# Regulation SBSR-Reporting and Dissemination of Security-Based Swap Information

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2010-29710

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** December 2, 2010
- **Citation:** 75 FR 75208

## Text

SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 242
[Release No. 34-63346; File No. S7-34-10]
RIN 3235-AK80
Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rules.

SUMMARY:

In accordance with Section 763 (“Section 763”) and Section 766 (“Section 766”) of Title VII (“Title VII”) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Securities and Exchange Commission (“SEC” or “Commission”) is proposing Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information (“Regulation SBSR”) under the Securities Exchange Act of 1934 (“Exchange Act”).
1

Proposed Regulation SBSR would provide for the reporting of security-based swap information to registered security-based swap data repositories or the Commission and the public dissemination of security-based swap transaction, volume, and pricing information. Registered security-based swap data repositories would be required to establish and maintain certain policies and procedures regarding how transaction data are reported and disseminated, and participants of registered security-based swap data repositories that are security-based swap dealers or major security-based swap participants would be required to establish and maintain policies and procedures that are reasonably designed to ensure that they comply with applicable reporting obligations. Finally, proposed Regulation SBSR also would require a registered SDR to register with the Commission as a securities information processor on existing Form SIP.

1
15 U.S.C. 78a
et seq.
All references in this release to the Exchange Act refer to the Securities Exchange Act of 1934, as amended by the Dodd-Frank Act.

DATES:

Comments should be received on or before January 18, 2011.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form (
http://www.sec.gov/rules/final.shtml
); or

• Send an e-mail to
rule-comments@sec.gov.
Please include File Number S7- on the subject line; or

• Use the Federal eRulemaking Portal (
http://www.regulations.gov
). Follow the instructions for submitting comments.

Paper Comments

• Send paper comments in triplicate to Elizabeth Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-34-10. This file number should be included on the subject line if e-mail is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (
http://www.sec.gov/rules/proposed.shtml
). Comments are also available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549 on official business days between the hours of 10 a.m. and 3 p.m. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT:

Michael Gaw, Assistant Director, at (202) 551-5602, David Michehl, Senior Special Counsel, at (202) 551-5627, Sarah Albertson, Special Counsel, at (202) 551-5647, Natasha Cowen, Special Counsel, at (202) 551-5652, Yvonne Fraticelli, Special Counsel, at (202) 551-5654, Geoffrey Pemble, Special Counsel, at (202) 551-5628, Brian Trackman, Special Counsel, at (202) 551-5616, Mia Zur, Special Counsel, at (202) 551-5638, Kathleen Gray, Attorney, at (202) 551-5305, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

The Commission is proposing Regulation SBSR under the Exchange Act providing for the reporting of security-based swap information to registered security-based swap data repositories or the Commission, and the public dissemination of security-based swap transaction, volume, and pricing information. The Commission is soliciting comments on all aspects of the proposed rules and will carefully consider any comments received.

I. Introduction

A. Background

On July 21, 2010, the President signed the Dodd-Frank Act into law.
2

The Dodd-Frank Act was enacted to, among other things, promote the financial stability of the United States by improving accountability and transparency in the financial system.
3

Title VII of the Dodd-Frank Act provides the Commission and the Commodity Futures Trading Commission (“CFTC”) with the authority to regulate over-the-counter (“OTC”) derivatives in light of the recent financial crisis, which demonstrated the need for enhanced regulation in the OTC derivatives markets. The Dodd-Frank Act is intended to close loopholes in the existing regulatory structure and to provide the Commission and the CFTC with effective regulatory tools to oversee the OTC derivatives markets, which have grown exponentially in recent years and are capable of affecting significant sectors of the U.S. economy. The primary goals of Title VII, among others, are to increase the transparency and efficiency of the OTC derivatives markets and to reduce the potential for counterparty and systemic risk.
4

2
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. No. 111-203, H.R. 4173).

3

See id.
at Preamble.

4

See
“Financial Regulatory Reform—A New Foundation: Rebuilding Financial Supervision and Regulation,” U.S. Department of the Treasury, pp. 47-48 (June 17, 2009).

The Dodd-Frank Act provides that the CFTC will regulate “swaps,” the Commission will regulate “security-based swaps” (“SBSs”), and the CFTC and the Commission will jointly regulate “mixed swaps.”
5

The Dodd-

Frank Act amends the Exchange Act to require the Commission to adopt rules providing for, among other things (1) the reporting of SBSs to a registered security-based swap data repository (“SDR”)
6

or to the Commission; and (2) real-time public dissemination of SBS transaction, volume, and pricing information.
7

To fulfill these requirements, the Commission today is proposing Regulation SBSR, which would be comprised of Rules 900 to 911 under the Exchange Act. In preparation for the rulemakings required by the Dodd-Frank Act, the Commission and the CFTC held a joint public roundtable (the “Market Data Roundtable”) on September 14, 2010, to gain further insight into many of the issues addressed in this proposal.
8

In addition, the Commission has offered the opportunity for the public to express its views on the Commission rulemakings required by the Dodd-Frank prior to proposing rules.
9

The rules proposed today generally take into account the views expressed at the Market Data Roundtable, as well as any comments received.

5
Section 712(d) of the Dodd-Frank Act provides that the Commission and the CFTC, in consultation with the Board of Governors of the Federal Reserve System (“Federal Reserve”), shall jointly further define the terms “swap,” “security-based swap,” “swap dealer,” “security-based swap dealer,” “major swap participant,” “major security-based swap participant,” “eligible contract participant,” and “security-based swap agreement.” These terms are defined in Sections 721 and 761 of the Dodd-Frank Act and, with respect to the term “eligible contract participant,” in Section 1a(18) of the Commodity Exchange Act (“CEA”), 7 U.S.C. 1a(18), as re-designated and amended by Section 721 of the Dodd-Frank Act. Further, Section 721(c) of the Dodd-Frank Act requires the CFTC to adopt a rule to further define the terms “swap,” “swap dealer,” “major swap participant,” and “eligible contract participant,” and Section 761(b) of the Dodd-Frank Act requires the Commission to adopt a rule to further define the terms “security-based swap,” “security-based swap dealer,” “major security-based swap participant,” and “eligible contract participant,” with regard to SBSs, for the purpose of including transactions and entities that have been structured to evade Title VII of the Dodd-Frank Act. Finally, Section 712(a) of the Dodd-Frank Act provides that the Commission and CFTC, after consultation with the Federal Reserve, shall

jointly prescribe regulations regarding “mixed swaps,” as may be necessary to carry out the purposes of Title VII. To assist the Commission and CFTC in further defining the terms specified above, and to prescribe regulations regarding “mixed swaps” as may be necessary to carry out the purposes of Title VII, the Commission and the CFTC sought comment from interested parties.
See
Securities Exchange Act Release No. 62717 (August 13, 2010), 75 FR 51429 (August 20, 2010) (File No. S7-16-10) (advance joint notice of proposed rulemaking regarding definitions contained in Title VII of the Dodd-Frank Act) (“Definitions Release”).

6
A SDR is “any person that collects and maintains information or records with respect to transactions or positions in, or the terms and conditions of, security-based swaps entered into by third parties for the purpose of providing a centralized recordkeeping facility for security based swaps.”
See
Section 3(a)(75) of the Exchange Act, 15 U.S.C. 78c(a)(75). The Commission is also proposing today new Rules 13n-1 through 13n-11 under the Exchange Act relating to the SDR registration process, the duties of SDRs, and the core principles for operating a registered SDR.
See
Securities Exchange Act Release No. 63347 (November 19, 2010) (“SDR Registration Proposing Release”).

7
Rules governing the reporting and dissemination of swaps are the subject of a separate rulemaking by the CFTC.

8
The Commission and the CFTC solicited comments on the Market Data Roundtable.
See
Securities Exchange Act Release No. 62863 (September 8, 2010), 75 FR 55575 (September 13, 2010). Comments received by the Commission are available at
http://www.sec.gov/cgi-bin/ruling-comments?ruling=df-title-vii-real-time-reporting&rule_path=/comments/df-title-vii/real-time-reporting&file_num=DF%20Title%20VII%20-%20Real%20Time%20Reporting&action=Show_Form&title=Real-Time%20Reporting%20-%20Title%20VII%20Provisions%20of%20the%20Dodd-Frank%20Wall%20Street%20Reform%20and%20Consumer%20Protection%20Act.

9

See http://www.sec.gov/spotlight/regreformcomments.shtml.

In a separate release, the Commission is today proposing new rules under the Exchange Act governing the security-based swap data repository registration process, duties, and core principles.
10

Proposed Rules 13n-1 through 13n-11 under the Exchange Act would, among other things, require SDRs to comply with the requirements and core principles described in Section 13(n) of the Exchange Act. An SDR also would be required to appoint a chief compliance officer and specify the duties of the chief compliance officer.

10

See
SDR Registration Proposing Release,
supra
note 6.

Taken together, the rules that the Commission proposes today would establish comprehensive regulation of SBS data and thus provide transparency for SBSs to regulators and the markets. The proposed rules would require SBS transaction information to be (1) provided to registered SDRs in accordance with uniform data standards; (2) verified and maintained by registered SDRs, which would serve as secure, centralized recordkeeping facilities that are accessible by regulators and relevant authorities; and (3) publicly disseminated in a timely fashion by registered SDRs. In combination, these proposed rules are designed to promote transparency and efficiency in the SBS markets and create an infrastructure to assist the Commission and other regulators in performing their market oversight functions.

In proposing these rules, the Commission is mindful that there may be differences between the SBS market and the other securities markets that the Commission regulates. For example, though the marketplace has developed standardized terms for various types of SBSs, contracts are nevertheless customizable. Furthermore, unlike bonds or equity securities, SBSs are not today readily fungible. The liquidity characteristics of SBSs also may differ in comparison with other markets. Relative to the overall equity markets, SBSs trade much less frequently, though the trading frequency of some illiquid equities would be comparable to that of some SBSs. The liquidity of SBSs compared to the bond market depends on the specifics of the SBS and the bond (
e.g.,
Treasury, corporate, municipal). Many bonds do not have standardized SBS analogs and would therefore be more liquid than bespoke customizable SBS contracts that would function as the analog. But some market participants have found the SBSs written on some issuers and securities to be more liquid and readily tradable during certain periods of time than the underlying securities themselves.

Another notable distinction is that the SBS market does not generally have the equivalent of a “retail” segment characterized by a high-volume of small-sized trades. Though some swaps on some interest rates, indices, and currencies may support high volumes, many SBSs trade infrequently. For example, an analysis by the staff of trading in single-name credit default swaps (“CDS”) show that approximately 90% of single-name CDS on corporate issuers trade at an average of five times or less per day, with an average trade size of over $5 million.
11

This same analysis shows that 89% of single-name CDS on sovereign issuers trade at an average of ten times or less per day, with an average trade size of over $12 million.

11
This analysis is based on a sample of dollar-quoted, gold record transactions submitted to the Depository Trust & Clearing Corporation (“DTCC”) between August 1, 2009, and July 30, 2010.

The Commission also is mindful that, both over time and as a result of Commission proposals to implement the Dodd-Frank Act, the further development of the SBS market may alter some of the specific calculus for future regulation of reporting and real-time public dissemination of SBS transaction information. During the process of implementing the Dodd-Frank Act and beyond, the Commission will therefore closely monitor developments in the SBS market.

B. Overview of Security-Based Swap Reporting and Dissemination Requirements in the Dodd-Frank Act

1. Security-Based Swap Reporting Requirements

The Dodd-Frank Act adds several provisions to the Exchange Act that require the reporting of information relating to SBSs. Section 3C(e) of the Exchange Act
12

requires the Commission to adopt rules that provide for the reporting of SBS data as follows: (1) SBSs entered into before the date of enactment of Section 3C shall be reported to a registered SDR or the Commission no later than 180 days after the effective date of Section 3C (
i.e.,
540 days after the enactment of the Dodd-Frank Act); and (2) SBSs entered into on or after the date of enactment of Section 3C shall be reported to a registered SDR or to the Commission no later than the later of (1) 90 days after the effective date of Section 3C (
i.e.,
450 days after the enactment of the Dodd-Frank Act),

or (2) such other time after entering into the SBS as the Commission may prescribe by rule or regulation.

12
15 U.S.C. 78c-3(e).

In addition, Section 13A(a)(1) of the Exchange Act
13

requires that each SBS that is not accepted for clearing by any clearing agency or derivatives clearing organization be reported to (1) an SDR, or (2) in the case in which there is no SDR that would accept such SBS, to the Commission, within such time period as the Commission may by rule or regulation prescribe. Section 13(m)(1)(G) of the Exchange Act
14

provides, further, that each SBS (whether cleared or uncleared) shall be reported to a registered SDR. Section 13(m)(1)(F) of the Exchange Act
15

states that the parties to a SBS, including agents of the parties to a SBS, shall be responsible for reporting SBS transaction information to the appropriate registered entity in a timely manner as may be prescribed by the Commission.
16

13
15 U.S.C. 78m-1(a)(1).

14
15 U.S.C. 78m(1)(G).

15
15 U.S.C. 78m(m)(1)(F).

16
In addition, Section 13A(a)(2) of the Exchange Act requires the Commission to adopt an interim final rule providing for the reporting of SBSs entered into before the date of enactment of the Dodd-Frank Act the terms of which had not expired as of that date. To satisfy this requirement, the Commission adopted Rule 13Aa-2T under the Exchange Act, an interim final temporary rule for the reporting of such SBSs.
See
Securities Exchange Act Release No. 63094 (“Interim Rule Release”).

Section 13(n)(4)(A)(i) of the Exchange Act
17

requires the Commission to prescribe standards that specify the data elements for each SBS that must be collected and maintained by each registered SDR. Further, Section 13(n)(4)(A)(ii) of the Exchange Act
18

requires the Commission, in carrying out Section 13(n)(4)(A)(i) of the Exchange Act, to prescribe consistent data element standards applicable to registered entities and reporting counterparties. Under Section 13(n)(5) of the Exchange Act, a registered SDR must, among other things, maintain the SBS data it collects in the form and manner prescribed by the Commission, provide the Commission or its designee with direct electronic access, and make SBS data available on a confidential basis, upon request, to certain regulatory authorities.
19

17
15 U.S.C. 78(n)(4)(A)(i).

18
15 U.S.C. 78(n)(4)(A)(ii).

19
These responsibilities of registered SDRs under Section 13(n)(5) of the Exchange Act, 15 U.S.C. 78m(n)(5), will be the subject of a separate Commission rulemaking.
See
SDR Registration Proposing Release,
supra
note 6.

2. Security-Based Swap Dissemination Requirements

Section 13(m)(1)(B) of the Exchange Act
20

authorizes the Commission to make SBS transaction and pricing data available to the public in such form and at such times as the Commission determines appropriate to enhance price discovery, subject to the general requirement in Section 13(m)(1)(C) of the Exchange Act
21

that all SBS transactions be subject to real-time public reporting. Section 13(m)(1)(C) authorizes the Commission to provide by rule for the public availability of SBS transaction, volume, and pricing data as follows:

20
15 U.S.C. 78m(m)(1)(B).

21
15 U.S.C. 78m(m)(1)(C).

(1) With respect to those SBSs that are subject to the mandatory clearing requirement described in Section 3C(a)(1) of the Exchange Act (including those SBSs that are excepted from the requirement pursuant to Section 3C(g) of the Exchange Act), the Commission shall require real-time public reporting for such transactions;
22

22
Section 3C(a)(1) of the Exchange Act provides that it shall be unlawful for any person to engage in a SBS unless that person submits such SBS for clearing to a clearing agency that is registered under the Exchange Act or a clearing agency that is exempt from registration under the Exchange Act if the SBS is required to be cleared. Section 3C(g)(1) of the Exchange Act provides that requirements of Section 3C(a)(1) will not apply to a SBS if one of the counterparties to the SBS (1) is not a financial entity; (2) is using SBSs to hedge or mitigate commercial risk; and (3) notifies the Commission, in a manner set forth by the Commission, how it generally meets its financial obligations associated with entering into non-cleared SBSs.

(2) With respect to those SBSs that are not subject to the mandatory clearing requirement described in Section 3C(a)(1) of the Exchange Act, but are cleared at a registered clearing agency, the Commission shall require real-time public reporting for such transactions;

(3) With respect to SBSs that are not cleared at a registered clearing agency and which are reported to a SDR or the Commission under Section 3C(a)(6),
23

the Commission shall require real-time public reporting for such transactions, in a manner that does not disclose the business transactions and market positions of any person; and

23
The reference in Section 13(m)(1)(C)(iii) of the Exchange Act to Section 3C(a)(6) of the Exchange Act is incorrect. Section 3C of the Exchange Act does not contain a paragraph (a)(6).

(4) With respect to SBSs that are determined to be required to be cleared under Section 3C(b) of the Exchange Act but are not cleared, the Commission shall require real-time public reporting for such transactions.
24

24
Section 3C(b)(1) of the Exchange Act requires the Commission to review on an ongoing basis each SBS, or any group, category, type, or class of SBS to make a determination that such SBS, or group, category, type, or class of SBS should be required to be cleared.

Section 13(m)(1)(A) of the Exchange Act
25

states that the term “real-time public reporting” means to report data relating to a SBS transaction, including price and volume, as soon as technologically practicable after the time at which the SBS transaction has been executed.

25
15 U.S.C. 78m(m)(1)(A).

With respect to SBSs that are subject to Sections 13(m)(1)(C)(i) and (ii) of the Exchange—
i.e.,
SBSs that are subject to the mandatory clearing requirement in Section 3C(a)(1) (including those SBSs that are not cleared pursuant to the exception in Section 3C(g)(1)) and SBSs that are not subject to the mandatory clearing requirement in Section 3C(a)(1) but are cleared—Section 13(m)(1)(E) of the Exchange Act
26

requires that the Commission's rule providing for the public availability of SBS transaction and pricing data contain provisions to: (1) Ensure that such information does not identify the participants; (2) specify the criteria for determining what constitutes a large notional SBS transaction (block trade) for particular markets and contracts; (3) specify the appropriate time delay for reporting large notional SBS transactions (block trades) to the public; and (4) that take into account whether public disclosure will materially reduce market liquidity.

26
15 U.S.C. 78m(m)(1)(E).

Section 13(m)(1)(D) of the Exchange Act
27

authorizes the Commission to require registered entities
28

to publicly disseminate the SBS transaction and pricing data required to be reported under Section 13(m)(1) of the Exchange Act. In addition, Section 13(n)(5)(D)(ii) of the Exchange Act states that a registered SDR shall provide data “in such form and at such frequency as the Commission may require to comply with the public reporting requirements set forth in subsection (m).”
29

27
15 U.S.C. 78m(m)(1)(D).

28
The Exchange Act does not define the term “registered entity” or “registered entities.” The Commission believes that the term “registered entities” in Sections 13(m)(1)(F) and 13(n)(4)(A)(ii) of the Exchange Act includes registered SDRs because SDRs are required to register with the Commission pursuant to Section 13(n) of the Exchange Act, 15 U.S.C. 78m(n).

29
15 U.S.C. 78m(n)(5)(D)(ii).

II. Description of Proposed Rules

A. Overview

In general, proposed Regulation SBSR would provide for the reporting of three broad categories of SBS information: (1) Information that would be required to be reported to a registered SDR in real

time and publicly disseminated;
30

(2) additional information that would be required to be reported to a registered SDR or, if there is no registered SDR that would receive such information, to the Commission, within specified timeframes, but that would not be publicly disseminated; and (3) information about “life cycle events”, as defined in proposed Rule 900
31

and discussed below, that would be reported as a result of a change to information previously reported for a SBS. As described in greater detail below, proposed Regulation SBSR would identify the SBS transaction information that would be required to be reported, establish reporting obligations, and specify the timeframes for reporting and disseminating information.

30

See
proposed Rule 900 (defining “real time” to mean, with respect to the reporting of SBS information, as soon as technologically practicable, but in no event later than 15 minutes after the time of execution of the SBS, and defining “time of execution” as the point at which the counterparties to a SBS become irrevocably bound under applicable law).
See also

infra
Section III (discussing proposed rules relating to real-time public dissemination of SBS transaction information).

31
Proposed Rule 900 would provide definitions of various terms used in proposed Regulation SBSR and further provide that terms that appear in Section 3 of the Exchange Act, 15 U.S.C. 78c, would have the same meaning as in Section 3 and the rules or regulations thereunder.

In addition, proposed Regulation SBSR would require a registered SDR to publicly disseminate the SBS information that would be required to be reported in real time. Proposed Regulation SBSR also would require a registered SDR to register with the Commission as a securities information processor (“SIP”) on existing Form SIP.

B. Who Must Report

Section 13(m)(1)(F) of the Exchange Act
32

provides that parties to a SBS (including agents of parties to a SBS) shall be responsible for reporting SBS transaction information to the appropriate registered entity in a timely manner as may be prescribed by the Commission. Section 13A(a)(3) of the Exchange Act
33

specifies the party obligated to report SBSs that are not accepted by any clearing agency or derivative clearing organization. Proposed Rule 901(a) would specify which counterparty is the “reporting party” for a SBS, thereby implementing Sections 13(m)(1)(F) and 13A(a)(3) of the Exchange Act, as follows:

32
15 U.S.C. 78m(m)(1)(F).

33
15 U.S.C. 78m[A(a)(3)].

• With respect to a SBS in which only one counterparty is a security-based swap dealer (“SBS dealer”) or major security-based swap participant (“major SBS participant”),
34

the SBS dealer or major SBS participant shall be the reporting party;

34

See
15 U.S.C. 78c(a)(71) (defining “security-based swap dealer”); 15 U.S.C. 78c(a)(67) (defining “major security-based swap participant”).
See also

supra
note 5.

• With respect to a SBS in which one counterparty is a SBS dealer and the other counterparty is a major SBS participant, the SBS dealer shall be the reporting party; and

• With respect to any other SBS not described in the first two cases, the counterparties to the SBS shall select a counterparty to be the reporting party.

The Exchange Act, as modified by the Dodd-Frank Act, does not explicitly specify which counterparty should be the reporting party for those SBSs that are cleared by a clearing agency or derivative clearing organization. The Commission preliminarily believes that, for the sake of uniformity and ease of applicability, the duty to report a SBS should attach to the same counterparty regardless of whether the SBS is cleared or uncleared. In addition, the Commission preliminarily believes that SBS dealers and major SBS participants generally should have the responsibility to report SBS transactions, as they are more likely than other counterparties to have appropriate systems in place to facilitate reporting.

Accordingly, with respect to a SBS where both counterparties are U.S. persons,
35

proposed Rule 901(a) would assign reporting responsibilities as follows:

35

See
proposed Rule 900 (defining “U.S. person” to mean a natural person that is a U.S. citizen or U.S. resident or a legal person that is organized under the corporate laws of any part of the United States or has its principal place of business in the United States).
See also

infra
Section VIII (discussing application of proposed Regulation SBSR to cross-border SBS transactions).

• With respect to a SBS in which only one counterparty is a SBS dealer or major SBS participant, the SBS dealer or major SBS participant would be the reporting party;

• With respect to a SBS in which one counterparty is a SBS dealer and the other counterparty is a major SBS participant, the SBS dealer would be the reporting party; and

• With respect to any other SBS not described in the first two cases, the counterparties to the SBS would select a counterparty to be the reporting party.

Proposed Rule 901(a)(1) would provide that, where only one counterparty to a SBS is a U.S. person, the U.S. person would be the reporting party. The Commission preliminarily believes that, where only one counterparty is a U.S. person, assigning the reporting duty to the counterparty that is a U.S. person would help to assure compliance with the reporting requirements of proposed Regulation SBSR.

In addition, it is possible that a SBS executed in the United States or through any means of interstate commerce, or that is cleared through a clearing agency having its principal place of business in the United States, could be executed between two counterparties neither of which is a U.S. person. Proposed Rule 901(a)(3) would provide that, if neither party is a U.S. person but the SBS is executed in the United States or through any means of interstate commerce, or is cleared through a clearing agency having its principal place of business in the United States,
36

the counterparties to the SBS would be required to select a counterparty to be the reporting party.
37

36

See
proposed Rules 908(a)(2) and (3) and
infra
Section VIII.

37

See infra
Section VIII (discussing the requirements for the reporting of a SBS if the SBS is executed in the United States or through any means of interstate commerce, or is cleared through a registered clearing agency having its principal place of business in the United States).

To comply with the duty to report in real time itself, a reporting party likely would need to develop and maintain an internal order management system (“OMS”) capable of capturing all relevant SBS data and sending it in real time. The Commission further believes that each reporting party likely would need to establish and maintain an appropriate compliance program and support for the operation of the OMS and reporting mechanism, which could include transaction verification and validation protocols, and necessary technical, administrative, and legal support. However, proposed Rule 901(a) would not prevent a reporting party to a SBS from entering into an agreement with a third party to report the transaction on behalf of the reporting party. For example, for a SBS executed on a security-based swap execution facility (“SB SEF”)
38

or a national securities exchange, the SB SEF or national securities exchange could transmit a transaction report for the SBS to a registered SDR. By specifying the reporting party with the duty to report SBS information under proposed Regulation SBSR, the Commission does not intend to inhibit the development of commercial ventures to provide trade processing services to SBS counterparties. Nevertheless, a SBS counterparty that is a reporting party would retain the obligation to ensure

that information is provided to a registered SDR in the manner and form required by proposed Regulation SBSR, even if the reporting party has entered into an agreement with a third party to report on its behalf.
39

38

See
15 U.S.C. 78c(a)(77) (defining “security-based swap execution facility”). The registration and regulation of SB SEFs is the subject of a separate Commission rulemaking.

39
Thus, a reporting party would be liable for a violation of proposed Rule 901 if, for example, a SB SEF acting on the reporting party's behalf reported a SBS transaction to a registered SDR late or inaccurately.

Request for Comment

The Commission requests comment on all aspects of the proposal as to who would be responsible for reporting SBSs to a registered SDR.

1. Do any entities currently have the functionality to report SBSs, as proposed, to data repositories? If so, who? Do commenters think it is likely that entities other than SBS counterparties will develop the functionality to report SBSs to registered SDRs? If so, what are these entities and how will they operate?

2. Should the Commission
require
one or more entities other than a SBS counterparty, such as a registered SB SEF, a national securities exchange, a clearing agency, or a broker, to report SBSs? Or do commenters agree with the Commission's approach of assigning the responsibility to report to a counterparty, while allowing the counterparty to have an agent (such as a SB SEF) act on its behalf?

3. In practice, would reporting parties employ agents? Should the Commission encourage this?

4. Are the obligations assigned in proposed Rule 901(a) sufficiently clear?

5. For SBSs executed on a SB SEF or national securities exchange, would the counterparties to the SBS have the information necessary to know which counterparty would incur the reporting obligation? For example, for an anonymous SBS executed on a SB SEF and cleared by a clearing agency, would the counterparties know each other's identities? If not, what steps could they take to obtain enough information to be able to ascertain which party has the reporting obligation? Could the SB SEF provide that information to the counterparties? Alternatively, should the reporting obligation be assigned to the SB SEF or other trading venue?

6. In cases where counterparties would be required to select which counterparty would report the transaction, is additional Commission guidance likely to be necessary? Should the Commission adopt a default mechanism to allocate the reporting obligation in such cases? For example, if a SBS is between two SBS dealers, should the Commission mandate that the “seller” always have the responsibility for reporting?

7. Do commenters agree with the Commission's proposed approach for reporting for SBSs where only one counterparty is a U.S. person? If not, how should it be revised?

8. Do commenters agree with the Commission's proposed approach for reporting for SBSs where neither counterparty is a U.S. person? If not, how should it be revised?

9. To what extent would reporting parties have to obtain new or update existing OMSs and establish appropriate compliance programs to satisfy the real-time reporting obligations of proposed Rule 901(c)? Would current systems be able to handle this responsibility? Could current systems be upgraded or would they have to be replaced completely?

C. Where Information Is Reported

Proposed Rule 901(b) would require a reporting party to report the information required under proposed Regulation SBSR to a registered SDR or, if there is no registered SDR that would accept the information, to the Commission. The Commission believes that it would be very unlikely that there would be a situation where a reporting party would be required to report to the Commission rather than a registered SDR. Proposed Rule 13n-5(b)(1)(ii) under the Exchange Act would require a registered SDR that accepts reports for any SBS in a particular asset class to accept reports for all SBSs in that asset class.
40

Thus, a reporting party would not be able to report a SBS transaction to the Commission unless no registered SDR accepts transaction information for any SBS in the same asset class as the transaction. In addition, there currently exist entities that accept SBS transaction data in CDS and equity swaps that would likely be required to register as a SDR.

40

See
SDR Registration Proposing Release,
supra
note 6.

Request for Comment

10. Is the Commission's belief that it would be unlikely to have a situation where a reporting party must report to the Commission rather than a registered SDR reasonable?

11. Do commenters believe that there will be at least one registered SDR in each SBS asset class?

12. Are there any SBS asset classes for which there might not be a registered SDR?

III. Information To Be Reported in Real Time

A. Introduction

Proposed Rule 901 divides the SBS information that would be required to be reported into three broad categories: (1) Information that would be required to be reported in real time pursuant to proposed Rule 901(c)
41

and publicly disseminated pursuant to proposed Rule 902; (2) additional information that would be required to be reported (but not publicly disseminated) pursuant to proposed Rule 901(d)(1)
42

within the timeframes specified in proposed Rule 901(d)(2), which would vary depending on whether the transaction was executed and confirmed electronically or manually; and (3) life cycle event information that would be required to be reported under proposed Rule 901(e).
43

41

See infra
Section III.B (discussing the categories of information to be provided for real-time reporting).

42

See infra
Section IV.B (discussing those data elements required under Rule 901(d)(1)).

43

See infra
Section IV.D (discussing the reporting of life cycle event information). A registered SDR would be required to adopt policies and procedures to determine, among other things, whether and how it would publicly disseminate reports of life cycle events.
See
proposed Rule 907(a)(4).

The Commission notes that, although only the information specified in proposed Rule 901(c) would be required to be reported in real time, proposed Rule 901(c) would not prevent a reporting party from reporting some or all of the additional information required under proposed Rule 901(d)(1) at the same time that it reports the information required under proposed Rule 901(c). In other words, proposed Rule 901 would not mandate separate reports for the SBS information required under paragraphs (c) and (d) of proposed Rule 901; if a reporting party wished to provide all of the information required under proposed Rule 901 in a single transaction report, it would be free to do so—provided it could provide all of the information within the timeframe required by proposed Rule 901(c).

B. Categories of Information To Be Provided for Real-time Reporting

Proposed Rule 901(c) would set forth the categories of information pertaining to a SBS transaction that a reporting party would be required to report to a registered SDR in real time. For the reasons discussed below, the Commission preliminarily believes that the SBS information required to be reported under proposed Rule 901(c)—which the registered SDR would publicly disseminate pursuant to

proposed Rule 902—would serve the objectives of Section 13(m) of the Exchange Act by enhancing price discovery in the SBS market.

The Commission recognizes that the SBS market involves complex instruments and that reporting conventions continue to evolve. Consequently, in developing proposed Rule 901, the Commission explored various alternative approaches, including mandating by rule an enumerated list of all specific data elements to be reported. The Commission believes that such a list likely would have to vary by asset class (
e.g.,
CDS and equity-based swaps), and would require further variations based on sub-asset type.
44

The Commission understands, based on discussion with industry participants, that between 50 and 100 or more separate data elements could be used to express a typical CDS.

44
For example, the following types of CDS could each require a different list of data elements: Single-name CDS, index CDS, loan CDS, and CDS on asset-backed securities.

A Commission rule that attempted to identify each data element for each SBS asset class or sub-asset type could be less flexible in responding to changes in the marketplace, including the introduction of new types of SBSs, because it would be necessary for the Commission to amend its rules each time it sought to require the reporting of additional or different data elements. Accordingly, rather than enumerating each data element for each SBS asset class or sub-asset type that would be required to be reported, proposed Rule 901(c) would instead specify the categories of information that would be required to be reported for each SBS transaction. Furthermore, proposed Rule 907, discussed more fully below, would require each registered SDR to establish, maintain, and make publicly available policies and procedures that, among other things, specify the data elements of a SBS (or a life cycle event) that a reporting party would be required to report. These data elements would be required to include, at a minimum, the data elements required under proposed Rule 901(c) (for information that will be publicly disseminated) and proposed Rule 901(d) (for non-disseminated regulatory information). The Commission preliminarily believes that proposed Rule 901(c), together with these policies and procedures, would promote the reporting of uniform, material information for each SBS, while providing flexibility to account for changes to the SBS market over time.

The Commission discusses below the SBS data that would be required to be reported in real time, and which would be publicly disseminated.

1. Asset Class

Proposed Rule 901(c)(1) would require the reporting party to report the asset class of the SBS and, if the SBS is an equity derivative, whether the SBS is a total return swap or is otherwise designed to offer risks and returns proportional to a position in the equity security or securities on which the SBS is based. Proposed Rule 900 would define “asset class” to mean those SBSs in a particular broad category, including, but not limited to, credit derivatives, equity derivatives, and loan-based derivatives. The Commission believes that identifying the asset class would provide market participants with basic information about the SBS transaction to identify the type of SBS being publicly reported. In addition, requiring the reporting party to indicate whether the SBS is an equity total return swap or is otherwise designed to offer risks and returns proportional to a position in the equity security or securities on which the SBS is based would enable a registered SDR to know if the SBS was excluded from being a block trade.
45

45

See
proposed Rule 907(b)(4)(ii).

2. Date and Time of Execution

Proposed Rule 901(c)(4) would require the reporting party to report the date and time, to the second, of execution of a SBS, so that prices of transactions that are disseminated in real time can be properly ordered, and so the Commission can have a detailed record of when any given SBS was executed. In the absence of this information, market participants and regulators would not know whether transaction reports they are seeing reflect the current state of the market.

The Commission preliminarily believes that the time at which the SBS transaction has been executed should be the point at which the counterparties to a SBS become irrevocably bound under applicable law.
46

For example, in the context of SBSs, an oral agreement over the phone will create an enforceable contract, and the time of execution would be deemed to be the time that the parties to the telephone call agree to the material terms.
47

The Commission recognizes that trades agreed to over the phone would need to be systematized for purposes of fulfilling this reporting requirement (as well as real-time reporting of other data elements) by being entered in an electronic system that assigns a time stamp. The Commission believes that it is consistent with Congress' intent for orally negotiated SBS transactions to be systematized as quickly as possible so that they could be publicly disseminated using electronic means.
48

46

See
proposed Rule 900. Section 13(m)(1)(A) of the Exchange Act defines “real time” in relation to the “execution” of the SBS, not when it is confirmed or cleared.

47
The Dodd-Frank Act amends the definition of “security” under the Securities Act and Exchange Act to explicitly include SBSs, and the execution of the transaction will be the sale for purposes of the federal securities laws.
See
Securities Act Release No. 3591 (July 19, 2005), 70 FR 44722 (August 3, 2005), notes 391 and 394 (explaining when a sale occurs under the Securities Act).

48
The Senate Report accompanying the Dodd-Frank Act indicates that “[m]arket participants—including exchanges, contract markets, brokers, clearing houses and clearing agencies-were consulted and affirmed that the existing communications and data infrastructure for the swaps markets could accommodate real time swap transaction and price reporting.” The Senate Report stated, further, that real time swap transaction and price reporting would narrow swap bid/ask spreads, make for a more efficient swaps market and benefit consumers and counterparties overall.
See
156 Cong. Rep. S5921 (July 15, 2010). In light of this acknowledgement of the benefits of real-time SBS transaction and price reporting, and the apparent feasibility of such reporting, the Commission believes that Congress intended for orally negotiated SBS transactions to be systematized as quickly as possible and reported in real time.

The Commission is proposing that the date and time of execution be expressed using Coordinated Universal Time (“UTC”), a slight variation on Greenwich Mean Time.
49

SBSs are traded globally, and the Commission expects that many SBSs subject to these reporting and dissemination rules would be executed between counterparties in different time zones. In the absence of a uniform standard, it might not be clear whether the date and time of execution were being expressed from the standpoint of the time zone of the first counterparty, the second counterparty, or the registered SDR itself. Mandating a common standard for expressing date and time is designed to alleviate any potential confusion on the part of registered SDRs, counterparties, other market participants, and the public as to when the SBS was executed. The Commission believes that UTC is an appropriate and well known standard

suitable for purposes of reporting the time of execution of SBSs.

49
The generally acknowledged acronym for Coordinated Universal Time is “UTC,” rather than “CUT.” The International Telecommunication Union, an agency of the United Nations that oversees information and communication technology issues, wanted Coordinated Universal Time to have the same symbol in all languages. English and French speakers wanted the initials of both their respective language's terms to be used internationally: “CUT” for “coordinated universal time” and “TUC” for “temps universel coordonné.” This resulted in the final compromise of “UTC.”
See

http://www.nist.gov/physlab/div847/utenist.cfm#cut.

3. Price

Proposed Rule 901(c)(7) would require the reporting of the price of a SBS transaction, expressed in terms of the commercial conventions used in that asset class.
50

The Commission recognizes that the price of a SBS generally would not be a simple number, as with stocks, but would be expressed in terms of the quoting conventions for that SBS. For example, a CDS may be quoted in terms of the economic spread—which is variously referred to as the “traded spread,” “quote spread,” or “composite spread”—expressed as a number of basis points per annum. Alternately, CDS can be quoted in terms of prices representing a discount or premium over par. In contrast, an equity or loan total return swap may be quoted in terms of a LIBOR-based floating rate payment, expressed as a floating rate plus a fixed number of basis points.

50
One commenter identified the traded price as one of the elements that should be included in a SBS transaction report.
See
letter from James W. Toffey, Chief Executive Officer, Benchmark Solutions, to David A. Stawick, Secretary, CFTC, and Elizabeth M. Murphy, Secretary, Commission, dated October 1, 2010 (“Benchmark Letter”) at 2.

The Commission preliminarily believes that, because these quoting conventions are widely used and understood by SBS market participants, requiring the price of a SBS to be reported in terms of one of these existing quoting conventions would be consistent with the mandate in Section 13(m)(1)(B) of the Exchange Act to enhance price discovery. As discussed further below, however, proposed Rule 907(a)(1) would require a registered SDR to establish, maintain, and make publicly available policies and procedures that specify the data elements of a SBS that a reporting party must report, which would include the elements that constitute the price. The Commission preliminarily believes that, because of the many different conventions that exist to express the price in various SBS markets and the new conventions that might arise in the future, some flexibility should be given to registered SDRs to select appropriate conventions for denoting the price of different asset classes of SBSs.

4. Other Terms of the SBS

Proposed Rule 901(c) would require the reporting of, among other things, information that identifies the SBS instrument
51

and the specific asset(s) or issuer(s) of a security or indexes on which the SBS is based; the notional amount(s) of the SBS and the currenc(ies) in which the notional amount(s) is expressed; the effective date of the SBS; the scheduled termination date of the SBS; and the terms of any fixed or floating rate payments and the frequency of any payments. The Commission preliminarily believes that this information is fundamental to understanding the SBS transaction being publicly reported, and that a SBS transaction report that lacked such information would not be meaningful.

51

See
proposed Rule 900 (defining “security-based swap instrument” to mean each SBS in the same asset class, with the same underlying reference asset, reference issuer, or reference index).

For example, some types of SBSs are contractual agreements that generally involve the periodic exchange of cash flows from specified assets over a defined time period. These cash flows are based on the notional amount(s) of the SBS—
i.e.,
the notional principal(s) of the SBS is used to calculate the periodic payments made under the agreement. Accordingly, information that identifies the asset(s), including a narrow-based index, or issuer(s) of the security or securities on which a SBS is based, the notional amount(s) of the SBS (including the currenc(ies) in which it is expressed), the effective date, and the scheduled termination date of that SBS are fundamental elements of the transaction that would enhance price discovery.
52

52
One commenter believed that a SBS transaction report should include: (1) The traded price and execution time; (2) the counterparty type, including a designation for an “end user;” (3) the notional size of the transaction; and (4) contract “open interest.”
See
Benchmark Letter at 2. In addition, the commenter believed that the reference data for a SBS must include “standard attributes necessary to derive cash flows and any contingent claims that can alter or terminate payments” of the SBS.
See id.
at 1. As described above, the proposed rules would require the real-time reporting of price and time of execution, notional size, and an indication of whether a SBS is between two dealers. The proposed rules would not require the reporting of “open interest.” However, another Commission rulemaking will provide regulators with the ability to monitor open SBS positions.
See
SDR Registration Proposing Release,
supra
note 6.

The Commission anticipates that, for at least some standardized instruments, conventions about how a SBS instrument is referred to can become so well known that certain terms of the underlying contract can be assumed, and thus would not need to be specifically provided pursuant to other provisions of proposed Rule 901(c).

5. Whether the SBS Will Be Cleared by a Clearing Agency

Proposed Rule 901(c)(9) would require the reporting party to indicate whether or not the SBS will be cleared by a clearing agency. This factor can impact the price of the SBS. If a SBS is not cleared, one counterparty might charge a higher price to do the trade because of the counterparty credit risk it would incur (which might be significantly diminished if the SBS were centrally cleared). Because the use of a clearing agency to clear a SBS would thus impact price, knowing whether a SBS will be cleared should provide market participants with additional information that would be useful in assessing the reported price for a SBS, thus enhancing price discovery. Therefore, the Commission is proposing to require that this data element be reported in real time and publicly disseminated.

6. Indication That a Transaction Is Between Two SBS Dealers

Proposed Rule 901(c)(10) would require the reporting party to indicate if both counterparties to the SBS are SBS dealers. The Commission preliminarily believes that such an indication would enhance market transparency and provide more accurate information about the pricing of the SBS transaction, and thus about trading activity in the SBS market. Prices of transactions involving a dealer and non-dealer are typically “all-in” prices that include a mark-up or mark-down, while interdealer transaction prices typically do not. Thus, the Commission believes that requiring an indication of whether a SBS was an interdealer transaction or a transaction between a dealer and a non-dealer counterparty would enhance transparency by allowing market participants to more accurately assess the reported price for a SBS.

7. If Applicable, an Indication That the SBS Transaction Does Not Accurately Reflect the Market

In some instances, a SBS transaction might not reflect the current state of the market. Thus, publicly disseminating a report of that transaction without an indication to that effect could mislead market participants and other observers. The Commission does not expect that a registered SDR would be able to identify such cases. Therefore, proposed Rule 901(c)(11) would require the reporting party to alert the registered SDR in such cases. This could occur, for example, if the reporting party were reporting the transaction late (
i.e.,
over 15 minutes after the time of execution). An aged transaction by definition no longer represents the current state of the market, and a reporting party would therefore be required to indicate that the

transaction is being reported late.
53

Other situations where this could occur are inter-affiliate transfers and assignments where the new counterparty has no opportunity to negotiate the terms, including the price, of taking on the position. In such cases, there might not be an arm's length negotiation over the terms of the SBS transaction, and disseminating a report of the transaction report without noting that fact would be inimical to price discovery. Accordingly, the Commission preliminarily believes that a reporting party must note such circumstances in its real-time transaction report to a registered SDR.

53
The registered SDR could deduce that a transaction has been reported late by looking to the time of execution, a data element required to be reported by proposed Rule 901(c)(4). However, if a registered SDR received a transaction report submitted with an anomalous time stamp, the registered SDR might not know whether the time stamp was correct and the trade was reported late, or whether the trade was reported in a timely fashion but the time stamp was inaccurate. Supplementing the time stamp with a “late” indicator would confirm to the registered SDR that the transaction was in fact being reported late.

The Commission further notes that a registered SDR would be required to have policies and procedures that, among other things, describe how reporting parties shall report SBS transactions that, in the estimation of the registered SDR, do not accurately reflect the market.
54

The Commission expects that these policies and procedures would require, among other things, different indicators being applied in different situations.

54

See
proposed Rule 907(a)(4);
infra
Section VI.A.

8. Indication for Customized Trades

Proposed Rule 901(c)(12) would provide that the reporting party must indicate if the SBS is customized to the extent that the other information provided pursuant to proposed Rule 901(c) does not provide all of the material information necessary to identify such customized SBS or does not contain the data elements necessary to calculate the price of the SBS. The Commission believes that reporting highly customized SBS in this manner would promote transparency by providing market participants with knowledge of the transaction in a given asset class and on certain reference securities or issuers while, at the same time, making clear that the reported data elements would not, and would not be required to, provide sufficient information to fully understand all aspects of the customized transaction. The Commission preliminarily believes that requiring public dissemination of more detailed information about customized SBSs would be of limited utility in facilitating price discovery because of the unique nature of such transactions.

Request for Comment

The Commission requests comment generally on all aspects of the categories of information that would be required to be reported in real time for public dissemination.

13. Do commenters agree with the proposed categories of information that would be required to be reported in real time for public dissemination? If not, what additional specific categories of information should be required to be reported in real time for public dissemination, and why? How would public dissemination of such additional information enhance price discovery or market liquidity?

14. What categories of information, if any, should not be required to be reported in real time for public dissemination, and why? Would the public dissemination of certain information materially reduce market liquidity? If so, how, specifically, would dissemination of the particular information affect liquidity? Please supply data to support your answer.

15. Does proposed Rule 901(c) provide adequate guidance with respect to the information that must be reported? If not, what additional guidance do commenters believe is necessary?

16. Would the real-time dissemination of the categories of information specified in proposed Rule 901(c) serve the objectives of Section 13(m) of the Exchange Act by enhancing price discovery in the SBS market? If so, how? Would disclosure of certain categories of information not further price discovery? If so, why not? Please provide examples.

17. Is it necessary to require dissemination of the date of execution, unless it is a date other than the current date?

18. Do commenters agree that it would be feasible to require SBSs agreed to by phone to be entered into an electronic system that assigns a time stamp? Why or why not?

19. Do commenters agree that the time of execution should be reported to the second? Why or why not? Should it be reported in a finer increment?

20. Would requiring the reporting and dissemination of price in terms of the existing quoting conventions provide adequate information regarding the price of a SBS? Where more than one quoting or pricing convention exists within an asset class, what convention should be used? Should proposed Regulation SBSR require specific conventions to be used?

21. Are there specific data elements that should be required to be reported to help understand the price of a SBS? If so, what are they, and do they vary by asset class? Or by some further categorization?

22. Are there categories of SBSs that do not have an existing quoting convention? If so, how should “price” be expressed for those SBSs? What data elements should be required to be reported and disseminated to capture the price of such SBSs?

23. Would information regarding whether a SBS is cleared impact the price of the SBS? If not, why not? Would the reporting party in all cases know whether the SBS transaction will be cleared?

24. Would information concerning whether a SBS is a transaction between two SBS dealers enhance transparency and provide more accurate information about the pricing of the SBS? If not, why not?

25. In a SBS executed on a SB SEF or national securities exchange, would a counterparty know in real time the category of its counterparty,
e.g.,
whether its counterparty is a SBS dealer, a major SBS participant, or not?

26. Do commenters agree that it would be appropriate for reporting parties to report whether a SBS transaction accurately reflects the market? How should such “off-market” transactions be defined? Could public dissemination of potential off-market transactions (
e.g.,
related to portfolio compressions) make it more difficult for market participants to understand and analyze market pricing?

27. Do commenters agree with the proposed approach for real-time reporting and public dissemination with respect to customized SBSs? Should the Commission require that additional information be reported and publicly disseminated for these SBSs? How practical would it be to report and publicly disseminate sufficient details about a customized SBSs in real time? Is there sufficient agreement over which SBSs should be considered customized for this purpose or is additional guidance needed? Is there a risk that this rule could be applied inconsistently by counterparties or across asset classes? Would public dissemination of information concerning customized SBSs materially reduce market liquidity? If so, why?

28. Would real-time transaction reports of customized SBSs have price discovery value? If so, in what way and how much? If not, why not? Would price discovery be enhanced by

requiring public dissemination of additional details of a customized SBS at a later time? If so, what additional details of the transaction should be publicly disseminated, and when?

29. Would any of the data elements specified in proposed Rule 901(c), if reported in real time, reveal the trading strategies or positions of any person? If so, how?

30. What do commenters believe would be the costs of reporting and publicly disseminating the proposed categories of information for SBSs? Or the benefits? Please be specific in your responses, and quantify your answers to the extent possible.

C. Definition of Real Time

Proposed Rule 900 would define “real time” to mean, with respect to the reporting of SBS transaction information, “as soon as technologically practicable, but in no event later than 15 minutes after the time of execution of the SBS transaction.”
55

The Commission preliminarily believes that this proposed definition of “real-time” reporting is consistent with Sections 13(m)(1)(A) and (B) of the Exchange Act and technologically practicable in light of current industry practice.
56

Based on its discussions with market participants, the Commission understands that much of the infrastructure necessary to support real-time reporting to a registered SDR may already be in place.
57

The Commission understands, further, that the SBS market is almost entirely institutional, and large institutions have in place the systems and processes necessary to support trading and risk management of complex structured products. In many cases, trade details will already be systematized and little or no manual intervention would be necessary to aggregate or send the transaction data. In such cases, where it is technologically practicable for a reporting party to report the SBS transaction information required by proposed Rule 901(c) in one second, then it would be required to report the SBS transaction to a registered SDR in one second.

55

See supra
note 30 (noting that the “time of execution” would mean the point at which the counterparties to a SBS become irrevocably bound under applicable law).

56
The Commission notes, in addition, that the Senate report accompanying the Dodd-Frank Act indicates that “[m]arket participants—including exchanges, contract markets, brokers, clearing houses and clearing agencies—were consulted and affirmed that the existing communications and data infrastructure for the swaps markets could accommodate real time swap transaction and price reporting.”
See
156 Cong. Rec. S5921 (July 15, 2010).

57

See, e.g.,
CFTC and SEC, Public Roundtable to Discuss Swap Data, Swap Data Repositories, and Real Time Reporting, transcript available at
http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/derivative18sub091410.pdf,
comments of Sean Bernardo, Managing Director of Tullett Prebon Americas Corp. and representing the Wholesale Market Brokers Association, at 297 (“From the brokers' perspective, however you tell us to send those [transactions] straight to you, whatever the time frame is, we're able to do that, whether it's done voice, whether it's done electronic, or whether it's done hybrid”), and at 310 (“From the brokers' perspective, we already have these systems in place for 99 percent of these products already in some way, shape, or form. So, as far as upgrading them, we're upgrading the systems on a regular basis. So, I think, again, we can accommodate the needs that you have, and we currently do a lot of the reporting and * * * processing with the firms”).

The Commission recognizes that, in other cases, a SBS transaction might be negotiated orally, and some manual data entry might be necessary before a transaction report could be sent. At the same time, however, the Commission believes it is appropriate to encourage market participants to take steps to minimize manual handling of such transactions, because the Dodd-Frank Act requires price and volume information of all SBS transactions to be disseminated publicly as soon as technologically practicable after the time of execution. Furthermore, the Commission notes that real-time reporting under proposed Rule 901(c) would require only certain elements of the trade to be systematized and reported, not all of the data elements that are required for full regulatory reporting under proposed Rule 901(d). The Commission is, therefore, proposing a 15-minute outer boundary for real-time public reporting of the data elements specified in proposed Rule 901(c) following the SBS's time of execution.
58

58
One commenter believed that SBS transaction reports should be disseminated to the market within five minutes of execution, or as soon as technologically feasible.
See
Benchmark Letter at 2. The commenter noted that “the sooner post trade data is accessible to the market, the more effectively it can feed back into the update cycle of pre-trade information. Better pre-trade information allows investors to make more well-informed decisions regarding market values, risk and helps assure that investors achieve best execution.”
Id.
Another commenter argued that “voice/hybrid execution systems” should have the same reporting timeframes as venues that execute electronically, because “a bifurcated requirement could result in an inaccurate trade tape confusing the market and regulator alike,” and because “such a bifurcation might also create a `race to the slowest' * * * as certain market participants, seeking to shroud their trading, favor slower reporting SEF's with their business over more efficient and transparent counterparts.”
See
letter from James Cawley, CEO, Javelin Capital Markets, to SEC and CFTC (October 20, 2010) (“Javelin Letter”) at 2. The Commission further notes that the Financial Industry Regulatory Authority (“FINRA”) requires its members to report transactions in corporate and agency debt securities to FINRA's Transaction Reporting and Compliance Engine (“TRACE”) within 15 minutes of the time of execution.
See
FINRA Rule 6730(a). For purposes of TRACE reporting, the time of execution generally means the time when the parties to the trade agree to all of the terms of the transaction that are sufficient to calculate the dollar price of the trade.
See
FINRA Rule 6710(d). FINRA has indicated that, based on 2009 figures, approximately 98% of corporate bond trades were reported within 15 minutes, 96% within ten minutes, and 92% within five minutes.
See
e-mail from Steve Joachim, Executive Vice President for Transparency Services, FINRA, to Michael Gaw, Assistant Director, Division of Trading and Markets, Commission (November 17, 2010).

Under the proposed approach, a reporting party would not be permitted to delay submission of a transaction report required by proposed Rule 901(c) while preparing the information necessary to provide a transaction report under proposed Rule 901(d), even if the reporting party could prepare the latter in under 15 minutes. Assume, for example, that two counterparties execute a SBS on an electronic trading platform, which permits the collection and transmission of all information required by proposed Rule 901(c) in one second, and all other details of the SBS can be confirmed in eight minutes. The reporting party would not be permitted to wait eight minutes to send a single transaction report containing the information required under proposed Rules 901(c) and (d) to a registered SDR. Instead, the reporting party would be required to send the information required by proposed Rule 901(c) in one second—because one second in this example is as soon as technologically practicable—and to send the information required by proposed Rule 901(d) in eight minutes. The Commission preliminarily believes that this approach is most conducive to price discovery. Collecting data elements that have less bearing on price discovery (such as those required by proposed Rule 901(d)) should not slow down the public dissemination of data elements that would facilitate price discovery (
i.e.,
those required by proposed Rule 901(c)).

Request for Comment

31. Do commenters agree with the proposed definition of “real time”? Would it be technologically practicable in all cases to report the information that would be required under proposed Rule 901(c) within 15 minutes? If not, why not? Would it be technologically practicable for some, but not all, SBSs? Or some, but not all, of the data elements? If so, what are the differentiating factors?

32. Should the Commission require shorter reporting time frames for certain SBS transactions? For example, should electronically executed SBSs be

reported as soon as technologically practical but in any event no later than 5 seconds? 30 seconds? Some other period? What should that period be, and why?

33. Should the Commission require longer reporting time frames for orally executed SBS transactions (such as 30 minutes)? If so, what should that longer period be, and why?

34. If there were a longer reporting time frame for orally executed SBSs, would the potential benefits of real-time public reporting be compromised? If so, how? If not, why not? Would this create an incentive for market participants to prefer oral negotiation of SBSs to delay real-time reporting of their transactions?

35. In the context of real-time reporting of SBS transactions, what is “technologically practicable”? Should the Commission define that term specifically? What systems and processes would be necessary to report orally concluded SBSs as soon as technologically practicable? Does this imply a requirement that all such SBSs must be immediately systematized?

36. What do commenters believe would be the costs of reporting the proposed data elements within 15 minutes? What would be the benefits? Please be specific in your response, and quantify the costs and benefits to the extent possible.

IV. Additional Reporting of Regulatory Information

A. Introduction

Proposed Rule 901(d) would require the reporting, within specified timeframes, of certain SBS transaction information that would not be publicly disseminated, in addition to the information required to be reported in real time pursuant to proposed Rule 901(c) that would be publicly disseminated. The Commission believes that the information that would be reported pursuant to proposed Rule 901(d) would facilitate regulatory oversight and monitoring of the SBS market by providing comprehensive information regarding SBS transactions and trading activity.
59

The Commission believes, further, that this information would assist the Commission in detecting and investigating fraud and trading abuses in the SBS market.

59
To the extent the Commission receives information that is reported under proposed Rule 901(d), such information would be kept confidential, subject to the provisions of the Freedom of Information Act.

B. Data Elements Required Under Proposed Rule 901(d)

The data elements that would be required to be reported by the reporting party for each SBS pursuant to proposed Rule 901(d) are discussed below.

1. Unique Identifiers

Proposed Rule 901(d) would require the reporting of a participant ID of each counterparty and, as applicable, the broker ID, desk ID, and trader ID of the reporting party. The Commission preliminarily believes that reporting of this information would help promote effective oversight, enforcement, and surveillance of the SBS market by the Commission and other regulators. For example, activity could be tracked by a particular participant, a particular desk, or a particular trader. Regulators could observe patterns and connections in trading activity, or examine whether a trader had engaged in questionable activity across different SBS instruments. These identifiers also would facilitate aggregation and monitoring of the positions of SBS counterparties, which could be of significant benefit for systemic risk management.

The Commission understands that some efforts have been undertaken—in both the private and public sectors, both domestically and internationally—to establish a comprehensive and widely accepted system for identifying entities that participate not just in the SBS market, but in the financial markets generally. Such a system could be of significant benefit to regulators worldwide, as each market participant could readily be identified using a single reference code regardless of the jurisdiction or product market in which the market participant was engaging. Such a system also could be of significant benefit to the private sector, as market participants would have a common identification system for all counterparties and reference entities, and would no longer have to use multiple identification systems. The enactment of the Dodd-Frank Act and the establishment of a comprehensive system for reporting and dissemination of SBSs—and for reporting and dissemination of swaps, under the jurisdiction of the CFTC—offer a unique opportunity to facilitate the establishment of a comprehensive and widely accepted system for identifying entities that participate not just in the SBS market, but in the financial markets generally.
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One commenter believes that a single source of reference data and a standard set of unique identifiers must be used across the industry (
i.e.,
SB SEFs and SDRs) to ensure the comparability of similar contracts. The commenter urged the Commission to work with the industry to standardize terms and definitions of all reference data components and establish a single master reference data source.
See
Benchmark Letter at 1.
See also
Neal S. Wolin, Deputy Secretary of the Treasury, Remarks at Georgetown University McDonough School of Business (October 25, 2010), available at
http://www.treas.gov/press/releases/tg923.htm
(stating that the Office of Financial Research (“OFR”) “is working with regulators and industry, laying the groundwork to standardize financial reporting and develop reference data that will identify and describe financial contracts and institutions. Data standardization will provide for more consistent and complete reporting, making the data available to decision makers easier to obtain, digest, and utilize. Over the coming weeks and months, the OFR will begin to define a set of standards for reporting of financial transaction and position data. The OFR will collaborate with the financial industry, data experts, and regulators to develop an approach to standardization that works for everyone”).

The Commission preliminarily believes that a registered SDR must have a systematic means to identify and track all products and all persons involved in SBS transactions captured and recorded by the registered SDR. Therefore, the Commission is requiring that a “unique identification code” (“UIC”) be assigned to each such product or person (or unit thereof, such as a branch or desk of a financial institution). Thus, under proposed Regulation SBSR, the “participant ID” would mean the UIC assigned to a participant.
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“Broker ID” would be defined as the UIC assigned to an entity acting as a broker for a participant. “Desk ID” would be defined as the UIC assigned to the trading desk of a participant or of a broker of a participant, and “trader ID” would be defined as the UIC assigned to a natural person who executes SBSs.

61
“Participant” would be defined as: (1) a U.S. person that is a counterparty to a SBS that is required to be reported to a registered SDR; or (2) a non-U.S. person that is a counterparty to a SBS that is (i) required to be reported to a registered SDR; and (ii) executed in the United States or through any means of interstate commerce, or cleared through a clearing agency having its principal place of business in the United States.
See
proposed Rule 900.

Under the definition of “unique identification code” in proposed Rule 900, a UIC would have to be assigned by or on behalf of an internationally recognized standards-setting body (“IRSB”) that imposes fees and usage restrictions that are fair and reasonable and not unreasonably discriminatory. The Commission seeks to avoid requiring market participants to participate in a system that would require them to pay unreasonable fees, or that would permit discrimination among potential users of the system. Thus, the definition of “UIC” would further provide that, if no standards-setting body meets these criteria, a

registered SDR would be required to assign all necessary UICs using its own methodology.

The Commission preliminarily believes that, if an IRSB meets these criteria, the UICs employed by a registered SDR must come from the IRSB, and participants of that registered SDR must take necessary steps to obtain UICs from that IRSB. However, it could take an extended period for an IRSB to assign, or establish protocols for assigning, UICs for all entities participating in the SBS market. A registered SDR would be required to use the UICs available from the IRSB's system, while using its own methodology to assign the rest. In addition, the definition of “UIC” would provide that, if a standards-setting body meets these criteria but has not assigned a UIC to a particular person, unit of a person, or product, a registered security-based swap data repository would be required to assign a UIC to that person, unit of a person, or product using its own methodology.

The proposed definition of “UIC” would not require that a UIC be assigned “by” a IRSB itself. Rather, the proposed definition would provide only that the UIC be assigned “by or on behalf of” the IRSB. This is designed to preserve flexibility in how UICs may be assigned. An IRSB might establish the general protocols under which UICs are assigned, while another entity operating as an agent on behalf of the IRSB might assign the UICs pursuant to the protocols established by the IRSB. The proposed definition would allow for that possibility.

2. Other Terms of the SBS

Proposed Rule 901(d) would require identification of the amount(s) and currenc(ies) of any up-front payment(s) and a description of the terms and contingencies of the payment streams of each counterparty to the other;
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the title of any master agreement, or any other agreement governing the transaction (including the title of any document governing the satisfaction of margin obligations), incorporated by reference and the date of any such agreement; and the data elements necessary to calculate the market value of a transaction.
63

In addition, for a SBS that is not cleared, proposed Rule 901(d) would require a description of the settlement terms, including whether the SBS is cash-settled or physically settled, and the method for determining the settlement value.
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62
For example, this would include, for a CDS, an indication of the counterparty purchasing protection and the counterparty selling protection, and the terms and contingencies of their payments to each other; and for other SBSs, an indication of which counterparty is long and which is short. This information could be useful to regulators in investigating suspicious trading activity.

63
The Commission believes that these elements would include, for a SBS that is not cleared, information related to the provision of collateral, such as the title and date of the relevant collateral agreement.

64
One commenter believed that a SBS transaction report should include information necessary to derive cash flows and any contingent claims that could alter or terminate payments of the SBS.
See
Benchmark Letter at 1. This is similar to the information required by proposed Rule 901(d)(1)(iii).

The Commission believes that each of these data elements would facilitate regulatory oversight of counterparties and the SBS market generally by providing information concerning counterparty obligations and risk exposures. For example, the reporting of data elements necessary to calculate the market value of a transaction would allow regulators to value an entity's SBS positions and calculate the exposure resulting from those positions. The Commission understands, based on discussions with industry participants, that market participants currently provide this information regarding SBSs to data repositories.

3. Clearing Information

Proposed Rule 901(d) would require the reporting of the name of the clearing agency, if the SBS is cleared. The Commission believes that the identity of the clearing agency that cleared a SBS is fundamental information regarding a cleared SBS. This information would allow regulators to verify, if necessary, that a SBS was cleared, and to easily identify the clearing agency that cleared the transaction.

Proposed Rule 901(d) also would require the reporting party to report, if the SBS is not cleared, whether the exception provided in Section 3C(g) of the Exchange Act was invoked. Section 3C(g)(1) of the Exchange Act provides that the requirements of Section 3C(a)(1) will not apply to a SBS if one of the counterparties to the SBS: (1) Is not a financial entity; (2) is using SBSs to hedge or mitigate commercial risk; and (3) notifies the Commission, in a manner set forth by the Commission, how it generally meets its financial obligations associated with entering into non-cleared SBSs. The application of the clearing exception in Section 3C(g)(1) of the Exchange Act is solely at the discretion of the SBS counterparty that satisfies these conditions.
65

Section 3C(g)(6) of the Exchange Act
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authorizes the Commission, among other things, to request information from those persons claiming the clearing exception as necessary to prevent abuse of the exceptions described in Section 3C(g) of the Exchange Act. The Commission believes that information regarding whether the exception in Section 3C(g)(1) was invoked for a non-cleared SBS would assist the Commission in overseeing and monitoring the use of the exception. This information would be a necessary preliminary step in determining whether the exception was properly invoked.
67

65

See
15 U.S.C. 78c[C(g)(2)].

66
15 U.S.C. 78c[C(g)(6)].

67
The use of this exception, and further information required to be reported regarding this exception, will be the subject of another Commission rulemaking. Any comments regarding this exception should be submitted in connection with that proposal.

4. Execution Venue

Proposed Rule 901(d) would require the reporting party to report the venue where the SBS was executed, or whether the SBS was executed bilaterally in the OTC market. The venue where a SBS is executed is necessary for investigating any potential improper behavior relating to the transaction. For example, regulators investigating a suspected abuse or other impropriety would need to know the execution venue in order to obtain records from the venue to assist in their investigation.

Request for Comment

The Commission requests comment on all aspects of the proposed additional information that would be required to be reported pursuant to proposed Rule 901(d).

37. Do commenters agree with the information that the Commission has proposed to be required to be reported pursuant to proposed Rule 901(d)? Should additional information be reported? If so, what information, and why?

38. Are there any data elements proposed to be reported that commenters believe should not be reported? If so, why not?

39. Should proposed Rule 901(d) also require reporting of the purpose of the SBS transaction (such as market making, directional trade, or asset hedge)? If so, what categories of purposes should be established, and why?

40. Is it possible that inconsistencies in pricing conventions among SBS market participants could result in uninformative prices being reported to a registered SDR? Could a reporting party use variation in pricing conventions to obscure pricing information? Do commenters believe that proposed Regulation SBSR should prescribe the

specific pricing conventions that should be used?

41. Does proposed Rule 901(d) provide adequate guidance with respect to the information that must be reported?

42. Do commenters agree that the information described above regarding the material terms of a SBS would be useful for monitoring risk exposure and for other regulatory purposes? Why or why not?

43. Would it be difficult or cost prohibitive for reporting parties to report such information? If so, why?

44. Do SBS counterparties employ transaction-level collateral arrangements? If so, what specific information on transaction-level collateral information should be reported to a registered SDR?

45. Do commenters agree that the participant ID of each counterparty, and, as applicable, the broker ID, desk ID, and trader ID of the reporting party or its broker would be useful information to be reported? Why or why not? Would these identifiers be helpful for conducting regulatory oversight, including measuring risk exposure? How costly would it be for participants to report this information for each SBS?

46. Are there other entities that may play some part in the execution or reporting of a SBS transaction? If so, what are they? Should their identification information be reported to a registered SDR?

47. Are there additional subunits of a legal person, besides the desk, that should be identified by a UIC? If so, what are those subunits and how should they be defined?

48. Would the reporting party be in a position to know, in all cases, the participant ID of its counterparty? If a SBS is executed on a SB SEF, would the SB SEF be able to provide the reporting party the participant ID of the counterparty? If not, what alternative would be available to have this information reported?

49. Does an IRSB currently exist or will one exist in the near future that could carry out the functions envisioned by proposed Regulation SBSR? What additional steps would need to be taken for that entity to carry out these functions?

50. Who would own the intellectual property underlying the UICs assigned by or on behalf of an IRSB? Would a registered SDR have to pay fees to obtain UICs from an IRSB? If so, how much? What usage restrictions might the owners of the relevant intellectual property impose on registered SDRs or on consumers of the market data feed? Are any fees and usage restrictions imposed by an IRSB (or any entity that might become an IRSB) fair and reasonable and not unreasonably discriminatory? If not, in what way are they not?

51. Are there any issues that could result from the Commission requiring that UICs only be assigned by or on behalf of an IRSB that imposes fees and usage restrictions that are fair and reasonable and not unreasonably discriminatory? Would imposing such a standard allow for any activity that could undermine the ability of market participants to effectively obtain or use the UICs as anticipated? In the alternative, should the Commission require that there be no fees related to the use of UICs?

52. Would any end users of SBS market data disseminated by a registered SDR have to pay fees relating to an IRSB? If so, why? How much would these fees be?

53. How do data repositories currently identify participants and products? If UICs cannot be assigned by or on behalf of an IRSB, would the current methodologies of data repositories be adequate for assigning UICs pursuant to proposed Regulation SBSR? What would be the likely costs to a registered SDR of assigning such UICs itself?

54. What would be the potential impact on market participants and registered SDRs if no IRSB emerges and there are multiple SDRs per asset class assigning UICs?

55. What additional steps can or should the Commission take to promote internationally recognized standards for UICs?

56. Are there any other factors not already discussed that the Commission should take into account when considering voluntary consensus standards for UICs?

C. Reporting Timeframes for Regulatory Information

The Dodd-Frank Act does not specify the timeframes under which SBS transaction information, beyond that necessary to support real-time public dissemination for enhancing price discovery, must be reported to a registered SDR or to the Commission for regulatory purposes. However, the Commission preliminarily believes that, to further the objectives of the Dodd-Frank Act, SBS transaction information should be reported within a reasonable time following the time of execution—
i.e.,
the point at which the counterparties to a SBS become irrevocably bound under applicable law—rather than waiting until the time a transaction is confirmed.
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For purposes of proposed Regulation SBSR, the time a transaction is confirmed means the production of a confirmation that is agreed to by the parties to be definitive and complete and that has been manually, electronically, or, by some other legally equivalent means, signed.
69

Requiring reporting at or after the time a SBS transaction is confirmed, rather than at the time of execution, could encourage counterparties to delay confirming in order to delay the reporting of a transaction.

68

See
proposed Rule 900 (defining “time of execution”);
supra
Section III.B.2.

69

See
proposed Rule 900 (defining “confirm”). “Confirmation” refers to the specific documentation that evidences the legally binding agreement. Section 15F(i)(2) of the Exchange Act provides that SBS dealers and major SBS participants shall conform with such standards as may be prescribed by the Commission that relate, among other things, to timely and accurate confirmation of SBSs. Requirements for confirmations issued by SBS dealers and major SBS participants will be the subject of a separate Commission rulemaking.

The Commission recognizes that the amount of time required for counterparties to report the data elements that would be required to be reported under proposed Rule 901(d)(1) could vary depending upon, among other things, the extent to which the SBS is customized and whether the SBS is executed or confirmed electronically or manually. The Commission believes that the extent to which a SBS is executed or confirmed electronically is an indication of the degree to which the SBS is or could be systematized, and thus could directly impact the amount of time needed to report such SBS. For example, the Commission believes, based on discussions with industry participants, that the required information would be available relatively quickly for a SBS that is executed and confirmed electronically because most of the information required to be reported would already be in an electronic format. On the other hand, the Commission recognizes that, for those SBSs that are not executed or confirmed electronically, additional time may be needed to systematize the information required to be reported under proposed Rule 901(d) and put it into an acceptable format. Accordingly, proposed Rule 901(d)(2) would obligate a reporting party to report the regulatory, non-real-time information required to be reported under proposed Rule 901(d)(1) promptly, but in no event later than:

• 15 minutes after the time of execution for a SBS that is executed and confirmed electronically;

• 30 minutes after the time of execution for a SBS that is confirmed

electronically but not executed electronically; or

• 24 hours after execution for a SBS that is not executed or confirmed electronically.

The Commission preliminarily believes that requiring a SBS that is executed and confirmed electronically to be reported promptly, but in no event later than 15 minutes after the time of execution, is appropriate because such SBS could be easily systematized (if it is not already), thus allowing the SBS to be reported within a time period similar to that required for real-time reporting. The Commission further believes that, for a SBS that is confirmed electronically but not executed electronically, additional time would be needed to report such SBS. However, the Commission preliminarily believes that 30 minutes would be a sufficient amount of time because such SBS already would be put into electronic form for confirmation, and thus likely could be easily systematized and would not require a significant amount of manual handling.

Finally, since a SBS that is not executed or confirmed electronically would likely not already be systematized and could require a significant amount of manual intervention, the proposed rules would allow additional time for reporting. For this group of SBSs, the Commission seeks to balance the need to allow market participants sufficient time to determine the terms of their trade, with the need for regulators to have current and complete information about positions in the SBS market.

Request for Comment

The Commission requests general comments on the proposed reporting times and the basis for the proposed reporting times.

57. Do commenters believe that there should be different reporting times based on whether a SBS is executed or confirmed manually or electronically? If so, why? If not, what other basis should be used to distinguish reporting timeframes, and why? Should all SBSs be reported in the same time frame? If so, what should the timeframe be, and why?

58. Do commenters agree that the reporting time for a SBS that is executed and confirmed electronically should be 15 minutes after the time of execution? Should that period be shorter, for example, 30 seconds, one minute, or five minutes? Why or why not?

59. Do commenters agree that the reporting time for a SBS that is confirmed electronically but not executed electronically should be 30 minutes after the time of execution? Should that period be shorter, for example, one minute, five minutes, or 15 minutes? Why or why not?

60. Do commenters agree that the reporting time for a SBS that is not executed or confirmed electronically should be 24 hours? Should that period be shorter—perhaps eight hours? 12 hours? Should that period be longer—perhaps 36 hours? 48 hours? Why or why not? If the time period were greater than 24 hours, how significant would be the risks that regulators would not know of SBS positions recently taken by counterparties engaging in SBSs that are not executed or confirmed electronically?

61. Do commenters agree with the proposed timeframes for reporting information required to be reported pursuant to proposed Rule 901(d)(1)? Would the timeframes in proposed Rule 901(d)(2) provide adequate time for reporting the information that would be required to be reported under proposed Rule 901(d)(1)? If not, why not? Should the time frame for reporting be shorter or longer? Why or why not?

62. Would public dissemination of information in the proposed timeframes materially reduce market liquidity? If so, for what types of SBSs? Why? What timeframe(s) would balance the concerns about market liquidity with the requirement for real-time reporting?

63. Are there customized SBSs for which it would be too difficult or burdensome to report within 24 hours? How long do those SBS transactions currently take to report to a SDR? What steps would have to be taken to accelerate reporting for such SBS transactions?

D. Reporting of Life Cycle Events

Proposed Rule 901(e) would require the reporting of certain “life cycle event” information. Proposed Rule 900 would define a “life cycle event” to mean, with respect to a SBS, any event that would result in a change in the information reported to a registered SDR pursuant to proposed Rule 901, including a counterparty change resulting from an assignment or novation; a partial or full termination of the SBS; a change in the cash flows originally reported; for a SBS that is not cleared, any change to the collateral agreement; or a corporate action affecting a security or securities on which the SBS is based (
e.g.,
a merger, dividend, stock split, or bankruptcy). Notwithstanding the above, a life cycle event shall not include the scheduled expiration of the SBS, a previously described and anticipated interest rate adjustment (such as a quarterly interest rate adjustment), or other event that does not result in any change to the contractual terms of the SBS.

For any life cycle event that results in a change to information previously reported, proposed Rule 901(e) would require the reporting party to promptly provide updated information reflecting such change to the entity to which it reported the original transaction, using the transaction ID, except that:

(1) If a reporting party ceases to be a counterparty to a SBS due to an assignment or novation, the new counterparty would be the reporting party following such assignment or novation, if the new counterparty is a U.S. person; and

(2) If, following an assignment or novation, the new counterparty is not a U.S. person, the counterparty that is a U.S. person would be the reporting party following such assignment or novation.

As discussed in greater detail below, proposed Rule 907(a)(1) would require the policies and procedures of a registered SDR to specify the data elements of a life cycle event that a reporting party would be required to report, which would include, at a minimum, the data elements specified in proposed Rules 901(c) and (d). Proposed Rule 901(g) would require a registered SDR to assign a transaction ID to each SBS reported by a reporting party. The assignment of a transaction ID, which would be included in a life cycle event report, would facilitate the reporting of life cycle event information by identifying the particular SBS transaction to which the life cycle event pertained.
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70

See infra
Section IV.E.2 (discussing proposed Rule 901(g)).

The reporting of life cycle event information would provide regulators with access to information about significant changes that occur over the duration of a SBS, including, for example, a counterparty change resulting from an assignment or novation, a change in the data elements necessary to calculate the value of the SBS, a partial or full termination of the SBS prior to the scheduled termination date of the SBS, or a modification of the periodic cash flows originally reported. The Commission preliminarily believes that the reporting of life cycle event information would help to assure that regulators have accurate and up-to-date information concerning outstanding SBSs and the current obligations and exposures of SBS counterparties.
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In a separate rulemaking today, the Commission is proposing to require a registered SDR to establish, maintain, and enforce policies and

procedures reasonably designed to calculate positions for all persons with open SBSs maintained by the registered SDR, and is requesting comment on whether a SDR should calculate (on at least a daily basis) the market value of each position in SBSs for which the registered SDR maintains transaction data.
See
SDR Registration Proposing Release,
supra
note 6 (proposing Rule 13n-5(b)(2) under the Exchange Act).

Request for Comment

The Commission requests comment on all aspects of the proposed life cycle event reporting requirements.

64. Do participants agree with the proposed definition of life cycle event? What life cycle event information should be reported? Should changes to all information that would be required to be reported under proposed Rules 901(c) and (d) be updated, or only specific items? If so, which items, and why?

65. Should a life cycle event report be formatted to include only the transaction ID and the updated information, or should it include the transaction ID, the updated information, and the other information that would be required to be reported under proposed Rules 901(c) and (d)? Should the Commission prescribe the format of a life cycle event report, or allow a registered SDR to determine the format of the report?

66. Does the proposed rule provide adequate guidance concerning the life cycle events that would be required to be reported? If not, what areas require further guidance? Does the proposed rule provide adequate guidance regarding what information would be required to be reported for each life cycle event?

67. What benefits would result from the reporting of life cycle events? What would be the costs of such reporting?

68. Is it appropriate to require that life cycle events be reported promptly? If not, what should be the appropriate timeframe for reporting such events?

E. Additional Requirements Applicable to Registered SDRs or Participants

1. Time Stamp for Reported Information

Proposed Rule 901(f) would require a registered SDR to time stamp, to the second, receipt of any information required to be submitted pursuant to proposed Rule 901(c), (d), or (e). The Commission believes that this requirement would help regulators to evaluate certain trading activity. For example, a reporting party's pattern of submitting late transaction reports could be an indicator of weaknesses in the reporting party's internal compliance processes. Accordingly, the Commission believes that the ability to compare the time of execution reported with the time of receipt of the report by the registered SDR could be an important component of surveillance activity conducted by regulators.

2. Transaction Identifiers

Proposed Rule 901(g) would require a registered SDR to assign a transaction ID to each SBS transaction reported to it. Proposed Rule 900 would define “transaction ID” to mean the unique identification code assigned by a registered SDR to a specific SBS. The Commission preliminarily believes that, because each transaction is unique, it is not necessary or appropriate to look to an IRSB for assigning such identifiers. Accordingly, a registered SDR would be required to use its own methodology for assigning transaction IDs.
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72

Cf. supra
Section IV.B.1 (discussing participant IDs, broker IDs, desk IDs, and trader IDs, which could be used for multiple transactions across multiple asset classes).

The Commission preliminarily believes that a unique transaction ID would allow registered SDRs, regulators, and counterparties to more easily track a SBS over its duration and facilitate the reporting of life cycle events and the correction of errors in previously reported SBS information. The transaction ID of the original SBS would allow for the linking of the original report to a report of a life cycle event. Similarly, the transaction ID would be required to be included on an error report to identify the transaction to which the error report pertained.

3. Counterparty ID Information

As discussed above, proposed Rule 901(d) would require the reporting of a participant ID of each counterparty and, as applicable, the broker ID, desk ID, and trader ID of the reporting party or its broker.
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For regulators to monitor the SBS positions of market participants, evaluate trading activity, and conduct effective oversight and enforcement of the SBS market, it is important that the applicable UICs for both counterparties to a SBS be available to regulators.

73

See id.

Proposed Rule 901(d) would require the reporting party, for each SBS for which it is a reporting party, to report the participant ID of itself and its counterparty, and (as applicable) the reporting party's broker ID, desk ID, and trader ID. The reporting party would not be required to report the broker ID, desk ID, and trader ID for its counterparty. However, nothing in proposed Regulation SBSR would prevent a reporting party from reporting, or providing for the reporting to a registered SDR, of its counterparty's applicable UICs. For example, orders entered into an electronic trading system could be coded to include all relevant UICs. When the system matches two orders, it could bundle information about both orders (including the UICs) into a transaction report for the reporting party to report to a registered SDR, or the execution venue could provide the UICs directly to the registered SDR on behalf of the reporting party. Further, in a bilateral negotiated SBS, the counterparties could agree to have the non-reporting-party participant provide the applicable UICs to the reporting party for reporting to the registered SDR.

The Commission preliminarily believes that, to the extent that it is not feasible or desirable in a particular SBS transaction for the reporting party to report UICs, proposed Regulation SBSR should contain some means for the registered SDR to obtain the applicable UICs from the counterparty that is not the reporting party. Accordingly, proposed Rule 906(a) would set forth a procedure designed to ensure that a registered SDR obtains applicable UICs for both counterparties to a SBS, not just the reporting party. Proposed Rule 906(a) would require a registered SDR to identify any SBS reported to it for which the registered SDR did not have a participant ID and (if applicable), the broker ID, desk ID, and trader ID of each counterparty. Proposed Rule 906(a) would further require the registered SDR, once a day, to send a report to each participant identifying, for each SBS to which that participant is a counterparty, the SBS(s) for which the registered SDR lacks participant ID and (if applicable) broker ID, desk ID, and trader ID. Finally, under proposed Rule 906(a), a participant that receives such a report would be required to provide the missing UICs to the registered SDR within 24 hours of receipt of the report.

The Commission preliminarily believes that the registered SDR would be in the best position to know whether the reporting party had reported the UICs for its counterparty, and to request the missing UICs from any participant as necessary. In addition, the Commission recognizes that some reasonable period should be afforded to the registered SDR to determine what UICs have not been reported, to provide the report to each participant requesting such information, and for the participant to complete and return the report. The Commission preliminarily believes that it would be reasonable to require a registered SDR to produce only one such report per day, and to allow a participant up to 24 hours to complete

and return the report with the requested information.

4. Parent and Affiliate Information

The Commission also preliminarily believes that, to be able to effectively report on participant positions to assist the Commission and other regulators in monitoring systemic risk, a registered SDR should be able to identify all SBS positions within the same ownership group. Therefore, the Commission is proposing Rule 906(b), which would require each participant of a registered SDR to provide to the registered SDR information sufficient to identify its ultimate parent(s)
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and any affiliate(s)
75

of the participant that also are participants of the registered SDR. Proposed Rule 906(b) also would require a participant to promptly notify the registered SDR of any changes to that information. Under proposed Rule 906(b), a participant would be required to provide this ownership and affiliation information to a registered SDR immediately upon becoming a participant (in other words, as soon as a SBS for which it is a counterparty is required to be reported to the registered SDR). As with other UICs,
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an ultimate parent ID would be the unique identification code assigned to an ultimate parent by or on behalf of an IRSB (or, if no standards-setting body meet the required criteria or the IRSB has not assigned a UIC to a particular person or unit thereof, by the registered SDR).

74

See
proposed Rule 900 (defining “parent” as a legal person that controls a participant); Rule 900 (defining “ultimate parent” as a legal person that controls a participant and that itself has no parent); Rule 900 (defining “control” for purposes of proposed Regulation SBSR as the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise. A person would be presumed to control another person if the person: (1) Is a director, general partner or officer exercising executive responsibility (or having similar status or functions); (2) directly or indirectly has the right to vote 25% or more of a class of voting securities or has the power to sell or direct the sale of 25% or more of a class of voting securities; or (3) in the case of a partnership, has the right to receive, upon dissolution, or has contributed, 25% or more of the capital). The proposed definitions of “parent” and “ultimate parent” are designed to identify particular categories of affiliated entities based on their ability to control a participant. Thus, a “parent” refers to a legal person that controls a participant, and the “ultimate parent” refers to an entity that controls a participant but that itself has no parent and thus is not controlled by another entity.

75

See
proposed Rule 900 (defining “affiliate” as any person that, directly or indirectly, controls, is controlled by, or is under common control with, a person).

76

See supra
Section IV.B.1.

Request for Comment

The Commission requests comment on all aspects of the proposed time stamp and identifier requirements.

69. Would it be feasible for a registered SDR to time stamp, to the second, information that would be submitted pursuant to proposed Rule 901? Would some other time increment be appropriate? If so, why?

70. Would requiring a transaction ID for each reported SBS help facilitate reporting of all events related to that SBS? If not, what alternative method should be required to allow for tracking of all events related to a SBS throughout its life?

71. Would transaction IDs be helpful to counterparties? If so, how?

72. Should registered SDRs have the sole responsibility to assign transaction IDs? Would it be feasible for other registered entities (
e.g.,
exchanges or SB SEFs) to assign transaction IDs?

73. Do existing SDRs that accept reports of SBSs assign transaction IDs or an equivalent identifier? If so, how?

74. Do commenters agree that the applicable UICs for both counterparties to a SBS would be useful to regulators? Why or why not?

75. Is the method set forth in proposed Rule 906(a) a practical way for the registered SDR to obtain the applicable UICs from the other counterparty if necessary? Why or why not? If not, what better mechanism should be required to ensure that a registered SDR has applicable UICs for both counterparties for any SBSs for which it acts as a repository?

76. Do commenters agree with the proposal to require participants to provide the required UICs within 24 hours? If not, why not? How long should the counterparty be given to complete the report?

77. Would it be more practicable and less burdensome to require a registered SDR to post on its Web site (in an area accessible only to participants) reports identifying missing UICs and requiring participants to check these reports daily, rather than requiring the registered SDR to send these reports to participants each day, as provided in proposed Rule 906(a)?

78. Would it be unduly burdensome to require a registered SDR to periodically obtain information from each participant that identifies the participant's ultimate parent(s) and any other participant(s) with which the counterparty is affiliated? If so, why? Would there be an easier method for assuring that such information is readily available to regulators? If so, what is it?

79. How much information about its counterparty should a reporting party be expected to obtain? Would it be practical to require the reporting party to report applicable UICs on behalf of its counterparty? If not, what alternative do commenters propose? For example, should the Commission directly require each counterparty to report applicable UICs for each SBS?

80. For SBSs executed on a SB SEF or on a national securities exchange where a reporting party might not know the identity of its counterparty, how should the reporting of counterparty UICs be addressed? Should the Commission require the SB SEF or national securities exchange to report to the registered SDR, at a minimum, the participant ID of the counterparty?

81. Do commenters agree with the need for, and the goal of, having parent and affiliate information reported to a registered SDR?

82. What difficulties do commenters envision in establishing and implementing a UIC system for ultimate parents and affiliates of participants of a registered SDR?

6. Format of Reported Information

a. Data Format

To develop a meaningful reporting and dissemination regime for SBSs, the Commission believes that it is essential that all required information for all SBS transactions be reported in a uniform electronic format.
77

Accordingly, proposed Rules 901(h) and 907(a)(2) together would mandate the use of a uniform reporting format for SBS information reported to a particular registered SDR. Specifically, proposed Rule 901(h) would require the reporting party to electronically transmit the information required to be reported by proposed Rule 901 in a format as required by the registered SDR. In addition, proposed Rule 907(a)(2) would require a registered SDR to have policies and procedures that specify the data format (which must be an open-source structured data format that is widely used by participants), connectivity requirements, and other protocols for submitting information.
78

77
In a separate rulemaking today, the Commission is proposing various requirements for registered SDRs that would include, among other things, standards regarding data that registered SDRs would be required to collect and maintain.
See
SDR Registration Proposing Release,
supra
note 6.

78

See infra
Section VI.

The Commission recognizes that this likely would require some change in existing practice, particularly with respect to highly customized transactions that may not be electronically executed or confirmed currently. However, the Commission

believes that such a requirement would provide significant benefits by allowing for more efficient use and analysis of the data. The Commission understands that, currently, information for certain SBSs is communicated using an open-source structured data format called Financial Products Markup Language (“FpML”), which is accepted and used industry-wide and has a sufficiently flexible structure to accommodate new products and asset classes.
79

79
FpML is based on XML (eXtensible Markup Language), the standard meta-language for describing data shared between applications. The Commission preliminarily believes that FpML would be an appropriate format for data reporting, in part because it is already widely understood and used and can be used across multiple asset classes.

Request for Comment

The Commission requests comment on all aspects of the proposed rules regarding the electronic submission of information required under proposed Rule 901 and the formatting of information that would be required to be reported to a registered SDR.

83. Are there different standard data formats currently in use depending on the type or class of SBS?

84. Should the registered SDR have the flexibility to specify acceptable data formats, connectivity requirements, and other protocols for submitting information? Are there disadvantages to this approach? If so, what are they and how should they be addressed?

85. Are there concerns with a registered SDR requiring use of FpML to report SBSs? If so, what are they? Are there any licensing fees associated with use of FpML? If so, what actions should the Commission take, if any, to help ensure wide availability of a common data format by all participants?

86. Are commenters concerned that varying reporting formats would develop if there were more than one registered SDR in each asset class? If so, should there be a uniform reporting format across all registered SDRs? How would commenters recommend that the Commission achieve this goal? Should the Commission require all registered SDRs to use the same format and the same data elements?

b. Reference Codes

The Commission understands that there are—or could be developed—industry conventions for identifying SBSs or reference entities on which SBS are based through readily available reference codes comparable to the CUSIP identifier used for debt, equity, and certain derivative securities.
80

Proposed Rule 903 would permit the use of codes in place of certain data elements for purposes of reporting and disseminating the information required under proposed Regulation SBSR, provided that the information needed to interpret such codes is widely available on a non-fee basis. Specifically, proposed Rule 903 would provide that a reporting party could provide information to a registered SDR pursuant to proposed Rule 901, and a registered SDR could publicly disseminate information pursuant to proposed Rule 902, using codes in place of certain data elements, provided that the information necessary to interpret such codes is widely available on a non-fee basis.

80
The CUSIP number for a security uniquely identifies a company or issuer, the type of security, and other information about the instrument. From the CUSIP number for a debt instrument, for example, market participants are able to determine the issuer, the date of maturity, the interest rate, the coupon structure, and other terms of the instrument.

The Commission preliminarily believes that it is appropriate for the information required to interpret any codes used for reporting SBSs be widely available on a non-fee basis. If the information necessary to interpret such codes were not widely available, or available only for a fee, SBS transaction and pricing data might not be meaningfully available to the public. In the absence of proposed Rule 903, a registered SDR potentially could use proprietary code information, thereby requiring all consumers of its SBS market data to purchase from the code creator information necessary to interpret the codes.

Request for Comment

The Commission requests comment on all aspects of the proposed rules regarding the use of reference codes.

87. Do commenters agree it would be useful to permit the use of codes in place of specific data elements? Why or why not?

88. Are such codes currently in use? How would proposed Rule 903 affect how market participants employ any existing codes? Should the Commission permit registered SDRs to publicly disseminate SBS information using existing co

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2010-29710. Public record. Not legal advice.