# Conformed to Federal Register version > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3A8c8bccd72f6e27d3 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text Conformed to Federal Register version SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 200, 201, 232, 240, 242, and 249 [Release No. 34-98845; File No. S7-14-22] RIN 3235-AK93 Security-Based Swap Execution and Registration and Regulation of Security-Based Swap Execution Facilities AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: The Securities and Exchange Commission (“SEC” or “Commission”) is adopting a set of rules and forms under the Securities Exchange Act of 1934 (“SEA”) that would create a regime for the registration and regulation of security-based swap execution facilities (“SBSEFs”) and address other issues relating to security-based swap (“SBS”) execution generally. One of the rules being adopted implements an element of the Dodd-Frank Act that is intended to mitigate conflicts of interest at SBSEFs and national securities exchanges that trade SBS (“SBS exchanges”). Other rules being adopted address the cross-border application of the SEA’s trading venue registration requirements and the trade execution requirement for SBS. In addition, the Commission is amending an existing rule to exempt, from the SEA definition of “exchange,” certain registered clearing agencies, as well as registered SBSEFs that provide a market place only for SBS. The Commission is also adopting a new rule that, while affirming that an SBSEF would be a broker under the SEA, exempts a registered SBSEF from certain broker requirements. Further, the Commission is adopting certain new rules and amendments to its Rules of Practice to allow persons who are aggrieved by certain actions by an SBSEF to apply for review by the Commission. Finally, the Commission is delegating new authority to the Director of the Division of Trading and Markets and to the General Counsel to take actions necessary to carry out the rules being adopted. DATES: Effective date: February 13, 2024. Compliance dates: See section XVI (Compliance Schedule). FOR FURTHER INFORMATION CONTACT: Michael E. Coe, Assistant Director; David Liu, Special Counsel; Leah Mesfin, Special Counsel; Michou Nguyen, Special Counsel; or Geoffrey Pemble, Special Counsel, at (202) 551-5000, Office of Market Supervision, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: The Commission is adopting new 17 CFR 242.800 through 242.835 (“Regulation SE”) to create a regime for the registration and regulation of SBSEFs and to address other issues relating to SBS execution generally. Regulation SE consists of 17 CFR 242.800 through 242.835 (Rules 800 through 835). Key rules within Regulation SE include Rule 803, which establishes a process for SBSEF registration; Rules 804 to 810, which establish procedures for rule and product filings by SBSEFs; Rule 815, which establishes permissible execution methods for SBS that are subject to the SEA’s trade execution requirement; Rule 816, which sets out a procedure for SBSEFs to make an SBS available to trade and establish certain exemptions from the trade execution requirement; Rules 818 to 831, which implement the 14 Core Principles for SBSEFs set forth in section 3D(d) of the SEA; Rules 832 to 833, which address cross-border matters; and Rule 834, which imposes requirements addressing conflicts of interest involving SBSEFs and SBS exchanges, as required by section 765 of the Dodd-Frank Act. 2 In addition to the rules described above, the Commission is also adopting 17 CFR 249.1701 (Form SBSEF), which is the form that an entity will use to register with the Commission as an SBSEF; 17 CFR 249.1702 (a submission cover sheet), which will be required to accompany filings with the Commission made by SBSEFs for rule and rule amendments and for product listings; adopting amendments to 17 CFR 232.405 (Rule 405 of Regulation S-T) to require various SBSEF filings to be provided in Inline eXtensible Business Reporting Language (“Inline XBRL”), a structured data language; adopting amendments to 17 CFR 240.3a1-1 (Rule 3a1-1) to exempt from the SEA definition of “exchange” certain registered clearing agencies, as well as registered SBSEFs that provide a market place only for SBS; adopting 17 CFR 240.15a-12 (Rule 15a-12), which, while affirming that an SBSEF would also be a broker under the SEA, exempts a registered SBSEF from certain broker requirements; providing for the sunset of existing temporary exemptions from the requirement to register as a clearing agency that, among other things, applies to an entity performing the functions of an SBSEF but that is not yet registered as such, and from the requirement to register as an SBSEF or a national securities exchange for entities that meet the statutory definition of SBSEF; adopting certain new rules and amendments to 17 CFR Part 201 (Rules of Practice) to allow persons who are aggrieved by certain actions by an SBSEF to apply for review by the Commission; and adopting amendments to 17 CFR 200.30-3 and 17 CFR 200.30-14 regarding delegations of authority to the Director of the Division of Trading and Markets and to the General Counsel. Table of Contents I. Background ......................................................................................................................... 8 II. Introductory Provisions of Regulation SE ........................................................................ 15 A. Rule 800—Scope .................................................................................................. 15 3 III. IV. B. Rule 801—Applicable Provisions......................................................................... 15 C. Rule 802—Definitions .......................................................................................... 16 Registration of SBSEFs .................................................................................................... 18 A. Rule 803—Requirements and Procedures for Registration .................................. 19 B. Form SBSEF ......................................................................................................... 32 Rule and Product Filings by SBSEFs ............................................................................... 35 A. Rule 804—Listing Products for Trading by Certification .................................... 36 B. Rule 805—Voluntary Submission of New Products for Commission Review and Approval ......................................................................................................... 46 C. Rule 806—Voluntary Submission of Rules for Commission Review and Approval ............................................................................................................... 50 D. Rule 807—Self-Certification of Rules.................................................................. 53 E. Submission Cover Sheet and Instructions............................................................. 62 F. Rule 808—Availability of Public Information ..................................................... 65 G. Rule 809—Staying of Certification and Tolling of Review Period Pending Jurisdictional Determination ................................................................................. 67 H. Rule 810—Product Filings by SBSEFs That Are Not Yet Registered and by Dormant SBSEFs .................................................................................................. 69 V. Miscellaneous Requirements ............................................................................................ 69 A. Rule 811—Information Relating to SBSEF Compliance ..................................... 69 B. Rule 812—Enforceability ..................................................................................... 73 C. Rule 813—Prohibited Use of Data Collected for Regulatory Purposes ............... 77 4 D. Rule 814—Entity Operating Both a National Securities Exchange and an SBSEF .............................................................................................................. 77 VI. VII. E. Rule 815—Methods of Execution for Required and Permitted Transactions ...... 79 F. Rule 816—Trade Execution Requirement and Exemptions Therefrom ............. 119 G. Rule 817—Trade Execution Compliance Schedule ........................................... 140 Implementation of Core Principles ................................................................................. 144 A. Rule 818—Core Principle 1—Compliance with Core Principles....................... 145 B. Rule 819—Core Principle 2—Compliance with Rules ...................................... 145 C. Rule 820—Core Principle 3—SBS Not Readily Susceptible to Manipulation .. 173 D. Rule 821—Core Principle 4—Monitoring of Trading and Trade Processing .... 173 E. Rule 822—Core Principle 5—Ability to Obtain Information ............................ 175 F. Rule 823—Core Principle 6—Financial Integrity of Transactions .................... 176 G. Rule 824—Core Principle 7—Emergency Authority ......................................... 181 H. Rule 825—Core Principle 8—Timely Publication of Trading Information ....... 183 I. Rule 826—Core Principle 9—Recordkeeping and Reporting ............................ 195 J. Rule 827—Core Principle 10—Antitrust Considerations................................... 198 K. Rule 828—Core Principle 11—Conflicts of Interest .......................................... 199 L. Rule 829—Core Principle 12—Financial Resources ......................................... 200 M. Rule 830—Core Principle 13—System Safeguards ........................................... 207 N. Rule 831—Core Principle 14—Designation of Chief Compliance Officer ....... 210 Cross-Border Rules ......................................................................................................... 213 A. Rule 832—Cross-border Mandatory Trade Execution ....................................... 213 5 B. Rule 833—Cross-border Exemptions for Foreign Trading Venues and Relating to the Trade Execution Requirement .................................................... 228 VIII. Rule 834—Implementation of Section 765 of the Dodd-Frank Act and Governance of SBSEFs and SBS Exchanges ...................................................................................... 242 IX. A. Rule 834(a).......................................................................................................... 244 B. Rule 834(b) ......................................................................................................... 244 C. Rule 834(c).......................................................................................................... 252 D. Rule 834(d) ......................................................................................................... 253 E. Rule 834(e).......................................................................................................... 254 F. Rule 834(f) .......................................................................................................... 255 G. Rule 834(g) ......................................................................................................... 255 H. Rule 834(h) ......................................................................................................... 257 Rule 835—Notice to Commission by SBSEF of Final Disciplinary Action, Denial or Conditioning of Membership, or Denial or Limitation of Access .................................. 257 X. Amendments to Existing Rule 3a1-1 under the SEA-Exemptions from the Definition of “Exchange” ................................................................................................................. 260 XI. Rule 15a-12—SBSEFs as Registered Brokers; Relief from Certain Broker Requirements .................................................................................................................. 265 XII. Termination of Temporary Exemptions.......................................................................... 269 XIII. Electronic Filings under Regulation SE.......................................................................... 273 A. Use of Electronic Filing Systems and Structured Data ....................................... 273 B. Use of Identifiers................................................................................................. 282 XIV. Amendments to Commission’s Rules of Practice for Appeals of SBSEF Actions ........ 285 6 XV. A. Amendment to Rule 101 ..................................................................................... 286 B. Amendment to Rule 202 ..................................................................................... 286 C. Amendment to Rule 210 ..................................................................................... 287 D. Amendment to Rule 401 ..................................................................................... 288 E. Rule 442—Right to Appeal ................................................................................ 289 F. Rule 443—Sua sponte Review by Commission ................................................. 291 G. Amendment to Rule 450 ..................................................................................... 292 H. Amendment to Rule 460 ..................................................................................... 292 Amendments to Delegations of Authority in Rule 30-3 and Rule 30-14 ....................... 293 A. Delegated Authority Related to SBSEF Registration and Form SBSEF ............ 295 B. Delegated Authority Related to New Products Proposed by an SBSEF ............ 296 C. Delegated Authority Related to New Rules or Rule Amendments Proposed by an SBSEF ....................................................................................................... 297 D. Delegated Authority Related to Request for Joint Interpretation ....................... 298 E. Delegated Authority Related to SBSEF Submissions Contemplated by Rule 811 .............................................................................................................. 298 F. Delegated Authority Related to Information Sharing ......................................... 299 G. Delegated Authority Related to Commission Review Proceedings ................... 300 XVI. Compliance Schedule...................................................................................................... 300 XVII. Economic Analysis ......................................................................................................... 305 A. Introduction ......................................................................................................... 305 B. Economic Baseline.............................................................................................. 307 C. Benefits and Costs............................................................................................... 335 7 D. Effects on Efficiency, Competition, and Capital Formation............................... 381 E. Reasonable Alternatives...................................................................................... 386 XVIII. Paperwork Reduction Act ............................................................................................... 401 A. Summary of collection of information................................................................ 402 B. Proposed use of information ............................................................................... 409 C. Respondents ........................................................................................................ 413 D. Total Annual Reporting and Recordkeeping Burden.......................................... 415 E. Collection of Information is Mandatory ............................................................. 436 F. Responses to Collection of Information Will Not Be Confidential .................... 436 G. Retention Period of Recordkeeping Requirements ............................................. 437 XIX. Regulatory Flexibility Certification ................................................................................ 437 A. SBSEFs ............................................................................................................... 438 B. Persons Requesting an Exemption Order Pursuant to Rule 833 ......................... 439 C. SBS Exchanges ................................................................................................... 440 D. Certification ........................................................................................................ 441 XX. Other Matters .................................................................................................................. 441 I. BACKGROUND The Commission is adopting Regulation SE,1 which governs the registration and regulation of SBSEFs, as required by section 3D of the SEA. 2 Section 3D was enacted as part of 1 The Commission proposed Regulation SE on Apr. 6, 2022. See Rules Relating to Security-Based Swap Execution and Registration and Regulation of Security-Based Swap Execution Facilities (Proposed Rule), SEA Release No. 94615 (Apr. 6, 2022), 87 FR 28872 (May 11, 2022) (“Proposing Release”). 2 15 U.S.C. 78c-4. In this release, the Commission is defining the Securities Exchange Act as the “SEA” to distinguish it from the Commodity Exchange Act (“CEA”). 8 Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). 3 The Dodd-Frank Act was enacted, among other reasons, to promote the financial stability of the United States by improving accountability and transparency in the financial system. 4 The 2008 financial crisis highlighted significant issues in the over-the-counter (“OTC”) derivatives markets, which experienced dramatic growth in the years leading up to the financial crisis and are capable of affecting significant sectors of the U.S. economy. Section 3D(a)(1) of the SEA provides that no person may operate a facility for the trading or processing of SBS unless the facility is registered as an SBSEF or as a national securities exchange. Section 3D(d) enumerates 14 Core Principles with which SBSEFs must comply. 5 And section 3D(f) requires the Commission to prescribe rules governing the regulation of SBSEFs. In addition, section 765 of the Dodd-Frank Act directs the Commission to adopt rules to mitigate conflicts of interest with respect to clearing agencies that clear SBS (“SBS clearing agencies”), SBSEFs, and national securities exchanges that post or make available for trading SBS (“SBS exchanges”). On April 6, 2022, the Commission proposed Regulation SE, relating to the registration and regulation of SBSEFs and to SBS execution generally. 6 As discussed in the Proposing Release, the proposed rules superseded previous Commission proposals on these subjects. 7 3 Pub. L. No. 111-203, H.R. 4173, sec. 763(c). 4 See Pub. L. No. 111-203 Preamble. 5 See infra section VI (listing the Core Principles). 6 See Proposing Release, supra note 1. In 2011, the Commission published for comment proposed Regulation SBSEF relating to, among other things, the registration and regulation of SBSEFs. Registration and Regulation of Security-Based Swap Execution Facilities, SEA Release No. 63825 (Feb. 2, 2011), 76 FR 10948 (Feb. 28, 2011) (“2011 SBSEF Proposal”). The Proposing Release, which contains a more detailed discussion of that and related proposals, withdrew the 2011 SBSEF Proposal. See Proposing Release, 87 FR at 28874. 7 See Proposing Release, supra note 1, 87 FR at 28874. However, Rule 834 of proposed Regulation SE would implement section 765 only with respect to SBSEFs and SBS exchanges. See infra section VIII. 9 The SBS market is closely related to the swaps market, which is regulated by the Commodity Futures Trading Commission (“CFTC”). 8 In June 2013, the CFTC adopted rules (in 17 CFR chapter I) under Title VII of the Dodd-Frank Act for swap execution facilities (“SEFs”). 9 The swaps market has grown and matured within the framework established by the CFTC’s rules. 10 As discussed in the Proposing Release, the SBS market is a small fraction of the overall swaps market, and the swaps market provides greater opportunities for revenue capture from swap execution as compared to SBS execution. 11 For example, as of November 25, 2022, the gross notional amount outstanding in the SBS market was approximately $8.5 trillion across the credit, equity, and interest rate asset classes, 12 while the gross notional amount outstanding in the swaps market was approximately $352 trillion across the interest rate, credit, and foreign- 8 In adopting Regulation SE, the Commission has consulted and coordinated with the CFTC and the prudential regulators, in accordance with the consultation mandate of the Dodd-Frank Act. Section 712(a)(2) of the Dodd-Frank Act provides in relevant part that the Commission shall “consult and coordinate to the extent possible with the Commodity Futures Trading Commission and the prudential regulators for the purposes of assuring regulatory consistency and comparability, to the extent possible.” In addition, section 752(a) of the Dodd-Frank Act provides in relevant part that “[i]n order to promote effective and consistent global regulation of swaps and security-based swaps, the Commodity Futures Trading Commission, the Securities and Exchange Commission, and the prudential regulators … as appropriate, shall consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards with respect to the regulation (including fees) of swaps.” The term “prudential regulator” is defined in section 1a(39) of the CEA, 7 U.S.C. 1a(39), and that definition is incorporated by reference in section 3(a)(74) of the SEA, 15 U.S.C. 78c(a)(74). 9 See CFTC, Core Principles and Other Requirements for Swap Execution Facilities, 78 FR 33476 (June 4, 2013) (“2013 CFTC Final SEF Rules Release”); CFTC, Process for a Designated Contract Market or Swap Execution Facility To Make a Swap Available to Trade, Swap Transaction Compliance and Implementation Schedule, and Trade Execution Requirement Under the Commodity Exchange Act, 78 FR 33606 (June 4, 2013) (“2013 CFTC Final MAT Rules Release”). 10 In 2018, the CFTC proposed to make fundamental changes to the SEF regulatory structure. See CFTC, Swap Execution Facilities and Trade Execution Requirement, 83 FR 61946 (Nov. 30, 2018) (“2018 SEF Proposal”). In 2021, the CFTC ultimately declined to finalize the 2018 SEF Proposal and elected instead “to improve the SEF framework through targeted rulemakings that address distinct issues.” Accordingly, the CFTC withdrew the unadopted portions of its 2018 proposal. See CFTC, Swap Execution Facilities and Trade Execution Requirement – Proposed rule; partial withdrawal, 86 FR 9304, 9304 (Feb. 12, 2021). 11 See Proposing Release, supra note 1, 87 FR at 28874–76. 12 See Report on Security-Based Swaps (Mar. 20, 2023), available at https://www.sec.gov/files/reportsecurity-based-swaps-032023.pdf. See also infra note 815 and accompanying text (discussing securitybased swap transactions data in the credit, equity, and interest rate derivatives asset classes reported by registered SBSDRs). 10 exchange asset classes. 13 The Commission was sensitive in the Proposing Release to the economic impact its proposed SBSEF rules could have. 14 In addition, the Commission recognized that the entities that are most likely to register with the Commission as SBSEFs are existing, CFTC-registered SEFs, which have already made substantial investments in systems, policies, and procedures to comply with and adapt to the regulatory system developed by the CFTC. Harmonization between the Commission’s SBSEF rules and the CFTC’s SEF rules could facilitate the ability of entities to dually register and minimize costs by allowing incumbent SEFs to use their existing systems, policies, and procedures to comply with the Commission’s SBSEF rules. 15 Thus, in proposing Regulation SE, the Commission took the general approach of harmonizing closely with analogous CFTC SEF rules, except where differences in the SEC’s statutory authority relative to the CFTC’s statutory authority, or differences in the SBS market relative to the swaps market, necessitated differences between the Commission’s rules and the CFTC’s, or where the benefits of deviating from the CFTC’s rules would otherwise justify the burdens and costs associated with imposing different or additional requirements than the corresponding CFTC rule. And the Commission sought public comment on this approach. 16 One commenter opposes this harmonization approach, and argues that it does not make sense to harmonize with the “looser” rules of SEFs, which he believes would allow “more fraud 13 See CFTC Swaps Report, available at https://www.cftc.gov/MarketReports/SwapsReports/L3Grossexp.html (accessed on Sept. 27, 2023). 14 See Proposing Release, supra note 1, 87 FR at 28875. 15 See Proposing Release, supra note 1, 87 FR at 28875. 16 The comment letters are available at https://www.sec.gov/comments/s7-14-22/s71422.htm. The Commission also received comments on topics outside the scope of the proposal that are not addressed in this release. See, e.g., Letter from Anonymous (Apr. 27, 2022) (discussing CFTC oversight and transparency); Letter from Anonymous (Apr. 20, 2022) (discussing securities financial transactions). 11 and false narratives to creep into the market,” and instead advocates that the Commission start from scratch with new rules. 17 Many other commenters, however, generally support this harmonization approach. 18 Many of these commenters echo the Commission’s rationale for harmonizing with the CFTC’s SEF rules, and state that such harmonization would minimize the compliance burden for dually registered entities. 19 Two of these commenters also state that the CFTC’s regulatory framework has been in place for almost a decade and has functioned well. 20 17 See Letter from Robert McLaughlin (Apr. 7, 2022). 18 See, e.g., Letter from Robert Laorno, General Counsel, ICE Swap Trade, LLC, to Vanessa A. Countryman, Secretary, Commission, at 1–2 (June 20, 2022) (“ICE Letter”); Letter from Stephen W. Hall, Legal Director and Securities Specialist, and Jason Grimes, Senior Counsel, Better Markets, Inc., to Vanessa A. Countryman, Secretary, Commission, at 9–11 (June 10, 2022) (“Better Markets Letter”); Letter from Derek J. Kleinbauer, Vice-President, Bloomberg SEF LLC, and Benjamin MacDonald, Global Head Enterprise Products, Bloomberg L.P., to Vanessa A. Countryman, Secretary, Commission, at 1–2 (June 10, 2022) (“Bloomberg Letter”); Letter from Bella Rosenberg, Senior Counsel and Head of Legal and Regulatory Practice Group, International Swaps and Derivatives Association, Inc., and Kyla Brandon, Managing Director, Head of Derivatives Policy, Securities Industry and Financial Markets Association, to Vanessa Countryman, Secretary, Commission, at 1–2 (June 10, 2022) (“ISDA-SIFMA Letter”); Letter from Sarah A. Bessin Associate General Counsel, and Nicholas Valderrama, Counsel, Investment Company Institute, at 1–2 (June 10, 2022) (“ICI Letter”); Letter from Elizabeth Kirby, Head of U.S. Market Structure, Tradeweb Markets Inc., to Vanessa A. Countryman, Secretary, Commission, at 1–2 (June 10, 2022) (“Tradeweb Letter”); Letter from Williams Shields, Chairman, Wholesale Markets Brokers’ Association, Americas, to Vanessa A. Countryman, Secretary, Commission, at 1–2 (June 10, 2022) (“WMBAA Letter”); Letter from Lindsey Weber Keljo, Head of SIFMA Asset Management Group, and William Thun, Associate General Counsel, SIFMA Asset Management Group, to Vanessa A. Countryman, Secretary, Commission, at 1–2 (June 10, 2022) (“SIFMA AMG Letter”); Letter from Jennifer W. Han, Chief Counsel & Head of Regulatory Affairs, Managed Funds Association, at 1–2 (June 10, 2022) (“MFA Letter”); Letter from Stephen John Berger, Global Head of Government & Regulatory Policy, Citadel and Citadel Securities (June 10, 2022) (“Citadel Letter”). While these commenters support the Commission’s general harmonization approach, they also provide specific recommendations on changes to the Commission’s Regulation SE proposal that they believe would improve the rules, as described in detail below in the sections discussing these individual rules. See infra sections II through XVII. 19 See, e.g., ICE Letter, supra note 18, at 1–2; ISDA-SIFMA Letter, supra note 18, at 1–2; ICI Letter, supra note 18, at 1–2; Tradeweb Letter, supra note 18, at 1–2; WMBAA Letter, supra note 18, at 1–2; MFA Letter, supra note 18, at 1. 20 See, e.g., ISDA-SIFMA Letter, supra note 18, at 1–2; SIFMA AMG Letter, supra note 18, at 1–2. 12 One commenter also supports the Commission’s decision and rationale in withdrawing proposed Regulation MC 21 and the Commission’s 2011 SBSEF Proposal. 22 The Commission disagrees with the comment that harmonizing with the CFTC approach would allow for more fraud and false narratives in the SBS markets. Standing up a formal regulatory framework for SBSEFs where none yet exists will provide greater accountability and oversight for the SBS market and should, contrary to this commenter’s views, serve to detect and deter abusive and manipulative trading practices by providing for a set of Commission rules that SBSEFs must adhere to in operating their platforms and by requiring SBSEFs to make filings with the Commission regarding the operation of their platforms and to make their rules publicly available, as described in detail in sections II through XVII below. Given the relative size of the SBS market as compared to the swaps market, the fact that the CFTC’s SEF regulation has been in place for many years now, and the cost efficiencies and reduced burdens that would result from harmonized rules for dually registered SEFs/SBSEFs, it is appropriate to generally harmonize the Commission’s SBSEF regulatory framework with the CFTC’s SEF regulatory framework. At the same time, where appropriate, adopted Regulation SE differs in certain targeted respects from the CFTC’s regulatory framework for SEFs. This includes areas where differences in the Commission’s statutory authority relative to the CFTC’s statutory authority or differences in the SBS market relative to the swaps market necessitate differences between the Commission’s rules and the CFTC’s, or where the benefits of deviating from the CFTC’s rules would otherwise justify the burdens and costs associated with imposing 21 Ownership Limitations and Governance Requirements for Security-Based Swap Clearing Agencies, Security-Based Swap Execution Facilities, and National Securities Exchanges With Respect to SecurityBased Swaps Under Regulation MC, SEA Release No. 63107 (Oct. 14, 2010), 75 FR 65882 (Oct. 26, 2010) (“Regulation MC Proposal”). 22 See Bloomberg Letter, supra note 18, at 2. 13 different or additional requirements than the corresponding CFTC rule. The specific approach to harmonization that the Commission has pursued, along with differences from CFTC’s regime for SEFs, are described in detail in sections II through XVII below. As discussed below, the Commission is modifying the proposed provisions of Regulation SE regarding the definition of “block trade,” 23 the treatment of package transactions, 24 the treatment of SBS transactions that are intended to be cleared but are not accepted for clearing by a registered clearing agency, 25 permitting SBSEFs to contract with designated contract markets (“DCMs”) to provide services to assist in complying with the SEA and Commission rules thereunder, 26 the content and timing of the Daily Market Data Report, 27 an exception to ownership and voting restrictions for SBSEFs, 28 the application of deadlines and standard of review for Commission review of SBSEF actions, 29 and the applicability of electronic filing and structured-data requirements with respect to specific SBSEF filings. 30 Otherwise, the rules of Regulation SE are generally being adopted as proposed, in some instances with minor or technical modifications, which are described in more detail below. 31 23 See infra section V.E.1(c). 24 See infra section V.E.4. 25 See infra section V.E.7. 26 See infra section VI.B.5. 27 See infra section VI.H. 28 See infra section VIII.B. 29 See infra section XIV.E. 30 See infra section XIII. 31 See infra note 32. 14 II. INTRODUCTORY PROVISIONS OF REGULATION SE A. Rule 800—Scope Proposed Rule 800 is based on 17 CFR 37.1, which provides that part 37 of the CFTC’s regulations applies to every SEF that is registered or applying to become registered as a SEF under section 5h of the CEA. Proposed Rule 800 would provide that the provisions of Regulation SE apply to every SBSEF that is registered or is applying to become registered as an SBSEF under section 3D of the SEA. The Commission received no comments on Proposed Rule 800 and is adopting Rule 800 as proposed, with minor technical modifications, 32 for the reasons stated in the Proposing Release. B. Rule 801—Applicable Provisions Proposed Rule 801 is based on § 37.2 of the CFTC’s rules, which provides that a SEF shall comply with the requirements of part 37 and all other applicable CFTC regulations, including 17 CFR 1.60 and part 9, and including any related definitions and cross-referenced sections. Proposed Rule 801 would require an SBSEF to comply with the requirements of Regulation SE and all other applicable Commission rules, including any related definitions and cross-referenced sections. The Commission did not receive any comments on Proposed Rule 801 and is adopting Rule 801 as proposed, with minor technical modifications. 33 32 In several instances, here and as noted below, the Commission has made technical modifications to the proposed regulatory text to conform cross-references in the regulatory text to the CFR to the required style, as well as to correct simple typographical errors. Here, the Commission has modified Rule 800 to change a reference from “[t]he provisions of this section” to “[t]he provisions of §§ 242.800 through 242.835.” In other instances, the Commission has added the words “of this section” to a CFR cross-reference to conform to the required form of citation. Other types of technical modifications, and any substantive modifications, are described below with respect to specific instances. 33 See id. 15 C. Rule 802—Definitions Proposed Rule 802 would set forth the definitions of terms that are used in multiple rules in proposed Regulation SE. The majority of these terms were adapted from the CFTC’s swaps rules. Other terms were taken from section 3 of the SEA 34 or from a Commission rule under the SEA. In particular, Proposed Rule 802 would define the term “security-based swap execution facility” by cross-referencing the definition of that term provided in section 3(a)(77) of the SEA, 35 but with one carve-out. An entity that is registered with the Commission as a clearing agency pursuant to section 17A of the SEA 36 and limits its SBSEF functions to operation of a trading session that is designed to further the accuracy of end-of-day valuations—i.e., a “forced trading session”—would be exempt from the definition of “security-based swap execution facility.” 37 Although the Commission received comments regarding the proper application of the proposed definitions with respect to registration requirements, discussed below in section III.A.2, 34 15 U.S.C. 78c. 35 15 U.S.C. 78c(a)(77). 36 15 U.S.C. 78q-1. 37 See Proposing Release, supra note 1, 87 FR at 28878. This provision codifies a series of exemptions granted by the Commission to SBS clearing agencies that operate “forced trading” sessions. See, e.g., Order Granting Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With Request on Behalf of ICE U.S. Trust LLC Related to Central Clearing of Credit Default Swaps, and Request for Comments, SEA Release No. 59527 (Mar. 6, 2009), 74 FR 10791, 10796 (Mar. 12, 2009) (providing, among other things, an exemption from sections 5 and 6 of the SEA because “ICE Trust will periodically require ICE Trust Participants to execute certain CDS trades at the applicable end-of-day settlement price. Requiring ICE Trust Participants to trade CDS periodically in this manner is designed to help ensure that such submitted prices reflect each ICE Trust Participant’s best assessment of the value of each of its open positions in Cleared CDS on a daily basis, thereby reducing risk by allowing ICE Trust to impose appropriate margin requirements”); Order Extending and Modifying Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With Request of Chicago Mercantile Exchange Inc. Related to Central Clearing of Credit Default Swaps, and Request for Comments, SEA Release No. 61164 (Dec. 14, 2009), 74 FR 67258, 67262 (Dec. 18, 2009) (providing, among other things, an exemption from sections 5 and 6 of the SEA because, “[a]s part of the CDS clearing process, CME will periodically require CDS clearing members to trade at prices generated by their indicative settlement prices where those indicative settlement prices generate crossed bids and offers, pursuant to CME’s price quality auction methodology”). 16 and the proposed amendments to Rule 3a1-1, discussed below in section X, the Commission did not receive comments suggesting a modification of the definitions themselves. The term “security-based swap execution facility” is defined directly in section 3(a)(77) of the SEA as “a trading system or platform in which multiple participants have the ability to execute or trade security-based swaps by accepting bids and offers made by multiple participants in the facility or system…,” 38 and it is appropriate to adopt the same definition in Rule 802, with a narrow exception to address certain activities of registered clearing agencies in furthering the accuracy of end-of-day valuations. 39 Specifically, it is necessary or appropriate in the public interest, and is consistent with the protection of investors, to exempt a registered clearing agency that utilizes a forced trading functionality for SBS from the definition of “security-based swap execution facility.” Such an entity will continue to be registered as a clearing agency and subject to the requirements of section 17A of the SEA. Furthermore, a registered clearing agency is a self-regulatory organization (“SRO”); therefore, all of its rules—including those governing the forced trading session—have to be submitted to the Commission pursuant to section 19 of the SEA. Therefore, codification of the exemption from the definitions of “exchange” and “security-based swap execution facility” preserves the status quo and eliminates a largely duplicative and unnecessary set of regulatory requirements. This exemption covers only the forced-trading functionality of an SBS clearing agency; any other exchange or SBSEF activity in which a clearing agency might 38 15 U.S.C. 78c(a)(77). 39 Because this exception for certain clearing agencies specifies “an entity that is registered with the Commission as a clearing agency pursuant to section 17A of the [SEA]” and meets other specified conditions, the exception would not be available to any exempt clearing agency. 17 engage could subject the clearing agency to the SEA provisions and the Commission’s rules thereunder applying to exchanges or SBSEFs. Proposed Rule 802 would have defined the term “block trade” to be an SBS transaction that, among other requirements, is an SBS based on a single credit instrument (or issuer of credit instruments) or a narrow-based index of credit instruments (or issuers of credit instruments) having a notional size of $5 million or greater. 40 The Commission received a number of comments on the proposed definition of “block trade.” These comments are discussed below in section V.E.1(c) relating to Rule 815(a), which specifies mandatory methods of execution for a Required Transaction that is not a block trade. As discussed in detail below in section V.E.1(c), the Commission is not adopting the proposed definition of “block trade.” 41 Therefore, the Commission is adopting Rule 802 as proposed, except for the definition of “block trade,” which it is reserving, and minor technical modifications. 42 III. REGISTRATION OF SBSEFS Section 3D(a)(1) of the SEA 43 provides that no person may operate a facility for the trading or processing of SBS 44 unless the facility is registered as an SBSEF or as a national securities exchange. After issuing the 2011 SBSEF Proposal, the Commission granted temporary 40 See Proposing Release, supra note 1, 87 FR at 28896, 28975. 41 Additionally, as discussed below, the Commission is removing the term “block trade” from the text of certain rules other than Rule 815(a), see infra sections VI.B.1 (Rule 819(a)(3)), V.B (Rule 812(b)), VI.B.4 (Rule 819(d)(1)), VI.H (Rule 825(c)(1)(i) and (ii)), and is adding language regarding future definition of “block trade” in Rule 825(c)(1)(iii). See infra section VI.H. 42 See supra note 32. The Commission has also replaced the term “SBSEF” with “security-based swap execution facility,” defined “SBS exchange” when the term is first used, added the words “of this definition of trading facility” to paragraph (2)(C)(ii) of the definition of “trading facility,” and moved the definition of “dormant security-based swap execution facility” so that it appears in alphabetical order. 43 15 U.S.C. 78c-4(a)(1). 44 The term “security-based swap” is defined in section 3(a)(68) of the SEA, 15 U.S.C. 78c(a)(68), to include, among other things, a swap that is based 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. 18 exemptions pursuant to section 36(a)(1) of the SEA 45 to entities that meet the definition of “security-based swap execution facility” from having to register with the Commission as an SBSEF or national securities exchange (“Temporary SBSEF Exemptions”). 46 According to their terms, the Temporary SBSEF Exemptions expire upon the earliest compliance date for the Commission’s final rules regarding SBSEF registration. 47 A. Rule 803—Requirements and Procedures for Registration 1. Summary of Proposed Rule 803 Proposed Rule 803 of Regulation SE is closely modeled on § 37.3 of the CFTC’s rules and would set forth a process for registration with the Commission as an SBSEF. Paragraph (a)(1) of Proposed Rule 803 would track the language of § 37.3(a)(1) closely, and would provide that any person operating a facility that offers a trading system or platform in which more than one market participant has the ability to execute or trade security-based swaps 45 15 U.S.C. 78mm(a)(1). 46 See SEA Release No. 64678 (June 15, 2011), 76 FR 36287 (June 22, 2011) (temporarily exempting entities that meet the definition of “security-based swap execution facility” from the requirement to register with the Commission as an SBSEF) (“June 2011 Exemptive Order”); SEA Release No. 64795 (July 1, 2011), 76 FR 39927 (July 7, 2011) (temporarily exempting entities that meet the definition of “security-based swap execution facility” from the restrictions and requirements of sections 5 and 6 of the SEA) (“July 2011 Exemptive Order”). An entity that meets the definition of “security-based swap execution facility” is required to register as an SBSEF under section 3D of the SEA or as an exchange under section 6 of the SEA. But because the Commission has not previously adopted final rules relating to SBSEFs, such entities have been unable to register with the Commission as SBSEFs. The Temporary SBSEF Exemptions have allowed such entities to continue trading SBS without needing to register either as SBSEFs or national securities exchanges before the compliance date of the SBSEF registration rules. 47 See June 2011 Exemptive Order, supra note 46, 76 FR at 36293, 36306; July 2011 Exemptive Order, supra note 46, 76 FR at 39934, 39939. The July 2011 Exemptive Order also provided an exemption from the broker registration requirements of section 15(a)(1) of the SEA, 15 U.S.C. 78o(a)(1), and other requirements of the SEA and the Commission’s rules thereunder that apply to a broker, solely in connection with broker activities involving SBS (“Broker Exemptions”). The Broker Exemptions generally expired on Oct. 6, 2021; however, because an entity that meets the definition of “security-based swap execution facility” also would also meet the definition of “broker” in section 3(a)(4) of the SEA, 15 U.S.C. 78c(a)(4), the Commission extended the Broker Exemptions solely for persons acting as an SBSEF until the expiration of the Temporary SBSEF Exemptions (i.e., the earliest compliance date set forth in any of the Commission’s final rules regarding registration of SBSEFs). See SEA Release No. 87005 (Sept. 19, 2019), 84 FR 68550, 68602 (Dec. 16, 2019). 19 with more than one other market participant on the system or platform shall register the facility as a security-based swap execution facility under this section or as a national securities exchange pursuant to section 6 of the SEA. 48 Paragraph (a)(2) of Rule 803, like § 37.3(a)(2), would require an SBSEF, at a minimum, to offer an order book, which would be defined in Rule 802 to mean an electronic trading facility, a trading facility, or a trading system or platform in which all market participants in the trading system or platform have the ability to enter multiple bids and offers, observe or receive bids and offers entered by other market participants, and transact on such bids and offers. 49 Paragraph (a)(3) of Rule 803 is closely modeled on § 37.3(a)(4) and would provide a narrow exception to the requirement to provide an order book for a Required Transaction 50 to allow an SBSEF not to offer an order book for the SBS component(s) of a package transaction that contains a mix of products, with some parts of the package being subject to a trade execution requirement and some not. 48 A person that registers with the Commission as a national securities exchange pursuant to section 6 of the SEA does not fall within the statutory definition of “security-based swap execution facility,” see sec. 3(a)(77) of the SEA, 15 U.S.C. 78c(a)(77), and thus does not need to register as an SBSEF under Rule 803. Furthermore, as discussed below, see infra section X (discussing proposed paragraph (a)(4) of SEA Rule 3a1-1), a person that registers as an SBSEF under Rule 803 and provides a market place for no securities other than SBS is exempt from the definition of “exchange” and does not need to register as such pursuant to section 6 of the SEA. 15 U.S.C. 78c(a)(1) (defining “exchange” as “any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange”). 49 Section 37.3(a)(3) defines “trading facility” and “electronic trading facility” by cross-referencing definitions of those terms in the CEA. Rather than cross-referencing the CEA, the Commission adapted the CEA definitions of those terms directly into Rule 802. See Proposed Rule 802 (defining “trading facility” and “electronic trading facility”). 50 As discussed below in section V.E.1(a), the Commission is incorporating into Regulation SE the concepts of “Required Transaction” and “Permitted Transaction” in a manner closely modeled on the CFTC’s use of those terms. A Required Transaction would be a transaction involving an SBS that is subject to the trade execution requirement. Section 37.3 of the CFTC’s rules requires an order book as a minimum trading functionality for all SEFs and is not limited to provision of an order book only for Required Transactions. 20 Paragraph (b) of Proposed Rule 803 is closely modeled on § 37.3(b) and would set out procedures for full registration of an SBSEF. Paragraph (b)(1), like § 37.3(b)(1), would provide that an applicant requesting registration must file electronically a complete Form SBSEF or any successor forms, and all information and documentation described in such forms with the Commission using the Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system as an Interactive Data File in accordance with Rule 405 of Regulation S-T, and must provide to the Commission, upon the Commission’s request, any additional information and documentation necessary to review an application. Paragraph (b)(2) of Proposed Rule 803, like § 37.3(b)(2), would provide that an applicant requesting registration as an SBSEF must identify with particularity any information in the application that will be subject to a request for confidential treatment pursuant to Rule 24b-2 under the SEA. 51 Paragraph (b)(2) would also provide that, as set forth in Rule 808, certain information provided in an application shall be made publicly available. Paragraph (b)(3) of Proposed Rule 803 would address amendments to the SBSEF registration application. Like § 37.3(b)(3), Rule 803(b)(3) would provide that an applicant amending a pending application or requesting an amendment to an order of registration shall file an amended application electronically with the Commission using the EDGAR system as an Interactive Data File in accordance with Rule 405 of Regulation S-T. Subsequent to being registered, an SBSEF would be required to submit rule and product filings under Rule 806 or 51 See 17 CFR 240.24b-2 (setting forth the procedures for identifying and redacting the portion of a submission under the SEA for which confidential treatment is requested). As the Commission stated in the Proposing Release, it is not necessary or appropriate to establish and utilize one set of procedures to handle confidential treatment requests made by SBSEFs while utilizing a different set of procedures for other persons who request confidential treatment from the Commission under the SEA. See Proposing Release, supra note 1, 87 FR at 28880 n.50. 21 Rule 807, as well as provide other updates as may be required pursuant to other rules for SBSEFs. Paragraph (b)(4) of Proposed Rule 803 would address the effect of an incomplete application. Like § 37.3(b)(4), Proposed Rule 803(b)(4) would provide that, if an application is incomplete, the Commission shall notify the applicant that its application will not be deemed to have been submitted for purposes of the Commission’s review. Paragraph (b)(5) of Proposed Rule 803 would establish the Commission review period for an application to register as an SBSEF. Proposed Rule 803(b)(5) is closely modeled on § 37.3(b)(5) and would require the Commission to approve or deny an application for registration as an SBSEF within 180 days of the filing of the application. Proposed Rule 803(b)(5) would further provide that, if the Commission notifies the person that its application is materially incomplete and specifies the deficiencies in the application, the running of the 180day period would be stayed from the time of that notification until the application is resubmitted in completed form. In such a case, the Commission would have not less than 60 days to approve or deny the application from the time the application is resubmitted in completed form. Paragraph (b)(6)(i) of Proposed Rule 803, like § 37.3(b)(6)(i), would provide that the Commission shall issue an order granting registration upon a Commission determination, in its discretion, that the applicant has demonstrated compliance with the SEA and the Commission’s rules applicable to SBSEFs. Paragraph (b)(6)(i) would allow the Commission to issue an order granting registration, subject to conditions. Paragraph (b)(6)(ii) of Proposed Rule 803, modeled on § 37.3(b)(6)(ii), would provide that the Commission may issue an order denying registration upon a Commission determination, in its own discretion, that the applicant has not demonstrated compliance with the SEA and the Commission’s rules applicable to SBSEFs. If the Commission 22 denies an application under Rule 803(b)(6)(ii), it would be required to specify the grounds for the denial. Paragraph (c) of Proposed Rule 803, like § 37.3(d), would address reinstatement of a dormant registration. Proposed Rule 803(c) would provide that a dormant SBSEF 52 may reinstate its registration under the procedures of Rule 803(b). Proposed Rule 803(c) would further provide that the applicant may rely upon previously submitted materials if such materials accurately describe the dormant SBSEF’s conditions at the time that it applies for reinstatement of its registration. Paragraph (d) of Proposed Rule 803, like § 37.3(e), would set out procedures for an SBSEF to request a transfer of registration. Paragraph (d)(1), which is closely modeled on § 37.3(e)(1), would provide that an SBSEF seeking to transfer its registration from its current legal entity to a new legal entity as a result of a corporate change shall file a request for approval to transfer such registration with the Commission in the form and manner specified by the Commission. Paragraph (d)(2), modeled on § 37.3(e)(2), would provide that a request for transfer of registration shall be filed no later than three months prior to the anticipated corporate change; or in the event that the SBSEF could not have known of the anticipated change three months prior to the anticipated change, as soon as it knows of that change. Paragraph (d)(3) of Proposed Rule 803, like § 37.3(e)(3), would require an SBSEF’s request for a transfer of registration to include the underlying agreement governing the corporate change, a description of the corporate change, a discussion of the transferee’s ability to comply 52 See Proposed Rule 802 (defining “dormant security-based swap execution facility” to mean “a securitybased swap execution facility on which no trading has occurred for the previous 12 consecutive calendar months; provided, however, that no security-based swap execution facility shall be considered to be a dormant security-based swap execution facility if its initial and original Commission order of registration was issued within the preceding 36 consecutive calendar months”). This definition is modeled on the definition of “dormant swap execution facility” found in § 40.1(f). 23 with the SEA, the governing documents of the transferee, the transferee’s rules marked to show changes from the rules of the SBSEF, and specified representations by the transferee. 53 Paragraph (d)(4) of Proposed Rule 803, modeled on § 37.3(e)(4), would provide that, upon review of a request for transfer of registration, the Commission, as soon as practicable, shall issue an order either approving or denying the request. Paragraph (e) of Proposed Rule 803, like § 37.3(f), would provide that an applicant for registration as an SBSEF may withdraw its application by filing a withdrawal request electronically with the Commission using the EDGAR system as an Interactive Data File in accordance with Rule 405 of Regulation S-T. 54 Proposed Rule 803(e) would further provide that withdrawal of an application for registration shall not affect any action taken or to be taken by the Commission based upon actions, activities, or events occurring during the time that the application was pending with the Commission. Paragraph (f) of Proposed Rule 803, like § 37.3(g), would provide that an SBSEF may request that its registration be vacated by filing a vacation request electronically with the Commission using the EDGAR system and must be provided as an Interactive Data File in accordance with Rule 405 of Regulation S-T at least 90 days prior to the date that the vacation is requested to take effect. 53 See Proposing Release, supra note 1, 87 FR at 28880–81. 54 17 CFR 232.405. The proposed electronic filing requirement discussed above does not appear in the CFTC version of this provision. The Commission is adding this specification to implement the Inline XBRL and EDGAR electronic filing requirements for certain documents required by Regulation SE. See infra section XIII.A. 24 2. Comments and Analysis (a) Registration Requirements, Generally Two commenters support the proposed SBSEF registration requirements under Rule 803 being modeled on the CFTC’s rules and state that, as market participants are familiar with CFTC’s requirements, they appreciate the Commission’s attempts to minimize registration burdens and expedite the establishment of the SBSEF regime. 55 One commenter states that the Commission should ensure that all multilateral trading venues for SBS are required to register as an SBSEF, regardless of the specific trading protocol used. 56 Another commenter argues that section 3D(a)(1) of the SEA requires the registration of any “facility for the trading or processing of SBS,” not just those that meet the statutory definition of SBSEF, which includes multiple-to-multiple trading. 57 Accordingly, this commenter states that single-dealer platforms should be required to register as SBSEFs and to change their operations to offer multiple-to-multiple trading, consistent with the definition of SBSEF. 58 One commenter asks the Commission to “make clear that the SBSEF registration requirement applies only to these types of platforms that are within the statutory and proposed regulatory definition and does not include any broader CFTC staff interpretations purporting to 55 See SIFMA AMG Letter, supra note 18, at 5; see also Bloomberg Letter, supra note 18, at 11. 56 See Citadel Letter, supra note 18, at 9 (“[A] security-based swap transaction executed via a fully electronic multilateral RFQ protocol should be subject to the same regulations as one executed by voice with the assistance of a voice broker (who may or may not be employed by the SBSEF)”). 57 As discussed above, see supra note 38 and accompanying text, the statutory definition of SBSEF provides in relevant part that an SBSEF is “a trading system platform in which multiple participants have the ability to execute or trade security-based swaps by accepting bids and offers made by multiple participants….” SEA section 3(a)(77), 15 U.S.C. 78c(a)(77) (emphasis added). This is sometimes referred to as “multipleto-multiple trading.” 58 See Better Markets Letter, supra note 18, at 11–13. 25 expand the SEF definition.” 59 This commenter states that CFTC Staff Letter 21-19 60 maintains that platforms can be required to register as SEFs “(i) even where multiple participants cannot simultaneously request, make, or accept bids and offers from market participants; or (ii) where multiple participants can initiate a one-to-many communication.” 61 The commenter states that extending the definition of SBSEF to include “facilities offering one-to-many or bilateral communications if more than one participant is able to submit an RFQ on the platform” would “contradict Congress’ express intent” to limit the scope of SBSEF registration requirements to multiple-to-multiple platforms; that the Commission should make clear that the CFTC staff guidance is inapplicable to SBSEFs; and that the Commission should confirm that it is not adopting or incorporating, explicitly or implicitly, similar guidance. 62 The Commission agrees with the comment that the definition of SBSEF applies to multilateral trading facilities regardless of the specific trading protocol used. As the statutory definition of SBSEF makes clear, a trading facility would fall under the definition of SBSEF if it offers “multiple participants the ability to execute or trade security-based swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce….” 63 Whether a specific instance or practice of brokering in fact offers multiple participants the ability to accept the bids or offers made by multiple participants, though, will depend on the attendant facts and circumstances of that instance or practice. The 59 See MFA Letter, supra note 18, at 3. 60 See CFTC Staff Advisory on Swap Execution Facility Registration Requirement, Letter No. 21-19 (Sept. 29, 2021), available at https://www.cftc.gov/node/238336. 61 See MFA Letter, supra note 18, at 3 (quoting CFTC Staff Letter No. 21-19, supra note 60 (emphasis in original)). 62 MFA Letter, supra note 18, at 3–4 (internal quotations omitted). 63 SEA section 3(a)(77), 15 U.S.C. 78c(a)(77) (emphasis added). 26 Commission does not, however, agree with the comment that the language of SEA section 3D(a)(1) means that single-dealer platforms for trading SBS must register as SBSEFs and, consistent with the statutory definition of SBSEF, change their operations to provide multiple-tomultiple trading. SEA section 3D is titled “Security-based swap execution facilities,” and section 3D(a)(1) states, in full, “No person may operate a facility for the trading or processing of security-based swaps, unless the facility is registered as a security-based swap execution facility or as a national securities exchange under this section.” 64 The Commission is not persuaded that the phrase “facility for the trading or processing of security-based swaps” in this context can reasonably be read to apply more broadly to encompass anything other than an SBSEF or an SBS exchange. Since the definitions of both SBSEF and exchange include the concept of multiple-to-multiple trading, 65 single-dealer “one-to-many” trading platforms that do not offer multiple-to-multiple trading are outside the scope of the provisions of section 3D(a)(1). It is not necessary to incorporate the guidance in CFTC Staff Letter 21-19 into this release, because the CFTC staff letter in large part refers to fact-specific circumstances that the Commission has yet to encounter since Reg SE is not yet effective and the application of the SBSEF definition depends on the particular facts and circumstances of a platform’s structure and operations. For the same reason, it would be premature to reject the possibility of taking a position similar to that of the CFTC guidance with regard to SBSEFs, as one commenter 64 SEA section 3D(a)(1), 15 U.S.C. 78c-4(a)(1). 65 See SEA section 3(a)(77), 15 U.S.C. 78c(a)(77) (defining SBSEF in relevant part as “a trading system or platform in which multiple participants have the ability to execute or trade security-based swaps by accepting bids and offers made by multiple participants in the facility or system…”); SEA section 3(a)(1), 15 U.S.C. 78c(a)(1) (defining an exchange in relevant part as “any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities”) (emphasis added). 27 suggested. 66 Moreover, because the statutory definition of SBSEF does not include the word “simultaneous,” the Commission declines to issue its own guidance to reflect a requirement for simultaneity here. Where operators of SBS trading platforms have questions about the facts and circumstances particular to their situations, they can discuss their particular circumstances with Commission staff. (b) Abbreviated Registration Procedures for CFTC-Registered SEFs Several commenters state that the Commission should use its exemptive authority to provide a streamlined registration process for SBSEFs that are already registered with the CFTC as SEFs. 67 One commenter states that, because many entities will likely be registering with both the Commission and the CFTC, a streamlined SBSEF registration process will ease the burden of new requirements imposed on potential dual-registrants. 68 This commenter further states that allowing currently registered CFTC SEFs to become SEC-registered SBSEFs would be more efficient and would more quickly kick-start the Commission’s SBS regime. This commenter thus supports the use of exemptive authority for SEFs that are currently registered, provided that the Commission’s approach to exemptive authority does not disrupt the existing market structure and the relationships between venues and participants. Another commenter states that a streamlined registration process for SEFs currently registered and in good standing with the CFTC would have the potential to lower the costs of registration and encourage the entry of market participants. 69 66 See supra notes 59–62 and accompanying text. 67 See SIFMA AMG Letter, supra note 18, at 5; Bloomberg Letter, supra note 18, at 11; WMBAA Letter, supra note 18, at 3; ICE Letter, supra note 18, at 5. 68 See SIFMA AMG Letter, supra note 18, at 5. 69 See Bloomberg Letter, supra note 18, at 11. 28 One commenter that supports a streamlined SBSEF registration process for SEFs states that a prolonged registration process, particularly for venues already registered with the CFTC, only further delays the introduction of regulated price discovery, liquidity formation, and trade execution for SBS. 70 This commenter also states that SBSEF registration also further expedites SBS data reporting to the extent SBSEFs will report trades to an SBS swap data repository under the Commission’s Regulation SBSR, as this service cannot be provided until SBSEFs are registered and operational. If the Commission were not to retain the exemptive authority within Rule 803, this commenter supports a process that gives deference to existing CFTC SEFs and provides a more streamlined process for such registrants. The commenter states that, as the Commission observed in the proposing release, most of the SBS liquidity will likely be centralized around a few facilities, with most (if not all) of them already operating CFTCregulated SEFs. 71 Another commenter states that SEFs that are currently registered and in good standing with the CFTC should be permitted to register with the Commission utilizing their current documentation filed pursuant to the requirements of Form SEF. 72 This commenter states that CFTC registered SEFs are required to keep their Form SEF and its exhibits current through postregistration amendments and that, as the Commission is modeling proposed Form SBSEF on the CFTC’s Form SEF, substituting the forms should not be problematic for the Commission to review. The commenter states that the Commission should permit registered SEFs seeking to register as an SBSEF to submit their Form SEF and exhibits, with an accompanying addendum 70 See WMBAA Letter, supra note 18, at 3. 71 See WMBAA Letter, supra note 18, at 3–4. 72 See ICE Letter, supra note 18, at 5. 29 reflecting only those changes necessary to fulfill the specific requirements of proposed Regulation SE, in lieu of filing a new Form SBSEF. One commenter, however, stated that “relaxing or eliminating any registration requirements would be highly inappropriate,” and argued that the Commission must be “rigorous in reviewing and approving SBSEFs applicants while upholding complete impartiality.” 73 This commenter further states that both active SEFs and non-SEFs seeking to register SBSEFs “must be held under the same standard to avoid any conflict of interests.” 74 Therefore, this commenter states that the Commission should not use exemptive authority under SEA section 36(a)(1) to adopt an abbreviated procedure for SEFs seeking to register as SBSEFs, because doing so would rely on the “CFTC’s biased judgment” and would not permit an “unprejudiced determination” by the Commission.75 In the Proposing Release, the Commission stated that it was considering that, after adopting final rules establishing a registration process for SBSEFs, it could exercise its exemptive authority under section 36(a)(1) of the SEA 76 to relax or eliminate entirely certain of the registration requirements for entities that are already registered as SEFs with the CFTC. 77 The Commission recognizes that many of the entities that will seek registration with the Commission as SBSEFs are already registered with the CFTC as SEFs. Entities that seek dual registration presumably see efficiencies in utilizing the same systems, policies, and procedures to trade both swaps and SBS. As noted throughout this release, the Commission has sought to 73 Letter from J. T. at 1 (May 26, 2022). 74 Id. 75 Id. 76 15 U.S.C. 78mm(a)(1). 77 See Proposing Release, supra note 1, 87 FR at 28882. 30 harmonize the SBSEF regulatory regime as closely as practicable with the CFTC’s SEF regulatory regime, achieving similar regulatory benefits as the CFTC regime while minimizing costs so as to impose only marginal costs on dually registered SEF/SBSEFs and their members. As a result of these harmonized regimes, SEFs that seek dual registration with the SEC would likely need to make only minor adjustments to their rules and trading procedures to support trading of SBS in addition to the trading of swaps. While one commenter states that it would be inappropriate to relax or eliminate any SBSEF registration requirements for CFTC-registered SEFs, 78 an entity’s status as a registered SEF in good standing with the CFTC is relevant when considering its application to register as an SBSEF and that reducing the registration burden for CFTC-registered SEFs, where possible, is appropriate. However, granting exemptive relief under section 36(a)(1), which this commenter opposes, or providing for a formally abbreviated SBSEF registration regime for CFTC-registered SEFs is not necessary to accomplish expedited registration and reduced registration burdens. 79 Requiring all applicants to submit Form SBSEF will support consistency in the review by the Commission and its staff of applications for registration of SBSEFs, which will include a review of the proposed rules for the SBSEFs. The Commission expects that prospective SBSEFs will be able to use the information in their SEF applications to complete their SBSEF applications, as discussed below. 78 See supra note 75 and accompanying text. 79 In the Proposing Release, the Commission stated that it was “preliminarily considering” that it would exercise exemptive authority under section 36(a)(1) of the Act, 15 U.S.C. 78mm(a)(1), “to relax or eliminate entirely certain of the registration requirements for entities that are already registered as SEFs with the CFTC.” Proposing Release, supra note 1, 87 FR at 28882. 31 For the reasons discussed above, the Commission is adopting Rule 803 as proposed, with minor technical modifications. 80 B. Form SBSEF The Commission proposed new § 249.2001 to require that entities use Form SBSEF to register with the Commission as an SBSEF. Form SBSEF would also be used for submitting any updates, corrections, or supplemental information to a pending application for registration. Form SBSEF is closely modeled on the CFTC’s Form SEF for entities that seek to register with the CFTC as SEFs, with only minor changes to remove from the form the concept of postregistration amendments, as the proposed rule would not require any amendments to Form SBSEF post-registration. The exhibits that were proposed along with Form SBSEF are very similar to the exhibits in Form SEF. As with Form SEF, each applicant submitting a Form SBSEF would be required to provide the Commission with documents and descriptions pertaining to its business organization, financial resources, and compliance program, including various documents describing the applicant’s legal and financial status. An applicant would be required to disclose any affiliates, provide a brief description of the nature of the affiliation, and submit copies of any agreements between the SBSEF and third parties that would assist the applicant in complying with its duties under the SEA. In addition, an applicant would be required to demonstrate operational capability through documentation, including technical manuals and third-party service provider agreements. 80 See supra note 32. The Commission is also deleting the header text “Minimum trading functionality” from paragraph (a)(3), and is adding the header text “Request to register” to paragraph (b)(1), in order to maintain consistency of style in the regulatory text. Additionally, the Commission is removing the requirement to use an Interactive Data File for filing requests to withdraw or vacate an application for registration pursuant to Rules 803(e) and 803(f). See infra section XIII.A. 32 Under Rule 803(b)(1), an applicant for SBSEF registration would be required to complete Form SBSEF and provide, upon the Commission’s request, any additional necessary information and documentation in order review the application. The determination as to when an application submission is complete would be at the sole discretion of the Commission. The Commission would review Form SBSEF and, at the conclusion of its review, by order either: (i) grant registration; (ii) deny the application for registration; or (iii) grant registration subject to certain conditions. After an applicant is granted registration, any updates or amendments to the information contained in its Form SBSEF by an active SBSEF would be required to be submitted as rules or rule amendments under Rule 806 or Rule 807 or as may be required by other rules in Regulation SE. One commenter states that the Commission should closely harmonize the rules for SBSEF registration with the CFTC’s rules, with the exception of Exhibits D and H of Form SBSEF, which require: (a) a list of all affiliates and a description of any material pending legal proceedings of such affiliates, and (b) the financial statements of the affiliates. This commenter states that the information required by these exhibits is “burdensome and not fit for purpose” and should not be required unless the affiliate provides support services to the SBSEF or the legal proceedings are expected to have a material effect on the applicant or the operation of its proposed SBSEF. 81 As discussed above, several commenters expressed support for the Commission providing an expedited process for CFTC-registered SEFs that wish to register as SBSEFs. 81 See Bloomberg Letter, supra note 18, at 11. 33 The CFTC adopted rules for the registration and regulation of SEFs in 2013, 82 and the CFTC’s process for registering SEFs appears to be well understood by the industry and well designed for being adapted to the SBS market. Therefore, the Commission has used the CFTC’s process as a basis for its own process for registering SBSEFs, and information about SBSEF affiliates is relevant to the Commission’s oversight of SBSEFs and, in particular, oversight of SBSEF compliance with Rule 828 (conflicts of interest). 83 In addition, we assume that most if not all SBSEFs will be dually registered as SEFs. However, while the content and exhibits of Form SBSEF closely match the form and content of Form SEF, exhibits to Form SEF are provided to the CFTC as unstructured documents, whereas most exhibits to Form SBSEF will be provided to the Commission as structured, machine-readable documents. Permitting SBSEFs to provide copies of Form SEF exhibits in lieu of Form SBSEF exhibits, while likely resulting in an expedited registration process for most SBSEFs, would also potentially result in a much higher volume of unstructured data, making the Form SBSEF disclosures more difficult for market participants and the Commission to analyze in an efficient manner. Thus, notwithstanding some commenters’ support for an expedited registration process, the final rules do not permit SBSEFs to provide copies of Form SEF exhibits in lieu of Form SBSEF exhibits. The Commission is therefore adopting 17 CFR 249.2001 as proposed, but is renumbering it as 17 CFR 249.1701 under new subpart R (“Forms for Registration of, and Filings by, Security-Based Swap Execution Facilities”) and is making a minor technical correction. 84 82 See 2013 CFTC Final SEF Rules Release, supra note 9. 83 See infra section VI.K. 84 The Commission is correcting the text in Instruction 20 to Form SBSEF to read “a list with the name(s) of the clearing agency(ies)” instead of “a list of the name of the clearing organization(s).” 34 IV. RULE AND PRODUCT FILINGS BY SBSEFS Unlike section 19(b) of the SEA, 85 which sets out a process whereby national securities exchanges and other SROs submit filings to the Commission to add, delete, or amend rules (including rules to list products), section 3D of the SEA 86 does not set out an equivalent process for SBSEFs, which are not SROs. It can be expected, however, that an SBSEF will seek to change its rules over time in order, for example, to implement new trading methodologies and to expand its product offerings to make its market more attractive to participants, and adopting rules for filings related to these changes will promote public transparency regarding the changes, as well as consistent handling of those filings by the Commission. An appropriate review process is necessary to assess whether changes to an SBSEF’s rules and product offerings are consistent with section 3D of the SEA and the Commission’s rules thereunder, and the CFTC’s filing procedures are an appropriate model on which to base the Commission’s own filing procedures. Furthermore, because of the likelihood that most if not all SBSEFs will be dually registered with the CFTC as SEFs, and that many rule changes for a dual registrant will affect both its SBS and swap trading businesses, close harmonization with the CFTC’s filing procedures would allow a dual registrant to make a similar filing to each agency, allowing each agency to carry out its oversight functions while minimizing the burdens on dual registrants. Parts 37 and 40 of the CFTC’s rules set out processes whereby SEFs may establish or amend rules and list products. These processes allow a SEF to voluntarily submit a rule, rule amendment, or new product for CFTC review and approval, or to “self-certify” that a rule, rule 85 15 U.S.C. 78s(b). 86 15 U.S.C. 78c-4. 35 amendment, or new product meets applicable standards under the CEA and the CFTC’s rules thereunder without obtaining CFTC approval, although the CFTC retains the ability, in certain circumstances, to stay the self-certification for further review before it may become effective. Using its general authority to impose any requirement on SBSEFs and to prescribe rules governing the regulation of SBSEFs, 87 the Commission proposed to establish similar filing processes for registered SBSEFs in Rules 804 to 810 of Regulation SE. 88 A. Rule 804—Listing Products for Trading by Certification 1. Summary of the Proposed Rule Proposed Rule 804 is modeled on 17 CFR 40.2 of the CFTC’s rules and would set forth procedures by which an SBSEF may list a product via certification. Paragraph (a)(1) of Proposed Rule 804 would require an SBSEF to file its submission electronically with the Commission using the EDGAR system as an Interactive Data File in accordance with Rule 405 of Regulation S-T. Paragraph (a)(2) of Proposed Rule 804 would provide that the Commission must receive the submission by the open of business on the business day that is 10 business days preceding the product’s listing. 89 87 See 15 U.S.C. 78c-4(d)(1)(A)(ii) (requiring an SBSEF, in order to be registered and to maintain registration, to comply with any requirement that the Commission may impose by rule or regulation); 15 U.S.C. 78c-4(f) (directing the Commission to prescribe rules governing the regulation of SBSEFs). 88 The CFTC has proposed to amend the rules that govern how CFTC-registered entities submit selfcertifications and requests for approval of their rules, rule amendments, and new products for trading and clearing, as well as the CFTC’s review and processing of such submissions. See CFTC, Provisions Common to Registered Entities (Notice of Proposed Rulemaking), 88 FR 61432 (Sept. 9, 2023).The CFTC’s proposing release states that the proposed amendments “are intended to clarify, simplify and enhance the utility of those regulations for market participants and the [CFTC].” Id. at 61432. The CFTC has not yet taken action on this proposal. 89 By contrast, the parallel provision in § 40.2(a) provides that a DCM or SEF must file the self-certification only one business day before listing the product. See § 40.2(a)(2) (one of the conditions for a valid selfcertification 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). 36 Paragraph (a)(3) of Proposed Rule 804 would require a self-certification to include a copy of the submission cover sheet; 90 a copy of the product’s rules, including all rules related to its terms and conditions; the intended listing date; a certification by the SBSEF that the product to be listed complies with the SEA and the Commission’s rules thereunder; a concise explanation and analysis of the product and its compliance with applicable provisions of the SEA, including the Core Principles, and the Commission’s rules thereunder; a certification that the SBSEF posted a notice of pending product certification with the Commission and a copy of the submission, concurrent with the filing of a submission with the Commission, on the SBSEF’s website; 91 and a request for confidential treatment, if appropriate, as permitted pursuant to SEA Rule 24b-2. 92 Paragraph (b) of Proposed Rule 804, modeled on § 40.2(b), would provide that, if requested by Commission staff, an SBSEF shall provide any additional evidence, information, or data that demonstrates that the SBS meets, initially or on a continuing basis, the requirements of the SEA or the Commission’s rules or policies thereunder. Paragraph (c)(1) of Proposed Rule 804 would provide that the Commission may stay the certification of a new product by issuing a notification informing the SBSEF that the Commission is staying the certification on the grounds that the product presents novel or complex issues that require additional time to analyze, is accompanied by an inadequate 90 The Commission proposed, in new § 249.2002, a submission cover sheet (with instructions) that is closely modeled on the CFTC’s submission cover sheet. 91 Under Rule 804(a)(3)(vi), information that the SBSEF seeks to keep confidential can be redacted from the documents published on the SBSEF’s website but would have to be republished consistent with any determination made pursuant to SEA Rule 24b-2. 92 Section 40.2(a)(3) instructs filers to make any request for confidential treatment pursuant to § 40.8 of the CFTC’s rules, which in turn cross-references 17 CFR 145.9. The Commission proposed instead to direct filers to make any request for confidential treatment pursuant to existing SEA Rule 24b-2. See supra note 51. 37 explanation, or is potentially inconsistent with the SEA or the Commission’s rules thereunder. 93 Under paragraph (c)(1), the Commission would have an additional 90 days from the date of the notification to conduct the review. Paragraph (c)(2) would require the Commission to provide a 30-day comment period during that 90-day period, and to publish a notice of the 30-day comment period on the Commission’s website. Comments from the public could be submitted as specified in that notice. Paragraph (c)(3) would provide that the product that had been stayed would become effective, pursuant to the certification, at the expiration of the 90-day review period, unless the Commission withdraws the stay prior to that time, or the Commission notifies the SBSEF during the 90-day time period that it objects to the proposed certification on the grounds that the proposed product is inconsistent with the SEA or the Commission’s rules. 2. Comments and Analysis One commenter states that, while the proposed self-certification process does include improvements to the CFTC’s self-certification process, including extending the initial review period from one business day to 10 business days and expanding the scope of reasons for staying the self-certification, it is still fundamentally flawed. This commenter states that the CFTC’s self-certification process is mandated by statute and that, in the absence of any statutory mandate 93 Rule 807(c) is based on § 40.2(c), which provides that the CFTC may stay the listing of a contract pursuant to paragraph (a) of this section during the pendency of CFTC proceedings for filing a false certification or during the pendency of a petition to alter or amend the contract terms and conditions pursuant to section 8a(7) of the CEA. The SEA does not include the CEA’s provisions regarding altering or amending the terms and conditions of an SBS listed by an SBSEF like the authority granted to the CFTC with respect to products listed by SEFs, such that the Commission would be able to stay the listing of an SBS that it believes may be inconsistent with the SEA, pending proceedings to exercise that authority. Nor are proceedings for false certification of an SBS contemplated by the SEA. For this reason, in lieu of harmonizing with § 40.2(c), the Commission proposed, in Rule 804(c), a provision that would allow the Commission to stay the certification of a new product in the same manner that Rule 807(c) would allow the Commission to stay the self-certification of a new rule or rule amendment. 38 analogous to that applicable to the CFTC, the Commission must, at the very least, provide a coherent policy justification for its proposed self-certification process. 94 This commenter states that it is not clear why it is necessary or desirable for SBSEFs to be able to bring new products to the market “speedily” and that self-certification turns the regulatory process on its head, creating in effect a presumption of regulatory compliance and putting the onus on the agency, under a predetermined timeline, to fully evaluate a proposed product that may threaten significant harm to investors and market stability. 95 This is especially the case, the commenter states, considering the context in which the SEC was given comprehensive authority to regulate and oversee the SBS market, i.e., a financial crisis caused in large part by SBS and other novel financial products whose risks regulators and market participants thought were well understood, but in fact were not. Given this context, the commenter states, it “makes little policy sense to establish a regime whereby an SBSEF could introduce a new potentially dangerous product to the financial system without an affirmative, independent SEC determination that such product not only complies with the SBSEF Core Principles and other requirements, but also that it does not pose an unwarranted danger to investors, the financial system, and the broader economy.” 96 For several reasons the Commission does not agree with the objections raised by this commenter. First, the Commission does not agree that the self-certification process of Rule 804 94 See Better Markets Letter, supra note 18, at 13. 95 See Better Markets Letter, supra note 18, at 13–14; see also Letter from Bryce Keeney (Apr. 27, 2022) (“Keeney Letter”) (stating that “[d]erivatives are not the purpose of the market” and that the Commission should “align rules to focus on the primary purpose, not to support tertiary aspects that result in systemic risk and systemic abuse”); Letter from Kevin (Apr. 20, 2023) (“Kevin Letter”) (stating that the proposed rules do not protect retail investors and that “[c]reating a self governing regime, allowing easier swaps trading across borders, exemption exchanges and registered brokers … sound like a terrible recipe for disaster in a multi-trillion marketplace”). 96 Better Markets Letter, supra note 18, at 13–14. 39 either “turns the regulatory process on its head” or would deny the Commission the opportunity to “fully evaluate a proposed product that may threaten significant harm to investors and market stability.” 97 The ability of the Commission to stay the effectiveness of any product selfcertification, to seek public comment on that self-certification, and to object to (i.e., effectively disapprove) the proposed certification on the grounds that the product is inconsistent with the SEA or the Commission’s rules will provide the Commission with sufficient opportunity (including the opportunity to seek public comment) to consider the self-certified rules and take steps to protect investors and maintain fair, orderly, and efficient markets. Further, the selfcertification process does not create a “presumption of compliance,” because: (a) Rule 804(b) requires an SBSEF to provide, at Commission request, any “additional evidence, information, or data that demonstrates that the SBS meets, initially or on a continuing basis, the requirements of the SEA or the Commission’s rules or policies thereunder”; (b) Rule 804(c)(1) permits the Commission to suspend a new product certification because “the product presents novel or complex issues that require additional time to analyze, is accompanied by an inadequate explanation, or is potentially inconsistent with the SEA or the Commission’s rules thereunder” (emphasis added); and (c) Rule 804(c)(3) does not create a presumption of compliance but instead provides the Commission a mechanism by which to object to a proposed certification “on the grounds that the proposed product is inconsistent with the SEA or the Commission’s rules.” 98 Second, given the relationship between the swaps market and the SBS market, as well as the likelihood that most or all entities seeking to register as SBSEFs will be CFTC-registered 97 See supra note 96 and accompanying text. 98 Section IV.D, infra, discusses the process for self-certification of rule changes, including the Commission’s ability to stay the effectiveness of such a filing, which would lead to a public comment period and the opportunity for the Commission to object to the certification. 40 SEFs, harmonization with the CFTC filing procedures for new products should facilitate the ability of entities to dually register and minimize costs by allowing incumbent SEFs to use their existing systems, policies, and procedures to comply with the Commission’s SBSEF rules. The aim of the rule is, however, not merely to allow SBSEFs to bring products to market “speedily,” or at minimal cost, and, as discussed below in this section, it is appropriate for its rules to provide for a longer review period than the CFTC’s rules. And third, the Commission disagrees with this commenter’s view that the selfcertification process “would pose an unwarranted danger to investors, the financial system, and the broader economy.” The new-product provisions of Regulation SE must be read in the context of the other relevant provisions of Title VII of the Dodd-Frank Act and the Commission’s rules thereunder, which include, among other things, rules governing the registration and regulation of Security-Based Swap Dealers (“SBSDs”) and Major Security-Based Swap Participants (“MSBSPs”) 99; capital, margin, and segregation requirements for SBSDs and MSBSPs 100; business conduct standards and chief compliance officer requirements for SBSDs and MSBSPs 101; and post-trade reporting and public dissemination of SBS transactions. 102 Because of the significant role these other rules play in addressing potential risks posed by SBS, the Commission’s ability to require SBSEFs to provide any evidence, information, or data 99 See Registration Process for Security-Based Swap Dealers and Major Security-Based Swap Participants, SEA Release No. 75611 (Aug. 5, 2015), 80 FR 48963 (Aug. 14, 2015) (“SBSD and MSBSP Registration Release”). 100 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major SecurityBased Swap Participants and Capital and Segregation Requirements for Broker-Dealers, SEA Release No. 86175 (June 21, 2019), 84 FR 43872 (Aug. 22, 2019) (“Capital, Margin, and Segregation Release”). 101 See Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants, SEA Release No. 77617 (Apr. 14, 2016), 81 FR 29959 (May 13, 2016) (“Business Conduct Standards Release”). 102 See Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, SEA Release No, 78321 (July 14, 2016), 81 FR 53546 (Aug. 12, 2016) (“Regulation SBSR Release”). 41 demonstrating that the SBS meets, initially or on a continuing basis, the requirements of the SEA or the Commission’s rules or policies thereunder, and the Commission’s ability to suspend and ultimately object to SBSEF self-certifications, are appropriate to protect investors, the financial system, and the broader economy with respect to new SBSEF products and rules. 103 Thus, the self-certification process in this context is appropriate for the underlying aims of the Dodd-Frank Act. Two commenters state that the relatively low volume of SBS products expected to be self-certified supports a shorter review period than the proposed ten-business-day Commission review period. 104 Both commenters recommend a shorter review period of one day to harmonize with the CFTC’s approach. 105 Alternatively, one of the commenters suggests a two-day review period. 106 This commenter suggests that a shorter review period would be beneficial to allow market operators to meet participants’ demands to transact on regulated platforms in a reasonable period of time. 107 The commenter also states that a shorter review period would accommodate participants’ needs to hedge risk in a timely manner. 108 The other commenter states that a longer review period would reduce the competitive benefit to SBSEFs that develop new products because a 10-day review period would enable competitors to list similar products. 109 This 103 The Commission’s rules for SBSEFs do not directly affect retail investors. Only eligible contract participants (“ECPs”) are eligible to trade on an SBSEF, see section 6(l) of the SEA, 15 U.S.C. 78f(l), and retail investors would have access to an SBS only after an SBS exchange has filed a proposed rule change with the Commission under Rule 19b-4, 17 CFR 240.19b-4, to amend its rules to permit the listing of a registered SBS, with that proposed rule change being published for public comment. 104 See WMBAA Letter, supra note 18, at 4; ICE Letter, supra note 18, at 2. 105 See WMBAA Letter, supra note 18, at 4; ICE Letter, supra note 18, at 2. 106 See WMBAA Letter, supra note 18, at 4. 107 See id. 108 See id. 109 See ICE Letter, supra note 18, at 3. 42 commenter also suggests varying from the one-day review period in certain limited circumstances, such as when an SBSEF submits an SBS for a made-available-to-trade determination. 110 While a ten-day review period differs from the CFTC’s one-day review period, one business day would not provide the SEC staff sufficient time to review a new product filing for error or incompleteness, let alone review a new product for compliance with the SEA or Regulation SE. Further, if a product does warrant a stay, the Commission would also need sufficient time to go through the administrative steps of formally issuing the stay. 111 The proposed ten-business-day review period for self-certified products also accords with the CFTC’s ten-business-day review period for self-certified rules, 112 which the Commission is replicating in Rule 807(a)(3). 113 Further, while a shorter review period may allow SBS to trade on an SBSEF more quickly, failing to provide the Commission with a meaningful period for review of a new product would hamper the Commission’s ability to protect market participants and maintain fair, orderly, and efficient SBS markets. A ten-day review period would still permit market participants to trade SBS on regulated platforms within a “reasonable period” and would provide the Commission the time it needs to review submissions. The Commission also disagrees with the comment that a shorter review period is necessary to accommodate market participants’ need to 110 See id. 111 See infra sections XV.D and XV.E (delegating authority to the Director of the Division of Trading and Markets to stay the effectiveness of a self-certification and to extend the period for consideration of a new product). 112 See § 40.6(a)(3) (one of the conditions for a valid self-certification of a rule or rule amendment is that the CFTC has received the submission not later than the open of business on the business day that is 10 business days prior to the registered entity’s implementation of the rule or rule amendment). 113 See infra section IV.D. 43 hedge risk in a timely manner. During the relatively brief and time-limited period for Commission review of an SBSEF new-product filings, market participants would remain able to hedge that risk in other ways, such as in the OTC SBS market or other related securities markets, depending on the risk to be managed. Finally, while the 10-day review period might reduce the first-to-market competitive advantage of an SBSEF that first lists a given SBS, 114 the extent of such an advantage may vary considerably based on other factors in the SBSEF market, and that, in any event, the need for the Commission to have sufficient time to review a new product before it is listed justifies the potential competitive effect. Thus, a ten-business-day review period strikes an appropriate balance between allowing SBSEFs to list new products quickly and affording Commission staff a sufficient time period in which to assess those products prior to listing. One commenter asks the Commission to confirm that it does not expect SBSEFs to selfcertify for every security for which there may exist a related SBS. 115 This commenter states that, for example, while an SBSEF may publish “terms and conditions” relevant for an instrument (like a single-name total return SBS) under Rule 804, the Commission might receive thousands of underlying national market system equity stocks from each SBSEF, exponentially increasing the number of products the Commission would need to review. The commenter also states that, given the potential 10-day review period (compared to the CFTC’s shorter timeframe), SBSEFs will be forced to proactively self-certify every potential SBS in an attempt to meet all potential participant demand without a two-week delay, only increasing the volume of self-certifications the Commission may receive. This commenter states that listing the instrument, and not each 114 Cf. ICI Letter, supra note 18, at 9 n.29 (discussing “first mover” advantage in the context of an SBSEF that has made an SBS available to trade). 115 See WMBAA Letter, supra note 18, at 4. 44 equity that may be linked to the instrument, is an appropriate approach to balance the SBSEFs and the Commission’s resources with respect to product self-certification. The Commission is conscious of the large number of individual SBS that may constitute a “class” of SBS, such as single-name, total return SBS given as an example by the commenter. While an SBSEF should not necessarily be required to make an individual filing for each of the securities underlying a single such class of SBS, a filing for a simple class certification that merely described the parameters of the SBS covered by the certification would not necessarily provide sufficient information for the Commission to determine whether all the potential products covered by the class are consistent with the SEA and the rules thereunder, including Regulation SE. Therefore, while the Commission is not providing for “class certifications” of SBS, the Commission will not necessarily require separate submissions for each underlying security. 116 The Commission will consider submissions for an SBS that might overlie one or more of a list of securities, provided that those potential underlying securities are specifically identified and that the submission addresses, as part of the requirement in Rule 804 to submit “a concise explanation and analysis of the product and its compliance with applicable provisions of the Act, including core principles, and the Commission’s rules thereunder,” 117 why all included underlying securities meet the applicable provisions of the SEA and the Commission’s rules thereunder. 118 116 By contrast, paragraph (d) of § 40.2 provides that a DCM or SEF may submit a class certification of swaps based on an “excluded commodity,” subject to certain conditions. See section 1a(19) of the CEA, 7 U.S.C. 1a(19) (defining “excluded commodity”). 117 Rule 804(a)(3)(v). 118 For example, a submission might cover a single-name total return SBS on any of the components of a given index, provided that the submission explains why the minimum criteria for inclusion in that index are sufficient to ensure that the proposed SBS are consistent with the requirements of the SEA and the rules thereunder, including Regulation SE. 45 Accordingly, for the reasons discussed above, the Commission is adopting Rule 804 as proposed, with the exception of the proposed Inline XBRL and EDGAR filing requirements, and with minor technical modifications. 119 B. Rule 805—Voluntary Submission of New Products for Commission Review and Approval Proposed Rule 805 is closely modeled on § 40.3 of the CFTC’s rules and would set forth procedures by which an SBSEF may voluntarily submit new SBS products for Commission review and approval. Paragraph (a) of Proposed Rule 805 would adapt these requirements for SBSEFs. 120 First, an SBSEF would be required to file its submission electronically with the Commission using the EDGAR system as an Interactive Data File in accordance with Rule 405 of Regulation S-T. The filing would also have to include a copy of the submission cover sheet, a copy of the rules that set forth the terms and conditions of the SBS to be listed, and an explanation and analysis of the product and its compliance with applicable provisions of the SEA, including the Core Principles and the Commission’s rules thereunder. 121 The submission would also have to describe any 119 See supra note 32. As described in further detail in the discussion of electronic filing systems and structured data, the Commission will require all rule and product filings required by Rules 804 through 807 and 816 to be filed in unstructured format through EFFS, rather than in Inline XBRL through EDGAR. See infra section XIII.A. 120 Paragraph (a) of Rule 805 omits two provisions in § 40.3(a). First, § 40.3(a)(6) requires the submitting entity to include the certifications required in 17 CFR 41.22 for product approval of a commodity that is a security future or a security futures product, as defined in sections 1a(44) or 1a(45) of the CEA, respectively. The Commission did not propose to adapt this provision into proposed Regulation SE because it pertains to security futures and security futures products, not to swaps or SBS. Second, § 40.3(a)(8) requires the submitting entity to include a filing fee. The Commission is not proposing to charge SBSEFs filing fees for submitting new product proposals. 121 This explanation and analysis would have to either be accompanied by the documentation relied upon to establish the basis for compliance with the applicable law, or incorporate information contained in such documentation, with appropriate citations to data sources. 46 agreements or contracts entered into with other parties that enable the SBSEF to carry out its responsibilities. Furthermore, paragraph (a) of Proposed Rule 805, modeled on § 40.3(a), would require the SBSEF to include, if requested by Commission staff, additional evidence, information, or data demonstrating that the SBS meets, initially or on a continuing basis, the requirements of the SEA, or other requirement for registration under the SEA, or the Commission’s rules or policies thereunder. The SBSEF would be required to submit the requested information by the open of business on the date that is two business days from the date of request by Commission staff, or at the conclusion of such extended period agreed to by Commission staff after timely receipt of a written request from the SBSEF. Paragraph (a) of Proposed Rule 805, like § 40.3(a), would permit the submitting SBSEF to include a request for confidential treatment. 122 Finally, paragraph (a) of Proposed Rule 805, like § 40.3(a), would require the SBSEF to certify that it posted a notice of its request for Commission approval of the new product and a copy of the submission, concurrent with the filing of a submission with the Commission, on the SBSEF’s website. 123 Paragraph (b) of Proposed Rule 805, like § 40.3(b), would provide that the Commission shall approve a new product unless the terms and conditions of the product violate the SEA or the Commission’s rules thereunder. 122 Section 40.3(a), like § 40.2(a)(3), instructs filers to make any request for confidential treatment pursuant to § 40.8 of the CFTC’s rules, which in turn cross-references § 145.9. As noted previously, the Commission proposes instead to direct filers to make any request for confidential treatment pursuant to SEA Rule 24b-2. See supra note 51. 123 Information that the SBSEF seeks to keep confidential could be redacted from the documents published on the SBSEF’s website but would have to be republished consistent with any determination made pursuant to SEA Rule 24b-2. 47 Paragraph (c) of Proposed Rule 805, modeled on § 40.3(c), would provide that a product submitted for Commission approval under Rule 805 shall be deemed approved by the Commission 45 days after receipt by the Commission, or at the conclusion of an extended period as provided under Rule 805(d), unless notified otherwise within the applicable period, if the submission complies with the requirements of Rule 805(a) and the SBSEF does not amend the terms or conditions of the product or supplement the request for approval, except as requested by the Commission or for correction of typographical errors, renumbering, or other non-substantive revisions, during that period. Paragraph (c) would also provide that any voluntary, substantive amendment by the SBSEF would be treated as a new submission under Rule 805. Paragraph (d) of Proposed Rule 805, modeled on § 40.3(d), would provide that the Commission may extend the 45-day review period in paragraph (c) for an additional 45 days, if the product raises novel or complex issues that require additional time to analyze, in which case the Commission shall notify the SBSEF within the initial 45-day review period and briefly describe the nature of the specific issue(s) for which additional time for review is required. Paragraph (d) would also provide that the Commission may extend the 45-day review period for any length of time to which the SBSEF agrees in writing. Paragraph (e) of Proposed Rule 805 would provide that the Commission may, at any time during its review, notify the SBSEF that it will not, or is unable to, approve the product. This notification would have to briefly specify the nature of the issues raised and the specific provision of the SEA or the Commission’s rules thereunder, including the form or content requirements of Rule 805(a), that the product violates, appears to violate, or potentially violates but which cannot be ascertained from the submission. 48 Paragraph (f) of Proposed Rule 805, like § 40.3(f), would provide that a notification of the Commission’s determination not to approve a product does not prejudice the SBSEF from subsequently submitting a revised version of the product for Commission approval, or from submitting the product as initially proposed pursuant to a supplemented submission. Furthermore, the notification would be presumptive evidence that the entity may not truthfully certify under Rule 804 that the same, or substantially the same, product does not violate the SEA or the Commission’s rules thereunder. The Commission did not receive any comments on this proposed rule. It is reasonable and appropriate to supplement the product certification procedures in Rule 804 by also including in Regulation SE, as Rule 805, procedures for voluntary submission of new products for Commission review and approval. Providing this approval process, as the CFTC does, can be valuable to an SBSEF seeking the Commission’s concurrence that a new product does not violate the SEA or the Commission’s rules thereunder prior to listing it. The CFTC’s procedures in this regard are well articulated and well understood by SEFs, and that closely harmonizing with these procedures would yield comparable regulatory benefits while minimizing burdens on SBSEFs. 124 124 As stated in the Proposing Release, the Commission does not discount the possibility that an entity might elect to register as an SBSEF with the SEC but not as a SEF with the CFTC. In such case, the SEC-only registrant would not have any familiarity with the CFTC’s rules and filing procedures. Nevertheless, because most if not all entities that will seek SBSEF registration with the SEC are or will also be registered as SEFs with the CFTC, such dual registrants would benefit from harmonized rules. Furthermore, because the Commission is adopting these procedures substantially as proposed, is unnecessary to establish and apply one set of procedures for dual registrants and a different set for SEC-only SBSEFs. See Proposing Release, supra note 1, 87 FR at 28956 (stating that if the Commission “establishe[d] different or additive requirements, dually registered entities and their market participants might need to incur costs and burdens to modify their systems, policies, and procedures to comply with the SEC-specific rules”). See also Bloomberg Letter, supra note 18, at 10 (“[A] harmonized framework has the potential to lower compliance costs by allowing SBSEFs and market participants to integrate with existing operational and compliance frameworks. Any potential differences would require SBSEF registrants to devote resources toward assessing the potential gaps and consequences of regulatory divergence.”). 49 Therefore, the Commission is adopting Rule 805 as proposed, with the exception of the proposed Inline XBRL and EDGAR filing requirements, and with minor technical modifications. 125 C. Rule 806—Voluntary Submission of Rules for Commission Review and Approval Proposed Rule 806 is closely modeled on § 40.5 of the CFTC’s rules and would set forth procedures by which an SBSEF may voluntarily submit rules, rule amendments, or dormant rules for Commission review and approval. Paragraph (a) of Proposed Rule 806 would provide that an SBSEF may request that the Commission approve a new rule, rule amendment, or dormant rule prior to implementation of the rule. First, an SBSEF must file its submission electronically with the Commission using the EDGAR system as an Interactive Data File in accordance with Rule 405 of Regulation S-T. The filing would be required to include a copy of the submission cover sheet and to set forth the text of the rule or rule amendment (in the case of a rule amendment, deletions and additions must be indicated). Further, the SBSEF would be required to describe the proposed effective date of the rule or rule amendment and any action taken or anticipated to be taken to adopt the proposed rule by the SBSEF or by its governing board or by any committee thereof, and to cite the rules of the SBSEF that authorize the adoption of the proposed rule. The SBSEF would be required to provide an explanation and analysis of the operation, purpose, and effect of the proposed rule or rule amendment and its compliance with applicable provisions of the SEA, including the Core Principles relating to SBSEFs and the Commission’s rules thereunder, and, as applicable, a description of the anticipated benefits to market participants or others, any potential 125 See supra note 32. As described in further detail in the discussion of electronic filing systems and structured data, the Commission will require all rule and product filings required by Rules 804 through 807 and 816 to be filed in unstructured format through EFFS, rather than in Inline XBRL through EDGAR. See infra section XIII.A. 50 anticompetitive effects on market participants or others, and how the rule fits into the SBSEF’s framework of regulation. Additionally, if a proposed rule affects, directly or indirectly, the application of any other rule of the SBSEF, the pertinent text of any such rule would be required to be set forth and the anticipated effect described. The SBSEF would also be required to provide a brief explanation of any substantive opposing views expressed to the SBSEF by governing board or committee members, members of the SBSEF, or market participants that were not incorporated into the rule, or a statement that no such opposing views were expressed. The SBSEF could, as appropriate, include a request for confidential treatment as permitted under SEA Rule 24b-2. Finally, the SBSEF would be required to certify that it posted a notice of the pending rule with the Commission and a copy of the submission, concurrent with the filing of a submission with the Commission, on the SBSEF’s website. 126 Paragraph (b) of Proposed Rule 806, modeled on § 40.5(b), would provide that the Commission shall approve a new rule or rule amendment unless the rule or rule amendment is inconsistent with the SEA or the Commission’s rules thereunder. Paragraph (c) of Proposed Rule 806, like § 40.5(c), would provide that a rule or rule amendment submitted for Commission approval under Rule 806 shall be deemed approved by the Commission 45 days after receipt by the Commission, or at the conclusion of such extended period as provided under paragraph (d) of this section, unless the SBSEF is notified otherwise within the applicable period, if the submission complies with the requirements of Rule 806(a) and the SBSEF does not amend the proposed rule or supplement the submission, except as requested by the Commission, during the 126 Information that the SBSEF seeks to keep confidential could be redacted from the documents published on the SBSEF’s website but would have to be republished consistent with any determination made pursuant to SEA Rule 24b-2. 51 pendency of the review period, other than for correction of typographical errors, renumbering, or other non-substantive revisions. Paragraph (c) would also provide that any amendment or supplementation not requested by the Commission would be treated as the submission of a new filing under Rule 806. Paragraph (d) of Proposed Rule 806, modeled on § 40.5(d), would provide that the Commission may further extend the review period in paragraph (c) for an additional 45 days, if the proposed rule or rule amendment raises novel or complex issues that require additional time for review or is of major economic significance, the submission is incomplete, or the requestor does not respond completely to Commission questions in a timely manner, in which case the Commission shall notify the submitting SBSEF within the initial 45-day review period and shall briefly describe the nature of the specific issues for which additional time for review shall be required. Paragraph (d) would also allow an extension to which the SBSEF agrees in writing. Paragraph (e) of Proposed Rule 806, like § 40.5(e), would provide that, at any time during its review, the Commission may notify the SBSEF that it will not, or is unable to, approve the new rule or rule amendment. This notification would have to briefly specify the nature of the issues raised and the specific provision of the SEA or the Commission’s rules thereunder, including the form or content requirements of Proposed Rule 806, with which the new rule or rule amendment is inconsistent or appears to be inconsistent with the SEA or the Commission’s rules thereunder. Paragraph (f) of Proposed Rule 806, like § 40.5(f), would provide that such a notification to an SBSEF would not prevent the SBSEF from subsequently submitting a revised version of the proposed rule or rule amendment for Commission review and approval or from submitting the new rule or rule amendment as initially proposed in a supplemented submission. Paragraph 52 (f) would further provide that the revised submission would be reviewed without prejudice. Finally, paragraph (f) would provide that such a notification to an SBSEF of the Commission’s determination not to approve a proposed rule or rule amendment shall be presumptive evidence that the SBSEF may not truthfully certify the same, or substantially the same, proposed rule or rule amendment under Rule 807(a). Paragraph (g) of Proposed Rule 806, like § 40.5(g), would provide that, notwithstanding Rule 806(c), changes to a proposed rule or a rule amendment, including changes to terms and conditions of a product that are consistent with the SEA and the Commission’s rules thereunder, may be approved by the Commission at such time and under such conditions as the Commission shall specify in the written notification; provided, however, that the Commission may, at any time, alter or revoke the applicability of such a notice to any particular product or rule amendment. The Commission received no comments on Proposed Rule 806 and the Commission is adopting Rule 806 as proposed, with the exception of the proposed Inline XBRL and EDGAR filing requirements, and with minor technical modifications, for the reasons stated in the Proposing Release. 127 D. Rule 807—Self-Certification of Rules Proposed Rule 807 is closely modeled on § 40.6 of the CFTC’s rules and would set forth procedures by which an SBSEF may self-certify changes to its rules. Paragraph (a) of Proposed Rule 807, modeled on § 40.6(a), would set forth the conditions that an SBSEF must comply with before implementing a rule or rule amendment via self-certification. Like § 40.6(a), Proposed 127 See supra note 32. As described in further detail in the discussion of electronic filing systems and structured data, the Commission will require all rule and product filings required by Rules 804 through 807 and 816 to be filed in unstructured format through EFFS, rather than in Inline XBRL through EDGAR. See infra section XIII.A. 53 Rule 807(a) would permit an SBSEF to implement a rule or rule amendment without obtaining the Commission’s prior approval under Rule 806, but only if it “self-certifies” the rule or rule amendment in compliance with the conditions set forth in Rule 807. Proposed Rule 807(a) would also permit an SBSEF to self-certify a rule or rule amendment that the Commission had previously approved under Rule 806, or that the SBSEF had previously self-certified under Rule 807, but that in the interim had become a dormant rule (i.e., unimplemented for 12 consecutive calendar months). 128 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 t [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A8c8bccd72f6e27d3. Public record. Not legal advice.