made pursuant
to Sec. 240.24b-2 of this chapter.
(3) The Commission has received the submission not later than the
open of business on the business day that is ten business days prior to
the security-based swap execution facility's implementation of the rule
or rule amendment.
(4) The Commission has not stayed the submission pursuant to Sec.
242.807(c).
(5) A new rule or rule amendment that establishes standards for
responding to an emergency shall be submitted pursuant to Sec.
242.807(a). A rule or rule amendment implemented under procedures of
the governing board to respond to an emergency shall, if practicable,
be filed with the Commission prior to implementation or, if not
practicable, be filed with the Commission at the earliest possible time
after implementation, but in no event more than 24 hours after
implementation. Any such submission shall be subject to the
certification and stay provisions of paragraphs (b) and (c) of this
section.
(6) The rule submission shall include:
(i) A copy of the submission cover sheet in accordance with the
instructions in Sec. 249.2002 of this chapter (in the case of a rule
or rule amendment that responds to an emergency, ``Emergency Rule
Certification'' should be noted in the description section of the
submission cover sheet);
(ii) The text of the rule (in the case of a rule amendment,
deletions and additions must be indicated);
(iii) The date of intended implementation;
(iv) A certification by the security-based swap execution facility
that the rule complies with the Act and the Commission's rules
thereunder;
(v) A concise explanation and analysis of the operation, purpose,
and effect of the proposed rule or rule amendment and its compliance
with applicable provisions of the Act, including core principles
relating to security-based swap execution facilities and the
Commission's rules thereunder;
(vi) A brief explanation of any substantive opposing views
expressed to the security-based swap execution facility by governing
board or committee members, members of the security-based swap
execution facility, or market participants, that were not incorporated
[[Page 28981]]
into the rule, or a statement that no such opposing views were
expressed; and
(vii) As appropriate, a request for confidential treatment pursuant
to the procedures provided in Sec. 240.24b-2 of this chapter.
(7) The security-based swap execution facility shall provide, if
requested by Commission staff, additional evidence, information, or
data that may be beneficial to the Commission in conducting a due
diligence assessment of the filing and the security-based swap
execution facility's compliance with any of the requirements of the Act
or the Commission's rules or policies thereunder.
(b) Review by the Commission. The Commission shall have ten
business days to review the new rule or rule amendment before the new
rule or rule amendment is deemed certified and can be made effective,
unless the Commission notifies the security-based swap execution
facility during the ten-business-day review period that it intends to
issue a stay of the certification under paragraph (c) of this section.
(c) Stay--(1) Stay of certification of new rule or rule amendment.
The Commission may stay the certification of a new rule or rule
amendment submitted pursuant to paragraph (a) of this section by
issuing a notification informing the security-based swap execution
facility that the Commission is staying the certification of the rule
or rule amendment on the grounds that the rule or rule amendment
presents novel or complex issues that require additional time to
analyze, the rule or rule amendment is accompanied by an inadequate
explanation, or the rule or rule amendment is potentially inconsistent
with the Act or the Commission's rules thereunder. The Commission will
have an additional 90 days from the date of the notification to conduct
the review.
(2) Public comment. The Commission shall provide a 30-day comment
period within the 90-day period in which the stay is in effect, as
described in paragraph (c)(1) of this section. The Commission shall
publish a notice of the 30-day comment period on the Commission
website. Comments from the public shall be submitted as specified in
that notice.
(3) Expiration of a stay of certification of new rule or rule
amendment. A new rule or rule amendment subject to a stay pursuant to
this paragraph shall become effective, pursuant to the certification,
at the expiration of the 90-day review period described in paragraph
(c)(1) of this section, unless the Commission withdraws the stay prior
to that time, or the Commission notifies the security-based swap
execution facility during the 90-day time period that it objects to the
proposed certification on the grounds that the proposed rule or rule
amendment is inconsistent with the Act or the Commission's rules
thereunder.
(d) Notification of rule amendments. Notwithstanding the rule
certification requirement of paragraph (a) of this section, a security-
based swap execution facility may place the following rules or rule
amendments into effect without certification to the Commission if the
following conditions are met:
(1) The security-based swap execution facility provides to the
Commission at least weekly a summary notice of all rule amendments made
effective pursuant to this paragraph during the preceding week. Such
notice must be labeled ``Weekly Notification of Rule Amendments'' and
need not be filed for weeks during which no such actions have been
taken. One copy of each such submission shall be furnished
electronically using the EDGAR system as an Interactive Data File in
accordance with Sec. 232.405; and
(2) The rule governs:
(i) Non-substantive revisions. Corrections of typographical errors,
renumbering, periodic routine updates to identifying information about
the security-based swap execution facility, and other such non-
substantive revisions of a product's terms and conditions that have no
effect on the economic characteristics of the product;
(ii) Fees. Fees or fee changes, other than fees or fee changes
associated with market making or trading incentive programs, that:
(A) Total $1.00 or more per contract, and
(B) Are established by an independent third party or are unrelated
to delivery, trading, clearing, or dispute resolution.
(iii) Survey lists. Changes to lists of banks, brokers, dealers, or
other entities that provide price or cash market information to an
independent third party and that are incorporated by reference as
product terms;
(iv) Approved brands. Changes in lists of approved brands or
markings pursuant to previously certified or Commission approved
standards or criteria;
(v) Trading months. The initial listing of trading months, which
may qualify for implementation without notice pursuant to paragraph
(d)(3)(ii)(F) of this section, within the currently established cycle
of trading months; or
(vi) Minimum tick. Reductions in the minimum price fluctuation (or
``tick'').
(3) Notification of rule amendments not required. Notwithstanding
the rule certification requirements of paragraph (a) of this section, a
security-based swap execution facility may place the following rules or
rule amendments into effect without certification or notice to the
Commission if the following conditions are met:
(i) The security-based swap execution facility maintains
documentation regarding all changes to rules; and
(ii) The rule governs:
(A) Transfer of membership or ownership. Procedures and forms for
the purchase, sale, or transfer of membership or ownership, but not
including qualifications for membership or ownership, any right or
obligation of membership or ownership, or dues or assessments;
(B) Administrative procedures. The organization and administrative
procedures of a security-based swap execution facility's governing
bodies such as a governing board, officers, and committees, but not
voting requirements, governing board, or committee composition
requirements or procedures, decision-making procedures, use or
disclosure of material non-public information gained through the
performance of official duties, or requirements relating to conflicts
of interest;
(C) Administration. The routine daily administration, direction,
and control of employees, requirements relating to gratuity and similar
funds, but not guaranty, reserves, or similar funds; declaration of
holidays; and changes to facilities housing the market, trading floor,
or trading area;
(D) Standards of decorum. Standards of decorum or attire or similar
provisions relating to admission to the floor, badges, or visitors, but
not the establishment of penalties for violations of such rules; and
(E) Fees. Fees or fee changes, other than fees or fee changes
associated with market making or trading incentive programs, that:
(1) Are less than $1.00; or
(2) Relate to matters such as dues, badges, telecommunication
services, booth space, real-time quotations, historical information,
publications, software licenses, or other matters that are
administrative in nature.
(F) Trading months. The initial listing of trading months which are
within the currently established cycle of trading months.
Sec. 242.808 Availability of public information.
(a) The Commission shall make publicly available on its website the
following parts of an application to register as a security-based swap
[[Page 28982]]
execution facility, unless confidential treatment is obtained pursuant
to Sec. 240.24b-2 of this chapter:
(1) Transmittal letter and first page of the application cover
sheet;
(2) Exhibit C;
(3) Exhibit G;
(4) Exhibit L; and
(5) Exhibit M.
(b) The Commission shall make publicly available on its website,
unless confidential treatment is obtained pursuant to Sec. 240.24b-2
of this chapter, a security-based swap execution facility's filing of
new products pursuant to the self-certification procedures of Sec.
242.804, new products for Commission review and approval pursuant to
Sec. 242.805, new rules and rule amendments for Commission review and
approval pursuant to Sec. 242.806, and new rules and rule amendments
pursuant to the self-certification procedures of Sec. 242.807.
(c) The terms and conditions of a product submitted to the
Commission pursuant to Sec. 242.804, 242.805, 242.806, or 242.807
shall be made publicly available at the time of submission unless
confidential treatment is obtained pursuant to Sec. 240.24b-2 of this
chapter.
Sec. 242.809 Staying of certification and tolling of review period
pending jurisdictional determination.
(a) A product certification made by a security-based swap execution
facility pursuant to Sec. 242.804 shall be stayed, or the review
period for a product that has been submitted for Commission approval by
a security-based swap execution facility pursuant to Sec. 242.805
shall be tolled, upon request for a joint interpretation of whether the
product is a swap, security-based swap, or mixed swap made pursuant to
Sec. 240.3a68-2 of this chapter by the security-based swap execution
facility, the Commission, or the Commodity Futures Trading Commission.
(b) The Commission shall provide the security-based swap execution
facility with a written notice of the stay or tolling pending issuance
of a joint interpretation.
(c) The stay shall be withdrawn, or the approval review period
shall resume, if a joint interpretation finding that the Commission has
jurisdiction over the product is issued.
Sec. 242.810 Product filings by security-based swap execution
facilities that are not yet registered and by dormant security-based
swap execution facilities.
(a) An applicant for registration as a security-based swap
execution facility may submit a security-based swap's terms and
conditions prior to listing the product as part of its application for
registration.
(b) Any security-based swap terms and conditions or rules submitted
as part of a security-based swap execution facility's application for
registration shall be considered for approval by the Commission at the
time the Commission issues the security-based swap execution facility's
order of registration.
(c) After the Commission issues the order of registration, the
security-based swap execution facility shall submit a security-based
swap's terms and conditions, including amendments to such terms and
conditions, new rules, or rule amendments pursuant to the procedures in
Sec. Sec. 242.804, 242.805, 242.806, and 242.807.
(d) Any security-based swap terms and conditions or rules submitted
as part of an application to reinstate the registration of a dormant
security-based swap execution facility shall be considered for approval
by the Commission at the time the Commission approves the reinstatement
of registration of the dormant security-based swap execution facility.
Sec. 242.811 Information relating to security-based swap execution
facility compliance.
(a) Request for information. Upon the Commission's request, a
security-based swap execution facility shall file with the Commission
information related to its business as a security-based swap execution
facility in the form and manner, and within the timeframe, specified by
the Commission.
(b) Demonstration of compliance. Upon the Commission's request, a
security-based swap execution facility shall file with the Commission a
written demonstration, containing supporting data, information, and
documents, that it is in compliance with one or more core principles or
with its other obligations under the Act or the Commission's rules
thereunder, as the Commission specifies in its request. The security-
based swap execution facility shall file such written demonstration in
the form and manner, and within the timeframe, specified by the
Commission.
(c) Equity interest transfer--(1) Equity interest transfer
notification. A security-based swap execution facility shall file with
the Commission a notification of any transaction involving the direct
or indirect transfer of 50 percent or more of the equity interest in
the security-based swap execution facility. The Commission may, upon
receiving such notification, request supporting documentation of the
transaction.
(2) Timing of notification. The equity interest transfer notice
described in paragraph (c)(1) of this section shall be filed with the
Commission in a form and manner specified by the Commission at the
earliest possible time, but in no event later than the open of business
ten business days following the date upon which the security-based swap
execution facility enters into a firm obligation to transfer the equity
interest.
(3) Rule filing. Notwithstanding the foregoing, if any aspect of an
equity interest transfer described in paragraph (c)(1) of this section
requires a security-based swap execution facility to file a rule, the
security-based swap execution facility shall comply with the applicable
rule filing requirements of Sec. 242.806 or Sec. 242.807.
(4) Certification. Upon a transfer of an equity interest of 50
percent or more in a security-based swap execution facility, the
security-based swap execution facility shall file with the Commission,
in a form and manner specified by the Commission, a certification that
the security-based swap execution facility meets all of the
requirements of section 3D of the Act and the Commission rules
thereunder, no later than two business days following the date on which
the equity interest of 50 percent or more was acquired.
(d) Pending legal proceedings. (1) A security-based swap execution
facility shall submit to the Commission a copy of the complaint, any
dispositive or partially dispositive decision, any notice of appeal
filed concerning such decision, and such further documents as the
Commission may thereafter request filed in any material legal
proceeding to which the security-based swap execution facility is a
party or its property or assets is subject.
(2) A security-based swap execution facility shall submit to the
Commission a copy of the complaint, any dispositive or partially
dispositive decision, any notice of appeal filed concerning such
decision, and such further documents as the Commission may thereafter
request filed in any material legal proceeding instituted against any
officer, director, or other official of the security-based swap
execution facility from conduct in such person's capacity as an
official of the security-based swap execution facility and alleging
violations of:
(i) The Act or any rule, regulation, or order thereunder;
(ii) The constitution, bylaws, or rules of the security-based swap
execution facility; or
(iii) The applicable provisions of State law relating to the duties
of officers, directors, or other officials of business organizations.
(3) All documents required by this paragraph (d) to be submitted to
the
[[Page 28983]]
Commission shall be submitted electronically in a form and manner
specified by the Commission within ten days after the initiation of the
legal proceedings to which they relate, after the date of issuance, or
after receipt by the security-based swap execution facility of the
notice of appeal, as the case may be.
(4) For purposes of this paragraph (d), a ``material legal
proceeding'' includes but is not limited to actions involving alleged
violations of the Act or the Commission rules thereunder. However, a
legal proceeding is not ``material'' for the purposes of this rule if
the proceeding is not in a Federal or State court or if the Commission
is a party.
Sec. 242.812 Enforceability.
(a) A transaction entered into on or pursuant to the rules of a
security-based swap execution facility shall not be void, voidable,
subject to rescission, otherwise invalidated, or rendered unenforceable
as a result of a violation by the security-based swap execution
facility of the provisions of section 3D of the Act or the Commission's
rules thereunder.
(b) A security-based swap execution facility shall, as soon as
technologically practicable after the time of execution of a
transaction entered into on or pursuant to the rules of the facility,
provide a written record to each counterparty of all of the terms of
the transaction that were agreed to on the facility, which shall
legally supersede any previous agreement regarding such terms.
Sec. 242.813 Prohibited use of data collected for regulatory
purposes.
A security-based swap execution facility shall not use for business
or marketing purposes any proprietary data or personal information it
collects or receives, from or on behalf of any person, for the purpose
of fulfilling its regulatory obligations; provided, however, that a
security-based swap execution facility may use such data or information
for business or marketing purposes if the person from whom it collects
or receives such data or information clearly consents to the security-
based swap execution facility's use of such data or information in such
manner. A security-based swap execution facility shall not condition
access to its market(s) or market services on a person's consent to the
security-based swap execution facility's use of proprietary data or
personal information for business or marketing purposes. A security-
based swap execution facility, where necessary for regulatory purposes,
may share such data or information with one or more security-based swap
execution facilities or national securities exchanges registered with
the Commission.
Sec. 242.814 Entity operating both a national securities exchange and
security-based swap execution facility.
(a) An entity that intends to operate both a national securities
exchange and a security-based swap execution facility shall separately
register the two facilities pursuant to section 6 of the Act and Sec.
242.803, respectively.
(b) A national securities exchange shall, to the extent that the
exchange also operates a security-based swap execution facility and
uses the same electronic trade execution system for listing and
executing trades of security-based swaps on or through the exchange and
the facility, identify whether electronic trading of such security-
based swaps is taking place on or through the national securities
exchange or the security-based swap execution facility.
Sec. 242.815 Methods of execution for Required and Permitted
Transactions.
(a) Execution methods for Required Transactions--(1) Required
Transaction means any transaction involving a security-based swap that
is subject to the trade execution requirement in section 3C(h) of the
Act.
(2) Execution methods. (i) Each Required Transaction that is not a
block trade shall be executed on a security-based swap execution
facility in accordance with one of the following methods of execution,
except as provided in paragraph (d) or (e) of this section:
(A) An order book; or
(B) A request-for-quote system that operates in conjunction with an
order book.
(ii) In providing either one of the execution methods set forth in
paragraph (a)(2)(i)(A) or (B) of this section, a security-based swap
execution facility may for purposes of execution and communication use
any means of interstate commerce, including, but not limited to, the
mail, internet, email, and telephone, provided that the chosen
execution method satisfies the requirements for order books in Sec.
242.800(x) or in paragraph (a)(3) of this section for request-for-quote
systems.
(3) Request-for-quote system means a trading system or platform in
which a market participant transmits a request for a quote to buy or
sell a specific instrument to no less than three market participants in
the trading system or platform, to which all such market participants
may respond. The three market participants shall not be affiliates of
or controlled by the requester and shall not be affiliates of or
controlled by each other. A security-based swap execution facility that
offers a request-for-quote system in connection with Required
Transactions shall provide the following functionality:
(i) At the same time that the requester receives the first
responsive bid or offer, the security-based swap execution facility
shall communicate to the requester any firm bid or offer pertaining to
the same instrument resting on any of the security-based swap execution
facility's order books;
(ii) The security-based swap execution facility shall provide the
requester with the ability to execute against such firm resting bids or
offers along with any responsive orders; and
(iii) The security-based swap execution facility shall ensure that
its trading protocols provide each of its market participants with
equal priority in receiving requests for quotes and in transmitting and
displaying for execution responsive orders.
(b) Time delay requirement for Required Transactions on an order
book--(1) Time delay requirement. A security-based swap execution
facility shall require that a broker or dealer who seeks to either
execute against its customer's order or execute two of its customers'
orders against each other through the security-based swap execution
facility's order book, following some form of pre-arrangement or pre-
negotiation of such orders, be subject to at least a 15-second time
delay between the entry of those two orders into the order book, such
that one side of the potential transaction is disclosed and made
available to other market participants before the second side of the
potential transaction, whether for the broker's or dealer's own account
or for a second customer, is submitted for execution.
(2) Adjustment of time delay requirement. A security-based swap
execution facility may adjust the time period of the 15-second time
delay requirement described in paragraph (b)(1) of this section, based
upon a security-based swap's liquidity or other product-specific
considerations; however, the time delay shall be set for a sufficient
period of time so that an order is exposed to the market and other
market participants have a meaningful opportunity to execute against
such order.
(c) Execution methods for Permitted Transactions--(1) Permitted
Transaction means any transaction not involving a security-based swap
that is
[[Page 28984]]
subject to the trade execution requirement in section 3C(h) of the Act.
(2) Execution methods. A security-based swap execution facility may
offer any method of execution for each Permitted Transaction.
(d) Exceptions to required methods of execution for package
transactions. (1) For purposes of this paragraph, a package transaction
consists of two or more component transactions executed between two or
more counterparties where:
(i) At least one component transaction is a Required Transaction;
(ii) Execution of each component transaction is contingent upon the
execution of all other component transactions; and
(iii) The component transactions are priced or quoted together as
one economic transaction with simultaneous or near-simultaneous
execution of all components.
(2) A Required Transaction that is executed as a component of a
package transaction that includes a component security-based swap that
is subject exclusively to the Commission's jurisdiction, but is not
subject to the clearing requirement under section 3C of the Act, may be
executed on a security-based swap execution facility in accordance with
paragraph (c)(2) of this section as if it were a Permitted Transaction;
(3) A Required Transaction that is executed as a component of a
package transaction that includes a component that is not a security-
based swap may be executed on a security-based swap execution facility
in accordance with paragraph (c)(2) of this section as if it were a
Permitted Transaction. This provision shall not apply to:
(i) A Required Transaction that is executed as a component of a
package transaction in which all other non-security-based swap
components are U.S. Treasury securities;
(ii) A Required Transaction that is executed as a component of a
package transaction in which all other non-security-based swap
components are contracts for the purchase or sale of a commodity for
future delivery;
(iii) A Required Transaction that is executed as a component of a
package transaction in which all other non-security-based swap
components are agency mortgage-backed securities; and
(iv) A Required Transaction that is executed as a component of a
package transaction that includes a component transaction that is the
issuance of a bond in a primary market.
(4) A Required Transaction that is executed as a component of a
package transaction that includes a component security-based swap that
is not exclusively subject to the Commission's jurisdiction may be
executed on a security-based swap in accordance with paragraph (c)(2)
of this section as if it were a Permitted Transaction.
(e) Resolution of operational and clerical error trades. (1) A
security-based swap execution facility shall maintain rules and
procedures that facilitate the resolution of error trades. Such rules
shall be fair, transparent, and consistent; allow for timely
resolution; require members to provide prompt notice of an error
trade--and, as applicable, offsetting and correcting trades--to the
security-based swap execution facility; and permit members to:
(i) Execute a correcting trade, in accordance with paragraph (c)(2)
of this section, regardless of whether it is a Required or Permitted
Transaction, for an error trade that has been rejected from clearing as
soon as technologically practicable, but no later than one hour after a
registered clearing agency provides notice of the rejection; or
(ii) Execute an offsetting trade and a correcting trade, in
accordance with paragraph (c)(2) of this section, regardless of whether
it is a Required or Permitted Transaction, for an error trade that was
accepted for clearing as soon as technologically practicable, but no
later than three days after the error trade was accepted for clearing
at a registered clearing agency.
(2) If a correcting trade is rejected from clearing, then the
security-based swap execution facility shall not allow the
counterparties to execute another correcting trade.
(f) Counterparty anonymity. (1) Except as otherwise required under
the Act or the Commission's rules thereunder, a security-based swap
execution facility shall not directly or indirectly, including through
a third-party service provider, disclose the identity of a counterparty
to a security-based swap that is executed anonymously and intended to
be cleared.
(2) A security-based swap execution facility shall establish and
enforce rules that prohibit any person from directly or indirectly,
including through a third-party service provider, disclosing the
identity of a counterparty to a security-based swap execution facility
that is executed anonymously and intended to be cleared.
(3) For purposes of paragraphs (f)(1) and (2) of this section,
``executed anonymously'' shall include a security-based swap that is
pre-arranged or pre-negotiated anonymously, including by a member of
the security-based swap execution facility.
(4) For a package transaction that includes a component transaction
that is not a security-based swap intended to be cleared, disclosing
the identity of a counterparty shall not violate paragraph (f)(1) or
(2) of this section. For purposes of this paragraph (f), a ``package
transaction'' consists of two or more component transactions executed
between two or more counterparties where:
(i) Execution of each component transaction is contingent upon the
execution of all other component transactions; and
(ii) The component transactions are priced or quoted together as
one economic transaction with simultaneous or near-simultaneous
execution of all components.
Sec. 242.816 Trade execution requirement and exemptions therefrom.
(a) General. (1) Required submission. A security-based swap
execution facility that makes a security-based swap available to trade
in accordance with paragraph (b) of this section, shall submit to the
Commission its determination with respect to such security-based swap
as a rule, pursuant to the procedures under Sec. 242.806 or 242.807.
(2) Listing requirement. A security-based swap execution facility
that makes a security-based swap available to trade must demonstrate
that it lists or offers that security-based swap for trading on its
trading system or platform.
(b) Factors to consider. To make a security-based swap available to
trade for purposes of section 3C(h) of the Act, a security-based swap
execution facility shall consider, as appropriate, the following
factors with respect to such security-based swap:
(1) Whether there are ready and willing buyers and sellers;
(2) The frequency or size of transactions;
(3) The trading volume;
(4) The number and types of market participants;
(5) The bid/ask spread; or
(6) The usual number of resting firm or indicative bids and offers.
(c) Applicability. Upon a determination that a security-based swap
is available to trade on a security-based swap execution facility or
national securities exchange, all other security-based swap execution
facilities and SBS exchanges shall comply with the requirements of
section 3C(h) of the Act in listing or offering such security-based
swap for trading.
[[Page 28985]]
(d) Removal. The Commission may issue a determination that a
security-based swap is no longer available to trade upon determining
that no security-based swap execution facility or SBS exchange lists
such security-based swap for trading.
(e) Exemptions to trade execution requirement. (1) A security-based
swap transaction that is executed as a component of a package
transaction that also includes a component transaction that is the
issuance of a bond in a primary market is exempt from the trade
execution requirement in section 3C(h) of the Act. For purposes of
paragraph (e) of this section, a package transaction consists of two or
more component transactions executed between two or more counterparties
where:
(i) At least one component transaction is subject to the trade
execution requirement in section 3C(h) of the Act;
(ii) Execution of each component transaction is contingent upon the
execution of all other component transactions; and
(iii) The component transactions are priced or quoted together as
one economic transaction with simultaneous or near-simultaneous
execution of all components.
(2) Section 3C(h) of the Act does not apply to a security-based
swap transaction that qualifies for an exception under section 3C(g) of
the Act, or any exemption from the clearing requirement that is granted
by the Commission, for which the associated requirements are met.
(3)(i) Section 3C(h) of the Act does not apply to a security-based
swap transaction that is executed between counterparties that qualify
as ``eligible affiliate counterparties,'' as defined below.
(ii) For purposes of this paragraph (e)(3), counterparties will be
``eligible affiliate counterparties'' if:
(A) One counterparty, directly or indirectly, holds a majority
ownership interest in the other counterparty, and the counterparty that
holds the majority interest in the other counterparty reports its
financial statements on a consolidated basis under Generally Accepted
Accounting Principles or International Financial Reporting Standards,
and such consolidated financial statements include the financial
results of the majority-owned counterparty; or
(B) A third party, directly or indirectly, holds a majority
ownership interest in both counterparties, and the third party reports
its financial statements on a consolidated basis under Generally
Accepted Accounting Principles or International Financial Reporting
Standards, and such consolidated financial statements include the
financial results of both of the counterparties.
(iii) For purposes of this paragraph (e)(3), a counterparty or
third party directly or indirectly holds a majority ownership interest
if it directly or indirectly holds a majority of the equity securities
of an entity, or the right to receive upon dissolution, or the
contribution of, a majority of the capital of a partnership.
Sec. 242.817 Trade execution compliance schedule.
(a) A security-based swap transaction shall be subject to the
requirements of section 3C(h) of the Act upon the later of:
(1) A determination by the Commission that the security-based swap
is required to be cleared as set forth in section 3C(a) or any later
compliance date that the Commission may establish as a term or
condition of such determination or following a stay and review of such
determination pursuant to section 3C(c) of the Act and Sec. 240.3Ca-1
of this chapter thereunder; and
(2) Thirty days after the available-to-trade determination
submission or certification for that security-based swap is,
respectively, deemed approved under Sec. 242.806 or deemed certified
under Sec. 242.807.
(b) Nothing in this section shall prohibit any counterparty from
complying voluntarily with the requirements of section 3C(h) of the Act
sooner than as provided in paragraph (a) of this section.
Sec. 242.818 Core Principle 1--Compliance with core principles.
(a) In general. To be registered, and maintain registration, as a
security-based swap execution facility, the security-based swap
execution facility shall comply with the core principles described in
section 3D of the Act, and any requirement that the Commission may
impose by rule or regulation.
(b) Reasonable discretion of security-based swap execution
facility. Unless otherwise determined by the Commission, by rule or
regulation, a security-based swap execution facility described in
paragraph (a) of this section shall have reasonable discretion in
establishing the manner in which it complies with the core principles
described in section 3D of the Act.
Sec. 242.819 Core Principle 2--Compliance with rules.
(a) General. A security-based swap execution facility shall:
(1) Establish and enforce compliance with any rule established by
such security-based swap execution facility, including the terms and
conditions of the security-based swaps traded or processed on or
through the facility, and any limitation on access to the facility;
(2) Establish and enforce trading, trade processing, and
participation rules that will deter abuses and have the capacity to
detect, investigate, and enforce those rules, including means to
provide market participants with impartial access to the market and to
capture information that may be used in establishing whether rule
violations have occurred; and
(3) Establish rules governing the operation of the facility,
including rules specifying trading procedures to be used in entering
and executing orders traded or posted on the facility, including block
trades.
(b) Operation of security-based swap execution facility and
compliance with rules. (1) A security-based swap execution facility
shall establish rules governing the operation of the security-based
swap execution facility, including, but not limited to, rules
specifying trading procedures to be followed by members when entering
and executing orders traded or posted on the security-based swap
execution facility, including block trades, if offered.
(2) A security-based swap execution facility shall establish and
impartially enforce compliance with the rules of the security-based
swap execution facility, including, but not limited to:
(i) The terms and conditions of any security-based swaps traded or
processed on or through the security-based swap execution facility;
(ii) Access to the security-based swap execution facility;
(iii) Trade practice rules;
(iv) Audit trail requirements;
(v) Disciplinary rules; and
(vi) Mandatory trading requirements.
(c) Access requirements--(1) Impartial access to markets and market
services. A security-based swap execution facility shall provide any
eligible contract participant and any independent software vendor with
impartial access to its market(s) and market services, including any
indicative quote screens or any similar pricing data displays, provided
that the facility has:
(i) Criteria governing such access that are impartial, transparent,
and applied in a fair and non-discriminatory manner;
(ii) Procedures whereby eligible contract participants provide the
security-based swap execution facility
[[Page 28986]]
with written or electronic confirmation of their status as eligible
contract participants, as defined by the Act and Commission rules
thereunder, prior to obtaining access; and
(iii) Comparable fee structures for eligible contract participants
and independent software vendors receiving comparable access to, or
services from, the security-based swap execution facility.
(2) Jurisdiction. Prior to granting any eligible contract
participant access to its facilities, a security-based swap execution
facility shall require that the eligible contract participant consent
to its jurisdiction.
(3) Limitations on access. A security-based swap execution facility
shall establish and impartially enforce rules governing any decision to
allow, deny, suspend, or permanently bar an eligible contract
participant's access to the security-based swap execution facility,
including when a decision is made as part of a disciplinary or
emergency action taken by the security-based swap execution facility.
(d) Rule enforcement program. A security-based swap execution
facility shall establish and enforce trading, trade processing, and
participation rules that will deter abuses and it shall have the
capacity to detect, investigate, and enforce those rules.
(1) Abusive trading practices prohibited. A security-based swap
execution facility shall prohibit abusive trading practices on its
markets by members. A security-based swap execution facility that
permits intermediation shall prohibit customer-related abuses
including, but not limited to, trading ahead of customer orders,
trading against customer orders, accommodation trading, and improper
cross trading. Specific trading practices that shall be prohibited
include front-running, wash trading, pre-arranged trading (except for
block trades or other types of transactions approved by or certified to
the Commission pursuant Sec. 242.806 or Sec. 242.807, respectively),
fraudulent trading, money passes, and any other trading practices that
a security-based swap execution facility deems to be abusive. A
security-based swap execution facility shall also prohibit any other
manipulative or disruptive trading practices prohibited by the Act or
by the Commission pursuant to Commission regulation.
(2) Capacity to detect and investigate rule violations. A security-
based swap execution facility shall have arrangements and resources for
effective enforcement of its rules. Such arrangements shall include the
authority to collect information and documents on both a routine and
non-routine basis, including the authority to examine books and records
kept by the security-based swap execution facility's members and by
persons under investigation. A security-based swap execution facility's
arrangements and resources shall also facilitate the direct supervision
of the market and the analysis of data collected to determine whether a
rule violation has occurred.
(3) Compliance staff and resources. A security-based swap execution
facility shall establish and maintain sufficient compliance staff and
resources to ensure that it can conduct effective audit trail reviews,
trade practice surveillance, market surveillance, and real-time market
monitoring. The security-based swap execution facility's compliance
staff shall also be sufficient to address unusual market or trading
events as they arise, and to conduct and complete investigations in a
timely manner, as set forth in paragraph (d)(6) of this section.
(4) Automated trade surveillance system. A security-based swap
execution facility shall maintain an automated trade surveillance
system capable of detecting potential trade practice violations. The
automated trade surveillance system shall load and process daily orders
and trades no later than 24 hours after the completion of the trading
day. The automated trade surveillance system shall have the capability
to detect and flag specific trade execution patterns and trade
anomalies; compute, retain, and compare trading statistics; reconstruct
the sequence of market activity; perform market analyses; and support
system users to perform in-depth analyses and ad hoc queries of trade-
related data.
(5) Real-time market monitoring. A security-based swap execution
facility shall conduct real-time market monitoring of all trading
activity on its system(s) or platform(s) to identify any market or
system anomalies. A security-based swap execution facility shall have
the authority to adjust trade prices or cancel trades when necessary to
mitigate market disrupting events caused by malfunctions in its
system(s) or platform(s) or errors in orders submitted by members. Any
trade price adjustments or trade cancellations shall be transparent to
the market and subject to standards that are clear, fair, and publicly
available.
(6) Investigations and investigation reports--(i) Procedures. A
security-based swap execution facility shall establish and maintain
procedures that require its compliance staff to conduct investigations
of possible rule violations. An investigation shall be commenced upon
the receipt of a request from Commission staff or upon the discovery or
receipt of information by the security-based swap execution facility
that indicates a reasonable basis for finding that a violation may have
occurred or will occur.
(ii) Timeliness. Each compliance staff investigation shall be
completed in a timely manner. Absent mitigating factors, a timely
manner is no later than 12 months after the date that an investigation
is opened. Mitigating factors that may reasonably justify an
investigation taking longer than 12 months to complete include the
complexity of the investigation, the number of firms or individuals
involved as potential wrongdoers, the number of potential violations to
be investigated, and the volume of documents and data to be examined
and analyzed by compliance staff.
(iii) Investigation reports when a reasonable basis exists for
finding a violation. Compliance staff shall submit a written
investigation report for disciplinary action in every instance in which
compliance staff determines from surveillance or from an investigation
that a reasonable basis exists for finding a rule violation. The
investigation report shall include the reason the investigation was
initiated; a summary of the complaint, if any; the relevant facts;
compliance staff's analysis and conclusions; and a recommendation as to
whether disciplinary action should be pursued.
(iv) Investigation reports when no reasonable basis exists for
finding a violation. If after conducting an investigation, compliance
staff determines that no reasonable basis exists for finding a rule
violation, it shall prepare a written report including the reason the
investigation was initiated; a summary of the complaint, if any; the
relevant facts; and compliance staff's analysis and conclusions.
(v) Warning letters. The rules of a security-based swap execution
facility may authorize its compliance staff to issue a warning letter
to a person or entity under investigation or to recommend that a
disciplinary panel take such an action. No more than one warning letter
may be issued to the same person or entity found to have committed the
same rule violation within a rolling 12-month period.
(e) Regulatory services provided by a third party--(1) Use of
regulatory service provider permitted. A security-based swap execution
facility may choose to contract with a registered futures association
(under section 17 of the Commodity Exchange Act), a national securities
exchange, a national
[[Page 28987]]
securities association, or another security-based swap execution
facility (each a ``regulatory service provider''), for the provision of
services to assist in complying with the Act and Commission rules
thereunder, as approved by the Commission. A security-based swap
execution facility that chooses to contract with a regulatory service
provider shall ensure that such provider has the capacity and resources
necessary to provide timely and effective regulatory services,
including adequate staff and automated surveillance systems. A
security-based swap execution facility shall at all times remain
responsible for the performance of any regulatory services received,
for compliance with the security-based swap execution facility's
obligations under the Act and Commission rules thereunder, and for the
regulatory service provider's performance on its behalf.
(2) Duty to supervise regulatory service provider. A security-based
swap execution facility that elects to use the service of a regulatory
service provider shall retain sufficient compliance staff to supervise
the quality and effectiveness of the regulatory services provided on
its behalf. Compliance staff of the security-based swap execution
facility shall hold regular meetings with the regulatory service
provider to discuss ongoing investigations, trading patterns, market
participants, and any other matters of regulatory concern. A security-
based swap execution facility shall also conduct periodic reviews of
the adequacy and effectiveness of services provided on its behalf. Such
reviews shall be documented carefully and made available to the
Commission upon request.
(3) Regulatory decisions required from the security-based swap
execution facility. A security-based swap execution facility that
elects to use the service of a regulatory service provider shall retain
exclusive authority in all substantive decisions made by its regulatory
service provider, including, but not limited to, decisions involving
the cancellation of trades, the issuance of disciplinary charges
against members, and denials of access to the trading platform for
disciplinary reasons. A security-based swap execution facility shall
document any instances where its actions differ from those recommended
by its regulatory service provider, including the reasons for the
course of action recommended by the regulatory service provider and the
reasons why the security-based swap execution facility chose a
different course of action.
(f) Audit trail. A security-based swap execution facility shall
establish procedures to capture and retain information that may be used
in establishing whether rule violations have occurred.
(1) Audit trail required. A security-based swap execution facility
shall capture and retain all audit trail data necessary to detect,
investigate, and prevent customer and market abuses. Such data shall be
sufficient to reconstruct all indications of interest, requests for
quotes, orders, and trades within a reasonable period of time and to
provide evidence of any violations of the rules of the security-based
swap execution facility. An acceptable audit trail shall also permit
the security-based swap execution facility to track a customer order
from the time of receipt through execution on the security-based swap
execution facility.
(2) Elements of an acceptable audit trail program--(i) Original
source documents. A security-based swap execution facility's audit
trail shall include original source documents. Original source
documents include unalterable, sequentially-identified records on which
trade execution information is originally recorded, whether recorded
manually or electronically. Records for customer orders (whether
filled, unfilled, or cancelled, each of which shall be retained or
electronically captured) shall reflect the terms of the order, an
account identifier that relates back to the account(s) owner(s), the
time of order entry, and the time of trade execution. A security-based
swap execution facility shall require that all orders, indications of
interest, and requests for quotes be immediately captured in the audit
trail.
(ii) Transaction history database. A security-based swap execution
facility's audit trail program shall include an electronic transaction
history database. An adequate transaction history database shall
include a history of all indications of interest, requests for quotes,
orders, and trades entered into a security-based swap execution
facility's trading system or platform, including all order
modifications and cancellations. An adequate transaction history
database shall also include:
(A) All data that are input into the trade entry or matching system
for the transaction to match and clear;
(B) The customer type indicator code; and
(C) Timing and sequencing data adequate to reconstruct trading.
(iii) Electronic analysis capability. A security-based swap
execution facility's audit trail program shall include electronic
analysis capability with respect to all audit trail data in the
transaction history database. Such electronic analysis capability shall
ensure that the security-based swap execution facility has the ability
to reconstruct indications of interest, requests for quotes, orders,
and trades, and identify possible trading violations with respect to
both customer and market abuse.
(iv) Safe-storage capability. A security-based swap execution
facility's audit trail program shall include the capability to safely
store all audit trail data retained in its transaction history
database. Such safe-storage capability shall include the capability to
store all data in the database in a manner that protects it from
unauthorized alteration, as well as from accidental erasure or other
loss. Data shall be retained in accordance with the recordkeeping
requirements of Core Principle 9 and Sec. 242.826.
(3) Enforcement of audit trail requirements--(i) Annual audit trail
and recordkeeping reviews. A security-based swap execution facility
shall enforce its audit trail and recordkeeping requirements through at
least annual reviews of all members and persons and firms subject to
the security-based swap execution facility's recordkeeping rules to
verify their compliance with the security-based swap execution
facility's audit trail and recordkeeping requirements. Such reviews
shall include, but are not limited to, reviews of randomly selected
samples of front-end audit trail data for order routing systems; a
review of the process by which user identifications are assigned and
user identification records are maintained; a review of usage patterns
associated with user identifications to monitor for violations of user
identification rules; and reviews of account numbers and customer type
indicator codes in trade records to test for accuracy and improper use.
(ii) Enforcement program required. A security-based swap execution
facility shall establish a program for effective enforcement of its
audit trail and recordkeeping requirements. An effective program shall
identify members, persons, and firms subject to the security-based swap
execution facility's recordkeeping rules that have failed to maintain
high levels of compliance with such requirements, and impose meaningful
sanctions when deficiencies are found. Sanctions shall be sufficient to
deter recidivist behavior. No more than one warning letter shall be
issued to the same person or entity found to have committed the same
violation of audit trail or recordkeeping
[[Page 28988]]
requirements within a rolling 12-month period.
(g) Disciplinary procedures and sanctions. A security-based swap
execution facility shall establish trading, trade processing, and
participation rules that will deter abuses and have the capacity to
enforce such rules through prompt and effective disciplinary action,
including suspension or expulsion of members that violate the rules of
the security-based swap execution facility.
(1) Enforcement staff. (i) A security-based swap execution facility
shall establish and maintain sufficient enforcement staff and resources
to effectively and promptly prosecute possible rule violations within
the disciplinary jurisdiction of the security-based swap execution
facility.
(ii) The enforcement staff of a security-based swap execution
facility shall not include members or other persons whose interests
conflict with their enforcement duties.
(iii) A member of the enforcement staff shall not operate under the
direction or control of any person or persons with trading privileges
at the security-based swap execution facility.
(iv) The enforcement staff of a security-based swap execution
facility may operate as part of the security-based swap execution
facility's compliance department.
(2) Disciplinary panels. A security-based swap execution facility
shall establish one or more disciplinary panels that are authorized to
fulfill their obligations under the rules of this section. Disciplinary
panels shall meet the composition requirements of Sec. 242.834(d), and
shall not include any members of the security-based swap execution
facility's compliance staff or any person involved in adjudicating any
other stage of the same proceeding.
(3) Notice of charges. If compliance staff authorized by a
security-based swap execution facility or disciplinary panel thereof
determines that a reasonable basis exists for finding a violation and
adjudication is warranted, it shall direct that the person or entity
alleged to have committed the violation be served with a notice of
charges. A notice of charges shall adequately state the acts, conduct,
or practices in which the respondent is alleged to have engaged; state
the rule or rules alleged to have been violated (or about to be
violated); advise the respondent that it is entitled, upon request, to
a hearing on the charges; and prescribe the period within which a
hearing on the charges may be requested. If the rules of the security-
based swap execution facility so provide, a notice may also advise:
(i) That failure to request a hearing within the period prescribed
in the notice, except for good cause, may be deemed a waiver of the
right to a hearing; and
(ii) That failure to answer or to deny expressly a charge may be
deemed to be an admission of such charge.
(4) Right to representation. Upon being served with a notice of
charges, a respondent shall have the right to be represented by legal
counsel or any other representative of its choosing in all succeeding
stages of the disciplinary process, except by any member of the
security-based swap execution facility's governing board or
disciplinary panel, any employee of the security-based swap execution
facility, or any person substantially related to the underlying
investigations, such as a material witness or respondent.
(5) Answer to charges. A respondent shall be given a reasonable
period of time to file an answer to a notice of charges. The rules of a
security-based swap execution facility governing the requirements and
timeliness of a respondent's answer to a notice of charges shall be
fair, equitable, and publicly available.
(6) Admission or failure to deny charges. The rules of a security-
based swap execution facility may provide that, if a respondent admits
or fails to deny any of the charges, a disciplinary panel may find that
the violations alleged in the notice of charges for which the
respondent admitted or failed to deny any of the charges have been
committed. If the security-based swap execution facility's rules so
provide, then:
(i) The disciplinary panel may impose a sanction for each violation
found to have been committed;
(ii) The disciplinary panel shall promptly notify the respondent in
writing of any sanction to be imposed and shall advise the respondent
that the respondent may request a hearing on such sanction within the
period of time, which shall be stated in the notice; and
(iii) The rules of a security-based swap execution facility may
provide that, if a respondent fails to request a hearing within the
period of time stated in the notice, the respondent will be deemed to
have accepted the sanction.
(7) Denial of charges and right to hearing. Where a respondent has
requested a hearing on a charge that is denied, or on a sanction set by
the disciplinary panel, the respondent shall be given an opportunity
for a hearing in accordance with the rules of the security-based swap
execution facility.
(8) Settlement offers. (i) The rules of a security-based swap
execution facility may permit a respondent to submit a written offer of
settlement at any time after an investigation report is completed. The
disciplinary panel presiding over the matter may accept the offer of
settlement, but may not alter the terms of a settlement offer unless
the respondent agrees.
(ii) The rules of a security-based swap execution facility may
provide that, in its discretion, a disciplinary panel may permit the
respondent to accept a sanction without either admitting or denying the
rule violations upon which the sanction is based.
(iii) If an offer of settlement is accepted, the panel accepting
the offer shall issue a written decision specifying the rule violations
it has reason to believe were committed, including the basis or reasons
for the panel's conclusions, and any sanction to be imposed, which
shall include full customer restitution where customer harm is
demonstrated, except where the amount of restitution or to whom it
should be provided cannot be reasonably determined. If an offer of
settlement is accepted without the agreement of the enforcement staff,
the decision shall adequately support the disciplinary panel's
acceptance of the settlement. Where applicable, the decision shall also
include a statement that the respondent has accepted the sanctions
imposed without either admitting or denying the rule violations.
(iv) The respondent may withdraw its offer of settlement at any
time before final acceptance by a disciplinary panel. If an offer is
withdrawn after submission, or is rejected by a disciplinary panel, the
respondent shall not be deemed to have made any admissions by reason of
the offer of settlement and shall not be otherwise prejudiced by having
submitted the offer of settlement.
(9) Hearings. A security-based swap execution facility shall adopt
rules that provide for the following minimum requirements for any
hearing:
(i) The hearing shall be fair, shall be conducted before members of
the disciplinary panel, and shall be promptly convened after reasonable
notice to the respondent. A security-based swap execution facility need
not apply the formal rules of evidence for a hearing; nevertheless, the
procedures for the hearing may not be so informal as to deny a fair
hearing;
(ii) No member of the disciplinary panel for the hearing may have a
financial, personal, or other direct interest in the matter under
consideration;
(iii) In advance of the hearing, the respondent shall be entitled
to examine
[[Page 28989]]
all books, documents, or other evidence in the possession or under the
control of the security-based swap execution facility. The security-
based swap execution facility may withhold documents that are
privileged or constitute attorney work product; were prepared by an
employee of the security-based swap execution facility but will not be
offered in evidence in the disciplinary proceedings; may disclose a
technique or guideline used in examinations, investigations, or
enforcement proceedings; or disclose the identity of a confidential
source;
(iv) The security-based swap execution facility's enforcement and
compliance staffs shall be parties to the hearing, and the enforcement
staff shall present their case on those charges and sanctions that are
the subject of the hearing;
(v) The respondent shall be entitled to appear personally at the
hearing, to cross-examine any persons appearing as witnesses at the
hearing, to call witnesses, and to present such evidence as may be
relevant to the charges;
(vi) The security-based swap execution facility shall require
persons within its jurisdiction who are called as witnesses to
participate in the hearing and produce evidence. The security-based
swap execution facility shall make reasonable efforts to secure the
presence of all other persons called as witnesses whose testimony would
be relevant. The rules of a security-based swap execution facility may
provide that a sanction may be summarily imposed upon any person within
its jurisdiction whose actions impede the progress of a hearing; and
(vii) If the respondent has requested a hearing, a copy of the
hearing shall be made and shall become a part of the record of the
proceeding. The record shall not be required to be transcribed unless:
(A) The transcript is requested by Commission staff or the
respondent;
(B) The decision is appealed pursuant to the rules of the security-
based swap execution facility; or
(C) The decision is reviewed by the Commission pursuant to Sec.
201.442 of this chapter. In all other instances, a summary record of a
hearing is permitted.
(10) Decisions. Promptly following a hearing conducted in
accordance with the rules of the security-based swap execution
facility, the disciplinary panel shall render a written decision based
upon the weight of the evidence contained in the record of the
proceeding and shall provide a copy to the respondent. The decision
shall include:
(i) The notice of charges or a summary of the charges;
(ii) The answer, if any, or a summary of the answer;
(iii) A summary of the evidence produced at the hearing or, where
appropriate, incorporation by reference of the investigation report;
(iv) A statement of findings and conclusions with respect to each
charge and a complete explanation of the evidentiary and other basis
for such findings and conclusions with respect to each charge;
(v) An indication of each specific rule that the respondent was
found to have violated; and
(vi) A declaration of all sanctions imposed against the respondent,
including the basis for such sanctions and the effective date of such
sanctions.
(11) Emergency disciplinary actions.
(i) A security-based swap execution facility may impose a sanction,
including suspension, or take other summary action against a person or
entity subject to its jurisdiction upon a reasonable belief that such
immediate action is necessary to protect the best interest of the
market place.
(ii) Any emergency disciplinary action shall be taken in accordance
with a security-based swap execution facility's procedures that provide
for the following:
(A) If practicable, a respondent should be served with a notice
before the action is taken, or otherwise at the earliest possible
opportunity. The notice shall state the action, briefly state the
reasons for the action, and state the effective time and date, and the
duration of the action.
(B) The respondent shall have the right to be represented by legal
counsel or any other representative of its choosing in all proceedings
subsequent to the emergency action taken. The respondent shall be given
the opportunity for a hearing as soon as reasonably practicable and the
hearing shall be conducted before the disciplinary panel pursuant to
the rules of the security-based swap execution facility.
(C) Promptly following the hearing, the security-based swap
execution facility shall render a written decision based upon the
weight of the evidence contained in the record of the proceeding and
shall provide a copy to the respondent. The decision shall include a
description of the summary action taken; the reasons for the summary
action; a summary of the evidence produced at the hearing; a statement
of findings and conclusions; a determination that the summary action
should be affirmed, modified, or reversed; and a declaration of any
action to be taken pursuant to the determination, and the effective
date and duration of such action.
(12) Right to appeal. The rules of a security-based swap execution
facility may permit the parties to a proceeding to appeal promptly an
adverse decision of a disciplinary panel in all or in certain classes
of cases. Such rules may require a party's notice of appeal to be in
writing and to specify the findings, conclusions, or sanctions to which
objection are taken. If the rules of a security-based swap execution
facility permit appeals, then both the respondent and the enforcement
staff shall have the opportunity to appeal and:
(i) The security-based swap execution facility shall establish an
appellate panel that is authorized to hear appeals. The rules of the
security-based swap execution facility may provide that the appellate
panel may, on its own initiative, order review of a decision by a
disciplinary panel within a reasonable period of time after the
decision has been rendered;
(ii) The composition of the appellate panel shall be consistent
with Sec. 242.834(d) and shall not include any members of the
security-based swap execution facility's compliance staff or any person
involved in adjudicating any other stage of the same proceeding. The
rules of a security-based swap execution facility shall provide for the
appeal proceeding to be conducted before all of the members of the
appellate panel or a panel thereof;
(iii) Except for good cause shown, the appeal or review shall be
conducted solely on the record before the disciplinary panel, the
written exceptions filed by the parties, and the oral or written
arguments of the parties; and
(iv) Promptly following the appeal or review proceeding, the
appellate panel shall issue a written decision and shall provide a copy
to the respondent. The decision issued by the appellate panel shall
adhere to all the requirements of paragraph (g)(10) of this section to
the extent that a different conclusion is reached from that issued by
the disciplinary panel.
(13) Disciplinary sanctions--(i) In general. All disciplinary
sanctions imposed by a security-based swap execution facility or its
disciplinary panels shall be commensurate with the violations committed
and shall be clearly sufficient to deter recidivism or similar
violations by other members. All disciplinary sanctions, including
sanctions imposed pursuant to an accepted settlement offer, shall take
into
[[Page 28990]]
account the respondent's disciplinary history. In the event of
demonstrated customer harm, any disciplinary sanction shall also
include full customer restitution, except where the amount of
restitution or to whom it should be provided cannot be reasonably
determined.
(ii) Summary fines for violations of rules regarding timely
submission of records. A security-based swap execution facility may
adopt a summary fine schedule for violations of rules relating to the
failure to timely submit accurate records required for clearing or
verifying each day's transactions. A security-based swap execution
facility may permit its compliance staff, or a designated panel of
security-based swap execution facility officials, to summarily impose
minor sanctions against persons within the security-based swap
execution facility's jurisdiction for violating such rules. A security-
based swap execution facility's summary fine schedule may allow for
warning letters to be issued for first-time violations or violators. If
adopted, a summary fine schedule shall provide for progressively larger
fines for recurring violations.
(h) Activities of security-based swap execution facility's
employees, governing board members, committee members, and
consultants--(1) Definitions. The following definitions shall apply
only in this paragraph (h) of this section:
(i) Covered interest, with respect to a security-based swap
execution facility, means:
(A) A security-based swap that trades on the security-based swap
execution facility;
(B) A security of an issuer that has issued a security that
underlies a security-based swap that is listed on that facility; or
(C) A derivative based on a security that falls within paragraph
(h)(1)(i)(B) of this section.
(ii) Pooled investment vehicle means an investment company
registered under the Investment Company Act of 1940 in which no covered
interest constitutes more than ten percent of the investment company's
assets.
(2) Required rules. A security-based swap execution facility must
maintain in effect rules which have been submitted to the Commission
pursuant to Sec. 242.806 or 242.807 that, at a minimum, prohibit an
employee of the security-based swap execution facility from:
(i) Trading, directly or indirectly, any covered interest; and
(ii) Disclosing to any other person any material, non-public
information which such employee obtains as a result of their employment
at the security-based swap execution facility, where such employee has
or should have a reasonable expectation that the information disclosed
may assist another person in trading any covered interest; provided,
however, that such rules shall not prohibit disclosures made in the
course of an employee's duties, or disclosures made to another
security-based swap execution facility, court of competent
jurisdiction, or representative of any agency or department of the
Federal or State government acting in their official capacity.
(3) Possible exemptions. A security-based swap execution facility
may adopt rules, which must be submitted to the Commission pursuant to
Sec. 242.806 or Sec. 242.807, which set forth circumstances under
which exemptions from the trading prohibition contained in paragraph
(h)(2)(i) of this section may be granted; such exemptions are to be
administered by the security-based swap execution facility on a case-
by-case basis. Specifically, such circumstances may include:
(i) Participation by an employee in a pooled investment vehicle
where the employee has no direct or indirect control with respect to
transactions executed for or on behalf of such vehicle;
(ii) Trading by an employee in a derivative based on a pooled
investment vehicle that falls within paragraph (h)(3)(i) of this
section;
(iii) Trading by an employee in a derivative based on an index in
which no covered interest constitutes more than ten percent of the
index; and
(iv) Trading by an employee under circumstances enumerated by the
security-based swap execution facility in rules which the security-
based swap execution facility determines are not contrary to applicable
law, the public interest, or just and equitable principles of trade.
(4) Prohibited conduct. (i) No employee, governing board member,
committee member, or consultant of a security-based swap execution
facility shall:
(A) Trade for such person's own account, or for or on behalf of any
other account, in any covered interest on the basis of any material,
non-public information obtained through special access related to the
performance of such person's official duties as an employee, governing
board member, committee member, or consultant; or
(B) Disclose for any purpose inconsistent with the performance of
such person's official duties as an employee, governing board member,
committee member, or consultant any material, non-public information
obtained through special access related to the performance of such
duties.
(ii) No person shall trade for such person's own account, or for or
on behalf of any other account, in any covered interest on the basis of
any material, non-public information that such person knows was
obtained in violation of this paragraph (h)(4) from an employee,
governing board member, committee member, or consultant.
(i) Service on security-based swap execution facility governing
boards or committees by persons with disciplinary histories. (1) A
security-based swap execution facility shall maintain in effect rules
which have been submitted to the Commission pursuant to Sec. 242.806
or Sec. 242.807 that render a person ineligible to serve on its
disciplinary committees, arbitration panels, oversight panels, or
governing board who:
(i) Was found within the prior three years by a final decision of a
security-based swap execution facility, a self-regulatory organization,
an administrative law judge, a court of competent jurisdiction, or the
Commission to have committed a disciplinary offense;
(ii) Entered into a settlement agreement with a security-based swap
execution facility, a court of competent jurisdiction, or the
Commission within the prior three years in which any of the findings
or, in the absence of such findings, any of the acts charged included a
disciplinary offense;
(iii) Currently is suspended from trading on any security-based
swap execution facility, is suspended or expelled from membership with
a self-regulatory organization, is serving any sentence of probation,
or owes any portion of a fine imposed pursuant to:
(A) A finding by a final decision of a security-based swap
execution facility, a self-regulatory organization, an administrative
law judge, a court of competent jurisdiction, or the Commission that
such person committed a disciplinary offense; or
(B) A settlement agreement with a security-based swap execution
facility, a court of competent jurisdiction, or the Commission in which
any of the findings or, in the absence of such findings, any of the
acts charged included a disciplinary offense;
(iv) Currently is subject to an agreement with the Commission, a
security-based swap execution facility, or a self-regulatory
organization not to apply for registration with the Commission or
membership in any self-regulatory organization;
[[Page 28991]]
(v) Currently is subject to or has had imposed on him or her within
the prior three years a Commission registration revocation or
suspension in any capacity for any reason, or has been convicted within
the prior three years of any felony; or
(vi) Currently is subject to a denial, suspension, or
disqualification from serving on a disciplinary committee, arbitration
panel, or governing board of any security-based swap execution facility
or self-regulatory organization.
(2) No person may serve on a disciplinary committee, arbitration
panel, oversight panel or governing board of a security-based swap
execution facility if such person is subject to any of the conditions
listed in paragraphs (i)(1)(i) through (vi) of this section.
(3) A security-based swap execution facility shall submit to the
Commission a schedule listing all those rule violations which
constitute disciplinary offenses and, to the extent necessary to
reflect revisions, shall submit an amended schedule within 30 days of
the end of each calendar year. A security-based swap execution facility
shall maintain and keep current the schedule required by this section,
and post the schedule on the security-based swap execution facility's
website so that it is in a public place designed to provide notice to
members and otherwise ensure its availability to the general public.
(4) A security-based swap execution facility shall submit to the
Commission within 30 days of the end of each calendar year a certified
list of any persons who have been removed from its disciplinary
committees, arbitration panels, oversight panels, or governing board
pursuant to the requirements of this section during the prior year.
(5) Whenever a security-based swap execution facility finds by
final decision that a person has committed a disciplinary offense and
such finding makes such person ineligible to serve on that security-
based swap execution facility's disciplinary committees, arbitration
panels, oversight panels, or governing board, the security-based swap
execution facility shall inform the Commission of that finding and the
length of the ineligibility in a form and manner specified by the
Commission.
(6) For purposes of this paragraph:
(i) Arbitration panel means any person or panel empowered by a
security-based swap execution facility to arbitrate disputes involving
the security-based swap execution facility's members or their
customers.
(ii) Disciplinary offense means:
(A) Any violation of the rules of a security-based swap execution
facility, except a violation resulting in fines aggregating to less
than $5000 within a calendar year involving:
(1) Decorum or attire;
(2) Financial requirements; or
(3) Reporting or recordkeeping;
(B) Any rule violation which involves fraud, deceit, or conversion
or results in a suspension or expulsion;
(C) Any violation of the Act or the Commission's rules thereunder;
or
(D) Any failure to exercise supervisory responsibility when such
failure is itself a violation of either the rules of the security-based
swap execution facility, the Act, or the Commission's rules thereunder.
(E) A disciplinary offense must arise out of a proceeding or action
which is brought by a security-based swap execution facility, the
Commission, any Federal or State agency, or other governmental body.
(iii) Final decision means:
(A) A decision of a security-based swap execution facility which
cannot be further appealed within the security-based swap execution
facility, is not subject to the stay of the Commission or a court of
competent jurisdiction, and has not been reversed by the Commission or
any court of competent jurisdiction; or
(B) Any decision by an administrative law judge, a court of
competent jurisdiction, or the Commission which has not been stayed or
reversed.
(j) Notification of final disciplinary action involving financial
harm to a customer. (1) Upon any final disciplinary action in which a
security-based swap execution facility finds that a member has
committed a rule violation that involved a transaction for a customer,
whether executed or not, and that resulted in financial harm to the
customer:
(i) The security-based swap execution facility shall promptly
provide written notice of the disciplinary action to the member; and
(ii) The security-based swap execution facility shall have
established a rule pursuant to Sec. 242.806 or 242.807 that requires a
member that receives such a notice to promptly provide written notice
of the disciplinary action to the customer, as disclosed on the
member's books and records.
(2) A written notice required by paragraph (j)(1) of this section
must include the principal facts of the disciplinary action and a
statement that the security-based swap execution facility has found
that the member has committed a rule violation that involved a
transaction for the customer, whether executed or not, and that
resulted in financial harm to the customer.
(3) Solely for purposes of this paragraph (j):
(i) Customer means a person that utilizes an agent in connection
with trading on a security-based swap execution facility.
(ii) Final disciplinary action means any decision by or settlement
with a security-based swap execution facility in a disciplinary matter
which cannot be further appealed at the security-based swap execution
facility, is not subject to the stay of the Commission or a court of
competent jurisdiction, and has not been reversed by the Commission or
any court of competent jurisdiction.
(k) Designation of agent for non-U.S. member. (1) A security-based
swap execution facility that admits a non-U.S. person as a member shall
be deemed to be the agent of the non-U.S. member with respect to any
security-based swaps executed by the non-U.S. member. Service or
delivery of any communication issued by or on behalf of the Commission
to the security-based swap execution facility shall constitute valid
and effective service upon the non-U.S. member. The security-based swap
execution facility which has been served with, or to which there has
been delivered, a communication issued by or on behalf of the
Commission to a non-U.S. member shall transmit the communication
promptly and in a manner which is reasonable under the circumstances,
or in a manner specified by the Commission in the communication, to the
non-U.S. member.
(2) It shall be unlawful for a security-based swap execution
facility to permit a non-U.S. member to execute security-based swaps on
the facility unless the security-based swap execution facility prior
thereto informs the non-U.S. member in writing of the requirements of
this section.
(3) The requirements of paragraphs (k)(1) and (2) of this section
shall not apply if the non-U.S. member has duly executed and maintains
in effect a written agency agreement in compliance with this paragraph
with a person domiciled in the United States and has provided a copy of
the agreement to the security-based swap execution facility prior to
effecting any transaction on the security-based swap execution
facility. This agreement must authorize the person domiciled in the
United States to serve as the agent of the non-U.S. member for purposes
of accepting delivery and service of all communications issued by or on
behalf of the Commission to the non-U.S. member and must provide an
address in the United States where the agent will accept delivery and
service of
[[Page 28992]]
communications from the Commission. This agreement must be filed with
the Commission by the security-based swap execution facility prior to
permitting the non-U.S. member to effect any transactions in security-
based swaps. Such agreements shall be filed in a manner specified by
the Commission.
(4) A non-U.S. member shall notify the Commission immediately if
the written agency agreement is terminated, revoked, or is otherwise no
longer in effect. If the security-based swap execution facility knows
or should know that the agreement has expired, been terminated, or is
no longer in effect, the security-based swap execution facility shall
notify the Commission immediately.
Sec. 242.820 Core Principle 3--Security-based swaps not readily
susceptible to manipulation.
The security-based swap execution facility shall permit trading
only in security-based swaps that are not readily susceptible to
manipulation.
Sec. 242.821 Core Principle 4--Monitoring of trading and trade
processing.
(a) General. The security-based swap execution facility shall:
(1) Establish and enforce rules or terms and conditions defining,
or specifications detailing:
(i) Trading procedures to be used in entering and executing orders
traded on or through the facilities of the security-based swap
execution facility; and
(ii) Procedures for trade processing of security-based swaps on or
through the facilities of the security-based swap execution facility;
and
(2) Monitor trading in security-based swaps to prevent
manipulation, price distortion, and disruptions of the delivery or cash
settlement process through surveillance, compliance, and disciplinary
practices and procedures, including methods for conducting real-time
monitoring of trading and comprehensive and accurate trade
reconstructions.
(b) Market oversight obligations. A security-based swap execution
facility shall:
(1) Collect and evaluate data on its members' market activity on an
ongoing basis in order to detect and prevent manipulation, price
distortions, and, where possible, disruptions of the physical-delivery
or cash-settlement process;
(2) Monitor and evaluate general market data in order to detect and
prevent manipulative activity that would result in the failure of the
market price to reflect the normal forces of supply and demand;
(3) Demonstrate an effective program for conducting real-time
monitoring of trading for the purpose of detecting and resolving
abnormalities. A security-based swap execution facility shall employ
automated alerts to detect abnormal price movements and unusual trading
volumes in real time and instances or threats of manipulation, price
distortion, and disruptions on at least a T+1 basis. The T+1 detection
and analysis should incorporate any additional data that becomes
available on a T+1 basis, including the trade reconstruction data;
(4) Demonstrate the ability to comprehensively and accurately
reconstruct daily trading activity for the purpose of detecting
instances or threats of manipulation, price distortion, and
disruptions; and
(5) Have rules in place that allow it to intervene to prevent or
reduce market disruptions. Once a threatened or actual disruption is
detected, the security-based swap execution facility shall take steps
to prevent the market disruption or reduce its severity.
(c) Monitoring of physical-delivery security-based swaps. For
physical-delivery security-based swaps, the security-based swap
execution facility shall demonstrate that it:
(1) Monitors a security-based swap's terms and conditions as they
relate to the underlying asset market; and
(2) Monitors the availability of the supply of the asset specified
by the delivery requirements of the security-based swap.
(d) Additional requirements for cash-settled security-based swaps.
(1) For cash-settled security-based swaps, the security-based swap
execution facility shall demonstrate that it monitors the pricing of
the reference price used to determine cash flows or settlement.
(2) For cash-settled security-based swaps listed on the security-
based swap execution facility where the reference price is formulated
and computed by the security-based swap execution facility, the
security-based swap execution facility shall demonstrate that it
monitors the continued appropriateness of its methodology for deriving
that price and shall promptly amend any methodologies that result, or
are likely to result, in manipulation, price distortions, or market
disruptions, or impose new methodologies to resolve the threat of
disruptions or distortions.
(3) For cash-settled security-based swaps listed on the security-
based swap execution facility where the reference price relies on a
third-party index or instrument, including an index or instrument
traded on another venue, the security-based swap execution facility
shall demonstrate that it monitors for pricing abnormalities in the
index or instrument used to calculate the reference price and shall
conduct due diligence to ensure that the reference price is not
susceptible to manipulation.
(e) Ability to obtain information. (1) A security-based swap
execution facility shall demonstrate that it has access to sufficient
information to assess whether trading in security-based swaps listed on
its market, in the index or instrument used as a reference price, or in
the underlying asset for its listed security-based swaps is being used
to affect prices on its market. The security-based swap execution
facility shall demonstrate that it can obtain position and trading
information directly from members that conduct substantial trading on
its facility or through an information-sharing agreement with other
venues or a third-party regulatory service provider. If the position
and trading information is not available directly from its members but
is available through information-sharing agreements with other trading
venues or a third-party regulatory service provider, the security-based
swap execution facility should cooperate in such information-sharing
agreements.
(2) A security-based swap execution facility shall have rules that
require its members to keep records of their trading, including records
of their activity in the underlying asset, and related derivatives
markets, and make such records available, upon request, to the
security-based swap execution facility or, if applicable, to its
regulatory service provider and the Commission. The security-based swap
execution facility may limit the application of this requirement to
only those members that conduct substantial trading on its facility.
(f) Risk controls for trading. A security-based swap execution
facility shall establish and maintain risk control mechanisms to
prevent and reduce the potential risk of market disruptions, including,
but not limited to, market restrictions that pause or halt trading
under market conditions prescribed by the security-based swap execution
facility. Such risk control mechanisms shall be designed to avoid
market disruptions without unduly interfering with that market's price
discovery function. The security-based swap execution facility may
choose from among controls that include: Pre-trade limits on order
size, price collars or bands around the current price, message
throttles, daily price limits, and intraday position limits related to
financial risk to the clearing member, or design other types of
controls, as well as clear error-
[[Page 28993]]
trade and order-cancellation policies. Within the specific array of
controls that are selected, the security-based swap execution facility
shall set the parameters for those controls, so that the specific
parameters are reasonably likely to serve the purpose of preventing
market disruptions and price distortions.
(g) Trade reconstruction. A security-based swap execution facility
shall have the ability to comprehensively and accurately reconstruct
all trading on its facility. All audit-trail data and reconstructions
shall be made available to the Commission in a form, manner, and time
that is acceptable to the Commission.
(h) Regulatory service provider. A security-based swap execution
facility shall comply with the rules in this section through a
dedicated regulatory department or by contracting with a regulatory
service provider pursuant to Sec. 242.819(e).
Sec. 242.822 Core Principle 5--Ability to obtain information.
(a) General. The security-based swap execution facility shall:
(1) Establish and enforce rules that will allow the facility to
obtain any necessary information to perform any of the functions
described in section 3D of the Act;
(2) Provide the information to the Commission on request; and
(3) Have the capacity to carry out such international information-
sharing agreements as the Commission may require.
(b) Establish and enforce rules. A security-based swap execution
facility shall establish and enforce rules that will allow the
security-based swap execution facility to have the ability and
authority to obtain sufficient information to allow it to fully perform
its operational, risk management, governance, and regulatory functions
and any requirements under this section, including the capacity to
carry out international information-sharing agreements as the
Commission may require.
(c) Collection of information. A security-based swap execution
facility shall have rules that allow it to collect information on a
routine basis, allow for the collection of non-routine data from its
members, and allow for its examination of books and records kept by
members on its facility.
(d) Provide information to the Commission. A security-based swap
execution facility shall provide information in its possession to the
Commission upon request, in a form and manner specified by the
Commission.
(e) Information-sharing agreements. A security-based swap execution
facility shall share information with other regulatory organizations,
data repositories, and third-party data reporting services as required
by the Commission or as otherwise necessary and appropriate to fulfill
its regulatory and reporting responsibilities. Appropriate information-
sharing agreements can be established with such entities, or the
Commission can act in conjunction with the security-based swap
execution facility to carry out such information sharing.
Sec. 242.823 Core Principle 6--Financial integrity of transactions.
(a) General. The security-based swap execution facility shall
establish and enforce rules and procedures for ensuring the financial
integrity of security-based swaps entered on or through the facilities
of the security-based swap execution facility, including the clearance
and settlement of security-based swaps pursuant to section 3C(a)(1) of
the Act.
(b) Required clearing. Transactions executed on or through the
security-based swap execution facility that are required to be cleared
under section 3C(a)(1) of the Act or are voluntarily cleared by the
counterparties shall be cleared through a registered clearing agency or
a clearing agency that has obtained an exemption from clearing agency
registration to provide central counterparty services for security
based swaps.
(c) General financial integrity. A security-based swap execution
facility shall provide for the financial integrity of its transactions:
(1) By establishing minimum financial standards for its members,
which shall, at a minimum, require that each member qualify as an
eligible contract participant;
(2) For transactions cleared by a registered clearing agency:
(i) By ensuring that the security-based swap execution facility has
the capacity to route transactions to the registered clearing agency in
a manner acceptable to the clearing agency for purposes of clearing;
and
(ii) By coordinating with each registered clearing agency to which
it submits transactions for clearing, in the development of rules and
procedures to facilitate prompt and efficient transaction processing.
(d) Monitoring for financial soundness. A security-based swap
execution facility shall monitor its members to ensure that they
continue to qualify as eligible contract participants.
Sec. 242.824 Core Principle 7--Emergency authority.
(a) The security-based swap execution facility shall adopt rules to
provide for the exercise of emergency authority, in consultation or
cooperation with the Commission, as is necessary and appropriate,
including the authority to liquidate or transfer open positions in any
security-based swap or to suspend or curtail trading in a security-
based swap.
(b) To comply with this core principle, a security-based swap
execution facility shall adopt rules that are reasonably designed to:
(1) Allow the security-based swap execution facility to intervene
as necessary to maintain markets with fair and orderly trading and to
prevent or address manipulation or disruptive trading practices,
whether the need for intervention arises exclusively from the security-
based swap execution facility's market or as part of a coordinated,
cross-market intervention;
(2) Have the flexibility and independence to address market
emergencies in an effective and timely manner consistent with the
nature of the emergency, as long as all such actions taken by the
security-based swap execution facility are made in good faith to
protect the integrity of the markets;
(3) Take market actions as may be directed by the Commission,
including, in situations where a security-based swap is traded on more
than one platform, emergency action to liquidate or transfer open
interest as directed, or agreed to, by the Commission or the
Commission's staff.
(4) Include procedures and guidelines for decision-making and
implementation of emergency intervention that avoid conflicts of
interest;
(5) Include alternate lines of communication and approval
procedures to address emergencies associated with real-time events;
(6) Allow the security-based swap execution facility, to address
perceived market threats, to impose or modify position limits, impose
or modify price limits, impose or modify intraday market restrictions,
impose special margin requirements, order the liquidation or transfer
of open positions in any contract, order the fixing of a settlement
price, extend or shorten the expiration date or the trading hours,
suspend or curtail trading in any contract, transfer customer contracts
and the margin, or alter any contract's settlement terms or conditions,
or, if
[[Page 28994]]
applicable, provide for the carrying out of such actions through its
agreements with its third-party provider of clearing or regulatory
services.
(c) A security-based swap execution facility shall promptly notify
the Commission of its exercise of emergency action, explaining its
decision-making process, the reasons for using its emergency authority,
and how conflicts of interest were minimized, including the extent to
which the security-based swap execution facility considered the effect
of its emergency action on the underlying markets and on markets that
are linked or referenced to the contracts traded on its facility,
including similar markets on other trading venues. Information on all
regulatory actions carried out pursuant to a security-based swap
execution facility's emergency authority shall be included in a timely
submission of a certified rule pursuant to Sec. 242.807.
Sec. 242.825 Core Principle 8--Timely publication of trading
information.
(a)(1) The security-based swap execution facility shall make public
timely information on price, trading volume, and other trading data on
security-based swaps to the extent prescribed by the Commission.
(2) The security-based swap execution facility shall be required to
have the capacity to electronically capture and transmit and
disseminate trade information with respect to transactions executed on
or through the facility.
(b) A security-based swap execution facility shall report security-
based swap transaction data as required by Regulation SBSR.
(c) A security-based swap execution facility shall make available a
``Daily Market Data Report'' containing the information required in
paragraphs (c)(1) and (2) of this section in a manner and timeframe
required by this section.
(1) Contents. The Daily Market Data Report of a security-based swap
execution facility for a business day shall contain the following
information for each tenor of each security-based swap traded on that
security-based swap execution facility during that business day:
(i) The trade count (including block trades but excluding error
trades, correcting trades, and offsetting trades);
(ii) The total notional amount traded (including block trades but
excluding error trades, correcting trades, and offsetting trades);
(iii) The number of block trades;
(iv) The total notional amount of block trades;
(v) The opening and closing price;
(vi) The price that is used for settlement purposes, if different
from the closing price; and
(vii) The lowest price of a sale or offer, whichever is lower, and
the highest price of a sale or bid, whichever is higher, that the
security-based swap execution facility reasonably determines accurately
reflects market conditions. Bids and offers vacated or withdrawn shall
not be used in making this determination. A bid is vacated if followed
by a higher bid or price and an offer is vacated if followed by a lower
offer or price.
(2) Additional information. A security-based swap execution
facility must record the following information with respect to
security-based swaps on that reporting market:
(i) The method used by the security-based swap execution facility
in determining nominal prices and settlement prices; and
(ii) If discretion is used by the security-based swap execution
facility in determining the opening and/or closing ranges or the
settlement prices, an explanation that certain discretion may be
employed by the security-based swap execution facility and a
description of the manner in which that discretion may be employed.
Discretionary authority must be noted explicitly in each case in which
it is applied (for example, by use of an asterisk or footnote).
(3) Form of publication. A security-based swap execution facility
shall publicly post the Daily Market Data Report on its website:
(i) In a downloadable and machine-readable format using the most
recent versions of the associated XML schema and PDF renderer as
published on the Commission's website;
(ii) Without fees or other charges;
(iii) Without any encumbrances on access or usage restrictions; and
(iv) Without requiring a user to agree to any terms before being
allowed to view or download the Daily Market Data Report, such as by
waiving any requirements of this paragraph (c)(3). Any such waiver
agreed to by a user shall be null and void.
(4) Timing of publication. A security-based swap execution facility
shall publish the Daily Market Data Report on its website no later than
the security-based swap execution facility's commencement of trading on
the next business day after the day to which the information pertains.
(5) Duration. A security-based swap execution facility shall keep
each Daily Market Data Report available on its website in the same
location as all other Daily Market Data Reports for no less than one
year after the date of first publication.
Sec. 242.826 Core Principle 9--Recordkeeping and reporting.
(a) In general. (1) A security-based swap execution facility shall:
(i) Maintain records of all activities relating to the business of
the facility, including a complete audit trail, in a form and manner
acceptable to the Commission for a period of five years; and
(ii) Report to the Commission, in a form and manner acceptable to
the Commission, such information as the Commission determines to be
necessary or appropriate for the Commission to perform the duties of
the Commission under the Act.
(2) The Commission shall adopt data collection and reporting
requirements for security-based swap execution facilities that are
comparable to corresponding requirements for clearing agencies and
security-based swap data repositories.
(b) Required records. A security-based swap execution facility
shall keep full, complete, and systematic records, together with all
pertinent data and memoranda, of all activities relating to its
business with respect to security-based swaps. Such records shall
include, without limitation, the audit trail information required under
Sec. 242.819(f) and all other records that a security-based swap
execution facility is required to create or obtain under Regulation SE.
(c) Duration of retention. (1) A security-based swap execution
facility shall keep records of any security-based swap from the date of
execution until the termination, maturity, expiration, transfer,
assignment, or novation date of the transaction, and for a period of
not less than five years, the first two years in an easily accessible
place, after such date.
(2) A security-based swap execution facility shall keep each record
other than the records described in paragraph (c)(1) of this section
for a period of not less than five years, the first two years in an
easily accessible place, from the date on which the record was created.
(d) Record retention--(1) A security-based swap execution facility
shall retain all records in a form and manner that ensures the
authenticity and reliability of such records in accordance with the Act
and the Commission's rules thereunder.
(2) A security-based swap execution facility shall, upon request of
any representative of the Commission, promptly furnish to the
representative legible, true, complete, and current
[[Page 28995]]
copies of any records required to be kept and preserved pursuant to
this section.
(3) (i) An electronic record shall be retained in a form and manner
that allows for prompt production at the request of any representative
of the Commission.
(ii) A security-based swap execution facility maintaining
electronic records shall establish appropriate systems and controls
that ensure the authenticity and reliability of electronic records,
including, without limitation:
(A) Systems that maintain the security, signature, and data as
necessary to ensure the authenticity of the information contained in
electronic records and to monitor compliance with the Act and the
Commission's rules thereunder;
(B) Systems that ensure that the security-based swap execution
facility is able to produce electronic records in accordance with this
section, and ensure the availability of such electronic records in the
event of an emergency or other disruption of the security-based swap
execution facility's electronic record retention systems; and
(C) The creation and maintenance of an up-to-date inventory that
identifies and describes each system that maintains information
necessary for accessing or producing electronic records.
(e) Record examination. All records required to be kept by a
security-based swap execution facility pursuant to this section are
subject to examination by any representative of the Commission pursuant
to section 17(b) of the Act (15 U.S.C. 78q).
(f) Records of non-U.S. members. A security-based swap execution
facility shall keep a record in permanent form, which shall show the
true name, address, and principal occupation or business of any non-
U.S. member that executes transactions on the facility. Upon request,
the security-based swap execution facility shall provide to the
Commission information regarding the name of any person guaranteeing
such transactions or exercising any control over the trading of such
non-U.S. member.
Sec. 242.827 Core Principle 10--Antitrust considerations.
Unless necessary or appropriate to achieve the purposes of the Act,
the security-based swap execution facility shall not:
(a) Adopt any rules or take any actions that result in any
unreasonable restraint of trade; or
(b) Impose any material anticompetitive burden on trading or
clearing.
Sec. 242.828 Core Principle 11--Conflicts of interest.
(a) The security-based swap execution facility shall:
(1) Establish and enforce rules to minimize conflicts of interest
in its decision-making process; and
(2) Establish a process for resolving the conflicts of interest.
(b) A security-based swap execution facility shall comply with the
requirements of Sec. 242.834.
Sec. 242.829 Core Principle 12--Financial resources.
(a)In general. (1) The security-based swap execution facility shall
have adequate financial, operational, and managerial resources to
discharge each responsibility of the security-based swap execution
facility, as determined by the Commission.
(2) The financial resources of a security-based swap execution
facility shall be considered to be adequate if the value of the
financial resources:
(i) Enables the organization to meet its financial obligations to
its members notwithstanding a default by a member creating the largest
financial exposure for that organization in extreme but plausible
market conditions; and
(ii) Exceeds the total amount that would enable the security-based
swap execution facility to cover the operating costs of the security-
based swap execution facility for a one-year period, as calculated on a
rolling basis.
(b) General requirements. A security-based swap execution facility
shall maintain financial resources on an ongoing basis that are
adequate to enable it to comply with the core principles set forth in
section 3D of the Act and any applicable Commission rules. Financial
resources shall be considered adequate if their value exceeds the total
amount that would enable the security-based swap execution facility to
cover its projected operating costs necessary for the security-based
swap execution facility to comply with section 3D of the Act and
applicable Commission rules for a one-year period, as calculated on a
rolling basis pursuant to paragraph (e) of this section.
(c) Types of financial resources. Financial resources available to
satisfy the requirements of this section may include:
(1) The security-based swap execution facility's own capital,
meaning its assets minus its liabilities calculated in accordance with
generally accepted accounting principles in the United States; and
(2) Any other financial resource deemed acceptable by the
Commission.
(d) Liquidity of financial resources. The financial resources
allocated by a security-based swap execution facility to meet the
ongoing requirements of paragraph (b) of this section shall include
unencumbered, liquid financial assets (i.e., cash and/or highly liquid
securities) equal to at least the greater of three months of projected
operating costs, as calculated on a rolling basis, or the projected
costs needed to wind down the security-based swap execution facility's
operations, in each case as determined under paragraph (e) of this
section. If a security-based swap execution facility lacks sufficient
unencumbered, liquid financial assets to satisfy its obligations under
this section, the security-based swap execution facility may satisfy
this requirement by obtaining a committed line of credit or similar
facility in an amount at least equal to such deficiency.
(e) Computation of costs to meet financial resources requirement.
(1) A security-based swap execution facility shall, each fiscal
quarter, make a reasonable calculation of its projected operating costs
and wind-down costs in order to determine its applicable obligations
under this section. The security-based swap execution facility shall
have reasonable discretion in determining the methodologies used to
compute such amounts.
(i) Calculation of projected operating costs. A security-based swap
execution facility's calculation of its projected operating costs shall
be deemed reasonable if it includes all expenses necessary for the
security-based swap execution facility to comply with the core
principles set forth in section 3D of the Act and any applicable
Commission rules, and if the calculation is based on the security-based
swap execution facility's current level of business and business model,
taking into account any projected modification to its business model
(e.g., the addition or subtraction of business lines or operations or
other changes), and any projected increase or decrease in its level of
business over the next 12 months. A security-based swap execution
facility may exclude the following expenses (``excludable expenses'')
from its projected operating cost calculations:
(A) Costs attributable solely to sales, marketing, business
development, product development, or recruitment and any related
travel, entertainment, event, or conference costs;
(B) Compensation and related taxes and benefits for personnel who
are not necessary to ensure that the security-based swap execution
facility is able to comply with the core principles set
[[Page 28996]]
forth in section 3D of the Act and any applicable Commission rules;
(C) Costs for acquiring and defending patents and trademarks for
security-based swap execution facility products and related
intellectual property;
(D) Magazine, newspaper, and online periodical subscription fees;
(E) Tax preparation and audit fees;
(F) The variable commissions that a voice-based security-based swap
execution facility may pay to its trading specialists, calculated as a
percentage of transaction revenue generated by the voice-based
security-based swap execution facility; and
(G) Any non-cash costs, including depreciation and amortization.
(ii) Prorated expenses. A security-based swap execution facility's
calculation of its projected operating costs shall be deemed reasonable
if an expense is prorated and the security-based swap execution
facility:
(A) Maintains sufficient documentation that reasonably shows the
extent to which an expense is partially attributable to an excludable
expense;
(B) Identifies any prorated expense in the financial reports that
it submits to the Commission pursuant to paragraph (g) of this section;
and
(C) Sufficiently explains why it prorated any expense. Common
allocation methodologies that may be used include actual use,
headcount, or square footage. A security-based swap execution facility
may provide documentation, such as copies of service agreements, other
legal documents, firm policies, audit statements, or allocation
methodologies to support its determination to prorate an expense.
(iii) Expenses allocated among affiliates. A security-based swap
execution facility's calculation of its projected operating costs shall
be deemed reasonable if it prorates any shared expense that the
security-based swap execution facility pays for, but only to the extent
that such shared expense is attributable to an affiliate and for which
the security-based swap execution facility is reimbursed. To prorate a
shared expense, the security-based swap execution facility shall:
(A) Maintain sufficient documentation that reasonably shows the
extent to which the shared expense is attributable to and paid for by
the security-based swap execution facility and/or affiliated entity.
The security-based swap execution facility may provide documentation,
such as copies of service agreements, other legal documents, firm
policies, audit statements, or allocation methodologies, that
reasonably shows how expenses are attributable to, and paid for by, the
security-based swap execution facility and/or its affiliated entities
to support its determination to prorate an expense;
(B) Identify any shared expense in the financial reports that it
submits to the Commission pursuant to paragraph (h) of this section;
and
(C) Sufficiently explain why it prorated the shared expense.
(2) Notwithstanding any provision of paragraph (e)(1) of this
section, the Commission may review the methodologies and require
changes as appropriate.
(f) Valuation of financial resources. No less than each fiscal
quarter, a security-based swap execution facility shall compute the
current market value of each financial resource used to meet its
obligations under this section. Reductions in value to reflect market
and credit risk (``haircuts'') shall be applied as appropriate.
(g) Reporting to the Commission. (1) Each fiscal quarter, or at any
time upon Commission request, a security-based swap execution facility
shall provide a report to the Commission that includes:
(i) The amount of financial resources necessary to meet the
requirements of this section, computed in accordance with the
requirements of paragraph (e) of this section, and the market value of
each available financial resource, computed in accordance with the
requirements of paragraph (f) of this section; and
(ii) Financial statements, including the balance sheet, income
statement, and statement of cash flows of the security-based swap
execution facility.
(A) The financial statements shall be prepared in accordance with
generally accepted accounting principles in the United States, prepared
in English, and denominated in U.S. dollars.
(B) The financial statements of a security-based swap execution
facility that is not domiciled in the United States, and is not
otherwise required to prepare financial statements in accordance with
generally accepted accounting principles in the United States, may
satisfy the requirement in paragraph (g)(1)(ii)(A) of this section if
such financial statements are prepared in accordance with either
International Financial Reporting Standards issued by the International
Accounting Standards Board, or a comparable international standard as
the Commission may otherwise accept in its discretion.
(2) The calculations required by this paragraph (g) shall be made
as of the last business day of the security-based swap execution
facility's applicable fiscal quarter.
(3) With each report required under paragraph (g) of this section,
the security-based swap execution facility shall also provide the
Commission with sufficient documentation explaining the methodology
used to compute its financial requirements under this section. Such
documentation shall:
(i) Allow the Commission to reliably determine, without additional
requests for information, that the security-based swap execution
facility has made reasonable calculations pursuant to paragraph (e) of
this section; and
(ii) Include, at a minimum:
(A) A total list of all expenses, without any exclusion;
(B) All expenses and the corresponding amounts, if any, that the
security-based swap execution facility excluded or prorated when
determining its operating costs, calculated on a rolling basis,
required under this section, and the basis for any determination to
exclude or prorate any such expenses;
(C) Documentation demonstrating the existence of any committed line
of credit or similar facility relied upon for the purpose of meeting
the requirements of this section (e.g., copies of agreements
establishing or amending a credit facility or similar facility); and
(D) All costs that a security-based swap execution facility would
incur to wind down its operations, the projected amount of time for any
such wind-down period, and the basis of its determination for the
estimation of its costs and timing.
(4) The reports and supporting documentation required by this
section shall be filed not later than 40 calendar days after the end of
the security-based swap execution facility's first three fiscal
quarters, and not later than 90 calendar days after the end of the
security-based swap execution facility's fourth fiscal quarter, or at
such later time as the Commission may permit, in its discretion, upon
request by the security-based swap execution facility.
(5) A security-based swap execution facility shall provide notice
to the Commission no later than 48 hours after it knows or reasonably
should know that it no longer meets its obligations under paragraph (b)
and (d) of this section.
(6) A security-based swap execution facility shall provide the
report and documentation required by this section to the Commission
electronically using the EDGAR system as an Interactive Data File in
accordance with Sec. 232.405.
[[Page 28997]]
Sec. 242.830 Core Principle 13--System safeguards.
(a) In general. The security-based swap execution facility shall:
(1) Establish and maintain a program of risk analysis and oversight
to identify and minimize sources of operational risk, through the
development of appropriate controls and procedures, and automated
systems, that:
(i) Are reliable and secure; and
(ii) Have adequate scalable capacity;
(2) Establish and maintain emergency procedures, backup facilities,
and a plan for disaster recovery that allow for:
(i) The timely recovery and resumption of operations; and
(ii) The fulfillment of the responsibilities and obligations of the
security-based swap execution facility; and
(3) Periodically conduct tests to verify that the backup resources
of the security-based swap execution facility are sufficient to ensure
continued:
(i) Order processing and trade matching;
(ii) Price reporting;
(iii) Market surveillance; and
(iv) Maintenance of a comprehensive and accurate audit trail.
(b) Requirements. (1) A security-based swap execution facility's
program of risk analysis and oversight with respect to its operations
and automated systems shall address each of the following categories of
risk analysis and oversight:
(i) Enterprise risk management and governance. This category
includes, but is not limited to: Assessment, mitigation, and monitoring
of security and technology risk; security and technology capital
planning and investment; governing board and management oversight of
technology and security; information technology audit and controls
assessments; remediation of deficiencies; and any other elements of
enterprise risk management and governance included in generally
accepted best practices.
(ii) Information security. This category includes, but is not
limited to, controls relating to: Access to systems and data (including
least privilege, separation of duties, account monitoring, and
control); user and device identification and authentication; security
awareness training; audit log maintenance, monitoring, and analysis;
media protection; personnel security and screening; automated system
and communications protection (including network port control, boundary
defenses, and encryption); system and information integrity (including
malware defenses and software integrity monitoring); vulnerability
management; penetration testing; security incident response and
management; and any other elements of information security included in
generally accepted best practices.
(iii) Business continuity-disaster recovery planning and resources.
This category includes, but is not limited to: Regular, periodic
testing and review of business continuity-disaster recovery
capabilities; the controls and capabilities described in paragraphs
(b)(3) and (10) of this section; and any other elements of business
continuity-disaster recovery planning and resources included in
generally accepted best practices.
(iv) Capacity and performance planning. This category includes, but
is not limited to: Controls for monitoring the security-based swap
execution facility's systems to ensure adequate scalable capacity
(including testing, monitoring, and analysis of current and projected
future capacity and performance, and of possible capacity degradation
due to planned automated system changes); and any other elements of
capacity and performance planning included in generally accepted best
practices.
(v) Systems operations. This category includes, but is not limited
to: System maintenance; configuration management (including baseline
configuration, configuration change and patch management, least
functionality, and inventory of authorized and unauthorized devices and
software); event and problem response and management; and any other
elements of system operations included in generally accepted best
practices.
(vi) Systems development and quality assurance. This category
includes, but is not limited to: Requirements development; pre-
production and regression testing; change management procedures and
approvals; outsourcing and vendor management; training in secure coding
practices; and any other elements of systems development and quality
assurance included in generally accepted best practices.
(vii) Physical security and environmental controls. This category
includes, but is not limited to: Physical access and monitoring; power,
telecommunication, and environmental controls; fire protection; and any
other elements of physical security and environmental controls included
in generally accepted best practices.
(2) In addressing the categories of risk analysis and oversight
required under paragraph (b)(1) of this section, a security-based swap
execution facility shall follow generally accepted standards and best
practices with respect to the development, operation, reliability,
security, and capacity of automated systems.
(3) A security-based swap execution facility shall maintain a
business continuity-disaster recovery plan and business continuity-
disaster recovery resources, emergency procedures, and back-up
facilities sufficient to enable timely recovery and resumption of its
operations and resumption of its ongoing fulfillment of its
responsibilities and obligations as a security-based swap execution
facility following any disruption of its operations. Such
responsibilities and obligations include, without limitation: Order
processing and trade matching; transmission of matched orders to a
registered clearing agency for clearing, where appropriate; price
reporting; market surveillance; and maintenance of a comprehensive
audit trail. A security-based swap execution facility's business
continuity-disaster recovery plan and resources generally should enable
resumption of trading and clearing of security-based swaps executed on
or pursuant to the rules of the security-based swap execution facility
during the next business day following the disruption. A security-based
swap execution facility shall update its business continuity-disaster
recovery plan and emergency procedures at a frequency determined by an
appropriate risk analysis, but at a minimum no less frequently than
annually.
(4) A security-based swap execution facility satisfies the
requirement to be able to resume its operations and resume its ongoing
fulfillment of its responsibilities and obligations during the next
business day following any disruption of its operations by maintaining
either:
(i) Infrastructure and personnel resources of its own that are
sufficient to ensure timely recovery and resumption of its operations
and resumption of its ongoing fulfillment of its responsibilities and
obligations as a security-based swap execution facility following any
disruption of its operations; or
(ii) Contractual arrangements with other security-based swap
execution facilities or disaster recovery service providers, as
appropriate, that are sufficient to ensure continued trading and
clearing of security-based swaps executed on the security-based swap
execution facility, and ongoing fulfillment of all of the security-
based swap execution facility's responsibilities and obligations with
respect to such security-based swaps, in the event that a disruption
renders the security-based swap execution facility
[[Page 28998]]
temporarily or permanently unable to satisfy this requirement on its
own behalf.
(5) A security-based swap execution facility shall notify
Commission staff promptly of all:
(i) Electronic trading halts and material system malfunctions;
(ii) Cyber-security incidents or targeted threats that actually or
potentially jeopardize automated system operation, reliability,
security, or capacity; and
(iii) Activations of the security-based swap execution facility's
business continuity-disaster recovery plan.
(6) A security-based swap execution facility shall provide
Commission staff timely advance notice of all material:
(i) Planned changes to automated systems that may impact the
reliability, security, or adequate scalable capacity of such systems;
and
(ii) Planned changes to the security-based swap execution
facility's program of risk analysis and oversight.
(7) As part of a security-based swap execution facility's
obligation to produce books and records in accordance with Core
Principle 9 and Sec. 242.826, the security-based swap execution
facility shall provide to the Commission the following system-
safeguards-related books and records, promptly upon the request of any
Commission representative:
(i) Current copies of its business continuity-disaster recovery
plans and other emergency procedures;
(ii) All assessments of its operational risks or system safeguards-
related controls;
(iii) All reports concerning system safeguards testing and
assessment required by this chapter, whether performed by independent
contractors or by employees of the security-based swap execution
facility; and
(iv) All other books and records requested by Commission staff in
connection with Commission oversight of system safeguards pursuant to
the Act or Commission rules, or in connection with Commission
maintenance of a current profile of the security-based swap execution
facility's automated systems.
(v) Nothing in paragraph (b)(7) of this section shall be
interpreted as reducing or limiting in any way a security-based swap
execution facility's obligation to comply with Core Principle 9 and
Sec. 242.826.
(8) A security-based swap execution facility shall conduct regular,
periodic, objective testing and review of its automated systems to
ensure that they are reliable, secure, and have adequate scalable
capacity. A security-based swap execution facility shall also conduct
regular, periodic testing and review of its business continuity-
disaster recovery capabilities. Such testing and review shall include,
without limitation, all of the types of testing set forth in this
paragraph (b)(8).
(i) Definitions. As used in this paragraph (b)(8):
Controls means the safeguards or countermeasures employed by the
security-based swap execution facility to protect the reliability,
security, or capacity of its automated systems or the confidentiality,
integrity, and availability of its data and information, and to enable
the security-based swap execution facility to fulfill its statutory and
regulatory responsibilities.
Controls testing means assessment of the security-based swap
execution facility's controls to determine whether such controls are
implemented correctly, are operating as intended, and are enabling the
security-based swap execution facility to meet the requirements of this
section.
Enterprise technology risk assessment means a written assessment
that includes, but is not limited to, an analysis of threats and
vulnerabilities in the context of mitigating controls. An enterprise
technology risk assessment identifies, estimates, and prioritizes risks
to security-based swap execution facility operations or assets, or to
market participants, individuals, or other entities, resulting from
impairment of the confidentiality, integrity, and availability of data
and information or the reliability, security, or capacity of automated
systems.
External penetration testing means attempts to penetrate the
security-based swap execution facility's automated systems from outside
the systems' boundaries to identify and exploit vulnerabilities.
Methods of conducting external penetration testing include, but are not
limited to, methods for circumventing the security features of an
automated system.
Internal penetration testing means attempts to penetrate the
security-based swap execution facility's automated systems from inside
the systems' boundaries, to identify and exploit vulnerabilities.
Methods of conducting internal penetration testing include, but are not
limited to, methods for circumventing the security features of an
automated system.
Security incident means a cybersecurity or physical security event
that actually jeopardizes or has a significant likelihood of
jeopardizing automated system operation, reliability, security, or
capacity, or the availability, confidentiality or integrity of data.
Security incident response plan means a written plan documenting
the security-based swap execution facility's policies, controls,
procedures, and resources for identifying, responding to, mitigating,
and recovering from security incidents, and the roles and
responsibilities of its management, staff, and independent contractors
in responding to security incidents. A security incident response plan
may be a separate document or a business continuity-disaster recovery
plan section or appendix dedicated to security incident response.
Security incident response plan testing means testing of a
security-based swap execution facility's security incident response
plan to determine the plan's effectiveness, identify its potential
weaknesses or deficiencies, enable regular plan updating and
improvement, and maintain organizational preparedness and resiliency
with respect to security incidents. Methods of conducting security
incident response plan testing may include, but are not limited to,
checklist completion, walk-through or table-top exercises, simulations,
and comprehensive exercises.
Vulnerability testing means testing of a security-based swap
execution facility's automated systems to determine what information
may be discoverable through a reconnaissance analysis of those systems
and what vulnerabilities may be present on those systems.
(ii) Vulnerability testing. A security-based swap execution
facility shall conduct vulnerability testing of a scope sufficient to
satisfy the requirements set forth in paragraph (b)(10) of this
section.
(A) A security-based swap execution facility shall conduct such
vulnerability testing at a frequency determined by an appropriate risk
analysis.
(B) Such vulnerability testing shall include automated
vulnerability scanning, which shall follow generally accepted best
practices.
(C) A security-based swap execution facility shall conduct
vulnerability testing by engaging independent contractors or by using
employees of the security-based swap execution facility who are not
responsible for development or operation of the systems or capabilities
being tested.
(iii) External penetration testing. A security-based swap execution
facility shall conduct external penetration testing of a scope
sufficient to satisfy the requirements set forth in paragraph (b)(10)
of this section.
(A) A security-based swap execution facility shall conduct such
external penetration testing at a frequency
[[Page 28999]]
determined by an appropriate risk analysis.
(B) A security-based swap execution facility shall conduct external
penetration testing by engaging independent contractors or by using
employees of the security-based swap execution facility who are not
responsible for development or operation of the systems or capabilities
being tested.
(iv) Internal penetration testing. A security-based swap execution
facility shall conduct internal penetration testing of a scope
sufficient to satisfy the requirements set forth in paragraph (b)(10)
of this section.
(A) A security-based swap execution facility shall conduct such
internal penetration testing at a frequency determined by an
appropriate risk analysis.
(B) A security-based swap execution facility shall conduct internal
penetration testing by engaging independent contractors, or by using
employees of the security-based swap execution facility who are not
responsible for development or operation of the systems or capabilities
being tested.
(v) Controls testing. A security-based swap execution facility
shall conduct controls testing of a scope sufficient to satisfy the
requirements set forth in paragraph (b)(10) of this section.
(A) A security-based swap execution facility shall conduct controls
testing, which includes testing of each control included in its program
of risk analysis and oversight, at a frequency determined by an
appropriate risk analysis. Such testing may be conducted on a rolling
basis.
(B) A security-based swap execution facility shall conduct controls
testing by engaging independent contractors or by using employees of
the security-based swap execution facility who are not responsible for
development or operation of the systems or capabilities being tested.
(vi) Security incident response plan testing. A security-based swap
execution facility shall conduct security incident response plan
testing sufficient to satisfy the requirements set forth in paragraph
(b)(10) of this section.
(A) A security-based swap execution facility shall conduct such
security incident response plan testing at a frequency determined by an
appropriate risk analysis.
(B) A security-based swap execution facility's security incident
response plan shall include, without limitation, the security-based
swap execution facility's definition and classification of security
incidents, its policies and procedures for reporting security incidents
and for internal and external communication and information sharing
regarding security incidents, and the hand-off and escalation points in
its security incident response process.
(C) A security-based swap execution facility may coordinate its
security incident response plan testing with other testing required by
this section or with testing of its other business continuity-disaster
recovery and crisis management plans.
(D) A security-based swap execution facility may conduct security
incident response plan testing by engaging independent contractors or
by using employees of the security-based swap execution facility.
(vii) Enterprise technology risk assessment. A security-based swap
execution facility shall conduct enterprise technology risk assessment
of a scope sufficient to satisfy the requirements set forth in
paragraph (b)(10) of this section.
(A) A security-based swap execution facility shall conduct
enterprise technology risk assessment at a frequency determined by an
appropriate risk analysis. A security-based swap execution facility
that has conducted an enterprise technology risk assessment that
complies with this section may conduct subsequent assessments by
updating the previous assessment.
(B) A security-based swap execution facility may conduct enterprise
technology risk assessments by using independent contractors or
employees of the security-based swap execution facility who are not
responsible for development or operation of the systems or capabilities
being assessed.
(9) To the extent practicable, a security-based swap execution
facility shall:
(i) Coordinate its business continuity-disaster recovery plan with
those of its members that it depends upon to provide liquidity, in a
manner adequate to enable effective resumption of activity in its
markets following a disruption causing activation of the security-based
swap execution facility's business continuity-disaster recovery plan;
(ii) Initiate and coordinate periodic, synchronized testing of its
business continuity-disaster recovery plan with those of members that
it depends upon to provide liquidity; and
(iii) Ensure that its business continuity-disaster recovery plan
takes into account the business continuity-disaster recovery plans of
its telecommunications, power, water, and other essential service
providers.
(10) The scope for all system safeguards testing and assessment
required by this section shall be broad enough to include the testing
of automated systems and controls that the security-based swap
execution facility's required program of risk analysis and oversight
and its current cybersecurity threat analysis indicate is necessary to
identify risks and vulnerabilities that could enable an intruder or
unauthorized user or insider to:
(i) Interfere with the security-based swap execution facility's
operations or with fulfillment of its statutory and regulatory
responsibilities;
(ii) Impair or degrade the reliability, security, or adequate
scalable capacity of the security-based swap execution facility's
automated systems;
(iii) Add to, delete, modify, exfiltrate, or compromise the
integrity of any data related to the security-based swap execution
facility's regulated activities; or
(iv) Undertake any other unauthorized action affecting the
security-based swap execution facility's regulated activities or the
hardware or software used in connection with those activities.
(11) Both the senior management and the governing board of a
security-based swap execution facility shall receive and review reports
setting forth the results of the testing and assessment required by
this section. A security-based swap execution facility shall establish
and follow appropriate procedures for the remediation of issues
identified through such review, as provided in paragraph (b)(12) of
this section, and for evaluation of the effectiveness of testing and
assessment protocols.
(12) A security-based swap execution facility shall identify and
document the vulnerabilities and deficiencies in its systems revealed
by the testing and assessment required by this section. The security-
based swap execution facility shall conduct and document an appropriate
analysis of the risks presented by such vulnerabilities and
deficiencies, to determine and document whether to remediate or accept
the associated risk. When the security-based swap execution facility
determines to remediate a vulnerability or deficiency, it must
remediate in a timely manner given the nature and magnitude of the
associated risk.
Sec. 242.831 Core Principle 14--Designation of chief compliance
officer.
(a)(1) In general. Each security-based swap execution facility
shall designate an individual to serve as a chief compliance officer.
[[Page 29000]]
(2) Duties. The chief compliance officer shall:
(i) Report directly to the board or to the senior officer of the
facility;
(ii) Review compliance with the core principles in this subsection;
(iii) In consultation with the board of the facility, a body
performing a function similar to that of a board, or the senior officer
of the facility, resolve any conflicts of interest that may arise;
(iv) Be responsible for establishing and administering the policies
and procedures required to be established pursuant to this section;
(v) Ensure compliance with the Act and the rules and regulations
issued under the Act, including rules prescribed by the Commission
pursuant to section 3D of the Act; and
(vi) Establish procedures for the remediation of noncompliance
issues found during compliance office reviews, look backs, internal or
external audit findings, self-reported errors, or through validated
complaints; and
(vii) Establish and follow appropriate procedures for the handling,
management response, remediation, retesting, and closing of
noncompliance issues.
(3) Annual reports--(i) In general. In accordance with rules
prescribed by the Commission, the chief compliance officer shall
annually prepare and sign a report that contains a description of:
(A) The compliance of the security-based swap execution facility
with the Act; and
(B) The policies and procedures, including the code of ethics and
conflict of interest policies, of the security-based swap execution
facility.
(ii) [Reserved]
(4) Requirements. The chief compliance officer shall:
(i) Submit each report described in paragraph (a)(3) of this
section with the appropriate financial report of the security-based
swap execution facility that is required to be submitted to the
Commission pursuant to this section; and
(ii) Include in the report a certification that, under penalty of
law, the report is accurate and complete.
(b) Authority of chief compliance officer. (1) The position of
chief compliance officer shall carry with it the authority and
resources to develop, in consultation with the governing board or
senior officer, the policies and procedures of the security-based swap
execution facility and enforce such policies and procedures to fulfill
the duties set forth for chief compliance officers in the Act and the
Commission's rules thereunder.
(2) The chief compliance officer shall have supervisory authority
over all staff acting at the direction of the chief compliance officer.
(c) Qualifications of chief compliance officer. (1) The individual
designated to serve as chief compliance officer shall have the
background and skills appropriate for fulfilling the responsibilities
of the position.
(2) No individual that would be disqualified from serving on a
security-based swap execution facility's governing board or committees
pursuant to the criteria set forth in Sec. 242.819(i) may serve as a
chief compliance officer.
(3) In determining whether the background and skills of a potential
chief compliance officer are appropriate for fulfilling the
responsibilities of the role of the chief compliance officer, a
security-based swap execution facility has the discretion to base its
determination on the totality of the qualifications of the potential
chief compliance officer, including, but not limited to, compliance
experience, related career experience, training, potential conflicts of
interest, and any other relevant factors to the position.
(d) Appointment and removal of chief compliance officer. (1) Only
the governing board or the senior officer may appoint or remove the
chief compliance officer.
(2) The security-based swap execution facility shall notify the
Commission within two business days of the appointment or removal,
whether interim or permanent, of a chief compliance officer.
(e) Compensation of the chief compliance officer. The governing
board or the senior officer shall approve the compensation of the chief
compliance officer.
(f) Annual meeting with the chief compliance officer. The chief
compliance officer shall meet with the governing board or senior
officer of the security-based swap execution facility at least
annually.
(g) Information requested of the chief compliance officer. The
chief compliance officer shall provide any information regarding the
regulatory program of the security-based swap execution facility as
requested by the governing board or the senior officer.
(h) Duties of chief compliance officer. The duties of the chief
compliance officer shall include, but are not limited to, the
following:
(1) Overseeing and reviewing compliance of the security-based swap
execution facility with section 3D of the Act and the Commission rules
thereunder;
(2) Taking reasonable steps, in consultation with the governing
board or the senior officer of the security-based swap execution
facility, to resolve any material conflicts of interest that may arise,
including, but not limited to:
(i) Conflicts between business considerations and compliance
requirements;
(ii) Conflicts between business considerations and the requirement
that the security-based swap execution facility provide fair, open, and
impartial access as set forth in Sec. 242.819(c); and
(iii) Conflicts between a security-based swap execution facility's
management and members of the governing board;
(3) Establishing and administering written policies and procedures
reasonably designed to prevent violations of the Act and the rules of
the Commission;
(4) Taking reasonable steps to ensure compliance with the Act and
the rules of the Commission;
(5) Establishing procedures reasonably designed to handle, respond,
remediate, retest, and resolve noncompliance issues identified by the
chief compliance officer through any means, including any compliance
office review, look-back, internal or external audit finding, self-
reported error, or validated complaint;
(6) Establishing and administering a compliance manual designed to
promote compliance with the applicable laws, rules, and regulations and
a written code of ethics for the security-based swap execution facility
designed to prevent ethical violations and to promote honesty and
ethical conduct by personnel of the security-based swap execution
facility;
(7) Supervising the regulatory program of the security-based swap
execution facility with respect to trade practice surveillance; market
surveillance; real-time market monitoring; compliance with audit trail
requirements; enforcement and disciplinary proceedings; audits,
examinations, and other regulatory responsibilities (including taking
reasonable steps to ensure compliance with, if applicable, financial
integrity, financial reporting, sales practice, recordkeeping, and
other requirements); and
(8) Supervising the effectiveness and sufficiency of any regulatory
services provided to the security-based swap execution facility by a
regulatory service provider in accordance with Sec. 242.819(e).
(i) Preparation of annual compliance report. The chief compliance
officer shall, not less than annually, prepare and sign an annual
compliance report that covers the prior fiscal year. The report shall,
at a minimum, contain:
[[Page 29001]]
(1) A description and self-assessment of the effectiveness of the
written policies and procedures of the security-based swap execution
facility, including the code of ethics and conflict of interest
policies, to reasonably ensure compliance with the Act and applicable
Commission rules;
(2) Any material changes made to compliance policies and procedures
during the coverage period for the report and any areas of improvement
or recommended changes to the compliance program;
(3) A description of the financial, managerial, and operational
resources set aside for compliance with the Act and applicable
Commission rules;
(4) Any material non-compliance matters identified and an
explanation of the corresponding action taken to resolve such non-
compliance matters; and
(5) A certification by the chief compliance officer that, to the
best of their knowledge and reasonable belief, and under penalty of
law, the annual compliance report is accurate and complete in all
material respects.
(j) Submission of annual compliance report and related matters--(1)
Furnishing the annual compliance report prior to submission to the
Commission. Prior to submission to the Commission, the chief compliance
officer shall provide the annual compliance report for review to the
governing board or, in the absence of a governing board, to the senior
officer. Members of the governing board and the senior officer shall
not require the chief compliance officer to make any changes to the
report.
(2) Submission of annual compliance report to the Commission. The
annual compliance report shall be submitted electronically to the
Commission using the EDGAR system as an Interactive Data File in
accordance with Sec. 232.405 not later than 90 calendar days after the
end of the security-based swap execution facility's fiscal year. The
security-based swap execution facility shall concurrently file the
annual compliance report with the fourth-quarter financial report
pursuant to Sec. 242.829(g).
(3) Amendments to annual compliance report. (i) Promptly upon
discovery of any material error or omission made in a previously filed
annual compliance report, the chief compliance officer shall file an
amendment with the Commission to correct the material error or
omission. The chief compliance officer shall submit the amended annual
compliance report to the governing board, or in the absence of a
governing board, to the senior officer, pursuant to paragraph (j)(1) of
this section.
(ii) An amendment shall contain the certification required under
paragraph (i)(5) of this section.
(4) Request for extension. A security-based swap execution facility
may request an extension of time to file its annual compliance report
from the Commission. Reasonable and valid requests for extensions of
the filing deadline may be granted at the discretion of the Commission.
(k) Recordkeeping. A security-based swap execution facility shall
maintain all records demonstrating compliance with the duties of the
chief compliance officer and the preparation and submission of annual
compliance reports consistent with Core Principle 9 and Sec. 242.826.
Sec. 242.832 Application of the trade execution requirement to
cross-border security-based swap transactions.
(a) The trade execution requirement set forth in section 3C(h) of
the Act shall not apply in connection with a security-based swap unless
at least one counterparty to the security-based swap is a ``covered
person'' as defined below in paragraph (b) of this rule.
(b) A ``covered person'' means, with respect to a particular
security-based swap, any person that is:
(1) A U.S. person;
(2) A non-U.S. person whose performance under a security-based swap
is guaranteed by a U.S. person; or
(3) A non-U.S. person who, in connection with its security-based
swap dealing activity, uses U.S. personnel located in a U.S. branch or
office, or personnel of an agent of such non-U.S. person located in a
U.S. branch or office, to arrange, negotiate, or execute a transaction.
Sec. 242.833 Cross-border exemptions.
(a) Exemptions for foreign trading venues for security-based swaps.
An application for an order for exemptive relief under section 36(a)(1)
of the Act (15 U.S.C. 78mm(a)(1)) relating to the registration status
under the Act of a foreign trading venue for security-based swaps that
has one or more members who are covered persons, as defined in Sec.
242.832, with respect to security-based swaps transacted on that venue
may state that the application also is submitted pursuant to this
paragraph (a). In such case, the Commission will consider the
submission as an application to exempt the foreign trading venue, with
respect to its providing a market place for security-based swaps, from:
(1) The definition of ``exchange'' in section 3(a)(1) of the Act
(15 U.S.C. 78c(a)(1));
(2) The definition of ``security-based swap execution facility'' in
section 3(a)(77) of the Act (15 U.S.C. 78c(a)(77));
(3) The definition of ``broker'' in section 3(a)(4) of the Act (15
U.S.C. 78c(a)(4)); and
(4) Section 3D(a)(1) of the Act (15 U.S.C. 78c-4(a)(1)).
(b) Exemptions relating to the trade execution requirement. (1) An
application for an order for exemptive relief under section 36(a)(1) of
the Act (15 U.S.C. 78mm(a)(1)) relating to the application of the trade
execution requirement in section 3C(h) of the Act (15 U.S.C. 78c-3(h))
to security-based swaps executed on a foreign trading venue, may state
that the application also is submitted pursuant to this paragraph (b).
(2) When considering an application under section 36 of the Act (15
U.S.C. 78mm) and this paragraph (b), the Commission may consider:
(i) The extent to which the security-based swaps traded in the
foreign jurisdiction covered by the request are subject to a trade
execution requirement comparable to that in section 3C(h) of the Act
(15 U.S.C. 78c-3(h)) and the Commission's rules thereunder;
(ii) The extent to which trading venues in the foreign jurisdiction
covered by the request are subject to regulation and supervision
comparable to that under the Act, including section 3D of the Act (15
U.S.C. 78c-4), and the Commission's rules thereunder;
(iii) Whether the foreign trading venue or venues where covered
persons, as defined in Sec. 242.832, intend to trade security-based
swaps have received an exemption order contemplated by paragraph (a) of
this section; and
(iv) Any other factor that the Commission believes is relevant for
assessing whether the exemption is in the public interest and
consistent with the protection of investors.
Sec. 242.834 Mitigation of conflicts of interest of security-based
swap execution facilities and certain exchanges.
(a) For purposes of this section:
Family relationship of a person means the person's spouse, former
spouse, parent, step-parent, child, step-child, sibling, step-brother,
step-sister, grandparent, grandchild, uncle, aunt, nephew, niece, or
in-law.
Major disciplinary committee means a committee of persons who are
authorized by a security-based swap execution facility to conduct
disciplinary hearings, to settle disciplinary charges, to impose
[[Page 29002]]
disciplinary sanctions, or to hear appeals thereof in cases involving
any violation of the rules of the security-based swap execution
facility except those which:
(i) Are related to decorum or attire, financial requirements, or
reporting or recordkeeping; and
(ii) Do not involve fraud, deceit, or conversion.
Member's affiliated firm is a firm in which the member is a
principal or an employee.
Named party in interest means a person or entity that is identified
by name as a subject of any matter being considered by a governing
board, disciplinary committee, or oversight panel.
Significant action includes any of the following types of actions
or rule changes by a security-based swap execution facility or SBS
exchange that can be implemented without the Commission's prior
approval:
(i) Any actions or rule changes which address an emergency; and
(ii) Any changes in margin levels that are designed to respond to
extraordinary market conditions such as an actual or attempted corner,
squeeze, congestion, or undue concentration of positions, or that
otherwise are likely to have a substantial effect on prices in any
contract traded or cleared at such security-based swap execution
facility or SBS exchange; but does not include any rule not submitted
for prior Commission approval because such rule is unrelated to the
terms and conditions of any security-based swap traded at such
security-based swap execution facility or SBS exchange.
(b) Each security-based swap execution facility and SBS exchange
shall not permit any of its members, either alone or together with any
officer, principal, or employee of the member, to:
(1) Own, directly or indirectly, 20 percent or more of any class of
voting securities or of other voting interest in the security-based
swap execution facility or SBS exchange; or
(2) Directly or indirectly vote, cause the voting of, or give any
consent or proxy with respect to the voting of, any interest that
exceeds 20 percent of the voting power of any class of securities or of
other ownership interest in the security-based swap execution facility
or SBS exchange.
(c) The rules of each security-based swap execution facility and
SBS exchange must be reasonably designed, and have an effective
mechanism, to:
(1) Deny effect to the portion of any voting interest held by a
member in excess of the limitations in paragraph (b) of this section;
(2) Compel a member who possesses a voting interest in excess of
the limitations in paragraph (a) of this section to divest enough of
that voting interest to come within those limitations; and
(3) Obtain information relating to its ownership and voting
interests owned or controlled, directly or indirectly, by its members.
(d) Each security-based swap execution facility and SBS exchange
shall ensure that its disciplinary processes preclude any member, or
group or class of its members, from dominating or exercising
disproportionate influence on the disciplinary process. Each major
disciplinary committee or hearing panel thereof shall include
sufficient different groups or classes of its members so as to ensure
fairness and to prevent special treatment or preference for any person
or member in the conduct of the responsibilities of the committee or
panel.
(e) Each security-based swap execution facility and SBS exchange
shall ensure that:
(1) 20 percent or more of the persons who are eligible to vote
routinely on matters being considered by the governing board (excluding
those members who are eligible to vote only in the case of a tie vote
by the governing board) are:
(i) Knowledgeable of security-based swap trading or financial
regulation, or otherwise capable of contributing to governing board
deliberations;
(ii) Not members of the security-based swap execution facility or
SBS exchange;
(iii) Not salaried employees of the security-based swap execution
facility or SBS exchange;
(iv) Not primarily performing services for the security-based swap
execution facility or SBS exchange in a capacity other than as a member
of the governing board; and
(v) Not officers, principals, or employees of a firm which holds a
membership at the security-based swap execution facility or SBS
exchange, either in its own name or through an employee on behalf of
the firm; and
(2) The membership of the governing board includes a diversity of
groups or classes of its members. The security-based swap execution
facility or SBS exchange must be able to demonstrate that the board
membership fairly represents the diversity of interests at such
security-based swap execution facility or SBS exchange and is otherwise
consistent with the composition requirements of this section.
(f) Providing information about the board to the Commission. Each
security-based swap execution facility and SBS exchange shall submit to
the Commission, within 30 days after each governing board election, a
list of the governing board's members, the groups or classes of its
members that they represent, and how the composition of the governing
board otherwise meets the requirements of this section.
(g) Voting by interested members of governing boards and various
committees of security-based swap execution facilities and SBS
exchanges--(1) Rules required. Each security-based swap execution
facility and SBS exchange shall maintain in effect rules to address the
avoidance of conflicts of interest in the execution of its regulatory
functions. Such rules must provide for the following:
(i) Relationship with named party in interest--(A) Nature of
relationship. A member of a governing board, disciplinary committee, or
oversight panel of a security-based swap execution facility or SBS
exchange must abstain from such body's deliberations and voting on any
matter involving a named party in interest where such member:
(1) Is a named party in interest;
(2) Is an employer, employee, or fellow employee of a named party
in interest;
(3) Has any other significant, ongoing business relationship with a
named party in interest, not including relationships limited to
executing security-based swaps opposite of each other or to clearing
security-based swaps through the same clearing member; or
(4) Has a family relationship with a named party in interest.
(B) Disclosure of relationship. Prior to the consideration of any
matter involving a named party in interest, each member of a governing
board, disciplinary committee, or oversight panel of a security-based
swap execution facility or SBS exchange must disclose to the
appropriate staff of the security-based swap execution facility or SBS
exchange whether they have one of the relationships listed in paragraph
(g)(1)(i)(A) of this section with a named party in interest.
(C) Procedure for determination. Each security-based swap execution
facility and SBS exchange must establish procedures for determining
whether any member of its governing board, disciplinary committees, or
oversight committees is subject to a conflicts restriction in any
matter involving a
[[Page 29003]]
named party in interest. Taking into consideration the exigency of the
committee action, such determinations should be based upon:
(1) Information provided by the member pursuant to paragraph
(g)(1)(i)(B) of this section; and
(2) Any other source of information that is held by and reasonably
available to the security-based swap execution facility or SBS
exchange.
(ii) Financial interest in a significant action--(A) Nature of
interest. A member of the governing board, disciplinary committee, or
oversight panel of a security-based swap execution facility or SBS
exchange must abstain from such body's deliberations and voting on any
significant action if the member knowingly has a direct and substantial
financial interest in the result of the vote based upon either exchange
or non-exchange positions that could reasonably be expected to be
affected by the action.
(B) Disclosure of interest. Prior to the consideration of any
significant action, each member of a governing board, disciplinary
committee, or oversight panel of a security-based swap execution
facility or SBS exchange must disclose to the appropriate staff of the
security-based swap execution facility or SBS exchange the position
information referred to in paragraph (g)(1)(ii)(C) of this section that
is known to them. This requirement does not apply to members who choose
to abstain from deliberations and voting on the subject significant
action.
(C) Procedure for determination. Each security-based swap execution
facility and SBS exchange must establish procedures for determining
whether any member of its governing board, disciplinary committees, or
oversight committees is subject to a conflicts restriction under this
section in any significant action. Such determination must include a
review of any positions, whether maintained at that security-based swap
execution facility, SBS exchange, or elsewhere, held in the member's
personal accounts or the proprietary accounts of the member's
affiliated firm that the security-based swap execution facility or SBS
exchange reasonably expects could be affected by the significant
action.
(D) Bases for determination. Taking into consideration the exigency
of the significant action, such determinations should be based upon:
(1) Information provided by the member with respect to positions
pursuant to paragraph (f)(2)(ii)(B) of this section; and
(2) Any other source of information that is held by and reasonably
available to the security-based swap execution facility or SBS
exchange.
(iii) Participation in deliberations. (A) Under the rules required
by this section, a governing board, disciplinary committee, or
oversight panel of a security-based swap execution facility or SBS
exchange may permit a member to participate in deliberations prior to a
vote on a significant action for which they otherwise would be required
to abstain, pursuant to paragraph (g)(1)(ii) of this section, if such
participation would be consistent with the public interest and the
member recuses from voting on such action.
(B) In making a determination as to whether to permit a member to
participate in deliberations on a significant action for which they
otherwise would be required to abstain, the deliberating body shall
consider the following factors:
(1) Whether the member's participation in deliberations is
necessary for the deliberating body to achieve a quorum in the matter;
and
(2) Whether the member has unique or special expertise, knowledge,
or experience in the matter under consideration.
(C) Prior to any determination pursuant to paragraph (g)(1)(iii)(A)
of this section, the deliberating body must fully consider the position
information which is the basis for the member's direct and substantial
financial interest in the result of a vote on a significant action
pursuant to paragraph (g)(1)(ii) of this section.
(iv) Documentation of determination. The governing boards,
disciplinary committees, and oversight panels of each security-based
swap execution facility and SBS exchange must reflect in their minutes
or otherwise document that the conflicts determination procedures
required by this section have been followed. Such records also must
include:
(A) The names of all members who attended the meeting in person or
who otherwise were present by electronic means;
(B) The name of any members who voluntarily recused themselves or
were required to abstain from deliberations and/or voting on a matter
and the reason for the recusal or abstention, if stated; and
(C) Information on the position information that was reviewed for
each member.
(h) Rules required. (1) A security-based swap execution facility
shall maintain in effect rules to comply with this section that have
been submitted to the Commission pursuant to Sec. 242.806 or Sec.
242.807.
(2) An SBS exchange shall maintain in effect rules to comply with
this section that have been submitted to the Commission pursuant to
Sec. 240.19b-4 of this chapter.
Sec. 242.835 Notice to Commission by security-based swap execution
facility of final disciplinary action or denial or limitation of
access.
(a) If a security-based swap execution facility issues a final
disciplinary action against a member, or takes final action with
respect to a denial or conditioning membership, or takes final action
with respect to a denial or limitation of access of a person to any
services offered by the security-based swap execution facility, the
security-based swap execution facility shall file a notice of such
action with the Commission within 30 days and serve a copy on the
affected person.
(b) For purposes of paragraph (a) of this section:
(1) A disciplinary action shall not be considered ``final'' unless:
(i) The affected person has sought an adjudication or hearing with
respect to the matter, or otherwise exhausted their administrative
remedies at the security-based swap execution facility; and
(ii) The disciplinary action is not a summary action permitted
under Sec. 242.819(g)(13)(ii).
(2) A disposition of a matter with respect to a denial or
conditioning of membership, or a denial or limitation of access shall
not be considered ``final'' unless such person has sought an
adjudication or hearing, or otherwise exhausted their administrative
remedies at the security-based swap execution facility with respect to
such matter.
(c) A notice required by paragraph (a) of this section shall
provide the following information:
(1) The name of the member and its last known address, as reflected
in the security-based swap execution facility's records;
(2) The name of the person, committee, or other organizational unit
of the security-based swap execution facility that initiated the
disciplinary action or access restriction;
(3) In the case of a final disciplinary action:
(i) A description of the acts or practices, or omissions to act,
upon which the sanction is based, including, as appropriate, the
specific rules that the security-based swap execution facility has
found to have been violated;
(ii) A statement describing the respondent's answer to the charges;
and
(iii) A statement of the sanction imposed and the reasons therefor;
(4) In the case of a final action with respect to a denial or
conditioning of
[[Page 29004]]
membership, or a denial or limitation of access:
(i) The financial or operating difficulty of the member or
prospective member (as the case may be) upon which the security-based
swap execution facility determined that the member or prospective
member could not be permitted to do, or continue to do, business with
safety to investors, creditors, other members, or the security-based
swap execution facility;
(ii) The pertinent failure to meet qualification requirements or
other prerequisites for membership or access and the basis upon which
the security-based swap execution facility determined that the person
concerned could not be permitted to have membership or access with
safety to investors, creditors, other members, or the security-based
swap execution facility; or
(iii) The default of any delivery of funds or securities to a
clearing agency by the member;
(5) The effective date of the final disciplinary action, or final
action with respect to a denial or conditioning of membership, or a
denial or limitation of access; and
(6) Any other information that the security-based swap execution
facility may deem relevant.
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
18. The general authority citation for part 249 continues to read in
part as follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C.
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111-203, 124
Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309 (2012);
Sec. 107, Pub. L. 112-106, 126 Stat. 313 (2012), Sec. 72001, Pub. L.
114-94, 129 Stat. 1312 (2015), and secs. 2 and 3, Pub. L. 116-222,
134 Stat. 1063 (2020), unless otherwise noted.
* * * * *
0
19. Add Sec. 249.2001 to read as follows:
Sec. 249.2001 Form SBSEF, for application for registration as a
security-based swap execution facility or to amend such application or
registration.
This form shall be used for application for registration as a
security-based swap execution facility, pursuant to section 3D of the
Securities Exchange Act of 1934 (15 U.S.C. 78c-4) and Sec. 242.803 of
this chapter, or to amend such application or registration.
By the Commission.
Dated: April 6, 2022.
Vanessa A. Countryman,
Secretary.
Appendix A
Note: Form SBSEF will not appear in the Code of Federal
Regulations.
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Appendix B
0
19. Add Sec. 249.2002 to read as follows:
Sec. 249.2002 Submission cover sheet, for rule and product
submissions.
This submission cover sheet shall be used by registered security-
based swap execution facilities for making submissions pursuant to
Rules 804 through 807, 809, and 816 (Sec. 242.804 through 242.807,
242.809, and 242.816).
Note: The submission cover sheet will not appear in the Code of
Federal Regulations.
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[FR Doc. 2022-07850 Filed 5-10-22; 8:45 am]
BILLING CODE 8011-01-C