Document ID: SEC-2016-0271-0001
Agency: sec
Document Type: Rule
Title: Security-Based Swap Dealer De Minimis Exceptions: 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
Posted Date: 2016-02-19T05:00Z

[Federal Register Volume 81, Number 33 (Friday, February 19, 2016)]
[Rules and Regulations]
[Pages 8597-8637]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-03178]

[[Page 8597]]

Vol. 81

Friday,

No. 33

February 19, 2016

Part II

Securities and Exchange Commission

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17 CFR Part 240

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; 
Final Rule

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

[[Page 8598]]

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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.

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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 ``Security-Based 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 
Dodd-Frank 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 SBSR \4\ 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 security-based swap dealers.\5\
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    \1\ Public Law 111-203, 124 Stat. 1376 (2010). Unless otherwise 
indicated, references to Title VII in this release are to Subtitle B 
of Title VII.
    \2\ Application 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 non-U.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.
    \4\ Regulation 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'').
    \5\ Each 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; Re-Proposal of 
Regulation SBSR and Certain Rules and Forms Relating to the 
Registration of Security-Based Swap Dealers and Major Security-Based 
Swap Participants, Exchange Act Release No. 69490 (May 1, 2013), 78 
FR 30967 (May 23, 2013) (``Cross-Border Proposing Release'').
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    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

[[Page 8599]]

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 non-U.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\
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    \6\ Cf. 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 cross-border 
rule'').
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    Further, we note that these rules complete our rulemaking 
implementing the de minimis exception for security-based 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\
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    \7\ See Further Definition of ``Swap Dealer,'' ``Security-Based 
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based 
Swap Participant'' and ``Eligible Contract Participant,'' Exchange 
Act Release No. 66868 (April 27, 2012), 77 FR 30595, 30640 (May 23, 
2012) (``Intermediary Definitions Adopting Release'').
    \8\ See 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.
    \9\ See Intermediary Definitions Adopting Release, 77 FR 30640-
41 and n.523.
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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 
cross-border 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.
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    \10\ See U.S. Activity Proposing Release, 80 FR 27446.
    \11\ See Section II.A.3, infra, regarding the preponderance of 
cross-border activity in the security-based swap market.
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    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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    \12\ The 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.
    \13\ Section 712(a)(2) of the Dodd-Frank Act provides in part 
that the Commission shall ``consult and coordinate to the extent 
possible with the Commodity Futures Trading Commission and the 
prudential regulators for the 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).
    \14\ For 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.
    \15\ Commission 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.
    \16\ See 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 
of consistent international standards with respect to the regulation 
(including fees) of swaps.'').

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[[Page 8600]]

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\
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    \17\ See Cross-Border Proposing Release, 78 FR 31000-01; U.S. 
Activity Proposing Release, 80 FR 27463.
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    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\
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    \18\ Cross-Border Proposing Release, 78 FR 30999-31000.
    \19\ See U.S. Activity Proposing Release, 80 FR 27459.
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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\
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    \20\ See 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.
    \21\ See Request for Comment on Application of Commission 
Regulations to Swaps Between Non-U.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'').
    \22\ See U.S. Activity Proposing Release, 80 FR 27461-63.
    \23\ See Extension of No-Action Relief: Transaction-Level 
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.
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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\
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    \24\ See Letter from Chris Barnard, dated June 26, 2015 (``Chris 
Barnard Letter''), at 2.
    \25\ See, e.g., Letter from International Swaps and Derivatives 
Association (``ISDA''), dated July 13, 2015 (``ISDA Letter''), at 5-
6.
    \26\ See 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.
    \27\ See, e.g., SIFMA/FSR Letter at 2, 6; IIB Letter at 2; ISDA 
Letter at 5.
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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.
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    \28\ Pursuant 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.
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A. Baseline

    To assess the economic impact of the final rules described in this 
release, we are using as our baseline the security-based 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

[[Page 8601]]

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.
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    \29\ We 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.
    \30\ See Application of ``Security-Based Swap Dealer'' and 
``Major-Security-Based Swap Participant'' Definitions to Cross-
Border Security-Based Swap Activities, Exchange Act Release No. 
72472 (June 25, 2014), 79 FR 47277 (August 12, 2014 (republication)) 
(``Cross-Border Adopting Release'').
    \31\ See 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'').
    \32\ See 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'').
    \33\ See 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'').
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1. Available Data Regarding Security-Based 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.
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    \34\ We 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.
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    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\
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    \35\ The 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.
    \36\ See semi-annual OTC derivatives statistics at December 
2014, Table 19, available at http://www.bis.org/statistics/dt1920a.pdf (accessed July 29, 2015).
    \37\ These totals include both swaps and security-based swaps, 
as well as products that are excluded from the definition of 
``swap,'' such as certain equity forwards.
    \38\ While other repositories may collect data on transactions 
in total return swaps on equity and debt, we do not currently have 
access to such data for these products (or other products that are 
security-based swaps). Consistent with the Cross-Border 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \39\ Following 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).
    \40\ The 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \41\ See ISDA Letter at 3, 7 (arguing that the Commission lacks 
complete data to estimate the number of non-U.S. persons that use 
U.S. personnel to arrange, negotiate, or execute security-based swap 
transactions or the number of registered U.S. broker-dealers that 
intermediate these transactions and that this ``makes it difficult 
or impossible for the Commission to formulate a useful estimate of 
the market impact, cost and benefits of the Proposal''; suggesting 
that the Commission ``gather[ ] more robust and complete data prior 
to finalizing a rulemaking that will have meaningful impact on a 
global market.'').
    \42\ See Section V.A.1, infra.

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[[Page 8602]]

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\
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    \43\ These 1,875 entities, which are presented in more detail in 
Table 1, below, include all DTCC-defined ``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.
---------------------------------------------------------------------------

    As shown in Table 1, below, close to three-quarters of these 
entities (DTCC-defined ``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.
---------------------------------------------------------------------------

    \44\ See 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.

 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, ISDA-recognized dealers in Table 1 allocated 
transactions across 75 accounts.
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    \45\ Adjustments to these statistics from the proposal reflect 
updated classifications of counterparties and transactions 
classification resulting from further analysis of the TIW data.
    \46\ For the purpose of this analysis, the ISDA-recognized 
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, Soci[eacute]t[eacute] G[eacute]n[eacute]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.
    \48\ Unregistered 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.

 
 
 
 
 
 
 
 

[[Page 8603]]

   Table 2--The Number and Percentage of Account Holders--by Type--Who Participate in the Security-Based 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\
---------------------------------------------------------------------------

    \49\ Adjustments to these statistics from the proposal reflect 
updated counterparty and transaction classification resulting from 
additional analysis of the TIW data.
    \50\ This column reflects the number of participants who are 
also trading for their own accounts.
    \51\ See 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 Dodd-Frank Act and instead 
was likely to be an entity such as a corporation, an insurance 
company, or a bank.
    \52\ For the purposes of this discussion, ``private fund'' 
encompasses various unregistered pooled investment vehicles, 
including hedge funds, private equity funds, and venture capital 
funds.
[GRAPHIC] [TIFF OMITTED] TR19FE16.001

[[Page 8604]]

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\
---------------------------------------------------------------------------

    \53\ See note 39, supra (explaining how domiciles for firms were 
identified for purposes of this analysis).
    \54\ See 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-banks-swaps-idUSL3N10S57R20150821.
    \55\ As 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).
---------------------------------------------------------------------------

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 risk-management activities in these security-based 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\
---------------------------------------------------------------------------

    \56\ See U.S. Activity Proposing Release, 80 FR 27449-52.
    \57\ See 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.
    \58\ See IIB Letter at 2; SIFMA/FSR Letter at 6; ISDA Letter at 
5.
    \59\ See IIB Letter at 2; SIFMA/FSR Letter at 6; ISDA Letter at 
5.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \60\ TIW 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.
---------------------------------------------------------------------------

    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 market-facing activities that generate those 
transactions, reflects a range of business and regulatory 
considerations, which each financial group may weigh differently.
    A financial group may choose to book all of its security-based swap 
transactions, regardless of where the transaction originated, in a 
single, central booking entity. That entity generally retains the risk 
associated with that transaction, but it also may lay off that risk to 
another affiliate via a back-to-back transaction or an assignment of 
the security-based swap.\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\
---------------------------------------------------------------------------

    \61\ See U.S. Activity Proposing Release, 80 FR 27463; Cross-
Border Proposing Release, 78 FR 30977-78.
    \62\ See, e.g., HSBC Letter at 2; SIFMA/FSR Letter at 6-7.
    \63\ There is some indication that this booking structure is 
becoming increasingly common in the market. See, e.g., ``Regional 
swaps booking replacing global hubs,'' Risk.net (September 4, 2015), 
available at: http://www.risk.net/risk-magazine/feature/2423975/regional-swaps-booking-replacing-global-hubs. Such a development may 
be reflected in the increasing percentage of new entrants that have 
a foreign domicile, as described above in Section II.A.2.b.
---------------------------------------------------------------------------

    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

[[Page 8605]]

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\
---------------------------------------------------------------------------

    \64\ These offices may be branches or offices of the booking 
entity itself, or branches or offices of an affiliated agent, such 
as, in the United States, a registered broker-dealer.
    \65\ See SIFMA/FSR Letter at 3; HSBC Letter at 2.
    \66\ See HSBC Letter at 2.
    \67\ See note 59, supra.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \68\ See HSBC Letter at 2.
---------------------------------------------------------------------------

    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 security-based swap operations of its 
own.
---------------------------------------------------------------------------

    \69\ We 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 
anonymity until the trade is executed. These interdealer brokers 
also may play a particularly important role in facilitating 
transactions in less-liquid security-based swaps.
---------------------------------------------------------------------------

    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 non-U.S.-person counterparties. In transactions with non-
U.S.-person counterparties, these foreign affiliates may affirmatively 
seek to engage in dealing activity in the United States because the 
sales personnel of the non-U.S.-person dealer (or of its agent) in the 
United States have existing relationships with counterparties in other 
locations (such as Canada or Latin America) or because the trading 
personnel of the non-U.S.-person dealer (or of its agent) in the United 
States have the expertise to manage the trading books for security-
based swaps on U.S. reference securities or entities. 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 non-U.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, third-party agent.
---------------------------------------------------------------------------

    \70\ See IIB Letter at 18-19.
---------------------------------------------------------------------------

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 security-based 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\
---------------------------------------------------------------------------

    \71\ See II.A.2.a,, supra.
    \72\ See U.S. Activity Proposing Release, 80 FR 27452.
    \73\ These estimates are based on the number of accounts in TIW 
data with total notional volume in excess of de minimis thresholds, 
increased by a factor of two, to account for any potential growth in 
the security-based swap market, to account for the fact that 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.
    \74\ Adjustments 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 
non-U.S. persons).
---------------------------------------------------------------------------

    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 security-based swap market, that of 
the 55 firms that might register as security-based swap dealers or 
major security-based swap participants, approximately 35 would also be 
registered with the CFTC as swap dealers or major swap 
participants.\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

[[Page 8606]]

requirements in one or more foreign jurisdictions.\76\
---------------------------------------------------------------------------

    \75\ Based 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 security-based 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.
    \76\ See, e.g., ISDA Letter at 5, 6.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \77\ Commission staff analysis of TIW transaction records 
indicates that approximately 99 percent of single-name CDS price-
forming transactions in 2014 involved an ISDA-recognized dealer.
---------------------------------------------------------------------------

    These dealers transact with hundreds or thousands of 
counterparties. Approximately 35 percent of accounts of firms expected 
to register as security-based dealers and observable in TIW have 
entered into security-based swaps with over 1,000 unique counterparty 
accounts as of year-end 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.
---------------------------------------------------------------------------

    \78\ Many 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.
---------------------------------------------------------------------------

    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 ISDA-recognized dealers (interdealer 
transactions) or whether a transaction has at least one non-dealer 
counterparty.
    Figure 2 also shows that the portion of the notional volume of 
North American corporate single-name CDS represented by interdealer 
transactions has remained fairly constant and that interdealer 
transactions continue to represent a significant majority of trading 
activity, even as notional volume has declined over the past six 
years,\79\ from more than $6 trillion in 2008 to less than $3 trillion 
in 2014.\80\
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    \79\ The start of this decline predates the enactment of the 
Dodd-Frank Act and the proposal of rules thereunder, which is 
important to note for the purpose of understanding the economic 
baseline for this rulemaking.
    \80\ This 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \81\ One 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.

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[[Page 8607]]

[GRAPHIC] [TIFF OMITTED] TR19FE16.002

    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 foreign-domiciled 
counterparty and 40 percent entered into between two foreign-domiciled 
counterparties.\83\
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    \82\ Adjustments 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 inter-dealer activity.
    \83\ For 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.
---------------------------------------------------------------------------

    If we consider the number of cross-border transactions instead from 
the perspective of the domicile of the corporate group (e.g., by 
classifying a foreign bank branch or foreign subsidiary of a U.S. 
entity as domiciled in the United States), the percentages shift 
significantly. Under this approach, the fraction of transactions 
entered into between two U.S.-domiciled counterparties increases to 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 non-dealers, 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 ISDA-recognized dealer and a U.S.-person non-
dealer.

[[Page 8608]]

[GRAPHIC] [TIFF OMITTED] TR19FE16.003

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\
---------------------------------------------------------------------------

    \84\ See, e.g., G20 Leaders' Final Declaration, November 2011, 
para. 24, available at: https://g20.org/wp-content/uploads/2014/12/Declaration_eng_Cannes.pdf.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \85\ Several commenters raised concerns about the potential for 
overlap or conflict of Title VII security-based 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \86\ See Regulation SBSR, Rule 901(a)(2)(ii).
    \87\ See Capital, Margin, and Segregation Requirements for 
Security-Based Swap Dealers and Major Security-Based Swap 
Participants and Capital Requirements for Broker-Dealers, Exchange 
Act Release No. 68071 (October 18, 2012), 77 FR 70213 (November 23, 
2012) (``Capital, Margin, and Segregation Proposing Release''); 
Trade Acknowledgment and Verification of Security-Based 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.
---------------------------------------------------------------------------

    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 non-centrally cleared OTC derivatives transactions.\89\ Several 
jurisdictions

[[Page 8609]]

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\
---------------------------------------------------------------------------

    \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 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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \91\ See 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 
security-based swaps. See, e.g., George Casella and Roger L. Berger, 
``Statistical Inference'' (2002), at 171.
---------------------------------------------------------------------------

    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 single-name 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\
---------------------------------------------------------------------------

    \93\ The 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.
---------------------------------------------------------------------------

    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. Security-based 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\
---------------------------------------------------------------------------

    \94\ See 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).
---------------------------------------------------------------------------

B. Economic Considerations

    These final rules, together with our previously adopted rules 
defining ``security-based swap dealer'' and applying that definition in 
the cross-border 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\
---------------------------------------------------------------------------

    \95\ See 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).
    \96\ See Intermediary Definitions Adopting Release, 77 FR 30596.
---------------------------------------------------------------------------

    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

[[Page 8610]]

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.
---------------------------------------------------------------------------

    \97\ See Cross-Border Adopting Release, 79 FR 47282.
    \98\ See Section II.A.3, supra.
    \99\ See Section II.A.2d, supra.
    \100\ See 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \101\ We 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).
---------------------------------------------------------------------------

    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 non-U.S. person dealer. 
For example, a non-U.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 non-
U.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\
---------------------------------------------------------------------------

    \102\ See 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).
    \103\ See 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).
    \104\ See 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.
    \105\ See note 27, supra (citing IIB Letter at 2).
    \106\ See Section V.B.2, infra.
---------------------------------------------------------------------------

    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

[[Page 8611]]

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 non-U.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.
---------------------------------------------------------------------------

    \107\ See 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 security-based swap transaction between two ISDA-
recognized dealers as interdealer activity.
    \108\ Reducing 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).
---------------------------------------------------------------------------

    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 security-based swap market.
---------------------------------------------------------------------------

    \109\ Such 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.
---------------------------------------------------------------------------

    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 security-based swap trades are dealer-
to-dealer, rather than dealer-to-non-dealer or non-dealer-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\
---------------------------------------------------------------------------

    \110\ See Section II.A.2.a., supra. See also Cross-Border 
Adopting Release, 79 FR 47283.
    \111\ See 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 non-dealers) was 3 counterparties. See Section 
0, supra.
    \112\ See Section II.A.3, supra. See also Cross-Border Adopting 
Release, 79 FR 47283.
    \113\ See Cross-Border Adopting Release, 79 FR 47283.
---------------------------------------------------------------------------

    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\
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    \114\ See 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).
    \115\ We 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.
---------------------------------------------------------------------------

    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

[[Page 8612]]

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\
---------------------------------------------------------------------------

    \116\ See U.S. Activity Proposing Release, 80 FR 27482.
    \117\ See 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \118\ See 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 non-dealers and other 
dealers'').
    \119\ See note 57 and accompanying text, supra.
    \120\ See Section II.A.3, supra.
    \121\ For more on liquidity shocks and contagion, see Rodrigo 
Vald[eacute]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).
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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 phase-in 
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\
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    \122\ See Exchange Act section 3(a)(71)(D).
    \123\ See 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).
    \124\ See 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.
---------------------------------------------------------------------------

    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 non-U.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 Cross-
Border Adopting Release.
---------------------------------------------------------------------------

    \125\ See Cross-Border Proposing Release, 78 FR 30999; U.S. 
Activity Proposing Release, 80 FR 27444.
    \126\ See Cross-Border Proposing Release, 78 FR 31000-01.
    \127\ See initially proposed Exchange Act rule 3a71-3(b)(1)(ii).
    \128\ See initially proposed Exchange Act rule 3a71-3(a)(5). See 
also Cross-Border Proposing Release, 78 FR 30999-31000.
    \129\ The 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.
    \130\ See, e.g., Cross-Border Adopting Release, 79 FR 47280.
---------------------------------------------------------------------------

    In light of comments received on the initial proposal, subsequent 
regulatory and other developments in the security-based 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

[[Page 8613]]

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 security-based 
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\
---------------------------------------------------------------------------

    \131\ See proposed Exchange Act rule 3a71-3(b)(1)(iii)(C).
---------------------------------------------------------------------------

    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 security-based 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\
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    \132\ See U.S. Activity Proposing Release, 80 FR 27467.
    \133\ See id. at 27464.
    \134\ See 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.
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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 security-based 
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.
---------------------------------------------------------------------------

    \135\ See 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).
    \136\ See Exchange Act rule 3a71-3(b)(1)(iii)(C); Exchange Act 
rule 3a71-5(c).
    \137\ See 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.
    \138\ See Exchange Act rule 3a71-5(c).
---------------------------------------------------------------------------

B. Statutory Scope and Policy Concerns Arising from Security-Based Swap 
Dealing Activity in the United States

1. Territorial Application of ``Security-Based 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 
security-based 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

[[Page 8614]]

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\
---------------------------------------------------------------------------

    \139\ See 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 security-based 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.
    \140\ See 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).
    \141\ See SIFMA/FSR Letter at 6.
    \142\ See, e.g., id. at 5.
---------------------------------------------------------------------------

    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 Cross-Border 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 security-based 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 security-based swap dealer registration.\147\
---------------------------------------------------------------------------

    \143\ Cf. ISDA Letter at 6, note 11.
    \144\ Cross-Border Adopting Release, 79 FR 47287-88.
    \145\ Id. at 47288. We have also stated that security-based 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.
    \146\ See 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 ``security-based 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.
    \147\ See note 140, supra.
---------------------------------------------------------------------------

    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\
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    \148\ See Exchange Act section 3(a)(71)(A), 15 U.S.C. 
78c(a)(71)(A).
    \149\ See Intermediary Definitions Adopting Release, 77 FR 
30617-18. As we stated in the Cross-Border 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.
    \150\ See Exchange Act section 3(a)(71)(A), 15 U.S.C. 
78c(a)(71)(A); Intermediary Definitions Adopting Release, 77 FR 
30617-18.
    \151\ See 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).
    \152\ See 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 transaction-based notional thresholds 
for the security-based swap dealer de minimis exception).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \153\ See, e.g., Intermediary Definitions Adopting Release, 77 
FR 30612 (noting the focus of the ``security-based swap dealer'' 
definition on dealing activity).
    \154\ See 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 security-based swaps without 
the jurisdiction of the United States'' for purposes of section 
30(c).
---------------------------------------------------------------------------

    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 ``security-

[[Page 8615]]

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 non-U.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\
---------------------------------------------------------------------------

    \155\ See U.S. Activity Proposing Release, 80 FR 27465.
    \156\ See 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'').
    \157\ More 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'').
    \158\ Our 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.
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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\
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    \159\ See 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 security-based swap dealers and to comply with 
the Title VII rules. See, e.g., ISDA Letter at 4.
    \160\ See IIB Letter at 3.
---------------------------------------------------------------------------

    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\
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    \161\ See U.S. Activity Proposing Release, 80 FR 27481.
    \162\ See 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.
---------------------------------------------------------------------------

    We believe that not requiring non-U.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.
---------------------------------------------------------------------------

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

    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 security-based 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

[[Page 8616]]

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 non-U.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 non-U.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.
---------------------------------------------------------------------------

    \164\ See 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.
---------------------------------------------------------------------------

    This potential response to competitive disparities demonstrates the 
``nexus'' between the regulatory concerns addressed by the Title VII 
security-based 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.
---------------------------------------------------------------------------

    \165\ See Section II.B, supra.
    \166\ See 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.
    \167\ The 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.
---------------------------------------------------------------------------

    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

[[Page 8617]]

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\
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    \168\ See Section II.A.3, supra.
    \169\ See Section II.B, supra.
    \170\ See 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).
    \171\ See 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.
    \172\ For 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).
---------------------------------------------------------------------------

    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\
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    \173\ See Section IV.B.1, supra (describing territorial 
application of the dealer definition); Cross-Border Adopting 
Release, 79 FR 47287-88 (same).
    \174\ See 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'').
    \175\ Certain 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.
---------------------------------------------------------------------------

    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\
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    \176\ ISDA Letter at 3.
    \177\ See 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).
---------------------------------------------------------------------------

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 broker-dealer 
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\
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    \178\ See, e.g., IIB Letter at 5, 8; ISDA Letter at 8; SIFMA/FSR 
Letter at 6; HSBC Letter at 2-3.
    \179\ SIFMA/FSR Letter at 7-8.
    \180\ See, 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.
---------------------------------------------------------------------------

    Because they view the concerns potentially raised by this activity 
as relating primarily to counterparty protection concerns and because 
registered broker-dealers are already

[[Page 8618]]

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 broker-dealers that use a 
registered broker-dealer 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\
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    \181\ See, 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 non-U.S.-person dealers and arguing that applying 
only broker-dealer rules would avoid unnecessary duplication).
    \182\ See also 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'') as revised by section 761(a)(2) of the Dodd-
Frank Act.
    \183\ See Exchange Act section 3(a)(4) (defining ``broker'').
    \184\ See, 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 security-based 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 security-based 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 Self-Regulatory 
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).
    \185\ See 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).
    \186\ See 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 
security-based 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.
---------------------------------------------------------------------------

    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 security-based swap 
transactions if it is required to register as a security-based swap 
dealer, the requirements that likely would apply to the registered 
broker-dealer 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 non-U.S.-person dealers could 
be subject to broker-dealer or other requirements that could duplicate 
some of the security-based swap dealer requirements.\188\
---------------------------------------------------------------------------

    \188\ See U.S. Activity Proposing Release, 80 FR 27470-71.
---------------------------------------------------------------------------

    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 market-facing 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\

[[Page 8619]]

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 security-based swap dealers.\192\
---------------------------------------------------------------------------

    \189\ Compare 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).
    \190\ See 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 broker-dealer or as a 
security-based swap dealer, also does nothing to address concerns 
about the potential spillover risk or contagion from the activity of 
non-U.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.
    \191\ See 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.
    \192\ See U.S. Activity Proposing Release, 80 FR 27470-471.
---------------------------------------------------------------------------

    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 non-U.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 broker-dealer; 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\
---------------------------------------------------------------------------

    \193\ See IIB Letter at 8-10; SIFMA/FSR Letter at 8; ISDA Letter 
at 9-10.
    \194\ See IIB Letter at 8-10. The commenter suggested that the 
Commission could use its anti-evasion 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).
    \195\ See 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).
    \196\ See IIB Letter at 8-10; SIFMA/FSR Letter at 7-8.
---------------------------------------------------------------------------

    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 non-U.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, anti-evasion 
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\
---------------------------------------------------------------------------

    \197\ See Section IV.B.2, supra.
---------------------------------------------------------------------------

    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 broker-dealer 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.
---------------------------------------------------------------------------

    \198\ See IIB Letter at 7-8; ISDA Letter at 8-9; HSBC Letter at 
3, note 3.
    \199\ See IIB Letter at 7-8; ISDA Letter at 8-9; HSBC Letter at 
3, note 3.
---------------------------------------------------------------------------

    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

[[Page 8620]]

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 security-based 
swap dealing activity in the United States to be regulated under an 
entirely different regime from the comprehensive dealer regulatory 
framework established by Congress.
---------------------------------------------------------------------------

    \200\ As 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.
---------------------------------------------------------------------------

    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 broker-dealer 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 non-U.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\
---------------------------------------------------------------------------

    \201\ See IIB Letter at 7.
    \202\ See ISDA Letter at 9-10.
    \203\ See IIB Letter at 8-9.
    \204\ Indeed, we note that any exception from the uniform 
application of the requirement that non-U.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).
    \205\ See IIB Letter at 11; SIFMA/FSR Letter at 9. For example, 
one commenter explained that a non-U.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.
    \206\ See note 184, supra.
    \207\ See notes 201-203, supra.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \208\ See 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).
    \209\ See 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.
---------------------------------------------------------------------------

    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

[[Page 8621]]

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 ``security-based swap dealer'' or our further definition 
of that term, as described above, at least in part in the United 
States.\211\
---------------------------------------------------------------------------

    \210\ See 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.
    \211\ Non-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).
---------------------------------------------------------------------------

    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 security-based swap dealers when the volume of that activity exceeds 
the dealer de minimis threshold.\212\
---------------------------------------------------------------------------

    \212\ Several 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'').
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \213\ See ICI Letter at 1-2, 5; SIFMA/FSR Letter at 3; IIB 
Letter at 2.
    \214\ See Cross-Border Proposing Release, 78 FR 30999.
    \215\ See 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).
    \216\ See 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'').
    \217\ SIFMA/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'').
---------------------------------------------------------------------------

    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

[[Page 8622]]

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-by-transaction basis.
---------------------------------------------------------------------------

    \218\ See Sections V.A and V.B, infra (discussing comment 
letters addressing costs, competition, and market fragmentation).
    \219\ See 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 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.
    \220\ See U.S. Activity Proposing Release, 80 FR 27468.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \221\ As 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \222\ See 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)).
    \223\ See U.S. Activity Proposing Release, 80 FR 27468.
---------------------------------------------------------------------------

    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 market-facing 
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\
---------------------------------------------------------------------------

    \224\ On the other hand, to the extent that personnel located in 
a U.S. branch or office engage in market-facing 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.
    \225\ Similarly, 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.
---------------------------------------------------------------------------

    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

[[Page 8623]]

relevant dealing transactions exceed a de minimis threshold.
---------------------------------------------------------------------------

    \226\ See 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.
    \227\ For 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).
    \228\ See 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).
    \229\ See note 162 and accompanying text, supra.
---------------------------------------------------------------------------

    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 
security-based 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\
---------------------------------------------------------------------------

    \230\ We would not view personnel responsible solely for coding 
the algorithm as specifying the trading strategy or techniques 
carried out through such trading or execution.
    \231\ See 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).
    \232\ Cf. 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).
---------------------------------------------------------------------------

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 non-U.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.
---------------------------------------------------------------------------

    \233\ As 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.
---------------------------------------------------------------------------

    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 market-facing 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 non-U.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.
---------------------------------------------------------------------------

    \234\ See U.S. Activity Proposing Release, 80 FR 27469.
    \235\ Based 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \236\ See 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).
---------------------------------------------------------------------------

    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 non-U.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 market-facing 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

[[Page 8624]]

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\
---------------------------------------------------------------------------

    \237\ See Sections IV.B.2 and II.B, supra.
    \238\ Cf. 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).
    \239\ We also recognize that Exchange Act section 3(a)(71)(C) 
excepts from the security-based swap dealer definition a person that 
enters into security-based 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.
---------------------------------------------------------------------------

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 non-U.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 non-U.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\
---------------------------------------------------------------------------

    \240\ For 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).
    \241\ See 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.
    \242\ We 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.
    \243\ A non-U.S. person that uses a broker as its agent to 
arrange, negotiate, or execute security-based 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.
    \244\ Consistent 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 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.

---------------------------------------------------------------------------

[[Page 8625]]

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\
---------------------------------------------------------------------------

    \245\ See Cross-Border Adopting Release, 79 FR 47305-06, nn. 
224, 225 (citing commenters expressing concern about application of 
Title VII to certain MDBs).
    \246\ See id. at 47305-06.
    \247\ See id. at 47349.
    \248\ See id. at 47312-313; Exchange Act rule 3a71-3(a)(4)(iii) 
(excluding certain international organizations from the definition 
of U.S. person).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \249\ See Letter from Sullivan and Cromwell, dated July 13, 2015 
(``Sullivan and Cromwell Letter''), at 1-2.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \250\ The 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 
security-based swap participants. See Sullivan and Cromwell Letter 
at 2, note 5.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \251\ See Exchange Act rule 3a71-3(b)(1)(iii)(C).
    \252\ Cf. 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'').
---------------------------------------------------------------------------

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 security-
based swap dealer based on information unavailable to the non-U.S. 
market participant at the time of the transaction.\255\
---------------------------------------------------------------------------

    \253\ See Exchange Act rule 3a71-5.
    \254\ See Cross-Border Adopting Release, 79 FR 47325 n.412.
    \255\ See id. at 47325.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \256\ See U.S. Activity Proposing Release, 80 FR 27472-73.
    \257\ See 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).
---------------------------------------------------------------------------

    However, as we have noted already, to the extent that personnel 
located in the

[[Page 8626]]

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 non-U.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 non-U.S. person, whether in over-the-counter 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.
---------------------------------------------------------------------------

    \258\ See Section IV.B.2, supra.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \259\ See Section IV.B.2, supra.
---------------------------------------------------------------------------

    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 non-U.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\
---------------------------------------------------------------------------

    \260\ The 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \261\ One 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).
    \262\ We refer to these costs as ``assessment costs.'' See 
Intermediary Definitions Adopting Release, 77 FR 30722.
    \263\ The 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.
---------------------------------------------------------------------------

    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 non-U.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).
---------------------------------------------------------------------------

    \264\ Cf. 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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \265\ See U.S. Activity Proposing Release 80 FR 27490; Cross-
Border Adopting Release, 79 FR 47331.
---------------------------------------------------------------------------

    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

[[Page 8627]]

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.
---------------------------------------------------------------------------

    \266\ See Section II.A.1, supra.
    \267\ See, e.g., Section II.A.2.c, supra.
    \268\ We 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.
---------------------------------------------------------------------------

    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 security-based swaps 
(including equity swaps) whether on U.S. or non-U.S. underliers.\270\
---------------------------------------------------------------------------

    \269\ Adjustments 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).
    \270\ Although 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.
---------------------------------------------------------------------------

    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 security-based 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\
---------------------------------------------------------------------------

    \271\ See Cross-Border Adopting Release, 79 FR 47331-33.
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    \272\ Although 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 
Cross-Border 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.
    \273\ See U.S. Activity Proposing Release, 80 FR 27467, supra 
(discussing cost concerns about initially proposed approach).
    \274\ See ICI Global Letter at 5.
---------------------------------------------------------------------------

    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 per-entity 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 one-time 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\
---------------------------------------------------------------------------

    \275\ See note 261, supra.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \276\ Calculated as Internal Cost, 90 hours x $50 per hour = 
$4,500 plus Consulting Costs, 10 hours x $200 per hour = $2000, for 
a total cost of $6,500.
    \277\ Calculated as 134 entities x 10 market centers as 
identified in TIW x $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.
---------------------------------------------------------------------------

    Second, non-U.S. firms might instead restrict personnel located in 
a U.S. branch or office from arranging, negotiating, or executing 
security-based

[[Page 8628]]

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.
---------------------------------------------------------------------------

    \278\ See SIFMA/FSR Letter at 2, 6; IIB Letter at 2-3; ISDA 
Letter at 5.
    \279\ See IIB Letter at 2-3.
---------------------------------------------------------------------------

    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 
non-U.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.
---------------------------------------------------------------------------

    \280\ The 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.
    \281\ Calculated as Compliance Manager, 100 hours x $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.
---------------------------------------------------------------------------

    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-by-trade 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\
---------------------------------------------------------------------------

    \282\ Calculated as (Senior Accountant, 500 hours x $198 per 
hour) + (Outside Counsel, 5 hours x $400 per hour) + (Compliance 
Attorney, 2 hours x $334 per hour) + (Compliance Manager, 8 hours x 
$283 per hour) = $103,932.
    \283\ This 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 x $198 per 
hour) + (Compliance Attorney, 4 hours x $334 per hour) + (Compliance 
Manager, 4 hours x $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.

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[[Page 8629]]

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\
---------------------------------------------------------------------------

    \284\ See Intermediary Definitions Adopting Release, 77 FR 
30722.
    \285\ According 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'').
    \286\ See 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 non-U.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).
    \287\ See 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \288\ See 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.
    \289\ See, e.g., IIB Letter at 4 (stating that ``[n]on-U.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'').
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \291\ Under 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).
---------------------------------------------------------------------------

    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

[[Page 8630]]

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.
---------------------------------------------------------------------------

    \292\ See note 286, supra.
---------------------------------------------------------------------------

    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 security-based 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.
---------------------------------------------------------------------------

    \293\ See Section IV.B.2, supra; Section V.B.2, infra.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \294\ See note 108, supra.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \295\ We do not believe that the exception for certain 
international organizations in the final rule will have any effect 
on the number of security-based 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 non-U.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.
    \296\ See Section IV.B.2, supra.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \297\ See 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 non-U.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).
    \298\ Under 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.
---------------------------------------------------------------------------

    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

[[Page 8631]]

arrange, negotiate, or execute security-based 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 security-based 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.
---------------------------------------------------------------------------

    \299\ See Section II.B, supra.
---------------------------------------------------------------------------

    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 non-U.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 non-U.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\
---------------------------------------------------------------------------

    \300\ See note 287, supra.
    \301\ See 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.
    \302\ See note 289, supra.
    \303\ See, e.g., IIB Letter at 2-3.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \304\ See, e.g., Sections II.B and IV.B.2, supra.
---------------------------------------------------------------------------

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 non-U.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 
security-based 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.
---------------------------------------------------------------------------

    \305\ See 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 security-based 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \306\ See Citadel Letter at 12; Section II.A.2.c, supra. But see 
IIB Letter at 2-3 (stating that non-U.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).
    \307\ See notes 57-59 and accompanying text, supra.
---------------------------------------------------------------------------

    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 Title VII regulatory regime for 
security-

[[Page 8632]]

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\
---------------------------------------------------------------------------

    \308\ See Cross-Border Adopting Release, 79 FR 47361.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \309\ See note 102, supra.
    \310\ See 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.
    \311\ See Cross-Border Adopting Release, 79 FR 47362.
---------------------------------------------------------------------------

    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 non-U.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 
security-based 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.
---------------------------------------------------------------------------

    \312\ We also note that, under the final rules, non-U.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 Cross-Border Adopting Release, 
79 FR 47362 n.762.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \313\ See id. at 47364.
---------------------------------------------------------------------------

    We also believe that the amendments will affect competition among 
security-based 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\
---------------------------------------------------------------------------

    \314\ See IIB Letter at 4.
    \315\ See id.
    \316\ See 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.
    \317\ See 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 non-
U.S. regulated fund with a U.S. manager to stay under the [de 
minimis] threshold''. Id. at 2.
---------------------------------------------------------------------------

    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, 
non-U.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\
---------------------------------------------------------------------------

    \318\ See note 289, supra.
---------------------------------------------------------------------------

    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

[[Page 8633]]

to competitive disparities in regulation, a significant portion of the 
security-based 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\
---------------------------------------------------------------------------

    \319\ See section II.B, supra. See also IIB Letter at 2-3; ISDA 
Letter at 5; SIFMA/FSR Letter at 6.
    \320\ As 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 non-U.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.
    \321\ See Cross-Border Adopting Release, 79 FR 39152; Cross-
Border Proposing Release, 78 FR 31127.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \322\ See Section II.A.4, supra.
    \323\ See Section IV.B.3, supra.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \324\ See note 231, supra.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \325\ See Cross-Border Adopting Release, 79 FR 47363.
---------------------------------------------------------------------------

    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 
non-U.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.
---------------------------------------------------------------------------

    \326\ See note 102, supra (citing comment letters asserting that 
the final rules may result in inefficient restructuring of business 
generally).
    \327\ See 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).
---------------------------------------------------------------------------

    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

[[Page 8634]]

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.
---------------------------------------------------------------------------

    \328\ Cf. 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).
---------------------------------------------------------------------------

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 non-U.S. person from shifting its 
security-based swap dealing activity to a non-U.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 non-U.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.
---------------------------------------------------------------------------

    \329\ See 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).
    \330\ See IIB Letter at 17; SIFMA/FSR Letter at 3.
    \331\ SIFMA/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'').
    \332\ See 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)).
    \333\ See U.S. Activity Proposing Release, 80 FR 27461 
(discussing commenters' concerns related to costs of the initially 
proposed approach).
---------------------------------------------------------------------------

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 broker-dealer 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.
---------------------------------------------------------------------------

    \334\ See IIB Letter at 7; HSBC Letter at 3; SIFMA/FSR Letter at 
7-8.
---------------------------------------------------------------------------

    Such an exception could reduce programmatic and assessment costs 
associated with engaging in customer-facing 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\
---------------------------------------------------------------------------

    \335\ See Section IV.B.3, supra.
    \336\ Quantifying 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \337\ See SIFMA/FSR Letter at 5; IIB Letter at 5.
---------------------------------------------------------------------------

    As with the alternative just discussed, this alternative could 
reduce programmatic and assessment costs associated with engaging in 
customer-facing activity in connection with dealing activity in 
security-based swaps in the United States, which may mitigate any 
incentives for inefficient

[[Page 8635]]

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 non-U.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\
---------------------------------------------------------------------------

    \338\ See Section IV.B.2, supra.
    \339\ For additional discussion of the likely effects of this 
alternative, see the discussion in Sections IV.B.2 and IV.B.3, 
supra.
---------------------------------------------------------------------------

    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, non-U.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.
---------------------------------------------------------------------------

    \340\ See 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).
    \341\ See U.S. Activity Proposing Release, 80 FR 27472; Cross-
Border Adopting Release 79 FR 47325.
---------------------------------------------------------------------------

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 security-
based swap liquidity to fragment into two pools, and reduce the amount 
of liquidity available to U.S. security-based swap market 
participants.\344\
---------------------------------------------------------------------------

    \342\ See 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'').
    \343\ See text accompanying note 259, supra.
    \344\ See Section II.B, supra.
---------------------------------------------------------------------------

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 non-U.S. counterparty outside of 
operating hours in the counterparty's time zone.\345\ Under these 
amendments, a

[[Page 8636]]

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.
---------------------------------------------------------------------------

    \345\ See 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.
    \346\ See Section IV.C.2, supra.
    \347\ See note 236, supra.
---------------------------------------------------------------------------

    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 non-U.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\
---------------------------------------------------------------------------

    \348\ See Section V.C.3, supra.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \349\ 5 U.S.C. 601 et seq.
    \350\ 5 U.S.C. 605(b).
    \351\ Although 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).
---------------------------------------------------------------------------

    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 non-depository 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 
security-based 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\
---------------------------------------------------------------------------

    \352\ See 17 CFR 240.0-10(a).
    \353\ See 17 CFR 240.17a-5(d).
    \354\ See 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.
    \360\ See 13 CFR 121.201.
    \361\ See U.S. Activity Proposing Release, 80 FR 27505-08; 
Cross-Border Adopting Release, 79 FR 47368.
---------------------------------------------------------------------------

    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\

[[Page 8637]]

Two commenters urged the Commission to defer the compliance date until 
it has made comparability determinations for a number of jurisdictions 
so that non-U.S. dealers can rely on substituted compliance.\363\
---------------------------------------------------------------------------

    \362\ See HSBC Letter at 3-4.
    \363\ See IIB Letter at 19; SIFMA/FSR Letter at 15.
---------------------------------------------------------------------------

    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

0
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).
* * * * *

0
2. Sec.  240.3a71-3 is amended by adding paragraph (b)(1)(iii)(C) to 
read as follows:

Sec.  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
* * * * *

0
3. Sec.  240.3a71-5 is amended by adding paragraph (c) to read as 
follows:

Sec.  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