# Security-Based Swap Data Repository Registration, Duties, and Core Principles > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2015-03127 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** March 19, 2015 - **Citation:** 80 FR 14438 ## 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. 1 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. 2 1 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)). 2 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. 3 In that release, the Commission proposed guidance regarding the application of certain SDR requirements in the cross-border context; 4 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; 5 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. 6 In addition, the Commission proposed an exemption from the indemnification requirement in the Exchange Act. 7 3 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”). 4 Cross-Border Proposing Release, 78 FR at 31041-44, supra note 3. 5 Cross-Border Proposing Release, 78 FR at 31209, supra note 3. 6 Cross-Border Proposing Release, 78 FR at 31046-48, supra note 3. 7 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. 8 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). 9 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. 10 On May 1, 2013, the Commission re-proposed Regulation SBSR in the Cross-Border Proposing Release. 11 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. 12 8 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”). 9 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). 10 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”). 11 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”). 12 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. 13 The Dodd-Frank Act requires the Commission to engage in rulemaking for the public dissemination of SBS transaction, volume, and pricing data, 14 and provides the Commission with discretion to determine an appropriate approach to implement this important function. Regulation SBSR requires SDRs to undertake this role. 15 13 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”). 14 Exchange Act Section 13(m)(1), 15 U.S.C. 78m(m)(1), as added by Dodd-Frank Act Section 763(i). 15 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. 16 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. 16 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”) 17 and a joint public roundtable on international issues relating to the implementation of Title VII (“International Joint Roundtable”). 18 17 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 . 18 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 19 as well as six letters submitted with respect to SDRs prior to the Proposing Release. 20 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, 21 which will be addressed in this release. In addition, the Commission received one letter in response to the Implementation Policy Statement, 22 two letters in response to the Implementation Joint Roundtable 23 and a letter in response to the International Joint Roundtable, 24 all of which are relevant to the Proposing Release and are addressed in this release. 25 The Commission also received four comment letters in response to the Cross-Border Proposing Release relating directly to the proposed SDR Rules. 26 19 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 . 20 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 . 21 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 . 22 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 . 23 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 . 24 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). 25 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. 26 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, 27 the interim temporary final rule for reporting of SBS transaction data, 28 and proposed rules for the registration and regulation of security-based swap execution facilities (“SB SEFs”). 29 27 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). 28 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 . 29 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, 30 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. 31 As adopted, the SDR Rules and new Form SDR have been modified from the proposal, in part to respond to these comments. 32 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: 30 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”). 31 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. 32 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. 33 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. 34 33 Proposing Release, 75 FR at 77313, supra note 2. 34 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. 35 35 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. 36 The CFTC also adopted rules regarding swap data recordkeeping and reporting requirements, some of which pertain to subjects covered in this release. 37 Commission staff consulted with CFTC staff with respect to the rules applicable to swap data repositories and SDRs, as well as with prudential regulators, 38 and the Commission has taken into consideration comments received supporting harmonization of the CFTC's rules for swap data repositories with the SDR Rules. 39 The Commission believes that the final SDR Rules are largely consistent with the rules adopted by the CFTC. 40 While one commenter recommended adopting joint rules with the CFTC, 41 the Commission has not done so. Congress did not require the two agencies to engage in joint rulemakings on this topic. 42 In addition, the CFTC has already adopted its final rules for swap data repositories. 43 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. 44 36 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). 37 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). 38 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”). 39 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”). 40 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”). 41 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. 42 Cf., e.g., Dodd-Frank Act Section 712(d) (requiring joint rulemaking regarding certain definitions). 43 CFTC Part 49 Adopting Release, supra note 36; CFTC Part 45 Adopting Release, supra note 37. 44 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. 45 For example, the Committee on Payments and Market Infrastructures (“CPMI”), formerly known as the Committee on Payment and Settlement Systems (“CPSS”), 46 and the International Organization of Securities Commissions (“IOSCO,” 47 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”). 48 Second, in January 2012, CPSS and the Technical Committee of IOSCO issued a final report on OTC derivatives data reporting and aggregation requirements. 49 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”). 50 Fourth, in August 2013, CPSS and the Board of IOSCO issued a report on authorities' access to trade repository data (“CPSS-IOSCO Access Report”). 51 The Commission has taken these discussions and reports into consideration in developing the final SDR Rules and Form SDR. 52 45 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.”). 46 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/. 47 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. 48 See Considerations for Trade Repositories in OTC Derivatives Markets, CPSS-IOSCO (May 2010), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD321.pdf. 49 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. 50 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. 51 See Authorities' Access to Trade Repository Data, CPSS-IOSCO (Aug. 2013), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD417.pdf. 52 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, 53 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. 54 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. 53 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. 54 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, 55 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. 56 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. 57 55 See Regulation SBSR Adopting Release, supra note 13. 56 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. 57 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. 58 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. 59 58 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). 59 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. 60 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. 61 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. 60 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.”). 61 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. 62 The Commission believes, however, that the SDR Rules relating to data accuracy 63 and maintenance 64 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. 62 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). 63 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). 64 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. 65 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. 66 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. 65 See Section IV of this release discussing number of SDRs and consolidation of SBS data. 66 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. 67 A more complete database of current and historical settlement prices is available by subscription. 67 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. 68 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. 69 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, 70 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. 71 68 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. 69 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.”). 70 The Commission notes that DTCC-TIW's entity domicile determinations may not reflect the Commission's definition of “U.S. person” in all cases. 71 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. 72 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. 73 Table 1 below highlights that of these entities, there were 17, or approximately 0.9%, that were ISDA-recognized dealers. 74 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. 72 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. 73 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). 74 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 share (%) Investment Advisers 1,347 74.8 9.7 —SEC registered 529 29.4 5.9 Banks 256 14.2 5.0 Pension Funds 29 1.6 0.1 Insurance Companies 36 2.0 0.2 ISDA-Recognized Dealers 17 0.9 84.1 Other 115 6.4 1.0 Total 1,800 100.0 100.0 Principal holders of CDS risk exposure are represented by accounts in DTCC-TIW. 75 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. 75 “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. 76 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. 77 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. 76 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. 77 “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 78 adviser adviser Private Funds 2,914 1,395 48% 1,496 51% 23 1% Dodd-Frank Act Special Entities 1,086 1,050 97% 12 1% 24 2% Registered Investment Companies 636 620 97% 14 2% 2 0% Banks (non-ISDA-recognized dealers) 369 25 7% 5 1% 339 92% Insurance Companies 224 144 64% 21 9% 59 26% ISDA-Recognized Dealers 69 0 0% 0 0% 69 100% Foreign Sovereigns 63 45 71% 2 3% 16 25% Non-Financial Corporations 57 39 68% 3 5% 15 26% Finance Companies 10 5 50% 0 0% 5 50% Other/Unclassified 4,626 3,131 68% 1,295 28% 200 4% All 10,054 6,454 64% 2,848 28% 752 7% 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. 78 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, 79 (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. 79 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. 80 80 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. 81 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. 81 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. 82 Substantial progress has been made in establishing the trade repository infrastructure to support the reporting of all contracts. 83 Currently, multiple trade repositories operate, or are undergoing approval processes to do so, in a number of different jurisdictions. 84 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. 82 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 . 83 See OTC Derivatives Market Reforms Eighth Progress Report on Implementation (Nov. 2014), available at http://www.financialstabilityboard.org/wp-content/uploads/r_141107.pdf . 84 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, 85 but it did not specifically address the applicability of the statutory definition of an SDR. 86 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 87 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. 85 See Proposing Release, 75 FR at 77307-77308, supra note 2. 86 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. 87 Exchange Act Section 3(a)(75), 15 U.S.C. 78c(a)(75). A. 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.” 88 88 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.” 89 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.” 90 Another commenter described an SDR's core functions as “basic receipt and storage of [SBS] data.” 91 89 DTCC 2, supra note 19. 90 DTCC 2, supra note 19. 91 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].” 92 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].” 93 92 See Exchange Act Section 3(a)(75), 15 U.S.C. 78c(a)(75). 93 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. 94 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,” 95 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.” 94 See DTCC 2, supra note 19. 95 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, 96 absent an exemption. 97 As discussed in the Cross-Border Proposing Release, 98 the Commission believes that U.S. persons 99 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. 96 See Exchange Act Section 13(n)(1), 15 U.S.C. 78m(n)(1). 97 See Section VI.K of this release discussing Rule 13n-12. 98 Cross-Border Proposing Release, 78 FR at 31042, supra note 3. 99 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. C. 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). D. 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 [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2015-03127. Public record. Not legal advice.