4614 Federal Register / Vol. 84, No. 32 / Friday, February 15, 2019 / Proposed Rules 

1 15 U.S.C. 78a et seq. 2 In April 2014, the Commission proposed new 

Rules 18a–5 and 18a–6, and amendments to 

existing Rules 17a–3 and 17a–4. See Recordkeeping 

and Reporting Requirements for Security-Based 

Swap Dealers, Major Security-Based Swap 

Participants, and Broker-Dealers; Capital Rule for 

Certain Security-Based Swap Dealers, Exchange Act 

Release No. 71958 (Apr. 17, 2014), 79 FR 25194 

(May 2, 2014) (‘‘SBS Books and Records Proposing 

Release’’). Although those proposed rules and rule 

amendments have not yet been adopted by the 

Commission, all of the relevant proposals included 

in this release are based on the proposed regulatory 

text contained in the SBS Books and Records 

Proposing Release. 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 240 

[Release No. 34–84861; File No. S7–28–18] 

RIN 3235–AL83 

Risk Mitigation Techniques for 

Uncleared Security-Based Swaps 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule. 

SUMMARY: The Securities and Exchange 

Commission (‘‘SEC’’ or ‘‘Commission’’) 

is proposing rules that would require 

the application of specific risk 

mitigation techniques to portfolios of 

security-based swaps not submitted for 

clearing. In particular, the proposal 

would establish requirements for each 

registered security-based swap dealer 

(‘‘SBS dealer’’) and each registered 

major security-based swap participant 

(‘‘major SBS participant’’) (each SBS 

dealer and each major SBS participant 

hereafter referred to as an ‘‘SBS Entity’’ 

and together referred to as ‘‘SBS 

Entities’’) with respect to, among other 

things, reconciling outstanding securitybased swaps with applicable 

counterparties on a periodic basis, 

engaging in certain forms of portfolio 

compression exercises, as appropriate, 

and executing written security-based 

swap trading relationship 

documentation with each of its 

counterparties prior to, or 

contemporaneously with, executing a 

security-based swap transaction. In 

addition, the Commission is proposing 

an interpretation to address the 

application of the portfolio 

reconciliation, portfolio compression, 

and trading relationship documentation 

requirements to cross-border securitybased swap activities and is proposing 

to amend Rule 3a71–6 to address the 

potential availability of substituted 

compliance in connection with those 

requirements. Moreover, the proposed 

rules would make corresponding 

changes to the recordkeeping, reporting, 

and notification requirements 

applicable to SBS Entities. Finally, the 

Commission is requesting comment on 

how certain aspects of the proposed 

rules address how a security-based swap 

data repository (‘‘SDR’’) could 

potentially satisfy its obligation to verify 

the terms of each security-based swap 

with both counterparties to the 

transaction. 

DATES: Comments should be received on 

or before April 16, 2019. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (http://www.sec.gov/ 

rules/proposed.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number S7– 

28–18 on the subject line; or 

Paper Comments 

• Send paper comments to Brent J. 

Fields, Secretary, Securities and 

Exchange Commission, 100 F Street NE, 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number S7–28–18. This file number 

should be included on the subject line 

if email is used. To help us process and 

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s internet website 

(http://www.sec.gov/rules/ 

proposed.shtml). Comments are also 

available for website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549 on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Persons 

submitting comments are cautioned that 

we do not redact or edit personal 

identifying information from comment 

submissions. You should submit only 

information that you wish to make 

available publicly. 

Studies, memoranda, or other 

substantive items may be added by the 

Commission or staff to the comment file 

during this rulemaking. A notification of 

the inclusion in the comment file of any 

such materials will be made available 

on the SEC’s website. To ensure direct 

electronic receipt of such notifications, 

sign up through the ‘‘Stay Connected’’ 

option at www.sec.gov to receive 

notifications by email. 

FOR FURTHER INFORMATION CONTACT: 

Carol McGee, Assistant Director, or 

Andrew Bernstein, Senior Special 

Counsel, at (202) 551–5870, Office of 

Derivatives Policy, Division of Trading 

and Markets, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–8010. 

SUPPLEMENTARY INFORMATION: The 

Commission is proposing for public 

comment the following new rules: 

Commission 

reference 

CFR citation 

(17 CFR) 

Securities Exchange Act 

of 1934 (‘‘Exchange 

Act’’): 1

Rule 15Fi–3 ................. § 240.15Fi–3. 

Rule 15Fi–4 ................. § 240.15Fi–4. 

Commission 

reference 

CFR citation 

(17 CFR) 

Rule 15Fi–5 ................. § 240.15Fi–5. 

The Commission also is proposing for 

comment amendments to: 

Commission 

reference 

CFR citation 

(17 CFR) 

Exchange Act: 

Rule 3a71–6 ................ § 240.3a71–6. 

Rule 15Fi–1 ................. § 240.15Fi–1. 

Rule 17a–3 2 ................ § 240.17a–3. 

Rule 17a–4 .................. § 240.17a–4. 

Rule 18a–5 (proposed) § 240.18a–5 (proposed). 

Rule 18a–6 (proposed) § 240.18a–6 (proposed). 

Finally, the Commission is requesting 

comment under: 

Commission 

reference 

CFR or U.S.C. 

citation 

Exchange Act: 

Section 13(n)(5)(B) ..... 15 U.S.C. 78m(n)(5). 

Rule 13n–4(b)(3) ......... 17 CFR 240.13n–4(b)(3). 

Table of Contents 

I. Proposed Rules and Rule Amendments 

A. Background 

B. Rule 15Fi–3 (Portfolio Reconciliation) 

1. Overview of Portfolio Reconciliation 

2. Scope of the Portfolio Reconciliation 

Requirements 

3. Proposed Rule 15Fi–3(a): Portfolio 

Reconciliation With Other SBS Entities 

4. Proposed Rule 15Fi–3(a): Resolution of 

Discrepancies With Other SBS Entities 

5. Proposed Rule 15Fi–3(b): Portfolio 

Reconciliation With Other 

Counterparties 

6. Reporting of Valuation Disputes 

7. Application of Proposed Rule 15Fi–3 to 

Cleared Security-Based Swaps 

8. Comments Requested 

C. Rule 15Fi–4 (Portfolio Compression) 

1. Overview of Portfolio Compression 

2. Scope of Proposed Rule 15Fi–4— 

Portfolio Compression Exercises 

3. Scope of Proposed Rule 15Fi–4— 

Bilateral Offset 

4. Application of Proposed Rule 15Fi–4 to 

Cleared Security-Based Swaps 

5. Comments Requested 

D. Rule 15Fi–5 (Trading Relationship 

Documentation) 

1. Overview of Trading Relationship 

Documentation 

2. Scope of Proposed Rule 15Fi–5 

3. Proposed Rule 15Fi–5(b)(4): 

Documenting Valuation Methodologies 


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Federal Register / Vol. 84, No. 32 / Friday, February 15, 2019 / Proposed Rules 4615 

3Public Law 111–203, 124 Stat. 1376 (2010). 

Unless otherwise indicated, references to ‘‘Title 

VII’’ in this release are to Subtitle B of Title VII of 

the Dodd-Frank Act. 

4 15 U.S.C. 78o–10(i)(1). 

5 15 U.S.C. 78o–10(i)(2). 

6See Trade Acknowledgment and Verification of 

Security-Based Swap Transactions, Exchange Act 

Release No. 78011 (June 8, 2016), 81 FR 39807 (June 

17, 2016) (‘‘Trade Acknowledgment and 

Verification Adopting Release’’). 

7See Confirmation, Portfolio Reconciliation, 

Portfolio Compression, and Swap Trading 

Relationship Documentation Requirements for 

Swap Dealers and Major Swap Participants, 77 FR 

55904 (Sept. 11, 2012) (‘‘CFTC Risk Mitigation 

Adopting Release’’). The European Commission 

(‘‘EC’’) has implemented similar measures. See 

Commission Delegated Regulation (EU) No. 149/ 

2013 (Dec. 18, 2012) supplementing Regulation 

(EU) No. 648/2012 of the European Parliament and 

of the Council with regard to regulatory technical 

standards on indirect clearing arrangements, the 

clearing obligation, the public register, access to a 

trading venue, non-financial counterparties, and 

risk mitigation techniques for over-the-counter 

(‘‘OTC’’) derivatives contracts not cleared by a 

central counterparty (Feb. 23, 2013), available at: 

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?

uri=OJ:L:2013:052:0011:0024:en:PDF. Regulatory 

authorities in other jurisdictions (e.g., the Hong 

Kong Monetary Authority and the Monetary 

Authority of Singapore) have also proposed 

requirements similar to those adopted by the CFTC 

and the EC. In addition, the Canadian Securities 

Administrators (‘‘CSA’’) published a consultation 

paper in 2016 proposing a requirement that 

financial institutions enter into a written agreement 

documenting the material terms and conditions of 

any non-centrally cleared derivative, including 

standards related to the maintenance, review, and 

contents of that documentation. See CSA 

Consultation Paper 95–401—Margin and Collateral 

Requirements for Non-Centrally Cleared Derivatives 

(Jul. 7, 2016), available at: http://

www.osc.gov.on.ca/documents/en/SecuritiesCategory9/csa_20160707_95-401_collateralrequirements-cleared-derivatives.pdf. 

4. Proposed Rule 15Fi–5(b)(5) and (6): 

Other Disclosure Requirements 

5. Proposed Rule 15Fi–5(c): Audit of 

Security-Based Swap Trading 

Relationship Documentation 

6. Exceptions to the Trading Relationship 

Documentation Requirements 

7. Comments Requested 

E. Verification of Transaction Data by SDRs 

1. Reconciliation of Terms Submitted to an 

SDR 

2. Documentation of Regulatory Reporting 

Obligations 

3. Comments Requested 

F. Recordkeeping Requirements 

1. Proposed Amendments to 

Recordkeeping Rules 

2. Comments Requested 

II. Cross-Border Application of Rules 15Fi–3 

Through 15Fi–5 

A. Background on the Cross-Border 

Application of Title VII Requirements 

B. Proposed Cross-Border Interpretation 

C. Comments Requested 

III. Availability of Substituted Compliance 

for Rules 15Fi–3 Through 15Fi–5 

A. Existing Substituted Compliance Rule 

B. Proposed Amendment to Rule 3a71–6 

1. Basis for Substituted Compliance in 

Connection With the Portfolio 

Reconciliation, Portfolio Compression, 

and Trading Relationship 

Documentation Requirements 

2. Comparability Criteria, and 

Consideration of Related Requirements 

3. Comments Requested 

IV. General Request or Comment 

V. Paperwork Reduction Act 

A. Summary of Collections of Information 

1. Proposed Rule 15Fi–3: Portfolio 

Reconciliation 

2. Proposed Rule 15Fi–4: Portfolio 

Compression 

3. Proposed Rule 15Fi–5: Written Trading 

Relationship Documentation 

4. Proposed Amendments to Rules 17a–3, 

17a–4, 18a–5, and 18a–6: Books and 

Records Requirements 

5. Proposed Amendment to Rule 3a71–6: 

Substituted Compliance 

B. Proposed Use of Information 

1. Proposed Rule 15Fi–3: Portfolio 

Reconciliation 

2. Proposed Rule 15Fi–4: Portfolio 

Compression 

3. Proposed Rule 15Fi–5: Written Trading 

Relationship Documentation 

4. Proposed Amendments to Rules 17a–3, 

17a–4, 18a–5, and 18a–6: Books and 

Records Requirements 

5. Proposed Amendment to Rule 3a71–6: 

Substituted Compliance 

C. Respondents 

D. Total Annual Recordkeeping Burden 

1. Portfolio Reconciliation Activities 

Generally 

2. Establishing, Maintaining, and Enforcing 

Written Policies and Procedures 

3. Reporting of Certain Valuation Disputes 

4. Proposed Rule 15Fi–4: Portfolio 

Compression 

5. Proposed Rule 15Fi–5: Written Trading 

Relationship Documentation 

6. Proposed Amendments to Rules 17a–3, 

17a–4, 18a–5, and 18a–6: Books and 

Records Requirements 

7. Proposed Amendment to Rule 3a71–6: 

Substituted Compliance 

E. Collection of Information Is Mandatory 

F. Confidentiality 

G. Request for Comment 

VI. Economic Analysis 

A. Broad Economic Considerations 

B. Economic Baseline 

1. Security-Based Swap Market Activity 

and Participants 

a. Available Data From the Security-Based 

Swap Market 

b. Affected SBS Entities 

c. Other Market Participants 

d. Outstanding Positions 

2. Current Portfolio Reconciliation 

Practices 

3. Current Portfolio Compression Practices 

4. Current Trading Relationship 

Documentation Practices 

C. Economic Costs and Benefits, Including 

Impact on Efficiency, Competition, and 

Capital Formation 

1. Effects on Efficiency, Competition, and 

Capital Formation 

a. Broad Market Effects 

b. Substituted Compliance 

2. Portfolio Reconciliation 

a. Requirements 

b. Benefits 

c. Costs 

d. Alternatives 

3. Portfolio Compression 

a. Requirements 

b. Benefits 

c. Costs 

d. Alternatives 

4. Trading Relationship Documentation 

a. Requirements 

b. Benefits 

c. Costs 

d. Alternatives 

5. Recordkeeping Requirements 

a. Requirements 

b. Benefits 

c. Costs 

d. Alternatives 

6. Cross-Border Application of Rules 15Fi– 

3 Through 15Fi–5. 

a. Requirements 

b. Benefits 

c. Costs 

D. Request for Comment 

VII. Consideration of Impact on the Economy 

VIII. Regulatory Flexibility Act Certification 

IX. Statutory Basis and Text of Proposed 

Rules 

I. Proposed Rules and Rule 

Amendments 

A. Background 

Section 15F(i)(1) of the Exchange Act, 

as added by Section 764(a) of Title VII 

of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (‘‘DoddFrank Act’’),3 requires each SBS Entity 

to conform with such standards as may 

be prescribed by the Commission, by 

rule or regulation, that relate to timely 

and accurate confirmation, processing, 

netting, documentation, and valuation 

of all security-based swaps.4 Section 

15F(i)(2) of the Exchange Act provides 

that the Commission shall adopt rules 

governing documentation standards for 

SBS Entities.5

The Commission previously adopted 

rules requiring SBS Entities to provide 

trade acknowledgments and to verify 

those trade acknowledgments with their 

counterparties to security-based swap 

transactions,6 but has not proposed 

rules concerning portfolio 

reconciliation, portfolio compression, or 

trading relationship documentation. By 

contrast, the Commodity Futures 

Trading Commission (‘‘CFTC’’) has 

implemented rules setting forth 

standards for the timely and accurate 

confirmation of swaps, addressing the 

reconciliation and compression of swap 

portfolios, and setting forth 

requirements for documenting the swap 

trading relationship between swap 

dealers or major swap participants (each 

swap dealer and each major swap 

participant hereafter referred to as a 

‘‘Swap Entity’’ and together referred to 

as ‘‘Swap Entities’’) and their 

counterparties.7


amozie on DSK3GDR082PROD with PROPOSALS2
4616 Federal Register / Vol. 84, No. 32 / Friday, February 15, 2019 / Proposed Rules 

8For purposes of this statement, the term 

‘‘prudential regulator’’ is defined in Section 1a(39) 

of the CEA, 7 U.S.C. 1a(39), and that definition is 

incorporated by reference into Section 3(a)(74) of 

the Exchange Act, 15 U.S.C. 78c(a)(74). Pursuant to 

that definition, the Board of Governors of the 

Federal Reserve System (‘‘Federal Reserve Board’’), 

the Office of the Comptroller of the Currency, the 

Federal Deposit Insurance Corporation (‘‘FDIC’’), 

the Farm Credit Administration, or the Federal 

Housing Finance Agency (collectively, the 

‘‘prudential regulators’’) is the ‘‘prudential 

regulator’’ of an SBS Entity if the entity is directly 

supervised by that regulator. Separately, we are 

proposing a definition of ‘‘prudential regulator,’’ to 

be used for purposes of the proposed portfolio 

reconciliation and trading relationship 

documentation requirements. See infra note 48. 

That proposed definition also references Section 

3(a)(74) of the Exchange Act and includes the same 

list of agencies as noted above. 

9Section 712(a)(2) of the Dodd-Frank Act 

provides in part that the Commission shall ‘‘consult 

and coordinate to the extent possible with the 

Commodity Futures Trading Commission and the 

prudential regulators for the purposes of assuring 

regulatory consistency and comparability, to the 

extent possible.’’ 

In addition, Section 752(a) of the Dodd-Frank Act 

provides, in part, that ‘‘[i]n order to promote 

effective and consistent global regulation of swaps 

and security-based swaps, the Commodity Futures 

Trading Commission, the Securities and Exchange 

Commission, and the prudential regulators . . . as 

appropriate, shall consult and coordinate with 

foreign regulatory authorities on the establishment 

of consistent international standards with respect to 

the regulation (including fees) of swaps.’’ 

10Staff participates in a number of international 

standard-setting bodies and workstreams working 

on OTC derivatives reforms. For example, 

Commission staff participated in the International 

Organization of Securities Commissions’ (‘‘IOSCO’’) 

preparation of a report regarding risk mitigation 

standards for non-centrally cleared OTC 

derivatives. See Risk Mitigation Standards for Noncentrally Cleared OTC Derivatives (Jan. 28, 2015), 

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

pdf/IOSCOPD469.pdf. IOSCO developed those 

standards in consultation with the Basel Committee 

on Banking Supervision and the Committee on 

Payments and Market Infrastructures. 

11Trade Acknowledgement and Verification 

Adopting release, 81 FR at 39833. 12 Id. 

13 Id. 

14See Summary of OTC Commitments, 

Attachment to the July 31, 2008 letter from the 

Operations Management Group to Timothy 

Geithner, President, Federal Reserve Bank of New 

York (‘‘FRBNY’’), available at: https://

www.newyorkfed.org/medialibrary/media/ 

newsevents/news/markets/2008/ 

CommitmentSummaryTable.pdf (‘‘Positive 

affirmation of trade economics is a key risk 

mitigation technique for OTC derivatives because it 

assures that each counterparty’s risk management 

system accurately reflect the economic details of 

trades that have not yet been matched.’’). Although 

this particular commitment was made in the 

context of the trade affirmation process, we believe 

that the same basic principle supports the need to 

reconcile terms throughout the life of a trade, even 

if a term is accurately reflected in a firm’s system 

as a result of the affirmation process. This is 

particularly true for terms that do not remain 

constant during the life of a trade. 

Accordingly, the Commission is today 

proposing requirements applicable to 

SBS Entities addressing, among other 

things, reconciling and compressing 

portfolios of uncleared security-based 

swaps and executing written trading 

relationship documentation with each 

counterparty prior to or 

contemporaneously with executing an 

uncleared security-based swap. In 

developing this proposal, we have 

consulted and coordinated with the 

CFTC, the prudential regulators,8 and 

foreign regulatory authorities in 

accordance with the consultation 

mandate of the Dodd-Frank Act.9 We 

also have consulted and coordinated 

with foreign regulatory authorities 

through Commission staff participation 

in numerous bilateral and multilateral 

discussions with foreign regulatory 

authorities addressing the regulation of 

OTC derivatives.10 Through these 

multilateral and bilateral discussions 

and the Commission staff’s participation 

in various international task forces and 

working groups, we have gathered 

information about foreign regulatory 

reform efforts and their effect on, and 

relationship with, the U.S. regulatory 

regime. The Commission has taken, and 

will continue to take, these discussions 

into consideration in developing rules, 

forms, and interpretations for 

implementing Title VII of the DoddFrank Act. 

Finally, the Commission recognizes 

that the CFTC rules pertaining to 

portfolio reconciliation, portfolio 

compression, and written trading 

relationship documentation have been 

in effect since 2012, and that any SBS 

Entity that also is registered with the 

CFTC as a Swap Entity will already 

have incurred systems and compliance 

costs in connection with the 

corresponding CFTC requirements. In 

order to minimize compliance burdens 

on such potential dual registrants in 

connection with the rules we are 

proposing today, we have attempted to 

harmonize this proposal with the 

existing CFTC rules wherever possible. 

There are, however, a limited number of 

provisions where we preliminarily 

believe it is appropriate to diverge from 

a particular aspect of the CFTC rules. 

Each of those differences is described 

below, along with the preliminary 

reasons for the different approaches. To 

the extent that no such substantive 

difference is described, it is because we 

have preliminarily determined that 

none exists. However, below we 

welcome and solicit comment on any 

potential substantive differences 

between the proposed rules and the 

corresponding CFTC rules, as well as on 

the decision to harmonize with the 

CFTC, both as an overall approach and 

with respect to any specific provisions 

of the proposed rules. 

B. Rule 15Fi–3 (Portfolio Reconciliation) 

1. Overview of Portfolio Reconciliation 

In the Trade Acknowledgement and 

Verification Adopting Release, the 

Commission noted the importance of 

confirming trades in a timely manner, 

explaining that the process of 

confirming the terms of a transaction is 

essential for SBS Entities ‘‘to effectively 

measure and manage market and credit 

risk.’’ 11 The Commission further 

explained that ‘‘a backlog of 

unconfirmed trades could hinder the 

settlement process, particularly if errors 

go undetected or a counterparty 

disputes the terms of a transaction.’’ 12

Such disruptions in the settlement 

process could, in turn, lead to broader 

market instability in the case of a credit 

event involving a reference entity on 

which many different counterparties 

have, in the aggregate, a large notional 

outstanding exposure.13

In this regard, portfolio reconciliation 

addresses many of these same issues, 

but unlike the confirmation process, 

which occurs at the outset of a 

transaction, reconciliation operates 

throughout the life of the transaction. If 

a security-based swap transaction is 

accurately confirmed by both parties 

during the trade acknowledgement and 

verification process, reconciliation 

helps to identify any discrepancies in 

terms that do not remain constant 

throughout the life of a trade. 

Furthermore, if a discrepancy is not 

identified during the trade 

acknowledgement and verification 

process, it could be identified during a 

subsequent reconciliation exercise. 

The Commission preliminarily 

believes that portfolio reconciliation 

serves as an important mechanism for 

promoting risk mitigation by requiring 

security-based swap counterparties to 

have established processes for 

identifying and resolving discrepancies 

involving key terms of their 

transactions. To illustrate this point, if 

a term necessary for calculating the 

market value of a security-based swap is 

not properly confirmed during the trade 

acknowledgment and verification 

process, such as due to some form of 

systems or human error, that 

discrepancy could lead to complications 

at various points throughout the life of 

the transaction, which could become 

particularly problematic if it remains 

undetected until such time as the 

parties are required to perform on their 

obligations.14 Thus, portfolio 

reconciliation could help to mitigate the 

possibility of a discrepancy 

unexpectedly affecting performance 

under the security-based swap 

transaction by increasing the likelihood 


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15See GAO, Financial Crisis: Review of Federal 

Reserve System Financial Assistance to American 

International Group, Inc., GAO–11–616 (Sept. 

2011), available at http://www.gao.gov/assets/590/ 

585560.pdf (‘‘According to information we 

reviewed, on a [collateralized debt obligation 

(‘‘CDO’’)] portfolio of $71 billion . . . , AIG and its 

counterparties had valuation differences totaling 

$4.3 billion. Among a group of 15 counterparties, 

9 had valued their assets differently than AIG.’’). 

16 Id. at 82. 

17Unless otherwise noted, all references to rules 

(both proposed and existing) without an 

accompanying statutory reference are to rules 

adopted (or proposed to be adopted) under the 

Exchange Act. 

18The corresponding CFTC rule is 17 CFR 23.502. 

The structure of the CFTC rule, including the 

subsections, mirrors the structure of proposed Rule 

15Fi–3. 

19See proposed Rule 15Fi–1(l). The 

corresponding CFTC definition is in 17 CFR 

23.500(i). 

20See proposed Rule 15Fi–1(o). The 

corresponding CFTC definition is in 17 CFR 

23.500(k) 

21See proposed Rule 15Fi–1(q). The 

corresponding CFTC definition is in 17 CFR 

23.500(m). 

22 17 CFR 242.900 to 242.909. 

23CFTC Rule 23.500(g) defines ‘‘material terms’’ 

to include the minimum primary economic terms 

(as defined in Appendix 1 of part 45 of the CFTC’s 

regulations) of a swap, other than the 24 specific 

data fields identified in that rule. See 17 CFR 

23.500(g). Among the excluded fields are: (1) The 

status of either counterparty as a swap dealer, major 

swap participant, financial entity, or U.S. person; 

(2) an indication that the swap will be allocated and 

certain information regarding the agent and the 

original swap; (3) an indication that the swap is a 

multi-asset swap and a further indication of its 

primary and secondary asset class; (4) an indication 

that the swap is a mixed swap and the 

identification of any non-CFTC registered swap data 

repository to which it is also reported (if 

applicable); (5) the block trade indicator, execution 

timestamp, and timestamp for submission to a swap 

data repository; (6) the clearing indicator and 

clearing venue; and (7) certain information 

regarding the application of the end user exception 

from mandatory clearing. 

24See proposed Rule 15Fi–1(i)(1) (referencing 17 

CFR 242.901). 

that the parties are and remain in 

agreement with respect to all material 

terms. 

This practice is particularly relevant 

with respect to terms used to perform a 

valuation of the financial instrument. 

Specifically, unresolved discrepancies 

regarding the value of a security-based 

swap can lead to, among other things, 

difficulties in the application of any 

processes that depend on the valuation 

being accurate, such as determining the 

amount of margin that must be posted 

or collected during the life of a securitybased swap transaction. In the aggregate, 

such errors and other complications 

could result in significant 

uncollateralized exposure in the 

uncleared security-based swap markets 

(or alternatively, potentially inefficient 

overcollateralization). 

In addition, valuation discrepancies 

identified during reconciliation could 

help to identify problems with one or 

both of the counterparties’ internal 

valuation systems and models, or 

possibly even with a firm’s internal 

controls. For example, in a report 

analyzing federal assistance to 

American International Group, Inc. 

(‘‘AIG’’) following the events of 

September 2008, the General 

Accountability Office (‘‘GAO’’) noted 

that in structuring this relief one of the 

many open issues the FRBNY had to 

address was the number of collateral 

disputes AIG had with its 

counterparties.15 GAO further explained 

that ‘‘[t]o the extent that lower 

valuations (more CDO value lost) 

produced greater collateral postings, 

counterparties had an interest in seeking 

lower valuations. Similarly, to the 

extent that higher valuations (less CDO 

value lost) meant smaller collateral 

postings, AIG had an interest in seeking 

higher valuations.’’ 16

In light of this information, the 

Commission preliminarily believes that 

the use of portfolio reconciliation to 

help maintain an agreed-upon valuation 

of a security-based swap throughout the 

lifecycle of a transaction should be a 

hallmark of prudent risk mitigation 

practices within the operations of an 

SBS Entity. Accordingly, the 

Commission is proposing new Rule 

15Fi–3 under the Exchange Act,17

which generally would require those 

entities, in connection with securitybased swaps not submitted for clearing, 

to (1) engage in portfolio reconciliation 

with counterparties who are SBS 

Entities and (2) establish, maintain, and 

follow written policies and procedures 

reasonably designed to ensure that they 

engage in portfolio reconciliation with 

counterparties who are not SBS Entities. 

In both cases, the frequency of the 

portfolio reconciliation would be based 

on the number of outstanding 

transactions with the applicable 

counterparty. 

2. Scope of the Portfolio Reconciliation 

Requirements 

For purposes of proposed Rule 15Fi– 

3,18 the Commission is proposing to 

amend existing Rule 15Fi–1 to add a 

definition of ‘‘portfolio 

reconciliation.’’ 19 As proposed, this 

term would be defined to mean any 

process by which the counterparties to 

one or more uncleared security-based 

swaps: 

(i) Exchange the material terms of all 

security-based swaps in the securitybased swap portfolio between the 

counterparties; 

(ii) Exchange each counterparty’s 

valuation of each security-based swap in 

the security-based swap portfolio 

between the counterparties as of the 

close of business on the immediately 

preceding business day; and 

(iii) Resolve any discrepancy in 

valuations or material terms. 

For purposes of this proposed 

definition, the Commission also is 

proposing to amend Rule 15Fi–1 to add 

the terms ‘‘security-based swap 

portfolio,’’ which would be defined to 

mean all security-based swaps currently 

in effect between a particular SBS Entity 

and a particular counterparty,20 and 

‘‘valuation,’’ which would be defined to 

mean the current market value or net 

present value of a security-based 

swap.21 Both of these definitions help to 

establish the scope of the portfolio 

reconciliation requirements in proposed 

Rule 15Fi–3, with the former defining 

which security-based swaps are subject 

to the rule and the latter defining one of 

the two categories of information that 

must be exchanged during a 

reconciliation (the other being ‘‘material 

terms’’). Moreover, for consistency with 

the corresponding CFTC rules 

applicable to Swap Entities, these 

definitions are substantively identical to 

the CFTC’s corresponding definitions, 

which we preliminarily believe are 

appropriately scoped and clear for 

purposes of proposed Rule 15Fi–3. 

With respect to the phrase ‘‘material 

terms,’’ the proposed definition would 

follow a similar approach to the one 

taken by the CFTC in that it would base 

the definition on the terms required to 

be reported to an SDR pursuant to 

Regulation SBSR.22 Unlike the approach 

taken by the CFTC, however, which has 

adopted a single definition of ‘‘material 

terms,’’ the definition in proposed Rule 

15Fi–1(i) would be bifurcated 

depending on whether a security-based 

swap transaction had already been 

included in a security-based swap 

portfolio and reconciled pursuant to 

proposed Rule 15Fi–3.23 With respect to 

any security-based swap that has not yet 

been reconciled as part of a securitybased swap portfolio, ‘‘material terms’’ 

would be defined to mean each term 

that is required to be reported to a 

registered SDR pursuant to Rule 901 

under the Exchange Act.24 With respect 

to all other security-based swaps within 

a security-based swap portfolio, the 

definition of ‘‘material terms’’ would 

continue to be based on the reporting 

requirements in Rule 901, but would 

exclude any term that is not relevant to 

the ongoing rights and obligations of the 


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25See proposed Rule 15Fi–1(i)(2). 

26See Regulation SBSR—Reporting and 

Dissemination of Security-Based Swap Information; 

Final Rule, Exchange Act Release No. 74244 (Feb. 

11, 2015), 80 FR 14563, 14646 (Mar. 19, 2015) 

(‘‘Regulation SBSR Adopting Release’’). 

27The Commission does not, however, believe 

that a term would be appropriately excluded from 

the definition of ‘‘material terms’’ if it was 

resubmitted to an SDR because of an error in how 

it was initially reported or due to a lifecycle event. 

In those circumstances, the Commission 

preliminarily believes that such term would 

continue to be material for the same reasons that 

every term subject to a reporting requirement under 

Rule 901 would be material the first time that a 

transaction is reconciled. Once the updated term is 

reconciled, however, an SBS Entity would be able 

to exclude that term from subsequent 

reconciliations to the extent that it determines that 

it is not relevant to the ongoing rights and 

obligations of the parties and the valuation of the 

security-based swap. 

28See supra note 23 (discussing CFTC Rule 

23.500(g)). We further recognize that when the 

CFTC adopted amendments to Rule 23.500(g) to 

exclude these terms, it noted that ‘‘removal of these 

terms from reconciliations would alleviate the 

burden of resolving discrepancies in terms of a 

swap that are not relevant to the ongoing rights and 

obligations of the parties and the valuation of the 

swap without impairing the [CFTC’s] regulatory 

mission.’’ See Definitions of ‘‘Portfolio 

Reconciliation’’ and ‘‘Material Terms’’ for Purposes 

of Swap Portfolio Reconciliation, 81 FR 27309, 

27311 (May 6, 2016). 

29See proposed Rule 15Fi–3(a). 

30See proposed Rule 15Fi–3(a)(3). For the 

avoidance of doubt, if a security-based swap 

portfolio between two SBS Entity counterparties 

crosses from one threshold to another, both sides 

would be required to comply with the proposed 

rule as of the date that the requirement applies. For 

example, if two SBS Entities that have long 

maintained a portfolio of 50 or fewer security-based 

swaps (and accordingly reconcile on a quarterly 

basis) exceed the 50 transaction threshold, the two 

sides would become subject to the weekly 

reconciliation requirement as of the first day that 

the portfolio exceeds 50 security-based swaps (or 

the daily reconciliation requirement if the portfolio 

increases to 500 or more security-based swaps). By 

parties and the valuation of the securitybased swap.25

The Commission preliminarily 

believes that the data set submitted to 

an SDR under Rule 901 is an 

appropriate measure for determining 

which terms should be reconciled 

pursuant to proposed Rule 15Fi–3. As 

noted above, the Commission believes 

that one of the fundamental goals of the 

portfolio reconciliation process is to 

help ensure that both counterparties to 

a security-based swap are in agreement 

on all of the terms necessary for 

developing a comprehensive 

understanding of each of their rights 

and obligations under the security-based 

swap, and that they remain in such 

agreement throughout the life of the 

transaction. To effect that objective, we 

are proposing that the term ‘‘portfolio 

reconciliation’’ be defined in part as the 

exchange of the ‘‘material terms’’ of all 

security-based swaps in the securitybased swap portfolio between the 

counterparties. Similarly, in adopting 

Regulation SBSR the Commission 

explained that the Title VII regulatory 

reporting requirement ‘‘is designed to 

allow the Commission and other 

relevant authorities to have access to 

comprehensive information about 

security-based swap activity in 

registered SDRs.’’ 26 The Commission 

therefore preliminarily believes that the 

terms that must be reported to an SDR 

under Regulation SBSR are a good proxy 

for identifying the ‘‘material terms’’ that 

should be subject to the portfolio 

reconciliation requirements. 

The Commission also preliminarily 

believes that basing the definition of 

‘‘material terms’’ on what is required to 

be reported to an SDR provides certainty 

for SBS Entities regarding what 

information must be reconciled, which 

should in turn reduce the burdens on 

those entities without lessening the 

benefits of the proposed rule (which are 

described earlier in this section and in 

the Economic Analysis section below). 

Furthermore, the proposed approach is 

designed to allow affected 

counterparties to leverage the same 

systems used for SDR reporting for 

purposes of the portfolio reconciliation 

requirements, should such synergies 

exist. Moreover, this proposed approach 

would promote the same policy goals 

that underpin a particular requirement 

imposed on SDRs to verify the terms of 

each security-based swap with both 

counterparties to the transaction, as 

discussed in detail in Section I.E below. 

The Commission preliminarily 

believes that the proposed rule is 

reasonably tailored to avoid 

unnecessary burdens while still 

promoting important risk mitigation 

goals inherent to the portfolio 

reconciliation process. That said, certain 

terms of a security-based swap 

transaction may be material the first 

time that a transaction is reconciled, but 

might not be material during a 

subsequent reconciliation. This could be 

true, for example, with respect to any 

term of a transaction that does not affect 

any ongoing rights or obligations of the 

parties and that has no effect on the 

valuation of the security-based swap. 

Accordingly, the definition of ‘‘material 

terms’’ in proposed Rule 15Fi–1(i)(2) 

provides that with respect to any 

subsequent reconciliations, SBS Entities 

may exclude any term that is not 

relevant to the ongoing rights and 

obligations of the parties and the 

valuation of the security-based swap, 

regardless of the fact that the term was 

required to be reported to an SDR under 

Regulation SBSR.27 For example, the 

Commission preliminarily believes that 

the 24 terms excluded from the CFTC 

definition could be excluded from the 

proposed definition of ‘‘material terms’’ 

in the context of security-based swaps 

that have previously been reconciled.28

Finally, the Commission recognizes 

that our proposed definition of 

‘‘material terms’’ would differ from the 

corresponding CFTC definition in that 

Swap Entities would never need to 

reconcile the 24 terms excluded from 

the definition of ‘‘material terms’’ in 

CFTC Rule 23.500(g). Nevertheless, we 

are proposing to require all reported 

terms to be reconciled at least initially 

because, among other things, such 

requirement could potentially help to 

address an issue related to how 

registered SDRs can verify the 

information that they receive, as 

discussed in detail in Section I.E below. 

However, below we solicit comment on 

our approach, and particularly welcome 

comments on any trade-offs that may 

exist as between our efforts to address 

the SDR-related issue and any 

additional burdens resulting from a 

definition of ‘‘material terms’’ that 

departs from the corresponding CFTC 

rule, particularly in the context of 

CFTC-regulated Swap Entities that also 

may register with the Commission as 

SBS Entities. 

3. Proposed Rule 15Fi–3(a): Portfolio 

Reconciliation With Other SBS Entities 

The Commission is proposing to 

bifurcate proposed Rule 15Fi–3 based 

on the particular type of counterparty 

with which the SBS Entity transacts. For 

transactions between two SBS Entities, 

proposed Rule 15Fi–3(a) would require 

the two sides to engage in portfolio 

reconciliation at frequencies that are 

based on the size of the security-based 

swap portfolio between the two parties, 

expressed in ranges (or tiers).29

Under this tiered approach, if the two 

SBS Entity counterparties maintain a 

security-based swap portfolio that 

includes 500 or more security-based 

swaps, portfolio reconciliation would 

need to occur once each business day 

for as long as the portfolio exceeds this 

threshold. If a security-based swap 

portfolio between two SBS Entities 

includes more than 50 but fewer than 

500 security-based swaps on any 

business day during a week, portfolio 

reconciliation would be required to 

occur on a weekly basis. For a securitybased swap portfolio between two SBS 

Entities that includes no more than 50 

security-based swaps at any time during 

the calendar quarter, portfolio 

reconciliation would be required on a 

quarterly basis.30


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contrast, if two SBS Entities that maintain a 

security-based swap portfolio of more than 500 

transactions fall below that threshold, they could 

begin reconciling on a weekly basis as of the first 

business day after the date on which they were able 

to verify that their security-based swap portfolio has 

fallen below 500 transactions. 

31When it adopted the same numerical 

thresholds in 2012, the CFTC noted that the 

requirement to reconcile portfolios with 500 or 

more swaps on a daily basis was consistent with the 

commitments made by the OTC Derivatives 

Steering Group’s 14 major dealers (‘‘G–14 dealers’’) 

in December 2008 as well as international 

regulatory efforts underway at the time of the 

CFTC’s release. See CFTC Risk Mitigation Adopting 

Release, 77 FR at 55928 nn. 35 and 36. See also 

Summary of OTC Commitments, Attachment to the 

June 2, 2009 letter from G–14 dealers and certain 

buy-side participants to William C. Dudley, 

President, FRBNY, available at: https://

www.newyorkfed.org/medialibrary/media/ 

newsevents/news/markets/2009/060209table.pdf 

(committing, ‘‘[b]y June 30, 2009, [to] execute daily 

collateralized portfolio reconciliations for 

collateralized portfolios in excess of 500 trades 

between [Operations Management Group] dealers as 

detailed in the December 31, 2008 Collateral Update 

letter’’). See also Attachment to the Mar. 31, 2011 

letter from the G–14 dealers and certain buy-side 

participants to William C. Dudley, President, 

FRBNY, available at: https://www.newyorkfed.org/ 

medialibrary/media/newsevents/news/markets/ 

2011/SCL0331.pdf (‘‘We commit to reduce the 

threshold for routine portfolio reconciliation of 

collateralized portfolios from those exceeding 1,000 

transactions to those exceeding 500 transactions 

starting June 30, 2011. These portfolios will be 

reconciled at least monthly.’’) (internal citation 

omitted). 

32Proposed Rule 15Fi–3(a)(2) provides that 

portfolio reconciliation may be performed either on 

a bilateral basis by the counterparties or by a third 

party selected by the counterparties in accordance 

with paragraph (a)(1) of the proposed rule. The 

Commission notes that CFTC Rule 23.502(a)(2), 

which is comparable to proposed Rule 15Fi–3(a)(2), 

uses the term ‘‘qualified third party.’’ When it 

adopted the above provision in 2012, the CFTC 

explained that it ‘‘expects that parties will 

determine if the third-party is qualified based on 

their own policies.’’ See CFTC Risk Mitigation 

Release, 77 FR at 55929. In addition, the CFTC’s 

portfolio reconciliation requirements for 

transactions between Swap Entities and 

counterparties that are not Swap Entities do not 

require the relevant third party to be ‘‘qualified’’ 

and, instead, provide that ‘‘[t]he portfolio 

reconciliation may be performed on a bilateral basis 

by the counterparties or by one or more third 

parties selected by the counterparties.’’ See 17 CFR 

23.502(b)(2) (emphasis added). Accordingly, the 

Commission has decided not to refer to a ‘‘qualified 

third party’’ and, instead, uses the term ‘‘third party 

selected by the counterparties’’ for purposes of 

proposed Rule 15Fi–3(a)(2). We preliminarily 

believe that it is sufficient for our purposes to refer 

solely to the fact that a third party has been 

selected. 

33Once the two parties have agreed in writing on 

the terms of the portfolio reconciliation for the first 

time, the requirement could then be satisfied in 

connection with any new security-based swap 

transaction executed by the two sides merely by 

agreeing in writing to abide by the existing 

agreement regarding the reconciliation process. 

34Under this proposal, the definition of ‘‘business 

day’’ currently in Rule 15Fi–1(a) would be 

renumbered as proposed Rule 15Fi–1(b). 

35See, e.g., 17 CFR 270.2a–7(a)(4) (‘‘Business day 

means any day other than Saturday, Sunday, or any 

customary business holiday.’’) and 17 CFR 

230.261(b) (‘‘Business day [means] [a]ny day, except 

Saturdays, Sundays or United States federal 

holidays.’’). 

36By contrast, the applicable definition of 

‘‘business day’’ for purposes of the CFTC’s portfolio 

reconciliation rules is contained in CFTC Rule 

1.3(b), and includes ‘‘any day other than a Sunday 

or holiday.’’ That definition also provides 

instructions for computing time periods for CFTC 

rules that include notice requirements. 

37As a reminder, the proposal would require SBS 

entities to agree in writing with each of their 

counterparties on the terms of the portfolio 

reconciliation pursuant to proposed Rule 15Fi– 

3(a)(1) (in the case of security-based swap portfolios 

with other SBS Entities) and Rule 15Fi–3(b)(1) (in 

the case of security-based swap portfolios with all 

other counterparties). Accordingly, such agreement 

between an SBS Entity and its counterparty could 

include a determination as to which holidays 

would be considered ‘‘legal holidays’’ for purposes 

of any applicable portfolio reconciliation exercises 

involving those two parties. 

The Commission preliminarily 

believes that the proposed tiering of 

obligations, whereby the frequency of 

the portfolio reconciliation would be 

based on the number of outstanding 

transactions with the applicable 

counterparty, represents a reasonable 

attempt to calibrate the costs to the 

benefits expected from reconciling a 

person’s security-based swap portfolio 

at regular intervals. All other things 

being equal, a larger and more complex 

portfolio represents a greater potential 

for loss than a smaller, less complex 

portfolio. Therefore, the proposed rule 

would require more frequent 

reconciliation of the larger, more 

complex portfolio. We also note that the 

CFTC has adopted rules that utilize 

identical levels as our proposal, and that 

divergence from those thresholds could 

lead to additional costs and other 

inefficiencies for SBS Entities that are 

also registered with the CFTC as Swap 

Entities.31

In addition to the requirements 

regarding the frequency of the 

reconciliation, proposed Rule 15Fi– 

3(a)(1) would require SBS Entities to 

agree in writing with each of their 

counterparties on the terms of the 

portfolio reconciliation including, if 

applicable, agreement on the selection 

of any third party service provider who 

may be performing the reconciliation.32

In practice, the Commission notes that 

an SBS Entity could satisfy such 

requirement by including the terms 

governing the portfolio reconciliation 

process in the written security-based 

swap trading relationship 

documentation that the SBS Entity 

executes with its counterparty which, 

pursuant to proposed Rule 15Fi–5 

would be required to be executed prior 

to, or contemporaneously with, the two 

parties executing any new securitybased swap transaction.33 This practice 

should help to ensure that portfolio 

reconciliation begins without delay after 

execution of the transaction and is 

designed to minimize the number of 

disagreements regarding the portfolio 

reconciliation process itself. 

Finally, the Commission has 

preliminarily determined not to propose 

the CFTC’s definition of ‘‘business day’’ 

and to rely on the definition in existing 

Rule 15Fi–1, which was adopted in 

2016 in connection with the trade 

acknowledgement and verification 

requirements in Rule 15Fi–2. That 

definition includes ‘‘any day other than 

a Saturday, Sunday, or legal holiday.’’ 34

Specifically, we believe that the existing 

definition of ‘‘business day’’ is broadly 

consistent with other uses of the term 

within the Commission’s rules.35 We 

also do not believe it necessary to have 

two different definitions of the same 

term promulgated under the same legal 

authority (i.e., Section 15F(i) of the 

Exchange Act), one for purposes of the 

portfolio reconciliation rules and the 

other for purposes of the trade 

acknowledgement and verification 

rules.36 Moreover, we believe that this 

definition provides market participants 

with the flexibility to determine which 

holidays are ‘‘legal holidays’’ for 

purposes of the portfolio reconciliation 

requirements in proposed Rule 15Fi–3, 

which should be particularly useful 

given the cross-border nature of the OTC 

derivatives market.37 However, below 

we solicit comment on our approach. 

4. Proposed Rule 15Fi–3(a): Resolution 

of Discrepancies With Other SBS 

Entities 

Proposed Rule 15Fi–3(a) also would 

require each SBS Entity to take 

additional actions in the event of a 

discrepancy with a counterparty that is 

an SBS Entity. First, proposed Rule 

15Fi–3(a)(4) would require the two SBS 

Entities to resolve immediately any 

discrepancy in a material term, whether 

identified directly as part of the 

portfolio reconciliation or otherwise. 

We preliminarily believe that this 

timeframe is appropriate given the 

ongoing nature of security-based swap 

transactions, as well as the potential for 

disagreements between the 

counterparties regarding the terms of a 

transaction to compound over the 

course of the security-based swap 

transaction. We have not, however, 

proposed a fixed definition of 

‘‘immediately’’ as we believe that the 

amount of time that will be needed to 

resolve a discrepancy will depend on 

the particular facts and circumstances 

involved, including the complexity of 

the material term in question and the 


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4620 Federal Register / Vol. 84, No. 32 / Friday, February 15, 2019 / Proposed Rules 

38 15 U.S.C. 78o–10(e). 

39For the avoidance of doubt, an SBS Entity that 

identifies a valuation discrepancy in excess of 10% 

would be in compliance with the proposed rule if 

it resolves such discrepancy to a level below 10%, 

even if the entire discrepancy is not completely 

eliminated. Thus, an SBS Entity would not be 

required to reduce an 11% valuation discrepancy 

down to zero, in contrast to an SBS Entity with a 

9% valuation discrepancy, who would have no 

further obligations under proposed Rule 15Fi– 

3(a)(5). 

40See proposed Rule 15Fi–3(b). Additionally, 

proposed Rule 15Fi–3(b) contains a slight deviation 

from corresponding CFTC Rule 23.502(b) to 

eliminate language that we believe to be redundant. 

We do not intend for such clarification to signify 

any substantive differences between proposed rule 

Rule15Fi–3(b) and CFTC Rule 23.502(b). 

41See proposed Rule 15Fi–3(b)(3). 

42See supra note 31 (discussing how the CFTC 

arrived at setting the numerical thresholds for the 

requirement to engage in portfolio reconciliation as 

between two Swap Entities.). 

43See proposed Rules 15Fi–3(b)(1) and (2). 

44See proposed Rule 15Fi–3(b)(2). As noted in 

the discussion of the corresponding provision in 

Rule 15Fi–3(a)(1), an SBS Entity could in practice 

magnitude of the discrepancy. We have, 

however, solicited comment on this 

approach. 

At the same time, we also recognize 

that discrepancies related to the 

valuation of a security-based swap 

could be particularly difficult to resolve 

in a short period of time. Accordingly, 

proposed Rule 15Fi–3(a)(5) would 

require SBS Entities to have policies 

and procedures reasonably designed to 

resolve valuation discrepancies no later 

than five business days from the date 

they were discovered, which we 

preliminarily believe to be both a 

reasonable and appropriate amount of 

time to resolve such discrepancies. As a 

condition to this requirement, however, 

proposed Rule 15Fi–3(a)(5) would 

require each SBS Entity to establish, 

maintain, and follow written policies 

and procedures reasonably designed to 

identify how it will comply with any 

variation margin requirements under 

Section 15F(e) of the Exchange Act 38

and any related regulations pending 

resolution of the valuation discrepancy. 

Although we preliminarily believe that 

counterparties should be given 

sufficient time to resolve valuation 

discrepancies, we also believe it to be 

important for those counterparties to 

take reasonable steps during the 

pendency of the resolution to ensure 

that they are continuing to manage their 

credit risk to each other by way of 

exchanging variation margin. 

Moreover, proposed Rule 15Fi–3(a)(5) 

provides that for purposes of the 

requirement to resolve valuation 

discrepancies within five business days 

of being identified, a difference between 

the lower valuation and the higher 

valuation of less than 10% of the higher 

valuation need not be deemed a 

discrepancy. This 10% threshold would 

apply on a transaction-by-transaction 

basis and not on a portfolio level. As 

discussed in the immediately preceding 

paragraph, the Commission recognizes 

that valuation discrepancies could be 

challenging and costly to resolve. 

Accordingly, we preliminarily believe 

that providing SBS Entities with a clear 

understanding of exactly which 

valuation discrepancies would need to 

be resolved within five business days 

will help focus the internal resources of 

both counterparties on the largest 

discrepancies. At the same time, 

however, the Commission believes that, 

in most cases, prudent risk mitigation of 

a firm’s security-based swap portfolio 

and proper governance over an entity’s 

operations would involve ensuring that, 

at least to a certain degree, most 

valuation discrepancies are ultimately 

resolved.39

5. Proposed Rule 15Fi–3(b): Portfolio 

Reconciliation With Other 

Counterparties 

Proposed Rule 15Fi–3(b) would 

establish reconciliation requirements for 

security-based swap portfolios between 

an SBS Entity and a counterparty that is 

not an SBS Entity. Although there is 

some broad similarity between proposed 

Rule 15Fi–3(b) and the rules applicable 

to security-based swap portfolios 

between two SBS Entities, we have 

preliminarily determined to take a more 

streamlined approach with respect to 

security-based swaps between an SBS 

Entity and its non-SBS Entity 

counterparties, similar to the CFTC’s 

approach. This approach reflects our 

preliminary view that a dealer-to-dealer 

portfolio may be associated with a 

degree of market interconnectedness 

and volume that could potentially carry 

considerable market-wide risks, at least 

as compared to a security-based swap 

portfolio that involves only one SBS 

Entity. Moreover, the Commission 

preliminarily believes it to be 

appropriate to impose more prescriptive 

requirements in cases where both 

entities are subject to the SEC’s 

requirements for registered entities. 

Accordingly, there are differences in 

both the application of the portfolio 

reconciliation requirements with nonSBS Entity counterparties as well as in 

the thresholds governing the frequency 

of the required reconciliation exercises. 

Specifically, the proposal would 

require each SBS Entity to establish, 

maintain, and follow written policies 

and procedures reasonably designed to 

ensure that it engages in portfolio 

reconciliation with non-SBS Entity 

counterparties as set forth in the rule.40

This is in contrast to proposed Rule 

15Fi–3(a), which expressly requires 

portfolio reconciliation with respect to 

transactions where both counterparties 

are SBS Entities. In addition, the 

policies and procedures would require 

that the portfolio reconciliation be 

performed no less frequently than: (1) 

Once each calendar quarter for each 

security-based swap portfolio that 

includes more than 100 security-based 

swaps at any time during the calendar 

quarter and (2) once annually for each 

security-based swap portfolio that 

includes no more than 100 securitybased swaps at any time during the 

calendar year.41

As we previously explained, the 

Commission preliminarily believes that 

basing the required frequency of the 

portfolio reconciliation on the number 

of outstanding transactions with the 

applicable counterparty represents a 

reasonable attempt to calibrate the costs 

to the benefits expected from 

reconciling a person’s security-based 

swap portfolio at regular intervals. As 

we also noted above, all other things 

being equal a larger and more complex 

portfolio represents a greater potential 

for loss than a smaller, less complex 

portfolio. As before, in selecting the 

specific levels we recognize that the 

CFTC has adopted rules with identical 

thresholds and frequencies and that 

divergence from those thresholds could 

lead to additional costs and other 

inefficiencies for SBS Entities that are 

also registered with the CFTC as Swap 

Entities.42

In addition, paragraph (b)(1) of 

proposed Rule 15Fi–3 would require 

that the applicable policies and 

procedures be reasonably designed to 

ensure that each SBS Entity agrees in 

writing with each of its non-SBS Entity 

counterparties on the terms of the 

portfolio reconciliation including, if 

applicable, agreement on the selection 

of any third party service provider who 

may be performing the reconciliation, 

and paragraph (b)(2) provides that under 

such required policies and procedures, 

the portfolio reconciliation may be 

performed on a bilateral basis by the 

counterparties or by one or more third 

parties selected by the counterparties.43

To the extent that the counterparties 

elect to use a third party to provide 

these services, the policies and 

procedures should be reasonably 

designed to ensure that the SBS Entity 

and its counterparty agree on the 

selection of that third party in writing 

in accordance with the requirements set 

forth in proposed Rule 15Fi–3(b)(1).44


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satisfy such requirement by including the terms 

governing the portfolio reconciliation process in the 

written security-based swap trading relationship 

documentation that it executes with its 

counterparty which, pursuant to proposed Rule 

15Fi–5 would be required to be executed prior to, 

or contemporaneously with, the two parties 

executing any new security-based swap transaction. 

In addition, once the two parties have agreed in 

writing on the terms of the portfolio reconciliation 

for the first time, the requirement could then be 

satisfied in connection with any new security-based 

swap transaction executed by the two sides merely 

by agreeing in writing to abide by the existing 

agreement regarding the reconciliation process. See 

supra notes 32 and 33 and accompanying text. 

45Similar to the requirement in paragraph (a) of 

the proposed rule for portfolio reconciliation with 

counterparties that are also SBS Entities, proposed 

Rule 15Fi–3(b)(4) provides that a difference 

between the lower valuation and the higher 

valuation of less than 10% of the higher valuation 

need not be deemed a discrepancy for purposes of 

that paragraph. See supra note 39 and 

accompanying text (discussing the 10% threshold 

in the context of Rule 15Fi–3(a)(5)). 

46The language ‘‘at either the transaction or 

portfolio level’’ is not included in CFTC Rule 

23.502(c), which is the corresponding requirement 

applicable to Swap Entities. The specific 

requirements as to the operation of CFTC Rule 

23.502(c) are contained in the rules of the National 

Futures Association (‘‘NFA’’), which the CFTC has 

authorized to, among other things, receive and 

review notices of reportable swap valuation 

disputes. See Performance of Certain Functions by 

the National Futures Association Related to Notices 

of Swap Valuation Disputes Filed by Swap Dealers 

and Major Swap Participants, 81 FR 3390 (Jan. 21, 

2016). A detailed discussion of the NFA 

requirements, including with respect to whether 

notices of swap valuation disputes should be filed 

at either the transaction or portfolio level, is set 

forth at the end of this Section I.B.6. 

47With respect to the language addressing the 

form and manner of submitting such notices, our 

intention is to provide SBS Entities with flexibility 

to determine the most efficient and cost-effective 

means of making such submissions, so long as it is 

deemed to be acceptable by the Commission. At the 

same time, we also understand that SBS Entities 

may prefer to have more specific direction as to 

how to report these disputes to the Commission 

(and any applicable prudential regulator). 

Accordingly, below we solicit comment on the form 

of notice that would be required to be submitted 

pursuant to the proposal. 

48Additionally, the Commission is proposing to 

amend Rule 15Fi–1 to add the term ‘‘prudential 

regulator,’’ which would be defined to have the 

same meaning given to the term in Section 3(a)(74) 

of the Exchange Act, 15 U.S.C. 78c(a)(74), and 

would include the Federal Reserve Board, the 

Office of the Comptroller of the Currency, the FDIC, 

the Farm Credit Association, and the Federal 

Housing Finance Agency, as applicable to the 

specific type of SBS Entity. See proposed Rule 

15Fi–1(m). 

49See CFTC Risk Mitigation Adopting Release 77 

FR at 55914. 

50 Id. The CFTC has a nearly identical 

requirement in its Rule 23.502(c), except that it also 

requires Swap Entities to send such notices to the 

Commission when the dispute involves a swap that 

is also a security-based swap agreement, of which 

a material term is based on the price, yield, value, 

or volatility of any security or any group or index 

of securities, or any interest therein. See 17 CFR 

23.502(c) (citing the inclusion of security-based 

swap agreements in the definition of ‘‘swap’’ in 7 

U.S.C. 1a(47)(v)). Because there is no corresponding 

inclusion of swap agreements in the definition of 

‘‘security-based swap agreement’’ in Section 

3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)), 

proposed Rule 15Fi–3(c) does not contain a 

requirement to provide notices of any securitybased swap valuation disputes to the CFTC. 

51We have preliminarily determined not to 

provide a fixed definition of the term ‘‘promptly’’ 

in the context of when the SBS Entity would need 

to provide the Commission of an applicable 

security-based swap valuation dispute. Although 

we would expect that SBS Entities would be able 

to provide these notices to the Commission as soon 

as the disputes exceed the applicable timeframes 

(e.g., the beginning of fourth business day in the 

case of a dispute between two SBS Entities), we also 

understand that some notices may take longer to 

prepare, such as in cases when the counterparties 

are unable to agree even on the size of the dispute. 

52See NFA Interpretive Notice to Rule 2–49, 

available at: https://www.nfa.futures.org/rulebook/ 

rules.aspx?Section=9&RuleID=9072. 

Finally, proposed Rule 15Fi–3(b)(4) 

would require each SBS Entity to 

establish, maintain, and follow written 

procedures reasonably designed to 

resolve any discrepancies in the 

valuation or a material term of each 

security-based swap identified as part of 

a portfolio reconciliation or otherwise 

with a non-SBS Entity counterparty in 

a timely fashion.45 We are reluctant to 

provide a fixed definition of ‘‘timely 

fashion’’ in the context of resolving 

discrepancies with counterparties who 

are not SBS Entities due to the fact that 

such counterparties may vary 

considerably in terms of their size, 

sophistication, and background. 

Although it may be possible to resolve 

most valuation discrepancies with large 

hedge funds and pension funds within 

the five-business-day period applicable 

to transactions between two SBS 

Entities, that timeframe may be much 

more challenging with respect to 

transactions with smaller buy-side 

firms. Accordingly, below we request 

comment on the amount of time SBS 

Entities should be provided to resolve 

discrepancies in the valuation or a 

material term with respect to 

transactions with a non-SBS Entity 

counterparty. Commenters are 

particularly encouraged to explain how 

any recommended time period 

appropriately balances the importance 

of quickly resolving valuation 

discrepancies to the greatest extent 

possible, with an understanding that 

more complex discrepancies could 

involve the need for additional 

discussion and time for resolution. 

6. Reporting of Valuation Disputes 

Valuation is one of the most 

fundamental elements for determining 

the economic rights and obligations of 

each of the counterparties to a securitybased swap transaction. For example, 

market participants manage their credit 

risks to their counterparties by 

exchanging margin with each other in 

an amount determined using the value 

of the underlying security-based swap. 

If those valuations are not accurate for 

any reason, such as human or system 

errors, problems with the valuation 

methodology, or an issue affecting the 

timeliness of the calculation, that error 

could result in one of the counterparties 

having an uncollaterialized credit 

exposure and a potential for loss in the 

event of a default. 

Given those risks, proposed Rule 

15Fi–3(c) would require each SBS 

Entity to promptly notify the 

Commission of any security-based swap 

valuation dispute in excess of 

$20,000,000 (or its equivalent in any 

other currency), at either the transaction 

or portfolio level,46 if not resolved 

within: (1) Three business days, if the 

dispute is with a counterparty that is an 

SBS Entity; or (2) five business days, if 

the dispute is with a counterparty that 

is not an SBS Entity. Such notification 

would be required to be in a form and 

manner acceptable to the Commission,47

and would also be required to be sent 

to any applicable prudential regulator 

(i.e., in the case of any SBS Entity that 

is also a bank).48

We note that the CFTC has adopted a 

nearly identical requirement with the 

same $20,000,000 threshold and 

timeframes, and that divergence from 

those requirements could lead to 

additional costs and other inefficiencies 

for SBS Entities that are also registered 

with the CFTC as Swap Entities.49 In 

addition, when the CFTC adopted this 

requirement, it explained that ‘‘the 

$20,000,000 materiality threshold for 

reporting is sufficiently high to 

eliminate unnecessary ‘noise’ from overreporting, but not so high as to eliminate 

reporting that the [CFTC] may find of 

regulatory value, such as a large number 

of relatively small disputes that in 

aggregate could provide the [CFTC] with 

information regarding a widespread 

market disruption.’’ 50 We preliminarily 

concur with that justification, and also 

note that such notifications could assist 

the Commission in identifying potential 

issues with respect to an SBS Entity’s 

internal valuation methodology. That 

said, we also invite public comment as 

to whether the dollar threshold or 

reporting periods should be modified in 

any way.51

Finally, the Commission notes that on 

January 2, 2018, the NFA’s Interpretive 

Notice entitled, ‘‘NFA Compliance Rule 

2–49: Swap Valuation Dispute Filing 

Requirements’’ went into effect.52

Among other things, that interpretive 

notice describes the types of disputes 

that would trigger a notice requirement. 

Specifically, if the swap dealer and its 

counterparty exchange collateral, NFA 


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53NFA Interpretive Notice to Rule 2–49 defines 

‘‘collateralized eligible master netting agreement’’ to 

include an eligible master agreement, including any 

applicable schedule and credit support annex. 

54See id. See also Transcript of the NFA Swap 

Valuation Dispute Notices and Swap Dealer Risk 

Data Reports Webinar (Oct. 12, 2017), available at: 

https://www.nfa.futures.org/members/memberresources/files/transcripts/svdwebinar-transcript

oct2017.pdf. 

55See NFA Interpretive Notice to Rule 2–49, 

supra note 52. NFA Interpretive Notice to Rule 2– 

49 provided an example of a swap dealer that filed 

a notice of a $30 million dispute, noting that an 

amended notice updating the dispute amount 

would be required if that dispute increases to $40 

million or more and each subsequent $20 million 

increment (i.e., the dispute amount increases to $60 

million or more, $80 million or more, etc.), or if the 

amount decreases at these $20 million increments. 

56See id. Under NFA Interpretive Notice to Rule 

2–49, the termination notice would be due on the 

15th (or the following business day if the 15th is 

a weekend or holiday) and the last business day of 

the month based on the dispute amount on the 

reporting date. 

57See NFA Notice to Members I–17–30, available 

at https://www.nfa.futures.org/news/ 

newsNotice.asp?ArticleID=4827. That notice 

provided that all swap valuation disputes must 

include: (1) The swap dealer’s NFA ID and legal 

entity identifier (‘‘LEI’’), (2) the dispute reportable 

date, (3) the dispute type, (4) the dispute 

termination date, (5) the receiver/payer, (6) the 

disputed amount, in U.S. Dollars (‘‘USD’’), (7) the 

counterparty name, and (8) counterparty LEI or 

Privacy Law Identifier. For initial and variation 

margin disputes, the swap dealer would also be 

required to provide (1) the unique swap identifier, 

(2) the base currency notional amount, (3) the base 

currency code, (4) the notional value USD 

equivalent, (5) the asset type, and (6) the product 

type. For disputes where no collateral is exchange, 

the notice also would need to include the credit 

support annex/netting agreement ID. 

58See proposed Rule 15Fi–3(d). Under existing 

Rule 15Fi–1(b) under the Exchange Act (which 

would be renumbered as Rule 15Fi–1(c) under the 

proposed rules), the term ‘‘clearing agency’’ means 

a clearing agency registered with the Commission 

pursuant to Section 17A of the Exchange Act and 

provides central counterparty services for securitybased swap transactions. See also Trade 

Acknowledgement and Verification Adopting 

release, 81 FR at 39820–21 (explaining the agency 

and principal models of clearing in the context of 

providing a comparable exception from the trade 

acknowledgement and verification requirements). 

Interpretive Notice to Rule 2–49 

provides that the swap dealer would be 

required to file notice of any dispute 

regarding (1) the amount of initial 

margin to be posted or collected 

pursuant to a collateralized eligible 

master netting agreement 53 if the 

dispute exceeds the $20 million 

reporting threshold and (2) the amount 

of variation margin to be posted or 

collected pursuant to such master 

netting agreement if the dispute exceeds 

the $20 million reporting threshold. 

Because master netting agreements by 

definition operate at the portfolio level, 

such notices also would apply to the 

relevant swap portfolio. 

To the extent that a swap dealer and 

its counterparty do not exchange 

collateral, NFA Interpretive Notice to 

Rule 2–49 requires the swap dealer to 

submit a notice to the NFA upon being 

notified by its counterparty that such 

counterparty is disputing any valuation 

provided by the swap dealer if the 

dispute exceeds the $20 million 

reporting threshold. Such notices would 

either be at the portfolio or transaction 

level, depending on the particular 

valuation in question. That is, if the 

counterparty disputes a valuation 

provided by the swap dealer related to 

a particular transaction, the notice 

provided by the swap dealer to the NFA 

also would need to be at the transaction 

level. By contrast, if the counterparty 

disputes a portfolio valuation provided 

by the swap dealer, the notice provided 

by the swap dealer to the NFA also 

would need to be at the portfolio level.54

NFA Interpretive Notice to Rule 2–49 

also provides that swap dealers should 

not file a daily notice of a previously 

reported dispute even if the valuation 

dispute amount changes. Instead, swap 

dealers are required to notify the NFA 

of certain changes to the dispute amount 

on the 15th (or the following business 

day if the 15th is a weekend or holiday) 

and last business day of each month by 

amending any previously filed notice 

where the dispute amount has increased 

in $20 million incremental bands.55

NFA Notice to Interpretive Rule 2–49 

also requires swap dealers to file 

termination notices of disputes that are 

no longer reportable under CFTC Rule 

23.502(c).56 In addition, on July 20, 

2017, NFA issued a Notice to Members 

(I–17–13) outlining the types of disputes 

that must be reported under the 

Interpretive Notice to Rule 2–49 and 

specifying the information that will be 

required in NFA’s dispute form.57

Below we solicit comment on whether 

the Commission should incorporate 

some or all of the NFA’s approach, 

including with respect to any of the 

specific requirements described above, 

directly into proposed Rule 15Fi–3(c). 

7. Application of Proposed Rule 15Fi– 

3 to Cleared Security-Based Swaps 

Pursuant to proposed Rule 15Fi–3(d), 

the new requirements regarding 

portfolio reconciliation would not apply 

to a ‘‘clearing transaction’’ which, 

pursuant to existing Rule 15Fi–1(c) 

under the Exchange Act, is defined as a 

security-based swap that has a clearing 

agency as a direct counterparty.58

Notwithstanding this provision, the 

Commission understands that some 

parties may offer portfolio reconciliation 

services with respect to OTC derivative 

transactions novated to a clearing 

agency. Although the Commission 

recognizes the importance of reconciling 

the terms of security-based swap 

transactions between a clearing member 

(either acting on its own behalf or for 

the benefit of a customer) and the 

clearing agency, we preliminarily 

believe that the issue of reconciling the 

terms of cleared trades is more 

appropriately addressed by the rules 

governing a clearing agency’s risk 

management practices, as well as by the 

documentation governing the 

relationship between a clearing agency 

and its members. 

8. Comments Requested 

The Commission generally requests 

comments on all aspects of proposed 

Rule 15Fi–3, as well as any definitions 

in Rule 15Fi–1 that are used in 

proposed Rule 15Fi–3. In addition, the 

Commission requests comments on the 

following specific issues: 

• Do commenters agree with the three 

activities comprising the scope of the 

Commission’s proposed definition of 

‘‘portfolio reconciliation’’? Why or why 

not? 

• Do you agree that the scope of the 

proposed definition of ‘‘material terms’’ 

for purposes of the portfolio 

reconciliation requirements in proposed 

Rule 15Fi–3 should be coterminous 

with the terms of a security-based swap 

that must be reported to an SDR under 

Regulation SBSR? Why or why not? Do 

you believe that there are any terms that 

must be reported to an SDR that should 

not be subject to the proposed portfolio 

reconciliation requirements? If so, 

which term(s) and why? 

• As opposed to using a fixed 

definition of ‘‘material terms,’’ should 

the Commission adopt a more flexible 

definition? For example, are there other 

uses of materiality, such as with regard 

to the disclosure of information in 

registration statements (including 

accounting statements) or proxy 

solicitations that would be useful to 

include? Why or why not? 

• Do you agree with the 

Commission’s preliminary approach of 

allowing SBS Entities to exclude certain 

information from the definition of 

‘‘material terms’’ after a transaction is 

reconciled the first time so long as the 

excluded terms are not relevant to the 

ongoing rights and obligations of the 

parties and the valuation of the securitybased swap? Alternatively, should the 

definition be revised to conform to the 

corresponding CFTC definition, which 

excludes certain terms for purposes of 

all portfolio reconciliations? Why or 

why not? With respect to either 

approach, which terms should be 

excluded and why? For example, should 

the final definition include as rule text 

some or all of the specific data elements 


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excluded from the CFTC’s definition? 

Which ones and why? By contrast, are 

there any terms that would be excluded 

for purposes of subsequent 

reconciliations under the proposed 

approach that should also be excluded 

from the initial reconciliation? Which 

ones and why? 

• Do commenters agree with the 

decision to use the existing definition of 

‘‘business day’’ (as currently in effect for 

the security-based swap trade 

acknowledgement and verification 

requirements) for purposes of the 

portfolio reconciliation requirements in 

proposed Rule 15Fi–3? If not, why not 

and how should that definition be 

modified for purposes of the proposed 

portfolio reconciliation requirements? 

For example, should the definition 

specify which jurisdiction’s legal 

holidays are the default for specifying 

which holidays are not included in the 

definition of ‘‘business days’’? Would 

the differences between the proposed 

definition of ‘‘business day’’ and the 

corresponding CFTC definition (which 

includes ‘‘any day other than a Sunday 

or holiday’’) create any practical 

difficulties for dual SEC–CFTC 

registrants? If so, what are they? Should 

the Commission instead adopt a 

definition of ‘‘business day’’ that 

mirrors the CFTC definition? Why or 

why not? 

• Do commenters agree with the 

proposed approach of basing the 

required frequency of portfolio 

reconciliation in proposed Rule 15Fi–3 

on the type of counterparty involved 

(i.e., its status as an SBS Entity) and on 

the size of the security-based swap 

portfolio? If not, why not? If 

commenters believe that the proposed 

approach should be retained, should 

any of the particular frequencies 

proposed (e.g., daily, weekly, quarterly, 

or annually) be modified to be either 

more or less frequent? 

• Proposed Rule 15Fi–3 permits the 

portfolio reconciliation exercises 

required thereunder to be performed by 

a third party, with the only qualification 

being that the selection of that third 

party has been agreed to by both of the 

parties in writing. As an alternative 

approach, should the Commission 

instead establish specific requirements 

for qualifying third parties that offer 

portfolio reconciliation services used for 

compliance with the rule? If so, how 

should a third party be deemed to be 

qualified to provide portfolio 

reconciliation services and who should 

make such a determination? 

• Should the Commission’s rules 

require two SBS Entities to resolve a 

discrepancy in a material term 

‘‘immediately’’? Why or why not? 

Should the Commission define or 

provide an interpretation of the term 

‘‘immediately,’’ such as ‘‘without undue 

delay,’’ or, as an alternative, specify a 

fixed period of time in the rule text 

within which SBS Entities would be 

required to comply with proposed Rule 

15Fi–3(a)(4)? Why or why not and, if so, 

how much time should be provided? 

• Are there any current industry 

practices that relate to how 

counterparties to swaps and securitybased swaps resolve discrepancies in a 

material term in the case of a dealer-todealer transaction? If any such practices 

exist, please describe them, including 

with regard to the length of time that it 

typically takes to resolve these types of 

discrepancies. Are there particular 

material terms for which a discrepancy 

typically takes a longer (or shorter) 

amount of time to resolve? If so, which 

ones? 

• Should the Commission require 

SBS Entities to have policies and 

procedures reasonably designed to 

resolve any discrepancy in a valuation 

(with another SBS Entity) identified as 

part of a portfolio reconciliation or 

otherwise as soon as possible, but in any 

event within five business days after the 

date on which the discrepancy is first 

identified? Why or why not? Should 

SBS Entities be provided with more 

days to resolve these discrepancies? 

Should they have fewer days? 

• Are there any current industry 

practices that relate to how 

counterparties to swaps and securitybased swaps resolve valuation 

discrepancies in the case of a dealer-todealer transaction? If any such practices 

exist, please describe them, including 

with regard to the length of time that it 

typically takes to resolve these types of 

discrepancies. Are there particular 

circumstances that typically make 

valuation disputes more (or less) 

difficult and time-consuming to resolve? 

If so, which ones? 

• Should the Commission require 

SBS Entities to have policies and 

procedures reasonably designed to 

resolve any discrepancy in a valuation 

or material term with a counterparty 

that is not an SBS Entity (identified 

either as part of a portfolio 

reconciliation or otherwise) in a timely 

fashion? Why or why not? Should the 

Commission define or provide an 

interpretation of the term ‘‘timely 

fashion,’’ or, as an alternative, specify a 

fixed period of time in the rule text 

within which SBS Entities would be 

required to comply with proposed Rule 

15Fi–3(b)(4)? Why or why not and, if so, 

how much time should be provided? In 

suggesting potential timeframes, we 

note that the period for resolving 

discrepancies in a valuation or material 

term with non-SBS Entities should 

likely not be shorter than the five 

business days provided in the parallel 

requirement applicable to valuation 

discrepancies between two SBS Entities. 

Should the Commission look at any 

other similar provisions under the 

federal securities laws addressing 

dispute resolution procedures as a guide 

for determining the amount of time that 

an SBS Entity should be provided to 

resolve discrepancies pursuant to 

proposed Rule 15Fi–3(b)(4)? If so, which 

ones? 

• Are there any current industry 

practices that relate to how 

counterparties to swaps and securitybased swaps resolve discrepancies in a 

valuation or material term in the case of 

a transaction between a dealer and a 

non-dealer? If any such practices exist, 

please describe them, including with 

regard to the length of time that it 

typically takes to resolve these types of 

discrepancies. Are there particular 

terms for which a discrepancy typically 

takes a longer (or shorter) amount of 

time to resolve? If so, which ones? In 

this context, should valuation 

discrepancies be treated differently than 

discrepancies in some (or all) material 

terms? If so, which ones and why? 

• Do you agree with the 

Commission’s proposed approach of 

deeming valuation differences of less 

than 10% not to be discrepancies for 

purposes of requiring resolution under 

either proposed Rule 15Fi–3(a)(5) or 

(b)(4)? If not, why not and how should 

the rules address the resolution of 

valuation differences? Should the 

threshold be based on the actual dollar 

amount of the valuation difference (or 

the related currency equivalent) instead 

of being expressed as a percentage of the 

difference of the two amounts? 

• How has the 10% threshold 

functioned in the context of CFTC rules 

applicable to Swap Entities? Has that 

threshold been under-inclusive, in the 

sense that it may not identity a 

sufficient number of swap valuation 

discrepancies that could affect 

performance under the swap 

transaction? Why or why not? By 

contrast, has the CFTC’s 10% threshold 

been over-inclusive, in the sense that it 

has captured swap valuation 

discrepancies that typically would not 

affect performance under the swap 

transaction? Why or why not? 

• Proposed Rule 15Fi–3(c) would 

require SBS Entities to promptly notify 

the Commission, in a form and manner 

acceptable to the Commission, and any 

applicable prudential regulator of any 

security-based swap valuation dispute 

in excess of $20,000,000 (or its 


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4624 Federal Register / Vol. 84, No. 32 / Friday, February 15, 2019 / Proposed Rules 

59See supra notes 52–57 and accompanying text. 

60See, e.g., ISDA Study, Interest Rate Swaps 

Compression: A Progress Report, (Feb. 2012), 

available at: http://www2.isda.org/attachment/ 

NDAzMw==/IRS%20compression

%20progress%20report%20-%20Feb%202012.pdf. 

61 In 2011, the Commission issued an order 

granting temporary exemptions from the 

requirement to register as a clearing agency under 

Section 17A of the Exchange Act for entities 

providing certain clearing services for securitybased swaps including, among other things, tear-up 

and compression services. That order contains 

general descriptions of the portfolio compression 

process, based on discussions between Commission 

staff and market participants prior to the issuance 

of the exemptive order. See Order Pursuant to 

Section 36 of the Securities Exchange Act of 1934 

Granting Temporary Exemptions from Clearing 

Agency Registration Requirements under Section 

17A(b) of the Exchange Act for Entities Providing 

Certain Clearing Services for Security-Based Swaps, 

Exchange Act Release No. 64796 (Jul. 1, 2011), 76 

FR 39963 (Jul. 7, 2011) (‘‘Clearing Services 

Exemptive Order’’). 

equivalent in any other currency) if not 

resolved within either three business 

days, if the dispute is with a 

counterparty that is an SBS Entity, or 

five business days, if the dispute is with 

a counterparty that is not an SBS Entity. 

Do commenters agree with this 

requirement? Why or why not? As an 

alternative, should the Commission 

instead require SBS Entities to make 

and keep records of these unresolved 

disputes? Why or why not? Is 

$20,000,000 the appropriate threshold 

for notifying the Commission of 

unresolved disputes? If not, should the 

threshold be higher or lower? Should 

the threshold instead be expressed as a 

percentage? Do commenters agree with 

the proposed timeframes for submitting 

such a report? If not, should they be 

increased or decreased? 

• Should the Commission establish a 

specific process for how SBS Entities 

would need to provide notices of 

valuation disputes to the Commission 

pursuant to proposed Rule 15Fi–3(c)? If 

so, how should such notices be 

provided? For example, should the 

Commission require that such notices be 

submitted in electronic format through 

the EDGAR system (or any successor 

system thereto, as designated by the 

Commission)? Why or why not? 

Alternatively, should the Commission 

create a dedicated email box to accept 

such notices in letter format? Why or 

why not? Should these notices be 

submitted on a confidential basis? If so, 

how would that affect the potential 

delivery options? 

• As discussed above, the NFA has 

issued an interpretive notice to NFA 

Compliance Rule 2–49 and a separate 

notice to its members that, together, 

specify the timing, frequency, and 

contents for submitting notices of swap 

valuation disputes pursuant to CFTC 

Rule 23.502(c).59 Should the 

Commission consider incorporating 

some or all of those requirements into 

proposed Rule 15Fi–3(c) at adoption? If 

so, which ones and why, and should 

any of the requirements promulgated by 

the NFA be modified as part of the 

process of incorporating them into the 

Commission’s rules to account for 

differences between the swap and 

security-based swap markets? 

• Do commenters agree with the 

proposed exception from the 

reconciliation requirement for clearing 

transactions? Why or why not? Because 

the definition of ‘‘clearing transactions’’ 

only includes transactions cleared at a 

clearing agency registered with the 

Commission pursuant to Section 17A of 

the Exchange Act, security-based swaps 

cleared at a foreign clearing agency that 

is not registered with the Commission 

would not be deemed to be ‘‘cleared’’ 

for these purposes, and would therefore 

be subject to proposed Rule 15Fi–3. 

Should the Commission modify the 

scope of the exception for cleared 

security-based swaps, such as by 

including transactions that are cleared 

at a clearing agency that is not registered 

with the Commission pursuant to 

Section 17A of the Exchange Act, 

whether because of an applicable 

exemption from registration or because 

the Exchange Act does not cover the 

activities of the clearing agency? Why or 

why not? 

• With respect to any Swap Entity 

that could potentially register with the 

Commission as an SBS Entity, would 

the portfolio reconciliation protocols (or 

any other applicable documentation) 

already in existence with respect to 

CFTC Rule 23.502 satisfy the 

requirements in proposed Rule 15Fi–3? 

Why or why not? Should proposed Rule 

15Fi–3 be modified to account for the 

way that market participants have 

designed their existing protocols (or any 

other applicable documentation) to be 

compliant with the CFTC’s rules? Why 

or why not? For the purposes of 

compliance with the proposed portfolio 

reconciliation rules, should the 

Commission allow compliance with the 

CFTC’s parallel requirements for some 

period of time to allow dual SEC–CFTC 

registrants to conform their existing 

portfolio reconciliation protocols (or 

any other applicable documentation) 

following the adoption of proposed Rule 

15Fi–3? If so, on what factors should 

that reliance be conditioned and how 

long of a compliance period should be 

provided? In the alternative, should the 

Commission delay compliance with, or 

establish phased compliance deadlines 

for, some or all of these requirements? 

Please explain the nature of any 

compliance challenges (including any 

additional documentation 

requirements), and the basis for any 

suggested compliance period. 

• As previously noted, proposed Rule 

15Fi–3 has been designed to be as 

consistent as possible with CFTC Rule 

23.502, which imposes portfolio 

reconciliation requirements on Swap 

Entities, in order to avoid requiring dual 

SEC–CFTC registrants to incur 

additional systems or compliance costs 

due to differences between the two 

agencies’ approaches. To the extent that 

any such differences remain, should the 

Commission consider, for any firm 

dually-registered as both an SBS Entity 

and Swap Entity (regardless of whether 

such firm is also registered with the 

Commission as a broker-dealer or with 

the CFTC as a futures commission 

merchant), permitting such firm to 

comply with proposed Rule 15Fi–3 on 

an ongoing basis by complying with 

CFTC Rule 23.502, as if such rule 

applied to security-based swaps? If so, 

what conditions, if any, should be 

placed on such reliance? 

• Should SBS dealers and major SBS 

participants be treated the same for 

purposes of the portfolio reconciliation 

requirements in proposed Rule 15Fi–3? 

Why or why not? 

C. Rule 15Fi–4 (Portfolio Compression) 

1. Overview of Portfolio Compression 

Portfolio compression generally refers 

to a post-trade processing exercise that 

allows two or more market participants 

to eliminate redundant derivatives 

transactions within their portfolios in a 

manner that does not change their net 

exposure. Compression exercises 

typically take place in ‘‘cycles,’’ 

whereby each participating counterparty 

designates particular contracts within 

its portfolio as being eligible for 

compression and specifies its risk 

tolerances with respect to the 

composition of its derivatives portfolio 

following completion of the cycle.60

Following an analysis of the submitted 

contracts, counterparties may be 

provided with the option of terminating 

or modifying those contracts and 

replacing them with a smaller number 

of substantially similar contracts. In 

most cases, the gross notional value of 

the replacement and remaining 

contracts is reduced, although the 

counterparty’s net exposure typically 

remains the same.61

By reducing the total number of open 

contracts, portfolio compression is 

intended to help market participants 

manage their post-trade risks in a 

number of important ways. For 

example, two or more counterparties 


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62See Darrell Duffie, Ada Li, and Theo Lubke, 

Policy Perspectives of OTC Derivatives Market 

Infrastructure, FRBNY Staff Report No. 424, dated 

Jan. 2010, as revised Mar. 2010, available at: http:// 

www.newyorkfed.org/research/staff_reports/ 

sr424.pdf (‘‘FRBNY OTC Derivatives Report’’) (‘‘In 

some types of derivatives that are not cleared, major 

market participants tend to build offsetting 

positions with different counterparties, long with 

one set of counterparties, and short with the others. 

In many cases, these offsetting positions are 

redundant. They serve no useful business purpose 

and create counterparty risk. Market participants 

should continue to engage in regular market-wide 

portfolio compression exercises in order to 

eliminate these redundant positions.’’). See also, 

John Kiff, et al., Credit Derivatives: Systemic Risks 

and Policy Options, IMF Working Paper No. 254 

(Nov. 2009), available at: http://www.imf.org/ 

external/pubs/ft/wp/2009/wp09254.pdf 

(‘‘Multilateral netting, typically operationalized via 

‘tear-up’ or ‘compression’ operations that eliminate 

redundant contracts, reduces both individual and 

system counterparty credit risk.’’). 

63See Portfolio compression platform launched to 

reduce CDS operational risk, Hedgeweek (Sept. 8, 

2008) (explaining that a portfolio compression 

platform ‘‘reduces operational risk while leaving 

market risk profiles unchanged,’’ which is achieved 

‘‘by terminating existing trades and replacing them 

with a smaller number of new replacement trades 

that carry the same risk profile and cash flows as 

the initial portfolio but have less capital exposure’’). 

64See 15 U.S.C. 78o–8 (requiring SBS Entities to 

‘‘conform with such standards as may be prescribed 

by the Commission, by rule or regulation, that relate 

to timely and accurate confirmation, processing, 

netting, documentation, and valuation of all 

security-based swaps’’). 

65The corresponding CFTC rule is 17 CFR 23.503. 

The structure of the CFTC rule, including the 

subsections, mirrors the structure of proposed Rule 

15Fi–4. 

66See proposed Rule 15Fi–1(a). The 

corresponding CFTC definition is in 17 CFR 

23.500(b). 

67See proposed Rule 15Fi–1(j). The 

corresponding CFTC definition is in 17 CFR 

23.500(h). 

68As noted below in Section I.C.4, proposed Rule 

15Fi–4 is applicable only to uncleared securitybased swaps. 

69See proposed Rules 15Fi–4(a)(2) and (3). 

70CFTC Rule 23.503(b), which is the 

corresponding CFTC compression rule applicable to 

transactions with counterparties that are not SBS 

Entities does not contain the caveat that the 

compression or offset covered by the applicable 

policies and procedures would only need to occur 

‘‘when appropriate.’’ Rather, we preliminarily 

believe it to be prudent to allow an SBS Entity to 

engage in bilateral offset or compression exercises 

(to the extent requested by its non-SBS Entity 

counterparty) only in circumstances when doing so 

was appropriate for the SBS Entity in light of the 

particular facts and circumstances involved, 

recognizing of course that such discretion should 

not be used by the SBS Entity arbitrarily not to 

honor the request by its counterparty. Below we 

solicit comment on this difference. 

71See proposed Rule 15Fi–4(b). As we noted in 

discussing the proposed portfolio reconciliation 

requirements, the Commission preliminarily 

believes it to be appropriate to impose more 

prescriptive requirements in cases where both 

entities are subject to the SEC’s requirements for 

registered entities. 

72The one exception to this statement is the 

requirement in both proposed Rules 15Fi–4(a)(2) 

and (a)(3) that such policies and procedures address 

the evaluation of portfolio compression exercises 

that are initiated, offered, or sponsored by any third 

party. The Commission preliminarily believes that 

the decision of which party to use (or not use) to 

conduct a compression exercise is of critical 

importance to the overall determination of whether 

to participate in compression. Although the 

Commission takes no position with respect to the 

type or identity of the party used to conduct a 

compression exercise, we recognize that a number 

of parties are currently offering such services, 

including third-party vendors and some selfregulatory organizations (e.g., clearing agencies). 

The Commission also understands that there may 

be some instances where compression could be 

performed without the use of a third-party service 

provider. 

that are active in the OTC derivatives 

markets might have built up positions in 

the same (or comparable) products that, 

when analyzed at the portfolio level 

across all applicable counterparties, 

offset each other. Eliminating these 

offsetting and redundant uncleared 

derivatives transactions through 

compression—as measured both by the 

number of contracts and total notional 

value—reduces a market participant’s 

gross exposure to its direct 

counterparties, including by eliminating 

all exposure to certain counterparties.62

Reducing the total number of 

outstanding contracts within a 

derivatives portfolio also provides 

important operational benefits and 

efficiencies for market participants in 

that there are fewer open contracts to 

manage, maintain, and settle, resulting 

in fewer opportunities for processing 

errors, failures, or other problems that 

could develop throughout the lifecycle 

of a transaction.63 Accordingly, the 

Commission preliminarily believes that 

the use of portfolio compression by SBS 

Entities, where appropriate given the 

circumstances (and to the extent that 

such activity is not already occurring), 

should provide important processing 

improvements consistent with the 

overall framework of Section 15F(i) of 

the Exchange Act.64

2. Scope of Proposed Rule 15Fi–4— 

Portfolio Compression Exercises 

For purposes of proposed Rule 15Fi– 

4 under the Exchange Act, the phrase 

‘‘portfolio compression exercise’’ would 

generally refer to an exercise by which 

security-based swap counterparties 

wholly terminate or change the notional 

value of some or all of the securitybased swaps submitted by the 

counterparties for inclusion in the 

portfolio compression exercise and, 

depending on the methodology 

employed, replace the terminated 

security-based swaps with other 

security-based swaps whose combined 

notional value (or some other measure 

of risk) is less than the combined 

notional value (or some other measure 

of risk) of the terminated security-based 

swaps in the exercise.65 In order to 

incorporate that concept into the 

proposal, the Commission is proposing 

to amend Rule 15Fi–1 to create 

definitions for both ‘‘bilateral portfolio 

compression exercise’’ 66 and 

‘‘multilateral portfolio compression 

exercise.’’ 67 These two definitions are 

nearly identical, with the sole difference 

being that the former would apply to a 

portfolio compression exercise that 

includes only two security-based swap 

counterparties, while the latter would 

refer to a portfolio compression exercise 

that includes more than two securitybased swap counterparties.68

Under proposed Rule 15Fi–4(a), SBS 

Entities would be required to establish, 

maintain, and follow written policies 

and procedures for periodically 

engaging in both bilateral portfolio 

compression exercises and multilateral 

portfolio compression exercises, in each 

case when appropriate, with any 

counterparties that are SBS Entities.69

To the extent that an SBS Entity 

transacts with counterparties that are 

not SBS Entities, proposed Rule 15Fi– 

4(b) provides that the policies and 

procedures required under the proposed 

rule would require that portfolio 

compression exercises occur when 

appropriate 70 and only to the extent 

requested by any such counterparty.71

The proposed definitions of ‘‘bilateral 

portfolio compression exercise’’ and 

‘‘multilateral portfolio compression 

exercise’’ are designed to be sufficiently 

broad as to provide market participants 

with maximum flexibility when 

complying with proposed Rule 15Fi–4, 

while also retaining the key elements 

necessary to achieve the important risk 

reducing benefits previously 

discussed—namely the reduction of 

counterparty and operational risk 

achieved by terminating offsetting 

security-based swap transactions. 

Accordingly, we are not proposing 

specific requirements as to the contents 

of the policies and procedures created to 

comply with these rules.72 In addition, 

for consistency with the rules applicable 

to Swap Entities, these definitions are 

substantively identical to the CFTC’s 

corresponding definitions, which we 

preliminarily believe are appropriately 

scoped and clear for purposes of 

proposed Rule 15Fi–4. 


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73See 17 CFR 23.503(a)(3)(ii). 

74See 17 CFR 23.503(a)(2). 

75The Commission also is proposing to amend 

Rule 15Fi–1 to add the term ‘‘fully offsetting 

security-based swaps,’’ which would be defined as 

‘‘security-based swaps of equivalent terms where no 

net cash flow would be owed to either counterparty 

after the offset of payment obligations thereunder.’’ 

See proposed Rule 15Fi–1(h). For consistency with 

the rules applicable to Swap Entities, this definition 

is substantively identical to the CFTC’s 

corresponding definition in 17 CFR 23.500(f), 

which we preliminarily believe is appropriately 

scoped and clear for purposes of proposed Rule 

15Fi–4. 

76See supra note 58 and accompanying text. 

Rather, the Commission recognizes 

that a decision to engage in a process 

that could ultimately result in the 

termination or modification of existing 

contracts, and the potential entry into 

new ones, should be made in 

accordance with policies and 

procedures that are tailored to the 

specific risks and operations of the 

relevant SBS Entity. Such policies and 

procedures should, in the Commission’s 

view, be permitted to take into account 

the specific risk tolerances of the 

regulated entity, including with respect 

to such areas as operational, funding, 

liquidity, and credit risk, and also 

reflect the possibility that firms may 

have legitimate business reasons for 

maintaining certain offsetting securitybased swap positions, even if in theory 

they could be compressed. 

For example, the Commission 

understands that an SBS Entity might be 

unable to participate in a particular 

portfolio compression exercise that 

could result in it transacting with 

certain counterparties (e.g., because a 

counterparty poses an unacceptable 

level of credit risk), or in certain types 

of transactions. To the extent that such 

limitations exist and are reflected in the 

policies and procedures required 

pursuant to proposed Rules 15Fi–4(a) 

and (b), an SBS Entity would be in 

compliance with the proposed rules so 

long as it follows those policies and 

procedures, even if it determines not to 

engage in a particular compression 

exercise. 

Finally, in comparing the 

requirements we are proposing today 

with respect to bilateral and multilateral 

compression exercises with those 

previously adopted by the CFTC, we 

note two differences that we believe to 

be minor and technical in nature. First, 

CFTC Rule 23.503(a)(3)(i) requires that 

any policies and procedures related to 

multilateral portfolio compression 

address, among other things, 

participation in all multilateral portfolio 

compression exercises required by 

CFTC regulation or order. We have 

preliminarily determined not to include 

a comparable requirement in proposed 

Rule 15Fi–4(a)(3). Although the 

Commission would expect that any 

comprehensive policy or procedure 

would, as a matter of course, reflect any 

applicable laws and regulations 

expressly mandating participation in 

certain types of portfolio compression 

exercises, there are currently no 

Commission regulations or orders 

mandating participation in any 

particular type of portfolio compression 

exercise, and we are reluctant to include 

a requirement that could lead to 

confusion by suggesting that such 

regulations or orders exist. 

Second, CFTC Rule 23.503(a)(3)(ii) 

requires that any policies and 

procedures related to multilateral 

portfolio compression exercises 

evaluate, among other things, any 

services that are initiated, offered, or 

sponsored by any third party.73 The 

CFTC did not, however, include such a 

requirement in the corresponding 

requirement related to policies and 

procedures addressing bilateral 

portfolio compression exercises.74

Although the inclusion of a specific 

requirement in the rule should not be 

interpreted as creating an exhaustive list 

of what we would expect to see 

included in the policies and procedures, 

we understand that bilateral portfolio 

compression services are currently 

being offered by third-party vendors. 

Evaluating those services would seem to 

be a natural part of the process of 

broadly analyzing the applicability of 

bilateral compression in general. 

Therefore, we are proposing to expressly 

include a similar requirement in both 

proposed Rules 15Fi–4(a)(2) (policies 

and procedures regarding bilateral 

compression) and 15Fi–4(a)(3) (policies 

and procedures regarding multilateral 

compression). 

3. Scope of Proposed Rule 15Fi–4— 

Bilateral Offset 

As we previously noted, the 

Commission has preliminarily made the 

determination not to suggest a 

preference as to the use of any particular 

type of compression, or as to the type 

or identity of the party conducting the 

exercise and has, instead, proposed 

broad definitions of the terms ‘‘bilateral 

portfolio compression exercise’’ and 

‘‘multilateral portfolio compression 

exercise.’’ In addition, the Commission 

recognizes that there may be other ways 

for market participants to reduce the 

size of their derivatives portfolios that 

may not be considered to be ‘‘portfolio 

compression exercises’’ for purposes of 

those two proposed definitions. 

In light of those considerations, 

proposed Rule 15Fi–4(a)(1) would 

require each SBS Entity to establish, 

maintain, and follow written policies 

and procedures for terminating each 

‘‘fully offsetting security-based swap’’ 

that it maintains with another SBS 

Entity in a timely fashion, when 

appropriate.75 To the extent that an SBS 

Entity transacts with a counterparty that 

is not an SBS Entity, the requirements 

of proposed Rule 15Fi–4(b) would be 

identical to those in proposed Rule 

15Fi–4(a)(1), except that the required 

policies and procedures would only 

need to address engaging in bilateral 

offset when appropriate and to the 

extent requested by the counterparty. 

The Commission preliminarily believes 

that by not proposing prescriptive 

requirements as to the form of bilateral 

offset that would need to be reflected in 

an SBS Entity’s policies and procedures, 

the proposed rule would allow the 

counterparties flexibility in the manner 

in which they reduce the size of their 

security-based swap portfolios in light 

of each counterparty’s unique risks and 

operations. 

In addition, the proposed rules 

regarding bilateral offset have been 

designed to reflect the Commission’s 

understanding that firms may have 

legitimate business reasons for 

maintaining fully offsetting securitybased swap transactions. As such, 

proposed Rules 15Fi–4(a)(1) and (b) 

would require a firm’s policies and 

procedures to address the termination of 

fully offsetting security-based swaps 

only ‘‘when appropriate.’’ 

Finally, for purposes of proposed 

Rules 15Fi–4(a)(1) and (b), the 

Commission would generally consider 

an SBS Entity to have terminated each 

fully offsetting security-based swap in a 

‘‘timely fashion’’ so long as (1) 

termination of the offsetting securitybased swaps occurs within a period that 

is reasonable in light of the 

circumstances of each particular 

transaction and (2) the relevant SBS 

Entity is otherwise in compliance with 

its policies and procedures regarding 

bilateral offset. 

4. Application of Proposed Rule 15Fi– 

4 to Cleared Security-Based Swaps 

Pursuant to proposed Rule 15Fi–4(c), 

the new requirements regarding 

portfolio compression would not apply 

to a ‘‘clearing transaction’’ which, 

pursuant to existing Rule 15Fi–1(c) 

under the Exchange Act, is defined as a 

security-based swap that has a clearing 

agency as a direct counterparty.76

Notwithstanding this provision, the 

Commission recognizes that portfolio 

compression is not limited to uncleared 


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77Notwithstanding the applicability of the 

requirements of proposed Rule 15Fi–4, the 

Commission reminds any third parties performing 

compression or offset services to keep in mind any 

potential requirements under other provisions of 

the securities laws. For example, the Commission 

has stated that the provision of tear-up and 

compression services for security-based swaps 

would qualify these participants as clearing 

agencies and therefore trigger the statutory 

requirement to register as clearing agencies 

pursuant to Section 17A of the Exchange Act, 

absent exemptive relief (which the Commission 

provided on a conditional temporary basis in July 

2011). See Clearing Services Exemptive Order, 76 

FR at 39964. 

78The corresponding CFTC rule is 17 CFR 

23.503(c). 

swaps and that compression services 

may be offered either by a clearing 

agency itself or by a third-party vendor 

that works collaboratively with the 

clearing agency.77 Although the riskreducing benefits that could be realized 

through the compression of cleared 

security-based swaps, we preliminarily 

believe that the issue of whether and 

when compression should occur within 

a clearing agency is best addressed by 

the rules governing the clearing agency’s 

risk management practices, as well as by 

the documentation governing the 

relationship between the clearing 

agency and its members.78

5. Comments Requested 

The Commission generally requests 

comments on all aspects of Proposed 

Rule 15Fi–4 (and any related 

definitions). In addition, the 

Commission requests comments on the 

following specific issues: 

• Do commenters agree with the 

scope of the Commission’s approach of 

proposing broad definitions of ‘‘bilateral 

portfolio compression exercise’’ and 

‘‘multilateral portfolio compression 

exercise’’? Why or why not? 

• Should SBS Entities be required to 

have policies and procedures in place 

for terminating fully offsetting securitybased swaps in a timely fashion? Why 

or why not? Do you agree with the 

proposed interpretation of the term 

‘‘timely fashion’’ to mean that the 

relevant security-based swaps should be 

terminated within a period that is 

reasonable in light of the circumstances 

of each particular transaction (so long as 

the relevant SBS Entity is otherwise in 

compliance with its policies and 

procedures regarding bilateral offset)? 

Why or why not? Should the 

Commission instead specify a fixed 

period of time for the required 

termination of these security-based 

swaps? Why or why not? 

• With respect to any Swap Entity 

that could potentially register with the 

Commission as an SBS Entity, would 

the portfolio compression protocols (or 

any other applicable documentation) 

already in existence with respect to 

CFTC Rule 23.503 satisfy the 

requirements in proposed Rule 15Fi–4? 

Why or why not? Should proposed Rule 

15Fi–4 be modified to account for the 

way that market participants have 

designed their existing protocols (or any 

other applicable documentation) to be 

compliant with the CFTC’s rules? Why 

or why not? For the purposes of 

compliance with the proposed portfolio 

compression rules, should the 

Commission allow compliance with the 

CFTC’s parallel requirements for some 

period of time to allow dual SEC–CFTC 

registrants to conform their existing 

portfolio compression protocols (or any 

other applicable documentation) 

following the adoption of proposed Rule 

15Fi–4? If so, on what factors should 

that reliance be conditioned and how 

long of a compliance period should be 

provided? In the alternative, should the 

Commission delay compliance with, or 

establish phased compliance deadlines 

for, some or all of these requirements? 

Please explain the nature of any 

compliance challenges (including any 

additional documentation 

requirements), and the basis for any 

suggested compliance period. 

• As previously noted, proposed Rule 

15Fi–4 has been designed to be as 

consistent as possible with CFTC Rule 

23.503, which imposes portfolio 

compression requirements on Swap 

Entities, in order to avoid requiring dual 

SEC–CFTC registrants to incur 

additional systems or compliance costs 

due to differences between the two 

agencies’ approaches. To the extent that 

any such differences remain, should the 

Commission consider, for any firm 

dually-registered as both an SBS Entity 

and Swap Entity (regardless of whether 

such firm is also registered with the 

Commission as a broker-dealer or with 

the CFTC as a futures commission 

merchant), permitting such firm to 

comply with proposed Rule 15Fi–4 on 

an ongoing basis by complying with 

CFTC Rule 23.503, as if such rule 

applied to security-based swaps? If so, 

what conditions, if any, should be 

placed on such reliance? 

• Do commenters agree with the 

proposed exception from the 

compression requirements in proposed 

Rule 15Fi–4 for clearing transactions? 

Why or why not? Because the definition 

of ‘‘clearing transactions’’ only includes 

transactions cleared at a clearing agency 

registered with the Commission 

pursuant to Section 17A of the 

Exchange Act, security-based swaps 

cleared at a foreign clearing agency that 

is not registered with the Commission 

would not be deemed to be ‘‘cleared’’ 

for these purposes, and would therefore 

be subject to proposed Rule 15Fi–4. 

Should the Commission modify the 

scope of the exception for cleared 

security-based swaps, such as by 

including transactions that are cleared 

at a clearing agency that is not registered 

with the Commission pursuant to 

Section 17A of the Exchange Act, 

whether because of an applicable 

exemption from registration or because 

the Exchange Act does not cover the 

activities of the clearing? Why or why 

not? 

• Proposed Rule 15Fi–4(b) requires 

each SBS Entity to establish, maintain, 

and follow written policies and 

procedures for periodically terminating 

fully offsetting security-based swaps 

and for engaging in bilateral or 

multilateral portfolio compression 

exercises with respect to security-based 

swaps in which its counterparty is an 

entity other than an SBS Entity, ‘‘when 

appropriate’’ and to the extent requested 

by any such counterparty. CFTC Rule 

23.503(b) does not contain the ‘‘when 

appropriate’’ qualifier and provides only 

that a Swap Entity’s policies and 

procedures address engaging in bilateral 

offset or compression exercises ‘‘to the 

extent requested’’ by a counterparty that 

is not a Swap Entity. Would the 

Commission’s proposed approach create 

any practical difficulties for dual SEC– 

CFTC registrants? If so, what are they? 

Should the Commission instead strike 

the ‘‘when appropriate’’ qualifier in 

order to mirror the corresponding CFTC 

requirement? Why or why not? To the 

extent that the Commission were to 

follow the approach of CFTC Rule 

23.503(b), should there be a 

reasonableness standard to address 

situations when a request by a non-SBS 

Entity counterparty to engage in 

bilateral offset or compression exercises 

would be not be reasonable, such as a 

situation when doing so could be 

detrimental to the SBS Entity? If so, 

under what conditions should an SBS 

Entity be able to refuse a request from 

a non-SBS Entity counterparty to engage 

in such activity pursuant to proposed 

Rule 15Fi–4(b)? 

• What practices, if any, are currently 

being used (or are currently under 

consideration) by market participants 

with respect to the use of portfolio 

compression across asset classes? For 

example, could a compression exercise 

occur with respect to two or more 

counterparties maintaining portfolios of 

both single-name credit default swaps 

(‘‘CDS’’) and index CDS? If so, should 

the Commission modify proposed Rule 

15Fi–4, or provide related interpretive 

guidance to accommodate portfolio 

compression across asset classes? 


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79See supra Section I.B.1. 80See, e.g., Sylvie A. Durham, Terminating 

Derivatives Transactions: Risk Mitigation and 

Close-Out Netting § 8:1 (Nov. 2010) (‘‘[L]egal 

contractual provisions are the foundation on which 

the rights and obligations of the parties are based, 

and sound collateral and risk management practices 

may be ineffective if the legal rights of the parties 

are not clearly set forth.’’). 

81The corresponding CFTC rule is 17 CFR 23.504. 

The structure of the CFTC rule, including the 

subsections, mirrors the structure of proposed Rule 

15Fi–5. 

82Among other exceptions discussed below in 

Section I.D.6, proposed Rule 15Fi–5 is applicable 

only to uncleared security-based swaps. 

83See proposed Rule 15Fi–5(b)(2). For purposes 

of this requirement, the Commission preliminarily 

views the term ‘‘senior officer’’ as covering only the 

most senior executives in the organization, such as 

a firm’s chief executive officer, chief financial 

officer, chief legal officer, chief compliance officer, 

president, or other person at a similar level. This 

approach is similar to how the Commission has 

previously interpreted the term in the context of 

other requirements applicable to SBS Entities. See 

Registration Process for Security-Based Swap 

Dealers and Major Security-Based Swap 

Participants, Exchange Act Release No. 75611 (Aug. 

5, 2015), 80 FR 48964, 48968 n. 29 (Aug.14, 2015) 

(‘‘SBS Entity Registration Adopting Release’’). By 

contrast, CFTC Rule 23.504 uses the term ‘‘senior 

management,’’ which is not further defined in 

either CFTC Rules 23.500 or 23.504. We 

preliminarily view this difference as a clarification 

and do not believe that it represents a substantive 

difference between the two sets of rules, but below 

we solicit comment on this issue. 

84We note that CFTC Rule 23.504 does not 

contain a comparable provision to the requirement 

in proposed Rule 15Fi–5(b)(1) that the trading 

relationship documentation address ‘‘applicable 

regulatory reporting obligations (including pursuant 

to Regulation SBSR).’’ The Commission is 

proposing this requirement not only because of our 

view that reporting arrangements should be 

clarified in advance, due to the importance of 

ensuring that the transaction is reported accurately 

and in a timely manner, but also because the 

inclusion of such provision could potentially help 

to address an issue related to how SDRs can verify 

the information that they receive, as discussed in 

detail in Section I.E below. 

85See proposed Rule 15Fi–5(b)(3). 

86See supra note 48. 

87 15 U.S.C. 78c–5(f). 

88See supra Section I.B.1. 

• Should SBS dealers and major SBS 

participants be treated the same for 

purposes of the portfolio compression 

requirements in proposed Rule 15Fi–4? 

Why or why not? 

D. Rule 15Fi–5 (Trading Relationship 

Documentation) 

1. Overview of Trading Relationship 

Documentation 

Section 15F(i)(2) of the Exchange Act 

provides that the Commission shall 

adopt rules governing documentation 

standards for SBS Entities. Just as 

portfolio reconciliation is designed to 

allow counterparties to manage their 

internal risks by better ensuring 

agreement with respect to the terms of 

the transaction (and thereby avoiding 

complications at various points 

throughout the life of the transaction),79

requiring each SBS Entity to document 

the terms of the trading relationship 

with each of its counterparties before 

executing a new security-based swap 

transaction should promote sound 

collateral and risk management 

practices by enhancing transparency 

and legal certainty regarding each 

party’s rights and obligations under the 

transaction. This, in turn, should help to 

reduce counterparty credit risk and 

promote certainty regarding the agreedupon valuation and other material terms 

of a security-based swap.80 Having 

adequate written documentation prior 

to, or contemporaneously with, 

executing a security-based swap should 

also facilitate the ability of the 

counterparties to engage in portfolio 

reconciliation, as would be required 

under these proposed rules, in an 

efficient and cost-effective manner. 

2. Scope of Proposed Rule 15Fi–5 

In light of the important risk 

mitigating factors described above, the 

Commission is proposing Rule 15Fi–5, 

which establishes certain requirements 

for SBS Entities related to the use of 

written trading relationship 

documentation in connection with their 

security-based swap transactions.81

Specifically, proposed Rule 15Fi–5(a)(2) 

would require each SBS Entity to 

establish, maintain, and follow written 

policies and procedures reasonably 

designed to ensure that it executes 

written security-based swap trading 

relationship documentation with each 

of its counterparties prior to, or 

contemporaneously with, executing a 

security-based swap with any 

counterparty.82 The proposed rule 

would further require that the policies 

and procedures required thereunder be 

approved in writing by a senior officer 

of the SBS Entity, and that a record of 

the approval be retained.83

Pursuant to proposed Rule 15Fi– 

5(b)(1), the required policies and 

procedures would require that the 

security-based swap trading relationship 

documentation be in writing. The 

policies and procedures would also 

require that the documentation include 

all terms governing the trading 

relationship between the SBS Entity and 

its counterparty, including, without 

limitation, terms addressing payment 

obligations, netting of payments, events 

of default or other termination events, 

calculation and netting of obligations 

upon termination, transfer of rights and 

obligations, allocation of any applicable 

regulatory reporting obligations 

(including pursuant to Regulation 

SBSR), governing law, valuation, and 

dispute resolution.84

For purposes of Rule 15Fi–5(b)(2), all 

trade acknowledgements and 

verifications of security-based swap 

transactions required under Rule 15Fi– 

2 would be deemed to be security-based 

swap trading relationship 

documentation, as they often may 

contain one or more terms contemplated 

by the policies and procedures required 

by proposed Rule 15Fi–5. Further, the 

Commission understands that in some 

transactions, the parties may choose to 

document their trading relationship by 

using a stand-alone ‘‘long-form 

confirmation’’ that includes all of the 

terms governing the relationship. The 

proposed rule is not intended to 

interfere with this practice. 

Accordingly, we preliminarily believe 

that the use of a ‘‘long-form 

confirmation’’ would comply with 

proposed Rule 15Fi–5 so long as such 

document is: (1) In written form and 

includes all of the elements of the 

trading relationship required under the 

rule (whether by incorporating them by 

reference from a standard master 

agreement or by expressly restating 

them in the confirmation) and (2) 

executed prior to, or contemporaneously 

with, the execution of each relevant 

security-based swap. 

The policies and procedures required 

by the proposed rule also would require 

that the security-based swap trading 

relationship documentation include 

credit support arrangements.85 Such 

credit support would be required to 

contain, among other things and in 

accordance with applicable 

requirements under regulations adopted 

by the Commission or any prudential 

regulators,86 and without limitation, the 

following: 

• Initial and variation margin 

requirements, if any; 

• types of assets that may be used as 

margin and asset valuation haircuts, if 

any; 

• investment and re-hypothecation 

terms for assets used as margin for 

uncleared security-based swaps, if any; 

and 

• custodial arrangements for margin 

assets, including whether margin assets 

are to be segregated with an 

independent third party, in accordance 

with Section 3E(f) of the Exchange Act, 

if any.87

As the Commission has previously 

explained, ensuring that uncleared OTC 

derivatives transactions are 

appropriately collateralized was one of 

the key elements of the Title VII 

reforms.88 Accordingly, we 

preliminarily believe that policies and 

procedures requiring counterparties to 


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89See id. 

90See 15 U.S.C. 78o–10(e). For the avoidance of 

doubt, the requirements in proposed Rule 15Fi– 

5(b)(4) are intended to facilitate agreement between 

an SBS Entity and its counterparty as to how they 

will determine the value of a security-based swap 

in order to, among other things, comply with the 

margin requirements promulgated by either the 

Commission or, with respect to an SBS Entity that 

is a bank, the applicable prudential regulator. These 

requirements are not intended in any way to 

supersede those underlying margin requirements. 

91See 15 U.S.C. 78o–10(j). 

92See proposed Rule 15Fi–5(b)(4)(i). 

93See proposed Rule 15Fi–1(g). The 

corresponding definition in CFTC Rule 23.500(e) is 

referred to as a ‘‘financial entity.’’. We replaced the 

word ‘‘entity’’ with ‘‘counterparty’’ to avoid any 

confusion due to the fact that there are other 

definitions of ‘‘financial entity’’ within the 

Exchange Act and its implementing regulations. For 

example, term ‘‘financial entity’’ is used in Section 

3C(g) of the Exchange Act for purposes of the 

statutory exception to the mandatory clearing 

requirement in Title VII. See 15 U.S.C. 78c–3(g)(3). 

Similarly, there is a definition of ‘‘financial entity’’ 

in Rule 3a67–6 under the Exchange Act, which is 

used for one of the tests for determining a person’s 

status under the definition of ‘‘major security-based 

swap participant’’ in Section 3(a)(67) of the 

Exchange Act. See 15 U.S.C. 78. Other than the 

different titles, we do not believe that there are any 

substantive differences between the CFTC’s 

definition of ‘‘financial entity’’ and the proposed 

definition of ‘‘financial counterparty.’’ 

94See proposed Rule 15Fi–5(b)(4)(ii). 

95The text of CFTC Rule 23.504(b)(4)(iv), which 

is the corresponding subsection under CFTC rules, 

provides that ‘‘[t]he parties may agree on changes 

or procedures for modifying or amending the 

documentation required by this paragraph at any 

time.’’ Proposed Rule 15Fi–5(b)(4)(iv) does not 

contain the phrase ‘‘required by this paragraph.’’ 

We view this to be solely a technical change and 

do not intend for it to represent a substantive 

deviation from the corresponding CFTC rule. 

Rather, the difference is intended to avoid any 

suggestion that the parties could amend the 

underlying requirements contained in proposed 

Rule 15Fi–5(b)(4). 

96See 12 U.S.C. 5382; 12 U.S.C. 5383. 

97The term ‘‘financial company’’ is defined in 12 

U.S.C. 5381(a)(11) to include any company (as 

defined in 12 U.S.C. 5381(a)(5)) that— 

(A) is incorporated or organized under any 

provision of Federal law or the laws of any State; 

(B) is— 

(i) a bank holding company (as defined in 12 

U.S.C. 1841(a)); 

(ii) a nonbank financial company supervised by 

the Federal Reserve Board; 

(iii) any company that is predominantly engaged 

in activities that the Federal Reserve Board has 

determined are financial in nature or incidental 

thereto for purposes of 12 U.S.C. 1843(k) (other than 

a company described in clause (i) or (ii)); or 

(iv) any subsidiary of any company described in 

any of clauses (i) through (iii) that is predominantly 

engaged in activities that the Federal Reserve Board 

has determined are financial in nature or incidental 

Continued 

clearly document the applicable 

processes and requirements for 

calculating and exchanging margin in 

connection with a security-based swap 

transaction is an important step in 

achieving this broader regulatory 

objective. 

3. Proposed Rule 15Fi–5(b)(4): 

Documenting Valuation Methodologies 

As mentioned throughout this release, 

ensuring that security-based swaps are 

accurately valued throughout the 

duration of a contract should play an 

important role in protecting the integrity 

of the OTC derivatives market, both at 

the level of an individual participant 

and systemically across the broader 

financial market.89 Accordingly, 

proposed Rule 15Fi–5(b)(4) would 

require that the applicable policies and 

procedures provide that the relevant 

swap trading relationship 

documentation between certain types of 

counterparties include written 

documentation in which the parties 

agree on the process, which may 

include any agreed upon methods, 

procedures, rules, and inputs, for 

determining the value of each securitybased swap at any time from execution 

to the termination, maturity, or 

expiration of such security-based swap 

for the purposes of complying with the 

margin requirements under Section 

15F(e) of the Exchange Act (and 

applicable regulations),90 and the risk 

management requirements under 

Section 15F(j) of the Exchange Act (and 

applicable regulations).91 To the 

maximum extent practicable, such 

valuations would need to be based on 

recently-executed transactions, 

valuations provided by independent 

third parties, or other objective 

criteria.92

The requirements in proposed Rule 

15Fi–5(b)(4) regarding valuation 

methodology would apply to securitybased swap trading relationship 

documentation entered into between: (1) 

Two SBS Entities; (2) an SBS Entity and 

a ‘‘financial counterparty;’’ and (3) an 

SBS Entity and any other counterparty, 

if requested by such counterparty. 

Accordingly, we are also proposing to 

amend Rule 15Fi-1 to add a definition 

of ‘‘financial counterparty,’’ which 

would include any counterparty that is 

not an SBS Entity and that is one of the 

following: 

• A swap dealer; 

• a major swap participant; 

• a commodity pool as defined in 

Section 1a(10) of the Commodity 

Exchange Act (7 U.S.C. 1a(10)); 

• a private fund as defined in Section 

202(a)(29) of the Investment Advisers 

Act of 1940 (15 U.S.C. 80b–2(a)); 

• an employee benefit plan as defined 

in paragraphs (3) and (32) of Section 3 

of the Employee Retirement Income 

Security Act of 1974 (29 U.S.C. 1002); 

and 

• a person predominantly engaged in 

activities that are in the business of 

banking or, in activities that are 

financial in nature, as defined in 

Section 4(k) of the Bank Holding 

Company Act of 1956 (12 U.S.C. 

1843k).93

Further, proposed Rule 15Fi– 

5(b)(4)(ii) has been designed to help 

ensure that the required valuation 

documentation between SBS Entities 

and their counterparties contains 

sufficient guidance and information in 

the event of a problem with determining 

the value of a security-based swap. 

Specifically, the documentation 

required by the applicable policies and 

procedures must include either: (1) 

Alternative methods for determining the 

value of the security-based swap for the 

purposes of complying with proposed 

Rule 15Fi–5(b)(4) in the event of the 

unavailability or other failure of any 

input required to value the securitybased swap for such purposes; or (2) a 

valuation dispute resolution process by 

which the value of the security-based 

swap shall be determined for the 

purposes of complying with the rule.94

To the extent that the prescribed 

valuation documentation needs to be 

updated, revised, or otherwise modified, 

proposed Rule 15Fi–5(b)(4)(iv) provides 

that the parties may agree on changes or 

procedures for modifying or amending 

such documentation at any time.95

Finally, in recognition of the fact that 

valuation data and methodologies often 

include, or may be based on, private 

information, proposed Rule 15Fi– 

5(b)(4)(iii) makes clear that an SBS 

Entity is not required to disclose to the 

counterparty confidential, proprietary 

information about any model it may use 

to value a security-based swap. 

4. Proposed Rule 15Fi–5(b)(5) and (6): 

Other Disclosure Requirements 

Proposed Rule 15Fi–5 also would 

require that the policies and procedures 

governing the applicable trading 

relationship documentation require an 

SBS Entity and its counterparty to 

disclose to each other certain 

information regarding their legal and 

bankruptcy status, and to include a 

statement regarding the status of a 

security-based swap if accepted for 

clearing by a CCP. The first requirement 

relates to whether the SBS Entity or its 

counterparty is subject to a particular 

legal regime in the event of its failure, 

such as FDIC receivership for banks or 

orderly liquidation for certain financial 

companies that meet the requirements 

set forth in Title II of the Dodd-Frank 

Act.96 As background, Title II of the 

Dodd-Frank Act provides for an 

alternative insolvency regime for the 

‘‘orderly liquidation’’ of large financial 

companies,97 including broker-dealers, 


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thereto for purposes of 12 U.S.C. 1843(k) (other than 

a subsidiary that is an insured depository 

institution or an insurance company); and 

(C) is not a Farm Credit System institution 

chartered under and subject to the provisions of the 

Farm Credit Act of 1971, as amended (12 U.S.C. 

2001 et seq.), a governmental entity, or a regulated 

entity, as defined under 12 U.S.C. 4502(20). 

98Section 203 of the Dodd-Frank Act sets forth 

the process for designating a financial company as 

a ‘‘covered financial company.’’ In the case of a 

broker-dealer, or when a financial company’s 

largest U.S. subsidiary is a broker-dealer, Section 

203(a)(1)(B) provides that the Federal Reserve Board 

and the Commission (in each case subject to the 

approval of a two-thirds majority of each agency’s 

members), in consultation with the FDIC, may, 

either on their own initiative or at the request of 

the Secretary of the U.S. Treasury (‘‘Secretary’’), 

issue a written orderly liquidation recommendation 

to the Secretary. See 12 U.S.C. 5383(a). Section 

203(b) requires the Secretary (after consultation 

with the President) to take action on the 

recommendation upon an affirmative determination 

that, among other things, the failure of a financial 

company would have serious adverse effects on 

financial stability in the United States and that 

taking action under the orderly liquidation 

authority with respect to that company would avoid 

or mitigate such adverse effects. See 12 U.S.C. 

5383(b). 

99See 12 U.S.C. 5384. Section 205(a) of the DoddFrank Act requires the FDIC, as the appointed 

receiver for any covered broker or dealer, to appoint 

SIPC as trustee for the liquidation. See 12 U.S.C. 

5385(a). 

100 15 U.S.C. 78aaa et seq. 

101 11 U.S.C. 101 et seq. 

102 12 U.S.C. 1811 et seq. 

103Specifically, proposed Rule 15Fi–5(b)(5) 

would require that an SBS Entity’s policies and 

procedures require that the applicable securitybased swap trading relationship documentation 

contain: 

(A) A statement of whether the SBS Entity is an 

insured depository institution (as defined in 12 

U.S.C. 1813) or a financial company (as defined in 

Section 201(a)(11) of the Dodd-Frank Act, 12 U.S.C. 

5381(a)(11)); 

(B) A statement of whether the counterparty is an 

insured depository institution or financial 

company; 

(C) A statement that in the event either the SBS 

Entity or its counterparty becomes a covered 

financial company (as defined in 12 U.S.C. 

5381(a)(8)) or is an insured depository institution 

for which the FDIC has been appointed as a receiver 

(the ‘‘covered party’’), certain limitations under 

Title II of the Dodd-Frank Act or the Federal 

Deposit Insurance Act may apply to the right of the 

non-covered party to terminate, liquidate, or net 

any security-based swap by reason of the 

appointment of the FDIC as receiver, 

notwithstanding the agreement of the parties in the 

security-based swap trading relationship 

documentation, and that the FDIC may have certain 

rights to transfer security-based swaps of the 

covered party under Section 210(c)(9)(A) of the 

Dodd-Frank Act, 12 U.S.C. 5390(c)(9)(A), or 12 

U.S.C. 1821(e)(9)(A); and 

(D) An agreement between the SBS Entity and its 

counterparty to provide notice if either it or its 

counterparty becomes or ceases to be an insured 

depository institution or a financial company. 

104The three year holding period for these 

records is contained in the applicable 

recordkeeping, reporting, and notification 

requirements for SBS Entities, as opposed to in 

proposed Rule 15Fi–5(c) itself. 

105See 17 CFR 23.504(c). In the Commission’s 

experience overseeing accounting and auditing 

standards in the context of certain disclosure 

requirements under the federal securities laws, an 

internal auditor typically reports to the 

management of the applicable entity, which would 

be inconsistent with the Commission’s auditor 

independence rules. See Rule 2–01(c)(2) of 

Regulation S–X (Employment Relationships). 17 

CFR 210.2–01(c). At the same time, we are not 

foreclosing the possibility that there could be 

alternative structures to the typical ‘‘internal’’ 

auditor employment relationship that could, if 

structured properly, not be inconsistent with the 

Commission’s auditor independence rules and 

request comment below identifying and describing 

such potential structures. 

that meet specified criteria (each a 

‘‘covered financial company’’) as set 

forth in Title II of the Dodd-Frank Act.98

If the covered financial company is (1) 

a broker or dealer and (2) a member of 

the Securities Investor Protection 

Corporation (‘‘SIPC’’), such ‘‘covered 

broker or dealer’’ would be placed into 

an orderly liquidation proceeding with 

the FDIC appointed as receiver.99

Because this orderly liquidation 

process, which was modeled on the 

receivership process used for failed 

banks, is different from the liquidation 

regimes established under the Securities 

Investor Protection Act of 1970 100 or by 

the U.S. Bankruptcy Code,101 the 

Commission preliminarily believes it to 

be appropriate to require counterparties 

to a security-based swap transaction to 

disclose to each other whether this 

alternative regime may potentially apply 

in the event of an insolvency. 

Accordingly, proposed Rule 15Fi– 

5(b)(5) would require that each SBS 

Entity’s policies and procedures require 

that the security-based swap trading 

relationship documentation contain a 

statement as to whether it or its 

counterparty is an insured depository 

institution or financial company. 

Further, the documentation also would 

need to contain a statement that the 

orderly liquidation provisions of the 

Dodd-Frank Act and the Federal Deposit 

Insurance Act 102 may limit the rights of 

the parties under their trading 

relationship documentation should 

either party be deemed a ‘‘covered 

financial company’’ or is otherwise 

subject to having the FDIC appointed as 

a receiver. The documentation would 

further be required to state that such 

limitations relate to the right of the noncovered party to terminate, liquidate, or 

net any security-based swap by reason 

of the appointment of the FDIC as 

receiver, notwithstanding the agreement 

of the parties in the security-based swap 

trading relationship documentation, and 

of certain rights of the FDIC to transfer 

security-based swaps of the covered 

party. Finally, the policies and 

procedures would require that the 

trading relationship documentation 

contain an agreement between the SBS 

Entity and its counterparty to provide 

notice if either it or its counterparty 

becomes or ceases to be an insured 

depository institution or a financial 

company.103

Second, the policies and procures 

required pursuant to proposed Rule 

15Fi–5(b)(6) would require the securitybased swap trading relationship 

documentation of each SBS Entity 

disclose certain information regarding 

the status of a security-based swap 

accepted for clearing by a clearing 

agency. Specifically, such 

documentation would need to contain a 

notice that, upon acceptance of a 

security-based swap by a clearing 

agency: 

• The original security-based swap is 

extinguished; 

• The original security-based swap is 

replaced by equal and opposite securitybased swaps with the clearing agency; 

and 

• All terms of the security-based 

swap shall conform to the product 

specifications of the cleared securitybased swap established under the 

clearing agency’s rules. 

The Commission preliminarily 

believes that this disclosure should 

provide important information to 

counterparties regarding the effects of 

clearing a trade at a clearing agency and 

clarify the status of the contract 

following its acceptance and novation at 

the clearing agency. 

5. Proposed Rule 15Fi–5(c): Audit of 

Security-Based Swap Trading 

Relationship Documentation 

Proposed Rule 15Fi–5(c) would 

require each SBS Entity to have an 

independent auditor conduct periodic 

audits sufficient to identify any material 

weakness in its documentation policies 

and procedures required by the rule. 

The proposal also would require that a 

record of the results of each audit be 

retained for a period of three years after 

the conclusion of the audit.104 The 

Commission preliminarily believes that 

requiring periodic audits of a firm’s 

security-based swap trading relationship 

documentation is consistent with sound 

risk mitigation practices and is designed 

to reduce the prevalence of 

discrepancies during the course of these 

transactions. This proposed requirement 

differs slightly from CFTC Rule 

23.504(c), which references an 

independent ‘‘internal or external’’ 

auditor.105


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106As discussed in detail in Section I.F.1 of this 

release, the Commission also is proposing 

amendments to Rule 17a–4 and to proposed Rule 

18a–6 that would, among other things, require SBS 

Entities to retain all security-based swap trading 

relationship documentation with counterparties 

required to be created under proposed Rule 15Fi– 

5. Because security-based swaps executed prior to 

the date on which an SBS Entity is required to be 

in compliance with proposed Rule 15Fi–5 would be 

exempt from the underlying documentation 

requirement, any trading relationship 

documentation voluntarily entered into in respect 

of those transactions would not be deemed to have 

been created pursuant to proposed Rule 15Fi–5. 107See supra note 58 and accompanying text. 

108The provisions in proposed Rule 15Fi–5(a)(iii) 

to account for cleared anonymous transactions that 

are submitted for clearing, but ultimately not 

accepted, are not included in CFTC Rule 23.504. 

We have included this provision to account for 

situations when an SBS Entity could be otherwise 

deemed to be not in compliance with proposed 

Rule 15Fi–5 due to a transaction being rejected for 

clearing for reasons which the SBS Entity did not 

know (or have a reasonable basis to know) prior to 

when the transaction was submitted to the clearing 

agency. 

6. Exceptions to the Trading 

Relationship Documentation 

Requirements 

Proposed Rule 15Fi–5(a)(1) would 

establish three different exceptions from 

the basic requirement that each SBS 

Entity establish, maintain, and follow 

written policies and procedures 

reasonably designed to ensure that it 

executes written security-based swap 

trading relationship documentation 

with each of its counterparties prior to, 

or contemporaneously with, executing a 

security-based swap with any 

counterparty. First, proposed Rule 15Fi– 

5(a)(1)(i) would provide an exception 

for security-based swaps executed prior 

to the date on which an SBS Entity is 

required to be in compliance with the 

documentation rule. Although the 

Commission recognizes the significant 

risk mitigation benefits associated with 

ensuring that all transactions are 

supported by comprehensive and 

accurate documentation, we also 

understand that it may be impractical to 

require SBS Entities to have policies 

and procedures to bring existing 

transactions into compliance with these 

proposed rules, particularly when 

weighing any potential benefits of doing 

so against the potential costs. 

Accordingly, we preliminarily believe 

that those transactions should be 

excepted from the proposed 

documentation requirements.106

To the extent that an SBS Entity 

maintains an existing security-based 

swap portfolio with a counterparty that 

pre-dates the compliance date, proposed 

Rule 15F–5(a)(1)(i) would provide an 

exception from the documentation 

requirements only with respect to those 

existing transactions. This means that 

the SBS Entity would not be in violation 

of Rule 15Fi–5 solely as a result of 

having policies and procedures that do 

not require such SBS Entity to have 

executed written security-based swap 

trading relationship documentation 

with any counterparty with respect to 

those existing transactions, or if the 

existing documentation that it maintains 

with the counterparty does not 

otherwise comply with the requirements 

of the rule. However, if the SBS Entity 

enters into new security-based swap 

transactions with the counterparty, the 

exception would not apply to those new 

trades, even if trading relationship 

documentation already existed. Under 

those circumstances, the SBS Entity’s 

policies and procedures would be need 

to be reasonably designed to ensure that 

the existing documentation complies 

with the proposed rule before using it as 

the basis to enter into any new securitybased swaps with that counterparty. 

Second, proposed Rule 15Fi– 

5(a)(1)(ii) would provide an exception 

for any ‘‘clearing transaction’’ which, 

pursuant to existing Rule 15Fi–1(c), is 

defined as a security-based swap that 

has a clearing agency as a direct 

counterparty.107 This exception is 

intended to recognize the fact that once 

a security-based swap is cleared, the 

transaction is governed primarily by the 

terms of the agreements in effect 

between the clearing member and the 

clearing agency (as well as between the 

clearing member and its customer, if 

applicable). 

Finally, proposed Rule 15Fi– 

5(a)(1)(iii) would provide an exception 

for security-based swaps executed 

anonymously on a national securities 

exchange or a security-based swap 

execution facility (‘‘SBSEF’’), provided 

that: 

• Such security-based swaps are 

intended to be cleared and are actually 

submitted for clearing to a clearing 

agency; 

• All terms of such security-based 

swaps conform to the rules of the 

clearing agency; and 

• Upon acceptance of such securitybased swap by the clearing agency: (1) 

The original security-based swap is 

extinguished; (2) the original securitybased swap is replaced by equal and 

opposite security-based swaps with the 

clearing agency; and (3) all terms of the 

security-based swap shall conform to 

the product specifications of the cleared 

security-based swap established under 

the clearing agency’s rules. 

The exception in proposed Rule 15Fi– 

5(a)(1)(iii) is intended to recognize the 

fact that the documentation 

requirements may be largely impossible 

to comply with in the context of cleared 

anonymous transactions by virtue of the 

fact that, by definition, the parties to 

these transactions would not know the 

identity their counterparties. Therefore, 

trading relationship documentation 

with any such counterparty would be 

unnecessary and impractical. 

The exception provided for in 

proposed Rule 15Fi–5(a)(1)(iii) is 

limited—and therefore distinguishable 

from the exception for cleared securitybased swap transactions—in one 

important respect to account for 

instances where a transaction is not 

accepted for clearing following its 

submission. For example, an SBS Entity 

may enter into a security-based swap 

transaction on an anonymous basis on a 

national securities exchange or an 

SBSEF, fully intending for the 

transaction to be submitted to, and 

cleared by, a clearing agency. In some 

cases, the transaction may be rejected by 

the clearing agency for reasons which 

the SBS Entity did not know (or had no 

reasonable basis to know) prior to its 

submission, such as possible 

operational or clerical errors or if one of 

the clearing members unintentionally 

exceeded its clearing limits. If a bilateral 

transaction continues to exist between 

the two counterparties (who would no 

longer be unknown to each other), 

written trading relationship 

documentation governing that 

transaction might not exist between 

them. 

Under those circumstances, the 

Commission preliminarily believes that 

the objectives of Rule 15Fi–5 would not 

be satisfied if the SBS Entity and its 

counterparty did not ultimately have 

written agreement on the terms of the 

remaining security-based swap 

transaction. At the same time, however, 

because the transaction was initially 

entered into on an anonymous basis, the 

two sides might need additional time to 

agree to the terms of the trading 

relationship documentation, 

particularly if they previously had not 

engaged in any other transactions. 

Accordingly, the Commission is 

proposing that if an SBS Entity that is 

relying on the exception in proposed 

Rule 15Fi–5(a)(1)(iii) subsequently 

receives notice that the relevant 

security-based swap transaction has not 

been accepted for clearing by a clearing 

agency, the applicable policies and 

procedures would need to require that 

the SBS Entity be in compliance with 

the requirements of proposed Rule 

15Fi–5 in all respects promptly after 

receipt of such notice.108

The Commission notes that whether a 

contract that has not been accepted for 


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clearing by a clearing agency continues 

to exist may depend on the rules of the 

particular SBSEF, national securities 

exchange, or clearing agency, or the 

agreement of the counterparties. If the 

end result is that a security-based swap 

continues to exist despite being rejected 

by the clearing agency, then the policies 

and procedures would need to require 

that the SBS Entity be in compliance 

with the requirements of Rule 15Fi–5 

with respect to that transaction. If the 

rejection from clearing results in a 

termination or voiding of the original 

security-based swap, then there is no 

security-based swap for which it is 

necessary to comply with Rule 15Fi–5. 

7. Comments Requested 

The Commission generally requests 

comments on all aspects of Proposed 

Rule 15Fi–5 (and any related 

definitions). In addition, the 

Commission requests comments on the 

following specific issues: 

• Do commenters agree with the 

scope of the proposed exception from 

the trading relationship documentation 

requirements in proposed Rule 15Fi–5 

for clearing transactions? Why or why 

not? Because the definition of ‘‘clearing 

transactions’’ only includes transactions 

cleared at a clearing agency registered 

with the Commission pursuant to 

Section 17A of the Exchange Act, 

security-based swaps cleared at a 

foreign clearing agency that is not 

registered with the Commission would 

not be deemed to be ‘‘cleared’’ for these 

purposes, and would therefore be 

subject to proposed Rule 15Fi–5. Should 

the Commission modify the scope of the 

exception for cleared security-based 

swaps, such as by including 

transactions that are cleared at a 

clearing agency that is not registered 

with the Commission pursuant to 

Section 17A of the Exchange Act, 

whether because of an applicable 

exemption from registration or because 

Exchange Act does not cover the 

activities of the clearing agency? Why or 

why not? 

• Do commenters agree with the 

proposed exception from the trading 

relationship documentation 

requirements for security-based swaps 

executed anonymously on a national 

securities exchange or an SBSEF? Is it 

sufficiently comprehensive? Why or 

why not? The proposed exception also 

provides that if a security-based swap 

executed anonymously on a platform is 

subsequently rejected for clearing, the 

SBS Entity would then be required to 

come into compliance with the 

documentation requirements 

‘‘promptly’’ after receipt of the notice of 

rejection. Do you agree with this 

approach? Why or why not? Should the 

Commission define or provide an 

interpretation of the word ‘‘promptly’’ 

for these purposes or, as an alternative, 

specify a fixed period of time in the rule 

text in which SBS Entities would be 

required to comply with proposed Rule 

15Fi–5? Why or why not and, if so, how 

much time should be provided? 

• Are there any current industry 

practices that relate to how 

counterparties to swaps and securitybased swaps treat transactions executed 

anonymously on a trading platform, but 

subsequently rejected for clearing? If 

any such practices exist, please describe 

them, including with regard to the 

length of time that it typically takes to 

document these transactions, if they 

remain in effect. 

• With respect to any Swap Entity 

that could potentially register with the 

Commission as an SBS Entity, would 

the documentation protocols (or any 

other applicable documentation) already 

in existence with respect to CFTC Rule 

23.504 satisfy the requirements in 

proposed Rule 15Fi–5? Why or why 

not? Should proposed Rule 15Fi–5 be 

modified to account for the way that 

market participants have designed their 

existing protocols (or any other 

applicable documentation) to be 

compliant with the CFTC’s rules? Why 

or why not? For the purposes of 

compliance with the proposed 

documentation rules, should the 

Commission allow compliance with the 

CFTC’s parallel documentation rules for 

some period of time to allow dual SEC– 

CFTC registrants to conform their 

existing documentation protocols (or 

any other applicable documentation) 

following the adoption of proposed Rule 

15Fi–5? If so, on what factors should 

that reliance be conditioned and how 

long of a compliance period should be 

provided? In the alternative, should the 

Commission delay compliance with, or 

establish phased compliance deadlines 

for, some or all of these requirements? 

Please explain the nature of any 

compliance challenges (including any 

additional documentation 

requirements), and the basis for any 

suggested compliance period. 

• As previously noted, proposed Rule 

15Fi–5 has been designed to be as 

consistent as possible with CFTC Rule 

23.504, which imposes trading 

relationship documentation 

requirements on Swap Entities, in order 

to avoid requiring dual SEC–CFTC 

registrants to incur additional systems 

or compliance costs due to differences 

between the two agencies’ approaches. 

To the extent that any such differences 

remain, should the Commission 

consider, for any firm dually-registered 

as both an SBS Entity and Swap Entity 

(regardless of whether such firm is also 

registered with the Commission as a 

broker-dealer or with the CFTC as a 

futures commission merchant), 

permitting such firm to comply with 

proposed Rule 15Fi–5 on an ongoing 

basis by complying with CFTC Rule 

23.504, as if such rule applied to 

security-based swaps? If so, what 

conditions, if any, should be placed on 

such reliance? 

• In addition to the exceptions set 

forth in the proposed rule, are there 

other types of security-based swaps that 

should not be subject to the underlying 

trading relationship documentation 

requirements? 

• Should the Commission require that 

the policies and procedures governing 

the required written security-based 

swap trading relationship 

documentation be approved by a senior 

officer of the SBS Entity, as is currently 

contemplated pursuant to proposed 

Rule 15Fi–5? Why or why not? As an 

alternative to requiring action by a 

senior officer, should such approval 

come instead from the governing body 

of the SBS Entity? Why or why not? As 

an additional alternative, should the 

Commission consider requiring 

approval of those policies and 

procedures by someone below the 

senior officer level? If so, who within an 

SBS Entity should approve them? 

• For purposes of the requirement 

that a senior officer approve the policies 

and procedures required by proposed 

Rule 15Fi–5, the Commission has 

preliminarily interpreted the term 

‘‘senior officer’’ as covering only the 

most senior executives in the 

organization, such as a firm’s chief 

executive officer, chief financial officer, 

chief legal officer, chief compliance 

officer, president, or other person at a 

similar level. Do commenters agree with 

such interpretation? Why or why not? 

Does the proposed interpretation create 

any differences with respect to the 

manner in which Swap Entities are 

required to comply with CFTC Rule 

23.504(a)(2), which uses the term 

‘‘senior management’’? Should the 

explanation included in the 

Commission’s proposed interpretation 

instead be included in the rule text? 

• Proposed Rule 15Fi–5 does not 

contain a comprehensive list of all of 

the terms that should be addressed in 

the required security-based swap 

trading relationship documentation. 

Rather, it provides that the 

documentation must include ‘‘all terms 

governing the trading relationship’’ 

between the SBS Entity and its 

counterparty and also contains a nonexclusive list of terms that must be 


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included. Do commenters agree with 

that approach? Why or why not? Should 

the Commission consider modifying the 

list of terms specifically identified in 

proposed Rule 15Fi–5(b)(1)? 

• Should the Commission provide 

any additional specificity and/or 

guidance as it relates to one or more of 

the terms identified in proposed Rule 

15Fi–5(b)(1) as required to be included 

in the trading relationship 

documentation? For example, should 

the rule specify the types of payment 

obligation terms that should be 

addressed in the documentation? Are 

there any particular details regarding 

potential events of default or 

termination events that should be 

specified in the documentation? Should 

the information requirements regarding 

the terms of the credit support 

arrangements between the two parties 

be modified in any way? In each case, 

why or why not and what additional 

details or guidance should be provided? 

• Proposed Rule 15Fi–5(b)(1) requires 

that the security-based swap trading 

relationship documentation that SBS 

Entities execute with the counterparties 

include terms addressing dispute 

resolution. Should the Commission 

provide any additional specificity with 

respect to this proposed requirement, 

including by identifying what particular 

aspects of the dispute resolution process 

should be addressed in the 

documentation? For example, should 

the documentation include specific 

requirements regarding the methods for 

identifying, recording, and monitoring 

disputes? Should the terms governing 

dispute resolution identify specific time 

periods applicable to the process? Are 

there particular aspects regarding 

communications between the 

counterparties that should be specified 

in connection with the terms related to 

dispute resolution, such as the method 

for providing notice of a potential or 

actual dispute? In each case, why or 

why not, and what additional details or 

guidance should be provided? 

• Proposed Rule 15Fi–5(b)(4) would 

require SBS Entities to include in their 

security-based swap trading relationship 

documentation with certain 

counterparties written agreement on the 

terms for valuing security-based swaps 

for the purposes of complying with the 

margin and risk management 

requirements. Do you agree with the 

scope of that requirement? Why or why 

not? Should these requirements apply to 

an SBS Entity’s transactions with all 

counterparties, including non-financial 

counterparties, without regard to 

whether they are requested? Why or 

why not? Is there any additional 

information that should be included in 

this requirement, or should any of the 

proposed requirements be modified or 

deleted? Do the provisions related to 

valuation discrepancies provide a 

sufficient basis for helping to ensure 

that disputes related to the value of a 

security-based swap are resolved in as 

efficient a manner as possible, or should 

any changes be made to these 

requirements? Should the requirements 

regarding valuation be modified in any 

way to account for the use of internal 

and/or proprietary inputs and models? 

In each case, why or why not, and how 

and why should the proposed rule be 

modified? 

• Are the protections in the proposed 

rule regarding the treatment of 

confidential, proprietary information in 

connection with the required valuation 

agreement sufficient to meet the needs 

of both the party providing the 

information and the party receiving it? 

If not, how should the proposal be 

revised to address any such concerns? 

• In addition to the terms governing 

the valuation agreement in proposed 

Rule 15Fi–5(b)(4), are there any other 

requirements that should be limited to, 

or modified for, certain types of 

counterparties (e.g., financial 

counterparties)? If so, which ones, and 

what particular requirements should 

apply? 

• Do the disclosure requirements in 

paragraphs (5) and (6) of proposed Rule 

15Fi–5(b), as they relate to the ‘‘insured 

depository institution’’ or ‘‘financial 

company’’ status of the SBS Entity or its 

counterparty and to the status of a 

security-based swap accepted for 

clearing, respectively, provide useful 

and relevant information to 

counterparties to security-based swaps? 

Why or why not? Should any other 

disclosure requirements be modified or 

deleted? If so, which ones and how? 

Should any additional disclosure 

requirements be added to the proposed 

rule? If so, what should be added and 

why? 

• Do commenters agree with the 

scope of the proposed definition of 

‘‘financial counterparty’’ in proposed 

Rule 15Fi–1(g), which is used for 

determining when the required securitybased swap trading relationship 

documentation would need to include 

the valuation methodology set forth in 

proposed Rule 15Fi–5(b)(4)? Should that 

definition be expanded to include other 

types of financial entities, such as SECregistered broker-dealers, investment 

companies, or investment advisers? If 

so, which types of entities should be 

added to the definition and why? 

• Do commenters agree with the 

proposed requirements related to the 

performance of periodic audits of the 

SBS Entity’s security-based swap 

relationship documentation, as set forth 

in proposed Rule 15Fi–5(c)? Why or 

why not? If not, how should they be 

clarified? Should the Commission 

provide any additional specificity 

regarding what constitutes 

‘‘independence’’ for these purposes? If 

so, how should that standard be 

measured and evaluated? For example, 

the Commission has extensive 

experience with respect to determining 

what constitutes ‘‘independence’’ in the 

context of accountants that audit and 

review financial statements and prepare 

attestation reports filed with the 

Commission, including in connection 

with rules adopted pursuant to Title II 

of the Sarbanes-Oxley Act of 2002. 

Should the Commission consider 

leveraging particular aspects of that 

experience in connection with refining 

the requirements in proposed Rule 

15Fi–5(c)? If so, please explain. 

• Are there any circumstances under 

which an internal auditor could be 

considered to be ‘‘independent’’ for 

purposes of proposed Rule 15Fi–5(c)? If 

so, please explain. If not, should the 

Commission consider eliminating the 

requirement that the auditor be 

independent in order to allow for 

internal audits of the SBS Entity’s 

security-based swap relationship 

documentation? If so, are there 

particular conditions that should be 

included in the requirement in order to 

maintain the integrity of the audit 

process? 

• Should the person performing the 

audit of the SBS Entity’s security-based 

swap relationship documentation 

pursuant to proposed Rule 15Fi–5(c) be 

subject to any qualification 

requirements, such as the requirement 

to be registered with the Public 

Company Accounting Oversight Board 

(‘‘PCAOB’’)? If so, which qualifications 

should be required and why? If not, 

should proposed Rule 15Fi–5(c) be 

clarified to state explicitly that PCAOB 

registration is not a condition of the 

rule? 

• Should SBS dealers and major SBS 

participants be treated the same for 

purposes of the portfolio reconciliation 

requirements in proposed Rule 15Fi–5? 

Why or why not? 

E. Verification of Transaction Data by 

SDRs 

In light of certain of the rules we are 

proposing today, the Commission 

believes it to be an appropriate time to 

revisit and request comment on an issue 

previously identified in connection with 

the rules applicable to the registration 

and ongoing regulation of SDRs. As 

background, Section 13(n) of the 


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4634 Federal Register / Vol. 84, No. 32 / Friday, February 15, 2019 / Proposed Rules 

109Section 3(a)(75) of the Exchange Act defines 

the term ‘‘security-based swap data repository’’ to 

mean ‘‘any person that collects and maintains 

information or records with respect to transactions 

or positions in, or the terms and conditions of, 

security-based swaps entered into by third parties 

for the purpose of providing a centralized 

recordkeeping facility for security-based swaps.’’ 15 

U.S.C. 78c(a)(75). 

110See 15 U.S.C. 78m(n)(5). 

111See Security-Based Swap Data Repository 

Registration, Duties, and Core Principles, Exchange 

Act Release No. 74246 (Feb. 11, 2015), 80 FR 14437 

(Mar. 19, 2015) (‘‘SDR Adopting Release’’). 

112See 17 CFR 240.13n–4(b)(3). 

113See, e.g., Letter from Michael C. Bodson, 

President and Chief Executive Officer, The 

Depository Trust & Clearing Corporation, and Larry 

E. Thompson, Chairman, DTCC Data Repository 

(U.S.) LLC (‘‘DDR’’), Managing Director and Vice 

Chairman, The Depository Trust & Clearing 

Corporation, dated Sept. 22, 2017, regarding DDR’s 

application for registration as an SDR (withdrawn 

on Mar. 27, 2018), available at: https://

www.sec.gov/comments/sbsdr-2016-02/ 

sbsdr201602-2590214-161092.pdf (noting the 

difficulty an SDR faces with respect to outreach to 

the non-reporting side of a security-based swap 

when that non-reporting counterparty is not a 

member of an SDR and proposing that Section 

13(n)(5)(B) and corresponding Rule 13n–4(b)(3) be 

interpreted as requiring SDRs to confirm the 

accuracy of the security-based swap solely with 

counterparties who are its members). 

114Cf. SDR Adopting Release, 80 FR at 14491. 

115See id. 

116See proposed Rule 15Fi–1(i)(1) (referencing 17 

CFR 242.901). 

117The Commission also notes that Rule 905(a) of 

Regulation SBSR, which was adopted in 2015, 

generally imposes a duty to correct on any 

counterparty to a security-based swap (or any other 

person having a duty to report the security-based 

swap) that discovers an error in the information 

reported with respect to that security-based swap. 

See 17 CFR 242.905(a). Accordingly, if any 

discrepancies are identified in the course of 

satisfying the portfolio reconciliation requirements 

contained in proposed Rule 15F–3 that resulted in 

incorrect information having been reported to an 

SDR, then the SBS Entity would be required to 

follow the procedures set forth in Rule 905(a) to 

correct any erroneous information with the SDR. 

Exchange Act establishes a regulatory 

regime for the operation of and 

governance of SDRs.109 Among other 

things, Section 13(n)(5)(B) requires each 

registered SDR to ‘‘confirm with both 

counterparties to the security-based 

swap the accuracy of the data that was 

submitted.’’ 110 On February 15, 2015, 

the Commission adopted Rules 13n–1 to 

13n–12, which govern the SDR 

registration process, duties, and core 

principles.111 Among other core 

principles governing the registration 

and ongoing obligations of SDRs, Rule 

13n–4(b)(3) implements the statutory 

requirement set forth in Section 

13(n)(5)(B) by requiring SDRs to 

confirm, as prescribed in Rule 13n–5, 

with both counterparties to the securitybased swap the accuracy of the data that 

was submitted.112

As part of the process of 

implementing the SDR rules, at least 

one former SDR applicant expressed 

reservations and concerns about the 

burdens of requiring SDRs to reach out 

to counterparties who are not its 

members to verify accuracy of the 

data.113 The Commission understands 

these concerns and the difficulty SDRs 

could face when attempting to contact 

counterparties to a security-based swap 

transaction with whom the SDR has no 

existing relationship. At the same time, 

however, the Commission also 

recognizes the importance of ensuring 

that the security-based swap data 

reported to an SDR is complete and 

accurate. 

Accordingly, the Commission 

preliminarily believes that certain 

provisions in proposed Rules 15Fi–3 

and 15Fi–5, if adopted and taken 

together, could be relevant to SDRs in 

seeking to meet their obligations under 

Section 13(n)(5)(B) and Rule 13n– 

4(b)(3). As we explained in connection 

with adopting the SDR rules, SDRs may 

be able to reasonably rely on certain 

third parties to address the accuracy of 

the transaction data.114 For example, the 

Commission previously stated that if an 

SDR develops reasonable policies and 

procedures that rely on confirmations 

completed by another entity, such as a 

third-party confirmation provider, as 

long as such reliance is reasonable the 

SDR could use such confirmation to 

fulfill its obligations under certain SDR 

rules.115 Because the two relevant 

provisions that we are proposing today 

generally relate to the obligation of SBS 

Entities to take certain steps in the 

reconciliation and documentation 

processes related specifically to the 

reporting of the relevant security-based 

swap data to an SDR, including by 

clarifying the reporting obligations of 

the counterparties, the Commission 

believes that, like the previous example, 

these measures, taken together, could 

provide an SDR with a set of factors to 

assess the reasonableness of relying on 

an SBS Entity’s ability to independently 

provide the definitive report of a given 

security-based swap position, thereby 

providing a basis for the SDR to satisfy 

its statutory and regulatory obligations 

to verify the accuracy of the reported 

data when the SBS Entity’s counterparty 

is not a member of the SDR. The 

Commission requests comment on 

whether this preliminary analysis is 

accurate. 

1. Reconciliation of Terms Submitted to 

an SDR 

As described above in Section I.B.2, 

the definition of ‘‘material terms’’ in 

proposed Rule 15Fi–1(i), which 

identifies the information that SBS 

Entities would be required to reconcile 

with their counterparties, differs based 

on whether a security-based swap 

transaction had previously been 

included in a security-based swap 

portfolio for purposes of the portfolio 

reconciliation requirements in proposed 

Rule 15Fi–3. With respect to any 

security-based swap that has not yet 

been reconciled as part of, a securitybased swap portfolio, ‘‘material terms’’ 

would be defined to mean each term 

that is required to be reported to a 

registered SDR under Rule 901 under 

the Exchange Act.116 With respect to all 

other security-based swaps within a 

security-based swap portfolio, the 

definition of ‘‘material terms’’ would 

exclude any term that is not relevant to 

the ongoing rights and obligations of the 

parties and the valuation of the securitybased swap. 

As we also previously noted in 

Section I.B.2, the Commission 

preliminarily believes that there are 

potential benefits, both to SBS Entities 

and potentially to the security-based 

swap market as a whole, of requiring 

firms to initially reconcile all of the 

information required to be reported to 

an SDR. Specifically, doing so helps to 

ensure that the data reported to an SDR, 

and ultimately disseminated to the 

public, is accurate and complete. 

Section 13(n)(5)(B) of the Exchange Act 

and Rule 13n–4(b)(3) are both intended 

to accomplish the same objective of 

transparency regarding complete and 

accurate security-based swap data. 

Accordingly, like the previous example 

involving the third-party confirmation 

process, it may be appropriate to allow 

an SDR to meet its obligations by 

reasonably relying on an SBS Entity. 

Such reliance could be based, at least in 

part, on that fact that the SBS Entity 

would be subject to the portfolio 

reconciliation requirements in proposed 

Rule 15Fi–3 using the proposed 

definition of ‘‘material terms’’ in Rule 

15Fi–1(i), were it to be adopted, to 

initially reconcile all of the terms of a 

transaction required to be reported to an 

SDR or the Commission pursuant to 

Rule 901, particularly in cases when the 

SBS Entity’s counterparty is not 

onboarded to the SDR.117 The 

Commission seeks comment on whether 

this preliminary analysis is accurate. 

2. Documentation of Regulatory 

Reporting Obligations 

As discussed above in Section I.D, 

proposed Rule 15Fi–5 would require 

each SBS Entity to establish, maintain, 

and follow written policies and 

procedures reasonably designed to 

ensure that it executes written securityVerDate Sep<11>2014 22:04 Feb 14, 2019 Jkt 247001 PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 E:\FR\FM\15FEP2.SGM 15FEP2

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118See 17 CFR 242.901(a). 

119See supra note 2. Although we are proposing 

books and records requirements that would be 

additive to an existing proposal, we are not reopening the comment period for the entirety of the 

SBS Books and Records Proposing Release. Rather, 

our request for comment in this section is limited 

solely to the recordkeeping requirements related to 

the rules we are proposing today. 

120See proposed amendments to Rules 17a– 

3(a)(31)(i), 18a–5(a)(18)(i), and 18a–5(b)(14)(i). 

121See proposed amendments to Rules 17a– 

3(a)(31)(ii), 18a–5(a)(18)(ii), and 18a–5(b)(14)(ii). 

122See proposed amendments to Rules 17a– 

3(a)(31)(iii), 18a–5(a)(18)(iii), and 18a–5(b)(14)(iii). 

based swap trading relationship 

documentation with each of its 

counterparties prior to, or 

contemporaneously with, executing a 

security-based swap with any 

counterparty. Paragraph (b)(1) of that 

rule requires that the trading 

relationship documentation be in 

writing and also sets forth the minimum 

set of items that must be addressed by 

the documentation including, among 

other things, the allocation of any 

applicable regulatory reporting 

obligations (including pursuant to 

Regulation SBSR).118

Rule 901(a) of Regulation SBSR 

establishes a ‘‘reporting hierarchy’’ that 

specifies which counterparty to a 

security-based swap has the duty to 

report the transaction. Where possible, 

the rule assigns the reporting duty to the 

side that is registered with the 

Commission as an SBS Entity. Thus, if 

only one of the counterparties to a 

security-based swap transaction is an 

SBS Entity, then such SBS Entity will be 

the reporting side. In addition, if one 

counterparty to a security-based swap 

transaction is an SBS dealer and the 

other is a major SBS participant, the 

SBS dealer will be the reporting side. 

However, if both counterparties to a 

security-based swap transaction are SBS 

dealers (or both are major SBS 

participants), the sides are required to 

select the reporting side. The selection 

of the reporting side is an example of 

the type of ‘‘applicable reporting 

obligation’’ that proposed Rule 15Fi– 

5(b)(1) would cover. 

Accordingly, the Commission 

preliminarily believes that requiring 

SBS Entities to address any applicable 

regulatory reporting obligations in the 

written trading relationship 

documentation that it executes with 

their counterparties also could be 

relevant to SDRs in seeking to meet their 

obligations under Section 13(n)(5)(B) 

and Rule 13n–4(b)(3). For example, to 

the extent that only one counterparty to 

a security-based swap is an SBS Entity, 

the trading relationship documentation 

could be used to memorialize the fact 

that the SBS Entity is the reporting party 

for purposes of Rule 901(a), and that 

such SBS Entity will be responsible for 

verifying the accuracy of each securitybased swap transaction with the SDR. 

3. Comments Requested 

The Commission generally requests 

comments on the issues described 

above. In addition, the Commission 

requests comments on the following 

specific issues: 

• Do you agree with the analysis 

described above, particularly as to how 

parts of proposed Rules 15Fi–3 

(including the definition of ‘‘material 

terms’’ in proposed Rule 15Fi–1(i)) and 

15Fi–5 could help address the concerns 

raised by former SDR applicants with 

respect to their obligations, pursuant to 

Section 13(n)(5)(B) of the Exchange Act 

and Rule 13n–4(b)(3), to confirm with 

both counterparties to a security-based 

swap the accuracy of the data that was 

submitted to the SDR? 

Æ Specifically, do those aspects of the 

proposed rules provide a sufficient 

basis, in whole or in part, for an SDR to 

assess whether it can reasonably rely on 

a SBS Entity’s verification of transaction 

data as the basis to meet the 

requirements of Section 13(n)(5)(B) and 

Rule 13n–4(b)(3)? Why or why not? 

Æ If not, should the Commission 

provide an exemption from the 

verification requirements described 

above to SDRs that reasonably rely on 

SBS Entities? Why or why not? If so, 

what specific terms and conditions 

should be included in such exemption 

and why? 

Æ Are there other regulatory actions 

the Commission should consider to 

address the issue? If so, which ones and 

why? 

• Should any aspect of the proposed 

analysis be modified in any way to 

account for other situations that may not 

be fully addressed here? If so, how and 

why? For example, would an SDR be 

able to reasonably rely on an SBS Entity 

to independently provide the definitive 

report of a given security-based swap 

position for both counterparties in 

situations when the SBS Entity is acting 

as agent for one of the two 

counterparties and is not itself a 

counterparty? Why or why not, and how 

should the analysis be revised to 

address that situation? 

F. Recordkeeping Requirements 

1. Proposed Amendments to 

Recordkeeping Rules 

The Commission also is proposing 

rule amendments that would modify 

certain proposed requirements 

contained in its April 2014 release 

proposing rules for the recordkeeping, 

reporting, and notification requirements 

applicable to SBS Entities.119 Those rule 

amendments would require each SBS 

Entity to make and keep current 

information relevant to each portfolio 

reconciliation and portfolio 

compression exercise in which it 

participates, and to retain a record of 

each valuation dispute notification 

required pursuant to proposed Rule 

15Fi–3(c), all security-based swap 

trading relationship documentation 

required to be created under proposed 

Rule 15Fi–5, a record of the results of 

each audit of the SBS Entity’s securitybased swap trading relationship 

documentation policies and procedures, 

as required pursuant to proposed Rule 

15Fi–5(c), and each policy and 

procedure created pursuant to proposed 

Rules 15Fi–3 through 15Fi–5. 

Specifically, the Commission is 

proposing to amend: (1) Existing Rule 

17a–3 under the Exchange Act, which 

applies to SBS Entities that are also 

registered with the Commission as 

broker-dealers under Section 15(b) of 

the Exchange Act (‘‘broker-dealer SBS 

Entities’’), and (2) proposed Rule 18a–5 

under the Exchange Act, which applies 

to SBS Entities that are not also 

registered with the Commission as 

broker-dealers under Section 15(b) of 

the Exchange Act (‘‘stand-alone and 

bank SBS Entities’’). These proposed 

amendments would require each SBS 

Entity to make and keep current records 

of each security-based swap portfolio 

reconciliation, whether conducted 

pursuant to proposed Rule 15Fi–3 or 

otherwise,120 a copy of each valuation 

dispute notification required to be 

provided to the Commission pursuant to 

proposed Rule15Fi–3(c),121 and a record 

of each bilateral offset and each bilateral 

portfolio compression exercise or 

multilateral portfolio compression 

exercise in which it participates, 

whether conducted pursuant to 

proposed Rule 15Fi–4 or otherwise.122

With respect to the reconciliation 

requirement, the proposed rules would 

require that these records include the 

dates of the security-based swap 

portfolio reconciliation, the number of 

portfolio reconciliation discrepancies, 

the number of security-based swap 

valuation disputes (including the timeto-resolution of each valuation dispute 

and the age of outstanding valuation 

disputes, categorized by transaction and 

counterparty), and the name of the 

third-party entity performing the 

security-based swap portfolio 


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4636 Federal Register / Vol. 84, No. 32 / Friday, February 15, 2019 / Proposed Rules 

123See proposed amendments to Rules 17a– 

3(a)(31)(i), 18a–5(a)(18)(i), and 18a–5(b)(14)(i). 

124See proposed amendments to Rules 17a– 

3(a)(31)(ii), 18a–5(a)(18)(ii), and 18a–5(b)(14)(ii). 

125See proposed amendments to Rules 17a– 

3(a)(31)(iii), 18a–5(a)(18)(iii), and 18a–5(b)(14)(iii). 

126See proposed amendments to Rules 17a– 

4(b)(1), 18a–6(b)(1)(i), and 18a–6(b)(2)(i). 

127See proposed amendments to Rules 17a– 

4(e)(10) and 18a–6(d)(4). 

128See proposed amendments to Rules 17a– 

4(e)(11)(i) and 18a–6(d)(5)(i). 

129See proposed amendments to Rules 17a– 

4(e)(11)(ii) and 18a–6(d)(5)(ii). 

130See proposed amendments to Rules 17a– 

4(e)(11)(iii) and 18a–6(d)(5)(iii). 

131See Cross-Border Security-Based Swap 

Activities; Re-Proposal of Regulation SBSR and 

Certain Rules and Forms Relating to the 

Registration of Security-Based Swap Dealers and 

Major Security-Based Swap Participants, Exchange 

Act Release No. 69490 (May 1, 2013), 78 FR 30968 

(May 23, 2013) (‘‘Cross-Border Proposing Release’’) 

(discussing joint rulemaking to further define 

various Title VII terms). 

132See id. at 30986 (‘‘We are proposing to apply 

the Title VII requirements associated with 

registration (including, among others, capital and 

margin requirements and external business conduct 

requirements) to the activities of registered entities 

to the extent we have determined that doing so 

advances the purposes of Title VII.’’) (footnotes 

omitted). 

133See id. at 31009–10. 

134 Id. 

135See id. at 31011. 

136See id. at 31011–16 (addressing the 

classification of capital and margin requirements, as 

well as of the documentation standard requirements 

of Section 15F(i) of the Exchange Act and other risk 

management requirements applicable to SBS 

dealers). 

137See id. at 31011, 31024–25. See also id. at 

31035 (applying the analysis to major SBS 

participants). In reaching this conclusion, the 

Commission explained that it ‘‘preliminarily 

believes that entity-level requirements are core 

requirements of the Commission’s responsibility to 

ensure the safety and soundness of registered 

security-based swap dealers,’’ and that ‘‘it would 

reconciliation, if any.123 With respect to 

the valuation notification requirement, 

the proposed rules would require the 

retention of each notification required to 

be provided to the Commission 

pursuant to proposed Rule 15Fi–3(c).124

With respect to compression, the 

proposed rules would require that these 

records include the dates of the offset or 

compression, the security-based swaps 

included in the offset or compression, 

the identity of the counterparties 

participating in the offset or 

compression, the results of the 

compression, and the name of the thirdparty entity performing the offset or 

compression, if any.125 The Commission 

preliminarily believes that requiring 

SBS Entities to make and retain such 

records will, among other things, 

promote compliance with proposed 

Rules 15Fi–3 and 15Fi–4, assist SBS 

Entities in the event that they need to 

resolve problems that relate to a 

previous reconciliation or compression, 

and assist Commission examiners in 

reviewing compliance with those rules. 

In addition, the Commission is 

proposing to amend (1) existing Rule 

17a–4 under the Exchange Act, which 

requires each applicable broker-dealer, 

including broker-dealer SBS Entities, to 

preserve certain records if the brokerdealer makes or receives the type of 

record and (2) proposed Rule 18a–6 

under the Exchange Act, which imposes 

parallel preservation requirements on 

stand-alone and bank SBS Entities. In 

particular, the proposed amendments to 

Rule 17a–4 and to proposed Rule 18a– 

6 would require SBS Entities to retain 

all of the records required to be made 

and kept under the proposed 

amendments to Rule 17a–3 and 

proposed Rule 18a–5 for at least three 

years, the first two years in an easily 

accessible place.126 The proposed 

amendments also would require each 

SBS Entity to retain the following: 

• the written policies and procedures 

required pursuant to proposed Rules 

15Fi–3 through 15Fi–5 until three years 

after termination of the use of the 

policies and procedures; 127

• each written agreement with 

counterparties on the terms of portfolio 

reconciliation with those counterparties 

as required to be created under 

proposed Rules 15Fi–3(a)(1) and (b)(1) 

until three years after the termination of 

the agreement and all transactions 

governed thereby; 128

• security-based swap trading 

relationship documentation with 

counterparties required to be created 

under proposed Rule 15Fi–5 until three 

years after the termination of such 

documentation and all transactions 

governed thereby; 129 and 

• a record of the results of each audit 

required to be performed pursuant to 

proposed Rule 15Fi–5(c) until three 

years after the completion of the 

audit.130

The Commission preliminarily 

believes that requiring the retention of 

the above records in accordance with 

the applicable rules will help ensure 

that those records are retained in a 

manner that would allow them to be 

readily accessible for Commission 

examiners. 

2. Comments Requested 

The Commission generally requests 

comments on all aspects of the proposed 

amendments to Rules 17a–3 and 17a–4 

and to proposed Rules 18a–5, and 18a– 

6. In addition, the Commission requests 

comments on the following specific 

issues: 

• Has the Commission provided 

sufficient guidance regarding the scope 

of the proposed recordkeeping 

amendments? Are there aspects of the 

proposed amendments for which the 

Commission should consider providing 

additional guidance? If so, please 

explain. 

• How do the types of records that 

would need to be made and kept current 

under Rule 17a–3 and proposed Rule 

18a–5, in each case as proposed to be 

amended in this release, align with the 

types of records that a futures 

commission merchant or a swap dealer 

is required to make pursuant to CFTC 

regulations? 

II. Cross-Border Application of Rules 

15Fi–3 Through 15Fi–5. 

A. Background on the Cross-Border 

Application of Title VII Requirements 

In 2013, the Commission proposed 

rules and interpretive guidance to 

address the cross-border application of 

Title VII, including requirements 

applicable to SBS Entities.131 In that 

proposal, the Commission preliminarily 

interpreted the Title VII requirements 

associated with registration to apply 

generally to the activities of registered 

entities.132 The Commission further 

proposed a taxonomy to classify 

requirements under Section 15F of the 

Exchange Act as applying at either the 

transaction-level or at the entitylevel.133 The Commission took the 

preliminary view that transaction-level 

requirements under Section 15F of the 

Exchange Act are those that primarily 

focus on protecting counterparties to 

security-based swap transactions by 

requiring SBS dealers to, among other 

things, provide certain disclosures to 

counterparties, adhere to certain 

standards of business conduct, and 

segregate customer funds, securities, 

and other assets.134

In contrast to transaction-level 

requirements, the Commission 

preliminarily took the view that entitylevel requirements under Section 15F of 

the Exchange Act are those that are 

expected to play a role in ensuring the 

safety and soundness of the entity and 

thus relate to the SBS Entity as a 

whole.135 Entity-level requirements 

include capital and margin 

requirements, as well as other 

requirements relating to a firm’s 

identification and management of its 

risk exposure, such as the requirements 

in Section 15F(i) of the Exchange Act, 

which provides the statutory basis for 

the rules the Commission is proposing 

in this release.136 Because these 

requirements relate to the entire entity, 

the Commission proposed to apply them 

to SBS Entities on a firm-wide basis, 

without exception.137


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not be consistent with this mandate to provide a 

blanket exclusion to foreign security-based swap 

dealers from entity-level requirements applicable to 

such entities.’’ Id. at 31024 (footnotes omitted). The 

Commission further expressed the preliminary view 

that concerns regarding the application of entitylevel requirements to foreign SBS dealers would 

largely be addressed through the proposed 

approach to substituted compliance. See id. 

138See Business Conduct Standards for SecurityBased Swap Dealers and Major Security-Based 

Swap Participants, Release No. 77617 (Apr. 14, 

2016), 81 FR 29960, 30061–69 (May 13, 2016) 

(‘‘Business Conduct Standards Adopting Release’’). 

Under this framework, rules relating to diligent 

supervision pursuant to Section 15F(h)(1)(B), those 

relating to the chief compliance officer under 

Section 15F(k) of the Exchange Act, and those 

relating to certain risk management requirements 

under Section 15F(j) of the Exchange Act were 

determined to be entity-level requirements that 

apply to an SBS Entity’s business with foreign 

counterparties to the same extent that they apply to 

the SBS dealer’s or major SBS participant’s U.S. 

business. The remaining rules were determined to 

apply at the transaction-level. 

139See Trade Acknowledgment and Verification 

Adopting Release, 81 FR at 39826. 

140See supra note 14 and accompanying text. 

141See supra notes 62–63 and accompanying text. 

142We recognize that the CFTC has taken a 

different position with regard to corresponding 

requirements pursuant to the CEA, classifying them 

as what the CFTC has termed ‘‘Category A’’ 

transaction-level requirements. See CFTC 

Interpretive Guidance and Policy Statement 

Regarding Compliance With Certain Swap 

Regulations, 78 FR 45292, 45334 (Jul. 26, 2013). 

The Commission first applied this 

taxonomy with respect to the rules 

adopted pursuant to Section 15F(i) of 

the Exchange Act in 2016 when we 

adopted rules to implement business 

conduct standards for SBS Entities.138

The Commission subsequently 

determined that the trade 

acknowledgment and verification rules 

would apply at the entity-level.139 The 

Commission has not, however, proposed 

or adopted a cross-border interpretation 

with respect to the portfolio 

reconciliation, portfolio compression, 

and trading relationship documentation 

requirements that we are now 

proposing. 

B. Proposed Cross-Border Interpretation 

Consistent with its approach in both 

the Cross-Border Proposing Release and 

the Trade Acknowledgement and 

Verification Adopting Release, the 

Commission believes that the 

requirements being proposed in this 

release pursuant to Section 15F(i) of the 

Exchange Act—as they relate to 

portfolio reconciliation, portfolio 

compression, and trading relationship 

documentation—should be treated as 

entity-level requirements that apply to 

an SBS Entity’s entire security-based 

swap business without exception, 

including in connection with any 

security-based swap business it 

conducts with foreign counterparties. 

The Commission preliminarily 

believes that the requirements 

referenced above play an important role 

in addressing risks to the SBS Entity as 

a whole, including risks related to the 

entity’s safety and soundness. As we 

have noted throughout this release in 

connection with describing each of the 

proposed rules, providing SBS Entities 

and their counterparties to securitybased swap transactions with the ability 

to identify and resolve discrepancies 

involving key terms of their 

transactions—which is a key 

consideration underpinning both the 

proposed portfolio reconciliation and 

trading relationship documentation 

requirements—serves as an important 

mechanism for allowing SBS Entities 

and their counterparties to manage their 

internal risks.140 Similarly, portfolio 

compression is intended to help SBS 

Entities and their counterparties in 

security-based swap transactions 

manage their post-trade risks in a 

number of important ways, including by 

eliminating redundant uncleared 

derivatives transactions (as measured 

both by the number of contracts and 

total notional value) and potentially 

reducing a market participant’s credit 

risk to its direct counterparties, 

including by eliminating all outstanding 

transactions with some counterparties, 

without affecting the market 

participant’s overall economic 

position.141

An alternative approach that does not 

require an SBS Entity to take steps to 

manage its internal risk using portfolio 

reconciliation, compression, or 

standards governing trading relationship 

documentation could be expected to 

contribute to operational risk and legal 

uncertainty throughout the firm’s entire 

security-based swap business, affecting 

the entity’s business as a whole, and not 

merely specific security-based swap 

transactions. For example, as we have 

previously noted, inaccurate or 

incomplete trading relationship 

documentation could lead to, among 

other things, a collateral dispute 

between the counterparties to a securitybased swap transaction. The larger the 

dispute, even if confined to a single 

counterparty, the greater the risk that an 

SBS Entity could experience liquidity 

problems on a firmwide basis. 

Moreover, to the extent that these 

risks affect the safety and soundness of 

the SBS Entity, they also may affect the 

firm’s counterparties and the 

functioning of the broader securitybased swap market. Continuing with the 

previous example, if a collateral dispute 

with a foreign counterparty creates 

liquidity issues throughout an SBS 

Entity, the firm could experience 

difficulty making payments or posting 

collateral to its other counterparties, 

which may include U.S. persons. 

Accordingly, the Commission 

preliminarily believes that it is 

appropriate to apply the proposed 

requirements to the entirety of an SBS 

Entity’s security-based swap 

business.142

C. Comments Requested 

The Commission generally requests 

comments on its interpretative guidance 

regarding the cross-border application of 

Proposed Rules15Fi–3 through 15Fi–5. 

In addition, the Commission requests 

comments on the following specific 

issues: 

• Does the proposed approach 

appropriately treat the proposed 

portfolio reconciliation, portfolio 

compression, and trading relationship 

documentation requirements as entitylevel requirements applicable to the 

entire business conducted by foreign 

SBS Entities? If not, please identify any 

particular aspects of those proposed 

rules that should not be applied to a 

foreign SBS Entity, or applied only to 

specific transactions, and explain how 

such an approach would be consistent 

with the goals of Title VII. 

• Should the Commission apply the 

same cross-border approach to the 

application of the proposed portfolio 

reconciliation, portfolio compression, 

and trading relationship documentation 

requirements for both SBS dealers and 

major SBS participants? If you believe 

that the approach should vary based on 

the type of SBS Entity involved, please 

describe how the cross-border approach 

for SBS dealers should differ from the 

cross-border approach for major SBS 

participants, and explain the 

justification for any potential 

differences in approach. 

• What types of conflicts might a 

foreign SBS Entity face if subjected to 

the proposed portfolio reconciliation, 

portfolio compression, and trading 

relationship documentation 

requirements in more than one 

jurisdiction? In what situations would 

compliance with more than one of these 

requirements be difficult or impossible? 

• As an alternative to treating the 

proposed requirements as entity-level 

requirements, should the Commission 

instead follow the approach taken by 

the CFTC and treat the proposed 

portfolio reconciliation, portfolio 

compression, and trading relationship 

documentation requirements (or some 

combination of the three) as transactionlevel requirements? If so, to which 

cross-border security-based swap 


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143See Business Conduct Standards Adopting 

Release, 81 FR at 30074. 

144The Commission first addressed the potential 

for allowing market participants to satisfy certain 

Title VII requirements by complying with 

comparable foreign rules as a substitute in 2013 as 

part of the Cross-Border Proposing Release. 

Pursuant to that release, the Commission proposed 

making substituted compliance potentially 

available in connection with the requirements 

applicable to SBS dealers pursuant to Section 15F 

of the Exchange Act, other than the registration 

requirements applicable to dealers. See CrossBorder Proposing Release, 78 FR at 31088, 31207– 

08 (proposed Rule 3a71–5). 

145See Trade Acknowledgment and Verification 

Adopting Release, 81 FR at 39827–28. 

146The discussions in the Business Conduct 

Standards Adopting Release, including those 

regarding consideration of supervisory and 

enforcement practices (see id. at 30079), regarding 

certain multi-jurisdictional issues (see id. at 30079– 

80), and regarding application procedures (see id. 

at 30080–81) are applicable to the proposed 

portfolio compression, portfolio reconciliation, and 

trading relationship documentation requirements. 

147See generally Business Conduct Standards 

Adopting Release, 81 FR at 30073–74 (addressing 

the basis for making substituted compliance 

available in the context of the business conduct 

requirements). 

148Paragraph (a)(1) of the rule provides that the 

Commission may, conditionally or unconditionally, 

by order, make a determination with respect to a 

foreign financial regulatory system that compliance 

with specified requirements under the foreign 

financial system by an SBS dealer and/or by a 

registered major SBS swap participant, or class 

thereof, may satisfy the corresponding requirements 

identified in paragraph (d) of the rule that would 

otherwise apply. 

149See Business Conduct Standards Adopting 

Release, 81 FR at 30078–79. See also Trade 

Acknowledgment and Verification Adopting 

Release, 81 FR at 39828. 

transactions should these requirements 

apply and why? Please describe how 

these requirements would apply 

differently if classified as transactionlevel requirements instead of as entitylevel requirements. Please also describe 

any practical challenges that would be 

presented by classifying them 

differently from the CFTC. 

III. Availability of Substituted 

Compliance for Rules 15Fi–3 Through 

15Fi–5 

A. Existing Substituted Compliance 

Rule 

In 2016, the Commission adopted 

Rule 3a71–6 under the Exchange Act to 

provide that non-U.S. SBS Entities 

could satisfy applicable business 

conduct requirements under Section 

15F by complying with comparable 

regulatory requirements of a foreign 

jurisdiction, subject to certain 

conditions. The rule in part provides 

that the Commission shall not make a 

determination providing for substituted 

compliance unless the Commission 

determines, among other things, that the 

foreign regulatory requirements are 

comparable to otherwise applicable 

requirements.143 In adopting that 

substituted compliance rule, the 

Commission addressed a range of issues 

and concerns that commenters had 

raised in response to the substituted 

compliance proposal that was set forth 

in the Cross-Border Proposing Release. 

When the Commission adopted this 

substituted compliance rule that solely 

addressed the business conduct rules, it 

stated that it expected to assess the 

potential availability of substituted 

compliance in connection with other 

requirements when the Commission 

considers final rules to implement those 

requirements.144 Consistent with that 

statement, the Commission 

subsequently amended Rule 3a71–6 in 

the Trade Acknowledgment and 

Verification Adopting Release to 

provide SBS Entities with the potential 

to avail themselves of substituted 

compliance to satisfy the Title VII trade 

acknowledgment and verification 

requirements.145

B. Proposed Amendment to Rule 3a71– 

6 

The Commission is proposing to 

further amend Rule 3a71–6 to provide 

SBS Entities that are not U.S. persons 

(as defined in Rule 3a71–3(a)(4) of the 

Exchange Act) with the potential to 

avail themselves of substituted 

compliance to satisfy the Title VII 

portfolio compression, portfolio 

reconciliation, and trading relationship 

documentation requirements. In 

proposing to amend the rule, the 

Commission has preliminarily 

concluded that the principles associated 

with substituted compliance, as 

previously adopted in connection with 

both the business conduct requirements 

and the trade acknowledgement and 

verification requirements, in large part 

should similarly apply to the portfolio 

compression, portfolio reconciliation, 

and trading relationship documentation 

requirements we are proposing today. 

Accordingly, except as discussed below, 

the proposed substituted compliance 

rule would apply to the portfolio 

compression, portfolio reconciliation, 

and trading relationship documentation 

requirements in the same manner as it 

already applies to the business conduct 

requirements and the trade 

acknowledgement and verification 

requirements.146

1. Basis for Substituted Compliance in 

Connection With the Portfolio 

Reconciliation, Portfolio Compression, 

and Trading Relationship 

Documentation Requirements 

In light of the global nature of the 

security-based swap market and the 

prevalence of cross-border transactions 

within that market, there is the potential 

that the application of the Title VII 

portfolio compression, portfolio 

reconciliation, and trading relationship 

documentation requirements may lead 

to requirements that are duplicative of, 

or in conflict with, applicable foreign 

requirements, even when the two sets of 

requirements implement similar goals 

and lead to similar results. Those results 

have the potential to disrupt existing 

business relationships and, more 

generally, to reduce competition and 

market efficiency.147

To address those effects, the 

Commission preliminarily believes that 

under certain circumstances it may be 

appropriate to allow the possibility of 

substituted compliance, whereby market 

participants may satisfy the proposed 

portfolio compression, portfolio 

reconciliation, and trading relationship 

documentation requirements by 

complying with comparable foreign 

requirements. Allowing for the 

possibility of substituted compliance in 

this manner may be expected to help 

achieve the benefits of those particular 

risk mitigation requirements—helping 

to curb legal uncertainty and reduce 

credit and operational risk for 

participants in security-based swap 

transactions and in the broader 

market—in a way that helps avoid 

regulatory conflict and minimizes 

duplication, thereby promoting market 

efficiency, enhancing competition, and 

contributing to the overall functioning 

of the global security-based swap 

market. Accordingly, the Commission is 

proposing to amend paragraph (d) of 

Rule 3a71–6 to identify the portfolio 

compression, portfolio reconciliation, 

and trading relationship documentation 

requirements of Title VII as being 

potentially eligible for substituted 

compliance.148

2. Comparability Criteria, and 

Consideration of Related Requirements 

As discussed when we first adopted 

Rule 3a71–6—and reiterated when we 

amended the rule pursuant to the Trade 

Acknowledgement and Verification 

Adopting Release—the Commission will 

endeavor to take a holistic approach in 

determining the comparability of foreign 

requirements for substituted compliance 

purposes, focusing on regulatory 

outcomes as a whole, rather than on a 

requirement-by-requirement 

comparison.149 Under the proposed 

rule, the Commission’s comparability 

assessments associated with the 


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150We have not proposed rules making 

substituted compliance available specifically with 

respect to the amendments we are proposing to 

proposed Rules 18a–5 and 18a–6, which specify the 

recordkeeping, reporting, and notification 

requirements applicable to SBS Entities. Rather, to 

the extent that substituted compliance is made 

available with respect to those rules, we would 

anticipate that any determination made with 

respect to the comparability of the foreign financial 

regulatory system would address all aspects of the 

Commission recordkeeping, reporting, and 

notification requirements for SBS Entities including 

any amendments that we ultimately adopt with 

respect to the portfolio reconciliation, portfolio 

compression, and trading relationship document 

requirements. 

151 44 U.S.C. 3501 et seq. 

152See 44 U.S.C. 3502(3). 

153See 44 U.S.C. 3507(a)(1)(D); see also 5 CFR 

1320.5(a)(1)(iv). 

portfolio compression, portfolio 

reconciliation, and trading relationship 

documentation rules accordingly will 

consider whether, in the Commission’s 

view, the foreign regulatory system 

achieves regulatory outcomes that are 

comparable to the regulatory outcomes 

associated with those Exchange Act 

requirements. 

Proposed new paragraph (d)(4) of 

Rule 3a71–6 would also provide that 

prior to making a substituted 

compliance determination in 

connection with the portfolio 

reconciliation, portfolio compression, 

and trading relationship documentation 

requirements, the Commission intends 

to consider whether the requirements of 

the foreign financial regulatory system, 

the duties imposed by the foreign 

financial regulatory system, and the 

information that is required to be 

provided to counterparties pursuant to 

the requirements of the foreign financial 

regulatory system, are comparable to 

those required pursuant to the 

applicable Exchange Act provisions. 

In application, the Commission may 

determine to conduct its comparability 

analyses regarding the portfolio 

reconciliation, portfolio compression, 

and trading relationship documentation 

requirements in conjunction with 

comparability analyses regarding other 

Exchange Act requirements that, like the 

requirements we are proposing today, 

promote risk mitigation in connection 

with SBS Entities. Accordingly, 

depending on the applicable facts and 

circumstances, the comparability 

assessment associated with the portfolio 

reconciliation, portfolio compression, 

and trading relationship documentation 

requirements may constitute part of a 

broader assessment of Exchange Act risk 

mitigation requirements, and the 

applicable comparability decisions may 

be made at the level of those risk 

mitigation requirements as a whole.150

3. Comments Requested 

The Commission generally requests 

comments on all aspects of the proposed 

amendment to Rule 3a71–6. In addition, 

the Commission requests comments on 

the following specific issues: 

• Should the Commission provide 

SBS Entities with the potential to avail 

themselves of substituted compliance to 

satisfy the Title VII portfolio 

reconciliation, portfolio compression, 

and trading relationship requirements? 

Why or why not? If you believe that 

substituted compliance should not be 

available with respect to these 

requirements, how would you 

distinguish this policy decision from the 

Commission’s previous determination to 

make substituted compliance 

potentially available with respect to 

other Title VII requirements (i.e., the 

business conduct rules and the trade 

acknowledgment and verification 

rules)? 

• Do commenters agree with the 

scope and language of the proposed 

amendment to Rule 3a71–6? Why or 

why not? Are there aspects of the scope 

of the proposed rule for which the 

Commission should consider providing 

additional guidance? If so, what 

additional guidance should be provided 

and why? 

• Are the items identified in the 

proposed amendment to Rule 3a71–6 as 

factors the Commission will consider 

prior to making a substituted 

compliance determination in 

connection with the portfolio 

reconciliation, portfolio compression, 

and trading relationship documentation 

requirements appropriate? Why or why 

not? Should any of those items be 

modified or deleted? Should additional 

considerations be added? If so, please 

explain. 

IV. General Request for Comment 

We request and encourage any 

interested person to submit comments 

regarding the proposed rules, specific 

issues discussed in this release, and 

other matters that may have an effect on 

the proposed rules. With regard to any 

comments, we note that such comments 

are of particular assistance to our 

rulemaking initiative if accompanied by 

supporting data and analysis of the 

issues addressed in those comments. In 

addition, we would appreciate any 

comments related to the comparability 

of the rules we are proposing today and 

the corresponding CFTC rules already in 

effect, including whether certain aspects 

of the proposed rules should be 

modified to more fully conform to the 

CFTC’s rules. In comparing the two sets 

of rules, commenters are encouraged to 

identify any areas where the proposed 

rules may not be sufficiently aligned 

with the corresponding CFTC rules, 

such that they could impose 

unnecessary burdens (with respect to 

documentation or otherwise) on persons 

likely to register with the Commission 

as SBS Entities who are also registered 

with the CFTC as Swap Entities. 

V. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(‘‘PRA’’) 151 imposes certain 

requirements on federal agencies in 

connection with the conducting or 

sponsoring of any ‘‘collection of 

information.’’ 152 For example, 44 U.S.C. 

3507(a)(1)(D) provides that before 

adopting (or revising) a collection of 

information requirement, an agency 

must, among other things, publish a 

notice in the Federal Register stating 

that the agency has submitted the 

proposed collection of information to 

the Office of Management and Budget 

(‘‘OMB’’) and setting forth certain 

required information, including: (1) A 

title for the collection information; (2) a 

summary of the collected information; 

(3) a brief description of the need for the 

information and the proposed use of the 

information; (4) a description of the 

likely respondents and proposed 

frequency of response to the collection 

of information; (5) an estimate of the 

paperwork burden that shall result from 

the collection of information; and (6) 

notice that comments may be submitted 

to the agency and director of OMB.153

Certain provisions of the proposed 

rules contain ‘‘collection of 

information’’ requirements within the 

meaning of the PRA. The Commission is 

submitting these collections of 

information to OMB for review in 

accordance with 44 U.S.C. 3507 and 5 

CFR 1320.11. An agency may not 

conduct or sponsor, and a person is not 

required to respond to, a collection of 

information unless it displays a 

currently valid control number. 

Specifically, proposed Rules 15Fi–3, 

15Fi–4, and 15Fi–5 would impose new 

collection of information requirements. 

The title of these new collections of 

information is, collectively, ‘‘Rules 

15Fi–3—15Fi–5—Risk Mitigation 

Techniques for Uncleared SecurityBased Swaps.’’ OMB has not yet 

assigned a control number to these new 

collections of information. In addition, 

the proposals to amend Rules 3a71–6, 

17a–3 and 17a–4 would amend alreadyexisting collection of information 

requirements. Finally, the proposals to 

amend proposed Rules 18a–5 and 18a– 

6 would amend proposed collection of 

information requirements that were 

previously submitted to OMB for review 


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4640 Federal Register / Vol. 84, No. 32 / Friday, February 15, 2019 / Proposed Rules 

154Proposed Rule 15Fi–3 would not apply to any 

security-based swap that has a clearing agency as 

a direct counterparty. 

155See supra Section I.B.2. 

156See supra Sections I.B.3 and I.B.5. 

157See supra Sections I.B.4 and I.B.5. 

158See supra Sections I.B.3 and I.B.5. 

159See supra Section I.B.6. 

160See supra Section I.C.2. 

161See supra Section I.C.3. 

162See supra Section I.C.2 and I.C.3. 

163See supra Section I.D.2. The proposed rule 

would require that the security-based swap trading 

relationship documentation address, among other 

things, terms addressing payment obligations, 

netting of payments, events of default or other 

termination events, calculation and netting of 

obligations upon termination, transfer of rights and 

obligations, allocation of any applicable regulatory 

reporting obligations, governing law, valuation and 

dispute resolution. 

164See id. 

165See supra Section I.D.3. 

166See supra Section I.D.4. 

167See supra Section I.D.5. 

168 17 CFR 240.17a–3; 17 CFR 240.17a–4. 

169See supra Section I.F.1. 

in connection with the SBS Books and 

Records Proposing Release. The titles 

and control numbers for these 

collections of information are as 

follows: 

(1) Rule 17a–3—Records to be made 

by certain brokers and dealers (OMB 

control number 3235–0033); 

(2) Rule 17a–4—Records to be 

preserved by certain brokers and dealers 

(OMB control number 3235–0279); 

(3) Rule 18a–5—Records to be made 

by certain security-based swap dealers 

and major security-based swap 

participants (OMB control number 

3235–0745); 

(4) Rule 18a–6—Records to be 

preserved by certain security-based 

swap dealers and major security-based 

swap participants (OMB control number 

3235–0751); and 

(5) Rule 3a71–6—Substituted 

Compliance for Foreign Security-Based 

Swap Dealers (OMB control number 

3235–0715). 

A. Summary of Collections of 

Information 

1. Proposed Rule 15Fi–3: Portfolio 

Reconciliation 

Proposed Rule 15Fi–3 generally 

would require SBS Entities to (1) engage 

in periodic portfolio reconciliation 

activities with counterparties who are 

also SBS Entities, and (2) establish, 

maintain, and follow written policies 

and procedures reasonably designed to 

ensure that they engage in periodic 

portfolio reconciliation with 

counterparties who are not SBS 

Entities.154 Among other things, 

proposed Rule 15Fi–3 would specify the 

requirements applicable to an SBS 

Entity for purposes of engaging in 

portfolio reconciliation with either type 

of counterparty (as well as the 

applicable definitions), with regard to 

(1) the information that the two sides 

would be required to exchange as part 

of the reconciliation process,155 (2) the 

frequency by which an SBS Entity 

would be required to reconcile its 

security-based swap portfolios with its 

counterparties,156 (3) the required 

policies and procedures specifying the 

means and timeframes by which an SBS 

Entity would be required to resolve 

discrepancies with respect to either the 

valuation or a material term of a 

security-based swap,157 and (4) the 

requirement that an SBS Entity agree in 

writing with each of its counterparties 

on the terms of the portfolio 

reconciliation, including agreement of 

the selection of any third-party service 

provider.158 Finally, proposed Rule 

15Fi–3(c) would require an SBS Entity 

to promptly notify the Commission of 

any security-based swap valuation 

dispute in excess of $20,000,000 (or its 

equivalent in any other currency) if not 

resolved within: (1) Three business 

days, if the dispute is with a 

counterparty that is an SBS Entity; or (2) 

five business days, if the dispute is with 

a counterparty that is not an SBS 

Entity.159

2. Proposed Rule 15Fi–4: Portfolio 

Compression 

Proposed Rule 15Fi–4 would require 

SBS Entities to establish, maintain, and 

follow written policies and procedures 

related to bilateral offsetting of securitybased swaps, and periodic bilateral and 

multilateral compression exercises. 

Specifically, proposed Rules 15Fi– 

4(a)(2) and (3) would require each SBS 

Entity to establish, maintain, and follow 

written policies and procedures for 

periodically engaging in both bilateral 

portfolio compression exercises and 

multilateral portfolio compression 

exercises, in each case when 

appropriate, with each counterparty that 

is an SBS Entity.160 Similarly, proposed 

Rule 15Fi–4(a)(1) would require each 

SBS Entity to establish, maintain, and 

follow written policies and procedures 

for terminating each ‘‘fully offsetting 

security-based swap’’ that it maintains 

with another SBS Entity in a timely 

fashion, when appropriate.161 To the 

extent that an SBS Entity transacts with 

a counterparty that is not an SBS Entity, 

proposed Rule 15Fi–4(b) provides that 

such policies and procedures would 

only need to address terminating each 

‘‘fully offsetting security-based swap’’ or 

engaging in a bilateral or multilateral 

portfolio compression exercise, when 

appropriate and to the extent requested 

by any such counterparty.162

3. Proposed Rule 15Fi–5: Written 

Trading Relationship Documentation 

Proposed Rule 15Fi–5 would require 

that each SBS Entity enter into written 

trading relationship documentation 

with each of its counterparties, subject 

to certain exceptions, prior to, or 

contemporaneously with, executing a 

security-based swap transaction, in each 

case in the manner as provided for in 

the rule.163 The proposed rule also 

requires that the trading relationship 

documentation include (1) credit 

support arrangements addressing certain 

specified items related to, among other 

things, margin haircuts, and custody of 

margin assets 164 and (2) agreements 

regarding the means by which the 

counterparties would determine the 

value of each security-based swap.165

The proposal also contains requirements 

for SBS Entities and their counterparties 

to disclose to each other certain 

information regarding their legal and 

bankruptcy status, and to include a 

statement regarding the status of a 

security-based swap if accepted for 

clearing by a CCP.166 Finally, the 

proposal would require each SBS Entity 

to have an independent auditor conduct 

periodic audits sufficient to identify any 

material weakness in its documentation 

policies and procedures required by the 

rule.167

4. Proposed Amendments to Rules 17a– 

3, 17a–4, 18a–5, and 18a–6: Books and 

Records Requirements 

Rule 17a–3 requires a broker-dealer to 

make and keep current certain records, 

and Rule 17a–4 requires a broker-dealer 

to preserve certain records if it makes or 

receives them.168 The Commission is 

proposing to amend these existing rules 

to account for the security-based swap 

risk mitigation activities of brokerdealers, including broker-dealer SBS 

Entities, by requiring the making and 

preserving of any required records 

regarding portfolio reconciliation, 

bilateral offsets, bilateral or multilateral 

portfolio compression, valuation 

disputes, and written trading 

relationship documentation. With 

respect to stand-alone SBS Entities, the 

Commission is proposing to amend 

proposed Rules 18a–5 and 18a–6— 

which were first proposed in 2014 and 

are themselves modeled on Rule 17a–3 

and 17a–4—to account for these same 

risk mitigation requirements.169


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170See supra Sections III.B.1 and III.B.2. 

171See SBS Entity Registration Adopting Release, 

80 FR at 48990. See also Trade Acknowledgement 

and Verification Adopting Release, 81 FR at 39830. 

5. Proposed Amendment to Rule 3a71– 

6: Substituted Compliance 

The proposed amendment to Rule 

3a71–6 would permit non-U.S. SBS 

Entities to comply with the proposed 

portfolio reconciliation, portfolio 

compression, and written trading 

relationship documentation 

requirements by following the 

comparable regulatory requirements of a 

foreign financial regulatory system. 

Specifically, the proposal would add 

proposed Rules 15Fi–3 through 15Fi–5 

to the list of Commission requirements 

eligible for a substituted compliance 

determination and would set forth the 

standard by which the Commission 

would make such determination.170

B. Proposed Use of Information 

1. Proposed Rule 15Fi–3: Portfolio 

Reconciliation 

As previously noted, the Commission 

preliminarily believes that the 

information shared by counterparties to 

a security-based swap transaction 

periodically during the portfolio 

reconciliation process, as contemplated 

by proposed Rule 15Fi–3, will play an 

important role in assisting those 

counterparties in identifying and 

resolving discrepancies involving key 

terms of their transactions on an 

ongoing basis. This information also 

should allow those counterparties to 

improve their management of internal 

risks related to the enforcement of their 

rights and the performance of their 

obligations under a security-based swap. 

For example, the information obtained 

and provided in the course of portfolio 

reconciliation should help ensure that 

the counterparties to a security-based 

swap are and remain in agreement with 

respect to all material terms throughout 

the life of the transaction, thereby 

mitigating the possibility that a 

discrepancy could unexpectedly affect 

either side’s ability to perform any or all 

of its obligations under the contract, 

including those obligations related to 

the posting of collateral. Moreover, 

requiring SBS Entities to agree in 

writing with each of their counterparties 

on the terms of the portfolio 

reconciliation (including, if applicable, 

agreement on the selection of any third 

party service provider who may be 

performing the reconciliation) should 

help to minimize any discrepancies 

regarding the portfolio reconciliation 

process itself, thereby ensuring that it 

operates in as efficient and cost-effective 

means possible. Finally, the 

requirement to report certain unresolved 

valuation disputes to the Commission 

should assist the Commission in 

identifying potential issues with respect 

to an SBS Entity’s internal valuation 

methodology and also could serve as an 

indication of a widespread market 

disruption in cases where the 

Commission receives a large number of 

such notices from multiple firms. 

2. Proposed Rule 15Fi–4: Portfolio 

Compression 

As previously discussed, the 

Commission preliminarily believes that 

proposed Rule 15Fi–4 would help 

market participants by eliminating 

redundant uncleared derivatives 

contracts, thereby potentially reducing a 

market participant’s credit risk to its 

direct counterparties, including by 

eliminating all outstanding contracts 

with some counterparties, without 

affecting the market participant’s overall 

economic position. In addition, we 

preliminarily believe that the proposed 

collection of information is expected to 

lead to processing improvements for 

market participants, as envisioned by 

Section 15F(i) of the Exchange Act, by 

virtue of the fact that both SBS Entities 

and their counterparties should 

ultimately have fewer trades to manage, 

maintain, and settle, resulting in fewer 

opportunities for processing errors, 

failures, or other problems that could 

develop throughout the lifecycle of a 

transaction. 

3. Proposed Rule 15Fi–5: Written 

Trading Relationship Documentation 

The Commission preliminarily 

believes that the information required to 

be contained in the written trading 

relationship documentation pursuant to 

proposed Rule 15Fi–5 should help 

ensure that each SBS Entity mitigates 

risk with respect to its security-based 

swap portfolio by, among other things, 

enhancing clarity and legal certainty 

from the outset of a transaction 

regarding each party’s rights and 

obligations. This outcome should help 

to reduce exposure to, among other 

things, counterparty credit risk and 

promote agreement regarding the proper 

valuation and other material terms of a 

security-based swap. 

4. Proposed Amendments to Rules 17a– 

3, 17a–4, 18a–5, and 18a–6: Books and 

Records Requirements 

The Commission preliminarily 

expects that the information contained 

in the records required to be made and 

kept pursuant to the proposed 

amendments to Rules 17a–3, 17a–4, 

18a–5, and 18a–6 would be used to 

assist the Commission in conducting 

effective examinations and oversight of 

SBS Entities. In addition, records 

regarding portfolio reconciliation, 

bilateral offsets, bilateral or multilateral 

portfolio compression, valuation 

disputes, and written trading 

relationship documentation should help 

to provide SBS Entities and their 

counterparties to security-based swaps 

with an ability to identify and resolve 

discrepancies involving key terms of 

their transactions on an ongoing basis, 

allowing for better management of 

internal risks related to performance of 

obligations, valuation, margin 

obligations, internal valuation systems 

and models, or internal controls. 

5. Proposed Amendment to Rule 3a71– 

6: Substituted Compliance 

Under the proposed amendment to 

Rule 3a71–6 under the Exchange Act, 

the Commission would use the 

information collected to evaluate 

requests for substituted compliance 

with respect to the portfolio 

reconciliation, portfolio compression, 

and written trading relationship 

documentation requirements applicable 

to SBS Entities. 

C. Respondents 

Proposed Rules 15Fi–3 through 15Fi– 

5 and Rules 17a–3, 17a–4, 18a–5, and 

18a–6 would apply only to SBS Entities, 

each of which will be registered with 

the Commission. In a number of prior 

releases, including the release adopting 

the rules by which SBS Entities can 

register (and withdraw from 

registration) with the Commission, we 

estimated that approximately 50 entities 

may meet the definition of SBS dealer, 

and up to five entities may meet the 

definition of major SBS participant.171

The Commission continues to believe 

that these estimates are appropriate. 

Thus, the Commission preliminarily 

believes that approximately 55 entities 

will be required to register with the 

Commission under either category, and 

will therefore be subject to Rules 15Fi– 

3 through 15Fi–5. 

With regard to the requirements under 

Rule 3a71–6, as proposed to be 

amended, requests for a substituted 

compliance determination with respect 

to the portfolio reconciliation, portfolio 

compression, and written trading 

relationship documentation 

requirements may be filed by foreign 

financial authorities, or by non-U.S. SBS 

Entities. Consistent with prior estimates, 

the Commission expects that there may 

be approximately 22 non-U.S. entities 

that may potentially register as SBS 

dealers, out of approximately 50 total 


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172See Application of the Title VII Security-Based 

Swap Dealer De Minimis Counting Requirements to 

Activity in the United States,’’ Exchange Act 

Release No. 77104 (Feb. 10, 2016), 81 FR 8598, 8605 

(Feb. 19, 2016) (‘‘U.S. Activity Adopting Release’’); 

see also Business Conduct Standards Adopting 

Release, 81 FR at 30090. 

173Consistent with prior estimates, the 

Commission further believes that there may up to 

five major SBS participants. See SBS Entity 

Registration Adopting Release, 80 FR at 49000; see 

also Business Conduct Standards Adopting Release, 

81 FR at 30089. It is possible that some subset of 

those entities will be non-U.S. major SBS 

participants that will seek to rely on substituted 

compliance in connection with the applicable 

portfolio reconciliation, portfolio compression, and 

written trading relationship documentation 

requirements. 

174These estimates are consistent with those used 

by the CFTC in connection with its portfolio 

reconciliation rule. See Confirmation, Portfolio 

Reconciliation, and Portfolio Compression 

Requirements for Swap Dealers and Major Swap 

Participants, 75 FR 81519, 81528 (Dec. 28, 2010). 

175This estimate uses 252 business days for 

purposes of the daily portfolio reconciliation 

requirement, which is consistent with the definition 

of ‘‘business day’’ in proposed Rule 15Fi–1(b). 

176The Commission recognizes that some 

respondents may choose to engage a third-party 

vendor to conduct portfolio reconciliations. For 

simplicity, however, the Commission’s burden 

estimate is based upon SBS Entities conducting 

these activities internally, without the use of thirdparty vendors. The Commission welcomes 

comments on this approach, including regarding 

the likelihood and cost of using third-party 

providers. 

177Because the 30 minute estimate is for the 

entire reconciliation process, without respect to 

how that time is allocated between the two parties, 

to avoid double-counting we have divided it by 

one-half in the context of security-based swap 

portfolios between two SBS Entities, resulting in an 

estimate of 15 minutes per reconciliation per 

counterparty for those portfolios. 

178The Commission’s estimate for the hourly 

burden for preparing these policies and procedures 

is discussed below. 

179 In the Economic Analysis, the Commission 

estimates that there are approximately 13,137 

market participants in the security-based swap 

market. See infra Section VI.B.1.c (Table 2). 

Subtracting the estimated 55 SBS Entities from this 

figure results in an estimated 13,082 non-SBS 

Entities. 

180This estimate is based upon the assumption 

that each non-SBS Entity market participant will do 

business with, on average, between one or two SBS 

Entities and is calculated as follows: ((13,082 nonSBS Entity market participants/55 SBS Entities) × 

1.5 SBS Entities per non-SBS market participants) 

= approximately 350 non-SBS Entity counterparties 

per SBS Entity. 

entities that may register as SBS 

dealers.172

Potentially, all such non-U.S. SBS 

dealers, or some subset thereof, may 

seek to rely on a substituted compliance 

determination in connection with these 

portfolio reconciliation, portfolio 

compression, and written trading 

relationship documentation 

requirements.173 In practice, however, 

the Commission expects that the greater 

portion of any such requests will be 

submitted by foreign financial 

authorities, given their expertise in 

connection with the relevant 

substantive requirements, and in 

connection with their supervisory and 

enforcement oversight with regard to 

SBS dealers and their activities. 

D. Total Annual Recordkeeping Burden 

1. Portfolio Reconciliation Activities 

Generally 

Under proposed Rule 15Fi–3(a), the 

approximately 55 respondent SBS 

Entities would be required to reconcile 

security-based swap portfolios with 

other SBS Entities on a daily, weekly, or 

quarterly basis, depending upon the size 

of the portfolio. For purposes of this 

requirement, the Commission 

preliminarily estimates that each SBS 

Entity will engage in security-based 

swap transactions with approximately 

one-third of the other 54 SBS Entities, 

meaning that an SBS Entity will 

maintain security-based swap portfolios 

with approximately 18 SBS Entities. Of 

this total, we preliminarily believe that, 

on average, two SBS Entity counterparty 

portfolios will require daily 

reconciliation (i.e., a portfolio consisting 

of 500 or more uncleared security-based 

swaps), four SBS Entity counterparty 

portfolios will require weekly 

reconciliation (i.e., a portfolio of more 

than 50 but fewer than 500 uncleared 

security-based swaps), and the 

remaining 12 SBS Entity counterparty 

portfolios will require quarterly 

reconciliation (i.e. a portfolio of no more 

than 50 uncleared security-based 

swaps).174 The Commission therefore 

estimates that each SBS Entity will 

engage in an average of 760 portfolio 

reconciliations with other SBS Entities 

per year.175

The Commission preliminarily 

believes that each portfolio 

reconciliation is likely to be conducted 

through an automated process.176 As a 

result, we preliminarily believe that 

each reconciliation will require an 

average of 30 minutes to complete in 

total (which is the combined estimate 

for both counterparties), regardless of 

the size of the security-based swap 

portfolio with the applicable 

counterparty.177 Using these figures, the 

Commission preliminarily estimates 

that compliance with proposed Rule 

15Fi–3(a), as it relates to engaging in 

portfolio reconciliation with other SBS 

Entities, will impose an average annual 

burden of approximately 190 hours per 

year on each of the respondent 55 SBS 

Entities, for an estimated average annual 

burden of 10,450 hours in the aggregate. 

These calculations are summarized in 

PRA Table 1, below. 

PRA TABLE 1—PROPOSED RULE 15i–3(a): PORTFOLIO RECONCILIATIONS WITH OTHER SBS ENTITIES

Number of counterparties per respondent Number of annual 

reconciliations 

Hourly 

burden per 

reconciliation 

(hours) 

Total annual 

burden 

(hours) 

2 (≥500 transactions) .................................................................... 252 (daily) ..................................................................................... .25 126 

4 (>50<500 transactions) .............................................................. 52 (weekly) .................................................................................... .25 52 

12 (≤50 transactions) .................................................................... 4 (quarterly) ................................................................................... .25 12 

Total per respondent .............................................................. ........................................................................................................ ........................ 190 

Total Aggregate Annual Burden for all 55 respondents ........ ........................................................................................................ ........................ 10,450 

In addition, proposed Rule 15Fi–3(b) 

would require each SBS Entity to 

establish, maintain, and follow written 

policies and procedures reasonably 

designed to ensure that it engages in 

portfolio reconciliation for all securitybased swaps (other than security-based 

swaps that will be cleared by a clearing 

agency) in which its counterparty is not 

an SBS Entity.178 In calculating the 

burden of performing the portfolio 

reconciliations required by these 

policies and procedures, the 

Commission preliminarily estimates 

that (1) there are currently 13,082 

market participants in security-based 

swaps who will not be required to 

register as SBS Entities,179 and (2) each 

SBS Entity will have an average of 

approximately 350 of these non-SBS 

Entity market participants as 

counterparties.180 Further, the 

Commission preliminarily believes that 

reconciliations with these parties will 


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181Accordingly, of the estimated 350 securitybased swap portfolios that an SBS Entity maintains 

with non-SBS Entities, 90% (or 315) will require 

only one portfolio reconciliation each year, and 

10% (or 35) will require quarterly portfolio 

reconciliations, resulting in a total of 455 portfolio 

reconciliations per SBS Entity per year. 

182This figure is identical to the estimate used for 

reconciliations between two SBS Entities (before 

dividing by one-half to avoid double-counting) and 

is consistent with the estimate used by the CFTC, 

which used an estimate of six minutes (or .10 

hours) in connection with its portfolio 

reconciliation requirements. See supra notes 174 

and 177 and accompanying text. 

183See Business Conduct Standards Adopting 

Release, 81 FR at 30098. 

184This estimate is based on Commission staff 

discussions with market participants and is 

calculated as follows: [((Compliance Attorney at 40 

hours) + (Director of Compliance at 20 hours) + 

(Deputy General Counsel at 20 hours))] = 80 hours 

per SBS Entity. See Trade Acknowledgment and 

Verification Adopting Release, 81 FR at 39831 n. 

242. 185Although dually-registered SBS Entities would 

technically need to revise and maintain their 

policies and procedures to ensure compliance with 

both the Commission’s and CFTC’s rules, we have 

preliminarily decided to conservatively assume that 

all of the estimated hours would be incurred in 

connection with compliance with the collection of 

information associated with proposed Rule 15Fi–3. 

186This estimate is based on Commission staff 

discussions with market participants and is 

calculated as follows: [((Compliance Attorney at 20 

hours) + (Director of Compliance at 10 hours) + 

(General Counsel at 10 hours))] = 40 hours per SBS 

Entity. See Trade Acknowledgment and Verification 

Adopting Release, 81 FR at 39831 n. 243. 

187See supra note 47. 

188 In the request for comments, we asked 

whether we should require such notices to be 

submitted in a particular manner, such as having 

them sent to a dedicated email box or using the 

EDGAR system (or any successor system thereto, as 

designated by the Commission). As SBS Entities 

will already have access to EDGAR (and a Form ID) 

by virtue of having used the system to register with 

the Commission, we would not expect there to be 

any initial burden associated with either approach. 

be conducted on a quarterly basis for 

10% of these portfolios (i.e., portfolios 

with more than 100 uncleared securitybased swaps), and on an annual basis 

for the remaining 90% of these 

portfolios (i.e., portfolios that do not 

involve 100 or more uncleared securitybased swaps).181

The Commission further estimates 

that each portfolio reconciliation 

between an SBS Entity and a non-SBS 

Entity will require an average of 30 

minutes to complete (which is the 

combined estimate for both 

counterparties).182 Using these figures, 

the Commission preliminarily estimates 

that compliance with proposed Rule 

15Fi–3(b), as it relates to conducting 

portfolio reconciliations with non-SBS 

Entities, will impose an annual hourly 

burden of approximately 227.5 hours 

per SBS Entity, for an estimated average 

annual burden of approximately 

12,512.5 hours in the aggregate for all 55 

SBS Entity respondents. These 

calculations are summarized in PRA 

Table 2, below. 

PRA TABLE 2—PROPOSED RULE 15i–3(b): PORTFOLIO RECONCILIATIONS WITH NON-SBS ENTITIES

Number of counterparties per respondent Number of annual 

reconciliations 

Hourly 

burden per 

reconciliation 

Total annual 

burden 

(hours) 

35 (>100 transactions) .................................................................. 4 (quarterly) ................................................................................... .5 70 

315 (≤100 transactions) ................................................................ 1 (annual) ...................................................................................... .5 157.5 

Total per respondent .............................................................. ........................................................................................................ ........................ 227.5 

Total Aggregate Annual Burden for all 55 respondents ........ ........................................................................................................ ........................ 12,512.5 

2. Establishing, Maintaining, and 

Enforcing Written Policies and 

Procedures 

Proposed Rule 15Fi–3 also contains 

policies and procedures requirements 

applicable to SBS Entities in connection 

with engaging in portfolio reconciliation 

with both SBS Entities and other 

counterparties. As the Commission 

explained in the Business Conduct 

Standards Adopting Release, the 

Commission estimates that of the 

estimated 55 persons that may register 

with the Commission as SBS Entities, 

approximately 35 will be duallyregistered with the CFTC as Swap 

Entities.183 In addition, other than as 

expressly noted above in Section I.B, the 

CFTC’s adopted final rules on portfolio 

reconciliation written policies and 

procedures are substantively identical to 

those proposed by Rule 15Fi–3. 

Accordingly, these 35 dually-registered 

entities are already required to establish, 

maintain, and follow written policies 

and procedures as they relate to the 

reconciliation of their swap portfolios, 

and these policies and procedures 

would be expected to be largely 

consistent with those that would be 

required with respect to their securitybased swap portfolios. Assuming that 

these existing policies and procedures 

would simply need to be amended to 

apply to security-based swap 

transactions upon adoption of proposed 

Rule 15Fi–3, we preliminarily estimate 

that the initial burden of revising these 

policies and procedures would be one 

hour per respondent, for an estimated 

one-time initial burden of 35 hours in 

the aggregate. With respect to the 

remaining 20 SBS Entities that will not 

be dually-registered with the CFTC, the 

Commission preliminarily estimates, 

based on prior estimates in earlier 

Dodd-Frank rulemakings, that these 

policies and procedures would require 

an average of 80 hours per non-duallyregistered respondent to initially 

prepare and implement, for an 

estimated one-time initial burden of 

1,600 hours in the aggregate.184 Once 

these policies and procedures are 

established, the Commission estimates 

that it will take an average of 40 hours 

annually to revise and maintain these 

policies and procedures per respondent 

(including both dually-registered and 

non-dually-registered SBS Entities),185

for an estimated average annual burden 

of 2,200 hours in the aggregate for all 55 

respondents.186

3. Reporting of Certain Valuation 

Disputes 

Proposed Rule 15Fi–3(c) would 

require each SBS Entity to promptly 

notify the Commission (and any 

applicable prudential regulator for an 

SBS Entity that is also a bank), in a form 

and manner acceptable to the 

Commission, of any security-based swap 

valuation dispute in excess of 

$20,000,000 (or its equivalent in any 

other currency) if not resolved within a 

prescribed time period. As previously 

noted, we crafted the rule in this way to 

provide SBS Entities with flexibility to 

determine the most efficient and costeffective form and manner of making 

such submissions, so long as it is 

deemed to be acceptable by the 

Commission.187 Accordingly, we 

preliminarily do not expect there to be 

any initial burden of designing a system 

for submitting these notices.188 We also 

preliminarily believe that the associated 

ongoing hourly burden of preparing and 

submitting such notices would be 

minimal. In addition, until SBS Entities 


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189See Swap Trading Relationship 

Documentation Requirements for Swap Dealers and 

Major Swap Participants, 76 FR 6715, 6723 (Feb. 8, 

2011). 

190Rule 15Fi–3(a)(1) and 15Fi–3(b)(1) also require 

an SBS Entity to agree in writing with each of its 

counterparties on the terms of the portfolio 

reconciliation including, if applicable, agreement 

on the selection of any third party service provider 

who may be performing the reconciliation. The 

Commission expects SBS Entities to undertake this 

agreement as part of the written trading relationship 

documentation each is required to enter into with 

its counterparties as a result of proposed Rule 15Fi– 

5. Thus, the estimate here does not account for this 

burden, which is instead assumed to form part of 

the burden of complying with Rule 15Fi–5. 

191See supra note 184. 

are registered with the Commission, it is 

difficult for us to determine the typical 

number of valuation disputes meeting 

the applicable thresholds that SBS 

Entities would be required to submit on 

an annual basis. As such, and consistent 

with the estimate the CFTC provided 

when it first proposed a similar 

requirement, we preliminarily estimate 

that each SBS Entities will spend on 

average of 24 hours each year complying 

with this requirement, for an estimated 

average annual burden of 1,320 hours in 

the aggregate for all 55 respondents.189

We also recognize, however, that there 

are differences between the markets for 

swaps and security-based swaps and 

welcomes comment from the public on 

this estimate. 

Combining all of the estimated 

burdens described above, the 

Commission preliminarily estimates 

that proposed Rule 15Fi–3 would 

impose an estimated one-time initial 

burden of 1,635 hours in the aggregate 

for all SBS Entities to prepare new 

written policies and procedures or to 

bring existing ones into compliance. 

The Commission also preliminarily 

estimates that proposed Rule 15Fi–3 

would impose an estimated ongoing 

burden of 26,482.5 hours each year in 

the aggregate for all SBS Entities, which 

is composed of (1) an estimated annual 

burden of 10,450 hours in the aggregate 

for all SBS Entities to engage in 

portfolio reconciliation with SBS 

Entities; (2) an estimated annual burden 

of 12,512.5 hours in the aggregate for all 

SBS Entities to engage in portfolio 

reconciliation with non-SBS Entities; (3) 

an estimated annual burden of 2,200 

hours in the aggregate for all SBS 

Entities to revise and maintain the 

written policies and procedures 

required pursuant to the rule; and (4) 

1,320 hours for all SBS Entities to report 

certain large valuation disputes to the 

Commission and any applicable 

prudential regulator.190 These 

calculations are summarized in PRA 

Tables 3 and 4, below. 

PRA TABLE 3—PROPOSED RULE 15Fi–3: TOTAL ESTIMATED INITIAL BURDENS

Requirement Hourly burden 

Total one-time 

burden 

(hours) 

Preparation of New Written Policies and Procedures (35 dual SEC-CFTC registrants) ......................................................................... 1 35 

Preparation of New Written Policies and Procedures (20 SEC-only registrants) .................................................................................... 80 1,600 

Total Aggregate One-Time Burden for all 55 respondents ............................................................................................................... ........................ 1,635 

PRA TABLE 4—PROPOSED RULE 15Fi–3: SUMMARY OF ANNUAL BURDENS

Requirement Aggregate hourly burden 

(all 55 respondents) 

Portfolio Reconciliations with Other SBS Entities ............................................................................................................................. 10,450 

Portfolio Reconciliations with Non-SBS Entities ............................................................................................................................... 12,512.5 

Revise and Maintain Written Policies and Procedures ..................................................................................................................... 2,200 

Prepare and Submit Notices of Valuation Disputes >$20 million ..................................................................................................... 1,320 

Total Aggregate Annual Burden for all 55 respondents ............................................................................................................ 26,482.5 

4. Proposed Rule 15Fi–4: Portfolio 

Compression 

With regard to the written policies 

and procedures, the Commission 

continues to believe that of the 

estimated 55 persons that may register 

with the Commission as SBS Entities, 

approximately 35 will be duallyregistered with the CFTC as Swap 

Entities. In addition, and as we 

previously noted, the CFTC’s adopted 

final rules requiring Swap Entities to 

establish, maintain, and follow written 

policies and procedures on bilateral 

offsets and portfolio compression 

exercises are, other than as expressly 

noted above in Section I.C, 

substantively identical to those 

proposed by Rule 15Fi–4. Accordingly, 

these 35 entities are already required to 

establish, maintain, and follow relevant 

written policies and procedures related 

to bilateral offsets and portfolio 

compression exercises involving their 

swap portfolios, and these policies and 

procedures would be expected to be 

largely consistent with those that would 

be required with respect to their 

security-based swap portfolios. 

Assuming that these existing policies 

and procedures would simply need to 

be amended to apply to security-based 

swap transactions upon adoption of 

proposed Rule 15Fi–4, we preliminarily 

estimate that the initial burden of 

revising these policies and procedures 

would be one hour per respondent, for 

an estimated one-time initial burden of 

35 hours in the aggregate. 

With respect to the remaining 20 SBS 

Entities that are not dually-registered 

with the CFTC, the Commission 

preliminarily estimates, based on prior 

estimates in earlier Dodd-Frank 

rulemakings, that these policies and 

procedures would require an average of 

80 hours per non-dually-registered 

respondent to initially prepare and 

implement, for an estimated average 

annual burden of 1,600 hours in the 

aggregate.191 Once these policies and 

procedures are established, the 

Commission estimates that it will take 

an average of 40 hours annually to 

revise and maintain these policies and 

procedures per respondent (including 

both dually-registered and non-duallyregistered SBS Entities), for an 

estimated average annual burden of 

2,200 hours in the aggregate for all 55 

respondents. 

In addition, the respondents will 

incur additional hourly burdens as they 

undertake bilateral offsets and portfolio 

compression exercises consistent with 

these written policies and procedures. 

As noted above the Commission 

estimates that each of the 55 estimated 


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192Similar to our estimates in the context of the 

portfolio reconciliation requirements, because the 

five minute estimate is for the entire bilateral offset 

process, without respect to how that time is 

allocated between the two parties, to avoid doublecounting we have divided it by one-half in the 

context of security-based swap portfolios between 

two SBS Entities, resulting in an estimate of 2.5 

minutes per bilateral offset for those portfolios. 

193Again, we have divided the 15 minute 

estimate to complete the bilateral compression 

exercise by one-half in the context of security-based 

swap portfolios between two SBS Entities, resulting 

in an estimate of 7.5 minutes per bilateral 

compression for those portfolios. 

SBS Entities will be counterparty to an 

average of 18 other SBS Entities and 350 

non-SBS Entities, for a total of 368 

counterparties. For purposes of 

conducting bilateral offsets and 

portfolio compression exercises, the 

Commission preliminarily estimates 

that (1) each SBS Entity will have an 

average of one set of security-based 

swaps that are eligible for annual 

bilateral offset with each of these 368 

counterparties, (2) each SBS Entity will 

conduct an annual bilateral 

compression exercise with one-third, or 

six of its 18 SBS Entity counterparties, 

(3) each SBS Entity will conduct an 

annual bilateral compression exercise 

with each of its 350 non-SBS Entity 

counterparties, and (4) each SBS Entity 

will engage in multilateral compression 

exercises at an average rate of 12 

exercises per year. 

The Commission preliminarily 

believes that each bilateral offset and 

portfolio compression exercise is likely 

to be conducted through an automated 

process. As a result, we preliminarily 

believe that (1) each bilateral offset will 

require on average five minutes of 

respondent time to complete with each 

of the 350 non-SBS Entity 

counterparties, (2) each bilateral offset 

will require on average 2.5 minutes of 

respondent time to complete with each 

of the 18 SBS Entity counterparties,192

(3) each bilateral compression will 

require an average of 15 minutes of 

respondent time to complete with each 

of the 350 non-SBS Entity 

counterparties, (4) each bilateral 

compression will require an average of 

7.5 minutes with each of the six SBS 

Entity counterparties,193 and (5) each 

multilateral compression exercise will 

require an average of 30 minutes of 

respondent time to complete 12 times 

annually. In each of those hourly 

burdens, the figure used is the 

combined estimate for both 

counterparties. Based on these 

estimates, the Commission estimates the 

average annual hourly burden for these 

activities at 124.16 hours per 

respondent, an estimated average 

annual burden of 6,828.8 hours in the 

aggregate. These calculations are 

summarized in PRA Table 5, below. 

PRA TABLE 5—PORTFOLIO COMPRESSION WITH ALL ENTITIES

Type of exercise Number of 

counterparties 

Number of 

annual 

exercises 

Hourly burden 

per exercise 

(hours) 

Total annual 

burden 

(hours) 

Bilateral Offset (w/non-SBS Entities) ................................................................................................ 350 1 .0833 29.16 

Bilateral Offset (w/SBS Entities) ....................................................................................................... 18 1 .0417 .75 

Bilateral Compression (w/non SBS-Entities) .................................................................................... 350 1 .25 87.5 

Bilateral Compression (w/SBS Entities) ............................................................................................ 6 1 .125 .75 

Multilateral Compression ................................................................................................................... N/A 12 .5 6 

Total per respondent .................................................................................................................. ........................ ........................ ........................ 124.16 

Total Aggregate Annual Burden for all 55 respondents ............................................................ ........................ ........................ ........................ 6,828.8 

Combining all of the estimated 

burdens described above, the 

Commission preliminarily estimates 

that proposed Rule 15Fi–4 would 

impose an estimated one-time initial 

burden of 1,635 hours in the aggregate 

for all SBS Entities to prepare new 

written policies and procedures or to 

bring existing ones into compliance. 

The Commission also preliminarily 

estimates that proposed Rule 15Fi–4 

would impose an estimated ongoing 

burden of 9,028.8 hours each year in the 

aggregate for all SBS Entities, which is 

composed of (1) an estimated annual 

burden of 1,603.8 hours in the aggregate 

to conduct bilateral offsets with nonSBS Entities; (2) an estimated annual 

burden of 41.25 hours in the aggregate 

to conduct bilateral offsets with SBS 

Entities; (3) an estimated annual burden 

of 4,812.5 hours in the aggregate to 

participate in bilateral compression 

exercises with non-SBS Entities; (4) an 

estimated annual burden of 41.25 hours 

in the aggregate to participate in 

bilateral compression exercises with 

SBS Entities; (5) an estimated annual 

burden of 330 hours in the aggregate to 

participate in multilateral compression 

exercises; and (6) an estimated annual 

burden of 2,200 hours in the aggregate 

for all SBS Entities to revise and 

maintain written policies and 

procedures. These calculations are 

summarized in PRA Tables 6 and 7, 

below. 

PRA TABLE 6—PROPOSED RULE 15Fi–4: TOTAL ESTIMATED INITIAL BURDEN

Activity Hourly burden 

(hours) 

Total one-time 

burden 

(hours) 

Preparation of New Written Policies and Procedures (35 dual SEC–CFTC registrants) ........................................................................ 1 35 

Preparation of New Written Policies and Procedures (20 SEC-only registrants) .................................................................................... 80 1,600 

Total Aggregate One-Time Burden for all 55 respondents ............................................................................................................... ........................ 1,635 


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194As was the case in calculating the PRA 

estimates for the portfolio reconciliation and 

portfolio compression requirements, because the 30 

hours estimate is for the entire process of 

negotiating and executing written trading 

relationship documentation, without respect to how 

that time is allocated between the two parties, to 

avoid double-counting we have divided it by onehalf in the context of counterparties that are also 

SBS Entities, resulting in an estimate of 15 hours 

to negotiate and execute such documentation. 195See supra note 184. 

PRA TABLE 7—PROPOSED RULE 15Fi–3: SUMMARY OF ANNUAL BURDENS

Requirement 

Aggregate 

hourly burden 

(hours) 

(all 55 

respondents) 

Bilateral Offsets with non-SBS Entities ................................................................................................................................................................................. 1,603.8 

Bilateral Offsets with SBS Entities ........................................................................................................................................................................................ 41.25 

Bilateral Compression with non-SBS Entities ....................................................................................................................................................................... 4,812.5 

Bilateral Compression with SBS Entities .............................................................................................................................................................................. 41.25 

Multilateral Compression ....................................................................................................................................................................................................... 330 

Revise and Maintain Written Policies and Procedures ........................................................................................................................................................ 2,200 

Total Aggregate Annual Burden for all 55 respondents ................................................................................................................................................ 9,028.8 

5. Proposed Rule 15Fi–5: Written 

Trading Relationship Documentation 

As previously noted, the Commission 

estimates that each SBS Entity will have 

18 SBS Entity counterparties and 350 

non-SBS Entity counterparties, for a 

total of 368 counterparties per SBS 

Entity. For the purposes of the 

underlying documentation 

requirements, and based on staff 

discussions with market participants, 

the Commission understands that many 

SBS Entities already have in place 

industry-standard written trading 

relationship documentation that is 

likely to contain many of the elements 

required by this proposed rule. With 

this in mind, the Commission 

preliminarily estimates that (1) the 

initial burden per respondent to 

negotiate and draft written trading 

relationship documentation with nonSBS Entities that is compliant with 

proposed Rule 15Fi–5 will be 

approximately 30 hours (which is the 

combined estimate for both 

counterparties), and (2) the initial 

burden per respondent to negotiate and 

draft written trading relationship 

documentation with SBS Entities that is 

compliant with proposed Rule 15Fi–5 

will be approximately 15 hours.194

These estimates are averages, and both 

account for the fact that some SBS 

Entities may lack appropriate 

documentation in certain respects and 

will need to enter into new 

documentation with counterparties, 

while in other cases existing 

documentation will need only to be 

modified to be brought into compliance. 

The Commission’s estimates are further 

based on an assumption that, in each 

case, the written documentation will 

always include the valuation 

agreements set forth in proposed Rule 

15Fi–5(b)(4), notwithstanding the fact 

that the rule only requires this 

information in certain circumstances. 

Based on these estimates and 

assumptions, the Commission 

preliminarily believes that the 

requirement to prepare written 

relationship documentation in 

accordance with proposed Rule 15Fi–5 

will result in an estimated one-time 

initial burden of 9,540 hours for each of 

the 55 SBS Entity respondents, for an 

estimated average one-time burden of 

524,700 hours in the aggregate. The 

Commission also preliminarily believes 

that there will be little need to modify 

the written trading relationship 

documentation on an ongoing basis 

once it is in place, and therefore is not 

estimating any additional annual hourly 

burden for ongoing modifications. 

With regard to the written policies 

and procedures required pursuant to 

proposed Rule 15Fi–5, the Commission 

continues to believe that of the 

estimated 55 persons that may register 

with the Commission as SBS Entities, 

approximately 35 will be duallyregistered with the CFTC as Swap 

Entities. In addition, and as we 

previously noted, the CFTC’s adopted 

final rules requiring Swap Entities to 

establish, maintain, and follow written 

policies and procedures requiring the 

execution of written trading relationship 

documentation are, other than as 

expressly noted above in Section I.D, 

substantively identical to those 

proposed by Rule 15Fi–5. Accordingly, 

these 35 entities are already required to 

establish, maintain, and follow relevant 

written policies as they relate to the 

execution of written trading relationship 

documentation involving their swap 

portfolios, and these policies and 

procedures would be expected to be 

largely consistent with those that would 

be required with respect to their 

security-based swap portfolios. 

Assuming that these existing policies 

and procedures would simply need to 

be amended to apply to security-based 

swap transactions upon adoption of 

proposed Rule 15Fi–5, we preliminarily 

estimate that the average initial burden 

of revising these policies and 

procedures would be one hour per 

respondent, for an estimated one-time 

burden of 35 hours in the aggregate. 

With respect to the remaining 20 SBS 

Entities that are not dually-registered 

with the CFTC, the Commission 

preliminarily estimates, based on prior 

estimates in earlier Dodd-Frank 

rulemakings, that these policies and 

procedures would require an average of 

80 hours per non-dually-registered 

respondent to initially prepare and 

implement, for an estimated average 

annual burden of 1,600 hours in the 

aggregate.195 Once these policies and 

procedures are established, the 

Commission estimates that it will take 

an average of 40 hours annually to 

revise and maintain these policies and 

procedures per respondent (including 

both dually-registered and non-duallyregistered SBS Entities), for an 

estimated average annual burden of 

2,200 hours in the aggregate for all 55 

respondents. 

With regard to having an independent 

auditor conduct the required periodic 

audit of written trading relationship 

documentation and the requirement to 

retain a record of each such audit, the 

Commission estimates that it will take 

an average of 10 hours to audit an SBS 

Entity’s documentation with each of its 

368 counterparties, for a total of 3,680 

hours per SBS Entity, or 202,400 hours 

for all 55 SBS Entity respondents. 

Combining all of the estimated 

burdens described above, the 

Commission preliminarily estimates 

that proposed Rule 15Fi–5 would 

impose an estimated one-time initial 

burden of 593,985 hours in the aggregate 

for all SBS Entities, which consists of 

(1) 1,635 hours in the aggregate for all 

SBS Entities to prepare new written 

policies and procedures or to bring 


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196See Business Conduct Standards Adopting 

Release, 81 FR at 30097 n. 1582. 197See Business Conduct Standards Adopting 

Release, 81 FR at 30097 n. 1583. 

existing ones into compliance, (2) 

577,500 hours in the aggregate for SBS 

Entities to negotiate and execute trading 

relationship documentation with 350 

non-SBS Entity counterparties, and (3) 

14,850 hours in the aggregate for SBS 

Entities to negotiate and execute trading 

relationship documentation with 18 

SBS Entity counterparties. The 

Commission also preliminarily 

estimates that proposed Rule 15Fi–5 

would impose an estimated ongoing 

burden of 204,600 hours each year in 

the aggregate for all SBS Entities, which 

is composed of: (1) An estimated annual 

burden of 2,200 hours in the aggregate 

for all SBS Entities to revise and 

maintain written policies and 

procedures and (2) an estimated annual 

burden of 202,400 hours in the aggregate 

for all SBS Entities to conduct the 

required periodic audits. These 

calculations are summarized in PRA 

Tables 8 and 9, below. 

PRA TABLE 8—PROPOSED RULE 15Fi–5: TOTAL ESTIMATED INITIAL BURDENS

Activity Hourly burden 

(hours) 

Total one-time 

burden 

(hours) 

Preparation of New Written Policies and Procedures (35 dual SEC–CFTC registrants) ........................................................................ 1 35 

Preparation of New Written Policies and Procedures (20 SEC-only registrants) .................................................................................... 80 1,600 

Negotiate and Execute Trading Relationship Documentation with 350 non-SBS Entities (all 55 respondents) ..................................... 30 577,500 

Negotiate and Execute Trading Relationship Documentation with 18 SBS Entities (all 55 respondents) .............................................. 15 14,850 

Total Aggregate One-Time Burden for all 55 respondents ............................................................................................................... ........................ 593,985 

PRA TABLE 9—PROPOSED RULE 15Fi–3: SUMMARY OF ANNUAL BURDENS

Requirement 

Aggregate 

hourly burden 

(hours) 

(all 55 

respondents) 

Audit of Written Trading Relationship Documentation .......................................................................................................................................................... 202,400 

Revise and Maintain Written Policies and Procedures ........................................................................................................................................................ 2,200 

Total Aggregate Annual Burden for all 55 respondents ................................................................................................................................................ 204,600 

6. Proposed Amendments to Rules 17a– 

3, 17a–4, 18a–5, and 18a–6: Books and 

Records Requirements 

The proposed amendments to Rules 

17a–3, 17a–4, 18a–5, and 18a–6 would 

impose collection of information 

requirements that result in initial and 

annual time burdens for SBS Entities. 

The proposed amendments to Rules 

17a–3 and 18a–5 would require three 

additional types of records to be made 

and kept current by SBS Entities— 

records regarding portfolio 

reconciliations, valuation disputes, and 

portfolio compressions. Because the 

burden to make these records is 

accounted for in the PRA estimates for 

proposed Rules 15Fi–3 and 15Fi–4, the 

burden imposed by these proposed new 

requirements is the requirement in 

Rules 17a–4 and 18a–6 to maintain and 

preserve a written record of these tasks, 

as well as the additional requirements 

in those provisions to maintain and 

preserve records of policies and 

procedures required by Rules 15Fi–3 

through 15Fi–5 and written agreements 

with counterparties regarding the terms 

of portfolio reconciliation. The 

Commission estimates that these 

recordkeeping requirements, as 

proposed to be amended, would impose 

an initial burden of 60 hours per firm 

for updating the applicable policies and 

systems required to account for 

capturing the additional records made 

pursuant to proposed Rule 15Fi–3 

through 15Fi–5, and an ongoing annual 

burden of 75 hours per firm for 

maintaining such records as well as to 

make additional updates to the 

applicable recordkeeping policies and 

systems to account for the proposed 

rules. As noted previously, the 

Commission estimates that there are 55 

SBS Entity respondents, for a total 

average initial annual burden for all 

respondents of 3,300 hours and a total 

ongoing average annual burden of 4,125 

hours. 

7. Proposed Amendment to Rule 3a71– 

6: Substituted Compliance 

Proposed amended Rule 3a71–6 

would require submission of certain 

information to the Commission to the 

extent SBS Entities elect to request a 

substituted compliance determination 

with respect to the proposed portfolio 

reconciliation, portfolio compression, 

and written trading relationship 

documentation requirements. The 

Commission expects that registered SBS 

Entities will seek to rely on substituted 

compliance upon registration, and that 

it is likely that the majority of such 

requests will be made during the first 

year following the effective date. 

Requests would not be necessary with 

regard to applicable rules and 

regulations of a foreign financial 

regulatory system that have previously 

been the subject of a substituted 

compliance determination in 

connection with the applicable rules. 

The Commission expects that the 

great majority of substituted compliance 

applications will be submitted by 

foreign authorities, and that very few 

substituted compliance requests will 

come from SBS Entities. For purposes of 

this assessment, the Commission 

estimates that three such SBS Entities 

will submit such an application.196

The Commission has previously 

estimated that the paperwork burden 

associated with making each such 

substituted compliance request would 

be approximately 80 hours of in-house 

counsel time, plus $80,000 for the 

services of outside professionals (based 

on 200 hours of outside time × $400 per 

hour).197 The Commission is currently 

of the belief that this prior estimate is 

sufficient to cover a combined 

substituted compliance request that also 

seeks a determination for the portfolio 

reconciliation, portfolio compression, 

and written trading relationship 

documentation rules proposed in this 

release. This estimate results in an 

aggregate total of 240 internal hours, 

plus $240,000 for outside services. 

Therefore, the Commission estimates 

that the total paperwork burden 

incurred by such entities associated 


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198 15 U.S.C. 78c(f). 

199 15 U.S.C. 78w(a)(2). 

200See id. 

with preparing and submitting a request 

for a substituted compliance 

determination in connection with the 

portfolio reconciliation, portfolio 

compression, and written trading 

relationship documentation 

requirements will be approximately 240 

hours per applicant, plus $240,000 for 

the services of outside professionals for 

all three requests. 

E. Collection of Information Is 

Mandatory 

Each collection of information for 

proposed Rules 15Fi–3 through 15Fi–5 

and for the proposed amendments to 

Rules 17a–3, 17a–4, 18a–5, and 18a–6 is 

a mandatory collection of information. 

With respect to the proposed 

amendment to Rule 3a71–6, the 

application for substituted compliance 

is mandatory for all foreign financial 

authorities or SBS Entities that seek a 

substituted compliance determination. 

F. Confidentiality 

Proposed Rule 15Fi–3(c) would 

require an SBS Entity to promptly notify 

the Commission of any security-based 

swap valuation dispute in excess of 

$20,000,000 (or its equivalent in any 

other currency) if not resolved within: 

(1) Three business days, if the dispute 

is with a counterparty that is an SBS 

Entity; or (2) five business days, if the 

dispute is with a counterparty that is 

not an SBS Entity. We have requested 

comment as to whether these notices 

should be submitted to the Commission 

on a confidential basis. No other 

information would be submitted 

directly to the Commission under 

proposed Rules 15Fi–3 through 15Fi–5 

or under the proposed amendments to 

Rules 17a–3, 17a–4, 18a–5, and 18a–6. 

To the extent that the Commission 

receives confidential information 

pursuant to this collection of 

information that is otherwise not 

publicly available, including in 

connection with examinations or 

investigations, that information will be 

kept confidential, subject to applicable 

law. 

With regard to the proposed 

amendment to Rule 3a71–6, the 

Commission generally will make 

requests for a substituted compliance 

determination public, subject to 

requests for confidential treatment being 

submitted pursuant to any applicable 

provisions governing confidentiality 

under the Exchange Act. 

G. Request for Comment 

We request comment on whether our 

estimates for burden hours and any 

external costs as described above are 

reasonable. Pursuant to 44 U.S.C. 

3506(c)(2)(B), the Commission solicits 

comments in order to: (1) Evaluate 

whether the proposed collections of 

information are necessary for the proper 

performance of the functions of the 

Commission, including whether the 

information will have practical utility; 

(2) evaluate the accuracy of the 

Commission’s estimate of the burden of 

the proposed collections of information; 

(3) determine whether there are ways to 

enhance the quality, utility, and clarity 

of the information to be collected; and 

(4) determine whether there are ways to 

minimize the burden of the collections 

of information on those who are to 

respond, including through the use of 

automated collection techniques or 

other forms of information technology. 

In addition, would we would 

appreciate any comments related to our 

Paperwork Reduction Act estimates 

with respect to the following: 

• The number of counterparties with 

whom an SBS Entity would maintain a 

security-based swap portfolio. 

• The number and proportion of 

security-based swap portfolios that 

would fall under each of the proposed 

thresholds for determining the 

frequency of the required portfolio 

reconciliations, with respect to both 

SBS Entity and non-SBS Entity 

counterparties. 

• The hourly burden of conducting 

each portfolio reconciliation and the use 

of automated systems to perform this 

function, including those offered by 

third parties. 

• The use of third parties to perform 

portfolio reconciliation and portfolio 

compression exercises, any upfront 

burdens associated with engaging a 

third party to perform these services, 

and the ongoing burdens associated 

with each exercise. 

• The burdens associated with 

establishing and routinely updating all 

required policies and procedures. 

The agency has submitted the 

proposed collections of information to 

OMB for approval.Persons wishing to 

submit comments on the collection of 

information requirements should direct 

the comments to the Office of 

Management and Budget, Attention: 

Desk Officer for the Securities and 

Exchange Commission, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, and send a copy 

to Brent J. Fields, Secretary, Securities 

and Exchange Commission, 100 F Street 

NE, Washington, DC 20549–1090, with 

reference to File No. S7–28–18. OMB is 

required to make a decision concerning 

the collection of information between 30 

and 60 days after publication of this 

release. Consequently, a comment to 

OMB is best assured of having its full 

effect if OMB receives it within 30 days 

of publication. Requests for materials 

submitted to OMB by the Commission 

with regard to these collections of 

information should be in writing, refer 

to File No. S7–28–18, and be submitted 

to the Securities and Exchange 

Commission, Office of FOIA Services, 

100 F Street NE, Washington, DC 

20549–2736. 

VI. Economic Analysis 

The Commission is sensitive to the 

economic effects of its rules, including 

the costs and benefits and the effects of 

its rules on efficiency, competition, and 

capital formation. Section 3(f) 198 of the 

Exchange Act requires the Commission, 

whenever it engages in rulemaking 

pursuant to the Exchange Act and is 

required to consider or determine 

whether an action is necessary or 

appropriate in the public interest, also 

to consider, in addition to the protection 

of investors, whether the action would 

promote efficiency, competition, and 

capital formation. In addition, Section 

23(a)(2) 199 of the Exchange Act requires 

the Commission, when promulgating 

rules under the Exchange Act, to 

consider the impact such rules would 

have on competition. Section 23(a)(2) 

also provides that the Commission shall 

not adopt any rule which would impose 

a burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Exchange Act.200

A. Broad Economic Considerations 

Unlike some other types of securities 

transactions, a security-based swap 

typically gives rise to ongoing 

obligations between transaction 

counterparties during the life of the 

transaction, including payments 

contingent on specific events, such as a 

corporate default or a change in the 

price of an underlying reference asset 

(e.g., changes in price to the floating leg 

of a total return swap). Consequently, 

certain risk mitigation techniques, such 

as engaging in portfolio reconciliation at 

periodic intervals, exercising 

opportunities for portfolio compression, 

and ensuring that the terms of a 

transaction are fully documented, are 

important practices for assisting SBS 

Entities in effectively measuring and 

managing market and credit risk. 

Credit risk refers to the probability of 

a financial loss due to a counterparty to 

a transaction failing to fulfill its 

financial obligations. In order to manage 

credit risk in the security-based swap 

context properly, a market participant 


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201See Lessons of the Financial Crisis for Future 

Regulation of Financial Institutions, at 3–4, IMF 

Policy Paper (Feb. 4, 2009), available at: http://

www.imf.org/external/np/pp/eng/2009/020409.pdf; 

see also Sewall Chan, Financial Crisis Was 

Avoidable, Inquiry Finds, N.Y. Times (Jan. 25, 

2011), available at: http://www.nytimes.com/2011/ 

01/26/business/economy/26inquiry.html?_r=1;. 202See Linda Sandler, Lehman Derivatives 

Records a ‘Mess,’ Barclays Executive Says, 

Bloomberg (Aug. 30, 2010), available at: http://

www.bloomberg.com/news/articles/2010-08-30/ 

lehman-derivatives-records-a-mess-barclaysexecutive-says. 

203See Satyajit Das, In the Matter of Lehman 

Brothers, 59 Wilmott 20–29 (May 2012). 

Disagreement over CDO valuation between AIG and 

its counterparties was also an issue around the 

same time. See supra note 15 and accompanying 

text. 

204See PriceWaterhouseCoopers, Lehman 

Brothers’ Bankruptcy: Lessons learned for the 

survivors, Informational presentation for clients, 

(Aug. 2009), at 12–24, available at: http://

www.pwc.com/en_JG/jg/events/Lessons-learned-forthesurvivors.pdf.2009), at 12–24, available at http:// 

www.pwc.com/en_JG/jg/events/Lessons-learned-forthesurvivors.pdf. 

205See The President’s Working Group on 

Financial Markets, Policy Statements on Financial 

Market Developments, (Mar. 2008) (‘‘PWG Report’’), 

available at: http://www.treasury.gov/resourcecenter/fin-mkts/Documents/pwgpolicystatemkt

turmoil_03122008.pdf.2008) (‘‘PWG Report’’), 

available at http://www.treasury.gov/resourcecenter/fin-mkts/Documents/pwgpolicy

statemktturmoil_03122008.pdf. 

206The proposed rules also would (1) address the 

potential availability of substituted compliance in 

connection with those portfolio reconciliation, 

portfolio compression, and trading relationship 

documentation requirements and (2) add 

corresponding requirements to the Commission’s 

recordkeeping rules that would require SBS Entities 

to make and keep records demonstrating 

compliance with the new risk mitigation 

requirements. 

207See supra note 138. 

208See supra note 6. 

should know the identity of each of its 

counterparties, the details of the 

obligations of each counterparty in each 

transaction into which the two have 

entered, and the value of those 

obligations (including for purposes of 

calculating margin or measuring 

outstanding exposure for risk 

management). The greater the number of 

counterparties and transactions, the 

complexity of those transactions, and 

the value of the outstanding obligations, 

the more important it becomes for each 

counterparty to have well-documented 

credit risk management policies. 

The risks of the counterparties’ failure 

to manage credit risk adequately may 

not become apparent until the onset of 

a financial crisis. Such a crisis occurred 

in the fall of 2008, when certain events 

threatened to freeze U.S. and global 

credit markets. The severity of that 

crisis has been partially attributed to 

poor risk management practices of 

financial firms and flawed supervisory 

oversight for certain financial 

institutions.201

Shortcomings in credit risk 

management and documentation may be 

unobservable to counterparties and 

other market participants until a crisis 

occurs as it did in 2008; thus some 

benefits of compliance will accrue to the 

financial system as a whole while the 

ongoing direct costs are borne by the 

institution. If firms do not fully 

internalize the benefits of risk 

management, then they may 

underinvest. For example, shortcomings 

in documentation were reported to have 

created significant problems during the 

financial crisis that immediately 

preceded passage of the Dodd-Frank Act 

in connection with efforts by Barclays 

PLC to take over a portion of Lehman 

Brothers Holdings Inc.’s derivatives 

trades.202 Shortcomings in the 

documentation of portfolio valuation 

methods and reconciliation of portfolio 

values were also exposed when, during 

bankruptcy proceedings, counterparties’ 

valuations differed by hundreds of 

millions of dollars from the value of 

those same positions on the bankrupt 

entity’s books.203

Among other things, effective risk 

management requires the existence of 

sound documentation, periodic 

reconciliation of portfolios, rigorously 

tested valuation methodologies, and 

sound collateralization practices.204

More broadly, the President’s Working 

Group on Financial Policy (‘‘PWG’’) 

noted shortcomings in the OTC 

derivatives market as a whole during the 

financial crisis that immediately 

preceded passage of the Dodd-Frank 

Act. The PWG identified the need for an 

improved integrated operational 

structure supporting OTC derivatives, 

specifically highlighting the need for an 

enhanced ability to manage 

counterparty risk through ‘‘netting and 

collateral agreements by promoting 

portfolio reconciliation and accurate 

valuation of trades.’’ 205

The rules we are proposing today are 

designed to ensure that SBS Entities 

implement certain risk mitigation 

techniques by engaging in periodic 

portfolio reconciliation, maintaining 

policies and procedures for engaging in 

certain forms of portfolio compression 

exercises with each of their 

counterparties, and maintaining policies 

and procedures reasonably designed to 

ensure that they execute written trading 

relationship documentation with each 

of their counterparties prior to executing 

a security-based swap transaction. The 

proposed rules also would set minimum 

standards with respect to identifying the 

matters that must be addressed in the 

security-based swap trading 

documentation, and outline certain 

requirements related to the resolution of 

discrepancies, particularly those 

involving differences in the valuation of 

security-based swaps.206 In proposing 

these rules, the Commission 

preliminarily believes that they will 

promote effective risk management 

practiced by security-based swap market 

participants in a number of important 

ways, which we discuss in greater detail 

below. 

The Commission notes that, where 

possible, it has attempted to quantify 

the costs, benefits, and effects on 

efficiency, competition, and capital 

formation expected to result from 

adopting these rules. In certain cases, 

however, the Commission is unable to 

quantify the economic effects. Crucially, 

many of the relevant economic effects, 

such as improved risk management and 

the value of Commission enforcement 

and oversight, are inherently difficult to 

quantify. In other cases, we lack the 

information necessary to provide 

reasonable estimates. For example, we 

lack data on prices charged by certain 

third-party service providers, current 

trading relationship documentation 

practices for entities and transactions 

not already subject to similar rules from 

other regulators, the fraction of 

outstanding positions that when 

reconciled will result in a dispute and 

the costs incurred by the participants in 

resolving the dispute. To the best of our 

knowledge, no such data is publicly 

available. Where the Commission is 

unable to quantify the economic effects, 

the discussion is qualitative in nature 

and includes, where possible, 

descriptions of the direction of these 

effects. The Commission requests data 

from commenters to help quantify these 

effects. 

B. Economic Baseline 

To assess the economic impact of the 

proposed risk mitigation rules, the 

Commission is using as a baseline the 

security-based swap market as it exists 

today, including applicable rules that 

have already been adopted, and 

excluding rules that have been proposed 

but not yet finalized. The analysis 

includes the statutory and regulatory 

provisions that currently govern the 

security-based swap market pursuant to 

the Dodd-Frank Act, as well as rules 

adopted in, among others, the Business 

Conduct Standards Adopting Release 207

and the Trade Acknowledgment and 

Verification Adopting Release.208

Moreover, because participants in the 

security-based swap market may also 

operate in other markets, particularly 

the swaps market, we have considered 

both the direct and indirect impact of 


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209 In prior releases, the Commission has 

examined data for other time periods. For example, 

in the Business Conduct Standards Adopting 

Release, the Commission presented an analysis of 

TIW data for November 2006 through December 

2014. While the exact numbers of various groups of 

transacting agents and account holders in that 

analysis differ from the figures reported in this 

section (for a longer time period), we do not observe 

significant structural differences in market 

participation. Compare 81 FR at 30102 (Tables 1 

and 2) with Tables 1 and 2 below. 

210While other repositories may collect data on 

transactions in total return swaps on equity and 

debt, we do not currently have access to such data 

for these products (or other products that are 

security-based swaps). Additionally, the 

Commission explains below that data related to 

single-name CDS provides reasonably 

comprehensive information for the purpose of this 

analysis. 

211The global notional amount outstanding 

represents the total face amount used to calculate 

payments under outstanding contracts. The gross 

market value is the cost of replacing all open 

contracts at current market prices. 

212See BIS, Semi-annual OTC derivatives 

statistics at December 2017, Table 10.1, available at: 

https://www.bis.org/statistics/d10_1.pdf (last 

accessed May 18, 2018). 

213See id. 

214These totals include swaps and security-based 

swaps, as well as products that are excluded from 

the definition of ‘‘swap,’’ such as certain equity 

forwards. See OTC, Equity-Linked Derivatives 

Statistics, Table D8, available at: https://

www.bis.org/statistics/d8.pdf (last accessed May 18, 

2018). For the purposes of this analysis, the 

Commission assumes that multi-name index CDS 

are not narrow-based index CDS and therefore, do 

not fall within the security-based swap definition. 

See 15 U.S.C. 78c(a)(68)(A). See also Further 

Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and 

‘‘Security-Based Swap Agreement’’; Mixed Swaps; 

Security-Based Swap Agreement Recordkeeping, 77 

FR 48208. The Commission also assumes that all 

instruments reported as equity forwards and swaps 

are security-based swaps, potentially resulting in 

underestimation of the proportion of the securitybased swap market represented by single-name 

CDS. Therefore, when measured on the basis of 

gross notional outstanding single-name CDS 

contracts appear to constitute roughly 59% of the 

security-based swap market. Although the BIS data 

reflects the global OTC derivatives market, and not 

just the U.S. market, the Commission has no reason 

to believe that these ratios differ significantly in the 

U.S. market. 

215Following publication of the Warehouse Trust 

Guidance on CDS data access, TIW surveyed market 

participants, asking for the physical address 

associated with each of their accounts (i.e., where 

the account is organized as a legal entity). This 

physical address is designated the registered office 

location by TIW. When an account reports a 

registered office location, we have assumed that the 

registered office location reflects the place of 

domicile for the fund or account. When an account 

does not report a registered office location, we have 

assumed that the settlement country reported by the 

investment adviser or parent entity to the fund or 

account is the place of domicile. Thus, for purposes 

of this analysis, the Commission has classified 

accounts as ‘‘U.S. counterparties’’ when they have 

reported a registered office location in the United 

States. The Commission notes, however, that this 

classification is not necessarily identical in all cases 

to the definition of U.S. person under Rule 3a71– 

3(a)(4). 

216The challenges the Commission faces in 

estimating measures of current market activity stem, 

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 the 

Commission with additional measures of market 

activity that will allow us to better understand and 

monitor activity in the security-based swap market. 

See Regulation SBSR Adopting Release, 81 FR at 

53545. 

217See, e.g., Registration Adopting Release, 80 FR 

at 49000. 

rules that have been adopted by other 

regulators (e.g., the CFTC as well as 

foreign regulatory bodies) in formulating 

the baseline. Our understanding of the 

market is informed by available data on 

security-based swap transactions, 

though we acknowledge the data 

available to us limits the extent to 

which we can quantitatively 

characterize the market. Because this 

data does not cover the entire market, 

we have developed an understanding of 

market activity using a sample that 

includes only certain portions of the 

market. 

Furthermore, the overall Title VII 

regulatory framework will have 

consequences for the ways in which 

security-based swaps are transacted 

which, in turn, will affect the activities 

addressed by these proposed rules. For 

example, the proposed rules generally 

do not apply to security-based swaps 

cleared through a registered clearing 

agency. Therefore, the scope of future 

mandatory clearing requirements may 

affect the overall level of security-based 

swap activity subject to the final rules 

ultimately adopted under the proposal, 

as well as the overall costs borne by SBS 

Entities. 

1. Security-Based Swap Market Activity 

and Participants 

a. Available Data From the SecurityBased Swap Market 

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 limit the extent to which it is 

possible to quantitatively characterize 

the market. Since this data does not 

cover the entire market, the Commission 

has analyzed market activity using a 

sample of transactions that includes 

only certain segments of the market. The 

Commission believes, however, that the 

data underlying this analysis provides 

reasonably comprehensive information 

regarding single-name CDS transactions 

and the composition of the participants 

in the single-name CDS market. 

Specifically, the analysis of the state 

of the current security-based swap 

market is based on data obtained from 

the Depository Trust and Clearing 

Corporation (‘‘DTCC’’) Derivatives 

Repository Limited Trade Information 

Warehouse (‘‘DTCC–TIW’’), especially 

data regarding the activity of market 

participants in the single-name CDS 

market during the period from 2006 to 

2017.209 Although the definition of 

‘‘security-based swap’’ is not limited to 

single-name CDS,210 single-name CDS 

contracts make up a majority of 

security-based swaps, and we believe 

that the single-name CDS data is 

sufficiently representative of the market 

to inform our analysis of the current 

security-based swap market. According 

to data published by the Bank for 

International Settlements (‘‘BIS’’), the 

global notional amount outstanding in 

single-name CDS was approximately 

$4.6 trillion,211 in multi-name index 

CDS was approximately $4.4 trillion, 

and in multi-name, non-index CDS was 

approximately $343 billion.212 The total 

gross market value outstanding in 

single-name CDS was approximately 

$130 billion, and in multi-name CDS 

instruments was approximately $174 

billion.213 The global notional amount 

outstanding in equity forwards and 

swaps as of December 2017 was $3.21 

trillion, with total gross market value of 

$197 billion.214

The Commission further notes that 

the data available from TIW does not 

encompass those CDS transactions that 

both: (i) Do not involve U.S. 

counterparties; 215 and (ii) are based on 

non-U.S. reference entities. 

Notwithstanding this limitation, the 

TIW single-name CDS 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.216

b. Affected SBS Entities 

Final SBS Entity registration rules 

have been adopted, but compliance is 

not yet required. Therefore, we do not 

have data on the actual number of SBS 

Entities that will register with the 

Commission, or the number of persons 

associated with registered SBS Entities. 

The Commission has elsewhere 

estimated that up to 50 entities may 

register with the Commission as 

security-based swap dealers, and up to 

five additional entities may register as 

major security-based swap 

participants,217 and these estimates 

remain unchanged. 

Firms that act as dealers play a central 

role in the security-based swap market. 

Based on an analysis of 2017 singlename CDS data in TIW, accounts of 

those firms that are likely to exceed the 


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218The Commission staff analysis of DTCC 

Derivatives Repository Limited Trade Information 

Warehouse transaction records indicates that 

approximately 99% of single-name CDS priceforming transactions in 2017 involved an ISDArecognized dealer. 219Many 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. 

220These 2,110 entities, which are presented in 

more detail in Table 1, infra, include all DTCCdefined ‘‘firms’’ shown in TIW as transaction 

counterparties that report at least one transaction to 

TIW as of December 2017. The staff in the Division 

of Economic and Risk Analysis classified these 

firms, which are shown as transaction 

counterparties, by machine matching names to 

known third-party databases and by manual 

classification. See, e.g., Dealing Activity Adopting 

Release, 81 FR 8602, fn.43. Manual classification 

was based in part on searches of the EDGAR and 

Bloomberg databases, the SEC’s Investment Adviser 

Public Disclosure database, and a firm’s public 

website or the public website of the account 

represented by a firm. The staff also referred to 

ISDA protocol adherence letters available on the 

ISDA website. 221See 15 U.S.C. 80b1–80b21. Transacting agents 

participate directly in the security-based swap 

market, without relying on an intermediary, on 

behalf of principals. For example, a university 

endowment may hold a position in a security-based 

swap that is established by an investment adviser 

that transacts on the endowment’s behalf. In this 

case, the university endowment is a principal that 

uses the investment adviser as its transacting agent. 

222For the purpose of this analysis, the ISDArecognized dealers are those identified by ISDA as 

belonging to the G14 or G16 dealer group during the 

period: JP Morgan Chase NA (and Bear Stearns), 

Morgan Stanley, Bank of America NA (and Merrill 

Lynch), Goldman Sachs, Deutsche Bank AG, 

Barclays Capital, Citigroup, UBS, Credit Suisse AG, 

RBS Group, BNP Paribas, HSBC Bank, Lehman 

Brothers, Socie ́te ́ Ge ́ne ́rale, Credit Agricole, Wells 

Fargo and Nomura. See, e.g., https://www.isda.org/ 

a/5eiDE/isda-operations-survey-2010.pdf. 

223 ‘‘Accounts’’ as defined in the TIW context are 

not equivalent to ‘‘accounts’’ in the definition of 

‘‘U.S. person’’ provided by Exchange Act rule 3a71– 

3(a)(4)(i)(C). They also do not necessarily represent 

separate legal persons. One entity or legal person 

may have multiple accounts. For example, a bank 

may have one DTCC account for its U.S. 

headquarters and one DTCC account for one of its 

foreign branches. 

224Unregistered investment advisers include all 

investment advisers not registered under the 

Investment Advisers Act and may include 

investment advisers registered with a state or a 

foreign authority as well as investment advisers that 

are exempt reporting advisers under Section 203(l) 

or 203(m) of the Investment Advisers Act. 

security-based swap dealer de minimis 

thresholds and trigger registration 

requirements for intermediated 

transactions with a gross notional 

amount of approximately $2.9 trillion, 

approximately 55% of the gross notional 

intermediated by the top five dealer 

accounts.218

These dealers transact with hundreds 

or thousands of counterparties. 

Approximately 21% 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 2017.219

Another 25% of these accounts 

transacted with 500 to 1,000 unique 

counterparty accounts; 29% transacted 

with 100 to 500 unique accounts; and 

25% of these accounts intermediated 

security-based swaps with fewer than 

100 unique counterparties in 2017. The 

median dealer account transacted with 

495 unique accounts (with an average of 

approximately 570 unique accounts). 

Non-dealer counterparties transacted 

almost exclusively with these dealers. 

The median non-dealer counterparty 

transacted with two dealer accounts 

(with an average of approximately three 

dealer accounts) in 2017. 

c. Other Market Participants 

In addition to dealers, thousands of 

other participants appear as 

counterparties to security-based swap 

contracts in our sample, and include, 

but are not limited to, investment 

companies, pension funds, private 

funds, sovereign entities, and industrial 

companies. We observe that most nondealer users of security-based swaps do 

not engage directly in the trading of 

swaps, but trade through banks, 

investment advisers, or other types of 

firms acting as dealers or agents. Based 

on an analysis of the counterparties to 

trades reported to the TIW, there are 

2,110 entities that engaged directly in 

trading between November 2006 and 

December 2017.220

As shown in Table 1 below, close to 

three-quarters of these entities (DTCCdefined ‘‘firms’’ shown in TIW, which 

we refer to here as ‘‘transacting agents’’) 

were identified as investment advisers, 

of which approximately 40% (about 

30% of all transacting agents) were 

registered as investment advisers under 

the Advisers Act.221 Although 

investment advisers are the vast 

majority of transacting agents, the 

transactions they executed account for 

only 12.8% of all single-name CDS 

trading activity reported to the TIW, 

measured by number of transactionsides (each transaction has two 

transaction sides, i.e., two transaction 

counterparties). The vast majority of 

transactions (83.3%) measured by 

number of transaction-sides were 

executed by ISDA-recognized dealers. 

TABLE 1—THE NUMBER OF TRANSACTING AGENTS BY COUNTERPARTY TYPE AND THE FRACTION OF TOTAL TRADING

ACTIVITY, FROM NOVEMBER 2006 THROUGH DECEMBER 2017, REPRESENTED BY EACH COUNTERPARTY TYPE

Transacting agents Number Percent 

Transaction 

share 

(percent) 

Investment Advisers ...................................................................................................................................................... 1635 77.5 12.8 

-SEC registered ..................................................................................................................................................... 658 31.2 8.6 

Banks ............................................................................................................................................................................ 262 12.4 3.4 

Pension Funds .............................................................................................................................................................. 29 1.4 0.1 

Insurance Companies ................................................................................................................................................... 42 2.0 0.2 

ISDA-Recognized Dealers 222 ....................................................................................................................................... 17 0.8 83.3 

Other ............................................................................................................................................................................. 125 5.9 0.2 

Total ................................................................................................................................................................ 2,110 100.0 100 

Principalholders of CDS risk exposure 

are represented by ‘‘accounts’’ in the 

TIW.223 The staff’s analysis of these 

accounts in TIW shows that the 2,110 

transacting agents classified in Table 1 

represent 13,137 principal risk holders. 

Table 2, below, classifies these principal 

risk holders by their counterparty type 

and whether they are represented by a 

registered or unregistered investment 

adviser.224 For instance, banks in Table 

1 allocated transactions across 349 

accounts, of which 20 were represented 

by investment advisers. In the 

remaining instances, banks traded for 

their own accounts. Meanwhile, ISDArecognized dealers in Table 1 allocated 

transactions across 91 accounts. Private 

funds are the largest type of account 

holders that we were able to classify, 

and although not verified through a 

recognized database, most of the funds 


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225For the purposes of this discussion, ‘‘private 

fund’’ encompasses various unregistered pooled 

investment vehicles, including hedge funds, private 

equity funds, and venture capital funds. There 

remain over 5,800 DTCC accounts unclassified by 

type. Although unclassified, each account was 

manually reviewed to verify that it was not likely 

to be a special entity within the meaning of the 

Dodd-Frank Act and instead was likely to be an 

entity such as a corporation, an insurance company, 

or a bank. 

226This column reflects the number of 

participants who are also trading for their own 

accounts. 

227While other repositories may collect data on 

transactions in total return swaps on equity and 

debt, we do not currently have access to such data 

for these products (or other products that are 

security-based swaps). In the Cross-Border 

Proposing Release, we explained that we believed 

that data related to single-name CDS was reasonable 

for purposes of this analysis; such transactions 

appear to constitute roughly 82% of the securitybased swap market as measured on a notional basis. 

See Cross-Border Proposing Release, 78 FR at 31120 

n. 1301. None of the commenters to that release 

disputed these assumptions, and we therefore 

continue to believe that, although the BIS data 

reflect the global OTC derivatives market, and not 

just the U.S. market, these ratios are an adequate 

representation of the U.S. market. 

Also consistent with our approach in that release, 

with the exception of the analysis regarding the 

degree of overlap between participation in the 

single-name CDS market and the index CDS market 

(cross-market activity), our analysis below does not 

include data regarding index CDS (including CDS 

based on narrow-based security indices) as we do 

not currently have sufficient information to identify 

the relative volumes of index CDS that are either 

swaps or security-based swaps. 

228For the purposes of this analysis, we estimate 

there were approximately 1.53 million single-name 

CDS transactions in 2017, of which approximately 

1.04 million were transactions with a clearing 

agency as a counterparty. In addition to CDS, 

security-based swap products include equity swaps, 

such as total return swaps on single names and 

swaps based on narrow-based security indices. The 

Commission currently lacks comprehensive data on 

equity swaps, including data on transaction 

volumes and notional amounts. While there were 

more than 1.53 million security-based swap 

transactions in 2017, we do not currently have 

sufficient information to precisely identify the 

number of transactions beyond those that were 

single-name CDS. However, while recognizing that 

average notional transaction amounts for equity and 

multi-name CDS may differ from average notional 

transaction amounts for CDS, our estimate (using 

data from 2015) that single-name CDS constitute 

roughly 82% of the security-based swap market 

implies that there were approximately 337,000 

security-based swap transactions in 2017 in 

addition to the approximately 1.53 million singlename CDS transactions we identify in the DTCC– 

TIW data, or 1.87 million total security-based swap 

transactions. Note that our estimate that singlename CDS constitutes roughly 82% of the securitybased swap market is based on notional transaction 

amounts rather than transaction counts; in using 

this figure to estimate the total number of securitybased swap transactions, we have assumed that the 

average notional amount is the same across singlename CDS, multi-name CDS, and equity swaps. 

229For the purpose of this analysis, the reference 

to ‘‘ISDA-recognized dealers’’ means those dealers 

identified by ISDA as belonging to the G14 or G16 

dealer group during the period. This group 

includes: JP Morgan Chase NA (and Bear Stearns), 

Morgan Stanley, Bank of America NA (and Merrill 

Lynch), Goldman Sachs, Deutsche Bank AG, 

Barclays Capital, Citigroup, UBS, Credit Suisse AG, 

RBS Group, BNP Paribas, HSBC Bank, Lehman 

Brothers, Socie ́te ́ Ge ́ne ́rale, Credit Agricole, Wells 

Fargo and Nomura. See, e.g., https://www.isda.org/ 

a/5eiDE/isda-operations-survey-2010.pdf. See also 

Aldasoro, Inaki, and Torsten Ehlers, 2018, The 

Credit Default Swap Market: What a Difference a 

Decade Makes, BIS Quarterly Review June 2018, 

Graph 2, available at: https://www.bis.org/publ/ 

qtrpdf/r_qt1806b.pdf. https://www.bis.org/publ/ 

qtrpdf/r_qt1806b.pdf. https://www.bis.org/publ/ 

qtrpdf/r_qt1806b.pdf, Graph 2. 

230See supra Section VI.B.1.b for current 

estimates of the number of SBS Entities. 

we were not able to classify appear to 

be private funds.225

TABLE 2—THE NUMBER AND PERCENTAGE OF ACCOUNT HOLDERS—BY TYPE—WHO PARTICIPATE IN THE SECURITYBASED SWAP MARKET THROUGH A REGISTERED INVESTMENT ADVISER, AN UNREGISTERED INVESTMENT ADVISER, OR

DIRECTLY AS A TRANSACTING AGENT, FROM NOVEMBER 2006 THROUGH DECEMBER 2017 

Account holders by type Number Represented by a registered investment adviser Represented by an unregistered investment dviser Participant is transacting 

agent 226

Private Funds ........................................... 3,857 1,973 51% 1,859 48% 25 1% 

DFA Special Entities ................................ 1,319 1,262 96% 37 3% 20 2% 

Registered Investment Companies .......... 1,159 1,082 93% 73 6% 4 0% 

Banks (non-ISDA-recognized dealers) ..... 349 20 6% 8 2% 321 92% 

Insurance Companies .............................. 301 196 65% 34 11% 71 24% 

ISDA-Recognized Dealers ....................... 91 0 0% 0 0% 91 100% 

Foreign Sovereigns .................................. 83 63 76% 3 4% 17 20% 

Non-Financial Corporations ...................... 75 52 69% 4 5% 19 25% 

Finance Companies ................................. 20 11 55% 0 0% 9 45% 

Other/Unclassified .................................... 5,883 3,745 64% 1,887 32% 251 4% 

All ...................................................... 13,137 8,404 64% 3,905 30% 828 6% 

d. Outstanding Positions 

Our analysis here focuses on 

outstanding positions in single-name 

CDS. As we have previously noted, 

although the definition of a securitybased swap is not limited to singlename CDS, we believe that the singlename CDS data is sufficiently 

representative of the market and 

therefore can directly inform the 

analysis of the state of the current 

security-based swap market.227 In 2017, 

there were 1,534,753 single-name CDS 

transactions reported to DTCC–TIW, of 

which 1,036,155 were transactions with 

a clearing agency as a counterparty.228

Currently, security-based swap 

transactions are generally negotiated 

and executed bilaterally, typically with 

a dealer as one of the counterparties. 

Indeed, based on our analysis of DTCC– 

TIW data for 2017, more than 99% of 

single-name CDS transactions have an 

ISDA-recognized dealer as a 

counterparty, and 31% of transactions 

are between two ISDA-recognized 

dealers.229

As of December 30, 2017 there were 

360,473 outstanding positions (with a 

gross notional value of $4.196 trillion) 

in single-name corporate CDS of which 

252,108 positions ($2.095 trillion) did 

not include a central counterparty 

(‘‘CCP’’) as one of the counterparties. Of 

the 252,108 positions, 158,674 positions 

($1.383 trillion) were between two 

market participants the Commission 

expects will register as SBS Entities, 

based on an analysis of DTCC–TIW 

data.230 In addition, 90,559 positions 

($0.684 trillion) were between an 

expected SBS Entity and a market 

participant not expected to register as an 

SBS Entity and 2,875 ($0.028 trillion) 

were between two participants not 

expected to register as SBS Entities. 

If transactions are examined instead, 

there were 383,212 price-forming 

transactions in calendar-year 2017 (with 

an aggregate gross trade size of $5.304 

trillion) in single-name corporate CDS of 

which 175,600 transactions ($4.321 

trillion) did not include a CCP as one of 

the counterparties. Of those 175,660 


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231We note that DTCC–TIW’s determinations as 

to the domicile of a counterparty or reference entity 

may not reflect our definition of ‘‘U.S. person’’ in 

all cases. Our definition of ‘‘U.S. person’’ follows 

the definition used in the Commission’s June 2014 

release where it, among other things, adopted rules 

and guidance regarding the application of the 

certain Title VII definitions in the cross-border 

context. See Application of ‘‘Security-Based Swap 

Dealer’’ and ‘‘Major-Security-Based Swap 

Participant’’ Definitions to Cross-Border SecurityBased Swap Activities, Exchange Act Release No. 

72472 (June 25, 2014), 79 FR 47277, 47303 (Aug. 

12, 2014 (republication)) (‘‘Cross-Border Adopting 

Release’’). 

232The challenges we face 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. 

233Although the Commission does not have 

information on the number of valuation 

discrepancies between counterparties in SBS 

markets, a June 2017 survey on dealer financing 

noted that two-fifths of survey respondents reported 

that the volume of valuation disputes increased 

somewhat over the September 2016 to June 2017 

period. Small net fractions of dealers responded 

that the volume, duration, and persistence of mark 

and collateral disputes had increased in OTC 

derivatives, especially in foreign exchange and 

interest rate contracts. Three-fifths of dealers 

responded that, on average, it takes more than two 

days but less than a week to resolve a mark and 

collateral dispute on VM. One-third indicated two 

days or fewer. See Yesol Huh, Division of Research 

and Statistics, Federal Reserve Board, The June 

2017 Senior Credit Officer Opinion Survey on 

Dealer Financing Terms, available at: https://

www.federalreserve.gov/data/scoos/files/scoos_

201706.pdf. 

234See 17 CFR 23.502 (Portfolio reconciliation). 

235See, e.g., supra Section I.B.2 for a discussion 

of similarities and differences in approach to the 

definition of material terms that must be reconciled. 

236See ISDA, 2013 Interim Updated Best 

Practices for the OTC Derivatives Collateral Process, 

Best Practices 10.1—10.6 (Oct. 23, 2013), available 

at: https://www2.isda.org/attachment/NjA3NQ==/ 

2013%20ISDA%20Best%20Practices%20for%

20the%20OTC%20Derivatives%20Collateral%

20Process%20-%20FINAL.pdf (‘‘ISDA Collateral 

Best Practices’’). 

transactions, 75,119 transactions ($1.695 

trillion) were between two expected 

SBS Entities, 99,370 transactions 

($2.245 trillion) were between an 

expected SBS Entity and a participant 

not expected to register, and 1,171 

transactions ($0.382 trillion) were 

between two participants not expected 

to register as SBS Entities. 

Further analysis of the data reveals 

that of the 24 expected SBS Entities 

with outstanding positions as of 

December 30, 2017, 10 are not U.S. 

persons and may be subject to similar 

requirements as those being proposed 

here by foreign regulators. We note that 

the data available to us from DTCC–TIW 

does not encompass those CDS 

positions that both: (i) Do not involve 

U.S. counterparties; 231 and (ii) are 

based on non-U.S. reference entities. 

Notwithstanding this limitation, we 

believe that the DTCC–TIW data 

provides sufficient information to 

identify the types of market participants 

active in the security-based swap market 

and the general pattern of transactions 

within that market.232 We find that of 

the outstanding positions on December 

30, 2017, 317,854 positions ($1.661 

trillion) include at least one expected 

SBS Entity, 3,037 ($0.018 trillion) are 

between non-U.S. domiciled expected 

SBS Entities and 60,948 ($0.489 trillion) 

are between a non-U.S, domiciled 

expected SBS Entity and a participant 

not expected to register as an SBS 

Entity. 

2. Current Portfolio Reconciliation 

Practices 

While the Commission does not have 

data on current portfolio reconciliation 

practices of security-based swap market 

participants,233 certain market 

participants we expect will register as 

SBS Entities are already subject to 

similar requirements from other 

regulators. In particular, those entities 

that are also registered with the CFTC as 

Swap Entities are subject to CFTC rules 

on portfolio reconciliation. These rules 

require Swap Entities to reconcile their 

swap portfolios with one another and to 

provide counterparties who are not 

registered as Swap Entities with regular 

opportunities for portfolio 

reconciliation.234 The Commission has 

reviewed these rules and preliminarily 

believes that, other than as expressly 

noted above in Section I.B, they are 

substantively identical to the rules we 

are proposing today.235

Further, SBS Entities that are 

domiciled outside of the U.S. may be 

subject to similar requirements of 

regulators from their home jurisdiction. 

For example, entities subject to Chapter 

VII, Article 13 of EU Regulation No 149/ 

2013 already must comply with 

portfolio reconciliation requirements 

similar to those under the proposed 

rules. The EU regulations require all 

counterparties to agree on arrangements 

under which portfolios shall be 

reconciled before entering into an OTC 

derivative contract. Furthermore, the 

frequency of portfolio reconciliation 

under those regulations depends on 

both whether either counterparty is a 

‘‘financial counterparty’’ or a ‘‘nonfinancial counterparty’’ (each as defined 

in European regulations), and the 

number of outstanding contracts 

between the counterparties. 

In addition to regulations that may 

apply to certain SBS Entities that are 

either dually registered with the CFTC 

as Swap Entities or subject to similar 

portfolio reconciliation rules in other 

jurisdictions, portfolio reconciliation 

forms a part of current market practices. 

In particular, ISDA publishes a set of 

‘best practices’ for its members for the 

OTC derivatives collateral process that 

addresses, among other things, portfolio 

reconciliation of non-cleared OTC 

derivatives.236 These ‘best practices’ 

include written agreement between 

counterparties as to the terms of the 

reconciliation and reconciliation 

tolerances, and also recognize both the 

CFTC and EU rules pertaining to 

portfolio reconciliation. 

3. Current Portfolio Compression 

Practices 

While the Commission does not have 

data on current portfolio compression 

practices of security-based swap market 

participants, certain SBS Entities are 

already subject to similar compression 

requirements in other contexts similar 

to the situation involving portfolio 

reconciliation. Specifically, SBS Entities 

that are also registered with the CFTC as 

Swap Entities are subject to CFTC rules 

on portfolio compression. As discussed 

above, the Commission has reviewed 

those rules and preliminarily believes 

that they are, other than as expressly 

noted above in Section I.C, 

substantively identical to the rules we 

are proposing today. 

Further, SBS Entities that are 

domiciled outside of the U.S. may be 

subject to similar requirements from 

regulators in their home jurisdiction. 

For example, entities subject to Chapter 

VII, Article 14 of EU Regulation No 149/ 

2013 already must comply with 

portfolio compression requirements. 

Under these requirements any entity 

that has 500 or more non-cleared OTC 

derivative contracts with any one 

counterparty must have procedures in 

place to regularly (at least twice a year) 

analyze the possibility of conducting a 

portfolio compression exercise in order 

to reduce their counterparty credit risk 

and engage in such a portfolio 

compression exercise. The EU 

regulations differ from these proposed 

rules in a few important ways, including 

their application to all OTC derivative 

positions, not just security-based swaps, 

as well as the minimum frequency of 

compression exercises. Moreover, both 

financial and non-financial 

counterparties are required under the 

EU regulations to ensure that they are 

able to provide ‘‘a reasonable and valid 

explanation to the relevant competent 

authority for concluding that a portfolio 

compression exercise is not 

appropriate.’’ 


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237See ISDA Collateral Best Practices, supra note 

236, Best Practice 8.4. 238The data available to the Commission with 

respect to portfolio compression does not allow for 

enumeration of the actual participants which 

participate in such practices; however, inferences 

regarding the scope can be drawn from the 

magnitude of the reduction in the gross notional 

value of the credit derivatives. 

239See DTCC Press Release, DTCC Trade 

Information Warehouse Completes Record Year 

Processing OTC Credit Derivatives, (Mar. 11, 2010). 

Notably, beginning in August 2008, ISDA 

encouraged compression exercises for CDS by 

selecting the service provider and defining the 

terms of service. 

240See Aldasoro, Inaki, and Torsten Ehlers, 2018, 

The Credit Default Swap Market: What a Difference 

a Decade Makes, BIS Quarterly Review June 2018, 

Graph 1 panel 2 and accompanying text, available 

at: https://www.bis.org/publ/qtrpdf/r_qt1806b.pdf. 

In March of 2010, the staff of the FRBNY estimated 

that since 2008 nearly $50 trillion gross notional of 

CDS positions has been eliminated through 

portfolio compression. See FRBNY OTC Derivatives 

Report, supra note 62. 

241 Id. 

242The chart below includes only gross and net 

notional of single-name security-based swaps. The 

inclusion of index security-based swaps could 

expand potential compression opportunities 

available to SBS Entities. 

243The result is likely driven by banks and 

securities firms. See Aldasoro, Inaki, and Torsten 

Ehlers, 2018, supra note 240, Graph 5. 

In addition to regulations that may 

apply to certain SBS Entities that are 

either dually registered with the CFTC 

as Swap Entities or subject to similar 

portfolio compression rules in other 

jurisdictions, portfolio compression 

forms a part of current market practices. 

The ISDA Collateral Best Practices also 

includes a best practice that addresses 

portfolio compression, explaining that 

trades that are subject to industry-wide 

trade-reducing events should be 

removed from the portfolio on the day 

the trade-reducing event occurs and that 

this should be in agreement with 

governing documentation for the 

applicable risk reducing process.237

Although we lack data on current 

portfolio compression practices of 

individual SBS market participants, the 

importance of portfolio compression is 

illustrated by the scope of its use among 

security-based swap market 

participants.238 In March 2010, DTCC 

explicitly attributed the reduction in the 

gross notional value of the credit 

derivatives in its warehouse to industry 

supported portfolio compression.239

Using data from TriOptima, the BIS 

reports CDS portfolio compression rates 

as high as 25% of notional outstanding 

in the first half of 2008.240 Compression 

volumes fell steadily over the following 

years due, in part, to falling transaction 

volumes and the rise of central 

clearing.241 TriOptima, as well as other 

firms, continue to offer compression 

services, and the Commission 

preliminarily believes that the fact that 

market participants continue to find it 

worthwhile to pay for such services 

lends support to the argument that 

market participants view portfolio 

compression as a valuable tool. 

The chart below illustrates the 

opportunities for portfolio compression 

between 2010 and 2017 for single-name 

security-based swaps.242 As the gap 

between gross and net notional values 

widens, the opportunities for portfolio 

compression increase. Over our 

reference period, however, the 

difference between gross and net 

notional values has declined. For 

instance, in 2010, the percentage, which 

captures the ratio of net to gross 

notional value, was 11.0%, but this 

number has been gradually increasing 

through December 30, 2018 when it was 

15.2%. Smaller ratios indicate greater 

opportunities for portfolio compression; 

however, as shown in the chart below, 

based on changes in gross and net 

notional value over time, unexploited 

opportunities for compression are 

diminishing.243


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244See Trade Acknowledgment and Verification 

Adopting Release, 81 FR at 39833. 

245See supra Section I.B.1. 246See id. 

It is possible that market participants 

may already be taking advantage of 

portfolio compression opportunities. 

However, the Commission does not 

infer that the entirety of the reduction 

in the gap between gross and net 

notional values is due to portfolio 

compression exercises. Other plausible 

explanations for the reduction in the 

gross notional value of security-based 

swaps include both fewer and/or 

smaller new transactions, expiration of 

existing positions without rollover into 

new positions, and loss or consolidation 

of market participants throughout time. 

Due to limitations of the data available 

to the Commission, it is infeasible to 

distinguish the overall effect of portfolio 

compression exercises on the reduction 

in the gross notional value of the 

security-based swap market from the 

alternative explanations presented 

above. 

4. Current Trading Relationship 

Documentation Practices 

Memorializing the specific terms of 

the security-based swap trading 

relationship and security-based swap 

transactions between counterparties is 

prudent business practice and, in fact, 

many market participants already use 

standardized documentation. 

Examination of the use of ISDA Master 

Agreements (the measure of trading 

relationship documentation available to 

the Commission in the data provided by 

DTCC–TIW) shows that the percentage 

of transactions with these agreements 

declines from 78.2% in 2008 to 34.1% 

in 2017, with the peak occurring in 2010 

(96.1%). However, as trading 

relationship documentation may be 

different when the counterparty is a 

CCP, an analysis of documentation on 

aggregate security-based swap 

transactions (both cleared and 

uncleared) may be misleading. With the 

introduction of ICE Clear Credit in 2009, 

the percentage of cleared transactions 

has increased over time, thus a 

seemingly more relevant measure to 

look at is the frequency of use of ISDA 

Master Agreements for uncleared 

transactions. Approximately 99% of all 

uncleared transactions are reported (by 

DTCC–TIW) as using trading 

relationship documentation (in the form 

of ISDA Master Agreements) in 2017 

compared to 78.2% in 2008. 

Accordingly, the Commission generally 

believes that many, if not most, market 

participants currently execute and 

maintain trading relationship 

documentation of the type required by 

the proposed rules in the ordinary 

course of their businesses, including 

documentation that contains several of 

the terms that would be required by the 

proposed rules. 

Finally, and similar to the discussion 

regarding the reconciliation and 

compression, SBS Entities that are also 

registered with the CFTC as Swap 

Entities are subject to CFTC rules 

requiring the use of trading relationship 

documentation. As discussed above, the 

Commission has reviewed those rules 

and preliminarily believes that they are, 

other than as expressly noted above in 

Section I.D, substantively identical to 

the rules we are proposing today. 

C. Economic Costs and Benefits, 

Including Impact on Efficiency, 

Competition, and Capital Formation 

In this section we first discuss the 

expected effects of the proposed rules 

on efficiency, competition, and capital 

formation, focusing particularly on the 

risk-mitigation benefits that stem from 

the use of portfolio reconciliation, 

expanding opportunities for portfolio 

compression, and improvements in 

documentation. We then turn our 

discussion to additional costs and 

benefits, including compliance costs 

and alternatives considered of the 

proposed rules. 

1. Effects on Efficiency, Competition, 

and Capital Formation 

Risk mitigation rules have the 

potential to affect efficiency, 

competition, and capital formation in 

the security-based swap market, 

primarily through a reduction in 

operational, market, and credit risks that 

accompany outstanding security-based 

swap positions. In addition, the 

substituted compliance framework may 

provide additional effects that are 

distinct from the broader market 

impacts that are described below. As 

with the benefits and costs, we believe 

that several of the effects described 

below only occur to the extent that 

current market practices do not already 

conform to our proposed rules. 

a. Broad Market Effects 

In the release adopting final rules 

requiring SBS Entities to provide trade 

acknowledgments and to verify those 

trade acknowledgments with their 

counterparties to security-based swap 

transactions, the Commission explained 

the importance of confirming trades in 

a timely manner, noting that 

confirmation of the terms of a 

transaction is essential for SBS Entities 

‘‘to effectively measure and manage 

market and credit risk.’’ 244 245 In this 

regard, portfolio reconciliation 

addresses many of these same issues, 

but unlike the confirmation process, 

which occurs at the outset of a 

transaction, reconciliation operates 

throughout the life of the transaction.246

Failure to periodically conduct 

portfolio reconciliation may cause errors 

and disputes over the terms of a 

transaction that may exist to go 

undetected, leading to errors in 

measurement and management of 

market and credit risks associated with 

particular transactions. More generally, 

timely portfolio reconciliation will 

provide counterparties with accurate 

information that will enable them to 

evaluate their own risk exposure in a 

timely manner. Efficient and costeffective risk management may conserve 

resources and free up capital that can be 

deployed in other asset classes, 

promoting risk-sharing and efficient 

capital allocation. In addition, costeffective risk management may reduce 

the overall costs of financial 

intermediation, allowing market 

participants to increase lending and 

other capital formation activities. 

Similarly, periodic portfolio 

reconciliation and improved standards 

for transaction documentation may 

contribute to broader market stability, 

particularly during periods of distress. 

Disagreement as to one or more material 

terms of a transaction or inadequate 

documentation could hinder timely and 

efficient settlement of security-based 

swap transactions, particularly in the 

case of a credit event on a reference 

entity on which many different 

counterparties have, in the aggregate, a 

large notional outstanding exposure. 

During periods of financial distress, 

uncertainty about terms, value, and 

documentation of outstanding 

transactions could contribute to 

liquidity and cash shortfalls that 

threaten the stability of the financial 

system. Thus, to the extent that the 

proposed rules reduce uncertainty about 

outstanding transactions, we expect 

reduced risk of uncertainty about the 

credit risk of potential counterparties, 

particularly during a financial crisis. 

Finally, to the extent that portfolio 

reconciliation requirements differ from 

current market practices, the proposed 

rules have the potential to affect 

competition across multiple 

dimensions. If the costs of portfolio 

reconciliation, portfolio compression, 

and complying with transaction 

documentation rules for security-based 

swap transactions are largely fixed (i.e., 

the costs come from establishing 

infrastructure and systems necessary to 


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247The Commission does not expect that this 

effect would extend to major SBS participants, 

which are by definition the largest non-dealer 

participants in the security-based swap market. As 

described in the economic baseline, out of more 

than 4,000 security-based swap market participants, 

we expect at most five to register as major SBS 

participants. These entities maintain substantial 

positions in security-based swaps, as defined in the 

Intermediary Definitions Adopting Release, and the 

Commission expects these entities have sufficient 

resources and infrastructure to comply with 

portfolio reconciliation and documentation 

requirements. 

248See ISDA Collateral Best Practices, supra note 

236, Section 10. 

249The lack of liquidity in markets for mortgagebacked securities led to wide disparities in the 

valuation of CDS referencing mortgage-backed 

securities (especially collateralized debt 

obligations). Such wide disparities led to large 

collateral calls from dealers on AIG, hastening its 

downfall. See CBS News, ‘‘Calling AIG? Internal 

Docs Reveal Company Silent About Dozens of 

Collateral Calls,’’ June 23, 2009, available at: http:// 

www.cbsnews.com/stories/2009/06/23/cbsnews_

investigates/main5106672.shtml; See also Financial 

Crisis Inquiry Commission, The Financial Crisis 

Inquiry Report: Final Report of the National 

Commission on the Causes of the Financial and 

Economic Crisis in the United States, Chapter 8, 

available at: https://www.gpo.gov/fdsys/pkg/GPOFCIC/pdf/GPO-FCIC.pdf. 

250Pursuant to proposed Rule 15Fi–3(d), the new 

requirements regarding portfolio reconciliation 

would not apply to a clearing transaction (i.e., a 

security-based swap that has a clearing agency as 

a direct counterparty). See supra note 58 and 

accompanying text. 

251See proposed Rule 15Fi–3(a). 

perform portfolio reconciliation and 

portfolio compression and comply with 

documentation requirements) rather 

than varying with the number of 

transactions or positions outstanding, 

smaller dealers intermediating a smaller 

number of trades may have a larger 

burden placed on them; larger dealers, 

on the other hand, may be able to spread 

the costs over a greater number of trades 

or positions, with a lower average cost 

of complying with these rules. 

Similarly, the costs of establishing an 

infrastructure to comply with these 

requirements may create a barrier to 

entry for market participants wishing to 

establish a SBS dealer business.247

b. Substituted Compliance 

As discussed above, if the 

Commission has made a positive 

substituted compliance determination 

with respect to a particular foreign 

regulatory regime, SBS Entities 

operating in that jurisdiction may be 

able to satisfy their Title VII risk 

mitigation requirements by complying 

with similar requirements of the foreign 

financial regulatory system. Substituted 

compliance would be available only for 

SBS Entities who are not U.S. persons. 

The Commission is proposing to 

amend its rules to make substituted 

compliance potentially available to the 

portfolio reconciliation, portfolio 

compression, and trading relationship 

documentation requirements in order to 

minimize the likelihood that SBS 

dealers are subjected to potentially 

duplicative or conflicting regulation. 

The Commission preliminarily believes 

that duplicative regulations that achieve 

comparable regulatory outcomes 

increase the compliance burdens on 

market participants without 

corresponding increases in benefits. By 

decreasing the compliance burden for 

foreign SBS dealers active in the U.S. 

market, the availability of substituted 

compliance could encourage foreign 

firms’ participation in the U.S. market, 

increasing the ability of U.S. firms to 

access global liquidity, and reducing the 

likelihood that liquidity would fragment 

along jurisdictional lines. Such 

participation and access to liquidity 

might result in increased competition 

between both U.S. and foreign 

intermediaries without compromising 

the regulatory benefits intended by the 

applicable risk mitigation rules. 

2. Portfolio Reconciliation 

Disputes related to confirming the 

terms of a swap, as well as swap 

valuation disputes, have long been 

recognized as a significant problem in 

the OTC derivatives market. The 

Commission preliminarily believes that 

the ability to determine definitively the 

value of a security-based swap at any 

given time is an important component 

of many of the OTC derivatives market 

reforms contained in the Dodd-Frank 

Act and is a component of sound risk 

management practices.248 Securitybased swap valuation is also crucial for 

determining capital and margin 

requirements applicable to SBS Entities 

and therefore plays a primary role in 

risk mitigation for uncleared securitybased swaps. Portfolio reconciliation is 

considered an effective means of 

identifying and resolving these disputes 

at a time and in a manner that will be 

least disruptive to the counterparties 

and the broader financial system. 

Parties may dispute valuations of 

thinly traded security-based swaps 

where there is not agreement on 

valuation methodologies or the source 

for formula inputs. Many of these 

security-based swaps are thinly traded 

either because of their limited liquidity 

or because they are simply too 

customized to have comparable 

counterparts in the market. As many of 

these security-based swaps are valued 

by dealers internally by ‘‘marking-tomodel,’’ their counterparties may 

dispute the inputs and methodologies 

used in the model. As uncleared 

security-based swaps are bilateral, 

privately negotiated contracts, on-going 

security-based swap valuation for 

purposes of initial and variation margin 

calculation and security-based swap 

terminations or novations, also has been 

largely a process of on-going negotiation 

between the parties. The inability to 

agree on the value of a security-based 

swap became especially acute during 

the financial crisis that immediately 

preceded passage of the Dodd-Frank Act 

when there was widespread failure of 

the market inputs needed to value many 

security-based swaps.249

a. Requirements 

The Commission is proposing rules 

and interpretations that generally would 

require each SBS Entity (1) to engage in 

portfolio reconciliation with 

counterparties who are also SBS Entities 

at periodic intervals based on the 

number of outstanding transactions with 

the counterparty and (2) to establish, 

maintain, and follow written policies 

and procedures reasonably designed to 

ensure that it engages in portfolio 

reconciliation with counterparties who 

are not SBS Entities, also at periodic 

intervals based on the number of 

outstanding transactions with the 

counterparty.250

The Commission is proposing to vary 

the proposed portfolio reconciliation 

requirement based on the particular 

type of counterparty with which the 

SBS Entity transacts. For transactions 

between two SBS Entities, the proposed 

rules would require the two sides to 

engage in portfolio reconciliation at 

frequencies that are based on the size of 

the security-based swap portfolio 

between the two parties.251 In addition 

to the requirements regarding the 

frequency of the reconciliation, 

proposed Rule 15Fi–3(a)(1) would 

require the two SBS Entities to agree in 

writing with each of their counterparties 

on the terms of the portfolio 

reconciliation including, if applicable, 

agreement on the selection of any third 

party service provider who may be 

performing the reconciliation. 

To the extent that the two SBS 

Entities identify a discrepancy, the 

proposed rule would require the parties 

to take certain steps. First, proposed 

Rule 15Fi–3(a)(4) would require the two 

sides to resolve immediately any 

discrepancy in a material term, whether 

identified directly as part of the 

portfolio reconciliation or otherwise. 

Second, proposed Rule 15Fi–3(a)(5) 

would require each SBS Entity to 

establish, maintain, and follow written 

policies and procedures reasonably 

designed to resolve any discrepancy in 

a valuation identified as part of a 


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252 15 U.S.C. 78o–10(e). 

253This 10% threshold would apply on a 

transaction-by-transaction basis, and not on a 

portfolio level. 

254See proposed Rule 15Fi–3(b). 

255Similar to the requirement in paragraph (a) of 

the proposed rule for portfolio reconciliation with 

counterparties that are either SBS dealers or major 

SBS participants, proposed Rule 15Fi–3(b)(4) 

provides that a difference between the lower 

valuation and the higher valuation of less than 10% 

of the higher valuation need not be deemed a 

discrepancy for purposes of that paragraph. See 

supra note 39 and accompanying text (discussing 

the 10% threshold in the context of Rule 15Fi– 

3(a)(5)). 

256See supra Section I.B.6. 

portfolio reconciliation or otherwise as 

soon as possible, but in any event 

within five business days after the date 

on which the discrepancy is first 

identified. As a condition to this 

requirement, however, proposed Rule 

15Fi–3(a)(5) would require each SBS 

Entity to establish, maintain, and follow 

written policies and procedures 

reasonably designed to identify how the 

SBS Entity will comply with any 

variation margin requirements under 

Section 15F(e) of the Exchange Act 252

and any related regulations pending 

resolution of the valuation discrepancy. 

Finally, proposed Rule 15Fi–3(a)(5) 

would clarify that for purposes of the 

requirement to resolve valuation 

discrepancies within five business days 

of being identified, a difference between 

the lower valuation and the higher 

valuation of less than 10% of the higher 

valuation need not be deemed a 

discrepancy.253

Separately, with respect to 

transactions between an SBS Entity and 

a counterparty that is not an SBS Entity, 

proposed Rule 15Fi–3(b) would require 

each SBS Entity to establish, maintain, 

and follow written policies and 

procedures reasonably designed to 

ensure that it engages in portfolio 

reconciliation as set forth in the rule.254

This is in contrast to proposed Rule 

15Fi–3(a), which expressly requires 

portfolio reconciliation with respect to 

transactions where both counterparties 

are SBS Entities. 

Proposed Rule 15Fi–3(b) contains a 

number of requirements regarding the 

contents of the policies and procedures 

required therein, as they relate to 

reconciliation with non-SBS Entities, 

which are largely consistent with the 

requirements imposed directly on the 

parties under proposed Rule 15Fi–3(a). 

Specifically, proposed Rule 15Fi–3(b)(3) 

provides that such policies and 

procedures must require that the 

portfolio reconciliation be performed no 

less frequently than: (1) Once each 

calendar quarter for each security-based 

swap portfolio that includes more than 

100 security-based swaps at any time 

during the calendar quarter and (2) once 

annually for each security-based swap 

portfolio that includes no more than 100 

security-based swaps at any time during 

the calendar year. 

In addition, proposed Rule 15Fi– 

3(b)(4) requires each SBS Entity to 

establish, maintain, and follow written 

procedures reasonably designed to 

resolve any discrepancies in the 

valuation or a material term of each 

security-based swap identified as part of 

a portfolio reconciliation or otherwise 

with a counterparty that is not an SBS 

Entity within five days.255

Finally, proposed Rule 15Fi–3(c) 

would require each SBS Entity to 

promptly notify the Commission of any 

security-based swap valuation dispute 

in excess of $20,000,000 (or its 

equivalent in any other currency) if not 

resolved within: 

• three business days, if the dispute 

is with a counterparty that is an SBS 

Entity, or 

• five business days, if the dispute is 

with a counterparty that is not an SBS 

Entity. 

Such notification would be required 

to be in a form and manner acceptable 

to the Commission, and would also be 

required to be sent to any applicable 

prudential regulator (i.e., for any SBS 

Entity that is also a bank, to its bank 

regulator).256

For the security-based swap market to 

operate efficiently and to reduce credit 

and operational risk between 

counterparties, the Commission 

preliminarily believes that, although the 

frequency of portfolio reconciliation 

depends on the number of positions 

with a counterparty, reconciliation 

should occur by position because terms 

may vary across positions with the same 

counterparty. By identifying and 

managing mismatches in key economic 

terms and valuation for individual 

transactions across an entire portfolio, 

these rules are intended to require a 

process in which risk between 

counterparties can be identified and 

reduced. 

b. Benefits 

Reconciliation is beneficial not only 

to the parties involved but also to the 

markets as a whole. By identifying and 

managing disputed key economic terms 

or valuation for each transaction across 

a portfolio, an entity’s counterparty 

credit risk and operational risk can be 

diminished. By requiring a systematic 

reconciliation process, as well as 

policies and procedures related to 

portfolio reconciliation between 

counterparties, SBS Entities will be able 

to better identify and correct problems 

in a timely manner in their postexecution processes (including 

confirmation) in order to reduce the 

number of disputes and improve the 

integrity and efficiency of their internal 

processes. Accordingly, expanding the 

universe of participants subject to the 

reconciliation requirements can help to 

reduce the risk bilateral markets may 

pose to the broader financial system. 

As discussed above, because 

shortcomings in credit risk management 

and documentation may only become 

evident during a crisis, some benefits of 

portfolio reconciliation will accrue to 

the financial system as a whole while 

the ongoing direct costs are borne by the 

individual market participant. 

Therefore, in the absence of these rules, 

the level and frequency of portfolio 

reconciliation chosen by individual 

market participants may be less than 

what would be desired by all market 

participants in order to properly manage 

risks to the financial system. 

In addition, the Commission 

preliminarily believes that the proposed 

tiering of obligations, whereby the 

frequency of the portfolio reconciliation 

would be based on the number of 

outstanding transactions with the 

applicable counterparty, represents a 

reasonable attempt to calibrate the costs 

to the benefits expected from 

reconciling a person’s security-based 

swap portfolio at regular intervals. In 

this respect, those benefits would be 

expected to rise for larger—and often 

more complex—portfolios that may 

represent a greater potential for loss 

than a smaller, less complex portfolio. 

The Commission preliminarily 

believes that, given the expected 

benefits of making the frequency of 

portfolio reconciliation a function of the 

size of a portfolio with a particular 

counterparty, setting the frequency of 

reconciliation identical to that adopted 

by the CFTC will provide additional 

benefit for SBS Entities that are also 

registered with the CFTC as Swap 

Entities. In particular, harmonizing the 

frequency of reconciliation for swaps 

and SBS should reduce implementation 

cost and reduce operational complexity. 

Similarly, the Commission notes that 

the EC has adopted portfolio 

reconciliation requirements for the EU 

that are similar to those proposed by the 

Commission in this release. The 

Commission preliminarily believes that 

aligning its portfolio reconciliation 

requirements with those in other major 

security-based swap markets will 

benefit SBS Entities by avoiding the 

imposition of disparate compliance and 

operational policies and procedures. 


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257See supra note 14. 

258See supra note 203. 259See supra Section I.B.6. 

260See SDR Adopting Release, 80 FR at 14528– 

48, for a discussion of the expected economic 

benefits accurate SBS data held at SDRs. 

261See proposed Rule 15Fi–1(i)(1) (referencing 17 

CFR 242.901). 

262This estimate is based on an estimate supplied 

by ISDA to the CFTC in response to their proposed 

portfolio reconciliation rule. See CFTC Risk 

Mitigation Adopting Release 77 FR at 55952–3. 

Moreover, proposed Rule 15Fi–3(a)(2) 

provides that portfolio reconciliation 

may be performed either on a bilateral 

basis by the counterparties or by a third 

party selected by the counterparties in 

accordance with paragraph (a)(1) of the 

proposed rule. Under this approach, the 

process for selecting a third-party 

service provider—or the actual identity 

of the service provider—should be 

included in the written agreement 

between the two sides setting forth the 

terms of the portfolio reconciliation 

process. 

In the absence of periodic portfolio 

reconciliation, if the counterparties to a 

security-based swap transaction are not 

in agreement with respect to each of the 

terms of the transaction that may affect 

each party’s rights and obligations, any 

such difference could lead to 

complications at various points 

throughout the trade.257 These 

discrepancies could be exacerbated if 

they remain undetected until such times 

as the parties become obligated to 

perform on their requirements under the 

contract. Such discrepancies could be 

particularly problematic if they are 

discovered during a period of financial 

stress for the market participant.258

Thus, portfolio reconciliation may help 

to mitigate the possibility of a 

discrepancy unexpectedly affecting 

performance by ensuring that the parties 

are and remain in agreement with 

respect to all of the material terms of the 

security-based swap transaction. 

Regular reconciliation of all portfolios 

is a process to reduce counterparty 

credit exposure and operational risk and 

help prevent disputes from arising. The 

rule should promote market integrity 

and reduce risk by establishing 

procedures that will promote legal 

certainty concerning security-based 

swap transactions, assist with the early 

resolution of valuation disputes, reduce 

operational risk, and increase 

operational efficiency. 

The proposed rules may have 

differential benefits for smaller market 

participants. Smaller market 

participants may not have the 

bargaining power necessary to compel 

larger counterparties to coordinate on 

portfolio reconciliation. Since SBS 

Entities, absent a mandate, are likely to 

focus risk management resources on 

larger counterparties, the ability of 

smaller counterparties to require the 

necessary cooperation from their 

counterparties who are SBS Entities will 

be improved. Reduced uncertainty 

concerning material terms and valuation 

methodologies could reduce the risks to 

these smaller participants for using SBS 

for hedging market risk to which they 

may be exposed. 

Portfolio reconciliation is particularly 

relevant with respect to terms related to 

the valuation of the instrument. 

Unresolved discrepancies regarding the 

value of a security-based swap can lead 

to, among other things, active disputes 

between counterparties with respect to 

the amount of margin that must be 

posted or collected, as well as errors and 

other complications that may result in 

significant uncollateralized exposure in 

the uncleared security-based swap 

markets (or alternately, potentially 

inefficient overcollateralization). 

Accordingly, we preliminarily believe 

that requiring counterparties to clearly 

document the applicable processes and 

requirements for calculating and 

exchanging margin in connection with a 

security-based swap transaction is an 

important step in achieving this broader 

regulatory objective. 

The notification requirement of 

proposed Rule 15Fi–3(c) would provide 

the Commission with information about 

disagreements over position values 

between counterparties. Valuation is 

one of the most fundamental elements 

for determining the economic rights and 

obligations of each of the counterparties 

to a security-based swap transaction. 

For example, market participants 

manage credit risks to their 

counterparties by exchanging margin 

with each other in an amount 

determined using the value of the 

underlying security-based swap. If those 

valuations are not accurate for any 

reason, such as human or system errors, 

problems with the valuation 

methodology, or an issue affecting the 

timeliness of the calculation, that error 

could result in one of the counterparties 

having an uncollateralized credit 

exposure and a potential for loss in the 

event of a default. We therefore expect 

that the notification requirement could 

assist the Commission in anticipating 

potential valuation problems that could 

ultimately lead to market disruption, 

and in identifying potential issues with 

respect to an SBS Entity’s internal 

valuation methodology. As noted above, 

the CFTC has adopted a nearly identical 

requirement with the same $20,000,000 

threshold, and the Commission believes 

that divergence from that requirement 

could lead to additional costs for SBS 

Entities that are also registered with the 

CFTC as Swap Entities.259 Finally, as 

discussed above, the Commission 

preliminarily believes reconciliation 

may provide indirect benefits by 

improving the accuracy of SDR data.260

As described above in Section I.B.2, the 

information that SBS Entities would 

initially be required to reconcile with 

their counterparties would include each 

term that is required to be reported to 

a registered SDR under Rule 901 under 

the Exchange Act.261

c. Costs 

The portfolio reconciliation rules the 

Commission is proposing today are 

similar to the corresponding CFTC rules 

for Swap Entities. As a result, the onetime costs to develop, test, and 

implement new procedures and 

technology that may be required in 

order to be compliant with the proposed 

rules are mitigated by the fact that many 

SBS Entities also are likely to be Swap 

Entities. These dually registered entities 

are likely to be familiar with these 

general requirements and have the 

infrastructure in place to comply with 

similar rules that apply to their swap 

business. 

SBS Entities that are not also CFTCregulated Swap Entities and that do not 

currently use an electronic platform or 

vendor service to conduct portfolio 

reconciliation will need to expend 

significant time and resources to modify 

the necessary systems to comply with 

proposed Rule 15Fi–3. Even those SBS 

Entities that do use electronic platforms 

or vendors services may find it 

necessary to make significant 

adjustments to comply with the rules. 

The Commission estimates a one-time 

upfront cost of approximately $5–10 

million for an SBS Entity that is not also 

a Swap Entity.262 Although the 

Commission does not currently have 

cost data for either reconciliation 

performed in-house or by third-party 

service providers, and therefore cannot 

quantify these costs, the Commission 

preliminarily believes that the ongoing 

portfolio reconciliation cost would 

likely be a function of portfolio size and 

the availability of third party service 

providers. 

In contrast, when commenting on the 

CFTC’s then-proposed portfolio 

reconciliation rule, a third party 

provider of multilateral compression 

services stated that a large number of 

Swap Entities already regularly 

reconcile their portfolios with each 

other and with other entities and that 


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263See Letter from Per Sjo ̈berg, Executive Vice 

TriOptima AB to the CFTC, dated Feb. 28, 2011 at 

2, available at: http://comments.cftc.gov/ 

PublicComments/ViewComment.aspx?id=30562&

SearchText.28, 2011 at 2, available at http://

comments.cftc.gov/PublicComments/ 

ViewComment.aspx?id=30562&SearchText. 

264This estimate is based on the following: [(Sr. 

Programmer (80 hours) × $314 per hour) + (Sr. 

Systems Analyst (80 hours) × $269 per hour) + 

(Compliance Manager (10 hours) × $293 per hour) 

+ (Director of Compliance (5 hours) × $461 per 

hour) + (Compliance Attorney (20 hours) × $346 per 

hour)] = $58,795 per SBS Entity, or ($58,795 × 20 

SBS Entities) = $1,175,900 in aggregate. 

265The hourly rates for internal professionals 

used throughout Sections VII.C.2.c, VII.C.3.c, and 

VII.C.4.c of the release are taken from SIFMA’s 

Management & Professional Earnings in the 

Securities Industry 2013, modified to account for an 

1800-hour work-year and inflation, and multiplied 

by 5.35 to account for bonuses, firm size, employee 

benefits, and overhead. 

266See supra note 262 and associated text. 

267Each SBS Entity is anticipated to have 

counterparty relationships with approximately onethird of the other SBS market participants (1⁄3 × 55 

= 18.333), which is rounded to 18 participants. Of 

those counterparty relationships, two are expected 

to have portfolios in excess of 500 positions, which 

would need to be reconciled daily (252 trading days 

per year), four would have between 50 and 500 

positions, which would need to be reconciled 

weekly (52 weeks per year), and the remaining 12 

would have less than 50 positions, which would 

need to be reconciled quarterly (four times per 

year). The Commission estimates that each portfolio 

reconciliation would require 30 minutes, 15 

minutes per counterparty, through an automated 

system, thus the total anticipated reconciliation 

time would be [(2 counterparties × 252 trading days 

× 0.25 hours) + (4 counterparties × 52 weeks × 0.25 

hours) + (12 counterparties × 4 quarters × 0.25 

hours)] = 190 hours per SBS Entity, or (190 × 55 

SBS Entities) = 10,450 hours in aggregate. 

268There are anticipated to be 13,137 total SBS 

counterparties, of which 55 are registered SBS 

Entities, leaving 13,082 non-SBS market 

participants. See supra note 179. The Commission 

estimates that each SBS Entity will transact with 

approximately 350 of these non-registered 

participants. Of those 350 counterparties, 35 are 

expected to have portfolio positions in excess of 

100 positions, which would require quarterly 

reconciliations, while the remaining 315 are 

expected to have positions of less than 100 securitybased swaps, and therefore, would require annual 

reconciliation. The Commission estimates that each 

portfolio reconciliation would require 30 minutes 

through an automated system, thus the total 

anticipated reconciliation time would be [(35 

counterparties × 4 quarters × 0.5 hours) + (315 

counterparties × 1 time per year × 0.5 hours)] = 

227.5 hours per SBS Entity, or (227.5 × 55 SBS 

Entities) = 12,512.5 hours in aggregate. 

269The estimate is based on the following: 

[((Compliance Attorney (30 minutes) at $346 per 

hour) + ((Director of Compliance (15 minutes) at 

$461 per hour) + ((Deputy General Counsel (15 

minutes) at $565 per hour)] = $429.50 per hour per 

SBS Entity or ($429.50 per hour × 35 SBS duallyregistered Entities) = $15,032.50. 

270The estimate is based on the following: 

[((Compliance Attorney (40 hours) at $346 per hour) 

+ ((Director of Compliance (20 hours) at $461 per 

hour) + ((Deputy General Counsel (20 hours) at 

$565 per hour)] = $34,360 per SBS Entity or 

($34,360 × 20 SBS Entities that are not duallyregistered) = $687,200 in aggregate. 

271The estimate is based on the following: 

[((Compliance Attorney (20 hours) at $346 per hour) 

+ ((Director of Compliance (10 hours) at $461 per 

hour) + ((Deputy General Counsel (10 hours) at 

$565 per hour)] = $17,180 per SBS Entity or 

($17,180 × 55 SBS Entities) = $944,900 in aggregate. 

the increased frequency and inclusion 

of smaller portfolios as proposed should 

prove no obstacle to such entities.263 If 

SBS Entities have similar business 

practices, then this comment suggests 

start-up and on-going portfolio 

reconciliation costs could be small. 

The Commission preliminarily 

believes that certain costs will arise 

despite the fact that an SBS Entity also 

may be registered with the CFTC as a 

Swap Entity, and therefore subject to 

similar rules already adopted by the 

CFTC. Such costs may include (i) 

increased costs to account for possible 

differences between the SEC and CFTC 

related to the terms considered to be 

material for purposes of the 

reconciliation requirement; (ii) the 

additional resources necessary to 

design, compose, and implement the 

required policies and procedures; (iii) 

the additional resources needed to 

comply with the dispute resolution 

timeframes; and (iv) the compilation 

and maintenance of applicable records. 

These costs, however, are by nature 

specific to each entity’s internal 

operations; absent specific information 

from commenters, the Commission 

cannot provide reasonable estimations 

regarding the resources needed to 

comply. 

The proposed rule also requires SBS 

Entities to agree in writing with each of 

their counterparties on the terms of the 

portfolio reconciliation including, if 

applicable, agreement on the selection 

of any third party service provider who 

may be performing the reconciliation. 

Accordingly, each counterparty to a SBS 

Entity subject to these rules would incur 

an upfront cost in implementing this 

requirement, particularly since the 

Commission would expect that such 

terms be agreed to in writing prior to, 

or contemporaneously with, the two 

parties executing any new securitybased swap transaction. These costs 

would be mitigated if, once the parties 

have agreed in writing on the terms of 

the portfolio reconciliation for the first 

time, the two sides comply with this 

requirement for subsequent transactions 

by merely agreeing in writing to abide 

by the existing agreement regarding the 

reconciliation process. This practice 

could help to ensure that portfolio 

reconciliation begins without delay after 

execution of the transaction and is 

designed to minimize the number of 

disagreements regarding the portfolio 

reconciliation process itself. 

The Commission estimates that of the 

55 market participants we expect to 

register as SBS Entities, approximately 

35 will be dually-registered with the 

CFTC and may already have automated 

portfolio reconciliation systems in 

place. Thus, for these entities, the costs 

associated with modifying these existing 

systems to account for security-based 

swap reconciliations is expected to be 

minimal. For the remaining 20 SBS 

Entities which are not expected be 

dually-registered with the CFTC, the 

anticipated personnel costs associated 

with setting up an automated portfolio 

reconciliation system per SBS Entity is 

$58,795, or $1,175,900 in 

aggregate.264 265 The Commission 

preliminarily believes that these costs 

would be a component of the upfront 

cost estimate of $5–10 million discussed 

above.266 For each SBS Entity, we 

anticipate that approximately 190 hours 

per year will be required for 

reconciliation or a total of 10,450 hours 

across the 55 SBS Entities.267 With 

respect to reconciliations with non-SBS 

counterparties, the Commission 

estimates that an additional 227.5 hours 

per SBS Entity, or 12,512.5 hours in 

aggregate would be needed for 

automated portfolio reconciliation with 

these counterparties.268

The Commission further estimates 

that the development and 

implementation of written policies and 

procedures as required under proposed 

Rule 15Fi–3 would impose an initial 

cost of $702,232.50. Of the total 55 SBS 

Entities that would be subject to Rule 

15Fi–3, 35 are estimated to be duallyregistered with the CFTC, and are 

anticipated to already have policies and 

procedures in place with respect to 

reconciliation. The expected additional 

time to revise the existing policies and 

procedures for these SBS Entities is 

expected to be one hour per SBS Entity, 

for a cumulative 35 hours, costing 

$429.50 per SBS Entity or $15,032.50 in 

aggregate.269 For the remaining 20 SBS 

Entities, the Commission estimates that 

it will take approximately 80 hours per 

entity to establish the written policies 

and procedures. The costs for these SBS 

Entities will be $687,200, or $34,360 per 

SBS Entity.270 Once established, the 

Commission estimates that it would cost 

SBS Entities approximately $944,900 or 

$17,180 per SBS Entity to revise and 

maintain these policies and 

procedures.271 Resolution of valuation 

discrepancies can be labor intensive. 

One objective of the proposed rule is to 

reduce the incidence of valuation 

discrepancies through the periodic 

reconciliations between security-based 

swap counterparties. It is unlikely, 

however, that the proposed rule will 

completely eliminate disputes related to 


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272See 17 CFR 23.502 (portfolio reconciliation). 

273The estimate is based on the following: 

[Compliance Attorney (24 hours) at $346 per hour] 

= $8,304 per entity × 55 SBS entities = $456,720. 

274See supra Section I.B.7. 

275Currently, there is no regulatory requirement 

in the United States to clear security-based swaps. 

As of December 2015, approximately 56% of the 

total volume of new trade activity in single-name 

security-based swap products had been cleared 

through ICE Clear Credit. Further, approximately 

79% of index CDS transactions were centrally 

cleared as of December 2015 (see https://

www.isda.org/a/kVDDE/swapsinfo-q4-2015-reviewfinal.pdf); therefore, single-name security-based 

swaps potentially could be cleared at a similar rate. 

valuation. The Commission lacks data 

on the fraction of positions that, when 

reconciled, will result in a dispute as 

well as the costs likely to be incurred 

resolving those disputes, and is 

therefore unable to quantify these costs. 

However, the Commission recognizes 

that the costs associated with resolution 

of these disputes is likely to be higher 

than costs for reconciliations in which 

disputes do not arise. 

However, the Commission 

preliminarily believes that these costs 

may be mitigated by only requiring 

counterparties to address differences in 

valuation greater than 10%. These costs 

of reconciliation may be further 

mitigated by agreement between the 

counterparties to use a third party 

service provider to assist in resolving 

valuation discrepancies. Reconciliation 

of other terms is likely to be less costly 

as the terms of the agreement are 

unlikely to change over the life of the 

contract. 

The 10% threshold was designed to 

both identify large deviations in 

valuations between SBS Entities, while 

not requiring those entities to devote 

significant effort to resolving minor 

valuation disputes. Further, this 

threshold is identical to that already 

adopted by the CFTC.272 The 

Commission notes, however, that this 

10% threshold is at the transaction 

level, rather than the entity level. While 

discrepancies could be random in 

nature, the risk exists that one 

counterparty could have systemic issues 

in valuation across its entire portfolio, 

thereby leading to discrepancies in 

valuation with one or several 

counterparties and throughout the 

portfolio. For example, if an entity’s 

valuation model consistently 

undervalued each of its security-based 

swap positions by 9%, in aggregate, the 

overall level of risk could be substantial, 

even though it would not trigger a 

discrepancy event as currently defined 

by the 10% transaction level threshold. 

Further, since the Commission estimates 

that approximately 35 of the expected 

55 SBS Entities are likely to be duallyregistered with the CFTC and active in 

swap and security-based swap markets, 

these participants are likely to face 

higher costs when regulations differ. 

The costs of resolving valuation 

disputes are expected to be mitigated, 

because the reconciliation requirements 

are expected to prevent disputes from 

arising in the first instance through the 

regular comparison of material terms 

and valuations. The Commission 

preliminarily believes that by requiring 

SBS Entities to reach agreement with 

certain counterparties on the methods 

and inputs for valuation of each 

security-based swap, as required in 

connection with the trading relationship 

documentation requirements in 

proposed Rule 15Fi–5, the overall 

framework of these rules should assist 

SBS Entities in resolving valuation 

disputes within five business days. In 

addition, the Commission estimates that 

SBS Entities will spend an average of 24 

hours per year to comply with the 

notification requirement of proposed 

Rule 15Fi–3(c) costing $8,304 per SBS 

Entity or $456,720 in aggregate.273

Lastly, portfolio reconciliation costs 

are also mitigated by virtue of the fact 

that cleared security-based swaps are 

not within the scope of the requirements 

of these rules. The Commission 

preliminarily believes that CCPs 

establish settlement prices for each 

cleared security-based swap every 

business day for margining purposes 

and this process is more appropriately 

addressed by rules governing a clearing 

agency’s risk management practices.274

Because a large part of the securitybased swap portfolios of SBS Entities 

may consist of cleared security-based 

swaps to which the reconciliation 

requirements will not apply, the sizes of 

the bilateral, uncleared portfolios (to 

which the requirement would apply) 

may be limited.275

d. Alternatives 

The proposed rule creates a specific 

definition of ‘‘material terms’’ for 

purposes of determining what 

discrepancies must be resolved in 

connection with the portfolio 

reconciliation which includes each term 

required to be reported to an SDR, but 

then permits SBS Entities to exclude 

any term that is not relevant to the 

ongoing rights and obligations of the 

parties and the valuation of the securitybased swap during subsequent 

reconciliations. The Commission 

considered not providing a specific 

definition of ‘‘material terms’’ and 

allowing SBS Entities discretion in 

determining those terms that are 

relevant to the ongoing rights or 

obligations of the parties or affect the 

valuation of the security-based swap. 

The Commission has preliminarily 

concluded that the data required to be 

submitted to an SDR in connection with 

regulatory reporting requirements is an 

appropriate measure for determining 

which terms should be reconciled 

pursuant to proposed Rule 15Fi-3. The 

Commission also preliminarily believes 

that tying the definition of ‘‘material 

terms’’ to reporting requirements to an 

SDR could reduce the burdens on some 

SBS Entities by potentially allowing 

them to leverage the same electronic 

systems used for SDR reporting for 

purposes of the portfolio reconciliation 

requirements. 

The portfolio size breakpoints and 

frequencies are consistent with those 

adopted by the CFTC for Swap Entities 

and are therefore likely to be familiar to 

those entities that are registered as both 

an SBS Entity and a Swap Entity. These 

are also the breakpoints adopted by the 

EC. Further, the Commission believes 

that alternative breakpoints based on the 

number of transactions which deviate 

from those adopted by the CFTC and the 

EC would likely impose additional costs 

on SBS Entities without any 

corresponding increases in material 

benefits to those participants. 

Although the notion of breakpoints 

based on number of transactions 

previously has been accepted by the 

CFTC and other regulatory agencies, the 

Commission notes that breakpoints 

based on alternative measures could be 

considered. In particular, breakpoints 

for reconciliation could be categorized 

by either gross (or net) notional amounts 

of positions or the current market value 

of positions, and identified as levels or 

scaled by some measure such as the 

aggregate notional value of the market 

(for gross or net notional values) or the 

assets of the SBS Entity (if market 

values are used instead). Although the 

number of security-based swaps 

between counterparties is easy to 

capture, it may actually be misleading 

with respect to the complexity or 

magnitude of the risk between 

counterparties. 

For instance, say two counterparties 

have over 500 transactions between 

them, but the average value of each 

transaction is only $5 million notional 

value. The total exposure between the 

two counterparties would only be $2.5 

billion, but this portfolio would need to 

be reconciled daily due to the number 

of transactions. If, on the other hand, 

two counterparties have only 40 

transactions, but the average value of 

each transaction is $1 billion notional 

value, the overall exposure would be 

$40 billion (16 times greater exposure 


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276See supra Section I.B.6. 

277See supra Section I.B.7. 

278See, e.g., Trade Acknowledgement and 

Verification Adopting Release, 81 FR at 39839. 

279Specifically, CFTC Rule 23.502(c) provides 

that ‘‘[n]othing in this section shall apply to a swap 

that is cleared by a derivatives clearing 

organization.’’ 17 CFR 23.502(c). 

280See supra Section I.E for a discussion of the 

proposed reconciliation rules and the verification of 

transaction data by SDRs. See also supra note 32 

for a discussion of differences between CFTC and 

proposed Commission requirements concerning 

third party reconciliation. 

than the 500 transaction counterparties), 

but this portfolio would only be 

reconciled quarterly. Basing breakpoints 

on some measure other than the number 

of transactions may enable SBS Entities 

to better assess the overall level of 

counterparty credit risk as well as 

operational risk associated with their 

security-based swap portfolios. Setting 

aside these concerns, the Commission 

believes that breakpoints based on the 

number of transactions is likely to 

capture the complexity of SBS Entities’ 

portfolios, and that reconciliations 

based on this dimension are likely to 

identify discrepancies in a timely 

manner. Further, given that the 

Commission estimates that 

approximately 35 of the expected 55 

SBS Entities are likely to be duallyregistered with the CFTC and active in 

both swap and security-based swap 

markets, this alternative could 

potentially impose additional costs due 

to differences in regulatory 

requirements. 

The Commission has also considered 

alternatives to the requirement that 

valuation discrepancies exceeding 10% 

must be resolved within five days. The 

10% threshold is consistent with the 

rule adopted by the CFTC for Swap 

Entities and, as a result, is likely to be 

familiar to those entities that are 

registered as both an SBS Entity and a 

Swap Entity. The Commission 

preliminarily believes that the proposed 

10% threshold is high enough to 

prevent market participants from 

incurring costs to resolve small 

valuation differences that would have 

only a small effect on margin or other 

risk management practices, yet low 

enough to prevent difference in 

valuation from resulting in significant 

miscalculations in risk management. 

As noted above, there are potential 

economic costs that could accrue to 

counterparties related to both the 10% 

threshold and the five business day 

resolution window. An alternative 

(albeit supplementary) approach would 

be an additional requirement of a 

valuation threshold related to the 

overall portfolio discrepancies, in 

aggregate and/or with individual 

counterparties. For instance, if the 

aggregate portfolio has valuation 

discrepancies of 5% or 10%, this could 

trigger a discrepancy event, even if the 

individual transaction-level 

discrepancies fall below the prescribed 

threshold as documented currently in 

the proposed rule. Relatedly, while the 

five business day window is narrow 

enough to potentially stem valuations 

from deviating for extended periods of 

time while still providing a horizon in 

which parties can work through their 

valuation disputes, entities can face 

significant counterparty risk over 

seemingly short-term horizons. For 

relatively stable valuation disputes in 

which the value does not continue to 

deviate further from the agreed-upon 

level, then a five business day window 

is likely to be sufficient; however, a 

more compressed alternative horizon 

could be invoked when the 

discrepancies in value continue to 

widen between counterparties. The 

Commission preliminarily believes that 

the proposed five business day horizon 

is sufficient and serves as an upperbound for which market participants to 

address and correct any material 

discrepancies that arise during 

reconciliation. Moreover, this approach 

is consistent with requirements from 

other regulators, and given the 

Commission’s estimates on SBS Entities 

that are likely to be dually-registered 

with the CFTC, any differences in 

regulation would likely impose 

additional costs to those entities. 

Finally, proposed Rule 15Fi-3(c) 

would require each SBS Entity to 

promptly notify the Commission of any 

security-based swap valuation dispute 

in excess of $20,000,000 (or its 

equivalent in any other currency) if not 

resolved within: 

• Three business days, if the dispute 

is with a counterparty that is an SBS 

Entity, or 

• five business days, if the dispute is 

with a counterparty that is not an SBS 

Entity. 

Such notification would be required 

to be in a form and manner acceptable 

to the Commission, and would also be 

required to be sent to any applicable 

prudential regulator (i.e., for any SBS 

Entity that is also a bank, to its bank 

regulator).276

The Commission has considered as an 

alternative, requiring SBS Entities to 

make and keep records of valuation 

discrepancies that exceed $20,000,000 

rather than requiring that they be 

reported to the Commission. The 

Commission preliminarily concluded 

that the benefit of receiving an early 

warning of potential problems before 

they surfaced though an ordinary course 

of review of books and records justifies 

any additional cost imposed on SBS 

entities. 

Proposed Rule 15Fi-3(d), the new 

requirements regarding portfolio 

reconciliation would not apply to a 

‘‘clearing transaction’’ which is defined 

as a security-based swap that has a 

clearing agency as a direct 

counterparty.277 A clearing agency 

means a clearing agency that is 

registered with the Commission 

pursuant to Section 17A of the 

Exchange Act and that provides central 

counterparty services for security-based 

swap transactions. The Commission 

considered as an alternative including 

transactions cleared at a foreign clearing 

agency that is not registered with the 

Commission within its definition of 

‘‘clearing transaction’’ for the purposes 

of the proposed rule. The Commission 

preliminarily concluded that an 

approach that is similar to that taken by 

the Commission in other rules,278 as 

well as the approach taken by the 

CFTC,279 would reduce implementation 

and compliance costs. 

The Commission has considered as an 

alternative, an alternative compliance 

mechanism that would allow a SBS 

Entity to be deemed in compliance with 

certain proposed rules regarding 

portfolio reconciliation if the SBS Entity 

is also registered as a swap dealer or 

major swap participant with the CFTC 

and is in compliance with the 

corresponding CFTC portfolio 

reconciliation rules. The Commission 

preliminarily concludes that differences 

between its proposed rules and rules 

adopted by the CFTC may provide 

certain benefits to SBS Entities and 

other market participants that would not 

be available under a rule that was 

identical to the corresponding CFTC 

rule. For example, the requirement in 

the proposed rule that each term 

required to be reported to a registered 

SDR under Rule 901 must be reconciled 

may facilitate the verification of 

transaction data by SDRs, which could 

address concerns raised by market 

participants and data repositories. Such 

benefits could be unavailable under an 

alternative compliance mechanism 

given that CFTC portfolio reconciliation 

rules do not require all of this 

information to be reconciled.280

3. Portfolio Compression 

Portfolio compression is an important 

post-trade processing mechanism that 

can be an effective and efficient tool for 

the management of risk by securitybased swap market participants. 

Portfolio compression is a mechanism 

whereby directionally opposite 


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281See http://www2.isda.org/news/isdapublishes-paper-highlighting-achievements-inportfolio-compression. 

282See proposed Rules 15Fi–4(a)(2) and (3). 

283See proposed Rule 15Fi–4(b). See also supra 

notes 70 and 71 and associated text. 

284For example, in 2008, the PWG identified 

frequent portfolio compression of outstanding 

trades as a key policy objective in the effort to 

strengthen the OTC derivatives market 

infrastructure. See PWG Report, supra note 205. 

Similarly, the 2010 staff report issued by the 

FRBNY outlined policy perspectives on OTC 

derivatives infrastructure and identified trade 

compression as an element of strong risk 

management and recommended that market 

participants engage in regular, market-wide 

portfolio compression exercises. See FRBNY OTC 

Derivatives Report, supra note 62. Since the years 

immediately following the 2008 financial crisis, 

compression outside of CCPs has been somewhat 

less common and has declined substantially from 

its 2008 peak. See supra note 240. 285See supra Section I.C. 

transactions with substantially similar 

terms among two or more counterparties 

are terminated and, if any exposure 

remains, replaced with a smaller 

number of transactions of decreased 

notional value in an effort to reduce the 

risk, cost, and inefficiency of 

maintaining offsetting transactions on 

the counterparties’ books. Because 

portfolio compression participants are 

permitted to establish their own credit, 

market, and cash payment risk 

tolerances and to establish their own 

mark-to-market values for the 

transactions to be compressed, the 

process does not alter the risk profiles 

of the individual participants beyond a 

level acceptable to the participant. 

Portfolio compression is commonly 

acknowledged as useful risk 

management tool.281

a. Requirements 

The Commission is proposing rules 

and interpretations that generally would 

require each SBS Entity to establish, 

maintain, and follow written policies 

and procedures for engaging in certain 

forms of portfolio compression exercises 

with each of its counterparties. 

Depending on the number of 

counterparties, the portfolio 

compression exercise would be defined 

as either a ‘‘bilateral portfolio 

compression exercise’’ or as a 

‘‘multilateral portfolio compression 

exercise.’’ 

Under proposed Rule 15Fi–4(a), SBS 

Entities would be required to establish, 

maintain, and follow written policies 

and procedures for periodically 

engaging in both bilateral portfolio 

compression exercises and multilateral 

portfolio compression exercises, when 

appropriate, with each counterparty that 

is also an SBS Entity.282 For 

transactions with non-SBS Entities, the 

policies and procedures required under 

the proposed rule would require only 

that portfolio compression exercise 

would have to occur when appropriate 

and only if requested by any such 

counterparty.283

b. Benefits 

As a mechanism for post-trade 

management of risk in security-based 

swaps, portfolio compression provides 

benefits not only to the counterparties 

in each transaction but also to the 

markets as a whole. A portfolio 

compression exercise permits firms to 

identify instances in which 

directionally opposite transactions with 

similar terms can be terminated or 

replaced, with a smaller number of 

transactions with decreased notional 

value, reducing the overall risk, cost, 

and inefficiencies associated with 

maintaining offsetting transactions. As 

such, portfolio compression is 

recognized as an important risk 

management tool.284 By expanding the 

universe of participants required to 

maintain portfolio compression policies 

and procedures, credit risk in the 

uncleared security-based swaps market 

can be reduced and may provide 

benefits to the entire financial system. 

Further, the termination of redundant 

security-based swap transactions 

through the portfolio compression 

process is likely to result in the 

potential reduction of both counterparty 

and operational risk at the SBS Entity 

level. The use of portfolio compression 

also could reduce the overall level of 

bilateral risk exposures, while leaving 

the net positions of market participants 

unaltered, thereby improving 

operational efficiency. Improvements in 

operational efficiency may arise due to 

fewer overall positions for each entity, 

a reduction in carried margin and 

variation margin calculations, and fewer 

(and potentially less frequent) portfolio 

reconciliations. This would also reduce 

the number of bilateral positions that 

would have to be resolved in the event 

of insolvency of a market participant. 

These reductions in risk and 

improvements in operational efficiency 

of SBS Entities could benefit the 

financial system as a whole, thereby 

potentially increasing the number of 

market participants as well as 

improving liquidity. 

Although the costs of participating in 

portfolio reconciliation are fully 

internalized by each counterparty, the 

potential benefits, particularly for 

multilateral compression exercises, 

increase with the number of 

counterparties that participate. Under 

proposed Rule 15Fi–4(a), SBS Entities 

would be required to establish, 

maintain, and follow written policies 

and procedures for periodically 

engaging in both bilateral portfolio 

compression exercises and multilateral 

portfolio compression exercises, in each 

case when appropriate, with 

counterparties that also are an SBS 

Entities.285 To the extent that an SBS 

Entity transacts with a counterparties 

that are not SBS Entities, the policies 

and procedures required under the 

proposed rule would require only that 

portfolio compression exercises occur 

when appropriate and only if requested 

by any such counterparty. In the 

absence of the proposed rules, some 

counterparties may not participate in 

compression activities reducing the 

potential benefits available to other 

counterparties and the financial system 

generally. 

As noted in the economic baseline, 

the emergence of third-party vendors 

has provided portfolio compression 

services for security-based swaps. SBS 

Entities may be able to continue to 

benefit from the services of these thirdparty vendors to provide additional 

portfolio compression opportunities for 

these firms. 

The proposed rule provides flexibility 

to security-based swap market 

participants with respect to portfolio 

compression. The Commission 

preliminarily believes that by not 

proposing prescriptive requirements, an 

SBS Entity would allow the 

counterparties flexibility in the manner 

in which they reduce the size of their 

security-based swap portfolios in light 

of each counterparty’s unique risks and 

operations. Moreover, the proposed 

rules regarding bilateral offset have been 

designed to reflect the understanding by 

the Commission that firms may have 

legitimate economic and business 

reasons for maintaining fully offsetting 

security-based swap transactions. 

Certain portfolio compression exercises 

could result in adverse credit exposures 

to certain counterparties. For example, 

the results of a particular multilateral 

compression exercise may result in a 

credit exposure to a particular 

counterparty that exceeds credit 

exposure limits for that counterparty. 

Thus, the Commission preliminarily 

believes that the policies and 

procedures should be flexible enough to 

allow an SBS Entity to take the most 

appropriate course of action with 

respect to managing its risks, while at 

the same time, encouraging SBS Entities 

to consider the risk mitigation 

possibilities of portfolio compression in 

a non-arbitrary manner and consistent 

with the purposes of Section 15F(i) of 

the Exchange Act. As such, proposed 


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286See supra note 7 and accompanying text. 

287See Press Release, ISDA Announces 

Successful Implementation of ‘Big Bang’ CDS 

Protocol; Determinations Committees and Auction 

Settlement Changes Take Effect (Apr. 8, 2009), 

available at: https://www.isda.org/a/XS6EE/ISDAAnnounces-Successful-Implementation-of-%E2%

80%98Big-Bang%E2%80%99-CDS-ProtocolDeterminations-Committees-and-AuctionSettlement-Changes-Take-Effect.docx. 

288See Nicholas Vause, Counterparty risk and 

contract volumes in the credit default swap market, 

BIS Quarterly Review (Dec. 2010), available at: 

http://www.bis.org/publ/qtrpdf/r_qt1012g.pdf 

(‘‘TriOptima became the first company to offer CDS 

portfolio compression when it extended its 

TriReduce service from interest rate swaps to the 

CDS market in 2005. In the CDS market, TriReduce 

has compressed mainly portfolios of CDS indices 

and index tranches, but single names have 

accounted for an increasing share of its 

compression volumes since standardisation in 

2009.’’). 

289See http://www2.isda.org/asset-classes/creditderivatives/single-name-cds-roll/. 

290The estimate is based on the following: 

[((Compliance Attorney (30 minutes) at $346 per 

hour) + ((Director of Compliance (15 minutes) at 

$461 per hour) + ((Deputy General Counsel (15 

minutes) at $565 per hour)] = $429.50 per hour per 

SBS Entity or ($429.50 per hour × 35 SBS duallyregistered Entities) = $15,032.50. 

291The estimate is based on the following: 

[((Compliance Attorney (40 hours) at $346 per hour) 

+ ((Director of Compliance (20 hours) at $461 per 

hour) + ((Deputy General Counsel (20 hours) at 

$565 per hour)] = $34,360 per SBS Entity or 

($34,360 × 20 SBS Entities that are not duallyregistered) = $687,200 in aggregate. 

292The estimate is based on the following: 

[((Compliance Attorney (20 hours) at $346 per hour) 

+ ((Director of Compliance (10 hours) at $461 per 

hour) + ((Deputy General Counsel (10 hours) at 

$565 per hour)] = $17,180 per SBS Entity or 

($17,180 × 55 SBS Entities) = $944,900 in aggregate. 

293The Commission estimates that each SBS 

Entity will transact with approximately 368 

counterparties (18 SBS Entities and 350 non-SBS 

market participants). It is estimated that 

approximately one offset per year will take place 

between counterparties and it is expected to take 

five minutes to complete, for a total number of 

hours of (2.5/60 × 18 + 5/60*350) or 29.92 hours 

per year per SBS Entity. Further, each SBS Entity 

is expected to conduct six bilateral compressions 

with SBS Entities and 350 bilateral compressions 

with non-SBS counterparties, each taking 15 

minutes for total hours of [(7.5/60 × 6) + (15/60 × 

350)] = 88.25 hours. Lastly, each SBS Entity is 

anticipated to complete 12 multilateral 

compressions each year, each taking 30 minutes for 

a total of 6 hours. Total time for each SBS Entity 

for portfolio compression exercises is estimated to 

be (29.92 + 88.25 + 6) = 124.17 hours, or 6829.35 

hours (124.17 hours × 55 SBS Entities). 

Rules 15Fi–4(a)(1) and (b) would require 

a firm’s policies and procedures to 

address the termination of fully 

offsetting security-based swaps only 

‘‘when appropriate.’’ 

Finally, the Commission notes that 

both the CFTC and the EC have adopted 

portfolio compression requirements that 

are substantially similar to those being 

proposed by the Commission in this 

release.286 By closely aligning portfolio 

compression requirements through 

consultation with the CFTC and with 

ESMA, the Commission preliminarily 

believes that SBS Entities will benefit 

from a largely unitary regulatory regime 

that does not require separate 

compliance and operational policies 

and procedures. 

c. Costs 

SBS Entities will necessarily have to 

design, compose, and implement 

policies and procedures to regularly 

evaluate compression opportunities 

with their counterparties as well as 

those opportunities offered by third 

parties. However, the Commission 

preliminarily believes that given the 

large risk management benefits available 

from the regular compression of 

offsetting trades—benefits including 

reduced risk and enhanced operational 

efficiency—SBS Entities already 

undertake regular portfolio compression 

exercises. For this reason and those 

discussed below, the Commission 

preliminarily believes that the relevant 

costs will primarily be the creation of 

policies and procedures. 

The greater the level of 

standardization in security-based swaps, 

the less costly it becomes to identify 

compression opportunities. In April 

2009, ISDA announced the 

implementation of the 2009 ISDA Credit 

Derivatives Determinations Committees 

and Auction Settlement CDS Protocol, 

known colloquially in the industry as 

the ‘‘Big Bang Protocol,’’ which 

introduced a number of documentation 

changes to help standardize single-name 

CDS contracts.287 Among these changes 

were the introduction of standard 

coupon rates and standard effective 

dates. Following the standardization of 

single-name CDS, compression in this 

market segment increased.288 As that 

standardization continues, we would 

expect that the cost of identifying 

appropriate compression opportunities 

should continue to fall. Using singlename corporate CDS data from DTCC– 

TIW discussed above, we find the 

percentage of new trades in North 

American Single-Name Corporate that 

have standardized coupons has risen 

from 95.2% in 2012 to 99.8% in 2017. 

The reduction in the number of rolldates from four to two in order to both 

improve liquidity as well as to align 

with updates to CDS indices 289 also 

may result in increased standardization 

and therefore may reduce the costs of 

identifying compression opportunities. 

The Commission estimates that the 

development and implementation of 

written policies and procedures as 

required under proposed Rule 15Fi–4 

would impose an initial cost of 

$702,232.50 in aggregate. Of the 55 

market participants the Commission 

expects will register as SBS Entities and 

be subject to Rule 15Fi–4, the 

Commission estimates that 

approximately 35 of these market 

participants are registered with the 

CFTC, and are anticipated to already 

have policies and procedures in place 

with respect to portfolio compression. 

The expected additional time to revise 

the existing policies and procedures for 

these SBS Entities is expected to be one 

hour per SBS Entity, for a cumulative 35 

hours, costing $429.50 per SBS Entity or 

$15,032.50 in aggregate.290 For the 

remaining 20 SBS Entities, the 

Commission estimates that it will take 

approximately 80 hours per entity to 

establish the written policies and 

procedures. The costs for these SBS 

Entities will be $687,200, or $34,360 per 

SBS Entity.291 Once established, the 

Commission estimates that it would cost 

SBS Entities approximately $944,900 or 

$17,180 per SBS Entity to revise and 

maintain these policies and 

procedures.292

The Commission further estimates 

that an SBS Entity will devote 

approximately 124.17 hours per year for 

portfolio offsets and compression 

exercises (6,829.35 aggregate hours), a 

substantial portion of which will be 

automated, and some of which may be 

handled by third-party vendors.293

Similar to our discussion for portfolio 

reconciliation (Section VIII.C.2.c), the 

Commission expects that the costs of 

implementing portfolio compression 

exercises through an automated process 

will be minimal for those SBS Entities 

that are dually-registered with the 

CFTC, as many of those systems will 

already be in place. With respect to the 

remaining 20 SBS Entities that are not 

dually-registered, the Commission 

anticipates that any cost associated with 

implementing the portfolio 

reconciliation system may also account 

for the portfolio compression exercises 

that may periodically take place; 

therefore, the overall costs of portfolio 

compression systems should be 

minimal. 

In terms of quantification of the costs 

of compression, the Commission also 

notes that that there are a number of 

third-party vendors that provide 

compression services, and some of these 

providers may charge fees based on 

results achieved (such as number of 

swaps or security-based swaps 

compressed). Assuming that third-party 

vendors charge a fee directly related to 

the outcome of the compression exercise 

(as opposed to a fixed fee in whole or 

some portion thereof for portfolio 

compression activities), the direct costs 

of portfolio compression by third-party 

vendors would therefore likely be 


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294There is one exception to this statement, see 

supra note 72. 

295See supra Section I.C.3. 

296See EU Regulation 149/2013, art. 14, 2013 O.J. 

11, 22. 

297See supra Section I.C.4. 

298See supra note 278. 

299Specifically, CFTC Rule 23.503(c) provides 

that ‘‘[n]othing in this section shall apply to a swap 

that is cleared by a derivatives clearing 

organization.’’ 17 CFR 23.503(c). 

300See supra note 70 and accompanying text. 

directly related to the economic benefits 

of reduced counterparty and operational 

risk realized through the compression 

exercises. The Commission does not 

currently have pricing data for thirdparty service providers that offer 

portfolio compression services and so is 

unable to quantify the costs to market 

participants who make use of these 

services. 

Many non-SBS Entities typically trade 

only in small volumes and on one side 

of a particular security-based swap, to 

create a synthetic position in the 

underlying asset or to hedge another 

position, for example. Such one-sided 

market positions reduce the 

opportunities to engage in periodic 

compression cycles. For SBS Entities 

that do not currently participate in 

compression cycles, there could be costs 

to modify the participant’s risk systems 

and connectivity enhancements that 

would allow for sharing the necessary 

information required to identify 

compression opportunities and for the 

booking and processing of a large 

volume of security-based swaps in a 

short time period. Multilateral 

compression cycles are typically 

managed with automated tools to 

support tear-up and new trade creation 

that end-users usually do not possess, 

and the costs of obtaining such tools 

cannot be justified by the benefits. The 

rule does not require market 

participants to engage in mandatory 

compression cycles, but only to 

establish, maintain, and follow written 

policies and procedures for engaging in 

certain forms of portfolio compression 

exercises. 

d. Alternatives 

The proposed rule requires that SBS 

Entities establish, maintain, and follow 

written policies and procedures as they 

relate to certain forms of portfolio 

compression exercises with each of its 

counterparties. As such, the 

Commission is not proposing to 

mandate the specific contents of the 

policies and procedures created to 

comply with these rules.294 However, a 

number of more specific requirements 

for portfolio compression could be 

included. For example, the current 

proposal only requires policies and 

procedures that address compression to 

the extent requested by the counterparty 

rather than a more prescriptive 

requirement.295

Pursuant to the proposed Rule 15Fi– 

4, SBS Entities are required 

‘‘periodically’’ to examine the 

possibility for whether portfolio 

compression exercises can take place. 

While this provides flexibility to the 

counterparties in terms of the frequency 

with which rebalancing would have to 

be explored, it leaves open the 

possibility that market participants will 

suboptimally select the frequency with 

which portfolio compression exercises 

can occur, which could impose 

externalities on SBS counterparties as 

well as the financial system as a whole. 

As an alternative, the Commission has 

considered requiring a minimum 

frequency of analysis of portfolio 

compression exercises. For instance, at 

least twice a year, SBS Entities could 

conduct an analysis of the possibility of 

a portfolio compression exercise in 

order to reduce their counterparty credit 

risk and engage in such a portfolio 

compression exercise, similar to those 

adopted by the EC.296 Given that 

portfolio compression has been 

identified to be a valuable and 

important tool for risk management, it is 

likely that many SBS Entities already 

have in place policies and procedures 

for periodic evaluation of compression 

possibilities, thus imposing a minimum 

standard could be burdensome and 

costly for firms to implement. 

Relatedly, the frequency with which 

SBS Entities evaluate their prospects for 

portfolio compression opportunities 

could be related to the number of 

transactions between counterparties (as 

is required for portfolio reconciliation in 

proposed rule 15Fi–3). For instance, if 

counterparties have portfolios in excess 

of 500 transactions, an analysis of 

portfolio compression could be 

conducted quarterly, while SBS Entities 

with portfolios between 50 and 500 

transactions, portfolio compression 

exercises could be explored twice a 

year. For counterparties with fewer than 

50 transactions between them (or for 

portfolios with non-SBS Entities), 

portfolio compression exercises could 

be simply ‘‘periodically.’’ This would 

allow counterparties to assess the 

counterparty credit risk at frequencies 

aligned with the complexities of their 

portfolios without incurring substantive 

additional costs of this increase in 

periodic evaluation of portfolio 

compression opportunities. The 

Commission has considered the costs 

and benefits to market participants of 

imposing policies and procedures 

related to portfolio compression based 

on the number of transactions between 

counterparties. However, it is likely that 

market participants expected to register 

as SBS Entities already have policies 

and procedures in place to evaluate 

portfolio compression opportunities 

with counterparties, and requiring 

alterations to these policies could be 

costly for these entities without 

corresponding benefits. 

Proposed Rule 15Fi–4(c), the new 

requirements regarding portfolio 

compression, would not apply to a 

‘‘clearing transaction’’, which is defined 

as a security-based swap that has a 

clearing agency as a direct 

counterparty.297 A clearing agency 

means a clearing agency that is 

registered with the Commission 

pursuant to Section 17A of the 

Exchange Act and that provides central 

counterparty services for security-based 

swap transactions. The Commission 

considered as an alternative including 

transactions cleared at a foreign clearing 

agency that is not registered with the 

Commission within its definition of 

‘‘clearing transaction’’ for the purposes 

of the proposed rule. The Commission 

preliminarily concluded that an 

approach that is similar to that taken by 

the Commission in other rules,298 as 

well as the approach taken by the 

CFTC,299 would reduce implementation 

and compliance costs. 

The Commission has considered as an 

alternative, an alternative compliance 

mechanism that would allow a SBS 

Entity to be deemed in compliance with 

certain proposed rules regarding 

portfolio compression if the SBS Entity 

is also registered as a swap dealer or 

major swap participant with the CFTC 

and is in compliance with the 

corresponding CFTC portfolio 

compression rules. The Commission 

preliminarily concludes that, as a 

practical matter, the rules are nearly 

equivalent, suggesting that any 

additional compliance cost arising from 

differences in these rules for an entity 

that is registered with both the CFTC 

and the Commission should be small. 

The Commission preliminarily believes 

that the differences that do exist (such 

as the proposed rule providing that 

requested compression by an entity that 

is not a security-based swap dealer or 

major security-based swap participant 

need only be conducted if 

appropriate 300) may provide marginal 

benefits to SBS market participants 

(such as by preventing portfolio 

compression that is not appropriate 

given the particular circumstances of 


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301The corresponding CFTC compression rule 

applicable to transactions with counterparties that 

are not SBS Entities does not contain the caveat that 

any form of compression or offset covered by the 

applicable policies and procedures would only 

need to occur ‘‘when appropriate.’’ See supra note 

70. We solicit comment on this difference. See 

supra Section I.C.5. 

302One commonly used form of the industry 

standard documentation is the ISDA Master 

Agreement and related definitions, schedules, and 

confirmations specific to particular asset classes. As 

noted in Section VI.B.4, over 99% of uncleared 

security-based swap transactions use an ISDA 

Master Agreement as reported in DTCC–TIW. 

303See supra Section I.C.2 304 15 U.S.C. 78c–5(f). 

the trade and the counterparties to that 

trade).301

4. Trading Relationship Documentation 

OTC derivatives market participants 

typically have relied on the use of 

industry standard legal documentation, 

including master netting agreements, 

definitions, schedules, and 

confirmations, to document their 

security-based swap trading 

relationships. This industry standard 

documentation offers a framework for 

documenting the transactions between 

counterparties for OTC derivatives 

products.302 The standard 

documentation is designed to set forth 

the legal, trading, and credit 

relationship between the parties and to 

facilitate netting of transactions in the 

event that parties have to close-out their 

position with one another or determine 

credit exposure for margin and 

collateral management. Notwithstanding 

the standardization of such 

documentation, some or all of the terms 

of the master agreement and other 

documents are subject to negotiation 

and modification. 

a. Requirements 

The Commission is proposing rules 

and interpretations that generally would 

require each SBS Entity to establish, 

maintain, and follow written policies 

and procedures reasonably designed to 

ensure that it executes written trading 

relationship documentation with its 

counterparties prior to, or 

contemporaneously with, executing a 

security-based swap. The security-based 

swap trading relationship 

documentation is required to be in 

writing and to include all material terms 

governing the trading relationship 

between counterparties. 

Further, the proposed rule would also 

require that the security-based swap 

trading relationship documentation 

include credit support arrangements.303

One of the key elements of Title VII 

reforms was to ensure that uncleared 

OTC derivatives were appropriately 

collateralized, thus the documentation 

of processes for calculating and 

exchanging margin in connection with 

security-based swaps helps to achieve 

the broader regulatory objective.304

The proposed rules also would 

establish minimum standards with 

respect to identifying the matters that 

must be addressed in the security-based 

swap trading documentation, and 

outline certain requirements related to 

the resolution of discrepancies, 

particularly those involving differences 

in the valuation of security-based 

swaps. In the event that discrepancies in 

valuation arise, the proposed rule 

requires that counterparties must 

provide documentation for either an 

alternative method for determining 

value of the security-based swap or 

documentation on the resolution 

process for such disputes. 

The proposed rule also requires that 

counterparties to the security-based 

swap provide information on their legal 

status, particularly in the event of 

liquidation, as well as to disclose 

certain information of a security-based 

swap accepted for clearing by a clearing 

agency, in order to reduce any potential 

confusion regarding the status of the 

trade following its acceptance and 

novation at the clearing agency. Lastly, 

proposed Rule 15Fi–5 requires a 

periodic independent audit to identify 

any material deficiencies in the trading 

relationship documentation policies and 

procedures. 

b. Benefits 

Inadequate or incomplete 

documentation of open security-based 

swap transactions could, in some cases, 

result in collateral and legal disputes 

between the two counterparties, thereby 

exposing both sides to significant 

counterparty credit risk. By way of 

contrast, adequate documentation 

between counterparties offers a 

framework for establishing the trading 

relationship between the parties from 

the outset of the transaction, which 

should minimize both the number and 

magnitude of potential disputes. 

Further, the proposed rule provides 

particular guidance with respect to 

policies and procedures documenting 

the valuation of security-based swaps. 

Although having policies and 

procedures regarding trading 

relationship documentation in place is 

important for all aspects of the 

transaction, the valuation of the 

transaction and how it affects margin 

requirements on an on-going basis is 

critical for managing both counterparty 

credit as well as operational risk. 

Pursuant to proposed Rule 15Fi–5, 

counterparties are required to provide 

information on the valuation methods, 

procedures, rules, and inputs (within 

limits so as to not reveal private 

information regarding proprietary 

valuation models), while further 

stipulating that either alternative 

valuation methods or valuation 

discrepancy resolutions are detailed in 

the trading relationship documentation. 

These benefits are both complemented 

by, and accrue to, the portfolio 

reconciliation process contemplated by 

proposed Rule 15Fi–3. That is, 

comprehensive and accurate 

documentation of a transaction may 

contribute to a smoother reconciliation 

process by reducing the possibility of 

discrepancies; and any discrepancies 

that may still arise could subsequently 

be identified and resolved through 

reconciliation. 

As discussed above, because 

shortcomings in credit risk management 

and documentation may only become 

evident during a crisis, some benefits of 

complying with these rules will accrue 

to the financial system as a whole while 

the ongoing direct costs are borne by the 

individual market participant. 

Therefore, in the absence of these rules, 

trading relationship documentation 

practices employed by individual 

market participants may be less 

thorough than would be desired by all 

market participants in order to properly 

manage risks to the financial system. 

However, the widespread use of 

standard documentation mitigates both 

the potential benefit and costs of the 

proposed rule. 

c. Costs 

Market participants will likely incur 

ongoing costs associated with the rules 

concerning trading relationship 

documentation. Market participants will 

have to (1) negotiate and document all 

terms of each trading relationship; (2) 

design, compose, and implement 

policies and procedures reasonably 

designed to ensure the execution of 

security-based swap trading relationship 

documentation, including valuation 

documentation; (3) obtain 

documentation from counterparties who 

are claiming the end user exception to 

clearing; and (4) periodically audit 

documentation and keep records and/or 

make reports as required under these 

rules. 

The Commission estimates that the 

initial burden to negotiate and draft 

trading relationship documentation will 

be $4,741,680 per SBS Entity, or 

$260,792,400 in aggregate across the 55 


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305Each SBS Entity is anticipated to be 

counterparty to 18 other SBS Entities and 350 nonSBS market participants, for a total of 368 

counterparties. The initial negotiation and draft in 

expected to take 30 hours per counterparty. The 

estimation is as follows: [((Compliance Manager (15 

hours) × $346) + (Director of Compliance (7.5 hours) 

× $461) + (Deputy General Counsel (7.5 hours) × 

$565)) × 368 counterparties] = $4,741,680 per SBS 

Entity, or ($4,741,680 × 55 SBS Entities) = 

$260,792,400 in aggregate. 

306The estimate is based on the following: 

[((Compliance Attorney (30 minutes) at $346 per 

hour) + ((Director of Compliance (15 minutes) at 

$461 per hour) + ((Deputy General Counsel (15 

minutes) at $565 per hour)] = $429.50 per hour per 

SBS Entity or ($429.50 per hour × 35 SBS duallyregistered Entities) = $15,032.50. 

307The estimate is based on the following: 

[((Compliance Attorney (40 hours) at $346 per hour) 

+ ((Director of Compliance (20 hours) at $461 per 

hour) + ((Deputy General Counsel (20 hours) at 

$565 per hour)] = $34,360 per SBS Entity or 

($34,360 × 20 SBS Entities that are not duallyregistered) = $687,200 in aggregate. 

308The estimate is based on the following: 

[((Compliance Attorney (20 hours) at $346 per hour) 

+ ((Director of Compliance (10 hours) at $461 per 

hour) + ((Deputy General Counsel (10 hours) at 

$565 per hour)] = $17,180 per SBS Entity or 

($17,180 × 55 SBS Entities) = $944,900 in aggregate. 

309The estimate is based on the following: [368 

counterparties × 10 hours per Audit × Auditor ($216 

per hour)] = $794,880 per SBS Entity, or ($794,880 

× 55 SBS Entities) = $43,718,400 in aggregate. 

310As noted in Section VI.B.4, as of 2015, the 

DTCC–TIW data shows that over 99% of SBS 

Entities use the ISDA Master Agreement. 

311 In response to prior Dodd Frank Act related 

regulatory requirements, ISDA in partnership with 

third party providers, has created technology-based 

solutions enabling counterparties to modify OTC 

derivatives related documentation quickly and 

efficiently. See http://www2.isda.org/dodd-frankdocumentation-initiative/. 

312The exception with respect to security-based 

swap transactions on national exchanges or SBSEF 

is limited. See Section I.D.6 for a complete 

discussion of those limitations. 

SBS Entities.305 The Commission 

further estimates that the development 

and implementation of written policies 

and procedures as required under 

proposed Rule 15Fi–5 would impose an 

initial cost of $702,232.50 in aggregate. 

Of the total 55 SBS Entities as expected 

by the Commission that would be 

subject to Rule 15Fi–5, 35 are 

anticipated to be registered concurrently 

with the CFTC, and are anticipated to 

already have policies and procedures in 

place with respect to portfolio 

compression. The expected additional 

time to revise the existing policies and 

procedures for these Entities is expected 

to be one hour per Entity, for a 

cumulative 35 hours, costing $429.50 

per Entity or $15,032.50 in aggregate.306

For the remaining 20 SBS Entities, the 

Commission estimates that it will take 

approximately 80 hours per entity to 

establish the written policies and 

procedures. The costs for these SBS 

Entities will be $687,200, or $34,360 per 

SBS Entity.307 Once established, the 

Commission estimates that it would cost 

SBS Entities approximately $944,900 or 

$17,180 per SBS Entity to revise and 

maintain these policies and 

procedures.308 Lastly, proposed Rule 

15Fi–5 requires periodic independent 

audits of the trading relationship 

documentation. The Commission 

estimates that the costs associated with 

these audits will be $794,880 per SBS 

Entity, or $43,718,400 in aggregate.309

Memorializing the specific terms of 

the security-based swap trading 

relationship and security-based swap 

transactions between counterparties is 

prudent business practice and, in fact, 

many market participants already use 

standardized documentation.310

Accordingly, the Commission 

preliminarily believes that many, if not 

most, market participants that are 

expected to register as SBS Entities 

currently execute and maintain trading 

relationship documentation of the type 

required by the proposed rules in the 

ordinary course of their businesses, 

including documentation that contains 

several of the terms that would be 

required by the proposed rules. Thus, 

the hour and dollar burdens associated 

with the security-based swap trading 

relationship documentation 

requirements may be limited to 

amending existing documentation to 

expressly include any additional terms 

required by the proposed rules. In 

addition the Commission anticipates 

that standardized security-based swap 

trading relationship documentation will 

eventually incorporate changes that may 

be necessary to comply with many of 

the requirements of this rule reducing 

the cost to individual security-based 

swap market participants.311

Proposed Rule 15Fi–5 also includes 

certain exceptions that are intended to 

mitigate costs incurred by market 

participants while preserving the risk 

mitigating benefits of thorough trading 

relationship documents. First, the 

proposed rule would provide an 

exception for security-based swaps 

executed prior to the date on which the 

SBS Entity is required to be in 

compliance with the trading 

relationship documentation rule, as it 

may be costly and impractical to require 

SBS Entities to bring existing 

transactions into compliance with the 

proposed rules. The Commission notes 

that this exception may increase the 

likelihood of disputes in valuation with 

respect to such transactions, which will 

be subject to the portfolio reconciliation 

requirement of proposed Rule 15Fi–3 

even though they are not subject to the 

documentation requirements of 

proposed Rule 15Fi–5. Such disputes 

could be costly to resolve and may lead 

to greater uncertainty with respect to 

counterparty credit risk. 

The proposed rule further provides 

exceptions for any ‘‘clearing 

transaction’’, which, pursuant to 

existing Rule 15Fi–1(c) under the 

Exchange Act, is defined as a securitybased swap that has a clearing agency as 

a direct counterparty. Once a security is 

cleared, the transaction is primarily 

governed by the terms of the agreement 

between clearing member and the 

clearing agency. Lastly, the proposed 

rule would provide an exception for 

security-based swaps executed 

anonymously on a national securities 

exchange or an SBSEF, provided that 

these security-based swaps are intended 

to be cleared and are actually submitted 

for clearing to a clearing agency that 

provides CCP services. This exception is 

intended to recognize that 

documentation requirements may be 

nearly impossible to fulfill within the 

context of cleared anonymous 

transactions.312

d. Alternatives 

The Commission has evaluated 

reasonable alternatives to the proposed 

rule on trading relationship 

documentation. One alternative would 

be that all SBS Entities are required to 

adhere to an industry-accepted standard 

form of trading documentation, instead 

of establishing policies and procedures 

related to documentation. It is unlikely 

that this alternative would materially 

alter the primary benefits of the rule, 

namely that of reducing disputes over 

documentation that could lead to 

increased counterparty risk, but could 

increase overall compliance costs 

without analogous increases in benefits, 

due to reduced operational flexibility. 

Further, the proposed rule requires 

that SBS Entities undertake a periodic, 

independent audit to identify material 

weaknesses in its documentation 

policies and procedures. As proposed, 

there is flexibility on behalf of the SBS 

Entity as to how and when those audits 

occur. Alternatively, the Commission 

has considered limiting to only external 

auditors and requiring a once per year 

audit of trading relationship 

documentation. Although this 

alternative would not materially amend 

the primary benefits related to the audit 

of SBS Entities’ policies and procedures 

related to trading relationship 

documentation, the Commission 

anticipates that this alternative could 

increase compliance costs by reducing 

operational flexibility. 


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313See supra Section I.D.6. 

314See supra note 278. 

315Specifically, CFTC Rule 23.504(a)(1)(iii) 

excludes from the written trading relationship 

documentation requirements ‘‘swaps cleared by a 

derivatives clearing organization.’’ 17 CFR 

23.504(a)(1)(iii). 

316See supra Section I.D.6. 

Proposed Rule 15Fi–5(a)(1)(ii) would 

provide an exception to the trading 

relationship documentations 

requirements for any ‘‘clearing 

transaction’’ which is defined as a 

security-based swap that has a clearing 

agency as a direct counterparty.313 A 

clearing agency means a clearing agency 

that is registered with the Commission 

pursuant to Section 17A of the 

Exchange Act and that provides central 

counterparty services for security-based 

swap transactions. The Commission 

considered as an alternative including 

transactions cleared at a foreign clearing 

agency that is not registered with the 

Commission within its definition of 

‘‘clearing transaction’’ for the purposes 

of the proposed rule. The Commission 

preliminarily concluded that an 

approach that is similar to that taken by 

the Commission in other rules,314 as 

well as the approach taken by the 

CFTC,315 would reduce implementation 

and compliance costs. 

The Commission has considered as an 

alternative, an alternative compliance 

mechanism that would allow a SBS 

Entity to be deemed in compliance with 

certain proposed rules regarding trading 

relationship documentation if the SBS 

Entity is also registered as a swap dealer 

or major swap participant with the 

CFTC and is in compliance with the 

corresponding CFTC trading 

relationship documentation rules. The 

Commission preliminarily concludes 

that, as a practical matter, the rules are 

nearly equivalent, suggesting that any 

additional compliance cost arising from 

differences in these rules for an entity 

that is registered with both the CFTC 

and the Commission should be small. 

The Commission preliminarily believes 

that differences that do exist are 

necessary and appropriate. For example, 

to the extent that a transaction entered 

into on an anonymous basis on a 

national securities exchange or SBSEF 

that is then rejected for clearing but 

continues to exist, the Commission 

preliminarily believes that the 

counterparties to the ongoing securitybased swap should have in place a 

written agreement on the terms of that 

transaction.316

5. Recordkeeping Requirements 

The Commission is also proposing 

rules that would modify existing Rules 

17a–3 and 17a–4, as well as proposed 

Rules 18a–5 and 18a–6 for the 

recordkeeping and reporting 

requirements applicable to SBS Entities. 

The proposed amendments would 

involve requiring each SBS Entity to 

make and keep current information 

relevant to portfolio reconciliation and 

portfolio compression exercises and to 

retain all security-based swap trading 

relationship documentation required to 

be created under proposed Rule 15Fi–5, 

as well as each policy and procedure 

created pursuant to proposed Rules 

15Fi–3, 15Fi–4, and 15Fi–5. 

a. Requirements 

The Commission is proposing to 

amend Rule 17a–3 (which applies to 

SBS Entities that are also registered with 

the Commission as broker-dealers) and 

proposed Rule 18a–5 (which applies to 

SBS Entities that are not registered with 

the Commission as broker-dealers). 

Under these amendments, each SBS 

Entity would be required to make and 

keep records of each security-based 

swap portfolio reconciliation and 

portfolio compression exercise, which is 

believed to promote compliance with 

proposed Rules 15Fi–3 and 15Fi–4 as 

well as support SBS Entities in the 

event that disputes arise in relation to 

previous reconciliations or 

compressions. The proposed 

amendments would also require that 

SBS Entities make and keep records of 

valuation disputes in excess of $20 

million if not resolved within three (for 

SBS Entities) or five (for non-SBS 

counterparties) days. 

The Commission also is proposing to 

amend Rule 17a–4 (which applies to 

SBS Entities that are also registered with 

the Commission as broker-dealers) and 

proposed Rule 18a–6 (which applies to 

SBS Entities that are not registered with 

the Commission as broker-dealers), 

which address record retention. All 

records made and kept under the 

proposed amendments to Rule 17a–3 

and proposed Rule 18a–5 would need to 

be retained for at least three years. 

Further, all policies and procedures 

related to proposed Rules 15Fi–3 

through 15Fi–5, all written agreements 

between counterparties on terms of 

portfolio reconciliation, and all securitybased swap trading relationship 

documentation with counterparties 

would need to be retained until at least 

three years following the termination of 

said policies and procedures and/or 

documentation. 

b. Benefits 

In proposing these requirements, the 

Commission considered the potential 

benefits of improving the oversight, 

transparency, and documentation of 

security-based swap activities. The 

amendments to Rules 17a–3 and 17a–4, 

and proposed Rules 18a–5 and 18a–6 

are intended to facilitate effective 

oversight of SBS Entities, thus the 

benefits associated with the proposed 

amendments related to recordkeeping 

are beneficial not only to the SBS 

Entities, but also are expected to 

facilitate regulatory oversight. 

Requiring retention of records related 

to portfolio reconciliation, portfolio 

compression, and trading relationship 

documentation for a minimum of three 

years provides SBS Entities with a wellestablished track record should disputes 

about terms of the security-based swap 

arise. The benefits of these proposed 

amendments, to the extent that they 

enhance existing practice, could reduce 

both counterparty credit risk as well as 

operational risk for the SBS Entities. 

Further, the proposed amendments are 

expected to facilitate examinations by 

the Commission of SBS Entities. 

c. Costs 

The Commission also recognizes that 

there will be costs associated with the 

new rules and rule amendments. Those 

costs include the costs of creating 

procedures to ensure that records are 

kept as required by the proposed rule 

amendments, and costs associated with 

ongoing record maintenance. As the 

recordkeeping requirements would be 

amendments to Rules 17a–3 and 17a–4, 

and proposed Rules 18a–5 and 18a–6; 

however, the incremental costs of 

compliance with these amendments is 

likely to be minimal. 

The proposed Rules 15Fi–3 through 

15Fi–5 would require that SBS Entities 

would establish and maintain written 

policies and procedures related to 

portfolio reconciliation, portfolio 

compression exercises, and trading 

relationship documentation. Further, 

SBS Entities are already required to 

comply with the retention of written 

policies and procedures with respect to 

Rule 15Fi–2 related to trade 

acknowledgement and verification, and 

should have recordkeeping systems 

previously instituted. Therefore, only 

minor modifications would need to be 

made in order to make the systems 

compliant with the proposed 

amendments regarding recordkeeping 

requirements for portfolio 

reconciliation, portfolio compression 

exercises, and trading relationship 

documentation. 

Generally, the Commission does not 

expect the amendments to Rules 17a–3 

and 17a–4, and proposed Rules 18a–5 

and 18a–6 to create material burdens for 

registrants, although as noted above the 

Commission does expect that there will 


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317See supra Section I.F.1. 

318See supra Section I.D.5. 

319See Business Conduct Standards Adopting 

Release, 81 FR at 30074. 

320See Trade Acknowledgement and Verification 

Adopting Release, 81 FR at 39827–28. 

321See Cross-Border Adopting Release, 79 FR at 

47277. 

be incremental costs related to 

complying with the proposed rule 

amendments.317

d. Alternatives 

The Commission has considered 

reasonable alternatives to the proposed 

amendments. In particular, the costs 

and benefits associated with the 

required recordkeeping horizon have 

been evaluated. Shorter horizons (of less 

than three years) would lessen the 

overall recordkeeping burden by 

reducing the retention requirements and 

corresponding storage of records. 

However, as it may take time for 

disputes, particularly in the event of 

liquidations to be fully settled, shorter 

horizons may lead to the elimination of 

relevant records prior to resolution. On 

the other hand, longer horizons for 

maintaining records could be costly 

with respect to storage and system 

requirements. However, longer record 

preservation would reduce the 

likelihood that historical records are 

unavailable if needed at some point in 

the future. 

Proposed Rule 15Fi–5(c) requires each 

SBS Entity to have an independent 

auditor conduct periodic audits 

sufficient to identify any material 

weakness in it documentation policies 

and procedures required by the rule. 

The Commission considered using the 

same requirement as that required by 

the CFTC that the audit be conducted by 

an independent internal or external 

auditor. The Commission chose not to 

follow this approach because in its 

experience overseeing accounting and 

auditing standards in the context of 

certain disclosure requirements under 

the federal securities laws, an internal 

auditor typically reports to the 

management of the applicable entity, 

which by definition would not satisfy 

the test for auditor independence under 

any existing statutory or regulatory 

provision that the Commission 

administers.318 However, because the 

proposed rule would still encompass 

any auditor, whether external or 

internal, that is in fact independent, the 

Commission preliminarily believes that 

the practical differences between the 

Commission’s proposed rule and the 

corresponding CFTC rule are negligible. 

6. Cross-Border Application of Rules 

15Fi–3 Through 15Fi–5 

In early 2016, the Commission 

adopted Rule 3a71–6 under the 

Exchange Act, which determined that 

non-U.S. SBS Entities could satisfy 

certain requirements of Section 15F by 

complying with comparable regulatory 

requirements of a foreign financial 

regulatory system.319 At the time of the 

substituted compliance rule, it applied 

solely to business conduct standards; 

however, Rule 3a71–6 was amended in 

the Trade Acknowledgement and 

Verification Adopting Release to 

provide foreign SBS Entities with the 

potential to rely on substituted 

compliance to satisfy Title VII trade 

confirmation requirements.320

a. Requirements 

The Commission is proposing to 

amend further Rule 3a71–6 to allow 

non-U.S. SBS Entities to potentially be 

able to satisfy through substituted 

compliance the Title VII portfolio 

reconciliation, portfolio compression, 

and trading relationship documentation 

requirements in proposed Rules 15Fi–3 

through 15Fi–5. The Commission has 

preliminarily determined that the 

principles previously set forth in the 

Business Conduct Standards Adopting 

Release and the Trade 

Acknowledgement and Verification 

Adopting Release with respect to 

substituted compliance should in large 

part similarly pertain to the 

reconciliation, compression, and 

documentation requirements proposed 

herein. 

b. Benefits 

The Commission proposed 

amendments to Rule 3a71–6 permit 

consideration of substituted compliance 

in order to reduce the probability that 

SBS Entities are subject to potentially 

duplicative or conflicting regulation. 

Market participants that face duplicative 

regulatory regimes are likely to attain 

comparable regulatory outcomes, but at 

a cost of increased compliance burdens 

without an analogous increase in 

benefits. The availability of substituted 

compliance could decrease the 

compliance burden for non-U.S. SBS 

Entities, particularly as it pertains to 

portfolio reconciliation, portfolio 

compression, and trading relationship 

documentation. Allowing for the 

possibility of substituted compliance 

may help achieve the risk mitigation 

requirements set forth in proposed 

Rules 15Fi–3 through 15Fi–5, in 

particular as it reduces legal 

uncertainty, counterparty credit risk 

exposure, and operational risk for 

market participants. 

Further, the Commission anticipates 

broader market implications of 

substituted compliance, as well, namely 

an increase in foreign SBS dealers’ 

activity in the U.S. market, the 

expansion of access by both U.S. and 

foreign SBS Entities to global liquidity, 

and a reduction in the possibility of 

liquidity fragmentation along 

jurisdictional lines. The availability of 

substituted compliance for non-U.S. 

SBS Entities also could promote market 

efficiency, while enhancing competition 

in U.S. markets. Increased participation 

and access to liquidity is likely to 

improve efficiencies related to hedging 

and risk sharing, while simultaneously 

increasing competition between 

domestic and foreign SBS Entities. 

c. Costs 

The Commission preliminarily 

believes that the availability of 

substituted compliance for portfolio 

reconciliation, portfolio compression, 

and trading relationship documentation 

would not substantially alter the 

benefits intended by the proposed Rules 

15Fi–3 through 15Fi–5. In particular, it 

is expected that the availability of 

substituted compliance will not detract 

from the risk mitigation benefits that 

stem from periodic portfolio 

reconciliation, as well as policies and 

procedures regarding portfolio 

compression exercises and trading 

relationship documentation. 

To the extent that substituted 

compliance reduces duplicative 

compliance costs, non-U.S. SBS Entities 

entering into transactions in which 

substituted compliance is available may 

incur lower overall costs associated 

with portfolio reconciliation, portfolio 

compression, and documentation 

exercises with their counterparties than 

they would otherwise incur without the 

option of substituted compliance 

availability, either because a non-U.S. 

SBS Entity may have already 

implemented foreign regulatory 

requirements which have been deemed 

comparable by the Commission, or 

because security-based swap 

counterparties eligible for substituted 

compliance do not need to duplicate 

compliance with two sets of comparable 

requirements. 

A substituted compliance request can 

be made by either a foreign regulatory 

jurisdiction on behalf of its market 

participants, or by the registered market 

participant itself.321 The decision to 

request substituted compliance is 

voluntary, and therefore, to the extent 

that requests are made by individual 

market participants, such participants 

would request substituted compliance 


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only if compliance with foreign 

regulatory requirements was less costly, 

in their own assessment, than 

compliance with both the foreign 

regulatory regime and the relevant Title 

VII requirements, including portfolio 

reconciliation, portfolio compression, 

and trading relationship documentation 

requirements. Even after a substituted 

compliance determination is made, 

market participants would only choose 

substituted compliance for portfolio 

reconciliation, compression, and 

documentation requirements if the 

benefits that they expect to receive from 

transacting in the U.S. markets exceed 

the costs that they expect to bear for 

doing so. 

D. Request for Comment 

The Commission requests comment 

on all aspects of this initial economic 

analysis, including whether the analysis 

has: (i) Identified all benefits and costs, 

including all effects on efficiency, 

competition, and capital formation; (ii) 

given due consideration to each benefit 

and cost, including each effect on 

efficiency, competition, and capital 

formation; and (iii) identified and 

considered reasonable alternatives to 

the proposed regulations. We request 

and encourage any interested person to 

submit comments regarding the 

proposed regulations and our analysis of 

the potential effects of the proposed 

regulations. We request that 

commenters identify sources of data and 

information as well as provide data and 

information to assist us in analyzing the 

economic consequences of the proposed 

rule and proposed amendments. We 

also are interested in comments on the 

qualitative benefits and costs we have 

identified and any benefits and costs we 

may have overlooked. In addition to our 

general request for comment on the 

economic analysis associated with the 

proposed rule and proposed 

amendments, we request specific 

comment on certain aspects of the 

proposal: 

• We request comment on our 

characterization of current portfolio 

reconciliation practices. Do commenters 

agree that the proposed portfolio 

reconciliation rules are similar to 

current best practices? If not, how are 

they different? Are there third party 

service providers that offer portfolio 

reconciliation services? If so, what are 

the costs associated with using such 

services? 

• We request comment on our 

characterization of current portfolio 

compression practices. Do commenters 

agree that the proposed portfolio 

compression rules are similar to current 

best practices? If not, how are they 

different? The Commission understands 

that there are third party service 

providers that offer portfolio 

compression services. What are the 

direct and indirect costs of using such 

service providers? 

• We request comment on our 

characterization of current trading 

relationship documentation practices. 

Do commenters agree with our 

characterization? If not, how are they 

different? 

• We request comment on our 

characterization of the benefits of the 

proposed regulations concerning 

portfolio reconciliation. The 

Commission preliminarily believes that 

the main benefit of portfolio 

reconciliation is improved management 

of market and credit risks associated 

with particular transactions. Do 

commenters agree with this 

characterization of the benefits? Are 

there other benefits of the proposed rule 

that have not been identified in our 

discussion and that warrant 

consideration? Are the assumptions that 

form the basis of our analysis of the 

benefits appropriate? Can commenters 

provide data that supports or opposes 

these assumptions? Can commenters 

provide data that would help the 

Commission quantify the magnitude of 

the benefits identified in our discussion 

or other benefits that we did not identify 

in our discussion and that warrant 

consideration? 

• We request comment on our 

characterization of the costs of the 

proposed regulations concerning 

portfolio reconciliation. The 

Commission preliminarily believes that 

making its rules as similar as practicable 

to those of the CFTC will mitigate 

compliance costs for SBS entities. The 

Commission also preliminarily believes 

that ongoing portfolio reconciliation 

costs would likely be a function of 

portfolio size and the availability of 

third party service providers. Do 

commenters agree with our 

characterization of the costs? Are there 

other costs of the proposed rule that 

have not been identified in our 

discussion and that warrant 

consideration? Are the assumptions that 

form the basis of our analysis of the 

costs appropriate? Can commenters 

provide data that supports or opposes 

these assumptions? Can commenters 

provide data that would help the 

Commission quantify the magnitude of 

the costs identified in our discussion or 

other costs that we did not identify in 

our discussion and that warrant 

consideration? 

• We request comment on our 

characterization of the benefits of the 

proposed rules concerning portfolio 

compression. The Commission 

preliminarily believes that the main 

benefit of the proposed portfolio 

compression rule is the potential for 

reducing the overall risk, cost, and 

inefficiencies associated with 

maintaining offsetting transactions. Do 

commenters agree with this 

characterization of the benefits? Are 

there other benefits of the proposed rule 

that have not been identified in our 

discussion and that warrant 

consideration? Are the assumptions that 

form the basis of our analysis of the 

benefits appropriate? Can commenters 

provide data that supports or opposes 

these assumptions? Can commenters 

provide data that would help the 

Commission quantify the magnitude of 

the benefits identified in our discussion 

or other benefits that we did not identify 

in our discussion and that warrant 

consideration? 

• We request comment on our 

characterization of the costs of the 

proposed regulations concerning 

portfolio compression. The Commission 

preliminarily believes the making its 

rules as similar as practicable to those 

of the CFTC will mitigate compliance 

costs for SBS entities. Do commenters 

agree with our characterization of the 

costs? Are there other costs of the 

proposed rule that have not been 

identified in our discussion and that 

warrant consideration? Are the 

assumptions that form the basis of our 

analysis of the costs appropriate? The 

Commission preliminarily believes 

third-party service providers often 

facilitate multilateral portfolio 

compression but lacks data on the costs 

to participants of using these services. 

Can commenters provide data that 

supports or opposes these assumptions? 

Can commenters provide data that 

would help the Commission quantify 

the magnitude of the costs identified in 

our discussion or other costs that we did 

not identify in our discussion and that 

warrant consideration? 

• We request comment on our 

characterization of the benefits of the 

proposed rules concerning trading 

relationship documentation. The 

Commission preliminarily believes that 

the main benefit of the proposed trading 

relationship documentation rule is the 

potential for reducing the likelihood of 

collateral and legal disputes between 

counterparties that might expose each 

side to significant counterparty credit 

risk. Do commenters agree with this 

characterization of the benefits? Are 

there other benefits of the proposed rule 

that have not been identified in our 

discussion and that warrant 

consideration? Are the assumptions that 

form the basis of our analysis of the 


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322Public Law 104–121, Title II, 110 Stat. 857 

(1996) (codified in various sections of 5 U.S.C., 15 

U.S.C. and as a note to 5 U.S.C. 601). 

323 5 U.S.C. 601 et seq. 

324 5 U.S.C. 603(a). 

325 5 U.S.C. 551 et seq. 

326 5 U.S.C. 605(b). 

327Although Section 601(b) of the RFA defines 

the term ‘‘small entity,’’ the statute permits agencies 

to formulate their own definitions. The Commission 

has adopted definitions for the term ‘‘small entity’’ 

for the purposes of Commission rulemaking in 

accordance with the RFA. Those definitions, as 

relevant to this proposed rulemaking, are set forth 

in Rule 0–10 under the Exchange Act, 17 CFR 

240.0–10. See Exchange Act Release No. 18451 

(Jan., 28, 1982), 47 FR 5215 (Feb., 4, 1982) (File No. 

AS–305). 

328See 17 CFR 240.0–10(a). 

329 17 CFR 240.17a–5(d). 

330See 17 CFR 240.0–10(c). 

331See 13 CFR 121.201 (Subsector 522). 

332See id. at Subsector 522. 

333See id. at Subsector 523. 

334See id. at Subsector 524. 

335See id. at Subsector 525. 

336See SBS Entity Registration Adopting Release, 

80 FR at 49013; SBS Books and Records Proposing 

Release, 79 FR at 25296–97 and n.1441; 

Intermediary Definitions Adopting Release, 77 FR at 

30743. See also Sections V (Paperwork Reduction 

Act) and VI (Economic Analysis) (discussing, 

among other things, the economic impact, including 

the estimated compliance costs and burdens, of the 

amendments). 

benefits appropriate? Can commenters 

provide data that supports or opposes 

these assumptions? Can commenters 

provide data that would help the 

Commission quantify the magnitude of 

the benefits identified in our discussion 

or other benefits that we did not identify 

in our discussion and that warrant 

consideration? 

• We request comment on our 

characterization of the costs of the 

proposed regulations concerning trading 

relationship documentation. The 

Commission preliminarily believes the 

widespread use of standard 

documentation mitigates the costs of the 

proposed rule. Do commenters agree 

with our characterization of the costs? 

Are there other costs of the proposed 

rule that have not been identified in our 

discussion and that warrant 

consideration? Are the assumptions that 

form the basis of our analysis of the 

costs appropriate? Can commenters 

provide data that would help the 

Commission quantify the magnitude of 

the costs identified in our discussion or 

other costs that we did not identify in 

our discussion and that warrant 

consideration? 

• Are there any effects on efficiency, 

competition, and capital formation that 

are not identified or are misidentified in 

our economic analysis? Please be 

specific and provide data and analysis 

to support your views. 

• Do commenters believe that the 

alternatives the Commission considered 

are appropriate? Are there other 

reasonable alternatives that the 

Commission should consider? If so, 

please provide additional alternatives 

and how their costs and benefits would 

compare to the proposal. 

• We request and encourage any 

interested person to submit comments 

regarding any aspect of the economic 

analysis of the proposed rule, specific 

issues discussed in the economic 

analysis, and other matters that may 

have an effect on the costs or benefits of 

the proposed rule. With regard to any 

comments, we note that such comments 

are of particular assistance to our 

rulemaking initiative if accompanied by 

supporting data and analysis of the 

issues addressed in those comments. 

VII. Consideration of Impact on the 

Economy 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996 (‘‘SBREFA’’) 322 the Commission 

requests comment on the potential 

impact of the proposed rules and 

amendments on the economy on an 

annual basis. The Commission also 

requests comment on any potential 

increases in costs or prices for 

consumers or individual industries, and 

any potential effect on competition, 

investment, or innovation. Commenters 

are requested to provide empirical data 

and other factual support for their views 

to the extent possible. 

VIII. Regulatory Flexibility Act 

Certification 

The Regulatory Flexibility Act of 1980 

(‘‘RFA’’) 323 requires the Commission, in 

promulgating rules, to consider the 

impact of those rules on small entities. 

Section 603(a) 324 of the Administrative 

Procedure Act,325 as amended by the 

RFA, generally requires the Commission 

to undertake a regulatory flexibility 

analysis of all proposed rules to 

determine the impact of such 

rulemaking on ‘‘small entities.’’ Section 

605(b) of the RFA 326 provides that this 

requirement shall not apply to any 

proposed rule or proposed rule 

amendment which, if adopted, would 

not have a significant economic impact 

on a substantial number of small 

entities. 

For purposes of Commission 

rulemaking in connection with the 

RFA,327 a small entity includes: (1) 

When used with reference to an 

‘‘issuer’’ or a ‘‘person,’’ other than an 

investment company, an ‘‘issuer’’ or 

‘‘person’’ that, on the last day of its most 

recent fiscal year, had total assets of $5 

million or less; 328 or (2) a broker-dealer 

with total capital (net worth plus 

subordinated liabilities) of less than 

$500,000 on the date in the prior fiscal 

year as of which its audited financial 

statements were prepared pursuant to 

Rule 17a–5(d) under the Exchange 

Act,329 or, if not required to file such 

statements, a broker-dealer with total 

capital (net worth plus subordinated 

liabilities) of less than $500,000 on the 

last day of the preceding fiscal year (or 

in the time that it has been in business, 

if shorter); and is not affiliated with any 

person (other than a natural person) that 

is not a small business or small 

organization.330 Under the standards 

adopted by the Small Business 

Administration, small entities in the 

finance and insurance industry include 

the following: (i) For entities engaged in 

credit intermediation and related 

activities, entities with $175 million or 

less in assets; 331 (ii) for entities engaged 

in non-depository credit intermediation 

and certain other activities, entities with 

$7 million or less in annual receipts; 332

(iii) for entities engaged in financial 

investments and related activities, 

entities with $7 million or less in 

annual receipts; 333 (iv) for insurance 

carriers and entities engaged in related 

activities, entities with $7 million or 

less in annual receipts; 334 and (v) for 

funds, trusts, and other financial 

vehicles, entities with $7 million or less 

in annual receipts.335

With respect to SBS Entities, based on 

feedback from market participants and 

our information about the securitybased swap markets, and consistent 

with our position in prior Dodd-Frank 

Act rulemakings, the Commission 

continues to believe that (1) the types of 

entities that would engage in more than 

a de minimis amount of dealing activity 

involving security-based swaps—which 

generally would be large financial 

institutions—would not be ‘‘small 

entities’’ for purposes of the RFA and (2) 

the types of entities that may have 

security-based swap positions above the 

level required to be ‘‘major securitybased swap participants’’ would not be 

‘‘small entities’’ for purposes of the 

RFA.336

For the foregoing reasons, the 

Commission certifies that neither 

proposed Rules 15Fi–3 through 15Fi, 

nor the proposed amendments to Rules 

3a71–6, 15Fi–1, 17a–3, 17a–4, 18a–5 

(proposed) and 18a–6 (proposed) would, 

if adopted, have a significant economic 

impact on a substantial number of small 

entities. The Commission encourages 

written comments regarding this 

certification. The Commission solicits 

comment as to whether the proposed 

rules could have an effect on small 


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337 15 U.S.C. 78c(b), 78o–10, 78q, 78w(a), and 

78mm. 

entities that has not been considered. 

The Commission requests that 

commenters describe the nature of any 

impact on small entities and provide 

empirical data to support the extent of 

such impact. 

IX. Statutory Basis and Text of 

Proposed Rules 

The Commission is proposing to 

revise Rules 3a71–6, 15Fi–1, 17a–3, and 

17a–4 under the Exchange Act (17 CFR 

240.3a71–6, 17 CFR 240.15Fi–1, 17 CFR 

240.17a–3 [as proposed to be amended 

at 79 FR 25193, May 2, 2014], and 17 

CFR 240.17a–4 [as proposed to be 

amended at 79 FR 25193, May 2, 2014]), 

to revise proposed Rules 18a–5 and 

18a–6 under the Exchange Act (17 CFR 

240.18a–5 [as proposed to be adopted at 

79 FR 25193, May 2, 2014] and 17 CFR 

240.18a–6 [as proposed to be adopted at 

79 FR 25193, May 2, 2014]) and to add 

new Rules 15Fi–3, 15Fi–4, and 15Fi–5 

under the Exchange Act (17 CFR 

240.15Fi–3, 17 CFR 240.15Fi–4, and 17 

CFR 240.15Fi–5) pursuant to the 

authority conferred by the Exchange 

Act, as amended, and particularly 

sections 3(b), 15F, 17, and 23(a).337

List of Subjects in 17 CFR Part 240 

Reporting and recordkeeping 

requirements, Securities, Security-based 

swaps, Security-based swap dealers, 

Major security-based swap participants. 

Text of the Amendments 

In accordance with the foregoing, the 

Securities and Exchange Commission 

proposes to amend Title 17, chapter II 

of the Code of Federal Regulations as 

follows: 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

■ 1. The general authority citation for 

Part 240 continues to read as follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss,77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, 

78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, 

78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q, 

78q–1, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 

80a–20, 80a–23, 80a–29, 80a–37, 80b–3, 80b– 

4, 80b–11, 7201 et seq., and 8302; 7 U.S.C. 

2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 

1350; and Pub. L. 111–203, 939A, 124 Stat. 

1376 (2010), unless otherwise noted. 

■ 2. Section 240.3a71–6 is amended by 

adding paragraph (d)(4) to read as 

follows: 

§ 240.3a71–6 Substituted compliance for 

security-based swap dealers and major 

security-based swap participants. 

* * * * * 

(d) * * * 

(4) Portfolio reconciliation, portfolio 

compression, and trading relationship 

documentation requirements. The 

portfolio reconciliation, portfolio 

compression, and trading relationship 

documentation requirements of section 

15F(i) of the Act (15 U.S.C. 78o–10(i)) 

and §§ 240.15Fi–3 through 15Fi–5; 

provided, however, that prior to making 

such a substituted compliance 

determination the Commission intends 

to consider whether the requirements of 

the foreign financial regulatory system 

for engaging in portfolio reconciliation 

and portfolio compression and for 

executing trading relationship 

documentation with counterparties, the 

duties imposed by the foreign financial 

regulatory system, and the information 

that is required to be provided to 

counterparties pursuant to the 

requirements of the foreign financial 

regulatory system, are comparable to 

those required pursuant to the 

applicable provisions arising under the 

Act and its rules and regulations. 

■ 3. Revise § 240.15Fi–1 to read as 

follows: 

§ 240.15Fi–1 Definitions. 

For the purposes of § 240.15Fi–1 

through § 240.15Fi–5: 

(a) The term bilateral portfolio 

compression exercise means an exercise 

by which two security-based swap 

counterparties wholly terminate or 

change the notional value of some or all 

of the security-based swaps submitted 

by the counterparties for inclusion in 

the portfolio compression exercise and, 

depending on the methodology 

employed, replace the terminated 

security-based swaps with other 

security-based swaps whose combined 

notional value (or some other measure 

of risk) is less than the combined 

notional value (or some other measure 

of risk) of the terminated security-based 

swaps in the exercise. 

(b) The term business day means any 

day other than a Saturday, Sunday, or 

legal holiday. 

(c) The term clearing agency means a 

clearing agency as defined in section 

3(a)(23) of the Securities Exchange Act 

of 1934 (15 U.S.C. 78c(a)(23)) that is 

registered pursuant to section 17A of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78q–1) and provides central 

counterparty services for security-based 

swap transactions. 

(d) The term clearing transaction 

means a security-based swap that has a 

clearing agency as a direct counterparty. 

(e) The term day of execution means 

the calendar day of the counterparty to 

the security-based swap transaction that 

ends the latest, provided that if a 

security-based swap transaction is 

(1) Entered into after 4:00 p.m. in the 

place of a counterparty; or 

(2) Entered into on a day that is not 

a business day in the place of a 

counterparty, then such security-based 

swap transaction shall be deemed to 

have been entered into by that 

counterparty on the immediately 

succeeding business day of that 

counterparty, and the day of execution 

shall be determined with reference to 

such business day. 

(f) The term execution means the 

point at which the counterparties 

become irrevocably bound to a 

transaction under applicable law. 

(g) The term financial counterparty 

means a counterparty that is not a 

security-based swap dealer or a major 

security-based swap participant and that 

is one of the following: 

(1) A swap dealer; 

(2) A major swap participant; 

(3) A commodity pool as defined in 

section 1a(10) of the Commodity 

Exchange Act (7 U.S.C. 1a(10)); 

(4) A private fund as defined in 

section 202(a)(29) of the Investment 

Advisers Act of 1940 (15 U.S.C. 80b– 

2(a)); 

(5) An employee benefit plan as 

defined in paragraphs (3) and (32) of 

section 3 of the Employee Retirement 

Income Security Act of 1974 (29 U.S.C. 

1002); and 

(6) A person predominantly engaged 

in activities that are in the business of 

banking, or in activities that are 

financial in nature, as defined in section 

4(k) of the Bank Holding Company Act 

of 1956 (12 U.S.C. 1843k). 

(h) The term fully offsetting securitybased swaps means security-based 

swaps of equivalent terms where no net 

cash flow would be owed to either 

counterparty after the offset of payment 

obligations thereunder. 

(i) The term material terms means: 

(1) With respect to any security-based 

swap that has not yet been included in 

a security-based swap portfolio and 

reconciled pursuant to § 240.15Fi–3, 

each term that is required to be reported 

to a registered swap data repository or 

the Commission pursuant to § 242.901 

of this chapter; and 

(2) With respect to all other securitybased swaps within a security-based 

swap portfolio, each term that is 

required to be reported to a registered 

swap data repository or the Commission 

pursuant to § 242.901 of this chapter; 

provided, however, that such definition 

does not include any term that is not 


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relevant to the ongoing rights and 

obligations of the parties and the 

valuation of the security-based swap. 

(j) The term multilateral portfolio 

compression exercise means an exercise 

by which multiple security-based swap 

counterparties wholly terminate or 

change the notional value of some or all 

of the security-based swaps submitted 

by the counterparties for inclusion in 

the portfolio compression exercise and, 

depending on the methodology 

employed, replace the terminated 

security-based swaps with other 

security-based swaps whose combined 

notional value (or some other measure 

of risk) is less than the combined 

notional value (or some other measure 

of risk) of the terminated security-based 

swaps in the exercise. 

(k) The term national securities 

exchange means an exchange as defined 

in section 3(a)(1) of the Securities 

Exchange Act of 1934 (15 U.S.C. 

78c(a)(1)) that is registered pursuant to 

section 6 of the Securities Exchange Act 

of 1934 (15 U.S.C. 78f). 

(l) The term portfolio reconciliation 

means any process by which the 

counterparties to one or more securitybased swaps: 

(1) Exchange the material terms of all 

security-based swaps in the securitybased swap portfolio between the 

counterparties; 

(2) Exchange each counterparty’s 

valuation of each security-based swap in 

the security-based swap portfolio 

between the counterparties as of the 

close of business on the immediately 

preceding business day; and 

(3) Resolve any discrepancy in 

valuations or material terms. 

(m) The term prudential regulator has 

the meaning given to the term in section 

3(a)(74) of the Act (15 U.S.C. 78c(a)(74)) 

and includes the Board of Governors of 

the Federal Reserve System, the Office 

of the Comptroller of the Currency, the 

Federal Deposit Insurance Corporation, 

the Farm Credit Association, and the 

Federal Housing Finance Agency, as 

applicable to the security-based swap 

dealer or major security-based swap 

participant. 

(n) The term security-based swap 

execution facility means a securitybased swap execution facility as defined 

in section 3(a)(77) of the Securities 

Exchange Act of 1934 (15 U.S.C. 

78c(a)(77)) that is registered pursuant to 

section 3D of the Securities Exchange 

Act of 1934 (15 U.S.C. 78c–4). 

(o) The term security-based swap 

portfolio means all security-based swaps 

currently in effect between a particular 

security-based swap dealer or major 

security-based swap participant and a 

particular counterparty. 

(p) The term trade acknowledgment 

means a written or electronic record of 

a security-based swap transaction sent 

by one counterparty of the securitybased swap transaction to the other. 

(q) The term valuation means the 

current market value or net present 

value of a security-based swap. 

(r) The term verification means the 

process by which a trade 

acknowledgment has been manually, 

electronically, or by some other legally 

equivalent means, signed by the 

receiving counterparty. 

■ 4. Section 240.15Fi–3 is added to read 

as follows: 

§ 240.15Fi–3 Security-based swap 

portfolio reconciliation. 

(a) Security-based swaps with 

security-based swap dealers or major 

security-based swap participants. Each 

security-based swap dealer and major 

security-based swap participant shall 

engage in portfolio reconciliation as 

follows for all security-based swaps in 

which its counterparty is also a securitybased swap dealer or major securitybased swap participant. 

(1) Each security-based swap dealer or 

major security-based swap participant 

shall agree in writing with each of its 

counterparties on the terms of the 

portfolio reconciliation including, if 

applicable, agreement on the selection 

of any third party service provider who 

may be performing the portfolio 

reconciliation. 

(2) The portfolio reconciliation may 

be performed on a bilateral basis by the 

counterparties or by a third party 

selected by the counterparties in 

accordance with paragraph (a)(1) of this 

section. 

(3) The portfolio reconciliation shall 

be performed no less frequently than: 

(i) Once each business day for each 

security-based swap portfolio that 

includes 500 or more security-based 

swaps; 

(ii) Once each week for each securitybased swap portfolio that includes more 

than 50 but fewer than 500 securitybased swaps on any business day during 

the week; and 

(iii) Once each calendar quarter for 

each security-based swap portfolio that 

includes no more than 50 security-based 

swaps at any time during the calendar 

quarter. 

(4) Each security-based swap dealer 

and major security-based swap 

participant shall resolve immediately 

any discrepancy in a material term of a 

security-based swap identified as part of 

a portfolio reconciliation or otherwise. 

(5) Each security-based swap dealer 

and major security-based swap 

participant shall establish, maintain, 

and follow written policies and 

procedures reasonably designed to 

resolve any discrepancy in a valuation 

identified as part of a portfolio 

reconciliation or otherwise as soon as 

possible, but in any event within five 

business days after the date on which 

the discrepancy is first identified, 

provided that the security-based swap 

dealer and major security-based swap 

participant establishes, maintains, and 

follows written policies and procedures 

reasonably designed to identify how the 

security-based swap dealer or major 

security-based swap participant will 

comply with any variation margin 

requirements under section 15F(e) of the 

Act (15 U.S.C. 78o–10(e)) and 

regulations thereunder pending 

resolution of the discrepancy in 

valuation. For purposes of this 

paragraph, a difference between the 

lower valuation and the higher 

valuation of less than 10 percent of the 

higher valuation need not be deemed a 

discrepancy. 

(b) Security-based swaps with entities 

other than security-based swap dealers 

or major security-based swap 

participants. Each security-based swap 

dealer and major security-based swap 

participant shall establish, maintain, 

and follow written policies and 

procedures reasonably designed to 

ensure that it engages in portfolio 

reconciliation for all security-based 

swaps in which its counterparty is 

neither a security-based swap dealer nor 

a major security-based swap participant 

as follows. 

(1) Each security-based swap dealer or 

major security-based swap participant 

shall agree in writing with each of its 

counterparties on the terms of the 

portfolio reconciliation including, if 

applicable, agreement on the selection 

of any third party service provider who 

may be performing the reconciliation. 

(2) The portfolio reconciliation may 

be performed on a bilateral basis by the 

counterparties or by one or more third 

parties selected by the counterparties in 

accordance with paragraph (b)(1) of this 

section. 

(3) The portfolio reconciliation will be 

required to be performed no less 

frequently than: 

(i) Once each calendar quarter for 

each security-based swap portfolio that 

includes more than 100 security-based 

swaps at any time during the calendar 

quarter; and 

(ii) Once annually for each securitybased swap portfolio that includes no 

more than 100 security-based swaps at 

any time during the calendar year. 

(4) Each security-based swap dealer or 

major security-based swap participant 

shall establish, maintain, and follow 


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written procedures reasonably designed 

to resolve any discrepancies in the 

valuation or material terms of each 

security-based swap identified as part of 

a portfolio reconciliation or otherwise 

with a counterparty that is neither a 

security-based swap dealer nor major 

security-based swap participant in a 

timely fashion. For purposes of this 

paragraph, a difference between the 

lower valuation and the higher 

valuation of less than 10 percent of the 

higher valuation need not be deemed a 

discrepancy. 

(c) Reporting of Security-Based Swap 

Valuation Disputes. Each security-based 

swap dealer and major security-based 

swap participant shall promptly notify 

the Commission, in a form and manner 

acceptable to the Commission, and any 

applicable prudential regulator of any 

security-based swap valuation dispute 

in excess of $20,000,000 (or its 

equivalent in any other currency), at 

either the transaction or portfolio level, 

if not resolved within: 

(1) Three business days, if the dispute 

is with a counterparty that is a securitybased swap dealer or major securitybased swap participant; or 

(2) Five business days, if the dispute 

is with a counterparty that is not a 

security-based swap dealer or major 

security-based swap participant. 

(d) Reconciliation of cleared securitybased swaps. Nothing in this section 

shall apply to any clearing transaction. 

■ 5. Section 240.15Fi–4 is added to read 

as follows: 

§ 240.15Fi–4 Security-based swap 

portfolio compression. 

(a) Portfolio compression with 

security-based swap dealers and major 

security-based swap participants—(1) 

Bilateral offset. Each security-based 

swap dealer and major security-based 

swap participant shall establish, 

maintain, and follow written policies 

and procedures for terminating each 

fully offsetting security-based swap 

between a security-based swap dealer or 

major security-based swap participant 

and another security-based swap dealer 

or major security-based swap 

participant in a timely fashion, when 

appropriate. 

(2) Bilateral compression. Each 

security-based swap dealer and major 

security-based swap participant shall 

establish, maintain, and follow written 

policies and procedures for periodically 

engaging in bilateral portfolio 

compression exercises, when 

appropriate, with each counterparty that 

is also a security-based swap dealer or 

major security-based swap participant. 

Such policies and procedures shall 

address, among other things, the 

evaluation of bilateral portfolio 

compression exercises that are initiated, 

offered, or sponsored by any third party. 

(3) Multilateral compression. Each 

security-based swap dealer and major 

security-based swap participant shall 

establish, maintain, and follow written 

policies and procedures for periodically 

engaging in multilateral portfolio 

compression exercises, when 

appropriate, with each counterparty that 

is also a security-based swap dealer or 

major security-based swap participant. 

Such policies and procedures shall 

address, among other things, the 

evaluation of multilateral portfolio 

compression exercises that are initiated, 

offered, or sponsored by any third party. 

(b) Portfolio compression with 

counterparties other than security-based 

swap dealers and major security-based 

swap participants. Each security-based 

swap dealer and major security-based 

swap participant shall establish, 

maintain, and follow written policies 

and procedures for periodically 

terminating fully offsetting securitybased swaps and for engaging in 

bilateral or multilateral portfolio 

compression exercises with respect to 

security-based swaps in which its 

counterparty is an entity other than a 

security-based swap dealer or major 

security-based swap participant, when 

appropriate and to the extent requested 

by any such counterparty. 

(c) Portfolio compression of cleared 

security-based swaps. Nothing in this 

section shall apply to any clearing 

transaction. 

■ 6. Section 240.15Fi–5 is added to read 

as follows: 

§ 240.15Fi–5 Security-based swap trading 

relationship documentation. 

(a)(1) Applicability. The requirements 

of this section shall not apply to: 

(i) Security-based swaps executed 

prior to the date on which a securitybased swap dealer or major securitybased swap participant is required to be 

in compliance with this section; 

(ii) Any clearing transaction; and 

(iii) Security-based swaps executed 

anonymously on a national securities 

exchange or a security-based swap 

execution facility, Provided that: 

(A) Such security-based swaps are 

intended to be cleared and are actually 

submitted for clearing to a clearing 

agency; 

(B) All terms of such security-based 

swaps conform to the rules of the 

clearing agency; and 

(C) Upon acceptance of such securitybased swap by the clearing agency: 

(1) The original security-based swap 

is extinguished; 

(2) The original security-based swap 

is replaced by equal and opposite 

security-based swaps with the clearing 

agency; and 

(3) All terms of the security-based 

swap shall conform to the product 

specifications of the cleared securitybased swap established under the 

clearing agency’s rules; and Provided 

further, That if a security-based swap 

dealer or major security-based swap 

participant receives notice that a 

security-based swap transaction has not 

been accepted for clearing by a clearing 

agency, the security-based swap dealer 

or major security-based swap 

participant shall be required to comply 

with the requirements of this section in 

all respects promptly after receipt of 

such notice. 

(2) Policies and procedures. Each 

security-based swap dealer and major 

security-based swap participant shall 

establish, maintain, and follow written 

policies and procedures reasonably 

designed to ensure that the securitybased swap dealer or major securitybased swap participant executes written 

security-based swap trading relationship 

documentation with its counterparty 

that complies with the requirements of 

this section. The policies and 

procedures shall be approved in writing 

by a senior officer of the security-based 

swap dealer or major security-based 

swap participant, and a record of the 

approval shall be retained. Other than 

trade acknowledgements and 

verifications of security-based swap 

transactions under § 240.15Fi–2, the 

security-based swap trading relationship 

documentation shall be executed prior 

to, or contemporaneously with, 

executing a security-based swap with 

any counterparty. 

(b) Security-based swap trading 

relationship documentation. (1) The 

security-based swap trading relationship 

documentation shall be in writing and 

shall include all terms governing the 

trading relationship between the 

security-based swap dealer or major 

security-based swap participant and its 

counterparty, including, without 

limitation, terms addressing payment 

obligations, netting of payments, events 

of default or other termination events, 

calculation and netting of obligations 

upon termination, transfer of rights and 

obligations, allocation of any applicable 

regulatory reporting obligations 

(including pursuant to §§ 242.900 to 

242.909) of this chapter, governing law, 

valuation, and dispute resolution. 

(2) The security-based swap trading 

relationship documentation shall 

include all trade acknowledgements and 

verifications of security-based swap 

transactions under § 240.15Fi–2. 

(3) The security-based swap trading 

relationship documentation shall 


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include credit support arrangements, 

which shall contain, in accordance with 

applicable requirements under 

Commission regulations or regulations 

adopted by prudential regulators and 

without limitation, the following: 

(i) Initial and variation margin 

requirements, if any; 

(ii) Types of assets that may be used 

as margin and asset valuation haircuts, 

if any; 

(iii) Investment and re-hypothecation 

terms for assets used as margin for 

uncleared security-based swaps, if any; 

and 

(iv) Custodial arrangements for 

margin assets, including whether 

margin assets are to be segregated with 

an independent third party, in 

accordance with section 3E(f) of the Act 

(15 U.S.C. 78c–5(f)), if any. 

(4)(i) The security-based swap trading 

relationship documentation between 

security-based swap dealers, between 

major security-based swap participants, 

between a security-based swap dealer 

and major security-based swap 

participant, between a security-based 

swap dealer or major security-based 

swap participant and a financial 

counterparty, and, if requested by any 

other counterparty, between a securitybased swap dealer or major securitybased swap participant and such 

counterparty, shall include written 

documentation in which the parties 

agree on the process, which may 

include any agreed upon methods, 

procedures, rules, and inputs, for 

determining the value of each securitybased swap at any time from execution 

to the termination, maturity, or 

expiration of such security-based swap 

for the purposes of complying with the 

margin requirements under section 

15F(e) of the Act (15 U.S.C. 78o–10(e)) 

and regulations thereunder, and the risk 

management requirements under 

section 15F(j) of the Act (15 U.S.C. 78o– 

10(j)) of the Act and regulations 

thereunder. To the maximum extent 

practicable, the valuation of each 

security-based swap shall be based on 

recently-executed transactions, 

valuations provided by independent 

third parties, or other objective criteria. 

(ii) Such documentation shall include 

either: 

(A) Alternative methods for 

determining the value of the securitybased swap for the purposes of 

complying with this paragraph in the 

event of the unavailability or other 

failure of any input required to value 

the security-based swap for such 

purposes; or 

(B) A valuation dispute resolution 

process by which the value of the 

security-based swap shall be determined 

for the purposes of complying with this 

paragraph (b)(4). 

(iii) A security-based swap dealer or 

major security-based swap participant is 

not required to disclose to the 

counterparty confidential, proprietary 

information about any model it may use 

to value a security-based swap. 

(iv) The parties may agree on changes 

or procedures for modifying or 

amending the documentation at any 

time. 

(5) The security-based swap trading 

relationship documentation of a 

security-based swap dealer or major 

security-based swap participant shall 

include the following: 

(i) A statement of whether the 

security-based swap dealer or major 

security-based swap participant is an 

insured depository institution (as 

defined in 12 U.S.C. 1813) or a financial 

company (as defined in section 

201(a)(11) of the Dodd-Frank Act, 12 

U.S.C. 5381(a)(11)); 

(ii) A statement of whether the 

counterparty is an insured depository 

institution or financial company; 

(iii) A statement that in the event 

either the security-based swap dealer or 

major security-based swap participant 

or its counterparty becomes a covered 

financial company (as defined in section 

201(a)(8) of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act, 

12 U.S.C. 5381(a)(8)) or is an insured 

depository institution for which the 

Federal Deposit Insurance Corporation 

(FDIC) has been appointed as a receiver 

(the ‘‘covered party’’), certain 

limitations under Title II of the DoddFrank Act or the Federal Deposit 

Insurance Act may apply to the right of 

the non-covered party to terminate, 

liquidate, or net any security-based 

swap by reason of the appointment of 

the FDIC as receiver, notwithstanding 

the agreement of the parties in the 

security-based swap trading relationship 

documentation, and that the FDIC may 

have certain rights to transfer securitybased swaps of the covered party under 

section 210(c)(9)(A) of the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act, 12 U.S.C. 5390(c)(9)(A), 

or 12 U.S.C. 1821(e)(9)(A); and 

(iv) An agreement between the 

security-based swap dealer or major 

security-based swap participant and its 

counterparty to provide notice if either 

it or its counterparty becomes or ceases 

to be an insured depository institution 

or a financial company. 

(6) The security-based swap trading 

relationship documentation of each 

security-based swap dealer and major 

security-based swap participant shall 

contain a notice that, upon acceptance 

of a security-based swap by a clearing 

agency: 

(i) The original security-based swap is 

extinguished; 

(ii) The original security-based swap 

is replaced by equal and opposite 

security-based swaps with the clearing 

agency; and 

(iii) All terms of the security-based 

swap shall conform to the product 

specifications of the cleared securitybased swap established under the 

clearing agency’s rules. 

(c) Audit of security-based swap 

trading relationship documentation. 

Each security-based swap dealer and 

major security-based swap participant 

shall have an independent auditor 

conduct periodic audits sufficient to 

identify any material weakness in its 

documentation policies and procedures 

required by this section. A record of the 

results of each audit shall be retained. 

■ 7. Section 240.17a–3, as proposed to 

be amended at 79 FR 25193, May 2, 

2014 is further amended by adding 

paragraph (a)(31) to read as follows: 

§ 240.17a–3 Records to be made by certain 

brokers and dealers. 

* * * * * 

(a) * * * 

(31)(i) A record of each security-based 

swap portfolio reconciliation, whether 

conducted pursuant to § 240.15Fi–3 or 

otherwise, including the dates of the 

security-based swap portfolio 

reconciliation, the number of portfolio 

reconciliation discrepancies, the 

number of security-based swap 

valuation disputes (including the timeto-resolution of each valuation dispute 

and the age of outstanding valuation 

disputes, categorized by transaction and 

counterparty), and the name of the 

third-party entity performing the 

security-based swap portfolio 

reconciliation, if any. 

(ii) A copy of each notification 

required to be provided to the 

Commission pursuant to § 240.15Fi– 

3(c). 

(iii) A record of each bilateral offset 

and each bilateral portfolio compression 

exercise or multilateral portfolio 

compression exercise in which it 

participates, whether conducted 

pursuant to § 240.15Fi–4 or otherwise, 

including the dates of the offset or 

compression, the security-based swaps 

included in the offset or compression, 

the identity of the counterparties 

participating in the offset or 

compression, the results of the 

compression, and the name of the thirdparty entity performing the offset or 

compression, if any. 

* * * * * 


amozie on DSK3GDR082PROD with PROPOSALS2
Federal Register / Vol. 84, No. 32 / Friday, February 15, 2019 / Proposed Rules 4675 

■ 8. Section 240.17a–4, as proposed to 

be amended at 79 FR 25193, May 2, 

2014 is amended by revising paragraph 

(b)(1) and adding paragraphs (e)(10) and 

(11) to read as follows: 

§ 240.17a–4 Records to be preserved by 

certain exchange members, brokers and 

dealers. 

* * * * * 

(b) * * * 

(1) All records required to be made 

pursuant to § 240.17a–3(a)(4), (a)(6), 

(a)(7), (a)(8), (a)(9), (a)(10), (a)(11), 

(a)(16), (a)(18), (a)(19), (a)(20), (a)(24), 

(a)(25), (a)(26), (a)(27), (a)(28), (a)(29), 

(a)(30), and (a)(31), and analogous 

records created pursuant to § 240.17a– 

3(e). 

* * * * * 

(e) * * * 

(10) The written policies and 

procedures required pursuant to 

§§ 240.15Fi–3, 240.15Fi–4, and 

240.15Fi–5 until three years after 

termination of the use of the policies 

and procedures. 

(11) (i) Each written agreement with 

counterparties on the terms of portfolio 

reconciliation with those counterparties 

as required to be created under 

§ 240.15Fi–3(a)(1) and (b)(1) until three 

years after the termination of the 

agreement and all transactions governed 

thereby. 

(ii) Security-based swap trading 

relationship documentation with 

counterparties required to be created 

under § 240.15Fi–5 until three years 

after the termination of such 

documentation and all transactions 

governed thereby. 

(iii) A record of the results of each 

audit required to be performed pursuant 

to § 240.15Fi–5(c) until three years after 

the conclusion of the audit. 

* * * * * 

■ 9. Section 240.18a–5, as proposed to 

be added at 79 FR 25193, May 2, 2014, 

is further amended by adding 

paragraphs (a)(18) and (b)(14) to read as 

follows: 

§ 240.18a–5 Records to be made by certain 

security-based swap dealers and major 

security-based swap participants. 

* * * * * 

(a) * * * 

(18)(i) A record of each security-based 

swap portfolio reconciliation, whether 

conducted pursuant to § 240.15Fi–3 or 

otherwise, including the dates of the 

security-based swap portfolio 

reconciliation, the number of portfolio 

reconciliation discrepancies, the 

number of security-based swap 

valuation disputes (including the timeto-resolution of each valuation dispute 

and the age of outstanding valuation 

disputes, categorized by transaction and 

counterparty), and the name of the 

third-party entity performing the 

security-based swap portfolio 

reconciliation, if any. 

(ii) A copy of each notification 

required to be provided to the 

Commission pursuant to § 240.15Fi– 

3(c). 

(iii) A record of each bilateral offset 

and each bilateral portfolio compression 

exercise or multilateral portfolio 

compression exercise in which it 

participates, whether conducted 

pursuant to § 240.15Fi–4 or otherwise, 

including the dates of the offset or 

compression, the security-based swaps 

included in the offset or compression, 

the identity of the counterparties 

participating in the offset or 

compression, the results of the 

compression, and the name of the thirdparty entity performing the offset or 

compression, if any. 

* * * * * 

(b) * * * 

(14)(i) A record of each security-based 

swap portfolio reconciliation, whether 

conducted pursuant to § 240.15Fi–3 or 

otherwise, including the dates of the 

security-based swap portfolio 

reconciliation, the number of portfolio 

reconciliation discrepancies, the 

number of security-based swap 

valuation disputes (including the timeto-resolution of each valuation dispute 

and the age of outstanding valuation 

disputes, categorized by transaction and 

counterparty), and the name of the 

third-party entity performing the 

security-based swap portfolio 

reconciliation, if any. 

(ii) A copy of each notification 

required to be provided to the 

Commission pursuant to § 240.15Fi– 

3(c). 

(iii) A record of each bilateral offset 

and each bilateral portfolio compression 

exercise or multilateral portfolio 

compression exercise in which it 

participates, whether conducted 

pursuant to § 240.15Fi–4 or otherwise, 

including the dates of the offset or 

compression, the security-based swaps 

included in the offset or compression, 

the identity of the counterparties 

participating in the offset or 

compression, the results of the 

compression, and the name of the thirdparty entity performing the offset or 

compression, if any. 

* * * * * 

■ 10. Section 240.18a–6, as proposed to 

be added at 79 FR 25193, May 2, 2014, 

is further amended by revising 

paragraphs (b)(1)(i) and (b)(2)(i) and 

adding paragraphs (d)(4) and (d)(5) to 

read as follows: 

§ 240.18a–6 Records to be preserved by 

certain security-based swap dealers and 

major security-based swap participants. 

* * * * * 

(b) * * * 

(1) * * * 

(i) All records required to be made 

pursuant to §§ 240.18a–5(a)(5), (a)(6), 

(a)(7), (a)(8), (a)(9), (a)(11), (a)(12), 

(a)(13), (a)(14), (a)(15), (a)(16), (a)(17), 

and (a)(18). 

* * * * * 

(2) * * * 

(i) All records required to be made 

pursuant to § 240.18a–5(b)(4), (b)(5), 

(b)(6), (b)(7), (b)(9), (b)(10), (b)(11), 

(b)(12), (b)(13), and (b)(14). 

* * * * * 

(d) * * * 

(4) The written policies and 

procedures required pursuant to 

§§ 240.15Fi–3, 240.15Fi–4, and 

240.15Fi–5 until three years after 

termination of the use of the policies 

and procedures. 

(5)(i) Each written agreement with 

counterparties on the terms of portfolio 

reconciliation with those counterparties 

as required to be created under 

§ 240.15Fi–3(a)(1) and (b)(1) until three 

years after the termination of the 

agreement and all transactions governed 

thereby. 

(ii) Security-based swap trading 

relationship documentation with 

counterparties required to be created 

under § 240.15Fi–5 until three years 

after the termination of such 

documentation and all transactions 

governed thereby. 

(iii) A record of the results of each 

audit required to be performed pursuant 

to § 240.15Fi–5(c) until three years after 

the conclusion of the audit. 

* * * * * 

By the Commission. 

Dated: December 19, 2018. 

Brent J. Fields, 

Secretary. 

[FR Doc. 2018–27979 Filed 2–14–19; 8:45 am] 

BILLING CODE 8011–01–P 


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