Security-Based Swap Data Repository Registration, Duties, and Core Principles

Federal RegisterMar 19, 2015

Ask Donna

What actually matters in this document.

Text

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 232, 240, and 249

[Release No. 34-74246; File No. S7-35-10]

RIN 3235-AK79

Security-Based Swap Data Repository Registration, Duties, and Core Principles

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

Pursuant to Section 763(i) of Title VII (“Title VII”) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), the Securities and Exchange Commission (“Commission”) is adopting new rules under the Securities Exchange Act of 1934 (“Exchange Act”) governing the security-based swap data repository (“SDR”) registration process, duties, and core principles. The Commission is also adopting a new registration form. Additionally, the Commission is amending several of its existing rules and regulations in order to accommodate SDRs. First, the Commission is amending Regulation S-T and Exchange Act Rule 24b-2 to clarify that all filings by SDRs, including any confidential portion, and their requests for confidential treatment must be filed electronically. Second, the Commission is amending Regulation S-T by, among other things, adding a new rule that specifically applies to the electronic filing of SDRs' financial reports.

DATES:

Effective Date:

May 18, 2015.

Compliance Date:

March 18, 2016.

FOR FURTHER INFORMATION CONTACT:

Paula Jenson, Acting Chief Counsel; Jo Anne Swindler, Assistant Director; Richard Vorosmarti, Branch Chief; Angie Le, Special Counsel; or Kevin Schopp, Special Counsel, Division of Trading and Markets, at (202) 551-5750, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. For questions regarding the SDR registration process, please contact Jeffrey Mooney, Assistant Director, Stephanie Park, Senior Special Counsel, Andrew Shanbrom, Special Counsel, or Elizabeth Fitzgerald, Special Counsel, Division of Trading and Markets, at (202) 551-5710.

SUPPLEMENTARY INFORMATION:

The Commission is taking several actions. First, the Commission is adopting Rules 13n-1 to 13n-12 (“SDR Rules”) under the Exchange Act governing SDRs and a new form for registration as a security-based swap data repository (“Form SDR”). Second, the Commission is adopting technical amendments to Regulation S-T and Exchange Act Rule 24b-2 to clarify that all filings by SDRs, including any confidential portion, and their requests for confidential treatment must be filed electronically. Third, the Commission is amending Regulation S-T, including adopting new Rule 407, as a technical amendment related to Rule 13n-11, which is applicable to the electronic filing of SDRs' financial reports.

Table of Contents

I. Introduction

A. Proposed Rules Governing the SDR Registration Process, Duties, and Core Principles, and Form SDR

B. Related Commission Actions

C. Public Comment

D. Other Initiatives Considered in This Rulemaking

II. Broad Economic Considerations and Baseline

A. Broad Economic Considerations

B. Baseline

1. Transparency in the SBS Market

2. Current Security-Based Swap Market

a. Security-Based Swap Market Participants

b. Security-Based Swap Data Repositories

III. Definition, Scope of Registration, Services, and Business Models of SDRs

A. Definition of SDR: Core Services

B. SDRs Required to Register With the Commission

C. Ancillary Services

D. Business Models of SDRs

IV. Number of SDRs and Consolidation of SBS Data

V. Implementation of the SDR Rules

A. Prior Commission Action

1. Effective Date Order

2. Implementation Policy Statement

B. Summary of Comments

C. Sequenced Effective Date and Compliance Date for the SDR Rules

VI. Discussion of Rules Governing SDRs

A. Registration of SDRs (Rule 13n-1 and Form SDR)

1. New Form SDR; Electronic Filing

a. Proposed Form SDR

b. Comments on Proposed Form SDR

c. Final Form SDR

2. Factors for Approval of Registration and Procedural Process for Review (Rule 13n-1(c))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

3. Temporary Registration (Rule 13n-1(d))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

4. Amendment on Form SDR (Proposed Rule 13n-1(e)/Final Rule 13n-1(d))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

5. Service of Process and Non-Resident SDRs (Proposed Rules 13n-1(f) and 13n-1(g)/Final Rules 13n-1(e) and 13n-1(f))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

6. Definition of “Report” (Proposed Rule 13n-1(h)/Final Rule 13n-1(g))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

B. Withdrawal From Registration; Revocation and Cancellation (Rule 13n-2)

1. Proposed Rule

2. Comments on the Proposed Rule

3. Final Rule

C. Registration of Successor to Registered SDR (Rule 13n-3)

1. Proposed Rule

2. Comments on the Proposed Rule

3. Final Rule

a. Succession by Application

b. Succession by Amendment

c. Scope and Applicability of Rule 13n-3

D. Enumerated Duties and Core Principles (Rule 13n-4)

1. Definitions (Rule 13n-4(a))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

2. Enumerated Duties (Rule 13n-4(b))

a. Proposed Rule

b. Comments on the Proposed Rule

i. Inspection and Examination

ii. Direct Electronic Access

iii. Monitoring, Screening, and Analysis

iv. Other Enumerated Duties

c. Final Rule

i. Inspection and Examination

ii. Direct Electronic Access

iii. Monitoring, Screening, and Analysis

3. Implementation of Core Principles (Rule 13n-4(c))

a. First Core Principle: Market Access to Services and Data (Rule 13n-4(c)(1))

i. Proposed Rule

ii. Comments on the Proposed Rule

(1) Rule 13n-4(c)(1)(i): Fair, Reasonable, and Not Unreasonably Discriminatory Dues, Fees, Other Charges, Discounts, and Rebates

(2) Rule 13n-4(c)(1)(ii): Offering Services Separately

(3) Rule 13n-4(c)(1)(iii): Fair, Open, and Not Unreasonably Discriminatory Access

(4) Rule 13n-4(c)(1)(iv): Prohibited or Limited Access

iii. Final Rule

(1) Rule 13n-4(c)(1)(i): Fair, Reasonable, and Not Unreasonably Discriminatory Dues, Fees, Other Charges, Discounts, and Rebates

(2) Rule 13n-4(c)(1)(ii): Offering Services Separately

(3) Rule 13n-4(c)(1)(iii): Fair, Open, and Not Unreasonably Discriminatory Access

(4) Rule 13n-4(c)(1)(iv): Prohibited or Limited Access

b. Second Core Principle: Governance Arrangements (Rule 13n-4(c)(2))

i. Proposed Rule

ii. Comments on the Proposed Rule

iii. Final Rule

c. Third Core Principle: Rules and Procedures for Minimizing and Resolving Conflicts of Interest (Rule 13n-4(c)(3))

i. Proposed Rule

ii. Comments on the Proposed Rule

iii. Final Rule

4. Indemnification Exemption (Rule 13n-4(d))

E. Data Collection and Maintenance (Rule 13n-5)

1. Transaction Data (Rule 13n-5(b)(1))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

2. Positions (Rule 13n-5(b)(2))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

3. Maintain Accurate Data (Rule 13n-5(b)(3))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

4. Data Retention (Rule 13n-5(b)(4))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

5. Controls to Prevent Invalidation (Rule 13n-5(b)(5))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

6. Dispute Resolution Procedures (Rule 13n-5(b)(6))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

7. Data Preservation After an SDR Ceases To Do Business (Rule 13n-5(b)(7))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

8. Plan for Data Preservation (Rule 13n-5(b)(8))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

F. Automated Systems (Rule 13n-6)

1. Proposed Rule

2. Comments on the Proposed Rule

3. Final Rule

G. SDR Recordkeeping (Rule 13n-7)

1. Records To Be Made by SDRs (Rule 13n-7(a))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

2. Records To Be Preserved by SDRs (Rule 13n-7(b))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

3. Recordkeeping After an SDR Ceases To Do Business (Rule 13n-7(c))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

4. Applicability (Rule 13n-7(d))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

H. Reports To Be Provided to the Commission (Rule 13n-8)

1. Proposed Rule

2. Comments on the Proposed Rule

3. Final Rule

I. Privacy of SBS Transaction Information and Disclosure to Market Participants (Rules 13n-9 and 13n-10)

1. Privacy Requirements (Rule 13n-9)

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

2. Disclosure Requirements (Rule 13n-10)

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

J. Chief Compliance Officer of Each SDR; Compliance Reports and Financial Reports (Rule 13n-11)

1. In General (Rule 13n-11(a))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

2. Definitions (Rule 13n-11(b))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

3. Enumerated Duties of Chief Compliance Officer (Rule 13n-11(c))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

4. Compliance Reports (Rules 13n-11(d) and 13n-11(e))

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rule

5. Financial Reports and Filing of Reports (Exchange Act Rules 13n-11(f) and (g)/Rules 11, 305, and 407 of Regulation S-T)

a. Proposed Rule

b. Comments on the Proposed Rule

c. Final Rules

6. Additional Rule Regarding Chief Compliance Officer (Rule 13n-11(h))

K. Exemption from Requirements Governing SDRs for Certain Non-U.S. Persons (Rule 13n-12)

1. Proposed Rule

2. Comments on the Proposed Rule

3. Final Rule

VII. Paperwork Reduction Act

A. Summary of Collection of Information

1. Registration Requirements, Form SDR, and Withdrawal From Registration SDR Duties, Data Collection and Maintenance, and Direct Electronic Access

2. Recordkeeping

3. Reports

4. Disclosure

5. Chief Compliance Officer; Compliance Reports and Financial Reports

6. Other Provisions Relevant to the Collection of Information

B. Use of Information

1. Registration Requirements, Form SDR, and Withdrawal From Registration

2. SDR Duties, Data Collection and Maintenance, and Direct Electronic Access

3. Recordkeeping

4. Reports

5. Disclosure

6. Chief Compliance Officer; Compliance Reports and Financial Reports

7. Other Provisions Relevant to the Collection of Information

C. Respondents

1. Registration Requirements, Form SDR, and Withdrawal From Registration

2. SDR Duties, Data Collection and Maintenance, and Direct Electronic Access

3. Recordkeeping

4. Reports

5. Disclosure

6. Chief Compliance Officer; Compliance Reports and Financial Reports

7. Other Provisions Relevant to the Collection of Information

D. Total Annual Reporting and Recordkeeping Burden

1. Registration Requirements, Form SDR, and Withdrawal From Registration 2. SDR Duties, Data Collection and Maintenance, and Direct Electronic Access

3. Recordkeeping

4. Reports

5. Disclosure

6. Chief Compliance Officer; Compliance Reports and Financial Reports

7. Other Provisions Relevant to the Collection of Information

E. Collection of Information is Mandatory

1. Registration Requirements, Form SDR, and Withdrawal From Registration

2. SDR Duties, Data Collection and Maintenance, and Direct Electronic Access

3. Recordkeeping

4. Reports

5. Disclosure

6. Chief Compliance Officer; Compliance Reports and Financial Reports

7. Other Provisions Relevant to the Collection of Information

F. Confidentiality

G. Retention Period of Recordkeeping Requirements

VIII. Economic Analysis

A. Introduction

B. General Comments on the Costs and Benefits of the SDR Rules

C. Consideration of Benefits, Costs, and the Effect on Efficiency, Competition, and Capital Formation

1. Assessment Costs

2. Programmatic Costs and Benefits

a. SDR Registration, Duties, and Core Principles

b. Registration Requirements in the Cross-Border Context

3. Consideration of Burden on Competition and Promotion of Efficiency, Competition, and Capital Formation

a. Potential Effects on Efficiency

b. Potential Effects on Competition

c. Potential Effects on Capital Formation

D. Costs and Benefits of Specific Rules

1. Registration Requirements, Form SDR, and Withdrawal From Registration

a. Benefits

b. Costs

c. Alternatives

2. SDR Duties, Data Collection and Maintenance, and Direct Electronic Access

a. Benefits

b. Costs

c. Alternatives

3. Recordkeeping

a. Benefits

b. Costs

4. Reports

a. Benefits

b. Costs

5. Disclosure

a. Benefits

b. Costs

6. Chief Compliance Officer and Compliance Functions; Compliance Reports and Financial Reports

a. Benefits

b. Costs

c. Alternatives

7. Other Policies and Procedures Relating to an SDR's Business

a. Benefits

b. Costs

c. Alternatives

8. Total Costs

IX. Regulatory Flexibility Act Certification

X. Statutory Authority

I. Introduction

A. Proposed Rules Governing the SDR Registration Process, Duties, and Core Principles, and Form SDR

Title VII of the Dodd-Frank Act provides for a comprehensive new regulatory framework for security-based swaps (“SBSs”), including the regulation of SDRs.

SDRs are required to collect and maintain accurate SBS transaction data so that relevant authorities can access and analyze the data from secure, central locations, thereby putting them in a better position to monitor for potential market abuse and risks to financial stability. On November 19, 2010, the Commission proposed new Rules 13n-1 to 13n-11 under the Exchange Act governing the SDR registration process, duties, and core principles, and new Form SDR, through which applicants would seek to register as SDRs.

Public Law 111-203, section 761(a) (adding Exchange Act Section 3(a)(75) (defining SDR)) and section 763(i) (adding Exchange Act Section 13(n) (establishing a regulatory regime for SDRs)).

See

Security-Based Swap Data Repository Registration, Duties, and Core Principles, Exchange Act Release No. 63347 (Nov. 19, 2010), 75 FR 77306 (Dec. 10, 2010),

corrected at

75 FR 79320 (Dec. 20, 2010)

and

76 FR 2287 (Jan. 13, 2011) (“Proposing Release”).

Subsequently, on May 1, 2013, the Commission issued a proposing release discussing cross-border SBS activities, including activities involving SDRs.

In that release, the Commission proposed guidance regarding the application of certain SDR requirements in the cross-border context;

new Rule 13n-12 under the Exchange Act, which would provide certain SDRs with an exemption from Exchange Act Section 13(n) and the rules and regulations thereunder;

and guidance to specify how SDRs may comply with the notification requirement in the Exchange Act and how the Commission proposes to determine whether a relevant authority is appropriate for purposes of receiving SBS data from an SDR.

In addition, the Commission proposed an exemption from the indemnification requirement in the Exchange Act.

Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants, Exchange Act Release No. 69490 (May 1, 2013), 78 FR 30968 (May 23, 2013) (“Cross-Border Proposing Release”).

Cross-Border Proposing Release, 78 FR at 31041-44,

supra

note 3.

Cross-Border Proposing Release, 78 FR at 31209,

supra

note 3.

Cross-Border Proposing Release, 78 FR at 31046-48,

supra

note 3.

Cross-Border Proposing Release, 78 FR at 31209,

supra

note 3 (proposing Rule 13n-4(d)).

B. Related Commission Actions

In conjunction with issuing the Proposing Release on November 19, 2010, the Commission also proposed Regulation SBSR to implement the Dodd-Frank Act's provisions relating to reporting SBS information to SDRs, including standards for the data elements that must be provided to SDRs.

Subsequently, on June 15, 2011, the Commission issued an exemptive order, which provided guidance and certain exemptions with respect to the requirements under Title VII, including requirements governing SDRs, which would have had to be complied with as of July 16, 2011 (

i.e.,

the effective date of Title VII).

Later, on June 11, 2012, the Commission issued a statement of general policy on the anticipated sequencing of compliance dates of final rules to be adopted under Title VII.

On May 1, 2013, the Commission re-proposed Regulation SBSR in the Cross-Border Proposing Release.

At the same time, the Commission reopened the comment period for certain rules proposed under Title VII, including the SDR Rules and Form SDR, and the Implementation Policy Statement.

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

See

Temporary Exemptions and Other Temporary Relief, Together With Information on Compliance Dates for New Provisions of the Securities Exchange Act of 1934 Applicable to Security-Based Swaps, Exchange Act Release No. 64678 (June 15, 2011), 76 FR 36287 (June 22, 2011) (“Effective Date Order”). The Effective Date Order included temporary exemptions from Exchange Act Sections 13(n)(5)(D)(i), 13(n)(5)(F), 13(n)(5)(G), 13(n)(5)(H), 13(n)(7)(A), 13(n)(7)(B), and 13(n)(7)(C), each of which will expire on the earlier of (1) the date the Commission grants registration to the SDR and (2) the earliest compliance date set forth in any of the final rules regarding the registration of SDRs.

Id.

at 36306. In addition, the Commission granted temporary exemptions from Exchange Act Section 29(b) in connection with the above listed provisions of the Exchange Act until such date as the Commission specifies.

Id.

at 36307. Section 29(b) generally provides that contracts made in violation of any provision of the Exchange Act, or the rules thereunder, shall be void “(1) as regards the rights of any person who, in violation of any such provision . . . shall have made or engaged in the performance of any such contract, and (2) as regards the rights of any person who, not being a party to such contract, shall have acquired any right thereunder with actual knowledge of the facts by reason of which the making or performance of such contract was in violation of any such provision. . . .” 15 U.S.C. 78cc(b).

See

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

Cross-Border Proposing Release, 78 FR at 31210-31216,

supra

note 3. The Commission subsequently adopted certain aspects of the Cross-Border Proposing Release, which, as discussed below, has implications on this release.

See

Application of “Security-Based Swap Dealer” and “Major Security-Based Swap Participant” Definitions to Cross-Border Security-Based Swap Activities, Exchange Act Release No. 72472 (June 25, 2014), 79 FR 39068 (July 9, 2014)

republished at

79 FR 47278 (Aug. 12, 2014) (“Cross-Border Adopting Release”).

Reopening of Comment Periods for Certain Rulemaking Releases and Policy Statement Applicable to Security-Based Swaps Proposed Pursuant to the Securities Exchange Act of 1934 and the Dodd-Frank Wall Street Reform and Consumer Protection Act, Exchange Act Release No. 69491 (May 1, 2013), 78 FR 30800 (May 23, 2013) (“Reopening Release”).

The Commission is concurrently adopting Regulation SBSR in a separate release.

The Dodd-Frank Act requires the Commission to engage in rulemaking for the public dissemination of SBS transaction, volume, and pricing data,

and provides the Commission with discretion to determine an appropriate approach to implement this important function. Regulation SBSR requires SDRs to undertake this role.

Regulation SBSR-Reporting and Dissemination of Security-Based Swap Information, Exchange Act Release No. 74244 (Feb. 11, 2015) (“Regulation SBSR Adopting Release”). The Commission is also concurrently proposing certain new rules and amendments to Regulation SBSR.

See

Regulation SBSR-Reporting and Dissemination of Security-Based Swap Information, Exchange Act Release No. 74245 (Feb. 11, 2015) (“Regulation SBSR Proposed Amendments Release”).

Exchange Act Section 13(m)(1), 15 U.S.C. 78m(m)(1), as added by Dodd-Frank Act Section 763(i).

See

Regulation SBSR Adopting Release,

supra

note 13. In a separate proposal relating to implementation of Dodd-Frank Act Section 763(i) (adding Exchange Act Section 13(n)(5)(E)), the Commission proposed rules that would require SDRs to collect data related to monitoring the compliance and frequency of end-user clearing exemption claims.

See

End-User Exception to Mandatory Clearing of Security-Based Swaps, Exchange Act Release No. 63556 (Dec. 15, 2010), 75 FR 79992 (Dec. 21, 2010) (“End-User Exception Proposing Release”).

As discussed in the Proposing Release, when considered in conjunction with Regulation SBSR, the rules that the Commission adopts in this release seek to provide improved transparency to regulators and the markets through comprehensive regulations for SBS transaction data and

SDRs.

In combination, these rules represent a significant step forward in providing a regulatory framework that promotes transparency and efficiency in the OTC derivatives markets and creates important infrastructure to assist relevant authorities in performing their market oversight functions.

Proposing Release, 75 FR at 77307,

supra

note 2.

C. Public Comment

In each of the releases discussed above, the Commission requested comment on a number of issues related to the proposed SDR Rules. In addition, Commission staff and Commodity Futures Trading Commission (“CFTC”) staff conducted joint public roundtables, including, for example, a joint public roundtable on implementation issues raised by Title VII (“Implementation Joint Roundtable”)

and a joint public roundtable on international issues relating to the implementation of Title VII (“International Joint Roundtable”).

See

Joint Public Roundtable on Issues Related to the Schedule for Implementing Final Rules for Swaps and Security-Based Swaps Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, Exchange Act Release No. 64314 (Apr. 20, 2011), 76 FR 23221 (Apr. 26, 2011). Transcripts for the public roundtable are available on the Commission's Web site at

http://www.sec.gov/news/press/2011/2011-90-transcript.pdf

See

Joint Public Roundtable on International Issues Relating to the Implementation of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Exchange Act Release No. 64939 (July 21, 2011); 76 FR 44507 (July 26, 2011). The transcript for the public roundtable is available on the Commission's Web site at:

http://www.sec.gov/news/press/2011/2011-151-transcript.pdf

The Commission received twenty comment letters in response to the Proposing Release and the Reopening Release

as well as six letters submitted with respect to SDRs prior to the Proposing Release.

The Commission also received three comment letters that address issues related to SDRs, among others, after the Proposing Release through the Commission's solicitation for comments,

which will be addressed in this release. In addition, the Commission received one letter in response to the Implementation Policy Statement,

two letters in response to the Implementation Joint Roundtable

and a letter in response to the International Joint Roundtable,

all of which are relevant to the Proposing Release and are addressed in this release.

The Commission also received four comment letters in response to the Cross-Border Proposing Release relating directly to the proposed SDR Rules.

See

letters from The Bank of New York Mellon Corporation (“BNY Mellon”); Better Markets, Inc. dated January 24, 2011 (“Better Markets 1”); Better Markets, Inc. dated July 22, 2013 (“Better Markets 2”); Better Markets, Inc. dated October 18, 2013 (“Better Markets 3”); Chris Barnard (“Barnard”); Depository Trust & Clearing Corporation dated January 24, 2011 (“DTCC 2”); Depository Trust & Clearing Corporation dated June 3, 2011 (“DTCC 3”); Depository Trust & Clearing Corporation dated July 21, 2011 (“DTCC 4”); Depository Trust & Clearing Corporation dated July 22, 2013 (“DTCC 5”); Ethics Metrics (“Ethics Metrics”); European Securities and Markets Authority (“ESMA”); International Swaps and Derivatives Association dated June 28, 2013 (“ISDA”); Managed Funds Association dated January 24, 2011 (“MFA 1”); Managed Funds Association dated March 24, 2011 (“MFA 2”); Markit North America Inc. (“Markit”); MarkitSERV LLC (“MarkitSERV”); Ralph S. Saul (“Saul”); and TriOptima AB (“TriOptima”). Two of these comment letters did not raise issues relating to the SDR Rules.

See

letters from the Chicago Mercantile Exchange, Inc. and ICE Trade Vault, LLC dated November 19, 2013 (relating to Regulation SBSR) and Financial Services Roundtable, Futures Industry Association, Institute of International Bankers, International Swaps and Derivatives Association, Investment Company Institute, Securities Industry and Financial Markets Association dated May 21, 2013 (requesting 90-day extension of the comment period for the Cross-Border Proposing Release). The comments that the Commission received on the Proposing Release and the Reopening Release are available on the Commission's Web site at

http://www.sec.gov/comments/s7-35-10/s73510.shtml

See

letters from Benchmark Solutions (“Benchmark*”); Coalition for Derivatives End-Users (“CDEU*”); Depository Trust & Clearing Corporation dated November 15, 2010 (“DTCC 1*”); Morgan Stanley (“Morgan Stanley*”); Robin McLeish (“McLeish*”); and Securities Industry and Financial Markets Association (“SIFMA*”), available on the Commission's Web site at

http://www.sec.gov/comments/df-title-vii/swap-data-repositories/swap-data-repositories.shtml

. To facilitate public input on the Dodd-Frank Act, the Commission provided a series of email links, organized by topic, on its Web site at

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

See

letters from Barclays Capital Inc. (“Barclays*”); Financial Services Forum, Futures Industry Association, International Swaps and Derivatives Association, and Securities Industry and Financial Markets Association (“FSF*”); and Futures Industry Association, The Financial Services Roundtable, Institute of International Bankers, Insured Retirement Institute, International Swaps and Derivatives Association, Securities Industry and Financial Markets Association, and U.S. Chamber of Commerce (“FIA*”), available on the Commission's Web site at

http://www.sec.gov/comments/df-title-vii/swap-data-repositories/swap-data-repositories.shtml

See

letter from Securities Industry and Financial Markets Association (“SIFMA Implementation”), available on the Commission's Web site at

http://www.sec.gov/comments/s7-05-12/s70512-11.pdf

See

letters from The Financial Services Roundtable (“FSR Implementation”), available on the Commission's Web site at

http://www.sec.gov/comments/4-625/4625-1.pdf

; and Association of Institutional Investors (“AII Implementation”), available on the Commission's Web site at

http://www.sec.gov/comments/4-625/4625-5.pdf

See

letter from Bank of America Merrill Lynch, Barclays Capital, BNP Paribas, Citi, Crédit Agricole Corporate and Investment Bank, Credit Suisse Securities (USA), Deutsche Bank AG, HSBC, Morgan Stanley, Nomura Securities International, Inc., Société Générale, and UBS Securities LLC (“US & Foreign Banks”), available on the Commission's Web site at

http://www.sec.gov/comments/4-636/4636-4.pdf

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

One commenter recommended that the Commission “encourage the formation of a planning group composed of market participants” to address the questions in the Proposing Release. Saul,

supra

note 19. The Commission believes that market participants have had sufficient opportunities to comment on the Proposing Release and market participants have taken advantage of these opportunities. Therefore, the Commission does not believe that a planning group composed of market participants is necessary.

See

letters from Better Markets, Inc. dated August 21, 2013 (“Better Markets CB”); Depository Trust & Clearing Corporation dated August 21, 2013 (“DTCC CB”); ICE Trade Vault, LLC (“ICE CB”); and Institute of International Bankers (“IIB CB”). The comments that the Commission received on the Cross-Border Proposing Release are available on the Commission's Web site at

http://sec.gov/comments/s7-02-13/s70213.shtml

. The Commission addressed comment letters in response to the Cross-Border Proposing Release that address Title VII generally and do not relate directly to the proposed SDR Rules in the Cross-Border Adopting Release.

See

Cross-Border Adopting Release, 79 FR at 47281-2,

supra

note 11.

The Commission also considered relevant comments submitted with respect to proposed Regulation SBSR,

the interim temporary final rule for reporting of SBS transaction data,

and proposed rules for the registration and regulation of security-based swap execution facilities (“SB SEFs”).

Regulation SBSR Proposing Release,

supra

note 8.

See

letters from Bank of America, Merrill Lynch et al. (“BofA SBSR”); Barclays Bank PLC, BNP Paribas S.A., Deutsche Bank AG, Royal Bank of Canada, The Royal Bank of Scotland Group PLC, Société Générale, and UBS AG (“Foreign Banks SBSR”); Depository Trust & Clearing Corporation (“DTCC SBSR”); Financial Industry Regulatory Authority (“FINRA SBSR”); International Swaps and Derivatives Association & Securities Industry and Financial Markets Association (“ISDA SIFMA SBSR”); Managed Funds Association (“MFA SBSR”); Société Générale (“Société Générale SBSR”); The Bank of Tokyo-Mitsubishi UFJ, Ltd., Mizuho Corporate Bank, Ltd., and Sumitomo Mitsui Banking Corporation (“Bank of Tokyo SBSR”); Tradeweb (“Tradeweb SBSR”); and Wholesale Markets Brokers' Association, Americas (“WMBAA SBSR”). The comments that the Commission received on the Regulation SBSR Proposing Release are available on the Commission's Web site at

http://www.sec.gov/comments/s7-34-10/s73410.shtml

See also

Cross-Border Proposing Release, 78 FR at 31210-6,

supra

note 3 (re-proposing Regulation SBSR).

Reporting of Security-Based Swap Transaction Data, Exchange Act Release No. 63094 (Oct. 13, 2010), 75 FR 64643 (Oct. 20, 2010) (“Temporary Rule Release”).

See

letters from International Swaps and Derivatives Association (“ISDA Temp Rule”) and Deutsche Bank AG (“Deutsche Temp Rule”). The comments that the Commission received on the Temporary Rule Release are available on the Commission's Web site at

http://www.sec.gov/comments/s7-28-10/s72810.shtml

Registration and Regulation of Security-Based Swap Execution Facilities, Exchange Act Release No. 63825 (Feb. 2, 2011), 76 FR 10948 (Feb. 28, 2011) (“SB SEF Proposing Release”).

See

letter from Tradeweb Markets LLC (“Tradeweb SB SEF”). The comments that the Commission received on the SB SEF Proposing Release are available on the

Commission's Web site at

http://www.sec.gov/comments/s7-06-11/s70611.shtml

While commenters generally supported the Commission's approach set forth in the Proposing Release and the Cross-Border Proposing Release with respect to the proposed SDR Rules,

they set forth a range of opinions addressing issues raised by the proposed rules and provided information regarding industry practices. In particular, commenters discussed SDRs' registration, enumerated duties, market access to services and data, governance arrangements, conflicts of interest, data collection and maintenance, privacy and disclosure requirements, and chief compliance officers (“CCOs”). The Commission has carefully reviewed and considered all of the comments that it received relating to the proposed rules.

As adopted, the SDR Rules and new Form SDR have been modified from the proposal, in part to respond to these comments.

The revisions to each proposed rule are described in more detail throughout this release. The following are among the most significant changes from the Commission's proposed rules:

See, e.g.,

Barnard,

supra

note 19 (generally supporting the proposed SDR Rules and agreeing that establishing SDRs will enhance transparency and promote standardization in the SBS market); MFA 1,

supra

note 19 (fully supporting the objectives of the Dodd-Frank Act and the proposed rules to enhance transparency in the SBS market); Markit,

supra

note 19 (supporting the Commission's objectives of increasing transparency and efficiency in the OTC derivatives markets and of reducing both systemic and counterparty risk); DTCC 2,

supra

note 19 (supporting the Commission's efforts to establish a comprehensive new framework for the regulation of SDRs and noting that “[i]mposing requirements on [SDRs] would promote safety and soundness for all U.S. markets by bringing increased transparency and oversight to [the SBS market]”); IIB CB,

supra

note 26 (believing that “the Commission has appropriately sought to take into account the greater extent to which the SBS markets are globally interconnected, as well as the role that foreign regulators therefore must play as the primary supervisors of SBS market participants based abroad”).

The Commission also considered certain comments submitted with respect to other proposed Commission rulemakings, related CFTC rulemakings, and international initiatives.

See

Sections I.C and I.D discussing other comments and initiatives considered in this rulemaking.

As discussed below, comments relating to relevant authorities' access to SBS data will be addressed in a separate release.

• Form SDR: In the Proposing Release, the Commission asked whether it should combine Form SDR and Form SIP such that an SDR would register as an SDR and a securities information processer (“SIP”) using only one form.

After further consideration and in response to comments received, the Commission has determined that Form SDR should be modified from the proposal to allow an SDR to register as both an SDR and SIP on one form.

Proposing Release, 75 FR at 77313,

supra

note 2.

See

Section VI.A.1.c of this release discussing the combination of Form SDR and Form SIP.

• Access by Relevant Authorities: The Commission proposed Rules 13n-4(b)(9) and (10) and Rule 13n-4(d) relating to relevant authorities' access to SBS data maintained by SDRs. The Commission has determined not to adopt these rules at this time and anticipates soliciting additional public comment regarding such relevant authorities' access.

• Automated Systems: The Commission proposed Rule 13n-6 to provide standards for SDRs with regard to their automated systems' capacity, resiliency, and security. After further consideration, and as explained more fully below, the Commission has determined to adopt an abbreviated version of proposed Rule 13n-6.

See

Section VI.F of this release discussing Rule 13n-6.

• CCO: In the Proposing Release, the Commission asked whether it should prohibit officers, directors, or employees of an SDR from, directly or indirectly, taking any action to coerce, manipulate, mislead, or fraudulently influence the SDR's CCO in the performance of his responsibilities. The Commission has decided to adopt new Rule 13n-11(h).

D. Other Initiatives Considered in This Rulemaking

The Commission also recognizes the CFTC's companion efforts in promulgating rules governing swap data repositories pursuant to Dodd-Frank Act Section 728. The CFTC adopted final rules on swap data repositories on August 4, 2011.

The CFTC also adopted rules regarding swap data recordkeeping and reporting requirements, some of which pertain to subjects covered in this release.

Commission staff consulted with CFTC staff with respect to the rules applicable to swap data repositories and SDRs, as well as with prudential regulators,

and the Commission has taken into consideration comments received supporting harmonization of the CFTC's rules for swap data repositories with the SDR Rules.

The Commission believes that the final SDR Rules are largely consistent with the rules adopted by the CFTC.

While one commenter recommended adopting joint rules with the CFTC,

the Commission has not done so. Congress did not require the two agencies to engage in joint rulemakings on this topic.

In addition, the CFTC has already adopted its final rules for swap data repositories.

The Commission does not believe that the differences between the rules adopted herein and the CFTC's rules regarding

swap data repositories will place undue burdens on persons that register as both SDRs and swap data repositories.

See

Swap Data Repositories: Registration Standards, Duties and Core Principles, 76 FR 54538 (Sept. 1, 2011) (“CFTC Part 49 Adopting Release”).

See also

Swap Data Repositories—Access to SDR Data by Market Participants, 79 FR 16672 (Mar. 26, 2014) (CFTC adopting interim final rule regarding access to swap data repositories' data).

See

Swap Data Recordkeeping and Reporting Requirements, 77 FR 2136 (Jan. 13, 2012) (“CFTC Part 45 Adopting Release”).

See also

Review of Swap Data Recordkeeping and Reporting Requirements, 79 FR 16689 (Mar. 26, 2014) (CFTC requesting comment on specific swap data reporting and recordkeeping rules).

See

Dodd-Frank Act Section 712(a)(2) (requiring the Commission to consult and coordinate to the extent possible with the CFTC and prudential regulators for “the purposes of assuring regulatory consistency and comparability, to the extent possible”).

See

DTCC 2,

supra

note 19 (recommending that to the extent that there are any differences, “the Commission and the CFTC should harmonize the regimes that oversee SDRs” and noting that “harmonization is a more important priority than the exact nature of the consistent standard, as SDRs can adjust to meet a single standard but not multiple, inconsistent standards”); DTCC 5,

supra

note 19 (urging the Commission to harmonize its rules with the CFTC's rules by working, to the extent possible, with the CFTC to minimize the number of regulatory inconsistencies between the two agencies); DTCC CB,

supra

note 26 (“Given the significant number of registered entities (execution platforms, clearinghouses, SDRs, dealers, and major swap participants) that will face dual oversight, unnecessary distinctions in the registration and regulation of these entities risk jeopardizing regulatory compliance, add confusion to Dodd-Frank Act implementation, and ultimately impose unnecessary costs.”); Better Markets CB,

supra

note 26 (recommending that the Commission “promote harmony with the CFTC's cross-border guidance, subject to its primary duty and recognizing that its statutory authority and jurisdiction is distinct from that of the CFTC” and that the Commission “adopt rules that are at least as strong as the CFTC's guidance, consistent with its statutory authority, but should go further than the CFTC wherever necessary, and again consistent with its statutory authority, to better fulfill the goals of the Dodd-Frank Act”).

But see

Better Markets 2,

supra

note 19 (recommending that “all of the substantive rule provisions proposed [as of July 22, 2013] must remain as strong as possible, irrespective of . . . the CFTC's approach to the implementation of Title VII”).

See

DTCC 2,

supra

note 19 (observing that, with respect to the Commission's proposed rules and the CFTC's proposed rules for swap data repositories, “[t]here appear to be relatively narrow differences between the Commission's and the CFTC's approaches to the regulation of SDRs”).

FSR Implementation,

supra

note 23 (supporting a Title VII-wide harmonization process and recommending adopting joint SEC-CFTC rules in areas, such as SDRs, where they are not required to do so). The commenter stated that the “process of jointly adopting final rules would ensure consistency on the most critical points. It would also ensure that final rules are adopted at the same time, so that market participants do not have to bear the cost of complying with one set of rules before they know whether their actions will be consistent with the other rules to which they will be subject.”

Id.

Cf., e.g.,

Dodd-Frank Act Section 712(d) (requiring joint rulemaking regarding certain definitions).

CFTC Part 49 Adopting Release,

supra

note 36; CFTC Part 45 Adopting Release,

supra

note 37.

See

Section VIII of this release discussing economic analysis.

Finally, Commission staff has consulted and coordinated with foreign regulators through bilateral and multilateral discussions, including in groups that have prepared reports related to SDRs.

For example, the Committee on Payments and Market Infrastructures (“CPMI”), formerly known as the Committee on Payment and Settlement Systems (“CPSS”),

and the International Organization of Securities Commissions (“IOSCO,”

jointly, “CPSS-IOSCO”) have issued several reports applicable to SDRs. First, in May 2010, CPSS and the Technical Committee of IOSCO issued a consultative report that presented a set of factors for trade repositories in the OTC derivatives markets to consider in designing and operating their services and for relevant authorities to consider in regulating and overseeing trade repositories (“CPSS-IOSCO Trade Repository Report”).

Second, in January 2012, CPSS and the Technical Committee of IOSCO issued a final report on OTC derivatives data reporting and aggregation requirements.

Third, in April 2012, CPSS-IOSCO issued a final report that sets forth risk management and related standards applicable to financial market infrastructures, including trade repositories (“PFMI Report”).

Fourth, in August 2013, CPSS and the Board of IOSCO issued a report on authorities' access to trade repository data (“CPSS-IOSCO Access Report”).

The Commission has taken these discussions and reports into consideration in developing the final SDR Rules and Form SDR.

See

Dodd-Frank Act Section 752 (relating to international harmonization); DTCC 3,

supra

note 19 (“The global SDR framework emerging from the Dodd-Frank Act and European regulatory processes must provide comprehensive data for all derivatives markets globally. If the global regulatory process is not harmonized, both the published and regulator-only accessible data will be fragmented, resulting in misleading reporting of exposures, uncertain risk concentration reports and a decreased ability to identify systemic risk.”).

CPMI is an international standard setting body for payment, clearing, and securities settlement systems. It serves as a forum for central banks to monitor and analyze developments in domestic payment, clearing, and settlement systems as well as in cross-border and multicurrency settlement schemes.

See

http://www.bis.org/cpmi/.

IOSCO is an international standard setting body for securities regulation. It serves as a forum to review regulatory issues related to international securities and futures transactions.

See http://www.iosco.org.

See

Considerations for Trade Repositories in OTC Derivatives Markets, CPSS-IOSCO (May 2010),

available at

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD321.pdf.

See

Report on OTC Derivatives Data Reporting and Aggregation Requirements, CPSS-IOSCO (Jan. 2012),

available at

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

See

Principles for Financial Market Infrastructures, CPSS-IOSCO (Apr. 2012),

available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf.

The PFMI Report incorporated feedback received on the CPSS-IOSCO Trade Repository Report. Commission representatives participated in the development and drafting of the PFMI Report. In particular, Commission staff co-chaired the Editorial Team, a working group within CPSS-IOSCO that drafted both the consultative and final versions of the PFMI Report. The Commission believes that the standards applicable to trade repositories set forth in the PFMI Report are generally consistent with the final SDR Rules.

See

Authorities' Access to Trade Repository Data, CPSS-IOSCO (Aug. 2013),

available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD417.pdf.

If any provision of these rules, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application.

II. Broad Economic Considerations and Baseline

This section describes the most significant economic considerations that the Commission has taken into account in adopting Form SDR and the SDR Rules, as well as the baseline for evaluating the economic effects of the final SDR Rules. The Commission is sensitive to the economic consequences and effects, including the costs and benefits, of Form SDR and the SDR Rules. A detailed analysis of the particular economic effects—including the costs and benefits and the impact on efficiency, competition, and capital formation—that may result from Form SDR and the final SDR Rules is discussed in Section VIII of this release.

A. Broad Economic Considerations

The SBS market prior to the passage of the Dodd-Frank Act has been described as being opaque,

in part because price and volume data for SBS transactions were not publicly available. In opaque markets, price and volume information is difficult or impossible to obtain, and access to price and volume information confers a competitive advantage on market participants with such access. In the SBS market, for example, SBS dealers currently gain access to proprietary transaction-level price and volume information by observing order flow. Large SBS dealers and other large market participants with a large share of order flow have an informational advantage over smaller SBS dealers and non-dealers who, in the absence of pre-trade transparency, observe a smaller subset of the market. As the Commission highlights in Section II.B below, the majority of SBS market activity, and therefore information about market activity, is concentrated in a small number of SBS dealers and widely dispersed among other market participants. Greater access by SBS dealers to non-public information about order flow enables better assessment of current market values by SBS dealers, permitting them to extract economic rents from counterparties who are less informed.

Non-dealers are aware of this information asymmetry, and certain non-dealers—particularly larger entities who transact with many dealers—may be able to obtain access to competitive pricing or otherwise demand a price discount that reflects the information asymmetry. Typically, however, the market participants with an information advantage will earn economic rents from their non-public information. In the SBS market, it is predominantly SBS dealers who observe the greatest order flow and benefit from market opacity.

With respect to one type of SBS, credit default swaps (“CDSs”), the Government Accountability Office found that “comprehensive and consistent data on the overall market have not been readily available,” “authoritative information about the actual size of the [CDS] market is generally not available,” and regulators currently are unable “to monitor activities across the market.” Government Accountability Office, GAO-09-397T,

Systemic Risk: Regulatory Oversight and Recent Initiatives to Address Risk Posed by Credit Default Swaps,

at 2, 5, 27, (2009)

available at

http://www.gao.gov/new.items/d09397t.pdf; see also

Robert E. Litan,

The Derivatives Dealers' Club and Derivatives Market Reform: A Guide for Policy Makers, Citizens and Other Interested Parties,

Brookings Institution (Apr. 7, 2010),

http://www.brookings.edu/~/media/research/files/papers/2010/4/07%20derivatives%20litan/0407_derivatives_litan.pdf;

Michael Mackenzie,

Era of an Opaque Swaps Market Ends,

Financial Times, June 25, 2010,

http://www.ft.com/intl/cms/s/0/f49f635c-8081-11df-be5a-00144feabdc0.html#axzz3HLUjYNI7.

In this situation, economic rents are the profits that SBS dealers earn by trading with counterparties who are less informed. In a market with competitive access to information, there is no informational premium; SBS dealers only earn a liquidity premium. The difference between the competitive liquidity premium and the actual profits that SBS dealers earn is the economic rent.

The Commission expects that SDRs will play a critical role in enhancing transparency and competitive access to information in the SBS market. In order to increase the transparency of the OTC derivatives market, Title VII requires the Commission to undertake a number of rulemakings, including the SDR Rules and Regulation SBSR,

to establish a framework for the regulatory reporting of SBS transaction information to SDRs, public dissemination of transaction-level information, and a framework for SDRs to provide access to the

information to the Commission. Persons that meet the definition of an SDR will be required, absent an exemption, to comply with all SDR obligations, including the SDR Rules requiring SDRs to collect and maintain accurate data and the requirements under Regulation SBSR to publicly disseminate transaction-level information. Reporting of SBS transaction information and public dissemination of accurate transaction price and volume information should promote price discovery and lessen the informational advantage enjoyed by SBS dealers with access to order flow.

By requiring SDRs to collect SBS transaction, volume, and pricing information and publicly disseminate information, the SDR Rules and Regulation SBSR may promote transparency in the SBS market.

See

Regulation SBSR Adopting Release,

supra

note 13.

Price discovery refers to the process by which buyers seek the lowest available prices and sellers seek the highest available prices. This process reveals the prices that best match buyers to sellers.

See

Larry Harris,

Trading & Exchanges: Market Microstructure for Practitioners

94 (2003). Price discovery may be hindered by such things as a scarcity of buyers or sellers or an asymmetry of information between potential buyers and sellers. For example, when traders are asymmetrically informed, liquidity suppliers set their prices far from the market to recover from uninformed traders what they lose to well-informed traders.

See id.

at 312.

Regulation SBSR requires that the economic terms of the transaction, with the exception of the identities of the counterparties, be publicly disseminated. These terms include the product ID, date and time of execution, price, and notional amount of an SBS.

See

Regulation SBSR Adopting Release,

supra

note 13 (Rules 901(c) and 902).

In addition to lessening the informational advantage currently available to SBS dealers, increased transparency of the SBS market could have other widespread benefits. Public availability of SBS price and volume information could lower the costs of SBS trading by reducing implicit trading costs.

To the extent that implicit costs of SBS trading are reduced and the availability of the data necessary to evaluate the performance of a market participant's SBS dealer using transaction cost analysis, more market participants may be inclined to trade in the SBS market.

Implicit trading cost is the difference between the price at which a market participant can enter into an SBS and the theoretical fundamental value of that SBS. Post-trade transparency has been shown to lower implicit trading costs in US corporate bond markets, which, prior to the introduction of FINRA's Trade Reporting and Compliance Engine (TRACE), was a dealer-centric over-the-counter (“OTC”) market characterized by limited transparency, similar to the SBS market.

See, e.g.,

Amy K. Edwards, Lawrence Harris, & Michael S. Piwowar,

Corporate Bond Market Transparency and Transaction Costs,

62 Journal of Finance 1421 (2007); Hendrik Bessembinder, William F. Maxwell, & Kumar Venkataraman,

Market Transparency, Liquidity, Externalities and Institutional Trading Costs in Corporate Bonds,

82 Journal of Financial Economics 251 (2006).

Transaction cost analysis refers to an evaluation of the price received by a market participant relative to prevailing market prices at the time the decision to transact was made as well as transaction prices received by other market participants just before and just after the transaction.

Allowing competitive, impartial access to the most recent transaction price and volume information may promote the efficiency of SBS trading and increase opportunities for risk-sharing in other ways. In particular, as in other securities markets, quoted bids and offers should form and adjust according to the reporting of executed trades, attracting liquidity from hedgers and other market participants that do not observe customer order flow and do not benefit from opacity.

Separately, the SDR Rules are designed to, among other things, make available to the Commission SBS data that will provide a broad view of the SBS market and help monitor for pockets of risk that might not otherwise be observed by financial market regulators.

Unlike most other securities transactions, SBSs involve ongoing financial obligations between counterparties during the life of transactions that typically span several years. Counterparties to an SBS rely on each other's creditworthiness and bear this credit risk and market risk until the SBS terminates or expires. This can lead to market instability when a large market participant, such as an SBS dealer, major SBS market participant, or central counterparty (“CCP”), becomes financially distressed. The default of a large market participant could introduce the potential for sequential counterparty failure; the resulting uncertainty could reduce the willingness of market participants to extend credit, and substantially reduce liquidity and valuations for particular types of financial instruments.

A broad view of the SBS market, including aggregate market exposures to referenced entities (instruments), positions taken by individual entities or groups, and data elements necessary for a person to determine the market value of the transaction could provide the Commission with a better understanding of the actual and potential risks in the SBS market and promote better risk monitoring efforts. The information provided by SDRs could also help the Commission detect market manipulation, fraud, and other market abuses.

See

Exchange Act Section 13(n)(5)(D), 15 U.S.C. 78m(n)(5)(D), and Rule 13n-4(b)(5) (requiring SDRs to provide direct electronic access to the Commission).

See also

156 Cong. Rec. S5920 (daily ed. July 15, 2010) (statement of Sen. Lincoln) (“These new `data repositories' will be required to register with the CFTC and the SEC and be subject to the statutory duties and core principles which will assist the CFTC and the SEC in their oversight and market regulation responsibilities.”).

See, e.g.,

Markus K. Brunnermeier and Lasse Heje Pedersen,

Market Liquidity and Funding Liquidity,

22 Review of Financial Studies 2201 (2009); Denis Gromb and Dimitri Vayanos,

A Model of Financial Market Liquidity Based on Intermediary Capital,

8 Journal of the European Economic Association 456 (2010).

The extent of the benefits discussed above may be limited by the inaccuracy or incompleteness of SBS data maintained by SDRs.

The Commission believes, however, that the SDR Rules relating to data accuracy

and maintenance

will help minimize the inaccuracy or incompleteness of SBS data maintained by SDRs. The benefits discussed above may have associated costs for compliance with the SDR Rules and Regulation SBSR. Persons that meet the definition of an SDR will be required to invest in infrastructure necessary to comply with rules for collecting, maintaining, and disseminating accurate data. Such infrastructure costs may ultimately be reflected in the prices that SBS dealers charge to customers, mitigating the reduction in indirect trading costs that may accrue from reducing SBS dealers' information advantage.

The CFTC's experience with collecting swap data suggests that the benefits of receiving information from trade repositories may be reduced by inaccuracies or inconsistencies in information maintained by trade repositories.

See, e.g.,

Andrew Ackerman,

CFTC Seeks Comment on Improving Swaps Data Stream; Data Problems Have Hobbled Efforts to See More Clearly Into Swaps Market,

Wall Street Journal Mar. 19, 2014,

http://online.wsj.com/news/articles/SB10001424052702304026304579449552899867592

(noting that “a series of data problems . . . have hobbled efforts to see more clearly into the multitrillion-dollar swaps market”). The CFTC has published a request for comment on specific swap data reporting and recordkeeping rules to determine how these rules were being applied and whether or what clarifications, enhancements, or guidance may be appropriate.

See

Review of Swap Data Recordkeeping and Reporting Requirements, 79 FR 16689 (Mar. 26, 2014).

See, e.g.,

Rule 13n-5(b)(3) (requiring an SDR to establish, maintain, and enforce written policies and procedures reasonably designed to ensure that the transaction data and positions that it maintains are complete and accurate).

See, e.g.,

Rule 13n-5(b)(4) (requiring an SDR to maintain transaction data and related identifying information for not less than five years after the applicable SBS expires and historical positions for not less than five years); Rule 13n-5(b)(5) (requiring an SDR to establish, maintain, and enforce written policies and procedures reasonably designed to prevent any provision in a valid SBS from being invalidated or modified through the procedures or operations of the SDR).

The SDR Rules permit the possibility of multiple SDRs within an asset class.

If there are multiple SDRs in any given asset class, then differences in how each

SDR accepts, stores, and disseminates SBS data may cause fragmentation in the SBS data, thereby making it more difficult for the Commission and the public to compile, compare, and analyze market information. As discussed below, the Commission anticipates that it will propose for public comment detailed specifications of acceptable formats and taxonomies that would facilitate an accurate interpretation, aggregation, and analysis of SBS data by the Commission.

The Commission believes that these specifications may help reduce any difficulties resulting from the fragmentation of data among multiple SDRs by facilitating the clear, uniform reporting of SBS data to the Commission.

See

Section IV of this release discussing number of SDRs and consolidation of SBS data.

See

Section VI.D.2.c.ii of this release.

B. Baseline

To assess the economic impact of the SDR Rules described in this release, the Commission is using as a baseline the SBS market as it exists today, including applicable rules that have already been adopted and excluding rules that have been proposed, but not yet finalized. The Commission acknowledges limitations in the degree to which the Commission can quantitatively characterize the current state of the SBS market. As described in more detail below, because the available data on SBS transactions do not cover the entire market, the Commission has developed an understanding of market activity using a sample that includes only certain portions of the market.

1. Transparency in the SBS Market

There currently is no robust, widely accessible source of information about individual SBS transactions. Nevertheless, market participants can gather certain limited information for the single-name CDS market from a variety of sources. For example, some vendors provide indicative quotes. Indicative quotes are not based on actual transactions and, as such, they may not reflect the true value. Moreover, these quotes do not represent firm commitments to buy or sell protection on particular reference entities. However, market participants can gather information from indicative quotes that may inform their trading. In addition, one entity as part of its single-name CDS clearing, makes its daily settlement prices on 5 year single-name CDSs available to the public on its Web site.

A more complete database of current and historical settlement prices is available by subscription.

See

https://www.theice.com/cds/MarkitSingleNames.shtml

. End-of-Day (“EOD”) prices are established for all cleared CDS single name and index instruments using a price discovery process developed for the CDS market. Clearing participants are required to submit prices every business day, and the clearing house conducts a daily auction-like process resulting in periodic trade executions among clearing participants. This process determines the clearing house EOD prices, which are used for daily mark-to-market purposes.

In addition to the pricing data discussed above, there is limited, publicly-disseminated information about aggregate SBS market activity. The Depository Trust and Clearing Corporation—Trade Information Warehouse (“DTCC-TIW”) publishes weekly transaction and position reports for single-name CDSs. ICE Clear Credit also provides aggregated volumes of clearing activity. Additionally, large multilateral organizations periodically report measures of market activity. For example, the Bank for International Settlements (“BIS”) reports gross notional outstanding for single-name CDSs and equity forwards and swaps semiannually.

Market participants that are SBS dealers can also draw inferences about SBS market activity by observing order flow. This source of proprietary information is most useful for SBS dealers with large market shares.

Finally, DTCC-TIW voluntarily provides to the Commission data on individual CDS transactions. This information is made available to the Commission in accordance with an agreement between the DTCC-TIW and the OTC Derivatives Regulators' Forum (“ODRF”), of which the Commission is a member. While DTCC-TIW generally provides this information to regulators that are members of the ODRF, DTCC-TIW does not make the information available to the public.

2. Current Security-Based Swap Market

The Commission's analysis of the current state of the SBS market is based on data obtained from DTCC-TIW, particularly data regarding the activity of market participants for single-name CDSs from 2008 to 2013. While other repositories may collect data on transactions in total return swaps on equity and debt, the Commission does not currently have access to such data for these products (or other products that are SBSs). Although the Commission has previously noted that the definition of SBS is not limited to single-name CDSs, the Commission believes that the single-name CDS data is sufficiently representative of the SBS market and therefore can directly inform the analysis of the state of the current SBS market.

The Commission believes that DTCC-TIW's data for single-name CDSs is reasonably comprehensive because it includes data on almost all single-name CDS transactions and market participants trading in single-name CDSs.

The Commission notes that the data that it receives from DTCC-TIW does not encompass CDS transactions that both: (i) Do not involve any U.S. counterparty,

and (ii) are not based on a U.S. reference entity. Notwithstanding this limitation, the Commission believes that DTCC-TIW data provides sufficient information to identify the types of market participants active in the SBS market and the general pattern of dealing within that market.

According to data published by BIS, the global notional amount outstanding in equity forwards and swaps as of December 2013 was $2.28 trillion. The notional amount outstanding was approximately $11.32 trillion for single-name CDSs, approximately $9.70 trillion for multi-name index CDSs, and approximately $0.95 trillion for multi-name, non-index CDSs.

See

Bank of International Settlement, BIS Quarterly Review, Statistical Annex, Table 19 (June 2014),

available at

http://www.bis.org/publ/qtrpdf/r_qt1406.htm

. For purposes of this analysis, the Commission assumes that multi-name index CDSs are not narrow-based index CDSs, and therefore do not fall within the definition of SBS.

See

Exchange Act Section 3(a)(68)(A), 15 U.S.C. 78c(a)(68)(A);

see also

Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, Exchange Act Release No. 67453 (July 18, 2012), 77 FR 48207 (Aug. 13, 2012). The Commission also assumes that instruments reported as equity forwards and swaps include instruments such as total return swaps on individual equities that fall with the definition of SBS, potentially resulting in underestimation of the proportion of the SBS market represented by single-name CDSs. Although the BIS data reflects the global OTC derivatives market, and not only the U.S. market, the Commission is not aware of any reason to believe that these ratios differ significantly in the U.S. market.

See

ISDA, CDS Marketplace, Exposures & Activity,

http://www.isdacdsmarketplace.com/exposures_and_activity

(“DTCC Deriv/SERV's Trade Information Warehouse is the only comprehensive trade repository and post-trade processing infrastructure for OTC credit derivatives in the world. Its Deriv/SERV matching and confirmation service electronically matches and confirms more than 98% of credit default swaps transactions globally.”).

The Commission notes that DTCC-TIW's entity domicile determinations may not reflect the Commission's definition of “U.S. person” in all cases.

In 2013, DTCC-TIW reported on its Web site new trades in single-name CDSs with gross notional of $12.0 trillion. DTCC-TIW provided to the Commission data that included only transactions with a U.S. counterparty or a U.S. reference entity. During the same period, this data included new trades with gross notional equaling $9.3 trillion, or 77% of the total reported by DTCC-TIW.

a. Security-Based Swap Market Participants

A key characteristic of SBS activity is that it is concentrated among a relatively small number of entities that

engage in dealing activities.

Based on DTCC-TIW data that the Commission has received, thousands of other market participants appear as counterparties to SBS transactions, including, but not limited to, investment companies, pension funds, private (hedge) funds, sovereign entities, and industrial companies. The Commission observes that most end users of SBSs do not directly trade SBSs, but instead use dealers, banks, or investment advisers as agents to establish the end users' positions. Based on the Commission's analysis of DTCC-TIW data, there were 1,800 entities engaged directly in trading CDSs between November 2006 and December 2013.

Table 1 below highlights that of these entities, there were 17, or approximately 0.9%, that were ISDA-recognized dealers.

The vast majority of transactions (84.1%) measured by the number of counterparties (each transaction has two counterparties or transaction sides) were executed by ISDA-recognized dealers. Thus, a small set of dealers observe the largest share of the market and potentially benefit the most from opacity.

See

Cross-Border Adopting Release, 79 FR at 47293,

supra

note 11. All data in this section cites updated data from this release and the accompanying discussion.

These 1,800 transacting agents represent over 10,000 accounts representing principal risk holders.

See

Regulation SBSR Adopting Release,

supra

note 13 and Cross Border Adopting Release, 79 FR at 47293-4,

supra

note 11 (discussing the number of transacting agents and accounts of principal risk holders).

For the purpose of this analysis, the ISDA-recognized dealers are those identified by ISDA as a recognized dealer in any year during the relevant period. Dealers are only included in the ISDA-recognized dealer category during the calendar year in which they are so identified. The complete list of ISDA recognized dealers is: JP Morgan Chase NA (and Bear Stearns), Morgan Stanley, Bank of America NA (and Merrill Lynch), Goldman Sachs, Deutsche Bank AG, Barclays Capital, Citigroup, UBS, Credit Suisse AG, RBS Group, BNP Paribas, HSBC Bank, Lehman Brothers, Société Générale, Credit Agricole, Wells Fargo, and Nomura.

See

ISDA, Operations Benchmarking Surveys,

available at

http://www2.isda.org/functional-areas/research/surveys/operations-benchmarking-surveys.

Table 1—The Number of Transacting Agents in the CDS Market by Counterparty Type and the Fraction of Total Trading Activity, From November 2006 Through December 2013, Represented by Each Counterparty Type.

Transacting agents

Number

Percent

Transaction

(%)

Investment Advisers

1,347

74.8

9.7

—SEC registered

529

29.4

5.9

Banks

256

14.2

5.0

Pension Funds

1.6

0.1

Insurance Companies

2.0

0.2

ISDA-Recognized Dealers

0.9

84.1

Other

115

6.4

1.0

Total

1,800

100.0

Principal holders of CDS risk exposure are represented by accounts in DTCC-TIW.

As highlighted in Table 2 below, Commission staff's analysis of these accounts in DTCC-TIW shows that the 1,800 transacting agents (entities directly engaged in trading) described above represented 10,054 principal risk holders (entities bearing the risk of the CDS). In some cases, the principal risk holder may have been represented by an investment adviser that served as the transacting agent. In other cases, the principal risk holder may have participated directly as the transacting agent. Each account does not necessarily represent a separate legal person; one legal person may allocate transactions across multiple accounts. For example, the 17 ISDA-recognized dealers described above allocated transactions across 69 accounts.

“Accounts” as defined in the DTCC-TIW context are not equivalent to “accounts” in the definition of “U.S. person” provided by Exchange Act Rule 3a71-3(a)(4)(i)(C). They also do not necessarily represent separate legal persons. One entity or legal person may have multiple accounts. For example, a bank may have one DTCC account for its U.S. headquarters and one DTCC account for one of its foreign branches.

Among the accounts, there are 1,086 Dodd-Frank Act-defined special entities and 636 investment companies registered under the Investment Company Act of 1940.

Private funds comprise the largest type of account holders that the Commission was able to classify, and although not verified through a recognized database, most of the funds the Commission was not able to classify appear to be private funds.

While the Commission anticipates that some of these accounts may prefer to operate in an opaque market (if, for example, they are relying on a proprietary trading strategy and wish to keep their transactions anonymous), the data suggest that the vast majority of principal risk holders in CDS may benefit from the Dodd-Frank Act's transparency requirements. As discussed above and in Section VIII below, dealers are the category of market participants most likely to benefit from opaqueness. As shown in Table 1, of the 1,800 transacting agents in the 2006-2013 sample, 17 (or 0.9%) are ISDA-recognized dealers. Similarly, as shown in Table 2, of the 10,054 accounts with CDS transactions, 69 (or 0.7%) are accounts held by ISDA-recognized dealers. As many as 99% of market participants may benefit from increasing transparency.

There remain over 4,600 DTCC “accounts” unclassified by type. Although unclassified, each was manually reviewed to verify that it was not likely to be a special entity within the meaning of the Dodd-Frank Act and instead was likely to be an entity such as a corporation, an insurance company, or a bank.

“Private funds” encompass various unregistered pooled investment vehicles, including hedge funds, private equity funds, and venture capital funds.

Table 2—the Number and Percentage of Account Holders—by Type—Who Participate in the CDS Market Through a Registered Investment Adviser, an Unregistered Investment Adviser, or Directly as a Transacting Agent From November 2006 Through December 2013

Account holders by type

Number

Represented by a

Represented by an

Participant is transacting

registered investment

unregistered investment

agent

adviser

Private Funds

2,914

1,395

48%

1,496

51%

Dodd-Frank Act Special Entities

1,086

1,050

97%

Registered Investment Companies

636

620

97%

Banks (non-ISDA-recognized dealers)

369

339

92%

Insurance Companies

224

144

64%

26%

ISDA-Recognized Dealers

100%

Foreign Sovereigns

71%

25%

Non-Financial Corporations

68%

26%

Finance Companies

50%

Other/Unclassified

4,626

3,131

68%

1,295

28%

200

All

10,054

6,454

64%

2,848

28%

752

Although the SBS market is global in nature, 61% of the transaction volume in the 2008-2013 period included at least one U.S.-domiciled entity (see Figure 1).

Moreover, 18% of the CDS transactions reflected in DTCC-TIW data that include at least one U.S.-domiciled counterparty or a U.S. reference entity were between U.S.-domiciled entities and foreign-domiciled counterparties.

This column reflects the number of participants who are also trading for their own accounts.

ER19MR15.001

The cross-border nature of the SBS market is growing over time. Figure 2 below is a chart of (1) the percentage of new accounts with a domicile in the United States,

(2) the percentage of new

accounts with a domicile outside

the United States, and (3) the percentage of new accounts outside the United States, but managed by a U.S. entity, foreign accounts that include new accounts of a foreign branch of a U.S. bank, and new accounts of a foreign subsidiary of a U.S. entity. Over time, a greater share of accounts entering the DTCC-TIW data either have a foreign domicile or have a foreign domicile while being managed by a U.S. person. The increase in foreign accounts may reflect an increase in participation by foreign accountholders and the increase in foreign accounts managed by U.S. persons may reflect the flexibility with which market participants can restructure their market participation in response to regulatory intervention, competitive pressures, and other factors. There are, however, alternative explanations for the shifts in new account domicile in Figure 2. Changes in the domicile of new accounts through time may reflect improvements in reporting by market participants to DTCC-TIW. Additionally, because the data includes only accounts that are domiciled in the United States, transact with U.S.-domiciled counterparties, or transact in single-name CDSs with U.S. reference entities, changes in the domicile of new accounts may reflect increased transaction activity between U.S. and non-U.S. counterparties.

The domicile classifications in DTCC-TIW are based on the market participants' own reporting and have not been verified by Commission staff. Prior to enactment of the Dodd-Frank Act, account holders did not formally report their domicile to DTCC-TIW because there was no systematic requirement to do so. After enactment of the Dodd-Frank Act, the DTCC-TIW has collected the registered office location of the account. This information is self-reported on a voluntary basis. It is possible that some market participants may misclassify their domicile status because the databases in DTCC-TIW do not assign a unique legal entity identifier to each separate entity. It is

also possible that the domicile classifications may not correspond precisely to the definition of U.S. person under the rules defined in Exchange Act Rule 3a71-3(a)(4), 17 CFR 240.3a71-3(a)(4). Notwithstanding these limitations, the Commission believes that the cross-border and foreign activity demonstrates the nature of the single-name CDS market.

ER19MR15.002

b. Security-Based Swap Data Repositories

No SDRs are currently registered with the Commission. The Commission is aware of one entity in the market (

i.e.,

the DTCC-TIW) that has been accepting voluntary reporting of single-name and index CDS transactions. In 2013, DTCC-TIW received approximately 3.1 million records of CDS transactions, of which

approximately 800,000 were price forming.

Price-forming CDS transactions include all new transactions, assignments, modifications to increase the notional amounts of previously executed transactions, and terminations of previously executed transactions. Transactions terminated or entered into in connection with a compression exercise, and expiration of contracts at maturity are not considered price-forming and are therefore excluded, as are replacement trades and all bookkeeping-related trades.

The CFTC has provisionally registered four swap data repositories.

These swap data repositories are: BSDR LLC, Chicago Mercantile Exchange Inc., DTCC Data Repository LLC, and ICE Trade Vault, LLC. The Commission believes that most of these entities will likely register with the Commission as SDRs and that other persons may seek to register with both the CFTC and the Commission as swap data repositories and SDRs, respectively. As stated above, the Commission believes that the final SDR Rules are largely consistent with the CFTC's rules governing swap data repositories.

CFTC Rule 49.3(b) provides for provisional registration of a swap data repository. 17 CFR 49.3(b).

Efforts to regulate the swap and SBS market are underway not only in the United States, but also abroad. In 2009, leaders of the G20—whose members include the United States, 18 other countries, and the European Union—called for global improvements in the functioning, transparency, and regulatory oversight of OTC derivatives markets and agreed, among other things, that OTC derivatives contracts should be reported to trade repositories.

Substantial progress has been made in establishing the trade repository infrastructure to support the reporting of all contracts.

Currently, multiple trade repositories operate, or are undergoing approval processes to do so, in a number of different jurisdictions.

The requirements for trade reporting differ across jurisdictions. The result is that trade repository data is fragmented across many locations, stored in a variety of formats, and subject to many different rules for authorities' access. The data in these trade repositories will need to be aggregated in various ways if authorities are to obtain a comprehensive and accurate view of the global OTC derivatives markets and to meet the original financial stability objectives of the G20 in calling for comprehensive use of trade repositories.

See

Leaders' Statement, The Pittsburgh Summit, September 24-25, 2009,

available at

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

See

OTC Derivatives Market Reforms Eighth Progress Report on Implementation (Nov. 2014),

available at

http://www.financialstabilityboard.org/wp-content/uploads/r_141107.pdf

Id.

III. Definition, Scope of Registration, Services, and Business Models of SDRs

The Proposing Release generally discussed the role, regulation, and business models of SDRs,

but it did not specifically address the applicability of the statutory definition of an SDR.

The Commission received several comments that addressed broad issues regarding what persons fall within the statutory definition of an SDR, what services can or must be provided by SDRs, and what business models are appropriate for SDRs. In light of these comments, the Commission believes that it is useful to provide clarity on the definition of an SDR and the services that are required or permitted to be provided by SDRs. For purposes of this release, the Commission will refer to services that are specifically included in the statutory definition of an SDR

as “core” services. All other services—both those required by the Dodd-Frank Act and the rules and regulations thereunder, and those not required, but which the Commission believes are permissible for SDRs to perform—will be referred to as “ancillary” services.

See

Proposing Release, 75 FR at 77307-77308,

supra

note 2.

In the Cross-Border Proposing Release, the Commission discussed several examples of circumstances in which a person would be performing the functions of an SDR in the cross-border context. 78 FR at 31041-31043,

supra

note 3. The Commission did not receive any comments on this aspect of the Cross-Border Proposing Release.

Exchange Act Section 3(a)(75), 15 U.S.C. 78c(a)(75).

Definition of SDR: Core Services

Exchange Act Section 3(a)(75), enacted by Dodd-Frank Act Section 761, defines a “security-based swap data repository” to mean “any person that collects and maintains information or records with respect to transactions or positions in, or the terms and conditions of, security-based swaps entered into by third parties for the purpose of providing a centralized recordkeeping facility for security-based swaps.”

Exchange Act Section 3(a)(75), 15 U.S.C. 78c(a)(75).

One commenter requested that “the Commission provide clear guidance as to the scope of the entities covered within the [statutory] definition of SDR in the Dodd-Frank Act.”

The commenter stated as follows: “The statutory duties required of an SDR are extensive and can form a business in their own right. The requirements of an SDR should not be imposed upon service providers looking to provide targeted solutions to specific processes, as opposed to providers looking more broadly to fulfill the role of an SDR. All third party service providers have to perform a level of recordkeeping and often retain data previously submitted by customers to offer services efficiently. This should not transform them into an SDR unless there is a corresponding policy reason for doing so. In fact, there is a strong policy reason to exclude them, the goal of countering the risk of fragmentation in data collection and dissemination on a global basis.”

Another commenter described an SDR's core functions as “basic receipt and storage of [SBS] data.”

DTCC 2,

supra

note 19.

DTCC 2,

supra

note 19.

MarkitSERV,

supra

note 19.

The Commission believes that the statutory definition in Exchange Act Section 3(a)(75) describes the core services or functions of an SDR. Whether a person falls within the statutory definition of an SDR is fact-specific. An example of a person that would likely meet the statutory definition of an SDR is a person that provides the service of maintaining a centralized repository of records of SBSs for counterparties to SBS transactions that are intended to be relied on by counterparties for legal purposes. Providing this service would cause the person to meet the statutory definition of an SDR because the person is “collect[ing] and maintain[ing] information or records with respect to transactions or positions in, or the terms and conditions of, [SBSs] entered into by third parties for the purpose of providing a centralized recordkeeping facility for [SBSs].”

In contrast, a law firm, trustee, custodian, or broker-dealer that holds SBS records likely would not meet the statutory definition of an SDR because those persons would not be doing so “for the purpose of providing a centralized recordkeeping facility for [SBSs].”

See

Exchange Act Section 3(a)(75), 15 U.S.C. 78c(a)(75).

See

Exchange Act Section 3(a)(75), 15 U.S.C. 78c(a)(75).

One commenter identified countering the risk of fragmentation in data collection and dissemination as a policy reason to exclude certain persons, such as certain third party service providers, from the definition of an SDR.

The Commission believes that while third party service providers may collect and maintain SBS data, they generally do not do so “for the purpose of providing a centralized recordkeeping facility.” As such, third party service providers

generally would not fall within the statutory definition of an SDR. Thus, they do not need to be excluded from the definition of an SDR, as the commenter suggested. If, however, the third party service provider collects and maintains the SBS data “for the purpose of providing a centralized recordkeeping facility,”

it would likely fall within the definition of an SDR. The Commission does not believe that there are any policy reasons, including countering the risk of fragmentation, to warrant a broad-based exemption from registration for third party service providers that collect and maintain SBS data “for the purpose of providing a centralized recordkeeping facility.”

See

DTCC 2,

supra

note 19.

Exchange Act Section 3(a)(75), 15 U.S.C. 78c(a)(75).

B. SDRs Required To Register With the Commission

To the extent that a person falls within the statutory definition of an SDR, and makes use of the mails or any means or instrumentality of interstate commerce to perform the functions of an SDR, then that person is required to register with the Commission,

absent an exemption.

As discussed in the Cross-Border Proposing Release,

the Commission believes that U.S. persons

that perform the functions of an SDR are required to register with the Commission and comply with Exchange Act Section 13(n)

100

and the rules and regulations thereunder, as well as other requirements applicable to SDRs registered with the Commission.

101

Requiring U.S. persons that perform the functions of an SDR to be operated in a manner consistent with the Title VII regulatory framework and subject to the Commission's oversight, among other things, helps ensure that relevant authorities are able to monitor the build-up and concentration of risk exposure in the SBS market, reduce operational risk in that market, and increase operational efficiency.

102

SDRs themselves are subject to certain operational risks that may impede the ability of SDRs to meet these goals,

103

and the Title VII regulatory framework is intended to address these risks.

See

Exchange Act Section 13(n)(1), 15 U.S.C. 78m(n)(1).

See

Section VI.K of this release discussing Rule 13n-12.

Cross-Border Proposing Release, 78 FR at 31042,

supra

note 3.

The term “U.S. person” is defined in Rule 13n-12(a), as discussed in Section VI.K.3 of this release, and cross-references to the definition of “U.S. person” in Exchange Act Rule 3a71-3(a)(4)(i), 17 CFR 240.3a71-3(a)(4)(i).

See

Cross-Border Adopting Release, 79 FR at 47371,

supra

note 11. Rule 3a71-3(a)(4)(i) defines “U.S. person” to mean “any person that is: (A) A natural person resident in the United States; (B) A partnership, corporation, trust, investment vehicle, or other legal person organized, incorporated, or established under the laws of the United States or having its principal place of business in the United States; (C) An account (whether discretionary or non-discretionary) of a U.S. person; or (D) An estate of a decedent who was a resident of the United States at the time of death.”

Id.

at 47371. As the Commission noted in the Cross-Border Adopting Release, the definition of “U.S. person” in Rule 3a71-3(a)(4)(i) “reflect[s] a territorial approach to the application of Title VII.” Cross-Border Adopting Release, 79 FR at 47306,

supra

note 11. The Commission believes that the territorial focus of the definition is appropriate in the context of the SDR Rules because it will enable the Commission to identify those SDRs that should be required to register with the Commission by virtue of the location of a significant portion of their commercial and legal relationships within the United States.

Cf.

Cross-Border Adopting Release, 79 FR at 47337,

supra

note 11.

100

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

101

In addition to the SDR Rules, the Commission is adopting Regulation SBSR, which imposes certain obligations on SDRs registered with the Commission.

See

Regulation SBSR Adopting Release,

supra

note 13. In a separate proposal relating to implementation of Dodd-Frank Act Section 763(i) (adding Exchange Act Section 13(n)(5)(E), 15 U.S.C. 78m(n)(5)(E)), the Commission proposed rules that would require SDRs registered with the Commission to collect data related to monitoring the compliance and frequency of end-user clearing exemption claims.

See

End-User Exception Proposing Release,

supra

note 15.

102

See

Proposing Release, 75 FR at 77307,

supra

note 2 (“The enhanced transparency provided by an SDR is important to help regulators and others monitor the build-up and concentration of risk exposures in the SBS market . . . . In addition, SDRs have the potential to reduce operational risk and enhance operational efficiency in the SBS market.”).

103

See

Proposing Release, 75 FR at 77307,

supra

note 2 (“The inability of an SDR to protect the accuracy and integrity of the data that it maintains or the inability of an SDR to make such data available to regulators, market participants, and others in a timely manner could have a significant negative impact on the SBS market. Failure to maintain privacy of such data could lead to market abuse and subsequent loss of liquidity.”).

Also, as stated in the Cross-Border Proposing Release, the Commission believes that a non-U.S. person

104

that performs the functions of an SDR within the United States would be required to register with the Commission, absent an exemption.

105

The Commission's interpretation of the scope of SDR registration is consistent with the Commission's territorial approach to the application of Title VII, as discussed in the Cross-Border Adopting Release.

106

As noted in that release, the Commission takes the view that a territorial approach to the application of Title VII is grounded in the text of the relevant statutory provisions and is designed to help ensure that the Commission's application of the relevant provisions is consistent with the goals that the statute was intended to achieve.

107

Once the focus of the statute has been identified using this analysis, determining whether a particular application of the statute is territorial turns on whether any relevant conduct that is the focus of the statute has a sufficient territorial nexus with the United States.

108

104

Under this interpretation, the term “non-U.S. person” would have the same meaning as set forth in Rule 13n-12(a), as discussed in Section VI.K.3 of this release.

105

Cross-Border Proposing Release, 78 FR at 31042,

supra

note 3.

See also

Exchange Act Section 13(n)(1), 15 U.S.C. 78m(n)(1) (requiring persons that, directly or indirectly, make use of the mails or any means or instrumentality of interstate commerce to perform the functions of an SDR to register with the Commission). The Commission recognizes that some non-U.S. persons that perform the functions of an SDR may do so entirely outside the United States, and thus, are not required to register with the Commission.

See

Cross-Border Proposing Release, 78 FR at 31042 n.721,

supra

note 3.

106

Cross-Border Adopting Release, 79 FR at 47287,

supra

note 11.

Accord

IIB CB,

supra

note 26 (believing that the Commission's territorial approach to registration is appropriate for market infrastructures, including SDRs, and stating that “[t]his approach will help [ ] achieve the Commission's market oversight objectives while avoiding conflicts with foreign regulators, and it is consistent with the CFTC's approach”).

107

Cross-Border Adopting Release, 79 FR at 47287,

supra

note 11.

108

See

Cross-Border Adopting Release, 79 FR at 47287,

supra

note 11.

As stated in the Cross-Border Proposing Release, the Commission believes that “a non-U.S. person would be performing `the functions of a security-based swap data repository within the United States' if, for example, it enters into contracts, such as user or technical agreements, with a U.S. person to enable the U.S. person to report [SBS] data to such non-U.S. person.”

109

As another example, “a non-U.S. person would be performing `the functions of a security-based swap data repository within the United States' if it has operations in the United States, such as maintaining [SBS] data on servers physically located in the United States, even if its principal place of business is not in the United States.”

110

109

Cross-Border Proposing Release, 78 FR at 31042,

supra

note 3.

110

Cross-Border Proposing Release, 78 FR at 31042,

supra

note 3. The Commission notes that if a person performing the functions of an SDR has operations in the United States to the extent that such operations constitute a principal place of business, then the person would fall within the definition of “U.S. person” in Rule 13n-12, which cross-references to Exchange Act Rule 3a71-3(a)(4)(i), 17 CFR 240.3a71-3(a)(4)(i). As adopted, the term “U.S. person” includes a partnership, corporation, trust, investment vehicle, or other legal person having its principal place of business in the United States.

See

Cross-Border Adopting Release, 79 FR at 47371,

supra

note 11. As a result of being a “U.S. person,” the person with its principal place of business in the United States would be required to register as an SDR with the Commission.

One commenter submitted a comment relating to the Commission's guidance on SDR registration in the cross-border context.

111

This commenter suggested

that “[t]he SDR registration requirement should apply to any entity, regardless of physical location of servers, that receives [SBS] transaction data from reporting sides who are U.S. persons for the purpose of complying with the Commission's reporting regulations.”

112

The commenter also suggested that if an SDR “collects and maintains [SBS] transaction information or records in furtherance of these obligations, then it should be deemed to `function' as an SDR in the United States and face the registration requirements.”

113

The Commission agrees generally with the commenter, but notes that determination of whether or not an SDR is required to register with the Commission is based on relevant facts and circumstances, including, for example, whether the SDR performs the functions of an SDR within the United States, such as having operations within the United States, as discussed above. Thus, an SDR's registration requirements should be analyzed separately from the reporting requirements of Title VII and Regulation SBSR.

111

See

DTCC CB,

supra

note 26.

112

DTCC CB,

supra

note 26.

113

DTCC CB,

supra

note 26.

The commenter stated that “an entity that (i) collects and maintains [non-SBS] transaction information, (ii) collects and maintains [SBS] transaction information from activity between non-U.S. persons, or (iii) collects and maintains [SBS] transaction information reported to the entity pursuant to regulatory requirements or commitments unrelated to those imposed by the Commission . . . should not be considered to function in the United States,” and “[a]ccordingly, such an entity would not be required to register with the Commission as an SDR.”

114

The Commission believes that this position is overly broad. The Commission agrees that a person that collects and maintains only non-SBS transaction information would not have to register with the Commission because it would not fall within the statutory definition of an SDR.

115

However, consistent with the Commission's territorial approach to the application of Title VII, an SDR that collects and maintains data relating to SBS transactions between non-U.S. persons may still be required to register with the Commission if the SDR makes use of the mails or any means or instrumentality of interstate commerce to perform the functions of an SDR—for example by maintaining SBS data on servers physically located in the United States. Similarly, an SDR that collects and maintains SBS transaction information reported to the SDR pursuant to requirements or commitments unrelated to those imposed by the Commission may still be required to register with the Commission if the SDR makes use of the mails or any means or instrumentality of interstate commerce to perform the functions of an SDR.

114

DTCC CB,

supra

note 26.

115

See

Exchange Act Section 3(a)(75), 15 U.S.C. 78c(a)(75).

Determination of whether or not an SDR is required to register with the Commission is fact-specific. As stated in the Cross-Border Proposing Release, given the constant innovation in the market and the fact-specific nature of the determination, it is not possible to provide a comprehensive discussion of every activity that would constitute a non-U.S. person performing “the functions of a security-based swap data repository within the United States.”

116

In order to provide legal certainty to market participants and to address commenters' concerns regarding the potential for duplicative regulatory requirements, the Commission is adopting Rule 13n-12, which exempts certain non-U.S. persons performing “the functions of a security-based swap data repository within the United States” from the registration and other requirements set forth in Exchange Act Section 13(n) and the rules and regulations thereunder. Rule 13n-12 is discussed in Section VI.K of this release.

116

Cross-Border Proposing Release, 78 FR at 31042-3,

supra

note 3.

Ancillary Services

As stated above, the Commission believes that the statutory definition of an SDR describes the core services or functions of an SDR. This release will refer to all other services or functions provided by an SDR as “ancillary services.” SDRs are required to provide some ancillary services under the Exchange Act and the rules and regulations thereunder (“required ancillary services”). These required ancillary services include certain duties of SDRs that are set forth in Exchange Act Section 13(n)(5)

117

and the duties imposed by the SDR Rules. SDRs also may voluntarily choose to provide other ancillary services (“voluntary ancillary services”).

117

15 U.S.C. 78m(n)(5).

Five commenters submitted comments relating to “ancillary services.”

118

Three commenters recommended that SDRs be allowed (but not be required) to offer ancillary services to SBS counterparties.

119

One of these commenters recommended that SDRs be allowed (but not be required) to offer “ancillary services,” which, according to that commenter, “may include: Asset servicing, confirmation, verification and affirmation facilities, collateral management, settlement, trade compression and netting services, valuation, pricing and reconciliation functionalities, position limits management, dispute resolution, counterparty identity verification and others.”

120

The commenter noted that allowing SDRs to offer such services would “promote greater efficiencies and greater accuracy of data.”

121

The commenter also recommended allowing an SDR's affiliates, which may not be registered with the Commission, to perform such “ancillary services.”

122

The second commenter recommended that life cycle event processing and legal recordkeeping services be treated as “ancillary” services.

123

The second commenter also recommended allowing SDRs to offer “an asset servicing function,” which would allow SDRs to “assist in systemic risk monitoring by providing regulators with regular reports analyzing the data (such as position limit violations or certain identified manipulative trading practices).”

124

With respect to bundling, both commenters agreed that an SDR should not be allowed to require counterparties to use “ancillary services” in order to gain access to the SDR.

125

The third commenter believed that SDRs should be able to offer “ancillary services,” but did not support the bundling of such services with mandatory or regulatory services.

126

The

fourth commenter believed that if SDRs provide “ancillary services,” then the SDRs should not have advantages in providing these services over competitors offering the same services.

127

This commenter noted, for example, that SDRs will maintain granular trade data that is valuable in providing post-trade services, and that other post-trade service providers should have the same access to the granular trade data as the SDR and its affiliates when providing post-trade services.

128

The fifth commenter suggested that certain functions that an SDR may perform (

e.g.,

confirmation of trades, reconciliation, valuation of transactions, life-cycle management, collateral management) should not be considered as “processing of [SBSs]” for the purposes of SB SEF registration.

129

118

See

Barnard,

supra

note 19; BNY Mellon,

supra

note 19; DTCC 2,

supra

note 19; MarkitSERV,

supra

note 19; TriOptima,

supra

note 19;

see also

DTCC 1*,

supra

note 20; DTCC 3,

supra

note 19. These commenters generally did not define “ancillary services.”

But see

MarkitSERV,

supra

note 19 (referring to “an array of services that are ancillary . . . to those narrowly outlined in the [SDR Rules] (

i.e.,

basic receipt and storage of [SBS] data.)”).

119

See

MarkitSERV,

supra

note 19; DTCC 2,

supra

note 19; Barnard,

supra

note 19;

see also

TriOptima,

supra

note 19 (contemplating that an SDR would provide ancillary services and stressing the importance of equal access to SDR data when such services are provided).

120

MarkitSERV,

supra

note 19.

121

MarkitSERV,

supra

note 19.

122

MarkitSERV,

supra

note 19.

123

DTCC 2,

supra

note 19.

124

DTCC 1*,

supra

note 20.

125

MarkitSERV,

supra

note 19; DTCC 3,

supra

note 19;

see also

DTCC 4,

supra

note 19 (stating that providers offering services for one asset class should not be permitted to bundle or tie these services with services for other asset classes); TriOptima,

supra

note 19 (agreeing that “it is important that market participants have the ability to access specific services separately”).

See

Section VI.D.3.a of this release discussing bundling of services.

126

Barnard,

supra

note 19.

127

TriOptima,

supra

note 19.

128

TriOptima,

supra

note 19.

129

BNY Mellon,

supra

note 19.

See also

Exchange Act Section 3D(a)(1), 15 U.S.C. 78c-4(a)(1) (stating that “[n]o person may operate a facility for the trading or processing of security-based swaps, unless the facility is registered as a security-based swap execution facility or as a national securities exchange under this section”). Subsequent to receiving this comment, the Commission issued a proposing release on the registration and regulation of SB SEFs, interpreting the Dodd-Frank Act to key the SB SEF registration obligation on the definition of an SB SEF in Exchange Act Section 3(a)(77).

See

15 U.S.C. 78c(a)(77), as added by Dodd-Frank Act Section 761(a).

See

SB SEF Proposing Release, 76 FR at 10959 n.62,

supra

note 29. The Commission expects to address the scope of SB SEF registration when it adopts final rules relating to the registration and regulation of SB SEFs.

It appears that the commenters generally used the term “ancillary services” to mean voluntary ancillary services. The Commission, however, notes that at least two services identified by a commenter as “ancillary services” are considered by the Commission to be required ancillary services for an SDR. This commenter suggested that “confirmation” and “dispute resolution” are ancillary to “those [services] narrowly outlined in the SBS SDR Regulation (

i.e.,

basic receipt and storage of swaps data).”

130

The Commission agrees with the commenter's suggestion that these two services are not “core” SDR services, which would cause a person providing such core services to meet the definition of an SDR, and thus, require the person to register with the Commission as an SDR. However, SDRs are required to perform these two services or functions, and thus, they are required ancillary services; as discussed in Sections VI.E.1.c and VI.E.6.c of this release, the Exchange Act requires SDRs to “confirm” the accuracy of the data submitted,

131

and the final SDR Rules include a dispute resolution requirement.

132

130

See

MarkitSERV,

supra

note 19.

131

See

Exchange Act Section 13(n)(5)(B), 15 U.S.C. 78m(n)(5)(B); Rule 13n-4(b)(3) (requiring an SDR to “[c]onfirm, as prescribed in Rule 13n-5(§ 240.13n-5), with both counterparties to the [SBS] the accuracy of the data that was submitted”); Rule 13n-5(b)(1)(iii) (requiring an SDR to establish, maintain, and enforce written policies and procedures reasonably designed to satisfy the SDR that the transaction data that has been submitted to the SDR is complete and accurate).

132

See

Section VI.E.6.c of this release discussing Rule 13n-5(b)(6).

An SDR may delegate some of these required ancillary services to third party service providers, who do not need to register as SDRs to provide such services. The SDR will remain legally responsible for the third party service providers' activities relating to the required ancillary services and their compliance with applicable rules under the Exchange Act. For example, as discussed above, the Exchange Act requires SDRs to “confirm” the accuracy of the data submitted.

133

If an SDR delegates its confirmation obligation to a third party service provider, then the third party service provider that provides this required ancillary service would not need to register as an SDR, unless it otherwise falls within the definition of an SDR; however, the SDR that delegates its obligation to the third party service provider would remain responsible for compliance with the statutory requirement.

134

133

See

Exchange Act Section 13(n)(5)(B), 15 U.S.C. 78m(n)(5)(B). In a separate release, the Commission proposed rules under Exchange Act Section 15F(i)(1), which provides that SBS dealers and major SBS participants must “conform with such standards as may be prescribed by the Commission, by rule or regulation, that relate to timely and accurate confirmation . . . of all security-based swaps.”

See

Trade Acknowledgment and Verification of Security-Based Swap Transactions, Exchange Act Release No. 63727 (Jan. 14, 2011), 76 FR 3859 (Jan. 21, 2011) (“Trade Acknowledgment Release”). SDRs are not required to perform confirmations under Exchange Act Section 15F(i)(1) and the rules and regulations thereunder, but, in certain circumstances, SDRs may be able to rely on confirmations that are provided pursuant to Exchange Act Section 15F(i)(1).

See

Section VI.E.1.c of this release discussing the circumstances where a single confirmation could fulfill both requirements.

134

An SDR that delegates required ancillary services to a third party service provider must have a reasonable basis for relying on the third party service provider.

See

Section VI.E.1.c of this release discussing reasonable reliance in the context of confirmations.

Cf.

Exchange Act Rule 17a-4(i), 71 CFR 240.17a-4(i) (stating that an agreement with an outside entity to maintain and preserve records for a member, broker, or dealer will not relieve the member, broker, or dealer from its responsibilities under Exchange Act Rules 17a-3 or 17a-4).

The Commission agrees with the commenters' view that SDRs should be allowed to offer voluntary ancillary services.

135

The Commission believes that use of such services by market participants and market infrastructures will likely improve the quality of the data held by the SDRs.

136

The Commission believes that when the data held at an SDR is used by counterparties for their own business purposes, rather than solely for regulatory purposes, the counterparties will have additional opportunities to identify errors in the data and will likely have incentives to ensure the accuracy of the data held by the SDR.

137

Such voluntary ancillary services that an SDR could provide include, for example, collateral management, clearing and settlement, trade compression and netting services, and pricing and reconciliation functionalities. These services could also be provided by persons that are not SDRs and would not, in and of themselves, require the providers to register as SDRs.

138

135

See

MarkitSERV,

supra

note 19; DTCC 2,

supra

note 19; Barnard,

supra

note 19.

136

See

MarkitSERV,

supra

note 19 (recommending allowing SDRs to offer “ancillary services” because it would “promote greater efficiencies and greater accuracy of data”).

137

For example, counterparties might use the data maintained by the SDR as part of their risk management activities.

See

MarkitSERV,

supra

note 19 (“[O]ne of the critical components in ensuring the accuracy of swaps data is the degree to which such data is utilized by industry participants in other processes. The existence of a number of feedback loops and distribution channels through which data will flow will enable participants to identify, test and correct inaccuracies and errors.”).

138

The performance of some of these services, such as clearing and settlement and netting services, may cause a person to be a “clearing agency,” as defined in Exchange Act Section 3(a)(23), 15 U.S.C. 78c(a)(23);

see also

Clearing Agency Standards, Exchange Act Release No. 68080 (Oct. 22, 2012), 77 FR 66220, 66227-28 (Nov. 2, 2012) (“Clearing Agency Standards Release”) ([T]he definition of clearing agency in Section 3(a)(23)(A) of the Exchange Act covers any person who acts as an intermediary in making payments or deliveries or both in connection with transactions in securities and provides facilities for the comparison of data regarding the terms of settlement of securities transactions, to reduce the number of settlements of securities transactions, or for the allocation of securities settlement responsibilities. . . . The determination of whether particular activities meet the definition of a clearing agency depends on the totality of the facts and circumstances involved.”). It is unlawful for a clearing agency to make use of the mails or any means or instrumentality of interstate commerce to perform the functions of a clearing agency with respect to any security (other than exempted securities) unless it is registered with the Commission, or exempted from registration, pursuant to Exchange Act Sections 17A(b) and 19(a), and the rules and regulations thereunder.

The Commission also agrees with the commenters' view that market participants should not be required to use voluntary ancillary services offered by an SDR as a condition to use the SDR's repository services,

139

and that SDRs should not be permitted to use their repository function to gain

advantages in providing voluntary ancillary services over competitors offering the same services.

140

As discussed further below, the Commission is adopting Rule 13n-4(c)(1), which should address commenters' concerns.

141

139

See

MarkitSERV,

supra

note 19; DTCC 2,

supra

note 19; Barnard,

supra

note 19.

140

See

TriOptima,

supra

note 19.

141

See

Section VI.D.3.a of this release discussing Rule 13n-4(c)(1).

Business Models of SDRs

The Commission understands that SDRs might operate under a number of business models and did not intend for the proposed SDR Rules to mandate any particular business model.

142

In the Proposing Release, the Commission solicited comments on whether the SDR Rules should favor or discourage one business model over another.

143

Three commenters, including one comment submitted prior to the Proposing Release, suggested that SDRs should be required to operate on an at-cost utility model.

144

142

See

Proposing Release, 75 FR at 77308,

supra

note 2.

143

Proposing Release, 75 FR at 77308,

supra

note 2.

144

See

DTCC 2,

supra

note 19 (stating that “there is a significant advantage to the market if SDRs are required to provide basic services on an at-cost or utility model basis, as it avoids the potential abuse or conflict of interest related to a relatively small number of service providers in the SDR industry” and that “SDR fee structures should reflect an at-cost operating budget”); Benchmark*,

supra

note 20 (stating that a non-profit utility structure “helps promote innovative uses” of SBS data “to maximize its value to market participants”); Saul,

supra

note 19 (stating that SDRs should “serve the entire industry as a utility” and that “[t]reating an SDR as a utility would also make it easier for the industry to provide the manpower and the capital to form an SDR”);

see also

DTCC 3,

supra

note 19 (“SDRs should serve an impartial, utility function.”).

Consistent with commenters' views, the Commission understands that an SDR operating on a for-profit, non-utility model, or commercial basis, may be presented with more conflicts of interest, including economic self-interest in pricing or bundling its services, than an SDR operating on an at-cost utility model, or non-profit basis.

145

The Commission believes, however, that if an SDR operating on an at-cost utility model has an affiliate that provides ancillary services for SBSs for profit, then that SDR may be presented with conflicts of interest similar to conflicts at an SDR operating on a for-profit, non-utility model.

146

For example, an SDR that has an affiliate that provides asset servicing for profit would most likely face similar conflicts as a for-profit SDR that provides asset servicing itself.

145

See

Section VIII of this release discussing the costs and benefits of different business models.

146

See

Section VIII of this release for further discussion.

The Commission believes that the final SDR Rules, including rules pertaining to conflicts of interest, are sufficiently broad to address the range of conflicts of interest inherent in different SDR business models. For instance, under Rule 13n-4(c)(3), each SDR is required to identify conflicts of interest applicable to it and establish, maintain, and enforce written policies and procedures to mitigate these conflicts.

147

In addition, the Commission believes that allowing SDRs to pursue different business models will increase competition, efficiency, and innovation among SDRs. For example, by not prescribing one particular business model, new entrants may have an incentive to develop business models for SDRs that efficiently provide core services to the industry and effectively mitigate conflicts.

148

Therefore, after considering the comments, the Commission continues to believe that it is not necessary to mandate any particular business model for SDRs.

147

See

Section VI.D.3.c.iii of this release discussing Rule 13n-4(c)(3).

148

See

Section VIII of this release discussing the costs and benefits of different business models.

IV. Number of SDRs and Consolidation of SBS Data

The Commission received several comments relating to the issue of data fragmentation among SDRs. The Commission believes that if there are multiple SDRs in any given asset class, then it may be more difficult for regulators to monitor the SBS market because of the challenges in aggregating SBS data from multiple SDRs.

149

Some commenters suggested limiting the number of SDRs to one per asset class in order to address these concerns.

150

While such a limitation would resolve many of the challenges involved in aggregating SBS data, the Commission believes that imposing such a limitation would stymie competition among SDRs, and, consequently, may lead to increased costs to market participants.

151

The Commission believes that the better avenue at this point is to refrain from regulating the number of SDRs in an asset class to permit market forces to determine an efficient outcome. Therefore, the Commission is not adopting the commenters' suggestions to limit the number of SDRs in each asset class.

149

See

FINRA SBSR,

supra

note 27 (recognizing “the Commission's acknowledgement of `the possibility that there could emerge multiple registered SDRs in an asset class,' and, in the event this should occur that `the Commission and the markets would be confronted with the possibility that different registered SDRs could adopt different dissemination protocols, potentially creating fragmentation in SBS market data' ”) (citations omitted); DTCC 3,

supra

note 19 (“When there are multiple SDRs in any particular asset class, the [Commission] should take such action as is necessary to eliminate any overstatements of open interest or other inaccuracies that may result from having broader market data published from separate SDRs.”).

150

See

ISDA Temp Rule,

supra

note 28 (“[T]he designation of a single [SDR] per class of security-based swap would provide the Commission and market participants with valuable efficiencies. In particular, there would be no redundancy of platforms, no need for additional levels of data aggregation for each asset class and reduced risk of errors and greater transparency (because a single [SDR] per asset class would avoid the risk of errors associated with transmitting, aggregating and analyzing multiple sources of potentially incompatible and duplicative trade data).”);

see also

Saul,

supra

note 19 (suggesting that the Commission should seek to have only one or two SDRs to service the SBS market).

151

See

Section VIII.C.3.b of this release discussing the SDR Rules' potential effects on competition (“The Commission believes that by allowing multiple SDRs to provide data collection, maintenance, and recordkeeping services, the SDR Rules should promote competition among SDRs. . . . Increased competition may lower costs for users of SDR services.”).

Accord

PFMI Report,

supra

note 50 (“Competition can be an important mechanism for promoting efficiency. Where there is effective competition and participants have meaningful choices among FMIs[, including SDRs], such competition may help to ensure that FMIs are efficient.”).

In the Proposing Release, the Commission requested comment on whether the Commission should designate one SDR as the recipient of the information from all other SDRs in order to provide the Commission and relevant authorities with a consolidated location from which to access SBS data for regulatory monitoring and oversight purposes.

152

Some commenters suggested that an SDR's duties should include reporting SBS data to a single SDR that would consolidate the data for relevant authorities or otherwise mandating the consolidation of SBS data.

153

Specifically, one commenter recommended that the Commission “designate one SDR as the recipient of the information of other SDRs to ensure the efficient consolidation of data.”

154

The commenter further stated that the designated SDR would need to have “the organization and governance structure that is consistent with being a

financial market utility serving a vital function to the entire marketplace.”

155

152

Proposing Release, 75 FR at 77309,

supra

note 2.

153

See

DTCC 1*,

supra

note 20; Better Markets 1,

supra

note 19;

see also

FINRA SBSR,

supra

note 27 (urging the Commission to mandate the consolidation of disseminated SBS data to the public).

154

DTCC 1*,

supra

note 20;

see also

Better Markets 1,

supra

note 19 (making similar comments);

see also

DTCC 2,

supra

note 19 (“The role of an aggregating SDR is significant in that it ensures regulators efficient, streamlined access to consolidated data, reducing the strain on limited agency resources.”).

155

DTCC 1*,

supra

note 20.

The Commission does not dispute the commenter's assertion that fragmentation of data among SDRs would “leave to regulators the time consuming, complicated and expensive task of rebuilding complex data aggregation and reporting mechanisms.”

156

However, if the Commission were to designate one SDR as the data consolidator, such an action could be deemed as the Commission's endorsement of one regulated person over another, discourage new market entrants, and interfere with competition, resulting in a perceived government-sponsored monopoly.

157

In addition, such a requirement would likely impose an additional cost on market participants to cover the SDR's cost for acting as the data consolidator.

156

DTCC 3,

supra

note 19.

157

See

Section VIII of this release for further discussion.

In addition, any consolidation required by the Commission would be limited to SBS data and may not necessarily include data not required to be reported under Title VII and Regulation SBSR, such as swap data. For example, consolidated SBS data may show that a person entered into several SBSs based on individual equity securities. If the person also entered into swaps based on a broad-based security index made up of the individual equity securities, then the consolidated data would not necessarily include that information. Therefore, commenters' suggestion to designate one SDR as the data consolidator may not fully address their data fragmentation concerns unless the same SDR also consolidates swap data, which the CFTC regulates.

Therefore, after considering the comments, the Commission is not designating, at this time, one SDR as the recipient of information from other SDRs in order to provide relevant authorities with consolidated data. The Commission may revisit this issue if there is data fragmentation among SDRs that is creating substantial difficulties for relevant authorities to get a complete and accurate view of the market.

158

See

Section VI.D.2.c.ii of this release discussing aggregation of data across multiple registered SDRs by the Commission.

V. Implementation of the SDR Rules

A. Prior Commission Action

The Commission solicited comment in the Proposing Release on whether it should adopt an incremental, phase-in approach with respect to Exchange Act Section 13(n) and the rules thereunder.

159

The Commission further sought and received comments on similar implementation issues relating to Title VII in other rulemakings and through solicitations for comments.

160

159

Proposing Release, 75 FR at 77314,

supra

note 2.

160

See

Sections I.C and I.D of this release discussing other comments and regulatory initiatives considered in this rulemaking.

1. Effective Date Order

In addition, as discussed above, on June 15, 2011, the Commission issued the Effective Date Order, which provided guidance on the provisions of the Exchange Act added by Title VII with which compliance would have been required as of July 16, 2011 (

i.e.,

the effective date of the provisions of Title VII). The Effective Date Order provided exemptions to SDRs from Exchange Act Sections 13(n)(5)(D)(i), 13(n)(5)(F), 13(n)(5)(G), 13(n)(5)(H), 13(n)(7)(A), 13(n)(7)(B), and 13(n)(7)(C), each of which will expire on the earlier of (1) the date the Commission grants registration to the SDR and (2) the earliest compliance date set forth in any of the final rules regarding the registration of SDRs.

161

Absent further Commission action, these exemptions will expire as of the Compliance Date (as defined below), unless the Commission has granted an SDR's registration before the Compliance Date, in which case these exemptions will expire, with respect to that SDR, as of the date the Commission grants the SDR's registration.

161

Effective Date Order, 76 FR at 36306,

supra

note 9.

In addition, the Effective Date Order also provided exemptive relief from the rescission provisions of Exchange Act Section 29(b) in connection with Exchange Act Sections 13(n)(5)(D)(i), 13(n)(5)(F), 13(n)(5)(G), 13(n)(5)(H), 13(n)(7)(A), 13(n)(7)(B), and 13(n)(7)(C).

162

That relief does not expire automatically, but rather when the Commission specifies.

163

The Commission is now specifying that this exemption from Section 29(b) will expire on the Compliance Date, or for those SDRs that are registered prior to the Compliance Date, the date that the Commission grants each SDR's registration.

162

Effective Date Order, 76 FR at 36307,

supra

note 9.

163

Effective Date Order, 76 FR at 36307,

supra

note 9.

2. Implementation Policy Statement

As discussed above, on June 11, 2012, the Commission issued a statement of general policy on the anticipated sequencing of compliance dates of final rules to be adopted under Title VII. The Implementation Policy Statement stated that compliance with the SDR Rules “earlier in the implementation process should facilitate the development and utilization of SDRs in a regulated manner.”

164

Among other things, the Implementation Policy Statement requested comment on whether the Commission should adopt a phase-in of the SDR Rules and whether SDRs should be able to secure a grace period to defer compliance with some or all of the requirements of Exchange Act Section 13(n) and the SDR Rules.

165

164

Implementation Policy Statement, 77 FR at 35631,

supra

note 10.

165

Implementation Policy Statement, 77 FR at 35634,

supra

note 10.

B. Summary of Comments

While only two commenters on implementation referred specifically to the SDR Rules, the Commission believes that other comments, particularly those related to timing with respect to implementing rules on SBS reporting, are relevant to the implementation of the SDR Rules as well. Eight commenters suggested that a phase-in approach to the SDR Rules or SBS reporting generally may be appropriate.

166

The commenters generally indicated that a phase-in would be necessary to enable existing SDRs and other market participants to make the necessary changes to their operations to comply with the new

regulatory requirements.

167

One of the commenters who advocated a phase-in approach also recognized the importance of reporting SBS data to SDRs as an early part of the Dodd-Frank Act implementation process.

168

166

See

Barclays*,

supra

note 21; DTCC 2,

supra

note 19 (“[T]he Commission [should] ensure that the registration process does not interrupt current operation of existing trade repositories who intend to register as SDRs. This can be achieved as a phase-in for existing SDRs where services will need to be amended to conform with the final rules given the compressed time period between the publication of the final rules and the effective date of the Dodd-Frank Act.”); FIA*,

supra

note 21 (“[P]hase-in is critical for a smooth implementation of the changes required under the Dodd-Frank Act.”); FSF*,

supra

note 21; FSR Implementation,

supra

note 23; MFA 2,

supra

note 19; Morgan Stanley*,

supra

note 20 (“[G]iven the market disruption that could result from the simultaneous application of these requirements across products and markets, and the potentially severe consequences to the markets and the larger economy, we believe that a phase in approach is both permitted and contemplated by Dodd-Frank, and desirable in order to maintain orderly, efficient, liquid and inclusive markets.”); SIFMA Implementation,

supra

note 22 (“Once SDRs are registered and [SBS dealers] and [major SBS participants] have connected to them, data reporting can begin. [SBS dealers] and [major SBS participants] will not be able to provide, and [SDRs] will not be able to accept, all data on Dodd-Frank Act-compliant timelines on the first day of operation. Instead, there should be a phased process to develop the procedures and connections needed to ultimately report all Dodd-Frank Act-required data in the appropriate time frame.”);

see also

DTCC 3,

supra

note 19; DTCC 5,

supra

note 19 (“[T]he final rules should include implementation and compliance dates that are unambiguous. . . . Appropriate time must be afforded to ensure that implementation can take place smoothly for all market participants.”).

167

See, e.g.,

Barclays*,

supra

note 21 (“Changes envisioned by Title VII require very significant investment into operational, IT and other infrastructure—infrastructure that will take time and resources to build, test and optimize. The ability to fund and execute the necessary infrastructure build, as well as put in place the risk management and operational processes needed to conduct business under the new regulatory regime, will vary significantly by asset class and type of market participant.”); DTCC 2,

supra

note 19 (stating that “the final rules [should] be subject to a phase-in period to allow an adequate period for existing service providers . . . to make necessary changes to their service offerings,” requesting that the Commission alternatively “provide specific transitional arrangements for existing infrastructures,” and noting that the continuation of counterparty reporting and the ability of SDRs to receive and maintain current trade information on an ongoing basis is “imperative for effective oversight of systemic risk and the continuance of the operational services to market participants”); FSF*,

supra

note 21 (“New market infrastructure and technologies, including central clearing services, data reporting services and trading platforms, will be required to give effect to the new Swap regulatory regime. Unless sufficient time is allotted for these components of market infrastructure and technologies to adequately develop, all market participants (and particularly end users) will face interruptions in their ability to enter into Swaps to hedge their business risks or manage investments to meet client objectives.”).

168

See

MFA 2,

supra

note 19 (“[W]e believe the first two priorities should be: (i) Expanding the use of central clearing for liquid (`clearable') contracts; and (ii) having trade repositories receive data on both cleared and bilateral swaps. These changes would provide substantial benefits to the markets by enhancing price transparency and competition for the most liquid swap transactions. . . . Comprehensive reporting to SDRs and regulators . . . will allow regulators to monitor systemic risk and individual risk concentrations much more effectively, and intervene specifically as necessary.”);

see also

FSF*,

supra

note 21 (The Commission “should prioritize implementation of data reporting, including registration of [SDRs], to regulators ahead of real-time reporting and other requirements, including public reporting. The [Commission] will learn much about the full range of Swap markets from the data collected by SDRs. This knowledge will be essential in developing rules that meet Dodd-Frank's requirements while still allowing for active and liquid Swap markets.”).

Six commenters supported a phase-in approach based on asset class.

169

Some commenters supported a phase-in based on other criteria.

170

Some commenters indicated that a phase-in period, which could be based on asset class or other SBS or market participant attributes, is important in order to avoid market disruption.

171

While one commenter indicated that connectivity concerns should not delay implementation because it is easy for an SDR and other market infrastructures to establish connectivity,

172

another commenter cautioned that market connectivity will take time to establish and test.

173

None of the commenters provided specific timeframes for a phase-in approach.

174

169

See

Barclays*,

supra

note 21 (“[W]e recommend that the [Commission] phase in the clearing, execution and reporting requirements gradually over time, staggered by asset class.”); DTCC 3,

supra

note 19 (“[P]hasing should focus first on the products with the greatest automation and then on products with less automation. The more widespread the automated processing, the higher quality the data reported to SDRs. As automated processing is most widely prevalent in credit derivatives . . . it should be the first asset class implemented. Interest rate derivatives, being the next most widely automated asset class, would be next, followed by FX derivatives, then commodity and equity derivatives last.”); FSF*,

supra

note 21 (“The [Commission] should phase in requirements based on the state of readiness of each particular asset class (including, where applicable, by specific products within an asset class) and market participant type.”); FSR Implementation,

supra

note 23 (“[I]mplementing regulations on a product-by-product basis would reduce the risk of significant market dislocation during a transition period. For example, certain credit default swaps that are already reported to a trade information warehouse, are highly standardized, and are being regularly submitted for central clearing . . . may be a natural choice with which to confirm that systems are operating appropriately before expanding regulatory requirements to other [asset] classes.”); AII Implementation,

supra

note 23 (“[C]learing and other requirements should come first for highly liquid, standardized instruments, such as credit default swaps” and “[l]ess liquid products, such as certain physical commodity instruments, should come afterward.”); SIFMA Implementation,

supra

note 22 (“Reporting should also be phased in by asset class, based on whether reporting infrastructure and data exist.”).

170

See

Morgan Stanley*,

supra

note 20 (“In addition to phase in based on asset class and reporting times, reporting could also be phased in based on how a product trades [

e.g.,

whether the SBS is cleared].”); FSR Implementation,

supra

note 23 (stating that “it may be prudent to have different portions of a single rulemaking proposal take effect at different times and with due consideration of steps that are preconditions to other steps”; suggesting, as an example, that a requirement to designate a CCO should be implemented quickly, but that the CCO be given time to design, implement, and test the compliance system before any requirement to certify as to the compliance system becomes effective; and supporting a phase-in approach “that recognizes the varying levels of sophistication, resources and scale of operations within a particular category of market participant”).

But see

Barclays*,

supra

note 21 (“Phasing by type of market participant would not be useful for reporting obligations, in [the commenter's] view, as the reported information needs to reflect the entirety of the market to be useful for the market participants and regulators.”).

171

See, e.g.,

DTCC 2,

supra

note 19 (“[A]ppropriate transitional arrangements [should] be made to avoid market disruption by the implementation of the Proposed Rule. . . . Restrictions to [the commenter's SDR] operation could introduce significant operational risks to market participants.”); Barclays*,

supra

note 21 (Phase-in by asset class would help “ensure that both the industry and SDRs have sufficient time to build and test the needed infrastructure in order to prevent any potential market disruptions that could result from the implementation of new rules.”);

see also

FSR Implementation,

supra

note 23 (recommending that the Commission consider resource constraints in evaluating transition deadlines and stating that “if there are a dozen rules that would each take about a month to implement in isolation under normal circumstances, it is unrealistic to expect all twelve rules to be implemented one month from passage of final rules”).

172

DTCC 3,

supra

note 19 (“Connectivity between clearinghouses and [SB SEFs], as well as SDRs, is easy to establish (and, in many instances, already exists) and should not be the reason for delaying the implementation of real-time reporting rules.”).

173

FSR Implementation,

supra

note 23 (“Although we recognize that central clearing, exchange trading and transparent reporting are core aspects of the new regulatory system, they require a web of interconnections that will take time to establish and test, and their use should not become obligatory until such establishment and testing is complete.”).

174

But see

Bank of Tokyo SBSR,

supra

note 27 (requesting “that the [Commission] . . . defer compliance requirements under Title VII until December 31, 2012” to “facilitate coordination among national authorities in the United States, Japan and other relevant jurisdictions in order to avoid overlapping and inconsistent regulatory regimes”). Because the timeframe suggested by this commenter has passed, this aspect of the comment is now moot.

In addition to the comments received above, participants in the Implementation Joint Roundtable provided input regarding the appropriateness of a phase-in period for Title VII rulemakings. Many of the participants in the Implementation Joint Roundtable advocated for a phase-in period for the SDR Rules or SBS reporting generally; however, the participants' specific approaches varied. While some participants at the Implementation Joint Roundtable advocated a phase-in by asset class,

175

other participants suggested that a phase-in should be based on other product attributes, such as the liquidity of the product,

176

or based on the development of other market infrastructures.

177

Another participant suggested that SDRs' obligations to provide reports of SBS transactions to regulators—which the Commission believes are relevant to the direct

electronic access requirement in Rule 13n-4(b)(5)

178

—should be implemented in a prioritized manner, with daily batch snapshots provided until more real-time solutions are developed.

179

None of the Implementation Joint Roundtable participants provided specific timeframes for a phase-in approach.

175

See, e.g.,

statement of Ronald Levi, GFI Group, Inc., at Implementation Joint Roundtable (“[D]epending on which asset classes go first or which asset classes are amongst the first phase will determine how long it takes us.”); statement of Larry Thompson, The Depository Trust & Clearing Corporation, at Implementation Joint Roundtable (“And right now, at least for a couple of classes, they're in a much better position to be able to see transparent into the marketplace, especially the credit default swap [marketplace] . . . .”); statement of Jamie Cawley, Javelin Capital Markets, LLC, at Implementation Joint Roundtable (“Certainly from where we sit . . . interest rate swaps, vanilla swaps clearly qualify for a day one [implementation and] index [swaps] right behind that or on the same day. And the constituents of the indices certainly as well. And then it trails off from there over time. . . .”).

176

See, e.g.,

statement of Chris Edmonds, ICE Trust, at Implementation Joint Roundtable (“[I]nstead of looking at it necessarily by asset class, the commissions may want to look at it by the instruments that have the greatest amount of liquidity.”).

177

See, e.g.,

statement of Sunil Cutinho, CME Group, at Implementation Joint Roundtable (“[W]e don't believe that . . . data should be in an SDR before clearing has to be done.”).

178

See

Section VI.D.2.c.ii of this release discussing direct electronic access.

179

Statement of Raf Pritchard, TriOptima—triResolve, at Implementation Joint Roundtable (“[W]e would observe obviously that building real-time solutions is a lot more critical and sensitive than building daily batch solutions. And so in terms of getting that first cut, it might make sense to prioritize a daily batch snapshot of the market. . . . [T]hen you could sequence the real-time—the more real-time sensitive parts of the reporting requirements subsequent to that.”).

C. Sequenced Effective Date and Compliance Date for the SDR Rules

After considering the issues raised by the commenters and Implementation Joint Roundtable participants, the Commission has determined to adopt, in lieu of a phase-in approach, a sequenced effective date and compliance date for the SDR Rules

180

that recognizes the practical constraints arising from the time necessary for persons to analyze and understand the final rules adopted by the Commission, to develop and test new systems required as a result of the Dodd-Frank Act's regulation of SDRs and the SDR Rules, to prepare and file a completed Form SDR, to be in a position to demonstrate their ability to meet the criteria for registration set forth in Rule 13n-1(c)(3),

181

and to register with the Commission. The Commission agrees with commenters who have suggested that the Commission require the reporting of SBS transaction information to registered SDRs early in the implementation process because the Commission will then be able to utilize the information reported to registered SDRs to inform other aspects of its Title VII rulemaking.

182

Adopting and implementing a regulatory framework for SDRs will facilitate access by the Commission and market participants to SBS information collected by SDRs.

183

180

Title VII provides the Commission with the flexibility to establish effective dates beyond the minimum 60 days specified therein for Title VII provisions that require a rulemaking.

See

Dodd-Frank Act Section 774 (specifying that the effective date for a provision requiring a rulemaking is “not less than 60 days after publication of the final rule or regulation implementing such provision”). Furthermore, as with other rulemakings under the Exchange Act, the Commission may set compliance dates (which may be later than the effective dates) for rulemakings under the Title VII amendments to the Exchange Act. Together, this provides the Commission with the ability to sequence the implementation of the various Title VII requirements in a way that effectuates the policy goals of Title VII while minimizing unnecessary disruption or costs.

See

Effective Date Order, 76 FR at 36289,

supra

note 9.

181

See

Section VI.A.2.c of this release discussing Rule 13n-1(c), which requires that the Commission make a finding that a “security-based swap data repository is so organized, and has the capacity, to be able to assure the prompt, accurate, and reliable performance of its functions as a security-based swap data repository, comply with any applicable provision of the federal securities laws and the rules and regulations thereunder, and carry out its functions in a manner consistent with the purposes of section 13(n) of the [Exchange] Act . . . and the rules and regulations thereunder.”

182

See, e.g.,

FSF*,

supra

note 21 (noting that the Commission “will be in a better position to adopt rules that achieve Dodd-Frank's goals while maintaining active and viable [SBS] markets” if SDRs are required to register and data reporting is enabled).

183

See, e.g.,

FSF*,

supra

note 21 (“The [Commission] should prioritize implementation of data reporting, including registration of Swap data repositories (`SDRs'), to regulators ahead of real-time reporting and other requirements, including public reporting. The [Commission] will learn much about the full range of Swap markets from the data collected by SDRs. This knowledge will be essential in developing rules that meet Dodd-Frank's requirements while still allowing for active and liquid Swap markets.”).

All of the SDR Rules will become effective 60 days following publication of the rules in the

Federal Register

(“Effective Date”). However, the exemptions to provisions in Exchange Act Section 13(n) that the Commission provided in the Effective Date Order will continue to be in effect following the adoption of the SDR Rules. Consistent with the Effective Date Order, the exemptive relief remains in place and will expire: (1) Upon the compliance date for the SDR Rules, or (2) for those SDRs that are registered prior to such compliance date, the date that the Commission grants each SDR's registration.

184

See

Effective Date Order, 76 FR at 36306,

supra

note 9.

SDRs must be in compliance with the SDR Rules by 365 days after publication of the rules in the

Federal Register

(“Compliance Date”).

185

Absent an exemption, SDRs must be registered with the Commission and in compliance with the federal securities laws and the rules and regulations thereunder (including the applicable Dodd-Frank Act provisions and all of the SDR Rules) by the Compliance Date, and all exemptions that the Commission provided in the Effective Date Order will expire on the Compliance Date.

186

After the Compliance Date, pursuant to Exchange Act Section 13(n)(1), it will be unlawful, absent exemptive relief,

187

(1) for a person, unless registered with the Commission as an SDR, directly or indirectly, to make use of the mails or any means or instrumentality of interstate commerce to perform the functions of an SDR or (2) for an SDR to fail to comply with all applicable statutory provisions and the SDR Rules.

185

In a separate release, the Commission is proposing a compliance schedule for portions of Regulation SBSR in which the timeframes for compliance with the reporting and public dissemination requirements would key off of the registration of SDRs.

See

Regulation SBSR Proposed Amendments Release,

supra

note 13.

186

Any SDR that is registered with the Commission before the Compliance Date will be required, absent an exemption, to comply with Exchange Act Section 13(n); the SDR Rules; and Regulation SBSR, as applicable to registered SDRs, as of the date the Commission grants registration to the SDR.

See

Effective Date Order, 76 FR at 36306,

supra

note 9 (granting exemptions to certain provisions in Exchange Act Section 13(n) and indicated that the exemptions will expire on the earlier of (1) the date the Commission grants registration to an SDR and (2) the earliest compliance date set forth in any of the final rules regarding the registration of SDRs).

187

See

Section VI.K of this release discussing Rule 13n-12, which provides an exemption for certain non-U.S. persons from the SDR requirements.

The Commission believes that setting the Compliance Date for the SDR Rules at 365 days after publication of the rules in the

Federal Register

adequately addresses commenters' concerns

188

by providing SDRs with sufficient time to become compliant with the Dodd-Frank Act and the SDR Rules and for the Commission to act on SDRs' applications for registration, while also allowing SDRs to continue performing the functions of an SDR without interruption.

188

See, e.g.,

DTCC 2,

supra

note 19.

The Commission notes that if an SDR files its Form SDR close to the Compliance Date, it is possible that the Commission will not have sufficient time to consider the Form SDR and the SDR may not be registered with the Commission by the Compliance Date. In this case, the SDR must cease any operations that cause it to meet the statutory definition of an SDR as of the Compliance Date and not begin or resume such operations until (and unless) the Commission grants the SDR's registration or provides the SDR with an exemption. As discussed below, Rule 13n-1(c), as adopted, provides that the Commission will grant registration to an SDR or institute proceedings to determine whether registration should be granted or denied within 90 days of the date of the publication of notice of the filing of an application for registration. Accordingly, SDRs should consider that the Commission may take several months following the publication of notice of the filing of an application for registration

189

to review

an SDR's application for registration and assess whether the SDR meets the criteria for registration set forth in Rule 13n-1(c)(3).

190

189

The Commission's review of the application for registration could extend beyond 90 days. Rule 13n-1(c) provides that the Commission will grant registration or institute proceedings to determine whether registration should be granted or denied within 90 days of the publication of notice of the

filing of an application for registration “or within such longer period as to which the applicant consents.”

190

As provided in Rule 13n-1(c)(3), in order to grant the registration of an SDR, the Commission must make a finding that “such security-based swap data repository is so organized, and has the capacity, to be able to assure the prompt, accurate, and reliable performance of its functions as a security-based swap data repository, comply with any applicable provision of the federal securities laws and the rules and regulations thereunder, and carry out its functions in a manner consistent with the purposes of section 13(n) of the [Exchange] Act . . . and the rules and regulations thereunder.” In addition to the application for registration on Form SDR, Rule 13n-1(b) provides that, “[a]s part of the application process, each [SDR] shall provide additional information to any representative of the Commission upon request.” In determining whether an applicant meets the criteria set forth in Rule 13n-1(c), the Commission will consider the application and any additional information obtained from the SDR, which may include information obtained in connection with an inspection or examination of the SDR. If the Commission is unable to determine that the applicant meets the criteria for registration set forth in Rule 13n-1(c)(3), then the Commission may not grant registration to the applicant.

See also

Section VI.A.1 of this release discussing Form SDR and information required for registration as an SDR.

After weighing the practical considerations with respect to SDRs' preparations for compliance with the Dodd-Frank Act and the SDR Rules, as well as the benefits to investors and regulators of adopting the SDR Rules in order to facilitate the establishment and utilization of registered SDRs, the Commission has determined not to adopt a phase-in approach, as suggested by some commenters and Implementation Joint Roundtable participants.

191

Specifically, the Commission does not believe that it is necessary or appropriate to tailor a phase-in period for the SDR Rules based on specific asset classes, type of market participant, or other SBS attributes. While a phase-in approach based on asset class, type of market participant, or other attributes may have been appropriate had the Commission adopted rules prior to the July 16, 2011 effective date of the Dodd-Frank Act,

192

the Commission believes that the passage of time has afforded ample time for the development of SDR infrastructure. This belief is based, in part, on the existence of four swap data repositories already provisionally registered with the CFTC.

193

These swap data repositories, most of which will likely register as SDRs with the Commission, have had approximately three years to implement the final swap data repository rules adopted by the CFTC on August 4, 2011 (Part 49 swap data repository rules)

194

and December 20, 2011 (Part 45 swap data recordkeeping and reporting rules).

195

The Commission believes that the CFTC's Part 49 rules

196

and Part 45 rules

197

applicable to swap data repositories are substantially similar to the final SDR Rules. Because of the substantial similarity between the Commissions' rules, to the extent that the SDRs are in compliance with the CFTC's rules, they are likely already in substantial compliance with the Commission's SDR Rules.

191

See

Section V.B of this release discussing commenters' and Implementation Joint Roundtable participants' views with respect to phase-in approaches.

192

See

Section V.A.1 of this release discussing the Effective Date Order.

193

CFTC Rule 49.3(b) provides for provisional registration of a swap data repository. 17 CFR 49.3(b).

194

See

CFTC Part 49 Adopting Release,

supra

note 36.

195

See

CFTC Part 45 Adopting Release,

supra

note 37.

196

See

CFTC Part 49 Adopting Release,

supra

note 36.

197

See

CFTC Part 45 Adopting Release,

supra

note 37.

VI. Discussion of Rules Governing SDRs

Exchange Act Section 13(n), enacted in Dodd-Frank Act Section 763(i), makes it “unlawful for any person, unless registered with the Commission, directly or indirectly, to make use of the mails or any means or instrumentality of interstate commerce to perform the functions of a security-based swap data repository.”

198

To be registered and maintain such registration, each SDR is required (absent an exemption) to comply with the requirements and core principles described in Exchange Act Section 13(n), as well as with any requirements that the Commission adopts by rule or regulation.

199

The Exchange Act also requires each SDR to designate an individual to serve as a CCO and specifies the CCO's duties.

200

In addition, the Exchange Act grants the Commission authority to inspect and examine any registered SDR and to prescribe data standards for SDRs.

201

198

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

see also

Section III.A of this release discussing definition of “security-based swap data repository.” Any person that is required to be registered as an SDR under Exchange Act Section 13(n) must register with the Commission (absent an exemption), regardless of whether that person is also registered under the Commodity Exchange Act (“CEA”) as a swap data repository. Exchange Act Section 13(n)(8), 15 U.S.C. 78m(n)(8);

see also

CEA Section 21, 7 U.S.C. 24a (regarding swap data repositories). Under the Exchange Act, a clearing agency may register as an SDR. Exchange Act Section 13(m)(1)(H), 15 U.S.C. 78m(m)(1)(H). In addition, any person that is required to register as an SDR pursuant to this section must register with the Commission (absent an exemption) regardless of whether that person is also registered as an SB SEF.

See

SB SEF Proposing Release,

supra

note 29.

199

See

Exchange Act Section 13(n)(3), 15 U.S.C. 78m(n)(3).

200

See

Exchange Act Section 13(n)(6), 15 U.S.C. 78m(n)(6).

201

See

Exchange Act Sections 13(n)(2) and 13(n)(4), 15 U.S.C. 78m(n)(2) and 78m(n)(4). In a separate release, the Commission proposed rules prescribing the data elements that an SDR would be required to accept for each SBS in association with requirements under Dodd-Frank Act Section 763(i), adding Exchange Act Section 13(n)(4)(A) relating to standard setting and data identification.

See

Regulation SBSR Proposing Release, 75 FR at 75284-5,

supra

note 8 (proposed Rule 901);

see also

Cross-Border Proposing Release, 78 FR at 31212-3,

supra

note 3 (re-proposing Rule 901). The Commission is concurrently adopting Regulation SBSR, including rules prescribing the data elements that an SDR is required to accept.

See

Regulation SBSR Adopting Release,

supra

note 13 (Rule 901).

A. Registration of SDRs (Rule 13n-1 and Form SDR)

Proposed Rule 13n-1 and proposed Form SDR would establish the procedures by which a person may apply to the Commission for registration as an SDR. After considering the comments, the Commission is adopting Rule 13n-1 and Form SDR substantially as

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.