# Trade Acknowledgment and Verification of Security-Based Swap Transactions > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2016-13915 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** June 17, 2016 - **Citation:** 81 FR 39808 ## Text SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 240 [Release No. 34-78011; File No. S7-03-11] RIN 3235-AK91 Trade Acknowledgment and Verification of Security-Based Swap Transactions AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: In accordance with Section 764(a) of 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 Rules 15Fi-1 and 15Fi-2 under the Securities Exchange Act of 1934 (“Exchange Act”) requiring security-based swap dealers and major security-based swap participants to provide trade acknowledgments and to verify those trade acknowledgments in security-based swap transactions. The Commission also is amending Rule 3a71-6 under the Exchange Act to address the potential availability of substituted compliance in connection with those trade acknowledgment and verification requirements. DATES: Effective Date: August 16, 2016. Compliance date: The applicable compliance date is discussed in Section V of this final rule. FOR FURTHER INFORMATION CONTACT: Paula Jenson, Deputy Chief Counsel; Joanne Rutkowski, Assistant Chief Counsel; or Darren Vieira, Special Counsel, at (202) 551-5550, Office of Chief Counsel, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010. SUPPLEMENTARY INFORMATION: Table of Contents I. Introduction A. Trade Acknowledgment and Verification B. Cross-Border Application and Availability of Substituted Compliance II. Discussion of Trade Acknowledgment and Verification Rule A. Definitions 1. Proposed Rule 2. Comments 3. Response to Comments and Final Rule B. Trade Acknowledgment Requirement 1. Proposed Rule 2. Comments 3. Response to Comments and Final Rule C. Time To Provide a Trade Acknowledgment 1. Proposed Rule 2. Comments 3. Response to Comments and Final Rule D. Form and Content of Trade Acknowledgments 1. Proposed Rule 2. Comments 3. Response to Comments and Final Rule E. Trade Verification 1. Proposed Rule 2. Comments 3. Response to Comments and Final Rule F. Exception for Clearing Transactions G. Exception for Transactions Executed on a Security-Based Swap Execution Facility or National Securities Exchange or Accepted for Clearing by a Clearing Agency 1. Exception for Transactions Executed on a Security-Based Swap Execution Facility or National Securities Exchange 2. Exception for Transactions Accepted for Clearing by a Clearing Agency 3. Trade Acknowledgment and Verification After Notice That an SBSEF or Exchange Has Not Acknowledged and Verified a Transaction or That a Transaction Has Not Been Accepted for Clearing by a Clearing Agency H. Exemption From Rule 10b-10 III. Cross-Border Application of Trade Acknowledgment and Verification Requirements A. Proposed Application B. Commenter Views C. Response to Comments and Final Interpretation IV. Availability of Substituted Compliance for Trade Acknowledgment and Verification Requirements A. Existing Substituted Compliance Rule B. Response to Comments and Final Rule 1. Basis for Substituted Compliance in Connection With the Trade Acknowledgment and Verification Requirements 2. Comparability Criteria, and Consideration of Related Requirements V. Effective and Compliance Dates A. Trade Acknowledgment and Verification B. Substituted Compliance Rule VI. Paperwork Reduction Act A. Introduction B. Rule 15Fi-2 1. Summary of Collection of Information 2. Proposed Use of Information 3. Respondents 4. Total Initial and Annual Reporting and Recordkeeping Burdens 5. Retention Period of Recordkeeping Requirements 6. Collection of Information is Mandatory 7. Confidentiality C. Rule 3a71-6 1. Summary of Collection of Information 2. Proposed Use of Information 3. Respondents 4. Total Initial and Annual Reporting and Recordkeeping Burdens 5. Collection of Information Is Mandatory 6. Confidentiality VII. Economic Analysis A. Introduction B. Economic Baseline 1. Available Data on Security-Based Swaps 2. Current Security-Based Swap Market 3. Current Estimates of Number of SBS Dealers and Major SBS Participants 4. Trade Execution 5. Clearing Activity 6. Current Trade Confirmation Practices a. Joint Regulatory Initiative b. CFTC Trade Confirmation Rules c. Foreign Trade Confirmation Rules C. Benefits, Costs, and Effects on Efficiency, Competition, and Capital Formation 1. Effects on Efficiency, Competition, and Capital Formation a. Broad Market Effects b. Substituted Compliance 2. Costs and Benefits to Registered SBS Entities 3. Costs and Benefits to Non-Registered Market Participants 4. Costs and Benefits of the Substituted Compliance Provisions 5. Costs and Benefits of the Clearing and Security-Based Swap Execution Facility and National Securities Exchange Exceptions 6. Exemption from Rule 10b-10 D. Alternatives Considered 1. Trade Acknowledgment Rules a. Approved Third Parties b. Time of Acknowledgment c. Terms of the Transaction 2. Clearing Transactions 3. Certain Transactions on a Security-Based Swap Execution Facility or a National Securities Exchange E. Comment and Response to Comment VIII. Regulatory Flexibility Act Certification IX. Statutory Basis and Text of Amendments I. Introduction A. Trade Acknowledgment and Verification Section 764 of the Dodd-Frank Act, 1 enacted on July 21, 2010, added Section 15F to the Exchange Act. 2 Among other things, Section 15F requires security-based swap (“SBS”) dealers 3 and major SBS participants 4 (together, “SBS Entities”) to register with the Commission, and directs the Commission to prescribe rules applicable to SBS Entities. 1 Pub. L. 111-203, 124 Stat. 1376, 1784 (2010). 2 15 U.S.C. 78o-8. 3 See Exchange Act Section 3(a)(71)(A) [15 U.S.C. 78c(71)(A)] and Rule 3a71-1 [17 CFR 240.3a71-1]; see also Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant”, Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012) (“Intermediary Definitions Adopting Release”) and Application of “Security-Based Swap Dealer” and “Major Security-Based Swap Participant” Definitions to Cross-Border Security-Based Swap Activities; Republication, Exchange Act Release No. 72472 (Jun. 25, 2014), 79 FR 47278 (Aug. 12, 2014) (“Cross-Border Adopting Release”). 4 See Exchange Act Section 3(a)(67) [15 U.S.C. 78c(67)] and Rule 3a67-1 [17 CFR 240.3a67-1]; see also Intermediary Definitions Adopting Release and Cross-Border Adopting Release. Section 15F(i)(1) of the Exchange Act provides that registered SBS Entities shall conform with such standards as may be prescribed by the Commission, by rule or regulation, that relate to timely and accurate confirmation, processing, netting, documentation, and valuation of all security-based swaps. Section 15F(i)(2) of the Exchange Act requires the Commission to adopt rules governing documentation standards for SBS Entities. Pursuant to this authority, the Commission published proposed Rule 15Fi-1 for public comment. 5 The proposed rule prescribed standards intended to provide for timely and accurate confirmation of SBS transactions, as discussed more fully below. 5 Trade Acknowledgment and Verification of Security-Based Swap Transactions, Exchange Act Release No. 63727 (Jan. 14, 2011), 76 FR 3859 (Jan. 21, 2011) (“Proposing Release”). The Commission proposed Rule 15Fi-1 to promote the efficient operation of the SBS market, and to facilitate market participants' management of their SBS-related risk. 6 The proposed rule was intended to help avoid a recurrence of documentation backlogs that had persisted in the industry prior to the adoption of the Dodd-Frank Act, and to help address concerns expressed by the Government Accountability Office regarding the documentation of credit derivatives. 7 In particular, the proposed rule was intended to reduce the risk a court may have to supply contract terms upon which there was no previous agreement. 8 Furthermore, unconfirmed trades could allow errors to go undetected that might subsequently lead to losses and other problems, such as an SBS Entity's inaccurately measuring and managing its risk exposures. 9 Such operational risks have the potential to contribute to broader market problems. 10 6 See Proposing Release, 76 FR at 3861. 7 See Proposing Release, 76 FR at 3860-61, and Section VII.A, infra. 8 See Proposing Release, 76 FR at 3860. 9 U.S. Gov't Accountability Office, GAO-07-716, Confirmation Backlogs Increased Dealers' Operational Risks, but Were Successfully Addressed After Joint Regulatory Action (2007) (“GAO Confirmation Report”) at 15. 10 Id. If an SBS transaction is not reduced to writing, there is no definitive written record of the contract terms to which the counterparties have agreed, which can lead to legal and operational risk for market participants. For this reason, prudent practice requires that, after coming to an agreement on the terms of an SBS transaction, the counterparties document the transaction in a complete and definitive written record so there is certainty about the terms of their agreement in case those terms are later disputed. The Commission understands that market participants generally issue a “trade acknowledgment” (sometimes referred to by market participants as a “draft confirmation” or an “alleged trade”) to memorialize the economic and related terms of an SBS transaction, regardless of the means by which the transaction was executed. The Commission also understands that industry best practices incorporate a process by which the counterparties verify that the trade acknowledgment accurately reflects the terms of their trade. 11 This process, through which one counterparty acknowledges an SBS transaction and its counterparty verifies it, is the confirmation process, which results in the issuance of a confirmation that reflects the terms of the contract between the counterparties. 12 This confirmation generally includes any transaction-specific modifications to master agreements between the counterparties that might apply to the transaction, such as the International Swaps and Derivatives Association (“ISDA”) Master Agreement and Schedule. A confirmation is thus a written or electronic record of an SBS transaction that has been sent by one counterparty to its counterparty and then manually, electronically, or by some other legally equivalent means, signed ( i.e., verified) by the receiving counterparty. 11 See Part II.E, below, for a discussion of verification. 12 Confirmations may also be used by an SBS Entity to make certain disclosures, or to disclaim certain obligations, to a counterparty. The Commission has separately adopted rules governing required disclosures by an SBS Entity in connection with business conduct rules for SBS Entities. See Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants, Exchange Act Release No. 77617 (Apr. 14, 2016), 81 FR 29960 (May 13, 2016) (“Business Conduct Adopting Release”). Proposed Rule 15Fi-1 generally would have required that an SBS Entity provide a trade acknowledgment containing certain information memorializing an SBS transaction to its counterparty. If more than one counterparty to the SBS transaction is an SBS Entity, the proposed rule specified which counterparty would be required to provide the trade acknowledgment. The proposed rule also would have required an SBS Entity to establish, maintain, and enforce written policies and procedures that are reasonably designed to obtain prompt verification of the terms of a trade acknowledgment. In addition, an SBS Entity would have been required to promptly verify the accuracy of, or otherwise dispute with its counterparty, the terms of any trade acknowledgment that it receives. The proposed rule is described more fully below in Section II. The comment period for proposed Rule 15Fi-1 ended on February 22, 2011. On May 1, 2013, the Commission reopened the comment period for proposed Rule 15Fi-1 and sought comment on, among other things, the relationship of the proposed rule to any parallel requirements of other authorities, including the CFTC and relevant foreign regulatory authorities and, with respect to the CFTC rules, whether the Commission's rules should emphasize consistency with the CFTC rules or be more tailored to the security-based swap market. 13 The Commission received seven comments in total on proposed Rule 15Fi-1. 14 As discussed more fully in Section II below, commenters generally supported the proposed rule but suggested modifications to certain provisions. 13 Reopening of Comment Periods for Certain Rulemaking Releases and Policy Statement Applicable to Security-Based Swaps, Exchange Act Release No. 69491 (May 1, 2013), 78 FR 30800 (May 23, 2013). The CFTC adopted its final rule on swap confirmation, 17 CFR 23.501 (“CFTC Rule”), in 2012. See Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants, 77 FR 55904 (Sept. 11, 2012) (“CFTC Adopting Release”). 14 Comments were received from Chris Barnard, dated Jan. 22, 2011 (“Barnard”); Robert Pickel, Executive Vice Chairman, International Swaps and Derivatives Association, Inc., dated Feb. 22, 2011 (“ISDA I”); Jeff Gooch, Chief Executive Officer, MarkitSERV, dated Feb. 22, 2011 (“MarkitSERV”); Anonymous, dated Feb. 19, 2011 (“Anonymous”); Dennis Kelleher, President & CEO, and Stephen W. Hall, Securities Specialist, Better Markets, Inc., dated Jul. 22, 2013 (“Better Markets I”); Robert G. Pickel, Chief Executive Officer, International Swaps and Derivatives Association, Inc., dated Jul. 22, 2013 (“ISDA II”); 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 (in relevant part, this letter requested that the Commission grant additional time for the commenters to analyze the implications of the Commission's cross-border proposal on certain rules, including the Proposed Rule that the Commission reopened for comment). After careful consideration of the comments, the Commission is adopting Rules 15Fi-1 and 15Fi-2 (each a “Final Rule”) with certain modifications to the proposal as discussed below in Section II. These changes generally are intended to address concerns expressed by some commenters and to bring the rule into greater conformity with the CFTC Rule. The Commission has also modified the proposal to separate the proposed rule into two rules. Final Rule 15Fi-1 contains the definitions, which are re-designated as paragraphs (a) through (i) of Final Rule 15Fi-1. Final Rule 15Fi-2 contains the substantive trade acknowledgment and verification requirements, an exception for clearing transactions, an exception for certain transactions that are executed on a security-based swap execution facility (“SBSEF”) or a national securities exchange or that are accepted for clearing by a clearing agency, and the exemption from Rule 10b-10. Final Rule 15Fi-2 generally requires an SBS Entity to provide a trade acknowledgment through electronic means disclosing all the terms of a security-based swap transaction to its counterparty promptly, but in any event no later than then end of the first business day following the day of execution. Final Rule 15Fi-2 also requires an SBS Entity to establish, maintain, and enforce written policies and procedures that are reasonably designed to obtain prompt verification of the terms of a trade acknowledgment, and to promptly verify the accuracy of, or otherwise dispute with its counterparty, the terms of a trade acknowledgment it receives. In addition, Final Rule 15Fi-2 provides an exception from the requirement to send a trade acknowledgment for clearing transactions and an exception for certain security-based swap transactions executed on an SBSEF or a national securities exchange, or accepted for clearing by a clearing agency. Finally, Final Rule 15Fi-2 provides to an SBS Entity that is also a broker or dealer an exemption from Exchange Act Rule 10b-10 if the SBS Entity provides a trade acknowledgment, or timely verifies or disputes the terms of a trade acknowledgment that it receives, in compliance with the Final Rules. Final Rules 15Fi-1 and 15Fi-2 reflect deliberation by the Commission of the way that its rules could affect the security-based swap market. The Commission has sought to adopt rules that take into account current market practices while providing appropriate protections for investors' interests and to promote the purposes of the Exchange Act. In developing these rules, Commission staff consulted and coordinated with the CFTC and the prudential regulators. 15 15 Section 712(a)(2) of the Dodd-Frank Act provides in part that the Commission shall “consult and coordinate to the extent possible with the Commodity Futures Trading Commission and the prudential regulators for the purpose of assuring regulatory consistency and comparability, to the extent possible.” B. Cross-Border Application and Availability of Substituted Compliance In 2013, the Commission proposed rules and interpretive guidance to address the cross-border application of Title VII, including requirements applicable to security-based swap dealers and major security-based swap participants. 16 The Commission in particular expressed the preliminary view that the Title VII requirements apply generally to the activities of registered security-based swap dealers and major security-based swap participants. 17 The Commission also proposed rules that would provide that a registered foreign security-based swap dealer, a foreign branch of a registered U.S. security-based swap dealer or a foreign major security-based swap participant, with respect to their foreign business, shall not be subject to certain transaction-level business conduct requirements. 18 16 See 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, 30986 (May 23, 2013) (“Cross-Border Proposing Release”). 17 See notes 191 to 195, infra, and accompanying text. 18 See note 197, infra, and accompanying text. As part of that Cross-Border Proposing Release, the Commission also proposed rules to establish a framework to permit market participants to satisfy certain requirements by complying with comparable regulatory requirements of a foreign jurisdiction. Among these was a proposed rule by which foreign security-based swap dealers registered with the Commission might satisfy requirements under Exchange Act Section 15F—other than dealer registration requirements—by complying with the corresponding rules and regulations established in a foreign jurisdiction. 19 19 See Cross-Border Proposing Release, 78 FR at 31088, 31207-08 (proposed Exchange Act Rule 3a71-5). In adopting final rules related to the registration requirements applicable to security-based swap dealers, the Commission stated that substituted compliance would not be available in connection with those registration requirements. See Exchange Act Release No. 75611 (Aug. 5, 2015), 80 FR 48964, 48972-73 (Aug. 14, 2015) (“Registration Adopting Release”). Also, in 2014, the Commission adopted a final procedural rule regarding the submission of requests for substituted compliance determinations. See Cross-Border Adopting Release, 79 FR at 47357-60, 47369 (Exchange Act Rule 0-13). As discussed below, a number of commenters to the Cross-Border Proposing Release addressed various aspects of the proposed substituted compliance framework for security-based swap dealers. As discussed below, moreover, the Commission is setting forth its interpretation regarding the cross-border scope of the trade acknowledgment and verification requirements. The Commission also is amending Rule 3a71-6 to provide that when the Commission has made a substituted compliance determination, non-U.S. SBS Entities may satisfy the trade acknowledgment and verification requirements applicable to SBS Entities by complying with comparable requirements of a foreign regime. II. Discussion of Trade Acknowledgment and Verification Rule A. Definitions 1. Proposed Rule We proposed to define several key terms in Rule 15Fi-1 to have the meaning that we believe is commonly attributed to those terms by industry participants. Thus, we proposed to define the term “trade acknowledgment” to mean a written or electronic record of an SBS transaction sent by one party to the other. 20 We also proposed that the term “verification” would mean the process by which a trade acknowledgment has been manually, electronically, or by some other legally equivalent means, signed by the receiving counterparty, 21 and that a “confirmation” of an SBS transaction would mean a trade acknowledgment that has been verified. 22 “Execution” would have been defined to mean the point at which the parties become irrevocably bound to a transaction under applicable law. 23 20 See proposed Rule 15Fi-1(a)(10). 21 See proposed Rule 15Fi-1(a)(13). 22 See proposed Rule 15Fi-1(a)(4). 23 See proposed Rule 15Fi-1(a)(6). Proposed Rule 15Fi-1 also would have defined certain items that SBS Entities would have been required to include on a trade acknowledgment, including “asset class”; 24 “broker ID”; 25 “desk ID”; 26 “participant ID”; 27 “price; 28 and “trader ID”. 29 UIC was also defined to mean the unique identification code assigned to a person, unit of a person, or product by or on behalf of an internationally recognized standards-setting body that imposes fees and usage restrictions that are fair and reasonable and not unreasonably discriminatory. 30 These terms were proposed to be defined as in the proposed rules for reporting and public dissemination of SBS. 31 24 See proposed Rule 15Fi-1(a)(1) (defining the term to mean “those security-based swaps in a particular broad category, including, but not limited to, credit derivatives, equity derivatives, and loan-based derivatives”). 25 See proposed Rule 15Fi-1(a)(2) (defining the term to mean “the unique identification code (“UIC”) assigned to a person acting as a broker for a participant”). 26 See proposed Rule 15Fi-1(a)(5) (defining the term to mean “the UIC assigned to the trading desk of a participant or of a broker of a participant”). 27 See proposed Rule 15Fi-1(a)(7) (defining the term to mean “the UIC assigned to a participant”). 28 See proposed Rule 15Fi-1(a)(8) (defining the term to mean “the price of a security-based swap transaction, expressed in terms of the commercial conventions used in that asset class”). 29 See proposed Rule 15Fi-1(a)(11) (defining the term to mean “the UIC assigned to a natural person who executes security-based swaps”). 30 See proposed Rule 15Fi-1(a)(12). Proposed Rule 15Fi-1(a)(12) also provided that if no standards-setting body meets these criteria, a registered security-based swap data repository shall assign all necessary UICs using its own methodology. If a standards-setting body meets these criteria but has not assigned a UIC to a particular person, unit of a person, or product, a registered security-based swap data repository shall assign a UIC to that person, unit of a person, or product using its own methodology. 31 See Regulation SBSR-Reporting and Dissemination of Security-Based Swap Information, Exchange Act Release No. 63346 (Nov. 19, 2010), 75 FR 75207 (Dec. 2, 2010) (“SBSR Proposing Release”). Proposed Rule 15Fi-1 also would have defined “clearing agency” for purposes of the rule to mean a clearing agency registered pursuant to Section 17A of the Securities Exchange Act of 1934. 32 In addition, the proposed rule would have defined “processed electronically” to mean entered into a security-based swap dealer or security-based swap participant's computerized processing systems to facilitate clearance and settlement. 33 32 See proposed Rule 15Fi-1(a)(3). 33 See proposed Rule 15Fi-1(a)(9). 2. Comments Two commenters requested that the Commission clarify the meanings of certain terms used in the proposal, particularly “executed electronically” and “processed electronically.” 34 One commenter noted that there are a variety of systems and communication devices that may be used and that may have different assortments of features, and stated its view that it would be inappropriate to include in these terms all transactions for which some element of the transaction is captured or processed through electronic means. 35 This commenter suggested that the Commission define “processed electronically” with reference to a trading facility's electronic processing system. 36 The other commenter suggested that the term “processed electronically” be defined as “entered into a [SBS Dealer] or [Major SBS Participant]'s computerized processing systems to facilitate clearance and settlement, as well as to become capable of being communicated electronically to the counterparty either as trade acknowledgment or as trade verification.” 37 34 ISDA I at 5; MarkitSERV at 2, 9. 35 ISDA I at 5. 36 Id. 37 MarkitSERV at 9. 3. Response to Comments and Final Rule We did not receive any comments on, and we are adopting as proposed the definition for the term “verification” in Final Rule 15Fi-1. Final Rule 15Fi-1(e) as adopted defines the term “execution” substantially as proposed, except we have changed a reference to “parties” in a transaction to “counterparties” to clarify that we are referring to the same persons in each part of the rule where the term is used. Final Rule 15Fi-1(f) adopts the term “trade acknowledgment” substantially as proposed, except that the definition is clarified by changing a reference to a “party” to “counterparty of the security-based swap transaction” for the same reason discussed above. Final Rule 15Fi-1 also defines the terms “clearing transaction” as discussed further in Section II.F. below, “business day” and “day of execution” as discussed further in Section II.C. below, and “security-based swap execution facility” and “national securities exchange” as discussed further in Section II.G. below. In addition, Final Rule 15Fi-1(b) as adopted defines the term “clearing agency” differently than the proposed rule for reasons discussed further in Section II.F. below. The term “executed electronically” is not being adopted as part of Final Rule 15Fi-1 as a result of changes, discussed in Section II.C. below, made to the rule's timing requirements. The Commission also is not adopting the definition of “processed electronically,” 38 due to changes in Final Rule 15Fi-2's timing requirements and the elimination of the requirement for electronic processing. 39 In addition, as discussed further in Section II.D. below, Final Rule 15Fi-2 does not contain an enumerated list of items that are required to be disclosed on the trade acknowledgment, and thus the Commission is not adopting definitions for the terms “asset class,” “broker ID,” “desk ID,” “participant ID,” “price,” “trader ID,” or “UIC,” which were proposed only to define the enumerated contents of the trade acknowledgment. Finally, Final Rule 15Fi-1 does not adopt the term “confirmation,” which is not used elsewhere in Final Rules 15Fi-1 or 15Fi-2. 38 See proposed Rule 15Fi-1(c)(1)(i) and (ii) (which would have required SBS transactions to be acknowledged within 15 minutes for transactions that were electronically executed and processed electronically, and within 30 minutes for transactions that were not electronically executed but were processed electronically). 39 See infra, Section II.C. B. Trade Acknowledgment Requirement 1. Proposed Rule Proposed Rule 15Fi-1(b) would have required an SBS Entity to provide a trade acknowledgment to its counterparty when it purchases an SBS from, or sells an SBS to, the counterparty. As noted in the Proposing Release, the terms “purchase” and “sale” are defined in Sections 3(a)(13) and (14), respectively, of the Exchange Act. 40 As amended by the Dodd-Frank Act, those definitions as applied to SBS transactions include any “execution, termination (prior to its scheduled maturity date), assignment, exchange, or similar transfer or conveyance of, or extinguishing of rights or obligations under, a security-based swap.” 41 Because the proposed rule would apply solely to an SBS Entity that “purchases” or “sells” an SBS, the proposed rule would be effectively limited to “principal transactions” in which the SBS Entity is a counterparty to the transaction and is acting for its own account. 40 See Proposing Release, 76 FR at 3861; see also 15 U.S.C. 78c(a)(13) and (14). 41 Dodd-Frank Act Sections 761(a)(3) and (4), amending Exchange Act Sections 3(a)(13) and (14), respectively; 15 U.S.C. 78c(a)(13) and (14). Proposed Rule 15Fi-1(b) also stated which counterparty that is an SBS Entity to a security-based swap transaction has the responsibility to provide a trade acknowledgment. Specifically, proposed Rule 15Fi-1(b) would have required that, in a transaction between an SBS dealer and a major SBS participant, the SBS dealer would be responsible for providing the trade acknowledgment. 42 In a transaction where only one counterparty is an SBS dealer or major SBS participant, the SBS dealer or major SBS participant would be responsible for providing the trade acknowledgment. 43 In any other transaction involving SBS Entities, the counterparties would be required to select which counterparty would provide the trade acknowledgment. 44 The rule therefore would have applied only to SBS Entities, thus there would have been no requirement to provide a trade acknowledgment in a transaction that does not involve an SBS Entity. 42 See proposed Rule 15Fi-1(b)(1)(i). 43 See proposed Rule 15Fi-1(b)(1)(ii). 44 See proposed Rule 15Fi-1(b)(1)(iii). For most transactions subject to the proposed rule, the party responsible for providing the trade acknowledgment would be determined in a similar manner to the party responsible for reporting the transaction under proposed Regulation SBSR. As discussed in the Proposing Release, the Commission used Section 13A(a)(3) of the Exchange Act as a model in proposed Rule 15Fi-1 to determine which counterparty would be responsible for providing the trade acknowledgment in the transaction. See Proposing Release, 76 FR at 3862. Section 13A(a)(3) specifies which party is obligated to report certain SBS transactions—an SBS dealer, a major SBS participant, or a counterparty to the transaction. 15 U.S.C. 78m-1(a)(3). The Commission stated in the Proposing Release that it expected that many transactions would be confirmed by “matching services” provided through a clearing agency, noting that it used the term “matching services” in the Proposing Release to refer only to services through which two counterparties enter a new transaction. 45 The Commission also noted in the Proposing Release that a clearing agency is providing matching services if it captures trade information regarding a securities transaction, performs an independent comparison of that information, and issues a confirmation of the transaction. 46 The Commission stated that the use of clearing agencies' matching services would promote the principles of Exchange Act Section 15F(i) and that it wished to encourage SBS Entities to use these matching services. Accordingly, paragraph (b)(2) of the proposed rule would have provided that an SBS Entity would have satisfied its requirement to provide a trade acknowledgment if a clearing agency, through its matching service facilities, produced a confirmation of the SBS transaction. 47 45 See Proposing Release, 76 FR at 3862. 46 Id. “Confirmation” was proposed to mean a trade acknowledgment that has been subject to verification. See proposed Rule 15Fi-1(a)(4). 47 See Proposing Release, 76 FR at 3862 and n.22. The Commission also noted in the Proposing Release that a clearing agency may also serve as a central counterparty (“CCP”) in SBS transactions whereby the counterparties may novate their contracts to the CCP. 48 The novation would constitute a purchase from or a sale to the clearing agency in the agency model of clearing which predominates in the United States. 49 In the agency model, a swap that is accepted for clearing—often referred to in the industry as an “alpha”—is terminated and replaced with two new swaps, known as “beta” and “gamma.” 50 Therefore, such a novation would involve three security-based swap transactions: The initial bilateral contract between the counterparties, a new transaction between the CCP and one of the counterparties to the initial bilateral contract, and a new transaction between the CCP and the other counterparty to the initial bilateral contract. Under proposed Rule 15Fi-1, if an SBS entity were a counterparty to the bilateral transaction, it would be subject to the trade acknowledgment requirement. Further, any subsequent transaction in which an SBS Entity novated the transaction to a CCP would also be subject to the trade acknowledgment requirement. While the purchase or sale would require that an SBS Entity provide a trade acknowledgment under paragraph (b)(1) of the proposed rule, paragraph (b)(2) of the proposed rule would have permitted the CCP to satisfy the SBS Entity's obligation to provide a trade acknowledgment to the SBS Entity's counterparty, both for the initial bilateral transaction between an SBS Entity and its counterparty, and for the subsequent purchases or sales that result from the novation to the CCP. 48 In the Proposing Release, the Commission noted its understanding that in a CCP arrangement, if the original counterparties to a bilateral SBS transaction are clearing members, they may novate their bilateral trade to the clearing agency (acting as a CCP). In such a novation to a CCP, each counterparty may terminate its contract with the other and enter into a new contract on identical terms with the CCP. In this way, the CCP would become buyer to one counterparty and seller to the other. See Proposing Release, 76 FR at 3862. 49 See Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, Exchange Act Release No. 74244 (Feb. 11, 2015), 80 FR 14564 at 14599 (Mar. 19, 2015) (“SBSR Adopting Release”). 50 Id. 2. Comments Commenters focused on paragraph (b)(2) of proposed Rule 15Fi-1, which would have permitted a clearing agency to provide a trade acknowledgment on behalf of an SBS Entity. One commenter suggested that SBS Entities should be permitted to delegate their recordkeeping responsibilities to qualified third parties. 51 51 MarkitSERV at 2. One commenter indicated its view that an SBS Entity should be able to satisfy the proposed rule's requirements merely by executing the transaction on a swap execution facility or a designated contract market, or by clearing the swap through a derivatives clearing organization. 52 Another commenter believed, however, that execution platforms would not hold all the data necessary to bilaterally confirm trades, either because the data is assumed at execution (such as payment frequency) or because the execution platform lacks bilaterally specific terms (such as the master confirmation agreement type and date). 53 These comments are addressed in Sections II.F and II.G below. 52 ISDA I at 5. 53 MarkitSERV at 5. One commenter also maintained that any swap execution facility, designated contract market, or derivatives clearing organization that provides confirmations should be required to meet all the regulatory requirements applicable to clearing agencies that provide confirmations. 54 Alternatively, the commenter suggested that the Commission provide an exemption from registration as a clearing agency for “confirmation clearing agencies,” or otherwise provide a conditional exemption from registration that would apply only relevant requirements to confirmation clearing agencies. 55 The commenter also suggested that the registration requirements applicable to entities that must register with the Commission as clearing agencies for providing confirmation services should be fair and apply to all entities that provide similar acknowledgment, verification, and confirmation services. 56 Moreover, the commenter indicated that “confirmation clearing agencies” should be subject to a more limited scope of clearing agency regulation than credit-substituting central clearing counterparties, or should receive an exemption from certain requirements that the commenter viewed as irrelevant. 57 54 Id. at 7. 55 Id. at 6. 56 Id. 57 Id. 3. Response to Comments and Final Rule We did not receive any comments on proposed paragraph (b)(1) of the proposed rule, and are adopting it as proposed but re-designating it as Rule 15Fi-2(a). We are also making a technical change to paragraph (b)(3) of proposed rule 15Fi-1, changing the word “in” to “by” in one place, re-designating the rule as Rule 15Fi-2(a), and updating cross references in the paragraph to the re-designated rule numbers as appropriate. In response to comments, the Commission is not adopting paragraph (b)(2) of proposed Rule 15Fi-1, which would have permitted a clearing agency to provide a trade acknowledgment on behalf of an SBS Entity. After further consideration and in response to the comments, we believe that it is appropriate to permit an SBS Entity to rely on a third party of its choice to provide a trade acknowledgment on its behalf because it will allow SBS Entities flexibility to select a provider of these services even if the provider is not a registered clearing agency. The Final Rules do not restrict an SBS Entity's ability to use a third party of its choice to provide a trade acknowledgment. Eliminating paragraph (b)(2) of the proposed rule will also make the Final Rules more consistent with the CFTC Rule, which does not impose any limitation on which third parties may provide a swap trade acknowledgment or confirmation on behalf of a swap dealer or major swap participant (“Swap Entities”). 58 Thus, SBS Entities that are also Swap Entities may use the same third parties to provide trade acknowledgments pursuant to Final Rule 15Fi-2 that they use to comply with the CFTC Rule 59 without regard to whether those third parties are registered as clearing agencies. This may simplify dually-registered SBS Entities' operations or help to mitigate their costs of compliance. However, the Commission emphasizes that the SBS Entity remains responsible for complying with Final Rule 15Fi-2. 58 Two commenters encouraged the SEC and the CFTC to harmonize their rules. MarkitSERV at 9, ISDA II at 3, 8. 59 See 17 CFR 23.501. We do, however, recognize the role of a clearing agency in security-based swap transactions to which it is a counterparty. Thus, Final Rule 15Fi-2 also provides an exception from an SBS Entity's general requirement to provide a trade acknowledgment for: (1) Clearing transactions, as discussed in Section II.G below; and (2) SBS transactions that are submitted for clearing at a clearing agency, if the transaction is submitted for clearing as soon as technologically practicable, but in any event no later than the time established for providing a trade acknowledgment under the rule; and the rules, procedures or processes of the clearing agency provide for the acknowledgment and verification of all the terms of the transaction prior to or at the same time that the SBS is accepted for clearing, as discussed in Section II.G below. 60 We also recognize that executing an SBS transaction on an SBSEF may provide the counterparties a means of providing a trade acknowledgment and verifying the transaction and, as discussed further in Section II.G. below, we are excepting certain transactions executed on an SBSEF from the requirement that the counterparties provide a trade acknowledgment. 61 60 See also infra Section II.G., which discusses an exception from trade acknowledgment and verification requirements for SBS transactions executed on an SBSEF or national securities exchange, subject to certain conditions. 61 We are not addressing at this time when a third-party provider of trade acknowledgment and confirmation services, such as one that provides matching services as discussed in the Proposing Release, would be required to register as a clearing agency. In 2011, the Commission issued a temporary conditional exemption from the registration requirement under Section 17A(b)(1) of the Exchange Act for any clearing agency that may be required to register with the Commission solely as a result of providing collateral management services, trade matching services, tear up and compression services, and/or substantially similar services for SBS (“Exempted Activities”). See Order Pursuant to Section 36 of the Securities Exchange Act of 1934 Granting Temporary Exemptions from Clearing Agency Registration Requirements under Section 17A(b) of the Exchange Act for Entities Providing Certain Clearing Services for Security-Based Swaps, Exchange Act Release No. 64796 (July 1, 2011). The order provides a temporary exemption, until the compliance date for the final rules relating to registration of clearing agencies that clear security-based swaps pursuant to Sections 17A(i) and (j) of the Exchange Act, from Section 17A(b)(1) of the Exchange Act to persons conducting Exempted Activities. Id. C. Time To Provide a Trade Acknowledgment 1. Proposed Rule Proposed Rule 15Fi-1(c) would have provided that the maximum time for providing a trade acknowledgment of an SBS transaction would vary depending upon whether the transaction was electronically executed or electronically processed, but would not exceed 24 hours following execution. Specifically, proposed Rule 15Fi-1(c)(1) would have required any SBS transaction to be confirmed promptly, but in any event: • For any transaction that has been executed and processed electronically, a trade acknowledgment must be provided within 15 minutes of execution. • For any transaction that is not electronically executed, but that will be processed electronically, a trade acknowledgment must be provided within 30 minutes of execution. • For any transaction that the SBS Entity cannot process electronically, a trade acknowledgment must be provided within 24 hours following execution. The Commission stated that it encourages SBS Entities to minimize the number of manual transactions processed, and to process electronically all SBS transactions if it is reasonably practicable to do so. 62 However, the Commission also stated that it understands that an SBS Entity may have the ability to process electronically only certain SBS transactions. For example, an SBS Entity may have the ability to process electronically certain standardized SBS transactions in certain asset classes, or transactions that it executes on an exchange or SBS execution facility, but may lack the ability to process electronically SBS transactions in other asset classes or that are executed by other means. 63 The Commission also stated that an SBS Entity's ability to process a transaction electronically may be limited by its counterparty's abilities. 64 For example, an SBS Entity may have the ability to process an SBS transaction through a matching facility, but if its counterparty lacks access to the matching facility, it would need to process transactions with that counterparty through non-computerized means. 62 See Proposing Release, 76 FR at 3863. 63 The Commission noted that transactions in non-standardized SBS that are individually negotiated and contain unique terms, or transactions effected telephonically and processed manually, might be in this category. See Proposing Release, 76 FR at 3863 and n.28. 64 See Proposing Release, 76 FR at 3863. Proposed Rule 15Fi-1(c)(2) would have provided that an SBS Entity would be required to process electronically an SBS transaction if it has the ability to do so. In other words, an SBS Entity could not delay providing a trade acknowledgment by choosing to process a transaction by non-electronic means. The Commission stated its preliminary view that requiring SBS Entities to acknowledge trades as promptly as they are able to do so would promote the purposes of Exchange Act Section 15Fi-1. 65 65 Id. The proposed requirements were intended to promote the stability of the SBS market by preventing documentation backlogs from creating uncertainty over SBS Entities' exposure to SBS. As the Commission noted in the Proposing Release, it expects a lag between the time when an SBS is executed ( i.e., the point at which both counterparties become irrevocably bound to a transaction under applicable law), and when the transaction is confirmed ( i.e., when a trade acknowledgment of the transaction is provided and verified). 66 Requiring prompt provision of trade acknowledgments also should help SBS Entities to submit timely and accurate reports with respect to those transactions to SBS data repositories. The Commission's proposed rule was intended to promote the goal of promptly providing trade acknowledgments, though it tempered that objective due to the Commission's recognition that it might be difficult to achieve that goal, particularly for customized agreements that are not executed or processed electronically. 67 66 Id. 67 Id. 2. Comments Four commenters discussed the timing requirements of proposed Rule 15Fi-1(c). 68 Two comments from the same commenter generally questioned the reason for requiring confirmation in 24 hours or less and expressed concern that it could increase systemic risk by forcing market participants to focus on speed rather than accuracy. 69 68 ISDA I; MarkitSERV; ISDA II; Barnard. 69 ISDA I at 3; ISDA II at 3. One commenter expressed the view that the proposed timing standards are impractical for products where no master confirmation agreement or similar template exists. 70 This commenter also suggested that certain terms of the transaction, such as the counterparty name (if the trade is being allocated by an investment manager) or initial rates, may not be available until after the execution. 71 In addition, this commenter stated that SBS Entities may need more than 24 hours to deliver a trade acknowledgment in cross-border transactions due to business day and time zone differences. 72 Moreover, this commenter maintained that it may not be achievable to send a trade acknowledgment within the proposed time period for a transaction that is neither traded electronically nor processed electronically. 73 The commenter stated that some transactions are heavily negotiated, bespoke in nature, and require protracted post-trade detail work. 74 The commenter also indicated that “complete pre-agreement of terms would require end-users to engage significant legal resources for all proposed transactions, as compared to existing practice, which focuses on transactions that have actually been executed.” 75 70 ISDA I at 4. 71 Id. at 3. 72 Id. 73 Id. at 5. 74 Id. 75 Id. at 6. One commenter compared the Commission's proposed rule (which would have allowed SBS Entities 24 hours from execution to issue the trade acknowledgment for transactions that are not electronically processed) with the CFTC's proposal to require confirmation of non-electronically processed transactions by the end of the day of execution. 76 The commenter suggested that the 24 hour period should be measured only during business days, but expressed doubts that even this time frame could be achieved for all transactions that are not electronically processed. 77 76 MarkitSERV at 8. The final CFTC Rule requires that Swap Entities, as soon as technologically practicable, but in any event by the end of first business day following the day of execution: (i) Confirm a transaction with another Swap Entity, and (ii) provide a trade acknowledgment to a counterparty that is not a Swap Entity. 17 CFR 23.501(a). 77 MarkitSERV at 8. The commenter also expressed concern that the proposed rule's timing requirement is inconsistent with the CFTC Rule and those of relevant foreign regulatory authorities. 78 The commenter believes that these differences will impose unnecessary costs on market participants, and may lead to confusion in, and disruption of, the SBS market without yielding commensurate benefits. 79 The commenter noted that the CFTC replaced the proposed time periods for swaps executed or processed electronically in their entirety with a requirement that, subject to a compliance phase-in schedule, all swaps among Swap Entities or between swap dealers, major swap participants, and financial entities be confirmed as soon as technologically practicable, but no later than the end of the first business day following the day of execution. 80 78 ISDA II at 2. 79 Id. 80 Id. at 2-3. Further, this commenter suggested that different asset classes, and even different products within an asset class, will require tailoring the confirmation timing requirements, particularly between bespoke transactions and “garden variety” security-based swaps. 81 81 ISDA II at 3. One commenter suggested that the Commission provide more guidance on how to interpret the term “promptly” as used in proposed Rule 15Fi-1(c). 82 82 Barnard at 2. Two commenters maintained that the proposed rule may affect the way investment managers conduct their business. 83 One of these commenters asserted that certain terms required to be on a trade acknowledgment may not be known to the transacting counterparties within 24 hours of execution, including the counterparty name (if the trade is being allocated by an investment manager). 84 The commenter explained that investment managers commonly execute a single trade and then allocate positions across their clients and this process may take more than 24 hours. 85 The commenter also stated that the allocation process may require investment managers to receive instructions from their clients. 86 The second commenter explained that the current market practice is for investment managers to enter a transaction at the `execution' level for a certain notional size and price,” and only allocate the transaction to multiple underlying funds thereafter. 87 Thus, the commenter suggested measuring the time period in which a trade acknowledgment should be sent from the point when the SBS Entity possesses all the information necessary to issue the trade acknowledgment. 88 83 Id. at 4; MarkitSERV at 8. 84 ISDA I at 3. 85 ISDA I at 4. 86 Id. 87 MarkitSERV at 8. 88 Id. 3. Response to Comments and Final Rule After considering the comments, the Commission is revising proposed Rule 15Fi-1(c) to provide that an SBS Entity must provide a trade acknowledgment promptly, but in any event by the end of the first business day following the day of execution, and renumbering it as Rule 15Fi-2(b). 89 The requirement that the responsible counterparty promptly provide a trade acknowledgment would help ensure that the counterparties know, and have a record of, the terms of their executed agreement in a timely manner. “Promptly,” in this context, generally should be understood to mean that an SBS Entity should provide a trade acknowledgment as soon as practicable within the period specified in the rule (by the end of the first business day following the day of execution). 90 89 Final Rule 15Fi-2(b). 90 An SBS Entity generally should not purposefully delay sending trade acknowledgments, for example by programming its systems to delay sending the trade acknowledgments until the end of the allowable time period specified in the rule. The Commission recognizes the commenters that were concerned that 24 hours might not be enough time for all transactions, and has taken those comments into account in providing additional time under the rule as adopted. 91 The additional time permitted under the rule as adopted to provide a trade acknowledgment takes into account that certain transactions may take more time to acknowledge because of the asset class of the transaction or the bespoke nature of the particular transaction. In addition, the additional time permitted under the rule as adopted takes into account the process by which investment managers allocate transactions, and should help to ensure that SBS Entities have adequate time to provide a trade acknowledgment for transactions that occur late in the day. This time period also will provide efficiencies for SBS Entities that are also Swap Entities by allowing the same amount of time as that required by the CFTC rule requiring confirmation of swap transactions. 92 We also note that, under the final rule, an SBS Entity has at least as much time to provide a trade acknowledgment as it would under one commenter's suggestion that we measure our proposed 24 hour timing requirement only during business days. 93 As compared to the timing requirement of the proposed rule, the final rule's requirement that an SBS Entity provide a trade acknowledgment promptly but no later than the end of the first business day following the day of execution aligns more closely with the timing requirement for confirmation of SBS transactions that have been adopted by certain foreign regulators. 94 91 See ISDA I at 3-4; ISDA II at 3; MarkitSERV at 8. 92 See 17 CFR 23.501(a)(1)-(2). This change thus responds to commenters who requested greater conformity between the Commission's and the CFTC's rules. See MarkitSERV at 9, ISDA II at 3, 8. 93 MarkitSERV at 8. 94 See note 78, supra, and accompanying text. See, e.g., Commission Delegated Regulation 149/2013, art. 12(1)-(2), 2013 O.J. (L52) 20-21 (EU) (requiring the documentation of the counterparties' agreement to all the terms of non-centrally cleared OTC derivative contracts as soon as possible and at the latest as follows: (1) If concluded between financial counterparties or certain non-financial counterparties with OTC derivatives portfolios above specified thresholds, by the end of the next business day following the date of execution, and (2) if concluded with a non-financial counterparty with an OTC derivatives portfolio at or below specified thresholds, by the end of the second business day following the date of execution). Given this change, the Commission is also defining “day of execution” to mean the calendar day of the counterparty to the security-based swap transaction that ends the latest, provided that if a security-based swap transaction is: (1) Entered into after 4:00 p.m. in the place of a counterparty; or (2) entered into on a day that is not a business day in the place of a counterparty, then such security-based swap transaction shall be deemed to have been entered into by the counterparty on the immediately succeeding business day of that counterparty, and the day of execution shall be determined with reference to such business day. This definition matches that used in the CFTC Rule, except to replace references to “party” in the CFTC rule with “counterparty” in Rule 15Fi-2, and references to “swap” with “security-based swap.” 95 For clarity, the Commission is also defining “business day” to mean any day other than a Saturday, Sunday, or a legal holiday. 96 For SBS Entities in the U.S., a “legal holiday” generally would be any U.S. federal holiday. The Commission recognizes that counterparties to the trade may be in different time zones and/or jurisdictions, and that in the absence of Rule 15Fi-1(d), there could be confusion about whether “business day” referred to the jurisdiction and time zone of one counterparty or the jurisdiction and time zone of the other counterparty. These definitions help to clarify the obligation to provide a trade acknowledgment in cross-border transactions or those in which the parties have different business days or time zones. These definitions also create consistency with the CFTC Rule. 95 17 CFR 23.501(a)(5)(i). 96 Final Rule 15Fi-1(a). As noted, the timing requirement in Final Rule 15Fi-2(b) takes into account and should help address the comment suggesting that the Commission adopt different timing requirements for different asset classes of security-based swap transactions and to distinguish between the timing requirements for transactions that are bespoke to greater or lesser degrees. 97 Although the timing requirement is uniform for transactions in any asset class and between standardized and bespoke contracts, the additional time provided should address what we believe is the root of the commenter's concern—that the proposed rule did not provide sufficient time to provide a trade acknowledgment for certain asset classes or for more bespoke transactions. The Commission notes that a uniform timing requirement for trade acknowledgments is consistent with the CFTC Rule, which does not recognize distinctions between different asset classes or whether a swap is standardized when specifying the time allotted for provision of a trade acknowledgment or confirmation. The Commission recognizes that the commenter may desire even more time than that provided in the final rule to provide a trade acknowledgment in bespoke transactions, but does not believe that it is appropriate to provide for a longer period of time. The rule as adopted takes into account the comments requesting a longer period of time than that which we proposed, as well as the objective of the proposed rule to help ensure that the counterparties know, and have a record of, the terms of their executed agreement in a timely manner, and the Commission believes that the time period as adopted is an appropriate approach. 97 See ISDA II at 3. One commenter noted that different investment managers may have different policies for allocating trades to their clients and do so over differing time periods. 98 For example, assume a single investment manager manages several investment funds and has discretionary authority to execute SBS transactions with an SBS Entity on behalf of each of the funds. Assume further that the SBS Entity knows the universe of funds managed by the investment manager. We understand that common industry practice is that the SBS Entity will execute SBS transactions with the investment manager on behalf of one or more of the funds it manages without requiring the investment manager to disclose at the time of execution the specific funds that will be the counterparties to the transaction. The timing requirement in Final Rule 15Fi-2(b) recognizes that allocations by an investment manager may not occur before or contemporaneous with the execution of the “bunched” order, and thus it allows additional time compared to the proposed rule for an SBS Entity to provide a trade acknowledgment. 99 98 ISDA I at 4. 99 The Commission has proposed rules concerning margin requirements and books and record keeping requirements for SBS. To the extent these rules are adopted, an SBS Entity that accepts trades from an agent on behalf of unidentified principals in this manner will need to separately consider its obligations under those rules. In light of these considerations and the time period for providing a trade acknowledgment that is being adopted, the Commission is not modifying the rule, as suggested by one commenter, to measure the time period in which a trade acknowledgment should be sent from the point when the SBS Entity possesses all the information necessary to issue the trade acknowledgment. Generally, the Commission is concerned that, once an execution has occurred, delaying the trade acknowledgment for an indefinite and unknown amount of time could create an unacceptable period of lingering uncertainty about the terms of the transaction. This in turn would extend the period of risk presented by undocumented transactions and would be inconsistent with the objective of the rule to promote timely provision of the trade acknowledgment. With respect to the commenter's specific concerns regarding allocations or the initial rate for a transaction, 100 the Commission believes, as discussed above, 101 that the additional time allowed under Final Rule 15Fi-2(b) for an SBS Entity to provide a trade acknowledgment should provide an appropriate amount of time for an SBS Entity to obtain the information required on a trade acknowledgment that was not available at the time of execution. The timing requirements of the CFTC Rule are substantially similar to the Commission's final rule, 102 and many SBS Entities that will be subject to the final rule are Swap Entities subject to the CFTC Rule. We have considered the commenter's request that we effectively allow an unlimited amount of time to provide a trade acknowledgment if the SBS Entity has not received certain information, such as the allocation or initial rate for a transaction, and we also considered the objectives of the rule to promote timely acknowledgment and verification of transactions. After taking into consideration the comments and the objectives of the rule, we believe, as discussed above, that requiring that SBS Entities provide the trade acknowledgment by the end of the next business day after the day of execution is an appropriate approach that promotes timely acknowledgment and verification of the terms of the transactions. We are not adopting proposed Rule 15Fi-1(c)(2), which would have required that an SBS Entity electronically process transactions if it has the ability to do so. The Commission proposed the requirement to improve the recordkeeping of SBS Entities and further promote the goals of Section 15F(i) of the Exchange Act. 103 However, the Commission believes that requiring electronic processing is not necessary at this time to achieve this objective in light of the Final Rule's timing requirement—which requires prompt acknowledgment of SBS transactions and thus encourages SBS Entities to electronically process transactions to improve their ability to comply with its requirements. 100 ISDA I at 3. 101 See notes 98-99, supra, and associated text. 102 See 17 CFR 23.501(a) (requiring that a Swap Entity either confirm its transaction (if it is with a Swap Entity) or provide a trade acknowledgment for the transaction (if it with counterparty that is not a Swap Entity) as soon as technologically practicable, but in any event by the end of first business day following the day of execution. 103 See Proposing Release, 76 FR at 3863. D. Form and Content of Trade Acknowledgments 1. Proposed Rule Paragraph (d) of proposed Rule 15Fi-1 would have required the trade acknowledgments to be provided through any electronic means that provide reasonable assurance of delivery and a record of transmittal. The Commission proposed the electronic delivery requirement to promote the timely provision of trade acknowledgments in accordance with Exchange Act Section 15F(i). The proposed rule was intended to provide flexibility for SBS Entities to determine the specific electronic means by which they will comply. 104 104 See id. at 3864. The Commission noted in particular that SBS Entities may choose to provide trade acknowledgments through a mutually agreed upon electronic standard, such as a messaging system that uses Financial products Markup Language (commonly known as FpML). 105 The Commission also specifically discussed facsimile transmission or electronic mail as a means of providing trade acknowledgments, particularly when engaging in SBS transactions with counterparties that rarely buy or sell SBS and that consequently do not have the means to receive trade acknowledgments otherwise. 106 The Commission further stated that providing trade acknowledgments exclusively by mail or overnight courier would not satisfy the requirements of the proposed rule. 107 105 Id. 106 Id. 107 Id. Paragraph (d) of proposed Rule 15Fi-1 also would have required trade acknowledgments to contain a minimum of 22 items of information, all but one of which were identical to the items that the Commission had proposed that SBS Entities would be required to report to an SBS data repository pursuant to Regulation SBSR. 108 108 See SBSR Proposing Release, note 31, supra. The Commission later adopted Regulation SBSR. See SBSR Adopting Release, note 49, supra. Specifically, proposed Rule 15Fi-1(d) would have required the trade acknowledgment to include terms from proposed Regulation SBSR, including: (1) The asset class; (2) information identifying the SBS instrument and the specific asset(s) or issuer of a security on which the SBS is based; (3) the notional amount and currency; (4) date and time of execution; (5) the effective date; (6) the scheduled termination date; (7) the price; (8) the terms of any fixed or floating rate payments, and the frequency of any payments; (9) whether or not the security-based swap would have been cleared by a clearing agency; (10) an indication if both counterparties are SBS dealers; (11) if the transaction involved an existing SBS, an indication that the transaction did not involve an opportunity to negotiate a material term of the contract, other than the counterparty; (12) an indication if the SBS is customized to the extent that the information provided above does not provide all of the material information necessary to identify the customized SBS or does not contain the data elements necessary to calculate the price; (13) the participant ID of each counterparty; (14) the broker ID, desk ID, and trader ID of the reporting party; (15) the amount(s) and currenc(ies) of any up-front payment(s) and a description of the terms and contingencies of the payment streams of each counterparty to the other; (16) the title of any master agreement, or any other agreement governing the transaction, incorporated by reference and the date of any such agreement; (17) the data elements necessary for a person to determine the market value of the transaction; (18) if the SBS will be cleared, the name of the clearing agency; (19) if the SBS is not cleared, whether the exception in Section 3C(g) of the Exchange Act (15 U.S.C. 78c-3(g)) was invoked; (20) if the SBS is not cleared, a description of the settlement terms, including whether the security-based swap is cash-settled or physically settled, and the method for determining the settlement value; and (21) the execution venue. In addition to these items from proposed Regulation SBSR, proposed Rule 15Fi-1(d)(22) would also have required the trade acknowledgment to include any additional information that is required for the transaction to be cleared by a clearing agency, if the transaction was to be cleared. 2. Comments One commenter asserted that product innovation or the bespoke nature of some SBS might cause situations where electronic confirmation cannot be provided, and that the low number of transactions in a specific instrument type might sometimes be insufficient to justify the cost of building the capabilities to electronically confirm transactions. 109 Thus, the commenter indicated that it is not realistic or achievable for the Commission to mandate electronic confirmation of all SBS transactions, and it should be merely encouraged rather than required. 110 109 MarkitSERV at 10. 110 Id. at 2 and 10. Another commenter suggested that the trade acknowledgment terms should be only the minimum required to evidence agreement to a trade and its material economic terms, and objected to many of the enumerated items in the proposed rule. 111 In particular, the commenter objected to inclusion on the trade acknowledgment of the following specific items: 111 ISDA I at 6. • Asset class (recommending that the Commission adopt standard taxonomy before requiring this item); • notional amount (suggesting that the quantity of assets—shares—rather than notional amount should be disclosed for equity derivatives); • time of the transaction (because execution times are not typically recorded for voice trades); • counterparty regulatory status (because dealers may not know their counterparty's regulatory status unless it is published by the Commission) and the counterparty's broker, trading and desk identification (noting that there is no analog under Exchange Act Rule 10b-10, and because the information would presumably be maintained as central reference data that could be saved elsewhere); • an indication that the transaction did not involve an opportunity to negotiate a material term of the contract, if the transaction involved an existing SBS transaction; • certain information for customized transactions (because inclusion of the elements necessary to calculate prices may go beyond the scope of what can or should be included in a confirmation); • a description of the payment streams (because contingent payment streams may be elaborate and can be located in other documents); • the data elements necessary for the counterparty to determine the market value (because this information may also go beyond the scope of what can or should be included in a confirmation); • venue (because it is unclear whether this means trading venue); and • clearing-required information (asserting that it is unnecessary to include clearing agency instructions on the confirmation). 112 112 Id. at 6-7. The commenter also urged the Commission to reconsider requiring the trade acknowledgment to include all the data elements necessary to determine the value of the security-based swap. 113 The commenter stated that valuation procedures vary from party to party, and, to the extent that they must be agreed upon, they will be heavily negotiated. The commenter said that requiring the results of the negotiations to be reflected in the trade acknowledgment would slow down the confirmation process. 114 113 Id. at 4. 114 Id. One commenter also objected to the proposed rule diverging substantially from the CFTC Rule, which requires parties to memorialize the agreement of the counterparties to all the terms of a swap transaction without identifying specific items to be listed on the confirmation. 115 This commenter also requested that the Commission's rule allow for documentation to differ between different asset classes. 116 115 ISDA II at 3; see also CFTC Rule, 17 CFR 23.501 and CFTC Adopting Release, 77 FR 55901. 116 ISDA I at 2. One commenter suggested that “the record trail created by the verification process ( i.e., the confirmation) should constitute the best evidence that the counterparties . . . agree to the terms and binding nature of the trade.” 117 This commenter indicated that the current practice in the security-based swap market is for counterparties to execute a transaction by agreeing to the main economic terms of the transaction ( e.g., as to pricing and notional size) and agreeing to other economic details only when they differ from the accepted market practice or are specific to the terms of the counterparty relationship ( e.g., master agreement reference or credit terms). 118 The commenter explained that the process of adding additional information to the transaction record to create a complete documentation of the transaction is referred to as “trade enrichment,” and that trade enrichment may happen through a variety of processes, including trade capture systems or automated confirmation services. 119 The commenter also suggests that the definition of “processed electronically” should include electronic communication as a required component. 120 117 MarkitSERV at 1. 118 Id. at 2. 119 Id. 120 Id. 3. Response to Comments and Final Rule The Commission is adopting the requirement to provide a trade acknowledgment through any electronic means that provide reasonable assurance of delivery and a record of transmittal as proposed in Rule 15Fi-1(d), but is re-designating it as Rule 15Fi-2(c). 121 The Commission acknowledges the comment that it should allow SBS Entities to deliver trade acknowledgments in certain instances on paper rather than electronically, 122 but the Commission believes that requiring electronic delivery of trade acknowledgments will promote the objectives of Exchange Act Section 15F(i)(1) for timely and accurate confirmation and documentation of security-based swaps. Specifically, the electronic delivery of trade acknowledgments will result in SBS counterparties receiving trade acknowledgments in a timelier manner, which will enable them to review the terms of their transactions more quickly to either verify the transactions or dispute the terms. This in turn should help to reduce operational risk by decreasing the amount of time within which a counterparty may recognize and work to resolve any potential discrepancies in the trade documentation. The Commission also understands that electronic confirmation is the norm for SBS transactions. 123 The Commission does not, however, specify the means of electronic delivery, so SBS Entities may rely on any electronic means, such as email systems, to comply with the rule's requirements rather than acquiring or building new computer systems solely to provide trade acknowledgments. Thus, taking into consideration the potential costs of electronic trade acknowledgments and the expected benefits, the Commission believes that it is appropriate to require electronic delivery of trade acknowledgments. The Commission acknowledges the comment that asserts that it might not be possible to provide an electronic confirmation in all cases. 124 However, the rule as adopted does not require any particular means of electronic delivery; for example, an SBS Entity could send an email with a PDF attachment as a trade acknowledgment to a counterparty. Thus, given the flexibility provided by the rule to provide an electronic confirmation, the Commission believes it is appropriate to require SBS Entities to provide an electronic trade acknowledgment by the end of the next business day after the day of execution. 121 The final rule also contains a technical correction changing the word “in” to “by.” 122 See notes 109 and 110, supra, and accompanying text. 123 See the discussion of current trade confirmation practices in Section VII.B.3 below. 124 See supra notes 109 and 110. After careful consideration of the comments, the Commission is revising proposed Rule 15Fi-1(d), now re-designated as Final Rule 15Fi-2(c), to require an SBS Entity to disclose all the terms of the security-based swap transaction, rather than certain enumerated items. 125 The Commission agrees with the commenter that maintained that the confirmation should constitute the best record of the transaction so as to help SBS counterparties have a record that clearly identifies their rights and obligations under the SBS, and thus is requiring that the trade acknowledgment (which forms the basis of the confirmation) include all the terms of the transaction. Final Rule 15Fi-2(c) also responds to objections to the required disclosure of certain listed data requirements of proposed Regulation SBSR, such as the participant ID of each counterparty, the broker ID, the desk ID, and the trader ID, which are not terms of the transaction and may not reflect the data that is most relevant to counterparties. Further, by not enumerating the content requirements of the trade acknowledgment, Final Rule 15Fi-2(c) also allows for flexibility for counterparties with respect to the information provided for different SBS in different asset classes. The requirement to report all the terms of the SBS transaction implicitly accepts that if the terms of SBS in different classes vary, only the terms relevant to the specific asset class of the transaction being acknowledged must be included on the trade acknowledgment under Final Rule 15Fi-2. 126 125 We emphasize that Rule 15Fi-2 as adopted does not limit any disclosure obligations that an SBS Entity may have under other applicable federal securities laws, rules or regulations, including the anti-fraud provisions of the federal securities laws. 126 The change to require all of the terms of the transaction also responds to the commenter who opposed requiring the trade acknowledgment to include all the data elements necessary to determine the value of the security-based swap, as Final Rule 15Fi-2 does not state that an SBS Entity must include the data elements necessary to determine the value of the security-based swap on the trade acknowledgment. This change also responds to commenters who advocated for greater consistency between the Commission's rules and those of the CFTC. 127 The Commission believes that commonality between the trade acknowledgment and verification standards for swaps and SBS will facilitate compliance for SBS Entities that are also Swap Entities and thus are already complying with the CFTC's rule. 127 MarkitSERV at 9; ISDA II at 3, 8. Further, the Commission acknowledges that an SBS Entity may want to comply with the Final Rule's content requirements by incorporating documents by reference into the trade acknowledgment. For example, the Commission understands that an SBS Entity may want to include by reference in the trade acknowledgment certain standard provisions in its master agreement with its counterparty that will control each SBS transaction executed with that counterparty. An SBS Entity that chooses to utilize this method should ensure that it complies with any applicable rules regarding its maintenance of the documents incorporated by reference 128 and that the trade acknowledgment reflects the actual terms of each SBS transaction. 129 128 The Commission has proposed rules governing books and recordkeeping requirements for SBS Entities. See Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers; Capital Rule for Certain Security-Based Swap Dealers, Exchange Act Release No. 71958 (Apr. 17, 2014), 79 FR 25193 (May 2, 2014) (“SBS Books and Records Proposing Release”). 129 This position is consistent with the CFTC's interpretive guidance for the confirmation of swap transactions. See CFTC Adopting Release, 77 FR 55903 at 55919. The Commission is not adopting any changes to the proposed rule following one commenter's suggestion that “processed electronically” be defined to include electronic communication as a required component. The Commission proposed the term “processed electronically” to define a group of SBS transactions for which the proposed rule would have required SBS Entities to provide a trade acknowledgment within 15 or 30 minutes of the transaction's execution. The proposed rule would have required SBS Entities to provide a trade acknowledgment for certain other transactions no later than 24 hours from the time of execution. The Commission is not adopting a definition of “processed electronically,” and the final rule does not use this term. The final rule instead sets a uniform time during which SBS Entities must provide a trade acknowledgment. E. Trade Verification 1. Proposed Rule As part of the trade verification process, paragraph (e)(1) of proposed Rule 15Fi-1 would have required an SBS Entity to establish, maintain, and enforce written policies and procedures that are reasonably designed to obtain prompt verification of trade acknowledgments that it provides pursuant to the proposed rule. The Commission stated that it preliminarily believed that this requirement would help to minimize the number of unverified trade acknowledgments, and thereby reduce the operational risk and uncertainty associated with unverified SBS transactions. 130 130 Proposing Release, 76 FR at 3866. Proposed Rule 15Fi-1(a)(13) would have defined “verification” as the process by which a trade acknowledgment has been manually, electronically, or by some other legally equivalent means, signed by the receiving counterparty. 131 The Commission noted in proposing the rule that verifying trades may be done through a process in which the counterparty affirms the transaction terms after reviewing a trade acknowledgment sent by the first counterparty. 132 The counterparty may also dispute the terms of the transaction (often referred to as a “DK” of the transaction, short for “don't know”). Verifying or disputing the transaction may be done by various methods, including where the first counterparty transmits a trade acknowledgment to its counterparty, after which the counterparty—electronically, manually, or by some other legally equivalent method—either signs and returns the trade acknowledgment to verify the transaction, or notifies the counterparty that it rejects the terms. By promoting prompt verification, the proposed rule was intended to minimize the operational risk and uncertainty associated with SBS transactions for which trade acknowledgments have not been verified. 131 See proposed Rule 15Fi-1(a)(13). 132 Proposing Release, 76 FR at 3866. For SBS transactions that are not subject to clearing, paragraph (e)(1) of the proposed rule would have required SBS Entities to establish their own trade verification processes. For example, an SBS Entity could establish, maintain, and enforce policies and procedures under which it will only deal with a counterparty that agrees to timely review any trade acknowledgment to ensure that it accurately describes their agreed upon transaction, and sign and return the trade acknowledgment as evidence of the verification. SBS Entities' policies and procedures for verification could also include using a third-party matching service. Proposed Rule 15Fi-1(e)(2) would have provided that: in any SBS transaction to be cleared through a clearing agency, an SBS Entity must comply with the verification process prescribed by the clearing agency; 133 and that such compliance would have satisfied the verification requirements of subparagraph (e)(1) with respect to the transaction. 134 133 The Commission noted in the Proposing Release that it expected that clearing agencies would adopt rules to obtain the signature of a counterparty on a trade acknowledgment as part of their verification procedures. In electronically processed transactions, the clearing agency could obtain counterparties' signatures electronically or by other means. See Proposing Release, 76 FR at 3866. 134 As also noted in the Proposing Release, each counterparty could submit the SBS terms to an agreed-upon matching service operated by a registered clearing agency. The matching service would then compare the submitted transaction terms. If the submitted SBS terms agreed, the transaction would be verified; otherwise, the matching service would notify the counterparties of the discrepancies, and the counterparties would have the opportunity to resolve them. Id. at n.39. Paragraph (e)(3) of the proposed rule would have required SBS Entities to promptly verify the accuracy of, or dispute with their counterparties, the terms of trade acknowledgments they receive pursuant to the proposed rule. This requirement was intended to reduce the incidence of unverified SBS transactions, thereby reducing the operational risk for SBS Entities. 135 135 See proposed Rule 15Fi-1(e)(3); see also Proposing Release, 76 FR at 3867. 2. Comments One commenter recommended applying time limitations to verifying the transaction in addition to the proposed time limitation for sending the trade acknowledgment. 136 The commenter suggested that if the trade acknowledgment is executed electronically and processed electronically, the trade acknowledgment should be sent within 15 minutes, and the verification provided within 15 minutes of the trade acknowledgment being sent. Similarly, trades that must be acknowledged within 30 minutes should have to be verified within 30 minutes of the trade acknowledgment being sent, and trades acknowledged within 24 hours of execution should have to be verified within 24 hours of receiving the trade acknowledgment. 137 This commenter also supported the CFTC's proposed requirement that Swap Entities have written policies and procedures reasonably designed to ensure confirmation with non-financial entities not later than the next business day following the day the swap transaction is executed, and the commenter suggested that Commission harmonize its requirement with the CFTC's requirement. 138 136 MarkitSERV at 9. 137 Id. 138 Id. The CFTC Rule as adopted requires that a Swap Entity establish, maintain, and follow written policies and procedures reasonably designed to ensure that it executes a confirmation for each swap transaction with a Swap Entity or a financial entity no later than the end of the first business day following the day of execution, and a requirement that a Swap Entity establish, maintain, and follow written policies and procedures reasonably designed to ensure that it executes a confirmation for each swap transaction that it enters with any other entity not later than the end of the second business day following the day of execution. See 17 CFR 23.501(a)(3). One commenter stated its view that the proposed trade acknowledgment and verification process does not account for competing conventions in some transactions. 139 The commenter stated that, for some products, an acknowledgment or notice is sent for certain “`mid-life' trade events” without the expectation of verification. 140 In other transactions, both counterparties may issue a trade acknowledgment to their counterparty, but will respond only if there are discrepancies. 141 The commenter noted that counterparties may also rely on “negative affirmation,” which relies only on one-way confirmations unless the terms are being disputed. 142 139 ISDA I at 8. 140 Id. 141 Id. 142 Id. at 5. One commenter supported what it viewed as a requirement in proposed Rule 15Fi-1(e) that the counterparties “consent to the binding nature of the verification process ( i.e., produce a legally binding confirmation)”, and made the observation that this is consistent with the CFTC Rule. 143 143 MarkitSERV at 4-5. We note that nothing in the rule as proposed or adopted requires parties to “consent to the binding nature of the trade verification process.” 3. Response to Comments and Final Rule The Commission is adopting proposed Rule15Fi-1(e) with some modifications compared to the proposed rule as described below, and is re-designating it as Final Rule 15Fi-2(d). The Commission believes that requiring SBS Entities to establish, maintain, and enforce written policies and procedures reasonably designed to obtain prompt verification of security-based swap transactions will encourage prompt verification of trades with SBS Entities and thereby will advance the objective of Exchange Act Section 15(F)(i) to promote timely and accurate confirmation and documentation of security-based swaps. Final Rule 15Fi-2(d)(2) will further promote this objective by requiring an SBS Entity to promptly verify the accuracy of, or otherwise dispute with its counterparty, the terms of a trade acknowledgment it receives pursuant to Final Rule 15Fi-2(a). 144 144 “Promptly,” in this context, generally should be understood to mean that an SBS Entity should verify or otherwise dispute with its counterparty, the terms of a trade acknowledgment that it receives as soon as practicable. See note 90, supra, and the related text. The Commission is not adopting, as suggested by a commenter, a maximum amount of time for an SBS Entity to verify a trade acknowledgment that it receives. The Commission believes that it is appropriate for the final rule to specify a maximum amount of time for an SBS Entity to provide a trade acknowledgment because the trade acknowledgment serves the important roles of notifying the recipient that (1) its counterparty believes it has executed an SBS transaction and (2) the purported terms of that transaction. The recipient then has the opportunity to review the trade acknowledgment to determine if the trade acknowledgment accurately reflects its agreement with the counterparty. If the recipient agrees that the trade acknowledgment is accurate, the recipient could be expected as an ordinary business practice to verify the transaction promptly. If the recipient believes the trade acknowledgment is inaccurate, the recipient may need additional time to resolve its dispute about the purported terms. Placing a specific time period on the requirement to verify a transaction could mean that, even in the case of good faith disputes about the terms of a trade acknowledgment, a trade acknowledgment recipient would be made to verify, and effectively agree to, incorrect terms on a trade acknowledgment solely to avoid violating the rule even though both counterparties might benefit from using more time to resolve the dispute. The trade acknowledgment's timing requirement thus promotes timely documentation of the transaction, and the flexibility afforded by the final rule's requirements on verification help to safeguard the accuracy of that documentation. The Commission also is not modifying the proposed rule in response to the commenter's concern that it does not account for differing conventions with respect to “'mid-life' trade events.” It is not clear whether the concern is with respect to certain corporate actions ( e.g., mergers, dividends, stock splits, or bankruptcies) that may affect the securities underlying the SBS, or with respect to modifications to the SBS agreed by the counterparties after execution ( e.g., novations or assignments, unwinds, terminations, or other amendments or modifications to the SBS transaction). In our view, such corporate actions do not require a trade acknowledgment under the rule because these actions are not themselves a purchase or a sale of an SBS. 145 Thus, although counterparties may choose to issue some record acknowledging these actions according to whatever conventions the counterparties prefer, it is not required by Final Rule 15Fi-2. A novation, assignment, unwind or termination (prior to the scheduled maturity date) of an existing SBS would be a purchase or sale, and thus require a trade acknowledgment under Final Rule 15Fi-2. 146 This is consistent with the objective of the rules, to help ensure that counterparties have a complete understanding of their agreement and a record of its terms in a timely manner. 145 However, a modification to an SBS that was made by the counterparties as a result of a corporate action with respect to a security underlying the SBS may be a purchase or sale of an SBS under the definition of “purchase” or “sale” in Exchange Act Sections 3(a)(13) and (14). 146 Other amendments or modifications to an existing SBS may also be purchases or sales if they meet the definitions for a “purchase” or “sale” in Exchange Act Sections 3(a)(13) and (14). The Commission has previously noted that if the material terms of an SBS are amended or modified during its life based on an exercise of discretion and not through predetermined criteria or a predetermined self-executing formula, the Commission views the amended or modified SBS as a new SBS. See Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, Exchange Act Release No. 67453, 77 FR 48207 at 48286 (Aug. 13, 2012). The Commission considers such amendments or modifications to an SBS based on the exercise of discretion to result in the purchase and sale of a new SBS. The Commission has also previously noted that its business conduct rules generally will not apply to amendments or modifications to a pre-existing SBS unless the amendment or modification results in a new SBS. See Business Conduct Adopting Release, 81 FR at 29969. For example, the Commission has stated that the business conduct rules generally will not apply to either a full or partial termination of a pre-existing SBS. Id. The trade acknowledgment rule, however, applies to any transaction that is a purchase or sale of an SBS, even if the amendment or modification based on the exercise of discretion does not result in a new SBS. Thus, for example, an SBS Entity must provide a trade acknowledgment for a full termination (if prior to the scheduled maturity date) or a partial termination. The Commission is not adopting the commenter's suggested requirement for SBS Entities to have written policies and procedures reasonably designed to ensure confirmation with non-SBS Entities by the next business day after the swap transaction is executed. 147 The Commission expects that SBS Entities may enter transactions with unregistered counterparties with varying levels of sophistication and different compliance procedures, which may require different amounts of time to respond to trade acknowledgments. The Commission notes, however, that policies and procedures reasonably designed to ensure prompt verification of a transaction may include policies and procedures under which the SBS Entity relies on its counterparty's negative affirmation to the terms of a trade acknowledgment. The Commission understands that Swap Entities commonly use negative affirmation to reduce the legal uncertainty that might otherwise occur if a counterparty were to fail to verify a trade acknowledgment in a timely manner. The Commission generally would consider negative affirmation policies and procedures reasonable if they require that the SBS Entity's counterparty agree to be bound by negative affirmation before or at the time of execution of the SBS transaction and if the policies and procedures provide adequate time after the counterparty receives the trade acknowledgment to dispute its terms or otherwise respond to the trade acknowledgment. Further, the policies and procedures generally should require the SBS Entity to document its counterparty's agreement to rely on negative affirmation. 147 Id. After further consideration, the Commission has determined not to adopt Rule 15Fi-1(e)(2) as proposed, which would have: (1) Required, in any transaction to be cleared by a clearing agency, an SBS Entity to comply with the verification process prescribed by the clearing agency; and (2) provided that compliance with the clearing agency's verification process in a transaction to be cleared would satisfy the SBS Entity's requirement to establish, maintain, and enforce written policies and procedures that are reasonably designed to obtain prompt verification of the transaction. Instead, as discussed in Section II.G. below, the Commission is adopting an exception from Rule 15Fi-2 for SBS transactions submitted to, and accepted for, clearing at a registered clearing agency, which exception essentially would address more broadly the application of the proposed verification requirements to SBS transactions to be cleared. Finally, we are adopting as proposed Rule 15Fi-1(e)(3), but re-designating it as Final Rule 15Fi-2(d)(2). F. Exception for Clearing Transactions Proposed Rule 15Fi-1(b) generally would have required an SBS Entity to provide a trade acknowledgment to its counterparty whenever it purchases or sells an SBS. “Purchase” is defined in the Exchange Act to include “any contract to buy, purchase, or otherwise acquire.” 148 Sale is defined under the Exchange Act as “any contract to sell or otherwise dispose of.” 149 “Purchase” and “sale” are each further defined, for purposes of an SBS, to include “the execution, termination (prior to its scheduled maturity date), assignment, exchange or similar transfer or conveyance of, or extinguishing of rights or obligations under, a security-based swap, as the context may require.” 150 Proposed Rule 15Fi-1(b) did not differentiate between cleared SBS and uncleared SBS. Accordingly, if an SBS Entity purchased a security-based swap from or sold a security-based swap to a clearing agency as part of a clearing transaction, proposed Rule 15Fi-1(b) would have required the SBS Entity to provide a trade acknowledgment to the clearing agency. 148 Exchange Act Section 3(a)(13). 149 Exchange Act Section 3(a)(14). 150 Exchange Act Sections 3(a)(13) and (14). In the Proposing Release, the Commission asked whether clearing agencies should be permitted to provide trade acknowledgments on behalf of SBS Entities in transactions where the clearing agency was not responsible for clearing the transaction through a matching process, and if so, under what conditions. 151 One commenter suggested that an SBS Entity should be able to satisfy the rule's requirements merely by clearing the swap through a derivatives clearing organization, among other means. 152 151 Proposing Release, 76 FR at 3863. 152 ISDA I at 5. Upon consideration of the comment, for the reasons discussed below, the Commission believes that it is unnecessary to require an SBS Entity to comply with the trade acknowledgment and verification provisions of Rule 15Fi-2 when it is a counterparty to an SBS transaction with a clearing agency. Thus, we are providing in Rule 15Fi-2(e) as adopted that a security-based swap dealer or major security-based swap participant is excepted from the requirements of Rule 15Fi-2 with respect to any clearing transaction. For these purposes, Final Rule 15Fi-1(c) defines “clearing transaction” as a security-based swap that has a clearing agency as a direct counterparty, 153 and “clearing agency” as a clearing agency as defined in Section 3(a)(23) of the Exchange Act that is registered pursuant to Section 17A of the Exchange Act and provides central counterparty services for SBS transactions. 153 This is the same meaning as in Exchange Act Rule 900(g). Clearing transactions thus include, for example, any security-based swaps that arise if a registered clearing agency accepts a security-based swap for clearing, as well as any security-based swaps that arise as part of a clearing agency's internal processes, such as security-based swaps used to establish prices for cleared products and security-based swaps that result from netting other clearing transactions of the same product in the same account into an open position. See SBSR Adopting Release, supra note 49, 80 FR at 14599. In the agency model of clearing which predominates in the United States, clearing transactions are new transactions created to replace a bilateral SBS transaction that was submitted to, and has been accepted for clearing by, a registered clearing agency, in which the clearing agency becomes the new direct counterparty to each of the counterparties of the original bilateral transaction. Therefore, these clearing transactions (known as the “beta” and “gamma”) effectively mirror the original bilateral transaction (known as the “alpha”) that was extinguished in the process of acceptance for clearing. 154 Because the final rules define “clearing transaction” to include only a transaction where the clearing agency is a counterparty to a trade, e.g., beta and gamma transactions, the exception in Final Rule &15Fi-2(e) does not apply to the initial bilateral transaction, i.e., the alpha transaction. 155 In the principal model, a clearing member would clear a security-based swap for a customer by becoming a direct counterparty to a transaction with the customer, and then would become a counterparty to an offsetting transaction with the clearing agency. 156 Thus, the transaction between the clearing member and the clearing agency would be a clearing transaction for purposes of this rule. 154 If both direct counterparties to the alpha transaction are members of the clearing agency, the direct counterparties would submit the transaction to the clearing agency directly and the resulting beta transaction would be between the clearing agency and one clearing member, and the gamma transaction would be between the clearing agency and the other clearing member. The Commission understands, however, that if the direct counterparties to the alpha transaction are a clearing member and a non-clearing member (a “customer”), the customer's side of the trade would be submitted for clearing by a clearing member acting on behalf of the customer. When the clearing agency accepts the alpha transaction for clearing, one of the resulting transactions—in this case, assume the beta transaction—would be between the clearing agency and the customer, with the customer's clearing member acting as guarantor for the customer's trade. The other resulting transaction—the gamma transaction—would be between the clearing agency and the clearing member that was a direct counterparty to the alpha transaction. See SBSR Adopting Release, supra note 49, 80 FR 14563 at n. 292. 155 The application of an exception from the trade acknowledgment and verification requirements for bilateral trades that are submitted to clearing is discussed further in Sections G.2 and G.3 below. 156 See SBSR Adopting Release, supra note 49, 80 FR 14563 at n. 293. In each of the models discussed above, when the CCP is a counterparty to a transaction, the Commission observes that the rules, procedures, and processes of registered clearing agencies that provide central counterparty services for SBSs 157 are generally designed to ensure that the terms of SBS transactions submitted for clearing have been matched and confirmed prior to or at the same time the transaction is accepted by the registered clearing agency for clearing. 158 Thus, the Commission believes that it would be unnecessary and duplicative to require SBS Entities to comply with the requirements of Rule 15Fi-2 for clearing transactions, as it would result in essentially two processes, those of the CCP and those under the rule, to acknowledge and verify the same transaction. Therefore, paragraph (e) of Final Rule 15Fi-2 excepts an SBS Entity from the requirements of Rule 15Fi-2 with respect to clearing transactions. 159 157 There are currently two clearing agencies registered with the Commission that provide central counterparty services for SBS transactions. The two clearing agencies are ICE Clear Credit LLC and ICE Clear Europe Limited. 158 See, e.g., ICE Clear Credit LLC Clearing Rule 305 (requiring that participants file with ICE Clear Credit LLC each business day confirmations covering trades made during the day that include certain information about the trade, and providing that, for authorized trade execution/processing platforms or other electronic systems that submit matched trades, the requirement that participants file a confirmation is satisfied by confirming reports that are automatically generated by the platform) and Rule 306 (providing that when a trade between two participants is submitted for clearing, if the trade confirmations submitted by the two participants do not match in all material respects, ICE Clear Credit LLC may reject the trade); see also, ICE Clear Europe Limited CDS Procedures, Section 4.4(c) and more generally the provisions included in Section 4 of the ICE Clear Europe Limited CDS Procedures. 159 Final Rule 15Fi-2(e). The Commission proposed to define “clearing agency” as “a clearing agency registered pursuant to Section 17A of the Securities Exchange Act of 1934 (15 U.S.C. 78q-1),” 160 but has adopted a final definition that differs from the proposed definition in two ways. First, the exception in the final rule is intended only for transactions with a clearing agency that provides services that would bring the person within the statutory definition of clearing agency. 161 Thus, for clarity, the final rule's definition of “clearing agency” is limited to a clearing agency as that term is defined in Section 3(a)(23) of the Exchange Act. Second, the final definition of clearing agency is further limited to a registered clearing agency that provides central counterparty services for SBS transactions. As discussed above, the Commission observes, through its ability to approve the rules and procedures of registered clearing agencies, and its ability to inspect the processes and operations of registered clearing agencies, that the rules, procedures, and processes of registered clearing agencies that provide central counterparty services for SBSs are generally designed so that the terms of SBS transactions submitted for clearing have been matched and confirmed prior to or at the same time the transaction is accepted by the registered clearing agency for clearing. Thus, the Commission is satisfied that registered clearing agencies that provide central counterparty services for SBSs have rules, procedures, and processes that will serve the purpose of the trade acknowledgment rule by providing the parties to the transaction with a record of their transaction. However, the Commission does not make this same observation about the rules, procedures, and processes of clearing agencies that are not registered and do not provide central counterparty services for SBS transactions, and thus it is not extending the exception to clearing agencies that are not registered or that do not provide central counterparty services for SBSs. 160 See proposed Rule 15Fi-1(a)(3). 161 Exchange Act Section 3(a)(23)(A) generally defines a clearing agency as “any person who acts as an intermediary in making payments or deliveries or both in connection with transactions in securities or who provides facilities for comparison of data respecting the terms of settlement of securities transactions, to reduce the number of settlements of securities transactions, or for the allocation of securities settlement responsibilities. Such term also means any person, such as a securities depository, who (i) acts as a custodian of securities in connection with a system for the central handling of securities whereby all securities of a particular class or series of any issuer deposited within the system are treated as fungible and may be transferred, loaned, or pledged by bookkeeping entry without physical delivery of securities certificates, or (ii) otherwise permits or facilitates the settlement of securities transactions or the hypothecation or lending of securities without physical delivery of securities certificates.” Exchange Act Section 3(a)(23)(B) excepts certain persons from the definition of “clearing agency.” G. Exception for Transactions Executed on a Security-Based Swap Execution Facility or National Securities Exchange or Accepted for Clearing by a Clearing Agency The trade acknowledgment and verification requirements in proposed Rules 15Fi-1(b) and (e) generally did not distinguish between transactions executed in the over-the-counter market or transactions executed on a security-based swap execution facility or a national securities exchange. Proposed Rule 15Fi-1(b) also did not distinguish between transactions that would be submitted for clearing at a clearing agency, and those that are not. 162 Proposed Rule 15Fi-1(e)(2) would have addressed SBS transactions to be cleared by a clearing agency, by: (1) Requiring, in any transaction to be cleared by a clearing agency, an SBS Entity to comply with the verification process prescribed by the clearing agency; and (2) providing that compliance with the clearing agency's verification process in a transaction to be cleared would satisfy the SBS Entity's requirement to establish, maintain, and enforce written policies and procedures that are reasonably designed to obtain prompt verification of the transaction. 162 Proposed Rule 15Fi-1(a) did, however, propose an exception related to the use of the matching services of a clearing agency, which is discussed separately in Section II.B.1 above. The Commission solicited comment on whether persons such as security-based swap execution facilities should be permitted to provide trade acknowledgments on behalf of SBS Entities. 163 Commenters disagreed on the trade acknowledgment requirements for transactions executed on an execution facility or cleared at a clearing agency. One commenter supported a rule that would be satisfied by executing an SBS on a swap execution facility or on a designated contract market, or by clearing the swap through a derivatives clearing organization. 164 The commenter noted that this approach was consistent with the CFTC's proposed rule. 165 Another commenter expressed concern that an execution facility would not typically have all of the data required to bilaterally confirm trades, either because it supports trading for standardized transactions, where for example common terms such as payment frequency are assumed at execution, or because it does not hold bilaterally specific terms, such as master confirmation agreement type and date. 166 In either case, the commenter stated that these terms would be added during the enrichment process, with the full transaction details later agreed through an affirmation or matching process. 167 163 Proposing Release, 76 FR 3862-3. 164 ISDA I at 5. 165 Id. The CFTC Rule as adopted provides that any swap transaction executed on a swap execution facility or designated contract market shall be deemed to satisfy the requirements of the rule, provided that the rules of the swap execution facility or designated contract market establish that confirmation of all terms of the transaction shall take place at the same time as execution. 17 CFR 23.501(a)(4)(i). Furthermore, any swap transaction submitted for clearing by a derivatives clearing organization are deemed to satisfy the requirements of the rule, provided that: (A) The swap transaction is submitted for clearing as soon as technologically practicable, but in any event no later than the times established for confirmation under the rule, and (B) confirmation of all terms of the transaction takes place at the same time as the swap transaction is accepted for clearing pursuant to the rules of the derivatives clearing organization. 17 CFR 23.501(a)(4)(ii). The CFTC Rule also requires a swap dealer or major swap participant to execute a confirmation for a swap transaction as soon as technologically practicable, but in any event no later than the times established for confirmation under the rule as if such swap transaction were executed at the time the swap dealer or major swap participant receives notice that a swap transaction has not been confirmed by a swap execution facility or a designated contract market, or accepted for clearing by a derivatives clearing organization. 17 CFR 23.501(a)(4)(iii). 166 MarkitSERV at 5. 167 Id. For the reasons discussed below and in response to comments, the Commission has determined to adopt an exception from the trade acknowledgment and verification requirements of Final Rule 15Fi-2 for transactions executed on registered SBSEFs and registered national securities exchanges, and for transactions submitted to, and accepted for, clearing at a registered clearing agency, subject to certain conditions. Specifically, Rule 15Fi-2(f)(1) as adopted provides that an SBS Entity is excepted from the requirements of the rule with respect to any SBS transaction executed on an SBSEF or national securities exchange, provided that the rules, procedures or processes of the SBSEF or national securities exchange provide for the acknowledgment and verification of all terms of the SBS transaction no later than the time required by paragraphs (b) and (d)(2) of Rule 15Fi-2. Rule 15Fi-2(f)(2) as adopted provides that an SBS Entity is excepted from the requirements of the rule with respect to any SBS transaction that is submitted for clearing to a clearing agency, provided that: (i) The SBS transaction is submitted for clearing as soon as technologically practicable, but in any event no later than the time established for providing a trade acknowledgment under paragraph (b) of the rule; and (ii) the rules, procedures or processes of the clearing agency provide for the acknowledgment and verification 168 of all terms of the security-based swap transaction prior to or at the same time that the security-based swap transaction is accepted for clearing. Finally, Rule 15Fi-2(f)(3) as adopted provides that if an SBS Entity receives notice that an SBS transaction has not been acknowledged and verified pursuant to the rules, procedures or processes of an SBSEF or a national securities exchange, or accepted for clearing by a clearing agency ( e.g., if an alpha trade is not accepted for clearing), the SBS Entity shall comply with the requirements of the rule with respect to such SBS transaction as if such SBS transaction were executed at the time the SBS Entity receives such notice. 168 Clearing agencies' rules and/or procedures generally refer to “confirming” or “confirmation” of transactions rather than trade acknowledgment and verification, but as the Commission has noted, the process through which one counterparty acknowledges an SBS transaction and its counterparty verifies it, is the confirmation process. See Section I.A. above. Thus, clearing agency confirmation practices generally provide for the acknowledgment and verification of SBS transactions for purposes of this exception. 1. Exception for Transactions Executed on a Security-Based Swap Execution Facility or National Securities Exchange As discussed above, the trade acknowledgment and verification rules being adopted today are designed to provide in a timely manner a definitive record of the contract terms to which the counterparties have agreed, thus providing legal certainty about the terms of their agreement in case those terms are later disputed, and serving to reduce operational risk. The Commission understands that there are existing execution facilities that, in connection with facilitating the execution of SBSs transactions on their platform also provide a mechanism that obtains the agreement of the counterparties to the terms of the executed SBS transaction. As suggested by a commenter, 169 the Commission believes that it is appropriate to provide an exception from the trade acknowledgment and verification requirements in the circumstances where the execution facility on which the SBS transaction is executed is essentially already providing the same service for an SBS transaction executed on its platform. The Commission believes that providing an exception for SBS transactions executed on an SBSEF or national securities exchange, provided that the rules, procedures or processes of the SBSEF or exchange provide for the acknowledgment and verification of all terms of the SBS no later than the time required by paragraphs (b) and (d)(2) of Rule 15Fi-2, will serve the intended purpose of the rule in a more efficient manner than if the rule were applied without the exception because SBS Entities will not need processes or systems to provide trade acknowledgments for transactions when execution on the SBSEF or national securities exchange provides the same result. Such an exception is also generally consistent with the CFTC Rule, as two commenters urged. 170 This consistency will permit SBS Entities that are also registered as Swap Entities to rely on executing a transaction on an SBSEF or national securities exchange to comply with the requirements of Rule 15Fi-2 in the same manner they may rely on execution on a swap execution facility or designated contract market for compliance with the CFTC Rule. 169 See note 164, supra. 170 MarkitSERV at 9; ISDA II at 3, 8. The Commission further believes that it is appropriate to require, as part of the exception, that the rules, procedures or processes of the SBSEF or national securities exchange provide for the acknowledgment and verification of all terms of the SBS no later than the time required by paragraphs (b) and (d)(2) of the rule. Otherwise, the Commission is concerned that SBS transactions executed on SBSEFs or national securities exchanges could end up not being acknowledged and verified either pursuant to the rules, procedures or processes of the SBSEF or the exchange, or pursuant to the requirements of this rule, for an extended period of time, which would undermine the objective of the rule to provide legal certainty as to the terms of SBS transactions in a timely manner. As adopted, the exception applies to transactions executed on either a security-based swap execution facility or a national securities exchange. Final Rule 15Fi-1(f) defines the term “security-based swap execution facility” to mean a security-based swap execution facility as defined in Section 3(a)(77) of the Exchange Act 171 that is registered pursuant to Section 3D of the Exchange Act, 172 and Final Rule 15Fi-1(g) defines the term “national securities exchange” to mean an exchange as defined in Section 3(a)(1) of the Exchange Act 173 that is registered pursuant to Section 6 of the Exchange Act. 174 These definitions limit the exception in Final Rule 15Fi-2(f) to such organized platforms for the trading of SBSs that are registered with the Commission. The Commission believes that it is appropriate to impose this limitation, as those entities are subject to the Commission's oversight, which will help to ensure that the exception supports the objectives of Final Rule 15Fi-2 to promote timely and accurate documentation of SBS transactions. The Commission will be able to review the operations of these entities, in particular how the rules, procedures, and processes for providing the trade acknowledgments and obtaining verification operate in practice. 175 171 15 U.S.C. 78c(a)(77). 172 15 U.S.C. 78c-4. 173 15 U.S.C. 78c(a)(1). 174 15 U.S.C. 78f. 175 See Exchange Act Sec. 3D, 15 U.S.C. 78c-4 (statutory authority to oversee SBSEFs) and Registration and Regulation of Security-Based Swap Execution Facilities, Exchange Act Release No. 63825 (Feb. 2, 2011), 76 FR 10948 (Feb. 28, 2011) (proposing rules to register and regulate SBSEFs); see also Exchange Act Section 6, 15 U.S.C. 78f and Exchange Act Section 19, 15 U.S.C. 78s (statutory authority to oversee national securities exchanges). SBS Entities executing transactions on organized trading platforms that are not registered with the Commission, such as a foreign organized trading platform that is not registered with the Commission, are not within the scope of this exception, for the reasons discussed above. In such cases, an SBS Entity retains the obligation to comply with the trade acknowledgment and verification requirements of Final Rule 15Fi-2 when executing a transaction on one of these alternative platforms. The Commission notes, however, that an SBS Entity may allow such an alternative platform to provide a trade acknowledgment on its behalf, but the SBS Entity would retain ultimate responsibility for its own compliance with the rule. 176 176 See discussion of an SBS Entity relying on a third party to provide a trade acknowledgment on its behalf in Section II.B.3, supra. The exception in Rule 15Fi-2(f)(1) as adopted also addresses one commenter's concern that SBSEFs may lack certain information necessary to confirm trades. Under the exception in Final Rule 15Fi-2(f)(1), an SBSEF or exchange's rules, procedures or processes must provide for the acknowledgment and verification of all the terms of an SBS transaction—which is the same content as is required by Final Rule 15Fi-2(c) for a trade acknowledgment provided by an SBS Entity. Thus, if the rules, procedures or processes of the SBSEF or exchange do not provide for the acknowledgment and verification of all terms of an SBS transactio [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%3A2016-13915. Public record. Not legal advice.