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

Federal RegisterMay 23, 2013

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 242, and 249

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

RIN 3235-AL25

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

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rules; proposed interpretations.

SUMMARY:

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

i.e.,

“substituted compliance”). Finally, the Commission is setting forth our view of the scope of our authority, with respect to enforcement proceedings, under Section 929P of the Dodd-Frank Act.

DATES:

Submit comments on or before August 21, 2013.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form (

http://www.sec.gov/rules/proposed.shtml

);

• Send an email to

rule-comments@sec.gov

. Please include File Number S7-02-13, and File Numbers S7-34-10 (Regulation SBSR) and/or S7-40-11 (registration of security-based swap dealers and major security-based swap participants), as applicable, on the subject line; or

• Use the Federal eRulemaking Portal (

http://www.regulations.gov

). Follow the instructions for submitting comments.

Paper Comments

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

All submissions should refer to File Number S7-02-13, and File Numbers S7-34-10 (Regulation SBSR) and/or S7-40-11 (registration of security-based swap dealers and major security-based swap participants), as applicable. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (

http://www.sec.gov/rules/proposed.shtml

). Comments also are available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT:

Matthew A. Daigler, Senior Special Counsel, at 202-551-5578, Wenchi Hu, Senior Special Counsel, at 202-551-6268, Richard E. Grant, Special Counsel, at 202-551-5914, or Richard Gabbert, Special Counsel, at 202-551-7814, Office of Derivatives Policy, Division of Trading and Markets, regarding security-based swap dealers and major security-based swap participants; Jeffrey Mooney, Assistant Director, Matthew Landon, Senior Special Counsel, or Stephanie Park, Special Counsel, Office of Clearance and Settlement, Division of Trading and Markets, at 202-551-5710, regarding security-based swap clearing agencies, security-based swap data repositories, and the security-based swap clearing requirement; David Michehl, Senior Counsel, Office of Market Supervision, Division of Trading and Markets, at 202-551-5627, regarding security-based swap reporting; Leah Mesfin, Special Counsel, at 202-551-5655, or Michael P. Bradley, Special Counsel, at 202-551-5594, Office of Market Supervision, Division of Trading and Markets, regarding the trade execution requirement and swap execution facilities; Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

The Commission is proposing new rules and interpretive guidance under the Exchange Act relating to the application of Subtitle B of Title VII of the Dodd-Frank Act to cross-border activities and re-proposing Regulation SBSR and certain rules and forms relating to the registration of security-based swap dealers and major security-based swap participants.

The Commission is proposing the following rules under the Exchange Act: Rule 0-13 (Substituted Compliance Request Procedure); Rule 3a67-10 (Foreign Major Security-Based Swap Participants); Rule 3a71-3 (Cross-Border Security-Based Swap Dealing Activity); Rule 3a71-4 (Exception from Aggregation for Affiliated Groups with Registered Security-Based Swap Dealers); Rule 3a71-5 (Substituted Compliance for Foreign Security-Based Swap Dealers); Rule 3Ca-3 (Application of the Mandatory Clearing Requirement to Cross-Border Security-Based Swap Transactions); Rule 3Ch-1 (Application of the Mandatory Trade Execution Requirement to Cross-Border Security-Based Swap Transactions); Rule 3Ch-2 (Substituted Compliance for Mandatory Trade Execution); Rule 13n-4(d) (Exemption from the Indemnification Requirement); Rule 13n-12 (Exemption from Requirements Governing Security-Based Swap Data Repositories for Certain Non-U.S. Persons); Rule 18a-4(e) (Segregation Requirements for Foreign Security-Based Swap Dealers); and Rule 18a-4(f) (Segregation Requirements for Foreign Major

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

Table of Contents

I. Background

A. The Dodd-Frank Wall Street Reform and Consumer Protection Act

B. Overview of the Cross-Border Proposal

C. Consultation and Coordination

D. Substituted Compliance

E. Conclusion

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

A. Overview of the Security-Based Swap Market

1. Global Nature of the Security-Based Swap Market

2. Dealing Structures

(a) U.S. Bank Dealer

(b) U.S. Non-Bank Dealer

(d) Foreign-Based Dealer

i. Direct Dealing

ii. Intermediation in the United States

3. Clearing Practices

4. Reporting Practices

5. Trade Execution Practices

6. Broad Economic Considerations of Cross-Border Security-Based Swaps

(a) Major Economic Considerations

(b) Global Nature and Interconnectedness of the Security-Based Swap Market

(d) Security-Based Swap Data Reporting

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

1. Commenters' Views

2. Scope of Application of Title VII in the Cross-Border Context

(a) Overview and General Approach

(b) Territorial Approach to Application of Title VII Security-Based Swap Dealer Registration Requirements

(d) Application of Title VII Regulatory Requirements to Transactions of Foreign Entities Receiving Guarantees From U.S. Persons

(e) Regulations Necessary or Appropriate To Prevent Evasion of Title VII

C. Principles Guiding Proposed Approach to Applying Title VII in the Cross-Border Context

D. Conclusion

III. Security-Based Swap Dealers

A. Introduction

B. Registration Requirement

1. Introduction

2. Background Discussion Regarding the Registration of Foreign Brokers and Dealers

3. Comment Summary

(a) Market Participants

(b) Foreign Regulators

4. Application of the De Minimis Exception to Cross-Border Security-Based Swap Dealing Activity

(a) Meaning of the Term “Person” in the Security-Based Swap Dealer Definition

(b) Proposed Rule

5. Proposed Definition of “U.S. Person”

(a) Introduction

(b) Discussion

i. Natural Persons

ii. Corporations, Organizations, Trusts, and Other Legal Persons

iii. Accounts of U.S. Persons

iv. International Organizations

6. Proposed Definition of “Transaction Conducted Within the United States”

7. Proposed Treatment of Transactions With Foreign Branches of U.S. Banks

8. Proposed Rule Regarding Aggregation of Affiliate Positions

9. Treatment of Inter-Affiliate and Guaranteed Transactions

10. Comparison With Definition of “U.S. Person” in Regulation S

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

1. Introduction

2. Comment Summary

3. Title VII Requirements Applicable to Security-Based Swap Dealers

(a) Transaction-Level Requirements

i. External Business Conduct Standards

ii. Segregation of Assets

(b) Entity-Level Requirements

i. Capital

ii. Margin

iii. Risk Management

iv. Recordkeeping and Reporting

v. Internal System and Controls

vi. Diligent Supervision

vii. Conflicts of Interest

viii. Chief Compliance Officer

ix. Inspection and Examination

x. Licensing Requirements and Statutory Disqualification

4. Application of Certain Transaction-Level Requirements

(a) Proposed Rule

(b) Discussion

i. External Business Conduct Standards

a. Foreign Security-Based Swap Dealers

b. U.S. Security-Based Swap Dealers

ii. Segregation Requirements

a. Foreign Security-Based Swap Dealers

b. Non-Cleared Security-Based Swaps

c. Cleared Security-Based Swaps

d. Disclosure

5. Application of Entity-Level Rules

(a) Introduction

(b) Proposed Approach

D. Intermediation

1. Introduction

2. Comment Summary

3. Discussion

E. Registration Application Re-Proposal

1. Introduction

2. Discussion

IV. Major Security-Based Swap Participants

A. Introduction

B. Comment Summary

C. Proposed Approach

1. In General

2. Guarantees

(a) Guarantees Provided by U.S. Persons to Non-U.S. Persons

(b) Guarantees Provided by Non-U.S. Persons to U.S. Persons and Guarantees Provided by Non-U.S. Persons to Non-U.S. Persons

(d) Operational Compliance

3. Foreign Public Sector Financial Institutions (FPSFIs)

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

1. Transaction-Level Requirements Related to Customer Protection

(a) Overview

(b) Proposed Rules

2. Entity-Level Requirements

3. Substituted Compliance

V. Security-Based Swap Clearing Agencies

A. Introduction

B. Proposed Title VII Approach

1. Clearing Agency Registration

(a) Clearing Agencies Acting as CCPs

(b) Proposed Interpretive Guidance

2. Exemption From Registration Under Section 17A(k)

3. Application of Alternative Standards to Certain Registrants

VI. Security-Based Swap Data Repositories

A. Introduction

B. Application of the SDR Requirements in the Cross-Border Context

1. Introduction

2. Comment Summary

3. Proposed Approach

(a) U.S. Persons Performing SDR Functions Are Required To Register With the Commission

(b) Interpretive Guidance and Exemption for Non-U.S. Persons That Perform the Functions of an SDR Within the United States

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

1. Information Sharing Under Sections 21 and 24 of the Exchange Act

2. Comment Summary

3. Proposed Guidance and Exemptive Relief

(a) Notification Requirement

(b) Determination of Appropriate Regulators

i. Impact of the Indemnification Requirement

ii. Proposed Rule 13n-4(d): Indemnification Exemption

VII. Security-Based Swap Execution Facilities

A. Introduction

B. Registration of Foreign Security-Based Swap Markets

C. Registration Exemption for Foreign Security-Based Swap Markets

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

A. Background

B. Modifications to the Definition of “U.S. Person”

C. Additional Modifications to Scope of Regulation SBSR

1. Revisions to Proposed Rule 908(a)

2. Revisions to Proposed Rule 908(b)

D. Modifications to “Reporting Party” Rules and Assigning Duty To Report

E. Other Technical and Conforming Changes

F. Cross-Border Inter-Affiliate Transactions

G. Foreign Privacy Laws versus Duty To Report Counterparty ID

H. Foreign Public Sector Financial Institutions

I. Summary and Additional Request for Comment

IX. Mandatory Security-Based Swap Clearing Requirement

A. Introduction

B. Summary of Comments

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

1. Statutory Framework

2. Proposed Rule

3. Discussion

(a) Security-Based Swap Transactions Involving U.S. Persons or Non-U.S. Persons Receiving Guarantees From U.S. Persons

i. Proposed Rule

ii. Proposed Exception for Certain Transactions Involving Foreign Branches of U.S. Banks and Guaranteed Non-U.S. Persons

(b) Transactions Conducted Within the United States

i. Proposed Rule

ii. Proposed Exception for Transactions Conducted Within the United States by Certain Non-U.S. Persons

X. Mandatory Security-Based Swap Trade Execution Requirement

A. Introduction

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

1. Statutory Framework

2. Proposed Rule

3. Discussion

(a) Security-Based Swap Transactions Involving U.S. Persons or Non-U.S. Persons Receiving Guarantees From U.S. Persons

i. Proposed Rule

ii. Proposed Exception for Certain Transactions Involving Foreign Branches of U.S. Banks and Guaranteed Non-U.S. Persons

(b) Transactions Conducted Within the United States

i. Proposed Rule

ii. Proposed Exception for Transactions Conducted Within the United States by Certain Non-U.S. Persons

XI. Substituted Compliance

A. Introduction

B. Process for Making Substituted Compliance Requests

C. Security-Based Swap Dealer Requirements

1. Proposed Rule—Commission Substituted Compliance Determinations

2. Discussion

D. Regulatory Reporting and Public Dissemination

1. General

2. Security-Based Swaps Eligible and Not Eligible for Substituted Compliance

3. Requests for Substituted Compliance

4. Findings Necessary for Substituted Compliance

5. Modification or Withdrawal of Substituted Compliance Order

6. Regulatory Reporting and Public Dissemination Considered Together in the Commission's Analysis of Substituted Compliance

E. Clearing Requirement

F. Trade Execution Requirement

XII. Antifraud Authority

XIII. General Request for Comment

A. General Comments

B. Consistency With CFTC's Cross-Border Approach

XIV. Paperwork Reduction Act

A. Introduction

B. Re-Proposal of Form SBSE, Form SBSE-A, and Form SBSE-BD

1. Summary of Collection of Information

2. Proposed Use of Information

3. Respondents

4. Total Initial and Annual Reporting and Recordkeeping Burdens

(a) Paperwork Burden Associated With Filing Application Forms

(b) Paperwork Burden Associated With Amending Schedule F

5. Request for Comment on Paperwork Burden Estimates

C. Disclosures by Certain Foreign Security-Based Swap Dealers and Major Security-Based Swap Participants

1. Summary of Collection of Information

2. Proposed Use of Information

3. Respondents

4. Total Initial and Annual Reporting Burdens

5. Request for Comment on Paperwork Burden Estimates

D. Reliance on Counterparty Representations Regarding Activity Within the United States

1. Summary of Collection of Information

2. Proposed Use of Information

3. Respondents

4. Total Initial and Annual Reporting and Recordkeeping Burdens

5. Request for Comment on Paperwork Burden Estimates

E. Requests for Cross-Border Substituted Compliance Determinations

1. Summary of Collection of Information

2. Proposed Use of Information

3. Respondents

4. Total Initial and Annual Reporting and Recordkeeping Burdens

(a) Proposed Rule 3a71-5

(b) Re-Proposed Rule 242.908(c)(2)(ii) of Regulation SBSR

F. Reporting and Dissemination of Security-Based Swap Information

1. Background on the Re-Proposed Rules

2. Modifications to “Reporting Party” Rules

(a) Summary of Collection of Information

(b) Proposed Use of Information

(d) Total Initial and Annual Reporting and Recordkeeping Burdens

i. Baseline Burdens

ii. Re-Proposed Burdens

iii. Summary of Re-Proposed Burdens

iv. Recordkeeping Requirements

(e) Collection of Information Is Mandatory

(f) Confidentiality

3. Rules 902, 905, 906, 907, and 909

(a) Rule 902

(b) Rule 905

(d) Rule 907

(e) Rule 909

i. Impact of Re-Proposed Rules 902, 905, 906, 907, and 909 on the Commission's PRA Analysis

4. Rules 900, 903, 908, 910, and 911

(a) Modification of the Definition of “U.S. Person”

(b) Rule 903

(d) Rule 910

(e) Rule 911

G. Request for Comments by the Commission and Director of OMB

XV. Economic Analysis

A. Introduction

B. Economic Baseline

1. Overview

2. Current Security-Based Swap Market

(a) Security-Based Swap Market Participants

(b) Levels of Security-Based Swap Trading Activity

(d) Level of Current Cross-Border Activity in Single-Name CDS

(e) Levels of Security-Based Swap Clearing

C. Analysis of Potential Effects on Efficiency, Competition, and Capital Formation

1. Introduction

2. Competition

(a) Security-Based Swap Dealers

(b) Security-Based Swap Market Infrastructure Requirements

i. Registration of Clearing Agencies, SDRs and SB SEFs

ii. Application of Mandatory Clearing, Public Dissemination, Regulatory Reporting, and Trade Execution Requirements in the Cross-Border Context

3. Efficiency

4. Capital Formation

D. Economic Analysis of Proposed Rules Regarding “Security-Based Swap Dealers” and “Major Security-Based Swap Participants”

1. Programmatic Costs and Benefits

(a) Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants

(b) Security-Based Swap Dealers—De Minimis Exception

2. Assessment Costs

(a) Security-Based Swap Dealers—De Minimis Exception

(b) Major Security-Based Swap Participants—“Substantial Position” and “Substantial Counterparty Exposure” Thresholds

3. Alternatives Considered

(a) De Minimis Exception

i. Alternatives to the Proposed Definition of U.S. Person

ii. Alternatives to the Proposed Rule Regarding Application of the De Minimis Exception

a. Calculation of U.S. Persons' Transactions for De Minimis Exception

b. Calculation of Non-U.S. Persons' Transactions for De Minimis Exception (Including Transactions Conducted Within the United States)

iii. Aggregation of Affiliate Dealing Activity

(b) Major Security-Based Swap Participants

E. Economic Analysis of the Proposed Application of the Entity-Level and Transaction-Level Requirements to Security-Based Swap Dealers and Major Security-Based Swap Participants

1. Entity-Level Requirements

2. Transaction-Level Requirements

(a) Proposed Rule 3a71-3(c)—Application of Customer Protection Requirements

i. Programmatic Benefits and Costs

ii. Assessment Costs

iii. Alternatives

(b) Proposed Rule 18a-4(e)—Application of Segregation Requirements

i. Programmatic Benefits and Costs

a. Pre-Dodd Frank Segregation Practice

b. Benefits of the Segregation Requirements

c. Costs of the Segregation Requirements

d. Costs and Benefits of Proposed Rules 18a-4(e)(1) and (2) Regarding Application of Segregation Requirements to Foreign Security-Based Swap Dealers

e. Costs and Benefits of Proposed Rule 18a-4(e)(3) Regarding Disclosures

ii. Assessment Costs

F. Economic Analysis of Application of Rules Governing Security-Based Swap Clearing in Cross-Border Context

1. Programmatic Benefits and Costs Associated With the Clearing Agency Registration

(a) Proposed Interpretive Guidance Regarding Clearing Agency Registration

(b) Proposed Exemption of Foreign Clearing Agency From Registration

2. Programmatic Benefits and Costs Associated With the Mandatory Clearing Requirement of Section 3C(a)(1) of the Exchange Act

(a) Programmatic Effects of the Mandatory Clearing Requirement

(b) Programmatic Benefits and Costs of the Mandatory Clearing Requirement

3. Programmatic Benefits and Costs of Proposed Rule 3Ca-3

(a) Programmatic Effect of Proposed Rule 3Ca-3

(b) Programmatic Benefits and Costs of Proposed Rule 3Ca-3

(d) Assessment Costs

G. The Economic Analysis of Application of Rules Governing Security-Based Swap Trading in the Cross-Border Context

1. Programmatic Benefits and Costs of the Proposed Application of the Registration Requirements of Section 3D of the Exchange Act to Foreign Security-Based Swap Markets

(a) Programmatic Benefits

(b) Programmatic Costs

2. Programmatic Benefits and Costs of the Potential Availability of Exemptive Relief to Foreign Security-Based Swap Markets

(a) Programmatic Benefits

(b) Programmatic Costs

(d) Assessment Costs

3. Programmatic Benefits and Costs Associated With the Mandatory Trade Execution Requirement of Section 3C(h) of the Exchange Act

(a) Programmatic Effect of the Statutory Mandatory Trade Execution Requirement

(b) Programmatic Benefits of the Statutory Mandatory Trade Execution Requirement

4. Programmatic Benefits and Costs of Proposed Rule 3Ch-1 Regarding Application of the Mandatory Trade Execution Requirement in Cross-Border Context

(a) Programmatic Effect of Proposed Rule 3Ch-1

(b) Programmatic Benefits and Costs of Proposed Rule 3Ch-1

H. Application of Rules Governing Security-Based Swap Data Repositories in Cross-Border Context

1. Benefits and Costs Associated With Application of the SDR Requirements in the Cross-Border Context

(a) Benefits of Proposed Approach to SDR Requirements

i. Programmatic Benefits of Proposed Guidance Regarding Registration

ii. Programmatic Benefits of the SDR Exemption

(b) Costs of Proposed Approach to SDR Requirements

i. Programmatic Costs of the Commission's Proposed Approach

ii. Assessment Costs

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

(a) Benefits and Costs of Relevant Authorities' Access to Security-Based Swap Data Under the Dodd-Frank Act

i. Benefits of Relevant Authorities' Access to Security-Based Swap Data

ii. Costs of Relevant Authorities' Access to Security-Based Swap Data

(b) Benefits and Costs of Proposed Guidance and Exemptive Rule

i. Notification Requirement

ii. Determination of Appropriate Regulators

iii. Exemptive Relief From the Indemnification Requirement

i. Notification Requirement

ii. Determination of Appropriate Regulators

iii. Exemptive Relief From the Indemnification Requirement

3. Economic Analysis of the Re-Proposal of Regulation SBSR

(a) Modifications to “Reporting Party” Rules and Jurisdictional Reach of Regulation SBSR—Re-Proposed Rules 901(a) and 908(a)

i. Initial Proposal

a. Programmatic Benefits of Initial Proposal

b. Programmatic Costs of Initial Proposal

ii. Re-Proposal

a. Programmatic Benefits

b. Programmatic Costs

(b) Proposed Modification of the Definition of “U.S. Person”

i. Initial Proposal

ii. Re-Proposal

a. Programmatic Benefits

b. Programmatic Costs

(d) Other Technical Revisions in Re-Proposed Regulation SBSR

(e) Aggregate Total Quantifiable Costs

I. Economic Analysis of Substituted Compliance

1. Programmatic Benefits and Costs

2. Alternatives

3. Assessment Costs

J. General Request for Comments

XVI. Consideration of Impact on the Economy

XVII. Regulatory Flexibility Act Certification

Statutory Basis and Text of Proposed Rules

Appendix A: Application of Subtitle B of Title VII in the Cross-Border Context

Table I—Registered U.S. Security-Based Swap Dealers

Table II—Registered Non-U.S. Security-Based Swap Dealer with U.S. Guarantee

Table III—Unregistered Non-U.S. Dealer (or Market Participant) With U.S. Guarantee

Table IV—Registered Non-U.S. Security-Based Swap Dealer Without U.S. Guarantee

Table V—Unregistered Non-U.S. Dealer (or Market Participant) Without U.S. Guarantee

Appendix B: Registration of Security-Based Swap Dealers

Appendix C: Re-Proposal of Registration Forms

Appendix D: List of Commenters

I. Background

The global nature of the security-based swap market highlights the critical importance of addressing the application of the Title VII of the Dodd-Frank Act

(“Title VII”) to cross-border activities.

The Commission has received numerous inquiries and comments from market participants, foreign regulators, and other interested parties concerning how Title VII and the Commission's implementing regulations thereunder will apply to the cross-border activities of U.S. and non-U.S. market participants. To respond to these inquiries and comments, the Commission is providing our preliminary views on the application of Title VII to cross-border security-based swap activities

and non-U.S. persons

that act in capacities regulated under the Dodd-Frank Act in the proposed rules and interpretations discussed below.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).

Unless otherwise indicated, references to Title VII of the Dodd-Frank Act in this release are to Subtitle B of Title VII.

Generally, in this release, the application of Title VII to “cross-border activities” refers to the application of Title VII to a security-based swap transaction involving (i) A U.S. person and a non-U.S. person, (ii) two non-U.S. persons where one or both are located within the United States, or (iii) two non-U.S. persons conducting a security-based swap transaction that otherwise occurs in relevant part within the United States, including by

negotiating the terms of the security-based swap transaction within the United States or where performance of one or both counterparties under the security-based swap is guaranteed by a U.S. person.

A. The Dodd-Frank Wall Street Reform and Consumer Protection Act

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

The 2008 financial crisis highlighted significant issues in the over-the-counter (“OTC”) derivatives markets, which have experienced dramatic growth in recent years

and are capable of affecting significant sectors of the U.S. economy.

Title VII of the Dodd-Frank Act provides for a comprehensive new regulatory framework for swaps and security-based swaps, including by: (i) Providing for the registration and comprehensive regulation of swap dealers, security-based swap dealers, major swap participants, and major security-based swap participants; (ii) imposing clearing and trade execution requirements on swaps and security-based swaps, subject to certain exceptions; (iii) creating recordkeeping and real-time reporting regimes and public dissemination; and (iv) enhancing the rulemaking and enforcement authorities of the Commission and the Commodity Futures Trading Commission (“CFTC”).

The Dodd-Frank Act was enacted “[t]o promote the financial stability of the United States by improving accountability and transparency in the financial system, to end `too big to fail', to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.” Public Law 111-203, Preamble.

From their beginnings in the early 1980s, the notional value of these markets grew to approximately $650 trillion globally by the end of 2011.

See

Bank for International Settlements, Statistical Release: OTC Derivatives Statistics at End-December 2011 (May 2012) at 1,

available at:

http://www.bis.org/publ/otc_hy1205.pdf

See

Section II.A.6(b),

infra.

See

Public Law 111-203 sections 701-774.

Specifically, the Dodd-Frank Act provides that the CFTC will regulate “swaps,” the Commission will regulate “security-based swaps,”

and both the CFTC and the Commission (together, the “Commissions”) will regulate “mixed swaps.”

Title VII also amends the Exchange Act to include many specific provisions governing security-based swaps that could apply to cross-border security-based swap transactions and to non-U.S. persons who act in capacities regulated under the Dodd-Frank Act.

These provisions primarily relate to Commission oversight of security-based swap dealers,

major security-based

swap participants,

security-based swap data repositories (“SDRs”),

security-based swap clearing agencies,

security-based swap execution facilities (“SB SEFs”),

and mandatory security-based swap reporting and dissemination,

clearing,

and trade execution.

The definition of “security” in both the Exchange Act and the Securities Act of 1933 (“Securities Act”), 15 U.S.C. 77a

et seq.,

was amended by the Dodd-Frank Act to include security-based swaps. Public Law 111-203, Section 761(a)(2) (inserting “security-based swap” after “security future” in Section 3(a)(10) of the Exchange Act, 15 U.S.C. 78c(a)(10)) and Section 768(a)(1) (inserting “security-based swap” after “security future” in Section 2(a)(1) of the Securities Act, 15 U.S.C. 77b(a)(1)). The revision of the Exchange Act's definition of “security” raises, among other things, issues related to the definition of “broker” in Section 3(a)(4) of the Exchange Act, 15 U.S.C. 78c(a)(4), the definition of “dealer” in Section 3(a)(5) of the Exchange Act, 15 U.S.C. 78c(a)(5), the exchange registration requirements in Sections 5 and 6 of the Exchange Act, 15 U.S.C. 78e and 78f, respectively, and the requirement in Section 12 of the Exchange Act that securities be registered before a transaction is effected on a national securities exchange.

See

15 U.S.C. 78l(a). The Securities Act requires that any offer and sale of a security must either be registered under the Securities Act (

see

Section 5 of the Securities Act, 15 U.S.C. 77e) or made pursuant to an exemption from registration (

see,

e.g., Sections 3 and 4 of the Securities Act, 15 U.S.C. 77c and 77d, respectively). In addition, the Securities Act requires that any offer to sell, offer to buy or purchase or sell a security-based swap to any person who is not an eligible contract participant (“ECP”) must be registered under the Securities Act.

See

Section 5(e) of the Securities Act, 15 U.S.C. 77e(e). Because of the statutory language of Section 5(e), exemptions from this requirement in Sections 3 and 4 of the Securities Act are not available. This release does not address the requirements under Section 5 of the Securities Act.

The Commission adopted interim final rules that provide exemptions from certain provisions of the Securities Act, the Exchange Act, and the Trust Indenture Act of 1939 (“Trust Indenture Act”), 15 U.S.C. 77aaa

et seq

for those security-based swaps that prior to July 16, 2011 were “security-based swap agreements” and are defined as “securities” under the Securities Act and the Exchange Act as of July 16, 2011 due solely to the provisions of Title VII of the Dodd-Frank Act.

See

Exemptions for Security-Based Swaps, Securities Act Release No. 9231 (July 1, 2011), 76 FR 40605 (July 11, 2011);

see also

Extension of Exemptions for Security-Based Swaps, Securities Act Release No. 9383 (Jan. 29, 2013), 78 FR 7654 (Feb. 4, 2013). The Commission also issued temporary exemptions under the Exchange Act regarding certain issues raised by the inclusion of security-based swaps in the definition of “security.”

See

Order Extending Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With the Revision of the Definition of “Security” To Encompass Security-Based Swaps, and Request for Comment, Exchange Act Release No. 68864 (Feb. 7, 2013), 78 FR 10218 (Feb. 13, 2013);

see also

Order Granting Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With the Pending Revision of the Definition of “Security” To Encompass Security-Based Swaps, and Request for Comment, Exchange Act Release No. 64795 (July 1, 2011) 76 FR 39927 (July 7, 2011).

In addition, the Dodd-Frank Act adds to the Commodity Exchange Act (“CEA”) and Exchange Act definitions of the terms “swap dealer,” “security-based swap dealer,” “major swap participant,” and “major security-based swap participant,” and amends the CEA definition of the term “eligible contract participant.” These terms are defined in Sections 721 and 761 of the Dodd-Frank Act and, with respect to the term “eligible contract participant,” in Section 1a(18) of the CEA, 7 U.S.C. 1a(18), as redesignated and amended by Section 721 of the Dodd-Frank Act. Section 712(d)(1) of the Dodd-Frank Act provides that the CFTC and the Commission, in consultation with the Board of Governors of the Federal Reserve System, shall jointly further define the terms “swap,” “security-based swap,” “swap dealer,” “security-based swap dealer,” “major swap participant,” “major security-based swap participant,” “eligible contract participant,” and “security-based swap agreement.” Further, Section 721(c) of the Dodd-Frank Act requires the CFTC to adopt a rule to further define the terms “swap,” “swap dealer,” “major swap participant,” and “eligible contract participant,” and Section 761(b)(3) of the Dodd-Frank Act permits the Commission to adopt a rule to further define the terms “security-based swap,” “security-based swap dealer,” “major security-based swap participant,” and “eligible contract participant,” with regard to security-based swaps, for the purpose of including transactions and entities that have been structured to evade Title VII or the amendments made by Title VII.

The Commission and the CFTC jointly adopted rules and interpretive guidance further defining the terms “swap,” “security-based swap,” and “security-based swap agreement,” and regulations regarding mixed swaps.

See

Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, Exchange Act Release No. 67453 (July 18, 2012), 77 FR 48208 (Aug. 13, 2012) (“Product Definitions Adopting Release”). The Commission and the CFTC also jointly adopted rules further defining the terms “swap dealer,” “security-based swap dealer,” “major swap participant,” “major security-based swap participant,” and “eligible contract participant.”

See

Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant,” Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012) (“Intermediary Definitions Adopting Release”).

The provisions of the Exchange Act relating to security-based swaps that were enacted by Title VII also are referred to herein as “Title VII requirements” or “requirements in Title VII.”

See

Section 764(a) of the Dodd-Frank Act. The Commission, jointly with the CFTC, adopted rules further defining the term “security-based swap dealer.”

See

Intermediary Definitions Adopting Release, 77 FR 30596.

The Commission has proposed rules regarding the registration and substantive requirements for security-based swap dealers and major security-based swap participants.

See

Proposed Rules Governing Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, Exchange Act Release No. 68071 (Oct. 18, 2012) 77 FR 70214 (Nov. 23, 2012) (“Capital, Margin, and Segregation Proposing Release”); Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants, Exchange Act Release No. 65543 (Oct. 12, 2011) (RIN 3235-AL05), 76 FR 65784 (Oct. 24, 2011) (“Registration Proposing Release”); Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants, Exchange Act Release No. 64766 (June 29, 2011), 76 FR 42396 (July 18, 2011) (“External Business Conduct Standards Proposing Release”); and Trade Acknowledgment and Verification of Security-Based Swap Transactions, Exchange Act Release No. 63727 (Jan. 14, 2011), 76 FR 3859 (Jan. 21, 2011) (“Trade Acknowledgment Proposing Release”). The Commission has not yet proposed rules governing the recordkeeping, reporting, and notification requirements for security-based swap

dealers and major security-based swap dealers pursuant to Section 15F(f) of the Exchange Act, 15 U.S.C. 78o-10(f), as added by Section 764(a) of the Dodd-Frank Act.

See

Section 764(a) of the Dodd-Frank Act. The Commission, jointly with the CFTC, adopted rules further defining the term “major security-based swap participant.”

See

Intermediary Definitions Adopting Release, 77 FR 30596. In a number of releases, the Commission also has proposed rules regarding the registration and substantive requirements for major security-based swap participants.

See

note 11,

supra.

See

Section 763(i) of the Dodd-Frank Act. The Commission has proposed rules regarding the registration and regulation of SDRs.

See

Security-Based Swap Data Repository Registration, Duties, and Core Principles, Exchange Act Release No. 63347 (Nov. 19, 2010), 75 FR 77306 (Dec. 10, 2010), corrected at 75 FR 79320 (Dec. 20, 2010) and 76 FR 2287 (Jan. 13, 2011) (“SDR Proposing Release”).

See

Section 763(b) of the Dodd-Frank Act. The Commission adopted rules regarding the standards for risk management practices and operations of registered clearing agencies, including security-based swap clearing agencies.

See

Clearing Agency Standards, Exchange Act Release No. 68080 (Oct. 22, 2012), 77 FR 66220 (Nov. 2, 2012) (“Clearing Agency Standards Adopting Release”).

See

Section 763(c) of the Dodd-Frank Act. The Commission has proposed rules regarding the registration and regulation of SB SEFs.

See

Registration and Regulation of Security-Based Swap Execution Facilities, Exchange Act Release No. 63825 (Feb. 2, 2011), 76 FR 10948 (Feb. 29, 2011) (“SB SEF Proposing Release”).

See

Sections 763 and 766 of the Dodd-Frank Act. The Commission has proposed rules on trade reporting, data elements, and real-time public reporting for security-based swaps.

See

Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, Exchange Act Release No. 63346 (Nov. 19, 2010) (RIN 3235-AK80), 75 FR 75208 (Dec. 2, 2010) (“Regulation SBSR Proposing Release”).

See

Section 763(b) of the Dodd-Frank Act. The Commission has proposed or adopted rules relating to the end-user clearing exception and the process for submitting for review of security-based swaps for mandatory clearing.

See

Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies; Technical Amendments to Rule 19b-4 and Form 19b-4 Applicable to All Self-Regulatory Organizations, Exchange Act Release No. 67286 (June 28, 2012), 77 FR 41602 (July 13, 2012) (“Clearing Procedures Adopting Release”); End-User Exception to Mandatory Clearing of Security-Based Swaps (Corrected), Exchange Act Release No. 63556 (Dec. 15, 2010), 75 FR 79992 (Dec. 21, 2010) (“End-User Exception Proposing Release”).

See

Section 763(b) of the Dodd-Frank Act.

B. Overview of the Cross-Border Proposal

With limited exceptions, the Commission has not proposed specific provisions of rules or forms or provided guidance regarding the application of Title VII to cross-border activities.

Rather than addressing these issues in a piecemeal fashion through the various substantive rulemaking proposals implementing Title VII, the Commission instead is addressing the application of Title VII to cross-border activities holistically in a single proposing release.

This approach provides market participants, foreign regulators, and other interested parties with an opportunity to consider, as an integrated whole, the Commission's proposed approach to the application of Title VII to cross-border security-based swap activities and non-U.S. persons that act in capacities regulated under the Dodd-Frank Act.

The Commission has proposed a rule addressing the application of the security-based swap trade reporting requirement to cross-border transactions and to non-U.S. persons.

See

Regulation SBSR Proposing Release, 75 FR 75239-40, as discussed in Section VIII,

infra.

The Commission also has proposed rules imposing special requirements on “nonresident security-based swap dealers,” “nonresident major security-based swap participants,” “non-resident swap data repositories,” and “non-resident SB SEFs.”

See

Registration Proposing Release, 76 FR 65799-801, as discussed in Section III.E,

infra;

SDR Proposing Release, 75 FR 77310, as discussed in Section VI,

infra;

and SB SEF Proposing Release, 76 FR 11000-3, as discussed in Section VII,

infra.

Tables reflecting the Commission's proposed approach as it would apply to security-based swap transactions between different types of entities are included in this release as Appendix A. Each table focuses on a specific type of security-based swap dealing entity or market participant and sets out the Title VII requirements that would apply to such person under different transaction scenarios.

Cf.

CFTC Proposed Interpretive Guidance and Policy Statement, Cross-Border Application of Certain Swaps Provisions of the Commodity Exchange Act, 77 FR 41214 (July 12, 2012) (“CFTC Cross-Border Proposal”); Exemptive Order Regarding Compliance with Certain Swap Regulations, 77 FR 41110 (July 12, 2012) (“CFTC Proposed Cross-Border Exemptive Order”); Final Exemptive Order Regarding Compliance with Certain Swap Regulations, 78 FR 858 (Jan. 7, 2013) (“Final CFTC Cross-Border Exemptive Order”); Further Proposed Guidance Regarding Compliance With Certain Swap Regulations, 78 FR 909 (Jan. 7, 2013) (“CFTC Further Proposed Guidance”). In Section XIII.B below, we solicit general comment on the differences between our proposed approach and the CFTC's proposed approach.

After providing an overview of the security-based swap market, the Commission's preliminary views on the scope of application of Title VII to cross-border security-based swap activity, and the legal and policy principles guiding the Commission's approach to the application of Title VII to cross-border activities in Section II, we set forth our proposed approach in the subsequent sections of the release.

In Sections III and IV, we propose rules and interpretive guidance regarding the registration and regulation of security-based swap dealers and major security-based swap participants, including the treatment of foreign branches of U.S. banks and the provision of guarantees in the cross-border context. In connection with this, we are re-proposing the following rules and forms: 17 CFR 249.1600 (Form SBSE), 249.1600a (Form SBSE-A), and 249.1600b (Form SBSE-BD).

See

Registration Proposing Release, 76 FR 65784, as discussed in Section III.E,

infra.

In Sections V-VII, we propose rules and interpretive guidance regarding the registration of security-based swap clearing agencies, SDRs, and SB SEFs, as well as discuss generally under what circumstances the Commission would consider granting exemptions from registration for these infrastructures. To facilitate relevant authorities' access to security-based swap data collected and maintained by Commission-registered SDRs, the Commission also is proposing interpretive guidance to specify how SDRs may comply with the notification requirement in the Exchange Act and specifying how the Commission proposes to determine whether a relevant authority is appropriate for purposes of receiving security-based swap data from an SDR.

In addition, the Commission is proposing a tailored exemption from the indemnification requirement in the Exchange Act.

See

Section VI.C,

infra.

Id.

In Sections VIII-X, we propose rules and interpretive guidance regarding the application of Title VII to cross-border activities with respect to certain transactional requirements in connection with reporting and dissemination, clearing, and trade execution for security-based swaps. As discussed further below, these requirements apply to persons independent of their registration status. In connection with this, we are re-proposing the following rules: 17 CFR 242.900-242.911 (Regulation SBSR).

See

Regulation SBSR Proposing Release, 75 FR 75208, as discussed in Section VIII,

infra.

In Section XI, we set forth a proposed policy and procedural framework under which we would consider permitting compliance with comparable regulatory requirements in a foreign jurisdiction to substitute for compliance with certain requirements of the Exchange Act, and the rules and regulations thereunder, relating to security-based swaps (

i.e.,

“substituted compliance”).

Generally speaking, the Commission is proposing a policy and procedural framework that would allow for the possibility of substituted compliance in recognition of

the potential, in a market as global as the security-based swap market, for market participants who engage in cross-border security-based swap activity to be subject to conflicting or duplicative compliance obligations.

In addition, the Commission is proposing a rule that would set forth procedures for requesting a substituted compliance determination.

See

Section XI,

infra.

As discussed in Section XI, in permitting substituted compliance, the Commission might use different procedural approaches depending on the different substantive requirements that are the subject of the substituted compliance determinations.

See also

note 27,

infra.

Separately, in Sections V-VII below, the Commission also discusses generally when we would consider exempting non-resident security-based swap clearing agencies and SB SEFs that are subject to comparable, comprehensive supervision and regulation in their home countries, and certain SDRs that are non-U.S. persons, from certain obligations under the Exchange Act, including the requirement to register.

In Section XII, the Commission sets forth our view of the scope of our authority, with respect to enforcement proceedings, under Section 929P of the Dodd-Frank Act.

Section XIII sets forth a general request for comment, including request for comment on the consistency of our proposed approach with the CFTC's proposed approach to applying the provisions of the CEA that were enacted by Title VII in the cross-border context.

The rules, forms, and interpretive guidance proposed herein and discussed in Sections II-XI below relate solely to the applicability of the registration (and the attendant substantive regulation) and reporting and dissemination, clearing, and trade execution requirements in Title VII, and are not intended to limit or address the cross-border reach or extraterritorial application of the antifraud or other provisions of the federal securities laws.

Finally, in Section XIV, the Commission addresses the Paperwork Reduction Act, and Section XV provides an economic analysis of the proposed approach, including a discussion of the associated costs and benefits of the proposals discussed in Sections III-XI, as well as a discussion of issues related to efficiency, competition, and capital formation.

Because this release is directly related to security-based swap data reporting and dissemination, clearing, and trade execution, as well as the regulation of various persons required to register as a result of amendments made to the Exchange Act by Title VII, we anticipate that some of the rules, forms, and interpretive guidance proposed herein, and comments received thereon, will be addressed in the adopting releases relating to the impacted substantive rules. In some areas, we may decide to address comments received on the proposals contained in this release by adopting rules in a separate rulemaking.

The Commission is not addressing in this release issues relating to compliance dates of final rules adopted pursuant to amendments made to the Exchange Act by Title VII. Compliance issues, including compliance dates, will be addressed in connection with the various Title VII final rules.

See

Statement of General Policy on the Sequencing of the Compliance Dates for Final Rules Applicable to Security-Based Swaps Adopted Pursuant to the Securities Exchange Act of 1934 and the Dodd-Frank Wall Street Reform and Consumer Protection Act, Exchange Act Release No. 67177 (June 11, 2012), 77 FR 35625 (June 14, 2012) (“Implementation Policy Statement”).

See also

Reopening of Comment Periods for Certain Rulemaking Releases and Policy Statement Applicable to Security-Based Swaps Proposed Pursuant to the Securities Exchange Act of 1934 and the Dodd-Frank Wall Street Reform and Consumer Protection Act, Exchange Act Release No. 34-69491 (May 1, 2013).

C. Consultation and Coordination

As discussed more fully below, a number of market participants, foreign regulators, and other interested parties have already provided their views on the application of Title VII to cross-border activities through both written comment letters to the Commission and/or the CFTC and meetings with Commissioners and Commission staff.

The Commission has taken the commenters' views expressed thus far into consideration in developing these proposed rules, forms, and interpretive guidance.

In addition, in developing this proposal, the Commission has, in compliance with Sections 712(a)(2)

and 752(a)

of the Dodd-Frank Act, consulted and coordinated with the CFTC, the prudential regulators,

and foreign regulatory authorities.

The views expressed in comment letters and meetings are collectively referred to as the views of “commenters.” See Appendix D for a list of commenters referred to in this release and the location of their comment letters on the Commission's (or the CFTC's) Web site.

In addition, the Commission and the CFTC held a joint public roundtable regarding the application of Title VII to cross-border activities.

See

Joint Public Roundtable on International Issues Relating to the Implementation of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Exchange Act Release No. 64939 (July 21, 2011), 76 FR 44507 (July 26, 2011).

Section 712(a)(2) of the Dodd-Frank Act states, in part, that “the Securities and Exchange Commission shall consult and coordinate to the extent possible with the Commodity Futures Trading Commission and the prudential regulators for the purposes of assuring regulatory consistency and comparability, to the extent possible.”

Section 752(a) of the Dodd-Frank Act states, in part, that “[i]n order to promote effective and consistent global regulation of swaps and security-based swaps, the Commodity Futures Trading Commission, the Securities and Exchange Commission, and the prudential regulators (as that term is defined in Section 1a(39) of the Commodity Exchange Act), as appropriate, shall consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards with respect to the regulation (including fees) of swaps.”

The term “prudential regulator” is defined in Section 1a(39) of the CEA, 7 U.S.C. 1a(39), and that definition is incorporated by reference in Section 3(a)(74) of the Exchange Act, 15 U.S.C. 78c(a)(74). Pursuant to the definition, the Board of Governors of the Federal Reserve System (“Federal Reserve Board”), the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Farm Credit Administration, or the Federal Housing Finance Agency (collectively, the “prudential regulators”) is the “prudential regulator” of a security-based swap dealer if the entity is directly supervised by that agency.

Efforts to regulate the swaps market are underway not only in the United States but also abroad. In 2009, leaders of the Group of 20 (“G20”)—whose membership includes the United States, 18 other countries, and the European Union (“EU”)—called for global improvements in the functioning, transparency, and regulatory oversight of OTC derivatives markets. Specifically, the G20 leaders declared that:

[a]ll standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements. We ask the [Financial Stability Board] and its relevant members to assess regularly implementation and whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic risk and protect against market abuse.

G20 Meeting, Pittsburgh, United States, September 25, 2009,

available at: http://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf.

In subsequent summits, the G20 leaders have reiterated their commitment to OTC derivatives regulatory reform.

The Commission has participated in numerous bilateral and multilateral discussions with foreign regulatory authorities addressing the regulation of OTC derivatives.

Through these

discussions and our participation in various international task forces and working groups,

we have gathered information about foreign regulatory reform efforts and have discussed the possibility of conflicts and gaps, as well as inconsistencies and duplications, between U.S. and foreign regulatory regimes. We have taken these discussions into consideration in developing these proposed rules, forms, and interpretations.

For example, on June 18-19, 2012, the leaders of the G20 convened in Los Cabos, Mexico, and reaffirmed their commitments with respect to the regulation of the OTC derivatives markets.

See

the G20 Leaders Declaration (June 2012), para. 39,

available at: http://www.g20.org/documents/.

Senior representatives of OTC derivatives market regulators from G20 jurisdictions have met on a number of occasions to discuss international coordination of OTC derivatives regulations.

See, e.g.,

Joint Press Statement of Leaders on Operating Principles and Areas of Exploration in the Regulation of the Cross-Border OTC Derivatives Market (Dec. 4, 2012),

available at: http://www.sec.gov/news/press/2012/2012-251.htm;

Joint Statement on Regulation of OTC Derivatives Markets (May 7, 2012),

available at: http://www.sec.gov/news/press/2012/2012-85.htm;

and Joint Statement on Regulation of OTC Derivatives Markets (Dec. 9, 2011),

available at: http://www.sec.gov/news/press/2011/2011-260.htm . See also

Financial Stability Board (“FSB”), OTC Derivatives Market Reforms, Fifth Progress Report on Implementation (April 15, 2013) (“FSB Progress Report April 2013”), at 47,

available at: http://www.financialstabilityboard.org/publications/r_130415.pdf

(noting that SEC staff has regularly consulted its counterparts in other jurisdictions to discuss and compare approaches to the application of Title VII of the Dodd-Frank Act in cross-border contexts); FSB Progress Report April 2013 at 5 and

45-46 (discussing meetings of the group of market regulators “to identify and explore ways to address issues and uncertainties in the application of rules in a cross-border context, including options to address identified conflicts, inconsistencies, and duplication.”).

The Commission participates in the FSB's Working Group on OTC Derivatives Regulation (“ODWG”), both on its own behalf and as the representative of the International Organization of Securities Commissions (“IOSCO”), which is co-chair of the ODWG. The Commission also serves as one of the co-chairs of the IOSCO Task Force on OTC Derivatives Regulation.

In addition, the Commission and the CFTC have conducted staff studies to assess developments in OTC derivatives regulation abroad. As directed by Congress in Section 719(c) of the Dodd-Frank Act, on January 31, 2012, the Commission and the CFTC jointly submitted to Congress a “Joint Report on International Swap Regulation” (“Swap Report”).

The Swap Report discussed swap and security-based swap regulation and clearinghouse regulation in the Americas, Asia, and the European Union, and identified similarities and differences in jurisdictions' approaches to areas of regulation, as well as other areas of regulation that could be harmonized. The Swap Report also identified major clearinghouses, clearing members, and regulators in each geographic area and described the major contracts (including clearing volumes and notional values), methods for clearing swaps, and the systems used for setting margin in each geographic area.

See

CFTC and SEC, Joint Report on International Swap Regulation (Jan. 31, 2012),

available at: http://www.sec.gov/news/studies/2012/sec-cftc-intlswapreg.pdf.

In addition, Commission and CFTC staff submitted a joint study to Congress on the feasibility of requiring the derivatives industry to adopt standardized computer-readable algorithmic descriptions which may be used to describe complex and standardized financial derivatives.

See

Joint Study on the Feasibility of Mandating Algorithmic Descriptions for Derivatives: A Study by the Staff of the Securities and Exchange Commission and the Commodity Futures Trading Commission as Required by Section 719(c) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Apr. 7, 2011),

available at: http://www.sec.gov/news/studies/2011/719b-study.pdf.

In preparing this report, Commission and CFTC staff coordinated extensively with international financial institutions and foreign regulators.

D. Substituted Compliance

As noted above, we recognize the potential, in a market as global as the security-based swap market, that market participants who engage in cross-border security-based swap activity may be subject to conflicting or duplicative compliance obligations. To address this possibility, we are proposing a “substituted compliance” framework under which we would consider permitting compliance with requirements in a foreign

regulatory system to substitute for compliance with certain requirements of the Exchange Act relating to security-based swaps, provided that the corresponding requirements in the foreign regulatory system are comparable to the relevant provisions of the Exchange Act.

The availability of substituted compliance should reduce the likelihood that market participants would be subject to potentially conflicting or duplicative sets of rules.

In this release, the term “foreign” is used interchangeably with the term “non-U.S.”

See, e.g.,

note 372,

infra

(discussing the definition of “foreign security-based swap dealer”).

See

Section XI,

infra.

As discussed more fully below, the Commission would perform comparability analysis and make substituted compliance determinations with respect to four separate categories of requirements.

If, for example, a foreign regulatory system achieves comparable regulatory outcomes in three out of the four categories, then the Commission would permit substituted compliance with respect to those three categories of comparable requirements, but not for the one, non-comparable category for which comparable regulatory outcomes are not achieved. In other words, we are not proposing an “all-or-nothing” approach. In addition, in making comparability determinations within each category of requirements, the Commission is proposing to take a holistic approach; that is, we would ultimately focus on regulatory outcomes rather than a rule-by-rule comparison. Substituted compliance therefore should accept differences between regulatory regimes when those differences nevertheless accomplish comparable regulatory outcomes.

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

See

Section XI,

infra.

E. Conclusion

In proposing these rules, forms, and interpretations, the Commission is mindful that the security-based swap market is global in nature and developed prior to the enactment of the Dodd-Frank Act.

There are challenges involved in imposing a comprehensive regulatory regime on existing markets, particularly ones that have not been subject to the particular regulation that the Dodd-Frank Act provides. Any rules and interpretive guidance we adopt governing the application of Title VII to cross-border activities could significantly affect the global security-based swap market. As discussed further below, to the extent practicable and consistent with our statutory mandate,

the Commission has proposed these rules and interpretations with the intent to achieve the regulatory benefits intended by the Dodd-Frank Act and to facilitate a well-functioning global security-based swap market, including by taking into account the impact these proposed rules and interpretations will have on counterparty protection, transparency, systemic risk, liquidity, efficiency, and competition in the market. In addition, the Commission is mindful of the fact that the application of Title VII to cross-border activities raises issues of potential conflict or overlap with foreign regulatory regimes. Furthermore, the Commission is attentive to the fact that a number of registrants may be registered with both us and the CFTC.

See

Section II,

infra.

See

Section II.C,

infra

(discussing the principles guiding proposed approach to applying Title VII in the cross-border context).

All references in this release to an entity that is “registered” indicate an entity that is registered with the Commission, unless otherwise indicated.

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

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

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

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

A. Overview of the Security-Based Swap Market

1. Global Nature of the Security-Based Swap Market

The security-based swap market is a global market.

Security-based swap business currently takes place across national borders, with agreements negotiated and executed between counterparties often in different jurisdictions (and at times booked and risk-managed in still other jurisdictions).

See, e.g.,

IIB Letter at 1 (noting the “truly global nature of the OTC derivatives market”); Cleary Letter IV at 2 (noting that swaps and security-based swaps trade in a “unique global market”); Société Générale Letter II at 2 (noting the “global nature of the derivatives business”);

see also

Bank of International Settlements (“BIS”), Committee on the Global Financial System, No. 46, The macro financial implications of alternative configurations for access to central counterparties in OTC derivatives markets (Nov. 2011) at 1,

available at:

http://www.bis.org/publ/cgfs46.pdf

(referring to the “globalized nature of the market, in which a significant proportion of OTC derivatives trading is undertaken across borders”).

See, e.g.,

SIFMA Letter I at 2.

The global nature of the security-based swap market is evidenced by the data available to the Commission.

Based on market data in the Depository Trust and Clearing Corporation's Trade Information Warehouse (“DTCC-TIW”),

viewed from the perspective of the domiciles of the counterparties booking credit default swap (“CDS”) transactions, approximately 49% of U.S. single-name CDS transactions in 2011 were cross-border transactions between a U.S.-domiciled

counterparty and a foreign-domiciled counterparty

and an additional 44% of such CDS transactions were between two foreign-domiciled counterparties.

Thus, approximately 7% of the U.S. single-name CDS transactions in 2011 were between two U.S.-domiciled counterparties.

These statistics indicate that cross-border transactions are the norm, not the exception, in the security-based swap market.

Accordingly, the question of how the Commission is implementing Title VII with respect to security-based swaps will, to a large extent, be affected by how the Commission applies Title VII to the cross-border transactions that are the majority of security-based swaps.

See

Section XV.B,

infra

(discussing in detail the global nature of the security-based swap market).

The information was made available to the Commission in accordance with the agreement between DTCC-TIW and the OTC Derivatives Regulatory Forum (“ODRF”).

The domicile classifications in DTCC-TIW are based on the market participants' own reporting and may not have been verified. Prior to enactment of the Dodd-Frank Act, funds and accounts did not formally report their domicile to DTCC-TIW because there was no systematic requirement to do so. After enactment of the Dodd-Frank Act, the DTCC-TIW has collected the registered office location of the account or fund. This information is self-reported on a voluntary basis. It is possible that some market participants may misclassify their domicile status because the databases in DTCC-TIW do not assign a unique legal entity identifier to each separate entity. Notwithstanding this limitation, we believe that the cross-border and foreign activity presented in the analysis by the Commission's Division of Risk, Strategy, and Financial Innovation demonstrates the nature of the CDS market.

See

Section XV.B.2.c,

infra.

DTCC-TIW classified a foreign branch or foreign subsidiary of a U.S. domiciled entity as foreign-domiciled. Therefore, CDS transactions with a foreign-domiciled counterparty include CDS transactions with a foreign branch or foreign subsidiary of a U.S.-domiciled entity as counterparty.

Put another way, in 2011, a vast majority (approximately 93%) of U.S. single-name CDS transactions directly involved at least one foreign-domiciled counterparty. This observation is based on the data compiled by the Commission's Division of Risk, Strategy, and Financial Innovation on single-name CDS transactions with U.S. reference entities from the DTCC-TIW between January 1, 2011, and December 31, 2011.

See

Section XV.B.2.d,

infra.

Id.

We note, however, that, in addition to classifying transactions between a U.S. counterparty and a foreign branch of a U.S. bank as a cross-border transaction (

see

note 51,

supra

), these statistics characterize as cross-border transactions those in which all or substantially all of the activity takes place in the United States and all or much of the risk of the transactions ultimately is borne by U.S. persons.

2. Dealing Structures

Dealers use a variety of business models and legal structures to conduct security-based swap dealing business

with counterparties in jurisdictions all around the world.

Commenters have indicated that both U.S.-based and foreign-based entities use certain dealing structures for a variety of legal, tax, strategic, and business reasons that often pre-date the enactment of the Dodd-Frank Act.

Among the reasons cited for the variety of dealing structures is the desire of counterparties to reduce risk and enhance credit protection based on the particular characteristics of each entity's business.

As used in this release, “security-based swap dealing,” “security-based swap dealing activity,” “dealing activity,” and related concepts have the meaning described in the Intermediary Definitions Adopting Release, 77 FR 30596, unless otherwise indicated in this release.

See, e.g.,

Cleary Letter IV at 5; Davis Polk Letter I at 2-3; IIB Letter at 7.

See, e.g.,

Cleary Letter at 3.

See, e.g.,

SIFMA Letter at 2.

In this subsection, we describe certain dealing structures that U.S.-based entities and foreign-based entities in the security-based swap market might use. In each of these dealing structures, because the booking entity is the counterparty to the security-based swap transaction resulting from the dealing activity (

i.e.,

the principal) and bears the ongoing risk of performance on the transaction, we view the booking entity, and not the intermediary that acts as an agent on behalf of the booking entity to originate the transaction, as the dealing entity.

See

Intermediary Definitions Adopting Release, 77 FR 30617 n.264 (“A sales force, however, is not a prerequisite to a person being a security-based swap dealer. For example, a person that enters into security-based swaps in a dealing capacity can fall within the dealer definition even if it uses an affiliated entity to market and/or negotiate those security-based swaps (

e.g.,

the person is a booking entity).”).

See also

Section III.D,

infra.

(a) U.S. Bank Dealer

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

The resulting security-based swap transactions may be

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

See

Sullivan & Cromwell Letter at 2.

See id.

at 3-4.

(b) U.S. Non-bank Dealer

A U.S.-based holding company may use a non-bank subsidiary to conduct security-based swap dealing activity in the U.S. market and foreign local markets. The U.S. non-bank dealer may act as principal to originate and book transactions in the United States and use a sales force in the foreign local markets (

e.g.,

salespersons employed by its foreign affiliate) as agent to originate transactions on its behalf, and then centrally book the resulting transactions in the U.S. non-bank dealer. In some situations, such as where the holding company has rated debt, but the U.S. non-bank dealer does not, the U.S. non-bank dealer's performance under security-based swaps may be supported by a parental guarantee provided by the holding company.

The guarantee would typically give counterparties to the U.S. non-bank dealer direct recourse to the holding company for obligations owed by such non-bank dealer under the security-based swaps as though the guarantor had entered into the transactions directly with the counterparties.

See

Cleary Letter IV at 10 (discussing a U.S. holding company providing a guarantee of performance on the obligations of its foreign swap dealing subsidiary).

See

Intermediary Definitions Adopting Release, 77 FR 30689.

See also

Product Definitions Adopting Release, 77 FR 48227 (stating that the Commission would consider issues involving cross-border guarantees of security-based swaps in a separate release addressing the application of Title VII in the cross-border context).

A U.S.-based holding company also may conduct dealing activity in both U.S. markets and foreign markets out of a foreign subsidiary.

The foreign subsidiary may use a sales force in the United States (

e.g.,

salespersons employed by its U.S. affiliate) to originate security-based swap transactions with counterparties in the U.S. markets, or may directly solicit, negotiate, and execute security-based swap transactions with counterparties in the U.S. markets from outside the United States, and centrally book the resulting transactions itself. The foreign subsidiary also may conduct security-based swap dealing activity in various foreign markets using local salespersons as agent to originate and centrally book the resulting security-based swap transactions itself. In some situations, such as where the U.S.-based holding company has rated debt, but the foreign subsidiary does not, the foreign subsidiary's performance under security-based swaps may be supported by a parental guarantee provided by the holding company.

Such guarantee would typically give its counterparty direct recourse to the U.S. parent acting as guarantor for obligations owed by such foreign subsidiary under the security-based swaps. As a result, a guarantee provided by a U.S. person of another person's obligations owed under a security-based swap transaction poses the same degree of risk to the United States as the risk posed by a transaction entered into directly by such U.S. person.

See, e.g.,

Sullivan & Cromwell Letter, at 3-4 (stating that Bank of America Corporation, Citigroup Inc. and JPMorgan Chase & Co. conduct swap activities overseas through subsidiaries of the bank holding company, Edge Corporation subsidiaries of their U.S. banks and non-U.S. branches of the bank); Cleary Letter IV at 10-11.

See

Cleary Letter IV at 10 (discussing a U.S. holding company providing a guarantee of performance on the obligations of its foreign swap dealing subsidiary).

In circumstances where a foreign non-bank subsidiary of a U.S. holding company has sufficient credit-worthiness and does not rely on a U.S. parental guarantee to support its creditworthiness, the risk of the security-based swaps entered into by the foreign subsidiary of a U.S.-based holding company resides in the foreign subsidiary outside the United States.

(d) Foreign-Based Dealer

i. Direct Dealing

Foreign-based entities also may use a number of business models and legal structures to conduct global security-based swap dealing activity in both the U.S. and foreign markets. Like U.S. dealers, foreign dealers may deal directly with U.S. counterparties and non-U.S. counterparties without using any agents in the local market to intermediate and book the resulting transactions in the foreign entities themselves.

See

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

ii. Intermediation in the United States

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

See

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

Intermediation activity within the United States on behalf of foreign entities may occur in two principal legal structures.

First, foreign dealers that are banking entities may conduct dealing activity with U.S. counterparties out of their U.S. branches. In this structure, a foreign banking entity may originate and book transactions in its U.S. branch, or the U.S. branch may originate transactions that are booked in the foreign home office.

See

IIB Letter at 8.

Second, both bank and non-bank foreign dealers may conduct dealing activity out of their U.S. subsidiaries. The U.S. subsidiaries may act as principal to originate and book security-based swaps in the United States and enter into inter-affiliate back-to-back transactions with the foreign central booking entity (usually the foreign parent) for purposes of centralized booking and centralized risk management.

The U.S. subsidiary also may act as agent to originate security-based swaps in the United States on behalf of the foreign entity and the resulting transactions would be booked in a centralized foreign booking entity, usually the foreign parent. In some situations, such as where the foreign-based entity has rated debt, but the U.S. subsidiary does not, the U.S.-based subsidiary's performance under security-based swaps that it enters into as principal may be supported by a parental guarantee provided by the foreign-based entity.

See

Cleary Letter IV at 10 (discussing inter-affiliate transactions).

See id.

(discussing a non-U.S. holding company providing a guarantee on the obligations of its U.S. swap dealing subsidiary).

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

acting as agent but books the transaction itself outside the United States.

3. Clearing Practices

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

The President's Working Group on Financial Markets made the central clearing of OTC derivatives a top policy objective in 2008.

See

Policy Objectives for the OTC Derivatives Market (Nov. 14, 2008),

available at:

http://www.treasury.gov/resource-center/fin-mkts/Documents/policyobjectives.pdf

;

see also

Policy Statement on Financial Market Developments (Mar. 13, 2008),

available at:

http://www.law.du.edu/images/uploads/presidents-working-group.pdf

; and Progress Update on March Policy Statement on Financial Market Developments (Oct. 2008),

available at:

http://www.treasury.gov/resource-center/fin-mkts/Documents/q4progress%20update.pdf

In November 2008, the Commission, in consultation and coordination with the Federal Reserve Board and the CFTC, took steps to help facilitate the prompt development of CCPs for OTC derivatives.

Specifically, the Commission authorized the clearing of OTC security-based swaps by permitting certain clearing agencies to clear CDS on a temporary conditional basis.

As the Commission and other regulatory agencies monitored the activities of those clearing agencies, a significant volume of interdealer OTC CDS transactions and a smaller volume of dealer-to-non-dealer OTC CDS transactions were centrally cleared on a voluntary basis.

The level of voluntary clearing in swaps and security-based swaps has steadily increased since that time. Although the volume of interdealer CDS cleared to date is quite large,

many security-based swap transactions are still ineligible for central clearing, and many transactions in security-based swaps eligible for clearing at a CCP continue to settle bilaterally.

On November 14, 2008, the Commission executed a Memorandum of Understanding with the Board and the CFTC that established a framework for consultation and information sharing on issues related to central counterparties for the OTC derivatives market.

See

http://www.sec.gov/news/press/2008/2008-269.htm

The Commission authorized five entities to clear CDS.

See

CDS clearing by ICE Clear Europe Limited, Exchange Act Release Nos. 60372 (July 23, 2009), 74 FR 37748 (July 29, 2009) and 61973 (Apr. 23, 2010), 75 FR 22656 (Apr. 29, 2010); CDS clearing by Eurex Clearing AG, Exchange Act Release Nos. 60373 (July 23, 2009), 74 FR 37740 (July 29, 2009) and 61975 (Apr. 23, 2010), 75 FR 22641 (Apr. 29, 2010); CDS clearing by Chicago Mercantile Exchange Inc., Exchange Act Release Nos. 59578 (Mar. 13, 2009), 74 FR 11781 (Mar. 19, 2009), 61164 (Dec. 14, 2009), 74 FR 67258 (Dec. 18, 2009) and 61803 (Mar. 30, 2010), 75 FR 17181 (Apr. 5, 2010); CDS clearing by ICE Clear Credit LLC (formerly ICE Trust US LLC), Exchange Act Release Nos. 59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 12, 2009), 61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 2009) and 61662 (Mar. 5, 2010), 75 FR 11589 (Mar. 11, 2010); Temporary CDS clearing by LIFFE A&M and LCH.Clearnet Ltd., Exchange Act Release No. 59164 (Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009) (“CDS Clearing Exemption Orders”).

Voluntary CCP clearing grew out of a series of meetings beginning in September 2005 hosted by the Federal Reserve Bank of New York with major market participants and their domestic and international supervisors for the purpose of discussing problems in the processing of CDS, and related risk management and control issues.

See

http://www.ny.frb.org/newsevents/news/markets/2005/an050915.html

. In June 2008 the attendees agreed to an agenda for improvement in the derivatives market infrastructure that included “developing a central counterparty for credit default swaps that, with a robust risk management regime, can help reduce systemic risk.”

See

http://www.ny.frb.org/newsevents/news/markets/2008/ma080609.html

;

see also

https://www.theice.com/marketdata/reports/ReportCenter.shtml

As of April 19, 2012, ICE Clear Credit had cleared approximately $15.6 trillion notional amount of CDS contracts based on indices of securities and approximately $1.5 trillion notional amount of CDS contracts based on individual reference entities or securities. As of April 19, 2012, ICE Clear Europe had cleared approximately €7.2 trillion notional amount of CDS contracts based on indices of securities and approximately €1.2 trillion notional amount of CDS contracts based on individual reference entities or securities.

See

Clearing Agency Standards Adopting Release, 77 FR 66236 n.184 (

citing

https://www.theice.com/marketdata/reports/ReportCenter.shtml

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

See

Section XV.B.2(e),

infra.

4. Reporting Practices

The OTC derivatives markets have historically been largely opaque.

With respect to CDS, for example, the Government Accountability Office found in 2009 that “comprehensive and consistent data on the overall market have not been readily available,” that “authoritative information about the actual size of the CDS market is generally not available,” and that regulators currently are unable “to monitor activities across the market.”

The reporting of comprehensive OTC derivative transaction data to trade repositories is intended to address the lack of transparency in this market, and as such it was one of the G20 regulatory reform commitments previously discussed.

See

FSB, Implementing OTC Derivatives Market Reforms (Oct. 25, 2010) (“FSB October 2010 Report”), at 11,

available at:

http://www.financialstabilityboard.org/publications/r_101025.pdf

Government Accountability Office, “Systemic Risk: Regulatory Oversight and Recent Initiatives to Address Risk Posed by Credit Default Swaps,” GAO-09-397T (Mar. 2009), at 2, 5, 27,

available at:

http://www.gao.gov/new.items/d09397t.pdf

See

note 35 and accompanying text,

supra. See

also

SDR Proposing Release, 75 FR 77307 (“Under the Dodd-Frank Act, SDRs are intended to play a key role in enhancing transparency in the [security-based swap] market by retaining complete records of [security-based swap] transactions, maintaining the integrity of those records, and providing effective access to those records to relevant authorities and the public in line with their respective information needs. The enhanced transparency provided by an SDR is important to help regulators and others monitor the build-up and concentration of risk exposures in the [security-based swap] market. Without an SDR, data on [security-based swap] transactions is dispersed and not readily available to regulators and others.”).

The first trade repositories were established in the mid-2000s.

The development of trade repositories for different asset classes accelerated following the 2009 G20 commitment in this area, and as legislative and regulatory requirements began to be put in place. As of the end of the first quarter of 2013, fourteen FSB member jurisdictions had legislation in place either requiring reporting of OTC derivatives contracts or authorizing regulators to implement such regulations.

In addition, as of the date of publication of the FSB Progress Report April 2013, eighteen trade repositories were either registered or in the process of becoming registered and twelve were operational, meaning, typically, that they were at least accepting transaction reports from more than one asset class.

See

Committee on Payment and Settlement Systems (“CPSS”) and Technical Committee of IOSCO, Report on OTC Derivatives Data Reporting and Aggregation Requirements (Jan. 2012), at 5,

available at:

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD366.pdf

(“CPSS-IOSCO Data Report”).

FSB Progress Report April 2013 at 19.

Id.

at 20-21, 63-65. Ten trade repositories were offering trade reporting on interest rate derivatives transactions; eight were offering trade reporting on commodity derivative transactions; seven were offering trade reporting on equity derivatives transactions; eight were offering trade reporting on foreign exchange derivative transactions; and seven were offering trade reporting on credit derivatives.

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

derivatives.

In addition, in June 2010, the OTC Derivatives Regulators' Forum (“ODRF”)

developed indicative guidance for Warehouse Trust

aiming to identify data that authorities would expect to request from Warehouse Trust to carry out their mandates.

Pursuant to initiatives led by the OTC Derivatives Supervisors Group (“ODSG”), in 2009 the largest OTC derivatives dealers at the global level committed to reporting all of their CDS trades to a trade repository. At that time, a trade repository for credit derivatives was already in existence and used by the industry. To promote the development of trade repositories for all interest rate and equity derivatives, in 2008 and 2009 ISDA sought proposals for the creation of central trade repositories for these asset classes. Two entities were selected to provide trade repository functions for these asset classes.

See

FSB October 2010 Report at 44. The ODSG originated in 2005, when the Federal Reserve Bank of New York (“New York Federal Reserve”) hosted a meeting with representatives of major OTC derivatives market participants and their domestic and international supervisors, including the Commission, in order to address the emerging risks of inadequate infrastructure for the rapidly growing market in credit derivatives. The ODSG is chaired by the New York Federal Reserve.

The ODRF, formed in January 2009, brings together representatives from central banks, prudential supervisors, and securities and market regulators to discuss issues of common interest, regarding OTC derivatives central counterparties and trade repositories. The ODRF's scope and focus include information sharing/needs and oversight co-ordination and co-operation.

The Warehouse Trust Company LLC (“Warehouse Trust”) today provides certain post-trade processing services to DTCC-TIW. DTCC-TIW provides a centralized electronic trade database for OTC credit derivatives contracts.

See

FSB October 2010 Report at 63. Building on this work, CPSS and IOSCO have published a consultation paper setting forth more comprehensive guidance regarding trade repositories more broadly. The paper provides guidance to authorities that supervise trade repositories; regulators, supervisors, resolution authorities, central banks, and other public-sector authorities (collectively, “authorities”) that request OTC derivative data from trade repositories; and trade repositories. This guidance concerns the types of data to which authorities will typically require access and possible approaches to addressing potential constraints and concerns that may prevent effective access to such data.

See

CPSS and IOSCO, Consultative Report on Authorities' Access to Trade Repository Data (April 2013),

available at:

http://iosco.org/library/pubdocs/pdf/IOSCOPD408.pdf?v=1

Public availability of trade repository data varies globally and has changed significantly over time. For example, since October 2008, on a weekly basis, DTCC has published aggregated data via its Web site.

More generally, in a recent FSB survey, all trade repositories that responded stated that they provide or intend to provide, transaction data on OTC derivatives to the public. In some cases and for some products, trading information is provided on a real-time basis. Some trade repositories publicly disclose only aggregated, end-of-day information.

See

CPSS-IOSCO Data Report at 45-46.

See

OTC Derivatives Market Reforms, Fourth Progress Report on Implementation (Oct. 31, 2012) at 5,

available at:

http://www.financialstabilityboard.org/publications/r_121031a.pdf

5. Trade Execution Practices

Unlike the markets for cash equity securities and listed options, the market for security-based swaps currently is characterized generally by bilateral negotiation directly between two counterparties in the OTC market and is largely decentralized; many instruments are individually negotiated and often customized; and many security-based swaps are not centrally cleared.

The historical one-to-one nature of trade negotiation in security-based swaps has fostered various types of trading venues and execution practices, ranging among the following:

See

SB SEF Proposing Release, 76 FR 10951.

Bilateral Negotiations

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

See id.

Single-Dealer RFQ Platforms

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

See id.

at 10951.

Multi-Dealer RFQ Platforms

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

For example, to the extent that a RFQ platform sets limits on the number of dealers to whom a customer may send an RFQ, the customer's pre-trade transparency is restricted to that number of quotes it receives in response to its RFQ.

See

SB SEF Proposing Release, 76 FR 10952.

Central Limit Order Books

A central limit order book system or similar system refers to a trading system in which firm bids and offers are posted for all participants to see, with the identity of the parties withheld until a transaction occurs. Bids and offers are then matched based on price-time priority or other established parameters and trades are executed accordingly. The quotes on a limit order book system are firm. In general, a limit order book system provides greater pricing information than the three platforms described above because all participants can view bids and offers before placing their bids and offers.

Currently, limit order books for the trading of security-based swaps in the United States are utilized by inter-dealer brokers for dealer-to-dealer transactions.

See id.

Brokerage Trading

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

See id.

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

pricing information available in the security-based swap market.

6. Broad Economic Considerations of Cross-Border Security-Based Swaps

See

Section XV,

infra

(providing more detailed commentary on the economic effects of the proposed rules, including supporting citations).

Our primary economic considerations for promulgating rules and interpretations regarding the application of Title VII to cross-border activities include the potential risks of security-based swaps to the U.S. financial system

that could affect financial stability, the level of transparency and counterparty protection in the security-based swap market, the costs to market participants, and the impact of such rules and interpretations on liquidity, efficiency, and competition in the market. Unlike most other securities transactions, a security-based swap gives rise to ongoing obligations between transaction counterparties during the life of the transaction. This means that each counterparty to the transaction undertakes the obligation to perform the security-based swap in accordance with its terms and bears the counterparty credit risk and market risk until the transaction is terminated.

The cross-border rules ultimately adopted by the Commission could materially impact the economic effects of the final Title VII regulatory requirements.

The Commission generally understands the “U.S. financial system” to include the U.S. banking system and the U.S. financial markets, including the U.S. security-based swap market, the traditional securities markets (

e.g.,

the debt and equity markets), and the markets for other financial activities (

e.g.,

lending).

See

Intermediary Definitions Adopting Release, 77 FR 30616-17 (noting that “the completion of a purchase or sale transaction” in the secondary equity or debt markets “can be expected to terminate the mutual obligations of the parties,” unlike security-based swap transactions, which often give rise to “an ongoing obligation to exchange cash flows over the life of the agreement”).

(a) Major Economic Considerations

In determining how Title VII requirements should apply to persons and transactions in the cross-border context, the Commission is aware of the potentially significant trade-offs inherent in our policy decisions. For example, it is possible that counterparties excluded from the Title VII regulatory framework would not, among other things, receive the same level of counterparty protection or impartial access to trading venues and information as those included in the Title VII regulatory framework. However, it is also possible that market participants excluded from the Title VII regulatory framework would face lower regulatory burdens and lower compliance costs associated with their security-based swap activity. Further, it is possible that these trade-offs could alter the incentives for individuals to participate in the security-based swap market, which may impact the overall market, affecting its liquidity, as well as its efficiency and the competitive dynamics among participants. In addition, we also recognize that regulators in other jurisdictions are currently engaged in implementing their own regulatory reforms of the OTC derivatives markets and that our proposed application of Title VII to cross-border activities may affect the policy decisions of these other regulators as they seek to address potential conflicts or duplication in the regulatory requirements that apply to market participants under their authority. In proposing our rules and interpretations in this release, the Commission has considered the benefits of the Title VII regulatory framework, including counterparty protection and access to information, as well as the costs of compliance, taking into account the potential impact of the rules and interpretations on liquidity, efficiency, and competition in the security-based swap market.

Moreover, the costs and benefits of various Title VII substantive requirements may not be the same for each individual market participant, depending on the role it plays, the market function it performs, and the activity it engages in in the security-based swap market. For example, Title VII requirements for security-based swap dealers and major security-based swap participants may impose significant costs on persons falling within the definitions of security-based swap dealer and major security-based swap participant that are not borne by other market participants. The costs of these requirements may provide economic incentive for some market participants falling within the definitions of security-based swap dealer and major security-based swap participant to restructure their security-based swap business to operate wholly outside of the Title VII regulatory framework, exiting the security-based swap market in the United States and not transacting with U.S. persons. Conversely, certain Title VII requirements may promote financial stability and increase market participants' confidence in entering into security-based swap transactions.

(b) Global Nature and Interconnectedness of the Security-Based Swap Market

In considering the proposed approach to the application of the Title VII requirements, the Commission has been informed by the analysis of current market activity described in this release,

including the extent of cross-border trading activity in the security-based swap market.

100

The security-based swap transactions between U.S.- and non-U.S. domiciled market participants provide conduits of risk into the U.S. financial system, which could affect the safety and soundness of the U.S. financial system. Similarly, such transactions also provide conduits for liquidity into the U.S. financial system. As a consequence, changes to incentives or costs that result from the application of U.S. regulatory requirements may have effects on the liquidity of the global market, as well as its efficiency and competitive dynamics.

See

Section II.A,

supra,

and Section XV.B.2,

infra.

100

For example, review of the DTCC-TIW single-name CDS transactions executed in 2011 reveals that approximately 49% of the U.S. single-name CDS transactions were between one U.S.-domiciled counterparty and one foreign-domiciled counterparty, and 44% of such transactions were between two foreign-domiciled counterparties.

See

Section II.A.1,

supra,

and Section XV.B.2(d),

infra.

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

101

See, e.g.,

Markus K. Brunnermeier and Lasse Heje Pedersen, “Market Liquidity and Funding Liquidity,” Rev. Financ. Stud. (2009); Denis Gromb and Dimitri Vayanos, “A Model of Financial Market Liquidity,” Journal of the European Economic Association (2010).

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

U.S. financial system if the security-based swap market were not adequately regulated.

102

AIG FP sold extensive amounts of credit protection in the form of CDS in the years leading up to the crisis,

103

largely on the strength of AIG's AAA rating; AIG FP's obligations were guaranteed by its parent AIG.

104

AIG FP's CDS business reflected the global nature of the security-based swap market because, although both AIG and AIG FP were headquartered in the United States, much of AIG FP's CDS business was run out of its London office,

105

and AIG FP sold credit protection to counterparties both within the United States and around the world.

106

102

More generally, the Lehman Brothers Holding Inc. bankruptcy offers an example of how risk can spread across affiliated entities of multinational financial institutions.

See

Lehman Brothers International (Europe) in Administration, Joint Administrators' Progress Report for the Period 15 September 2008 to 14 March 2009 (Apr. 14, 2009),

available at:

http://www.pwc.co.uk/assets/pdf/lbie-progress-report-140409.pdf

(“The global nature of the Lehman business with highly integrated, trading and non-trading relationships across the group led to a complex series of inter-company positions being outstanding at the date of Administration. There are over 300 debtor and creditor balances between LBIE and its affiliates representing $10.5B of receivables and $11.0B of payables as at 15 September 2008.”).

103

In 2007, AIG FP's CDS portfolio reached a peak of $527 billion. Congressional Oversight Panel, June Oversight Report, “The AIG Rescue, Its Impact on Markets, and the Government's Exit Strategy,” June 2010, at 23,

available at:

http://www.gpo.gov/fdsys/pkg/CPRT-111JPRT56698/pdf/CPRT-111JPRT56698.pdf

(“AIG Report”).

104

See

Intermediary Definitions Adopting Release, 77 FR 30689 n.1133 (“AIGFP's obligations were guaranteed by its highly-rated parent company . . . an arrangement that facilitated easy money via much lower interest rates from the public markets, but ultimately made it difficult to isolate AIGFP from its parent, with disastrous consequences”) (quoting AIG Report at 20).

105

See

AIG Report at 18.

106

See

Office of the Special Inspector General for the Troubled Asset Relief Program, Factors Affecting Efforts to Limit Payments to AIG Counterparties, at 20 (Nov. 17, 2009) (listing AIG FP's CDS counterparties, including a variety of U.S. and foreign financial institutions),

available at:

http://www.sigtarp.gov/Audit%20Reports/Factors_Affecting_Efforts_to_Limit_Payments_to_AIG_Counterparties.pdf

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

107

See

AIG Report at 2.

As we discuss in more detail below, security-based swap market regulators need to take into account the spillover and contagion effect of security-based swap risk to avoid overburdening the financial system. One way to mitigate the spillover effect of a firm failure is to impose capital standards that take into account the security-based swap risk the firm undertakes while allowing flexibility in how it conducts security-based swap business.

108

At the same time, the Commission is mindful that the application of Title VII prudential requirements such as capital and margin impose costs on market participants that could provide economic incentives to restructure or separate their security-based swap activity according to geographical or jurisdictional regions, or to engage in less security-based swap activity, which may reduce the liquidity or efficiency of the overall market.

109

108

See

Capital, Margin, and Segregation Proposing Release, 77 FR 70218.

109

See id.

at 70303-06.

There are circumstances where risk generated by security-based swaps may reside in the United States while conduits of such risk (

e.g.,

security-based swap transactions or persons engaged in security-based swap transactions) could take place or reside outside the United States or outside the scope of application of the Title VII requirements. In these instances, the Commission has considered the nature of the risk, the magnitude of the risk, and the existence of other financial regulations, such as regulation of systemically important financial institutions in Title I and Title II of the Dodd-Frank Act and banking regulations.

The Commission is mindful that the same interconnectedness in the security-based swap market that may provide conduits for risk also may mean that changes to incentives or costs caused by the application of U.S. regulatory requirements may have effects on the liquidity of the global market, as well as its efficiency and competitive dynamics. As described below in Section XV.C, there are a myriad of paths for liquidity as well as risk to move throughout the financial system in this interconnected market. In addition, differences in regulatory requirements between the United States and non-U.S. jurisdictions may also impact markets by changing the competitive dynamics currently at play in the interconnected global market. For example, as articulated in Section XV.C, some potential responses by market participants to the proposed rules and interpretations in this release may result in lessened competition in the security-based swap market within the United States. Among other considerations, some entities may determine that the compliance costs arising from the requirements of Title VII warrant exiting the security-based swap market in the United States and not transacting with U.S. persons. These exits could result in higher spreads and affect the ability and willingness of end users to engage in security-based swaps.

Many of the bilateral counterparty credit risks associated with security-based swaps can be mitigated by central clearing. Central clearing of security-based swaps provides a mechanism for market participants to engage in security-based swap activity without having to assess the creditworthiness of each counterparty. Clearing of security-based swaps shifts the counterparty risk from individual counterparties to CCPs whose members collectively share the default risk of all members.

110

Central clearing also requires consistent application of mark-to-market pricing and margin requirements, which standardizes the settling of payment or collateral delivery resulting from market movements and minimizes the risk of clearing member defaults.

111

110

See, e.g.,

Darrell Duffie and Haoxiang Zhu, “Does a Central Clearing Counterparty Reduce Counterparty Risk?” Stanford University, Working Paper (2010),

available at:

http://www.stanford.edu/~duffie/DuffieZhu.pdf

; Nout Wellink, “Mitigating systemic risk in OTC derivatives markets,” Banque de France, Financial Stability Review, No. 14—Derivatives—Financial innovation and stability (July 2010),

available at:

http://www.banque-france.fr/fileadmin/user_upload/banque_de_france/publications/Revue_de_la_stabilite_financiere/etude15_rsf_1007.pdf

111

See

Christopher Culp, “OTC-Cleared Derivative: Benefits, Costs, and Implications of the Dodd-Frank Wall Street Reform and Consumer Protection Act,” Journal of Applied Finance No. 2 (2010),

available at:

http://www.rmcsinc.com/articles/OTCCleared.pdf

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

112

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

112

The Financial Stability Oversight Council (“FSOC”) can designate a CCP as systemically important under Section 804 of the Dodd-Frank Act.

See, e.g.,

Craig Pirrong, “Mutualization of Default Risk, Fungibility, and Moral Hazard: The Economics of Default Risk Sharing in Cleared and Bilateral Markets,” University of Houston, Working Paper (2010),

available at:

http://business.nd.edu/uploadedFiles/Academic_Centers/Study_of_Financial_Regulation/pdf_and_documents/clearing_moral_hazard_1.pdf

(“[c]learing of OTC derivatives has been touted as an essential component of reforms designed to prevent a repeat of the financial crisis. A back-to-basics analysis of the economics of clearing suggests

that such claims are overstated, and that traditional OTC mechanisms may be more efficient for some instruments and some counterparties.”).

Certain aspects of Title VII are intended to reduce the risk of CCP failure by promoting sound risk management practices among registered clearing agencies, while also providing open access to market participants.

113

Sound risk management practices are important among both domestic and foreign CCPs, given the global nature of CCP membership.

114

When a CCP in the United States has significant number of foreign members, the CCP and its U.S.-domiciled members would be exposed to the foreign members. Similarly, when U.S.-domiciled entities are members of foreign domiciled CCPs, U.S. exposure to a foreign institution is created that may be systemically important.

113

See, e.g.,

Clearing Agency Standards Adopting Release, 77 FR 66220.

114

Based on the analysis of the member positions at ICE Clear Credit in the United States by the staff in the Division of Risk, Strategy and Financial Innovation, approximately half of the positions at ICE Clear Credit in the United States are held by foreign-domiciled dealing entities.

See

Section XV.B.2(e),

infra.

(d) Security-Based Swap Data Reporting

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

115

For example, market participants may be less willing to provide liquidity for large, potentially market-moving trades if the implementation of the Title VII public dissemination requirements reveals private information about future hedging and inventory needs.

115

See

Section XV.C,

infra

(discussing the effects of our proposed cross-border approach on competition, efficiency, and capital formation).

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

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

Congress has given the Commission authority in Title VII to implement a security-based swap regulatory framework. In the statutory definitions and registration requirements for market intermediaries and participants (

i.e.,

security-based swap dealers and major security-based swap participants) and security-based swap infrastructures (

i.e.,

SDRs, security-based swap clearing agencies, and SB SEFs), Congress has identified the types of security-based swap activity that triggers Title VII registration and regulatory requirements relevant to such persons or the application of Title VII transaction-level requirements.

We recognize that applying Title VII to persons and transactions that fall within the statutory definitions or requirements may subject some persons based outside the United States, or some transactions arising from activity that occurs in part inside and in part outside the United States, to the various provisions of Title VII. At the same time, however, the global nature of the security-based swap market and the characteristics of the risk associated with security-based swap activity suggest that applying Title VII only to the conduct of persons located within the United States or to security-based swap activity occurring entirely within the United States would exclude from regulation a significant proportion of security-based swap activity that occurs in part inside and in part outside the United States.

116

Our proposed approach is intended to strike a reasonable balance in light of the authority provided by Congress, the structure of the security-based swap market, and the transfer of risk within that market. Accordingly, among other things, our proposed approach does not impose Title VII requirements on persons whose relevant security-based swap activity occurs entirely outside the United States and thus likely does not raise the types of concerns in the U.S. financial system that would warrant application of Title VII.

116

See

Section II.A,

supra.

We preliminarily believe that many of the circumstances of concern also would create the opportunity for evasion of the Dodd-Frank Act's regulatory regime.

See, e.g.,

note 558,

infra.

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

117

In subsequent sections of the release, we discuss in more detail our proposed

application of Title VII to cross-border security-based swap activity.

117

15 U.S.C. 78dd(c).

1. Commenters' Views

Commenters generally expressed the view that Section 30(c) restricts the Commission's authority to apply Title VII to “extraterritorial” conduct and thus, that the Commission follow a territorial approach in applying Title VII to cross-border security-based swap activity. One commenter interpreted Section 30(c) as prescribing a strictly territorial approach to the application of Title VII, arguing that this section codifies the territorial approach that we have historically taken in our existing securities regulations.

118

Several commenters argued that a narrow interpretation of the “extraterritorial” reach of Title VII was consistent with both Commission precedent

119

and the Supreme Court's decision in

Morrison

National Australia Bank.

120

118

See

Cleary Letter IV at 33-36;

see also

SIFMA Letter I at 5, 22; Sullivan & Cromwell Letter at 6 (suggesting that Section 30(c) permits “extraterritorial” application of Title VII only to prevent “efforts to evade” statutory requirements).

119

See, e.g.,

Sullivan & Cromwell Letter at 11 (stating that the Commission has “plainly stated that it uses a territorial approach in applying the broker-dealer requirements to international operations”).

120

130 S.Ct. 2869 (2010).

See, e.g.,

Jones Day Letter at 7-8 (suggesting that the jurisdictional limits of Dodd-Frank Act Sections 722 and 772 be interpreted narrowly in a manner consistent with the

Morrison

decision); Cleary Letter IV at 33-6 (arguing against an extraterritorial application of Title VII); SIFMA Letter I at 5-6; ISDA Letter I at 11.

Based on this interpretation of Section 30(c), commenters generally argued that Title VII does not give the Commission authority to regulate entities that transact a business in security-based swaps outside the United States.

121

Some commenters suggested that non-U.S. entities (including affiliates of U.S. persons) that conduct business entirely with counterparties outside the United States should not be required to register as swap or security-based swap dealers or comply with Title VII.

122

Some of these commenters also urged the Commission not to subject foreign branches and affiliates of U.S. banks to Title VII registration requirements to the extent that they transact solely with foreign persons.

123

Some commenters urged that, even within a single entity, only those branches, departments, or divisions that engage in business within the United States should be required to register.

124

121

See, e.g.,

Jones Day Letter at 7-8; Cleary Letter IV at 33-6; Sullivan & Cromwell Letter at 10-11; SIFMA Letter I at 5-6; ISDA Letter I at 11.

122

See

SIFMA Letter I at 4;

see also

ISDA Letter I at 11 (recommending that designation as a dealer should not be triggered by transactions entered into with foreign affiliates or branches of a U.S. bank or with foreign entities whose obligations are guaranteed by a U.S. person, or by legacy positions with U.S. counterparties); Davis Polk Letter II at 5-6 (stating that a foreign entity engaged in swaps exclusively with foreign counterparties is “`without the jurisdiction of the United States'”). Similarly, one commenter recommended that transactions between two foreign entities should be excluded from calculations of substantial position for purposes of the major participant definition. Canadian MAVs Letter at 7-8.

123

See, e.g.,

Sullivan & Cromwell Letter at 7 (stating that a territorial interpretation of Section 30(c) prevented the Commission from imposing Title VII requirements on the U.S. banks' “Non-U.S. Operations,” defined to include both foreign affiliates or subsidiaries and foreign branches of these banks).

124

See, e.g.,

Cleary Letter IV at 12;

see also

id.

at 26 (arguing that a non-U.S. branch or affiliate of a U.S. entity should not be required to register as a dealer by virtue of its transactions with a non-U.S. person counterparty); ISDA Letter I at 11 (stating that a “branch, division or office of an entity should be able to be designated as a Dealer without subjecting the whole entity to regulation”).

Commenters generally took the view that Section 30(c) does not permit the Commission to apply Title VII to transactions occurring outside the United States. Accordingly, commenters suggested that Section 30(c) restricts the Commission's ability to apply Title VII requirements to the foreign business of entities that are required to register with the Commission.

125

For example, one commenter interpreted Section 30(c) to prohibit application of Title VII to any of a person's “activity” or “business” outside the United States, even if that person otherwise transacts a business in security-based swaps within the jurisdiction of the United States.

126

125

See

Cleary Letter IV at 11;

see also

SIFMA Letter I at 14 (suggesting that Section 30(c) “provide[s] strong support” for not applying Title VII to transactions between a registered foreign swap dealer and non-U.S. persons); ISDA Letter I at 11 (recommending that no Title VII requirements should apply to transactions between a non-U.S. entity registered as a dealer and its non-U.S. person counterparties).

126

See

Cleary Letter IV at 12.

Similarly, some commenters suggested that Section 30(c) prohibits the application of Title VII to transactions involving the foreign affiliates of U.S. persons, on the basis that such transactions occur “without the jurisdiction of the United States” when no U.S. person is a counterparty to the trade.

127

One commenter explained that, because such transactions involve parties outside the United States and occur outside the United States, they are “removed from the stream of U.S. commerce.”

128

127

See

SIFMA Letter I at 5-6;

see also

ISDA Letter I at 11 (suggesting that dealer-related requirements of Title VII should not apply to business with non-U.S. person counterparties, including foreign affiliates and branches of U.S. persons).

128

See

Sullivan & Cromwell Letter at 9.

Commenters also generally recommended a narrower interpretation of the language in Section 30(c) permitting the application of Title VII regulations to persons transacting a business in security-based swaps without the jurisdiction of the United States to the extent that they are doing so in contravention of rules the Commission has prescribed as “necessary or appropriate to prevent the evasion of any provision of [the Exchange Act that was added by the Dodd-Frank Act].” Under this view, Section 30(c) permits “extraterritorial” application of Title VII only to entities that have themselves engaged in willful or intentional evasion.

129

These commenters argued that the longstanding use of foreign branches and affiliates by security-based swap market entities demonstrates that these types of business structures are not evasive and, therefore, do not fall within the exception to the limits on the applicability of Title VII as set forth in Section 30(c).

130

129

See, e.g.,

id.

at 9-10 (suggesting that “extraterritorial” application of Title VII requires an “intent to evade” Title VII).

130

See

Cleary Letter IV at 7.

2. Scope of Application of Title VII in the Cross-Border Context

(a) Overview and General Approach

Section 772(b) of the Dodd-Frank Act amends Section 30 of the Exchange Act to provide that “[n]o provision of [Title VII] . . . shall apply to any person insofar as such person transacts a business in security-based swaps without the jurisdiction of the United States,” unless that business is transacted in contravention of rules prescribed to prevent evasion of Title VII.

131

In so amending Section 30 of the Exchange Act, Congress directly appropriated nearly identical language defining the scope of the Exchange Act's application that appears in subsection (b) of Section 30 of the Exchange Act,

132

indicating that Congress intended the territorial application of Title VII to entities and transactions in the security-based swap market to follow similar principles to those applicable to the

securities market under the Exchange Act.

133

131

See

Section 30(c) of the Exchange Act, 15 U.S.C. 78dd(c), added by Section 772(b) of the Dodd-Frank Act.

132

Section 30(b) of the Exchange Act, 15 U.S.C. 78dd(b), provides that the Exchange Act and related rules “shall not apply to any person insofar as he transacts a business in securities without the jurisdiction of the United States,” unless that business is transacted in contravention of rules prescribed as necessary or appropriate to prevent evasion of the Exchange Act.

133

See, e.g.,

Commodity Futures Trading Comm'n

Schor,

478 U.S. 833, 846 (1986) (holding that “when Congress revisits a statute giving rise to a longstanding administrative interpretation without pertinent change, the `congressional failure to revise or repeal the agency's interpretation is persuasive evidence that the interpretation is the one intended by Congress'”).

In light of this similar language, commenters have urged us to follow a territorial approach in applying Title VII to cross-border security-based swap activity.

134

We preliminarily agree that a territorial approach, if properly tailored to the characteristics of the security-based swap market, should help ensure that our regulatory framework focuses on security-based swap activity that is most likely to raise the concerns that Congress intended to address in Title VII, including the effects of security-based swap activity on the financial stability of the United States, on the transparency of the U.S. financial system, and on the protection of counterparties.

134

See, e.g.,

Cleary Letter IV at 33-37.

We differ from commenters, however, in our understanding of what a territorial approach means in the context of a global security-based swap market. As noted above, some commenters suggested that the security-based swap activity of foreign branches and affiliates of U.S. persons with non-U.S. persons occurs outside the United States and has only an indirect connection with the United States and that, therefore, subjecting transactions resulting from that activity to Title VII would involve extraterritorial application of the statute.

135

Although we recognize that some of the security-based swap activity involving these foreign branches and affiliates occur outside the United States, we believe that a properly tailored territorial approach should look to both the full range of activities described in the statutory text as well as to the concerns that Congress intended Title VII to address in determining whether the relevant activity, considered in its entirety, occurs at least in part within the United States.

136

135

See, e.g.,

Cleary Letter IV at 35; ISDA Letter I at 11; SIFMA Letter I at 5-6; Sullivan & Cromwell Letter at 11-13.

136

See Morrison,

130 S. Ct. at 2884 (looking to the “focus” of the relevant statutory provision in determining whether the statute was being applied to domestic conduct).

As noted above, security-based swap transactions differ from most traditional securities transactions in that they give rise to an ongoing obligation between the counterparties to the trade: the counterparties bear the risks that result from those transactions for the duration of the transactions.

137

The Dodd-Frank Act was enacted, in part, to address the risks to the financial stability of the United States posed by entities bearing such risks, and a territorial approach to the application of Title VII should be consistent with achieving these statutory purposes. A territorial approach to the application of Title VII that excluded from the application of Title VII any activity conducted by the foreign operations of a U.S. person where they do business only with non-U.S. counterparties located outside the United States would likely fail to achieve the financial stability goals of Title VII, as such an approach would not account for the security-based swap risks that may be borne by entities located within the United States whose foreign operations solicit, negotiate, or execute transactions outside the United States. In addition, it is not clear that a different territorial approach that focused solely on the location of the entity bearing the risk (and disregarded whether certain relevant activity, including execution of the transaction, occurred within the United States) would adequately address the Dodd-Frank Act's concern with promoting transparency in the U.S. financial system and protecting counterparties, concerns that are likely to be raised by the solicitation, negotiation, or execution within the United States, even if the risk arising from those security-based swaps transactions is borne by entities outside the United States. For example, some transactions characterized by commenters as occurring outside the United States, even with non-U.S. persons, are entered into by persons located within the United States and would appear to raise the same types of risk concerns as transactions occurring wholly within the United States.

137

See

Section II.A,

infra.

Similarly, the Commission preliminarily believes that a territorial approach should be informed by the text of the statutory provision that imposes the registration or other regulatory requirement.

138

Some commenters suggested, for instance, that a territorial approach would necessarily exclude certain foreign operations of U.S. persons from registration as security-based swap dealers so long as they did not enter into security-based swap transactions with counterparties located within the United States.

139

However, in this instance, these commenters did not show how their suggested approach relates to the statutory definition of security-based swap dealer or to the rules and interpretation adopted by the Commission and the CFTC to further define “security-based swap dealer” in the Intermediary Definitions Adopting Release, including our discussion of conduct that is indicative of dealing activity.

140

In our preliminary view, we should identify the activity that the statutory provision regulates before reaching a determination of whether relevant activity is occurring within the United States.

141

Only after we identify the activity that the statutory provision regulates would we then be able to determine whether the conduct at issue involves activity that the statutory provision regulates and whether this conduct occurs within the United States. To the extent that conduct involving activity that the statutory provision regulates occurs within the United States, application of Title VII to that conduct would be consistent with a territorial approach.

138

See Morrison,

130 S. Ct. at 2884 (performing a textual analysis of Section 10(b) of the Exchange Act to determine what conduct was relevant in determining whether the statute was being applied to domestic conduct).

139

See, e.g.,

Sullivan & Cromwell Letter at 11.

140

See

note 135,

supra; see

also

Intermediary Definitions Adopting Release, 77 FR 30616-19.

141

See Morrison,

130 S. Ct. at 2884.

(b) Territorial Approach to Application of Title VII Security-Based Swap Dealer Registration Requirements

We discuss our application of this approach with respect to each of the major Title VII registration categories and requirements in connection with reporting, public dissemination, clearing, and trade execution for security-based swaps in further detail in the sections below,

142

but for sake of illustration, we provide a brief overview of our territorial approach as it applies to the security-based swap dealer definition.

142

See

Sections III-VII,

infra

(discussing each major registration category), and Sections VIII-IX.A,

infra

(discussing certain requirements in connection with reporting and dissemination, clearing, and trade execution for security-based swaps).

Section 3(a)(71) of the Exchange Act

143

defines security-based swap dealer as a person that engages in any of the following types of activity:

143

15 U.S.C. 78c(a)(71).

(i) Holding oneself out as a dealer in security-based swaps,

(ii) making a market in security-based swaps,

(iii) regularly entering into security-based swaps with counterparties as an ordinary course of business for one's own account,

(iv) engaging in any activity causing oneself to be commonly known in the

trade as a dealer in security-based swaps.

144

Section 3(a)(71)(A) of the Exchange Act, 15 U.S.C. 78c(a)(71)(A).

We have further interpreted this definition by jointly adopting interpretive guidance with the CFTC that identifies the types of activity that is relevant in determining whether a person is a security-based swap dealer.

145

In this interpretive guidance, we have identified indicia of security-based swap dealing activity to include the following activities:

145

See

Intermediary Definitions Adopting Release, 77 FR 30617-18.

• Providing liquidity to market professionals or other persons in connection with security-based swaps,

• seeking to profit by providing liquidity in connection with security-based swaps,

• providing advice in connection with security-based swaps or structuring security-based swaps,

• having a regular clientele and actively soliciting clients,

• using inter-dealer brokers, and

• acting as a market maker on an organized security-based swap exchange or trading system.

146

Id.

As the foregoing list of relevant activities illustrates, both the statutory text and our interpretation of that text include within the security-based swap dealer definition a range of activities. The broad scope of activities listed above identifies various characteristics of dealing activity. Given the risks associated with dealing activity that the dealer definition and associated regulatory framework in Title VII are intended to address, we preliminarily believe that a territorial approach consistent with these statutory purposes should consider whether the entity performs any of these indicia of dealing activity within the United States (even if some of these indicia also arise in activity conducted outside the United States). This type of analysis appears to us more consistent with the statutory text and with the Supreme Court's approach to statutory analysis in its decision in

Morrison

than an approach that excludes from jurisdiction certain foreign operations of U.S. persons transacting with foreign counterparties. We also believe that our proposed approach would better help ensure that our regulatory framework achieves the various purposes of security-based swap dealer regulation under Title VII, while avoiding application of security-based swap dealer registration to persons whose dealing activity is unlikely to raise the types of dealer-specific risks that Title VII dealer registration was intended to address because it occurs entirely outside the United States.

147

Under our proposed approach to the application of the

de minimis

threshold in the cross-border context, non-U.S. persons that engage in dealing activity with U.S. persons or otherwise within the United States at levels below the

de minimis

threshold generally would also not be required to register as security-based swap dealers. Such entities are engaged in dealing activity within the United States, and their dealing activity within the United States may raise certain concerns addressed by Title VII. However, we preliminarily believe that, to the extent that this dealing activity remains at levels below the

de minimis

threshold, they should be treated similarly to a U.S. person that engages in dealing activity at levels below the

de minimis

threshold.

See

Section III.B.4,

infra.

Like U.S. entities engaged in dealing activity, they may be required to register under the aggregation requirements the Commission and the CFTC adopted in the Intermediary Definitions Adopting Release.

See

Intermediary Definitions Adopting Release, 77 FR 30631; 17 CFR 240.3a71-2(a)(1). Under the aggregation requirements we propose below, even entities with security-based swap dealing activity at levels below the

de minimis

threshold may be required to register if the total security-based swap dealing activity of affiliates under common control (excluding the activity of any registered affiliates that have independent operations) exceeds the

de minimis

threshold.

See

Section III.B.8,

infra.

Under our proposed territorial approach to the security-based swap dealer definition, as explained further below, we would require persons resident or organized in the United States, or with their principal place of business in the United States, to count all of their dealing transactions toward their

de minimis

threshold, including transactions that arise from dealing activity that occurs in part outside the United States (for example, because it is negotiated and executed through that person's foreign branch or office).

148

See

Section III.B.4,

infra.

An interpretation of Section 30(c) that advances the view that security-based swap activity conducted by a U.S. person through a foreign branch constitutes activity “without the jurisdiction of the United States” or that a transaction arising from such activity constitutes “transacting a business in security-based swaps without the jurisdiction of the United States” for purposes of Section 30(c) may not fully account for the statutory definition of “security-based swap dealer,” the purposes of Title VII, or the global nature of the security-based swap market. It does not account for the entire range of activities performed by entities active in the security-based swap market, including security-based swap dealers, and the relevance of such activities to the statutory definitions and requirements, given the purposes of Title VII, and it would leave unaddressed significant levels of activity that poses precisely the sorts of risks that Title VII was intended to address.

In our preliminary view, to the extent that a U.S. person engages in dealing activity through a foreign operation that is part of the U.S. legal person (such as a foreign branch or office), relevant activity for purposes of the security-based swap dealer definition occurs, at least in part, within the United States because we believe it is the U.S. entity as a whole, and not just the foreign branch or office, that is holding itself out as a dealer and making a market in security-based swaps. Moreover, it is necessarily the U.S. person as a whole that is seeking to profit by providing liquidity and engaging in market-making in security-based swaps, and it is the financial resources of the entire entity that enable it to provide liquidity and engage in market-making in connection with security-based swaps. Its dealing counterparties will look to the entire U.S. person, and not just the foreign branch or office, for performance on the transaction. The entire U.S. person assumes, and stands behind, the obligations arising from the resulting agreement. For these reasons, to the extent that a dealer resides or is organized, or has its principal place of business, within the United States, we believe that it cannot hold itself out as a security-based swap dealer, even through a foreign branch, as anything other than a single person, given that it generally could not operate as a dealer absent the financial and other resources of the entire U.S. person. Its dealing activity with all of its counterparties, including dealing activity conducted through its foreign branch or office, is best characterized as occurring, at least in part, within the United States and should therefore be counted toward the entity's

de minimis

threshold.

More generally, we preliminarily believe that transactions that create ongoing obligations that are borne by a U.S. person are properly described as directly occurring within the United States, particularly given Title VII's focus on, among other things, addressing risks to the financial stability of the United States.

149

Indeed, the history of AIG FP confirms that such transactions of U.S. persons can pose risks to the U.S. financial system even if they are conducted through foreign operations. The nature of such risks, and their role in the financial crisis and in the enactment of Title VII, suggest that the statutory framework established

by Congress and the objectives of Title VII may require a broader analysis than excluding transactions involving U.S. persons from the application of Title VII solely because they are conducted through operations outside the United States, while others by the same U.S. persons occur within the United States.

150

149

As we discuss below, such activity would include providing guarantees for a foreign entity's security-based swap transactions.

See

Section II.B.2(d),

infra.

150

However, for reasons explained below, the Commission is not proposing to subject the foreign operations of U.S. persons to certain of the requirements in Title VII.

See, e.g.,

Sections III.B.7, III.B.9, VIII.C, IX.C.3(a), and X.B.3(a),

infra.

However, we preliminarily believe that non-U.S. persons engaged in dealing activity would be required to count toward their

de minimis

thresholds only transactions arising from their dealing activity with U.S. persons

151

or dealing activity otherwise conducted within the United States. In addition, to the extent that a non-U.S. person engages in security-based swap dealing activity within the United States, we preliminarily believe that such dealing activity should be counted toward the non-U.S. person's

de minimis

threshold regardless of whether its counterparties are U.S. persons.

152

This view is consistent with the fact that such security-based swap activity raises the types of concerns that the Dodd-Frank Act was intended to address.

151

However, for reasons explained below, the Commission is not proposing to require non-U.S. persons to include transactions with the foreign branches of U.S. banks in their

de minimis

calculations.

See

Section III.B.7,

infra.

152

See

Intermediary Definitions Adopting Release, 77 FR 30617-18.

We preliminarily believe that a non-U.S. person not engaged in any security-based swap activity within the United States (or engaged only at levels below the

de minimis

threshold) is unlikely to pose the types of concerns within the U.S. financial system that Title VII dealer regulation was intended to address.

153

Thus, under our proposed approach, a non-U.S. person that engages in dealing activity entirely outside the United States (

i.e.,

does not enter into transactions with a U.S. person or otherwise conduct any part of its dealing activity within the United States) would not be required to register as a security-based swap dealer.

154

153

Proposed Rule 3a71-3(b) under the Exchange Act, as discussed in Section III.B.4,

infra.

Of course, the transactions of an entity engaged in security-based swap dealing activity within the United States at levels below the

de minimis

threshold or in security-based swap activity within the United States that is not dealing activity may be subject to other Title VII requirements, as discussed below, or other provisions of the federal securities laws.

154

This proposed approach to the application of Title VII security-based swap dealer registration requirements is not intended to limit or address the cross-border reach or extraterritorial application of the antifraud or other provisions of the federal securities laws.

We are proposing to apply the Title VII requirements associated with registration (including, among others, capital and margin requirements and external business conduct requirements

155

) to the activities of registered entities to the extent we have determined that doing so advances the purposes of Title VII.

156

Although some commenters suggested that a territorial approach would prohibit the Commission from applying Title VII to the foreign security-based swap activities of even registered entities, such an interpretation of the application of Title VII to registered entities is difficult to reconcile with the statutory language describing the requirements applicable to registered security-based swap dealers, with the text of Section 30(c),

157

or with the purposes of Title VII and the nature of risks in the security-based swap market as described above. We have long taken the view that an entity that has registered with the Commission subjects itself to the entire regulatory system governing such registered entities.

158

155

See

Section 15F of the Exchange Act, 15 U.S.C. 78o-10.

156

See, e.g.,

Sections III.C.3 and 4,

infra

(discussing requirements applicable to security-based swap dealers).

157

Section 30(c) prohibits the application of the Exchange Act only with respect to those persons that “transact[] a business in security-based swaps without the jurisdiction of the United States.” Because only security-based swap entities that transact a business in security-based swaps within the United States would be required to register under the approach proposed in this release, registered entities are not persons that “transact[] a business in security-based swaps without the jurisdiction of the United States.”

158

See

Registration Requirements for Foreign Broker-Dealers, Exchange Act Release No. 27017 (July 11, 1989), 54 FR 30013, 30016-17 (July 18, 1989) (“Rule 15a-6 Adopting Release”) (noting that a foreign registrant is subject to the regulatory system applicable to such entities); Revision of Form BD, Exchange Act Release No. 25285 (Jan. 22, 1988) (“It is the Commission's view that a broker-dealer submits to the Commission's jurisdiction when it registers with the Commission.”);

In re International Paper and Power Co.,

4 SEC 873, 876 (1939) (registration with the Commission makes registrant “subject to the complete jurisdiction of the Commission”).

See also

Exemption of Certain Foreign Brokers or Dealers, Exchange Act Release No. 58047 (June 27, 2008), 73 FR 39182 (July 8, 2008) (“Proposed Amendments to Rule 15a-6”), at 39182 (describing registration requirements as applying to the entire foreign entity);

In re Ira William Scott,

53 SEC 862, 866 (1998) (holding that investment adviser that registers with the Commission has “submitted himself to [the Commission's] jurisdiction pursuant to the Advisers Act”).

Cf. In re United Corp.,

232 F.2d 601, 606 (1956) (stating that, upon registration as a holding company, an entity comes within “the jurisdiction of the Commission and [is] subject to all requirements applicable to a registered holding company”).

(d) Application of Title VII Regulatory Requirements to Transactions of Foreign Entities Receiving Guarantees From U.S. Persons

We also are proposing to apply certain Title VII transaction-level requirements (

e.g.,

mandatory clearing, reporting and dissemination, and mandatory trade execution of security-based swaps) to certain transactions involving one or more non-U.S. persons whose performance under the security-based swaps is guaranteed by a U.S. person. We discuss the statutory basis for applying specific Title VII requirements to such transactions in the relevant substantive discussions below.

159

In this subsection, we briefly explain why we believe that a territorial approach that is consistent with the purposes and text of the Dodd-Frank Act supports the application of Title VII to such transactions.

159

See

Sections VIII-XI,

infra.

In a security-based swap transaction between two non-U.S. persons where the performance of at least one side of the transaction is guaranteed by a U.S. person, the guarantee gives the guaranteed entity's counterparty direct recourse to the U.S. person for performance of obligations owed by the guaranteed entity under the security-based swap,

160

and the U.S. guarantor exposes itself to the security-based swap risk as if it were a direct counterparty to the security-based swap through the security-based swap activity engaged in by the guaranteed entity. As a result, the guarantee creates risk to the U.S. financial system and counterparties (including U.S. guarantors) to the same degree as if the transaction were entered into directly by a U.S. person. In addition, in many cases, the counterparty would not enter into the transaction (or would not do so on the same terms) with the guaranteed entity, and the guaranteed entity would not be able to engage in any security-based swaps, absent the presence of the guarantee. Given that the guarantee is

provided by a U.S. person and poses risks to the U.S. financial system, and considering the reliance by both the guaranteed entity and its counterparty on the creditworthiness of the guarantor in the course of engaging in security-based swap transactions and for the duration of the security-based swap, we preliminarily believe that a transaction entered into by a non-U.S. person whose performance under the security-based swap is guaranteed by a U.S. person is within the United States by virtue of the involvement of the U.S. guarantor in the security-based swap. Therefore, we preliminarily believe that subjecting such transactions to Title VII is consistent with our territorial approach.

160

In discussing the application of the major participant tests to guaranteed positions in the Intermediary Definitions Adopting Release, the Commission and the CFTC noted that an entity's security-based swap positions are attributed to a parent, other affiliate, or guarantor for purposes of the major participant analysis to the extent that the counterparties to those po

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