# Regulation SBSR-Reporting and Dissemination of Security-Based Swap Information > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2016-17032 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** August 12, 2016 - **Citation:** 81 FR 53546 ## Text SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 242 [Release No. 34-78321; File No. S7-03-15] RIN 3235-AL71 Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: The Securities and Exchange Commission (“SEC” or “Commission”) is adopting certain amendments to Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information (“Regulation SBSR”). Specifically, new Rule 901(a)(1) of Regulation SBSR requires a platform ( i.e., a national securities exchange or security-based swap execution facility (“SB SEF”) that is registered with the Commission or exempt from registration) to report a security-based swap executed on such platform that will be submitted to clearing. New Rule 901(a)(2)(i) of Regulation SBSR requires a registered clearing agency to report any security-based swap to which it is a counterparty. The Commission is adopting certain conforming amendments to other provisions of Regulation SBSR in light of the newly adopted amendments to Rule 901(a), and an amendment that would require registered security-based swap data repositories (“SDRs”) to provide the security-based swap transaction data that they are required to publicly disseminate to the users of the information on a non-fee basis. The Commission also is adopting amendments to Rule 908(a) to extend Regulation SBSR's regulatory reporting and public dissemination requirements to additional types of cross-border security-based swaps. The Commission is offering guidance regarding the application of Regulation SBSR to prime brokerage transactions and to the allocation of cleared security-based swaps. Finally, the Commission is adopting a new compliance schedule for the portions of Regulation SBSR for which the Commission has not previously specified compliance dates. DATES: Effective Date: October 11, 2016. Compliance Dates: For a discussion of the Compliance Dates for Regulation SBSR, see Section X of the Supplementary Information. FOR FURTHER INFORMATION CONTACT: Michael Gaw, Assistant Director, at (202) 551-5602; Sarah Albertson, Special Counsel, at (202) 551-5647; Yvonne Fraticelli, Special Counsel, at (202) 551-5654; Kathleen Gross, Special Counsel, at (202) 551-5305; David Michehl, Special Counsel, at (202) 551-5627; or Geoffrey Pemble, Special Counsel, at (202) 551-5628; all of the Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010. SUPPLEMENTARY INFORMATION: Table of Contents I. Introduction II. Economic Considerations and Baseline Analysis A. Baseline 1. Available Data Regarding Security-Based Swap Activity 2. Clearing Activity in Single-Name CDS 3. Current Market Structure for Security-Based Swap Infrastructure a. Exchanges and SB SEFs b. Clearing Agencies c. Trade Repositories d. Vertical Integration of Security-Based Swap Market Infrastructure 4. Security-Based Swap Market: Market Participants and Dealing Structures a. Market Centers b. Common Business Structures for Firms Engaged in Security-Based Swap Dealing Activity c. Current Estimates of Number of Security-Based Swap Dealers d. Arranging, Negotiating, and Executing Activity Using Personnel Located in a U.S. Branch or Office 5. Security-Based Swap Market: Levels of Security-Based Swap Trading Activity 6. Global Regulatory Efforts B. Economic Considerations 1. Security-Based Swap Market Infrastructure 2. Competition Among Security-Based Swap Infrastructure Providers 3. Security-Based Swaps Trading by Non-U.S. Persons Within the United States III. Reporting by Registered Clearing Agencies A. Background 1. Clearing Process for Security Based Swaps 2. Proposed Rules and General Summary of Comments B. Discussion and Final Rules C. Choice of Registered SDR for Clearing Transactions D. Scope of Clearing Agencies Covered by Final Rules E. Reporting Under the Principal Model of Clearing F. Clearing Transactions and Other Unique Identification Codes G. Reporting Whether an Alpha Transaction Is Accepted for Clearing H. A Registered Clearing Agency Must Know the Transaction ID of the Alpha and the Identity of the Alpha SDR I. Alpha Submitted to Clearing Before It Is Reported to a Registered SDR J. Consequences of Rejection K. Scope of Clearing Transactions L. Reporting of Historical Clearing Transactions IV. Reporting by Platforms A. Overview B. A Platform Is Not Required To Report All Transactions Occurring on Its Facilities C. Data Elements That a Platform Must Report D. Platform Duty to Report Secondary Trade Information E. Platform Has No Duty To Report Life Cycle Events F. Implementation Issues G. Reporting Duty Applies Even to Unregistered Platforms V. Additional Matters Concerning Platforms and Registered Clearing Agencies A. Extending “Participant” Status B. Examples of Reporting Workflows Involving Platforms and Registered Clearing Agencies C. Amendments to Rule 905(a) D. Requirements Related to Participant Providing Ultimate Parent and Affiliate Information to Registered SDR E. Additional Entities Must Have Policies and Procedures for Supporting Their Reporting Duties VI. Reporting and Public Dissemination of Security-Based Swaps Involving Allocation A. Background B. Guidance on How Regulation SBSR Applies to Bunched Order Executions 1. Example 1: Off-Platform Cleared Transaction a. Reporting the Bunched Order Alpha b. Reporting the Security-Based Swaps Resulting From Allocation 2. Example 2: Cleared Platform Transaction a. Reporting the Bunched Order Alpha b. Reporting the Security-Based Swaps Resulting From Allocation C. Comments Received D. Conforming Amendment to Rule 901(d)(4) VII. Reporting and Public Dissemination of Prime Brokerage Transactions A. Background B. Reporting of Security-Based Swaps Resulting From Prime Brokerage Arrangements 1. If There Are Three Legs 2. If There Are Two Legs C. Public Dissemination of Prime Brokerage Transactions D. If the Prime Broker Rejects the Initial Security-Based Swap VIII. Prohibition on Registered SDRs From Charging Fees for or Imposing Usage Restrictions on Publicly Disseminated Data A. Background B. Comments Received and Final Rule C. Other Interpretive Issues IX. Cross-Border Matters A. Introduction B. Existing Rules 901 and 908 C. Extending Regulation SBSR to All ANE Transactions 1. Description of Proposed Rule 2. Discussion of Comments and Final Rule a. Impact on Regulatory Reporting b. Impact on Public Dissemination c. Impact of Substituted Compliance D. Extending Regulation SBSR to All Transactions Executed on a U.S. Platform Effected By or Through a Registered Broker-Dealer E. Public Dissemination of Covered Cross-Border Transactions F. Expanding Rule 908(b) 1. Expanding Rule 908(b) To Include All Platforms and Registered Clearing Agencies 2. Expanding Rule 908(b) To Include Non-U.S. Persons Engaging in ANE Transactions G. Reporting Duties of Unregistered Persons 1. Description of Proposed Rules 2. Discussion of Comments and Final Rules a. Transactions Where One or Both Sides Consist Only of Unregistered Persons b. Transactions Involving a Registered Broker-Dealer H. Conforming Amendments 1. Expanding Definition of “Participant” 2. Rule 901(d)(9) 3. Limitation of Duty To Report Ultimate Parent and Affiliate Information I. Availability of Substituted Compliance X. Compliance Schedule for Regulation SBSR A. Proposed Compliance Schedule B. General Summary of Comments Received C. Compliance Date 1 1. Compliance With Regulation SBSR Follows Security-Based Swap Dealer Registration 2. At Least Six Months Between First SDR to Register and Compliance Date 1 3. There May Be Separate Compliance Dates for Separate Asset Classes 4. “First-Mover” Concerns 5. No Delay for Substituted Compliance Determinations 6. No Delay for Adoption of SB SEF Rules 7. Compliance With UIC Requirements a. UICs for Legal Entities b. Branch ID, Trading Desk ID, and Trader ID c. Transaction ID d. Product ID 8. Switching of Reporting Side Designation D. Compliance Date 2 E. New Compliance Date 3 for Historical Security-Based Swaps F. No Separate Compliance Dates for Cross-Border Transactions G. Exemptions Related to the Compliance Schedule H. Substituted Compliance Requests XI. Paperwork Reduction Act A. Definitions—Rule 900 B. Reporting Obligations—Rule 901 1. Existing Rule 901 2. Rule 901—Amendments a. Rule 901—Reporting Obligations Resulting From Amendments to Rule 901(a)(2)(ii)(E) i. Summary of Collection of Information ii. Respondents iii. Total Initial and Annual Reporting Burdens b. Rule 901—Reporting Obligations for Platforms and Clearing Agencies Resulting From Amendments to Rules 901(a)(1) and (2) and Platforms and Reporting Sides Resulting From Amendments to Rule 901(a)(3) i. Summary of Collection of Information ii. Respondents iii. Total Initial and Annual Reporting Burdens a) Platforms and Registered Clearing Agencies b) Rule 901(a)(3) Burdens c) Bunched Order Executions and Allocations d) Prime Brokerage Transactions 3. Rule 901—Aggregate Total PRA Burdens and Costs a. For Platforms b. For Registered Clearing Agencies c. For New Broker-Dealer Respondents d. For Reporting Sides C. Correction of Errors in Security-Based Swap Information—Rule 905 1. Existing Rule 905 2. Amendments to Rule 905 a. Summary of Collection of Information b. Respondents c. Total Initial and Annual Reporting Burdens i. New Broker-Dealer Respondents ii. For Platforms and Registered Clearing Agencies iii. For Non-Reporting Sides iv. For Registered SDRs v. Aggregate Reporting Burdens Under Rule 905 D. Other Duties of Participants—Rule 906 1. Existing Rule 906 2. Amendments to Rule 906 a. Rule 906(a) b. Rule 906(b)—Amendments c. Rule 906(c)—Amendments i. Summary of Collection of Information ii. Respondents iii. Total Initial and Annual Reporting and Recordkeeping Burdens 3. Rule 906—Aggregate Total PRA Burdens and Costs a. For Platforms and Registered Clearing Agencies b. For Registered SDRs c. For Participants d. For New Broker-Dealer Respondents e. Aggregate Rule 906 Burdens E. Policies and Procedures of Registered SDRs—Rule 907 1. Existing Rule 907 2. Rule 907—Amendments 3. Rule 907—Aggregate Total PRA Burdens and Costs F. Cross-Border Matters—Rule 908 1. Existing Rule 908 2. Rule 908—Amendments 3. Rule 908—Aggregate Total Burdens and Costs G. Additional PRA Discussion 1. Use of Information 2. Recordkeeping Requirements 3. Collection of Information Is Mandatory 4. Confidentiality of Responses to Collection of Information XII. Economic Analysis A. Programmatic Costs of Amendments to Regulation SBSR 1. Programmatic Costs of Newly Adopted Requirements a. For Platforms and Registered Clearing Agencies b. For Platforms and Reporting Sides of Alphas c. Total Costs of Platforms, Registered Clearing Agencies, and Reporting Sides Relating to Amendments to Rule 901 d. Reporting by Unregistered Persons 2. Amendment to Rule 905(a) 3. Amendments to Rule 906(c) 4. Amendments That Subject Additional Cross-Border Security-Based Swaps to Regulation SBSR a. ANE Transactions Involving Unregistered Entities b. Transactions Executed on a Platform or By or Through a Registered Broker-Dealer 5. Amendments to Rule 908(b) 6. Other Conforming Amendments 7. Discussion of Comments Received B. Assessment Costs of Unregistered Entities Related to ANE Transactions 1. Assessment Costs of Foreign Dealing Entities Engaged in ANE Transactions 2. Assessment Costs of Unregistered U.S. Persons Engaging in Security-Based Swaps Against Foreign Entities 3. Assessment Costs Associated With Rule 901(a)(2)(ii)(E)( 4 ) 4. Discussion of Comments Received XIII. Economic Effects and Effects on Efficiency, Competition, and Capital Formation A. Reporting of Clearing Transactions B. Alternative Approaches to Reporting Clearing Transactions 1. Alternative 1 2. Alternative 2 3. Alternative 3 4. Commenter Views C. Reporting by Platforms 1. Alternative Approaches to Reporting Platform-Executed Transactions D. Reporting of Clearing Transactions Involving Allocation E. Application of Regulation SBSR to Prime Brokerage Transactions F. Prohibition of Fees and Usage Restrictions for Public Dissemination G. Compliance Schedule for Regulation SBSR H. Amendments Related to Cross-Border Transactions 1. Competition 2. Efficiency 3. Capital Formation XIV. Regulatory Flexibility Act Certification XV. Statutory Basis I. Introduction Section 13A(a)(1) of the Exchange Act 1 provides that each security-based swap that is not accepted for clearing by any clearing agency or derivatives clearing organization shall be subject to regulatory reporting. Section 13(m)(1)(G) of the Exchange Act 2 provides that each security-based swap (whether cleared or uncleared) shall be reported to a registered SDR, and Section 13(m)(1)(C) of the Exchange Act 3 generally provides that transaction, volume, and pricing data of security-based swaps shall be publically disseminated in real time. 4 1 15 U.S.C. 78m-1(a)(1). All references in this release to the Exchange Act refer to the Securities Exchange Act of 1934. 2 15 U.S.C. 78m(m)(1)(G). 3 15 U.S.C. 78m(m)(1)(C). 4 In addition, Section 13(m)(1)(E) of the Exchange Act, 15 U.S.C. 78m(m)(1)(E), provides that, with respect to cleared security-based swaps, the rule promulgated by the Commission related to public dissemination shall contain provisions, among others, that “specify the criteria for determining what constitutes a large notional security-based swap transaction (block trade) for particular markets and contracts” and “specify the appropriate time delay for reporting large notional security-based swap transactions (block trades) to the public.” In February 2015, the Commission adopted Regulation SBSR, 5 which consists of Rules 900 to 909 under the Exchange Act and provides for the regulatory reporting and public dissemination of security-based swap transactions. At the same time that it adopted Regulation SBSR, the Commission also proposed certain additional rules and guidance relating to regulatory reporting and public dissemination of security-based swap transactions that were not addressed in the Regulation SBSR Adopting Release. 6 In April 2015, the Commission proposed certain rules that would address the application of Title VII requirements to security-based swap activity engaged in by non-U.S. persons within the United States, 7 including how Regulation SBSR would apply to such activity, and certain related issues. In this release, the Commission is adopting, with a number of revisions, the amendments to Regulation SBSR contained in the Regulation SBSR Proposed Amendments Release and the U.S. Activity Proposal. 5 Securities Exchange Act Release No. 74244 (February 11, 2015), 80 FR 14564 (March 19, 2015) (“Regulation SBSR Adopting Release”). The Commission initially proposed Regulation SBSR in November 2010. See Securities Exchange Act Release No. 63346 (November 19, 2010), 75 FR 75207 (December 2, 2010) (“Regulation SBSR Proposing Release”). In May 2013, the Commission re-proposed the entirety of Regulation SBSR as part of a larger release that proposed rules and interpretations regarding the application of Title VII of the Dodd-Frank Act (“Title VII”) to cross-border security-based swap activities. See Securities Exchange Act Release No. 69490 (May 1, 2013), 78 FR 30967 (May 23, 2013) (“Cross-Border Proposing Release”). 6 Securities Exchange Act Release No. 74244 (February 11, 2015), 80 FR 14740 (March 19, 2015) (“Regulation SBSR Proposed Amendments Release”). 7 Securities Exchange Act Release No. 74834 (April 29, 2015), 80 FR 27444 (May 13, 2015) (“U.S. Activity Proposal”). The Commission received 18 comments on the Regulation SBSR Proposed Amendments Release 8 and 16 comments on the U.S. Activity Proposal, of which seven addressed issues relating to Regulation SBSR. 9 Below, the Commission responds to issues raised in those comments and discusses the amendments to Regulation SBSR being adopted herein. Some commenters directed comments to the rules the Commission already adopted in the Regulation SBSR Adopting Release. 10 As the Commission stated in the Regulation SBSR Proposed Amendments Release, however, the Commission did not reopen comment on the rules that it adopted in the Regulation SBSR Adopting Release. 11 Accordingly, these comments are beyond the scope of this release and are not addressed herein. 8 See letters to Brent J. Fields, Secretary, Commission, from Larry E. Thompson, Vice Chairman and General Counsel, Depository Trust & Clearing Corporation (“DTCC”), dated May 4, 2015 (“DTCC Letter”); Susan Milligan, Head of U.S. Public Affairs, LCH.Clearnet Group Limited, dated May 4, 2015 (“LCH.Clearnet Letter”); Marcus Schüler, Head of Regulatory Affairs, Markit, dated May 4, 2015 (“Markit Letter”); and Vincent A. McGonagle, Director, Division of Market Oversight, and Phyllis P. Dietz, Acting Director, Division of Clearing and Risk, Wholesale Market Brokers' Association, Americas (“WMBAA”), dated May 4, 2015 (“WMBAA Letter”); letters to Elizabeth M. Murphy, Secretary, Commission, from Marisol Collazo, Chief Executive Officer, DTCC Data Repository (U.S.) LLC, Bruce A. Tupper, President, ICE Trade Vault, LLC, and Jonathan A. Thursby, Global Head of Repository Services, CME Group, dated June 10, 2015 (“DTCC/ICE/CME Letter”); Kara Dutta, General Counsel, and Bruce A. Tupper, President, ICE Trade Vault, LLC, dated May 4, 2015 (“ICE Letter”); Tara Kruse, Director, Co-Head of Data, Reporting, and FpML, International Swaps and Derivatives Association, Inc. (“ISDA”), and Kyle Brandon, Managing Director, Director of Research, Securities Industry and Financial Markets Association (“SIFMA”), dated May 4, 2015 (“ISDA/SIFMA Letter”); undated letter from Timothy W. Cameron, Managing Director-Head, and Laura Martin, Managing Director and Associate General Counsel, Asset Management Group, SIFMA (“SIFMA-AMG II”); letters to the Secretary, Commission, from Dennis M. Kelleher, President and Chief Executive Officer, Stephen W. Hall, Securities Specialist, and Todd Philips, Attorney, Better Markets, Inc., dated May 4, 2015 (“Better Markets Letter”); Allan D. Grody, President, Financial InterGroup Holdings Ltd, dated May 18, 2015 (“Financial InterGroup Letter”); and Tara Kruse, Director, Co-Head of Data, Reporting, and FpML, ISDA, dated November 25, 2015 (“ISDA III”); letter to Michael Gaw, Assistant Director, Office of Market Supervision (“OMS”), Division of Trading and Markets, Commission, from Bert Fuqua, General Counsel, Investment Bank Americas Legal, UBS AG, and Michael Loftus, Managing Director, Investment Bank Americas Legal, UBS AG, dated May 6, 2016 (“UBS Letter”); letter to Michael Gaw, Assistant Director, OMS, Division of Trading and Markets (“Division”), Commission, and Tom Eady, Senior Policy Advisor, Division, Commission, from Tara Kruse, Director, Co-Head of Data, Reporting and FpML, ISDA, dated August 3, 2015 (“ISDA II”); letter from Chris Barnard, dated May 4, 2015 (“Barnard I”). Four comments, although submitted to the comment file for the Regulation SBSR Proposed Amendments Release, were not germane to the proposal and are not considered here. 9 See UBS Letter and letters to Brent J. Fields, Secretary, Commission, from Dan Waters, Managing Director, ICI Global, dated July 13, 2015 (“ICI Global Letter”); Sarah A. Miller, Chief Executive Officer, Institute of International Bankers (“IIB”), dated July 13, 2015 (“IIB Letter”); David Geen, General Counsel, ISDA, dated July 13, 2015 (“ISDA I”); Timothy W. Cameron, Managing Director-Head, and Laura Martin, Managing Director and Associate General Counsel, Asset Management Group, SIFMA, dated July 13, 2015 (“SIFMA-AMG I”); Kenneth E. Bentsen, Jr., President and Chief Executive Officer, SIFMA, and Rich Foster, Senior Vice President and Senior Counsel for Regulatory and Legal Affairs, Financial Services Roundtable (“FSR”), dated July 13, 2015 (“SIFMA/FSR Letter”); letter from Chris Barnard, dated June 26, 2015 (“Barnard II”). 10 The issues raised by these commenters included, for example, the 24-hour reporting delay adopted in the Regulation SBSR Adopting Release; the ability to report all transaction information required by Regulation SBSR in light of certain foreign privacy laws; the identification of indirect counterparties; public dissemination of certain illiquid security-based swaps; the requirement for registered SDRs to disseminate the full notional size of all transactions; and the requirement that a registered SDR immediately disseminate information upon receiving a transaction report. 11 See 80 FR at 14741, n. 8. II. Economic Considerations and Baseline Analysis To provide context for understanding the rules being adopted today and the related economic analysis that follows, this section describes the current state of the security-based swap market and the existing regulatory framework; it also identifies broad economic considerations that underlie the likely economic effects of these rules. A. Baseline To assess the economic impact of the final rules described in this release, the Commission employs as a baseline the security-based swap market as it exists at the time of this release, including applicable rules that the Commission already has adopted but excluding rules that the Commission has proposed but not yet finalized. 12 The analysis includes the statutory and regulatory provisions that currently govern the security-based swap market pursuant to the Dodd-Frank Act, rules adopted in the Intermediary Definitions Adopting Release, 13 the Cross-Border Adopting Release, 14 the SDR Adopting Release, 15 and the U.S. Activity Adopting Release. 16 In addition, the baseline includes rules that have been adopted but for which compliance is not yet required, including the SBS Entity Registration Adopting Release, 17 the Regulation SBSR Adopting Release, 18 and the External Business Conduct Adopting Release, 19 as these final rules—even if compliance is not required—are part of the existing regulatory landscape that market participants must take into account when conducting their security-based swap activity. 12 The Commission also considered, where appropriate, the impact of rules and technical standards promulgated by other regulators, such as the CFTC and the European Securities and Markets Authority (“ESMA”), on practices in the security-based swap market. 13 See Securities Exchange Act Release No. 66868 (April 27, 2012), 77 FR 30596 (May 23, 2012) (“Intermediary Definitions Adopting Release”). 14 See Securities Exchange Act Release No. 72472 (June 25, 2014), 79 FR 47278 (August 12, 2014) (“Cross-Border Adopting Release”). 15 See Securities Exchange Act Release No. 74246 (February 11, 2015), 80 FR 14438 (March 19, 2015) (“SDR Adopting Release”). 16 See Securities Exchange Act Release No. 77104 (February 10, 2016), 81 FR 8598 (February 19, 2016) (“U.S. Activity Adopting Release”). 17 See Securities Exchange Act Release No. 75611 (August 5, 2015), 80 FR 48963 (August 14, 2015) (“SBS Entities Registration Adopting Release”). 18 See supra note 5. 19 See Securities Exchange Act Release No. 77617 (April 14, 2016), 81 FR 29960 (May 13, 2016) (“External Business Conduct Adopting Release”). The following sections provide an overview of aspects of the security-based swap market that are likely to be most affected by the amendments and guidance being adopted today, as well as elements of the current market structure, such as central clearing and platform trading, that are likely to determine the scope of transactions that will be covered by them. 1. Available Data Regarding Security-Based Swap Activity The Commission's understanding of the market is informed in part by available data on security-based swap transactions, though the Commission acknowledges that limitations in the data prevent the Commission from quantitatively characterizing certain aspects of the market. 20 Because these data do not cover the entire market, the Commission has developed an understanding of market activity using a sample of transaction data that includes only certain portions of the market. The Commission believes, however, that the data underlying its analysis here provide reasonably comprehensive information regarding single-name credit default swap (“CDS”) transactions and the composition of participants in the single-name CDS market. 20 The Commission also relies on qualitative information regarding market structure and evolving market practices provided by commenters, both in letters and in meetings with Commission staff, and knowledge and expertise of Commission staff. Specifically, the Commission's analysis of the state of the current security-based swap market is based on data obtained from the DTCC Derivatives Repository Limited Trade Information Warehouse (“TIW”), especially data regarding the activity of market participants in the single-name CDS market during the period from 2008 to 2015. According to data published by the Bank for International Settlements (“BIS”), the global notional amount outstanding in single-name CDS was approximately $7.18 trillion, 21 in multi-name index CDS was approximately $4.74 trillion, and in multi-name, non-index CDS was approximately $373 billion. The total gross market value outstanding in single-name CDS was approximately $284 billion, and in multi-name CDS instruments was approximately $137 billion. 22 The global notional amount outstanding in equity forwards and swaps as of December 2015 was $3.32 trillion, with total gross market value of $147 billion. 23 As these figure show (and as the Commission has previously noted), although the definition of security-based swaps is not limited to single-name CDS, single-name CDS make up a vast majority of security-based swaps in terms of notional amount outstanding, and the Commission believes that the single-name CDS data are sufficiently representative of the market to inform the Commission's analysis of the state of the current security-based swap market. 24 21 The global notional amount outstanding represents the total face amount of the swap used to calculate payments. The gross market value is the cost of replacing all open contracts at current market prices. 22 See Semi-annual OTC derivatives statistics (December 2015), Table D5, available at http://www.bis.org/statistics/derstats.htm (last viewed May 25, 2016). 23 These totals include both swaps and security-based swaps, as well as products that are excluded from the definition of “swap,” such as certain equity forwards. 24 See U.S. Activity Adopting Release, 81 FR at 8601. The Commission notes that the data available to it from TIW do not encompass those CDS transactions that both: (1) Do not involve U.S. counterparties; 25 and (2) are based on non-U.S. reference entities. Notwithstanding this limitation, the TIW data should provide sufficient information to permit the Commission to identify the types of market participants active in the security-based swap market and the general pattern of dealing within that market. 26 25 The Commission has classified accounts as “U.S. counterparties” based on TIW's entity domicile determinations. The Commission notes, however, that TIW's entity domicile determinations are not necessarily identical in all cases to the definition of “U.S. person” under Exchange Act Rule 3a71-3(a)(4), 17 CFR 240.3a71-3(a)(4). 26 The challenges the Commission faces in estimating measures of current market activity stems, in part, from the absence of comprehensive reporting requirements for security-based swap market participants. The Commission has adopted rules regarding trade reporting, data elements, and public reporting for security-based swaps that are designed to, when fully implemented, provide us with appropriate measures of market activity. See Regulation SBSR Adopting Release, 80 FR at 14699-700. One commenter recommended that the Commission collect a more complete set of data to more precisely estimate the number of non-U.S. persons that would be affected by the proposed rules. 27 Given the absence of comprehensive reporting requirements for security-based swap transactions, and the fact that the location of personnel that arrange, negotiate, or execute a security-based swap transaction is not currently available in TIW, a more precise estimate of the number of non-U.S. persons affected by the adopted rules is not currently feasible. 27 See ISDA Letter at 3, 7 (arguing that the Commission lacks complete data to estimate the number of non-U.S. persons that use U.S. personnel to arrange, negotiate, or execute security-based swap transactions or the number of registered U.S. broker-dealers that intermediate these transactions and that this “makes it difficult or impossible for the Commission to formulate a useful estimate of the market impact, cost and benefits of the Proposal”; suggesting that the Commission “gather[ ] more robust and complete data prior to finalizing a rulemaking that will have meaningful impact on a global market”). 2. Clearing Activity in Single-Name CDS Currently, there is no regulatory requirement in the United States to clear security-based swaps. Clearing for certain single-name CDS products occurs on a voluntary basis. Voluntary clearing activity in single-name CDS has steadily increased in recent years. As of the end of 2015, ICE Clear Credit accepted for clearing security-based swap products based on a total of 232 North American corporate reference entities, 174 European corporate reference entities, and 21 individual sovereign reference entities. Figure 1, below, shows characteristics of new trades in single-name CDS that reference North American standard corporate ISDA documentation. In particular, the figure documents that about half of all clearable transactions are cleared. Analysis of trade activity from January 2011 to December 2015 indicates that, out of $3,460 billion of notional amount traded in North American corporate single-name CDS products that are accepted for clearing during the 60 months ending December 2015, approximately 70%, or $2,422 billion, had characteristics making them suitable for clearing by ICE Clear Credit and represented trades between two ICE Clear Credit clearing members. Approximately 80% of this notional value, or $1,938 billion, was cleared through ICE Clear Credit, or 56% of the total volume of new trade activity. As of the end of 2015, ICE Clear Europe accepted for clearing single-name CDS products referencing a total of 176 European corporate reference entities and seven sovereign reference entities. Analysis of new trade activity from January 2011 to December 2015 indicates that, out of €1,963 billion of notional volume traded in European corporate single-name CDS products that are accepted for clearing during the 60 months ending December 2015, approximately 58%, or €1,139 billion, had characteristics making them suitable for clearing by ICE Clear Europe and represented trades between two ICE Clear Europe clearing members. Approximately 71% of this notional amount, or €805 billion, was cleared through ICE Clear Europe, or 41% of the total volume of new trade activity. 28 28 These numbers do not include transactions in European corporate single-name CDS that were cleared by ICE Clear Credit. During the sample period, a total of 2,168 transactions in European corporate single-name CDS (with a total gross notional amount of approximately €11 billion) were cleared by ICE Clear Credit. All but one of these transactions occurred between 2014 and 2015. For historical data, see https://www.theice.com/marketdata/reports/99 (last visited on May 25, 2016). ER12AU16.000 29 The Commission believes that it is reasonable to assume that, when clearing occurs within 14 days of execution, counterparties made the decision to clear at the time of execution and not as a result of information arriving after execution. 3. Current Market Structure for Security-Based Swap Infrastructure a. Exchanges and SB SEFs The rules and amendments adopted herein address how transactions conducted on platforms ( i.e., national securities exchanges and SB SEFs) must be reported under Regulation SBSR. Currently, there are no SB SEFs registered with the Commission, and as a result, there is no registered SB SEF trading activity to report. There are, however, currently 22 swap execution facilities (“SEFs”) that are either temporarily registered with the Commodity Futures Trading Commission (“CFTC”) or whose temporary registrations are pending with the CFTC and currently are exempt from registration with the Commission. 30 As the Commission noted in the U.S. Activity Adopting Release, the cash flows of security-based swaps and other swaps are closely related and many participants in the swap market also participate in the security-based swap market. 31 Likewise, the Commission believes that it is possible that some entities that currently act as SEFs will register with the Commission as SB SEFs. The Commission anticipates that, owing to the smaller size of the security-based swap market, there will be fewer platforms for executing transactions in security-based swaps than the 22 SEFs reported within the CFTC's jurisdiction. Under newly adopted Rule 901(a)(1), a platform is required to report to a registered SDR any security-based swap transaction that is executed on the platform and submitted to clearing. 30 See Securities Exchange Act Release No. 64678 (June 15, 2011), 76 FR 36287, at 36306 (June 22, 2011) (Temporary Exemptions and Other Temporary Relief, Together With Information on Compliance Dates for New Provisions of the Securities Exchange Act of 1934 Applicable to Security-Based Swaps) (“Effective Date Release”) (exempting persons that operate a facility for the trading or processing of security-based swaps that is not currently registered as a national securities exchange or that cannot yet register as an SB SEF because final rules for such registration have not yet been adopted from the requirements of Section 3D(a)(1) of the Exchange Act until the earliest compliance date set forth in any of the final rules regarding registration of SB SEFs). A list of SEFs that are either temporarily registered with the CFTC or whose temporary registrations are pending with the CFTC is available at http://sirt.cftc.gov/SIRT/SIRT.aspx?Topic=SwapExecutionFacilities (last visited May 25, 2016). 31 See 81 FR at 8609. b. Clearing Agencies The market for clearing services in the security-based swap market is currently concentrated among a handful of firms. Table 1 lists the firms that currently clear index and single-name CDS and identifies the segments of the market each firm serves. While there may be several choices available to participants interested in cleared index CDS transactions, only two firms (albeit with the same parent) clear sovereign single-name CDS and only a single firm serves the market for North American single-name CDS. Concentration of clearing services within a limited set of clearing agencies can be explained, in part, by the existence of strong economies of scale in central clearing. 32 32 See Securities Exchange Act Release No. 68080 (October 22, 2012), 77 FR at 66265 (November 2, 2012) (noting that economies of scale can result in natural monopolies). See also Craig Pirrong, “The Industrial Organization of Execution, Clearing and Settlement in Financial Markets,” Working Paper (2007), available at http://www.bauer.uh.edu/spirrong/Clearing_silos.pdf (last visited May 25, 2016) (discussing the presence of economies of scale in central clearing). The rules adopted today will, among other things, assign regulatory reporting duties for clearing transactions ( i.e., security-based swaps to which registered clearing agencies are direct counterparties). Any rule that would assign reporting duties for clearing transactions would affect the accessibility of data related to a large number of security-based swap transactions. In addition, the number of clearing transactions would affect the magnitude of the regulatory burdens associated with those reporting duties. Table 1—Clearing Agencies Currently Clearing Index and Single-Name CDS North American European Japanese Sovereign Index ICE Clear Credit 33 X X X X ICE Clear Europe 34 X X X CME 35 X LCH.Clearnet 36 X X JSCC 37 X X c. Trade Repositories The market for data services has evolved along similar lines. While there is currently no mandatory reporting requirement for the single-name CDS market, virtually all transactions are voluntarily reported to TIW, which maintains a legal record of transactions. 38 That there currently is a single dominant provider of recordkeeping services for security-based swaps is consistent with the presence of a natural monopoly for a service that involves a predominantly fixed cost investment with low marginal costs of operation. 33 A current list of single-name and index CDS cleared by ICE Clear Credit is available at: https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Clearing_Eligible_Products.xls (last visited May 25, 2016). 34 A current list of single-name and index CDS cleared by ICE Clear Europe is available at: https://www.theice.com/publicdocs/clear_europe/ICE_Clear_Europe_Cleared_Products_List.xlsx (last visited on May 25, 2016). 35 A current list of CDS cleared by CME is available at: http://www.cmegroup.com/trading/cds/files/cleared-cds-product-specs.xls (last visited May 25, 2016). 36 A current list of single-name and index CDS cleared by LCH.Clearnet is available at: http://www.lchclearnet.com/documents/731485/762470/cdsclear_product_list_oct_2015_.xlsx/20b23881-9973-4671-8e78-ee4cfc04b693 (last visited May 25, 2016). 37 A current list of single-name and index CDS cleared by the Japanese Securities Clearing Corporation is available at: http://www.jscc.co.jp/en/data/en/2015/05/Settlement_Prices.pdf (last visited May 25, 2016). 38 See http://www.dtcc.com/derivatives-services/trade-information-warehouse (last visited May 25, 2016) (describing the function and coverage of TIW). There are currently no SDRs registered with the Commission. 39 Registration requirements are part of the new rules discussed in the SDR Adopting Release. 40 In the absence of SEC-registered SDRs, the analysis of the economic effects of the adopted rules and amendments discussed in this release on SDRs is informed by the experience of the CFTC-registered swap data repositories that operate in the swap market. The CFTC has provisionally registered four swap data repositories to accept transactions in swap credit derivatives. 41 39 ICE Trade Vault, LLC, and DTCC Data Repository (U.S.) LLC (“DDR”) each have filed an application with the Commission to register as an SDR. See Securities Exchange Act Release No. 77699 (April 22, 2016), 81 FR 25475 (April 28, 2016) (ICE Trade Vault); Securities Exchange Act Release No. 78216 (June 30, 2016), 81 FR at 44379 (July 7, 2016). 40 See 80 FR at 14457-69. 41 A list of swap data repositories provisionally registered with the CFTC is available at http://sirt.cftc.gov/sirt/sirt.aspx?Topic=DataRepositories (last visited May 25, 2016). It is reasonable to estimate that a similar number of persons provisionally registered with the CFTC to service the equity and credit swap markets might seek to register with the Commission as SDRs, and that other persons could seek to register with both the CFTC and the Commission as swap data repositories and SDRs, respectively. There are economic incentives for the dual registration attributed to the fact that many of the market participants in the security-based swap market also participate in the swap market. Moreover, once a swap data repository is registered with the CFTC and the required infrastructure for regulatory reporting and public dissemination is in place, the marginal costs for a swap data repository to also register with the Commission as an SDR, adding products and databases and implementing modifications to account for differences between Commission and CFTC rules, will likely be lower than the initial cost of registration with the CFTC. d. Vertical Integration of Security-Based Swap Market Infrastructure The Commission has already observed vertical integration of swap market infrastructure: Clearing agencies have entered the market for record keeping services for swaps by provisionally registering themselves, or their affiliates, as swap data repositories with the CFTC. Under the CFTC swap reporting regime, two provisionally registered swap data repositories are, or are affiliated with, clearing agencies that clear swaps. These clearing agencies have adopted rules providing that they will satisfy their CFTC swap reporting obligations by reporting to their own, or their affiliated, swap data repository. 42 As a result, beta and gamma transactions and subsequent netting transactions that arise from the clearing process are reported by each of these clearing agencies to their associated swap data repositories. 42 See CME Clearing Rule 1001 (Regulatory Reporting of Swap Data); ICE Clear Credit Clearing Rule 211 (Regulatory Reporting of Swap Data). 4. Security-Based Swap Market: Market Participants and Dealing Structures a. Market Centers Financial groups engaged in security-based swap dealing activity operate in multiple market centers and carry out such activity with counterparties around the world. 43 Several commenters noted that many market participants that engage in dealing activity prefer to use traders and manage risk for security-based swaps in the jurisdiction where the underlier is traded. 44 Thus, although a significant amount of the dealing activity in security-based swaps on U.S. reference entities involves non-U.S. dealers, the Commission understands that these dealers tend to carry out much of the security-based swap trading and related risk-management activities in these security-based swaps within the United States. 45 Some dealers have explained that being able to centralize their trading, sales, risk management, and other activities related to U.S. reference entities in U.S. operations (even when the resulting transaction is booked in a foreign entity) improves the efficiency of their dealing business. 46 43 See U.S. Activity Adopting Release, 81 FR at 8603-604. 44 See IIB Letter at 2; SIFMA/FSR Letter at 6; ISDA I at 5; MFA/AIMA Letter at 7, n. 34. 45 See IIB Letter at 2; SIFMA/FSR Letter at 6; ISDA Letter at 5. 46 See id. Consistent with these operational concerns and the global nature of the security-based swap market, the available data appear to confirm that participants in this market are in fact active in market centers around the globe. Although, as noted above, the available data do not permit the Commission to identify the location of personnel in a transaction, TIW transaction records indicate that firms that are likely to be security-based swap dealers operate out of branch locations in key market centers around the world, including New York, London, Tokyo, Hong Kong, Chicago, Sydney, Toronto, Frankfurt, Singapore and the Cayman Islands. Given these market characteristics and practices, participants in the security-based swap market may bear the financial risk of a security-based swap transaction in a location different from the location where the transaction is arranged, negotiated, or executed, or where economic decisions are made by managers on behalf of beneficial owners. And market activity may occur in a jurisdiction other than where the market participant or its counterparty books the transaction. Similarly, a participant in the security-based swap market may be exposed to counterparty risk from a counterparty located in a jurisdiction that is different from the market center or centers in which it participates. b. Common Business Structures for Firms Engaged in Security-Based Swap Dealing Activity A financial group that engages in a global security-based swap dealing business in multiple market centers may choose to structure its dealing business in a number of different ways. This structure, including where it books the transactions that constitute that business and how it carries out market-facing activities that generate those transactions, reflects a range of business and regulatory considerations, which each financial group may weigh differently. A financial group may choose to book all of its security-based swap transactions, regardless of where the transaction originated, in a single, central booking entity. That entity generally retains the risk associated with that transaction, but it also may lay off that risk to another affiliate via a back-to-back transaction or an assignment of the security-based swap. 47 Alternatively, a financial group may book security-based swaps arising from its dealing business in separate affiliates, which may be located in the jurisdiction where it originates the risk associated with those security-based swaps, or alternatively, the jurisdiction where it manages that risk. 48 Some financial groups may book transactions originating in a particular region to an affiliate established in a jurisdiction located in that region. 49 47 See U.S. Activity Adopting Release, 81 FR at 8604. 48 See id. 49 There is some indication that this booking structure is becoming increasingly common in the market. See, e.g., “Regional swaps booking replacing global hubs,” Risk.net (Sept. 4, 2015), available at: http://www.risk.net/risk-magazine/feature/2423975/regional-swaps-booking-replacing-global-hubs. Regardless of where a financial group determines to book its security-based swaps arising out of its dealing activity, it is likely to operate offices that perform sales or trading functions in one or more market centers in other jurisdictions. Maintaining sales and trading desks in global market centers permits the financial group to deal with counterparties in that jurisdiction or in a specific geographic region, or to ensure that it is able to provide liquidity to counterparties in other jurisdictions, for example, when a counterparty's home financial markets are closed. 50 A financial group engaged in security-based swap dealing business also may choose to manage its trading book in particular reference entities or securities primarily from a trading desk that can take advantage of local expertise in such products or that can gain access to better liquidity, which may permit it to more efficiently price such products or to otherwise compete more effectively in the security-based swap market. 51 Some financial groups prefer to centralize risk management, pricing, and hedging for specific products with the personnel responsible for carrying out the trading of such products to mitigate operational risk associated with transactions in those products. 50 These offices may be branches or offices of the booking entity itself, or branches or offices of an affiliated agent, such as, in the United States, a registered broker-dealer. See U.S. Activity Adopting Release, 81 FR at 8604-605. 51 See id. at 8605. The financial group affiliate that books these transactions may carry out related market-facing activities, whether in its home jurisdiction or in a foreign jurisdiction, using either its own personnel or the personnel of an affiliated or unaffiliated agent. For example, the financial group may determine that another affiliate in the financial group employs personnel who possess expertise in relevant products or who have established sales relationships with key counterparties in a foreign jurisdiction, making it more efficient to use the personnel of the affiliate to engage in security-based swap dealing activity on its behalf in that jurisdiction. 52 In these cases, the affiliate that books these transactions and its affiliated agent may operate as an integrated dealing business, each performing distinct core functions in carrying out that business. 52 See id. Alternatively, the financial group affiliate that books these transactions may in some circumstances determine to engage the services of an unaffiliated agent through which it can engage in dealing activity. For example, a financial group may determine that using an interdealer broker may provide an efficient means of participating in the interdealer market in its own, or in another, jurisdiction, particularly if it is seeking to do so anonymously or to take a position in products that trade relatively infrequently. 53 A financial group may also use unaffiliated agents that operate at its direction. Such an arrangement may be particularly valuable in enabling a financial group to service clients or access liquidity in jurisdictions in which it has no security-based swap operations of its own. 53 The Commission understands that inter-dealer brokers may provide voice or electronic trading services that, among other things, permit dealers to take positions or hedge risks in a manner that preserves their anonymity until the trade is executed. These inter-dealer brokers also may play a particularly important role in facilitating transactions in less-liquid security-based swaps. The Commission understands that financial group affiliates (whether affiliated with U.S.-based financial groups or not) that are established in foreign jurisdictions may use any of these structures to engage in dealing activity in the United States, and that they may seek to engage in dealing activity in the United States to transact with both U.S.-person and non-U.S.-person counterparties. In transactions with non-U.S.-person counterparties, these foreign affiliates may affirmatively seek to engage in dealing activity in the United States because the sales personnel of the non-U.S.-person dealer (or of its agent) in the United States have existing relationships with counterparties in other locations (such as Canada or Latin America) or because the trading personnel of the non-U.S. person dealer (or of its agent) in the United States have the expertise to manage the trading books for security-based swaps on U.S. reference securities or entities. The Commission understands that some of these foreign affiliates engage in dealing activity in the United States through their personnel (or personnel of their affiliates) in part to ensure that they are able to provide their own counterparties, or those of financial group affiliates in other jurisdictions, with access to liquidity (often in non-U.S. reference entities) during U.S. business hours, permitting them to meet client demand even when the home markets are closed. In some cases, such as when seeking to transact with other dealers through an interdealer broker, these foreign affiliates may act, in a dealing capacity, in the United States through an unaffiliated, third-party agent. c. Current Estimates of Number of Security-Based Swap Dealers Security-based swap activity is concentrated in a relatively small number of dealers, which already represent a small percentage of all market participants active in the security-based swap market. 54 Based on an analysis of 2015 data, the Commission's earlier estimates of the number of entities likely to register as security-based swap dealers remain largely unchanged. 55 Of the approximately 50 entities that the Commission estimates might register as security-based swap dealers, the Commission believes that it is reasonable to expect 22 to be non-U.S. persons. 56 Under the rules as they currently exist, the Commission identified approximately 170 entities engaged in single-name CDS activity, with all counterparties, of $2 billion or more. Of those entities, 104 are expected to incur assessment costs to determine whether they meet the definition of “security-based swap dealer.” Approximately 47 of these entities are non-U.S. persons. 57 54 See U.S. Activity Adopting Release, 81 FR at 8605. 55 See id. 56 These estimates are based on the number of accounts in TIW data with total notional volume in excess of de minimis thresholds, increased by a factor of two, to account for any potential growth in the security-based swap market, to account for the fact that the Commission is limited in observing transaction records for activity between non-U.S. persons that reference U.S. underliers, and to account for the fact that the Commission does not observe security-based swap transactions other than in single-name CDS. See U.S. Activity Adopting Release, 81 FR at 8605. 57 See id. Many of these dealers are already subject to other regulatory frameworks under U.S. law based on their role as intermediaries or on the volume of their positions in other products, such as swaps. Available data support the Commission's prior estimates, based on the Commission's experience and understanding of the swap and security-based swap market, that, of the 55 firms that might register as security-based swap dealers or major security-based swap participants, approximately 35 would also be registered with the CFTC as swap dealers or major swap participants. 58 Based on an analysis of TIW data and filings with the Commission, the Commission estimates that 16 market participants that will register as security-based swap dealers have already registered with the Commission as broker-dealers and are thus subject to Exchange Act and Financial Industry Regulatory Authority (“FINRA”) requirements applicable to such entities. Finally, as the Commission discusses below, some dealers may be subject to similar requirements in one or more foreign jurisdictions. 59 58 See id. 59 See id. at 8605-606. Finally, the Commission also notes that it has adopted rules for the registration of security-based swap dealers and major security-based swap participants, although market participants are not yet required to comply with those rules. 60 Thus, there are not yet any security-based swap dealers or major security-based swap participants registered with the Commission. 60 In the SBS Entity Registration Adopting Release, the Commission established the compliance date for security-based swap dealer and major security-based swap participant registration (the “SBS entities registration compliance date”) as the later of six months after the date of publication in the Federal Register of a final rule release adopting rules establishing capital, margin and segregation requirements for SBS entities; the compliance date of final rules establishing recordkeeping and reporting requirements for SBS entities; the compliance date of final rules establishing business conduct requirements under Exchange Act Sections 15F(h) and 15F(k); or the compliance date for final rules establishing a process for a registered SBS entities to make an application to the Commission to allow an associated person who is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on the SBS entities' behalf. See 80 FR at 48964. d. Arranging, Negotiating, and Executing Activity Using Personnel Located in a U.S. Branch or Office Under rules recently adopted by the Commission as part of the U.S. Activity Adopting Release, non-U.S. persons will be required to apply transactions with other non-U.S. persons in connection with their dealing activity towards their de minimis thresholds when those transactions are arranged, negotiated, or executed by personnel located in a U.S. branch or office, or by personnel of an agent of such non-U.S. person located in a U.S. branch or office. 61 As a result of this requirement, certain market participants will likely incur costs associated with determining the location of relevant personnel who arrange, negotiate, or execute a transaction, 62 and, having determined the locations, these market participants will be able to identify those transactions that are arranged, negotiated, or executed by personnel located in a U.S. branch or office, or by personnel of an agent of such non-U.S. person located in a U.S. branch or office. The Commission estimated that an additional 20 non-U.S. persons, beyond the 56 identified under the Cross-Border Adopting Release, were likely to incur assessment costs in connection with the de minimis exception as a result of these rules. 63 61 See Rule 3a71-3(C) under the Exchange Act, 17 CFR 240.3a71-3(C). 62 See U.S. Activity Adopting Release, 81 FR at 8627-28. 63 See id. at 8627. To estimate the number of unregistered foreign entities that arrange, negotiate, or execute security-based swap transactions using U.S. personnel in connection with their dealing activity for the purpose of this rulemaking, Commission staff used 2015 TIW single-name CDS transaction data to identify foreign entities that have three or more counterparties that are not recognized as dealers by ISDA and that traded less than $3 billion in notional volume and identified four entities that met these criteria. In 2015, these four entities were counterparties to 1,080 transactions in single-name CDS, referencing 186 reference entities, with a total notional volume of $5.2 billion. The Commission believes that these foreign dealing entities that are likely to remain unregistered engage in transactions in essentially the same products as foreign dealing entities that are likely to register as security-based swap dealers. The Commission staff observed in the 2015 data that foreign dealing entities that are likely to register as security-based swap dealers based on single-name CDS transaction activity in 2015 traded in 185 out of the 186 reference entities that the smaller foreign dealing entities had traded in. These smaller foreign dealing entities were counterparties to a very small number of security-based swaps involving foreign dealing entities engaging in U.S. activity. Using 2015 TIW data, the Commission estimates that foreign dealing entities that likely would register with Commission as security-based swap dealers based on their transaction activity in 2015, were counterparties to nearly all security-based swaps involving foreign dealing entities engaging in U.S. activity. 64 64 The Commission staff analysis of TIW transaction records indicates that approximately 99.72% of single-name CDS price-forming transactions and 99.73% of price-forming transaction volume in 2015 that involved foreign dealing entities involved a foreign dealing entity likely to register with the Commission as a security-based swap dealer based on its 2015 transaction activity. 5. Security-Based Swap Market: Levels of Security-Based Swap Trading Activity As already noted, firms that act as dealers play a central role in the security-based swap market. Based on an analysis of 2015 single-name CDS data in TIW, accounts of those firms that are likely to exceed the security-based swap dealer de minimis thresholds and trigger registration requirements intermediated transactions with a gross notional amount of approximately $5.8 trillion, approximately 60% of which was intermediated by the top five dealer accounts. 65 65 The Commission staff analysis of TIW transaction records indicates that approximately 99% of single-name CDS price-forming transactions in 2015 involved an ISDA-recognized dealer. These dealers transact with hundreds or thousands of counterparties. Approximately 24% of accounts of firms expected to register as security-based dealers and observable in TIW have entered into security-based swaps with over 1,000 unique counterparty accounts as of year-end 2015. 66 Another 24% of these accounts transacted with 500 to 1,000 unique counterparty accounts; 16% transacted with 100 to 500 unique accounts; and 36% of these accounts intermediated swaps with fewer than 100 unique counterparties in 2015. The median dealer account transacted with 481 unique accounts (with an average of approximately 635 unique accounts). Non-dealer counterparties transacted almost exclusively with these dealers. The median non-dealer counterparty transacted with three dealer accounts (with an average of approximately four dealer accounts) in 2015. 66 Many dealer entities and financial groups transact through numerous accounts. Given that individual accounts may transact with hundreds of counterparties, the Commission may infer that entities and financial groups may transact with at least as many counterparties as the largest of their accounts. Figure 2 below describes the percentage of global, notional transaction volume in North American corporate single-name CDS reported to TIW between January 2008 and December 2015, separated by whether transactions are between two ISDA-recognized dealers (interdealer transactions) or whether a transaction has at least one non-dealer counterparty. Figure 2 also shows that the portion of the notional volume of North American corporate single-name CDS represented by interdealer transactions has remained fairly constant and that interdealer transactions continue to represent a significant majority of trading activity, even as notional volume has declined over the past seven years, 67 from more than $6 trillion in 2008 to less than $1.3 trillion in 2015. 68 67 The start of this decline predates the enactment of the Dodd-Frank Act and the proposal of rules thereunder, which is important to note for the purpose of understanding the economic baseline for this rulemaking. 68 This estimate is lower than the gross notional amount of $5.8 trillion noted above as it includes only the subset of single-name CDS referencing North American corporate documentation. See supra note 65. ER12AU16.001 The high level of interdealer trading activity reflects the central position of a small number of dealers, each of which intermediates trades with many hundreds of counterparties. While the Commission is unable to quantify the current level of trading costs for single-name CDS, those dealers appear to enjoy market power as a result of their small number and the large proportion of order flow that they privately observe. Against this backdrop of declining North American corporate single-name CDS activity, about half of the trading activity in North American corporate single-name CDS reflected in the set of data that the Commission analyzed was between counterparties domiciled in the United States and counterparties domiciled abroad, as shown in Figure 3 below. Using the self-reported registered office location of the TIW accounts as a proxy for domicile, the Commission estimates that only 12% of the global transaction volume by notional volume between 2008 and 2015 was between two U.S.-domiciled counterparties, compared to 48% entered into between one U.S.-domiciled counterparty and a foreign-domiciled counterparty and 40% entered into between two foreign-domiciled counterparties. 69 69 For purposes of this discussion, the Commission has assumed that the registered office location reflects the place of domicile for the fund or account, but the Commission notes that this domicile does not necessarily correspond to the location of an entity's sales or trading desk. See U.S. Activity Adopting Release, 81 FR at 8607, n. 83. If the Commission considers the number of cross-border transactions instead from the perspective of the domicile of the corporate group ( e.g., by classifying a foreign bank branch or foreign subsidiary of a U.S. entity as domiciled in the United States), the percentages shift significantly. Under this approach, the fraction of transactions entered into between two U.S.-domiciled counterparties increases to 33%, and to 52% for transactions entered into between a U.S.-domiciled counterparty and a foreign-domiciled counterparty. By contrast, the proportion of activity between two foreign-domiciled counterparties drops from 40% to 16%. This change in respective shares based on different classifications suggests that the activity of foreign subsidiaries of U.S. firms and foreign branches of U.S. banks accounts for a higher percentage of security-based swap activity than U.S. subsidiaries of foreign firms and U.S. branches of foreign banks. It also demonstrates that financial groups based in the United States are involved in an overwhelming majority (approximately 85%) of all reported transactions in North American corporate single-name CDS. Financial groups based in the United States are also involved in a majority of interdealer transactions in North American corporate single-name CDS. Of transactions on North American corporate single-name CDS between two ISDA-recognized dealers and their branches or affiliates, 93% of transaction notional volume involved at least one account of an entity with a U.S. parent. The Commission notes, in addition, that a significant majority of North American corporate single-name CDS transactions occur in the interdealer market or between dealers and foreign non-dealers, with the remaining (and much smaller) portion of the market consisting of transactions between dealers and U.S.-person non-dealers. Specifically, 74% of North American corporate single-name CDS transactions involved either two ISDA-recognized dealers or an ISDA-recognized dealer and a foreign non-dealer. Approximately 16.5% of such transactions involved an ISDA-recognized dealer and a U.S.-person non-dealer. ER12AU16.002 6. Global Regulatory Efforts In 2009, the G20 Leaders—whose membership includes the United States, 18 other countries, and the European Union—addressed global improvements in the OTC derivatives markets. They expressed their view on a variety of issues relating to OTC derivatives contracts. In subsequent summits, the G20 Leaders have returned to OTC derivatives regulatory reform and encouraged international consultation in developing standards for these markets. 70 70 See, e.g., G20 Leaders' Final Declaration (November 2011), paragraph 24, available at: http://www.g20.utoronto.ca/2011/2011-cannes-declaration-111104-en.html (last visited on May 25, 2016). Foreign legislative and regulatory efforts have focused on five general areas: moving OTC derivatives onto organized trading platforms, requiring central clearing of OTC derivatives, requiring post-trade reporting of transaction data for regulatory purposes and public dissemination of anonymized versions of such data, establishing or enhancing capital requirements for non-centrally cleared OTC derivatives transactions, and establishing or enhancing margin and other risk mitigation requirements for non-centrally cleared OTC derivatives transactions. The rules being adopted in this release will affect a person's obligations with respect to post-trade reporting of transaction data for public dissemination and regulatory purposes under Regulation SBSR. Foreign jurisdictions have been actively implementing regulations of the OTC derivatives markets. Regulatory transaction reporting requirements are in force in a number of jurisdictions, including the European Union, Hong Kong SAR, Japan, Australia, Brazil, Canada, China, India, Indonesia, South Korea, Mexico, Russia, Saudi Arabia, and Singapore; other jurisdictions are in the process of proposing legislation and rules to implement these requirements. 71 The CFTC, the 13 Canadian provinces and territories, the European Union, and Japan have adopted requirements to publicly disseminate transaction-level data about OTC derivatives transactions. In addition, a number of foreign jurisdictions have initiated the process of implementing margin and other risk mitigation requirements for non-centrally cleared OTC derivatives transactions. 72 Several jurisdictions have also taken steps to implement the Basel III recommendations governing capital requirements for financial entities, which include enhanced capital charges for non-centrally cleared OTC derivatives transactions. 73 There has been limited progress in moving OTC derivatives onto organized trading platforms among G20 countries. The CFTC mandated the trading of certain interest rate swaps and index CDS on CFTC-regulated SEFs in 2014. Japan implemented a similar requirement for a subset of Yen-denominated interest rate swaps in September 2015. The European Union has adopted legislation that addresses trading OTC derivatives on regulated trading platforms, but has not mandated specific OTC derivatives to trade on these platforms. This legislation also should promote post-trade public transparency in OTC derivatives markets by requiring the price, volume, and time of derivatives transactions conducted on these regulated trading platforms to be made public in as close to real time as technically possible. 74 71 See Financial Stability Board, OTC Derivatives Market Reforms Tenth Progress Report on Implementation (November 2015), available at http://www.fsb.org/wp-content/uploads/OTC-Derivatives-10th-Progress-Report.pdf (last visited on May 25, 2016). The Financial Stability Board's report on a peer review of trade reporting confirmed that most Financial Stability Board member jurisdictions have trade reporting requirements in place. See Financial Stability Board, Thematic Review on OTC Derivatives Trade Reporting (November 2015), available at http://www.fsb.org/wp-content/uploads/Peer-review-on-trade-reporting.pdf (last visited on May 25, 2016). 72 In November 2015, the Financial Stability Board reported that 12 member jurisdictions participating in its tenth progress report on OTC derivatives market reforms had in force a legislative framework or other authority to require exchange of margin for non-centrally cleared transactions and had published implementing standards or requirements for consultation or proposal. A further 11 member jurisdictions had a legislative framework or other authority in force or published for consultation or proposal. See Financial Stability Board, OTC Derivatives Market Reforms Tenth Progress Report on Implementation (November 2015), available at http://www.financialstabilityboard.org/wp-content/uploads/OTC-Derivatives-10th-Progress-Report.pdf (last visited on May 25, 2016). 73 In November 2015, the Financial Stability Board reported that 18 member jurisdictions participating in its tenth progress report on OTC derivatives market reforms had in force standards or requirements covering more than 90% of transactions that require enhanced capital charges for non-centrally cleared transactions. A further three member jurisdictions had a legislative framework or other authority in force and had adopted implementing standards or requirements that were not yet in force. An additional three member jurisdictions had a legislative framework or other authority in force or published for consultation or proposal. See Financial Stability Board, OTC Derivatives Market Reforms Tenth Progress Report on Implementation (November 2015), available at http://www.financialstabilityboard.org/wp-content/uploads/OTC-Derivatives-10th-Progress-Report.pdf (last visited on May 25, 2016). 74 See Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) no 648/2012), available at: http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32014R0600&from=EN (last visited on May 25, 2016). B. Economic Considerations In the Regulation SBSR Adopting Release, the Commission highlighted certain overarching effects on the security-based swap market that it believes will result from the adoption of Regulation SBSR. These benefits could include, generally, improved market quality, improved risk management, greater efficiency, and improved oversight by the Commission and other relevant authorities. 75 Regulation SBSR requires market participants to make infrastructure investments in order to report security-based swap transactions to registered SDRs, and for SDRs to make infrastructure investments to receive and store that transaction data and to publicly disseminate transaction data in a manner required by Rule 902 of Regulation SBSR. 75 See Regulation SBSR Adopting Release, 80 FR at 14699-705. The amendments to Regulation SBSR being adopted today will, among other things, impose certain requirements on the platforms, 76 registered clearing agencies, and registered SDRs that constitute infrastructure for the security-based swap market and provide services to counterparties who participate in security-based swap transactions. The adopted amendments and the guidance provided will affect the manner in which these infrastructure providers compete with one another and exercise market power over security-based swap counterparties. In turn, there will be implications for the security-based swap counterparties who utilize these infrastructure providers and the security-based swap market generally. 76 A platform is a national securities exchange or security-based swap execution facility that is registered or exempt from registration. See Rule 900(v), 17 CFR 242.900(v). In addition, the Commission is adopting regulatory reporting and public dissemination requirements under Regulation SBSR for certain types of cross-border security-based swaps not currently addressed in Regulation SBSR. Subjecting additional types of security-based swaps to regulatory reporting and public dissemination will affect the overall costs and benefits associated with Regulation SBSR and have implications for transparency, competition, and liquidity provision in the security-based swap market. 1. Security-Based Swap Market Infrastructure Title VII requires the Commission to create a new regulatory regime for the security-based swap market that, among other things, includes trade execution, central clearing, and reporting requirements aimed at increasing transparency and customer protection as well as mitigating the risk of financial contagion. 77 These new requirements, once implemented, might require market participants, who may have previously engaged in bilateral transaction activity without any need to engage third-party service providers, to interface with platforms, registered clearing agencies, and registered SDRs. 77 See Cross-Border Adopting Release, 79 FR at 47285. As a general matter, rules that require regulated parties to obtain services can have a material impact on the prices of those services in the absence of a competitive market for those services. In particular, if service providers are monopolists or otherwise have market power, requiring market participants to obtain their services can potentially allow the service providers to increase the profits that they earn from providing the required services. 78 Because Title VII requires the Commission to implement rules requiring market participants to use the services provided by platforms, 79 registered clearing agencies, 80 and registered SDRs, 81 these requirements could reduce the sensitivity of demand to changes in prices or quality of the services of firms that create and develop security-based swap market infrastructure. As such, should security-based swap infrastructure providers-such as platforms, registered clearing agencies, and registered SDRs-enjoy market power, they might be able to change their prices or service quality without a significant effect on demand for their services. In turn, these changes in prices or quality could have negative effects on activity in the security-based swap market. 78 These effects, as they relate specifically to the rules and amendments, as well as alternative approaches, are discussed in Section XIII, infra. 79 See 15 U.S.C. 78c-3(h)(1). 80 See 15 U.S.C. 78c-3(a)(1). 81 See 15 U.S.C. 78m(m)(1)(G). As discussed in Section XIII, infra, the amendments to Regulation SBSR being adopted today could have an impact on the level of competition among suppliers of trade reporting services and affect the relative bargaining power of suppliers and consumers in determining the prices of those services. In particular, when the supply of trade reporting services is concentrated among a small number of firms, consumers of these services have few alternative suppliers from which to choose. Such an outcome could limit the incentives to produce more efficient trade reporting processes and services and could, in certain circumstances, result in less security-based swap transaction activity than would otherwise be optimal. In the case of security-based swap transaction activity, welfare losses could result from higher costs to counterparties for hedging financial or commercial risks. 2. Competition Among Security-Based Swap Infrastructure Providers As noted above, the Commission recognizes how regulatory requirements may affect the demand for services provided by platforms, registered clearing agencies, and SDRs, and, in turn, the ability of these entities to exercise their market power. The Commission's economic analysis of the amendments adopted today considers how the competitive landscape for platforms, registered clearing agencies, and registered SDRs might affect the market power of these entities and hence the level and allocation of costs related to regulatory requirements. Some of the factors that may influence this competitive landscape have to do with the nature of trade reporting and are unrelated to regulation, while others may be a result of, or influenced by, the rules that the Commission is adopting in this release. To the extent that the adopted rules inhibit competition among infrastructure providers, they could result in fees charged to counterparties that deviate from the underlying costs of providing services. As a general matter, trade execution, clearing, and reporting services are likely to be concentrated among a small number of providers. For example, SDRs and clearing agencies must make significant infrastructure and human capital investments to enter their respective markets, but once these start-up costs are incurred, the addition of data management by SDRs or transaction clearing services by clearing agencies is likely to occur at low marginal costs. As a result, the per-transaction cost to provide infrastructure services quickly falls for SDRs and clearing agencies as their customer base grows, because they are able to amortize the fixed costs associated with serving counterparties over a larger number of transactions. These economies of scale would be expected to favor incumbent service providers who can leverage their market position to discourage entry by potential new competitors that face significant fixed costs to enter the market. As a result, the markets for clearing services and SDR services are likely to be dominated by a small number of firms that each have large market share, which is borne out in the current security-based swap market. 82 82 See supra Section II(A). Competition among registered clearing agencies and registered SDRs could also be influenced by the fact that security-based swap market participants incur up-front costs for each connection that they establish with an SDR or clearing agency. If these costs are sufficiently high, an SDR or clearing agency could establish itself as an industry leader by “locking-in” customers who are unwilling or unable to make a similar investment for establishing a connection with a competitor. 83 An SDR or clearing agency attempting to enter the market or increase market share would have to provide services valuable enough, or set fees low enough, to offset the costs of switching from a competitor. In this way, costs to security-based swap market participants of interfacing with market infrastructure could serve as a barrier to entry for firms that would like to provide market infrastructure services provided by SDRs and clearing agencies. 83 See Joseph Farrell and Paul Klemperer, “Coordination and Lock-in: Competition with Switching Costs and Network Effects,” in Handbook of Industrial Organization, Mark Armstrong and Robert Porter (ed.) (2007), at 1972. The authors describe how switching costs affect entry, noting that, on one hand, “switching costs hamper forms of entry that must persuade customers to pay those costs” while, on the other hand, if incumbents must set a single price for both new and old customers, a large incumbent might focus on harvesting its existing customer base, ceding new customers to the entrant. In this case, a competitive market outcome would be characterized by prices for services that equal the marginal costs associated with providing services to market participants. This is because, in a competitive market with free entry and exit of firms, a firm that charges a price that is higher than marginal cost would lose sales to existing firms or entrants that are willing to provide the same service at a lower price. Such price competition prevents firms from charging prices that are above marginal costs. The rules adopted today might also influence the competitive landscape for firms that provide security-based swap market infrastructure. Fundamentally, requiring the reporting of security-based swap transactions to SDRs creates an inelastic demand for reporting services that would not be present if not for regulation. This necessarily reduces a counterparty's ability to bargain with infrastructure service providers over price or service because the option of not reporting is unavailable. Moreover, infrastructure requirements imposed by Title VII regulation will increase the fixed costs of an SDR operating in the security-based swap market and increase the barriers to entry into the market, potentially discouraging firms from entering the market for SDR services. For example, under Rule 907, as adopted, registered SDRs are required to establish and maintain certain written policies and procedures. The Commission estimated that this requirement will impose initial costs on each registered SDR of approximately $12,250,000. 84 84 See Regulation SBSR Adopting Release, 80 FR at 14718, n. 1343. The rules adopted today might also affect the competitive landscape by increasing the incentives for security-based swap infrastructure service providers to integrate horizontally or vertically. As a general matter, firms engage in horizontal integration when they expand their product offerings to include similar goods and services or to acquire competitors. For example, swap data repositories that presently serve the swap market might horizontally integrate by offering similar services in the security-based swap market. Firms vertically integrate by entering into businesses that supply the market that they occupy (“backward vertical integration”) or by entering into businesses that they supply (“forward vertical integration”). As discussed in more detail in Section XIII(A), infra, while adopting a reporting methodology that assigns reporting responsibilities to registered clearing agencies, which will hold the most complete and accurate information for cleared transactions, could minimize potential data discrepancies and errors, rules that give registered clearing agencies discretion over where to report transaction data could provide incentives for registered clearing agencies to create affiliate SDRs and compete with other registered SDRs for post-trade reporting services. The cost to a clearing agency of entering the market for SDR services is likely to be low, given that many of the infrastructure requirements for entrant SDRs are shared by clearing agencies. Clearing agencies already have the infrastructure necessary for capturing transaction records from clearing members and might be able to leverage that preexisting infrastructure to provide services as an SDR at lower incremental cost than other new SDRs. Because all clearing transactions, like all other security-based swaps, must be reported to a registered SDR, there would be a set of potentially captive transactions that clearing agencies could initially use to vertically integrate into SDR services. 85 85 A registered clearing agency expanding to provide SDR services is an example of forward vertical integration. In the context of the rules adopted today, SDRs “consume” the data supplied by registered clearing agencies. Clearing agencies engage in forward vertical integration by creating or acquiring the SDRs that consume the data that they produce as a result of their clearing business. Entry into the SDR market by registered clearing agencies could potentially lower the cost of SDR services if clearing agencies are able to transmit data to an affiliated SDR at a lower cost relative to transmitting the same data to an independent SDR. The Commission believes that this is likely to be true for clearing transactions, given that the clearing agency and the affiliated SDR would have greater control over the reporting process relative to sending clearing transaction data to an independent SDR. Even if registered clearing agencies did not enter the market for SDR services, their ability to pursue a vertical integration strategy could motivate incumbent SDRs to offer competitive service models. However, the Commission recognizes that the entry of clearing-agency-affiliated SDRs might not necessarily result in increased competition among SDRs or result in lower costs for SDR services. In an environment where registered clearing agencies with affiliated SDRs have discretion to send their clearing transaction data to their affiliates, security-based swap market participants who wish to submit their transactions to clearing may have reduced ability to direct the reporting of the clearing transaction to an independent SDR. As a result, clearing-agency-affiliated SDRs would not directly compete with independent SDRs on the basis of price or quality, because they inherit their clearing agency affiliate's market share. This might allow clearing agency incumbents to exercise market power through their affiliated SDRs relative to independent SDRs. 3. Security-Based Swaps Trading by Non-U.S. Persons Within the United States Several broad economic considerations have informed the Commission's approach to identifying transactions between two non-U.S. persons that should be subject to certain Title VII requirements. The Commission has taken into account the potential impact that rules already adopted as part of the Regulation SBSR Adopting Release might have on competition between U.S. persons and non-U.S. persons when they engage in security-based swap transactions with non-U.S. persons, along with the implications of these competitive frictions for the ability of market participants to obtain liquidity in a market that is predominantly over-the-counter. In particular, competitive disparities could arise between U.S. dealing entities and foreign dealing entities 86 using personnel located in a U.S. branch or office when serving unregistered non-U.S. counterparties. In the absence of the rules adopted today, U.S. dealing entities and their agents would bear the costs associated with regulatory reporting and public dissemination requirements when trading with unregistered non-U.S. counterparties, while foreign dealing entities that use U.S.-based personnel to trade with the same unregistered non-U.S. counterparties would not bear such regulatory costs if these foreign dealing entities are not subject to comparable regulatory requirements in their home jurisdictions. Thus, these foreign dealing entities could offer liquidity at a lower cost to unregistered non-U.S. persons thereby gaining a competitive advantage over U.S. dealing entities. 86 Throughout this release, a “dealing entity” refers to an entity that engages in security-based swap dealing activity regardless of whether the volume of such activity exceeds the de minimis threshold established by the Commission that would cause the entity to be a “security-based swap dealer” and thus require the entity to register with the Commission as a security-based swap dealer. Competitive disparities could also arise between U.S. persons and non-U.S. persons that trade with foreign dealing entities that use U.S. personnel to arrange, negotiate, or execute security-based swap transactions. 87 A transaction between an unregistered U.S. person and a foreign dealing entity that uses U.S. personnel to arrange, negotiate, or execute the transaction is subject to regulatory reporting and public dissemination under existing Rule 908(a)(1)(i). In the absence of newly adopted Rule 908(a)(1)(v), a transaction between an unregistered non-U.S. person and the foreign dealing entity engaging in ANE activity would not be subject to Regulation SBSR. This could create a competitive advantage for unregistered non-U.S. persons over similarly situated U.S. persons when unregistered non-U.S. persons trade with foreign dealing entities that engage in ANE activity. Such a foreign dealing entity might be able to offer liquidity to an unregistered non-U.S. person at a lower price than to an unregistered U.S. person, because the foreign dealing entity that is engaging in ANE activity would not have to embed the potential costs of regulatory reporting and public dissemination into the price offered to the unregistered non-U.S. counterparty. By contrast, the price offered by that foreign dealing entity to an unregistered U.S. counterparty likely would reflect these additional costs. 87 Throughout this release, a security-based swap transaction involving a non-U.S.-person counterparty that, in connection with its dealing activity, has arranged, negotiated, or executed using its personnel located in a U.S. branch or office, or the personnel of its agent located in a U.S. branch or office, is referred to as an “ANE transaction”; the arrangement, negotiation, and/or execution of such a security-based swap by personnel of a non-U.S. person located in a U.S. branch or office, or by the personnel of its agent located in a U.S. branch or office are referred to as “ANE activities” or “engaging in ANE activity”; and the personnel located in the U.S. branch or office of the foreign dealing entity, or (if applicable) the personnel of its agent located in a U.S. branch or office, are referred to as “U.S. personnel.” The Commission acknowledges, however, that applying Title VII rules based on the location of personnel who engage in relevant conduct could provide incentives for these foreign dealing entities to restructure their operations to avoid triggering requirements under Regulation SBSR. For example, a foreign dealing entity could restrict its U.S. personnel from intermediating transactions with non-U.S. persons or use agents who are located outside the United States when engaging in security-based swap transactions with non-U.S. persons. In addition, disparate treatment of transactions depending on whether they are arranged, negotiated, or executed by personnel located in a U.S. branch or office could create fragmentation among agents that may seek to provide services to foreign dealing entities. To the extent that using agents with personnel located in a U.S. branch or office might result in regulatory costs being imposed on foreign dealing entities, such entities might prefer and primarily use agents located outside the United States, while U.S. dealers might continue to use agents located in the United States. III. Reporting by Registered Clearing Agencies A. Background Section 13(m)(1)(F) of the Exchange Act 88 provides that parties to a security-based swap (including agents of parties to a security-based swap) shall be responsible for reporting security-based swap transaction information to the appropriate registered entity in a timely manner as may be prescribed by the Commission. Section 13(m)(1)(G) of the Exchange Act 89 provides that each security-based swap (whether cleared or uncleared) shall be reported to a registered SDR. Section 13A(a)(3) of the Exchange Act 90 specifies the party obligated to report a security-based swap that is not accepted for clearing by any clearing agency or derivatives clearing organization. To implement these statutory provisions, the Commission in February 2015 adopted Rule 901(a) of Regulation SBSR, which designates the persons who must report all security-based swaps except: (1) Clearing transactions; 91 (2) security-based swaps that are executed on a platform and that will be submitted to clearing; (3) transactions where there is no U.S. person, registered security-based swap dealer, or registered major security-based swap participant on either side; and (4) transactions where there is no registered security-based swap dealer or registered major security-based swap participant on either side and there is a U.S. person on only one side (“covered transactions”). This section addresses reporting duties for clearing transactions— i.e., the security-based swaps in category (1) above. 92 88 15 U.S.C. 78m(m)(1)(F). 89 15 U.S.C. 78m(m)(1)(G). 90 15 U.S.C. 78m-1(a)(3). 91 Rule 900(g) defines “clearing transaction” as “a security-based swap that has a registered clearing agency as a direct counterparty.” This definition describes security-based swaps that arise when a registered clearing agency accepts a security-based swap for clearing as well as security-based swaps that arise as part of a clearing agency's internal processes, including those used to establish prices for cleared products and those resulting from netting other clearing transactions of the same product in the same account into a new open position. See Regulation SBSR Adopting Release, 80 FR at 14599. 92 Security-based swaps in category (2) are discussed in Section IV, infra. Security-based swaps in categories (3) and (4) are discussed in Section IX, infra. 1. Clearing Process for Security-Based Swaps As discussed in the Regulation SBSR Adopting Release and the Regulation SBSR Proposed Amendments Release, two models of clearing—an agency model and a principal model—are currently used in the swap markets. 93 In the agency model, which predominates in the United States, a swap that is submitted to clearing—typically referred to in the industry as an “alpha”—is, if accepted by the clearing agency, terminated and replaced with two new swaps, known as the “beta” and “gamma.” One of the direct counterparties 94 to the alpha becomes a direct counterparty to the beta, the other direct counterparty to the alpha becomes a direct counterparty to the gamma, and the clearing agency becomes a direct counterparty to each of the beta and the gamma. 95 This release uses the terms “alpha,” “beta,” and “gamma” in the same way that the Commission understands they are used in the agency model of clearing in the U.S. swap market. As noted in the Regulation SBSR Adopting Release, an alpha is not a “clearing transaction” under Regulation SBSR, even though it is submitted for clearing, because it does not have a registered clearing agency as a direct counterparty. 96 93 See Regulation SBSR Adopting Release, 80 FR at 14599; Regulation SBSR Proposed Amendments Release, 80 FR at 14742-43. 94 Existing Rule 900(k) defines “direct counterparty” as “a person that is a primary obligor on a security-based swap.” 95 If both direct counterparties to the alpha are clearing members, the direct counterparties would submit the transaction to the clearing agency directly and the resulting beta would be between the clearing agency and one clearing member, and the gamma would be between the clearing agency and the other clearing member. The Commission understands, however, that, if the direct counterparties to the alpha are a clearing member and a non-clearing member (a “customer”), the customer's side of the trade would be submitted for clearing by a clearing member acting on behalf of the customer. When the clearing agency accepts the alpha for clearing, one of the resulting swaps—in this case, assume the beta—would be between the clearing agency and the customer, with the customer's clearing member acting as guarantor for the customer's trade. The other resulting swap—the gamma—would be between the clearing agency and the clearing member that was a direct counterparty to the alpha. See, e.g., Byungkwon Lim and Aaron J. Levy, “Contractual Framework for Cleared Derivatives: The Master Netting Agreement Between a Clearing Customer Bank and a Central Counterparty,” 10 Pratt's J. of Bankr. Law 509, 515-517 (LexisNexis A.S. Pratt) (describing the clearing model for swaps in the United States); LCH.Clearnet Letter at 2 (generally concurring with the Commission's depiction of the agency model of clearing). 96 See 80 FR at 14599. This release does not address the application of Section 5 of the Securities Act of 1933, 15 U.S.C. 77a et seq. (“Securities Act”), to security-based swap transactions that are intended to be submitted to clearing ( i.e., alphas, in the agency model of clearing). Rule 239 under the Securities Act, 17 CFR 230.239, provides an exemption for certain security-based swap transactions involving an eligible clearing agency from all provisions of the Securities Act, other than anti-fraud provisions of Section 17(a) of the Securities Act. This exemption does not apply to security-based swap transactions not involving an eligible clearing agency, including a transaction that is intended to be submitted to clearing, regardless of whether the security-based swaps subsequently are cleared by an eligible clearing agency. See Exemptions for Security-Based Swaps Issued By Certain Clearing Agencies, Securities Act Release No. 33-9308 (March 30, 2012), 77 FR 20536 (April 5, 2012). 2. Proposed Rules and General Summary of Comments In the Regulation SBSR Proposed Amendments Release, the Commission proposed a new paragraph (a)(2)(i) of existing 97 Rule 901(a), which would designate a registered clearing agency as the reporting side for all clearing transactions to which it is a counterparty. In its capacity as the reporting side, the registered clearing agency would be permitted to select the registered SDR to which it reports. 98 97 Throughout this release, the Commission distinguishes “existing” provisions of Regulation SBSR— i.e., provisions of Regulation SBSR that the Commission adopted in the Regulation SBSR Adopting Release in February 2015—from provisions that the Commission is adopting in this release. 98 See Regulation SBSR Proposed Amendments Release, 80 FR at 14746-47. The Commission also proposed certain rules that would specify the reporting requirements for life cycle events attendant to the clearing process. The determination by a registered clearing agency of whether or not to accept an alpha for clearing is a life cycle event of the alpha. 99 Existing paragraph (i) of Rule 901(e)(1) generally requires the reporting side for a security-based swap to report a life cycle event of that security-based swap, “except that the reporting side shall not report whether or not a security-based swap has been accepted for clearing.” Under existing Rule 901(e)(2), a life cycle event must be reported “to the entity to which the original security-based swap transaction was reported.” In the Regulation SBSR Proposed Amendments Release, the Commission proposed a new paragraph (ii) of Rule 901(e)(1) that would require a registered clearing agency to report to the registered SDR that received or will receive the transaction report of the alpha (the “alpha SDR”) whether or not it has accepted an alpha security-based swap for clearing. 100 The Commission also proposed to amend the definition of “participant” in existing Rule 900(u) to include a registered clearing agency that is required to report whether or not it accepts an alpha for clearing. 101 99 See id., 80 FR at 14746, 14748. A life cycle event is, with respect to a security-based swap, any event that would result in a change in the information reported to a registered security-based swap data repository under Rule 901(c), 901(d), or 901(i), including an assignment or novation of the security-based swap; a partial or full termination of the security-based swap; a change in the cash flows originally reported; for a security-based swap that is not a clearing transaction, any change to the title or date of any master agreement, collateral agreement, margin agreement, or any other agreement incorporated by reference into the security-based swap contract; or a corporate action affecting a security or securities on which the security-based swap is based ( e.g., a merger, dividend, stock split, or bankruptcy). Notwithstanding the above, a life cycle event shall not include the scheduled expiration of the security-based swap, a previously described and anticipated interest rate adjustment (such as a quarterly interest rate adjustment), or other event that does not result in any change to the contractual terms of the security-based swap. See 17 CFR 242.900(q). 100 See Regulation SBSR Proposed Amendments Release, 80 FR at 14748. 101 See id. at 14751. If the registered clearing agency does not know the identity of the alpha SDR, the registered clearing agency would be unable to report to the alpha SDR whether or not it accepted the alpha transaction for clearing, as required by proposed Rule 901(e)(1)(ii). Therefore, the Commission proposed a new paragraph (3) of Rule 901(a), which would require the platform or reporting side for a security-based swap that has been submitted to clearing to promptly provide the relevant registered clearing agency with the identity of the alpha SDR and the transaction ID of the alpha transaction that will be or has been submitted to clearing. 102 102 See id. at 14748. The Commission requested and received comment on a wide range of issues related to these proposed amendments. Four commenters generally supported the Commission's proposal to require the registered clearing agency to report clearing transactions and to allow it to select the SDR to which it reports. 103 One of these commenters noted that a clearing agency is “the sole party who holds the complete and accurate record of transactions and positions” for clearing transactions. 104 Another commenter agreed, noting that alternative reporting workflows “could require a person who does not have information about [a] clearing transaction at the time of its creation to report that transaction.” 105 The commenter expressed the view that the Commission's proposal for reporting clearing transactions “is simple in that the same party in each and every transaction will be the party with the reporting requirement,” and that this approach would eliminate confusion “as to who has the obligation to report the initial trades and different life-cycle events.” 106 Two commenters expressed the view that clearing agencies can leverage existing reporting processes and the existing infrastructure that they have in place with market participants and vendors to report clearing transactions. 107 A third commenter observed that requiring clearing agencies to report clearing transactions would be “efficient, cost effective and promote[ ] global data consistency,” because clearing agencies already report transactions under swap data reporting rules established by the CFTC and certain foreign jurisdictions, such as the European Union and Canada. 108 103 See LCH.Clearnet Letter at 3; Better Markets Letter at 2; ISDA/SIFMA Letter at 24; ICE Letter at 1, 5. 104 ICE Letter at 1, 3 (arguing that no person other than a clearing agency has complete information about beta and gamma security-based swaps and that the reporting hierarchy in Rule 901(a)(2)(ii) is not suitable for reporting clearing transactions). 105 Better Markets Letter at 4. 106 Id. at 2. 107 See ICE Letter at 5; LCH.Clearnet Letter at 8. 108 ISDA/SIFMA Letter at 24. However, one commenter opposed assigning the reporting duty to the registered clearing agency, arguing instead that the reporting side for the alpha transaction should be the reporting side for any subsequent clearing transactions. 109 Another commenter expressed support for the Commission's proposal to require registered clearing agencies to report betas and gammas, but disagreed with the Commission's proposal to permit registered clearing agencies to choose the registered SDR that receives these reports. 110 109 See Markit Letter at 2-3. 110 See DTCC Letter at 5-6. B. Discussion and Final Rules After careful consideration of the comments, the Commission is adopting paragraph (2)(i) of Rule 901(a) as proposed. As a result, a registered clearing agency is the reporting side for all clearing transactions to which it is a counterparty. 111 In its capacity as the reporting side, the registered clearing agency is permitted to select the registered SDR to which it reports. 111 In its capacity as a reporting side, a registered clearing agency must report all of the primary trade information and secondary trade information required by existing Rules 901(c) and 901(d), respectively, for each security-based swap to which it is a counterparty. See infra Section III(F) (discussing the UICs that a registered clearing agency must report). The Commission believes that, because a registered clearing agency creates the clearing transactions to which it is a counterparty, the registered clearing agency is in the best position to provide complete and accurate information to a registered SDR about the clearing transactions resulting from the security-based swaps that it clears. Two commenters noted that swap clearing agencies currently report clearing transactions to CFTC-registered swap data repositories, thus evidencing their ability to report clearing transactions. 112 The Commission's determination to assign to registered clearing agencies the duty to report clearing transactions should promote efficiency in the reporting process under Regulation SBSR by leveraging these existing workflows. 112 See ICE Letter at 5; LCH.Clearnet Letter at 8. The Commission notes that the CFTC has adopted rules that would impose reporting responsibilities on these clearing agencies similar to those that the Commission is adopting today. See Amendments to Swap Data Recordkeeping and Reporting Requirements for Cleared Swaps, Final Rule, 80 FR 41736 (June 27, 2016). In the Regulation SBSR Proposed Amendments Release, the Commission considered three alternatives to requiring the clearing agency to report clearing transactions: (1) Utilize the reporting hierarchy in existing Rule 901(a)(2)(ii); (2) modify that reporting hierarchy to place registered clearing agencies above other non-registered persons, but below registered security-based swap dealers and major security-based swap participants; and (3) require the reporting side of the alpha to report both the beta and the gamma. 113 The Commission assessed each alternative and expressed the preliminary view that none would be as efficient and reliable as assigning the reporting duty to the registered clearing agency. 114 The Commission noted that each of the three alternatives could place the duty to report the clearing transaction on a person who does not have information about the clearing transaction at the time of its creation; to discharge its duty, this person would have to obtain necessary transaction information from the registered clearing agency or from a counterparty to the registered clearing agency. 115 113 See 80 FR at 14745-46. 114 See id. 115 See id., 80 FR at 14746. One commenter urged the Commission to adopt Alternative 3— i.e., to designate the reporting side for the alpha as the reporting side for the beta and gamma. 116 The commenter stated that the non-clearing-agency counterparties to the beta and gamma will always obtain information regarding their clearing transactions as a part of the clearing process. 117 The commenter suggested, therefore, that Alternative 3 would not result in unnecessary data transfers prior to reporting. In support of Alternative 3, the commenter noted that an alpha counterparty could rely on a “middleware reporting agent [who] could perform all steps necessary to report an alpha transaction as well as the associated beta and gamma security-based swaps in a matter of seconds, while a clearing agency could, at best, perform only the last two steps.” 118 Furthermore, while endorsing Alternative 3, the commenter also believed that Alternatives 1 and 2 would be preferable to the Commission's proposed approach. 119 116 See Markit Letter at 13. 117 See id. at 5, 13. The commenter stated that a clearing agency “must, as a matter of course, send the cleared SBS trade record straight through to the sides of the trade or, if relevant, any non-affiliated reporting side ( e.g., the platform or reporting agent). In other words, for the clearing agency to transmit a message indicating that a trade has or has not been accepted for clearing (a necessary last step to conclude cleared transactions between the clearinghouse and the parties to the beta and gamma trades) there is no `extra step.' ” Id. at 5. 118 Id. at 7 (also stating that the interconnectedness of the middleware provider makes it “better able to ensure the accuracy of trade records and the linkage between alpha, beta, and gamma trade records”). 119 See id. at 13 (“these other alternatives, relative to the Proposal, encourage competition based on quality of service and cost and the rule of reporting agents and are more likely to result in outcomes whereby the same SDR will receive alpha, beta, and gamma trades”). Finally, the commenter suggested a fourth alternative to address the concern of an alpha counterparty having to report a clearing transaction to which it is not a counterparty. The commenter suggested that “the platform would remain the reporting side for all platform-executed trades while for bilateral or off platform cleared transactions, the reporting side would be the clearing agency. However, the clearing agency would be required to submit beta and gamma trade records to the alpha SDR (which would be determined by the alpha trade reporting side and not the clearing agency).” 120 120 Id. The Commission believes that assigning reporting duties for clearing transactions to registered clearing agencies will be more efficient and reliable than any of the alternatives discussed in the Regulation SBSR Proposed Amendments Release or raised by the commenter. Because each of these alternatives could assign the reporting duty to a person who does not have information about the clearing transaction at the time of its creation, the person with the reporting duty would have to rely on the clearing agency, directly or indirectly, to provide it with the information to be reported: • Alternative 1 would be to utilize the existing reporting hierarchy in Regulation SBSR. Since a registered clearing agency is not a registered security-based swap dealer or registered major security-based swap participant, it would occupy the lowest rung in the hierarchy. Therefore, in any clearing transaction between a registered clearing agency and a registered security-based swap dealer or registered major security-based swap participant, the registered security-based swap dealer or registered major security-based swap participant would incur the reporting duty. However, the registered security-based swap dealer or registered major security-based swap participant would be dependent on the registered clearing agency to supply the information that must be reported. 121 121 For any clearing transaction between a registered clearing agency and a non-registered person that is not guaranteed by a registered security-based swap dealer or registered major security-based swap participant, the reporting hierarchy in existing Rule 901(a)(2)(i) would require the sides to select the reporting side. In these circumstances, it is likely that the counterparties would select the registered clearing agency as the reporting side for the clearing transactions. Assigning the duty to report clearing transactions directly to the clearing agency is consistent with the Commission's objective of minimizing the possibility that the reporting obligation would be imposed on a non-registered counterparty. See Regulation SBSR Adopting Release, 80 FR at 14598. • Alternative 2 is similar to Alternative 1 in that the registered security-based swap dealer or registered major security-based swap participant with the reporting duty would be dependent on the registered clearing agency to supply the information that would be reported. • Alternative 3 would designate the reporting side for the alpha as the reporting side for the beta and gamma. Under this alternative, the alpha reporting side would need to obtain information from the clearing agency to report its own clearing transaction. The alpha reporting side also would need to obtain, either from the non-reporting side or from the registered clearing agency, information about the clearing transaction of the alpha's non-reporting side. The Commission believes that Alternative 3 would be difficult to implement operationally and could create confidentiality concerns, because it does not offer a mechanism for reporting of subsequent clearing positions created by the registered clearing agency in the account of the non-reporting side of the alpha. 122 122 Assume, under Alternative 3, that P and Q execute a security-based swap (S1) and submit it to a registered clearing agency (CA). P is the reporting side of the S1 alpha. When CA accepts the alpha for clearing, P would then have to report the beta between P and CA and the gamma between Q and CA (gamma1). Further assume that Q executes a second transaction (S2) in the same product as S1 with R, and that R is the reporting side for S2. If CA accepts S2 for clearing, R then must report the beta between R and CA and the gamma between Q and CA (gamma2). In its next netting cycle, CA nets together gamma1 and gamma2 to create a new security-based swap representing the net open position (NOP) of Q in that product. Under Alternative 3, it is unclear who should report NOP as between P and R, because NOP is a security-based swap resulting from the netting of security-based swaps involving both P and R. Furthermore, Q likely will not want P or R to know of its additional activity in that product with other counterparties. • Under the fourth alternative, 123 while the Commission concurs with the approach of requiring the registered clearing agency to report the resulting beta and gamma transactions, the Commission believes that the registered clearing agency, when it has the duty to report security-based swaps, should be able to choose the registered SDR to which it reports. 124 123 See Markit Letter at 13. 124 See infra Section III(C). In general, the Commission believes that Regulation SBSR should not assign reporting obligations to persons who lack direct access to the information necessary to make the report. With respect to clearing transactions, a person who lacked direct access to the necessary information would be obligated to obtain the information from the clearing agency or another party who has access to that information to discharge its reporting duties. Placing the reporting duty on the non-clearing-agency side would create additional reporting steps and each extra reporting step could introduce some possibility for discrepancy, error, or delay. The Commission believes that discrepancies, errors, and delays are less likely to occur if the duty to report clearing transactions is assigned to registered clearing agencies directly, because there would be no intermediate steps where data would have to be transferred between parties before it is sent to a registered SDR. Therefore, the Commission is adopting Rule 901(a)(2)(i) as proposed. A registered clearing agency has complete information about all clearing transactions to which it is a counterparty. This includes not only betas and gammas that arise from clearing alphas, but also security-based swaps that result from the clearing agency netting together betas and gammas of the same person in the same product to create new open positions in successive netting cycles. Under the alternatives discussed above, a person other than the registered clearing agency would have to obtain information from the clearing agency to report the clearing transactions—not just once, to report the initial beta and gamma, but potentially with every netting cycle of the registered clearing agency. This further increases the risks that there could be discrepancies, errors, or delays in reporting new clearing transactions as they are created. The commenter who endorsed Alternative 3 also argued that “[t]he Proposal's failure to acknowledge the efficiency benefits and reduced costs that result from the presence of middleware reporting agents is a serious defect.” 125 To the contrary, the Commission has considered the potential economic effects of new Rule 901(a)(2)(i) and the alternatives noted above, including the role that agents might play in reporting security-based swap transactions under these different alternatives. 126 The Commission notes that, while Regulation SBSR permits the use of agents to carry out reporting duties, it does not require the use of an agent. 125 Markit Letter at 8. See also id. at 6 (“The Proposal ignores the efficiency gains resulting from the presence of middleware reporting agents in the market for SDR and post-trade processing services despite noting such benefits in the Regulation SBSR Final Rule”) and 8 (“The efficiency benefits introduced by the presence of middleware reporting agents, if they were properly accounted for by the Commission . . . would have provided additional and, in our opinion, decisive support to the three alternative approaches described by the Commission”). 126 See infra Sections XIII(A) and (B). C. Choice of Registered SDR for Clearing Transactions In the Regulation SBSR Proposed Amendments Release, the Commission considered whether, if a registered clearing agency is assigned the duty to report clearing transactions, the clearing agency should be permitted to choose the registered SDR to which it reports or whether it should be required to report them to the alpha SDR. 127 The Commission proposed to allow a registered clearing agency to choose the registered SDR to which it reports clearing transactions. 128 The Commission recognized that this approach might result in beta and gamma security-based swaps being reported to a registered SDR other than the alpha SDR, thereby requiring the Commission to link these trades together across SDRs. 129 127 See 80 FR at 14746-47. 128 See id. 129 See id. Some commenters supported the Commission's proposal to allow the registered clearing agency to select the registered SDR to which it reports. 130 Other commenters, however, recommended that the Commission require the registered clearing agency to report the beta and gamma transactions to the alpha SDR. 131 These commenters generally believed that requiring beta and gamma security-based swaps to be reported to the alpha SDR would reduce data fragmentation and enhance the Commission's ability to obtain a complete and accurate understanding of the security-based swap market. 132 130 See ICE Letter at 1; LCH.Clearnet Letter at 3; ISDA/SIFMA Letter at 24. 131 See Better Markets Letter at 2, 4-5 (“we are concerned that allowing the clearing agency to report data to a different SDR than the one [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%3A2016-17032. Public record. Not legal advice.