47278 Federal Register / Vol. 79, No. 155 / Tuesday, August 12, 2014 / Rules and Regulations 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 240, 241, and 250 

[Release No. 34–72472; File No. S7–02–13] 

RIN 3235–AL25 

Application of ‘‘Security-Based Swap 

Dealer’’ and ‘‘Major Security-Based 

Swap Participant’’ Definitions to 

Cross-Border Security-Based Swap 

Activities; Republication 

Editorial Note: Proposed rule document 

2014–15337 was originally published on 

pages 39067 through 39162 in the issue of 

Wednesday, July 9, 2014. In that publication 

the footnotes contained erroneous entries. 

The corrected document is republished in its 

entirety. 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Final rules; interpretation. 

SUMMARY: The Securities and Exchange 

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

is adopting rules and providing 

guidance to address the application of 

certain provisions of the Securities 

Exchange Act of 1934 (‘‘Exchange Act’’) 

that were added by Subtitle B of Title 

VII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(‘‘Dodd-Frank Act’’), to cross-border 

security-based swap activities. These 

rules and guidance in large part focus 

on the application of the Title VII 

definitions of ‘‘security-based swap 

dealer’’ and ‘‘major security-based swap 

participant’’ in the cross-border context. 

The Commission also is adopting a 

procedural rule related to the 

submission of applications for 

substituted compliance. In addition, the 

Commission is adopting a rule 

addressing the scope of our authority, 

with respect to enforcement 

proceedings, under section 929P of the 

Dodd-Frank Act. 

DATES: Effective September 8, 2014. 

FOR FURTHER INFORMATION CONTACT: 

Richard Gabbert, Senior Special 

Counsel, Joshua Kans, Senior Special 

Counsel, or Margaret Rubin, Special 

Counsel, Office of Derivatives Policy, at 

202–551–5870, Division of Trading and 

Markets, Securities and Exchange 

Commission, 100 F Street NE., 

Washington, DC 20549–7010. 

SUPPLEMENTARY INFORMATION: The 

Commission is adopting the following 

rules under the Exchange Act, 

accompanied by related guidance, 

regarding the application of Subtitle B 

of Title VII of the Dodd-Frank Act to 

cross-border activities: Rule 0–13 (filing 

procedures regarding substituted 

compliance requests); Rule 3a67–10 

(regarding the cross-border 

implementation of the ‘‘major securitybased swap participant’’ definition); 

Rule 3a71–3 (regarding the cross-border 

implementation of the de minimis 

exception to the ‘‘security-based swap 

dealer’’ definition); Rule 3a71–4 

(regarding the cross-border 

implementation of the aggregation 

provisions of the dealer de minimis 

exception); and Rule 3a71–5 (regarding 

an exception, from the dealer de 

minimis analysis, for certain cleared 

anonymous transactions). The 

Commission is not addressing, as part of 

this release, certain other rules that we 

proposed regarding the application of 

Subtitle B of Title VII in the crossborder context. The Commission also is 

adopting Rule 250.1 to clarify the scope 

of its antifraud civil law-enforcement 

authority, with respect to enforcement 

proceedings, in the cross-border context. 

Table of Contents 

I. Background 

A. Scope of This Rulemaking 

B. The Dodd-Frank Act 

C. The Cross-Border Proposing Release and 

the CFTC Cross-Border Guidance 

D. Comments on the Proposal 

II. The Economic, Legal, and Policy 

Principles Guiding the Commission’s 

Approach to the Application of Title VII 

to Cross-Border Activities 

A. Economic Considerations in the CrossBorder Regulation of Security-Based 

Swaps 

1. Economic Features of the Security-Based 

Swap Market 

2. Context for Regulatory Determinations 

B. Scope of Title VII’s Application to 

Cross-Border Security-Based Swap 

Activity 

1. Commenters’ Views 

2. Scope of Application of Title VII in the 

Cross-Border Context 

C. Principles Guiding Final Approach To 

Applying ‘‘Security-Based Swap Dealer’’ 

and ‘‘Major Security-Based Swap 

Participant’’ Definitions in the CrossBorder Context 

III. Baseline 

A. Current Security-Based Swap Market 

1. Security-Based Swap Market 

Participants 

2. Levels of Security-Based Swap Trading 

Activity 

B. Global Regulatory Efforts 

C. Cross-Market Participation 

IV. Cross-Border Application of Dealer De 

Minimis Exception 

A. Overview 

B. Application of De Minimis Exception To 

Dealing Activities of U.S. Persons 

1. Proposed Approach and Commenters’ 

Views 

2. Final Rule 

C. Definition of ‘‘U.S. Person’’ 

1. Proposed Approach 

2. Commenters’ Views 

3. Final Rule 

4. Representations Regarding U.S.-Person 

Status 

D. Application of De Minimis Exception To 

Dealing Activities of Conduit Affiliates 

1. Proposed Approach and Commenters’ 

Views 

2. Final Rule 

E. Application of De Minimis Exception To 

Dealing Activities of Other Non-U.S. 

Persons 

1. Dealing Transactions of Non-U.S. 

Persons That Are Subject to Recourse 

Guarantees by Their U.S. Affiliates 

2. Dealing Transactions of Non-U.S. 

Persons Involving U.S. and Other 

Counterparties 

F. Application of the Exception’s 

Aggregation Principles to Cross-Border 

Dealing Activity 

1. Proposed Approach and Commenters’ 

Views 

2. Final Rule 

G. Exception for Cleared Anonymous 

Transactions 

1. Proposed Approach and Commenters’ 

Views 

2. Final Rule 

H. Additional Issues 

1. Particular Activities and Entities 

2. Foreign Public Sector Financial 

Institutions and Government-Related 

Entities 

I. Economic Analysis of the Final CrossBorder Dealer De Minimis Rule 

1. Programmatic Costs and Benefits 

2. Assessment Costs 

3. Alternative Approaches 

V. Cross-Border Application of Major 

Security-Based Swap Participant 

Thresholds 

A. Overview 

B. Application of the Major Security-Based 

Swap Participant Definition to U.S. 

Persons 

1. Proposed Approach and Commenters’ 

Views 

2. Final Rule 

C. Application of the Major Security-Based 

Swap Participant Definition to Conduit 

Affiliates 

1. Proposed Approach and Commenters’ 

Views 

2. Final Rule 

D. Application to Other Non-U.S. Persons 

1. Positions With U.S. Persons Other Than 

Foreign Branches of U.S. Banks 

2. Positions With Foreign Branches of U.S. 

Banks 

3. Positions of Non-U.S. Persons That Are 

Subject to Recourse Guarantees by a U.S. 

Person 

E. Attribution 

1. Positions Attributed to U.S. Person 

Guarantors 

2. Positions Attributed to Non-U.S. Person 

Guarantors 

3. Limited Circumstances Where 

Attribution of Guaranteed SecurityBased Swap Positions Does Not Apply 

F. Other Issues Related to the Application 

of the Major Security-Based Swap 

Participant Definition 

1. Threshold for Registration as a Major 

Security-Based Swap Participant 

2. Entities That Maintain Legacy Portfolios 


emcdonald on DSK67QTVN1PROD with RULES5
Federal Register / Vol. 79, No. 155 / Tuesday, August 12, 2014 / Rules and Regulations 47279 

1Public Law 111–203, 124 Stat. 1376 (2010). 

Unless otherwise indicated, references to Title VII 

in this release are to Subtitle B of Title VII. 

2Consistent with the scope of the final rules as 

discussed below, the references in this release to 

the application of Title VII to ‘‘cross-border 

activities’’ refer to security-based swap transactions 

involving: (i) A U.S. person and a non-U.S. person, 

or (ii) two non-U.S. persons conducting a securitybased swap transaction that otherwise occurs in 

relevant part within the United States, including 

where performance of one or both counterparties 

under the security-based swap are guaranteed by a 

U.S. person. For purposes of this release only, 

‘‘cross-border activities’’ do not indicate activities 

involving a transaction between two non-U.S. 

persons where one or both are conducting dealing 

activity within the United States, because, as 

discussed below, we anticipate considering this 

issue in a subsequent release. 

3The procedural rule addresses only the process 

for submitting such substituted compliance requests 

to the Commission. It does not address issues 

regarding whether substituted compliance would be 

available in connection with particular regulatory 

requirements, and, if so, under what conditions. We 

expect to address those matters as part of later 

rulemakings. 

4See 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’’). 

5See id. at 30974. 

6This rulemaking does not address the 

requirements under section 5 of the Securities Act 

applicable to security-based swap transactions. 

Security-based swaps, as securities, are subject to 

the provisions of the Securities Act of 1933 (15 

U.S.C. 77a et seq.) (‘‘Securities Act’’) and the rules 

and regulations thereunder applicable to securities. 

The Securities Act requires that any offer and sale 

of a security must either be registered under the 

Securities Act (see section 5 of the Securities Act, 

15 U.S.C. 77e) or made pursuant to an exemption 

from registration (see, e.g., sections 3 and 4 of the 

Securities Act, 15 U.S.C. 77c and 77d, respectively). 

In addition, the Securities Act requires that any 

offer to sell, offer to buy or purchase, or purchase 

or sale of, a security-based swap to any person who 

is not an eligible contract participant must be 

registered under the Securities Act (see section 5(e) 

of the Securities Act, 15 U.S.C. 77e(e)). Because of 

the statutory language of section 5(e) of the 

Securities Act, exemptions from this requirement in 

sections 3 and 4 of the Securities Act are not 

available. 

7Those subsequent rulemakings may make use of 

definitions of ‘‘U.S. person’’ and certain other terms 

that we are adopting today. 

8See Temporary Exemptions and Other 

Temporary Relief, Together With Information on 

Compliance Dates for New Provisions of the 

Securities Exchange Act of 1934 Applicable to 

Security-Based Swaps, Exchange Act Release No. 

64678 (Jun. 15, 2011), 76 FR 36287 (Jun. 22, 2011) 

(clarifying the compliance date for certain 

requirements added by Title VII, and in some cases 

providing temporary exemptive relief in connection 

with those requirements); Order Extending 

Temporary Exemptions under the Securities 

Exchange Act of 1934 in Connection with the 

Revision of the Definition of ‘‘Security’’ to 

Encompass Security-Based Swaps, and Request for 

Comment, Exchange Act Release No. 71485 (Feb. 5, 

2014), 79 FR 7731 (Feb. 10, 2014) (extending 

exemptive relief from certain Exchange Act 

provisions in connection with Title VII’s revision of 

the Exchange Act definition of ‘‘security’’ to 

encompass security-based swaps). 

9See proposed Exchange Act rule 3a71–3(b). The 

proposal further would have defined a ‘‘transaction 

conducted within the United States’’ to encompass 

transactions that are solicited, executed, or booked 

within the United States by or on behalf of either 

counterparty, regardless of either counterparty’s 

location, domicile or residence status, subject to an 

exception for transactions conducted through the 

foreign branches of U.S. banks. See proposed 

Exchange Act rule 3a71–3(a)(5). 

G. Foreign Public Sector Financial 

Institutions and Government-Related 

Entities 

H. Economic Analysis of Final Rules 

Regarding ‘‘Major Security-Based Swap 

Participants’’ 

1. Programmatic Costs and Benefits 

2. Assessment Costs 

3. Alternative Approaches 

VI. Substituted Compliance Procedural Rule 

A. Proposed Approach and Commenters’ 

Views 

B. Final Rule 

C. Economic Analysis 

VII. Antifraud Authority 

A. Final Rule 

B. Economic Analysis 

VIII. Impacts on Efficiency, Competition, and 

Capital Formation 

A. Competition 

B. Efficiency 

C. Capital Formation 

IX. Paperwork Reduction Act 

A. Introduction 

B. Reliance on Counterparty 

Representations Regarding Transactions 

Conducted Through a Foreign Branch 

1. Summary of Collection of Information 

2. Proposed Use of Information 

3. Respondents 

4. Total Initial and Annual Reporting and 

Recordkeeping Burdens 

C. Reliance on Counterparty 

Representations Regarding Non-U.S. 

Person Status 

1. Summary of Collection of Information 

2. Proposed Use of Information 

3. Respondents 

4. Total Initial and Annual Reporting and 

Recordkeeping Burdens 

X. Regulatory Flexibility Act Certification 

XI. Effective Date and Implementation 

Statutory Authority and Text of Final Rules 

I. Background 

A. Scope of This Rulemaking 

The Commission is adopting the first 

of a series of rules and providing 

guidance regarding the application of 

Title VII of the Dodd-Frank Act 1 (‘‘Title 

VII’’) to cross-border security-based 

swap activities and persons engaged in 

those activities.2 This rulemaking 

primarily focuses on the application of 

the de minimis exception to the 

definition of ‘‘security-based swap 

dealer’’ in the cross-border context, and 

on the application of thresholds related 

to the definition of ‘‘major securitybased swap participant’’ in the crossborder context. We also are adopting a 

procedural rule regarding the 

submission of ‘‘substituted compliance’’ 

requests to allow market participants to 

satisfy certain Title VII obligations by 

complying with comparable foreign 

regulatory requirements.3

The rules and guidance we are 

adopting are based on our May 23, 2013 

proposal, which addressed the 

application of Title VII in the crossborder context.4 Aside from addressing 

the definitions and procedural rule 

noted above, the Cross-Border Proposing 

Release also addressed a range of other 

cross-border issues, including issues 

regarding the requirements applicable to 

dealers and major participants, and 

requirements relating to mandatory 

clearing, trade execution, regulatory 

reporting, and public dissemination. 

The Cross-Border Proposing Release 

stated that it was possible that we 

would consider final rules and guidance 

related to some of those issues in the 

adopting releases related to the relevant 

substantive rulemakings, and that we 

would address others in a separate 

rulemaking.5

This rulemaking’s focus on the crossborder application of the dealer and 

major participant definitions reflects the 

critical and foundational role that those 

definitions occupy with regard to the 

implementation of Title VII.6 We expect 

to address other matters raised by the 

Cross-Border Proposing Release as part 

of subsequent rulemakings, to allow us 

to consider the cross-border application 

of the substantive requirements imposed 

by Title VII—including the economic 

consequences of that cross-border 

application—in conjunction with the 

final rules that will implement those 

substantive requirements.7 Market 

participants are not required to comply 

with certain of those Title VII 

requirements pending the publication of 

final rules or other Commission action, 

and temporarily are exempt from having 

to comply with certain other 

requirements added by or arising from 

Title VII.8

These final rules and guidance do not 

address one key issue related to the 

application of the ‘‘security-based swap 

dealer’’ definition in the cross-border 

context. In the Cross-Border Proposing 

Release, we proposed that non-U.S. 

persons must count, against the relevant 

thresholds of the de minimis exemption, 

their dealing activity involving 

‘‘transactions conducted within the 

United States.’’ 9 Commenters raised a 

number of significant issues related to 

this proposed requirement, including 

issues regarding the Commission’s 

authority to impose this requirement 

and regarding the costs associated with 

this requirement. While we continue to 

preliminarily believe that the crossborder application of the security-based 


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47280 Federal Register / Vol. 79, No. 155 / Tuesday, August 12, 2014 / Rules and Regulations 

10See generally Cross-Border Proposing Release, 

78 FR 30972–73. 

11See Pub. L. 111–203, Preamble (stating that the 

Dodd-Frank Act was enacted ‘‘[t]o promote the 

financial stability of the United States by improving 

accountability and transparency in the financial 

system, to end ‘too big to fail’, to protect the 

American taxpayer by ending bailouts, to protect 

consumers from abusive financial services 

practices, and for other purposes’’). 

12The Commission has proposed a series of rules 

regarding these matters. See Cross-Border Proposing 

Release, 78 FR 30972 nn.11–18. Most recently, the 

Commission proposed rules governing 

recordkeeping, reporting, and notification 

requirements for dealers and major participants. See 

Exchange Act Release No. 71958 (Apr. 17, 2014), 79 

FR 25194 (May 2, 2014). 

The Dodd-Frank Act further provides that the 

SEC and CFTC jointly should further define certain 

terms, including ‘‘security-based swap dealer’’ and 

‘‘major security-based swap participant.’’ See DoddFrank Act section 712(d). Pursuant to that 

requirement, the SEC and CFTC jointly adopted 

rules to further define those terms. See Further 

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

Dealer,’’ ‘‘Major Swap Participant,’’ ‘‘Major 

Security-Based Swap Participant’’ and ‘‘Eligible 

Contract Participant,’’ Exchange Act Release No. 

66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012) 

(‘‘Intermediary Definitions Adopting Release’’); see 

also Cross-Border Proposing Release, 78 FR 30972 

n.9 (discussing joint rulemaking to further define 

various Title VII terms). 

13See section II.A, infra, regarding the 

preponderance of cross-border activity in the 

security-based swap market. 

14The 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 in section 

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

Pursuant to the 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, the Farm Credit Administration, or the 

Federal Housing Finance Agency (collectively, the 

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

regulator’’ of a security-based swap dealer or major 

security-based swap participant if the entity is 

directly supervised by that regulator. 

15Section 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.’’ 

16 In 2009, leaders of the Group of 20 (‘‘G20’’)— 

whose membership includes the United States, 18 

other countries, and the European Union (‘‘EU’’)— 

called for global improvements in the functioning, 

transparency, and regulatory oversight of OTC 

derivatives markets. See G20 Leaders’ Statement, 

Pittsburgh, United States, September 24–25, 2009, 

available at: http://www.treasury.gov/resourcecenter/international/g7-g20/Documents/pittsburgh_

summit_leaders_statement_250909.pdf. (‘‘G20 

Leaders’ Pittsburgh Statement’’). 

In subsequent summits, the G20 leaders have 

reiterated their commitment to OTC derivatives 

regulatory reform. For example, in September 2013, 

the leaders of the G20 reaffirmed their 

commitments with respect to the regulation of the 

OTC derivatives markets, welcoming Financial 

Stability Board (‘‘FSB’’) members’ confirmed 

actions and committed timetables to put the agreed 

OTC derivatives reforms into practice. See the G20 

Leaders Declaration (September 2013), para. 71, 

available at: https://www.g20.org/sites/default/files/ 

g20_resources/library/Saint_Petersburg_

Declaration_ENGpdf (‘‘G20 Leaders’ St. Petersburg 

Declaration’’). 

17Senior representatives of authorities with 

responsibility for regulation of OTC derivatives 

have met on a number of occasions to discuss 

international coordination of OTC derivatives 

regulations. See, e.g., Report of the OTC Derivatives 

Regulators Group (‘‘ODRG’’) on Cross-Border 

Implementation Issues March 2014 (Mar. 31, 2014), 

available at: http://www.cftc.gov/ucm/groups/

public/@internationalaffairs/documents/file/

odrgreport033114.pdf. 

18Commission representatives participate in the 

FSB’s Working Group on OTC Derivatives 

Regulation (‘‘ODWG’’), both on its own behalf and 

as the representative of the International 

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

which is co-chair of the ODWG. A Commission 

representative also serves as one of the co-chairs of 

the IOSCO Task Force on OTC Derivatives 

Regulation. 

19See Cross-Border Proposing Release, 78 FR 

30975–76. 

20See id. at 30975. 

swap dealer definition should account 

for activities in the United States related 

to dealing—even when neither party to 

the transaction is a U.S. person—we 

also believe that the final resolution of 

this issue can benefit from further 

consideration and public comment. 

Accordingly, we anticipate soliciting 

additional public comment regarding 

approaches by which the cross-border 

application of the dealer definition 

appropriately can reflect activity 

between two non-U.S. persons where 

one or both are conducting dealing 

activity within the United States. 

B. The Dodd-Frank Act 

As discussed in the Cross-Border 

Proposing Release, the 2008 financial 

crisis highlighted significant issues in 

the over-the-counter (‘‘OTC’’) 

derivatives markets, which had 

experienced dramatic growth in the 

years leading up to the crisis and are 

capable of affecting significant sectors of 

the U.S. economy.10 The Dodd-Frank 

Act was enacted, among other reasons, 

to promote the financial stability of the 

United States by improving 

accountability and transparency in the 

financial system, including in 

connection with swaps and securitybased swaps.11

Title VII provides for a 

comprehensive new regulatory 

framework for swaps and security-based 

swaps. Under this framework, the 

Commodity Futures Trading 

Commission (‘‘CFTC’’) regulates 

‘‘swaps’’ while the Commission 

regulates ‘‘security-based swaps,’’ and 

the Commission and CFTC jointly 

regulate ‘‘mixed swaps.’’ The new 

framework encompasses the registration 

and comprehensive regulation of dealers 

and major participants, as well as 

requirements related to clearing, trade 

execution, regulatory reporting, and 

public dissemination.12 Security-based 

swap transactions are largely crossborder in practice,13 and the various 

market participants and infrastructures 

operate in a global market. To ensure 

that our regulatory framework 

appropriately reflects and addresses the 

nature and extent of the potential 

impact that the global market can have 

on U.S. persons and the U.S. financial 

system, it is critically important that we 

provide market participants with clear 

rules and guidance regarding how the 

regulatory framework mandated by Title 

VII will apply in the cross-border 

context. 

In developing these final rules and 

guidance, we have consulted and 

coordinated with the CFTC, the 

prudential regulators,14 and foreign 

regulatory authorities in accordance 

with the consultation provisions of the 

Dodd-Frank Act,15 and more generally 

as part of our domestic and 

international coordination efforts.16

Commission staff has participated in 

numerous bilateral and multilateral 

discussions with foreign regulatory 

authorities addressing the regulation of 

OTC derivatives.17 Through these 

discussions and the Commission staff’s 

participation in various international 

task forces and working groups,18 we 

have gathered information about foreign 

regulatory reform efforts and the 

possibility of conflicts and gaps, as well 

as inconsistencies and overlaps, 

between U.S. and foreign regulatory 

regimes. We have taken this information 

into consideration in developing the 

final rules and guidance. 

C. The Cross-Border Proposing Release 

and the CFTC Cross-Border Guidance 

In expressing our preliminary views 

regarding the application of Title VII to 

security-based swap activity carried out 

in the cross-border context (including to 

persons engaged in such activities), the 

Cross-Border Proposing Release 

recognized that the security-based swap 

market is global in nature and that it 

developed prior to the enactment of the 

Dodd-Frank Act.19 The proposal further 

recognized that the rules we adopt and 

guidance we provide regarding the 

cross-border application of Title VII 

could significantly affect the global 

security-based swap market.20

Reflecting the range of regulatory 

requirements that Title VII imposes 

upon the security-based swap market, 


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Federal Register / Vol. 79, No. 155 / Tuesday, August 12, 2014 / Rules and Regulations 47281 

21See ‘‘Interpretive Guidance and Policy 

Statement Regarding Compliance With Certain 

Swap Regulations’’ (Jul. 17, 2013), 78 FR 45292 (Jul. 

26, 2013) (‘‘CFTC Cross-Border Guidance’’). 

22The CFTC Cross-Border Guidance currently is 

subject to legal challenge. See Complaint, Securities 

Indus. & Fin. Mkts. Ass’n. v. CFTC, No. 1:13-cv1916 (D.D.C. filed Dec. 4, 2013). 

23See section III.B, infra. 

24The comment letters are located at: http://

www.sec.gov/comments/s7-02-13/s70213.shtml. 

The majority of those commenters addressed, at 

least in part, the definitional issues that are the 

subject of this release. A number of commenters 

also addressed aspects of the proposal that are 

outside the scope of this release, and a few of those 

commenters only addressed issues that were 

outside the scope of this release (for example, 

addressing only proposed Regulation SBSR). We 

will consider those comments in connection with 

the relevant rulemakings. 

25See, e.g., Managed Funds Assoc. and 

Alternative Investment Management Assoc. (‘‘MFA/ 

AIMA’’) Letter at 3 (‘‘We recognize that there are 

differences between the Commission’s proposed 

approach and the CFTC Cross-Border Guidance, 

and we expect that other international regulators 

will similarly issue proposals related to the crossborder application of their regulations. Thus, in 

light of the global nature of the derivatives market, 

we urge continued harmonization with the CFTC 

and other regulatory authorities with respect to the 

extraterritorial scope of all these regimes. In 

particular, we encourage international coordination 

of substituted compliance regimes to ensure 

appropriate recognition of comparable regulations, 

create practical and administrable frameworks, and 

alleviate duplicative regulation.’’ (footnotes 

omitted)). See also letter from six members of the 

United States Senate at 2 (stating that there should 

be no gaps or loopholes between the Commission’s 

and the CFTC’s rules); Futures and Options 

Association (‘‘FOA’’) Letter at 8 (urging the 

Commission and the CFTC ‘‘to coordinate, to the 

extent possible, on their approaches in order to 

minimise distortions or other unintended 

consequences for market participants’’); letter from 

Senator Jeffrey A. Merkley, et al., Congress of the 

United States (Aug. 6, 2013). 

Some commenters generally suggested that we 

harmonize with aspects of the CFTC Cross-Border 

Guidance, but also expressed preferences for 

particular elements of our proposed approach. See, 

e.g., Institute of International Bankers (‘‘IIB’’) Letter 

at 3–4 (generally emphasizing the need for 

consistency with the CFTC and European Securities 

and Markets Authority (‘‘ESMA’’) approaches, 

unless the SEC requirement is more flexible than 

those other requirements). One commenter took the 

view that the Commission’s rules should be at least 

as strong as the CFTC Cross-Border Guidance, but 

should go further than the CFTC wherever 

necessary. See Better Markets (‘‘BM’’) Letter. See 

also Chris Barnard Letter at 2 (recommending that 

the Commission and the CFTC propose one set of 

rules applicable to cross-border activities to avoid 

duplicative and conflicting rules). 

26See notes 192–224, infra, and accompanying 

text. 

27As noted above, these final rules and guidance 

do not address the application of the ‘‘transaction 

conducted within the United States’’ concept to the 

dealer definition. We instead anticipate soliciting 

additional public comment regarding the issue. 

28For example, a few commenters took the view 

that cost-benefit principles weighed in favor of 

consistency with the CFTC Cross-Border Guidance. 

See Securities Industry and Financial Markets 

Association/Futures Industry Association/Financial 

Services Roundtable (‘‘SIFMA/FIA/FSR’’) Letter at 

3; PensionsEurope Letter (incorporating by 

reference SIFMA/FIA/FSR Letter; all references to 

SIFMA/FIA/FSR Letter incorporate reference to 

PensionsEurope Letter); IIB Letter at 2, 3. One 

commenter further took the view that cost-benefit 

principles merited rejection of the use of the 

‘‘transaction conducted within the United States’’ 

concept. See SIFMA/FIA/FSR Letter at 3. See also 

Chris Barnard Letter at 2 (suggesting that there is 

insufficient administrative, legal, or economic 

rationale for having ‘‘very different rules’’ of crossborder application between the SEC and the CFTC); 

Coalition for Derivatives End-Users (‘‘CDEU’’) Letter 

at 2 (stating that conflicting regulatory regimes will 

result in increased compliance and regulatory costs 

and an inefficient financial system); Association of 

Financial Guaranty Insurers (‘‘AFGI’’) Letter, dated 

August 20, 2013 (‘‘AFGI Letter I’’) at 2 (stating that 

the security-based swap dealer and major securitybased swap participant regime would be disruptive 

and have financial consequences for guaranty 

insurers and their counterparties who have legacy 

transactions with a projected run-off date in the 

near future); AFGI letter, dated July 22, 2013 

(‘‘AFGI Letter II’’) at 4 (incorporated by reference in 

AFGI Letter I); AFGI letter, dated February 15, 2013 

(‘‘AFGI Letter III’’) at 4 (incorporated by reference 

in AFGI Letter I). 

One commenter conversely argued that, in lieu of 

cost-benefit principles, the Commission instead 

should be guided by public interest and investor 

protection principles, as well as the Dodd-Frank 

Act’s intent to increase financial system soundness 

and prevent another financial crisis. See BM Letter 

at 4, 37–45 (stating, inter alia, that ‘‘Congress 

passed the Dodd-Frank Act knowing full well that 

it would impose significant costs on industry, yet 

it determined those costs were not only justified but 

necessary to stabilize our financial system and 

avoid another financial crisis’’). 

One commenter challenged the adequacy— 

indeed, the existence—of the cost-benefit analysis 

in the proposing release. See CDEU Letter at 6 (‘‘To 

better understand the negative effects of imposing 

conflicting rules on the market, the SEC should 

conduct a direct cost-benefit analysis of the 

conflicting rule regimes (e.g., with the European 

Market Infrastructure Regulation and the CFTC’s 

cross-border guidance). Instead, the SEC asks the 

public to conduct such an analysis for the SEC: 

‘what would be the economic impact, including the 

costs and benefits, of these differences on market 

participants . . . ?’ ’’). 

29See BM Letter at 2–3, 7–8; CDEU Letter at 5. 

30See Americans for Financial Reform (‘‘AFR’’) 

Letter, dated August 22, 2013 (‘‘AFR Letter I’’) at 3– 

4 (criticizing the proposal as having failed to apply 

the rules based on the geographic location of the 

entity ultimately responsible for the resulting 

liabilities, and stating that the rules should apply 

to transactions engaged in by ‘‘guaranteed foreign 

subsidiaries of U.S. entities’’). 

31See BM Letter at 7–8 (stating that the proposal 

was the result of unwarranted and inappropriate 

concessions, such as with regard to the application 

of the de minimis threshold to U.S.-guaranteed 

entities). See also Karim Shariff letter at 1 (stating 

that the proposal will allow banks to take risks that 

will lead to an economic collapse). 

the Cross-Border Proposing Release 

addressed the cross-border application 

of: (a) The de minimis exception to the 

‘‘security-based swap dealer’’ definition; 

(b) the entity-level and transaction-level 

requirements applicable to securitybased swap dealers (e.g., margin, 

capital, and business conduct 

requirements); (c) the ‘‘substantial 

position’’ and ‘‘substantial counterparty 

exposure’’ thresholds for the ‘‘major 

security-based swap participant’’ 

definition and the requirements 

applicable to major participants; (d) the 

registration of security-based swap 

clearing agencies and mandatory 

clearing requirements; (e) the 

registration of security-based swap 

execution facilities and mandatory trade 

execution requirements; and (f) the 

registration of security-based swap data 

repositories and regulatory reporting 

and public dissemination requirements. 

The proposal also addressed the 

potential for market participants to 

satisfy certain of those Title VII 

requirements by complying with 

comparable foreign rules as a substitute. 

This rulemaking establishes a process 

for submission of such requests. 

Following the Commission’s proposal, 

the CFTC issued guidance regarding 

Title VII’s application to cross-border 

swap activity.21 The CFTC Cross-Border 

Guidance differed from the 

Commission’s proposed rules in certain 

ways, including, as discussed below, 

with regard to the meaning of ‘‘U.S. 

person,’’ the cross-border application of 

the de minimis exception to the dealer 

definition, the cross-border application 

of the major participant definition, and 

the process for submitting substituted 

compliance requests.22

Certain foreign regulators also have 

addressed or are in the process of 

addressing issues related to the crossborder implementation of requirements 

applicable to OTC derivatives.23

D. Comments on the Proposal 

The Commission received 36 

comments in connection with the 

proposal.24 Several of the commenters 

addressed differences between the SEC’s 

proposed rules and the CFTC CrossBorder Guidance, and urged the 

Commission to harmonize its rules with 

the approaches taken by the CFTC and 

by foreign regulators.25

Many of those commenters 

particularly focused on differences 

between the two regulators’ meanings of 

the term ‘‘U.S. person,’’ with several 

suggesting that we change our proposed 

definition to align with the CFTC’s 

approach.26 A number of commenters 

also addressed the definition of 

‘‘transaction conducted within the 

United States,’’ with several opposing 

any use of the concept as part of the 

Commission’s rules.27

Commenters further raised a number 

of more general concerns in connection 

with the proposal, including concerns 

regarding cost-benefit issues,28 the 

clarity of the proposal as a whole,29 the 

link between the rules and the location 

of the associated risk,30 and perceived 

concessions to the financial industry.31

In addition, commenters addressed 

issues specific to the cross-border 


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32See, e.g., BM Letter at 3, 20–21, 28 (stating that 

transactions conducted through foreign branches of 

U.S. dealers with non-U.S. persons should be 

subject to external business conduct requirements, 

and that margin should be treated as a transactionlevel requirement); SIFMA/FIA/FSR Letter at A–22 

to A–26 (addressing application of margin, 

segregation, external business conduct and certain 

other requirements). 

33See, e.g., BM Letter at 3, 21–22 (criticizing 

exceptions from mandatory clearing and trade 

execution requirements); SIFMA/FIA/FSR Letter at 

A–38 to A–52 (in part urging that application of 

regulatory reporting, public dissemination, trade 

execution and clearing requirements should follow 

the same rules as external business conduct 

requirements). 

34See, e.g., AFR Letter I at 8, 12 (opposing 

rationale for substituted compliance, and noting 

need for the Commission to retain discretion to find 

a lack of comparability based on substantive 

enforcement issues); AFR letter to CFTC, dated 

August 27, 2012 (‘‘AFR Letter II’’) (stating that 

CFTC should narrow the scope of substituted 

compliance) (incorporated by reference in AFR 

Letter I); Michael Greenberger letter to CFTC, dated 

February 6, 2013 at 13 (‘‘Greenberger Letter I’’) 

(stating that substituted compliance should be a last 

resort and that the CFTC regime be enforced 

vigorously) (incorporated by reference in AFR 

Letter I); Michael Greenberger letter to CFTC, dated 

August 27, 2012 at 8, 19–23 (‘‘Greenberger Letter 

II’’) (explaining that international comity does not 

require that the CFTC exempt foreign subsidiaries 

from compliance with U.S. financial regulation) 

(incorporated by reference in AFR Letter I); BM 

Letter at 3, 26–27 (questioning authority for 

substituted compliance and suggesting potential for 

loopholes; also stating that substituted compliance 

should not be allowed for transactions with U.S. 

persons or for transactions in the United States and 

urging limited use of exemptive authority; further 

stating that the proposal gave only passing reference 

to foreign supervision and enforcement); SIFMA/

FIA/FSR Letter at A–30 to A–38 (in part supporting 

the approach to focus on similar regulatory 

objectives rather than requiring foreign rules to be 

identical, stating that foreign branches should be 

able to make use of substituted compliance for 

certain purposes, stating that variations in foreign 

supervisory practices should not be assumed to be 

defects, and requesting further clarity regarding 

substituted compliance assessment factors); ESMA 

Letter at 1, 3–4 (suggesting particular expansions of 

the proposed scope of substituted compliance); 

European Commission (‘‘EC’’) Letter (supporting 

‘‘holistic’’ approach toward substituted compliance 

based on comparison of regulatory outcomes). 

35 In this regard, the final rules in a number of 

areas take approaches that are similar to the 

approaches taken by the CFTC in its own crossborder guidance, although independent 

considerations have driven our approaches. 

Moreover, throughout the Cross-Border Proposing 

Release we recognized and solicited comment on 

the differences between our proposal and the 

CFTC’s proposed guidance on the cross-border 

application of swap regulation. As noted above, 

many commenters urged harmonization with 

various aspects of the CFTC’s guidance. We have 

taken these comments into account, and in 

developing final rules we have carefully considered 

the CFTC’s guidance and the underlying policy 

rationales. Further, where we have determined such 

policy rationales and approaches are applicable in 

the context of the market for security-based swaps, 

we have adopted similar approaches to the CFTC 

(see, e.g., application of the de minimis exception 

to non-U.S. persons’ dealing transactions with 

foreign branches of U.S. banks). 

36See section III.A.2, infra (discussing in detail 

the global nature of the security-based swap 

market). 

37The information was made available to the 

Commission under an agreement with the DTCC– 

TIW and in accordance with guidance provided to 

DTCC–TIW by the OTC Derivatives Regulatory 

Forum (‘‘ODRF’’). 

38This figure is based on all price-forming DTCC– 

TIW North American corporate single-name CDS 

transactions. Price-forming transactions include all 

new transactions, assignments, modifications to 

increase the notional amounts of previously 

executed transactions, and terminations of 

previously executed transactions. Transactions 

terminated, transactions entered into in connection 

with a compression exercise, and expiration of 

contracts at maturity are not considered priceforming and are therefore excluded, as are 

application of the entity-level and 

transaction-level requirements for 

dealers,32 as well as requirements 

specific to clearing, trade execution, 

regulatory reporting and public 

disclosure.33 We expect to address those 

comments regarding the relevant 

substantive requirements in subsequent 

rulemakings and guidance regarding the 

relevant substantive requirements. 

Commenters also addressed the 

proposed availability of substituted 

compliance.34 Although today we are 

adopting a procedural rule regarding 

requests for substituted compliance, we 

generally expect to address the potential 

availability of substituted compliance 

for specific Title VII requirements in 

connection with subsequent 

rulemakings regarding each substantive 

requirement. 

We have carefully considered the 

comments received in adopting the final 

rules and providing guidance. Our final 

rules and guidance further reflect 

consultation with the CFTC, prudential 

regulators, and foreign regulatory 

authorities with regard to the 

development of consistent and 

comparable standards. Accordingly, 

certain aspects of the final rules and 

guidance—such as, for example, the 

treatment of guaranteed affiliates of U.S. 

persons for purposes of the dealer de 

minimis exception—have been modified 

from the proposal.35

II. The Economic, Legal, and Policy 

Principles Guiding the Commission’s 

Approach to the Application of Title 

VII to Cross-Border Activities 

In this section, we describe the most 

significant economic considerations 

regarding the security-based swap 

market that we have taken into account 

in implementing the cross-border 

application of the security-based swap 

dealer and major security-based swap 

participant definitions of Title VII. We 

are sensitive to the economic 

consequences and effects, including 

costs and benefits, of our rules, 

including with respect to the scope of 

our application of the security-based 

swap dealer and major security-based 

swap participant definitions in the 

cross-border context. We have taken 

into consideration the costs and benefits 

associated with persons being brought 

within one of these definitions through 

our cross-border application, as well as 

the costs market participants may incur 

in determining whether they are within 

the scope of these definitions and thus 

subject to Title VII, while recognizing 

that the ultimate economic impact of 

these definitions will be determined in 

part by the final rules regarding the 

substantive requirements applicable to 

security-based swap dealers and major 

security-based swap participants. Some 

of these economic consequences and 

effects stem from statutory mandates, 

while others result from the discretion 

we exercise in implementing the 

mandates. 

A. Economic Considerations in the 

Cross-Border Regulation of SecurityBased Swaps 

1. Economic Features of the SecurityBased Swap Market 

As noted above, the cross-border 

implementation of the rules defining 

security-based swap dealer and major 

security-based swap participant is the 

first in a series of final rules that 

consider the cross-border implications 

of security-based swaps and Title VII. In 

determining how Title VII securitybased swap dealer and major securitybased swap participant definitions 

should apply to persons and 

transactions in the cross-border context, 

the Commission has been informed by 

our analysis of current market activity, 

including the extent of cross-border 

trading activity in the security-based 

swap market. Several key features of the 

market inform our analysis. 

First, the security-based swap market 

is a global market. Security-based swap 

business currently takes place across 

national borders, with agreements 

negotiated and executed between 

counterparties often in different 

jurisdictions (and at times booked, 

managed, and hedged in still other 

jurisdictions). The global nature of the 

security-based swap market is 

evidenced by the data available to the 

Commission.36 Based on market data in 

the Depository Trust and Clearing 

Corporation’s Trade Information 

Warehouse (‘‘DTCC–TIW’’),37 viewed 

from the perspective of the domiciles of 

the counterparties booking credit 

default swap (‘‘CDS’’) transactions, 

approximately 48 percent of price 

forming North American corporate 

single-name CDS transactions 38 from 


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replacement trades and all bookkeeping-related 

trades. 

‘‘North American corporate single-name CDS 

transactions’’ are classified as such because they 

use The International Swaps and Derivatives 

Association, Inc. (‘‘ISDA’’) North American 

documentation. These may include certain 

transactions involving non-U.S. reference entities. 

We do not have sufficiently reliable data on 

reference entity domicile (as opposed to 

counterparty domicile, which we have sought to 

identify in the manner described in note 39, infra) 

to limit our analysis to only U.S. single-name CDS. 

Although the inclusion of transactions involving 

such non-U.S. reference entities introduces some 

noise into the data, we do not believe that this noise 

is sufficiently significant to alter the conclusions we 

draw from the data. 

39The domicile classifications in DTCC–TIW are 

based on the market participants’ own reporting 

and have not been verified by Commission staff. 

Prior to enactment of the Dodd-Frank Act, funds 

and accounts did not formally report their domicile 

to DTCC–TIW because there was no systematic 

requirement to do so. After enactment of the DoddFrank Act, the DTCC–TIW has collected the 

registered office location of the account or fund. 

This information is self-reported on a voluntary 

basis. It is possible that some market participants 

may misclassify their domicile status because the 

databases in DTCC–TIW do not assign a unique 

legal entity identifier to each separate entity. It is 

also possible that the domicile classifications may 

not correspond precisely to treatment as a U.S. 

person under the rules adopted today. 

Notwithstanding these limitations, we believe that 

the cross-border and foreign activity presented in 

the analysis by the Commission’s Division of 

Economic and Risk Analysis demonstrates the 

nature of the single-name CDS market. See section 

III.A.2, infra. 

40 DTCC–TIW classifies a foreign branch or 

foreign subsidiary of a U.S.-domiciled entity as 

foreign-domiciled. Therefore, CDS transactions 

classified as involving a foreign-domiciled 

counterparty in the DTCC–TIW data may include 

CDS transactions with a foreign branch or foreign 

subsidiary of a U.S.-domiciled entity as 

counterparty. 

41Put another way, between 2008 and 2012, a 

vast majority (approximately 87 percent) of North 

American corporate single-name CDS transactions 

directly involved at least one foreign-domiciled 

counterparty. This observation is based on the data 

compiled by the Commission’s Division of 

Economic and Risk Analysis on North American 

corporate single-name CDS transactions from 

DTCC–TIW between January 1, 2008, and December 

31, 2012. See section III.A.2, infra. 

42See id. 

43We note, however, that, in addition to 

classifying transactions between a U.S. counterparty 

and a foreign branch of a U.S. bank as cross-border 

transactions, see note 40, supra, these statistics 

characterize as cross-border transactions some 

transactions in which all or substantially all of the 

activity takes place in the United States and all or 

much of the risk of the transactions ultimately is 

borne by U.S. persons. That is, a transaction is 

classified as cross-border if the legal domicile of at 

least one of the counterparties to the transaction is 

outside the United States, but if the transaction is 

classified as cross-border solely on the basis of legal 

domicile, the risk associated with these transactions 

may still ultimately be borne by U.S. persons. In 

this sense, our estimates of the cross-border 

allocation of security-based swap activity may not 

precisely reflect the proportion of transactions that 

are cross-border in nature. 

44Based on an analysis of 2012 transaction data 

by staff in the Division of Economic and Risk 

Analysis, accounts associated with market 

participants recognized by ISDA as dealers had on 

average 403 counterparties. All other accounts (i.e., 

those more likely to belong to non-dealers) averaged 

four counterparties. 

45See Intermediary Definitions Adopting Release, 

77 FR 30639–42. 

46 In this situation, economic rents are the profits 

that dealers earn by trading with counterparties 

who are less informed. In a market with competitive 

access to information, there is no informational 

premium; dealers only earn a liquidity premium. 

The difference between the competitive liquidity 

premium and the actual profits that dealers earn is 

the economic rent. 

January 2008 to December 2012 were 

cross-border transactions between a 

U.S.-domiciled 39 counterparty and a 

foreign-domiciled counterparty 40 and 

an additional 39 percent of such CDS 

transactions were between two foreigndomiciled counterparties.41 Thus, 

approximately 13 percent of the North 

American corporate single-name CDS 

transactions in 2008–2012 were between 

two U.S.-domiciled counterparties.42

These statistics indicate that, rather than 

being an exception, cross-border North 

American corporate single-name CDS 

transactions are as common as intrajurisdictional transactions in the 

security-based swap market.43

Second, dealers and other market 

participants are highly interconnected 

within this global market. While most 

market participants have only a few 

counterparties, dealers can have 

hundreds of counterparties, consisting 

of both non-dealing market participants 

(e.g., non-dealers, including commercial 

and financial market participants and 

investment funds) and other dealers.44

Furthermore, as described in more 

detail below, the great majority of trades 

are dealer-to-dealer, rather than dealerto-non-dealer or non-dealer-to-nondealer, and a large fraction of singlename CDS volume is between 

counterparties domiciled in different 

jurisdictions. This interconnectedness 

facilitates the use of security-based 

swaps as a tool for sharing financial and 

commercial risks. In an environment in 

which market participants can have 

diverse and offsetting risk exposures, 

security-based swap transactions can 

allow participants to transfer risks so 

that they are borne by those who can do 

so efficiently. The global scale of the 

security-based swap market allows 

counterparties to access liquidity across 

jurisdictional boundaries, providing 

U.S. market participants with 

opportunities to share these risks with 

counterparties around the world. As 

discussed further in section VIII, a broad 

set of counterparties across which risks 

can be shared may result in more 

efficient risk sharing. 

However, these opportunities for 

international risk sharing also represent 

channels for risk transmission. In other 

words, the interconnectedness of 

security-based swap market participants 

provides paths for liquidity and risk to 

flow throughout the system, so that it 

can be difficult to isolate risks to a 

particular entity or geographic segment. 

Because dealers facilitate the great 

majority of security-based swap 

transactions, with bilateral relationships 

that extend to potentially hundreds of 

counterparties, liquidity problems or 

other forms of financial distress that 

begin in one entity or one corner of the 

globe can potentially spread throughout 

the network, with dealers as a central 

conduit. 

Third, as highlighted in the 

Intermediary Definitions Adopting 

Release, dealing activity within the 

market for security-based swaps is 

highly concentrated.45 This 

concentration in large part appears to 

reflect the fact that larger entities 

possess competitive advantages in 

engaging in OTC security-based swap 

dealing activities, particularly with 

regard to having sufficient financial 

resources to provide potential 

counterparties with adequate assurances 

of financial performance. 

The security-based swap market 

developed as an OTC market, without 

centralized trading venues or 

dissemination of pre- or post-trade 

pricing and volume information. In 

markets without transparent pricing, 

access to information confers a 

competitive advantage. In the current 

security-based swap market, large 

dealers and other large market 

participants with a large share of order 

flow have an informational advantage 

over smaller dealers and non-dealers 

who, in the absence of pre-trade 

transparency, observe a smaller subset 

of the market. Greater private 

information about order flow enables 

better assessment of current market 

values by dealers, permitting them to 

extract economic rents from 

counterparties who are less informed.46

Non-dealers are aware of this 

information asymmetry, and certain 

non-dealers—particularly larger entities 

who transact with many dealers—may 

be able to obtain access to competitive 

pricing or otherwise demand a price 

discount that reflects the information 

asymmetry. Typically, however, the 

value of private information (i.e., the 

economic rent or informational 

premium) will be earned by those who 

have the most information. In the case 

of security-based swap markets, it is 

predominantly dealers who observe the 

greatest order flow and benefit from 

market opacity. 


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47See Viral V. Acharya, Lasse H. Pedersen, 

Thomas Philippon, and Matthew Richardson, 

‘‘Measuring Systemic Risk’’ (May 2010), available 

at: http://vlab.stern.nyu.edu/public/static/SRv3.pdf. The authors use a theoretical model of the 

banking sector to show that, unless the external 

costs of their trades are considered, financial 

institutions will have an incentive to take risks that 

are borne by the aggregate financial sector. Under 

this theory, in the context of Title VII, the relevant 

external cost is the potential for risk spillovers and 

sequential counterparty failure, leading to an 

aggregate capital shortfall and breakdown of 

financial intermediation in the financial sector. 

48See Intermediary Definitions Adopting Release, 

77 FR 30616–17 (noting that ‘‘the completion of a 

purchase or sale transaction’’ in the secondary 

equity or debt markets ‘‘can be expected to 

terminate the mutual obligations of the parties,’’ 

unlike security-based swap transactions, which 

often give rise to ‘‘an ongoing obligation to 

exchange cash flows over the life of the 

agreement’’). 

49See Brunnermeier, Markus K., Andrew 

Crockett, Charles A. Goodhart, Avinash Persaud, 

and Hyun Song Shin. ‘‘The Fundamental Principles 

of Financial Regulation.’’ (2009) at 15, available at: 

www.princeton.edu/∼markus/research/papers/

Geneva11.pdf. 

50See Daron Acemoglu, Asuman Ozdaglar & 

Alireza Tahbaz-Salehi, Systemic Risk and Stability 

in Financial Networks (NBER Working Paper No. 

18727, Jan. 2013), available at: http://www.nber.org/ 

papers/w18727. 

51See Giulio Girardi, Craig Lewis, and Mila 

Getmansky, ‘‘Interconnectedness in the CDS 

Market,’’ Division of Economic and Risk Analysis 

White Paper, April 2014, available at http://

www.sec.gov/servlet/sec/dera/staff-papers/whitepapers/credit-defaul-swaps-interconnectivity-04- 

2014.pdf (describing institutional features of credit 

default swaps). 

52The Commission estimates that, of 

approximately 1,000 transacting agents that 

participated in single-name CDS transactions in 

2012, nearly 80 percent of transactions, by notional 

volume, can be attributed to the 13 largest entities. 

See also section III.A.2, infra. 

53We have previously noted that, depending on 

the size of the security-based swap dealer, default 

by a security-based swap dealer ‘‘could have 

adverse spillover or contagion effects that could 

create instability for the financial markets more 

generally.’’ See Capital, Margin, and Segregation 

Requirements for Security-Based Swap Dealers and 

Major Security-Based Swap Participants and Capital 

Requirements for Broker-Dealers, Exchange Act 

Release No. 68071 (Oct. 18, 2012), 77 FR 70214, 

70304 (Nov. 23, 2012) (‘‘Capital and Margin 

Proposing Release’’). 

Taken together, the need for financial 

resources and the private information 

conveyed by order flow suggest that 

new entrants who intend to engage in 

security-based swap dealing activity in 

fact face high barriers to entry. One 

consequence of the current concentrated 

market structure is the potential for risk 

spillovers and contagion, which can 

occur when the financial sector as a 

whole (or certain key segments) 

becomes undercapitalized.47 Unlike 

most other securities transactions, a 

security-based swap gives rise to 

ongoing obligations between transaction 

counterparties during the life of the 

transaction. This means that each 

counterparty to the transaction 

undertakes the obligation to perform the 

security-based swap in accordance with 

its terms and bears counterparty credit 

risk and market risk until the 

transaction expires or is terminated.48

Within this interconnected market, 

participants may have ongoing bilateral 

obligations with multiple 

counterparties, allowing for efficient 

risk-sharing and access to liquidity 

throughout the global network. 

However, a primary risk of the 

integrated market is the potential for 

sequential counterparty failure and 

contagion when one or more large 

market participants become financially 

distressed, causing the market 

participant to default on its obligations 

to its counterparties.49 A default by one 

or more security-based swap dealers or 

major security-based swap participants, 

or even the perceived lack of 

creditworthiness of these large entities, 

could produce contagion, either through 

direct defaults and risk spillovers, 

reduced willingness to extend credit, 

reduced liquidity, or reduced valuations 

for financial instruments. As financial 

distress spreads, the aggregate financial 

system may become undercapitalized, 

hindering its ability to provide financial 

intermediation services, including 

security-based swap intermediation 

services. 

In other words, the failure of a single 

large firm active in the security-based 

swap market can have consequences 

beyond the firm itself. One firm’s 

default may reduce the willingness of 

dealers to trade with, or extend credit 

to, both non-dealers and other dealers. 

By reducing the availability of sufficient 

credit to provide intermediation 

services, and by reducing transaction 

volume that reveals information about 

underlying asset values, the effects of a 

dealer default may, through asset price 

and liquidity channels, spill over into 

other jurisdictions and even other 

markets in which security-based swap 

dealers participate. 

Given that firms may be expected to 

consider the implications of securitybased swap activity only on their own 

operations, without considering 

aggregate financial sector risk,50 the 

financial system may end up bearing 

more risk than the aggregate capital of 

the intermediaries in the system can 

support and may cease to function 

normally during times of market 

distress. For example, during times of 

financial distress a dealer’s leverage 

constraints may begin to bind, either 

because lenders require more collateral 

or because market declines erode a 

dealer’s capital position, forcing the 

dealer to de-lever, either by selling 

assets or raising additional capital. 

Without adequate capital, the dealer 

may be unable to intermediate trades, 

potentially reducing liquidity in the 

markets it serves. Security-based swap 

positions replicate leveraged positions 

in the underlying asset, with a small 

amount of capital supporting large 

notional exposures.51 Given the 

leveraged nature of swap transactions, 

and the concentrated structure of the 

dealer market, in which a large amount 

of highly leveraged risk exposures may 

be concentrated in a relatively small 

number of entities that are responsible 

for the vast majority of global dealing 

activity,52 the potential consequences 

arising from financial instability in the 

security-based swap market may be 

acute. 

In sum, the security-based swap 

market is characterized by a high level 

of interconnectedness, facilitating risk 

sharing by counterparties. Further, it is 

a global market, in which the potential 

for significant inter-jurisdictional 

activity and access to liquidity may 

enhance risk sharing among 

counterparties. At the same time, 

channels for risk sharing also represent 

channels for risk transmission. The 

global nature of this market, combined 

with the interconnectedness of market 

participants, means that liquidity 

shortfalls or risks that begin pooling in 

one corner of the market can potentially 

spread beyond that corner to the entire 

security-based swap market, with 

dealers as a key conduit. Because 

dealers and major participants are a 

large subset of all participants in the 

global security-based swap market and 

facilitate the majority of transactions 

(and thus reach many counterparties), 

concerns surrounding these types of 

spillovers are part of the framework in 

which we analyze the economic effects 

of our final rules implementing the 

security-based swap dealer and major 

participant definitions in the crossborder context.53

2. Context for Regulatory 

Determinations 

In determining how Title VII 

requirements should apply to persons 

and transactions in a market 

characterized by the types of risks we 

have described, we are aware of the 

potentially significant tradeoffs inherent 

in our policy decisions. Our primary 

economic considerations for 

promulgating rules and guidance 

regarding the application of the 

security-based swap dealer and major 

participant definitions to cross-border 

activities include the effect of our 

choices on efficiency, competition, and 


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54See Exchange Act section 3(f). 55Title VII imposes financial responsibility and 

risk mitigation requirements on registered securitybased swap dealers and major security-based swap 

participants. As we noted in proposing rules 

regarding capital and margin requirements 

applicable to security-based swap dealers, ‘‘the 

capital and margin requirements in particular are 

broadly intended to work in tandem to strengthen 

the financial system by reducing the potential for 

default to an acceptable level and limiting the 

amount of leverage that can be employed by 

[security-based swap dealers] and other market 

participants.’’ See Capital and Margin Proposing 

Release, 77 FR 70304. We also noted that 

‘‘[r]equiring particular firms to hold more capital or 

exchange more margin may reduce the risk of 

default by one or more market participants and 

reduce the amount of leverage employed in the 

system generally, which in turn may have a number 

of important benefits.’’ Id. 

56As we noted in the Cross-Border Proposing 

Release, the Commission generally understands the 

‘‘U.S. financial system’’ to include the U.S. banking 

system and the U.S. financial markets, including 

the U.S. security-based swap market, the traditional 

securities markets (e.g., the debt and equity 

markets), and the markets for other financial 

activities (e.g., lending). See Cross-Border Proposing 

Release, 78 FR 30980 n.97. 

57See note 139, infra, and accompanying text. 

58See note 44, supra. 

59As discussed above, the global security-based 

swaps network, characterized by multiple bilateral 

relationships between counterparties, has the 

potential for risk spillovers and sequential 

counterparty failure. These exposures are not 

unique to the U.S. financial system. Indeed, the 

global scope of the security-based swap market 

suggests that, given our territorial approach to Title 

VII, there will be the fewest potential gaps in 

coverage if other jurisdictions also adopt similar 

comprehensive and comparable derivative 

regulations. See Section III.B for a discussion of 

global regulatory efforts in this space. 

60To the extent that registered dealers are 

ultimately subject to more extensive reporting and 

public dissemination requirements than other 

market participants under Title VII, these 

requirements may also alter the incentives of 

market participants to transact with registered 

dealers if, for example, public dissemination 

requirements reveal information that participants 

wish to treat as confidential about trading strategies 

or future hedging needs. Incentives for these 

participants to avoid registered dealers could 

potentially isolate liquidity to less transparent 

corners of the market. 

61See, e.g., Exchange Act sections 15F(e), (f), (h) 

(providing that security-based swap dealers and 

major security-based swap participants be subject to 

requirements relating to capital and margin, 

reporting and recordkeeping, and business 

conduct). 

62Any forward-looking analysis of the costs and 

benefits that flow from these Title VII requirements 

necessarily encompasses uncertain elements, since 

the final requirements have not been adopted. For 

example, whether foreign security-based swap 

dealers will be subject to the full range of Title VII 

requirements in all of their transactions will be 

determined in subsequent rulemaking. 

capital formation,54 the potential risks 

of security-based swaps to U.S. market 

participants that could affect financial 

stability,55 the level of transparency and 

counterparty protection in the securitybased swap market, and the costs to 

market participants.56

As noted above, participants may use 

security-based swaps to manage 

financial and commercial risks and 

benefit from a liquid market with broad 

participation that facilitates risk sharing. 

We also recognize the possibility that 

the same channels that enable risk 

sharing also facilitate the transmission 

of risks and liquidity problems that 

begin pooling in one geographic 

segment of the market to the global 

security-based swap market. As 

described more fully in section III.A.1, 

U.S. entities may take on risk exposures 

in the security-based swap market by 

transacting with non-U.S. counterparties 

through non-U.S. affiliates. This 

suggests that an approach that applied 

these Title VII definitions to 

transactions only where all activity 

occurs inside the United States would 

have little effect in addressing the risks 

associated with security-based swaps, 

including risks and associated economic 

consequences flowing from contagion 

that may originate abroad and reach 

U.S. market participants through 

security-based swap activities and the 

multiple bilateral relationships that may 

form as a result of those activities. The 

global reach of security-based swap 

dealers, including U.S. dealers, 

participating in the vast majority of 

trades 57 and extending to upwards of 

hundreds of counterparties,58 provides 

paths for these risks to flow back into 

the United States.59

At the same time, the Commission 

recognizes that the regulatory 

requirements we adopt for securitybased swap dealers and major 

participants under Title VII may not 

reach all market participants that act as 

dealers or that have positions that pose 

considerable risk concerns in the global 

security-based swap markets. These 

limits to the application of Title VII 

raise several issues. First, market 

participants may shift their behavior. 

Final Title VII requirements may impose 

significant direct costs on participants 

falling within the security-based swap 

dealer and major security-based swap 

participant definitions that are not 

borne by other market participants, 

including costs related to capital and 

margin requirements, regulatory 

reporting requirements, and business 

conduct requirements. The costs of 

these requirements may provide 

economic incentive for some market 

participants falling within the dealer 

and major participant definitions to 

restructure their security-based swap 

business to seek to operate wholly 

outside of the Title VII regulatory 

framework by exiting the security-based 

swap market in the United States and 

not transacting with U.S. persons, 

potentially fragmenting liquidity across 

geographic boundaries.60 Conversely, 

such incentives potentially may be 

mitigated by the fact that capital and 

margin requirements, counterparty 

protections, and business conduct 

standards required by Title VII 61 may 

promote financial stability and lead to 

non-dealer market participants 

exhibiting a preference for transacting 

with registered dealers and major 

participants. 

Second, to the extent that other 

jurisdictions may adopt requirements 

with different scopes or on different 

timelines, the requirements we adopt 

may also result in competitive 

distortions. That is, differences in 

regulatory requirements across 

jurisdictions, or the ability of certain 

non-U.S. market participants to avoid 

security-based swap dealer regulation 

under Title VII, may generate 

competitive burdens and provide 

incentives for non-U.S. persons to avoid 

transacting with U.S. persons. 

Third, key elements of the rules 

adopted today—the definition of ‘‘U.S. 

person,’’ as well as rules covering 

treatment of guaranteed transactions, 

transactions with foreign branches, 

transactions conducted through conduit 

affiliates, and cleared anonymous 

transactions, and rules covering 

aggregation standards—all have 

implications for how U.S. and non-U.S. 

entities perform their de minimis and 

major participant threshold calculations 

and may affect the number of 

participants who ultimately register as 

security-based swap dealers or major 

security-based swap participants. The 

number of persons required to register 

will affect the costs and benefits of the 

substantive Title VII requirements that 

will ultimately be adopted; depending 

on the final rules, more or fewer 

entities, and therefore more or fewer 

security-based swaps, will be subject to 

Title VII requirements applicable to 

security-based swap dealers and major 

security-based swap participants.62 Title 

VII requires the Commission to create a 

new regulatory regime that includes 

capital, margin, registration and 

reporting requirements aimed at 

increasing transparency and customer 

protections as well as mitigating the risk 

of financial contagion. Each of these 

requirements will impose new costs and 

regulatory burdens on persons that 

engage in security-based swap dealing 

activity at levels above the de minimis 

thresholds and on persons whose 

security-based swap positions are large 

enough to cause them to be major 

security-based swap participants. 

We expect that these requirements’ 

application to security-based swap 


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63Title VII imposes a number of business conduct 

requirements designed to protect counterparties to 

security-based swaps, including disclosures about 

material risks and conflicts of interest, disclosures 

concerning the daily mark, or value of the position, 

and segregation of customer assets and collateral 

from the dealer’s assets. 

64See section IV.I.1 for a discussion of how we 

expect the cross-border application of the de 

minimis exception to alter the number of entities 

required to register with the Commission, and how 

that may affect the programmatic costs and benefits 

of Title VII. 

65 In adopting the definition of ‘‘security-based 

swap dealer,’’ we intended to determine the set of 

entities in the security-based swap market for 

whom regulation ‘‘is warranted due to the nature 

of their interactions with counterparties, or is 

warranted to promote market stability and 

transparency.’’ See Intermediary Definitions 

Adopting Release, 77 FR 30726. Similarly, in 

adopting rules governing the ‘‘major security-based 

swap participant’’ definition, we sought to impose 

regulations applicable to major security-based swap 

participants in a way that reflects ‘‘when it would 

be ‘prudent’ that particular entities be subject to 

monitoring, management and oversight of entities 

that may be systemically important or may 

significantly impact the U.S. financial system.’’ See 

id. at 30666. 

Future rulemakings that depend on these 

definitions are intended to address the 

transparency, risk, and customer protection goals of 

Title VII. For example, to further risk mitigation in 

the security-based swap market, we explained that 

‘‘section 15F(e) of the Exchange Act and related 

rules impose capital and margin requirements on 

dealers and major participants, which will reduce 

the financial risks of these institutions and 

contribute to the stability of the security-based 

swap market in particular and the U.S. financial 

system more generally.’’ See id. at 30723. 

66See note 11, supra. See also Pub. L. 111–203 

sections 701–774 (providing for, among other 

things, a comprehensive new regulatory framework 

for security-based swaps, including by: (i) Providing 

for the registration and comprehensive regulation of 

security-based swap dealers and major securitybased swap participants; (ii) imposing clearing and 

trade execution requirements on security-based 

swaps, subject to certain exceptions; and (iii) 

creating real-time reporting and public 

dissemination regimes for security-based swaps). 

67See section II.A, supra (noting that cross-border 

activity accounts for the majority of security-based 

swaps involving U.S. firms). 

68For example, a single financial firm engaged in 

dealing activity may utilize two or more entities 

domiciled in different countries to effectuate a 

single transaction with a counterparty that may 

similarly use multiple entities domiciled in 

different countries. 

69See Cross-Border Proposing Release, 78 FR 

30984. 

70See id. at 30983. Exchange Act section 30(c) 

was added to the Act by Title VII and provides, 

among other things, that ‘‘[n]o provision of [Title 

VII] . . . shall apply to any person insofar as such 

person transacts a business in security-based swaps 

without the jurisdiction of the United States,’’ 

unless that business is transacted in contravention 

of rules prescribed to prevent evasion of Title VII. 

See section 30(c) of the Exchange Act, 15 U.S.C. 

78dd(c), added by section 772(b) of the Dodd-Frank 

Act. 

71See Cross-Border Proposing Release, 78 FR 

30984–87. 

72We also interpret what it means for a person 

to ‘‘transact a business in security-based swaps 

without the jurisdiction of the United States’’ as set 

forth in Exchange Act section 30(c). 15 U.S.C. 

78dd(c). 

dealers and major security-based swap 

participants subject to Title VII will be 

associated with a number of benefits to 

the security-based swap market and 

security-based swap market 

participants, including transparency, 

accountability, and increased 

counterparty protections.63

Nevertheless, as we discuss later in this 

release, the de minimis rules for nonU.S. persons could allow certain nonU.S. entities to avoid the costs of dealer 

registration, which could reduce the 

number of entities that register as 

security-based swap dealers, relative to 

the Commission’s estimates in the 

Intermediary Definitions Adopting 

Release. Although the number of 

entities that are not required to register 

will depend on the availability of the de 

minimis exclusions, we believe that, to 

the extent that the final rules change the 

number of eventual registrants, the 

ultimate programmatic costs and 

benefits expected from Title VII may 

differ from those that were described in 

the Intermediary Definitions Adopting 

Release.64

Finally, the final rules determining 

how non-U.S. persons must perform 

their de minimis and major participant 

threshold calculations may face limits 

as to how precisely they address the risk 

mitigation goals of Title VII that are 

reflected in our rules implementing the 

de minimis exception and the ‘‘major 

security-based swap participant’’ 

definition. On the one hand, the scope 

of dealer and major participant 

regulation under Title VII may be 

subject to limitations on the ability to 

control risk because the global nature of 

counterparty interconnections means 

that it is difficult to prevent risk that 

pools in one geographic segment of the 

market from flowing throughout the 

entire security-based swap network. On 

the other hand, there is a possibility that 

the rules defining the scope of dealer 

and major participant regulation, 

including the territorial application of 

the definitions, may capture certain 

activity that does not represent risk to 

the U.S. financial system. Because these 

rules and guidance implementing Title 

VII regulatory definitions will not 

capture all transactions and all entities 

that engage in security-based swap 

activity, these rules and guidance 

therefore may create incentives for those 

entities at the boundaries of the 

definitions to restructure their business 

in a way that allows them to operate 

outside the scope of Title VII. However, 

as we described in the Intermediary 

Definitions Adopting Release, we have 

sought to implement the statutory dealer 

and major participant definitions in 

such a way as to impose the substantive 

rules of Title VII on those entities most 

likely to contribute to those risks that 

Title VII is intended to address without 

imposing unnecessary burdens on those 

who do not pose comparable risks to the 

U.S. financial system.65

B. Scope of Title VII’s Application to 

Cross-Border Security-Based Swap 

Activity 

Congress has given the Commission 

authority in Title VII to implement a 

security-based swap regulatory 

framework to address the potential 

effects of security-based swap activity 

on U.S. market participants, the 

financial stability of the United States, 

on the transparency of the U.S. financial 

system, and on the protection of 

counterparties.66 The global nature of 

the security-based swap market and the 

high proportion of cross-border 

transactions in that market 67 mean that 

much of this activity occurs at least in 

part outside the United States and 

frequently involves persons that are 

incorporated, organized, or established 

in a location outside the United States.68

In light of these market realities, we 

noted in the proposal that applying Title 

VII only to persons incorporated, 

organized, or established within the 

United States or only to security-based 

swap activity occurring entirely within 

the United States would inappropriately 

exclude from regulation a majority of 

security-based swap activity that 

involves U.S. persons or otherwise 

involves conduct within the United 

States, even though such activity raises 

the types of concerns that we believe 

Congress intended to address through 

Title VII.69

Because some commenters had, prior 

to the proposal, argued that section 

30(c) of the Exchange Act limited our 

ability to reach certain types of activity 

occurring at least in part outside the 

United States,70 we discussed in some 

detail in the proposal our preliminary 

views on the appropriate approach to 

determining whether certain securitybased swap activity that involves some 

conduct outside the United States also 

occurs within the United States for 

purposes of Title VII.71 In this 

subsection, we discuss comments 

received on this question following 

publication of our proposal and explain 

our final views—which remain largely 

unchanged from the proposal—on the 

proper approach to determining 

whether cross-border security-based 

swap activity occurs, in relevant part, 

within the United States.72 We then 

briefly describe how this framework 


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73The following discussion does not reflect a 

comprehensive analysis of the full range of 

transactions that may fall within our territorial 

approach to application of Title VII or of the full 

range of substantive requirements to which such 

transactions may be subject under Title VII. 

It is important to note that our approach to the 

application of Title VII security-based swap dealer 

and major security-based swap participant 

registration requirements does not limit, alter, or 

address the cross-border reach or extraterritorial 

application of any other provisions of the federal 

securities laws, including Commission rules, 

regulations, interpretations, or guidance. 

74See BM Letter at 6. 

75See IIB Letter at 4 (noting, inter alia, that 

section 712 of the Dodd-Frank Act requires 

consultation and coordination between the SEC, 

CFTC, and prudential regulators, and arguing that 

differences between Exchange Act section 30(c) and 

CEA section 2(i) do not require the Commission to 

take an approach to regulation of cross-border 

security-based swap activity that is ‘‘fundamentally 

different’’ from that taken by the CFTC); SIFMA/

FIA/FSR Letter at A–4 to A–5 (stating that Exchange 

Act section 30(c) must be read to harmonize with 

CFTC approach in light of congressional intent that 

rules be harmonized); FOA Letter at 7 (referring to 

this element of the SIFMA/FIA/FSR Letter). Section 

2(i) of the CEA provides, inter alia, that Title VII 

requirements will not apply to activities outside the 

United States unless they ‘‘have a direct and 

significant connection with activities in, or effect 

on, commerce of the United States.’’ 7 U.S.C. 2(i). 

The CFTC Cross-Border Guidance was adopted as 

an interpretation of this provision. See CFTC CrossBorder Guidance, 78 FR 45295. 

76See SIFMA/FIA/FSR Letter at 4, A–4 to A–6 

(acknowledging that proposed application of Title 

VII to transactions conducted within the United 

States between two non-U.S. persons is consistent 

with Commission practice in traditional securities 

markets but arguing that similar language in 

sections 30(b) and 30(c) of the Exchange Act should 

be read differently, given the different nature of 

security-based swap transactions and focus of Title 

VII on risk); FOA Letter at 7 (referring to this 

element of the SIFMA/FIA/FSR Letter). These 

commenters argue that we should focus on risks to 

the U.S. financial system and the protection of U.S. 

counterparties, and that neither concern is raised by 

transactions between two non-U.S. persons that 

happen to occur within the United States. See 

SIFMA/FIA/FSR Letter at A–5 to A–6. We continue 

to believe that this argument does not account for 

the full range of concerns addressed by Title VII, 

but, as discussed further below, we are not 

addressing issues surrounding the proposed 

‘‘transaction conducted within the United States’’ 

definition in this release. 

Because, as discussed above, we are not adopting 

‘‘transaction conducted within the United States’’ 

as part of the final rule, we anticipate considering 

these comments in connection with soliciting 

additional public comment. 

77See id. at A–11 (stating that a guarantee may 

not necessarily import risk into the United States 

and thus creates ‘‘no nexus for purposes of [s]ection 

30(c) of the Exchange Act’’). 

78See Mitsubishi UFJ Financial Group (‘‘MUFJ’’) 

Letter at 4–5 (urging the Commission not to require 

both participants in a foreign joint venture to 

aggregate the dealing transactions of the joint 

venture for purposes of the dealer de minimis 

calculation). 

79See Morrison v. National Australia Bank, Ltd., 

130 S. Ct. 2869, 2884 (2010) (identifying focus of 

statutory language to determine what conduct was 

relevant in determining whether the statute was 

being applied to domestic conduct). 

Section 772(b) of the Dodd-Frank Act amends 

section 30 of the Exchange Act to provide that ‘‘[n]o 

provision of [Title VII] * * * shall apply to any 

person insofar as such person transacts a business 

in security-based swaps without the jurisdiction of 

the United States,’’ unless that business is 

transacted in contravention of rules prescribed to 

prevent evasion of Title VII. See section 30(c) of the 

Exchange Act. As noted above, some commenters 

suggest that statutory language requiring us to 

coordinate and consult with the CFTC also requires 

us to interpret section 30(c) of the Exchange Act in 

a manner similar to the CFTC’s interpretation of 

CEA section 2(i). See note 75, supra. However, in 

light of the differences between Exchange Act 

section 30(c) and CEA section 2(i), we do not find 

this argument persuasive. As noted above, however, 

in developing final rules we have carefully 

considered the CFTC’s guidance and the underlying 

policy rationales, consistent with the statutory 

requirement that we consult and coordinate with 

the CFTC. 

80The Dodd-Frank Act provides that the CFTC 

and SEC ‘‘shall further define’’ several terms, 

including ‘‘security-based swap dealer’’ and ‘‘major 

security-based swap participant.’’ Dodd-Frank Act 

section 712(d) (emphasis added). The Commissions 

fulfilled this mandate in the Intermediary 

Definitions Adopting Release. See Intermediary 

Definitions Adopting Release, 77 FR 30973. 

81See e.g., note 11, supra. See also Exchange Act 

section 15F(h) (establishing business conduct 

standards for security-based swap dealers and major 

security-based swap participants). 

82See notes 76–77, supra. 

applies to specific types of transactions 

relevant to the rules we are adopting 

here.73

1. Commenters’ Views 

Prior to our proposal, several 

commenters raised concerns about the 

application of Title VII to security-based 

swap activity in the cross-border context 

and specifically about the possibility 

that we would impose Title VII 

requirements on ‘‘extraterritorial’’ 

conduct. We received only a few 

comments on this issue in response to 

our preliminary views set forth in the 

proposal, and these generally focused 

on the application of section 30(c) of the 

Exchange Act to specific types of 

activity that we proposed to subject to 

Title VII rather than the proposed 

territorial framework more broadly. 

One commenter expressed general 

agreement with our proposed 

guidance.74 Three commenters 

suggested that textual differences 

between section 30(c) of the Exchange 

Act and section 2(i) of the Commodity 

Exchange Act (‘‘CEA’’) do not require 

the Commission to take a different 

approach to application of Title VII to 

cross-border security-based swap 

activity from that taken by the CFTC.75

Two commenters expressed the view 

that section 30(c) of the Exchange Act, 

considered in light of what they 

described as the risk-based focus of Title 

VII, prohibited the Commission from 

imposing Title VII requirements on 

transactions carried out within the 

United States but booked in locations 

outside the United States.76 One 

commenter stated that section 30(c) of 

the Exchange Act prevents us from 

imposing Title VII requirements on 

transactions of guaranteed foreign 

affiliates of U.S. persons.77 One 

commenter argued that section 30(c) 

prevents application of Title VII to 

certain joint ventures.78

2. Scope of Application of Title VII in 

the Cross-Border Context 

We continue to believe that a 

territorial approach to the application of 

Title VII is appropriate. This approach, 

properly understood, is grounded in the 

text of the relevant statutory provisions 

and is designed to help ensure that our 

application of the relevant provisions is 

consistent with the goals that the statute 

was intended to achieve. 

(a) Overview and General Approach 

As in our proposal, our analysis 

begins with an examination of the text 

of the statutory provision that imposes 

the relevant requirement. The statutory 

language generally identifies the types 

of conduct that trigger the relevant 

requirement and, by extension, the 

focus of the statute.79 Once we have 

identified the activity regulated by the 

statutory provision, we can determine 

whether a person is engaged in conduct 

that the statutory provision regulates 

and whether this conduct occurs within 

the United States. When the statutory 

text does not describe the relevant 

activity with specificity or provides for 

further Commission interpretation of 

statutory terms or requirements, this 

analysis may require us to identify 

through interpretation of the statutory 

text the specific activity that is relevant 

under the statute or to incorporate prior 

interpretations of the relevant statutory 

text.80

As noted above, the Dodd-Frank Act 

was enacted, in part, with the intent to 

address the risks to the financial 

stability of the United States posed by 

entities engaged in security-based swap 

activity, to promote transparency in the 

U.S. financial system, and to protect 

counterparties to such transactions.81

These purposes, considered together 

with the specific statutory requirement, 

lead us to conclude that it is appropriate 

to impose the statutory requirements, 

and rules or regulations thereunder, on 

security-based swap activity occurring 

within the United States even if certain 

conduct in connection with the 

security-based swap also occurs in part 

outside the United States. 

Contrary to the views expressed by 

some commenters,82 we do not agree 

that the location of risk alone should 

necessarily determine the scope of an 

appropriate territorial application of 


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83See note 88, infra, and accompanying text 

(describing elements of statutory definition of 

‘‘security-based swap dealer’’); note 90, infra, and 

accompanying text (describing elements of the 

further definition of ‘‘security-based swap dealer’’ 

adopted by the Commission and the CFTC pursuant 

to section 712(d) of the Dodd-Frank Act); Exchange 

Act section 15F(h) (establishing business conduct 

standards for security-based swap dealers). 

84See note 11, supra. 

85Exchange Act section 30(c). 

86See Intermediary Definitions Adopting Release, 

77 FR 30616–30619 (further defining ‘‘securitybased swap dealer’’ by identifying the types of 

activities that characterize dealing and that would 

therefore lead a transaction to be required to be 

included in a person’s de minimis calculation 

under Exchange Act rule 3a71–2). 

87 15 U.S.C. 78c(a)(71). 

88Exchange Act section 3(a)(71)(A), 15 U.S.C. 

78c(a)(71)(A). 

89See Dodd-Frank Act section 712(d)(1). 

90See Intermediary Definitions Adopting Release, 

77 FR 30617–18. 

91 Id. 

92See notes 76–77, supra. 

93Cf. Exchange Act section 30(c) (limiting the 

application of, among other provisions, Title VII to 

‘‘any person insofar as such person transacts a 

business in security-based swaps without the 

jurisdiction of the United States’’). 

94See, e.g., Intermediary Definitions Adopting 

Release, 77 FR 30629–30 (noting that the de 

minimis threshold is intended to capture firms that 

engage in a level of dealing activity that is likely 

to raise the types of concerns that the dealer 

regulatory framework is intended to address). 

95See Exchange Act rule 3a71–3(a)(4). 

every Title VII requirement, given that 

the definition and the relevant 

regulatory regime address not only risk 

but other concerns as well, as just 

described. For example, neither the 

statutory definition of ‘‘security-based 

swap dealer,’’ our subsequent further 

definition of the term pursuant to 

section 712(d) of the Dodd-Frank Act, 

nor the regulatory requirements 

applicable to security-based swap 

dealers focus solely on risk to the U.S. 

financial system.83

We believe that this approach to 

territorial application of Title VII 

provides a reasonable means of helping 

to ensure that our regulatory framework 

focuses on security-based swap activity 

that is most likely to raise the concerns 

that Congress intended to address in 

Title VII, including the potential effects 

of security-based swap activity on U.S. 

market participants, on the financial 

stability of the United States, on the 

transparency of the U.S. financial 

markets, and on the protection of 

counterparties.84 Persons that engage in 

relevant conduct, as identified through 

this analysis, within the United States 

are not, in our view, ‘‘transact[ing] a 

business in security-based swaps 

without the jurisdiction of the United 

States,’’ 85 and thus are properly subject 

to regulation under Title VII. 

(b) Territorial Approach to Application 

of Title VII Security-Based Swap Dealer 

Registration Requirements 

In determining whether specific 

transactions should be included in a 

person’s dealer de minimis calculation, 

we begin by looking to the statutory text 

to identify the type of dealing activity 

that the statute describes as relevant to 

a person’s status as a security-based 

swap dealer.86 Section 3(a)(71) of the 

Exchange Act 87 defines security-based 

swap dealer as a person that engages in 

any of the following types of activity: 

(i) Holding oneself out as a dealer in 

security-based swaps, 

(ii) making a market in security-based 

swaps, 

(iii) regularly entering into securitybased swaps with counterparties as an 

ordinary course of business for one’s 

own account, or 

(iv) engaging in any activity causing 

oneself to be commonly known in the 

trade as a dealer in security-based 

swaps.88

In accordance with the authority 

provided by section 712(d)(1) of the 

Dodd-Frank Act, which provides that 

the CFTC and the Commission shall by 

rule further define, among other things, 

‘‘security-based swap dealer,’’ 89 we 

further interpreted the statutory 

definition by identifying the types of 

activities that are relevant in 

determining whether a person is a 

security-based swap dealer.90 Pursuant 

to this further definition, indicia of 

security-based swap dealing activity 

include any of the following activities: 

• Providing liquidity to market 

professionals or other persons in 

connection with security-based swaps; 

• seeking to profit by providing 

liquidity in connection with securitybased swaps, 

• providing advice in connection 

with security-based swaps or structuring 

security-based swaps; 

• having a regular clientele and 

actively soliciting clients; 

• using inter-dealer brokers; and 

• acting as a market maker on an 

organized security-based swap exchange 

or trading system.91

As the foregoing lists illustrate, both 

the statutory text and our interpretation 

further defining the statutory term 

include within the security-based swap 

dealer definition a range of activities. In 

the Intermediary Definitions Adopting 

Release, we stated that transactions 

arising from dealing activity, as 

identified by the indicia described 

above, would generally be subject to 

relevant Title VII requirements 

applicable to dealers, including that 

such transactions be included in a 

person’s calculations for purposes of the 

dealer de minimis calculations. Our 

territorial approach applying Title VII to 

dealing activity similarly looks to 

whether any of the activities described 

above occur within the United States, 

and not simply to the location of the 

risk, as some commenters suggested is 

required under section 30(c) of the 

Exchange Act.92 To the extent that such 

activity does occur within the United 

States, the person engaged in such 

activity, in our view, is transacting a 

business in security-based swaps within 

the United States,93 and therefore 

applying Title VII to the activity by, 

among other things, requiring the 

person to include transactions arising 

from such activity in its de minimis 

calculation is consistent with a 

territorial approach, even if some of this 

activity (or other activity bearing the 

indicia of dealing activity) relating to 

the transaction also occurs outside the 

United States. 

This approach is consistent with the 

purposes of the dealer definition and 

the de minimis exception as they relate 

to dealer regulation under Title VII. The 

de minimis exception excludes from the 

dealer registration requirement those 

entities that may engage in dealing 

activity but that do so in amounts that 

may not raise, to a degree that warrants 

application of security-based swap 

dealer requirements, the risk, 

counterparty protection, or other 

concerns that the dealer registration and 

regulatory framework were intended to 

address.94 On the other hand, dealing 

activity, as identified by the types of 

activities described above, carried out 

within the United States at levels 

exceeding the de minimis threshold is 

likely to raise these concerns, which 

would be addressed by requiring 

persons engaged in that volume of 

dealing activity to register as securitybased swap dealers under Title VII and 

to comply with relevant requirements 

applicable to security-based swap 

dealers. Accordingly, to the extent that 

a person engages in dealing activity 

within the United States that results in 

transactions in a notional amount 

exceeding the applicable de minimis 

threshold, it is appropriate to require 

the person to register as a security-based 

swap dealer. 

i. Dealing Activity of U.S. Persons 

Under the foregoing analysis and 

consistent with our proposal, when a 

U.S. person as defined under this final 

rule 95 engages in dealing activity, it 

necessarily engages in such activity 

within the United States, even when it 

enters into such transactions through a 


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96See section IV.C, infra. In our view, dealing 

activity involving such persons is particularly likely 

to raise the types of concerns Title VII was intended 

to address, including those related to risk to the 

U.S. financial system, transparency of the U.S. 

financial markets, and customer protection. 

97Cf. SIFMA/FIA/FSR Letter at 4, A–5 (stating 

that main purpose of Title VII is to address risk 

arising from security-based swap activity). 

98This is consistent with the view expressed in 

our proposing release. See Cross-Border Proposing 

Release, 78 FR 30985. 

99As discussed in further detail below, this 

interpretation is consistent with the goals of dealer 

regulation under Title VII. Security-based swap 

activity that results in a transaction involving a 

U.S.-person counterparty creates ongoing 

obligations that are borne by a U.S. person and, as 

such, is properly viewed as occurring within the 

United States. See note 186, infra. 

100 In our proposal, we noted that in a securitybased swap transaction between two non-U.S. 

persons where the performance of at least one side 

of the transaction is guaranteed by a U.S. person, 

the guarantee gives the guaranteed person’s 

counterparty recourse to the U.S. person for 

performance of obligations owed by the guaranteed 

person under the security-based swap, and the U.S. 

guarantor exposes itself to the risk of the securitybased swap as if it were a counterparty to the 

security-based swap through the security-based 

swap activity engaged in by the guaranteed person. 

See Cross-Border Proposing Release, 78 FR 30986– 

87. This interpretation of guarantee was consistent 

with our discussion of the application of the major 

participant tests to guaranteed positions in the 

Intermediary Definitions Adopting Release, where 

we, together with the CFTC, noted that a person’s 

security-based swap positions are attributed to a 

parent, other affiliate, or guarantor for purposes of 

the major participant analysis to the extent that the 

counterparties to those positions have recourse to 

that parent, other affiliate, or guarantor in 

connection with the position; as we noted in that 

release, positions are not attributed in the absence 

of recourse. See Intermediary Definitions Adopting 

Release, 77 FR 30689. In this release, we continue 

to use the term ‘‘guarantee’’ to refer to an 

arrangement pursuant to which one party to a 

security-based swap transaction has recourse to its 

counterparty’s parent, other affiliate, or guarantor 

with respect to the counterparty’s obligations owed 

under the transaction. See section IV.E.1(b), infra. 

101Even if the U.S. guarantor generally does not 

hold itself out as a dealer or make a market in 

security-based swaps, the U.S. guarantor enables 

the non-U.S. person whose dealing activity it 

guarantees to engage in dealing activity by 

providing financial backing. We note that references 

to ‘‘guarantee,’’ ‘‘recourse guarantee,’’ or ‘‘rights of 

recourse,’’ as those terms are used in this release, 

may describe economic relationships that are 

different from ‘‘guarantee’’ under section 2(a)(1) of 

the Securities Act. We note, however, that, 

depending on the nature of the ‘‘guarantee,’’ 

‘‘recourse guarantee,’’ or ‘‘rights of recourse’’ 

provided by the guarantor, the transaction at issue 

may involve not only a security-based swap 

between two non-U.S. persons but also the offer and 

sale of a security by a U.S. person, given that a 

‘‘guarantee’’ of a security-based swap is itself a 

separate security issued by the U.S. guarantor. See, 

e.g., Securities Act section 2(a)(1), 15 U.S.C. 

77b(a)(1) (including in the statutory definition of 

‘‘security’’ a guarantee of a security). 

foreign branch or office. As discussed in 

further detail below, the definition of 

‘‘U.S. person’’ in the final rule is 

intended, in part, to identify those 

persons for whom it is reasonable to 

infer that a significant portion of their 

financial and legal relationships are 

likely to exist within the United States 

and that it is therefore reasonable to 

conclude that risk arising from their 

security-based swap activities could 

manifest itself within the United States, 

regardless of the location of their 

counterparties, given the ongoing nature 

of the obligations that result from 

security-based swap transactions.96

Wherever a U.S. person enters into a 

transaction in a dealing capacity, it is 

the U.S. person as a whole that is 

holding itself out as a dealer in securitybased swaps, given that the financial 

resources of the entire person stand 

behind any dealing activity of the U.S. 

person, both at the time it enters into 

the transaction and for the life of the 

contract, even when the U.S. person 

enters into the transaction through a 

foreign branch or office. Moreover, the 

U.S. person as a whole seeks to profit by 

providing liquidity and engaging in 

market-making in security-based swaps, 

and the financial resources of the entire 

person enable it to provide liquidity and 

engage in market-making in connection 

with security-based swaps. Its dealing 

counterparties will look to the entire 

U.S. person, even when the U.S. person 

enters into the transaction through a 

foreign branch or office, for performance 

on the transaction. The entire U.S. 

person assumes, and stands behind, the 

obligations arising from the resulting 

agreement and is directly exposed to 

liability arising from non-performance 

of the non-U.S. person.97

For these reasons, in our view a 

person does not hold itself out as a 

security-based swap dealer as anything 

other than a single person even when it 

enters into transactions through its 

foreign branch or office.98 Because the 

foreign branch generally could not 

operate as a dealer absent the financial 

and other resources of the entire U.S. 

person, its dealing activity with all of its 

counterparties, including dealing 

activity conducted through its foreign 

branch or office, is best characterized as 

occurring, at least in part, within the 

United States and should therefore be 

included in the person’s de minimis 

threshold calculation.99

ii. Dealing Transactions of Non-U.S. 

Persons That Are Subject to Recourse 

Guarantees by Their U.S. Affiliates 

In the proposing release, we 

explained that we preliminarily 

believed that a territorial approach 

consistent with the text and purposes of 

the Dodd-Frank Act encompasses 

transactions involving a non-U.S. 

person counterparty whose dealing 

activity is guaranteed by a U.S. 

person.100 However, because we 

proposed to treat non-U.S. persons 

receiving a guarantee on their securitybased swap transactions from a U.S. 

person like any other non-U.S. person 

for purposes of the de minimis 

exception (i.e., requiring them to 

include in their calculations only 

dealing activity involving U.S.-person 

counterparties or transactions 

conducted within the United States), we 

did not elaborate specifically on how 

the presence of a guarantee related to a 

territorial application of the dealer 

definition, including the de minimis 

exception. Because our final rule 

requires transactions of non-U.S. 

persons whose obligations under the 

security-based swap are subject to 

recourse guarantees enforceable against 

their U.S. affiliates to be included in the 

dealer de minimis calculation of the 

non-U.S. person, we address it here. 

In our view, a non-U.S. person 

engaged in dealing activity, to the extent 

that one or more transactions arising 

from such activity are guaranteed by a 

U.S. person, is engaged in relevant 

activity for purposes of the securitybased swap dealer definition within the 

United States, with respect to those 

transactions. By virtue of the guarantee, 

the non-U.S. person effectively acts 

together with the U.S. person to engage 

in the dealing activity that results in the 

transactions, and the non-U.S. person’s 

dealing activity with respect to such 

transactions cannot reasonably be 

isolated from the U.S. person’s activity 

in providing the guarantee. The U.S.- 

person guarantor together with the nonU.S. person whose dealing activity it 

guarantees, and not just the non-U.S. 

person, may seek to profit by providing 

liquidity and engaging in marketmaking in security-based swaps, and the 

non-U.S. person provides liquidity and 

engages in market-making in connection 

with security-based swaps by drawing 

on the U.S. person’s financial 

resources.101 The non-U.S. person’s 

counterparty, pursuant to the recourse 

guarantee, looks to both the non-U.S. 

person and its U.S. guarantor, which is 

responsible for performance on the 

transaction that is part of the non-U.S. 

person’s dealing activity. In sum, the 

non-U.S. person is engaged in the 

United States in relevant dealing 

activity identified in the statutory 

definition and in our jointly adopted 

further definition of ‘‘security-based 

swap dealer.’’ 

Moreover, the economic reality of the 

non-U.S. person’s dealing activity, 

where the resulting transactions are 

guaranteed by a U.S. person, is 

identical, in relevant respects, to a 

transaction entered into directly by the 


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102SIFMA/FIA/FSR Letter at A–11. 

103 Id. 

104 In addition, this commenter suggested that any 

risk created by guarantees provided to prudentially 

regulated foreign entities is adequately addressed 

by the foreign prudential regulation. See id. 

Although we recognize that foreign prudential 

regulation may reduce the risk that a guaranteed 

foreign affiliate’s counterparties will seek to enforce 

the terms of the guarantee against the U.S. guarantor 

(depending on the quality of prudential regulation 

in the foreign jurisdiction), it does not eliminate 

this risk, and the counterparty continues to retain 

a right of recourse under the guarantee against the 

guarantor. 

Given the role of a foreign person whose activity 

is guaranteed in creating risk within the United 

States through its dealing activity, we believe that 

it is important to ensure that such a foreign person 

be required to register as a security-based swap 

dealer to the extent that its guaranteed dealing 

transactions (together with any dealing transactions 

with U.S. persons) are included in its de minimis 

threshold calculations. As noted above, our 

proposal set forth a framework under which 

substituted compliance potentially would be 

available for certain Title VII requirements, 

including for dealer-specific requirements such as 

capital and margin, which should mitigate concerns 

about overlapping regulation of such entities. 

105We continue to believe that security-based 

swap activity carried out within the United States 

may also be relevant activity under our territorial 

approach, even if the resulting transaction involves 

two non-U.S. counterparties. As discussed below, 

however, we anticipate soliciting additional public 

comment regarding the issue. 106 Given the global nature of the security-based 

swap market, U.S. persons seeking to access this 

market may readily do so through both U.S.-person 

dealers and foreign dealers. That a foreign dealer 

holding itself out as a dealer to U.S. persons is 

based in, and operating out of, a foreign jurisdiction 

does not alter the economic reality of its activity: 

It is holding itself out as a dealer within the United 

States in a manner largely indistinguishable from a 

U.S.-person dealer that ‘‘hangs out its shingle’’ in 

Manhattan. 

107Exchange Act section 3(a)(71)(A)(iv). 

108Exchange Act section 3(a)(71)(A)(iii). 

109See Intermediary Definitions Adopting 

Release, 77 FR 30618. 

U.S. guarantor. By virtue of the 

guarantee, transactions arising from the 

non-U.S. person’s dealing activity result 

in risk from the transaction being borne 

by a U.S. person (the guarantor, which 

is responsible for the transactions it 

guarantees in a manner similar to a 

direct counterparty to the transactions) 

and potentially the U.S. financial 

system in a manner similar to a dealing 

transaction entered into directly by a 

U.S. person. As with transactions 

entered into directly by a U.S. person, 

transactions for which a counterparty 

has a right of recourse against a U.S. 

person create risk to a U.S. person and 

potentially the U.S. financial system 

regardless of the location of the 

counterparty. 

Our interpretation of the statutory text 

of the definition, as well as our further 

definition of the term, as it applies to 

these entities is consistent with the 

purposes of Title VII, as discussed 

above. The exposure of the U.S. 

guarantor creates risk to U.S. persons 

and potentially to the U.S. financial 

system via the guarantor to a 

comparable degree as if the transaction 

were entered into directly by a U.S. 

person. We understand that in some 

circumstances a counterparty may 

choose not to enter into a security-based 

swap transaction (or may not do so on 

the same terms) with a non-U.S. 

subsidiary of a U.S. person when that 

non-U.S. subsidiary is acting in a 

dealing capacity to the extent that its 

dealing activity is not subject to a 

recourse guarantee by a U.S. affiliate, 

absent other circumstances (e.g., 

adequate capitalization of the hithertoguaranteed affiliate). 

One commenter noted that U.S. 

guarantors may provide guarantees for a 

variety of reasons, including to satisfy 

regulatory requirements, to ‘‘manage 

capital treatment across an entity,’’ and 

to ‘‘avoid negative credit rating 

consequences,’’ and argued that a 

guarantee may therefore not create risk 

within the United States.102 Absent the 

creation of such risk, this commenter 

further argued that a guarantee creates 

‘‘no nexus for purposes of section 30(c) 

of the Exchange Act.’’ 103 However, 

regardless of the motivation for 

providing the guarantee, the non-U.S. 

person’s dealing activity still occurs 

within the United States and creates risk 

within the United States in the manner 

described above. The commenter 

provided no evidence that the 

motivation for providing a guarantee 

affects this analysis: It neither alters the 

risk created within the United States by 

such a guarantee when it is provided by 

a U.S. person nor affects the economic 

reality of the transaction. Moreover, 

even if a person provides guarantees not 

in response to counterparty demands 

but to satisfy regulatory requirements or 

to avoid negative credit rating 

consequences, the very reasons for 

issuing the guarantee suggest that the 

non-U.S. person would not be able to 

engage in dealing activity, or to do so on 

the same terms, without the 

guarantee.104

In sum, the guarantee provided by a 

U.S. person poses risk to U.S. persons 

and potentially to the U.S. financial 

system, and both the non-U.S. person 

whose dealing activity is guaranteed 

and its counterparty rely on the 

creditworthiness of the U.S. guarantor 

when entering into a security-based 

swap transaction and for the duration of 

the security-based swap. The economic 

reality of this transaction, even though 

entered into by a non-U.S. person, is 

substantially identical, in relevant 

respects, to a transaction entered into 

directly by a U.S. person. Accordingly, 

in our view, it is consistent with both 

the statutory text and with the purposes 

of the statute to identify such 

transactions as occurring within the 

United States for purposes of Title VII. 

iii. Dealing Activity of Other Non-U.S. 

Persons 

In our proposal, we stated that nonU.S. persons engaging in dealing 

activity would be required to count 

toward their de minimis thresholds only 

transactions arising from their dealing 

activity with U.S. persons or dealing 

activity otherwise conducted within the 

United States. Under the approach 

described above, and consistent with 

our proposal, we believe that a non-U.S. 

person engaged in dealing activity with 

U.S. persons engages in relevant activity 

for purposes of the security-based swap 

dealer definition within the United 

States.105

Dealing activity of non-U.S. persons 

that involves counterparties who are 

U.S. persons, as that term is defined in 

the final rule, necessarily involves the 

performance by the non-U.S. person of 

relevant activity under the ‘‘securitybased swap dealer’’ definition at least in 

part within the United States. For 

example, in our view, a non-U.S. person 

engaging in dealing activity with a U.S. 

person is holding itself out as a dealer 

in security-based swaps within the 

United States.106 Similarly, by entering 

into a transaction with a U.S. person in 

a dealing capacity, it is seeking to profit 

by providing liquidity within the United 

States and possibly engaging in marketmaking in security-based swaps within 

the United States, given that its decision 

to engage in dealing activity with U.S. 

persons, as defined by the rule, affects 

the liquidity of the security-based swap 

market within the United States. 

Particularly at volumes in excess of the 

de minimis threshold, entering into 

security-based swap transactions in a 

dealing capacity with U.S. persons 

likely is the type of activity that would 

cause a non-U.S. person ‘‘to be 

commonly known in the trade as a 

dealer in security-based swaps’’ 107

within the United States, that 

constitutes ‘‘regularly entering into 

security-based swaps with 

counterparties as an ordinary course of 

business for one’s own account’’ 108

within the United States, and that 

permits a reasonable inference that it 

has a regular clientele and actively 

solicits clients within the United 

States.109

Our application of the statute to nonU.S. persons is consistent with the 

purposes of Title VII, as discussed 


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110Although at least one commenter suggested 

that we lack the authority under section 30(c) of the 

Exchange Act to require non-U.S. person jointventures to aggregate relevant dealing transactions 

with the relevant dealing transactions of multiple 

investors in the joint-venture, see note 78, supra, 

we believe that our limitation on application of the 

aggregation requirement only to the transactions of 

such non-U.S. persons that occur within the United 

States (because they involve U.S.-person 

counterparties or are subject to a recourse guarantee 

against a U.S. person) is consistent with our 

territorial approach. 

111The statute further provides the Commission 

with the authority to determine the scope of these 

categories. See Exchange Act section 

3(a)(67)(A)(ii)(I). 

112Exchange Act section 3(a)(67)(A). 

113 Dodd-Frank Act section 712(d)(1). 

114Exchange Act section 3(a)(67)(B). 

115See Intermediary Definitions Adopting 

Release, 77 FR 30663–84. 

116See id. 

117 Id. at 30666. 

118See id. We defined ‘‘substantial counterparty 

exposure’’ in a similar manner, noting the focus of 

the statutory test on ‘‘serious adverse effects on 

financial stability or financial markets.’’ Id. at 

30683. Cf. Section 3(a)(67)(A)(ii)(II) of the Exchange 

Act (encompassing in major security-based swap 

participant definition persons whose ‘‘outstanding 

security-based swaps create substantial 

counterparty exposure that could have serious 

adverse effects on the financial stability of the 

United States banking system or financial 

markets’’). 

119Cf. Morrison, 130 S. Ct. at 2884 (performing a 

textual analysis to identify the focus of the statute). 

120The economic reality of a position subject to 

such a guarantee, even though entered into by a 

non-U.S. person, is substantially identical in 

relevant respects to a position entered into directly 

by the U.S. guarantor. See section II.B.2(b)ii, supra. 

above. U.S. persons incur risks arising 

from this dealing activity, which in turn 

potentially creates risk to other market 

participants and the U.S. financial 

system more generally, and transactions 

with U.S. persons raise counterparty 

protection and market transparency 

concerns that Title VII is intended to 

address. Accordingly, we believe that 

the dealing activity of a non-U.S. person 

that involves a U.S.-person counterparty 

is appropriately characterized as 

occurring, at least in part, within the 

United States.110

(c) Territorial Approach to Application 

of Title VII Major Security-Based Swap 

Participant Registration Requirements 

As in our territorial approach to the 

security-based swap dealer definition 

(including the de minimis exception) 

described above, our territorial 

approach to the application of the major 

security-based swap participant 

definition looks first to the statutory text 

to identify the types of activity that are 

relevant for purposes of the definition. 

Section 3(a)(67) of the Exchange Act 

provides that a major security-based 

swap participant is any person who is 

not a dealer and who satisfies one or 

more of the following requirements: 

(i) Maintains a substantial position in 

security-based swaps for any of the 

major security-based swap categories,111

excluding certain positions; 

(ii) has outstanding security-based 

swaps that create substantial 

counterparty exposure that could have 

serious adverse effects on the financial 

stability of the U.S. banking system or 

financial markets; or 

(iii) is a highly leveraged financial 

entity that maintains substantial 

position in outstanding security-based 

swaps in any major security-based swap 

category.112

The statute directs us to further 

define, jointly with the CFTC, ‘‘major 

security-based swap participant’’ 113 and 

separately provides us with authority to 

‘‘define . . . the term ‘substantial 

position’ at the threshold that the 

Commission determines to be prudent 

for the effective monitoring, 

management, and oversight of entities 

that are systemically important or can 

significantly impact the financial system 

of the United States.’’ 114

Pursuant to these provisions, we 

further interpreted this definition by, 

among other things, defining what 

constitutes a ‘‘substantial position’’ and 

‘‘substantial counterparty exposure’’ for 

purposes of the major security-based 

swap participant definition.115 In doing 

so, we set forth calculation 

methodologies and thresholds for each 

and adopted rules requiring persons that 

exceeded these thresholds to register as 

major security-based swap 

participants.116 These thresholds were 

designed to identify persons that were 

likely to pose counterparty credit risks, 

as such risks are ‘‘more closely linked 

to the statutory criteria that the 

definition focuses on entities that are 

‘systemically important’ or can 

‘significantly impact’ the U.S. financial 

system.’’ 117 We also noted that our 

definition of ‘‘substantial position’’ was 

intended to address the risk that would 

be posed by the default of multiple 

entities close in time and the aggregate 

risks presented by a person’s securitybased swap activity, as these 

considerations reflect the market risk 

concerns expressly identified in the 

statute.118

The statutory focus of the major 

security-based swap participant 

definition differs from that of securitybased swap dealer, in that the securitybased swap dealer definition focuses on 

activity that may raise the concerns that 

dealer regulation is intended to address, 

while the major security-based swap 

participant definition focuses on 

positions that may raise systemic risk 

concerns within the United States. 

Accordingly, a territorial approach to 

application of the definition of major 

security-based swap participant 

involves identifying security-based 

swap positions that exist within the 

United States.119 In our view, and 

consistent with the approach taken in 

our proposal, a security-based swap 

position exists within the United States 

when it is held by or with a U.S. person, 

or when it is subject to a recourse 

guarantee against a U.S. person,120 as 

the risks associated with such positions 

are borne within the United States, and 

given the involvement of U.S. persons 

may, at the thresholds established for 

the major security-based swap 

participant definition, give rise to the 

types of systemic risk within the United 

States that major security-based swap 

regulation is intended to address. To the 

extent that a position exists within the 

United States in this sense, we believe 

that it is appropriate under a territorial 

approach to require a market 

participant, whether a U.S. person or 

otherwise, that is a counterparty or 

guarantor with respect to that position, 

to include that position in its major 

security-based swap participant 

threshold calculations, wherever the 

security-based swap was entered into. 

(d) Regulations Necessary or 

Appropriate To Prevent Evasion of Title 

VII 

Consistent with our proposal, we 

interpret section 30(c) of the Exchange 

Act as not requiring us to find that 

actual evasion has occurred or is 

occurring to invoke our authority to 

reach activity ‘‘without the jurisdiction 

of the United States’’ or to limit 

application of Title VII to security-based 

swap activity ‘‘without the jurisdiction 

of the United States’’ only to business 

that is transacted in a way that is 

purposefully intended to evade Title 

VII. Section 30(c) of the Exchange Act 

authorizes the Commission to apply 

Title VII to persons transacting a 

business ‘‘without the jurisdiction of the 

United States’’ if they contravene rules 

that the Commission has prescribed as 

‘‘necessary or appropriate to prevent the 

evasion of any provision’’ of Title VII. 

The focus of this provision is not 

whether such rules impose Title VII 

requirements only on entities engaged 

in evasive activity but whether the rules 

are generally ‘‘necessary or appropriate’’ 

to prevent potential evasion of Title VII. 

In other words, section 30(c) of the 

Exchange Act permits us to impose 

prophylactic rules intended to prevent 

possible purposeful evasion, even 

though such rules may affect or prohibit 


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121Such an interpretation of our anti-evasion 

authority, for example, could privilege incumbent 

firms by allowing them to leverage existing business 

models that may not be available to new entrants 

under rules promulgated pursuant to that authority. 122As a general matter, the final rules adopted in 

this release are not being applied to persons who 

are ‘‘transacting a business in security-based swaps 

without the jurisdiction of the United States’’ 

within the meaning of section 30(c) of the Exchange 

Act. See sections II.B.2(a)–(c), supra. However, as 

noted below, the Commission also believes that 

these rules are necessary or appropriate as a 

prophylactic measure to help prevent the evasion 

of the provisions of the Exchange Act that were 

added by the Dodd-Frank Act and thus help ensure 

that the particular purposes of the Dodd-Frank Act 

addressed by the rule are not undermined. See, e.g., 

section II.B.2(d) and note 186, infra. 

123See section II.A, supra. 

124See note 11, supra. 

125Specifically, section 3(f) of the Exchange Act 

provides: ‘‘Whenever pursuant to this title the 

Commission is engaged in rulemaking, . . ., and is 

required to consider or determine whether an action 

is necessary or appropriate in the public interest, 

the Commission shall also consider, in addition to 

the protection of investors, whether the action will 

promote efficiency, competition, and capital 

formation.’’ Section 23(a)(2) of the Exchange Act 

also provides: ‘‘The Commission . . . , in making 

rules and regulations pursuant to any provisions of 

this title, shall consider among other matters the 

impact any such rule or regulation would have on 

competition. The Commission . . . shall not adopt 

any such rule or regulation which would impose a 

burden on competition not necessary or appropriate 

in furtherance of the purposes of [the Exchange 

Act].’’ 

126See Exchange Act section 15F(h), as added by 

section 764(a) of the Dodd-Frank Act, in particular. 

127See note 11, supra. 

128 Id. 

129See Exchange Act section 30(c), 15 U.S.C. 

78dd(c), as discussed in section II.B.2(d), supra. 

130See section 712(a)(2) of the Dodd-Frank Act. 

131See section 752(a) of the Dodd-Frank Act. 

132For example, subjecting non-U.S. persons to 

Title VII may prompt a foreign jurisdiction to 

respond by subjecting U.S. persons to the foreign 

jurisdiction’s regulatory regime. 

some non-evasive conduct. Moreover, 

exercising the section 30(c) authority 

does not require us to draw a distinction 

between conduct ‘‘without the 

jurisdiction of the United States’’ that is 

purposely evasive as opposed to 

identical conduct that was motivated by 

some non-evasive purpose. Indeed, to 

interpret section 30(c) authority 

otherwise could create a bifurcated 

regulatory regime where the same 

conduct is treated differently based on 

parties’ underlying purpose for engaging 

in it, which could create extraordinary 

oversight challenges involving difficult 

subjective considerations concerning 

parties’ true intentions in entering any 

given transaction or establishing 

particular business structures, and 

could create significant competitive 

advantages for incumbent firms.121

Thus, we read the statute to permit us 

to prescribe such rules to conduct 

without the jurisdiction of the United 

States, even if those rules would also 

apply to a market participant that has 

been transacting business through a preexisting market structure, such as a 

foreign branch or foreign affiliate whose 

positions are guaranteed by the market 

participant, established for valid 

business purposes, provided the 

proposed rule or guidance is designed to 

prevent possibly evasive conduct.122

C. Principles Guiding Final Approach 

To Applying ‘‘Security-Based Swap 

Dealer’’ and ‘‘Major Security-Based 

Swap Participant’’ Definitions in the 

Cross-Border Context 

As in our proposal, our final rules and 

guidance reflect our careful 

consideration of the global nature of the 

security-based swap market and the 

types of risks created by security-based 

swap activity to the U.S. financial 

system and market participants and 

other concerns that the dealer and major 

security-based swap participant 

definitions were intended to address, as 

well as the needs of a well-functioning 

security-based swap market.123 We also 

have been guided by the purpose of 

Title VII 124 and the applicable 

requirements of the Exchange Act, 

including the following: 

• Economic Impacts—The Exchange 

Act requires the Commission to 

consider the impact of our rulemakings 

on efficiency, competition, and capital 

formation.125

• Counterparty Protection—The 

Dodd-Frank Act adds provisions to the 

Exchange Act relating to counterparty 

protection, particularly with respect to 

‘‘special entities.’’ 126

• Transparency—The Dodd-Frank 

Act was intended to promote 

transparency in the U.S. financial 

system.127

• Risk to the U.S. Financial System— 

The Dodd-Frank Act was intended to 

promote, among other things, the 

financial stability of the United States 

by limiting/mitigating risks to the 

financial system.128

• Anti-Evasion—The Dodd-Frank Act 

amends the Exchange Act to provide the 

Commission with authority to prescribe 

rules and regulations as necessary or 

appropriate to prevent the evasion of 

any provision of the Exchange Act that 

was added by the Dodd-Frank Act.129

• Consultation and Coordination with 

Other U.S. Regulators—In connection 

with implementation of Title VII, the 

Dodd Frank Act requires the 

Commission to consult and coordinate 

with the CFTC and prudential regulators 

for the purpose of ensuring ‘‘regulatory 

consistency and comparability, to the 

extent possible.’’ 130

• Consistent International 

Standards—To promote effective and 

consistent global regulation of swaps 

and security-based swaps, the DoddFrank Act requires the Commission and 

the CFTC to consult and coordinate 

with foreign regulatory authorities on 

the ‘‘establishment of consistent 

international standards’’ with respect to 

the regulation of swaps and securitybased swaps.131 In this regard, the 

Commission recognizes that regulators 

in other jurisdictions are currently 

engaged in implementing their own 

regulatory reforms of the OTC 

derivatives markets and that our 

application of Title VII to cross-border 

activities may affect the policy decisions 

of these other regulators as they seek to 

address potential conflicts or overlaps 

in the regulatory requirements that 

apply to market participants under their 

authority.132

At times, these principles reinforce 

one another; at other times, they may be 

in tension. For instance, regulating risk 

posed to the United States may, 

depending on the final rules, make it 

more costly for U.S.-based firms to 

conduct security-based swap business, 

particularly in foreign markets, 

compared to foreign firms; it could 

make foreign firms less willing to deal 

with U.S. persons; and it could 

discourage foreign firms from carrying 

out security-based swap dealing activity 

through branches or offices located in 

the United States. On the other hand, 

providing U.S. persons greater access to 

foreign security-based swap markets 

may, depending on the final rules, fail 

to appropriately address the risks posed 

to the United States from transactions 

conducted in part outside the United 

States or create opportunities for market 

participants to evade the application of 

Title VII, particularly until such time as 

other jurisdictions adopt similar 

comprehensive and comparable 

derivative regulations. 

Balancing these sometimes competing 

principles has been complicated by the 

fact that Title VII imposes a new 

regulatory regime in a global 

marketplace. Title VII establishes 

reforms that will have implications for 

entities that compete internationally in 

the global security-based swap market. 

We have generally sought, in 

accordance with the statutory factors 

described above, to avoid creating 

opportunities for market participants to 

evade Title VII requirements, whether 

by restructuring their business or other 

means, or the potential for overlapping 

or conflicting regulations. We also have 

considered the needs for a wellfunctioning security-based swap market 

and for avoiding disruption that may 


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133We also consider, where appropriate, the 

impact of rules and technical standards 

promulgated by other regulators, such as the CFTC 

and the European Securities and Markets Authority, 

on practices in the security-based swap market. 134As noted above, we have not yet adopted other 

substantive requirements of Title VII that may affect 

how firms structure their security-based swap 

business and market practices more generally. 135According to data published by the Bank for 

International Settlements (‘‘BIS’’), the global 

notional amount outstanding in equity forwards 

and swaps as of June 2013 was $2.32 trillion. The 

notional amount outstanding in single-name CDS 

was approximately $13.14 trillion, in multi-name 

index CDS was approximately $10.17 trillion, and 

in multi-name, non-index CDS was approximately 

$1.04 trillion. See Semi-annual OTC derivatives 

statistics at end-June 2013 (Nov. 2013), Table 19, 

available at: http://www.bis.org/statistics/

dt1920a.pdf. As we stated in the Cross-Border 

Proposing Release, for the purposes of this analysis, 

we assume that multi-name index CDS are not 

narrow-based index CDS and therefore, do not fall 

within the security-based swap definition. See 

Cross-Border Proposing Release, 78 FR 31120 

n.1301; see also Exchange Act section 3(a)(68)(A); 

Further Definition of ‘‘Swap,’’ ‘‘Security-BasedSwap,’’ and ‘‘Security-Based Swap Agreement’’; 

Mixed Swaps; Security-Based Swap Agreement 

Recordkeeping, Exchange Act Release No. 67453 

(July 18, 2012), 77 FR 48208 (Aug. 13, 2012) 

(‘‘Product Definitions Adopting Release’’), 77 FR 

48208. We also assume that all instruments 

reported as equity forwards and swaps are securitybased swaps, potentially resulting in 

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

CDS. Based on those assumptions, single-name CDS 

appear to constitute roughly 80 percent of the 

security-based swap market. No commenters 

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. 

136We note that DTCC–TIW’s entity domicile 

determinations may not reflect our definition of 

‘‘U.S. person’’ in all cases. 

137The 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 proposed rules regarding trade 

reporting, data elements, and real-time public 

reporting for security-based swaps that would 

provide us with appropriate measures of market 

activity. See Regulation SBSR—Reporting and 

Dissemination of Security-Based Swap Information, 

Exchange Act Release No. 34–63346 (Nov. 19, 

2010), 75 FR 75208 (Dec. 2, 2010). 

138See 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 built up 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. 

139The 1,695 entities included all DTCC-defined 

‘‘firms’’ shown in DTCC–TIW as transaction 

counterparties that report at least one transaction to 

DTCC–TIW as of December 2012. 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. This is consistent with the 

methodology used in the proposal. See CrossBorder Proposing Release, 78 FR 31120 n.1304. 

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 Web site or the public Web site of 

the account represented by a firm. The staff also 

referred to ISDA protocol adherence letters 

available on the ISDA Web site. 

reduce liquidity, competition, 

efficiency, transparency, or stability in 

the security-based swap market. 

III. Baseline 

To assess the economic impact of the 

final rules described in this release, we 

are using as our baseline the securitybased swap market as it exists at the 

time of this release, including 

applicable rules we have already 

adopted but excluding rules that we 

have proposed but not yet finalized.133

The analysis includes the statutory and 

regulatory provisions that currently 

govern the security-based swap market 

pursuant to the Dodd-Frank Act.134 We 

acknowledge limitations in the degree to 

which we can quantitatively 

characterize the current state of the 

security-based swap market. As we 

describe in more detail below, because 

the available data on security-based 

swap transactions do not cover the 

entire market, we have developed an 

understanding of market activity using a 

sample that includes only certain 

portions of the market. 

A. Current Security-Based Swap Market 

Our analysis of the state of the current 

security-based swap market is based on 

data obtained from DTCC–TIW, 

especially data regarding the activity of 

market participants in the single-name 

CDS market during the period from 

2008 to 2012. While 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). We have 

previously noted that the definition of 

security-based swaps is not limited to 

single-name CDS but we believe that the 

single-name CDS data are sufficiently 

representative of the market and 

therefore can directly inform the 

analysis of the state of the current 

security-based swap market.135

Additionally, the data for index CDS 

encompass both broad-based security 

indices and narrow-based security 

indices, and ‘‘security-based swap’’ in 

relevant part encompasses swaps based 

on single securities or reference entities 

or on narrow-based security indices. 

Accordingly, with the exception of the 

analysis regarding the degree of overlap 

between participation in the singlename CDS market and the index CDS 

market (cross-market activity), our 

analysis below does not include data 

regarding index CDS. 

We believe that the data underlying 

our analysis here provide reasonably 

comprehensive information regarding 

the single-name CDS transactions and 

composition of the single-name CDS 

market participants. We note that the 

data available to us from DTCC–TIW do 

not encompass those CDS transactions 

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

counterparties; 136 and (ii) are based on 

non-U.S. reference entities. 

Notwithstanding this limitation, we 

believe that the DTCC–TIW data provide 

sufficient information to identify the 

types of market participants active in 

the security-based swap market and the 

general pattern of dealing within that 

market.137

1. Security-Based Swap Market 

Participants 

A key characteristic of security-based 

swap activity is that it is concentrated 

among a relatively small number of 

entities that engage in dealing activities. 

In addition to these entities, 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 

(hedge) funds, sovereign entities, and 

industrial companies. We observe that 

most non-dealer users of security-based 

swaps do not engage directly in the 

trading of swaps, but use dealers, banks, 

or investment advisers as intermediaries 

or agents to establish their positions. 

Based on an analysis of the 

counterparties to trades reported to the 

DTCC–TIW, there are 1,695 entities that 

engaged directly in trading between 

November 2006 and December 2012. 

Table 1, below, highlights that more 

than three-quarters of these entities 

(DTCC-defined ‘‘firms’’ shown in 

DTCC–TIW, which we refer to here as 

‘‘transacting agents’’) were identified as 

investment advisers, of which 

approximately 40 percent (about 30 

percent of all transacting agents) were 

registered investment advisers under the 

Investment Advisers Act of 1940 

(‘‘Investment Advisers Act’’).138

Although investment advisers comprise 

the vast majority of transacting agents, 

the transactions they executed account 

for only 10.8 percent of all single-name 

CDS trading activity reported to the 

DTCC–TIW, measured by number of 

transaction-sides (each transaction has 

two transaction sides, i.e., two 

transaction counterparties). The vast 

majority of transactions (81.9 percent) 

measured by number of transactionsides were executed by ISDA-recognized 

dealers.139


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140For 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., http://www.isda.org/ 

c_and_a/pdf/ISDA-Operations-Survey-2010.pdf. 

141 ‘‘Accounts’’ as defined in the DTCC–TIW 

context are not equivalent to ‘‘accounts’’ in the 

definition of ‘‘U.S. person’’ provided by Exchange 

Act rule 3a71–3(a)(4)(i)(C). They also do not 

necessarily represent separate legal persons. One 

entity or legal person may have multiple accounts. 

For example, a bank may have one DTCC account 

for its U.S. headquarters and one DTCC account for 

one of its foreign branches. 

142Unregistered 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. 

143See 15 U.S.C. 80a1 through 80a64. There 

remain over 4,000 DTCC ‘‘accounts’’ unclassified by 

type. Although unclassified, each was manually 

reviewed to verify that it was not likely to be a 

special entity within the meaning of the DoddFrank Act and instead was likely to be an entity 

such as a corporation, an insurance company, or a 

bank. 

144Private funds for this purposes encompasses 

various unregistered pooled investment vehicles, 

including hedge funds, private equity funds, and 

venture capital funds. 

145This column reflects the number of 

participants who are also trading for their own 

accounts. 

146See Cross-Border Proposing Release, 78 FR 

30976–78. 

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

ACTIVITY, FROM NOVEMBER 2006 THROUGH DECEMBER 2012, REPRESENTED BY EACH COUNTERPARTY TYPE

Transacting agents Number Percent 

Transaction 

share 

(percent) 

Investment Advisers .................................................................................................................... 1,261 74.4 10.9 

—SEC registered .................................................................................................................. 510 30.1 6.6 

Banks ........................................................................................................................................... 256 15.1 5.9 

Pension Funds ............................................................................................................................. 27 1.6 0.1 

Insurance Companies .................................................................................................................. 32 1.9 0.3 

ISDA-Recognized Dealers 140 ...................................................................................................... 17 1.0 82.1 

Other ............................................................................................................................................ 102 6.0 0.8 

Total ...................................................................................................................................... 1,695 100.0 100.0 

Principal holders of CDS risk 

exposure are represented by ‘‘accounts’’ 

in the DTCC–TIW.141 The staff’s 

analysis of these accounts in DTCC–TIW 

shows that the 1,695 transacting agents 

classified in Table 1 represent over 

9,238 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.142 For instance, 256 banks in 

Table 1 allocated transactions across 

364 accounts, of which 25 were 

represented by investment advisers. In 

the remaining 339 instances, banks 

traded for their own accounts. 

Meanwhile, 17 ISDA-recognized dealers 

in Table 1 allocated transactions across 

65 accounts. 

Among the accounts, there are 1,000 

Dodd-Frank Act-defined special entities 

and 570 investment companies 

registered under the Investment 

Company Act of 1940.143 Private funds 

comprise the largest type of account 

holders that we were able to classify, 

and although not verified through a 

recognized database, most of the funds 

we were not able to classify appear to 

be private funds.144

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 2012 

Account holders by type Number 

Represented by a 

registered investment 

adviser 

Represented by an 

unregistered investment 

adviser 

Participant is transacting 

agent 145

Private Funds ....................................................... 2,696 1,275 47% 1,400 52% 21 1% 

DFA Special Entities ............................................ 1,000 973 97% 7 1% 20 2% 

Registered Investment Companies ..................... 570 560 98% 8 1% 2 0% 

Banks (non-ISDA-recognized dealers) ................ 364 21 6% 4 1% 339 93% 

Insurance Companies .......................................... 205 132 64% 20 10% 53 26% 

ISDA-Recognized Dealers ................................... 65 0 0% 0 0% 65 100% 

Foreign Sovereigns .............................................. 57 40 70% 2 4% 15 26% 

Non-Financial Corporations ................................. 55 37 67% 3 5% 15 27% 

Finance Companies ............................................. 8 4 50% 0 0% 4 50% 

Other/Unclassified ................................................ 4,218 2,885 68% 1,146 27% 187 4% 

All .................................................................. 9,238 5,927 64% 2,590 28% 721 8% 

(a) Dealing Structures 

Security-based swap dealers use a 

variety of business models and legal 

structures to engage in dealing business 

with counterparties in jurisdictions all 

around the world. As we noted in the 

proposal, both U.S.-based and foreignbased entities use certain dealing 

structures for a variety of legal, tax, 

strategic, and business reasons.146

Dealers may use a variety of structures 

in part to reduce risk and enhance credit 

protection based on the particular 

characteristics of each entity’s business. 

Bank and non-bank holding 

companies may use subsidiaries to deal 

with counterparties. Further, dealers 

may rely on multiple sales forces to 


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147 In these instances, the fund or account lists a 

non-U.S. registered office location while the 

investment adviser, U.S. bank, or U.S. parent lists 

the United States as its settlement country. 

148Consistent with the guidance on CDS data 

access, see text accompanying note 37, supra, 

DTCC–TIW surveyed market participants, asking for 

the physical address associated with each of their 

accounts (i.e., where the account is incorporated as 

a legal entity). This is designated the registered 

office location. For purposes of this discussion, we 

have assumed that the registered office location 

reflects the place of domicile for the fund or 

account. When the fund does not report a registered 

office location, we assume that the settlement 

country reported by the investment adviser or 

Continued 

originate security-based swap 

transactions. For example, a U.S. bank 

dealer may use a sales force in its U.S. 

home office to originate security-based 

swap transactions in the United States 

and use separate sales forces spread 

across foreign branches to originate 

security-based swap transactions with 

counterparties in foreign markets. 

In some situations, an entity’s 

performance under security-based 

swaps may be supported by a guarantee 

provided by an affiliate. More generally, 

guarantees may take the form of a 

blanket guarantee of an affiliate’s 

performance on all security-based swap 

contracts, or a guarantee may apply only 

to a specified transaction or 

counterparty. Guarantees may give 

counterparties to the dealer direct 

recourse to the holding company or 

another affiliate for its dealer-affiliate’s 

obligations under security-based swaps 

for which that dealer-affiliate acts as 

counterparty. 

(b) Participant Domiciles 

The security-based swap market is 

global in scope, with counterparties 

located across multiple jurisdictions. As 

depicted in Figure 1, the domicile of 

new accounts participating in the 

market has shifted over time. 

Over time a greater share of accounts 

entering the market either have a foreign 

domicile, or have a foreign domicile 

while being managed by a U.S. person. 

The increase in foreign accounts may 

reflect an increase in participation by 

foreign accountholders while the 

increase in foreign accounts managed by 

U.S. persons may reflect the flexibility 

with which market participants can 

restructure their market participation in 

response to regulatory intervention, 

competitive pressures, and other 

stimuli. There are, however, alternative 

explanations for the shifts in new 

account domicile we observe in Figure 

1. Changes in the domicile of new 

accounts through time may reflect 

improvements in reporting by market 

participants to DTCC–TIW.148


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parent entity to the fund or account is the place of 

domicile. 

149Based on the de minimis threshold of $3 

billion for single-name CDS, we estimated that there 

were 123 entities engaged in engaged in singlename CDS transactions in 2011 that had more than 

$3 billion in single-name CDS transactions over the 

previous 12 months. We also estimated that 43 

entities with between $2 and $3 billion in 

transactions over the trailing 12 months may opt to 

engage in the dealer analysis out of an abundance 

of caution or to meet internal compliance 

guidelines, thus leading to the 166 total. See 

Intermediary Definitions Adopting Release, 77 FR 

30731–32; see also Cross-Border Proposing Release, 

78 FR 31139–40. We adopted a phase-in period 

during which the de minimis threshold will be $8 

billion and during which Commission staff will 

study the security-based swap market as it evolves 

under the new regulatory framework, resulting in a 

report that will consider the operation of the 

security-based swap dealer and major securitybased swap participant definitions. At the end of 

the phase-in period, the Commission will take into 

account the report, as well as public comment on 

the report, in determining whether to terminate the 

phase-in period or propose any changes to the rule 

implementing the de minimis exception, including 

any increases or decreases to the $3 billion 

threshold. See Intermediary Definitions Adopting 

Release, 77 FR 30640. 

150 In particular, we estimated that 28 entities and 

corporate groups had three or more counterparties 

that are not ISDA dealers (which we viewed as a 

useful proxy for application of the dealer-trader 

distinction) and that 25 of those entities had trailing 

notional transactions exceeding $3 billion. See id. 

at 30725 n.1457; SEC Staff Report, ‘‘Information 

regarding activities and positions of participants in 

the single-name credit default swap market (‘‘CDS 

Data Analysis’’) (Mar. 15, 2012), available at: http:// 

www.sec.gov/comments/s7-39-10/s73910-154.pdf at 

14. Our additional estimate of up to 50 potential 

dealers reflected our recognition of the potential for 

growth in the security-based swap market, for new 

entrants into the dealing space, and the possibility 

that some corporate groups may register more than 

one entity. See Intermediary Definitions Adopting 

Release, 77 FR 30725 n.1457. 

In the Cross-Border Proposing Release, we revised 

those estimates to reflect a more granular analysis 

of the data. Under this refined approach—which 

identified the number of entities within a corporate 

group that may have to register—we estimated that 

46 individual firms had three or more non-ISDA 

dealer counterparties, and that, of those, 31 firms 

engaged in at least $3 billion of security-based swap 

activity in 2011. We further estimated that, under 

the cross-border provisions of proposed Exchange 

Act rule 3a71–3(b), 27 of those entities engaged in 

at least $3 billion notional activity that they would 

have to count against the de minimis threshold, and 

that accounting for the aggregation requirement may 

result in an additional two firms being required to 

register, for a total of 29. We also concluded that 

our original estimate of there being up to 50 dealers 

was still valid, noting that the revised estimate 

included individual entities within corporate 

groups (thus accounting for the possibility that 

some corporate groups may register more than one 

dealer), and also accounted for the likely results of 

the proposed aggregation requirement. See CrossBorder Proposing Release, 78 FR 31137–38 n.1407. 

151Consistent with the earlier analysis, this figure 

is derived from the fact that 110 transacting agents 

had total single-name security-based swap activity 

above the $3 billion de minimis threshold, while 

another 35 transacting agents had activity between 

$2 and $3 billion and hence out of caution may be 

expected to engage in the dealer-trader analysis. 

In calculating this estimate, Commission staff 

used methods identical to those used referenced in 

the Intermediary Definitions Adopting Release, 77 

FR 30732 n.1509, aggregating the activity of DTCC 

accounts to the level of transacting agents and 

estimating the number of transacting agents with 

gross transaction notional amounts exceeding $2 

billion in 2012. While the analysis contained in the 

Intermediary Definitions Adopting Release used a 

sample that ended in December 2011, the sample 

has been updated through the end of December 

2012. 

In connection with the economic analysis of the 

final cross-border dealer de minimis rules, we also 

have estimated the number of entities that may 

perform the dealer-trader analysis using a more 

granular methodology that considers data both at 

the account level and at the transacting agent level. 

See notes 456 through 458, infra, and 

accompanying text. 

152As discussed below, and consistent with the 

methodology used in the Cross-Border Proposing 

Release, 78 FR 31137 n.1407, data from 2012 

indicates that 40 entities engaged in the singlename security-based swap market had three or more 

counterparties that were not identified by ISDA as 

dealers, and that 27 of those entities had $3 billion 

or more in notional single-name CDS activity over 

a 12 month period. Applying the principles 

reflected in these final rules regarding the counting 

of transactions against the de minimis thresholds 

suggests that 25 of those entities would have $3 

billion or more in notional transactions counted 

against the thresholds, and that applying the 

aggregation rules increases that number to 26 

entities. Based on this data, we believe that it is 

reasonable to conclude that up to 50 entities 

ultimately may register as security-based swap 

dealers, although the number may be smaller. See 

note 444, infra. 

In this regard it is important to note that, due to 

limitations in the availability of the underlying 

data, this analysis does not include information 

about transactions involving single-name CDS with 

a non-U.S. reference entity when neither party is 

domiciled in the United States or guaranteed by a 

person domiciled in the United States. This is 

because for single-name CDS with a non-U.S. 

reference entity, the data supplied to the 

Commission by the DTCC–TIW encompasses only 

information regarding transactions involving at 

least one counterparty domiciled in the United 

States or guaranteed by a person domiciled in the 

United States, based on physical addresses reported 

by market participants. That data exclusion 

introduces the possibility that these numbers may 

underestimate the number of persons that would 

engage in the dealer-trader analysis (and hence 

incur assessment costs) or that exceed $3 billion in 

dealing transactions on an annual basis (and hence 

would potentially be linked to programmatic costs 

and benefits). 

Additionally, because the data only 

include accounts that are domiciled in 

the United States, transact with U.S.- 

domiciled counterparties, or transact in 

single-name CDS with U.S. reference 

entities, changes in the domicile of new 

accounts may reflect increased 

transaction activity between U.S. and 

non-U.S. counterparties. 

A U.S.-based holding company may 

conduct dealing activity through a 

foreign subsidiary that faces both U.S. 

and foreign counterparties. Similarly, 

foreign dealers may choose to deal with 

U.S. and foreign counterparties through 

U.S. subsidiaries. Non-dealer users of 

security-based swaps may participate in 

the market using an agent in their home 

country or abroad. An investment 

adviser located in one jurisdiction may 

transact in security-based swaps on 

behalf of beneficial owners that reside 

in another. 

The various layers separating 

origination from booking by dealers, and 

management from ownership by nondealer users, highlights the potential 

distinctions between the location where 

a transaction is arranged, negotiated, or 

executed, the location where economic 

decisions are made by managers on 

behalf of beneficial owners, and the 

jurisdiction ultimately bearing the 

financial risks associated with the 

security-based swap transaction that 

results. As a corollary, a participant in 

the security-based swap market may be 

exposed to counterparty risk from a 

jurisdiction that is different from the 

market center in which it participates. 

(c) Current Estimates of Dealers and 

Major Participants 

In the Intermediary Definitions 

Adopting Release, we estimated, based 

on an analysis of DTCC–TIW data, that 

out of more than 1,000 entities engaged 

in single-name CDS activity worldwide 

in 2011, 166 entities engaged in singlename CDS activity at a sufficiently high 

level that they would be expected to 

incur assessment costs to determine 

whether they meet the ‘‘security-based 

swap dealer’’ definition.149 Analysis of 

those data further indicated that 

potentially 50 entities may engage in 

dealing activity that would exceed the 

de minimis threshold and thus 

ultimately have to register as securitybased swap dealers.150

Analysis of more recent data 

regarding the single-name CDS market 

using the same methodology suggests 

comparable results that are consistent 

with the reduction in transaction 

volume noted below. In particular, 

single-name CDS data from 2012 

indicate that out of more than 1,000 

entities engaged in single-name CDS 

activity, approximately 145 engaged in 

single-name CDS activity at a level high 

enough such that they may be expected 

to perform the dealer-trader analysis 

prescribed under the security-based 

swap dealer definition.151 These data 

suggest that, consistent with the 

Intermediary Definitions Adopting 

Release analysis, up to approximately 

50 entities would engage in dealing 

activity that would exceed the de 

minimis threshold.152

Additionally, in the Intermediary 

Definitions Adopting Release, we 

estimated, based on position data from 

DTCC–TIW for 2011, that as many as 12 

entities would be likely to perform 

substantial position and substantial 

counterparty exposure tests, and thus 

incur assessment costs, prescribed 


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153 In calculating this estimate, Commission staff 

used methods identical to those used referenced in 

the Intermediary Definitions Adopting Release, 77 

FR 30734, note 1529, estimating the number of 

participants with notional positions exceeding $100 

billion in 2012. The analysis contained in the 

Intermediary Adopting Release used a sample that 

ended in December 2011, aggregated the activity of 

DTCC accounts to the level of transacting agents, 

and did not attribute positions to parent companies. 

For the purposes of analysis of the final rules, the 

sample has been updated through the end of 

December 2012 and positions falling short of the 

$100 billion threshold have been attributed to 

parent companies. 

154The start of this decline predates the 

enactment of the Dodd-Frank Act and the proposal 

of rules thereunder, which is important to note for 

the purpose of understanding the economic 

baseline for this rulemaking. The timing of this 

decline seems to indicate that CDS market demand 

shrank prior to the enactment of the Dodd-Frank 

Act, and therefore the causes of this reduction in 

trading volume may be related to market dynamics 

and not directly related to the enactment of statutes 

and the development of security-based swap market 

regulation. If the security-based swap market 

experiences further declines in trading activity, it 

would be difficult to identify the effects of the 

newly developed security-based swap market 

regulation apart from changes in trading activity 

that may be due to natural market forces, or the 

anticipation of (or reaction to) proposed (or 

adopted) Title VII requirements or requirements 

being considered or implemented in other 

jurisdictions. 

under the major security-based swap 

participant definition. Of these 12 firms, 

we estimated that the number of persons 

with positions sufficiently large to bring 

them within the scope of the definition 

of major security-based swap participant 

likely would be fewer than five. 

Although we did not specify how the 

major security-based swap participant 

definition would apply to foreign 

persons in the Intermediary Definitions 

Adopting Release, our approach in 

estimating the assessment costs caused 

by our final definition used available 

single-name CDS data as a proxy for the 

market as a whole, and assumed that all 

potential major security-based swap 

participants would be required to 

include in their threshold calculations 

all positions with all counterparties. 

Analysis of more recent data 

regarding the single-name CDS market 

suggests comparable results. In 

particular, single-name CDS data from 

2012 indicate that out of over 1,100 

DTCC–TIW firms holding positions in 

single-name CDS activity and not 

expected to register as security-based 

swap dealers, nine had worldwide 

single-name CDS positions at a level 

high enough such that they may be 

expected to perform the major securitybased swap participant threshold 

analysis prescribed under the securitybased swap dealer definition. Analysis 

based on these more recent data is 

consistent with the prior conclusion 

that five or fewer entities would be 

likely to register as major security-based 

swap participants.153

2. Levels of Security-Based Swap 

Trading Activity 

Single-name CDS contracts make up 

the vast majority of security-based swap 

products and most are written on 

corporate issuers, corporate securities, 

sovereign countries, or sovereign debt 

(reference entities and reference 

securities). Figure 2 below describes the 

percentage of global, notional 

transaction volume in North American 

corporate single-name CDS reported to 

the DTCC–TIW between January 2008 

and December 2012, separated by 

whether transactions are between two 

ISDA-recognized dealers (interdealer 

transactions) or whether a transaction 

has at least one non-dealer counterparty. 

The level of trading activity with 

respect to North American corporate 

single-name CDS in terms of notional 

volume has declined from more than $5 

trillion in 2008 to approximately $2 

trillion in 2012.154 While notional 

volume has declined over the past five 

years, the share of interdealer 

transactions has remained fairly 

constant and interdealer transactions 

continue to represent the bulk of trading 

activity, whether measured in terms of 

notional value or number of transactions 

(see Figure 2). 


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47298 Federal Register / Vol. 79, No. 155 / Tuesday, August 12, 2014 / Rules and Regulations 

155Following publication of the Warehouse Trust 

Guidance on CDS data access, the DTCC–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 is designated the registered office 

location by the DTCC–TIW. When an account does 

not report a registered office location, we assume 

that the settlement country reported by the 

investment adviser or parent entity to the fund or 

account is the place of domicile. For purposes of 

this discussion, we have assumed that the 

registered office location reflects the place of 

domicile for the fund or account. 

Changes to these estimates relative to figures 

presented in the proposing release represent 

additional data regarding new accounts in the time 

series as well as the use of a longer sample period. 

Against this backdrop of declining 

North American corporate single-name 

CDS activity, about half of the trading 

activity in North American corporate 

single-name CDS reflected in the set of 

data we analyzed was between 

counterparties domiciled in the United 

States and counterparties domiciled 

abroad. Basing counterparty domicile on 

the self-reported registered office 

location of the DTCC–TIW accounts, the 

Commission estimates that only 13 

percent of the global transaction volume 

by notional volume between 2008 and 

2012 was between two U.S.-domiciled 

counterparties, compared to 48 percent 

entered into between one U.S.- 

domiciled counterparty and a foreigndomiciled counterparty and 39 percent 

entered into between two foreigndomiciled counterparties (see Figure 

3).155

When the domicile of DTCC–TIW 

accounts are instead defined according 

to the domicile of their ultimate parents, 

headquarters, or home offices (e.g., 

classifying a foreign bank branch or 

foreign subsidiary of a U.S. entity as 

domiciled in the United States), the 

fraction of transactions entered into 

between two U.S.-domiciled 

counterparties increases to 29 percent, 

and to 53 percent for transactions 

entered into between a U.S.-domiciled 

counterparty and a foreign-domiciled 

counterparty. 

Differences in classifications across 

different definitions of domicile 

illustrate the effect of participant 

structures that operate across 

jurisdictions. Notably, the proportion of 

activity between two foreign-domiciled 

counterparties drops from 39 percent to 

18 percent when domicile is defined as 

the ultimate parent’s domicile. As noted 

earlier, foreign subsidiaries of U.S. 

parent companies and foreign branches 

of U.S. banks, and U.S. subsidiaries of 

foreign parent companies and U.S. 

branches of foreign banks may transact 

with U.S. and foreign counterparties. 

However, this decrease in share suggests 

that the activity of foreign subsidiaries 

of U.S. firms and foreign branches of 

U.S. banks is generally higher than the 

activity of U.S. subsidiaries of foreign 

firms and U.S. branches of foreign 

banks. 

By either of those definitions of 

domicile, the data indicate that a large 

fraction of North American corporate 

single-name CDS transaction volume is 

entered into between counterparties 

domiciled in two different jurisdictions 

or between counterparties domiciled 

outside the United States. For the 

purpose of establishing an economic 

baseline, this observation indicates that 

a large fraction of security-based swap 


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Federal Register / Vol. 79, No. 155 / Tuesday, August 12, 2014 / Rules and Regulations 47299 

156See G20 Leaders’ Statement cited in note 16, 

supra. 

157See e.g., G20 Leaders’ St. Petersburg 

Declaration. See also G20 Meeting, Los Cabos, 

Mexico, June 2012, available at: http://

www.treasury.gov/resource-center/international/g7- 

g20/Documents/

Los%20Cabos%20Leaders%27%20Declaration.pdf; 

and G20 Meeting, Cannes, France, November 2011, 

available at: https://www.g20.org/sites/default/files/ 

g20_resources/library/Declaration_eng_Cannes.pdf 

(‘‘G20 Leaders’ Cannes Declaration’’). In the G20 

Leaders’ Cannes Declaration, the G20 Leaders 

agreed to develop standards on margin for noncentrally cleared OTC derivatives. 

158The FSB has published seven progress reports 

on OTC derivatives markets reform implementation: 

FSB Progress Report April 2014 (available at: http:// 

www.financialstabilityboard.org/publications/r_

140408.pdf); September 2013 (available at: http://

www.financialstabilityboard.org/publications/r_

130902b.pdf), April 2013 (available at: http://

www.financialstabilityboard.org/publications/r_

130415.pdf), October 2012 (available at: http://

www.financialstabilityboard.org/publications/r_

121031a.pdf), June 2012 (available at: http://

www.financialstabilityboard.org/publications/r_

120615.pdf), October 2011 (available at: http://

www.financialstabilityboard.org/publications/r_

111011b.pdf) and April 2011 (available at: http://

www.financialstabilityboard.org/publications/r_

110415b.pdf) (collectively, ‘‘FSB Progress 

Reports’’). The ODWG prepares the FSB Progress 

Reports. The Commission participates in the 

ODWG, both on its own behalf and as the 

representative of IOSCO, which is co-chair of the 

ODWG. 

activity would be affected by the scope 

of any cross-border approach we take in 

applying the Title VII requirements. 

Further, the large fraction of North 

American corporate single-name CDS 

transactions between U.S.-domiciled 

and foreign-domiciled counterparties 

also highlights the extent to which 

security-based swap activity transfers 

risk across geographical boundaries, 

both facilitating risk sharing among 

market participants and allowing for 

risk transmission between jurisdictions. 

B. Global Regulatory Efforts 

Efforts to regulate the swaps market 

are underway not only in the United 

States but also abroad. In 2009, leaders 

of the G20—whose membership 

includes the United States, 18 other 

countries, and the EU—called for global 

improvements in the functioning, 

transparency, and regulatory oversight 

of OTC derivatives markets agreeing that 

‘‘all standardised OTC derivatives 

contracts should be traded on exchanges 

or electronic trading platforms, where 

appropriate, and cleared through central 

counterparties (‘‘CCPs’’) by end-2012 at 

the latest. OTC derivatives contracts 

should be reported to trade repositories. 

Non-centrally cleared contracts should 

be subject to higher capital 

requirements.’’ 156 In subsequent 

summits, the G20 leaders have 

reiterated their commitment to OTC 

derivatives regulatory reform and 

encouraged international consultation 

in developing standards for these 

markets.157 The FSB monitors 

implementation of OTC derivatives 

reforms and provides progress reports to 

the G20.158

Pursuant to these commitments, 

jurisdictions with major OTC 

derivatives markets have taken steps 

toward substantive regulation of these 

markets, though the pace of regulation 

varies. This suggests that many foreign 

participants will face substantive 

regulation of their security-based swap 

activities that is intended to implement 

the G20 objectives and that may 

therefore address concerns similar to 

those addressed by rules the 

Commission has proposed but not yet 

adopted. 

Foreign legislative and regulatory 

efforts have focused on five general 

areas: Requiring post-trade reporting of 

transactions data for regulatory 

purposes, moving OTC derivatives onto 

organized trading platforms, requiring 

central clearing of OTC derivatives, 

establishing or enhancing capital 

requirements, and establishing or 

enhancing margin requirements for OTC 

derivatives transactions. 

The first two areas of regulation 

should help improve transparency in 

OTC derivatives markets, both to 

regulators and market participants. 

Regulatory transaction reporting 

requirements have entered into force in 

a number of jurisdictions including the 

EU, Hong Kong SAR, Japan, and 


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47300 Federal Register / Vol. 79, No. 155 / Tuesday, August 12, 2014 / Rules and Regulations 

159 Information regarding ongoing regulatory 

developments described in this section was 

primarily obtained from the FSB Progress Reports 

cited in note 158, supra, which reflect the input of 

relevant jurisdictions. 

160 Id. 

161See Registration of Security-Based Swap 

Dealers and Major Security-Based Swap 

Participants, Exchange Act Release No. 65543 (Oct. 

12, 2011), 76 FR 65784, 65808 (Oct. 24, 2011). 

Based on its analysis of 2012 DTCC–TIW and the 

list of swap dealers provisionally-registered with 

the CFTC, and applying the methodology used in 

the Intermediary Definitions Adopting Release, the 

Commission estimates that substantially all 

registered security-based swap dealers would also 

register as swap dealers with the CFTC. See also 

CFTC list of provisionally registered swap dealers, 

available at: http://www.cftc.gov/LawRegulation/

DoddFrankAct/registerswapdealer. 

162 ‘‘Correlation’’ typically refers to linear 

relationships between variables; ‘‘dependence’’ 

captures a broader set of relationships that may be 

more appropriate for certain swaps and securitybased swaps. See, e.g., Casella, George and Roger L. 

Berger, ‘‘Statistical Inference’’ (2002), at 171. 

163See, e.g., SIFMA/FIA/FSR Letter at 2–3. We 

understand that new capabilities have been built by 

swap market participants following issuance of the 

CFTC’s guidance. To the extent that such 

capabilities can be transferred to these participants’ 

security-based swap activities (e.g., to the extent 

that a market participant’s assessment practices 

regarding whether a counterparty would generally 

be considered a U.S. person for purposes of the 

CFTC guidance also can help determine the 

corresponding assessment for purposes of these 

final rules and guidance), such capabilities may 

tend to mitigate the costs that market participants 

otherwise would incur in connection with the 

Commission’s final cross-border rules. 

164 Id. at 2–4. The commenter notes the 

‘‘technological, operational, legal and compliance 

systems’’ necessary for complying with the 

Commission’s proposed rules, and taking account of 

the CFTC Cross-Border Guidance, outlining the 

general categories of changes to practice necessary 

for compliance. The commenter further indicates a 

potential need to ‘‘build[] separate systems for a 

small percentage of the combined swaps and SBS 

market instead of using the systems already built for 

compliance with the CFTC’s cross-border 

approach,’’ suggesting that market participants have 

already altered market practices to follow the CFTC 

Cross-Border Guidance. 

Singapore, and other jurisdictions are in 

the process of proposing legislation and 

rules to implement these 

requirements.159 The European 

Parliament has adopted legislation for 

markets in financial instruments that 

addresses trading OTC derivatives on 

regulated trading platforms.160 This 

legislation also should promote posttrade public transparency in OTC 

derivatives markets by requiring the 

price, volume, and time of OTC 

derivatives transactions conducted on 

these regulated trading platforms to be 

made public in as close to real time as 

technically possible. 

Regulation of derivatives central 

clearing, capital requirements, and 

margin requirements aims to improve 

management of financial risks in these 

markets. Japan has rules in force 

mandating central clearing of certain 

OTC derivatives transactions. The EU 

has its legislation in place but has not 

yet made any determinations of specific 

OTC derivatives transactions subject to 

mandatory central clearing. Most other 

jurisdictions are still in the process of 

formulating their legal frameworks that 

govern central clearing. While the EU is 

the only major foreign jurisdiction that 

has initiated the process of drafting 

rules to implement margin requirements 

for OTC derivatives transactions, we 

understand that several other 

jurisdictions anticipate taking steps 

towards implementing such 

requirements. 

C. Cross-Market Participation 

Persons registered as security-based 

swap dealers or major security-based 

swap participants are likely also to 

engage in swap activity, which is 

subject to regulation by the CFTC. In the 

release proposing registration 

requirements for security-based swap 

dealers and major security-based swap 

participants, we estimated, based on our 

experience and understanding of the 

swap and security-based swap markets 

that of the 55 firms that might register 

as security-based swap dealers or major 

security-based swap participants, 

approximately 35 would also register 

with the CFTC as swap dealers or major 

swap participants.161

This overlap reflects the relationship 

between single-name CDS contracts, 

which are security-based swaps, and 

index CDS contracts, which may be 

swaps or security-based swaps. A 

single-name CDS contract covers default 

events for a single reference entity or 

reference security. These entities and 

securities are often part of broad-based 

indices on which market participants 

write index CDS contracts. Index CDS 

contracts and related products make 

payouts that are contingent on the 

default of index components and allow 

participants in these instruments to gain 

exposure to the credit risk of the basket 

of reference entities that comprise the 

index, which is a function of the credit 

risk of the index components. As a 

result of this construction, a default 

event for a reference entity that is an 

index component will result in payoffs 

on both single-name CDS written on the 

reference entity and index CDS written 

on indices that contain the reference 

entity. Because of this relationship 

between the payoffs of single-name CDS 

and index CDS products, prices of these 

products depend upon one another. 

This dependence is particularly strong 

between index CDS contracts and 

single-name CDS contracts written on 

index components.162

Because payoffs associated with these 

single-name CDS and index CDS are 

dependent, hedging opportunities exist 

across these markets. Participants who 

sell protection on reference entities 

through a series of single-name CDS 

transactions can lay off some of the 

credit risk of their resulting positions by 

buying protection on an index that 

includes a subset of those reference 

entities. Participants that are active in 

one market are likely to be active in the 

other. Commission staff analysis of 

approximately 4,400 DTCC–TIW 

accounts that participated in the market 

for single-name CDS in 2012 revealed 

that approximately 2,700 of those 

accounts, or 61 percent, also 

participated in the market for index 

CDS. Of the accounts that participated 

in both markets, data regarding 

transactions in 2012 suggest that, 

conditional on an account transacting in 

notional volume of index CDS in the top 

third of accounts, the probability of the 

same account landing in the top third of 

accounts in terms of single-name CDS 

notional volume is approximately 62 

percent; by contrast, the probability of 

the same account landing in the bottom 

third of accounts in terms of singlename CDS notional volume is only 14 

percent. 

In an effort to comply with CFTC 

rules and applicable statutory 

provisions in the cross-border context, 

swap market participants, many of 

whom, as discussed above, likely also 

participate in the security-based swap 

market, may have already changed some 

market practices.163 Although a 

commenter suggested that swap market 

participants have already conformed 

their business practices to the CFTC’s 

approach to cross-border regulation, the 

commenter did not supply particular 

details as to the scope of that operations 

restructuring.164 We believe, however, 

based on these comments, it is likely 

that all participants who preliminarily 

believe they may be subject to the 

CFTC’s registration requirements will 

have expended resources to build 

systems and infrastructure that will 

permit them to determine and then 

record the U.S.-person status of their 

counterparties consistent with 

applicable requirements, as interpreted 

by the CFTC Cross-Border Guidance. 

The CFTC’s rules and cross-border 

guidance have likely influenced the 

information that market participants 

collect and maintain about the swap 

transactions they enter into and the 

counterparties they face. For example, 

the CFTC’s guidance describes a 

majority-ownership approach for 

collective investment vehicles that are 


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165See section IV.I.2(c), supra, for a discussion of 

costs to market participants that may arise from 

differences between the CFTC approach to 

guarantees and the Commission’s final rules. 

166We recognize that the CFTC Cross-Border 

Guidance is the subject of ongoing litigation. Our 

economic analysis is not intended to draw any 

conclusions about the ultimate outcome of that 

litigation; rather, the economic analysis relies on 

the current practices and operational abilities of 

firms that are, we understand, either in accordance 

with the CFTC Cross-Border Guidance or are in the 

process of adapting their systems to account for the 

CFTC’s approach to cross-border issues. 

167See Exchange Act section 3(a)(71)(D). 

168See Exchange Act rule 3a71–2(a). 

169See Intermediary Definitions Adopting 

Release, 77 FR 30640–41; see also note 149, supra 

(addressing process for termination of phase-in 

level). Lower thresholds are set forth in connection 

with dealing activity involving other types of 

security-based swaps. See Exchange Act rule 3a71– 

2(a)(1)(ii). 

170See proposed Exchange Act rule 3a71– 

3(b)(1)(i). 

171See proposed Exchange Act rule 3a71– 

3(b)(1)(ii). 

172See Exchange Act rule 3a71–2(a)(1) (providing 

that, for purposes of the de minimis exception, a 

person shall count its own dealing activity plus the 

dealing activity of ‘‘any other entity controlling, 

controlled by, or under common control with the 

person’’). 

173See proposed Exchange Act rule 3a71–3(b)(2). 

174See proposed Exchange Act rule 3a71–4. 

175The proposal also set forth definitions of 

‘‘foreign branch’’ and ‘‘transaction conducted 

through a foreign branch’’ in connection with the 

de minimis exception. See proposed Exchange Act 

rule 3a71–3(a). The proposed definitions of ‘‘U.S. 

person,’’ ‘‘transaction conducted within the United 

States,’’ ‘‘foreign branch,’’ and ‘‘transaction 

conducted through a foreign branch’’ also are 

relevant to the Commission’s proposed rules 

regarding the cross-border application of certain 

other Title VII requirements. See, e.g., proposed 

Exchange Act regulation SBSR (regarding regulatory 

reporting and public dissemination). 

Proposed Exchange Act rule 3a71–3 also 

contained a provision and associated definitions 

related to the cross-border application of 

counterparty protection requirements in connection 

with security-based swap activities. As discussed 

above, those matters are not the subject of the 

present rulemaking, and the Commission intends to 

address those matters as part of a subsequent 

rulemaking. 

offered to U.S. persons, contemplating 

that managers of these vehicles would 

assess, on an ongoing basis, the 

proportion of ownership by U.S. 

persons. As another example, the 

CFTC’s guidance articulates an 

approach by which all swap 

transactions by a non-U.S. person that 

rely on guarantees from U.S. affiliates 

would generally count against that nonU.S. person’s dealer de minimis 

exception.165

Thus, as discussed in more detail in 

sections IV.I.2 and V.H.2 below, the 

adoption of rules that would seek 

similar information from security-based 

swap market participants as the CFTC 

seeks from swap market participants, 

may allow such participants to use 

infrastructure already in place as a 

result of CFTC regulation to comply 

with Commission regulation. Among 

those entities that participate in both 

markets, entities that are able to apply 

to security-based swap activity new 

capabilities they have built in order to 

comply with requirements applicable to 

cross-border swap activity may 

experience lower costs associated with 

assessing which cross-border securitybased swap activity counts against the 

dealer de minimis exception or towards 

the major participant threshold, relative 

to those that are unable to redeploy such 

capabilities. The Commission remains 

sensitive to the fact that in cases where 

its final rules differ from the CFTC 

approach, additional outlays related to 

information collection and storage may 

be required even of market participants 

that conformed to the CFTC’s guidance 

regarding the applicable cross-border 

requirements.166 These costs are 

discussed in sections IV.I.1 and 

V.H.1(b). 

IV. Cross-Border Application of Dealer 

De Minimis Exception 

A. Overview 

The Exchange Act excepts from 

designation as ‘‘security-based swap 

dealer’’ entities that engage in a ‘‘ de 

minimis’’ quantity of security-based 

swap dealing activity with or on behalf 

of customers.167 Under the final rules 

adopted in the Intermediary Definitions 

Adopting Release, a person may take 

advantage of that exception if, in 

connection with CDS that constitute 

security-based swaps, the person’s 

dealing activity over the preceding 12 

months does not exceed a gross notional 

amount of $3 billion, subject to a phasein level of $8 billion.168 The phase-in 

level will remain in place until— 

following a study regarding the 

definitions of ‘‘security-based swap 

dealer’’ and ‘‘major security-based swap 

participant’’—the Commission either 

terminates the phase-in period or 

establishes an alternative threshold 

following rulemaking.169

To apply the exception to crossborder dealing activity, the Cross-Border 

Proposing Release would have required 

that a U.S. person count against the de 

minimis thresholds all of its securitybased swap dealing activity, including 

transactions conducted through a 

foreign branch of a U.S. bank.170 NonU.S. persons, in contrast, would have 

included only dealing transactions 

entered into with U.S. persons other 

than foreign branches of U.S. banks, 

plus dealing transactions where the 

transaction is ‘‘conducted within the 

United States.’’ 171 To implement, 

within the cross-border context, the 

existing rule that requires a person to 

aggregate the dealing activity of its 

affiliates against its own de minimis 

thresholds,172 the proposal would have 

required a person to count: (i) dealing 

transactions by its affiliates that are U.S. 

persons; and (ii) dealing transactions by 

non-U.S. affiliates that either are entered 

into with U.S. persons other than 

foreign branches, or that are conducted 

within the United States.173 The 

proposal further would have permitted 

a person to exclude, from the de 

minimis analysis, transactions by 

affiliates that are registered securitybased swap dealers, provided that the 

person’s dealing activity is 

‘‘operationally independent’’ from the 

registered dealer’s dealing activity.174

The proposal, moreover, set forth 

definitions relevant to the application of 

the de minimis exception in the crossborder context, including proposed 

definitions of the terms ‘‘U.S. person’’ 

and ‘‘transaction conducted within the 

United States.’’ 175

Commenters raised issues related to 

various aspects of this proposed 

approach to application of the de 

minimis exception in the cross-border 

context. As discussed below, these 

include issues regarding: the scope of 

the ‘‘U.S. person’’ definition, the 

proposal to require counting of certain 

‘‘transactions conducted within the 

United States’’ between two non-U.S. 

persons, the treatment of the dealing 

activity of non-U.S. persons that is 

guaranteed by U.S. persons, and the 

application of the exception to non-U.S. 

persons whose counterparties are 

foreign branches of U.S. banks. Some 

commenters also urged us to more 

closely harmonize particular aspects of 

our proposal with the CFTC CrossBorder Guidance. 

After considering commenters’ views 

regarding the cross-border application of 

the de minimis exception, we are 

adopting final rules that have been 

modified from the proposal in certain 

important respects. While these changes 

are discussed in more detail below, key 

elements include: 

• Modifications to the proposed 

definition of ‘‘U.S. person’’; 

• Provisions to distinguish non-U.S. 

persons’ dealing activity involving 

security-based swaps that are 

guaranteed by their U.S. affiliates from 

such non-U.S. persons’ other dealing 

activity for purposes of the de minimis 

exception, by requiring a non-U.S. 

person to count against the de minimis 

thresholds all dealing activity involving 

security-based swaps for which its 

counterparty has rights of recourse 


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176See Cross-Border Proposing Release, 78 FR 

30990; see generally section III.B, supra. 

177See Intermediary Definitions Adopting 

Release, 77 FR 30624; see also Cross-Border 

Proposing Release at 30993. 

178See Exchange Act rule 3a71–1(d). 

179See section I.A, supra. 

180See proposed Exchange Act rule 3a71– 

3(b)(1)(i). 

181See, e.g., ISDA Letter (Feb. 22, 2011) (‘‘NonU.S. entities (including non-U.S. affiliates and 

branches of U.S. banks) should not be required to 

register as Dealers when they are conducting 

business with non-U.S. counterparties’’). This and 

other comments in connection with the 

Intermediary Definitions Adopting Release are 

located at: http://www.sec.gov/comments/s7-39-10/ 

s73910.shtml. 

182We considered these comments in connection 

with the Cross-Border Proposing Release. See CrossBorder Proposing Release, 78 FR 30990, 30994. 

183We address these comments in the context of 

our discussion of our final definition of ‘‘U.S. 

person.’’ See notes 192–231, infra, and 

accompanying text. 

184See Exchange Act rule 3a71–3(b)(1)(i). Issues 

regarding how the de minimis exception applies to 

a non-U.S. person whose counterparty is a foreign 

branch are addressed in section IV.E.2, infra. 

185See Cross-Border Proposing Release, 78 FR 

30994. 

186The definition of ‘‘U.S. person’’ is addressed 

below. The definitions of ‘‘foreign branch’’ and 

against a U.S. guarantor that is affiliated 

with the non-U.S. person; 

• Provisions to distinguish non-U.S. 

persons that act as conduit affiliates (by 

entering into certain security-based 

swap transactions on behalf of their U.S. 

affiliates) from other non-U.S. persons 

for purposes of the de minimis 

exception, in that conduit affiliates are 

required to count all of their dealing 

activity against the de minimis 

thresholds regardless of counterparty; 

• Modifications to the application of 

the de minimis exception to dealing 

activity by non-U.S. persons when the 

counterparty is the foreign branch of a 

U.S. bank. 

• The addition of an exclusion related 

to cleared, anonymous transactions; and 

• Modifications of the proposed 

aggregation provisions, in part by 

removing the ‘‘operational 

independence’’ condition to excluding 

dealing positions of affiliates that are 

registered dealers. 

The final rules we are adopting reflect 

a territorial approach that is generally 

consistent with the principles that the 

Commission traditionally has followed 

with respect to the registration of 

brokers and dealers under the Exchange 

Act. Under this territorial approach, 

registration and other requirements 

applicable to brokers and dealers 

generally are triggered by a broker or 

dealer physically operating in the 

United States, even if its activities are 

directed solely toward non-U.S. persons 

outside the United States. The territorial 

approach further generally requires 

broker-dealer registration by foreign 

brokers or dealers that, from outside the 

United States, induce or attempt to 

induce securities transactions by 

persons within the United States—but 

not when such foreign brokers or 

dealers conduct their activities entirely 

outside the United States.176

In the cross-border context, moreover, 

the application of the ‘‘security-based 

swap dealer’’ definition and its de 

minimis exception remains subject to 

general principles that we addressed in 

the Intermediary Definitions Adopting 

Release. Accordingly, the term ‘‘person’’ 

as used in the ‘‘security-based swap 

dealer’’ definition and in the 

Commission’s rules implementing the 

de minimis exception should be 

interpreted to refer to a particular legal 

person, meaning that a trading desk, 

department, office, branch or other 

discrete business unit that is not a 

separately organized legal person will 

not be viewed as a security-based swap 

dealer. As a result, a legal person with 

a branch, agency, or office that is 

engaged in dealing activity above the de 

minimis threshold is required to register 

as a security-based swap dealer, even if 

the legal person’s dealing activity is 

limited to such branch, agency, or 

office.177

Cross-border security-based swap 

transactions also are subject to the 

principle that transactions between 

majority-owned affiliates need not be 

considered for purposes of determining 

whether a person is a dealer.178

As discussed below, these final rules 

and guidance do not address the 

proposed provisions regarding the crossborder application of the dealer 

definition to ‘‘transactions conducted 

within the United States,’’ as defined in 

the Cross-Border Proposing Release. We 

anticipate soliciting additional public 

comment on potential approaches for 

applying the dealer definition to nonU.S. persons in connection with activity 

between two non-U.S. persons where 

one or both are conducting dealing 

activity that occurs within the United 

States.179

B. Application of De Minimis Exception 

to Dealing Activities of U.S. Persons 

1. Proposed Approach and Commenters’ 

Views 

Under the proposal, a U.S. person 

would have counted all of its securitybased swap dealing activity against the 

de minimis thresholds, including 

transactions that it conducted through a 

foreign branch.180 Although some 

persons who submitted comments in 

connection with the Intermediary 

Definitions Adopting Release expressed 

the view that dealing activity by foreign 

branches should not be counted as part 

of a U.S. person’s de minimis 

calculation,181 we did not propose such 

an approach.182 Moreover, commenters 

to the Cross-Border Proposing Release 

did not specifically express opposition 

to this aspect of the proposal, although 

several commenters addressed related 

issues regarding the proposed scope of 

the ‘‘U.S. person’’ definition.183

2. Final Rule 

Consistent with the proposal, the final 

rules require U.S. persons to apply all 

of their dealing transactions against the 

de minimis thresholds, including 

activity they conduct through their 

foreign branches.184 Such dealing 

transactions must be counted regardless 

of where they are arranged, negotiated, 

or executed. 

As discussed above, it is our view that 

any dealing activity undertaken by a 

U.S. person, as defined in this final rule, 

occurs at least in part within the United 

States and therefore warrants the 

application of Title VII regardless of 

where particular aspects of dealing 

activity are conducted.185 Whenever a 

U.S. person enters into a security-based 

swap in a dealing capacity, it is the U.S. 

person as a whole—and not merely any 

applicable foreign branch or office of 

that U.S. person—that holds itself out as 

a dealer in security-based swaps. It is 

the U.S. person as a whole that seeks to 

profit by providing liquidity and making 

a market in security-based swaps, and it 

is the financial resources of the U.S. 

person as a whole that enable it to do 

so. Even if the U.S. person engages in 

dealing activity through a foreign 

branch or office, its dealing 

counterparties will look to the entire 

U.S. person—and not merely its foreign 

branch or office—for performance on 

the transaction, and the U.S. person as 

a whole assumes and stands behind the 

obligations arising from the securitybased swap, thereby creating risk to the 

U.S. person and potentially to the U.S. 

financial system. A dealer that is 

organized or has its principal place of 

business in the United States thus 

cannot hold itself out as anything other 

than a single person, and generally 

cannot operate as a dealer absent the 

financial and other resources of that 

single person. Accordingly, we 

conclude that U.S. persons that engage 

in security-based swap dealing activity 

through foreign branches or offices 

should be subject to the regulatory 

framework for dealers even if those U.S. 

persons deal exclusively with non-U.S. 

persons.186


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‘‘transaction conducted through a foreign branch’’ 

are addressed in section IV.E.2, infra. 

This interpretation, moreover, is consistent with 

the goals of security-based swap dealer regulation 

under Title VII. Security-based swap activity that 

results in a transaction involving a U.S. 

counterparty creates ongoing obligations that are 

borne by a U.S. person, and thus is properly viewed 

as occurring within the United States. The events 

associated with AIG FP, described in detail in our 

proposal, illustrate how certain transactions of U.S. 

persons can pose risks to the U.S. financial system 

even when they are conducted through foreign 

operations. See Cross-Border Proposing Release, 78 

FR 30980–81. Such risks, and their role in the 

financial crisis and in the enactment of Title VII, 

suggest that the statutory framework established by 

Congress and the objectives of Title VII would be 

undermined by an analysis that excludes from Title 

VII’s application certain transactions involving U.S. 

persons solely because they involve conduct carried 

out through operations outside the United States, 

particularly when those transactions raise concerns 

about risk to the U.S. person and to the U.S. 

financial system that are similar or identical to 

those raised by such conduct when carried out by 

the U.S. person entirely inside the United States. 

For the above reasons, we conclude that our 

approach does not apply to persons who are 

‘‘transact[ing] a business in security-based swaps 

without the jurisdiction of the United States,’’ 

within the meaning of section 30(c) of the Exchange 

Act. See section II.B.2(d), supra. A contrary 

interpretation would, in our view, reflect an 

understanding of what it means to conduct a 

security-based swaps business within the 

jurisdiction of the United States that is divorced 

both from Title VII’s statutory objectives and from 

the reality of the role of U.S. persons within the 

global security-based swap market. But in any event 

we also believe that this final rule is necessary or 

appropriate as a prophylactic measure to help 

prevent the evasion of the provisions of the 

Exchange Act that were added by the Dodd-Frank 

Act, and thus help ensure that the relevant 

purposes of the Dodd-Frank Act are not 

undermined. Otherwise, U.S. persons could simply 

conduct dealing activities with non-U.S. persons 

using foreign branches and remain outside of the 

application of the dealer requirements of Title VII, 

bringing the same risk into the United States that 

would be associated with such dealing activity that 

is conducted out of their U.S. offices. 

187Proposed Exchange Act rule 3a71–3(a)(9) 

under the Exchange Act defined ‘‘United States’’ as 

‘‘the United States of America, its territories and 

possessions, any States of the United States, and the 

District of Columbia.’’ 

188Proposed Exchange Act rule 3a71–3(a)(7)(i) 

under the Exchange Act. 

189See proposed Exchange Act rule 3a71– 

3(a)(7)(ii). 

190See, e.g., Securities Act Release No. 6863 

(‘‘Regulation S Adopting Release’’) (April 24, 1990), 

55 FR 18306, 18308 (May 2, 1990), 55 FR 18308 

(adopting regulation ‘‘based on a territorial 

approach to [s]ection 5 of the Securities Act’’). 

Although the proposed rule followed the approach 

to defining ‘‘U.S. person’’ in Regulation S in certain 

respects, we stated that we preliminarily believed 

that it was necessary to depart from Regulation S 

in defining ‘‘U.S. person’’ in the context of the 

cross-border application of Title VII. See CrossBorder Proposing Release, 78 FR 31007–08 

(comparing the proposed definition of ‘‘U.S. 

person’’ with the definition of ‘‘U.S. person’’ in 

Regulation S). For example, Regulation S expressly 

excludes foreign branches of U.S. banks from the 

definition of ‘‘U.S. person,’’ whereas our proposed 

definition provided that U.S.-person status would 

be determined at the entity level, meaning that a 

foreign branch of a U.S. person would, as part of 

that U.S. person, share in that U.S.-person status of 

the entity as a whole. See section II.B.2(b)i, supra. 

Thus, under our proposed approach, the term ‘‘U.S. 

person’’ would have been interpreted to include 

any foreign trading desk, office, or branch of an 

entity that is organized under U.S. law or that has 

its principal place of business in the United States. 

See Cross-Border Proposing Release, 78 FR 30996. 

The proposed definition of ‘‘U.S. person’’ was 

similar in many respects to the definition provided 

by CFTC staff in its October 12, 2012 no-action 

letter. See Time-Limited No-Action Relief: Swaps 

Only With Certain Persons to be Included in 

Calculation of Aggregate Gross Notional Amount for 

Purposes of Swap Dealer De Minimis Exception and 

Calculation of Whether a Person is a Major Swap 

Participant (Oct. 12, 2012), available at: http://

www.cftc.gov/ucm/groups/public/@lrlettergeneral/

documents/letter/12-22.pdf; see also Final CFTC 

Cross-Border Exemptive Order, 78 FR 862 

(indicating that for purposes of its temporary 

conditional relief the CFTC is taking a similar 

approach to the ‘‘U.S. person’’ definition as that set 

forth in the October 12, 2012 no-action letter). In 

July 2013, the CFTC issued its cross-border 

guidance, which modified its interpretation of U.S. 

person in certain respects, discussed in greater 

detail below. 

191See Cross-Border Proposing Release, 78 FR 

30996. 

192See, e.g., SIFMA/FIA/FSR Letter at A–6 

(stating that the Commission’s proposed ‘‘U.S. 

person’’ definition was ‘‘clear, objective and 

ascertainable’’); American Bar Association (‘‘ABA’’) 

Letter at 1–2, 4 (commending the Commission for 

a ‘‘clear and objective’’ approach to the ‘‘U.S. 

person’’ definition that is consistent with its 

statutory authority and respects principles of 

comity); IIB Letter at 5 (stating that the 

Commission’s proposed ‘‘U.S. person’’ definition is 

sensible in its jurisdictional scope and is consistent 

with territorial principles). But see EC Letter at 2 

(generally supporting the territorial scope of the 

‘‘U.S. person’’ definition, with the exception of the 

‘‘principal place of business’’ requirement, arguing 

that it is inconsistent with the territorial approach); 

ESMA Letter at 2 (supporting a definition of ‘‘U.S. 

person’’ that covers only persons located or 

incorporated in the United States). 

193See, e.g., SIFMA/FIA/FSR Letter at 2–3, A–7 

(suggesting that the Commission coordinate with 

the CFTC in order to provide a ‘‘consistent set of 

standards for determining an entity’s principal 

place of business’’); IIB Letter at 2 (noting that its 

recommendations are generally intended to 

emphasize consistency across regimes). See also 

Chris Barnard Letter at 2 (stating belief that the 

‘‘U.S. person’’ definition should be aligned with the 

CFTC’s definition, specifically with respect to 

commodity pools, pension plans, estates, and 

trusts); Japan Financial Markets Council (‘‘JFMC’’) 

Letter at 4 (noting that, even though JFMC does not 

support all aspects of the CFTC’s definition, it 

believes the Commission should adopt the same 

definition as the CFTC); Japan Securities Dealers 

Association (‘‘JSDA’’) Letter at 3 (expressing hope 

Continued 

C. Definition of ‘‘U.S. Person’’ 

1. Proposed Approach 

Consistent with our territorial 

approach to application of Title VII to 

cross-border security-based swap 

activity, our Cross-Border Proposal 

defined ‘‘U.S. person’’ to mean: 

• Any natural person resident in the 

United States; 

• Any partnership, corporation, trust, 

or other legal person organized or 

incorporated under the laws of the 

United States 187 or having its principal 

place of business in the United States; 

and 

• Any account (whether discretionary 

or non-discretionary) of a U.S. 

person.188

The Commission also proposed that 

the term ‘‘U.S. person’’ would exclude 

the following international 

organizations: the International 

Monetary Fund (‘‘IMF’’), the 

International Bank for Reconstruction 

and Development, the Inter-American 

Development Bank, the Asian 

Development Bank, the African 

Development Bank, the United Nations, 

and their agencies and pension plans, 

and any other similar international 

organizations, their agencies and 

pension plans.189

This proposed definition of ‘‘U.S. 

person’’ generally followed an approach 

to defining U.S. person that is similar to 

that used by the Commission in other 

contexts,190 though it was tailored to the 

specific goals of Title VII. As we noted 

in the proposal, we sought with the 

proposed definition to identify those 

types of individuals or entities whose 

security-based swap activity is likely to 

impact the U.S. market even if they 

transact with security-based swap 

dealers that are not U.S. persons and to 

identify those types of individuals or 

entities that are part of the U.S. securitybased swap market and should receive 

the protections of Title VII.191

2. Commenters’ Views 

We received extensive comments on 

our proposed definition of ‘‘U.S. 

person.’’ In these comments, many 

commenters also expressed their views 

on the interpretation of ‘‘U.S. person’’ in 

the CFTC Cross-Border Guidance. As 

explained in more detail below, several 

commenters emphasized that we should 

minimize divergence from the CFTC’s 

approach, including by adding certain 

elements to our definition of ‘‘U.S. 

person’’ that we had not proposed. 

Many commenters also identified 

specific elements of the CFTC 

interpretation that we should not adopt 

in our final rule. 

(a) Definition of ‘‘U.S. Person’’ 

Generally 

Several commenters expressed the 

view that our proposed definition of 

‘‘U.S. person’’ was clear, objective, and 

territorial in scope.192 At the same time, 

many commenters, including some who 

expressed agreement with our proposed 

approach, urged us to adopt, in whole 

or in part, a definition of ‘‘U.S. person’’ 

that is consistent with the interpretation 

of ‘‘U.S. person’’ in the CFTC CrossBorder Guidance.193 In contrast, two 


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that the Commission and the CFTC do not adopt 

different definitions of U.S. person); Investment 

Adviser Association (‘‘IAA’’) Letter at 3 (noting that, 

given the finalization of the CFTC Cross-Border 

Guidance, the Commission should modify its 

proposal in several respects to be more consistent 

with the CFTC’s definition of ‘‘U.S. person’’). 194See AFR Letter I at 3, 5 (stating that the 

proposed definition of ‘‘U.S. person’’ is overly 

narrow because it does not include foreign 

subsidiaries of the seven largest U.S. bank holding 

companies); BM Letter at 5, 9, 14–15 (stating that 

the proposed definition of ‘‘U.S. person’’ is too 

narrow because it excludes guaranteed affiliates and 

other affiliates in a control relationship with a U.S. 

person; further suggesting that, should such 

guaranteed entities, whether they are implicitly or 

explicitly guaranteed, not be considered U.S. 

persons, they be separately ‘‘ring-fenced’’ from their 

U.S. affiliate in order to ensure that the U.S. affiliate 

does not cover any of the guaranteed affiliates 

obligations; further stating that such entities are 

within the scope of the Commission’s broad 

authority under Exchange Act section 30(c) to 

regulate cross-border activity). 

195See Citadel Letter at 3 (supporting our 

proposal to not rely on Regulation S as it would not 

capture certain foreign funds that the commenter 

believed should be considered U.S. persons); ICI 

Letter at 6 (recommending that our analysis be 

consistent with Regulation S because fund 

managers are accustomed to that definition). Cf. 

note 190, supra (describing elements of ‘‘U.S. 

person’’ definition contained in Regulation S). 

196See Citadel Letter at 2–3 (noting further that 

such an approach will ensure that these entities 

will be subject to clearing, reporting, and other 

transaction-level requirements). 

197See id. 

198See ICI Letter at 4–5 (arguing that a ‘‘principal 

place of business’’ test is inappropriate for 

investment vehicles because they generally have no 

employees or offices of their own). 

199See IAA Letter at 3 (urging the Commission to 

coordinate with the CFTC to develop a consistent 

definition of principal place of business); SIFMA/ 

FIA/FSR Letter at A–8 (urging harmonization with 

the CFTC). 

200See IIB Letter at 6. But see ICI Letter at 5 n.13 

(requesting that the U.S.-person status of an 

investment vehicle not turn on the location of the 

vehicle’s activities, employees, or the offices of its 

sponsor or adviser because such considerations are 

not relevant to whether risk is transferred to the 

United States). 

201See Citadel Letter at 2. This commenter 

suggested looking to those senior personnel 

responsible for implementing the investment 

vehicle’s investment and trading strategy as well as 

those responsible for ‘‘investment selections, risk 

management decisions, portfolio management, or 

trade execution.’’ See id. 

202See IAA Letter at 4 (suggesting that the 

Commission follow the CFTC Cross-Border 

Guidance by specifically providing that non-U.S. 

persons are not U.S. persons simply by virtue of 

using a U.S.-person asset manager); SIFMA/FIA/

FSA at A–8 (same). 

203Compare ICI Letter at 7 (arguing that a 

majority-ownership test is not workable for nonU.S. regulated funds that are offered publicly 

abroad because it may be impossible or inconsistent 

with local law to identify or reveal investor 

information) and IAA Letter at 4 (explaining that a 

majority-ownership test would capture non-U.S. 

funds with minimal nexus to the United States and 

present implementation challenges) with AFR Letter 

I at 8 (recommending that the U.S.-person status of 

investment vehicles be based on majority 

ownership and/or actual locations of the person, 

regardless of the location of incorporation), and 

Greenberger Letter I at 6–7 (making a similar 

argument with respect to CFTC’s interpretation of 

U.S. person), and BM Letter at 10 (recommending 

that the ‘‘U.S. person’’ definition include collective 

investment vehicles that are majority-owned by 

U.S. persons). 

204See IAA Letter at 5. 

205See id. at 3, 5 (noting that the CFTC CrossBorder Guidance has been finalized and urging the 

Commission to adopt the CFTC approach to permit 

market participants to operate ‘‘under the certainty 

and clarity’’ of consistent definitions of U.S. 

persons). 

206See ICI Letter at 5–6 (noting that such 

investment vehicles have only minimal nexus to the 

United States and stating that institutional investors 

that invest in such funds would not expect U.S. law 

to apply to the vehicles’ transactions). 

207See AFR Letter I at 3, 5–7 (stating that 

proposed definition is too narrow and would allow 

U.S. entities to avoid regulation and engage in 

regulatory arbitrage); BM Letter at 9, 11–15 

(requesting that the ‘‘U.S. person’’ definition be 

broadened to include any person that is 

‘‘indistinguishable’’ from a U.S. person, such as by 

implicit or explicit guarantees from a U.S. person, 

including any affiliate controlling, controlled by, or 

under common control with a person that is 

headquartered, incorporated, or otherwise residing 

in the United States). These commenters further 

argued that the acknowledgement in the CrossBorder Proposing Release that guarantees of foreign 

entities by a U.S. person may subject the U.S. 

financial system to risk is inconsistent with a 

definition that does not include such entities in the 

‘‘U.S. person’’ definition. See id. at 5–6; BM letter 

at 8, 12. Cf. AFR Letter II at 2 (urging CFTC to 

include guaranteed affiliates in of U.S. persons in 

the interpretation of U.S. person); Greenberger 

Letter II at 3, 16 (requesting that the CFTC classify 

foreign subsidiaries of U.S. financial institutions as 

U.S. persons); AFR letter to CFTC, dated August 13, 

2012 (‘‘AFR Letter III’’) (stating that the CFTC’s 

Final Exemptive Order Regarding Compliance with 

Certain Swap Regulation, 78 FR 858, will pose a 

risk to U.S. taxpayers due to the delay in applying 

commenters disagreed with our 

approach as being underinclusive and 

urged us to define U.S. person more 

broadly than the CFTC had interpreted 

it.194 Two commenters addressed 

whether our ‘‘U.S. person’’ definition 

should follow the U.S. person analysis 

in Regulation S.195

(b) Treatment of Investment Vehicles 

In response to our questions about 

whether our proposed definition of 

‘‘U.S. person’’ provided sufficient 

guidance to investment vehicles and 

similar legal persons, commenters 

generally requested guidance but 

expressed a range of views as to what 

guidance we should provide. One 

commenter requested that we ensure 

that foreign investment vehicles with a 

‘‘U.S. nexus’’ be considered U.S. 

persons.196 This commenter expressed 

support for what it described as our 

‘‘complementary’’ proposed approach 

that would have required legal persons, 

including investment vehicles, to 

perform a principal place of business 

assessment to determine whether they 

are U.S. persons, and would have 

subjected all transactions conducted 

within the United States to Title VII 

requirements.197 One commenter 

conversely argued that a ‘‘principal 

place of business’’ test for investment 

vehicles would be inappropriate.198

Several commenters requested that we 

provide additional guidance regarding 

the application of the ‘‘principal place 

of business’’ test to investment vehicles. 

Some commenters specifically 

requested that we avoid diverging from 

the CFTC’s interpretation of ‘‘U.S. 

person’’ in our own final definition.199

One commenter urged us to help ensure 

that market participants are able to 

make rational and consistent 

determinations regarding the U.S.- 

person status of investment vehicles, 

and suggested that an appropriate test 

would look to the location of the person 

responsible for the fund’s operational 

management, which the commenter 

identified as the person that establishes 

the investment vehicle and selects 

persons to carry out functions on behalf 

of the vehicle, as opposed to the person 

responsible for the fund’s investment 

management activities.200 Another 

commenter requested guidance 

regarding the application of the 

‘‘principal place of business’’ test, while 

expressing support for using an 

approach similar to the CFTC CrossBorder Guidance.201 One commenter 

requested that the location of an asset 

manager retained by a person not be the 

sole factor used to determine the 

person’s principal place of business or 

U.S.-person status.202

A few commenters responded to our 

question whether the proposed 

definition should encompass funds that 

are majority-owned by U.S. persons, as 

the CFTC’s interpretation does, with 

two commenters advocating against and 

three advocating in favor of such an 

approach.203 One of the commenters 

that opposed such a test urged, 

however, that if we were to adopt such 

a test, the test be identical to the 

approach taken by the CFTC.204

One commenter suggested that we 

adopt the CFTC’s approach by which 

collective investment vehicles that are 

offered publicly only to non-U.S. 

persons, and not offered to U.S. persons, 

would not generally be considered ‘‘U.S. 

persons.’’ 205 Another commenter urged 

that the definition exclude ‘‘non-U.S. 

regulated funds’’ that are offered 

publicly only to non-U.S. persons but 

are offered privately to U.S. persons in 

certain specific circumstances.206

(c) Treatment of Legal Persons More 

Generally 

Two commenters urged us to include 

in the definition of ‘‘U.S. person’’ 

guaranteed subsidiaries and affiliates of 

U.S. persons.207 Alternatively, these 


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requirements to foreign affiliates of U.S. banks) 

(incorporated by reference in AFR Letter I); Michael 

Greenberger letter to CFTC, dated August 13, 2012 

(‘‘Greenberger Letter III’’) (incorporated by reference 

in AFR Letter I). 

208See AFR Letter I at 7; BM Letter at 17 (stating 

that the exclusion from the de minimis calculation 

for guaranteed transactions is ‘‘indefensible’’ and 

‘‘must be eliminated’’). See also Chris Barnard 

Letter at 2 (stating that Title VII should apply to 

transactions involving a guarantee by a U.S. 

person). 

209See SIFMA/FIA/FSR Letter at A–11 to A–12 

(stating that to treat the existence of a U.S. parent 

as relevant to determining whether a person is a 

U.S. person would disregard the legal 

independence of affiliates and imply that persons 

within the same corporate group necessarily 

coordinate their security-based swap activities). 

210See BM Letter at 10. Cf. CFTC Cross-Border 

Guidance, 78 FR 45312. 

211See Citadel Letter at 2 (stating that 

Commission was correct to incorporate a principal 

place of business determination into the ‘‘U.S. 

person’’ definition). 

212See IIB Letter at 5 (noting the difficulty of 

implementing the ‘‘principal place of business’’ test 

without further guidance and requesting the 

Commission to provide workable criteria); ABA 

Letter at 2–3 (requesting clarification of ‘‘principal 

place of business’’ test and recommending that the 

Commission confirm that an entity may rely on its 

counterparty’s written representations regarding the 

counterparty’s principal place of business). 

213See IIB Letter at 5–6. Another commenter 

suggested that the location of the personnel 

directing the security-based swap activity of the 

legal person be determinative. See Citadel Letter at 

2. 

214See JFMC Letter at 4 (notwithstanding 

burdensome aspects of the CFTC’s interpretation, 

and the difficulties of the ‘‘principal place of 

business’’ test in particular, urging the Commission 

to adopt the same definition as the CFTC); SIFMA/ 

FIA/FSR Letter at A–8 (explaining the difficulty in 

having to determine a counterparty’s principal 

place of business under two different standards); 

Citadel Letter at 2 (requesting that the Commission 

provide further guidance ‘‘to parallel the CFTC’s 

guidance’’ on principal place of business). 

215See IAA Letter at 3 (urging that, if the 

Commission adopts a ‘‘principal place of business’’ 

test, it coordinate with the CFTC to develop a 

consistent and harmonized definition). 

216See ESMA Letter at 2 (arguing that the ‘‘U.S. 

person’’ definition should be limited to entities that 

are established within the United States and should 

not in any case extend to an entity, such as a U.S. 

branch of a foreign bank, whose presence in the 

United States is ‘‘complementary’’ to its principal 

activity outside the United States and which is 

already regulated by a non-U.S. jurisdiction); JSDA 

Letter at 3 (recommending that the Commission and 

the CFTC eliminate the principal place of business 

concept from their respective criteria for identifying 

U.S. persons). See also EC Letter at 2 (supporting 

the territorial approach of the ‘‘U.S. person’’ 

definition, but suggesting that the ‘‘principal place 

of business’’ test is not territorial and suffers from 

ambiguity); 

217See EC Letter at 2. See also ESMA Letter at 

2 (requesting that the Commission provide clarity 

with respect to its proposed ‘‘U.S. person’’ 

definition, particularly the ‘‘principal place of 

business’’ test). 

218See ESMA Letter at 2 (noting that to include 

such persons would place potentially duplicative 

and conflicting requirements on the person in the 

case of European persons that would also be subject 

to the European Market Infrastructure Regulation). 

219See EC Letter at 2. 

220See ABA Letter at 2–3 (stating that entities 

should be able to rely on their counterparty’s 

written representations ‘‘absent evidence to the 

contrary,’’ regarding their principal place of 

business); JSDA Letter at 3 (recommending that, if 

the Commissions determine to keep a ‘‘principal 

place of business’’ test, they permit entities to rely 

on counterparty representations); IIB Letter at 5 n.9 

(recommending that a counterparty representation 

as to U.S.-person status be sufficient to fulfill a 

person’s diligence requirements). One of these 

commenters specifically requested that the 

reasonable reliance standard be limited to 

representations regarding principal place of 

business. See ABA letter at 3 n.2. 

221See IIB Letter at 6. 

222See SIFMA/FIA/FSR Letter at A–8. 

223See id. at A–9. See also IAA Letter at 4–5 

(requesting that, should the Commission adopt an 

ownership test, it adopt a test consistent with and 

no more restrictive than the CFTC test for collective 

investment vehicles). 

224See SIFMA/FIA/FSR Letter at A–8 to A–9. 

Another commenter expressed disagreement with 

the Commission’s proposed treatment of accounts 

in the ‘‘U.S. person’’ definition, expressing concern 

that inclusion of accounts in the definition may 

affect the U.S.-person status of funds. See IAA 

Letter at 4 (explaining that an ownership test 

applying to accounts would potentially capture 

non-U.S. funds that may have U.S. investors but 

whose ‘‘purposeful activities’’ such as ‘‘marketing 

or offering’’ are not aimed at U.S. persons, meaning 

the fund would have ‘‘little nexus to the U.S.’’). 

225See SIFMA/FIA/FSR Letter at A–10 

(supporting an exclusion for all Foreign Public 

Continued 

commenters suggested that we should 

require dealing transactions with such 

persons to be included in the dealing 

counterparty’s security-based swap 

dealer de minimis calculation.208

However, another commenter supported 

our proposed approach not to look to 

whether a person’s transactions are 

guaranteed by a U.S. person for 

purposes of determining that person’s 

U.S.-person status, stating that our 

proposal to address such risk through 

major security-based swap participant 

registration was sufficient.209

One commenter suggested that the 

Commission follow the CFTC in 

including in its final ‘‘U.S. person’’ 

definition legal persons that are directly 

or indirectly majority-owned by one or 

more U.S. persons who bear unlimited 

responsibility for the obligations of that 

legal person, stating that such a 

provision is necessary to prevent 

evasion of Title VII.210

One commenter expressed support for 

a principal place of business component 

to the ‘‘U.S. person’’ definition as set 

forth in our proposal.211 Several 

commenters requested that the 

Commission provide additional 

guidance regarding relevant factors in 

identifying a legal person’s principal 

place of business.212 One commenter 

suggested that the location of a 

company’s headquarters should be 

determinative and that a particular legal 

person should have only one principal 

place of business.213

Several commenters suggested that 

the Commission harmonize its approach 

to determining a person’s principal 

place of business to the approach in the 

CFTC Cross-Border Guidance,214 while 

at least one commenter suggested that 

the Commission work with the CFTC to 

develop a new, common definition.215

At least two commenters, on the other 

hand, objected to the use of a ‘‘principal 

place of business’’ test.216 One 

commenter suggested an alternative 

approach that would establish criteria 

for this determination, such as 

quantitative thresholds, and would also 

consider not requiring a principal place 

of business analysis if the jurisdiction of 

incorporation has an acceptable 

regulatory framework.217 Another 

commenter stated that a U.S. branch of 

a person established in another 

jurisdiction should not be considered to 

have its principal place of business in 

the United States.218 Another suggested 

that requiring a principal place of 

business analysis represented a 

departure from the Commission’s stated 

territorial approach to U.S. person.219

Several commenters recommended 

that, if the Commission were to adopt a 

‘‘principal place’’ of business test in its 

‘‘U.S. person’’ definition, market 

participants be allowed to rely on a 

counterparty’s representations as to the 

counterparty’s principal place of 

business.220 Another suggested that the 

test look to information found in the 

public filings of a public company or, 

with respect to a private company, the 

location of its business.221

(d) Accounts 

One commenter supported the 

Commission’s proposal for determining 

the U.S.-person status of an account, 

which would look to whether the owner 

of the account itself is a U.S. person,222

but suggested that the Commission 

provide bright-line thresholds to clarify 

that de minimis ownership by U.S. 

persons would not cause the account to 

be considered a U.S. person.223 The 

commenter further requested that the 

Commission clarify that the ‘‘account’’ 

prong of the ‘‘U.S. person’’ definition 

would not apply to collective 

investment vehicles but was intended to 

capture persons that should be 

considered U.S. persons even though 

they are conducting trades, as the direct 

counterparty, through an account.224

(e) International Organizations 

A number of commenters expressed 

support for the Commission’s proposal 

to exclude certain international 

organizations (e.g., multilateral 

development banks, or ‘‘MDBs’’) from 

the ‘‘U.S. person’’ definition.225 Three 


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Sector Financial Institutions (including MDBs) 

(‘‘FPSFIs’’) and their affiliates from the ‘‘U.S. 

person’’ definition); JFMC Letter at 4 (supporting an 

exclusion from ‘‘U.S. person’’ definition for FPSFIs 

and their affiliates); JSDA letter at 3 (supporting the 

Commission’s proposed exclusion from the ‘‘U.S. 

person’’ definition for certain ‘‘international 

organizations’’ and expressing support for an 

exclusion for FPSFIs); International Bank for 

Reconstruction and Development, International 

Finance Corporation et al. Letter (‘‘WB/IFC Letter’’) 

at 1, 6 (supporting an exclusion for multilateral 

development institutions and their affiliates from 

the ‘‘U.S. person’’ definition, and noting that such 

affiliates are excluded under Regulation S as well); 

IDB Letter at 1 (requesting that MDBs and their 

affiliates not be considered U.S. persons). 

226See Sullivan and Cromwell (‘‘SC’’) Letter at 18 

and n.20; WB/IFC Letter at 4–5 (suggesting that to 

avoid confusion, the Commission expressly include 

other MDBs that maintain headquarters in 

Washington, DC and identify those organizations 

which include IFC, the International Development 

Association, the Multilateral Investment Guarantee 

Agency, and the Inter-American Investment 

Corporation); IIB Letter at 5 (supporting an 

exclusion from U.S.-person status for ‘‘international 

organizations’’ similar to those already enumerated 

in the Cross-Border Proposing Release, and stating 

that such an exclusion would be consistent with the 

CFTC Cross-Border Guidance and ‘‘wellestablished’’ principles of international law); InterAmerican Development Bank (‘‘IDB’’) Letter at 2 

(stating that it shares the position of the 

International Finance Corporation and the 

International Bank for Reconstruction and 

Development that the Commission’s approach to 

MDB’s should be consistent with the CFTC). See 

also Intermediary Definitions Adopting Release, 77 

FR 30692 n.1180 (listing international financial 

institutions for purposes of CFTC requirements); 

CFTC Cross-Border Guidance, 78 FR 45353 n.531 

(incorporating list provided in Intermediary 

Definitions Adopting Release by reference). 

227Proposed Exchange Act rule 3a71–3(a)(7)(ii). 

228See SC Letter at 3–4, 7–9, 12–14; WB/IFC 

letter at 2. See also IDB Letter at 1 (requesting 

confirmation that MDBs will not be subject to 

Commission’s requirements with respect to 

security-based swaps and indicating that such an 

approach would respect its privileges and 

immunities). 

229See SC Letter at 19–22 (requesting that, in 

response to footnote 301 of the Cross-Border 

Proposing Release, ‘‘controlled affiliates’’ of MDBs 

not be treated as U.S. persons); IDB Letter at 1 

(requesting that affiliates of international 

organizations not be treated as U.S. persons); WB/ 

IFC Letter at 1, 6 (supporting an exclusion for 

multilateral development institutions and their 

affiliates from the ‘‘U.S. person’’ definition, and 

noting that such affiliates are excluded under 

Regulation S as well). One commenter suggested 

that this exclusion be made available for a 

‘‘controlled affiliate,’’ defined as follows: (1) an 

entity subject to the MDB’s governance structure; 

(2) all of whose activities must be consistent with 

and in furtherance of the MDB’s purpose and 

mission; (3) whose governing instruments restrict it 

to engaging in activities in which the MDB could 

itself engage and provide that it is not authorized 

to engage in any other activities; and (4) which is 

under the ‘‘control’’ of the MDB as that term is used 

in securities laws (Securities Act Rule 405). See also 

note 225, supra. 

230See IIB Letter at 5 n.9. This commenter 

suggested that we should permit reliance on a 

representation ‘‘absent knowledge of facts that 

would cause a reasonable person to question the 

accuracy of the representation.’’ See also JSDA 

Letter at 3. 

231See note 220, supra. 

232See SIFMA/FIA/FSR Letter at A–8 (noting that 

performing a separate analysis would be 

burdensome); IIB Letter at 5, note 9 (noting that the 

CFTC’s interpretation of ‘‘U.S. person’’ is broader 

than, and encompasses the three elements of, the 

Commission’s proposed ‘‘U.S. person’’ definition). 

233Cf. note 192, supra (citing comment letters 

expressing general agreement with our territorial 

approach to defining U.S. person). 

234Exchange Act rule 3a71–3(a)(4)(i). The second 

prong has been modified from the proposal to 

include an express reference to ‘‘investment 

vehicle’’ and to clarify that any legal person 

‘‘established’’ under United States law is a U.S. 

person, as discussed further below. See Exchange 

Act rule 3a71–3(a)(4)(i)(B). The fourth prong has 

been added to include an express reference to 

‘‘estate.’’ See Exchange Act rule 3a71–3(a)(4)(i)(D). 

In the text of the final rule we have made a 

technical change to the proposal to clarify that the 

‘‘U.S. person’’ definition is met if any one of the 

applicable prongs is satisfied (in part by replacing 

‘‘and’’ with ‘‘or’’ in connection with the 

enumeration of the prongs). See Exchange Act rule 

3a71–3(a)(4)(i). 

Consistent with the proposal, ‘‘special entities,’’ 

as defined in section 15F(h)(2)(C) of the Exchange 

Act, are U.S. persons because they are legal persons 

organized under the laws of the United States. 

Section 15F(h)(2)(C) of the Exchange Act defines 

the term ‘‘special entity’’ as: A Federal agency; a 

State, State agency, city, county, municipality, or 

other political subdivision of a State; any employee 

benefit plan, as defined in section 3 of the 

Employee Retirement Income Security Act of 1974, 

29 U.S.C. 1002; any governmental plan, as defined 

in section 3 of the Employee Retirement Income 

Security Act of 1974, 29 U.S.C. 1002; or any 

endowment, including an endowment that is an 

organization described in section 501(c)(3) of the 

Internal Revenue Code of 1986. 15 U.S.C. 78o– 

10(h)(2)(C). 

235Exchange Act rule 3a71–3(a)(4)(ii). 

236 Id. 

237Exchange Act rule 3a71–3(a)(4)(iii). 

238See notes 220, 230, supra. 

commenters specifically requested that 

the Commission list all such institutions 

that would be excluded from the ‘‘U.S. 

person’’ definition, similar to the 

approach the CFTC took in its 

guidance,226 rather than refer to ‘‘other 

similar international organizations.’’ 227

These commenters also argued that 

certain organizations have absolute 

immunity under federal law and should 

be excluded from regulation under Title 

VII entirely.228 Three commenters 

requested that affiliates of MDBs and 

similar organizations also be excluded 

from the definition of ‘‘U.S. person.’’ 229

(f) Status Representations 

Some commenters requested that a 

potential dealer expressly be permitted 

to rely on a counterparty representation 

to fulfill its diligence requirements in 

determining whether its counterparty is 

a U.S. person under the final rule.230

Several commenters, as discussed 

above, specifically requested that we 

permit reliance on representations as to 

a person’s principal place of 

business.231 Two commenters requested 

that market participants be permitted to 

rely on the representations prepared by 

counterparties under the CFTC CrossBorder Guidance.232

3. Final Rule 

Consistent with the proposal, we are 

adopting a final definition of ‘‘U.S. 

person’’ that continues to reflect a 

territorial approach to the application of 

Title VII and is in most respects 

unchanged from the proposal.233 In 

response to comments, the final 

definition reflects certain changes 

intended to clarify the scope of the 

definition. Also in response to 

comments, we are adopting a general 

definition of ‘‘principal place of 

business’’ and a specific application of 

the term to externally managed 

investment vehicles. We are also adding 

a prong relating specifically to the U.S.- 

person status of estates. 

The final rule defines ‘‘U.S. person’’ 

to mean: 

• Any natural person resident in the 

United States; 

• Any partnership, corporation, trust, 

investment vehicle, or other legal 

person organized, incorporated, or 

established under the laws of the United 

States or having its principal place of 

business in the United States; 

• Any account (whether discretionary 

or non-discretionary) of a U.S. person; 

or 

• Any estate of a decedent who was 

a resident of the United States at the 

time of death.234

The final rule defines ‘‘principal place 

of business’’ to mean ‘‘the location from 

which the officers, partners, or 

managers of the legal person primarily 

direct, control, and coordinate the 

activities of the legal person.’’ 235 It also 

provides that, with respect to an 

externally managed investment vehicle, 

this location ‘‘is the office from which 

the manager of the vehicle primarily 

directs, controls, and coordinates the 

investment activities of the vehicle.’’ 236

Also consistent with the proposal, the 

final definition excludes the following 

international organizations from the 

definition of ‘‘U.S. person’’: The IMF, 

the International Bank for 

Reconstruction and Development, the 

Inter-American Development Bank, the 

Asian Development Bank, the African 

Development Bank, the United Nations, 

and their agencies and pension plans, 

and any other similar international 

organizations, their agencies and 

pension plans.237

To address commenters’ requests,238

the final rule also has been revised from 

the proposal to provide that a person 

may rely on a counterparty’s 

representation regarding its status as a 

U.S. person, unless such person knows, 


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239Exchange Act rule 3a71–3(a)(4)(iv). 

240See note 195, supra. 

241See 17 CFR 230.901(k); Regulation S Adopting 

Release, 55 FR 18306. See also Cross-Border 

Proposing Release, 78 FR 31007 (describing 

differences between policy concerns underlying 

Regulation S and Title VII). For example, with its 

exclusions for certain foreign branches and agencies 

of U.S. persons from the definition of ‘‘U.S. 

person,’’ Regulation S would not address the entitywide nature of the risks that Title VII seeks to 

address. See id. 

242Exchange Act rule 3a71–3(a)(5) defines 

‘‘United States’’ to mean ‘‘the United States of 

America, its territories and possessions, any State 

of the United States, and the District of Columbia.’’ 

243Exchange Act rule 3a71–3(a)(4)(i)(A). 

244This approach to treating natural persons as 

U.S. persons solely based on residence, rather than 

citizenship, differs from the approach to legal 

persons, such as partnerships and corporations, 

discussed below. 

Notwithstanding slight differences between the 

language of our final rule and the CFTC CrossBorder Guidance, we expect that a natural person’s 

U.S.-person status under our final definition would 

be the same as under the CFTC Cross-Border 

Guidance. Cf. note 193, supra (citing commenters 

urging the Commission to harmonize its definition 

of ‘‘U.S. person’’ with the interpretation set forth by 

the CFTC). 

245See Rule 15a–6 Adopting Release, 54 FR 

30017 (providing that foreign broker-dealers 

soliciting U.S. investors abroad generally would not 

be subject to registration requirements with the 

Commission). 

246See Cross-Border Proposing Release, 78 FR 

30996. 

247Moreover, we expect that a legal person’s U.S.- 

person status under the Commission’s final 

definition of ‘‘U.S. person’’ and under the definition 

‘‘principal place of business’’ would as a general 

matter be the same as under similar prongs on the 

CFTC Cross-Border Guidance. 

248See Exchange Act rule 3a71–3(a)(4)(i)(B). 

249Cf. Cross-Border Proposing Release, 78 FR 

30997 n.296 (using funds and special-purpose 

investment vehicles as examples of other legal 

persons that may be U.S. persons). 

250See Regulation S Adopting Release, 55 FR 

18316. 

251Cf. EC Letter at 2 (expressing support for this 

approach); ESMA letter at 1 (same). 

or has reason to know, that the 

representation is inaccurate.239

Although one commenter requested 

that we use a definition of ‘‘U.S. 

person’’ that is consistent with 

Regulation S, we are declining to do so 

for the reasons described in our CrossBorder Proposing Release.240 We 

acknowledge that many market 

participants are accustomed to 

Regulation S and may find such a 

definition relatively easy to implement. 

As we discussed in our proposal, 

however, Regulation S addresses 

different concerns from those addressed 

by Title VII.241 In light of these 

differences, the Commission believes 

that adopting the definition of ‘‘U.S. 

person’’ in Regulation S would not 

achieve the goals of Title VII and that a 

definition of U.S. person specifically 

tailored to the regulatory objectives it is 

meant to serve, as we are adopting here, 

is appropriate. 

(a) Natural Persons 

As in our proposed definition, the 

final definition of ‘‘U.S. person’’ 

provides that any natural person 

resident in the United States 242 is a U.S. 

person. This definition encompasses 

persons resident within the United 

States regardless of the individual’s 

citizenship status,243 but it does not 

encompass individuals who are resident 

abroad, even if they possess U.S. 

citizenship.244

As we noted in the proposal, it is 

consistent with the approach we have 

taken in prior rulemakings relating to 

the cross-border application of certain 

similar regulatory requirements to 

subject natural persons residing within 

the United States to our regulatory 

framework.245 Moreover, we believe that 

natural persons residing within the 

United States who engage in securitybased swap transactions are likely to 

raise the types of concerns intended to 

be addressed by Title VII, including 

those related to risk, transparency, and 

counterparty protection.246 We believe 

that it is reasonable to infer that a 

significant portion of such persons’ 

financial and legal relationships are 

likely to exist within the United States 

and that it is therefore reasonable to 

conclude that risks arising from the 

security-based swap activities of such 

persons could manifest themselves 

within the United States, regardless of 

the location of their counterparties. 

(b) Corporations, Organizations, Trusts, 

Investment Vehicles, and Other Legal 

Persons 

The final definition of ‘‘U.S. person’’ 

as applied to legal persons has been 

modified to clarify certain aspects of the 

rule. Also, in response to comments, we 

are adopting a definition of ‘‘principal 

place of business.’’ In general, the scope 

of the definition as applied to legal 

persons does not differ materially from 

the scope of our proposal.247

i. Entities Incorporated, Organized, or 

Established Under U.S. Law 

As with the proposed rule, the final 

definition provides that any 

partnership, corporation, trust, or other 

legal person organized or incorporated 

under the laws of the United States or 

having its principal place of business in 

the United States would be a U.S. 

person.248 The final definition also 

includes two changes that are intended 

to make explicit certain concepts that 

were implicit in the proposed 

definition. First, the final rule provides 

that a legal person ‘‘established’’ under 

the laws of the United States is a U.S. 

person, just as if it had been 

‘‘organized’’ or ‘‘incorporated’’ under 

the laws of the United States. This 

change is intended to clarify the 

Commission’s intention that any person 

formed in any manner under the laws of 

the United States will be a U.S. person 

for purposes of Title VII. 

Second, the final rule adds an express 

reference to ‘‘investment vehicle’’ in the 

non-exclusive list of legal persons to 

clarify that any such person, however 

formed, will be treated as a U.S. person 

for purposes of Title VII if it is 

organized, incorporated, or established 

under the laws of the United States or 

has its principal place of business in the 

United States.249 Investment vehicles 

are commonly established as 

partnerships, trusts, or limited liability 

entities and, therefore, fall within the 

scope of the rule as proposed. However, 

given the significant role that such 

vehicles have played and likely will 

continue to play in the security-based 

swap market, we believe that the final 

rule should incorporate an express 

reference to such vehicles to avoid any 

ambiguity regarding whether the 

definition of ‘‘U.S. person,’’ including 

the principal place of business 

component of that definition, applies to 

them. 

As noted in our proposal, we have 

previously looked to where a legal 

person is organized, incorporated, or 

established to determine whether it is a 

U.S. person.250 We continue to believe 

that place of organization, 

incorporation, or establishment is 

relevant in the context of Title VII. In 

our view, the decision of a corporation, 

trustee, or other person to organize 

under the laws of the United States 

indicates a degree of involvement in the 

U.S. economy or legal system that 

warrants subjecting it to security-based 

swap dealer or major security-based 

swap participant registration 

requirements under Title VII if its 

security-based swap dealing activity or 

its security-based swap positions exceed 

the relevant thresholds.251 We believe 

that it is reasonable to infer that an 

entity incorporated, organized, or 

established under the laws of the United 

States is likely to have a significant 

portion of its financial and legal 

relationships in the United States and 

that it is therefore reasonable to 

conclude that the risks arising from its 

security-based swap activities are likely 

to manifest themselves in the United 

States, regardless of the location of its 

counterparties. Accordingly, the final 


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252See note 194, supra (citing AFR and BM 

Letters). One of these commenters argued that the 

final definition of ‘‘U.S. person’’ should include 

guaranteed foreign affiliates of U.S. persons, 

whether the guarantee is explicit or implicit, and 

that affiliates should be presumed to be receiving 

guarantees. See AFR Letter I at 3, 5–7. The other 

urged that the final definition of ‘‘U.S. person’’ 

include guaranteed foreign affiliates and ‘‘de facto 

guaranteed’’ affiliates of U.S. persons that may not 

be explicitly guaranteed. See BM Letter at 9, 11–15. 

253But see section IV.F, infra (discussing the 

aggregation of affiliate positions for purposes of the 

de minimis calculation). 

254See note 207 (citing AFR and BM Letters). 

255As we noted above, our ‘‘U.S. person’’ 

definition is intended to identify those persons 

whose financial and legal relationships are likely to 

be located in significant part within the United 

States. The mere fact of an affiliate relationship 

with, or a guarantee from, a U.S. person does not 

appear to us to indicate that such person has such 

relationships within the United States. Similarly, 

the mere fact that a person’s security-based swap 

activity poses some degree of risk to the United 

States does not necessarily indicate that the person 

has the types of financial and legal relationships 

within the United States that warrant treating it as 

a U.S. person. However, we recognize that non-U.S. 

persons may in fact pose risk to the United States, 

particularly when their security-based swap 

transactions are subject to a recourse guarantee 

against a U.S.-person affiliate, and, even though we 

do not include them in our ‘‘U.S. person’’ 

definition, we do address such risk through our 

final rules applying the security-based swap dealer 

de minimis exception and the major security-based 

swap participant thresholds. 

One commenter also urged us to follow the CFTC 

in including within the final definition any legal 

person that is directly or indirectly majority-owned 

by one or more U.S. persons that bear unlimited 

responsibility for the obligations and liabilities of 

such legal person. See note 210, supra (citing BM 

Letter). Cf. CFTC Cross-Border Guidance, 78 FR 

45312, 45317. Although we recognize that such 

persons give rise to risk to the U.S. financial system, 

as with non-U.S. persons whose security-based 

swap transactions are subject to explicit financial 

support arrangements from U.S. persons, we do not 

believe that it is appropriate in the context of 

security-based swap markets to treat such persons 

as U.S. persons given that they are incorporated 

under foreign law, unless their principal place of 

business is in the United States. See Exchange Act 

rule 3a71–3(a)(4)(i)(B). Moreover, to the extent that 

a non-U.S. person’s counterparty has recourse to a 

U.S. person for the performance of the non-U.S. 

person’s obligations under a security-based swap by 

virtue of the U.S. person’s unlimited responsibility 

for the non-U.S. person, the non-U.S. person would 

be required to include the security-based swap in 

its own dealer de minimis calculations (if the 

transaction arises out of the non-U.S. person’s 

dealing activity) and its major participant threshold 

calculations. See sections IV.E.1 and V.D.3, infra. 

For example, if a counterparty to a transaction is 

a general partnership that is not a U.S. person but 

has a U.S.-person general partner that has unlimited 

responsibility for the general partnership’s 

liabilities, including for its obligations to securitybased swap counterparties, we would view the 

general partner’s obligations with respect to the 

security-based swaps of the partnership as recourse 

guarantees for purposes of this final rule, absent 

countervailing factors. 

256See section IV.E.1 (describing application of 

de minimis exception to transactions of non-U.S. 

persons that are subject to a recourse guarantee 

against a U.S. person) and section V.D.3 (describing 

application of major security-based swap 

participant threshold calculations to positions of 

non-U.S. persons that are subject to a recourse 

guarantee against a U.S. person), infra. As discussed 

above, we will address the application of other Title 

VII requirements to these persons in subsequent 

releases. 

257 In the proposing release, we did not provide 

guidance regarding the meaning of ‘‘principal place 

of business,’’ but we requested comment whether 

such guidance was desirable, including whether it 

would be appropriate to adopt a definition similar 

to that adopted in rules under the Investment 

Advisers Act. See Cross-Border Proposing Release, 

78 FR 30999 n.306 (noting that the focus of one 

possible definition would be similar to that of the 

definition used in rules promulgated under the 

Investment Advisers Act, which define principal 

place of business as ‘‘the executive office of the 

investment adviser from which the officers, 

partners, or managers of the investment adviser 

direct, control, and coordinate the activities of the 

investment adviser’’) (citing 17 CFR 275.222–1(b)). 

As noted above, several commenters requested that 

we provide guidance regarding the concept, and 

some provided suggested interpretations of the 

phrase with respect to operating companies and 

investment vehicles. See, e.g., note 213, supra 

(citing IIB Letter). See also SIFMA/FIA/FSR letter 

at A–8; Citadel Letter at 2. Several of these 

commenters urged us to minimize divergence from 

the approach taken subsequent to our proposal by 

the CFTC in its July 2013 guidance (or from likely 

outcomes under that approach). See note 214, supra 

(citing letters from JFMC, SIFMA/FIA/FSR, Citadel, 

and IAA). Another commenter urged us to work 

closely with the CFTC in developing guidance 

regarding the meaning of principal place of 

business. See note 215, supra (citing IAA Letter). 

258Exchange Act rule 3a71–3(a)(4)(ii). Cf. 17 CFR 

275.222–1(b) (defining principal place of business 

for investment advisers under the Investment 

Advisers Act to mean ‘‘the executive office of the 

investment adviser from which the officers, 

partners, or managers of the investment adviser 

direct, control, and coordinate the activities of the 

investment adviser’’). 

Because the definition of ‘‘principal place of 

business’’ in this final rule is tailored to the unique 

characteristics of the security-based swap market, it 

does not limit, alter, or address any guidance 

regarding the meaning of the phrase ‘‘principal 

place of business’’ that may appear in other 

provisions of the federal securities laws, including 

the Investment Advisers Act, Commission rules, 

regulations, interpretations, or guidance. 

rule retains this element of the 

definition. 

As under the proposal, the final 

definition determines a legal person’s 

status at the entity level and thus 

applies to the entire legal person, 

including any foreign operations that 

are part of the U.S. legal person. 

Consistent with this approach, a foreign 

branch, agency, or office of a U.S. 

person is treated as part of a U.S. 

person, as it lacks the legal 

independence to be considered a nonU.S. person for purposes of Title VII 

even if its head office is physically 

located within the United States. We 

continue to believe that there is no basis 

to treat security-based swap transactions 

or positions of a foreign branch, agency, 

or office of a U.S. person differently 

from similar transactions or positions of 

the home office for purposes of the 

dealer de minimis or major securitybased swap participant threshold 

calculations, given that the legal 

obligations and economic risks 

associated with such transactions or 

positions directly affect the entire U.S. 

person. 

Under the final definition, the status 

of a legal person as a U.S. person has no 

bearing on whether separately 

incorporated or organized legal persons 

in its affiliated corporate group are U.S. 

persons. Accordingly, a foreign 

subsidiary of a U.S. person is not a U.S. 

person merely by virtue of its 

relationship with its U.S. parent. 

Similarly, a foreign person with a U.S. 

subsidiary is not a U.S. person simply 

by virtue of its relationship with its U.S. 

subsidiary. Although two commenters 

urged that most foreign affiliates of U.S. 

persons be treated as U.S. persons 

themselves,252 we continue to believe 

that it is appropriate for each affiliate to 

determine its U.S.-person status 

independently, given the distinct legal 

status of each of the affiliates, and that 

such status should turn on each 

affiliate’s place of incorporation, 

organization, or establishment, or on its 

principal place of business.253 We 

recognize that certain foreign persons, 

including foreign persons whose 

security-based swap activity is subject 

to a recourse guarantee against a U.S. 

person, may create risk to persons 

within the United States such as 

counterparties or guarantors.254 We 

continue to believe, however, that, to 

the extent that such persons are 

established under the laws of a foreign 

jurisdiction and have their principal 

place of business abroad, they should 

not be included in the definition of 

‘‘U.S. person.’’ 255 As discussed in 

further detail below, we believe that our 

final rules regarding application of the 

dealer de minimis exception and the 

major security-based swap participant 

thresholds adequately address concerns 

about the treatment of these persons 

under the dealer and major participant 

definitions without categorizing them as 

U.S. persons.256

ii. Entities Having Their Principal Place 

of Business in the United States 

a. In General 

Consistent with our proposal, we are 

defining ‘‘U.S. person’’ to include 

persons that are organized, 

incorporated, or established abroad, but 

have their principal place of business in 

the United States. For purposes of this 

final rule, and in response to 

commenters’ request for further 

guidance,257 we are defining ‘‘principal 

place of business’’ generally to mean 

‘‘the location from which the officers, 

partners, or managers of the legal person 

primarily direct, control, and coordinate 

the activities of the legal person.’’ 258 As 


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259Cf. IIB Letter at 6 (urging an approach that 

‘‘enable[s] market participants to reach rational, 

consistent U.S. person determinations for funds’’). 

We also believe that our definition of ‘‘principal 

place of business’’ should reduce the potential that 

a particular entity would have a different U.S.- 

person status by virtue of the ‘‘principal place of 

business’’ prong under our definition and under the 

CFTC Cross-Border Guidance. 

As discussed in further detail below, we also are 

including in our definition of ‘‘U.S. person’’ a 

provision permitting persons to rely on 

representations from a counterparty regarding 

whether the counterparty’s principal place of 

business is in the United States, unless these 

persons know or have reason to know that the 

representation is false. See section IV.C.4, infra. Cf. 

note 220, supra (citing letters requesting that the 

Commission’s final rule permit reliance on 

representations regarding principal place of 

business). This provision should further facilitate 

consistent application of the ‘‘U.S. person’’ to 

specific entities across market participants. We are 

not, however, specifically providing that entities 

may rely solely on representations prepared by 

counterparties under the CFTC Cross-Border 

Guidance, see note 232, supra, given that the CFTC 

has articulated a facts-and-circumstances approach 

to the principal place of business determination 

that is susceptible to significant further 

development and interpretation. However, 

depending on how market participants have 

applied the CFTC’s facts-and-circumstances 

analysis, they may be able to rely on such 

representations. Because we are permitting persons 

to rely on counterparty representations, we do not 

think it necessary to provide guidance regarding 

specific factors a person may consider in 

determining its counterparty’s principal place of 

business, as some commenters requested. Cf. note 

221, supra (citing IIB Letter). 

260Cf. note 213, supra (citing IIB letter suggesting 

that an entity’s principal place of business should 

be the location of its headquarters). Our definition 

of ‘‘principal place of business’’ is in this respect 

similar to the guidance issued by the CFTC 

regarding the application of ‘‘principal place of 

business’’ to operating companies. See CFTC CrossBorder Guidance, 78 FR 45309. We expect that 

outcomes of our final definition of ‘‘principal place 

of business’’ for such entities would generally be 

similar to those produced under the CFTC CrossBorder Guidance. 

261See note 216, supra. 

262For this reason, although we believe that the 

definition of ‘‘principal place of business’’ set forth 

in the final rule is consistent with our territorial 

approach to application of Title VII, we also believe 

that it is necessary or appropriate to prevent the 

evasion of Title VII. See Exchange Act section 30(c). 

The final definition of ‘‘principal place of business’’ 

will help ensure that entities do not restructure 

their business by incorporating under foreign law 

while continuing to direct, control, and coordinate 

the operations of the entity from within the United 

States, which would enable them to maintain a 

significant portion of their financial and legal 

relationships within the United States while 

avoiding application of Title VII requirements to 

such transactions. 

263 In addition, some foreign regulators expressed 

concerns about our proposed inclusion of a 

‘‘principal place of business’’ element in the ‘‘U.S. 

person’’ definition, see notes 216–217, supra, and 

one foreign regulator encouraged us to focus our 

final ‘‘U.S. person’’ definition on where a legal 

person is established. See note 216, supra. We note 

that under the European Market Infrastructure 

Regulation, a foreign fund is treated identically to 

a European financial counterparty if it is managed 

by a European investment manager. See Regulation 

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

of the Council on OTC derivatives, CCPs, and trade 

repositories, Article 2(8) (defining ‘‘financial 

counterparty’’ to include ‘‘an alternative investment 

fund managed by [alternative investment fund 

managers] authorised or registered in accordance 

with Directive 2011/61/EU’’). This appears to reflect 

a recognition that where legal person is established 

should not be treated as the sole relevant factor in 

determining whether legal person should be subject 

to such jurisdiction’s rules. 

We also note that limiting our definition of ‘‘U.S. 

person’’ to entities incorporated, established, or 

organized in the United States as some commenters 

requested would not eliminate the potential that 

entities would be simultaneously classified as U.S. 

persons and as local persons under foreign law. 

Even under such a definition, some persons could 

be classified both as U.S. persons for purposes of 

Title VII and as persons established in foreign 

jurisdictions under a foreign regulatory regime. Cf. 

EC Letter. Although we are adopting a definition of 

‘‘U.S. person’’ that should mitigate this likelihood, 

we recognize that such entities may be subject to 

overlapping regulation, and we intend to address 

the availability of substituted compliance with 

respect to specific substantive requirements in 

subsequent releases, which should mitigate the 

concerns expressed by these commenters. Cf. note 

218, supra (citing ESMA Letter noting possibility of 

duplicative and conflicting regulation of certain 

persons as a result of the Commission’s inclusion 

of a principal place of business element in the ‘‘U.S. 

person’’ definition). 

264See note 217, supra (citing EC Letter); note 

216, supra (citing ESMA Letter urging the 

Commission not to include U.S. branches of foreign 

banks in its ‘‘U.S. person’’ definition under a 

‘‘principal place of business’’ test). 

with the ‘‘U.S. person’’ definition more 

generally, our definition of ‘‘principal 

place of business’’ is intended to 

identify the location where a significant 

portion of the person’s financial and 

legal relationships would be likely to 

exist, and we think it is reasonable to 

assume, for purposes of this final rule, 

that this location also generally 

corresponds to the location from which 

the activities of the person are primarily 

directed, controlled, and coordinated. In 

our view, to the extent that this location 

is within the United States, it is 

reasonable to conclude that the risks 

arising from that entity’s security-based 

swap activity could manifest themselves 

within the United States, regardless of 

location of its counterparties. 

This definition is intended to help 

market participants make rational and 

consistent determinations regarding 

whether their (or their counterparty’s) 

principal place of business is in the 

United States.259 Under the final rule, 

the principal place of business is in the 

United States if the location from which 

the overall business activities of the 

entity are primarily directed, controlled, 

and coordinated is within the United 

States. With the exception of externally 

managed entities, as discussed further 

below, we expect that for most entities 

the location of these officers, partners, 

or managers generally would 

correspond to the location of the 

person’s headquarters or main office.260

Although we recognize that several 

commenters objected to including a 

‘‘principal place of business’’ test in our 

definition of ‘‘U.S. person,’’ 261 we 

believe that a definition that focused 

solely on whether a legal person is 

organized, incorporated, or established 

in the United States could encourage 

some entities to move their place of 

incorporation to a non-U.S. jurisdiction 

to avoid complying with Title VII, while 

maintaining their principal place of 

business—and thus, reasonably likely, 

risks arising from their security-based 

swap transactions—in the United 

States.262 Moreover, we believe that a 

definition of ‘‘U.S. person’’ that did not 

incorporate a ‘‘principal place of 

business’’ element potentially would 

result in certain entities falling outside 

the Title VII regulatory framework, even 

though the nature of their legal and 

financial relationships in the United 

States is, as a general matter, 

indistinguishable from that of entities 

incorporated, organized, or established 

in the United States.263 Given that such 

entities raise the types of concerns that 

Title VII was intended to address, we 

believe it is both appropriate under our 

territorial approach and consistent with 

the purposes of Title VII to treat such 

entities as U.S. persons for purposes of 

the final rule. 

We also have considered the 

suggestion by one commenter that 

‘‘principal place of business’’ be defined 

to incorporate certain quantitative 

thresholds and an exception for firms 

whose jurisdiction of incorporation has 

an acceptable regulatory framework in 

place.264 However, we do not believe 

such thresholds are necessary. Because 

the analysis is applied on an entity-wide 

basis, consistent with our entity-based 

approach generally, the ‘‘principal place 

of business’’ analysis generally will not 

encompass companies incorporated, 

organized, or established outside the 

United States merely because they have 

an office or branch within the United 

States. Similarly, we do not believe that 

the determination whether a legal 

person’s jurisdiction of incorporation, 

organization, or establishment has an 

acceptable regulatory framework is 

relevant to the question whether a 

specific person has its principal place of 

business in the United States any more 

than it would be relevant for a person 

incorporated within the United States 

but subject to regulation abroad. The 

question whether such a company 

should be permitted to fulfill relevant 

Title VII requirements by complying 

with the law of the jurisdiction in which 

it is incorporated, organized, or 

established is a separate issue that may 


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265Cf. Cross-Border Proposing Release, 78 FR 

31085–102 (setting forth proposed substituted 

compliance framework). 

266See note 206, supra (citing Citadel Letter). 

267As noted above, we believe that the definition 

of ‘‘principal place of business’’ set forth in the final 

rule is consistent with our territorial approach to 

application of Title VII. We also note, however, that 

for the reasons just discussed the final definition’s 

focus on activity of the person as a whole, as 

opposed to a focus on the security-based swap 

activity of the person, is in our view necessary or 

appropriate to prevent the evasion of Title VII. See 

Exchange Act section 30(c). 

268Such functions may not even be carried out in 

the jurisdiction in which the externally managed 

vehicle is incorporated, organized, or established. 

Indeed, many private investment funds are 

incorporated, organized, or established under the 

laws of a jurisdiction with which they have only a 

nominal connection. 

269See Tables 1 and 2, supra (noting involvement 

of investment advisers and private funds in the 

security-based swap market). 

270This observation is consistent with data 

reported to us by private fund managers. See Staff 

of the Division of Investment Management, U.S. 

Securities and Exchange Commission, Annual Staff 

Report Relating to the Use of Data Collected from 

Private Fund Systemic Risk Reports (July 25, 2013) 

at Appendix A (providing aggregated, nonproprietary data on percentages of reporting private 

funds organized under non-U.S. law and on 

locations of advisers to such funds). 

271For example, Long Term Capital Management 

(‘‘LTCM’’), a Delaware partnership with its 

principal place of business in Connecticut, 

established a master fund, Long-Term Capital 

Portfolio, L.P. (‘‘LTCP’’), in the Cayman Islands. 

Mine Aysen Doyran, Financial Crisis Management 

and the Pursuit of Power: American Pre-Eminience 

and the Credit Crunch 83–84 (Ashgate 2011). LTCP 

attracted investments from both U.S. and foreign 

investors. Id. When it failed in 1998, fourteen 

domestic and foreign banks and securities firms 

(‘‘the Consortium’’) that were major creditors or 

counterparties of the fund agreed to recapitalize it. 

GAO, Responses to Questions Concerning LongTerm Capital Management and Related Events 1 

n.2, (identifying these fourteen firms); id. at 8–9 

(stating that ‘‘[t]hese firms contributed about $3.6 

billion into [LTCP]’’) (available at: http://

www.gao.gov/archive/2000/gg00067r.pdf). The 

Federal Reserve Board of New York played a key 

role in initiating discussion among the banks that 

ultimately formed the Consortium. Id. at 10. 

Other, more recent, examples of risks of such 

entities established under foreign law manifesting 

themselves within the United States include the 

failure of two Bear Stearns hedge funds, which had 

significant repercussions within the United States, 

and the bailouts of bank-sponsored structured 

investment vehicles. See, e.g., FCIC Report at 241, 

289–90; Henry Tabe, The Unravelling of Structured 

Investment Vehicles: How Liquidity Leaked 

Through SIVs (2010), at 192–94. 

272For these reasons, we are declining to follow 

the suggestion of one commenter that we not 

include a principal place of business element of the 

‘‘U.S. person’’ definition for investment vehicles. 

See note 198, supra. 

273 Identifying the manager for purposes of this 

definition will depend on the structure and 

organizing documents of the investment vehicle 

under consideration. 

274Exchange Act rule 3a71–3(a)(4)(ii). At least 

one commenter also recognized that differences 

between categories of legal persons may require 

different tests for determining whether a person has 

its principal place of business in the United States. 

See IIB Letter at 5–6 (suggesting separate ‘‘principal 

place of business’’ tests for operating companies 

and investment vehicles). The CFTC Cross-Border 

Guidance, which provides separate guidance for 

operating companies, trusts, and investment 

vehicles, tailored to the characteristics of each, 

be addressed in a separate substituted 

compliance determination.265

Finally, we recognize that one 

commenter suggested that a ‘‘principal 

place of business’’ test should look to 

the location of personnel directing the 

security-based swap activity of the 

entity,266 but we are not convinced that 

the location of such personnel, without 

more, would necessarily correspond to 

the location of a significant portion of 

the entity’s financial and legal 

relationships, which is the focus of our 

‘‘U.S. person’’ definition. We also note 

that a focus on the location of personnel 

directing the entity’s security-based 

swap activity would provide an 

incentive for market participants to 

move such personnel outside the United 

States while maintaining their executive 

offices, and the bulk of their operations, 

within the United States. Such 

restructuring would allow an entity to 

avoid application of Title VII to its 

security-based swap activities while 

continuing to maintain a significant 

portion of its financial and legal 

relationships within the United States, 

leaving unchanged the likelihood that 

risks arising from its security-based 

swap activity could manifest themselves 

within the United States while avoiding 

application of Title VII to such 

activities.267

b. Externally Managed Investment 

Vehicles 

Application of the ‘‘principal place of 

business’’ test to externally managed 

investment vehicles presents certain 

challenges not present when 

determining the principal place of 

business of an operating company or 

other internally managed legal person. 

For example, an operating company 

generally will carry out key functions 

(including directing, controlling, and 

coordinating its business activities) on 

its own behalf and generally will have 

offices through which these functions 

are performed. Responsibility for key 

functions of an externally managed 

investment vehicle, on the other hand, 

generally will be allocated to one or 

more separate persons (such as external 

managers, or other agents), with few or 

no functions carried out through an 

office of the vehicle itself.268 Further 

complicating the application of this 

definition is the organizational and 

operational diversity of such vehicles. 

Notwithstanding these challenges, we 

also recognize that externally managed 

investment vehicle are active 

participants in the security-based swap 

market 269 and, in our view, should be 

treated as U.S. persons if their 

operations are primarily directed, 

controlled, and coordinated from a 

location within the United States. For 

example, we understand that a 

significant portion of the investment 

vehicles that participate in the securitybased swap market are private funds 

such as hedge funds. We have observed 

that such private funds commonly may 

be organized under non-U.S. law— 

frequently in the Cayman Islands—but 

are managed by investment advisers 

headquartered in the United States.270

We also understand that those advisers 

commonly manage or direct the 

investment activities of these vehicles, 

including the arrangement of securitybased swaps, through locations within 

the United States. We further 

understand that a significant portion of 

the financial and legal relationships of 

such vehicles, as a general matter, are in 

the United States, including some 

combination of equity ownership by 

managers (or their affiliates) and outside 

investors, credit relationships with 

prime brokers and other lenders, and 

relationships with other market 

participants and service providers. 

These vehicles, therefore, raise concerns 

that are similar to those raised by the 

security-based swap activities of market 

participants that are incorporated, 

established, or organized in the United 

States. Over the past two decades, 

failures of investment vehicles of 

various types organized under foreign 

law, but directed, controlled, or 

coordinated from within the United 

States have had significant negative 

impact on U.S. financial institutions, 

potentially threatening the stability of 

the U.S. financial system more 

generally.271 We believe that it is 

reasonable to expect that the securitybased swap activities of such vehicles 

may pose similar risks.272

To address the unique characteristics 

of externally managed investment 

vehicles, we are including in our 

definition of ‘‘principal place of 

business’’ language specifying that an 

externally managed investment 

vehicle’s principal place of business is 

‘‘the office from which the manager 273

of the vehicle primarily directs, 

controls, and coordinates the 

investment activities of the vehicle.’’ 

This definition directs market 

participants to consider where the 

activities of an externally managed 

investment vehicle generally are 

directed, controlled, and coordinated, 

even if this conduct is performed by one 

or more legally separate persons.274 For 


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appears to reflect this distinction. See CFTC CrossBorder Guidance, 78 FR 45309–311. 

275As noted above, one commenter suggested that 

we adopt a definition of ‘‘principal place of 

business’’ that looked to where the operational 

management activities of the fund are carried out. 

Cf. note 200, supra. We are not convinced, however, 

that the location of such activities (which the 

commenter identified as including ‘‘establishing the 

fund and selecting its investment manager, broker, 

and underwriter/placement agent’’), absent an 

ongoing role by the person performing those 

activities in directing, controlling, and coordinating 

the investment activities of the fund, generally will 

be as indicative of activities, financial and legal 

relationships, and risks within the United States of 

the type that Title VII as the location of a fund 

manager. 

276See note 213, supra (citing Citadel Letter). 

277See Exchange Act section 30(c). 

278See Cross-Border Proposing Release, 78 FR 

31144 n.1454. 

279Cf. note 195, supra (citing IAA letter urging 

the Commission to follow the CFTC in clarifying 

that retention of an asset manager that is a U.S. 

person alone would not bring a person within the 

scope of the ‘‘U.S. person’’ definition). 

280We also noted in our proposal that a 

transaction by an adviser on behalf of a fund could 

be a ‘‘transaction conducted within the United 

States’’ as defined in the proposal and thus fall 

within the scope of Title VII. See Cross-Border 

Proposing Release, 78 FR 31144 n.1454. As noted 

above, we are not addressing the ‘‘transaction 

conducted within the United States’’ element of our 

proposal in the final rule and instead intend to 

address this element of the proposed dealer de 

minimis threshold calculations in a subsequent 

reproposal. 

281See note 203, supra (citing BM Letter and AFR 

Letter). The CFTC also incorporated a majorityownership inquiry in its interpretation of ‘‘U.S. 

person’’ as it applies to funds. See CFTC CrossBorder Guidance, 78 FR 45313. 

282BM Letter at 10 (quoting CFTC Cross-Border 

Guidance, 78 FR 45314). 

283See Cross-Border Proposal, 78 FR 31144 

(noting that losses arising from investments in 

investment vehicles ‘‘are generally limited to their 

investments in the form of equity or debt securities’’ 

and that these risks are ‘‘addressed by other 

provisions of U.S. securities law pertaining to 

issuances and offerings of equity or debt 

securities’’). 

284Several commenters also argued that a 

majority-ownership test, including any lookthrough requirements, may be difficult to 

implement in this context. See note 203, supra 

(citing ICI Letter and IAA Letter). We believe that 

our definition of ‘‘principal place of business’’ with 

respect to externally managed entities should help 

to ensure that the ‘‘U.S. person’’ definition 

encompasses investment vehicles that may 

generally have a significant portion of their 

financial and legal relationships within the United 

States and that may therefore raise the types of risk 

concerns within the United States that Title VII was 

intended to address. 

We note that, because we are not following a 

majority-ownership approach for collective 

investment vehicles as part of the ‘‘U.S. person’’ 

definition, the U.S.-person status of accounts 

investing in such investment vehicles will not affect 

the U.S.-person status of such vehicles. Cf. IAA 

Letter at 4 (explaining that a majority-ownership 

test would capture non-U.S. funds with minimal 

nexus to the United States and present 

implementation challenges). 

an investment vehicle, for example, the 

primary manager is responsible for 

directing, controlling, and coordinating 

the overall activity of the vehicle, such 

that the business of the vehicle, such as 

its investment and financing activity, is 

principally carried out at the location of 

the primary manager. Such an 

investment vehicle’s principal place of 

business under the final rule would be 

the location from which the manager 

carries out those responsibilities.275

As noted above, at least one 

commenter suggested that a ‘‘principal 

place of business’’ test should look to 

the location of personnel directing the 

security-based swap activity of the 

vehicle.276 Although we believe that the 

manager responsible for directing, 

controlling, and coordinating the 

activities of the externally managed 

investment vehicle also would generally 

be responsible for directing, controlling, 

and coordinating the security-based 

swap activity of such vehicle, we do not 

believe that an externally managed 

vehicle should be excluded from the 

U.S. person definition merely because 

the manager that otherwise directs, 

controls, and coordinates its activity has 

effectively shifted responsibility for the 

security-based swap activity of the 

externally managed vehicle to a nonU.S. person. As noted above, such an 

approach would provide an incentive to 

move responsibility for the securitybased swap activity of externally 

managed vehicles outside the United 

States while retaining control of all 

other activities relating to management 

of such vehicles within the United 

States. As with the ‘‘principal place of 

business’’ definition more generally, 

and for similar reasons, we believe that 

the definition of ‘‘principal place of 

business’’ set forth in the final rule with 

respect to externally managed vehicles 

is consistent with our territorial 

approach to application of Title VII. We 

also note, however, that for the reasons 

just discussed the final definition’s 

focus on where the activity of the 

vehicle as a whole is primarily directed, 

controlled, and coordinated, as opposed 

to a focus on its security-based swap 

activity, is in our view necessary or 

appropriate to prevent the evasion of 

Title VII.277

In our proposal, we stated that we did 

not think that the U.S.-person status of 

a commodity pool operator (‘‘CPO’’) or 

fund adviser (as opposed to the fund 

actually entering into the transaction) 

was in itself relevant in determining the 

U.S.-person status of an investment 

vehicle.278 Although the definition of 

‘‘principal place of business’’ we are 

adopting in this final rule may lead to 

similar classifications of investment 

vehicles for purposes of the ‘‘U.S. 

person’’ definition as a test that looked 

to the U.S.-person status of a CPO or 

fund adviser, we believe that the 

definition we are adopting is more 

appropriately designed to capture 

externally managed investment vehicles 

that raise the kinds of concerns that 

Title VII was intended to address. 

Moreover, we note that mere retention 

of an asset manager that is a U.S. 

person, without more, would not 

necessarily bring an offshore investment 

vehicle or other person within the scope 

of the ‘‘U.S. person’’ definition.279

However, where an asset manager, 

whether or not a U.S. person, is 

primarily responsible for directing, 

controlling, and coordinating the 

activities of an externally managed 

vehicle and carries out this 

responsibility within the United States, 

we believe that it is reasonable to 

include the externally managed vehicle 

in the definition of ‘‘U.S. person’’ 280

and to require foreign dealers to include 

dealing activity with such vehicles in 

their de minimis threshold calculations. 

iii. Fund Ownership 

Some commenters urged us to include 

in the definition investment vehicles 

that are majority-owned by U.S. 

persons.281 One of these commenters 

noted that the CFTC had reasoned that 

‘‘‘passive investment vehicles’’’ 

designed to ‘‘‘achieve the investment 

objectives of their beneficial owner’’’ 

were distinguishable from majorityowned entities that are ‘‘‘separate, active 

operating businesses.’ ’’ 282 We are not 

persuaded, however, that this 

distinction between investment vehicles 

and operating companies warrants 

treating ownership interests in these 

two types of entities differently for 

purposes of the ‘‘U.S. person’’ 

definition, particularly given that the 

exposure of investors in a collective 

investment vehicle engaging in securitybased swap transactions typically is 

capped at the amount of their 

investment and such investors generally 

are unlikely to seek to make the 

investment vehicle’s counterparties 

whole for reputational or other reasons 

in the event of a default.283 We do not 

believe risks created through ownership 

interests in collective investment 

vehicles are the types of risks that Title 

VII is intended to address with respect 

to security-based swaps.284

Because we are not adopting an 

ownership test for funds, we are also not 

following the suggestion of some 

commenters that we exclude from the 

‘‘U.S. person’’ definition investment 

vehicles that are offered publicly only to 

non-U.S. persons and are not offered to 


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285See note 205, supra (citing IAA Letter). Cf. 

CFTC Cross-Border Guidance, 78 FR 45314, 45317. 

One commenter suggested that the exclusion apply 

to funds offered publicly only to non-U.S. persons 

and are regulated in a foreign jurisdiction. See note 

205, supra (citing ICI Letter, which suggested that 

funds regulated under foreign law be excluded from 

the ‘‘U.S. person’’ definition if they are (1) offered 

publicly only to non-U.S. persons; (2) offered 

publicly only to non-U.S. persons but offered 

privately to U.S. persons; or (3) authorized to offer 

publicly within the United States. but elect to offer 

only privately to non-U.S. institutional investors). 

286See CFTC Cross-Border Guidance, 78 FR 

45314. 

287We also note that our guidance regarding the 

meaning of ‘‘principal place of business’’ is 

designed to identify, among other entities, 

investment vehicles that may pose risks to the 

United States, regardless of where they may be 

offered. 

288Exchange Act rule 3a71–3(a)(4)(i)(C). Thus, if 

a partnership, corporation, trust, investment 

vehicle, or other legal person is a U.S. person, any 

account of that person is a U.S. person. 

289See Exchange Act rule 3a71–3(a)(4)(i)(A) and 

(B). 

290As we noted in the Cross-Border Proposing 

Release, this approach is consistent with the 

treatment of managed accounts in the context of the 

major security-based swap participant definition, 

whereby the swap or security-based swap positions 

in client accounts managed by asset managers or 

investment advisers are not attributed to such 

entities for purposes of the major participant 

definitions, but rather are attributed to the 

beneficial owners of such positions based on where 

the risk associated with those positions ultimately 

lies. See Intermediary Definitions Adopting Release, 

77 FR 30690. 

291 In other words, the U.S.-person status of an 

account is relevant under our final rule to the extent 

that the security-based swap activity is carried out 

by or through the account. Because our final 

definition of ‘‘U.S. person’’ does not include 

investment vehicles that are majority-owned by 

U.S. persons, the underlying ownership of an 

investment vehicle that engages in security-based 

swap activity through an account is not relevant in 

determining the U.S.-person status of an account. 

Cf. note 224, supra (citing IAA Letter expressing 

concern about the relationship between the 

definition of accounts and treatment of funds). 

292Two commenters urged us to exclude from the 

definition of ‘‘U.S. person’’ any account with a de 

minimis level of ownership by a U.S. person. See 

note 223, supra (citing letters from IAA and SIFMA/ 

FIA/FSR). We, however, do not believe it would be 

appropriate to incorporate this concept wholesale 

into the definition of ‘‘U.S. person,’’ as a de minimis 

level of ownership by a U.S. person in the account 

does not necessarily indicate that such a U.S. 

person incurs only a de minimis level of risk or 

obligations under the security-based swap 

transactions entered into through the account. For 

example, the U.S. person may be jointly and 

severally liable with all of the other account owners 

for obligations incurred under a security-based 

swap. We recognize that account ownership may 

take different forms and that security-based swap 

transactions may impose risks and obligations on 

account holders in different ways. The approach we 

are taking here is intended to take into account the 

concerns expressed by commenters regarding de 

minimis U.S.-person interests in such accounts, 

while also recognizing that security-based swap 

transactions carried out through such accounts may 

pose risks to U.S. persons and to the U.S. financial 

system. 

293See Exchange Act rule 3a71–3(a)(4)(i)(D). 

294The CFTC subsequently issued an 

interpretation of ‘‘U.S. person’’ that expressly 

incorporates estates. See CFTC Cross-Border 

Guidance, 78 FR 45314. 

295Exchange Act rule 3a71–3(a)(4)(iii). 

U.S. persons.285 Although we recognize 

that the CFTC reasoned that such 

investment vehicles would generally not 

be within its interpretation of ‘‘U.S. 

person,’’ 286 we do not believe that it 

would be relevant under our final 

definition, which does not focus on an 

investment vehicle’s ownership by U.S. 

persons.287

(c) Accounts 

The final definition of ‘‘U.S. person’’ 

continues to mean ‘‘any account 

(whether discretionary or not) of a U.S. 

person,’’ irrespective of whether the 

person at which the account is held or 

maintained is a U.S. person.288 As a 

general matter, we expect that market 

participants will determine their U.S.- 

person status under the prongs of that 

definition relating to natural persons or 

to legal persons.289 This ‘‘account’’ 

prong of the definition is intended to 

clarify that a person’s status for 

purposes of this rule generally does not 

differ depending on whether the person 

enters into security-based swap 

transactions through an account, or 

depending on whether the account is 

held or maintained at a U.S. person or 

a non-U.S. person intermediary or 

financial institution.290

Consistent with the overall approach 

to the definition of ‘‘U.S. person,’’ our 

focus under the ‘‘account’’ prong of this 

definition is on the party that actually 

bears the risk arising from the securitybased swap transactions.291

Accordingly, an account owned solely 

by one or more U.S. persons is a U.S. 

person, even if it is held or maintained 

at a foreign financial institution or other 

person that is itself not a U.S. person; 

an account owned solely by one or more 

non-U.S. persons is not a U.S. person, 

even if it is held or maintained at a U.S. 

financial institution or other person that 

is itself a U.S. person. For purposes of 

this ‘‘account’’ prong of the ‘‘U.S. 

person’’ definition, account ownership 

is evaluated only with respect to direct 

beneficial owners of the account. 

Because the status of an account turns 

on the status of the account’s beneficial 

owners, the status of any nominees of an 

account is irrelevant in determining 

whether the account is a U.S. person 

under the final rule. 

Where an account is owned by both 

U.S. persons and non-U.S. persons, the 

U.S.-person status of the account, as a 

general matter, should turn on whether 

any U.S.-person owner of the account 

incurs obligations under the securitybased swap.292 Consistent with the 

approach to U.S.-person and non-U.S.- 

person accounts described above, 

neither the status of the fiduciary or 

other person managing the account, nor 

the discretionary or non-discretionary 

nature of the account, nor the status of 

the person at which the account is held 

or maintained are relevant in 

determining the account’s U.S.-person 

status. 

(d) Estates 

The final rule incorporates a new 

prong that expressly includes certain 

estates within the definition of ‘‘U.S. 

person.’’ Under the final rule any estate 

of a natural person who was a resident 

of the United States at the time of death 

is itself a U.S. person.293 Our proposed 

rule did not expressly address estates 

because we did not believe that they 

typically engage in security-based swap 

activity and, to the extent that they do, 

their U.S.-person status would have 

been determined under the standard 

applicable to any legal person under our 

proposed rule. We received no 

comments in response to our questions 

regarding whether we should adopt a 

final rule that expressly addresses 

estates or that reflects the CFTC’s 

proposed approach.294

We continue to believe that estates are 

not likely to be significant participants 

in the security-based swap market, but 

we also believe that, given the unique 

characteristics of estates, it is 

appropriate to include in the ‘‘U.S. 

person’’ definition an express reference 

to estates of decedents who were 

residents of the United States at the time 

of death. This element of our final 

definition reflects similar considerations 

to those that informed our inclusion of 

natural persons who are residents of the 

United States within the scope of that 

definition. We noted above that the 

security-based swap activity of a natural 

person who is a resident of the United 

States raises the types of risks that Title 

VII is intended to address, given that 

person’s residence status and likely 

financial and legal relationships, and we 

expect that the estate of a natural person 

who was a resident of the United States 

at the time of his or her death is likely 

to operate within the same relationships 

that warranted subjecting such 

transactions to Title VII during the life 

of the decedent. 

(e) Certain International Organizations 

As under the proposal, the final rule 

expressly excludes certain international 

organizations from the definition of U.S. 

person.295 This list includes ‘‘the [IMF], 

the International Bank for 

Reconstruction and Development, the 

Inter-American Development Bank, the 


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296 Id. Although three commenters requested that 

we list all such organizations that are excluded 

from U.S. persons, see note 226, supra, we do not 

believe it appropriate to attempt to enumerate an 

exclusive list of entities that may be eligible for 

such exclusion. 

297Although three commenters requested that the 

final rule also exclude ‘‘controlled affiliates’’ of 

these international organizations from the 

definition of ‘‘U.S. person,’’ see note 229, supra 

(citing SC Letter, WB/IFC Letter, and IDB Letter), 

our final rule does not incorporate such an 

exclusion, as commenters did not provide us with 

information that leads us to change our view that 

we should not treat such affiliates’ security-based 

swap or other activities differently from other 

persons that are incorporated, organized, or 

established in the United States or have their 

principal place of business here. 

298See Cross-Border Proposing Release, 78 FR 

31140. 

299Cf. note 230, supra (citing IIB Letter requesting 

the Commission to confirm that, as a general matter, 

a representation is sufficient to fulfill diligence 

requirements under these rules). 

300See Exchange Act rule 3a71–3(a)(4)(iii). This 

provision applies to each prong of the ‘‘U.S. 

person’’ definition, including the principal place of 

business prong. Cf. note 220, supra. As noted above, 

we are not providing that persons may rely solely 

on representations from counterparties that have 

been developed for purposes of the CFTC’s 

interpretation of U.S. person. However, depending 

on how market participants have applied the 

CFTC’s general facts-and-circumstances inquiry, 

they may be able to rely on such representations. 

As we noted in the proposal, for purposes of the 

de minimis threshold, the U.S.-person status of a 

non-U.S. person’s counterparty would be relevant 

only at the time of a transaction that arises out of 

the non-U.S. person’s dealing activity. See CrossBorder Proposing Release, 78 FR 30994 n.264. Any 

change in a counterparty’s U.S.-person status after 

the transaction is executed would not affect the 

original transaction’s treatment for purposes of the 

de minimis exception, though it would affect the 

treatment of any subsequent dealing transactions 

with that counterparty. See also Product Definitions 

Adopting Release, 77 FR 48286 (‘‘If the material 

terms of a Title VII instrument are amended or 

modified during its life based on an exercise of 

discretion and not through predetermined criteria 

or a predetermined self-executing formula, the 

Commissions view the amended or modified Title 

VII instrument as a new Title VII instrument’’). 

301The final rule permitting reliance on 

representations with respect to a counterparty’s 

U.S.-person status applies only to the definition of 

‘‘U.S. person’’ as used in this final rule and does 

not apply to any determinations of a person’s U.S.- 

person status under any other provision of the 

federal securities laws, including Commission 

rules, regulations, interpretations, or guidance. 

302Cf. IIB Letter at 5 n.9 (urging the Commission 

to permit reliance on counterparty representations, 

‘‘absent knowledge of facts that would cause a 

reasonable person to question the accuracy of the 

representation’’). To the extent that a person has 

knowledge of facts that would lead a reasonable 

person to believe that a counterparty may be a U.S. 

person under the final definitions it may need to 

conduct additional diligence before relying on the 

representation. 

We recognize that one commenter urged us to 

limit a reasonable reliance standard for such 

representations to representations concerning 

whether a person had its principal place of business 

in the United States. Cf. note 220, supra (citing 

ABA Letter). However, we believe that applying a 

single standard of reliance to all representations 

regarding a person’s U.S.-person status will reduce 

the potential complexity of establishing policies 

and procedures associated with identifying the 

U.S.-person status of counterparties. 

303See proposed Exchange Act rule 3a71– 

3(b)(1)(ii). 

304See Cross-Border Proposing Release at 31006 

(citing Exchange Act rule 3a71–1(d)). 

305See id. at 31006 n.356. 

306See id. at 31024. 

307See id. at 31007. 

Asian Development Bank, the African 

Development Bank, the United Nations, 

and their agencies and pension plans, 

and any other similar international 

organizations, their agencies and 

pension plans.’’ 296 Although these 

organizations may have headquarters in 

the United States, the Commission 

continues to believe that their status as 

international organizations warrants 

excluding them from the definition of 

‘‘U.S. person.’’ 297

4. Representations Regarding U.S.- 

Person Status 

Our proposed definition of ‘‘U.S. 

person’’ did not expressly provide that 

parties could rely on representations 

from their counterparties as to their 

counterparties’ U.S.-person status, 

although we did anticipate that parties 

likely would request such 

representations.298 On further 

consideration, we believe that market 

participants would benefit from an 

express provision permitting reliance on 

such representations.299 Accordingly, 

under the final rule, a person need not 

consider its counterparty to be a U.S. 

person for purposes of Title VII if that 

person receives a representation from 

the counterparty that the counterparty 

does not satisfy the criteria set forth in 

Exchange Act rule 3a71–3(a)(4)(i), 

unless such person knows or has reason 

to know that the representation is not 

accurate. For purposes of the final rule 

a person would have reason to know the 

representation is not accurate if a 

reasonable person should know, under 

all of the facts of which the person is 

aware, that it is not accurate.300

Expressly permitting market 

participants to rely on such 

representations in the ‘‘U.S. person’’ 

definition should help mitigate 

challenges that could arise in 

determining a counterparty’s U.S.- 

person status under the final rule. It 

permits the party best positioned to 

make this determination to perform an 

analysis of its own U.S.-person status 

and convey, in the form of a 

representation, the results of that 

analysis to its counterparty. In addition, 

such representations should help reduce 

the potential for inconsistent 

classification and treatment of a person 

by its counterparties and promote 

uniform application of Title VII.301

The final rule reflects a constructive 

knowledge standard for reliance. Under 

this standard, a counterparty is 

permitted to rely on a representation, 

unless the person knows or has reason 

to know that the representation is 

inaccurate. A person would have reason 

to know the representation is not 

accurate for purposes of the final rule if 

a reasonable person should know, under 

all of the facts of which the person is 

aware, that it is not accurate.302 We 

believe that this ‘‘know or have reason 

to know’’ standard should help ensure 

that potential security-based swap 

dealers and major security-based swap 

participants do not disregard facts that 

call into question the validity of the 

representation. 

D. Application of De Minimis Exception 

to Dealing Activities of Conduit 

Affiliates 

1. Proposed Approach and Commenters’ 

Views 

The Cross-Border Proposing Release 

did not include requirements specific to 

‘‘conduit affiliates’’ or other non-U.S. 

persons that enter into security-based 

swap transactions on behalf of their U.S. 

affiliates. Instead, the proposal would 

have treated those entities like other 

non-U.S. persons, and required them to 

count, against the de minimis 

thresholds, only their dealing 

transactions with U.S. persons other 

than foreign branches, and their dealing 

transactions conducted in the United 

States.303 The proposal also noted that 

the general rule implementing the de 

minimis exception excludes 

transactions between majority-owned 

affiliates from the analysis.304

The proposal acknowledged the 

difference between its approach and the 

CFTC’s approach in its proposed crossborder guidance, which encompassed 

special provisions for foreign affiliates 

that act as conduits for U.S. persons.305

We thus cited the CFTC’s proposed 

approach toward conduit affiliates in 

requesting comment regarding whether 

the Commission should follow a similar 

approach.306 We also requested 

comment as to whether the Commission 

should, consistent with the CFTC’s 

proposed approach, require a person 

that operates a ‘‘central booking 

system’’—whereby security-based swaps 

are booked to a single legal person—be 

subject to applicable dealer registration 

requirements as if the person had 

entered into the security-based swaps 

directly.307 More generally, we 

requested comment as to whether 

foreign affiliates of U.S. persons, such as 

majority-owned subsidiaries of U.S. 


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308See id. at 30998–99. 

309See CDEU Letter at 3–5 (adding that if the 

conduit concept is not rejected, at a minimum it 

should exclude non-dealers and should not be 

applied to security-based swaps in which neither 

party is a dealer or a major participant). 

310See BM Letter at 3, 14–15. 

311See SIFMA/FIA/FSR Letter at A–16 to A–17 

(also stating that the final CFTC cross-border 

guidance does not include the central booking 

system concept). See also CDEU Letter at 3–5 

(raising concerns that the regulation of conduit 

affiliates may have the potential to interfere with 

the use of centralized treasury units that corporate 

groups may use as a market-facing entity for a nondealer’s corporate group). 

312See Exchange Act rule 3a71–3(b)(1)(ii). 

313As discussed below, the ‘‘conduit affiliate’’ 

definition does not encompass persons that engage 

in such offsetting transactions solely with U.S. 

persons that are registered with the Commission as 

security-based swap dealers or major security-based 

swap participants because we do not believe that 

such transactions raise the types of evasion 

concerns that the conduit affiliate concept is 

designed to address. 

314The rule requires that a conduit affiliate count 

all of its dealing activity, and is not limited to the 

conduit affiliate’s dealing transactions that 

specifically are linked to offsetting transactions 

with a U.S. affiliate. This is because there may not 

be a one-to-one correspondence between dealing 

transactions and their offsets for reasons such as 

netting. 

315See Exchange Act section 30(c); section 

II.B.2(d), supra. In noting that this requirement is 

consistent with our anti-evasion authority under 

Exchange Act section 30(c), we are not taking a 

position as to whether such activity by a conduit 

affiliate otherwise constitutes a ‘‘business in 

security-based swaps without the jurisdiction of the 

United States.’’ 

316We recognize that not all dealing structures 

involving conduit affiliates may be evasive in 

purpose. We believe, however, that the anti-evasion 

authority of section 30(c) permits us to prescribe 

prophylactic rules to conduct without the 

jurisdiction of the United States, even if those rules 

would also apply to a market participant that has 

been transacting business through a pre-existing 

market structure established for valid business 

purposes, so long as the rule is designed to prevent 

possible evasive conduct. See Cross-Border 

Proposing Release, 78 FR 30987; see also section 

II.B.2(d), supra (discussion of anti-evasion 

authority); Abramski v. United States, No. 12–1493, 

slip op. at 14 (S. Ct. June 16, 2014) (noting ‘‘courts’ 

standard practice, evident in many legal spheres 

and presumably known to Congress, of ignoring 

artifice when identifying the parties to a 

transaction’’). 

We also note that while this requirement appears 

consistent with the views of a commenter that 

supported the use of the conduit affiliate concept, 

we take no position on that commenter’s view that 

conduit affiliates represent a type of entity that is 

subject to a de facto guarantee by a U.S. person. See 

note 310, supra. Indeed, in our view the conduit 

affiliate concept will serve as a useful anti-evasion 

tool even in the situation where the conduit 

affiliate’s counterparty does not consider the U.S. 

person’s creditworthiness in determining whether 

to enter into a security-based swap with the conduit 

affiliate. 

317For example, one potential alternative antievasion safeguard could be to narrow the interaffiliate exception to counting dealing transactions 

against the de minimis thresholds, such as by 

making the exception unavailable in the context of 

transactions between non-U.S. persons and their 

U.S. affiliates. We believe, however, that such an 

approach would be less well-targeted than the use 

of the conduit affiliate concept, as that alternative 

could impact a corporate group’s ability to use 

specific market-facing entities to facilitate the 

group’s security-based swap activities (given that 

the market-facing entities would arguably be acting 

as a dealer on behalf of its affiliates). 

318See CDEU Letter at 3 (‘‘The concept of a 

conduit affiliate is not based on statutory or 

regulatory authority, and does not decrease the 

potential for systemic risk.’’). See also note 309, 

supra. 

parents, should be considered to be U.S. 

persons.308

One commenter took the view that the 

Commission’s rules should not make 

use of the conduit affiliate concept 

notwithstanding its use in the CFTC 

Cross-Border Guidance, stating that the 

concept lacks any statutory or regulatory 

authority, would not advance efforts to 

reduce systemic risk, and, if applied to 

end-users, would interfere with internal 

risk allocations within a corporate 

group.309 In contrast, one commenter 

depicted conduit affiliates as being a 

type of person that is subject to a de 

facto guarantee by a U.S. affiliate and 

that should thus be treated as a U.S. 

person, and also argued that the dealer 

registration requirement should apply to 

other types of entities subject to a de 

facto guarantee.310

One commenter further opposed the 

adoption of an approach that would 

require a ‘‘central booking system’’ or 

any other affiliate to register as a 

security-based swap dealer based solely 

on its inter-affiliate security-based swap 

transactions, arguing that such an 

approach would tie registration 

requirements to firms’ internal risk 

management practices, and would 

hamper the ability to manage risk across 

a multinational enterprise.311

2. Final Rule 

The final rule distinguishes ‘‘conduit 

affiliates’’ from other non-U.S. persons 

by requiring such entities to count all of 

their dealing transactions against the de 

minimis thresholds, regardless of the 

counterparty.312 As discussed below, for 

these purposes a ‘‘conduit affiliate’’ is a 

non-U.S. affiliate of a U.S. person that 

enters into security-based swaps with 

non-U.S. persons, or with certain 

foreign branches of U.S. banks, on 

behalf of one or more of its U.S. 

affiliates (other than U.S. affiliates that 

are registered as security-based swap 

dealers or major security-based swap 

participants), and enters into offsetting 

transactions with its U.S. affiliates to 

transfer the risks and benefits of those 

security-based swaps. 

After careful consideration, we 

believe that requiring such conduit 

affiliates to count their dealing 

transactions against the de minimis 

thresholds is appropriate to help ensure 

that non-U.S. persons do not facilitate 

the evasion of registration requirements 

under Dodd-Frank by participating in 

arrangements whereby a non-U.S. 

person engages in security-based swap 

activity outside the United States on 

behalf of a U.S. affiliate that is not a 

registered security-based swap dealer or 

major security-based swap 

participant,313 and the U.S. affiliate 

assumes economic risks and benefits of 

those positions by entering into 

offsetting transactions with the non-U.S. 

affiliate. Absent such a requirement that 

conduit affiliates count their dealing 

transactions for purposes of the de 

minimis exception, a U.S. person may 

be able to effectively engage in 

unregistered dealing activity involving 

non-U.S. persons by having a non-U.S. 

affiliate enter into dealing transactions 

with other non-U.S. persons (which 

would not be counted against the de 

minimis thresholds because both 

counterparties are non-U.S. persons) or 

with foreign branches of U.S. banks that 

are registered as security-based swap 

dealers (which would not be counted 

against the de minimis thresholds 

because of an exclusion for dealing 

transactions with foreign branches of 

U.S. banks that are registered as 

security-based swap dealers). The U.S. 

person could enter into offsetting 

transactions with those non-U.S. 

affiliates, and those offsetting 

transactions would not be counted 

against the de minimis thresholds due to 

the inter-affiliate exception to the dealer 

analysis.314

Accordingly, in our view, requiring 

conduit affiliates to count their dealing 

transactions against the thresholds is 

necessary or appropriate to prevent the 

evasion of any provision of the 

amendments made to the Exchange Act 

by Title VII for the reasons given 

above.315 We believe that this 

requirement is appropriately tailored to 

prevent the evasion of the dealer 

requirements,316 while preserving 

participants’ flexibility in managing risk 

exposures through inter-affiliate 

transactions.317

In light of the anti-evasion rationale 

for this use of the conduit affiliate 

concept, which is consistent with our 

statutory anti-evasion authority, we are 

not persuaded by a commenter’s view 

that the use of the concept is outside of 

our authority.318 We also are not 

persuaded by that commenter’s 

suggestion that the use of the conduit 

affiliate concept would not advance 

risk-mitigation goals, given that the 

concept can be expected to help ensure 

that the provisions of Title VII 


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319See note 311, supra (citing CDEU Letter). 

320As discussed below, we also are applying the 

conduit affiliate concept to the major participant 

analysis to help guard against evasive practices. See 

section V.C, infra. 

321One commenter particularly suggested that the 

conduit affiliate concept, if implemented, should 

exclude non-dealers. See CDEU Letter. As the 

requirement related to counting by conduit affiliates 

for purposes of the de minimis dealer exception is 

relevant only to the extent that a conduit affiliate 

engages in dealing activity, however, we do not 

believe that it is necessary to otherwise tailor the 

requirement to address the possibility that a 

conduit affiliate is acting on behalf of an affiliated 

U.S. non-dealer for risk management or other nondealing purposes. 

Moreover, as discussed above, over a recent sixyear period, entities that are recognized as dealers 

are responsible for almost 85 percent of transactions 

involving single-name CDS. See Table 1, section 

III.A.1, supra. 

322See Exchange Act rule 3a71–3(a)(1)(i)(A). 

For purposes of the definition, the majorityownership standard is met if one or more U.S. 

persons directly or indirectly own a majority 

interest in the non-U.S. person, where ‘‘majority 

interest’’ is the right to vote or direct the vote of 

a majority of a class of voting securities of an entity, 

the power to sell or direct the sale of a majority of 

a class of voting securities of an entity, or the right 

to receive upon dissolution, or the contribution of, 

a majority of the capital of a partnership. See 

Exchange Act rule 3a71–3(a)(1)(ii). This parallels 

the majority-ownership standard in the interaffiliate exclusion from the dealer analysis. See 

Exchange Act rule 3a71–1(d). 

323The definition does not require a conduit 

affiliate to exclusively transact with such non-U.S. 

persons and foreign branches. Accordingly, 

transactions with other types of U.S. persons would 

not cause a person to fall outside the ‘‘conduit 

affiliate’ definition. 

324For these purposes, it would not be necessary 

that the non-U.S. person transfer the risks and 

benefits of all of its security-based swaps. It also 

would not be necessary that the non-U.S. person 

transfer all of the risks and benefits of any 

particular security-based swap; for example, the 

non-U.S. person may retain the credit risk 

associated with a security-based swap with a nonU.S. counterparty, but transfer to its U.S. affiliate 

the market risk associated with the instrument. 

325See Exchange Act rule 3a71–3(a)(1)(i)(B). 

The reference to ‘‘other arrangements’’ to transfer 

the risks and benefits of security-based swaps, as an 

alternative to entering into offsetting security-based 

swaps, may encompass, for example, the use of 

swaps to transfer risks and benefits of the securitybased swaps (for example, two CDS based on 

slightly different indices of securities could be used 

to approximately replicate a security-based swap 

such as a CDS based on a single reference entity). 

We note that while the CFTC Cross-Border 

Guidance also states the view that as a general 

matter conduit affiliates should count their dealing 

activity against the de minimis thresholds (see 78 

FR 45318–19), the CFTC’s interpretation of what 

constitutes a ‘‘conduit affiliate’’ differs in certain 

ways from our final rule. For example, the CFTC’s 

approach takes into account whether the conduit 

affiliate’s financial results are consolidated in the 

U.S. person’s financial statements, and the CFTC 

states that it did not ‘‘intend that the term ‘conduit 

affiliate’ would include affiliates of swap dealers.’’ 

See CFTC Cross-Border Guidance, 78 FR 45359; see 

also id. at 45318–19 n.258. 

In our view, the final rule’s definition—including 

its prerequisite that the conduit affiliate be 

majority-owned by non-natural U.S. persons— 

appropriately focuses the meaning of the term 

‘‘conduit affiliate’’ on persons who may engage in 

security-based swap activity on behalf of U.S. 

affiliates in connection with dealing activity (and, 

as discussed below, see section V.C, infra, in 

connection with other security-based swap activity 

in the context of the major participant definition). 

326See proposed Exchange Act rule 3a71– 

3(b)(1)(ii). 

327 In addition, some commenters requested an 

exclusion for transactions that are executed 

anonymously and cleared. Those comments—and 

our incorporation of an exception for certain 

cleared anonymous transactions—are addressed 

below. See section IV.G, infra. 

applicable to dealers (including risk 

mitigation provisions such as margin 

and capital requirements) are 

implemented, which can be expected to 

produce risk mitigation benefits. 

At the same time, we recognize the 

significance of commenter concerns that 

the use of the ‘‘conduit affiliate’’ 

concept or the use of a ‘‘central booking 

system’’ approach to registration could 

impede efficient risk management 

practices.319 The conduit affiliate 

concept serves as a prophylactic antievasion measure, and we do not believe 

that any entities currently act as conduit 

affiliates in the security-based swap 

market, particularly given that a 

framework for the comprehensive 

regulation of security-based swaps did 

not exist prior to the enactment of Title 

VII, suggesting that market participants 

would have had no incentives to use 

such arrangements for evasive purposes. 

Moreover, in light of this anti-evasion 

purpose, the definition of ‘‘conduit 

affiliate’’ does not include entities that 

may otherwise engage in relevant 

activity on behalf of affiliated U.S. 

persons that are registered with the 

Commission as security-based swap 

dealers or major security-based swap 

participants, as we do not believe that 

transactions involving these types of 

registered entities and their foreign 

affiliates raise the types of evasion 

concerns that the conduit affiliate 

concept is designed to address.320

In addition, in the context of the 

dealer de minimis exception, the 

relevant rules would require the conduit 

affiliate to count only its dealing 

transactions. The rules accordingly 

distinguish dealing activity by a conduit 

affiliate from a corporate group’s use of 

affiliates for non-dealing purposes, such 

as a corporate group’s use of a single 

affiliated person to enter into 

transactions with the market for risk 

management not involving dealing 

activity (accompanied by offsetting 

inter-affiliate transactions that place the 

economic substance of the instrument 

into another person within the group). 

The requirement we are adopting here— 

under which a conduit affiliate will 

count only its dealing transactions 

against the de minimis thresholds—is 

not expected to impact persons that 

enter into security-based swaps with 

affiliates for non-dealing purposes.321

Consistent with these goals, the final 

rule defines ‘‘conduit affiliate’’ in part 

as a non-U.S. person that directly or 

indirectly is majority-owned by one or 

more U.S. persons.322 To be a conduit 

affiliate, moreover, such a person must 

in the regular course of business enter 

into in security-based swaps with one or 

more other non-U.S. persons or with 

foreign branches of U.S. banks that are 

registered as security-based swap 

dealers,323 for the purposes of hedging 

or mitigating risks faced by, or 

otherwise taking positions on behalf of, 

one or more U.S. persons 324 (other than 

U.S. persons that are registered as 

security-based swap dealers or major 

security-based swap participants) that 

control, are controlled by, or are under 

common control with the potential 

conduit affiliate, and enter into 

offsetting security-based swaps or other 

arrangements with such affiliated U.S. 

persons to transfer risks and benefits of 

those security-based swaps.325

E. Application of De Minimis Exception 

to Dealing Activities of Other Non-U.S. 

Persons 

As noted above, the proposal would 

have required non-U.S. persons to 

count, against the de minimis 

thresholds, only their dealing 

transactions involving U.S. persons 

other than foreign branches, and their 

dealing transactions conducted within 

the United States.326

Aside from issues related to conduit 

affiliates, addressed above, commenters 

discussed other issues regarding the 

application of the de minimis exception 

to the dealing activities of non-U.S. 

persons, particularly relating to: (i) 

Dealing transactions of non-U.S. persons 

that are guaranteed by their U.S. 

affiliates; (ii) activities within the 

United States; and (iii) dealing activities 

of other non-U.S. persons whose 

counterparties are U.S. persons 

(including foreign branches of U.S. 

banks) or non-U.S. persons guaranteed 

by U.S. persons. We are addressing 

those groups of issues separately, given 

the distinct issues relevant to each.327

As discussed below, the final rule 

requires non-U.S. persons (apart from 

the conduit affiliates addressed above) 

to count all of their dealing transactions 

where: (1) The transaction is subject to 

a recourse guarantee against a U.S. 

affiliate of the non-U.S. person; or (2) 

the counterparty to the transaction is a 

U.S. person, other than the foreign 

branch of a registered security-based 

swap dealer. 


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328See proposed Exchange Act rule 3a71– 

3(b)(1)(ii). 329See Cross-Border Proposing Release, 78 FR 

30998. 330See id. at 31006. As part of the proposal, we 

also expressed the preliminary view that dealer 

regulation of such persons would not materially 

increase the programmatic benefits of the dealer 

registration requirement, and that such an approach 

would impose programmatic costs without a 

corresponding increase in programmatic benefits to 

the U.S. security-based swap market. See id. at 

31146–47. For the reasons discussed below, 

however, we have concluded that it is appropriate 

to require non-U.S. guaranteed affiliates of U.S. 

persons to count, against the de minimis thresholds, 

their dealing transactions that are subject to a right 

of recourse against a U.S. person. See IV.E.1(b) 

(discussing the final rule’s changes to the 

preliminary view). 

331See BM Letter at 17–18. 

332See AFR Letter I at 7–8, 14. 

333See id. at 14 (‘‘In cases where a guarantee is 

implicit, the use of a rebuttable presumption of a 

guarantee will put the burden on the foreign 

affiliate in question to demonstrate to regulators 

that it is not guaranteed.’’); BM Letter at 14 

(suggesting in part that support should be presumed 

if a foreign affiliate incorporates a ‘‘de facto 

guarantor’s name in its own’’). 

334See AFR Letter I at 7 (‘‘This presumption 

could be rebutted by showing clear evidence that 

counterparties were informed of the absence of a 

guarantee.’’); BM Letter at 14–15 (suggesting that 

presumptions of support might be rebutted by 

explicit statements within trade documentation 

accompanied by explicit counterparty waivers, and 

discussing the potential additional use of associated 

public filing requirements and of possible ‘‘ringfence’’ systems for determining which affiliates 

should be considered U.S persons). 

335See SIFMA/FIA/FSR Letter at A–17. 

336See Exchange Act rule 3a71–3(b)(1)(iii)(B). 

Consistent with the rule generally requiring a 

person to consider its affiliates’ dealing activities 

for purposes of the de minimis exception (Exchange 

Act rule 3a71–2(a)(1)), the Commission interprets 

control to mean the possession, direct or indirect, 

of the power to direct or cause the direction of the 

management and policies of a person, whether 

through the ownership of voting securities, by 

contract or otherwise. See Intermediary Definitions 

Adopting Release, 77 FR 30631 n.437. 

337For purposes of the dealer de minimis 

exception, rights of recourse would not be present 

if legally enforceable rights were to arise by 

operation of law following the transaction, such as 

due to later actions that evidence the disregard of 

corporate form by a party to the transaction and its 

affiliate. Rights of recourse, in contrast, would 

encompass rights existing at the time of the 

transaction but conditioned upon the non-U.S. 

person’s insolvency or failure to meet its obligations 

under the security-based swap or conditioned upon 

the counterparty first being required to take legal 

action against the non-U.S. person to enforce its 

right of collection. 

1. Dealing Transactions of Non-U.S. 

Persons That Are Subject to Recourse 

Guarantees by Their U.S. Affiliates 

(a) Proposed Approach and 

Commenters’ Views 

Under the proposal, a non-U.S. 

person’s transactions involving securitybased swaps guaranteed by its U.S. 

affiliate would have been treated the 

same as other transactions of non-U.S. 

persons for purposes of the de minimis 

exception. In other words, the non-U.S. 

guaranteed affiliate would have 

counted, against the de minimis 

thresholds, only its dealing transactions 

involving U.S. persons other than 

foreign branches, and its dealing 

transactions otherwise conducted 

within the United States.328

In the Cross-Border Proposing 

Release, we solicited comment 

regarding whether the ‘‘U.S. person’’ 

definition should incorporate foreign 

entities that are guaranteed by their U.S. 

affiliates.329 We also expressed the 

preliminary view that the primary risk 

related to such guaranteed transactions 

of non-U.S. persons was the risk posed 

to the United States via the guarantee 

from a U.S. person, rather than the 

dealing activity occurring between two 

non-U.S. persons outside the United 

States, and sought to address this risk 

via the proposed attribution principles 

in the ‘‘major security-based swap 

participant’’ definition, and we also 

expressed the view that the use of the 

major participant definition effectively 

would address those regulatory 

concerns.330

Two commenters supported an 

alternative approach to require such 

guaranteed non-U.S. persons to count 

all of their dealing transactions against 

the thresholds. One commenter stated 

that non-U.S. persons that receive 

guarantees from U.S. persons should 

count all of their dealing transactions 

toward the de minimis thresholds, 

arguing that the failure to do so would 

be inconsistent with the resulting flow 

of risk to the United States and that 

major participant regulation was not the 

appropriate means of addressing those 

risks.331 Another commenter took the 

position that the proposed approach 

would provide a loophole whereby U.S. 

entities trading in security-based swaps 

could avoid regulation under the DoddFrank Act.332 Both commenters further 

suggested that affiliates of U.S. persons 

be presumed to be beneficiaries of 

guarantees,333 with the presumption 

potentially subject to rebuttal if there is 

notice that no guarantee would be 

provided.334

One comment letter did not explicitly 

address this issue, but did support the 

Commission’s proposed approach not to 

require non-U.S. persons to aggregate 

the dealing transactions of their U.S.- 

guaranteed affiliates against the de 

minimis thresholds, stating that this 

would pose too tenuous a nexus with 

the U.S. to justify registration.335

(b) Final Rule 

Under the final rule, a non-U.S. 

person (other than a conduit affiliate, as 

discussed above) must count, against 

the de minimis thresholds, any securitybased swap transaction connected with 

its dealing activity for which, in 

connection with that particular securitybased swap, the counterparty to the 

security-based swap has rights of 

recourse against a U.S. person that is 

controlling, controlled by, or under 

common control with the non-U.S. 

person.336 For these purposes, the 

counterparty would be deemed to have 

a right of recourse against a U.S. affiliate 

of the non-U.S. person if the 

counterparty has a conditional or 

unconditional legally enforceable right, 

in whole or in part, to receive payments 

from, or otherwise collect from, the U.S. 

affiliate in connection with the non-U.S. 

person’s obligations under the securitybased swap. 

We understand that such rights may 

arise in a variety of contexts. For 

example, a counterparty would have 

such a right of recourse against the U.S. 

person if the applicable arrangement 

provides the counterparty the legally 

enforceable right to demand payment 

from the U.S. person in connection with 

the security-based swap, without 

conditioning that right upon the nonU.S. person’s non-performance or 

requiring that the counterparty first 

make a demand on the non-U.S. person. 

A counterparty also would have such a 

right of recourse if the counterparty 

itself could exercise legally enforceable 

rights of collection against the U.S. 

person in connection with the securitybased swap, even when such rights are 

conditioned upon the non-U.S. person’s 

insolvency or failure to meet its 

obligations under the security-based 

swap, and/or are conditioned upon the 

counterparty first being required to take 

legal action against the non-U.S. person 

to enforce its rights of collection. 

The terms of the guarantee need not 

necessarily be included within the 

security-based swap documentation or 

even otherwise reduced to writing (so 

long as legally enforceable rights are 

created under the laws of the relevant 

jurisdiction); for instance, such rights of 

recourse would arise when the 

counterparty, as a matter of law in the 

relevant jurisdiction, would have rights 

to payment and/or collection that may 

arise in connection with the non-U.S. 

person’s obligations under the securitybased swap that are enforceable.337 We 

would view the transactions of a nonU.S. person as subject to a recourse 

guarantee if at least one U.S. person 

(either individually or jointly and 

severally with others) bears unlimited 

responsibility for the non-U.S. person’s 

obligations, including the non-U.S. 

person’s obligations to security-based 


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Federal Register / Vol. 79, No. 155 / Tuesday, August 12, 2014 / Rules and Regulations 47317 

338See Exchange Act rule 3a71–3(b)(1)(B). This 

approach of looking to the presence of rights of 

recourse to identify guarantees is consistent with 

our prior views in connection with Title VII 

implementation. See generally Intermediary 

Definitions Adopting Release, 77 FR 30689 (stating 

that in connection with the application of the major 

participant definition, ‘‘positions in general would 

be attributed to a parent, other affiliate or guarantor 

for purposes of the major participant analysis to the 

extent that the counterparties to those positions 

would have recourse to that other entity in 

connection with the position’’); Cross-Border 

Proposing Release, 78 FR 30977 (noting that a 

guarantee would typically give the counterparties to 

a U.S. non-bank dealer direct recourse to a holding 

company, as though the guarantor had entered into 

the transactions directly). 

339See BM Letter at 12, 17–18 (stating that the 

‘‘proposed exemption has the potential to create a 

large loophole for foreign market participants, while 

leaving the risk with the American taxpayer,’’ also 

stating that ‘‘de facto guaranteed affiliates’’ should 

be classified as U.S. persons ‘‘under the SEC’s 

territorial or anti-evasion authority’’); AFR Letter I 

at 5 (suggesting that the proposed treatment of U.S.- 

guaranteed affiliates, as well as certain other aspects 

of the proposal, could result in regulatory arbitrage). 

340We understand that, in practice, a guarantor’s 

obligation to a derivatives counterparty of a person 

whose security-based swap activity is guaranteed 

may be based on the same terms as that of the 

guaranteed person, and that the guarantor’s 

obligation to make payments under the contract 

may not be contingent upon the guaranteed 

person’s default. Moreover, we understand that 

margin payments under a contract at times may be 

made directly by a U.S. guarantor to the 

counterparty of the guaranteed person, particularly 

when the corporate group uses a consolidated back 

office located within a parent guarantor, or when 

the derivative is denominated in U.S. dollars. We 

further understand that a counterparty may, for risk 

management purposes, use a single credit limit for 

all transactions guaranteed by a parent, regardless 

of which particular affiliate may be used for 

booking the transaction with that counterparty. 

341For the above reasons, we conclude that this 

final rule is not being applied to persons who are 

‘‘transact[ing] a business in security-based swaps 

without the jurisdiction of the United States,’’ 

within the meaning of Exchange Act section 30(c). 

See section II.B.2(a), supra. 

swap counterparties. Such arrangements 

may include those associated with 

foreign unlimited companies or 

unlimited liability companies with at 

least one U.S.-person member or 

shareholder, general partnerships with 

at least one U.S.-person general partner, 

or entities formed under similar 

arrangements such that at least one U.S. 

persons bears unlimited responsibility 

for the non-U.S. person’s liabilities. In 

our view, the nature of the legal 

arrangement between the U.S. person 

and the non-U.S. person—which makes 

the U.S. person responsible for the 

obligations of the non-U.S. person—is 

appropriately characterized as a 

recourse guarantee, absent 

countervailing factors. More generally, a 

recourse guarantee is present if, in 

connection with the security-based 

swap, the counterparty itself has a 

legally enforceable right to payment or 

collection from the U.S. person, 

regardless of the form of the 

arrangement that provides such a legally 

enforceable right to payment or 

collection. 

Accordingly, the final rule clarifies 

that for these purposes a counterparty 

would have rights of recourse against 

the U.S. person ‘‘if the counterparty has 

a conditional or unconditional legally 

enforceable right, in whole or in part, to 

receive payments from, or otherwise 

collect from, the U.S. person in 

connection with the security-based 

swap.’’ 338

In revising the proposal, we have been 

influenced by commenter concerns that 

the proposed approach could allow nonU.S. persons to conduct a dealing 

business involving security-based swaps 

that are guaranteed by a U.S. affiliate 

without being regulated as a dealer, 

even though the guarantee exposes the 

U.S. person guarantor to risk in 

connection with the dealing activity.339

This final rule also reflects our 

conclusion that a non-U.S. person—to 

the extent it engages in dealing activity 

involving security-based swaps subject 

to a recourse guarantee by its U.S. 

affiliate—engages in dealing activity 

that occurs, at least in part, within the 

United States. As discussed above, the 

economic reality is that by virtue of the 

guarantee the non-U.S. person 

effectively acts together with its U.S. 

affiliate to engage in the dealing activity 

that results in the transactions, and the 

non-U.S. person’s dealing activity 

cannot reasonably be isolated from the 

U.S. person’s activity in providing the 

guarantee. The U.S. person guarantor 

together with the non-U.S. person 

whose dealing activity it guarantees 

jointly may seek to profit by providing 

liquidity and otherwise engaging in 

dealing activity in security-based swaps, 

and it is the U.S. guarantor’s financial 

resources that enable the guarantor to 

help its affiliate provide liquidity and 

otherwise engage in dealing activity. It 

is reasonable to assume that the 

counterparties of the non-U.S. person 

whose dealing activity is guaranteed 

look to both the non-U.S. person and the 

U.S. guarantor for performance on the 

security-based swap. Moreover, the U.S. 

guarantor bears risks arising from any 

security-based swap between the nonU.S. person whose dealing activity it 

guarantees and that affiliate’s 

counterparties, wherever located. 

This approach is consistent with the 

purposes of Title VII. The exposure of 

the U.S. guarantor creates risk to U.S. 

persons and potentially to the U.S. 

financial system via the guarantor to a 

comparable degree as if that U.S. person 

had directly entered into the 

transactions that constituted dealing 

activity by the affiliate. In many cases 

the counterparty to the non-U.S. person 

whose dealing activity is guaranteed 

may not enter into the transaction with 

that non-U.S. person, or may not do so 

on the same terms, absent the guarantee. 

The U.S. guarantor usually undertakes 

obligations with respect to the securitybased swap regardless of whether that 

non-U.S. person ultimately defaults in 

connection with the security-based 

swap.340

In requiring non-U.S. persons whose 

dealing involves security-based swaps 

that are guaranteed by a U.S. person to 

apply those dealing transactions against 

the de minimis thresholds, the final rule 

further reflects the fact that the 

economic reality of an offshore dealing 

business using such non-U.S. persons 

may be similar or identical to an 

offshore dealing business carried out 

through a foreign branch. In both cases 

the risk of the dealing activity has 

directly been placed into the United 

States, and non-U.S. counterparties 

generally may be expected to look to a 

U.S. person’s creditworthiness in 

deciding whether to enter into the 

transaction with the guarantor’s nonU.S. affiliate or the foreign branch (and 

on what terms). The final rule thus 

should help apply dealer regulation in 

similar ways to differing organizational 

structures that serve similar economic 

purposes, and help avoid disparities in 

applying dealer regulation to differing 

arrangements that pose similar risks to 

the United States.341

We believe, moreover, that this final 

rule is necessary or appropriate as a 

prophylactic measure to help prevent 

the evasion of the provisions of the 

Exchange Act that were added by the 

Dodd-Frank Act, and thus help ensure 

that the relevant purposes of the DoddFrank Act are not undermined. Without 

this rule, U.S. persons may have a 

strong incentive to evade dealer 

regulation under Title VII simply by 

conducting their dealing activity via a 

guaranteed affiliate, while the economic 

reality of transactions arising from that 

activity—including the risks these 

transactions introduce to the U.S. 

market—would be no different in most 

respects than transactions directly 

entered into by U.S. persons. In other 

words, for example, if a U.S. entity 

engaged in security-based swap dealing 

wanted to either avoid registration or 

otherwise have its security-based swap 

transactions with foreign counterparties 

be outside the various Title VII 

requirements with respect to those 

transactions, it could establish an 

overseas affiliate and simply extend a 


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47318 Federal Register / Vol. 79, No. 155 / Tuesday, August 12, 2014 / Rules and Regulations 

342Exchange Act section 30(c) particularly 

provides that ‘‘[n]o provision of [Title VII] . . . 

shall apply to any person insofar as such person 

transacts a business in security-based swaps 

without the jurisdiction of the United States,’’ 

unless that business is transacted in contravention 

of rules prescribed to prevent evasion of Title VII. 

343See Exchange Act section 3(a)(67). 

344For example, for cleared security-based CDS, 

a person would have to write $200 billion notional 

of CDS protection to meet the relevant $2 billion 

‘‘potential future exposure’’ threshold that is used 

as part of the major participant analysis. See 

Intermediary Definitions Adopting Release, 77 FR 

30671 n.914. 

345See id. at 30629 (‘‘The statutory requirements 

that apply to swap dealers and security-based swap 

dealers include requirements aimed at the 

protection of customers and counterparties, . . . as 

well as requirements aimed at helping to promote 

effective operations and transparency of the swap 

and security-based swap markets.’’; footnotes 

omitted). 

346This is consistent with the view of one 

commenter that highlighted the differences in 

purpose between dealer and major participant 

regulation. See BM Letter. 

347See id. at 14, 17–18 (‘‘Thus, regardless of 

whether an affiliate is ‘guaranteed’ by a U.S. person, 

that affiliate may be effectively guaranteed, having 

the same connection with and posing the same risks 

to the United States.’’). See also AFR Letter I at 7– 

8. 

348See notes 333 and 334, supra and 

accompanying text. We note that any U.S. person 

that is subject to the reporting requirements of 

section 13(a) or section 15(d) of the Exchange Act, 

15 U.S.C. 78m(a) or 15 U.S.C. 78o(d) respectively, 

regardless of whether that person provides a 

recourse guarantee relating to its non-U.S. affiliates’ 

obligations, must consider whether there are 

disclosures that must be made in its periodic 

reports regarding any of its obligations. These 

disclosures would include any known trends, 

events, demands, commitments and uncertainties 

that are reasonably likely to have a material effect 

on the financial condition or operating performance 

of the U.S. person that would be required to be 

disclosed pursuant to Item 303 of Regulation S–K. 

As required by Item 303 of Regulation S–K, the 

disclosures are presented with regard to the 

registrant (the U.S. person) and its subsidiaries on 

a consolidated basis. See Item 303 of Regulation S– 

K, 17 CFR 229.303, and Commission’s Guidance 

Regarding Management’s Discussion and Analysis 

of Financial Condition and Results of Operations, 

Securities Act Release No. 8350 (Dec. 19, 2003), 68 

FR 75056 (Dec. 29, 2003). See also Item 305 of 

Regulation S–K, 17 CFR 229.305. 

349See AFR Letter I at 7 (stating that ‘‘[b]oth 

explicit and implicit guarantees of support from the 

parent institution should be counted,’’ with a 

rebuttable presumption that a subsidiary of a U.S. 

entity is guaranteed, and that ‘‘[s]hould the SEC not 

include guaranteed affiliates and subsidiaries in the 

definition of ‘U.S. person’, at the very least SBS 

with such entities should count toward entities de 

minimis calculation’’); BM Letter at 12, 17 (stating 

that guaranteed affiliate should be defined ‘‘to 

include those affiliates that are de factor 

guaranteed, even though not explicitly subject to a 

guarantee agreement,’’ and that transactions with 

non-U.S. persons that receive guarantees from U.S. 

persons should be included in the de minimis 

calculation). 

350This final rule regarding the de minimis 

exception does not encompass non-U.S. persons 

who receive a guarantee from an unaffiliated U.S. 

person. We do not expect that U.S. persons would 

use guarantees of unaffiliated persons as a 

substitute for dealing activity via a foreign branch, 

and we do not believe such arrangements comprise 

a significant part of dealing activity in the market. 

Our final rules do, however, generally require such 

non-affiliate arrangements to be included in the 

major security-based swap participant threshold 

calculations. See section V.D.3, infra. 

payment guarantee. The purpose for 

doing so would be to evade the 

requirements of Title VII and the 

incentives to do so could be high, 

making it necessary and appropriate to 

invoke our Title VII authority, because 

the economic reality of these 

transactions would be no different in 

most respects, including the risks these 

transactions could introduce to the U.S. 

market. Arrangements between a U.S. 

person and a non-U.S. person that, as a 

matter of law in the relevant 

jurisdiction, make the U.S. person 

responsible for the non-U.S. person’s 

liabilities may create similarly strong 

incentives to restructure business 

operations to avoid the application of 

Title VII by providing the economic 

equivalent of an express guarantee 

through an arrangement that under 

relevant law provides the non-U.S. 

person counterparty with direct 

recourse against the U.S. person. For 

these reasons, we believe that it is 

necessary and appropriate to adopt this 

rule pursuant to our anti-evasion 

authority under Exchange Act section 

30(c).342

Compared to the proposal, this 

approach also more fully accounts for 

differences between the regulatory 

regimes applicable to security-based 

swap dealers and major security-based 

swap participants. The definition of 

‘‘major security-based swap participant’’ 

focuses on systemic risk issues, in that 

it particularly targets persons that 

maintain ‘‘substantial positions’’ that 

are ‘‘systemically important,’’ or that 

pose ‘‘substantial counterparty exposure 

that could have serious adverse effects 

on the financial stability of the United 

States banking system or financial 

markets.’’ 343 The thresholds associated 

with the major participant definition 

reflect that systemic risk focus.344 The 

dealer definition, in contrast, is activityfocused, addresses the significance of a 

person’s dealing activity only via the de 

minimis exception, and addresses 

regulatory interests apart from risk.345

Accordingly, upon further 

consideration, we believe that 

availability of major participant 

regulation does not mitigate the above 

considerations regarding risk and 

regulatory treatment of similar business 

models, and those considerations are 

better addressed by counting dealing 

activities guaranteed by U.S. affiliates 

against the de minimis thresholds of the 

non-U.S. persons whose transactions are 

subject to the guarantees.346

In adopting these provisions, we 

acknowledge that the final rule does not 

go as far as some commenters have 

requested, in that it does not require a 

non-U.S. person to count its dealing 

transactions involving security-based 

swaps that do not grant its counterparty 

a recourse guarantee against the U.S. 

affiliate of that non-U.S. person, even if 

the U.S. affiliate is subject to a recourse 

guarantee with respect to other securitybased swaps of the same non-U.S. 

person. The final rule also does not 

incorporate the suggestion from certain 

commenters that we should treat U.S. 

entities and their affiliates as equivalent 

for purposes of the cross-border 

implementation of Title VII.347 The final 

rule further does not incorporate the 

suggestion that affiliates of a U.S. person 

should be presumed to be recipients of 

de facto guarantees, which could be 

rebutted via disclosure.348

Those commenters raise important 

concerns regarding the possibility that, 

even absent explicit financial support 

arrangements, U.S. entities that are 

affiliated with non-U.S. persons for 

reputational reasons may determine that 

they must support their non-U.S. 

affiliates at times of crisis. In those 

commenters’ view, such considerations 

impose risks upon U.S. markets even 

absent explicit legal obligations. As a 

result, the commenters suggest that 

foreign affiliates of U.S. entities should 

have to count all their dealing 

transactions against the de minimis 

thresholds, or that such foreign affiliates 

should be deemed to be ‘‘U.S. persons’’ 

for purposes of Title VII.349

Our modification requiring these nonU.S. persons to count certain of their 

dealing transactions with non-U.S. 

persons against the de minimis 

thresholds partially addresses those 

commenter concerns.350 We also 

recognize that there may be 

circumstances in which a U.S. person 

provides its foreign affiliate with nonrecourse support that is not specifically 

linked to particular instruments or to 

derivatives activities generally. Our 

final rule, however, targets recoursebased arrangements whereby the 

counterparties to the non-U.S. affiliate 

would be particularly likely to look to 

the U.S. person for satisfaction of some 

or all of the obligations arising under 

the security-based swap. On balance, we 

believe that an approach that focuses on 

the presence of recourse arrangements 

appropriately addresses dealing 

activities that have a particularly direct 

effect on the U.S. market, as well as the 

ability of a U.S. person to use such 

guarantees to conduct a security-based 


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Federal Register / Vol. 79, No. 155 / Tuesday, August 12, 2014 / Rules and Regulations 47319 

351See, e.g., Public Law 111–203, sections 165– 

166 of the Dodd Frank Act, 124 Stat. 1376, 1423– 

32 (2010). In the Cross-Border Proposing Release, in 

connection with our preliminary view that the risks 

posed by guarantees could be adequately addressed 

via the regulation of major security-based swap 

participants, we referenced the Bank Holding 

Company Act of 1956, and the provisions of Title 

I of the Dodd-Frank Act regarding the regulation of 

certain nonbank financial companies and bank 

holding companies that pose a threat to the 

financial stability of the United States. See CrossBorder Proposing Release, 78 FR 31006 n.360. 

For the reasons discussed above, however, we 

have concluded that the presence of those 

particular regulatory safeguards do not warrant the 

conclusion that non-U.S. guaranteed affiliates of 

U.S. persons should not have to count, against the 

de minimis thresholds, their dealing activity 

involving other non-U.S. persons when the 

transaction is subject to a right of recourse against 

the U.S. affiliate. Although those provisions 

encompass regulatory safeguards that can be 

expected to address the risks associated with U.S.- 

based financial groups, upon further consideration 

we conclude that it is appropriate for the 

application of the de minimis test to directly 

account for those specific security-based swap 

transactions that are subject to recourse guarantees, 

as opposed to more generalized risks arising from 

the range of activities conducted by non-guaranteed 

foreign affiliates, given the U.S. person’s 

participation in the security-based swap transaction 

through the guarantee. 

352See note 335, supra, and accompanying text. 

353See CFTC Cross-Border Guidance, 78 FR 

45319. For those purposes, the CFTC Cross-Border 

Guidance interprets guarantees generally to include 

‘‘not only traditional guarantees of payment or 

performance of the related swaps, but also other 

formal arrangements that, in view of all the facts 

and circumstances, support the non-U.S. person’s 

ability to pay or perform its swap obligations with 

respect to its swaps,’’ and also refers to ‘‘keepwells 

and liquidity puts, certain types of indemnity 

agreements, master trust agreements, liability or 

loss transfer or sharing agreements, and any other 

explicit financial support arrangements’’ as being 

types of guarantees notwithstanding that that they 

‘‘may provide for different third-party rights and/or 

address different risks than traditional guarantees.’’ 

See id. at 45319–20. 

354See proposed Exchange Act rule 3a71– 

3(b)(1)(ii). For those purposes, ‘‘foreign branch’’ was 

defined to mean any branch of a U.S. bank if: the 

branch is located outside the United States; the 

branch operates for valid business reasons; and the 

branch is engaged in the business of banking and 

is subject to substantive banking regulation in the 

jurisdiction where it is located. See proposed 

Exchange Act rule 3a71–3(a)(1). The proposal also 

included a definition of ‘‘transaction conducted 

through a foreign branch’’ that encompassed 

transactions solicited, negotiated, or executed 

through a foreign branch where the foreign branch 

is the counterparty to the transaction, and the 

transaction was not solicited, negotiated, or 

executed by a person within the United States. See 

proposed Exchange Act rule 3a71–3(a)(4). 

Under the CFTC’s cross-border guidance, as a 

general matter non-U.S. persons may exclude their 

dealing activities involving foreign branches of U.S. 

persons only if the U.S. person is registered with 

the CFTC as a swap dealer. See CFTC Cross-Border 

Guidance, 78 FR 45319. 

swap dealing business as an alternative 

to using a foreign branch. 

This is not to say that more general 

financial support arrangements do not 

also pose risks to U.S. persons and 

potentially to the U.S. financial system, 

including risks posed by the activity of 

non-U.S. persons to their U.S. parents or 

affiliates. However, we believe that this 

focus on recourse guarantees 

appropriately addresses the most direct 

risks posed by such guarantee 

arrangements to U.S. persons and 

potentially to the U.S. financial system. 

We also note that Congress has provided 

additional regulatory tools apart from 

Title VII to address such risks. Indeed, 

in enacting the Dodd-Frank Act, 

Congress provided general tools—not 

merely tools focusing on derivatives 

activities—to address the risks 

associated with U.S.-based financial 

groups as a whole, including the risks 

posed by such groups’ non-guaranteed 

foreign affiliates engaged in financial 

services business. This holistic 

approach to risks that could flow back 

to the United States may reflect the fact 

that financial services activities apart 

from security-based swaps constitute 

the great majority of such groups’ 

overall financial activities outside the 

United States that can produce such 

risks. The regulatory tools substantially 

enhanced by the Dodd-Frank Act to 

better address these cross-border risks 

posed by financial services activities 

other than security-based swaps and 

such tools include globally consolidated 

capital requirements (including 

enhanced capital and leverage 

standards, group-wide singlecounterparty credit limits, and capital 

surcharges for firms with particularly 

high levels of risk), and globally 

consolidated liquidity and risk 

management standards (including stress 

testing, debt-to-equity limitations, living 

will requirement, and timely 

remediation measures). By accounting 

for risks at the consolidated level, these 

tools address risks posed by guaranteed 

and non-guaranteed subsidiaries within 

U.S.-based financial groups, regardless 

of whether the subsidiaries are based in 

the United States or outside the United 

States.351 Our focus on recourse 

guarantees appropriately targets the 

concerns raised by security-based swap 

activity that Title VII was intended to 

address, recognizing that Congress has 

established other regulatory tools that 

are specifically intended, and better 

suited, to address risks to bank holding 

companies and financial holding 

companies, arising from the financial 

services activities of a foreign affiliate of 

those holding companies where the 

foreign affiliate does not engage in 

security-based swap activity in the 

United States. 

Conversely, one commenter implicitly 

appeared to oppose any requirement 

that non-U.S. persons count their 

guaranteed transactions carried out in a 

dealing capacity with non-U.S. person 

counterparties against their de minimis 

thresholds.352 For the reasons discussed 

above, however, we believe that the 

targeted counting required by the final 

rule is appropriate to reflect activity 

involving security-based swaps that 

occurs in the United States and presents 

risks to U.S. persons and potentially to 

the U.S. financial system. 

Finally, in adopting these provisions 

we recognize that the CFTC CrossBorder Guidance appears to broadly 

opine that non-U.S. persons who receive 

any express guarantee from a U.S. 

affiliate should, as a general matter, 

count all of their dealing activity against 

the de minimis thresholds, regardless of 

whether a counterparty has recourse 

against the U.S. person in connection 

with the swap.353 Our final rule is more 

targeted than the CFTC approach, in 

that our final rule requires a non-U.S. 

guaranteed affiliate to count only those 

dealing transactions for which the 

counterparty to the security-based swap 

has recourse against a U.S. person that 

is affiliated with the non-U.S. person. 

This reflects our decision to focus the 

application of the de minimis exception 

on recourse arrangements involving 

security-based swaps, while recognizing 

that some non-recourse arrangements 

could influence a U.S. person to provide 

financial support to non-U.S. persons 

and thereby present risk to the U.S. 

person and potential risk to the U.S. 

financial system. 

2. Dealing Transactions of Non-U.S. 

Persons Involving U.S. and Other 

Counterparties 

(a) Proposed Approach and 

Commenters’ Views 

Under the proposal, non-U.S. persons 

also would be required to count their 

dealing transactions entered into with a 

U.S. person, other than a foreign 

branch.354 As discussed below, this 

proposed exclusion for transactions in 

which the counterparty is a foreign 

branch reflected concerns regarding U.S. 

banks being limited in their access to 

foreign counterparties when conducting 

dealing activity through their foreign 

branches. 

The proposal solicited comment 

regarding whether non-U.S. persons 

should be required to count, towards 

their de minimis thresholds, 

transactions with U.S. persons or with 

foreign branches of U.S. banks. It also 

solicited comment regarding whether 

non-U.S. persons should be required to 

count the dealing transactions they 

enter into with registered security-based 


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47320 Federal Register / Vol. 79, No. 155 / Tuesday, August 12, 2014 / Rules and Regulations 

355See Cross-Border Proposing Release, 78 FR 

30995. 

356See AFR Letter I at 6 (supporting the premise 

that offices and branches of U.S. persons are ‘‘an 

integral part of the U.S. person’’ but arguing that it 

is inconsistent to treat such foreign branches 

different from their U.S. parent institutions); BM 

Letter at 18 (noting that the foreign branch of a U.S. 

person should be treated no differently than the 

U.S. person). 

357See AFR Letter I at 6–7 (‘‘With these 

incentives [related to transactions with foreign 

branches, offices and guaranteed subsidiaries and 

affiliates of U.S. persons], it is unlikely that any 

foreign entities will choose to trade within the 

United States directly, and quite likely that U.S. 

financial institutions will simply advise their 

clients to trade with their foreign branches if they 

want to avoid Dodd-Frank’’); BM Letter at 3, 18–19 

(‘‘This exception is no more than a loophole based 

upon a scare tactic, which will cause U.S. firms to 

operate their SBS business through offshore 

branches.’’). 

358See SIFMA/FIA/FSR Letter at A–15 to A–16 

(supporting the proposed approach and urging the 

Commission to extend the exclusion to transactions 

between non-U.S. persons and foreign branches 

even if they are conducted within the United 

States). 

359See SIFMA/FIA/FSR Letter at A–17. Under the 

CFTC’s guidance, non-U.S. persons would generally 

count certain dealing transactions involving 

counterparties that are guaranteed affiliates of U.S. 

persons, subject to exceptions. See CFTC CrossBorder Guidance, 78 FR 45319. 

360See AFR Letter I at 7–8 and note 28 (stating 

that the proposal ‘‘incentivizes U.S. institutions to 

execute SBS indirectly by using foreign affiliates, 

subsidiaries, branches and offices,’’ and thus lead 

U.S. institutions to incur risks ‘‘by trading with 

foreign entities without the full regulatory 

protections of Dodd-Frank’’; also acknowledging 

that U.S. guarantors would count those trades for 

determining whether the guarantor is a major 

participant, but adding that major participants are 

subject to fewer requirements than dealers ‘‘so this 

is not a satisfactory method for addressing the risks 

presented by U.S. parent institutions guaranteeing 

the swaps of foreign subsidiaries and affiliates’’). 

361See note 333, supra. 

362The separate counting requirements applicable 

to conduit affiliates are addressed above. See 

section IV.D, supra. 

363See Exchange Act rule 3a71–3(b)(1)(iii)(A). 

‘‘Foreign branch’’ is defined in Exchange Act rule 

3a71–3(a)(2). 

364See section II.B.2(b)iii, supra. We also note 

that the Commission’s traditional approach toward 

the registration of securities brokers and dealers 

under the Exchange Act generally requires 

registration of foreign brokers or dealers that, from 

outside the United States, induce or attempt to 

induce securities transactions by persons within the 

United States. See Cross-Border Proposing Release, 

78 FR 30990 n.213 and accompanying text. 

In this regard we recognize that Exchange Act 

rule 15a-6, which provides an exemption for the 

activities of certain foreign broker-dealers, includes 

an exemption for transactions in securities with or 

for persons ‘‘that have not been solicited by the 

foreign broker or dealer.’’ Exchange Act rule 15a6(a)(1). In adopting this provision, the Commission 

stated that it ‘‘does not believe, as a policy matter, 

that registration is necessary if U.S. investors have 

sought out foreign broker-dealers outside the United 

States and initiated transactions in foreign 

securities markets entirely of their own accord.’’ 

See 54 FR 30013, 30017 (Jul. 18, 1989). The 

Commission further stated that a narrow 

construction of ‘‘solicitation’’ would be inconsistent 

with the Exchange Act. See id. at 30018. We do not 

believe that a similar unsolicited exception—which 

reflects a policy decision rather than a matter of 

statutory scope—would be appropriate in this 

context, particularly given that situations in which 

non-U.S. persons engage in dealing activity with 

U.S. persons in an amount that is significant 

enough to implicate the de minimis thresholds 

would not appear consistent with a policy allowing 

non-U.S. persons to accommodate transactions 

which U.S. persons initiate ‘‘entirely of their own 

accord.’’ Moreover, we note that the definition of 

‘‘security-based swap dealer’’ includes persons that 

hold themselves out as security-based swap dealers 

or that are commonly known in the trade as 

security-based swap dealers. See Exchange Act 

section 3(a)(71)(A). Such persons may not actively 

solicit transactions from particular customers, and 

nothing in the statutory definition suggests that 

active solicitation on the part of such persons is 

required for them to fall within the definition of 

‘‘security-based swap dealer.’’ 

365For the above reasons, we conclude that this 

final rule is not being applied to persons who are 

‘‘transact[ing] a business in security-based swaps 

without the jurisdiction of the United States,’’ 

within the meaning of Exchange Act section 30(c). 

See section II.B.2(b)iii, supra. We also believe, 

moreover, that this final rule is necessary or 

appropriate as a prophylactic measure to help 

prevent the evasion of the provisions of the 

Exchange Act that were added by the Dodd-Frank 

Act, and thus help ensure that the relevant 

purposes of the Dodd-Frank Act are not 

undermined. Without this rule, market participants 

could engage in dealing activity with persons 

swap dealers, and regarding whether 

non-U.S. persons should be able to 

conduct dealing transactions within the 

United States without registering if their 

transactions are with a registered 

security-based swap dealer.355

Two commenters took the position 

that non-U.S. persons should have to 

count their transactions with foreign 

branches of U.S. banks against the de 

minimis thresholds, noting that those 

foreign branches themselves fall within 

the ‘‘U.S. person’’ definition,356 and 

stating that excluding those transactions 

would serve as a loophole from 

regulation.357 In contrast, one 

commenter stated that such transactions 

should be excluded from the de minimis 

analysis even if U.S. personnel are 

involved in soliciting, negotiating, 

executing or booking the transaction.358

Commenters also addressed the 

application of the exception to non-U.S. 

persons’ dealing activities involving 

counterparties that are guaranteed 

affiliates of non-U.S. persons. The 

proposal did not require such 

transactions to be counted. One 

commenter expressed support for the 

fact that our proposal, unlike the CFTC’s 

guidance, did not require non-U.S. 

persons to count certain transactions 

with non-U.S. counterparties that are 

guaranteed by U.S. persons.359 On the 

other hand, one commenter stated that 

non-U.S. persons should count against 

the thresholds security-based swaps 

entered into with guaranteed affiliates 

and subsidiaries of U.S. persons if those 

affiliates and subsidiaries are not 

included within the ‘‘U.S. person’’ 

definition.360 Also, as noted above, that 

commenter and one other commenter 

generally suggested that the presence of 

explicit or implicit guarantees of foreign 

affiliates should trigger application of 

the Exchange Act.361

(b) Final Rule 

The final rule has been modified from 

the proposal to require non-U.S. persons 

(other than conduit affiliates 362) to 

count, against the de minimis 

thresholds, their dealing transactions 

with U.S. persons other than certain 

transactions with the foreign branches 

of registered security-based swap 

dealers.363 The proposal would have 

excluded all of the non-U.S. person’s 

transactions with a foreign branch (other 

than ‘‘transactions conducted within the 

United States’’) regardless of the 

branch’s registration status. 

The requirement that such non-U.S. 

persons must count their dealing 

transactions with U.S. persons against 

the de minimis thresholds reflects the 

fact that dealing activity involving 

counterparties who are U.S. persons 

necessarily involves the performance, at 

least in part, of dealing activity within 

the United States. As discussed above, 

a non-U.S. person engaged in dealing 

activity with U.S. persons in an amount 

sufficient to implicate the de minimis 

thresholds reasonably can be concluded 

to constitute dealing activity within the 

United States by virtue of indicating 

that the non-U.S. person is commonly 

known in the trade as a security-based 

swap dealer within the United States, 

and that the non-U.S. person is regularly 

entering into security-based swaps as an 

ordinary course of business within the 

United States.364 Similarly, that nonU.S. person seeks to profit by, among 

other things, providing liquidity within 

the United States and engaging in 

market making in security-based swaps 

within the United States, and its 

decision to engage in dealing activity 

with U.S. persons affects the liquidity of 

the security-based swap market within 

the United States. U.S. persons incur 

risks arising from this dealing activity, 

which in turn potentially creates risk to 

the U.S. financial system more 

generally. Transactions with U.S. 

persons further raise market 

transparency and counterparty 

protection concerns that Title VII is 

intended to address. Accordingly, the 

dealing activity of such a non-U.S. 

person is best characterized as 

occurring, at least in part, within the 

United States to the extent that the 

dealing activity involves a U.S. 

person.365 No commenters to the CrossVerDate Mar<15>2010 19:37 Aug 11, 2014 Jkt 232001 PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 E:\FR\FM\12AUR5.SGM 12AUR5

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Federal Register / Vol. 79, No. 155 / Tuesday, August 12, 2014 / Rules and Regulations 47321 

within the U.S. market, causing the U.S. person 

counterparties to incur associated risks simply by 

using non-U.S. persons to engage in those 

transactions with U.S. counterparties. 

366See Exchange Act rule 3a71–3(b)(1)(iii)(A)(1). 

As addressed in the Cross-Border Proposing 

Release, the ability of U.S. banks to conduct 

security-based swap activity potentially will be 

limited by section 716 of the Dodd-Frank Act, 

which in part prohibits certain federal assistance to 

security-based swap dealers, and by section 619 of 

the Dodd-Frank Act, which in part prohibits 

banking entities from engaging in proprietary 

trading. See Cross-Border Proposing Release, 78 FR 

31002 n.326. The prohibitions of section 619 do not 

extend to certain market making activities. See 

Dodd-Frank Act section 619(d)(1)(B). In December 

of 2013, the Commission, together with the Office 

of the Comptroller of Currency, the Federal Reserve 

Board, the Federal Deposit Insurance Corporation, 

and the CFTC, issued final rules implementing 

section 619 of the Dodd-Frank Act. See 79 FR 5536 

(Jan. 31, 2014). In addition, based on our 

understanding of changes in the way major U.S. 

dealers engage with non-U.S. counterparties in the 

single-name CDS market following the issuance of 

the CFTC Cross-Border Guidance, we believe that 

few, if any, U.S. persons currently may participate 

in the single-name CDS market through their 

foreign branches. 

367See Exchange Act rule 3a71–3(b)(1)(iii)(A)(2). 

368 In other words, this provision will help to 

avoid requiring non-U.S. persons to speculate 

whether their counterparties would register, and to 

face the consequences of their speculation being 

wrong. 

369Cross-Border Proposing Release, 78 FR 31003. 

370We note that the mere involvement of a 

registered dealer in a transaction by itself would not 

implicate the above concerns regarding disparate 

treatment and liquidity that balance against the 

purposes of dealer regulation when it is not acting 

through a foreign branch, and thus by itself would 

not be sufficient to justify a more general exception 

to these counting principles (e.g., an exception for 

a non-U.S. person’s dealing transactions involving 

any U.S. person that is registered as a securitybased swap dealer). 

371See CFTC Cross-Border Guidance, 78 FR 

45319. 

372See note 357, supra. 

373 In this regard we recognize that dealing 

activity involving foreign branches of U.S. banks 

does pose risks to the U.S. bank of which the 

foreign branch is a part and potentially to the U.S. 

financial system. Such risks are mitigated in part, 

however, in that foreign branches of banks that are 

registered security-based swap dealers will be 

subject to a number of Title VII regulatory 

requirements, including capital and margin 

requirements, that are designed to protect the 

system against those risks. Furthermore, this 

limitation is designed to help preserve liquidity 

throughout the system, given that absent the 

exclusion non-U.S. dealers may have reasons to 

favor non-U.S. counterparties to avoid the 

regulatory requirements of Title VII, which could 

threaten to fragment liquidity across geographical or 

jurisdictional lines. 

374This modification—in conjunction with the 

fact that dealing transactions conducted through the 

foreign branch of a U.S. bank will have to be 

counted against the bank’s de minimis thresholds 

regardless of counterparty (as was proposed)—will 

limit the possibility that U.S. banks could engage 

in a significant amount of security-based swap 

business through their foreign branches without 

either the banks or their non-U.S. counterparties 

being subject to dealer regulation. 

375See note 356, supra. 

Border Proposing Release expressed 

opposition to generally requiring nonU.S. persons to count their dealing 

transactions with U.S. persons (other 

than comments regarding transactions 

with foreign branches, as discussed 

below). 

The final rule permits such non-U.S. 

persons not to count certain dealing 

transactions conducted through a 

foreign branch of a counterparty that is 

a U.S. bank as part of the de minimis 

analysis. For this exclusion to be 

effective, persons located within the 

United States cannot be involved in 

arranging, negotiating, or executing the 

transaction. Moreover—and in contrast 

to the proposal—the counterparty bank 

must be registered as a security-based 

swap dealer,366 unless the transaction 

occurs prior to 60 days following the 

effective date of final rules providing for 

the registration of security-based swap 

dealers.367 Registration of the 

counterparty U.S. bank would not be 

required for the exclusion to be effective 

before then, given that the non-U.S. 

person would not be able to know with 

certainty whether the U.S. bank in the 

future would register with the 

Commission as a security-based swap 

dealer.368

As we noted in the proposal, although 

a foreign branch is part of a ‘‘U.S. 

person,’’ and dealing transactions with 

foreign branches pose risk to the U.S. 

financial system, requiring non-U.S. 

persons to count transactions with 

foreign branches ‘‘could limit access of 

U.S. banks to non-U.S. counterparties 

when they conduct their foreign 

security-based swap dealing activity 

through foreign branches because nonU.S. persons may not be willing to enter 

into transactions with them in order to 

avoid being required to register as a 

security-based swap dealer.’’369 We 

continue to believe that generally 

permitting a non-U.S. person not to 

count those types of transactions that do 

not involve U.S. personnel against the 

thresholds thus should help avoid the 

disparate treatment of foreign branches 

that engage in security-based swap 

dealing activity and that seek to access 

offshore dealing services, compared to 

other persons that engage in securitybased swap dealing activities outside 

the U.S. 

The final rule differs from the 

proposal in that the final rule permits a 

non-U.S. person not to count its 

transactions with a foreign branch of a 

U.S. person against the de minimis 

thresholds only when the foreign branch 

is part of a registered security-based 

swap dealer (or for a temporary period 

of time prior to 60 days prior to the 

effectiveness of the dealer registration 

requirements), rather than transactions 

with any foreign branch. This tailoring 

of the proposal seeks to balance the 

above concerns that the proposed 

approach would result in disparate 

treatment of foreign branches and U.S. 

persons having inadequate access to 

liquidity located outside the United 

States, against the purposes of dealer 

regulation under Title VII. This 

consideration of competing interests 

results in an approach that will help to 

focus the application of the de minimis 

exception in such a way as to ensure 

that a registered security-based swap 

dealer is involved in the transaction, 

and thus that relevant Title VII 

provisions applicable to dealers (such as 

margin requirements) will apply to the 

transaction.370 This manner of focusing 

the exclusion also is consistent with the 

approach taken by the CFTC in its crossborder guidance.371

In adopting an exclusion for certain 

transactions with foreign branches, we 

recognize that some commenters 

opposed having any such exclusion for 

a non-U.S. person’s transactions with a 

foreign branch, stating that the breadth 

of the proposed exclusion would 

facilitate the avoidance of the DoddFrank Act even while U.S. entities incur 

the risks of transactions with foreign 

entities, and that the exclusion would 

be based on a ‘‘scare tactic.’’372 We 

nonetheless believe that this approach is 

justified by concerns about disparate 

treatment, along with associated 

liquidity concerns.373 We also note that 

the modification of the proposal—such 

that transactions with foreign branches 

are excluded only if the foreign branch 

is part of a registered dealer—should 

help address concerns that the 

exclusion would promote evasion of the 

dealer requirements.374 Also, as 

discussed below, a transaction would 

not constitute a ‘‘transaction conducted 

through a foreign branch’’ if personnel 

located in the United States were 

responsible for arranging, negotiating or 

executing the transaction. 

We also recognize that commenters 

took the view that such an exclusion is 

inconsistent with the fact that foreign 

branches fall within the ‘‘U.S. person’’ 

definition.375 In our view, the exclusion 

does not disregard the U.S.-person 

status of foreign branches. Instead, as 

discussed above, we believe that this 

exclusion is appropriate to address 

market concerns regarding disparate 

treatment of the dealing activity of 

foreign branches, notwithstanding that 

U.S.-person status. 

We also have considered the view of 

one commenter that all of a non-U.S. 

person’s transactions with foreign 


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376See note 358, supra. 377See section II.B.2(b)iii, supra. 378See Exchange Act rule 3a71–3(a)(2). 379See Cross-Border Proposing Release, 78 FR 

31002. No commenters specifically addressed the 

proposed definition of ‘‘foreign branch.’’ 

We are adopting this definition as proposed while 

recognizing that it differs from the CFTC’s 

interpretation of ‘‘foreign branch’’ in its crossborder guidance. See CFTC Cross-Border Guidance, 

78 FR 45329 (interpreting ‘‘foreign branch’’ in part 

by reference to designation by banking regulators, 

and by reference to the accounting of profits and 

losses). However, we believe that any foreign 

branch of a U.S. bank that would generally be 

considered a foreign branch under the CFTC CrossBorder Guidance also likely would be a foreign 

branch under our final rule. 

380See Exchange Act rule 3a71–3(a)(3)(i). No 

commenters specifically addressed the proposed 

definition. 

381The proposed definition would have 

addressed transactions that are ‘‘solicited, 

negotiated, or executed’’ by persons outside the 

United States. The final rule refers to ‘‘arranged’’ in 

lieu of ‘‘solicited’’ to reflect the fact that a person 

may engage in dealing activity not only through 

transactions that the person actively solicits, but 

also through transactions that result from 

counterparties reaching out to the person. See 

generally Exchange Act section 3(a)(71)(A)(i) 

(defining ‘‘security-based swap dealer’’ in part to 

encompass any person who ‘‘holds themselves out 

as a dealer in security-based swaps’’). 

Under the proposed rule, ‘‘transaction conducted 

through a foreign branch’’ was defined, in part, to 

exclude any transaction solicited, negotiated, or 

executed by a person within the United States on 

behalf of the foreign branch. See proposed 

Exchange Act rule 3a71–3(a)(4)(i)(B). Under the 

final rule, this element of the definition is set forth 

in the affirmative and provides that the transaction 

must be arranged, negotiated, and executed on 

behalf of the foreign branch solely by persons 

located outside the United States. See Exchange Act 

Rule 3a71–3(a)(3)(i)(B). Consistent with the 

proposed rule, the final definition requires all 

relevant activity to be performed outside the United 

States for a transaction to fall within the definition 

of ‘‘transaction conducted through a foreign 

branch.’’ 

382See Exchange Act rule 3a71–3(a)(3)(ii). This 

representation provision within the final definition 

also contains certain clarifying changes from the 

proposal, in part to reflect the reference to 

‘‘arranged’’ in lieu of ‘‘solicited.’’ See note 364, 

supra. The final rule has been modified from the 

proposal to reflect the change in the definition of 

‘‘transaction conducted through a foreign branch’’ 

described above. See note 382, supra. Also, 

consistent with the analogous representation 

provisions of the ‘‘U.S. person’’ definition, the final 

rule also changes the proposal to reflect that the 

non-U.S. person may not rely on the representation 

if it knows that the representation is not accurate, 

or has reason to know that the representation is not 

accurate; for these purposes a person would have 

reason to know the representation is not accurate 

if a reasonable person should know, under all of the 

facts of which the person is aware, that it is not 

accurate. This ‘‘know or have reason to know’’ 

standard should help ensure that potential securitybased swap dealers and major security-based swap 

participants do not disregard facts that may call into 

question the validity of the representation. See note 

302, supra, and accompanying text. In addition, 

applying a single standard of reliance to all 

representations regarding the status of a person or 

transaction for purposes of the final rule will reduce 

the potential complexity of establishing policies 

and procedures associated with reliance on such 

representations. See section IV.C.4, supra. 

383See note 360, supra. 

384 In taking this position we also recognize that 

the CFTC takes a different approach in its crossborder guidance, which generally considers it 

appropriate for such non-U.S. persons to count their 

dealing transactions with guaranteed affiliate 

counterparties, subject to certain exceptions. See 

CFTC Cross-Border Guidance, 78 FR 45319, 45324 

(stating there generally is no need for non-U.S. 

persons to count such dealing transactions with a 

counterparty that is a registered dealer, an affiliate 

of a registered dealer whose own dealing activities 

are below the relevant de minimis thresholds, or is 

guaranteed by a U.S. person that is not a financial 

entity). 

branches should be excluded from the 

analysis, even if U.S. personnel are 

involved in soliciting, negotiating, 

executing or booking the transaction.376

As discussed elsewhere, we conclude 

that a non-U.S. person’s dealing 

transactions within the United States 

should be counted against the 

thresholds.377 More generally, for the 

reasons addressed above we conclude 

that the proposed exclusion related to a 

non-U.S. person’s transactions with a 

foreign branch should be narrowed—not 

widened. 

The final rule retains the proposed 

definition of ‘‘foreign branch,’’ which 

encompasses any branch of a U.S. bank 

that is located outside the United States, 

operates for valid business reasons, and 

is engaged in the business of banking 

and is subject to substantive banking 

regulation in the jurisdiction where it is 

located.378 As discussed in the CrossBorder Proposing Release, we believe 

these factors appropriately focus on the 

location of the branch, the nature of its 

business and its regulation in a foreign 

jurisdiction.379

The final rule modifies the proposed 

definition of ‘‘transaction conducted 

through a foreign branch’’ to provide 

that the definition addresses 

transactions that are arranged, 

negotiated, and executed by a U.S. 

person through a foreign branch if both: 

(a) The foreign branch is the 

counterparty to the transaction; and (b) 

the security-based swap transaction is 

arranged, negotiated, and executed on 

behalf of the foreign branch solely by 

persons located outside the United 

States.380 We believe that this definition 

identifies the functions associated with 

foreign branch activity in a manner that 

appropriately focuses the exclusion for 

non-U.S. person’s transactions toward 

situations in which the branch performs 

the core dealing functions outside the 

United States.381

Similar to the proposal, the final 

definition of ‘‘transaction conducted 

through a foreign branch’’ also states 

that a person need not consider its 

counterparty’s activities in connection 

with the transaction—i.e., where its 

counterparty’s personnel arranged, 

negotiated and executed the 

transaction—if the person received a 

representation from the counterparty 

that the transaction is arranged, 

negotiated, and executed on behalf of 

the branch solely by persons located 

outside the United States, unless the 

person knows or has reason to know 

that the representation is not accurate. 

For these purposes a person would have 

reason to know the representation is not 

accurate if a reasonable person should 

know, under all of the facts of which the 

person is aware, that it is not 

accurate.382 This is intended to help 

address operational difficulties that a 

non-U.S. person otherwise could face in 

investigating the activities of its 

counterparty to ensure compliance with 

the rule. 

Separately, the final rule, consistent 

with the proposal, does not require such 

non-U.S. persons to count, against the 

de minimis thresholds, their dealing 

transactions with non-U.S. persons 

whose security-based swap transactions 

are guaranteed by a U.S. person. We 

recognize the significance of commenter 

concerns regarding the risk posed to the 

United States by such security-based 

swaps, and regarding the potential use 

of such guaranteed affiliates to evade 

the Dodd-Frank Act.383 We nonetheless 

believe that such concerns are 

adequately addressed by the 

requirement that guaranteed affiliates 

count their own dealing activity against 

the de minimis thresholds when the 

counterparty has recourse to a U.S. 

person. Although there can remain 

residual risk to U.S. markets associated 

with the security-based swaps involving 

such non-U.S. guaranteed affiliates, we 

do not believe that such risk is 

significant enough to warrant a 

requirement that non-U.S. persons 

count all of their dealing activity 

involving such non-U.S. guaranteed 

affiliates against their own de minimis 

thresholds. In this regard we note that 

such a requirement would necessitate 

certain non-U.S. persons to incur 

compliance costs associated with 

assessing whether their counterparties 

are guaranteed affiliates.384 For similar 

reasons, the final rule does not require 

such non-U.S. persons to count, against 

the thresholds, their dealing 

transactions involving non-U.S. persons 

that are conduit affiliates. 

F. Application of the Exception’s 

Aggregation Principles to Cross-Border 

Dealing Activity 

1. Proposed Approach and Commenters’ 

Views 

The Cross-Border Proposing Release 

also addressed the cross-border 


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385See Exchange Act rule 3a71–2 (requiring that 

a person count against the thresholds its dealing 

activity plus that of ‘‘any other entity controlling, 

controlled by, or under common control with the 

person’’). 

386See proposed Exchange Act rule 3a71–3(b)(2). 

387See Cross-Border Proposing Release, 78 FR 

31004. 

388See proposed Exchange Act rule 3a71–4. 

389See Cross-Border Proposing Release, 78 FR 

31005. 

390See id. 

391See SIFMA/FIA/FSR Letter at A–13 to A–15 

(stating that the operational independence 

condition is overbroad and unnecessary to achieve 

the statutory goals in that it ‘‘would have the effect 

of tying registration requirements to firms’ internal 

risk management strategies or limited efficient 

leverage of back office functions’’ without any 

regulatory benefit and noting that the requirement 

would be burdensome for smaller market 

participants who would need to register solely due 

to their affiliation with larger entities); IIB Letter at 

14–15 (stating that preventing the sharing of groupwide risk management and other resources would 

have the effect of nullifying the exclusion from the 

aggregation requirement for affiliates that are 

registered security-based swap dealers); JSDA Letter 

at 4–5 (stating that the ‘‘operationally independent’’ 

condition would discourage efficient global 

management of transactions). 

392See JFMC Letter at 6–7. 

393See SIFMA/FIA/FSR Letter at A–15; JFMC 

Letter at 6–7; IIB Letter at 14. 

394See SIFMA/FIA/FSR Letter at A–12 to A–13 

(stating that the aggregation requirement 

‘‘effectively disregards the legal independence of 

entities’’ and that the Commission’s existing antievasion capabilities are sufficient to guard against 

abuses; also stating that had the aggregation 

requirement been proposed as part of the 

underlying definitional rules SIFMA would have 

objected to the requirement). 

395See JSDA Letter at 5 (requesting that 

aggregation not be required of the minority 

shareholder of a joint venture); see also MUFJ Letter 

at 2–8 (generally opposing aggregation for such joint 

venture arrangements). 

396See BM Letter at 17 (stating that the condition 

is a safeguard that addresses evasion concerns 

while promoting the purpose of the de minimis 

exception). 

397 IIB Letter at 14–15. 

398See Exchange Act rule 3a71–3(b)(2)(i). 

Consistent with our position in the Intermediary 

Definitions Adopting Release (see 77 FR 30631 

n.437) and in the Cross-Border Proposing Release 

(see 78 FR 31004), and with our position regarding 

the de minimis exception when there is a right of 

recourse against a U.S. person (see note 336, supra) 

for purposes of determining whether a person is 

controlling, controlled by, or under common 

control with another person (i.e., an affiliate), we 

interpret control to mean the direct or indirect 

power to direct or cause the direction of the 

management and policies of a person, whether 

through the ownership of voting securities, by 

contract or otherwise. 

implementation of a previously adopted 

rule requiring a person to count dealing 

transactions by its affiliates against its 

own de minimis thresholds.385 Under 

the proposal, a person engaged in 

dealing activity would have had to 

count: (i) Dealing transactions by its 

U.S. affiliates, including transactions 

conducted through a foreign branch; 

and (ii) all dealing transactions of its 

non-U.S. affiliates where the 

counterparty is a U.S. person other than 

a foreign branch, or where the 

transaction is conducted within the 

United States.386

In the Cross-Border Proposing Release 

we took the view that the approach 

would be consistent with the DoddFrank Act’s statutory focus on the U.S. 

security-based swap market, in that the 

dealing of a person’s U.S. affiliates 

would impact the U.S. financial system 

regardless of the location of the 

affiliate’s counterparty, but that the 

dealing of a person’s non-U.S. affiliates 

with other non-U.S. persons outside the 

United States would not impact the U.S. 

financial system to the same extent. We 

also took the view that the aggregation 

approach would minimize the 

opportunity for a person to evasively 

engage in large amounts of dealing 

activity, and that the approach would be 

in accordance with other aspects of the 

proposal governing which transactions 

would be applied against the 

thresholds.387

The proposal separately would have 

permitted a person not to include, as 

part of the de minimis analysis, 

transactions by an affiliate that is 

registered as a security-based swap 

dealer, so long as the person’s dealing 

activity is ‘‘operationally independent’’ 

of the dealer’s activity.388 For these 

purposes, the person and its registered 

dealer affiliate would be considered to 

be ‘‘operationally independent’’ if the 

two entities maintained separate sales 

and trading functions, operations 

(including separate back offices) and 

risk management.389

This aspect of the proposal recognized 

that any person affiliated with a 

registered dealer otherwise would have 

to count the registered affiliate’s dealing 

activity against the person’s own de 

minimis thresholds, which likely would 

require the person to register as a dealer 

if it engages in any dealing activity. We 

stated in the Cross-Border Proposing 

Release that, in our preliminary view, 

this outcome of preventing all affiliates 

of a dealer from taking advantage of the 

de minimis exception would not be 

consistent with the statutory purpose of 

the exception. We noted, moreover, that 

this scenario would not appear to raise 

the anti-evasion concerns at the core of 

the aggregation provisions, given that it 

would apply only where a corporate 

group already included a registered 

dealer subject to Commission 

oversight.390

A number of commenters opposed the 

operational independence condition to 

the proposed exclusion, arguing that it 

would hinder operational efficiency— 

including the use of group-wide risk 

management—without any 

countervailing benefit,391 and that the 

requirement was vague and would 

impede the growth of different business 

models.392 Commenters also pointed out 

that, in the parallel discussion in the 

CFTC’s cross-border guidance, the CFTC 

did not interpret its cross-border statute 

as requiring operational 

independence.393 One of these 

commenters further opposed the use of 

any aggregation requirement in 

connection with the de minimis 

exception.394 One commenter expressed 

particular concerns regarding the 

application of aggregation principles in 

connection with joint venture 

arrangements involving dealer 

shareholders.395 One commenter 

supported the proposed approach as an 

anti-evasion safeguard.396 One 

commenter suggested we eliminate the 

‘‘operationally independent’’ 

requirement but, to prevent evasion of 

the dealer requirements, prohibit a 

registered dealer from using an 

unregistered affiliate as a booking 

vehicle.397

2. Final Rule 

The final rule governing aggregation, 

like the proposal, generally applies the 

principles that govern the counting of a 

person’s own dealing activity to also 

determine how the person must count 

its affiliates’ dealing activities for 

purposes of the de minimis exception. 

Accordingly, the rule has been modified 

from the proposal to be consistent with 

changes to the proposed provisions 

regarding the counting of a person’s 

dealing activity. 

Moreover, the final rule modifies the 

exclusion from having to aggregate the 

dealing transactions of a person’s 

registered dealer affiliate from the 

proposal, both to remove the operational 

independence condition and to address 

situations in which a person’s affiliate 

has exceeded the de minimis thresholds 

but is in the process of registering as a 

dealer. 

(a) General Provisions Regarding 

Aggregation of Cross-Border 

Transactions 

The final rule, like the proposal, 

provides in part that if a person engages 

in dealing transactions counted against 

the de minimis thresholds, the person 

also must count all dealing transactions 

in which any U.S. person controlling, 

controlled by, or under common control 

with the person engages, including 

transactions conducted through a 

foreign branch.398 The final rule has 

been revised from the proposal to 

further provide that the person should 


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399See Exchange Act rule 3a71–3(b)(2)(ii). 

400See Exchange Act rule 3a71–3(b)(2)(iii) (crossreferencing the direct counting provisions of 

paragraph (b)(1)(iii), applicable to non-U.S. persons 

other than conduit affiliates); see also Sections IV.E, 

supra (addressing counting by non-U.S. persons 

engaged in dealing activity whose counterparties 

are U.S. persons); and IV.E.1 (addressing counting 

by non-U.S. persons engaged in dealing activity 

when their counterparties have recourse against a 

U.S. person). 

401See Intermediary Definitions Adopting 

Release, 77 FR 30631. 

402As noted above, one commenter questioned 

whether any aggregation principles should be 

applied in the de minimis context, arguing that the 

requirement disregards the legal independence of 

entities and disregards the possibility that two 

entities under common control may operate 

independently of each other. The comment further 

stated that the Commission’s existing anti-evasion 

capacities are sufficient to guard against abuse 

without requiring aggregation. See note 391, supra. 

In our view, however, the aggregation provision is 

tailored appropriately to prevent evasion of the 

limits of the de minimis exception. See 

Intermediary Definitions Adopting Release, 77 FR 

30631 (discussing the use of the aggregation 

principles in light of the ‘‘increased notional 

thresholds of the final [definitional] rules, and the 

resulting opportunity for a person to evasively 

engage in large amounts of dealing activity if it can 

multiply those thresholds’’; and addressing the use 

of the common control standard ‘‘as a means 

reasonably designed to prevent evasion of the 

limitations of that exception’’). We further believe 

that this aggregation approach would be more 

effective at implementing the de minimis exception 

than a case-by-case approach, because the 

aggregation provision would provide upfront 

objective standards regarding which affiliate 

transactions must be counted against the 

thresholds, and thus help avoid uncertainty. 

Moreover, as discussed below, we are revising the 

aggregation provisions to allow the exclusion of the 

positions of affiliates that are registered as dealers 

(or that are in the process of registering), in 

response to comments. 

403 In short, we believe that this final rule is 

necessary or appropriate as a prophylactic measure 

to help prevent the evasion of the provisions of the 

Exchange Act that were added by the Dodd-Frank 

Act, and thus help ensure that the relevant 

purposes of the Dodd-Frank Act are not 

undermined. Without this rule, corporate groups 

may engage in dealing activity above the de 

minimis thresholds within the United States while 

avoiding dealer regulation under Title VII by 

dividing up the dealing activity among multiple 

affiliated entities, none of which individually 

engages in dealing activity above the thresholds. 

404See Exchange Act rule 3a71–4. This exception, 

when available, applies to all of the dealing of a 

person’s registered dealing affiliate (or affiliate 

deemed not to be a dealer pursuant to the 

provisions of Exchange Act rule 3a71–2(b)), 

regardless of the counterparty or the location of the 

transaction, and regardless of whether the dealing 

transaction otherwise implicates cross-border 

issues. 

405See notes 391 and 392, supra. 

406We recognize that one commenter supported 

the proposed operational independence condition, 

stating that the condition would address evasion 

concerns while promoting the statutory purpose of 

the de minimis exception. See note 396, supra. 

After further consideration, however, we believe 

that the fact that the aggregation provision will still 

limit cumulative group-wide dealing activity by 

unregistered entities to no more than the de 

minimis thresholds should suffice as a safeguard 

against evasive activity. This is particularly true 

given that those thresholds are significantly below 

the amounts of dealing typically engaged in by 

persons above the thresholds. See Intermediary 

Definitions Adopting Release, 77 FR 30636 (noting 

that, out of 28 potential dealers that had three or 

more counterparties that themselves were not 

recognized as dealers by ISDA, 15 of those exceeded 

a notional transaction threshold of $100 billion and 

accounted for over 98 percent of the total activity 

of all 28 entities). 

We also note that certain commenters raised 

concerns about the application of the aggregation 

provisions generally in the context of joint ventures, 

particularly in the context of minority shareholders. 

See note 395, supra. Those issues regarding the 

scope of the aggregation provisions that the 

Commission previously adopted are not unique to 

the cross-border context, and in our view are 

outside the scope of this release. We note generally, 

however, that in the Intermediary Definitions 

Adopting Release we concluded that a common 

control standard is more appropriate than a 

majority-ownership standard in the context of the 

anti-evasive purposes of the aggregation 

requirement. See Intermediary Definitions Adopting 

Release, 77 FR 30631 n.437. 

407See Exchange Act rule 3a71–2(b). 

408See Intermediary Definitions Adopting 

Release, 77 FR 30643. 

count all dealing transactions of its 

conduit affiliates.399 Finally, the final 

rule has been modified from the 

proposal to provide that the person 

must count all dealing transactions of 

non-U.S. person affiliates that: (a) Are 

entered into with U.S. persons other 

than the foreign branches of registered 

dealers; or (b) constitute dealing activity 

subject to a guarantee giving the nonU.S. person’s counterparty rights of 

recourse against a U.S. person affiliated 

with the non-U.S. person.400

These modifications from the 

proposal are consistent with similar 

modifications made to the rules 

regarding the counting of a person’s 

own transactions for purposes of the de 

minimis exception, and reflect the risk 

concerns and interests discussed above. 

The aggregation requirement serves to 

prevent evasion of the dealer 

registration requirements by persons 

that otherwise may seek to avoid dealer 

registration by simply dividing up 

dealing activity in excess of the de 

minimis thresholds among multiple 

affiliates.401 In keeping with that 

purpose, in the cross-border context it is 

appropriate to require a person’s 

affiliates to count the same dealing 

transactions that the person itself would 

be required to count for purposes of the 

de minimis exception—unless, as 

discussed below, the person is 

registered as a dealer.402 Because this 

approach incorporates the direct 

counting standards discussed above, we 

believe that the approach implements 

the de minimis exception in a manner 

that is consistent with the Dodd-Frank 

Act’s focus on the U.S. security-based 

swap market.403

(b) Application to Dealing Activities of 

Registered Affiliates 

In addition, we are adopting an 

exception which provides that a person 

need not count against the de minimis 

thresholds the security-based swap 

transactions of an affiliate that either is: 

(1) Registered with the Commission as 

a dealer; or (2) deemed not to be a dealer 

pursuant to the provisions of Exchange 

Act rule 3a71–2(b), which addresses 

persons who have exceeded the de 

minimis thresholds but are in the 

process of registering.404

In part, this final rule has been 

modified from the proposal by removing 

the proposed operational independence 

condition. After considering the views 

of several commenters that the proposed 

operational independence condition 

would tend to inhibit operational 

efficiencies,405 we are persuaded that 

excluding the condition from the final 

rule would help facilitate efficiency and 

avoid deterring beneficial group-wide 

risk management practices. In this 

regard we also note that even with the 

removal of the proposed operational 

independence condition, the 

aggregation provisions would prevent a 

corporate group from cumulatively 

engaging in aggregate relevant dealing 

activity—outside of its registered 

dealers—in excess of the de minimis 

thresholds.406

The final rule also has been modified 

from the proposal to permit a person to 

rely on this provision if its affiliate is in 

the process of registering as a dealer. 

The de minimis rule generally provides 

that a person that is not registered as a 

dealer but that no longer falls below the 

applicable de minimis thresholds 

nonetheless will be deemed not to be a 

dealer until the earlier of the date in 

which it submits a complete application 

for registration as a dealer, or two 

months after the end of the month that 

it becomes no longer able to take 

advantage of the exception.407 That 

provision was intended to avoid market 

disruption in conjunction with the 

registration process.408 Upon further 

consideration, we similarly believe that 

the provision at issue here should allow 

a person not to count the transactions of 

its affiliates that are in the process of 

registering as dealers, to avoid market 

disruption that may otherwise result 

due to the prospect of a person 

intermittently exceeding the de minimis 

thresholds when its affiliates are in the 

process of registering. Such situations, 

moreover, would not appear to provide 

practical opportunities for corporate 

groups to evade dealer registration by 


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409See IIB Letter at 13–14; JSDA Letter at 4; JFMC 

Letter at 5. 410See CFTC Cross-Border Guidance, 78 FR 

45325 (stating that when a non-U.S. person that is 

not a guaranteed or conduit affiliate enters in to 

swaps anonymously on CFTC-registered platforms, 

and the swaps are cleared, the non-U.S. person 

would generally not have to count those swaps 

against the applicable thresholds, noting that, in 

such circumstances, the non-U.S. person would not 

have any prior information regarding its 

counterparty; also interpreting the CFTC’s crossborder jurisdiction such that, with respect to such 

cleared and anonymously executed swaps, the nonU.S. person would generally satisfy certain 

transaction-level requirements). 

The Cross-Border Proposing Release generally 

requested comment as to whether the proposed de 

minimis approach would place market participants 

at a competitive advantage or disadvantage, and as 

to whether there are other measures the 

Commission should consider to implement the de 

minimis exception. See Cross-Border Proposing 

Release, 78 FR 30996. More generally, the 

Commission also requested comment regarding the 

proposals as whole, and regarding consistency with 

the CFTC’s cross-border approach, including 

comments regarding the impact of differences 

between the two approaches, and comments 

regarding whether the Commission’s proposed 

approach should be modified to conform with that 

taken by the CFTC. See id. at 31102. 

411See IIB Letter at 13–14. 

412The exclusion for cleared anonymous 

transactions is intended to avoid placing market 

participants in a position where counterpartyrelated information needed for compliance would 

be unavailable, which may in turn lead execution 

facilities to exclude U.S. persons. We also note that 

the exclusion would strengthen incentives for 

shifting activity to transparent trading venues, 

which is a key goal of Title VII. While these 

transactions may pose risks to U.S. persons and to 

the U.S. financial system as a whole, those risks 

may be offset by the liquidity and transparency 

benefits that occur due to trading on transparent 

venues. Furthermore, the characteristics expected to 

be associated with central clearing (e.g., the daily 

exchange of mark-to-market margin) have parallels 

to the capital and margin requirements for 

registered dealers in terms of helping to protect the 

financial system against the risks introduced by 

particular transactions. On the other hand, such risk 

mitigation may be absent to the extent that the 

relevant clearing agency—which under the 

exception is not required to be registered with the 

Commission—does not follow standards consistent 

with the Title VII requirements applicable to 

registered clearing agencies. 

413See Exchange Act rule 3a71–5. This exception 

solely addresses the issue of whether a particular 

transaction needs to be counted against the de 

minimis thresholds. It does not address the issue of 

when a particular execution facility or clearing 

agency needs to register with the Commission. The 

Cross-Border Proposing Release separately 

addressed cross-border issues regarding when an 

execution facility or clearing agency would have to 

register with the Commission. See Cross-Border 

Proposing Release, 78 FR 31054–58 (regarding 

security-based swap execution facility registration), 

78 FR 31038–40 (regarding clearing agency 

registration); see also Registration and Regulation of 

Security-Based Swap Execution Facilities, 

Exchange Act Release No. 63825 (Feb. 2, 2011), 76 

FR 10948 (Feb. 28, 2011) (proposed rules regarding 

registration and other requirements applicable to 

security-based swap execution facilities). 

This exception also does not address the 

application of section 5 of the Securities Act to such 

transactions. Rule 239 under the Securities Act (17 

CFR 230.239) provides an exemption under the 

Securities Act for certain security-based swap 

transactions involving an eligible clearing agency. 

This exemption does not apply to security-based 

swap transactions not involving an eligible clearing 

agency, such as the anonymous transactions entered 

into on the execution facility or national securities 

exchange, regardless of whether the security-based 

swaps subsequently are cleared by an eligible 

clearing agency. See Exemptions for Security-Based 

Swaps Issued By Certain Clearing Agencies, 

Securities Act Release No. 9308 (Mar. 30, 2012), 77 

FR 20536 (Apr. 5, 2012). 

414See Exchange Act rule 3a71–5(a). This 

exception applies regardless of whether the 

execution facility on which the transaction is 

entered into, or the clearing agency through which 

it is cleared, needs to be registered with the 

Commission. This is because the exclusion of U.S. 

market participants from an overseas execution or 

clearing facility—a result this exception is intended 

to guard against—could impair the markets 

regardless of whether the facility from which U.S. 

persons are excluded in fact are registered, and thus 

lead to increased costs and risks. 

415See Exchange Act rule 3a71–5(a)(2), (b). 

416See SIFMA/FIA/FSR Letter at A–18 

(addressing entities that are consolidating U.S.- 

facing dealing activities worldwide into one or a 

few registered dealers, but that may not be able to 

transfer or terminate their legacy security-based 

swap portfolios and thus may need to enter into 

new transactions in connection with those legacy 

portfolios); JSDA Letter at 4 (suggesting that 

including contract cancellations, alternations and 

transfers within the de minimis calculation ‘‘might 

invite a rush of cancellation before the enforcement 

of the proposed rules and make it difficult to cancel 

or transfer contracts for reducing risks’’). 

417See TriOptima Letter at 3–4 (explaining that 

portfolio compression services do not involve any 

Continued 

dividing dealing activities among 

multiple affiliates. 

G. Exception for Cleared Anonymous 

Transactions 

1. Proposed Approach and Commenters’ 

Views 

Three commenters expressed the 

view 409 that the Commission’s final 

rules should include a provision similar 

to an aspect of the CFTC Cross-Border 

Guidance, which stated the CFTC’s view 

that certain dealing transactions that are 

executed anonymously and cleared 

generally would not be counted against 

the de minimis thresholds.410 One 

commenter particularly emphasized that 

market participants would not have 

information available regarding a 

counterparty’s identity in an 

anonymous transaction, and suggested 

that the prospect of becoming subject to 

dealer registration could deter non-U.S. 

liquidity providers from participating 

on security-based swap markets that 

provide access to U.S. persons.411

2. Final Rule 

After considering commenter views 

we have concluded that this type of 

exception is appropriate, particularly 

given that the final de minimis rules 

turn in part on the domicile of the 

counterparty to the non-U.S. person, 

and this information would be 

unavailable to the non-U.S. person that 

is a counterparty to a cleared 

anonymous transaction. Absent such an 

exception, it is possible that execution 

facilities would exclude U.S. market 

participants to prevent their non-U.S. 

members from having to face the 

prospect of dealer regulation, which 

could impair market liquidity and 

increase costs and risks.412

For those reasons, the final rule has 

been revised from the proposal to 

except, from having to be counted 

against the de minimis thresholds, 

certain security-based swap transactions 

that a non-U.S. person enters into 

anonymously on an execution facility or 

national securities exchange and that 

are cleared through a clearing agency.413

In particular, the final rule in part 

provides that a non-U.S. person need 

not count such cleared anonymous 

transactions against the threshold, 

unless the non-U.S. person is a conduit 

affiliate.414 In addition, the final rule 

permits an affiliate (that itself may be a 

U.S. or non-U.S. person) of such a nonU.S. person not to count such 

transactions of the non-U.S. person 

against the affiliate’s own thresholds for 

purposes of the aggregation provisions, 

unless the non-U.S. person is a conduit 

affiliate.415

The exception is not available when 

the non-U.S. person is a conduit affiliate 

because conduit affiliates are required to 

count all of their dealing transaction 

against the thresholds regardless of 

whether their counterparty is a U.S. or 

a non-U.S. person. As a result, the 

anonymous nature of the transaction 

would not cause implementation issues 

for conduit affiliates. 

For purposes of the exception, a 

transaction would be ‘‘anonymous’’ 

only if the counterparty to the 

transaction in fact is unknown to the 

non-U.S. person prior to the transaction. 

The transaction would not be 

‘‘anonymous’’ if, for example, a person 

submitted the transaction to an 

execution facility after accepting a 

request for quotation from a known 

counterparty or a known group of 

potential counterparties, even if the 

process of submitting the transaction 

itself did not involve a named 

counterparty. 

H. Additional Issues 

1. Particular Activities and Entities 

Commenters to the Cross-Border 

Proposing Release raised issues 

regarding the application of the dealer 

registration requirement to limited 

security-based swap activities by certain 

‘‘run-off’’ entities,416 and in the context 

of portfolio compression.417 Those 


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of the enumerated factors that the Commission has 

identified as indicators of dealing activity). 

418See generally Intermediary Definitions 

Adopting Release, 77 FR 30616–20 (discussing 

application of the dealer-trader distinction to 

security-based swap transactions). 

419See section IV.C.2(e), supra. 

420See, e.g., WB/IFC Letter at 2–4, 6–7 (also 

stating that such organizations should not be 

required to register as major participants or to clear 

security-based swaps, and that affiliates of such 

organizations should be excluded from the ‘‘U.S. 

person’’ definition); SC Letter at 16–24 (contending 

that the privileges and immunities afforded such 

organizations would be violated by their direct 

regulation as dealers or major participants, or by 

direct regulation equivalents, and that affiliates of 

such organizations also are immune from 

regulation); IDB Letter at 5. See also notes 225 and 

229, supra. 

421See SC Letter at 18–19 (stating that the 

inclusion of such transactions against a 

counterparty’s de minimis thresholds would be 

‘‘tantamount to regulation of the operations of the 

World Bank and the IFC, in violation of their 

privileges and immunities’’); WB/IFC Letter 

(incorporating SC Letter). These comments did not 

object to the inclusion of transactions between a 

U.S. person and an FPSFI, because the Commission 

would have jurisdiction to regulate that ‘‘U.S. 

person’’ for other reasons and it would not be 

regulated simply because it does business with the 

FPSFI. See SC Letter at note 21. 

422See KfW Letter; FMS–WM Letter. 

423As we noted in the Intermediary Definitions 

Adopting Release, because the de minimis 

exception will determine which entities engaged in 

security-based swap dealing activity ultimately will 

be regulated as dealers under Title VII, the 

exception will have an effect on the burdens and 

benefits associated with dealer regulation. See 

Intermediary Definitions Adopting Release, 77 FR 

30628–30. The thresholds used in the de minimis 

exception accordingly were set at a level that sought 

to meet the goals of Title VII while appropriately 

minimizing the costs to market participants by 

providing for the regulation, as dealers, ‘‘of persons 

responsible for the vast majority of dealing activity 

within the market.’’ See id. at 30638–40. 

424See section III.A, supra. 

425See, e.g., IIB Letter (stating that cost-benefit 

considerations warrant harmonization to the CFTC 

and foreign regulatory authorities with regard to 

cross-border rules, and that divergence generally 

would be warranted only if the Commission’s rules 

are more flexible, and thence would not preclude 

the voluntary adoption of consistent practices). 

Although we have considered those comments 

that expressed complete or partial support in favor 

of consistency with the CFTC guidance, these final 

rules nonetheless follow approaches that differ from 

those taken by the CFTC in certain regards, 

generally by taking approaches that are narrower in 

scope than those adopted by the CFTC. See supra 

note 255 (Commission’s definition of ‘‘U.S. person’’ 

differs from the CFTC approach in part by not 

including investment companies that beneficially 

are majority-owned by U.S. persons); note 353 and 

accompanying text (Commission’s rules regarding 

the treatment of guaranteed affiliates of U.S. 

persons focuses on the presence of recourse against 

a U.S. guarantor, in contrast to the CFTC approach 

that more generally accounts for financial support 

commitments regardless of recourse rights), note 

325(Commission’s definition of ‘‘conduit affiliate’’ 

differs from the CFTC’s approach in part by not 

considering financial statement treatment); note 379 

(discussing expectation that any foreign branch of 

a U.S. bank that generally would be considered a 

foreign branch under the CFTC Cross-Border 

Guidance also likely would be a foreign branch 

under our final rule). 

We also have considered initiatives by foreign 

regulators related to the regulation of OTC 

derivatives. In that regard, we note that the 

regulatory regimes in certain other jurisdictions do 

not provide for the registration of persons who 

function as dealers, in contrast to the approach 

Congress took in Title VII. Also, we expect to take 

into account the regulatory frameworks followed in 

other jurisdictions as we assess requests for 

substituted compliance in connection with the 

substantive requirements applicable to securitybased swap dealers and other market participants. 

issues are not unique to the cross-border 

context, and are outside of the scope of 

this release. We generally note, 

moreover, that in the Intermediary 

Definitions Adopting Release we 

considered and rejected certain requests 

for categorical exclusions from dealer 

definition. With regard to issues 

regarding the relevance of those or other 

activities to the de minimis analysis, we 

generally note that the dealer 

registration requirement necessarily 

distinguishes between a person’s 

dealing and non-dealing activities.418

2. Foreign Public Sector Financial 

Institutions and Government-Related 

Entities 

As discussed above, the final rule 

defining ‘‘U.S. person’’ (like the 

proposed definition of that term) 

specifically excludes several foreign 

public sector financial institutions and 

their agencies and pension plans, and 

more generally excludes any other 

similar international organization and 

its agencies and pension plans.419

Certain commenters requested that we 

take further action to address the 

application of the dealer definition and 

its de minimis exception to securitybased swap activities involving such 

foreign public sector financial 

institutions. Those commenters in part 

stated that such organizations should 

not be required to register as securitybased swap dealers, and that those 

organizations’ affiliates should be 

considered immune from domestic 

regulation to the same extent as the 

organizations themselves.420 In our 

view, however, such issues are outside 

the scope of this release, given that the 

source of any such privileges and 

immunities is found outside of the 

Dodd-Frank Act and the federal 

securities laws. 

Separately, commenters stated that 

non-U.S. persons should not have to 

count their dealing transactions 

involving those organizations against 

the non-U.S. persons’ dealer de minimis 

thresholds, on the grounds that counting 

such transactions would constitute the 

impermissible regulation of such 

organizations even if those were 

‘‘transactions conducted within the 

United States.’’ 421 As noted below, we 

have determined not to include the 

‘‘transaction conducted within the 

United States’’ provisions in this final 

rule. With that said, we do not concur 

with the suggestion that counting a 

person’s dealing transactions with such 

organizations against the de minimis 

thresholds—when otherwise provided 

for by the rules—involves the regulation 

of such organizations. Requiring a 

person to count, against the de minimis 

thresholds, the person’s dealing 

transactions involving such an 

international organization as 

counterparty simply reflects the 

application of the federal securities laws 

to that person and its dealing activities, 

and does not constitute the regulation of 

the international organization. A 

person’s security-based swap dealing 

transaction with such an international 

organization accordingly are considered 

the same, for purposes of applying the 

de minimis thresholds and other Title 

VII requirements, as a dealing 

transaction with some other non-U.S. 

person counterparty. 

Finally, two commenters stated that 

they should not be subject to the 

possibility of dealer regulation for 

comity reasons, on the grounds that they 

are arms of a foreign government.422 We 

believe that such issues best are 

addressed on a case-by-case basis, but 

we generally note that the prospect of 

dealer regulation is relevant only to the 

extent that a person engages in dealing 

activity. 

I. Economic Analysis of the Final CrossBorder Dealer De Minimis Rule 

These final rules and guidance 

regarding the cross-border 

implementation of the de minimis 

exception to the ‘‘security-based swap 

dealer’’ definition will affect the costs 

and benefits of dealer regulation by 

determining which dealing transactions 

will be counted against the exception’s 

thresholds.423 The cross-border rules 

have the potential to be important in 

determining the extent to which the risk 

mitigation and other benefits of Title VII 

(such as market transparency and 

customer protection) are achieved, given 

the core role that dealers play within the 

security-based swap market and the 

market’s cross-border nature.424

Commenters addressed the associated 

cost-benefit issues from a variety of 

perspectives. Some directly addressed 

the link between the cross-border scope 

of the dealer definition and the 

associated costs and benefits, by arguing 

that cost-benefit principles warranted 

greater harmonization with approaches 

taken by the CFTC or foreign 

regulators.425 Commenters also 


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Those substituted compliance assessments are 

geared to promote Title VII in a way that fairly 

accounts for other regimes by assessing the 

requirements of those regimes on a function-byfunction basis. 

426See BM Letter, note 28, supra. As stated above, 

the Commission in fact is sensitive to the economic 

consequences of its rules, and has taken the costs 

and benefits into account in adopting these rules. 

427See CDEU Letter, note 28, supra. This 

commenter particularly expressed the view that the 

Commission’s proposal had failed to engage in an 

adequate consideration of cost-benefit principles, 

and instead stated that the Commission should 

‘‘conduct a direct cost-benefit analysis of the 

conflicting rule regimes (e.g., with the European 

Market Infrastructure Regulation and the CFTC’s 

cross-border guidance).’’ That commenter further 

expressed the view that, in requesting comment on 

the proposal’s cost-benefit analysis, the 

Commission actually ‘‘asks the public to conduct 

such an analysis for the SEC’’ in lieu of the 

Commission having conducted its own analysis. 

See id. 

In actuality, our request for comment simply gave 

the public the opportunity to address our economic 

analysis. The economic assessment in this release 

specifically addresses those economic impacts in a 

context where many entities may have taken steps 

to follow the CFTC’s cross-border guidance, and 

also recognizes that market participants may seek 

to structure their activities to avoid Title VII given 

differences between Title VII regulation and the 

regulation present in foreign regimes. 

428For example, one comment in opposition to 

the proposed ‘‘operational independence’’ 

condition to the exception to the aggregation 

requirement for positions of affiliates that are 

registered as security-based swap dealers in part 

addressed the extra costs that would be associated 

with such a provision. See SIFMA/FIA/FSR Letter, 

note 391, supra. As discussed above, that proposed 

condition has been removed. See section IV.F, 

supra. 

429See Cross-Border Proposing Release, 78 FR 

31135. 

430See Intermediary Definitions Adopting 

Release, 77 FR 30724. 

431See id. (‘‘Some of the costs of regulating a 

particular person as a dealer or major participants, 

such as costs of registration, may largely be fixed. 

At the same time, other costs associated with 

regulating that person as a dealer or major 

participant (e.g., costs associated with margin and 

capital requirements) may be variable, reflecting the 

level of the person’s security-based swap activity. 

Similarly, the regulatory benefits that would arise 

from deeming that person to be a dealer or major 

participant (e.g., benefits associated with increased 

transparency and efficiency, and reduced risks 

faced by customers and counterparties), although 

not quantifiable, may be expected to be variable in 

a way that reflects the person’s security-based swap 

activity.’’). 

432See id. at 30617. 

addressed the need for cost-benefit 

analysis,426 or questioned the adequacy 

of the Cross-Border Proposal’s costbenefit assessment.427 Other comments 

that addressed the dealer definition 

implicate the tradeoff between the costs 

and benefits associated with the 

definition’s scope, even when the 

commenters did not directly address the 

economic analysis in the Cross-Border 

Proposing Release or otherwise 

explicitly raise cost-benefit 

considerations.428

We have taken economic effects into 

account in adopting these final crossborder rules and providing guidance. In 

doing so, we believe that a narrow 

application of dealer regulation under 

Title VII—such as one that is limited to 

dealing activity that might be viewed as 

occurring solely within the United 

States—would not be sufficient to 

achieve the purposes of Title VII in light 

of the attributes of the security-based 

swap market, including the market’s 

global nature, the concentration of 

dealing activity, the key role played by 

dealers and the risks posed by dealers 

via their legal and financial 

relationships. At the same time, we 

recognize that the cross-border 

application of Title VII has the potential 

to reduce liquidity within the U.S. 

market to the extent it increases the 

costs of entering into security-based 

swaps or provides incentives for 

particular market participants to avoid 

the U.S. market by operating wholly 

outside the Title VII framework. 

The cross-border rules applying the 

‘‘security-based swap dealer’’ definition 

to cross-border dealing activity 

implicate two categories of costs and 

benefits. First, certain current and future 

participants in the security-based swap 

market will incur assessment costs in 

connection with determining whether 

they fall within the ‘‘security-based 

swap dealer’’ definition and thus would 

have to register with the Commission. 

Second, the registration and 

regulation of some entities as securitybased swap dealers will lead to 

programmatic costs and benefits arising 

as a consequence of the Title VII 

requirements that apply to registered 

security-based swap dealers, such as the 

capital, margin, and business conduct 

requirements.429 These requirements 

may be expected to impose certain costs 

on participants acting as dealers, but 

also to produce benefits to the market 

and its participants, including 

counterparty protections and riskmitigation benefits. 

We discuss the programmatic and 

assessment costs and benefits associated 

with the final rules more fully below. 

We also discuss the economic impact of 

certain potential alternatives to the 

approach taken by the final rules. 

1. Programmatic Costs and Benefits 

(a) Cost-Benefit Considerations of the 

Final Rules 

Exchange Act rules 3a71–3, 3a71–4, 

and 3a71–5 will permit market 

participants to exclude certain dealing 

transactions from their de minimis 

calculations, and thus may cause 

particular entities that engage in certain 

dealing activities not to be regulated as 

security-based swap dealers. The rules 

accordingly may be expected to affect 

the programmatic costs and benefits 

associated with the regulation of 

security-based swap dealers under Title 

VII, given that those costs and benefits 

are determined in part by which persons 

will be regulated as security-based swap 

dealers.430

This does not mean that there is a 

one-to-one relationship between a 

person not being a ‘‘security-based swap 

dealer’’ as a result of these cross-border 

rules, and the resulting change to 

programmatic benefits and costs. 

Indeed, although these rules may 

determine which particular entities will 

be regulated as dealers, it does not 

follow that total programmatic costs and 

benefits will vary by an amount 

proportional to the volume of those 

entities’ dealing activity. As the 

Commission explained in the 

Intermediary Definitions Adopting 

Release, some of the costs and benefits 

of regulating dealers may be fixed, while 

others may be variable depending on a 

particular person’s security-based swap 

dealing activity.431 In practice, the 

programmatic benefits associated with 

the regulation of persons engaged in 

security-based swap dealing activity—in 

other words, the expected transparency, 

customer protection and market 

efficiency objectives associated with 

dealer regulation—likely will vary 

depending on the type and nature of 

those persons’ dealing activity, 

including the degree to which those 

persons engage in security-based swap 

dealing activity within the United States 

or in a manner likely to give rise to Title 

VII concerns within the United States. 

We believe that the cross-border rules 

we are adopting today will focus the 

regulation of security-based swap 

dealers under Title VII upon those 

entities that engage in security-based 

swap transactions that occur in the 

United States, or on the prevention of 

evasion. Our definition of ‘‘securitybased swap dealer’’ seeks to capture 

those entities for which regulation of 

security-based swap activity is 

warranted due to the nature of their 

activities with other market 

participants.432 Specifically, we have 

focused the rules on those market 

participants that are likely to have 

financial and legal relationships within 

the United States. This set of entities 

includes those that currently provide 

liquidity to U.S. persons as market 

makers in the OTC security-based swap 

market and those that trade with U.S. 

persons as market makers for securitybased swaps on organized trading 

venues. Regulation of these entities will 


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433See section IV.C.3, supra. 

434See section IV.B.2, supra. 

435See section IV.E.1(b), supra. In the CrossBorder Proposing Release we preliminarily 

concluded that the risks associated with such 

guarantees could be adequately addressed through 

major participant regulation. We have reconsidered 

that view for the reasons discussed above. 

436See section IV.E.2(b), supra. 

437See section IV.E.2(b), supra. Although dealing 

activity involving foreign branches of U.S. banks 

does pose risks to the U.S. bank of which the 

foreign branch is a part and potentially to the U.S. 

financial system, foreign branches of registered 

security-based swap dealers will be subject to a 

number of Title VII regulatory requirements, 

including capital and margin requirements, that are 

designed to protect the system against those risks. 

Furthermore, this limitation is guided in part by the 

desire to preserve liquidity throughout the system, 

given that absent the exclusion non-U.S. dealers 

may have reasons to favor non-U.S. counterparties 

to avoid the regulatory requirements of Title VII, 

which could threaten to fragment liquidity across 

geographical or jurisdictional lines. 

438See section IV.G.2, supra. As noted above, see 

note 412, supra, the exclusion for cleared 

anonymous transactions is driven by concerns 

about counterparty-related information needed for 

compliance being unavailable, which in turn may 

lead U.S. persons to be excluded from certain 

execution facilities. The exclusion for such 

transactions also would be expected to have the 

effect of strengthening incentives for shifting 

activity to transparent trading venues, a key goal of 

Title VII. While these transactions of non-U.S. 

persons may pose risks to the U.S. bank of which 

the foreign branch is a part and potentially to the 

U.S. financial system as a whole, those risks may 

be offset by the liquidity and transparency benefits 

that occur due to trading on transparent venues. 

Furthermore, certain of the characteristics we 

expect to be associated with central clearing (e.g., 

the daily exchange of mark-to-market margin) serve 

similar functions as the capital and margin 

requirements for registered dealers in terms of 

helping to protect the financial system against the 

risks introduced by particular transactions. Of 

course, such risk mitigation may be absent to the 

extent that the relevant clearing agency—which 

under the exception is not required to be registered 

with the Commission—does not follow standards 

consistent with the Title VII requirements 

applicable to registered clearing agencies. As noted 

above, moreover, see note 413, supra, we are not 

addressing the registration requirements for such 

clearing agencies in this release. 

439See sections IV.D.2 and IV.F.2, supra. 

440Based on an analysis of dealing activity within 

the security-based swap market, we concluded that 

a de minimis threshold of $3 billion for dealing 

activity involving security-based swaps would 

capture over 99 percent of dealing activity within 

the single-name CDS market under the ambit of 

dealer regulation. See Intermediary Definitions 

Adopting Release, 77 FR 30639. We also concluded 

that this amount constituted a reasonable threshold, 

though not the only such threshold, for addressing 

the relevant competing factors—including the fact 

that the economic benefits provided by dealer 

requirements in large part will depend on the 

proportion of security-based swaps that are 

transacted subject to those requirements, while 

certain of the costs associated with dealer 

regulation would include costs that are 

independent of the amount of a person’s dealing 

activity. See Intermediary Definitions Adopting 

Release, 77 FR 30629, 30639. 

As noted above, in application the general de 

minimis threshold currently is subject to an $8 

billion phase-in level, and that phase-in level will 

remain in place until the Commission, following a 

study, either determines to terminate the phase-in 

level or adopts a different threshold. See part IV.A, 

supra. 

mitigate risk and promote stability for 

U.S. persons and potentially the U.S. 

financial markets by increasing the 

likelihood that they are able to meet 

their obligations under security-based 

swap contracts against counterparties 

with ties to the U.S. financial system 

once they are subject to the final 

adopted rules regarding the 

requirements applicable to dealers 

(rules establishing capital and margin 

requirements for registered securitybased swap dealers). Furthermore, 

regulation of these entities as dealers 

may enable them to continue to provide 

liquidity to their counterparties, 

particularly in times when the markets 

are under financial stress and their 

counterparties may struggle to meet 

their financial obligations. We also 

believe that regulation of these entities 

will further other goals of Title VII, 

particularly as we consider future 

substantive regulation of the securitybased swap market. In other words, 

these requirements will direct the 

application of the de minimis 

thresholds—which themselves are the 

product of cost-benefit considerations— 

toward those dealing activities in U.S. 

financial markets that most directly 

implicate the purposes of Title VII. As 

such, these rules reflect our assessment 

and evaluation of those programmatic 

costs and benefits: 

• Dealing by U.S. persons—The ‘‘U.S. 

person’’ definition captures entities 

whose security-based swap activities 

pose risks to the United States that may 

raise the concerns intended to be 

addressed by Title VII, regardless of the 

status of their counterparty.433 The 

requirement that U.S. persons, 

including foreign branches, count all of 

their dealing transactions against the de 

minimis thresholds reflects the domestic 

nature of their dealing activity, 

particularly given that it is the financial 

resources of the entire person that 

enable it to engage in dealing activity.434

• Dealing by guaranteed affiliates of 

U.S. persons—The requirement that 

non-U.S. persons count all their dealing 

transactions that are subject to a 

recourse guarantee by a U.S. affiliate, 

even when the counterparty is another 

non-U.S. person, reflects the domestic 

nature of that activity and the risks that 

those recourse guarantees pose to U.S. 

persons and potentially to the U.S. 

financial system via the U.S. person 

guarantor.435

• Dealing by other non-U.S. persons 

with U.S.-person counterparties—The 

general requirement that non-U.S. 

persons count their dealing transactions 

with counterparties that are U.S. 

persons reflects the domestic nature of 

that activity and the concerns raised by 

the performance of dealing activity 

within the United States, impacts on 

U.S. market liquidity, risks that this 

dealing activity poses to U.S. persons 

and potentially toward the U.S. 

financial system as a whole, and 

counterparty and market transparency 

concerns.436 This general requirement is 

limited, however, as it does not extend 

to transactions with foreign branches of 

U.S. banks that are registered as dealers, 

or to certain cleared anonymous 

transactions. While those excluded 

transactions also involve the 

performance, at least in part, of relevant 

dealing activity within the United 

States, implicate Title VII concerns, and 

import risk into the United States—and 

their counting against the thresholds 

thus would be consistent with achieving 

the programmatic benefits of dealer 

regulation—their exclusion is 

nevertheless warranted by 

considerations regarding market access 

by U.S. persons (in the case of 

transactions with certain foreign 

branches of U.S. banks) 437 and by 

considerations regarding information 

availability and market liquidity (in the 

case of the exclusion for cleared 

anonymous transactions).438

• Anti-evasion provisions—The 

requirement that conduit affiliates count 

all of their dealing activities against the 

thresholds, and the cross-border 

application of the aggregation 

requirements related to the de minimis 

exception, both reflect targeted efforts to 

prevent evasion of the security-based 

swap dealer requirements of Title VII.439

We are adopting a definition of ‘‘conduit 

affiliate’’ that excludes affiliates of 

registered security-based swap dealers 

and major security-based swap 

participants to avoid imposing costs on 

registered persons in situations where 

the types of evasion concerns that the 

conduit affiliate definition is intended 

to address are minimal. 

In short, these final rules apply the de 

minimis thresholds—which themselves 

reflect cost-benefit considerations 440— 

to cross-border security-based swap 

activity in a way that directs the focus 

of dealer regulation toward those 

entities whose security-based swap 

dealing activities most fully implicate 

the purposes of Title VII, or that is 

reasonably designed to prevent evasion 

of dealer regulation under Title VII. 

In the Cross-Border Proposing 

Release, we concluded that ‘‘[t]o the 

extent that an entity engaged in dealing 

activity wholly outside the United 


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441See Cross-Border Proposing Release, 77 FR 

31137. 

442See Intermediary Definitions Adopting 

Release, 77 FR 30724–25. 

443See section III.A.1, supra; see also 

Intermediary Definitions Adopting Release, 77 FR 

30635. 

We stated that this was a ‘‘conservative’’ estimate. 

See Intermediary Definitions Adopting Release, 77 

FR 30725 and n.1457. In establishing the de 

minimis threshold, we analyzed the percentage of 

the market activity that would likely be attributable 

to registered security-based swap dealers under 

various thresholds and various screens designed to 

identify entities that are engaged in dealing activity. 

See id. at 30636. Our analysis placed particular 

weight on the screen that identified entities that 

engaged in security-based swap transactions with 

three or more counterparties that themselves were 

not identified as dealers by ISDA. See id. at 30636. 

Of the 28 firms and corporate groups that satisfied 

this criterion, 25 also engaged in activity over the 

$3 billion threshold. See id. Based on this analysis, 

together with our expectation that some of the 

included corporate groups would register more than 

a single security-based swap dealer and that new 

entrants may be likely to enter the market, we 

estimated that as many as 50 entities would 

ultimately be required to register as a security-based 

swap dealer. See id. at 30725 n.1457. 

444While these revised figures are based on 

methodology similar to what Commission staff 

employed in the Intermediary Definitions Adopting 

Release, they make use of newer data and also 

account for the final rules’ approach to counting 

dealing transactions against the de minimis 

thresholds. 

Consistent with that methodology regarding the 

use of market data to identify entities that may be 

engaged in dealing activity pursuant to the dealertrader distinction (see id. 30636 n.478), the data 

indicated that in 2012, 40 entities engaged in the 

single-name security-based swap market had three 

or more counterparties that were not identified by 

ISDA as dealers. Of those 40 entities, 27 had $3 

billion or more in notional single-name CDS 

activity over a 12 month period. Applying the 

principles reflected in these final rules regarding 

the counting of transactions against the de minimis 

thresholds suggests that 25 of those entities would 

have $3 billion or more in notional transactions 

counted against the thresholds. Applying the 

aggregation rules (by aggregating the transactions, 

that are subject to counting, of other affiliates 

within a corporate group that individually do not 

have $3 billion in transactions subject to counting) 

increases that number to 26 entities. Based on this 

data, we believe that it is reasonable to conclude 

that up to 50 entities ultimately may register as 

security-based swap dealers, although fewer dealers 

also is possible. 

To apply the counting tests of these final rules to 

the data, Commission staff identified DTCC–TIW 

accounts associated with foreign branches and 

foreign subsidiaries of U.S. entities and counted all 

transaction activity in these accounts against the 

firm’s de minimis threshold. Commission staff 

further counted non-U.S. persons’ activity against 

U.S. persons and foreign branches and subsidiaries 

of U.S. persons against the de minimis thresholds. 

445 In these assessments, we have taken into 

account data obtained from DTCC–TIW regarding 

the activity of participants in the single-name CDS 

market. See Intermediary Definitions Adopting 

Release, 77 FR 30635. The present assessments use 

data from 2012, rather than the 2011 period used 

in connection with the Intermediary Definitions 

Adopting Release. 

As part of the Intermediary Definitions Adopting 

Release we also considered more limited publicly 

available data regarding equity swaps. See id. at 

30636 n.476, and 30637 n.485. The lack of market 

data is significant in the context of total return 

swaps on equity and debt, in that we do not have 

the same amount of information regarding those 

products as we have in connection with the present 

market for single name CDS. See id. at 30724 

n.1456. Although the definition of security-based 

swaps is not limited to single-name CDS, we believe 

that the single-name CDS data are sufficiently 

representative of the market to help inform the 

analysis. See id. at 30636. 

446As we noted in the Intermediary Definitions 

Adopting Release, the data incorporates 

transactions reflecting both dealing activity and 

non-dealing activity, including transactions by 

persons who may engage in no dealing activity 

whatsoever. See id. at 30635–36. For these purposes 

we have identified potential dealers based on 

whether an entity engaged in the single-name 

security-based swap market had three or more 

counterparties that were not identified by ISDA as 

dealers. We recognize that this may be imperfect as 

a tool for identifying dealing activity, given that the 

presence or absence of dealing activity ultimately 

turns upon the relevant facts and circumstances of 

an entity’s security-based swap transactions, as 

informed by the dealer-trader distinction. 

States poses risks to the U.S. financial 

system, we preliminarily believe that 

subjecting it to dealer registration and 

the related requirements would not 

generate the types of programmatic 

benefits that Title VII dealer regulation 

is intended to produce, as the dealing 

activity of such entity poses risks to 

counterparties outside the United 

States.’’ 441 These final rules and 

guidance regarding which transactions 

are to be counted against the de minimis 

thresholds are consistent with that 

principle, although in part they reflect 

a further assessment of the 

programmatic benefits resulting from 

the application of dealer regulation to 

non-U.S. persons when there is a 

recourse guarantee against a U.S. 

affiliate, including the benefits resulting 

from the application of financial 

responsibility requirements imposed 

upon registered security-based swap 

dealers. In this regard, the final rules 

and guidance reflect a reconsideration 

of our earlier conclusion that the risks 

to U.S. persons arising from such 

guarantees could adequately be 

addressed by the regulation of major 

security-based swap participants. In 

addition, these final rules and guidance 

more fully account for anti-evasion 

concerns associated with the potential 

for a U.S. person to engage in dealing 

activity using a guaranteed non-U.S. 

affiliate that is economically equivalent 

to the U.S. person itself entering into 

those dealing transactions. 

(b) Evaluation of Programmatic Impacts 

In setting the de minimis thresholds 

as part of the Intermediary Definitions 

Adopting Release, we attempted to 

identify a level of dealing activity that 

would identify and capture the entities 

for which the Title VII dealer 

requirements are most appropriate, 

without imposing the costs of Title VII 

on those entities for which regulation 

currently may not be justified in light of 

the purposes of the statute.442 We 

particularly took into account data 

regarding the activities of participants in 

the security-based swap market, 

including data regarding activity 

suggestive of dealing. Based on this 

analysis, we estimated that up to 50 

entities in the security-based swap 

market might register as security-based 

swap dealers.443 Those estimates—made 

outside of the context the cross-border 

application of the dealer definition— 

provide a baseline against which the 

Commission can analyze the 

programmatic costs and benefits and 

assessment costs of the final rules 

applying the de minimis exception to 

cross-border activities. 

We believe the methodology used in 

the Intermediary Definitions Adopting 

Release also is appropriate for 

considering the potential programmatic 

costs and benefits associated with the 

final cross-border rules. This 

methodology particularly can help 

provide context as to how rules 

regarding the cross-border application of 

the de minimis exception may change 

the number of entities that must register 

as security-based swap dealers, and thus 

help provide perspective regarding the 

corresponding impact on the 

programmatic costs and benefits of Title 

VII. Applying that methodology to 2012 

data regarding the single-name CDS 

market suggests that under these final 

rules approximately 50 entities may 

have to register as dealers—a number 

that is consistent with our estimates as 

part of the Intermediary Definitions 

Adopting Release.444

We recognize that there are 

limitations to using this methodology to 

consider the potential programmatic 

impact of the cross-border rules. These 

include limitations associated with the 

fact that the available data does not 

extend to all types of security-based 

swaps,445 and challenges in 

extrapolating transaction data into 

inferences of dealing activity.446 Also, 

the available single-name CDS data in 

certain regards potentially may lead the 

impact of these rules to be 

underestimated or overestimated: 

• The Commission’s access to data on 

CDS that are written on non-U.S. 

reference entities does not extend to 

data regarding transactions between two 

counterparties that are not domiciled in 

the United States, or guaranteed by a 

person domiciled in the United 


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447The Commission has more complete access to 

data regarding transactions involving single-name 

CDS on U.S. reference entities. 

448 In the Intermediary Definitions Adopting 

Release, we and the CFTC noted that we are ‘‘not 

of the general view that the costs of extending 

regulation to any particular entity must be 

outweighed by the quantifiable or other benefits to 

be achieved with respect to that particular entity.’’ 

See Intermediary Definitions Adopting Release, 77 

FR 30630. We also noted that ‘‘it does not appear 

possible to demonstrate empirically—let alone 

quantify—the increase or decrease in the possibility 

that a financial crisis would occur at a particular 

future time and with a particular intensity in the 

absence of financial regulation or as a result of 

varying levels or types of financial regulation.’’ See 

id. at 30630 n.421 (also noting the difficulty of 

demonstrating empirically ‘‘that the customer 

protections associated with dealer regulation would 

increase or decrease the likelihood that any 

particular market participant would suffer injury (or 

the degree to which the participant would suffer 

injury) associated with entering into an 

inappropriate swap or security-based swap’’). 

449See section VIII, supra. 

450See Intermediary Definitions Adopting 

Release, 77 FR 30731–32. 

451See id. at 30731. These assessment costs 

include costs associated with analyzing a person’s 

security-based swap activities to determine whether 

those activities constitute dealing activity and the 

States.447 More generally, the 

Commission’s access to data also does 

not extend to transactions among 

affiliated entities. The available data 

thus does not extend to the activities of 

non-U.S. conduit affiliates, to the extent 

that they engage in transactions with 

non-U.S. persons (that themselves are 

not the subject of a guarantee), and 

potentially makes the assessment 

underinclusive to the extent that 

conduit affiliates engaged in dealing 

activity during the relevant period. 

• The available data also does not 

specifically distinguish those 

transactions of non-U.S. persons that are 

subject to a guarantee by a U.S. person, 

and other (non-guaranteed) transactions 

by such non-U.S. persons. As a result, 

we have assumed that all foreign 

subsidiaries of U.S. persons rely on 

guarantees for all transactions, which 

potentially overestimates the level of 

transaction activity that would count 

toward de minimis thresholds for U.S. 

persons with foreign subsidiaries. 

Separately, the programmatic costs 

and benefits associated with the 

implementation of these rules cannot be 

quantified with any degree of precision 

because the full range of the de minimis 

exception’s effects on the programmatic 

costs and benefits also will reflect final 

rules—which have yet to be finalized— 

implementing the Title VII entity-level 

and transaction-level requirements 

applicable to security-based swap 

dealers. 

In addition, the programmatic benefits 

and costs associated with the crossborder application of the de minimis 

exception may change as market 

participants modify their business 

structure or practices in response to 

these rules. To avoid the prospect of 

being regulated as a security-based swap 

dealer, some market participants may 

restructure their businesses or take other 

steps (such as avoiding engaging in 

security-based swap activities involving 

U.S. persons) to avoid having their 

dealing transactions counted against the 

de minimis thresholds. Other market 

participants may take similar steps in 

response to counterparty demands. We 

understand that some market 

participants already have taken these 

types of steps to restructure their 

derivatives operations in response to the 

implementation of Title VII 

requirements related to swaps. More 

fundamentally, there are inherent 

challenges associated with attempting to 

quantify the risk-mitigation and other 

benefits of financial regulation.448 The 

programmatic impact of these rules may 

further reflect the fact that certain 

entities that are deemed to be securitybased swap dealers, and hence are 

subject to the applicable Title VII dealer 

requirements, separately may be subject 

to other regulatory requirements that are 

analogous to the security-based swap 

dealer requirements. For example, we 

recognize that certain entities that are 

deemed to be security-based swap 

dealers pursuant to these rules also may 

be registered as swap dealers with the 

CFTC, pursuant to the CEA. Those 

entities’ compliance with CFTC 

requirements applicable to swap dealers 

potentially may mitigate the 

programmatic effect of these rules—in 

terms of both costs and benefits—to the 

extent that those CFTC requirements are 

comparable with the SEC’s yet-to-befinalized substantive rules applicable to 

security-based swap dealers. The 

potential availability of substituted 

compliance, whereby a market 

participant may comply with a Title VII 

security-based swap dealer requirement 

by complying with a comparable 

requirement of a foreign financial 

regulator, also may affect the final 

programmatic impact of these rules. 

In general, however, and consistent 

with our territorial approach, we believe 

that these rules are targeted 

appropriately, and do not apply dealer 

regulation to those entities that have a 

more limited involvement in the U.S. 

financial system and hence whose 

regulation as a security-based swap 

dealer under Title VII would be less 

linked to programmatic benefits (i.e., 

non-U.S. persons that engage in 

security-based swap dealing activity 

entirely, or almost entirely, outside the 

United States with non-U.S. persons or 

with certain foreign branches), while 

applying dealer regulation to those 

entities whose dealing activity would be 

more likely to produce programmatic 

benefits under Title VII. The nexus 

between specific aspects of these 

requirements and the programmatic 

costs and benefits also is addressed 

below in connection with our 

consideration of various alternatives to 

the approach taken in the final rules. 

Finally, we recognize that the U.S. 

market participants and transactions 

regulated under Title VII are a subset of 

the overall global security-based swap 

market and that shocks to risk or 

liquidity arising from a foreign entity’s 

dealing activity outside the United 

States may spill into the United States. 

Such spillover risks associated with 

dealing activity that falls outside the 

scope of Title VII have the potential to 

affect U.S. persons and the U.S. 

financial system either through a foreign 

entity’s transactions with foreign 

entities, which, in turn, transact with 

U.S. persons (and may, as a result, be 

registered security-based swap dealers 

or major security-based swap 

participants), or through membership in 

a clearing agency that may provide CCP 

services in the United States or have a 

U.S. person as a clearing member. We 

also have considered these spillovers in 

connection with our analysis of the 

effects of these final cross-border rules 

on efficiency, competition and capital 

formation.449

2. Assessment Costs 

The analysis of how these crossborder rules will affect the assessment 

costs associated with the ‘‘securitybased swap dealer’’ definition and its de 

minimis exception is related to the 

assessment cost analysis described in 

the Intermediary Definitions Adopting 

Release,450 but must also account for 

certain issues specific to these crossborder rules. While in certain regards 

those assessment costs can more readily 

be estimated than the programmatic 

effects discussed above, the assessment 

costs associated with the cross-border 

application of the Title VII dealer 

requirements will be considerably 

smaller in significance than those 

programmatic effects. 

The Intermediary Definitions 

Adopting Release addressed how certain 

market participants whose securitybased swap activities exceed or are not 

materially below the de minimis 

threshold may be expected to incur 

assessment costs in connection with the 

dealer analysis.451 In that release we 


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costs of monitoring the volume of dealing activity 

against the de minimis threshold. 

452 Id. at 30731–32. As discussed below, a 

comparable assessment using 2012 data indicates 

that there were approximately 210 entities in the 

single-name CDS market with more than $2 billion 

in transactions over 12 months. That analysis 

accounts for the aggregation of affiliate activity for 

purposes of the de minimis analysis, by first 

counting individual accounts with more than $2 

billion in activity, and then aggregating any 

remaining accounts to the level of the ultimate 

parent and counting those also. 

453See id. We estimated that the per-entity cost 

of the dealer analysis would be approximately 

$25,000. Our estimate of aggregate industry-wide 

costs of $4.2 million reflected the costs that may be 

incurred by all 166 entities. See id. 

454See id. at 30731–32. Using an estimate of 

$25,000 in legal costs per firm, this led to a total 

estimate of $4.2 million. See id. at 30732. 

455See Cross-Border Proposing Release, 78 FR 

31141. 

456A total of 16 of those 71 entities that are not 

domiciled in the United States appear to have less 

than $2 billion in activity that involve U.S. 

counterparties or that otherwise would appear to 

potentially have to be counted against the de 

minimis thresholds. 

457 In the Intermediary Definitions Adopting 

Release, we estimated that such costs may range 

from $20,000 to $30,000. See Intermediary 

Definitions Adopting Release, 77 FR 30732. For 

purposes of this analysis, we conservatively are 

using the upper end of that range. 

458This analysis of data related to potential 

assessment costs reflects both the activities of 

individual DTCC–TIW accounts as well as the 

activities of transacting agents. The analysis in 

particular first considers the number of accounts 

that have $2 billion or more in annual securitybased swap activity, and then, after removing those 

particular accounts, considers activity aggregated at 

the level of individual transacting agents. This 

analysis is comparable to the analysis we use to 

estimate the potential number of dealers under the 

final rules. See note 444, supra. This analysis is 

distinct from the analogous analysis we used in the 

Intermediary Definitions Adopting Release to 

estimate the number of entities that may be 

expected to perform the dealer-trader analysis (see 

notes 149 through 151 and accompanying text, 

supra), which focuses on activity at the transacting 

agent level, because further experience with the 

associated data permits us to conduct a more 

granular analysis of that data. See generally CrossBorder Proposing Release, 78 FR 31137 n.1407. 

These estimates do not reflect a new category of 

costs arising from the cross-border rules. They 

instead are a revision of a category of previously 

identified costs that market participants may incur 

in engaging in the dealer-trader analysis, using 

newer data and reflecting only trades that are 

counted under the final cross-border rules. 

estimated that 166 entities—out of over 

one thousand U.S. and non-U.S. entities 

that engaged in single-name CDS 

transactions in 2011—had more than $2 

billion in single-name CDS transactions 

over the previous 12 months, and as a 

result would engage in the dealer 

analysis.452 Based on those numbers, 

and assuming that that all of those 

entities retain outside counsel to 

analyze their status under the securitybased swap dealer definition, including 

the de minimis exception, we estimated 

that the legal costs associated with 

assessing market participants’ potential 

status as security-based swap dealers 

may approach $4.2 million.453

Application of these cross-border 

rules to the de minimis exception can be 

expected to affect the assessment costs 

that market participants will incur. In 

part, certain non-U.S. persons may be 

expected to incur personnel costs and 

legal costs—beyond the legal costs 

addressed as part of the Intermediary 

Definitions Adopting Release— 

associated with analyzing these crossborder rules and developing systems 

and procedures to assess which 

transactions would have to be counted 

against the de minimis thresholds (or 

with the purpose of avoiding activities 

within the United States that would be 

sufficient to meet the applicable 

thresholds). On the other hand, while 

certain market participants also would 

incur additional legal costs associated 

with the dealer determination (i.e., the 

assessment of whether particular 

activities constitute dealing activity for 

purposes of the analysis) addressed in 

the Intermediary Definitions Adopting 

Release, the application of the crossborder rules may reduce the number of 

entities that incur such legal costs. 

In adopting these rules we estimate 

the assessment costs that market 

participants may incur as a result. As 

discussed below, however, these costs 

in practice may be mitigated in large 

part by steps that market participants 

already have taken in response to other 

regulatory initiatives, including the 

CFTC Cross-Border Guidance. 

(a) Legal Costs 

The implementation of these crossborder rules in some circumstances has 

the potential to change the legal costs 

identified in the Intermediary 

Definitions Adopting Release, including 

by adding new categories of legal costs 

that non-U.S. persons may incur in 

connection with applying the de 

minimis exception in the cross-border 

context. 

Legal costs related to application of 

the dealer-trader distinction—As 

discussed in the Intermediary 

Definitions Adopting Release, certain 

market participants will incur 

assessment costs relating to performing 

the analysis as to whether their securitybased swap activities constitute dealing. 

For purposes of that release we assumed 

that only entities with more than $2 

billion in security-based swap 

transactions over the previous 12 

months would be likely to engage in the 

full dealer analysis, and, based on 

analysis of single-name CDS data, we 

concluded that there were 166 market 

participants that would meet those 

criteria.454

In the cross-border context, we 

believe that some non-U.S. persons that 

have more than $2 billion in total 

security-based swap transactions over 

the previous 12 months nonetheless 

may be expected to forgo the costs of 

performing the dealing activity analysis, 

if only a comparatively low volume of 

their security-based swap activity 

involves U.S. counterparties or 

otherwise potentially needs to be 

counted against the de minimis 

thresholds. In particular, we believe that 

it is unlikely that non-U.S. persons 

would engage in the dealer analysis 

(and hence would not be likely to incur 

such legal costs described in the 

Intermediary Definitions Adopting 

Release) if over the previous 12 months 

they have less than $2 billion in 

security-based swap transactions that 

potentially would have to be counted 

against the thresholds.455

Available data from 2012 indicates 

that 218 entities worldwide (147 of 

which are domiciled in the United 

States and 71 domiciled elsewhere) had 

security-based swap activity, with all 

counterparties, of $2 billion or more. Of 

those 218 entities 202 had total activity 

of $2 billion or more that—to the extent 

it constituted dealing activity—would 

appear to have to be counted against the 

de minimis thresholds. Those 202 

entities consisted of 147 entities 

domiciled in the United States (which 

would have to count all of their dealing 

transactions), and 55 entities domiciled 

elsewhere that have $2 billion in 

transactions with U.S. counterparties or 

that otherwise may have to be counted 

for purposes of the de minimis 

analysis.456 To the extent that all 202 of 

those entities engage in the legal 

analysis related to which of their 

security-based swap activities 

constitutes dealing under the dealertrader distinction (while recognizing 

that some such entities may conclude 

that, based on the nature of their 

business, they engage in dealing 

activities and that no such additional 

analysis is necessary), and assuming 

that such analyses amount to $30,000 

per entity,457 those 202 entities would 

incur a total of approximately $6.1 

million in such legal costs.458

Legal costs related to systems and 

analysis—As noted above, out of the 

218 entities that had total security-based 

swap activity of $2 billion or more in 

2012, 71 are domiciled outside of the 

United States. Upon further 

consideration (and in addition to the 

estimates in the Cross-Border Proposing 

Release), we also believe that it is 


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459We would not expect U.S. persons with more 

than $2 billion in activities to incur such costs, 

given that U.S. persons would need to count all of 

their dealing activities against the de minimis 

thresholds. 

460This estimate of $30,400 reflects an 

assumption that such efforts would require 80 

hours of in-house legal or compliance staff’s time. 

Based upon data from SIFMA’s Management & 

Professional Earnings in the Securities Industry 

2012 (modified by the Commission staff to account 

for an 1800-hour-work-year and multiplied by 5.35 

to account for bonuses, firm size, employee 

benefits, and overhead), the staff estimates that the 

average national hourly rate for an in-house 

attorney is $380. 

461 It is possible that a subset of non-U.S. dealers 

may reasonably conclude they are above the de 

minimis thresholds and should register with the 

Commission as security-based swap dealers, 

without establishing systems to analyze their status 

under the exception, in light of the nature of their 

operations and their activity within the United 

States. 

Moreover, in considering the assessment costs 

associated with the final rules, we continue to hold 

the expectation, noted in the Intermediary 

Definitions Adopting Release, that market 

participants generally would be aware of the 

notional amount of their activity involving securitybased swaps as a matter of good business practice. 

See Intermediary Definitions Adopting Release, 77 

FR 30732. These systems cost estimates for nonU.S. persons are provided in recognition of the fact 

that non-U.S. persons will likely need to 

distinguish those transactions that must be counted 

against their de minimis thresholds and those that 

do not need to be included. 

462 In considering the assessment costs associated 

with the final rules, we believe that a potential 

dealer assessment of whether it is a ‘‘conduit 

affiliate’’ would not require the use of any systems. 

A conduit affiliate must count all of its dealing 

transactions, making transaction-specific tracking 

unnecessary. Moreover, the question of whether a 

person acts as a conduit affiliate would turn upon 

whether it engages in certain security-based 

transactions on behalf of a U.S. affiliate, 

accompanied by back-to-back transactions with that 

affiliate. That analysis fundamentally is different 

from the transaction-specific assessments that are 

more likely to require the development of new 

systems for monitoring the attributes of particular 

transactions. 

463As discussed in the Cross-Border Proposing 

Release, we would expect that market participants 

would be aware of the notional amount of their 

security-based swap activity as a matter of good 

business practice. See Cross-Border Proposing 

Release, 78 FR 31140. 

464 In the Intermediary Definitions Adopting 

Release, we estimated that the one-time 

programming costs of $13,692 per entity and annual 

ongoing assessment costs of $15,268. See 

Intermediary Definitions Adopting Release, 77 FR 

30734–35 and accompanying text (providing an 

explanation of the methodology used to estimate 

these costs). The hourly cost figures in the 

Intermediary Definitions Adopting Release for the 

positions of Compliance Attorney, Compliance 

Manager, Programmer Analyst, and Senior Internal 

Auditor were based on data from SIFMA’s 

Management & Professional Earnings in the 

Securities Industry 2010. 

For purposes of the cost estimates in this release, 

we have updated these figures with more recent 

data as follows: the figure for a Compliance 

Attorney is $334/hour, the figure for a Compliance 

Manager is $283/hour, the figure for a Programmer 

Analyst is $220/hour, and the figure for a Senior 

Internal Auditor is $209/hour, each from SIFMA’s 

Management & Professional Earnings in the 

Securities Industry 2013, modified by SEC staff to 

account for an 1800-hour work-year and multiplied 

by 5.35 to account for bonuses, firm size, employee 

benefits, and overhead. We also have updated the 

Intermediary Definitions Adopting Release’s $464/ 

hour figure for a Chief Financial Officer, which was 

based on 2011 data, with a revised figure of $500/ 

hour, for a Chief Financial Officer with five years 

of experience in New York, that is from http://

www.payscale.com, modified by Commission staff 

to account for an 1800-hour work-year and 

multiplied by 5.35 to account for bonuses, firm size, 

employee benefits, and overhead. See http://

www.payscale.com (last visited Apr. 16, 2014). 

Incorporating these new cost figures, the updated 

one-time programming costs based upon our 

assumptions regarding the number of hours 

required in the Intermediary Definitions Adopting 

Release would be $15,287 per entity, i.e., 

(Compliance Attorney at $334 per hour for 2 hours) 

+ (Compliance Manager at $283 per hour for 8 

hours) + (Programmer Analyst at $220 per hour for 

40 hours) + (Senior Internal Auditor at $209 per 

hour for 8 hours) + (Chief Financial Officer at $500 

per hour for 3 hours) = $14,904, and the annual 

ongoing costs would be $16,612 per entity, i.e., 

((Senior Internal Auditor at $209 per hour for 16 

hours) + Compliance Attorney at $334 per hour for 

4 hours) + (Compliance Manager at $283 per hour 

for 4 hours) + (Chief Financial Officer at $500 per 

hour for 4 hours) + (Programmer Analyst at $220 

per hour for 40 hours) = $16,612). 465Non-U.S. market participants potentially may 

also assess and seek representations related to 

whether their security-based swap activity with a 

particular counterparty constitutes transactions 

conducted through a foreign branch of a U.S. bank 

(including representations regarding the noninvolvement of U.S. personnel) that is registered as 

a security-based swap dealer. Based on our 

understanding of changes in the way major U.S. 

dealers engage with non-U.S. counterparties in the 

single-name CDS market following the issuance of 

the CFTC Cross-Border Guidance, we believe that 

few, if any, U.S. persons currently may participate 

in this market through their foreign branches. Also, 

as noted above, other regulatory provisions may 

limit the ability of U.S. banks to conduct securitybased swap activity. See note 366, supra. 

Accordingly, we do not believe that it is likely that 

non-U.S. market participants will independently 

assess, and seek representations related to, the 

foreign branch status of their counterparties. 

Instead, we believe that it is likely that such nonU.S. persons will focus on assessing the U.S.-person 

status of the bank for which the foreign branch is 

a part. 

reasonable to conclude that those 71 

entities may have to incur one-time 

legal expenses related to the 

development of systems and analysis 

expenses—discussed below—to identify 

which of their total security-based swap 

transactions potentially must be 

counted for purposes of the de minimis 

analysis consistent with these crossborder rules. This additional cost 

estimate reflects the fact that the 

development of such systems and 

procedures must address cross-border 

rules that require accounting for factors 

such as whether an entity’s securitybased swaps are subject to guarantees 

from affiliated U.S. persons, and 

whether its counterparties are U.S. 

persons.459 We estimate that such legal 

costs would amount to approximately 

$30,400 per entity, and that those 60 

entities would incur total costs of 

approximately $2.2 million.460

(b) Costs Related to Systems, Analysis, 

and Representations 

Transaction-monitoring systems—The 

elements introduced by the final crossborder rules may cause certain non-U.S. 

persons to implement systems to 

identify whether their dealing 

transactions exceed the de minimis 

thresholds.461 Such systems may reflect 

the need for non-U.S. persons to: (i) 

identify whether their dealing 

counterparties are ‘‘U.S. persons’’; (ii) 

determine whether their dealing 

transactions with a U.S. person 

constitutes ‘‘transactions conducted 

through a foreign branch’’ (which itself 

requires consideration of whether their 

counterparty is a ‘‘foreign branch’’) 

and—of those—determine which 

transactions involve a foreign branch of 

a U.S. bank that itself is registered as a 

security-based swap dealer; (iii) 

determine whether particular 

transactions are subject to a recourse 

guarantee against a U.S. affiliate; (iv) 

evaluate the applicability of the 

aggregation principles; and (v) evaluate 

the availability of the exception for 

cleared anonymous transactions.462

In general, we believe that the costs of 

such systems should be similar to the 

costs estimated in the Intermediary 

Definitions Adopting Release for a 

system to monitor positions for 

purposes of the major security-based 

swap participant thresholds. In both 

cases –the assessment of dealer status in 

the cross-border context and the 

assessment of major participant status— 

such systems would have to flag a 

person’s security-based swaps against 

the specific criteria embedded in the 

final rules, and then compare the 

cumulative amount of security-based 

swaps that meet those criteria against 

regulatory thresholds.463 Based on the 

methodology set forth in the 

Intermediary Definitions Adopting 

Release related to systems associated 

with the major participant analysis, we 

estimate that such systems would be 

associated with one-time programming 

costs of $14,904 and ongoing annual 

systems costs of $16,612 per entity.464

Analysis of counterparty status, 

including representations—Non-U.S. 

market participants also would be likely 

to incur costs arising from the need to 

assess the potential U.S.-person status of 

their counterparties, and in some cases 

to obtain and maintain records related 

to representations regarding their 

counterparties’ U.S.-person status.465

We anticipate that non-U.S. persons are 

likely to review existing information 

(e.g., information already available in 

connection with account opening 


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466We expect that an assessment of whether a 

particular counterparty is a U.S. person—once 

properly made—generally will not vary over time, 

given that the components of the ‘‘U.S. person’’ 

definition generally would not be expected to vary 

for a particular counterparty absent changes such as 

a corporate reorganization, restructuring or merger. 

With that said, we believe market participants will 

likely monitor for the presence of information that 

may indicate that the representations they have 

received in connection with a person’s U.S.-person 

status are outdated or otherwise are no longer 

accurate (e.g., information regarding a 

counterparty’s reorganization, restructuring, or 

merger). 

We also believe that such non-U.S. persons will 

likely obtain the relevant information regarding the 

U.S.-person status of their new accounts as part of 

the account opening process, as a result of these 

and other regulatory requirements. 

467 In part, this estimate is based on each firm 

incurring an estimated one-half hour compliance 

staff time and one-half hour of legal staff time—per 

counterparty of the firm—to review and assess 

information regarding the counterparty, and 

potentially to request and obtain representations 

regarding the U.S.-person status of their 

counterparties. These are in addition to the 

assessment cost estimates we made in the CrossBorder Proposing Release, and reflect further 

consideration of the issue in light of industry 

experience in connection with the CFTC CrossBorder Guidance. For these purposes, we 

conservatively assume that each of those non U.S. 

firms will have 2400 single-name CDS 

counterparties (based on data indicating that the 60 

non-U.S. persons with total single-name CDS 

transactions in 2012 of $2 billion or less all had 

fewer than 2400 counterparties in connection with 

single-name CDS), which produces an estimate of 

1200 hours of compliance staff time and 1200 hours 

of legal staff time per firm. Based upon data from 

SIFMA’s Management & Professional Earnings in 

the Securities Industry 2013 (modified by the 

Commission staff to account for an 1800-hour-workyear and multiplied by 5.35 to account for bonuses, 

firm size, employee benefits, and overhead), the 

staff estimates that the average national hourly rate 

for a senior compliance examiner is $217 and that 

the average national hourly rate for an in-house 

attorney is $380; this leads to a cumulative estimate 

of approximately $716 thousand per firm for such 

costs. 

Consistent with the Cross-Border Proposing 

Release, moreover, this estimate is further based on 

estimated 40 hours of in-house legal or compliance 

staff’s time (based on the above rate of $380 per 

hour for an in-house attorney) to establish a 

procedure of requesting and collecting 

representations from trading counterparties, taking 

into account that such representation may be 

incorporated into standardized trading 

documentation used by market participants. This 

leads to an estimate of $15,200 per firm for such 

costs. 

468The exclusion for a non-U.S. person’s dealing 

transactions conducted through the foreign branch 

of a counterparty that is a registered security-based 

swap dealer is predicated on U.S.-based personnel 

of the counterparty not being involved in arranging, 

negotiating or executing the transaction at issue. 

Notwithstanding the potentially transaction-specific 

nature of that assessment, we believe that parties 

may structure their relationships in such a way that 

the non-U.S. person may rely on general 

representations by its counterparty, without the 

need for a separate representation in conjunction 

with each individual transaction. 

469 It is possible that the need to monitor for 

information inconsistent with existing 

representations would be more significant in the 

context of representations regarding whether a 

transaction has been conducted through a foreign 

branch of a U.S. bank, than they would be in the 

context of representations regarding the U.S.-person 

status of a counterparty. This is because a 

counterparty’s potential status as a U.S. person 

would not be expected to vary on a transaction-bytransaction basis. At the same time, we believe that 

few, if any, U.S. persons currently may participate 

in this market through their foreign branches. See 

note 465, supra. 

470 In part, this is based on an estimate of the time 

required for a programmer analyst to modify the 

software to track whether the counterparty is a U.S. 

person (including whether it is a foreign branch of 

a U.S. bank that is not registered as a security-based 

swap dealer), and to record and classify whether a 

transaction constitutes dealing activity conducted 

through a foreign branch of a registered dealer This 

includes time associated with consultation with 

internal personnel, and an estimate of the time such 

personnel would require to ensure that these 

modifications conformed to those aspects of the 

final rule. Using the estimated hourly costs 

described above, we estimate the costs as follows: 

(Compliance Attorney at $334 per hour for 2 hours) 

+ (Compliance Manager at $283 per hour for 4 

hours) + (Programmer Analyst at $220 per hour for 

40 hours) + (Senior Internal Auditor at $209 per 

hour for 4 hours) + (Chief Financial Officer at $500 

per hour for 2 hours) = $12,436. See note 464, supra 

(for source of the estimated per-hour costs). 

As noted above, we generally would not expect 

a counterparty’s U.S.-person status to vary over 

time absent changes such as reorganization, 

restructuring or merger. See note 466, supra. 

471Consistent with the above discussion, the 

estimated one-time costs of $759 thousand 

represent: the costs to establish a system to assess 

the status of their dealing activities under the 

definitions and other provisions specific to these 

cross-border rules ($14,904); the costs related to the 

assessment of counterparty status, including costs 

of assessing existing information and of requesting 

and obtaining representations, as well as costs of 

related procedures ($732 thousand), and the costs 

for monitoring the status of their counterparties for 

purposes of their future security-based swap 

activities ($12,436). 

materials and ‘‘know your customer’’ 

practices) to assess whether their 

counterparties are U.S. persons. NonU.S. persons at times may also request 

and maintain representations from their 

counterparties to help determine or 

confirm their counterparties’ status. 

Accordingly, in our view, such 

assessment costs primarily would 

encompass one-time costs to review and 

assess existing information regarding 

counterparty domicile, principal place 

of business, and other factors relevant to 

potential U.S.-person status, as well as 

one-time costs associated with 

requesting and collecting 

representations from counterparties.466

The Commission believes that such onetime costs would be approximately $732 

thousand per firm.467

Monitoring of counterparty status—In 

addition, market participants may be 

expected to adapt the systems described 

above to monitor the status of their 

counterparties for purposes of their 

future security-based swap activities. 

Such refinements would permit these 

systems to maintain records of 

counterparty status for purposes of 

conducting the de minimis assessments 

(e.g., representations regarding a 

counterparty’s U.S.-person status, or 

whether a counterparty’s transaction 

through a foreign branch involve U.S. 

personnel), such as by monitoring for 

the presence of existing representations, 

to obviate the need to request 

representations on a transaction-bytransaction basis.468 Market participants 

also may need to monitor for the 

presence of information that may 

indicate that the representation they 

have received are outdated or otherwise 

are not valid.469 We estimate that this 

would require one-time costs of 

approximately $12,436 per firm.470

Summary of system, analysis and 

representation costs—In sum, we 

estimate that the costs that certain nonU.S. market participants would incur in 

connection with systems, analysis of 

counterparty status and representations 

in connection with these cross-border 

rules would be approximately $759 

thousand in one-time costs,471 and their 

estimated annual ongoing costs would 

be $16,612. The available data provided 

by the DTCC–TIW, subject to the 

limitations associated with the use of 

data analysis discussed above, suggests 

that such costs may be incurred by 71 

non-U.S. domiciled entities with total 

annual activity of at least $2 billion. 

Assuming that each of these 71 entities 

concludes it has a need to monitor the 

above categories of information in 

connection with its security-based swap 

activities, we estimate that the total onetime industry-wide costs associated 

with establishing such systems would 

amount to approximately $54 million, 

and total annual ongoing costs would 

amount to approximately $1.2 million. 

(c) Overall Considerations Related to 

Assessment Costs 

In sum, we believe that the effect of 

these final cross-border rules would be 

an increase over the amounts that 

otherwise would be incurred by certain 

non-U.S. market participants, both in 

terms of additional categories of legal 

costs and in terms of the need to 

develop certain systems and procedures. 

Requiring certain non-U.S. persons to 

incur such assessment costs is an 

unavoidable adjunct to the 

implementation of a set of rules that are 

appropriately tailored to apply the 

‘‘security-based swap dealer’’ definition 

under Title VII to a global securitybased swap market in a way that yields 

the important transparency, 

accountability, and counterparty 

protection benefits associated with 

dealer regulation under Title VII. The 

alternative—avoiding application of the 


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472For example, the final rules incorporate an 

express representation provision in the ‘‘U.S. 

person’’ definition, to help the parties best 

positioned to make the U.S.-person determination 

and convey the results of that analysis to its 

counterparty. See section IV.C.4, supra. 

473For example, one commenter urged the 

Commission to exempt from the definition of U.S. 

person collective investment vehicles that are 

publicly offered only to non-U.S. persons, 

consistent with the CFTC’s interpretation, on 

account of the costs that would be required for 

collective investment vehicles that transact in both 

swaps and security-based swaps to develop separate 

compliance systems and operations for swaps and 

security-based swaps. 

474 In this regard we also note that in certain areas 

the Commission has taken an approach that is 

narrower than the CFTC analogue. 

475See note 181, supra, and accompanying text. 

This issue—regarding whether a foreign branch of 

a U.S. bank should count all of its dealing activity 

against the de minimis thresholds—is distinct from 

the issue regarding the extent to which a non-U.S. 

person should count its dealing activity involving 

a foreign branch of a U.S. bank as a counterparty. 

That latter issue is addressed below. See section 

IV.I.3(d), supra. 

476See section IV.B, supra. 

Title VII dealer requirements to nonU.S. persons—would be inappropriate 

because, in our view, the dealing 

activity of non-U.S. persons required to 

count their dealing activity under these 

final rules constitutes part of the U.S. 

financial system. The benefits that arise 

from Title VII regulatory requirements, 

including risk management and 

transparency benefits associated with 

dealer regulation accordingly could be 

undermined if a significant portion of 

U.S. dealing activity by non-U.S. 

persons were excluded from the Title 

VII framework. In certain respects, 

however, decisions embedded in these 

final rules are designed to avoid 

imposing assessment costs upon market 

participants.472

It is important to recognize that our 

estimates of the assessment costs 

associated with these rules in practice 

may tend to overestimate that costs that 

market participants actually will incur 

as a result of these rules. This is because 

in practice, the assessment costs 

associated with the cross-border scope 

of the dealer definition (like the 

potential programmatic effects of that 

cross-border scope) may be tempered to 

the extent that the assessments that 

market participants conduct in 

connection with their security-based 

swap activities correspond to the 

assessments they otherwise would 

follow due to other regulatory 

requirements or business practices. 

Significantly, we understand that a 

substantial number of market 

participants already have engaged in 

assessment activities—including 

activities to determine whether their 

counterparties are U.S. persons— 

conforming to the requirements 

applicable to swaps. Given our 

expectation that persons that are not 

‘‘U.S. persons’’ under the CFTC’s policy 

(as set forth in its cross-border guidance) 

generally also would not be ‘‘U.S. 

persons’’ under our rules, certain market 

participants may reasonably determine 

that as part of the implementation of the 

rules we are adopting today they need 

not duplicate work already done in 

connection with implementing the 

CFTC’s swaps regulations. In this regard 

we recognize the significance of 

commenter views emphasizing the 

importance of harmonization with the 

CFTC to control the costs associated 

with assessments under Title VII.473 We 

acknowledge that, to the extent our final 

rules differ from the CFTC’s approach— 

especially if they were to require 

counting of transactions that would not 

be captured by the requirements 

applicable to swaps in the cross-border 

context, or were to require the collection 

and/or consideration of information that 

is materially different from that 

collected under the CFTC’s approach— 

market participants may face higher 

costs than if regulations were 

identical.474 As discussed in connection 

with the specific aspects of these rules, 

however, we believe that such 

differences are justified, as are any 

associated assessment (or programmatic) 

costs. 

Finally, we also anticipate that certain 

market participants that wish to limit 

the possibility of being regulated as a 

dealer under Title VII, including the 

programmatic and assessment costs 

associated with the dealer definition, 

may choose to structure their business 

to avoid engaging in dealing 

transactions with U.S. persons (other 

than foreign branches of banks 

registered with the Commission as 

dealers). 

3. Alternative Approaches 

As discussed above, the final rules 

incorporate a number of provisions 

designed to focus Title VII dealer 

regulation upon those persons that 

engage in the performance of securitybased swap dealing activity within the 

United States in excess of the de 

minimis thresholds, taking into account 

the mitigation of risks to U.S. persons 

and potentially to the U.S. financial 

markets, as well as other purposes of 

Title VII. 

In adopting these final rules we have 

considered alternative approaches 

suggested by commenters, including the 

economic effects of following such 

alternative approaches. In considering 

the economic impact of potential 

alternatives, we have sought to isolate 

the individual alternatives to the extent 

practicable, while recognizing that 

many of those alternatives are not 

mutually exclusive. 

We further have considered such 

potential alternatives in light of the 

methodologies discussed above, by 

assessing the extent to which following 

particular alternatives would be 

expected to increase or decrease the 

number of entities that ultimately would 

be expected to be regulated as dealers 

under the final rules, as well as the 

corresponding economic impact. As 

discussed below, however, analysis of 

the available data standing alone would 

tend to suggest that various alternative 

approaches suggested by commenters 

would not produce large changes in the 

numbers of market participants that may 

have to be regulated as security-based 

swap dealers. These results are subject 

to the above limitations, however, 

including limitations regarding the 

ability to quantitatively assess how 

market participants may adjust their 

future activities in response to the rules 

we adopt or for independent reasons. 

Accordingly, while such analyses 

provide some context regarding 

alternatives, their use as tools for 

illustrating the economic effects of such 

alternatives is limited. 

(a) Dealing Activity by Foreign Branches 

of U.S. Banks 

The final rules require U.S. banks to 

count all dealing transactions of their 

foreign branches against the de minimis 

thresholds, even when the counterparty 

is a non-U.S. person or another foreign 

branch of a U.S. person. Certain 

commenters to the rules addressed in 

the Intermediary Definitions Adopting 

Release had expressed the view that 

such transactions by foreign branches 

should not have to count their dealing 

transactions involving non-U.S. 

persons.475 For the reasons discussed 

above, we believe that it is appropriate 

for the analysis to include dealing 

transactions conducted through foreign 

branches to the same extent as other 

dealing transactions by U.S. persons.476

Adopting such an alternative 

approach potentially could provide 

market participants that are U.S. 

persons with incentives to execute 

higher volumes through their foreign 

branches. Such an outcome may be 

expected in part to reduce the 

programmatic and assessment costs 

associated with dealer regulation under 

Title VII. Such an outcome also would 

be expected to reduce the programmatic 

benefits associated with dealer 

regulation, given that those U.S. banks 

(and potentially the U.S. financial 


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477The DTCC–TIW data permits us to separately 

consider dealing activity involving accounts of 

foreign branches of U.S. banks from other accounts 

of U.S.-domiciled persons. As a result, it is possible 

to consider the potential impact of a requirement 

under which—in contrast to the final rules—dealing 

activity conducted through a foreign branch only 

needs to be counted against the thresholds when 

the counterparty is a U.S.-domiciled person. Under 

such an alternative approach, the U.S. person 

would not have to count dealing transactions in 

which the counterparty is a non-U.S. person or 

another foreign branch of a U.S. bank. 

As discussed above, current data indicates that 

there are 27 market participants that have three or 

more counterparties that are not recognized as 

dealers by ISDA, and that have $3 billion or more 

in notional single-name CDS transactions over a 12 

month period. Screening those entities against a 

cross-border test that is identical to the one we are 

adopting, except that it does not count foreign 

branches of U.S. banks as U.S. persons, leads to an 

estimate of 25 market entities that have $3 billion 

or more in activity that must be counted against the 

thresholds (rather than the 26 estimated in 

connection with the test we are adopting). That 

difference does not appear to warrant a change in 

the conservative estimate that up to 50 entities may 

register as security-based swap dealers. 

478See note 310, supra. 

479See section IV.E.1(b), supra. 

480 In the Cross-Border Proposing Release, we 

expressed the preliminary view that dealer 

regulation of such persons would not materially 

increase the programmatic benefits of the dealer 

registration requirement, and that such an approach 

would impose programmatic costs without a 

corresponding increase in programmatic benefits to 

the U.S. security-based swap market. See CrossBorder Proposing Release, 78 FR 31146–47. For the 

reasons discussed above, we have reached a 

different conclusion in conjunction with these final 

rules. See section IV.E.1(b), supra. 

481Although the data available to the Commission 

includes data regarding transactions of non-U.S. 

persons that are guaranteed by their U.S. affiliates, 

the data does not allow us to identify which 

individual transactions of those non-U.S. persons 

are subject to guarantees by their U.S. affiliates, or 

to distinguish the guaranteed and non-guaranteed 

transactions of such non-U.S. persons. As a result, 

the assessment of the final rule presumed that all 

transactions of foreign subsidiaries of U.S. persons 

for which we have data available constitute 

guaranteed transactions. 

Screening the 27 market participants that have 

three or more counterparties that are not recognized 

as dealers by ISDA, and that have $3 billion or more 

in notional single-name CDS transactions over a 12 

month period, with a revised de minimis test that 

does not include any transactions with non-U.S. 

person counterparties entered into by a foreign 

subsidiary of a U.S. person produces 26 entities that 

would have more than $3 billion in notional 

transactions over 12 months counted against the 

threshold—a number that is identical to the number 

associated with the test we are adopting. 

482The available data does not include 

information about the single-name security-based 

swap transactions of non-U.S. domiciled persons 

(including non-U.S. affiliates of U.S.-domiciled 

persons) for single-name CDS involving a non-U.S. 

reference entity. 

483See note 314, supra, and accompanying text. 

system) would incur risks via their 

foreign branches equivalent to the risk 

that might arise from transactions of 

U.S. banks that are not conducted 

through foreign branches, but without 

the additional oversight (including risk 

mitigation requirements such as capital 

and margin requirements) that comes 

from regulation as a dealer. 

Using the 2012 data to assess the 

impact associated with this alternative 

does not indicate a change to our 

conservative estimate that up to 50 

entities potentially would register as 

security-based swap dealers.477 This 

assessment, as well as the other 

assessments of alternatives discussed 

below, is subject to the limitations 

discussed above, including limitations 

regarding the ability to assess how 

market participants would change their 

activities in response to the final rules. 

(b) Dealing Activity by Guaranteed 

Affiliates of U.S. Persons 

The final rules require a non-U.S. 

person to count, against the de minimis 

thresholds, dealing transactions for 

which the non-U.S. person’s 

performance in connection with the 

transaction is subject to a recourse 

guarantee against a U.S. affiliate of the 

non-U.S. person. Although the proposal 

instead would have treated such 

guaranteed affiliates like any other nonU.S. persons, we believe that this 

provision is appropriate for the reasons 

discussed above, including that such 

recourse guarantees pose risks to U.S. 

persons and potentially to the U.S. 

financial system via the U.S. guarantor. 

This aspect of the final rules reflects 

a middle ground between commenter 

views, given that some commenters 

opposed any consideration of 

guarantees as part of the dealer analysis, 

while others expressed the view that all 

affiliates of a U.S. person should be 

assumed to be the beneficiary of a de 

facto guarantee from the U.S. person 

and, absent a showing otherwise, should 

have to count all of their dealing activity 

against the thresholds.478 This diversity 

of commenter views suggests a range of 

potential alternatives to the final rules— 

including one alternative in which the 

final rules do not address guarantees at 

all, as well as alternatives in which 

(based on the concept of a de facto 

guarantee) all affiliates of a U.S. person, 

or at least all affiliates within a U.S.- 

based holding company structure, 

should have to count their dealing 

activity against the thresholds (with a 

potential exception if they demonstrate 

to the market that there will be no 

guarantee). For the reasons discussed 

above, we believe that the approach 

taken by the final rules is 

appropriate.479

Following such alternative 

approaches could be expected to lead to 

disparate economic effects depending 

on which approach is followed. On the 

one hand, an approach that does not 

require counting against the thresholds 

of a non-U.S. person’s transactions with 

non-U.S. counterparties that are 

guaranteed by their U.S. affiliates would 

help provide incentives for greater use 

of guarantees by U.S. persons, with an 

increase of the associated risk flowing to 

the United States.480 On the other hand, 

an approach that requires the 

conditional or unconditional counting 

of transactions by all affiliates of U.S. 

persons could provide incentives for 

certain non-U.S. holding companies to 

limit or eliminate relationships with 

U.S.-based affiliates, even if these 

affiliates perform functions unrelated to 

security-based swap activity. 

Additionally, a more limited approach 

that requires counting by non-U.S. 

subsidiaries of U.S. holding companies 

could reduce liquidity in the securitybased swap market even if such a 

subsidiary’s participation does not 

depend on the financial position or 

backing of its parent. 

Data assessment of the first alternative 

does not indicate a change to our 

estimate that up to 50 entities may be 

expected to register with the 

Commission as security-based swap 

dealers.481 The available data does not 

permit us to assess the other 

approaches, whereby all affiliates 

within a U.S.-based holding company, 

or all affiliates of any U.S. person 

generally, should have to count their 

dealing activity against the 

thresholds.482

(c) Dealing by Conduit Affiliates 

The final rules require that conduit 

affiliates of U.S. persons count all of 

their dealing transactions against the de 

minimis thresholds. The available data 

does not permit us to identify which 

market participants currently engage in 

security-based swap dealing activity on 

behalf of U.S. affiliates, and hence 

would be deemed to be conduit 

affiliates. Accordingly, we are limited in 

our ability to quantify the economic 

impact of this anti-evasion provision. 

The economic effects of not including 

these provisions—and instead treating 

conduit affiliates the same as other nonU.S. persons—has the potential to be 

significant, as it would remove a tool 

that should help to deter market 

participants from seeking to evade 

dealer regulation through arrangements 

whereby U.S. persons effectively engage 

in dealing activity with non-U.S. 

persons via back-to-back transactions 

involving non-U.S. affiliates.483

Following that alternative thus may 

partially impair the effective 


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484See note 370, supra, and accompanying text. 

485See notes 359 through 361, supra, and 

accompanying text. 

486 In practice, based on our understanding of 

changes in the way major U.S. dealers engage with 

non-U.S. counterparties in the single-name CDS 

market following the issuance of the CFTC CrossBorder Guidance, we believe that few, if any, U.S. 

persons currently may participate in the singlename CDS market through their foreign branches. 

Also, as noted above, we recognize that other 

regulatory provisions may limit the ability of U.S. 

banks to conduct security-based swap activities. See 

note 366, supra. 

487Screening the 27 market participants that have 

three or more counterparties that are not recognized 

as dealers by ISDA, and that have $3 billion or more 

in notional single-name CDS transactions over a 12 

month period, with the two revised de minimis 

tests addressed above produces 26 entities that 

would have more than $3 billion in notional 

transactions over 12 months counted against the 

threshold—a number identical to the number 

associated with the test we are adopting. 

488For the reasons discussed above, we do not 

believe that it is necessary to require non-U.S. 

persons to count their dealing transactions with 

such non-U.S. counterparties. See section IV.E.2, 

supra. 

Also, as discussed above, we anticipate soliciting 

additional public comment regarding counting of 

dealing transactions between two non-U.S. persons 

towards the de minimis exception when activities 

related to the transaction occur in the United States. 

See section I.A, supra. 

functioning of the Title VII dealer 

requirements, and lead risk and 

liquidity to concentrate outside of the 

U.S. market. 

Another potential alternative 

approach to addressing such evasive 

activity could be to narrow the interaffiliate exception to having to count 

dealing transactions against the de 

minimis thresholds, such as by making 

the exception unavailable when nonU.S. persons transact with their U.S. 

affiliates. Such an alternative approach 

may be expected to reduce the ability of 

corporate groups to use central marketfacing entities to facilitate the group’s 

security-based swap activities, and as 

such may increase the costs faced by 

such entities (e.g., by requiring 

additional entities to directly face the 

market and hence negotiate master 

agreements with dealers and other 

counterparties). We believe that the 

more targeted approach of incorporating 

the conduit affiliate concept would 

achieve comparable anti-evasion 

purposes with less cost and disruption. 

(d) Dealing Activity by Non-U.S. 

Counterparties With Foreign Branches 

of U.S. Banks and Certain Other 

Counterparties 

The final rules require non-U.S. 

persons to count, against the thresholds, 

their dealing transactions involving 

counterparties that are foreign branches 

of U.S. banks unless the U.S. bank is 

registered as a security-based swap 

dealer and unless no U.S.-based 

personnel of the counterparty are 

involved in arranging, negotiating and 

executing the transaction. This reflects a 

change from the proposal, which would 

have excluded all such transactions 

with a foreign branch regardless of 

whether the U.S. bank was registered as 

a dealer. The change appropriately takes 

into consideration the benefits of having 

relevant Title VII provisions applicable 

to dealers apply to the transaction 

against the liquidity and disparate 

treatment rationales underlying the 

exclusion.484

This aspect of the final rules reflects 

a middle ground between commenter 

views regarding transactions with 

foreign branches, given that some 

commenters expressed the view that all 

transactions with foreign branches 

should be counted against a non-U.S. 

person’s de minimis threshold, while 

another commenter took the view that 

no such transaction should be 

counted.485 This suggests at least two 

possible alternatives to the final rule— 

one in which all transactions with 

foreign branches are excluded from 

being counted against the thresholds, 

and one in which all transactions with 

foreign branches are counted against the 

thresholds (just like other transactions 

with U.S. person counterparties). 

The effect of adopting the first 

alternative—whereby all transactions 

with foreign branches are excluded from 

being counted—could provide U.S. 

market participants that are not 

registered as dealers with incentives to 

execute higher volumes of securitybased swaps through their foreign 

branches, resulting in higher amounts of 

risk being transmitted to the United 

States without the risk-mitigating 

attributes of having a registered dealer 

involved in the transaction.486 Adopting 

the second alternative—whereby all of a 

non-U.S. person’s transactions with 

foreign branches are counted regardless 

of the registration status of the U.S. 

counterparty—would raise the potential 

for disparate impacts upon U.S. persons 

trading with foreign branches, along 

with associated concerns about liquidity 

impacts. 

The available data allows for 

estimates related to both potential 

alternatives subject to the limitations 

discussed above, and neither alternative 

would be expected to indicate a change 

to our assessment that up to 50 entities 

may be expected to register with the 

Commission as security-based swap 

dealers.487

The final rules also incorporate 

definitions of ‘‘foreign branch’’ and 

‘‘transaction conducted through a 

foreign branch’’ that potentially could 

be modified to reflect alternative 

approaches. While we do not believe 

that the economic impact of following 

such alternatives is readily quantifiable 

given the available data, we generally 

believe that any such effects would be 

limited, particularly in light of our 

understanding that few, if any, U.S. 

persons currently may participate in the 

single-name CDS market through their 

foreign branches. 

Separately, the final rules do not 

require non-U.S. persons to count their 

dealing transactions with non-U.S. 

counterparties. Potential alternatives to 

that approach could be to require nonU.S. persons to count their dealing 

transactions with counterparties that are 

guaranteed affiliates of U.S. persons (at 

least with regard to transactions subject 

to the guarantees), or their dealing 

transactions with counterparties that are 

conduit affiliates.488 The alternative 

approach of requiring non-U.S. persons 

to count dealing transactions with either 

or both of those types of non-U.S. 

counterparties potentially would 

increase the programmatic benefits 

associated with Title VII dealer 

regulation, by applying the risk 

mitigating aspects of dealer regulation 

(such as capital and margin 

requirements) to the dealer 

counterparties of persons whose 

security-based swap activities directly 

affect the United States, while 

recognizing that such risk mitigating 

benefits would be more attenuated than 

those that are associated with the final 

rules’ approach of directly counting 

dealing transactions of such guaranteed 

and conduit affiliates. On the other 

hand, requiring non-U.S. persons to 

count such transactions would be 

expected to increase assessment costs by 

requiring such persons to evaluate and 

track whether their non-U.S. 

counterparties are guaranteed or conduit 

affiliates. Also, to the extent such an 

alternative approach causes non-U.S. 

dealers to avoid entering into 

transactions with affiliates of U.S. 

persons to avoid the need to conduct 

such assessments, the approach could 

reduce the liquidity available to 

corporate groups with U.S. affiliates, 

and further could provide an incentive 

for such corporate groups to move their 

security-based swap activity entirely 

outside the United States (which could 

impair the transparency goals of Title 

VII). 

As we discussed in the Cross-Border 

Proposing Release, another potential 

approach related to the treatment of 

non-U.S. persons’ dealing activities 

would be to not require the registration 

of non-U.S. persons that engage in 


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489See Cross-Border Proposing Release, 78 FR 

31146. 

490The issues regarding the treatment of foreign 

branches of U.S. banks—as potential dealers or as 

counterparties to non-U.S. persons that engage in 

dealing activity—that are addressed above also 

implicate the status of those foreign branches as 

‘‘U.S. persons.’’ 

491See section IV.C.3(b)(ii), supra. 

492See section IV.C.3(b)(iii), supra. The CFTC 

Cross-Border Guidance follows such an approach. 

493See note 285 through 287, supra, and 

accompanying text. Here too, the CFTC CrossBorder Guidance follows such an approach. 

dealing activity with U.S. person 

counterparties through an affiliated U.S. 

person intermediary. 489 In our view, 

such an approach would reduce the 

programmatic benefits associated with 

dealer regulation under Title VII, and 

would raise particular concerns related 

to financial responsibility and 

counterparty risk, as well as create risk 

to U.S. persons and potentially to the 

U.S. financial system. 

(e) ‘‘U.S. Person’’ Definition 

The ‘‘U.S. person’’ definition used by 

the final rules seeks to identify those 

persons for whom it is reasonable to 

infer that a significant portion of their 

financial and legal relationships are 

likely to exist within the United States 

and for whom it is therefore reasonable 

to conclude that risks arising from their 

security-based swap activities could 

manifest themselves within the United 

States, regardless of location of their 

counterparties. Because the definition 

incorporates decisions regarding a range 

of issues, the definition potentially is 

associated with a number of alternative 

approaches that could influence the 

final rules’ economic impact.490

A particularly significant element of 

this definition addresses the treatment 

of investment vehicles. Under the final 

rule, a fund is a ‘‘U.S. person’’ if the 

vehicle is organized, incorporated or 

established within the United States, or 

if its principal place of business is in the 

United States, which we are interpreting 

to mean that the primary locus of the 

investment vehicle’s day-to-day 

operations is within the United States. 

One potential alternative approach to 

this element would be to make use of a 

narrower definition that does not use a 

principal place of business test for 

investment vehicles, and hence does not 

encompass vehicles that are not 

established, incorporated, or organized 

within the United States, even if the 

primary locus of their day-to-day 

operations is located here. Another 

potential approach would be to focus 

the meaning of ‘‘principal place of 

business’’ on the location where the 

operational management activities of the 

fund are carried out, without regard to 

the location of the fund’s managers. 

Similarly, another potential 

alternative approach to the ‘‘U.S. 

person’’ definition would be for the 

definition not to incorporate a principal 

place of business test for operating 

companies. Under such an alternative 

approach, an operating company would 

not fall within the ‘‘U.S. person’’ 

definition if it is not organized, 

incorporated or established within the 

United States, even if the officers or 

directors who direct, control and 

coordinate the operating company’s 

overall business activities are located in 

the United States. 

Following an alternative approach 

whereby the ‘‘U.S. person’’ definition 

did not encompass a ‘‘principal place of 

business’’ test, or whereby the definition 

followed a narrower such test with 

regard to particular types of market 

participants, may be expected to reduce 

the programmatic costs and benefits 

associated with dealer regulation, in 

that it may lead certain non-U.S. 

persons not to have to register as dealers 

notwithstanding dealing activities with 

such counterparties above the de 

minimis thresholds. Such an alternative 

approach also may promote market 

participants’ use of such counterparties 

that are closely linked to the United 

States but that are not organized, 

incorporated or established within the 

United States, or that do not have 

operational management activities 

within the United States, in lieu of 

entering into security-based swaps with 

U.S. persons. While such an approach 

may be expected to reduce 

programmatic costs, it also would 

reduce the programmatic risk mitigation 

and other benefits of dealer regulation 

under Title VII given that the ‘‘principal 

place of business’’ test helps to identify 

persons for which the risks associated 

with their security-based swap activities 

can manifest themselves within the 

United States.491 Such an alternative 

approach may also be expected to 

reduce assessment costs incurred by 

non-U.S. persons, although such 

assessment costs in any event would be 

reduced by the ability of non-U.S. 

persons to rely on a counterparty’s 

representation that the counterparty is 

not a U.S. person. 

Aside from those issues related to the 

use of a ‘‘principal place of business’’ 

test, other aspects of the ‘‘U.S. person’’ 

definition also may affect the 

programmatic costs and benefits and 

assessment costs associated with dealer 

regulation. For example, the final rules 

do not encompass funds that are 

majority-owned by U.S. persons, 

although two commenters supported 

such an approach.492 Also, the final 

‘‘U.S. person’’ definition does not 

exclude investment vehicles that are 

offered publicly only to non-U.S. 

persons and are not offered to U.S. 

persons, although some commenters 

also supported this type of exclusion.493

For the reasons detailed above, we 

believe that including majority-owned 

funds within the definition of ‘‘U.S. 

person’’ would be likely to increase 

programmatic costs (by causing more 

investment funds to be subject to Title 

VII requirements) as well as assessment 

costs, while not significantly increasing 

programmatic benefits given our view 

that the composition of a fund’s 

beneficial owners is not likely to have 

significant bearing on the degree of risk 

that the fund’s security-based swap 

activity poses to the U.S. financial 

system. Moreover, for the reasons 

discussed above, we also believe that an 

exclusion for publicly offered funds that 

are offered only to non-U.S. persons and 

not offered to U.S. persons, while likely 

to reduce programmatic costs, would 

also reduce programmatic benefits, by 

excluding certain funds from the 

definition of U.S. person based on 

factors that we do not believe are 

directly relevant to the degree of risk a 

fund’s security-based swap activities are 

likely to pose to U.S. persons and 

potentially to the U.S. financial system. 

Apart from those potential 

alternatives regarding the treatment of 

majority-owned funds and of 

investment vehicles offered only to nonU.S. persons, an additional alternative 

approach would be for the Commission 

simply to adopt the CFTC’s 

interpretation of ‘‘U.S. person.’’ We do 

not believe that following that 

alternative approach would be expected 

to have a significant effect on 

programmatic costs and benefits, given 

the substantive similarities between the 

CFTC’s interpretation and our final rule. 

Adopting such an alternative approach, 

however, could have an impact on 

assessment costs. We particularly are 

mindful that some commenters 

requested that we adopt a consistent 

definition notwithstanding their views 

regarding specific features of the 

definition, in part because they believed 

that differences between our definition 

of ‘‘U.S. person’’ and the CFTC’s 

interpretation of that term would 

significantly increase costs associated 

with determining whether they or their 

counterparties are U.S. persons for 

purposes of Title VII. We recognize that 

differences between the two definitions 

could lead certain market participants to 

incur additional costs that they would 


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494See section IV.C, supra. 

495See section IV.C.3, supra. 

496Separately, as discussed above, we do not 

concur with the view of some commenters that a 

person’s dealing activities involving such 

international organizations as counterparty should 

be excluded from having to be counted under the 

final rules. See section IV.3(e), supra. An alternative 

approach that followed those views would reduce 

the programmatic benefits of dealer regulation 

under Title VII, such as by permitting dealers that 

are U.S. persons to escape dealer regulation, 

notwithstanding the risk such U.S. dealers pose to 

the U.S. market, simply by focusing their dealing 

activities toward transactions with such 

international organizations. 

497Screening the 27 market participants that have 

three or more counterparties that are not recognized 

as dealers by ISDA, and that have $3 billion or more 

in notional single-name CDS transactions over a 12 

month period, with a revised de minimis test that 

does not count non-U.S. persons’ dealing 

transactions involving offshore funds managed by 

U.S. persons produces 26 entities that would have 

more than $3 billion in notional transactions over 

12 months counted against the threshold—a 

number identical to the number associated with the 

test we are adopting. 

498We note generally, however, that similarities 

between the definition of ‘‘U.S. person’’ in the final 

rules and the CFTC’s interpretation of that term 

would help mitigate the assessment costs associated 

with the ‘‘U.S. person’’ determination. We do not 

believe that there are any significant differences, 

whereby a person that is a ‘‘U.S. person’’ for 

purposes of our final rules would generally not be 

a ‘‘U.S. person’’ for purposes of the CFTC CrossBorder Guidance, that may tend to increase 

assessment costs. 

499By removing the proposed ‘‘operational 

independence’’ condition, the final rule provides 

that a person need not count the transactions of its 

registered dealer affiliate regardless of whether the 

person and the registered dealer affiliate are 

operationally independent. 

The final rule also has been revised from the 

proposal to make the exclusion for registered dealer 

affiliates also available when an affiliate is in the 

process of registering as a dealer. 

500See note 396, supra. 

501See note 391 through 395, supra. 

502Screening the 27 market participants that have 

three or more counterparties that are not recognized 

as dealers by ISDA, and that have $3 billion or more 

in notional single-name CDS transactions over a 12- 

month period, with a revised de minimis test that 

limits aggregation to U.S. affiliates within a 

corporate group produces 26 entities that would 

have more than $3 billion in notional transactions 

over 12 months counted against the threshold—a 

number identical to the number associated with the 

test we are adopting. 

not incur in the presence of identical 

definitions. At the same time, we are 

adopting definitions of ‘‘U.S. person’’ 

and ‘‘principal place of business’’ that 

should be relatively simple and 

straightforward to implement, which 

should mitigate commenters’ concerns 

about the costs associated with different 

approaches to these terms. More 

generally, for the reasons discussed 

above we believe that the definitions we 

are adopting are the appropriate 

definitions for the cross-border 

implementation of Title VII in the 

security-based swap context.494

In addition, as discussed above, the 

final ‘‘U.S. person’’ definition does not 

follow an approach similar to the one 

used in Regulation S.495 Because such 

an alternative approach would treat 

certain foreign branches of U.S. persons 

as non-U.S. persons, notwithstanding 

the entity-wide nature of the associated 

risks, following such an approach 

would be expected to reduce 

programmatic benefits by causing Title 

VII dealer regulation not to apply to 

certain dealing activities that occur in 

the United States and pose direct risks 

to U.S. persons. Although such an 

alternative approach potentially could 

impact assessment costs, given that 

certain market participants may already 

be familiar with the parameters of such 

a Regulation S approach, in our view 

the ‘‘U.S. person’’ definition we are 

adopting is more appropriate and 

simpler than an approach based on 

Regulation S. 

Another potential alternative 

approach for addressing the ‘‘U.S. 

person’’ definition would be for the 

definition not to include the exclusion 

we are adopting with regard to specified 

international organizations. The 

alternative approach of not explicitly 

excluding such organizations from the 

definition could be expected to increase 

assessment costs—as counterparties to 

such organizations would have to 

consider those organizations’ potential 

status as U.S. persons, which would 

implicate analysis of the privileges and 

immunities granted such persons under 

U.S. law—without likely countervailing 

programmatic benefits.496

The available data suggests that an 

alternative in which offshore funds 

managed by U.S. persons are excluded 

from de minimis calculations by nonU.S. persons would not be expected to 

indicate a change to our assessment that 

up to 50 entities may be expected to 

register with the Commission as 

security-based swap dealers.497 We do 

not believe that other alternative 

approaches to the ‘‘U.S. person’’ 

definition are readily susceptible to 

quantitative analysis that would 

illustrate their potential programmatic 

and assessment effects.498

(f) Aggregation Requirement 

The final rules apply the de minimis 

exception’s aggregation requirement to 

cross-border activities in a way that 

reflects the same principles that govern 

when non-U.S. persons must directly 

count their dealing activity against the 

thresholds. The final rules thus have 

been revised from the proposal to 

incorporate other aspects of the way that 

the final rules require counting of 

particular transactions against the 

thresholds. The final rules further have 

been modified from the proposal to 

remove the proposed ‘‘operational 

independence’’ condition to the 

exclusion that permits a person not to 

count transactions of its affiliates that 

are registered as security-based swap 

dealers.499 These rules—like the 

incorporation of the aggregation 

requirement as part of the Intermediary 

Definitions Adopting Release—are 

intended to avoid evasion of the Title 

VII dealer requirements. 

The final rules regarding the 

aggregation provision represent a 

middle ground between commenter 

views. One commenter specifically 

supported the proposal’s ‘‘operational 

independence’’ condition that would 

limit when a person could exclude the 

dealing transactions of affiliates that are 

registered as dealers.500 On the other 

hand, other commenters opposed any 

application of the aggregation 

provisions in the cross-border context 

(as well as more generally).501 This 

suggests at least two alternatives—one 

in which the ‘‘operational 

independence’’ condition is retained, 

and one in which the aggregation 

requirement is further limited to only 

require U.S. persons to count dealing 

activities of affiliated U.S. persons. 

The economic impact of retaining the 

proposed operational independence 

condition potentially would reduce 

efficiencies and deter beneficial groupwide risk management practices. 

Conversely, the impact of the alternative 

approach of further limiting the 

aggregation requirement, such that it 

addresses only affiliated U.S. persons, 

would facilitate market participants’ 

evasion of the dealer regulation 

requirement by dividing their dealing 

activity among multiple non-U.S. 

entities. 

The economic impact of the 

alternative approach of retaining the 

‘‘operational independence’’ condition 

is not readily susceptible to 

quantification, given the lack of data 

regarding the extent to which affiliates 

that engage in security-based swap 

activities jointly make use of back office, 

risk management, sales or trades, or 

other functions. Analysis of data related 

to the alternate approach under which 

the requirement would be further 

limited to aggregating transactions of 

affiliated U.S. persons would not be 

expected to indicate a change to our 

assessment that up to 50 entities may be 

expected to register with the 

Commission as security-based swap 

dealers, subject to the limitations 

discussed above.502


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503Based on our understanding of the market, 

transactions in security-based swaps in general 

currently would not be eligible for the exception 

because transactions currently are not anonymous. 

504As discussed in the Intermediary Definitions 

Adopting Release, the major security-based swap 

participant definition employs tests incorporating 

terms—particularly ‘‘systemically important,’’ 

‘‘significantly impact the financial system’’ or 

‘‘create substantial counterparty exposure’’—that 

denote a focus on entities that pose a high degree 

of risk through their security-based swap activities. 

See Intermediary Definitions Adopting Release, 77 

FR 30661 n.761. That discussion also noted that the 

link between the major participant definitions and 

risk was highlighted during the congressional 

debate on the statute. See id. (citing 156 Cong. Rec. 

S5907 (daily ed. July 15, 2010) (citing colloquy 

between Senators Hagen and Lincoln, discussing 

how the goal of the major participant definitions 

was to ‘‘focus on risk factors that contributed to the 

recent financial crisis, such as excessive leverage, 

under-collateralization of swap positions, and a 

lack of information about the aggregate size of 

positions.’’)). 

505See section II.B.2(c), supra. 

506See section 3(a)(67) of the Exchange Act. The 

statute defines a ‘‘major security-based swap 

participant’’ as a person that satisfies any one of 

three alternative statutory tests: a person that 

maintains a ‘‘substantial position’’ in swaps or 

security-based swaps for any of the major swap 

categories as determined by the Commission; a 

person whose outstanding security-based swaps 

create substantial counterparty exposure that could 

have serious adverse effects on the financial 

stability of the U.S. banking system or financial 

markets; or a person that is a ‘‘financial entity’’ that 

is ‘‘highly leveraged’’ relative to the amount of 

capital it holds (and that is not subject to capital 

requirements established by an appropriate Federal 

banking agency) and maintains a ‘‘substantial 

position’’ in outstanding security-based swaps in 

any major category as determined by the 

Commission. 

507See Exchange Act section 3(a)(67)(B). 

508See Intermediary Definitions Adopting 

Release, 77 FR 30663–84. 

509See id. at 30661, 30666. 

510See id. at 30666 (noting the use of such tests 

in context of ‘‘substantial position’’ definition); id. 

at 30682 (noting use of such tests in context of 

‘‘substantial counterparty exposure’’ definition). We 

also noted that our definition of ‘‘substantial 

position’’ was intended to address default-related 

credit risks, the risk that would be posed by the 

default of multiple entities close in time, and the 

aggregate risks presented by a person’s securitybased swap activity, as these considerations reflect 

the market risk concerns expressly identified in the 

statute. We interpreted ‘‘substantial counterparty 

exposure’’ in a similar manner, noting the focus of 

the statutory test on ‘‘serious adverse effects on 

financial stability or financial markets.’’ Id. at 

30683. Cf. section 3(a)(67)(A)(ii)(II) of the Exchange 

Act (encompassing as major security-based swap 

participants persons ‘‘whose outstanding securitybased swaps create substantial counterparty 

exposure that could have serious adverse effects on 

the financial stability of the United States banking 

system or financial markets’’). 

511See proposed Exchange Act rule 3a67–10(c); 

Cross-Border Proposing Release, 78 FR 31030. 

512See Cross-Border Proposing Release, 78 FR 

31031 and n.625. Cf. Intermediary Definitions 

Adopting Release, 77 FR 30689 (describing same 

attribution treatment in context of domestic 

security-based swap activities). 

513See Cross-Border Proposing Release, 78 FR 

31032. 

(g) Exception for Cleared Anonymous 

Transactions 

The final rules include an exception 

whereby non-U.S. persons need not 

count, against the thresholds, 

transactions that are entered into 

anonymously and are cleared. This 

exception reflects limits on the potential 

availability of relevant information to 

non-U.S. persons, as well as potential 

impacts on liquidity that may result 

absent such an exception. 

The likely impact of the alternative 

approach of not including such an 

exception could be to deter the 

development of anonymous trading 

platforms, or to reduce U.S. persons’ 

ability to participate in such platforms. 

In this regard the alternative can be 

expected to help reduce the 

programmatic benefits of Title VII. The 

impact of the alternative approach of 

not including this type of exception is 

not readily susceptible to 

quantification.503

V. Cross-Border Application of Major 

Security-Based Swap Participant 

Thresholds 

A. Overview 

The statutory definition of ‘‘major 

security-based swap participant’’ 

encompasses persons that are not 

dealers but that nonetheless could pose 

a high degree of risk to the U.S. 

financial system.504 The statutory focus 

of the ‘‘major security-based swap 

participant’’ definition differs from that 

of the ‘‘security-based swap dealer’’ 

definition, in that the latter focuses on 

activity that may raise the concerns that 

dealer regulation is intended to address, 

while the former focuses on positions 

that may raise systemic risk concerns 

within the United States.505 The 

definition focuses on systemic risk 

issues by targeting persons that 

maintain ‘‘substantial positions’’ that 

are ‘‘systemically important,’’ or whose 

positions create ‘‘substantial 

counterparty exposure that could have 

serious adverse effects on the financial 

stability of the United States banking 

system or financial markets.’’ 506 The 

statute further directed us to define the 

term ‘‘substantial position’’ at the 

‘‘threshold that the Commission 

determines to be prudent for the 

effective monitoring, management, and 

oversight of entities that are 

systemically important or can 

significantly impact the financial system 

of the United States.’’ 507

In the Intermediary Definitions 

Adopting Release, we, together with the 

CFTC, adopted rules defining what 

constitutes a ‘‘substantial position’’ and 

‘‘substantial counterparty exposure.’’ 508

In doing so, we concentrated on 

identifying persons whose large 

security-based swap positions pose 

market risks that are significant enough 

that it is prudent to regulate and 

monitor those persons.509 The definition 

incorporates a current exposure test and 

a potential future exposure test designed 

to identify such persons.510

We addressed the application of the 

major participant definition to crossborder security-based swaps in the 

Cross-Border Proposing Release, 

proposing that a U.S. person consider 

all security-based swap positions 

entered into by it, and also proposing 

that a non-U.S. person consider only its 

positions with U.S. persons but not its 

positions with other non-U.S. 

counterparties, even if the positions are 

entered into within the United States or 

the non-U.S. counterparties are 

guaranteed by a U.S. person.511

In the proposal, we also explained our 

preliminary view on the application in 

the cross-border context of the general 

principles regarding attribution, which 

were set forth in guidance in the 

Intermediary Definitions Adopting 

Release. Specifically, we stated that a 

person’s security-based swap positions 

must be attributed to a parent, affiliate, 

or guarantor for purposes of the major 

security-based swap participant analysis 

to the extent that the counterparties to 

those positions have recourse to that 

parent, affiliate, or guarantor in 

connection with the position.512 This 

treatment was intended to reflect the 

risk focus of the major security-based 

swap participant definition by 

providing that entities will be regulated 

as major security-based swap 

participants when the guarantees they 

provide pose a sufficiently high level of 

risk to the U.S. financial system.513

Commenters raised several issues 

related to the proposed approach for 

applying the major security-based swap 

participant definition to cross-border 

security-based swaps. As discussed 

below, these include issues regarding: 

the treatment of a non-U.S. person’s 

positions with foreign branches of U.S. 

banks, the treatment of guarantees, and 

the treatment of entities with legacy 

positions. Commenters also requested 

that the Commission generally 

harmonize its rules and guidance with 

the CFTC’s Cross-Border Guidance. 

After considering commenters’ views, 

we are adopting final rules that have 

been modified from the proposal in 

certain important respects. As addressed 

in further detail below, key changes to 

the proposal include: 

• A requirement that a conduit 

affiliate, as defined above, must include 

in its major security-based swap 


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47340 Federal Register / Vol. 79, No. 155 / Tuesday, August 12, 2014 / Rules and Regulations 

514 In addition to the changes listed above, the 

final rules do not include certain provisions that 

were included in proposed Exchange Act rule 

3a67–10 because those provisions, which defined 

‘‘foreign major security-based swap participant,’’ 

and addressed the application of business conduct 

requirements to registered foreign major securitybased swap participants, were relevant to proposed 

rules regarding substantive requirements that were 

included in the Cross-Border Proposing Release. As 

this release only addresses various definitional 

rules and not those substantive requirements that 

were proposed, those provisions are not relevant to 

this release and are not addressed. Those provisions 

may, however, be relevant to matters addressed in 

subsequent rulemakings. 

The final rules applying the major security-based 

swap participant definition also incorporate a 

conforming change by referring to such person’s 

‘‘positions’’ rather than ‘‘transactions.’’ This is 

consistent with the use of the term ‘‘positions’’ in 

the statutory definition of major security-based 

swap participant and the rules further defining that 

term. 

515See Intermediary Definitions Adopting 

Release, 77 FR 30624 (discussing our guidance 

regarding the meaning of the term ‘‘person’’ as used 

in security-based swap dealer definition). Cf. 

section IV.A, supra. 

516See section IV.A. Cf. Intermediary Definitions 

Adopting Release, 77 FR 30624. 

517Cf. Intermediary Definitions Adopting Release, 

77 FR 30624; see also Cross-Border Proposing 

Release, 78 FR 30993. 

518See Exchange Act rule 3a67–3(e); Intermediary 

Definitions Adopting Release, 77 FR 30687. 

519See proposed Exchange Act rule 3a–67– 

10(c)(1). 

520See section IV.C.2(a) and notes 192–194 (citing 

comment letters regarding ‘‘U.S. person’’ definition 

generally), supra. 

521See Exchange Act rule 3a67–10(b)(1). 

522See Exchange Act rule 3a67–10(a)(4) (defining 

‘‘U.S. person’’ by referring to rule 3a71–3(a)(4)). 

523See section II.B.2(c); Cf. Exchange Act section 

3(a)(67)(B). 

524Cross-Border Proposing Release, 78 FR 31006. 

See id. at 31006 n.356 (acknowledging that such 

treatment differed from the CFTC’s proposal and 

citing CFTC’s proposed cross-border guidance). 

525 Id. at 31036. 

526See section IV.D.1, supra. 

527See id. 

528See section IV.D.1, supra, notes 309 and 311 

(citing SIFMA/FIA/FSR Letter and CDEU Letter). 

529See section IV.D.1, note 310, supra (citing BM 

Letter). 

530Exchange Act rule 3a67–10(b)(2). 

participant threshold calculations all of 

its security-based swap positions; 

• A requirement that a non-U.S. 

person other than a conduit affiliate 

must include in its major security-based 

swap participant threshold calculations 

all of its security-based swap positions 

for which its counterparty has rights of 

recourse against a U.S. person; and 

• A modification to the proposed 

requirement that a non-U.S. person 

must include in its major security-based 

swap participant threshold calculations 

security-based swap positions with 

foreign branches of U.S. banks.514

Our approach to the application of the 

major security-based swap participant 

definition in the cross-border context 

incorporates certain principles that also 

apply in the context of the dealer 

definition and that are set forth in the 

Intermediary Definitions Adopting 

Release.515 First, as in the Intermediary 

Definitions Adopting Release, we 

interpret the term ‘‘person’’ to refer to a 

particular legal person, meaning that we 

view a trading desk, department, office, 

branch, or other discrete business unit 

that is not a separately organized legal 

person as a part of the legal person that 

enters into security-based swap 

positions.516 Thus, a legal person with 

a branch, agency, or office that exceeds 

the major security-based swap 

participant thresholds is required to 

register as a major security-based swap 

participant as a legal person, even if the 

legal person’s positions are limited to 

such branch, agency, or office.517 In 

addition, consistent with rules adopted 

in the Intermediary Definitions 

Adopting Release, cross-border securitybased swap positions between majorityowned affiliates will not be considered 

for purposes of determining whether the 

person as a whole is a major securitybased swap participant.518

B. Application of the Major SecurityBased Swap Participant Definition to 

U.S. Persons 

1. Proposed Approach and Commenters’ 

Views 

Under the proposal, a U.S. person 

would have considered all of its 

security-based swap positions for 

purposes of the major participant 

analysis.519 Commenters did not 

comment on this aspect of the proposed 

approach, although, as discussed above, 

several commenters addressed the 

proposed scope of the ‘‘U.S. person’’ 

definition.520

2. Final Rule 

Consistent with the proposal, the final 

rules require a U.S. person to consider 

all of its security-based swap positions 

in its major security-based swap 

participant threshold calculations.521

The final rule incorporates the 

definition of ‘‘U.S. person’’ used in the 

context of a security-based swap 

dealer’s de minimis calculation.522

As discussed above, in our view, the 

security-based swap positions of a U.S. 

person exist in the United States and 

raise, at the thresholds set forth in our 

further definition of major securitybased swap participant, risks to the 

stability of the U.S. financial system or 

of U.S. entities, including those that 

may be systemically important.523 As 

noted above, it is the U.S. person as a 

whole and not merely a foreign branch 

or office that bears the risk of the 

security-based swap. Accordingly, it is 

consistent with our territorial approach 

to require a U.S. person to include all 

of its security-based swap positions in 

its major security-based swap 

participant threshold calculations. 

C. Application of the Major SecurityBased Swap Participant Definition to 

Conduit Affiliates 

1. Proposed Approach and Commenters’ 

Views 

The proposal would have treated nonU.S. persons acting as ‘‘conduits’’ for 

their U.S. affiliates the same as any 

other non-U.S. person for purposes of 

the major participant analysis, and, as 

such would have required those persons 

to include in their major participant 

threshold calculations only positions 

with U.S. persons.524

The proposal solicited comment 

regarding whether a non-U.S. person’s 

major participant analysis should 

incorporate security-based swaps other 

than those entered into with U.S. 

persons.525 Also, as discussed above, 

the proposal requested comment on the 

use of the conduit affiliate concept and 

the treatment of entities that operate a 

‘‘central booking system’’.526

As discussed above, two commenters 

opposed applying the ‘‘conduit affiliate’’ 

definition to entities that serve as 

‘‘central booking systems’’ for a 

corporate group, noting that the ‘‘central 

booking systems’’ are used to manage 

internal risk.527 The commenters argued 

that applying the conduit affiliate 

definition in this manner would tie 

regulatory requirements to firms’ 

internal risk management practices, and 

would hamper the firms’ ability to 

manage risk across a multinational 

enterprise.528 Another commenter 

suggested that conduit affiliates are the 

recipients of a de facto guarantee from 

their U.S. affiliates and thus should be 

treated as U.S. persons.529

2. Final Rule 

The final rule modifies the proposal 

to require conduit affiliates to include 

all of their security-based swap 

positions in their major participant 

threshold calculations.530 Consistent 

with the dealer de minimis rules, a 

‘‘conduit affiliate’’ is a non-U.S. affiliate 

of a U.S. person that enters into 

security-based swaps with non-U.S. 

persons, or with foreign branches of 

U.S. banks that are registered securitybased swap dealers, on behalf of one or 

more of its U.S. affiliates (other than 


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531As noted in the discussion of conduit affiliate 

in the context of the application of dealer de 

minimis exception, the ‘‘conduit affiliate’’ 

definition does not encompass persons that engage 

in such offsetting transactions solely with U.S. 

persons that are registered with the Commission as 

security-based swap dealers or major security-based 

swap participants because we believe the registered 

status of the U.S. person mitigates evasion 

concerns. See note 313, supra. 

532See section IV.D.2, supra; Exchange Act 

section 3a67–10(a)(1) (incorporating the ‘‘conduit 

affiliate’’ definition used in the dealer de minimis 

rule). 

533See Exchange Act section 30(c); section 

II.B.2(d), supra. In noting that this requirement is 

consistent with our anti-evasion authority under 

section 30(c), we are not taking a position as to 

whether such activity by a conduit affiliate 

otherwise constitutes a ‘‘business in security-based 

swaps without the jurisdiction of the United 

States.’’ See note 315, supra. 

We recognize that not all structures involving 

conduit affiliates may be evasive in purpose. We 

believe, however, that the anti-evasion authority of 

Exchange Act section 30(c) permits us to prescribe 

prophylactic rules to conduct without the 

jurisdiction of the United States, even if those rules 

would also apply to a market participant that has 

been transacting business through a pre-existing 

market structure established for valid business 

purposes, so long as the rule is designed to prevent 

possible evasive conduct. See Cross-Border 

Proposing Release, 78 FR 30987; see also section 

II.B.2(d) and note 316, supra (discussion of antievasion authority). 

534Consistent with the approach we are taking in 

the dealer context, the rule under the major 

participant analysis requires a conduit affiliate to 

count all of its positions. See section IV.D.2 and 

note 312, supra. It is not limited to the conduit 

affiliate’s positions that are specifically linked to 

offsetting positions with its U.S. affiliate because 

the correspondence between positions and their 

offsets may not be one-to-one, such as due to 

netting. 

535See note 311, supra (citing SIFMA/FIA/FSR 

Letter and CDEU Letter). 

536See Intermediary Definitions Adopting 

Release, 77 FR 30671–72 and n.914 (explaining 

that, for cleared security-based CDS, a person 

would have to write $200 billion notional of CDS 

protection to meet the relevant $2 billion threshold 

for potential future exposure). 

537We note that of the five non-U.S. domiciled 

entities that we expect to perceive the need to 

engage in the major security-based swap participant 

calculation threshold analysis (see section V.H.2(a), 

infra), none appear to have any U.S.-based affiliates. 

538See Exchange Act rule 3a67–1(a)(2)(i). 

539See Intermediary Definitions Adopting 

Release, 77 FR 30675–76. 

540We also note that the third test of the major 

participant definition, rule 3a67–1(a)(2)(iii), which 

only applies to ‘‘highly leveraged financial 

entities,’’ excludes centralized hedging facilities 

acting on behalf of a non-financial entity from the 

definition of financial entity. To the extent 

commenters expressed concern that the conduit 

affiliate rules would affect financial entities and 

their risk mitigation procedures, this exclusion for 

centralized hedging facilities is designed to limit 

that impact. However, to the extent that an entity 

is not able to use the exclusion and falls within the 

definition of a highly leveraged financial entity, we 

believe that requiring such positions to be included 

is consistent with the focus of the major participant 

definition. Cf. CDEU Letter at 1 (stating that 

financial and non-financial end-users should be 

subject to the same cross-border requirements); IIB 

Letter at 22 (noting that many financial institutions 

that do not enter into CDS for dealing purposes still 

enter into them for hedging purposes). 

541See section IV.D.2, supra. 

542See Cross-Border Proposing Release, 78 FR 

31031 (explaining that the ‘‘U.S. person’’ definition 

Continued 

U.S. affiliates that are registered as 

security-based swap dealers or major 

security-based swap participants 531), 

and enters into offsetting transactions 

with its U.S. affiliates to transfer risks 

and benefits of those security-based 

swaps.532

After careful consideration and as 

discussed in the context of the dealer de 

minimis exception, we believe that 

requiring such conduit affiliates to 

include their positions in their major 

participant threshold calculations is 

consistent with our statutory antievasion authority and necessary or 

appropriate to help ensure that non-U.S. 

persons do not facilitate the evasion of 

major participant regulation under the 

Dodd-Frank Act. Absent a requirement 

that conduit affiliates include their 

positions in the threshold calculations, 

a U.S. person may be able to evade 

registration requirements under the 

Dodd-Frank Act by participating in 

arrangements whereby a non-U.S. 

person engages in security-based swap 

activity outside the United States on 

behalf of a U.S. affiliate that is not a 

registered security-based swap dealer or 

major security-based swap participant. 

The U.S. person could enter into 

offsetting transactions with the non-U.S. 

affiliate, thereby assuming the risks and 

benefits of those positions.533 Requiring 

conduit affiliates to include their 

positions in their major participant 

threshold calculations will help guard 

against evasion of major participant 

regulation and the risk that such entities 

could pose to the U.S. financial 

system.534

In this context, as in the dealer 

context, we recognize the significance of 

commenters’ concerns that the ‘‘conduit 

affiliate’’ concept may impede efficient 

risk management procedures, such as 

the use of central booking entities.535 As 

in the context of the de minimis 

exception to the dealer analysis, the 

‘‘conduit affiliate’’ definition serves as a 

prophylactic anti-evasion measure, and 

we do not believe that any entities 

currently act as conduit affiliates in the 

security-based swap market, particularly 

given that a framework for the 

comprehensive regulation of securitybased swaps did not exist prior to the 

enactment of Title VII, suggesting that 

market participants would have had no 

incentives to use such arrangements for 

evasive purposes. 

Moreover, we believe that commenter 

concerns may be mitigated by certain 

features of the major participant 

analysis and that, to the extent risk 

mitigation procedures such as ‘‘central 

booking systems’’ are impacted by the 

final rules on conduit affiliates, such 

anticipated impact is appropriate given 

the purpose of the major participant 

definition to identify entities that may 

pose significant risk to the market. As 

discussed in the Intermediary 

Definitions Adopting Release, we 

believe the major participant thresholds 

are high enough that they will not affect 

entities, including centralized hedging 

facilities, of any but the largest securitybased swap users.536 We would not 

expect that centralized hedging facilities 

would generally hold positions at the 

level of the major participant 

thresholds.537 Further, the first test in 

the major security-based swap 

participant definition, which calculates 

whether a person maintains a 

‘‘substantial position,’’ excludes 

positions held for hedging or mitigating 

commercial risk.538 In the Intermediary 

Definitions Adopting Release, we 

explained that the exclusion includes 

hedging on behalf of a majority-owned 

affiliate, such as a centralized hedging 

facility.539 We believe this exclusion in 

the first test of the major participant 

definition is likely to lessen the impact 

that the conduit affiliate rules will have 

on centralized hedging facilities.540

In addition to these features of the 

major security-based swap participant 

definition that we anticipate will 

mitigate the impact of the conduit 

affiliate rules on risk mitigation 

practices, we believe the focus of the 

major participant definition on the 

degree of risk to the U.S. financial 

system justifies regulation of certain 

entities that perform this function if 

they maintain positions at a level that 

may pose sufficient risk to trigger the 

major participant definition, regardless 

of the nature of their security-based 

swap activity. 

For the foregoing reasons, we believe 

that the final rules regarding conduit 

affiliates are necessary or appropriate to 

prevent the evasion of any provision of 

the amendments made to the Exchange 

Act by Title VII and appropriately target 

potentially evasive scenarios that 

present the level of risk that the major 

security-based swap participant 

definition is intended to address.541

D. Application to Other Non-U.S. 

Persons 

The proposed rules would have 

required a non-U.S. person to include in 

its major security-based swap 

participant analysis all positions with 

U.S. persons, including foreign branches 

of U.S. banks.542 A non-U.S. person 


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applies to the entire person, including its branches 

and offices that may be located in a foreign 

jurisdiction and, as such, the potential impact in 

the United States due to a non-U.S. counterparty’s 

default would not differ depending on whether the 

non-U.S. counterparty entered into the securitybased swap transaction with the home office of a 

U.S. bank or with a foreign branch of a U.S. bank). 

543See proposed Exchange Act rule 3a67– 

10(c)(2). 

544See SIFMA/FIA/FSR Letter at A–19 to A–20 

(noting that the requirement may provide an 

incentive for non-U.S. persons to limit trading with 

foreign branches of U.S. persons and differs from 

the CFTC guidance); IIB Letter at 12 (noting that the 

requirement that non-U.S. person include its 

positions with foreign branches of U.S. persons in 

its major participant calculation is inconsistent 

with the proposed requirement in the de minimis 

context and the CFTC guidance). 

545See SIFMA/FIA/FSR Letter at A–10 to A–11 

(stating that a guaranteed non-U.S. person does not 

have the necessary ‘‘requisite jurisdictional nexus’’ 

to be classified as a U.S. person, and thereby 

supporting the Commission’s proposal to address 

the risk of such guarantees through the attribution 

process in the major security-based swap 

participant requirements); note 209, supra. 

546See note 207 (citing AFR Letter I and BM 

Letter). 

547See Cross-Border Proposing Release, 78 FR 

31031. 

548See id. at 31030 n.612. 

549See CME Letter at 2–3. 

550See Cross-Border Proposing Release, FR 78 

31030 n.612. 

551CME Letter at 3 (explaining that the 

requirement will discourage market participants 

from clearing through a clearing agency in the 

United States). 

552See section V.C, supra. 

553See Exchange Act rule 3a67–10(b)(3)(i). 

554See Cross-Border Proposing Release, 78 FR 

31030 (explaining that the risk to the U.S. financial 

system would be measured by calculating a nonU.S. person’s aggregated outward exposures to U.S. 

persons, meaning what such non-U.S. person owes, 

or potentially could owe, on its security-based 

swaps with U.S. persons). 

555Cf. section 3(a)(67)(B) of the Exchange Act. 

556See CME Letter, supra, note 549. 

557See section II.B.2(c), supra. 

558This results in a 90 percent discount on the 

notional exposure under the security-based swap. 

See Exchange Act rule 3a67–3(c)(3)(i)(A); 

Intermediary Definitions Adopting Release, 77 FR 

30670. 

559See Intermediary Definitions Adopting 

Release, 77 FR 30670. 

would not have had to include its 

security-based swap positions with nonU.S. person counterparties, even if such 

positions were guaranteed by another 

person.543 A few commenters criticized 

the proposed requirement that a nonU.S. person include its positions with 

foreign branches of U.S. banks in its 

calculation thresholds.544 Regarding the 

treatment of a non-U.S. person whose 

positions with non-U.S. persons are 

guaranteed by a U.S. person, one 

commenter supported our proposed 

approach not to require the person 

whose position is guaranteed to include 

such guaranteed positions in its 

calculation,545 while other commenters 

requested that such entities be treated as 

U.S. persons.546 The final rules applying 

the major participant definition to nonU.S. persons are tailored to address the 

market impact and risk that we believe 

a person’s security-based swap positions 

would pose to the U.S. financial system. 

1. Positions With U.S. Persons Other 

Than Foreign Branches of U.S. Banks 

(a) Proposed Approach and 

Commenters’ Views 

As noted above, the proposed rules 

would have required a non-U.S. person 

to include in its major security-based 

swap participant threshold calculations 

all positions with U.S. persons, 

including foreign branches of U.S. 

banks.547 The proposal stated that 

requiring non-U.S. persons to include 

their positions with U.S. persons, as 

defined in the proposal, would ‘‘provide 

an appropriate indication of the degree 

of default risk proposed by such nonU.S. person’s security-based swap 

positions to the U.S. financial system,’’ 

by accounting for such non-U.S. 

person’s outward exposures to U.S. 

persons.548 One commenter objected to 

the proposal’s approach to look to the 

U.S.-person status of a clearing agency 

when a non-U.S. person enters into a 

security-based swap that is cleared and 

novated through a clearing agency.549 In 

the proposal, we explained that we 

would consider the clearing agency as 

the non-U.S. person’s counterparty and 

because the clearing agency is a U.S. 

person we would require such novated 

security-based swap to be included in 

the non-U.S. person’s major securitybased swap participant calculation 

threshold calculations.550 The 

commenter objected, arguing that the 

location of clearing should be irrelevant 

for purposes of determining major 

security-based swap participant 

status.551 Although some commenters 

took issue with the scope of the ‘‘U.S. 

person’’ definition, as described above, 

commenters did not otherwise address 

this specific requirement within the 

application of the major security-based 

swap participant definition. 

(b) Final Rule 

The final rule, like the proposal, 

generally requires that non-U.S. persons 

(apart from the conduit affiliates, which 

are addressed above) 552 include in their 

major security-based swap participant 

threshold calculations their positions 

with U.S. persons.553

Generally requiring non-U.S. persons 

to consider their security-based swap 

positions with U.S. persons (except for 

positions with foreign branches of 

registered security-based swap dealers, 

as discussed below) will help ensure 

that persons whose positions are likely 

to pose a risk to the U.S. financial 

system at the relevant thresholds are 

subject to regulation as a major securitybased swap participant.554 Securitybased swap positions involving a U.S.- 

person counterparty exist within the 

United States by virtue of being 

undertaken with a counterparty that is 

a U.S. person. For these reasons, 

positions entered into with U.S. persons 

are likely to raise, at the thresholds set 

forth in our further definition of major 

security-based swap participant, risks to 

the stability of the U.S. financial system 

or of U.S. entities, including those that 

may be systemically important.555

While we considered one 

commenter’s concern that the location 

of clearing should not be relevant for 

purposes of determining a non-U.S. 

person’s major security-based swap 

participant status,556 we continue to 

believe that, as such positions are 

cleared through a U.S.-person clearing 

agency, they exist within the United 

States and create risk in the United 

States of the type the major securitybased swap participant definition is 

intended to address.557 We note, in 

response to commenters’ opinions about 

the risk-mitigating effects of central 

clearing, and the additional level of 

rigor that clearing agencies may have 

with regards to the process and 

procedures for collecting daily margin, 

that the final rules further defining 

‘‘substantial position’’ provide that the 

potential future exposure associated 

with positions that are subject to central 

clearing by a registered or exempt 

clearing agency is equal to 0.1 times the 

potential future exposure that would 

otherwise be calculated.558 This 

treatment reflects our view that clearing 

the security-based swap substantially 

mitigates the risk of such positions but 

cannot eliminate such risk.559 We 

believe that this previously adopted 

provision may provide additional 

incentives for market participants to 

clear their positions through registered 

or exempt clearing agencies, and that 

the requirement to include such 

positions in the major security-based 

swap participant threshold calculations 

should not discourage market 

participants from clearing positions 

through U.S.-based clearing agencies. 

2. Positions With Foreign Branches of 

U.S. Banks 

(a) Proposed Approach and 

Commenters’ Views 

As noted above, the proposal would 

have required non-U.S. persons to 

include their positions with U.S. 


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560See proposed rule 3a67–10(c)(2). 

561See SIFMA/FIA/FSR Letter at A–19 to A–20 

(stating that the proposal would result in disparate 

treatment of foreign branches of U.S. banks because 

non-U.S. persons could exclude such transactions 

from their dealer de minimis threshold calculations 

but not from their major security-based swap 

participant threshold calculations, and noting that 

the proposal differs from the CFTC Cross-Border 

Guidance, which takes the approach that non-U.S. 

person financial entities generally should exclude 

swaps with foreign branches of U.S. swap dealers, 

subject to certain conditions); IIB Letter at 12 

(stating that the same rationale that applies to 

excluding transactions with foreign branches of 

U.S. banks in the dealer context should apply in the 

major security-based swap participant context and 

that the proposed approach is inconsistent with the 

CFTC Cross-Border Guidance). 

562See IIB Letter at 12–13 (suggesting that the 

CFTC’s general policy of not counting non-financial 

entities’ swaps with guaranteed affiliates that are 

swap dealers or foreign branches that are swap 

dealers reflects an understanding that non-financial 

entities present less risk than financial entities). Cf. 

CFTC Cross-Border Guidance at 45324–25. 

563See SIFMA/FIA/FSR Letter at A–20 (stating 

that the proposal to include transactions with 

foreign branches in a non-U.S. person’s major 

security-based swap participant threshold 

calculations may cause non-U.S. persons that 

would otherwise be considered major securitybased swap participants to limit or stop trading 

with foreign branches of U.S. banks); id. at A–20 to 

A–21 (noting that the approach differs from the 

CFTC Cross-Border Guidance with respect to 

counting such transactions towards the major swap 

participant threshold); see also IIB Letter at 12–13 

(stating that the proposal is inconsistent with the 

CFTC Cross-Border Guidance, whose exceptions 

demonstrate an understanding that the risk to the 

U.S. financial system can be addressed through 

different means and noting that the proposal may 

cause non-U.S. counterparties to stop transacting 

with foreign branches of U.S. banks). 

564See Exchange Act rule 3a67–10(b)(3)(i). 

Exchange Act rule 3a67–10(a)(2) defines ‘‘foreign 

branch’’ by referring to Exchange Act rule 3a71– 

3(a)(2). We note for clarification that the rule 

described here uses the defined term ‘‘transactions 

conducted through a foreign branch’’ (as defined in 

Exchange Act rule 3a71–3(a)(3)) to describe the 

manner in which the U.S.-person must enter into 

the position in order for the non-U.S. person 

counterparty to avail itself of this exception. The 

non-U.S. person counterparty that is calculating its 

major security-based swap participant calculation 

thresholds is entering into the position with the 

foreign branch of the U.S. person. 

565Proposed Exchange Act rule 3a67–10(c)(2). 

566See Exchange Act rule 3a67–10(b)(3)(i). See 

also IV.E.2(b) (discussing similar exception in the 

context of the de minimis analysis). 

567See Exchange Act rule 3a67–10(b)(3)(i) (using 

the term ‘‘transaction conducted through a foreign 

branch,’’ which requires that ‘‘the security-based 

swap transaction is arranged, negotiated, and 

executed on behalf of the foreign branch solely by 

persons located outside the United States,’’ as 

defined in Exchange Act rule 3a71–3(a)(3)(i)(B)). 

568See Exchange Act rule 3a67–10(b)(3)(i)(A). 

A non-U.S. person would still have to count such 

positions for purposes of calculating its major 

security-based swap participant calculation 

thresholds if the non-U.S. person’s counterparty 

(i.e., the U.S. bank) has rights of recourse against 

a U.S. person in the position with the non-U.S. 

person. See Exchange Act rule 3a67–10(b)(3)(ii). 

569See Exchange Act rule 3a67–10(b)(3)(i)(B). 

570 In other words, this provision will help to 

avoid requiring non-U.S. persons to speculate 

whether their counterparties would register, and to 

face the consequences of their speculation being 

wrong. 

571See section IV.E.2(b) and note 373 (discussing 

that the risk of such positions is mitigated in part 

because the foreign branch of a registered securitybased swap dealer will be subject to a number of 

Title VII regulatory requirements). 

572See Exchange Act rule 3a71–3(b)(1)(iii)(A); 

section IV.E.2(b), supra. 

573See note 561, supra. 

574See notes 562 and 563, supra. Although our 

inclusion of this exception brings us closer to the 

general policy set forth by the CFTC, our 

approaches are not entirely identical, as the CFTC 

includes certain additional inputs for non-U.S. 

persons that are financial entities that we have 

determined not to incorporate in our final rule. See 

CFTC Cross-Border Guidance, 78 FR 45326–27. 

persons in their threshold calculations. 

This requirement would have extended 

to positions with foreign branches of 

U.S. banks.560 Two commenters 

criticized the proposal’s requirement 

that a non-U.S. person would need to 

include positions with foreign branches 

of U.S. banks.561 One of these 

commenters suggested that the 

Commission adopt the CFTC policy, 

which set forth an exception generally 

permitting a non-U.S. person that is a 

non-financial entity to exclude from its 

calculation positions with foreign 

branches of U.S. banks that are 

registered swap dealers.562 One of the 

commenters suggested that if the 

Commission did not allow all non-U.S. 

persons to exclude transactions with 

foreign branches of U.S. banks from 

their calculation, the Commission 

should at least adopt the approach taken 

by the CFTC in its cross-border 

guidance of allowing a non-U.S. person 

that is a financial entity to exclude 

transactions, subject to certain 

additional conditions, with foreign 

branches of U.S. banks that are 

registered security-based swap 

dealers.563

(b) Final Rule 

The final rule has been modified from 

the proposal to require non-U.S. persons 

(other than conduit affiliates, as 

discussed above) to count, against their 

major security-based swap participant 

threshold calculations, their positions 

with U.S. persons other than positions 

with foreign branches of registered 

security-based swap dealers.564 The 

proposal would have required non-U.S. 

persons to all include their positions 

with U.S. persons in their threshold 

calculations, including any positions 

with foreign branches of U.S. banks.565

The final rule permits non-U.S. 

persons not to count certain positions 

that arise from transactions conducted 

through a foreign branch of a 

counterparty that is a U.S. bank.566 For 

this exclusion to be effective, persons 

located within the United States cannot 

be involved in arranging, negotiating, or 

executing the transaction.567 Moreover, 

the counterparty bank must be 

registered as a security-based swap 

dealer,568 unless the transaction occurs 

prior to 60 days following the effective 

date of final rules providing for the 

registration of security-based swap 

dealers.569 Registration of the 

counterparty U.S. bank would not be 

required for the exclusion to be effective 

before then, given that the non-U.S. 

person would not be able to know with 

certainty whether the U.S. bank in the 

future would register with the 

Commission as a security-based swap 

dealer.570

We believe that the revision to the 

proposal allowing for an exclusion from 

counting positions that arise from 

transactions conducted through foreign 

branches of registered security-based 

swap dealers appropriately accounts for 

the risk in the U.S. financial system 

created by such positions. In our view, 

the risk of such positions is lessened 

when the U.S. bank itself is registered 

with the Commission as a securitybased swap dealer because the U.S. 

bank, and its transactions, will be 

subject to the relevant Title VII 

provisions applicable to security-based 

swap dealers (for example, margin and 

reporting requirements).571 The 

exception is also consistent with our 

application of the dealer de minimis 

exception in our final rule, which 

requires non-U.S. persons, other than 

conduit affiliates, to include in their de 

minimis threshold calculations dealing 

transactions with U.S. persons other 

than the foreign branch of a registered 

security-based swap dealer (or for a 

temporary period of time prior to 60 

days prior to the effectiveness of the 

dealer registration rules).572

The final rule should help mitigate 

concerns that non-U.S. persons will 

limit or stop trading with foreign 

branches of U.S. banks for fear of too 

easily triggering major security-based 

swap participant registration 

requirements under Title VII. Moreover, 

the inclusion of this exception in our 

final rule addresses comments 

expressing concern that non-U.S. 

persons would have to include positions 

with foreign branches of U.S. banks in 

their major security-based swap 

participant threshold calculations.573

We also note that the exception reduces 

divergence between our major 

participant threshold calculation and 

that outlined in the CFTC’s guidance, as 

requested by commenters.574


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575See Cross-Border Proposing Release, 78 FR 

31031 and n.622; see also proposed Exchange Act 

rule 3a67–10(c)(2). In the proposal, we stated that 

the non-U.S. person counterparties of a non-U.S. 

person would bear the risk of loss if that non-U.S. 

person was unable to pay what it owes, and 

therefore, that the non-U.S. person need not include 

in its major participant threshold calculations 

positions with a non-U.S. counterparty, even if its 

obligations under the security-based swap are 

guaranteed by a U.S. person. See Cross-Border 

Proposing Release, 78 FR 31031. 

576See id. at 31032. 

577See note 545, supra (citing SIFMA/FIA/FSR 

Letter). 

578See note 207, supra (citing AFR Letter I and 

BM Letter). 

579See note 25, supra. 

580See Exchange Act rule 3a67–10(b)(3)(ii). Cf. 

note 350, supra (noting that this final rule 

encompasses non-U.S. persons who receive a 

guarantee from an unaffiliated U.S. person, whereas 

the final rule under the de minimis exception only 

encompasses non-U.S. persons who receive a 

guarantee from a U.S. affiliate). 

We note that we have retained the requirement 

in the proposal that the U.S. guarantor also attribute 

to itself, for purposes of its own major securitybased swap participant threshold calculations, all 

security-based swaps entered into by a non-U.S. 

person that are guaranteed by the U.S. person. See 

Cross-Border Proposing Release, 78 FR 31032; 

section V.E.1, infra. 

581See section II.B.2(c), supra. 

582Exchange Act rule 3a67–10(b)(3)(ii). 

3. Positions of Non-U.S. Persons That 

Are Subject to Recourse Guarantees by 

a U.S. Person 

(a) Proposed Approach and 

Commenters’ Views 

The proposal would have not required 

a non-U.S. person to count towards its 

major security-based swap participant 

calculation thresholds, those positions 

that it entered into with non-U.S. 

persons, regardless of whether the 

counterparty to the position has a right 

of recourse against a U.S. person under 

the security-based swap.575 To address 

the risk posed by the existence of a 

recourse guarantee against a U.S. 

person, the proposal would have 

required that all security-based swaps 

entered into by a non-U.S. person and 

guaranteed by a U.S. person be 

attributed to such U.S. person guarantor 

for purposes of determining such U.S. 

person guarantor’s major security-based 

swap participant status.576

As noted above, one commenter 

supported the Commission’s proposed 

approach not to require a non-U.S. 

person whose positions with other nonU.S. persons are subject to a recourse 

guarantee from a U.S. person, to include 

such guaranteed positions in its own 

major participant threshold 

calculations, expressing support for 

using the major security-based swap 

participant attribution requirements to 

address the risk posed to the U.S. 

markets by such guarantees.577 Two 

commenters argued that non-U.S. 

persons whose positions are guaranteed 

by U.S. persons should be treated as 

U.S. persons for purposes of the major 

participant threshold calculations, 

which would require them to include all 

their positions in their major participant 

threshold calculations.578 Additionally, 

although commenters did not refer 

specifically to the application of the 

major security-based swap participant 

definition, some commenters requested 

that the Commission generally 

harmonize its approach to cross-border 

activities with that of the CFTC.579

(b) Final Rule 

We are adopting a final rule that 

requires a non-U.S. person to include in 

its major security-based swap 

participant threshold calculations those 

positions for which the non-U.S. 

person’s counterparty has rights of 

recourse against a U.S. person.580 We 

believe that when a U.S. person 

guarantees a position, the position exists 

within the United States and poses risk 

to the U.S. person guarantor,581 and the 

non-U.S. person that enters directly into 

the position should be required to 

include the position in its major 

security-based swap participant 

threshold calculations. The final rule 

will also help to apply major participant 

regulation in a consistent manner to 

differing organizational structures that 

serve similar economic purposes, and 

help avoid disparities in applying major 

participant regulation to differing 

arrangements that pose similar risks to 

the United States. 

Accordingly, the final rule modifies 

the proposal by requiring a non-U.S. 

person to include in its major securitybased swap participant threshold 

calculations security-based swap 

positions for which a counterparty to 

the security-based swap has legally 

enforceable rights of recourse against a 

U.S. person, even if a non-U.S. person 

is counterparty to the security-based 

swap.582 For these purposes, and as 

addressed in the context of de minimis 

exception to the ‘‘security-based swap 

dealer’’ definition, the counterparty 

would be deemed to have a right of 

recourse against a U.S. person if the 

counterparty has a conditional or 

unconditional legally enforceable right, 

in whole or in part, to receive payments 

from, or otherwise collect from, a U.S. 

person in connection with the non-U.S. 

person’s obligations under the securitybased swap. 

We understand that such rights may 

arise in a variety of contexts. For 

example, a counterparty would have 

such a right of recourse against the U.S. 

person if the applicable arrangement 

provides the counterparty the legally 

enforceable right to demand payment 

from the U.S. person in connection with 

the security-based swap, without 

conditioning that right upon the nonU.S. person’s non-performance or 

requiring that the counterparty first 

make a demand on the non-U.S. person. 

A counterparty also would have such a 

right of recourse if the counterparty 

itself could exercise legally enforceable 

rights of collection against the U.S. 

person in connection with the securitybased swap, even when such rights are 

conditioned upon the non-U.S. person’s 

insolvency or failure to meet its 

obligations under the security-based 

swap, and/or are conditioned upon the 

counterparty first being required to take 

legal action against the non-U.S. person 

to enforce its rights of collection. 

The terms of the guarantee need not 

necessarily be included within the 

security-based swap documentation or 

even otherwise reduced to writing (so 

long as legally enforceable rights are 

created under the laws of the relevant 

jurisdiction); for instance, such rights of 

recourse would arise when the 

counterparty, as a matter of law in the 

relevant jurisdiction, would have rights 

to payment and/or collection that may 

arise in connection with the non-U.S. 

person’s obligations under the securitybased swap that are enforceable. We 

would view the positions of a non-U.S. 

person as subject to a recourse guarantee 

if at least one U.S. person (either 

individually or jointly and severally 

with others) bears unlimited 

responsibility for the non-U.S. person’s 

obligations, including the non-U.S. 

person’s obligations to security-based 

swap counterparties. Such arrangements 

may include those associated with 

foreign unlimited companies or 

unlimited liability companies with at 

least one U.S.-person member or 

shareholder, general partnerships with 

at least one U.S.-person general partner, 

or entities formed under similar 

arrangements such that at least one U.S. 

persons bears unlimited responsibility 

for the non-U.S. person’s liabilities. In 

our view, the nature of the legal 

arrangement between the U.S. person 

and the non-U.S. person—which makes 

the U.S. person responsible for the 

obligations of the non-U.S. person—is 

appropriately characterized as a 

recourse guarantee, absent 

countervailing factors. More generally, a 

recourse guarantee is present if, in 

connection with the security-based 

swap, the counterparty itself has a 

legally enforceable right to payment or 

collection from the U.S. person, 

regardless of the form of the 


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583Consistent with the rule implementing the 

dealer de minimis exception, this final rule clarifies 

that for these purposes a counterparty would have 

rights of recourse against the U.S. person ‘‘if the 

counterparty has a conditional or unconditional 

legally enforceable right, in whole or in part, to 

receive payments from, or otherwise collect from, 

the U.S. person in connection with the securitybased swap.’’ See Exchange Act rule 3a67– 

10(b)(3)(ii). 

584We are not requiring a non-U.S. person whose 

performance with respect to one or more securitybased swap positions is subject to a recourse 

guarantee to include all of its positions with nonU.S. persons towards its major security-based swap 

participant threshold calculations. We recognize 

that the CFTC Cross-Border Guidance uses the term 

‘‘guaranteed affiliate’’ and states the view that such 

entities should include all of their swap positions 

in their major swap participant threshold 

calculations. See CFTC Cross-Border Guidance, 78 

FR 45319. We believe that our final rule, which 

requires a non-U.S. person to include only those 

positions with non-U.S. persons where the 

counterparty has rights of recourse to a U.S. person, 

appropriately in the context of the security-based 

swap markets reflects the risk that such positions 

may create within the United States. 

585Cf. notes 577 and 578 (discussing comment 

letters). 

586See section II.B.2(c), supra. 

587See section IV.E.1(b), supra (discussing the 

same point in the context of the application of the 

de minimis exception). 

588Cf. section IV.E.1(b), supra (discussing a nonU.S. person’s dealing activity that is subject to a 

recourse guarantee). 

589See section IV.E.1(b) and note 341, supra. For 

the above reasons, we conclude that this final rule 

is not being applied to persons who are 

‘‘transact[ing] a business in security-based swaps 

without the jurisdiction of the United States,’’ 

within the meaning of section 30(c). See section 

II.B.2(a), supra. We also believe, moreover, that this 

final rule is necessary or appropriate as a 

prophylactic measure to help prevent the evasion 

of the provisions of the Exchange Act that were 

added by the Dodd-Frank Act, and thus help ensure 

that the relevant purposes of the Dodd-Frank Act 

are not undermined. Without this rule, U.S. persons 

would be able to evade major participant regulation 

under Title VII simply by conducting their securitybased swap positions via a guaranteed non-U.S. 

person, while still being subject to risks associated 

with those positions. 

590See section II.B.2(c), supra. 

591See section V.E.1(b), infra. 

592See section V.E, infra. 

593See Cross-Border Proposing Release, 78 FR 

31031 and n.622. We recognize that the CFTC 

Cross-Border Guidance does set forth the concept 

that non-U.S. persons should generally include in 

their major swap participant analysis positions with 

entities that fall within the CFTC’s description of 

a ‘‘guaranteed affiliate,’’ subject to certain 

exceptions. See CFTC Cross-Border Guidance, 78 

FR 45326–27. We continue to believe, however, 

consistent with the proposal, that it is not necessary 

that such non-U.S. person that has rights of 

recourse against a U.S. person include that position 

in its major participant threshold calculations 

because the inability of that non-U.S. person 

counterparty to pay what it owes pursuant to a 

security-based swap will generally not pose risk to 

the U.S. financial system because it will not trigger 

the obligation of the U.S. guarantor. See CrossBorder Proposing Release, 78 FR 31031. 

arrangement that provides such an 

enforceable right to payment or 

collection.583

In light of comments received and 

upon further consideration, we believe 

that the revised approach addresses, in 

a targeted manner, the risk to the U.S. 

financial system posed by entities 

whose counterparties are able to turn to 

a U.S. person for performance of the 

non-U.S. person’s obligations under a 

security-based swap position.584 We 

believe our final approach strikes an 

appropriate balance by directly 

regulating a non-U.S. person that enters 

into a position with a counterparty that 

has a recourse guarantee against a U.S. 

person, while not treating that non-U.S. 

person as a U.S. person.585

The final rule reflects our conclusion 

that a non-U.S. person—to the extent it 

enters into security-based swap 

positions subject to a recourse guarantee 

by a U.S. person—enters into securitybased swap positions that exist within 

the United States.586 The economic 

reality of such positions is that by virtue 

of the guarantee the non-U.S. person 

effectively acts together with a U.S. 

person to engage in the security-based 

swap activity that results in the 

positions, and the non-U.S. person’s 

positions cannot reasonably be isolated 

from the U.S. person’s engagement in 

providing the guarantee.587 Both the 

guarantor and guaranteed entity are 

involved in the position and may jointly 

seek to profit by engaging in such 

security-based swap positions.588 The 

final rule echoes our approach, 

consistent with our approach to 

regulation of security-based swap 

dealers that, to the extent that a single 

non-U.S. person is responsible for 

positions within the United States 

(whether by entering into positions with 

U.S.-person counterparties or for which 

its non-U.S. person counterparties have 

recourse against a U.S. person) that rise 

above the major participant thresholds, 

the entity that directly enters into such 

positions should be required to register 

as a major security-based swap 

participant and should be subject to 

direct regulation as a major securitybased swap participant. 

The final rules regarding positions for 

which a counterparty to the position has 

rights of recourse against a U.S. person 

aim to apply major participant 

regulation in similar ways to differing 

organizational structures that serve 

similar economic purposes, such as 

positions entered into by a non-U.S. 

person that are subject to a recourse 

guarantee by a U.S. person and securitybased swap positions carried out 

through a foreign branch of a U.S. 

person.589 These two differing 

organizational structures serve similar 

economic purposes and thus should be 

treated similarly. 

As discussed below, we have 

maintained the proposed approach 

requiring a U.S. person to attribute to 

itself any position of a non-U.S. person 

for which the non-U.S. person’s 

counterparty has rights of recourse 

against the U.S. person. This attribution 

requirement further reflects the focus of 

the major security-based swap 

participant definition on positions that 

may raise systemic risk concerns within 

the United States.590 Such positions 

exist within the United States by virtue 

of the U.S. person’s guarantee, which 

transmits risk to the U.S. financial 

system to the extent obligations are 

owed under the security-based swap by 

the guaranteed non-U.S. person because 

the non-U.S. person’s counterparty may 

seek recourse from the U.S. person 

guaranteeing the position.591

Additionally, the economic reality of 

this position, even though entered into 

by a non-U.S. person, is substantially 

identical, in relevant respects, to a 

transaction entered into directly by the 

U.S. guarantor, because a U.S. person is 

participating directly in the 

transaction.592 For these reasons the 

attribution requirement, which is 

consistent with our territorial approach 

and the approach taken in the proposal, 

reflects the focus of the major securitybased swap participant definition. 

We note that, consistent with our 

proposal, we are not requiring non-U.S. 

persons to include in their major 

security-based swap participant 

threshold calculations positions for 

which they (as opposed to their 

counterparties) have a guarantee 

creating a right of recourse against a 

U.S. person. As we noted in the 

proposal, non-U.S. persons with a right 

of recourse against a U.S. person 

pursuant to a security-based swap do 

not pose a direct risk to the person 

providing a guarantee, as that person’s 

failure generally will not trigger any 

obligations under the guarantee.593

E. Attribution 

The Cross-Border Proposing Release 

stated the preliminary view that a 

person’s security-based swap positions 

in the cross-border context would be 

attributed to a parent, other affiliate, or 

guarantor for purposes of the major 

participant analysis to the extent that 

the person’s counterparties in those 

positions have recourse to that parent, 

other affiliate, or guarantor in 

connection with the position. Positions 


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594See id. 31032 and n.625 (noting that we were 

not proposing to alter the approach with respect to 

attribution of guarantees that was adopted by the 

Commission and the CFTC in the Intermediary 

Definitions Adopting Release, but rather proposing 

to apply the same principles in the cross-border 

context). 

595As discussed above in section V.D.3(b), the 

economic reality of this position, even though 

entered into by a non-U.S. person, is substantially 

identical, in relevant respects, to a transaction 

entered into directly by the U.S. guarantor. 

596The economic reality of the non-U.S. person’s 

position is substantially identical, in relevant 

respects, to a position entered into directly by the 

non-U.S. person. 

597Cross-Border Proposing Release, 78 FR 31032 

and n.628. See also Cross-Border Proposing Release, 

78 FR 31033 and section V.E.3, infra (discussing 

limited circumstances where attribution of 

guaranteed security-based swap positions do not 

apply). 

598See Cross-Border Proposing Release, 78 FR 

31032 n.624; see also Intermediary Definitions 

Adopting Release, 77 FR 30689 n.1132. 

599Cross-Border Proposing Release, 78 FR 31032. 

600SIFMA/FIA/FSR Letter at A–20 to A–21 

(asserting that only the guaranteed entity, which is 

the direct counterparty to the security-based swap 

transactions, should include the positions and that 

to require the guarantor to include the positions 

goes ‘‘beyond the intended limits of Section 30(c) 

of the Exchange Act’’). 

601See id. at A–20 to A–21. 

602Exchange Act rule 3a67–10(c)(1)(i). 

603See Intermediary Definitions Adopting 

Release, 77 FR 30689 n.1135 (stating that the type 

of attribution addressed at that time may also be 

expected to raise special issues in the context of 

guarantees involving security-based swap positions 

of non-U.S. entities). As noted in the Cross-Border 

Proposing Release, these risk concerns are the same 

regardless of whether the underlying security-based 

swap positions of the non-U.S. person that the U.S. 

person guarantees are entered into with U.S. 

persons or non-U.S. persons. See Cross-Border 

Proposing Release, 78 FR 31032. 

604See Intermediary Definitions Adopting 

Release, 77 FR 30689. 

605See SIFMA/FIA/FSR Letter at A–21. 

606See section II.B.2(c), supra. 

607See id. 

608See section V.D.3(b), supra. For the above 

reasons, we conclude that this final rule is not being 

applied to persons who are ‘‘transact[ing] a business 

in security-based swaps without the jurisdiction of 

the United States,’’ within the meaning of Exchange 

Act section 30(c). See section II.B.2(a), supra. We 

also believe, moreover, that this final rule is 

necessary or appropriate as a prophylactic measure 

to help prevent the evasion of the provisions of the 

Exchange Act that were added by the Dodd-Frank 

Act, and thus help ensure that the relevant 

purposes of the Dodd-Frank Act are not 

undermined. Without this rule, U.S. persons would 

be able to evade major participant regulation under 

Title VII simply by conducting their security-based 

would not be attributed in the absence 

of recourse.594

The final rules codify the proposed 

guidance related to attribution of 

guaranteed positions to provide clarity 

to market participants. We continue to 

believe that a U.S. person should 

attribute to itself any positions of a nonU.S. person for which the non-U.S. 

person’s counterparty has rights of 

recourse against the U.S. person, as the 

position exists within the United States 

by virtue of the U.S. person guarantor’s 

involvement in the position.595

Similarly, a non-U.S. person should 

attribute to itself any positions of a U.S. 

person for which that U.S. person’s 

counterparty has rights of recourse 

against the non-U.S. person.596 We also 

continue to believe that when a nonU.S. person guarantor has extended a 

recourse guarantee on the obligations of 

a U.S. person, those positions exist 

within the United States by virtue of the 

guaranteed U.S. person’s involvement in 

the positions as a direct counterparty to 

the transaction and therefore the 

positions should be attributed to the 

non-U.S. person guarantor that is 

participating in that position through 

providing its guarantee. The final rules 

requiring attribution also aim to apply 

major participant regulation in similar 

ways to differing organizational 

structures that serve similar economic 

purposes, thus helping to ensure that 

the relevant purposes of the Dodd-Frank 

Act are not undermined. 

1. Positions Attributed to U.S. Person 

Guarantors 

(a) Proposed Approach and 

Commenters’ Views 

Our preliminary view was that a U.S. 

person would attribute to itself all 

security-based swap positions for which 

it provides a guarantee for performance 

on the obligations of a non-U.S. person, 

other than in limited circumstances.597

We noted that the proposed approach 

did not alter the guidance regarding 

attribution that was adopted in the 

Intermediary Definitions Adopting 

Release, but proposed an approach in 

the cross-border context applying the 

principles set forth in the Intermediary 

Definitions Adopting Release.598 This 

attribution standard was based on our 

preliminary view that, when a U.S. 

person acts as a guarantor of a position 

of a non-U.S. person, the guarantee 

creates risks within the United States 

whether the underlying security-based 

swaps that they guarantee are entered 

into with U.S. persons or with non-U.S. 

persons.599 One commenter argued that 

attribution is beyond the scope of 

section 30(c) of the Exchange Act.600

One commenter argued that our 

preliminary view regarding attribution 

for entities guaranteed by U.S. persons 

would result in ‘‘double-counting’’ and 

that security-based swap positions 

should only be attributed to a U.S. 

guarantor where the direct counterparty 

to the security-based swap is not 

otherwise required to count those 

positions toward its own calculation.601

(b) Final Rule 

We are adopting rules that codify the 

preliminary views set forth in our 

proposal: A U.S. person is required to 

attribute to itself any security-based 

swap position of a non-U.S. person for 

which the non-U.S. person’s 

counterparty to the security-based swap 

has rights of recourse against that U.S. 

person.602 Although we considered 

commenters’ objections to our proposed 

attribution requirement, we continue to 

believe that this approach is necessary 

because, as stated in the Intermediary 

Definitions Adopting Release, 

attribution is intended to reflect the risk 

posed to the U.S. financial system when 

a counterparty to a position has recourse 

against a U.S. person.603 The final rule 

also includes a note to clarify that a U.S. 

person is still expected to attribute to 

itself positions of other U.S. persons for 

which the counterparty to that U.S. 

person has a recourse guarantee against 

the U.S.-person guarantor, as explained 

in interpretation in the Intermediary 

Definitions Adopting Release.604

We believe that attribution of 

positions to guarantors is consistent 

with Exchange Act section 30(c), 

notwithstanding the argument by one 

commenter that attribution to a 

guarantor ‘‘extends beyond the intended 

limits of [s]ection 30(c) of the Exchange 

Act.’’ 605 As we discuss in more detail 

above, the major security-based swap 

participant definition focuses on 

positions that may raise systemic risk 

concerns within the United States.606 It 

is our view that a security-based swap 

position exists within the United States 

when it is held by or with a U.S. person, 

or when a counterparty to the securitybased swap has recourse against a U.S. 

person, as the risks associated with such 

positions are borne within the United 

States, and given the involvement of 

U.S. persons may, at the thresholds 

established for the major security-based 

swap participant definition, give rise to 

the types of systemic risk within the 

United States that major security-based 

swap participant regulation is intended 

to address.607

As discussed above, the final rules 

regarding positions for which a 

counterparty to the position has rights 

of recourse against a U.S. person aim to 

apply major participant regulation to in 

similar ways to differing organizational 

structures that serve similar economic 

purposes, including structures such as 

security-based swap positions entered 

into by a non-U.S. person that are 

subject to a recourse guarantee by a U.S. 

person and security-based swap 

positions carried out through a foreign 

branch.608


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swap positions via a guaranteed non-U.S. person, 

while still being subject to the risks associated with 

those positions. 

609See Exchange Act rule 3a67–10(c)(2)(i). 

610See Cross-Border Proposing Release, 78 FR 

31032–33. 

611See note 600, supra. 

612Exchange Act rule 3a67–10(c)(1)(ii)(A). 

613Exchange Act rule 3a67–10(c)(1)(ii)(A) may be 

broader than the CFTC Cross-Border Guidance in 

this context because the final rule requires the nonU.S. person to attribute to itself all the positions of 

the U.S. person that are guaranteed by the non-U.S. 

person, whereas the CFTC Cross-Border Guidance 

states that the non-U.S. person would generally not 

attribute to itself positions of the U.S. person that 

it guarantees where the counterparty is another 

non-U.S. person that is not guaranteed by a U.S. 

person. See CFTC Cross-Border Guidance at 45326 

(stating that a non-U.S. person would generally 

consider in its own calculation (i.e., attribute to 

itself) any swap position (of a U.S. or non-U.S. 

person) that it guarantees in which the counterparty 

is a U.S. person or a guaranteed affiliate). 

614See Cross-Border Proposing Release, 78 FR 

31032–33. 

615Exchange Act rule 3a67–10(c)(ii)(B). 

616See section V.D.2 (describing exception for 

transaction conducted through a foreign branch of 

a registered security-based swap dealer), supra; 

Exchange Act rule 3a67–10(c)(ii)(B) (incorporating 

Exchange Act rule 3a67–10(b)(3)(i)(A) and (B)). 

617See SIFMA/FIA/FSR Letter at A–20 to A–21. 

618See section II.B.2(c), supra. 

619See id. 

620See section V.D.3(b), supra. For the above 

reasons, we conclude that this final rule is not being 

applied to persons who are ‘‘transact[ing] a business 

in security-based swaps without the jurisdiction of 

the United States,’’ within the meaning of section 

30(c). See section II.B.2(a), supra. We also believe, 

moreover, that this final rule is necessary or 

appropriate as a prophylactic measure to help 

prevent the evasion of the provisions of the 

Exchange Act that were added by the Dodd-Frank 

Act, and thus help ensure that the relevant 

purposes of the Dodd-Frank Act are not 

undermined. Without this rule, non-U.S. persons 

would be able to evade major participant regulation 

under Title VII simply by conducting their securitybased swap positions by guaranteeing another 

entity that would then enter into the positions. 

While we recognize one commenter’s 

concern that attribution would require 

‘‘double counting’’ certain positions, we 

do not agree with that commenter’s 

assertion that the final rule constitutes 

double-counting, given that both entities 

assume the risk of the position by either 

entering into it directly or by 

guaranteeing it. Because both entities 

are involved in the position that poses 

risk to the U.S. financial system, both 

entities are required to include it in 

their respective major participant 

threshold calculations, at least until the 

entity whose position is guaranteed is 

required to register as a major securitybased swap participant.609

2. Positions Attributed to Non-U.S. 

Person Guarantors 

(a) Proposed Approach and 

Commenters’ Views 

In the proposal, we expressed our 

preliminary view that a non-U.S. person 

that provides a recourse guarantee for 

performance on the obligations of a U.S. 

person should attribute to itself the 

security-based swap positions of the 

U.S. person that are subject to 

guarantees by the non-U.S. person.610

However, when a non-U.S. person 

provides a guarantee to another nonU.S. person, the non-U.S. person 

providing the guarantee would have 

been required to attribute to itself only 

those positions for which a U.S. person 

counterparty has rights of recourse 

against the non-U.S. person guarantor 

under the security-based swap. As noted 

above, one commenter argued that 

attribution is beyond the scope of 

section 30(c) of the Exchange Act.611

(b) Final Rule 

Consistent with our preliminary view, 

the final rule requires a non-U.S. person 

to attribute to itself any security-based 

swap positions of a U.S. person that are 

subject to a guarantee by the non-U.S. 

person.612 In other words, the non-U.S. 

person guarantor will attribute to itself 

all security-based swap positions of the 

U.S. person for which a counterparty of 

the U.S. person has rights of recourse 

against the non-U.S. person 

guaranteeing the position.613 The rule 

reflects our view that the guarantee may 

enable the U.S. person to enter into 

significantly more security-based swap 

positions with both U.S.-person and 

non-U.S. person counterparties than it 

would be able to absent the guarantee, 

increasing the risk that such persons 

could incur, amplifying the risk of the 

non-U.S. person’s inability to carry out 

its obligations under the guarantee.614

Under the final rule, if a U.S. person 

in a transaction with a non-U.S. person 

counterparty has rights of recourse 

against another non-U.S. person under 

the security-based swap, the non-U.S. 

person guaranteeing the transaction 

must attribute the security-based swap 

to itself for purposes of its major 

security-based swap participant 

threshold calculations.615 We note that, 

consistent with the rule requiring nonU.S. persons to count positions entered 

into with U.S. persons, a non-U.S. 

person that attributes a position of 

another non-U.S. person to itself does 

not need to attribute to itself positions 

arising from a transaction conducted 

through a foreign branch of the U.S.- 

person counterparty when the 

counterparty is a registered securitybased swap dealer or positions arising 

from a transaction conducted through a 

foreign branch of a U.S.-person 

counterparty, when the transaction is 

entered into prior to 60 days following 

the earliest date on which registration of 

security-based swap dealers is first 

required.616

As explained above, we believe that 

attribution of positions to guarantors is 

consistent with Exchange Act section 

30(c), notwithstanding the argument by 

one commenter that attribution to a 

guarantor ‘‘goes beyond the intended 

limits of section 30(c) of the Exchange 

Act.’’ 617 As we discuss in more detail 

above, the major security-based swap 

participant definition focuses on 

positions that may raise systemic risk 

concerns within the United States.618 It 

is our view that a security-based swap 

position exists within the United States 

when it is held by or with a U.S. person, 

or when it is guaranteed by a U.S. 

person, as the risks associated with such 

positions are borne within the United 

States, and given the involvement of 

U.S. persons may give rise, at the 

thresholds established for the major 

security-based swap participant 

definition, to the types of systemic risk 

within the United States that major 

security-based swap participant 

regulation is intended to address.619

The final rules requiring non-U.S. 

persons to attribute certain positions to 

themselves for purposes of calculating 

their own major security-based swap 

participant calculation thresholds aims 

to apply major participant regulation in 

similar ways to differing organizational 

structures that serve similar economic 

purposes. For example, when a U.S. 

person has rights of recourse against a 

non-U.S. person, the economic reality of 

the position is substantially identical, in 

relevant respects, to a position entered 

into directly by the non-U.S. person 

with the U.S. person. The relevant 

attribution requirements reflect that a 

non-U.S. person would need to include 

such positions were it to enter into them 

directly.620

3. Limited Circumstances Where 

Attribution of Guaranteed SecurityBased Swap Positions Does Not Apply 

(a) Proposed Approach and 

Commenters’ Views 

The proposal stated our preliminary 

view that a guarantor would not be 

required to attribute to itself the 

security-based swap positions it 

guarantees, and, therefore, may exclude 

those positions from its threshold 

calculations, if the person whose 

positions it guarantees is already subject 

to capital regulation by the Commission 

or the CFTC (for example, by virtue of 

being regulated as a swap dealer, 

security-based swap dealer, major swap 

participant, major security-based swap 

participant, FCMs, brokers, or dealers), 


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621See Cross-Border Proposing Release, 78 FR 

31033 (explaining that the non-U.S. person must be 

subject to capital standards that are consistent with 

the capital standards such non-U.S. person would 

have been subject to if it was a bank subject to the 

prudential regulators’ capital regulation, i.e., the 

Basel Accord); see also Intermediary Definitions 

Adopting Release, 77 FR 30689 (stating that it is not 

necessary to attribute a person’s positions to a 

parent or other guarantor if the person already is 

subject to capital regulation by the CFTC or SEC or 

if the person is a U.S. person regulated as a bank 

in the United States). Thus, once the person whose 

position is guaranteed registers as a major securitybased swap participant, attribution would no longer 

be required. 

622See Cross-Border Proposing Release, 78 FR 

31033 at n.636. 

623See id. at 31033–34. 

624See id. at 31033 (citing § 225.2(r)(3) of 

Regulation Y, which states that ‘‘[f]or purposes of 

determining whether a foreign banking organization 

qualifies under paragraph (r)(1) of this section: (A) 

A foreign banking organization whose home 

country supervisor . . . has adopted capital 

standards consistent in all respects with the Basel 

Accord may calculate its capital ratios under the 

home country standard . . .’’). 

625See SIFMA/FIA/FSR Letter at A–21 to A–22; 

see also Cross-Border Proposing Release, 78 FR 

31033. 

626See AFGI Letter I at 3 (stating that this 

clarification would be within the spirit and 

language of the proposed rules). 

627See Exchange Act rule 3a67–10(c)(2)(i). 

628See Cross-Border Proposing Release, 78 FR 

31032–33, notes 629, 632, and 634. 

629Exchange Act rule § 240.3a67–10(c)(2)(ii) and 

(iii). See Cross-Border Proposing Release, 78 FR 

31033 (explaining that the non-U.S. person must be 

subject to capital standards that are consistent with 

the capital standards such non-U.S. person would 

have been subject to if it were a bank subject to the 

prudential regulators’ capital regulation, i.e., the 

Basel Accord); Intermediary Definitions Adopting 

Release, 77 FR 30689. This approach generally is 

consistent with the CFTC Cross-Border Guidance. 

See CFTC Cross-Border Guidance, 78 FR 45326 

(stating that ‘‘where a subsidiary is subject to Baselcompliant capital standards and oversight by a G20 

prudential supervisor, the subsidiary’s positions 

would generally not be attributed to a parental 

guarantor in the computation of the parent’s 

outward exposure under the MSP definition’’). 

630See Cross-Border Proposing Release, 78 FR 

31033–34. 

631See note 626, supra. 632See Exchange Act rule 3a67–10(c)(2)(iv) 

(referring to rule 3a67–8(a)); see also Exchange Act 

rule 3a71–4 (addressing persons who have 

exceeded the de minimis thresholds but are in the 

process of registering); section IV.F.2, supra. 

633BM Letter at 15–16 (stating that the 

excessively high major participant threshold 

excludes most market participants, thus leaving 

large, non-U.S. entities that are active in the market 

subject only to dealer requirements). 

634See Intermediary Definitions Adopting 

Release, 77 FR 30697–30699. 

635 Id. at 30691. 

is regulated as a bank in the United 

States, or is subject to capital standards 

adopted by its home country supervisor 

that are consistent in all respects with 

the Capital Accord of the Basel 

Committee on Banking Supervision 

(‘‘Basel Accord’’).621 This preliminary 

view applied both to U.S. persons and 

non-U.S. persons that are subject to 

registration and regulation in the 

enumerated categories.622 Our 

preliminary view was that such 

consistent foreign regulatory capital 

requirements would adequately address 

the risks arising from such positions, 

making it unnecessary to separately 

address the risks associated with 

guarantees of those same positions.623

We noted that this approach was 

consistent with the capital standards of 

the prudential regulators with respect to 

foreign banks that are bank holding 

companies subject to the Federal 

Reserve Board of Governors’ 

supervision.624

One commenter supported our 

preliminary view that a non-U.S. 

person’s guaranteed positions would not 

be attributed to the guarantor if the 

guaranteed non-U.S. person is subject to 

capital regulation by the Commission, 

the CFTC, or capital standards in its 

home jurisdiction that are consistent 

with the Basel Accord.625 Another 

commenter sought clarification that a 

U.S. guarantor will not be required to 

attribute transactions of guaranteed 

entities while the guaranteed person’s 

registration as a major security-based 

swap participant is pending.626

(b) Final Rules 

Although the final rules require, in 

some circumstances, both the guarantor 

and the guaranteed person to include 

guaranteed positions in their respective 

major security-based swap participant 

threshold calculations, the final rules do 

not require a guarantor to attribute 

guaranteed positions to itself when the 

guaranteed person is subject to capital 

regulation by the Commission or the 

CFTC (including, but not limited to 

regulation as a swap dealer, major swap 

participant, security-based swap dealer, 

major security-based swap participant, 

futures commission merchant, broker, or 

dealer).627 This codifies our preliminary 

view.628 The final rule, moreover, does 

not require a guarantor to attribute to 

itself positions that it guarantees when 

the guaranteed person is regulated as a 

bank in the United States, or is subject 

to capital standards adopted by its home 

country supervisor that are consistent in 

all respects with the Basel Accord.629

Consistent with our preliminary view, 

we believe that consistent foreign 

regulatory capital requirements would 

adequately address the risks arising 

from such positions, making it 

unnecessary to separately address the 

risks associated with guarantees of those 

same positions.630 We continue to view 

such regulatory treatment as adequate to 

address the risks that the attribution 

requirement is intended to address. We 

also note that this approach is 

consistent with the capital standards of 

the prudential regulators with respect to 

foreign banks that are bank holding 

companies subject to the Federal 

Reserve Board of Governors’ 

supervision. 

As noted above, one commenter 

requested that a U.S. guarantor not be 

required to attribute to itself a person’s 

positions for which it provides a 

guarantee while that person’s 

registration as a major security-based 

swap participant is pending.631 Upon 

further consideration, we believe that it 

is appropriate to permit a guarantor not 

to attribute the positions of such entities 

to itself. This change will mitigate 

market disruption that may otherwise 

result due to the prospect of a person 

intermittently exceeding the major 

participant threshold when a person 

that it guarantees is in the process of 

registering as a major security-based 

swap participant. This approach is also 

consistent with the approach under the 

application of the de minimis exception 

that allows a person not to count the 

transactions of its affiliates that are in 

the process of registering as dealers.632

F. Other Issues Related to the 

Application of the Major Security-Based 

Swap Participant Definition 

1. Threshold for Registration as a Major 

Security-Based Swap Participant 

One commenter commented generally 

that the threshold for having to register 

as a major-security-based swap 

participant is too high.633 This 

threshold, however, was adopted in the 

Intermediary Definitions Adopting 

Release and is not under consideration 

in this rulemaking. In addition, the 

Intermediary Definitions Adopting 

Release provided that the Commission 

staff will prepare a report subsequent to 

the effectiveness of the security-based 

swap reporting requirements that will 

examine a number of aspects of our 

definitional rules and related 

interpretations, including relevant major 

security-based swap participant 

thresholds.634

2. Entities That Maintain Legacy 

Portfolios 

The Cross-Border Proposing Release 

did not address the treatment of legacy 

portfolios, but we stated in the 

Intermediary Definitions Adopting 

Release that ‘‘the fact that these entities 

no longer engage in new swap or 

security-based swap transactions does 

not overcome the fact that entities that 

are major participants will have 

portfolios that are quite large and could 

pose systemic risk to the U.S. financial 

system.’’ 635 Based on this 


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636 Id. at 30691 and n.1170. 

637See Exchange Act proposed rules 18a3(c)(1)(iii)(D) and 18a-3(c)(2)(iii)(C); see also Capital 

and Margin Proposing Release, 77 FR 70214, 70247, 

70265, 70269–70, 70271–72 (proposed capital, 

margin and segregation requirements for securitybased swap dealers and major security-based swap 

participants). 

638 Intermediary Definitions Adopting Release, 77 

FR 30691. 

639AFGI Letter I at 2 (suggesting that the 

Commission consider providing an exemption from 

major security-based swap participant registration 

for entities that will be required to register solely 

due to their legacy portfolios, if their legacy 

positions are expected to decline below the major 

security-based swap participant threshold within 12 

to 14 months of the effective date due to projected 

run-off or terminations); AFGI Letter II at 2–5; AFGI 

letter, dated February 18, 2011 (‘‘AFGI Letter V’’) 

at 11 (stating that attribution to a financial guaranty 

insurer is not appropriate when the insurer 

guarantees a security-based swap obligation of an 

unaffiliated entity) (incorporated by reference in 

AFGI Letter I). 

640AFGI Letter I at 3 (stating that such activities, 

like activities related to legacy swaps, do not 

constitute new business and that regulators should 

implement consistent regulatory treatment in this 

area to reduce exposure resulting from these legacy 

transactions); AFGI Letter II at 2–3. See also AFGI 

Letter III at 5 (arguing that an amendment to a 

legacy account for loss mitigation or credit 

strengthening without increasing notional exposure 

should still be considered the legacy account 

instead of a new security-based swap); AFGI letter, 

dated July 20, 2011 (‘‘AFGI Letter IV’’) at 2–4 

(supporting exclusion for state-regulated insurers) 

(incorporated by reference in AFGI Letter I); AFGI 

Letter V at 3 (same). 

641See Intermediary Definitions Adopting 

Release, 77 FR 30691. 

642See Cross-Border Proposing Release, 78 FR 

31034–35. See section IV.C.2(e) and Exchange Act 

rule 3a71–3(a)(4)(iii) (listing the international 

organizations that are excluded from the definition 

of ‘‘U.S. person’’). 

643See section IV.C.2(e), supra. 

644See, e.g., WB/IFC Letter at 2–4, 6–7 (also 

stating that such organizations should not be 

required to register as major participants or to clear 

security-based swaps, and that affiliates of such 

organizations should be excluded from the ‘‘U.S. 

person’’ definition); SC Letter at 16–24 (contending 

that the privileged and immunities afforded such 

organizations would be violated by their direct 

regulation as dealers or major participants, or by 

direct regulation equivalents, and that affiliates of 

such organizations also are immune from 

regulation); IDB Letter at 5. See note 420, supra. 645See note 422, supra. 646See SC Letter at 16. 647See section IV.H.2, supra. 648See section IV.H.2, supra; SC Letter at 18–19; 

WB/IFC Letter (incorporating SC Letter). 649See IV.H.2, supra. 650See id. 

understanding, the Commissions jointly 

determined that such entities should not 

be excluded from major participant 

regulation but explained that the 

Commissions would pay particular 

attention to special issues raised by the 

application of substantive rules to those 

legacy portfolios.636

In the Commission’s proposed capital 

and margin requirements, we proposed 

exceptions from certain account equity 

requirements, such as collection of 

margin, for non-bank security-based 

swap dealers’ and non-bank major 

security-based swap participants’ 

accounts holding legacy security-based 

swaps and we requested comment on 

these proposals.637 As explained in the 

Intermediary Definitions Adopting 

Release, we may entertain requests for 

relief or guidance on a case-by-case 

basis.638 One commenter requested that, 

at a minimum, the Commission provide 

flexibility in any requirements that 

require a person to register as a major 

security-based swap participant solely 

due to activity related to its legacy 

portfolios.639 With respect to the 

activities of financial guaranty insurers, 

one commenter suggested that 

amendments made to an existing 

insured security-based swap or entry 

into a new security-based swap with the 

same or a substituted counterparty in 

connection with loss mitigation or risk 

reduction efforts, should receive the 

same regulatory treatment given to 

legacy portfolio security-based swaps 

because such security-based swaps do 

not increase notional exposure.640

In the context of the cross-border 

application of the major security-based 

swap participant definition, we are 

maintaining our approach to legacy 

portfolios as described in the 

Intermediary Definitions Adopting 

Release and are not excluding entities 

that maintain legacy portfolios from the 

major security-based swap participant 

definition.641 Given the foregoing, we 

are not adopting an exclusion from the 

cross-border application of the major 

security-based swap participant 

definition for entities that maintain 

legacy portfolios. 

G. Foreign Public Sector Financial 

Institutions and Government-Related 

Entities 

In the Cross-Border Proposing 

Release, we did not propose to 

specifically address the treatment of 

entities such as foreign central banks, 

international financial institutions, 

multilateral development banks, and 

sovereign wealth funds in the context of 

the major security-based swap 

participant definition and instead 

sought comment regarding the types, 

levels, and natures of security-based 

swap activity that such organizations 

regularly engage in in order to allow us 

to better understand the roles of these 

organizations in the security-based swap 

markets.642

The final rule defining ‘‘U.S. person’’ 

(like the proposed definition of that 

term) specifically excludes several 

foreign public sector financial 

institutions and their agencies and 

pension plans, and more generally 

excludes any other similar international 

organization and its agencies and 

pension plans.643 As explained in the 

context of the de minimis exception, 

certain commenters requested that we 

take further action to address the 

application of the dealer definition and 

its de minimis exception to securitybased swap activities involving such 

organizations.644 Additionally, we noted 

that two commenters stated that they 

should not be subject to the possibility 

of dealer regulation for comity reasons, 

on the grounds that they were arms of 

a foreign government.645 Commenters 

did not make arguments specific to the 

application of the major security-based 

swap participant definition but 

articulated their arguments in 

conjunction with their arguments 

related to the application of the dealer 

definition. However, one commenter 

explained that, though it understands 

that multilateral development banks do 

not currently engage in security-based 

swap at the level that would trigger 

major security-based swap participant 

registration, even if they did, regulation 

would violate their privileges and 

immunities.646

As discussed in the context of the de 

minimis exception, it is our view that 

such issues are outside the scope of this 

release given that the source of any such 

privileges and immunities is found 

outside of the Dodd-Frank Act and the 

federal securities laws.647

Similar to the discussion in the 

context of the de minimis exception, 

commenters also stated that non-U.S. 

persons should not have to count their 

security-based swap positions involving 

these organizations against their major 

security-based swap participant 

threshold calculations on the basis that 

counting such positions would 

constitute the impermissible regulation 

of such organizations.648 As discussed 

in the context of the de minimis 

exception, we do not agree with the 

suggestion that counting a person’s 

positions with such organizations 

against the major participant calculation 

thresholds—when otherwise provided 

for by the rules—involves the regulation 

of such organizations.649 Requiring a 

person to count, against their major 

participant calculation thresholds, the 

person’s positions involving such an 

international organization as 

counterparty simply reflects the 

application of the federal securities laws 

to that person and its positions, and 

does not constitute the regulation of the 

international organization.650 A person’s 

security-based swap positions with such 

an international organization are 


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651See section IV.I, supra; see also Intermediary 

Definitions Adopting Release, 77 FR 30666 

(explaining that in developing the rules further 

defining ‘‘substantial position,’’ we were mindful of 

the costs associated with regulating major 

participants and considered cost and benefit 

principles as part of that analysis). 

652See section III.A, supra. 

653See section IV.I, supra. 

654See id., supra. 

655See id., supra. 

656See Cross-Border Proposing Release, 78 FR 

31139. 

657See Intermediary Definitions Adopting 

Release, 77 FR 30727. 

658See section IV.I.1(a) and note 431, supra 

(discussing various fixed and variable costs). 

659See Exchange Act rule 3a67–10(b)(3)(ii); 

section V.D.3, supra. 

considered the same, for purposes of 

applying the major participant 

calculation thresholds and other Title 

VII requirements, as a position with 

some other non-U.S. person 

counterparty. 

H. Economic Analysis of Final Rules 

Regarding ‘‘Major Security-Based Swap 

Participants’’ 

These final rules and guidance 

regarding the cross-border 

implementation of the application of the 

definition of major security-based swap 

participants will affect the costs and 

benefits of major security-based swap 

participant regulation by determining 

which positions will be counted against 

a market participant’s major securitybased swap participant calculation 

thresholds.651 The cross-border rules 

have the potential to be important in 

determining the extent to which the risk 

mitigation and other benefits of Title VII 

are achieved, by identifying those 

market participants with sufficiently 

large exposures to raise the types of 

systemic risk concerns that the major 

security-based swap participant 

definition was intended to address.652

As discussed in the context of the 

cost-benefit analysis of the application 

of the de minimis exception in the 

cross-border context, commenters 

addressed cost-benefit issues from a 

variety of perspectives, including 

arguing that cost-benefit principles 

warranted greater harmonization with 

the approaches taken by the CFTC or 

foreign regulators.653 Commenters, 

however, did not separately address 

cost-benefit issues related to the 

application of the major security-based 

swap participant definition. 

We have taken economic effects into 

account in adopting these final crossborder rules and providing guidance. 

Because security-based swap contracts 

are associated with complex risks and 

the markets are highly interconnected, 

we believe that positions that exist 

within the United States, which are 

most likely to expose the U.S. financial 

system to financial risk, should 

generally be included in the major 

security-based swap participant 

threshold calculations. At the same 

time, we recognize that the cross-border 

application of Title VII has the potential 

to reduce liquidity within the U.S. 

market to the extent it increases the 

costs of entering into security-based 

swaps or provides incentives for 

particular market participants to avoid 

the U.S. market to operate wholly 

outside the Title VII framework.654

As addressed in the analysis of the 

costs and benefits of our application of 

the de minimis rule, the application of 

the major security-based swap 

participant definition implicates two 

types of costs and benefits: assessment 

costs and programmatic costs and 

benefits.655 First, certain current and 

future participants in the security-based 

swap market will incur assessment costs 

in connection with determining whether 

they fall within the ‘‘major securitybased swap participant’’ definition and 

thus would have to register with the 

Commission. 

Second, the registration and 

regulation of some entities as major 

security-based swap participants will 

lead to programmatic costs and benefits 

arising as a consequence of the Title VII 

requirements that apply to registered 

major security-based swap 

participants.656

We discuss these costs and benefits 

associated with the final rules more 

fully below. We also discuss the 

economic impact of certain potential 

alternatives to the approach taken in the 

final rules. 

1. Programmatic Costs and Benefits 

(a) Cost-Benefit Considerations of the 

Final Rules 

Exchange Act rule 3a67–10 will 

permit market participants to exclude 

certain of their positions from their 

major security-based swap participant 

threshold calculations, and thus may 

cause particular entities that engage in 

security-based swap transactions not to 

be regulated as major security-based 

swap participants. The rules 

accordingly may be expected to affect 

the programmatic costs and benefits 

associated with the regulation of major 

security-based swap participants under 

Title VII, given that those costs and 

benefits are determined in part by 

which persons will be regulated as 

major security-based swap 

participants.657

As discussed in the context of the 

application of the de minimis exception, 

this does not mean that there is a oneto-one relationship between a person 

not being a ‘‘major security-based swap 

participant’’ as a result of these crossborder rules, and the resulting change to 

programmatic benefits and costs.658 In 

practice, we believe that these rules will 

focus the regulation of major securitybased swap participants on those market 

participants whose security-based swap 

positions may expose the U.S. financial 

system to the levels of risk we identified 

as warranting regulation as a major 

security-based swap participant in the 

Intermediary Definitions Adopting 

Release, or on the prevention of evasion. 

To the extent that a person’s positions 

within the United States remain below 

these thresholds, we believe that 

regulating it as a major security-based 

swap participant under Title VII would 

be less likely to produce the types of 

programmatic benefits that Title VII was 

intended to address. In other words, 

these requirements will direct the 

application of the major security-based 

swap participant definition—which 

itself is the product of cost-benefit 

considerations—towards those entities 

whose security-based swap positions are 

most likely to pose the type and level of 

risk to the U.S. financial system that 

Title VII was intended to mitigate. 

As such, the rules reflect our 

assessment and evaluation of 

programmatic costs and benefits: 

• Positions of U.S. persons— 

Requiring U.S. persons, as defined in 

the final rules (including the foreign 

branches of such persons), to include all 

of their positions in their major 

participant threshold calculations, 

addresses risks that these positions pose 

to the U.S. financial system. 

• Positions guaranteed by U.S. 

persons—Requiring non-U.S. persons to 

include in their major security-based 

swap participant threshold calculations 

all their positions that are guaranteed by 

a U.S. person, where their 

counterparties have recourse to the 

guarantor, reflects both the economic 

reality of the position—that the position 

exists within the United States—and 

addresses the risks posed to the U.S. 

financial system by the positions of 

such persons that are guaranteed by U.S. 

persons.659

• Positions with U.S.-person 

counterparties—Requiring non-U.S. 

persons to include their positions with 

counterparties that are U.S. persons, 

unless the positions are with a foreign 

branch of a registered security-based 

swap dealer, addresses risks to the U.S. 


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660See Exchange Act rule 3a67–10(b)(3)(i); 

section V.D.1; see also note 437, supra (discussing 

rationale for this limitation in context of de minimis 

exception). 

661See Exchange Act rule 3a67–10(c); section V.E, 

supra. 

662See Exchange Act rule 3a67–10(b)(2); section 

V.C, supra. 

663See Intermediary Definitions Adopting 

Release, 77 FR 30666 (explaining that in developing 

the rules further defining ‘‘substantial position,’’ we 

were mindful of the costs associated with regulating 

major participants and considered cost and benefit 

principles as part of that analysis). 

664See id. at 30724–25. 

665See id. at 30727 and note 1529; section III.A.2. 

That methodology determined that an entity that 

margins its positions would need to have securitybased swap positions approaching $100 billion to 

reach the levels of potential future exposure 

required to meet the substantial position threshold, 

even before accounting for the impact of netting, 

while an entity that clears its security based swaps 

generally would need to have positions 

approaching $200 billion. We believed that it was 

reasonable to assume that most entities that will 

have security-based swap positions large enough to 

potentially cause them to be major participants in 

practice will post variation margin in connection 

with those positions that they do not clear, making 

$100 billion the relevant measure. The available 

data from 2011 showed that only one entity had 

aggregate gross notional positions (i.e., aggregate 

buy and sell notional positions) in single-name CDS 

exceeding $100 billion, and three other entities had 

aggregate gross notional positions between $50 and 

$100 billion. We explained, however, that an 

entity’s positions reflecting single-name credit 

protection sold to its counterparties, as opposed to 

purchased, may be expected to be a more key 

determinant of potential future exposure under 

those rules. The data showed that zero entities had 

more than $100 billion in positions arising from 

selling single-name credit protection and that only 

two entities had between $50 and $100 billion 

arising from such positions. See id. at 30727, 30734 

and note 1529. 

In the Intermediary Definitions Adopting Release, 

we noted that to the extent that an entity’s securitybased swap positions are not cleared or associated 

with the posting of variation margin, security-based 

swap positions of $20 billion may lead to sufficient 

potential future exposure to cause the entity to be 

a major participant, though we believed that few, 

if any, entities would have a significant number of 

such positions. The data indicated that only 32 

entities have notional CDS positions in excess of 

$10 billion. See id. at note 1529. 

666See note 444, supra (noting that the data on 

which the methodology is based has been updated). 

Consistent with the methodology used in the 

Intermediary Definitions Adopting Release, the 

2012 data indicated that two entities had aggregate 

gross notional positions (i.e., aggregate buy and sell 

notional positions) in single-name CDS exceeding 

$100 billion. Applying the principles reflected in 

these final rules regarding the counting of positions 

against the major security-based swap participant 

thresholds suggests that two entities would have 

aggregate gross notional positions in single name 

CDS exceeding $100 billion. No additional entities 

would be required to register as a result of 

aggregation. Based on this data, we believe that it 

is reasonable to conclude that five or fewer entities 

ultimately may register as major security-based 

swap participants. 

667See section IV.I.1(b), supra. 

financial system arising from positions 

entered into with U.S. persons.660

• Attribution of certain positions to 

guarantors of performance under a 

security-based swap—Requiring 

guarantors of performance under 

security-based swaps to attribute to 

themselves, for purposes of their own 

major security-based swap participant 

threshold calculations, positions that 

they guarantee, addresses risks that 

guarantees pose to the U.S. financial 

system. To the extent that the guarantee 

involves a position within the United 

States or brings a position within the 

United States, our final rules would 

typically require attribution to the 

guarantor. These requirements are 

intended to help ensure that positions 

that pose risks to the U.S. financial 

system are included in the guarantor’s 

major participant threshold 

calculations.661

• Positions subject to anti-evasion 

provisions—Requiring conduit affiliates 

to include all of their positions in their 

major participant threshold calculations 

addresses, in a targeted manner, the 

potential for evasion of the major 

security-based swap participant 

requirements of Title VII.662 As noted 

above we are adopting a definition of 

‘‘conduit affiliate’’ that excludes 

affiliates of registered security-based 

swap dealers and major security-based 

swap participants to avoid imposing 

costs on registered persons in situations 

that would not appear to implicate the 

types of evasion concerns that the 

conduit affiliate definition is intended 

to address. 

In short, these final rules apply the 

major security-based swap participant 

definition—which itself reflects costbenefit considerations 663—to crossborder security-based swap positions in 

a way that directs the focus of major 

participant regulation toward those 

entities whose security-based swap 

positions may expose the U.S. financial 

system to the levels of risk we identified 

as warranting regulation as a major 

security-based swap participant. 

(b) Evaluation of Programmatic Impacts 

In defining ‘‘substantial position’’ and 

‘‘substantial counterparty exposure’’ as 

part of the Intermediary Definitions 

Adopting Release, we sought to capture 

persons whose security-based swap 

positions pose sufficient risk to 

counterparties and the markets 

generally that regulation as a market 

participant was warranted, without 

imposing costs of Title VII on those 

entities for which regulation currently 

may not be justified in light of the 

purposes of the statute.664 As discussed 

above in the context of the dealer 

analysis, we estimated in the 

Intermediary Definitions Adopting 

Release that, under those rules, 

approximately 12 entities had 

outstanding positions large enough that 

they would likely carry out threshold 

calculations and that fewer than five 

entities, and potentially zero, would 

ultimately be required to register as 

major security-based swap 

participants.665 Those estimates provide 

a baseline against which the 

Commission can analyze the 

programmatic costs and benefits and 

assessment costs of the final rules 

applying the major security-based swap 

participant definition to cross-border 

activities. 

We believe the methodology used in 

the Intermediary Definitions Adopting 

Release also is appropriate for 

considering the potential programmatic 

costs and benefits associated with the 

final cross-border rules. This 

methodology particularly can help 

provide context as to how rules 

regarding the cross-border application of 

the definition of major security-based 

swap participant may change the 

number of entities that must register as 

major security-based swap participants, 

and thus help provide perspective 

regarding the corresponding impact on 

the programmatic costs and benefits of 

Title VII. Applying that methodology to 

2012 data regarding the single-name 

CDS market suggests that under these 

final rules five or fewer entities may 

have to register as major security-based 

swap participants—a number that is 

consistent with our estimates in the 

Intermediary Definitions Adopting 

Release.666

The factors that are described in more 

detail in section IV.I.1(b) regarding the 

application of the de minimis exception 

are also relevant to and may impact the 

programmatic benefits and costs 

associated with the implementation of 

the cross-border application of the major 

security-based swap participant 

definition. Those factors include 

limitations of the methodology and data 

used, the impact of the not yet finalized 

rules implementing Title VII entity-level 

and transaction-level requirements 

applicable to major security-based swap 

participants, market participants’ 

modifications to their business structure 

or practices in response to the final 

rules, and the impact on market 

participants of other regulatory 

requirements that are analogous to the 

major security-based swap participant 

requirements.667

In general, however, and consistent 

with our territorial approach, we believe 

that these rules are targeted 


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668See section IV.I.1(b), supra (describing 

spillover risks). 

669See section VIII.B, infra. 

670See Intermediary Definitions Adopting 

Release, 77 FR 30733–36. 

671See id. at 30734–36. 

672See id. at 30734. 

673See Cross-Border Proposing Release, 77 FR 

31141. 

674See Intermediary Definitions Adopting 

Release, 77 FR 30736. We also noted in that release 

that if 32 entities were to perform the analysis, the 

market wide legal costs would total $960,000. See 

id. at 30736 n. 1539; see also note 665, supra 

(noting that if an entity did not clear or post 

variation margin, $20 billion in notional CDS 

positions may be sufficient exposure to cause the 

entity to be a major participant and that 32 entities 

have notional CDS positions exceeding $10 billion). 

675See section IV.I.2, supra. 

676See Intermediary Definitions Adopting 

Release, 77 FR note 1529. 

677Based on data as of December 2011, in that 

release we found that 1 entity had aggregate gross 

notional positions from bought and sold credit 

protection exceeding $100 billion, 4 entities had 

aggregate gross notional single-name CDS positions 

exceeding $50 million, and 12 entities had 

aggregate gross notional CDS positions exceeding 

$25 billion. See id. at 30734 n. 1529. 

678See section III.A.1, supra. The difference 

between this and our previous estimate of 12 

entities reflects changes in security-based swap 

activity since the Intermediary Definitions 

Adopting Release and the final rules’ treatment of 

positions between non-U.S. persons in the absence 

of guarantees from U.S. persons. 

appropriately and do not apply major 

security-based swap participant 

regulation to those entities whose 

positions have a more limited impact on 

the U.S. financial system and hence 

whose regulation as a major securitybased swap participant under Title VII 

would be less linked to programmatic 

benefits (i.e., non-U.S. persons that 

engage in security-based swap 

transactions entirely, or almost entirely, 

outside the United States with non-U.S. 

persons or with certain foreign 

branches), while applying major 

participant regulation to those entities 

whose positions would be more likely to 

produce programmatic benefits under 

Title VII. The nexus between specific 

aspects of these requirements and the 

programmatic costs and benefits also is 

addressed below in connection with our 

consideration of various alternatives to 

the approach taken in the final rules. 

Finally, as discussed in the context of 

the de minimis exception, we recognize 

that the U.S. market participants and 

positions regulated under Title VII are a 

subset of the overall global securitybased swap market and that shocks to 

risk or liquidity arising from a foreign 

entity’s positions outside the United 

States may spill into the United 

States.668 We also have considered these 

spillovers in connection with our 

analysis of the effects of these final 

cross-border rules on efficiency, 

competition, and capital formation.669

2. Assessment Costs 

The analysis of how these crossborder rules will affect the assessment 

costs associated with the ‘‘major 

security-based swap participant’’ 

definition is related to the assessment 

cost analysis described in the 

Intermediary Definitions Adopting 

Release,670 but must also account for 

certain issues specific to these crossborder rules. While in certain regards 

those assessment costs can more readily 

be estimated than the programmatic 

effects discussed above, the assessment 

costs associated with the cross-border 

application of the Title VII major 

participant requirements will be 

considerably less significant than those 

programmatic effects. 

The Intermediary Definitions 

Adopting Release addressed how certain 

market participants could be expected 

to incur costs in connection with their 

determination of whether they have a 

‘‘substantial position’’ in security-based 

swaps or pose ‘‘substantial counterparty 

exposure’’ created by their securitybased swaps, which is necessary for 

determining whether they are major 

security-based swap participants.671 In 

that release we estimated that as many 

as 12 entities would likely perceive the 

need to perform these calculations, 

given the size of their security-based 

swap positions.672 We preliminarily 

believed that entities that perceive the 

need to perform the threshold 

calculations as a result of the proposed 

rules and guidance set forth in the 

Cross-Border Proposing Release would 

incur only relatively minor incremental 

costs to those described in the 

Intermediary Definitions Adopting 

Release.673 Based on the estimate that 

no more than 12 entities would perceive 

the need to engage in the analysis of 

whether they are a major security-based 

swap participant, we estimated that the 

total legal costs associated with 

evaluating the various elements of the 

definition may approach $360,000.674

As discussed in the context of the de 

minimis exception, application of these 

cross-border rules can be expected to 

affect the assessment costs that market 

participants will incur. In part, certain 

non-U.S. persons may be expected to 

incur personnel costs and legal costs— 

beyond the legal costs addressed as part 

of the Intermediary Definitions 

Adopting Release—associated with 

analyzing these cross-border rules and 

developing systems and procedures to 

assess which transactions would have to 

be counted against the major securitybased swap participant calculation 

thresholds (or with the purpose of 

avoiding positions that pose risk to the 

United States financial system that 

would be sufficient to meet the 

applicable thresholds). On the other 

hand, while certain market participants 

also would incur additional legal costs 

associated with the major security-based 

swap participant determination (i.e., the 

assessment of whether particular 

positions should be included in the 

major participant threshold 

calculations) addressed in the 

Intermediary Definitions Adopting 

Release, the application of the crossborder rules may reduce the number of 

entities that incur such legal costs.675

In adopting these rules we estimate 

the assessment costs that market 

participants may incur as a result. As 

discussed below, however, these costs 

in practice may be mitigated in large 

part by steps that market participants 

already have taken in response to other 

regulatory initiatives, including 

compliance actions taken in connection 

with the requirements applicable to 

swaps. 

(a) Legal Costs 

The implementation of these crossborder rules in some circumstances has 

the potential to change the legal costs 

identified in the Intermediary 

Definitions Adopting Release, including 

by adding new categories of legal costs 

that non-U.S. persons may incur in 

connection with applying the major 

security-based swap participant 

definition in the cross-border context. 

Legal costs related to the cross-border 

application of major security-based 

swap participant definition—As 

discussed in the Intermediary 

Definitions Adopting Release, certain 

market participants will incur 

assessment costs related to the analysis 

of whether their positions rise to the 

levels set by the major security-based 

swap participant definition. For 

purposes of that release, we assumed 

that entities with aggregate gross 

notional single-name CDS positions 

exceeding $25 billion may identify a 

need to perform the major participant 

analysis.676 Based on that figure, we 

estimated that 12 entities would 

perceive the need to perform the major 

participant analysis.677

Under the final rules described above, 

available data from 2012 indicates that 

approximately nine persons will have 

relevant positions exceeding $25 billion, 

and we continue to believe that firms 

whose positions exceed this amount 

will be likely to perform the major 

participant threshold analysis.678 Of 

those nine, five entities are not 


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679See Intermediary Definitions Adopting 

Release, 77 FR 30735. 

680The average cost incurred by such entities in 

connection with outside counsel is based on staff 

experience in undertaking legal analysis of status 

under federal securities laws. The staff believes that 

costs associated with obtaining outside legal 

counsel relating to such determinations range from 

$20,000 to $40,000 depending on the complexity of 

the entity. See id. at 30735–36 n. 1537 (estimating 

the upper bound of such costs at $30,000). We note 

that the additional $10,000 added to the estimate 

in the Intermediary Definitions Adopting Release is 

intended to account for the additional complexity 

that non-U.S. persons may face in performing the 

analysis. 

These estimates do not reflect a new category of 

costs arising from the cross-border rules. They 

instead are a revision of a category of previously 

identified costs that market participants may incur 

in obtaining legal services to assist in performing 

the major participant analysis, using newer data 

and reflecting only positions that are counted under 

the final cross-border rules. 

681See section IV.I.2(a) and note 460 (addressing 

calculations of costs), supra. 

682We do not believe that a potential major 

security-based swap participant will need to use 

any systems to determine if it is a ‘‘conduit 

affiliate.’’ See note 462, supra. 

683See section IV.I.2(b) and note 464, supra. 

684See Exchange Act rule 3a67–10(a)(4) and (3) 

(incorporating the definitions of ‘‘U.S. person’’ 

‘‘transaction conducted through a foreign branch,’’ 

including provisions permitting reliance on 

representations); see also section IV.I.2(b) and note 

465, supra (noting that non-U.S. market participants 

may seek representations as to whether positions 

arise from transactions conducted through a foreign 

branch of a U.S. bank that is registered as a securitybased swap dealer and also noting our 

understanding that few, if any, U.S. persons may 

participant in the single-name CDS market through 

their foreign branches). 

685See section IV.I.2(b), supra. 

686See id. 

687See section IV.I.2(b) and note 466, supra 

(explaining that determination of U.S.-person status 

generally will not vary over time absent changes 

involving corporate reorganizations). 

688See section IV.I.2(b), supra. The cumulative 

estimate is based on the same methodology and 

SIFMA Management & Professional Earnings in the 

Securities Industry 2013 data that we used to 

estimate these one-time costs for dealers. See note 

467, supra. With respect to major security-based 

swap participants, we conservatively assume that 

each of the non-U.S. firms will have 30 single-name 

CDS counterparties (based on data indicating that 

the five non-U.S. firms persons with total singlename CDS positions in 2012 exceeding $25 billion 

all had fewer than 45 counterparties in connection 

with single-name CDS, which produces an estimate 

of 15 hours of compliance staff time and 15 hours 

of legal staff time per firm. Based upon data from 

SIFMA’s Management & Professional Earnings in 

the Securities Industry 2013 (modified by the 

Commission staff to account for an 1800-hour-workyear and multiplied by 5.35 to account for bonuses, 

firm size, employee benefits, and overhead), the 

staff estimates that the average national hourly rate 

for a senior compliance examiner is $217 and that 

the average national hourly rate for an in-house 

attorney is $380; this leads to a cumulative estimate 

of $9,000 per firm for such costs. 

Continued 

domiciled in the United States. 

Consistent with our view in the 

proposing release, we expect that nonU.S. firms in this set will incur 

additional costs beyond those described 

in the Intermediary Definitions 

Adopting Release. These additional 

costs would arise due to information 

that non-U.S. market participants would 

have to collect and maintain in order to 

calculate the size of positions that count 

towards the major participant 

thresholds. Consistent with our analysis 

in the Intermediary Definitions 

Adopting Release, we believe that it is 

reasonable to conclude that at least 

some entities with security-based swap 

positions approaching the major 

participant thresholds are likely to seek 

legal counsel for interpretation of 

various aspects of the rules pertaining to 

the major participant definition.679

Though the costs associated with 

obtaining such legal services would vary 

depending on the facts and 

circumstances regarding an entity’s 

positions, we believe that $40,000 is a 

reasonable estimate of the upper end of 

the range of the costs of obtaining the 

services of outside counsel in 

undertaking the legal analysis of the 

entity’s status as a major security-based 

swap participant.680

Legal costs related to systems 

analysis—As noted in the assessment 

cost analysis related to the de minimis 

exception (and in addition to the 

estimates in the Cross-Border Proposing 

Release), we believe that it is reasonable 

to conclude that those five entities not 

domiciled in the United States may 

have to incur one-time legal expenses 

related to the development of systems 

and analysis expenses—discussed 

below—to identify which of their 

security-based swap positions 

potentially must be counted for 

purposes of the major security-based 

swap participant analysis, consistent 

with these cross-border rules. As in the 

dealer context, this additional cost 

estimate reflects the fact that the 

development of such systems and 

procedures must address cross-border 

rules that require accounting for factors 

such as whether an entity’s securitybased swaps are subject to guarantees 

from U.S. persons, whether its 

counterparties are U.S. persons, and, 

specific to the major security-based 

swap participant analysis, whether the 

entity must attribute the position to 

itself pursuant to the attribution rules. 

As in the analysis of assessment costs 

related to the dealer definition, we 

estimate that such legal costs would 

amount to approximately $30,400 per 

entity, and that those five entities would 

incur total costs of approximately 

$152,000.681

(b) Costs Related to New Systems, 

Analysis, and Representations 

Transaction-monitoring systems—The 

elements introduced by the final crossborder rules may cause certain non-U.S. 

persons to implement systems to 

identify whether their positions exceed 

the major security-based swap 

participant calculation thresholds. Such 

systems may reflect the need for nonU.S. persons to: (i) identify whether 

their counterparties are ‘‘U.S. persons’’; 

(ii) determine whether their positions 

with U.S. persons arise from 

transactions conducted through a 

foreign branch (which itself requires 

consideration of whether their 

counterparty is a ‘‘foreign branch’’) 

and—of those—determine which 

positions involve a foreign branch of a 

U.S. bank that itself is a registered 

security-based swap dealer; (iii) 

determine whether particular positions 

are subject to a recourse guarantee 

against a U.S. person; and (iv) evaluate 

the applicability of the attribution 

rules.682 Our estimates for the required 

systems are the same in the major 

participant analysis as they are in the 

dealer analysis: one-time programming 

costs of $14,904 and ongoing annual 

systems costs of $16,612 per entity.683

Analysis of counterparty status, 

including representations—As 

discussed in the context of the de 

minimis exception, non-U.S. market 

participants would be likely to incur 

costs arising from the need to assess the 

potential U.S.-person status of their 

counterparties, which we would 

typically expect to be dealers, and in 

some cases to obtain and maintain 

records related to representations 

regarding their counterparty’s U.S.- 

person status.684 We anticipate that nonU.S. persons are likely to review 

existing information about their 

counterparties to assess whether those 

counterparties are U.S. persons.685 NonU.S. persons at times may also request 

and maintain representations from their 

dealer and non-dealer counterparties to 

help determine or confirm their 

counterparties’ status.686 Accordingly, 

as in the discussion of dealer 

assessment costs, in our view, such 

assessment costs primarily would 

encompass one-time costs to review and 

assess existing information regarding 

counterparty domicile, principal place 

of business, and other factors relevant to 

potential U.S.-person status, as well as 

one-time costs associated with 

requesting and collecting 

representations from counterparties.687

The costs associated with 

representations in the context of the 

major participant analysis would be 

one-time costs of approximately $24,200 

per firm.688


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Consistent with the Cross-Border Proposing 

Release, moreover, this estimate is further based on 

estimated 40 hours of in-house legal or compliance 

staff’s time (based on the above rate of $380 per 

hour for an in-house attorney) to establish a 

procedure of requesting and collecting 

representations from trading counterparties, taking 

into account that such representation may be 

incorporated into standardized trading 

documentation used by market participants. This 

leads to an estimate of $15,200 per firm for such 

costs. See section IV.I.2(b) and note 467, supra. 

689We also recognize that the final rules requiring 

attribution may impose certain additional 

monitoring costs on market participants whose 

position in a security-based swap is guaranteed by 

another entity and on the entities that provide the 

guarantee. We anticipate that the guarantors may 

receive reports from the market participants whose 

position is guaranteed in order to allow the 

guarantors to monitor the amount of such positions 

for purposes of determining whether the positions 

attributed to the guarantor rise to the level that 

would require them to register as a major securitybased swap participant. 

690See section IV.I.2(b) and note 469, supra. 

691See section IV.I.2(b) and note 468 (noting that 

parties may structure their relationships in a way 

that will not require a separate representation in 

conjunction with each individual position) and 470, 

supra (describing calculations for this estimate). 

692Consistent with the above discussion, the 

estimated one-time costs of $51,500 represent: the 

costs to establish a system to assess the status of 

their positions under the definitions and other 

provisions specific to these cross-border rules 

($14,904); the costs related to the assessment of 

counterparty status, including costs of assessing 

existing information and of requesting and 

obtaining representations, as well as costs of related 

procedures ($24,200); and the costs for monitoring 

the status of their counterparties for purposes of 

their future security-based swap activities 

($12,436). See section IV.I.2(b) and note 471, supra. 

693See section IV.I.2(b), supra. 

694See section IV.I.2(c), supra. 

695See id. 

696See id. 

697See id. 

698See id. 

699See section V.A, supra. 

700Cf. section IV.I.3, supra. 

Monitoring of counterparty status— 

Also as addressed in the context of the 

de minimis exception, market 

participants may be expected to adapt 

their systems to monitor the status of 

their counterparties for purposes of 

future security-based swap activities, 

which would allow market participants 

to maintain records of counterparty 

status for purposes of conducting the 

major participant assessment.689 Market 

participants also may need to monitor 

for the presence of information that may 

indicate that the representations they 

have received are outdated or otherwise 

are not valid.690 The costs associated 

with adapting the systems described 

above to monitor the status of their 

counterparties for purposes of their 

future security-based swaps would be 

the same as the costs in the dealer 

analysis: one-time costs of 

approximately $12,436.691

Summary of systems, analysis, and 

representation costs—The summary of 

costs that certain non-U.S. market 

participants would incur in connection 

with systems, analysis of counterparty 

status and representations in connection 

with these cross-border rules would be 

approximately $51,500 in one-time 

costs 692 and $16,612 in estimated 

annual ongoing costs.693 Based on our 

estimate, subject to the limitations 

associated with the use of data analysis 

discussed above, that five non-U.S. 

domiciled entities will incur these 

assessment costs, we estimate that the 

total one-time industry-wide costs 

associated with establishing such 

systems would amount to 

approximately $257,500 and total 

ongoing costs would amount to 

approximately $83,100. 

(c) Overall Considerations Related to 

Assessment Costs 

In sum, we believe that the effect of 

these final cross-border rules would be 

an increase over the amounts that 

otherwise would be incurred by certain 

non-U.S. market participants, both in 

terms of additional categories of legal 

costs and in terms of the need to 

develop certain systems and procedures. 

As discussed in the context of the 

assessment costs applicable to the 

dealer analysis, we believe that 

requiring certain non-U.S. persons to 

incur such assessment costs is an 

unavoidable adjunct to the 

implementation of a set of rules that are 

appropriately tailored to apply the 

‘‘major security-based swap participant’’ 

definition under Title VII to a global 

security-based swap market in a way 

that yields the relevant benefits 

associated with the regulation of major 

participants and achieves the benefits of 

Title VII.694 The benefits of Title VII’s 

regulatory requirements applicable to 

major security-based swap participants 

could be undermined if a significant 

portion of positions held by non-U.S. 

persons that impose risk on the U.S. 

financial system were excluded from the 

Title VII framework. In certain respects, 

however, decisions embedded in these 

final rules are designed to avoid 

imposing assessment costs upon market 

participants.695

As explained in the context of the 

analysis for dealers, we recognize that 

our estimates of assessment costs may 

result in an overestimation as such costs 

may be tempered to the extent that 

market participants’ assessments 

correspond to the assessments they 

otherwise would follow due to other 

regulatory requirements or business 

practices, particularly with respect to 

assessments they may have made 

regarding the U.S.-person status of their 

counterparties.696

Also as noted in the dealer 

discussion, we acknowledge that certain 

aspects of the final rules may differ from 

those of the CFTC, which may result in 

higher costs for market participants, but 

we believe that such differences are 

justified and we discuss those 

differences in the substantive 

discussions of the specific rules.697 We 

also recognize other factors that may 

impact the assessment costs for 

potential major security-based swap 

participants, such as the possibility that 

certain market participants will choose 

to restructure their business to avoid 

major security-based swap participant 

regulation.698

3. Alternative Approaches 

As discussed above, the final rules 

incorporate a number of provisions 

designed to focus Title VII major 

security-based swap participant 

regulation upon those persons whose 

security-based swap positions may raise 

the risks within the United States that 

the major participant definition was 

intended to address.699

In adopting these final rules we have 

considered alternative approaches 

suggested by commenters, including the 

economic effects of following such 

alternative approaches. In considering 

the economic impact of potential 

alternatives, we have sought to isolate 

the individual alternatives to the extent 

practicable, while recognizing that 

many of those alternatives are not 

mutually exclusive.700

We further have considered such 

potential alternatives in light of the 

methodologies discussed above, by 

assessing the extent to which following 

particular alternatives would be 

expected to increase or decrease the 

number of entities that ultimately would 

be expected to be regulated as major 

security-based swap participants under 

the final rules, as well as the 

corresponding economic impact. 

Analysis of the available data would 

tend to suggest that various alternative 

approaches suggested by commenters 

would not produce any changes in the 

numbers of market participants that may 

have to be regulated as major securitybased swap participants. These results 

are subject to the above limitations, 

however, including limitations 

regarding the ability to quantitatively 

assess how market participants may 

adjust their future activities in response 

to the rules we adopt or for independent 

reasons. Accordingly, while such 

analyses provide some context regarding 

alternatives, their use as tools for 


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701See section II.B.2(c), supra. 

702See section V.B.2, supra. 

703See section IV.I.3(a) and note 477, supra. 

704See section IV.I.3(a), supra (discussing the 

same issue in the dealer context). 

705See section IV.I.3(b), supra (addressing similar 

discussion in the context of the dealer analysis). 

706See id., supra. 

707See id. 

708See section IV.I.3(b), supra (explaining that 

not requiring non-U.S. persons to include positions 

for which their counterparty has a recourse 

guarantee against a U.S. person could incentivize 

U.S. persons to use such guarantees, whereas an 

approach that requires an affiliate of a non-U.S. 

person to include all of its positions in its major 

security-based swap participant calculation 

thresholds may negatively impact liquidity). 

709See section II.B.2(c), supra. 

710See section V.D.3(b), supra. 

711See id. 

712See section IV.I.3(b) and note 481 (explaining 

that the data does not enable us to identify which 

positions of non-U.S. persons are subject to 

guarantees by U.S. persons). 

713See section IV.I.3(b) and notes 481 and 482, 

supra. 

illustrating the economic effects of such 

alternatives is limited. 

(a) Security-Based Swap Positions Held 

by Foreign Branches of U.S. Banks 

As with the final rules in the context 

of the de minimis exception, the final 

rules applying the major security-based 

swap participant definition require U.S. 

banks to count all positions of their 

foreign branches against the major 

participant calculation thresholds, even 

when the counterparty is a non-U.S. 

person or another foreign branch of a 

U.S. person. The proposed definition of 

‘‘U.S. person’’ plays a central role in the 

application of Title VII in the crossborder context, directly affecting which 

positions a person must include in its 

major security-based swap participant 

threshold calculations and ultimately, 

the number of entities that will register 

as major security-based swap 

participants. An alternative approach 

would permit U.S. persons not to 

include the positions of their foreign 

branches in their major security based 

swap participant calculation thresholds. 

As discussed above, we believe our 

approach to U.S. persons as described 

above, is consistent with our overall 

territorial approach to the application of 

Title VII requirements to the crossborder security-based swap market, 

because it requires that major securitybased swap participant calculation 

thresholds include the positions of such 

persons that are most likely to cause risk 

to the U.S. financial system at the 

threshold levels set in the major 

security-based swap participant 

definition.701 For the reasons discussed 

above, we believe that it is appropriate 

for a U.S. person to include in its 

calculation thresholds positions 

conducted through foreign branches to 

the same extent as other positions held 

by U.S. persons.702

As in the dealer analysis, using the 

2012 data to assess the impact 

associated with this alternative does not 

indicate a change to our estimate that up 

to five entities potentially would 

register as major security-based swap 

participants, and the analysis is subject 

to the limitations discussed in the 

context of the dealer analysis.703

Adopting an alternative approach that 

does not require foreign branches to 

count their positions with non-U.S. 

persons could incentivize U.S. persons 

to execute higher volumes through their 

branches.704

(b) Positions of Non-U.S. Persons for 

Which the Counterparty Has Rights of 

Recourse Against a U.S. Person 

The final rules require a non-U.S. 

person to count, against its major 

security-based swap participant 

calculation thresholds, positions for 

which the non-U.S. person’s 

performance in connection with the 

transaction is subject to a recourse 

guarantee against a U.S. person. 

Although the proposal instead would 

have treated such guaranteed affiliates 

like any other non-U.S. persons, we 

believe that this provision is appropriate 

for the reasons discussed above, 

including the fact that such recourse 

guarantees pose risks to the U.S. 

financial system via the guarantor.705

This aspect of the final rules reflects 

a middle ground between commenter 

views, as is discussed above regarding 

the approach taken in the dealer 

analysis.706 The same two alternatives 

that are presented in the analysis of 

alternatives to the approach to the 

dealer final rules are relevant to the 

discussion of the application of the 

major security-based swap participant 

definition—one alternative in which the 

final rules do not address guarantees at 

all, and one in which (based on the 

concept of a de facto guarantee) all 

affiliates of a U.S. person should have 

to count their security-based swap 

positions against the calculation 

thresholds, with a potential exception if 

they demonstrate to the market that 

there will be no guarantee.707 A third 

alternative and the approach taken in 

the proposal would require the non-U.S. 

person to include in its threshold 

calculations only those positions with 

U.S. persons that are not guaranteed but 

would require those positions that are 

guaranteed to be attributed to the U.S. 

person guarantor for purposes of its own 

threshold calculations. 

The analysis of the first two 

alternatives discussed in the context of 

the application of the dealer 

requirements above also applies in the 

context of applying the major securitybased swap participant definition.708

The third alternative, which is the 

approach taken in the proposal, may 

have reduced programmatic benefits by 

increasing the likelihood that, even 

when a person exceeds the thresholds 

by virtue of its own positions, which 

exist within the United States by virtue 

of the U.S. person guarantor, it will not 

be subject to direct regulation as a major 

participant.709 Under the proposed 

approach, only the U.S. person 

guarantor would have counted the 

positions for which the non-U.S. 

person’s counterparty had rights of 

recourse against the U.S. person, 

meaning that such positions would not 

be accounted for in the major 

participant threshold calculations of the 

entity that directly enters into the 

positions. The economic reality of such 

positions is that by virtue of the 

guarantee the non-U.S. person 

effectively acts together with a U.S. 

person to engage in the security-based 

swap activity that results in the 

positions, and the non-U.S. person’s 

positions cannot reasonably be isolated 

from the U.S. person’s engagement in 

providing the guarantee.710 The final 

rule reflects this economic reality by 

requiring the non-U.S. person whose 

position is guaranteed to include such 

positions in its major security-based 

swap participant threshold 

calculations.711

For the foregoing reasons, we believe 

that the approach taken in the final 

rules is appropriate. We note that an 

assessment of the data regarding the first 

alternative does not indicate a change in 

the number of entities that may be 

expected to register as major securitybased swap participants.712 Due to data 

limitations that prevent us from 

identifying which individual 

transactions of non-U.S. persons are 

subject to guarantees by U.S. persons 

and data limitations preventing us from 

obtaining information about the singlename security-based swap transactions 

of non-U.S. domiciled persons for 

single-name CDS involving a non-U.S. 

reference entity, the available data does 

not enable us to assess the second and 

third alternatives.713

(c) Positions of Conduit Affiliates 

The final rules require conduit 

affiliates to count all of their securitybased swap positions in their major 

security-based swap participant 

threshold calculations. The available 


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714See section IV.I.3(c), supra. 

715See id. 

716See id. 

717See section IV.I.3(d), supra. 

718See id. 

719See id. 

720See id. 

721See note 576 (describing CFTC approach) and 

note 189 (describing comments suggesting to treat 

guaranteed entities as U.S. persons), supra. 

722See section IV.I.3(d). 

data does not permit us to identify 

which market participants would be 

deemed conduit affiliates.714 As 

explained in the corollary discussion in 

the dealer analysis, we believe the 

alternative of not requiring such entities 

to count their positions would remove 

a tool that should help to deter market 

participants from seeking to evade 

regulation. 

As addressed in the dealer analysis 

another alternative to address such 

evasive activity could be to narrow the 

inter-affiliate exception, such as by 

making the exception unavailable when 

non-U.S. persons enter into positions 

with their U.S. affiliates.715 While this 

alternative may be expected to reduce 

costs to such entities, we believe the 

final rules will achieve comparable antievasion purposes with less cost and 

disruption.716

(d) Positions of Non-U.S. Persons With 

Foreign Branches of U.S. Banks and 

Certain Other Counterparties 

The final rules require non-U.S. 

persons to include their positions 

arising from transactions conducted 

through foreign branches of U.S. banks 

unless the U.S. bank is registered as a 

security-based swap dealer. This reflects 

a change from the proposal, which 

would have required non-U.S. persons 

to include all positions with foreign 

branches of U.S. banks without 

exception. The final approach, as in the 

context of the dealer analysis, reflects a 

middle ground between commenter 

views, which provided two alternatives: 

that all positions arising from 

transactions conducted through foreign 

branches be counted or that no such 

position be counted against a non-U.S. 

person’s major security-based swap 

participant calculation thresholds.717

Adopting the first alternative requiring 

non-U.S. persons to include all 

positions with foreign branches would 

raise the potential for disparate impacts 

upon U.S. persons with foreign 

branches, along with associated 

concerns about liquidity impacts.718

Adopting the second alternative 

excluding all such positions from being 

counted, could incentivize U.S. market 

participants that are not registered as 

dealers to execute higher volumes of 

security-based swaps through their 

foreign branches, resulting in higher 

levels of risk being transmitted to the 

United States without the riskmitigating attributes of having a 

registered dealer involved in the 

position.719

The available data related to these 

alternatives is subject to the limitations 

discussed above and does not indicate 

a change to our assessment of the 

number of entities that may be expected 

to register as major security-based swap 

participants.720

Another alternative approach would 

require non-U.S. persons to include in 

their major security-based swap 

participant threshold calculations those 

positions for which they have rights of 

recourse against a U.S. person or their 

positions with counterparties that are 

conduit affiliates.721 We believe that the 

positions of such non-U.S. persons do 

not transmit risk to the United States in 

the same way as if the potential major 

security-based swap participant is the 

entity whose performance is guaranteed 

by a U.S. person because the default of 

the non-U.S. person who holds the right 

of recourse against the U.S. person 

guarantor will not impact the outward 

exposure of the U.S. person or the nonU.S. person whose position is 

guaranteed. While these alternatives 

may potentially increase programmatic 

benefits associated with Title VII major 

participant regulation, they would also 

likely increase assessment costs by 

requiring such non-U.S. persons to 

evaluate and track whether they have a 

right of recourse against a U.S. person, 

potentially reducing liquidity available 

to U.S. corporate groups that provide 

guarantees to non-U.S. persons.722 We 

note that, under the final rules regarding 

guaranteed positions, the entity 

involved in the position with the closest 

connection to the United States, the 

non-U.S. person whose position is 

guaranteed, as well as the U.S. guarantor 

itself, will already be including the 

position in each of their calculations. 

Thus we believe such benefits would be 

more attenuated than those associated 

with the final rules’ approach of directly 

counting the positions of such 

guaranteed non-U.S. persons. 

Accordingly, we do not believe these 

alternatives would generate significant 

additional programmatic benefits. 

(e) Attribution 

i. Attribution to U.S. Persons 

Our final attribution approach 

requires U.S. persons to include, for 

purposes of their major security-based 

swap participant calculation thresholds, 

those positions for which a non-U.S. 

person’s counterparty has rights of 

recourse against the U.S. person. 

An alternative approach would not 

require a U.S. person to include such 

positions in its threshold calculations. 

This alternative potentially reduces the 

programmatic costs and benefits of 

major participant regulation because it 

would reduce the number of positions 

that U.S. guarantors would include in 

their calculations. By reducing the costs 

associated with providing guarantees, 

such an alternative could reduce the 

barriers to participation in the securitybased swap market faced by participants 

who might benefit from risk sharing 

afforded by security-based swap 

positions but cannot credibly provide 

sufficient information for their 

counterparties to assess 

creditworthiness. We further believe 

that such an approach would only 

reduce the assessment costs associated 

with major participant regulation to the 

extent that U.S. guarantors do not have 

private incentives in place to collect 

information about positions they 

guarantee. 

As noted in section V.D.3, however, 

we believe it is important to account for 

the risk to the U.S. financial system 

transmitted by such guaranteed 

positions. Ensuring that a U.S. person 

counts positions of potentially several 

entities whose counterparties have 

rights of recourse against it, where each 

of those entities may be individually 

below the major participant threshold, 

will generate the types of benefits that 

Title VII was intended to produce. The 

benefits of including these positions are 

significant because, through the U.S. 

guarantor, these positions expose the 

U.S. financial system to the type of risk 

that the definition of major securitybased swap participant is intended to 

address. 

ii. Attribution to Non-U.S. Persons 

Under the final rules a non-U.S. 

person must include security-based 

swap positions of a U.S. person for 

which that person’s counterparty has 

rights of recourse against the non-U.S. 

person, and security-based swap 

positions of another non-U.S. person 

that are with a U.S.-person counterparty 

who has rights of recourse against the 

non-U.S. person that is the potential 

major security-based swap participant. 

An alternative approach to these 

requirements would be to not require 

non-U.S. persons to include such 

positions, even when those positions are 

entered into by U.S. persons or when a 

U.S. person has a right of recourse 

against them under those positions. Not 

requiring these positions to be attributed 


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723See section V.B.2 and note 549, supra. See 

also section VIII.A, infra. 

724See section IV.H.2 and note 420 (addressing 

comments in de minimis context and citing WB/IFC 

Letter SC Letter and IDB Letter at 5), supra. 

725See section V.G, supra. 

726See generally Cross-Border Proposing Release, 

78 FR 31087–88. 

727See proposed Exchange Act rule 0–13(a), (e). 

Proposed Exchange Act rule 0–13 further would 

provide that applications must comply with 

Commission rule 0–3 (regarding the filing of 

materials with the Commission). Under the 

proposal, all applications would be submitted to the 

Commission’s Office of the Secretary electronically 

or in paper format, and in the English language. If 

an application is incomplete, the Commission may 

request that the application be withdrawn unless 

the applicant can justify why supporting materials 

have not been submitted and undertakes to submit 

promptly the omitted materials. The Commission 

would not consider hypothetical or anonymous 

requests for a substituted compliance order. The 

proposed rule further addressed issues regarding 

contact information, amendments to the 

application, the review process, and potential 

hearings regarding the application. See proposed 

Exchange Act rule 0–13; see also Cross-Border 

Proposing Release, 78 FR 31087–88. 

728See proposed Exchange Act rule 0–13(a), (h). 

The proposal stated that requests for confidential 

treatment would be permitted to the extent 

provided under 17 CFR 200.81. See proposed 

Exchange Act rule 0–13(a); Cross-Border Proposing 

Release, 78 FR 31087–88. Under 17 CFR 200.81, 

persons submitting exemptions and related relief 

may also request that it be accorded confidential 

treatment for a specified period of time not 

exceeding 120 days. If the Commission staff 

determines that the request is reasonable and 

appropriate it will be granted and the letter or other 

communication will not be made available for 

public inspection or copying until the expiration of 

the specified period. If the staff determines that the 

request for confidential treatment should be denied, 

the staff shall advise the person making the request 

and the person may withdraw the letter or other 

communication within 30 days. 

729See Cross-Border Proposing Release, 78 FR 

31088. 

to the non-U.S. person could reduce 

assessment costs for non-U.S. persons 

and potentially result in fewer non-U.S. 

persons ultimately registering as major 

security-based swap participants. This 

alternative potentially improves risk 

sharing by U.S. persons who must rely 

on guarantees in order to participate in 

the security-based swap market by 

reducing the costs incurred by non-U.S. 

person guarantors. It likely would, 

however, also reduce programmatic 

benefits to the extent that non-U.S. 

persons that guarantee positions within 

the United States of multiple entities, 

each of which is below the major 

participant threshold, are not required 

to include such positions in their own 

calculations. 

Such non-U.S. persons who provide 

guarantees ultimately bear the risk of 

positions they guarantee, and the 

aggregate risk exposure of the U.S. 

financial system to a non-U.S. person 

guarantor varies more directly with the 

notional amount of positions involving 

U.S. persons that are guaranteed than 

with the number of entities to which it 

provides guarantees. As a result, the 

Commission believes it is appropriate to 

apply attribution requirements that treat 

non-U.S. person guarantors of positions 

to which U.S. persons are counterparties 

as if they were direct counterparties. 

With respect to guarantees provided by 

non-U.S. persons to U.S. persons, the 

Commission believes it is appropriate to 

attribute guaranteed positions because 

U.S. persons bear the risk that non-U.S. 

person guarantors will be unable to 

fulfill obligations under the guarantees 

they provide. 

(f) Positions Cleared Through a Clearing 

Agency in the United States 

The final approach requires non-U.S. 

persons to include in their major 

participant threshold calculations those 

positions that are entered into with U.S. 

persons, including positions that are 

cleared through a registered clearing 

agency in the United States. An 

alternative raised by a commenter 

suggested that the location of clearing 

not be relevant for purposes of 

determining whether a non-U.S. person 

is a major security-based swap 

participant.723 This alternative would 

ignore the risk that is posed to the U.S. 

financial system by positions cleared 

through a U.S.-person clearing agency, 

and would be inconsistent with the 

general approach that all positions with 

U.S. counterparties should be counted 

towards the major security-based swap 

participant threshold calculation. For 

this reason, we believe the alternative 

would ignore important programmatic 

benefits that are incorporated in the 

final approach. 

(g) Foreign Government-Related Entities 

Several commenters suggested that 

foreign government-related entities, 

such as sovereign wealth funds and 

MDBs, should be excluded from the 

U.S. person, security-based swap dealer, 

and major security-based swap 

participant definitions.724 By potentially 

capturing fewer major security-based 

swap participants, this alternative 

approach would correspondingly 

decrease the programmatic costs and 

benefits associated with Title VII 

regulation of major security-based swap 

participants. We believe that securitybased swap transactions entered into by 

these types of foreign governmentrelated entities with U.S. persons pose 

the same risks to the U.S. security-based 

swap markets as transactions entered 

into by entities that are not foreigngovernment related. Moreover, as noted 

above,725 we understand that foreign 

government-related entities rarely enter 

into security-based swap transactions 

(as opposed to other types of swap 

transactions) in amounts that would 

trigger the obligation to register as a 

major security-based swap participant. 

To the extent that such entities do enter 

into security-based swaps with U.S. 

persons, however, we believe such 

requiring such entities to include those 

positions in their major participant 

threshold calculations will generate 

programmatic benefits, as such 

positions introduce risk into the United 

States of the type title VII intended to 

address. 

VI. Substituted Compliance Procedural 

Rule 

A. Proposed Approach and 

Commenters’ Views 

The Cross-Border Proposing Release 

addressed a range of substantive issues 

regarding the potential availability of 

substituted compliance, whereby a 

market participant could satisfy certain 

Title VII obligations by complying with 

comparable foreign requirements. These 

included issues regarding which 

requirements might be satisfied via 

substituted compliance, and regarding 

the showings necessary to obtain a 

substituted compliance order from the 

Commission. 

The release also proposed to amend 

the Commission’s Rules of General 

Application to establish procedures for 

considering substituted compliance 

requests, similar to the procedures that 

the Commission uses to consider 

exemptive order applications under 

section 36 of the Exchange Act.726

Among other aspects, proposed 

Exchange Act rule 0–13 would require 

that substituted compliance 

applications be in writing and include 

any supporting documentation 

necessary to make the application 

complete—‘‘including information 

regarding applicable requirements 

established by the foreign financial 

regulatory authority or authorities, as 

well as the methods used by the foreign 

financial regulatory authority or 

authorities to monitor compliance with 

such rules’’—and that applications cite 

applicable precedent.727 The proposed 

rule also stated that the Commission 

may choose to publish requests in the 

Federal Register, and stated that 

requestors may seek confidential 

treatment.728 We preliminarily 

concluded that those proposed 

procedures would provide sufficient 

guidance regarding the submission 

process.729 We also solicited comment 

regarding the sufficiency of the 

guidance provided by the proposed rule, 


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730See id. 

731See AFR Letter I at 11–12. 

732See FOA Letter at 4 (stating that the proposed 

requirement that an application include supporting 

documentation that the applicant believes 

necessary for the Commission to make the 

determination ‘‘puts the burden of interpretation 

wholly on the applicant’’; requesting additional 

guidance regarding the information needed to 

accompany requests, and greater specificity to 

ensure ‘‘that the applications it receives address a 

similar range of compliance issues and contain a 

similar amount of supporting detail’’); SIFMA/FIA/ 

FSR Letter at A–38 (urging the Commission ‘‘to 

provide a more granular and detailed framework 

regarding the considerations relevant to evaluating 

substituted compliance requests’’). 

733See, e.g., FOA Letter at 8 (requesting that the 

Commission and the CFTC coordinate in making 

substituted compliance determinations and that the 

Commissions consider whether to accept joint 

submissions from foreign regulators or foreign 

market participants); CEDU Letter at 2 (stating that 

the Commission should work closely with the CFTC 

‘‘when determining whether substituted 

compliance is applicable with respect to a 

particular jurisdiction’’). 

734See, e.g., SIFMA/FIA/FSR Letter at A–36 

(‘‘Foreign regulators are often best placed to 

describe their rules and provide information for the 

purposes of a comparability analysis. Such an 

approach would also allow for a more efficient use 

of resources.’’). 

735See EC Letter at 3 (suggesting that ‘‘the review 

of a foreign regime should be conducted in 

cooperation solely with the relevant foreign 

regulators or legislators, as opposed to firms’’ to 

avoid duplication or confusion); ESMA Letter at 3. 

736See AFR Letter I at 12 (supporting ability to 

reject or withdraw substituted compliance 

determinations based on the failure of a foreign 

regime to exercise supervisory or enforcement 

authority); BM Letter at 30–31 (criticizing CrossBorder Proposing Release for including ‘‘only 

passing reference to foreign supervision and 

enforcement as discretionary factors the SEC may 

consider in making a substituted compliance 

determination,’’ and stating that any substituted 

compliance determinations be predicated on 

evaluation of ‘‘a host of factors regarding the foreign 

regulatory system, including staff expertise, agency 

funding, agency independence, technological 

capacity, supervision in fact, and enforcement in 

fact’’). 

737The decision to permit foreign regulators to 

submit substituted compliance requests may impact 

our future consideration of proposed rule 3a71–5(c), 

which specified that applications for substituted 

compliance determinations in connection with 

security-based swap dealer requirements may be 

made by foreign dealers or by groups of foreign 

dealers. 

738To the extent we receive multiple requests in 

connection with a particular jurisdiction, we may 

consider such requests together. 

739See Exchange Act rule 0–13(e). The final rule 

addresses the need for applications to provide 

information regarding how foreign regulatory 

authorities ‘‘monitor and enforce’’ compliance with 

the applicable rules. The relevant language of the 

proposal simply referred to ‘‘monitor.’’ 

In addition, the final rule revises the proposed 

language regarding the Commission’s ability to 

request applications to be withdrawn, by omitting 

the proposed reference to the Commission acting 

‘‘through its staff.’’ See Exchange Act rule 0–13(a). 

The final rule further revises the proposed 

language regarding the process for considering 

applications, by providing that an appropriate 

response will be issued following ‘‘a vote by’’ the 

Commission. See Exchange Act rule 0–13(g). 

740We note that assessments of analogous factors 

occur in other contexts. For example, assessments 

conducted by the Federal Reserve in connection 

with applications by foreign banks to establish a 

branch, agency or commercial lending company in 

the United States consider—and the Federal 

Reserve requires applications to provide 

information regarding—the following factors 

regarding the role played by the foreign bank’s 

and regarding whether foreign 

regulatory authorities should be able to 

submit substituted compliance 

requests.730

One commenter raised concerns that 

the proposed availability of confidential 

treatment ‘‘would foreclose any public 

comment, debate or analysis of the 

applicant’s claims about the foreign 

regulatory regime, leading to an 

industry-led process.’’ That commenter 

urged us to disallow confidential 

treatment of applications, and to invite 

public comment as foreign jurisdictions 

are considered for comparability.’’ 731

Commenters also asked for greater 

clarity regarding the information to be 

provided in connection with substituted 

compliance requests.732 Commenters 

also asked that the Commission 

coordinate with the CFTC and foreign 

regulators in making substituted 

compliance determinations.733

Other commenters addressed a related 

issue regarding whether foreign 

regulators could submit substituted 

compliance requests. Proposed 

Exchange Act rule 3a71–5, regarding 

substituted compliance for foreign 

security-based swap dealers, specified 

that such requests may be filed by a 

foreign security-based swap dealer or 

group of dealers. A number of 

commenters took the contrasting 

position that foreign regulators should 

be able to submit substituted 

compliance requests.734 Some 

commenters further stated that such 

requests solely should be submitted by 

foreign regulators.735 Two commenters 

particularly emphasized the importance 

of the Commission’s substituted 

compliance assessments taking into 

account foreign enforcement and 

supervisory practices.736

B. Final Rule 

In large part, we expect to address 

issues regarding the availability of 

substituted compliance as part of future 

rulemakings, in conjunction with 

considering the cross-border application 

of the relevant substantive rules. As 

discussed above, we believe that it is 

appropriate to address issues regarding 

the cross-border application of the 

substantive requirements under Title VII 

in conjunction with considering the 

final rules to implement those 

substantive requirements, as substituted 

compliance potentially will constitute 

an integral part of the final approach 

toward cross-border application. 

At this time, however, we believe that 

it is appropriate to adopt a final rule to 

address the procedures for submitting 

substituted compliance requests. Using 

the same general procedural 

requirements would facilitate the 

efficient consideration of substituted 

compliance requests. Proposed 

Exchange Act rule 0–13, moreover, is 

sufficiently flexible to accommodate 

requests related to a range of regulatory 

requirements, even when the 

requirements necessitate different 

approaches toward substituted 

compliance. 

Accordingly, we are adopting 

Exchange Act rule 0–13 largely as 

proposed. In response to commenter 

input, however, the final rule has been 

modified from the proposal to provide 

that a request for a substituted 

compliance order may be submitted 

either by a party that potentially would 

comply with requirements under the 

Exchange Act pursuant to a substituted 

compliance order, or by a relevant 

foreign financial regulatory authority or 

authorities.737 We are persuaded that 

allowing foreign regulators to submit 

such requests would promote the 

completeness of requests and promote 

efficiency in the process for considering 

such requests, in light of foreign 

regulators’ expertise regarding their 

domestic regulatory system, including 

the effectiveness of their compliance 

and enforcement mechanisms, and to 

allow for a single point of contact to 

facilitate the consideration of 

substituted compliance requests 

associated with the jurisdiction. We are 

not, however, foreclosing the ability of 

a market participant itself to submit a 

request that it be able to comply with 

Exchange Act requirements pursuant to 

a substituted compliance order.738

The final rule further revises the 

proposal to provide that applications 

should include supporting 

documentation regarding the methods 

that foreign financial regulatory 

authorities use to enforce compliance 

with the applicable rules.739 This type 

of information—which we expect would 

be best provided by the relevant foreign 

regulator—is consistent with the fact 

that our substituted compliance 

assessments will not be limited to a 

comparison of applicable rules and their 

underlying goals, but also will take into 

account the capability of a foreign 

financial regulatory authority to monitor 

compliance with its rules and take 

appropriate enforcement action in 

response to violations of such rules.740


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home country supervisor: (a) the scope and 

frequency of on-site examinations by the homecountry supervisor; (b) off-site monitoring by the 

home-country supervisor; (c) the role of external 

auditors; (d) regulation and monitoring of affiliate 

transactions; (e) other applicable prudential 

requirements (including capital adequacy, asset 

classification and provisioning, single or aggregate 

credit and foreign currency exposure limits, and 

liquidity) and associated supervisor monitoring; (f) 

remedial authority of the home-country supervisor 

to enforce compliance with prudential controls and 

other supervisory or regulatory requirements; and 

(g) prior approval requirements (related to 

investments in other companies or the 

establishment of overseas offices). See Federal 

Reserve Board, ‘‘International Applications and 

Prior Notifications under Subpart B of Regulation 

K,’’ (http://www.federalreserve.gov/reportforms/

forms/FR_K–220110331_f.pdf). In noting this 

analogous requirement, we are not predicting the 

extent to which such factors may or may not be 

considered as part of the Commission’s substituted 

compliance assessments. 

741For example, Exchange Act rule 24b–2 

addresses the potential availability of confidential 

treatment in connection with any registration 

statement, report, application, correspondence or 

other document filed pursuant to the Exchange Act. 

The rule provides that the person filing the 

information must make written objection to its 

public disclosure at the time of the filing. See 17 

CFR 240.24b–2. 

Separately, Commission Rule 200.83 is a 

procedural rule that addresses how persons 

submitting information to the Commission may 

request that the information not be disclosed 

pursuant to a request under the Freedom of 

Information Act for reasons permitted by Federal 

law. The rule does not apply when any other statute 

or Commission rule provides procedures for 

confidential treatment regarding particular 

categories of information, or where the Commission 

has specified that an alternative procedure be 

utilized in connection with a particular study, 

report, investigation or other matter. Under this 

rule, a person submitting information to the 

Commission must request confidential treatment at 

the time of the submission. See 17 CFR 200.83. 

742Exchange Act Section 24(d) provides that the 

Commission generally shall not be compelled to 

disclose records obtained from a foreign securities 

authority if: (1) the foreign authority in good faith 

determines and represents that public disclosure of 

the records would violate the laws applicable to 

that foreign securities authority; and (2) the 

Commission obtains the records pursuant to 

procedures authorized for use in connection with 

the administration or enforcement of the securities 

laws, or a memorandum of understanding. 

Exchange Act Section 24(f)(2) further provides 

that the Commission shall not be compelled to 

disclose privileged information obtained from any 

foreign securities authority or law enforcement 

authority if the foreign authority in good faith has 

determined and represented that the information is 

privileged. 

743The text of the final rule has been revised from 

the proposal to eliminate a reference to the 

Commission having ‘‘sole discretion’’ to choose to 

publish a notice, and to provide that publication 

would occur following submission of a ‘‘complete’’ 

application. See Exchange Act rule 0–13(h). 

744The final rule also makes technical change to 

the proposal by replacing references to the 

Commission’s Division of Trading and Markets with 

general references to the ‘‘staff,’’ consistent with the 

broad range of issues that will likely arise in 

connection with evaluating substituted compliance 

requests. See Exchange Act rule 0–13(a), (g). 

745Cf. Institute of International Finance (‘‘IIF’’) 

Letter (making a similar point). 

Finally, the final rule revises the 

proposal by removing a provision that 

would have stated that requestors may 

seek confidential treatment of their 

application to the extent provided by 

Exchange Act rule 200.81. This change 

reflects the fact that under the final 

rules substituted compliance 

applications may be submitted by 

foreign financial regulatory authorities, 

and recognizes the importance of having 

the assessment consider potentially 

sensitive information regarding a foreign 

regime’s compliance and enforcement 

capabilities and practices. Accordingly, 

requests for confidential treatment may 

be submitted pursuant to any applicable 

provisions governing confidentiality 

under the Exchange Act.741 We expect 

confidential treatment requests will seek 

protection for privileged information 

obtained from foreign regulators.742

Recognizing the significance of 

commenter concerns regarding the need 

for public comment, debate and analysis 

of substituted compliance requests, 

moreover, rule 0–13 provides that the 

Commission shall provide public notice 

of requests and solicit public comment 

when a complete application has been 

submitted.743 We recognize that public 

comment regarding substituted 

compliance requests may be helpful to 

our consideration of particular 

requests.744

In adopting rule 0–13, we recognize 

that the requirement that an application 

‘‘include any supporting documents 

necessary to make the application 

complete’’ implicates commenter 

concerns regarding the need for further 

guidance regarding what information 

must be submitted as part of substituted 

compliance requests. We expect to 

address such issues regarding 

supporting documentation in the future, 

as we consider the potential availability 

of substituted compliance in connection 

with particular Title VII requirements. 

C. Economic Analysis 

The availability of substituted 

compliance has the potential to impact 

the interplay between programmatic 

costs and benefits associated with the 

Title VII regulation of security-based 

swap dealers and major security-based 

swap participants, as well as those 

associated with other Title VII 

requirements. For example, substituted 

compliance potentially may permit the 

risk management and other 

programmatic benefits of dealer 

regulation to be achieved while 

avoiding costs that market participants 

otherwise may incur. At the same time, 

the process of making substituted 

compliance requests may cause certain 

market participants to incur extra costs, 

although that possibility may be 

obviated in part by the provision that 

permits foreign financial authorities to 

make such requests. 

As discussed throughout this release, 

the security-based swap market is a 

global market that is subject to 

regulatory requirements that may vary 

by jurisdiction. As a result, market 

participants that operate globally 

potentially could be subject to 

overlapping or conflicting regulations. If 

Title VII requirements for non-U.S. 

market participants conflict with 

regulations in local jurisdictions, Title 

VII could act as a barrier to entry to the 

U.S. security-based swap market. In 

such cases, allowing market participants 

to comply with Title VII via substituted 

compliance could act as a mechanism to 

preserve access for non-U.S. persons to 

the U.S. security-based swap market, 

reducing the likelihood that non-U.S. 

persons exit the U.S. market entirely. 

Therefore, we expect that substituted 

compliance—so long as it is conditioned 

on a foreign regime’s comparability to 

the relevant requirements under the 

Dodd-Frank Act, and on the foreign 

regime having adequate compliance and 

enforcement capabilities—would help 

preserve access and competition in the 

U.S. market, and thus benefit non-dealer 

participants in the security-based swap 

market.745

Although the costs associated with 

the process of making substituted 

compliance request may be uncertain at 

this time, the decision to request 

substituted compliance is purely 

voluntary. To the extent such requests 

are made by market participants, 

moreover, such participants would 

request substituted compliance only if, 

in their own assessment, compliance 

with applicable requirements under a 

foreign regulatory system was less costly 

than compliance with both the foreign 

regulatory regime and the relevant Title 

VII requirement. Even after a substituted 

compliance determination is made, 

market participants would only choose 

substituted compliance if the private 

benefits they expect to receive from 

participating in the U.S. market exceeds 

the private costs they expect to bear, 

including any conditions the 

Commission may attach to the 

substituted compliance determination. 

Where substituted compliance increases 

the number of dealers or other 

participants in the U.S. security-based 

swap market, or prevents existing 

participants from leaving the U.S. 

market, this may help mitigate the 

programmatic costs associated with the 

applicable Title VII requirements, while 


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746See section II.B, supra. 

747The antifraud provisions of the securities laws 

include section 17(a) of the Securities Act, 15 

U.S.C. 77q(a); sections 9, 10(b), 14(e), and 15(c)(1)– 

(2) & (7) of the Exchange Act, 15 U.S.C. 78i, 78j, 

78n, 78o(c)(1)–(2); section 206 of the Investment 

Advisers Act of 1940, 15 U.S.C. 80b-6; and any rule 

or regulation of the Commission promulgated under 

these statutory authorities. 

748See 130 S. Ct. 2869, 2888 (2010) (holding in 

a section 10(b) class action that ‘‘it is . . . only 

transactions in securities listed on domestic 

exchanges, and domestic transactions in other 

securities, to which § 10(b) applies’’). 

749See, e.g., Schoenbaum v. Firstbrook, 405 F.2d 

200, 206 (2d Cir. 1968), modified on other grounds, 

405 F.2d 215 (1968) (en banc). 

750See 156 Cong. Rec. H5237 (daily ed. June 30, 

2010) (statement of Rep. Kanjorski, author of 

section 929P(b)) (‘‘In the case of Morrison v. 

National Australia Bank, the Supreme Court last 

week held that section 10(b) of the Exchange Act 

applies only to transactions in securities listed on 

United States exchanges and transactions in other 

securities that occur in the United States. In this 

case, the Court also said that it was applying a 

presumption against extraterritoriality. This bill’s 

provisions concerning extraterritoriality, however, 

are intended to rebut that presumption by clearly 

indicating that Congress intends extraterritorial 

application in cases brought by the SEC or the 

Justice Department. Thus, the purpose of the 

language of section 929P(b) of the bill is to make 

clear that in actions and proceedings brought by the 

SEC or the Justice Department, the specified 

provisions of the Securities Act, the Exchange Act 

and the Investment Advisers Act may have 

extraterritorial application, and that extraterritorial 

application is appropriate, irrespective of whether 

the securities are traded on a domestic exchange or 

the transactions occur in the United States, when 

the conduct within the United States is significant 

or when conduct outside the United States has a 

foreseeable substantial effect within the United 

States.’’). See also 156 Cong. Rec. S5915–16 (daily 

ed. July 15, 2010) (statement of Senator Reed). 

751Section 22 of the Securities Act, 15 U.S.C. 

77v(a); section 27 of the Exchange Act, 15 U.S.C. 

78aa. 

752Section 214 of the Investment Advisers Act, 15 

U.S.C. 80b–14. 

753See SEC v. A Chicago Convention Center, LLC, 

961 F. Supp. 2d 905 (N.D. Ill. 2013); see also 

Richard W. Painter et al., ‘‘When Courts and 

Congress Don’t Say What They Mean: Initial 

Reactions to Morrison v. National Australia Bank 

and to the Extraterritorial Jurisdiction Provisions of 

the Dodd-Frank Act,’’ 20 Minn. J. of Inter. L. 1 

(Winter 2011). But see Liu v. Siemens A.G., 2013 

WL 5692504, *3 (S.D.N.Y. Oct. 21, 2013) (‘‘Section 

929P(b) permits the SEC to bring enforcement 

actions for certain conduct or transactions outside 

the United States.’’); SEC v. Tourre, 2013 WL 

2407172, *1 n.4 (S.D.N.Y. June 4, 2013) (929P(b) 

‘‘effectively reversed Morrison in the context of SEC 

enforcement actions’’); In re Optimal U.S. Litig., 865 

F. Supp. 2d 451, 456 n.28 (S.D.N.Y. 2012) 

(‘‘Congress has . . . restor[ed] the conducts and 

effects test for SEC enforcement actions.’’); SEC v. 

Gruss, 2012 WL 3306166, *3 (S.D.N.Y. Aug. 13, 

2012) (‘‘Section 929P(b) . . . allows the SEC to 

commence civil actions extraterritorially in certain 

cases.’’); SEC v. Compania Internacional Financiera 

S.A., 2011 WL 3251813, *6 n.2 (S.D.N.Y. July 29, 

2011) (‘‘It may be that [929P(b)] was specifically 

designed to reinstate the Second Circuit’s ‘conduct 

and effects’ test.’’); Cornwell v. Credit Suisse Grp., 

729 F. Supp. 2d 620, 627 n.3 (S.D.N.Y. 2010) (‘‘[I]n 

legislation recently enacted, Congress explicitly 

granted federal courts extraterritorial jurisdiction 

under the conduct or effect test for proceedings 

brought by the SEC.’’). 

754See rule 250.1. 

755The Morrison decision does not preclude the 

Commission’s interpretation. When the Supreme 

Court construed section 10(b) in Morrison to 

helping to ensure that the associated 

programmatic benefits are achieved. 

The costs particularly associated with 

making substituted compliance 

requests, as well as the general costs and 

benefits associated with allowing 

substituted compliance, may be 

expected to vary between the various 

categories of Title VII requirements. 

Relevant considerations may include: 

whether (and to what extent) substituted 

compliance is permitted in connection 

with a requirement; the relevant 

information required to demonstrate 

consistency between the foreign 

regulatory requirements and the 

Commission’s analogous dealer 

requirements; the relevant information 

required to demonstrate the adequacy of 

the foreign regime’s compliance and 

enforcement mechanisms; and whether 

substituted compliance requests are 

made by market participants or by 

foreign regulatory authorities. These 

factors limit our ability to further 

predict the economic consequences of 

this procedural rule. 

We recognize that commenters have 

asked that the Commission coordinate 

with the CFTC and foreign regulators in 

making substituted compliance 

determinations. As discussed above, the 

Commission is subject to obligations to 

consult and coordinate with the CFTC 

and foreign regulators in connection 

with Title VII.746 Our revision of the 

final rule to permit foreign regulators to 

submit substituted compliance requests 

also helps address goals of increased 

coordination. Moreover, our substituted 

compliance assessments regarding 

particular requirements applicable to 

security-based swap dealers also as 

appropriate may take into account the 

way that other regulators address 

similar issues, subject to the need for 

any allowance of substituted 

compliance to be predicated on the 

extent to which compliance with 

another regulatory regime will help 

achieve the goals of Title VII. 

VII. Antifraud Authority 

A. Final Rule 

The provisions of the rules and 

guidance, discussed above, do not limit 

the cross-border reach of the antifraud 

provisions or other provisions of the 

federal securities laws that are not 

specifically addressed by this release. 

In section 929P(b) of the Dodd-Frank 

Act, Congress added provisions to the 

federal securities laws confirming the 

Commission’s broad cross-border 

antifraud authority.747 Congress enacted 

section 929P(b) in the wake of the 

Supreme Court’s decision in Morrison v. 

National Australia Bank,748 which 

created uncertainty about the 

Commission’s cross-border enforcement 

authority under the antifraud provisions 

of the federal securities laws. Before 

Morrison, the federal courts of appeals 

for nearly four decades had construed 

the antifraud provisions to reach crossborder securities frauds when the fraud 

either involved significant conduct 

within the United States causing injury 

to overseas investors, or had substantial 

foreseeable effects on investors or 

markets within the United States.749

With respect to the Commission’s 

enforcement authority, section 929P(b) 

codified the courts of appeals’ prior 

interpretation of the scope of the 

antifraud provisions’ cross-border reach. 

Section 929P(b) also made clear that the 

scope of subject-matter jurisdiction was 

coextensive with the cross-border reach 

of the antifraud provisions.750

Specifically, the Commission’s 

antifraud enforcement authority under 

section 17(a) of the Securities Act and 

the antifraud provisions of the Exchange 

Act—including sections 9(j) and 10(b)— 

extends to ‘‘(1) conduct within the 

United States that constitutes significant 

steps in furtherance of [the antifraud 

violation], even if the securities 

transaction occurs outside the United 

States and involves only foreign 

investors,’’ and ‘‘(2) conduct occurring 

outside the United States that has a 

foreseeable substantial effect within the 

United States.’’ 751 Similarly, the 

Commission’s enforcement authority 

under section 206 of the Investment 

Advisers Act applies broadly to reach 

‘‘(1) conduct within the United States 

that constitutes significant steps in 

furtherance of the violation, even if the 

violation is committed by a foreign 

adviser and involves only foreign 

investors,’’ and ‘‘(2) conduct occurring 

outside the United States that has a 

foreseeable substantial effect within the 

United States.’’ 752

Although no commenters challenged 

the Commission’s interpretation of its 

cross-border antifraud authority, we are 

aware that a federal district court 

recently expressed the view that the 

statutory language may be unclear.753

We therefore have determined to adopt 

a rule that clearly sets forth our 

interpretation of the Commission’s 

cross-border antifraud authority.754 We 

believe that our interpretation is not 

only the better reading of the antifraud 

authorities and the statutory text added 

by section 929P(b), but that our reading 

is consistent with section 929P(b)’s 

legislative history and purpose.755


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determine its territorial scope, it acknowledged that 

the language of section 10(b) neither required nor 

precluded extraterritorial application. Morrison, 

130 S.Ct. at 2881–82. It was merely silent. The 

Court also looked to other provisions of the 

Exchange Act for evidence of extraterritorial intent, 

but found none. The Court thus applied a default 

‘‘presumption’’ against extraterritoriality to find 

that section 10(b) lacked extraterritorial effect, 

while making clear that this presumption was not 

‘‘a limit upon Congress’s power to legislate’’ and 

only applied ‘‘unless a contrary intent appears.’’ Id. 

at 2877. Section 929P(b) now provides that contrary 

intent—–in the words of Morrison, it supplies the 

‘‘indication of an extraterritorial application’’ that 

had been missing. Our interpretation is thus, at a 

minimum, a reasonable reading of the antifraud 

provisions in light of section 929P(b)’s enactment. 

756See generally Restatement (Third) of Foreign 

Relations Law of the United States § 402 (1987) 

(stating that ‘‘the United States has authority to 

prescribe law with respect to . . . conduct that, 

wholly or in substantial part, takes place within its 

territory; the status of persons, or interests in things, 

present within its territory’’ and ‘‘conduct outside 

its territory that has or is intended to have 

substantial effect within its territory’’). 

757See e.g., Luigi Guiso, Paola Sapienza, and 

Luigi Zingales. ‘‘Trusting the stock market,’’ 63 J. 

Fin. Vol. 63, No. 6: 2557 2600 (2008); see also David 

Easley and Maureen O’Hara, Microstructure and 

Ambiguity, 65 J. Fin. 1817 (2010). 

758 15 U.S.C. 78c(f). 

759 15 U.S.C. 78w(a)(2). 

Further, we believe that our 

interpretation of the cross-border 

antifraud enforcement authority best 

advances the strong interest of the 

United States in applying the antifraud 

provisions to cross-border frauds that 

implicate U.S. territory, U.S. markets, 

U.S. investors, other U.S. market 

participants, or other U.S. interests.756

We believe that our interpretation of the 

cross-border antifraud authority is 

necessary to ensure honest securities 

markets and high ethical standards in 

the U.S. securities industry, and thereby 

to promote confidence in our securities 

markets among both domestic and 

foreign investors. Our interpretation of 

the cross-border antifraud authority will 

also allow us to better protect U.S. 

investors from securities frauds 

executed outside of the United States 

where those frauds may involve nondomestic securities transactions but 

nonetheless threaten to produce, 

foreseeably do produce, or were 

otherwise intended to produce effects 

upon U.S. markets, U.S. investors, other 

U.S. market participants, or other U.S. 

interests. 

B. Economic Analysis 

This rule is designed to ensure the 

antifraud provisions of the securities 

laws are provided broad cross-border 

reach. Effective cross-border 

enforcement of the antifraud provisions 

should help detect and deter or stop 

transnational securities frauds the final 

rule may mitigate inefficiencies in 

allocation of capital. For example, by 

directly diverting financial resources 

from more productive projects to less 

productive projects, serious 

transnational securities frauds can 

generate welfare losses. 

Further, in the absence of the crossborder application of the antifraud 

provisions, the perceived risk of fraud 

may indirectly result in less efficient 

capital allocation if it reduces investors’ 

trust in the securities market.757

Additionally, given the global nature of 

the securities market, ensuring that 

antifraud provisions of the securities 

laws have cross-border reach will 

reduce the likelihood of a fragmented 

market. As a result of reduced ambiguity 

over the degree to which they are 

protected from fraud, U.S. market 

participants will have fewer incentives 

to avoid cross-border activity because, 

as explained above, they will have 

increased confidence in the integrity of 

the market. Through this channel, the 

final rules support a market that 

provides greater opportunities for U.S. 

market participants to share risks with 

market participants in other 

jurisdictions. 

VIII. Impacts on Efficiency, 

Competition, and Capital Formation 

In developing our approach to the 

cross-border application of the Title VII 

security-based swap dealer and major 

participant definitions, we have focused 

on meeting the goals of Title VII, 

including the promotion of the financial 

stability of the United States, by the 

improvement of accountability and 

transparency in the U.S. financial 

system and the protection of 

counterparties to security-based swaps. 

We also have considered the effects of 

our policy choices on competition, 

efficiency, and capital formation as 

mandated under section 3(f) of the 

Exchange Act. That section requires us, 

whenever we engage in rulemaking 

pursuant to the Exchange Act and are 

required to consider or determine 

whether an action is necessary or 

appropriate in the public interest, to 

consider, in addition to the protection of 

investors, whether the action will 

promote efficiency, competition, and 

capital formation.758 In addition, section 

23(a)(2) of the Exchange Act requires us, 

when making rules under the Exchange 

Act, to consider the impact such rules 

would have on competition. Section 

23(a)(2) also prohibits the Commission 

from adopting any rule that would 

impose a burden on competition not 

necessary or appropriate in furtherance 

of the purposes of the Exchange Act.759

In this section, we focus particularly 

on these effects. In adopting these final 

rules, we recognize that the most 

significant impact of the cross-border 

implementation of the dealer and major 

participant definitions will derive from 

the role of the definitions in 

determining which market entities are 

subject to security-based swap dealer 

and major security-based swap 

participant regulation under Title VII 

and which entities are not. That is, the 

scope of the final definitions will affect 

the ultimate regulatory costs and 

benefits that will accompany the full 

implementation of Title VII rules aimed 

at increasing transparency, 

accountability, and financial stability. 

Furthermore, the final cross-border rules 

may create incentives for market 

participants, including dealers as well 

as non-dealers and other non-registered 

entities who transact with dealers, to 

structure their businesses to operate 

wholly outside of the Title VII 

framework. This incentive may be 

particularly strong for entities at the 

boundaries of the definitions—for 

example, entities with relatively limited 

contact with U.S. persons—for whom 

the benefits of operating outside of Title 

VII may exceed the costs of 

restructuring or forgoing trading 

opportunities with U.S. counterparties. 

A. Competition 

As noted above, a key goal of Title VII 

of the Dodd-Frank Act is to promote the 

financial stability of the United States 

by improving accountability and 

transparency in the financial system. To 

that end, Title VII imposes new 

regulatory requirements on market 

participants who register as securitybased swap dealers or major 

participants. The final cross-border 

implementation of the dealer and major 

participant definitions discussed in this 

release, including the cross-border 

implementation of the de minimis 

exception, will likely affect competition 

in the U.S. security-based swap market 

and potentially change the set of 

available counterparties that would 

compete for business and provide 

liquidity to U.S. market participants. 

Though these substantive Title VII 

requirements have not been finalized, 

application of Title VII to registered 

dealers and major participants may 

directly affect the competitive landscape 

of the security-based swap market. 

As detailed above, the security-based 

swap market is a global, interconnected 

market. Within this global market, 

foreign and domestic dealers compete 

for business from counterparties, while 

non-dealers (including major 

participants) that participate in the 


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760See section V.D.1(b). 

761The rules we are adopting regarding conduit 

affiliates should mitigate this risk to some degree, 

as the foreign affiliate’s non-U.S. person 

counterparties would not generally be able to 

engage in security-based swap dealing activity on 

behalf of its U.S.-person affiliate without itself 

being required to include those transactions in its 

own de minimis calculations. 

762Cf. Carl Shapiro, ‘‘Investment, Moral Hazard, 

and Occupational Licensing,’’ The Review of 

Economic Studies, Vol. 53, No. 5 (1986) (using a 

theoretical model to show ‘‘that licensing and 

certification tend to benefit customers who value 

quality highly at the expense of those who do not’’). 

Oren Fuerst, ‘‘A Theoretical Analysis of the Investor 

Protection Regulations Argument for Global Listing 

of Stocks,’’ Working Paper (1998) (using a 

theoretical model of the listing decision to show 

how managers of high quality firms signal their 

quality more effectively in a strict regulatory 

regime). Craig Doidge, G. Andrew Karolyi, and Rene 

M. Stulz, ‘‘Why are Foreign Firms Listed in the U.S. 

Worth More?’’ Journal of Financial Economics, Vol. 

71, Issue 2 (2004) (hypothesizing that firms crosslisted in the United States are better able to take 

advantage of growth opportunities, and finding that 

‘‘expected sales growth is valued more highly for 

firms listing in the U.S. and that this effect is greater 

for firms from countries with poorer investor 

rights’’). While economic theory supports the 

assertion that registration can separate high-quality 

dealers from low-quality dealers, with 

corresponding differences in pricing, we received 

no comments either agreeing or disagreeing with 

the assertion that some market participants may be 

willing to pay higher prices to trade with a highquality intermediary. 

market use security-based swaps for 

purposes that can include speculation 

and hedging. Because the market for 

security-based swaps is a global market 

and some participants may not engage 

in relevant security-based swap activity 

within the United States, the rules we 

adopt pursuant to Title VII will not 

reach all participants or all transactions 

in the global market. We are aware that 

application of rules to a subset of 

participants in the worldwide securitybased swap market would change the 

costs and benefits of market 

participation for one group (those that 

engage in relevant security-based swap 

activity within the United States) 

relative to another (those that do not) 

and therefore create competitive effects. 

More specifically, in addition to 

requiring U.S. dealers to register, our 

final rules implementing the crossborder approach to the security-based 

swap dealer definition would generally 

apply dealer registration and other Title 

VII requirements to non-U.S. entities 

that conduct dealing activity (as defined 

in the Intermediary Definitions 

Adopting Release) in excess of the de 

minimis threshold, but where 

calculation of the threshold depends on 

various features of the person’s 

transactions (e.g., whether the person’s 

counterparty is a U.S. or non-U.S. 

person, whether the transaction is 

guaranteed by a U.S. person, whether 

the counterparty is a registered or nonregistered foreign branch of a U.S. 

person, and whether the person is a 

conduit affiliate of a U.S. person). 

Similarly, our final rules implementing 

cross-border application of the major 

security-based swap participant 

definition would apply major 

participant registration and other Title 

VII requirements to entities that have 

exposures to U.S. persons that exceed 

the major participant thresholds (as 

defined in the Intermediary Definitions 

Adopting Release). Given the approach 

we are adopting with respect to 

application of the dealer de minimis and 

major participant threshold calculation 

requirements, U.S. persons should have 

no incentive to favor a non-U.S. person 

counterparty over a U.S.-person 

counterparty. 

However, we recognize that the final 

rule treats U.S. persons and different 

types of non-U.S. persons differently. 

Unless their dealing activity is 

guaranteed by a U.S. person, non-U.S. 

persons may exclude from their de 

minimis calculations dealing activity 

with other non-U.S. persons. Similarly, 

unless their security-based swap activity 

is guaranteed by a U.S. person, non-U.S. 

persons may exclude from their major 

participant threshold calculations their 

positions with non-U.S. persons. U.S. 

persons, non-U.S. persons whose 

security-based swap transactions are 

guaranteed by a U.S. person, and 

conduit affiliates cannot exclude such 

transactions or positions from their own 

calculations. This differential treatment 

makes it more likely that non-U.S. 

persons will not be subject to the 

regulatory requirements associated with 

dealer and major participant 

registration. Furthermore, because 

transactions with U.S. persons in excess 

of the de minimis and major participant 

thresholds trigger registration 

requirements, non-U.S. dealers and 

other market participants may be 

reluctant to trade with U.S. 

counterparties or clear security-based 

swap transactions through U.S. person 

clearing agencies because of the 

potential application of Title VII 

regulation. For example, our final rules 

may produce competitive frictions 

insofar as market participants prefer to 

clear transactions using non-U.S. person 

clearing agencies who may have U.S. 

person members instead of U.S. person 

clearing agencies, because only 

positions held against the latter would 

count against their major participant 

thresholds.760 Indeed, some entities may 

determine that the compliance costs 

arising from the requirements of Title 

VII warrant exiting the security-based 

swap market in the United States 

entirely. Non-U.S. persons may find this 

option more attractive than U.S. persons 

because they may find it easier to 

structure their foreign business so as to 

prevent it from falling within the scope 

of Title VII. However, U.S. entities may 

also have an incentive to establish 

separately-capitalized foreign 

subsidiaries to conduct their securitybased swap operations, since such 

subsidiaries would qualify as non-U.S. 

persons.761 In this case, the cross-border 

application of Title VII rules may affect 

participants depending on their size, as 

larger participants could be betterequipped to set up offshore vehicles 

enabling them to transact as non-U.S. 

persons. 

To the extent that entities engaged in 

dealing activity exit the U.S. securitybased swap market, the end result could 

be a U.S. market where fewer 

intermediaries compete less intensively 

for business. These exits could result in 

higher spreads and reduced liquidity, 

and could affect the ability and 

willingness of non-dealers within the 

United States to engage in securitybased swaps. The concentrated nature of 

dealing activity suggests that there are 

high barriers to entry in connection with 

security-based swap dealing activity, 

which could preclude the ability of new 

dealers to enter the security-based swap 

market and compete away spreads. 

Notwithstanding the potential that 

our final rule may reduce competition, 

the Commission believes it appropriate 

to require U.S. persons to count all 

dealing transactions towards the de 

minimis threshold and all positions 

toward the major security-based swap 

participant thresholds, given the 

potential for these transactions to create 

risk to U.S. persons and in the U.S. 

financial system. We also note that it is 

uncertain that such requirements will 

reduce competition. In fact, the final 

rule may enhance competition among 

dealers, as the Title VII regulatory 

requirements and the ability to meet the 

standards set by Title VII may allow 

registered dealers to credibly signal high 

quality, better risk management, and 

better counterparty protection relative to 

foreign unregistered dealers that 

compete for the same order flow. In this 

scenario, non-dealers in the U.S. market 

may be willing to pay higher prices for 

higher-quality services in regulated 

markets, and registration requirements 

may separate high-quality 

intermediaries that are willing and able 

to register from low-quality firms that 

are not.762 Furthermore, while dealers 

and speculative traders may prefer to 

transact in opaque markets, 

transparency requirements that apply to 


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763See IIF Letter (noting that, ‘‘. . . the rule 

proposal if adopted would make it much easier for 

foreign market participants to offer services in the 

US, providing greater choice and competition, and 

making it easier for instance for corporates to hedge 

their risks).’’ 

764The exclusion for cleared, anonymous 

transactions does not require participants to use a 

registered clearing agency. Therefore, this benefit 

may be limited if final Title VII rules for registered 

clearing agencies create incentives for market 

participants to trade through CCPs that are not 

registered and regulated under Title VII. 

U.S. dealers and transactions that occur 

within the scope of Title VII may be 

attractive to hedgers and other market 

participants who do not benefit from 

opacity. Therefore, Title VII 

requirements may promote liquidity in 

the U.S.; liquid markets should attract 

additional participants, thereby 

enhancing risk sharing and making 

markets more competitive. These 

regulatory benefits could mitigate the 

competitive burdens imposed by the 

proposed and anticipated final crossborder rules and substantive Title VII 

requirements applicable to registered 

security-based swap dealers by, for 

example, reducing incentives for firms 

to exit the market. 

Similarly, the cross-border 

application of the de minimis exception 

could reduce the number of entities 

likely to exit the U.S. market entirely 

because it would enable an established 

foreign entity to transact a de minimis 

amount of security-based swap dealing 

activity in the U.S. market before it 

determines whether to expand its U.S. 

business and become a registered 

security-based swap dealer.763 However, 

since the ability of smaller entities to 

access the U.S. security-based swap 

market without registration would be 

limited to conducting dealing activity 

below the de minimis threshold, these 

entities would have an incentive to 

curtail their security-based swap dealing 

activity with U.S. persons as they 

approach the de minimis threshold to 

avoid dealer registration requirements. 

Finally, incentives to restructure 

ultimately depend on future regulatory 

developments, both with respect to final 

Title VII rules and foreign regulatory 

frameworks; the differences in 

regulatory requirements across 

jurisdictions; and strategic interactions 

with non-dealer participants. For 

example, although pre-and post-trade 

transparency requirements provide a 

number of benefits both to financial 

markets and the real economy, dealers 

benefit from operating in opaque 

markets. To the extent that foreign 

jurisdictions require only regulatory 

reporting, without public dissemination 

requirements, dealers may wish to 

operate in jurisdictions where they can 

continue to benefit from opaque 

markets. 

Other market participants, however, 

may prefer transparency, and the 

availability of transparent trading 

venues that result from Title VII preand post-trade transparency 

requirements could shift market power 

away from dealers. If non-dealer market 

participants are able to demand 

transparent trade execution, the 

incentives to restructure may be 

tempered, particularly if transparent 

venues attract liquidity away from 

opaque markets. Ultimately, the effects 

of transparency requirements on 

dealers’ incentives to restructure 

depend on differences across 

jurisdictions, as well as whether nondealer participants prefer transparency. 

These preferences may, in turn, depend 

on motives for trading among nondealers. Hedgers and participants that 

need liquidity may prefer transparent 

venues while participants who believe 

they have private information about 

asset values may prefer opaque markets 

that allow them to trade more profitably 

on their information. 

The potential restructurings and exits 

described above may impact 

competition in the U.S. market in 

different ways. On one hand, the ability 

to restructure one’s business rather than 

exit the U.S. market entirely to avoid 

application of Title VII to a person’s 

non-U.S. operations may reduce the 

number of entities that exit the market, 

thus mitigating the negative effects on 

competition described above. On the 

other hand, U.S. non-dealers may find 

that the only foreign security-based 

swap dealers that are willing to deal 

with them are those whose securitybased swap business is sufficiently large 

to afford the costs of restructuring as 

well as registration and the ensuing 

compliance costs associated with 

applicable Title VII requirements. To 

the extent that smaller dealers continue 

to have an incentive to exit the market, 

the overall level of competition in the 

market may decline. 

Moreover, regardless of the response 

of dealers to our approach, we cannot 

preclude the possibility that large nondealer financial entities and other nondealer market participants in the United 

States, such as investment funds, who 

have the resources to restructure their 

business also may pursue restructuring 

and move part of their business offshore 

in order to transact with dealers outside 

the reach of Title VII, either because 

liquidity has moved offshore or because 

these participants want to avoid Title 

VII requirements (such as transparency 

requirements) that may reveal 

information about trading strategies. 

This may reduce liquidity within the 

U.S. market and provide additional 

incentives for U.S. persons and non-U.S. 

persons to shift a higher proportion of 

their security-based swap business 

offshore, further reducing the level of 

competition within the United States. In 

this scenario, the competitive frictions 

caused by the application, in the crossborder context, of a de minimis 

threshold for dealing activity may affect 

the ability of small market participants 

of security-based swaps to access the 

security-based swap market more than 

large ones, as smaller participants are 

less likely to have the resources that 

would enable or justify a restructuring 

of their business. 

In addition to the global nature of the 

security-based swap market and the 

implications for the reach of Title VII 

dealer and major participant registration 

requirements, we also noted above the 

current opacity of the over-the-counter 

derivatives market and the 

informational advantage that dealers 

currently have over non-dealers. By 

having greater private order flow 

information, dealers are in a position to 

make more-informed assessments of 

market values and can use that 

information to extract rents from lessinformed counterparties. While this 

issue will be the focus of future 

Commission rulemaking covering preand post-trade transparency, we note 

that the final rule to exclude cleared, 

anonymous transactions from the de 

minimis threshold for non-U.S. persons 

has implications for competition in the 

security-based swap market. Because 

cleared, anonymous transactions will 

not trigger registration requirements, the 

exclusion strengthens incentives for 

trading in transparent venues, reducing 

market power and the competitive 

advantage currently enjoyed by dealers 

over non-dealer market participants. 

Furthermore, while Title VII rules 

governing clearing, trade execution, and 

trade reporting have not been finalized, 

providing stronger incentives to trade 

on transparent venues and through 

CCPs increases the likelihood that the 

benefits of Title VII, including increased 

transparency and reduced potential for 

risk spillovers, will be realized.764

The overall effects of the final 

approach described in this release on 

competition among dealing entities in 

the U.S. security-based swap market 

will depend on the way market 

participants ultimately respond to 

different elements of Title VII. 

Application of the dealer and major 

participant registration requirements 

may create incentives for dealers and 

market participants to favor non-U.S. 


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765 Definitional rules do not promote efficiency by 

themselves; rather, the effect is through the number 

of entities required to register as dealers and major 

participants, and the corresponding effect on the 

programmatic costs and benefits associated with 

registration requirements. 

766See Section III.B, supra (discussing global 

regulatory efforts). 

767See note 320, supra. 768As discussed above, this benefit may be 

limited if final Title VII rules for registered clearing 

agencies create incentives for market participants to 

trade through CCPs that are not registered and 

regulated under Title VII. 

769See note 193, supra. 

counterparties; incentives to restructure 

due to inconsistent regulatory 

requirements may increase 

concentration among security-based 

swap dealers providing services to U.S. 

non-dealers. However, registration and 

compliance with Title VII may signal 

high quality and mitigate the incentive 

to restructure and exit U.S. markets for 

intermediaries with the ability to meet 

the standards set by Title VII. 

Furthermore, if hedgers and other 

market participants who do not benefit 

from opacity demand transparency and 

counterparty protections that come from 

trading with a registered dealer, dealers 

may prefer to register if serving this 

market is profitable. Finally, while 

fewer dealing entities could lead to 

decreased competition and wider 

spreads in the security-based swap 

market, exclusion of cleared, 

anonymous trades from the de minimis 

threshold strengthen incentives to trade 

in transparent venues, reducing the 

ability of dealing entities to post wider 

spreads and reducing the competitive 

advantage over access to information 

enjoyed by dealers. 

B. Efficiency 

As noted above, in adopting the rules 

and guidance discussed in this release, 

we are required to consider whether 

these actions would promote efficiency. 

In significant part, the effect of these 

rules on efficiency is linked to the effect 

of these rules on competition. 

Definitional rules that promote, or do 

not unduly restrict, competition can be 

accompanied by regulatory benefits that 

minimize the risk of liquidity crises, 

aggregate capital shortfalls, and other 

manifestations of contagion. 

Furthermore, by reducing the costs that 

individual market participants impose 

on others through their trades—that is, 

by imposing registration requirements 

and substantive regulations on dealers 

and major participants who, by virtue of 

the volume of their transactions, their 

number of counterparties, and their 

aggregate positions and exposures, are 

most likely to contribute to risk 

spillovers—the rules promote efficiency 

within the market. Generally, rules and 

interpretations that promote competitive 

capital markets can be expected to 

promote the efficient allocation of risk, 

capital, and other resources by 

facilitating price discovery and reducing 

costs associated with dislocations in the 

market for security-based swaps.765

As discussed several times throughout 

this release, the global nature of the 

security-based swap market suggests 

that the regulatory framework adopted 

under Title VII may not reach all 

participants or all transactions. 

Additionally, differing regulatory 

timelines and differences in regulatory 

scope may moderate the benefits 

flowing from Title VII. In particular, if 

other regulatory regimes offer more 

opacity in transactions, those who are 

most harmed by transparency (including 

dealers who currently benefit from 

privately observing order flow) have 

incentives to restructure their business 

to operate abroad or otherwise take 

advantage of regulatory gaps. 

Restructuring itself, while potentially 

optimal for an individual participant, 

represents a form of inefficiency for the 

overall market in that firms expend 

resources simply to circumvent 

regulation and not for any productive 

purpose. 

More importantly, altering business 

models to take advantage of looser 

regulatory regimes undermines other 

efficiency benefits to Title VII. For 

example, U.S. dealers may have an 

incentive to restructure their businesses 

by setting up separately capitalized 

entities in non-U.S. jurisdictions, 

through which they would continue 

their dealing operations in order to take 

advantage of the rules applicable to nonU.S. persons. As discussed above, if 

some market participants choose to 

operate wholly outside of the Title VII 

regulatory framework, risk and liquidity 

may concentrate in less regulated, 

opaque corners of the market, 

undermining the benefits of Title VII. 

Moreover, insofar as the types of 

restructuring contemplated above 

purely constitute attempts at arbitraging 

regulations, including regulations 

applied to registered dealers, such as 

capital and reporting regulations, they 

represent a use of resources that could 

potentially be put to more productive 

uses. Ultimately, the incentive to 

restructure, and the corresponding loss 

of benefits, depends on the extent to 

which other jurisdictions implement 

comprehensive OTC derivatives 

regulations. If foreign jurisdictions 

subject security-based swap transactions 

to regulatory oversight consistent with 

Title VII, the ability to arbitrage 

regulations will be limited.766

Nevertheless, two features of our rules 

adopted today may mitigate the 

incentive for market participants to 

undermine the benefits of Title VII 

through inefficient restructuring or 

evasion. First, the requirement that 

conduit affiliates count all dealing 

activity towards the de minimis 

threshold closes one potential path for 

evasion. We have tailored the 

application of these requirements in 

connection with affiliates of registered 

security-based swap dealers and major 

security-based swap participants, as we 

do not believe that transactions 

involving these types of registered 

entities and their foreign affiliates raise 

the types of evasion concerns that the 

conduit affiliate concept is designed to 

address.767 Second, the exclusion of 

cleared, anonymous transactions from 

the de minimis threshold for non-U.S. 

persons strengthens incentives for 

trading in transparent venues, reducing 

the incentive to trade in opaque corners 

of the market in order to avoid the reach 

of Title VII. Strengthening incentives for 

non-U.S. persons to trade in transparent 

venues reduces the likelihood that 

liquidity will fragment to opaque 

corners of the market and increases the 

likelihood that risks that non-U.S. 

persons present to the U.S. financial 

system will be covered by the Title VII 

regulatory framework. Furthermore, 

shifting trades to transparent venues 

produces benefits associated with preand post-trade price transparency, 

including more efficient valuations of 

financial assets.768

Finally, we received several 

comments from outside commenters 

urging us to harmonize our final rules 

with interpretations set forth in the 

CFTC’s guidance.769 While our final 

rules track the CFTC’s guidance in many 

respects—for example, in the treatment 

of conduit affiliates, the treatment of 

transactions with foreign branches, and 

the exclusion for cleared, anonymous 

transactions from non-U.S. persons’ de 

minimis calculations—we are not 

adopting rules identical to the policies 

and interpretations in the guidance. For 

example, our treatment of investment 

funds with respect to the U.S. person 

definition differs from the CFTC’s, 

which, in addition to looking to the 

location of incorporation and principal 

place of business, considers majorityownership. While we acknowledge the 

benefits of harmonization, we believe 

our rules meet the goals of Title VII 

while appropriately minimizing the 

costs to security-based swap market 

participants. More specifically, our rules 

are designed to capture transactions and 


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770For instance, as discussed above, LTCM 

demonstrated that an investment vehicle could 

have a negative impact on U.S. financial 

institutions and on the stability of the U.S. financial 

system more generally when the vehicle is directed, 

controlled, or coordinated from within the United 

States. See note 271, supra. 

771See Sugato Chakravarty, Huseyin Gulen, and 

Stewart Mayhew, ‘‘Informed Trading in Stock and 

Option Markets,’’ Journal of Finance, Vol. 59, No. 

3 (2004) (estimating that the proportion of 

information about underlying stocks revealed first 

in option markets ranges from 10 to 20 percent). 

772See Philip Bond, Alex Edmans, and Itay 

Goldstein, ‘‘The Real Effects of Financial Markets,’’ 

Annual Review of Financial Markets, Vol. 4 (Oct. 

2012) (reviewing the theoretical literature on the 

feedback between financial market prices and the 

real economy). 

773 44 U.S.C. 3501 et seq. 

774 44 U.S.C. 3502(3). 

775 44 U.S.C. 3507(a)(1)(D) (internal formatting 

omitted); see also 5 CFR 1320.5(a)(1)(iv). 

776See Cross-Border Proposing Release, 77 FR 

31103. 

777 In particular, the present release does not 

address the following proposed rules and forms that 

implicated collections of information under the 

Paperwork Reduction Act: proposed Rule 3Ch–2; 

reproposed Forms SBSE, SBSE–A and SBSE–BD; 

proposed Rule 18a–4, and reproposed Rules 

242.900 through 242.911 of Regulation SBSR. We 

expect to address those Paperwork Reduction Act 

issues in connection with our consideration of 

those proposed rules and forms. 

In addition, the representation provision of the 

proposed definition of ‘‘transaction conducted 

within the United States’’ contained a collection of 

information. These final rules do not encompass 

that collection of information requirement, 

however, because we are not adopting the 

‘‘transaction conducted within the United States’’ 

element of the proposed rule in this release. See 

section I.A, supra. 

entities that pose risk to U.S. persons 

and potentially to the U.S. financial 

system, while excluding those 

transactions and entities that do not 

warrant regulation under Title VII. In 

the case of investment funds, we have 

decided not to look to majorityownership for determining U.S.-person 

status, notwithstanding that the CFTC 

Cross-Border Guidance articulates such 

an approach. Our belief is that, by 

adopting an approach that generally 

focuses on the location of economic 

decisions made on behalf of a fund, we 

are more accurately measuring whether 

a fund poses risks to U.S. persons and 

to the U.S. financial system of the type 

that Title VII was intended to 

address.770 Nevertheless, we 

acknowledge that different regulations 

for swaps and security-based swaps may 

create inefficiencies for market 

participants due to conflicting or 

overlapping requirements, particularly 

for those participants who deal in both 

swaps and security-based swaps. 

C. Capital Formation 

We believe that many aspects of the 

final cross-border approach to the dealer 

and major participant definitions are 

likely to promote capital formation, by 

focusing dealer and major participant 

regulation on activity and entities that 

are most likely to serve as conduits of 

risk to U.S. persons and potentially to 

the U.S. financial system. We also 

believe that applying the full range of 

Title VII requirements to this group of 

entities will increase the likelihood that 

the benefits of Title VII, including 

increased transparency, accountability, 

and financial stability, will be realized. 

To the extent that these requirements 

reduce asymmetric information about 

market valuations, we expect that a 

security-based swap market with 

enhanced transparency and enhanced 

regulatory oversight may facilitate entry 

by a wide range of market participants 

seeking to engage in a broad range of 

hedging and trading activities. 

Additionally, strengthening 

incentives for non-U.S. persons to trade 

in transparent venues encourages 

market participants to express their true 

valuations for security-based swaps; 

information revealed through 

transparent trades allows market 

participants to derive more-informed 

assessments with respect to asset 

valuations, leading to more efficient 

capital allocation. This should be true 

for the underlying assets as well. That 

is, information learned from securitybased swap trading provides signals not 

only about security-based swap 

valuation, but also about the value of 

the reference assets underlying the 

swap.771 Similarly, we expect 

transparency to benefit the real 

economy as well. Transparent prices 

provide better signals about the quality 

of a business investment, promoting 

capital formation in the real economy by 

helping managers to make moreinformed decisions and making it easier 

for firms to obtain new financing for 

new business opportunities.772

However, the Commission recognizes 

that, to the extent that the cross-border 

implementation of the dealer and major 

participant definitions encourages 

inefficient restructuring or results in 

market fragmentation, the final rules 

may impair capital formation and result 

in a redistribution of capital across 

jurisdictional boundaries. We note that, 

unlike in the proposed rules, we are 

requiring non-U.S. persons with U.S. 

guarantees to include all transactions 

that benefit from a U.S. guarantee in 

their de minimis calculations. Similarly, 

we are requiring conduit affiliates to 

include all transactions in their de 

minimis calculations, whether with a 

U.S. person or not. Inclusion of these 

transactions will limit the risk these 

participants pose to U.S. persons and to 

the U.S. financial system. More 

generally, the definition of ‘‘U.S. 

person’’ mitigates the risk of contagion 

affecting U.S. markets as a result of 

cross-border swap activity. To the extent 

that future substantive regulation under 

Title VII is conditioned on entities’ 

registration status, this definition may 

also improve transparency and provide 

increased customer protection for U.S. 

persons who participate in the securitybased swap market. Nevertheless, 

expanding the scope of transactions that 

must be included in these calculations 

may also increase the scope of potential 

market fragmentation, to the extent that 

it raises the costs that market 

participants will incur if they engage in 

security-based swap activity through 

guaranteed non-U.S. persons or conduit 

affiliates. 

IX. Paperwork Reduction Act 

A. Introduction 

The Paperwork Reduction Act of 1995 

(‘‘PRA’’) 773 imposes certain 

requirements on Federal agencies in 

connection with their conducting or 

sponsoring any ‘‘collection of 

information.’’ 774 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. In 

addition, 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 of information; (2) a summary 

of the collection of 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.775

In the Cross-Border Proposing 

Release, we identified a number of 

proposed rules that contained 

‘‘collection of information 

requirements’’ within the meaning of 

the PRA.776 The majority of those 

proposed rules and forms are outside of 

the scope of the dealer and major 

participant definitions at issue in this 

release.777 In two areas, however, 


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778We also note that Exchange Act rule 0–13, 

which we are adopting today, determines the 

procedures for market participants and foreign 

regulatory authorities to submit substituted 

compliance requests. The rule, however, does not 

provide any substituted compliance rights, and its 

applicability will be determined solely by the 

substituted compliance provisions of the 

substantive rulemakings. Accordingly, collection of 

information arising from substituted compliance 

requests, including associated control numbers, will 

be addressed in connection with any applicable 

substantive rulemakings that provide for substituted 

compliance. 

779See Exchange Act rule 3a71–3(a)(3)(ii). 

780See Exchange Act rule 3a71–3(a)(3)(i). 

781See Cross-Border Proposing Release, 78 FR 

31107. 

782See, e.g., 5 U.S.C. 552 (Exemption 4 of the 

Freedom of Information Act provides an exemption 

for ‘‘trade secrets and commercial or financial 

information obtained from a person and privileged 

or confidential.’’ 5 U.S.C. 552(b)(4). Exemption 8 of 

the Freedom of Information Act provides an 

exemption for matters that are ‘‘contained in or 

related to examination, operating, or condition 

reports prepare by, or on behalf of, or for the use 

of an agency responsible for the regulation or 

supervision of financial institutions.’’ 5 U.S.C. 

552(b)(8)). 

783We have estimated that up to 50 entities may 

register with the Commission as security-based 

swap dealers, based on an analysis of 2012 data 

indicating that 27 entities had $3 billion or more 

in notional transactions that would be counted 

against the thresholds under the final rules, and 

further accounting for new entrants into the market. 

See note 444, supra, and accompanying text. 

Because six of those 27 entities are domiciled in the 

United States, we conservatively estimate that it is 

possible that new entrants may lead up to 15 

registered dealers to be U.S. banks. Although not all 

U.S. banks engaged in security-based swap dealing 

activity currently operate foreign branches, we also 

conservatively estimate that all such dealers that are 

U.S. banks would do so. 

In the Cross-Border Proposing Release, we 

preliminarily estimated that 50 entities may include 

a representation that a transaction constitutes a 

‘‘transaction conducted through a foreign branch.’’ 

See Cross-Border Proposing Release, 78 FR 31108. 

This revised estimate reflects the fact that under the 

final rules such a representation would be relevant 

only if provided by a person that is registered with 

the Commission as a security-based swap dealer. In 

practice, however, based on our understanding of 

changes in the way major U.S. dealers engage with 

non-U.S. counterparties in the single-name CDS 

market following the issuance of the CFTC CrossBorder Guidance, we believe that few, if any, U.S. 

persons currently may participate in the singlename CDS market through their foreign branches. 

Also, as noted above, moreover, we recognize that 

other regulatory provisions may limit the ability of 

U.S. banks to conduct security-based swap activity. 

See note 366, supra. 

784The Commission believes that because trading 

relationship documentation is established between 

two counterparties, the question of whether one of 

those counterparties, that is registered with the 

Commission as a security-based swap dealer, is able 

to represent that it is entering into a ‘‘transaction 

conducted through a foreign branch’’ would not 

change on a transaction-by-transaction basis and, 

therefore, such representations would generally be 

made in the schedule to a master agreement, rather 

than in individual confirmations. 

Exchange Act rule 3a71–3 which we are 

adopting today contains collections of 

information requirements. First, the 

rule’s definition of ‘‘transaction 

conducted through a foreign branch,’’ 

which we are adopting largely as 

proposed, contains a representation 

provision that constitutes a collection of 

information. Moreover, the rule’s final 

definition of ‘‘U.S. person’’ 

incorporates, as an addition to the 

proposal, a representation provision that 

constitutes a collection of 

information.778 Commenters did not 

address Paperwork Reduction Act issues 

in connection with the proposal. 

The Commission previously 

submitted proposed rule 3a71–3, as well 

as certain other rules proposed as part 

of the Cross-Border Proposing Release, 

to OMB for review in accordance with 

44 U.S.C. 3507 and 5 CFR 1320.11. The 

title of the collection related to 

proposed rule 3a71–3 is ‘‘Reliance on 

Counterparty Representations Regarding 

Activity Within the United States.’’ 

OMB has not yet assigned Control 

Numbers in connection with rule 3a71– 

3 or the other rules submitted in 

connection with the proposal. 

B. Reliance on Counterparty 

Representations Regarding Transactions 

Conducted Through a Foreign Branch 

1. Summary of Collection of Information 

When determining whether a 

security-based swap transaction 

constitutes a ‘‘transaction conducted 

through a foreign branch,’’ a person may 

rely on its counterparty’s representation 

that the transaction ‘‘was arranged, 

negotiated, and executed on behalf of 

the foreign branch solely by persons 

located outside the United States, unless 

such person knows or has reason to 

know that the representation is not 

accurate.’’ 779

2. Proposed Use of Information 

Under the final rules, a non-U.S. 

person need not count, against the 

applicable thresholds of the dealer 

exception and the major security-based 

swap participant definition, dealing 

transactions with foreign branches of 

U.S. banks that are registered as 

security-based swap dealers. For these 

purposes, the foreign branch must be 

the counterparty to the security-based 

swap transaction, and the transaction 

must be arranged, negotiated, and 

executed on behalf of the foreign branch 

solely by persons located outside the 

United States.780

As discussed in the Cross-Border 

Proposing Release, the Commission 

acknowledges that verifying whether a 

security-based swap transaction falls 

within the definition of ‘‘transaction 

conducted through a foreign branch’’ 

could require significant due diligence. 

The definition’s representation 

provision would mitigate the 

operational difficulties and costs that 

otherwise could arise in connection 

with investigating the activities of a 

counterparty to ensure compliance with 

the corresponding rules.781

These representations would be 

provided voluntarily by the 

counterparties to certain security-based 

swap transactions to other 

counterparties; therefore, the 

Commission would not typically receive 

confidential information as a result of 

this collection of information. However, 

to the extent that the Commission 

receives confidential information 

described in this representation 

provision through our examination and 

oversight program, an investigation, or 

some other means, such information 

would be kept confidential, subject to 

the provisions of applicable law.782

3. Respondents 

Based on our understanding of the 

OTC derivatives markets, including the 

size of the market, the number of 

counterparties that are active in the 

market, and how market participants 

currently structure security-based swap 

transactions, the Commission estimates 

that up to 15 entities that are registered 

as security-based swap dealers may 

include a representation that a securitybased swap is a ‘‘transaction conducted 

through a foreign branch’’ in their 

trading relationship documentation 

(e.g., the schedule to a master 

agreement).783

4. Total Initial and Annual Reporting 

and Recordkeeping Burdens 

The estimates in this section reflect 

the Commission’s experience with 

burden estimates for similar 

requirements and discussions by our 

staff with market participants. The 

Commission believes that, in most 

cases, the representations associated 

with the definition of ‘‘transaction 

conducted through a foreign branch’’ 

would be made through amendments to 

the parties’ existing trading 

documentation (e.g., the schedule to a 

master agreement).784 Because these 

representations relate to new regulatory 

requirements, the Commission 

anticipates that counterparties may elect 

to develop and incorporate these 

representations in trading 

documentation soon after the effective 

date of the Commission’s security-based 

swap regulations, rather than 

incorporating specific language on a 

transactional basis. The Commission 

believes that parties would be able to 

adopt, where appropriate, standardized 


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785The Commission staff estimates that this 

burden would consist of 10 hours of in-house 

counsel time for each security-based swap market 

participant that may make such representations. 

786See Exchange Act rule 3a71–3(a)(4)(iv). 

787See note 782, supra. 

788 Data regarding activity from 2012 indicates 

that a total of 4452 accounts had positions in singlename CDS, with those activities conducted by a 

total 1030 transacting agents such as investment 

advisers. Of those 4452 accounts, 1199 are 

domiciled outside of the United States. Accounting 

for potential growth in the number of market 

participants domiciled outside of the United 

States—particularly in light of information 

suggesting there has been some shifting of 

derivatives activities to non-U.S. entities—leads to 

our estimate that such representations may be made 

on behalf of 2400 accounts. To the extent that one 

transacting agent such as an investment adviser 

conducts derivatives activities on behalf of multiple 

accounts, it is possible that a single representation 

by a transacting agent would address the U.S.- 

person status of multiple accounts. 

789See section IV.E.2, supra. 

790The Commission staff estimates that this 

burden would consist of 10 hours of in-house 

counsel time for each security-based swap market 

participant that may make such representations. 

language across all of their securitybased swap trading relationships. This 

language may be developed by 

individual firms or through a 

combination of trade associations and 

industry working groups. 

The Commission estimates the 

maximum total paperwork burden 

associated with developing new 

representations would be, for each U.S. 

bank registered as a security-based swap 

dealer that may make such 

representations, no more than five 

hours, and up to $2,000 for the services 

of outside professionals, for an estimate 

of approximately 75 hours and $30,000 

across all security-based swap 

counterparties that may make such 

representations. This estimate assumes 

little or no reliance on standardized 

disclosure language. 

The Commission expects that the 

majority of the burden associated with 

the new disclosure requirements will be 

experienced during the first year as 

language is developed and trading 

documentation is amended. After the 

new representations are developed and 

incorporated into trading 

documentation, the Commission 

believes that the annual paperwork 

burden associated with this requirement 

would be no more than approximately 

10 hours per counterparty for verifying 

representations with existing 

counterparties and onboarding new 

counterparties, for a maximum of 

approximately 150 hours across all 

applicable security-based swap 

counterparties.785

C. Reliance on Counterparty 

Representations Regarding Non-U.S. 

Person Status 

1. Summary of Collection of Information 

When determining whether its 

counterparty is a U.S. person for 

purposes of the application of the dealer 

and major participant analyses, a person 

may rely on its counterparty’s 

representation that the counterparty 

does not meet the applicable criteria to 

be a U.S. person, unless the person 

knows or has reason to know that the 

representation is not accurate.786

2. Proposed Use of Information 

Under the final rules, a non-U.S. 

person’s dealer and major participant 

analysis require it to determine whether 

its security-based swap counterparties 

are U.S. persons because certain 

security-based swaps in which the 

counterparty is not a U.S. person will 

not have to be counted against the 

applicable thresholds. 

The Commission recognizes that the 

‘‘U.S. person’’ definition encompasses a 

number of distinct components, and 

that in some circumstances verifying 

whether a security-based swap 

counterparty is a ‘‘U.S. person’’ could 

require significant due diligence. As a 

result, the final rules have added a 

representation provision to that 

definition, to help mitigate the 

operational difficulties and costs that 

could arise in connection with 

investigating the status of a 

counterparty. 

As with the representations associated 

with the ‘‘transaction conducted 

through a foreign branch’’ definition, 

these representations would be 

provided voluntarily by the 

counterparties to certain security-based 

swap transactions to other 

counterparties. The Commission would 

not typically receive confidential 

information as a result of this collection 

of information. However, to the extent 

that the Commission receives 

confidential information described in 

this representation provision through 

our examination and oversight program, 

an investigation, or some other means, 

such information would be kept 

confidential, subject to the provisions of 

applicable law.787

3. Respondents 

Based on our understanding of the 

OTC derivatives markets, including the 

domiciles of counterparties that are 

active in the market, the Commission 

estimates that up to 2400 entities may 

provide representations that they do not 

meet the criteria necessary to be U.S. 

persons.788

4. Total Initial and Annual Reporting 

and Recordkeeping Burdens 

The estimates in this section reflect 

the Commission’s experience with 

burden estimates for similar 

requirements and discussions by our 

staff with market participants. 

Consistent with the discussion above 

related to the representation provision 

of the ‘‘transaction conducted through a 

foreign branch’’ definition, the 

Commission believes that in most cases 

the representations associated with the 

‘‘U.S. person’’ definition would be made 

through amendments to the parties’ 

existing trading documentation (e.g., the 

schedule to a master agreement).789

Here too, because these representations 

relate to new regulatory requirements, 

the Commission anticipates that 

counterparties may elect to develop and 

incorporate these representations in 

trading documentation soon after the 

effective date of the Commission’s 

security-based swap regulations, rather 

than incorporating specific language on 

a transactional basis. The Commission 

believes that parties would be able to 

adopt, where appropriate, standardized 

language across all of their securitybased swap trading relationships. This 

language may be developed by 

individual firms or through a 

combination of trade associations and 

industry working groups. 

As above, the Commission estimates 

the maximum total paperwork burden 

associated with developing new 

representations would be, for each 

counterparty that may make such 

representations, no more than five hours 

and up to $2,000 for the services of 

outside professionals, for a maximum of 

approximately 12,000 hours and $4.8 

million across all security-based swap 

counterparties that may make such 

representations. This estimate assumes 

little or no reliance on standardized 

disclosure language. 

The Commission expects that the 

majority of the burden associated with 

the new disclosure requirements will be 

experienced during the first year as 

language is developed and trading 

documentation is amended. After the 

new representations are developed and 

incorporated into trading 

documentation, the Commission 

believes that the annual paperwork 

burden associated with this requirement 

would be no more than approximately 

10 hours per counterparty for verifying 

representations with existing 

counterparties and onboarding new 

counterparties, for a maximum of 

approximately 24,000 hours across all 

applicable security-based swap 

counterparties.790


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791 5 U.S.C. 601 et seq. 

792 5 U.S.C. 603(a). 

793Although 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). 

794 5 U.S.C. 605(b). 

795See 17 CFR 240.0–10(a). 

796 17 CFR 240.17a–5(d). 

797See 17 CFR 240.0–10(c). 

798See 13 CFR 121.201 (Subsector 522). 

799See id. at Subsector 522. 

800See id. at Subsector 523. 

801See id. at Subsector 524. 

802See id. at Subsector 525. 

803See Cross-Border Proposing Release, 78 FR 

31205. 

804See Intermediary Definitions Adopting 

Release, 77 FR 30700. We also noted that an 

extended compliance period was available with 

regard to the applicable thresholds used in the de 

minimis exception to the dealer definition. See id.; 

see also section III.A, supra. 

X. Regulatory Flexibility Act 

Certification 

The Regulatory Flexibility Act 

(‘‘RFA’’) 791 requires Federal agencies, in 

promulgating rules, to consider the 

impact of those rules on small entities. 

Section 603(a) of the Administrative 

Procedure Act,792 as amended by the 

RFA, generally requires the Commission 

to undertake a regulatory flexibility 

analysis of all proposed rules, or 

proposed rule amendments, to 

determine the impact of such 

rulemaking on ‘‘small entities.’’ 793

Section 605(b) of the RFA 794 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, 

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; 795 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,796 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.797 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; 798 (ii) for 

entities engaged in non-depository 

credit intermediation and certain other 

activities, entities with $7 million or 

less in annual receipts; 799 (iii) for 

entities engaged in financial 

investments and related activities, 

entities with $7 million or less in 

annual receipts; 800 (iv) for insurance 

carriers and entities engaged in related 

activities, entities with $7 million or 

less in annual receipts; 801 and (v) for 

funds, trusts, and other financial 

vehicles, entities with $7 million or less 

in annual receipts.802

The Cross-Border Proposal stated that, 

based on feedback from industry 

participants and our own information 

about the security-based swap markets, 

we preliminarily believed that non-U.S. 

entities that would be required to 

register and be regulated as securitybased swap dealers and major securitybased swap participants exceed the 

thresholds defining ‘‘small entities’’ set 

out above. Thus, we noted that we 

preliminarily believed it is unlikely that 

the proposed rules regarding registration 

of security-based swap dealers and 

major security-based swap market 

participants would have a significant 

economic impact any small entity. As a 

result, we certified that the proposed 

rules would not have a significant 

economic impact on a substantial 

number of small entities for purposes of 

the RFA and requested written 

comments regarding this 

certification.803

While we received comment letters 

that addressed cost issues in connection 

with the proposed rules, we did not 

receive any comments that specifically 

addressed whether the rules applying 

the definitions of ‘‘security-based swap 

dealer’’ or ‘‘major security-based swap 

participant’’ to the cross-border context 

would have a significant economic 

impact on small entities. 

We continue to believe that 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 major 

banks—would not be ‘‘small entities’’ 

for purposes of the RFA. Similarly, we 

believe that only the largest financial 

companies would be likely to develop 

security-based swap exposures of the 

size that would be required to cross the 

major security-based swap participant 

definition thresholds. Accordingly, the 

SEC certifies that the final rules 

applying the definitions of ‘‘securitybased swap dealer’’ or ‘‘major securitybased swap participant’’ to the crossborder context will not have a 

significant economic impact on a 

substantial number of small entities for 

purposes of the RFA. 

XI. Effective Date and Implementation 

These final rules will be effective 60 

days following publication in the 

Federal Register. 

If any provision of these rules, or the 

application thereof to any person or 

circumstance, is held to be invalid, such 

invalidity shall not affect other 

provisions or application of such 

provisions to other persons or 

circumstances that can be given effect 

without the invalid provision or 

application. 

Because Exchange Act rules 3a67–10 

and 3a71–3 through 3a71–5 address the 

application of the dealer and major 

participant definitions to cross-border 

security-based swap activities, those 

rules will not immediately impose 

requirements upon market participants 

even after the rules become effective. In 

the Intermediary Definitions Adopting 

Release, we noted that because the 

Commission has not yet promulgated 

final rules implementing the substantive 

requirements imposed on dealers and 

major participants by Title VII, persons 

determined to be dealers or major 

participants under the regulations 

adopted in that release need not register 

as such until the dates provided in the 

Commission’s final rules regarding 

security-based swap dealer and major 

security-based swap participant 

registration requirements, and will not 

be subject to the requirements 

applicable to those dealers and major 

participants until the dates provided in 

the applicable final rules.804 Those 

principles apply here too. 

Although Exchange Act rule 0–13— 

regarding the procedures for the 

submission of substituted compliance 

requests—also will become effective at 

that time, we would not expect to 

receive any such requests until relevant 

substantive rulemakings have been 

completed. Those rulemakings are 

necessary to determine when 

substituted compliance may be 

available, and to promulgate the 

requirements against which we may 

assess comparability for purposes of 

making substituted compliance 

determinations. 


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Federal Register / Vol. 79, No. 155 / Tuesday, August 12, 2014 / Rules and Regulations 47369 

Statutory Authority and Text of Final 

Rules 

Pursuant to the Exchange Act, 15 

U.S.C. 78a et seq., and particularly, 

sections 3(b), 23(a)(1), and 30(c) thereof, 

sections 761(b), and 929P(b) of the 

Dodd-Frank Act, the SEC is adopting 

rules 0–13, 3a67–10, 3a71–3, 3a71–4, 

and 3a71–5 under the Exchange Act, 

and the SEC is adding Part 250 to 

chapter II of Title 17 of the Code of 

Federal Regulations. 

List of Subjects 

17 CFR Part 240 

Brokers, Confidential business 

information, Fraud, Reporting and 

recordkeeping requirements, Securities. 

17 CFR Parts 241 and 250 

Securities. 

Text of Final Rules 

For the reasons stated in the 

preamble, the SEC is amending 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, and a 

sectional authority is added in 

numerical order 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); and 18 U.S.C. 

1350, unless otherwise noted. 

* * * * * 

Sections 240.3a67–10, 240.3a71–3, 

240.3a71–4, and 240.3a71–5 are also issued 

under Pub. L. 111–203, section 761(b), 124 

Stat. 1754 (2010), and 15 U.S.C. 78dd(c). 

* * * * * 

■ 2. Add § 240.0–13 to read as follows: 

§ 240.0–13 Commission procedures for 

filing applications to request a substituted 

compliance order under the Exchange Act. 

(a) The application shall be in writing 

in the form of a letter, must include any 

supporting documents necessary to 

make the application complete, and 

otherwise must comply with § 240.0–3. 

All applications must be submitted to 

the Office of the Secretary of the 

Commission, by a party that potentially 

would comply with requirements under 

the Exchange Act pursuant to a 

substituted compliance order, or by the 

relevant foreign financial regulatory 

authority or authorities. If an 

application is incomplete, the 

Commission may request that the 

application be withdrawn unless the 

applicant can justify, based on all the 

facts and circumstances, why 

supporting materials have not been 

submitted and undertakes to submit the 

omitted materials promptly. 

(b) An applicant may submit a request 

electronically. The electronic mailbox to 

use for these applications is described 

on the Commission’s Web site at 

www.sec.gov in the ‘‘Exchange Act 

Substituted Compliance Applications’’ 

section. In the event electronic 

mailboxes are revised in the future, 

applicants can find the appropriate 

mailbox by accessing the ‘‘Electronic 

Mailboxes at the Commission’’ section. 

(c) All filings and submissions filed 

pursuant to this rule must be in the 

English language. If a filing or 

submission filed pursuant to this rule 

requires the inclusion of a document 

that is in a foreign language, a party 

must submit instead a fair and accurate 

English translation of the entire foreign 

language document. A party may submit 

a copy of the unabridged foreign 

language document when including an 

English translation of a foreign language 

document in a filing or submission filed 

pursuant to this rule. A party must 

provide a copy of any foreign language 

document upon the request of 

Commission staff. 

(d) An applicant also may submit a 

request in paper format. Five copies of 

every paper application and every 

amendment to such an application must 

be submitted to the Office of the 

Secretary at 100 F Street NE., 

Washington, DC 20549–1090. 

Applications must be on white paper no 

larger than 81⁄2 by 11 inches in size. The 

left margin of applications must be at 

least 11⁄2 inches wide, and if the 

application is bound, it must be bound 

on the left side. All typewritten or 

printed material must be set forth in 

black ink so as to permit photocopying. 

(e) Every application (electronic or 

paper) must contain the name, address, 

telephone number, and email address of 

each applicant and the name, address, 

telephone number, and email address of 

a person to whom any questions 

regarding the application should be 

directed. The Commission will not 

consider hypothetical or anonymous 

requests for a substituted compliance 

order. Each applicant shall provide the 

Commission with any supporting 

documentation it believes necessary for 

the Commission to make such 

determination, including information 

regarding applicable requirements 

established by the foreign financial 

regulatory authority or authorities, as 

well as the methods used by the foreign 

financial regulatory authority or 

authorities to monitor and enforce 

compliance with such rules. Applicants 

should also cite to and discuss 

applicable precedent. 

(f) Amendments to the application 

should be prepared and submitted as set 

forth in these procedures and should be 

marked to show what changes have 

been made. 

(g) After the filing is complete, the 

staff will review the application. Once 

all questions and issues have been 

answered to the satisfaction of the staff, 

the staff will make an appropriate 

recommendation to the Commission. 

After consideration of the 

recommendation and a vote by the 

Commission, the Commission’s Office of 

the Secretary will issue an appropriate 

response and will notify the applicant. 

(h) The Commission shall publish in 

the Federal Register a notice that a 

complete application has been 

submitted. The notice will provide that 

any person may, within the period 

specified therein, submit to the 

Commission any information that 

relates to the Commission action 

requested in the application. The notice 

also will indicate the earliest date on 

which the Commission would take final 

action on the application, but in no 

event would such action be taken earlier 

than 25 days following publication of 

the notice in the Federal Register. 

(i) The Commission may, in its sole 

discretion, schedule a hearing on the 

matter addressed by the application. 

■ 3. Add § 240–3a67–10 to read as 

follows: 

§ 240.3a67–10 Foreign major securitybased swap participants. 

(a) Definitions. As used in this 

section, the following terms shall have 

the meanings indicated: 

(1) Conduit affiliate has the meaning 

set forth in § 240.3a71–3(a)(1). 

(2) Foreign branch has the meaning 

set forth in § 240.3a71–3(a)(2). 

(3) Transaction conducted through a 

foreign branch has the meaning set forth 

in § 240.3a71–3(a)(3). 

(4) U.S. person has the meaning set 

forth in § 240.3a71–3(a)(4). 

(b) Application of major securitybased swap participant tests in the 

cross-border context. For purposes of 

calculating a person’s status as a major 

security-based swap participant as 

defined in section 3(a)(67) of the Act (15 

U.S.C. 78c(a)(67)), and the rules and 

regulations thereunder, a person shall 

include the following security-based 

swap positions: 

(1) If such person is a U.S. person, all 

security-based swap positions that are 


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47370 Federal Register / Vol. 79, No. 155 / Tuesday, August 12, 2014 / Rules and Regulations 

entered into by the person, including 

positions entered into through a foreign 

branch; 

(2) If such person is a conduit 

affiliate, all security-based swap 

positions that are entered into by the 

person; and 

(3) If such person is a non-U.S. person 

other than a conduit affiliate, all of the 

following types of security-based swap 

positions that are entered into by the 

person: 

(i) Security-based swap positions that 

are entered into with a U.S. person; 

provided, however, that this paragraph 

(b)(3)(i) shall not apply to: 

(A) Positions with a U.S. person 

counterparty that arise from transactions 

conducted through a foreign branch of 

the counterparty, when the counterparty 

is a registered security-based swap 

dealer; and 

(B) Positions with a U.S. person 

counterparty that arise from transactions 

conducted through a foreign branch of 

the counterparty, when the transaction 

is entered into prior to 60 days 

following the earliest date on which the 

registration of security-based swap 

dealers is first required pursuant to the 

applicable final rules and regulations; 

and 

(ii) Security-based swap positions for 

which the non-U.S. person’s 

counterparty to the security-based swap 

has rights of recourse against a U.S. 

person; for these purposes a 

counterparty has rights of recourse 

against the U.S. person if the 

counterparty has a conditional or 

unconditional legally enforceable right, 

in whole or in part, to receive payments 

from, or otherwise collect from, the U.S. 

person in connection with the securitybased swap. 

(c) Attributed positions—(1) In 

general. For purposes of calculating a 

person’s status as a major security-based 

swap participant as defined in section 

3(a)(67) of the Act (15 U.S.C. 78c(a)(67)), 

and the rules and regulations 

thereunder, a person also shall include 

the following security-based swap 

positions: 

(i) If such person is a U.S. person, any 

security-based swap position of a nonU.S. person for which the non-U.S. 

person’s counterparty to the securitybased swap has rights of recourse 

against that U.S. person. 

Note to paragraph (c)(1)(i). This paragraph 

describes attribution requirements for a U.S. 

person solely with respect to the guarantee of 

the obligations of a non-U.S. person under a 

security-based swap. The Commission and 

the Commodity Futures Trading Commission 

previously provided an interpretation about 

attribution to a U.S. parent, other affiliate, or 

guarantor to the extent that the 

counterparties to those positions have 

recourse against that parent, other affiliate, or 

guarantor in connection with the position. 

See Intermediary Definitions Adopting 

Release, http://www.gpo.gov/fdsys/pkg/FR– 

2012–08–13/pdf/2012–18003.pdf. The 

Commission explained that it intended to 

issue separate releases addressing the 

application of the major participant 

definition, and Title VII generally, to nonU.S. persons. See id. at note 1041. 

(ii) If such person is a non-U.S. 

person: 

(A) Any security-based swap position 

of a U.S. person for which that person’s 

counterparty has rights of recourse 

against the non-U.S. person; and 

(B) Any security-based swap position 

of another non-U.S. person entered into 

with a U.S. person counterparty who 

has rights of recourse against the first 

non-U.S. person, provided, however, 

that this paragraph (c)(1)(ii)(B) shall not 

apply to positions described in 

§ 240.3a67–10(b)(3)(i)(A) and (B). 

(2) Exceptions. Notwithstanding 

paragraph (c)(1) of this section, a person 

shall not include such security-based 

swap positions if the person whose 

performance is guaranteed in 

connection with the security-based 

swap is: 

(i) Subject to capital regulation by the 

Commission or the Commodity Futures 

Trading Commission (including, but not 

limited to regulation as a swap dealer, 

major swap participant, security-based 

swap dealer, major security-based swap 

participant, futures commission 

merchant, broker, or dealer); 

(ii) Regulated as a bank in the United 

States; 

(iii) Subject to capital standards, 

adopted by the person’s home country 

supervisor, that are consistent in all 

respects with the Capital Accord of the 

Basel Committee on Banking 

Supervision; or 

(iv) Deemed not to be a major 

security-based swap participant 

pursuant to § 240.3a67–8(a). 

■ 4. Add §§ 240.3a71–3, 240.3a71–4, 

and 240.3a71–5 to read as follows: 

* * * * * 

Sec. 

240.3a71–3 Cross-border security-based 

swap dealing activity. 

240.3a71–4 Exception from aggregation for 

affiliated groups with registered securitybased swap dealers. 

240.3a71–5 Substituted compliance for 

foreign security-based swap dealers. 

* * * * * 

§ 240.3a71–3 Cross-border security-based 

swap dealing activity. 

(a) Definitions. As used in this 

section, the following terms shall have 

the meanings indicated: 

(1) Conduit affiliate—(i) Definition. 

Conduit affiliate means a person, other 

than a U.S. person, that: 

(A) Is directly or indirectly majorityowned by one or more U.S. persons; and 

(B) In the regular course of business 

enters into security-based swaps with 

one or more other non-U.S. persons, or 

with foreign branches of U.S. banks that 

are registered as security-based swap 

dealers, for the purpose of hedging or 

mitigating risks faced by, or otherwise 

taking positions on behalf of, one or 

more U.S. persons (other than U.S. 

persons that are registered as securitybased swap dealers or major securitybased swap participants) who are 

controlling, controlled by, or under 

common control with the person, and 

enters into offsetting security-based 

swaps or other arrangements with such 

U.S. persons to transfer risks and 

benefits of those security-based swaps. 

(ii) Majority-ownership standard. The 

majority-ownership standard in 

paragraph (a)(1)(i)(A) of this section is 

satisfied if one or more persons 

described in § 240.3a71–3(a)(4)(i)(B) 

directly or indirectly own a majority 

interest in the non-U.S. person, where 

‘‘majority interest’’ is the right to vote or 

direct the vote of a majority of a class 

of voting securities of an entity, the 

power to sell or direct the sale of a 

majority of a class of voting securities of 

an entity, or the right to receive upon 

dissolution, or the contribution of, a 

majority of the capital of a partnership. 

(2) Foreign branch means any branch 

of a U.S. bank if: 

(i) The branch is located outside the 

United States; 

(ii) The branch operates for valid 

business reasons; and 

(iii) The branch is engaged in the 

business of banking and is subject to 

substantive banking regulation in the 

jurisdiction where located. 

(3) Transaction conducted through a 

foreign branch—(i) Definition. 

Transaction conducted through a 

foreign branch means a security-based 

swap transaction that is arranged, 

negotiated, and executed by a U.S. 

person through a foreign branch of such 

U.S. person if: 

(A) The foreign branch is the 

counterparty to such security-based 

swap transaction; and 

(B) The security-based swap 

transaction is arranged, negotiated, and 

executed on behalf of the foreign branch 

solely by persons located outside the 

United States. 

(ii) Representations. A person shall 

not be required to consider its 

counterparty’s activity in connection 

with paragraph (a)(3)(i)(B) of this 

section in determining whether a 


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Federal Register / Vol. 79, No. 155 / Tuesday, August 12, 2014 / Rules and Regulations 47371 

security-based swap transaction is a 

transaction conducted through a foreign 

branch if such person receives a 

representation from its counterparty that 

the security-based swap transaction is 

arranged, negotiated, and executed on 

behalf of the foreign branch solely by 

persons located outside the United 

States, unless such person knows or has 

reason to know that the representation 

is not accurate; for the purposes of this 

final rule a person would have reason to 

know the representation is not accurate 

if a reasonable person should know, 

under all of the facts of which the 

person is aware, that it is not accurate. 

(4) U.S. person. (i) Except as provided 

in paragraph (a)(4)(iii) of this section, 

U.S. person means any person that is: 

(A) A natural person resident in the 

United States; 

(B) A partnership, corporation, trust, 

investment vehicle, or other legal 

person organized, incorporated, or 

established under the laws of the United 

States or having its principal place of 

business in the United States; 

(C) An account (whether discretionary 

or non-discretionary) of a U.S. person; 

or 

(D) An estate of a decedent who was 

a resident of the United States at the 

time of death. 

(ii) For purposes of this section, 

principal place of business means the 

location from which the officers, 

partners, or managers of the legal person 

primarily direct, control, and coordinate 

the activities of the legal person. With 

respect to an externally managed 

investment vehicle, this location is the 

office from which the manager of the 

vehicle primarily directs, controls, and 

coordinates the investment activities of 

the vehicle. 

(iii) The term U.S. person does not 

include the International Monetary 

Fund, the International Bank for 

Reconstruction and Development, the 

Inter-American Development Bank, the 

Asian Development Bank, the African 

Development Bank, the United Nations, 

and their agencies and pension plans, 

and any other similar international 

organizations, their agencies and 

pension plans. 

(iv) A person shall not be required to 

consider its counterparty to a securitybased swap to be a U.S. person if such 

person receives a representation from 

the counterparty that the counterparty 

does not satisfy the criteria set forth in 

paragraph (a)(4)(i) of this section, unless 

such person knows or has reason to 

know that the representation is not 

accurate; for the purposes of this final 

rule a person would have reason to 

know the representation is not accurate 

if a reasonable person should know, 

under all of the facts of which the 

person is aware, that it is not accurate. 

(5) United States means the United 

States of America, its territories and 

possessions, any State of the United 

States, and the District of Columbia. 

(b) Application of de minimis 

exception to cross-border dealing 

activity. For purposes of calculating the 

amount of security-based swap 

positions connected with dealing 

activity under § 240.3a71–2(a)(1), except 

as provided in § 240.3a71–5, a person 

shall include the following securitybased swap transactions: 

(1)(i) If such person is a U.S. person, 

all security-based swap transactions 

connected with the dealing activity in 

which such person engages, including 

transactions conducted through a 

foreign branch; 

(ii) If such person is a conduit 

affiliate, all security-based swap 

transactions connected with the dealing 

activity in which such person engages; 

and 

(iii) If such person is a non-U.S. 

person other than a conduit affiliate, all 

of the following types of transactions: 

(A) Security-based swap transactions 

connected with the dealing activity in 

which such person engages that are 

entered into with a U.S. person; 

provided, however, that this paragraph 

(b)(1)(iii)(A) shall not apply to: 

(1) Transactions with a U.S. person 

counterparty that constitute transactions 

conducted through a foreign branch of 

the counterparty, when the counterparty 

is a registered security-based swap 

dealer; and 

(2) Transactions with a U.S. person 

counterparty that constitute transactions 

conducted through a foreign branch of 

the counterparty, when the transaction 

is entered into prior to 60 days 

following the earliest date on which the 

registration of security-based swap 

dealers is first required pursuant to the 

applicable final rules and regulations; 

and 

(B) Security-based swap transactions 

connected with the dealing activity in 

which such person engages for which 

the counterparty to the security-based 

swap has rights of recourse against a 

U.S. person that is controlling, 

controlled by, or under common control 

with the non-U.S. person; for these 

purposes a counterparty has rights of 

recourse against the U.S. person if the 

counterparty has a conditional or 

unconditional legally enforceable right, 

in whole or in part, to receive payments 

from, or otherwise collect from, the U.S. 

person in connection with the securitybased swap; and 

(2) If such person engages in 

transactions described in paragraph 

(b)(1) of this section, except as provided 

in § 240.3a71–4, all of the following 

types of security-based swap 

transactions: 

(i) Security-based swap transactions 

connected with the dealing activity in 

which any U.S. person controlling, 

controlled by, or under common control 

with such person engages, including 

transactions conducted through a 

foreign branch; 

(ii) Security-based swap transactions 

connected with the dealing activity in 

which any conduit affiliate controlling, 

controlled by, or under common control 

with such person engages; and 

(iii) Security-based swap transactions 

connected with the dealing activity of 

any non-U.S. person, other than a 

conduit affiliate, that is controlling, 

controlled by, or under common control 

with such person, that are described in 

paragraph (b)(1)(iii) of this section. 

§ 240.3a71–4 Exception from aggregation 

for affiliated groups with registered 

security-based swap dealers. 

Notwithstanding §§ 240.3a71–2(a)(1) 

and 240.3a71–3(b)(2), a person shall not 

include the security-based swap 

transactions of another person (an 

‘‘affiliate’’) controlling, controlled by, or 

under common control with such 

person where such affiliate either is: 

(a) Registered with the Commission as 

a security-based swap dealer; or 

(b) Deemed not to be a security-based 

swap dealer pursuant to § 240.3a71– 

2(b). 

§ 240.3a71–5 Exception for cleared 

transactions executed on a swap execution 

facility. 

(a) For purposes of § 240.3a71–3(b)(1), 

a non-U.S. person, other than a conduit 

affiliate, shall not include its securitybased swap transactions that are entered 

into anonymously on an execution 

facility or national securities exchange 

and are cleared through a clearing 

agency; and 

(b) For purposes of § 240.3a71–3(b)(2), 

a person shall not include securitybased swap transactions of an affiliated 

non-U.S. person, other than a conduit 

affiliate, when such transactions are 

entered into anonymously on an 

execution facility or national securities 

exchange and are cleared through a 

clearing agency. 

PART 241—INTERPRETIVE RELEASES 

RELATING TO THE SECURITIES 

EXCHANGE ACT OF 1934 AND 

GENERAL RULES AND REGULATIONS 

THEREUNDER 

■ 5. Part 241 is amended by adding 

Release No. 34–72472 to the list of 

interpretive releases as follows: 


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47372 Federal Register / Vol. 79, No. 155 / Tuesday, August 12, 2014 / Rules and Regulations 

Subject Release No. Date Fed. Reg. vol. and page 

Application of ‘‘Security-Based Swap Dealer’’ and 

‘‘Major Security-Based Swap Participant’’ Definitions to Cross-Border Security-Based Swap Activities.

34–72472 June 25, 2014 ........................ 79 FR [Insert FR Page Number] 

■ 6. Part 250, consisting of § 250.1, is 

added to read as follows: 

PART 250—CROSS–BORDER 

ANTIFRAUD LAW–ENFORCEMENT 

AUTHORITY 

Authority: 15 U.S.C. 77s, 77v(c), 78w, 

78aa(b), 80b–11, and 80b–14(b). 

§ 250.1 Cross-border antifraud lawenforcement authority. 

(a) Notwithstanding any other 

Commission rule or regulation, the 

antifraud provisions of the securities 

laws apply to: 

(1) Conduct within the United States 

that constitutes significant steps in 

furtherance of the violation; or 

(2) Conduct occurring outside the 

United States that has a foreseeable 

substantial effect within the United 

States. 

(b) The antifraud provisions of the 

securities laws apply to conduct 

described in paragraph (a)(1) of this 

section even if: 

(1) The violation relates to a securities 

transaction or securities transactions 

occurring outside the United States that 

involves only foreign investors; or 

(2) The violation is committed by a 

foreign adviser and involves only 

foreign investors. 

(c) Violations of the antifraud 

provisions of the securities laws 

described in this section may be 

pursued in judicial proceedings brought 

by the Commission or the United States. 

By the Commission. 

Date: June 25, 2014. 

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–15337 Filed 7–3–14; 8:45 am] 

Editorial Note: Proposed rule document 

2014–15337 was originally published on 

pages 39067 through 39162 in the issue of 

Wednesday, July 9, 2014. In that publication 

the footnotes contained erroneous entries. 

The corrected document is republished in its 

entirety. 

[FR Doc. R1–2014–15337 Filed 8–11–14; 8:45 am] 

BILLING CODE 1505–01–D 


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