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

Federal RegisterMar 19, 2015

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 242

[Release No. 34-74245; File No. S7-03-15]

RIN 3235-AL71

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

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule; guidance.

SUMMARY:

The Securities and Exchange Commission (“SEC” or “Commission”) is proposing certain new rules and rule amendments to Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information (“Regulation SBSR”). Specifically, proposed Rule 901(a)(1) of Regulation SBSR would require a platform (

i.e.,

a national securities exchange or security-based swap execution facility (“SB SEF”) that is registered with the Commission or exempt from registration) to report to a registered security-based swap data repository (“registered SDR”) a security-based swap executed on such platform that will be submitted to clearing. Proposed Rule 901(a)(2)(i) of Regulation SBSR would require a registered clearing agency to report to a registered SDR any security-based swap to which it is a counterparty. The Commission also is proposing certain conforming changes to other provisions of Regulation SBSR in light the proposed amendments to Rule 901(a), and a new rule that would prohibit registered SDRs from charging fees for or imposing usage restrictions on the users of the security-based swap transaction data that they are required to publicly disseminate. In addition, the Commission is explaining the application of Regulation SBSR to prime brokerage transactions and proposing guidance for the reporting and public dissemination of allocations of cleared security-based swaps. Finally, the Commission is proposing a new compliance schedule for the portions of Regulation SBSR for which the Commission has not specified a compliance date.

DATES:

Comments should be received on or before May 4, 2015.

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

); or

• Send an email to

rule-comments@sec.gov

. Please include File Number S7-03-15 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 to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-03-15. 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 are also available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the SEC's Web site. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at

www.sec.gov

to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

Michael Gaw, Assistant Director, at (202) 551-5602; Yvonne Fraticelli, Special Counsel, at (202) 551-5654; George Gilbert, Special Counsel, at (202) 551-5677; David Michehl, Special Counsel, at (202) 551-5627; Geoffrey Pemble, Special Counsel, at (202) 551-5628; all of the Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

II. Reporting by Registered Clearing Agencies and Platforms—Proposed Amendments to Rule 901(a) and Conforming Changes

A. Clearing Process for Security-Based Swaps

B. Summary of the Proposed Amendments to Rule 901(a) and Conforming Changes

1. Proposed Rule 901(a)(1)—Reporting by Platforms

2. Proposed Reporting Obligations of Registered Clearing Agencies

C. Discussion of Comments and Further Explanation of the Proposal

1. Reporting Clearing Transactions

a. Requirements for Reporting of Clearing Transactions to a Registered SDR

b. Determining the Reporting Side for Clearing Transactions

c. Choice of Registered SDR for Clearing Transactions

d. Reporting Whether an Alpha Transaction is Accepted for Clearing

2. Reporting by a Platform

3. Additional Amendments to Account for Platforms and Registered Clearing Agencies Incurring Duties to Report

4. Examples

D. Request for Comment

III. Reporting and Public Dissemination of Security-Based Swaps Involving Allocation

A. Examples

1. Off-Platform Cleared Transaction

a. Reporting the Bunched Order Alpha

b. Reporting the Security-Based Swaps

Resulting From Allocation

2. Cleared Platform Transaction

a. Reporting the Bunched Order Alpha

b. Reporting the Security-Based Swaps Resulting From Allocation

B. Request for Comment

IV. Reporting and Public Dissemination of Prime Brokerage Transactions

A. Application of Regulation SBSR as Adopted to Prime Brokerage Transactions

1. Regulatory Reporting Duties

2. Public Dissemination of Prime Brokerage Transactions

B. Example of the Application of the Adopted Rules

C. Request for Comment

V. Additional Proposed Amendments

A. Amendments to Rule 905(a)

B. Amendments to Rules 906(b) and 907(a)(6)

C. Extending the Applicability of Rule 906(c)

D. Rule 908(b)—Limitations on Counterparty Reporting Obligations

E. Request for Comment

VI. Proposed Rule Prohibiting a Registered SDR from Charging Fees for or Imposing Usage Restrictions on Publicly Disseminated Data

A. Background

B. Request for Comment

VII. Proposed Compliance Schedule for Regulation SBSR

A. Initial Proposal

1. Rule 910

2. Rule 911

B. New Proposed Compliance Schedule for Regulation SBSR

1. Proposed Compliance Date 1

2. Proposed Compliance Date 2

3. Effect of Registration of Additional SDRs

4. Proposed Changes to Certain Exemptions Related to the Proposed Compliance Schedule

C. Discussion of Comments Received in Response to the Initial Proposal

D. Request for Comment

VIII. Economic Analysis

A. Broad Economic Considerations

1. Security-Based Swap Market Infrastructure

2. Competition Among Security-Based swap Service Providers

B. Baseline

1. Current Security-Based Swap Market

2. Clearing Activity in Single-Name Credit Default Swaps

3. Execution Methods in the Security-Based Swap Market

4. Current Market Structure for Security-Based Swap Infrastructure

a. Exchanges and SB SEFs

b. Clearing Agencies

c. SDRs

d. Vertical Integration of Security-Based Swap Market Infrastructure

C. Programmatic Cost of Proposed Amendments to Regulation SBSR

1. Proposed Amendments to Rule 901

a. For Platforms and Registered Clearing Agencies—Rule 901(a)(1) and Rule 901(a)(2)(i)

b. For Platforms and Reporting Sides of Alphas—Rule 901(a)(3)

c. Total Cost of Rule 901 Compliance for Platforms, Registered Clearing Agencies, and Reporting Sides

2. Proposed Amendment to Rule 905(a)

3. Proposed Amendments to Rule 906(c)

D. Economic Effects and Effects on Efficiency, Competition, and Capital Formation

1. Reporting of Clearing Transactions

2. Reporting of Clearing Transactions Involving Allocation

3. Alternative Approaches to Reporting Clearing Transactions

a. Maintain Reporting Hierarchy as Adopted in Regulation SBSR

b. Move Registered Clearing Agencies Within the Regulation SBSR Reporting Hierarchy

c. Require the Reporting Side for an Alpha to also Report Beta and Gamma Transactions

4. Reporting by Platforms

5. Alternative Approaches to Reporting Platform-Executed Transactions

6. Application of Regulation SBSR to Prime Brokerage Transactions

7. Proposed Prohibition on Fees for Public Dissemination

8. Proposed Compliance Schedule for Regulation SBSR

IX. Paperwork Reduction Act

A. Definitions—Rule 900

B. Reporting Obligations—Rule 901

1. Rule 901—As Adopted

2. Rule 901—Proposed Amendments

a. Summary of Collection of Information

b. Proposed Use of Information

c. Respondents

d. Total Initial and Annual Reporting and Recordkeeping Burdens

i. Platforms and Registered Clearing Agencies

ii. Platforms and Reporting Sides

iii. Bunched Orders and Allocations

iv. Prime Brokerage Transactions

e. Recordkeeping Requirements

f. Collection of Information is Mandatory

g. Confidentiality of Responses to Collection of Information

3. Rule 901—Aggregate Total PRA Burdens and Costs

a. For Platforms

b. For Registered Clearing Agencies

c. For Reporting Sides

d. For Registered SDRs

C. Correction of Errors in Security-Based Swap Information—Rule 905

1. Rule 905—As Adopted

2. Rule 905—Proposed Amendments

a. Summary of Collection of Information

b. Proposed Use of Information

c. Respondents

d. Total Initial and Annual Reporting and Recordkeeping Burdens

e. Recordkeeping Requirements

f. Collection of Information is Mandatory

g. Confidentiality of Responses to Collection of Information

3. Rule 905—Aggregate Total PRA Burdens and Costs

a. For Platforms

b. For Non-Reporting Sides

c. For Registered SDRs

D. Other Duties of Participants—Rule 906

1. Rule 906—As Adopted

2. Rule 906—Proposed Amendments

a. Rule 906(b) —Proposed Amendments

b. Rule 906(c)—Proposed Amendments

i. Summary of Collection of Information

ii. Proposed Use of Information

iii. Respondents

iv. Total Initial and Annual Reporting and Recordkeeping Burdens

v. Recordkeeping Requirements

vi. Collection of Information is Mandatory

vii. Confidentiality of Responses to Collection of Information

3. Rule 906—Aggregate Total PRA Burdens and Costs

a. For Platforms and Registered Clearing Agencies

b. For Registered SDRs

c. For Participants

E. Policies and Procedures of Registered SDRs—Rule 907

1. Rule 907—As Adopted

2. Rule 907—Proposed Amendments

3. Rule 907—Aggregate Total PRA Burdens and Costs

F. Cross-Border Matters—Rule 908

1. Rule 908—As Adopted

2. Rule 908—Proposed Amendments

3. Rule 908—Aggregate Total PRA Burdens and Costs

G. Request for Comments

X. Consideration of Impact on the Economy

XI. Regulatory Flexibility Act Certification

XII. Statutory Basis and Text of Proposed Rules

I. Introduction

Section 13A(a)(1) of the Exchange Act

provides that each security-based swap that is not accepted for clearing by any clearing agency or derivatives clearing organization shall be subject to regulatory reporting. Section 13(m)(1)(G) of the Exchange Act

provides that each security-based swap (whether cleared or uncleared) shall be reported to a registered SDR, and Section 13(m)(1)(C) of the Exchange Act

generally provides that transaction, volume, and pricing data of security-based swaps shall be publically disseminated in real time, except in the case of block trades.

15 U.S.C. 78m-1(a)(1). All references in this release to the Exchange Act refer to the Securities Exchange Act of 1934.

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

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

Section 13(m)(1)(E) of the Exchange Act, 15 U.S.C. 78m(m)(1)(E), provides that, with respect to cleared security-based swaps, the rule promulgated by the Commission related to public dissemination shall contain provisions, among others, that “specify the criteria for determining what constitutes a large notional security-based swap transaction (block trade) for particular markets and contracts” and “specify the appropriate time delay for reporting large notional security-based swap transactions (block trades) to the public.”

In a separate release, the Commission is adopting Regulation SBSR,

which contains several rules relating to regulatory reporting and public dissemination of security-based swap transactions. The Commission initially proposed Regulation SBSR in November 2010.

In May 2013, the Commission re-proposed the entirety of Regulation SBSR as part of the Cross-Border Proposing Release, which proposed rules and interpretations regarding the application of Title VII of the Dodd-Frank Act to cross-border security-based swap activities.

In this release, the Commission is proposing certain new rules of Regulation SBSR as well as amendments to, and guidance regarding Regulation SBSR, as adopted. The Commission also is proposing a compliance schedule for Regulation SBSR. The Commission seeks comment on all of the rules, rule amendments, and guidance proposed in this release.

Securities Exchange Act Release No. 74244 (February 11, 2015) (no

Federal Register

publication yet) (“Regulation SBSR Adopting Release”).

See

Securities Exchange Act Release No. 63346 (November 19, 2010), 75 FR 75207 (December 2, 2010) (“Regulation SBSR Proposing Release”).

See

Securities Exchange Act Release No. 69490 (May 1, 2013), 78 FR 30967 (May 23, 2013) (“Cross-Border Proposing Release”).

With these proposed rules, rule amendments, and guidance, the Commission is not re-opening comment on the rules adopted in Regulation SBSR Adopting Release. The Commission received 86 comments that were specifically directed to the comment file (File No. S7-34-10) for the Regulation SBSR Proposing Release, of which 38 were comments submitted in response to the re-opening of the comment period. Of the comments directed to the comment file (File No. S7-02-13) for the Cross-Border Proposing Release, six referenced Regulation SBSR specifically, while many others addressed cross-border issues generally, without specifically referring to Regulation SBSR. As discussed in the Regulation SBSR Adopting Release, the Commission also has considered other comments that are relevant to regulatory reporting and/or public dissemination of security-based swaps that were submitted in other contexts. The comments discussed in this release are listed in the Appendix. For ease of reference, this release

identifies commenters using the same naming convention as the Regulation SBSR Adopting Release, although it does not discuss all of the comment letters included in the Regulation SBSR Adopting Release. For example, this release refers to a letter identified as “ISDA IV,” but does not discuss ISDA I, ISDA II, or ISDA III because those letters are not relevant to the current release.

II. Reporting by Registered Clearing Agencies and Platforms—Proposed Amendments to Rule 901(a) and Conforming Changes

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

provides that parties to a security-based swap (including agents of parties to a security-based swap) shall be responsible for reporting security-based swap transaction information to the appropriate registered entity in a timely manner as may be prescribed by the Commission. Section 13(m)(1)(G) of the Exchange Act

provides that each security-based swap (whether cleared or uncleared) shall be reported to a registered SDR. Section 13A(a)(3) of the Exchange Act

specifies the party obligated to report a security-based swap that is not accepted for clearing by any clearing agency or derivatives clearing organization. Consistent with these statutory provisions, Rule 901(a) of Regulation SBSR, as adopted, assigns the duty to report “covered transactions,” which include all security-based swaps except: (1) Clearing transactions;

(2) security-based swaps that are executed on a platform and that will be submitted to clearing; (3) transactions where there is no U.S. person, registered security-based swap dealer, or registered major security-based swap participant on either side; and (4) transactions where there is no registered security-based swap dealer or registered major security-based swap participant on either side and there is a U.S. person on only one side. This release proposes to assign the duty to report security-based swaps in categories (1) and (2) above. The Commission anticipates seeking additional public comment in the future on the reporting obligations for security-based swaps in categories (3) and (4) above.

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

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

15 U.S.C. 78m-1(a)(3).

Rule 900(g), as adopted, defines “clearing transaction” as “a security-based swap that has a registered clearing agency as a direct counterparty.” This definition describes security-based swaps that arise when a registered clearing agency accepts a security-based swap for clearing as well as security-based swaps that arise as part of a clearing agency's internal processes, such as security-based swaps used to establish prices for cleared products and security-based swaps that result from netting other clearing transactions of the same product in the same account into an open position.

See

Regulation SBSR Adopting Release, Section V(B)(2).

Rule 901(a), as proposed and re-proposed, would have used a hierarchy to assign reporting obligations for all security-based swaps—including those in the four non-covered categories noted above—without regard to whether a particular security-based swap was cleared or uncleared. In the Regulation SBSR Proposing Release, the Commission expressed a preliminary view that cleared and uncleared security-based swaps should be subject to the same reporting hierarchy.

In addition, Rule 901(a), as proposed and as re-proposed, did not differentiate between security-based swaps that are executed on a platform and other security-based swaps. The Commission preliminarily believed that security-based swap dealers and major security-based swap participants generally should be responsible for reporting security-based swap transactions of all types, because they would be more likely than other persons to have appropriate systems in place to facilitate reporting.

See

75 FR 75211.

See id.

The Commission requested comment on a range of issues related to Rule 901(a), as proposed and as re-proposed. In particular, the Commission sought comment on whether platforms or clearing agencies should be required to report security-based swaps.

The Commission also asked whether counterparties to a security-based swap executed anonymously on a platform and subsequently cleared would have the information necessary to know which counterparty would incur the reporting obligation under Rule 901(a).

The comments that the Commission received in response are discussed below.

See id.

at 75212.

See id.

In light of comments received and upon additional consideration of the issues, the Commission is proposing two amendments to Rule 901(a) of Regulation SBSR. First, the Commission is proposing a new subparagraph (1) of Rule 901(a), which would provide that, if a security-based swap is executed on a platform and will be submitted to clearing, the platform on which the transaction was executed shall have the duty to report the transaction to a registered SDR. Second, the Commission is proposing a new subparagraph (2)(i) of Rule 901(a), which would assign the reporting duty for a clearing transaction to the registered clearing agency that is a counterparty to the security-based swap. In connection with these proposed rules, the Commission also is proposing several conforming rule amendments to Regulation SBSR. The Commission describes each of these proposed rules and rule amendments in more detail below, following a description of the process for central clearing of security-based swap transactions.

A. Clearing Process for Security-Based Swaps

As discussed in Section V of the Regulation SBSR Adopting Release, two models of clearing—an agency model and a principal model—are currently used in the swap markets. In the agency model, which predominates in the U.S. swap market, a swap that is accepted for clearing—often referred to in the industry as an “alpha”—is terminated and replaced with two new swaps, known as “beta” and “gamma.” The Commission understands that, under the agency model, one of the direct counterparties to the alpha becomes a direct counterparty to the beta, and the other direct counterparty to the alpha becomes a direct counterparty to the gamma. The clearing agency would be a direct counterparty to each of the beta and the gamma.

This release uses the terms “alpha,” “beta,” and “gamma” in the same way that they are used in the agency model of clearing in the U.S. swap market.

The Commission notes

that, under Regulation SBSR, an alpha is not a “clearing transaction,” even though it is submitted for clearing, because it does not have a registered clearing agency as a direct counterparty.

If both direct counterparties to the alpha are clearing members, the direct counterparties would submit the transaction to the clearing agency directly and the resulting beta would be between the clearing agency and one clearing member, and the gamma would be between the clearing agency and the other clearing member. The Commission understands, however, that, if the direct counterparties to the alpha are a clearing member and a non-clearing member (a “customer”), the customer's side of the trade would be submitted for clearing by a clearing member acting on behalf of the customer. When the clearing agency accepts the alpha for clearing, one of the resulting swaps—in this case, assume the beta—would be between the clearing agency and the customer, with the customer's clearing member acting as guarantor for the customer's trade. The other resulting swap—the gamma—would be between the clearing agency and the clearing member that was a direct counterparty to the alpha.

See, e.g.,

Byungkwon Lim and Aaron J. Levy, “Contractual Framework for Cleared Derivatives: The Master Netting Agreement Between a Clearing Customer Bank and a Central Counterparty,” 10 Pratt's J. of Bankr. Law 509, 515-517 (LexisNexis A.S. Pratt) (describing the clearing model for swaps in the United States).

In the principal model of clearing, which the Commission understands is used in certain foreign swap markets, a customer is not a direct counterparty of the clearing agency. Under this model, a clearing member would clear a swap for a customer by entering into a back-to-back swap with the clearing agency: The clearing member would become a direct counterparty to a swap with the customer, and then would become a counterparty to an offsetting swap with the clearing agency. In this circumstance, unlike in the agency model of clearing, the swap between the direct counterparties might not terminate upon acceptance for clearing. The Commission notes that one

commenter recommended that Regulation SBSR should clarify the applicable reporting requirements under each of the agency and principal clearing models.

See

ISDA IV at 6. Although this release focuses on the agency model of clearing, which predominates in the United States, the Commission is requesting comment regarding the application of the principal model.

This release does not address the application of Section 5 of the Securities Act of 1933, 15 U.S.C. 77a

et seq.

(“Securities Act”), to security-based swap transactions that are intended to be submitted to clearing (

e.g.,

alphas, in the agency model of clearing). Rule 239 under the Securities Act, 17 CFR 230.239, provides an exemption for certain security-based swap transactions involving an eligible clearing agency from all provisions of the Securities Act, other than the Section 17(a) anti-fraud provisions. This exemption does not apply to security-based swap transactions not involving an eligible clearing agency, including a transaction that is intended to be submitted to clearing, regardless of whether the security-based swaps subsequently are cleared by an eligible clearing agency.

See

Exemptions for Security-Based Swaps Issued By Certain Clearing Agencies, Securities Act Release No. 33-9308 (March 30, 2012), 77 FR 20536 (April 5, 2012).

B. Summary of the Proposed Amendments to Rule 901(a) and Conforming Changes

In a separate release, the Commission is adopting Regulation SBSR under the Exchange Act. In light of comments received in response to both the Regulation SBSR Proposing Release and the Cross-Border Proposing Release (which re-proposed Regulation SBSR in its entirety), the Commission in this release is proposing to amend Rule 901(a) of Regulation SBSR to assign reporting duties for: (1) Platform-executed security-based swaps that will be submitted to clearing; and (2) clearing transactions.

1. Proposed Rule 901(a)(1)—Reporting by Platforms

The Commission is proposing a new subparagraph (1) of Rule 901(a), which would require a platform to report to a registered SDR any security-based swap that is executed on that platform and that will be submitted to clearing (

i.e.,

any alpha executed on the platform).

As the person with the duty to report the transaction, the platform would be able to select the registered SDR to which it reports.

If the execution occurs otherwise than on a platform, or if the security-based swap is executed on a platform but will not be submitted to clearing, the reporting hierarchy in Rule 901(a)(2)(ii), as adopted, will apply to the transaction.

This is consistent with the Commission's guidance in Section V(B) of the Regulation SBSR Adopting Release that, for transactions subject to Rule 901(a)(2)(ii), the reporting side may choose the registered SDR to which it makes the report required by Rule 901: “The reporting side may select the registered SDR to which it makes the required report. However, with respect to any particular transaction, all information required to be reported by Rule 901(a)(2)(ii), as adopted, must be reported to the same registered SDR.”

2. Proposed Reporting Obligations of Registered Clearing Agencies

The Commission is proposing a new subparagraph (2)(i) of Rule 901(a), which would designate a registered clearing agency as the reporting side for all clearing transactions to which it is a counterparty. In its capacity as the reporting side, the registered clearing agency would be permitted to select the registered SDR to which it reports a clearing transaction.

The Commission also is proposing certain rules to address reporting requirements for life cycle events arising from the clearing process. Subparagraph (i) of Rule 901(e)(1), as adopted, provides that the reporting side for a security-based swap must generally report a life cycle event of that swap, “except that the reporting side shall not report whether or not a security-based swap has been accepted for clearing.” The Commission is proposing a new subparagraph (ii) of Rule 901(e)(1), which would require a registered clearing agency to report whether or not it has accepted an alpha security-based swap for clearing.

If the alpha security-based swap is not required to be reported to a registered SDR—which could occur if Rule 901(a) does not assign a reporting obligation for the transaction or if the person assigned under Rule 901(a) is not enumerated in Rule 908(b)—the registered clearing agency would have no duty to report whether or not it has accepted the alpha for clearing.

Rule 901(e)(2), as adopted, requires a life cycle event to be reported “to the entity to which the original security-based swap transaction will be or has been reported.” Thus, proposed Rule 901(e)(1)(ii) would require a registered clearing agency to report to the registered SDR that received or will receive the transaction report of the alpha (the “alpha SDR”) whether or not it has accepted the alpha for clearing. As discussed in Section II(C)(3),

infra,

the Commission is proposing that this obligation to report whether or not it has accepted the alpha for clearing would cause the registered clearing agency to become a participant of the alpha SDR.

If the registered clearing agency does not know the identity of the alpha SDR, the registered clearing agency would be unable to report to the alpha SDR whether or not it accepted the alpha transaction for clearing, as would be required by proposed Rule 901(e)(1)(ii). Therefore, the Commission is proposing a new subparagraph (3) of Rule 901(a), which would require a platform or reporting side for a security-based swap that has been submitted to clearing to promptly provide the relevant registered clearing agency with the identity of the alpha SDR and the transaction ID of the alpha transaction that has been submitted to clearing.

C. Discussion of Comments and Further Explanation of the Proposal

The Commission requested and received comment on a wide range of issues related to Rules 901(a) and 901(e), as initially proposed in the Regulation SBSR Proposing Release and as re-proposed in the Cross-Border Proposing Release. For example, in the Regulation SBSR Proposing Release, the Commission asked commenters about the types of entities that should have the duty to report security-based swaps and the practicability of the proposed reporting hierarchy in certain cases where the counterparties might not know each other's identities.

See

75 FR 75212.

1. Reporting Clearing Transactions

Six commenters addressed the Commission's proposal to treat cleared security-based swaps the same as uncleared security-based swaps for purposes of assigning reporting obligations under Rule 901(a). Two commenters generally supported the Commission's proposal, noting that it would allow security-based swap counterparties, rather than clearing agencies, to choose the registered SDR that receives data about their security-based swaps.

However, three other commenters objected to the proposal on statutory or operational grounds.

One commenter argued that Title VII's security-based swap reporting provisions and Regulation SBSR should not extend to clearing transactions.

Two commenters stated that the reporting hierarchy in Regulation SBSR is appropriate for OTC bilateral markets, but that it should not be applied to cleared transactions because the clearing model substantially differs from OTC bilateral markets.

These commenters argued that, in the alternative, if the Commission requires clearing transactions to be reported to a registered SDR, the clearing agency that

clears the alpha should have the duty to report the associated clearing transactions to a registered SDR of its choice.

Another commenter expressed the view that a clearing agency is best-positioned to report cleared security-based swaps.

See

DTCC VI at 8-9; MarkitSERV III at 3-5.

See

CME/ICE Letter at 2-4; ICE Letter at 2-5; CME II at 4; ISDA IV at 5-6.

See

CME II at 5 (stating that “a choice by the Commission to require that data on cleared SBS be reported to a third-party SDR would impose substantial costs on market participants which greatly outweigh the benefits (if any). . . . The Commission already has access to this data via the clearing agency.”)

See

ICE Letter at 2; CME/ICE Letter at 2.

See

CME II at 4-5; CME/ICE Letter at 2-4; ICE Letter at 2-3.

ISDA IV at 5 (stating further that . . .”[I]f the Commission assigns responsibility to clearing agencies for the reporting of cleared [security-based swaps], the clearing agency should be the sole party responsible for reporting all the trade data for cleared swaps.”)

See also

ICE Letter at 2-3 (stating that “The Clearing Agency is best positioned to have the sole responsibility to report . . . required swap data, including valuation data”).

a. Requirements for Reporting of Clearing Transactions to a Registered SDR

Two commenters argued that the Exchange Act does not require data on clearing transactions to be reported to a registered SDR for regulatory reporting purposes.

They noted that Section 13A(a)(1) of the Exchange Act

provides that “[e]ach security-based swap that is not accepted for clearing by any clearing agency or derivatives clearing organization shall be reported” to a registered SDR or the Commission. In the view of these commenters, Section 13A(a)(1) is intended to ensure that the Commission has access to data for

uncleared

security-based swaps. Section 13A(a)(1) does not, according to these commenters, apply to clearing transactions, because complete data for these security-based swaps already would be collected, maintained, and made available to the Commission by the relevant clearing agency.

Accordingly, these commenters contend that “any system that would require a Clearing Agency to make duplicative reports to an outside third party regarding [security-based swaps] it clears would be costly and unnecessary.”

See

CME/ICE Letter at 4; CME II at 4.

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

See

CME/ICE Letter at 2, 4; CME II at 4.

CME/ICE Letter at 4.

The Commission does not agree with the commenters' reading of the Exchange Act. While Section 13A(a) of the Exchange Act requires all uncleared security-based swaps to be reported to a registered SDR and specifies who must report an uncleared security-based swap, it does not address whether cleared security-based swaps must be reported to a registered SDR. However, Section 13(m)(1)(G) of the Exchange Act

provides that “[e]ach security-based swap (whether cleared or uncleared) shall be reported to a registered security-based swap data repository.” This section explicitly requires reporting of

each

security-based swap to a registered SDR, including a security-based swap that is a clearing transaction, because all security-based swaps necessarily are either cleared or uncleared.

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

Furthermore, the Commission preliminarily believes that having data for all security-based swaps reported to registered SDRs will provide the Commission and other relevant authorities with the most efficient access to security-based swap information.

If data for clearing transactions were not reported to registered SDRs, the Commission would have to obtain transaction information from multiple types of registered entities—

i.e.,

registered clearing agencies as well as registered SDRs—to obtain a complete picture of the security-based swap market. Obtaining transaction data separately from additional types of registrants would exacerbate concerns about fragmentation of the data that could be reduced by requiring all security-based swap transactions to be reported to registered SDRs. For example, registered clearing agencies might store, maintain, and furnish data to the Commission in a format different from the data provided by registered SDRs, which would force the Commission to expend greater resources harmonizing the data sets.

Section 13(n)(5)(G) of the Exchange Act, 15 U.S.C. 78m(n)(5)(G), provides specified authorities other than the Commission with access to security-based swap data held by SDRs, but does not grant similar access to security-based swap data held by registered clearing agencies. If the Commission relied exclusively on registered clearing agencies to store data for clearing transactions, the ability of other relevant authorities to access the information could be impaired.

b. Determining the Reporting Side for Clearing Transactions

Two commenters supported the Commission's original proposal to assign reporting obligations for all security-based swaps, including clearing transactions, through the reporting hierarchy in all circumstances.

One of these commenters expressed the view that counterparty choice would “ensure that a party to the transaction (instead of a platform or clearinghouse) can chose [

sic

] the most efficient manner of performing its reporting across all of the regions and asset classes that it is active in.”

This commenter further stated that permitting a platform or clearing agency to report security-based swaps would impose costs on market participants by obligating them to establish connectivity to multiple trade repositories.

See

DTCC VI at 8-9; DTCC VIII (recommending that the Commission should not assign reporting obligations to clearing agencies because Regulation SBSR, as proposed and re-proposed, would not have required reporting by clearing agencies); MarkitSERV III at 4.

MarkitSERV III at 4.

See id.

Three other commenters objected to this aspect of Regulation SBSR, as proposed and re-proposed. Two of these commenters argued that, if clearing transactions are subject to Regulation SBSR, they should be reported by the clearing agency that clears the alpha: “In contrast to uncleared [security-based swaps], the Clearing Agency is the sole party who holds the complete and accurate record of transactions and positions for cleared [security-based swaps] and in fact is the only entity capable of providing accurate and useful positional information on cleared [security-based swaps] for systemic risk monitoring purposes.”

The other commenter stated that the clearing agency is best positioned to report cleared security-based swaps timely and accurately as an extension of the clearing process, and that the clearing agency should be the sole party responsible for reporting all the trade data for cleared swaps, including valuation data.

CME/ICE Letter at 3-4.

ISDA IV at 5. The Commission notes that Regulation SBSR as adopted does not require the reporting of the market value of a security-based swap.

See

Regulation SBSR Adopting Release, Section II(B)(3)(e) and Section II(B)(3)(k).

After careful consideration of the comments, the Commission now preliminarily believes that a registered clearing agency should have the duty to report any clearing transaction to which it is a counterparty. The Commission believes that, because the registered clearing agency creates the clearing transactions to which it is a counterparty, the registered clearing agency is in the best position to provide complete and accurate information for the clearing transactions resulting from the security-based swaps that it clears.

One commenter urged the Commission to be clear which party is responsible for reporting a clearing transaction in the event that reporting commences before security-based swap clearing agencies are required to register with the Commission or in the event that a security-based swap is cleared through a clearing agency that is not required to register, exempted from registration, or granted relief.

See

ISDA IV at 6. This commenter further recommended that the reporting requirement for a clearing agency should apply equally to clearing agencies required to register and those that may be exempted from the requirement but which clear security-based swaps subject to reporting.

See id.

The Commission believes that the proposed rules are clear as to which side would have the responsibility for reporting a clearing

transaction. The Commission notes that proposed Rule 901(a)(2)(i) would impose the duty to report clearing transactions on

registered

clearing agencies. It is possible that a non-U.S. person could register with the Commission as a clearing agency under Section 17A of the Exchange Act, 15 U.S.C. 78q-1. The Commission generally believes that, if a person registers with the Commission as a clearing agency, it should assume the same obligations as all other persons that register as clearing agencies. Proposed Rule 901(a)(2)(i) would not apply to unregistered clearing agencies (

i.e.,

persons that act as clearing agencies outside the United States that are not required to, and choose not to, register with the Commission). If in the future the Commission contemplates a process for exempting clearing agencies from registration or considers an application for relief from clearing agency registration requirements, the Commission could at that time consider the issue of whether to extend the duty to report clearing transactions to an exempt clearing agency.

The Commission understands that certain registered clearing agencies that offer central clearing in swaps currently report their clearing transactions to swap data repositories that are provisionally registered with the CFTC. These registered clearing agencies have adopted rules stating that they will comply with the CFTC's swap data reporting rules by reporting beta and gamma swaps to a swap data repository that is an affiliate or business unit of the registered clearing agency. These current swap market practices evidence the ability of registered clearing agencies to report clearing transactions. The Commission's proposal to assign to registered clearing agencies the duty to report clearing transactions is intended, in part, to promote efficiency in the reporting process under Regulation SBSR by leveraging these existing workflows.

The Commission has considered the following alternatives to proposed Rule 901(a)(2)(i):

(1)

Utilize the reporting hierarchy in Regulation SBSR, as re-proposed.

Under this approach, a registered clearing agency would occupy the lowest spot in the hierarchy, along with other persons who are neither registered security-based swap dealers nor registered major security-based swap participants. Thus, in the case of a beta or gamma transaction between a registered security-based swap dealer or registered major security-based swap participant and a registered clearing agency, the registered security-based swap dealer or registered major security-based swap participant would be the reporting side. In the case of a beta or gamma transaction between a non-registered person and a registered clearing agency, the outcome would depend on whether the non-clearing agency direct counterparty is guaranteed by a registered security-based swap dealer or registered major security-based swap participant. If the non-clearing agency direct counterparty is guaranteed by a registered security-based swap dealer or registered major security-based swap participant, that side would be the reporting side. If the non-clearing agency direct counterparty has no guarantor or is guaranteed by a person who is not a registered security-based swap dealer or registered major security-based swap participant, there would be a tie and the sides would be required to select the reporting side.

(2)

Modify the re-proposed hierarchy to place registered clearing agencies above other non-registered persons but below registered security-based swap dealers and registered major security-based swap participants.

Thus, in a transaction between a registered clearing agency and a registered security-based swap dealer (or a transaction between a registered clearing agency and a non-registered person who is guaranteed by a registered security-based swap dealer), the outcome would be the same as in Alternative 1: The side with the registered security-based swap dealer would have the duty to report. However, the outcome would be different from Alternative 1 in the case of a beta or gamma transaction between a registered clearing agency and a non-registered person who is not guaranteed by a registered security-based swap dealer or registered major security-based swap participant: Instead of the sides choosing, the registered clearing agency would have the duty to report.

(3)

Require the reporting side of the alpha to report both the beta and gamma transaction.

Under this approach, the reporting side of the alpha transaction also would be the reporting side for the beta and gamma transactions. Under this approach, the beta and gamma could be viewed as life cycle events of the alpha, and thus should be treated like other life cycle events of the alpha, which the reporting side of the alpha has the duty to report.

The Commission preliminarily believes that each of these three alternatives for assigning the reporting duty for clearing transactions would be less efficient and could result in less reliable reporting than assigning to registered clearing agencies the duty to report all clearing transactions. Two commenters have asserted that a clearing agency is the only party that has complete information about clearing transactions immediately upon their creation.

Each of the three alternatives could require a person who does not have information about the clearing transaction at the time of its creation to report that transaction. The only way such a person could discharge its reporting duty would be to obtain the information from the registered clearing agency or from the counterparty to the registered clearing agency. This extra and unnecessary step could introduce more opportunities for data discrepancies, errors, or delays in reporting. The Commission preliminarily believes instead that a more efficient way to obtain a regulatory report of each clearing transaction would be to require the registered clearing agency to report each clearing transaction to a registered SDR directly.

See

CME/ICE Letter at 3-4. Even the commenters who opposed reporting by clearing agencies did not suggest that a clearing agency lacks adequate information to report the beta and the gamma.

Under Alternative 1, applying the reporting hierarchy to a transaction between a registered clearing agency and a registered security-based swap dealer or registered major security-based swap participant would result in the side opposite the clearing agency being the reporting side for the security-based swap. This approach would comport with the suggestion of commenters who opposed placing reporting obligations on registered clearing agencies.

As discussed above, however, the Commission believes that it would be more efficient to require the registered clearing agency to report the transaction. Furthermore, applying the reporting hierarchy to a transaction between a registered clearing agency and another non-registered person (assuming it is not guaranteed by a registered security-based swap dealer or major security-based swap participant) would require the sides to select the reporting side. While it is likely that the counterparties in this case would select the registered clearing agency as the reporting side, the Commission preliminarily believes that it would be more efficient to obviate the need for registered clearing agencies and non-registered persons to negotiate reporting duties. As discussed in the Regulation SBSR Adopting Release, the Commission designed Rule 901(a), in part, to minimize the possibility of reporting obligations being imposed on non-registered counterparties.

See

DTCC VI at 8-9; DTCC VIII (noting that Regulation SBSR, as proposed and re-proposed, would not have required reporting by clearing agencies); MarkitSERV III at 4.

See

Regulation SBSR Adopting Release, Section V.

See also

Vanguard Letter at 6 (noting that clearing agencies, platforms, security-based swap dealers, and major security-based swap participants would be better situated to report security-based

swaps than other types of market participants, such as buy-side firms).

Alternative 2 would assign the reporting obligation to a registered security-based swap dealer or registered major security-based swap participant when it is a counterparty to a registered clearing agency, while avoiding the need for non-registered persons to negotiate reporting obligations with registered clearing agencies. The Commission preliminarily believes, however, that this alternative—like Alternatives 1 and 3—would be less efficient than requiring the registered clearing agency to report the transaction information directly to a registered SDR, because the registered clearing agency is the only person who has complete information about a clearing transaction immediately upon its creation.

Under Alternative 3, the reporting side for the alpha also would be the reporting side for the beta and gamma. Alternative 3 would require the reporting side for the alpha also to report information about a security-based swap—the clearing transaction between the registered clearing agency and the non-reporting side of the alpha—to which it is not a counterparty. The Commission could require the non-reporting side of the alpha to transmit information about its clearing transaction to the reporting side of the alpha. In theory, this would allow the reporting side of the alpha to report both the beta and the gamma. The Commission believes, however, that this result could be difficult to achieve operationally and, in any event, could create confidentiality concerns, as an alpha counterparty may not wish to reveal information about its clearing transactions except to the registered clearing agency (and, if applicable, its clearing member). Moreover, all other things being equal, having more steps in the reporting process—

e.g.,

more data transfers between execution and reporting—introduces greater opportunity for data discrepancies and delays than having fewer steps. Also, because the reporting side of the alpha would have the duty to report the beta and gamma, Alternative 3 is premised on the view that the beta and gamma are life cycle events of the alpha. The Commission, however, considered and rejected this approach in the Regulation SBSR Adopting Release.

See

Regulation SBSR Adopting Release, Section V(B)(2) at note 267 (“Under Rule 900(g), a security-based swap that results from clearing is an independent security-based swap and not a life cycle event of a security-based swap that is submitted to clearing. Thus, Rule 901(e), which addresses the reporting of life cycle events, does not address what person has the duty to report the clearing transactions that arise when a security-based swap is accepted for clearing”).

In sum, having considered these alternatives, the Commission preliminarily believes that the most direct and efficient way of reporting clearing transactions to a registered SDR is to assign to a registered clearing agency the duty to report all clearing transactions to which it is a counterparty. Therefore, the Commission is proposing new subparagraph (i) of Rule 901(a)(2) to achieve this result. A registered clearing agency has complete information about all clearing transactions to which it is a counterparty, including betas and gammas that arise from clearing alpha security-based swaps. The alternative reporting regimes discussed above could result in less efficiencies in reporting, and thus greater costs, because persons that are less likely to have established infrastructure for reporting or that do not possess the same degree of direct and complete access to the relevant data as the registered clearing agency could have the duty to report. Furthermore, these non-clearing agency counterparties would first have to obtain information about executed clearing transactions from the registered clearing agency before they, in turn, could provide the transaction information to a registered SDR. This extra step in reporting could result in delays, or create opportunities for errors that could lead to a loss of data integrity. The Commission preliminarily believes that data discrepancies, errors, and delays are less likely to occur if the duty to report information about clearing transactions were assigned to registered clearing agencies directly.

c. Choice of Registered SDR for Clearing Transactions

The Commission has carefully considered how registered clearing agencies would fulfill their reporting obligations under proposed Rule 901(a)(2)(i), including whether registered clearing agencies could choose the registered SDR to which they report or whether they should be required to report clearing transactions to the registered SDR that received the report of the associated alpha transaction. Regulation SBSR allows the reporting side to choose the registered SDR to which it reports, subject to the requirement that reports of life cycle events must be made to the same registered SDR that received the initial report of the security-based swap.

See

Regulation SBSR Adopting Release, Section V(B)(2) (“The reporting side may select the registered SDR to which it makes the required report”).

As noted in the Regulation SBSR Adopting Release, a clearing transaction is an independent security-based swap and not a life cycle event of an alpha security-based swap that is submitted to clearing.

As discussed in the Regulation SBSR Adopting Release, the Commission believes that, in general, the person with the duty to report a security-based swap under Rule 901(a) should be permitted to discharge this duty by reporting to a registered SDR of its choice.

This approach is designed to promote efficiency by allowing the person with the reporting duty to select the registered SDR that offers it the greatest ease of use or the lowest fees. Under proposed Rule 901(a)(2)(i), a registered clearing agency would be the reporting side for all clearing transactions to which it is a counterparty; because the registered clearing agency would have the duty to report, it also would have the ability to choose the registered SDR. The Commission considered proposing that reports of betas and gammas go to the same registered SDR that received the report of the associated alpha, but has declined to do so, for the reasons discussed below.

See

Regulation SBSR Adopting Release, Section V(B). However, the determination by a registered clearing agency of whether or not to accept the alpha for clearing is a life cycle event of the alpha. Proposed Rule 901(e)(1)(ii) would require registered clearing agencies to report these life cycle events to the alpha SDR.

See

Regulation SBSR Adopting Release, Section V(B).

If Regulation SBSR were to require registered clearing agencies to report betas and gammas to the registered SDR that received the report of the associated alpha, the registered clearing agency would be required to report to a registered SDR that might not offer it the greatest ease of use or the lowest fees. As such, this result could be less efficient for the registered clearing agency than the alternative approach of permitting the registered clearing agency to choose the registered SDR to which it reports the beta and gamma. Moreover, the Commission preliminarily believes that it would have sufficient tools to be able to track related transactions across SDRs,

and thus that it would be appropriate to allow a registered clearing agency to choose where to report the beta and gamma, even if it chooses to report to

a registered SDR other than the alpha SDR.

See

Regulation SBSR Adopting Release, Section II(B)(3)(j) (explaining that Rule 901(d)(10), as adopted, will facilitate the Commission's ability to link transactions using the transaction ID); Regulation SBSR Adopting Release, Section VIII (further describing the ability of the Commission to link related transactions using the transaction ID).

One commenter asserted that allowing a registered clearing agency to report betas and gammas to a registered SDR of the clearing agency's choice, rather than to the alpha SDR, would impose substantial costs on security-based swap counterparties because the non-clearing agency counterparties would have to establish connectivity to multiple SDRs.

This comment appears premised on the idea that non-clearing agency counterparties would have ongoing obligations to report subsequent information—such as life cycle events or a daily mark of the security-based swap—to registered SDRs not of their choosing, which could force them to establish connections to multiple registered SDRs. However, proposed Rule 901(a)(2)(ii) would assign the reporting duty for a clearing transaction to the registered clearing agency, and Regulation SBSR, as adopted, does not impose any duty on a non-reporting side to report life cycle events or a daily mark.

Therefore, the Commission does not believe that any duty under Regulation SBSR, as adopted, or the amendments to Regulation SBSR proposed herein, would cause non-clearing agency counterparties to incur significant costs resulting from the ability of a registered clearing agency to select the registered SDR to which it reports clearing transactions.

See

MarkitSERV III at 4, n. 11.

Nor does Regulation SBSR require a non-reporting side to alert a registered SDR if it becomes aware that any security-based swap information has been reported erroneously. Under the proposed amendments to Rule 905(a) discussed below, if an error is discovered by a person other than the person having the duty to report a security-based swap, the person who discovered the error would report such error to the person who had the duty to report the transaction, rather than to the registered SDR directly.

Non-clearing agency counterparties to clearing transactions might incur modest costs associated with reporting certain unique identification code (“UIC”) information required by Rule 906(a),

e.g.,

their branch ID, broker ID, trader ID, and trading desk ID, as applicable.

See

Regulation SBSR Adopting Release, Section XXII(C)(6)(c) (discussing the costs of complying with Rule 906(a), as adopted).

d. Reporting Whether an Alpha Transaction is Accepted for Clearing

One commenter expressed the view that a clearing agency would be well-positioned to issue a termination report for the alpha and subsequently report the beta, gamma, and, if necessary, open positions to a registered SDR.

The Commission agrees with this commenter and is therefore proposing a new subparagraph (ii) of Rule 901(e)(1), which would require a registered clearing agency to report to the alpha SDR whether or not it has accepted the alpha for clearing. Rule 901(e)(1)(i), as adopted, requires the reporting side of a security-based swap to report—to the same entity to which it reported the original transaction—any life cycle event (or adjustment due to a life cycle event) except for whether or not the security-based swap has been accepted for clearing. Proposed Rule 901(e)(1)(ii) would address the reporting of whether or not the security-based swap has been accepted for clearing, and would assign that duty to the registered clearing agency to which the transaction is submitted for clearing, rather than to the reporting side of the original transaction. Proposed Rule 901(e)(1)(ii) would ensure that all potential life cycle events (and adjustments due to life cycle events) would be subject to regulatory reporting, and that Regulation SBSR would specify the person who has the duty to report each kind of life cycle event (or adjustment).

See

ICE Letter at 2-5.

When an alpha is submitted for clearing, the registered clearing agency will review the trade and decide whether or not to accept it. Acceptance for clearing can result in the termination of the alpha and the creation of the beta and gamma. Furthermore, rejection from clearing is an important event in the life of the alpha—because rejection could result in the voiding of the transaction or the activation of credit support provisions that would alter the character of the transaction—and thus is the kind of event that Rule 901(e) is designed to capture for regulatory purposes. Accordingly, proposed Rule 901(e)(1)(ii) would require a registered clearing agency to report whether or not it has accepted a security-based swap for clearing.

The Commission preliminarily believes that requiring a registered clearing agency, rather than the reporting side of the alpha, to report whether or not the registered clearing agency has accepted an alpha for clearing is consistent with the Commission's approach of assigning reporting obligations to the person with the most complete and efficient access to the required information. The registered clearing agency would have the most complete and efficient access to information about whether a particular alpha has been accepted for clearing because the registered clearing agency determines whether to accept a submitted alpha and knows the precise moment when the transaction is cleared. Although it would be possible for the reporting side for the alpha transaction to report whether a registered clearing agency has accepted the alpha for clearing, the reporting side would need to learn this information from the clearing agency. The Commission preliminarily believes it is more efficient to require the registered clearing agency to report to the alpha SDR whether or not the registered clearing agency has accepted the alpha for clearing.

Rule 901(e)(2), as adopted, requires whoever has the duty to report a life cycle event to include in the report of the life cycle event the transaction ID of the original transaction. If the Commission ultimately adopts proposed Rule 901(e)(1)(ii), a registered clearing agency that accepts or rejects an alpha transaction from clearing would incur this duty under existing Rule 901(e)(2). The transaction ID of the alpha transaction is information that the registered clearing agency might not have, because the registered clearing agency is not involved in the execution or reporting to a registered SDR of the alpha transaction. Therefore, the Commission also is proposing a new subparagraph (3) of Rule 901(a), which would provide that “a person who, under [Rule 901(a)(1) or 901(a)(2)(ii)] has a duty to report a security-based swap that has been submitted to clearing at a registered clearing agency shall promptly provide that registered clearing agency with the transaction ID of the submitted security-based swap and the identity of the registered security-based swap data repository to which the transaction will be reported or has been reported.” Proposed Rule 901(a)(3) would ensure that the registered clearing agency knows the identity of the alpha SDR and the transaction ID of the alpha, so that the registered clearing agency knows where to report whether or not it accepts the alpha for clearing—as required under existing Rule 901(e)(2)—and so that this report can be linked to the alpha report.

The Commission recognizes the potential for proposed Rules 901(e)(1)(ii) and 901(a)(3) to result in the registered clearing agency reporting whether or not it accepted the alpha for clearing to the alpha SDR before the alpha transaction itself has been reported to the alpha SDR. This could occur during the interim phase for regulatory reporting and public dissemination, which the Commission discussed in Section VII of the Regulation SBSR Adopting Release. Rule 901(j), as adopted, generally permits the person with the duty to report a security-based swap up to 24 hours after the time of execution to report to a registered SDR the transaction information required by Rules 901(c) and 901(d). Accordingly,

an alpha could be submitted for clearing immediately after execution, but not reported to a registered SDR for up to 24 hours (or, if 24 hours after the time of execution would fall on a day that is not a business day, by the same time on the next day that is a business day). If the registered clearing agency accepts the alpha for clearing, the registered clearing agency might, pursuant to proposed Rule 901(e)(1)(ii), submit a report of this life cycle event to the alpha SDR before the alpha SDR has received the transaction report of the alpha transaction itself.

To submit the report contemplated by proposed Rule 901(e)(1)(ii), the registered clearing agency would need to know the transaction ID of the alpha. The person with the duty to report the alpha might know the transaction ID of the alpha before it reports the transaction to a registered SDR. Under Rules 903(a) and 907(a)(5), as adopted, there is no requirement that a registered SDR itself assign a transaction ID. Under those rules, a registered SDR may allow third parties—such as reporting sides or platforms—to assign a transaction ID using a methodology endorsed by the registered SDR. If the registered SDR allows third parties to assign the transaction ID, the reporting side or platform could tell the registered clearing agency the transaction ID, which in turn could allow the registered clearing agency to report to the alpha SDR whether or not the alpha has been accepted for clearing before the alpha has been reported to the registered SDR. If, however, the person with the duty to report the alpha does not obtain the transaction ID until it reports the alpha to a registered SDR, the person could not provide the transaction ID of the alpha to the registered clearing agency, and the registered clearing agency could not report whether or not it accepts the alpha for clearing until after it received alpha's transaction ID.

To account for this possibility, the Commission is proposing a minor amendment to Rule 901(e)(2). Rule 901(e)(2), as adopted, states in relevant part that a life cycle event must be reported “to the entity to which the original security-based swap transaction

was reported”

(emphasis added). Under the proposed amendment to Rule 901(e)(2), a life cycle event would have to be reported “to the entity to which the original security-based swap transaction will be reported or has been reported.” This amendment mirrors the language in proposed Rule 901(a)(3), which would require a person who reports an alpha to provide the registered clearing agency to which the alpha is submitted the transaction ID of the alpha and the identity of the registered SDR to which the alpha “will be reported or has been reported.”

A registered SDR should consider—in formulating its policies and procedures under Rule 907(a), as adopted—whether those policies and procedures should address the situation where it receives a report from a registered clearing agency stating whether or not it has accepted an alpha (with a particular transaction ID) for clearing before the registered SDR has received a transaction report of the alpha. For example, the policies and procedures could provide that the registered SDR would hold a report from a registered clearing agency that it accepted the alpha for clearing in a pending state until it receives the transaction report of the alpha, and then disseminate the security-based swap transaction information and the fact that the alpha has been terminated as a single report.

2. Reporting by a Platform

Some commenters, responding to Rule 901(a) as initially proposed, suggested that the Commission require a platform to report security-based swaps executed on or through its facilities.

One of these commenters stated that a platform would have the technology to report a security-based swap executed on its facilities and would be in the best position to ensure that the transaction was reported accurately and on a real-time basis.

This commenter also stated that the counterparties to a transaction executed on a platform should be relieved of any reporting obligations because they would not be in a position to control or confirm the accuracy of the information reported or to control the timing of the platform's reporting.

Another commenter expressed the view that having platforms report security-based swaps would facilitate economies in the marketplace because fewer entities, including end users, would be required to build the systems necessary to support security-based swap reporting.

Four commenters, however, raised concerns about imposing reporting requirements on platforms.

See

ICI I at 5; Tradeweb Letter at 3-4; Vanguard Letter at 2, 7.

See

Tradeweb Letter at 3.

See id.

at 3-4. The commenter also noted that the CFTC's proposed swap data reporting rules would require a SEF or designated contract market to report a swap executed on its facilities.

See id.

at 4. The CFTC has subsequently adopted a final rule that requires SEFs and designated contract markets to report swaps executed on their facilities.

See

17 CFR 45.3.

See

Vanguard Letter at 7; ICI I at 5 (arguing that because investment funds would need to spend significant time and resources to build security-based swap reporting systems, platforms and security-based swap dealers should be obligated to report security-based swap data).

See

ISDA/SIFMA I at 18; ISDA IV at 7; MarkitSERV III at 4; WMBAA II at 6.

After carefully considering these comments, the Commission is proposing to require a platform to report any security-based swap that is executed on the platform, but only if the security-based swap will be submitted to clearing. Proposed Rule 901(a)(1) provides that, if a security-based swap is executed on a platform and will be submitted to clearing, the platform on which the transaction was executed shall report to a registered SDR the information required by Rules 901(c) (the primary trade information), 901(d)(1) (the participant ID or execution agent ID for each counterparty, as applicable), and 901(d)(9) (the platform ID). If the security-based swap will not be submitted to clearing, the platform would have no reporting obligations under Regulation SBSR. Instead, the reporting hierarchy in Rule 901(a)(2)(ii), as adopted, will determine which side is the reporting side for such a platform-executed transaction.

As discussed below, proposed subparagraph (1) of Rule 901(a) is intended to maximize the accuracy and completeness of data reported to registered SDRs, while continuing to align the reporting duty with persons that are best able to carry it out.

See

Regulation SBSR Adopting Release, Section V.

The Commission understands that each counterparty to a platform-executed transaction that will be submitted to clearing intends to assume the credit risk of the clearing agency rather than any of the other platform participants, so there is no need to have credit and other documentation in place between itself and its counterparty. Thus, such a transaction could be executed anonymously, as there might be no mechanism by which one counterparty would learn the identity of the other.

The direct counterparties to such an alpha might not know which side would be the reporting side (if the hierarchy in Rule 901(a)(2), as adopted,

applied) and there might be no mechanism for them to learn this information because they would not be assuming each other's credit risk.

Even if the direct counterparties could agree that one side—for example, the side selling protection in a single-name credit default swap—would report the trade, the reporting side might not learn the identity of its counterparty even though Rule 901(d)(1), as adopted, requires the reporting side to report all counterparty IDs.

The Commission notes that the offer and sale of security-based swaps, even if affected anonymously on a platform, must either be registered under the Securities Act or be made pursuant to an exemption from registration. The registration exemption in Section 4(a)(2) of the Securities Act, 15 U.S.C. 77d(a)(2), generally is available for transactions by an issuer not involving any public offering. One factor in determining the availability of the Section 4(a)(2) exemption is that the purchasers of the securities in the transaction must be sophisticated investors. As previously noted by the Commission, Congress determined that eligible contract participants are sophisticated investors for purposes of security-based swap transactions.

See

Exemptions for Security-Based Swaps Issued By Certain Clearing Agencies, Securities Act Release No. 9308 (March 30, 2012), 77 FR 20536 (April 5, 2012); Exemptions for Security-Based Swaps, Securities Act Release No. 9231 (July 1, 2011), 76 FR 40605 (July 11, 2011). The Commission believes that Congressional determination of eligible contract participants as sophisticated investors for purposes of security-based swap transactions applies as well for purposes of Section 4(a)(2) of the Securities Act. In addition, the exemption in Rule 240 under the Securities Act, 17 CFR 230.240, also may be available for security-based swap transactions involving eligible contract participants, to the extent applicable.

Cf.

Cross-Border Adopting Release, 79 FR 47325 (creating an exception, from having to be counted against the

de minimis

thresholds, for certain security-based swap transactions that a non-U.S. person enters into anonymously on a platform and that are cleared through a clearing agency, because each counterparty would not be in a position to know whether the other is a U.S. person).

Rule 901(d)(1) requires the reporting side to provide the counterparty ID or execution agent ID for each counterparty, as applicable. If the execution occurs anonymously, neither side would know the counterparty ID or execution agent ID of the other side.

Although some platform-executed transactions that will be submitted to clearing might not be executed anonymously, the Commission preliminarily believes that it would be more efficient to require the platform to report all security-based swaps executed on that platform that will be submitted to clearing, regardless of whether the counterparties are, in fact, anonymous to each other. The Commission preliminarily believes that assigning the duty to report to the platform minimizes the number of reporting steps and thus minimizes the possibility of data corruption and delays in reporting the transaction to a registered SDR. Thus, the Commission preliminarily believes that all platform-executed transactions that will be submitted to clearing should be reported by the platform. This approach would be more efficient than if the platform had to assess on a transaction-by-transaction basis whether or not the counterparties are in fact unknown to each other.

As noted above,

four commenters generally opposed assigning to platforms the duty to report security-based swap transactions. One commenter stated generally that “the reporting party should be able to choose which SDR to report to, while being allowed to delegate the actual reporting to qualified third parties where it sees fit.”

The commenter appeared to suggest that a platform could be a qualified third party acting as an agent for a reporting side.

The Commission agrees with the commenter that the platform is well-placed to carry out the act of reporting, but, unlike the commenter, the Commission preliminarily believes that the platform itself should have the legal duty to report for the reasons discussed above.

See supra

note 59.

MarkitSERV III at 4.

See id.

(stating that counterparties should be able to choose the registered SDR “regardless of whether the transaction is executed on a SEF”).

Three other commenters argued generally that platforms should not be assigned the duty to report because they lack certain information that would have to be reported. One of these commenters stated, for example, that “the SB SEF or national securities exchange may not itself have access to all of the information required, such as whether the trade has been accepted for clearing.”

The other commenter argued that “[t]he SB SEF would likely not be privy to all of the terms required to be reported in accordance with proposed Regulation SBSR, such as, but not limited to: (i) Contingencies of the payment streams of each counterparty to the other; (ii) the title of any master agreement or other agreement governing the transaction; (iii) data elements necessary to calculate the market value of the transaction; and (iv) other details not typically provided to the SB SEF by the customer, such as the actual desk on whose behalf the transaction is entered. Moreover, and quite critical, an SB SEF would not be in a position or necessarily have the capabilities to report life cycle event information. Indeed, even if an SB SEF were required to report the transaction details as the proposed regulation requires, something we do not think advisable, it would likely take at least 30 minutes to gather and confirm the accuracy of that information.”

ISDA/SIFMA I at 18.

See also

ISDA IV at 7 (stating that the clearing agency should be responsible for reporting the alpha trade once it has been accepted for clearing, and that one of the counterparties should be responsible per the reporting hierarchy for reporting a bilateral transaction that is not intended for clearing). The last commenter also stated that certain aspects of the CFTC regime for reporting bilateral swaps executed on a facility have been challenging due to the difficulty for SEFs to know and report certain trade data that is not essential to trade execution, and because of the shared responsibility for reporting since the SEF/DCM is responsible for the initial creation data reporting and the SD/MSP is responsible for continuation data reporting.

See id.

The Commission notes that Regulation SBSR, as adopted, applies the reporting hierarchy in Rule 901(a) to a security-based swap executed on a platform that is not intended to be cleared.

See

Regulation SBSR Adopting Release, Section V(C)(4).

WMBAA II at 6.

The Commission shares the commenters' concern that it would not be appropriate to require platforms to report information that they do not have or that would be impractical to obtain. However, a close examination of the data elements that must be reported under Rules 901(c) and 901(d), as adopted, suggests that a platform would not be put in this position:

• Rule 901(c)(1) requires reporting of the product ID, if available, or else other information that identifies the security-based swap. Proposed Rule 901(a)(1) would apply only to platform-executed security-based swaps submitted to clearing, which suggests that these are products that would have a product ID. Even if these security-based swaps did not have a product ID, the platform would have sufficient information to identify a security-based swap traded on its facilities to allow its subscribers to trade it; this same information would be sufficient for the platform to report the information required by Rule 901(c)(1) to a registered SDR.

• Rules 901(c)(2), 901(c)(3), and 901(c)(4) require reporting of the date and time of execution, the price, and the notional amount, respectively, of the security-based swap. The platform will know these data elements because they were determined on the platform's facilities.

• Rule 901(c)(5) requires reporting of whether both sides of the transaction include a registered security-based swap dealer. The Commission anticipates that this information will be publicly available, or the platform could easily obtain it from a platform participant.

• Rule 901(c)(6) requires reporting of whether the direct counterparties intend that the security-based swap will be submitted to clearing. Rule 901(d)(6) requires reporting of the name of the clearing agency to which the security-based swap will be submitted to clearing. The fact that the transaction is intended to be cleared may be implicit in the product ID (

e.g.,

if the security-based swap traded has a product ID of a “made available to trade” product). Alternatively, the counterparties may inform the platform that the security-based swap will be submitted to clearing; in some cases, the platform may provide the mechanism for reporting the transaction to a clearing agency. The Commission presumes that, if the platform knows that the security-based swap will be submitted to clearing, the platform will also know the name of the clearing agency. If the platform has no knowledge that the transaction will be submitted to clearing, the platform would have no duty to report it under proposed Rule 901(a)(1).

• Rule 901(c)(7) requires reporting, if applicable, of any flags pertaining to the

transaction that are specified in the policies and procedures of the registered SDR to which the transaction will be reported. The Commission preliminarily believes that, because the transaction occurs on the platform's facilities, the platform would have knowledge of any circumstances that would require application of a flag.

• Rule 901(d)(1) requires reporting of the counterparty ID or the execution agent ID of each counterparty, as applicable. A platform will know the identity of each direct counterparty or the execution agent for each direct counterparty because those market participants will be using the platform's facilities to execute the alpha transaction. To the extent that such alphas have an indirect counterparty, the Commission presumes that the platform will be able to obtain this information from the participant that is a direct counterparty to the alpha.

• Rule 901(d)(2) requires the reporting side to report the branch ID, broker ID, execution agent ID, trader ID, and trading desk ID “of the direct counterparty on the reporting side.” Regardless of whether a platform has these UICs for the counterparties to a security-based swap executed on its facilities, the platform would not be the reporting side for such a transaction because it is not a counterparty to the security-based swap.

Thus, when a platform has the duty to report a transaction, there is no reporting side, and the registered SDR to which the platform reports the security-based swap would be required to obtain the branch ID, broker ID, execution agent ID, trader ID, and trading desk ID, as applicable, from each direct counterparty using the process in Rule 906(a), as adopted.

Under Rule 900(hh), as adopted, the sides are counterparties to the security-based swap. Thus, the platform would not be one of the sides (except possibly in unusual circumstances) and thus could not be the reporting side.

See

Regulation SBSR Adopting Release, Section XIII (describing Rule 906(a), as adopted). The Commission preliminarily believes that relying on the Rule 906(a) process to obtain UIC information from both sides to a platform-executed security-based swap that will be submitted to clearing would not cause counterparties to such transactions to incur significant additional costs.

See

Regulation SBSR Adopting Release, Section XXII(C)(6)(c) (estimating the costs of complying with Rule 906(a), as adopted, for reporting sides). As noted above, assigning the reporting duty to the platform should minimize the number of reporting steps and thus the possibility of data corruption and delays in reporting the transaction to a registered SDR because a platform will have superior access to the economic terms of security-based swaps that are executed on its facilities and will be submitted to clearing. The Commission further notes that the platform could report the branch ID, broker ID, execution agent ID, trader ID, and trading desk ID, as applicable, as agent for a direct counterparty, if the direct counterparty provided this information to the platform.

See

Regulation SBSR Adopting Release, Section V(C)(2) (discussing use of agents to carry out reporting duties).

• Rules 901(d)(3) and 901(d)(5) require reporting of the terms of any fixed or floating rate payments and any other elements included in the agreement necessary to calculate the value of the contract, respectively, but only “[t]o the extent not provided pursuant to [Rule 901(c)].” The Commission believes that all of the identifying information would be contained in the product ID or otherwise available to the platform and reported by the platform pursuant to Rule 901(c).

Therefore, the Commission preliminarily believes that the information required under Rules 901(d)(3) and 901(d)(5) would be a null set for a transaction executed on a platform that is submitted to clearing.

For a platform to make a security-based swap eligible for trading on its facilities, it must display a product in specific enough detail for the platform participants to reach a meeting of the minds about what they are trading. In other words, the platform must provide information that identifies the security-based swap, the effective date, the scheduled termination date, and the terms of any standardized fixed or floating rate payments and the frequency of such payments. The platform would be required to report these elements, or a product ID that incorporates these elements, to a registered SDR pursuant to Rule 901(c).

• Rule 901(d)(4) requires reporting of the titles and dates of agreements that are “incorporated by reference into the security-based swap contract.” The terms of the alpha security-based swap will be established according to the rules of the platform and, potentially, the rules of the registered clearing agency to which the security-based swap will be submitted, and likely will not be written. Therefore, the Commission presumes that there will be no agreements incorporated by reference to such contracts, and the information required under Rule 901(d)(4) would be a null set for a transaction executed on a platform that will be submitted to clearing.

• Rule 901(d)(7) would apply only if the direct counterparties do

not

intend to submit the security-based swap to clearing. Rule 901(d)(8) would apply only if the transaction is

not

submitted to clearing. Because a platform would be required to report a security-based swap executed on its facilities only if the transaction will be submitted to clearing, Rules 901(d)(7) and 901(d)(8) would not be applicable.

• Rule 901(d)(9) requires reporting of the platform ID. The platform can provide this information.

• Rule 901(d)(10) would apply only if the security-based swap arises from the allocation, termination, novation, or assignment of one or more existing security-based swaps. To the extent that platforms facilitate allocations, terminations, novations, or assignments of existing security-based swaps, the platform participants engaging in such exercises could provide the platform with the transaction IDs of those existing security-based swaps,

which the platform would need to report pursuant to Rule 901(d)(10).

For a platform to facilitate allocations, terminations, novations, or assignments of existing security-based swaps, the platform participants necessarily must provide a significant amount of information to the platform regarding those existing security-based swaps. Given that the platform participants must provide a significant amount of information about the existing transactions to the platform, the Commission preliminarily believes that the platform participants also could provide the platform with the transaction IDs of those existing security-based swaps.

Two commenters who raised general issues about platforms having the duty to report questioned, in particular, a platform's ability to report subsequent events affecting the initial alpha transaction. One commenter stated that “an SB SEF would not be in a position or necessarily have the capabilities to report life cycle event information.”

The second commenter noted that “the SB SEF or national securities exchange may not itself have access to . . . whether the trade has been accepted for clearing.”

This commenter further noted that “the relevant clearing agency . . . could report the missing data in parallel.”

The Commission broadly agrees with that suggestion and therefore is proposing a new subparagraph (ii) of Rule 901(e)(1), which would require a registered clearing agency to report whether or not it has accepted a security-based swap for clearing. Proposed Rule 901(e)(1)(ii) reflects the Commission's preliminary view that the registered clearing agency—and not a platform or any other person—has the most direct access to that information and, therefore, should have the duty to report it to the alpha SDR.

Similarly, the Commission generally agrees with the first commenter that a platform is not in a good position to know about life cycle events of security-based swaps executed on their facilities. However, the Commission preliminarily believes that the only life cycle event of a platform-executed security-based swap that will be submitted to clearing will be whether the security-based swap is accepted for clearing. Proposed Rule 901(e)(1)(ii) would require the registered clearing

agency to report that information, not the platform.

WMBAA II at 6.

ISDA/SIFMA I at 18.

Id.

See supra

Section II(C)(2)(d).

The Commission notes that proposed Rule 901(a)(1) would require a platform to report a security-based swap only if the security-based swap will be submitted to clearing. If the platform-executed transaction will not be submitted to clearing, Rule 901(a)(2)(ii), as adopted, already requires the counterparties to apply the reporting hierarchy to determine which side will have the duty to report the transaction, as well as any life cycle event of that transaction. This result is consistent with Section 13A(a)(3) of the Exchange Act,

which sets out a reporting hierarchy under which one of the counterparties, but not a platform, will have the duty to report a security-based swap that is not accepted by any clearing agency.

15 U.S.C. 78mA(a)(3).

3. Additional Amendments To Account for Platforms and Registered Clearing Agencies Incurring Duties To Report

Under Rule 901(h), as adopted, “a reporting side” must electronically transmit the information required by Rule 901 in a format required by the registered SDR.

The Commission is now proposing to replace the term “reporting side” in Rule 901(h) with the phrase “person having a duty to report” because, under the proposed amendments to Rule 901(a), platforms and registered clearing agencies would have duties to report certain transaction information, in addition to reporting sides. The Commission believes that all persons who have a duty to report under Regulation SBSR—

i.e.,

platforms, registered clearing agencies, and reporting sides—should electronically transmit the information required by Rule 901 in a format required by the registered SDR.

Rule 907, as adopted, requires a registered SDR to establish and maintain written policies and procedures to govern various aspects of the registered SDR's operations, including the manner and format in which the registered SDR will accept data from its participants.

Under Rule 900(u), as adopted, platforms and registered clearing agencies would not be participants of registered SDRs solely as a result of reporting security-based swap transaction information pursuant to proposed Rule 901(a)(1) or 901(e)(1)(ii), respectively.

However, consistent with the proposed amendment to Rule 901(h) described immediately above, the Commission believes that platforms and registered clearing agencies should be participants of any registered SDR to which they report security-based swap transaction information. Imposing participant status on platforms and registered clearing agencies would explicitly require those entities to report security-based swap transaction information to a registered SDR in a format required by that registered SDR. If platforms and registered clearing agencies were not participants of the registered SDR and were permitted to report data in a format of their own choosing, it could be difficult or impossible for the registered SDR to understand individual transaction reports or aggregate them with other reports in a meaningful way. This could adversely affect the ability of the Commission and other relevant authorities to carry out their oversight responsibilities and could interfere with the ability of a registered SDR to publicly disseminate security-based swap transaction information as required by Rule 902, as adopted. Therefore, the Commission is proposing to amend the definition of “participant” in Rule 900(u) to mean: (1) A person that is a counterparty to a security-based swap, provided that the security-based swap is subject to regulatory reporting under Regulation SBSR and is reported to a registered SDR pursuant to Regulation SBSR; (2) a platform that is required to report a security-based swap pursuant to Rule 901(a)(1); or (3) a registered clearing agency that is required to report a life cycle event pursuant to Rule 901(e).

Rule 900(u), as adopted, provides that a “[p]articipant, with respect to a registered security-based swap data repository, means a counterparty, that meets the criteria of [Rule 908(b)], of a security-based swap that is reported to that registered security-based swap data repository to satisfy an obligation under [Rule 901(a)].”

A registered clearing agency that is required to report a clearing transaction pursuant to proposed Rule 901(a)(2)(i) would be a counterparty to a security-based swap and covered by the first prong of the proposed definition of “participant.”

4. Examples

The following examples illustrate the proposed reporting process for alpha, beta, and gamma security-based swaps, assuming an agency model of clearing under which a non-clearing member counterparty becomes a direct counterparty to a clearing transaction:

As noted in Section II(A),

supra,

because clearing of security-based swaps in the United States is still evolving, other models of clearing might emerge where customers would not become direct counterparties of a registered clearing agency.

•

Example 1.

A registered security-based swap dealer enters into a security-based swap with a private fund. The transaction is not executed on a platform. The counterparties intend to clear the transaction (

i.e.,

the transaction is an alpha). Neither side has a guarantor with respect to the alpha, and both direct counterparties are U.S. persons.

○ The registered security-based swap dealer is the reporting side under Rule 901(a)(2)(ii), as adopted, and must report this alpha transaction to a registered SDR (and may choose the registered SDR).

○ Proposed Rule 901(a)(3) would require the registered security-based swap dealer, as the reporting side of the alpha transaction, to promptly provide to the registered clearing agency the transaction ID of the alpha and the identity of the alpha SDR.

○ If the registered clearing agency accepts the alpha for clearing and terminates the alpha, two clearing transactions—a beta (between the registered security-based swap dealer and the registered clearing agency) and a gamma (between the registered clearing agency and the private fund)—take its place.

○ Proposed Rule 901(e)(1)(ii) would require the registered clearing agency to report to the alpha SDR that it accepted the transaction for clearing.

○ Under proposed Rule 901(a)(2)(i), the registered clearing agency would be the reporting side for each of the beta and the gamma. Therefore, the registered clearing agency would be required to report the beta and gamma to a registered SDR and could choose the registered SDR to which it reports the beta and gamma. The report for each of the beta and the gamma must include the transaction ID of the alpha, as required by Rule 901(d)(10), as adopted.

•

Example 2.

Same facts as Example 1, except that the private fund and the registered security-based swap dealer transact on a SB SEF.

○ Proposed Rule 901(a)(1) would require the SB SEF to report the alpha transaction (and allow the SB SEF to choose the registered SDR).

○ Upon submission of the alpha for clearing, proposed Rule 901(a)(3) would require the SB SEF to promptly report to the registered clearing agency the transaction ID of the alpha and the identity of the alpha SDR.

○ Once the alpha is submitted to clearing, the reporting workflows are the same as in Example 1.

D. Request for Comment

The Commission requests comment on all aspects of the proposed new Rules 901(a)(1), 901(a)(2)(i), and 901(a)(3), as well as the proposed amendment to Rule 901(e).

1. Is the Commission's discussion of how Regulation SBSR—under the amendments proposed in this release—would apply to different steps or actions in the clearing process under the agency

model sufficiently clear and complete? If not, please provide detail about the operation of the agency model of clearing (

e.g.,

particular steps or actions in the clearing process) that you believe the Commission has not adequately addressed and how you believe they should be treated under Regulation SBSR.

2. Do you believe that the principal model of clearing is or is likely to become sufficiently prevalent in the U.S. market that the Commission should address how Regulation SBSR would apply to different steps in the clearing process under the principal model? If so, do you think that further guidance is necessary to apply Regulation SBSR effectively to the principal model? What aspects of the principal model should the Commission focus on for purposes of providing further guidance?

3. At the time that a security-based swap is accepted for clearing, will any person other than the registered clearing agency have complete information about the beta and the gamma that result from clearing?

4. Do you agree with the Commission's preliminary assessment of the data elements under Rules 901(c) and 901(d) that will be available to a platform and required to be reported for a platform-executed security-based swap that will be submitted to clearing? If not, what information would the platform find difficult to obtain? For example, could a platform reasonably be expected to know of guarantors of direct counterparties transacting on its facilities (if the guarantors are clearing members who guarantee platform participants who are not themselves direct members of the clearing agency)?

5. If the Commission were to adopt the basic requirement that a platform must report transactions executed on its facilities that are submitted to clearing but, as discussed above, would not require the platform to report certain data elements in Rule 901(c) or 901(d), what data elements should be excepted? Can you suggest an alternate mechanism—besides requiring the platform to report—for such data elements to be reported to the registered SDR?

6. Would a platform have knowledge of any special circumstances of a transaction executed on its facilities that might have to be flagged pursuant to the policies and procedures of the registered SDR to which the platform reports the transaction? Are there any special circumstances that it would be difficult or impossible for a platform to know? If so, please discuss and suggest how the transaction could be appropriately flagged if the platform does not do so.

7. Are there any potential life cycle events of a platform-executed security-based swap that will be submitted to clearing, other than acceptance or rejection from clearing? If so, what are they and who do you think should have the duty of reporting such life cycle events to a registered SDR? Why?

8. What costs might platforms incur to report security-based swap transactions pursuant to proposed Rule 901(a)(1)? Could other market participants report these transactions more efficiently or cost effectively?

9. Would a registered clearing agency have the information necessary to report a platform-executed alpha that will be submitted to clearing? If so, should the registered clearing agency, rather than the platform, be required to report the transaction? Why or why not? How long does it typically take between the execution of a security-based swap on a platform and submission to clearing? How long does it typically take between submission to clearing and when the registered clearing agency determines whether to accept or reject the transaction?

10. Rule 901(d)(2), as adopted, requires the reporting side to report—“as applicable”—the branch ID, broker ID, execution agent ID, trader ID, and trading desk ID with respect to the direct counterparty on the reporting side. As described above, the Commission is proposing that the registered clearing agency would be the reporting side for all clearing transactions to which it is a counterparty. Would the branch ID, broker ID, execution agent ID, trader ID, or trading desk ID ever be applicable to a registered clearing agency? Why or why not?

11. Rule 906(a), as adopted, provides a mechanism for a registered SDR to obtain the branch ID, broker ID, execution agent ID, trading ID, and trading desk ID—“as applicable”—for the non-reporting side of a security-based swap. Thus, mechanisms exist under Regulation SBSR, as adopted, for the Commission to learn the UICs, as applicable, for both sides of the alpha transaction. Would these UICs be applicable to the non-clearing agency side of a clearing transaction? Why or why not? If not, do you believe that the Commission should provide guidance that there is no requirement under Rule 906(a) to report the UICs for the non-clearing agency counterparty of a clearing transaction?

12. Will registered clearing agencies be able to leverage existing reporting processes to report data to registered SDRs? What additional reporting processes might registered clearing agencies need to develop to ensure accurate reporting in accordance with the proposed amendments to Rule 901? What costs might registered clearing agencies incur to adopt these processes?

13. Would other market participants be able to report clearing transactions or terminations of transactions submitted to clearing more efficiently or cost effectively than the registered clearing agency? What costs might counterparties incur if one of the sides of the alpha were assigned the duty to report a clearing transaction rather than the registered clearing agency?

14. Should the proposed reporting requirements for registered clearing agencies apply only to registered clearing agencies having their principal place of business in the United States rather than to all registered clearing agencies (which could include registered clearing agencies having their principal place of business outside the United States)? Why or why not? Would U.S. persons, registered security-based swap dealers, and registered major security-based swap participants be in a better position to report transactions with non-U.S. person registered clearing agencies? Why or why not?

15. Under proposed Rule 901(e)(1)(ii), a registered clearing agency would be required to report whether or not it has accepted a security-based swap for clearing. Should this information be required to be reported to the same registered SDR that receives the transaction report of the alpha? If not, how would the Commission and other relevant authorities be able to ascertain whether or not the alpha had been cleared? If so, what costs would be imposed on registered clearing agencies for having to report this transaction information to a registered SDR not of their choosing?

16. Is it appropriate to require a registered clearing agency to become a participant of the alpha SDR solely as a result of reporting whether or not it has accepted an alpha for clearing? What costs would be imposed on registered clearing agencies as a result of this requirement? If a registered clearing agency did not become a participant of the alpha SDR solely by virtue of reporting the disposition of an alpha, in what other way should the registered clearing agency be required to report the disposition of an alpha such that the systems of the alpha SDR can accept and understand that report?

17. What costs might platforms and reporting sides incur to comply with proposed Rule 901(a)(3), which would require the person with the duty to report a security-based swap that has been submitted to clearing at a

registered clearing agency to promptly provide that registered clearing agency with the transaction ID of the submitted security-based swap and the identity of the alpha SDR? Is there a more efficient way of ensuring that registered clearing agencies know the transaction ID of the alpha and the identity of the alpha SDR? If so, please discuss.

18. Should platforms and registered clearing agencies be participants of the registered SDRs to which they report? If not, how would a registered SDR ensure that these persons provide data in a format required by the registered SDR?

19. How might the policies and procedures of a registered SDR address the circumstance where the registered SDR receives a termination report of an alpha pursuant to proposed Rule 901(e)(1)(ii) before it receives the initial report of the alpha? What costs would registered SDRs incur to implement policies and procedures addressing this scenario?

20. Can anonymous trading occur on any other type of trading venue besides a platform? If so, please describe where and how such activity occurs and provide your view as to how Regulation SBSR should, if necessary, be amended to require reporting of such transactions.

III. Reporting and Public Dissemination of Security-Based Swaps Involving Allocation

The Regulation SBSR Adopting Release provides guidance for the reporting of certain security-based swaps executed by an asset manager on behalf of multiple clients—transactions involving what are sometimes referred to as “bunched orders.”

Specifically, the Regulation SBSR Adopting Release explains how Regulation SBSR applies to executed bunched orders that are reported pursuant to the reporting hierarchy in Rule 901(a)(2)(ii), as adopted, including bunched order alphas. That release also explains how Regulation SBSR applies to the security-based swaps that result from allocation of that executed bunched order, if the resulting security-based swaps are uncleared. This section explains how the Commission preliminarily believes Regulation SBSR, as adopted and as proposed to be amended by this release, would apply to a platform-executed bunched order that will be submitted to clearing, and the security-based swaps that result from the allocation of any bunched order execution, if the resulting security-based swaps are cleared.

See

Regulation SBSR Adopting Release, Section VIII. The Commission recognizes that market participants may use a variety of other terms to refer to such transactions, including “blocks,” “parent/child” transactions, and “splits.” The Commission has determined to use a single term, “bunched orders,” for purposes of this release, as this appears to be a widely accepted term.

See, e.g.,

“Bunched orders challenge SEFs,” MarketsMedia (March 25, 2014), available at

http://marketsmedia.com/bunched-orders-challenge-sefs/,

(last visited September 22, 2014); “Cleared bunched trades could become mandatory rule,”

Futures and Options World

(October 31, 2013), available at

http://www.fow.com/3273356/Cleared-bunched-trades-could-become-mandatory-rule.html,

(last visited September 22, 2014).

As described in the Regulation SBSR Adopting Release, to execute a bunched order, an asset manager negotiates and executes a security-based swap with a counterparty, typically a security-based swap dealer, on behalf of multiple clients. The bunched order could be executed on- or off-platform. After execution of the bunched order, the asset manager would allocate a fractional amount of the aggregate notional amount of the transaction to each of several clients, thereby creating several new security-based swaps and terminating the bunched order execution.

By executing a bunched order, the asset manager avoids having to negotiate the client-level transactions individually, and obtains exposure for each client on the same terms (except, perhaps, for size).

In aggregate, the notional amount of the security-based swaps that result from the allocation is the same as the notional amount of the executed bunched order.

In the Regulation SBSR Adopting Release, the Commission explained that a bunched order execution and the security-based swaps resulting from the allocation of the bunched order execution, if they are not cleared, must be reported like other security-based swaps. Regulation SBSR provides that the registered SDR to which the initial bunched order execution is reported must disseminate a report of the bunched order execution, including the full notional amount of the transaction. The Commission observed that publicly disseminating bunched order executions in this manner would allow the public to “know the full size of the bunched order execution and that this size was negotiated at a single price.”

Rule 902(c)(7), as adopted, provides that the registered SDR shall not publicly disseminate any information regarding the allocation of a bunched order execution, which would include the smaller security-based swaps resulting from the allocation of the initial transaction as well as the fact that the initial transaction is terminated following this allocation.

Regulation SBSR Adopting Release, Section VIII.

A. Examples

The following examples illustrate how Regulation SBSR would apply to platform-executed bunched order alphas, and security-based swaps that result from allocation of bunched order alphas, if the resulting security-based swaps are cleared. The examples specify which actions are addressed by Regulation SBSR, as adopted, and which actions would be addressed by the new provisions of Regulation SBSR that are being proposed in this release. The Commission notes that the proposed amendments to Rule 901(a) and the conforming changes discussed in Section II,

supra,

would not affect the examples describing the reporting of bunched orders and the security-based swaps that result from their allocation that the Commission provided in the Regulation SBSR Adopting Release. Furthermore, the examples assume that the bunched order alpha would be cleared using the agency model of clearing.

In the case of a bunched order alpha, the final placement of risk will take the form of clearing transactions between: (1) The client accounts of the asset manager and the registered clearing agency that clears the bunched order alpha; and (2) the registered security-based swap dealer and the registered clearing agency.

As noted in Section II(A),

supra,

the agency model of clearing predominates in the United States.

The Commission understands that market participants may use a variety of workflows for allocating a bunched order alpha. Regulation SBSR, as adopted, provides that, regardless of the workflow employed, a bunched order alpha that is executed off-platform shall be reported and publicly disseminated as a single transaction, showing the full notional amount.

The proposed interpretation discussed below would take the same approach to bunched order alphas that are executed on a platform. Regulation SBSR, as adopted, further provides that the security-based swaps that result from allocation of a bunched order execution are subject to regulatory reporting but not public dissemination, if these resulting security-based swaps are uncleared. The proposed interpretation discussed below would take the same approach to cleared security-based swaps that result from the allocation of a bunched order alpha.

See

Regulation SBSR Adopting Release, Section VIII(A).

See

ISDA IV at 10 (recommending that bunched order executions be subject to public dissemination instead of the transactions resulting from the allocation).

1. Example 1: Off-Platform Cleared Transaction

Assume that an asset manager, acting on behalf of several advised accounts, executes a bunched order alpha with a registered security-based swap dealer. The execution does not occur on a platform, and there are no indirect counterparties on either side of the bunched order alpha. The transaction is submitted to a registered clearing agency.

a. Reporting the Bunched Order Alpha

The reporting hierarchy of Rule 901(a)(2)(ii), as adopted, applies to the bunched order alpha because the execution does not occur on a platform and the bunched order alpha is not a clearing transaction. Under Rule 901(a)(2)(ii)(B), as adopted, the registered security-based swap dealer is the reporting side for the bunched order alpha because its side includes the only registered security-based swap dealer. As the reporting side, the registered security-based swap dealer must report the primary and secondary trade information for the bunched order alpha to a registered SDR (the “alpha SDR”) of its choice within 24 hours after the time of execution. Rule 902(a), as adopted, requires the alpha SDR to publicly disseminate a transaction report of the bunched order alpha immediately upon receiving the report from the registered security-based swap dealer.

Pursuant to Rule 906(a), as adopted, the registered SDR also would be required to obtain any missing UICs from the counterparties.

When the registered security-based swap dealer submits the bunched order alpha to a registered clearing agency for clearing, proposed Rule 901(a)(3) would require the registered security-based swap dealer promptly to provide the registered clearing agency with the transaction ID of the bunched order alpha and the identity of the alpha SDR. This requirement would facilitate the registered clearing agency's ability to report whether or not it accepts the bunched order alpha for clearing pursuant to proposed Rule 901(e)(1)(ii).

b. Reporting the Security-Based Swaps Resulting From Allocation

Proposed Rule 901(a)(2)(i) would require the registered clearing agency to report all clearing transactions that arise as a result of clearing the bunched order alpha, regardless of the workflows used to clear the bunched order alpha.

Like other clearing transactions that arise from the acceptance of a security-based swap for clearing, these security-based swaps would not be subject to public dissemination.

See

Rule 902(c)(6).

See also

Rule 902(c)(7) (exempting from public dissemination any “information regarding the allocation of a security-based swap”); Regulation SBSR Adopting Release, Section VI(D)(1) (describing final Rule 902(c)(7)).

If the asset manager provides allocation instructions prior to or contemporaneous with the clearing of the bunched order alpha, clearing could result in the creation of a beta (

i.e.,

the clearing transaction between the registered clearing agency and the security-based swap dealer) and a “gamma series” (

i.e.,

the gammas between the registered clearing agency and each of the client funds selected by the asset manager to receive a portion of the initial notional amount). The beta and each security-based swap that comprises the gamma series would not be treated differently under Regulation SBSR than any other clearing transactions.

See supra

Section II(C)(1) (explaining the reporting process for clearing transactions).

If the asset manager does not provide allocation instructions until after the bunched order alpha is cleared, clearing could result in the creation of a beta (

i.e.,

the clearing transaction between the registered clearing agency and the security-based swap dealer) and an “intermediate gamma” (

i.e.,

the clearing transaction between the clearing agency and the side representing the clients of the asset manager). The beta would be the same—and would be treated the same—as any other clearing transaction, while the intermediate gamma would continue to exist until the registered clearing agency receives the allocation information, which could come from the asset manager or its clearing member and would allow for the creation of the gamma series. As the registered clearing agency receives the allocation information, it would terminate the intermediate gamma and create new security-based swaps as part of the gamma series. The partial terminations of the intermediate gamma would be life cycle events of the intermediate gamma that the registered clearing agency must report under Rule 901(e)(1)(i), as adopted. Rule 901(e)(2), as adopted, would require the registered clearing agency to report these life cycle events to the same registered SDR to which it reported the intermediate gamma. Under proposed Rule 901(a)(2)(i), the registered clearing agency also would be required to report to a registered SDR each new security-based swap comprising part of the gamma series. Because these security-based swaps arise from the termination (or partial termination) of an existing security-based swap (

i.e.,

the gamma series), Rule 901(d)(10), as adopted, requires the registered clearing agency to link each new transaction in the gamma series to the intermediate gamma by including the transaction ID of the intermediate gamma as part of the report of each new security-based swap in the gamma series.

2. Example 2: Cleared Platform Transaction

Assume the same facts as Example 1, except that the registered security-based swap dealer and asset manager execute the bunched order alpha on a SB SEF.

a. Reporting the Bunched Order Alpha

Because the initial transaction is executed on a platform and will be submitted to clearing, the platform would have the duty, under proposed Rule 901(a)(1), to report the bunched order alpha to a registered SDR. To satisfy this reporting obligation, the platform would be required to provide all of the applicable information required by proposed Rule 901(a)(1). Commission staff understands from discussions with market participants that, even if the platform does not know and thus cannot report the counterparty IDs of each account that will receive an allocation, the platform would know the identity of the execution agent who executed the bunched order alpha on behalf of its advised accounts. The platform, therefore, could report the execution agent ID of the execution agent, even though it might not know the intended counterparties of the security-based swaps that will result from the allocation.

Rule 902(a), as adopted, requires the registered SDR that receives the report of the bunched order alpha from the platform to publicly disseminate a report of the bunched order alpha. Then, pursuant to Rule 906(a), as adopted, the registered SDR would be required to obtain any missing UICs from its participants.

See

Rule 901(d)(1) (requiring reporting of the counterparty ID “or the execution agent ID of each counterparty, if applicable”). If the counterparties—

i.e.,

the specific accounts who will receive allocations—are not yet known, the requirement to report the execution agent ID instead of the counterparty ID would apply. Similarly, if the asset manager uses an execution agent to access the platform, the platform would report the identity of the asset manager's execution agent.

b. Reporting the Security-Based Swaps Resulting From Allocation

If the asset manager provides allocation instructions prior to or contemporaneous with the clearing of the bunched order alpha, clearing would (under the agency model of clearing) result in the creation of a beta (

i.e.,

the clearing transaction between the registered clearing agency and the registered security-based swap dealer)

and a “gamma series” (

i.e.,

the gammas between the clearing agency and each of the asset manager's clients). The beta and each security-based swap that comprises the gamma series would be no different—and would not be treated differently under Regulation SBSR—from other clearing transactions.

See supra

Section II(C)(1) (explaining the reporting process for clearing transactions).

If the asset manager does not provide allocation instructions until after the bunched order alpha is cleared, clearing (under the agency model) would result in the creation of a beta (between the registered clearing agency and the security-based swap dealer) and an intermediate gamma (between the registered clearing agency and the side representing the clients of the asset manager). The registered clearing agency would then be required to report the termination of the bunched order alpha and the creation of the beta and intermediate gamma, pursuant to proposed Rules 901(e)(1)(ii) and 901(a)(2)(i), respectively. From this point on, the beta would be treated the same as any other clearing transaction, while the intermediate gamma would be decremented and replaced by the gamma series, as described in Example 1.

B. Request for Comment

The Commission requests comment on all aspects of its preliminary views regarding how the proposed amendments to Regulation SBSR would apply to various allocation scenarios involving cleared security-based swaps.

21. Is the Commission's discussion of how Regulation SBSR—under the amendments proposed in this release—would apply to different steps in the process for reporting the betas and gammas that result from clearing a bunched order alpha sufficiently clear and complete? If not, please provide detail about particular steps that you believe the Commission has not adequately addressed and how you believe they should be treated under Regulation SBSR.

22. Are there additional processes or workflows related to the clearing of bunched order alphas for which market participants need guidance? If so, please describe these situations and your recommendation for how Regulation SBSR should address them.

23. Do asset managers identify the clients that will receive allocations from a bunched order alpha before the bunched order alpha is submitted to clearing? If so, when is allocation of the bunched order alpha complete? If the bunched order alpha is allocated prior to clearing, would the information provided to the registered clearing agency allow the registered clearing agency to recognize that it is clearing a bunched order alpha? If a registered clearing agency is unable to recognize that it is clearing a bunched order alpha, would the registered clearing agency be able to fulfill its reporting duties under the proposed amendments to Regulation SBSR?

IV. Reporting and Public Dissemination of Prime Brokerage Transactions

Commission staff understands from discussions with market participants that, under a prime brokerage arrangement, a customer of a prime broker will negotiate and agree to the economic terms of a security-based swap with a registered security-based swap dealer (the “executing dealer”) but both the customer and the executing dealer ultimately will face the prime broker, rather than each other.

Before negotiating with one or more executing dealers, the customer will first enter into a prime brokerage arrangement with a prime broker.

The terms of this arrangement typically will, among other things, set out the types of transactions eligible for prime brokerage treatment, enumerate the executing dealers with whom the customer may negotiate, and establish terms for the credit support and other transaction-related services provided by the prime broker to the customer. A prime brokerage arrangement allows a customer to negotiate transactions with a range of executing dealers without having to negotiate credit documentation with each dealer individually. This is because both the customer and the executing dealer know that the transaction between them will be replaced by separate transactions between each of them and the prime broker, thus obviating the need for credit documentation between the two original counterparties.

See

The Financial Markets Lawyers Group, CFTC No-Action Letter No. 12-53 at 2-3 (December 17, 2012) (“CFTC NAL No. 12-53”); Division of Swap Dealer and Intermediary Oversight, CFTC No-Action Letter at 3-4 (April 30, 2013) (“CFTC NAL No. 13-11”). These no-action letters describe the CFTC's understanding of prime brokerage arrangements in the swap market. It is the Commission's understanding that prime brokerage arrangements in the security-based swap market are similar to those in the swap market.

For purposes of this release, the Commission assumes that both the prime broker and the executing dealer would be registered security-based swap dealers.

The agreement between the customer and the executing dealer would constitute a contract for the sale of a security for purposes of the federal securities laws.

See

Securities Offering Reform, Securities Act Release No. 33-8591 (July 19, 2005), 70 FR 44722, 44767 (August 3, 2005) (discussing the determination of the time of sale with respect to a contract of sale for securities and noting that “a contract of sale under the federal securities laws can occur before there is an unconditional bilateral contract under state law”).

Through the prime brokerage arrangement, the prime broker permits the customer to negotiate and agree to the terms of security-based swaps with approved executing dealers, subject to specified limits and parameters.

If the terms of the transaction agreed to by the customer and the executing dealer are within those parameters, the prime broker would replace the initial transaction between the customer and the executing dealer with two separate transactions—one between the prime broker and the customer and the second between the prime broker and the executing dealer—having substantially the same terms as the original transaction between the customer and the executing dealer. Thus, a prime brokerage arrangement in the security-based swap market typically results in the following three transactions:

See

ISDA, 2005 Master Give-Up Agreement (providing standard terms that market participants can use to document prime brokerage arrangements).

See also

CFTC NAL No. 12-53,

supra

note 93, at 2-3 (describing a typical prime brokerage arrangement in the swap market).

•

Transaction 1.

The customer and the executing dealer negotiate and agree to the terms of a security-based swap transaction (the “customer/executing dealer transaction”) and notify the prime broker of these terms.

•

Transaction 2.

The prime broker will accept the transaction and face the executing dealer in a security-based swap with the same economic terms agreed to by the executing dealer and the customer, if the terms are within the parameters established by the prime brokerage arrangement (the “prime broker/executing dealer transaction”).

•

Transaction 3.

Upon executing the security-based swap with the executing dealer, the prime broker will enter into an offsetting security-based swap with the customer (the “prime broker/customer transaction”).

See

CFTC NAL No. 12-53,

supra

note 93, at 2-3; CFTC NAL No. 13-11,

supra

note 93, at 3-4 (describing typical prime brokerage arrangements in the swap market).

A. Application of Regulation SBSR as Adopted to Prime Brokerage Transactions

The Commission understands that prime brokerage arrangements involve credit intermediation offered by the prime broker, rather than a registered clearing agency. Thus, prime brokerage transactions are not cleared. Therefore, Rule 901(a)(2)(ii), as adopted, assigns the reporting duty for Transaction 1,

because Transaction 1 is not a clearing transaction.

If the prime broker determines that Transaction 1 meets the terms of the prime brokerage arrangement, the prime broker would initiate Transactions 2 and 3, which would have the effect of terminating Transaction 1. The termination would be a life cycle event of Transaction 1, and the reporting side for Transaction 1 (likely the executing dealer) would be required by Rule 901(e)(i), as adopted, to report the life cycle event to the same SDR to which it reported the transaction initially.

If the reporting side for Transaction1 did not report whether Transaction 1 was terminated, the Commission and market observers might incorrectly conclude that the counterparties to Transaction 1 (the customer and executing dealer) continue to have exposure to each other.

If the prime broker determines that Transaction 1 does not meet the terms of the prime brokerage arrangement, the executing dealer also would be required to report this fact to the registered SDR to which it reported the transaction initially pursuant to Rule 901(e)(2), as adopted. Rule 901(e)(2) requires, in relevant part, reporting a life cycle event to the entity to which the original security-based swap was reported. Pursuant to commonly used industry documentation for prime brokerage trades, the rejection by the prime broker could cause the initial transaction to be void or, in some cases, the customer and executing dealer could agree to revise their initial agreement and preserve their contract without the involvement of the prime broker.

See

ISDA, 2005 ISDA Compensation Agreement, at Section 2. In either case, a life cycle event of Transaction 1 would result, because the terms of Transaction 1 would change.

Transactions 2 and 3 (

i.e.,

the prime broker/executing dealer transaction and the prime broker/customer transaction, respectively) also are security-based swaps that must be reported pursuant to Rule 901(a)(2)(ii), as adopted. Because both sides of Transaction 2 likely include a registered security-based swap dealer, the sides are required to select the reporting side. In the case of Transaction 3, however, the prime broker is likely to be the only registered security-based swap dealer involved in the transaction, in which case the prime broker would be the reporting side.

Furthermore, because each of these transactions is a security-based swap that arises from the termination of another security-based swap (

i.e.,

the Transaction 1), Rule 901(d)(10), as adopted, requires the reporting of Transaction 1's transaction ID as part of the secondary trade information for both Transaction 2 and Transaction 3. As the Commission stated in the Regulation SBSR Adopting Release, Rule 901(d)(10) is designed to ensure that the Commission and other relevant authorities have an accurate picture of counterparty exposures. In the case of prime brokerage transactions, Rule 901(d)(10) should enable the Commission and other relevant authorities to link the three prime brokerage transactions together for surveillance purposes and to identify the parties that ultimately assume the risks of these transactions.

If, however, both sides of Transaction 3 include a registered security-based swap dealer, the sides would be required to select the reporting side. One commenter recommended that, in accordance with current industry practice under the CFTC rules, Regulation SBSR assign the reporting duty for the prime broker/executing broker transaction (Transaction 2) to the executing broker, and responsibility for reporting the prime broker/client transaction (Transaction 3) to the prime broker.

See

ISDA IV at 5. Under the application of the rules as adopted, as just discussed, if both sides of the prime broker/executing broker transaction include a registered security-based swap dealer, the sides are required to choose who has the reporting duty and can choose the executing broker. Likewise, with respect to the prime broker/client transaction, it is likely that the prime broker is the only registered security-based swap dealer involved in the transaction, and thus application of the reporting hierarchy would result in the side with the prime broker being the reporting side.

Rule 902(a), as adopted, requires public dissemination of each security-based swap, unless it falls within a category enumerated in Rule 902(c). Each prime brokerage transaction (

i.e.,

the customer/executing dealer transaction, the prime broker/executing dealer transaction, and the prime broker/customer transaction) is subject to Rule 902(a). The statutory provisions relating to the reporting of security-based swap transactions state that “each” security-based swap shall be reported; these statutory provisions do not by their terms limit the reporting requirement to transactions having particular characteristics,

100

and Rule 902(c), as adopted, does not contain an exclusion from public dissemination for prime brokerage transactions.

100

See

Section 13(m)(1)(G) of the Exchange Act, 15 U.S.C. 78m(m)(1)(G).

One commenter requested that the Commission exempt the prime broker/customer leg of a prime broker transaction from public dissemination, stating its belief that dissemination of this transaction would not increase price transparency, and a concern that dissemination of this transaction may confuse the market and undermine the value of the data made public.

101

The Commission believes that publicly disseminating reports of prime brokerage transactions could provide market observers with useful information about the cost of the prime broker's credit intermediation services, because prime brokers may charge for these services by pricing Transaction 2 or 3 differently than Transaction 1. This differentiates Transactions 2 and 3 from clearing transactions that are excepted from public dissemination under Rule 902(c)(6), because a registered clearing agency is compensated for its credit intermediation services through clearing fees that are publicly disclosed. With prime brokerage transactions, however, the only mechanism for ascertaining the charge for the credit intermediation service offered by the prime broker would be to compare the prices of Transaction 1 with the prices of the two subsequent transactions. Thus, market observers could discern useful information by comparing reports of the related prime brokerage transactions, and the Commission does not believe at this time that an exception from public dissemination is warranted for any prime brokerage transactions. If a report of each prime brokerage transaction is publicly disseminated, price discovery would be enhanced. The published transaction reports would be required to consist of all the information reported pursuant to Rule 901(c), as adopted, plus any condition flags required by the registered SDR's policies and procedures, such as a flag indicating that the three transactions are related.

101

See

ISDA IV at 13.

Rule 907(a)(4), as adopted, requires each registered SDR to establish and maintain written policies and procedures for, among other things, establishing flags to denote special characteristics of a security-based swap, or special circumstances associated with the execution or reporting of a security-based swap. Rules 907(a)(4)(i) and (ii) require the registered SDR to identify those characteristics or circumstances that could, in the fair and reasonable estimation of the registered SDR, cause a person without knowledge of those characteristic(s) or circumstance(s), to receive a distorted view of the market and establish flags to denote such characteristic(s) or circumstance(s). In the Regulation SBSR Adopting Release, the Commission noted several conditions that registered SDRs generally should consider including in their list of condition flags.

102

The fact that all three transactions in a prime brokerage arrangement are related, the Commission generally believes, is a special circumstance of the type that registered SDRs should consider in developing the condition flags required by Rule 907(a)(4). Absent such flags, market observers might interpret the three transaction reports as three separate pricing events and incorrectly infer the existence of more market

activity than actually exists, which could distort their view of the market.

102

See

Regulation SBSR Adopting Release, Section VII(G).

B. Example of Application of the Adopted Rules

The following example explains how Regulation SBSR, as adopted, would apply to the steps in a prime brokerage transaction described above. For purposes of this example, assume that the customer is a private fund and both the executing dealer and the prime broker are registered security-based swap dealers.

103

One commenter requested that Regulation SBSR specify that the time of execution for the prime broker/executing dealer transaction is the time of commitment to economic terms with the prime broker's client, and that for the prime broker/customer transaction, the prime broker may use the time of acceptance as the time of execution for reporting purposes.

See

ISDA IV at 9. The Commission notes that the time of execution for all security-based swaps is defined in Rule 900(ii), as adopted, as the point at which the counterparties to a security-based swap become irrevocably bound under applicable law.

See

Regulation SBSR Adopting Release, Section II(A)(2)(c). The Commission sees no reason at this time to have a different standard for prime brokerage transactions.

Transaction 1: The Customer/Executing Dealer Transaction

• The executing dealer would be the reporting side under Rule 901(a)(2)(ii) and would be required to report the customer/executing dealer transaction (Transaction 1) to a registered SDR.

104

See

Rule 901(a)(2)(ii)(B) (“If only one side of the security-based swap includes a registered security-based swap dealer, that side shall be the reporting side”).

• The executing dealer would have up to 24 hours after the time of execution to report to the registered SDR the applicable primary and secondary trade information of Transaction 1.

• Immediately upon receiving the report of Transaction 1, the registered SDR would be required to publicly disseminate a transaction report with all the information required by Rule 902(a).

• When the customer and the executing dealer agree to the terms of Transaction 1, each party would typically report the terms to the prime broker. The Commission understands that, if the terms of Transaction 1 fall within the prime brokerage arrangement, the prime broker would be obligated to face the executing dealer with substantially the same terms agreed upon by the customer and the executing dealer in Transaction 1.

• If the prime broker determines that Transaction 1 meets the terms of the prime brokerage arrangement and accepts the transaction, Transaction 1 would terminate. The executing dealer, as the reporting side for Transaction 1, would be required to report this life cycle event pursuant to Rule 901(e), as adopted, to the same registered SDR that received the initial report of Transaction 1. Immediately upon receiving this report, the registered SDR would be required to publicly disseminate the termination information.

• If the prime broker does not accept the terms agreed to by the customer and executing dealer, the executing dealer, in its capacity as reporting side for Transaction 1, would notify the registered SDR that the prime broker had rejected the transaction pursuant to Rule 901(e)(1)(i), as adopted.

Transaction 2: The Prime Broker/Executing Dealer Transaction

• The executing dealer and prime broker would enter into a prime broker/executing dealer transaction (Transaction 2).

• The prime broker and executing dealer would be required by Rule 901(a)(2)(ii)(A), as adopted, to select the side that would be the reporting side for Transaction 2.

• The reporting side of Transaction 2 would have up to 24 hours after the time of execution to report to the registered SDR the applicable primary and secondary trade information of the transaction. Because Transaction 2 arises from the termination, novation, or assignment of Transaction 1, the reporting side of Transaction 2 would need to report the transaction ID of Transaction 1 pursuant to Rule 901(d)(10), as adopted.

105

If the executing dealer is the reporting side for both Transaction 1 and Transaction 2, the executing dealer will know the transaction ID of Transaction 1 and can include it in the report of Transaction 2. However, if the prime broker is the reporting side for Transaction 2, the Commission anticipates that the prime broker will obtain from the executing dealer the transaction ID of Transaction 1, along with all of the other information regarding Transaction 1 that will permit the prime broker to determine whether to accept Transaction 1.

• Immediately upon receiving the report of Transaction 2, the registered SDR would be required to publicly disseminate a transaction report with all the information required by Rule 902(a) and with any flags required by the registered SDR's policies and procedures under Rule 907.

Transaction 3: The Prime Broker/Customer Transaction

• The prime broker would execute the prime broker/customer transaction (Transaction 3) to “step into” the position that the executing dealer established against the customer in Transaction 1.

• The prime broker would be the reporting side for Transaction 3 under Rule 901(a)(2)(ii), as adopted.

106

See

Rule 901(a)(2)(ii)(B) (“If only one side of the security-based swap includes a registered security-based swap dealer, that side shall be the reporting side”).

• The prime broker would have up to 24 hours after the time of execution to report to the registered SDR the applicable primary and secondary trade information of Transaction 3. Because Transaction 3 arises from the termination, novation, or assignment of Transaction 1, the prime broker would need to report the transaction ID of Transaction 1 as part of the report of Transaction 3, pursuant to Rule 901(d)(10), as adopted.

107

The Commission anticipates that the prime broker (the reporting side for Transaction 3) will obtain the transaction ID of Transaction 1 from the executing dealer.

See supra

note 104 and associated text.

• Immediately upon receiving the report of Transaction 3, the registered SDR would be required to publicly disseminate a transaction report with all the information required by Rule 902(a) and with any flags required by the registered SDR's policies and procedures under Rule 907.

C. Request for Comment

The Commission requests comment on its discussion above of the application of Regulation SBSR to security-based swaps that are part of a prime brokerage arrangement. In particular:

24. Does the description of prime brokerage arrangements above adequately describe prime brokerage arrangements in the security-based swap market? Do market participants employ other types of prime brokerage arrangements? If so, how do these prime brokerage arrangements differ from the arrangements discussed above?

25. Should the prime broker/customer and/or prime broker/executing dealer transactions be exempted from public dissemination? Why or why not?

26. Would market observers benefit from being able to observe any difference in price between the customer/executing dealer transaction and the prime broker/customer and prime broker/executing dealer transactions?

27. Should public reports of related prime brokerage transactions include condition flags to indicate a relationship between the transactions? Would a market participant receive a distorted view of the market if condition flags are not used? Why or why not?

28. Rule 901(e), as adopted, requires the executing dealer to report the termination of the customer/executing dealer transaction, because the executing dealer was the reporting side of that transaction. Should the duty to report the termination of the customer/

executing dealer transaction be shifted to the prime broker? Why or why not? As between the executing dealer and the prime broker, which person do you believe is better placed to report the termination? Why?

29. Should the time of execution for any leg of a prime brokerage transaction be defined differently than as provided for in Rule 900(ii)? If so, why?

V. Additional Proposed Amendments

A. Amendments to Rule 905(a)

Rule 905(a), as adopted, establishes a mechanism for reporting corrections of previously submitted security-based swap transaction information. Rule 905(a) applies to any counterparty to a security-based swap that discovers an error in the information reported with respect to that security-based swap. Under Rule 905(a)(1), as adopted, if the non-reporting side discovers the error, the non-reporting side must promptly notify the reporting side of the error. Under Rule 905(a)(2), as adopted, once the reporting side receives notification of the error from the non-reporting side, or if the reporting side discovers the error on its own, the reporting side must promptly submit an amended report—containing the corrected information—to the registered SDR that received the erroneous transaction report. The reporting side must submit the report required by Rule 905(a) in a manner consistent with the policies and procedures of the registered SDR.

As discussed in Section II,

supra,

the Commission is proposing to amend Rule 901(a) to require a platform to report a security-based swap that is executed on the platform and that will be submitted to clearing. Accordingly, to preserve the principle in adopted Rule 905(a) that the person responsible for reporting a security-based swap also should be responsible for submitting a correction if it discovers an error, the Commission is proposing a conforming amendment to Rule 905(a) to account for the possibility that a person who is not a counterparty and is thus not on either side

108

of the transaction (

i.e.,

a platform) could have the original duty to report the transaction. Thus, under the proposed amendment to Rule 905(a)(1), a non-reporting side that discovers an error in the information reported with respect to a security-based swap would be required to promptly notify “the person having the duty to report” that security-based swap of the error. The Commission is proposing a similar change to Rule 905(a)(2). Under the proposed amendment to Rule 905(a)(2), the person having the duty to report a security-based swap, whether a side or a platform, would be required to correct previously reported erroneous information with respect to that security-based swap if it discovers an error or if it receives notification of an error from a counterparty.

108

Under Rule 900(hh), as adopted, a “side” is a direct counterparty and any guarantor of that direct counterparty's performance who meets the definition of “indirect counterparty” in connection with the security-based swap. Under the proposed amendments described above, there would be no “reporting side” for a security-based swap for a platform-executed security-based swap that is submitted to clearing. While the platform would have the duty to report, it would not be a counterparty to the security-based swap and thus would not be a side. Furthermore, neither side would have the duty to report, and thus both sides would be non-reporting sides.

B. Amendments to Rules 906(b) and 907(a)(6)

Under the proposed amendment to Rule 900(u) described above,

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the definition of “participant” would be expanded to include platforms that are required to report platform-executed security-based swaps that are submitted to clearing and registered clearing agencies that are required to report whether or not an alpha is accepted for clearing. Rule 906(b), as adopted, requires each participant of a registered SDR to provide the registered SDR information sufficient to identify any affiliate(s) of the participant that also are participants of the registered SDR and any ultimate parent(s) of the participant.

110

By itself, the proposed amendment to Rule 900(u) would subject platforms and registered clearing agencies that are required to report whether or not they accept alpha transactions for clearing to the requirements of Rule 906(b).

111

109

See supra

Section II(B)(3).

110

See

Regulation SBSR Adopting Release, Section XIII(B).

111

The Commission notes that proposed Rule 901(a)(2)(i) and the proposed amendment to Rule 908(b) would have the effect of making a registered clearing agency a participant—under Rule 900(u), as adopted—of any registered SDR to which it reports clearing transactions. Under Rule 900(u), as adopted, a counterparty of a security-based swap that is reported to a registered SDR becomes a participant of that registered SDR (assuming that the counterparty also falls within Rule 908(b), as adopted). The proposed amendment to the definition of “participant” also would make a registered clearing agency a participant of any alpha SDR to which it would be required to report whether it had accepted the alpha for clearing.

The Commission preliminarily believes that the purposes of Rule 906(b)—namely, facilitating the Commission's ability to measure derivatives exposure within the same ownership group—would not be advanced by requiring platforms and registered clearing agencies to report parent and affiliate information to a registered SDR. To the extent that a platform has an affiliate that transacts in security-based swaps, the positions of any such affiliate can be derived from other transaction reports indicating that affiliate as a counterparty. There would be no need for the Commission to aggregate the platform's positions with those of its affiliates, because a platform would not assume any position in security-based swaps executed on its facilities. Furthermore, the risk management of a registered clearing agency is directly overseen by the Commission, and the Commission believes that it has adequate tools to carry out this function without subjecting the registered clearing agency to Rule 906(b). Accordingly, the Commission proposes to amend Rule 906(b) to state that reporting obligations under Rule 906(b) do not apply to participants that are platforms or registered clearing agencies.

The Commission proposes to make a similar amendment to Rule 907(a)(6). This rule, as adopted, requires a registered SDR to have policies and procedures “[f]or periodically obtaining from each participant information that identifies the participant's ultimate parent(s) and any participant(s) with which the participant is affiliated, using ultimate parent IDs and counterparty IDs.” The Commission proposes to amend Rule 907(a)(6) to require a registered SDR to obtain this information only from a participant that is not a platform or a registered clearing agency. Thus, under the proposed amendment, Rule 907(a)(6) would require registered SDR to have policies and procedures “[f]or periodically obtaining from each participant other than a platform or a registered clearing agency information that identifies the participant's ultimate parent(s) and any participant(s) with which the participant is affiliated, using ultimate parent IDs and counterparty IDs.”

112

The Commission notes that, once a participant reports parent and affiliate information to a registered SDR, Rule 906(b) requires the participant to “promptly notify the registered [SDR] of any changes” to its parent and affiliate information.

C. Extending the Applicability of Rule 906(c)

Rule 906(c), as adopted, requires each participant of a registered SDR that is a registered security-based swap dealer or registered major security-based swap participant to establish, maintain, and enforce written policies and procedures that are reasonably designed to ensure that the participant complies with any obligations to report information to a registered SDR in a manner consistent with Regulation SBSR. As the

Commission stated in the Regulation SBSR Adopting Release, the policies and procedures required by Rule 906(c) are intended to promote complete and accurate reporting of security-based swap information by SDR participants that are registered security-based swap dealers or registered major security-based swap participants.

113

Rule 906(c) also requires each registered security-based swap dealer and registered major security-based swap participant to review and update its policies and procedures at least annually.

113

See

Regulation SBSR Adopting Release, Section XIII(C).

Because the Commission is proposing amendments to Rule 901(a) to assign reporting obligations to platforms and registered clearing agencies, the Commission preliminarily believes that such registered clearing agencies and platforms, like registered security-based swap dealers and major security-based swap participants, should be required to establish and maintain written policies and procedures designed to promote compliance with their reporting obligations. Accordingly, the Commission proposes to amend Rule 906(c) to extend the requirements of Rule 906(c) to registered clearing agencies and platforms that are participants of a registered SDR.

The Commission preliminarily believes that the proposed amendment to Rule 906(c) should result in greater accuracy and completeness of the security-based swap transaction data reported to registered SDRs. Without written policies and procedures, compliance with reporting obligations might depend too heavily on key individuals or unreliable processes. For example, if knowledge of the reporting function was not reflected in written policies and procedures but existed solely in the memories of one or a few individuals, compliance with applicable reporting requirements by the firm might suffer if these key individuals depart the firm. The Commission preliminarily believes, therefore, that requiring participants that are platforms and registered clearing agencies to establish, maintain, and enforce written policies and procedures should promote clear, reliable reporting that can continue independent of any specific individuals. The Commission further believes that requiring such participants to establish, maintain, and enforce written policies and procedures relevant to their reporting responsibilities, as would be required by the proposed amendment to Rule 906(c), would help to improve the degree and quality of overall compliance with the reporting requirements of Regulation SBSR.

D. Rule 908(b)—Limitations on Counterparty Reporting Obligations

Rule 908(b) is designed to help further the cross-border application of Regulation SBSR by specifying what types of counterparties would and would not be subject to any duties under Regulation SBSR. Rule 908(b), as adopted, provides that “[n]otwithstanding any other provision of [Regulation SBSR], a person shall not incur any obligation under [Regulation SBSR] unless it is: (1) A U.S. person; or (2) A registered security-based swap dealer or registered major security-based swap participant.” Thus, unregistered non-U.S. persons are not among the kinds of persons listed in Rule 908(b) as having any duties under Regulation SBSR.

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In the Regulation SBSR Adopting Release, however, the Commission stated that it anticipates soliciting additional public comment on whether regulatory reporting and/or public dissemination requirements should be extended to transactions occurring within the United States between non-U.S. persons and which non-U.S. persons should incur reporting duties under Regulation SBSR.

See

Regulation SBSR Adopting Release, Section XV(D).

Under the proposed amendments described above, platforms and registered clearing agencies would have the duty to report security-based swap transactions to registered SDRs in certain circumstances. Under Rule 908(b), as adopted, U.S. persons are among the types of persons that may incur duties under Regulation SBSR. Therefore, platforms and registered clearing agencies that are U.S. persons already fall within Rule 908(b). The Commission preliminarily believes that all platforms and registered clearing agencies should incur the duties specified in the proposed amendments to Rule 901(a),

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even if they are not U.S. persons. If the Commission does not propose to amend Rule 908(b) to include all platforms and registered clearing agencies, non-U.S.-person platforms and registered clearing agencies would be able to avoid duties to which U.S.-person platforms and registered clearing agencies would be subject. Therefore, the Commission proposes to amend Rule 908(b) to specifically include platforms and registered clearing agencies as entities that may incur duties under Regulation SBSR. Rule 908(b), as amended, would provide: “Notwithstanding any other provision of [Regulation SBSR], a person shall not incur any obligation under [Regulation SBSR] unless it is: (1) A U.S. person; (2) A registered security-based swap dealer or registered major security-based swap participant; (3) A platform; or (4) A registered clearing agency.”

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See supra

Section II(B).

E. Request for Comment

The Commission requests comment on all aspects of the proposed amendments to Rules 905, 906(b), 906(c), 907(a)(6), and 908 described above. In particular:

30. Do you believe that Rule 905(a) should be amended to include platforms? Why or why not? Would any other conforming changes to Rule 905 be advisable on account of the proposal to extend reporting duties to platforms?

31. Do you agree with the Commission's proposal to exclude platforms and registered clearing agencies from Rule 906(b)? Why or why not?

32. Should Rule 906(c) be expanded to include platforms and registered clearing agencies? Why or why not?

33. Do you agree with the proposed conforming amendment to Rule 908(b) to include platforms and registered clearing agencies? Why or why not?

34. Do you believe any other conforming amendments to Regulation SBSR are necessary or desirable in light of the Commission's proposal to extend reporting duties to platforms and registered clearing agencies as discussed above? If so, please describe.

VI. Proposed Rule Prohibiting a Registered SDR From Charging Fees for or Imposing Usage Restrictions on Publicly Disseminated Data

A. Background

In addition to implementing the Title VII mandate for regulatory reporting of all security-based swaps, Regulation SBSR also implements the Title VII mandate for public dissemination of all security-based swaps. Section 13(m)(1)(B) of the Exchange Act

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authorizes the Commission “to make security-based swap transaction and pricing data available to the public in such form and at such times as the Commission determines appropriate to enhance price discovery.” Section 13(m)(1)(C) of the Exchange Act

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identifies four categories of secu

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