8598 Federal Register / Vol. 81, No. 33 / Friday, February 19, 2016 / Rules and Regulations 

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. 

2Application of Certain Title VII Requirements to 

Security-Based Swap Transactions Connected With 

a Non-U.S. Person’s Dealing Activity That Are 

Arranged, Negotiated, or Executed by Personnel 

Located in a U.S. Branch or Office or in a U.S. 

Branch or Office of an Agent, Exchange Act Release 

No. 74834 (April 29, 2015), 80 FR 27443 (May 13, 

2015) (‘‘U.S. Activity Proposing Release’’). 

3 In this release, unless otherwise noted, we use 

the terms ‘‘personnel located in the United States’’ 

or ‘‘personnel located in a U.S. branch or office’’ 

interchangeably to refer to personnel of the nonU.S. person engaged in security-based swap dealing 

activity who are located in a U.S. branch or office, 

or to personnel of an agent of such non-U.S. person 

who are located in a U.S. branch or office. 

4Regulation SBSR—Reporting and Dissemination 

of Security-Based Swap Information; Final Rule, 

Exchange Act Release No. 74244 (February 11, 

2015), 80 FR 14563 (March 19, 2015) (‘‘Regulation 

SBSR Adopting Release’’). 

5Each of these issues had previously been 

considered in our May 23, 2013 proposal, in which 

we proposed rules regarding the application of Title 

VII in the cross-border context more generally. See 

Cross-Border Security-Based Swap Activities; ReProposal 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 30967 (May 23, 2013) (‘‘CrossBorder Proposing Release’’). 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 240 

[Release No. 34–77104; File No. S7–06–15] 

RIN 3235–AL73 

Security-Based Swap Transactions 

Connected With a Non-U.S. Person’s 

Dealing Activity That Are Arranged, 

Negotiated, or Executed by Personnel 

Located in a U.S. Branch or Office or 

in a U.S. Branch or Office of an Agent; 

Security-Based Swap Dealer De 

Minimis Exception 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Final rule. 

SUMMARY: The Securities and Exchange 

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

is adopting amendments to Exchange 

Act rules 3a71–3 and 3a71–5 that 

address the application of the de 

minimis exception to security-based 

swap transactions connected with a 

non-U.S. person’s security-based swap 

dealing activity that are arranged, 

negotiated, or executed by personnel of 

such person located in a U.S. branch or 

office, or by personnel of such person’s 

agent, located in a U.S. branch or office. 

DATES: Effective Date: April 19, 2016. 

Compliance Date: The later of (a) 

February 21, 2017 or (b) the SBS Entity 

Counting Date, as defined in Section VII 

of the Supplementary Information. 

FOR FURTHER INFORMATION CONTACT: 

Carol McGee, Assistant Director, 

Richard Gabbert, 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 amending Exchange Act 

rule 3a71–3 (addressing the cross-border 

implementation of the de minimis 

exception to the ‘‘security-based swap 

dealer’’ definition and the definition of 

certain terms) and Exchange Act rule 

3a71–5 (regarding availability of an 

exception from the dealer de minimis 

analysis for cleared anonymous 

transactions that fall within rule 3a71– 

3(b)(1)(iii)(C)). 

Table of Contents 

I. Background 

A. Scope of This Rulemaking 

B. The Dodd-Frank Act 

C. Relevant Proposing Releases 

D. Relevant CFTC Guidance 

E. Overview of Comments Received 

II. Economic Considerations and Baseline 

Analysis 

A. Baseline 

1. Available Data Regarding Security-Based 

Swap Activity 

2. Security-Based Swap Market: Market 

Participants and Dealing Structures 

3. Security-Based Swap Market: Levels of 

Security-Based Swap Trading Activity 

4. Global Regulatory Efforts 

5. Cross-Market Participation 

B. Economic Considerations 

III. Overview of Prior Proposals 

IV. Final Rules 

A. Overview 

B. Statutory Scope and Policy Concerns 

Arising From Security-Based Swap 

Dealing Activity in the United States 

1. Territorial Application of ‘‘SecurityBased Swap Dealer’’ Definition 

2. Policy Concerns Associated With 

Security-Based Swap Dealing Activity in 

the United States 

3. Existing Regulatory Frameworks and 

Security-Based Swap Dealer Regulation 

C. Application of the Dealer De Minimis 

Exception to Non-U.S. Persons Using 

Personnel Located in a U.S. Branch or 

Office To Arrange, Negotiate, or Execute 

Security-Based Swap Transactions 

1. ‘‘Arranging, Negotiating, or Executing’’ a 

Security-Based Swap Transaction 

2. ‘‘Located in a U.S. Branch or Office’’ 

3. ‘‘Personnel of Such Non-U.S. Person’’ or 

‘‘Personnel of an Agent’’ 

4. Exception for Transactions Involving 

Certain International Organizations 

D. Availability of the Exception for Cleared 

Anonymous Transactions 

V. Economic Analysis 

A. Assessment Costs 

1. Costs Associated With Increase in 

Number of Firms Performing Analysis 

2. Costs Associated With Determining the 

Location of Relevant Personnel Who 

Arrange, Negotiate, or Execute a 

Transaction 

B. Programmatic Costs and Benefits 

1. Benefits and Costs of the Final Rules 

2. Effects of Rule Amendments on 

Efficiency, Competition, and Capital 

Formation 

C. Alternatives Considered 

1. Retention of the Definition of 

‘‘Transaction Conducted Within the 

United States’’ 

2. Limited Exception From Title VII 

Requirements for Transactions Arranged, 

Negotiated, and Executed by Personnel 

Subject to Existing Domestic or Foreign 

Regulatory Requirements 

3. Non-Inclusion of Security-Based Swap 

Transactions Involving Dealing Activity 

in the United States in the De minimis 

Threshold Calculations 

4. Exception for Transactions Entered Into 

Anonymously on an Exchange and 

Cleared 

5. Exception for Transactions Cleared 

Through Foreign Clearing Agencies 

6. Exception for Transactions Arranged, 

Negotiated, or Executed in the United 

States Merely to Accommodate Foreign 

Clients’ Needs When Foreign Markets 

Are Closed 

VI. Regulatory Flexibility Act Certification 

VII. Effective Date and Implementation 

Statutory Basis and Text of Final Rules 

I. Background 

A. Scope of This Rulemaking 

In April 2015, the Commission 

proposed to amend certain rules and to 

re-propose a rule regarding the 

application of Title VII of the DoddFrank Act 1 (‘‘Title VII’’) to cross-border 

security-based swap transactions and 

persons engaged in those transactions.2

The proposed amendments included 

rules regarding the application of the de 

minimis exception to the dealing 

activity of non-U.S. persons carried out, 

in relevant part, by personnel located in 

the United States,3 and the application 

of Regulation SBSR4 to such 

transactions and to transactions effected 

by or through a registered broker-dealer, 

along with certain related issues. We 

also re-proposed a rule regarding the 

application of business conduct 

requirements to the foreign business and 

U.S. business of registered securitybased swap dealers.5

In this release, we are adopting rule 

amendments relating specifically to the 

first of these issues: The application of 

the de minimis exception to non-U.S. 

persons that are engaged in dealing 

activity with other non-U.S. persons 

using personnel located in the United 

States. Consistent with the proposal, 

these amendments focus on the activity 

of the person or persons acting in a 

dealing capacity in the transaction. 

Specifically, Exchange Act rule 3a71– 

3(b)(1)(iii)(C) requires a non-U.S. person 

to include in its de minimis calculation 

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6Cf. Letter from Citadel, dated February 2, 2016, 

at 12 (urging the Commission to address the scope 

of the Title VII mandatory clearing or trading 

requirement ‘‘in the context of those specific 

rulemakings, rather than in an overarching crossborder rule’’). 

7See 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 (April 27, 2012), 

77 FR 30595, 30640 (May 23, 2012) (‘‘Intermediary 

Definitions Adopting Release’’). 

8See Exchange Act rule 3a71–2. The threshold 

and phase-in levels for other types of security-based 

swaps are $150 million and $400 million, 

respectively. See id. 

9See Intermediary Definitions Adopting Release, 

77 FR 30640–41 and n.523. 

10See U.S. Activity Proposing Release, 80 FR 

27446. 

11See Section II.A.3, infra, regarding the 

preponderance of cross-border activity in the 

security-based swap market. 

12The term ‘‘prudential regulator’’ is defined in 

section 1a(39) of the Commodity Exchange Act, 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, 

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. 

13Section 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.’’ See Letter from Managed Funds 

Association, dated July 13, 2015 (‘‘MFA Letter’’), at 

4 (emphasizing need for Commission and its U.S. 

counterparts to develop a single, harmonized 

approach to cross-border derivatives regulation). 

14For example, senior 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 to G20 Leaders on 

Cross-Border Implementation Issues November 

2015 (November 2015), available at: http://

www.cftc.gov/idc/groups/public/@

internationalaffairs/documents/file/odrgreportg20_

1115.pdf. 

15Commission representatives participate in the 

Financial Stability Board’s Working Group on OTC 

Derivatives Regulation (‘‘ODWG’’), both on the 

Commission’s behalf and as the representative of 

the International Organization of Securities 

Commissions (‘‘IOSCO’’), which is co-chair of the 

ODWG. A Commission representative serves as one 

of the co-chairs of the IOSCO Task Force on OTC 

Derivatives Regulation. Commission representatives 

participate in joint working groups of the 

Committee on Payments and Market Infrastructures 

(‘‘CPMI’’) and IOSCO that examine key data 

elements of OTC derivatives transactions and 

participated in the Financial Stability Board’s 

review of OTC derivatives trade reporting. 

Commission representatives also participate in 

international working groups that impact OTC 

derivatives financial market infrastructures, such as 

CPMI–IOSCO joint working groups that assess legal 

and regulatory frameworks for central 

counterparties and trade repositories and that 

examine central counterparty resilience and 

recovery. 

16See Section 752(a) of the Dodd-Frank Act 

(providing 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 

Continued 

any transaction with a non-U.S.-person 

counterparty that is, in connection with 

its dealing activity, arranged, negotiated, 

or executed by personnel of the nonU.S. person located in a U.S. branch or 

office or by personnel of the non-U.S. 

person’s agent located in a U.S. branch 

or office. This test (‘‘U.S. Activity Test’’) 

focuses on the location of the personnel 

acting on behalf of the non-U.S. person 

engaged in dealing activity. This 

approach focuses on the activities of 

non-U.S. persons that are most likely to 

raise the types of concerns addressed by 

Title VII security-based swap dealer 

regulation. At the same time, it avoids 

the unnecessary complexity of the 

initially proposed application of the de 

minimis exception to transactions 

between two non-U.S. persons based on 

the location of dealing activity. The 

final rules do not require a non-U.S. 

person engaging in dealing activity to 

consider the location of any activity 

carried out by or on behalf of its 

counterparty in determining whether 

the transaction needs to be included in 

its own de minimis calculation. 

We are not addressing in this release 

any of the other elements of the April 

2015 proposal. We anticipate addressing 

the remaining issues (including the 

application of business conduct 

standards, of Regulation SBSR to certain 

transactions, and the application of 

clearing and trade execution 

requirements more generally) in 

subsequent releases.6

Further, we note that these rules 

complete our rulemaking implementing 

the de minimis exception for securitybased swap dealers. However, in the 

Intermediary Definitions Adopting 

Release we adopted rule 3a71–2 

establishing a phase-in period in 

connection with a person’s status as a 

security-based swap dealer and other 

regulatory requirements arising from 

dealer status.7 We established a $3 

billion notional threshold for the de 

minimis exception with respect to 

single-name credit default swaps 

(‘‘CDS’’), subject to a phase-in level of 

$8 billion.8 During the phase-in period 

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 security-based 

swap participant’’ definitions. As we 

explained in the Intermediary 

Definitions Adopting Release, at the end 

of the phase-in period, we 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 

rules implementing the de minimis 

exception, including any increases or 

decreases to both the $3 billion 

threshold for credit default swaps and 

the $150 million threshold for other 

types of security-based swaps.9

B. The Dodd-Frank Act 

As we have previously noted, Title 

VII of the Dodd-Frank Act provides for 

a comprehensive new regulatory 

framework for swaps and security-based 

swaps.10 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.’’ Security-based 

swap transactions are largely crossborder in practice,11 and the various 

market participants and infrastructures 

operate in a global market. A key part 

of this framework is the regulation of 

security-based swap dealers, which may 

transact extensively with counterparties 

established or located in other 

jurisdictions and, in doing so, may 

conduct sales and trading activity in one 

jurisdiction and book the resulting 

transactions in another. These market 

realities and the potential impact that 

these activities may have on U.S. 

persons and potentially the U.S. 

financial system have informed our 

consideration of these rules. 

In developing these final rules, we 

have consulted and coordinated with 

the CFTC and the prudential 

regulators 12 in accordance with the 

consultation mandate of the Dodd-Frank 

Act.13 We also have consulted and 

coordinated with foreign regulatory 

authorities through Commission staff 

participation in numerous bilateral and 

multilateral discussions with foreign 

regulatory authorities addressing the 

regulation of OTC (over-the-counter) 

derivatives.14 Through these 

discussions and the Commission staff’s 

participation in various international 

task forces and working groups,15 we 

have gathered information about foreign 

regulatory reform efforts and their 

impact on and relationship with the 

U.S. regulatory regime. The Commission 

has taken and will continue to take 

these discussions into consideration in 

developing rules, forms, and 

interpretations for implementing Title 

VII of the Dodd-Frank Act.16

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8600 Federal Register / Vol. 81, No. 33 / Friday, February 19, 2016 / Rules and Regulations 

of consistent international standards with respect to 

the regulation (including fees) of swaps.’’). 

17See Cross-Border Proposing Release, 78 FR 

31000–01; U.S. Activity Proposing Release, 80 FR 

27463. 

18Cross-Border Proposing Release, 78 FR 30999– 

31000. 

19See U.S. Activity Proposing Release, 80 FR 

27459. 

20See CFTC Staff Advisory No. 13–69, ‘‘Division 

of Swap Dealer and Intermediary Oversight 

Advisory: Applicability of Transaction-Level 

Requirements to Activity in the United States’’ 

(November 14, 2013), available at: http:// 

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

documents/letter/13-69.pdf. 

In the Interpretive Guidance and Policy 

Statement Regarding Compliance with Certain 

Swap Regulations (July 17, 2013), 78 FR 45292 (July 

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

CFTC defined transaction-level requirements to 

include the following: (i) Required clearing and 

swap processing; (ii) margining (and segregation) 

for uncleared swaps; (iii) mandatory trade 

execution; (iv) swap trading relationship 

documentation; (v) portfolio reconciliation and 

compression; (vi) real-time public reporting; (vii) 

trade confirmation; (viii) daily trading records; and 

(ix) external business conduct standards. See CFTC 

Cross-Border Guidance, 78 FR 45333. 

21See Request for Comment on Application of 

Commission Regulations to Swaps Between NonU.S. Swap Dealers and Non-U.S. Counterparties 

Involving Personnel or Agents of the Non-U.S. 

Swap Dealers Located in the United States, 79 FR 

1347 (January 8, 2014) (‘‘CFTC Request for 

Comment’’). 

22See U.S. Activity Proposing Release, 80 FR 

27461–63. 

23See Extension of No-Action Relief: TransactionLevel Requirements for Non-U.S. Swap Dealers, 

CFTC Letter No. 15–48 (August 13, 2015), available 

at: http://www.cftc.gov/ucm/groups/public/@

lrlettergeneral/documents/letter/15-48.pdf. 

24See Letter from Chris Barnard, dated June 26, 

2015 (‘‘Chris Barnard Letter’’), at 2. 

25See, e.g., Letter from International Swaps and 

Derivatives Association (‘‘ISDA’’), dated July 13, 

2015 (‘‘ISDA Letter’’), at 5–6. 

26See Letter from Institute of International 

Bankers, dated July 13, 2015 (‘‘IIB Letter’’), at 7; 

ISDA Letter at 6; Letter from Securities Industry and 

Financial Markets Association and Financial 

Services Roundtable, dated July 13, 2015 (‘‘SIFMA/ 

FSR Letter’’), at 6; Letter from HSBC, dated July 13, 

2015 (‘‘HSBC Letter’’), at 1–3; Letter from Securities 

Industry and Financial Markets Association, dated 

January 13, 2015 (‘‘SIFMA Sequencing Letter’’), at 

5. 

27See, e.g., SIFMA/FSR Letter at 2, 6; IIB Letter 

at 2; ISDA Letter at 5. 

28Pursuant to Exchange Act rules 3a71–3(b)(1)(ii) 

and (iii)(B), any transaction of a non-U.S. person 

engaged in dealing activity and that is a conduit 

affiliate or whose 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 is already required 

to be counted toward the non-U.S. person’s de 

minimis thresholds regardless of where personnel 

of the non-U.S. person arranges, negotiates, or 

executes the transactions. 

29We also considered, where appropriate, the 

impact of rules and technical standards 

promulgated by other regulators, such as the CFTC 

and the European Securities and Markets Authority, 

on practices in the security-based swap market. 

C. Relevant Proposing Releases 

As discussed in further detail below, 

we have twice proposed rules related to 

the application of the dealer de minimis 

calculations to security-based swap 

transactions that involve activity in the 

United States. In both proposals, we 

discussed the global nature of the 

security-based swap market and 

explained our view that dealing activity 

carried out by a non-U.S. person 

through a branch, office, affiliate, or 

agent acting on its behalf in the United 

States may raise concerns that Title VII 

addresses, even if a significant 

proportion—or all—of those 

transactions involve non-U.S.-person 

counterparties.17

We initially proposed to require any 

non-U.S. person engaged in dealing 

activity to include in its de minimis 

calculation any ‘‘transaction conducted 

within the United States.’’ 18 Thus, 

under the Cross-Border Proposing 

Release, a non-U.S. person engaged in 

security-based-swap dealing activity 

would have been required to include in 

its de minimis calculation any dealing 

transaction entered into with another 

non-U.S. person that was conducted in 

the United States by either the non-U.S. 

person engaged in dealing activity or its 

counterparty. In our April 2015 

proposal, we proposed a modified 

approach to applying the dealer de 

minimis exception to transactions 

between two non-U.S. persons based on 

activity in the United States that 

focused exclusively on the location of 

personnel engaged in relevant activity 

in connection with a non-U.S. person’s 

dealing activity.19

D. Relevant CFTC Guidance 

As discussed in our April 2015 

proposal, the CFTC’s Division of Swap 

Dealer and Intermediary Oversight 

issued a Staff Advisory (‘‘CFTC Staff 

Advisory’’) in November 2013 that 

addressed the applicability of the 

CFTC’s transaction-level requirements 

to certain activity by non-U.S. registered 

swap dealers arranged, negotiated, or 

executed by personnel or agents of the 

non-U.S. swap dealer located in the 

United States.20 The CFTC subsequently 

solicited and received public comment 

on various aspects of the CFTC Staff 

Advisory,21 and we discussed these 

comments in our April 2015 proposal.22

On August 13, 2015, the CFTC staff 

extended no-action relief related to the 

CFTC Staff Advisory until the earlier of 

September 30, 2016, or the effective date 

of any CFTC action addressing related 

issues.23

E. Overview of Comments Received 

As we discuss in more detail below, 

we received fifteen comment letters in 

response to our U.S. Activity Proposing 

Release. These comment letters address 

a range of issues, including the scope of 

the proposed U.S. Activity Test and 

concerns about its use as a trigger for the 

counting of transactions toward the de 

minimis thresholds of non-U.S. persons, 

as well as other issues—such as external 

business conduct, regulatory reporting 

and public dissemination, and 

mandatory trade execution and 

clearing—that we anticipate addressing 

in subsequent releases. Several 

commenters expressed support for our 

proposed U.S. Activity Test, and one 

commenter expressed general support 

for the rules proposed in the U.S. 

Activity Proposing Release.24 Several 

commenters, however, raised concerns 

about the use of the U.S. Activity Test 

to identify transactions that non-U.S. 

persons are required to include in their 

dealer de minimis calculations, arguing, 

among other things, that capturing these 

transactions would not advance the 

mitigation of risk, which commenters 

identified as the principal concern of 

Title VII dealer regulation,25 would 

impose excessive costs on market 

participants,26 and would cause market 

fragmentation and decreased liquidity 

for U.S. market participants.27

II. Economic Considerations and 

Baseline Analysis 

These final rules will determine when 

a non-U.S. person engaged in dealing 

activity and whose obligations under a 

security-based swap are not guaranteed 

by a U.S. person and that is not a 

conduit affiliate is required to include 

in its dealer de minimis threshold 

calculations transactions with another 

non-U.S. person.28 To provide context 

for understanding our final rules and 

the related economic analysis that 

follows, this section provides an 

overview of the current state of the 

security-based swap market and the 

existing regulatory framework; it also 

identifies economic considerations that 

we believe underlie the likely economic 

effects of these rules. 

A. 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.29

The analysis includes the statutory 

provisions that currently govern the 

security-based swap market pursuant to 

the Dodd-Frank Act and rules adopted 

in the Intermediary Definitions 

Adopting Release, the Cross-Border 

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30See Application of ‘‘Security-Based Swap 

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

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

72472 (June 25, 2014), 79 FR 47277 (August 12, 

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

Release’’). 

31See Security-Based Swap Data Repository 

Registration, Duties, and Core Principles, Exchange 

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

14437 (March 19, 2015) (‘‘SDR Rules and Core 

Principles Adopting Release’’). 

32See Registration Process for Security-Based 

Swap Dealers and Major Security-Based Swap 

Participants, Exchange Act Release No. 75611 

(August 5, 2015), 80 FR 48963 (August 14, 2015) 

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

33See Regulation SBSR-Reporting and 

Dissemination of Security-Based Swap Information, 

Exchange Act Release No. 74244 (February 11, 

2015), 80 FR 14563 (March 19, 2015) (‘‘Regulation 

SBSR Adopting Release’’). 

34We also rely on qualitative information 

regarding market structure and evolving market 

practices provided by commenters, both in letters 

and in meetings with Commission staff, and 

knowledge and expertise of Commission staff. 

35The global notional amount outstanding 

represents the total face amount used to calculate 

payments under outstanding contracts. The gross 

market value is the cost of replacing all open 

contracts at current market prices. 

36See semi-annual OTC derivatives statistics at 

December 2014, Table 19, available at http://

www.bis.org/statistics/dt1920a.pdf (accessed July 

29, 2015). 

37These totals include both swaps and securitybased swaps, as well as products that are excluded 

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

equity forwards. 

38While 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). Consistent with the CrossBorder Proposing Release, we believe that data 

related to single-name CDS provide reasonably 

comprehensive information for purposes of this 

analysis, as such transactions appear to constitute 

roughly 74 percent of the security-based swap 

market as measured on the basis of gross notional 

outstanding. See Cross-Border Proposing Release, 

78 FR 31120 n.1301. 

Also consistent with our approach in that release, 

with the exception of the analysis regarding the 

degree of overlap between participation in the 

single-name CDS market and the index CDS market 

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

include data regarding index CDS as we do not 

currently have sufficient information to classify 

index CDS as swaps or security-based swaps. 

39Following publication of the Warehouse Trust 

Guidance on CDS data access, TIW surveyed market 

participants, asking for the physical address 

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

the account is organized as a legal entity). This 

physical address is designated the registered office 

location by TIW. When an account reports a 

registered office location, we have assumed that the 

registered office location reflects the place of 

domicile for the fund or account. When an account 

does not report a registered office location, we have 

assumed that the settlement country reported by the 

investment adviser or parent entity to the fund or 

account is the place of domicile. Thus, for purposes 

of this analysis, we have classified accounts as 

‘‘U.S. counterparties’’ when they have reported a 

registered office location in the United States. We 

note, however, that this classification is not 

necessarily identical in all cases to the definition of 

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

3(a)(4). 

40The challenges we face in estimating measures 

of current market activity stem, in part, from the 

absence of comprehensive reporting requirements 

for security-based swap market participants. The 

Commission has adopted rules regarding trade 

reporting, data elements, and public reporting for 

security-based swaps that are designed to, when 

fully implemented, provide the Commission with 

additional measures of market activity that will 

allow us to better understand and monitor activity 

in the security-based swap market. See Regulation 

SBSR Adopting Release, 80 FR 14699–14700. 

41See ISDA Letter at 3, 7 (arguing that the 

Commission lacks complete data to estimate the 

number of non-U.S. persons that use U.S. personnel 

to arrange, negotiate, or execute security-based 

swap transactions or the number of registered U.S. 

broker-dealers that intermediate these transactions 

and that this ‘‘makes it difficult or impossible for 

the Commission to formulate a useful estimate of 

the market impact, cost and benefits of the 

Proposal’’; suggesting that the Commission 

‘‘gather[ ] more robust and complete data prior to 

finalizing a rulemaking that will have meaningful 

impact on a global market.’’). 

42See Section V.A.1, infra. 

Adopting Release,30 the SDR Rules and 

Core Principles Adopting Release,31 the 

SBS Entity Registration Adopting 

Release,32 and the Regulation SBSR 

Adopting Release,33 as these final 

rules—even if compliance is not yet 

required—are part of the existing 

regulatory landscape that market 

participants expect to govern their 

security-based swap activity. The 

following sections describe current 

security-based swap market activity, 

participants, common dealing 

structures, counterparties, and patterns 

of cross-border and cross-market 

participation. 

1. Available Data Regarding SecurityBased Swap Activity 

Our understanding of the market is 

informed in part by available data on 

security-based swap transactions, 

though we acknowledge that limitations 

in the data limit the extent to which we 

can quantitatively characterize the 

market.34 Because these data do not 

cover the entire market, we have 

developed an understanding of market 

activity using a sample of transactions 

data that includes only certain portions 

of the market. We believe, however, that 

the data underlying our analysis here 

provide reasonably comprehensive 

information regarding single-name CDS 

transactions and the composition of 

participants in the single-name CDS 

market. 

Specifically, our analysis of the state 

of the current security-based swap 

market is based on data obtained from 

the DTCC Derivatives Repository 

Limited Trade Information Warehouse 

(‘‘TIW’’), especially data regarding the 

activity of market participants in the 

single-name CDS market during the 

period from 2008 to 2014. According to 

data published by the Bank for 

International Settlements (‘‘BIS’’), the 

global notional amount outstanding in 

single-name CDS was approximately 

$9.04 trillion,35 in multi-name index 

CDS was approximately $6.75 trillion, 

and in multi-name, non-index CDS was 

approximately $611 billion. The total 

gross market value outstanding in 

single-name CDS was approximately 

$366 billion, and in multi-name CDS 

instruments was approximately $227 

billion.36 The global notional amount 

outstanding in equity forwards and 

swaps as of December 2014 was $2.50 

trillion, with total gross market value of 

$177 billion.37 As these figures show 

(and as we have previously noted), 

although the definition of security-based 

swaps is not limited to single-name 

CDS, single-name CDS contracts make 

up a majority of security-based swaps, 

and we believe that the single-name 

CDS data are sufficiently representative 

of the market to inform our analysis of 

the state of the current security-based 

swap market.38

We note that the data available to us 

from TIW do not encompass those CDS 

transactions that both: (i) Do not involve 

U.S. counterparties; 39 and (ii) are based 

on non-U.S. reference entities. 

Notwithstanding this limitation, the 

TIW data should provide sufficient 

information to permit us to identify the 

types of market participants active in 

the security-based swap market and the 

general pattern of dealing within that 

market.40

One commenter recommended that 

we collect a more complete set of data 

to more precisely estimate the number 

of non-U.S. persons that would be 

affected by the proposed rules.41 Given 

the absence of comprehensive reporting 

requirements for security-based swap 

transactions, and the fact that the 

location of personnel that arrange, 

negotiate, or execute a security-based 

swap transaction is not currently 

available in TIW, a more precise 

estimate of the number of non-U.S. 

persons affected by this rule is not 

currently feasible. However, because we 

assume that all transactions by dealers 

classified as non-U.S. persons with 

other persons classified as non-U.S. 

persons on U.S. reference entities are 

arranged, negotiated, or executed by 

personnel located in the United States, 

we believe our analysis of the available 

data reflects a reasonable estimate for 

identifying broad market effects and 

estimating the number of firms that 

would likely assess the location of their 

dealing activity.42

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43These 1,875 entities, which are presented in 

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

counterparties that report at least one transaction to 

TIW as of December 2014. The staff in the Division 

of Economic and Risk Analysis classified these 

firms, which are shown as transaction 

counterparties, by machine matching names to 

known third-party databases and by manual 

classification. See, e.g., Cross-Border 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. 

44See 15 U.S.C. 80b1–80b21. Transacting agents 

participate directly in the security-based swap 

market, without relying on an intermediary, on 

behalf of principals. For example, a university 

endowment may hold a position in a security-based 

swap that is established by an investment adviser 

that transacts on the endowment’s behalf. In this 

case, the university endowment is a principal that 

uses the investment adviser as its transacting agent. 

45Adjustments to these statistics from the 

proposal reflect updated classifications of 

counterparties and transactions classification 

resulting from further analysis of the TIW data. 

46For 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. 

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

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

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

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

separate legal persons. One entity or legal person 

may have multiple accounts. For example, a bank 

may have one DTCC account for its U.S. 

headquarters and one DTCC account for one of its 

foreign branches. 

48Unregistered 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. 

2. Security-Based Swap Market: Market 

Participants and Dealing Structures 

a. Security-Based Swap Market 

Participants 

Activity in the security-based swap 

market is concentrated among a 

relatively small number of entities that 

act as dealers in this market. 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 

trade through banks, investment 

advisers, or other types of firms acting 

as dealers or agents. Based on an 

analysis of the counterparties to trades 

reported to the TIW, there are 1,875 

entities that engaged directly in trading 

between November 2006 and December 

2014.43

As shown in Table 1, below, close to 

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

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

were identified as investment advisers, 

of which approximately 40 percent 

(about 30 percent of all transacting 

agents) were registered as investment 

advisers under the Investment Advisers 

Act of 1940 (‘‘Investment Advisers 

Act’’).44 Although investment advisers 

comprise the vast majority of transacting 

agents, the transactions they executed 

account for only 11.5 percent of all 

single-name CDS trading activity 

reported to the TIW, measured by 

number of transaction-sides (each 

transaction has two transaction sides, 

i.e., two transaction counterparties). The 

vast majority of transactions (83.7 

percent) measured by number of 

transaction-sides were executed by 

ISDA-recognized dealers. 

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

ACTIVITY, FROM NOVEMBER 2006 THROUGH DECEMBER 2014, REPRESENTED BY EACH COUNTERPARTY TYPE 45

Transacting agents Number Percent Transaction 

share 

Investment Advisers .................................................................................................. 1,425 76.0 11.5% 

—SEC registered ................................................................................................ 571 30.5 7.7% 

Banks ......................................................................................................................... 252 13.4 4.3% 

Pension Funds ........................................................................................................... 27 1.4 0.1% 

Insurance Companies ................................................................................................ 38 2.0 0.2% 

ISDA-Recognized Dealers 46 ..................................................................................... 17 0.9 83.7% 

Other .......................................................................................................................... 116 6.2 0.2% 

Total ............................................................................................................. 1,875 99.9 100% 

Principal holders of CDS risk 

exposure are represented by ‘‘accounts’’ 

in the TIW.47 The staff’s analysis of 

these accounts in TIW shows that the 

1,875 transacting agents classified in 

Table 1 represent 10,900 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.48 For 

instance, banks in Table 1 allocated 

transactions across 327 accounts, of 

which 23 were represented by 

investment advisers. In the remaining 

304 instances, banks traded for their 

own accounts. Meanwhile, ISDArecognized dealers in Table 1 allocated 

transactions across 75 accounts. 

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49Adjustments to these statistics from the 

proposal reflect updated counterparty and 

transaction classification resulting from additional 

analysis of the TIW data. 

50This column reflects the number of participants 

who are also trading for their own accounts. 

51See 15 U.S.C. 80a1–80a64. There remain 

approximately 5,000 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. 

52For the purposes of this discussion, ‘‘private 

fund’’ encompasses various unregistered pooled 

investment vehicles, including hedge funds, private 

equity funds, and venture capital funds. 

53See note 39, supra (explaining how domiciles 

for firms were identified for purposes of this 

analysis). 

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 2014 49

Account holders by type Number Represented by a

registered

investment adviser 

Represented by an 

unregistered

investment adviser 

Participant is 

transacting agent 50

Private Funds ....................................................................... 3,168 1,569 50% 1,565 49% 34 1% 

DFA Special Entities ............................................................ 1,141 1,088 95% 33 3% 20 2% 

Registered Investment Companies ...................................... 800 768 96% 30 4% 2 0% 

Banks (non-ISDA-recognized dealers) ................................ 327 17 5% 6 2% 304 93% 

Insurance Companies .......................................................... 232 150 65% 21 9% 61 26% 

ISDA-Recognized Dealers ................................................... 75 0 0% 0 0% 75 100% 

Foreign Sovereigns .............................................................. 72 53 74% 3 4% 16 22% 

Non-Financial Corporations ................................................. 61 43 70% 3 5% 15 25% 

Finance Companies ............................................................. 13 6 46% 0 0% 7 54% 

Other/Unclassified ................................................................ 5,011 3,327 66% 1,452 29% 232 5% 

All .................................................................................. 10,900 7,021 64% 3,113 29% 766 7% 

Among the accounts, there are 1,141 

Dodd-Frank Act-defined special entities 

and 800 investment companies 

registered under the Investment 

Company Act of 1940.51 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.52


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54See Charles Levinson, ‘‘U.S. banks moved 

billions in trades beyond the CFTC’s reach,’’ 

Reuters (August 21, 2015), available at: http://

www.reuters.com/article/2015/08/21/usa-banksswaps-idUSL3N10S57R20150821. 55As noted above, the available data do not 

include all security-based swap transactions but 

only transactions in single-name CDS that involve 

either (1) at least one account domiciled in the 

United States (regardless of the reference entity) or 

(2) single-name CDS on a U.S. reference entity 

(regardless of the U.S.-person status of the 

counterparties). 56See U.S. Activity Proposing Release, 80 FR 

27449–52. 57See IIB Letter at 2; SIFMA/FSR Letter at 6; 

ISDA Letter at 5. One commenter indicated that a 

significant number of interdealer transactions 

between two non-U.S. dealers involve trades 

arranged, negotiated, or executed within the United 

States, although this commenter did not specifically 

identify what underliers these trades involved. See 

MFA/AIMA Letter at 7, note 34. 

58See IIB Letter at 2; SIFMA/FSR Letter at 6; 

only transactions in single-name CDS that involve 

either (1) at least one account domiciled in the 

United States (regardless of the reference entity) or 

(2) single-name CDS on a U.S. reference entity 

(regardless of the U.S.-person status of the 

counterparties). 

56See U.S. Activity Proposing Release, 80 FR 

27449–52. 

57See IIB Letter at 2; SIFMA/FSR Letter at 6; 

ISDA Letter at 5. One commenter indicated that a 

significant number of interdealer transactions 

between two non-U.S. dealers involve trades 

arranged, negotiated, or executed within the United 

States, although this commenter did not specifically 

identify what underliers these trades involved. See 

MFA/AIMA Letter at 7, note 34. 

58See IIB Letter at 2; SIFMA/FSR Letter at 6; 

ISDA Letter at 5. 

59See IIB Letter at 2; SIFMA/FSR Letter at 6; 

ISDA Letter at 5. 

60TIW transaction records contain a proxy for the 

domicile of an entity, which may differ from branch 

locations, which are separately identified in the 

transaction records. 

61See U.S. Activity Proposing Release, 80 FR 

27463; Cross-Border Proposing Release, 78 FR 

30977–78. 

62See, e.g., HSBC Letter at 2; SIFMA/FSR Letter 

at 6–7. 

63There is some indication that this booking 

structure is becoming increasingly common in the 

market. See, e.g., ‘‘Regional swaps booking 

replacing global hubs,’’ Risk.net (September 4, 

b. Participant Domiciles 

As depicted in Figure 1 above, the 

domiciles of new accounts participating 

in the market have shifted over time. It 

is unclear whether these shifts represent 

changes in the types of participants 

active in this market, changes in 

reporting, or changes in transaction 

volumes in particular underliers. For 

example, the increased percentage of 

new entrants that are foreign accounts 

may reflect an increase in participation 

by foreign account holders in the 

security-based swap market, and the 

increased percentage of the subset of 

new entrants that are foreign accounts 

managed by U.S. persons also may 

reflect more specifically the flexibility 

with which market participants can 

restructure their market participation in 

response to regulatory intervention, 

competitive pressures, and other 

stimuli.54 On the other hand, apparent 

changes in the percentage of new 

accounts with foreign domiciles may 

reflect improvements in reporting by 

market participants to TIW, an increase 

in the percentage of transactions 

between U.S. and non-U.S. 

counterparties, and/or increased 

transactions in single-name CDS on U.S. 

reference entities by foreign persons.55

c. Market Centers 

A market participant’s domicile, 

however, does not necessarily 

correspond to where it engages in 

security-based swap activity. In 

particular, financial groups engaged in 

security-based swap dealing activity 

operate in multiple market centers and 

carry out such activity with 

counterparties around the world.56

Several commenters noted that many 

market participants that are engaged in 

dealing activity prefer to use traders and 

manage risk for security-based swaps in 

the jurisdiction where the underlier is 

traded.57 Thus, although a significant 

amount of the dealing activity in 

security-based swaps on U.S. reference 

entities involves non-U.S. dealers, we 

understand that these dealers tend to 

carry out much of the security-based 

swap trading and related riskmanagement activities in these securitybased swaps within the United States.58

Some dealers have explained that being 

able to centralize their trading, sales, 

risk management and other activities 

related to U.S. reference entities in U.S. 

operations (even when the resulting 

transaction is booked in a foreign entity) 

improves the efficiency of their dealing 

business.59

Consistent with these operational 

concerns and the global nature of the 

security-based swap market, the 

available data appear to confirm that 

participants in this market are in fact 

active in market centers around the 

globe. Although, as noted above, the 

available data do not permit us to 

identify the location of personnel in a 

transaction, TIW transaction records 

indicate that firms that are likely to be 

security-based swap dealers operate out 

of branch locations in key market 

centers around the world, including 

New York, London, Tokyo, Hong Kong, 

Chicago, Sydney, Toronto, Frankfurt, 

Singapore and the Cayman Islands.60

Given these market characteristics 

and practices, participants in the 

security-based swap market may bear 

the financial risk of a security-based 

swap transaction in a location different 

from the location where the transaction 

is arranged, negotiated, or executed, or 

where economic decisions are made by 

managers on behalf of beneficial 

owners. And market activity may occur 

in a jurisdiction other than where the 

market participant or its counterparty 

books the transaction. Similarly, a 

participant in the security-based swap 

market may be exposed to counterparty 

risk from a counterparty located in a 

jurisdiction that is different from the 

market center or centers in which it 

participates. 

d. Common Business Structures for 

Firms Engaged in Security-Based Swap 

Dealing Activity 

A financial group that engages in a 

global security-based swap dealing 

business in multiple market centers may 

choose to structure its dealing business 

in a number of different ways. This 

structure, including where it books the 

transactions that constitute that 

business and how it carries out marketfacing activities that generate those 

transactions, reflects a range of business 

and regulatory considerations, which 

each financial group may weigh 

differently. 

A financial group may choose to book 

all of its security-based swap 

transactions, regardless of where the 

transaction originated, in a single, 

central booking entity. That entity 

generally retains the risk associated 

with that transaction, but it also may lay 

off that risk to another affiliate via a 

back-to-back transaction or an 

assignment of the security-based 

swap.61 Alternatively, a financial group 

may book security-based swaps arising 

from its dealing business in separate 

affiliates, which may be located in the 

jurisdiction where it originates the risk 

associated with the security-based swap 

or, alternatively, the jurisdiction where 

it manages that risk.62 Some financial 

groups may book transactions 

originating in a particular region to an 

affiliate established in a jurisdiction 

located in that region.63

Regardless of where a financial group 

determines to book its security-based 

swaps arising out of its dealing activity, 

it is likely to operate offices that 

perform sales or trading functions in 

one or more market centers in other 

jurisdictions. Maintaining sales and 

trading desks in global market centers 

permits the financial group to deal with 

counterparties in that jurisdiction or in 

a specific geographic region, or to 

ensure that it is able to provide liquidity 

to counterparties in other 

jurisdictions,64 for example, when a 

counterparty’s home financial markets 

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64These offices may be branches or offices of the 

booking entity itself, or branches or offices of an 

affiliated agent, such as, in the United States, a 

registered broker-dealer. 

65See SIFMA/FSR Letter at 3; HSBC Letter at 2. 

66See HSBC Letter at 2. 

67See note 59, supra. 

68See HSBC Letter at 2. 

69We understand that interdealer brokers may 

provide voice or electronic trading services that, 

among other things, permit dealers to take positions 

or hedge risks in a manner that preserves their 

important role in facilitating transactions in lessliquid security-based swaps. 

70See IIB Letter at 18–19. 

71See II.A.2.a,, supra. 

72See U.S. Activity Proposing Release, 80 FR 

27452. 

73These estimates are based on the number of 

accounts in TIW data with total notional volume in 

excess of de minimis thresholds, increased by a 

factor of two, to account for any potential growth 

in the security-based swap market, to account for 

the fact that we are limited in observing transaction 

records for activity between non-U.S. persons to 

those that reference U.S. underliers, and to account 

for the fact that we do not observe security-based 

swap transactions other than in single-name CDS. 

See U.S. Activity Proposing Release, 80 FR 27452. 

See also Intermediary Definitions Adopting Release, 

77 FR 30725 n.1457. 

74Adjustments to these statistics from the 

proposal reflect further analysis of the TIW data. Cf. 

U.S. Activity Proposing Release, 80 FR 27452 

(providing an estimate of 56 entities that are nonU.S. persons). 

75Based on our analysis of 2014 TIW data and the 

list of swap dealers provisionally registered with 

the CFTC, and applying the methodology used in 

the Intermediary Definitions Adopting Release, we 

estimate that substantially all registered securitybased swap dealers would also be registered as 

swap dealers with the CFTC. See U.S. Activity 

Proposing Release, 80 FR 27458; SBS Entity 

Registration Adopting Release, 80 FR 49000. See 

also CFTC list of provisionally registered swap 

dealers, available at: http://www.cftc.gov/

LawRegulation/DoddFrankAct/registerswapdealer. 

are closed.65 A financial group engaged 

in a security-based swap dealing 

business also may choose to manage its 

trading book in particular reference 

entities or securities primarily from a 

trading desk that can take advantage of 

local expertise in such products or that 

can gain access to better liquidity, 

which may permit it to more efficiently 

price such products or to otherwise 

compete more effectively in the 

security-based swap market.66 Some 

financial groups prefer to centralize risk 

management, pricing, and hedging for 

specific products with the personnel 

responsible for carrying out the trading 

of such products to mitigate operational 

risk associated with transactions in 

those products.67

The financial group affiliate that 

books these transactions may carry out 

related market-facing activities, whether 

in its home jurisdiction or in a foreign 

jurisdiction, using either its own 

personnel or the personnel of an 

affiliated or unaffiliated agent. For 

example, the financial group may 

determine that another affiliate in the 

financial group employs personnel who 

possess expertise in relevant products or 

who have established sales relationships 

with key counterparties in a foreign 

jurisdiction, making it more efficient to 

use the personnel of the affiliate to 

engage in security-based swap dealing 

activity on its behalf in that 

jurisdiction.68 In these cases, the 

affiliate that books these transactions 

and its affiliated agent may operate as 

an integrated dealing business, each 

performing distinct core functions in 

carrying out that business. 

Alternatively, the financial group 

affiliate that books these transactions 

may in some circumstances determine 

to engage the services of an unaffiliated 

agent through which it can engage in 

dealing activity. For example, a 

financial group may determine that 

using an interdealer broker may provide 

an efficient means of participating in the 

interdealer market in its own, or in 

another, jurisdiction, particularly if it is 

seeking to do so anonymously or to take 

a position in products that trade 

relatively infrequently.69 A financial 

group may also use unaffiliated agents 

that operate at its direction. Such an 

arrangement may be particularly 

valuable in enabling a financial group to 

service clients or access liquidity in 

jurisdictions in which it has no securitybased swap operations of its own. 

We understand that financial group 

affiliates (whether affiliated with U.S.- 

based financial groups or not) that are 

established in foreign jurisdictions may 

use any of these structures to engage in 

dealing activity in the United States, 

and that they may seek to engage in 

dealing activity in the United States to 

transact with both U.S.-person and nonU.S.-person counterparties. In 

transactions with non-U.S.-person 

counterparties, these foreign affiliates 

may affirmatively seek to engage in 

dealing activity in the United States 

because the sales personnel of the nonU.S.-person dealer (or of its agent) in the 

United States have existing 

relationships with counterparties in 

other locations (such as Canada or Latin 

America) or because the trading 

personnel of the non-U.S.-person dealer 

(or of its agent) in the United States 

have the expertise to manage the trading 

books for security-based swaps on U.S. 

reference securities or entities. We 

understand that some of these foreign 

affiliates engage in dealing activity in 

the United States through their 

personnel (or personnel of their 

affiliates) in part to ensure that they are 

able to provide their own 

counterparties, or those of financial 

group affiliates in other jurisdictions, 

with access to liquidity (often in nonU.S. reference entities) during U.S. 

business hours, permitting them to meet 

client demand even when the home 

markets are closed.70 In some cases, 

such as when seeking to transact with 

other dealers through an interdealer 

broker, these foreign affiliates may act, 

in a dealing capacity, in the United 

States through an unaffiliated, thirdparty agent. 

e. Current Estimates of Number of 

Security-Based Wwap Dealers 

As discussed above, security-based 

swap activity is concentrated in a 

relatively small number of dealers, 

which already represent a small 

percentage of all market participants 

active in the security-based swap 

market.71 Based on analysis of 2014 

data, our earlier estimates of the number 

of entities likely to register as securitybased swap dealers remain largely 

unchanged.72 Of the approximately 50 

entities that we estimate may potentially 

register as security-based swap dealers, 

we believe it is reasonable to expect 22 

to be non-U.S. persons.73 Under the 

rules as they currently exist, we 

identified approximately 170 entities 

engaged in single-name CDS activity, 

with all counterparties, of $2 billion or 

more. Of those entities, 155 would be 

expected to incur assessment costs to 

determine whether they meet the 

‘‘security-based swap dealer’’ definition. 

Approximately 57 of these entities are 

non-U.S. persons.74

Many of these dealers are already 

subject to other regulatory frameworks 

under U.S. law based on their role as 

intermediaries or on the volume of their 

positions in other products, such as 

swaps. Available data supports our prior 

estimates, based on our experience and 

understanding of the swap and securitybased swap market, that of the 55 firms 

that might register as security-based 

swap dealers or major security-based 

swap participants, approximately 35 

would also be registered with the CFTC 

as swap dealers or major swap 

participants.75 Based on our analysis of 

TIW data and filings with the 

Commission, we estimate that 16 market 

participants expected to register as 

security-based swap dealers have 

already registered with the Commission 

as broker-dealers and are thus subject to 

Exchange Act and Financial Industry 

Regulatory Authority (‘‘FINRA’’) 

requirements applicable to such entities. 

Finally, as we discuss below, some 

dealers may be subject to similar 

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75Based on our analysis of 2014 TIW data and the 

list of swap dealers provisionally registered with 

the CFTC, and applying the methodology used in 

the Intermediary Definitions Adopting Release, we 

estimate that substantially all registered securitybased swap dealers would also be registered as 

swap dealers with the CFTC. See U.S. Activity 

Proposing Release, 80 FR 27458; SBS Entity 

Registration Adopting Release, 80 FR 49000. See 

also CFTC list of provisionally registered swap 

dealers, available at: http://www.cftc.gov/

LawRegulation/DoddFrankAct/registerswapdealer. 

76See, e.g., ISDA Letter at 5, 6. 

78Many dealer entities and financial groups 

transact through numerous accounts. Given that 

individual accounts may transact with hundreds of 

counterparties, we may infer that entities and 

financial groups, which may have multiple 

accounts, transact with at least as many 

counterparties as the largest of their accounts in 

terms of number of counterparties. 

79The 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. 

80This estimate is lower than the gross notional 

amount of $8.5 trillion noted above as it includes 

only the subset of single-name CDS referencing 

North American corporate documentation. See note 

77 and accompanying text, supra. 

81One commenter criticized the analysis in the 

U.S. Activity Proposing Release as ‘‘appear[ing] to 

suffer from certain defects’’ because the data 

implied that security-based swap dealing was not 

a ‘‘customer-driven business.’’ See Letter from 

Citadel, dated July 13, 2015 (‘‘Citadel Letter’’), at 9. 

We note that our current estimate of the relative 

size of the interdealer business, based on our 

updated analysis, is somewhat lower than the 80 

percent figure cited by the commenter. Nonetheless, 

we continue to estimate that interdealer 

transactions comprise the majority of price-forming 

transactions. Accordingly, it remains our view that 

dealers play a central role in the security-based 

swap market. 

requirements in one or more foreign 

jurisdictions.76

3. Security-Based Swap Market: Levels 

of Security-Based Swap Trading 

Activity 

As already noted, firms that act as 

dealers play a central role in the 

security-based swap market. Based on 

an analysis of 2014 single-name CDS 

data in TIW, accounts of those firms that 

are likely to exceed the security-based 

swap dealer de minimis thresholds and 

trigger registration requirements 

intermediated transactions with a gross 

notional amount of approximately $8.5 

trillion, over 60 percent of which was 

intermediated by top 5 dealer 

accounts.77

These dealers transact with hundreds 

or thousands of counterparties. 

Approximately 35 percent of accounts 

of firms expected to register as securitybased dealers and observable in TIW 

have entered into security-based swaps 

with over 1,000 unique counterparty 

accounts as of year-end 2014.78

Approximately 9 percent of these 

accounts transacted with 500–1,000 

unique counterparty accounts; another 

35 percent transacted with 100–500 

unique accounts, and only 22 percent of 

these accounts intermediated swaps 

with fewer than 100 unique 

counterparties in 2014. The median 

dealer account transacted with 453 

unique accounts (with an average of 

approximately 759 unique accounts). 

Non-dealer counterparties transact 

almost exclusively with these dealers. 

The median non-dealer counterparty 

transacted with 3 dealer accounts (with 

an average of approximately 4 dealer 

accounts) in 2014. 

Figure 2 below describes the 

percentage of global, notional 

transaction volume in North American 

corporate single-name CDS reported to 

the TIW between January 2008 and 

December 2014, separated by whether 

transactions are between two ISDArecognized dealers (interdealer 

transactions) or whether a transaction 

has at least one non-dealer counterparty. 

Figure 2 also shows that the portion 

of the notional volume of North 

American corporate single-name CDS 

represented by interdealer transactions 

has remained fairly constant and that 

interdealer transactions continue to 

represent a significant majority of 

trading activity, even as notional 

volume has declined over the past six 

years,79 from more than $6 trillion in 

2008 to less than $3 trillion in 2014.80

The high level of interdealer trading 

activity reflects the central position of a 

small number of dealers, each of which 

intermediates trades with many 

hundreds of counterparties.81 While we 

are unable to quantify the current level 

of trading costs for single-name CDS, 

those dealers appear to enjoy market 

power as a result of their small number 

and the large proportion of order flow 

they privately observe. 

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Federal Register / Vol. 81, No. 33 / Friday, February 19, 2016 / Rules and Regulations 8607 

82Adjustments to these statistics from the 

proposal reflect additional analysis of TIW data. Cf. 

U.S. Activity Proposing Release 80 FR 27453 

(showing slightly different values for 2012 through 

2014). For the purposes of this analysis, we assume 

that same-day cleared transactions reflect interdealer activity. 

83For purposes of this discussion, we have 

assumed that the registered office location reflects 

the place of domicile for the fund or account, but 

we note that this domicile does not necessarily 

correspond to the location of an entity’s sales or 

trading desk. See U.S. Activity Proposing Release, 

80 FR 27541 n.44. See also note 39, supra. 

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, as shown in Figure 3 below. 

Using the self-reported registered office 

location of the TIW accounts as a proxy 

for domicile, we estimate that only 12 

percent of the global transaction volume 

by notional volume between 2008 and 

2014 was between two U.S.-domiciled 

counterparties, compared to 48 percent 

entered into between one U.S.- 

domiciled counterparty and a foreigndomiciled counterparty and 40 percent 

entered into between two foreigndomiciled counterparties.83

If we consider the number of crossborder transactions instead from the 

perspective of the domicile of the 

corporate group (e.g., by classifying a 

foreign bank branch or foreign 

subsidiary of a U.S. entity as domiciled 

in the United States), the percentages 

shift significantly. Under this approach, 

the fraction of transactions entered into 

between two U.S.-domiciled 

counterparties increases to 32 percent, 

and to 51 percent for transactions 

entered into between a U.S.-domiciled 

counterparty and a foreign-domiciled 

counterparty. By contrast, the 

proportion of activity between two 

foreign-domiciled counterparties drops 

from 40 percent to 17 percent. This 

change in respective shares based on 

different classifications suggests that the 

activity of foreign subsidiaries of U.S. 

firms and foreign branches of U.S. banks 

accounts for a higher percentage of 

security-based swap activity than U.S. 

subsidiaries of foreign firms and U.S. 

branches of foreign banks. It also 

demonstrates that financial groups 

based in the United States are involved 

in an overwhelming majority 

(approximately 83 percent) of all 

reported transactions in North American 

corporate single-name CDS. 

Financial groups based in the United 

States are also involved in a majority of 

interdealer transactions in North 

American corporate single-name CDS: 

Of transactions on North American 

corporate single-name CDS between two 

ISDA-recognized dealers and their 

branches or affiliates, 65 percent of 

transaction notional volume involved at 

least one account of an entity with a 

U.S. parent. 

In addition, we note that a significant 

majority of North American corporate 

single-name CDS transactions occur in 

the interdealer market or between 

dealers and non-U.S.-person nondealers, with the remaining (and much 

smaller) portion of the market consisting 

of transactions between dealers and 

U.S.-person non-dealers. Specifically, 

79.5 percent of North American 

corporate single-name CDS transactions 

involved either two ISDA-recognized 

dealers or an ISDA-recognized dealer 

and a non-U.S.-person non-dealer. 

Approximately 20 percent of such 

transactions involved an ISDArecognized dealer and a U.S.-person 

non-dealer. 


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8608 Federal Register / Vol. 81, No. 33 / Friday, February 19, 2016 / Rules and Regulations 

84See, e.g., G20 Leaders’ Final Declaration, 

November 2011, para. 24, available at: https://

g20.org/wp-content/uploads/2014/12/Declaration_

eng_Cannes.pdf. 

85Several commenters raised concerns about the 

potential for overlap or conflict of Title VII securitybased swap dealer requirements and similar 

requirements under foreign law. See Citadel Letter 

at 8; Letter from ICI Global, dated July 13, 2015 

(‘‘ICI Global Letter’’), at 8; SIFMA/FSR Letter at 9; 

IIB Letter at 4, 6; ISDA Letter at 5, 10. 

86See Regulation SBSR, Rule 901(a)(2)(ii). 

87See 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 (October 18, 2012), 77 FR 70213 

(November 23, 2012) (‘‘Capital, Margin, and 

Segregation Proposing Release’’); Trade 

Acknowledgment and Verification of SecurityBased Swap Transactions, Exchange Act Release 

No. 63727 (January 14, 2011), 76 FR 3859 (January 

21, 2011). The Commission anticipates that it may 

address the impact, if any, of a person’s status as 

a registered security-based swap dealer on the first 

two of those requirements (application of the 

clearing requirement and trade execution 

requirement) in a subsequent release or releases. 

88 Information regarding ongoing regulatory 

developments described in this section was 

primarily obtained from progress reports on 

implementation of OTC derivatives market reforms 

published by the Financial Stability Board. These 

are available at: http://www.financialstabilityboard.

org/list/fsb_publications/index.htm. 

89 In November 2015, the Financial Stability 

Board reported that 12 member jurisdictions 

participating in its tenth progress report on OTC 

derivatives market reforms had in force a legislative 

framework or other authority to require exchange of 

4. Global Regulatory Efforts 

In 2009, the G20 Leaders—whose 

membership includes the United States, 

18 other countries, and the European 

Union (‘‘EU’’)—addressed global 

improvements in the OTC derivatives 

markets. They expressed their view on 

a variety of issues relating to OTC 

derivatives contracts. In subsequent 

summits, the G20 Leaders have returned 

to OTC derivatives regulatory reform 

and encouraged international 

consultation in developing standards for 

these markets.84

Many security-based swap dealers 

likely will be subject to foreign 

regulation of their security-based swap 

activities that are similar to regulations 

that may apply to them pursuant to Title 

VII, even if the relevant foreign 

jurisdictions do not classify certain 

market participants as ‘‘dealers’’ for 

regulatory purposes. Some of these 

regulations may duplicate, and in some 

cases conflict with, certain elements of 

the Title VII regulatory framework.85

Foreign legislative and regulatory 

efforts have focused on five general 

areas: Moving OTC derivatives onto 

organized trading platforms, requiring 

central clearing of OTC derivatives, 

requiring post-trade reporting of 

transaction data for regulatory purposes 

and public dissemination of 

anonymized versions of such data, 

establishing or enhancing capital 

requirements for non-centrally cleared 

OTC derivatives transactions, and 

establishing or enhancing margin and 

other risk mitigation requirements for 

non-centrally cleared OTC derivatives 

transactions. The rules being adopted in 

this release will affect a person’s 

obligations with respect to the latter 

three of these requirements, as a 

person’s status as a security-based swap 

dealer will affect its post-trade reporting 

obligations under Regulation SBSR,86

and, as proposed, would subject it to 

capital, margin, and other risk 

mitigation requirements under the Title 

VII dealer framework, such as trade 

acknowledgement and verification 

requirements.87

Foreign jurisdictions have been 

actively implementing regulations in 

connection with each of these three 

categories of requirements. Regulatory 

transaction reporting requirements are 

in force in a number of jurisdictions 

including the EU, Hong Kong SAR, 

Japan, Australia, Brazil, Canada, China, 

India, Indonesia, South Korea, Mexico, 

Russia, Saudi Arabia, and Singapore; 

other jurisdictions are in the process of 

proposing legislation and rules to 

implement these requirements.88 In 

addition, a number of major foreign 

jurisdictions have initiated the process 

of implementing margin and other risk 

mitigation requirements for noncentrally cleared OTC derivatives 

transactions.89 Several jurisdictions 


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Federal Register / Vol. 81, No. 33 / Friday, February 19, 2016 / Rules and Regulations 8609 

margin for non-centrally cleared transactions and 

had published implementing standards or 

requirements for consultation or proposal. A further 

11 member jurisdictions had a legislative 

framework or other authority in force or published 

for consultation or proposal. See Financial Stability 

Board, OTC Derivatives Market Reforms Tenth 

Progress Report on Implementation (November 

2015), available at http://

www.financialstabilityboard.org/wp-content/

uploads/OTC-Derivatives-10th-Progress-Report.pdf. 

90 In November 2015, the Financial Stability 

Board reported that 18 member jurisdictions 

participating in its tenth progress report on OTC 

derivatives market reforms had in force standards 

or requirements covering more than 90 percent of 

transactions that require enhanced capital charges 

for non-centrally cleared transactions. A further 

three member jurisdictions had a legislative 

framework or other authority in force and had 

adopted implementing standards or requirements 

that were not yet in force. An additional three 

member jurisdictions had a legislative framework or 

other authority in force or published for 

consultation or proposal. See Financial Stability 

Board, OTC Derivatives Market Reforms Tenth 

Progress Report on Implementation (November 

2015), available at http://

www.financialstabilityboard.org/wp-content/

uploads/OTC-Derivatives-10th-Progress-Report.pdf. 

91See note 75 and accompanying text, supra. See 

also U.S. Activity Proposing Release, 80 FR 27458; 

SBS Entity Registration Adopting Release, 80 FR 

49000. 

92 ‘‘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., George Casella and Roger L. 

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

93The Commission recently revised its 

methodology for estimating cross-market 

participation of TIW accounts. This has resulted in 

an increase in the reported number of accounts that 

participated in both markets relative to previous 

Commission releases. 

94See SBS Entity Registration Adopting Release, 

80 FR 49003. Empirical evidence on the direction 

and significance of the CDS-bond market spillover 

is mixed. See also Massimo Massa & Lei Zhang, 

CDS and the Liquidity Provision in the Bond 

Market (INSEAD Working Paper No. 2012/114/FIN, 

2012), available at http://papers.ssrn.com/sol3/

papers.cfm?abstract_id=2164675 (considering 

whether the presence of CDS improves pricing and 

liquidity of investment grade bonds in 2001–2009); 

Sanjiv Ranjan Das, Madhu Kalimipalli & Subhankar 

Nayak, Did CDS Trading Improve the Market for 

Corporate Bonds?, 111 J. Fin. Econ. 495 (2014) 

(considering the effects of CDS trading on the 

efficiency, pricing error and liquidity of corporate 

bond markets); Martin Oehmke & Adam 

Zawadowski, The Anatomy of the CDS Market 

(Working Paper, 2014), available at http://

papers.ssrn.com/sol3/papers.cfm?abstract_

id=2023108 (suggesting a standardization and 

liquidity role of CDS markets and documenting 

cross-market arbitrage links between the CDS 

market and the bond market); and Ekkehart 

Boehmer, Sudheer Chava, & Heather Tookes, 

Related Securities and Equity Market Quality: The 

Cases of CDS, forthcoming, J. Fin. & Quant. 

Analysis (2015) (providing evidence that firms with 

traded CDS contracts on their debt experience 

significantly lower liquidity and price efficiency in 

equity markets when these firms are closer to 

default and in times of high market volatility). 

95See Cross-Border Adopting Release, 79 FR 

47327 (stating that the registration and regulation of 

entities as security-based swap dealers and major 

security-based swap participants would lead to 

programmatic costs and benefits). 

96See Intermediary Definitions Adopting Release, 

77 FR 30596. 

97See Cross-Border Adopting Release, 79 FR 

47282. 

98See Section II.A.3, supra. 

99See Section II.A.2d, supra. 

have also taken steps to implement the 

Basel III recommendations governing 

capital requirements for financial 

entities, which include enhanced 

capital charges for non-centrally cleared 

OTC derivatives transactions.90

5. Cross-Market Participation 

As noted above, persons registered as 

security-based swap dealers and major 

security-based swap participants are 

likely also to engage in swap activity, 

which is subject to regulation by the 

CFTC.91 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. 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. 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,92

creating hedging opportunities across 

these markets. 

These hedging opportunities mean 

that participants that are active in one 

market are likely to be active in the 

other. Commission staff analysis of 

approximately 4,500 TIW accounts that 

participated in the market for singlename CDS in 2014 revealed that 

approximately 3,000 of those accounts, 

or 67 percent, also participated in the 

market for index CDS. Of the accounts 

that participated in both markets, data 

regarding transactions in 2014 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 64 percent; by contrast, 

the probability of the same account 

landing in the bottom third of accounts 

in terms of single-name CDS notional 

volume is only 10 percent.93

Similarly, since the payoffs of 

security-based swaps are dependent 

upon the value of underlying securities, 

activity in the security-based swap 

market can be correlated with activity in 

underlying securities markets. Securitybased swaps may be used in order to 

hedge or speculate on price movements 

of reference securities or the credit risk 

of reference securities. For instance, 

prices of both CDS and corporate bonds 

are sensitive to the credit risk of 

underlying reference securities. As a 

result, trading across markets may 

sometimes result in information and 

risk spillovers between these markets, 

with informational efficiency, pricing, 

and liquidity in the security-based swap 

market affecting informational 

efficiency, pricing, and liquidity in 

markets for related assets, such as 

equities and corporate bonds.94

B. Economic Considerations 

These final rules, together with our 

previously adopted rules defining 

‘‘security-based swap dealer’’ and 

applying that definition in the crossborder context, define the scope of 

entities that are subject to the Title VII 

dealer requirements. Although these 

final rules do not define specific 

substantive requirements, the scope of 

the definition will play a central role in 

determining the overall costs and 

benefits of particular regulatory 

requirements, and of the Title VII 

regulatory framework as a whole.95 In 

evaluating the expected benefits and 

costs of our final rules in this context, 

we have identified several economic 

considerations relevant to our analysis 

that have informed our final rule, in 

light of the establishment in Title VII of 

the Dodd-Frank Act of a statutory 

framework to reduce risk, increase 

transparency, and promote market 

integrity within the financial system.96

First, as we have previously noted, 

the security-based swap market is a 

global market.97 A significant 

proportion of single-name CDS 

transactions on U.S. reference entities is 

between counterparties that are based in 

different jurisdictions, and these 

counterparties may use personnel 

located in other jurisdictions to perform 

various functions in connection with 

these transactions.98 Moreover, dealers 

that carry out a global business, as noted 

above, have significant flexibility in 

choosing how to structure their 

business.99 In determining the scope of 

the rules specifying which transactions 

non-U.S. persons must include in their 

dealer de minimis calculations, we are 

aware both that non-U.S. persons engage 

in security-based swap dealing activity 

with other non-U.S. persons in the 

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8610 Federal Register / Vol. 81, No. 33 / Friday, February 19, 2016 / Rules and Regulations 

100See Cross-Border Adopting Release, 79 FR 

47285 (noting that ‘‘market participants may shift 

their behavior’’ in response to our cross-border 

application of Title VII requirements). 

101We note that, under Exchange Act rule 

3a71–3, a non-U.S.-person affiliate of a U.S. person 

is not required to include such transactions in its 

dealer de minimis threshold calculations if that 

non-U.S. person’s counterparties do not have 

recourse to a U.S. person under the terms of the 

security-based swap and the non-U.S. person is not 

a conduit affiliate. See Exchange Act rule 3171– 

3(b)(1)(ii) and (iii) (applying the de minimis 

exception to cross-border dealing activity of conduit 

affiliates and non-U.S. persons). 

102See IIB Letter at 2–3; ISDA Letter at 5; SIFMA/ 

FSR Letter at 6. See Section V.B, infra, for further 

discussion of potential effects of the final rules on 

non-U.S. persons’ incentives to use personnel 

located in U.S. branches or offices to arrange, 

negotiate, or execute security-based swap 

transactions. See also HSBC Letter at 2 (discussing 

the possibility of moving security-based swap 

trading relationships with non-U.S. customers from 

a U.S.-based affiliate to a registered security-based 

swap dealer affiliate while noting the 

impracticability of this response). 

103See IIB Letter at 15 (explaining that a dealer 

may widen its bid-ask spread for security-based 

swaps that are subject to public dissemination 

requirements to account for the risk that, due to the 

requirements the dealer may not be able to hedge 

the security-based swap before it is publicly 

disclosed). 

104See Charles Levinson, ‘‘U.S. banks moved 

billions in trades beyond CFTC’s reach,’’ Reuters 

(August 21, 2015), available at: http://

www.reuters.com/article/2015/08/21/usa-banksswaps-idUSL3N10S57R20150821. 

105See note 27, supra (citing IIB Letter at 2). 

106See Section V.B.2, infra. 

United States and that U.S. financial 

groups may choose to restructure their 

business to ensure that transactions 

with non-U.S. persons that involve 

dealing activity in the United States are 

booked in non-U.S.-person affiliates.100

Thus, the scope of our final framework 

could have a significant effect on the 

number of persons that ultimately 

register as security-based swap dealers 

and the proportion of security-based 

swap dealing activity carried out in the 

United States that will ultimately be 

carried out by such dealers. 

Second, the final scope of our rules, 

and market participants’ reactions to our 

rules (including rules already adopted 

as part of the Intermediary Definitions 

Adopting Release, and the Cross-Border 

Adopting Release) may affect 

competition between U.S.-person and 

non-U.S.-person dealers when they 

engage in security-based swap 

transactions with non-U.S. persons. In 

particular, without these rules, 

competitive disparities might arise 

between U.S.-person dealers, which 

would be subject to these rules, and 

non-U.S.-person dealers, which may not 

be, even if the non-U.S.-person dealers 

engage in dealing activity at levels 

exceeding the relevant de minimis 

thresholds using personnel located in 

the United States. This disparity in 

treatment likely would produce 

disparities in the costs that different 

types of dealers might bear, with 

significant effects on the structure and 

integrity of the security-based swap 

market. 

Under currently existing rules, for 

example, even if a U.S.-person dealer 

and a non-U.S.-person dealer both 

engaged in dealing activity in the 

United States in connection with 

transactions involving non-U.S.-person 

counterparties, the non-U.S.-person 

dealer would be more likely to be able 

to engage in this activity without 

registering as a security-based swap 

dealer,101 which would permit it, unlike 

the U.S.-person dealer, to avoid the 

costs associated with Title VII dealer 

requirements, including compliance 

with registration, books and records, 

and capital and margin requirements. 

To the extent that the non-U.S.-person 

dealer does not incur these costs, it 

would be likely to be able to offer more 

competitive pricing to its non-U.S.- 

person counterparties. 

Similarly, a non-U.S. person seeking 

to trade in a security-based swap on a 

U.S. reference entity may prefer to enter 

into the transaction with a non-U.S.- 

person dealer rather than a U.S.-person 

dealer not only because the non-U.S.- 

person dealer may offer more 

competitive prices, but also because the 

non-U.S. counterparty may itself incur 

lower costs in transacting with a nonU.S. person dealer. For example, a nonU.S.-person counterparty may find 

transacting with the non-U.S.-person 

dealer that is not required to register as 

a security-based swap dealer to be more 

attractive because a transaction with 

that dealer may not involve a 

requirement to post collateral consistent 

with Title VII margin requirements, 

particularly if it can do so without 

surrendering the benefits associated 

with facing personnel located in the 

United States. 

In addition, under currently existing 

rules, financial groups that use non-U.S. 

persons to carry out their dealing 

business with non-U.S.-person 

counterparties may be able to use profits 

from that dealing business to subsidize 

their dealing business with U.S.-person 

counterparties carried out through a 

registered security-based swap dealer. 

This cross-subsidization would allow 

them to gain further competitive 

advantage over financial groups whose 

dealers are U.S. persons, even with 

respect to transactions with U.S.-person 

counterparties. 

These competitive disparities likely 

would create an incentive for financial 

groups (whether based in the United 

States or abroad) to book security-based 

swap transactions with non-U.S.-person 

counterparties in a non-U.S.-person 

affiliate while continuing to use 

affiliates or agents that are located in the 

United States to engage in dealing 

activity with those counterparties. As 

discussed further below, market 

participants may respond in different 

ways to these incentives, but any such 

response likely would lead to significant 

changes in market structure, 

exacerbating market fragmentation. The 

final amendments reflect our 

consideration of the likely competitive 

effects of the scope of Title VII dealer 

requirements on participants in the 

security-based swap market. 

Third, as just noted, the scope of our 

rules may provide incentives for market 

fragmentation and negatively affect 

liquidity and pricing in the U.S. market. 

Subjecting certain transactions but not 

others to regulatory requirements, 

including the security-based swap 

dealer de minimis counting 

requirements, may lead certain dealers 

to seek to limit dealing activity with 

certain counterparties, to cease dealing 

with certain counterparties altogether, 

or to restructure their dealing business 

to minimize the volume that it carries 

out in a firm that is required to register 

as a security-based swap dealer.102 One 

commenter noted that requiring certain 

transactions but not others to be subject 

to Title VII requirements may lead 

dealers to quote less competitive prices 

to counterparties for transactions that 

are subject to these requirements,103 and 

it appears that some U.S.-based 

financial groups, in response to similar 

regulatory reforms, have already 

restructured their swap business to book 

their transactions in non-U.S.-person 

affiliates.104 Such responses by market 

participants are likely to fragment 

security-based swap liquidity into two 

pools, one for U.S. persons and the 

other for non-U.S. persons, even if nonU.S.-person dealers continue to engage 

in security-based swap dealing activity 

with non-U.S. persons (including other 

dealers) in the United States. This 

fragmentation could adversely affect the 

security-based swap market’s ability to 

efficiently allocate risk among its 

participants,105 as discussed further 

below.106

Depending on the final scope of Title 

VII application, the nature of the 

fragmentation could have a particularly 

deleterious effect on pricing and 

liquidity for U.S. persons seeking to 

enter into security-based swap 

transactions. To the extent that dealers 

seek to carry out transactions with other 

dealers in affiliates that are not subject 

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Federal Register / Vol. 81, No. 33 / Friday, February 19, 2016 / Rules and Regulations 8611 

107See Section III.A.3, supra, for an analysis of 

the proportion of the security-based swap market 

that constitutes interdealer transactions. For the 

purposes of this analysis we classify any securitybased swap transaction between two ISDArecognized dealers as interdealer activity. 

108Reducing the ability of market participants to 

find counterparties may increase bid-ask spreads. 

See, e.g., Darrell Duffie, Nicolae Garleanu and Lasse 

Heje Pedersen, ‘‘Over-the-Counter Markets’’ 

Econometrica, Vol. 73, No. 6 (2005). 

109Such information may include records of 

transactions reported to a swap data repository 

pursuant to rule 901(a)(2)(ii), which subjects all 

transactions that include a registered security-based 

swap dealer on a transaction side to regulatory 

reporting requirements. 

110See Section II.A.2.a., supra. See also CrossBorder Adopting Release, 79 FR 47283. 

111See Cross-Border Adopting Release, 79 FR 

47283. Based on an analysis of 2014 transaction 

data by staff in the Division of Economic and Risk 

Analysis, the median account associated with 

market participants recognized by ISDA as dealers 

had 453 counterparties. The median of all other 

accounts (i.e., those more likely to belong to nondealers) was 3 counterparties. See Section 0, supra. 

112See Section II.A.3, supra. See also CrossBorder Adopting Release, 79 FR 47283. 

113See Cross-Border Adopting Release, 79 FR 

47283. 

114See id. As discussed in more detail below, 

several commenters argued that the Commission 

should not finalize the proposed rules because they 

encompassed transactions that pose no risk to the 

United States. See notes 159–160 and 

accompanying text, infra (citing IIB Letter at 3, 5; 

ISDA Letter at 4, 5–6, SIFMA/FSR Letter at 5; and 

HSBC Letter at 3). 

115We have previously stated that spillover and 

contagion risks are important characteristics of the 

security-based swap market that are important 

considerations in our rulemaking. See Cross-Border 

Adopting Release, 79 FR 47284. In particular, given 

the structure of the security-based swap market and 

the concentration of security-based swap dealing 

activities among a relatively small number of firms, 

‘‘the failure of a single large firm active in the 

security-based swap market can have consequences 

beyond the firm itself,’’ including that risk may 

eventually ‘‘spill over into other jurisdictions and 

even other markets in which security-based swap 

dealers participate.’’ See id. 

116See U.S. Activity Proposing Release, 80 FR 

27482. 

to Title VII security-based swap dealer 

requirements, the large interdealer 

market, which accounts for a large 

majority of all security-based swap 

transactions,107 could shift to non-U.S. 

dealers that are not required to register 

as security-based swap dealers under 

currently existing rules. Such a shift 

likely would exacerbate the effects of 

market fragmentation on U.S. market 

participants, as security-based swap 

activity would be split into two very 

different pools: One very large pool of 

transactions unregulated by Title VII 

(interdealer trades, carried out primarily 

by unregistered non-U.S. persons, and 

transactions between unregistered nonU.S.-person dealers and non-U.S.- 

person non-dealers) and one much 

smaller pool limited to transactions 

between registered dealers (whether 

U.S. persons or non-U.S. persons) and 

U.S.-person counterparties.108 The final 

amendments reflect our consideration of 

the relationship between the scope of 

Title VII dealer requirements and 

market fragmentation, including related 

effects on market liquidity and pricing, 

particularly for U.S. market participants. 

Fourth, in addition to creating an 

incentive for market fragmentation, 

applying Title VII dealer requirements 

only to certain transactions carried out 

in the United States could affect the 

integrity of the U.S. security-based swap 

market as well as our ability to monitor 

the activity of participants in that 

market. To the extent that subjecting 

transactions involving dealing activity 

carried out by personnel located in the 

United States increases the likelihood 

that a non-U.S. person must register as 

a dealer, Title VII dealer recordkeeping 

requirements may enhance our ability to 

evaluate dealers’ records for evidence of 

market manipulation or other abusive 

practices within the United States. For 

example, such records, when combined 

with information from other sources 

available to the Commission,109 could 

help reveal situations where a registered 

security-based swap dealer is engaging 

in abusive or manipulative conduct 

with respect to a series of transactions 

in which it lays off risk from a 

transaction with a U.S.-person 

counterparty to a non-U.S.-person via an 

affiliated non-U.S.-person dealer, using 

personnel located in a U.S. branch or 

office. Absent these final amendments, 

the affiliated non-U.S.-person dealer 

might not need to register, which would 

inhibit our ability to evaluate the 

affiliated non-U.S.-person dealer’s 

records for the offsetting transaction 

with the non-U.S.-person counterparty, 

or related transactions, effected by the 

same personnel located in a U.S. branch 

or office that effected the transaction 

with the U.S.-person counterparty. The 

final amendments thus reflect our 

consideration of the impact that the 

scope of Title VII dealer requirements 

under our final rules may have on our 

ability to detect abusive and 

manipulative practices in the securitybased swap market. 

Finally, the global security-based 

swap market is highly interconnected 

and highly concentrated.110 As we have 

previously described, most market 

participants have only a few 

counterparties, but dealers can have 

hundreds of counterparties, consisting 

of both non-dealing market participants 

(including registered investment 

companies and private funds) and other 

dealers.111 Furthermore, as we have 

described above, a majority of securitybased swap trades are dealer-to-dealer, 

rather than dealer-to-non-dealer or nondealer-to-non-dealer, and a large 

fraction of single-name CDS volume is 

between counterparties domiciled in 

different jurisdictions.112 This 

interconnectedness facilitates the use of 

security-based swaps as a tool for 

sharing financial and commercial risks. 

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.113

However, as we have also noted, these 

opportunities for international risk 

sharing also represent channels for risk 

transmission.114 In other words, the 

interconnectedness of security-based 

swap market participants provides paths 

for both liquidity and risk to flow 

throughout the system, meaning 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 thousands 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.115

As we have previously recognized, a 

non-U.S.-person dealer affiliated with a 

U.S. financial group may pose 

‘‘reputational risk’’ to its U.S. parent, 

irrespective of the existence of any 

explicit guarantee from a U.S. person.116

This risk may affect the U.S. financial 

system in a number of ways. 

Specifically, if market participants 

generally expect a U.S. financial group 

to provide support to a foreign affiliate 

engaged in security-based swap dealing 

activity for reasons other than fulfilling 

obligations arising from an express 

guarantee from the U.S. financial group, 

financial contagion may spread to U.S. 

financial markets through the U.S. 

financial group, regardless of whether 

the U.S. parent financial group decides 

to support its foreign affiliate. If the U.S. 

financial group supports its foreign 

affiliate by bringing the foreign 

affiliate’s liabilities onto its balance 

sheet, the resulting capital deficiencies 

on the parent’s balance sheet may 

reduce its creditworthiness and increase 

the U.S. financial group’s risk of default. 

Alternatively, if the financial group acts 

contrary to the expectations of market 

participants by deciding not to support 

the foreign affiliate, this could be 

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8612 Federal Register / Vol. 81, No. 33 / Friday, February 19, 2016 / Rules and Regulations 

117See Section IV.B.2, infra (noting, among other 

things, that, as the market develops, foreign 

affiliates that might otherwise avoid Title VII dealer 

requirements, including margin, may be required to 

register as security-based swap dealers because they 

arrange, negotiate, or execute transactions in 

connection with their dealing activity using 

personnel located in the United States). 

118See Cross-Border Adopting Release, 79 FR 

47284 (noting that ‘‘the failure of a single large firm 

active in the security-based swap market can have 

consequences beyond the firm itself’’ and that 

‘‘[o]ne firm’s default may reduce the willingness of 

dealers to trade with, or extend credit to, both nondealers and other dealers’’). 

119See note 57 and accompanying text, supra. 

120See Section II.A.3, supra. 

121For more on liquidity shocks and contagion, 

see Rodrigo Valde ́s, ‘‘Emerging Market Contagion: 

Evidence and Theory’’ (1996). See also Guillermo 

Calvo and Enrique Mendoza, ‘‘Contagion, 

Globalization, and the Volatility of Capital Flows,’’ 

Capital Flows and the Emerging Economies (2000). 

122See Exchange Act section 3(a)(71)(D). 

123See Exchange Act rule 3a71–2(a)(1)(i). 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). 

124See Intermediary Definitions Adopting 

Release, 77 FR 30640–41. Exchange Act rule 

3a71–2 establishes a phase-in period during which 

the de minimis threshold for CDS 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 security-based swap 

participant’’ definitions. In that release we 

explained that, at the end of the phase-in period, 

we 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 id. at 

30640. 

125See Cross-Border Proposing Release, 78 FR 

30999; U.S. Activity Proposing Release, 80 FR 

27444. 

126See Cross-Border Proposing Release, 78 FR 

31000–01. 

127See initially proposed Exchange Act rule 

3a71–3(b)(1)(ii). 

128See initially proposed Exchange Act rule 

3a71–3(a)(5). See also Cross-Border Proposing 

Release, 78 FR 30999–31000. 

129The initially proposed definition of 

‘‘transaction conducted within the United States’’ 

did not include submitting a transaction for clearing 

in the United States, reporting a transaction to a 

security-based swap data repository in the United 

States, or performing collateral management 

activities (such as exchanging margin) within the 

United States. See Cross-Border Proposing Release, 

78 FR 31000. 

130See, e.g., Cross-Border Adopting Release, 79 

FR 47280. 

viewed as a negative signal by investors 

about the U.S. financial group’s risk of 

default. Consequently, even though the 

U.S. financial group is not exposed to 

any counterparty credit risk arising from 

its foreign affiliate’s security-based swap 

transactions, it may still be exposed to 

reputational risk from its foreign 

affiliates engaged in security-based 

swap activity. The final amendments 

reflect our consideration of the likely 

effects of the scope of Title VII dealer 

requirements on the degree of 

reputational risk posed to U.S. persons 

by their foreign affiliates.117

Another potential channel of the 

propagation of risk is through liquidity 

shocks from the failure of one market 

participant to other participants in the 

same market.118 In a highly 

concentrated market, the failure of a key 

liquidity provider poses a particularly 

high risk of propagating this kind of 

shock not only to its counterparties but 

to other participants, including other 

dealers. To the extent that U.S. persons 

are significant participants in the 

market, the liquidity shock may 

propagate to these U.S. persons, and 

from these U.S. persons to the U.S. 

financial system as a whole, even if the 

liquidity shock originates with the 

failure of a non-U.S. person liquidity 

provider. As already discussed, the 

security-based swap market is highly 

concentrated, with a relatively small 

number of dealers responsible for most 

of the activity in the market. Moreover, 

security-based swap activity carried out 

in U.S. market centers largely involves 

security-based swaps on U.S. reference 

entities,119 and the overwhelming 

majority of non-dealer counterparties to 

these transactions are U.S. persons; 

similarly, a significant proportion of the 

dealers active in this market are either 

U.S. persons or foreign affiliates of U.S. 

financial groups.120 In light of these 

market characteristics, we have 

considered the potential propagation of 

such risks through the failure of one or 

more non-U.S. persons engaged in 

dealing activity in the United States.121

III. Overview of Prior Proposals 

The Exchange Act excepts from 

designation as a ‘‘security-based swap 

dealer’’ an entity that engages in a ‘‘de 

minimis’’ quantity of security-based 

swap dealing activity with or on behalf 

of customers.122 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.123 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’’—we either terminate the 

phase-in period or establish an 

alternative threshold following 

rulemaking.124

As noted above, we have twice 

proposed rules to address the 

application of the security-based swap 

dealer de minimis exception to 

transactions between two non-U.S. 

persons on the basis of activity in the 

United States.125 In the Cross-Border 

Proposing Release, we stated that a nonU.S. person engaged in dealing activity 

through a U.S. branch, office, or affiliate 

or by a non-U.S. person that otherwise 

engages in security-based swap dealing 

activity in the United States, 

particularly at levels exceeding the 

relevant de minimis thresholds, may 

raise concerns that Title VII addresses, 

even if a significant proportion—or all— 

of its transactions involve non-U.S.- 

person counterparties.126 Accordingly, 

we initially proposed to require any 

non-U.S. person to include in its de 

minimis calculation any security-based 

swap transaction connected with its 

dealing activities that is a ‘‘transaction 

conducted within the United States.’’ 127

We proposed to define ‘‘transaction 

conducted within the United States’’ as 

any ‘‘security-based swap transaction 

that is solicited, negotiated, executed, or 

booked within the United States, by or 

on behalf of either counterparty to the 

transaction, regardless of the location, 

domicile, or residence status of either 

counterparty to the transaction.’’ 128

Thus, under this initially proposed 

definition, a non-U.S. person engaged in 

dealing activity would have been 

required to include in its de minimis 

calculation any dealing transaction 

entered into with another non-U.S. 

person that was conducted in the 

United States by either the non-U.S. 

person engaged in dealing activity or its 

counterparty or an agent of either the 

dealer or the counterparty.129 Given the 

number of concerns raised by 

commenters in connection with this 

element of the Cross-Border Proposing 

Release, we subsequently determined 

that final resolution of this issue would 

benefit from further consideration and 

public comment.130 Accordingly, we 

did not address this issue in our CrossBorder Adopting Release. 

In light of comments received on the 

initial proposal, subsequent regulatory 

and other developments in the securitybased swap market, and further 

consideration of policy concerns arising 

from these transactions, we proposed a 

modified approach in April 2015 that 

would amend Exchange Act rule 

3a71–3 to address the regulatory 

concerns associated with dealing 

activity in the United States while 

mitigating many of the concerns 

expressed by commenters on the initial 

proposal. The modified approach did 

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131See proposed Exchange Act rule 3a71– 

3(b)(1)(iii)(C). 

132See U.S. Activity Proposing Release, 80 FR 

27467. 

133See id. at 27464. 

134See id. at 27465. As we have stated elsewhere, 

the transactions of a guaranteed non-U.S. person 

exist, at least in part, within the United States, and 

the economic reality of these transactions is 

substantially identical to transactions entered into 

directly by a U.S. person (including through a 

foreign branch). See Regulation SBSR Adopting 

Release, 80 FR 14651. See also Cross-Border 

Adopting Release, 79 FR 47289–90. 

135See note 164, infra (noting our understanding 

that some U.S.-based financial groups have 

restructured their swap business to book their 

transactions in non-U.S. person affiliates). 

136See Exchange Act rule 3a71–3(b)(1)(iii)(C); 

Exchange Act rule 3a71–5(c). 

137See Exchange Act rule 3a71–3(b)(1)(iii)(C). 

The final rule does not incorporate a broker-dealer 

exception as requested by some commenters, but it 

does except transactions connected with the dealing 

activity of those international organizations 

excluded from the definition of U.S. person in 

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

IV.C.4, infra. 

138See Exchange Act rule 3a71–5(c). 

139See ISDA Letter at 4–5 (arguing that the 

proposed rule would capture firms that ‘‘have no 

material connection with the United States’’); 

SIFMA/FSR Letter at 5 (arguing that ‘‘[a] non-U.S. 

entity should not be required to count a securitybased swap toward its security-based swap dealer 

de minimis threshold solely on the basis of the 

conduct of its or its agent’s U.S.-located personnel,’’ 

as ‘‘such transactions between non-U.S. persons, 

where none of the risks of the transactions reside 

in the United States, do not have a sufficient nexus 

to the United States to be included in a 

determination of whether a non-U.S. entity should 

need to register with the Commission’’). We discuss 

the benefits of the final rule below. See Sections 

IV.B.2 and V.B, infra. 

140See SIFMA/FSR Letter at 5; IIB Letter at 5–6 

(arguing that the ‘‘Commission’s policy interests in 

regulating the [security-based swap] and its 

counterparties are much more limited than if one 

of the parties was a U.S. person, guaranteed affiliate 

or conduit affiliate,’’ as only the sales and trading 

activity at the inception of the transaction is 

occurring in the United States and the risks of such 

transactions ‘‘do not flow back to the U.S. financial 

system’’); HSBC Letter at 3 (arguing that subjecting 

foreign subsidiaries to entity-level dealer 

requirements would not provide additional benefits 

‘‘since no risk-based nexus would exist between 

those subsidiaries and the U.S. financial system,’’ 

particularly given that the Commission could use 

existing recordkeeping requirements to access the 

books and records relating to transactions involving 

U.S. activity); ISDA Letter at 5–6 (arguing that the 

Commission’s principal concern in regulating these 

entities is risk mitigation and that such transactions 

do not transmit risk into the U.S. financial system). 

Other commenters, in the context of discussing the 

Commission’s proposed approach to the clearing 

and trade execution requirements, argued that these 

types of transactions do pose counterparty credit 

risk to the U.S. financial system. See MFA Letter 

at 6 (disagreeing with our preliminary view that 

counterparty credit risk and operational risk of such 

transactions reside primarily outside the United 

States); Citadel Letter at 6–7 (discussing the 

significant risks to the U.S. financial system posed 

by ‘‘offshore’’ transactions). 

not include the initially proposed 

defined term ‘‘transaction conducted in 

the United States’’ and would not 

require a non-U.S. person engaging in 

dealing activity to consider the location 

of its non-U.S.-person counterparty or 

that counterparty’s agent in determining 

whether the transaction needs to be 

included in its own de minimis 

calculation. Instead, we proposed to 

require a non-U.S. person to include in 

its de minimis calculation any 

transaction connected with its securitybased swap dealing activity that it 

enters into with a non-U.S.-person 

counterparty only when the transaction 

is arranged, negotiated, or executed by 

personnel of the non-U.S. person 

located in a U.S. branch or office, or by 

personnel of such person’s agent located 

in a U.S. branch or office.131

Various statutory and policy concerns 

underpinned our proposed revisions to 

the initial approach. We noted in the 

U.S. Activity Proposing Release that 

requiring non-U.S. persons to include 

such transactions in their de minimis 

threshold calculations would help to 

ensure that all persons that engage in 

significant relevant dealing activity, 

including activity engaged in by 

personnel located in a U.S. branch or 

office, are required to register as 

security-based swap dealers and to 

comply with relevant Title VII 

requirements applicable to securitybased swap dealers.132 We also 

explained that subjecting security-based 

swap activity involving activity in the 

United States to Title VII, even when a 

transaction is between two non-U.S. 

persons, is consistent with Section 30(c) 

of the Exchange Act and is appropriate 

under a territorial approach.133 We also 

noted that the modified approach would 

prevent market participants from 

engaging in significant dealing activity 

in the United States while avoiding 

Title VII by booking such transactions in 

non-U.S. person dealers who are not 

conduit affiliates and whose obligations 

under such transactions are not 

guaranteed by a U.S. person.134

IV. Final Rules 

A. Overview 

Having carefully considered 

comments received in response to our 

proposal as well as the objectives of 

Title VII dealer regulation and recent 

regulatory and market developments 

(including market participants’ 

responses to the implementation of 

regulatory reforms of the OTC 

derivatives markets),135 we are 

amending Exchange Act rules 3a71–3 

and 3a71–5 in a manner generally 

consistent with the amendments 

proposed in our U.S. Activity Proposing 

Release.136 As discussed in the 

proposal, Exchange Act rule 3a71–3, as 

amended, focuses on certain activity 

carried out, at least in part, by personnel 

located in the United States in 

connection with a non-U.S. person’s 

dealing activity, but it does not require 

a non-U.S. person engaging in dealing 

activity to consider the location of its 

non-U.S.-person counterparty or that 

counterparty’s agent in determining 

whether the transaction needs to be 

included in its own de minimis 

calculation. Specifically, the 

amendment to final rule 3a71–3(b) 

requires a non-U.S. person to include in 

its de minimis calculation any 

transaction connected with its securitybased swap dealing activity that it 

enters into with a non-U.S.-person 

counterparty only when the transaction 

is arranged, negotiated, or executed by 

that person’s personnel who are located 

in a U.S. branch or office, or by its 

agent’s personnel who are located in a 

U.S. branch or office.137 Final Exchange 

Act rule 3a71–5(c) makes the exception 

for cleared anonymous transactions 

unavailable for trades that non-U.S. 

persons are required to count under 

proposed Exchange Act rule 3a71– 

3(b)(1)(iii)(C).138 The following sections 

discuss these rules, as well as guidance 

regarding the application of Exchange 

Act rule 3a71–3(b)(1)(iii)(C) to specific 

categories of transactions raised by 

commenters. 

B. Statutory Scope and Policy Concerns 

Arising from Security-Based Swap 

Dealing Activity in the United States 

1. Territorial Application of ‘‘SecurityBased Swap Dealer’’ Definition 

Some commenters have suggested that 

the modified approach to the de 

minimis exception set forth in our U.S. 

Activity Proposing Release would 

impose U.S. regulation on transactions 

and market participants lacking a 

sufficient ‘‘nexus’’ to the United States 

or to the U.S. financial system and, 

consequently, would produce few or no 

benefits.139 Several commenters argued 

that the primary focus of the securitybased swap dealer registration regime is 

on protecting U.S. market participants, 

and the market as a whole, against risk 

and that these transactions lack a 

sufficient ‘‘nexus’’ to the United States 

and to the U.S. financial system because 

they do not give rise to risk in the 

United States.140 One commenter 

further argued that the proposed rule 

was inconsistent with the concept of a 

de minimis threshold, stating that, 

under the Commission’s rules, the 

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141See SIFMA/FSR Letter at 6. 

142See, e.g., id. at 5. 

143Cf. ISDA Letter at 6, note 11. 

144Cross-Border Adopting Release, 79 FR 47287– 

88. 

145 Id. at 47288. We have also stated that securitybased swap dealer regulation may be warranted 

either to promote market stability and transparency 

in light of the role that these dealers occupy in the 

security-based swap market or to address concerns 

raised by the nature of the interactions between 

such dealers and their counterparties. See 

Intermediary Definitions Adopting Release, 77 FR 

30617. 

146See Cross-Border Proposing Release, 78 FR 

30988 (noting our view that the statutory provisions 

suggest that our focus should be not ‘‘solely on the 

risk these entities pose to the financial markets’’ but 

also on whether regulation is warranted due to the 

nature of their interactions with counterparties or 

in order to promote market stability and 

transparency, given the role these persons play in 

the security-based swap market). See Intermediary 

Definitions Adopting Release, 77 FR 30612. Indeed, 

we expressly contrasted this focus of the ‘‘securitybased swap dealer’’ definition with the focus of the 

‘‘major security-based swap participant’’ definition, 

which is focused on ‘‘the market impacts and risks 

associated with a person’s . . . security-based swap 

positions.’’ Id. at 30661. 

147See note 140, supra. 

148See Exchange Act section 3(a)(71)(A), 15 

U.S.C. 78c(a)(71)(A). 

149See Intermediary Definitions Adopting 

Release, 77 FR 30617–18. As we stated in the CrossBorder Adopting Release, when the statutory text 

does not describe the relevant activity with 

specificity or provides for further Commission 

interpretation of statutory terms or requirements, 

our territorial 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. See Cross-Border Adopting Release, 

79 FR 47287. 

150See Exchange Act section 3(a)(71)(A), 15 

U.S.C. 78c(a)(71)(A); Intermediary Definitions 

Adopting Release, 77 FR 30617–18. 

151See note 141, supra (citing SIFMA/FSR 

Letter). Cf. Intermediary Definitions Adopting 

Release, 77 FR 30620 (noting the focus of the 

‘‘security-based swap dealer’’ definition on dealing 

activity). 

152See Exchange Act section 3(a)(71)(D), 15 

U.S.C. 78c(a)(71)(D) (providing that the Commission 

‘‘shall exempt from designation as a security-based 

swap dealer an entity that engages in a de minimis 

quantity of security-based swap dealing’’); 

Exchange Act rule 3a71–2 (establishing transactionbased notional thresholds for the security-based 

swap dealer de minimis exception). 

153See, e.g., Intermediary Definitions Adopting 

Release, 77 FR 30612 (noting the focus of the 

‘‘security-based swap dealer’’ definition on dealing 

activity). 

154See Cross-Border Adopting Release, 79 FR 

47286–92 (describing the Commission’s territorial 

approach). In light of the foregoing analysis, we 

believe that the statutory prohibition on application 

of Title VII requirements to persons that ‘‘transact[] 

a business in security-based swaps without the 

jurisdiction of the United States’’ has no bearing on 

the final rule. See Exchange Act section 30(c). 

Under this rule, a non-U.S. person must include a 

transaction with another non-U.S. person in its 

dealer de minimis threshold calculations only 

when, in connection with its dealing activity, it 

arranges, negotiates, or executes a security-based 

swap using its personnel (or personnel of its agent) 

located in the United States. See Exchange Act rule 

3a71–3(b)(1)(iii)(C). The final rule, accordingly, 

would not impose requirements on non-U.S. 

persons that are ‘‘transacting a business in securitybased swaps without the jurisdiction of the United 

States’’ for purposes of section 30(c). 

threshold is ‘‘based on the aggregate 

notional size of security-based swaps, 

not the extent of U.S. involvement,’’ 

suggesting, in the commenter’s view, 

that ‘‘the threshold is concerned with 

risk posed to the entity, not the extent 

of involvement by the entity.’’141

Accordingly, these commenters argued 

that imposing security-based swap 

dealer regulation on non-U.S. persons 

on the basis of transactions with other 

non-U.S. persons—even if arranged, 

negotiated, or executed by personnel 

located in the United States—is 

inappropriate.142

To the extent that these comments are 

directed at whether transactions arising 

from this activity or persons engaged in 

this activity fall within the scope of 

Title VII,143 we reiterate our view that 

it is consistent with a territorial 

approach to the application of the 

Exchange Act to require non-U.S. 

persons that use personnel located in 

the United States to arrange, negotiate, 

or execute a security-based swap to 

include those transactions in their de 

minimis calculations. In the CrossBorder Adopting Release, we rejected 

the suggestion that ‘‘the location of risk 

alone should . . . determine the scope 

of an appropriate territorial application 

of every Title VII requirement,’’ 

including the application of the 

‘‘security-based swap dealer’’ 

definition.144 In doing so, we stated that 

‘‘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 securitybased swap dealers focus solely on risk 

to the U.S. financial system.’’ 145 And 

we have noted that the definition of 

‘‘security-based swap dealer’’ focuses on 

a person’s activity, not solely on the 

amount of risk created by that 

activity.146 Accordingly, we do not 

believe that security-based swap dealing 

activity must create counterparty credit 

risk in the United States for there to be 

a ‘‘nexus’’ sufficient to warrant securitybased swap dealer registration.147

As we have previously noted, 

Exchange Act section 3(a)(71)(A) 

identifies specific activities that bring a 

person within the definition of 

‘‘security-based swap dealer’’: (1) 

Holding oneself out as a dealer in 

security-based swaps, (2) making a 

market in security-based swaps; (3) 

regularly entering into security-based 

swaps with counterparties as an 

ordinary course of business for one’s 

own account; or (4) engaging in any 

activity causing oneself to be commonly 

known in the trade as a dealer in 

security-based swaps.148 We have 

further interpreted this definition to 

apply to persons engaged in indicia of 

dealing activity, including, among other 

things, providing liquidity to market 

professionals, providing advice in 

connection with security-based swaps, 

having regular clientele and actively 

soliciting clients, and using interdealer 

brokers.149 Neither the statutory 

definition of ‘‘security-based swap 

dealer’’ nor our further definition of that 

term turns primarily on the presence of 

risk or on the purchase or sale of any 

security, including a security-based 

swap.150 Accordingly, we disagree with 

the view that the ‘‘de minimis threshold 

is based on the aggregate notional size 

of security-based swaps’’ and that this 

suggests that ‘‘the de minimis threshold 

is concerned with the risk posed to the 

entity, not the extent of involvement by 

the entity.’’ 151 The de minimis 

exception relates to the volume of 

dealing activity and not to specifically 

risk-related factors, such as the notional 

volume of positions held by the 

dealer.152

Accordingly, the fact that the 

counterparty credit risk from a 

transaction between two non-U.S. 

persons, which are not conduit affiliates 

and where neither counterparty has a 

right of recourse against a U.S. person 

under the security-based swap, exists 

largely outside the United States is not 

determinative under our territorial 

analysis as to whether a sufficient 

‘‘nexus’’ exists to require a non-U.S. 

person to count the transaction toward 

its de minimis threshold. The 

appropriate analysis, in our view, also 

considers whether a non-U.S. person in 

such a transaction is engaged, in the 

United States, in any of the activities set 

forth in the statutory definition or in our 

further definition of ‘‘security-based 

swap dealer.’’ 153 If it is so engaged, it 

is appropriate under a territorial 

approach to require the non-U.S. person 

to include such transactions in its 

security-based swap dealer de minimis 

threshold calculations and, if those 

security-based swaps (together with any 

other security-based swaps it is required 

to include in its threshold calculations) 

exceed the de minimis threshold, to 

register as a security-based swap 

dealer.154

As we stated in the U.S. Activity 

Proposing Release, this analysis applies 

regardless of whether the non-U.S. 

person engages in dealing activity (as 

described in the statutory definition and 

in our further definition of ‘‘securitymstockstill on DSK4VPTVN1PROD with RULES2

Federal Register / Vol. 81, No. 33 / Friday, February 19, 2016 / Rules and Regulations 8615 

155See U.S. Activity Proposing Release, 80 FR 

27465. 

156See Exchange Act rule 3a71–1(a) (defining 

‘‘security-based swap dealer’’); Intermediary 

Definitions Adopting Release, 77 FR 30617–18 

(providing guidance to ‘‘further clarify the scope of 

the security-based swap dealer definition’’). 

157More generally, we believe that the routine use 

by dealers of the structures described in this 

discussion suggests that a person may engage in 

dealing activity through an agent in a manner very 

similar to engaging in such activity through its own 

branch or office. Cf. Exchange Act section 

3(a)(71)(A) (defining ‘‘security-based swap dealer’’); 

Intermediary Definitions Adopting Release, 77 FR 

30617–18 (further defining ‘‘security-based swap 

dealer’’). 

158Our treatment of activity performed by an 

agent on behalf of a non-U.S. person in connection 

with its dealing activity does not apply Title VII to 

persons that 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 note 154, supra. An 

approach that treated a non-U.S. person dealer that 

used an agent, whether affiliated or unaffiliated, in 

the United States to carry out some or all of its 

dealing business with non-U.S. persons as 

transacting a business in security-based swaps 

without jurisdiction of the United States, would, in 

our view, reflect an understanding of what it means 

to conduct a security-based swap business within 

the jurisdiction of the United States that is divorced 

from the definition of ‘‘security-based swap dealer,’’ 

from Title VII’s statutory objectives, and from the 

various structures that non-U.S. persons use to 

engage in security-based swap dealing activity. 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 provision of the 

Exchange Act that were added to the Dodd-Frank 

Act, and thus would help prevent the relevant 

purposes of the Dodd-Frank Act from being 

undermined. See Cross-Border Adopting Release, 

79 FR 47291–92 (interpreting anti-evasion 

provisions of Exchange Act section 30(c)). Without 

this rule, non-U.S. persons could simply carry on 

a dealing business within the United States with 

other non-U.S. persons through agents and remain 

outside of the application of the dealer 

requirements of Title VII, as described more fully 

in the following sections. 

159See SIFMA/FSR Letter at 5 (‘‘[S]uch 

transactions between non-U.S. persons . . . do not 

have a sufficient nexus to the United States to be 

included in a determination of whether a non-U.S. 

entity should need to register with the 

Commission.’’); IIB Letter at 5 (arguing that the 

Commission’s policy interests in such transactions 

are more limited than in transactions involving a 

U.S. person and that ‘‘[i]t is not necessary for one 

of the parties to register with the Commission as an 

SBSD for the Commission to address these more 

limited policy objectives.’’); ISDA Letter at 5 (‘‘In 

the absence of risks to the U.S. financial system and 

U.S. counterparties, the Commission has not 

identified any benefit associated with regulating 

SBS transactions between non-U.S. persons.’’) 

(emphasis added). Several commenters argued that 

the location of personnel involved in a transaction 

on behalf of a non-U.S.-person dealer is not 

particularly relevant to the policy considerations 

addressed by security-based swap dealer 

registration and accordingly should not ‘‘form the 

sole basis for requiring’’ firms to register as securitybased swap dealers and to comply with the Title VII 

rules. See, e.g., ISDA Letter at 4. 

160See IIB Letter at 3. 

161See U.S. Activity Proposing Release, 80 FR 

27481. 

162See note 145, supra. These policy objectives 

reflect the goals of Title VII of the Dodd-Frank Act, 

which established a statutory framework to reduce 

risk, increase transparency, and promote market 

integrity within the financial system. See 

Intermediary Definitions Adopting Release, 77 FR 

30596. 

163See Sections II.A.2.d and II.B, supra. 

based swap dealer’’) in the United States 

using its own personnel or using the 

personnel of an agent acting on its 

behalf.155 As described above, persons 

engaged in security-based swap dealing 

activity routinely do so both directly 

and through their agents, including as 

part of an integrated dealing business. 

Indeed, our further definition of 

‘‘security-based swap dealer’’ 

specifically identifies the use of 

interdealer brokers as one of several 

indicia of security-based swap dealing 

activity, and engaging an interdealer 

broker as agent or sending a trade to 

such a broker generally would be 

dealing activity.156 To the extent that 

this activity is directed to a broker in the 

United States, the non-U.S. person is 

engaged in dealing activity in the 

United States.157 Accordingly, a nonU.S. person that reaches into the United 

States by engaging an agent (including 

an interdealer broker) to perform 

dealing activity on its behalf is itself 

engaged, at least in part, in dealing 

activity in the United States. It is 

therefore consistent with our territorial 

approach to require the non-U.S. person 

to include transactions arising out of 

those activities in its own de minimis 

threshold calculations.158

2. Policy Concerns Associated With 

Security-Based Swap Dealing Activity 

in the United States 

Requiring transactions that, in 

connection with a non-U.S. person’s 

dealing activity, are arranged, 

negotiated, or executed by personnel 

located in the United States to be 

counted toward the non-U.S. person’s 

security-based swap dealer de minimis 

threshold is also consistent with the 

policy objectives of Title VII dealer 

regulation. Some commenters 

interpreted the primary, or even the 

sole, goal of Title VII dealer regulation 

as risk mitigation, generally arguing that 

no policy rationale warranted requiring 

non-U.S. persons to count transactions 

with other non-U.S. persons based on 

their activity in the United States.159

One commenter specifically urged us 

not to adopt the proposed rule, arguing 

that application of U.S. requirements to 

these transactions should ‘‘be tailored to 

address only the specific policy 

considerations raised by use of U.S. 

personnel,’’ such as certain concerns 

related to counterparty protection.160

We believe that these 

characterizations of the policy 

objectives of Title VII are incomplete. 

Although it is true that mitigating 

counterparty and operational risks— 

which we have acknowledged lie 

primarily outside the United States in 

these transactions 161—is an important 

objective of the Title VII dealer 

requirements, these requirements also 

advance other important policy 

objectives of security-based swap dealer 

regulation under Title VII, including 

enhancing counterparty protections and 

market integrity, increasing 

transparency, and mitigating risk to 

participants in the financial markets and 

the U.S. financial system more 

broadly.162

We believe that not requiring nonU.S. persons to count these trades 

toward their de minimis thresholds 

would significantly impair the 

effectiveness of the Title VII dealer 

framework in advancing these 

objectives. As noted above, financial 

groups engaged in security-based swap 

dealing activity may structure their 

business in many different ways.163

Many non-U.S. persons engaged in 

dealing activity in the United States do 

so through an affiliated or unaffiliated 

agent in the United States and, under 

currently existing rules, are not 

required, absent a guarantee, to include 

transactions arising from such activity 

in their dealer de minimis calculations 

if the counterparty is also a non-U.S. 

person. Some financial groups also use 

U.S. persons to book such transactions, 

but even U.S.-based financial groups 

may opt to book their security-based 

swap transactions in non-U.S. persons 

in response to regulation or to 

competitive disparities between U.S. 

persons and non-U.S. persons. 

Given these dynamics, failure to 

require non-U.S. persons to count the 

transactions encompassed by the final 

rule toward the dealer de minimis 

thresholds, even though doing so is 

entirely consistent with our territorial 

approach, would permit financial 

groups that have a security-based swap 

dealing business to avoid registering 

non-U.S. persons that engage in 

security-based swap dealing activity in 

the United States. As long as a non-U.S. 

person limited its dealing activity with 

U.S. persons to levels below the dealer 

de minimis thresholds, it could enter 

into an unlimited number of 

transactions connected with its dealing 

activity in the United States without 

being required to register as a securitybased swap dealer. 

Subjecting the transactions of certain 

dealers engaged in dealing activity in 

the United States, but not others, to the 

Title VII dealer requirements would 

undermine each of the policy objectives 

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8616 Federal Register / Vol. 81, No. 33 / Friday, February 19, 2016 / Rules and Regulations 

164See Section II.B, supra (discussing 

relationship between the scope of Title VII 

regulations and likely competitive disparities 

between different types of dealers). See also Charles 

Levinson, ‘‘U.S. banks moved billions in trades 

beyond CFTC’s reach,’’ Reuters (August 21, 2015), 

available at: http://www.reuters.com/article/2015/

08/21/usa-banks-swaps-idUSL3N10S57R20150821. 

165See Section II.B, supra. 

166See Section II.A.3, supra. For this reason, we 

do not agree with the commenters that suggested 

that we should not require a firm to register as a 

security-based swap dealer solely on the basis that 

it has transactions with non-U.S. persons arising 

out of dealing activity in the United States that 

exceed the dealer de minimis threshold. See ISDA 

Letter at 4; SIFMA/FSR Letter at 5; IIB Letter at 4– 

5. The overwhelming majority of transactions 

captured by this rule are likely to be transactions 

carried out by non-U.S. persons whose dealing 

activity likely exceeds the de minimis threshold by 

at least an order of magnitude. 

167The available data and analysis suggest that all 

entities that will exceed the de minimis threshold 

for credit default swaps under Exchange Act rule 

3a71–3(b), as amended by this release, will already 

exceed the threshold by virtue of the transactions 

they are required to count under Exchange Act rule 

3a71–3(b) as adopted in June 2014. However, as we 

describe more fully below, we acknowledge the 

potential for a change in the number of registrants 

based on a number of factors. See Section V.B, infra. 

described above. Under currently 

existing rules, a significant proportion 

of activity in the security-based swap 

market that is carried out within the 

United States—particularly as financial 

groups respond to the competitive 

pressures discussed in more detail 

below—likely would involve 

counterparties that are not subject to our 

regulations or oversight. Dealers 

accounting for significant volumes of 

security-based swap dealing activity in 

the United States—and together 

potentially accounting for a significant 

majority of all security-based swap 

activity in the United States—would not 

be subject to Title VII recordkeeping and 

reporting requirements, which would 

significantly impede our ability to 

monitor the market for manipulative 

and abusive conduct on the part of 

dealers or other market participants. 

Similarly, these dealers would not be 

subject to the Title VII business conduct 

requirements with respect to any of 

their transactions, which could 

significantly impair market integrity or 

raise other concerns, as counterparties 

seeking to enter into transactions with 

dealers through those dealers’ personnel 

located in the United States would not 

receive the full range of disclosures and 

other protections provided by Title VII. 

And these firms would not be subject to 

Title VII capital, margin, or segregation 

requirements. These requirements are 

intended to play a key role in mitigating 

the potential for financial contagion to 

spread to participants in the U.S. 

security-based swap market and to the 

U.S. financial system more generally by 

mitigating the risk of firm failure. 

Subjecting only a limited subset of 

transactions involving activity in the 

United States to Title VII dealer 

requirements would also likely produce 

competitive disparities and exacerbate 

market fragmentation, which would not 

only further undermine the policy 

objectives just described but also create 

potentially significant market 

distortions. Competitive disparities 

would arise as financial groups that use 

non-U.S.-person dealers to carry out 

their dealing business in the United 

States find themselves able to exit the 

Title VII regulatory regime without 

exiting the U.S. market with respect to 

their security-based swap dealing 

business with non-U.S.-person 

counterparties (including non-U.S.- 

person dealers). These dealers likely 

would incur fewer costs related to their 

dealing activity in the United States 

than U.S.-person dealers transacting 

with the same counterparties, and nonU.S. person counterparties likely would 

also find that they incur lower costs and 

obtain better pricing by entering into 

security-based swaps with non-U.S. 

dealers that are not required to register 

as security-based swap dealers. U.S.- 

person dealers would be at a further 

disadvantage as financial groups that 

carry out a significant proportion of 

their security-based swap dealing 

activity in the United States through 

non-registered dealers cross-subsidize 

the dealing activity of their affiliated 

registered security-based swap dealers 

that engage in dealing activity with 

U.S.-person counterparties, permitting 

financial groups that have shifted a 

significant proportion of their dealing 

activity to non-U.S.-person dealers to 

offer even U.S.-person counterparties 

better pricing than financial groups that 

have not made this shift are able to 

provide. 

These competitive pressures would 

provide a strong incentive for financial 

groups to book transactions with nonU.S. person counterparties (including 

with other dealers) in non-U.S.-person 

affiliates of those financial groups.164

Eventually, both U.S. and foreign 

financial groups may restructure their 

business in a way that would permit 

them to do the vast majority of their 

security-based swap dealing activity— 

including a significant majority of that 

activity that they continue to carry out 

using personnel located in the United 

States—outside the Title VII framework. 

This potential response to competitive 

disparities demonstrates the ‘‘nexus’’ 

between the regulatory concerns 

addressed by the Title VII securitybased swap dealer regulatory framework 

and our final rule. As already noted, the 

security-based swap market is a highly 

concentrated market in which dealers 

play a central role.165 Absent the 

amendment to rule 3a71–3(b), 

restructuring could lead to a market 

where the largest dealers representing a 

significant majority of security-based 

swap activity in the United States 

would not be required to register as 

security-based swap dealers or comply 

with Title VII dealer requirements 

because they would limit their 

transactions to other non-U.S.-person 

dealers (some affiliated with U.S.-based 

financial groups) and non-U.S. persons 

that are not dealers. In other words, the 

commenters’ suggested approach 

potentially would permit hundreds of 

billions of dollars in annual notional 

transaction activity (including most or 

all of the interdealer business in 

security-based swaps with U.S. 

underliers), representing two-thirds or 

more of all security-based swap 

transactions that currently involve U.S. 

counterparties or U.S. activity, to be 

carried out, at least in part, within the 

United States without being subject to 

Title VII dealer regulation, much as if 

Title VII had never been enacted.166

Thus, while we acknowledge the 

potential for this rule to increase the 

number of security-based swap dealers 

from the number that would be required 

to register under currently existing 

rules,167 we believe that it will mitigate 

these competitive disparities and help 

ensure the ability of the Title VII dealer 

requirements to advance the regulatory 

objectives described above. 

We further expect that the rule will be 

essential to reducing the likelihood of 

significant market fragmentation that 

would impair the liquidity available to, 

and increase costs for, U.S. market 

participants. As we have noted above, if 

a majority of security-based swap 

dealing activity in the United States, 

including most or all interdealer activity 

in the United States, is carried out by 

non-U.S. persons that are not subject to 

Title VII dealer regulation, the market is 

likely to fragment into two pools. The 

larger pool likely would consist of 

transactions that are carried out by 

unregistered non-U.S.-person dealers 

with non-U.S.-person counterparties, 

including the largest dealers in the 

security-based swap market, while the 

smaller pool likely would be limited to 

U.S.-person counterparties and 

registered dealers that do business 

exclusively with those U.S.-person 

counterparties (and that may or may not 

themselves be U.S. persons). In other 

words, absent these rules, U.S. market 

participants likely would find 

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Federal Register / Vol. 81, No. 33 / Friday, February 19, 2016 / Rules and Regulations 8617 

168See Section II.A.3, supra. 

169See Section II.B, supra. 

170See U.S. Activity Proposing Release, 80 FR 

27482. See also note 115, supra (noting the 

importance of these issues in our consideration of 

rules for the security-based swap market). 

171See U.S. Activity Proposing Release, 80 FR 

27482. This is particularly likely if most or all of 

the interdealer activity is carried out by non-U.S. 

persons using personnel located in the United 

States. 

172For these reasons, we do not agree with those 

commenters that suggested that our proposed 

approach was inconsistent with our determination 

not to propose to subject transactions to the 

mandatory clearing requirement solely on the basis 

of U.S. activity. See SIFMA/FSR Letter at 5–6; IIB 

Letter at 13–14. See also Citadel Letter at 6–7 

(arguing that the Commission’s assertion that the 

risks of transactions involving U.S. activity reside 

primarily offshore is inconsistent with other 

Commission rulemakings, namely the Volcker Rule, 

and the statutory interpretation adopted by the 

CFTC). 

173See Section IV.B.1, supra (describing 

territorial application of the dealer definition); 

Cross-Border Adopting Release, 79 FR 47287–88 

(same). 

174See Section II.B, supra (discussing the 

potential that a liquidity shock resulting from the 

failure of a non-U.S.-person dealer engaged in 

dealing activity in the United States might 

propagate risks to, and adversely affect the stability 

of, U.S. persons also active in those market centers 

and to the U.S. financial system more broadly). See 

also Capital, Margin, and Segregation Proposing 

Release, 77 FR 70222 (noting that the ‘‘failure of a 

stand-alone SBSD could have a broader adverse 

impact on a larger number of market participants, 

including customers and counterparties’’ and that 

the proposed capital requirements ‘‘are meant to 

account for this potential broader impact on market 

participants’’); id. at 70304 (describing the primary 

benefit of the proposed capital and margin 

requirements as reducing the probability of the 

failure of a security-based swap dealer, noting that 

such a default ‘‘could have adverse spillover or 

contagion effects that could create instability for the 

financial markets more generally’’). 

175Certain other Title VII dealer requirements 

may similarly help to mitigate these types of risks. 

For example, the risk management provision 

requires a security-based swap dealer to have 

systems in place to manage its exposure to risks 

arising from its security-based swap dealing 

activity. See Exchange Act section 15F(j)(2). See 

also Capital, Margin, and Segregation Proposing 

Release, 77 FR 70213. In that release, the 

Commission proposed to (1) amend Rule 15c3–1 by 

adding a new paragraph (a)(10)(ii); (2) add new Rule 

18a–1(g) and; (3) add new Rule 18a–2(c) which, 

taken together, generally would require each 

nonbank security-based swap dealer and major 

security-based swap participant to comply with 

existing Rule 15c3–4 (except for certain specified 

provisions of that rule), as if it were an OTC 

derivatives dealer. Rule 15c3–4 currently requires 

each person subject to the rule to ‘‘establish, 

document, and maintain a system of internal risk 

management controls to assist it in managing the 

risks associated with its business activities, 

including market, credit, leverage, liquidity, legal, 

and operational risks.’’ 17 CFR 240.15c3–4. 

176 ISDA Letter at 3. 

177See Section II.B, supra. Cf. IIB Letter at 8 

(stating that the Commission’s rationale for taking 

an approach different from broker-dealer regulation 

to regulate persons engaged in security-based swap 

activity does not hold where, among other things, 

‘‘the bilateral, executory credit risk inherent in 

[security-based swaps]’’ is not borne by a U.S. 

counterparty). 

178See, e.g., IIB Letter at 5, 8; ISDA Letter at 8; 

SIFMA/FSR Letter at 6; HSBC Letter at 2–3. 

179SIFMA/FSR Letter at 7–8. 

180See, e.g., IIB Letter at 4, 5, 6, 8; ISDA Letter 

at 8–9 (arguing that the Commission could 

reasonably limit the impact of the proposal on 

market participants by ‘‘leveraging the existing 

components of the SEC’s regulatory program,’’ 

specifically identifying the Commission’s existing 

regime that applies to broker-dealers and pointing 

out that cleared transactions are subject to 

regulations in other jurisdictions). One commenter 

argued that ‘‘[t]o the extent the Commission is 

concerned about conduct of non-registered dealers, 

it has more targeted tools at its disposal, including 

existing antifraud and anti-manipulation provisions 

and broker-dealer regulatory obligations applicable 

to registered agents.’’ SIFMA/FSR Letter at 6. 

themselves confined to a shallower 

liquidity pool with worse pricing than 

would be available to non-U.S. persons, 

even though those non-U.S. persons 

likely would themselves be using 

personnel, or facing dealers using 

personnel, located in the United States 

to arrange, negotiate, or execute similar 

transactions. 

Finally, as we have noted, a 

significant proportion of the dealing 

activity that is likely to be captured by 

this rule is actually carried out by 

foreign affiliates of U.S. financial 

groups.168 Given the significant volumes 

arising from the U.S. dealing activity of 

such foreign affiliates and the potential 

reputational effect that an affiliate’s 

failure can have on other affiliates in the 

same corporate group, this activity may 

pose a risk of contagion to the U.S. 

financial markets, as we have already 

discussed above.169 We previously 

acknowledged these concerns in 

explaining why we were not proposing 

to impose the clearing requirement on 

these transactions in the U.S. Activity 

Proposing Release, noting our view that 

other regulatory provisions, including 

Title VII margin requirements, were 

better suited to address the risk of 

spillovers and contagion arising from 

these affiliate relationships.170 But it is 

important to note that, as the market 

develops, many of those foreign 

affiliates may be required to register as 

security-based swap dealers and to 

comply with the Title VII margin 

requirements only because they arrange, 

negotiate, or execute transactions in 

connection with their dealing activity 

using personnel located in the United 

States.171 The final rule ensures that 

these affiliates, to the extent that they 

are engaged in such activity at levels 

above the relevant dealer de minimis 

threshold, are in fact required to register 

and comply with these requirements, 

which should mitigate the risks 

described above.172

Subjecting non-U.S. persons that 

engage in security-based swap dealing 

activity in the United States 173 at levels 

above the dealer de minimis threshold 

to capital and margin requirements also 

should help reduce the likelihood of 

firm failure and the likelihood that that 

the failure of a firm engaged in dealing 

activity in the United States might 

adversely affect not only its 

counterparties (which may include 

other firms engaged in security-based 

swap dealing activity in the United 

States) but also other participants in that 

market.174 The amendments being 

adopted today should also, in a manner 

consistent with our territorial approach, 

reduce gaps in the application of these 

types of requirements to global firms 

that are engaged in security-based swap 

dealing activity.175

We note that one commenter 

suggested that our amendments should 

exclude dealing activity by a non-U.S. 

person that ‘‘is part of or supports a 

business that is primarily based outside 

the United States.’’ 176 However, we do 

not believe that the fact that dealing 

activity is part of or supports a business 

primarily based outside the United 

States is relevant to the concerns 

described above regarding regulatory 

effectiveness, competitive disparities, 

market fragmentation, or contagion. 

Non-U.S.-person dealers, whose 

business may be characterized as 

‘‘primarily based outside the United 

States,’’ account for a significant volume 

of transactions in North American 

single-name CDS and may be expected 

to raise these concerns, even when ‘‘the 

bilateral, executory credit risk’’ in the 

transaction is borne by two non-U.S. 

persons.177

3. Existing Regulatory Frameworks and 

Security-Based Swap Dealer Regulation 

Several commenters suggested that we 

need not rely on Title VII dealer 

regulation at all to address regulatory 

concerns arising from dealing activity 

carried out by non-U.S. persons using 

personnel located in the United 

States.178 According to these 

commenters, the existing U.S. and 

foreign requirements (including brokerdealer regulation, and anti-fraud and 

anti-manipulation provisions) provide 

us with the tools needed to address 

what, in their view, are the primary 

regulatory concerns raised by this 

dealing activity, and using these tools 

would ‘‘essentially sever[ ] the nexus 

between the dealer counterparty and the 

U.S. market,’’ 179 eliminating the need to 

include the transaction in a firm’s dealer 

de minimis threshold calculations.180

Because they view the concerns 

potentially raised by this activity as 

relating primarily to counterparty 

protection concerns and because 

registered broker-dealers are already 

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8618 Federal Register / Vol. 81, No. 33 / Friday, February 19, 2016 / Rules and Regulations 

181See, e.g., IIB Letter at 6, 17. Commenters 

argued that permitting the personnel of non-U.S.- 

person dealers, or their agents, located in the 

United States to rely on existing regulatory 

requirements would be more efficient as these 

personnel could comply with a uniform set of 

requirements with respect to all of their business, 

whether in securities or in security-based swap 

transactions, on their own account or in their 

capacity as an intermediary for a non-U.S. person. 

See ISDA Letter at 9 (citing anti-fraud provisions of 

Securities Act section 17(a) and the fraud 

prohibitions in Rule 10b–5); IIB Letter at 6, 8, 17 

(stating that broker-dealer and FINRA rules, 

including sales practice, books and records, and 

examination and inspection requirements, will 

apply to broker-dealers arranging, negotiating, and 

executing security-based swaps on behalf of nonU.S.-person dealers and arguing that applying only 

broker-dealer rules would avoid unnecessary 

duplication). 

182See also U.S. Activity Proposing Release, 80 

FR 27470 n.198 (noting that Title VII of the DoddFrank Act amended the Exchange Act definition of 

‘‘security’’ to encompass security-based swaps); 

Exchange Act section 3(a)(10), 15 U.S.C. 78c(a)(10) 

(defining ‘‘security’’) as revised by section 761(a)(2) 

of the Dodd-Frank Act. 

183See Exchange Act section 3(a)(4) (defining 

‘‘broker’’). 

184See, e.g., note 181, supra (citing IIB Letter). 

We have granted temporary exemptive relief from 

compliance with certain provisions of the Exchange 

Act in connection with the Dodd-Frank Act’s 

amendment of the definition of ‘‘security’’ in order 

generally to maintain the status quo during the 

implementation process for the Dodd-Frank Act. 

See Order Granting Temporary Exemptions under 

the Securities Exchange Act of 1934 in Connection 

with the Pending Revisions of the Definition of 

‘‘Security’’ to Encompass Security-Based Swaps, 

Exchange Act Release No. 64795 (July 1, 2011), 76 

FR 39927 (July 7, 2011) (‘‘Exchange Act Exemptive 

Order’’). Among other things, this relief granted 

temporary exemptions specific to security-based 

swap activities by registered brokers and dealers. 

See id. at 39–44. In February 2014, we extended the 

expiration dates (1) for exemptions that are 

generally not directly related to specific securitybased swap rulemakings until the earlier of such 

time that we issue an order or rule determining 

whether any continuing exemptive relief is 

appropriate for security-based swap activities with 

respect to any of the Exchange Act provisions or 

until three years following the effective date of that 

order; and (2) for exemptions that are directly 

related to specific security-based swap rulemakings, 

until the compliance date for the relevant securitybased swap rulemaking. See 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 

(February 5, 2014), 79 FR 7731 (February 10, 2014). 

FINRA also adopted a rule, FINRA Rule 0180 

(Application of Rules to Security-Based Swaps), 

which temporarily limits the application of certain 

FINRA rules with respect to security-based swaps. 

On January 4, 2016, FINRA filed a proposed rule 

change, which was effective upon receipt by the 

Commission, extending the expiration date of 

FINRA Rule 0180 to February 11, 2017. See SelfRegulatory Organizations; Financial Industry 

Regulatory Authority, Inc.; Notice of Filing and 

Immediate Effectiveness of Proposed Rule Change 

to Extend the Expiration Date of FINRA Rule 0180 

(Application of Rules to Security-Based Swaps), 

Exchange Act Release No.76850 (January 7, 2016). 

185See HSBC Letter at 2–3 (stating that relevant 

U.S. personnel would already be subject to U.S. 

security-based swap dealer or broker-dealer 

regulation, ‘‘including extensive sales practice and 

recordkeeping rules’’ and suggesting that the 

Commission could require certain non-U.S. person 

subsidiaries to provide access to books and records 

in a manner similar to Rule 15a-6(a)(3) applicable 

to foreign broker-dealers); ISDA Letter at 3 

(requesting that, if the Commission adopts the 

proposed U.S. activity test, it minimize the impact 

by relying on certain already existing requirements 

on registered broker-dealers, such as 

recordkeeping); IIB Letter at 7. See also ISDA Letter 

at 6 (stating that the proposal would regulate these 

transactions ‘‘solely on the basis of some de 

minimis level of U.S. nexus during the initial stage 

of the transaction’’); id. at 9 (describing how 

existing rules would address regulatory concerns). 

186See ISDA Letter at 6, 8 (arguing that ‘‘the 

Commission already possesses a range of regulatory 

tools (such as books and records requirements and 

direct regulation of U.S.-based intermediaries) that 

it can use to satisfy its important regulatory 

interests in protecting against issues such as fraud 

and manipulation’’). 

187 IIB Letter at 7. This commenter stated that 

such an approach ‘‘also would be consistent with 

Congress’ decision to define [security-based swaps] 

as a type of security.’’ See id. To the extent that a 

firm uses a U.S. person to intermediate a securitybased swap transaction, that U.S. person may be 

required to register as a broker and comply with 

relevant broker requirements, but nothing in the 

statute suggests that the regulation of the broker 

under the Exchange Act affects the Title VII 

obligations of the non-U.S.-person dealer that uses 

the U.S. broker—perhaps as part of an integrated 

dealing business—to engage in dealing activity 

within the United States under the comprehensive 

Title VII regulatory framework for security-based 

swap dealers. 

188See U.S. Activity Proposing Release, 80 FR 

27470–71. 

189Compare Exchange Act section 3(a)(71) 

(defining ‘‘security-based swap dealer’’ with no 

exceptions for banks or banking activities) with 

Exchange Act section 3(a)(4)(B) (creating exception 

from broker definition for banks engaged in certain 

activities) and Exchange Act section 3(a)(5)(C) 

(creating exception from dealer definition for banks 

engaged in certain activities). 

190See U.S. Activity Proposing Release, 80 FR 

27466–67; Section IV.B.2, supra (describing 

regulatory concerns raised by security-based swap 

dealing activity, including risk, market integrity and 

transparency, and counterparty protection). 

Regulation of the agent, whether as a brokerdealer or as a security-based swap dealer, also does 

subject to customer protection 

requirements, these commenters argued 

that adding security-based swap dealer 

requirements would simply duplicate 

protections already available under 

existing law or impose requirements 

that address concerns (such as 

counterparty credit risk) that arise only 

outside the United States.181 Because 

the Exchange Act defines security-based 

swaps as securities,182 they asserted that 

an agent acting on behalf of a non-U.S. 

person that is engaged in security-based 

swap dealing activity generally would 

be required to register as a broker 183

and could be required to comply with 

relevant Exchange Act and FINRA 

requirements with respect to the 

security-based swap transactions that it 

intermediates.184 Some commenters 

argued that sales practice and 

recordkeeping rules applicable to 

registered U.S. security-based swap 

dealers and broker-dealers that 

intermediate these transactions would 

adequately address the key policy 

interests that underlie the requirement 

to count U.S. activity towards the de 

minimis thresholds.185 Another 

commenter suggested that this approach 

would be consistent with our historical 

approach to cross-border issues in cash 

markets, which provides an exemption 

from registration for foreign brokerdealers that use a registered brokerdealer to intermediate transactions on 

their behalf.186 One commenter argued 

that such an approach would help 

ensure consistency in rules applicable 

to cash and derivatives markets, ‘‘reduce 

the incentives for regulatory arbitrage,’’ 

and help mitigate compliance costs that 

would arise from ‘‘applying different 

registration standards to activity in 

economically comparable 

instruments.’’ 187

We recognize that some parallels exist 

between the Title VII dealer framework 

and the broker-dealer regime; we also 

recognize that there is at least a 

possibility of duplication between some 

of the requirements that would apply to 

the non-U.S.-person dealer’s securitybased swap transactions if it is required 

to register as a security-based swap 

dealer, the requirements that likely 

would apply to the registered brokerdealer whose personnel arrange, 

negotiate, or execute the relevant 

security-based swap transactions, and 

some requirements that may apply to 

the foreign security-based swap dealer 

under foreign law. However, as we 

discussed at some length in the U.S. 

Activity Proposing Release in response 

to similar comments, we do not believe 

it appropriate to except non-U.S.-person 

dealers from this requirement merely 

because some transactions of some nonU.S.-person dealers could be subject to 

broker-dealer or other requirements that 

could duplicate some of the securitybased swap dealer requirements.188

As we noted in that release, this type 

of approach has two significant 

weaknesses. First, the definition of 

‘‘broker’’ includes a number of 

exceptions for banks, including U.S. 

branches of foreign banks, that are 

engaged in certain activities, and these 

exceptions may be used by non-U.S.- 

person dealers to engage in marketfacing activity in the United States in 

connection with their dealing activity in 

security-based swaps.189 Second, 

broker-dealer regulation of the agent 

operating in the United States on behalf 

of the non-U.S.-person dealer would not 

address all of the concerns raised by 

non-U.S. persons engaged in this 

activity, as described above.190

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nothing to address concerns about the potential 

spillover risk or contagion from the activity of nonU.S.-person dealers—including affiliates of U.S.- 

based financial groups—that are engaged in 

potentially significant volumes of security-based 

swap activity in the United States. See Section 

IV.B.2, supra. 191See U.S. Activity Proposing Release, 80 FR 

27470 n.198 (noting that Title VII of the Dodd-Frank 

Act amended the Exchange Act definition of 

‘‘security’’ to encompass security-based swaps); 

Exchange Act section 3(a)(10), 15 U.S.C. 78c(a)(10) 

(defining ‘‘security’’), revised by section 761(a)(2) of 

the Dodd-Frank Act. 192See U.S. Activity Proposing Release, 80 FR 

27470–471. 193See IIB Letter at 8–10; SIFMA/FSR Letter at 8; 

ISDA Letter at 9–10. 194See IIB Letter at 8–10. The commenter 

suggested that the Commission could use its antievasion authority to require access to books and 

records of the non-U.S.-person dealer and consent 

to service of process and that it could ensure 

adequate capital regulation of the non-U.S.-person 

dealer by requiring the non-U.S.-person dealer to 

count these transactions toward the de minimis 

exception if it is not supervised by a home country 

prudential supervisor that is a member of the Basel 

Committee or located in a G20 jurisdiction. See id. 

at 9. See also ISDA Letter at 8 (stating that such an 

approach would be consistent with Exchange Act 

rule 15a-6, which provides an exemption from 

broker-dealer registration on the condition that, 

among other things, the foreign broker or dealer 

maintains books and records and makes them 

available to the Commission upon request). 

195See SIFMA/FSR Letter at 8. See also IIB Letter 

at 9 (suggesting that any exception could be 

conditioned on the non-U.S. person being 

supervised by a home country prudential 

supervisor that is either a member of the Basel 

Committee or located in a G–20 jurisdiction). 

196See IIB Letter at 8–10; SIFMA/FSR Letter 

at 7–8. 

197See Section IV.B.2, supra. 

198See IIB Letter at 7–8; ISDA Letter at 8–9; HSBC 

Letter at 3, note 3. 

199See IIB Letter at 7–8; ISDA Letter at 8–9; HSBC 

Letter at 3, note 3. 

Accordingly, while we recognized that 

the statutory framework provides for the 

regulation of brokers that intermediate 

security-based swap transactions,191 we 

preliminarily took the position that this 

provision neither warrants nor compels 

the adoption of an exception from the 

Title VII regime governing securitybased swap dealers.192

In response to our preliminary 

determination, several commenters 

suggested that, to the extent that the 

existing framework (including the 

broker-dealer regulatory regime) does 

not fully address our concerns, we 

could adopt an exception to the 

counting requirement subject to certain 

conditions that would help ensure that 

the non-U.S. person engaged in dealing 

activity is subject to requirements, 

whether under domestic or foreign law, 

that are similar to those imposed on 

security-based swap dealers by Title VII 

dealer requirements.193 For example, 

one commenter suggested that the nonU.S.-person dealer not be required to 

count any transaction entered into in a 

dealing capacity if the U.S. personnel 

are (a) personnel of a registered brokerdealer; or (b) personnel of a U.S. bank 

or U.S. branch of a foreign bank that, in 

connection with the arranging, 

negotiating, or executing activity, (i) 

complies with external business 

conduct requirements, (ii) maintains 

related books and records, and (iii) 

provides the Commission with access to 

such books and records and testimony 

of the relevant U.S. personnel.194

Another commenter suggested that we 

except transactions from the 

requirement that they be counted 

toward a non-U.S.-person dealer’s de 

minimis threshold if the non-U.S.- 

person dealer is ‘‘(i) [ ] an affiliate of the 

U.S.-located registered broker-dealer, (ii) 

[ ] registered as a dealer in a local 

jurisdiction recognized by the 

Commission as comparable, and/or (iii) 

[ ] located in a Basel-compliant 

jurisdiction and subject to such capital 

requirements under its local regime.’’ 195

In the commenters’ view, this type of 

alternative approach would leverage 

certain additional elements of domestic 

and foreign law, avoiding the costs of 

registering foreign affiliates and 

complying with potentially duplicative 

requirements, while achieving similar 

regulatory objectives.196

In offering these alternative 

approaches, commenters attempted to 

encompass all structures that non-U.S.- 

person dealers use to engage in dealing 

activity in the United States with nonU.S. counterparties and address the full 

range of regulatory concerns raised by 

that activity. But instead of a uniform 

set of comprehensive requirements 

using the framework that Congress 

established in Title VII, they urged us to 

develop an alternative approach that 

would cobble together existing foreign 

and domestic regulations in an attempt 

to replicate—and, as we discuss below, 

effectively replace—the statutory 

framework established by Congress by 

using a combination of pre-Dodd Frank 

Act regulatory authority, anti-fraud and 

anti-manipulation authority, antievasion authority, and certain foreign 

requirements. After careful 

consideration of these alternatives, we 

believe that such an approach would 

undermine the policy objectives 

advanced by Title VII that we describe 

above.197

As an initial matter, we believe that 

the approach suggested by commenters 

is inconsistent with the comprehensive, 

uniform statutory framework 

established by Congress for the 

regulation of security-based swap 

dealers in Title VII. The statutory 

definition of ‘‘security-based swap 

dealer’’ and the consequent regulatory 

requirements that apply to such persons 

apply to any person that engages in 

relevant activity above the dealer de 

minimis thresholds. The comprehensive 

scope of this definition and of the 

related requirements differs from the 

broker-dealer framework under the 

Exchange Act. Most significantly, as 

already discussed, the broker-dealer 

framework does not apply to banks 

engaged in certain activities, which may 

include a significant proportion of 

security-based swap dealing activity. 

Title VII, on the other hand, provides 

that both banks and non-banks— 

whether engaged in dealing activity 

with other dealers or with non-dealers— 

are subject to the same comprehensive 

regulatory framework, suggesting that 

the Title VII security-based swap dealer 

framework is designed to establish a 

uniform regulatory regime for all 

persons engaged in security-based swap 

dealing activity at levels above the de 

minimis threshold, regardless of the 

business structure that they use to carry 

out their business. 

Commenters argued that precedent for 

an approach that provides an exception 

for trades intermediated by a registered 

broker-dealer exists in the exemption 

available for foreign broker-dealers 

under Exchange Act rule 15a–6.198

However, this comparison is inapposite. 

First, the rule 15a–6(a)(3) exemption 

that commenters would have us 

follow 199 permits a foreign brokerdealer to effect transactions in the 

United States without being required to 

register only if the intermediating broker 

under rule 15a–6 is itself a registered 

broker-dealer. In other words, rule 15a– 

6(a)(3) exempts the foreign dealer only 

if its U.S. intermediary is subject to the 

same regulatory regime that otherwise 

would apply to the foreign broker-dealer 

absent the exemption. The commenters, 

on the other hand, urged us to permit a 

non-U.S.-person dealer engaged in 

security-based swap dealing activity in 

the United States to substitute broker 

regulation (subject to certain conditions, 

including compliance with certain 

foreign requirements) of the U.S. 

intermediary for comprehensive Title 

VII security-based swap dealer 

regulation of the non-U.S. person 

engaged in security-based swap dealing 

activity. 

Second, an exception of this type 

likely would effectively supplant Title 

VII dealer regulation for a majority of 

dealing activity carried out in the 

United States, replacing it with a less 

effective alternative cobbled together 

from other domestic and foreign 

requirements. As described above, much 

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8620 Federal Register / Vol. 81, No. 33 / Friday, February 19, 2016 / Rules and Regulations 

200As already discussed, the security-based swap 

market is a global market, and firms engaged in 

security-based swap dealing activity can restructure 

their dealing business to ensure that security-based 

swap transactions are not booked in U.S. persons. 

See Section II.B, supra. 

201See IIB Letter at 7. 

202See ISDA Letter at 9–10. 

203See IIB Letter at 8–9. 204 Indeed, we note that any exception from the 

uniform application of the requirement that nonU.S.-person dealers that engage in security-based 

swap dealing activity in the United States include 

the resulting transactions in their dealer de minimis 

threshold calculations is likely to create similar 

competitive disparities and exacerbate market 

fragmentation in the manner described in the 

previous section. See Section IV.B.2, supra. For this 

reason, and the reasons given in note 190, supra, 

we do not agree that compliance by the agent with 

either broker-dealer or security-based swap dealer 

requirements would warrant an exception from 

counting transactions under the U.S. Activity Test. 

Cf. note 185, supra (citing HSBC Letter at 3). 

205See IIB Letter at 11; SIFMA/FSR Letter at 9. 

For example, one commenter explained that a nonU.S. counterparty ‘‘would be surprised by any need 

to provide representations, agree to covenants or fill 

out questionnaires designed to comply with U.S. 

requirements’’ that would only apply if U.S. 

personnel is used in a subsequent transaction, 

particularly if such requirements differ from any 

local requirements that are already applicable. IIB 

Letter at 11. 

206See note 184, supra. 

207See notes 201–203, supra. 

208See proposed Exchange Act Rule 3a71–5; 

Cross-Border Proposing Release, 78 FR 31088. See 

also IIB Letter at 19 (noting that significant 

modifications to existing compliance and risk 

management systems in response to adoption of the 

U.S. Activity Test ‘‘may prove unnecessary’’ if 

foreign security-based swap dealers ‘‘are ultimately 

able to rely on substituted compliance’’). 

Although we did not directly address substituted 

compliance with respect to security-based swap 

dealer requirements in the U.S. Activity Proposing 

Release, we noted in that release that we had 

previously proposed such an approach and 

continued to believe that substituted compliance for 

such requirements would be the appropriate means 

of addressing potential overlap or duplication in 

their application, rather than forgoing regulation 

entirely. See U.S. Activity Proposing Release, 80 FR 

27471 and 27473 n.223. Cf. ISDA Letter at 10 

(expressing concern that the U.S. Activity 

Proposing Release had proposed substituted 

compliance only with respect to Regulation SBSR). 

209See Cross-Border Proposing Release, 78 FR 

31085. Under the proposal, the Commission would 

not permit dealer requirements to be satisfied by 

substituted compliance unless (i) the Commission 

determined that the foreign regime’s requirements 

were comparable to the otherwise applicable 

requirements, after taking into account such factors 

as the Commission determines are appropriate, 

including the scope and objectives of the relevant 

foreign regulatory requirements the effectiveness of 

the supervisory compliance program administered, 

and the enforcement authority exercised by the 

foreign financial regulatory authority in support of 

its oversight; and (ii) the Commission has entered 

into a supervisory and enforcement memorandum 

of understanding or other arrangement with the 

relevant foreign financial regulatory authority or 

authorities. See proposed Exchange Act Rule 3a71– 

5(a)(2)(i) and (ii); Cross-Border Proposing Release, 

78 FR 31086–88. 

of the dealing activity carried out in the 

United States is currently booked in 

non-U.S. persons, and the absence of a 

U.S. activity trigger for de minimis 

threshold calculations would create a 

strong incentive to move booking for all 

transactions with non-U.S. persons— 

including, eventually, potentially all 

dealer-to-dealer transactions—to 

booking entities that are themselves 

non-U.S. persons.200 Doing so would 

permit all of this activity—potentially a 

significant majority of security-based 

swap activity in the United States—to 

be regulated under an alternative to 

Title VII. Thus, whereas the exemption 

under Exchange Act rule 15a–6 permits 

a foreign broker-dealer to effect 

transactions in the United States 

without being required to register if the 

intermediating broker is subject to the 

same requirements that would apply to 

the foreign broker-dealer absent the 

exemption, the commenters’ alternative 

would potentially enable most securitybased swap dealing activity in the 

United States to be regulated under an 

entirely different regime from the 

comprehensive dealer regulatory 

framework established by Congress. 

One commenter argued that 

permitting personnel located in the 

United States to comply with the 

requirements that apply to registered 

broker-dealers would increase efficiency 

because such personnel would be 

subject to a single set of regulatory 

compliance obligations with respect to 

both their underlying securities 

transactions and derivatives 

transactions.201 Another commenter 

argued that our ‘‘generally favorable 

view of substituted compliance’’ 

suggests that we should be willing to 

refrain from adopting these amendments 

on the basis that existing Exchange Act 

and FINRA requirements ‘‘already 

secure the regulatory aims sought to be 

provided by the SBS dealer regime.’’ 202

However, banks engaged in certain 

activities, including U.S. branches of 

foreign banks, are, as noted above, 

excepted from the definition of ‘‘broker’’ 

and would not benefit from the 

efficiencies described by commenters, 

whether they are required to register as 

security-based swap dealers (because 

the exemption is not available to them) 

or required to comply with brokerdealer requirements as a condition of an 

exception, as suggested by one 

commenter.203 In addition, while 

permitting reliance on broker-dealer 

requirements for certain non-U.S.- 

person dealers may provide intra-firm 

efficiencies, it is also likely to create 

unnecessary competitive disparities 

between non-U.S.-person dealers that 

are eligible for the exception, on one 

hand, and U.S. dealers and other nonU.S.-person dealers that are not 

eligible.204 And to the extent that the 

commenters’ concerns relate to the 

difficulties in persuading non-U.S.- 

person counterparties to make 

representations and accept disclosures 

pursuant to business conduct 

requirements as proposed,205 reliance 

on broker-dealer regulation is unlikely 

to eliminate these concerns, as it is 

likely that similar requirements may 

apply under the Exchange Act or under 

FINRA rules, following the termination 

of relevant exemptions.206 For these 

reasons, we do not agree with 

commenters that existing requirements 

in fact secure the same regulatory aims 

as those secured by the Title VII dealer 

regulatory framework.207

Finally, many of the concerns 

expressed by commenters could be 

mitigated by the availability of 

substituted compliance, which, as 

proposed, may permit non-U.S.-person 

dealers to comply with comparable 

foreign requirements as an alternative 

means of complying with certain Title 

VII requirements.208 A person relying on 

substituted compliance would remain 

subject to the applicable Exchange Act 

requirements, but could comply with 

those requirements in an alternative 

fashion.209

In practice, however, we recognize 

that there will be limits to the 

availability of substituted compliance. 

For example, it is possible that 

substituted compliance may be 

permitted with regard to some 

requirements and not others with 

respect to a particular jurisdiction. For 

certain jurisdictions, moreover, 

substituted compliance may not be 

available with respect to any 

requirements depending on our 

assessment of the comparability of the 

relevant foreign requirements, as well as 

the availability of supervisory and 

enforcement arrangements among the 

Commission and relevant foreign 

financial regulatory authorities. 

Although comparability assessments 

will focus on regulatory outcomes rather 

than rule-by-rule comparisons, the 

assessments will require inquiry 

regarding whether foreign regulatory 

requirements adequately reflect the 

interests and protections associated 

with the particular Title VII 

requirement. In some circumstances, 

such a conclusion may be difficult to 

achieve. 

In the event that we are unable to 

determine that an entity may satisfy 

certain Title VII requirements via 

substituted compliance, we recognize 

that such persons may, as a result, be 

subject to requirements that are 

duplicative of particular Title VII 

requirements. While we recognize the 

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210See Exchange Act rule 3a71–3(b)(1)(iii)(C). 

Consistent with our proposal, a person would be 

required to include in its de minimis calculations 

only security-based swaps that, in connection with 

its dealing activity, are arranged, negotiated, or 

executed by personnel located in the United States. 

A non-U.S. person is not required to include in this 

calculation transactions connected with that 

person’s dealing activity solely on the basis that 

they were submitted for clearing in the United 

States, reported to a security-based swap data 

repository in the United States, or because activities 

related to collateral management of the transaction, 

such as the exchange of margin, occurred within the 

United States. See U.S. Activity Proposing Release, 

80 FR 27467 n.166; 27468 n.180; Cross-Border 

Proposing Release, 78 FR 31000. In our view, none 

of these activities, by themselves, indicate that a 

non-U.S. person is likely to raise the types of 

concerns addressed by Title VII security-based 

swap dealer regulation. 

211Non-U.S. persons engaged in security-based 

swap dealing activity may include persons whose 

counterparties have legal recourse against a U.S. 

person arising out of the security-based swap 

transactions of the non-U.S. person or persons that 

are conduit affiliates. Our Cross-Border Adopting 

Release finalized rules providing that a non-U.S. 

person must include in its dealer de minimis 

calculation transactions arising out of its dealing 

activity with counterparties that are U.S. persons, 

or such transactions with non-U.S. person 

counterparties if the non-U.S. person affiliate of the 

non-U.S. person is a conduit affiliate or if its 

counterparty has a right of recourse against a U.S.- 

person affiliate of the non-U.S. person under the 

security-based swap, even if the non-U.S. person is 

not engaging in dealing activity using personnel 

located in the United States to arrange, negotiate, 

or execute the transaction. See Exchange Act rules 

3a71–3(a)(1), (b)(1)(ii), and (b)(1)(iii)(B). 

212Several commenters urged the Commission to 

work with the CFTC to harmonize the 

Commissions’ approaches to cross-border and other 

issues, arguing that no administrative or economic 

rationale exists for different approaches. See Chris 

Barnard Letter at 2 (noting that the U.S. Activity 

Proposing Release differs in its application of 

mandatory clearing and trade execution from the 

CFTC and that, ideally, the SEC and CFTC should 

work together to create one set of rules); ICI Global 

Letter at 3–4 (emphasizing the need for 

coordination among regulators to determine the 

treatment of cross-border transactions); MFA Letter 

at 2–4 (urging that the Commission work with the 

CFTC and the prudential regulators to adopt a 

single approach, particularly with respect to the 

definition of ‘‘U.S. person’’); SIFMA Sequencing 

Letter at 5 (requesting that the Commission 

coordinate with the CFTC on cross-border rules 

generally and on any rules governing U.S. activity 

in particular). One commenter expressed concern 

about differences among cross-border approaches 

proposed by U.S. regulators particularly in light of 

the close relationship between the single-name CDS 

market and the index CDS market, given that many 

market participants are active in both markets. See 

MFA Letter at 3. We recognize the commenters’ 

concerns and continue to consult and coordinate 

with the CFTC and other regulators to minimize 

differences in our Title VII rules, including with 

respect to the issues addressed in this release. 

Another commenter specifically urged that the 

Commission’s proposed interpretation of ‘‘arrange, 

negotiate, and execute’’ be applied consistently to 

the use of these terms in other contexts, including 

the CFTC Staff Advisory and the Volcker Rule. See 

SIFMA/FSR Letter at 2–4. The Commission adopted 

the Volcker Rule together with the Board of 

Governors of the Federal Reserve System, the Office 

of the Comptroller of the Currency, the Federal 

Deposit Insurance Corporation, and the CFTC under 

a provision of the Dodd-Frank Act separate from the 

provisions under which the rules addressed in this 

release are being adopted. See Prohibitions and 

Restrictions on Proprietary Trading and Certain 

Interests in, and Relationships With, Hedge Funds 

and Private Equity Funds, Release No. BHCA–1 

(December 10, 2013), 79 FR 5535 (January 31, 2014) 

(‘‘Volcker Rule’’). 

213See ICI Letter at 1–2, 5; SIFMA/FSR Letter at 

3; IIB Letter at 2. 

214See Cross-Border Proposing Release, 78 FR 

30999. 

215See ICI Global Letter at 1–2, 5 (stating that the 

modified proposal would enable non-U.S. dealers to 

enter into transactions with non-U.S. persons that 

may use a U.S. fund manager without requiring the 

non-U.S. dealer to include the transaction in its de 

minimis calculations). 

216See IIB Letter at 17; SIFMA/FSR Letter at 3 

(stating that ‘‘market-facing focus is appropriate and 

consistent with the expectations of the parties as to 

when U.S. regulations will apply’’). 

217SIFMA/FSR Letter at 2–3 (stating also that the 

commenters ‘‘strongly believe that the Commission 

has taken the correct approach in focusing on 

market-facing activity of sales and trading 

personnel in defining the ‘arrange, negotiate, or 

execute’ nexus that subjects security-based swap 

activity to the Commission’s regulations based on 

location of conduct’’). 

218See Sections V.A and V.B, infra (discussing 

comment letters addressing costs, competition, and 

market fragmentation). 

219See Section IV.B.2, supra. We recognize, as 

two commenters argued, that it is possible that the 

final rule will result in additional registrants and 

Continued 

significance of such a result, in our view 

compliance with the Title VII 

requirements is necessary to advance 

the policy objectives of Title VII. This 

would be undermined by permitting 

non-U.S.-person dealers to comply with 

their Title VII obligations by satisfying 

foreign requirements, unless the 

alternative route provided by 

substituted compliance has been made 

available. 

C. Application of the Dealer De Minimis 

Exception to Non-U.S. Persons Using 

Personnel Located in a U.S. Branch or 

Office to Arrange, Negotiate, or Execute 

Security-Based Swap Transactions 

We are amending Exchange Act rule 

3a71–3(b)(1)(iii) in a manner generally 

consistent with our proposal. The final 

rule requires a non-U.S. person engaged 

in security-based swap dealing activity 

to include in its de minimis calculations 

any transactions connected with its 

security-based swap dealing activity 

that it arranges, negotiates, or executes 

using its personnel located in a U.S. 

branch or office, or using personnel of 

its agent located in a U.S. branch or 

office.210 This approach reflects our 

view that it is reasonable to conclude 

that a non-U.S. person that, in 

connection with its dealing activity, 

engages in market-facing activity using 

personnel located in the United States, 

is performing activities that fall within 

the statutory definition of ‘‘securitybased swap dealer’’ or our further 

definition of that term, as described 

above, at least in part in the United 

States.211

This amendment reflects our further 

consideration of the issues raised by 

non-U.S. persons engaged in this 

activity. We continue to believe that 

requiring non-U.S. persons to include 

such transactions in their de minimis 

threshold calculations will help to 

ensure that all persons that engage in a 

significant level of relevant dealing 

activity, including activity carried out 

through personnel located in a U.S. 

branch or office, are required to register 

as security-based swap dealers and to 

comply with relevant Title VII 

requirements applicable to securitybased swap dealers when the volume of 

that activity exceeds the dealer de 

minimis threshold.212

Most commenters that expressed a 

view on the U.S. Activity Test set forth 

in the U.S. Activity Proposing Release 

supported the changes made from our 

initially proposed approach.213 Under 

that initial approach, market 

participants would have been required 

to determine, in connection with several 

different Title VII rules, whether a 

transaction was a ‘‘transaction 

conducted within the United States,’’ 

and this determination would have 

required an analysis of the location of 

relevant activity performed by either 

counterparty or its agent in connection 

with that transaction.214 These 

commenters supported the narrower 

approach set forth in our U.S. Activity 

Proposing Release, which focused only 

on the location of relevant activity of a 

counterparty acting in a dealing 

capacity in the transaction of such 

counterparty’s agent 215 and limited 

relevant activity to ‘‘market-facing’’ 

activity of that counterparty or the 

counterparty’s agent.216 One commenter 

stated that the modified approach 

created ‘‘a definable standard that will 

bring clarity to the application of 

security-based swap requirements to 

security-based swap dealers, and is 

appropriate and consistent with the 

expectations of the parties as to when 

U.S. security-based swap requirements 

will apply.’’ 217

We have considered commenters’ 

concerns about the potential costs 

associated with the final rule, including 

the systems and monitoring costs, as 

well as the likelihood of market 

fragmentation arising from the full or 

partial exit of some dealing firms from 

the U.S. market.218 As discussed above, 

however, we believe that imposing the 

counting requirements on non-U.S.- 

person dealers engaged in such 

transactions will advance important 

regulatory objectives.219 However, the 

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8622 Federal Register / Vol. 81, No. 33 / Friday, February 19, 2016 / Rules and Regulations 

that this increase in the number of security-based 

swap dealers will impose additional responsibilities 

on the Commission and its staff. See IIB Letter at 

7, 10; HSBC Letter at 2. As discussed above, the 

final rule is intended to subject to registration 

requirements only those firms whose activity in the 

United States suggests that they raise the types of 

concerns addressed by Title VII dealer regulation, 

and we believe that the concern regarding 

Commission resources is not relevant, given that the 

final rule appears reasonably tailored to achieve our 

policy interests. 

220See U.S. Activity Proposing Release, 80 FR 

27468. 

221As noted above, the initially proposed rule 

would have required non-U.S. persons to include in 

their de minimis calculation any ‘‘transaction 

conducted within the United States’’ related to their 

dealing activity. See Cross-Border Proposing 

Release, 78 FR 30999–31000. Under that proposal, 

this term would have included any transaction 

solicited, negotiated, executed, or booked, by either 

party or either party’s agent, within the United 

States. See id. at 30999. 

222See U.S. Activity Proposing Release, 80 FR 

27467–68. 

Consistent with the approach taken to the final 

definition of ‘‘transaction conducted through a 

foreign branch’’ adopted in the Cross-Border 

Adopting Release, the amendment includes 

‘‘arrange’’ instead of ‘‘solicit’’ in recognition of the 

fact that a dealer, by virtue of being commonly 

known in the trade as a dealer, may respond to 

requests by counterparties to enter into dealing 

transactions, in addition to actively seeking out 

such counterparties. See id. at 27467 n.173 (citing 

Cross-Border Adopting Release, 79 FR 47322 n.381; 

15 U.S.C. 78c(a)(71)(A)(iv)). 

223See U.S. Activity Proposing Release, 80 FR 

27468. 

224On the other hand, to the extent that personnel 

located in a U.S. branch or office engage in marketfacing activity normally associated with sales and 

trading, the location of those personnel would be 

relevant, even if the personnel are not formally 

designated as sales persons or traders. 

225Similarly, the final rule does not encompass 

a transaction solely on the basis that a U.S.-based 

attorney is involved in negotiations regarding the 

terms of the transaction. 

226See Cross-Border Proposing Release, 78 FR 

30976. See also Intermediary Definitions Adopting 

Release, 77 FR 30617 n.264. For further discussion 

of this issue, see note 244, infra. 

227For example, if the transaction is booked in a 

U.S. person, that U.S. person is a counterparty to 

the security-based swap and is required to include 

the security-based swap in its own de minimis 

calculation if the transaction is in connection with 

its dealing activity, irrespective of whether the U.S. 

person used its own personnel or an agent’s 

personnel to carry out that dealing activity. See 

Exchange Act rule 3a71–3(b)(1)(i). 

228See Section IV.B.2, supra (describing concerns 

addressed by the final rule, including uniform 

application of Title VII dealer requirements, market 

integrity and fragmentation, and potential channels 

of financial contagion arising from dealing activity 

in the United States). See also U.S. Activity 

Proposing Release, 80 FR 27467 n.173 (stating our 

preliminary view that it is market-facing activity, 

rather than the booking of the transaction, that 

raises the types of concerns underlying our 

proposal of the U.S. Activity Test). 

229See note 162 and accompanying text, supra. 

final rule is intended to avoid 

unnecessary costs and complexity that 

may make it difficult for market 

participants to comply with such 

requirements. As we stated in 

connection with the proposed rule, this 

approach reflects our recognition of 

commenters’ concerns that our initially 

proposed approach to ‘‘transactions 

conducted within the United States’’ 

potentially could have imposed 

significant costs on, and presented 

compliance challenges to, market 

participants.220 The final rule should 

reduce the likelihood that personnel 

who are incidentally within the United 

States will trigger the counting 

requirement, and it will eliminate any 

need on the part of the non-U.S.-person 

dealer either to monitor the location of 

relevant personnel acting on behalf of 

its counterparty or to obtain relevant 

representations regarding the location of 

the counterparty’s or the counterparty’s 

agent’s personnel from their 

counterparty on a transaction-bytransaction basis. 

In the following subsections, we 

describe key elements of the 

amendment to Exchange Act rule 3a71– 

3(b)(1)(iii) and address comments 

received in response to the U.S. Activity 

Proposing Release that are of particular 

relevance with respect to each element. 

1. ‘‘Arranging, Negotiating, or 

Executing’’ a Security-Based Swap 

Transaction 

Exchange Act rule 3a71–3(b)(1)(iii)(C) 

applies only to transactions connected 

with a non-U.S. person’s security-based 

swap dealing activity that its personnel 

(or the personnel of an agent) located in 

the United States arrange, negotiate, or 

execute. The final rule, accordingly, 

would reach a narrower range of activity 

than did the initially proposed rules 

that would have required a non-U.S.- 

person dealer to count any ‘‘transaction 

conducted within the United States’’ 221

that it entered into in connection with 

its dealing activity. 

Consistent with our preliminary 

views set forth in the U.S. Activity 

Proposing Release, ‘‘arrange’’ and 

‘‘negotiate’’ in the final rule indicate 

market-facing activity of sales or trading 

personnel in connection with a 

particular transaction, including 

interactions with counterparties or their 

agents.222 ‘‘Execute’’ refers to the 

market-facing act that, in connection 

with a particular transaction, causes the 

person to become irrevocably bound 

under the security-based swap under 

applicable law.223

As noted in the proposal, this 

limitation to market-facing activity 

should enable market participants to 

identify the location of relevant activity 

in a relatively efficient manner. The 

final rule requires a market participant 

to focus on whether its sales or trading 

personnel (or such personnel of its 

agent) located in the United States 

engage in this market-facing activity in 

connection with a particular 

transaction, not on where these or other 

personnel perform internal functions 

(such as the processing of trades or 

other back-office activities) in 

connection with that transaction. 

Accordingly, the involvement of 

personnel located in a U.S. branch or 

office in a transaction, where such 

personnel do not engage in marketfacing activities with respect to a 

specific transaction (such as a person 

who designs the security-based swap 

but does not communicate with the 

counterparty regarding the contract in 

connection with a specific transaction 

and does not execute trades in the 

contract), and does not direct these 

activities (as described below), does not 

fall within the scope of the final rule.224

Similarly, the final rule also does not 

include the preparation of underlying 

documentation for the transaction, 

including negotiation of a master 

agreement and related documentation, 

or performing ministerial or clerical 

tasks in connection with the transaction 

as opposed to negotiating with the 

counterparty the specific economic 

terms of a particular security-based 

swap transaction.225

The final rule also does not require 

persons engaged in dealing activity to 

consider the location of personnel 

booking the transaction. As we have 

noted elsewhere, the booking entity is 

the counterparty to a transaction and 

bears the ongoing risk of performance 

on the transaction,226 and the entity in 

which the transaction is booked is the 

entity that may be required to include 

a transaction in its de minimis threshold 

calculations.227 However, the 

ministerial task of entering transactions 

on a non-U.S. person’s books once the 

transaction has been executed by 

market-facing personnel does not appear 

to involve the type of market-facing 

activity that reflects an involvement in 

the U.S. financial market that would 

indicate that the non-U.S. person may 

be likely to raise the types of regulatory 

concerns addressed by the Title VII 

dealer requirements, particularly if both 

counterparties to the transaction are 

non-U.S. persons and all relevant 

market-facing activity occurs outside the 

United States.228 On the other hand, a 

non-U.S. person’s market-facing activity 

in the United States suggests the type of 

involvement in the U.S. security-based 

swap market that may raise financial 

contagion, customer protection, market 

integrity, and market transparency 

concerns, for the reasons described in 

detail above,229 particularly when its 

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230We would not view personnel responsible 

solely for coding the algorithm as specifying the 

trading strategy or techniques carried out through 

such trading or execution. 

231See ISDA Letter at 7–8; SIFMA/FSR Letter at 

7 (stating that transactions should not be counted 

towards the de minimis calculations if executed 

anonymously on an exchange and cleared, or 

through algorithmic or program-driven trading); IIB 

Letter at 17–18 (same, noting that doing so could 

deter non-U.S. counterparties from trading on those 

platforms). 

232Cf. ISDA Letter at 5 (acknowledging that ‘‘the 

Commission’s concern that electronic trading does 

not eliminate the possibility of abusive or 

manipulative conduct’’ and requesting further 

clarification of the application of the proposed rule 

to electronic trading). 

233As noted in Section IV.C.1, however, if 

personnel located in a U.S. branch or office are 

arranging, negotiating, or executing a particular 

security-based swap by directing personnel not 

located in a U.S. branch or office to arrange, 

negotiate, or execute a security-based swap 

transaction, we would view that transaction as 

having been arranged, negotiated, or executed by 

the personnel located in the United States. 

234See U.S. Activity Proposing Release, 80 FR 

27469. 

235Based on our staff’s discussions with market 

participants, we continue to believe that persons 

engaged in dealing activity may already identify 

personnel involved in market-facing activity with 

respect to specific transactions in connection with 

regulatory compliance policies and procedures and 

to facilitate compensation. See id. at 27469 n.191. 

In addition, we believe that some market 

participants engaged in both swap dealing and 

security-based swap dealing activity may perform a 

similar analysis consistent with the CFTC Staff 

Advisory, which sets forth the CFTC staff’s view 

that Title VII requirements apply to transactions 

arranged, negotiated, or executed in the United 

States by, or on behalf of, swap dealers. See note 

20, supra. 

236See IIB Letter at 18–19 (arguing that the 

dealing activity of the U.S. personnel in the trade 

is solely based on the hour of the day and thus 

incidental and that maintaining the proposed 

approach would be difficult as it would require 

non-U.S. persons to hire staff to work after-hours in 

the non-U.S. offices). See also HSBC Letter at 2 

(explaining that U.S. sales and trading personnel 

may arrange, negotiate, or execute security-based 

swaps solely due to time-zone differences). 

relevant dealing transactions exceed a 

de minimis threshold. 

Finally, we note that, consistent with 

our proposal, ‘‘arranging,’’ 

‘‘negotiating,’’ and ‘‘executing’’ also 

include directing other personnel to 

arrange, negotiate, or execute a 

particular security-based swap. In other 

words, sales and trading personnel of a 

non-U.S. person who are located in the 

United States cannot avoid application 

of this rule by simply directing other 

personnel to carry out dealing activity, 

and we would view personnel located 

in a U.S. branch or office who direct 

personnel not located in the United 

States to arrange, negotiate, or execute a 

security-based swap transaction as 

themselves arranging, negotiating, or 

executing the transaction. Similarly, 

personnel directing the arranging, 

negotiation, or execution of securitybased swaps include personnel located 

in a U.S. branch or office that specify 

the trading strategy or techniques 

carried out through algorithmic trading 

or automated electronic execution of 

security-based swaps, even if the related 

server is located outside the United 

States.230 Some commenters requested 

that certain requirements not apply to 

transactions that involve U.S. activity if 

parties have no reasonable basis to 

expect that Title VII regulations will 

apply, for example, because the trade 

has been executed on an anonymous 

electronic platform or in algorithmic/

program driven trading, in which a 

counterparty may have personnel in the 

U.S. but there is no human contact 

within the U.S. related to the 

transaction.231 However, we do not 

believe that it is appropriate to create a 

blanket exclusion for these transactions 

from the de minimis counting 

requirement, as neither algorithmic 

trading nor automated electronic 

execution of security-based swaps 

eliminates the concerns addressed by 

Title VII dealer regulation, which exist 

irrespective of the expectations of the 

counterparty to a particular 

transaction.232

2. ‘‘Located in a U.S. Branch or Office’’ 

Exchange Act rule 3a71–3(b)(1)(iii)(C) 

applies only to transactions connected 

with a non-U.S. person’s security-based 

swap dealing activity that are arranged, 

negotiated, or executed by personnel 

located in a U.S. branch or office.233

Thus, on the one hand, we generally 

would view the rule to require a nonU.S.-person dealer to include in its de 

minimis calculations any transactions 

arranged, negotiated, or executed in the 

United States by, for example, personnel 

assigned to, on an ongoing or temporary 

basis, or regularly working in a U.S. 

branch or office. On the other hand, we 

would not view the rule to require a 

non-U.S.-person dealer to include in its 

de minimis calculations transactions 

arranged, negotiated, or executed by 

personnel assigned to a foreign office if 

such personnel are only incidentally in 

the United States. For example, the 

amendment does not require a non-U.S. 

person to include transactions that such 

personnel arrange, negotiate, or execute 

while traveling in the United States to 

attend an educational or industry 

conference. 

As we noted in our U.S. Activity 

Proposing Release, this element of the 

final rule also should mitigate the 

burdens associated with determining 

whether a particular transaction needs 

to be included in a non-U.S. person’s de 

minimis calculation.234 We 

acknowledge that the final rule 

potentially would lead a market 

participant to perform a trade-by-trade 

analysis to determine the location of 

relevant personnel performing marketfacing activity in connection with the 

transaction. However, because the final 

rule encompasses a person’s dealing 

activity only when its personnel or 

personnel of its agent located in a U.S. 

branch or office have arranged, 

negotiated, or executed the transaction, 

a non-U.S. person performing this 

analysis should be able to identify for 

purposes of ongoing compliance the 

specific sales and trading personnel 

whose involvement in market-facing 

activity would require a transaction to 

be included in its de minimis 

calculation.235 Alternatively, such nonU.S. person may establish policies and 

procedures that would facilitate 

compliance with this final amendment 

by requiring transactions connected 

with its dealing activity to be arranged, 

negotiated, and executed by personnel 

located outside the United States. 

Consistent with our proposed 

approach, the final rule applies to 

security-based swap transactions that 

the non-U.S. person, in connection with 

its dealing activity, arranges, negotiates, 

or executes, using personnel located in 

a U.S. branch or office, even in response 

to inquiries from a non-U.S.-person 

counterparty outside business hours in 

the counterparty’s jurisdiction. One 

commenter urged us not to include such 

transactions in the U.S. Activity Test, 

arguing that dealing activity carried out 

in the United States in response to 

inquiries is generally occurring 

pursuant to ‘‘product, credit and market 

risk parameters’’ set by management 

personnel outside the United States and 

that the activity is not ‘‘regular 

business’’ because the location of the 

activity is ‘‘solely incidental to the hour 

of the day when the non-U.S. 

counterparty desires to trade.’’ 236

We do not agree that these 

circumstances, including the fact that 

the dealer’s counterparty made the 

initial contact leading to the transaction, 

are relevant in determining whether a 

transaction should be included in a nonU.S. person’s de minimis threshold 

calculations. The focus of our U.S. 

Activity Test is on the location of the 

personnel used to arrange, negotiate, or 

execute the security-based swap 

transaction, as we continue to believe 

that a non-U.S. person that uses sales or 

trading personnel located in a U.S. 

branch or office to engage in marketfacing activity in connection with its 

dealing activity, at least to the extent 

that its relevant dealing activity exceeds 

the de minimis threshold, is likely to 

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237See Sections IV.B.2 and II.B, supra. 

238Cf. note 222, supra (noting that the 

amendment includes ‘‘arrange’’ instead of ‘‘solicit’’ 

in recognition of the fact that a dealer, by virtue of 

being commonly known in the trade as a dealer, 

may respond to requests by counterparties to enter 

into dealing transactions, in addition to actively 

seeking out such counterparties). 

239We also recognize that Exchange Act section 

3(a)(71)(C) excepts from the security-based swap 

dealer definition a person that enters into securitybased swaps for its own account, but not as a part 

of regular business. However, we have previously 

interpreted ‘‘regular business’’ to focus on activities 

of a person that are usual and normal in the 

person’s course of business and identifiable as a 

security-based swap dealing business. See 

Intermediary Definitions Adopting Release, 77 FR 

30610 (interpreting ‘‘regular business’’ for purposes 

of the ‘‘swap dealer’’ definition). We do not agree 

with the commenter that, because the non-U.S. 

person’s use of the personnel located in a U.S. 

branch or office is to accommodate the non-U.S. 

person counterparty outside its local market hours, 

the use of the trading or sales personnel located in 

a U.S. branch or office is incidental and thus not 

‘‘regular business’’ of the non-U.S. person. Under 

our interpretation of ‘‘regular business,’’ it is 

important to consider whether the non-U.S. 

person’s usual and normal course of business is 

identifiable as a security-based swap dealing 

business, not the frequency of or reasons for using 

personnel located in a U.S. branch or office. 

240For purposes of Exchange Act rule 3a71– 

3(b)(1)(iii)(C), we interpret the term ‘‘personnel’’ in 

a manner consistent with the definition of 

‘‘associated person of a security-based swap dealer’’ 

contained in section 3(a)(70) of the Exchange Act, 

15 U.S.C. 78c(a)(70), regardless of whether such 

non-U.S. person or such non-U.S. person’s agent is 

itself a security-based swap dealer. This definition 

is, in turn, substantially similar to the definition of 

‘‘associated person of a broker or dealer’’ in section 

3(a)(18) of the Exchange Act, 15 U.S.C. 78c(a)(18). 

The definition in section 3(a)(18) is intended to 

encompass a broad range of relationships that can 

be used by firms to engage in and effect securities 

transactions, and is not dependent solely on 

whether a natural person is technically an 

‘‘employee’’ of the entity in question. See 

Alexander C. Dill, Broker-Dealer Regulation Under 

the Securities Exchange Act of 1934: The Case of 

Independent Contracting, 1994 Colum. Bus. L. Rev. 

189, 211–213 (1994) (noting that the Securities Act 

Amendments of 1964, which amended section 

3(a)(18) of the Exchange Act, ‘‘rationalized and 

refined the concept of ‘control’ by firms over their 

sales force by introducing the concept of an 

‘associated person’ of a broker-dealer.’’). 

Accordingly, we expect to consider whether a 

particular entity is able to control or supervise the 

actions of an individual when determining whether 

the individual is considered to be ‘‘personnel’’ of 

a U.S. branch, office, or agent of a security-based 

swap dealer. This is particularly relevant in the 

context of a financial group that engages in a 

security-based swap dealing business, where 

personnel of one affiliate may operate under the 

direction of, or in some cases, report to personnel 

of another affiliate within the group. See also 

Prohibitions and Restrictions on Proprietary 

Trading and Certain Interests in, and Relationships 

with, Hedge Funds and Private Equity Funds, 

BHCA–1 (December 10, 2013), 59 FR 5535, 5591 

(January 31, 2014) (explaining, in the context of 

adopting certain provisions of what is commonly 

referred to as the Volcker Rule, that the relevant 

‘‘trading desk’’ of a banking entity ‘‘may manage a 

financial exposure that includes positions in 

different affiliated legal entities’’ and similarly 

‘‘may include employees working on behalf of 

multiple affiliated legal entities or booking trades in 

multiple affiliated entities’’) (internal citations 

omitted). 

241See Section IV.B, supra. One commenter urged 

the Commission to return to its initially proposed 

approach, which would have looked to the location 

of relevant activity of both counterparties. Letter 

from Better Markets, dated July 13, 2015 (‘‘Better 

Markets Letter’’), at 3, 6. The commenter urged the 

Commission to ‘‘strengthen its proposal by 

requiring that if either non-U.S. counterparty uses 

U.S.-based personnel, then the transaction must be 

included within U.S./Foreign Personnel Activity,’’ 

explaining that the involvement of personnel in the 

United States would be consistent with the 

Supreme Court’s decision in Morrison v. National 

Australia Bank, Ltd., 130 S. Ct. 2869, 2884 (2010) 

(‘‘Morrison’’), and that a counterparty engaged in 

dealing activity can reasonably be required to 

consider the location of its counterparty’s activity, 

as well as its own). Id. at 3. Given the structure of 

the security-based swap market and the 

concentration of security-based swap dealing 

among a small group of firms, we believe the final 

rule is appropriately tailored to capture the dealing 

activity that is likely to raise the types of concerns 

addressed by the Title VII dealer regime. See 

Section IV.B.2. 

242We continue to believe that it is appropriate 

for the final rule to take into account where 

personnel of the non-U.S. person’s agent are 

arranging, negotiating, or executing the transaction 

on behalf of the non-U.S. person, regardless of 

whether the agent is affiliated with the non-U.S. 

person, as security-based swap dealing activity 

carried out through an unaffiliated agent is likely 

to raise the same concerns as such activity carried 

out through an affiliated agent. 

243A non-U.S. person that uses a broker as its 

agent to arrange, negotiate, or execute securitybased swap transactions in connection with that 

non-U.S. person’s dealing activity would be 

required to include those transactions in its own de 

minimis calculations. We recognize that this 

approach may make certain brokers less able to 

compete for the business of non-U.S.-person dealers 

that would otherwise not be arranging, negotiating, 

or executing transactions using personnel located in 

a U.S. branch or office, but given the regulatory 

concerns such transactions may raise, we think it 

is appropriate to require such transactions to be 

included in the non-U.S. person’s de minimis 

threshold calculations. See Sections IV.B.2, IV.B.3, 

and II.B, supra. 

244Consistent with our views expressed in prior 

releases, if a financial group used one entity to 

perform the sales and trading functions of its 

dealing business and another to book the resulting 

transactions, we would ‘‘view the booking entity, 

and not the intermediary that acts as an agent on 

behalf of the booking entity to originate the 

transaction, as the dealing entity.’’ Cross-Border 

Proposing Release, 78 FR 30976. See also 

Intermediary Definitions Adopting Release, 77 FR 

30617 n.264 (‘‘A sales force, however, is not a 

prerequisite to a person being a security-based swap 

dealer. For example, a person that engages in 

raise concerns addressed by Title VII 

dealer regulation.237 As noted above, to 

the extent that personnel assigned to a 

foreign office are themselves only 

incidentally present in the United 

States, we would not view the final rule 

as encompassing any transactions that 

they arrange, negotiate, or execute. But 

we do not believe that either the nature 

of the initial contact made by the foreign 

counterparty or the fact that parameters 

for the market-facing activity in the 

United States are established by 

management personnel outside the 

United States mitigates the concerns 

arising from a non-U.S. person that, in 

connection with its dealing activity, 

uses personnel located in the United 

States to arrange, negotiate, or execute a 

security-based swap.238 Accordingly, we 

would view the final rule as 

encompassing transactions under such 

circumstances to the extent that the 

personnel arranging, negotiating, or 

executing the transaction on behalf of 

the non-U.S. person dealer are located 

in a U.S. branch or office as described 

above.239

3. ‘‘Personnel of Such Non-U.S. Person’’ 

or ‘‘Personnel of an Agent’’ 

Exchange Act rule 3a71–3(b)(1)(iii)(C) 

would apply to transactions connected 

with a non-U.S. person’s security-based 

swap dealing activity that are arranged, 

negotiated, or executed by personnel 

located in a U.S. branch or office, 

whether the non-U.S. person arranges, 

negotiates, or executes the transaction 

directly using its own personnel located 

in a U.S. branch or office, or does so 

using personnel of an agent of such nonU.S. person, located in a U.S. branch or 

office. 

As noted above, a non-U.S. person 

engaged in security-based swap dealing 

activity with other non-U.S. persons, if 

it wishes to avail itself of the expertise 

of sales, trading, and other personnel 

located in a U.S. branch or office, may 

carry out that activity using its own 

personnel located in a U.S. branch or 

office, or using the personnel of its 

agent, located in a U.S. branch or 

office.240 We continue to believe that 

the location of personnel carrying out 

market-facing activity appears 

particularly relevant for identifying nonU.S. persons that may raise the types of 

concerns described above,241 whether 

that dealing activity is carried out by the 

non-U.S. person’s personnel located in 

a U.S. branch or office or on its behalf 

by the personnel of its agent, located in 

a U.S. branch or office.242 Accordingly, 

the final rule requires a non-U.S. person 

to include in its de minimis calculations 

any transactions in connection with its 

security-based swap dealing activity 

that are arranged, negotiated, or 

executed by personnel of such person 

located in a U.S. branch or office, or by 

personnel of its agent located in a U.S. 

branch or office.243 For the reasons 

discussed in Section IV.B.3, above, the 

final rule does not include any 

exception from the de minimis counting 

requirement for security-based swap 

transactions that a non-U.S. person, in 

connection with its dealing activity, 

arranges, negotiates, or executes using 

personnel located in the United 

States.244

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dealing activity can fall within the dealer definition 

even if it uses an affiliated entity to market and/or 

negotiate those security-based swaps connected 

with its dealing activity (e.g., the person is a 

booking entity).’’). 

To the extent that the activities performed by the 

entity performing the sales and trading functions 

involve arranging, negotiating, or executing 

security-based swaps as agent for the booking entity 

in connection with the booking entity’s dealing 

activity, this amendment treats the booking entity’s 

transmission of an order and instructions to the 

agent as part of the dealing activity of the booking 

entity itself. As already noted, a person engaged in 

these activities on behalf of the booking entity may 

itself be subject to regulation as a broker under the 

Exchange Act. See note 187, and accompanying 

discussion, supra. 

245See Cross-Border Adopting Release, 79 FR 

47305–06, nn. 224, 225 (citing commenters 

expressing concern about application of Title VII to 

certain MDBs). 

246See id. at 47305–06. 

247See id. at 47349. 

248See id. at 47312–313; Exchange Act rule 3a71– 

3(a)(4)(iii) (excluding certain international 

organizations from the definition of U.S. person). 

249See Letter from Sullivan and Cromwell, dated 

July 13, 2015 (‘‘Sullivan and Cromwell Letter’’), at 

1–2. 

250The commenter noted that MDBs currently do 

not engage in security-based swap transactions in 

volumes that would require them to register either 

as security-based swap dealers or as major securitybased swap participants. See Sullivan and 

Cromwell Letter at 2, note 5. 

251See Exchange Act rule 3a71–3(b)(1)(iii)(C). 

252Cf. Cross-Border Adopting Release, 79 FR 

47313 (determining that the MDBs’ status as 

international organizations warranted excluding 

them from the definition of ‘‘U.S. person’’). 

253See Exchange Act rule 3a71–5. 

254See Cross-Border Adopting Release, 79 FR 

47325 n.412. 

255See id. at 47325. 

256See U.S. Activity Proposing Release, 80 FR 

27472–73. 

257See ISDA Letter at 3, 8 (stating that 

transactions cleared outside the United States 

should not be subject to Title VII, as they ‘‘are 

subject to regulatory oversight in the clearing 

jurisdiction and are subject to reporting and 

recordkeeping requirements in that jurisdiction’’); 

IIB Letter at 17–18 (explaining that non-U.S. 

counterparties trading on a platform may not know 

that their non-U.S. dealer counterparty is using U.S. 

personnel and therefore would not expect or want 

such trades to be subject to sales practice and 

reporting requirements, so they may be deterred 

from trading on the platforms or the platform may 

prohibit access by U.S. personnel). See also SIFMA/ 

FSR Letter at 7 (stating that transactions should not 

be counted towards the de minimis calculations if 

executed anonymously on an exchange and 

cleared). 

4. Exception for Transactions Involving 

Certain International Organizations 

In response to the Cross-Border 

Proposing Release, certain commenters 

raised concerns about the potential 

application of various Title VII 

provisions to multilateral development 

banks (‘‘MDBs’’), including the 

International Bank for Reconstruction 

and Development (or the World Bank) 

and the International Finance 

Corporation.245 These commenters 

argued that MDBs have absolute 

immunity under federal law and should 

be excluded from regulation under Title 

VII entirely; in addition, they argued 

that MDBs should be excluded from the 

definition of U.S. person.246 In the 

Cross-Border Adopting Release, which 

addressed the cross-border application 

of the ‘‘security-based swap dealer’’ and 

‘‘major security-based swap participant’’ 

definitions, we took the position that 

such issues were outside the scope of 

the release, as the source of any such 

immunities lies outside the Dodd-Frank 

Act and the federal securities laws.247

However, we concluded that their status 

as international organizations warranted 

excluding them from the definition of 

‘‘U.S. person.’’ 248

One commenter on the U.S. Activity 

Proposing Release objected to the view 

set forth in the Cross-Border Adopting 

Release that the scope of these entities’ 

immunities was outside the scope of our 

prior release, arguing that we had left 

unaddressed the effect of that immunity 

on relevant statutory provisions and that 

we should have entirely excluded MDBs 

from any obligation to register as a 

security-based swap dealer or major 

security-based swap participant, as the 

CFTC had done in the jointly adopted 

Intermediaries Definition Adopting 

Release.249

As an initial matter, we reiterate our 

view that issues related to the 

immunities of MDBs or other 

international organizations are outside 

the scope of our Title VII rulemaking, 

given that the source of any such 

immunities lies outside the scope of the 

Dodd-Frank Act and the federal 

securities laws. We recognize that to the 

extent that an MDB or other 

international organization believes that 

its security-based swap activities fall 

within the scope of the immunities 

available to it under U.S. law, the 

organization may decide not to register 

as either a security-based swap dealer or 

a major security-based swap participant, 

even if the volume of its transactions in 

these instruments exceed the de 

minimis threshold.250 However, we are 

not, in adopting rules under Title VII, 

expressing any views as to the 

immunities such entities may possess 

generally under international or U.S. 

law. 

In any event, on further consideration, 

and consistent with the considerations 

underlying the exclusion of certain 

international organizations from the 

definition of U.S. person, the final rule 

excepts the same international 

organizations, as defined in Exchange 

Act rule 3a71–3(a)(4)(iii), from the 

requirement to count a security-based 

swap transaction with another non-U.S. 

person toward their de minimis 

thresholds when they use personnel 

located in the United States to arrange, 

negotiate, or execute the transaction.251

Independent of any immunities that 

may be applicable to these international 

organizations, including MDBs, we do 

not believe that their dealing activity 

with other non-U.S. persons should be 

included in any de minimis calculations 

that such organizations may make.252

D. Availability of the Exception for 

Cleared Anonymous Transactions 

Under Exchange Act rule 3a71–5, a 

non-U.S. person, other than a conduit 

affiliate, is not required to include in its 

de minimis calculation transactions that 

are entered into anonymously on an 

execution facility or national securities 

exchange and are cleared through a 

clearing agency.253 This rule mitigates 

the likelihood that market participants 

will find themselves in a position where 

they are required to determine the 

treatment of the transaction under the 

de minimis exception in circumstances 

where the information necessary to that 

determination (e.g., the U.S.-person 

status of the counterparty) is 

unavailable to them.254 In addition, this 

exception should reduce the likelihood 

that execution facilities outside the 

United States will exclude U.S. market 

participants to prevent a non-U.S. 

market participant from potentially 

being required to register as a securitybased swap dealer based on information 

unavailable to the non-U.S. market 

participant at the time of the 

transaction.255

As we noted in the U.S. Activity 

Proposing Release, neither risk arises 

under the revised approach to 

transactions that are arranged, 

negotiated, or executed by personnel 

located in the United States that was 

proposed in that release.256

Accordingly, we proposed to amend 

rule 3a71–5 by adding new paragraph 

(c) to make this exception unavailable to 

transactions that non-U.S. persons 

would be required to count under 

proposed Exchange Act rule 3a71– 

3(b)(1)(iii)(C). Several commenters have 

urged us to exclude from this modified 

approach transactions that are traded on 

an electronic exchange or platform, 

whether registered or not, or that are 

cleared through a clearing agency 

located outside the United States, as 

such transactions do not create risk in 

the United States and such a rule would 

interfere with access to such 

platforms.257

However, as we have noted already, to 

the extent that personnel located in the 

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258See Section IV.B.2, supra. 

259See Section IV.B.2, supra. 

260The final rule should also help avoid 

competitive disparities that could arise if a non-U.S. 

person could avail itself of this exception even 

when arranging, negotiating, or executing a 

transaction in connection with its dealing activity 

using personnel located in a U.S. branch or office. 

261One commenter stated that these costs ‘‘would 

include the establishment and maintenance of 

compliance systems, controls, policies and 

procedures that track and control the interactions 

of U.S. personnel with non-U.S. counterparties 

across a wide range of communication media, 

including telephone, chat, instant messaging and 

electronic trading platforms.’’ See IIB Letter at 3. 

Another commenter stated that the global nature of 

the security-based swap market means that 

participants will arrange, negotiate, and execute 

security-based swap transactions in multiple 

jurisdictions, meaning that ‘‘elements of a single 

[security-based swap] transaction may take place in 

different parts of the world, which may often make 

it difficult, or even impossible to determine what, 

if any, activity has taken place in the United 

States.’’ See ISDA Letter at 5. See also HSBC Letter 

at 2 (stating that establishing a robust control 

framework for tracking these transactions would 

present challenges). 

262We refer to these costs as ‘‘assessment costs.’’ 

See Intermediary Definitions Adopting Release, 77 

FR 30722. 

263The amendments the Commission is adopting 

do not make substantive or material modifications 

to any collection of information requirements as 

defined by the Paperwork Reduction Act of 1995, 

as amended. 

264Cf. HSBC Letter at 2 (noting that even firms 

that are not required to register as security-based 

swap dealers as a result of the final rule could face 

significant costs and challenges associated with 

performing the de minimis analysis). 

265See U.S. Activity Proposing Release 80 FR 

27490; Cross-Border Adopting Release, 79 FR 

47331. 

266See Section II.A.1, supra. 

267See, e.g., Section II.A.2.c, supra. 

United States are arranging, negotiating, 

or executing a security-based swap 

transaction, the fact that a transaction is 

traded on a platform or exchange does 

not eliminate the regulatory concerns 

that would warrant applying Title VII 

dealer regulation to the extent the nonU.S. person’s dealing activity exceeds 

the de minimis thresholds: Dealing 

activity carried out by personnel located 

in the United States on behalf of a nonU.S. person, whether in over-thecounter markets or on a platform, may 

raise the risk of financial contagion and 

may present counterparty protection, 

market integrity, and transparency 

concerns.258 Moreover, although we 

recognize that clearing a security-based 

swap transaction can be expected to 

reduce operational and counterparty 

credit risks, we do not believe it entirely 

addresses these other regulatory 

concerns. 

Indeed, we note that a significant 

proportion of the interdealer market 

consists of cleared transactions, which 

suggests that the exception urged by 

commenters may lead to a similar result 

as is likely under a broker-dealer 

exception to the counting requirement 

described above, namely a shift of a 

significant portion of the interdealer 

market to foreign clearing agencies, 

taking that part of the market entirely 

outside the Title VII dealer framework 

even though the dealing activity 

continues to occur in the United 

States.259 In addition, we note that 

nothing in Title VII suggests that 

clearing a transaction should except a 

dealer from the requirement to include 

it in the dealer’s de minimis 

calculations. 

Because excepting such transactions 

could leave significant volumes of 

dealing activity carried out by non-U.S. 

persons in the United States outside the 

scope of Title VII dealer regulation and 

undermine the effectiveness of that 

regulatory framework to address the 

risks created by such activity, we are 

adopting Exchange Act rule 3a71–5(c) as 

proposed, with technical edits to clarify 

that the rule’s exclusion applies to the 

exceptions in both Exchange Act rules 

3a71–5(a) and (b). Accordingly, under 

the final rule, to the extent that a nonU.S. person is required to count a 

transaction under Exchange Act rule 

3a71–3(b)(1)(iii)(C), it must count the 

trade toward its de minimis threshold, 

even if the trade is executed 

anonymously on a platform and 

cleared.260

V. Economic Analysis 

We are sensitive to the economic 

consequences and effects, including 

costs and benefits, of our rules. In the 

following economic analysis, we 

identify and consider the assessment 

costs and programmatic costs and 

benefits of the rules we are now 

adopting, as well as the likely effects of 

the rules on efficiency, competition, and 

capital formation. We also discuss the 

potential economic effects of certain 

alternatives to the approach taken by the 

final rules. Our analysis addresses 

several issues that are particularly 

relevant to the security-based swap 

market—including the market’s global 

nature, the concentration of dealing 

activity, and the ease with which 

dealers can relocate their operations to 

different jurisdictions—and has 

informed the policy choices we have 

described throughout this release. 

A. Assessment Costs 

Several commenters argued that the 

proposed rule would impose significant 

costs on market participants, including 

costs related to identifying transactions 

that needed to be counted toward the de 

minimis thresholds.261 We recognize 

that under the final rules non-U.S. 

persons will incur costs to assess 

whether their activities must be counted 

against the dealer de minimis thresholds 

and subjected to Title VII dealer 

requirements.262 The analysis of 

assessment costs in the U.S. Activity 

Proposing Release accounted for these 

costs, and we continue to believe that 

the final rule represents a reasonable 

approach that mitigates the burden to 

market participants while applying the 

Title VII dealer framework to non-U.S. 

persons that are likely to raise the types 

of concerns that framework seeks to 

address.263

As in the U.S. Activity Proposing 

Release, we first estimate the likely 

increase in the number of entities that 

are likely to incur costs associated with 

the de minimis analyses because the 

final rule requires additional 

transactions to be included in these 

calculations.264 We then consider the 

effect on assessment costs associated 

with building, operating, and 

maintaining systems to identify 

security-based swap activity that nonU.S. persons would be required to count 

toward their de minimis thresholds 

under Exchange Act rules 3a71– 

3(b)(1)(iii)(C) and 3a71–5(c). 

1. Costs Associated With Increase in 

Number of Firms Performing Analysis 

We have previously assumed that any 

non-U.S. person that annually enters 

into more than $2 billion, in notional 

value, of security-based swap 

transactions that would count toward its 

de minimis threshold would be likely to 

incur assessment costs under Exchange 

Act rule 3a71–3(b).265 Under Exchange 

Act rules 3a71–3(b)(1)(iii)(C) and 3a71– 

5(c), these non-U.S. persons would 

likely also incur assessment costs in 

connection with their transactions with 

other non-U.S. persons if they use 

personnel located in a U.S. branch or 

office to arrange, negotiate, or execute 

the transactions. 

As we have previously noted, the TIW 

transaction data do not permit us to 

determine whether particular 

transactions were arranged, negotiated, 

or executed by personnel located in the 

United States.266 However, as discussed 

above, it appears that many dealers 

prefer to use personnel located in the 

United States to arrange, negotiate, or 

execute transactions in security-based 

swaps on U.S. reference entities.267

Accordingly, we believe that we can 

estimate the increase in the number of 

firms that would incur assessment costs 

in connection with determining the 

location of relevant activity involving 

single-name CDS, by assuming that all 

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268We note that TIW’s definitions of U.S. and 

non-U.S. entities do not necessarily correspond to 

the definition of U.S. person under Exchange Act 

rule 3a71–3(a)(4). See note 39, supra. 

269Adjustments to these statistics from the 

proposal reflect further analysis of the TIW data. Cf. 

U.S. Activity Proposing Release 80 FR 27491 

(providing an estimate of 15 additional entities that 

would be non-U.S. persons). 

270Although the total gross notional for equity 

swaps is significantly smaller than credit default 

swaps, some number of market participants may 

incur assessment costs as a result of their equity 

swap activity. 

271See Cross-Border Adopting Release, 79 FR 

47331–33. 

272Although firms that would already be 

registered under existing Exchange Act rule 3a71– 

3 may not establish systems to count these 

transactions for purposes of the de minimis 

exception because they would already be registered, 

for purposes of the following analysis, we assume 

that they would also incur these costs. In the CrossBorder Adopting Release, we identified 71 persons 

that would incur systems and analysis costs, but 

based on 2014 data, as noted above, we have 

identified only 57 firms that are likely to incur 

these costs pursuant to current rules. See Section 

II.A.2.e, supra. We continue to believe it is 

reasonable to increase this estimate by a factor of 

two, to account for any potential growth in the 

security-based swap market and to account for the 

fact that we are limited to observing transaction 

records for activity between non-U.S. persons that 

reference U.S. underliers. See U.S. Activity 

Proposing Release, 80 FR 27491. 

273See U.S. Activity Proposing Release, 80 FR 

27467, supra (discussing cost concerns about 

initially proposed approach). 

274See ICI Global Letter at 5. 

275See note 261, supra. 

276Calculated as Internal Cost, 90 hours × $50 per 

hour = $4,500 plus Consulting Costs, 10 hours × 

$200 per hour = $2000, for a total cost of $6,500. 

277Calculated as 134 entities × 10 market centers 

as identified in TIW × $6,500 per location, for a 

total cost of $8,710,000. This estimate assumes that 

each of the 134 persons that we believe are likely 

to incur costs to identify transactions that they are 

required to include in their de minimis thresholds 

under Exchange Act rules 3a71–3(b)(1)(iii)(C) and 

3a71–5(c) perform assessments on a per-transaction 

basis and further assumes that each person has 

personnel located in each market center identified 

in the TIW. See supra Section II.A.2.c. 

transactions by non-U.S. person 268

dealers with other non-U.S. persons on 

U.S. reference entities are arranged, 

negotiated, or executed by personnel 

located in the United States. 

Under these assumptions, we can 

estimate that a total of approximately 10 

additional non-U.S. persons,269 beyond 

those already incorporated into baseline 

estimates, that are likely to exceed the 

$2 billion threshold we have previously 

employed under Exchange Act rule 

3a71–3(b), as amended, and to incur 

assessment costs associated with the de 

minimis exception based on 2014 TIW 

transactions data. We acknowledge, 

however, that this estimate reflects some 

uncertainty: On one hand, it may be 

overinclusive, as it is unlikely that all 

such transactions are arranged, 

negotiated, or executed by personnel 

located in a U.S. branch or office; it may 

also be underinclusive, as our TIW data 

do not include single-name CDS 

transactions between two non-U.S. 

entities written on non-U.S. underliers, 

some of which may be arranged, 

negotiated, or executed by personnel 

located in a U.S. branch or office, or 

transactions on other types of securitybased swaps (including equity swaps) 

whether on U.S. or non-U.S. 

underliers.270

In light of this uncertainty and to 

account for potential growth in the 

security-based swap market, we believe 

that it is reasonable to increase this 

estimate by a factor of two. As a result, 

our estimate for the purposes of analysis 

is that the rules being adopted today 

will increase the number of non-U.S. 

persons likely to incur any assessment 

costs in connection with the de minimis 

exception by 20. In addition to the 

assessment costs directly connected 

with determining where personnel who 

arrange, negotiate, or execute a securitybased swap transaction are located, as 

described more fully below, these 20 

persons would also be required to 

perform the analyses, and incur the 

assessment costs, associated with the 

dealer de minimis rules adopted in the 

Cross-Border Adopting Release.271

2. Costs Associated With Determining 

the Location of Relevant Personnel Who 

Arrange, Negotiate, or Execute a 

Transaction 

In addition, these 20 non-U.S. 

persons, as well as the 114 persons that 

are likely to incur assessment costs in 

connection with the rules adopted in 

the Cross-Border Adopting Release,272

will incur costs to identify transactions 

that they are required to include in their 

de minimis thresholds under Exchange 

Act rules 3a71–3(b)(1)(iii)(C) and 3a71– 

5(c). We note that our final rule should 

mitigate the concerns of some 

commenters regarding the costs 

associated with the use of the defined 

term ‘‘transactions conducted within the 

United States’’ as originally proposed in 

the Cross-Border Proposing Release.273

In particular, by focusing on the 

location of relevant personnel of only 

the dealer (or of its agent), this approach 

should eliminate the need for non-U.S. 

persons that engage in dealing activity 

to assess whether their counterparties 

(or the counterparties’ agents) engage in 

relevant activity in the United States.274

Accordingly, the assessment costs 

arising from the final rule should be 

lower than under an approach that 

required a dealer to consider both the 

location of its own personnel (or the 

personnel of its agents) and of the 

personnel of its counterparties (or their 

agents). 

The costs these persons incur under 

the final rule will, to a significant 

extent, be influenced by the business 

structures employed by non-U.S. 

persons to engage in this dealing 

activity, and it is reasonable to expect 

that non-U.S. persons will generally 

choose a business structure that reflects, 

among other things, a careful 

consideration of their regulatory costs 

for both compliance and assessment. In 

this section, we discuss the approaches 

that these market participants may use 

to determine which transactions must 

be counted towards dealer de minimis 

thresholds under our approach and, to 

the extent possible, estimate the perentity assessment costs they would 

incur. 

First, non-U.S. persons may perform 

assessments on a per-transaction basis. 

We continue to believe that the 

approach reflected in our final rule 

should be less costly to implement than 

the approach that we initially proposed 

in the Cross-Border Proposing Release, 

which looked to whether a transaction 

was conducted, by either counterparty, 

within the United States. At the same 

time, we recognize that performing 

these assessments could involve 

significant costs for persons engaged in 

dealing activity in the United States. 

These costs likely would include onetime costs associated with developing 

computer systems to capture 

information about the location of 

personnel involved with each 

transaction in addition to ongoing costs 

of analyzing these data and modifying 

classification of transaction activity as 

personnel or offices change locations 

over time.275

Based on analogous situations dealing 

with the development and modification 

of information technology (IT) systems 

that track the location of firm inputs, we 

estimate the start-up costs associated 

with developing and modifying these 

systems to track the location of persons 

with dealing activity will be $410,000 

for the average non-U.S. entity. To the 

extent that non-U.S. persons already 

employ such systems, the costs of 

modifying such IT systems may be 

lower than our estimate. In addition to 

the development or modification of IT 

systems, we believe that entities would 

incur the cost of $6,500 per location per 

year on an ongoing basis for training, 

compliance, and verification costs.276

We believe a reasonable estimate of 

these costs in aggregate is $8,710,000.277

Second, non-U.S. firms might instead 

restrict personnel located in a U.S. 

branch or office from arranging, 

negotiating, or executing security-based 

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278See SIFMA/FSR Letter at 2, 6; IIB Letter at 2– 

3; ISDA Letter at 5. 

279See IIB Letter at 2–3. 

280The aggregate cost of this rule will ultimately 

depend on how the affected non-U.S. persons adjust 

their security-based swap activity because of this 

rule. For example, if a non-U.S. person chooses to 

relocate its operations abroad, it will not incur any 

direct assessment costs as a result of this rule, but 

it will incur the costs to relocate its operations. The 

cost of relocation will depend on many factors, 

such as the number of positions being relocated, the 

location of new operations, the costs of operating 

at the new location, and other factors. These factors 

in turn will depend on the relative volumes of 

dealing activity that a firm carries out on different 

underliers and with counterparties in different 

jurisdictions. As a result of these dependencies, we 

cannot reliably quantify the costs of these 

alternative approaches to compliance. However, we 

believe that firms would rely on these approaches 

only if they expect them to result in higher net 

profits than assessments on a per-transaction basis. 

281Calculated as Compliance Manager, 100 hours 

× $283 per hour = $28,300. We use salary figures 

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. 

The costs of policies and procedures are based on 

burden estimates in the recent Nationally 

Recognized Statistical Rating Organizations; Final 

Rule, Exchange Act Release No. 72936 (August 27, 

2014), 79 FR 55078 (September 15, 2015) (‘‘NRSRO 

Adopting Release’’). Specifically, we assume that 

the policies and procedures required to restrict 

communication between personnel located in a U.S. 

branch or office and personnel not located in a U.S. 

branch or office are similar to policies and 

procedures required to eliminate conflicts of 

interest under Rule 17g–5(c)(8). See NRSRO 

Adopting Release, 79 FR 55239, 55249. 

282Calculated as (Senior Accountant, 500 hours × 

$198 per hour) + (Outside Counsel, 5 hours × $400 

per hour) + (Compliance Attorney, 2 hours × $334 

per hour) + (Compliance Manager, 8 hours × $283 

per hour) = $103,932. 

283This estimate is based on previous experience 

with cost estimates for financial statements for a 

large financial institution. An entity’s assessment 

costs may require it to determine the amount of 

profits that it expected to flow from transaction 

activity performed by personnel located in the 

United States and compare it to the flow of profits 

from transaction activity performed by personnel 

not located in a U.S. branch or office. To the extent 

that the preparation of financial statements also 

involves analysis of the flow of profits from an 

entity’s different business lines, we believe that the 

cost of preparing financial statements provide a 

reasonable estimate of assessment costs. However, 

we acknowledge that costs associated with 

assessment and compliance for a given firm will 

depend on the firm’s size and structure. Calculated 

as (Senior Accountant, 250 hours × $198 per hour) 

+ (Compliance Attorney, 4 hours × $334 per hour) 

+ (Compliance Manager, 4 hours × $283 per hour) 

= $51,968. We use salary figures 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. 

swaps in connection with the non-U.S. 

firm’s dealing activity with non-U.S.- 

person counterparties.278 Such 

restrictions on communication and 

staffing for the purposes of avoiding 

certain Title VII requirements would 

reduce the costs of assessing the 

location of personnel involved in 

arranging, negotiating, or executing each 

trade, and may entirely remove the need 

for a system that assesses the location of 

personnel on a trade-by-trade basis. 

However, this reduction in assessment 

costs may be offset by the additional 

costs and inefficiencies of duplicating 

personnel in foreign and U.S. 

locations.279 Accordingly, we believe 

that non-U.S. persons that primarily 

trade with non-U.S. persons on non-U.S. 

reference entities may be most likely to 

undertake this approach. However, 

because our access to TIW transactions 

data is limited to transactions in which 

at least one counterparty is U.S.- 

domiciled or the reference entity or 

security is a U.S. entity or security, we 

cannot at this time estimate the size of 

this set of participants. 

While we do not currently have data 

necessary to precisely estimate these 

costs in total,280 we can estimate the 

costs of establishing policies and 

procedures to restrict communication 

between personnel located in the United 

States employed by non-U.S. persons (or 

their agents) and other personnel 

involved in dealing activity. Based on 

staff experience, we estimate that 

establishing policies would take a nonU.S. person approximately 100 hours 

and would cost approximately $28,300 

for each entity that chooses this 

approach.281 Further, we believe that 

the total costs incurred by entities that 

choose to restrict communication 

between personnel would be 

determined by the number of entities 

that choose such an approach as well as 

the number of additional personnel that 

these entities must hire as a result of 

restricted communication. 

Third, a dealer may choose to count 

all transactions with other non-U.S. 

persons towards its de minimis 

threshold, regardless of whether 

counting them is required, to avoid the 

cost of assessing the locations of 

personnel involved with each 

transaction. This strategy may be 

preferred by a non-U.S. person engaged 

in dealing activity that expects few 

transactions involving other non-U.S. 

persons to be arranged, negotiated, and 

executed by personnel located outside 

the United States, such as a non-U.S. 

person that primarily transacts in 

security-based swaps on U.S. reference 

entities or securities, and generally 

relies on personnel located in the 

United States to perform market-facing 

activities. For these non-U.S. persons, 

the expected benefits of identifying a 

few transactions that do not involve 

dealing activity by personnel from a 

location in the United States, which 

would not be required to be counted 

toward the person’s de minimis 

threshold, might be lower than the costs 

of implementing a system to track the 

locations of personnel on a trade-bytrade basis. 

We believe that the same principles 

apply to non-U.S. persons that rely on 

agents to arrange, negotiate, or execute 

security-based swaps on their behalf. 

We anticipate that non-U.S. persons 

may employ any of the strategies above 

to comply with the final rules through 

the choice of their agents. For example, 

a non-U.S. person may choose agents 

that do not use U.S.-based personnel to 

avoid the assessment and programmatic 

costs of this rule. We also anticipate that 

a non-U.S. person might rely on 

representations from its agents about 

whether transactions conducted on its 

behalf involved relevant dealing activity 

by personnel from a location in the 

United States. This may occur on a 

transaction-by-transaction basis, or, if 

the agent uses personnel located in the 

United States in all or none of its 

transactions, it may choose to make a 

representation about the entirety of the 

agent’s business. 

We believe that all the methods 

described above are likely to involve an 

initial one-time review of security-based 

swap business lines to help each entity 

determine which of the business 

structures outlined above is optimal. 

This review likely will encompass both 

employees of potential registrants as 

well as employees of agents used by 

potential registrants and identify 

whether these personnel are involved in 

arranging, negotiating, or executing 

security-based swaps. The information 

gathered as a result of this review would 

allow a foreign security-based swap 

dealer to assess the revenues it expects 

to flow from transaction activity 

performed by personnel located in a 

U.S. branch or office. This information 

would also help these market 

participants form preliminary estimates 

about the costs associated with various 

alternative structures, including the 

trade-by-trade analysis outlined above. 

This initial review may be followed 

with reassessment at regular intervals or 

subsequent to major changes in the 

market participant’s security-based 

swap business, such as acquisition or 

divestiture of business units. We 

estimate that the per-entity initial costs 

of a review of business lines would be 

approximately $104,000.282 Further, we 

believe that periodic reassessment of 

business lines would cost, on average, 

$52,000 per year, per entity.283

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284See Intermediary Definitions Adopting 

Release, 77 FR 30722. 

285According to commenters, costs include those 

associated with compliance with the various 

requirements that apply to registered security-based 

swap dealers under Title VII, and costs arising from 

relocation of personnel and operations to avoid 

application of Title VII requirements and any 

market fragmentation that results. See, e.g., ISDA 

Letter at 6 (arguing that the proposed approach 

‘‘will result in the unnecessary application of 

onerous and costly U.S. regulatory requirements to 

non-U.S. entities’’); HSBC Letter at 3 (arguing that 

costs of requiring firms to register on the basis of 

U.S. activity would exceed the benefits and cause 

both non-U.S. subsidiaries and the Commission to 

incur significant costs); IIB Letter at 3–4, 6–7 

(arguing that the proposed rules would not only 

result in costs to the market such as market 

fragmentation, decentralized risk management, and 

home country compliance costs, but also significant 

costs to the Commission in overseeing the 

additional registered security-based swap dealers); 

SIFMA Sequencing Letter at 5 (arguing that the 

Commission’s approach should accommodate the 

risk management and operational structures that 

market participants already have in place). See also 

ISDA Letter at 9 (suggesting that by not leveraging 

existing broker-dealer recordkeeping requirements 

to include access to the books and records relating 

to SBS transaction between non-U.S. persons in 

their dealing capacity, the proposal ‘‘only adds 

complexity and cost without offering any 

corresponding benefit’’). 286See IIB Letter at 4 (stating, among other things, 

that non-U.S. persons can opt not to do business 

with U.S. security-based swap dealers or with nonU.S. security-based swap dealers that use personnel 

in the United States, and non-U.S. security-based 

swap dealers may feel compelled to move personnel 

out of the United States, limiting the security-based 

swap dealers’ ability to centralize risk management 

and increase costs and affect pricing to non-U.S. 

persons); ISDA Letter at 6 (urging the Commission 

to complete its cost-benefit analysis, including by 

providing a quantitative account of the benefits that 

would result from adoption of the proposal and 

comparing the costs of regulatory approaches that 

may be less burdensome). 

287See SIFMA/FSR Letter at 6–7; HSBC Letter at 

2 (stating also that firms may be required to register 

multiple foreign affiliates as security-based swap 

dealers to the extent that they rely on personnel of 

affiliates located in the United States to interact 

with the foreign customers of these foreign 

subsidiaries, in part because it may not be 

practicable for counterparties to shift their trading 

relationship to an affiliate of its dealer, given that 

security-based swap transactions may represent 

only a small portion of their overall trading 

relationship with the dealer). 

288See IIB Letter at 2–3; ISDA Letter at 5; SIFMA/ 

FSR Letter at 6. Commenters argued that exit from 

U.S. market centers would potentially interfere with 

efficient pricing and prudent risk management, as 

this depends on centralization of pricing, hedging, 

and other risk-management functions with trading 

personnel, preferably ‘‘in the region of the 

underlying asset.’’ One commenter also argued that 

centralizing these functions in the United States, 

where the traders are located ‘‘also helps promote 

U.S. market liquidity by integrating trading interest 

from non-U.S. counterparties into the U.S. market.’’ 

See IIB Letter at 2. 

289See, e.g., IIB Letter at 4 (stating that ‘‘[n]onU.S. counterparties have shown great reluctance to 

undertake significant documentation changes due 

to the costs and resources necessary to obtain 

familiarity with a complicated body of foreign 

law’’). 

290 In Section V.A, supra, we have identified, as 

a result of this rule, approximately 10 non-U.S. 

entities that would exceed the $2 billion threshold 

we used in 2014 to identify entities that may incur 

assessment costs and thus would be likely to assess 

their transactions to determine whether they are 

required to register as a dealer. Of these 10 entities, 

we believe that none would exceed the $3 billion 

dealer de minimis threshold and thus be required 

to register as a security-based swap dealer. Given 

that we have multiplied our estimates by two to 

take into account portions of the security-based 

swap market we are unable to observe with our 

data, we estimate that 20 additional entities would 

incur assessment costs as a result of relevant 

activity exceeding the $2 billion threshold, and that 

zero additional entities will exceed the $3 billion 

dealer de minimis threshold. 

291Under Exchange Act rules 3a71–2(a) and 

3a71–4, a person engaged in dealing activity must 

aggregate the notional amount of its dealing activity 

that must be counted toward the de minimis 

threshold with that of any person controlling, 

controlled by, or under common control with such 

person, unless that person is registered with the 

Commission as a security-based swap dealer or 

deemed not to be a security-based swap dealer 

pursuant to Exchange Act rule 3a71–2(b). Cf. IIB 

Letter at 3 (stating that the proposed approach to 

the de minimis counting requirement could impose 

prohibitive costs on non-U.S.-person dealers that 

intend to operate under the de minimis threshold). 

B. Programmatic Costs and Benefits 

Programmatic costs and benefits arise 

from applying substantive regulation to 

those transactions and entities that fall 

within the scope of the Title VII 

regulatory regime.284 Commenters 

raised a wide range of concerns about 

costs, both the direct costs of 

compliance with Title VII dealer 

requirements on the part of persons 

required to register and broader costs to 

the market as a whole. With respect to 

the former, commenters generally 

argued that the proposed rules would 

impose significant additional and 

unwarranted costs on firms that are 

required to register as security-based 

swap dealers, given that the proposed 

rules are not likely to generate 

significant benefits.285 Several 

commenters specifically urged the 

Commission to perform ‘‘additional 

cost-benefit analysis’’ that reflects the 

ease with which market participants can 

move their business out of the United 

States.286 Some commenters noted that 

the proposed approach may impose 

disproportionate costs on certain market 

participants that carry out their dealing 

business using separately incorporated 

subsidiaries or affiliates in other 

jurisdictions.287

Several commenters expressed 

concerns that our approach would 

create a strong incentive to move 

dealing business out of the United 

States, and that this exit would have 

negative effects on market structure, risk 

management, and market efficiency.288

Some commenters also suggested that 

foreign counterparties of non-U.S. 

persons engaged in dealing activity may 

be reluctant to devote the resources 

necessary to comply with Title VII rules, 

and may instead opt to exit the U.S. 

security-based-swap market.289

In the following sections, we discuss 

the costs and benefits of requiring a 

non-U.S. person to include in its de 

minimis threshold calculations any 

transaction that it, in connection with 

its dealing activity, arranges, negotiates, 

or executes using personnel located in 

a U.S. branch or office. 

1. Benefits and Costs of the Final Rules 

Because the set of market participants 

that are subject to security-based swap 

dealer regulation under Title VII will 

determine the allocation and flow of 

programmatic costs and benefits arising 

from these Title VII requirements, the 

inclusion of additional transactions that 

must be counted under Exchange Act 

rule 3a71–3(b), as amended, will affect 

the ultimate costs and benefits of our 

transaction-level and entity-level rules. 

At this time, we are unable to precisely 

estimate the number of potential new 

dealers that would be required to 

register because we cannot observe in 

the data the location of entities’ dealing 

activity. However, even if we assume 

that all North American single-name 

CDS security-based swap dealing 

activity takes place in the United States, 

currently available data suggest that no 

additional entities above the baseline 

would be required to register.290

At the same time, we believe it is 

important to acknowledge the potential 

for a change in the number of registrants 

as a result of, among other things, 

security-based swap dealing activity 

located in the United States that is not 

reflected in the data, including equity 

swaps transactions that are not in our 

available data, transactions on non-U.S. 

underliers that non-U.S.-person dealers 

carry out in the United States that are 

not accounted for under the 

assumptions underlying this analysis, 

and the aggregation of the transactions 

of affiliated entities that do not 

themselves exceed the de minimis 

thresholds but must count transactions 

that involve market-facing activity by 

personnel located in a U.S. branch or 

office.291 The notional amounts of these 

additional types of transactions may 

cause some additional non-U.S. entities 

to exceed the de minimis threshold as 

a result of this rule. 

However, it is unclear how market 

participants might react to the final 

rules. Some non-U.S. entities, including 

those that might be required to register 

as a result of this rule because of 

transactions that lie beyond the scope of 

our available data, may instead prefer to 

restructure or relocate to avoid 

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292See note 286, supra. 

293See Section IV.B.2, supra; Section V.B.2, infra. 

294See note 108, supra. 295We do not believe that the exception for 

certain international organizations in the final rule 

will have any effect on the number of securitybased swap dealers, as such entities do not appear 

to engage in dealing activity to any significant 

extent. See Sullivan and Cromwell Letter at 2, note 

5. Similarly, given our current understanding of the 

market, we do not believe it likely that final 

Exchange Act rule 3a71–5(c) will increase the 

number of security-based swap dealers, as any nonU.S. persons engaged in significant dealing activity 

in cleared, anonymous transactions are likely to 

already be required to register on the basis of their 

other dealing activity. 

296See Section IV.B.2, supra. 

297See IIB Letter at 5–7, 10 (arguing that 

registration with the Commission would subject 

certain non-U.S. market participants to various 

requirements despite posing no risk to the U.S. 

financial system; arguing that not adopting the 

proposed approach would permit the Commission 

to avoid expending resources on overseeing nonU.S. persons that may be required to register solely 

on the basis of aggregation with other affiliates); 

ISDA Letter at 6 (arguing that the proposed 

approach ‘‘will result in the unnecessary 

application of onerous and costly U.S. regulatory 

requirements to non-U.S. entities’’); HSBC Letter at 

2–3 (arguing that costs of requiring firms to register 

on the basis of U.S. activity would exceed the 

benefits and cause both non-U.S. subsidiaries and 

the Commission to incur significant costs). 

298Under rule 901(a)(2)(ii), all transactions that 

include a registered security-based swap dealer on 

a transaction side are subject to regulatory reporting 

requirements. 

We note that our conclusion that the adopted 

approach will result in these requirements being 

applied to a larger number of transactions and 

notional volume of transactions requires the 

assumption that the demand for liquidity from 

security-based swap dealers is not very sensitive to 

price. Put another way, so long as market 

participants’ demand for risk sharing opportunities 

provided by security-based swap transactions is 

relatively inelastic, any reduction in transaction 

volume due to the costs of Title VII regulation is 

unlikely to fully offset the increase in the scope of 

security-based swap transactions subject to Title VII 

regulation under the final rules. If, on the other 

hand, demand for liquidity is elastic, then the 

effects of higher costs may dominate any increase 

in the scope of external business conduct and 

regulatory reporting requirements, resulting in these 

requirements being applied to a smaller number 

and lower notional value of transactions. 

299See Section II.B, supra. 

registration as a result of this rule.292

Other non-U.S. entities may otherwise 

alter their behavior in response to these 

amendments, given the potential change 

in costs of conducting dealing activity 

using personnel or their agents located 

in a U.S. branch or office. Although we 

are able to provide some estimates of the 

direct programmatic costs of these 

amendments, the extent to which 

market participants’ activities are 

sensitive to these costs is difficult to 

quantify. 

Notwithstanding these uncertainties, 

we believe the rules being considered 

for adoption today represent an 

important step towards treating 

substantially all dealing activity 

occurring in the United States similarly 

for purposes of determining whether a 

market participant is subject to the Title 

VII security-based swap dealer regime. 

We expect the final rules to yield 

benefits by reducing differences in the 

treatment of similar activity by U.S. 

persons and non-U.S. persons in the 

United States and potential gaps in the 

Title VII regulatory regime for securitybased swap entities. 

Additionally, we expect consistent 

treatment of dealing activity carried out 

within the United States to affect 

competition and market fragmentation. 

As discussed elsewhere in this 

release,293 we believe these 

amendments may mitigate the 

competitive disparities that would 

result from application of the Title VII 

dealer requirements under existing rules 

and that would permit non-U.S. persons 

to carry out significant volumes of 

dealing activity using personnel located 

in the United States without being 

required to register as a security-based 

swap dealer. The competitive disparities 

would create an incentive for, among 

other things, financial groups that carry 

out their security-based swap dealing 

business in a U.S.-person dealer to 

restructure a potentially significant 

proportion of this business to be carried 

out in a non-U.S.-person dealer. 

Even if the non-U.S.-person dealers 

continued using personnel located in a 

U.S. branch or office to arrange, 

negotiate, or execute security-based 

swap transactions, this type of 

restructuring could fragment the market 

into two pools, as the non-U.S.-person 

dealers that engage in dealing activity 

with other non-U.S. persons (whether 

dealers or otherwise) would have a 

strong incentive not to engage in dealing 

activity with U.S.-person counterparties. 

To the extent that the interdealer 

business and other dealing business 

with non-U.S.-person counterparties is 

moved to non-U.S.-person dealers, a 

significant majority of security-based 

swap dealing activity carried out in the 

United States could be inaccessible to 

U.S. persons. These counterparties 

would instead be limited to a much 

smaller pool of liquidity consisting of 

U.S. persons and dealers (whether U.S. 

persons or non-U.S. persons) that are 

willing to face U.S.-person 

counterparties. 

However, under these amendments, 

non-U.S. dealers that carry out a large 

volume of transaction activity using 

personnel located in a U.S. branch or 

office would not be able to avoid 

registration obligations under Title VII 

unless they relocate these personnel to 

locations outside the United States or 

restructure operations to use different 

personnel that are located outside the 

United States. Because these forms of 

restructuring, and the resulting market 

fragmentation, would impose costs on 

non-U.S. dealers associated with 

moving personnel outside the United 

States and/or foregoing the expertise of 

sales, trading, and other personnel 

located in a U.S. branch or office, these 

amendments should reduce the 

likelihood or extent of market 

fragmentation and associated 

distortions.294

Given that the ultimate number of 

non-U.S. entities that are required to 

register as a result of this rule will 

depend on several factors that are 

beyond the scope of our available data 

or are inherently difficult to quantify, 

we believe that it is appropriate for 

purposes of this analysis to assume that 

it is possible that more entities will 

register as SBS dealers.295 We also note 

that we expect a significant benefit of 

this rule to be its role in preventing 

significant volumes of dealing activity 

from being carried out in the United 

States without being subject to Title VII 

dealer requirements.296

If these final rules regarding the de 

minimis exception result in an 

increased number of non-U.S. persons 

that eventually register as security-based 

swap dealers or if they prevent firms 

from carrying on dealing activity in the 

United States without complying with 

Title VII dealer requirements, 

requirements applicable to registered 

dealers under Title VII (including, 

among others, capital requirements, 

recordkeeping requirements, and 

designation of a chief compliance 

officer) would apply to a larger number 

of dealers than without these rules.297

Additionally, an increase in the number 

of registered dealers would also mean 

that business conduct requirements and 

Regulation SBSR would apply to a 

larger number of transactions, as well as 

to a larger notional volume of 

transactions.298

In addition, these final rules may 

mitigate the risk that might flow into 

U.S. financial markets by requiring the 

inclusion in dealer de minimis 

calculations of transactions that, while 

less likely to directly expose U.S. 

persons to counterparty risk, may allow 

financial risk to spill over into U.S. 

markets. As noted above,299 reputational 

risk and liquidity spillovers represent 

two channels by which risks in foreign 

security-based swap markets may 

manifest in U.S. financial markets 

without the involvement of U.S. persons 

as counterparties. By requiring that all 

non-U.S. persons that use personnel 

located in a U.S. branch or office to 

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300See note 287, supra. 301See SIFMA/FSR Letter at 7. We note, however, 

that this is true of any dealer that exceeds the de 

minimis threshold with respect to only one asset 

class in which it carries on a dealing business: In 

the Intermediaries Definitions Adopting Release, 

the Commission and the CFTC stated that the final 

rules reflected the presumption that ‘‘a person who 

meets one of the dealer definitions will be deemed 

to be a dealer with regard to all of its swaps or 

security-based swaps activities’’ absent a limitation 

on this designation in response to application from 

the registrant. See Intermediaries Definition 

Adopting Release, 77 FR 30644–645. 

302See note 289, supra. 303See, e.g., IIB Letter at 2–3. 

304See, e.g., Sections II.B and IV.B.2, supra. 

305See IIB Letter at 2–3; ISDA Letter at 5; SIFMA/ 

FSR Letter at 6. See also HSBC Letter at 2. See 

Section II.B, supra, for a discussion of potential 

effects of the final rules on non-U.S. persons’ 

incentives to use personnel located in U.S. branches 

or offices to arrange, negotiate, or execute securitybased swap transactions in the context of our 

economic considerations in formulating these rules. 

But see Citadel Letter at 12 (arguing that other 

commenters are overstating the possibility that U.S. 

personnel will be relocated outside of the United 

States in reaction to the adopted rules). 

306See Citadel Letter at 12; Section II.A.2.c, 

supra. But see IIB Letter at 2–3 (stating that nonU.S. security-based swap dealers may need to 

relocate front office personnel from the United 

States in response to a U.S. activity test); ISDA 

Letter at 5 (stating that to continue to transact in 

U.S. products dealers will have incentives to move 

market-facing employees outside the United States); 

SIFMA/FSR Letter at 6 (explaining that dealers may 

move experts in U.S.-listed products outside of the 

United States to avoid the SEC’s registration and 

regulatory requirements). 

307See notes 57–59 and accompanying text, 

supra. 

arrange, negotiate, or execute securitybased swaps in connection with their 

dealing activity include such 

transactions in their de minimis 

threshold calculations, the final rules 

should mitigate risk from both channels. 

The final rules should increase the 

likelihood that the Title VII dealer 

framework, including capital and 

margin requirements, applies both to the 

foreign affiliates of U.S. persons and to 

other foreign dealers that engage in 

dealing activity in U.S. security-based 

swap markets. Increasing the likelihood 

that this activity, which may represent 

the overwhelming majority of securitybased swap dealing activity in the 

United States, is carried out by firms 

subject to Title VII capital, margin, and 

other security-based swap dealer 

requirements should mitigate the 

likelihood of the types of firm failures 

that may be likely to give rise to such 

risks. 

We recognize that compliance with 

these requirements will impose direct 

costs on persons that are required to 

register as a result of these amendments, 

and that some firms may be required to 

register multiple entities because of how 

they have chosen to structure their 

business.300 Other firms may be 

required to register as security-based 

swap dealers even though they use 

personnel located in a U.S. branch or 

office in connection with dealing 

activity only for certain asset classes in 

which they carry on a dealing 

business.301 We also understand that 

firms may incur other costs associated 

with maintaining separate sales and 

trading operations, in part because nonU.S.-person counterparties are reluctant 

to trade with dealers that are required to 

register under Title VII,302 or in 

connection with otherwise 

accommodating the preferences of nonU.S.-person counterparties. In some 

cases, these adjustments may reduce the 

efficiency of a non-U.S.-person’s 

operations and increase operational 

risks, depending on the response of a 

particular firm to the final rules.303

At the same time, we continue to 

believe that, notwithstanding these 

costs, the final rules will produce 

significant benefits to the U.S. financial 

markets and participants in those 

markets, in terms of promoting uniform 

application of Title VII dealer 

requirements, reducing competitive 

disparities, mitigating the likelihood or 

extent of market fragmentation, and 

mitigating the risk of spillovers and 

contagion, as we have discussed in 

detail above.304 Given these benefits, 

particularly in light of the magnitude of 

the potential competitive disparities 

that a more consistent application of 

Title VII dealer regulation may be 

expected to mitigate, we believe that the 

approach reflected in the final rules is 

appropriate even in light of the potential 

costs described by commenters. 

2. Effects of Rule Amendments on 

Efficiency, Competition, and Capital 

Formation 

The final rules are likely to affect 

efficiency, competition and capital 

formation in the security-based swap 

market through their effect on the scope 

of participants subject to dealer 

requirements under Title VII. In 

particular, the amendments may 

increase the likelihood that certain nonU.S. dealers would exceed de minimis 

levels of dealing activity and be 

required to register with the 

Commission. At the same time, they 

may make it more difficult to continue 

engaging in dealing activity in U.S. 

market centers while avoiding Title VII 

dealer requirements. 

Accordingly, the final rules and 

amendments will affect the securitybased swap market in a number of ways. 

A number of the potential effects that 

we discuss below are related to price 

efficiency, liquidity, and risk sharing. 

These effects are difficult to quantify for 

a number of reasons. First, in many 

cases the effects are contingent upon 

strategic responses of market 

participants. For instance, several 

commenters have noted that non-U.S. 

persons may choose to relocate 

personnel, which may make it more 

difficult for U.S. counterparties to 

access liquidity in security-based 

swaps.305 The magnitude of these effects 

on liquidity and on risk sharing depend 

upon a number of factors that we cannot 

estimate, including the likelihood of 

relocation, the availability of substitute 

liquidity suppliers, and the availability 

of substitute hedging assets. Therefore, 

much of the discussion below is 

qualitative in nature, although we try to 

describe, where possible, the direction 

of these effects. 

Moreover, there are many cases in 

which a rule could have two opposing 

effects, making it difficult to estimate a 

net impact on efficiency, competition, 

or capital formation. For example, while 

non-U.S. person dealers may have an 

incentive to relocate their operations 

outside of the United States to avoid the 

potential costs of dealer registration and 

requirements as a result of these rules, 

we assume that dealers would prefer to 

relocate their operations only if the 

benefits to the dealer of avoiding Title 

VII dealer registration and requirements 

exceed the cost of relocation.306 By 

defining the scope of transactions that 

must be counted toward a non-U.S. 

person’s de minimis threshold, this final 

approach not only affects the set of 

entities that would be subject to dealer 

registration and regulatory 

requirements, but also affects the 

extent—and cost—of relocation 

necessary to avoid dealer registration. 

The magnitude of these two opposing 

effects will depend on factors such as 

the sensitivity of traders to information 

about order flow, the impact of public 

dissemination of transaction 

information on the execution costs of 

large orders, and the ease with which 

non-U.S. persons can find substitutes 

that avoid contact with personnel 

located in a U.S. branch or office.307

Each of these factors is difficult to 

quantify individually, which makes the 

net impact on efficiency difficult to 

quantify. 

Notwithstanding this uncertainty, the 

amendments related to the treatment of 

transactions arranged, negotiated, or 

executed by personnel located in a U.S. 

branch or office for the purposes of de 

minimis calculations likely broaden the 

scope of security-based swap 

transactions and entities to which the 

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308See Cross-Border Adopting Release, 79 FR 

47361. 

309See note 102, supra. 

310See Section IV.B.2, supra. In particular, these 

final rules potentially reduce the risk of financial 

contagion and fraudulent or manipulative conduct 

by applying security-based swap dealer regulation 

to the appropriate set of entities whose activities 

raise these concerns. See id. 

311See Cross-Border Adopting Release, 79 FR 

47362. 

312We also note that, under the final rules, nonU.S. persons may be willing to pay higher prices for 

higher quality services provided by non-U.S.-person 

counterparties that use personnel or agents located 

in the United States because the ability of these 

counterparties to meet the standards set by Title VII 

may be a credible signal of high quality. See CrossBorder Adopting Release, 79 FR 47362 n.762. 

313See id. at 47364. 

314See IIB Letter at 4. 

315See id. 

316See id. One commenter argued that the 

Commission’s proposed approach likely would 

impose a particularly significant burden on firms 

that carry out their business, and book their 

security-based swap transactions, through local 

affiliates. See HSBC Letter. This commenter argued 

that this would create a ‘‘severe and disparate’’ 

impact on such firms, even though they have 

organized their business using this structure ‘‘for 

bona fide commercial reasons.’’ Id. at 3. 

317See ICI Global Letter at 2, 5. The commenter 

stated that ‘‘the Commission’s modified approach 

would no longer incentivize non-U.S. dealers to 

avoid engaging in swaps transactions with a nonU.S. regulated fund with a U.S. manager to stay 

under the [de minimis] threshold’’. Id. at 2. 

318See note 289, supra. 

319See section II.B, supra. See also IIB Letter at 

2–3; ISDA Letter at 5; SIFMA/FSR Letter at 6. 

based swap dealers applies. As a result, 

the amendments may amplify the effects 

on efficiency, competition, and capital 

formation of rules already adopted as 

well as of future substantive 

rulemakings that place responsibilities 

on registered security-based swap 

dealers to carry out entity- or 

transaction-level requirements 

applicable to security-based swap 

dealers under Title VII.308

Our amendments reflect consideration 

of the potentially inefficient 

restructuring and reduced access to the 

security-based swap markets by U.S. 

persons on the one hand 309 and, on the 

other, advancing the objectives of Title 

VII as discussed in detail above.310

Requiring these transactions to be 

included in their de minimis 

calculations may cause these non-U.S. 

dealers to incur registration costs (or 

prevent them from avoiding these costs 

while continuing to engage in dealing 

activity in the United States) and costs 

arising from dealer requirements under 

the Title VII regulatory regime, such as 

certain business conduct requirements, 

as well as under other Title VII 

requirements, such as Regulation SBSR. 

These costs may represent barriers to 

entry for non-U.S. persons that 

contemplate engaging in dealing activity 

using their own personnel or personnel 

of their agents located in a U.S. branch 

or office or may provide incentives for 

non-U.S. persons that currently engage 

in relevant activity using personnel or 

personnel of their agents located in a 

U.S. branch or office to restructure their 

business and move operations abroad or 

use agents with personnel outside of the 

United States.311 The barriers to entry 

and incentives to exit the market may 

reduce the number of security-based 

swap dealers willing to trade with U.S. 

person counterparties, which may 

impede the incorporation of new 

information into prices. 

The application of this approach to 

agents acting on behalf of non-U.S. 

persons may have similar effects on 

efficiency, competition, and capital 

formation. For example, the regulatory 

costs stemming from dealer registration 

may provide direct incentives for nonU.S. persons to avoid using personnel of 

agents located in a U.S. branch or office 

(or agents with such personnel) to 

arrange, negotiate, or execute securitybased swaps on their behalf. By 

reducing the ability of these agents to 

compete for business from non-U.S. 

persons, the final rules may reduce 

entry by potential agents because of this 

competitive disadvantage, or cause 

existing agents to relocate or restructure 

their business to minimize contact with 

the United States.312 In addition, to the 

extent that using agents with personnel 

located in a U.S. branch or office might 

result in substantial regulatory costs to 

non-U.S.-person dealers, such non-U.S.- 

person dealers might prefer and 

primarily use agents located outside the 

United States, while U.S. dealers might 

continue to use agents located in the 

United States. This incentive to split 

dealer and agent relationships on the 

basis of the location of personnel, as 

with the potential relocation of 

personnel discussed above, might also 

adversely affect the efficiency of risk 

sharing by security-based swap market 

participants. 

Reduced market entry or restructuring 

by non-U.S. persons and their agents, 

and efforts by non-U.S. persons to 

choose agents, solely for the purposes of 

avoiding Title VII regulation in response 

to our final rules, may be inefficient, 

may raise costs to market participants, 

and may reduce the level of 

participation by personnel of non-U.S. 

persons located in the United States, or 

personnel of their agents located in the 

United States.313

We also believe that the amendments 

will affect competition among securitybased swap dealers. Several commenters 

noted this possibility. One commenter 

argued that the competitive issues 

arising from the Commission’s proposal 

were very complex and did not depend 

solely on the scope of application of 

Title VII regulatory requirements.314 For 

example, many, if not all, foreign 

security-based swap dealers are likely to 

be subject to regulatory requirements in 

their home jurisdiction and may, 

therefore, already be subject to a 

competitive disparity with respect to 

U.S. firms, entirely independent of 

whether they are also required to 

register as security-based swap 

dealers.315 This commenter also argued 

that the proposal would generate 

competitive disparities between U.S. 

and non-U.S. personnel of foreign 

security-based swap dealers.316 Another 

commenter supported the re-proposed 

approach over the original proposal, 

arguing that it would prevent foreign 

funds that have a U.S. asset manager 

from being put at a competitive 

disadvantage compared to foreign funds 

with a foreign asset manager and would 

therefore avoid driving business 

overseas (as the commenter believed 

that the original proposal would have 

done).317

As noted in Section II.B, in the 

absence of these amendments, a U.S. 

person engaged in dealing activity and 

facing a non-U.S.-person counterparty 

or its agent would face different 

regulatory treatment under Title VII 

from a non-U.S. person engaged in the 

same activity with the same 

counterparty or its agent, even if both 

are arranging, negotiating, or executing 

the security-based swap using personnel 

located in a U.S. branch or office. As a 

result, and as some commenters argue, 

current rules may introduce different 

costs for U.S. security-based swap 

dealers and foreign security-based swap 

dealers, as well as their respective 

agents, that seek to supply liquidity to 

non-U.S. persons as a result of Title VII 

regulation. Under the current rules, nonU.S. persons seeking or supplying 

liquidity may also be reluctant to 

transact with a U.S. person because of 

the additional expected costs of dealer 

regulation and of future substantive 

regulations under Title VII that rest on 

the U.S.-person status of 

counterparties.318

These differences could introduce 

competitive disparities between U.S. 

persons and non-U.S. persons or their 

respective agents even if both, in 

connection with their dealing activity, 

use personnel located in the United 

States.319 As a result, to the extent that 

dealers may have the flexibility to 

restructure their operations in response 

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320As noted in Section II.A.3, supra, analysis of 

TIW data shows that 79.5 percent of North 

American corporate single-name CDS transactions 

in 2014 involved either two ISDA-recognized 

dealers or an ISDA-recognized dealer and a nonU.S.-person non-dealer. We believe that 

restructuring as a response to competitive 

disparities stemming from Title VII regulation is 

more likely to occur within this subset of the 

market because these dealers currently operate from 

locations throughout the world and enjoy a volume 

of business that is more likely to make such 

restructuring profitable. 

321See Cross-Border Adopting Release, 79 FR 

39152; Cross-Border Proposing Release, 78 FR 

31127. 

322See Section II.A.4, supra. 

323See Section IV.B.3, supra. 

324See note 231, supra. 

325See Cross-Border Adopting Release, 79 FR 

47363. 

326See note 102, supra (citing comment letters 

asserting that the final rules may result in 

inefficient restructuring of business generally). 

327See IIB Letter at 4 (arguing that avoidance of 

U.S. personnel by non-U.S. counterparties would 

likely reduce the transparency benefits of the 

proposed approach). 

to competitive disparities in regulation, 

a significant portion of the securitybased swap market may exit from the 

Title VII regime, and a significant 

portion of the market may be 

susceptible to fragmentation as a 

result.320 We believe that a significant 

portion of the costs of such a 

fragmentation would be borne by U.S.- 

person counterparties through higher 

spreads and by U.S. security-based swap 

dealers through the loss of non-U.S. 

person customers. The amendments 

may mitigate these competitive frictions 

because non-U.S. persons would be 

required to count transactions arranged, 

negotiated, or executed by personnel 

located in a U.S. branch or office 

towards their de minimis thresholds in 

a way that is identical to their U.S.- 

person competitors.321

At the same time, we acknowledge 

that this account of competitive impacts 

is complicated by the fact that many 

non-U.S. persons are likely to be subject 

to foreign regulatory frameworks that 

may, in certain respects, be similar to 

the Title VII dealer requirements.322 To 

the extent that these requirements 

achieve comparable regulatory 

outcomes, we note that we have 

proposed rules for a substituted 

compliance mechanism, which should 

mitigate this source of competitive 

disparity to the extent that we make 

substituted compliance determinations 

and the other prerequisites to 

substituted compliance have been 

satisfied. At the same time, we 

recognize that there will be limits to the 

availability of substituted compliance, 

including the possibility that 

substituted compliance may be 

permitted with regard to some 

requirements and not others, or that, in 

certain circumstances, substituted 

compliance may not be permitted with 

respect to any requirements with regard 

to a particular jurisdiction, depending 

on our assessment of the comparability 

of the relevant foreign requirements and 

the availability of supervisory and 

enforcement arrangements among the 

Commission and relevant foreign 

financial regulatory authorities. As we 

have noted above, however, we do not 

believe it would be appropriate to 

permit foreign security-based swap 

dealers to satisfy their obligations under 

Title VII by complying with foreign 

requirements when the prerequisites to 

substituted compliance have not been 

satisfied.323

The amendment to rule 3a71–5 

provides that its exception for cleared, 

anonymous transactions does not apply 

to non-U.S. persons that arrange, 

negotiate or execute transactions using 

personnel located in a U.S. branch or 

office or using agents with personnel 

located in a U.S. branch or office. 

Although non-U.S. persons engaged in 

dealing activity in the United States 

may also, as some commenters have 

suggested, find it more difficult to 

access foreign trading platforms,324 this 

amendment may also reduce the 

competitive frictions that would exist if 

the final rules retained the exception for 

such non-U.S. person dealers. Such an 

exception would provide such non-U.S.- 

person dealers a potential competitive 

advantage relative to U.S. persons 

through lower regulatory compliance 

and assessment costs, as the non-U.S. 

persons would be able to avoid 

including these transactions in their de 

minimis calculations, while U.S. 

persons would be required to count all 

such transactions towards their de 

minimis thresholds. 

However, we also note that, to the 

extent that non-U.S. persons otherwise 

would have relied upon this exception 

to engage in cleared, anonymous 

transactions using personnel located in 

a U.S. branch or office, our final 

approach may impair efficiency and 

capital formation by reducing liquidity 

in anonymous markets, increasing 

transaction costs, and reducing 

opportunities for risk-sharing among 

security-based swap market participants 

as non-U.S. persons reduce their 

security-based swap activity or switch 

to alternative methods to hedge risk.325

As some commenters have argued,326

the final rule may result in inefficient 

restructuring to move the arrangement, 

negotiation, and execution of cleared, 

anonymous transactions abroad, in 

order to avoid activities that would 

require counting towards de minimis 

thresholds. This shift in the market 

could reduce the expected 

programmatic benefits described 

above.327 It also may have adverse 

consequences for the availability of 

liquidity and the amount of transaction 

costs for U.S. persons seeking to hedge 

risk using security-based swaps. If nonU.S. persons relocate their dealing 

activity abroad in ways that make it 

more difficult for U.S. persons to find 

liquidity in the United States, those U.S. 

persons that might otherwise use 

security-based swaps to hedge financial 

and commercial risks may reduce their 

hedging activity and assume an 

inefficient amount of risk, or engage in 

precautionary savings by accumulating 

capital to mitigate the effects of market 

risks, which would inhibit capital 

formation. To the extent that non-U.S. 

persons use personnel located in a U.S. 

branch or office to engage in dealing 

activity only in particular categories of 

security-based swaps, such as those 

involving U.S. reference entities, we 

believe that the potential consequences 

of relocation on liquidity and risk 

sharing would be most concentrated in 

those categories. 

Finally, we note that relocation of 

dealing activity by non-U.S. persons in 

response to today’s amendments may 

produce the same type of market 

fragmentation we seek to avoid under 

existing rules. However, we expect 

fewer non-U.S. entities may exit U.S. 

markets under the amendments than in 

their absence. As noted above, in the 

absence of these amendments, non-U.S. 

entities that wished to avoid Title VII 

regulation would incur potentially 

lower costs, as they would not have to 

relocate their personnel and would only 

need to change the booking entity for 

their U.S.-facing business above the de 

minimis thresholds. This type of 

restructuring would likely lead to 

market fragmentation, as described 

above, given that non-U.S.-person 

dealers would have a strong incentive 

not to engage in dealing activity with 

U.S.-person counterparties, even if they 

continued to use personnel located in a 

U.S. branch or office to arrange, 

negotiate, or execute their transactions. 

On the other hand, the amendments 

being adopted today likely will increase 

the costs of the types of restructuring 

that would lead to market 

fragmentation. As noted above, in 

addition to the costs of relocating 

personnel who arrange, negotiate, or 

execute security-based swap 

transactions, non-U.S. persons who 

choose to relocate dealing activity as a 

result of the amendments would forgo 

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8634 Federal Register / Vol. 81, No. 33 / Friday, February 19, 2016 / Rules and Regulations 

328Cf. ISDA Letter at 6 (urging the Commission 

to complete a cost-benefit analysis of the proposed 

approach that considers the benefits and costs that 

would apply to non-U.S. persons, taking into 

account alternative approaches that would achieve 

the goals preventing fraud and manipulation). 

329See ICI Global Letter at 1–2, 5–6 (stating that 

the modified proposal would enable non-U.S. 

dealers to enter into transactions with non-U.S. 

persons that may use a U.S. fund manager without 

requiring the non-U.S. dealer to include the 

transaction in its de minimis calculations). 

330See IIB Letter at 17; SIFMA/FSR Letter at 3. 

331SIFMA/FSR Letter at 2–3 (stating also that the 

commenters ‘‘strongly believe that the Commission 

has taken the correct approach in focusing on 

market-facing activity of sales and trading 

personnel in defining the ‘arrange, negotiate, or 

execute’ nexus that subjects security-based swap 

activity to the Commission’s regulations based on 

location of conduct’’). 

332See Better Markets Letter at 3, 6 (urging that 

the Commission ‘‘strengthen its proposal by 

requiring that if either non-U.S. counterparty uses 

U.S.-based personnel, then the transaction must be 

included within U.S./Foreign Personnel Activity,’’ 

explaining that the involvement of personnel in the 

United States would be consistent with Morrison 

and that a counterparty engaged in dealing activity 

can reasonably be required to consider the location 

of its counterparty’s activity, as well as its own 

(emphasis in original)). 

333See U.S. Activity Proposing Release, 80 FR 

27461 (discussing commenters’ concerns related to 

costs of the initially proposed approach). 

334See IIB Letter at 7; HSBC Letter at 3; SIFMA/ 

FSR Letter at 7–8. 

335See Section IV.B.3, supra. 

336Quantifying the programmatic and assessment 

costs of this alternative is challenging given that we 

cannot observe the propensity of non-U.S. persons 

to use the limited exception. 

337See SIFMA/FSR Letter at 5; IIB Letter at 5. 

the benefits of access to local expertise 

in security-based swaps based on U.S. 

reference entities. As a result, we 

believe that the likelihood or extent of 

market fragmentation should be lower 

under the amendments being adopted 

today. 

C. Alternatives Considered 

In developing these amendments we 

considered a number of alternative 

approaches.328 This section outlines 

these alternatives and discusses the 

potential economic effects of each. 

1. Retention of the Definition of 

‘‘Transaction Conducted Within the 

United States’’ 

In the Cross-Border Proposing 

Release, we originally proposed the 

definition ‘‘transaction conducted 

within the United States’’ and used it to 

identify (i) transactions that should be 

included in an entity’s de minimis 

threshold calculations, and (ii) 

transactions that, subject to certain 

exceptions, would be subject to business 

conduct, clearing, trade execution, 

regulatory reporting, and public 

dissemination requirements under Title 

VII. The original objective of the 

initially proposed definition was 

identical to this rule: To capture 

relevant dealing activity within the 

United States in order to mitigate 

competitive frictions and prevent a nonU.S. person from shifting its securitybased swap dealing activity to a nonU.S. person and continuing to carry out 

this dealing activity in the United States 

while avoiding application of the Title 

VII requirements. That initial approach 

would have looked to whether dealing 

activity involved a ‘‘transaction 

conducted within the United States,’’ 

which, as defined in that proposal, 

turned on the location of personnel on 

both sides of the transaction. 

Most commenters supported the 

narrower approach set forth in our U.S. 

Activity Proposing Release, which 

focused only on the location of relevant 

activity of a counterparty acting in a 

dealing capacity in the transaction 329

and the limitation of relevant activity to 

‘‘market-facing’’ activity of that 

counterparty.330 One commenter stated 

that the modified approach created ‘‘a 

definable standard that will bring clarity 

to the application of security-based 

swap requirements to security-based 

swap dealers, and is appropriate and 

consistent with the expectations of 

parties as to when U.S. security-based 

swap requirements will apply.’’ 331

Although one commenter argued that a 

non-U.S. person should be required to 

include a transaction with another nonU.S. person in its dealer de minimis 

threshold calculations if either 

counterparty is engaged in relevant 

activity in the United States,332 we have 

determined to adopt the approach 

proposed in our U.S. Activity Proposing 

Release in part because we agree with 

other commenters that the initially 

proposed approach likely would have 

increased assessment costs significantly 

without materially enhancing the 

benefits of our Title VII dealer 

framework.333 Under the rule as initially 

proposed, gathering the information 

regarding the location of the personnel 

of the counterparty (or its agent), 

communicating it to relevant 

counterparties, and keeping records of 

this information on a per-transaction 

basis could be costly. We believe that 

our approach, which focuses only on 

the location of the personnel of the 

dealer or its agent, achieves similar 

programmatic benefits while likely 

resulting in lower assessment costs. 

2. Limited Exception From Title VII 

Requirements for Transactions 

Arranged, Negotiated, and Executed by 

Personnel Subject to Existing Domestic 

or Foreign Regulatory Requirements 

In response to suggestions from 

several commenters,334 we reconsidered 

providing an exception from the 

requirement to include a transaction in 

a person’s de minimis threshold 

calculations if it is arranged, negotiated, 

or executed in the United States solely 

using personnel of a registered brokerdealer acting in their capacity as 

associated persons of that broker-dealer, 

of a registered security-based swap 

dealer, or of a U.S. branch of a non-U.S. 

person, pursuant to certain conditions. 

Such an exception could reduce 

programmatic and assessment costs 

associated with engaging in customerfacing activity in connection with 

dealing activity in security-based swaps 

in the United States, which may 

mitigate incentives for inefficient 

relocation by financial groups that use 

a non-U.S. dealer to carry out their 

dealing activity in the United States. 

However, financial groups that use a 

U.S. dealer may respond to the 

incentives created by this exception by 

restructuring their security-based swap 

dealing business so that it is carried out 

by a non-U.S. person that relies on a 

registered broker-dealer, a registered 

security-based swap dealer, or a U.S. 

branch, that meets the conditions of the 

exception. 

However, as described in more detail 

above,335 such an exception could 

significantly reduce the expected 

benefits of our Title VII dealer 

framework: It could create potentially 

significant compliance gaps in the Title 

VII framework, impeding our effective 

enforcement of Title VII and other 

federal securities laws, by permitting 

non-U.S. persons to continue to carry 

out significant dealing activity— 

including dealing activity accounting 

for most or all of the interdealer market 

in security-based swaps on U.S. 

underliers—in the United States but 

outside the scope of Title VII dealer 

requirements.336

3. Non-Inclusion of Security-Based 

Swap Transactions Involving Dealing 

Activity in the United States in the De 

Minimis Threshold Calculations 

Another alternative to the final rules 

would be not to require any transactions 

other than those required in Exchange 

Act rule 3a71–3 as adopted in June 2014 

to be counted toward a person’s dealer 

de minimis threshold.337

As with the alternative just discussed, 

this alternative could reduce 

programmatic and assessment costs 

associated with engaging in customerfacing activity in connection with 

dealing activity in security-based swaps 

in the United States, which may 

mitigate any incentives for inefficient 

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338See Section IV.B.2, supra. 

339For additional discussion of the likely effects 

of this alternative, see the discussion in Sections 

IV.B.2 and IV.B.3, supra. 

340See ISDA Letter at 7–8; SIFMA/FSR Letter at 

7 (stating that transactions should not be counted 

towards the de minimis calculations if executed 

anonymously on an exchange and cleared). See also 

ISDA Letter at 5 (stating that the Commission 

correctly noted that electronic execution ‘‘does not 

eliminate the possibility of abusive or manipulative 

conduct,’’ but expressing concern that the proposed 

rules did not provide sufficient guidance regarding 

application of this test to electronic trading). 

341See U.S. Activity Proposing Release, 80 FR 

27472; Cross-Border Adopting Release 79 FR 47325. 

342See ISDA Letter at 3, 8 (stating that 

transactions cleared outside the United States 

should not be subject to Title VII, as they ‘‘are 

subject to regulatory oversight in the clearing 

jurisdiction and are subject to reporting and 

recordkeeping requirements in that jurisdiction’’). 

343See text accompanying note 259, supra. 

344See Section II.B, supra. 

345See IIB Letter at 18–19 (arguing that the 

dealing activity of the U.S. personnel in the trade 

is solely based on the hour of the day and thus 

incidental and that maintaining the proposed 

approach would be difficult as it would require 

non-U.S. persons to hire staff to work after-hours in 

the non-U.S. offices); HSBC Letter at 2. 

relocation by financial groups that use 

a non-U.S. dealer to carry out their 

dealing activity in the United States. 

However, as with the preceding 

alternative, financial groups that use a 

U.S. dealer may respond to the 

incentives created under the currently 

existing rules by restructuring their 

security-based swap dealing business so 

that it is carried out by a non-U.S. 

person, in which case none of its 

transactions with other non-U.S. 

persons would be counted toward the 

de minimis thresholds. 

In our view, in the absence of some 

form of activity-based test, the current 

scope of Exchange Act rule 3a71–3 

raises the full range of concerns arising 

from the ability of non-U.S. persons to 

continue to engage in security-based 

swap dealing activity in the United 

States without complying with Title VII 

dealer requirements, as described in 

detail above.338 Moreover, to the extent 

that there are no limitations on a nonU.S. person’s ability to exclude these 

transactions from its de minimis 

calculations, it is possible that a 

significant portion of that activity, 

including potentially all interdealer 

activity, eventually would occur 

entirely outside the scope of Title VII 

security-based swap dealer regulation, 

to the extent that financial groups 

restructure their dealing business in 

response to the incentives created by the 

resulting competitive disparities and 

market fragmentation. As we have 

already noted, this alternative would 

not only reduce the current volume of 

security-based swap transactions by 

non-U.S. persons included in such 

persons’ dealer de minimis threshold 

calculations, but financial groups that 

currently use U.S. persons to carry out 

their dealing business in the United 

States may have an incentive to migrate 

that business to affiliated non-U.S. 

persons to stay competitive with their 

non-U.S. competitors.339

The absence of an activity-based test 

might also be costly because of its 

adverse competitive effects between 

U.S. and non-U.S. persons. Under 

current rules, the disparity in regulatory 

treatment means U.S. and non-U.S. 

persons would face disparate regulatory 

costs even if both engage in dealing 

activity using personnel located in a 

U.S. office. Given these cost differences, 

non-U.S. persons or their agents 

transacting with other non-U.S. persons 

or their agents in the United States 

would potentially be able to provide 

liquidity at lower cost than U.S. persons 

because of differing regulatory treatment 

in other jurisdictions. As a result, nonU.S. persons could prefer to transact 

with non-U.S. persons or their agents, 

and a substantial portion of liquidity 

from non-U.S. persons might become 

unavailable to U.S. persons. 

4. Exception for Transactions Entered 

Into Anonymously on an Exchange and 

Cleared 

Another alternative to these 

amendments would be to not require 

transactions that are entered into 

anonymously on an exchange and are 

cleared to be counted towards an 

entity’s dealer de minimis threshold.340

As we noted in the U.S. Activity 

Proposing Release, the purpose of the 

exception was to avoid putting market 

participants in a position where they are 

required to determine the treatment of 

the transaction under the de minimis 

exception in circumstances where the 

information necessary to that 

determination is unavailable to them.341

We do not believe that anonymous 

trades raise these concerns in the 

context of the amendment to Exchange 

Act rule 3a71–3(b), given that it does 

not require non-U.S. persons to look to 

the location or status of their 

counterparty but only at that of its own 

personnel. We do, however, believe that 

allowing such an exception would have 

adverse consequences for competition 

between U.S. and non-U.S. dealers in 

the United States. If non-U.S. dealers 

could transact in the United States with 

non-U.S. counterparties but not be 

required to apply those transactions to 

their de minimis thresholds because 

their transactions were entered into 

anonymously on an exchange and 

cleared, non-U.S. dealers would be able 

to continue to operate in the U.S. 

without being subject to the dealer 

requirements of Title VII. The disparate 

costs generated by the unequal 

application of Title VII dealer 

requirements may further fragment 

liquidity into U.S. and non-U.S. pools, 

reducing the liquidity available to 

participants in the U.S. security-based 

swap market. 

5. Exception for Transactions Cleared 

Through Foreign Clearing Agencies 

One commenter suggested that we 

should not apply Title VII requirements 

to any transaction between two non-U.S. 

persons that is cleared outside the 

United States. 342 As we have noted 

elsewhere, however, clearing of 

security-based swaps reduces 

counterparty risk and operational risk, 

but the benefits of Title VII dealer 

regulations extend beyond the concerns 

addressed by clearing, to concerns about 

contagion, market fragmentation, and 

counterparty protection, among others. 

Because clearing these transactions does 

not address these concerns, whether a 

transaction is cleared does not appear to 

provide a useful basis for determining 

whether a transaction should be 

excepted from the de minimis counting 

requirement.343 It is also important to 

note that such an exception would 

allow non-U.S. security-based swap 

dealers to operate using personnel or 

personnel of agents located in the 

United States, without being subject to 

Title VII dealer requirements by clearing 

their transactions through a foreign 

clearing agency. This disparity, as 

already discussed, could cause securitybased swap liquidity to fragment into 

two pools, and reduce the amount of 

liquidity available to U.S. security-based 

swap market participants.344

6. Exception for Transactions Arranged, 

Negotiated, or Executed in the United 

States Merely To Accommodate Foreign 

Clients’ Needs When Foreign Markets 

Are Closed 

Another alternative would be to 

provide an exception for transactions 

arranged, negotiated, or executed in the 

United States merely to accommodate 

foreign clients’ needs when foreign 

markets are closed. For example, one 

commenter argued that the U.S. Activity 

Test should not include security-based 

swaps in which U.S. personnel are 

involved only to accommodate a nonU.S. counterparty outside of operating 

hours in the counterparty’s time 

zone.345 Under these amendments, a 

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8636 Federal Register / Vol. 81, No. 33 / Friday, February 19, 2016 / Rules and Regulations 

346See Section IV.C.2, supra. 

347See note 236, supra. 

348See Section V.C.3, supra. 

349 5 U.S.C. 601 et seq. 

350 5 U.S.C. 605(b). 351Although 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 rulemaking, are set forth in Rule 0– 

10, 17 CFR 240.0–10. See Statement of Management 

on Internal Control, Exchange Act Release No. 

18451 (January 28, 1982), 47 FR 5215 (February 4, 

1982). 

352See 17 CFR 240.0–10(a). 353See 17 CFR 240.17a–5(d). 354See 17 CFR 240.0–10(c). 355 Including commercial banks, savings 

institutions, credit unions, firms involved in other 

depository credit intermediation, credit card 

issuing, sales financing, consumer lending, real 

estate credit, and international trade financing. 13 

CFR 121.201 at Subsector 522. 

356 Including firms involved in secondary market 

financing, all other non-depository credit 

intermediation, mortgage and nonmortgage loan 

brokers, financial transactions processing, reserve, 

and clearing house activities, and other activities 

related to credit intermediation. 13 CFR 121.201 at 

Subsector 522. 

357 Including firms involved in investment 

banking and securities dealing, securities brokerage, 

commodity contracts dealing, commodity contracts 

brokerage, securities and commodity exchanges, 

miscellaneous intermediation, portfolio 

management, providing investment advice, trust, 

fiduciary and custody activities, and miscellaneous 

financial investment activities. 13 CFR 121.201 at 

Subsector 523. 

358 Including direct life insurance carriers, direct 

health and medical insurance carriers, direct 

property and casualty insurance carriers, direct title 

insurance carriers, other direct insurance (except 

life, health and medical) carriers, reinsurance 

carriers, insurance agencies and brokerages, claims 

adjusting, third party administration of insurance 

and pension funds, and all other insurance related 

activities. 13 CFR 121.201 at Subsector 524. 

359 Including pension funds, health and welfare 

funds, other insurance funds, open-end investment 

funds, trusts, estates, and agency accounts, real 

estate investment trusts and other financial 

vehicles. 13 CFR 121.201 at Subsector 525. 

360See 13 CFR 121.201. 

361See U.S. Activity Proposing Release, 80 FR 

27505–08; Cross-Border Adopting Release, 79 FR 

47368. 

362See HSBC Letter at 3–4. 

non-U.S. person is required to include 

in its dealer de minimis threshold 

calculations transactions that it 

arranges, negotiates, or executes using 

personnel located in the United States 

even if it does so for the sole purpose 

of accommodating a foreign client’s 

needs when foreign markets are 

closed.346 Commenters have argued that 

requiring these transactions to be 

included in a dealer’s de minimis 

threshold calculations may discourage 

non-U.S.-person dealers from providing 

these services to their non-U.S.-person 

clients, which may increase the 

transaction costs and the time necessary 

to execute their clients’ transactions.347

An exception for these types of 

transactions might improve the liquidity 

available to non-U.S. security-based 

swap market participants by allowing 

non-U.S. dealers to use personnel or 

personnel of their agents located in the 

United States to arrange, negotiate, or 

execute certain transactions when 

foreign markets are closed. 

However, the implementation of such 

an exception might have several adverse 

consequences. For example, such an 

exception might create an incentive for 

non-U.S. person dealers to claim such 

an exception for trades that, at any other 

time of day, they would still have 

arranged, negotiated, or executed using 

personnel located in the United States. 

In addition, non-U.S. person dealers 

may have incentives to artificially delay 

or advance the timing of trades to claim 

such an exception. By abusing such an 

exception, non-U.S. dealers might create 

a significant disparity in the way that 

they account for transactions that they 

arrange, negotiate, or execute using 

personnel located in the United States 

under the dealer de minimis exception. 

As a result, non-U.S. dealers might not 

exceed a de minimis threshold and 

therefore may not be required to register 

with the Commission, even if these nonU.S. dealers continue with substantial 

amounts of dealing activity located 

within the United States. The 

subsequent difference in the application 

of dealer requirements between U.S. and 

non-U.S. dealers operating in the United 

States may have the adverse market 

fragmentation and competition effects 

discussed earlier.348

VI. Regulatory Flexibility Act 

Certification 

The Regulatory Flexibility Act 

(‘‘RFA’’) 349 requires Federal agencies, in 

promulgating rules, to consider the 

impact of those rules on small entities. 

The Commission certified in the U.S. 

Activity Proposing Release, pursuant to 

Section 605(b) of the RFA,350 that the 

proposed amendments to Exchange Act 

rule 3a71–3 and 3a71–5 would not, if 

adopted, have a significant impact on a 

substantial number of ‘‘small 

entities.’’ 351 The Commission received 

no comments on this certification. 

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; 352 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,353 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.354 Under 

the standards adopted by the Small 

Business Administration, small entities 

in the finance and insurance industry 

include the following: (i) For entities in 

credit intermediation and related 

activities,355 entities with $550 million 

or less in assets or; (ii) for nondepository credit intermediation and 

certain other activities,356 entities 

engaged in non-depository credit 

intermediation and related activities, 

$38.5 million or less in annual receipts; 

(iii) for entities in financial investments 

and related activities,357 entities with 

$38.5 million or less in annual receipts; 

(iv) for insurance carriers and entities in 

related activities,358 entities with $38.5 

million or less in annual receipts, or 

1,500 employees for direct property and 

casualty insurance carriers; and (v) for 

funds, trusts, and other financial 

vehicles,359 entities with $32.5 million 

or less in annual receipts.360 Based on 

feedback from market participants and 

our information about the securitybased swap markets, the Commission 

continues 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 large financial 

institutions—would not be ‘‘small 

entities’’ for purposes of the RFA.361

For the foregoing reasons, the 

Commission certifies that the final 

amendments, as adopted, would not 

have a significant economic impact on 

a substantial number of small entities 

for purposes of the RFA. 

VII. Effective Date and Implementation 

These final rules will be effective 

April 19, 2016. 

Three commenters requested that we 

provide market participants adequate 

time to comply with any final rule that 

would require them to monitor the 

location of personnel engaged in 

relevant activity with respect to 

security-based swap transactions. One 

commenter stated that we should 

provide a 12-month transition period 

and clarify that the de minimis counting 

would only apply prospectively to 

security-based swap transactions 

executed after the transition period.362

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Federal Register / Vol. 81, No. 33 / Friday, February 19, 2016 / Rules and Regulations 8637 

363See IIB Letter at 19; SIFMA/FSR Letter at 15. 

Two commenters urged the Commission 

to defer the compliance date until it has 

made comparability determinations for 

a number of jurisdictions so that nonU.S. dealers can rely on substituted 

compliance.363

In the SBS Entity Registration 

Adopting Release, we established a 

compliance date for the final rules 

adopted in that release as the later of: 

Six months after the date of publication 

in the Federal Register of a final rule 

release adopting rules establishing 

capital, margin and segregation 

requirements for security-based swap 

dealers and major security-based swap 

participants (‘‘SBS Entities’’); the 

compliance date of final rules 

establishing recordkeeping and 

reporting requirements for SBS Entities; 

the compliance date of final rules 

establishing business conduct 

requirements under Exchange Act 

sections 15F(h) and 15F(k); or the 

compliance date for final rules 

establishing a process for a registered 

SBS Entity to make an application to the 

Commission to permit an associated 

person who is subject to a statutory 

disqualification to effect or be involved 

in effecting security-based swaps on its 

behalf (such date referred to as the 

‘‘Registration Compliance Date’’). 

In addition, we noted that, for 

purposes of complying with the 

registration and other requirements, 

persons engaged in dealing activity are 

not required to begin calculating 

whether their transactions meet or 

exceed the thresholds established in 

Exchange Act rule 3a71–2 until two 

months prior to the Registration 

Compliance Date (‘‘SBS Entity Counting 

Date’’). Accordingly, a person engaged 

in security-based swap dealing activity 

will not be required to include in its 

dealer de minimis threshold 

calculations any transactions entered 

into prior to the SBS Entity Counting 

Date. However, given the potential 

complexities of implementing the 

amendments being adopted today, we 

believe it is appropriate to establish a 

compliance date solely for Exchange Act 

rule 3a71–3(b)(1)(iii)(C) of the later of (a) 

February 21, 2017, or (b) the SBS Entity 

Counting Date. 

Statutory Basis and Text of Final Rules 

Pursuant to the Exchange Act, 15 

U.S.C. 78a et seq., and particularly 

sections 3(a)(71), 3(b), 23(a)(1), and 

30(c) thereof, and section 761(b) of the 

Dodd-Frank Act, the SEC is amending 

rules 3a71–3 and 3a71–5 under the 

Exchange Act. 

List of Subjects in 17 CFR Part 240 

Brokers, Confidential business 

information, Fraud, Reporting and 

recordkeeping requirements, Securities. 

Text of Final Rules 

For the reasons stated in the 

preamble, the SEC is amending Title 17, 

Chapter II of the Code of the Federal 

Regulations as follows: 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

■ 1. The 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, 78dd, 78ll, 

78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– 

3, 80b–4, 80b–11, 7201 et seq., and 8302; 7 

U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 

U.S.C. 1350; and Pub. L. 111–203, 939A, 124 

Stat. 1376 (2010), unless otherwise noted. 

* * * * * 

Sections 240.3a71–3 and 240.3a71–5 are 

also issued under Pub. L. 111–203, sec. 

761(b), 124 Stat. 1754 (2010), and 15 U.S.C. 

78dd(c). 

* * * * * 

■ 2. § 240.3a71–3 is amended by adding 

paragraph (b)(1)(iii)(C) to read as 

follows: 

§ 240.3a71–3 Cross-border security-based 

swap dealing activity. 

* * * * * 

(b) * * * 

(1) * * * 

(iii) * * * 

(C) Unless such person is a person 

described in paragraph (a)(4)(iii) of this 

section, security-based swap 

transactions connected with such 

person’s security-based swap dealing 

activity that are arranged, negotiated, or 

executed by personnel of such non-U.S. 

person located in a U.S. branch or 

office, or by personnel of an agent of 

such non-U.S. person located in a U.S. 

branch or office; and 

* * * * * 

■ 3. § 240.3a71–5 is amended by adding 

paragraph (c) to read as follows: 

§ 240.3a71–5 Exception for cleared 

transactions executed on a swap execution 

facility. 

* * * * * 

(c) The exceptions in paragraphs (a) 

and (b) of this section shall not apply to 

any security-based swap transactions of 

a non-U.S. person or of an affiliated 

non-U.S. person connected with the 

person’s security-based swap dealing 

activity that are arranged, negotiated, or 

executed by personnel of such non-U.S. 

person located in a U.S. branch or 

office, or by personnel of an agent of 

such non-U.S. person located in a U.S. 

branch or office. 

By the Commission. 

Dated: February 10, 2016. 

Brent J. Fields, 

Secretary. 

[FR Doc. 2016–03178 Filed 2–18–16; 8:45 am] 

BILLING CODE 8011–01–P 

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